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TMI Blog2021 (5) TMI 188X X X X Extracts X X X X X X X X Extracts X X X X ..... have already confirmed. Disallowance of Software expenditure - CIT(A) opined that the software which was purchased for resale was akin to purchases of raw material and therefore the same was an allowable expenditure and the remaining expenditure was held to be a capital expenditure - HELD THAT:- Before us, it is undisputed position that software was purchased for-resale and it was akin to purchase of raw material for the business. This being the case, no fault could be found in the adjudication of Ld. CIT(A). Ground No. 3 of revenue s appeal stands dismissed. Deduction u/s 10A and deduction u/s 80HHE against software exports - whether the old units which was earlier claiming deduction u/s 80HHE could claim deduction u/s 10A in this year? - HELD THAT:- We find that this issue is covered in assessee s favor by the decision of Hon ble Bombay High Court in group concern titled as CIT V/s Tata Consultancy Services [ 2019 (4) TMI 1439 - BOMBAY HIGH COURT] as relying on DAMCO SOLUTIONS (P.) LTD. [ 2010 (10) TMI 592 - DELHI HIGH COURT] Section 80HHE of the Act pertains to deduction in respect of profits from export of computer software etc. Sub-section (5) of Section 80HHE pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same principle of interpretation as followed by Hon ble Apex Court in HCL Technologies [ 2018 (5) TMI 357 - SUPREME COURT] and held that the export turnover in numerator as well as denominator could not assume two different characteristics for two parts of the same formula. Therefore, if export turnover in numerator has excluded the unrealized foreign exchange, than the same figure has to be adopted in denominator. The other decisions has cited by Ld. AR has also taken the same view. Therefore, going by the ratio of these decisions, we direct Ld. AO to reduce the unrealized debtors from total turnover in denominator while computing deduction u/s 10A / 80HHE. Correct formula to compute deduction u/s 80HHE - revenue is aggrieved by the action of Ld. CIT(A) in directing Ld. AO to consider entire profits of software business as a whole and apply the ratio of export turnover to total turnover including the total turnover of Sec.10A units - HELD THAT:- As relying on M/S SASKEN COMMUNICATION TECHNOLOGIES LTD [ 2014 (1) TMI 1538 - KARNATAKA HIGH COURT] AO is directed to deduct the profits of Sec.10A undertakings from the profit of the software business as a whole and applying the ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer to re-compute the deduction considering entire profits of software business as a whole as profits and apply the ratio of export turnover to the total turnover including the total turnover of 10A units. 1.3 The grounds urged by assessee reads as under: - 1) Overseas Taxes: The CIT(A) erred in not considering the Appellant's claim for deductibility of overseas taxes not covered / considered for relief under section 90/91 of the Income-tax Act, 1961 ('the Act'). 2) Disallowance of Software Expenditure: The CIT(A) erred in holding that software for internal use of ₹ 33.70 crores was capital in nature and denying deduction in respect thereof. 3) Uncollected Debtors: The CIT(A) erred in holding that uncollected debtors should not be excluded from the Total Turnover for the purpose of computing the deductions under section 10A/80HHE of the Act. 4) Disallowance of Interest Expenditure: The CIT(A) erred in allocating interest expenditure on a proportionate basis as an allowable deduction under sections 36(1)(iii) 57(iii) of the Act and, thereby, denying the Appellant's claim for deduction of the entire interest expenditure a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s follows: - (i) ITA No.4630 4637/Mum/2016 order dated 07/08/2020 for AY 2009-10 (ii) ITA No.3192 3508/Mum/2013 order dated 06/11/2019 for AY 2008-09 (iii) ITA No.4978/Mum/2014 10 Taxmann.com 87 23/02/2011 AY 2000-01 (iv) ITA No. 629/Mum/2003 order dated 13/01/2006 for AY 1995-96 Reliance has also been placed on various other decisions including the decision of Hon ble Bombay High Court in assessee s own case for AY 1996-97, ITA No.410 of 2009 rendered on 20/04/2009. The copies of the orders have been placed on records. The written submissions have also been filed by both the sides which we have carefully considered. The Ld. CIT-DR, Shri Sanjay Singh, made arguments to support the assessment order. After due consideration of relevant material on record, our adjudication to the subject matter of cross-appeals would be as given in succeeding paragraphs. 2. The assessee being resident corporate assessee stated to be engaged in export of software was assessed for the year under consideration u/s 143(3) on 21/03/2006 wherein the returned income of ₹ 10.53 Crores as filed by the assessee was assessed at ₹ 858.87 Crores. The assessee is stated to be an in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble in India. Reworking the same, the relief was restricted to the extent of ₹ 65.07 Crores which has been attached as Annexure A to the assessment order. 