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TMI Blog2022 (5) TMI 1560X X X X Extracts X X X X X X X X Extracts X X X X ..... TO projects are the products developed by the assessee for sale/license. These products are revenue assets. The development was complete in respect of first four products and the development work was continuing for the remaining two products. We noticed that the business of the assessee itself is development of software products or providing of software services and hence the revenue generated on their sales or providing of services is its income, in which case, the expenditure incurred on development of those applications shall constitute related expenditure. Even if the expenditure does not result in creation of any successful software product/application/tool etc., considering the business nature of the assessee, those expenses shall constitute revenue expenditure in the hands of the assessee, as it is necessary for the assessee to keep updating itself and keep trying new products to be afloat in the competitive market - Thus we hold that the impugned expenses incurred by the assessee are allowable as revenue expenditure and accordingly, the disallowance made by the assessing officer could not be sustained. TP Adjustment - Adjustment for interest on advances given to Overseas su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as on the balance sheet date, against which the outstanding forward contracts have been taken, should be more than the value of outstanding forward contracts. In that case, the loss arising on restatement of forward contract is fully allowable as deduction. Since the AO has not examined this aspect, we are of the view that this issue needs to be restored to the file of the AO for the limited purpose of examining as to whether the value of underlying assets is more than the value of the forward contracts. Setting off the loss arising from SEZ units against income earned by non-tax holiday units - HELD THAT:- An identical issue has been examined by the co-ordinate bench in the assessee s own case in AY 2009-10 to 2014-15 [ 2020 (10) TMI 605 - ITAT BANGALORE] held that the loss arising in eligible SEZ/STPI undertakings are not required to be adjusted against the profits arising from other SEZ/STPI undertakings and the said loss can be adjusted against profits arising from non-SEZ/non-STPI units. Taxability of profits from development centers located outside India - AO took the view that these development centres are independent units and accordingly estimated income from these centres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendered outside India, as contemplated in the definition of Export turnover. Hence the same is not required to be excluded from export turnover. Accordingly, what is required to be excluded is the expenses specifically mentioned in the definition of export turnover , viz., the expenditure incurred on freight, telecommunication charges or insurance attributable to the delivery of the computer software outside India or expenses, if any incurred in foreign exchange in providing technical services outside India alone are required to be excluded from the export turnover. If any amount is excluded from export turnover , the same is required to be excluded from total turnover also, as held in the case of Tata Elixi Ltd [ 2011 (8) TMI 782 - KARNATAKA HIGH COURT] and HCL Technologies Ltd. [ 2018 (5) TMI 357 - SUPREME COURT] - we set aside the order passed by AO on this issue and direct him to compute deduction u/s 10A/10AA/10B of the Act following the discussions made supra. Eligibility of the assessee to claim deduction u/s 10A of the Act in case of Delayed collections of export proceeds - HELD THAT:- We direct the AO to include sale amount in the Export turnover while computing deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt were not reflected in Form 26AS - HELD THAT:- The assessee cannot be penalised for the fault of the TDS deductor in not filing statement of TDS. It is also possible that the deductor of TDS would have filed the statement of TDS belatedly. Accordingly, we are of the view that this issue requires verification at the end of AO. Accordingly, we restore this issue to the file of AO with the direction to examine the claim of the assessee and allow TDS credit in accordance with law. Addition of amount disallowed u/s 14A of the Act under clause (f) of Explanation 1 to sec. 115JB of the Act to the net profit for the purpose of computing book profit - HELD THAT:- An identical issue was examined by the co-ordinate bench in the assessee s own case in AY 2014-15 [ 2020 (10) TMI 605 - ITAT BANGALORE] special bench of ITAT in the case of Vireet Investments Pvt. Ltd [ 2017 (6) TMI 1124 - ITAT DELHI] has expressed the view that the amount disallowed u/s 14A of the Act cannot be adopted for the purpose of computation of book profit u/s 115JB of the Act and the disallowance to be made u/s clause (f) to explanation 1 has to be computed independently without having regard to the provisions of sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bution Tax upon the assessee, without any basis. According to the assessee, it is erroneous one. The assessee could have moved rectification petition before the AO to redress this grievance. In any case, this issue also requires verification at the end of AO, we restore this issue to the file of the AO. 5. The third ground is general in nature and does not require adjudication. 6. The fourth issue relates to the capitalisation of Salaries and Wages. The back ground for making this addition is described as under by the AO:- "In the course of assessment proceedings, it was found that the assessee has designed some software tools for undertaking IOT, Block Chain and Machine Learning work. These are futuristic technologies and speculated to be disruptive in nature. Sometime in 2012 or 2013, tech specialists speculated that artificial intelligence and Machine Learning can do coding once sufficiently advanced technologies comes into operation. This will be a major challenge for software service providers. When computers start coding new algorithms on an automated basis, the only requirement for an American company will be to design the software architecture. The labour intensive work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relating to these software products should have been capitalised. From the explanations furnished by the assessee, the AO noticed that these software products are developed under the leadership of "Chief Technology Officer" (CTO). He also took the view that the assessee should have used services of 'bench' employees also at times in connection thereto. Since salary expenses constitute major portion of expenses in development of software, the AO called for details of man days of employees working under the CTO and also the bench employees. 6.2 The AO noticed that the 726343 mandays were spent under CTO. The AO took the view that above said salary expenses should be capitalised. Since services of "bench" employees are also utilised at time, the AO took the view that 25% of bench employees mandays could be taken as used for development of above said software and the same worked out to 24,82,972 mandays. Both the above said mandays constituted 7.96% of the total amount of mandays. Accordingly, the AO took the view that the salary expenses to the extent of 7.96% should be capitalised, which worked out to Rs.1496.67 crores. The assessee contended that these software products have been p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee made a claim that all revenue expenses including CTO cost and bench cost are proportionately allocated to all units, including 10AA units. Another Remand Report was called from the AO on 11.07.2019 seeking the actual allocation of CTO cost and bench cost among the l0AA units. The Remand Report of AO dated 20.08.2019 is reproduced as under: "6. In point 3, the Ld Panel has asked the AO to verify whether the CTO cost and Bench cost are actually distributed to l0AA units. The AO called for segmental. Same was furnished as Annexure-3 to assessee's reply dated 9.08.2019. As regards the veracity of the figures, the CA's certificate has been relied upon. 2.12 The Panel has carefully considered the submissions of the assessee as well as the Reports of the AO. The AO admitted that the claim for additional deduction under l0AA is made by the assessee before the AO during assessment proceedings. The claim made by the assessee is only consequential to the addition proposed. The critical aspect is to examine whether the cost of bench employees and CTO cost is allocated to l0AA units in the first place. This was the specific issue on which the remand report was sought fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of Sec 35(1)(iv) reads as under: "in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee, such deduction as may be admissible under the provisions of sub-section (2) " The expenditure is initially claimed by the assessee u/s 37(1) as business expenditure. Sec. 37(l) reads as under: "Any expenditure (not being expenditure of the nature described in section 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profit and gains of business or profession." 