Depreciation cannot be disallowed under section 40(a)(ia)

Wipro Limited Vs Addl. CIT (ITAT Bangalore)

Claim of depreciation on software-

Depreciation claimed by the assessee on the amount of software capitalized was disallowed invoking provisions of section 40(a)(ia) for non-deduction of tax at source.

Held, depreciation is a statutory allowance and hence it cannot be considered as expenditure. Accordingly, disallowance of depreciation cannot be made under section 40(a)(ia).

Allocation of corporate overheads to units claiming deduction under section 10A/ 10AA/ 10B-

Held, since deduction is allowed u/s 10A/10AA/10B of the Act on the profits derived from the undertakings, all direct or indirect expenses, must be adjusted in order to arrive at the profits derived from the undertaking. In that process, the component of head office expenses also requires allocation.

Setting off loss of STPI/SEZ units against business income from non-STPI/non-SEZ units-

The assessee set off the losses incurred in the “SEZ/STPI undertakings” against the business income generated from “non-STPI/non-SEZ” undertakings”.

Held that the loss arising in eligible SEZ/STPI undertakings are not required to be adjusted against the profits arising from other SEZ/STPI undertakings and the said loss can be adjusted against profits arising from non-SEZ/non-STPI units. Accordingly, this issue is decided in favour of the assessee.

FULL TEXT OF THE ITAT JUDGEMENT

All these appeals are directed against the assessment orders passed by Assessing officer u/s 143(3) r.w.s. 144C(13) of the Income-tax Act,1961 [‘the Act’ for short] in pursuance of directions issued by Ld Dispute Resolution Panel (DRP). The assessee has filed the appeals for assessment years 2009-10 to 2014-15. The revenue has filed the appeals for assessment years 2009-10 to 2011-12. Since most of the issues urged in these appeals are identical in nature, they were heard together and are being disposed of by this common order, for the sake of convenience.

2. The assessee is engaged in different types of business activities, viz., software development services and IT services; manufacture of Vanaspati/Hydro generated oils; toilet soaps; lighting products; pharmaceuticals & Neutraceutical products; leather products; computers, hydraulic and pneumatic equipment; water treatment systems and solutions etc. It is also engaged in trading of servers, routers, networking equipments, spare parts, etc.

3. During the course of hearing before us, the Ld. Counsel appearing for the assessee submitted that most of the issues urged in the appeals filed by both assessee and revenue are common in nature in all the years. Accordingly, he suggested that the Tribunal may adjudicate each of the issues separately and the same may be applied to all the years under consideration. Accordingly he preferred to advance his arguments also issue wise. The Ld D.R also agreed for the same. Accordingly, we are dealing with the grounds urged in all the years by both the parties issue-wise.

4. Issue No.1 relates to setting off of LOSS OF STPI/SEZ UNITS against business income from non-STPI/non-SEZ units:-

4.1 This issue is urged by the assessee and it relates to disallowance of claim of set off of loss arising in STPI/SEZ undertakings against “business income” generated from non-STPI/non-SEZ undertakings. STPI refers to “Software Technology Park” and SEZ refers to “Special Economic Zone”. This issue has been urged by the assessee in all the six years under consideration, viz., AY 2009-10 to 2014-15.

4.2 The facts relating to the issue are stated in brief. The assessee has set up various undertakings in SEZ/STPI located at different places in India. While most of the undertakings were making profits, certain undertakings were incurring losses during the years under consideration. The assessee set off the losses incurred in the “SEZ/STPI undertakings” against the business income generated from “non-STPI/non-SEZ” undertakings”. Accordingly, it claimed deductions u/s 10A/10AA of the Act in respect of profits earned by profit making SEZ/STPI undertakings.

4.3 However, the A.O. took the view that the provisions of section 10A/10AA of the Act are a special code by themselves. Accordingly he took the view that the profits/losses generated by SEZ/STPI undertakings should be grouped together, in which case, the losses incurred by STPI/SEZ undertakings should be set off against profits earned by other SEZ/STPI undertakings. The deduction u/s 10A/10AA is allowed for 10 years. The AO apparently took the view that the aggregate amount of deduction claimed during the period of 10 years by a SEZ/STPI undertaking should not exceed the aggregate amount of net income (aggregate amount of profits (minus) aggregate amount of loss) generated during the above said period of 10 years. Accordingly, the AO expressed the view that allowing losses incurred by a particular unit in first few years to be set off against the profits earned from non-SEZ/non-STPI units, will result in allowing deduction of only profits generated by SEZ/STPI units under sec. 10A/10AA of the Act and it will result in allowing deduction in excess of aggregate amount of net income generated by the STPI/SEZ units during the fiscal period of 10 years. Accordingly, the A.O. rejected the claim of the assessee for set off of losses incurred by SEZ/STPI undertakings against the profit earned by non-SEZ/non-STPI undertakings.

4.4 Before Ld. D.R.P., the assessee submitted that an identical claim made by the assessee in assessment year 2007-08 has been allowed by the Tribunal. Accordingly, it was prayed that the claim of the assessee should be allowed. However, the Ld. DRP did not accept the submissions of the assessee and accordingly, confirmed the order of the A.O. with the following observations:

”It is observed by the Panel in the immediately preceding year vide its order dated 17.9.2012 the Panel has decided while dealing with the preceding year that the A.O. had rightly denied the set off current year losses with 10A units with other income It has also upheld the AO’s action of denying set-off of losses of STP units in the AY 2007-08 while computing the profits of the business before allowing deduction under Chapter VIA and XA. The issue has not been judicially clarified by the Ld. Supreme Court in the case of HimatsingkaSeide Vs. CIT. This Panel therefore finds no reason to take a different view in the matter for the period under consideration. Accordingly, both the objections raised under this ground are rejected.”

4.5 The Ld. A.R. submitted that the provisions of section 10A of the Act has been substituted altogether by Finance Act, 2000 w.e.f. 1.4.2001. The new section envisages allowing “deduction of profits & gains” derived by an eligible undertaking. Accordingly, the provisions of section 10A of the Act has now been interpreted as “deduction provision”, meaning thereby, the question of allowing deduction u/s 10A shall arise only if the eligible undertaking generates profits. Consequently, if the eligible undertaking incurs loss, the question of allowing any deduction u/s 10A of the Act does not arise. The Ld A.R submitted that the position for section 10AA of the Act also is identical. Accordingly, he submitted that the assessee has claimed set off of loss incurred by any of the SEZ/STPI undertakings against income earned from non-STPI/non-SEZ undertakings. He submitted that the assessee has made identical claims in assessment years 2001-02 to 2005-06 and the same has been allowed by Tribunal in the assessee’s own case. The Ld A.R further submitted that the Hon’ble High Court of Karnataka has also upheld the view taken by the Tribunal on this issue in AY 2001-02 to 2004-05. He submitted that the decision rendered by Hon’ble Karnataka High Court is reported in 382 ITR 179 (kar.). The Ld. A.R. further submitted that the coordinate bench of the Tribunal has decided an identical issue in favour of the assessee in AY 2008-09 by following the decision rendered by Hon’ble Karnataka High Court in the assessee’s own case (referred above) and also the decision rendered in the assessee’s own case by the Tribunal in assessment year 2007-08. Accordingly, he submitted that the order passed by the A.O. in this regard should be reversed.

4.6 On the contrary, the Ld D.R relied upon the order passed by Ld DRP/AO on this issue.

4.7 We heard rival contentions on this issue and perused the record. We notice that the co-ordinate bench has considered an identical issue in AY 2008-09 in assessee’s own case in ITA No.1665/Bang/2012 dated 04-01-2017 and it was decided in favour of the assessee with the following observations:-

“14. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. At the outset, we note that an identical issue was also involved for the Assessment Year 2004-05 as well as for the Assessment Year 2007-08. The Hon’ble jurisdictional High Court in assessee’s own case reported in 382 ITR 179 for the Assessment Year 2004-05 has upheld the decision of this Tribunal in favour of the assessee and against the revenue. We further note that this Tribunal in assessee’s own case for the Assessment Year 2007-08 has again decided this issue in para 7.4 as under :

“7.4 We have heard both parties and perused and carefully considered thematerial on record We find that the identical issue was considered by a coordinate bench of the Tribunal in the assessee’s own case for Assessment Year 2004-05 in ITA Na1072/Bang/2007 (supra), wherein the Tribunal confirming the finding of the learned CI (A), at para 16.4 on pages 29 and 30 thereof, held as under :

“16.4. We have carefully considered the contentions of the either parties and also carefully perused the order of the Hon’ble Tribunal While deciding an identical issue, the Hon’ble Tribunal cited the following decisions –

(1) [12.5.] ITA No: 669 & 804/Ban/05 dated: 22.3.2006 for the AY-2000-01 in the case of assessee company wherein it was concluded that we direct the AO to allow set off of loss from 10,4 units against the other business income of the assessee or incomefromother sources.”

(2) ITA NO.248 & 249/Bang/07 dated 271 1.2007 in the case of I-Gate Global Solutions Ltd v. ACIT wherein the issue was decided in favour of the assessee.

(3) ITA No.387/Bang/06 dated: 26.6.2007 in the case of M/s Web Spectron P.Ltd the issue was decided in favour of the assessee. The Hon’ble Tribunal has, further, observed that “the decision of jurisdictional High Court is to the effect that deduction allowed u/s 10A in respect of undertaking is to be allowed after setting off of brought forward loss of that undertaking. Income of each undertaking is to be computed independently as per the provisions of the Act. An assessee cannot be compelled to seek deduction u/s 10A in respect of an undertaking in which there is a loss. This is the basis of not setting off of losses of 10A units against the profit of 10A units for computing deduction u/s 10A. This is in view of the decision of the Third Member in the case of Navin Bharat Industries Ltd v. DCIT 90 ITD 1. In view of the judgment of the jurisdictional High Court in the case of Himmatsingh (supra), the assessing officer will set off brought forward losses of the units for which the assessee has disclosed positive income for the purpose of claiming deduction u/s 10A”.

16.5 Respectfully following the decisions of the Hon’ble Tribunal referred supra, we direct the assessing officer to set off brought forward losses of the units for which the assessee has disclosed positive income for the purpose of claiming deduction u/s 10A”

Respectfully following the decision of the co­ordinate bench of the Tribunal in the assessee’s own case for Assessment Year 2004-05 (supra) on this issue, we direct the Assessing Officer to set off brought forward losses of the units for which the assessee has disclosed positive income for the purpose of claiming deduction under section 10A.”

Thus it is clear that the Tribunal has followed the earlier order for the Assessment Year 2004-05 which has been upheld by the Hon ‘ble jurisdictional High Court. Following the earlier order of this Tribunal as well as Hon ‘ble jurisdictional High Court, we decide this issue in favour of the assessee and against the revenue. ”

4.8 Though it is stated that the issue is decided in favour of the assessee, we notice that the discussions were not happily worded. We notice that an identical issue was decided by Hon’ble High Court of Karnataka in AY 2001-02 to 2004-05 in the assessee’s own case reported in 382 ITR 179. We extract below the relevant discussions made by Hon’ble Karnataka High Court on this issue:-

“Substantial question of law No.14:

“Whether the Tribunal was right in directing that losses of a section 10A unit, which are already set off against other business income of the appellant, should be again carried forward and set-off against eligible profits of the same unit in a subsequent year ?”

“Whether the Tribunal was correct in holding that income of each undertaking should be taken independently and losses of section 10A units cannot be set off against profits of section 10A units, when computing deduction under section 10A of the Act?”

“Whether the appellate authorities failing to take into consideration the amendment provision of section 10A(6)(ii) of the Act, which clearly contemplated that the loss of the undertaking can be carried forward and adjusted against other income?”

“Whether the appellate authorities were correct in holding that the finding recorded by the Assessing Officer that in view of the amendment to section 10A(6)(ii) with effect from April 1, 2001 the loss of the STP units should be carried forward at the end of the 10 years, tax holiday period under section 10A of the Act and should be set off against profits in respect of Madivala R&D unit by treating the cost of development of shrink wrap computer software as work in progress and therefore cannot set off the loss?”

163. The said substantial questions of law was considered by the apex court in the case of CIT v. Canara Workshops P. Ltd. (1986) 161 ITR 320 (SC) in favour of the assessee and against the Revenue.

164. Following the said judgement in the assessee’s case itself in ITA 1395 of 2006 connected with ITA 1394 of 2006, this court by its order dated November, 5, 2013 following the judgement of the Supreme Court answered the said substantial question of law in favour of the assessee and against the Revenue. Therefore, aforesaid questions of law are answered in favour of assessee and against the Revenue.”

4.9 We notice that the jurisdictional Hon’ble Karnataka High Court has decided an identical issue in favour of the assessee. Accordingly, we hold that the loss arising in eligible SEZ/STPI undertakings are not required to be adjusted against the profits arising from other SEZ/STPI undertakings and the said loss can be adjusted against profits arising from non-SEZ/non-STPI units. Accordingly, this issue is decided in favour of the assessee.

5. Issue No.2 relates to Exclusion of Miscellaneous income while computing deduction u/s 10A/10AA/10B:-

5.1 The next issue relates to denial of deduction u/s 10A/10AA/10B in respect of miscellaneous income disclosed by eligible undertakings. This issue has been urged by the assessee in all the six years, viz., assessment years 2009-10 to 2014-15.

5.2 The assessee has disclosed certain item of receipts as miscellaneous income and claimed the same as part of business profits. Accordingly, it claimed a deduction u/s 10A/10AA/10B of the Act on such income also. In assessment year 2009-10, the miscellaneous

income disclosed by the assessee consisted of following items:

Items of receipt	2009- 10	2010- 11	2011- 12	2012- 13	2013- 14	2014- 15
Sale of Scrap/Newspaper	178.15	82.86	121.54	163.04	372.93	165.59
Profit on sale of fixed asset	285.08	258.90	856.90	828.08	311.74	—
Rental Income	152.48	359.62	227.78	286.53	779.65	192.97
Dividend Income from Mutual fund	391.63	86.73	—	—	—	—
Others	325.49	90.33	267.56	51.24	—	372.32
Interest income	—	—	—	311.20	922.99	—

5.3 The assessee has not claimed deduction u/s 10A/10AA/10B in respect of “profit on sale of assets”, since the same is required to be deducted from Net profit while computing total income and it also requires different kind of treatment under Income tax Act. The A.O. accepted that dividend income from mutual fund is exempt and hence the same was also excluded while computing total income. In respect of other items shown in the table above, the assessee had claimed deduction u/s 10A/10AA/10B treating them as part of “Profits and gains derived from the eligible undertaking”. However, the A.O. took the view that these incomes do not have any nexus with software development activities of the units and hence they cannot be treated as part of “Profits and gains derived from eligible undertaking”. Accordingly, the A.O. held that these incomes are not eligible for deduction u/s 10A/10AA/10B of the Act. The Ld. DRP also confirmed the same. Identical view was taken in other years also. Ld DRP also confirmed the said view in other years.

5.4 We notice that an identical issue was considered by the Hon’ble High Court in the assessee’s own case reported in 382 ITR 179. For the sake of convenience, we extract below the decision rendered by Hon’ble High Court:

“166. The court had an occasion to consider the substantial question of law in the assessee’s case itself in ITA 507 of 2002 decided on August 25, 2010 while dealing with the income earned from sale of scrap, export incentive and rent received,answered the question in favour of the assessee and against the Revenue.

167. In so far as gain on exchange rate fluctuation is concerned, it was subject matter of ITA 3202 of 05 which was decided on February 28, 2012 in the assessee’s case itself, where the said question was answered in favour of the assessee and against the Revenue.

168. In so far as income earned from interest is concerned that was subject matter of this court in the case of CIT v. Motorola India Electronics P. Ltd. in ITA No.428 of 2007 decided on December 11, 2013 – (2014) 2 ITROL 499 (Karn), while dealing with exemption under section 10B. It is in Pari materia with section 10A and has answered the said question in favour of the assessee and against the Revenue.

169. As all these questions are decided and answered in favour of assessee in the aforesaid case, this question of law is answered in favour of the assessee and against the Revenue.”

5.5 The decision rendered by Hon’ble Karnataka High Court would cover the income booked under the head Sale of Scrap/Newspaper, Rental income and interest income. Accordingly, we direct the AO to allow deduction u/s 10A/10AA/10B of the Act in respect of income earned on sale of scrap/newspaper and Rental income. The issue relating to interest income is dealt under the head Issue no.3 below.

5.6 The remaining item is “Other income”. In AY 2007-08 and 2008-09, this item of miscellaneous income was restored to the file of the AO for examining the nature of receipt and decide the same accordingly. The observations made by the Tribunal in AY 2007-08 are extracted below:-

“……. However, since we find that no details are available with regard to ‘other income’ of Rs.3,48,524/-, we deem it fit to remit the matter back to the file of the Assessing Officer with a direction to examine the matter afresh and decide the issue on merits.”

Following the same, we restore the issue relating to “Other income” to the file of the AO with similar directions.

6. Issue No.3 relates to Exclusion of Net interest income for deduction u/s 10A/10AA/10B:-

6.1 This issue relates to rejection of claim for deduction u/s 10A/10AA/10B of the Act in respect of interest income earned by the assessee. This issue has been urged by the assessee in all the six years, namely in the assessment years 2009-10 to 2014-15.

6.2 We notice that the assessee has booked interest income under the head “Miscellaneous income” in AY 2012-13 and 2013-14, apart from booking interest income separately as under:-

Assessment year	Interest Income
2009-10	60.27 crores
2010-11	150.03 crores
2011-12	26.54 crores
2012-13	224.65 crores
2013-14	2.91 crores
2014-15	3.45 crores

It is also not clear as to whether the nature of interest income booked under the head “miscellaneous income” in AY 2012-13 and 2013-14 are identical with the nature of interest income booked separately. Since the legal principles relating to deduction of interest income u/s 10A/10AA/10B are discussed here, we adjudicate interest income booked under the head “miscellaneous income” and also reported separately. The facts relating to this issue as narrated by the assessee in its written submissions are that the assessee had availed “packing credit loan” in foreign currency (PCFC) from M/s Duetsche Bank, HSBC, JP Morgan, Bank of Tokyo. It is in the nature of pre-shipment credit extended to the exporters for financing working capital. According to the assessee, it has used the funds, which are not immediately required in operations, to make short term fixed deposits. Similarly, the surplus funds available with the SEZ units have also been invested in fixed deposits. All these fixed deposits have earned interest income. The contention of the assessee is that these fixed deposits have been made out of loan funds as well as surplus funds generated through operations of SEZ units and hence they form part of “profits of business”. Hence they are eligible for deduction u/s 10A/10AA/10B of the Act. However, the AO took the view that the impugned interest income is not related to the software development activity. Further, the AO also took the view that the surplus funds is fully fungible and hence surplus funds relating to SEZ division could not be separately identified, if all the surpluses of all divisions (both 10A/10AA/10B units and non-10A/non-10AA/non-10B units) are put together. Accordingly, the AO rejected the claim of the assessee. The Ld DRP also confirmed the same.

6.3 We notice that issue relating to the claim of deduction u/s 10A/10AA/10B on the interest income has been examined by the Hon’ble Karnataka High Court in AY 2004-05 referred above (382 ITR 179) and it has been decided as under:-

“168. In so far as income earned from interest is concerned that was subject matter of this court in the case of CIT v. Motorola India Electronics P. Ltd. in ITA No.428 of 2007 decided on December 11, 2013 – (2014) 2 ITROL 499 (Karn), while dealing with exemption under section 10B. It is in Pari materia with section 10A and has answered the said question in favour of the assessee and against the Revenue.”

We notice that the Hon’ble High Court followed the decision rendered by it in the case of CIT vs. Motorola India Electronics P Ltd (supra), wherein the Hon’ble jurisdictional Karnataka High Court has examined the issue of allowing deduction u/s 10B of the Act in respect of interest income earned by the assessee from the amount kept in EEFC account, fixed deposits with banks and from inter-corporate deposits. The Hon’ble High Court has decided as under:-

“But there is change in the law for the assessment year 2001­-02. Section 10(B)(1) and (4) reads as under:-

“Section 10B : Special provisions in respect of newly established hundred per cent export-oriented undertakings.-

(1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee :

Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance  Act, 2000, the undertaking shall be entitled to the deduction referred to in this sub-section only for the unexpired period of aforesaid ten consecutive assessment years :

Provided further that for the assessment year beginning on the 1st day of April, 2003, the deduction under this sub-section shall be ninety per cent of the profits and gains derived by an undertaking from the export of such articles or things or computer software: Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, 2012 and subsequent years :

Provided also that no deduction under this section shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified under sub-section (1) of section 139.

……………..

(4) For the purposes of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking.”

