9911796707
TMI Blog2023 (8) TMI 1528X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 make its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 exchange o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IGH 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. - SHRI CHA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iable 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 paras 4 6; pg nos. 3- 27, the order d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 noticed that the assessee has not capitalised any such asset in its books of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nology 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 to use were not available, the AO agreed to allow depreciation @ 30%, which worked out to Rs. 449. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tual 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 accountant based on which it can be seen that the bench cost and CTO cost is allocated to various 10AA units. Hence any alterat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure 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 permits the claim of expenditure of scientific research for both inhouse R D and institutional R D. For inhouse R D by the assessee the provisions of 35(1)(i) and 35(1)(iv) provide for revenue expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount 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 DSIR has not granted the approval even after four and half years clearly show that the assessee is not eligible for deduction under Sec 35. Hence this contention of the assessee is rejected. 6.6 Before us, the Ld A.R reiterated the assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 submitted that the AO had taken the view in the draft assessment order that these software/application/tools/platforms are in the nature of software eligible for depreciation at higher rate. However, before the Ld DRP, the AO expressed the view in his remand report that these prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rlier 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 BSS solution. It enables service provider to integrate and charge multiple services on a single platform. This project has been completed. (c) Assure Health :- It enables medical professions to deliver patient centric care at anytime and anywhere. Healthcare solutions include Remote fetal monitoring and Remote cardiac care . This project ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 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/products. In their hands, it may constitute capital expenditure. We can take an example of Car manufacturing company/dealer. In the hands of that company/dealer, it is a revenue item, while in the hands of the purchaser, it may become capital item. Sometimes, the present assessee might purchase any software, which are going to be used for its business of development of software products or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure 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. One of the important principles expressed by the Hon ble jurisdictional Karnataka High Court is that the purchase of application software may not always be capital expenditure. It has held that, if the software works as an aid in manufacturing process rather than tool itself, then the software does not result into acquisition of any capital asset, even though there is enduring benefit. The High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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. The assessee licenses software and derives income in the form of license fee or sells software and derives income from sale of software. This would be clear from the revenue recognition policy of the assessee as would be evident from Note 2(j) of the Notes to financial statement 22. The revenue received by the assessee from licensing the IPR to Spreadtrum was at all times earlier offered to tax by the assessee as license fee / roya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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-how cannot be said to be the element of the requisite degree of durability and non-ephemerality to share the requirements and qualifications of an enduring capital asset. The rapid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 products for worldwide customers. It has developed software differentiated, next generation products that enable telecommunication carriers to build converged networks that support traditional voice based services as well as new data dominated services. Their product line is marketed under the brand name TJ100. It claimed all material cost and salary expenses incurred in development of single product line as revenue expenditure on the plea that the machinery imported for preparation of Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal 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 in Product Development of other products, they are lying in the office, they are not scrapped as contended by the assessee and, therefore, the expenses incurred towards these components is of enduring nature and it is in the nature of capital expenditure and the Tribunal was in error in holding it otherwise. 