2.15 As seen from above, any expenditure which is not covered by section 30 to 36 and which is not capital expenditure is claimed under section 37(l). This shows that even as per the assessee this was not an expenditure covered by Sec. 30 to 36 of the Act. That is the reason why assessee chose to make a claim under Sec. 37(1). Hence, the assessee had no intention to claim the expenditure under the head "scientific resea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount relating to the activities of scientific research. ITAT Mumbai, B Bench in the case of M/s Nivo controls Pvt Ltd vs. CIT-l (ITA No.3533/Mum/20l4 AY 2009-10) held that for claim u/s 35(l)(iv) the assessee is expected to maintain separate books of account. Hence the claim of the assessee cannot be accepted without audited books of account evidencing the expenditure towards scientific research. 2.19 Even otherwise, if the assessee at any stage of its business is of the opinion that it conducting scientific research, then the appropriate course of action u/s 35 read with Rule 5D to apply to Central Government and get the approval of the prescribed authority. In the present case the fresh claim is made by the assessee with regard to conducting scientific research. Hence the burden is on the assessee to refer the matter to the prescribed authority for certificate. The assessee informed the Panel vide Ietter dated 24/09/2019 that it filed an application for approval from Department of Scientific and Industrial Research (DSIR) for recognition of its in-house development activities under section 35 of the Income Tax Act on 31/03/2015 but no approval is granted till date. Consideri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services. (v) Due to fast technological obsolescence in software industry, these products shall have short life only. Hence these products, in practical and real sense, cannot be expected to give enduring benefits to the assessee. (v) He submitted that these expenses have been incurred to facilitate extension of existing business of Information Technology carried on by the assessee and hence they are revenue in nature. 6.7 The Ld A.R also advanced his arguments on the alternative pleas put forth by the assessee. He submitted that (i) software development shall fall under the category of 'applied science' and hence the tax authorities are not justified in rejecting the contention of the assessee that the assessee has carried out scientific research in applied science and hence, even if the expenses are considered to be capital in nature, it is allowable as deduction u/s 35(1)(iv) of the Act. In this regard, the Ld A.R invited our attention to the detailed submissions made before Ld DRP. (ii) The Ld A.R submitted that the Ld DRP was not justified in rejecting the claim for allowing depreciation @ 60% on the amount capitalised. He submitted that the AO had allowed deduction of de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench employees cost 287.67 Total amount capitalised 601.77 We notice that the assessee has furnished details of nature of work carried out in each of the projects grouped under "CTO Projects". In our view, critical analysis of the relevant details thereof would help us to adjudicate the present issue. Accordingly, the relevant details are discussed in brief in the ensuing paragraphs. We noticed earlier that the allocation of bench employees cost has been made on adhoc basis on the presumption that their services would have been used for the projects falling under "CTO Projects". Since this disallowance is made on adhoc/estimated basis, it does not require any specific adjudication, i.e., the decision taken by us on disallowance of CTO projects will apply mutatis mutandis to the disallowance made out of salary expenses of bench employees. 6.11 The assessee has explained nature of work carried out/projects undertaken in each of the items mentioned above, which are discussed hereunder in brief. (A) CTO Projects:- The nature of work carried out/projects undertaken under CTO has been explained as under by the assessee:- (a) Wipro Accellerate :- It is prepaid cable broad band ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re Wipro specific solution on third party Platform and Tools customization to meet domain and customer needs for faster and efficient service delivery We notice that the "D-Internal Projects" alone constitutes applications/projects for internal use. Other items falling under A to C and E are meant for sale/service to customers etc. 6.12 The question that arises is whether the expenses incurred in all of the above nature is capital or revenue in nature. We shall also examine as to whether these expenses have resulted into any product, which requires to be capitalized. The assessee herein is one of the reputed information technology company. The business of the company, inter alia, is to develop software for its clients and also develop domain specific softwares, which shall be sold/licensed to the public. The development of software, being the core business activities of the assessee company, the revenue generated from sale/licensing of software or in providing software development services constitute its income and accordingly, the expenditure incurred on development of relevant software should constitute revenue expenditure under revenue-cost matching principle. 6.13 The case w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto acquisition of any capital asset. The same merely enhances the productivity or efficiency and, hence, to be treated as revenue expenditure. In fact, this court had an occasion to consider whether the software expenses is allowable as revenue expenses or not and held, when the life of a computer or software is less than two years and as such, the right to use it for a limited period, the fee paid for acquisition of the said right is allowable as revenue expenditure and these softwares if they are licensed for a particular period, for utilizing the same for the subsequent years fresh licence fee is to be paid. Therefore, when the software is fitted to a computer system to work, it enhances the efficiency of the operation. It is an aid in manufacturing process rather than the tool itself. Though certain application is an enduring benefit, it does not result into acquisition of any capital asset. It merely enhances the productivity or efficiency and, therefore, it has to be treated as revenue expenditure. In that view of the matter, the finding recorded by the Tribunal is in accordance with law and does not call for any interference. Accordingly, the second substantial question of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... means that is owned or controlled by a party existing prior to the beginning of the joint development project or resulting from activities which are independent from and concurrent with the joint development project. This source code was not a capital asset of the assessee and was clearly in the nature of stock-in-trade consumable stores or raw material held for the purpose of business or profession of the assessee's falling within clause (i) of exception to section 2(14) of the Act that defines capital asset. The same reasoning would be applicable to the Foreground Information which the assessee was privy to in the course of joint development of Foreground IPR. 21. The contention of the learned Counsel for assessee was that the assessee was not in the business of buying and selling IPR's and was only engaged in creating and exploiting IPRs. This argument is devoid of any merit. The business of the assessee is developing software for telecom companies. The revenue that the assessee derives in its business is from software services, product and technology licensing and commissioning services. In the course of its business, it develops software and becomes owner of the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce would fall under the exceptions given in the definition of Capital asset u/s 2(14) of the Act, since the issue agitated by the above said assessee required consideration of sec.2(14) of the Act. 6.16 There is one more reason to treat the software applications/tools etc., as revenue in nature, i.e., the software industry is prone to fast technological obsolescence and hence the assessee has submitted before the tax authorities that whatever tools, it has developed may have short life. Further, it was submitted that the assessee should be required to continue to do its research on developing new tools in order to be afloat in the software industry. Hence the very purpose of developing tools for its internal use is to expedite the software development/ providing of software services in tune with current practices, which would mean that they facilitate and enhance not only the productivity, but also the efficiency. The effect of technological obsolescence, in the context of allowing cost of certain assets as revenue expenditure, was well explained by Hon'ble Supreme Court in the case of Alembic Chemical works (177 ITR 377) in the following words:- "It would, in our opinion, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time, the test of enduring nature cannot always reliably