9911796707
TMI Blog2023 (8) TMI 1528X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal in assessee s own case in [ 2023 (6) TMI 1118 - ITAT BANGALORE] as held as during the course of hearing, after taking consent from both the sides, we think it will be appropriate to grant credit period of 45 days and interest is to be calculated using LIBOR 6 months+350 basis points. Accordingly this is sent back to TPO/AO to recalculate the interest on delayed receivables afresh following the LIBOR 6 months+350 basis points. This ground is allowed for statistical purpose. Disallowance u/s 14A - After hearing both the parties, we are of the opinion that this issue came for consideration before this Tribunal in assessee s own case [ 2023 (6) TMI 1118 - ITAT BANGALORE] held that a perusal of the assessment order passed by A.O. would show that the A.O. has observed that he was not satisfied with the working furnished by the assessee. A.O. has not examined the basis of the allocation and apportionment of expenses towards the exempt income. Hence, the coordinate bench has restored this issue to the file of the A.O. for examining it afresh. Accordingly, following the decision rendered by the coordinate bench, we restore this issue to the file of the A.O. The assessee is free to mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erein the Tribunal held as 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 could not be separately identified, if all the surpluses of all divisions are put together, meaning thereby, it is the case of the AO that there is no nexus between interest income and income of business undertaking. In our view, the assessee may be given an opportunity to show that the nexus between SEZ/STPI divisions and the fixed deposits from which interest income was earned. If the assessee is able to show the nexus to the satisfaction of the AO, then the interest income to that extent should be eligible for deduction u/s 10A/10AA/10B of the Act. Excluding deemed exports from export turnover of the undertaking for the purposes of computing deduction u/s 10AA - HELD THAT:- As in assessee s own case [ 2023 (6) TMI 1118 - ITAT BANGALORE] we direct the AO to include deemed exports to SEZ as part of turnover while computing deduction u/s 10AA of the Act. Accordingly this ground is allowed. Excluding revenues realized in convertible foreign exch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TAKA HIGH COURT] which has since been revered in the case of Engineering Analysis Centre of Excellence P Ltd [ 2021 (3) TMI 138 - SUPREME COURT] 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 the conclusion that the decision rendered by Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd is applicable to the payments made to Gartner group and there is no requirement to deduct tax at source, then there is no requirement of making any disallowance u/s 40(a)(i) - if the AO comes to the conclusion that the above said decision of Hon ble Supreme Court is not applicable and the assessee is liable to deduct tax at source, then the AO shall grant enhanced deduction u/s 10A/10AA/10B of the Act by increasing the profits of undertaking by the amount of disallowance so made. X X X X Extracts X X X X X X X X Extracts X X X X ..... void ab initio and liable to be quashed. 4.1 At the time of argument, the ld. A.R. has not pressed this ground. Accordingly, this ground is dismissed as not pressed. 5. Next ground No.4 is with regard to capitalization of salaries and wages. 4.1 That the NFAC and learned Dispute Resolution Panel ("DRP") erred in law in capitalising the employee cost incurred in relation to development of new technologies, software applications in the field of digital, artificial intelligence, machine learning, IoT etc. 4.2 That the NFAC and DRP erred in making an ad hoc adjustment in the case of salary cost of Bench employees. 4.3 Without prejudice to above, that the NFAC and DRP erred in law as the employee cost incurred by the Appellant is in the nature of scientific research and irrespective of nature of expense it qualifies for 100% deduction under section 35(1)(iv) of the Act. 4.4 Without prejudice to above, the NFAC and DRP erred in not following the order of Hon'ble Income Tax Appellate Tribunal dated 23rd May'22 for AY 2015-16 wherein it was held that expenditure incurred by the assessee should be allowed as a revenue expenditure 5.1 The ld. A.R. submitted that in terms of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the course of assessment proceedings, for AY 2016-17 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. Once such sufficiently advanced technologies come into operation, Artificial Intelligence and Machine Learning are expected to take over coding , This will be a major challenge for software service providers. When computers start coding new algorithms on an automated basis, the only requirement for a company that needs such new algorithms, will be to design the software architecture. The labour-intensive work of coding is, as of now, outsourced to Software suppliers in India, Philippines etc. With the advent of these disruptive technologies, India-based Software suppliers will face a steep fall in demand. . Fearing competition from Al bots, many India- based Software exporters, including the assessee company have started developing their own AI bots and Machine Learning Tools." 5. The AO noticed that the assessee herein has developed certain technologies and software platforms based on AI, IOT and Machine learning. He also no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 put to use and hence depreciation @ 60% should be allowed. Since the details of actual date of putting the software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocated 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 10AA 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 10AA 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 10AA 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 10AA units in the first place. This was the specific issue on which the remand report was sought from the AO. The AO states that he obtained information from the assessee including certificate of chartered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cientific research related to the business carried on by the assessee, such deduction as may be admissible under the provisions of subsection (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(1). 