10. Per contra, the learned counsel for the assessee submitted that, the expenses are incurred for upgrading their product every year. It is in the nature of product development expenses and, therefore, it ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 how cannot be said to be the element of the requisite degree of durability and nonephemerality to share the requirements and qualifications of an enduring capital asset. The rapid strides in science and technology in the field should make us a little slow and circumspect in too readily pigeon-holing an outlay such as this as capital. The improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business and there was no material to hold that it amounted to a new or fresh v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hmedabad), 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 software/provision of software services. In this view of the matter, the tools/applications/platforms developed for the internal use of the assessee company (Item D - Internal projects), in our view, cannot be capitalised and should be allowed as revenue expenditure. 6.20 We understand that the common practice followed by information technology companies is to expense all the expenses incurred on development of a software mean for sale/license/rent. We noticed earlier that, in the instant case, the applications developed under CTO projects are t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 applying a blanket rate based on LIBOR when working capital advance are provided in EURO to few subsidiaries. 5.5 Without prejudice, NFAC, TPO and DRP erred in not allowing the plea of the assessee Company that if the interest is computed on the advances given to subsidiary, then interest should also be calculated on the credit balance with the same AE and / or with other AEs as well. 6.1 The ld. A.R. submitted that the assessee has entered into an unilateral Advance Pricing Agreement for AYs 2016-17 to 2020-21 which is binding as per section 92CC(5). Hence, taking note of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 eligible for 100% deduction to other SEZ units eligible for 100% deduction of profits are tax neutral and do not fall within the jurisdiction of TPO to make adjustments under Section 92C of the Act. 5.12 Without prejudice, NFAC, TPO and DRP failed to establish the price that services would ordinarily fetch in the open market. 5.13 That NFAC, TPO and DRP failed to appreciate that since SDT constituted a very minor portion (less than 5%) of the overall turnover of each SEZ units and 95% of the services are rendered to external third party, it would only be prudent to take the margin on the external th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvice 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 made in respect of Specified Domestic Transaction (SDT) made. The TPO has made adjustment to the tune of Rs. 107.92 crores a-nd it was confirmed by Ld DRP. This issue is covered by the decision rendered by the coordinate bench in the assessee s own case in AY 2015- 16.The decision rendered by the co-ordinate bench on this issue are extracted below:- 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- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 income in relation to the specified domestic transaction shall be computed having regard to the arm's length price. (3) The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or sub-section (2A) or the determination of the allowance for any expense or interest 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 subsection (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on (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 business to eligible business carried on by the assessee. Section 10A/10AA/10B, 80IA etc., grants income tax concession by way of granting deduction to certain specified undertakings from gross total income (or) at the point of computation itself, meaning thereby, the same results in income-tax benefit to the assessee. It 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), 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 provisions of sec.92(3), the transfer pricing provision of sec.92 shall not apply in a case where the computation of income/expenses under sub. sec (1) or (2) or (2A) of sec.92 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 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/Chapte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mining 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 the assessee that the transactions entered between two eligible units would not be covered by the provisions of sec. 80IA(8) of the Act. Even if the rate of deduction allowable to two eligible units differ and such inter-unit transactions between two eligible units may result in tax arbitrage, yet, we are of the view that the 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons 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 adjustment contemplated in sec.92 of the Act. 39.21 We have prepared certain illustrations in order to explain above points. They are given below:- There are two situations in which the profits of eligible business are inflated. They are (a) Over invoicing revenue (b) Under invoicing expenses Let us give some illustrations 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 eligibl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,00,000 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 - -50,000 Adjustment for ALP Adj Cost -9,00,000 -4,25,000 - 13,25,000 -9,50,000 -4,25,000 -13,75,000 Net Income 1,00,000 75,000 1,75,000 50,000 1,25,000 1,75,000 Deduction u/s 10AA 100% -1,00,000 -1,00,000 -50,000 - -50,000 Total Income 75,000 1,25,000 SDT adjustment 50,000 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. 