2020 (10) TMI 605 - AT - Income Tax

Tribunal rules in favor of taxpayer on various tax issues, directs reexamination by AO

The tribunal ruled in favor of the taxpayer on various issues including setting off losses of STPI/SEZ units against non-STPI/non-SEZ unit income, ... Setting off of LOSS OF STPI/SEZ UNITS against business income from non-STPI/non-SEZ units - STPI refers to “Software Technology Park” and SEZ refers to “Special Economic Zone” - HELD THAT:- As decided in own case [2015 (10) TMI 826 - KARNATAKA HIGH COURT] 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. Exclusion of Miscellaneous income while computing deduction u/s 10A/10AA/10B - HELD THAT:- The decision rendered in own case [2015 (10) TMI 826 - KARNATAKA HIGH COURT] would cover the income booked under the head Sale of Scrap/Newspaper, Rental income and interest income. Accordingly, we direct the AO to allow deduction u/s 10A/10AA/10B of the Act in respect of income earned on sale of scrap/newspaper and Rental income. The remaining item is “Other income” - In AY 2007-08 and 2008-09, this item of miscellaneous income was restored to the file of the AO for examining the nature of receipt and decide the same accordingly - Following the same, we restore the issue relating to “Other income” to the file of the AO with similar directions. Exclusion of Net interest income for deduction u/s 10A/10AA/10B - HELD THAT:- 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. With regard to Category (a) above, if the nexus is shown between the loan funds and the deposits, the assessee is eligible for deduction in respect of interest income, following the decision rendered by the Hon'ble Karnataka High Court in the assessee’s own case . With regard to Category (b) above, it is imperative on the part of the assessee to show that there is nexus between interest income and income of business undertaking. We have noticed earlier that the AO has taken the view that the surplus funds of undertaking located in SEZ are put into common bank account. Accordingly, the AO has observed that the surplus funds relating to SEZ division 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 - restore this issue to the file of the AO for examining it afresh in the light of discussions made supra. Whether Deemed exports are eligible for deduction section 10A/10AA/10B - HELD THAT:- Identical issue has been decided in favour of the assessee in TATA ELXSI LTD. [2011 (8) TMI 782 - KARNATAKA HIGH COURT] - we direct the A.O. to include deemed exports as part of turnover while computing deduction u/s 10A/10AA/10B of the Act. Eligibility of the assessee to claim deduction u/s 10A of the Act in case of Delayed collections of export proceeds - HELD THAT:- As relying on own case 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. Set off of foreign tax credit/deduction relating to income generated abroad - HELD 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) 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. 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. Accordingly, following the binding decision of High Court in A.Y. 2001-02 to 2004-05 we set aside the order passed by A.O. on this issue and direct him to allow foreign taxes credit claimed by the assessee. Claim of Depreciation on Software - amount of software capitalized by it, by invoking provisions of section 40(a)(ia) of the Act for non-deduction of tax at source from the payments made for purchase of software - HELD THAT:- Following the decision rendered by the coordinate bench in the Tally Solution [2017 (7) TMI 606 - ITAT BANGALORE] we direct the A.O. to delete the disallowance on depreciation made u/s 40(a)(ia) of the Act. Since we have held that depreciation is not liable to be disallowed u/s 40(a)(ia) of the Act, the alternative claim of the assessee for enhanced deduction shall become infructuous, even though the claim of the assessee is supported by the circular no.37/2016 dated 2.11.2016 issued by CBDT. Allocation of Corporate overheads to units claiming deduction u/s 10A/10AA/10B - HELD THAT:- The head office does not exist for its own sake. Its existence is relevant for all the activities undertaken by various divisions, units and profit centres. The very existence of the divisions, units and profit centres is dependent upon the policy decisions taken in head-office. We the view that head office expenses which are in the nature of common expenses are required to be allocated to different units or undertakings and more particularly to the undertakings claiming beneficial deductions under the Act. Since deduction is allowed u/s 10A/10AA/10B on the profits derived from the undertakings, all direct or indirect expenses, must be adjusted in order to arrive at the profits derived from the undertaking. In that process, the component of head office expenses also requires allocation. It appears that the same principle has been upheld by Hon’ble Karnataka High Court. However, there appears