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TMI Blog2022 (11) TMI 1316X X X X Extracts X X X X X X X X Extracts X X X X ..... he sake of convenience and to put in summary manner, we are only referring to the relevant paragraphs wherein these issues have be considered and decided in the order dated 28/11/2022. A.Y. Ground No. Issue Contested in the Appeals Covered by Paras of A.Y. 2012-13 2010-11 2011-12 15 to 18 2 to 6 Denial of deduction claimed under section 10AA totally amounting to 1472,93,64,010 in respect of 4 SEZ units viz., Chennai - Unit 1, Chandigarh, Mangalore - Unit 1 and Pune Unit 1. Losses of Trivendrum SEZ unit amounting to Rs. 1,52,56,742 was not set off against other taxable income Erred in concluding that the 5 SEZ units have been formed by splitting up and reconstitution of an already existing business Deduction claimed u/s 10AA amounting to Rs.1920,38,02,954 in respect of profits of 5 SEZ units was denied. Erred in denying deduction in respect of profit of Trivandrum SEZ Unit - 1 and not giving effect to Hon'ble DRP directions. Erred in concluding that 5 SEZ units have been formed by splitting up and reconstruction of an already existing business and hence these SEZ units are not eligible for deduction under section 10AA. Ground nos. 2-5 Paras 6 to 6.15. Issue allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -11 2011-12 2011-12 11 13 13 10 15 16, 17 Disallowance of 'brand building expenditure' Percentage of total business revenues of 10A, 10AA(50%) and 10AA(100%) units wrongly computed by including other business income having no element of turnover and rounding off the said % to whole number instead of absolute % at two decimal points). Consequential wrong allocation of disallowances Ground no. 25 Paras 12 - 12.8 The issue is allowed in favour of assessee by following the decision of Coordinate Bench of this Tribunal in case of Infosys BPO Ltd v DCIT in ITA No. 1367/Bang/2014 by order dated 27.09.2019 referred to in para 12.5 2007-08 2008-09 2009-10 2010-11 2011-12 12 14 14 4 (Dept. Appeal) 7 (Dept. Appeal) Disallowance of Commission paid to non resident agents Ground no. 26 Paras 13.1 - 13.11 The issue is remanded to the Ld.AO to verify the claims in accordance with the directions of the Hon'ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT reported in (2021) 432 ITR 471. Both revenue and assessee's appeals allowed for statistical purposes. 2007-08 2008-09 2009-10 2010-11 2011-12 (Dept appeal) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Relied on Hon'ble Karnataka High Court in case of Wipro Ltd. vs. DCIT reported in 382 ITR 179. 2007-08 2008-09 2009-10 30 36 36 Deduction for taxes paid to Local municipal authorities in Japan and Italian regional production tax paid in Italy which was not in the nature of 'Income tax' Ground nos. 55-57, was not pressed by assessee for A.Y. 2012-13. 2010-11 2011-12 19 22 TDS credit Ground no. 53 Para 22.1. Remanded to the Ld.AO for verification and consideration in accordance with law. 2007-08 2008-09 2009-10 2010-11 2011-12 32 38 38 20 31 Interest levied under section 234B and 234D Consequential in nature. We have already tabulated hereinabove the issues that stands covered by the observations of the decision of Coordinate Bench of this Tribunal in assessee's own case for A.Y. 2012-13 (supra) by order dated 28/11/2022 which is annexed to this order and marked as "Annexure - A". For the sake of convenience and brevity, the relevant decision paragraphs which are identical and covered for the years under consideration has been mentioned hereinabove in the table. Accordingly, all the above grounds raised by assessee and revenue on common issues for the yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pacity or extra building space. He also submitted that the expenditure was not capable of enhancing the future benefits from the existing asset (buildings) beyond its previously assessed standard of performance. The Ld.AR submitted that the DRP gave factual observation that building repair expenses has been incurred in respect of existing assets and there is no change in facts and circumstances over the years. It is submitted that the disallowance is made only from AY 2007-08 to 2009-10 by the Ld.AO and for A.Ys. 2010-11 and 2011-12 the revenue is in appeal. The Ld.AR also submitted that for A.Y. 2012-13, the revenue has not preferred any appeal on this issue. 4.4 The Ld.DR relied on the orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 4.5 Hon'ble Bonbay High Court in the case of CIT vs. Oxford University Press reported in 108 ITR 166 has expounded that, the test for judging the nature of capital or revenue expenditure is to see whether as a result of expenditure what is being done is to preserve and maintain an already existing asset or whether as a result of expenditure a new asset or a new adva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs.17,55,37,820/- is not chargeable to tax. The assessee, vide submissions dated 28.1.2013 explained in detail as to why the above net surplus of Rs. 17,55,37,820/- is a capital receipt and not chargeable to tax. It was explained that expenditure incurred on proposed acquisition was also not claimed as deduction and the said expenditure has been set off against the inducement fees received. 