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2020 (1) TMI 1011 - AT - Income TaxAddition u/s 40(a) (ia) - paid vs payable in context of disallowance u/s 40(a) (ia) - HELD THAT - The issue stands squarely covered against assessee by decision of Hon ble Supreme Court in case of Palam Gas Services vs CIT 2017 (5) TMI 242 - SUPREME COURT . Accordingly we allow these grounds raised by revenue. Computation of deduction u/s 10A - direction to reduce telecommunication charges from both export turnover as well as total turnover by Ld.CIT (A) for purposes of computation of deduction - HELD THAT - Issue stands settled in favour of assessee by decision of Hon able Supreme Court in case of CIT vs HCL Technologies Ltd. 2018 (5) TMI 357 - SUPREME COURT wherein, it is been held that, expenses reduced from export turnover should also be reduced from total turnover while computing deduction under section 10A. Allowing deduction under section 10A before setting off brought forward losses and unabsorbed depreciation - HELD THAT - Admittedly, it has been submitted that this issue stands settled in favour of assessee by decision of Hon able Supreme Court in case of CIT vs Yokogawa India Ltd 2016 (12) TMI 881 - SUPREME COURT and CIT vs JP Morgan services India Pvt.Ltd. 2017 (5) TMI 640 - SC ORDER wherein it has been held that deductions under section 10 A, 10 B should be allowed in respect of current year profits of the undertaking before setting off brought forward losses and unabsorbed depreciation. Deduction u/s 10A - Reduction of foreign currency expenses from export turnover - HELD THAT - Assessee incurred expenditure in foreign currency in relation to sales and marketing activities, process study and analysis by experts of company who visit client location, expenditure incurred for providing training to employees of assessee in regard to business process of client. These services in our considered opinion cannot be considered to be one falling as defined in definition of computer software in Explanation 2 (i) to section 10A of the act. We are therefore unable to concur with arguments advanced byLd.AR. It is also observed that decisions relied upon by Ld.AR by Hon ble Jurisdictional High Court are on different set of facts and are of no assistance to assessee in present facts. However assessee cannot be denied benefit of exclusion of foreign currency expenses from total turnover as has been held by Hon ble Supreme Court in case of CIT vs HCL Technologies Ltd 2018 (5) TMI 357 - SUPREME COURT Respectfully following the same, we direct Ld.AO to exclude foreign currency expenditure incurred by assessee from total turnover as well. Accordingly this ground raised by assessee stands dismissed. Addition on account of deferred revenue - HELD THAT - Addition of deferred revenue is revenue neutral as corresponding increase in income has been treated as profit of business and deduction under section 10 A has been allowed by Ld.AO for assessment year 2007-08. He has also submitted that deferred revenue for assessment year under consideration has actually been recognised and accounted for as revenue for assessment year 2008-09 and the same has been considered in computing total income for assessment year 2008-09. It is observed that Ld.CIT (A) directed Ld.AO to verify the amount of ₹ 11,69,38,859/- from income for assessment year 2008-09. We therefore set aside this issue to Ld. AO for due verification as per direction and to consider claim of assessee as per law. Disallowance under section 14A having regards to Rule 8D (iii) - HELD THAT - Admittedly, year under consideration is 2007-08 and Rule 8D has been prospectively implemented. Ld.AO thus erred in resorting to computation as per Rule 8D. However considering fact that assessee earned exempt income which do not form part of total income for the year under consideration and no suo moto disallowance has been made by assessee, we direct Ld.AO to restrict disallowance under section 14 A to the extent of ₹ 10,000 only. Disallowance of expenses under 40(a)(i) / 40(a)(ia) - HELD THAT - Software payments are in the nature of 'royalty' and hence liable for TDS.See SAMSUNG ELECTRONICS CO. LTD. OTHERS 2011 (10) TMI 195 - KARNATAKA HIGH COURT Setting off loss from forward option contract while computing business income as against income from other sources contended by assessee - HELD THAT - Admittedly, assessee is not a dealer in foreign exchange. What is necessary to be analysed is, dominant purpose for entering into forward contract and option contracts. As we analyse reply filed by assessee on query raised by Ld. AO(referred to herein above), it is observed that forward contract was entered into by assessee in respect of all 5 units as a whole, to hedge against currency fluctuation in respect of receipts (98%) in view of services rendered by assessee to USA and European countries. It has been submitted in written submission dated 16/07/19 by Ld.AR that such contract was entered into by assessee to safeguard its interest. It is very clear that loss has been incurred by assessee upon hedging transaction of export, being business activity carried on by assessee. We therefore do not find force in submissions made by Ld.AR regarding forward contract in foreign exchange partaking character of treasury operations. Forward contract has been entered by assessee in relation to business income and therefore any loss or gain earned by assessee on account of such contract would partake nature of business income. In our view merely because Assessing Officer in preceding years and some of succeeding assessment years has not observed the issue does not mean, same should be allowed to perpetuate. Any claim made by assessee has to be analysed having regard to law applicable. Further, decisions relied upon by assessee has been decided on a different context and are factually not similar or even seemingly identical with that of assessee. Accordingly, ratio laid down in these decisions are of no assistance to assessee under present factual matrix. Alternative plea of Ld.AR in considering such loss to be set off against profits of 10A units before allowing deduction under section 10A cannot be ignored. Accordingly, we direct Ld.AO to apportion such loss against the profits of STPI unit s in ratio of turnover and to grant set of against such profit before computing deduction under section 10 A in respect of such unit. Brand building expenses claimed by assessee - nature of expenses - capital in nature OR revenue expenditure - HELD THAT - In the present facts of case, assessee incurred such expenses in the process of an ongoing business activity and therefore it was not right on behalf of authorities below to hold such expenditure to be capital in nature. Direct Ld. AO to delete disallowance made. Foreign tax credit - HELD THAT - As submitted that during the year assessee claimed foreign tax credit amounting to ₹ 1,10,183/-as double taxation relief under section 90 in the process of computing income tax. We direct Ld. AO to verify the same and allow the claim of assessee as per law. Accordingly this ground raised by assessee stands allowed.