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 research." 2.16 Section 35 relates to allowance of expenditure towards scientific Research. The Act perm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trols 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 letter 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. Considering the fact that the assessee has applied for recognizing its activities as "scientific research" and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l have short life only. Hence these products, in practical and real sense, cannot be expected to give enduring benefits to the assessee. (vi) 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 depreciation in the draft assessment order, but the Ld DRP has rejected the claim. He su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 solutions. This project has been completed. (b) RAPIDS :- It is digital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 would be different in the case of purchasers of software licenses/prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 law is answered in favour of the assessee and against the Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 copyright therein, depending on the contract with its customer. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, be unrealistic to ignore the rapid advances in researches in antibi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 High Court develops and sells leading edge optical networking produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore 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 components are retained by the Company for use by the Company i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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 high priority research is constantly updated so that the know ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 efficiency of the existing system of development of softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Scientific research expenses shall become academic and we are not adjudicating them". Accordingly,+ we partly allow the ground No. 4 to 4.4 raised by the assessee. 5.4 Respectfully following the above order of the Tribunal for the assessment year 2016-17 cited (supra), we uphold the above argument of the ld. A.R. Accordingly, ground Nos.4, 4.1 to 4.4 are allowed. 6. Next ground No.5 is with regard to interest on advances to overseas subsidiaries. 5.1 "That NFAC, TPO and DRP erred on facts in not appreciating that the moneys advanced to the subsidiaries of the appellant were out of surplus funds of the appellant and no interest expenditure was incurred for the moneys advanced or earned from such advances. 5.2 That the learned NFAC / TPO erred in law by not appreciating the commercial expediency in providing interest free advances to the subsidiaries 5.3 Without prejudice, NFAC, TPO and DRP erred in not computing the arm's length interest based on LIBOR with no mark up as directed by Hon'ble Supreme Court of India in the case of Commissioner of Income tax vs Vaibhav Gems Limited [SLP (C) Diary No(s) 30849/2018]. 5.4 Without prejudice, the NFAC/TPO erred in law by applyi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he section 80-IA(8), 80-IA(10) and 92BA of the Act and making an addition on inter unit transaction from one SEZ unit to another SEZ unit of the same Company, which squarely falls outside the ambit of transfer pricing regulations. 5.9 Without prejudice, NFAC, TPO and DRP erred in not recognizing the fact that the TP adjustment in the case of tax neutral transactions is not envisaged under SDT as laid down by the Hon'ble Supreme Court of India in the case of Commissioner of Income Tax vs Glaxo Smithkline Asia (P) Limited (CA No. 18121/2007). 5.10 Without prejudice, NFAC, TPO and DRP erred in not following the common order dated 5th October 2020 of this Hon'ble Tribunal in assessee's own case for AY 2009-10 to AY 2014-15 and order dated 23rd May 2022 for AY 2015- 16, wherein it was held that the transaction between two eligible units is not subject to adjustments even if both the units fall under different percentage of exemption. 5.11 Without prejudice, NFAC, TPO and DRP erred in facts in not appreciating that the services rendered by a SEZ unit eligible for 50% deduction u/s 10AA to other SEZ units eligible for deduction of 50% of profits or services rendered by a SEZ unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price adjustment should be made in both the service provider unit and service recipient unit and any reduction in 10AA deduction after considering this impact should be the transfer pricing adjustment. 8.1 The ld. A.R. submitted that in paras 17 - 18; pg nos 32 - 46, the order dated 23rd May 2022 for AY 2015-16 following order dated 5th October 2020 for AYs 2009-10 to 2014-15, was followed, which held as follows: i) Transactions between two eligible units are not subject to SDT, even if any of unit may fall under different % of exemption i.e. one may be 100% and other may be 50%. ii) ALP adjustment should be made in both service provider unit and service recipient unit and any reduction in 10AA deduction after considering this impact should be the TP Adjustment. 8.2 The ld. D.R. relied on the order of the ld. DRP 8.3 We have heard the rival submissions and perused the materials available on record. After hearing both the parties, we are of the opinion that this issue has been considered by this Tribunal in assessee's own case in IT(TP)A No.370/Bang/2021 cited (supra), wherein the Tribunal has held as under: 17. The next issue relates to the transfer pricing adjustment ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal transaction or specified domestic transaction having regard to arm's length price. The said section 92 reads as under:- "Section 92. (1) Any income arising from an international transaction shall be computed having regard to the arm's length price. Explanation.-For the removal of doubts, it is hereby clarified that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arm's length price. (2) Where in an international transaction or specified domestic transaction, two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm's length price of such benefit, service or facility, as the case may be. (2A) Any allowance for an expenditure or interest or allocation of any cost or expense or any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit. Explanation.