5.2 The Ld.AO considered the net surplus of Rs. 17,55,37,820/- as revenue receipt and assessed the same to tax. The Ld.AO was of the view that the assessee has been claiming expenditure on expansion of business, mergers and acquisitions as revenue in nature for the earlier years and consequently the net surplus of Rs. 17,55,37,820/- is chargeable to tax for the year under consideration. The Ld.AO also held that, the above sum cannot be regarded as part of profits of business so as to be eligible for deduction under section 10A and 10AA. 5.3 The CIT(A) held that the gross amount of Rs. 32,48,98,842 should be considered to be in the nature of non compete fees and should be brought to tax as business income. Having held as business income, the CIT(A) also held that, the inducement fees has no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt received by assessee from Axon being Rs.32,48,98,842/- is Rs.17,55,37,820/-. He submitted that this amount is in the nature of compensation received by assessee for the proposed acquisition that could not be concluded. He submitted that had this amalgamation to happen, assessee would have been enriched with a profit making apparatus that would have boosted the business structure of assessee. He thus supported the disallowance made by the Ld.AO. 5.7 We have perused the submissions advanced by both sides in the light of records placed before us. The assessee was in the process of acquiring Axon Group Plc, an IT service company, listed in London having expertise in SAP consultancy. An agreement was entered into between the assessee and Axon, as per which Axon would have to pay 1% of the consideration payable by the assessee for acquiring Axon shares if the proposal does not materialise. 5.8 As the proposed acquisition failed, the assessee was in recipient of certain amount in connection to the cancellation/lapse of the proposed scheme of acquisition. It is submitted that the assessee had spent certain amount towards due diligence in the form of legal charges, advisory etc., of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... similar to the interest expenditure and it is to be allowed as revenue expenditure u/s 37 of the I.T.Act, as per the accounting standard approved by the Institute of Chartered Accountants of India. 6.3 This issue is no longer res integra. Hon'ble Supreme Court in the case of CIT vs. Woodward Governor India Pvt. Ltd. reported in (2009) 312 ITR 254 has held that, the actual payment was not a condition precedent for making adjustment in respect of foreign currency transactions at the end of the closing year. 6.4 We also draw support from the decision of Hon'ble Mumbai Special Bench decision in case of DCIT vs. M/s. Bank of Bahrain and Kuwait reported in (2010) 41 SOT 290 wherein similar issue was under consideration. The Hon'ble Special Bench observed and held as under: "50. Therefore, this Accounting Standard mandates that in a situation like in the present case, since the transaction is not settled in the same accounting period, the effect of exchange difference has to be recorded on 31st March. Ld CIT D.R. has rightly pointed out that the expenses required to be charged against revenue as per accounting standard do not ipso facto imply that the same are always deductible for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as referred to in AS-11 and since forward foreign exchange contracts do not come within the monetary items, therefore, the said decision cannot be applied. However, we have already discussed in the concept of recognition of various events in financial statements and have noted that the assessee , in fact, has recorded net effect in its profit and loss account. Therefore, on this count, the department's plea cannot be accepted. Thus, in view of the decision of the Supreme Court in the case of Chellapali Sugar Mills (supra), and also in view of decision of the the Hon'ble Supreme Court in the case of Woodward Governor India (P)Ltd., (supra), assessee's plea deserves to be accepted. 51. Now, coming to the objection of ld CIT D.R. with reference to various decisions relied upon by ld counsel for the assessee on the ground that in the said decisions, the issue was relating to stock-in-trade but in the present case, there is no stock-in-trade. Admittedly, the assessee has not shown any closing stock of unmatured forward foreign exchange contracts as on balance sheet date and has only booked the profit and loss in that regard. There is no dispute that the foreign exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the present case as in the present case, we are concerned about the anticipated loss booked by the assessee on account of foreign exchange rate fluctuation as on balance sheet date, which was in accordance with RBI guidelines as well as in accordance with AS-11. Moreover, a binding obligation arose the minute the contract was entered into. However, now the decision of the Hon'ble Supreme Court in the case of Woodward Governor India P. ltd (supra) covers the issue on account of variation in foreign exchange rate with reference to current assets. The