TaxTMI 
TaxTMI 
2020 (10) TMI 605
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....revenue has filed the appeals for assessment years 2009-10 to 2011-12. Since most of the issues urged in these appeals are identical in nature, they were heard together and are being disposed of by this common order, for the sake of convenience. 2. The assessee is engaged in different types of business activities, viz., software development services and IT services; manufacture of Vanaspati/Hydro generated oils; toilet soaps; lighting products; pharmaceuticals & Neutraceutical products; leather products; computers, hydraulic and pneumatic equipment; water treatment systems and solutions etc. It is also engaged in trading of servers, routers, networking equipments, spare parts, etc. 3. During the course of hearing before us, the Ld. Counsel appearing for the assessee submitted that most of the issues urged in the appeals filed by both assessee and revenue are common in nature in all the years. Accordingly, he suggested that the Tribunal may adjudicate each of the issues separately and the same may be applied to all the years under consideration. Accordingly he preferred to advance his arguments also issue wise. The Ld D.R also agreed for the same. Accordingly, we are dealing w....
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.... of losses incurred by SEZ/STPI undertakings against the profit earned by non-SEZ/non-STPI undertakings. 4.4 Before Ld. D.R.P., the assessee submitted that an identical claim made by the assessee in assessment year 2007-08 has been allowed by the Tribunal. Accordingly, it was prayed that the claim of the assessee should be allowed. However, the Ld. DRP did not accept the submissions of the assessee and accordingly, confirmed the order of the A.O. with the following observations: "It is observed by the Panel in the immediately preceding year vide its order dated 17.9.2012 the Panel has decided while dealing with the preceding year that the A.O. had rightly denied the set off current year losses with 10A units with other income It has also upheld the AO's action of denying set-off of losses of STP units in the AY 2007-08 while computing the profits of the business before allowing deduction under Chapter VIA and XA. The issue has not been judicially clarified by the Ld. Supreme Court in the case of HimatsingkaSeide Vs. CIT. This Panel therefore finds no reason to take a different view in the matter for the period under consideration. Accordingly, both the objections raised....
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....d for the Assessment Year 2004-05 as well as for the Assessment Year 2007-08. The Hon'ble jurisdictional High Court in assessee's own case reported in 382 ITR 179 for the Assessment Year 2004-05 has upheld the decision of this Tribunal in favour of the assessee and against the revenue. We further note that this Tribunal in assessee's own case for the Assessment Year 2007-08 has again decided this issue in para 7.4 as under : "7.4 We have heard both parties and perused and carefully considered the-material on record We find that the identical issue was considered by a coordinate bench of the Tribunal in the assessee's own case for Assessment Year 2004-05 in ITA Na1072/Bang/2007 (supra), wherein the Tribunal confirming the finding of the learned CI (A), at para 16.4 on pages 29 and 30 thereof, held as under : "16.4. We have carefully considered the contentions of the either parties and also carefully perused the order of the Hon'ble Tribunal While deciding an identical issue, the Hon'ble Tribunal cited the following decisions - (1) [12.5.] ITA No: 669 & 804/Ban/05 dated: 22.3.2006 for the AY-2000-01 in the case of assessee company wherei....
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....s stated that the issue is decided in favour of the assessee, we notice that the discussions were not happily worded. We notice that an identical issue was decided by Hon'ble High Court of Karnataka in AY 2001-02 to 2004-05 in the assessee's own case reported in 382 ITR 179. We extract below the relevant discussions made by Hon'ble Karnataka High Court on this issue:- "Substantial question of law No.14: "Whether the Tribunal was right in directing that losses of a section 10A unit, which are already set off against other business income of the appellant, should be again carried forward and set-off against eligible profits of the same unit in a subsequent year ?" "Whether the Tribunal was correct in holding that income of each undertaking should be taken independently and losses of section 10A units cannot be set off against profits of section 10A units, when computing deduction under section 10A of the Act?" "Whether the appellate authorities failing to take into consideration the amendment provision of section 10A(6)(ii) of the Act, which clearly contemplated that the loss of the undertaking can be carried forward and adjusted against other inco....
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.... 178.15 82.86 121.54 163.04 372.93 165.59 Profit on sale of fixed asset 285.08 258.90 856.90 828.08 311.74 -- Rental Income 152.48 359.62 227.78 286.53 779.65 192.97 Dividend Income from Mutual fund 391.63 86.73 -- -- -- -- Others 325.49 90.33 267.56 51.24 -- 372.32 Interest income -- -- -- 311.20 922.99 -- 5.3 The assessee has not claimed deduction u/s 10A/10AA/10B in respect of "profit on sale of assets", since the same is required to be deducted from Net profit while computing total income and it also requires different kind of treatment under Income tax Act. The A.O. accepted that dividend income from mutual fund is exempt and hence the same was also excluded while computing total income. In respect of other items shown in the table above, the assessee had claimed deduction u/s 10A/10AA/10B treating them as part of "Profits and gains derived from the eligible undertaking". However, the A.O. took the view that these incomes do not have any nexus with software development activities of the units and hence they cannot be treated as part of "Profits and gains d....
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.... "......However, since we find that no details are available with regard to 'other income' of Rs. 3,48,524/-, we deem it fit to remit the matter back to the file of the Assessing Officer with a direction to examine the matter afresh and decide the issue on merits." Following the same, we restore the issue relating to "Other income" to the file of the AO with similar directions. 6. Issue No.3 relates to Exclusion of Net interest income for deduction u/s 10A/10AA/10B:- 6.1 This issue relates to rejection of claim for deduction u/s 10A/10AA/10B of the Act in respect of interest income earned by the assessee. This issue has been urged by the assessee in all the six years, namely in the assessment years 2009-10 to 2014-15. 6.2 We notice that the assessee has booked interest income under the head "Miscellaneous income" in AY 2012-13 and 2013-14, apart from booking interest income separately as under:- Assessment year Interest Income 2009-10 60.27 crores 2010-11 150.03 crores 2011-12 26.54 crores 2012-13 224.65 crores 2013-14 2.91 crores 2014-15 3.45 crores It is also not clear as to whether the nature of interest income booked und....
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....Hon'ble High Court followed the decision rendered by it in the case of CIT vs. Motorola India Electronics P Ltd (supra), wherein the Hon'ble jurisdictional Karnataka High Court has examined the issue of allowing deduction u/s 10B of the Act in respect of interest income earned by the assessee from the amount kept in EEFC account, fixed deposits with banks and from inter-corporate deposits. The Hon'ble High Court has decided as under:- "But there is change in the law for the assessment year 2001-02. Section 10(B)(1) and (4) reads as under:- "Section 10B : Special provisions in respect of newly established hundred per cent export-oriented undertakings.- (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred per cent exportoriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee : ....
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....ndertaking includes the profits and gains from export of the articles as well as all other incidental incomes derived from the business of the undertaking. It is interesting to note that similar provisions are not there while dealing with computation of income under Section 80HHC. On the contrary, there is specific provisions like Section 80HHB which expressly excludes this type of incomes. Therefore, in view of the aforesaid provisions, it is clear that, what is exempted is not merely the profits and gains from the export of articles but also the income from the business of the undertaking. 8. In the instant case, the assessee is a 100% EOU, which has exported software and earned the income. A portion of that income is included in EEFC account. Yet another portion of the amount is invested within the country by way of fixed deposits, another portion of the amount is invested by way of loan to the sister concern which is deriving interest or the consideration received from sale of the import entitlement, which is permissible in law. Now the question is whether the interest received and the consideration received by sale of import entitlement is to be construed as income of....
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....ess income of the undertaking eligible for deduction u/s 10A. Under the circumstances, we hold that the learned CIT(A) was justified in directing for not excluding the interest for the purpose of computing deduction u/s 10A as the assessing officer has not treated the interest income as income from other sources or has not held that such income does not belong to the undertaking to which section 10A is applicable." In view of the finding in the decision of the coordinate bench of the Tribunal (supra) and respectfully following the same, we are of the considered view that the said decision holds good for this assessment year also with regard to interest income and income from sale of scrap. However, since we find that no details are available with regard to other income of Rs. 3,48,524, we deem it fit to remit the matter back to the file of the Assessing Officer with a direction to examine the matter afresh and decide the issue on merits." The order passed on this issue in assessment year 2007-08 was followed in AY 2008-09 also. 6.5 From the foregoing discussions, we notice that the principle enunciated by Hon'ble Karnataka High Court in the case of Motorola India Ele....
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.... interest income, following the decision rendered by the Hon'ble Karnataka High Court in the assessee's own case (referred supra). 6.8 With regard to Category (b) above, it is imperative on the part of the assessee to show that there is nexus between interest income and income of business undertaking. We have noticed earlier that the AO has taken the view that the surplus funds of undertaking located in SEZ are put into common bank account. Accordingly, the AO has observed that the surplus funds relating to SEZ division 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. 6.9 With these observations, we restore this issue to the file of the AO for examining it afresh in the li....
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....y following the decision rendered by the Hon'ble High Court in the case of Tata Elixsi Ltd. 7.5 We heard Ld. D.R. and perused the record. We notice that an identical issue has been decided in favour of the assessee by Hon'ble High Court of Karnataka by following the decision rendered by High Court in the case of Tata Elixsi Ltd. The relevant portion of High Court's order is extracted below:- "Substantial Question No.8: "Whether the Tribunal was right in excluding the computer software sales made to STP units in India from "export turnover" for the purpose of computing deduction under section 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 Centra....
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....', besides being eligible for relevant entitlements under paragraph 6.12 of the Policy. They will also be eligible for the additional entitlements mentioned therein. What is of importance is when a supply is made from DTA to STP, it does not satisfy the requirements of export as defined under the Customs Act. However, for the purpose of Exim policy, it is treated as 'deemed export'. Therefore, when Section 10A of the Act was introduced to give effect to the Exim Policy, the supplies made from one STP to another STP has to be treated as 'deemed export' because Clause 6.19 specifically provides for export through Status Holder. It provides that an EOU/EHTP/STP/BTP unit may export goods manufactured/software developed by it 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 ....
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....e authorized dealer for extension of time for receipt of profits on export turnover. It was submitted that the amounts were collected subsequently after the expiry of the period of 6 months. Accordingly, during the course of assessment proceedings, the assessee made a claim before A.O. to include the sale amount, for which extension applications were submitted to RBI through the authorized dealers in the amount of "export turnover", for the purpose of computing deduction. However, the A.O. rejected the claim of the assessee on the reasoning that mere submission of application by the assessee to RBI is not sufficient to infer that RBI has allowed extension of time for realizing sale proceeds in foreign exchange. Accordingly, he rejected the claim of the assessee. Ld. DRP also confirmed the order of A.O. in all the years under consideration except in assessment year 2011-12, wherein Ld. DRP directed the A.O. to include the turnover covered by the application filed to RBI as part of export turnover. 8.3 We heard the parties on this issue and perused the record. We notice that an identical issue was considered by Hon'ble High Court of Karnataka in the assessee's own case in 2001-02 ....