be applied. Software industry is one such field where advancements and changes happen at a lightning pace and it is difficult to attribute any degree of endurability even to system software let alone application software." The Hon'ble Calcutta High Court accordingly allowed the cost of purchase of software by M/s Indian Aluminium Company Ltd as revenue expenditure. It has also expressed the view that the test of endurability cannot be applied to System Software also. Hence improvisation in the process and technology is supplemental to the existing business of Information Technology companies also. It would result in improvement in the operations of the existing business, its efficiency and profitability. Thus, the observations made by Hon'ble Supreme court in the case of a Pharma Company, in our view, equally applies to an Information Technology company also. 6.17 The jurisdictional Hon'ble Karnataka High Court had an occasion to decide the issue relating to expenditure incurred on development of software product in the case of CIT vs. Tejas India Network P Ltd (52 taxmann.com 513). In this case, The assessee before the Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct without any discussion." Following questions were posed before the Hon'ble High Court in one of the several appeals filed before it and the Hon'ble Karnataka High Court decided this issue in favour of the assessee taking note of technological obsolescence and also following the decision rendered by Hon'ble Supreme Court in the case of Alembic chemical works:- "(1) Whether the Tribunal was correct in-holding that a sum of Rs.5,82,21,211/- incurred for developing a product TJ-100 having a utility value for period of 5 years cannot be treated as a capital expenditure and depredation allowed as held by the Assessing officer and confirmed by the Appellate Commissioner but should be allowed as a revenue expenditure? (2) Whether the Tribunal was correct in holding that the expenditure allowable should be alternatively allowed u/s.35(1)(iv) of the Act, as the same had been incurred on scientific research related to the business carried on by the assessee?" 8. We have heard the learned counsel appearing for the parties. 9. Learned counsel for the revenue relying on the statements of the officials as set out in the order of the assessing authority contended that, the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t may break down. It is not every advantage of enduring nature acquired by an assessee that makes it a capital expenditure. What is material to consider is the nature of the advantage in a commercial sense. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. 13. In fact, the Apex Court in the case of Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377/43 Taxman 312 held that, it would be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know how at any particular stage in this fast-changing area of medical science. The state of the art in some of these areas of h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has been held that, it is well-settled that it is not only permissible, but it is also necessary for any business to update its own knowledge and adopt better ways of organising its business, if it is so to survive in the market. The expenditure so incurred for such purpose cannot be regarded as capital expenditure and it is only a revenue expenditure. Further, in the following decision it was held that study undertaken in relation to an existing business is revenue in nature. [CIT v. Manganese Ore India Ltd [2016] 67 Taxmann.com 268 (Bombay), ITO v. Dodsal Mfg P Ltd [1984] 19 Taxman 27 (Ahmedabad), CIT v. Priya Village Roadshows Ltd [2009] 185 Taxman 44 (Delhi). 6.19 The purchase cost of application software has been held to be revenue in nature by the jurisdictional High Court. The test of enduring benefit is also held to be not a deciding factor. The expenditure incurred in updating its capabilities and improvisation are held to be revenue in nature. The above said principles, even though laid down for purchase of software for the purpose of business, the same should, in our view, be applied with more force for software developed in house, since they are meant to improve effi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustment for interest on advances given to Overseas subsidiaries. (b) Adjustment made for Corporate guarantee commission. (c) Adjustment for Specified Domestic Transaction (SDT) 7.1 The first item in the above said list relates to the transfer pricing adjustment made towards interest on advances given to Overseas subsidiaries. The facts are that the assessee had granted short term advances to its various foreign subsidiaries without charging interest. Hence, the TPO computed interest on such advances to the tune of 87.69 crores. The Ld. DRP also confirmed the view taken by TPO. 7.2 We notice that an identical issue was examined by the coordinate bench in the assessee's own case in IT(TP)A Nos.99/Bang/2014 & others relating to AY 2009-10 to 2014-15, wherein the Co-ordinate bench has decided this issue as under:- "36.2 The Ld. AR submitted that an identical issue was examined by the coordinate bench in A.Y. 2008-09 and ALP rate of interest was fixed at LIBOR rate + 150 basis point. The Ld. A.R. submitted that the revenue has accepted the order passed by Tribunal on this issue by not challenging the same before Hon'ble High Court. The Ld. A.R. further submitted that the TPO him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uarantee the services to be rendered by the A.E. to its customers. In consideration for providing corporate guarantee, the Associated Enterprises has paid commission to the assessee computed at the rate of 0.50% p.a. on the value of corporate guarantee so provided. According to the assessee, it has bench marked this transaction by applying Comparable Uncontrolled Price (CUP) method. However, the TPO was not satisfied with the rate of 0.50% p.a. The TPO discussed about the nature of guarantees provided in the normal course and also various issues that should be considered while determining ALP of corporate guarantee. After discussing all these points the TPO made transfer pricing adjustment of Rs.52.95 crores towards Corporate Guarantee. 7.4 We notice that an identical issue has been decided by the coordinate bench in the assessee's own case in AY 2011-12 to 2014-15 as under:- "37.2 The Ld. A.R. submitted that the TPO has determined the rate of 3% p.a. in respect of corporate guarantee provided by the assessee to its Associated Enterprises without furnishing any basis for arriving @ 3%. The Ld. A.R. submitted that in many cases, the Tribunal has accepted ALP of corporate guarante ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commission in excess of 0.50%. 7.5 The last item in this issue relates to the transfer pricing adjustment made in respect of Specified Domestic Transaction (SDT) made. The TPO has made adjustment to the tune of Rs.345.96 crores and it was confirmed by Ld DRP. This issue is also covered by the decision rendered by the co-ordinate bench in the assessee's own case in AY 2014-15. The decision rendered by the co-ordinate bench on this issue are extracted below:- "39.12 We heard Ld D.R and perused the record. We shall first have regard to various applicable provisions of the Act. The provisions of sec.92BA of the Act was introduced by Finance Act, 2012 w.e.f. 1.4.2013 to determine Arm's length price of Specified domestic transactions (SDT), when the aggregate value of such transactions exceeds the prescribed limit. Sec.92BA reads as under:- "92BA. For the purposes of this section and sections 92, 92C, 92D and 92E, "specified domestic transaction" in case of an assessee means any of the following transactions, not being an international transaction, namely:-- (i) any expenditure in respect of which payment has been made or is to be made to a person referred to in claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under sub-section (1) or sub-section (2A), or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under sub-section (2) or sub-section (2A), has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction or specified domestic transaction was entered into." 39.13 The different undertakings owned by the assessee have entered into inter unit transactions and many of those undertakings have claimed deduction u/s 10AA of the Act. The aggregate value of those transactions has also exceeded the threshold limit prescribed in sec.92BA of the Act. Accordingly, it is submitted that the provisions of sec.92BA(v) relating to Specified Domestic Transaction are applicable to the assessee. At the cost of repetition, we extract below clause (v) of sec.92BA:- "(v) any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of sub-section (8) or subsection (10) of section 80-IA are applicable;" Hence, it is pertinent to refer to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t may so happen that an assessee may be having more than one undertaking, out of which only some units may be eligible for deduction/benefit prescribed in those sections. Hence, there may arise a tendency to shift profits from "non-eligible" undertaking to "eligible" undertaking by under invoicing/over invoicing of transactions of transfer of goods or services, so that the assessee could avail higher tax benefits. Hence, sub-sec. (8) was introduced in sec. 80IA and the same was made applicable to other incentive provisions also. The purpose of introducing sub-sec. (8) was to prevent claim of excess deduction or benefit granted to certain "eligible undertakings". The modality adopted in se.80IA(8) is to substitute "market value" to the transactions of transfer of goods or services between eligible unit and non-eligible unit, if the said transfer of goods or services between the undertakings did not occur at "market value". The AO, for the purpose of computing deduction under respective section, shall compute the "profits and gains" of the eligible undertaking by substituting the "actual price" with "market value". 