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TMI Blog2020 (3) TMI 338X X X X Extracts X X X X X X X X Extracts X X X X ..... the turnover while computing deduction u/s.10A/10AA - HELD THAT:- AR fairly agreed that the full amount of foreign currency expenses has been rightly held to be excludible from the amount of Export turnover . It was, however, prayed that the same amount may also be excluded from the amount of Total turnover - we hold that the amount of Foreign currency expenses to the tune of ₹ 107.63 crore be excluded from the Export turnover as well as Total turnover . Disallowance u/s.14A r.w.r.8D - HELD THAT:- When interest free funds in the form of share capitaland reserves etc. are more than the amount of investment, then no disallowance of interest can be made u/s 14A. Respectfully following the precedents, we order to delete the disallowance under Rule 8D(2)(ii) whereas, in respect of disallowance u/s.8D(2)(iii) hat only those investments should be considered for computing average value of investments which yield exempt income during the year. In view of the afore referred precedents, we set aside the impugned order to this extent and remit the matterto the file of Assessing Officer for re-computing the disallowance under Rule 8D(2)(iii) by considering only such investme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessee submitted that in the first ground, the assessee wants KALs Information System Ltd. to be excluded from the final list of comparable and the Revenue in its appeal wants Infosys Technologies Ltd. to be included in the final list of comparables. First, we would adjudicate the exclusion of KALs Information System Ltd. from final list of comparables in assessee s appeal. EXCLUSTION OF KALS IFNORMATION SYSTEM LTD FROM FINAL LIST OF COMPARABLES (A) KALs Information System Ltd :- 3. At the very opening of the argument, the Ld. Counsel for the assessee appraised the Bench taking us to the TPO s order at Page-1, Para-3 wherein brief profile of the company has been given and it is evident that the company is carrying out all IT enabled services and no marketing is done by the assessee, no sale of IT products are done by the assessee. The Ld. Counsel also took us through various agreements filed before us wherein it is evident that the assessee is performing only development services relating to software. These facts are clear from the documents annexed at Pages 30 to 31 of the paper book placed before us. That further, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions of the assessee. However, the DRP has ultimately held that the sale of products do not constitute a major portion of the company's revenue. We are unable to understand on what basis the DRP has given such a finding considering the fact that segmental details as regards sale of products Accenture Services Pvt. Ltd. and services are not available in the Annual Report. That being the case, there can be possibilities of revenue from products sale being included in application software segment. The Transfer Pricing Officer while rejecting the objections of the assessee has simply stated that the company is in the business of application software which is similar to the assessee. It is relevant to note, in a number of decisions of different Benches of the Tribunal for the very same assessment year, this company has been rejected as a comparable to a software service provider on the reasoning that it is also involved in development and sale of product. The ratio laid down in these decisions squarely applies to the facts of the present case. Pertinently, in course of hearing, it was brought to our notice by the learned Sr. Counsel for the assessee that the Tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard to exclusion of Infosys Technologies Ltd. wherein the prayer of the Revenue is that this company should be included in the final list of comparable with that of the assessee. (B) Infosys Technologies Ltd:- 8. The TPO has given his findings on this issue at Page 15 onwards of his order and has held that the objection of the assessee on Infosys Technologies Ltd. is not comparable because it is providing services to some other segment is not acceptable and it was included in the final set of comparable companies. 9. The Ld. CIT(Appeals) at Page 30 of his order Para 2.2.6.1 starts his observation and the assessee also filed written submission which has been reproduced and finally at Para 2.2.6.2 2.2.6.3, the Ld. CIT(Appeals) has held as follows: 2.2.6.2 I have carefully considered the assessee's submission. I find that the learned TPO has not applied the upper turnover filter presumably following the decisions of the honourable Tribunal, which have held that turnover filter is of no relevance in the software industry and there is no relationship of turnover with profit of the company as company with lower turnover has also earned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s ground of appeal raised by the Revenue is dismissed. 11. Ground No.2 of the assessee s appeal and Ground No.2 of the Revenue s appeal pertains to Telecommunication expenses u/s.10A and 10AA of the Act . Telecommunication Expenses u/s.10A 10AA of the Act : 12. The Assessing Officer stated that the assessee company has incurred certain telecommunication expenses with respect to the delivery of software abroad. According to the provisions of section 10A and section 10AA, telecommunication expenses should be reduced from the assessee s export turnover. The Assessing Officer reduced the telecom charges of ₹ 5,31,46,894/- and internet usage expenses of ₹ 3,51,30,538/- totaling ₹ 8,82,77,432/- from the export turnover while working out the deduction u/s.10A and u/s.10AA of the Act. 13. The assessee has filed detailed written submissions before the Ld. CIT(Appeals) which was duly considered by the Ld. CIT(Appeals) and thereafter vide Para 2.3.3 2.3.4, the Ld. CIT(Appeals) confirmed the decision of the Assessing Officer to reduce the telecommunication expenses from the total turnover. The Assessing Officer was also directed to red ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al is against the direction of the ld. CIT(A) that link charges and internet usage charges be reduced from Export turnover and also from Total turnover . 