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....offered the same for taxation in India.It has also paid income tax in those foreign countries, as per the laws prevailing therein. The assessee claimed credit of foreign tax so paid against the income tax payable under the Indian Income tax Act. The claim was made by the assessee in accordance with the provisions of section 90(1)(a)(i), section 90(1)(a)(ii) and section 91 of the Act. The said claim of the assessee was rejected by the A.O. on various grounds in different years. One of the main reasons cited by the A.O. is that the foreign tax credit can be allowed only if the assessee has paid incometax on the very same income both in the foreign Country and in India. The AO observed that the assessee has generated the income from foreign countries through the undertakings eligible for deduction u/s 10A & 10AA of the Act. The assessee has also been allowed deduction under the above said sections. If the deduction has been allowed, then it cannot be said that the assessee has not income tax on the profits so generated from the eligible undertakings from sources outside India. Accordingly, the AO took the view that the assessee did not pay tax on those income under the Indian Income t....
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....R. on this issue and perused the record. We have also gone through the decision rendered by Hon'ble High Court of Karnataka in the assessee's own case in assessment years 2001-02 to 2004-05 (referred supra). The claim made by the assessee falls u/s 90 & 91 of the Act. For the sake of convenience, we extract below the relevant provisions:- Agreement with foreign Countries or specified territories: 90. (1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,- (a) for the granting of relief in respect of- (i) income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or (ii) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or Countries with which no agreement exists 91. (1) If any person who is resident in India in any previous year proves that, in respect of his income which accrued or arose during that previous yea....
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....isions of relevant DTAA as well as clauses (i) and (ii) of sec. 90(1)(a). He submitted that the profit generated by an assessee through an undertaking eligible for deduction u/s 10A or 10AA of the Act and to whom the DTAA entered between India and USA (or other countries having identical provisions as that of USA in their respective DTAA) would fall under the category of clause (ii) of section 90(1)(a) of the Act. Since the income of those undertakings is otherwise chargeable to tax under the Indian Income Tax Act and even if the tax was not paid thereon in India in view of the deduction allowed u/s 10A of the Act, the assessee would still be eligible for foreign tax credit. The Ld. A.R. submitted that this issue has been examined by Hon'ble Karnataka High Court in assessment years 2001-02 to 2004-05 (supra) and the above said contentions of the assessee have been accepted. 9.8 The Ld. A.R. further submitted that the tax credit is allowed both u/s 90 and 91 of the Income tax Act. Section 90 is applicable in respect of Countries with which India has entered into DTAA. He submitted that section 91 of the Act is applicable in respect of taxes paid in a foreign country with which In....
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....voidance is granted to the assessee in both the countries. 38. Secondly, under section 90(1)(a)(i) of the Act, once such assessee has paid Income-tax, under the Act as well as the tax in the other country, by such agreement, relief could be given by giving credit of the tax paid in the foreign country to the assessee in India. In cases covered under this provision the assessee pays tax in both the jurisdictions. After payment of such tax, he is entitled to double taxation relief by way of credit in respect of the tax paid in the foreign jurisdiction. 39. Thirdly, in cases covered under section 90(1)(a)(ii) of the Act it is not a case of the income being subjected to tax or the assessee has paid tax on the income. This applies to a case where the income of the assessee is chargeable under this Act as well as in the corresponding law in force in the other country. Though the Income-tax is chargeable under the Act, it is open to Parliament to grant exemptions under the Act from payment of tax for any specified period. Normally it is done as an incentive to the assessee to carry on manufacturing activities or in providing the services. Though the Central Government ma....
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.... and gains derived by an undertaking referred to in that section shall be allowed as deduction from the total income of the assessee. Therefore, by virtue of the aforesaid statutory provision namely section 10A of the Act, the income of the asses-see from exports in respect of the said unit is exempted from payment of Income-tax. The very fact that it is exempted from payment of tax means but for that exemption such income is chargeable to tax. This relief under section 10A is in the nature of exemption although termed as deduction. But for this exemption, the said income namely profits and gains derived by an undertaking, is chargeable to tax under the Act. The said exemption is only for a period of ten years. After the expiry of the said ten years the said income is taxable. When such exemption is given under the Act, but the said income is taxed in foreign jurisdiction, there is no relief to the assessee at all. Therefore, to promote mutual economic relations, trade and investment, the Act was amended by way of the Finance Act, 2003 which came into force from April 1, 2004. By insertion of a new clause (ii) in subsection (1)(a) of section 90 the Central Government has been veste....
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....n the income of the resident, amount equal to the Income-tax paid in the United States of America, whether directly or by deduction. The conditions mandated in the treaty is that if any "income derived" and "tax paid in the United States of America on such income", then tax relief/credit shall be granted in India on such tax paid in the United States of America. The said provision does not speak of any Income-tax being paid by the resident Indian under the Income-tax Act as a condition precedent for claiming the said benefit. Where the Indian resident pays no tax on such income derived, whereas the said income is taxed in the United States, India shall allow..as a deduction from the tax on the income of that resident an amount equal to the Income-tax paid in the United States. Therefore, this provision is in conformity with section 90(1)(a)(ii) of the Act, i.e., the Income-tax chargeable under the Income-tax Act and in the corresponding law in force in the United States of America. Therefore, it is not the requirement of law that the assessee, before he claims credit under the Indo-US convention or under this provision of Act should pay tax in India on such income. However, the sai....
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.... entire income chargeable to Indian tax." 61. A reading of the aforesaid provision makes it clear that the benefit of article 23 would be available to an assessee in India only in respect of the income from sources within Canada, which has been subjected to tax both in India and Canada, which forms part of the total income of the assessee and has suffered tax in India under the Income-tax Act and has suffered tax in Canada also, i.e., assessee has paid tax both in India as well as in Canada on the same income. Then the agreement provides the tax paid in Canada shall be allowed as a credit against the Indian tax payable in respect of such income. However, the said benefit is confined only to the extent of an amount not exceeding that proportion of Indian tax, which such income bears to the entire income chargeable to Indian tax. In other words if the Income-tax paid in India is less than the Income-tax paid in Canada, the assessee would be entitled to relief only to the extent of tax paid in India and not to the extent of tax paid in Canada. Therefore, this clause is in conformity with section 90(1)(a)(i) of the Act. As a corollary if the assessee is exempted from payment o....
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....e by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country whichever is the lower, or at the Indian rate of tax if both the rates are equal . . . (iv) the expression 'Income-tax' in relation to any country includes any excess profits tax or business profits tax charged on the profits by the Government of any part of that country or a local authority in that country." 66. The said provision provides for deduction of the tax paid in any country from the Indian Income-tax payable by him of a sum calculated on such doubly taxed income even though there is no agreement under section 90 for the relief or avoidance of double taxation. Explanation (iv) defines the expression Income-tax in relation to any country includes any excess profit tax or business profits tax charged on the profits by the Government of any part of that country or a local authority in that country. Thereforethe intention of Parliament is very clear. The Income-tax in relation to any country includes Incometax paid in any part of the country or a local authority. It applies to cases where in a federal structure a citizen is made t....
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....chargeable under this Act and under the Corresponding law in force in that Country....." Thus, it can be noticed that the provisions of sec.90(1)(a)(i) and sec.91(1) refers to actual payment made in the foreign Country and the provisions of sec.90(1)(a)(ii) refers to "income tax chargeable under this Act and under the corresponding law in force in that Country", i.e., there is no reference to actual payment of tax. 9.12 Accordingly, following the binding decision of High Court, we set aside the order passed by A.O. on this issue and direct him to allow foreign taxes credit claimed by the assessee in terms of decision rendered by Hon'ble High Court of Karnataka referred above. 10. ISSUE NO.7 relates to claim of Depreciation on Software:- 10.1 This issue pertains to disallowance of depreciation claimed by the assessee on the 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. This issue arises only in assessment year 2009-10 & 2010-11 in the appeals filed by the assessee and in assessment year 2011-12 in the appeal filed by the revenue. 10.2 The fac....
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....ion rendered by coordinate bench in the case of DCIT Vs. Tally Solution (ITA No.1463/Bang/2014 dated 29.11.2016) on an identical issue:- "19. As regards the applicability of the provisions of Section 40(a)(ia) of the Act for disallowance of claim of depreciation, we find that when the assessee has capitalised this amount and not claimed as a revenue expenditure then the claim of depreciation cannot be disallowed by invoking the provisions of Section 40(a)(ia) of the Act. This issue has been dealt with by the co-ordinate bench of this Tribunal in the case of SKOL Beverages Ltd. Vs. ACIT (supra) as well as Kawasaki Micro Electronics, Inc. India Branch Vs. DCIT (supra). In the case of Kawasaki Micro Electronics, Inc. India Branch Vs. DCIT (supra), the Tribunal has considered an identical issue in paras 6 to 8 as under : 6. We have heard the rival submissions as well as considered the material on record. The issue before us is limited only with respect to the disallowance of depreciation by invoking the provisions of section 40(a)(i) of the Act. There is no dispute that the assessee has made the payment in question to a nonresident for purchase of software and the ....
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....es for technical services or other sum chargeable under this Act, which is payable, (A) outside India; or (B) in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub- section (1) of section 200 Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid . Explanation: For the purposes of this sub-clause, (A) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub- section (1) of section 9 ; (B) "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9; 16.2 It is manifest from the pla....
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.... the assessee could be disallowed claim for depreciation under Section 40(a)(i) of the Act on the ground that the payments made for technical know- how which had been capitalized, no tax deduction at source has been made thereon. The Tribunal while accepting the plea of the assessee, in para 3, had noticed as under: IT(IT)A No.1463/Bang/2014 "3. Ground no. 4 is against deletion of an addition of Rs. 6,88,1751- made by the AO on account of deduction of depreciation on technical know-how as the assessee failed to deduct tax in accordance with the provision contained in section 40(a)(i). The finding of the learned CIT(A) was that the assessee had incurred, expenditure by way of technical know-how, which was capitalized amount as made in the return of income. Since the assessee had not claimed deduction for the amount paid, the provisions contained in section 40(a) (i) were not attracted. The learned DR could not find any fault with this direction of the CIT(A) also although she referred to page 4 of the assessment order, where it was mentioned that the tax deducted in respect of the payment was made over to the Government in the subsequent year and, therefore, depreciation could not b....
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....es of Rs. 45.99 crores and the interest expenses of Rs. 102.84 crores. Out of the total corporate expenses of Rs. 157.15 crores, the A.O. considered that a sum of Rs. 83.62 crores is the common expenditure, which is required to be allocated to various units of the assessee including those units claiming deduction u/s 10A/10AA/10B. We notice that the A.O. has deducted Section 14A disallowance and interest on ECB loan from out of the total corporate expenses of Rs. 157.15 crores and accordingly arrived at the figure of Rs. 83.62 crores (referred above). The A.O. proposed to allocate the above said expenditure in the ratio of turnover of various divisions and units. 11.3 The assessee objected to the proposal put forth by A.O. by submitting that the Wipro Corporate is a separate set up and it is independent of other business divisions. It was submitted that all the divisions and units of the assessee are run as independent profit centers and expenses relating thereto are booked separately. In the alternative, the assessee submitted that the allocation of entire corporate expenses to various business divisions and units is not appropriate in the facts and circumstances of the case. A....