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 Uni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,00,000 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 - -50,000 Adjustment for ALP Adj Cost -9,00,000 -4,25,000 - -9,50,000 -4,25,000 -13,75,000 Net Income 1,00,000 75,000 1,75,000 50,000 1,25,000 1,75,000 Deduction u/s 10AA 100% -50,000 - -50,000 -25,000 - -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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , TPO and DRP erred in law in arbitrarily applying interest rate of 6 months LIBOR + 450 basis points need to be applied for interest on delayed trade receivables. 9.1 The ld. A.R. submitted that In paras 19-21; pg nos 46-47, issue was remitted back to TPO to recalculate interest at rate of 6 Months LIBOR + 350 basis points after granting credit period of 45 days. Hence, he submitted that : i) Wipro does not charge interest on receivables delayed beyond the credit 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 8th January 2013 in ITA(L) No.1053/2012 in the case of CIT v. Indo American Jewellery Ltd. 9.2 Without prejudice to above, he submitted that delayed receivables carry short credit period provided to AEs an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 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. 9.5 In view of the above order of the Tribunal, we remit this issue to the file of AO/TPO on similar directions. 10. Next ground in 5.24 is with regard to Software development service, which is reproduced as under: 5.24 That NFAC erred in facts and in law by not giving effect to the rectified directions of DRP and order of TPO giving effect to rectified directions of DRP . 10.1 This ground is not pressed before us. Accordingly, dismissed as not pressed. 11. Next ground 6 to 6.3 are with regard to disallowance u/s 14A of the Act, which are reproduced as under: 6.1 That the NFAC/DRP erred in law as it failed to appreciate that the appellant had itself quantified from its books of account a sum of ₹ 3,36,63,801 as the expenditure from different departments based on time spent co-relatable to earning exempt income and thus no further disallowance under section 14A of the Act was warranted. 6.2 That NFAC/DRP erred on facts and in law by quantifying and adding a notional expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment was more than the own funds available with the assessee, no disallowance was made out of interest expenses. Hence the disallowance was made out of administrative expenses only, which worked out to about 2% of the corporate expenses. The A.O. did not accept the workings furnished by the assessee. Accordingly he computed the disallowance as per rule 8D(2)(iii) of the I.T. Rules @ 0.5% of average value of investments. Ld. DRP restored the matter to the file of A.O. with the direction to examine this issue afresh by considering the decision rendered by ITAT in the case of Syndicate Bank, by Hon ble Bombay High Court in the case of Godrej Boyce Manufacturing Company Ltd. 328 ITR 81 and by Hon ble Kerala High Court in the case of Dhanalakshmi Bank Ltd. 344 ITR 259. The A.O. while passing the final assessment order, duly considered the above said 3 decisions and confirmed the disallowance originally made in the draft assessment order. Aggrieved, the assessee has filed this appeal before us. 22.3 We heard the parties on this issue and perused the records. We notice that the coordinate bench has considered an identical issue in assessment year 2008-09 and the matter was restored ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r statistical purpose. 11.4 In view of the above order of the Tribunal, we remit this issue to the file of AO on similar directions. 12. Next ground no.6.4 of the assessee s appeal is reproduced as under: 6.4 That the NFAC/ DRP erred in not accepting the additional claim of not adding back the notional disallowance computed u/s 14A, under the clause (f) of Explanation 1 of Section 115JB even if the amount of expenditure is not specifically debited in the Profit and Loss Account. 12.1 The ld. A.R. submitted that in paras 28 28.3 at pg no 127 of the order dated 5th October 2020 for AYs 2009-10 to 2014-15 where it was held that 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, if any, is to be computed independently without having regard to section 14A of the Act. Based on the same, matter was restored to the file of the AO for examining it afresh. 12.2 The ld. D.R. relied on the order of ld. DRP. 12.3 After hearing both the parties, we are of the opinion that similar issue came for consideration before this Tribunal in IT(TP)A No.3115/Bang/2018 and Others, the Tribunal vide order dated 5.10. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal in ITA No.370/Bang/2021 cited (supra), wherein the Tribunal held as under: 26. Ground No. 08 relates to the action of the AO in setting off the loss arising from SEZ units against income earned by non-tax holiday units. During the course of assessment proceedings the AO noted that the assessee has various SEZ units at different locations. Among SEZ units all are not profit making and the assessee had incurred losses on the six SEZ units as tabulated by the AO. The AO noted that the assessee has set-off the losses of the six SEZ units from other taxable units and other divisions. The AO after discussing the relevant provisions did not allow set off the losses of the six SEZ units and added back in to the total income of the assessee to the extent of Rs. 90.66 crores. Considering the rival submissions we noted that an identical issue has been examined by the co-ordinate bench in the assessee s own case in AY 2009-10 to 2015-16 and it was decided as under:- 4.7 We heard rival contentions on this issue and perused the record. We notice that the co-ordinate bench has considered an identical issue in AY 2008-09 in assessee s own case in ITA No.1665/Bang/2012 dated 04-01-2017 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10A units against the profit of 10A units for computing deduction u/s 10A. This is in view of the decision of the Third Member in the case of Navin Bharat Industries Ltd v. DCIT 90 ITD 1. In view of the judgment of the jurisdictional High Court in the case of Himmatsingh (supra), the assessing officer will set off brought forward losses of the units for which the assessee has disclosed positive income for the purpose of claiming deduction u/s 10A . 