2023 (2) TMI 566 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D(2)(iii) - exempt income comprising off dividends from mutual funds and interest on tax free bonds - HELD THAT - As relying on case of Maxopp Investment Ltd 2018 (3) TMI 805 - SUPREME COURT no disallowance can be made u/s 14A read with Rule 8D of the IT Rules, where the A.O. failed to record dissatisfaction of correctness of the claim of the assessee. Therefore the disallowance made u/s 14A r.w.r 8D(2)(iii) is deleted. This ground is allowed in favour of the assessee. Disallowance of subscription charges paid to Forester Research and Gartner - Assessee incurred expenditure on subscription charges which was paid to two non-resident entities - HELD THAT - As respectfully following the decision of the coordinate bench of the Tribunal 2021 (9) TMI 1473 - KARNATAKA HIGH COURT this issue is remanded to the ld. AO to verify the claim as per the decision of Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. 2021 (3) TMI 138 - SUPREME COURT . Accordingly, these grounds of appeal are allowed for statistical purposes. TDS u/s 194J - Disallowance of software expenses for not deducting tax at source - HELD THAT - We notice that this issue is remanded to the ld. AO to verify the claim as per the decision of Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. 2021 (3) TMI 138 - SUPREME COURT in assessee s own case for AY 2012-13 2022 (11) TMI 1317 - ITAT BANGALORE - Respectfully following the decision of the coordinate bench we remit the issue for the year under consideration also with a similar direction. Accordingly, these grounds of appeal are allowed for statistical purposes. Disallowance of software expenses as capital expenditure - HELD THAT - We notice that in assessee s own for AY 2012-13 2022 (11) TMI 1317 - ITAT BANGALORE has remanded the same issue to the Ld.AO to verify the claim in the light of the evidences/documents filed and respectfully following the said decision we remit the issue for the year under consideration also to the AO with similar direction. The AO is also directed to keep in mind the ratio laid down in the case of Toyota Kirloskar Motors (P) Ltd 2013 (2) TMI 108 - KARNATAKA HIGH COURT and IBM India Ltd 2013 (10) TMI 1225 - KARNATAKA HIGH COURT while deciding revenue or capital nature of the software spends. This ground is accordingly allowed for statistical purposes. Disallowance of brand building expenditure - HELD THAT - Considering that there is no change in the facts, circumstances and nature of brand building expenses incurred during the year under consideration as compared to the earlier years, we respectfully follow the decision of the coordinate bench and hold that the brand building expenditure incurred during the year should be allowed and the addition is deleted accordingly. This ground is allowed. Disallowance of commission paid to non-residents - Assessee generates substantial part of its business from overseas clients mainly from the North American, European and Asia Pacific markets - HELD THAT - As decided in assessee own case AY 2012-13 2022 (11) TMI 1317 - ITAT BANGALORE remand this issue to the Ld.AO to verify the above submissions. There is no quarrel that the benefit available to assessee as per DTAA must be granted as per the ratio of Hon ble Supreme Court in case of Engineering Analysis 2021 (3) TMI 138 - SUPREME COURT AO shall verify and consider the claim in accordance with law. Deduction u/s 10AA in respect of onsite activities - HELD THAT - We remit the issue back to the AO for verification of details and consider the claim of the assessee in accordance with law. The AO is directed to keep in mind the ratio laid down by the jurisdictional High Court in the case of Mphasis 2015 (10) TMI 2062 - KARNATAKA HIGH COURT while deciding the issue on merits after giving a reasonable opportunity of being heard to the assessee. Deduction u/s 80JJAA - deduction claimed pertains to the 3rd year claim in respect of services of employees who joined in financial year 2012-13 - HELD THAT - We notice that the coordinate bench of the Tribunal in assessee s own case for AY 2012-13 2022 (11) TMI 1317 - ITAT BANGALORE has followed the decision of Sap Labs 2021 (11) TMI 1129 - ITAT BANGALORE and has remitted the issue back to the AO to consider the claim in accordance with the observations and principles laid down by the Hon ble Tribunal in the said decision. Respectfully following the decision in assessee s own case, we remit the issue for the year under consideration also back to the AO to examine the issue afresh. This ground is allowed for statistical purposes. Disallowance of payments made to overseas subsidiaries - Assessee made various payments to its associated enterprises and two other vendors which are non-associated enterprises outside India - HELD THAT - We are of the considered view that the assessee cannot be denied the additional deduction claimed during the course of assessment towards payments made to overseas entities on the ground that the same is not made by filing revised return. Accordingly the AO is directed to consider these claims and decide the allowability of the claim on merits. Deduction for state taxes paid outside India - HELD THAT - In assessee s case it is noticed that the lower authorities have looked into the issue only from section 90/91 perspective and has not discussed anything with regard to the allowability u/s.37. This fact has been admitted by the CIT(A) in para 18.2 of the appellate order. We are therefore of the considered view that this issue should be remitted back to the AO for fresh examination of facts and the AO is directed to keep in mind the ratio laid down in the case of Reliance Infrastructure Ltd 2016 (12) TMI 1293 - BOMBAY HIGH COURT which is followed in the decision of the coordinate bench in the case of Onmobile 2022 (8) TMI 1343 - ITAT BANGALORE - The assessee is directed to provide necessary information to the AO and cooperate with the proceedings. It is ordered accordingly. This ground is allowed in favour of the assessee for statistical purposes. Deduction in respect of donation made under Corporate Social Responsibility (CSR) - HELD