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....a section 10A unit and which had generated 57 per cent. of the revenue of the assessee. The assessing authority did not agree with the assessee's submission and allocated expenses of the corporate division in the ratio of the revenue of the section 10A units. Aggrieved by the same the assessee preferred an appeal. In the appeal by the assessee, the Commissioner of Incometax following the judgments of the Income-tax Appellate Tribunal in the assessee's case itself for the earlier year set aside the said allocation made by the assessing authority, accepted the case of the assessee and directed the assessing authority to consider only such expenses for allocation as admitted by the assessee during the assessment process. Aggrieved by the said order the Revenue preferred an appeal to the Tribunal. The Tribunal held that the allocation of common expenditure cannot be made on the basis of the Revenue generated. The assessee himself has agreed to an allocation of 20 per cent. of its expenditure and the same has been confirmed by the Commissioner of Income-tax (Appeals). Therefore, the Tribunal felt that the allocation at the rate of 20 per cent. of common expenses is in order. Thu....
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....onsisted of salaries etc., excluding interest less revenues. They allocated a sum of Rs. 4,93,49,416 to the various subdivisions other than the software export subdivision. Similarly they have recovered a sum of Rs. 3,70,00,000 from software exports sub-division in the process the excess recoveries is 1,25,50,642. Further, a sum of Rs. 20,11,34,657 is the interest out go to intra business and external agencies. The interest earned from deployment of funds intrabusiness and with external agencies is Rs. 9,38,24,255. The net interest outgo is 10,73,10,402. 28. It is this amount which they were claiming as deduction. In the light of the aforesaid facts it does not represent the expenditure incurred by the corporate office in respect of its sub-divisions. In those circumstances, the Assessing Officer and the first appellate authority were not justified in allocating the substantial portion of the amount as the expenses incurred in respect of section 10A and disallowing the deduction. That is precisely what the Tribunal has held on proper appreciation of the material on record. In that view of the matter we do not find any justification to interfere with the well considered ord....
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....gh Court. 12. ISSUE NO.9 relates to the rejection of claim for deduction u/s 10A of the Act in respect of STPI units located at Bangalore. 12.1 This issue is being urged by the assessee in assessment year 2009-10 and by the revenue in assessment year 2010-11. The AO rejected the claim for deduction u/s 10A for the STPI units located in Bangalore by holding that they are not new undertakings. 12.2 The facts relating to the issue are that the assessee had claimed deduction u/s 10A/10AA/10B of the Act in respect of various units. The A.O. noticed that, in the past assessment years, the claim was rejected in respect of undertakings located at Bangalore on the reasoning that the assessee has started these units on the strength of approvals granted by STPI authorities in the financial year 1992-93 and further the assessee has obtained approval only as expansion of the existing business and not as new undertakings. Accordingly, the A.O. took the view that these units cannot be considered as new undertakings. The A.O. also noticed that the assessee has been incurring common expenses for various units on communication, travel, sub-contracting charges, personal allowances, etc. The ....
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....t of articles, things or computer software which is for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee. It is a provision which was introduced with the object of encouraging export outside the country. The benefit is extended to a ten consecutive assessment years. This is to boost earning of foreign exchange. Before an assessee can claim benefit under this provision, he has to fulfill the conditions stipulated in sub-section (2) of Section 10A. The first condition to be satisfied is, such an assessee should begin or begins to manufacture or produce articles or things or computer software during the previous year relevant to the, assessment year in respect of the undertakings situate in a software technology park; the assessee should have commenced manufacturing on or after first day of April, 1994. The second condition is such an undertaking should not be formed, by splitting up or reconstruction of a business already in existence. In other wor....
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....g undertaking in the software technology park, the profits and gains derived from that undertaking from export of articles, things or computer software, the assessee is entitled to the benefit under Section 10A of the Act. In fact, in one of the similar situation, the Apex Court in the case of Textile Machinery Corpn. Lt d. v. CIT [1977] 107 ITR 195 held as under: "10. The assessee continues to be the same for the purpose of assessment. It has its existing business already liable to tax. It produced in the two concerned undertakings commodities different from those which it has been manufacturing or producing in its existing business. Manufacture or production of articles yielding additional profit attributable to the new outlay of capital in a separate and distinct unit is the heart of the matter, to earn benefit from the exemption of tax liability under section 15C. Subsection (6) of the section also points to the same effect, namely, production of articles. The answer, in every particular case, depends upon the peculiar facts and conditions of the new industrial undertaking on account of which the assessee claims exemption under section 15C. No hard and fast rule can be....
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....inimum of ten persons with the aid of power and a minimum of twenty persons without the aid of power have been employed. Such a new industrially recognizable unit of an assessee cannot be said to be reconstruction of his old business since there is no transfer of any assets of the old business to the new undertaking which takes place when there is reconstruction of the old business. For the purpose of s.15C the industrial units set up must be new in the sense that new plants and machinery are erected for producing either the same commodities or some distinct commodities. In order to deny the benefit of s.15C the new undertaking must be formed by reconstruction of the old business. Now, in the instant case, there is no formation of any industrial undertaking out of the existing business since that can take place only when the assets of the old business are transferred substantially to the new undertaking. There is no such transfer of assets in the two cases with which we are concerned." It is seen from the decision of the Supreme Court that the grounds on which the Tribunal denied relief to the assessee are irrelevant. Merely because pursuant to a single collaboration agree....
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....setting up a new undertaking, an undertaking, which is independent of the old, undertaking. Such a new undertaking should not be commenced with the machinery or plant previously used by the assessee in the existing business. Similarly, such a new undertaking should not be found by building up or reconstruction of an undertaking already in existence. If a new undertaking is established as a separate entity, new machineries are purchased and installed and if the same business is carried on by the assessee namely manufacture or production of articles or things or computer software meant for exporting and other requirements provided under law, then the assessee would be entitled for the benefit under Section 10A. Newly established undertaking does not mean a new company or a partnership. The newly established undertaking is an undertaking of an assessee independent of all undertakings that he is already possessing. The fact that there was common management or the fact that separate accounts had not been maintained, would not lead to the conclusion that they were not separate undertakings. Even if separate account is not maintained, the investment on each of the units can be reasonably ....
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....he case of assessee's own case in AY 2001-02 to 2004-05, the Hon'ble Karnataka High Court has decided an identical issue with the following observations:- "153. A similar question was raised for consideration in assessee's case itself in ITA 893, 894, 900, 910, 929 and 931/08 which was decided on 10.06.2014. In fact, this Court followed the judgement rendered in assessee's sister concern in the case of Wipro GE Medical Systems Ltd., in ITA Nos. 391 and 392/2008 and substantial question of law was answered in favour of the assessee and against the revenue. 154. Following the said judgement, the above substantial question of law is answered in favour of the assessee and against the revenue." 12.6 Accordingly, 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. (supra), 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. 13. ISSUE NO.10 relates to the question as to whether applicable foreign VAT/GST s....
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.... separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India, though the said proceeds are not actually received in India or brought into India, it is deemed to have been received in India and forms part of the export turnover. 129. In that view of the matter, the finding recorded by the authorities is contrary to law. They have not taken into consideration Explanation 2 to subsection (3) of section 10A and thus committed an error. Hence, the said finding requires to be set aside. Accordingly, it is set aside. The substantial question of law is answered in favour of the assessee against the Revenue. Accordingly, following the binding decision of jurisdictional High Court, 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. 14. ISSUE NO.11 pertains to taxability of interest granted to the assessee u/s 244A of the Act. 14.1 This issue is being urged by the assessee in all the years under consideration, viz., AY 2009-10 to 2014-15. 14.2 The facts relating to the issue are stated in bri....
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....urt of Karnataka has considered an identical issue in assessment years 2001-02 to 2004-05. In that regard the Hon'ble Karnataka High Court has followed the decision rendered by it in the assessee's own case in ITA No.3204 of 2005 dated 28.2.2012 relating to assessment year 1999-2000. 14.5 In assessment year 1999-2000, the Tribunal had held that unless the interest accrued to the assessee becomes irrecoverable in the sense that the same would not be withdrawn by the department subsequently; the liability to include interest in the income does not arise. The view so expressed by the Tribunal was not acceptable to the High Court and accordingly it set aside the order so passed by the Tribunal. However, to resolve the issue, the High Court issued certain directions the A.O., i.e., the A.O. shall first calculate the interest refunded to the assessee and the amount of refund sought to be withdrawn by the subsequent orders and thereafter calculate the interest taxable under the Act. For the sake of convenience, we extract below the observations made by the Hon'ble High Court in assessment year 1999-2000 referred supra. The 4r' substantial questions of law is as follows:- ....
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....ncome Tax Acct. If an amount is due on a particular date and if that amount is not paid on that date and if it is paid on a subsequent date the recipient of that amount is deprived of the amount which was legally due till it was actually paid. it is to compensate the denial of the benefit of the said amount that interest is levied paid under various provisions under the Income-Tax Art. It is not dependent on the claim in any legal proceedings when admittedly the assessee has received the money by way of interest on refund and the said amount ought to have been shown in the returns as an income and was liable to pay tax. The offering of the said amount for tax is not dependent on the fact whether the said interest has become irrevocable under the Act or refundable under the Act. In that view of the matter, the said finding in our view is contrary to law and cannot be sustained. Accordingly, it is set aside. As the matter is already remitted to the assessing authority he shall first calculate the interest refunded and the amount of refund on the subsequent orders by which the said benefit is sought to be withdrawn and thereafter calculate the interest taxable under the aforesaid Act.....
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.... to the above said industrial unit located in Pondicherry. Accordingly, the A.O. took the view that the profit of this undertaking is overstated by not allocating proportionate corporate expenses, thereby the deduction u/s 80IB was claimed at a higher amount. It is pertinent to note that the A.O. has taken an identical view while computing allowable deduction u/s 10A/10AA/10B of the Act. We have noticed that the A.O. has allocated corporate expenses to various industrial units on the basis of turnover of each of the units. Following the same methodology, the A.O. allocated proportionate expenditure on the basis of turnover and accordingly reduced the profit of the undertaking, thereby reducing the deduction u/s 80IB of the Act. In assessment years 2009-10 & 2010-11, Ld. DRP confirmed the order passed by A.O. However, in assessment year 2011-12, the ld. DRP directed the AO to delete the allocation of expenditure. In that regard, Ld DRP followed the decision rendered by Hon'ble High Court of Karnataka in an earlier year. 15.3 We heard the parties and perused the record. We notice that an identical issue has been considered by Hon'ble High Court of Karnataka in assessment years 200....
