TMI Blog2020 (1) TMI 1011X X X X Extracts X X X X X X X X Extracts X X X X ..... on of Hon able Supreme Court in case of CIT vs Yokogawa India Ltd [ 2016 (12) TMI 881 - SUPREME COURT] and CIT vs JP Morgan services India Pvt.Ltd. [ 2017 (5) TMI 640 - SC ORDER] wherein it has been held that deductions under section 10 A, 10 B should be allowed in respect of current year profits of the undertaking before setting off brought forward losses and unabsorbed depreciation. Deduction u/s 10A - Reduction of foreign currency expenses from export turnover - HELD THAT:- Assessee incurred expenditure in foreign currency in relation to sales and marketing activities, process study and analysis by experts of company who visit client location, expenditure incurred for providing training to employees of assessee in regard to business process of client. These services in our considered opinion cannot be considered to be one falling as defined in definition of computer software in Explanation 2 (i) to section 10A of the act. We are therefore unable to concur with arguments advanced byLd.AR. It is also observed that decisions relied upon by Ld.AR by Hon ble Jurisdictional High Court are on different set of facts and are of no assistance to assessee in present facts. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s observed that forward contract was entered into by assessee in respect of all 5 units as a whole, to hedge against currency fluctuation in respect of receipts (98%) in view of services rendered by assessee to USA and European countries. It has been submitted in written submission dated 16/07/19 by Ld.AR that such contract was entered into by assessee to safeguard its interest. It is very clear that loss has been incurred by assessee upon hedging transaction of export, being business activity carried on by assessee. We therefore do not find force in submissions made by Ld.AR regarding forward contract in foreign exchange partaking character of treasury operations. Forward contract has been entered by assessee in relation to business income and therefore any loss or gain earned by assessee on account of such contract would partake nature of business income. In our view merely because Assessing Officer in preceding years and some of succeeding assessment years has not observed the issue does not mean, same should be allowed to perpetuate. Any claim made by assessee has to be analysed having regard to law applicable. Further, decisions relied upon by assessee has been decided on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant year without apppreciating that the provisions of section 40(a)(ia) do not restrict its application to the outstanding amounts as at the end of the previous year but to all such payments made or credited during the year, without deduction of tax at source. 3. The CIT(A) erred in not appreciating that the Visakapatnam Special bench of the ITAT has made an attempt to write its own statute rather than interpret the statute. 4. The CIT(A) erred in directing the AO to follow the ratio laid down by the Hon'ble Court in the case of Tata Elxsi Limited 349 ITR 98 and exclude the telecommunication charges incurred in foreign currency from the total turnover also while computing the deduction u/s 10A of the I.T. Act, without appreciating the fact that there is no provision in Section 10A that such expenses should be reduced from the total turnover also, as clause (iv) of the explanation to Section 10A provides that such expenses are to be reduced only from the export turnover. 5. The CIT(A) erred in not appreciating the fact that the jurisdictional High Court's decision in the case of Tata Elxsi Limited 349 ITR 98 has n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances of the case and law applicable, disallowance under section 14A read with rule 8D amounting to ₹ 23,58,820/- is to be deleted in entirety. 4.1.Assuming without admitting that disallowance under section 14A is warranted, the same is to be restricted to 5% of salary paid to SVP - Finance and 50% of salary paid to an employee handling treasury functions respectively. 5.The learned CIT(A) erred in not giving any finding as to whether software expenses of ₹ 7,66,68,466/- is liable for disallowance or not as made by the learned assessing officer in the order passed under section 143(3). 6.The learned CIT(A) erred in confirming the action of the learned assessing officer that - losses from forward and option contracts amounting to ₹ 1,72,86,687/- is to be set off while computing business income as against the contention of the appellant that the said losses should be set off while computing the income under the head 'Income from other sources'. 