--For the purposes of this sub-section, "market value", in relation to any goods or services, means-- (i) the price that such goods or services would ordinarily fetch in the open market; or (ii) the arm's length price as defined in clause (ii) of section 92F, where the transfer of such goods or services is a specified domestic transaction referred to in section 92BA." The provisions of sub.sec (9) of sec.10AA specifically states that the provisions of sub-section (8) and sub-section (10) of section 80IA shall, so far as may be, apply in relation to the undertaking referred to in this section as they apply for the purpose of the undertaking referred to in section 80-IA. The provisions of sec. 80IA(8) mandates substitution of actual price with "market value" when there is transfer of goods or services (a) from "eligible business" to "any other business" carried on by the assessee or (b) from "any other busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the Explanation to sec.80IA(8) of the Act, the "market value" for specified domestic transactions is meant as the "arms' length price" as defined in clause (ii) of section 92F. Under section 92F(ii), the term "arm's length price" has been defined as under:- "arm's length price" means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions." Accordingly, for the purpose of sec. 10A/10AA/10B/80-IA and other incentive provisions, the "market value" of the transaction shall mean "Arm's length price" as determined in sec. 92 of the Act.Section 92C of the Act prescribes the modes of computation of arm's length price. 39.15 Under section 92C(4), where an arm's length price is determined by the AO under sub-section (3), the AO may compute the total income of the assessee having regard to the arm's length price so determined. It is further provided that no deduction u/s 10A or section 10AA or section 10B or under Chapter VIA shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under sec. 92C(4). 39.16 As per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is also pertinent to remember here that the ALP of transactions could be determined under any of the prescribed methods only. 39.20 Before us, the assessee has raised many contentions. We shall address below some of the contentions, which are legal in nature. (A) One of the contentions of the assessee is that the inter-unit transactions between two eligible units should not be subjected to ALP adjustment. We notice that the provisions of sec.80IA(8) refer to the transactions between "eligible units" and "non-eligible units". We have noticed earlier that, in the case of the assessee, various eligible units, inter se, have also entered into transactions. We have noticed earlier that the TPO has expressed the view in his remand report that the transactions between two SEZ units (eligible units) have also been included for the purpose of determining ALP of the transactions. However, we notice that the provisions of sec. 80IA(8) cover only the transactions entered between "eligible units" and "non-eligible units", i.e., it does not take into its ambit the transactions entered between two eligible units. Accordingly, we are of the view that there is merit in the contentions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions of sec.92(3) shall not apply to inter-unit transactions. Sec.92(3) of the Act prescribes a condition that, where the T.P adjustment required to be made consequent to determination of ALP has the effect of reducing income chargeable to tax or increasing loss, then the T.P provisions shall not apply. In respect of international transactions, the transaction is entered between the assessee and its Associated Enterprises. Both are two different tax entities. However, in the instant cases, the transactions are entered between two units belonging to the same assessee. Hence both the units are two arms of the same tax entity. We have earlier expressed the view that the ALP value of inter-unit transactions has to be applied in both the transacting units for the purposes of sec. 92 of the Act. Hence the substitution of ALP value (market value) in respect of inter-unit transactions u/s 92 of the Act is tax neutral exercise. However, the effect will be seen in this regard while computing deduction u/s 10A/10AA/10B of the Act. Accordingly, the "reduction", if any, in the quantum of deduction under above sections after application of the ALP, in our view, is the Transfer pricing adjust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter ALP adjustment. On this increase of Rs. 50,000/-, the assessee is not eligible for deduction u/s 10AA of the Act. (c) It can be noticed that 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, i.e. the net effect is the addition of SDT adjustment of Rs. 50,000/-. ILLUSTRATION 2 (Under invoicing expenses) Transaction between an Eligible unit, which is eligible for deduction @ 100% and a non-eligible unit. (B) Eligible unit is Service receiver and accordingly pays money to non- eligible unit. The said payment constitutes expenditure in the hands of Eligible Unit. Transaction Price - 1,00,000 Arms Length Price - 1,50,000 Actual Transaction SDT Adjustment Eligible Unit Non-eligible unit Total Eligible Unit Non-eligible unit Total Sales Revenue 10,00,000 5,00,000 15,00,000 10,00,000 5,00,000 15,00,000 Less: Adjustment for ALP - - - - 50,000 50,000 Adj Rev 10,00,000 5,00,000 15,00,000 10,00,000 5,50,000 15,50,000 Cost -9,00,000 -4,25,000 - 13,25,000 -9,00,000 -4,25,000 -13,25,000 Add: Corresponding - - - -50,000 - -50 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. (b) 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/-. ILLUSTRATION 4(Under invoicing expenses) Transaction between an Eligible unit, which is eligible for deduction @ 50% and a non-eligible unit. Eligible unit is Service receiver and accordingly pays money to non- eligible unit. The said payment constitutes expenditure in the hands of Eligible Unit. Transaction Price - 1,00,000 Arms Length Price - 1,50,000 Actual Transaction SDT Adjustment Eligible Unit Non-eligible unit Total Eligible Unit Non-eligible unit Total Sales Revenue 10,00,000 5,00,000 15,00,000 10,00,000 5,00,000 15,00,000 Less: Adjustment for ALP - - - - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt for interest on delayed trade receivables, which are reproduced as under: "5.19 That NFAC, TPO and DRP erred in law by making adjustment towards interest on delayed receivable by contending that any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business advancement is covered under the definition of international transactions and by contending that the taxpayer has provided benefit to its AE by way of advancement of interest free loan in the garb of delay receipt of receivables which would otherwise have been deployed for earning interest income. 