THAT - In assessee s case the reason for denying the deduction u/s.80G is that the deduction is not available for donations which are part of CSR expenditure. CIT(A) while upholding the order of the AO stated that the CSR spend is not voluntary and therefore cannot be treated as donation. In our view, the assessee s case is therefore covered by the decision of the coordinate bench in the case of Goldman Sachs Services Pvt. Ltd 2020 (11) TMI 464 - ITAT BANGALORE and respectfully following the same we remit this issue back to the AO for verification of CSR spends in the light of the said decision. The AO is also directed to consider the ratio laid down by the coordinate bench in the case of Allegis Services (India) (P.) Ltd (supra) and allow a proper opportunity of being heard to the assessee. Disallowance of deduction under section 80G in respect of other donations - HELD THAT - We notice that the donations made to the above organisations by the assessee are not part of CSR expenditure and the lower authorities have not verified the details pertaining to these donations separately. We also noticed that the lower authorities have considered these donations along with CSR spend while disallowing deduction u/s.80G which according to the ld AR needs to examined separately for the purpose of allowability. Accordingly we remit this issue back to the AO to verify these donations in the light of the provisions of sections 80G and decide the allowability of the deduction accordingly. This ground is allowed for statistical purposes. Deduction u/s 10AA in respect of interest income on GLES deposits with LIC, receipts from sale of scrap, interest income from loans given to employees and incentives from airlines - HELD THAT - We are of the considered view that GLES deposits with LIC, receipts from sale of scrap, interest income from loans given to employees are covered by the decision of the Hon ble High Court in the case of Hewlett Packard Global Soft Ltd 2017 (11) TMI 205 - KARNATAKA HIGH COURT and assessee s own case for AY 2007-08 to 2011-12 2022 (11) TMI 1316 - ITAT BANGALORE Accordingly we hold that these income should be included for the purpose of computing the profits eligible for deduction u/s.10AA. With respect to incentives from airlines, we notice that the same is received from few airline companies such as Lufthansa, Qatar Airways, Indigo, Spicejet etc., as incentive amount for travelling of employees, officers etc., regularly. In our considered view, the income is not directly arising out of the business of the assessee and do not have any nexus to the business of the assessee. The income is arising for the reason that some of the employees are frequently travelling in these airlines and the income thus earned is incidental to the business. Therefore applying the ratio laid down by the Hon ble Supreme Court in the case of Sterling Food 1999 (4) TMI 1 - SUPREME COURT we hold that incentives received from airlines are not eligible for deduction u/s.10AA. Foreign tax credit - HELD THAT - We remit the issue back to the AO with a direction to keep in mind the above decision of the coordinate Assessee s own case for AY 2005-06 and AY 2006-07 while considering the issue from allowability u/s.90/91 perspective. The AO is further directed to keep in mind the directions given in the earlier part of this order with regard to the allowability u/s.37 of the foreign tax credit and the additional foreign tax claimed by assessee in respect of state taxes paid. Disallowance of payments made to US authorities - HELD THAT - Admittedly, the impugned payment is towards an offence of a foreign law and not any laws in India. The Co-ordinate Bench of the Tribunal in the case of Mylan Laboratories Ltd. 2019 (11) TMI 803 - ITAT HYDERABAD had held that the amount disallowed under Explanation 1 to section 37(1) of the I.T.Act are of those for contravention of law in force in India and not in any foreign country. ITAT Hyderabad Bench in Mylan Laboratories Ltd. 2019 (11) TMI 803 - ITAT HYDERABAD has held that amounts to be disallowed under Explanation 1 to section 37(1) of the Act are for those for contravention of laws in force in India and not of any foreign country. Settlement amount paid to US authorities should be allowed as deduction for the relevant assessment year. Disallowance u/s 32AC - investment in new plant and machinery - HELD THAT - The predominant activity of the assessee is software development. Accepting the contentions of the learned AR will lead to absurd result, wherein even a small revenue of 0.1% from the activity of manufacturing or production of article or thing, will lead to a conclusion that the entire investment in plant and machinery from a non-eligible business will be eligible for investment allowance under section 32AC of I.T.Act. AR had submitted that the prescribed authority i.e., DSIR had granted approval for deduction u/s. 35(2AB) of the I.T. Act. Section 35(2AB) deals with weighted deduction in respect of expenditure incurred on scientific research on in-house research and development facility. The said emphasis is on expenditure incurred on scientific research. Moreover, the approval given by DSIR is section specific i.e., section 35 of the I.T. Act. However, looking at the background of introduction of section 32AC, the definition of the term manufacture u/s. 2(29BA) of I.T. Act, we are of the firm view that benefit deduction is available to only manufacturing sector and not the service sector. For the aforesaid reasoning and judicial pronouncements cited supra, we hold that the assessee is not eligible for deduction u/s. 32AC. Deduction u/s. 35(2AB) - HELD THAT - In assessee s own case, the expenditure incurred by the assessee with respect to expenditure incurred during financial year 2013-14 i.e. prior to 01.07.2016. Therefore respectfully following the decision of the Coordinate Bench in case of Mahindra Electric Mobility Ltd. 2019 (1) TMI 20 - ITAT BANGALORE , we held that the entire expenditure incurred by the assessee with respect to R D facility, is eligible for deduction u/s. 35(2AB). Accordingly, the disallowance made by the assessing officer is deleted.