7. The learned CIT(A) erred in confirming the action of the learned assessing disallowing the brand building expenses of ₹ 55,93,402/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bangalore-STPI Unit I Pune STPI unit Bangalore STPI Unit II Jaipur STPI Unit Gurgaon STPI Unit Ld.AO further observed that assessee carried business activity by way of sub-contracting some of its activities to two concerns namely M/s Vocative Systems Inc. Located in Manila and M/s Infosys BPO S.R.O (subsidiary of assessee) located in Brno (Czech Republic). It was observed that assessee had total turnover of ₹ 649,56,53,722/- against which 10A exemption of ₹ 149,79,41,360/- was claimed in respect of 3 STPI units being Bangalore unit 1, Bangalore unit to and Pune unit. Ld.AO observed that assessee incurred foreign currency expenditure to the extent of ₹ 79,82,10,344/-, which has not been excluded from export turnover as per definition contained in provisions of section 10 A. Ld.AO observed that assessee incurred expenditure of ₹ 15,67,08,619/- towards telecommunication charges attributable to delivery of software outside India, which was excluded from both export turnover and total turnover for computation of deduction under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of Hon ble Supreme Court in case of Palam Gas Services vs CIT reported in (2017) 394 ITR 300, Accordingly we allow these grounds raised by revenue. 7.Ground No.4-5 is in respect of direction to reduce telecommunication charges from both export turnover as well as total turnover by Ld.CIT (A) for purposes of computation of deduction under section 10A. At the outset Ld.CIT DR concedes that, issue stands settled in favour of assessee by decision of Hon able Supreme Court in case of CIT vs HCL Technologies Ltd., reported in (2018) 404 ITR 719, wherein, it is been held that, expenses reduced from export turnover should also be reduced from total turnover while computing deduction under section 10A. In the light of aforestated submissions, we dismiss these grounds raised by revenue. 8. Ground No. 6 is in respect of allowing deduction under section 10A before setting off brought forward losses and unabsorbed depreciation by Ld.CIT (A). Admittedly, it has been submitted that this issue stands settled in favour of assessee by decision of Hon able Supreme Court in case of CIT vs Yokogawa India Ltd report ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puter software but for various other activities and therefore argument advanced by Ld.AR cannot be accepted. He submitted that detailed note on foreign currency expenditure placed at page 132-133 of paper book specifies activities for which, expenditure was incurred outside India by employees of assessee for its clients based outside India. She placed reliance upon page 113 which has been submitted by assessee before Ld.AO vide letter dated 14/10/09 wherein it is categorically mentioned that foreign currency expenses are incurred for paying professional charges to consultants in U.S. and UK for payroll processing for hiring the employees in U.S. office, for background check for obtaining visa in the U.S. etc. It has been submitted that the above expenses are incurred for managing branches outside India and are not incurred while providing the technical services outside India. At this juncture Ld. CIT DR submitted that from the explanation offered by assessee, it is clear that expenditure incurred in foreign currency do not relate to computer software as submitted by Ld.AR. Placing reliance upon definition of computer software provided in Explanation 2 to sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any expenses incurred in foreign exchange in providing technical services outside India . We refer to detailed note on foreign currency expenditure incurred by assessee that has been reproduced at page 132-133 of paper book relied upon by Ld. CIT DR: The company (M/s Infosys BPO Ltd.,)is involved in rendering business process services entirely (except to its holding company)s to clients based outside India. It also renders such services to its holding company namely M/s Infosys Limited and received a sum of ₹ 12,42,11,029/-during the year relevant to AY: 2007-08. During the year, Assessee company incurred expenditure in foreign currency o the extent of ₹ 90,13,27,780/-. The said expenditure is incurred in relation to the following activities of the company outside India by the employees of the company who are about 60 in numbers. Apart from these employees outside India, other employees who stationed in India also go to the client s location. Sales and marketing activities: They are basically marketing professional involved in finding prospective customers for business process service for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure in foreign currency in relation to sales and marketing activities, process study and analysis by experts of company who visit client location, expenditure incurred for providing training to employees of assessee in regard to business process of client. These services in our considered opinion cannot be considered to be one falling as defined in definition of computer software in Explanation 2 (i) to section 10A of the act. We are therefore unable to concur with arguments advanced byLd.AR. It is also observed that decisions relied upon by Ld.AR by Hon ble Jurisdictional High Court are on different set of facts and are of no assistance to assessee in present facts. However assessee cannot be denied benefit of exclusion of foreign currency expenses from total turnover as has been held by Hon ble Supreme Court in case of CIT vs HCL Technologies Ltd (supra). Respectfully following the same, we direct Ld.AO to exclude foreign currency expenditure incurred by assessee from total turnover as well. Accordingly this ground raised by assessee stands dismissed. 