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TMI Blog2008 (10) TMI 653X X X X Extracts X X X X X X X X Extracts X X X X ..... learned CIT, It is seen that the learned CIT himself had occasion to deal with the entire facts and the details. We had occasion to go through the details filed by the assessee before the AO. We have also seen details of Wipro Net Division in the Profit and Loss Account for the period ending 31-3-2003 which was enclosed with Setter dated 11-11-2005 send by the assessee. Considering this factual matrix, we are of the view that the order passed by the AO is not erroneous and prejudicial to the interests of revenue as held by the learned CIT. We, therefore, quash the order of the learned CIT dated 26.9.2007 passed u/s 263 of the act. Thus, we restore the order of the AO on this issue. It is ordered accordingly. In the result, the appeal filed by the assessee is allowed. - P. MOHANARAJAN, JUDICIAL MEMBER AND N.L. KALRA, ACCOUNTANT MEMBER For the Respondent : K.R. Pradeep and B.K. Manjunath For the Respondent : Etwa Munda ORDER P. MOHANARAJAN, JUDICIAL MEMBER:- 1. ITA No. 624/Bang/2007 and ITA No. 817/Bang/2007 are cross appeals by both the assessee and the revenue directed against the order of the learned CIT(A)-VI, Bangalore, dated 29.3.2007. ITA No.1178/Bang/2007 is by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar assessment, i.e. the assessment made either under section 143(3) or under section 144 (including the assessment made for the first time u/s 147), if no refund is due to the assessee, the assessee has to pay simple interest on the whole or excess amount so refunded from the date of grant of refund to the date of such regular assessment. The provision of section 234D is with regard to provision for recovery and collection of tax and not with regard to declaration of liability. It is settled law that a distinction has to be made by the Courts while interpreting the provisions of a taxing statute between charging provisions, which impose the charge to tax, and machinery provisions, which provide the machinery for the quantification of the tax and the levying and collection of the tax so imposed. While charging provisions are construed strictly, machinery sections are not generally subject to a rigorous construction. The Courts are expected to construe the machinery sections in such a manner that a charge to tax is not defeated. It is the duty of the Court while interpreting the machinery provisions of a taxing statute to give effect of its manifest purpose having a full view of it. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... found chargeable when the regular assessment is made on or after 1.6.2003 the period has to be seen from the date of granting refund till the date of regular assessment. The simple reason is that interest is chargeable for enjoying the refund which the assessee was not legally entitled to. Interest is compensatory in character and is mandatory in nature Accordingly, interest was rightly levied under the provisions of section 234D as the regular assessment was made on or after 1.6.2003. However, in view of the decision of the Special Bench (Delhi) of Tribunal in ITO vs. Ekta Promoters P. Ltd., (305 ITR (AT) 1), wherein the charge of interest u/s 234D was held to be prospective, therefore applying the same, we allow the appeal of the assessee insofar as it relates to section 234D. As regards the issue of interest u/s 234B, we confirm the order of the learned CIT(A). 4. The next issue relates to miscellaneous income and rental income which was claimed to be considered as part of income eligible u/s 10A by the assessee. This was disallowed by the authorities below. Similar issue was considered and the same was dismissed as not pressed in the above referred order. The facts are identic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents of EOU/EHTP/STP/BTP units are as under: (a) Exemption from Income tax as per sec.10A and 103 of Income lax Act Further, from the perusal of the Exim Policy (chapter 6) extracted above, it is seen that whatever benefit given should be as per the provisions of sections 10A and 10B of the Income Tax Act, Apart from the benefit conferred under the aforesaid Chapter, nothing has been indicated in respect of any deemed export when the issue considered under the Income-tax Act. The Exim Policy extracted above (Chapter 8.1 and 8.3) obviously does not include in respect of benefit to be given under Income-tax Act other than one referred to under Chapter 6.12(a). When this being consciously omitted in the Policy, we do not find any force in the stand taken by the learned counsel for assessee to treat the sales effected to other STP by the assessee as deemed export This ground fails . As the facts are similar in the present year also, applying the same, we confirm the order of the learned CIT(A). 6. The next issue relates to exclusion of foreign taxes (VAT/GST) from export and total turnover. While considering an identical issue, in para. 38.1 and 38.2 of the above referred order the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 08, similar issue also found a place wherein para. 41.1 it has been held as under: 41.1 This issue has also been discussed while disposing off the appeal of revenue in respect of deduction u/s 80IB. Following that discussion, it is held that the learned CIT(A) was justified in not allowing deduction u/s 80IB on the sale of monitors. As the facts are similar, applying the same, we uphold the order of the learned CIT(A). 9. In the revenue's appeal viz. ITA No.817/Bang/2007, the first issue relates to expenditure in respect of discontinued business. Similar issue fell for consideration in the assessee's own case for assessment years 1998-99 and 1999-00 in ITA Nos.895 and 896/Bang/2005 dated 21-6-2005 wherein it has been held as under: 10.4 We have considered the issue carefully. We find that the details submitted by the assessee was not properly looked into or appreciated by the AO whose order has been extracted above. Consequently, we do not feel handicapped to decide the issue on merits. Analysis of loss of stock from Apple Products activity indicates the loss to be operational loss incurred during the course of carrying on of business. The expenditure incurred by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vered in favour of the assessee. 