5.20 That NFAC, TPO and DRP erred in contending that the transaction relating to receivables needs to be benchmarked separately. 5.21 That NFAC, TPO and DRP erred in facts, in law and in circumstances of the case by not treating credit period to AE for realization of proceeds as a continuous transaction along with provision of services to the AE. 5.22 Without prejudice, NFAC, TPO and DRP erred in facts, in law and circumstances of the case in not appreciating that the Appellant does not charge interest on receivables delayed beyond the credit period to any party whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period to any party whether it is AE or not. Accordingly, interest should be benchmarked at nil interest based on internal CUP. Further, OECD TP Guidelines also states that no interest may be charged on delayed payment on commercial consideration for ensuring a long and healthy relationship as persuasive value; (ii) Even otherwise, Wipro provides similar credit period to both AEs and Non-AEs and accordingly, based on internal CUP, no adjustment is warranted. Reliance placed on order of the Hon'ble Bombay High Court dated 08.01.2013 in ITA(L) No.1053/2012 in the case of CIT v. Indo American Jewellery Ltd. (iii) Without prejudice to above, interest rate of Libor + 450 basis points is applied by TPO and DRP has directed to apply Average SBI deposit rate (which was not applied while computing adjustment in the FAO). As regards advances to overseas subsidiaries interest rate of Libor+150 basis point is directed by Hon'ble Tribunal. Delayed receivables are much shorter credit period provided to AEs and Non- AEs and should warrant even a lower rate of interest. 21. Considering the arguments from both the sides and the orders of the authorities below, during the course of hearing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in held as under: "22. The ground No. 06 relates to the disallowance of expenses u/s 14A of the Act against exempt income. During the year the assessee has received dividend of Rs. 6.58 crores and also earned Rs. 58.00 crores as interest income from tax free bonds. The assessee suo motu made disallowance for administrative expenses of Rs. 3.07 Crores. The total investments were made of Rs. 18463 crores and Reserve & Surplus were stood at Rs. 40,411.10 crores. The AO asked for details of computation made which was submitted by the assessee, but the AO was not satisfied and he calculated disallowance afresh after applying Rule 8D r.w.s. Section 14A of the Act at Rs. 8.76 Crores. The assessee had itself made disallowance of Rs. 3.07 crores accordingly the net disallowance were made of Rs. 5.69 crores. Considering the arguments from both the sides, we notice that an identical issue has been restored back to the file of the AO in AY 2015-16 following the decision rendered in assessee's own case in AY 2009-10 to 2014-15 where the relevant observations made by the co-ordinate bench are extracted below:- "22.2 The assessee has received dividend income from investments made in various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Manufacturing Company Ltd. 394 ITR 449. 22.4 We have noticed that this issue has been restored by ITAT in assessment year 2008-09 to the file of the A.O. A perusal of the assessment order passed by A.O. would show that the A.O. has observed that he was not satisfied with the working furnished by the assessee. However, the A.O. has not examined the basis of the allocation and apportionment of expenses towards the exempt income. Hence, the coordinate bench has restored this issue to the file of the A.O. for examining it afresh. Accordingly, following the decision rendered by the coordinate bench, we restore this issue to the file of the A.O. The assessee is free to make its submissions and the AO shall decide the decide the issue in accordance with law, by duly considering the submissions made by the assessee." 23. Accordingly, following the ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aving regard to the provisions of section 14A of the Act. In view of the above, we are unable to sustain the addition made by the A.O. Since the addition required to be made under clause (f) to explanation 1 is required to be computed independently, we restore this issue to the file of the A.O. for examining it afresh." 12.4 In view of the above order of the Tribunal, we remit this issue to the file of AO on similar directions. 13. Next ground no.7 of the assessee's appeal is reproduced below: 7. That the learned NFAC/DRP erred in denying set-off of losses of STP units aggregating to ₹ 36,83,30,977 against other business income of the appellant in terms of Section 70 or Section 71 of the Act. 13.1 The ld. A.R. submitted that in paras 26-27; pg nos 52-58, the order dated 23rd May 2022 for AY 2015-16 following order dated 5th October 2020 for AYs 2009-10 to 2014-15 was followed, in which it was held that 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. He submitted that the issue is also covered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn case for Assessment Year 2004-05 in ITA Na1072/Bang/2007 (supra), wherein the Tribunal confirming 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 br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear?" "Whether the Tribunal was correct in holding that income of each undertaking should be 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner of Income-tax & Another v. TATA Elxsi Ltd., 382 ITR 654 (Kar) are pending adjudication at the instance of the revenue before the Supreme Court. In view of the aforesaid submission needless to state that the Assessing Officer shall decide the issues in accordance with the decision which may be rendered by the Supreme Court. 