TMI Blog2023 (2) TMI 566X X X X Extracts X X X X X X X X Extracts X X X X ..... hese grounds of appeal are allowed for statistical purposes. TDS u/s 194J - Disallowance of software expenses for not deducting tax at source - HELD THAT:- We notice that this issue is remanded to the ld. AO to verify the claim as per the decision of Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. [ 2021 (3) TMI 138 - SUPREME COURT] in assessee s own case for AY 2012-13 [ 2022 (11) TMI 1317 - ITAT BANGALORE] - Respectfully following the decision of the coordinate bench we remit the issue for the year under consideration also with a similar direction. Accordingly, these grounds of appeal are allowed for statistical purposes. Disallowance of software expenses as capital expenditure - HELD THAT:- We notice that in assessee s own for AY 2012-13 [ 2022 (11) TMI 1317 - ITAT BANGALORE] has remanded the same issue to the Ld.AO to verify the claim in the light of the evidences/documents filed and respectfully following the said decision we remit the issue for the year under consideration also to the AO with similar direction. The AO is also directed to keep in mind the ratio laid down in the case of Toyota Kirloskar Motors (P) Ltd [ 2013 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration also back to the AO to examine the issue afresh. This ground is allowed for statistical purposes. Disallowance of payments made to overseas subsidiaries - Assessee made various payments to its associated enterprises and two other vendors which are non-associated enterprises outside India - HELD THAT:- We are of the considered view that the assessee cannot be denied the additional deduction claimed during the course of assessment towards payments made to overseas entities on the ground that the same is not made by filing revised return. Accordingly the AO is directed to consider these claims and decide the allowability of the claim on merits. Deduction for state taxes paid outside India - HELD THAT:- In assessee s case it is noticed that the lower authorities have looked into the issue only from section 90/91 perspective and has not discussed anything with regard to the allowability u/s.37. This fact has been admitted by the CIT(A) in para 18.2 of the appellate order. We are therefore of the considered view that this issue should be remitted back to the AO for fresh examination of facts and the AO is directed to keep in mind the ratio laid down in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of the Hon ble High Court in the case of Hewlett Packard Global Soft Ltd [ 2017 (11) TMI 205 - KARNATAKA HIGH COURT] and assessee s own case for AY 2007-08 to 2011-12 [ 2022 (11) TMI 1316 - ITAT BANGALORE] Accordingly we hold that these income should be included for the purpose of computing the profits eligible for deduction u/s.10AA. With respect to incentives from airlines, we notice that the same is received from few airline companies such as Lufthansa, Qatar Airways, Indigo, Spicejet etc., as incentive amount for travelling of employees, officers etc., regularly. In our considered view, the income is not directly arising out of the business of the assessee and do not have any nexus to the business of the assessee. The income is arising for the reason that some of the employees are frequently travelling in these airlines and the income thus earned is incidental to the business. Therefore applying the ratio laid down by the Hon ble Supreme Court in the case of Sterling Food [ 1999 (4) TMI 1 - SUPREME COURT] we hold that incentives received from airlines are not eligible for deduction u/s.10AA. Foreign tax credit - HELD THAT:- We remit the issue back to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lable to only manufacturing sector and not the service sector. For the aforesaid reasoning and judicial pronouncements cited supra, we hold that the assessee is not eligible for deduction u/s. 32AC. Deduction u/s. 35(2AB) - HELD THAT:- In assessee s own case, the expenditure incurred by the assessee with respect to expenditure incurred during financial year 2013-14 i.e. prior to 01.07.2016. Therefore respectfully following the decision of the Coordinate Bench in case of Mahindra Electric Mobility Ltd. [ 2019 (1) TMI 20 - ITAT BANGALORE] , we held that the entire expenditure incurred by the assessee with respect to R D facility, is eligible for deduction u/s. 35(2AB). Accordingly, the disallowance made by the assessing officer is deleted. - ITA Nos.125 & 126/Bang/2019, ITA Nos.226 & 227/Bang/2019 - - - Dated:- 31-1-2023 - SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER For the Assessee : Shri B.R. Sudheendra, CA For the Respondent : Shri Sankar K. Ganeshan, CIT(DR)(ITAT), Bengaluru. ORDER Per Bench These cross appeals by the assessee and the revenue are against the orders of the Commissioner of Income Tax (Appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue s appeal) 12 (Assessee s appeal) 3 (Revenue s appeal) Deduction u/s. 10AA in interest income etc. 2 (Revenue sappeal) 2 (Revenue s appeal) Deduction u/s. 80G in respect of CSR expenses - 13 3. We will first take up the appeal of the assessee (ITA No.126/Bang/2019) and the revenue (ITA No.227/Bang/2019) filed for AY 2015-16 for adjudication ITA No.126/Bang/2019 Assessee s appeal 4. The Assessee is an Indian Company engaged in development and export of computer software. For the year under consideration, original return of income was filed on 26.11.2015 declaring total income of Rs. 11170,33,18,710.A revised return of income was filed on 31.3.2017 declaring total income of Rs. 11191,68,71,750. Notice under section 143(2) was issued and served. Details called for from time to time were submitted. The assessment was completed and the order under section 143(3) was passed on 29.12.2017. As there were certain mistakes apparent from record, a rectification application was filed under section 154. The learned AO passed the recti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n be made. The AO also relied on the decision in Cheminvest Ltd v ITO ITAT DEL SB 121 ITD 318 and Pradeep Kar v ACIT 319 ITR 416 (Kar) in support of the contention that disallowance under section 14A should be made even when no exempt income is earned during the year. After noting the above, the AO has directly concluded that the Assessee s computation of disallowance under section 14A is not satisfactory and quantified the disallowance under section 14A as per old rule 8D(2)(iii) [as existed before its substitution w.e.f 2.6.2016] by considering 0.5% of average value of mutual funds, tax free bonds and equity shares of Infosys BPO Ltd. The disallowance so quantified amounted to Rs. 17,16,55,167. After reducing the disallowance voluntarily made by the Assessee amounting to Rs. 81,38,977, the remaining sum of Rs. 16,35,16,190 has been disallowed by the learned AO under section 14A read with rule 8D(2)(iii). 8. Aggrieved the assessee preferred appeal before the CIT(A). The CIT(A) held that the action of the learned AO in invoking provisions of section 14A and applying rule 8D cannot be faulted with. However, the CIT(A) directed the AO to recompute the disallowance under rule 8D by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso submitted that the AO in the assessment order has discussed only the provisions relating to section 14A and has directly proceeded to conclude that the computation of disallowance by the assessee is not satisfactory which is not correct as per the ratio laid down by the Hon ble Apex Court. The ld AR drew our attention to the decision of the coordinate bench in the case of Infosys BPM Ltd v DCIT ITA No 493/Bang/2018 dated 23.8.2021, where on identical facts and circumstances the Tribunal has deleted the disallowance made by the AO. 11. The ld DR relied on the orders of the lower authorities. 12. We heard the rival submissions and perused the material on record. For the year under consideration the assessee has made a suo moto disallowance of Rs. 81,38,976 under section 14A. We notice that the coordinate bench in assessee s own case for AY 2012-13, while considering a similar issue remanded the issue back to the AO for exclusion of the investment made in Infosys BPO Ltd. that did not yield any exempt income for the year following the ruling of the Special Bench of the Tribunal in Vireet Investment reported in (2017) 82 taxmann.com. It is also noticed that the Tribunal did n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.] Rule 8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with- (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:- (i) the amount of expenditure directly relating to income which does not form part of total income; and (ii) an amount equal to half per cent of the annual average of the monthly average of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is evident that the following conditions are required to be satisfied before invoking the provisions of section 14A of the Act: The taxpayer should have incurred the expenditure. Such expenditure should be in relation to income: and Such income does not form part of the total income under this Act. 3.2.4 Based on the above, it can be said that the provisions of section 14A of the Act would be attracted only if all the aforesaid conditions are cumulatively satisfied. The provisions of section 14A of the Act can be invoked where the taxpayer has not incurred any expenditure in relation to exempt income. 3.2.5 In this regard, the decision of Hon'ble High Court of Delhi in the case Maxopp investments Ltd Vs. CIT [TS-668-HC- 2011(HC)], which has upheld the decision of the Hon'ble High Court of Mumbai in the case of Godrej and Boyce Company Ltd. In this case, the Hon'ble High Court has held that 14A disallowance is attracted even in cases where Taxpayer Company has made strategic investments in the group companies as well as subsidiary companies. Considering the above, it is seen that the taxpayer company is liable for disallowance u/s. 