18.6 The Special Bench in the case of Amway India Enterprise v DCIT 111 ITD 112 had an occasion to consider as to whether the expenditure incurred on software is revenue or capital. If the life of the computer software is shorter, say less than two years, then it is to be treated as revenue expenditure. The Special Bench further observed that if there are associated capital expenditure like purchase of new computer equipment for running the software developed under the project, then it can be considered as capital expenditure. If the software is used as part of the profit making apparatus of the assessee, then expenditure on software is capital. If it is used to facilitate the running of the business, then it is revenue in nature. Since in the instant case, the Assessing Officer has simply relied on the order of his predecessor by holding the expenditure as capital, therefore, we have to record a finding on the basis of the finding recorded in earlier year. Since in earlier years, the issue stands decided in favour of the assessee, therefore, we are not inclined to interfere with the finding of the learned CIT(A), Moreover, the Tribunal is holding t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... empted income in the total income of the assessee is two folds. Firstly, the rate of tax is determined with reference to the total income and therefore, exempted income, which is included in the total income would effect the rate of tax applicable to the chargeable portion of total income'. 4.13 Considering the language of section 10A relevant for the asst. year under reference, it is clear that the profit of the undertaking, which is eligible for deduction u/s 10A, is not an income, which will not form part of total income, Hence, indirect expenses cannot be apportioned u/s 14A of the IT Act. However, what is exempt is the profit of the undertaking The direct expenses relating to the unit for which deduction u/s 10A is being claimed are to be considered for the purpose of computing deduction u/s 10A as such expenses are required to be considered for ascertaining the profit and gains of the undertaking. 4.14 Total income is defined in section 2(45) of the Income-tax Act. As per this definition, total income means the total amount of income referred to in section 5 computed in the manner laid down in this Act. Section 5 of the IT Act says that total income of any previous year o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be taken into account to arrive at the deduction allowable u/s 80IA. 5.5 The Bangalore Bench in the case of Wipro-GE Medical Systems v DCIT 81 TTJ 455 had an occasion to consider the allowability of deduction u/s 80IA. In that case, the assesses was having units in Bangalore and Goa. The Bangalore Bench held that there was no need for allocation of any expenses when the expenses were directly connected. What is required is the allocation of common expenses or indirect expenses. The assesses himself has shown the allocation of salaries/wages, bonus and commission, The working relating to the deduction was accepted. 5.6 The Delhi Tribunal in the case of DCIT v Catvision Products Ltd. 84 TTJ 241 held that only those expenses which have direct nexus with carrying on activity of undertaking is to be reduced for determining the quantum of deduction u/s 80I and those expenses which have indirect or remote nexus should not be deducted. 5.7 The Chennai Bench in the case of Alstorm v DCIT 95 TTJ 139 held that common expenses incurred by the assessee for marketing the industrial produces should be proportionately distributed in respect of each industrial undertaking. This is to be done to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exempt u/s 10A, we should consider the commission paid to the Directors as percentage of profit for computation of profit and gains of such undertaking. The profit from the undertaking, which is qualifying for exemption u/s 10A is a source of making payment of commission to the Directors. The Madras High Court in the case of CIT v Best and Co. P. Ltd. 213 ITR 164 held that bonus and commission paid to the Directors is to be deducted for the purposes of computing deduction u/s 80E. Since the payment of commission is directly relatable to the profits, therefore, the Assessing Officer has rightly allocated the commission expenditure in respect of undertaking whose income is deductible u/s 10A. 6. Another issue which arises before us is in respect of allocation of common expenditure. As per the Assessing Officer, 57% of revenue is generated by Wipro Technologies; therefore, he has allocated the common expenses in mat ratio. It will be useful to reproduce the allocation of rates and taxes as made by the Assessing Officer: Rates and taxes of an amount of ₹ 4,65,72,898/- an amount of ₹ 3.1 crores pertains to Wipro Infotech and has been wrongly accounted in the books. Only the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The assessee has not explained how the newspaper, diesel drum, wooden racks etc. are connected with the industrial activity. 22.2 We nave considered the facts of the case. It is not in dispute that the very nature of expenses in the form of newspaper, diesel drum and certain packing materials have formed part of the expenses incurred in the course of carrying on export oriented units The expenses of such nature have reduced the eligible profit of the export oriented unit. When the same items of expenses are reduced while calculating the eligible profit the income which actually reduces such type of expanses should not be treated as other income not forming part of profit of eligible business. While calculating the profit of the eligible business the expenses and the income of the same unit are required to be netted out. The expenses and the income are relatable to the same nature. We direct that the computation should be made after netting out the expenditure by reducing the income of the nature in dispute. In other words, though it cannot be held that the income of the nature in dispute is income arising out of the activity of an export oriented unit, however, the expenses are t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch section 10A is applicable. Since facts are identical, applying the same, we uphold the order of the learned CIT(A). 