Summary

Issues Involved:
1. Disallowance under section 14A.
2. Disallowance of subscription charges paid to Forester Research and Gartner.
3. Disallowance of software expenses for not deducting TDS.
4. Disallowance of software expenses as capital expenditure.
5. Disallowance of Brand Building expenditure.
6. Disallowance of commission paid to non-residents for not deducting tax at source under section 195.
7. Deduction under section 10AA in respect of onsite activities.
8. Deduction under section 80JJAA.
9. Disallowance of payments made to overseas subsidiaries under section 40(a)(i).
10. Disallowance of payments made to US authorities.
11. Disallowance of deduction claimed under section 32AC.
12. Partial disallowance under section 35(2AB).
13. Deduction for foreign tax credit, state tax paid outside India.
14. Deduction under section 10AA in respect of interest income, sale of scrap, interest income from employee loans, and airline incentives.
15. Deduction under section 80G in respect of CSR expenses.
16. Deduction under section 80G in respect of other donations.

Detailed Analysis:

Disallowance under section 14A:
The Tribunal noted that the AO did not record any satisfaction as to how the voluntary disallowance made by the Assessee under section 14A was incorrect. The Tribunal followed the Supreme Court's ruling in Maxopp Investment Ltd v CIT [2018] 91 taxmann.com 154, which mandates the AO to record satisfaction before invoking Rule 8D. The Tribunal deleted the disallowance made under section 14A read with Rule 8D(2)(iii).

