TMI Blog2022 (11) TMI 1317X X X X Extracts X X X X X X X X Extracts X X X X ..... at 6% p.a. - TPO determined the arm's length interest rate @ 11.17% stating the same as yield from BBB+ grade corporate bond (investment grade bonds) for a 1 to 2 years period during the FY 2011-12 - HELD THAT:- We note that, the assessee admittedly charged 6% interest rate on the loans advanced to Infosys China and Infosys Brazil. The revenue authorities have accepted the rate charged by the assessee in the subsequent as well as preceding assessment years. We therefore do not see any reason to deviate from the same. We also note that 11.17% computed by the Ld.TPO which was subsequently rectified to 8.53%, do not have any basis, as it is based on fixed deposit interest rate by different banks. We note that principles laid down in case of CIT vs. Cotton Naturals India Pvt. Ltd. [ 2015 (3) TMI 1031 - DELHI HIGH COURT] has not been followed by the Ld.TPO, We also note that the LIBOR rate of 12 month USD is much less than the rate computed by the assessee. We therefore uphold the interest rate computed at 6%. Disallowance u/s. 14A r.w.Rule 8D(2)(iii) - dividend income from mutual funds which was exempt - HELD THAT:- Admittedly, the assessee suo moto disallowed u/s.14A. We no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s BPO Ltd v DCIT [ 2020 (1) TMI 1011 - ITAT BANGALORE] considered identical issue on similar facts. Nothing has been brought on record by the revenue to the expenses incurred by the assessee is towards any capital asset. Respectfully following the same, we direct the disallowance to be deleted. TDS u/s 195 - Disallowance of Commission paid to non residents - non deduction of TDS - Addition u/s 40(a)(ia) - HELD THAT:- There is no quarrel that the benefit available to assessee as per DTAA must be granted as per the ratio of Hon ble Supreme Court in case of Engineering Analysis [ 2021 (3) TMI 138 - SUPREME COURT] . The Ld.AO shall verify and consider the claim in accordance with law. Needless to say that proper opportunity of being heard mist be granted to the assessee. Non reduction of communication expenses and expenses incurred in foreign currency from total turnover while computing deduction under section 10AA - HELD THAT:- This issue is no longer resintegra. Hon ble Supreme Court in the case of CIT v HCL Technologies Ltd [ 2018 (5) TMI 357 - SUPREME COURT] held that, freight, telecommunication charges, insurance charges and expenses incurred in foreign currency redu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 10AA of the Act. Reduction of deduction under section 10AA in respect of pure onsite revenue - HELD THAT:- We note that the denial of the exemptions claimed is purely due to the reason that the Ld.AO did not verify the details furnished by assessee. There is no doubt expressed by the Ld.AO regarding the nexus or any shortfall of evidence or materials in support of the assessee s claim as argued by the Ld.AR, the disallowance made on adhoc basis, without any justification and the reasoning for such disallowance is absolutely uncalled for. However in the interest of justice, the Ld.AR suggested the issue may be remanded to the Ld.AO for due verification. We direct the Ld.AO to verify the details filed and to consider the claim of assessee in accordance with law. Needless to say that proper opportunity of being heard is to be granted to the assessee. Deduction under section 80JJAA being disallowed - DRP held that the assessee is not engaged in manufacture or production of article or thing and therefore not eligible for deduction under section 80JJAA. It was held that manufacture or production of article or thing cannot be equated with software development - HELD THAT:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and advance tax in the final assessment order is contrary to the scheme of section 144C, invalid, bad in law and liable to be quashed. The Ld.AO be therefore directed to allow TDS credit and advance tax relating to Infosys Consulting India Ltd which was merged with the assessee. We direct the Ld.AO to verify the claim of assessee in accordance with law. Needless to say that proper opportunity of being heard is to be granted to the assessee. Allowability of incremental foreign tax credit which was allowed in the draft assessment order - HELD THAT:- As relying on case of Goetz India Ltd. [ 2006 (3) TMI 75 - SUPREME COURT] we direct the Ld.AO to consider the assessee s claim and grant credit of foreign taxes paid for the year under consideration that has been verified during the draft assessment proceedings. Needless to say that proper opportunity of being heard must ne granted to the assessee. Interest on IT Refund granted under section 143(1) but subsequently recovered on completion of assessment proceedings is allowable as deduction - HELD THAT:- This issue needs to be verified by the Ld.AO. The Ld.AO is directed to verify based on the necessary evidences filed by assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was necessary and expedient to do so and the Hon ble DRP has erred in confirming the action of the learned AO. 7. The lower authorities have erred in making a transfer pricing adjustment of Rs. 84,04,827, passing the orders without demonstrating that the appellant had motive of tax evasion, not appreciating that no addition can be made under Chapter X as Transfer pricing adjustment under Chapter X is not included in the definition of income u/s 2(24) or under Chapter IV of the IT Act, 1961. The orders passed by the lower authorities are therefore bad in law and liable to be quashed. 8. The learned assessing officer and transfer pricing officer have erred in making a transfer pricing adjustment of Rs 84,04,827 by adopting the average rate of interest on fixed deposits for a period exceeding 365 days calculated at 8.53% as internal CUP for the purpose of computing arm's length price (ALP) adjustment in respect of interest income charged on loan given to Infosys Technologies (China) Co Ltd. 9. On facts and in the circumstances of the case and law applicable, the impugned transfer pricing adjustment is liable to be deleted in entirety. Grounds on disallowance un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es paid/payable to residents and non residents amounting to Rs. 30,23,602 and Rs. 14,65,417 respectively [totaling to Rs.44,88,019] under section 40(a)(ia) / 40(a)(i) for not deducting tax at source in respect of the said payments under section 194J / 195 of the Income tax Act, 1961. 