14. The next issue relates to exclusion of exchange fluctuation from the receipts for the purpose of computing deduction u/s 10A of the Act. This issue is also covered by the decision of this Tribunal dated 30-5-2008 wherein it has been held as under: 11.3 It is seen that the Tribunal for the asst. year 2000-01, following its order for the asst. year 1998-99 and 1999-2000, held that foreign exchange gain due to fluctuation in the rate of rupee is to be included in the profit of the undertaking and is to be considered as eligible for deduction u/s 10A. The excess amount is received because the sale proceeds when received are more as compared to the price at which the goods were exported on account of exchange rate fluctuation. The exports are made at a price in foreign exchange and the amount is received in India subsequently and therefore, some gain is there on account of fluctuation. For the purpose of section 80HHC, the Mumbai Bench in the case of ACIT v Muthu Mandir Tardev Road, Mumbai (2006) 10 SOT 148 held that exchange gain itself is to be considered as part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits and all items that bear this character will be included. Hence, having regard to the substituted provisions of section 10A w.e.f. 1-4-2001, the decision of the Hon'ble Supreme Court in 237 ITR 579 is inapplicable. I find that gains on exchange fluctuation are integral to the realization of export debts and being in the nature of export turnover will have to be reckoned for arriving at the profits of the business of the undertaking, A similar finding has been given in the appellate order for AY 2001-02 and 2002-03 and direct the AO to follow the same. A cursory perusal of the same would indicate that after considering the facts, he directed the AO to follow the ITAT order for assessment years 2001-02 and 2002-03-As such, we do not find any infirmity in the order of the learned CIT(A). 16. The next issue relates to export sale proceeds received in India beyond the stipulated period, The revenue has raised the following grounds: 2.7. The CIT(A) erred in directing the AO to include in export turnover the collections made after the expiry of 6 months as per details submitted by the assessee. 28. The CIT(A) erred in observing that the competent authority is deemed to have all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt order within a period of four years in such cases. These amendments will take effect from the 1st day of June, 1999'. Section 155(13) provided that if such sale proceeds are brought into India after the period of six months then assessment can be modified u/s 154 of the IT Act. The obvious purpose is that in case the foreign exchange is brought into India, then the assessee will not be denied benefit of section 80HHC. In respect of foreign exchange brought into India after six months in respect of the undertakings claiming deduction u/s 10A, there was no provision for amending the assessment. To overcome this difficulty, section 155(11A) has been inserted by Taxation laws Amendment Act, 2006. As per this sub-section of section 155, the foreign exchange is brought into India in the extended period in respect of sale proceeds then the assessment is to be amended and the deduction is to be allowed u/s 10A. This shows the intention of the Legislature that it wanted to provide deduction in case the foreign exchange is brought into India after the extended period of six months. 23.6 As per section 8 of the Foreign Exchange Management Act, 1999, a person who is to receive any amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erson who has sold the goods or software or who is entitled to sell the goods or software or procure the sale thereof, such directions as appear to it to be expedient, for the purpose of securing, (a) the payment therefore if the goods or software has been sold and (b) the sale of goods and payment thereof, if goods or software has not been sold or re-import thereof into India as the circumstances permit, within such period as the Reserve Bank may specify in this behalf: Provided that omission of the Reserve Bank to give directions shall not have the effect of absolving the person committing the contravention from the consequences thereof. From the above Rule, it is clear that the foreign exchange can be repatriated to India with the direction of the RBI If there is no permission of RBI, then such foreign exchange cannot be repatriated to India. It means, the RBI has given permission to repatriate foreign exchange. It may be true that no formal approval letter might have been issued as the RBI might have thought not to issue any direction under Rule 15 of the RBI Regulations. 23.8 The learned AR has relied on the decision of the PandH High Court As per provisions of section 139(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the export turnover and the total turnover for the purpose of section 10A in respect of undertakings located in Software Technology Park is the same because all the proceeds are realized in convertible foreign exchange. Hence, in respect of such undertaking, 10A(4) will not be applicable. The learned CIT(A) further referred that section 10A amply clarifies that even profit and gains derived from on site development of computer software outside India shall be deemed to be eligible profits for the purpose of computing deduction u/s 10A. What cannot be turnover for the purpose of export turnover cannot be construed as turnover for total turnover. In the line of the decision of the Bombay High Court in 245 ITR 769, the learned CIT(A) held that if there is any exclusion in export turnover, then the same is to be considered for exclusion from the total turnover. The learned CIT(A) held that reimbursement of communication links and other sales performance incentives relate to manufacture and development of computer software. Therefore, these are to be included in the export turnover. The learned CIT(A) held that foreign taxes are to be excluded both from export and total turnover. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure incurred on on-site development, the issue stands covered by the order of this Tribunal in the case of Infosys Technologies Ltd. This Bench in the case of Infosys Technologies vide order dated 31st March, 2005 in ITA No.50/Bang/2001 held in that case that the assessee is involved in developing software. The assessee was not involved in rendering of technical services. Such softwares are provided through the computer programmes developed by them. Hence, expenses in foreign currency were not to be reduced for ascertaining the export turnover. This Bench in the case of M/s Relq Software Pvt. Ltd. in ITA No.767/Bang/2007 vide order dated 16th May, 2008 has also held that the on-site expenses for development of computer software is not in the nature of technical services. It will be useful to reproduce para 14 and 15 from that order:- 14. During the course of proceedings before us, the learned AR submitted that the issue stands deeded in favour of the assessee by the Tribunal in the case of; 1. ACIT v M/c Infosys Ltd. 653 and 969(B)/2006 2. M/s Tata Elxsi Ltd. 315(B)/2006 order dated 16.10.2007 