16.5 Respectfully following the decisions of the Hon ble Tribunal referred supra, we direct the assessing officer to set off brought forward losses of the units for which the assessee has disclosed positive income for the purpose of claiming deduction u/s 10A Respectfully following the decision of the co-ordinate bench of the Tribunal in the assessee's own case for Assessment Year 2004-05 (supra) on this issue, we direct the Assessing Officer to set off brought forward losses of the units for which the assessee has disclosed positive income for the purpose of claiming deduction under section 10A. Thus, it is clear that the Tribunal has followed the earlier order for the Assessment Year 2004-05 which has been upheld by the Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, aforesaid questions of law are answered in favour of assessee and against the Revenue. 4.9 We notice that the jurisdictional Hon ble Karnataka High Court has decided an identical issue in favour of the assessee. Accordingly, we hold 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. Accordingly, this issue is decided in favour of the assessee. The Ld A.R submitted that the above said view of the Hon ble Karnataka High Court has since been upheld by Hon ble Supreme Court in the case of Yokogawa India Limited (2017)(391 ITR 271)(SC). Accordingly, following the above said decision rendered in the assessee s own case, we hold 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. 9.2.We further noted that in the assessee s own case the Hon ble SC dismissed the SLP filed by the revenue against the order of the Hon ble High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directions issued by the High Court. 6. With these observations, the Special Leave Petition is disposed of. 27. Respectfully following the above judgements, we hold 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 this issue is decided in favour of the assessee. 13.4 In view of the above order of the Tribunal, this issue is decided in favour of the assessee. Accordingly, this ground of assessee s appeal is allowed. 14. Next ground no.8 of the assessee s appeal is reproduced as under: 8. That the NFAC/DRP erred on facts and in law in excluding income under the nomenclature of other income of ₹ 25,96,66,292 from the profits of the business of the undertakings eligible for deduction under section 10AA of the Act without appreciating that the said sum is inextricably linked to the export business carried on by the eligible undertakings of the appellant and thus eligible for the deduction under the said section. 14.1 The ld. A.R. submitted that in paras 30-32; pg nos 60-63, the order dated 23rd May ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tical issue was considered by the Hon ble High Court in the assessee s own case reported in 382 ITR 179. For the sake of convenience, we extract below the decision rendered by Hon ble High Court: 166. The court had an occasion to consider the substantial question of law in the assessee s case itself in ITA 507 of 2002 decided on August 25, 2010 while dealing with the income earned from sale of scrap, export incentive and rent 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. 15.1 The ld. A.R. submitted that in paras 33-34; pg nos 63-67, 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 the issue was restored to AO to examine first as to whether the interest income was assessed 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 income is assessed 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. 15.2 The ld. D.R. relied on the order of ld. DRP. 15.3 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: 33. The eleventh issue relates to rejection of claim for deduction u/s 10AA of the Act in respect of interest income earned by the assessee. During the year under consideration, the assessee had earned interest income on short ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. However, the AO took the view that the impugned interest income is not related to the software development activity. Further, the AO also took the view that the surplus funds is fully fungible and hence surplus funds relating to SEZ division could not be separately identified, if all the surpluses of all divisions (both 10A/10AA/10B units and non-10A/non- 10AA/non-10B units) are put together. Accordingly, the AO rejected the claim of the assessee. The Ld DRP also confirmed the same. 6.5 From the foregoing discussions, we notice that the principle enunciated by Hon ble Karnataka High Court in the case of Motorola India Electronics (P) Ltd (supra) is that the deduction u/s 10B is allowable if there is direct nexus between interest income and the income of the business of the undertaking. The co-ordinate benches in the earlier years have also followed the decision rendered by Hon ble Delhi High Court in the case of CIT Vs. Shriram Honda Power Equipment 289 ITR 475, wherein it was held that, if the AO has assessed interest income under the head Income from business and this has not been challenged by the department thereafter, then the question cannot be permitted to be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. 