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11,571,000 Infosys BPO 6,594,243,797 6,594,243,79 6,594,243,797 171,655,167 Total Total amount to be disallowed 171,655,167 Less: amount already disallowed in Return 8,130,976 Balance amount to be disallowed 163,516,190 15. Further it is noticed from the perusal of the records that the AO has also not called for any details from the assessee or analysed the workings of the disallowance. In this regard we notice that the Hon ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT [2018] 91 taxmann.com 154 (SC) has held as follows:- 41. Having regard to the language of Section 14A(2) of the Act, re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.2011. 19. The ld AR submitted that a similar issue is considered by the coordinate bench in assessee s own case where the issue has been remitted back to the AO to verify the claim as per the decision of the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT reported in (2021) 432 ITR 471. The ld AR prayed for a similar direction for the year under consideration also. The ld DR did not raise objections to the same. 20. We notice that the coordinate bench of the Tribunal while considering the same issue for AY 2012-13 in assessee s own case has held that 9.1. It was submitted that these expenditure were disallowed by the Ld.AO for non-deduction of TDS u/s.195 of the Act. The Ld.AO followed the decision of Hon ble Karnataka High Court in case of CIT vs. Samsung Electronics Co. Ltd. reported in (2011) 203 Taxman 477. It is submitted that Hon ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT reported in (2021) 432 ITR 471 as distinguished decision of Hon ble Karnataka High Court. In our opinion, as the decision of Hon ble Supreme Court was not available to the revenue authorities in the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ord. We notice that this issue is remanded to the ld. AO to verify the claim as per the decision of Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd (supra) in assessee s own case for AY 2012-13 (supra). Respectfully following the decision of the coordinate bench we remit the issue for the year under consideration also with a similar direction. Accordingly, these grounds of appeal are allowed for statistical purposes. Ground No. 5 Disallowance of software expenses as capital expenditure 25. The Assessee is engaged in the business of development and export of computer software. During the year, the Assessee incurred a sum of Rs. 797,19,52,409 towards software expenses representing the license fees for usage of licensed software/services for maintenance of licensed software. The assessee submitted before the AO a detailed note on allowability of expenditure on purchase of computer software as revenue expenditure along with statement showing in detail the type of computer software and useful life along with purchase order copies for the same vide letter filed on 22.12.2017 [Page 1064 to 1347 of Paper book 3]. 26. After considering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and allow the deduction of software expenses if the nature of the software is application software or if the duration of software license is less than 2 years. 30. We heard the DR. We notice that in case of IBM India Ltd (supra) the Hon`ble Karnataka High Court has considered the issue of allowability of expenses incurred towards software expenses and held that - The amount is paid for application of software WO not system software, The application software enables the assessee to carry out his business operation efficiently and smoothly. However, such software itself does not work on standalone boats. The same has to be fitted to a computer system to work. Such software enhances the efficiency of the operation. It is an aid in manufacturing process rather than the tool itself Thus for payment of such application software, though there is enduring benefit, it does not result into acquisition; of any capital asset. The same merely enhances the productivity or efficiency and hence can be treated as revenue expenditure. In fact, this court had an occasion to consider whether the software expenses are allowable as revenue expenses or not and held when the life, of a computer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure amounting to Rs. 18,32,08,816 and held that the remaining four fifth of the expenditure amounting to Rs. 73,28,35,264 is allowable as amortization over the next four years. On further appeal the CIT(A) upheld the action of the AO for the reason that the Assessee advanced generic statements and arguments rather than producing the details regarding the nature of the expenditure. 34. The ld AR submitted that the coordinate bench of the Tribunal in assessee s own case for AY 2012-13 in ITA No. 718/B/2017 dated 28.11.2022 has allowed the issue in favour of the Assessee by following the decision of Coordinate Bench of this Tribunal in case of Infosys BPO Ltd v DCIT in ITA No. 1367/Bang/2014 by order dated 27.09.2019. The ld AR submitted that the facts are identical for the year under consideration also and accordingly contended that the issue is covered by the above decision. 35. We have heard the rival submissions and perused the materials available on record. This issue came for consideration before this Tribunal in assessee s own case in earlier assessment year in ITA No.718/Bang/2017 dated 28.11.2022 for the assessment year 2012-13 wherein it was held as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not deducting tax at source in respect of the said payments under section 195. The AO placed reliance on the decision of the Karnataka High Court in Samsung Electronics Co. Ltd and others [2010] 320 ITR 209 in this regard. 40. Aggrieved the assessee preferred an appeal before the CIT(A). The CIT(A), relying on the appellate orders passed for AY 2007-08 to 2009-10 in Assessee s case, concluded that the impugned payments made by the Assessee constitute fees for technical services and therefore the Assessee was required to deduct tax at source on the same. Accordingly the CIT(A) confirmed the disallowance made by the AO. 41. The ld AR submitted that the coordinate bench in assessee s own case has considered the same issue for AY 2012-13 and facts being identical for the year under consideration also, the issue is covered by the said decision. The ld AR relied inter alia on the decision of the Delhi High Court in DIT(IT) v Panalfa Autoelektrik Ltd (2014) 49 taxmann.com 412 and submitted that, commission paid to foreign agent for arranging export sales cannot be regarded as fees for technical services under section 9(1)(vii). Additionally, it was argued that the position unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness Intelligence Indonesia 5,58,437 Commission CELER CONSULTING S.A. de Mexico 3,46,124 Agency commission SegmentistYazilimve Dan Turkey 7,43,914 License fees commission Trevally Financial Softwa South Africa 13,93,21,694 Fees commission KUWAIT COMPUTER SERVICES Kuwait 59,96,000 Towards commission on License sale Al Futooh Consultancies E UAE 36,38,800 Towards commission on License sale Nihon Unisys Ltd. Japan 7,15,299 Fees commission MDSL SAL (Offshore) Lebanon 21,01,555 Fees commission MKTY Information Technolo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, business, establishment etc., Manager = 1. A person who manages something, 2. ...... 3. A skilled in managing house hold affairs, money etc., ..... 4. A person whose office it id to manage an organization, business establishment, or public institution or part of one; a person with a primarily executive or supervisory function within an organization etc.; a person controlling the activities of a person or team in sports, entertainment, etc; the dictionary has used the term manager along with prefix such as bank manager, factory manager, floor manager, football manager, hotel manager, personnel manager, stage manager, team manager, theatre manager, etc., 1.5. In the present case, the services rendered outside India by BAP were not in the nature of managerial, technical or consultancy services. The said services were rendered to assist the Assessee in locating customers or for booking orders. The said services were not retable to management of the company. Similarly, no advice or consultancy was rendered by BAP so as to treat the services as consultancy services. Further, the services of BAP were not technical in nature. The payment of commission to BAP therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India. Hence payment not taxable under the Treaty Millennium Information Technologies Sri Lanka Same as above New DTAA is applicable only from 1.4.2014. Definition of FTS is similar to s. 9(1)(vii); Payment not in the nature of managerial, technical or consultancy; no PE in India; hence not taxable under the treaty Egabi FSI Egypt Same as above No FTS clause under theTreaty; No PE in India; Other income chargeable to tax only in Saudi Arabia and not in India. Hence payment not taxable under the Treaty Simba Technology Limited, Kenya Same as above New Treaty with Kenya is applicable only from 1.4.2018. Under the old treaty with Kenya, 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 CAS Trading House Pvt. Ltd. Nepal Same as above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Trevally Financial Software South Africa 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 KUWAIT COMPUTER SERVICES Kuwait 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 payment not taxable under the Treaty Al Futooh Consultancies E UAE 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 payment not taxable under the Treaty Nihon Unisys Ltd Japan Same as above Definition of FTS is similar to s. 9(1)(vii); Payment not in the nature of managerial, technical or consultancy; no PE in India; hence not taxable under the treaty MDSL SAL (O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... how, or processes, or consist of the development and transfer of a technical plan or technical design. 