15. For yet another reason, at this stage, no interference is called for with the order passed by the tribunal. The Supreme Court in Radhasoami Satsang v. Commissioner of Income Tax, (1992) 60 Taxman 248 (SC) has held that even though principles of res judicata do not apply to income tax proceedings, but where a fundamental aspect permeating through the different Assessment Years has been found as the fact one way or the other and the parties have allowed the position to be sustained by not challenge the order, it would not be at all appropriate to allow the position to be changed in subsequent year. For this reason also, in the facts of the case, a different view cannot be taken. In the instant case, the tribunal has answered all the substantial questions of law in favour of the assessee by placing reliance on the case of the assessee in previous Assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome 25.42 crores 26.32 crores 31. During the course of assessment proceedings the details of unit wise Miscellaneous income was furnished. The assessee submitted that the sale of- scrap/newspapers are covered in favour of the assessee by the judgement of Hon'ble Karnataka High Court in ITA No. 507/2002 for the AY 1997-98 but the AO observed that the revenue has filed appeal before the Hon'ble SC against the judgement of the Hon'ble High Court and he did not allow the claim of the assess. Further in respect of Other income reported above the AO noticed that the these income have no nexus with software development activity of the units . In this regards the assessee submitted that these includes refunds/write back of costs and liability recorded in earlier years. Further the assessee submitted that since the costs have reduced the net profits of the SEZ units in the past, the reversal of the same cost in AY 2016-17 must be considered as part of the SEZ income. The AO noted that the assessee has not furnished detailed break-up with respect to the expenses debited in earlier years relating to these items, accordingly he reduced from the computation of exemption u/s 10AA. Consideri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceipt and decide the same accordingly. The observations made by the Tribunal in AY 2007-08 are extracted below:- " ....... However, since we find that no details are available with regard to 'other income' of Rs. 3,48,524/-, we deem it fit to remit the matter back to the file of the Assessing Officer with a direction to examine the matter afresh and decide the issue on merits." Following the same, we restore the issue relating to "Other income" to the file of the AO with similar directions." 32. Following the above said decision rendered by the co-ordinate bench in the assessee's own case, we hold that the income generated on sale of scrap/newspaper should be included in the profits of the undertaking eligible for deduction u/s 10AA of the Act. In this year also, the break-up details of "Other income" are not available. Accordingly, we restore this issue to the file of AO with the direction to examine the break-up details of other income which were debited into the profit & loss account in earlier years and decide the issue in accordance with the discussions made supra. Accordingly, this issue is partly allowed for statistical purpose." 14.4 In view of the above order o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned by the co-ordinate bench in the assessee's own case and it was decided as under:- "6.2 We notice that the assessee has booked interest income under the head "Miscellaneous income" in AY 2012-13 and 2013-14, apart from booking interest income separately as under:- Assessment year Interest Income 2009-10 60.27 crores 2010-11 150.03 crores 2011-12 26.54 crores 2012-13 224.65 crores 2013-14 2.91 crores 2014-15 3.45 crores It is also not clear as to whether the nature of interest income booked under the head "miscellaneous income" 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. Accordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's own case. In both the cases, the interest income should be eligible for deduction u/s 10A/10AA/10B of the Act. 6.6 In the instant cases, the assessee has earned interest income from two types of deposits, viz., (a) The packing credit loan funds, which are not immediately required in its business operations were deposited into short term fixed deposits. (b) The surplus funds available with the SEZ units have also been invested in fixed deposits. Hence it is required to be examined 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA No.370/Bang/2021 cited (supra), wherein the Tribunal held as under: "35. Ground No. 12 relates to the eligibility of the assessee to claim deduction u/s 10AA of the Act for deemed exports, i.e., sales made to own units located in SEZs and Indian subsidiaries of Foreign MNCs. The claim of the assessee was rejected by the AO by observing that only turnover pertaining to sales outside India is being taken as export sales. He further observed that the deemed export cannot be treated as Export out of the country and sec. 10AA is very clear on that. Secondly, the assessee in the return filed has not included the deemed export as part of ETO and now no additional claim for exclusion will be entertained. 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:- 7.2 During the years under consideration, the assessee has provided services to some of the customers located in SEZ units and received sale proceeds in foreign currency. The assessee claimed it to be part of export turnover and accordingly claimed deduction u/s 10A/10AA/10B of the Act. According to the assessee, the services were provided to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which goods are supplied by EOUs to other Exporter or other EOU/EHTP/STP/BTP/SEZ unit. e) All export entitlements, including recognition as Status Holder would accrue to exporter in whose name foreign exchange earnings are realized. However, such export shall be counted towards fulfillment of obligation under EOU/EHTP/STP/BTP scheme only." 20. From the aforesaid provisions, it is clear that if a assessee wants to claim the benefit of Section 10A, firstly he must export articles or things or computer software. Secondly, the said export may be done directly by him or through other exporter after fulfilling the conditions mentioned therein. Thirdly, such an export should yield foreign exchange which should be brought into the country. If all these three conditions are fulfilled, then the object of enacting Section 10A is fulfilled and the assessee would be entitled to the benefit of exemption from payment of Income Tax Act on the profits and gains derived by the Undertaking from the export. 