3. M/s I-Gate Global Solutions Ltd. v ACIT (Supra) 15. We have heard both the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing the decision of this Bench and considering the decision of other Benches on this issue, the expenses on traveling etc. cannot be excluded from the export turnover. Income Tax Act does not provide any bifurcation of the expenses incurred outside India. The Assessing Officer has not brought on record any expenditure which may not be relevant for the purpose of export. Hence, the apportionment is not desirable. We confirm the finding of the learned CIT(A) that such apportionment cannot be done. 24.7 In respect of telecommunication expenses, only those expenses which are relevant for the delivery of software are to be excluded. No effort has been made by the Assessing Officer to ascertain the telecommunication expenses relating to the delivery of the software. This Bench in the case of I-Gate Global Sales held that 80% of uplinking charges should be reduced from the export turnover. Such finding of the learned CIT(A) was confirmed on the basis of the fact that the learned CIT(A) discussed the software development with a number of representatives of various companies and noticed that 80% of the uplinking charges are incurred for the delivery of software. We are not having the det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties. The Tribunal white deciding the appeal for the asst year 1998-99 and 1999-2000 has given a finding that the assessee has given the list of industrial undertakings in software technology parks electronic hardware technology parks eligible for exemption u/s 10A. These details included the date when the approval was granted and it also contained details of the first asst. year form which such exemption is available, As per section 10A, existing as on 1.4.94, profit and gains of an industrial undertaking was exempt from income in case the undertaking begins to manufacture or produce articles or things during the previous year relevant to the asst. year commenced on or after the 1st day of April, 1994 in any electronic hardware technology park or as the case may be, software technology park. However, section 10A was amended by the Finance Act, 2000 with effect from 1.4.2001. Earlier, the exemption was allowable for five asst. years while with effect from 1.4.2001, the deduction is allowable for ten asst. years. The conditions for deduction are mentioned in section 10A(2). The first condition is that the undertaking should commence manufacture or production of computer software dur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de. For the purpose of Bombay Retail Trade Control and Licensing Order, 1942, the Bombay High Court held that undertaking as used in that Act is used in the sense of an enterprise, which can be owned and transferred. Thus, an undertaking means any business or work or project. As per proviso to section 10A(2)(ii), the deduction is not permissible if undertaking is formed as a result of reestablishment or reconstruction or revival by the assessee of the business. Undertaking should not have been formed by splitting up or reconstruction of the business already in existence. It is not the case of the revenue that for the undertakings for which expansion of STP facilities were obtained were started with the help of old plant and machinery and with the existing employees. If an undertaking can independently work then such undertaking can be considered for the purpose of deduction u/s 10A. What is to ne seen is as to whether the undertaking in question is engaged in the production or manufacture of specified articles or things in its own right. Such undertaking may be producing the same article, which are being earlier produced. The Bombay Tribunal in the case of JCIT v Associated Capsule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear 1988-89 to 1994-95 and there was no change in facts. The Delhi High Court has referred to the decision of the Apex Court in the case of Radhasoami Satsang v CIT 193 ITR 321. The Apex Court in the case of Radhasoami Satsang (Supra) observed at page 329 as under:- 'This court in Parashuram Pottery Works Co. Ltd. v ITO (1977) 106 ITR 1 at page 10 stated: 'At the same time, we have to been in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi judicial controversies at it must in other spheres of human activity . Assessments are certainly quasi-judicial and these observations equally apply. We are aware of the fact that, strictly speaking, res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through it e different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny High Courts in favour of the appellant and accordingly we dismiss the grounds of the department on this issue'. From the above, it is clear that the issues stands covered by the decision of the Tribunal in the case of the assessee for the asst. year 2000-01. Hence, following the decision of the Tribunal, it is held that the learned CIT(A) was justified in directing the Assessing Officer to allow provision for warranty. Facts are identical in the present year. Hence applying the same, we confirm the order of the learned CIT(A). 21. The next issue relates to un-availed MODVAT credit. By order dated 30-5-2008 this issue was remanded to the AO with a specific direction to re-compute the income. The AO, is therefore, directed to verify the details as found in the Tribunal order dated 30-5-2008 for assessment years 2001-02 and 2002-03 and in the same line to re-compute the same. It is ordered accordingly. 22.. The next issue relates to action of the AO to exclude excise duty and sales tax from the total turnover for the purpose of computation of deduction u/s 80HHC of the Act. The revenue has raised the following grounds in their appeal: 66. The CIT(A) erred in directing the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f India out the sale proceeds of which are receivable in convertible foreign exchange. When we sit to consider sub-section (3), clause (a) thereof speaks about the assessee who has an exclusive business of exports of such goods or merchandise Clause (a) would apply where the assessee has no other business meaning all his income would be out of the export sales, the proceeds of which are receivable in convertible foreign exchange. There is again almost by way of abundant caution the use of the words goods or merchandise to which this section applies . Once we have this stage then the task of interpreting clause (b) of sub-section (3) becomes easier because even in clause (a) of sub-section (2) and clause (a) of sub-section (3) the