TMI Blog2020 (10) TMI 605X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of income earned on sale of scrap/newspaper and Rental income. The remaining item is Other income - In AY 2007-08 and 2008-09, this item of miscellaneous income was restored to the file of the AO for examining the nature of receipt and decide the same accordingly - Following the same, we restore the issue relating to Other income to the file of the AO with similar directions. Exclusion of Net interest income for deduction u/s 10A/10AA/10B - HELD THAT:- It is required to be examined first as to whether the AO has assessed interest income under the head Income from business or under the head Income from other sources . If the AO has assessed interest income as business income, then the assessee is eligible for deduction u/s 10A/10AA/10B on interest income also. However, if the AO has assessed interest income under the head income from other sources , then it is required to be examined as to whether there is direct nexus between interest income and income of business undertaking. With regard to Category (a) above, if the nexus is shown between the loan funds and the deposits, the assessee is eligible for deduction in respect of interest income, following the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r arise in India), he has paid in any Country with which there is no agreement under section 90 for the relief or avoidance of double taxation, income tax, by deduction or otherwise - It can be noticed that, payment of tax is mentioned both in sec.90(1)(a)(i) and sec. 91. Section 90(1)(a)(ii) uses the expression income tax chargeable under this Act and under the Corresponding law in force in that Country .. Thus, it can be noticed that the provisions of sec.90(1)(a)(i) and sec.91(1) refers to actual payment made in the foreign Country and the provisions of sec.90(1)(a)(ii) refers to income tax chargeable under this Act and under the corresponding law in force in that Country , i.e., there is no reference to actual payment of tax. Accordingly, following the binding decision of High Court in A.Y. 2001-02 to 2004-05 we set aside the order passed by A.O. on this issue and direct him to allow foreign taxes credit claimed by the assessee. Claim of Depreciation on Software - amount of software capitalized by it, by invoking provisions of section 40(a)(ia) of the Act for non-deduction of tax at source from the payments made for purchase of software - HELD THAT:- Following t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... direct the A.O. to include foreign VAT/GST in the export turnover, since export profits realized by the assessee is said to include the above said VAT/GST. Taxability of interest granted to the assessee u/s 244A - HELD THAT:- Restore this issue to the file of the A.O. with the direction to ascertain the interest, if any, withdrawn out of the interest given to the assessee u/s 244A of the Act in the respective years and reduce the same from the interest income and tax the balance amount. We order accordingly. Deduction claimed by the assessee u/s 80IB - HELD THAT:- As considered an identical issue in this order in the context of allocation of corporate expenses to undertakings claiming deduction u/s 10A/10AA/10B of the Act (Issue no.8). We have restored this issue to the file of the AO for the reasons discussed in issue no.8. Though the issue herein is contested in the context of deduction u/s 80IB of the Act, yet the underlying facts are identical with issue no.8, discussed supra. Accordingly, in order to maintain uniformity, we feel it proper to restore this issue to the file of AO with similar directions. Eligibility of the assessee to claim deduction u/s 80IB of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r expenses, if any incurred in foreign exchange in providing technical services outside India alone are required to be excluded from the export turnover. If any amount is excluded from export turnover , the same is required to be excluded from total turnover also, as held by Hon'ble Karnataka High Court in the case of Tata Elixi Ltd [ 2011 (8) TMI 782 - KARNATAKA HIGH COURT] and CIT vs. HCL Technologies Ltd [ 2018 (5) TMI 357 - SUPREME COURT] We set aside the order passed by the A.O. on this issue and direct him to compute the deduction u/s 10A/10AA/10B of the Act by following the discussions made supra. Whether reimbursements received by the assessee are required to be excluded from the export turnover for the purpose of computing deduction u/s 10A/10AA/10B ? - The assessee has debited the profit loss account with the cost of purchase of assets and credited the profit loss account with the amounts reimbursed by the customers - cost so incurred cannot be categorised as direct cost related to the development of software. Since it is an expenditure incurred at the request of customer for which reimbursement was also received, there is no revenue element involv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tstanding forward contracts have been taken, should be more than the value of outstanding forward contracts. In that case, the loss arising on restatement of forward contract is fully allowable as deduction. Since the AO has not examined this aspect, we are of the view that this issue needs to be restored to the file of the AO for the limited purpose of examining as to whether the value of underlying assets is more than the value of the forward contracts. Since the AO has disallowed the loss in AY 2009-10, 2011-12 and 2012-13, this issue is restored to the file of AO in the above said three years alone. The assessee is directed to furnish relevant details to prove that the value of underlying assets is more than the value of outstanding forward contracts as on the balance sheet date. Disallowance u/s 14A of the Act made to the net profit while computing book profit u/s 115JB of the Act - HELD THAT:- In the case of Vireet Investments Pvt. Ltd. [ 2017 (6) TMI 1124 - ITAT DELHI] has expressed the view that the amount disallowed u/s 14A of the Act cannot be adopted for the purpose of computation of book profit u/s 115JB and the disallowance to be made u/s clause (f) to explanatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment made to M/s. Gartner Group is in the nature of royalty within the meaning of section 9(1)(vi) of the Act and hence the assessee is liable to deduct tax at source from the said payment u/s 195 of the Act. In view of the default on the part of the assessee in not deducting the tax at source, the A.O. was justified in making the disallowance of payment made to M/s. Gartner Group by invoking provisions of section 40(a)(i). Non-granting of TDS credit - HELD THAT:- This issue requires fresh examination at the end of the A.O. by duly considering the TDS certificates furnished by the assessee and also making due enquiries, if required. Transfer pricing adjustment on the short term advances given to foreign subsidiaries - HELD THAT:- As assessee did not establish that there is parity of facts. We notice that the coordinate bench of ITAT has determined the ALP rate of interest at Libor + 150 basis point. It is also noticed that the revenue has accepted the decision rendered by ITAT and the TPO has also adopted the same in A.Y. 2015-16. Accordingly, it is noticed that a consistent view is being taken on this issue. Accordingly, we direct the A.O./TPO to adopt the ALP rate of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement was not valid in the year relevant to AY 2010-11. We also notice that the TPO has not brought any material on record in support of his observations that, in an uncontrolled transaction, no third party would have paid such kind of liquidated damages in respect of dispute between its subsidiary and a third party. We are of the view that, without examining the Mutual subcontracting agreement, the TPO could not have come to such kind of conclusion. Accordingly, we are of the view that this issue has not been properly examined by TPO - this issue requires fresh examination at the end of AO/TPO. - IT(TP)A No.99/Bang/2014, 398/Bang/2015, 222/Bang/2016, 492/Bang/2017, 2851/Bang/2017, 3115/Bang/2018, 151/Bang/2014, 467/Bang/2015, 609/Bang/2016 (AssessmentYear:2009-10, 2010-11, 2011-12, 2012-13, 2013-14, 2014-15) - - - Dated:- 5-10-2020 - SHRI B.R. BASKARAN, ACCOUNTANTMEMBER AND SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER Appellant by: Shri N. Venkataraman, Sr. Advocate, Shri Srinivasan Pagalthivarthi And Ms. Girija, A.Rs Respondent by: Shri Pradeep Kumar, D.R. ORDER PER BENCH: All these appeals are directed against the assessment orders passed by Assessing o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs against the business income generated from non-STPI/non-SEZ undertakings . Accordingly, it claimed deductions u/s 10A/10AA of the Act in respect of profits earned by profit making SEZ/STPI undertakings. 4.3 However, the A.O. took the view that the provisions of section 10A/10AA of the Act are a special code by themselves. Accordingly he took the view that the profits/losses generated by SEZ/STPI undertakings should be grouped together, in which case, the losses incurred by STPI/SEZ undertakings should be set off against profits earned by other SEZ/STPI undertakings. The deduction u/s 10A/10AA is allowed for 10 years. The AO apparently took the view that the aggregate amount of deduction claimed during the period of 10 years by a SEZ/STPI undertaking should not exceed the aggregate amount of net income (aggregate amount of profits (minus) aggregate amount of loss) generated during the above said period of 10 years. Accordingly, the AO expressed the view that allowing losses incurred by a particular unit in first few years to be set off against the profits earned from non-SEZ/non-STPI units, will result in allowing deduction of only profits generated by SEZ/STPI units under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laims in assessment years 2001-02 to 2005-06 and the same has been allowed by Tribunal in the assessee s own case. The Ld A.R further submitted that the Hon ble High Court of Karnataka has also upheld the view taken by the Tribunal on this issue in AY 2001-02 to 2004-05. He submitted that the decision rendered by Hon ble Karnataka High Court is reported in 382 ITR 179 (kar.). The Ld. A.R. further submitted that the coordinate bench of the Tribunal has decided an identical issue in favour of the assessee in AY 2008-09 by following the decision rendered by Hon ble Karnataka High Court in the assessee s own case (referred above) and also the decision rendered in the assessee s own case by the Tribunal in assessment year 2007-08. Accordingly, he submitted that the order passed by the A.O. in this regard should be reversed. 4.6 On the contrary, the Ld D.R relied upon the order passed by Ld DRP/AO on this issue. 4.7 We heard rival contentions on this issue and perused the record. We notice that the co-ordinate bench has considered an identical issue in AY 2008-09 in assessee s own case in ITA No.1665/Bang/2012 dated 04-01-2017 and it was decided in favour of the assessee with the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst the profit of 10A units for computing deduction u/s 10A. This is in view of the decision of the Third Member in the case of Navin Bharat Industries Ltd v. DCIT 90 ITD 1. In view of the judgment of the jurisdictional High Court in the case of Himmatsingh (supra), the assessing officer will set off brought forward losses of the units for which the assessee has disclosed positive income for the purpose of claiming deduction u/s 10A . 16.5 Respectfully following the decisions of the Hon ble Tribunal referred supra, we direct the assessing officer to set off brought forward losses of the units for which the assessee has disclosed positive income for the purpose of claiming deduction u/s 10A Respectfully following the decision of the coordinate bench of the Tribunal in the assessee's own case for Assessment Year 2004-05 (supra) on this issue, we direct the Assessing Officer to set off brought forward losses of the units for which the assessee has disclosed positive income for the purpose of claiming deduction under section 10A. Thus it is clear that the Tribunal has followed the earlier order for the Assessment Year 2004-05 which has been upheld by the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law in favour of the assessee and against the Revenue. Therefore, aforesaid questions of law are answered in favour of assessee and against the Revenue. 4.9 We notice that the jurisdictional Hon ble Karnataka High Court has decided an identical issue in favour of the assessee. Accordingly, we hold that the loss arising in eligible SEZ/STPI undertakings are not required to be adjusted against the profits arising from other SEZ/STPI undertakings and the said loss can be adjusted against profits arising from non-SEZ/non-STPI units. Accordingly, this issue is decided in favour of the assessee. 5. Issue No.2 relates to Exclusion of Miscellaneous income while computing deduction u/s 10A/10AA/10B:- 5.1 The next issue relates to denial of deduction u/s 10A/10AA/10B in respect of miscellaneous income disclosed by eligible undertakings. This issue has been urged by the assessee in all the six years, viz., assessment years 2009-10 to 2014-15. 5.2 The assessee has disclosed certain item of receipts as miscellaneous income and claimed the same as part of business profits. Accordingly, it claimed a deduction u/s 10A/10AA/10B of the Act on such income also. In assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered by the Hon ble High Court in the assessee s own case reported in 382 ITR 179. For the sake of convenience, we extract below the decision rendered by Hon ble High Court: 166. The court had an occasion to consider the substantial question of law in the assessee s case itself in ITA 507 of 2002 decided on August 25, 2010 while dealing with the income earned from sale of scrap, export incentive and rent received,answered the question in favour of the assessee and against the Revenue. 167. In so far as gain on exchange rate fluctuation is concerned, it was subject matter of ITA 3202 of 05 which was decided on February 28, 2012 in the assessee s case itself, where the said question was answered in favour of the assessee and against the Revenue. 168. In so far as income earned from interest is concerned that was subject matter of this court in the case of CIT v. Motorola India Electronics P. Ltd. in ITA No.428 of 2007 decided on December 11, 2013 (2014) 2 ITROL 499 (Karn), while dealing with exemption under section 10B. It is in Pari materia with section 10A and has answered the said question in favour of the assessee and against the Revenue. 