1.11. In the present case, payment of commission to BAP in UK did not make available technology, knowledge, skills, process etc. Hence, the said payment was not chargeable to tax under the Treaty with UK.As a result, commission paid to BAP of UK was not liable for TDS under section 195 and consequently the said payments cannot be disallowed under section 40(a)(i). 1.12 . India-Israel Treaty : The definition of Fees for technical services as per Article 13 of India Israel Treaty is as under. The term fees for technical services as used in this Article means payments of any kind received as a consideration for services of a managerial, technical or consultancy nature, including the provision of services by technical or other personnel, but does not include payments for services mentioned in Article 16 of this Convention. 1.13. Para 2 of Protocol between India Israel Treaty is as under.[omitted by Notification No. SO 441(E) [No.10/2017 (F.No.500/14/2004-FTD-II)], dated 14-2-2017, w.e.f. 14-2-2017] 2. The competent authorities of the Contracti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... republic Treaty, payment to Israel resident for services would not be regarded fees for technical services unless the payment would make available technical knowledge, experience, skill, know how etc., and the payee acquiring the services is enabled to apply the technology contained therein. 2.3. In the present case, payment of commission to BAP in Israel did not make available technology, knowledge, skills, process etc. Hence, the said payment was not chargeable to tax under the Treaty with Isreel. As a result, commission paid to BAP of Israel was not liable for TDS under section 195 and consequently the said payments cannot be disallowed under section 40(a)(i). 2.4 . DTAA with Saudi Arabia, Egypt, Nepal, Philippines, Indonesia, Kuwait, UAE, Vietnam, Lebanon These treaties do not have an Article relating to Fees for technical services . In the absence of the article dealing with fees for technical services clause, the payment would constitute business profit under Article 7 of the above Treaties. The Bangalore ITAT in JCIT v WiFi Networks P Ltd ITA Nos. 189 190/Bang/2012 and CO Nos. 60 61/Bang/2012 decision dated 8.3.2013, Exotic Fruits P Ltd v AC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that We have perused the submissions advanced by both sides in the light of records placed before us. The above arguments/submissions by the Ld.AR has not been verified by the Ld.AO. We accordingly remand this issue to the Ld.AO to verify the above submissions. 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 (supra). 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. 44. Considering that the facts are identical, respectfully following the decision of the coordinate bench in assessee s own case (supra), we remit the issue back to the AO with similar directions. This ground is allowed for statistical purposes. Ground No. 8 Deduction under section 10AA in respect of onsite activities 45. The assessee had claimed expenses which is incurred in respect of onsite activities as deduction for the purpose of section 10AA. The assessee filed the details of revenue along with onsite percentage relatable to exempt units before the AO during the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the current year. The ld AR submitted that the AO has merely relied on the fact that similar additions were made in the earlier years and accordingly made the same for current year also. The ld AR also submitted that the lower authorities have not followed the decision of the jurisdictional High Court in the case of Mphasis (supra), where the it is held that A mere reading of subsection (2) would not be sufficient. The entire section has to be read in conjunction with Explanation 3, which clarifies that profits and gains derived from on-site development of software outside India shall also be deemed to be profits and gains derived from the export of software outside India, and same would also be entitled to such benefit. If the interpretation, as contended by the revenue is accepted, the very purpose of inserting Explanation 3 to section 10A of the Act would be lost. 51. The ld AR in respect of the revenue s argument that there is no nexus between offshore production by the assessee in India and onsite production by the AE outside India, further submitted that the Karnataka High Court held that the MSA provides for onsite work to be carried out under the supervi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Central Board of Direct Taxes (CBDT). The relevant paragraph 7 of the said Circular is reproduced below: Similarly, for the purpose of s.10A or 10B, as long as a unit in the EPZ/EOU/STP itself produces computer programmes and exports them, it should not matter whether the programme is actually written within the premises of the unit. It is, accordingly, clarified that, where a unit in the EPZ/EOU/STP develops software sur place, that is, at the client's site abroad, such unit should not be denied the tax holiday under s.10A or 10B on the ground that it was prepared on site, as long as the software is a product of the unit, i.e., it is produced by the unit. 22. In our view, the said Circular is in favour of the assessee and not against it. Learned counsel for Revenue has laid much stress on the wordings that the assessee unit should have produced the computer programme by itself or that it should be produced by the unit of the assessee itself. There is no denial of the fact that even the 'on-site' work of computer software development has been done under the direct supervision and control of the assessee through the AE, which would be nothing but on behal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xplanation 3, which clarifies that profits and gains derived from 'on-site' development of software outside India shall also be deemed to be profits and gains derived from the export of software outside India, and same would also be entitled to such benefit. If the interpretation, as contended by the Revenue is accepted, the very purpose of inserting Explanation 3 to Section 10A of the Act would be lost or frustrated. 25. Lastly, learned counsel for the Revenue has contended that there is no nexus between 'off-shore' production by the assessee in India and 'onsite' production by the AE outside India. He relies on the finding of the Assessing Officer given in this regard, which is as under: Hence the profits and gains derived from Model No.2 cannot be deemed to be the profits and gains of the assessee company w.r. to export of computer software outside India. To be precise, the deduction is available only if the on-site development of computer software is executed by the assessee itself through its own personnel. The subcontracting of On site part of the software development to other entity and the resultant profit is not covered in Explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee . 27. From the record it is not borne out that the entire 'on-site' work has been sub-contracted to the AE. The MSA provides for the AE to work under total supervision and control of the assessee. The software to be produced by the assessee during its 'on-site' development has to be as per the specifications given by the assessee. The AE has no concern or direct dealing with the end customer. The assessee provides all relevant information and inputs to the AE on behalf of the end customer. The AE is admittedly answerable to the assessee and not the end customer. In such nature of the work which is carried on by the AE on behalf of the assessee, it cannot be said that there is no nexus between 'off-shore' development and 'on-site' development. 28. In view of the above discussion, we are of the opinion that in the facts of the present case, the income earned by the assessee through 'onsite' development of software by the AE on behalf of the assessee, would be eligible for deduction under Section 10A of the Act. 54. The various grounds on which revenue has denied the benefit of section 10AA in earlier year is absence of n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A in respect of each industrial undertaking as per details given in Annexure 1 to Form 10DA Audit report under section 80JJAA substantiates the same. 57. The AO has disallowed the deduction claimed under section 80JJAA amounting to Rs. 86,97,65,436 stating that the Assessee is not eligible for deduction under section 80JJAA for the following reasons: (a) The Assessee is a service provider and not a manufacturer. (b) The Assessee does not produce any articles or things. (c) The Parliament never intended to extend such benefits to white collared job creation. 