18. Without prejudice, software payments made to residents totally amounting to Rs. 30,23,602was not liable for TDS under section 40(a)(ia) in view of the 1st proviso to section 40(a)(ia) read with 1st proviso to section 40(a)(i). 19. On the facts and in the circumstances of the case and law applicable, software expenses of Rs. 30,23,602 and Rs. 14,65,417 respectively [totaling to Rs. 44,88,019]was not liable for disallowance under section 40(a)(i) / 40(a)(ia) of the Act. 20. In any case and without prejudice, disallowance under section 40(a)(ia), if any, should be restricted to Rs. 9,07,081 being 30% of Rs. 30,23,602 as the amendment to section 40(a)(ia) by the Finance (No. 2) Act, 2014 w.e.f. 1.4.2015 is beneficial in nature and hence retrospective. 21. In any case and without prejudice, the disallowance, if any, is to be limited to the amount of software expenses payable as on 31st March ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... EZ units at Chennai (Unit No 1), Chandigarh, Pune and Mangalore, for which deduction under section 10AA has not been allowed. On facts and circumstances of the case and law applicable, communication expenses should be reduced from total turnover also in computing deduction under section 10AA for the aforesaid units. Grounds on non reduction of expenses incurred in foreign currency from total turnover while computing deduction under section 10AA 29. The learned assessing officer has erred in not reducing the expenses incurred in foreign currency totally amounting to Rs.358,08,30,087 from total turnover while computing deduction u/s 10AA in respect of the SEZ units at Chennai (Unit 2), Trivandrum, Mysore, Hyderabad and Jaipur, for which deduction under section 10AA has been allowed. On facts and in the circumstances of the case and law applicable, expenses incurred in foreign currency should be reduced from total turnover also in computing deduction under section 10AA for the aforesaid units. 30. The learned assessing officer has erred in concluding that expenses incurred in foreign currency totally amounting to Rs.1688,21,01,184 should not be reduced from total turnove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in concluding that interest income from loans given to employees totally amounting to Rs.58,06,978 should be reduced from profits of SEZ units at Chennai (Unit No 1), Chandigarh, Pune and Mangalore respectively while computing deduction under section 10AA and for which deduction under section 10AA has not been allowed. On facts and in the circumstances of the case and law applicable, interest income from loans given to employees totally amounting to Rs.58,06,978 should be held as eligible for deduction under section 10AA in respect of the aforesaid SEZ units. Grounds on reduction of receipts from sale of scrap from profits of SEZ units while computing deduction under section 10AA 35. The learned assessing officer has erred in reducing receipts from sale of scrap amounting to Rs.6,54,378 from profits of SEZ unit at Trivandrum while computing deduction under section 10AA and for which deduction under section 10AA has been allowed. On facts and in the circumstances of the case and law applicable, deduction under section 10AA should be allowed in respect of receipts from sale of scrap amounting to Rs.6,54,378 relating to SEZ unit at Trivandrum. 36. The learned assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 10AA should be allowed in respect of income in the nature of Inter Company cessation of trading liability totally amounting to Rs.19,97,651 relating to aforesaid SEZ units. 40. The learned assessing officer has erred in concluding that income in the nature of Inter Company cessation of trading liability totally amounting to Rs.84,36,456should be reduced from profits of SEZ units at Chennai (Unit No 1), Chandigarh, Pune and Mangalore respectively while computing deduction under section 10AA and for which deduction under section 10AA has not been allowed. On facts and in the circumstances of the case and law applicable, income in the nature of Inter Company cessation of trading liability totally amounting to Rs.84,36,456 should be held as eligible for deduction under section 10AA in respect of the aforesaid SEZ units. Grounds on reduction of deduction u/s 10AA in respect of pure onsite revenue 41. The learned assessing officer has erred in computing and reducing a sum of Rs.1,02,27,137 from deduction computed u/s 10AAfor the reason that 1.08% (pure onsite revenue) of 50.8% (onsite revenue percentage) with a profit margin of 10.59% relating to 5 SEZs [viz., Chenna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AY 2014-15. Grounds on allowability of deduction u/s 35(2AB) for a sum of Rs.249,91,38,982 in respect of Scientific Research Expenditure incurred from 1.4.2011 to 22.11.2011 amounting to Rs.124,95,69,491 48. The learned AO has erred in not allowing deduction under section 35(2AB) in respect of scientific research expenditure incurred from 1.4.2011 to 22.11.2011 amounting to Rs.124,95,69,491 49. The learned AO has erred in not appreciating that as deduction u/s 35(2AB) for scientific research expenditure incurred from 23.11.2011 to 31.3.2012 was claimed in the return of income and the same has been allowed in the draft and final assessment order, the assessee is also eligible for deduction under section 35(2AB) in respect of scientific research expenditure incurred from 1.4.2011 to 22.11.2011 amounting to Rs.124,95,69,491. 50. On facts and circumstances of the case and law applicable, incremental deduction under section 35(2AB) amounting to Rs.249,91,38,982 [200% of Rs.124,95,69,491] should be allowed in respect of the scientific research expenditure incurred from 1.4.2011 to 22.11.2011. TDS credit not allowed fully 51. The learned AO has erred in not all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art of assessed tax. 59. The learned AO has erred in not allowing deduction for interest on IT refund amounting to Rs.7,24,03,804 which was granted in the intimation passed under section 143(1) dated 27.09.2010 for AY 2008-09 but which was subsequently recovered in the order passed under section 143(3) for AY 2008-09 as part of assessed tax. Grounds on Interest levied under section 234B and 234D 60. The learned assessing officer has erred in levying interest under section 234B and 234D. On the facts and in the circumstances of the case, interest under section 234B and 234D is not leviable. The appellant denies its liability to pay interest under section 234B and 234D. Prayer 61. In view of the above and other grounds to be adduced at the time of hearing, the appellant prays that the DRP directions and the final assessment order passed by the learned AO be quashed or in the alternative, the aforesaid grounds and the relief prayed for there under be allowed. The appellant submits that each of the above grounds/ sub-grounds are independent and without prejudice to one another. The appellant craves leave to add, alter, vary, omit, substitute or amend the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proposed an adjustment at Rs.1,71,75,081/-. 