to be some direction on the manner of allocation of Head office expenses. The AO should have implemented the direction given by Hon’ble High Court in the earlier years. Accordingly, we restore this issue to the file of the assessing officer. Rejection of claim for deduction u/s 10A of the Act in respect of STPI units located at Bangalore - HELD THAT:- Following the decision rendered by Hon’ble jurisdictional High Court in the assessee’s own case and in the case of Wipro GE Medical Systems Ltd. [2015 (8) TMI 548 - KARNATAKA HIGH COURT]we hold that the new STPI undertakings located in Bangalore, against which deduction has been claimed by the assessee are eligible for said deduction. Accordingly, we direct the A.O. to allow the claim of the assessee. Whether applicable foreign VAT/GST shall form part of export turnover or not while computing deduction u/s 10A/10AA/10B - HELD THAT:- We direct the A.O. to include foreign VAT/GST in the export turnover, since export profits realized by the assessee is said to include the above said VAT/GST. Taxability of interest granted to the assessee u/s 244A - HELD THAT:- Restore this issue to the file of the A.O. with the direction to ascertain the interest, if any, withdrawn out of the interest given to the assessee u/s 244A of the Act in the respective years and reduce the same from the interest income and tax the balance amount. We order accordingly. Deduction claimed by the assessee u/s 80IB - HELD THAT:- As considered an identical issue in this order in the context of allocation of corporate expenses to undertakings claiming deduction u/s 10A/10AA/10B of the Act (Issue no.8). We have restored this issue to the file of the AO for the reasons discussed in issue no.8. Though the issue herein is contested in the context of deduction u/s 80IB of the Act, yet the underlying facts are identical with issue no.8, discussed supra. Accordingly, in order to maintain uniformity, we feel it proper to restore this issue to the file of AO with similar directions. Eligibility of the assessee to claim deduction u/s 80IB of the Act on the profit derived on sale of monitors - HELD THAT:- Assessee did not claim benefit u/s 80IB of the Act in respect of profit derived from trading activity of monitors, i.e., monitors, which were sold separately and not along with computer hardware. In respect of monitors sold along with the computer hardware, the Hon’ble High Court has expressed the view that those monitors which are used in the computers are in the nature of spare parts in the manufacture of computers. Accordingly, the Hon’ble High Court has expressed the view that when the computer is sold along with monitor, then the monitor forms part of the said computer, and hence the same falls within the first degree and is eligible for deduction u/s 80IB of the Act. Accordingly, following the decision rendered by Hon’ble High Court, we direct the A.O. to allow deduction u/s 80IB of the Act in respect of sale of monitors made along with the computer hardware, as part of computers. Eligibility of the assessee to claim deduction u/s 80IB of the Act in respect of “other incomes” received by it - HELD THAT:- Coordinate bench has decided this issue against the assessee in assessment year 2008-09. We also notice that the decision rendered by Hon’ble High Court of Karnataka was in the context of section 80HHC of the Act, meaning thereby, the High Court has not decided an identical issue in the context of 80IB of the Act. Under these set of facts, we prefer to follow the decision rendered by the coordinate bench in assessment year 2008-09. Exclusion of other income while computing deduction u/s 80IC - HELD THAT:- Before us the assessee did not demonstrate that the miscellaneous income would fall under the category of income derived from industrial undertaking. Accordingly, we hold that the miscellaneous income is not eligible for deduction u/s 80IC - The direction of Ld DRP in AY 2011-12 is reversed. The A.O. is directed to compute the deduction u/s 80IC of the Act. Whether the expenditure incurred in foreign currency is required to be deducted from the export turnover while computing deduction u/s 10A/10AA/10B? - HELD THAT:- What is required to be excluded is the expenses specifically mentioned in the definition of “export turnover”, viz., the expenditure incurred on freight, telecommunication charges or insurance attributable to the delivery of the computer software outside India or expenses, if any incurred in foreign exchange in providing technical services outside India alone are required to be excluded from the export turnover. If any amount is excluded from “export turnover”, the same is required to be excluded from “total turnover” also, as held by Hon'ble Karnataka High Court in the case of Tata Elixi Ltd [2011 (8) TMI 782 - KARNATAKA HIGH COURT] and CIT vs. HCL Technologies Ltd [2018 (5) TMI 357 - SUPREME COURT] We set aside the order passed by the A.O. on this issue and direct him to compute