6.9 With these observations, we restore this issue to the file of the AO for examining it afresh in the light of discussions made supra. 34. Respectfully following the above said decision, we restore this issue to the file of AO for examining it afresh with similar directions. This ground is allowed for statistical purpose. 15.4 In view of the above order of the Tribunal, this issue is remitted to the file of AO/TPO on similar directions. 16. Next ground no.10 of the assessee s appeal is reproduced as under: 10. That NFAC/DRP failed to appreciate that deemed exports are exports as per the EXIM policy and thus erred in excluding deemed exports from export turnover of the undertaking for the purposes of computing d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10A of the Act? 147. The said question came up for consideration before this Court in the case Tata Elxsi vs. Asst. CIT (I.T.A No.411 of 2008). This court has answered the said substantial 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... through other exporter or Status holder recognized under this policy or any other EOU/EHTP/STP/SEZ/BTP unit. What follows from this provision 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts to the tune of Rs. 177.77 crores categorized as assets reimbursements of Rs. 3.17 crores, communication link reimbursements of Rs. 24.79 crores, travel reimbursements of Rs. 23.24 crores, and incentive awards/other reimbursements of Rs. 126.57 crores. The ld. AR of the assessee submitted that reimbursements constitute an integral part of the measurement for realizing its price for the computer software exported. He further submitted that the similar issue has been decided by the coordinate bench of the Tribunal in assessee s own case for the AY 2015-16. The AO excluded these reimbursements from the profits for computing deduction u/s 10AA of the Act. Considering the rival submissions we found that in assessee s own case the co-ordinate bench has observed as under:- An identical issue has been examined by the co-ordinate bench in the assessee s own case in AY 2009-10 to 2014-15. The relevant facts have been narrated by the co-ordinate bench as under:- 20.2 The facts relating to this issue are discussed in brief. In respect of software development activity, for which the assessee had claimed deduction u/s 10A/10AA/10B of the Act, the assessee has received certain payments as reimb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omers, meaning thereby, it is in the nature of additional payments received towards export of software. Hence, we are of the view that it shall form part of sales turnover. Since it is only a revenue item, it cannot be categorized as expenditure as contemplated under the definition of the export turnover. Hence the same is not required to be excluded from the export turnover. 20.7 In respect of the remaining amounts received, in our view, it is required to be examined as to whether the same shall form part of expenses, which are required to be excluded from the amount of Export turnover, as per the definition of the term export turnover given in sec.10A/10AA/10B of the Act. We have discussed the principles at length while adjudicating the earlier issue. Accordingly, the remaining amounts require fresh examination in the light of discussions made supra. 20.8 We also make it clear that, if any of the amount is required to be excluded from export turnover, then the same shall be excluded from the total turnover also, as held by Hon ble High Court of Karnataka in the case of CIT Vs. Tata Elxi Ltd. 204 Taxmann.com 321 and also by Hon ble Supreme Court in the case of CIT Vs. HCL Technolo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y is required to be deducted from the export turnover while computing deduction u/s 10AA of the Act. On going through the entire submissions and order of the authorities below we observe that the expenditure incurred outside India for onsite development of computer software is not to be deducted from export turnover. Only the expenditure on telecommunication charges or insurance attributable to the delivery of the computer software outside India or expenses, if any incurred in foreign currency in providing technical services outside India also are required to be excluded from the export turnover. Further , if any amount excluded from the export turnover is required to be deducted from total turnover. 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 deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liance on the decision of the CIT(A) for the AYs 01-02 and 0203 had argued that the exclusion of above sums of communication link and other reimbursements, VAT/GST, telecommunication expenses and expenditure in foreign currency as carried out by the AO be vacated. 15.1. After critically analyzing the rival submissions and also drew strength from his earlier decision on a similar issue, the Ld.CIT(A) has held that no exclusion was required on this issue and, accordingly, directed the Ld. AO to re-compute the deduction u/s 10A. 15.2.Protesting against the action of the Ld. CIT(A), the Revenue 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 retur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsement of certain expenses was also in the nature of export as the same was paid pursuant to the contract of sale of computer software. Alternatively, if it is held that the said sum does not form part of sale proceeds of export turnover then similar amount should be reduced from the total turnover also as held by Bombay High Court in Sudarshan Chemicals reported in 245 769. Alternatively, the AO should have consistently applied the rationale that what is not turnover in the first place cannot be part of either export turnover or total turnover. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elq software Pvt. Ltd. in ITA No:767/Bang/2007 vide order dated 16th May 2008 has also held that the on-site expenses for development of computer software is not in the nature of technical services. It will be useful to reproduce para 14 and 15 from that order:- 14. During the course of proceedings before us, the learned AR submitted that the issue stands decided in favour of the assessee by the Tribunal in the case of 1. ACIT v. M/s.Infosys Ltd.653 969(B)/2006 2. M/s.Tata Elxsi 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 compute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of software are to be excluded. No effort has been made by the assessing officer to ascertain the telecommunication expenses relating to the delivery of the software. This Bench in the case of I-Gate Global Sales held that 80% of unlinking charges should be reduced from the export turnover. Such finding of the learned CIT(A) was confirmed on the basis of the fact that the learned CIT(A) discussed the software development with a number of 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 for 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l services outside India as mentioned in the definition. Accordingly, we are of the view that the expenditure incurred in development of software and which forms part of direct cost of development of software would not fall under the category of technical services or services 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. The ld. DRP also rejected by observing that the assessee has not revised its return of Income A similar issue has been 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:- 8.2 The facts relating to the issue are stated in brief. As per the provisions of section 10A/10AA/10B of the Act deduction is allowable only on export turnover which received in or brought into India in convertible foreign currency within the period of 6 months from the end of the previous year within such further period as the competent authority may allow in this behalf. The competent authority means Reserve Bank of India (RBI) or such other authority as is authorized under any law for the time being in force for regulating payments and dealings in foreign currency. During the years under consideration, certain amounts were not received or brought into India within 6 months from the end of the previous year. It was the submission of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bank of India, as it has not been rejected and foreign exchange is received and remitted through the proper channel, the assessee is entitled to the benefit of Section 10A. In the facts of the case, we do not find any error committed by the Tribunal. Therefore, the said substantial question is answered in favour of the assessee and against the revenue. Respectfully following the binding decision of the jurisdictional High Court, we direct the AO to include sale amount in the export turnover, while computing deduction u/s 10A of the Act, where the applications have been filed by the assessee to RBI seeking permission to receive the export proceeds beyond the prescribed period. 42. Following the decision of the Hon ble jurisdictional Karnataka High Court, we direct the AO to include sale amount in the Export turnover while computing deduction u/s 10AA of the Act, wherever the applications have been filed by the assessee to RBI through its bankers seeking permission to receive the export proceeds beyond the prescribed period. Accordingly, this ground is allowed. 19.4 In view of the above order of the Tribunal, this issue is remitted to the file of AO/TPO for including the sale amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied on the order of ld. DRP. 20.4 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: 43. Ground No. 16 to 16.3 relates to the claim of foreign tax credit and allowability of State Taxes paid. The contentions raised by the assessee in this year is two-fold. The first contention relates to the allowability of quantum of foreign tax credit. The second contention is that the foreign tax State Taxes paid, if not fully allowed, then the difference amount should be allowed as business expenditure. A similar issue has been decided by the co-ordinate bench of the Tribunal in assessee s own case for the AY 2015-16 which is as under:- 18.1 With regard to the first contention, we notice that an identical issue was examined by the co-ordinate bench in the assessee s own case in AY 2009-10 to 2014-15 in respect of tax credit and it was decided as under:- 9.10 We notice that the issue relating to foreign tax credit has been examined in detail for Hon ble High Court of Karnataka in the assessee s own case. For the sake of convenience, we extract below the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntry could be given credit to the assessee. Thus for the payment of Income-tax in the foreign jurisdiction, the assessee gets the benefit of its credit in this country. 