21. Clause 6.11 of Exim Policy dealing with entitlement for supplies from the DTA states that supplies from the DTA to EOU/EHTP/STP/BTP units will be regarded as 'deemed export', besides b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above said decision of the coordinate bench and also the binding decision of the jurisdictional Hon'ble Karnataka High Court, we direct the AO to include deemed exports to SEZ as part of turnover while computing deduction u/s 10AA of the Act. Accordingly this ground is allowed." 16.4 In view of the above order of the Tribunal, this ground of assessee appeal is allowed. 17. Ground No.11 of the assessee's appeal is reproduced as under: 11. "That NFAC/DRP erred in excluding revenues realized in convertible foreign exchange of communication link reimbursement, asset reimbursement, incentive and rewards and other reimbursement from the export turnover." 17.1 The ld. A.R. submitted that in paras 37-38; pg nos 71-73, issue was remitted to the AO with a direction to fol low order dated 5th October 2020 for AYs 2009-10 to 2014-15, where it was held as follows: i) Asset reimbursement - expenditure is incurred at the request of customer and reimbursed by the customer, hence, the amount should not be considered as either expenditure or part of export turnover and receipt should be netted off against expenditure. ii) Incentive awards - not required to be excluded from export Others ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of export proceeds realized in respect of computer software export and hence they should not be excluded from export turnover." 15.1 It was noticed in the earlier years that the assessee had received different types of reimbursements, which have been grouped as under:- (a) Asset reimbursements (b) Communication link reimbursements (c) Travel reimbursements (d) Incentive rewards 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 reimburse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s given in AY 2009-10 to 2014-15 for computing deduction u/s 10AA of the Act. Accordingly, the grounds raised by the assessee is allowed for statistical purpose." 17.4 In view of the above order of the Tribunal, this ground of assessee's appeal is allowed and remitted to the file of AO/TPO for statistical purposes. 18. Ground No.12 of the assessee's appeal is reproduced as under: "12. That NFAC /DRP erred in excluding expenditure incurred in foreign currency of ₹ 2,08,18,06,80,361 from export turnover by holding that it has been incurred in providing technical services outside India ignoring the fact that the appellant is in the business of export of computer software." 18.1 The ld. A.R. submitted that in paras 39-40; pg nos 74-83, the order dated 23rd May 2022 for AY 2015-16 following order dated 5th October 2020 for AYs 2009-10 to 2014-15 was followed, where this Tribunal held that expenses incurred outside India for onsite development of computer software is not to be deducted from export turnover. It was further held that only the expenditure on telecommunication charges or insurance attributable to the delivery of the computer software outside India or expenses, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred 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 the amount of "export turnover", while computing deduction u/s 10A/10AA/10B of the Act. However, in assessment year 2009-10 to 2011-12, the Ld. DRP directed the A.O. to exclude expenses incurred in foreign currency towards communication expenses, travel expenses and legal & professional fees both from export turnover and total turnover while computing deduction u/s 10A of the Act. 19.6 We heard the rival contentions on this issue and perused the record. We notice that the co-ordinate bench has accepted the alternative submissions of the assessee in AY 2008-09 by following the decision rendered by Hon'ble Karnataka High Court in the case of Tata Elixi Ltd (supra) and accordingly directed the AO to exclude the amounts from both export turnover and total turnover, while computing the deduction. The relevant discussions find place at paragr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 and therefore such expenditure met out in foreign currency in providing technical services outside the country should be deducted from the export turnover. 15.3.On the other hand, the Ld.A.R, has submitted that the issue stands covered by the decision of the Hon'ble Tribunal for the AYs 2001-02 & 02-03 in the assessee company's own case which may be ordered to be followed for this assessment year as well. 15.4.Rival submissions were carefully considered. We have perused the order of Hon'ble Tribunal also. The decision of the Hon'ble Tribunal has been extensively quoted by us when we have decided the ground No.8 of the Revenue. The said decision is applicable to this issue also [issues raised by the Revenue in ground Nos: 8 & 9 are rather inter-linked), we respectfully following the Tribunal's decision referred supra, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 incurred for delivery of computer software outside India and reduced the same only from export turnover. If it is held that the said sum is required to be excluded from export turnover then similar amount should be reduced from the total turnover also as held by Bombay High Court in Sudarshan Chemicals reported in 245 ITR 769." 14.4. After considering the rival submissions, the Ld. CIT(A) took a view that this issue was also covered by his decision for the AYs 01-02 and 02- 03 and the same holds good for the AY under dispute and, accordingly, directed the AO to consider 5% of Rs. 14.56 crores for exclusion from the export turnover on account of telecommunications. The exclusion shall also be similarly made from the total turnover. 14.5. Aggrieved, the Revenue has come up before us. The Ld. A.R forcefully submitted that the issues stand covered by the decision of the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are. 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 a result of an intellectual analysis of the system and method followed by the purchaser of the programme. It is often prepared on site with the software personnel going to the clients premises. Hence, when the expenditure is in respect of payments on site development, the same cannot be excluded from the export turnover by holding it as technical services. When export of services only is not entitled to deduction u/s IOA then the Legislature made clear that foreign exchange relating to technical services will be excluded. If there is export of goods as well as services then only that portion will be eligible for deduction which relates goods. Hence, the AO is not justified in excluding Rs. 4,86,63,187/- from export turnover. 