same terminology is used in respect of the goods and merchandise. When a plain meaning has to be given to the opening part of the section, it is clear that the word business' means the business relating to the goods to which the section applies and the thrust is on the word 'exclusively'. The sub-section considers a situation where the assessee's business is of exports and the assessee's business is not that of export alone. However, on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re remains no doubt that the total turnover of the business would contemplate only the business regarding such goods part of which are exported and the others are not so exported. There is Just no scope to include the turnover of the business of the goods which are not contemplated by the section. That way, though the Legislature has specified about the applicability of the section to the goods by clause (a) of sub-section (2), we would be unnaturally making the section applicable even to the goods which are outside the limits of clause (a) of sub-section (2) and that will not be permissible. Once this situation is clear, there would be no scope for accepting the argument of the revenue that the total turnover of business would include even the turnover of goods which are outside the scope of clause (a) of sub-section (2). Hence, we are of the clear opinion that the turnover from the business of sale of motorcycles, motorcycle spare parts, television sets cannot be introduced to inflate the total turnover artificially in order to reduce the benefit which the assessee is entitled to. That would be clearly going against the object of section 80HHC which is solely to encourage the exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 3,89,15,811/-. From these calculations what can be seen is that the assessee had already computed the profit in the manner of section 80HHE(3) which in effect means it has computed the profits in the manner mentioned in the decision of the Kerala High Court relied on by the revenue. Hence, it is nobody's case that this decision has not been complied with by the assessee in its claim made in the Form 10 CCAF. The case law relied on by the assessee that is the Madras High Court in 257 ITR 60 supports the decision of this bench in ITA No.332 to 328/Bang/2000. These squarely address the issue in favour of the appellant Whereas the decision of Madras High Court was rendered subsequent to the decision of the Special Bench in Delhi Tribunal in 255 ITR 76. Consequently, it is essential that the decision of High Court must be followed in preference to the decision of the Special Bench. (Though it is to be mentioned that the issue involved before the Special Bench and before us are some what different). Such a course is correct in law as held in CIT v Smt. Godavaridevi Saraf reported in 113 ITR 589 (Bom.) the relevant portion is extracted hereunder: An authority like the Income Tax App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... balances written back Rs.64,637,268 Others Rs.20,377,247 The learned CIT(A) held that difference in exchange and royalty would fall within the ambit of operational income and hence, cannot be considered for exclusion of 90%. The items such as provision for doubtful debts written back, sundry creditors/other credit balances written back and scrap sales are mere reversal of expenditure debited to PandL account during earlier years and therefore, exclusion of such reversals from eligible profits is not warranted. In respect of discount received and customs claims, the learned CIT(A) upheld the disallowance of 90% as made by the Assessing Officer. Similar finding was recorded for the asst. year 2002-03. 21.3 During the course of proceedings before us, the learned AR has relied on the order of the Tribunal made in the case of the assessee for the earlier year. 21.4 On the other hand, the learned DR supported the order of the Assessing Officer. 21.5 After hearing both the parties, we make it clear that the assessee is free to revise his claim for deduction u/s 80HHC during the course of assessment proceedings provided such claim is supported by necessary documents to be filed for the cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, royalty is not to be reduced. It is to be considered as part of profit of the business. Following the same logic, we confirm the finding of the learned CIT(A) that 90% of the following cannot be excluded:- i) Provision for doubtful debts written back, sundry creditors/other balances written back and scrap sales. ii) We also upheld the finding of the learned CIT(A) in respect of discount received and customs claims. It is made clear the profit of the business as mentioned in Explanation (baa) to section 80HHC does not refer to commercial profit but the profit as computed under the provisions of the Act. Such profits of the business of the assessee is to be computed as per provisions of the Act in respect of that business, which is eligible to claim deduction u/s 80HHC Considering the fact that this issue is covered by the decision of this Tribunal in the assessee's own case for assessment years 1998-99 and 1999-00, we confirm the order of the learned CIT(A).24. The next issue that fells for our consideration is: i) issue of expenditure on difference in exchange ii) issue of exclusion of royalty iii) issue of exclusion of provision for doubtful debts written back iv) issue of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e profits of the business in respect of which deduction u/s 80HHC is claimed and not the entire profits of the company. The assessee relied on the decision of the Madras High Court in 257 ITR 60. The Assessing Officer has relied on the decision of the Special Bench in the case of Pearl Polymers v DCIT in 80 ITD 1 and the decision of the Kerala High Court in the case of CIT v Parry Agro Industries Ltd. in 257 ITR 41. The learned CIT(A) was of the view that the decision of the Madras High Court squarely covers the appellant's case. The learned CIT(A) has reproduced the following extract from the decision of the Madras High Court:- Therefore, it is crystal clear that the whole section 80HHC applies only to the goods which are not only exported out of India but the sale proceeds of which are receivable in convertible foreign exchange. When we sit to consider sub-section (3), clause (a) thereof speaks about the assessee who has an exclusive business of exports of such goods or merchandise Clause (a) would apply where the assessee has no other business meaning all his income would be out of the export sales, the proceeds of which are receivable in convertible foreign exchange. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reated only to see the ratio of the income out of the export to the total income out of the business in respect of those goods because of the obvious difficulty of segregating the profits earned out of export alone vis-a-vis the profits earned otherwise than by export. The total profits earned out of the business of such goods are not exemptible because those profits would include both profits out of exports and profits earned otherwise than by export but one thing is certain that the business contemplated in the sub-section would be in relation to those goods alone to which the section applies as per clause (a) of sub-section (2). Once we read sub-section (1) of section 80HHC, clause (a) of sub-section (2) and clauses (a) and (b) of sub-section (3), there remains no doubt that the total turnover of the business would contemplate only the business regarding such goods part of which are exported and the others are not so exported There is just no scope to include the turnover of the business of the goods which are not contemplated by the section. That way, though the Legislature has specified about the applicability of the section to the goods by clause (a) of sub-section (2), we wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been upheld by the Madras High Court in 257 ITR at page 69 to 70 extracted supra and supports the view that the total turnover of eligible business must be considered and not the turnover of other business of the company. Here we may notice that the Form 10 CCAF filed by the assessee, wherein the total turnover of the business of the assessee has been taken at ₹ 13,80,16.246/- and the export turnover at ₹ 12,36,29,409/-. Thus, the domestic business of the assessee is ₹ 1,43,95,837/-. The assessee has reckoned the turnover of the entire business that is domestic and exports. Similarly, the total profits of the business is ₹ 4,34,44,470/-. Whereas the profits derived in manner computed in sub-section 3 of section 80HHE is shown at ₹ 3,89,15,811/-. From these calculations what can be seen is that the assessee had already computed the profit in the manner of section 80HHE(3) which in effect means it has computed the profits in the manner mentioned in the decision of the Kerala High Court relied on by the revenue. Hence, it is nobody's case that this decision has not been complied with by the assessee in its claim made in the Form 10 CCAF. The case law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of income are either exempt from tax or liable to tax under a different head and these have already boon reduced by the assessee in computing the profits of the b business. Hence, no further exclusion is warranted . However, the above referred items have not been considered by the Assessing Officer in his chart at pace 170 but as per the assessee, these are part of other income of ₹ 69,29,15,000/-. In respect of the following items, the learned CIT(A) held that the decision of the Bombay High Court in 2.60 ITR 371 should be applied:- Difference in exchange Rs.86,399,088 Royalty Rs.30,788,838 Discounts received Rs.89,101 Customs claims Rs.1,609,094 Provision for doubtful debts written back Rs.6,367,169 Scrap sales Rs.1,635,104 Sundry creditors/other credit balances written back Rs.64,637,268 Others Rs.20,877,247 The learned CIT(A) held that difference in exchange and royalty would fall within the ambit of operational income and hence, cannot be considered for exclusion of 90%. The items such as provision for doubtful debts written back, sundry creditors/other credit balances written back and scrap sales are mere reversal of expenditure debited to PandL account during earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness income'. Under Explanation (baa) to section 80HHC, receipts by way of brokerage, commission, interest, rent chargeable on any other receipts of a similar nature included in the profits. As per rule of ejusdem generis, the words of general nature following specific and particular words then such words of general nature should be construed as limited to things which are of the some nature as those specified. This has been held by the Allahabad high Court in respect of interpretation of Rules 60 of Income Tex Rules in the case of CIT v Shivalik Drug (Family Trust) (300 ITR 339). The learned CIT(A) has also referred to the decision of the Bombay High Court. Considering these facts, we confirm the finding of the learned CIT(A) that 90% of difference in exchange, royalty is not to be reduced. It is to be considered as part of profit of the business. Following the same logic, we confirm the finding of the learned CIT(A) that 90% of the following cannot he excluded:- i) Provision for doubtful debts written back, sundry creditors/other balances written back and scrap sales. ii) We also upheld the finding of the learned CIT(A) in respect of discount received and customs claims. It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l turnover we have already decided the issue that total turnover of eligible business is to be taken and following that, the profits of the eligible business is to be taken if the assessee has maintained separate accounts for eligible business and other business. Subject to this direction, the finding of the learned CIT(A) is upheld in respect of the above referred grounds of appeal. 28. Ground of appeal no. 84 for the asst. year 2001-02 is that the learned CIT(A) has erred in directing the Assessing Officer not to consider the profit on sale of fixed assets for exclusion while computing the deduction u/s 80HHC. 28.1 Deduction u/s 80HHC is to be given as per provisions of section 80HHC read with section 80AB. Deduction is not available on commercial profit. If a fixed asset is sold, then its value is to be reduced from the block of assets. If due to sale of an asset, block ceases to exist, then such profit is to be taxed as short term capital gain as per section 50(2) of the I.T Act. Once it is held to be a capital gain, then it cannot be a part of profit and gains of business as computed from section 28 to 43D. The direction of the learned CIT(A) is therefore modified. The profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue's case is that total profit of the assessee's business should be considered. 31.1 This issue has been disposed off in view of the reasons given in earlier paras and accordingly, this ground of appeal is dismissed. 