By Finance Act, 2001, with effect from 01.04.2001, the present Subsection (4) is substituted in the place of old Subsection (4). No doubt Subsection 10(B) speaks about deduction of such profits and gains as derived from 100% EOU from the export of articles or things or computer software. Therefore, it excludes profit and gains from export of articles. But Subsection (4) explains what is the profit derived from export of articles as mentioned in Subsection (1). The substituted Subsection (4) says that profits derived from export of articles or things or computer software shall be the account which bears to the profits of the business of the undertaking and not the profits and gains from export of articles. Therefore, profits and gains derived from export of articles is different from the income derived from the profits of the business of the undertaking. The profits of the business of the undertaking includes the profits and gains from export of the articles as well as all other incidental incomes derived from the business of the undertaking. It is interesting to note that similar provisions are not there while dealing with computation of income under Section 80HHC. On the contrary, there is specific provisions like Section 80HHB which expressly excludes this type of incomes. Therefore, in view of the aforesaid provisions, it is clear that, what is exempted is not merely the profits and gains from the export of articles but also the income from the business of the undertaking.

8. In the instant case, the assessee is a 100% EOU, which has exported software and earned the income. A portion of that income is included in EEFC account. Yet another portion of the amount is invested within the country by way of fixed deposits, another portion of the amount is invested by way of loan to the sister concern which is deriving interest or the consideration received from sale of the import entitlement, which is permissible in law. Now the question is whether the interest received and the consideration received by sale of import entitlement is to be construed as income of the business of the undertaking. There is a direct nexus between this income and the income of the business of the undertaking. Though it does not partake the character of a profit and gains from the sale of an article, it is the income which is derived from the consideration realized by export of articles. In view of the definition of ‘Income from Profits and Gains’ incorporated in Subsection (4), the assessee is entitled to the benefit of exemption of the said amount as contemplated under Section  10B of the Act. Therefore, the Tribunal was justified in extending the benefit to the aforesaid amounts also. We do not find any merit in these appeals. Therefore, the first substantial question of law raised in ITA No.428/2007 is answered in favour of the revenue and against the assessee and the first substantial question of law in ITA No.447/2007 is answered in favour of the assessee and against the revenue.

6.4 The co-ordinate bench has also considered an identical issue in AY 2007-08, wherein the decision rendered by the Tribunal in AY 2004-05 was followed with the following observations:-

(3) With regard to interest income also, the Hon’ble Tribunal in its decision referred supra, after deliberating the issue at length has, arrived at a conclusion that –

“10.2…………. The treatment to be meted out to interest had been under dispute while computing profits of the business u/s 80HHC of the IT Act as per Explanation (baa) to section 80HHC, 90% of the interest is not to be included in the profits of the business. The issue as to whether the interest to be treated as business income or income from other sources has been considered by various High

Courts. The Delhi High Court in the case of CIT Vs. Shriram Honda Power Equipment 289 ITR 475 has discussed such an issue of length. However, it was observed by the Delhi High Court that in a given case if the assessing officer has held the interest income as business income and this has not been challenged by the department in thereafter, then the question cannot be permitted to be reopened and the only question then will be if netting should be allowed. In the instant case the interest receipts have not been taxed as income from other sources. The assessing officer has also not discussed the nature of the interest income. It is not the case of the revenue that interest income is not business income of the undertaking eligible for deduction u/s 10A. Under the circumstances, we hold that the learned CIT(A) was justified in directing for not excluding the interest for the purpose of computing deduction u/s 10A as the assessing officer has not treated the interest income as income from other sources or has not held that such income does not belong to the undertaking to which section 10A is applicable.”

In view of the finding in the decision of the coordinate bench of the Tribunal (supra) and respectfully following the same, we are of the considered view that the said decision holds good for this assessment year also with regard to interest income and income from sale of scrap. However, since we find that no details are available with regard to other income of Rs.3,48,524, we deem it fit to remit the matter back to the file of the Assessing Officer with a direction to examine the matter afresh and decide the issue on merits.”

The order passed on this issue in assessment year 2007-08 was followed in AY 2008-09 also.

6.5 From the foregoing discussions, we notice that the principle enunciated by Hon’ble Karnataka High Court in the case of Motorola India Electronics (P) Ltd (supra) is that the deduction u/s 10B is allowable if there is direct nexus between interest income and the income of the business of the undertaking. The co-ordinate benches in the earlier years have also followed the decision rendered by Hon’ble Delhi High Court in the case of CIT Vs. Shriram Honda Power Equipment 289 ITR 475, wherein it was held that, if the AO has assessed interest income under the head Income from business and this has not been challenged by the department thereafter, then the question cannot be permitted to be reopened and the only question then will be if netting should be allowed. Accordingly following principles emerge out from the above said discussions:-

(a) if the AO has assessed interest income under the head Income from business, which has not been challenged by the department, then it shall form part of business income as per the decision of Hon’ble Delhi High Court in the case of Shriram Honda Power equipment (supra).

(b) if there is direct nexus between interest income and income of the business of undertaking, then also it shall form part of business income as per the decision of Hon’ble Karnataka High Court in the assessee’s own case.

In both the cases, the interest income should be eligible for deduction u/s 10A/10AA/10B of the Act.

6.6 In the instant cases, the assessee has earned interest income from two types of deposits, viz.,

(a) The packing credit loan funds, which are not immediately required in its business operations were deposited into short term fixed deposits.

(b) The surplus funds available with the SEZ units have also been invested in fixed deposits.

Hence it is required to be examined first as to whether the AO has assessed interest income under the head “Income from business” or under the head “Income from other sources”. If the AO has assessed interest income as business income, then the assessee is eligible for deduction u/s 10A/10AA/10B on interest income also. However, if the AO has assessed interest income under the head “income from other sources”, then it is required to be examined as to whether there is direct nexus between interest income and income of business undertaking.

6.7 With regard to Category (a) above, if the nexus is shown between the loan funds and the deposits, the assessee is eligible for deduction in respect of interest income, following the decision rendered by the Hon’ble Karnataka High Court in the assessee’s own case (referred supra).

6.8 With regard to Category (b) above, it is imperative on the part of the assessee to show that there is nexus between interest income and income of business undertaking. We have noticed earlier that the AO has taken the view that the surplus funds of undertaking located in SEZ are put into common bank account. Accordingly, the AO has observed that the surplus funds relating to SEZ division could not be separately identified, if all the surpluses of all divisions are put together, meaning thereby, it is the case of the AO that there is no nexus between interest income and income of business undertaking. In our view, the assessee may be given an opportunity to show that the nexus between SEZ/STPI divisions and the fixed deposits from which interest income was earned. If the assessee is able to show the nexus to the satisfaction of the AO, then the interest income to that extent should be eligible for deduction u/s 10A/10AA/10B of the Act.

6.9 With these observations, we restore this issue to the file of the AO for examining it afresh in the light of discussions made supra.

7. Issue No.4 relates to the issue whether Deemed exports are eligible for deduction section 10A/10AA/10B:-

7.1 This issue relates to rejection of claim of deduction u/s 10A/10AA/10B of the Act in respect of sale proceeds received from customers located in SEZ units in India, though it was received in foreign currency. This issue is being urged by the assessee in assessment years 2009-10, 2010-11, 2012-13 to 2014-15.

7.2 During the years under consideration, the assessee has provided services to some of the customers located in SEZ units and received sale proceeds in foreign currency. The assessee claimed it to be part of export turnover and accordingly claimed deduction u/s 10A/10AA/10B of the Act. According to the assessee, the services were provided to its customers located in SEZs are ultimately exported by those SEZs to a person located outside India.

7.3 The A.O. did not accept the explanations of the assessee. He took the view that the assessee has raised sales bill against local parties even though the proceeds are received in foreign currency. Accordingly, the AO took the view that these are domestic sales only and further these kinds of receipts cannot be considered as a turnover arising on account of export of software. The A.O. also observed that provisions of section 10A(3) of the Act would apply to the undertaking, only if the sale proceeds of articles or things or software exported out of India are received in foreign currency, thereby implying that article or thing or software has to be exported out of the country by the assessee itself. Accordingly, he expressed the view that mere receipt of sale proceeds in foreign currency cannot convert a domestic sale into an export sale. Accordingly, he rejected the claim of the assessee to include deemed exports as part of export turnover. The view so taken by the A.O. was approved by Ld. DRP in assessment years 2009-10, 2010-11, 2012-13, 20140-15. Only in assessment year 2011-12, the Ld. DRP accepted the contentions of the assessee and directed the A.O. to include the deemed exports as part of turnover.

7.4 The Ld. A.R. submitted that an identical issue has been examined by the Hon’ble High Court of Karnataka in the assessee’s own case relating to assessment year 2001-02 – 2004-05, reported in 382 ITR 179 and it has been decided in favour of the assessee by following the decision rendered by the Hon’ble High Court in the case of Tata Elixsi Ltd.

7.5 We heard Ld. D.R. and perused the record. We notice that an identical issue has been decided in favour of the assessee by Hon’ble High Court of Karnataka by following the decision rendered by High Court in the case of Tata Elixsi Ltd. The relevant portion of High Court’s order is extracted below:-

“Substantial Question No.8:

“Whether the Tribunal was right in excluding the computer software sales made to STP units in India from “export turnover” for the purpose of computing deduction under section 10A of the Act?”

147. The said question came up for consideration before this Court in the case Tata Elxsi vs. Asst. CIT (I.T.A No.411 of 2008). This court has answered the said substantial question in favour of the assessee and against the Revenue. Accordingly, the said substantial question of law is answered in favour of the assessee and against the Revenue.”

7.6 In the case of Tata Elxsi Ltd (supra), the Hon’ble Karnataka High Court dealt with this issue as under:-

“18. As Section 10A was introduced to give effect to the Exim Policy of the Central Government, we have to take into consideration the provisions of the Exim Policy.

19. Paragraph 6.10 of the Exim Policy speaks about exchange through others. It provides that a EOU/EHTP/STP/BTP unit may export goods manufactured/software developed by it through another exporter or any other EOU/EHTP/STP/SEZ unit subject to the conditions mentioned in paragraph 6.19 of Handbook. The conditions to be fulfilled if a Unit has to export through other exporters is as under:

“6.19 An EOU/EHTP/STP/BTP unit may export goods manufactured/software developed by it through other exporter or any other EOU/EHTP/STP/SEZ/BTP unit subject to condition that:

a) Goods shall be produced in EOU/SHTP/STP/BTP unit concerned.

b) Level of NFE or any other conditions relating to imports and exports as prescribed shall continue to be discharged by EOU/EHTP/STP unit concerned.

c) Export orders so procured shall be executed within parameters of EOU/EHTP/STP/BTP schemes and oods shall be directly transferred from unit to port of shipment.

d) Fulfillment of NFE by EO U/EHTP/STP/BTP units in regard to such exports shall be reckoned on basis of price at which goods are supplied by EOUs to other Exporter or other EOU/EHTP/STP/BTP/SEZ unit.

e) All export entitlements, including recognition as Status Holder would accrue to exporter in whose name foreign exchange earnings are realized. However, such export shall be counted towards fulfillment of obligation under EOU/EHTP/STP/BTP scheme only.”

20. From the aforesaid provisions, it is clear that if a assessee wants to claim the benefit of Section 10A, firstly he must export articles or things or computer software. Secondly, the said export may be done directly by him or through other exporter after fulfilling the conditions mentioned therein. Thirdly, such an export should yield foreign exchange which should be brought into the country. If all these three conditions are fulfilled, then the object of enacting Section 10A is fulfilled and the assessee would be entitled to the benefit of exemption from payment of Income Tax Act on the profits and gains derived by the Undertaking from the export.

21. Clause 6.11 of Exim Policy dealing with entitlement for supplies from the DTA states that supplies from the DTA to EOU/EHTP/STP/BTP units will be regarded as ‘deemed export’, besides being eligible for relevant entitlements under paragraph 6.12 of the Policy. They will also be eligible for the additional entitlements mentioned therein. What is of importance is when a supply is made from DTA to STP, it does not satisfy the requirements of export as defined under the Customs Act. However, for the purpose of Exim policy, it is treated as ‘deemed export’. Therefore, when Section 10A of the Act was introduced to give effect to the Exim Policy, the supplies made from one STP to another STP has to be treated as ‘deemed export’ because Clause 6.19 specifically provides for export through Status Holder. It provides that an EOU/EHTP/STP/BTP unit may export goods manufactured/software developed by it through other exporter or Status holder recognized under this policy or any other EOU/EHTP/STP/SEZ/BTP unit. What follows from this provision is that to be eligible for exemption from payment of income tax, export Should earn foreign exchange. It does not mean that the undertaking should personally export goods manufactured/software developed by it outside the country. It may export out of India by itself or export Out of India through any other STP Unit. Once the goods manufactured by the assessee is shown to have been exported out of India either by the assessee or by another STP Unit and foreign exchange is directly attributable to such export, then Section 10A of the Act is attracted and such exporter is entitled to benefit of deduction of such profits and gains derived from such export from payment of income tax. Therefore, the finding of the authorities that the assessee has not directly exported the computer software outside country and because it supplied the software to another STP unit, which though exported and foreign exchange received was not treated as an export and was held to be not entitled to the benefit is unsustainable in law. The substantial question of law is answered in favour of the assessee and against the revenue. The appeal is allowed. The impugned orders are set-aside. The assessee is held to be entitled to deduction of such profits and gains derived from the export of the computer software.”

7.7 In view of the binding decision of the jurisdictional Karnataka High Court, we direct the A.O. to include deemed exports as part of turnover while computing deduction u/s 10A/10AA/10B of the Act.

8. Issue no.5 relates to the eligibility of the assessee to claim deduction u/s 10A of the Act in case of Delayed collections of export proceeds.

8.1 This issue relates to the eligibility of the assessee to claim deduction u/s 10A if the export proceeds are not received within the prescribed period. This issue is being contested by the assessee in assessment years 2009-10, 2010-11, 2012-13 to 2014-15.

8.2 The facts relating to the issue are stated in brief. As per the provisions of section 10A/10AA/10B of the Act deduction is allowable only on export turnover which received in or brought into India in convertible foreign currency within the period of 6 months from the end of the previous year within such further period as the competent authority may allow in this behalf. The competent authority means ‘Reserve Bank of India (RBI)’ or such other authority as is authorized under any law for the time being in force for regulating payments and dealings in foreign currency. During the years under consideration, certain amounts were not received or brought into India within 6 months from the end of the previous year. It was the submission of the assessee that it has made applications to RBI through the authorized dealer for extension of time for receipt of profits on export turnover. It was submitted that the amounts were collected subsequently after the expiry of the period of 6 months. Accordingly, during the course of assessment proceedings, the assessee made a claim before A.O. to include the sale amount, for which extension applications were submitted to RBI through the authorized dealers in the amount of “export turnover”, for the purpose of computing deduction. However, the A.O. rejected the claim of the assessee on the reasoning that mere submission of application by the assessee to RBI is not sufficient to infer that RBI has allowed extension of time for realizing sale proceeds in foreign exchange. Accordingly, he rejected the claim of the assessee. Ld. DRP also confirmed the order of A.O. in all the years under consideration except in assessment year 2011-12, wherein Ld. DRP directed the A.O. to include the turnover covered by the application filed to RBI as part of export turnover.

8.3 We heard the parties on this issue and perused the record. We notice that an identical issue was considered by Hon’ble High Court of Karnataka in the assessee’s own case in 2001-02 to 2004-05, wherein the High Court decided the issue in favour of the assessee with the following observations:-

“146. The facts are not in dispute. The assessee is a status holder exporter. The export has been done strictly in accordance with law. Foreign exchange remittances should have been received within six months from end of the financial year. It has not been received. Therefore, an application is filed seeking for extension of time to the Reserve Bank of India. Even to this day the Reserve Bank of India has not rejected the said request. On the contrary, after the period of 6 months, foreign exchange remittances are received and credited to the assessee’s account through the Reserve Bank of India. It is in this context merely because the written approval of extension is not passed by the Reserve Bank of India, whether the assessee could be denied the benefit of Section 10A. The Tribunal on consideration of the entire material on record, taking note of the statutory provisions and the object underlying this provision, has come to the conclusion that notwithstanding the fact there is no express order granting approval by the Reserve Bank of India, as it has not been rejected and foreign exchange is received and remitted through the proper channel, the assessee is entitled to the benefit of Section 10A. In the facts of the case, we do not find any error committed by the Tribunal. Therefore, the said substantial question is answered in favour of the assessee and against the revenue.”

Respectfully following the binding decision of the jurisdictional High Court, we direct the AO to include sale amount in the export turnover, while computing deduction u/s 10A of the Act, where the applications have been filed by the assessee to RBI seeking permission to receive the export proceeds beyond the prescribed period.

9. ISSUE NO.6 relates to claim of FOREIGN TAX CREDIT/DEDUCTION: –

9.1 This issue relates to the rejection of claim for set off of foreign tax credit/deduction relating to income generated abroad. The assessee has raised this issue in all the years under consideration, i.e. from assessment years 2009-10 to 2014-15.

9.2 The facts relating to this issue are stated in brief. The assessee is a resident company and hence it is liable to pay tax on its global income. The assessee has generated profits in various foreign countries and offered the same for taxation in India.It has also paid income tax in those foreign countries, as per the laws prevailing therein. The assessee claimed credit of foreign tax so paid against the income tax payable under the Indian Income tax Act. The claim was made by the assessee in accordance with the provisions of section 90(1)(a)(i), section 90(1)(a)(ii) and section 91 of the Act. The said claim of the assessee was rejected by the A.O. on various grounds in different years. One of the main reasons cited by the A.O. is that the foreign tax credit can be allowed only if the assessee has paid income-tax on the very same income both in the foreign Country and in India. The AO observed that the assessee has generated the income from foreign countries through the undertakings eligible for deduction u/s 10A & 10AA of the Act. The assessee has also been allowed deduction under the above said sections. If the deduction has been allowed, then it cannot be said that the assessee has not income tax on the profits so generated from the eligible undertakings from sources outside India. Accordingly, the AO took the view that the assessee did not pay tax on those income under the Indian Income tax Act. Accordingly, the A.O. held that there is no necessity to allow foreign tax credit on the said income.

9.3 In some of the years, the A.O. also referred to the provisions of DTAA entered with United States of America (USA) and observed that the tax credit shall not be allowable for units which have claimed deduction u/s 10A & 10AA of the Act.

9.4 The assessee had also paid taxes levied at “state level” and “local authority level” in the USA. It claimed for credit of those taxes also. It is stated that, in some of the states like California and New York in USA, income tax is levied by the state/local authorities on the income generated from their respective jurisdiction. It is stated that this tax has to be paid in addition to paying income tax at “Federal level” in USA. Accordingly, the assessee claimed “Foreign tax credit” in respect of taxes paid at State level/local authority level. However, the A.O. observed that the DTAA has been signed between two Sovereign Countries only, i.e., between India and USA and hence the provisions of Foreign Tax Credit shall be applicable only to Federal tax paid by the assessee. Accordingly, he rejected the claim of assessee for ‘Foreign tax credit’ in respect of taxes paid at state level and local authority level.

9.5 Accordingly, the A.O. restricted the claim of “Foreign tax credit”

(a) in respect of tax paid on income generated by non-exempt unit

(b) in respect of units for which deduction claimed u/s 10A of the Act have been rejected.

The A.O. also observed that, in case the deduction u/s 10A was allowed in the appellate proceedings in respect of certain undertakings (for which the AO had rejected the claim for deduction u/s 10A), the foreign tax credit relating to those undertakings should be reduced from the credit already allowed by him. The Ld DRP confirmed the order passed by the AO on this issue.

9.6 The Ld. A.R. submitted that this issue has already been considered by the Hon’ble Jurisdictional High Court in the assessee’s own case reported in 382 ITR 179 relating to assessment year 2001-02 to 2004-05 and it has been decided in favour of the assessee. The Ld.A.R. further submitted that the coordinate bench has also decided this issue in favour of the assessee in assessment year 2008-09, by following the decision rendered by Hon’ble Karnataka High Court.

9.7 We heard Ld. D.R. on this issue and perused the record. We have also gone through the decision rendered by Hon’ble High Court of Karnataka in the assessee’s own case in assessment years 2001-02 to 2004-05 (referred supra). The claim made by the assessee falls u/s 90 & 91 of the Act. For the sake of convenience, we extract below the relevant provisions:-

Agreement with foreign Countries or specified territories:

90. (1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,—

(a) for the granting of relief in respect of—

(i) income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or

(ii) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or

Countries with which no agreement exists

91. (1) If any person who is resident in India in any previous year proves that, in respect of his income which accrued or arose during that previous year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is no agreement under section 90 for the relief or avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal.

Explanation.—In this section,—

(i) ….

(ii) ….

(iii) ….

(iv) the expression “income-tax” in relation to any country includes any excess profits tax or business profits tax charged on the profits by the Government of any part of that country or a local authority in that country.