the deduction u/s 10A/10AA/10B of the Act by following the discussions made supra. Whether reimbursements received by the assessee are required to be excluded from the export turnover for the purpose of computing deduction u/s 10A/10AA/10B ? - 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 - cost so incurred cannot be categorised as direct cost related to the development of software. Since it is an expenditure incurred at the request of customer for which reimbursement was also received, there is no revenue element involved in it. Accordingly, we are of the view that this amount should not be considered as either expenditure or part of export turnover, i.e., the receipt should be netted off against the expenditure. Nature of payment received by way of incentive awards - this amount has been received as incentive from the customers, 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. Exclusion of profits attributable to overseas development centre for computing deduction u/s 10A/10AA/10B - HELD THAT:- We respectfully following this decision, are of the opinion that for this year also the issue requires to be remitted back to the Assessing Officer and accordingly do so with a direction to the Assessing Officer to follow the decision of Tribunal. Rejection of claim for deduction of educational cess - HELD THAT:- We notice that the Hon'ble Bombay High Court has also held in the case of Sesa Goa Ltd vs. JCIT [2020 (3) TMI 347 - BOMBAY HIGH COURT] that the education cess is allowable as deduction. Deduction of employees’ contribution made to ESIC - HELD THAT:- Even though assessee has not put up the claim in the return of income, a fresh claim can be admitted by the Tribunal as per the decision rendered by Hon’ble Supreme Court in the case of Goetz India Pvt. Ltd. [2006 (3) TMI 75 - SUPREME COURT] when all facts are available on record. Accordingly, we restore this issue to the file of the A.O. with the direction to examine the claim of the assessee and decide the same in accordance with the decision rendered by Hon’ble Karnataka High Court in the case of Essae Teraoka Pvt. Ltd. [2014 (3) TMI 386 - KARNATAKA HIGH COURT]. Disallowance of loss claimed towards provision of marked to market valuation of outstanding forward contracts - HELD THAT:- We notice that the details of underlying assets in respect of outstanding forward contracts are not available on record. There should not be any doubt that the value of underlying assets (in the form of debtors, creditors and other monetary assets) as on the balance sheet date, against which the outstanding forward contracts have been taken, should be more than the value of outstanding forward contracts. In that case, the loss arising on restatement of forward contract is fully allowable as deduction. Since the AO has not examined this aspect, we are of the view that this issue needs to be restored to the file of the AO for the limited purpose of examining as to whether the value of underlying assets is more than the value of the forward contracts. Since the AO has disallowed the loss in AY 2009-10, 2011-12 and 2012-13, this issue is restored to the file of AO in the above said three years alone. The assessee is directed to furnish relevant details to prove that the value of underlying assets is more than the value of outstanding forward contracts as on the balance sheet date. Disallowance u/s 14A of the Act made to the net profit while computing book profit u/s 115JB of the Act - HELD THAT:- In the case of Vireet Investments Pvt. Ltd. [2017 (6) TMI 1124 - ITAT DELHI] has expressed the view that the amount disallowed u/s 14A of the Act cannot be adopted for the purpose of computation of book profit u/s 115JB and the disallowance to be made u/s clause (f) to explanation 1 has to be computed independently without having regard to the provisions of section 14A - 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. Disallowance of expenditure by invoking provisions of sec. 115 BBD - HELD THAT:- A.O. was not justified in invoking the provisions of sec.115BBD of the Act for making the impugned disallowance. Since the AO has not disallowed the interest expenditure on the reasoning given by Ld DRP, we do not find it necessary to address the same. Disallowance of part of advertisement, publicity and sales promotion expenditure treating the same as “brand building expenses” - HELD THAT:- AO has not demonstrated with cogent evidence, any special circumstances or reasons to hold that the impugned expenditure was capital in nature. It is also note-worthy that no specific instances have been pointed out by the AO in this regard. The assessing officer has also not mentioned the basis for arriving at the conclusion that 25% of expenditure would be for promotion of brand value. Hence, we are of the view that the AO has made the ad-hoc disallowance only on surmises and conjectures. AO was not justified in disallowing part of advertisement expenses and accordingly direct him