facts in the case of CIT v. Kamani Metals and Alloys Ltd (supra) are more akin to such a situation where the assessee has simply ordered for purchase of material at a particular rate but the material has not been supplied by the seller by the end of the accounting period. No liability is accounted for in respect of such ordered goods because the basic elements of contract have not been fulfilled. In the present case, we have already observed that the forward contract is incidental to the foreign currency held by the assessee as stock-in-trade and, therefore, the decision in the case of CIT v. Kamani Metals and Alloys Ltd (supra) is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been urged by the revenue before us. However, a closer scrutiny of the said decision indicates that the Calcutta High Court in this case relied upon its earlier judgement in Sutlej Cottons Mills Ltd v CIT (1971) 81 ITR 641. It will be recalled that the Hon'ble Supreme Court in Sutlej Cotton Mills Ltd v CIT(1979) 116 ITR 1 reversed the aforesaid decision of the Calcutta High Court on this point and held that such liability would be treated as a trading loss. In that view of the matter, the reliance placed by the revenue on the judgement of the Calcutta High Court in Bestobell (India Ltd., (1979) 117 ITR 789 appears misplaced." 56. The controversy stands now resolved in view of the decision of the Supreme Court in the case of Sutlej Cotton Mills Ltd., 116 ITR 1 (SC), wherein, it has been held that fluctuation on account of foreign exchange rate is an allowable deduction and is not capital in nature. The observation of the Hon'ble Supreme Court is as under:- "The law may, therefore, now be taken to be well settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into anothe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly, hold that where a forward contract is entered into by the assessee to sell the foreign currency at an agreed price at a future date falling beyond the last date of accounting period, the loss is incurred to the assessee on account of evaluation of the contract on the last date of the accounting period i.e. before the date of maturity of the forward contract." 6.5 We direct the Ld.AO to carry out necessary verification in respect of the loss /gain incurred by the assessee for the years under consideration whether on account of Capital asset based on the principles laid down by Hon'ble Mumbai Special Bench in case of Bank of Bahrain and Kuwait (supra). 6.6 In the event the loss/gain is out of trading liability, no disallowance can be made. However, we make it clear that there cannot be double claim by the assessee; once in the year under consideration and on actual settlement of the bill in any subsequent year. Accordingly, these grounds raised by the assessee stands allowed for statistical purposes. 7. Reduction of export turnover u/s. 10A on account of later realization of export turnover into India. 7.1 The Ld.AR submitted that this issue has been raised by assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... export proceeds are realized within the time prescribed by the competent authority under the FEMA. In the instant case, the competent authority under the FEMA, namely, the RBI has granted approval in respect of the export proceeds realised by the assessee till December, 2004. Therefore, the approval granted by RBI under the FEMA would meet the requirements of section 10A. In other words, once the competent authority under the FEMA, which regulates the payments and dealings in foreign exchange, has approved realization of the export proceeds by the assessee till December, 2004, then it would meet the requirements of section 10A(3) and, consequently, the assessee would be entitled to the benefits under section 10A(1). [Para 8] Moreover, in the instant case, the RBI which is the competent authority under the FEMA as also under section 10A, has neither declined nor rejected the application made by the assessee seeking extension of time under section 10A. Therefore, the decision of the Tribunal in holding that the approval granted under the FEMA constitutes a deemed approval granted by the RBI under section 10A(3) cannot be faulted. [Para 9] The RBI being the competent authority un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment, the Assessing Officer held that the aforesaid rental income from Infosys BPO Limited and BSNL, Chennai cannot be regarded as income derived from the business of export of software. On appeal, before the learned CIT (Appeals), it was submitted by the assessee that inter alia, the rental income received from its subsidiary, Infosys BPO Limited, was incidental to the business carried on by the assessee as it facilitated operations, transactions, policies and procedures. In respect of the letting out of space to BSNL, in Chennai, it was for the purpose of setting up of Mini Exchange to equip the assessee's Chennai unit with telecommunication facilities. It was urged that the letting of space to Infosys BPO Limited and BSNL at Chennai were therefore incidental to the business carried on by the assessee and therefore eligible for deduction under Section 10A of the Act. 30.3.1 We have heard the