A perusal of the above provisions would show that section 90(1)(a) of the Act gives relief in respect of foreign taxes in two categories. Sub clause (i) talks of income tax paid in India as well as in a foreign country. Sub clause (ii) talks of income tax chargeable in India and in a foreign country. It is the contention of the assessee that sub clause (i) is applicable when income tax is paid both in India and in a foreign country. Sub clause (ii) shall be applicable if income tax is chargeable under Indian Income Tax Act and also under corresponding law in force in the foreign country, even if tax is not paid in India. Accordingly, it was submitted that, under sub clause (ii), actual payment of income tax is not relevant. The Ld. A.R. further submitted that DTAA entered by India with foreign countries is also not uniform in this matter. He submitted that DTAA entered with USA is akin to clause (ii) of section 90(1)(a) of the Act, since it does not mandate actual payment of income tax. On the other hand, the DTAA entered with Canada is akin to clause (i) of section 90(1)(a) of the Act, since it states that the income shall be subjected to tax both in India and Canada. Accordingly, the Ld. A.R. submitted that the A.O. was not justified in summarily holding that the assessee should have paid tax in India in all the cases on the profit generated from foreign countries, in order to claim foreign tax credits. He submitted that the claim for foreign tax credit would depend upon the provisions of relevant DTAA as well as clauses (i) and (ii) of sec. 90(1)(a). He submitted that the profit generated by an assessee through an undertaking eligible for deduction u/s 10A or 10AA of the Act and to whom the DTAA entered between India and USA (or other countries having identical provisions as that of USA in their respective DTAA) would fall under the category of clause (ii) of section 90(1)(a) of the Act. Since the income of those undertakings is otherwise chargeable to tax under the Indian Income Tax Act and even if the tax was not paid thereon in India in view of the deduction allowed u/s 10A of the Act, the assessee would still be eligible for foreign tax credit. The Ld. A.R. submitted that this issue has been examined by Hon’ble Karnataka High Court in assessment years 2001-02 to 2004-05 (supra) and the above said contentions of the assessee have been accepted.

9.8 The Ld. A.R. further submitted that the tax credit is allowed both u/s 90 and 91 of the Income tax Act. Section 90 is applicable in respect of Countries with which India has entered into DTAA. He submitted that section 91 of the Act is applicable in respect of taxes paid in a foreign country with which India has not entered into DTAA. The Ld A.R submitted that the AO has failed to appreciate these fine distinctions while examining the claim of the assessee for foreign tax credit.

9.9 The Ld. A.R. invited our attention to clause (iv) of explanation given u/s 91 of the Act, wherein it is mentioned that the expression “Income Tax” in relation to any country includes any excess profit tax or business profits tax charged on the profits by the Government of any part of the country or a local authority in that country. Accordingly, the Ld A.R. submitted that the taxes paid by the assessee in the foreign country at “State level” or “Local authority level” shall also be eligible for tax credit u/s 91 of the Act, even if there is no DTAA between India and that State. Accordingly, the Ld A.R submitted that the AO was not correct in law in holding that the assessee is not eligible for foreign tax credit for the taxes paid at State Level/Local authority level. The Ld. A.R. submitted that this issue has also been examined by the Hon’ble Karnataka High Court in A.Y. 2001-02 to 2004-05 and the contentions of the assessee have been accepted. Accordingly, the Ld. A.R. submitted that the order passed by A.O. on this issue may kindly be reversed and suitable direction be issued to the A.O. to allow foreign tax credit as claimed by the assessee.

9.10 We notice that the issue relating to foreign tax credit has been examined in detail for Hon’ble High Court of Karnataka in the assessee’s own case. For the sake of convenience, we extract below the relevant observations made by the Hon’ble High Court of Karnataka on this issue.

37. It is in this background, when we notice section 90 of  the Act—relief from double taxation is granted in the following circumstances.

Firstly, section 90(1)(b) of the Act speaks about avoidance of double taxation, i.e., the Central Government may enter into an agreement with the Government of any country for the avoidance of double taxation of income under this Act and under the corresponding law in force in other country, i.e., when tax is payable on income under this Act as well as under the corresponding law in that country they could agree to tax in one country. This happens even before payment of any tax. By virtue of such agreement, tax is paid only in one country, that is how the benefit of double taxation relief by way of avoidance is granted to the assessee in both the countries.

38. Secondly, under section 90(1)(a)(i) of the Act, once such assessee has paid Income-tax, under the Act as well as the tax in the other country, by such agreement, relief could be given by giving credit of the tax paid in the foreign country to the assessee in India. In cases covered under this provision the assessee pays tax in both the jurisdictions. After payment of such tax, he is entitled to double taxation relief by way of credit in respect of the tax paid in the foreign jurisdiction.

39. Thirdly, in cases covered under section 90(1)(a)(ii) of the Act it is not a case of the income being subjected to tax or the assessee has paid tax on the income. This applies to a case where the income of the assessee is chargeable under this Act as well as in the corresponding law in force in the other country. Though the Income-tax is chargeable under the Act, it is open to Parliament to grant exemptions under the Act from payment of tax for any specified period. Normally it is done as an incentive to the assessee to carry on manufacturing activities or in providing the services. Though the Central Government may extend the said benefit to the assessee in this country, by negotiations with the other countries, they could also be requested to extend the same benefit. If the contracting country agrees to extend the said benefit, then the assessee gets the relief. In another scenario, though the said income is exempt in this country, by virtue of the agreement, the amount of tax paid in the other country could be given credit to the assessee. Thus for the payment of Income-tax in the foreign jurisdiction, the assessee gets the benefit of its credit in this country.

40. However, if the contracting country is not agreeable to extend the said benefits, then in terms of the agreement and probably in terms of the exemption granted, the assessee would be entitled to benefit only in this country on account of the exemption and the benefit in the other country is not extended. Thus when exemption is granted in respect of the income chargeable to tax under this Act in respect of which no benefit is granted in the corresponding country the assessee gets no benefit. However, if the benefit is extended to a portion of the income say for example 90 per cent. and 10 per cent. is subjected to tax then to that extent the assessee would be entitled to benefit of tax credit as he has paid tax in the foreign jurisdiction as per section 90(1)(a)(i) of the Act.

41. In this connection, it is contended on behalf of the Revenue that if the income is chargeable to tax in India, then only the assessee can have the benefit of tax credit in respect of the tax paid in foreign jurisdiction. In respect of exemption under section 10A, the income derived is not included in the total income. It is not charged to Income-tax. Therefore, section 90 of the Act has no application at all.

…………..

52. Section 10A(1) speaks of “deduction”. The deduction is of profits and gains for a period of ten consecutive assessment years. The said deduction is from the total income of the assessee. Therefore, the total income before allowing the said deduction includes the profits and gains from the business referred to in section 10A(1). Section 5 of the Act explains the scope of total income to mean all income from whatsoever source derived. Section 4 of the Act charges this total income. However, section 10A(1) provides that, subject to the provisions of the said section , profits and gains derived by an undertaking referred to in that section shall be allowed as deduction from the total income of the assessee. Therefore, by virtue of the aforesaid statutory provision namely section 1 0A of the Act, the income of the asses-see from exports in respect of the said unit is exempted from payment of Income-tax. The very fact that it is exempted from payment of tax means but for that exemption such income is chargeable to tax. This relief under section 10A is in the nature of exemption although termed as deduction. But for this exemption, the said income namely profits and gains derived by an undertaking, is chargeable to tax under the Act. The said exemption is only for a period of ten years. After the expiry of the said ten years the said income is taxable. When such exemption is given under the Act, but the said income is taxed in foreign jurisdiction, there is no relief to the assessee at all. Therefore, to promote mutual economic relations, trade and investment, the Act was amended by way of the Finance Act, 2003 which came into force from April 1, 2004. By insertion of a new clause (ii) in sub­section (1)(a) of section 90 the Central Government has been vested with the power to enter into an agreement with the Government of any country outside India for the granting of relief in respect of Income-tax chargeable under the Income-tax Act or under the corresponding law in force in that country, to promote mutual economic relations, trade and investment. Therefore, the statute by itself is not granting any relief. But, by virtue of the statute, if an agreement is entered into providing for such relief, then the assessee would be entitled to such relief.

………………

56. Therefore, it follows that the income under section 10A is chargeable to tax under section 4 and is includible in the total income under section 5, but no tax is charged because of the exemption given under section 10A only for a period of 10 years. Merely because the exemption has been granted in respect of the taxability of the said source of income, it cannot be postulated that the assessee is not liable to tax. The said exemption granted under the statute has the effect of suspending the collection of Income-tax for a period of 10 years. It does not make the said income not leviable to Income-tax. The said exemption granted under the statute stands revoked after a period of 10 years. Therefore, the case falls under section 90(1)(a)(ii).

57. In the background of this legal position, we have to look into the Double Taxation Agreements entered into between India and United States, Canada.

(1) Indo-US Agreement :

58. Article 25 of the Indo-US Double Taxation Agreement deals with relief from double taxation. Clause 2(a) is the relevant provision. It reads as under (see [1991]187 ITR (St.) 102, 124) :

“2(a) Where a resident of India derives income which, in accordance with the provisions of this Convention, may be taxed in the United States, India shall allow as a deduction from the tax on the income of that resident an amount equal to the Income-tax paid in the United States, whether directly or by deduction. Such deduction shall not, however, exceed that part of the Income-tax (as computed before the deduction is given) which is attributable to the income which may be taxed in the United States.”

59. A perusal of the aforesaid  provision makes it clear that if a resident Indian derives income, which may be taxed in the United States, India shall allow as a deduction from the tax on the income of the resident, amount equal to the Income-tax paid in the United States of America, whether directly or by deduction. The conditions mandated in the treaty is that if any “income derived” and “tax paid in the United States of America on such income”, then tax relief/credit shall be granted in India on such tax paid in the United States of America. The said provision does not speak of any Income-tax being paid by the resident Indian under the Income-tax Act as a condition precedent for claiming the said benefit. Where the Indian resident pays no tax on such income derived, whereas the said income is taxed in the United States, India shall allow^..as a deduction from the tax on the income of that resident an amount equal to the Income-tax paid in the United States. Therefore, this provision is in conformity with section 90(1)(a)(ii) of the Act, i.e., the Income-tax chargeable under the Income-tax Act and in the corresponding law in force in the United States of America. Therefore, it is not the requirement of law that the assessee, before he claims credit under the Indo-US convention or under this provision of Act should pay tax in India on such income. However, the said provision makes it clear that such deduction shall not, however, exceed that part of the Income-tax (as computed before the deduction is given) which is attributable to the income which is to be taxed in the United States. Therefore, an embargo is prescribed for giving such tax credit. In other words, the assessee is entitled to such tax credit only in respect of that income, which is taxed in the United States. This provision became necessary because the accounting year in India varies from the accounting year in America. The accounting year in India starts from 1st of April and closes on 31st of March of the succeeding year. Whereas in America, the 1st of January is the commencement of the assessment year and ends on 31st of December of the same year. Therefore, the income derived by an Indian resident, which falls within the total income of a particular financial year when it is taxed in the United States, falls within two years in India. Therefore, while claiming credit in India, the assessee would be entitled to only the tax paid for that relevant financial year in America, i.e., the income attributable to that year in America.

In other words, the Income-tax paid in the same calendar year in the United States of America is to be accounted for two financial years in India. Of course, this exercise should be done by the assessing authority on the basis of the material to be produced by the assessee.

(2) Indo-Canada agreement :

60. In so far as the Indo-Canada Double Taxation Agreement is concerned, article 23 deals with elimination of double taxation. It provides that the laws in force in either of the Contracting States will continue to govern the taxation of income in the respective Contracting States except where pro­visions to the contrary are made in this agreement. In the case of India, double taxation should be eliminated as follows (see [1998] 229 ITR (St.) 44, 64) :

“3(a) The amount of Canadian tax paid, under the laws of Canada and in accordance with the provisions of the agreement, whether directly or by deduction, by a resident of India, in respect of income from sources within Canada which has been subjected to tax both in India and Canada shall be allowed as a credit against the Indian tax payable in respect of such income but in an amount not exceeding that proportion of Indian tax, which such income bears to the entire income chargeable to Indian tax.”

61. A reading of the aforesaid provision makes it clear that the benefit of article 23 would be available to an assessee in India only in respect of the income from sources within Canada, which has been subjected to tax both in India and Canada, which forms part of the total income of the assessee and has suffered tax in India under the Income-tax Act and has suffered tax in Canada also, i.e., assessee has paid tax both in India as well as in Canada on the same income. Then the agreement provides the tax paid in Canada shall be allowed as a credit against the Indian tax payable in respect of such income. However, the said benefit is confined only to the extent of an amount not exceeding that proportion of Indian tax, which such income bears to the entire income chargeable to Indian tax. In other words if the Income-tax paid in India is less than the Income-tax paid in Canada, the assessee would be entitled to relief only to the extent of tax paid in India and not to the extent of tax paid in Canada. Therefore, this clause is in conformity with section 90(1)(a)(i) of the Act. As a corollary if the assessee is exempted from payment of tax in India, then if the same income is subjected to tax in Canada, according to the treaty, there is no double taxation. Therefore, the benefit of this treaty is not available to the Indian assessee.

62. It is submitted on behalf of the assessee that by virtue of the formulae prescribed under section 10A(4), entire export profits had not got exempted under section 10A, residuary surplus being subjected to tax both in India and Canada. This residuary surplus could qualify for tax credit as it is subjected to tax in both the countries.

63. As is clear from the aforesaid clause in the Indo-Canadian agreement if the income from source within Canada, is lower, has been subjected to tax both in India and Canada then, the tax paid in Canada shall be allowed as a credit against the Indian tax paid in respect of such income. If the entire income assessed by the assessee under section 10A is exempted in India, then, the aforesaid clause does not confer any benefit on the assessee. However, notwithstanding the aforesaid provision, if any portion of the income falling under section 10A is subjected to tax then, by virtue of aforesaid provision, the tax paid in Canada corresponding to the income subjected to tax in India, the assessee would be entitled to credit of the tax paid in Canada. However, this exercise has to be done by the assessing authority on the basis of materials to be produced by the assessee and after giving effect to the formulae prescribed under section 10A(4) of the Act.

(3) No agreement with states :

64. Whether the assessee is entitled to the aforesaid benefit when India has no agreement with the States where tax is levied on the income of the assessee.

65. Section 91 of the Act specifically deals with the said question. The afore said section reads as under :

“91. Countries with which no agreement exists.— (1) If any person who is resident in India in any previous year proves that, in respect of his income which accrued or arose during that previous year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is no agreement under section 90 for the relief or avoidance of double taxation, Income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deduction from the Indian Income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country whichever is the lower, or at the Indian rate of tax if both the rates are equal . . .

(iv) the expression ‘Income-tax’ in relation to any country includes any excess profits tax or business profits tax charged on the profits by the Government of any part of that country or a local authority in that country.”

66. The said provision provides for deduction of the tax paid in any country from the Indian Income-tax payable by him of a sum calculated on such doubly taxed income even though there is no agreement under section 90 for the relief or avoidance of double taxation. Explanation (iv) defines the expression Income-tax in relation to any country includes any excess profit tax or business profits tax charged on the profits by the Government of any part of that country or a local authority in that country. Thereforethe intention of Parliament is very clear. The Income-tax in relation to any country includes Income-tax paid in any part of the country or a local authority. It applies to cases where in a federal structure a citizen is made to pay federal Income-tax and also the State income tax. The Income-tax in relation to any country includes Income-tax paid not only to the Federal Government of that country, but also any Income-tax charged by any part of that country meaning a State or a local authority, and the assessee would be entitled to the relief of double taxation benefit with respect to the latter payment also. Therefore, even in the absence of an agreement under section 90 of the Act, by virtue of the statutory provision, the benefit conferred under section 91 of the Act is extended to the Income-tax paid in foreign jurisdictions. India has entered into an agreement with the federal country and not with any State within that country. In order to extend the benefit of this, relief or avoidance of double taxation, the aforesaid Explanation explicitly makes it clear that Income-tax in relation to any country includes the Income-tax paid to the Government of any part of that country or a local authority in that country. Therefore, even though, India has not entered into any agreement with the State of a country and if the assessee has paid Income-tax to that State, the Income-tax paid in relation to that State is also eligible for being given credit to the assessee in India. Therefore, the argument that in the absence of an agreement between India and the State, the benefit of section 90 is not available to the assessee is ex-facie illegal and requires to be set aside.

We notice that the Hon’ble High Court has accepted all the contentions of the assessee on various aspects discussed above.

9.11 We are also of the view that the expressions used in sec. 90(1)(a)(i) and (ii) and in sec.91 would also merit attention in this regard. Section 90(1)(a)(i) uses the expression “income on which have  been paid both income tax….”. Section 91(1) uses the expression “If any person who is resident in India in any previous year proves that in respect of his income which accrued or arose during the previous year outside India (and which is not deemed to accrue or arise in India), he  has paid in any Country with which there is no agreement under section 90 for the relief or avoidance of double taxation, income tax, by deduction or otherwise….. It can be noticed that, “payment of tax” is mentioned both in sec.90(1)(a)(i) and sec. 91. However, section 90(1)(a)(ii) uses the expression “income tax chargeable under this  Act and under the Corresponding law in force in that Country…..” Thus, it can be noticed that the provisions of sec.90(1)(a)(i) and sec.91(1) refers to actual payment made in the foreign Country and the provisions of sec.90(1)(a)(ii) refers to “income tax chargeable under this Act and under the corresponding law in force in that Country”, i.e., there is no reference to actual payment of tax.

9.12 Accordingly, following the binding decision of High Court, we set aside the order passed by A.O. on this issue and direct him to allow foreign taxes credit claimed by the assessee in terms of decision rendered by Hon’ble High Court of Karnataka referred above.

10. ISSUE NO.7 relates to claim of Depreciation on Software:-

10.1 This issue pertains to disallowance of depreciation claimed by the assessee on the amount of software capitalized by it, by invoking provisions of section 40(a)(ia) of the Act for non-deduction of tax at source from the payments made for purchase of software. This issue arises only in assessment year 2009-10 & 2010-11 in the appeals filed by the assessee and in assessment year 2011-12 in the appeal filed by the revenue.

10.2 The facts relating to this issue are that the assessee had purchased software locally as well as from abroad for its own use. The assessee capitalized the value of software and accordingly, claimed depreciation on the software @ 60%, as applicable to computers. The A.O. noticed that the assessee has not deducted tax at source from the payments made for purchase of software. The A.O. noticed that the Hon’ble Karnataka High Court has held in the case of Samsung electronics Ltd. 345 ITR 494 that the payment made for purchase of software is in the nature of royalty. Accordingly, the A.O. took the view that the depreciation claimed by the assessee on the value of software is liable to be disallowed u/s 40(a)(ia) of the Act, as the assessee did not deduct tax at source from the payments made for purchase of software. The A.O. also held that the disallowance so made u/s 40(a)(ia) of the Act is not eligible for deduction u/s 10A/10B/10AA of the Act on the reasoning that the said disallowance is notional in nature and it does not generate any revenue.

10.3 The Ld. DRP noticed that identical disallowance made in the immediately preceding year has been upheld by it. Accordingly, in order to keep the matter alive, the ld. DRP confirmed the order passed by the A.O. However, it directed the A.O. to allow depreciation on the software already capitalized. Accordingly, the A.O. made the disallowance of depreciation u/s 40(a)(ia) of the Act. Both the parties are aggrieved by the direction so given by Ld. DRP. The assessee is contending that the A.O. was not justified in disallowing the depreciation claimed on software by invoking the provisions of sec. 40(a)(ia) of the Act and also in not enhancing the quantum of deduction allowed u/s 10A/10AA/10B of the Act by the amount so disallowed, since the profits eligible for deduction would go up by the said disallowance. The revenue is aggrieved by the decision of Ld. DRP in holding that the depreciation is allowable on the software capitalized by the assessee.