24.6. The Hyderabad Bench in the case of Patni Telecom P. Ltd. v. ITO vide order dated 11th January, 2008 in ITA NO.5/1-1yd/20005 and 354/11yd/2006 held that exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (iv) of explanation (2) to section 10A of the Act. Accordingly, it was held that the A.O. was not justified in excluding the expenses incurred in foreign currency from export turnover. The Tribunal also noticed that the decisions rendered by Hyderabad bench of Tribunal in the case of Patni Telecom Pvt. Ltd (supra) and Chennai bench of Tribunal in the case of "Change Pond Technologies Pvt. Ltd. (supra). I have also taken an identical issue. 19.9 We notice that the assessee has submitted before the A.O. that these expenses have been incurred in development of software on site and hence, they formed part of "direct cost" of developing a software. It has also been submitted that the assessee has been raising invoice on its customers on cost plus basis. Accordingly, it is required to be examined as to whether these expenses are required to be excluded from "export turnover", by consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s 10A/10AA/10B of the Act by following the discussions made supra." 17.1 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 No.776/2007 C/w ITA Nos. 1172/2006, 1171/2006, 744/2007 and 115/2006". 40. Following the above said decisions, we set aside the order passed by AO on this issue and direct him to compute deduction u/s 10AA of the Act following the discussions made supra. Accordingly, this ground is allowed." 18.4 In view of the above order of the Tribunal, this issue is remitted to the file of AO/TPO to compute the deduction u/s 10AA of the Act on similar directions. 19. Ground Nos.13 of the assessee's appeal is reproduced below: 13. "That NFAC/DRP erred in computing the deduction u/s 10A by excluding an aggregate sum of ₹ 2,05,48,67,042 from export turnover of the undertakings on the premise that the sale proceeds were not remitted into India within 6 months from the end of the previous year as provided in section 10A(3) of the Act by overlooking the fact that the application for ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... zed dealer for extension of time for receipt of profits on export turnover. It was submitted that the amounts were collected subsequently after the expiry of the period of 6 months. Accordingly, during the course of assessment proceedings, the assessee made a claim before A.O. to include the sale amount, for which extension applications were submitted to RBI through the authorized dealers in the amount of "export turnover", for the purpose of computing deduction. However, the A.O. rejected the claim of the assessee on the reasoning that mere submission of application by the assessee to RBI is not sufficient to infer that RBI has allowed extension of time for realizing sale proceeds in foreign exchange. Accordingly, he rejected the claim of the assessee. Ld. DRP also confirmed the order of A.O. in all the years under consideration except in assessment year 2011-12, wherein Ld. DRP directed the A.O. to include the turnover covered by the application filed to RBI as part of export turnover. 8.3 We heard 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 2004-0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the deduction u/s 10AA of the Act, wherever the application has been filed by the assessee to RBI through its banker seeking permission of receiving export proceeds in the prescribed period and the AO has to examine the same in the light of above order of Tribunal and decide accordingly. 20. Next ground nos.14 & 15 of the assessee's appeal are reproduced as under: 14. "Foreign tax credit: 14.1 That NFAC/DRP erred in law in not granting full credit for foreign taxes as per Double Taxation Avoidance Agreements in respect of profits and gains derived by the units of the appellant eligible for deduction under sections 10AA of the Act. 14.2 That the NFAC/DRP erred in not granting credit for State Level Taxes and Local Authority Taxes in accordance with the provisions of section 91 of the Act, without appreciating that the DTAA covers only federal taxes and therefore no agreement exists insofar as the State Level Taxes and Local Authority Taxes are concerned and thus section 91 was squarely applicable. 15. That NFAC/DRP erred in not allowing deduction of foreign tax paid which are not eligible for relief under section 90/91 of the Act since they are allowable under Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant observations made by the Hon'ble High Court of Karnataka on this issue. 37. It is in this background, when we notice section 90 of the Act-- relief from double taxation is granted in the following circumstances. Firstly, section 90(1)(b) of the Act speaks about avoidance of double taxation, i.e., the Central Government may enter into an agreement with the Government of any country for the avoidance of double 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of exemption under section 10A, the income derived is not included in the total income. It is not charged to Income-tax. Therefore, section 90 of the Act has no application at all. 52. Section 10A(1) speaks of "deduction". The deduction is of profits and gains for a period of ten consecutive assessment years. The said deduction is from the total income of the assessee. 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 exemptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR (St.) 102, 124) : "2(a) Where a resident of India derives income which, in accordance with the provisions of this Convention, may be 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, whether directly or by deduction. 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 Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cting States will continue to govern the taxation of income in the respective Contracting States except where provisions to the contrary are made in this agreement. In the case of India, double taxation should be eliminated as follows (see [1998] 229 ITR (St.) 44, 64): "3(a) The amount of Canadian tax paid, under the laws of Canada and 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax is levied on the income of the assessee. 