to allow the entire advertisement expenses claimed by the assessee. Disallowance of fees paid to Registrar of companies for increasing the Authorized capital of the assessee company - HELD THAT:- Hon’ble `Supreme Court in the case of Punjab State Industrial Corporation Ltd. [1996 (12) TMI 6 - SUPREME COURT]and Brooke Bond Ltd. [1997 (2) TMI 11 - SUPREME COURT] has expressed the view that the fees paid to Registrar of Companies for increasing the authorized capital is capital in nature. Hence, we do not find any infirmity in the decision of A.O. in disallowing the claim of assessee by holding that the same as capital in nature. The contention of the assessee that the expenditure should be allowed by amortised over a reasonable period of time. However, we notice that there is no provision under the Act to accept the claim of the assessee. Accordingly, we confirm the disallowance made by the A.O. TDS u/s 195 - HELD THAT:- 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). Non-granting of TDS credit - HELD THAT:- This issue requires fresh examination at the end of the A.O. by duly considering the TDS certificates furnished by the assessee and also making due enquiries, if required. Transfer pricing adjustment on the short term advances given to foreign subsidiaries - HELD THAT:- As assessee did not establish that there is parity of facts. We notice that the coordinate bench of ITAT has determined the ALP rate of interest at Libor + 150 basis point. It is also noticed that the revenue has accepted the decision rendered by ITAT and the TPO has also adopted the same in A.Y. 2015-16. Accordingly, it is noticed that a consistent view is being taken on this issue. Accordingly, we direct the A.O./TPO to adopt the ALP rate of interest at Libor + 150 basis point. Guarantee commission in respect of corporate guarantee provided by the assessee to its Associated Enterprises (AEs) - HELD THAT:- TPO did not examine internal CUP study of the assessee and has proceeded to determine the ALP of international transaction under TNMM method. Since we have held that the internal CUP is the most appropriate method. We have noticed that the assessee has furnished details of fees collected from AEs and Non-AEs, the nature of services provided to both the parties, copies of sample invoices. We have also noticed that the TPO has not examined them at all. Accordingly, we restore this issue to the file of AO/TPO for examining the issue under internal CUP method by considering all the details and information furnished by the assessee. Transfer pricing adjustment made for Specified Domestic Transaction - transfer pricing adjustment made for Specified Domestic Transactions - HELD THAT:- 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 interunit 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 adjustment contemplated in sec.92 - issue requires fresh examination at the end of TPO/AO by duly considering various other contentions of the assessee and also by considering the discussions made supra. Accordingly, we set aside the order passed by A.O. on this issue and restore the same to the file of the AO/TPO Adjustment in respect of liquidated damages - HELD THAT:- TPO has feel into error in not recognizing the Mutual subcontracting agreement dated 01st April, 2005 entered between the assessee and M/s Wipro Inc., USA, since it is the claim of the assessee that the said agreement has not been terminated. Without examining the said claim of the assessee, it may not be correct on the part of the TPO to observe that the said agreement was not valid in the year relevant to AY 2010-11. We also notice that the TPO has not brought any material on record in support of his observations that, in an uncontrolled transaction, no third party would have paid such kind of liquidated damages in respect of dispute between its subsidiary and a third party. We are of the view that, without examining the Mutual subcontracting agreement, the TPO could not have come to such kind of conclusion. Accordingly, we are of the view that this issue has not been properly examined by TPO - this issue requires fresh examination at the end of AO/TPO. ISSUES PRESENTED AND CONSIDERED 1. Whether losses of SEZ/STPI undertakings may be set off against business income of non-SEZ/non-STPI undertakings for computing taxable income and effect of sec.10A/10AA as a 'deduction'/'exemption' code. 2. Whether various items of miscellaneous receipts of eligible undertakings (sale of scrap/newspaper, rental, interest, dividend, profit on sale of assets, 'other income') form part of 'profits and gains derived from the eligible undertaking' for deduction under sec.10A/10AA/10B. 3. Whether interest income (including interest earned on deposits from packing credit or surplus SEZ funds) is eligible for deduction under sec.10A/10AA/10B - tests of classification as business income and nexus with the eligible undertaking. 