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....trading activity on monitors, i.e., on profit derived on sale of monitors independently. However, it has claimed deduction on the profits derived from sale of monitors, which were sold along with the computer hardware. The assessee submitted before the A.O. that monitors form integral part of computer hardware and hence it is eligible for profit derived on sale of computer system, when it is sold along with computer hardware. The A.O. however, took the view that the computer hardware and monitors can be sold independently and hence the assessee is not eligible for deduction u/s 80IB of the Act on the profits derived from sale of monitors. Since the assessee did not have separate details of sale value of monitors sold by it along with computer hardware, the A.O. estimated the turnover from sale of monitors and also estimated the profit on the said turnover. Accordingly, the A.O. reduced the claim for deduction u/s 80IB of the Act by the amount of the profit so computed by him. The Ld. DRP confirmed the order of A.O. on this issue in assessment years 2009-10 & 2010-11. However, in 2011-12, the Ld. DRP directed the A.O. to allow deduction u/s 80IB of the Act on this profit also. Accor....
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....m the said sale of monitor as a part of the computer is also eligible for benefit under section 80-IB. However, it is made clear the assessee is not entitled to the benefit of section 80-IB in respect of monitors which are purchased and sold separately as a traded commodity. In fact, the assessee has not claimed any benefit in respect of those monitors. Therefore, the finding recorded by the authorities that the assessee is not entitled to the benefit of deduction under section 80-IB in respect of the monitors which form part of the computer is hereby set aside. Both the substantial questions are answered in favour of the assessee and against the Revenue." 16.4 We notice that the Hon'ble High Court has taken note of the fact that the 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 C....
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....09. For the sake of convenience, we extract below the decision rendered by the coordinate bench on an identical issue in A.Y. 2008-09. "44.Ground No.29 is regarding denial of deduction under section 80IB of the Act in respect of other income of the undertaking. 45. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. At the outset, we note that an identical issue has been considered in assessee's own case for the Assessment year 2004-05 and again for the assessment year 2007-08. For the assessment year 2007-08, the Tribunal has decided this issue in para 20.4 as under: "20.4 We have heard both parties and have carefully perused and considered the material on record. Unless rental income represents a recovery of the rent paid by the undertaking, it cannot be regarded as profit derived by the industrial undertaking. Since the rental income in the assessee company's case does not meet this requirememnt, we confirm the order of the Assessing Officer that rental income should be excluded in computing the deduction u/s 80IB of the Act." Following the decision of the....
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....ed." Following the earlier orders of this Tribunal, we decide this issue against the assessee." We notice that the Tribunal did not decide the issue in assessment year 2008-09 for the reason that the assessee did not object to the action of the A.O. by filing objections before Ld. DRP. We notice that during the year under consideration, the Ld. DRP has noted that the identical disallowance made by the A.O. was confirmed by the Tribunal in assessment year 2007-08. Before us, the Ld. A.R. submitted that an identical issue has been decided in its favour by Hon'ble High Court in the context of section 80HHC of the Act. However, in the absence of any decision of High court in the context of section 80IC of the Act, we prefer to follow the decision rendered by the coordinate bench in assessment year 2007-08. 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 of the Act. 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 as pe....
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....or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India; The AO took the view that, as per the definition of the term "Export Turnover" given under sec.10A/10AA/10B of the Act,"expenditure incurred in foreign currency" is required to be excluded from the amount of "Export turnover". Accordingly, the A.O. proposed to exclude all the expenditure incurred in the foreign currency from the amount of export turnover while computing deduction u/s 10A of the Act. The assessee submitted that all the expenditure incurred by it in foreign currency is not required to be excluded. It was submitted that only those expenses mentioned in the definition are required to be excluded. The assessee had incurred majority part of expenses as "direct costs" in developing software abroad while providing onsite services. Accordingly, the assessee submitted that those kinds of expenditure do not fall under the category of "Technical Services"mentioned in the definition of the export turnover. The assessee explained that it has employed specialized engineers for development of software onsite, i.e., at the place of the....
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...., in assessment year 2009-10 to 2011-12, the Ld. DRP directed the A.O. to exclude expenses incurred in foreign currency towards communication expenses, travel expenses and legal & professional fees both from export turnover and total turnover while computing deduction u/s 10A of the Act. 19.6 We heard the rival contentions on this issue and perused the record. We notice that the co-ordinate bench has accepted the alternative submissions of the assessee in AY 2008-09 by following the decision rendered by Hon'ble Karnataka High Court in the case of Tata Elixi Ltd (supr) and accordingly directed the AO to exclude the amounts from both export turnover and total turnover, while computing the deduction. The relevant discussions find place at paragraphs 28 to 31 of the order. Before us, the Ld A.R submitted that the main contention of the assessee has been addressed by the coordinate bench in assessment year 2004-05 (ITA No.1072/Bang/2007). We notice that the main contention of the assessee has been decided as under in AY 2004-05 by the co-ordinate bench: "15. The ninth effective ground is with regard to the action of the CIT(A) in directing the AO not to exclude expenditu....
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....al services outside the country should be deducted from the export turnover. 15.3. On the other hand, the Ld.A.R, has submitted that the issue stands covered by the decision of the Hon'ble Tribunal for the AYs 2001-02 & 02-03 in the assessee company's own case which may be ordered to be followed for this assessment year as well. 15.4. Rival submissions were carefully considered. We have perused the order of Hon'ble Tribunal also. The decision of the Hon'ble Tribunal has been extensively quoted by us when we have decided the ground No.8 of the Revenue. The said decision is applicable to this issue also [issues raised by the Revenue in ground Nos: 8 & 9 are rather inter-linked), we respectfully following the Tribunal's decision referred supra, we uphold the action of the Ld.CIT(A) on this count." 19.7 We notice that the co-ordinate bench has referred to the ground no.8, wherein the question of exclusion of communication expenses was examined. For the sake of convenience, we extract below the relevant observations made in respect of ground no.8 in AY 2001-02 "14. The next effective eighth ground is with regard to reimbursement of commu....
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....me only from export turnover. If it is held that the said sum is required to be excluded from export turnover then similar amount should be reduced from the total turnover also as held by Bombay High Court in Sudarshan Chemicals reported in 245 ITR 769." 14.4. After considering the rival submissions, the Ld. CIT(A) took a view that this issue was also covered by his decision for the AYs 01-02 and 02-03 and the same holds good for the AY under dispute and, accordingly, directed the AO to consider 5% of Rs. 14.56 crores for exclusion from the export turnover on account of telecommunications. The exclusion shall also be similarly made from the total turnover. 14.5. Aggrieved, the Revenue has come up before us. The Ld. A.R forcefully submitted that the issues stand covered by the decision of the case of the assessee company for the AYs. 01-02 and 02-03. On the other hand, the Id. D.R urged that the action of the Ld. AO is in order which may be upheld. 14.6. We have carefully considered the submissions of the either parties. We find that the Hon'ble Tribunal has dealt with these issues comprehensively. After considering the pros and cons of the issues, the....
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....ectual analysis of the system and method followed by the purchaser of the programme. It is often prepared on site with the software personnel going to the clients premises. Hence, when the expenditure is in respect of payments on site development, the same cannot be excluded from the export turnover by holding it as technical services. When export of services only is not entitled to deduction u/s IOA then the Legislature made clear that foreign exchange relating to technical services will be excluded. If there is export of goods as well as services then only that portion will be eligible for deduction which relates goods. Hence, the AO is not justified in excluding Rs. 4,86,63,187/- from export turnover. 24.6. The Hyderabad Bench in the case of Patni Telecom P. Ltd. v. ITO vide order dated 11th January, 2008 in ITA NO.5/1-1yd/20005 and 354/11yd/2006 held that expenditure incurred on travel and allowances for the purpose of development of software at clients site outside India cannot be excluded from the export turn-over. Similar finding has been given by Chennai Bench vide order dated 15th February 2008 in ITA NO.731/Mad in the case of Changepond Technologies P.Ltd v. ACIT....
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....of explanation (2) to section 10A of the Act. Accordingly, it was held that the A.O. was not justified in excluding the expenses incurred in foreign currency from export turnover. The Tribunal also noticed that the decisions rendered by Hyderabad bench of Tribunal in the case of Patni Telecom Pvt. Ltd (supra) and Chennai bench of Tribunal in the case of "Change Pond Technologies Pvt. Ltd. (supra). I have also taken an identical issue. 19.9 We notice that the assessee has submitted before the A.O. that these expenses have been incurred in development of software on site and hence, they formed part of "direct cost" of developing a software. It has also been submitted that the assessee has been raising invoice on its customers on cost plus basis. Accordingly, it is required to be examined as to whether these expenses are required to be excluded from"export turnover", by considering the definition of the term "export turnover" given in section 10A/10AA/10B of the Act. We have extracted the definition given in all the three sections earlier.A careful perusal of the above said definition given in sec.10A and 10B would show that what is required to be excluded is freight, telecommunica....
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....ested by the assessee in all the six years, i.e., assessment years 2009-10 to 2014-15. The revenue is contesting this issue in AY 2010-11. 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 reimbursements. These reimbursements have been categorized as asset reimbursements, communication link reimbursements, travel reimbursements, incentive awards and other reimbursements. The A.O. excluded the above amounts from export turnover and accordingly computed deduction u/s 10A/10AA/10B of the Act. The A.O. did not accept the contentions of the assessee that these amounts were also received in foreign exchange and hence they are in the nature of export proceeds realized in respect of computer software export and hence they should not be excluded from export turnover. 20.3 Before Ld DRP, the assessee reiterated the above said contentions. In the alternative, the assessee contended that the amount excluded from the export turnover should also be excluded from the total turnover, while computing deduction u/s 10A/....
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....e for the computer software exported. (iv) Travel Reimbursement - INR 139,041,279 Travel reimbursements in convertible foreign exchange constitute another component in the realisation of sales price in the delivery of computer software and accordingly is included as part of export turnover. The expenses incurred on travel are debited to the profit and loss account of the SEZ unit. (v) Inventive rewards and other reimbursements: INR 1,501,943,058 The SEZ undertakings are engaged mostly in the business of manufacturing customized computer software. The technology and methods used for producing computer software to meet customers' specific requirements vary. In certain work orders, time becomes the essence to enable the customer build features into his products. Computer software is developed as a result of intellectual analysis of the systems and methods followed by the customers. Having regard to this, the customers pay a bonus/reward consideration. The amounts are also consideration realized in convertible foreign exchange by the undertakings in respect of export of computer software and accordingly is "export turnover" (vi) The appe....
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....re incurred at the request of customer for which reimbursement was also received, there is no revenue element involved in it. Accordingly, we are of the view that this amount should not be considered as either expenditure or part of export turnover, i.e., the receipt should be netted off against the expenditure. We hold accordingly. 20.6 We shall next examine the nature of payment received by way of incentive awards. It is the submission of the assessee that whenever it completes software development work within the timeframe to the satisfaction of the customer, the customers pay a bonus/reward as consideration. It is stated that the said amount has been realized in foreign exchange and accordingly included in the export turnover. From the submission so made, we notice that 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 ....