44. This issue also came up for consideration before the Tribunal in relation to the A.Y 2007-08. Vide its order dated 05-08-2019 in IT(TP)A. No.286/Bang/2013, the Tribunal has held that any amount reduced from Export turnover should also be reduced from the amount of Total turnover in the computation of deduction u/s.10A of the Act. Following the same, we allow the assessee s ground and dismiss that of the Revenue. Respectfully following the decision mentioned herein above, we allow ground No.2 raised by the assessee and dismiss ground No.2 of appeal of the Revenue on this count. 15. Ground No.3 of the assessee s appeal and Ground No.3 of the Revenue s appeal pertains to exclusion of expenditure on providing technical services abroad from the turnover while computing deduction u/s.10A/10AA of the Act . Treatment of Expenditure on providing technical services abroad: 16. The Assessing Officer vide Para at Page 7, Para 9 of his order on the issue has held as fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Additional disallowan ce under section 14A 95,72,365 283,815 1,047,014 976,399 356,969 504,719 697,625 1,34,38,906 Revised business profit 893,941,812 40,033,512 253,619,709 173,678,824 52,099,649 101,634,906 90,273,228 1,496,325,779 The computation of deduction u/s.10A/10AA is given below Total turnover of the units 9,074,259,586 Export turnover of the units eligible for tax holiday 8,877,392,151 Less : a) Expenses for technical services 1,066,663,964 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onourable AAR in the case of CAT Geodata GmBh, in re (2012) 346 ITR 549 (AAR) has held that the services are technical in nature, when special skills or knowledge or education are required for the provision of such services. Example 5 in the MOU to India-USA DTAA provides that computer software development is a technical service, technical explanation to India- Australia DTAA also provide the same. Honourable AAR in the case of Airports Authority of India, in re (2005) 273 ITR 437 (AAR) and (2011) 323 ITR 211 (AAR) has held that modification of software is also a technical service. In view of the decisions of the number of judicial authorities, it is clear that software development is also a technical service and hence, expenditure incurred in foreign currency for providing technical service or computer software development service should be reduced from the export turnover. Accordingly, I hold that the learned AO has correctly reduced ₹ 106,66,63,964 from the export turnover for computing the deduction u/s.10A and u/s10AA. 2.4.6 For the same reasons mentioned in my findings on Ground of Appeal 2 above, I hold that the amount of ₹ 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invoking of the provisions of the Rule 8D is not automatic and section 14A(2) require the AO to record his satisfaction for invoking the Rule 8D. Further, the satisfaction of the AO has to be an objective satisfaction and cannot be his subjective satisfaction. According to me, the AO's satisfaction need not be express as there is no provision in the Act for recording express satisfaction in the assessment Order. However, if the AO's satisfaction cannot even be gathered from the assessment Order, then the Rule 8D cannot be invoked. 2.6.6 In this case, I find that the learned AO in the para 8.1 of the assessment Order has merely stated that the Appellant should have made the correct disallowance u/s 14A however, he has not mentioned the grounds on which, he concluded that the Appellant's claim of the disallowance of ₹ 3,20,508 is not correct. Therefore, according to me, the learned AO cannot invoke the Rule 8D. I consider that he was not correct in invoking the Rule 80 and making' the disallowance. Therefore, I delete the disallowance of ₹ 1,34,38,904 made by the learned AO. 22. The Ld. Counsel for the assessee drew our att ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in CIT vs. HDFC Bank Ltd. (2014) 366 ITR 515 (Bom). It is further observed that this issue is now no more res integra in view of the judgment delivered by the Hon'ble Supreme Court in Godrej Boyce Manufacturing Company Ltd. vs. DCIT (2017) 394 ITR 449 (SC), upholding the view of the lower authorities that when interest free funds in the form of share capitaland reserves etc. are more than the amount of investment, then no disallowance of interest can be made u/s 14A. Respectfully following the precedents, we order to delete the disallowance under Rule 8D(2)(ii) to the tune of ₹ 5,49,818/-. 