TMI Blog2023 (6) TMI 1118X X X X Extracts X X X X X X X X Extracts X X X X ..... e pertaining to the SWD segment - We note from the order passed by the TPO on this application u/s. 154 that the said request for recomputing the TP adjustment has not been considered by the TPO. We deem it fit and proper to restore this issue to the TPO / AO with a direction to the TPO / AO to recompute the TP adjustment, if any, to the Assessee s SWD segment after taking into consideration only the amounts pertaining to the Assessee s SWD segment and not to take into account the entity-level data as has mistakenly been done in the TP order. Adjustment for interest on advances given to overseas subsidiaries and Adjustment made for Corporate guarantee commission - HELD THAT:- We dispose of the grounds raised in this appeal pertaining to two international transactions above by directing the TPO / AO to pass an order in terms of the above provisions modifying the total income of the Appellant in terms of the aforesaid APA subject to the Appellant having filed a modified return of income as is required in law. TP adjustment on interest on delayed receivables to Overseas subsidiaries - HELD THAT:- As we think it will be appropriate to grant credit period of 45 days and inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this year also, the break-up details of Other income are not available. Accordingly, we restore this issue to the file of AO with the direction to examine the break-up details of other income which were debited into the profit loss account in earlier years and decide the issue in accordance with the discussions made supra. Accordingly this issue is partly allowed for statistical purpose. Rejection of claim for deduction u/s 10AA of the Act in respect of interest income earned by the assessee - HELD THAT:- During the year under consideration, the assessee had earned interest income on short term deposits made out of PCFC Loan and also from Surplus funds. After deducting the interest expenses, there was net surplus of 2.19 crores. AO held that the same is not eligible for deduction u/s 10AA of the Act by observing that there is no relation of interest income with the Software Development Activity of the units claiming deduction u/s 10AA. It is also not akin to investment of surpluses earned and generated from Software Development Activity, which may be regarded as profits and gains of the undertaking to the extent they are held for working capital purpose of the undertakin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of application by the assessee to RBI is not sufficient to infer that RBI has allowed extension of time for realizing sale proceeds in foreign exchange - HELD THAT:- Since this issue has been decided as stated above for the AY 2015-16 in assessee s own case [ 2022 (5) TMI 1560 - ITAT BANGALORE] accordingly, we direct the AO to allow the foreign tax State Tax paid by the assessee, to the extent not allowed as tax credit u/s 90 91 of the Act, as deduction from the business income of the assessee from the respective units. TDS u/s 195 - disallowance of payment made to M/s. Gartner Group u/s 40(a)(i) for non-deduction of tax at source - assessee submitted that it is covered under exclusion clause of royalty as per section 9(1)(vi) wherein royalty paid for the purpose of business or profession carried outside India or for the purpose of making or earning any income from any source outside India is not regarded as royalty - HELD THAT:- As decided in assessee own case this issue requires fresh examination at the end of AO. If the AO comes to the conclusion that the decision rendered in the case of Engineering Analysis Centre of Excellence P Ltd [ 2021 (3) TMI 138 - SUPREME CO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we find that such a direction was in fact issued by the DRP, we find that while computing the deduction allowable under S.10AA, the said direction of the DRP has not been given effect to. We, therefore, direct the AO to comply with the aforesaid direction of the DRP and to, accordingly, recompute the deduction allowable to the assessee under S.10AA of the Act. Credit of TDS credit on the basis of additional TDS certificates - AO denied grant TDS credit on the reasoning that the said TDS amount were not reflected in Form 26AS and the ld. DRP has also rejected the objection filed before them - HELD THAT:- If the deductor of TDS has filed the Statement of TDS with the Income tax department, then the said TDS will automatically reflect in Form 26AS. If there is failure on the part of the deductor to file statement of TDS, then it will not be reflected in Form 26AS. In our considered view, the assessee cannot be penalised for the fault of the TDS deductor in not filing statement of TDS. It is also possible that the deductor of TDS would have filed the statement of TDS belatedly - This issue requires verification at the end of AO - we restore this issue to the file of AO with the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on ECB loan taken to invest in foreign subsidiaries company, viz, Wipro Cyprus. The assessee is engaged in different types of business activities, viz., software development services and IT services; manufacture of Vanaspati/Hydro generated oils; toilet soaps; lighting products; pharmaceuticals Neutraceutical products; leather products; computers, hydraulic and pneumatic equipment; water treatment systems and solutions etc. It is also engaged in trading of servers, routers, networking equipments, spare parts, etc. The assessing officer passed final assessment order on 28.05.2021 in conformity with the directions given by the Ld DRP. The assessee is aggrieved by the order so passed by the AO and hence it has filed this appeal before the Tribunal. The assessee has raised several grounds in a detailed manner. However, the Ld Senior Counsel appearing for the assessee has advanced his arguments on issue-wise on the basis of abridged grounds of appeal. Accordingly, we find it convenient to dispose of the issues, which would, in turn, dispose of relevant grounds of appeal. 3. The ground No. 01,02, and 03 are general in nature and does not require adjudication. 4. The fourth issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ze that Wipro Holmes is a capital asset. So where is this platform recognized in fixed asset schedule? Where are the other platforms for internet of Things and Blockchain reported? ln the course of hearing on 15.11.2018, this was confronted to the AR. AR argued that it is an industry practice to claim all employee expenses as revenue expenditure. The AR was asked to furnish details of (a) number of man-days of the company in the year, (b) number of man-days that have been utilized in in-house projects, and (c) number of man-days that have been characterized as 'bench'. 'Bench' is an industry nomenclature. An employee who is on the 'bench' is not working on any client project at a given time (she might have completed one client project and is awaiting another client project). But companies generally keep these employees busy by giving them some in-house projects. Assessee was also asked to furnish some sample timesheets of persons working on the 'bench', so as to verify this fact The AO noticed that the assessee has claimed all expenses incurred in development of these software products as revenue expenditure. The AO took the view that a portion o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP declined to grant depreciation. The relevant observations made by the Ld Dispute Resolution Panel are extracted below:- 2.g With respect to the classification of assets and resultant treatment for applying correct rates the information is not sufficient. The AO initially took the stand that the assets created are software and applied 60% rate (restricted to less than 182 days). However as per the remand report the AO raised alternative argument that the depreciation may be restricted to 25%, as the assessee was creating intangible assets. The information with regard to the nature of assets created and put to use is not made available to the Panel. Hence, it is not possible to grant depreciation to the assessee in the given circumstances. 