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....he Act. However, the DRP decided this issue in favour of the assessee in assessment year 2013-14 and 2014-15. The revenue has filed appeal for assessment year 2011-12 and the assessee has filed the appeal on this issue for 2009-10 to 2012-13. 21.5 The question of allocation of corporate expenses was examined by us in the preceding paragraphs in respect of deduction claimed by the assesseeunder 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 therein. Though the issue contested is in the context of deduction u/s 80IAB& 80IC 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. 22. ISSUE NO.20 pertains to disallowance made by the A.O. u/s 14A of the Act. 22.1 This issue is urged by the assessee in all the six years by the assessee, viz., AY 2009-10 to 2014-15. 22.2 The assessee has received dividend income from investments made in various mutual funds and claimed the same as exempt. The assessee also made disallowance u/s 14A of the Act by allocati....
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.... disallowed by the company. Accordingly, it was submitted that the A.O was not justified in applying rule 8D of IT Rules. The Ld. A.R. also placed reliance on the decision rendered by Hon'ble Supreme Court in the case of Godrej &BoyceManufacturing Company Ltd. 394 ITR 449. 22.4 We have noticed that this issue has been restored by ITAT in assessment year 2008-09 to the file of the A.O. A perusal of the assessment order passed by A.O. would show that the A.O. has observed that he was not satisfied with the working furnished by the assessee. However, the A.O. has not examined the basis of the allocation and apportionment of expenses towards the exempt income. Hence, the coordinate bench has restored this issue to the file of the A.O. for examining it afresh. Accordingly, following the decision rendered by the coordinate bench, we restore this issue to the file of the A.O. The assessee is free to make its submissions and the AO shall decide the decide the issue in accordance with law, by duly considering the submissions made by the assessee. 23. ISSUE NO.21 relates to exclusion of profits attributable to overseas development centre for computing deduction u/s 10A/10AA/10B of the ....
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....d and considered the material on record. We have perused the order of the co-ordinate bench of the Tribunal in the assessee's own case for Assessment year 2004-05 in ITA No.1072/Bang/07 (supra) and find that the discussions are at para 24 onwards and the relevant findings are at para 24.2 to para 24.2 which are extracted hereunder: "24.2 We have carefully considered the argument put-forth by the Ld. A.R. and also the reasoning of the Ld. A.O. and the Ld. CIT(A) in their respective orders. The Hon'ble Tribunal, for the AYs 2001-02 and 02-03 in the assessee's own case had an occasion to deal with an identical issue. After deliberations, the Hon'ble Tribunal had concluded thus - "34.4 The learned CIT(A) has also not recorded a finding that such goods or services have been transferred at the market value. In absence of such a finding, it is not possible to uphold the finding of the learned CIT(A). This issue is required to be remitted back to the assessing officer and the assessee will be required to file the relevant details as required by the assessing officer so that the assessing officer can ascertain the market value of such goods or services transferred by arriv....
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....d his reliance on the CBDT circular referred above and also the decision rendered by Hon'ble Rajasthan High Court in the case of Chambal Fertilisers & Chemicals Ltd. Vs. JCIT (ITA No.52/2018 dated 31.7.2018), wherein it was held that the education cess computed on income tax is not to be disallowed u/s 40(a)(ii) of the Act. 25.3 We heard the parties on this issue and perused the records. Besides the decision of Rajasthan High Court, referred supra, we notice that the Hon'ble Bombay High Court has also held in the case of Sesa Goa Ltd vs. JCIT (Tax Appeal No.17/2013) that the education cess is allowable as deduction. For the sake of convenience, we extract below the decision rendered by Hon'ble Bombay High Court in the case of Sesa Goa Ltd (supra):- 15. The substantial question of law No.(iii) in Tax Appeal No.17 of 2013 and the only substantial question of law in Tax Appeal No.18 of 2013 is one and the same namely, 'whether Education Cess and Higher and Secondary Education Cess, collectively referred to as "cess" is allowable as a deduction in the year of its payment ?'. 16. The aforesaid question arises in the context of provisions of Section 40(a)....
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....ity and precision, nothing more requires to be done. Indeed, in such a case the task of interpretation can hardly be said to arise : Absoluta sententia expositore non indiget. The language used by the Legislature best declares its intention and must be accepted as decisive of it. 19. Besides, when it comes to interpretation of the IT Act, it is well established that no tax can be imposed on the subject without words in the Act clearly showing an intention to lay a burden on him. The subject cannot be taxed unless he comes within the letter of the law and the argument that he falls within the spirit of the law cannot be availed of by the department. [See CIT vs Motors & General Stores 66 ITR 692 (SC)]. 20. In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied, into the provisions which has not been provided by the legislature [See CIT Vs Radhe Developers 341 ITR 403 ]. One can only look fairly at the language used. No tax can be imposed by inference or analogy. It is also not permissible to construe a....
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...., 1961. The effect of the omission of the word "cess" is that only any rate or tax levied on the profits or gains of any business or profession are to be deducted in computing the income chargeable under the head "profits and gains of business or profession". Since the deletion of expression "cess" from the Income Tax Bill, 1961, was deliberate, there is no question of reintroducing this expression in Section 40(a)(ii) of IT Act and that too, under the guise of interpretation of taxing statute. 26. In fact, in the aforesaid precise regard, reference can usefully be made to the Circular No. F. No.91/58/66-ITJ(19), dated 18th May, 1967 issued by the CBDT which reads as follows :- "Interpretation of provision of Section 40(a)(ii) of IT Act, 1961 - Clarification regarding.- "Recently a case has come to the notice of the Board where the Income Tax Officer has disallowed the 'cess' paid by the assessee on the ground that there has been no material change in the provisions of section 10(4) of the Old Act and Section 40(a)(ii) of the new Act. 2. The view of the Income Tax Officer is not correct. Clause 40(a)(ii) of the Income Tax Bill, 1961 as introduced in the P....
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....assessee as the owner or occupier of business premises, and the quantum of the rate was fixed after consideration of the 'circumstances' of the assessee, including his business income. The Privy Council held that the rate was not 'assessed on the basis of profits' and was allowable as a business expense. Following this decision, the Supreme Court held in JaipuriaSamla Amalgamated Collieries Ltd Vs CIT [82 ITR 580] that the expression 'profits or gains of any business or profession' has reference only to profits and gains as determined in accordance with Section 29 of this Act and that any rate or tax levied upon profits calculated in a manner other than that provided by that section could not be disallowed under this sub-clause. Similarly, this sub-clause is inapplicable, and a deduction should be allowed, where a tax is imposed by a district board on business with reference to 'estimated income' or by a municipality with reference to 'gross income'. Besides, unlike Section 10(4) of the 1922 Act, this sub-clause does not refer to 'cess' and therefore, a 'cess' even if levied upon or calculated on the basis of business profits may be allowed in computing such profits under this Act.....
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....ode of collection, is really not determinative in such matters. 34. Ms. Linhares, has relied upon M/s Unicorn Industries Vs Union of India and others, 2019 SCC Online SC 1567 in support of her contention that "cess" is nothing but "tax" and therefore, there is no question of deduction of amounts paid towards "cess" when it comes to computation of income chargeable under the head profits or gains of any business or profession. 35. The issue involved in Unicorn Industries ( supra ) was not in the context of provisions in Section 40(a)(ii) of the IT Act. Rather, the issue involved was whether the 'education cess, higher education cess and National Calamity Contingent Duty (NCCD)' on it could be construed as "duty of excise" which was exempted in terms of Notification dated 9th September, 2003 in respect of goods specified in the Notification and cleared from a unit located in the Industrial Growth Centre or other specified areas with the State of Sikkim. The High Court had held that the levy of education cess, higher education cess and NCCD could not be included in the expression "duty of excise" and consequently, the amounts paid towards such cess or NCCD did not qu....
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....e facts and circumstances of the case, the ITAT, in law, was right in holding that the claim of deduction not made in the original returns and not supported by revised return, was admissible. The Revenue had relied upon Goetze (supra ) and urged that the ITAT had no power to allow the claim for deduction. However, the Division Bench, whilst proceeding on the assumption that the Assessing Officer in terms of law laid down in Goetze ( supra ) had no power, proceeded to hold that the Appellate Authority under the IT Act had sufficient powers to permit such a deduction. In taking this view, the Division Bench relied upon the Full Bench decision of this Court in Ahmedabad Electricity Co. Ltd Vs CIT (199 ITR 351 to hold that the Appellate Authorities under the IT Act have very wide powers while considering an appeal which may be filed by the Assessee. The Appellate Authorities may confirm, reduce, enhance or annul the assessment or remand the case to the Assessing Officer. This is because, unlike an ordinary appeal, the basic purpose of a tax appeal is to ascertain the correct tax liability of the Assessee in accordance with law. 40. The decision in Goetze (supra) upon which rel....
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....ees contribution to ESI and PF have been paid before the due date for filing return of income u/s 139(1) of the Act and hence the same is required to be allowed as per the decision rendered by Hon'ble Karnataka High Court in the case of EssaeTeraoka Pvt. Ltd. Vs. DCIT (2014) 366 ITR 408. The A.O. noticed that the assessee has failed to make a claim in the income tax return filed by it and accordingly he held that the assessee cannot take support of decision rendered by jurisdictional High Court in the case of EssaeTeraoka Pvt. Ltd., as the assessee before the Hon'ble High Court had put up the claim in the return of income. Accordingly, the A.O. rejected the claim of the assessee. The Ld. DRP also confirmed the same. 26.3 We heard the parties on this issue and perused the record. There is no dispute with regard to the fact that this issue is decided in favour of the assessee by Hon'ble Karnataka High Court in the case of Essae Teraoka Pvt. Ltd. referred supra. 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.(284 ITR 323), w....
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....per the accounting standards, the assessee is required to revalue the outstanding forward contracts also and account for the gain/loss arising on such revaluation as at the balance sheet date. It was further submitted the assessee is following this method of revaluation consistently over the years. The Ld. A.R. also placed reliance on the decision rendered by coordinate bench in the case of Quality Engineering & Software Technologies Pvt. Ltd. (ITA No.257/B/2014) and also the decision rendered by Mumbai Bench of Tribunal in the case of Tata Consultancy Services Ltd. (ITA 2794/Mum/2018). 27.5 We heard Ld. D.R. on this issue and perused the record. We notice that the Tribunal is consistently taking the view that the loss arising on revaluation of outstanding forward contracts entered to safe guard the underlying revenue assets cannot be considered as notional loss and accordingly the same is eligible for deduction while computing total income. The following observations made by the coordinate bench in the case of M/s Quality Engineering and software Technologies P Ltd (supra) are relevant:- "4.5.11 As discussed earlier, in the case on hand, there has been an existing cont....
