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TMI Blog2019 (7) TMI 799X X X X Extracts X X X X X X X X Extracts X X X X ..... remit this issue to the file of the AO to verify and examine the applicability of TDS provisions with material evidence filed and judicial decisions and the ground of appeal is allowed for statistical purposes. Marked to Market ( M2M ) loss - disallowance on the basis that the said loss is notional and contingent in nature - HELD THAT:- As contention of the AR is that this is allowable whereas we are of the opinion that hedging should not be more than the receivables. Whereas the AR submitted that it is within limits of exports and substantiated with material in the paper book - DR submitted that these facts are to be verified and the matter has to be examined whether export proceeds have been received within time allowed for filing of return by the Income-tax Act. Accordingly, we are of the substantive opinion that the matter has to be restored back to the file of the AO for verification of facts and receipt of export proceeds as envisaged in the course of hearing. Accordingly, this ground of appeal is allowed for statistical purposes. Charging of interest u/s 234B and 234C are consequential and direct the AO accordingly. Deduction u/s 10A on the capitalization of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and dismissed. Hence, the effective grounds of appeal are 1, 2, 3, 7 and 8 which read as under: 1. The learned CIT(A) erred, in law and in facts, by disallowing Annual Maintenance Contract ( AMC ) expenses and software purchases incurred during the Financial Year 2008-09 under section 40(a)(ia) of the Act amounting to ₹ 2,58,64,790 without appreciating the factual and technical submissions made by the Company in this regard. 2. The learned CIT(A) erred, in law and in facts, in capitalising the software expenses amounting to ₹ 5,41,11,457 after providing depreciation at the rate of 45% without appreciating the detailed submissions made by the Company that such expenses do not result in any enduring benefit to the Company and such expenses are revenue in nature. 3. The learned CIT(A) has erred, in law and in facts, by disallowing Marked to Market ( M2M ) loss amounting to ₹ 14,40,59,736 on the basis that the said loss is notional and contingent in nature and has not appreciated the factual and technical submissions made by the Appellant. 7. The learned CIT(A) has erred, in law and in facts, in dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On the second disputed issue with respect to disallowance for non-deduction of tax on the annual maintenance contract and software purchase, the ld. AR submitted that on purchase of software there is no requirement of deduction of tax at source and AMC charges are revenue in nature and supported with voluminous paper book to substantiate the claim. 5.2 On the third disputed issue the ld. AR submitted that the CIT(A) has erred in confirming disallowance of Marked to Market loss amounting to ₹ 14,40,736/- on the ground that the loss is notional and arise on account of re-statement of contract and contingent in nature. The ld. AR submitted that the assessee is following system of entering into hedging contracts for hedging its purely foreign currency receivables in order to mitigate the risk of foreign exchange fluctuations. The AO has relied on the CBDT instruction which is clearly not applicable and relied on the evidence and judicial decisions. 5.3 Contra, the learned DR supported the order of the CIT(A) and submitted that the claim of the assessee of AMC expenses has to be verified and assessee could not substantiate in assessment proceedin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the file of the Assessing Officer to examine and reappraise the additional evidence filed by the assessee in respect of expenditure incurred on purchase of software of ₹ 10 lakhs and above and decide the issue in accordance with the decisions of the Hon'ble High Court of Karnataka in the case of Toyota Kirloskar Motors P. Ltd. (supra) and of the Hon'ble High Court of Delhi in the case of Amway India Enterprises (supra), after affording the assessee adequate opportunity of hearing and to file required details in the matter. It is ordered accordingly. Thus, the assessee's Ground No.2 is treated as allowed for statistical purposes. 7. We, follow the ratio of decision and judicial procedure and restore this disputed issue of purchase of software expenses, to the file of the AO with directions to examine and consider the evidences filed by the assessee and this ground of appeal is allowed for statistical purposes. 