6.4 The assessee raised an alternative contention that the above said disallowance would result in increasing the profits of undertakings, which are eligible for deduction u/s 10AA of the Act and hence enhanced amount of deduction should be given to the assessee. The Ld DRP accepted the same with the following observations:- 2.11 The Panel has considered the grounds, the submissions of assessee and the Report of the AO. At the outs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oducts mentioned above are considered to be capital in nature, then the same is allowable as deduction u/s 35(1)(iv) of the Act, since it is in the nature of Scientific Research expenses. In this regard, the assessee placed its reliance on the decision rendered by Hon ble Karnataka High Court in the case of Talisma Corporation P Ltd (ITA 515/2007). The Ld DRP called for a remand report from AO, who opined that the assessee has only created intangible assets in the nature of Software platform and software codes and it cannot qualify as Scientific research activity. He also expressed the view that the decision rendered in the case of Talisma Corporation is distinguishable and cannot be taken support of by the assessee. The assessee strongly refuted the remand report given by the AO and contended that the provisions of sec.35(1)(iv) should be allowed in assessee s case and accordingly entire expenditure should be allowed. The ld DRP did not accept the contentions of the assessee and accordingly rejected the claim for deduction u/s 35(1)((iv) with the following observations:- 2.14 The contention of the assessee are carefully considered. In this regard it is relevant to examin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clusively carries on scientific research, as business activity and cases where assessee carries on a business as well as scientific research as two distinct activities. Board's circular No. 281 dated 22.9.1980 states that the deductions u/s 35 are aimed at providing incentives to encourage scientific research in India and to encourage assessee who need the output of scientific research for their business. Hence the activities of the assessee need to be examined in the light of these provision if assessee has a stream of activity called scientific research related to the business carried on by it. Whether the activities of the assessee are in the nature of scientific research or commercial activities in development of new products not amounting to scientific research needs to be addressed as per the provisions of the Act. The assessee has never made any claim for conducting scientific research in the past. The returns of income do not show any claim to that effect. Section 35 is special incentive provision where both revenue and capital expenditure are allowed fully. It is also observed that assessee has not maintained separate books of account relating to the activities of sci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t so capitalised, which was accepted by AO in the draft assessment order. Before Ld DRP, the assessee raised another alternative plea to allow the capital expenditure as deduction u/s 35(1)(iv) of the Act. However, Ld DRP rejected both the alternative pleas, viz., claim for depreciation and also claim for deduction u/s 35(1)(iv) of the Act. (iii) The Ld A.R submitted that these software products/applications/software tools/platforms, which have been developed are part of its regular business operations and the products used for inhouse only enable enhancing its capabilities and efficiencies in newer technological areas. These are normal research expenses incurred on certain futuristic and disruptive technologies in order to stay competitive and relevant in market place. The assessee has intended to use them in-house and was not meant to exploit it commercially in order to facilitate its business activities. Hence these expenses are revenue expenses only. (iv) He submitted that the intangible assets (as named by AO) are only tools and solutions deployed along with other IT services to differentiate, facilitate and have effective delivery of services. (v) Due to fast technol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee is that the expenses incurred by it on development of software/applications/tools/platforms, which were meant to be used for internal purposes, are revenue in nature. These group of products have been titled as internal intangible assets by the AO. We noticed that the AO has, however, taken the view that cost of developing these internal intangible assets are required to be capitalised, as according to him, these internal intangible assets are capital in nature. 6.10 We notice that the assessee has furnished the details relating to the above said applications/tools etc before the AO. In the details furnished before the AO, the assessee has described these items as Tools/Solutions/Platforms . The relevant details are available at pages 235 to 240 of paper book filed by the assessee. The break-up details of expenses capitalised by Ld DRP are given below:- (A) CTO PROJECTS:- (Rs. In crores) (i) CTO projects 94.81 (ii) Customer future projects 24.17 (iii) Domain Projects ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RO IMAGINE):- The acronym IMAGINE stands for Interfaces to Machine Ambient Gamified Immersive New-age Experience . It provides near human abilities of multi-model interactions through voice, vision and haptic leading to personalised experiences. The application includes Customer service, Self service, In store interaction, Product-solution user manuals etc. It involves continuing development of the product. (f) Multiple Harizone 2 to Harizone 3 projects. It also involves continuing development. (B) Customer funded projects These projects have been undertaken by CTO for customers. We noticed earlier that the expenses relating to this project has not been capitalised. Hence it is outside ambit of this issue. (C) Domain projects:- These are expenses incurred as investment in Centre of Excellence (CoE) to do research in specific domain solutions. It is stated that any outcome, which qualifies for development will go to CTO projects for development and for further funding under CTO. As the name suggests, these expenses have been incurred to do research and improve domain specific solutions. Some of the work carried out under this heading are Digital CoE, Energy Utilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. The Hon ble Karnataka High Court has held that the purchase of application software shall still continue to he revenue expenditure, in the case of CIT vs. IBM India Ltd (357 ITR 88. The relevant observations made by Hon ble Karnataka High Court are extracted below:- The Tribunal, on consideration of the material on record and the rival contentions held, when the expenditure is made not only once and for all but also with a view to bringing into existence an asset or an advantage for the enduring benefit, the same can be properly classified as capital expenditure. At the same time, even though the expenses are once and for all and may give an advantage for enduring benefit but is not with a view to bringing into existence any asset, the same cannot be always classified as capital expenditure. The test to be applied is, is it a part of the company's working expenses or is it expenditure laid out as a part of the process of profit earning. Is it on the capital layout or is it an expenditure necessary for acquisition of property or of rights of a permanent character, possession of which is condition on carrying on trade at all. The assessee in the course of its business acqu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of enduring benefit was rejected in this case. 6.15 The Bangalore bench of Tribunal was considering an issue in the case of Sasken Technologies Ltd, wherein the sale of source code of software (referred as IPR ) was claimed by the above said company as sale of capital asset and accordingly claimed that the profit arising therefrom should be assessed as Capital Gains. The AO treated the same as business income and the view of the AO was upheld by the Tribunal in its decision rendered in ITA 2546/Bang/2019 order dated 16.03.2012. The reasoning given by the Tribunal is relevant here:- 20. We have carefully considered the rival submissions. The subject matter of the Settlement Agreement dated 21.03.20216 was independently owned IPR and Foreground Information that both the parties were privy to in the course of joint development of Foreground IPR but excluding Foreground IPR. We have already reproduced clause 3.1 and 3.2 of the Settlement Agreement in the earlier part of this order. The assessee and Spreadtrum were recognized as joint owners of the independently owned IPR and Foreground Information. In this regard, we may recollect that when the assessee and Spreadtrum entered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly the sum received under the Settlement Agreement that was claimed as not taxable. It is therefore clear that the independently owned IPR and Foreground Information which partakes the character of stock-in-trade for companies like that of the assessee was not a capital asset within the meaning of section 2(14) of the Act and therefore the sum received by the assessee cannot fall within the ambit of the head of Income from Capital Gain . The assessee did not receive the sum in question for giving up any source of income as the assessee was free to exploit independently owned IPR as well as Foreground information and therefore the argument that the sum received is capital receipt for losing a source of income and therefore not chargeable to tax, is devoid of any