4.4. As Infosys Consulting India Ltd. was merged into Infosys Ltd., a separate order u/s. 92CA was passed based on the international transactions between Infosys Consulting India Ltd. and the AE being Infosys Consulting Inc. The Ld.TPO has recorded as under: ICIL was incorporated in 19th August 2009 as a public limited company under the Companies Axt 1956. The company was a wholly owned subsidiary of Infosys Consulting Inc., which in turn was a 100 percent subsidiary of Infosys. However, during the year ended 315' March 2012, Infosys Consulting Inc. had been terminated and hence, ICIL became a wholly owned subsidiary of Infosys. Later ICIL got merged with Infosys Ltd. 4.5. The Ld.TPO noted that Infosys Consulting India Ltd. had following international transaction with Infosys Consulting Inc. Particulars Amount Professional charges for rendering Software Consultancy servicest Infosys Consulting Inc. 15,62,14,068 Cross charge of expenses by Infosys Consulting Inc. to ICIL 11,80,346 Cross c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed the deduction amounting to Rs.566,89,96,926/- that was claimed u/s. 10AA of the Act. The other deductions claimed under 80IAB and 80JJAA was also disallowed by the Ld.AO. Aggrieved by the order of Ld.AO, assessee is in appeal before this Tribunal. 5. In order to dispose of all the issues alleged, for the sake of convenience, the assessee has tabulated the issues as under: GROUND NO ISSUE CONTESTED IN THE APPEAL COVERED BY 2 TO 5 Denial of deduction claimed under section 10AA in respect of 4 SEZ units viz., Chennai Unit 1, Chandigarh, Mangalore - Unit 1 and Pune Unit 1 Assessment order for AY 2006-07 allowed deduction u/s 10AA for Chennai SEZ Unit 1 for 1st year Hence deduction cannot be disallowed for subsequent years. CIT(A) orders for AY 2007-08 to AY 2009-10 held that the aforesaid 4 SEZ Units have not been formed by splitting up or reconstruction of the existing business. Revenue s appeal to ITAT for AY 2007-08 to AY 2009-10 does not contest the relief allowed by CIT(A). Hence, deduction u/s 10AA has been allowed in the 1st years and it cannot be d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order dated 20.9.2021 in ITA No 281/2018 c/w ITA No 279/2018 deleted identical disallowance following Engineering Analysis decision of SC 22 23 24 Disallowance of software expenses as capital expenditure Without prejudice, depreciation to be allowed at 60% instead of 25% Without prejudice, depreciation should also be allowed in respect of software expenses of earlier years held as capital in nature. ITAT order in assessee s own case for AY 2005-06 IT(TP)A No 102/Bang/2013 dated 10.11.2017 set aside the issue of allowability of software expenses to AO with a direction to verify the nature and purpose of software expenses and decide in the light of decisions in Empire Jute Co Ltd 124 ITR 1, Alembic Chemicals Works Co Ltd 177 ITR 377, IBM India Ltd 357 ITR 88 etc. CIT v Toyota Kirloskar Motor P Ltd [2012] 349 ITR 65 (Kar) dt. 23.3.2011 CIT v IBM India Ltd [2013] 357 ITR 88 dt. 10.4.2013 25 Disallowance of brand building expenditure Infosys BPO Ltd v DCIT ITA No 1367/B/2014 decision dated 27.9.2019 for AY 2007-08 Your honour s order allowing brand buildi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... source under section 195 Held against the assessee in assessee s own case by ITAT Bangalore in IT(IT)A No 4/Bang/2014 1182/Bang/2014 11.4.2022 ITAT C Bench for AY 2011-12 AY 2012-13 on the issue of liability on Infosys Ltd to deduct tax at source on such payments under section 195. 46 Deduction under section 10AA in respect of the above disallowance under section 40(a)(i) Increase in SEZ profits on account of the above disallowance is eligible for deduction u/s 10AA CIT v M Pact Technology Services Pvt. Ltd ITA No 228/2013 dated 11.7.2018 CIT v Gem Plus Jewellery India Ltd [2011] 330 ITR 175 CBDT Circular No. 37 of 2016 dated 2.11.2016 47 Deduction in the year of payment of TDS demand Without prejudice, demand arising from the order passed under section 201(1) (1A) dt. 28.2.2014 for the AY 2012-13, (wherein the payments made to Infosys Technologies China Co Ltd were held as liable for TDS), was paid under protest on 20.3.2014 and 29.3.2014. [refer page 2893 of paper book 5] Consequently, in case the disallowance is upheld under section 40(a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO to verify and allow as per law. 60 Interest levied under section 234B and 234D Consequential Additional ground Additional grounds of appeal filed on 28.6.2021 on deduction for education cess Not pressed 6. Ground nos. 2 5 It is submitted by the Ld.AR that the assessing officer has denied the claim of Rs.2227,82,65,630/- in respect of four SEZ units being 1) Chennai Unit 1 2) Chandigarh 3) Mangalore Unit 1 and 4) Pune Unit 1 6.1. The Ld.AO disallowed deduction claimed under section 10AA in respect of the aforesaid 4 SEZ Units relying on similar disallowances made in the assessment orders passed for the earlier years. For all the 4 SEZ units, it was held by the Ld. AO that the projects undertaken by the new SEZ units were based on Master Service Agreements (MSAs) which were entered into by the assessee before the formation of the SEZs. It was therefore concluded that these SEZ units were formed by splitting up and reconstruction of the business and hence not eligible for deduction under section 10AA. 6.2. The Ld.AR submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of CIT v. Nippon Electronics (India) P. Ltd. reported in [1990] 181 ITR 518 6.5. The Ld.AR submitted that, the condition of splitting up and reconstruction cannot be examined once it stands satisfied and accepted by the revenue authorities in the initial years. He also placed reliance on the decision of Hon ble Bombay High Court in case of CIT vs. Western Outdoor Interactive P. Ltd. reported in (2012) 349 ITR 309 (Bom). 