32. Ground of appeal no.88 to 92 for the asst. year 2001-02 are against the finding of the learned CIT(A) in directing that the following items should not be considered for exclusion while computing deduction u/s 80HHC: 1. Difference in exchange 2. Royalty 3. Provision for doubtful debts written back 4. Scrap sales 5. Sundry creditors or other credit balances written back 32.1 The above referred issues have already been discussed in earlier paras and finding stands already recorded. Accordingly, such grounds of appeal are disposed off in view of the findings recorded in earlier paras. 25. The next issue arises u/s 80-IB of the Act. On the issue of reversal of warranty provision of ₹ 6,39,84,080/- the assessee submitted before the AO that the unit of PII was in brink of closure due to un-viability. Therefore, warranty provision was no longer required in the said unit. However, the AO has held that the said reversal is not income derived by the undert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer further held that since income is being treated as exempt u/s 10A, therefore, tax credit can be given under the DTAA only to the extent to which the income has been taxed twice. The learned Assessing Officer relied on the decision of the Madras Bench in the case of Duromattalic India v ACIT 85 ITD 442. 22.2 Before the learned CIT(A) it was submitted that the issue has been decided in favour of the assessee by the Tribunal while deciding appeals for the asst year 1998-99 and 1999-2000. It was further submitted that the learned CIT(A) allowed credit for foreign tax in the case of the assessee for the asst. year 1990-91 and the department has not filed any appeal against that order. The learned CIT(A) recorded the following finding for the asst. year 2000-01:- I have considered the submissions and perused the records. The findings of the ITAT is in para 20.7 of its order. I also find that the CIT(A) for the asst year 2000-01 has directed the Assessing Officer to consider and allow the similar claim of the assessee for the said year. Since the issues are identical and similar in this year also, I direct the Assessing Officer to allow credit for foreign taxes paid and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting upon the basis of which the profit or gains are computed under the head 'profit and gains of business or profession'. In respect of the income of the unit qualifying for deduction u/s 10A, income tax is neither paid nor incurred. The Apex Court in the case of CIT v Williamson Financial Services 297 ITR 17 had an occasion to consider the computation of deduction u/s 80HHC in respect of profits from export of tea. The Apex Court held that deduction u/s 80HHC is to be allowed only after apportionment of income from tea under Rule 8(1) of the Income Tax Rules, 1962. The Hon'ble Apex Court at page 30 referred that section 10 groups in one place various incomes, which are exempt from tax. In respect of income on which deduction under Chapter VIA are allowed, it is mentioned that such income, are wholly or partly tax free incomes. We have already held that w.e.f. asst. year 2001-02, section 10A provides deduction out of the total income and it is not the income, which is exempt from tax. Hence, the deduction, which is allowed u/s 10A is an item of income on which tax is not payable. 22.8 The learned Madras High Court in the case of CIT v K S Vaidyanathan 153 ITR 11 (FB) h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see that development expenses qualify for deduction u/s 37 or alternatively u/s 35. However, the AO did not allow it to be set off against 'other income' of the assessee. The learned CIT(A), when the matter traveled before him, granted relief to the assessee by observing as under: 20.6 I agree with the appellant that development of shrink wrapped computer software is a long gestation activity without certainty about outcome. Once the product is developed successfully, only the copies thereof are sold. The expenses incurred for development activities have not given rise to any inventory which has resale value. Hence, the expenses will have to be allowed as a deduction in the year in which it is incurred and cannot be treated as work in progress. While giving relief as such, the learned CIT(A) has taken note of the decision of this Tribunal in the case. 28. The next issue relates to deduction claimed u/s 80-IB of the Act. The assessee had claimed deduction u/s 80-IB in respect of the following undertakings; i) Lighting factory at Waluj Rs.60,86,905/- ii) Computer factory Pondicherry-I Rs.88,21,679/- iii) Computer factory Pondicherry-II Rs.6,89,70,526/- The facts are identical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the undertaking. It may be an integrated component of the computer. If there is no value addition without any change in name, character or and use, then such an activity cannot constitute manufacture or production. If the monitors have been sold as part of the computer without making any value addition by the industrial undertaking, then the profit derived from sale of such monitors cannot be considered as profit derived from the industrial undertaking. therefore, the learned CIT(A) was justified in holding that profit from sale of monitors is not inducible for computation of deduction u/s 80IB. 33.7 In respect of allocation of expenditure, be have perused the order of the learned CIT(A). The assessee himself has allocated the overheads and such allocation has been made on the basis of sales turnover. Once such an allocation has been made by the assesses, then it was the duty of the Assessing Officer to point out that why the allocation is not correct. The Assessing Officer has simply ignored the details filed by the assessee and made the allocation. Without pointing out any error in the allocation the Assessing Officer was not justified in disturbing the allocation. Hence, the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion to para 21 of the order of this tribunal dared 21st November, 2005 in ITA No.669/Bang/2004 and 804/Bang/2005. 22.5 On the other hand, the learned DR supported the order of the Assessing Officer. 