4. Whether supplies to SEZ/STP units (deemed exports) and foreign-currency receipts from customers in SEZs qualify as export turnover for sec.10A/10AA/10B. 5. Whether export turnover may include export proceeds received after prescribed period where extension to realise foreign exchange was applied to Reserve Bank - effect of applications to RBI on eligibility for deduction. 6. Whether foreign taxes (including federal, state/local taxes) paid on foreign-sourced profits are creditable against Indian tax under secs.90/91 when those profits are exempted in India under sec.10A/10AA (interaction of sec.90(1)(a)(i)/(ii) and sec.91). 7. Whether depreciation on capitalised software can be disallowed under sec.40(a)(ia) for failure to deduct TDS on payments for software procurement. 8. Whether corporate/head-office overheads must be allocated to units claiming deductions under sec.10A/10AA/10B/80IB/80IAB/80IC and correct methodology for such allocation. 9. Whether STPI units established as expansions (same building/floors) qualify as newly established undertakings for sec.10A (tests of separate identifiable undertaking, new plant/machinery, physical separateness). 10. Whether foreign VAT/GST collected and remitted forms part of export turnover for sec.10A/10AA/10B. 11. Whether interest received under sec.244A (interest on income-tax refunds) is taxable on accrual or only to the extent it becomes irrevocably retained (directions for netting against interest payable u/s234D and treatment where refunds are subsequently withdrawn). 12-19 (grouped): Whether various deductions/exclusions (80IB/80IC eligibility for trading components and 'other income', exclusion of miscellaneous income for those incentives, deduction of employees' contributions to ESIC, educational cess, ROC fees, brand-building advertising, mark-to-market forex/forward losses, 14A disallowance and book-profit treatment) are allowable under applicable statutory provisions and precedent. 20-37 (grouped transfer-pricing and related issues): Whether specified domestic transactions (SDTs) between group units (including SEZ/ STPI units), allocation of ALP, treatment of inter-SEZ transactions, corresponding adjustments, TP adjustments for interest on intra-group advances (LIBOR + mark-up), guarantee fees, software services pricing (internal CUP v. TNMM), liquidated damages reimbursements, and related TP methodology issues are to be sustained. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Set-off of SEZ/STPI losses against non-SEZ income Legal framework: Sec.10A/10AA provides deduction of profits derived by eligible undertaking; post-2001 amendments recharacterised the provision and introduced limited regimes. Precedent treatment: Coordinate Tribunal and Karnataka High Court decisions in the assessee's own earlier years held that income of each undertaking is to be computed independently and losses of a 10A/10AA unit, if not absorbed, may be set off against other business income - binding on the Tribunal. Interpretation/reasoning: The Court examined statutory purpose and earlier High Court/Supreme Court guidance (Canara Workshops principle) and concluded sec.10A/10AA does not mandate grouping SEZ/STPI units such as to preclude set-off of their losses against non-SEZ profits; deduction under sec.10A arises only when an eligible undertaking earns profits but losses do not become a fetter on set-off against other business income for tax computation. Ratio vs. Obiter: Ratio - SEZ/STPI losses need not be restricted to set-off only against other SEZ/STPI profits; they can be set off against non-SEZ business income. Conclusion: Claim for such set-off allowed. Issues 2 & 3 - Miscellaneous income and interest: inclusion for sec.10A/10AA/10B Legal framework: Definitions of 'export turnover' and the meaning of 'profits and gains derived by an undertaking'; sec.10B jurisprudence parimateria for interest; Explanation in sec.10A/10B and judicial interpretation of nexus test. Precedent treatment: Karnataka High Court decisions in assessee's own case and Motorola/others held that items like sale of scrap, rental, interest and gains on forex/other receipts, if directly related to business of the eligible undertaking or assessed as business income, qualify for deduction; on interest, nexus with business or assessment head as business income is decisive. Interpretation/reasoning: Tribunal follows High Court precedents: (a) exempt dividend/mutual fund income excluded; (b) sale of scrap and rental qualify as part of business profits where nexus exists; (c) 'other income' lacked detail - remitted for AO examination; (d) interest income: where AO assessed interest as business income or a demonstrable direct nexus exists (e.g., fixed deposits from packing credit or identifiable SEZ surplus), interest may be included in eligible undertaking profits; where nexus not shown, AO to examine. Ratio vs. Obiter: Ratio - items with direct nexus to export/business or assessed as business income are includible for deduction; interest requires nexus