merits. It can be noticed that the Tribunal has expressed the view that the software product developed by an Information Technology company constitutes its revenue asset (akin to stock in trade) and hence the revenue generated on its sale or licensing, constitutes business income. In respect of the software product so developed, the said information technology company may be holding IPR and the transfer of IPR was also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g an outlay, such as this as capital. The circumstance that the agreement insofar as it placed limitations on the right of the assessee in dealing with the know- how and the conditions as to non-partibility, confidentiality and secrecy of the know-how incline towards the inference that the right pertained more to the use of the knowhow than to its exclusive acquisition. * * *The improvisation in the process and technology in some areas of the enterprise was supplemental to the existing business and there was no material to hold that it amounted to a new or fresh venture. The further circumstance that the agreement pertained to a product already in the line of assessee's established business and not to a new product indicates that what was stipulated was an improvement in the operations of the existing business and its efficiency and profitability not removed from the area of the day to day business of the assessee's established enterprise. The above said observations were made by Hon ble Supreme Court in the context of deciding the issue whether the expenditure incurred by a pharma company for acquiring technical knowhow is revenue expenditure or not. The Hon ble Cal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... achineries are lying with the assessee and hence he treated the expenses incurred by the assessee as capital expenditure. The ld CIT(A) confirmed the disallowance, but the Tribunal reversed it. The Hon ble High Court has discussed the reasoning given by the Tribunal as under:- The Tribunal on reconsideration of the entire material on record, taking note of the various judgments on which reliance was placed by both the parties, by a detailed order came to the conclusion that the technology in telecommunication is developing at a very fast speed and new products are to be developed in case one has to remain in the business. The product developed is marketed for one year only, as the next product will come before the end of first year of the introduction of an earlier product. A number of prototypes are developed but all such prototypes are not used as model for the new product. The prototypes, which are not finally approved for commercial production, are rejected and such prototypes are of no use. Only those prototypes are retained, for which, the Company manufactures the product. Such prototype is kept for four to five years, so that the assessee Company is able to redress the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it as a revenue expenditure. 11. In the light of the aforesaid facts and the rival contentions, it is clear that the assessee is in the business of developing and selling leading edge optical networking products for worldwide customers. It has developed software differentiated, next generation products that enable telecommunication carriers to build converged networks. The life span of this product is hardly a year. Because of competition in the market, the assessee has to come out with new features every year if they want to be in the field. Therefore, there is a constant upgradation of the original product. It is in that context substantial amount is spent towards employees cost and the upgradation also includes use of components purchased every year. In fact, those components are used for manufacturing Printed Circuit Boards. Every year these Circuit Boards under go modification, changes. Therefore, the expenses incurred in this regard is in the nature of revenue expenditure. 12. The Apex Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1/3 Taxman 69 has held that, the decided cases have, from time to time, evolved various tests for distinguishing between c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... product already in the line of the assessee's established business and not to a new product indicates that what was stipulated was an improvement in the operations of the existing business and its efficiency and profitability not removed from the area of the day-to-day business of the assessee's established enterprise. 14. We are of the view the aforesaid statement of law equally holds good in the area of telecommunication, may be with more force. Having regard to the facts of this case, the expenditure that is claimed is for upgrading the existing product. Therefore, the product so upgraded goes on changing as time progresses, keeping in mind the requirement and the competition in the market. The Tribunal rightly held that the expenditure is not in the nature of capital expenditure but is revenue expenditure. Therefore, the first substantial question of law is answered in favour of the assessee and against the revenue. 15. In so far as the second substantial question of law is concerned, in fact the Tribunal has not given any reasons and as the assessee succeeds on the first substantial question of law, we are not going into the said question and that question is lef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... license. These products are revenue assets. We also noticed that the development was complete in respect of first four products and the development work was continuing for the remaining two products. We noticed that the business of the assessee itself is development of software products or providing of software services and hence the revenue generated on their sales or providing of services is its income, in which case, the expenditure incurred on development of those applications shall constitute related expenditure. Even if the expenditure does not result in creation of any successful software product/ application/tool etc., considering the business nature of the assessee, those expenses shall constitute revenue expenditure in the hands of the assessee, as it is necessary for the assessee to keep updating itself and keep trying new products to be afloat in the competitive market. Accordingly, apart from the principles discussed in the earlier paragraphs, applying above said rationale, the expenses incurred on CTO projects (Item A), Domain projects (Item C) and Planform/tools/solutions (Item D) are required to be allowed as revenue expenditure. 6.21 Accordingly, we hold that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been included in the final list of comparables in page 29 of the TP order. We note that the TPO has not assigned any reasons for not including these two companies in the final list despite his clear finding that they are comparable. Assessee did not raise this issue before the ld.DRP. 9. The assessee submitted that it had filed an application dated 31.05.2022 under S.154 of the Act seeking rectification of the TP order by recomputing the TP adjustment, if any, after reckoning the margins of these 2companies as well. However, we note from the order dated 24.02.2023 passed by the TPO on this application u/s. 154 that the said request for inclusion of these 2 comparable companies has not been considered by the TPO. Hence, we deem it fit and proper to restore this issue to the TPO / AO with a direction to the TPO / AO to re-compute the TP adjustment, if any, to the assessee s SWD segment after including CG Vak Software and Exports Ltd. and RS Software (India) Ltd. in the final list of comparables to this segment. 