13. Ground No.3 has been raised in respect of addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 and the same has been considered in computing total income for assessment year 2008-09. It is observed that Ld.CIT (A) directed Ld.AO to verify the amount of ₹ 11,69,38,859/- from income for assessment year 2008-09. We therefore set aside this issue to Ld. AO for due verification as per direction and to consider claim of assessee as per law. Needless to say that assessee shall be granted proper opportunity of being heard. Accordingly this ground raised by assessee stands allowed for statistical purposes. 16. Ground No. 4 and 4.1 It has been submitted that assessee, earned dividend from mutual funds amounting to ₹ 7,08,50,379/-, against which no suo moto disallowance was made. Ld.AO thus computed disallowance under section 14 A having regards to Rule 8D (iii) of the Act. Ld. CIT DR placed reliance upon order passed by authorities below. 17. We have heard submissions advanced by both sides in the light of the records placed before us. Admittedly, year under consideration is 2007-08 and Rule 8D has been prospectively implemented. Ld.AO thus erred in reso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration and that decision of Hon ble Karnataka High Court in Samsung was not there during FY 2006-07 relevant to AY 2007-08. Ld.AR thus argued that, when software expenses were incurred/paid during the FY 2006-07 relevant to AY 2007-08, by virtue of existing favourable decisions by coordinate bench of this Tribunal, there was no liability on assessee to deduct TDS on software payments. Ld.AR thus argued that, assessee under such circumstances, acted bonafidely, placing reliance upon decisions passed by this Tribunal. 20. On the contrary, Ld.CIT DR placed reliance upon view expressed by authorities below. 21. We have perused submissions advanced by both sides in light of records placed before us. Assessee placed reliance upon decision of this Tribunal in case of Allegis services India Pvt.Ltd vs. DCIT in ITA (TP) No. 1370/B/2014 vide order dated 15/09/17 for assessment year 2009-10, wherein on similar facts the issue has been decided as under: 7. We have considered the rival submissions as well as the relevant material on record. There is no dispute that the transaction in question regarding paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (the Karnataka HC in CIT v Samsung Electronics Co. Ltd. (16 taxmann.com 141) was passed on October 15, 2011). Courts have consistently upheld this principle as seen in ITO v. Clear Water Technology Services (P.) Ltd. (52 taxmann.com 115) Kerala Vision Ltd v. ACIT (46 taxmann.com 50) Sonic Biochem Extractions (P.) Ltd v. ITO (35 taxmann.com 463) Channel Guide India Ltd v. ACIT (25 taxmann.com 25) DCIv. Virola International (20 14(2) TMI 653) CIT v. Kotak Securities Ltd. (20 taxmann.com 846). 04. The relevant portion of the CIT(A) order is extracted as under : Disallowance of expenses under 40(a)(i) / 40(a)(ia) : 5.1. As regards disallowance of expenses under 40(a)(i)/40(a)(ia), it has been submitted that the company had determined the rate of tax to be deducted and following the judgments that were prevalent at the time of tax deduction, Supreme Court in the case of Tata Consultancy Services and jurisdictional Tribunal in the case of Samsung Electronics Co. Ltd, the appellant submitted that the said judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peals), confirmed the action of the Assessing Officer on the ground that the purchase of software amounted to acquisition of intangible asset and therefore, the payment was royalty and disallowable. On appeal: Held, (i) that mere purchase of software, a copyrighted article, for utilisation of computers cannot be considered as purchase of copyright and royalty. The assessee did not acquire any rights for making copies, selling or acquiring which generally could be considered within the definition of royalty . Explanation 2 to section 9(1)(vi) cannot be applied to purchase of a copyrighted software, which does not involve any commercial exploitation thereof. The assessee simply purchased software delivered along with computer hardware for utilization in the day-to-day business. 