Disallowance of subscription charges paid to Forester Research and Gartner:
The Tribunal remanded the issue back to the AO to verify the claim as per the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT (2021) 432 ITR 471.

Disallowance of software expenses for not deducting TDS:
The Tribunal remitted the issue back to the AO for verification as per the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT (2021) 432 ITR 471.

Disallowance of software expenses as capital expenditure:
The Tribunal remitted the issue back to the AO to verify the nature of the software, duration of the license, and allow the deduction if the software is application software or if the duration of the software license is less than 2 years, following the Karnataka High Court's decision in CIT v IBM India Ltd [2013] 357 ITR 88.

Disallowance of Brand Building expenditure:
The Tribunal allowed the Assessee's claim, following the decision in Infosys BPO Ltd v DCIT ITA No. 1367/Bang/2014, which held that brand building expenditure should be allowed as revenue expenditure.

Disallowance of commission paid to non-residents for not deducting tax at source under section 195:
The Tribunal remitted the issue back to the AO to verify the claim in accordance with the principles laid down by the Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT (2021) 432 ITR 471.

Deduction under section 10AA in respect of onsite activities:
The Tribunal remitted the issue back to the AO for verification of details and to consider the claim in accordance with the Karnataka High Court's decision in CIT v Mphasis Software and Service India Pvt. Ltd.

Deduction under section 80JJAA:
The Tribunal remitted the issue back to the AO to examine the issue afresh, keeping in mind the ratios laid down by the Tribunal in SAP Labs India Pvt Ltd [IT(TP)A Nos. 623, 566/Bang/2016] and in Assessee's own case for AY 2012-13 and AY 2013-14.

Disallowance of payments made to overseas subsidiaries under section 40(a)(i):
The Tribunal upheld the disallowance of payments made to Infosys China, Infosys BPO S.R.O. Czech Republic, Infosys Technologies S De Rl De Cv, Mexico, and Infosys BPO Poland Sp. The Tribunal remitted the issue of payments made to Infosys Technologia do BrasilLtda, Future Focus Infotech, UAE, and Pt Maya International, Indonesia, back to the AO for fresh consideration.

Disallowance of payments made to US authorities:
The Tribunal allowed the deduction for the settlement amount paid to US authorities, holding that Explanation 1 to section 37(1) applies only to contravention of laws in force in India and not in any foreign country.

Disallowance of deduction claimed under section 32AC:
The Tribunal held that the Assessee is not eligible for deduction under section 32AC as the software development activity does not qualify as "manufacture or production of any article or thing" under section 2(29BA).

Partial disallowance under section 35(2AB):
The Tribunal held that the entire expenditure incurred by the Assessee with respect to R&D facility is eligible for deduction under section 35(2AB) and deleted the disallowance made by the AO.

Deduction for foreign tax credit, state tax paid outside India:
The Tribunal remitted the issue back to the AO with a direction to consider the allowability under sections 90/91 and 37, following the Karnataka High Court's decision in Wipro Limited v DCIT [2016] 382 ITR 179.

Deduction under section 10AA in respect of interest income, sale of scrap, interest income from employee loans, and airline incentives:
The Tribunal upheld the inclusion of interest on GLES deposits, sale of scrap, and interest income from employee loans for the purpose of computing profits eligible for deduction under section 10AA. However, it held that incentives from airlines are not eligible for deduction under section 10AA.

Deduction under section 80G in respect of CSR expenses:
The Tribunal remitted the issue back to the AO for verification of CSR spends in light of the decision in M/s Goldman Sachs Services Pvt. Ltd. v JCIT [IT(TP)A No.2355/Bang/2019].

Deduction under section 80G in respect of other donations:
The Tribunal remitted the issue back to the AO to verify these donations in light of section 80G and decide the allowability of the deduction accordingly.

Conclusion:
The Tribunal allowed the appeals of both the Assessee and the Revenue partly for AY 2014-15 and 2015-16, with directions for fresh consideration and verification on several issues.