Issues Involved:
1. Applicability of Section 40(a)(i) / 40(a)(ia) on amounts payable at the end of the relevant year. 2. Exclusion of telecommunication charges from total turnover while computing deduction under Section 10A. 3. Deduction under Section 10A before setting off brought forward losses and unabsorbed depreciation. 4. Reduction of foreign currency expenses from export turnover while computing deduction under Section 10A. 5. Taxability of deferred revenue. 6. Disallowance under Section 14A read with Rule 8D. 7. Disallowance of software expenses under Section 40(a)(ia). 8. Treatment of losses from forward and option contracts. 9. Disallowance of brand building expenses as capital in nature. 10. Allowability of foreign tax credit. 11. Levy of interest under Section 234B and 234D. Issue-wise Detailed Analysis: 1. Applicability of Section 40(a)(i) / 40(a)(ia) on amounts payable at the end of the relevant year: The Tribunal acknowledged that the issue was covered against the assessee by the Supreme Court's decision in Palam Gas Services vs CIT (2017) 394 ITR 300. Therefore, the Tribunal allowed the grounds raised by the revenue. 2. Exclusion of telecommunication charges from total turnover while computing deduction under Section 10A: The Tribunal noted that the issue was settled in favor of the assessee by the Supreme Court in CIT vs HCL Technologies Ltd. (2018) 404 ITR 719. The expenses reduced from export turnover should also be reduced from total turnover while computing deduction under Section 10A. Hence, these grounds raised by the revenue were dismissed. 3. Deduction under Section 10A before setting off brought forward losses and unabsorbed depreciation: The Tribunal referred to the Supreme Court's decisions in CIT vs Yokogawa India Ltd (2017) 391 ITR 274 and CIT vs JP Morgan Services India Pvt. Ltd. (2017) 393 ITR 24, which held that deductions under Section 10A should be allowed before setting off brought forward losses and unabsorbed depreciation. Consequently, these grounds raised by the revenue were dismissed. 4. Reduction of foreign currency expenses from export turnover while computing deduction under Section 10A: The Tribunal examined the definition of "computer software" and "export turnover" under Section 10A. It concluded that the foreign currency expenses incurred by the assessee did not relate to "computer software" as defined. However, the Tribunal directed the AO to exclude foreign currency expenditure from the total turnover as well, following the Supreme Court's decision in CIT vs HCL Technologies Ltd. 5. Taxability of deferred revenue: The Tribunal set aside the issue to the AO for verification, directing the AO to consider the claim of the assessee as per law. The assessee's argument that the deferred revenue was revenue-neutral was noted, and the AO was instructed to verify the amount from the income for the subsequent assessment year. 6. Disallowance under Section 14A read with Rule 8D: The Tribunal observed that Rule 8D was prospectively implemented, and the AO erred in applying it for the year under consideration. The Tribunal directed the AO to restrict the disallowance under Section 14A to ?10,000 only. 7. Disallowance of software expenses under Section 40(a)(ia): The Tribunal referred to various decisions, including the jurisdictional High Court's decision in CIT vs Samsung Electronics Co. Ltd. (2012) 345 ITR 494, which held that software payments constituted 'royalty' and were liable for TDS. Following the jurisdictional High Court's decision, the Tribunal upheld the disallowance made by the AO. 8. Treatment of losses from forward and option contracts: The Tribunal held that the forward contract losses were related to the business income and should be treated as such. However, it directed the AO to apportion the loss against the profits of STPI units in the ratio of turnover before computing deduction under Section 10A. 9. Disallowance of brand building expenses as capital in nature: The Tribunal concluded that the expenses incurred towards advertisements, sales, and marketing were related to the ongoing business and should be considered revenue in nature. The Tribunal directed the AO to delete the disallowance made. 10. Allowability of foreign tax credit: The Tribunal directed the AO to verify the foreign tax credit claimed by the assessee and allow it as per law. 11. Levy of interest under Section 234B and 234D: The Tribunal noted that the issue was consequential in nature and did not require adjudication. Conclusion: The appeal filed by the revenue was dismissed, and the appeal filed by the assessee was partly allowed as indicated above. The Tribunal provided detailed directions for each issue, ensuring that the AO adheres to the legal precedents and verifies the claims appropriately.
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