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....ying assets is more than the value of outstanding forward contracts as on the balance sheet date. 28. ISSUE NO.26 relates to addition of amount disallowed u/s 14A of the Act made to the net profit while computing book profit u/s 115JB of the Act. 28.1 This issue arises in assessment year 2014-15 in the appeal of the assessee. 28.2 The facts relating to this issue are that A.O. had computed disallowance u/s 14A of the Act. while determining total income under normal provisions of the Act. The amount so computed by him for the purposes of sec.14A of the Act was adopted by the A.O. for making addition in terms of clause (f) of Explanation 1 to 115JB of the Act while computing book profit u/s 115JB of the Act. The Ld. DRP also confirmed the same. 28.3 We have heard the parties on this issue. We notice that the special bench of ITAT in the case of Vireet Investments Pvt. Ltd. (ITA No.502/Delhi/2012 dated 16.6.2017) has expressed the view that the amount disallowed u/s 14A of the Act cannot be adopted for the purpose of computation of book profit u/s 115JB of the Act and the disallowance to be made u/s clause (f) to explanation 1 has to be computed independently without havin....
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....ot with the objective of earning dividend income but for the purpose of acquiring controlling interest in the company. It held that the interest expenditure is allowable u/s 57(iii) only if the investment had been made for the purpose of earning dividend income. In support of this proposition, the Ld. DRP placed its reliance on the decision rendered by Hon'ble Bombay High Court in the case of CIT Vs. Smt. Amritaben R. Shaw (238 ITR 777) and held that the expenditure incurred for acquiring controlling interest in the company is not allowable as deduction u/s 57(iii) of the Act. Accordingly, the Ld. DRP also confirmed the disallowance of interest expenditure incurred on ECB Loan. However, in the final assessment order passed for assessment year 2012-13, the A.O. disallowed the interest expenditure by invoking provisions of section 115BBD of the Act only. The AO did not mention about the reasoning of 'acquiring of controlling interest" or sec. 57(iii) of the Act, while making the disallowance. Hence, we confine ourselves to the applicability or otherwise of sec.115BBD of the Act. 29.4 We heard the parties on this issue and perused the record. The provisions of section 115BBD of the....
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.... the said decision was rendered in the context of section 14A of the Act. He submitted that the Hon'ble Delhi High Court has held in the above said case that the provisions of sec.14A are attracted only if the assessee had received exempt income. 29.5 We have heard Ld D.R and perused the record. A careful perusal of provisions of section 115BBD would show that the same begins with the expression "where the total income of assessee, being an Indian company, includes any income by way of dividends declared, distributed or paid by a specified foreign company". Hence, there is merit in the submissions of Ld A.R that the primary condition to be satisfied for invoking section 115BBD of the Act is that the total income of the assessee should include any dividend income received/declared from/by a specified foreign company. There is no dispute with regard to the fact that the total income of the assessee for the years under consideration does not include any dividend income received/declared from/by a specified foreign company. Hence, the question of invoking provisions of section 115BBD of the Act does not arise. The decision rendered by Hon'ble Delhi High Court in the case of Chem inv....
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....issions made by the assessee. He noticed that the entire expenses have been incurred on promotion of one brand, viz., "Santoor". Accordingly, he took the view that the advertisement expenses so incurred by the assessee has led to creation of a "brand" and the same would bring enduring benefit to the assessee. Accordingly, the AO took the view that the "brand value" is an intangible asset. However, the AO was of the view that the entire advertisement expenses cannot be considered as incurred towards promotion of brand value. Accordingly, the A.O. estimated that 25% of the aggregate amount of expenses should be treated as having been incurred towards brand building and the same would constitute Capital expenditure in the hands of the assessee. Accordingly, the A.O. disallowed 25% of aggregate advertisement expenses of Rs. 51.90 crores, which worked out to Rs. 12.98 crores. The Ld. DRP accepted the view taken by the A.O. but directed the A.O. to allow depreciation on the amount so disallowed, since the same is capital in nature. 30.3 We heard the parties and perused the records. The Ld. A.R. placed his reliance on the decision rendered by Hon'ble Delhi High Court in the case of M/s....
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....and keep public informed, aware and remain in limelight. This requires continuous and repeated publicity and advertisements to remain in public eye, to do business by attracting customers. It is an expenditure of trading nature. The aforesaid aspect has been highlighted by the Delhi High Court in Commissioner of Income Tax Vs. Salora International Ltd., [2009] 308 ITR 199 (Delhi) and Commissioner of Income Tax Vs. Casio India Ltd., [2011] 335 ITR 196." In the case of Citi Financial Consumer Fin Ltd (supra), it has been held as under by Hon'ble Delhi High Court: - "14. Applying the aforesaid principle to the facts of this case, it clearly emerges that the expenditure on publicity and advertisement is to be treated as revenue in nature allowable fully in the year in which incurred. Concededly, there is no advantage which has accrued to the assessee in the capital field. The expenditure was incurred to facilitate the assessee's trading operations. No fixed capital was created by this expenditure. We may also add here that in the Income tax law, there is no concept of deferred revenue expenditure. Once the assessee claims the deduction for the whole amount of such expenditu....
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....ze this expenditure over a reasonable period of time. 31.3 We heard Ld. D.R. and perused the record. The Hon'ble `Supreme Court in the case of Punjab State Industrial Corporation Ltd. (supra) and Brooke Bond Ltd. (supra) 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. 32. ISSUE NO.30 relates to disallowance of payment made to M/s. Gartner Group u/s 40(a)(ia) of the Act for non-deduction of tax at source. This issue arises in assessment years 2010-11 to 2014-15 in the appeal filed by the assessee. 32.1 The facts relating to this issue are that M/s. Gartner Group maintains a data base and the same is allowed to be used by others on payment of license fee. The assessee has obtained license....
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....Accordingly, the Ld A.R submitted that the royalty given to M/s. Gartner Group shall not be deemed to accrue or arise in India in the hands of M/s Gartner Group. In the absence of any income in the hands of above said person, there is no obligation is placed on the shoulders of the assessee to deduct tax at source u/s 195 of the Act from the payment so made. In support of his contentions, the assessee relied on the decision rendered by Hon'ble Madras High Court in the case of Aktiengesellschaft Kuhnle Koop and Kausch (262 ITR 513). In the above said case, the assessee before the Madras High Court paid royalty outside India out of its export sales. The Hon'ble High Court held that the source for royalty is from the source generated outside India and hence the same is not taxable within the meaning of section 9(1)(vi) of the Act. 32.3 The Ld. A.R., however, fairly conceded that the Hon'ble Delhi High Court has examined the issue of "source of income" in the case of CIT Vs. Havells India Ltd. (ITA No.55/2012 & ITA No.57/2012 dated 21.5.2012) and the decision rendered by Hon'ble Madras High Court in the case of AktiengesellschaftKuhnle Koop and Kausch(supra) was also cited befor....
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....Delhi High Court in the case of Havells India Ltd. (supra) and the same was decided against the assessee with the following observations:- "13. Section 9(i)(vii)(b) contemplates a source located outside India. It is difficult to conceptualise the place/ situs of the person who make payment for the export sales as the source located outside India from which assessee earned profits. The export contracts obviously are concluded in India and the assessee's products are sent outside India under such contracts. The manufacturing activity is located in India. The source of income is created at the moment when the export contracts are concluded in India. Thereafter the goods are exported in pursuance of the contract and the export proceeds are sent by the importer and are received in India. The importer of the assessee's products is no doubt situated outside India, but he cannot be regarded as a source of income. The receipt of the sale proceeds emanate from him from outside India. He is, therefore, only the source of the monies received. The income component of the monies or the export receipts is located or situated only in India. We are making a distinction between the source o....
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....stand the meaning of the word "source". For the sake of convenience, we extract below the observations made by Hon'ble Delhi High Court in this regard. "12. The question as to what is a source of income has been dealt with in some authoritative pronouncements. The Judicial Committee in Rhodesia Metals Ltd. v. Commissioner of Income Tax, (1941) 9 ITR (Suppl.) 45 observed that a "source" means not a legal concept but one which a practical man would regard as a real source of income. This observation was adopted by Malik, J. in his separate but concurring judgment in the case of Rani Amrit Kaur v. CIT, (1946) 14 ITR 561, a decision of the Full Bench of the Allahabad High Court. A source of income was described by R. S. Pathak, J. (as he then was) in the following words in Seth Shiv Prasad v. CIT, (1972) 84 ITR 15 (All.) at page 18: - "A source of income, therefore, may be described as the spring or fount from which a clearly defined channel of income flows. It is that which by its nature and incidents constitutes a distinct and separate origin of income, capable of consideration as such in isolation from other sources of income, and which by the manner of dealing ado....
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....alternative contention to the file of the A.O. in all the years i.e. assessment years 2010-11 to 2014-15 for examining it by following the circular of CBDT referred by Ld. A.R. 33. ISSUE NO.31 relates to non-granting of TDS credit as claimed by the assessee. This issue is being contested in all the years by the assessee i.e. in assessment years 2009-10 to 2014-15. 33.1 It is the case of the assessee that it has furnished details of tax deducted at source and submitted all the relevant TDS certificates also to the assessing officer. However, the assessing officer allowed TDS credit only to the extent the claim was matching with data reported in Oltas/AST. The Ld. A.R. submitted that the tax has been deducted from the income reported by the assessee by the payer of income and hence the claim should be allowed in full. 33.2 We heard Ld. D.R. and perused the record. It is the submission of the assessee that it has furnished all TDS certificates in respect of claim made by it. It is also a fact that the deductor of TDS has to file TDS returns to the Income Tax Department. If the TDS return is so filed, then the TDS amount will be reflected in form 26AS (Oltas/AST). In our view,....
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....or was one of general governance, failure of administration, fairness and arbitrariness. The Court found that the Income Tax Department admitted that the Central Processing Unit at Bangalore had errors and faults, which was required to be rectified. The Delhi High Court further found that filing of an application under Section 154 of the Act for rectification and correction by the assessee entails substantial expenses on the part of the assessee. The Delhi High Court further observed that rectification and getting corrections made by the deductor and to get them uploaded was not an easy task. Filing a revised return or getting the application under Section 154 processed, was not only daunting, but expensive and that the problem of not getting the credit was being faced by a majority of small and middle class tax payers, including senior citizens. The Delhi High Court, accordingly, issued a mandamus directing the Central Board of Direct Taxes (hereinafter referred to as the "CBDT") to issue directions with regard to giving credit of unmatched and mismatched TDS certificates. Pursuant to the said decision of the Delhi High Court, the CBDT issued instruction No.5 of 2013, dat....