10. The second aspect of the Assessee s submissions on the TP adjustment to its SWD segment is that while computing the ALP of the SWD services segment, the TPO has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at which the ALP of the international transaction of receipt of commission towards provision of corporate guarantees to AEs is to be determined. We further note that Clause 6(b) provides for the rate at which the ALP of the international transaction of receipt of interest on inter-corporate advances to AEs is to be determined. The Appellant submits that as per Section 92CC(5) of the Act, the APA shall be binding on the Appellant and the Respondent Revenue authorities for these international transactions, which we concur with. 15. However, we note that in terms of S.92CD of the Act, the Appellant is required to file a modified return of income for this AY in accordance with and limited to the transactions covered in this APA. The Appellant submitted during the course of hearing on 03.04.2023 that the said modified return of income shall be filed by it in due course and in accordance with law. Pertinently, we note that as per S.92CD(3), the AO is bound to pass an order modifying the assessed income of the Appellant having regard to and in accordance with the APA. 16. In the light of the above, we dispose of the grounds raised in this appeal pertaining to these two international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of sub-section (8) or sub-section (10) of section 80-IA are applicable; or (vi) any other transaction as may be prescribed, and where the aggregate of such transactions entered into by the assessee in the previous year exceeds a sum of (twenty crore)** rupees. (* Omitted by Finance Act, 2017 w.e.f. 1-4-2017. ** Substituted for five by Finance Act, 2015 w.e.f. 1.4.2016) Section 92 of the Act mandates computation of income from international transaction or specified domestic 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date: Provided that where, in the opinion of the Assessing Officer, the computation 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 su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions between domestic related parties and suggested that Ministry of Finance should consider appropriate provisions in law to make transfer pricing regulations applicable to such related party domestic transactions. Accordingly sec.92BA was introduced along with corresponding amendment in sec.80IA of the Act. Under these provisions, the transfer pricing regulations were extended to cover Specified Domestic Transactions. Accordingly, under the Explanation 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), wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit ratio at 15.58% and has actually added the excess profit declared by the undertaking. The provisions of sec.10AA requires re-computation of deduction by substituting the actual value with market value. We notice that the AO/TPO did not carry out this exercise of recomputing the quantum of deduction allowable u/s 10AA of the Act by recasting the profit and loss account with the ALP, which is the market value of inter-unit transactions. It is also pertinent 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 noneligible 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 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the arms length price so determined. Accordingly, unless the ALP is adopted in both the service providing unit and service receiving unit in respect of their inter-unit transactions, the total income cannot be computed having regard to the arms length price. Accordingly, the ALP of the inter-unit transactions should be applied in both the eligible and noneligible unit for the purpose of sec.92 of the Act. (D) In our view, provisions of sec.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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,00,000 14,50,000 Cost Add: Corresponding Adjustment for ALP -9,00,000- -4,25,000- -13,25,000- -9,00,000- -4,25,000 50,000 -13,25,000 50,000 Adj Cost -9,00,000 -4,25,000 -13,25,000 -9,00,000 -3,75,000 -12,75,000 Net Income Deduction u/s 10AA 100% 1,00,000 -1,00,000 75,000 1,75,000 -1,00,000 50,000 -50,000 1,25,000 1,75,000 -50,000 Total Income 75,000 1,25,000 SDT adjustment 50,000 In this illustration, (a) the net income remains at Rs. 1,75,000/- before and after ALP adjustments u/s 92 of the Act, since adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Adj Cost -9,00,000 -4,25,000 -13,25,000 -9,50,000 -4,25,000 -13,75,000 Net Income Deduction u/s 10AA 100% 1,00,000 -1,00,000 75,000 1,75,000 -1,00,000 50,000 -50,000 1,25,000 - 1,75,000 -50,000 Total Income 75,000 1,25,000 SDT adjustment 50,000 In this illustration, (a) the net income remains at Rs. 1,75,000/- before and after ALP adjustments u/s 92 of the Act, since adjustment to the interunit transactions have to be done in the hands of both eligible and non-eligible units. (b) The amount of deduction u/s 10AA worked out to Rs. 1,00,000/- prior to ALP adjustment. However, it has fallen down to Rs. 50,000/- after ALP adjustment in terms of sec.80IA(8). (c) Thus the reduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,50,000 SDT adjustment 25,000 In this illustration, (a) the net income remains at Rs. 1,75,000/- before and after ALP adjustments u/s 92 of the Act, since adjustment to the interunit transactions have to be done in the hands of both eligible and non-eligible units. (b) The amount of deduction u/s 10AA worked out to Rs. 50,000/- prior to ALP adjustment. However, it has fallen down to Rs. 25,000/- after ALP adjustment in terms of sec.80IA(8). (c) Thus the reduction in the quantum of deduction u/s 10AA, i.e., Rs. 25,000/- is also the adjustment made u/s 92 of the Act in respect of Specified domestic transaction. (d) Hence the total income has increased from Rs. 1,25,000/- (prior to ALP adjustment) to Rs. 1,50,000/- after ALP adjustment. The net effect is the addition of SDT adjustment of Rs. 25,000/-. ILLUSTRATION 4(Under invoicing expenses) Transaction between an Eligible unit, which is eligible for deduction @ 50% and a non-eligible unit. Eligible unit is Service receiver and accordingly pays money to non-eligible unit. The said payment constitutes expenditure in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion u/s 10AA, i.e., Rs. 25,000/- is also the adjustment made u/s 92 of the Act in respect of Specified domestic transaction. (d) Hence the total income has increased from Rs. 1,25,000/- (prior to ALP adjustment) to Rs. 1,50,000/- after ALP adjustment. The net effect is the addition of SDT adjustment of Rs. 25,000/-. 39.22 We notice that the TPO has not carried out these exercises. Hence, in our view, this issue requires fresh examination at the end of TPO/AO by duly considering various other contentions of the assessee and also by considering the discussions made supra. Accordingly, we set aside the order passed by A.O. on this issue and restore the same to the file of the AO/TPO for examining it afresh. In this year also, the TPO has not examined this issue in the line discussed above. Accordingly, we set aside the order passed by the AO on this issue and restore the same to the file of AO/TPO for examining it afresh in the light of discussions made supra. 18. Respectfully following the above judgement cited supra in assessee s own case, we remit this issue to the TPO/AO for examining it afresh in the light of discussions made supra. In the result, this issue is allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has received dividend of Rs. 6.58 crores and also earned Rs. 58.00 crores as interest income from tax free bonds. The assessee suo motu made disallowance for administrative expenses of Rs. 3.07 Crores. The total investments were made of Rs. 18463 crores and Reserve Surplus were stood at Rs. 40,411.10 crores. The AO asked for details of computation made which was submitted by the assessee, but the AO was not satisfied and he calculated disallowance afresh after applying Rule 8D r.w.s. Section 14A of the Act at Rs. 8.76 Crores. The assessee had itself made disallowance of Rs. 3.07 crores accordingly the net disallowance were made of Rs. 5.69 crores. Considering the arguments from both the sides, we notice that an identical issue has been restored back to the file of the AO in AY 2015-16 following the decision rendered in assessee s own case in AY 2009-10 to 2014-15 where the relevant observations made by the co-ordinate bench are extracted below:- 22.2 The assessee has received dividend income from investments made in various mutual funds and claimed the same as exempt. The assessee also made disallowance u/s 14A of the Act by allocating some expenses as relatable to the exemp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the A.O was not justified in applying rule 8D of IT Rules. The Ld. A.R. also placed reliance on the decision rendered by Hon ble Supreme Court in the case of Godrej BoyceManufacturing Company Ltd. 394 ITR 449. 22.4 We have noticed that this issue has been restored by ITAT in assessment year 2008-09 to the file of the A.O. A perusal of the assessment order passed by A.O. would show that the A.O. has observed that he was not satisfied with the working furnished by the assessee. However, the A.O. has not examined the basis of the allocation and apportionment of expenses towards the exempt income. Hence, the coordinate bench has restored this issue to the file of the A.O. for examining it afresh. Accordingly, following the decision rendered by the coordinate bench, we restore this issue to the file of the A.O. The assessee is free to make its submissions and the AO shall decide the decide the issue in accordance with law, by duly considering the submissions made by the assessee. 23. Accordingly, following the above said decisions in assessee s own case for AY 2015-16, we restore this issue to the file of AO with similar directions. Since Rule 8D has been amended, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision on derivative contracts is allowable as expenditure. We, accordingly allow the Grounds at S. Nos. 1 to 9 raised by the assessee. We have noticed that the assessee has voluntarily disallowed the loss arising on restatement of foreign 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entical 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 following observations:- 14. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. At the outset, we note that an identical issue was also involved for the Assessment Year 2004-05 as well as for the Assessment Year 2007-08. The Hon'ble jurisdictional High Court in assessee's own case reported in 382 ITR 179 for the Assessment Year 2004-05 has upheld the decision of this Tribunal in favour of the assessee and against the revenue. We further note that this Tribunal in assessee's own case for the Assessment Year 2007-08 has again decided this issue in para 7.4 as under : 7.4 We have heard both parties and perused and carefully considered the material on record. We find that the identical issue was considered by a co-ordinate bench of the Tribunal in the assessee's own case for Assessment Year 2004-05 in ITA Na1072/Bang/2007 (supra), wherein the Tribunal confirming the finding of the learned CI (A), at para 16.4 on pages 29 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is clear that the Tribunal has followed the earlier order for the Assessment Year 2004-05 which has been upheld by the Hon'ble jurisdictional High Court. Following the earlier order of this Tribunal as well as Hon'ble jurisdictional High Court, we decide this issue in favour of the assessee and against the revenue. 4.8 Though it is stated that the issue is decided in favour of the assessee, we notice that the discussions were not happily worded. We notice that an identical issue was decided by Hon ble High Court of Karnataka in AY 2001-02 to 2004-05 in the assessee s own case reported in 382 ITR 179. We extract below the relevant discussions made by Hon ble Karnataka High Court on this issue:- Substantial question of law No.14: Whether the Tribunal was right in directing that losses of a section 10A unit, which are already set off against other business income of the appellant, should be again carried forward and setoff against eligible profits of the same unit in a subsequent year? Whether the Tribunal was correct in holding that income of each undertaking should be taken independently and losses of section 10A units cannot be set off against profits of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from non-SEZ/non-STPI units. 9.2.We further noted that in the assessee s own case the Hon ble SC dismissed the SLP filed by the revenue against the order of the Hon ble High Cort reported in [2022] 134 taxmann.com 302 (SC) in SLP APPEAL (C) NO.11582 OF 2021 NOVEMBER 26, 2021 in which it has been held as under:- 3. This Special Leave Petition challenges the judgment and final order dated 15-12-2020 passed by the High Court of Karnataka at Bengaluru in ITA No. 316 of 2012, which was disposed of in terms of the judgment passed in ITA No. 315 of 2021. ITA No. 315 of 2012 in turn was disposed of in terms of the judgment passed in Pr. CIT v. Wipro Ltd. [2021] 124 taxmann.com 240/278 Taxman 162 (Kar.). 4. While disposing of ITA No. 464 of 2017, the High Court had made following observations : 14. At this stage, learned counsel for the revenue submits that all the remaining issues covered by decisions of this Court in M/s. WIPRO Ltd. v. DCIT [2016] 383 ITR 179 (Kar) and Commissioner of Income-tax Another v. TATA Elxsi Ltd., 382 ITR 654 (Kar) are pending adjudication at the instance of the revenue before the Supreme Court. In view of the aforesaid submission needless to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acilitate on-site development of software to specific customers and these are cost centers , no separate books of accounts maintained in this regard. And revenue generated by these units are included in the SEZ units. The profits shown has been claimed as exemption in view of explanation (2) to section 10AA. The AO was not satisfied and disallowed the exemption. Considering the rival submissions, the coordinate bench has decided the similar issue in assessee s own case in the AY 2015-16 in which it has been held as under:- The case of the assessee was that these development centers are only extension of STPI units eligible for deduction u/s 10A/10AA/10B etc. However, the AO took the view that these development centres are independent units and accordingly estimated income from these centres and correspondingly reduced the said profit from the units eligible for deduction u/s 10A/10AA/10B of the Act. An identical issue has been examined by the co-ordinate bench in the assessee s own case in Ay 200910 to 2014-15 and it was adjudicated as under:- 23.3 We heard the parties on this issue and perused the record. We notice that the coordinate bench has considered an identical issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d accordingly do so with a direction 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. 29. 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. 30. The tenth issue relates to exclusion of other income for the purpose of computing deduction u/s 10AA of the Act. The details of miscellaneous income reported during the year under consideration are given below:- Sale of scrap/News paper - 0.90 crores Other income 25.42 crores 26.32 crores 31. During the course of assessment proceedings the details of unit wise Miscellaneous income was furnished. The assessee submitted that the sale of- scrap/newspapers are covered in favour of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber 11, 2013 (2014) 2 ITROL 499 (Karn), while dealing with exemption under section 10B. It is in Pari materia with section 10A and has answered the said question in favour of the assessee and against the Revenue. 169. As all these questions are decided and answered in favour of assessee in the aforesaid case, this question of law is answered in favour of the assessee and against the Revenue. 5.5 The decision rendered by Hon'ble Karnataka High Court would cover the income booked under the head Sale of Scrap/Newspaper, Rental income and interest income. Accordingly, we direct the AO to allow deduction u/s 10A/10AA/10B of the Act in respect of income earned on sale of scrap/newspaper and Rental income. The issue relating to interest income is dealt under the head Issue no.3 below. 5.6 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. The observations made by the Tribunal in AY 2007-08 are extracted below:- However, since we find that no details are available with regard to other income of Rs. 3,48,524/-, we de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 224.65 crores 2013-14 2.91 crores 2014-15 3.45 crores It is also not clear as to whether the nature of interest income booked under the head miscellaneous income in AY 2012-13 and 2013-14 are identical with the nature of interest 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 preshipment 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 conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y required in its business operations were deposited into short term fixed deposits. (b) The surplus funds available with the SEZ units have also been invested in fixed deposits. Hence 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. 6.7 With regard to Category (a) above, if the nexus is shown between the loan funds and the deposits, the assessee is eligible for deduction in respect of interest income, following the decision rendered by the Hon'ble Karnataka High Court in the assessee s own case (referred supra). 6.8 With regard to Category (b) above, it is imperative on the part of the assessee to show that there is nexus between interest income and income of business undertaking. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We notice that an identical issue has been decided in favour of the assessee by Hon ble High Court of Karnataka by following the decision rendered by High Court in the case of Tata Elixsi Ltd. The relevant portion of High Court s order is extracted below:- Substantial Question No.8: Whether the Tribunal was right in excluding the computer software sales made to STP units in India from export turnover for the purpose of computing deduction under section 10A of the Act? 147. The said question came up for consideration before this Court in the case Tata Elxsi vs. Asst. CIT (I.T.A No.411 of 2008). This court has answered the said substantial question in favour of the assessee and against the Revenue. Accordingly, the said substantial question of law is answered in favour of the assessee and against the Revenue. 7.6 In the case of Tata Elxsi Ltd (supra), the Hon'ble Karnataka High Court dealt with this issue as under:- 18. As Section 10A was introduced to give effect to the Exim Policy of the Central Government, we have to take into consideration the provisions of the Exim Policy. 19. Paragraph 6.10 of the Exim Policy speaks about exchange through others. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m DTA to STP, it does not satisfy the requirements of export as defined under the Customs Act. However, for the purpose of Exim policy, it is treated as deemed export . Therefore, when Section 10A of the Act was introduced to give effect to the Exim Policy, the supplies made from one STP to another STP has to be treated as deemed export because Clause 6.19 specifically provides for export through Status Holder. It provides that an EOU/EHTP/STP/BTP unit may export goods manufactured/software developed by it through other exporter or Status holder recognized under this policy or any other EOU/EHTP/STP/SEZ/BTP unit. What follows from this provision is that to be eligible for exemption from payment of income tax, export Should earn foreign exchange. It does not mean that the undertaking should personally export goods manufactured/software developed by it outside the country. It may export out of India by itself or export Out of India through any other STP Unit. Once the goods manufactured by the assessee is shown to have been exported out of India either by the assessee or by another STP Unit and foreign exchange is directly attributable to such export, then Section 10A of the Act i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate bench in the assessee s own case in AY 2009-10 to 2014-15. The relevant facts have been narrated by the co-ordinate bench as under:- 20.2 The facts relating to this issue are discussed in brief. In respect of software development activity, for which the assessee had claimed deduction u/s 10A/10AA/10B of the Act, the assessee has received certain payments as reimbursements. These reimbursements have been categorized as asset reimbursements, communication link reimbursements, travel reimbursements, incentive awards and other reimbursements. The A.O. excluded the above amounts from export turnover and accordingly computed deduction u/s 10A/10AA/10B of the Act. The A.O. did not accept the contentions of the assessee that these amounts were also received in foreign exchange and hence they are in the nature of export proceeds realized in respect of computer software export and hence they should not be excluded from export turnover. .. 15.1 It was noticed in the earlier years that the assessee had received different types of reimbursements, which have been grouped as under:- (a) Asset reimbursements (b) Communication link reimbursements (c) Travel reimburseme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remaining amounts require fresh examination in the light of discussions made supra. 20.8 We also make it clear that, if any of the amount is required to be excluded from export turnover, then the same shall be excluded from the total turnover also, as held by Hon ble High Court of Karnataka in the case of CIT Vs. Tata Elxi Ltd. 204 Taxmann.com 321 and also by Hon ble Supreme Court in the case of CIT Vs. HCL 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. 38. In the above said decision, detailed discussions have been made with regard to this issue. Accordingly, we restore this issue to the file of AO with the direction to examined the break-up details of reimbursements and follow the directions given in AY 2009-10 to 2014-15 for computing deduction u/s 10AA of the Act. Accordingly, the grounds raised by the assessee is allowed for statistical purpose. 39. The fourteenth issue relates to question as to whether the expenditure incurred in foreign currency is required to be deducted from the export turnover while computing deduction u/s 10AA of the Act. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO to exclude the amounts from both export turnover and total turnover, while computing the deduction. The relevant discussions find place at paragraphs 28 to 31 of the order. Before us, the Ld A.R submitted that the main contention of the assessee has been addressed by the coordinate bench in assessment year 2004-05 (ITA No.1072/Bang/2007). We notice that the main contention of the assessee has been decided as under in AY 2004-05 by the co-ordinate bench: 15. The ninth effective ground is with regard to the action of the CIT(A) in directing the AO not to exclude expenditure in foreign currency. The Ld.AO had excluded from export turnover the expenses incurred in foreign currency on the basis of the definition of the export turnover contain in section 10A. He had also concluded that the assessee had ed technical services and thus expenses incurred in foreign currency in rendering such technical services require exclusion from export turnover. On the other hand, the assessee company, extensively quoting the provisions of section 10A(4) of the Act and also placing strong reliance on the decision of the CIT(A) for the AYs 01-02 and 0203 had argued that the exclusion of above s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also [issues raised by the Revenue in ground Nos: 8 9 are rather inter-linked), we respectfully following the Tribunal's decision referred supra, we uphold the action of the Ld.CIT(A) on this count. 19.7 We notice that the co-ordinate bench has referred to the ground no.8, wherein the question of exclusion of communication expenses was examined. For the sake of convenience, we extract below the relevant observations made in respect of ground no.8 in AY 2001-02 14. The next effective eighth ground is with regard to reimbursement of communication links, incentives, rewards, telecommunication expenses etc., In respect of reimbursement of communication links and other sales performance incentives, the Ld. AO had stated that only the consideration in respect of export of article or things is liable to be taken for the purposes of section 10A. Thus, the AO had concluded that the amount received by the assessee as communication link charges or other rewards and incentives were not a consideration for the export of 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 sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved, the Revenue has come up before us. The Ld. A.R forcefully submitted that the issues stand covered by the decision of the case of the assessee company for the AYs. 01-02 and 02-03. On the other hand, the Id. D.R urged that the action of the Ld. AO is in order which may be upheld. 14.6. We have carefully considered the submissions of the either parties. We find that the Hon'ble Tribunal has dealt with these issues comprehensively. After considering the pros and cons of the issues, the Hon'ble Tribunal has decided thus 24.5 ...........In respect of expenditure incurred on on-site development, the issue stands covered by the order of this Tribunal in the case of Infosys Technologies Limited. This Bench in the case of Insosys Technologies vide order dated 31 March, 2005 in ITA NO.50/Bang/2001 held in that case that the assessee is involved in developing software. The assessee was not involved in rendering of technical services. Such software are provided through the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Patni Telecom P. Ltd. v. ITO vide order dated 11th January, 2008 in ITA NO.5/11yd/20005 and 354/11yd/2006 held that expenditure incurred on travel and allowances for the purpose of development of software at clients site outside India cannot be excluded from the export turn-over. Similar finding has been given by Chennai Bench vide order dated 15th February 2008 in ITA NO.731/Mad in the case of Changepond Technologies P.Ltd v. ACIT wherein it has been held that expenses on salaries, traveling and other perquisites are to be included in the export turnover. Hence, following the decision of this Bench and considering the decisions of other Benches on this issue, the expenses on traveling etc. cannot be excluded from the export turnover. Income-tax Act does not provide any bifurcation of the expenses incurred outside India. The assessing officer has not brought on record any expenditure which may not be relevant for the purpose of export. Hence, the 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 softw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, it is required to be examined as to whether these expenses are required to be excluded from export turnover , by considering the definition of the term export turnover given in section 10A/10AA/10B of the Act. We have extracted the definition given in all the three sections earlier. A careful perusal of the above said definition given in sec.10A and 10B would show that what is required to be excluded is freight, telecommunication charges, or insurance attributable to the computer software outside India or expenses, if any incurred in foreign exchange in providing technical services outside India. However, in sec.10AA, there is modification of the definition, i.e., the term technical is not used therein. It is mentioned as expenses, if any, incurred in foreign exchange in rendering of services (including computer software) outside India. The question as to whether the cost of development of software would fall under the category of technical 