6.6. Referring to Circular No. 01/2013 dated 17/01/2013, the Ld.AR further submitted that the statement of work prevails over the Master Service Agreement in determining the eligibility of deduction u/s. 10A/10AA. Master Service Agreements are in the nature of an umbrella agreement outlining broad terms and conditions for the relation between customer and Infosys. The MSA's outline the general relationship between the assessee and the client and does not describe the scope of work to be carried out. The scope of work is outlined in the SOW's. The actual work is performed as per the statement of work (work order /purchase order /task order) issued by the customer to Infosys. The SOW's describes the scope of the work, deliverables, timelines, resourc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. Thus the eligibility requirements are unit specific and not assessee specific. The section 10AA of the Act referrers to the 'unit' of the assessee to be eligible and entitled to exemption. Each unit in the SEZ must meet the conditions specified in clauses (i) - (iii) of sub-section (4) to Section 10AA of the Act. In case there are multiple units in the SEZ, each unit would, on satisfaction of the conditions, be entitled to exemption. Further the condition under section 10AA(4)(iii) is that it is not formed by transfer to a new business of machinery or plant previously used for any purpose, and Explanation 1 2 under 80IA(3) would be applicable. We have perused the submissions advanced by both sides in the light of records placed before us. 6.10 Conditions of splitting up and reconstruction as per clause (ii) of section 10AA(4) was inserted by Finance Act, 2007 with retrospective effect from February 10, 2006. The business of the SEZ unit 1 in Chennai was formed and commenced on 16.7.2005 i.e., before 10.2.2006. 6.11 The SEZ unit No. 1 at Chennai was formed and started claiming deduction under section 10AA in the FY 2005-06. Thus, AY 2006-07 was the first ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the business. 6.14. Before us the Ld.AR submitted that the employees transferred to new SEZ units were less than 20% of the total number of the employees, and therefore the condition stipulated in Circular 12 14 of 2014 dated 18/07/2014. This criteria has not been considered by the Ld.AO. 6.15. We have referred to the observations by the Ld.CIT(A) for assessment years 2007-08 to 2009-10 wherein there is a categorical finding that these units have not been formed by splitting up or restructuring. This observation has not been challenged by the revenue in appeals filed in ITA No.1557/B/2017 for AY 2007-18, ITA No.1849/B/17 for AY:2008-09 and ITA No.1848/B/2017 for AY: 2009-10. And thus this issue has attained finality. For sake of convenience, we reproduce the relevant observation by the L.dCIT(A) has been tabulated by the Ld.AR. We therefore direct the Ld.AO to grant the deduction claimed by the assessee in respect of the Chennai SEZ Unit I, Chandigarh nit, Mangalore Unit I and Pune Unit I. Accordingly these grounds raised by the assessee stands allowed. 7. Ground nos.6 9 are in respect of interest receivables from Infosys China and Infosys Brazil. 7.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1).It is submitted that, there is no change in the facts and circumstances of the case in respect of interest received from overseas entities for all the years. 7.6. The Ld.AR thus submitted that assessee has considered the LIBOR rates and had computed 6% interest on the loans advanced to Infosys China as well as Infosys Brazil. He submitted that, for the year under consideration, highest 12 months USD LIBOR interest rate was 1.128% and therefore the interest charged by assessee is at arms length. Referring to the DRP directions for year under consideration, he submitted that the DRP passed its view on the basis of opportunity cost , the principle which has been rejected by Coordinate Bench of this Tribunal in case of Advanta India Ltd. vs. ACIT reported in 64 taxmann.com 251. On the contrary, the Ld.St.Counsel relied on the observations by the Ld.AO/DRP. We have perused the submissions advanced by both sides in the light of records placed before us. 7.7. We note that, the assessee admittedly charged 6% interest rate on the loans advanced to Infosys China and Infosys Brazil. The revenue authorities have accepted the rate charged by the assessee in the subsequent as wel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee was incorrect. The Coordinate bench of this Tribunal in assessee's own case for the AY 2006-07 in ITA No 799/B/2015 vide order dated 10.11.2017 deleted the disallowance under section 14A as per rule 8D in the absence of satisfaction of the Ld.AO on incorrectness of the claim made by the assessee. 8.5. Without prejudice, Special bench of Hon ble Delhi Tribunal in the case of ACIT vs. Vireet Investment (P) Ltd., reported in (2017) 82 taxmann.com 415, among other cases has held that only those investments are to be considered for computing average value of investment under Rule 8D(2)(iii) which yielded exempt income during the year. In the present case, as submitted earlier, no dividends were declared by Infosys BPO Ltd., for the year under consideration. Thus, the investments made in the equity shares of Infosys BPO Limited should not be considered for computation of average value of investments under Rule 8D(2)(iii). 8.6. It is submitted that, if investments made in the equity shares of Infosys BPO Ltd., are excluded for computation of average value of investments under Rule 8D(2)(iii), the disallowance as per Rule 8D(2)(iii) at 0.5% of average value of mutual fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e authorities in the interest of justice, we remand these issues back to the Ld.AO/TPO to verify these claims in accordance with the principles laid down by Hon ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT (supra). In the event after verifying the relevant agreements / invoices and applying the ratio laid down by the Hon ble Supreme Court, no TDS is liable to the deducted, the disallowance u/s. 40(a)(i) / 40(a)(ia) deserves to be deleted. The Ld.AO is directed to carry out necessary verifications in accordance with law by granting proper opportunity of being heard to assessee. Accordingly, ground nos. 14-15 and 17-21 stands allowed for statistical purposes. 10. The Ld.AR submitted that Ground no. 16 is not pressed and accordingly the same is dismissed. 