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....that there is a mismatch between the details uploaded by the deductor and the details furnished by the assessee in the income tax returns. The Court finds that when the assessment was processed and a refund of Rs. 43,740/- was issued, no intimation was given by the department as to why the balance TDS amount could not be credited in favour of the petitioner. The Court further finds that the assessing officer was under a duty to verify whether or not the deductor had made the payment of the T.D.S. in the government account. The petitioner has suffered a tax deduction at source, but has not been given due credit inspite of the fact that he has been issued a TDS certificate by a government department. There is a presumption that the deductor has deposited TDS amount in the government account especially when the deductor is a government department. By denying the benefit of TDS to the petitioner because of the fault of the deductor causes not only harassment and inconvenience, but also makes the assessee feel cheated. There is no fault on the part of the petitioner. The fault, if any, lay with the deductor. In the instant case, nothing had been indicated that the fault lay wit....
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....D.R. and perused the record. Having regard to the fact that the A.O. has not afforded any opportunity to the assessee to present its view on the applicability of section 115O of the Act, we deem it proper to restore this issue to the file of the A.O. After affording adequate opportunity of being heard to the assessee the A.O. may take appropriate decision in accordance with the law. 35. ISSUE NO.33 relates to refund adjustment. This issue is being urged in A.Y. 2011-12 by the assessee. At the time of hearing, the Ld. A.R. submitted that this is a general ground and does not require any adjudication. 36. ISSUE NO.34 relates to transfer pricing adjustment on the short term advances given to foreign subsidiaries. This issue is being urged in all the years i.e. A.Y. 2009-10 to 2014-15 by the assessee. 36.1 The facts relating to the issue are that the assessee has granted short term advances to its various foreign subsidiaries. The TPO noticed the assessee did not charge any interest on the advance so given by the assessee to its foreign subsidiaries. The TPO proposed to charge interest @ 14.35 % p.a. on the outstanding balances. The assessee contended that the advances were gi....
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....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. 37. ISSUE NO.35 relates to transfer pricing adjustment made by the TPO for guarantee commission in respect of corporate guarantee provided by the assessee to its Associated Enterprises (AEs). This issue is being urged by the assessee in assessment year 2010-11 to 2014-15. 37.1 The assessee has provided corporate guarantee on behalf of its Associated Enterprises (AE) to guarantee the services to be rendered by the A.E. to its customers. In consideration for providing corporate guarantee, the Associated Enterprises has paid commission to the assessee computed at the rate of 0.50% p.a. on the value of corporate guarantee so provided. According to the assessee, it has bench marked this transaction by applying Comparable Uncontrolled Price (CUP) method. However, the TPO was not satisfied with the rate of 0.50% p.a. The TPO discuss....
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....nologies Ltd. (ITA No.4469 & 1551/Mum/2016 dated 27.2.2019), wherein the corporate guarantee commission of 0.50% is held to be at arms length. Accordingly, we are of the view that the TP adjustment made by the AO/TPO by adopting guarantee commission rate @ 3% as applicable to guarantees provided by banks is not justified. Accordingly, we direct the A.O. to delete the TP adjustment made on corporate guarantee in assessment year 2010-11 to 2014-15. 38. ISSUE NO.36 relates to TP adjustment made in respect of Software development services and information technology services provided by the assessee to its Associated Enterprises. This issue is being contested by the assessee in assessment years 2013-14 & 2014-15. 38.1 The assessee company provides comprehensive IT solutions & services and including systems integration, information systems outsourcing, package implementation, software application development and maintenance &research and development services to various customers globally. The assessee is one of the leaders in providing IT solutions & services in India. The assessee has provided software services to its AEs. The assessee adopted Comparable Uncontrolled Price (CUP) m....
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....tc." The assessee also furnished sample copies of invoices to prove that it is providing similar kinds of services both onsite and offshore to both AEs and Non-AEs. However, the TPO rejected the submissions of the assessee with the following observations: - "8 Analysis by the TPO: The taxpayer has just provided the rates and then compared the rates based on the man hours deployed. CUP can be used as MAM usually where products are being sold. It is a very difficult method to apply when Services are being compared. The taxpayer has not brought out the Services details nor has it compared the services rendered to the AEs with that of the services rendered to the non-AEs. The taxpayer has just adopted only the minimum number of man-hours and man-months as the criteria. To apply CUP method one of the following conditions should be met: 3 None of the differences between the controlled transaction and uncontrolled transaction would materially affect the price in the open market, or 4 Reasonably accurate judgements can be made to eliminate the material effects of such differences We can apply CUP method only when the controlled transactions a....
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....ractual terms (example, scope and terms of warranties provided, sale or purchase volumes, credit terms, transportation terms, etc. • Level of market, i.e. wholesale or retail, etc. • Geographical market in which the transaction takes place • Intangible property associated with the sale • Foreign currency receipt • Alternatives realistically available with the buyer and the seller. The Hon'ble ITAT further says that CUP method can be applicable in the following situations. c. The taxpayer or any other member of the group sells/buys similar goods, in similar quantities and under similar terms to an independent enterprise in a similar market. d. An independent enterprise buys/sells the particular product in similar quantities and under similar terms to any other independent enterprise in a similar market. These conditions have not been satisfied by the taxpayer either in the TP study report nor in the submissions made later. The taxpayer was specifically requested to demonstrate that the CUP was the most appropriate method to be deployed. Since the taxpayer failed to demonstrate the ab....
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....nder internal CUP. In support of this proposition the Ld. A.R. placed reliance on the decision rendered by Delhi Bench of Tribunal in the case of Hughes Systique India Pvt. Ltd. (ITA No.5420/Del/2011 and 6057/Del/2012), wherein it has been observed as under on internal comparables :- "6.9. In the case of Gharda Chemicals Limited Vs DCIT, 130 TTJ 556, the Hon'ble Income Tax Appellate Tribunal ("ITAT"), too, held that internal comparable should be preferred over external comparables. The relevant extract of the judgment is reproduced below: "Internal CUP method envisages comparing the uncontrolled transactions of the appellant itself with other unrelated parties so as to determine the ALP with the AE. However the External CUP method disregards the price charged or paid by the appellant to or from its unrelated parties and contemplates the comparison of the price so charged from or paid to its AE with some external independent reliable price data under similar circumstances of transactions with AE. Ordinarily the Internal CUP method should be preferred over the External CUP method as it neutralizes several distinguishing factors, such as the local factors and the....
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.... assessment year 2013-14 and 3.71% in assessment year 2014-15. The assessee has also furnished the nature of services provided by it to AEs and Non-AEs before the A.O/TPO. The assessee has also furnished copies of invoices to demonstrate that identical services are being provided to AEs and Non-AEs. As already noticed, the TPO has not examined these details at all. Hence the observations of the TPO that the assessee has not brought out details of nature of services provided nor the services to the AEs and non AEs, in our view, lacks credence. In our view, the TPO should have critically examined the details and invoices furnished by the assessee in order to find out the veracity of the explanations given by the assessee. Without pointing out defects, or unreliable nature of the evidences furnished by the assessee, we are of the view that the TPO was not justified in rejecting the TP study conducted under CUP method. 38.6 Since transactions with AEs constitute major portion of the turnover of the assessee, we are of the view that internal CUP adopted by the assessee is justified. The decision rendered by the Delhi Bench of Tribunal in the case of Hughes Systique India Pvt. Ltd. (s....
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....mer as a single deliverable point. 39.2 The primary unit shall compensate the secondary unit for the sub-contract work performed by it. The secondary unit will account the receipts as part of its "sales turnover". The payment so made by primary unit is expenditure in its hands and accordingly, it will account the payment as its expenditure. Various undertakings owned by the assessee may be classified into three categories:- (a) Undertakings eligible for deduction @ 100% u/s 10AA of the Act (b) Undertakings eligible for deduction @ 50% u/s 10AA of the Act and (c) Undertakings which are not eligible for deduction u/s 10A/10AA/10B. For the sake of convenience, we may refer the undertakings which are eligible for deduction u/s 10AA or under any other section as "eligible unit" and the undertakings which are not eligible for such deduction as "non-eligible unit". 39.3 In case of inter-unit transactions between an eligible unit and non-eligible unit, it may be possible for an assessee to arrange its affairs in such a way that the profits of non-eligible unit are shifted to eligible unit, so that he can claim deduction u/s 10AA or under any other sectio....
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.... AY 2014-15 has exceeded the prescribed limit. Hence the inter-unit transactions entered by various units of the assessee were also subjected to transfer pricing regulation, meaning thereby, the actual consideration of the inter unit transactions shall be substituted by "market value", which in turn means "Arms Length price" determined u/s 92F(ii) of the Act. 39.5 In compliance with the provisions of sec. 92BA of the Act, the assessee also furnished transfer pricing study in respect of Specified Domestic Transactions. The margin declared in various SEZ units was more than the average margin of the comparable companies. Accordingly, the assessee submitted that the Specified Domestic Transactions have been entered at arms length price. The Transfer Pricing Officer (TPO) noticed that sub-contract work/job work performed by various undertakings of the assessee during the year relevant for AY 2014-15 was Rs. 1087.25 crores. The TPO further noticed that the assessee is also claiming exemption u/s 10AA of the Act in respect of 28 of its undertakings. The T.P.O. further noticed that there is huge variation in the net margins declared by various undertakings of the assessee, i.e. that ne....
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....ng in the market and the transfer pricing adjustment has to be determined accordingly. The TPO, accordingly, rejected the contentions relating to "loss making SEZ units" and also the "higher margin declared by the assessee at the entity level". Accordingly, he observed that the if there is an excess profit attributed to the eligible units, then the position of law and the intention of legislation clearly justify an adjustment under the provisions of Sec.92CA(3). The TPO also observed that the assessee has not furnished any details or data relating to quantum of transactions of the SEZ units with the tax payer and with others. Accordingly, the TPO determined the Arm's Length margin of SDT transactions at 15.58%. Accordingly, the TPO made adjustment of Rs. 135.42 crores in respect of specified domestic transactions. The workings in this regard are furnished by the TPO in Annexure B to the TP order. We notice that the TPO has adopted following methodology:- (a) The TPO has first computed the ratio of income received from AE to the total operating incomefor each of the SEZ undertakings. (b) The TPO applied the Arm's Length PLI of 15.58% on the total operating income o....
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....ions of Act, ALP will (be) determined, if tax payer margin is higher or within +/- 3% range then the declared profit is accepted as within ALP and there is no reverse impact (benefit will be given for having higher margin). 3.4.9 Notwithstanding above statement, ALP will be determined only where transaction with AE is determined. Out of 28 units, only 3 units are loss making, i.e., Pune SEZ-3, Bhubaneshwar SEZ & Noida SEZ-2. There is no income from AE in these units. Hence, there is no question of determination of ALP. Hence TPO has not considered those units." The TPO also reported that the total profit eligible for deduction u/s 10AA is 4614.52 crores. He also reported that out of 28 units, 13 units are eligible for deduction @ 50% and 11 units are eligible for deduction @ 100%. Accordingly, he submitted that the units claiming 50% is more in number. Since there is huge volume of transactions between SEZ units, the TPO opined that there is a clear picture of shifting of profit from taxable to non-taxable units and it may be between SEZ units also. 39.10 In response to the remand report, the assessee, inter alia, submitted the following:- (a) There should b....