5.3 Relying on the above decision, the ITAT 'C' Bench, Bangalore upheld the order of the CIT(A) who had observed that the assessee did not have the benefit o f the clarification brought about by the retrospective amendment that the payments tantamount to payment for royalty and consequently tax was to be deducted u/s 194J. The law as extant o n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn by Jurisdictional High Court. This view has been expressed by Hon ble Supreme Court in case of East India Commercial Co. Ltd. v. Collector of Customs, reported in 1963 3 SCR 388; We, therefore, hold that the law declared by the highest court in the State is binding on authorities or Tribunals under its superintendence, and they cannot ignore it....... This Principle is called as Doctrine of Stare Decisis . In our considered opinion Hon ble Karnataka High Court expressed its view on interpretation of provisions, which has binding force. We are also aware of the fact that there is a contrary decision by Hon ble Delhi High Court on similar point. However, judicial discipline as well as Doctrine of Stare Decisis , calls upon us to follow view laid down by Hon ble jurisdictional High Court in case of Samsung Electronics Co Ltd reported in [2012] 345 ITR 494, within the state of Karnataka, while deciding identical issue. Hence we prefer to follow decision of Hon ble jurisdictional High Court over orders of coordinate bench, referred to by Ld.AR, hereinabove. Accordingly this gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hey relate to other units or to head office of assessee, such expenses cannot be taken into consideration while computing deduction under the said provisions. He also placed reliance upon decision of Hon ble Karnataka High Court in case of Wipro Ltd vs DCIT reported in 382 ITR 179, wherein, it has been held that, expenditure incurred by corporate division should not be allocated to various other units. Ld.AR alternatively submitted that such loss may be set off against the profits of eligible units before computing deduction under section 10 A. 23. On the contrary, Ld.DR placed reliance upon orders passed by authorities below. She placed reliance upon categorical observation made by Ld. CIT (A) in para 7.4 as under: 7.4. In the instant case, the appellant is not a dealer in foreign exchange. The appellant is a business process outsourcing with non-resident company. In order to hedge against losses, the appellant had booked foreign exchange in the forward market with the bank. From the decisions of the Hon ble ITAT, it is impliedly clear that loss on foreign exchange in the forward trading is a business loss. Therefore I m not inclined to interfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is, dominant purpose for entering into forward contract and option contracts. As we analyse reply filed by assessee on query raised by Ld. AO(referred to herein above), it is observed that forward contract was entered into by assessee in respect of all 5 units as a whole, to hedge against currency fluctuation in respect of receipts (98%) in view of services rendered by assessee to USA and European countries. It has been submitted in written submission dated 16/07/19 by Ld.AR that such contract was entered into by assessee to safeguard its interest. It is very clear that loss has been incurred by assessee upon hedging transaction of export, being business activity carried on by assessee. We therefore do not find force in submissions made by Ld.AR regarding forward contract in foreign exchange partaking character of treasury operations. In our considered opinion, forward contract has been entered by assessee in relation to business income and therefore any loss or gain earned by assessee on account of such contract would partake nature of business income. In our view merely because Assessing Officer in preceding years and some of succeeding assessment years has not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set or brand as contended by authorities below. Ld. CIT DR placed reliance upon observations of Ld.CIT (A) in para 8.5 that assessee had not furnished any details as how expenses have been incurred on intangible assets if not acquired. It has been submitted that in absence of complete details Ld. CIT (A) upheld disallowance by Ld.AO. 25. We have perused submissions advanced by both sides in the light of the records placed before us. It is observed that the expenditure incurred towards advertisements, sales and marketing, holding various seminars and exhibitions are in relation to ongoing business of assessee. As held by Hon ble Bombay High Court in case of CIT vs Jeoffrey Manners Co. Ltd reported in (2009) 180 Taxmann 87 that corrected test to be applied in respect of expenditure incurred for making advertisement films was that when, the same was incurred in respect of an ongoing business of assessee, it is revenue. On the other hand, when expenditures incurred in respect of a brand which is to be used in a business which is yet to be commenced, it is capital expenditure. Further as held by Hon ble Supreme Court in case of Empire ..... X X X X Extracts X X X X X X X X Extracts X X X X
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