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee on the reasoning that mere submission of application by the assessee to RBI is not sufficient to infer that RBI has allowed extension of time for realizing sale proceeds in foreign exchange. Accordingly, he rejected the claim of the assessee. The ld. DRP also rejected by observing that the assessee has not revised its return of Income A similar issue has been examined by the co-ordinate bench in the assessee s own case in AY 2009-10 to 2014-15 and it was decided as under:- 8.2 The facts relating to the issue are stated in brief. As per the provisions of section 10A/10AA/10B of the Act deduction is allowable only on export turnover which received in or brought into India in convertible foreign currency within the period of 6 months from the end of the previous year within such further period as the competent authority may allow in this behalf. The competent authority means Reserve Bank of India (RBI) or such other authority as is authorized under any law for the time being in force for regulating payments and dealings in foreign currency. During the years under consideration, certain amounts were not received or brought into India within 6 months from the end of the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here 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 by the Tribunal. Therefore, the said substantial question is answered in favour of the assessee and against the revenue. Respectfully following the binding decision of the jurisdictional High Court, we direct the AO to include sale amount in the export turnover, while computing deduction u/s 10A of the Act, where the applications have been filed by the assessee to RBI seeking permission to receive the export proceeds beyond the prescribed period. 42. Following the decision of the Hon ble jurisdictional Karnataka High Court, we direct the AO to include sale amount in the Export turnover while computing deduction u/s 10AA of the Act, wherever the applications have been filed by the assessee to RBI through its bankers seeking permission to receive the export proceeds beyond the prescribed period. Accordingly this ground is allowed. 43. Ground No. 16 to 16.3 relates to the claim of foreig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of the income being subjected to tax or the assessee has paid tax on the income. This applies to a case where the income of the assessee is chargeable under this Act as well as in the corresponding law in force in the other country. Though the Income-tax is chargeable under the Act, it is open to Parliament to grant exemptions under the Act from payment of tax for any specified period. Normally it is done as an incentive to the assessee to carry on manufacturing activities or in providing the services. Though the Central Government may extend the said benefit to the assessee in this country, by negotiations with the other countries, they could also be requested to extend the same benefit. If the contracting country agrees to extend the said benefit, then the assessee gets the relief. In another scenario, though the said income 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is only for a period of ten years. After the expiry of the said ten years the said income is taxable. When such exemption is given under the Act, but the said income is taxed in foreign jurisdiction, there is no relief to the assessee at all. Therefore, to promote mutual economic relations, trade and investment, the Act was amended by way of the Finance Act, 2003 which came into force from April 1, 2004. By insertion of a new clause (ii) in sub-section (1)(a) of section 90 the Central Government has been vested with the power to enter into an agreement with the Government of any country outside India for the granting of relief in respect of Income-tax chargeable under the Income-tax Act or under the corresponding law in force in that country, to promote mutual economic relations, trade and investment. Therefore, the statute 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 cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l to the Income-tax paid in the United States. Therefore, this provision is in conformity with section 90(1)(a)(ii) of the Act, i.e., the Income-tax chargeable under the Income-tax Act and in the corresponding law in force in the United States of America. Therefore, it is not the requirement of law that the assessee, before he claims credit under the Indo-US convention or under this provision of Act should pay tax in India on such income. However, the said provision makes it clear that such deduction shall not, however, exceed that part of the Income-tax (as computed before the deduction is given) which is attributable to the income which is to be taxed in the United States. Therefore, an embargo is prescribed for giving such tax credit. In other words, the assessee is entitled to such tax credit only 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 De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian tax, which such income bears to the entire income chargeable to Indian tax. In other words if the Income-tax paid in India is less than the Income-tax paid in Canada, the assessee would be entitled to relief only to the extent of tax paid in India and not to the extent of tax paid in Canada. Therefore, this clause is in conformity with section 90(1)(a)(i) of the Act. As a corollary if the assessee is exempted from payment of tax in India, then if the same income is subjected to tax in Canada, according to the treaty, there is no double taxation. Therefore, the benefit of this treaty is not available to the Indian assessee. 62. It is submitted on behalf of the assessee that by virtue of the formulae prescribed under section 10A(4), entire export profits had not got exempted 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 Indo-Canadian agreement if the income from source within Canada, is lower, has been subjected to tax both in India and Canada then, the tax paid in Canada shall be all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excess profit tax or business profits tax charged on the profits by the Government of any part of that country or a local authority in that country. Therefore the intention of Parliament is very clear. The Incometax in relation to any country includes Income-tax paid in any part of the country or a local authority. It applies to cases where in a federal structure a citizen is made to pay federal Income-tax and also the State income tax. The Income-tax in relation to any country includes Income-tax paid not only to the Federal Government of that country, but also any Income-tax charged by any part of that country meaning a State or a local authority, and the assessee would be entitled to the relief of double taxation benefit with respect to the latter payment also. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is issue and direct him to allow foreign tax credit claimed by the assessee in terms of the decision rendered by Hon ble High Court of Karnataka referred above. 18.3 The second contention of the assessee is that the foreign tax paid by the assessee, to the extent not given credit, should be allowed as business expenditure. The submission made by the assessee in this regard are extracted below:- FTC to be allowed as Business expense: If relief from double taxation is denied for the reason that the income-tax paid or deducted in any foreign country is not eligible for relief u/s 90 or u/s 91, such tax paid of Rs. 117.32 Crores is deductible u/s 37(1) of the Act or allowable as a loss u/s 28 and such unrelieved foreign taxes are not covered by the restriction in Section 40(a)(ii) of the Act. But for the restriction imposed by clause (ii) of section 40a, income-taxes paid or deducted in foreign countries by the assessee-company is an expenditure laid out or expended wholly and exclusively for the purposes of the business carried on by the assessee outside India and the same is deductible u/s 37 of the Act. In any case, it is a loss incurred by the assesse-company in carrying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 2(15) of the I. T. Act, the income accruing in Uganda has to be reduced by the tax paid to the Uganda Government in respect of such income? The Court while answering the question in the negative observed that it is not aware of any commercial principle/practice which lays down that the tax paid by one on one's income is allowed as a deduction in determining the income for the purposes of taxation. (k) It is axiomatic that income tax is a charge on the profits/ income. The payment of income tax is not a payment made/incurred to earn profits and gains of business. Therefore, it cannot be allowed an as expenditure to determine the profits of the business. Taxes such as Excise Duty, Customs Duty, Octroi etc., are incurred for the purpose of doing business and earning profits and/or gains from business or