3.3 The Ld. CIT(A) directed Ld. AO to rework the disallowance on the basis of Explanation-1 to Sec.40(a)(ii) and grant deduction only if the tax was not eligible for tax relief u/s 90 or 91 of the Act. Similar directions were given with respect to state and local taxes of USA and Canada. Regarding DIT relief u/s 90 / 91, Ld. CIT(A) confirmed the action of Ld. AO but finding certain computational errors, directed Ld. AO to verify the working of DIT relief and grant appropriate relief. 3.4 From the perusal of appellate-order giving effect order dated 26/04/2007, it is evident that the deduction of state and local taxes of USA / Canada amounting to ₹ 38.33 Crores has already been granted to the assessee. 3.5 Though the assessee has raised ground nos. 1 5, however, Ld. AR did not press these grounds except for the directions that deduction may be granted for foreign state tax laws. As noted in para 3.4, since appropriate relief has already been granted to the assessee in order dated 26/04/2007, no further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowed the decision of Ambalal Kilachand (supra) while deciding this issue in assessee s favor. 4.6 After going though the decisions, we find that the facts in this year are quite identical to facts in AY 2000-01. As of now, the issue is squarely covered in assessee s favor by the orders of Tribunal for AY 1995-96 as well as for AY 2000-01. In AY 2000-01, the bench following the decision of Hon ble Bombay High Court in CIT V/s Ambalal Kilachand (210 ITR 844) decided the issue in assessee s favor. Further, Hon ble Bombay High Court has not admitted question of law raised by revenue on this issue for AYs 1993-94 (ITA No.382 of 2009 dated 20/04/2009); AY 1994-95 (ITA No.381 of 2009 20/04/2009); AY 1996-97 (ITA No.410 of 2009 20/04/2009). Respectfully following the binding judicial precedents, we hold that the directions of Ld. CIT(A) would not require any interference on our part, in any manner. Ground No.1 of revenue s appeal stand dismissed. 4.7 Another similar issue arises from the fact that the assessee received foreign interest income and offered the same net of tax. The Ld. AO did not consider the assessee s submissions. The Ld. CIT(A) directed Ld. AO apply the analogy of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was claimed in respect of software income of TCS division which was engaged in export of software and developing computer software and rendering services in overseas markets across the world. From the location-wise (20 locations in total) data furnished by the assessee, total export turnover was claimed to be ₹ 4407.91 Crores which yielded profit of ₹ 1163.51 Crores. The total unrealized export income was shown at ₹ 28.32 Crores whereas proceeds received outside India with RBI approval were stated to be ₹ 53.99 Crores. 6.2 It was noted by Ld. AO that till AY 2000-01, the assessee was claiming deduction u/s 80HHE which would ultimately be not available to assessee from AY 2005-06 onwards. The rate of deduction available in this year was 50%. However, from AY 2001-02 onwards, the assessee would be eligible for 100% deduction of profit for a further period of 10 years u/s 10A which applies to an industrial undertaking fulfilling certain conditions. In order to make substantial tax gains, the assessee cleverly switched its claim from Sec.80HHE to Sec. 10A on all his new and old software development centers. On all the old centers, the assessee was claiming ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 590.67 Crores has been adjusted after adding back overseas taxes software expenses disallowed but reduced by the amount of depreciation allowed on software. Finally, eligible deduction has been computed at ₹ 673.23 Crores against which 90% deduction i.e. ₹ 605.91 Crores would be available as deduction u/s 10A to the assessee. 6.7 The deduction u/s 80HHE has been computed against 9 units having total turnover of ₹ 2212.33 Crores. Total Realized export turnover amounts to ₹ 2314.22 Crores after deduction of unrealized debtors for ₹ 25.64 Crores. The applicable profits of ₹ 529.78 Crores has similarly been adjusted after adding back overseas taxes software expenses disallowed but reduced by the amount of depreciation allowed on software. The eligible deductions have finally been computed at ₹ 373.28 Crores against which 50% deduction i.e. ₹ 186.64 Crores would be available as deduction u/s 80HHE to the assessee. Notably, while computing the deduction, total turnover has been taken at ₹ 4933.39 Crores including turnover of 10A units as against assessee s plea that the total turnover should be considered after reducing the tur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors were to be excluded from the turnover while computing deduction u/s 10A and 80HHE. The revenue, in ground nos.4 5, has assailed the action of Ld. CIT(A) in relying upon CBDT circular No.1/2005. The revenue has also assailed the final directions of Ld. CIT(A) with respect to computation of deduction u/s 80HHE. Our findings and Adjudication 8.1 First we take up the issue as to whether the old units which was earlier claiming deduction u/s 80HHE could claim deduction u/s 10A in this year. We find that this issue is covered in assessee s favor by the decision of Hon ble Bombay High Court in group concern titled as CIT V/s Tata