rival contentions, perused and carefully considered the material on record. The issue as to whether interest income, income from sale of scrap, export incentive, rental income, etc. are eligible for deduction under Section 10A of the Act has been considered by the Hon'ble High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt which bears to the profits of business of the undertaking. Though the said profits are not derived from export of articles or things or computer software, by virtue of sub Section (4) it is deemed to be the profits of the business of the undertaking for the purpose of extending the benefit of exemption of payment of tax under Section 10A of the Act to a newly established undertaking in a free trade zone. 30.3.2 Similarly, the Hon'ble High Court of Karnataka in the case of Wipro Ltd. Vs. DCIT in its order reported in (2016) 382 ITR 179 before whom the substantial question of law No.16 for consideration was in respect of income from sale of scrap, export incentive, rent received, interest income and gain on exchange rate fluctuation. The Hon'ble Court held that these items were eligible for deduction under Section 10A of the Act. At para 166 thereof; the Hon'ble Court followed its own earlier order in the case of Wipro Ltd. in ITA No.507 / 2002 dt.25.8.2010, in respect of income from sale of scrap, export incentive and rent received to hold as under : "166. This Court had occasion to consider the substantial questionof law in assessee's case itself in ITA 507 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovides for certain additions and deletions in computing the book profits. Subsection 6 of section 115JB provides that the provisions of this section shall not apply to the income accrued or arising on or after the 1st day of April, 2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic Zone, as the case may be. Subsection 6 of section 115JB was introduced by the Special Zones Act, 2005 with effect from 10.2.2006. Book profits of SEZ unit are exempt from MAT by virtue of section 115JB(6). He also relied on proviso to section 115JB(6) has withdrawn the MAT exemption in respect of profits of SEZ unit with effect from AY 2012-13 onwards. It is submitted that the said proviso is not applicable in the present case as the assessment years under consideration are A.Ys. 2007-08 to 2009-10. The Ld.AR thus submitted that the addition made by the assessing officer is bad in law. 9.5 The Ld.AR submitted that in the OGE to CIT(A) order, the Ld.AO do not make addition in respect of the difference between the deduction claimed by assessee u/s. 10AA and that allowed by the Ld.AO. The only issue that now survives for consideration i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attributing only 50% of total revenue towards the earning of license fee. Before the Ld.CIT(A), assessee had also claimed that Ld.AO only reduced the said amount of 50% from the profits of the 10A in respect of reducing the same from export turnover of the unit. The Ld.CIT(A) after considering the relevant submissions of assessee directed the Ld.AO to reduce the 50% from the export turnover for computing deduction u/s. 10A of the Act. Before this Tribunal, the Ld.AR submitted that assessee is eligible for 100% claim of the license fee received. It was submitted that Finacle was a new generation core banking product which was successor to BANCS 2000. He submitted that this new product was actively pursued by banks with e-commerce strategy and therefore it was a product that was launched by assessee in the year 2000 which can be categorically observed from the financial reports of March 2000. On the contrary, the Ld.DR relied on the observations of the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 10.4 It is an admitted fact that in a software development segment, once a software developed cannot be used in perp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ords placed before us. 12.2 We note that this claim has been made by assessee in respect of taxes reasonably accepted to be paid in USA and Switzerland where audit and assessment was under progress in relation to income of previous year 2010-11. 12.3 The Ld.AO is directed to verify the same based on the documents / evidences filed by assessee. In the event, the taxes have been actually paid pertaining to the income for previous year 2010-11, in the respective countries, credit shall be granted as per section 90 of the Act. Accordingly, this ground raised by assessee stands allowed for statistical purposes. 13. Assessee has filed an application for admission of additional ground for A.Y. 2011-12 wherein the deduction for education cess and secondary and higher secondary cess has been sought for. As this issue has been decided by Hon'ble Supreme Court against assessee, we dismiss this ground raised by assessee. Accordingly, the additional ground raised by assessee stands dismissed. Accordingly, the appeals filed by assessee as well as revenue stands partly allowed as indicated hereinabove. In the result, the appeals filed by the assessee and revenue stands partly allowed as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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