58. The AO also held that since there is a decrease in the number of employees as on 31.03.2013 (1,13,694) as compared to the number of employees as on 31.03.2012 (1,13,879) at the entire company level, the Assessee is not eligible for a deduction under section 80JJAA. 59. The learned AO has also relied on the decision in the case of LG Electronics India P Limited v ACIT (2013) 33 taxmann.com 465 (Del - Trib) and ACIT v Texas Instruments (India) P Limited [ITA Nos. 273 274/Bang/2005] dt.29.12.2016 to state that deduction will be available only if the new workmen is employed for a period of 300 days in the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gly, we will consider the only those relevant submissions to adjudicate the allowability of deduction u/s.80JJAA on the various grounds on which CIT(A) has rejected the claim. The arguments and written submissions taken on record is left open with regard to whether the assessee is an industrial undertaking engaged in manufacture of an article or thing and accordingly whether eligible for the deduction u/s.80JJAA. 63. We heard the rival submissions and perused the material on record. We notice that the similar issue has been considered by the coordinate bench in the case of SAP Labs India Pvt Ltd [IT(TP)A Nos. 623, 566/Bang/2016 dated 29.11.2021]. In the case of SAP Labs case (supra), the following issues concerning section 80JJAA were considered and adjudged i) Whether the deduction under section 80JJAA is applicable to the assessee as a whole or unit wise? ii) Whether application of 80A(4) in the context of section 80JJAA for 10A units is correct or not? iii) Whether employees engaged in software industry could be regarded as workmen for the purposes of section 80JJAA? 64. The ld AR during the course of hearing submitted that the issue in (ii) above is not a matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 100 employees for inclusion in each and every unit. 7.6 In view of the above, I am of the opinion that in the absence of furnishing unit wise certificate in respect of fulfillment of conditions stipulated u/s 80JJAA, the assessee is rot eligible to claim deduction u/s 80JJAA. On this specific ground itself, I have no hesitation to deny the deduction u/s 80JJAA for the current year also. 15. **** 16. As far as ground No.6.3 is concerned, the issue has been decided in Assessment Year 2007-08 in the order referred to above and this Tribunal held that the employees engaged in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Assessee 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 Assessee is not entitled for relief under s. 80JJAA in respect of the wages pertaining to the workers employed in the previous year 1999-2000. As such the Assessee would be eligible for relief of Rs. 3,46,44,722 being 30 per cent of the additional wages of Rs.11,54,82,406 (Rs.15,93,50,588 Rs.4,38,68,182) in respect of the workmen employed in previous years 2000-01 and 2001-02. The learned Authorised Representatives of the Assessee vide order-sheet noting dt. 24th Aug., 2004 agreed that the relief under s. 80JJAA in respect of the employees who joined in the previous year relevant to the asst. yr. 2001-02 onwards only may be considered and in respect of the employees who joined in earl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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. 65. We notice that the coordinate bench of the Tribunal in assessee s own case for AY 2012-13 and AY 2013-14 has followed the decision of Sap Labs (supra) and has remitted the issue back to the AO to consider the claim in accordance with the observations and principles laid down by the Hon ble Tribunal in the said decision. Respectfully following the decision in assessee s own case, we remit the issue for the year under consideration also back to the AO to examine the issue afresh keeping in mind the ratios laid down by the coordinate bench in Sap Labs (supra) and in assessee s own case (supra). Needless to say that the assessee be given a reasonable opportunity of being heard. This ground is allowed for statistical purposes. Ground No. 10 Disallowance of payments made to overseas subsidiaries 66. During the previous year 2014-15 relevant to AY 2015-16, the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld. DCIT (IT), Circle 1(1), Bangalore treated the Assessee as an assessee in default for not deducting tax at source under section 195 in respect of the aforesaid payments. The appeal against the said order is pending before the Hon ble CIT(A) 12, Bangalore. Relying on order passed under section 201(1) and 201(1A) for AY 2015-16, the learned AO has disallowed the aforesaid payments under section 40(a)(i) for non-deduction of tax at source under section 195. 71. The assessee during the assessment proceedings made a new claim of deduction under section 40(a)(i) for TDS paid during current financial year for similar disallowance made in the assessment order for AY 2013-14 amounting to Rs. 269,31,41,150 [Page 1419-1423 of paper book 3] and the same was not considered by the AO. 72. On further appeal the CIT(A) upheld the action of the AO with regard to disallowance of Rs. 167,11,32,938 for the reason that the appeal against the order passed under section 201(1)/201(1A) for AY 2015-16 is pending for adjudication before the CIT(A) 12,Bangalore and that if the Assessee succeeds in the said appeal, consequential relief in the assessment order would follow subsequently. With r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions of the Income Tax Act, 1961 would apply only to the extent they are beneficial to the assessee. This is provided in subsection 2 to section 90 of the Income Tax Act, 1961. The Assessee has made payments for onsite services to Infosys Technologia do Brasil Ltd a, Brazil ( Infosys Brazil ), Future Focus Infotech, UAE and Pt Maya International, Indonesia. The tax treaties between India and the aforesaid countries (i.e., Brazil, UAE, and Indonesia ) do not have a clause for fees for technical services (FTS). Payment of fees for technical services rendered by non-residents will not be taxable in India, if the relevant Treaty does not contain the clause on fees for technical services. Where, the Article on fees for technical services is absent in a Tax Treaty, such a payment is classifiable as Business Profit under Article 7 of the relevant Tax Treaty. If the payee does not have a Permanent Establishment in India in terms of Article 5 of the Tax Treaty, the same will not be liable to tax in India. The Bangalore ITAT in JCIT v WiFi Networks P Ltd ITA Nos. 189 190/Bang/2012 and CO Nos. 60 61/Bang/2012 decision dated 8.3.2013, Exotic Fruits P Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the aforesaid countries. Therefore respectfully following the above decision we hold that the tax ought to have been deducted on payments made to Infosys China, Infosys BPO S.R.O. Czech Republic, Infosys Technologies S De Rl De Cv, Mexico and Infosys BPO Poland Sp, and accordingly, the disallowance of payments made to these subsidiaries u/s.40(a)(i) for non-deduction of tax at source is upheld. 78. With regard to payments made to other subsidiaries, on perusal of the above submissions of the ld AR it is clear that the Treaties of these countries have not looked into by the lower authorities. We see merit in the submission of the ld AR that in the absence of a specific clause fees for technical services the impugned payments need to be looked into from the angle Business Profits and the taxability accordingly as per the said treaties and the Act. We therefore remit the issue of the payments made to Infosys Technologia do BrasilLtda; Future Focus Infotech, UAE and Pt Maya International, Indonesia, back to the AO for a fresh consideration. 79. With regard to the claim of Rs. 269,31,41,150, we will first look at the proviso to section 40(a)(i) which reads as follows Provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In Influence v. Commissioner of Income Tax (supra) a similar approach was adopted when the AO in that case refused to accept the revised computation submitted beyond the time limit for filing the revised return under Section 139(5) of the Act. This Court noted that the decision in Goetze (India) Ltd. (supra) would not apply if the Assessee had not made a new claim but had asked for re-computation of the deduction. 83. Therefore the principle laid down by the Hon ble Apex Court in the case of Goetz India (Supra) will not have application on the facts of the instance case since the assessee had already made a claim u/s.37 the Act towards payments made to overseas entities in the original return but for a wrong amount which was rectified during the course of the asst. proceedings. WIPRO Ltd., Vs. DCIT (2015) 62 taxmann.com 26 (Kar) has held in this context that 71 It was contended on behalf of the revenue that, no revised return was filed by the assessee under section 139 (5) of the Act claiming the relief under Section 90 of the Act read with Double Taxation Avoidance Agreement. Only a letter claiming the said relief was filed before assessment and the same cannot be tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee in accordance with the facts on record and in accordance with the law laid down by the legislature. The assessment is nothing but another name for adjustment of the tax liability to accord with the taxable event in the particular tax payer's case. While determining the tax liability of the assessee, the assessing authority shall allow the credit for all prepaid taxes referred to in Section 234B, Assessing officer to make available to the assessee any legitimate and legal tax relief to which the assessee is entitled, but has omitted to claim for one reason or another. Merely because the assessee in the return filed under Section 139(1) has not put forth a claim for relief, he cannot be estopped in getting the tax relief if he is entitled to in law. The omission in the return filed under Section 139 (1) of the Act is not about non-disclosing of income. Income is disclosed. The omission is claiming tax relief out of the income which the assessee is entitled to under Section 1OA of the Act. Realizing this mistake before the assessment proceedings concluded, the assessee has filed a letter pitting forth such claim. Therefore, the assessing authority is legally bound t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 11 Disallowance of deduction claimed under section 32AC 85. The same issue is contented by the assessee in the appeal filed for AY 2014-15 and the same is adjudicated in the later part of this order and accordingly this ground of the assessee is dismissed. Ground No. 12 Deduction for state taxes paid outside India 86. For the year under consideration, the Assessee claimed a deduction for state tax paid outside India to local municipal authorities of Japan in the revised return of income amounting to Rs.1,60,29,026. A note giving detailed reasons for allowability of state taxes paid outside India as a business expenditure under section 37 of the Act, was submitted vide letter filed on 22.12.2017 [Page 1348 to 1355 of Paper book 3]. In the said note, it was submitted that the said state taxes paid to local authorities of Japan are not covered in Article 2 of the DTAA entered with Japan and thus are not eligible for relief under section 90 of the Act. Therefore, since the said expenditure related to the business of the Assessee, a claim under section 37 was made. In the said note, an alternate contention was raised to allow the same under section 91 of the Act fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that the Bombay High Court in Reliance Infrastructure Ltd v CIT [2016] 76 taxmann.com 257 held that tax paid outside India which is not eligible for relief under section 90/91 should be allowed as a deduction while computing the business income. The ld AR also submitted that following the above decision in Reliance Infrastructure (supra), various benches of the Hon ble ITAT as listed below including the jurisdictional Bangalore bench, have allowed the deduction for state taxes paid under section 37 of the Act Onmobile Global Ltd. v ACIT [IT(TP)A Nos. 139 2560/Bang/2019 dated 10.08.2022] ITAT, Bangalore Bench Page 30 to 36, Para 49 Bank of India v. ACIT [2021] 125 taxmann.com 155 ITAT, Mumbai Bench Tata Consultancy Services Ltd v Ad. CIT [2020] 121 taxmann.com 190 ITAT, Mumbai Bench Virmati Software Telecommunication Ltd. v. DCIT [IT Appeal No. 1135 (Ahd.) of 2017, dated 15-3-2020] ITAT, Ahmedabad Bench 91. Accordingly the ld AR prayed that deduction for state taxes paid outside India should be fully allowed as claimed. 