10.4 We heard the parties and perused the record. We notice that various benches of Tribunal are consistently holding that the depreciation is a statutory allowance and hence it cannot be considered as expenditure. Accordingly, it is being held that the disallowance of depreciation cannot be made u/s 40(a)(ia) of the Act. For the sake of convenience, we extract below the decision rendered by coordinate bench in the case of DCIT Vs. Tally Solution (ITA No.1463/Bang/2014 dated 29.11.2016) on an identical issue:-

“19. As regards the applicability of the provisions of Section 40(a)(ia) of the Act for disallowance of claim of depreciation, we find that when the assessee has capitalised this amount and not claimed as a revenue expenditure then the claim of depreciation cannot be disallowed by invoking the provisions of Section 40(a)(ia) of the Act. This issue has been dealt with by the co-ordinate bench of this Tribunal in the case of SKOL Beverages Ltd. Vs. ACIT (supra) as well as Kawasaki Micro Electronics, Inc. India Branch Vs. DCIT (supra). In the case of Kawasaki Micro Electronics, Inc. India Branch Vs. DCIT (supra), the Tribunal has considered an identical issue in paras 6 to 8 as under :

6. We have heard the rival submissions as well as considered the material on record. The issue before us is limited only with respect to the disallowance of depreciation by invoking the provisions of section 40(a)(i) of the Act. There is no dispute that the assessee has made the payment in question to a non­resident for purchase of software and the said payment has been capitalized by the assessee in the block of computer asset. Once the assessee capitalized the payment and has not claimed the same as an expenditure against the profits of the business of the assessee, then, the question arises whether the depreciation is a statutory deduction as per the section 32 of the Act can be disallowed by invoking the provisions of section 40(a)(i) of the Act. At the outset, it is to mention that on the same set of facts an identical issue has been dealt by the ITAT, Mumbai Bench in the case of SKOL Breweries Ltd. (supra), wherein it was held in paras 16.1 to 16.4 as under :-

16.1 As regards the alternative plea of the ld Sr counsel for the assessee that since the assessee has not claimed the entire amount as revenue expenditure; but has capitalized the same and claimed only depreciation u/s 32(1)(ii); therefore, provisions of sec. 40(a)((i) shall not apply. Section 40(a)(i) contemplates that any interest, royalty, fee for technical services or other sum chargeable under this act, which is payable outside India as it is relevant for the case in hand on which tax is deductible at source under Chapter XVII – B and such tax has not been deducted or, after deduction, has not been paid, the amount of interest, royalty, fee for technical services and other sum shall not be deducted in computing the income chargeable under the head “profits & gains of business or profession”. This condition of deductibility has been stipulated u/s 40 notwithstanding anything to the contrary in section 30 to 38 of the Act. Sec. 40 begins with non-obstante clause; therefore, it is an overriding effect on the provisions of sec. 30 to 38 of the I T Act. The question arises is whether any amount paid outside India or to the Non Resident without deduction of tax at source and the assessee has capitalized the same in the fixed assets and claimed only depreciation is subjected to the provisions of sec. 40(a)(i) or not ?. We quote the provisions of sec. 40(a)(i) as under:

40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”,(a) in the case of any assessee[(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,

(A) outside India; or (B) in India to a non-resident, not being a company or to a foreign company, on hich tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub- section (1) of section 200 :

Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

Explanation: For the purposes of this sub-clause,

16.2 It is manifest from the plain reading of provisions of sec. 40(a)(i) that an amount payable towards interest, royalty, fee for technical services or other sums chargeable under this Act shall not be deducted while computing the income under the head profit and gain of business or profession on which tax is deductible at source; but such tax has not been deducted. The expression ‘amount payable’ which is otherwise an allowable deduction refers to the expenditure incurred for the purpose of business of the assessee and therefore, the said expenditure is a deductible claim. Thus, section 40 refers to the outgoing amount chargeable under this Act and subject to TDS under Chapter XVII-B. There is a difference between the expenditure and other kind of deduction. The other kind of deduction which includes any loss incidental to carrying on the business, bad debts etc., which are deductible items itself not because an expenditure was laid out and consequentially any sum has gone out; on the contrary the expenditure results a certain sums payable and goes out of the business of the assessee. The sum, as contemplated under sec. 40(a)(i) is the outgoing amount and therefore, necessarily refers to the outgoing expenditure. Depreciation is a statutory deduction and after the insertion of Explanation 5 to sec. 32, it is obligatory on the part of the Assessing Officer to allow the deduction of depreciation on the eligible asset irrespective of any claim made by the assessee. Therefore, depreciation is a mandatory deduction on the asset which is wholly or partly owned by the assessee and used for the purpose of business or profession which means the depreciation is a deduction for an asset owned by the assessee and used for the purpose of business and not for incurring of any expenditure.

“5. Adverting to questions (ii) and (iii), the issue which arises for consideration is whether the assessee could be disallowed claim for depreciation under Section 40(a)(i) of the Act on the ground that the payments made for technical know- how which had been capitalized, no tax deduction at source has been made thereon. The Tribunal while accepting the plea of the assessee, in para 3, had noticed as under: IT(IT)A No.1463/Bang/2014 “3. Ground no. 4 is against deletion of an addition of Rs. 6,88,1751- made by the AO on account of deduction of depreciation on technical know-how as the assessee failed to deduct tax in accordance with the provision contained in section 40(a)(i). The finding of the learned CIT(A) was that the assessee had incurred, expenditure by way of technical know-how, which was capitalized amount as made in the return of income. Since the assessee had not claimed deduction for the amount paid, the provisions contained in section 40(a) (i) were not attracted. The learned DR could not find any fault with this direction of the CIT(A) also although she referred to page 4 of the assessment order, where it was mentioned that the tax deducted in respect of the payment was made over to the Government in the subsequent year and, therefore, depreciation could not be deducted on the capital expenditure incurred by the assessee. In reply, the learned counsel pointed out that the expenditure by way of technical know- how was capitalized and it was not claimed as revenue expenditure. Therefore, there was also no reason to disallow depreciation on such capitalized amount as the aforesaid provision does not deal with deduction of depreciation. Having considered arguments from both the sides, we are of the view that there is no error in the order of the learned CIT(A) which requires correction from us. Thus, this ground is also dismissed.”

Following the decision rendered by the coordinate bench in the Tally Solution (supra), we direct the A.O. to delete the disallowance on depreciation made u/s 40(a)(ia) of the Act. Since we have held that depreciation is not liable to be disallowed u/s 40(a)(ia) of the Act, the alternative claim of the assessee for enhanced deduction shall become infructuous, even though the claim of the assessee is supported by the circular no.37/2016 dated 2.11.2016 issued by CBDT.

11. ISSUE NO.8 relates to Allocation of Corporate overheads to units claiming deduction u/s 10A/10AA/10B of the Act.

11.1 This issue relates to allocation of corporate overhead expenses to various units, which are claiming deduction u/s 10A/10AA/10B of the Act. This issue is being urged by the assessee in assessment years 2009-10, 2010-11 & 2011-12.

11.2 The facts relating to the issue are that the assessee company has maintained a separate division by name “Wipro Corporate”, which consisted of Chairman’s office, Corporate Human Resources, Corporate Finance & Mission, Quality and the I.M. and Corporate affairs. In effect, this division was undertaking the work of formulating short term and long term goals for the company. It also evaluates various business opportunities and investment strategies. The A.O. noticed that the assessee has incurred huge expenditure for this division and claimed the same as expenditure. However, the assessee did not allocate proportionate amount of this expenditure to other units including the units which claimed deduction u/s 10A/10AA/10B of the Act. The A.O. noticed that, in assessment year 2009-10 the total expenditure incurred by the assessee in Corporate division is Rs.157.15 crores which consisted of selling and marketing expenses of Rs.8.31 crores, General & Administration expenses of Rs.45.99 crores and the interest expenses of Rs.102.84 crores. Out of the total corporate expenses of Rs.157.15 crores, the A.O. considered that a sum of Rs.83.62 crores is the common expenditure, which is required to be allocated to various units of the assessee including those units claiming deduction u/s 10A/10AA/10B. We notice that the A.O. has deducted Section 14A disallowance and interest on ECB loan from out of the total corporate expenses of Rs.157.15 crores and accordingly arrived at the figure of Rs.83.62 crores (referred above). The A.O. proposed to allocate the above said expenditure in the ratio of turnover of various divisions and units.

11.3 The assessee objected to the proposal put forth by A.O. by submitting that the Wipro Corporate is a separate set up and it is independent of other business divisions. It was submitted that all the divisions and units of the assessee are run as independent profit centers and expenses relating thereto are booked separately. In the alternative, the assessee submitted that the allocation of entire corporate expenses to various business divisions and units is not appropriate in the facts and circumstances of the case. Accordingly, the assessee submitted that a sum computed up to 20% of the corporate expenses may be considered as relatable to other business divisions and units and the same may be allocated on a reasonable basis. The A.O. did not accept the submissions made by the assessee. He proceeded to allocate the expenditure of Rs.83.62 crores (referred to above) to various business divisions and units on the basis of turnover. Accordingly, profits of units which were claiming deduction u/s 10A/10AA/10B of the Act came to be reduced to the extent of corporate expenses allocated to those units, resulting in corresponding reduction of deduction claimed under those sections. In the same manner, the AO allocated corporate expenses in AY 2010-11 and 2011-12 also. The Ld. D.R.P. upheld the order of the A.O. in assessment years 2009-10, 2010-11 & 2011-12. However, the Ld. DRP directed the A.O. in assessment year 2012-13 to follow the decision rendered by jurisdictional High Court in the assessee’s own case.

11.4 We heard the parties on this issue and perused the record. We notice that the Hon’ble jurisdictional Karnataka High Court has considered an identical issue in AY 2001-02 to 2004-05 and the same has been disposed of as under:-

Substantial question No. 9 :

“Whether the appellate authority were correct in holding that the expenses incurred by the Corporate Division cannot be allocated in respect of various business units of the assessee based on the turn over, but at an ad hoc percentage of 20 per cent. as held in the earlier assessment years ?”

[Question of law No. 20 in I. T. A. Nos. 907 and 909 of 2008; Question of law No. 16 in I. T. A. Nos. 904 and 905 of 2008 ; Question of law No. 3 in I. T. A. Nos. 210 and 21 1 of 2009 and Question of law No. 1 1 in I. T. A. No. 363 of 2009—(Department’s appeal)]

148. The assessee had allocated the corporate expenses on the basis of the actual expenditure incurred by the units. The assessing authority taking into consideration that in the earlier year 57 per cent. expenditure was allocated to the section 10A units, was not willing to accept the case of the assessee. Therefore, the assessee by a letter dated March 4, 2004 agreed for allocation of only a part of the expenditure relating to salary, wages and allowances and directors’ fee at 20 per cent. to Wipro Technologies which is a section 10A unit and which had generated 57 per cent. of the revenue of the assessee. The assessing authority did not agree with the assessee’s submission and allocated expenses of the corporate division in the ratio of the revenue of the section 10A units. Aggrieved by the same the assessee preferred an appeal. In the appeal by the assessee, the Commissioner of Income-tax following the judgments of the Income-tax Appellate Tribunal in the assessee’s case itself for the earlier year set aside the said allocation made by the assessing authority, accepted the case of the assessee and directed the assessing authority to consider only such expenses for allocation as admitted by the assessee during the assessment process. Aggrieved by the said order the Revenue preferred an appeal to the Tribunal. The Tribunal held that the allocation of common expenditure cannot be made on the basis of the Revenue generated. The assessee himself has agreed to an allocation of 20 per cent. of its expenditure and the same has been confirmed by the Commissioner of Income-tax (Appeals). Therefore, the Tribunal felt that the allocation at the rate of 20 per cent. of common expenses is in order. Thus the Income-tax Appellate Tribunal upheld the order of the appellate authority. Aggrieved by the said order the Revenue is in appeal.

149. Learned senior counsel appearing for the Revenue submits that, when 57 per cent. of the revenue is generated by the section 10A units and 82 per cent. is the profit earned by the said units allocating 20 per cent. of the common expenditure to such section 10A units is not proper when in fact, on an earlier occasion 57 per cent. was allocated to the section 10A units and therefore he submits that the orders passed by the appellate authority requires to be set aside.

150. Per contra, learned senior counsel appearing for the assessee submitted the said issue is covered by the judgment of this court in the assessee’s case I. T. A. No. 507 of 2002 disposed on August 25, 2010. Based on the aforesaid facts it is clear that the assessee wanted allocation of actual expenditure incurred by each unit. When the assessing authority did not agree, they came forward and agreed that each of the units could be allocated 20 per cent. of the total expenditure incurred by corporate division. However, the assessing authority is of the view that, the allocation of the expenditure related to salary, wages and allowances and directors’ fee should be dependent on the revenue generated and therefore he did not accept the allocation of 20 per cent. of expenditure to each of the unit. There is no provision of law which is pointed out to us which states that the allocation of expenditure should be proportionate to the revenue generated by a unit when an assessee runs several units. Either it should be actual expenditure incurred or expenditure which is distributed equally to all the units of the assessee. In the instant case when the Department did not accede to the allocation of the actual expenditure, the assessee has come forward to distribute the entire expenditure equally to all the units and the said procedure is followed consistently by the assessee for more than a decade now. In the aforesaid judgment of the assessee’s cases, this court after consi­dering very same point accepted actual allocation of expenditure. The relevant observations of this court is at para. Nos. 27 and 28.

“27. A perusal of the aforesaid statement shows the corporate office has spent a sum of Rs. 7,37,98, 774 towards the expenses consisted of salaries etc., excluding interest less revenues. They allocated a sum of Rs. 4,93,49,416 to the various sub­divisions other than the software export sub­division. Similarly they have recovered a sum of Rs. 3,70,00,000 from software exports sub-division in the process the excess recoveries is 1,25,50,642. Further, a sum of Rs. 20,11,34,657 is the interest out go to intra business and external agencies. The interest earned from deployment of funds intra-business and with external agencies is Rs. 9,38,24,255. The net interest outgo is 10,73,10,402.

28. It is this amount which they were claiming as deduction. In the light of the aforesaid facts it does not represent the expenditure incurred by the corporate office in respect of its sub-divisions. In those circumstances, the Assessing Officer and the first appellate authority were not justified in allocating the substantial portion of the amount as the expenses incurred in respect of section 1 0A and disallowing the deduction. That is precisely what the Tribunal has held on proper appreciation of the material on record. In that view of the matter we do not find any justification to interfere with the well considered order of the Tribunal. Accordingly, this question of law is answered in favour of the assessee and against the Revenue.”

151. We do not find any justification to differ from the said view taken by this court and the question is answered in favour of the assessee and against the Revenue.

11.5 We notice that there is some confusion on the manner of allocation of Head office expenses. According to AO, the assessee has not allocated corporate office expenses to various undertakings and hence, the AO has proceeded to allocate them in the ratio of turnover of all the undertakings. The Hon’ble High Court has observed that the assessee has allocated the expenses on actual basis, which is contrary to the observations made by the AO. In between, there is a reference to allocation of 20% of expenses also, which appears to have not been accepted by Hon’ble High Court.

11.6 In our considered view, the head office maintained by the assessee is essentially a cost centre in that it incurs expenditure for providing the facilities and services, which are common to all the units. The head office does not exist for its own sake. Its existence is relevant for all the activities undertaken by various divisions, units and profit centres. The very existence of the divisions, units and profit centres is dependent upon the policy decisions taken in head-office. Hence, we are of the view that head office expenses which are in the nature of common expenses are required to be allocated to different units or undertakings and more particularly to the undertakings claiming beneficial deductions under the Act. Since deduction is allowed u/s 10A/10AA/10B of the Act on the profits derived from the undertakings, all direct or indirect expenses, must be adjusted in order to arrive at the profits derived from the undertaking. In that process, the component of head office expenses also requires allocation. It appears that the same principle has been upheld by Hon’ble Karnataka High Court. However, there appears to be some direction on the manner of allocation of Head office expenses. The AO should have implemented the direction given by Hon’ble High Court in the earlier years. Accordingly, we restore this issue to the file of the assessing officer for examining the same in accordance with the decision taken in the earlier years in compliance with the decision of Hon’ble High Court.

12. ISSUE NO.9 relates to the rejection of claim for deduction u/s 10A of the Act in respect of STPI units located at Bangalore.

12.1 This issue is being urged by the assessee in assessment year 2009-10 and by the revenue in assessment year 2010-11. The AO rejected the claim for deduction u/s 10A for the STPI units located in Bangalore by holding that they are not new undertakings.

12.2 The facts relating to the issue are that the assessee had claimed deduction u/s 10A/10AA/10B of the Act in respect of various units. The A.O. noticed that, in the past assessment years, the claim was rejected in respect of undertakings located at Bangalore on the reasoning that the assessee has started these units on the strength of approvals granted by STPI authorities in the financial year 1992-93 and further the assessee has obtained approval only as expansion of the existing business and not as new undertakings. Accordingly, the A.O. took the view that these units cannot be considered as new undertakings. The A.O. also noticed that the assessee has been incurring common expenses for various units on communication, travel, sub-contracting charges, personal allowances, etc. The said common expenses have been apportioned to various units by the assessee on the basis of turnovers on each of the units. Accordingly, the AO took the view that the fact of incurring of common expenses also would show that they are only expansion of existing business. Accordingly, the A.O. rejected the claim for deduction u/s 10A of the Act in the assessment year 2009-10. However, in assessment year 2010-11, the A.O. allowed the claim on the basis of directions issued by DRP, which had followed the decision rendered by the Tribunal in the earlier years. The assessee is aggrieved by the decision of A.O. taken in assessment year 2009-10 and the revenue is aggrieved by the decision of A.O. taken in assessment year 2010-11.

12.3 We heard the parties and perused the record. We notice that this is a recurring issue and in assessment year 2008-09, the Tribunal had directed the A.O. to allow the claim of the assessee by following the decision rendered by coordinate bench in assessment year 2007-08, which in turn had followed the decision rendered in assessment year 2004-05. It was also brought to our notice that the Hon’ble High Court of Karnataka has decided an identical issue in favour of the assessee in assessment year 2001-02 to 2004-05 in the assessee’s own case reported in 382 ITR 179. On a perusal of decision rendered by Hon’ble High Court, we notice that the High Court, in turn, has followed the decision rendered by it in Wipro GE Medical Systems Ltd. (2014) 50 Taxmann.com 181.

12.4 We have gone through the issue rendered by Hon’ble jurisdictional High Court in the case of Wipro GE Systems Ltd. (supra). For the sake of convenience, we extract below the decision rendered by High Court in the above said case.

“7. Re. Point No.2: Chapter 3 of the Act deals with incomes, which do not form part of total income. Section 10 sets out the incomes which are not included in the total income. It states that in computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included. Therefore, all incomes which are mentioned in the clauses are not included in the total income of any person. Section 10A of the Act is a special provision in respect of newly established undertaking in free trade zone etc. It provides a deduction of such profits and gains as derived by an undertaking for export of articles, things or computer software which is for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee. It is a provision which was introduced with the object of encouraging export outside the country. The benefit is extended to a ten consecutive assessment years. This is to boost earning of foreign exchange. Before an assessee can claim benefit under this provision, he has to fulfill the conditions stipulated in sub-section (2) of Section 10A. The first condition to be satisfied is, such an assessee should begin or begins to manufacture or produce articles or things or computer software during the previous year relevant to the, assessment year in respect of the undertakings situate in a software technology park; the assessee should have commenced manufacturing on or after first day of April, 1994. The second condition is such an undertaking should not be formed, by splitting up or reconstruction of a business already in existence. In other words, it should be a new undertaking. Third condition to be satisfied is that it should not have been formed by a transfer to a new business of any machinery or plant previously used for any purpose. In other words, that new undertaking should use new machinery or plant. Once all the conditions are fulfilled, the assessee is entitled to the benefit of tax exemption in respect of the income accrued from such undertaking.

8. The arguments of the revenue is that if the assessee has to avail the said benefit, he should set up a new independent undertaking after obtaining requisite permission for each of the floors and then only such benefit is granted. In the instant case, it is not disputed that the assessee is having manufacturing unit in the third floor of the Golden Enclave which was commenced prior to 1993 for which the assessee is not entitled to claim the benefit under Section 10A of the Act. The assessee sought permission to expand its business. After getting such permission it has set up a undertaking in the second floor on 16.11.1995 and in sixth floor on 30.07.1996. No separate bank accounts or accounts are maintained in these two new units. Only one account is maintained and benefit under Section 10A is claimed in respect of all the three units. Therefore, it is contended that the assessee is not entitled to the benefit under Section 10A.

9. In the entire Section 10A of the Act, it is nowhere mentioned that the assessee has to set up a new independent undertaking to be eligible for such benefit. Though the heading in Section 10A of the Act refers to newly established undertaking which has to be understood in the context of assessee establishing new undertakings. The said establishment of new business is necessarily has to be by way of an expansion because as it is clear from sub-section (2), if he starts an undertaking by transfer of the machineries and the plant which is already using, he is not entitled to the benefit under Section 10A of the Act. Similarly if he wants to form an undertaking by splitting up or by reconstruction of a business already in existence, then also the assessee is not entitled to the benefit under Section 10A. An assessee who is carrying on business by setting up an undertaking if he sets up an independent undertaking to manufacture or produce articles, it is already producing or manufacturing in the existing undertaking in the software technology park, the profits and gains derived from that undertaking from export of articles, things or computer software, the assessee is entitled to the benefit under Section 10A of the Act. In fact, in one of the similar situation, the Apex Court in the case of Textile Machinery Corpn. Ltd. v. CIT [1977] 107 ITR 195 held as under:

“10. The assessee continues to be the same for the purpose of assessment. It has its existing business already liable to tax. It produced in the two concerned undertakings commodities different from those which it has been manufacturing or producing in its existing business. Manufacture or production of articles yielding additional profit attributable to the new outlay of capital in a separate and distinct unit is the heart of the matter, to earn benefit from the exemption of tax liability under section 15C. Sub­section (6) of the section also points to the same effect, namely, production of articles. The answer, in every particular case, depends upon the peculiar facts and conditions of the new industrial undertaking on account of which the assessee claims exemption under section 15C. No hard and fast rule can be laid down. Trade and industry do not run in earmarked channels and particularly so in view of manifold scientific and technological developments. There is great scope for expansion of trade and industry. The fact that an assessee by establishment of a new industrial undertaking expands his existing business, which he certainly does, would not, on that score, deprive him of the benefit under section 15C. Every new creation in business is some kind of expansion and advancement. The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is all the same a new and identifiable undertaking separate and distinct from the existing business. No particular decision in one case can lay down an inexorable test to determine whether a given case comes under section 15C or not. In order that the new undertaking can be said to be not formed out of the already existing business, there must be a new emergence of a physically separate industrial unit which may exist on its own as a viable unit. An undertaking is formed out of the existing business if the physical identity with the old unit is preserved. This has not happened here in the case of the two undertakings which are separate and distinct.”