11. Ground nos. 22-24 Disallowance of software expenses as capital expenditure. Alternatively, assessee has prayed for depreciation to be granted at 60% as against 25%. The assessee is engaged in the business of development and export of computer software. During the year, the assessee incurred software expenses towards the usage of licensed software. Cost of software pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by payment of the fees at pre-defined intervals. In many cases, the software licenses were used by the employees for software development, maintenance, testing of applications etc. The Ld.AR submitted that Coordinate Bench of this Tribunal in assessee s own case for AY 2005-06 IT(TP)A No 102/Bang/2013 dated 10.11.2017 set aside the issue of allowability of software expenses to Ld.AO with a direction to verify the nature and purpose of software expenses and decide in the light of decisions in, Empire Jute Co Ltd reported in 124 ITR 1, Alembic Chemicals Works Co Ltd reported in 177 ITR 377, IBM India Ltd 357 ITR 88 etc. The relevant extracts are under. The Ld.AR submitted that, following the direction of this Tribunal, the Ld.AO passed the OGE to ITAT order on 3.9.2019 and allowed the software expenses as revenue expenditure. 11.5. The Ld.AR submitted that the software expenses were for software licenses in respect of application software. It was not in the nature of system software. The Ld.AR submitted that the assessee incurred regular expenditure for renewal, upgrades and maintenance of these software licenses and if the principles enunciated in all the above judicial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture. 12.2. In the draft assessment order, the Ld.AO treated the brand building expenses of Rs.81,79,53,112/-, as deferred revenue expenditure, and allowed 20% of the said expenditure amounting to Rs.16,35,90,622/- and held that the balance sum of Rs.65,43,62,490/- constituting 80% of the expenditure will be amortized over the next 4 years. 12.3. The DRP directed the Ld.AO to consider the expenses of Rs.81,79,53,112/- as capital expenditure incurred for creating intangible asset in the form of brand , instead of deferred revenue expenditure. However, the Ld.AO was directed to grant depreciation at 25% considering brand as an asset eligible for depreciation. Following the DRP Directions, the Ld.AO treated the brand building expenditure of Rs.81,79,53,112/- as capital expenditure. From this, disallowance of payments made to Forester research and Gartner totally amounting to Rs.5,99,41,068/- was reduced, as they were the subject matter of separate assessment and on the remaining sum of Rs.75,80,11,864/-, the Ld. AO allowed depreciation at the rate of 25% amounting to Rs.18,95,02,966/-, and made addition of Rs.56,85,08,898/-. 12.4. The Ld.AR submitted that, Coordinate Bench o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irements of its existing clients outside India, the assessee solicits help from agencies operating outside India. These agencies are termed Business Alliance partners (BAP), for the services rendered by these Business Alliance Partners outside India, and commission is paid to them in accordance with the terms of the agreement entered with them. The Ld.AR submitted that, no tax was deducted at source in respect of the impugned payments. It was submitted that, as stated above, the BAP render services outside India. They do not render services from India or in India. BAP are also non resident s under section 2(30) read with section 6 of the Act. Hence, no tax was deducted at source in respect of the commission paid to these non residents. 13.2. The Ld.AO relying on the decision of the Hon ble Karnataka High Court in case of CIT v Samsung Electronics Co Ltd., reported in (2010) 320 ITR 209 held that, the assessee should have either made TDS on commission paid or should have obtained an exemption certificate from the IT Dept. It was held that, in the absence of action taken on both these counts, commission paid is liable for disallowance under section 40(a)(ia) of the IT Act. 13. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FIRST BANK OF NIGERIA PLC Nigeria 1,43,53,056 Towards License Commission FIRST CITY MONUMENT BANK Nigeria 46,66,014 Towards License Commission SPRING BANK PLC Nigeria 1,34,86,672 Towards License Commission FIDELITY BANK PLC Nigeria 1,20,14,044 Towards License Commission KAKAWA DISCOUNT HOUSE LIMITED Nigeria 5,76,153 Towards License Commission BPI BANK Ghana 6,87,728 Towards License Commission UNITED BANK FOR AFRICA PLC Nigeria 2,97,49,999 Towards License Commission UNION HOMES SAVINGS AND LOANS PLC Nigeria 26,90,280 Towards License Commission WEMA BANK PLC. Nigeria 2,23,98,439 Towards License Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he commission paid to non residents. 13.6. The next proposition submitted by the Ld.AR is that, the taxability of commission under the DTAA must be there in order to cast liability on the assessee to deduct TDS. In support, he relied on the decision of Hon ble Supreme Court in case of Engineering Analysis (supra). He submitted that, the list of recipients of commission and their respective countries arethose with whom India has entered into DTAA. He submitted that with the countries mentioned except Bahrain, Ghana, Nigeria and Taiwan. The position of taxability of commission paid to BAP s under the Act and DTAA is depicted in the table below. Vendor name Country Taxability under the Act Taxability under the Treaty Almoayyed Computers Bahrain Payment not in the nature of managerial, technical or consultancy; outside the scope of s. 9(1)(vii) due to exception; hence not taxable under the Act No DTAA BAHWAN CYBERTEK LLC Oman Same as above Definition of FTS is similar to s. 9(1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther services were not rendered in India; no PE in India; hence not taxable under the treaty Simba Technology Limited, Kenya Same as above Definition of FTS is similar to s. 9(1)(vii); Payment not in the nature of managerial, technical or consultancy; further services were not rendered in India; no PE in India; hence not taxable under the treaty (i) Taldor, (ii) Taldor Computers Systems (1986) Ltd Israel Same as above Payment does not make available any technology, skills, process, know how etc as per the protocol to Treaty. Hence, payment not taxable under the Treaty. The Trizetto Group Inc USA Same as above Payment does not make available any technology, skills, process, know how etc. Hence, payment not taxable under the Treaty. Total Information Management (Tim) Philippines Same as above No FTS clause under the Treaty; No PE in India; further, other income taxable only in Philippines and not in India; hence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... coordinate bench of this Tribunal in case of IBM India P Ltd v DDIT (IT) ITA Nos. 489 to 498/B/13 decision dated 24.1.2014. The Ld.AR thus submitted that, commission paid to BAP s of Philippines, Nepal, Srilanka and Egypt would not be chargeable to tax in India. 