Consultancy Services (ITA No.1778 of 2016, AY 2005-06 18/03/2019) wherein Hon ble Court following the order of Hon ble Delhi High Court in CIT V/s Damco Solutions P. Ltd. 2011 (200 Taxman 26) held as under: - 6) Section 80HHE of the Act pertains to deduction in respect of profits from export of computer software etc. Sub-section (5) of Section 80HHE provides that where deduction under said section is claimed and allowed in respect of the profits of the business referred to in sub-section (1) for any assessment year, no deduction shall be all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court held that while computing deduction u/s 10A, if the export turnover in numerator is arrived at after excluding certain expenses, the said expenses should also be excluded from total turnover in denominator. The Ld. CIT-DR, on the other hand, maintained that the question in HCL Technologies (supra) was deduction of freight, telecommunication charges and insurance attributable to delivery of computer software outside India. In this context, Hon ble Court held that the amount excluded from the export turnover must also be reduced from total turnover. However, in the present case, the issue is with respect to export proceeds and foreign exchange not brought back within the stipulated time limit. If the contention of the assessee is accepted then the explicit requirement to bring export proceeds of convertible foreign exchange would have to be ignored which is not the intention of the legislatures. The interpretation sought by the assessee would go against the statutory provisions of Sec.10A(3) as well as Sec.80HHE(2). The Ld. CIT-DR relied on the decision of Hon ble Madras High Court in the case of Galaxy Granites Private Ltd. V/s CIT (211 Taxman 78 23/07/2012) as well a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 8.3 The last issue under this head is adoption of correct formula to compute deduction u/s 80HHE. The revenue is aggrieved by the action of Ld. CIT(A) in directing Ld. AO to consider entire profits of software business as a whole and apply the ratio of export turnover to total turnover including the total turnover of Sec.10A units. The Ld. AR, drawing attention to letter dated 05/09/2018, submitted that directions may be issued for application of correct formula as per the decision of Hon ble Karnataka High Court in CIT V/s Sasken Communication Technologies Ltd. (2014 50 Taxmann.com 134) which has held as under: - 7. Therefore, to be eligible for deduction under s. 80HHE not only the assessee should be engaged in the business of computer software, he must be exporting it out of India. If the assessee is a 100 per cent export oriented unit there is no difficulty in computing the profit from export of computer software business. Whatever profit that the assessee earns is the profit from export of computer software, which would be eligible for deduction. The difficulty arises only when the company being engaged in pie business of computer software, a portion of his busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hing to the contrary contained in s. 10A or s. 10AA or s. 10B or s. 10BA or in any provisions of this chapter under the heading 'C- Deductions in respect of certain incomes', where, in the case of an assessee, any amount of profits and gains of an undertaking or unit or enterprise or eligible business is claimed and allowed as a deduction under any of those provisions for any assessment year, deduction in respect of, and to the extent of, such profits and gains shall not be allowed under any other provisions of this Act for such assessment year and shall in no case exceed the profits and gains of such undertaking or unit or enterprise or eligible business, as the case may be. 9. This provision is inserted by Finance (No. 2) Act, 2009, which came into retrospective effect from 1st April, 2003 applicable to the asst. yr. 2003-04. In the case on hand, it relates to asst. yr. 2001-02. Nonetheless, this provision is explanatory in nature. The principle underlining the said provision makes it clear that when the profits and gains of an undertaking are allowed as deduction, the said benefit cannot be over again allowed under any other provisions. Consequently, the said profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d increased portfolio substantially by borrowing funds. The major investments were in Tata group of companies. The business of the assessee was to acquire the shares and rendering software consultancy services. The assessee incurred huge expenditure to acquire shares in Tata group of companies. After appreciating the objects of the assessee as well as meaning of business as defined u/s 2(13), Ld. AO held a conviction that holding of investment could not amount to business. Merely because the assessee has the object of dealing in investment in shares would not give it the characteristics of dealers of shares. In the above background, Ld. AO opined that interest expenditure could not be allowed either u/s 36(1)(iii) or u/s 37 since the same was not incurred wholly and exclusively for the purposes of business. Further, the same could also not be allowed u/s 57(iii) as it was no wholly and exclusively incurred for the purpose of earning of such income. 