38. Now we come to the disallowance made under Rule 8D(2)(iii) amounting to ₹ 75,43,252/-. It is seen that the same has been worked out by the AO at 0.50% of average amount of investments. This computation is strictly in accordance with the mandate of Rule8D(2)(iii). Since Rule 8D is applicable from the assessment year under consideration, the disallowance has to be made and sustained in accordance with the prescription of such rule only. 39. Here we would like to clarify that the Hon'ble Delhi High Court in ACB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... towards on site software services were related to and formed integral part of STPI/SEZ undertakings in India as all the resources who were deputed onsite always belonged to the STPI/SEZ undertakings situated in India. Hence, it can be established that there is a direct and intimate nexus between the onsite employees and the Indian STPIs/SEZs executing the project which in turn establishes the direct and intimate connection to the development of software done abroad. Based on the above facts it can be concluded that all the profits' ascribed towards onsite software services were related to and formed integral part of STP / SEZ undertakings in India and hence we request your honour to conclude the assessment by allowing 10A/10AA deduction in full without making any adjustments towards onsite profits 24.1 After considering the submissions of the assessee, the Assessing Officer held the eligible profit for deduction u/s.10A/10AA will reduce by ₹ 3,42,46,639/- by observing as follows: 10.44 However, the CIT(A) in the assessee own case for the AY 2009-10 has concluded as below: I have considered the facts of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee for AY 2008-09. A.Y. 2009-10, the revenue has not had to identify specific SOWs containing DTM and onshore projects. The assessee has itself come forward to identify all such 100% onshore and DTM projects. As such, the factual identification of DTM and 100% onshore projects has not been required. The assessee has submitted the facts of ₹ 63.26crores of revenue from 100% onshore projects which included the DTM projects also. As such, the task before revenue has become simpler. For A.Y. 2010-11, the revenue has not had to identity specific SOWs containing DTM and onshore projects. The assessee has itself come forward to identify all such 100 % onshore and DTM projects. As such, the factual identification of DTM and 100 % onshore projects has not been required. The assessee has submitted the facts of ₹ 63 crores of revenue from 100 % onshore projects which included the DTM projects also. As such, the task before revenue has become simpler. 10.47 The final computation of deduction u/s.10A/10AA of the Income Tax Act is given as under: 10A/10AA computation in Chapter II ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... drawing of adverse inference u/s 114 of the Evidence Act. Therefore, in the case of the failure to establish the direct and intimate nexus with the SEZ such contracts could be presumed to be of bodydhopping contracts. 2.5.26 In view of the above discussion and in absence of the supporting evidence produced by the Appellant, I hold that the amount of ₹ 3,42,46,639 is the body shopping activity, which is derived from the supply of technical manpower and not derived from the export of software. Therefore, the deduction u/s 10A or u/s 10AA is not available on such profits. Accordingly, I confirm the decision of the learned AO to deny the deduction u/s.10A or u/s.10AA on ₹ 3,42,46,639/- 26. The Ld. Counsel for the assessee submitted that this issue is covered by the decision in assessee s own case in ITA No.342/PUN/2014 for assessment year 2009-10 (supra.) wherein vide Para 46 and 47, the Tribunal has held as follows: 46. Ground No.7 of the assessee s appeal is against reduction in the amount of deduction u/s.10A by a sum of ₹ 2,41,23,133/- on the premise that the assessee is in the business of Deputation of Technical Manpowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of undertaking. So long as there exists a direct link between the eligible undertaking and some income, the same is profit of the business of undertaking, even if may not be derived from the export of computer software etc. Without accepting, even if we presume the contention of the ld. DR as correct that income from DTM and onsite software services rendered abroad cannot be considered as derived from the export of computer software, it, in any case, will have to be regarded as `profits of the business of the undertaking'. In view of the foregoing discussion, we uphold the impugned order on this score. Respectfully following the decisions of the Tribunal mentioned hereinabove on the issue, we set aside the order of the Ld. CIT(Appeals) on this issue and allow this ground of the assessee. Thus, ground No.4 raised in appeal by the assessee is allowed. 27. Ground No.5 of the assessee s appeal relates to foreign exchange fluctuation gain directly credited to the reserves . Foreign exchange fluctuation gain directly credited to the reserves:- 28. The Assessing Officer discussed this issue vide Para 12 of his order and held the amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome. 29. The Ld. CIT(Appeals) discussed this issue vide Paras 2.7.1 onwards and after considering the submissions of the assessee, assessment order and facts of the case has given his final finding at Page 55 vide Para 2.7.6 which is extracted as follows: 2.7.6 In this case, the learned AO has not examined as to how much fluctuation gain is on the capital account and how much is on the revenue account. The Appellant is also not forthcoming on this issue. Therefore, I direct the learned AO to ascertain the amount of the foreign exchange gain towards the capital account and towards the revenue account. Accordingly, the addition pertaining to the foreign exchange gain on the capital account would be deleted and addition pertaining to the foreign exchange gain on the revenue account would be confirmed. 30. The Ld. Counsel for the assessee submitted that this issue may be restored to the file of the AO/TPO for fresh adjudication as per law. 31. The Ld. DR did not raise any objection with regard to the prayer of the Ld. AR of the assessee. 32. We have perused the case records and analyzed the facts and circumstances in this case. We have a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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