92. The ld DR relied on the orders of the lower authorities. 93. We heard the rival submissions and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1979-80, we find that there is a justification for the same. This is so as the decision of this Court in S. Inder Singh Gill (supra) was noted by the Tribunal on an identical issue while passing the order for the subject assessment year. Thus, the Tribunal had not erred in not following its order for A.Y. 1979- 80. In fact, the decisions of this Court in South East Asia Shipping Co. (supra) and Tata Sons Ltd. (supra), which are being relied upon in preference to Inder Singh Gill (supra) cannot be accepted as both the orders being relied upon by the applicant was rendered not at the final hearing but on applications under Section 256(2) of the Act and at the stage of admission under Section 260A of the Act. This unlike the judgment rendered in a Reference by this Court in S. Inder Singh Gill (supra). Moreover, the decision in South East Asia Shipping Co. (supra) is not available in its entirety. Therefore, it would not be safe to rely upon it as all facts and on what consideration of law, it was rendered is not known. Similarly, the decision of this Court in Tata Sons (supra) being Income Tax Appeal No.209 of 2001 produced before us, dismissed the appeal of the Revenue by order date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra). However, we notice that the decision of this Court in S. Inder Singh Gill (supra) was rendered under the Indian Income Tax Act, 1922 and not under the Act. We further note that just as Section 40(a)(ii) of the Act does not allow deduction on tax paid on profit and/or gain of business. The Indian Income Tax Act, 1922 Act also contains a similar provision in Section 10(4) thereof. However, the Indian Income Tax Act, 1922 contains no definition of tax as provided in Section 2(43) of the Act. Consequently, the tax paid on income/profits and gains of business/profession anywhere in the world would not be allowed as deduction for determining the profits/gains of the business under Section 10(4) of the Indian Income Tax Act, 1922. Therefore, on the state of the statutory provisions as found in the Indian Income Tax Act, 1922 the decision of this Court in S. Inder Singh Gill (supra) would be unexceptionable. However, the ratio of the aforesaid decision in S. Inder Singh Gill (supra) cannot be applied to the present facts in view of the fact that the Act defines tax as income tax chargeable under the provisions of this Act. Thus, by definition, the tax which is payable un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aning of the word tax as defined in the Act is only restricted to the above and gives no license to widen the meaning of the word tax as defined in the Act to include all taxes on income/profits paid abroad. (o) Therefore, on the Explanation being inserted in Section 40(a)(ii) of the Act, the tax paid in Saudi Arabia on income which has accrued and/or arisen in India is not eligible to deduction under Section 91 of the Act. Therefore, not hit by Section 40(a)(ii) of the Act. Section 91 of the Act, itself excludes income which is deemed to accrue or arise in India. Thus, the benefit of the Explanation would now be available and on application of real income theory, the quantum of tax paid in Saudi Arabia, attributable to income arising or accruing in India would be reduced for the purposes of computing the income on which tax is payable in India. (p) It is not disputed before us that some part of the income on which the tax has been paid abroad is on the income accrued or arisen in India. Therefore, to the extent, the tax is paid abroad on income which has accrued and/or arisen in India, the benefit of Section 91 of the Act is not available. In such a case, an Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Hon ble Bombay High Court in the case of Reliance Infrastructure Ltd (supra) after giving reasonable opportunity of being heard. The assessee is directed to provide necessary information to the AO and cooperate with the proceedings. It is ordered accordingly. This ground is allowed in favour of the assessee for statistical purposes. 94. In assessee s case it is noticed that the lower authorities have looked into the issue only from section 90/91 perspective and has not discussed anything with regard to the allowability u/s.37. This fact has been admitted by the CIT(A) in para 18.2 of the appellate order. We are therefore of the considered view that this issue should be remitted back to the AO for fresh examination of facts and the AO is directed to keep in mind the ratio laid down by the Hon ble Bombay High Court in the case of Reliance Infrastructure Ltd (supra) which is followed in the decision of the coordinate bench in the case of Onmobile (supra). The assessee is directed to provide necessary information to the AO and cooperate with the proceedings. It is ordered accordingly. This ground is allowed in favour of the assessee for statistical purposes. Ground No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ief Fund which is not disputed. We are of the opinion that the A.O. has not made his observations clear that no CSR expenses are eligible for deduction u/s. 80G of the Act. We consider it appropriate to refer to the Clauses (iiihk) (iiihl) of sub-section 2 of section 80G of the Act which are read as under: (iiihk) the Swachh Bharat Kosh, set up by the Central Government, other than the sum spent by the assessee in pursuance of Corporate Social Responsibility under sub-section (5) of Section 135 of the Companies Act, 2013 (18 of 2013); or (iiihl) the Clean Ganga Fund, set up by the Central Government, where such assessee is a resident and such sum is other than the sum spent by the assessee in pursuance of Corporate Social Responsibility under subsection (5) of Section 135 of the Companies Act, 2013) (18 of 2013). Where these two exceptions are provided in Section 80G of the Act, it can be inferred that the other contributions made u/s. 135(5) of the Companies Act are also eligible for deduction u/s. 80G of Income Tax Act subject to assessee satisfying the requisite conditions prescribed for deduction u/s.80G of the Act. In the present case the A.O. has not dealt on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rification of CSR spends in the light of the said decision. The AO is also directed to consider the ratio laid down by the coordinate bench in the case of Allegis Services (India) (P.) Ltd (supra) and allow a proper opportunity of being heard to the assessee. Ground No. 14 Disallowance of deduction under section 80G in respect of other donations 102. During the year, the Assessee donated the following sums which were eligible for deduction under section 80G. Sl. No Donation paid to Amount in Rs. 1 Akanksha Foundation 6,00,000 2 Crafts Council of India 15,00,000 Total 236,15,50,000 103. The Assessee claimed deduction under section 80G computed at 50% of the aforesaid donations paid. During the course of assessment had no occasion to submit details pertaining to donations which did not form part of CSR expenditure and the AO while disallowing the deduction u/s.80G with respect to CSR expenditure had disallowed the above donations which were not fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest income on GLES deposits with LIC relating to SEZ units eligible for 100% and 50% deduction amounting to Rs. 13,50,96,470 and Rs. 23,68,91,036 respectively from profits of the business of SEZ units for the reason that the said income is not derived from the activity of software development and export. Similarly, the AO has reduced the receipts from sale of scrap, interest income from loans given to employees and incentive from airlines relating to SEZ units eligible for 100% and 50% deduction totally amounting to 1,51,73,388 and Rs. 1,74,94,176 respectively from profits of the business of SEZ units for the reason that the said income is not derived from the activity of software development and export. 110. The CIT(A) held that the issue is covered by the decisions of the jurisdictional High Court in Green Agro Pack P Ltd v CIT ITA No. 230/2008 decision dated 26.8.2014 and in Wipro Limited v DCIT[2016] 382 ITR 179 (Kar). The CIT(A) also noted that the issue was decided by the CIT(A) in Assessee s favour in its own case for AY 2013-14. In view of the same, the CIT(A) allowed relief of deduction under section 10AA for the aforementioned incomes. 