Following the aforesaid judgment, the Apex Court in the case of International Instruments (P.) Ltd. v. CIT 11980] 123 ITR 11/11979] 1 Taxman 91 has held as under:

“5. Sec. 15C partially exempts from tax a new industrial unit which is separate physically from the old one, the capital of which and the profits thereon are ascertainable. There is no difficulty to hold that s. 15C is applicable to an absolutely new undertaking for the first time started by an assessee. The cases which give rise to controversy are those where the old business is being carried on by the assessee and a new activity is launched by him by establishing new plants and machinery by investing substantial funds. The new ‘activity may produce the same commodities of the old business or it may produce some other distinct marketable products, even commodities which may feed the old business. These products may be consumed by the assessee in his old business or may be sold in the open market. One thing is certain that the new undertaking must be an integrated unit by itself wherein articles are produced and at least a minimum of ten persons with the aid of power and a minimum of twenty persons without the aid of power have been employed. Such a new industrially recognizable unit of an assessee cannot be said to be reconstruction of his old business since there is no transfer of any assets of the old business to the new undertaking which takes place when there is reconstruction of the old business. For the purpose of s.15C the industrial units set up must be new in the sense that new plants and machinery are erected for producing either the same commodities or some distinct commodities. In order to deny the benefit of s.15C the new undertaking must be formed by reconstruction of the old business. Now, in the instant case, there is no formation of any industrial undertaking out of the existing business since that can take place only when the assets of the old business are transferred substantially to the new undertaking. There is no such transfer of assets in the two cases with which we are concerned.”

It is seen from the decision of the Supreme Court that the grounds on which the Tribunal denied relief to the assessee are irrelevant. Merely because pursuant to a single collaboration agreement the units in question came into existence it cannot be said that they are not new industrial undertakings or separate units. The fact that the assessee was getting articles produced from the new undertakings from abroad for manufacturing dashboard instruments earlier, shows that they were marketable commodities and they answered one of the tests adopted by the Supreme Court in determining whether an undertaking is a new industrial undertaking or not. The fact that there was common management or the fact that separate accounts had not been maintained, would not also lead to the conclusion that they were not separate undertakings. Even if separate account is not maintained the investment on each of the units can be reasonably determined with the material which the assessee may make available to the Department. We are, therefore, of the view that the finding of the Tribunal that the assessee was not entitled to relief under s. 84 and deduction under s. 80J of the Act during the assessment years in question, is erroneous. ‘

10. From the aforesaid judgments, it is clear that trade and industry do not run in ear-marked channels in view of manifold scientific and technological developments. There is great scope for expansion of trade and industry. Every new creation in business is some kind of expansion and advancement. The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is all the same a new and identifiable undertaking separate and distinct from the existing business. In order that the new undertaking can be said to be not formed out of the already existing business, there must be a new emergence of a physically separate industrial unit which may exist on its own as a viable unit. An undertaking is formed out of the existing business if the physical identity with the old unit is preserved. The new activity may produce the same commodities of the old business or it may produce some other distinct marketable products, even commodities which may feed the old business. These products may be consumed by the assessee in his old business or may be sold in the open market. What the law requires for an assessee to be entitled to the benefit under Section 10A of the Act, is the assessee has begun or begins to manufacture or produce articles or things or computer software by setting up a new undertaking, an undertaking, which is independent of the old, undertaking. Such a new undertaking should not be commenced with the machinery or plant previously used by the assessee in the existing business. Similarly, such a new undertaking should not be found by building up or reconstruction of an undertaking already in existence. If a new undertaking is established as a separate entity, new machineries are purchased and installed and if the same business is carried on by the assessee namely manufacture or production of articles or things or computer software meant for exporting and other requirements provided under law, then the assessee would be entitled for the benefit under Section 10A. Newly established undertaking does not mean a new company or a partnership. The newly established undertaking is an undertaking of an assessee independent of all undertakings that he is already possessing. The fact that there was common management or the fact that separate accounts had not been maintained, would not lead to the conclusion that they were not separate undertakings. Even if separate account is not maintained, the investment on each of the units can be reasonably determined with the material which the assessee may make available to the Department. It has to be understood that by establishing of a new industrial undertaking the assessee expands its existing business. The assessee should not be deprived of the benefit under Section 10A. In order that the new undertaking is said to be not form part of the already existing business there must be a new emergence of a physically and separate industrial unit which may exist on its own as a viable unit. An undertaking newly formed should be in physical identity and the old unit be preserved. The fact that if there was common management or separate accounts had not been maintained would not lead to the conclusion that there were not separate undertakings. Even if separate accounts are not maintained, the investment on each of the units can be reasonably determined with the material, which the assessee may make available with the department.

11. In the background of the law, if we look at the facts of the case, the assessee set up an undertaking in the third floor of the Golden Enclave which is a software technology park. It was commenced prior to 1993. It is enjoying the benefit under Section 80HHE of the Act. It is not eligible for the benefit under Section 10A of the Act as it was commenced prior to 01.04.1994. Assessee wanted to expand the business. Therefore, a request was made to the authorities for permission to expand the business. Permission was granted. As an expansion, the assessee has set up one unit in Kadugodi and two units in the second floor of the same building on 16.11.1995 and sixth floor on 30.07.1996. The material on record discloses that for setting up these two undertakings nothing from the existing undertaking is made use of. Fresh machinery and plant were purchased, fresh employees were recruited and it was running as an independent unit. Because it is an undertaking belonging to the assessee, only single account is maintained by the assessee. In the light of the aforesaid undisputed facts, it cannot be said that the assessee is not entitled for the benefit under Section 10A of the Act in respect of these two newly established undertakings which it satisfies all the conditions stipulated in Subsection 2 of Section 10A of the Act. The second substantial question of law is answered in favour of the assessee and against the revenue.”

12.5 In the case of assessee’s own case in AY 2001-02 to 2004-05, the Hon’ble Karnataka High Court has decided an identical issue with the following observations:-

“153. A similar question was raised for consideration in assessee’s case itself in ITA 893, 894, 900, 910, 929 and 931/08 which was decided on 10.06.2014. In fact, this Court followed the judgement rendered in assessee’s sister concern in the case of Wipro GE Medical Systems Ltd., in ITA Nos. 391 and 392/2008 and substantial question of law was answered in favour of the assessee and against the revenue.

154. Following the said judgement, the above substantial question of law is answered in favour of the assessee and against the revenue.”

12.6 Accordingly, following the decision rendered by Hon’ble jurisdictional High Court in the assessee’s own case and in the case of Wipro GE Medical Systems Ltd. (supra), we hold that the new STPI undertakings located in Bangalore, against which deduction has been claimed by the assessee are eligible for said deduction. Accordingly, we direct the A.O. to allow the claim of the assessee.

13. ISSUE NO.10 relates to the question as to whether applicable foreign VAT/GST shall form part of export turnover or not while computing deduction u/s 10A/10AA/10B of the Act.

13.1 This issue has been urged by the assessee in assessment year 2009-10 and 2010-11 only. For the remaining years, the A.O. included the foreign VAT/GST in export turnover while computing deduction in compliance with the directions issued by DRP.

13.2 The facts relating to this issue are stated in brief. The assessee has raised invoices on its customers, which included foreign tax (VAT/GST). The assessee has also collected sale proceeds inclusive of foreign VAT/GST. Accordingly, the assessee included foreign tax VAT/GST as part of “export turnover”, while computing deduction u/s 10A/10AA/10B of the Act. The A.O. took the view that these taxes collected from customers are required to be remitted to the Government and hence these taxes cannot form part of component of export turnover. Accordingly, the A.O. excluded foreign VAT/GST amounts from the amount of export turnover. It is pertinent to note here that the deduction allowable u/s 10A/10AA/10B of the Act is computed in proportion of export turnover to the total turnover on the Profits of business. Accordingly, if the export turnover is reduced then the deduction allowable under the above said sections shall also be reduced correspondingly. Hence, the assessee is objecting to the action of the A.O.

13.3 We heard the parties and perused the record. We notice that this issue is covered by the decision rendered by Hon’ble jurisdictional Karnataka High Court in the assessee’s own case reported in 382 ITR 179. The relevant observations made by the Hon’ble High Court on this issue are extracted below:

128. In the instant case, VAT and GST is payable by the purchaser. It is a part of the sale price. The assessee collects the tax and remits it to the Govern­ment. It is an indirect tax. The definition of export turnover expressly says what is excluded from export turnover i.e., freight, telecommunication charges or insurance. It has not excluded the VAT and GST payable by the assessee in the foreign jurisdiction. The test to be applied in the light of the aforesaid definitions is excluding the aforesaid three charges from the sale consideration received, sale proceeds received in or brought into India in convertible foreign exchange constitutes the export turnover. If the sale proceeds are credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India, though the said proceeds are not actually received in India or brought into India, it is deemed to have been received in India and forms part of the export turnover.

129. In that view of the matter, the finding recorded by the authorities is contrary to law. They have not taken into consideration Explanation 2 to subsection (3) of section 1 0A and thus committed an error. Hence, the said finding requires to be set aside. Accordingly, it is set aside. The substantial question of law is answered in favour of the assessee against the Revenue.

Accordingly, following the binding decision of jurisdictional High Court, we direct the A.O. to include foreign VAT/GST in the export turnover, since export profits realized by the assessee is said to include the above said VAT/GST.

14. ISSUE NO.11 pertains to taxability of interest granted to the assessee u/s 244A of the Act.

14.1 This issue is being urged by the assessee in all the years under consideration, viz., AY 2009-10 to 2014-15.

14.2 The facts relating to the issue are stated in brief. Under the provisions of sec.244A of the Act, the revenue shall grant interest on the refund amount due to an assessee as per the order passed by the assessing officer. Generally, the assessment order/CIT(A) is
challenged by the assessee/revenue to higher appellate forum. On receipt of the order of the higher appellate forum, it is possible that the refund already issued to the assessee, may be required to be collected back. In that event the assessee has to return back the amount of refund along with interest u/s 234D of the Act.

14.3 The assessee followed the practice of accounting for “interest receivable on income tax refund due to it” on accrual basis. It was also accounting for interest payable by it u/s 234D of the Act also on accrual basis. Before the A.O., the assessee submitted that the net interest income (interest receivable and interest payable) relating to income tax refund should not be taxed on accrual basis, even though the assessee has accounted for the same on accrual basis. The A.O. accepted the claim of the assessee that interest accounted by it on accrual basis should not be assessed to tax. However, he noticed that the assessee has received interest during the years under consideration and accordingly proposed to assess the interest so received u/s 244A of the Act. For example, the interest received by the assessee in the year relevant to 2009-10 was Rs.25.92 crores. The A.O. took the view that the amount of Rs.25.92 crores received by the assessee is liable to be taxed on receipt basis. However, the assessee objected to the said proposal also by submitting that

(a) the said receipt cannot be considered as an absolute receipt, since many issues are being contested in the appellate proceedings;

(b) hence refund issued to the assessee may undergo change in future;

(c) and hence there is possibility of recovery of the above said refund from the assessee.

Accordingly, the assessee contended that the said interest income should be assessed to tax only when it reaches finality and becomes irrecoverable from the assessee. The A.O. did not accept the said contentions of the assessee and accordingly assessed the interest received by it in the respective years. Ld. DRP also upheld the view taken by the A.O.

14.4 We heard the parties on this issue and perused the records. We notice that the Hon’ble High Court of Karnataka has considered an identical issue in assessment years 2001-02 to 2004-05. In that regard the Hon’ble Karnataka High Court has followed the decision rendered by it in the assessee’s own case in ITA No.3204 of 2005 dated 28.2.2012 relating to assessment year 1999-2000.

14.5 In assessment year 1999-2000, the Tribunal had held that unless the interest accrued to the assessee becomes irrecoverable in the sense that the same would not be withdrawn by the department subsequently; the liability to include interest in the income does not arise. The view so expressed by the Tribunal was not acceptable to the High Court and accordingly it set aside the order so passed by the Tribunal. However, to resolve the issue, the High Court issued certain directions the A.O., i.e., the A.O. shall first calculate the interest refunded to the assessee and the amount of refund sought to be withdrawn by the subsequent orders and thereafter calculate the interest taxable under the Act. For the sake of convenience, we extract below the observations made by the Hon’ble High Court in assessment year 1999-2000 referred supra.

The 4r’ substantial questions of law is as follows:-

“4. Whether tile Tribunal was correct in holding that interest levied under Section 244A of the Act which was received by the assessee during the current assessment year cannot be brought to tax by basing its finding on mere conjectures and surmises even though the said amount of Rs.84,34,064/- was received by the assessee during the current assessment year and consequently recorded a perverse finding by remitting the matter back to the assessing officer?”

The assessee Company had been granted o sum of Rs.84,34,064/- as interest under Section 244-A of the Act during the financial year 1998-99. The assessee Company was asked to clarify whether the said interest had been included in the return of income. In reply it was stated by the assessee that it has riot been offered for tax in the present assessment year. Further it was stated that the same has been offered for tax from the assessment year 2002-03. Therefore, the said interest income was considered for addition under the head income from other sources. Aggrieved by the said order the assessee preferred an appeal to the Commissioner of Income-Tax(Appeals), who upheld the order of the assessing authority. Aggrieved by the same, the assessee preferred an appeal to the Tribunal

5. The Tribunal held that unless the interest accrues to the assessee irrevocably in the sense, that the same would not be withdrawn by the Department subsequently, the liability to include the interest in the income does not arise. The very concept of accrual supports this finding and also the Supreme Court in 37 ITR 66 has though explained the term accrual in the context of expenditure, nevertheless the decision is applicable for recognition of income even, more forcefully. The liability to tax interest arises when it became irrevocably due and not when the refund is actually given to the assessee. Therefore as further particulars are not forthcoming the said addition was set 6side and the issue was remitted to the assessing authority. However, it was held that when the issue has not become final, the interest on refund shall not be brought to tax as the receipt of interest is subject to the outcome of pending legal process and cannot be brought to tax. It is this finding which is assailed by the Revenue in this appeal.

6. It is settled law that interest paid is compensatory in nature under the Income Tax Acct. If an amount is due on a particular date and if that amount is not paid on that date and if it is paid on a subsequent date the recipient of that amount is deprived of the amount which was legally due till it was actually paid. it is to compensate the denial of the benefit of the said amount that interest is levied paid under various provisions under the Income-Tax Art. It is not dependent on the claim in any legal proceedings when admittedly the assessee has received the money by way of interest on refund and the said amount ought to have been shown in the returns as an income and was liable to pay tax. The offering of the said amount for tax is not dependent on the fact whether the said interest has become irrevocable under the Act or refundable under the Act. In that view of the matter, the said finding in our view is contrary to law and cannot be sustained. Accordingly, it is set aside. As the matter is already remitted to the assessing authority he shall first calculate the interest refunded and the amount of refund on the subsequent orders by which the said benefit is sought to be withdrawn and thereafter calculate the interest taxable under the aforesaid Act. That would meet the ends of justice. Thus question No.4 is disposed off.

14.6 In assessment years 2001-02 to 2004-05 also, this issue was remitted to the file of A.O. with identical directions given in assessment year 1999-2000. The coordinate bench of the Tribunal has followed the decision rendered by High Court in the assessment year 1998-99 and held that, in principle, the interest received u/s 244A of the Act is an income liable to tax. However, following the decision of the High Court referred above, this issue was restored to the file of the A.O. for the limited purpose of computing the taxable amount.

14.7 Since the facts are identical in this year also, following the decision rendered by the High Court, we also restore this issue to the file of the A.O. with the direction to ascertain the interest, if any, withdrawn out of the interest given to the assessee u/s 244A of the Act in the respective years and reduce the same from the interest income and tax the balance amount. We order accordingly.

15. ISSUE NO.12 pertains to deduction claimed by the assessee u/s 80IB of the Act.

15.1 This issue is urged by the assessee in assessment year 2009-10, 2010-11 & 2011-12. The case of the A.O. is that the assessee has not allocated proportionate corporate expenses to the unit claiming deduction u/s 80IB of the Act, thereby inflating its profit and claimed more amount of deduction. The A.O. reduced the claim in assessment year 2009-10 & 2010-11. However, in 2011-12, he accepted the contentions of the assessee and accordingly did not allocate corporate expenses in pursuance of directions issued by Ld. DRP. Hence, revenue has filed the appeal challenging the decision of Ld DRP on this issue in assessment year 2011-12. The assessee is challenging the decision of Ld DRP in AY 2009-10 and 2010-11.

15.2 The fact relating to the issue are set out in brief. The assessee owns an industrial undertaking, which manufactures ‘computers’ (hardware) in Pondicherry. The said unit is eligible for deduction u/s 80IB of the Act. The A.O. has stated in assessment year 2009-10 that the claim made in that year is 9^th year of claim. The A.O. also noticed that the assessee has maintained a separate division named as ‘Corporate Division’ and was incurring expenditure under that division. However, the assessee did not allocate any of the expenditure of ‘corporate division’ to the above said industrial unit located in Pondicherry. Accordingly, the A.O. took the view that the profit of this undertaking is overstated by not allocating proportionate corporate expenses, thereby the deduction u/s 80IB was claimed at a higher amount. It is pertinent to note that the A.O. has taken an identical view while computing allowable deduction u/s 10A/10AA/10B of the Act. We have noticed that the A.O. has allocated corporate expenses to various industrial units on the basis of turnover of each of the units. Following the same methodology, the A.O. allocated proportionate expenditure on the basis of turnover and accordingly reduced the profit of the undertaking, thereby reducing the deduction u/s 80IB of the Act. In assessment years 2009-10 & 2010-11, Ld. DRP confirmed the order passed by A.O. However, in assessment year 2011-12, the ld. DRP directed the AO to delete the allocation of expenditure. In that regard, Ld DRP followed the decision rendered by Hon’ble High Court of Karnataka in an earlier year.

15.3 We heard the parties and perused the record. We notice that an identical issue has been considered by Hon’ble High Court of Karnataka in assessment years 2001-02 to 2004-05 and the issue being identical with one of the issues raised in respect of deduction claimed u/s 10A of the Act, the Hon’ble High Court followed its decision rendered for deduction claimed u/s 10A of the Act. In that regard, the Hon’ble High Court followed its decision rendered in the assessee’s own case in ITA No.507/2002 dated 25.8.2010. The co-ordinate bench of ITAT has considered an identical issue in assessment year 2008-09, wherein it followed the decision rendered by the Tribunal for assessment year 2007-08, wherein the decision rendered in assessment year 2004-05 had been followed.

15.4 We have considered an identical issue in this order in the context of allocation of corporate expenses to undertakings claiming deduction u/s 10A/10AA/10B of the Act (Issue no.8). We have restored this issue to the file of the AO for the reasons discussed in issue no.8. Though the issue herein is contested in the context of deduction u/s 80IB of the Act, yet the underlying facts are identical with issue no.8, discussed supra. Accordingly, in order to maintain uniformity, we feel it proper to restore this issue to the file of AO with similar directions.

16. ISSUE NO.13 pertains to eligibility of the assessee to claim deduction u/s 80IB of the Act on the profit derived on sale of monitors.

16.1 The AO rejected the claim for deduction u/s 80IB of the Act in respect of profit derived from trading of monitors. This issue is urged in Assessment Years 2009-10 to 2010-11 by the assessee and in AY 2011-12 by the revenue.

16.2 We have noticed earlier that the assessee is having an undertakingin Pondicherry, wherein it produces and sells computer systems. The said undertaking is eligible for deduction u/s 80IB of the Act and accordingly, the assesseeclaimed deduction u/s 80IB of the Act on the profits derived from the said undertaking. The AO noticed that the sales turnover declared by the assessee includedproceeds received on sale of monitors. He further noticed that the assessee does not manufacture monitors and purchased them from outside. He also noticed that

(a) monitors were sold along with computers as part of computer system and

(b) monitors and printers were sold independently also, i.e., not along with computer hardware.