40. However, if the contracting country is not agreeable to extend the said benefits, then in terms of the agreement and probably in terms of the exemption granted, the assessee would be entitled to benefit only in this country on account of the exemption and the benefit in the other country is not extended. Thus when exemption is granted in respect of the income chargeable to tax under this Act in respect of which no benefit is granted in the corresponding country the assessee gets no benefit. However, if the benefit is extended to a portion of the income say for example 90 per cent. and 10 per cent. is subjected to tax then to that extent the assessee would be entitled to benefit of tax credit as he has paid tax in the foreign jurisdiction as per section 90(1)(a)(i) of the Act. 41. In this connection, it is contended on behalf of the Revenue that if the income is chargeable to tax in India, then only the assessee can have the benefit of tax credit in respect of the tax paid in foreign jurisdiction. In respect of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h relief, then the assessee would be entitled to such relief. 56. Therefore, it follows that the income under section 10A is chargeable to tax under section 4 and is includible in the total income under section 5, but no tax is charged because of the exemption given under section 10A only for a period of 10 years. Merely because the exemption has been granted in respect of the taxability of the said source of income, it cannot be postulated that the assessee is not liable to tax. The said exemption granted under the statute has the effect of suspending the collection of Income-tax for a period of 10 years. It does not make the said income not leviable to Income-tax. The said exemption granted under the statute stands revoked after a period of 10 years. Therefore, the case falls under section 90(1)(a)(ii). 57. In the background of this legal position, we have to look into the Double Taxation Agreements entered into between India and United States, Canada. (1) Indo-US Agreement : 58. Article 25 of the Indo-US Double Taxation Agreement deals with relief from double taxation. Clause 2(a) is the relevant provision. It reads as under (see [1991]187 ITR (St.) 102, 124) : 2(a) Where a resi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The accounting year in India starts from 1st of April and closes on 31st of March of the succeeding year. Whereas in America, the 1st of January is the commencement of the assessment year and ends on 31st of December of the same year. Therefore, the income derived by an Indian resident, which falls within the total income of a particular financial year when it is taxed in the United States, falls within two years in India. Therefore, while claiming credit in India, the assessee would be entitled to only the tax paid for that relevant financial year in America, i.e., the income attributable to that year in America. In other words, the Income- tax paid in the same calendar year in the United States of America is to be accounted for two financial years in India. Of course, this exercise should be done by the assessing authority on the basis of the material to be produced by the assessee. (2) Indo-Canada agreement : 60. In so far as the Indo-Canada Double Taxation Agreement is concerned, article 23 deals with elimination of double taxation. It provides that the laws in force in either of the Contracting States will continue to govern the taxation of income in the respective Contracti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e aforesaid clause in the Indo-Canadian agreement if the income from source within Canada, is lower, has been subjected to tax both in India and Canada then, the tax paid in Canada shall be allowed as a credit against the Indian tax paid in respect of such income. If the entire income assessed by the assessee under section 10A is exempted in India, then, the aforesaid clause does not confer any benefit on the assessee. However, notwithstanding the aforesaid provision, if any portion of the income falling under section 10A is subjected to tax then, by virtue of aforesaid provision, the tax paid in Canada corresponding to the income subjected to tax in India, the assessee would be entitled to credit of the tax paid in Canada. However, this exercise has to be done by the assessing authority on the basis of materials to be produced by the assessee and after giving effect to the formulae prescribed under section 10A(4) of the Act. (3) No agreement with states : 64. Whether the assessee is entitled to the aforesaid benefit when India has no agreement with the States where tax is levied on the income of the assessee. 65. Section 91 of the Act specifically deals with the said question. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n agreement with the federal country and not with any State within that country. In order to extend the benefit of this, relief or avoidance of double taxation, the aforesaid Explanation explicitly makes it clear that Income-tax in relation to any country includes the Income-tax paid to the Government of any part of that country or a local authority in that country. Therefore, even though, India has not entered into any agreement with the State of a country and if the assessee has paid Income-tax to that State, the Income-tax paid in relation to that State is also eligible for being given credit to the assessee in India. Therefore, the argument that in the absence of an agreement between India and the State, the benefit of section 90 is not available to the assessee is ex-facie illegal and requires to be set aside. We notice that the Hon ble High Court has accepted all the contentions of the assessee on various aspects discussed above. 