111. Aggrieved the revenue i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion under section 10B. In this context, the High Court observed There is a direct nexus between this income and the income of the business of the undertaking. Though it does not par take the character of a profit and gains from the sale of an article, it is the income which is derived from the consideration realized by export of articles. In view of the definition of Income from Profits and Gains incorporated in Subsection (4), the assessee is entitled to the benefit of exemption of the said amount as contemplated under Section 10B of the Act. Therefore, the Tribunal was justified in extending the benefit to the aforesaid amounts also. The Karnataka High Court in Green Agro Pack P Ltd v CIT ITA No. 230/2008 decision dated 26.8.2014 held that Interest on fixed deposits, interest on staff loans, fines collected from staff and insurance claim are eligible for deduction under section 10A/10B. Similarly, the Karnataka High Court in Wipro Limited v DCIT ITA No. 879/2008 and other connected appeals dt. 25.3.2015 reported in [2016] 382 ITR 179 following its earlier order in Wipro s case in ITA 507/2002 decided on 25.8.2010, held that Income from sale of scrap, export i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10-A and 10-B encompasses the entire income derived from the business of export of such eligible undertakings including interest income derived from the temporary parking of funds by such undertakings in Banks or even Staff loans. The dedicated nature of business or their special geographical locations in STPI or SEZs. etc. makes them a special category of assessees entitled to the incentive in the form of 100 per cent deduction under sections 10-A or 10-B. The computation of income entitled to exemption under section 10-A or 10-B is done at the prior stage of computation of Income from profits and gains of business as per sections 28 to 44 under Part-D of Chapter IV before 'Gross Total Income' as defined under section 80-B(5) is computed and after which the consideration of various deductions under Chapter VI-A in section 80HH etc. comes into picture. Therefore, all profits and gains of the 100 percent EOU including the incidental income by way of interest on bank deposits or staff loans would be entitled to 100 per cent exemption or deduction under section 10-A and 10- B. Such interest income arises in the ordinary course of export business of the Undertaking even though ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e next five consecutive assessment years, so much of the amount not exceeding fifty per cent of the profit as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the Special Economic Zone Re-investment Reserve Account ) to be created and utilized for the purposes of the business of the assessee in the manner laid down in sub-section (2). Explanation.-For the removal of doubts, it is hereby declared that the amount of deduction under this section shall be allowed from the total income of the assessee computed in accordance with the provisions of this Act, before giving effect to the provisions of this section and the deduction under this section shall not exceed such total income of the assessee. (2) **** (3) **** (4) **** (5) **** (6) **** (7) For the purposes of sub-section (1), the profits derived from the export of articles or things or services (including computer software) shall be the amount which bears to the profits of the business of the undertaking, being the Unit, the same proportion as the export turnover in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntal income of such undertaking by way of interest on the temporarily parked funds in Banks or even interest on staff loans would constitute part of profits and gains of such special Undertakings and these cases cannot be compared with deductions under Sections 80-HH or 80-IB in Chapter VI-A of the Act where an assessee dealing with several activities or commodities may inter alia earn profits and gains from the specified activity and therefore in those cases, the Hon'ble Supreme Court has held that the interest income would not be the income derived from such Undertakings doing such special business activity . 35. The Scheme of Deductions under Chapter VI-A in Sections 80-HH, 80-HHC, 80-IB, etc from the 'Gross Total Income of the Undertaking', which may arise from different specified activities in these provisions and other incomes may exclude interest income from the ambit of Deductions under these provisions, but exemption under Section 10-A and 10-B of the Act encompasses the entire income derived from the business of export of such eligible Undertakings including interest income derived from the temporary parking of funds by such Undertakings in Banks or ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dertaking engaged in the export of Articles as envisaged under Section 10-A or Section 10-B of the Act and cannot be taxed separately under Section 56 of the Act. 116. We also notice that the coordinate bench in assessee s own case for AY 2007-08 to AY 2011-12, vide common order in IT(TP)A Nos. 449, 509/Bang/2015, 613 532/Bang/2016 ITA Nos. 1530 to 1532, 1557, 1848 1849/Bang/2017 dated 30.11.2022 has considered the issue of eligibility of rental income to be part of profits eligible to be claimed as a deduction u/s.10AA and held that 8.2 The Ld.AR submitted that assessee had received rental income from its subsidiary companies that constituted income from incidental and ancillary activities that was subservient to carrying on the business of the assessee. The said rental income was claimed by the assessee as deduction u/s. 10A which was denied by the Ld.AO, based on the turnover of the SEZ units. The Ld.AR submitted that the rental income pertained only to STPI units and therefore it was an income that was generated out of the undertaking. It is the submission of the Ld.AR that the revenue is not doubting the origin of the rental income because the disallowance was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the aforesaid provisions, the opening words of Section 10A of the Act assumes importance. It commences with the words subject to the provisions of this section . The opening words of sub section 4 of the Act clearly state that for the purposes of [sub-sections (1) and (1A], the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking . If the assessee is entitled to deduction only profit derived under Section 10A(1) of the Act, the sub section (4) would be redundant. The sub section which came into effect on 01-04-2002 by Finance Act 2001 recognizes that the profits of the business of the undertaking would be, not only the profits and gains Page 28 IT(TP)A Nos. 449, 509/Bang/2015, 613 532/Bang/2016 ITA Nos. 1530 to 1532, 1557, 1848 1849/Bang/2017 from the exports of articles or things or computer, in addition to that, the undertaking may have some other profits also, which is derived from business of the undertaking. 9. In the instant case, the assessee took the premises on lease. Assessee has paid a sum of Rs.43,38,350/- as rent from April 2002 to March 2003. It is shown a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee in the aforesaid case, this question of law is answered in favour of the assessee and against revenue. 30.3.3 Respectfully following the decisions of the Hon'ble High Court of Karnataka in the case of Subex Ltd. Vs. ITO (supra) and Wipro Ltd. Vs. DCIT (supra), as discussed above, we are of the view that rental income received from Infosys BPO Limited and BSNL, Chennai cannot be excluded from the profits of the business of the undertaking while computing the deduction under Section 10A of the Act in the case on hand. Consequently, Ground No.9 of the revenue's appeal is dismissed. 8.3 There is nothing on record that is brought by the revenue in order to take a contrary view. Respectfully following the above view, we direct the Ld.AO to include the rental income received from the SEZ units for the purposes of computing profits u/s. 10A. 117. The ld AR during the course of hearing also submitted a detailed note with respect to the nature of GLES deposits with LIC, receipts from sale of scrap, interest income from loans given to employees and incentives from airlines which reads as follows Interest on GLES Deposit: During the year under consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven to employees are covered by the decision of the Hon ble High Court in the case of Hewlett Packard Global Soft Ltd (supra) and assessee s own case for AY 2007-08 to 2011-12 (supra). Accordingly we hold that these income should be included for the purpose of computing the profits eligible for deduction u/s.10AA. 119. With respect to incentives from airlines, we notice that the same is received from few airline companies such as Lufthansa, Qatar Airways, Indigo, Spicejet etc., as incentive amount for travelling of employees, officers etc., regularly. In our considered view, the income is not directly arising out of the business of the assessee and do not have any nexus to the business of the assessee. The income is arising for the reason that some of the employees are frequently travelling in these airlines and the income thus earned is incidental to the business. Therefore applying the ratio laid down by the Hon ble Supreme Court in the case of Sterling Food (supra) we hold that incentives received from airlines are not eligible for deduction u/s.10AA. It is ordered accordingly. This ground of the revenue is partially allowed. Ground No. 3 Foreign tax credit 120. D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 155(14A) read with rule 128(4). 124. Without prejudice to the above, the Assessee requests that state taxes paid in US and Canada be allowed as a deduction under section 37 of the Act following the decisions Reliance Infrastructure Ltd v CIT [2016] 76 taxmann.com 257 (Bombay) and Onmobile Global Ltd v ACIT IT(TP)A Nos 139 2560/Bang/2019 AY 2014-15 2015-16 10.8.2022. 