It is stated that the assessee did not claim deduction u/s 80IB of the Act on the profit arising from trading activity on monitors, i.e., on profit derived on sale of monitors independently. However, it has claimed deduction on the profits derived from sale of monitors, which were sold along with the computer hardware. The assessee submitted before the A.O. that monitors form integral part of computer hardware and hence it is eligible for profit derived on sale of computer system, when it is sold along with computer hardware. The A.O. however, took the view that the computer hardware and monitors can be sold independently and hence the assessee is not eligible for deduction u/s 80IB of the Act on the profits derived from sale of monitors. Since the assessee did not have separate details of sale value of monitors sold by it along with computer hardware, the A.O. estimated the turnover from sale of monitors and also estimated the profit on the said turnover. Accordingly, the A.O. reduced the claim for deduction u/s 80IB of the Act by the amount of the profit so computed by him. The Ld. DRP confirmed the order of A.O. on this issue in assessment years 2009-10 & 2010-11. However, in 2011-12, the Ld. DRP directed the A.O. to allow deduction u/s 80IB of the Act on this profit also. Accordingly, the assessee is contesting this issue in assessment year 2009-10 & 2010-11 and the revenue is contesting the issue in assessment year 2011-12.

16.3 We heard the parties on this issue and notice that an identical issue has been examined by the Hon’ble Karnataka High Court in the assessee’s own case relating to assessment year 2001-02 to 2004-05 (382 ITR 179) and has decided the issue as under:

“106. After the aforesaid information was furnished, the assessing authority proceeded with the assessment order holding that the assessee has fur­nished incomplete details, only value of monitors which have been sold separately are given and details of monitors sold as a component with the computer has not been furnished. Therefore, he took the average value on the basis of the details furnished filed in Annexure and did not extend the benefit of section 80-IB in respect of the monitors which were sold as a part of the computer. In the aforesaid tabular column, it is shown that the assessee has sold 25,681 monitors, i.e., they are purchased and sold as monitors and the value of the same is given and the assessee has not claimed benefit under section 80-IB in respect of the said amount. He has also given the particulars of the monitors sold along with the computers. 27,736 monitors were sold as a part of the computer. The assessee has pleaded its inability to give the value of the said monitor because the said monitor was sold as a part of the composite value of the computers and the assessee is claiming benefit under section 80-IB in respect of the total consideration. As set out earlier the assessee is carrying on the manufacturing of computers and sale of computers. He has satisfied all the requirements stipulated in sub-section (2) of section 80-IB and he is eligible for the said exemption. The monitors which he has purchased from outside is used as a spare part in the manufacture of computers and it is sold to the customers as such. In other words, those monitors which are used in the computers are not the traded commodities. Therefore, it is a part of the computer and the total consideration of the computer includes the value of this monitor. The profit derived from the said computer includes the sale of the monitor which is a part of the said computer which falls within the first degree. In view of the aforesaid judgments the profit derived from the said sale of monitor as a part of the computer is also eligible for benefit under section 80-IB. However, it is made clear the assessee is not entitled to the benefit of section 80-IB in respect of monitors which are purchased and sold separately as a traded commodity. In fact, the assessee has not claimed any benefit in respect of those monitors. Therefore, the finding recorded by the authorities that the assessee is not entitled to the benefit of deduction under section 80-IB in respect of the monitors which form part of the computer is hereby set aside. Both the substantial questions are answered in favour of the assessee and against the Revenue.”

16.4 We notice that the Hon’ble High Court has taken note of the fact that the assessee did not claim benefit u/s 80IB of the Act in respect of profit derived from trading activity of monitors, i.e., monitors, which were sold separately and not along with computer hardware. In respect of monitors sold along with the computer hardware, the Hon’ble High Court has expressed the view that those monitors which are used in the computers are in the nature of spare parts in the manufacture of computers. Accordingly, the Hon’ble High Court has expressed the view that when the computer is sold along with monitor, then the monitor forms part of the said computer, and hence the same falls within the first degree and is eligible for deduction u/s 80IB of the Act. Accordingly, following the decision rendered by Hon’ble High Court, we direct the A.O. to allow deduction u/s 80IB of the Act in respect of sale of monitors made along with the computer hardware, as part of computers.

17. ISSUE NO.14 relates to the issue of eligibility of the assessee to claim deduction u/s 80IB of the Act in respect of “other incomes” received by it.

17.1 This issue arises in assessment years 2009-10 & 2011-12. The A.O. took the view that the other income, which consisted of rental income and interest income is not eligible for deduction u/s 80IB of the Act, since the same does not fall under the category of “profit derived by industrial undertaking”. The Ld. DRP confirmed the view of the A.O. in assessment year 2009-10. However, the Ld. DRP directed the A.O. to allow deduction u/s 80IB of the Act in respect of other income in assessment year 2011-12. Hence, the assessee is in appeal before us in assessment year 2009-10 and the revenue is in appeal before us in assessment year 2011-12.

17.2 We heard the parties on this issue and perused the record. We notice that the coordinate bench of the Tribunal has considered an identical issue in assessment year 2008-09 and has decided this issue against the assessee. The Ld. A.R. submitted before us that the Hon’ble High Court of Karnataka has examined a similar claim in the context of deduction claimed u/s 80HHC of the Act and the same was decided in favour of the assessee. The Ld. A.R. submitted that the provisions of section 80HHC of the Act are Pari Materia and hence, following the principles laid down by Hon’ble High Court in the context of section 80HHC of the Act, the assessee’s claim should be allowed.

17.3 We have noticed that the coordinate bench has decided this issue against the assessee in assessment year 2008-09. We also notice that the decision rendered by Hon’ble High Court of Karnataka was in the context of section 80HHC of the Act, meaning thereby, the High Court has not decided an identical issue in the context of 80IB of the Act. Under these set of facts, we prefer to follow the decision rendered by the coordinate bench in assessment year 2008-09. For the sake of convenience, we extract below the decision rendered by the coordinate bench on an identical issue in A.Y. 2008-09.

“44.Ground No.29 is regarding denial of deduction under section 80IB of the Act in respect of other income of the undertaking.

45. We have heard the learned Authorised Representative as
well as learned Departmental Representative and considered the relevant material on record. At the outset, we note that an identical issue has been considered in assessee’s own case for the Assessment year 2004-05 and again for the assessment year 2007-08. For the assessment year 2007-08, the Tribunal has decided this issue in para 20.4 as under:

“20.4 We have heard both parties and have carefully perused and considered the material on record. Unless rental income represents a recovery of the rent paid by the undertaking, it cannot be regarded as profit derived by the industrial undertaking. Since the rental income in the assessee company’s case does not meet this requirememnt, we confirm the order of the Assessing Officer that rental income should be excluded in computing the deduction u/s 80IB of the Act.”

Following the decision of the coordinate bench, we decide this issue against the assessee. Accordingly, the direction given by Ld. DRP in assessment year 2011-12 is reversed.

18. ISSUE NO.15 pertains to exclusion of other income while computing deduction u/s 80IC of the Act.

18.1 This issue arises in assessment years 2009-10 in the appeal of the assessee and in assessment year 2011-12 in the appeal of the revenue.

18.2 The facts relating to the issue are stated in brief. The assessee has set up a new industrial undertaking at Baddi, Himachal Pradesh, which is eligible for deduction u/s 80IC of the Act. The A.O. noticed that assessee has shown certain miscellaneous income and claimed deduction u/s 80IC of the Act in respect of the miscellaneous income also. The A.O. took the view that the miscellaneous income cannot be considered as income derived from industrial undertaking and accordingly disallowed the same while computing deduction u/s 80IC of the act. The DRP confirmed the order of A.O. in assessment year 2009-10. However, DRP directed the A.O. to allow the deduction on miscellaneous income also in other years.

18.3 We heard the parties and perused the record. Before us, the assesseereferred to the decision of the coordinate bench of ITAT in assessment year 2008-09 wherein an identical issue was examined and it was rejected by the Tribunal with the following observations:

“41. We have heard the learned Authroised representative as well as learned Departmental Representative and considered the relevant material on record. At the outset, we note that an identical issue has been considered in assessee’s own case for the Assessment year 2004-05 and again for the assessment year 2007-08. For the assessment year 2007-08, the Tribunal has decided this issue in para 22.2 as under:

“22.2 We have heard both the learned counsel for the assessee and the learned departmental representative on the point. On careful perusal and consideration of the material on record, we find that the assessee company had not filed any objection against the Assessing Officer’s finding before the DRP on this issue. Further, it is seen that there are no details of this issue on record. Since there is no cause of grievance on this issue to the assessee as no dispute on this issue arises out of the order of the DRP, this ground of appeal is found to be infructuous and is accordingly dismissed.”

Following the earlier orders of this Tribunal, we decide this issue against the assessee.”

We notice that the Tribunal did not decide the issue in assessment year 2008-09 for the reason that the assessee did not object to the action of the A.O. by filing objections before Ld. DRP. We notice that during the year under consideration, the Ld. DRP has noted that the identical disallowance made by the A.O. was confirmed by the Tribunal in assessment year 2007-08. Before us, the Ld. A.R. submitted that an identical issue has been decided in its favour by Hon’ble High Court in the context of section 80HHC of the Act. However, in the absence of any decision of High court in the context of section 80IC of the Act, we prefer to follow the decision rendered by the coordinate bench in assessment year 2007-08. Before us the assessee did not demonstrate that the miscellaneous income would fall under the category of income derived from industrial undertaking. Accordingly, we hold that the

miscellaneous income is not eligible for deduction u/s 80IC of the Act. The direction of Ld DRP in AY 2011-12 is reversed. The A.O. is directed to compute the deduction u/s 80IC of the Act as per discussions made supra.

19. ISSUE NO.16 pertains to the question as to whether the expenditure incurred in foreign currency is required to be deducted from the export turnover while computing deduction u/s 10A/10AA/10B of the Act.

19.1 This issue is being contested by both the parties in all the years under consideration, viz.,assessment years 2009-10 to 2014-15.

19.2 The facts relating to this issue are stated in brief. The A.O. noticed that the assessee has incurred various expenses in foreign currency under different heads. The issue is whether these expenses are required to be deducted from “export turnover” as required under the definition of the term “Export turnover” for the purpose of computing deduction u/s 10A/10AA/10B of the Act.

19.3 We notice that the term “export turnover” is defined as under in the Explanation given under section 10A of the Act:-

iv) “export turnover” means the consideration in respect of export by the undertaking of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section

(3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India;

Under section 10AA of the Act, the term “export turnover” is defined as under:-

(i) “export turnover” means the consideration in respect of export by the undertaking, being the Unit of articles or things or services received in, or brought into, India by the assessee but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things outside India or expenses, if any, incurred in foreign exchange in rendering of services (including computer software) outside India;

Under section 10B of the Act, the term “export turnover” is defined as under:-

(iii) “export turnover” means the consideration in respect of export by the undertaking of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India;

The AO took the view that, as per the definition of the term “Export Turnover” given under sec.10A/10AA/10B of the Act,“expenditure incurred in foreign currency” is required to be excluded from the amount of “Export turnover”. Accordingly, the A.O. proposed to exclude all the expenditure incurred in the foreign currency from the amount of export turnover while computing deduction u/s 10A of the Act. The assessee submitted that all the expenditure incurred by it in foreign currency is not required to be excluded. It was submitted that only those expenses mentioned in the definition are required to be excluded. The assessee had incurred majority part of expenses as “direct costs” in developing software abroad while providing onsite services. Accordingly, the assessee submitted that those kinds of expenditure do not fall under the category of “Technical Services”mentioned in the definition of the export turnover. The assessee explained that it has employed specialized engineers for development of software onsite, i.e., at the place of these customers and they form part ofdirect cost incurred in development of software.It was submitted that the export invoice is being prepared on “cost plus profit” basis and hence the above expenses, being direct expenses, shall form part of “export turnover”.Hence they are not required to be excluded from the amount of export turnover.

19.4 The A.O. did not agree with the submissions made by the assessee. The A.O. noticed that assessee has incurred expenditure in foreign currency under 3 categories.

a) Expenditure on project allowances, salaries and wages, staff welfare, travelling expenses and insurance expenses.

b) Expenditure under the head “Legal & Professional fees”, which consisted of brokerage and commission, fees for technical services and legal and professional charges. It was explained to the A.O. that the fee for technical services primarily consisted of sub-contracting charges paid to various sub-contractors, who were engaged for the purpose of delivery of computer software to its overseas customers. It was explained that this payment is in the nature of software development expenses paid to technical personnel other than its own employees engaged in on site development. Accordingly, it was submitted that these expenses are also form part of direct cost incurred in development of software.

c) The assessee has also incurred expenses under the head “other expenses”, which consisted of advertisement, communication expenses, conveyance, insurance, miscellaneous purchases, recruitment, training and development, repairs, etc. It was submitted that these expenses are also direct expenses incurred on development of software.

The A.O. took the view that these expenses are also required to be excluded from the export turnover. Accordingly, he excluded these expenses from the export turnover and accordingly computed deduction u/s 10A of the Act. It is pertinent to note that the assessee had also pleaded before the A.O. that if any amount is excluded from the export turnover, the same is required to be excluded from total turnover also. The said submission of the assessee was also rejected by the A.O.

19.5 The Ld. DRP agreed with the view taken by A.O. on the matter of exclusion of those expenses incurred in foreign currency from the amount of“export turnover”, while computing deduction u/s 10A/10AA/10B of the Act. However, in assessment year 2009-10 to 2011-12, the Ld. DRP directed the A.O. to exclude expenses incurred in foreign currency towards communication expenses, travel expenses and legal & professional fees both from export turnover and total turnover while computing deduction u/s 10A of the Act.

19.6 We heard the rival contentions on this issue and perused the record. We notice that the co-ordinate bench has accepted the alternative submissions of the assessee in AY 2008-09 by following the decision rendered by Hon’ble Karnataka High Court in the case of Tata Elixi Ltd (supr) and accordingly directed the AO to exclude the amounts from both export turnover and total turnover, while computing the deduction. The relevant discussions find place at paragraphs 28 to 31 of the order. Before us, the Ld A.R submitted that the main contention of the assessee has been addressed by the coordinate bench in assessment year 2004-05 (ITA No.1072/Bang/2007). We notice that the main contention of the assessee has been decided as under in AY 2004-05 by the co-ordinate bench:

“15. The ninth effective ground is with regard to the action of the CIT(A) in directing the AO not to exclude expenditure inforeign currency. The Ld.AO had  excluded from export turnover the expenses incurred in foreign currency on the basis of the definition of the export turnover contain in section 10A. He had also concluded that the assessee had ed technical services and thus expenses incurred in foreign currency in rendering such technical services require exclusion from export turnover. On the other hand, the assessee company, extensively quoting the provisions of section 10A(4) of the Act and also placing strong reliance on the decision of the CIT(A) for the AYs 01-02 and 02-03 had argued that the exclusion of above sums of communication link and other reimbursements, VAT/GST, telecommunication expenses and expenditure in foreign currency as carried out by the AO be vacated.

15.1.  After critically analyzing the rival submissions and also drew strength from his earlier decision on a similar issue, the Ld.CIT(A) has held that no exclusion was required on this issue and, accordingly, directed the Ld. AO to re-compute the deduction u/s 10A.

15.2. Protesting against the action of the Ld. CIT(A), the Revenue has brought up this issue before us for redressal. It was the case of the Revenue that the Ld.CIT(A) has grossly erred in deciding the issue in favour of the assessee by following the decision of Hon’ble Tribunal in the case of Infosys Technologies Limited which has been challenged before the Hon’ble High Court. Another point on which the Revenue found fault with the CIT(A) was that the decision relied on by him was rendered with regard to deduction u/s 80HHC whereas the issue before him was the claim u/s 10A of the Act. It was, further, submitted that the assessee had filed annual returns before the STPI authorities showing the assessee had earned export income through data communication as well as onsite consultancy which shows that it had rendered technical services. The agreements entered into by the assessee with the clients for exporting computer software clearly provides software application development, deployment and support services. To strengthen its stand, the Revenue, further, submitted that the assessee provides technical services in developing software as per the specifications of the client(s) and, hence, it is clear that it provides technical services and therefore such expenditure met out in foreign currency in providing technical services outside the country should be deducted from the export turnover.

15.3. On the other hand, the Ld.A.R, has submitted that the issue stands covered by the decision of the Hon’ble Tribunal for the AYs 2001-02 & 02-03 in the assessee company’s own case which may be ordered to be followed for this assessment year as well.

15.4. Rival submissions were carefully considered. We have perused the order of Hon’ble Tribunal also. The decision of the Hon’ble Tribunal has been extensively quoted by us when we have decided the ground No.8 of the Revenue. The said decision is applicable to this issue also [issues raised by the Revenue in ground Nos: 8 & 9 are rather inter-linked), we respectfully following the Tribunal’s decision referred supra, we uphold the action of the Ld.CIT(A) on this count.”

19.7 We notice that the co-ordinate bench has referred to the ground no.8, wherein the question of exclusion of communication expenses was examined. For the sake of convenience, we extract below the relevant observations made in respect of ground no.8 in AY 2001-02

“14. The next effective eighth ground is with regard to reimbursement of communication links, incentives, rewards, telecommunication expenses etc., In respect of reimbursement of communication links and other sales performance incentives, the Ld. AO had stated that only the consideration in respect of export of article or things is liable to be taken for the purposes of section 10A. Thus, the AO had concluded that the amount received by the assessee as communication link charges or other rewards and incentives were not a consideration for the export of the software. However, the assessee company’s contention was that —

“15.1 The reimbursement of certain expenses was also in the nature of export as the same was paid pursuant to the contract of sale of computer software. Alternatively, if it is held that the said sum does not form part of sale proceeds of export turnover then similar amount should be reduced from the total turnover also as held by Bombay High Court in Sudarshan Chemicals reported in 245 769. Alternatively, the AO should have consistently applied the rationale that what is not turnover in the first place cannot be part of either export turnover or total turnover.”

14.1, After considering the rival submissions, the Ld. CIT(A) took a view that this issue was covered by his decision for the AYs 01-02 and 02-03 and holds good for the AY under dispute also and, accordingly, directed the AO to consider the reimbursements as part of export turnover for the purpose of computing deduction u/s 10A.

14.2. In respect of Telecommunication expenses, the Ld. AO retied on the definition of the export turnover to exclude of the said expenses as expenses attributable to delivery of computer software and excluded the said sum from export turnover.

14.3. The assessee company in its submission was of the view that —

“17.1 ………….. This is erroneously excluded by the AO. The expenses never formed part of export turnover. Exclusion can be made provided the same is included in the first place. As telecommunication expenses are debited to the profit and loss account of each section 1 0A unit, it is clear that they have not been included in the turnover. Thus exclusion from tunio.er is not warranted at all. However, the AO has estimated Rs.1,81,04,480/- being 5% of the net communication charges incurred as the amount incurred for delivery of computer software outside India and reduced the same only from export turnover. If it is held that the said sum is required to be excluded from export turnover then similar amount should be reduced from the total turnover also as held by Bombay High Court in Sudarshan Chemicals reported in 245 ITR 769.”

14.4. After considering the rival submissions, the Ld. CIT(A) took a view that this issue was also covered by his decision for the AYs 01-02 and 02-03 and the same holds good for the AY under dispute and, accordingly, directed the AO to consider 5% of Rs. 14.56 crores for exclusion from the export turnover on account of telecommunications. The exclusion shall also be similarly made from the total turnover.

14.5. Aggrieved, the Revenue has come up before us. The Ld. A.R forcefully submitted that the issues stand covered by the decision of the case of the assessee company for the AYs. 01-02 and 02-03. On the other hand, the Id. D.R urged that the action of the Ld. AO is in order which may be upheld.

14.6. We have carefully considered the submissions of the either parties. We find that the Hon’ble Tribunal has dealt with these issues comprehensively. After considering the pros and cons of the issues, the Hon’ble Tribunal has decided thus —

“24.5 ………. In respect of expenditure incurred on on-site development, the issue stands covered by the order of this Tribunal in the case of Infosys Technologies Limited. This Bench in the case of Insosys Technologies vide order dated 31 March, 2005 in ITA NO.50/Bang/2001 held in that case that the assessee is involved in developing software. The assessee was not involved in rendering oftechnical services.

Such software are provided through the computer programmes developed by them. Hence, expenses in foreign currency were not to be reduced for ascertaining the export turnover. This bench in the case of M/s.Relq software Pvt. Ltd. in ITA No:767/Bang/2007 vide order dated 16^th May 2008 has also held that the on-site expenses for development of computer software is not in the nature of technical services. It will be useful to reproduce para 14 and 15 from that order:-

“14. During the course of proceedings before us, the learned AR su’dmitted that the issue stands decided in favour of the assessee by the Tribunal in the case of”

1. ACIT v. M/s.Infosys Ltd.653 & 969(B)/2006

2. M/s.TataElxsi Ltd. 315(B)/2006 dt 16.10.2007

3. M/s.I-Gate Global Solutions Ltd.

15. We have heard both the parties. Deduction u/s 10A is available in respect of profit or gains derived from an undertaking from the export of articles or things or computer software. One has to understand the meaning of computer software with reference to the fact that it is preceded by articles or things. Deduction u/s 10A was allowed if export proceeds are from the export of articles or things or computer software. It means that such export proceeds must relate to the goods and no for the services. Computer software is developed by providing off site expenses and on site expenses. The amount receivable in respect of computer software does not include any reimbursement of on site expenses. Payments made to Engineers employed on site are for the development of software. By such development, the assessee has not rendered any technical services relevant to clause (iv) of Explanation 2 of section 10A technical services have not been defined. The CBDT vide Circular No.694 dated 2.3.11.1994 stated that computer programmes are not physical goods but are developed as a result of an intellectual analysis of the system and method followed by the purchaser of the programme. It is often prepared on site with the software personnel going to the clients premises. Hence, when the expenditure is in respect of payments on site development, the same cannot be excluded from the export turnover by holding it as technical services. When export of services only is not entitled to deduction u/s IOA then the Legislature made clear that foreign exchange relating to technical services will be excluded. If there is export of goods as well as services then only that portion will be eligible for deduction which relates goods. Hence, the AO is not justified in excluding Rs.4,86,63,187/- from export turnover.