7.1 On the second disputed issue of disallowance u/s 40(a)(ia), the contention of the ld. AR is that assessee has purchased software and does not required TDS and AMC expenses do not come within the purview of applicability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in law in directing the AO to allow the deduction u/s 10A on the amounts capitalized as software expenses by the AO despite confirming the capitalization and without appreciating the fact that it would be absurd that at one hand the disallowance is made and penal proceedings are being initiated and on the other hand benefit is being given to the assessee without concrete knowledge of intention of the noncompliance of statutory provisions of the IT Act. 3. On the facts and in the circumstances of the case the learned CIT(A) erred in holding that the assessee company is eligible for deduction u/s 80JJAA in respect of additional wages paid to software engineers employed without appreciating the fact that the software engineers cannot be equated with 'workmen' as envisaged under Rule 2(s) of Industrial Disputes Act 1947 by placing reliance on the orders of ITAT which are not applicable to the facts of the case. 4. On the facts and in the circumstances of the case the learned CIT(A) erred in law in directing the AO to exclude reimbursement of specific expenditure both from the export turnover as well as from total turnover for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own case for assessment year 2006-07 in ITA No.668/Bang/2013 dated 05/09/2013 has dealt on this issue at paras 12 to 14 which reads as under: 12. We have perused the orders and heard the rival contentions. The AO simply rejected the claim of the assessee with an observation that assessee could not show such claim to be related to workmen, as defined under the Industrial Disputes Act, 1947. It is true that the CIT(A) relied on the decision of the Co-ordinate Bench in the case of M/s Texas Instruments India Pvt. Ltd., (supra), for giving relief to the assessee. Though, the department has vehemently argued that M/s Texas Instruments Pvt. Ltd., was only a chip manufacturer and not in a line of the business similar to that of the assessee, nothing was produced to substantiate this contention. In any case, a claim of Sec.80JJA of the Act whether it relates to a chip manufacturer or it relates to an IT enabled services firm has to be seen from the parameters laid down under that section for giving such deduction. In our opinion, there cannot be any dispute that development of computer software tantamounts to production of an article or thing. As mentioned by the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l. (iv) of s. 2(s) of the Industrial. Disputes Act a worker, employed in supervisory capacity and getting a salary of more than ₹ 1,600 per month only be excluded from the definition of workman. In appellant's case the software engineers in respect of whom deduction under s. 8011AA has been claimed have not been employed in a supervisory capacity even though they may be getting a salary of more than ₹ 1,600 per month. As the software engineers were not employed in supervisory capacity they cannot be excluded from the definition of workman. Further as per the notification of the Karnataka Government, the appellant company engaged in the development of software is covered by the Industrial Disputes Act. As such, I am of the considered opinion that the appellant has satisfied all the conditions for claiming relief under s. 80JJAA. However, I find that the appellant has claimed deduction of ₹ 2,55,81,220 with reference to the additional wages of ₹ 4,87,64,029,70,736 which included the wages of ₹ 4,87,64,029 in respect of the new workmen employed during the year ended 31st March, 2000 relevant to the asst. yr. 2000-01. As there was no claim for relief u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ystems engineer, test engineer, software design engineer, IC design engineer, lead engineer etc. A cursory perusal of those lists establishes that the assessee had claimed deduction in respect of the engineers employed not in the category of supervisory control. All these details were filed before the AO during assessment proceedings. These facts were not properly considered by the AO. Further, from the order of the CIT(A), it is seen that he had taken note of the notification issued by the Government of Karnataka and concluded that as per the notification issued, the assessee company engaged in the development of software is covered by the Industrial Disputes Act, 1947. Further it is not the case of the Revenue that the assessee did not fulfil the conditions extracted elsewhere in this order. Considering all those factual matters we do not find any infirmity in the order of CIT(A) according relief to the assessee. In fact he had clarified the relevant portions related to Industrial Disputes Act, 1947 and IT Act while granting relief to the asssessee which are extracted at pp. 5 and 6 of this order. After carefully considering the same, we are incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this issue at para.10 which reads as under: 10. Grounds no.8 to 13 are against the reworking of deduction under sec.10A by excluding data link charges and other expenditure incurred in foreign currency from the export turnover without correspondingly reducing the same from the total turnover. In this regard appellant has relied on the decision of the Karnataka High court in its own case in ITA no.818/2009 dt.30.08.2011. In the said decision it has been held as follows. In other words, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term 'total turnover' in section 10A, there is nothing in the said section to mandate that what is excluded from the numerator that is export turnover would nevertheless form part of the denominator . 10.1 Following the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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