169. As all th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest income booked separately. Since the legal principles relating to deduction of interest income u/s 10A/10AA/10B are discussed here, we adjudicate interest income booked under the head miscellaneous income and also reported separately. The facts relating to this issue as narrated by the assessee in its written submissions are that the assessee had availed packing credit loan in foreign currency (PCFC) from M/s Duetsche Bank, HSBC, JP Morgan, Bank of Tokyo. It is in the nature of pre-shipment credit extended to the exporters for financing working capital. According to the assessee, it has used the funds, which are not immediately required in operations, to make short term fixed deposits. Similarly, the surplus funds available with the SEZ units have also been invested in fixed deposits. All these fixed deposits have earned interest income. The contention of the assessee is that these fixed deposits have been made out of loan funds as well as surplus funds generated through operations of SEZ units and hence they form part of profits of business . Hence they are eligible for deduction u/s 10A/10AA/10B of the Act. However, the AO took the view that the impugned interest income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to the deduction referred to in this sub-section only for the unexpired period of aforesaid ten consecutive assessment years : Provided further that for the assessment year beginning on the 1st day of April, 2003, the deduction under this sub-section shall be ninety per cent of the profits and gains derived by an undertaking from the export of such articles or things or computer software: Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, 2012 and subsequent years : Provided also that no deduction under this section shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified under sub-section (1) of section 139. . (4) For the purposes of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t does not partake the character of a profit and gains from the sale of an article, it is the income which is derived from the consideration realized by export of articles. In view of the definition of 'Income from Profits and Gains' incorporated in Subsection (4), the assessee is entitled to the benefit of exemption of the said amount as contemplated under Section 10B of the Act. Therefore, the Tribunal was justified in extending the benefit to the aforesaid amounts also. We do not find any merit in these appeals. Therefore, the first substantial question of law raised in ITA No.428/2007 is answered in favour of the revenue and against the assessee and the first substantial question of law in ITA No.447/2007 is answered in favour of the assessee and against the revenue. 6.4 The co-ordinate bench has also considered an identical issue in AY 2007-08, wherein the decision rendered by the Tribunal in AY 2004-05 was followed with the following observations:- (3) With regard to interest income also, the Hon ble Tribunal in its decision referred supra, after deliberating the issue at length has, arrived at a conclusion that 10.2 ..The treatment to be meted out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the undertaking. The co-ordinate benches in the earlier years have also followed the decision rendered by Hon ble Delhi High Court in the case of CIT Vs. Shriram Honda Power Equipment 289 ITR 475, wherein it was held that, if the AO has assessed interest income under the head Income from business and this has not been challenged by the department thereafter, then the question cannot be permitted to be reopened and the only question then will be if netting should be allowed. Accordingly following principles emerge out from the above said discussions:- (a) if the AO has assessed interest income under the head Income from business, which has not been challenged by the department, then it shall form part of business income as per the decision of Hon'ble Delhi High Court in the case of Shriram Honda Power equipment (supra). (b) if there is direct nexus between interest income and income of the business of undertaking, then also it shall form part of business income as per the decision of Hon'ble Karnataka High Court in the assessee s own case. In both the cases, the interest income should be eligible for deduction u/s 10A/10AA/10B of the Act. 6.6 In the instant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to rejection of claim of deduction u/s 10A/10AA/10B of the Act in respect of sale proceeds received from customers located in SEZ units in India, though it was received in foreign currency. This issue is being urged by the assessee in assessment years 2009-10, 2010-11, 2012-13 to 2014-15. 7.2 During the years under consideration, the assessee has provided services to some of the customers located in SEZ units and received sale proceeds in foreign currency. The assessee claimed it to be part of export turnover and accordingly claimed deduction u/s 10A/10AA/10B of the Act. According to the assessee, the services were provided to its customers located in SEZs are ultimately exported by those SEZs to a person located outside India. 7.3 The A.O. did not accept the explanations of the assessee. He took the view that the assessee has raised sales bill against local parties even though the proceeds are received in foreign currency. Accordingly, the AO took the view that these are domestic sales only and further these kinds of receipts cannot be considered as a turnover arising on account of export of software. The A.O. also observed that provisions of section 10A(3) of the Act wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that a EOU/EHTP/STP/BTP unit may export goods manufactured/software developed by it through another exporter or any other EOU/EHTP/STP/SEZ unit subject to the conditions mentioned in paragraph 6.19 of Handbook. The conditions to be fulfilled if a Unit has to export through other exporters is as under: 6.19 An EOU/EHTP/STP/BTP unit may export goods manufactured/software developed by it through other exporter or any other EOU/EHTP/STP/SEZ/BTP unit subject to condition that: a) Goods shall be produced in EOU/SHTP/STP/BTP unit concerned. b) Level of NFE or any other conditions relating to imports and exports as prescribed shall continue to be discharged by EOU/EHTP/STP unit concerned. c) Export orders so procured shall be executed within parameters of EOU/EHTP/STP/BTP schemes and oods shall be directly transferred from unit to port of shipment. d) Fulfillment of NFE by EO U/EHTP/STP/BTP units in regard to such exports shall be reckoned on basis of price at which goods are supplied by EOUs to other Exporter or other EOU/EHTP/STP/BTP/SEZ unit. e) All export entitlements, including recognition as Status Holder would accrue to exporter in whose name for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act is attracted and such exporter is entitled to benefit of deduction of such profits and gains derived from such export from payment of income tax. Therefore, the finding of the authorities that the assessee has not directly exported the computer software outside country and because it supplied the software to another STP unit, which though exported and foreign exchange received was not treated as an export and was held to be not entitled to the benefit is unsustainable in law. The substantial question of law is answered in favour of the assessee and against the revenue. The appeal is allowed. The impugned orders are set-aside. The assessee is held to be entitled to deduction of such profits and gains derived from the export of the computer software. 7.7 In view of the binding decision of the jurisdictional Karnataka High Court, we direct the A.O. to include deemed exports as part of turnover while computing deduction u/s 10A/10AA/10B of the Act. 8. Issue no.5 relates to the eligibility of the assessee to claim deduction u/s 10A of the Act in case of Delayed collections of export proceeds. 8.1 This issue relates to the eligibility of the assessee to claim ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e export has been done strictly in accordance with law. Foreign exchange remittances should have been received within six months from end of the financial year. It has not been received. Therefore, an application is filed seeking for extension of time to the Reserve Bank of India. Even to this day the Reserve Bank of India has not rejected the said request. On the contrary, after the period of 6 months, foreign exchange remittances are received and credited to the assessee s account through the Reserve Bank of India. It is in this context merely because the written approval of extension is not passed by the Reserve Bank of India, whether the assessee could be denied the benefit of Section 10A. The Tribunal on consideration of the entire material on record, taking note of the statutory provisions and the object underlying this provision, has come to the conclusion that notwithstanding the fact there is no express order granting approval by the Reserve Bank of India, as it has not been rejected and foreign exchange is received and remitted through the proper channel, the assessee is entitled to the benefit of Section 10A. In the facts of the case, we do not find any error committed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d with United States of America (USA) and observed that the tax credit shall not be allowable for units which have claimed deduction u/s 10A 10AA of the Act. 9.4 The assessee had also paid taxes levied at state level and local authority level in the USA. It claimed for credit of those taxes also. It is stated that, in some of the states like California and New York in USA, income tax is levied by the state/local authorities on the income generated from their respective jurisdiction. It is stated that this tax has to be paid in addition to paying income tax at Federal level in USA. Accordingly, the assessee claimed Foreign tax credit in respect of taxes paid at State level/local authority level. However, the A.O. observed that the DTAA has been signed between two Sovereign Countries only, i.e., between India and USA and hence the provisions of Foreign Tax Credit shall be applicable only to Federal tax paid by the assessee. Accordingly, he rejected the claim of assessee for Foreign tax credit in respect of taxes paid at state level and local authority level. 9.5 Accordingly, the A.O. restricted the claim of Foreign tax credit (a) in respect of tax paid on incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he law in force in that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal. Explanation.-In this section,- (i) . (ii) .. (iii) .. (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. A perusal of the above provisions would show that section 90(1)(a) of the Act gives relief in respect of foreign taxes in two categories. Sub clause (i) talks of income tax paid in India as well as in a foreign country. Sub clause (ii) talks of income tax chargeable in India and in a foreign country. It is the contention of the assessee that sub clause (i) is applicable when income tax is paid both in India and in a foreign country. Sub clause (ii) shall be applicable if income tax is chargeable under Indian Income Tax Act and also under corresponding law in force in the foreign coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is mentioned that 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 the country or a local authority in that country. Accordingly, the Ld A.R. submitted that the taxes paid by the assessee in the foreign country at State level or Local authority level shall also be eligible for tax credit u/s 91 of the Act, even if there is no DTAA between India and that State. Accordingly, the Ld A.R submitted that the AO was not correct in law in holding that the assessee is not eligible for foreign tax credit for the taxes paid at State Level/Local authority level. The Ld. A.R. submitted that this issue has also been examined by the Hon ble Karnataka High Court in A.Y. 2001-02 to 2004-05 and the contentions of the assessee have been accepted. Accordingly, the Ld. A.R. submitted that the order passed by A.O. on this issue may kindly be reversed and suitable direction be issued to the A.O. to allow foreign tax credit as claimed by the assessee. 9.10 We notice that the issue relating to foreign tax credit has been examined in detail for Hon ble High Court of Karnataka in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is exempt in this country, by virtue of the agreement, the amount of tax paid in the other country could be given credit to the assessee. Thus for the payment of Income-tax in the foreign jurisdiction, the assessee gets the benefit of its credit in this country. 40. However, if the contracting country is not agreeable to extend the said benefits, then in terms of the agreement and probably in terms of the exemption granted, the assessee would be entitled to benefit only in this country on account of the exemption and the benefit in the other country is not extended. Thus when exemption is granted in respect of the income chargeable to tax under this Act in respect of which no benefit is granted in the corresponding country the assessee gets no benefit. However, if the benefit is extended to a portion of the income say for example 90 per cent. and 10 per cent. is subjected to tax then to that extent the assessee would be entitled to benefit of tax credit as he has paid tax in the foreign jurisdiction as per section 90(1)(a)(i) of the Act. 41. In this connection, it is contended on behalf of the Revenue that if the income is chargeable to tax in India, then only the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tute by itself is not granting any relief. But, by virtue of the statute, if an agreement is entered into providing for such relief, then the assessee would be entitled to such relief. 56. Therefore, it follows that the income under section 10A is chargeable to tax under section 4 and is includible in the total income under section 5, but no tax is charged because of the exemption given under section 10A only for a period of 10 years. Merely because the exemption has been granted in respect of the taxability of the said source of income, it cannot be postulated that the assessee is not liable to tax. The said exemption granted under the statute has the effect of suspending the collection of Income-tax for a period of 10 years. It does not make the said income not leviable to Income-tax. The said exemption granted under the statute stands revoked after a period of 10 years. Therefore, the case falls under section 90(1)(a)(ii). 