9.11 We are also of the view that the expressions used in sec. 90(1)(a)(i) and (ii) and in sec.91 would 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) us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on by the assessee outside India and the same is deductible u/s 37 of the Act. In any case, it is a loss incurred by the assesse-company in carrying on business outside India and such tax is allowable u/s 28 of the Act. A plain reading of the aforesaid provision makes it abundantly clear that foreign taxes paid on profits or gains is not deductible only to the extent relief is eligible u/s 90 or deduction is eligible u/s 91. To the extent relief u/s 90 or deduction u/s 91 is denied as ineligible, the company is eligible for deduction u/s 37 or as a loss u/s 28 of the Act. Further, we wish to submit that the said amount shall also be allowed as a deduction from the book profits as taxes levied under any Act other than Income Tax Act is not covered in the inclusion given in Explanation 2 u/s 115JB. We wish to reproduce the definition of income tax as provided in Explanation 2: Explanation 2. For the purposes of clause (a) of Explanation 1, the amount of income-tax shall include (i) any tax on 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profession are determined. It is this determined profits or gains of business/profession which are subject to tax as income tax under the Act. The main part of Section 40(a)(ii) of the Act does not allow deduction in computing the income i.e. profits and gains of business chargeable to tax to the extent, the tax is levied/ paid on the profits/ gains of business. Therefore, it was on the aforesaid general principle, universally accepted, that this Court answered the question posed to it in S. Inder Singh Gill (supra) in favour of the Revenue. (l) We would have answered the question posed for our consideration by following the decision of this Court in S. Inder Singh Gill (supra). However, we notice that the decision of this Court in S. Inder Singh Gill (supra) was rendered under the Indian Income Tax Act, 1922 and not under the Act. We further note that just as Section 40(a)(ii) of the Act does not allow deduction on tax paid on profit and/or gain of business. The Indian Income 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 006 issued by the CBDT. The above circular inter alia, records the fact that some of the assessee who are eligible for credit against the tax payable in India on the global income to the extent the tax has been paid outside India under Sections 90 or 91 of the Act, were also claiming deduction of the tax paid abroad as it was not tax under the Act. In view of the above, Explanation inserted in 2006 to Section 40(a)(ii) of the Act, would require in the context thereof that the definition of the word tax under the Act to mean also the tax which is eligible to the benefit of Sections 90 and 91 of the Act. However, this departure from the meaning of the word tax as defined in the Act is only restricted to the above and gives no license to widen the meaning of the word tax as defined in the Act to include all taxes on income/profits paid abroad. (o) Therefore, on the Explanation being inserted in Section 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee, to the extent not allowed as tax credit u/s 90 91 of the Act, as deduction from the business income of the assessee from the respective units. 20.5 In view of the above order of the Tribunal, this issue is remitted to AO/TPO to decide the assessee s case in the light of above directions of the Tribunal. 21. Ground No.16 of the assessee s appeal is reproduced as under: 16. Payments made to Gartner Group: 16.1 That NFAC/DRP erred on facts and in law in treating the payments of ₹ 20,01,03,442 made to Gartner Group as royalty exigible to deduction of tax at source under the Act and under the India USA tax treaty. 16.2 Without prejudice to the above and in any event, the NFAC and the DRP erred in failing to appreciate that even assuming but not admitting that the sum is disallowable under section 40(a)(i), the same disallowance should 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 ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly, assessee is not obligated to deduct TDS. 21.3 He further submitted that the aforesaid order of this Tribunal in ITA Nos 152 to 154/Bang/2004 was reversed by Hon ble Karnataka High Court relying on the case of Samsung Electronics. This decision of Karnataka High Court in case of Samsung Electronics has been reversed by the Hon ble Supreme Court in case of Engineering Analysis (supra) and accordingly, ruling in the case of Samsung Electronic is no more good law. 21.4 Furthermore, he submitted that the Hon ble Supreme Court in Company s own case (CA Nos. 9838-8840/2013) while adjudicating the issue of deduction of tax on payments made to Gartner Group has set aside the order of Hon ble High Court with an order of remand to re-examine the issue and the question of law. Further, assessee and revenue are made entitled to raise 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 thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ictional 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 assessee in not deducting the tax at source, the A.O. was justified in making the disallowance of payment made to M/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt, referred above. Accordingly he prayed that this disallowance 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 the conclusion that the decision rendered by Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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