22.6 We have gone through the order of the Assessing Officer for the asst. year 2002-03. The Assessing Officer has discussed this issue from pages 103 to 113 of the order. Though the learned CIT(A) has discussed the reasons as to why the Assessing Officer has not allowed the deduction, but he has not given finding as to how the order of Assessing Officer is not legally correct. The Assessing Officer has mentioned that assessee has made claim for tax relief against the VAT tax paid in USA and Canada. As per the DTAA with USA and Canada, the claim is admissible only for the tax paid under Income Tax Act in India and federal tax in USA and Canada. It is clear that the learned CIT(A) has not disposed off this issue on merits. Section 10A has been amended by the finance Act, 2000 w.e.f. 1st April, 2001. After amendment it provides a deduction of such profit and gains as derived by undertaking. Such deduction is to be allowed from the total income. This Bench in the case of M/s Yokagawa Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entirety wealth tax is not chargeable then the debts secured on such assets has to be excluded from reckoning. In case where an asset is only partially exempt from chargeability to wealth-tax then it must necessarily follow that the portion of the debt secured on such portion of the asset or incurred in acquiring such portion of the asset has to be excluded from reckoning. Though the learned Madras High Court held that debt can be bifurcated and debt refutable to the portion of the asset on which wealth-tax is not payable u/s 5(1) of the Wealth Tax Act cannot be allowed as deduction u/s 2m(ii). Therefore, in view of above discussion, credit for income tax paid in other country in relation to income u/s 10A will not be available u/s 90(1)(a). U/s 90(1)(b), the Central Government may enter into an agreement with a Government of any country outside India for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country. To see the applicability of 90(1)(b), one is required to go through the DTAA agreements. Though the Assessing Officer has discussed this issue in detail in his order but the learned CIT(A) has not considered the argu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d enterprises. The assessee disputed the order of the TPO and the adjustments trade in the assessment order foe the following reasons: The advances predominantly relate to short-term advances which do not require any change of interest. No interest was earned by the appellant on these advances. The advances were made out of surplus funds available with the appellant and the substantial portion of the advances was repaid before March 2003. The appellant has not charged any interest on similar transactions with unrelated parties. Without prejudice, the interest is based on the presumption that the entire advances are made in January 2003. The interest, if any should be charged only on the reducing balance. When the matter traveled before the learned CIT(A), he had called for remand report and accordingly remand report dated 20-3-2007 was received from the TPO. After considering both the remand report and the submissions made by the assessee, the learned CIT(A) in para.6.4 of his order held as under: 6.4 The TPO has adopted interest rate at LIBOR+250 points. There is no discussion as to why the said rate has been adopted Further, there is also no identification of rate of interest cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enclosed balance-sheet as on March 31,2003 and Profit and Loss account for the year ending 31-3-2003. While dealing u/s 263 of the Act, the learned CIT was of the view that as there were no details available regarding discontinued operation loss at ₹ 18,15,85,000/- he proceeded in the matter u/s 263. Ultimately he held that: 7. From the facts discussed in detail above, it is clear that the order passed by the AO dated 28-3-2006 in allowing the expenses pertaining to loss from discontinuing operations of Wipro Net Division of the assassee company, in the absence of any details filed by the assessee, was erroneous in so far as it is prejudicial to the interest of revenue. I, therefore, restore this issue before the AO. The AO is directed to collect the relevant details of the expenses of Wipro Net Division of the assessee company and decide the allowability of such expenses in accordance with law. Learned counsel for assessee submitted that that relevant details were submitted to the AO and after deliberations the AO had accepted the claim of the assessee that too after due verification of the Profit and Loss Account and Balance-sheet which ware filed along with letter dated 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relation to the assets employed in the business was also added back Thus the claim before the AO as allowable revenue expenditure was in respect of ₹ 18.15 Cr. and ₹ 10.67 Cr. While AO has allowed the deduction of ₹ 18.15 Cr. the balance was disallowed, which were pertaining to the following: a) Termination of purchase commitment with Computer Associates- Rs.5.6 Cr. b) Termination of rent agreement with BSNL. communication link provider- Rs.3 Cr. c) Termination of Internet band with agreement with Loral Cyberstar- Rs.2.07 Cr. The consideration of ₹ 2.5 Cr. from an independent service provider was brought to tax. In effect, the disallowance was ₹ 10.67 Cr. The AO has disallowed saying that the details were not submitted. The AO is incorrect in the approach. The details were submitted and were also noted by him in para.9.1.3 of the assessment order. Perusal o the claim for expenditure indicates that these are all revenue in nature and incurred routinely in carrying on of business. These sums are claimed as revenue expenditure on termination of agreement with BSNL etc as noted above. The details are ex-facie available and the approach is inconsistent in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to allow the expenses after examination. The issue relating to allowability of ₹ 10.67 crores has been discussed by the learned CIT(A) and the facts in that issue are also similar to the present issue which was subject matter of order u/s 263 passed by the learned CIT, Further, From the order of the learned CIT, It is seen that the learned CIT himself had occasion to deal with the entire facts and the details. We had occasion to go through the details filed by the assessee before the AO. We have also seen details of Wipro Net Division in the Profit and Loss Account for the period ending 31-3-2003 which was enclosed with Setter dated 11-11-2005 send by the assessee. Considering this factual matrix, we are of the view that the order passed by the AO is not erroneous and prejudicial to the interests of revenue as held by the learned CIT. We, therefore, quash the order of the learned CIT dated 26.9.2007 passed u/s 263 of the act. In view of the above, we restore the order of the AO on this issue. It is ordered accordingly. 35. In the result, the appeal filed by the assessee (ITA No.1178/Bang/2007) is allowed. Order Pronounced in the open court on 31.10.2008. - - TaxTMI - TM ..... X X X X Extracts X X X X X X X X Extracts X X X X
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