57. In the background of this legal position, we have to look into the Double Taxation Agreements entered into between India and United States, Canada. (1) Indo-US Agreement : 58. Article 25 of the Indo-US Double Taxation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly in respect of that income, which is taxed in the United States. This provision became necessary because the accounting year in India varies from the accounting year in America. The accounting year in India starts from 1st of April and closes on 31st of March of the succeeding year. Whereas in America, the 1st of January is the commencement of the assessment year and ends on 31st of December of the same year. Therefore, the income derived by an Indian resident, which falls within the total income of a particular financial year when it is taxed in the United States, falls within two years in India. Therefore, while claiming credit in India, the assessee would be entitled to only the tax paid for that relevant financial year in America, i.e., the income attributable to that year in America. In other words, the Income-tax paid in the same calendar year in the United States of America is to be accounted for two financial years in India. Of course, this exercise should be done by the assessing authority on the basis of the material to be produced by the assessee. (2) Indo-Canada agreement : 60. In so far as the Indo-Canada Double Taxation Agreement is concerned, article 23 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 10A, residuary surplus being subjected to tax both in India and Canada. This residuary surplus could qualify for tax credit as it is subjected to tax in both the countries. 63. As is clear from the aforesaid clause in the IndoCanadian agreement if the income from source within Canada, is lower, has been subjected to tax both in India and Canada then, the tax paid in Canada shall be allowed as a credit against the Indian tax paid in respect of such income. If the entire income assessed by the assessee under section 10A is exempted in India, then, the aforesaid clause does not confer any benefit on the assessee. However, notwithstanding the aforesaid provision, if any portion of the income falling under section 10A is subjected to tax then, by virtue of aforesaid provision, the tax paid in Canada corresponding to the income subjected to tax in India, the assessee would be entitled to credit of the tax paid in Canada. However, this exercise has to be done by the assessing authority on the basis of materials to be produced by the assessee and after giving effect to the formulae prescribed under section 10A(4) of the Act. (3) No agreement with states : 64 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. Therefore, even in the absence of an agreement under section 90 of the Act, by virtue of the statutory provision, the benefit conferred under section 91 of the Act is extended to the Income-tax paid in foreign jurisdictions. India has entered into an agreement with the federal country and not with any State within that country. In order to extend the benefit of this, relief or avoidance of double taxation, the aforesaid Explanation explicitly makes it clear that Income-tax in relation to any country includes the Income-tax paid to the Government of any part of that country or a local authority in that country. Therefore, even though, India has not entered into any agreement with the State of a country and if the assessee has paid Income-tax to that State, the Income-tax paid in relation to that State is also eligible for being given credit to the assessee in India. Therefore, the argument that in the absence of an agreement between India and the State, the benefit of section 90 is not available to the assessee is ex-facie illegal and requires to be set aside. We notice that the Hon ble High Court has accepted all the contentions of the assessee on various aspects discussed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Hon ble Karnataka High Court has held in the case of Samsung electronics Ltd. 345 ITR 494 that the payment made for purchase of software is in the nature of royalty. Accordingly, the A.O. took the view that the depreciation claimed by the assessee on the value of software is liable to be disallowed u/s 40(a)(ia) of the Act, as the assessee did not deduct tax at source from the payments made for purchase of software. The A.O. also held that the disallowance so made u/s 40(a)(ia) of the Act is not eligible for deduction u/s 10A/10B/10AA of the Act on the reasoning that the said disallowance is notional in nature and it does not generate any revenue. 10.3 The Ld. DRP noticed that identical disallowance made in the immediately preceding year has been upheld by it. Accordingly, in order to keep the matter alive, the ld. DRP confirmed the order passed by the A.O. However, it directed the A.O. to allow depreciation on the software already capitalized. Accordingly, the A.O. made the disallowance of depreciation u/s 40(a)(ia) of the Act. Both the parties are aggrieved by the direction so given by Ld. DRP. The assessee is contending that the A.O. was not justified in disallowing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) of the Act. At the outset, it is to mention that on the same set of facts an identical issue has been dealt by the ITAT, Mumbai Bench in the case of SKOL Breweries Ltd. (supra), wherein it was held in paras 16.1 to 16.4 as under : 16.1 As regards the alternative plea of the ld Sr counsel for the assessee that since the assessee has not claimed the entire amount as revenue expenditure; but has capitalized the same and claimed only depreciation u/s 32(1)(ii); therefore, provisions of sec. 40(a)((i) shall not apply. Section 40(a)(i) contemplates that any interest, royalty, fee for technical services or other sum chargeable under this act, which is payable outside India as it is relevant for the case in hand 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, the amount of interest, royalty, fee for technical services and other sum shall not be deducted in computing the income chargeable under the head profits gains of business or profession . This condition of deductibility has been stipulated u/s 40 notwithstanding anything to the contrary in section 30 to 38 of the Act. Sec. 40 begins with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refers to the expenditure incurred for the purpose of business of the assessee and therefore, the said expenditure is a deductible claim. Thus, section 40 refers to the outgoing amount chargeable under this Act and subject to TDS under Chapter XVII-B. There is a difference between the expenditure and other kind of deduction. The other kind of deduction which includes any loss incidental to carrying on the business, bad debts etc., which are deductible items itself not because an expenditure was laid out and consequentially any sum has gone out; on the contrary the expenditure results a certain sums payable and goes out of the business of the assessee. The sum, as contemplated under sec. 40(a)(i) is the outgoing amount and therefore, necessarily refers to the outgoing expenditure. Depreciation is a statutory deduction and after the insertion of Explanation 5 to sec. 32, it is obligatory on the part of the Assessing Officer to allow the deduction of depreciation on the eligible asset irrespective of any claim made by the assessee. Therefore, depreciation is a mandatory deduction on the asset which is wholly or partly owned by the assessee and used for the purpose of business or profe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sides, we are of the view that there is no error in the order of the learned CIT(A) which requires correction from us. Thus, this ground is also dismissed. Following the decision rendered by the coordinate bench in the Tally Solution (supra), we direct the A.O. to delete the disallowance on depreciation made u/s 40(a)(ia) of the Act. Since we have held that depreciation is not liable to be disallowed u/s 40(a)(ia) of the Act, the alternative claim of the assessee for enhanced deduction shall become infructuous, even though the claim of the assessee is supported by the circular no.37/2016 dated 2.11.2016 issued by CBDT. 11. ISSUE NO.8 relates to Allocation of Corporate overheads to units claiming deduction u/s 10A/10AA/10B of the Act. 11.1 This issue relates to allocation of corporate overhead expenses to various units, which are claiming deduction u/s 10A/10AA/10B of the Act. This issue is being urged by the assessee in assessment years 2009-10, 2010-11 2011-12. 11.2 The facts relating to the issue are that the assessee company has maintained a separate division by name Wipro Corporate , which consisted of Chairman s office, Corporate Human Resources, Corpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions and units on the basis of turnover. Accordingly, profits of units which were claiming deduction u/s 10A/10AA/10B of the Act came to be reduced to the extent of corporate expenses allocated to those units, resulting in corresponding reduction of deduction claimed under those sections. In the same manner, the AO allocated corporate expenses in AY 2010-11 and 2011-12 also. The Ld. D.R.P. upheld the order of the A.O. in assessment years 2009-10, 2010-11 2011-12. However, the Ld. DRP directed the A.O. in assessment year 2012-13 to follow the decision rendered by jurisdictional High Court in the assessee s own case. 11.4 We heard the parties on this issue and perused the record. We notice that the Hon'ble jurisdictional Karnataka High Court has considered an identical issue in AY 2001-02 to 2004-05 and the same has been disposed of as under:- Substantial question No. 9 : Whether the appellate authority were correct in holding that the expenses incurred by the Corporate Division cannot be allocated in respect of various business units of the assessee based on the turn over, but at an ad hoc percentage of 20 per cent. as held in the earlier assessment years ? ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 10A units is not proper when in fact, on an earlier occasion 57 per cent. was allocated to the section 10A units and therefore he submits that the orders passed by the appellate authority requires to be set aside. 150. Per contra, learned senior counsel appearing for the assessee submitted the said issue is covered by the judgment of this court in the assessee's case I. T. A. No. 507 of 2002 disposed on August 25, 2010. Based on the aforesaid facts it is clear that the assessee wanted allocation of actual expenditure incurred by each unit. When the assessing authority did not agree, they came forward and agreed that each of the units could be allocated 20 per cent. of the total expenditure incurred by corporate division. However, the assessing authority is of the view that, the allocation of the expenditure related to salary, wages and allowances and directors' fee should be dependent on the revenue generated and therefore he did not accept the allocation of 20 per cent. of expenditure to each of the unit. There is no provision of law which is pointed out to us which states that the allocation of expenditure should be proportionate to the revenue generated by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses. According to AO, the assessee has not allocated corporate office expenses to various undertakings and hence, the AO has proceeded to allocate them in the ratio of turnover of all the undertakings. The Hon'ble High Court has observed that the assessee has allocated the expenses on actual basis, which is contrary to the observations made by the AO. In between, there is a reference to allocation of 20% of expenses also, which appears to have not been accepted by Hon'ble High Court. 11.6 In our considered view, the head office maintained by the assessee is essentially a cost centre in that it incurs expenditure for providing the facilities and services, which are common to all the units. The head office does not exist for its own sake. Its existence is relevant for all the activities undertaken by various divisions, units and profit centres. The very existence of the divisions, units and profit centres is dependent upon the policy decisions taken in head-office. Hence, we are of the view that head office expenses which are in the nature of common expenses are required to be allocated to different units or undertakings and more particularly to the undertakings claimin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver, in assessment year 2010-11, the A.O. allowed the claim on the basis of directions issued by DRP, which had followed the decision rendered by the Tribunal in the earlier years. The assessee is aggrieved by the decision of A.O. taken in assessment year 2009-10 and the revenue is aggrieved by the decision of A.O. taken in assessment year 2010-11. 12.3 We heard the parties and perused the record. We notice that this is a recurring issue and in assessment year 2008-09, the Tribunal had directed the A.O. to allow the claim of the assessee by following the decision rendered by coordinate bench in assessment year 2007-08, which in turn had followed the decision rendered in assessment year 2004-05. It was also brought to our notice that the Hon ble High Court of Karnataka has decided an identical issue in favour of the assessee in assessment year 2001-02 to 2004-05 in the assessee s own case reported in 382 ITR 179. On a perusal of decision rendered by Hon ble High Court, we notice that the High Court, in turn, has followed the decision rendered by it in Wipro GE Medical Systems Ltd. (2014) 50 Taxmann.com 181. 12.4 We have gone through the issue rendered by Hon ble jurisdictional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come accrued from such undertaking. 8. The arguments of the revenue is that if the assessee has to avail the said benefit, he should set up a new independent undertaking after obtaining requisite permission for each of the floors and then only such benefit is granted. In the instant case, it is not disputed that the assessee is having manufacturing unit in the third floor of the Golden Enclave which was commenced prior to 1993 for which the assessee is not entitled to claim the benefit under Section 10A of the Act. The assessee sought permission to expand its business. After getting such permission it has set up a undertaking in the second floor on 16.11.1995 and in sixth floor on 30.07.1996. No separate bank accounts or accounts are maintained in these two new units. Only one account is maintained and benefit under Section 10A is claimed in respect of all the three units. Therefore, it is contended that the assessee is not entitled to the benefit under Section 10A. 9. In the entire Section 10A of the Act, it is nowhere mentioned that the assessee has to set up a new independent undertaking to be eligible for such benefit. Though the heading in Section 10A of the Act re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 15C. Every new creation in business is some kind of expansion and advancement. The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is all the same a new and identifiable undertaking separate and distinct from the existing business. No particular decision in one case can lay down an inexorable test to determine whether a given case comes under section 15C or not. In order that the new undertaking can be said to be not formed out of the already existing business, there must be a new emergence of a physically separate industrial unit which may exist on its own as a viable unit. An undertaking is formed out of the existing business if the physical identity with the old unit is preserved. This has not happened here in the case of the two undertakings which are separate and distinct. Following the aforesaid judgment, the Apex Court in the case of International Instruments (P.) Ltd . v. CIT [1980] 123 ITR 11/[1979] 1 Taxman 91 has held as under: 5. Sec. 15C partially exempts from tax a new industrial unit which is separate physically from the old one, the capital of which and the profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an undertaking is a new industrial undertaking or not. The fact that there was common management or the fact that separate accounts had not been maintained, would not also 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 determined with the material which the assessee may make available to the Department. We are, therefore, of the view that the finding of the Tribunal that the assessee was not entitled to relief under s. 84 and deduction under s. 80J of the Act during the assessment years in question, is erroneous.' 