9.2 The assessee defended the claim by submitting that interest income of ₹ 40.12 Crores was earned on short-term temporary deployment of funds borrowed by it and therefore, the same has rightly been set-off against interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principal objective of the agreement was to protect and promote the image / goodwill / brand equity of Tata group being the Tata name / mark which has an immense goodwill and brand awareness attached to it. The Tata group of companies joining the scheme made contribution in terms of the agreement with the assessee and the assessee, in turn, undertake various obligations of brand promotion / goodwill etc. Since there was income flow on the basis of it being the holding company and therefore, interest expenditure was eligible for deduction u/s 36(1)(iii). The assessee earned ₹ 62.64 Crores as income from subscription from various investee entities under the said scheme which was offered to tax as Business Income. The assessee submitted that it is the holding promoter company of various Tata companies and pioneered the setting up of various businesses including setting up of Tata Steel Limited, Tata Motors Limited, Tata Power Company Limited, Indian Hotels Company Limited, Tata Consultancy Services Limited, Titan Limited and Tata Teleservices Limited. Reliance was placed on various judicial pronouncements in support of assessee s eligibility to claim deduction u/s 36(1)(iii). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . AO has been reversed. The net-interest has been worked out at ₹ 246.88 Crores out of which an amount of ₹ 80.85 Crores has been allowed under business income whereas remaining interest expenditure of ₹ 166.03 Crores has been allowed from dividend income which has been assessed as Income from other sources . Since dividend income earned during the year amounted to ₹ 126.73 Crores against which interest expenditure of ₹ 166.03 Crores was apportioned, there was no income which remained to be taxable as dividend income. Consequently, deduction u/s 80M has been denied and hence the grievance of the assessee before us by way of ground no. 4. It could be noted that full interest expenditure has already been allowed to the assessee. The only grievance of the assessee is apportionment of interest expenditure and consequential denial of deduction u/s 80M. Our findings and adjudication 10.1 Before us, Ld. AR has submitted that the issue is covered in assessee s favor by earlier decision of Tribunal for AY 2009-10 (supra) wherein at para 5.4 of the order, the bench has observed as under: - 5.4. We find that the ld. CIT(A) had further observed tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) of the Rules. This fact has been correctly dealt, in our considered opinion, by the ld. CIT(A) in his order. We also find that this issue is also covered in favour of the assessee s group company case by the order of this Tribunal in the case of Tata Industries Ltd., vs. ITO in ITA No.4894/Mum/2008 dated 20/07/2016 wherein this Tribunal by placing reliance on various decisions of the Hon ble High Courts including the Hon ble Jurisdictional High Court in the case of CIT vs. Phil Corporation Ltd., reported in 202 Taxman 368 had decided the issue in favour of the assessee with regard to allowability of interest. Hence, we do not find any infirmity in the observation made by the ld. CIT(A) that the interest on borrowed funds used for making investments would be allowable u/s.36(1)(ii) of the Act subject to the provisions of Section 14A of the Act. This observation made by the ld. CIT(A) is correct in the facts and circumstances of the instant case, which in our considered opinion, does not require any interference. Accordingly, ground No.2 raised by the revenue is dismissed. 10.2 However, Ld. CIT-DR submitted that the contention of controlling interest would no longer be applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T v Srishti Securities Pvt. Ltd. (321 ITR 498); decision of Hon ble Calcutta High Court in CIT V/s Rajeev Lochan Kanoria (208 ITR 616); Hon ble Delhi High Court in Eicher Goodearth Ltd. V CIT (378 ITR 28); decision of Hon ble Madras High Court in CIT vs. RPG Transmission Ltd. (359 ITR 673) 10.4 At the outset, it could be noted that dividend income is not exempt in this year but a deduction is allowed to the assessee u/s 80-M in respect of dividend. We are of the considered opinion that there is clear distinction between exemption and deduction provision. In case of exemption, the income does not, at all, enter into gross total income of the assessee whereas in case of deduction, the income first enters the assessee s gross total income and thereafter, a deduction is given against the same upon fulfillment of conditions as prescribed under the relevant provisions of the Act. Going by the same, the provisions of Section 14A, in our considered opinion, would apply only in relation to income which does not form part of total income under this Act as given in Chapter III of the Act. Clearly, the provisions are attracted only in those cases where the income is altogether exempted ..... X X X X Extracts X X X X X X X X Extracts X X X X
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