39.14 Though the above said provisions empowered AO to examine and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oks of account in respect of the previous year in which the Specified Domestic Transaction was entered into. 39.17 It can be noticed that the provisions of sec.92C(4) requires computation of total income by adopting arm's length price determined by the AO and further, if the total income is enhanced on account of adoption of ALP, then the deduction u/s 10A/10AA/10B/Chapter VIA will not be available for such enhanced income. At the same time, while computing the deduction u/s 10A/10AA/10B/Chapter VIA, the AO has to compute the "Profits and gains of business" by substituting ALP and this exercise has to be carried out for the purpose of computing the quantum of deduction. 39.18 We have noticed earlier that the assessee has entered into inter-unit transactions with different units. It included transactions between (a) SEZ units and SEZ units, (b) SEZ units and non-SEZ units. In between SEZ units also, the transactions have taken place between SEZ units enjoying 100% tax deduction and SEZ units enjoying 50% tax deduction. Accordingly, one unit shall be providing services and another unit shall be receiving services. The inter-unit transaction would result in "generation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same shall be outside the scope of provisions of sec.10AA/Transfer pricing provisions, since the provisions of sec.80IA(8) do not cover transactions between two eligible units. This may be a lacunae in the Income tax Act, but the said lacunae could be cured only by the Parliament. Hence, on a strict interpretation of law, the transactions between two eligible units are not covered by sec.80IA(8) of the Act. Consequently, the transactions entered between two eligible units are outside the scope of "specified domestic transactions" mentioned in sec.92BA of the Act. Accordingly, this view of the tax authorities is set aside. (B) The assessee also contended that Arms length price should be applied to both the eligible unit and non-eligible unit. This contention of the assessee is liable to rejected for the purpose of computing deduction u/s 10AA of the Act. This is so because, as per the provisions of sec.80IA(8) of the Act, the profits and gains of "eligible unit" alone is mandated to be recast by adopting "market value" for the purpose of computing deduction u/s 10AA of the Act. Since deduction u/s 10AA is not allowed for "noneligible unit", the question of recasting the profit a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns in order to explain the effect of adoption of ALP u/s 92 and also while computing deduction u/s 10AA of the Act. The illustrations are given in sets, i.e., for units eligible for deduction @ 100% and units eligible for deduction @ 50%. Within the above said examples, illustrations are given for both the situations, viz., over invoicing of revenue and under invoicing of expenses by eligible units. EXAMPLE A: - Eligible Unit - eligible for deduction u/s 10AA of the Act @ 100%. ILLUSTRATION 1 (Over invoicing revenue) Transaction between an Eligible unit, which is eligible for deduction @ 100% and a non-eligible unit. Eligible unit is Service Provider and accordingly earns revenue from noneligible unit. Transaction Price - 1,00,000 Arms Length Price - 50,000 Actual Transaction SDT Adjustment Eligible Unit Non-eligible unit Total Eligible Unit Non-eligible unit Total Sales Revenue Less: Adjustment for ALP 10,00,000 - 5,00,000 - 15,00,000 - 10,00,000 -50,000 5,00,000 15,00,000 -50,000 Adj Rev 10,00,000 5,00,000 15,00,000 9,50,000 5,00,000 14,50,000 Cost Add: Corresponding Adjustment for ALP -9,00,000- -4,25,000- -13,25,000- -9,00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... net income" remains at Rs.1,75,000/- before and after ALP adjustments u/s 92 of the Act, since adjustment to the inter-unit transactions have to be done in the hands of both eligible and non-eligible units. (b) The amount of deduction u/s 10AA worked out to Rs.1,00,000/- prior to ALP adjustment. However, it has fallen down to Rs.50,000/- after ALP adjustment in terms of sec.80IA(8). (c) Thus the reduction in the quantum of deduction u/s 10AA, i.e., Rs.50,000/- is also the adjustment made u/s 92 of the Act in respect of Specified domestic transaction. (d) Hence the total income has increased from Rs.75,000/- (prior to ALP adjustment) to Rs.1,25,000/- after ALP adjustment. The net effect is the addition of SDT adjustment of Rs.50,000/-. (B) Eligible Unit - eligible for deduction u/s 10AA of the Act @ 50%. ILLUSTRATION 3 (Over invoicing of revenue) Transaction between an Eligible unit, which is eligible for deduction @ 50% and a non-eligible unit. Eligible unit is Service Provider and accordingly earns revenue from noneligible unit. Transaction Price - 1,00,000 Arms Length Price - 50,000 Actual Transaction SDT Adjustment Eligible Unit Non-eligible unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0% 1,00,000 -50,000 75,000 - 1,75,000 -50,000 50,000 -25,000 1,25,000 - 1,75,000 -25,000 Total Income 1,25,000 1,50,000 SDT adjustment 25,000 In this illustration, (a) the "net income" remains at Rs.1,75,000/- before and after ALP adjustments u/s 92 of the Act, since adjustment to the inter-unit transactions have to be done in the hands of both eligible and non-eligible units. (b) The amount of deduction u/s 10AA worked out to Rs.50,000/- prior to ALP adjustment. However, it has fallen down to Rs.25,000/- after ALP adjustment in terms of sec.80IA(8). (c) Thus the reduction in the quantum of deduction u/s 10AA, i.e., Rs.25,000/- is also the adjustment made u/s 92 of the Act in respect of Specified domestic transaction. (d) Hence the total income has increased from Rs.1,25,000/- (prior to ALP adjustment) to Rs.1,50,000/- after ALP adjustment. The net effect is the addition of SDT adjustment of Rs.25,000/-. 39.22 We notice that the TPO has not carried out these exercises. Hence, in our view, this issue requires fresh examination at the end of TPO/AO by duly considering various other contentions of the assessee and also by considering the discussions m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 14A as computed under Rule 8D(2)(iii) cannot be more than the actual expenditure which can be relatable for earning the exempt income and debited to the Profit and Loss account. In the case on hand the disallowance made by the assessee on its own is not the total expenditure debited to the profit and loss account but it is the allocation made by the assessee out of the total expenditure. Therefore the basis of the allocation and apportionment of the said disallowance made by the assessee is subject matter of verification and satisfaction of the Assessing Officer. Accordingly, we set aside this issue to the record of the Assessing officer to re-examine the issue in the light of the orders of this Tribunal in assessee's own case as well as in the case of DCIT vs. M N Dastur & Co P Ltd (supra)." Before us the assessee contended that the A.O. has not given any substantial finding in respect of correctness or otherwise of the amount disallowed by the company. Accordingly, it was submitted that the A.O was not justified in applying rule 8D of IT Rules. The Ld. A.R. also placed reliance on the decision rendered by Hon'ble Supreme Court in the case of Godrej &Boyce Manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aised by the assessee." We have noticed that the assessee has voluntarily disallowed the loss arising on restatement of foreign hedge transactions and hedging on ECB loans, since both the items are relating to capital account transactions. We also notice that the AO has allowed the loss arising on restatement of trade debtors, trade creditors and other monetary assets. The AO has, however, disallowed the loss arising on restatement of forward contracts. 27.6 The decision rendered by the co-ordinate bench in the case of Quality Engineering and software technologies P Ltd (supra) states that the loss arising on reinstatement of a forward contract, whose underlying assets is a revenue item, then the said loss cannot be considered as speculative loss and also not a notional loss. We notice that the details of underlying assets in respect of outstanding forward contracts are not available on record. There should not be any doubt that the value of underlying assets (in the form of debtors, creditors and other monetary assets) as on the balance sheet date, against which the outstanding forward contracts have been taken, should be more than the value of outstanding forward contracts. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rming the finding of the learned CI (A), at para 16.4 on pages 29 and 30 thereof, held as under : "16.4. We have carefully considered the contentions of the either parties and also carefully perused the order of the Hon'ble Tribunal While deciding an identical issue, the Hon'ble Tribunal cited the following decisions - (1) [12.5.] ITA No: 669 & 804/Ban/05 dated: 22.3.2006 for the AY-2000-01 in the case of assessee company wherein it was concluded that we direct the AO to allow set off of loss from 10A units against the other business income of the assessee or income from other sources." (2) ITA NO.248 & 249/Bang/07 dated2711.2007in the case of I-Gate Global Solutions Ltd v. ACIT wherein the issue was decided in favour of the assessee. (3) ITA No.387/Bang/06 dated: 26.6.2007 in the case of M/s Web Spectron P.Ltd the issue was decided in favour of the assessee. The Hon'ble Tribunal has, further, observed that "the decision of jurisdictional High Court is to the effect that deduction allowed u/s 10A in respect of undertaking is to be allowed after setting off of brought forward loss of that undertaking. Income of each undertaking is to be computed independentl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken independently and losses of section 10A units cannot be set off against profits of section 10A units, when computing deduction under section 10A of the Act?" "Whether the appellate authorities failing to take into consideration the amendment provision of section 10A(6)(ii) of the Act, which clearly contemplated that the loss of the undertaking can be carried forward and adjusted against other income?" "Whether the appellate authorities were correct in holding that the finding recorded by the Assessing Officer that in view of the amendment to section 10A(6)(ii) with effect from April 1, 2001 the loss of the STP units should be carried forward at the end of the 10 years, tax holiday period under section 10A of the Act and should be set off against profits in respect of Madivala R&D unit by treating the cost of development of shrink wrap computer software as work in progress and therefore cannot set off the loss?" 163. The said substantial questions of law was considered by the apex court in the case of CIT v. Canara Workshops P. Ltd. (1986) 161 ITR 320 (SC) in favour of the assessee and against the Revenue. 164. Following the said judgement in the assessee's case i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esentative and considered the relevant material on record. At the outset, we note that an identical issue has been considered in assessee's own case for the Assessment year 2004-05 and again for the Assessment year 2007-08. For the Assessment Year 2007-08, the Tribunal has decided this issue in para 10.4 as under: "10.4 We have heard both parties and have carefully perused and considered the material on record. We have perused the order of the co-ordinate bench of the Tribunal in the assessee's own case for Assessment year 2004-05 in ITA No.1072/Bang/07 (supra) and find that the discussions are at para 24 onwards and the relevant findings are at para 24.2 to para 24.2 which are extracted hereunder: "24.2 We have carefully considered the argument putforth by the Ld. A.R. and also the reasoning of the Ld. A.O. and the Ld. CIT(A) in their respective orders. The Hon'ble Tribunal, for the AYs 2001-02 and 02-03 in the assessee's own case had an occasion to deal with an identical issue. After deliberations, the Hon'ble Tribunal had concluded thus - "34.4 The learned CIT(A) has also not recorded a finding that such goods or services have been transferred at the market value. In ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t received, answered the question in favour of the assessee and against the Revenue. 167. In so far as gain on exchange rate fluctuation is concerned, it was subject matter of ITA 3202 of 05 which was decided on February 28, 2012 in the assessee's case itself, where the said question was answered in favour of the assessee and against the Revenue. 168. In so far as income earned from interest is concerned that was subject matter of this court in the case of CIT v. Motorola India Electronics P. Ltd. in ITA No.428 of 2007 decided on December 11, 2013 - (2014) 2 ITROL 499 (Karn), while dealing with exemption under section 10B. It is in Pari materia with section 10A and has answered the said question in favour of the assessee and against the Revenue. 169. As all these questions are decided and answered in favour of assessee in the aforesaid case, this question of law is answered in favour of the assessee and against the Revenue." 5.5 The decision rendered by Hon'ble Karnataka High Court would cover the income booked under the head Sale of Scrap/Newspaper, Rental income and interest income. Accordingly, we direct the AO to allow deduction u/s 10A/10AA/10B of the Act in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in AY 2012-13 and 2013-14 are identical with the nature of interest income booked separately. Since the legal principles relating to deduction of interest income u/s 10A/10AA/10B are discussed here, we adjudicate interest income booked under the head "miscellaneous income" and also reported separately. The facts relating to this issue as narrated by the assessee in its written submissions are that the assessee had availed "packing credit loan" in foreign currency (PCFC) from M/s Duetsche Bank, HSBC, JP Morgan, Bank of Tokyo. It is in the nature of pre-shipment credit extended to the exporters for financing working capital. According to the assessee, it has used the funds, which are not immediately required in operations, to make short term fixed deposits. Similarly, the surplus funds available with the SEZ units have also been invested in fixed deposits. All these fixed deposits have earned interest income. The contention of the assessee is that these fixed deposits have been made out of loan funds as well as surplus funds generated through operations of SEZ units and hence they form part of "profits of business". Hence they are eligible for deduction u/s 10A/10AA/10B of the Act. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... first as to whether the AO has assessed interest income under the head "Income from business" or under the head "Income from other sources". If the AO has assessed interest income as business income, then the assessee is eligible for deduction u/s 10A/10AA/10B on interest income also. However, if the AO has assessed interest income under the head "income from other sources", then it is required to be examined as to whether there is direct nexus between interest income and income of business undertaking. 6.7 With regard to Category (a) above, if the nexus is shown between the loan funds and the deposits, the assessee is eligible for deduction in respect of interest income, following the decision rendered by the Hon'ble Karnataka High Court in the assessee's own case (referred supra). 6.8 With regard to Category (b) above, it is imperative on the part of the assessee to show that there is nexus between interest income and income of business undertaking. We have noticed earlier that the AO has taken the view that the surplus funds of undertaking located in SEZ are put into common bank account. Accordingly, the AO has observed that the surplus funds relating to SEZ division ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tantial question in favour of the assessee and against the Revenue. Accordingly, the said substantial question of law is answered in favour of the assessee and against the Revenue." 7.6 In the case of Tata Elxsi Ltd (supra), the Hon'ble Karnataka High Court dealt with this issue as under:- "18. As Section 10A was introduced to give effect to the Exim Policy of the Central Government, we have to take into consideration the provisions of the Exim Policy. 19. Paragraph 6.10 of the Exim Policy speaks about exchange through others. It provides that a EOU/EHTP/STP/BTP unit may export goods manufactured/software developed by it through another exporter or any other EOU/EHTP/STP/SEZ unit subject to the conditions mentioned in paragraph 6.19 of Handbook. The conditions to be fulfilled if a Unit has to export through other exporters is as under: "6.19 An EOU/EHTP/STP/BTP unit may export goods manufactured/software developed by it through other exporter or any other EOU/EHTP/STP/SEZ/BTP unit subject to condition that: a) Goods shall be produced in EOU/SHTP/STP/BTP unit concerned. b) Level of NFE or any other conditions relating to imports and exports as prescribed shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is that to be eligible for exemption from payment of income tax, export Should earn foreign exchange. It does not mean that the undertaking should personally export goods manufactured/software developed by it outside the country. It may export out of India by itself or export Out of India through any other STP Unit. Once the goods manufactured by the assessee is shown to have been exported out of India either by the assessee or by another STP Unit and foreign exchange is directly attributable to such export, then Section 10A of the Act is attracted and such exporter is entitled to benefit of deduction of such profits and gains derived from such export from payment of income tax. Therefore, the finding of the authorities that the assessee has not directly exported the computer software outside country and because it supplied the software to another STP unit, which though exported and foreign exchange received was not treated as an export and was held to be not entitled to the benefit is unsustainable in law. The substantial question of law is answered in favour of the assessee and against the revenue. The appeal is allowed. The impugned orders are set-aside. The assessee is held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ewards and other reimbursements. 