10. From the aforesaid judgments, it is clear that trade and industry do not run in ear-marked channels in view of manifold scientific and technological developments. There is great scope for expansion of trade and industry. Every new creation in business is some kind of expansion and advancement. The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is all the same a new and identifiable undertaking separate and distinct from the existing business. In order that the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... physically and separate industrial unit which may exist on its own as a viable unit. An undertaking newly formed should be in physical identity and the old unit be preserved. The fact that if there was common management or separate accounts had not been maintained would not lead to the conclusion that there were not separate undertakings. Even if separate accounts are not maintained, the investment on each of the units can be reasonably determined with the material, which the assessee may make available with the department. 11. In the background of the law, if we look at the facts of the case, the assessee set up an undertaking in the third floor of the Golden Enclave which is a software technology park. It was commenced prior to 1993. It is enjoying the benefit under Section 80HHE of the Act. It is not eligible for the benefit under Section 10A of the Act as it was commenced prior to 01.04.1994. Assessee wanted to expand the business. Therefore, a request was made to the authorities for permission to expand the business. Permission was granted. As an expansion, the assessee has set up one unit in Kadugodi and two units in the second floor of the same building on 16.11.1995 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee has raised invoices on its customers, which included foreign tax (VAT/GST). The assessee has also collected sale proceeds inclusive of foreign VAT/GST. Accordingly, the assessee included foreign tax VAT/GST as part of export turnover , while computing deduction u/s 10A/10AA/10B of the Act. The A.O. took the view that these taxes collected from customers are required to be remitted to the Government and hence these taxes cannot form part of component of export turnover. Accordingly, the A.O. excluded foreign VAT/GST amounts from the amount of export turnover. It is pertinent to note here that the deduction allowable u/s 10A/10AA/10B of the Act is computed in proportion of export turnover to the total turnover on the Profits of business. Accordingly, if the export turnover is reduced then the deduction allowable under the above said sections shall also be reduced correspondingly. Hence, the assessee is objecting to the action of the A.O. 13.3 We heard the parties and perused the record. We notice that this issue is covered by the decision rendered by Hon ble jurisdictional Karnataka High Court in the assessee s own case reported in 382 ITR 179. The relevant observat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to be collected back. In that event the assessee has to return back the amount of refund along with interest u/s 234D of the Act. 14.3 The assessee followed the practice of accounting for interest receivable on income tax refund due to it on accrual basis. It was also accounting for interest payable by it u/s 234D of the Act also on accrual basis. Before the A.O., the assessee submitted that the net interest income (interest receivable and interest payable) relating to income tax refund should not be taxed on accrual basis, even though the assessee has accounted for the same on accrual basis. The A.O. accepted the claim of the assessee that interest accounted by it on accrual basis should not be assessed to tax. However, he noticed that the assessee has received interest during the years under consideration and accordingly proposed to assess the interest so received u/s 244A of the Act. For example, the interest received by the assessee in the year relevant to 2009-10 was ₹ 25.92 crores. The A.O. took the view that the amount of ₹ 25.92 crores received by the assessee is liable to be taxed on receipt basis. However, the assessee objected to the said proposal als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tting the matter back to the assessing officer? The assessee Company had been granted o sum of ₹ 84,34,064/- as interest under Section 244-A of the Act during the financial year 1998-99. The assessee Company was asked to clarify whether the said interest had been included in the return of income. In reply it was stated by the assessee that it has riot been offered for tax in the present assessment year. Further it was stated that the same has been offered for tax from the assessment year 2002-03. Therefore, the said interest income was considered for addition under the head income from other sources. Aggrieved by the said order the assessee preferred an appeal to the Commissioner of Income-Tax(Appeals), who upheld the order of the assessing authority. Aggrieved by the same, the assessee preferred an appeal to the Tribunal 5. The Tribunal held that unless the interest accrues to the assessee irrevocably in the sense, that the same would not be withdrawn by the Department subsequently, the liability to include the interest in the income does not arise. The very concept of accrual supports this finding and also the Supreme Court in 37 ITR 66 has though explained the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an income liable to tax. However, following the decision of the High Court referred above, this issue was restored to the file of the A.O. for the limited purpose of computing the taxable amount. 14.7 Since the facts are identical in this year also, following the decision rendered by the High Court, we also restore this issue to the file of the A.O. with the direction to ascertain the interest, if any, withdrawn out of the interest given to the assessee u/s 244A of the Act in the respective years and reduce the same from the interest income and tax the balance amount. We order accordingly. 15. ISSUE NO.12 pertains to deduction claimed by the assessee u/s 80IB of the Act. 15.1 This issue is urged by the assessee in assessment year 2009-10, 2010-11 2011-12. The case of the A.O. is that the assessee has not allocated proportionate corporate expenses to the unit claiming deduction u/s 80IB of the Act, thereby inflating its profit and claimed more amount of deduction. The A.O. reduced the claim in assessment year 2009-10 2010-11. However, in 2011-12, he accepted the contentions of the assessee and accordingly did not allocate corporate expenses in pursuance of directio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in assessment year 2008-09, wherein it followed the decision rendered by the Tribunal for assessment year 2007-08, wherein the decision rendered in assessment year 2004-05 had been followed. 15.4 We have considered an identical issue in this order in the context of allocation of corporate expenses to undertakings claiming deduction u/s 10A/10AA/10B of the Act (Issue no.8). We have restored this issue to the file of the AO for the reasons discussed in issue no.8. Though the issue herein is contested in the context of deduction u/s 80IB of the Act, yet the underlying facts are identical with issue no.8, discussed supra. Accordingly, in order to maintain uniformity, we feel it proper to restore this issue to the file of AO with similar directions. 16. ISSUE NO.13 pertains to eligibility of the assessee to claim deduction u/s 80IB of the Act on the profit derived on sale of monitors. 16.1 The AO rejected the claim for deduction u/s 80IB of the Act in respect of profit derived from trading of monitors. This issue is urged in Assessment Years 2009-10 to 2010-11 by the assessee and in AY 2011-12 by the revenue. 16.2 We have noticed earlier that the assessee is having ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the aforesaid information was furnished, the assessing authority proceeded with the assessment order holding that the assessee has furnished incomplete details, only value of monitors which have been sold separately are given and details of monitors sold as a component with the computer has not been furnished. Therefore, he took the average value on the basis of the details furnished filed in Annexure and did not extend the benefit of section 80-IB in respect of the monitors which were sold as a part of the computer. In the aforesaid tabular column, it is shown that the assessee has sold 25,681 monitors, i.e., they are purchased and sold as monitors and the value of the same is given and the assessee has not claimed benefit under section 80-IB in respect of the said amount. He has also given the particulars of the monitors sold along with the computers. 27,736 monitors were sold as a part of the computer. The assessee has pleaded its inability to give the value of the said monitor because the said monitor was sold as a part of the composite value of the computers and the assessee is claiming benefit under section 80-IB in respect of the total consideration. As set out earlier the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s part of computers. 17. ISSUE NO.14 relates to the issue of eligibility of the assessee to claim deduction u/s 80IB of the Act in respect of other incomes received by it. 17.1 This issue arises in assessment years 2009-10 2011-12. The A.O. took the view that the other income, which consisted of rental income and interest income is not eligible for deduction u/s 80IB of the Act, since the same does not fall under the category of profit derived by industrial undertaking . The Ld. DRP confirmed the view of the A.O. in assessment year 2009-10. However, the Ld. DRP directed the A.O. to allow deduction u/s 80IB of the Act in respect of other income in assessment year 2011-12. Hence, the assessee is in appeal before us in assessment year 2009-10 and the revenue is in appeal before us in assessment year 2011-12. 17.2 We heard the parties on this issue and perused the record. We notice that the coordinate bench of the Tribunal has considered an identical issue in assessment year 2008-09 and has decided this issue against the assessee. The Ld. A.R. submitted before us that the Hon ble High Court of Karnataka has examined a similar claim in the context of deduction claimed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e issue are stated in brief. The assessee has set up a new industrial undertaking at Baddi, Himachal Pradesh, which is eligible for deduction u/s 80IC of the Act. The A.O. noticed that assessee has shown certain miscellaneous income and claimed deduction u/s 80IC of the Act in respect of the miscellaneous income also. The A.O. took the view that the miscellaneous income cannot be considered as income derived from industrial undertaking and accordingly disallowed the same while computing deduction u/s 80IC of the act. The DRP confirmed the order of A.O. in assessment year 2009-10. However, DRP directed the A.O. to allow the deduction on miscellaneous income also in other years. 18.3 We heard the parties and perused the record. Before us, the assesseereferred to the decision of the coordinate bench of ITAT in assessment year 2008-09 wherein an identical issue was examined and it was rejected by the Tribunal with the following observations: 41. We have heard the learned Authroised 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brief. The A.O. noticed that the assessee has incurred various expenses in foreign currency under different heads. The issue is whether these expenses are required to be deducted from export turnover as required under the definition of the term Export turnover for the purpose of computing deduction u/s 10A/10AA/10B of the Act. 19.3 We notice that the term export turnover is defined as under in the Explanation given under section 10A of the Act:- iv) export turnover means the consideration in respect of export by the undertaking of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India; Under section 10AA of the Act, the term export turnover is defined as under:- (i) export turnover means the consideration in respect of export by the undertaking, being the Unit of articles or things or services receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has incurred expenditure in foreign currency under 3 categories. a) Expenditure on project allowances, salaries and wages, staff welfare, travelling expenses and insurance expenses. b) Expenditure under the head Legal Professional fees , which consisted of brokerage and commission, fees for technical services and legal and professional charges. It was explained to the A.O. that the fee for technical services primarily consisted of sub-contracting charges paid to various sub-contractors, who were engaged for the purpose of delivery of computer software to its overseas customers. It was explained that this payment is in the nature of software development expenses paid to technical personnel other than its own employees engaged in on site development. Accordingly, it was submitted that these expenses are also form part of direct cost incurred in development of software. c) The assessee has also incurred expenses under the head other expenses , which consisted of advertisement, communication expenses, conveyance, insurance, miscellaneous purchases, recruitment, training and development, repairs, etc. It was submitted that these expenses are also direct expenses incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10A(4) of the Act and also placing strong reliance on the decision of the CIT(A) for the AYs 01-02 and 02-03 had argued that the exclusion of above sums of communication link and other reimbursements, VAT/GST, telecommunication expenses and expenditure in foreign currency as carried out by the AO be vacated. 