13.9 The Ld.AR submitted that in respect of commission paid to BAP s situated in Mexico, Kenya, South Africa, Japan, Turkey and Oman, the definition of the term Fees for technical services as per the Treaty between India and these countries is similar to section 9(1)(vii) of the Act. As a result, commission paid to BAP s situated in Kenya, South Africa, New Zealand and Turkey are not liable for TDS u/s195 and consequently the said payments cannot be disallowed u/s 40(a)(i). 13.10. The Ld.AR in respect of commission paid to Bahrain, Taiwan, Nigeria and Ghana submitted that India has not entered DTAA. Submissions have already been made as to why commission paid to BAP s is not liable for TDS under the Income Tax Act. The commission paid to companies based in Mexico and Egypt would therefore not be chargeable to tax in India and hence outside the purview of section 195. On the contrary, the Ld.St.Counsel relied o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed by the department before the Hon ble Supreme Court against the decision of the Hon ble Karnataka High Court in the assessee s own case and in the case of CIT v TATA Elxsi Ltd reported in 349 ITR 98. We have perused the submissions advanced by both sides in the light of records placed before us. 14.3. This issue is no longer resintegra. Hon ble Supreme Court in the case of CIT v HCL Technologies Ltd reported in (2018) 93 taxmann.com 33 held that, freight, telecommunication charges, insurance charges and expenses incurred in foreign currency reduced from export turnover should also be reduced from total turnover while computing deduction under section 10A. Ratio of the said decision is squarely applicable for the purposes of section 10AA/10A and both these sections are in pari material with each other. The CBDT vide Circular No. 4 of 2018 dated 14/08/ 2018 cited the decision of the Hon ble Supreme Court in the case of HCL Technologies Ltd.,(supra), and clarified that, all charges/expenses specified in Explanation 2(iv) to section 10A are liable to be excluded from total turnover also for the purpose of computation of deduction under section 10A. We thus hold that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Inter company cessation of trading liability:- During the year, the assessee realized certain amounts on sale of scrap. Similarly, few airline companies such as Lufthansa, Qatar Airways, Indigo, Spicejet etc provided incentive for travelling regularly. The inter company cessation of trading liability and write back of the said liability was on account of set off of receivables and payables of Infosys Technologies China Co Ltd.1. 14.2 It was thus submitted that all the aforesaid incomes were generated in the course of business of the assessee, these incomes were treated as business income and the same formed part of the profits of the business of the SEZ units, STPI units and other units of the assessee. The income referable to SEZ units were claimed as deduction under section 10AA. 15.3. It is submitted that the Ld.AO excluded the aforesaid income from the profits of SEZ units in computing deduction under section 10AA for the reason that the, aforesaid incomes are only attributable to the business but are not derived from the activity of software development and export. 15.4. The DRP directed the Ld.AO to consider reduction of deduction with reference to GLES interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l not qualify for the deduction section 10 AA of the Act. 15.10. From the above sources that have yielded income to the assessee for the year under consideration, except for income from sale of scrap, no other income could be said to have arisen out of the business undertaking. Further in respect of cessation of trading liability, we direct the Ld.AO to verify if the trade receivables were offered to tax by the assessee in any of the preceding assessment years. If the amount has been offered to tax in any of the preceding assessment years, as a sequitur, would obviously for part of the qualifying amount for the purposes of deduction under section 10AA of the Act. 15.11. In respect of interest income from GLES deposit, interest income from loans given to employees and incentive receipts from Airlines, in our opinion cannot be held to be profits that arises out of the business undertaking and therefore we hold the same not eligible for purposes of deduction under section 10AA of the Act. Accordingly these grounds raised by the assessee stands partly allowed. 16. Ground nos. 41 42 - Reduction of deduction under section 10AA in respect of pure onsite revenue 16.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the copy of several SOWs during the assessment proceedings. It is stated that going through all the SOWs is practically not possible. The Ld.Ar submitted that, Ld.AO merely relied on the earlier assessment orders for making addition. The Ld.Ar thus Submitted that addition was made without properly considering the factual details on record and by relying on the earlier years assessment orders. The DRP thought directed the Ld.AO to consider reduction of deduction under section 10AA in respect of profits from onsite development of computer software, on a protective basis, for the reason that the decision of Hon ble Karnataka High Court in case of CIT v Mphasis Software and Service India Pvt. Ltd reported in (2015) 62 taxmann.com 165 that allowed the deduction under section 10A in respect of onsite development of computer software. However it was also noted that the revenue has not been accepted by the department and a SLP has been filed before Hon ble Supreme Court. 16.4 The Ld.AO while passing the final assessment order, reduced sum of Rs.1,02,27,137 from deduction computed u/s 10AA for the reason that 1.08% (pure onsite revenue) of 50.8% (onsite revenue percentage) with a prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct would be lost. He also placed reliance on the CBDT Circular No. 01/2013 dated 17/01/2013 which is placed at pages 5156-5159 of paper book. 16.7 The Ld.AR submitted that, the Circular further clarifies regarding the software developed abroad at a client's place being eligible for benefits under the respective provisions, as it amount to 'deemed export' and tax benefits would not be denied merely on this ground. The Ld.AR thus, submitted that the deduction claimed under section 10A and 10AA cannot be denied in respect of profits from onsite development of computer software. 