24.6. The Hyderabad Bench in the case of Patni Telecom P. Ltd. v. ITO vide order dated 11^th January, 2008 in ITA NO.5/1-1yd/20005 and 354/11yd/2006 held that expenditure incurred on travel and allowances for the purpose of development of software at clients site outside India cannot be excluded from the export turn-over. Similar finding has been given by Chennai Bench vide order dated 15th February 2008 in ITA NO.731/Mad in the case of Changepond Technologies P.Ltd v. ACIT wherein it has been held that expenses on salaries, traveling and other perquisites are to be included in the export turnover. Hence, following the decision of this Bench and considering the decisions of other Benches on this issue, the expenses on traveling etc. cannot be excluded from the export turnover. Income-tax Act does not provide any bifurcation of the expenses incurred outside India. The assessing officer has not brought on record any expenditure which may not be relevant for the purpose of export. Hence, the apportionment is not desirable. We confirm the finds of the learned CIT(A) that such apportionment cannot be done.

24.7. In respect of telecommunication expenses, only those expenses which are relevant for the delivery of software are to be excluded. No effort has been made by the assessing officer to ascertain the telecommunication expenses relating to the delivery of the software. This Bench in the case of I-Gate Global Sales held that 80% of unlinking charges should be reduced from the export turnover. Such finding of the learned CIT(A) was confirmed on the basis of the fact that the learned CIT(A) discussed the software development with a number of representatives of various companies and noticed that 80% of the uplinking charges are incurred for the delivery of software. We are not having the details of the unlinking charges, hence, the issue of disallowance of telecommunication expenses relating to the delivery of software is restored on the file of the assessing officer. The assessing officer will give opportunity to the assessee to furnish the details in respect of telecommunication expenses fur the delivery of software.”

14.7. As similar issues have been decided by the Hon’ble Tribunal for the AYs 01-02 & 02-03 in the assessee’s own case, we respectfully follow the said decision in toto which holds good for the AY under dispute also. Accordingly, this issue is remitted back on the file of the assessing officer as in last year.”

19.8 We notice that the coordinate bench has followed the decision rendered by another coordinate bench in the case of M/s. RELQ Software Private Ltd (supra), wherein a distinction was made to the term “Technical services” and it was held that payment made to engineers employed on site for development of software cannot be considered as “Technical services” mentioned in clause (iv) of explanation (2) to section 10A of the Act. Accordingly, it was held that the A.O. was not justified in excluding the expenses incurred in foreign currency from export turnover. The Tribunal also noticed that the decisions rendered by Hyderabad bench of Tribunal in the case of Patni Telecom Pvt. Ltd (supra) and Chennai bench of Tribunal in the case of “Change Pond Technologies Pvt. Ltd. (supra). I have also taken an identical issue.

19.9 We notice that the assessee has submitted before the A.O. that these expenses have been incurred in development of software on site and hence, they formed part of “direct cost” of developing a software. It has also been submitted that the assessee has been raising invoice on its customers on cost plus basis. Accordingly, it is required to be examined as to whether these expenses are required to be excluded from“export turnover”, by considering the definition of the term “export turnover” given in section 10A/10AA/10B of the Act. We have extracted the definition given in all the three sections earlier.A careful perusal of the above said definition given in sec.10A and 10B would show that what is required to be excluded is freight, telecommunication charges, or insurance attributable to the computer software outside India or expenses, if any incurred in foreign exchange in providing technical services outside India. However, in sec.10AA, there is modification of the definition, i.e., the term “technical” is not used therein. It is mentioned as “expenses, if any, incurred in foreign exchange in rendering of services (including computer software) outside India. The question as to whether the cost of development of software would fall under the category of “technical services”has been examined by the coordinate bench in assessment year 2004-05 and the Tribunal has taken the view that the cost incurred outside India in development of software would not fall under the category of ‘expenses incurred in providing technical services outside India’ as mentioned in the definition. Accordingly, we are of the view that the expenditure incurred in development of software and which forms part of “direct cost of development of software” would not fall under the category of “technical services”or “services” rendered outside India, as contemplated in the definition of Export turnover. Hence the same is not required to be excluded from export turnover. Accordingly, what is required to be excluded is the expenses specifically mentioned in the definition of “export turnover”, viz., the expenditure incurred on freight, telecommunication charges or insurance attributable to the delivery of the computer software outside India or expenses, if any incurred in foreign exchange in providing technical services outside India alone are required to be excluded from the export turnover.

19.10 Further, if any amount is excluded from “export turnover”, the same is required to be excluded from “total turnover” also, as held by Hon’ble Karnataka High Court in the case of Tata Elixi Ltd (2012)(204 Taxman 321) and by Hon’ble Supreme Court in the case of CIT vs. HCL Technologies Ltd (CA No.8489-8490)

19.11 Accordingly, we set aside the order passed by the A.O. on this issue and direct him to compute the deduction u/s 10A/10AA/10B of the Act by following the discussions made supra.

20. ISSUE NO.17 relates to question as to whether reimbursements received by the assessee are required to be excluded from the export turnover for the purpose of computing deduction u/s 10A/10AA/10B of the Act.

20.1 This issue is being contested by the assessee in all the six years, i.e., assessment years 2009-10 to 2014-15. The revenue is contesting this issue in AY 2010-11.

20.2 The facts relating to this issue are discussed in brief. In respect of software development activity, for which the assessee had claimed deduction u/s 10A/10AA/10B of the Act, the assessee has received certain payments as reimbursements. These reimbursements have been categorized as asset reimbursements, communication link reimbursements, travel reimbursements, incentive awards and other reimbursements. The A.O. excluded the above amounts from export turnover and accordingly computed deduction u/s 10A/10AA/10B of the Act. The A.O. did not accept the contentions of the assessee that these amounts were also received in foreign exchange and hence they are in the nature of export proceeds realized in respect of computer software export and hence they should not be excluded from export turnover.

20.3 Before Ld DRP, the assessee reiterated the above said contentions. In the alternative, the assessee contended that the amount excluded from the export turnover should also be excluded from the total turnover, while computing deduction u/s 10A/10AA/10B of the Act. The Ld. DRP accepted the alternative contentions of the assessee. Accordingly, the assessee is in appeal in respect of the main issue in all the 6 years under consideration and the department is in appeal in assessment year 2010-11 in respect of exclusion of the amount from total turnover.

20.4 The submissions made by the assessee before the Tribunal are extracted below:-

“SUBMISSION BEFORE THE HON’BLE TRIBUNAL No Exclusion is necessary

(i) The assessee has various measures for realizing its price. Primarily this fall into two categories, viz

(a) Time and Material, which means that the price realized is linked to the efforts for the computer software delivered and the tools and equipment, identified resources used for the same.

(b) Fixed price contracts, wherein the price realized is  with reference to milestones for delivery of computer software.

The nomenclature of ‘reimbursement” is only representative of the customers having paid the price for the computer software delivered in terms of identified expenses which are reimbursed pursuant to the contract of sale of computer software.

(ii) Asset Reimbursement: INR 87,383,367

Some customers request the Company to purchase specialized equipment’s with an obligation to reimburse the cost. The payments made for acquiring the assets which are used in software development for the customers are debited to the P&L account, whereas the reimbursements received from customers are credited to the P&L account since it is a mechanism for realizing the consideration for export of software. Alternatively, the amount shown as asset reimbursement under the sales revenue is a recovery of the cost.

(iii) Communication link reimbursements — INR 207,638,971

The SEZ undertakings manufacture and export computer software and realize the sales proceeds in convertible foreign exchange. While most customers insist on establishing a direct communication link with the undertaking where the computer software is produced, only some customers agree to reimburse the communication link expenses. In such cases, the invoice is raised on the customers showing a separate charge for “Link charges”. Communication link reimbursements in convertible foreign exchange are in effect a component in the realization of the sales price for the computer software exported.

(iv) Travel Reimbursement — INR 139,041,279

Travel reimbursements in convertible foreign exchange constitute another component in the realisation of sales price in the delivery of computer software and accordingly is included as part of export turnover. The expenses incurred on travel are debited to the profit and loss account of the SEZ unit.

(v) Inventive rewards and other reimbursements: INR 1,501,943,058

The SEZ undertakings are engaged mostly in the business of manufacturing customized computer software. The technology and methods used for producing computer software to meet customers’ specific requirements vary. In certain work orders, time becomes the essence to enable the customer build features into his products. Computer software is developed as a result of intellectual analysis of the systems and methods followed by the customers. Having regard to this, the customers pay a bonus/reward consideration. The amounts are also consideration realized in convertible foreign exchange by the undertakings in respect of export of computer software and accordingly is “export turnover”

(vi) The appellant respectfully submits that the above reimbursements are in the nature of consideration for export of computer software and there should be included in both export turnover and total turnover.

(vii) The Assessing Officer had disallowed the said reimbursements and the same has been affirmed by the DRP for the years in question. However it is submitted that both the Assessing Officer and DRP had failed to take into consideration the binding decisions of this Hon’ble Tribunal rendered in the appellant own case in ITA no. 426 /B /2006, 427 /B /2006, 468 /B /2006, 469 /B /2006, 817 /B /2007,624 /B /2007.1178 /B /2008,C0 no. 77 /B /2007, ITA 1072 /B /2007, for AY 2001-02 to 2004-05. This order of the Tribunal has attended finality and revenue had not preferred any further appeal before the Hon’ble High Court.

(viii) It is also important to highlight and submit that along with the Bangalore bench of Hon’ble Tribunal, other co-ordinated benches of the Hon’ble Tribunal have also expressed similar view holding that a software development onsite will not tantamount to rendition of technical services and the cost incurred towards travel, lodging and other cost should not stand excluded and they should form part of the export turnover and therefore of total turnover too.

(ix) In this connection reliance is placed on the decision by this Hon’ble Tribunal in Infosys Technologies (ITA No. 50/B/2001) and Relq Software Pvt. Ltd. (ITA 767/B/2007). In this case, this Hon’ble Tribunal was pleased to refer to the decision rendered by the coordinated benches in Hyderabad Bench in the case of Patni Telecom P Ltd (ITA no.5/H/2005 and 354/H/2006) and Chennai Bench in the case of Changepond Technologies P Ltd (ITA no. 731/Mad).”

20.5 We shall first examine the amount received as asset reimbursement. From the submissions made by the assessee, we notice that the assessee has purchased certain specialized equipment on the specific request of the customers, who had also agreed to reimburse the cost of the equipment. The assessee has debited the profit & loss account with the cost of purchase of assets and credited the profit & loss account with the amounts reimbursed by the customers. From the facts, we notice that the cost so incurred cannot be categorised as direct cost related to the development of software. Since it is an expenditure incurred at the request of customer for which reimbursement was also received, there is no revenue element involved in it. Accordingly, we are of the view that this amount should not be considered as either expenditure or part of export turnover, i.e., the receipt should be netted off against the expenditure. We hold accordingly.

20.6 We shall next examine the nature of payment received by way of incentive awards. It is the submission of the assessee that whenever it completes software development work within the timeframe to the satisfaction of the customer, the customers pay a bonus/reward as consideration. It is stated that the said amount has been realized in foreign exchange and accordingly included in the export turnover. From the submission so made, we notice that this amount has been received as incentive from the customers, meaning thereby, it is in the nature of additional payments received towards export of software. Hence,we are of the view that it shall form part of sales turnover. Since it is only a revenue item, it cannot be categorized as expenditure as contemplated under the definition of the export turnover.Hence the same is not required to be excluded from the export turnover.

20.7 In respect of the remaining amounts received, in our view, it is required to be examined as to whether the same shall form part of expenses, which are required to be excluded from the amount of Export turnover, as per the definition of the term “export turnover” given in sec.10A/10AA/10B of the Act. We have discussed the principles at length while adjudicating the earlier issue. Accordingly, the remaining amounts require fresh examination in the light of discussions made supra.

20.8 We also make it clear that, if any of the amount is required to be excluded from export turnover, then the same shall be excluded from the total turnover also, as held by Hon’ble High Court of Karnataka in the case of CIT Vs. Tata Elxi Ltd. 204 Taxmann.com 321 and also by Hon’ble Supreme Court in the case of CIT Vs. HCL Technologies Ltd. (C.A. No.8489-8490).

20.9 Accordingly, we direct the AO to compute the deduction u/s 10A/10AA/10B of the Act by following discussions made supra.

21. ISSUE NOs.18 &19 relate to allocation of corporate overheads to the units claiming deduction u/s 80IAB & 80IC of the Act.

21.1 The assessee has raised this issue in Assessment Years 2009-10 to 2012-13. The revenue has raised this issue in AY 2011-12.

21.2 The assessee has developed Special Economic Zones named Kolkata Salt Lake SEZ Developer, Hyderabad SEZ Developer and electronic City SEZ Developer. It has claimed deduction u/s 80IAB of the Act in respect of the above said three SEZs. The assessee has also claimed deduction u/s 80IC of the Act in respect of units located at Baddi, Himachal Pradesh.

21.3 The A.O. noticed that the assessee has not allocated common corporate expenses to these units. The AO took the view that the assessee should have allocated common corporate expenses to various units. While examining an identical issue in respect of deduction claimed u/s 10A of the Act (issue no.8), we noticed that the AO allocated corporate expenses in the ratio of turnover between various units. The said allocation would reduce the profits of the undertakings. Accordingly, he reduced the profits of undertaking claiming deduction u/s 80IAB & 80IC and consequently reduced the deduction u/s 80IAB & 80IC of the Act.

21.4 The Ld. DRP confirmed the order of A.O. in assessment years 2009-10, 2010-11 & 2012-13 both for deduction claimed u/s 80IAB & 80IC of the Act. However, the DRP decided this issue in favour of the assessee in assessment year 2013-14 and 2014-15. The revenue has filed appeal for assessment year 2011-12 and the assessee has filed the appeal on this issue for 2009-10 to 2012-13.

21.5 The question of allocation of corporate expenses was examined by us in the preceding paragraphs in respect of deduction claimed by the assesseeunder u/s 10A/10AA/10B of the Act(Issue no.8). We have restored this issue to the file of the AO for the reasons discussed therein. Though the issue contested is in the context of deduction u/s 80IAB& 80IC of the Act, yet the underlying facts are identical with issue no.8, discussed supra. Accordingly, in order to maintain uniformity, we feel it proper to restore this issue to the file of AO with similar directions.

22. ISSUE NO.20 pertains to disallowance made by the A.O. u/s 14A of the Act.

22.1 This issue is urged by the assessee in all the six years by the assessee, viz., AY 2009-10 to 2014-15.

22.2 The assessee has received dividend income from investments made in various mutual funds and claimed the same as exempt. The assessee also made disallowance u/s 14A of the Act by allocating some expenses as relatable to the exempt earned by the assessee. Since the quantum of investment was more than the own funds available with the assessee, no disallowance was made out of interest expenses. Hence the disallowance was made out of administrative expenses only, which worked out to about 2% of the corporate expenses.The A.O. did not accept the workings furnished by the assessee. Accordingly he computed the disallowance as per rule 8D(2)(iii) of the I.T. Rules @ 0.5% of average value of investments. Ld. DRP restored the matter to the file of A.O. with the direction to examine this issue afresh by considering the decision rendered by ITAT in the case of Syndicate Bank, by Hon’ble Bombay High Court in the case of Godrej &Boyce Manufacturing Company Ltd. 328 ITR 81 and by Hon’ble Kerala High Court in the case of Dhanalakshmi Bank Ltd. 344 ITR 259. The A.O. while passing the final assessment order, duly considered the above said 3 decisions and confirmed the disallowance originally made in the draft assessment order. Aggrieved, the assessee has filed this appeal before us.

22.3 We heard the parties on this issue and perused the records. We notice that the coordinate bench has considered an identical issue in assessment year 2008-09 and the matter was restored to the file of the A.O. with the following observations:

“12. Thus it is clear that the Tribunal was of the view that the disallowance made under section 14A as computed under Rule 8D(2)(iii) cannot be more than the actual expenditure which can be relatable for earning the exempt income and debited to the Profit and Loss account. In the case on hand the disallowance made by the assessee on its own is not the total expenditure debited to the profit and loss account but it is the allocation made by the assessee out of the total expenditure. Therefore the basis of the allocation and apportionment of the said disallowance made by the assessee is subject matter of verification and satisfaction of the Assessing Officer. Accordingly, we set aside this issue to the record of the Assessing officer to re-examine the issue in the light of the orders of this Tribunal in assessee’s own case as well as in the case of DCIT vs. M N Dastur & Co P Ltd (supra).”

Before us the assessee contended that the A.O. has not given any substantial finding in respect of correctness or otherwise of the amount disallowed by the company. Accordingly, it was submitted that the A.O was not justified in applying rule 8D of IT Rules. The Ld. A.R. also placed reliance on the decision rendered by Hon’ble Supreme Court in the case of Godrej &Boyce Manufacturing Company Ltd. 394 ITR 449.

22.4 We have noticed that this issue has been restored by ITAT in assessment year 2008-09 to the file of the A.O. A perusal of the assessment order passed by A.O. would show that the A.O. has observed that he was not satisfied with the working furnished by the assessee. However, the A.O. has not examined the basis of the allocation and apportionment of expenses towards the exempt income. Hence, the coordinate bench has restored this issue to the file of the A.O. for examining it afresh. Accordingly, following the decision rendered by the coordinate bench, we restore this issue to the file of the A.O. The assessee is free to make its submissions and the AO shall decide the decide the issue in accordance with law, by duly considering the submissions made by the assessee.

23. ISSUE NO.21 relates to exclusion of profits attributable to overseas development centre for computing deduction u/s 10A/10AA/10B of the Act.

23.1 This issue is being urged in all the six years under consideration by the assessee, i.e. in AY 2009-10 to 2014-15.

23.2 The facts relating to this issue are that the assessee company has set up software development facilities in Germany, Sweden, United Kingdom, Canada, Japan and Australia. The assessee submitted that these units were set up to facilitate ‘on site’ development of software to specific customers. It was submitted that the assessee has been incurring only expenditure in these centers and revenue generated from onsite work are included in the turnover of the respective undertakings.

It was also submitted that the assessee do not maintain separate books of accounts for these centers. However, the A.O. took the view that these are independent units. Accordingly, he rejected the claim of the assessee that these are all extension centers of STP units located in India. The A.O. also took the view that profits derived from STP/SEZ units should be allocated to these cost centers and those profits should be excluded while computing deduction u/s 10A/10AA/10B of the Act. Since no specific turnover could be attributed to these centers, the A.O. estimated the profits attributable to these centers by taking into account space of the office, number of personnel employed therein, their salary, sales turnover etc. Accordingly, he computed profits attributable to each of these centers and excluded the same while computing deduction u/s 10A/10AA/10B of the Act. Ld. DRP also confirmed the view taken by the A.O. on this issue.

23.3 We heard the parties on this issue and perused the record. We notice that the coordinate bench has considered an identical issue in assessment year 2008-09 and matter was restored to the file of the A.O.

with the following observations:

“18. Ground no.11 & 12 are regarding computation of profit of overseas software development centre.

19. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. At the outset, we note that an identical issue has been considered in assessee’s own case for the Assessment year 2004-05 and again for the Assessment year 2007-08. For the Assessment Year 2007-08, the Tribunal has decided this issue in para 10.4 as under:

“10.4 We have heard both parties and have carefully perused and considered the material on record. We have perused the order of the co-ordinate bench of the Tribunal in the assessee’s own case for Assessment year 2004-05 in ITA No.1072/Bang/07 (supra) and find that the discussions are at para 24 onwards and the relevant findings are at para 24.2 to para 24.2 which are extracted hereunder:

“24.2 We have carefully considered the argument put-forth by the Ld. A.R. and also the reasoning of the Ld. A.O. and the Ld. CIT(A) in their respective orders. The Hon’ble Tribunal, for the AYs 2001-02 and 02-03 in the assessee’s own case had an occasion to deal with an identical issue. After deliberations, the Hon’ble Tribunal had concluded thus –

“34.4 The learned CIT(A) has also not recorded a finding that such goods or services have been transferred at the market value. In absence of such a finding, it is not possible to uphold the finding of the learned CIT(A). This issue is required to be remitted back to the assessing officer and the assessee will be required to file the relevant details as required by the assessing officer so that the assessing officer can ascertain the market value of such goods or services transferred by arriving at the profit of the eligible business.”