65. Section 91 of the Act specifically deals with the said question. The afore said section reads as under : "91. Countries with which no agreement exists.--(1) If any person who is resident in India in any previous year proves that, in respect of his income which accrued or arose during that previous 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 dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d also merit attention in this regard. Section 90(1)(a)(i) uses the expression "income on which have been paid both income tax....". Section 91(1) uses the expression "If any person who is resident in India in any previous year proves that in respect of his income which accrued or arose during the previous 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.....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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n distributed profits under section 115-O or on distributed income under section 115R; (ii) any interest charged under this Act; (iii) surcharge, if any, as levied by the Central Acts from time to time; (iv) Education Cess on income-tax, if any, as levied by the Central Acts from time to time; and (v) Secondary and Higher Education Cess on income-tax, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Tax Act, 1922 Act also contains a similar provision in Section 10(4) thereof. However, the Indian Income Tax Act, 1922 contains no definition of "tax" as provided in 2(43) of the Act. Consequently, the tax paid on income/profits and gains of business/profession anywhere in the world would not be allowed as deduction for determining the profits/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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 40(a)(ii) of the Act, the tax paid in Saudi Arabia on income which has accrued and/or arisen in India is not eligible to deduction under Section 91 of the Act. Therefore, not hit by Section 40(a)(ii) of the Act. Section 91 of the Act, itself excludes income which is deemed to accrue or arise in India. Thus, the benefit of the Explanation would now be available 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 Sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be considered for computing the profits and gains of undertakings eligible for deduction u/s 10AA of the Act. 21.1 The ld. A.R. submitted that in paras 45-46; pg nos 100-103, order dated 23rd May 2022 for AY 2015-16 was followed, in which it was observed that * Order of Karnataka High Court on issue of payment to Gartner group was based on ruling in case of Samsung Electronics. The Tribunal appreciated the contention that the decision of Karnataka High Court in case of Samsung Electronics has been reversed by the Hon'ble Supreme Court in case of Engineering Analysis Centre of Excellence Private Limited v. CIT (CA Nos. 8733 - 8734/2018) and accordingly, ruling in the case of Samsung Electronic is no more good law. * The Tribunal restored the matter to AO with following specific directions: o Examine the issue afresh applying the principles laid down by Hon'ble Supreme Court in the case of Engineering Analysis. o If principles laid down by Supreme court is applicable to payment made to Gartner then no requirement to deduct tax at source. Hence, there is no requirement of making any disallowance u/s 40(a)(i) of the Act. If ruling in case of Engineering Analysis is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aise all pleas and contentions, in accordance with law including reliance on the judgment in the case of Engineering Analysis (supra). Accordingly, he submitted that the order of this Tribunal in ITA Nos 152 to 154/Bang/2004 stands valid as on date. 21.5 The ld. D.R. relied on the order of ld. DRP. 21.6 After hearing both the parties, we are of the opinion that this issue came for consideration in assessee's own case in ITA No.370/Bang/2021 cited (supra), wherein the Tribunal held as under: "45. Ground No. 17 to 17.2 relates to disallowance of payment made to M/s. Gartner Group u/s 40(a)(i) of the Act for non-deduction of tax at source at Rs. 10.23 crores. During the year the assessee paid Rs. 10.23 Crores to M/s Gartner group and no TDS was deducted. The assessee submitted that it is covered under exclusion clause of royalty as per section 9(1)(vi) wherein royalty paid for the purpose of business or profession carried outside India or for the purpose of making or earning any income from any source outside India is not regarded as royalty. The ld. AR of the assessee alternatively submitted that the undertaking is eligible for deduction u/s 10AA, therefore the deduction should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee in not deducting the tax at source, the A.O. was justified in making the disallowance of payment made to M/s. Gartner Group by invoking provisions of section 40(a)(i) of the Act. 32.7 The assessee has raised one more alternative contention to press that the amount disallowed u/s 40(a)(i) of the Act would go to increase the profits of the undertakings and hence the eligible deduction u/s 10A/10AA/10Bof the Act would also get increased correspondingly. The Ld. A.R. submitted that the alternative contention of the assessee gets support from the circular issued by CBDT. We notice that the alternative contention of the assessee was not considered by the AO and in view of the submissions made by Ld A.R, the same requires examination at the end of AO. Accordingly, we restore the above said alternative contention to the file of the A.O. in all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 the conclusion that the decision rendered by Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd is applicable to the payments made to Gartner group and there is no requirement to deduct tax at source, then there is no requirement of making any disallowance u/s 40(a)(i) of the Act. However, if the AO comes to the conclusion that the above said decision of Hon'ble Supreme Court is not applicable and the assessee is liable to deduct tax at source, then the AO shall grant enhanced deduction u/s 10A/10AA/10B of the Act by increasing the profits of undertaking by the amount of disallowance so made. The assessee is given liberty to raise all contentions in this regard before the AO. 46. Respectfully following the above judgement of the co-ordinate bench of the Tribunal in assessee's own case cited supra we also s ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