125. We heard the parties. We notice that the Hon ble ITAT in Assessee s own case for AY 2005-06 [IT(TP)A No. 102/B/13 dated 10.11.2017] and AY 2006-07 [IT(TP)A No. 799/B/15 dated 10.11.2017] admitted the additional grounds of appeal pertaining to claim of relief under section 90, 91 and directed the AO to consider the said claim in the light of the decision of the Karnataka High Court in the case of Wipro Limited v DCIT decision dated 25.3.2015 [2016] 382 ITR 179 after verification of necessary details and documents. Accordingly we remit the issue back to the AO with a direction to keep in mind the above decision of the coordinate Assessee s own case for AY 2005-06 and AY 2006-07 while considering the issue from allowability u/s.90/91 perspective. The AO is further directed to keep in mind the directi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edings, the assessee was asked to substantiate the claim of settlement amount so paid as an allowable expenditure. The assessee vide letter dated 08.12.2017, submitted the details of the impugned payment made to the US Authorities along with note giving detailed reasons for allowability of such expenditure as a business expenditure. A copy of the settlement agreement with the US Authorities was also submitted as part of the said letter. However, the submission of the assessee was rejected by the A.O. The A.O. relied on certain clauses of the settlement agreement with reference to the terms of settlement wherein the assessee agreed that it had committed certain civil violation. The A.O. disallowed the payment made to the US Authorities for the reason that the said payment is in the nature of a fine paid on certain civil violation and hit by Explanation 1 to section 37(1) of the I.T.Act (refer para 10.1 to 10.9 of the assessment order for assessment year 2014-2015). 130. Aggrieved, the assessee raised this issue before the first appellate authority. The CIT(A) affirmed the disallowance made by the A.O. The CIT(A) held that the settlement agreement with US Authorities is akin to co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctive. It was also contended that the emphasis has been given to the words shall not deemed to have been incurred for the purpose of business or profession and not to the word law . It was submitted that the intend of the Legislature is to treat an expenditure for violation of law as an expenditure that would not have incurred wholly and exclusively for the purpose of business. Further, the learned DR by placing reliance on the judgment of the Hon ble Supreme Court in the case of Haji Aziz Brothers v. CIT reported in 41 ITR 350 (SC) submitted that it is not necessary for the application of Explanation for making disallowance of an expenditure incurred for violation of law. Lastly, it was contended that the introduction of Explanation 3 only makes clear provisions as it stood earlier. Therefore, it was submitted that the same needs to be having retrospective operation and cannot be prospective. 133. We have heard rival submissions and perused the material on record. Admittedly, the impugned payment is towards an offence of a foreign law and not any laws in India. The Co-ordinate Bench of the Tribunal in the case of Mylan Laboratories Ltd. v. DCIT (supra) had held that the amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit or perquisite by such person is in violation of any law or rule or regulation or guideline, as the case may be, for the time being in force, governing the conduct of such person; or (iii) to compound an offence under any law for the time being in force, in India or outside India. 137. The amendment clarifies that expenses incurred towards an offence under any law in India or outside shall not allowed as a deduction. The memorandum explaining the provisions of Finance Bill, 2022 gave the following reason for the aforesaid amendment:- 7. Further, some taxpayers are seen to be claiming deduction on expenses incurred for a purpose which is an offence under foreign law or for compounding of an offence for violation of foreign law, claiming that provisions of Explanation 1 to sub-section (1) of section 37 of the Act applies only to offences which are prohibited by the domestic law of the country. In some case this view has also been accepted by the tribunal. These judgements are also against the intention of the legislation as the legislation does not say that the Explanation 1 applies only to the violation of domestic law. 138. The memorandum explicitly says t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made to section 14A will take effect from 1st April, 2022 and will apply in relation to the assessment year 2022-23 and subsequent assessment years. Despite noting the same, the High Court observed the following: 8. Consequently, this Court is of the view that the amendment of section 14A, which is for removal of doubts cannot be presumed to be retrospective even where such language is used, if it alters or changes the law as it earlier stood. 142. The learned DR relied on the judgment of the Hon ble Supreme Court in Checkmate Services (P.) Ltd v CIT (2022) 448 ITR 518 (SC) to contend that the provisions of section 37(1) should be interpreted bereft the newly inserted Explanation 3 to the said section. In the said case, the Hon ble Supreme Court interpreted the existing provision of section 36(1)(va) of the I.T. Act without considering the amendment made to it by the insertion of a new Explanation 2 to the said section, which essentially clarified the same conclusion as was decided by the Hon ble Supreme Court in that case. Further, the learned DR had contended that the provision of section 37 read with Explanation 1 and without considering the newly inserted Explanati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s. 32AC of the I.T. Act is given as an impetus to the manufacturing sector only and assessee being predominantly in the service sector would not be entitled to the deduction. 148. We have heard the rival submissions and perused the material on record. The assessee is engaged in the business of software development activity. In the written submissions of the assessee it is stated that in the software business, parties may enter into a contract for the creation or modification of software by a software house or computer programmer. This is frequently the way in which customized software is developed and acquired by the user/purchaser. The level of activities/services rendered will vary with each contract. At one end of the spectrum, the customers needs may require that a programme be created virtually from scratch. At the other end of spectrum, a minor modification to an existing or standard program may be sufficient to meet the customers requirements. In the current economic and business scenarios, the creation of computer programs to assist the various business functions is a complex process. The software to be ultimately created is broken into different drivers or modules. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounterpart in services rather than manufacturing (OECD, 2007). In apparent contradiction, the literature on economic development has long argued that production shifts first from agriculture into manufacturing and - only at a later stage of development - from manufacturing into services. This so-called Three-Sector (or Fisher-Clark-Kuznets) Hypothesis appears consistent with much cross-country evidence, and has been associated with demand shifts and productivity differentials: the resource shift out of lowproductivity agriculture into higher-productivity manufacturing boosts overall productivity in converging economies. Two recent studies have attempted to answer the question of whether India can bypass a manufacturing stage. Kochhar et al. (2006) look across India's states and at industry-level evidence, and argue that the distortions in skill-intensity and scale that have emerged are persistent and may allow it to bypass the more traditional development path that other countries have followed. OECD (2007) takes a more skeptical view, noting that few countries have not relied heavily on manufacturing at some stage for their development. (Ref page 438 of DRPB) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... moving hinterland), sectors (services versus manufacturing or agriculture), and skill and education levels. Will India foster growth in labor-intensive manufacturing? If yes, how? If not, how can jobs be provided for India's vast, growing, pool of low-skilled labor? (refer p 458 of DRPB) 3.2. Manufacturing versus services in the cross-section The traditional perspective of Kuznets or Chenery would predict a rapid increase in the share of manufacturing, a decline in agriculture and an uncertain or modest effect on services. However, between 1980 and 2002, India's share of services in value added exploded from 37 percent to 49 percent. Its share of manufacturing in value added remained broadly unchanged at 16 percent, while the decline in agriculture mirrored the performance of services. The corresponding numbers for employment were 19 percent to 22 percent and 14 percent to 18 percent (Table 1). . . Furthermore, in the regressions using the change in the share of manufacturing value-added to overall growth (column 1, Panel B), the India indicator is negative. Thus, the data suggest a relative slowing in manufacturing growth. What is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the period 1.4.2013 to 31.3.2015 will be entitled to deduct an investment allowance of 15 percent of the investment. This will be in addition to the current rates of depreciation. There will be enormous spill-over benefits to small and medium enterprises. 152. So, the intention is very much clear that Sec. 32AC was introduced to boost the manufacturing sector vis- -vis service sector. Particularly the intention was to boost large manufacturing firms that is why initial investment allowance is given to those manufacturing firms belonging to manufacturing sector investing more than 100 Crore. It is without dispute known that Infosys Ltd, the appellant in the present case is a giant and one of the leaders in the service sector. A detailed reading of Annual Report clearly shows that the assessee is into service sector. Viewed from the above factual background of introduction of section 32AC of I.T. Act, let us analyse the section and the contention of both the parties. 