15.1. After critically analyzing the rival submissions and also drew strength from his earlier decision on a similar issue, the Ld.CIT(A) has held that no exclusion was required on this issue and, accordingly, directed the Ld. AO to re-compute the deduction u/s 10A. 15.2. Protesting against the action of the Ld. CIT(A), the Revenue has brought up this issue before us for redressal. It was the case of the Revenue that the Ld.CIT(A) has grossly erred in deciding the issue in favour of the assessee by following the decision of Hon'ble Tribunal in the case of Infosys Technologies Limited which has been challenged before the Hon'ble High Court. Another point on which the Revenue found fault with the CIT(A) was that the decision relied on by him was rendered with regard to deduction u/s 80HHC whereas the issue before him was the claim u/s 10A of the Act. It was, f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the software. However, the assessee company's contention was that - 15.1 The reimbursement of certain expenses was also in the nature of export as the same was paid pursuant to the contract of sale of computer software. Alternatively, if it is held that the said sum does not form part of sale proceeds of export turnover then similar amount should be reduced from the total turnover also as held by Bombay High Court in Sudarshan Chemicals reported in 245 769. Alternatively, the AO should have consistently applied the rationale that what is not turnover in the first place cannot be part of either export turnover or total turnover. 14.1, After considering the rival submissions, the Ld. CIT(A) took a view that this issue was covered by his decision for the AYs 01-02 and 02-03 and holds good for the AY under dispute also and, accordingly, directed the AO to consider the reimbursements as part of export turnover for the purpose of computing deduction u/s 10A. 14.2. In respect of Telecommunication expenses, the Ld. AO retied on the definition of the export turnover to exclude of the said expenses as expenses attributable to delivery of computer software and exclud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he computer programmes developed by them. Hence, expenses in foreign currency were not to be reduced for ascertaining the export turnover. This bench in the case of M/s.Relq software Pvt. Ltd. in ITA No:767/Bang/2007 vide order dated 16th May 2008 has also held that the on-site expenses for development of computer software is not in the nature of technical services. It will be useful to reproduce para 14 and 15 from that order:- 14. During the course of proceedings before us, the learned AR su'dmitted that the issue stands decided in favour of the assessee by the Tribunal in the case of I. ACIT v. M/s.Infosys Ltd.653 969(B)/2006 2. M/s.TataElxsi Ltd. 315(B)/2006 dt 16.10.2007 3. M/s.I-Gate Global Solutions Ltd. v.ACIT (Supra) 15. We have heard both the parties. Deduction u/s 10A is available in respect of profit or gains derived from an undertaking from the export of articles or things or computer software. One has to understand the meaning of computer software with reference to the fact that it is preceded by articles or things. Deduction u/s 10A was allowed if export proceeds are from the export of articles or things or computer software. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apportionment is not desirable. We confirm the finds of the learned CIT(A) that such apportionment cannot be done. 24.7. In respect of telecommunication expenses, only those expenses which are relevant for the delivery of software are to be excluded. No effort has been made by the assessing officer to ascertain the telecommunication expenses relating to the delivery of the software. This Bench in the case of I-Gate Global Sales held that 80% of unlinking charges should be reduced from the export turnover. Such finding of the learned CIT(A) was confirmed on the basis of the fact that the learned CIT(A) discussed the software development with a number of representatives of various companies and noticed that 80% of the uplinking charges are incurred for the delivery of software. We are not having the details of the unlinking charges, hence, the issue of disallowance of telecommunication expenses relating to the delivery of software is restored on the file of the assessing officer. The assessing officer will give opportunity to the assessee to furnish the details in respect of telecommunication expenses fur the delivery of software. 14.7. As similar issues have been decide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services has been examined by the coordinate bench in assessment year 2004-05 and the Tribunal has taken the view that the cost incurred outside India in development of software would not fall under the category of expenses incurred in providing technical services outside India as mentioned in the definition. Accordingly, we are of the view that the expenditure incurred in development of software and which forms part of direct cost of development of software would not fall under the category of technical services or services rendered outside India, as contemplated in the definition of Export turnover. Hence the same is not required to be excluded from export turnover. Accordingly, what is required to be excluded is the expenses specifically mentioned in the definition of export turnover , viz., the expenditure incurred on freight, telecommunication charges or insurance attributable to the delivery of the computer software outside India or expenses, if any incurred in foreign exchange in providing technical services outside India alone are required to be excluded from the export turnover. 19.10 Further, if any amount is excluded from export turnover , the same is requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asures for realizing its price. Primarily this fall into two categories, viz (a) Time and Material, which means that the price realized is linked to the efforts for the computer software delivered and the tools and equipment, identified resources used for the same. (b) Fixed price contracts, wherein the price realized is with reference to milestones for delivery of computer software. The nomenclature of 'reimbursement is only representative of the customers having paid the price for the computer software delivered in terms of identified expenses which are reimbursed pursuant to the contract of sale of computer software. (ii) Asset Reimbursement: INR 87,383,367 Some customers request the Company to purchase specialized equipment's with an obligation to reimburse the cost. The payments made for acquiring the assets which are used in software development for the customers are debited to the P L account, whereas the reimbursements received from customers are credited to the P L account since it is a mechanism for realizing the consideration for export of software. Alternatively, the amount shown as asset reimbursement under the sales revenue is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /B /2006, 468 /B /2006, 469 /B /2006, 817 /B /2007,624 /B /2007.1178 /B /2008,C0 no. 77 /B /2007, ITA 1072 /B /2007, for AY 2001-02 to 2004-05. This order of the Tribunal has attended finality and revenue had not preferred any further appeal before the Hon'ble High Court. (viii) It is also important to highlight and submit that along with the Bangalore bench of Hon'ble Tribunal, other co-ordinated benches of the Hon'ble Tribunal have also expressed similar view holding that a software development onsite will not tantamount to rendition of technical services and the cost incurred towards travel, lodging and other cost should not stand excluded and they should form part of the export turnover and therefore of total turnover too. (ix) In this connection reliance is placed on the decision by this Hon ble Tribunal in Infosys Technologies (ITA No. 50/B/2001) and Relq Software Pvt. Ltd. (ITA 767/B/2007). In this case, this Hon'ble Tribunal was pleased to refer to the decision rendered by the coordinated benches in Hyderabad Bench in the case of Patni Telecom P Ltd (ITA no.5/H/2005 and 354/H/2006) and Chennai Bench in the case of Changepond Technologies P Ltd ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount is required to be excluded from export turnover, then the same shall be excluded from the total turnover also, as held by Hon ble High Court of Karnataka in the case of CIT Vs. Tata Elxi Ltd. 204 Taxmann.com 321 and also by Hon ble Supreme Court in the case of CIT Vs. HCL Technologies Ltd. (C.A. No.8489-8490). 20.9 Accordingly, we direct the AO to compute the deduction u/s 10A/10AA/10B of the Act by following discussions made supra. 21. ISSUE NOs.18 19relate to allocation of corporate overheads to the units claiming deduction u/s 80IAB 80IC of the Act. 21.1 The assessee has raised this issue in Assessment Years 2009-10 to 2012-13. The revenue has raised this issue in AY 2011-12. 21.2 The assessee has developed Special Economic Zones named Kolkata Salt Lake SEZ Developer, Hyderabad SEZ Developer and electronic City SEZ Developer. It has claimed deduction u/s 80IAB of the Act in respect of the above said three SEZs. The assessee has also claimed deduction u/s 80IC of the Act in respect of units located at Baddi, Himachal Pradesh. 21.3 The A.O. noticed that the assessee has not allocated common corporate expenses to these units. The AO took the view that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the file of A.O. with the direction to examine this issue afresh by considering the decision rendered by ITAT in the case of Syndicate Bank, by Hon ble Bombay High Court in the case of Godrej Boyce Manufacturing Company Ltd. 328 ITR 81 and by Hon ble Kerala High Court in the case of Dhanalakshmi Bank Ltd. 344 ITR 259. The A.O. while passing the final assessment order, duly considered the above said 3 decisions and confirmed the disallowance originally made in the draft assessment order. Aggrieved, the assessee has filed this appeal before us. 22.3 We heard the parties on this issue and perused the records. We notice that the coordinate bench has considered an identical issue in assessment year 2008-09 and the matter was restored to the file of the A.O. with the following observations: 12. Thus it is clear that the Tribunal was of the view that the disallowance made under section 14A as computed under Rule 8D(2)(iii) cannot be more than the actual expenditure which can be relatable for earning the exempt income and debited to the Profit and Loss account. In the case on hand the disallowance made by the assessee on its own is not the total expenditure debited to the profit a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... site work are included in the turnover of the respective undertakings. It was also submitted that the assessee do not maintain separate books of accounts for these centers. However, the A.O. took the view that these are independent units. Accordingly, he rejected the claim of the assessee that these are all extension centers of STP units located in India. The A.O. also took the view that profits derived from STP/SEZ units should be allocated to these cost centers and those profits should be excluded while computing deduction u/s 10A/10AA/10B of the Act. Since no specific turnover could be attributed to these centers, the A.O. estimated the profits attributable to these centers by taking into account space of the office, number of personnel employed therein, their salary, sales turnover etc. Accordingly, he computed profits attributable to each of these centers and excluded the same while computing deduction u/s 10A/10AA/10B of the Act. Ld. DRP also confirmed the view taken by the A.O. on this issue. 23.3 We heard the parties on this issue and perused the record. We notice that the coordinate bench has considered an identical issue in assessment year 2008-09 and matter was restor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction to the Assessing Officer to follow the decision of Tribunal mentioned supra. By following the earlier orders of this Tribunal, we remit this issue to the record of the Assessing Officer to consider the same in accordance with the earlier directions of the Tribunal. Consistent with the view taken by the Tribunal in the earlier years, we remit this issue to the file of the A.O. for examining it afresh in accordance with the directions given in the earlier order of the Tribunal. 24. ISSUE No.22 relates to levy of interest u/s 234B/234C/234D of the Act. This issue is urged in all the six years under consideration. Charging of interest is consequential in nature and hence this issue does not require any adjudication. 25. ISSUE NO.23 relates to rejection of claim for deduction of educational cess. 25.1 This issue is urged by the assessee in AY 2013-14 and 2014-15. The assessee claimed educational cess paid by it along with the income tax as deductible expenditure in assessment year 2013-14 and 2014-15. The assessee placed its reliance on a circular issued by CBDT (Circular F.No.91/58/66-ITJ(19) dated 18.5.1967), wherein it was stated that the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [Explanation 1.-For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91.] [Explanation 2.-For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under section 90A;] 17. Therefore, the question which arises for determination is whether the expression any rate or tax levied as it appears in Section 40(a)(ii) of the IT Act includes cess . The Appellant Assessee contends that the expression does not include cess and therefore, the amounts paid towards cess are liable to be deducted in computing the income chargeable under the head profits and gains of business or profession . However, the Respondent Revenue contends that cess is also included in the scope and import of the expression any rate or tax levied and consequently, the amounts paid towards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or tax levied on profits and gains of business or profession shall not be deducted in computing the income chargeable under the head profits and gains of business or profession . There is no reference to any cess . Obviously therefore, there is no scope to accept Ms. Linhares s contention that cess being in the nature of a Tax is equally not deductable in computing the income chargeable under the head profits and gains of business or profession . Acceptance of such a contention will amount to reading something in the text of the provision which is not to be found in the text of the provision in Section 40(a)(ii) of the IT Act. 23. If the legislature intended to prohibit the deduction of amounts paid by a Assessee towards say, education cess or any other cess , then, the legislature could have easily included reference to cess in clause (ii) of Section 40(a) of the IT Act. The fact that the legislature has not done so means that the legislature did not intend to prevent the deduction of amounts paid by a Assessee towards the cess , when it comes to computing income chargeable under the head profits and gains of business or profession . 24. The legislativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No.91/58/66-ITJ(19), dated 18-5-1967.] 