proof or prior AO classification. Conclusion: Sale of scrap and rental - allow sec.10A/10AA/10B; interest - remand to AO to examine nexus and classification; 'other income' - remit for factual inquiry. Issue 4 - Deemed exports (sales to SEZ/STP units) as export turnover Legal framework: Exim Policy and its incorporation in statutory scheme; sec.10A read with Exim Policy permitting export through others/status holders. Precedent treatment: Karnataka High Court (Tata Elxsi and assessee's own) held supplies to STP/SEZ units treated as 'deemed export' for sec.10A if conditions of Exim Policy met. Interpretation/reasoning: Where (i) software/services are exported out of India though another exporter/SEZ status holder, (ii) foreign exchange attributable to such export is realized, and (iii) statutory/Exim conditions are satisfied, such receipts are part of export turnover. Ratio vs. Obiter: Ratio - deemed exports to SEZ/STP units meeting Exim conditions are to be included in export turnover for incentive computation. Conclusion: Deemed exports included in export turnover; AO directed to follow High Court precedent. Issue 5 - Delayed collections and RBI extensions Legal framework: Sec.10A/10AA/10B require export proceeds to be received/brought into India within six months unless extended by competent authority (RBI). Precedent treatment: Karnataka High Court accepted that where assessee applied to RBI for extension and remittances were later received through proper channel without rejection, benefit should be allowed. Interpretation/reasoning: Mere filing of application to RBI, followed by ultimate receipt through proper channel and absence of RBI rejection, suffices; denial is not warranted solely for lack of express RBI approval at time of assessment. Ratio vs. Obiter: Ratio - where application to RBI for extension filed and funds eventually remitted through proper channel, export turnover can include such amounts. Conclusion: Allow inclusion where RBI extension applications filed and receipts subsequently received; remit to AO if facts disputed. Issue 6 - Foreign tax credit when Indian exemption under sec.10A/10AA applied Legal framework: Secs.90 and 91; distinction between sec.90(1)(a)(i) (tax actually paid in both jurisdictions) and sec.90(1)(a)(ii) (income chargeable in both jurisdictions even if exempt in India) and sec.91 inclusive definition of income-tax to include state/local taxes. Precedent treatment: Karnataka High Court in assessee's own case held that where DTAA contemplates tax being chargeable in both countries (sec.90(1)(a)(ii) type treaties - e.g., Indo-US), credit may be allowed even if Indian tax is suspended by exemption; sec.91 allows credit for state/local taxes. Interpretation/reasoning: Sec.90(1)(a)(ii) covers situations where income is chargeable under Indian law but exempted by statute - treaty may still entitle credit for foreign tax; sec.91 explicitly treats local/state taxes as 'income-tax' for credit where no treaty exists. Ratio vs. Obiter: Ratio - foreign tax credit allowable in accordance with the specific DTAA provision (whether clause (i) or (ii)) and sec.91 covers state/local taxes. Conclusion: Direct the AO to allow foreign tax credit in line with High Court reasoning and statutory provisions; adjust where later Indian tax liability arises. Issue 7 - Depreciation on capitalised software vis-à-vis sec.40(a)(ia) Legal framework: Sec.32 (depreciation statutory allowance); sec.40(a)(ia) disallows certain payments if TDS not deducted. Precedent treatment: Tribunal benches held depreciation is statutory allowance and not an outgoing expenditure covered by sec.40(a)(ia); appellate and High Court decisions support that capitalisation and subsequent depreciation cannot be disallowed under sec.40(a)(ia). Interpretation/reasoning: Sec.40(a)(ia) targets outgoing payments chargeable under the Act on which TDS should have been made; depreciation is not such an outgoing payment but a statutory computation; therefore sec.40(a)(ia) inapplicable to depreciation on capitalised software. Ratio vs. Obiter: Ratio - depreciation on capitalised software cannot be disallowed under sec.40(a)(ia) for non-deduction of TDS. Conclusion: Deletion of sec.40(a)(ia) disallowance and allow depreciation; alternate claim for enhanced deduction rendered infructuous. Issue 8 - Allocation of corporate overheads to incentive units Legal framework: Sec.10A/10AA/10B/80IB etc. require profit computation of eligible undertaking; sec.80IA(8) and explanations relevant for 'market value'. Precedent treatment: Karnataka High Court and Tribunal in earlier years held that head-office/corporate expenses that are common must be allocated; methodology must be reasonable and consistent. Interpretation/reasoning: Head office is a cost centre providing services to all units; where such costs are common they should be apportioned to obtain true profits of eligible units for deduction computation. However the allocation method