153. Section 32AC of the I.T. Act provides for deduction for investment allowance where an assessee, being a company, engaged in the business of manufacture or production of any article or thing, acquires and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act or the Rules. It must, therefore, be understood in its normal connotation - the sense in which it is understood in commercial world. It was further observed that the expressions 'manufacture' and 'produce' are normally associated with movables - articles and goods, big and small - but they are never employed to denote the construction activity of the nature involved in the construction of a dam or for that matter a bridge, a road or a building. 157. As can be seen from the above decision, the expressions 'manufacture' and 'produce' are normally associated with movables - articles and goods, big and small. Whereas in the instant case the activity is software development, which is intangible. Further, in the case of CIT v. Madgul Udyog [1994] 208 ITR 541 (CAL.) it was observed as follows: Learned counsel for the assessee sought to make much capital of the fact that the dictionary meaning of the word article (vide the Shorter Oxford English Dictionary) includes the word, property . The expression property is a highly abstract concept. It is of no aid unless it is specifically indicated that the property referred to also includes immova ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion thereon under section 32(1)(iia). The Assessing Officer disallowed the claim on the ground that the assessee was engaged only in the manufacture of textile goods and the setting up of a wind mill had absolutely no connection with the manufacture of textile goods. However, the Commissioner (Appeals) as well as the Tribunal allowed the assessee's claim of additional depreciation. On appeal to the High Court, the Hon'ble High Court held that for application of section 32( I)(iia ) what is required to be satisfied in order to claim the additional depreciation is that a new machinery or plant, which has been set up, should have been acquired and installed after 31-3-2002 by an assessee, who was already engaged in the business of manufacture or production of any article or thing. The said provision does not state that the setting up of a new machinery or plant, which was acquired and installed after 31-3-2002 should have any operational connectivity to the article or thing that was already being manufactured by the assessee. Therefore, the contention that the setting up of a windmill had nothing to do with the manufacture of textile goods was totally not germane to the speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose. 161. As is clear from the above extract, the Tribunal was dealing with the question whether the new machinery or plant should be used by an assessee engaged in the business of manufacture or production of any article or thing and the new machinery or plant need not be used in manufacture or production of any article or thing. The aspect of whether the software development activity is in the nature of manufacture or production of article or thing was not discussed in that decision. Even otherwise, the decision relates to AY 2008-09, when the definition of term 'manufacture' is applicable from AY 2009-10. Similarly, reliance on the decision of Gujarat High Court in the case of CIT v. Professional Information Systems Management [2005] 146 Taxman 673 (GUJ.) for AY 1983-84 cannot be applicable in light of definition of term 'manufacture'. 162. The learned AR has contended that 4% of total revenue of the assessee during the year is derived from sale of software products and thus its claim u/s 32AC should be allowed. In our opinion, 4% of total revenue is miniscule and cannot change the character of the assessee of being engaged in the business of software d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not accept the submissions of the assessee confirming the disallowance made by the AO by relying on the decision of Hon ble Karnataka High Court in case of Tejas Networks Ltd. vs. DCIT (2015) 60 taxmann.com 309 (Karn.) The CIT(A) also did not accept the alternate submission of the assessee that differential amount of Rs. 14.71 crores should be allowed as regular scientific research expenditure u/s. 35(1)(i). 166. Aggrieved the assessee is in appeal before the Tribunal. 167. Before us, the Ld.AR reiterated the submissions made before the lower authorities. It is submitted by the Ld.AR that prior to 01.07.2016, form 3CL has no sanctity and only with effect from 01.07.2016 with the amendment to Rule 6(7A)(b) of the Income Tax Rules with the quantification of weighted deduction u/s. 35(2AB) has significance. In this regard, the Ld.AR relied on the decision of Coordinate Bench of the Tribunal in case of Mahindra Electric Mobility Ltd. vs. ACIT in ITA No. 641/Bang/2017 dated 14.09.2018. The Ld.DR relied on the order of the lower authorities. 168. We heard the rival submissions and perused the material on record. 169. We noticed that the Coordinate Bench of the Tribunal in cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the guidelines to facilitate submission of Report in Form 3CL). (ii) As per guideline 5(vi) of the guidelines, the audited accounts for each year maintained separately for each approved centre shall be furnished to the Secretary, Department of Scientific Industrial Research by 31st day of October of the succeeding year, along with information as per Annexure-IV of the Guidelines. (iii) As per guideline 5(ix) Expenditures, which are directly identifiable with approved R D facility only, shall be eligible for the weighted tax deduction. However, expenditure in R D on utilities which are supplied from a common source which also services areas of the plant other than R D may be admissible, provided they are metered/measured and subject to certification by a Chartered Accountant. (iv) As per guideline 5 (x) Expenditure on manpower from departments, other than R D centre, such as manufacturing, quality control, tool room etc. incurred on such functions as attending meetings providing advice / directions, ascertaining customer choice/response to new products under development and other liaison work shall not qualify for deduction under section 35(2AB) of I.T. Act 1961. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther where the facility has been recognized and necessary certification is issued by the prescribed authority, the assessee can avail the deduction in respect of expenditure incurred on inhouse R D facility, for which the adjudicating authority is the Assessing Officer and whether the prescribed authority is to approve expenditure in form No.3CL from year to year. Looking into the provisions of rules, it stipulates the filing of audit report before the prescribed authority by the persons availing the deduction under section 35(2AB) of the Act but the provisions of the Act do not prescribe any methodology of approval to be granted by the prescribed authority vis- -vis expenditure from year to year. The amendment brought in by the IT (Tenth Amendment) Rules w.e.f. 01.07.2016, wherein separate part has been inserted for certifying the amount of expenditure from year to year and the amended form No.3CL thus, lays down the procedure to be followed by the prescribed authority. Prior to the aforesaid amendment in 2016, no such procedure / methodology was prescribed. In the absence of the same, there is no merit in the order of Assessing Officer in curtailing the expenditure and consequent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and had incurred the expenditure thereupon. Once a certificate by DSIR is issued, that would be sufficient to hold that the assessee fulfils the conditions laid down in the aforesaid provisions. The Hon'ble Delhi High Court followed the decision of the Hon'ble Gujarat High Court and upheld the decision of the Tribunal. The Hon'ble Delhi High Court quoted the following observations of the Hon'ble Gujarat High Court and agreed with the said view: 7. ... The lower authorities are reading more than what is provided by law. A plain and simple reading of the Act provides that on approval of the research and development facility, expenditure so incurred is eligible for weighted deduction. 8. The Tribunal has considered the submissions made on behalf of the assessee and took the view that section speaks of : (i) development of facility; (ii) incurring of expenditure by the assessee for development of such facility; (iii) approval of the facility by the prescribed authority, which is DSIR; and (iv) allowance of weighted deduction on the expenditure so incurred by the assessee. 9. The provisions nowhere suggest or imply that researc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d only at 100%. The conditions for allowing deduction u/s.35(1)(i) of the Act and under Sec.35(2AB) of the Act are identical with the only difference being that the Assessee claiming deduction u/s.35(2AB) of the Act should be engaged in manufacture of certain articles or things. It is not in dispute that the Assessee is engaged in business to which Sec.35(2AB) of the Act applied. The other condition required to be fulfilled for claiming deduction u/s.35(2AB) of the Act is that the research and development facility should be approved by the prescribed authority. The prescribed authority is the Secretary, Department of Scientific Industrial Research, Govt. Of India (DSIR). It is not in dispute that the Assessee in the present case obtained approval in Form No.3CM as required by Rule 6 (5A) of the Rules. In these facts and circumstances and in the light of the judicial precedents on the issue, we are of the view that the deduction u/s.35(2AB) of the Act ought to have been allowed as weighted deduction at 200% of the expenditure as claimed by the Assessee and ought not to have been restricted to 100% of the expenditure incurred on scientific research. We hold and direct accordingly and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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