27. The CBDT Circular, is binding upon the authorities under the IT Act like Assessing Officer and the Appellate Authority. The CBDT Circular is quite consistent with the principles of interpretation of taxing statute. This, according to us, is an additional reason as to why the expression cess ought not to be read or included in the expression any rate or tax levied as appearing in Section 40(a)(ii) of the IT Act. 28. In the Income Tax Act, 1922, Section 10(4) had banned allowance of any sum paid on account of any cess, rate or tax levied on the profits or gains of any business or profession . In the corresponding Section 40(a)(ii) of the IT Act, 1961 the expression cess is quite conspicuous by its absence. In fact, legislative history bears out that this expression was in fact to be found in the Income Tax Bill, 1961 which was introduced in the Parliament. However, the Select Committee recommended the omission of expression cess and consequently, this expression finds no place in the final text of the provision in Section 40(a)(ii) of the IT Act, 1961. The effect of such omission is that the provision in Section 40(a)(ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct pointed out three decisions of ITAT, in which, the decision of the Rajasthan High Court in Chambal Fertilisers and Chemicals Ltd.(supra) was followed and it was held that the amounts paid by the Assessee towards the education cess were liable for deduction in computing the income chargeable under the head of profits and gains of business or profession . They are as follows :- (i) DCIT Vs Peerless General Finance and Investment and Co. Ltd. (ITA No.1469 and 1470/Kol/2019 decided on 5th December, 2019 by the ITAT, Calcutta; (ii) DCIT Vs Graphite India Ltd. (ITA No.472 and 474 Co. No.64 and 66/Kol/2018 decided on 22nd November, 2019 )by the ITAT, Calcutta; (iii) DCIT Vs Bajaj Allianz General Insurance (ITA No.1111 and 1112/PUN/2017 decided on 25th July, 2019) by the ITAT, Pune. 32. Again, Ms. Linhares, learned Standing Counsel for the Revenue was unable to say whether the Revenue had instituted the appeals in the aforesaid matters. Mr. Ramani, learned Senior Advocate for the Appellant submitted that to the best of his research, no appeals were instituted by the Revenue against the aforesaid decisions of the ITAT. 33. The ITAT, in the impugned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decision in Unicorn Industries (supra ) can be of no assistance to the Respondent Revenue in the present matters. 37. Mr. Linhares, learned Standing Counsel for the Revenue however submitted that the Appellant Assessee, in its original return, had never claimed deduction towards the amounts paid by it as cess . She submits that neither was any such claim made by filing any revised return before the Assessing Officer. She therefore relied upon the decision of the Supreme Court in Goetze (India) Ltd. Vs Commissioner of Income Tax (2006) 284 ITR 323 (SC) to submit that the Assessing Officer, was not only quite right in denying such a deduction, but further the Assessing Officer had no power or jurisdiction to grant such a deduction to the Appellant Assessee. She submits that this is what precisely held by the ITAT in its impugned judgments and orders and therefore, the same, warrants no interference. 38. Although, it is true that the Appellant Assessee did not claim any deduction in respect of amounts paid by it towards cess in their original return of income nor did the Appellant Assessee file any revised return of income, according to us, this was no bar t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn, the Appellant Assessee had indeed addressed a letter claiming such deduction before the assessment could be completed. However, even if we proceed on the basis that there was no obligation on the Assessing Officer to consider the claim for deduction in such letter, the Commissioner ( Appeals ) or the ITAT, before whom such deduction was specifically claimed was duty bound to consider such claim. Accordingly, we are unable to agree with Ms. Linhare s contention based upon the decision in Goetze (supra ). 42. For all the aforesaid reasons, we hold that the substantial question of law No.(iii) in Tax Appeal No.17 of 2013 and the sole substantial question of law in Tax Appeal No.18 of 2013 is also required to be answered in favour of the Appellant Assessee and against the Respondent-Revenue. To that extent therefore, the impugned judgments and orders made by the ITAT warrant interference and modification. Respectfully following the decision rendered by Hon'ble Rajasthan High Court and the Bombay High Court (referred above), we hold that the education cess is allowable as deduction. We direct the AO accordingly. 26. ISSUE NO.24 relates to claim of deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to foreign currency. The same resulted in gain/loss. The assessee voluntarily disallowed the loss arising on hedging transactions relating to capital account items. It claimed loss arising on restatement of debtors, creditors, other monetary assets and also outstanding forward contracts, as deduction. The A.O. accepted the gain/loss resulting in revaluation of debtors balances, creditors balances and other monetary assets. The assessee has reported a loss of ₹ 110.74 crores as loss on restatement of forward contracts in AY 2009-10. The assessing officer, following the CBDT instruction No.3 of 2010 dated 23.3.2010, took the view that the loss arising on restatement of forward contracts is notional and contingent. He accordingly disallowed the claim of ₹ 110.74 crores (referred above). The LD. DRP also confirmed the same by observing that the said loss is only an anticipated/notional loss. 27.3 The Ld A.R submitted that the assessee had disclosed loss arising on restatement of forward contracts as on the Balance sheet in AY 2011-12 and 2012-13 also and the AO has disallowed the same in those two years also. However, there was gain on restatement of forward contract a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gn hedge transactions and hedging on ECB loans, since both the items are relating to capital account transactions. We also notice that the AO has allowed the loss arising on restatement of trade debtors, trade creditors and other monetary assets. The AO has, however, disallowed the loss arising on restatement of forward contracts. 27.6 The decision rendered by the co-ordinate bench in the case of Quality Engineering and software technologies P Ltd (supra) states that the loss arising on reinstatement of a forward contract, whose underlying assets is a revenue item, then the said loss cannot be considered as speculative loss and also not a notional loss. We notice that the details of underlying assets in respect of outstanding forward contracts are not available on record. There should not be any doubt that the value of underlying assets (in the form of debtors, creditors and other monetary assets) as on the balance sheet date, against which the outstanding forward contracts have been taken, should be more than the value of outstanding forward contracts. In that case, the loss arising on restatement of forward contract is fully allowable as deduction. Since the AO has not examine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d ECB loan and invested the same in its overseas subsidiary named Wipro Cyprus Pvt. Ltd. He noticed that the interest expenditure relating to ECB loan has been claimed as expenditure under the head Income from other sources, even though no foreign dividend income was received from its subsidiary company, cited above. Accordingly, the assessee has claimed loss. 29.2 The A.O. noticed that section 115BBD of the Act provided for taxation of dividend income received from foreign companies at concessional rate, however, subject to the condition that the Indian company should hold 26% or more right in the nominal value of the equity share capital of the foreign company. It is also provided in the said section that no expenditure shall be allowed against the dividend income under any provisions of the Act. The AO noticed that the assessee s shareholding in the foreign subsidiary was more than 26% and hence the provisions of section 115BBD of the Act are attracted. Accordingly, the A.O. took the view that the interest expenditure claimed by the assessee on the ECB loan is not allowable as deduction u/s 115 BBD of the Act, in view of the specific bar mentioned in that section. Accordingly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of this Act in computing its income by way of dividends referred to in subsection (1). (3) In this section,- (i) dividends shall have the same meaning as is given to dividend in clause (22) of section 2 but shall not include sub-clause (e) thereof; (ii) specified foreign company means a foreign company in which the Indian company holds twenty-six per cent or more in nominal value of the equity share capital of the company. The Ld. A.R. submitted that the provisions of section 115BBD are attracted only if the total income of the assessee includes any income by way of dividend declared, distributed or paid by a specified foreign company. According to Ld A.R, availability of taxable dividend income during the previous year is the sin-qua-non for invoking the provisions of sec.115BBD of the Act. He submitted that the assessee has not received any dividend income from specified foreign company during the years under consideration and hence the total income of the assessee does not include any taxable dividend inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant previous year. Accordingly, we are of the view that the A.O. was not justified in invoking the provisions of sec.115BBD of the Act for making the impugned disallowance. Since the AO has not disallowed the interest expenditure on the reasoning given by Ld DRP, we do not find it necessary to address the same. 30. ISSUE NO.28 relates to disallowance of part of advertisement, publicity and sales promotion expenditure treating the same as brand building expenses . This issue arises only in assessment year 2012-13 in the appeal of the assessee. 30.1 The facts relating to this issue are stated in brief. The A.O. noticed that the assessee has claimed huge expenses on advertisement, publicity and sales promotion . The A.O. took the view that these expenses would confer a benefit of enduring nature to the assessee and accordingly, took the view that the same shall constitute capital expenditure in the hands of the assessee. Accordingly, the AO asked the assessee to explain as to why the expenditure claim of the assessee should not be disallowed. The assessee submitted that the advertisement expenses are incurred to promote its consumer care products and it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt has held as under:- 4. The Tribunal has rightly noticed and referred to the decision of the Delhi High Court in Commissioner of Income Tax Vs. Pepsico India Cold Drink Ltd. in ITA No. 319/2010, decided on 30.03.2011 wherein, the judgment of the Supreme Court in Madras Industrial Investment Corporation Vs. Commissioner of Income Tax, 225 ITR 802 (SC) was examined and it was observed that the assessee is entitled to claim deferred revenue expenditure but the Assessing Officer cannot treat the revenue expenditure as deferred revenue expenditure. The reason is that the Act itself does not have any concept of deferred revenue expenditure. Even otherwise, there are a number of decisions that the advertisement expenditure normally is and should be treated as revenue in nature because advertisements do not have long lasting effect and once the advertisements stop, the effect thereof on the general public and customer diminishes and vanished soon thereafter. Advertisements do not leave a long lasting and permanent effect in the sense that the product or service has to be repeatedly advertised. Even otherwise advertisement expense is a day to day expense incurred for running the bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure would be for promotion of brand value. Hence, we are of the view that the AO has made the ad-hoc disallowance only on surmises and conjectures. The Ld. CIT- DR, while arguing on behalf of the department, also could not cite any judicial precedents in favour of the Revenue. Accordingly, following the decisions rendered by Hon ble Delhi High Court, referred above, we hold that the AO was not justified in disallowing part of advertisement expenses and accordingly direct him to allow the entire advertisement expenses claimed by the assessee. 31 . ISSUE NO.29 relates to disallowance of fees paid to Registrar of companies for increasing the Authorized capital of the assessee company. The assessee is urging this issue in its appeal filed for assessment year 2011-12. 31.1 During the year relevant to the assessment year 2011-12, the assessee has increased its authorized capital and accordingly, it paid a sum of ₹ 31.48 lakhs as fee to Registrar of Companies (ROC). The assessee claimed the same as revenue expenditure. However, the A.O. disallowed the same by following the decision rendered by Hon ble Supreme Court in the case of Punjab Industrial Corporation Ltd. (225 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be covered by the exception given u/s 9(1)(vi) of the Act. However, the A.O. noticed that an identical issue has been examined by the jurisdictional Karnataka High Court in the assessee s own case reported in 355 ITR 284 and the issue has been decided against the assessee. Accordingly, the A.O. held that the payment made to M/s. Gartner Group is in the nature of royalty and assessee is liable to deduct TDS from the said payment u/s 195 of the Act. Since the assessee did not deduct TDS, the A.O. disallowed the payments made to Gartner Group in the years relevant to the assessment years 2010-11 to 2014-15 by invoking provisions of section 40(a)(i) of the Act. 32.2 The Ld. A.R. admitted that an identical issue has been decided against the assessee by Hon ble Karnataka High Court in its own case referred above. He submitted that the Hon ble Karnataka High Court, however, did not have occasion to examine the applicability of exceptions provided u/s 9(1)(vi)(b) of the Act to the facts of the assessee s case. He submitted that the provisions of sec.9(1)(vi)(b) states that if any royalty is paid for the purposes of business carried on outside India or for the purposes of making or earn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We heard Ld. D.R. on this issue and perused the record. There is no dispute with regard to the fact that identical payments made to M/s Gartner Group has been held to be royalty in the years relevant to assessment years 2001-02 to 2003-04 within the meaning of section 9(1)(vi) of the Act by Hon ble jurisdictional Karnataka High Court in the assessee s own case reported in 355 ITR 284. It is the case of the Ld A.R that the Hon ble Karnataka High Court did not have occasion to examine the applicability of exceptions provided in sec.9(1)(vi) of the Act. Hence, the Ld. A.R. has taken an alternative contention that the royalty was paid for the purpose of earning income from a source outside India. Accordingly, it was contended that the said payment would be covered by exception provided in sec.9(1)(vi). Accordingly, it was contended that the amount so paid to Gartner Group, shall not be deemed to accrue or arise in India within the meaning of section 9(1)(vi) of the Act. Accordingly, it was contended that there is no liability for the assessee to deduct tax from the said payment and hence the A.O. was not justified in disallowing the payment by invoking the section 40(a)(ia) of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chnical services were not utilised for its business activities of production in India, but it is further necessary for the assessee to show that the technical services were utilised in a business carried on outside India. Therefore, we cannot also approve of the Tribunal s conclusion in para 29 of its order to the extent it seems to suggest that the assessee satisfies the condition necessary for bringing its case under the first exception. Be that as it may, as we have already pointed out, since the source of income from the export sales cannot be said to be located or situated outside India, the case of the assessee cannot be brought under the second exception provided in the Section. 