16.8 He further stated that as per Circular since the benefits under these provisions can be availed of only by the units or undertakings set up under specified schemes in India, it is necessary that there must exist a direct and intimate nexus or connection of development of software done abroad with the eligible units set up in India and such development of software should be pursuant to a contract between the client and the eligible unit. The Ld.AR submitted that, there is no denial of nexus or connection of work performed onsite with the eligible units set up in India. He referred to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subject to verification of deduction of only those payments made to workmen who are not employed in supervisory capacity. The Ld.AR submitted that, various details were filed before the Ld.AO explaining as to how: (i) salary and wages are synonymous (ii) employees of Infosys are workman under section 80JJAA (iii) amendment to section 80JJAA by the Finance Act, 2013 w.e.f 1.4.2014 cannot be regarded as retro-active. 17.2 The Ld.AO however held that, the assessee is not eligible for deduction under section 80JJAA for the following reasons: 1. The assessee is not an industrial undertaking and is engaged in the business of development of computer software and export thereon. The activities of IT company cannot be considered as manufacturing or production. The intent of section 80JJAA has been clarified by the amended provisions which provides that the deduction is available to an Indian company deriving profit from manufacture of goods in a factory. 2. The assessee does not produce any articles or things. 3. The assessee does not pay wages to its employees; but pays salary to its regularly employed engineers. Salary does not come within the definition of wages ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee had claimed deduction of only those payments made to workmen who were not employed in supervisory capacity. Therefore, the assessee was entitled to the deduction under section 80JJAA of the Act. 17.5 He submitted that, the question as to whether the software industry can be regarded as an industrial undertaking was considered by the Hon ble Karnataka High Court in the case of CIT v Texas Instruments India P Ltd reported in [2021] 127 taxmann.com 59. The Hon ble Karnataka High Court held as under. 16.6 In our considered view, the concept of the workman has undergone a drastic change and is no longer restricted to a blue collared person but even extends to whitecollared person. A couple of decades ago, an industry would have meant only a factory, but today industry includes software and hardware industry, popularly known as the Information technology industry. Thus the undertaking of the Assessee being an industrial undertaking, the persons employed by the Assessee on this count also would satisfy the requirement of a workman under section 2(s) of the ID Act. We have perused the submissions advanced by both sides in the light of records placed before us. 17 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see as an undertaking. Accordingly, the assessee is required to compute deduction u/s 80JJAA in respect of each eligible unit separately. While doing so, all the conditions stipulated would be applied taking each unit as the reference point, i.e The additional wages are required to be restricted by excluding the additional wages payable to 100 workmen in respect of each unit. There should be increase in workmen in each year to the extent of minimum 10% of the existing workmen at each unit level. It is required to be seen that the workmen employed for less than 300 days during the previous year under reference to be excluded from the computation of additional wages payable. In the instant case, the assessee has not considered each unit as a basis for the purpose of fulfillment of conditions enumerated above as per working given in Form 10DA. In a sense, the assessee has considered total number of employees/workmen working in all the units put together as basis in order to reckon 10% increase in workforce during the year under reference, inclusion of only 100 employees in respect of all the units for the purpose of quantifying the additional wages paid instead of considering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction under Section 10A of the Act, is profit linked. In so far as deduction u/s.80JJA is concerned, a look at sub-section (1) of the said section is required, which is reproduced below : 80JJAA(1) : Where the gross total income of an assessee, being an Indian company, includes any profits and gains derived from any industrial undertaking engaged in the manufacture of production of article or thing, there shall, subject to the conditions specified in sub-section (2)m be allowed a deduction of an amount equal to thirty per cent of additional wages paid to the new regular workmen employed by the assessee in the previous year for three assessment years including the assessment year relevant to the previous year in which such employment is provided. A reading of the above sub-section would clearly show that the deduction is given on profits and gains derived from industrial undertaking engaged in manufacture of production of article or thing. It is only for quantification of the amount that 30% is applied. In our opinion the deduction is very much linked to the profits of the undertaking. We are therefore unable to accept this line of argument taken by the counsel. In the result ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant has satisfied all the conditions for claiming relief under s. 80JJAA. However, I find that the appellant has claimed deduction of Rs. 2,55,81,220 with reference to the additional wages of Rs. 8,52,70,736 which included the wages of Rs. 4,87,64,029 in respect of the new workmen employed during the year ended 31st March, 2000 relevant to the asst. yr. 2000-01. As there was no claim for relief under s. 80JJAA for the asst. yr. 2000-01, the relief in respect of the workers employed in asst. yr. 2000-01 cannot be considered for relief under s. 80JJAA in the asst. yr. 2001-02. As such the appellant will be entitled for relief under s. 80JJAA of Rs. 1,09,52,012 being 30 per cent of the additional wages of Rs. 3,65,06,707 (Rs. 8,52,70,736 Rs. 4,87,64,029) in respect of the new workmen employed during the previous year relevant to the asst. yr. 