15.2 The co-ordinate bench has rendered its decision on each type of reimbursements as under:- "20.5 We shall first examine the amount received as asset reimbursement. From the submissions made by the assessee, we notice that the assessee has purchased certain specialized equipment on the specific request of the customers, who had also agreed to reimburse the cost of the equipment. The assessee has debited the profit & loss account with the cost of purchase of assets and credited the profit & loss account with the amounts reimbursed by the customers. From the facts, we notice that the cost so incurred cannot be categorised as direct cost related to the development of software. Since it is an expenditure incurred at the request of customer for which reimbursement was also received, there is no revenue element involved in it. Accordingly, we are of the view that this amount should not be considered as either expenditure or part of export turnover, i.e., the receipt should be netted off against the expenditure. We hold accordingly. 20.6 We shall next examine the nature of payment received by way of incentive awards. It is the submission of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... An identical issue was examined by the co-ordinate bench in the assessee's own case in AY 2009-10 to 2014- 15 and it was decided as under:- "19.2 The facts relating to this issue are stated in brief. The A.O. noticed that the assessee has incurred various expenses in foreign currency under different heads. The issue is whether these expenses are required to be deducted from "export turnover" as required under the definition of the term "Export turnover" for the purpose of computing deduction u/s 10A/10AA/10B of the Act. … …… 19.3 ………………The AO took the view that, as per the definition of the term "Export Turnover" given under sec.10A/10AA/10B of the Act, "expenditure incurred in foreign currency" is required to be excluded from the amount of "Export turnover". Accordingly, the A.O. proposed to exclude all the expenditure incurred in the foreign currency from the amount of export turnover while computing deduction u/s 10A of the Act. ……………… 19.5 The Ld. DRP agreed with the view taken by A.O. on the matter of exclusion of those expenses incurred in foreign currency from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue has brought up this issue before us for redressal. It was the case of the Revenue that the Ld.CIT(A) has grossly erred in deciding the issue in favour of the assessee by following the decision of Hon'ble Tribunal in the case of Infosys Technologies Limited which has been challenged before the Hon'ble High Court. Another point on which the Revenue found fault with the CIT(A) was that the decision relied on by him was rendered with regard to deduction u/s 80HHC whereas the issue before him was the claim u/s 10A of the Act. It was, further, submitted that the assessee had filed annual returns before the STPI authorities showing the assessee had earned export income through data communication as well as onsite consultancy which shows that it had rendered technical services. The agreements entered into by the assessee with the clients for exporting computer software clearly provides software application development, deployment and support services. To strengthen its stand, the Revenue, further, submitted that the assessee provides technical services in developing software as per the specifications of the client(s) and, hence, it is clear that it provides technical services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14.1, After considering the rival submissions, the Ld. CIT(A) took a view that this issue was covered by his decision for the AYs 01-02 and 02-03 and holds good for the AY under dispute also and, accordingly, directed the AO to consider the reimbursements as part of export turnover for the purpose of computing deduction u/s 10A. 14.2. In respect of Telecommunication expenses, the Ld. AO retied on the definition of the export turnover to exclude of the said expenses as expenses attributable to delivery of computer software and excluded the said sum from export turnover. 14.3. The assessee company in its submission was of the view that -- "17.1 …………….This is erroneously excluded by the AO. The expenses never formed part of export turnover. Exclusion can be made provided the same is included in the first place. As telecommunication expenses are debited to the profit and loss account of each section 10A unit, it is clear that they have not been included in the turnover. Thus exclusion from tunio.er is not warranted at all. However, the AO has estimated Rs.1,81,04,480/- being 5% of the net communication charges incurred as the amount in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... & 969(B)/2006 2. M/s.TataElxsi Ltd. 315(B)/2006 dt 16.10.2007 3. M/s.I-Gate Global Solutions Ltd. v.ACIT (Supra) 15. We have heard both the parties. Deduction u/s 10A is available in respect of profit or gains derived from an undertaking from the export of articles or things or computer software. One has to understand the meaning of computer software with reference to the fact that it is preceded by articles or things. Deduction u/s 10A was allowed if export proceeds are from the export of articles or things or computer software. It means that such export proceeds must relate to the goods and no for the services. Computer software is developed by providing off site expenses and onsite expenses. The amount receivable in respect of computer software does not include any reimbursement of onsite expenses. Payments made to Engineers employed on site are for the development of software. By such development, the assessee has not rendered any technical services relevant to clause (iv) of Explanation 2 of section 10A technical services have not been defined. The CBDT vide Circular No.694 dated 2.3.11.1994 stated that computer programmes are not physical goods but are developed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... representatives of various companies and noticed that 80% of the uplinking charges are incurred for the delivery of software. We are not having the details of the unlinking charges, hence, the issue of disallowance of telecommunication expenses relating to the delivery of software is restored on the file of the assessing officer. The assessing officer will give opportunity to the assessee to furnish the details in respect of telecommunication expenses fur the delivery of software." 14.7. As similar issues have been decided by the Hon'ble Tribunal for the AYs 01-02 & 02-03 in the assessee's own case, we respectfully follow the said decision in toto which holds good for the AY under dispute also. Accordingly, this issue is remitted back on the file of the assessing officer as in last year." 19.8 We notice that the coordinate bench has followed the decision rendered by another coordinate bench in the case of M/s. RELQ Software Private Ltd (supra), wherein a distinction was made to the term "Technical services" and it was held that payment made to engineers employed on site for development of software cannot be considered as "Technical services" mentioned in clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from export turnover. Accordingly, what is required to be excluded is the expenses specifically mentioned in the definition of "export turnover", viz., the expenditure incurred on freight, telecommunication charges or insurance attributable to the delivery of the computer software outside India or expenses, if any incurred in foreign exchange in providing technical services outside India alone are required to be excluded from the export turnover. 19.10 Further, if any amount is excluded from "export turnover", the same is required to be excluded from "total turnover" also, as held by Hon'ble Karnataka High Court in the case of Tata Elixi Ltd (2012)(204 Taxman 321) and by Hon'ble Supreme Court in the case of CIT vs. HCL Technologies Ltd (CA No.8489-8490) 19.11 Accordingly, we set aside the order passed by the A.O. on this issue and direct him to compute the deduction u/s 10A/10AA/10B of the Act by following the discussions made supra." 