must follow materials and prior judicial directions; indiscriminate turnover-based mechanical allocation without respecting earlier judicial findings is impermissible. Ratio vs. Obiter: Ratio - corporate overheads should be allocated to units claiming incentives on a reasonable basis and in compliance with earlier High Court/Tribunal directions. Conclusion: Remit to AO to re-examine allocation consistent with precedents and factual material. Issues 9-13, 15-18, 21 etc. (summary treatment of other incentive-related issues) Legal framework & precedent: Multiple issues (eligibility of STPI units as new undertakings; whether monitors sold as part of computers qualify for 80IB; treatment of miscellaneous income for 80IB/80IC; exclusion of expenses in foreign currency from export turnover; treatment of reimbursements; overseas development centres) were adjudicated by reference to statutory tests (physical separateness, new plant/machinery, nexus, Exim Policy) and to binding High Court and Tribunal precedents. Interpretation/reasoning: Where factual criteria for 'new undertaking' and separateness satisfied, deduction allowed; monitors forming integral part of manufactured computers qualify; foreign currency expenses that are direct onsite development costs are not 'technical services' excluded from export turnover; reimbursements require fact-specific examination - asset reimbursements netted, incentive awards treated as revenue; overseas development/ODCs remitted for AO to determine market value/transfer between units in light of comparability. Conclusion: Follow High Court/Tribunal precedents; several issues remitted to AO for factual determination where details lacking. Issues 20-37 - Transfer pricing / SDT and related TP matters Legal framework: Secs.92/92BA/92C/92F and related rules prescribe ALP computation and application to specified domestic transactions (SDT); sec.80IA(8)/10AA interaction with ALP; rules on TP methods (CUP, TNMM, etc.). Precedent treatment: Authorities and benches referenced contrast internal CUP v. external comparables, market realities and prior Tribunal decisions on acceptability of internal comparables and LIBOR-linked mark-ups; Supreme Court/HC guidance led to extension of TP to SDTs. Interpretation/reasoning: (a) Transactions between two eligible units fall outside sec.80IA(8)'s explicit ambit (which speaks of transfers between eligible and other business); (b) for purposes of sec.92, ALP must be applied to inter-unit transactions with corresponding adjustments in both payer and receiver for computing total income; (c) AO/TPO must carry out detailed comparability analysis before rejecting internal CUP; (d) where TPO failed to examine factual materials (contracts, mutual sub-contract agreements, invoices, nature of services), matter remitted for re-examination; (e) where independent precedent establishes LIBOR+150 bps or internal CUP/0.5% guarantee fees, those benchmarks to be considered unless contrary comparable evidence provided. Ratio vs. Obiter: Ratios - (i) inter-SEZ eligible-to-eligible transactions not caught by sec.80IA(8) on strict textual reading; (ii) ALP for SDT must be applied consistently and AO/TPO must perform full re-casting and corresponding adjustments rather than mechanical additions to total income; (iii) internal CUP may be appropriate where strong comparability exists. Conclusion: Set aside TPO/AO findings where comparability and statutory application not properly examined; many TP adjustments restored to AO/TPO for fresh examination applying proper methodology; specific directions given on adoption of LIBOR+150 bps for intra-group advances and rejection of bank-guarantee benchmark for corporate guarantee where unsupported. Other procedural/technical issues (14A, 244A interest, TDS credit, 115JB book profit, ESIC, educational cess, ROC fees, advertisement capitalisation, mark-to-market forex losses) Summary conclusions: (a) 14A disallowance: remitted to AO to verify allocation and actual expenditure; (b) sec.244A interest: taxable but assessable only after allowing for amounts subsequently withdrawn - AO directed to net amounts and compute taxable portion; (c) TDS credit: where mismatch with Form 26AS, AO to verify deductor payment and give credit if deductor deposited - follow CBDT instruction and judicial guidance; (d) book profit (sec.115JB) addition of sec.14A disallowance must be computed independently - remand; (e) ESIC contributions: allow where facts meet High Court tests; (f) educational cess: allowable (constructive legislative history and CBDT circular); (g) ROC fees for increasing authorised capital: capital in nature - disallow; (h) advertisement: revenue unless clear enduring asset/brand-building proven - disallowance not sustained; (i) MTM losses on forwards: notional only if underlying assets insufficient - AO to verify underlying asset coverage; (j) many items remitted for fact-finding and computation in light of controlling precedents.