32.6 It can be noticed that the Hon ble Delhi High Court has made distinction between source of income and source of receipt of monies . So long as the export contracts are concluded in India, the source of income is treated as located or situated only in India. The Ld. A.R. placed his reliance on the decision rendered by Hon ble Madras High Court in the case of Aktiengesellschaft Kuhnle Koop and Kausch(supra). However, the Hon ble Delhi High Court has observed that the decision rendered by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the export sales proceeds received from goods manufactured and exported from India constitute a source inside or outside India. To decide the same we have to take a pragmatic and a practical view and not approach the question from a theoretical perspective. Accordingly, following the decision rendered by jurisdictional Hon ble Karnataka High Court in the assessee s own case reported in 355 ITR 284 and also the decision rendered by Hon ble Delhi High Court in the case of Havells India Ltd. (supra) we hold that the A.O. was justified in holding that the payment made to M/s. Gartner Group is in the nature of royalty within the meaning of section 9(1)(vi) of the Act and hence the assessee is liable to deduct tax at source from the said payment u/s 195 of the Act. In view of the default on the part of the assessee in not deducting the tax at source, the A.O. was justified in making the disallowance of payment made to M/s. Gartner Group by invoking provisions of section 40(a)(i) of the Act. 32.7 The assessee has raised one more alternative contention to press that the amount disallowed u/s 40(a)(i) of the Act would go to increase the profits of the undertakings and hence the el ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e above said case:- The difficulty faced by the tax payers relating to credit of tax deducted at source, i.e., TDS, which stands paid by the deductor was considered by the Delhi High Court in a Public Interest Litigation in Court On its Own Motion vs. Commissioner of Income Tax, 2013 (352) ITR 273. The Court found that a large percentage of cases were coming up where an assessee was entitled to be given the credit of TDS, which had been deducted by the deductor, but, was not being given credit by the Income Tax Department on account of the fact that the TDS was not reflected in Form-26AS for various reasons. The Court noticed that there were cases where the deductor failed to upload the correct and true particulars of the TDS, which had been deducted, as a result of which, the assessee was not given credit of the tax paid. The Court also noticed that there were cases where the details uploaded by the deductor and the details furnished by the assessee in the income tax returns were mismatched and, on this ground, credit was not given to the assessee. The Delhi High Court also noticed that on account of mismatch, the tax payer was required to approach the income tax author ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tched amount, the said Assessing Officer will verify whether or not the deductor has made payment of the TDS in the Government Account and if the payment has been made, credit of the same should be given to the assessee. However, the Assessing Officer is at liberty to ascertain and verify the true and correct position about the TDS with the relevant AO (TDS). The AO may also, if deemed necessary, issue a notice to the deductor to compel him to file correction statement as per the procedure laid down. In the light of the decision of the Delhi High Court and the instructions issued by the CBDT, we find that the admitted position in the instant case is, that the returns were processed and accepted by the Income Tax Department. A sum of ₹ 43,740/- was refunded and the balance amount was not refunded on account of the TDS being mismatched. It is also admitted that the TDS certificates were also filed by the assessee. It is also an admitted position that the deductor in the instant case is a Government Department. We find from a perusal of the counter affidavit that no effort was made by the assessing officer to verify the fact as to whether the deductor had made the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is allowed. A writ of mandamus is issued commanding respondent no.2 to refund an amount of ₹ 1,88,631/- along with interest as per the law within three weeks from the date of the production of a certified copy of this order is produced before respondent No. 2. Accordingly, we are of the view that this issue requires fresh examination at the end of the A.O. by duly considering the TDS certificates furnished by the assessee and also making due enquiries, if required. Accordingly, we restore this issue to the file of the A.O in all the years under consideration. 34. ISSUE NO.32 relates to tax charged by the assessing officer u/s 115O of the Act, being the tax payable on distributed profits by domestic companies. This issue is being contested by the assessee in A.Y. 2011-12. 34.1 The Ld. A.R. submitted that the A.O., without making any discussion in the draft assessment order, has added a sum of ₹ 41.37 crores u/s 115O/115P of the Act in the final assessment order. He submitted that Section 115O of the Act relates to levy of tax on distributed profits by domestic companies and section 115P relates to the interest payable for non payment of tax levied u/s 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Ld. DRP also confirmed the view taken by TPO by observing that in A.Ys 2006-07 to 2008-09 DRP has rejected the objections of the assessee. 36.2 The Ld. AR submitted that an identical issue was examined by the coordinate bench in A.Y. 2008-09 and ALP rate of interest was fixed at LIBOR rate + 150 basis point. The Ld. A.R. submitted that the revenue has accepted the order passed by Tribunal on this issue by not challenging the same before Hon ble High Court. The Ld. A.R. further submitted that the TPO himself has adopted libor/Euribor + 150 basis point in A.Y. 2015-16. Accordingly, he submitted that the TPO was not justified in adopting higher rate of interest. 36.3 The Ld. A.R. further submitted that the Hon ble High Court of Rajasthan has examined an identical issue in the case of Vibhav Gems Limited (ITA No.14/2015 dated 13.10.2017). In the above said case the ITAT had determined the interest rate to be adopted at Libor rate + 200 basis points in respect of interest free loan given by the assessee before High Court to its associated enterprises. The Hon ble High Court held that the mark up of 200 basis points is not proper. Accordingly, the Ld. A.R. submitted that the ALP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e compared with the guarantee provided by banks (named as bank guarantee ) for determining ALP of international transactions. The Ld. A.R. also further submitted that the Hon ble Supreme Court has upheld the view of Hon ble High Court in the case of Glenmark Pharmaceuticals Ltd. (Civil appeal No.12632/2017 dated 11.12.2018) by holding that the TP adjustment made by adopting bank guarantee rate of 3% in respect of corporate guarantee is not justified. Accordingly, the Ld. A.R. submitted that the TP adjustment made by adopting the rate of 3%, which is usually bank guarantee rate, should not be sustained. 37.3 We heard Ld. D.R. on this issue and perused the record. We notice that the assessee has collected guarantee commission @ 0.50% p.a. on the value of corporate guarantee provided by it to its associated enterprises. It is also stated that the above said rate of 0.50% was determined by the assessee under CUP method described in transfer pricing report. We notice that the TPO has adopted the rate of 3% without furnishing any basis or comparables though the assessee has placed its reliance on the decision rendered by Tribunals on this issue. It is stated that the guarantee commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices activities are at arm s length. The data provided by the assessee in this regard for assessment year 2013-14 2014-15 is extracted below:- In USD per person month Particulars AE Non-AE Offshore India based services 3,800 3,754 Onsite foreign bases services 11,000 10,599 (as per transfer pricing report of Assessee of AY 2014-15 Page no.28) In USD per person month Particulars AE Non-AE Offshore India based services 3,800 3,754 Onsite foreign bases services 11,000 10,873 38.3 The TPO however took the view that CUP method is not the appropriate method. Hence, he issued a show cause notice to the assessee asking for explanations. The assessee submitted that software services provided to Non-AEs constitute about 97% of the total turnover and the services provided t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... milarity. Here it would be worthwhile to mention of decision of Special Bench of ITAT Bangalore in the case of Aztec Software and Technology Services Ltd. v. ACIT (2007) 107 ITD 141 (ITAT Bangalore SB) which has been upheld by Karnataka High Court in Aztec Software and Technology Services Ltd. v. ACIT (2011) 209 Taxmann 187 (Karnataka HC). The ITAT held that CUP is essentially a comparison of prices charged for the property or services transferred in a controlled transaction to a price charged for property or services transferred in a comparable uncontrolled transaction. The bedrock of this method is the identification of an identical transaction, in a situation where a price is charged for products or services between unrelated parties. Even minor differences in contractual terms or economic conditions, geographical areas, risks assumed, functions assumed, etc could affect the amount charged in an uncontrolled transaction. Comparability under this method depends on close similarities with respect to various factors. In the case of UCB India, Hon ble ITAT Mumbai held that Under the CUP method, the properties of a product and accompanying circumstances and conditions have to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T.P study furnished by the assessee. He applied his own filters and selected two comparable companies, viz., M/s Infosys Ltd and M/s L T Infotech, whose average margin (OP/OC) worked out to 31.18% in AY 2013-14. Accordingly, the TPO made Transfer pricing adjustment of ₹ 56.61 crores in AY 2013-14. He also made TP adjustment in AY 2014-15 also under similar methodology. Ld DRP confirmed the order of TPO in both the years. 38.3 The Ld. A.R. submitted that the assessee is following same methodology of bench marking its international transactions with A.Es over the years and it has been accepted by the TPO in the past. He further submitted that the transaction with AEs constitutes only about 3% of the turnover of the assessee. He submitted that in assessment year 2013-14, the total turnover of the assessee was ₹ 33,226 crores, while the turnover with the AEs was ₹ 861 crores only. Similarly, in assessment year 2014-15, the total turnover was ₹ 38,757 crores and the turnover of the A.E. was only ₹ 1,438 crores. The Ld. A.R. submitted that the nature of services provided to AEs and Non-AEs are similar in nature and the assessee has demonstrated the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... length price of such international transactions of rendering software development services entered into by the appellant. Therefore, in the case of the appellant, CUP could appropriately be applied considering internal comparable uncontrolled transactions entered into by the appellant with unrelated parties. 6.11. The TPO was not justified in ignoring the aforesaid comparable uncontrolled transactions placed on record and instead embarking upon a less direct benchmarking exercise by resorting to comparison of profits of external comparables. The Ld A.R also relied upon the decision rendered by the Bangalore bench of Tribunal in the case of e 4 e Business solutions (IT(TP)A No.324 (B)/2015), wherein also identical view has been expressed. 38.4 The Ld. A.R. further submitted that the assessee has benchmarked its international transactions with its AE under TNMM method also. This exercise was carried out by the assessee, only to strengthen its submission that the transaction with its AEs are at arm s length. However, the TPO has taken the view that the assessee is combining two methods prescribed under the rules which is not correct understanding of TPO. Accordingly, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noticed that the assessee has furnished details of fees collected from AEs and Non-AEs, the nature of services provided to both the parties, copies of sample invoices. We have also noticed that the TPO has not examined them at all. Accordingly, we restore this issue to the file of AO/TPO for examining the issue under internal CUP method by considering all the details and information furnished by the assessee. We order accordingly. 39 . ISSUE NO.37 relates to transfer pricing adjustment made for Specified Domestic Transactions. This issue is being urged by the assessee in assessment year 2014-15 . 