profession. Therefore, such expenditure is allowable as a deduction to determine the profits of the business. It is only after deducting all expenses incurred for the purpose of business from the total receipts that profits and/or gains of business/ profession are determined. It is this determined profits or gains of business/profession which are subject to tax as incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e meaning of the word 'tax' as found in Section 2(43) of the Act would apply wherever it occurs in the Act. It is not even urged by the Revenue that the context of Section 40(a)(ii) of the Act would require it to mean tax paid anywhere in the world and not only tax payable/ paid under the Act. (n) However, to the extent tax is paid abroad, the Explanation to Section 40(a)(ii) of the Act provides/clarifies that whenever an Assessee is otherwise entitled to the benefit of double income tax relief under Sections 90 or 91 of the Act, then the tax paid abroad would be governed by Section 40(a)(ii) of the Act. The occasion to insert the Explanation to Section 40(a)(ii) of the Act arose as Assessee was claiming to be entitled to obtain necessary credit to the extent of the tax paid abroad under Sections 90 or 91 of the Act and also claim the benefit of tax paid abroad as expenditure on account of not being covered by Section 40(a)(ii) of the Act. This is evident from the Explanatory notes to the Finance Act, 2006 as recorded in Circular No.14 of 2006 dated 28th December, 2006 issued by the CBDT. The above circular inter alia, records the fact that some of the assessee who are e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Explanation inserted in Section 40(a)(ii) of the Act, makes it clear that it is declaratory in nature and would have retrospective effect. This is not even disputed by the Revenue before us as the issue of the nature of such declaratory statutes stands considered by the decision of the Supreme Court in CIT v. Vatika Township (P) Ltd. [2014] 367 ITR 466/227 Taxman 121/49 taxmann.com 249 and CIT v. Gold Coin Health Foods (P.) Ltd. [2008] 304 ITR 308/172 Taxman 386 (SC). (r) In the above facts and circumstances, question (iii)(a) is answered in the negative i.e. against the Revenue and in favour of the applicant assessee. Question (iii)(b) is answered in the negative i.e. against the Revenue and in favour of the applicant assessee. Accordingly, we direct the AO to allow the foreign tax paid by the assessee, to the extent not allowed as tax credit u/s 90 91 of the Act, as deduction from the business income of the assessee. 44. Since this issue has been decided as stated above for the AY 2015-16 in assessee s own case, accordingly, we direct the AO to allow the foreign tax State Tax paid by the assessee, to the extent not allowed as tax credit u/s 90 91 of the Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee s own case reported in 355 ITR 284 and the issue has been decided against the assessee. Accordingly, the A.O. held that the payment made to M/s. Gartner Group is in the nature of royalty and assessee is liable to deduct TDS from the said payment u/s 195 of the Act. Since the assessee did not deduct TDS, the A.O. disallowed the payments made to Gartner Group in the years relevant to the assessment years 2010-11 to 2014-15 by invoking provisions of section 40(a)(i) of the Act. .. Accordingly, following the decision rendered by jurisdictional Hon ble Karnataka High Court in the assessee s own case reported in 355 ITR 284 and also the decision rendered by Hon ble Delhi High Court in the case of Havells India Ltd. (supra) we hold that the A.O. was justified in holding that the payment made to M/s. Gartner Group is in the nature of royalty within the meaning of section 9(1)(vi) of the Act and hence the assessee is liable to deduct tax at source from the said payment u/s 195 of the Act. In view of the default on the part of the assessee in not deducting the tax at source, the A.O. was justified in making the disallowance of payment made to M/s. Gartner Group by invoking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d above. Accordingly he prayed that this disallowance should be deleted. 19.3 We heard Ld D.R on this issue and perused the record. We noticed that the co-ordinate bench had confirmed the disallowance following the decision rendered by the jurisdictional Hon ble Karnataka High Court in the assessee s own case. It is the submission of the assessee that the Hon ble High Court has decided an identical issue against the assessee following its own decision rendered in the case of Samsung Electronics Ltd, which has since been revered by Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd. The decision in the above said case has been rendered by Hon ble Supreme Court subsequent to the passing of the assessment order. Accordingly, we are of the view that this issue requires fresh examination at the end of AO. Accordingly we restore this issue to the file of the AO with the direction to examine this issue afresh applying the principles laid down by Hon ble Supreme Court in the case, referred above. If the AO comes to the conclusion that the decision rendered by Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd is applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture 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, the AO disallowed the interest expenditure claimed by the assessee by invoking sec.115BBD of the Act. 29.3 Before Ld. DRP, the assessee placed its reliance on the decision rendered by Hon ble Supreme Court in the case of Rajendra Prasad Mody (115 ITR 519) and contended that the expenditure is allowable, even if dividend income is not received during the year under consideration. However, the Ld. DRP took the view that the investment made by the assessee is not with the objective of earning dividend income but for the purpose of acquiring controlling interest in the company. It held that the interest expenditure is allowable u/s 57(iii) only if the investment had been made for the purpose of earning dividend income. In support of this proposition, the Ld. DRP placed its reliance on the decision rendered by Hon ble Bombay High Court in the case of CIT Vs. Smt. Amritaben R. Shaw (238 ITR 777) and held that the expenditure incurred for acquiring controlling interest in the company is not allowable as deduction u/s 57(i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end income from specified foreign company during the years under consideration and hence the total income of the assessee does not include any taxable dividend income. In fact, the A.O. also has also not included any such dividend income while computing the total income. Accordingly, he submitted that the A.O. was not justified in invoking the provisions of section 115BBD of the Act. The Ld. A.R. submitted that the ratio of decision rendered by Hon ble High Court of Delhi in the case of Cheminvest Ltd. (ITA 749/2014) is applicable to the facts of the present issue also, even though the said decision was rendered in the context of section 14A of the Act. He submitted that the Hon ble Delhi High Court has held in the above said case that the provisions of sec.14A are attracted only if the assessee had received exempt income. 29.5 We have heard Ld D.R and perused the record. A careful perusal of provisions of section 115BBD would show that the same begins with the expression where the total income of assessee, being an Indian company, includes any income by way of dividends declared, distributed or paid by a specified foreign company . Hence, there is merit in the submissions of L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mendment brought in by Finance Act 2022 inserting specific provision in the Income tax Act providing for disallowance of Education Cess. A similar issue has been decided against the assessee by the co-ordinate bench of the Tribunal in assessee s own case, In view of this, we also dismiss the ground No. 19 raised by the assessee. 50. Ground No. 20 relates to the AO not following the directions issued by the DRP vide its Directions. This ground urged in the appeal has two aspects to it. 51. Firstly, the assessee is contending that although the DRP directed that the deduction under S.10AA ought to be recomputed by adding back the disallowance of wages capitalized, the AO did not give effect to the said direction. On examining the DRP s directions, we find that such a direction was in fact issued by the DRP vide para 3.7 at page 8 of the directions. However, we find that while computing the deduction allowable under S.10AA, the said direction of the DRP has not been given effect to. We, therefore, direct the AO to comply with the aforesaid direction of the DRP vide para 3.7 at page 8 of the directions and to, accordingly, recompute the deduction allowable to the assessee under S. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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