2001-02. Similarly, for asst. yr. 2002-03 the appellant has claimed deduction of Rs. 4,78,05,176 being 30 per cent of the wages of Rs. 1,59,30,588 which also included the wages of Rs. 4,38,68,182 pertaining to the new workers employed in the previous year 1999- 2000. For the reasons mentioned above the appellant is not entitled for relief under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order of CIT(A) according relief to the assessee. In fact he had clarified the relevant portions related to Industrial Disputes Act, 1947 and IT Act while granting relief to the asssessee which are extracted at pp. 5 and 6 of this order. After carefully considering the same, we are inclined to accept the reasons shown by the learned CIT(A). The learned CITDepartmental Representative could not assail the finding reached by the learned CIT(A) by bringing in any valid materials. The order of the CIT(A) is confirmed. It is ordered accordingly. There is no case for the Revenue that assessee had failed to file details of software engineers employed by it. In our opinion software engineers newly employed by it fell within the meaning of the word 'workmen'. 17. We are of the view that ground Nos.6 and 6.4 should be decided in the light of the directions given above by the AO afresh after affording opportunity of being heard to the assessee. 17.7. The facts and circumstances under which the disallowance is made in the year under consideration is similar with the case referred above. Respectfully following the above view, we direct the Ld.AO to consider the claim in acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 10A/AA must follow. Needless to say that proper opportunity of being heard is to be granted to the assessee. Accordingly, these grounds raised by assessee stands allowed for statistical purposes. As we have already directed the Ld.AO to consider the claim of assessee for the year under consideration, the alternative ground raised by assessee in Ground no. 47 need not be adjudicated. 20. Ground nos. 48 to 50 Allowability of deduction u/s 35(2AB) for a sum of Rs.2,49,91,38,982/- in respect of scientific research expenditure incurred from 1.4.2011 to 22.11.2011 amounting to Rs.1,24,95,69,491/-. 20.1. During the year under consideration, the assessee incurred expenditure of Rs.75,22,14,103/- during the period 23/11/2011 to 31//03/2012 on account of Research and Development activities in its centres approved u/s 35(2AB) of the IT Act, 1961. The assessee thus claimed weighted deduction of 200% amounting to Rs. 150,44,28,206 u/s 35(2AB) of the IT Act, 1961 in its Return of Income. As the in house R D facilities were approved for the purposes of section 35(2AB) from 23.11.2011, scientific research expenditure incurred from 23.11.2011 to 31.3.2012 was c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowing TDS credit and advance tax relating to Infosys Consulting India Ltd which was merged with the assessee, amounting to Rs.27,73,096/- and Rs.75,00,000/- even though the same was allowed in the draft assessment order at page 52. The action of the Ld.AO in denying the aforesaid TDS credit and advance tax in the final assessment order is contrary to the scheme of section 144C, invalid, bad in law and liable to be quashed. The Ld.AO be therefore directed to allow TDS credit and advance tax relating to Infosys Consulting India Ltd which was merged with the assessee, amounting to Rs.27,73,096/- and Rs.75,00,000/- respectively. 22.2 We direct the Ld.AO to verify the claim of assessee in accordance with law. Needless to say that proper opportunity of being heard is to be granted to the assessee. Accordingly, this ground raised by assessee stands allowed for statistical purposes. 23. Ground no.54 is in respect of allowability of incremental foreign tax credit which was allowed in the draft assessment order. 23.1 It is submitted that Foreign tax credit was claimed in the revised return of income amounted to Rs. 336,90,86,298.. During the assessment, vide letter dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction of the DRP to Ld.AO to verify and rectify the mistake in computation of Foreign tax credit, if any, is invalid, bad in law and liable to be quashed. We have perused the submissions advanced by both sides in the light of records placed before us. 23.5 We note that the DRP has relied on the decision of Hon ble Supreme Court in case of Goetze India Ltd. vs. CIT (supra). There is no denial of the claim made by the assessee for any want of evidence or on a mistaken claim. The Ld.AO has already verified the foreign tax credit claimed by assessee during the draft assessment proceedings. This issue was not a subject matter of objections filed before the DRP and the DRP suo moto cannot consider an issue which is not filed by assessee. The DRP is only directed to consider those objections raised by assessee and to pass necessary directions to the Ld.AO. This act of suo moto considering an issue which was allowed by the Ld.AO in the draft assessment proceedings is not in accordance with law. We also note that Honble Supreme Court in case of Goetz India Ltd.,(supra) has also held as under: 4. The decision in question is that the power of the Tribunal under section 254 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpletion of assessment proceedings. The Ld.AO disallowed the claim by holding that the same was not offered to tax that pertain to A.Ys. 2007-08 and 2008-09. Before us the Ld.AR submitted as under: 21.5 Legal contentions:- During the AY 2009-10, Income Tax refund was granted vide intimation under section 143(1) for the AY 2007-08 dated 4th February 2009. Interest pertaining to refund granted was offered to tax under the head Income from other sources while filing return of Income for the AY 2009-10. Subsequently 50% of the refund granted was recovered from demand while passing assessment order u/s 143(3) for the AY 2007-08. 50% of the interest amounting to INR 1,16,28,374 which was offered to tax during the AY 2009-10 and subsequently recovered in AY 2012-13 should be allowed as a deduction in the AY 2012-13 as it was already offered to Tax during the AY 2009-10. 21.6 Similarly, During the AY 2011-12, Income Tax refund was granted vide intimation under section 143(1) for the AY 2008-09 dated 27th September 2010. Interest pertaining to refund granted was offered to tax under the head Income from other sources while filing return of Income for the AY 2011-12. Subsequently refu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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