2020 (12) TMI 678 - HC - Income Tax

Depreciation claimed on software - treated as royalty u/s 40(a)(ia) - Whether the tribunal is correct in allowing expenditure on imported software when the expenditure per se is capital in nature and is not allowable? - HELD THAT - Depreciation claimed on software, which was treated as royalty u/s 40(a)(ia) could not have been decided by the tribunal. Remand matter to the tribunal to decide the issue of depreciation claimed on software to the tribunal for decision afresh by taking into account the decision rendered in Wipro Ltd. 2010 (8) TMI 1053 - KARNATAKA HIGH COURT - Accordingly, the second substantial question of law is answered. From perusal of aforesaid paragraph, it is evident that the issue pertaining to expenditure incurred for purchase of software as royalty has been dealt with and it has been held that the same is not royalty and the provisions of Section 40(a)(ia) are not attracted. The decision of the Supreme Court in the case of Chaudhary Transport Company 2020 (8) TMI 23 - SUPREME COURT has no application to the fact situation of the case as the Supreme Court has interpreted Section 40(a)(ia) of the Act in the context of Section 194C of the Act. Thus, the second question of law has to be answered in favour of the assessee and against the revenue. Claim of assessee towards set-off of losses of STP/SEZ unit against the other income - Deduction u/s 10A - HELD THAT - Supreme Court in Yokogawa India Ltd. 2016 (12) TMI 881 - SUPREME COURT was dealing with the issue whether losses under Section 10A units or non Section 10A units can be set off against the profits of Section 10A units before deductions under Section 10A are effected held that it is only logical and natural that the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore, immediately after the stage of determination of its profits and gains. At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in Sections 70, 72 and 74 of the Act would be premature for application. The deductions under Section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income. It is further held that the somewhat discordant use of the expression 'total income of the assessee' in Section 10A has already been dealt with earlier and in the overall scenario unfolded by the provisions of Section 10A the aforesaid discord can be reconciled by understanding the expression 'total income of the assessee' in Section 10A as 'total income of the undertaking'. Thereafter, in para 18 has answered all the substantial questions of law in favour of the assessee including the one whether losses under Section 10A units or non Section 10A units can be set off against the profits of Section 10A units before deductions under Section 10A are effected have answered all the substantial questions of law in favour of the assessee. Therefore, first substantial question of law is answered in favour of assessee and against the revenue.

Issues Involved:
1. Set-off of losses of STP/SEZ unit against other income.
2. Depreciation on software.
3. Exclusion of interest income, rental income, and other income for Section 10A deduction.
4. Re-computation of deduction under Section 10A.
5. Deduction under Section 10A for export turnover not remitted within six months.
6. Deduction under Section 10A for Bangalore undertaking established prior to 1993.
7. Allocation of corporate overhead to 80IB unit.
8. Deduction under Section 80IB for trading activity of monitors and printers.
9. Corporate overhead expenses for units claiming 80IC deduction.
10. Allocation of corporate expenses to SEZ developers undertaking for Section 80IA deduction.
11. Foreign tax credit entitlement.
12. Allocation of corporate expenses for 10A and non-10A units.

Detailed Analysis:

1. Set-off of losses of STP/SEZ unit against other income:
The Tribunal allowed the set-off of losses of STP/SEZ units against other income by relying on its previous order for the Assessment Year 2007-08. The Supreme Court in 'Commissioner of Income-Tax vs. Yokogawa India Ltd.' held that losses of STP units cannot be set off against profits of taxable units. Therefore, the first substantial question of law is answered in favor of the assessee.

2. Depreciation on software:
The Tribunal allowed the depreciation on software by following its previous order for the Assessment Year 2004-05. The revenue argued that the payment for software should be treated as royalty and disallowed under Section 40(a)(ia) of the Act. The Tribunal's decision was based on the case of 'Wipro Ltd.', which did not deal with the issue of royalty. The matter is remanded to the Tribunal for fresh decision considering the decision in 'Wipro Ltd.'.

3. Exclusion of interest income, rental income, and other income for Section 10A deduction:
The Tribunal set aside the exclusion of these incomes for Section 10A deduction by following its previous orders for the Assessment Years 2004-05 and 2007-08, remitting the matter to the Assessing Officer.

4. Re-computation of deduction under Section 10A:
The Tribunal set aside the recomputation of deduction under Section 10A by following the decision of the High Court in 'CIT vs. Tata Elxsi', which has not reached finality. The Tribunal's decision is upheld.

5. Deduction under Section 10A for export turnover not remitted within six months:
The Tribunal allowed the deduction under Section 10A for export turnover not remitted within six months, directing the Assessing Officer to exclude the amount remitted after six months from the export turnover for computing the deduction.

6. Deduction under Section 10A for Bangalore undertaking established prior to 1993:
The Tribunal decided in favor of the assessee for deduction under Section 10A for the Bangalore undertaking established before 1993, clarifying that income from expanded undertaking is eligible to the extent of extended capacity utilized.

7. Allocation of corporate overhead to 80IB unit:
The Tribunal directed the Assessing Officer not to allocate any corporate overhead to the 80IB unit over and above the allocation made by the assessee, following its previous orders.

8. Deduction under Section 80IB for trading activity of monitors and printers:
The Tribunal allowed the deduction under Section 80IB for trading activity of monitors and printers by relying on its previous orders.

9. Corporate overhead expenses for units claiming 80IC deduction:
The Tribunal allowed the allocation of corporate overhead expenses for units claiming 80IC deduction by relying on its previous orders for the Assessment Years 2004-05 and 2007-08.

10. Allocation of corporate expenses to SEZ developers undertaking for Section 80IA deduction:
The Tribunal allowed the allocation of corporate expenses to SEZ developers undertaking for Section 80IA deduction by relying on its previous orders.

11. Foreign tax credit entitlement:
The Tribunal allowed the claim for foreign tax credit by following the decision of the High Court in the assessee's own case for the Assessment Year 2003-04.

12. Allocation of corporate expenses for 10A and non-10A units:
The Tribunal set aside the allocation of corporate expenses for 10A and non-10A units by relying on its previous orders for earlier assessment years.

Conclusion:
The appeal is disposed of, with most substantial questions of law answered in favor of the assessee, except for the issue of depreciation on software, which is remanded to the Tribunal for fresh consideration. The Tribunal's reliance on previous orders and the Supreme Court's decisions in similar cases played a significant role in the judgment. The Assessing Officer is directed to decide the issues in accordance with the Supreme Court's future decisions.

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