16.1 Before us, the Ld A.R submitted that the above said decision rendered by the co-ordinate bench would get support from the decision rendered by Hon'ble Jurisdictional High Court in the case of Motor Industries Company Limited (ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard the parties on this issue and perused the record. We notice that an identical issue was considered by Hon'ble High Court of Karnataka in the assessee's own case in 2001-02 to 2004-05, wherein the High Court decided the issue in favour of the assessee with the following observations:- "146. The facts are not in dispute. The assessee is a status holder exporter. The export has been done strictly in accordance with law. Foreign exchange remittances should have been received within six months from end of the financial year. It has not been received. Therefore, an application is filed seeking for extension of time to the Reserve Bank of India. Even to this day the Reserve Bank of India has not rejected the said request. On the contrary, after the period of 6 months, foreign exchange remittances are received and credited to the assessee's account through the Reserve Bank of India. It is in this context merely because the written approval of extension is not passed by the Reserve Bank of India, whether the assessee could be denied the benefit of Section 10A. The Tribunal on consideration of the entire material on record, taking note of the statutory provisions and the object underl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uble taxation of income under this Act and under the corresponding law in force in other country, i.e., when tax is payable on income under this Act as well as under the corresponding law in that country they could agree to tax in one country. This happens even before payment of any tax. By virtue of such agreement, tax is paid only in one country, that is how the benefit of double taxation relief by way of avoidance is granted to the assessee in both the countries. 38. Secondly, under section 90(1)(a)(i) of the Act, once such assessee has paid Income-tax, under the Act as well as the tax in the other country, by such agreement, relief could be given by giving credit of the tax paid in the foreign country to the assessee in India. In cases covered under this provision the assessee pays tax in both the jurisdictions. After payment of such tax, he is entitled to double taxation relief by way of credit in respect of the tax paid in the foreign jurisdiction. 39. Thirdly, in cases covered under section 90(1)(a)(ii) of the Act it is not a case of the income being subjected to tax or the assessee has paid tax on the income. This applies to a case where the income of the assessee is ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Therefore, the total income before allowing the said deduction includes the profits and gains from the business referred to in section 10A(1). Section 5 of the Act explains the scope of total income to mean all income from whatsoever source derived. Section 4 of the Act charges this total income. However, section 10A(1) provides that, subject to the provisions of the said section, profits and gains derived by an undertaking referred to in that section shall be allowed as deduction from the total income of the assessee. Therefore, by virtue of the aforesaid statutory provision namely section 10A of the Act, the income of the asses-see from exports in respect of the said unit is exempted from payment of Income-tax. The very fact that it is exempted from payment of tax means but for that exemption such income is chargeable to tax. This relief under section 10A is in the nature of exemption although termed as deduction. But for this exemption, the said income namely profits and gains derived by an undertaking, is chargeable to tax under the Act. The said exemption is only for a period of ten years. After the expiry of the said ten years the said income is taxable. When such exemptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. Such deduction shall not, however, exceed that part of the Income-tax (as computed before the deduction is given) which is attributable to the income which may be taxed in the United States." 59. A perusal of the aforesaid provision makes it clear that if a resident Indian derives income, which may be taxed in the United States, India shall allow as a deduction from the tax on the income of the resident, amount equal to the Income-tax paid in the United States of America, whether directly or by deduction. The conditions mandated in the treaty is that if any "income derived" and "tax paid in the United States of America on such income", then tax relief/credit shall be granted in India on such tax paid in the United States of America. The said provision does not speak of any Income-tax being paid by the resident Indian under the Income-tax Act as a condition precedent for claiming the said benefit. Where the Indian resident pays no tax on such income derived, whereas the said income is taxed in the United States, India shall allow as a deduction from the tax on the income of that resident an amount equal to the Income-tax paid in the United States. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in accordance with the provisions of the agreement, whether directly or by deduction, by a resident of India, in respect of income from sources within Canada which has been subjected to tax both in India and Canada shall be allowed as a credit against the Indian tax payable in respect of such income but in an amount not exceeding that proportion of Indian tax, which such income bears to the entire income chargeable to Indian tax." 61. A reading of the aforesaid provision makes it clear that the benefit of article 23 would be available to an assessee in India only in respect of the income from sources within Canada, which has been subjected to tax both in India and Canada, which forms part of the total income of the assessee and has suffered tax in India under the Income-tax Act and has suffered tax in Canada also, i.e., assessee has paid tax both in India as well as in Canada on the same income. Then the agreement provides the tax paid in Canada shall be allowed as a credit against the Indian tax payable in respect of such income. However, the said benefit is confined only to the extent of an amount not exceeding that proportion of Indian tax, which such income bears to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vious year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is no agreement under section 90 for the relief or avoidance of double taxation, Income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deduction from the Indian Income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country whichever is the lower, or at the Indian rate of tax if both the rates are equal . . . (iv) the expression 'Income-tax' in relation to any country includes any excess profits tax or business profits tax charged on the profits by the Government of any part of that country or a local authority in that country." 66. The said provision provides for deduction of the tax paid in any country from the Indian Income-tax payable by him of a sum calculated on such doubly taxed income even though there is no agreement under section 90 for the relief or avoidance of double taxation. Explanation (iv) defines the expression Incometax in relation to any country includes any excess profit tax or business profits t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accrue or arise in India), he has paid in any Country with which there is no agreement under section 90 for the relief or avoidance of double taxation, income tax, by deduction or otherwise….. It can be noticed that, "payment of tax" is mentioned both in sec.90(1)(a)(i) and sec. 91. However, section 90(1)(a)(ii) uses the expression "income tax chargeable under this Act and under the Corresponding law in force in that Country….." Thus, it can be noticed that the provisions of sec.90(1)(a)(i) and sec.91(1) refers to actual payment made in the foreign Country and the provisions of sec.90(1)(a)(ii) refers to "income tax chargeable under this Act and under the corresponding law in force in that Country", i.e., there is no reference to actual payment of tax. 9.12 Accordingly, following the binding decision of High Court, we set aside the order passed by A.O. on this issue and direct him to allow foreign taxes credit claimed by the assessee in terms of decision rendered by Hon'ble High Court of Karnataka referred above." 18.2 Following the above said decision of Hon'ble jurisdictional Karnataka High Court, we set aside the order passed by AO on this issue and direct him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , if any, as levied by the Central Acts from time to time.] Further, it is submitted that FTC claim for Australia and Oman for the current assessment year includes the additional liability arising during the financial year 2017-18 for an amount of AUD 27,69,773 and 17,775 OMR respectively. Based on the above, we request your goodself to allow full credit based on DTAA or the proportionate foreign tax credit on profits which are taxed in the eligible units or allow deduction u/s 37 or as a loss u/s 28, as these profits have been subject to double taxation. Further, we request your goodself to allow the credit for the additional liability arising in Australia over above the liability in the branch tax return 18.4 We notice that the above said claim of the assessee finds support from the decision rendered by Hon'ble Bombay High Court in the case of Reliance Infrastructure Ltd vs. CIT (2016)(390 ITR 271)(Bom). The relevant discussions made by Hon'ble Bombay High Court are extracted below:- "(j) This Court in S. Inder Singh Gill (supra) was required to answer the question whether for the purpose of computing total world income of the assessee as defined in Section 2(15) of the I. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /gains of the business under Section 10(4) of the Indian Income Tax Act, 1922. Therefore, on the state of the statutory provisions as found in the Indian Income Tax Act, 1922 the decision of this Court in S. Inder Singh Gill (supra) would be unexceptionable. However, the ratio of the aforesaid decision in S. Inder Singh Gill (supra) cannot be applied to the present facts in view of the fact that the Act defines "tax" as income tax chargeable under the provisions of this Act. Thus, by definition, the tax which is payable under the Act alone on the profits and gains of business are not allowed to be deducted notwithstanding Sections 30 to 38 of the Act. (m) It therefore, follows that the tax which has been paid abroad would not be covered within the meaning of Section 40(a) (ii) of the Act in view of the definition of the word 'tax' in Section 2(43) of the Act. To be covered by Section 40(a)(ii) of the Act, it has to be payable under the Act. We are conscious of the fact that Section 2 of the Act, while defining the various terms used in the Act, qualifies it by preceding the definition with the word "In this Act, unless the context otherwise requires" t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilable and on application of real income theory, the quantum of tax paid in Saudi Arabia, attributable to income arising or accruing in India would be reduced for the purposes of computing the income on which tax is payable in India. (p) It is not disputed before us that some part of the income on which the tax has been paid abroad is on the income accrued or arisen in India. Therefore, to the extent, the tax is paid abroad on income which has accrued and/or arisen in India, the benefit of Section 91 of the Act is not available. In such a case, an Assessee such as the applicant assessee is entitled to a deduction under Section 40(a)(ii) of the Act. This is so as it is a tax which has been paid abroad for the purpose of arriving global income on which the tax payable in India. Therefore, to the extent the payment of tax in Saudi Arabia on income which has arisen/accrued in India has to be considered in the nature of expenditure incurred or arisen to earn income and not hit by the provisions of Section 40(a)(ii) of the Act. (q) The Explanation to Section 40(a)(ii) of the Act was inserted into the Act by Finance Act, 2006. However, the use of the words "for removal of doubts& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he A.O. noticed that an identical issue has been examined by the jurisdictional Karnataka High Court in the assessee's own case reported in 355 ITR 284 and the issue has been decided against the assessee. Accordingly, the A.O. held that the payment made to M/s. Gartner Group is in the nature of royalty and assessee is liable to deduct TDS from the said payment u/s 195 of the Act. Since the assessee did not deduct TDS, the A.O. disallowed the payments made to Gartner Group in the years relevant to the assessment years 2010-11 to 2014-15 by invoking provisions of section 40(a)(i) of the Act. …………….. Accordingly, following the decision rendered by jurisdictional Hon'ble Karnataka High Court in the assessee's own case reported in 355 ITR 284 and also the decision rendered by Hon'ble Delhi High Court in the case of Havells India Ltd. (supra) we hold that the A.O. was justified in holding that the payment made to M/s. Gartner Group is in the nature of royalty within the meaning of section 9(1)(vi) of the Act and hence the assessee is liable to deduct tax at source from the said payment u/s 195 of the Act. In view of the default on the part of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Gartner Group, since the said payment cannot be treated as "royalty" payments as per the decision rendered by Hon'ble Supreme court, referred above. Accordingly he prayed that this dissallowance should be deleted. 19.3 We heard Ld D.R on this issue and perused the record. We noticed that the co-ordinate bench had confirmed the disallowance following the decision rendered by the jurisdictional Hon'ble Karnataka High Court in the assessee's own case. It is the submission of the assessee that the Hon'ble High Court has decided an identical issue against the assessee following its own decision rendered in the case of Samsung Electronics Ltd, which has since been revered by Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd. The decision in the above said case has been rendered by Hon'ble Supreme Court subsequent to the passing of the assessment order. Accordingly, we are of the view that this issue requires fresh examination at the end of AO. Accordingly we restore this issue to the file of the AO with the direction to examine this issue afresh applying the principles laid down by Hon'ble Supreme Court in the case, referred above. If the AO comes to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. Accordingly, the AO disallowed the interest expenditure claimed by the assessee by invoking sec.115BBD of the Act. 29.3 Before Ld. DRP, the assessee placed its reliance on the decision rendered by Hon'ble Supreme Court in the case of Rajendra Prasad Mody (115 ITR 519) and contended that the expenditure is allowable, even if dividend income is not received during the year under consideration. However, the Ld. DRP took the view that the investment made by the assessee is not with the objective of earning dividend income but for the purpose of acquiring controlling interest in the company. It held that the interest expenditure is allowable u/s 57(iii) only if the investment had been made for the purpose of earning dividend income. In support of this proposition, the Ld. DRP placed its reliance on the decision rendered by Hon'ble Bombay High Court in the case of CIT Vs. Smt. Amritaben R. Shaw (238 ITR 777) and held that the expenditure incurred for acquiring controlling interest in the company is not allowable as deduction u/s 57(iii) of the Act. Accordingly, the Ld. DRP also confirmed the disallowance of interest expenditure incurred on ECB Loan. However, in the final assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee does not include any taxable dividend income. In fact, the A.O. also has also not included any such dividend income while computing the total income. Accordingly, he submitted that the A.O. was not justified in invoking the provisions of section 115BBD of the Act. The Ld. A.R. submitted that the ratio of decision rendered by Hon'ble High Court of Delhi in the case of Cheminvest Ltd. (ITA 749/2014) is applicable to the facts of the present issue also, even though the said decision was rendered in the context of section 14A of the Act. He submitted that the Hon'ble Delhi High Court has held in the above said case that the provisions of sec.14A are attracted only if the assessee had received exempt income. 29.5 We have heard Ld D.R and perused the record. A careful perusal of provisions of section 115BBD would show that the same begins with the expression "where the total income of assessee, being an Indian company, includes any income by way of dividends declared, distributed or paid by a specified foreign company". Hence, there is merit in the submissions of Ld A.R that the primary condition to be satisfied for invoking section 115BBD of the Act is that the total income of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... automatically reflected in Form 26AS. If there is failure on the part of the deductor to file statement of TDS, then it will not be reflected in Form 26AS. In our considered view, the assessee cannot be penalised for the fault of the TDS deductor in not filing statement of TDS. It is also possible that the deductor of TDS would have filed the statement of TDS belatedly. Accordingly, we are of the view that this issue requires verification at the end of AO. Accordingly, we restore this issue to the file of AO with the direction to examine the claim of the assessee and allow TDS credit in accordance with law. 23. The last issue relates to the addition of amount disallowed u/s 14A of the Act under clause (f) of Explanation 1 to sec. 115JB of the Act to the net profit for the purpose of computing book profit. An identical issue was examined by the co-ordinate bench in the assessee's own case in AY 2014-15 and it was decided as under:- "28.3 We have heard the parties on this issue. We notice that the special bench of ITAT in the case of Vireet Investments Pvt. Ltd. (ITA No.502/Delhi/2012 dated 16.6.2017) has expressed the view that the amount disallowed u/s 14A of the Act cannot be a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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