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....e suggestion given by Hon'ble Supreme Court in the case of Glaxo Smithkline Asia (P) Ltd (Appeal (civil) No.18121/2007 dated 26-102010). In the above said case, the Hon'ble Supreme Court directed the Government to consider appropriate provisions in law to make transfer pricing regulations applicable to related party domestic transactions. (b) The Hon'ble Supreme Court also observed in the above said case that, in case of domestic transactions, the under-invoicing of sales and over-invoicing of expenses ordinarily would be revenue neutral except in two circumstances involving tax arbitrage: (i) If one of the related companies is loss making and the other is profit making, and profit is shifted to the loss making concern; and (ii) If there are different rates for two related units (on account of different status, area basis incentives, nature of activity etc.) and if profit is diverted to the unit on the lower side of tax arbitrage. Hence the intent behind introduction of Transfer pricing provisions for Specified Domestic Transaction is to curb the practice of shifting of profits where there is tax arbitrage. (c) Reference in sec. ....
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.... the deduction u/s 10AA should be recomputed. (i) The margin arrived at for international transactions should be adopted for the purposes of SDT also and the same would meet the ends of justice. 39.12 We heard Ld D.R and perused the record. We shall first have regard to various applicable provisions of the Act. The provisions of sec.92BA of the Act was introduced by Finance Act, 2012 w.e.f. 1.4.2013 to determine Arm's length price of Specified domestic transactions (SDT), when the aggregate value of such transactions exceeds the prescribed limit. Sec.92BA reads as under:- "92BA. For the purposes of this section and sections 92, 92C, 92D and 92E, "specified domestic transaction" in case of an assessee means any of the following transactions, not being an international transaction, namely:- (i) any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of sub-section (2) of section 40A; * (ii) any transaction referred to in section 80A; (iii) any transfer of goods or services referred to in sub-section (8) of section 80-IA; (iv) any business transacted between the assessee a....
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....tion (2A), has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction or specified domestic transaction was entered into." 39.13 The different undertakings owned by the assessee have entered into inter unit transactions and many of those undertakings have claimed deduction u/s 10AA of the Act. The aggregate value of those transactions has also exceeded the threshold limit prescribed in sec.92BA of the Act. Accordingly, it is submitted that the provisions of sec.92BA(v) relating to Specified Domestic Transaction are applicable to the assessee. At the cost of repetition, we extract below clause (v) of sec.92BA:- "(v) any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of subsection (8) or sub-section (10) of section 80-IA are applicable;" Hence, it is pertinent to refer to the provisions of sec.80IA(8), which read as under:- "80IA(8) Where any goods or services held for the purposes of the eligible business are transferred to any other ....
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....ed in those sections. Hence, there may arise a tendency to shift profits from "non-eligible" undertaking to "eligible" undertaking by under invoicing/over invoicing of transactions of transfer of goods or services, so that the assessee could avail higher tax benefits. Hence, sub-sec. (8) was introduced in sec. 80IA and the same was made applicable to other incentive provisions also. The purpose of introducing sub-sec. (8) was to prevent claim of excess deduction or benefit granted to certain "eligible undertakings". The modality adopted in se.80IA(8) is to substitute "market value" to the transactions of transfer of goods or services between eligible unit and non-eligible unit, if the said transfer of goods or services between the undertakings did not occur at "market value". The AO, for the purpose of computing deduction under respective section, shall compute the "profits and gains" of the eligible undertaking by substituting the "actual price" with "market value". 39.14 Though the above said provisions empowered AO to examine and determine the Fair Market Value of certain transactions mentioned therein, yet the Act did not prescribe any method to compute FMV of these transact....
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....e provisions of sec.92C(4) requires computation of total income by adopting arm's length price determined by the AO and further, if the total income is enhanced on account of adoption of ALP, then the deduction u/s 10A/10AA/10B/Chapter VIA will not be available for such enhanced income. At the same time, while computing the deduction u/s 10A/10AA/10B/Chapter VIA, the AO has to compute the "Profits and gains of business" by substituting ALP and this exercise has to be carried out for the purpose of computing the quantum of deduction. 39.18 We have noticed earlier that the assessee has entered into inter-unit transactions with different units. It included transactions between (a) SEZ units and SEZ units, (b) SEZ units and non-SEZ units. In between SEZ units also, the transactions have taken place between SEZ units enjoying 100% tax deduction and SEZ units enjoying 50% tax deduction. Accordingly, one unit shall be providing services and another unit shall be receiving services. The inter-unit transaction would result in "generation of income" for "Service provider", while it would constitute "expenditure" for the "Service receiver". 39.19 Before us, the asse....
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.... cover transactions between two eligible units. This may be a lacunae in the Income tax Act, but the said lacunae could be cured only by the Parliament. Hence, on a strict interpretation of law, the transactions between two eligible units are not covered by sec.80IA(8) of the Act. Consequently, the transactions entered between two eligible units are outside the scope of "specified domestic transactions" mentioned in sec.92BA of the Act. Accordingly, this view of the tax authorities is set aside. (B) The assessee also contended that Arms length price should be applied to both the eligible unit and non-eligible unit. This contention of the assessee is liable to rejected for the purpose of computing deduction u/s 10AA of the Act. This is so because, as per the provisions of sec.80IA(8) of the Act, the profits and gains of "eligible unit" alone is mandated to be recast by adopting "market value" for the purpose of computing deduction u/s 10AA of the Act. Since deduction u/s 10AA is not allowed for "non-eligible unit", the question of recasting the profit and loss account of that unit shall not arise. (C) However, in our view, the above said contention of the assessee will hold go....
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.... illustrations are given in sets, i.e., for units eligible for deduction @ 100% and units eligible for deduction @ 50%. Within the above said examples, illustrations are given for both the situations, viz., over invoicing of revenue and under invoicing of expenses by eligible units. EXAMPLE A: - Eligible Unit - eligible for deduction u/s 10AA of the Act @ 100%. ILLUSTRATION 1 (Over invoicing revenue) Transaction between an Eligible unit, which is eligible for deduction @ 100% and a non-eligible unit. Eligible unit is Service Provider and accordingly earns revenue from non-eligible unit. Transaction Price - 1,00,000 Arms Length Price - 50,000 Actual Transaction SDT Adjustment Eligible Unit Non-eligible unit Total Eligible Unit Non-eligible unit Total Sales Revenue Less: Adjustment for ALP 10,00,000 - 5,00,000 - 15,00,000 - 10,00,000 -50,000 5,00,000 15,00,000 -50,000 Adj Rev 10,00,000 5,00,000 15,00,000 9,50,000 5,00,000 14,50,000 Cost Add: Corresponding Adjustment for ALP -9,00,000 - -4,25,000 - -13,25,000 - -9,00,000 - -4,25,....
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.... u/s 10AA - 100% 1,00,000 -1,00,000 75,000 1,75,000 -1,00,000 50,000 -50,000 1,25,000 - 1,75,000 -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 noneligible units. (b) The amount of deduction u/s 10AA worked out to Rs. 1,00,000/- prior to ALP adjustment. However, it has fallen down to Rs. 50,000/- after ALP adjustment in terms of sec.80IA(8). (c) Thus the reduction in the quantum of deduction u/s 10AA, i.e., Rs. 50,000/- is also the adjustment made u/s 92 of the Act in respect of Specified domestic transaction. (d) Hence the total income has increased from Rs. 75,000/- (prior to ALP adjustment) to Rs. 1,25,000/- after ALP adjustment. The net effect is the addition of SDT adjustment of Rs. 50,000/-. (B) Eligible Unit - eligible for deduction u/s 10AA of the Act @ 50%. ILLUSTRATION 3 (Over invoicing of revenue) T....
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.... SDT Adjustment Eligible Unit Non-eligible unit Total Eligible Unit Non-eligible unit Total Sales Revenue Less: Adjustment for ALP 10,00,000 - 5,00,000 - 15,00,000 - 10,00,000 5,00,000 50,000 15,00,000 50,000 Adj Rev 10,00,000 5,00,000 15,00,000 10,00,000 5,50,000 15,50,000 Cost Add: Corresponding Adjustment for ALP -9,00,000 - -4,25,000 - -13,25,000 - -9,00,000 - 50,000 -4,25,000 -13,25,000 - 50,000 Adj Cost -9,00,000 -4,25,000 -13,25,000 -9,50,000 -4,25,000 -13,75,000 Net Income Deduction u/s 10AA - 100% 1,00,000 - 50,000 75,000 - 1,75,000 -50,000 50,000 -25,000 1,25,000 - 1,75,000 -25,000 Total Income 1,25,000 1,50,000 SDT adjustment 25,000 In this illustration, (a) the "net income" remains at Rs. 1,75,000/- before and after ALP adjustments u/s 92 of the Act, since adjustment to the inter-unit transactions have to be done in the hands of both eligible and noneligible units. (b) The amount of deduction u/s 10AA worked out to Rs. 50,000/- pr....
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....ettlement was reached between the parties in order to avoid litigations. In terms of the same M/s Wipro Inc., paid liquidated damages of Rs. 62,68,00,573/- to M/s ACS State Healthcare LLC. Since the entire services have been performed by the assessee, M/s Wipro Inc., claimed from the assessee the amount of liquidated damages so paid by it. The assessee also paid the same to M/s Wipro Inc., USA and claimed it as expenditure. In its Transfer pricing report, the assessee claimed the above said payment as "reimbursement of expenses". 40.4 However, the TPO took the view that there was no obligation on the part of the assessee to pay any liquidated damages to its AE and hence it is not required to reimburse the same to its AE. The observations made by TPO in this regard are extracted below:- "5.1 The Taxpayer Wipro India is paying liquidated damages to Wipro Inc for the litigation matters involving Wipro Inc and US customers. For any litigation between Wipro Inc USA and US customers, the damages should be paid by US entity and not by the Indian entity. As per the submission made by the Assessee, the Indian entity Wipro India is paying the liquidity damages as per an agreement....
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.... be taken support for the payment made in AY 2010-11 without showing that the said agreement was renewed. Accordingly, by applying CUP method, the TPO has determined the ALP at NIL. 40.7 We notice that the observations so made by the TPO are general observations without appreciating properly the facts surrounding the issue. According to the assessee, the software services were provided by the assessee to M/s ACS State healthcare services LLC, USA as per the "Mutual subcontractor Agreement" entered between the assessee and its subsidiary Wipro Inc., USA. It is pertinent to note that M/s Wipro Inc., USA had actually entered into a contract for providing software services with M/s ACS State healthcare services LLC, USA. It is stated that the entire contract was given to the assessee herein on back to back basis. According to the assessee, it has received 90% of the invoice value from M/s Wipro Inc., USA. Since there were deficiencies in the provision of services and also there was violation of terms, M/s ACS State health care services LLC has claimed damages from M/s Wipro Inc., USA, which was finally settled between themselves on payment of liquidated damages. Since entire softwar....