39.1 The facts relating to the issue are stated in brief. The assessee is providing software and IT services to its customers through various undertakings located in Special Economic Zone (SEZ) or Software Technology Park (STPI) or other places. Each of the SEZ/STPI/other undertakings are owned by the assessee. These undertakings would independently enter into a contract with each of their customers for providing software and IT services on comprehensive basis. The undertaking which enters into a contract for providing software services is referred to as Primary Unit . It may so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions of sec.10AA(9). Hence the profits of units eligible for deduction u/s 10AA of the Act are required to be computed by determining the profits of the eligible undertaking by substituting actual consideration with market value . The expression market value is also defined in the Explanation given under Sec. 80IA(8) and also in the Explanation given under sec.80A(6) of the Act. In respect of Specified domestic transactions covered under sec.92BA of the Act, the market value means the arm s length price as defined in clause (ii) of section 92F. 39.4 Hitherto, only international transactions entered by an assessee with its Associated Enterprises were subjected to Transfer pricing regulations. The provisions of sec.92BA were introduced in order to determine the Arms Length Price of specified domestic transactions, consequent to the suggestions given by Hon'ble Supreme Court in the case of Glaxo Smithkline Asia (P) Ltd (Appeal (civil) No.18121/2007 dated 26-10-2010). It is stated so by the Parliament in the Memorandum to Finance Bill, 2012 when the above said section was introduced in the Income tax Act. Accordingly, under sec.92BA of the Act, certain domestic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unless there is a tax benefit. Hence, the TPO proposed to make TP adjustment for Specified domestic transaction by adopting the net margin @ 15.58% as ALP margin, i.e., the TPO proposed to restrict the profits of the eligible units to 15.58% and assess the profits declared by the undertakings over and above the above said rate as Transfer pricing adjustment. 39.6 The assessee contended that the SEZs have been created by taking into account various business objectives. It was further stated that the assessee company is making healthy margin at entity level under its IT Non-IT segments. The assessee also submitted that the TPO has considered only those undertakings which have earned healthy margin and has ignored the fact that many of SEZs has also shown negative margin. It was also submitted that aggregate amount of specified domestic transactions between various undertakings constitute a small portion of the total turnover of the assessee at entity level. Accordingly, it was contended that no transfer pricing adjustment in respect of a Specified domestic transaction is warranted. 39.7 In the alternative, the assessee submitted that the TPO has proposed the Transfer prici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nit transactions including the transactions entered between one SEZ unit and another SEZ unit. He further submitted that, as per the proviso to sec.92C(4), the deduction u/s 10AA will not be available in respect of Transfer pricing adjustments made by adopting the Arms length price (ALP). Accordingly, the TPO submitted that the entire T.P adjustment has been considered as income in the hands of the assessee. One of the contentions raised by the assessee was that the TPO has not considered all SEZ units, i.e., the TPO has ignored loss making SEZ units. The TPO has replied as under in respect of this contention:- 3.4.6 Out of 28 SEZ units, TPO has considered 21 units for determination of ALP which has higher profit margin compared to the comparables margin, i.e. 15.58%. It means that units declaring higher profits and having Specific Domestic transaction are clear indication that profits were shifted from taxable units to non-taxable units. Hence, adjustment made only for units having higher profit margin and having specific Domestic transaction. Details of units having SDT as well as their profit margin their adjustment as per 92CA order and reason for determining ALP is encl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 10AA of the Act, then the addition made by the TPO would result in double taxation. (d) There is no tax arbitrage in respect of service provided by a - (i) 50% SEZ unit to another 50% SEZ unit (ii) 50% SEZ unit to a 100% SEZ unit (iii) 100% SEZ unit to another 100% SEZ unit. (e) If the transactions between above said units are removed and if adjustments are considered in respect of remaining transactions between other units (i.e., eligible unit and noneligible units; 100% SEZ units to 50% SEZ units), the addition to be made shall come down to ₹ 9.71 crores as against the addition of ₹ 135.42 crores made by the TPO. (f) If the revenue of service providing unit is reduced, then the same results in corresponding reduction of cost in the hands of service receiving unit . Accordingly, corresponding reduction of cost should be made in the hands of service receiving unit and the deduction u/s 10AA should be recomputed. It was submitted that there is no bar for making this corollary adjustment. The Ld DRP did not agree with contentions of the assessee and concurred with the views of the TPO. At the remand stage, the TPO reported to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax arbitrage may be there where the service is provided by 100% SEZ unit to a 50% SEZ unit or where the services are provided by a SEZ unit to a non-SEZ unit. (e) The TPO has determined the SDT adjustment for Service providing units only , i.e., on revenue receiving units only. The ALP amount determined by TPO should be adopted in respect of Service receiving unit also, since the same would result in corresponding reduction of costs. This principle of corresponding adjustment is provided in Article 9(2) of DTAA, which is applied in transactions between AEs based on treaty provisions. Hence the DTAA principles should be applied in respect of SDT involving two units of same assessee. This is also based on the principle that one cannot generate income out of himself. (f) Requirement of determination of market value or ALP value u/s 80IA(8) is there for both service provider and service receiver, if both the units are eligible units. (g) Restriction is placed in the first proviso to sec.92C (4) of the Act denying deduction u/s 10A/10AA/10B of the Act in respect of amount of T.P adjustment by which total income is enhanced. However, this restriction should not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omestic transaction having regard to arm s length price. The said section 92 reads as under:- Section 92. (1) Any income arising from an international transaction shall be computed having regard to the arm's length price. Explanation.-For the removal of doubts, it is hereby clarified that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arm's length price. (2) Where in an international transaction or specified domestic transaction, two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm's length price of such benefit, service or facility, as the case may be. (2A) Any allowance for an expenditure or interest or allocation of any cost or expense or any income in relation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit. Explanation.-For the purposes of this sub-section, market value , in relation to any goods or services, means- (i) the price that such goods or services would ordinarily fetch in the open market; or (ii) the arm's length price as defined in clause (ii) of section 92F, where the transfer of such goods or services is a specified domestic transaction referred to in section 92BA. The provisions of sub.sec (9) of sec.10AA specifically states that the provisions of sub-section (8) and sub-section (10) of section 80IA shall, so far as may be, apply in relation to the undertaking referred to in this section as they apply for the purpose of the undertaking referred to in section 80-IA. The provisions of sec. 80IA(8) mandates substitution of actual price with market value when there is transfer of goods or services (a) from eligible business to any other business carried on by the assessee or (b) from any other business to elig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to sec.80IA(8) of the Act, the market value for specified domestic transactions is meant as the arms length price as defined in clause (ii) of section 92F. Under section 92F(ii), the term arm s length price has been defined as under:- arm s length price means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions. Accordingly, for the purpose of sec. 10A/10AA/10B/80-IA and other incentive provisions, the market value of the transaction shall mean Arm s length price as determined in sec. 92 of the Act. Section 92C of the Act prescribes the modes of computation of arm s length price. 39.15 Under section 92C(4), where an arm s length price is determined by the AO under sub-section (3), the AO may compute the total income of the assessee having regard to the arm s length price so determined. It is further provided that no deduction u/s 10A or section 10AA or section 10B or under Chapter VIA shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under sec. 92C(4). 39.16 As per provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertinent to remember here that the ALP of transactions could be determined under any of the prescribed methods only. 39.20 Before us, the assessee has raised many contentions. We shall address below some of the contentions, which are legal in nature. (A) One of the contentions of the assessee is that the inter-unit transactions between two eligible units should not be subjected to ALP adjustment. We notice that the provisions of sec.80IA(8) refer to the transactions between eligible units and non-eligible units . We have noticed earlier that, in the case of the assessee, various eligible units, inter se, have also entered into transactions. We have noticed earlier that the TPO has expressed the view in his remand report that the transactions between two SEZ units (eligible units) have also been included for the purpose of determining ALP of the transactions. However, we notice that the provisions of sec. 80IA(8) cover only the transactions entered between eligible units and non-eligible units , i.e., it does not take into its ambit the transactions entered between two eligible units. Accordingly, we are of the view that there is merit in the contentions of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92(3) shall not apply to interunit transactions. Sec.92(3) of the Act prescribes a condition that, where the T.P adjustment required to be made consequent to determination of ALP has the effect of reducing income chargeable to tax or increasing loss, then the T.P provisions shall not apply. In respect of international transactions, the transaction is entered between the assessee and its Associated Enterprises. Both are two different tax entities. However, in the instant cases, the transactions are entered between two units belonging to the same assessee. Hence both the units are two arms of the same tax entity. We have earlier expressed the view that the ALP value of inter-unit transactions has to be applied in both the transacting units for the purposes of sec. 92 of the Act. Hence the substitution of ALP value (market value) in respect of interunit transactions u/s 92 of the Act is tax neutral exercise. However, the effect will be seen in this regard while computing deduction u/s 10A/10AA/10B of the Act. Accordingly, the reduction , if any, in the quantum of deduction under above sections after application of the ALP, in our view, is the Transfer pricing adjustment contemplated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 1,75,000/- before and after ALP adjustments u/s 92 of the Act, since adjustment to the inter-unit transactions have to be done in the hands of both eligible and non-eligible units u/s 92 of the Act. (b) The amount of deduction u/s 10AA worked out to ₹ 1,00,000/- prior to ALP adjustment. However, it has fallen down to ₹ 50,000/- after ALP adjustment in terms of sec.80IA(8). (c) Accordingly, the Total income has increased from ₹ 75,000/- (prior to ALP adjustment) to ₹ 1,25,000/- after ALP adjustment. On this increase of ₹ 50,000/-, the assessee is not eligible for deduction u/s 10AA of the Act. (c) It can be noticed that the reduction in the quantum of deduction u/s 10AA, i.e., ₹ 50,000/- is also the adjustment made u/s 92 of the Act in respect of Specified domestic tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d out to ₹ 1,00,000/- prior to ALP adjustment. However, it has fallen down to ₹ 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., ₹ 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 ₹ 75,000/- (prior to ALP adjustment) to ₹ 1,25,000/- after ALP adjustment. The net effect is the addition of SDT adjustment of ₹ 50,000/-. (B) Eligible Unit eligible for deduction u/s 10AA of the Act @ 50%. ILLUSTRATION 3 (Over invoicing of revenue) Transaction between an Eligible unit, which is eligible for deduction @ 50% 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oneligible unit. The said payment constitutes expenditure in the hands of Eligible Unit. Transaction Price - 1,00,000 Arms Length Price - 1,50,000 Actual Transaction SDT Adjustment Eligible Unit Non-eligible unit Total Eligible Unit Non-eligible unit Total Sales Revenue 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is also pertinent to note that the assessee and M/s Wipro Inc., USA has also entered into an agreement dated 1st April, 2005 titled as Mutual Sub-contractor Agreement , for provision of software services. 40.2 The entire work of performing contract won by M/s Wipro Inc., USA from M/s ACS State healthcare LLC, USA was allotted to the assessee herein on back to back basis as per the agreement dated 1st April, 2005, referred above. Accordingly, the assessee also performed entire work. M/s Wipro Inc., raised invoices on the above said Customer and paid 90% of the invoices value to the assessee. It is pertinent to note that the said receipt has been accepted to be at arms length. 40.3 M/s ACS State Healthcare LLC found out certain deficiencies in the services performed by the assessee and also pointed out certain violations of terms of contract while performing the services. It notified the same to M/s Wipro Inc. Thereafter a settlement was reached between the parties in order to avoid litigations. In terms of the same M/s Wipro Inc., paid liquidated damages of ₹ 62,68,00,573/- to M/s ACS State Healthcare LLC. Since the entire services have been performed by the assessee, M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... USA has been reimbursed by the assessee to M/s Wipro Inc. He further submitted that the assessee and M/s Wipro Inc., USA has entered an agreement titled as Mutual Sub-contractor Agreement dated 01st April, 2005 and the same has not been terminated yet. Accordingly, he submitted that the TPO was not correct in observing that the said agreement is not valid for the year relevant to AY 2010-11 without understanding that the said Mutual sub-contractor Agreement has not been terminated. 40.6 We notice that the assessee did not determine the Arm s length Price of the payment of liquidated damages, since it claimed the same to be mere reimbursement of expenses incurred by its foreign subsidiary. However, the TPO has taken the view that, in an uncontrolled transactions scenario, no Indian entity will pay for the litigation matters for its foreign entity. He has also further observed that the agreement entered on 1st April, 2005 cannot 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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