24.3 Considering the above finding, we are of the firm view that this issue requires to be remitted back to the assessing officer and, accordingly, we are remitting back this issue to the assessing officer for necessary action as contemplated in the Tribunal’s finding referred supra.”

On consideration of the above findings, we respectfully following this decision, are of the opinion that for this year also the issue requires to be remitted back to the Assessing Officer and accordingly do so with a direction to the Assessing Officer to follow the decision of Tribunal mentioned supra.”

By following the earlier orders of this Tribunal, we remit this issue to the record of the Assessing Officer to consider the same in accordance with the earlier directions of the Tribunal.” Consistent with the view taken by the Tribunal in the earlier years, we remit this issue to the file of the A.O. for examining it afresh in accordance with the directions given in the earlier order of the Tribunal.

24. ISSUE No.22 relates to levy of interest u/s 234B/234C/234D of the Act.

This issue is urged in all the six years under consideration. Charging of interest is consequential in nature and hence this issue does not require any adjudication.

25. ISSUE NO.23 relates to rejection of claim for deduction of educational cess.

25.1 This issue is urged by the assessee in AY 2013-14 and 2014-15. The assessee claimed “educational cess” paid by it along with the income tax as deductible expenditure in assessment year 2013-14 and 2014-15. The assessee placed its reliance on a circular issued by CBDT (Circular F.No.91/58/66-ITJ(19) dated 18.5.1967), wherein it was stated that the select committee, while examining the section 40(a)(ii) of I.T. Bill, 1961 introduced in Parliament at that point of time, has recommended omission of the word “cess” originally available in section 40(a)(ii) of the Act. Accordingly, the CBDT has interpreted that the effect of omission of the word “cess” is that only taxes paid are to be disallowed in the assessments for 1962-63 and onwards. The A.O. did not accept the submissions of the assessee and expressed the view that the cess is part of income tax and hence, it is not allowable u/s 40(a)(ii) of the Act. The Ld. DRP also confirmed the same.

25.2 Before us, the assessee placed his reliance on the CBDT circular referred above and also the decision rendered by Hon’ble Rajasthan High Court in the case of Chambal Fertilisers & Chemicals Ltd. Vs. JCIT (ITA No.52/2018 dated 31.7.2018), wherein it was held that the education cess computed on income tax is not to be disallowed u/s 40(a)(ii) of the Act.

25.3 We heard the parties on this issue and perused the records. Besides the decision of Rajasthan High Court, referred supra, we notice that the Hon’ble Bombay High Court has also held in the case of Sesa Goa Ltd vs. JCIT (Tax Appeal No. 17/2013) that the education cess is allowable as deduction. For the sake of convenience, we extract below the decision rendered by Hon’ble Bombay High Court in the case of Sesa Goa Ltd (supra):-

15. The substantial question of law No.(iii) in Tax Appeal No. 17 of 2013 and the only substantial question of law in Tax Appeal No. 18 of 2013 is one and the same namely, ‘whether Education Cess and Higher and Secondary Education Cess, collectively referred to as “cess” is allowable as a deduction in the year of its payment ?’.

16. The aforesaid question arises in the context of provisions of Section 40(a)(ii) which inter alia provides that notwithstanding anything to the contrary in sections 30 to 38 of the IT Act, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”, –

(a) in the case of any assessee –

(ia)……………………………..

(ib)…………………………………..

(ic) ………………………….  

(ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains.

[Explanation 1.—For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91.]

[Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under section 90A;]

17. Therefore, the question which arises for determination is whether the expression “any rate or tax levied” as it appears in Section 40(a)(ii) of the IT Act includes “cess”. The Appellant – Assessee contends that the expression does not include “cess” and therefore, the amounts paid towards “cess” are liable to be deducted in computing the income chargeable under the head “profits and gains of business or profession”.

However, the Respondent – Revenue contends that “cess” is also included in the scope and import of the expression “ any rate or tax levied” and consequently, the amounts paid towards the “cess” are not liable for deduction in computing the income chargeable under the head “profits and gains of business or profession”.

18. In relation to taxing statute, certain principles of interpretation are quite well settled. In New Shorrock Spinning and Manufacturing Co. Ltd. Vs Raval, 37 ITR 41 (Bom.), it is held that one safe and infallible principle, which is of guidance in these matters, is to read the words through and see if the rule is clearly stated. If the language employed gives the rule in words of sufficient clarity and precision, nothing more requires to be done. Indeed, in such a case the task of interpretation can hardly be said to arise : Absoluta sententia expositore non indiget. The language used by the Legislature best declares its intention and must be accepted as decisive of it.

19. Besides, when it comes to interpretation of the IT Act, it is well established that no tax can be imposed on the subject without words in the Act clearly showing an intention to lay a burden on him. The subject cannot be taxed unless he comes within the letter of the law and the argument that he falls within the spirit of the law cannot be availed of by the department. [See CIT vs Motors & General Stores 66 ITR 692 (SC)].

20. In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied, into the provisions which has not been provided by the legislature [See CIT Vs Radhe Developers 341 ITR 403 ]. One can only look fairly at the language used. No tax can be imposed by inference or analogy. It is also not permissible to construe a taxing statute by making assumptions and presumptions [See Goodyear Vs State of Haryana 188 ITR 402(SC)].

21. There are several decisions which lay down rule that the provision for deduction, exemption or relief should be interpreted liberally, reasonably and in favour of the assessee and it should be so construed as to effectuate the object of the legislature and not to defeat it. Further, the interpretation cannot go to the extent of reading something that is not stated in the provision [See AGS Tiber Vs CIT 233 ITR 207].

22. Applying the aforesaid principles, we find that the legislature, in Section 40(a)(ii) has provided that “any rate or tax levied” on “profits and gains of business or profession” shall not be deducted in computing the income chargeable under the head “profits and gains of business or profession”. There is no reference to any “cess”. Obviously therefore, there is no scope to accept Ms. Linhares’s contention that “cess” being in the nature of a “Tax” is equally not deductable in computing the income chargeable under the head “profits and gains of business or profession”. Acceptance of such a contention will amount to reading something in the text of the provision which is not to be found in the text of the provision in Section 40(a)(ii) of the IT Act.

23. If the legislature intended to prohibit the deduction of amounts paid by a Assessee towards say, “education cess” or any other “cess”, then, the legislature could have easily included reference to “cess” in clause (ii) of Section 40(a) of the IT Act. The fact that the legislature has not done so means that the legislature did not intend to prevent the deduction of amounts paid by a Assessee towards the “cess”, when it comes to computing income chargeable under the head “profits and gains of business or profession”.

24. The legislative history bears out that the Income Tax Bill, 1961, as introduced in the Parliament, had Section 40(a)(ii) which read as follows :

“(ii) any sum paid on account of any cess, rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains”

25. However, when the matter came up before the Select Committee of the Parliament, it was decided to omit the word “cess” from the aforesaid clause from the Income Tax Bill, 1961. The effect of the omission of the word “cess” is that only any rate or tax levied on the profits or gains of any business or profession are to be deducted in computing the income chargeable under the head “profits and gains of business or profession”. Since the deletion of expression “cess” from the Income Tax Bill, 1961, was deliberate, there is no question of reintroducing this expression in Section 40(a)(ii) of IT Act and that too, under the guise of interpretation of taxing statute.

26. In fact, in the aforesaid precise regard, reference can usefully be made to the Circular No. F. No.91/58/66-ITJ(19), dated 18^th May, 1967 issued by the CBDT which reads as follows :-

“Interpretation of provision of Section 40(a)(ii) of IT Act, 1961 – Clarification regarding.- “Recently a case has come to the notice of the Board where the Income Tax Officer has disallowed the ‘cess’ paid by the assessee on the ground that there has been no material change in the provisions of section 10(4) of the Old Act and Section 40(a)(ii) of the new Act.

2. The view of the Income Tax Officer is not correct. Clause 40(a)(ii) of the Income Tax Bill, 1961 as introduced in the Parliament stood as under:-

“(ii) any sum paid on account of any cess, rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains”.

When the matter came up before the Select Committee, it was decided to omit the word ‘cess’ from the clause. The effect of the omission of the word ‘cess’ is that only taxes paid are to be disallowed in the assessments for the years 1962-63 and onwards.

3. The Board desire that the changed position may please be brought to the notice of all the Income Tax Officers so that further litigation on this account may be avoided.[Board’s F. No. 91/58/66-ITJ(19), dated 18-5­-1967.]

27. The CBDT Circular, is binding upon the authorities under the IT Act like Assessing Officer and the Appellate Authority. The CBDT Circular is quite consistent with the principles of interpretation of taxing statute. This, according to us, is an additional reason as to why the expression “cess” ought not to be read or included in the expression “any rate or tax levied” as appearing in Section 40(a)(ii) of the IT Act.

28. In the Income Tax Act, 1922, Section 10(4) had banned allowance of any sum paid on account of ‘any cess, rate or tax levied on the profits or gains of any business or profession‘. In the corresponding Section 40(a)(ii) of the IT Act, 1961 the expression “cess” is quite conspicuous by its absence. In fact, legislative history bears out that this expression was in fact to be found in the Income Tax Bill, 1961 which was introduced in the Parliament. However, the Select Committee recommended the omission of expression “cess” and consequently, this expression finds no place in the final text of the provision in Section 40(a)(ii) of the IT Act, 1961. The effect of such omission is that the provision in Section 40(a)(ii) does not include, “cess” and consequently, “cess” whenever paid in relation to business, is allowable as deductable expenditure.

29. In Kanga and Palkhivala’s “The Law and Practice of Income Tax” (Tenth Edition), several decisions have been analyzed in the context of provisions of Section 40(a)(ii) of the IT Act, 1961. There is reference to the decision of Privy Council in CIT Vs Gurupada Dutta 14 ITR 100, where a union rate was imposed under a Village Self Government Act upon the assessee as the owner or occupier of business premises, and the quantum of the rate was fixed after consideration of the ‘circumstances’ of the assessee, including his business income. The Privy Council held that the rate was not ‘assessed on the basis of profits’ and was allowable as a business expense. Following this decision, the Supreme Court held in JaipuriaSamla Amalgamated Collieries Ltd Vs CIT [82 ITR 580] that the expression ‘profits or gains of any business or profession‘ has reference only to profits and gains as determined in accordance with Section 29 of this Act and that any rate or tax levied upon profits calculated in a manner other than that provided by that section could not be disallowed under this sub-clause. Similarly, this sub-clause is inapplicable, and a deduction should be allowed, where a tax is imposed by a district board on business with reference to ‘estimated income‘ or by a municipality with reference to ‘gross income’. Besides, unlike Section 10(4) of the 1922 Act, this sub-clause does not refer to ‘cess‘ and therefore, a ‘cess‘ even if levied upon or calculated on the basis of business profits may be allowed in computing such profits under this Act.

30. The Division Bench of the Rajasthan High Court (Jaipur Bench) in Income Tax Appeal No.52/2018 decided on 31^st July, 2018 (Chambal Fertilisers and Chemicals Ltd. Vs CIT Range-2, Kota ), by reference to the aforesaid CBDT Circular dated 18^th May, 1967 has held that the ITAT erred in holding that the “education cess” is a disallowable expenditure under Section 40(a)(ii) of the IT Act. Ms. Linhares was unable to state whether the Revenue has appealed this decision. Mr. Ramani, learned Senior Advocate submitted that his research did not suggest that any appeal was instituted by the Revenue against this decision, which is directly on the point and favours the Assessee.

31. Ramani, in fact pointed out three decisions of ITAT, in which, the decision of the Rajasthan High Court in Chambal Fertilisers and Chemicals Ltd.(supra) was followed and it was held that the amounts paid by the Assessee towards the ‘education cess‘ were liable for deduction in computing the income chargeable under the head of “profits and gains of business or profession”. They are as follows :-

(i) DCIT Vs Peerless General Finance and Investment and Co. Ltd. (ITA No.1469 and 1470/Kol/2019 decided on 5th December, 2019 by the ITAT, Calcutta;

(ii) DCIT Vs Graphite India Ltd. (ITA No.472 and 474 Co. No.64 and 66/Kol/2018 decided on 22^nd November, 2019 )by the ITAT, Calcutta;

(iii) DCIT Vs Bajaj Allianz General Insurance (ITA No.1111 and 1112/PUN/2017 decided on 25^th July, 2019) by the ITAT, Pune.

32. Again, Ms. Linhares, learned Standing Counsel for the Revenue was unable to say whether the Revenue had instituted the appeals in the aforesaid matters. Mr. Ramani, learned Senior Advocate for the Appellant submitted that to the best of his research, no appeals were instituted by the Revenue against the aforesaid decisions of the ITAT.

33. The ITAT, in the impugned judgment and order, has reasoned that since “cess” is collected as a part of the income tax and fringe benefit tax, therefore, such “cess” is to be construed as “tax”. According to us, there is no scope for such implications, when construing a taxing statute. Even, though, “cess” may be collected as a part of income tax, that does not render such “cess”, either rate or tax, which cannot be deducted in terms of the provisions in Section 40(a)(ii) of the IT Act. The mode of collection, is really not determinative in such matters.

34. Linhares, has relied upon M/s Unicorn Industries Vs Union of India and others, 2019 SCC Online SC 1567 in support of her contention that “cess” is nothing but “tax” and therefore, there is no question of deduction of amounts paid towards “cess” when it comes to computation of income chargeable under the head profits or gains of any business or profession.

35. The issue involved in Unicorn Industries ( supra ) was not in the context of provisions in Section 40(a)(ii) of the IT Act. Rather, the issue involved was whether the ‘education cess, higher education cess and National Calamity Contingent Duty (NCCD)’ on it could be construed as “duty of excise” which was exempted in terms of Notification dated 9^th September, 2003 in respect of goods specified in the Notification and cleared from a unit located in the Industrial Growth Centre or other specified areas with the State of Sikkim. The High Court had held that the levy of education cess, higher education cess and NCCD could not be included in the expression “duty of excise” and consequently, the amounts paid towards such cess or NCCD did not qualify for exemption under the exemption Notification.

This view of the High Court was upheld by the Apex Court in Unicorn Industries (supra ).

36. The aforesaid means that the Supreme Court refused to regard the levy of education cess, higher education cess and NCCD as “duty of excise” when it came to construing exemption Notification. Based upon this, Mr. Ramani contends that similarly amounts paid by the Appellant – Assessee towards the “cess” can never be regarded as the amounts paid towards the “tax” so as to attract provisions of Section 40(a)(ii) of the IT Act. All that we may observe is that the issue involved in Unicorn Industries ( supra ) was not at all the issue involved in the present matters and therefore, the decision in Unicorn Industries (supra ) can be of no assistance to the Respondent – Revenue in the present matters.

37. Linhares, learned Standing Counsel for the Revenue however submitted that the Appellant – Assessee, in its original return, had never claimed deduction towards the amounts paid by it as “cess”. She submits that neither was any such claim made by filing any revised return before the Assessing Officer. She therefore relied upon the decision of the Supreme Court in Goetze (India) Ltd. Vs Commissioner of Income Tax (2006) 284 ITR 323 (SC) to submit that the Assessing Officer, was not only quite right in denying such a deduction, but further the Assessing Officer had no power or jurisdiction to grant such a deduction to the Appellant – Assessee. She submits that this is what precisely held by the ITAT in its impugned judgments and orders and therefore, the same, warrants no interference.

38. Although, it is true that the Appellant – Assessee did not claim any deduction in respect of amounts paid by it towards “cess” in their original return of income nor did the Appellant – Assessee file any revised return of income, according to us, this was no bar to the Commissioner (Appeals) or the ITAT to consider and allow such deductions to the Appellant – Assessee in the facts and circumstances of the present case. The record bears out that such deduction was clearly claimed by the Appellant – Assessee, both before the Commissioner (Appeals) as well as the ITAT.

39. In CIT Vs Pruthvi Brokers & Shareholders Pvt. Ltd. 349 ITR 336, one of the questions of law which came to be framed was whether on the facts and circumstances of the case, the ITAT, in law, was right in holding that the claim of deduction not made in the original returns and not supported by revised return, was admissible. The Revenue had relied upon Goetze (supra ) and urged that the ITAT had no power to allow the claim for deduction. However, the Division Bench, whilst proceeding on the assumption that the Assessing Officer in terms of law laid down in Goetze ( supra ) had no power, proceeded to hold that the Appellate Authority under the IT Act had sufficient powers to permit such a deduction. In taking this view, the Division Bench relied upon the Full Bench decision of this Court in Ahmedabad Electricity Co. Ltd Vs CIT (199 ITR 351 to hold that the Appellate Authorities under the IT Act have very wide powers while considering an appeal which may be filed by the Assessee. The Appellate Authorities may confirm, reduce, enhance or annul the assessment or remand the case to the Assessing Officer. This is because, unlike an ordinary appeal, the basic purpose of a tax appeal is to ascertain the correct tax liability of the Assessee in accordance with law.

40. The decision in Goetze (supra) upon which reliance is placed by the ITAT also makes it clear that the issue involved in the said case was limited to the power of the assessing authority and does not impinge on the powers of the ITAT under section 254 of the said Act. This means that in Goetze (supra), the Hon’ble Apex Court was not dealing with the extent of the powers of the appellate authorities but the observations were in relation to the powers of the assessing authority. This is the distinction drawn by the division Bench in Pruthvi Brokers (supra) as well and this is the distinction which the ITAT failed to note in the impugned order.

41. Besides, we note that in the present case, though the claim for deduction was not raised in the original return or by filing revised return, the Appellant – Assessee had indeed addressed a letter claiming such deduction before the assessment could be completed. However, even if we proceed on the basis that there was no obligation on the Assessing Officer to consider the claim for deduction in such letter, the Commissioner ( Appeals ) or the ITAT, before whom such deduction was specifically claimed was duty bound to consider such claim. Accordingly, we are unable to agree with Ms. Linhare’s contention based upon the decision in Goetze (supra ).

42. For all the aforesaid reasons, we hold that the substantial question of law No.(iii) in Tax Appeal No.17 of 2013 and the sole substantial question of law in Tax Appeal No.18 of 2013 is also required to be answered in favour of the Appellant – Assessee and against the Respondent-Revenue. To that extent therefore, the impugned judgments and orders made by the ITAT warrant interference and modification.”

Respectfully following the decision rendered by Hon’ble Rajasthan High Court and the Bombay High Court (referred above), we hold that the education cess is allowable as deduction. We direct the AO accordingly.

26. ISSUE NO.24 relates to claim of deduction of employees’ contribution made to ESIC.

26.1 This issue is urged by the assessee in assessment years 2013-14 and 2014-15.

26.2 The facts are that the assessee company had paid employees contribution to ESIC belatedly i.e. beyond the date prescribed in the ESI Act. The assessee appears to have disallowed the same while computing deduction. However, before the A.O., the assessee furnished a letter dated 15.12.2017 claiming that the employees contribution to ESI and PF have been paid before the due date for filing return of income u/s 139(1) of the Act and hence the same is required to be allowed as per the decision rendered by Hon’ble Karnataka High Court in the case of EssaeTeraoka Pvt. Ltd. Vs. DCIT (2014) 366 ITR 408. The A.O. noticed that the assessee has failed to make a claim in the income tax return filed by it and accordingly he held that the assessee cannot take support of decision rendered by jurisdictional High Court in the case of EssaeTeraoka Pvt. Ltd., as the assessee before the Hon’ble High Court had put up the claim in the return of income. Accordingly, the A.O. rejected the claim of the assessee. The Ld. DRP also confirmed the same.

26.3 We heard the parties on this issue and perused the record. There is no dispute with regard to the fact that this issue is decided in favour of the assessee by Hon’ble Karnataka High Court in the case of Essae Teraoka Pvt. Ltd. referred supra. Even though assessee has not put up the claim in the return of income, a fresh claim can be admitted by the Tribunal as per the decision rendered by Hon’ble Supreme Court in the case of Goetz India Pvt. Ltd.(284 ITR 323), when all facts are available on record. Accordingly, we restore this issue to the file of the A.O. with the direction to examine the claim of the assessee and decide the same in accordance with the decision rendered by Hon’ble Karnataka High Court in the case of Essae Teraoka Pvt. Ltd. (supra).

27. ISSUE NO.25 relates to disallowance of loss claimed towards provision of marked to market valuation of outstanding forward contracts.

27.1 This issue is being contested in all the years under consideration by the assessee, i.e., in AY 2009-10 to 2014-15.

27.2 The facts relating to the issue are stated in brief. The A.O. noticed that the assessee has revalued, as on the Balance Sheet date, all assets and liabilities, which are exposed to foreign currency. The same resulted in gain/loss. The assessee voluntarily disallowed the loss arising on hedging transactions relating to capital account items. It claimed loss arising on restatement of debtors, creditors, other monetary assets and also outstanding forward contracts, as deduction.

The A.O. accepted the gain/loss resulting in revaluation of debtors balances, creditors balances and other monetary assets. The assessee has reported a loss of Rs.110.74 crores as loss on restatement of forward contracts in AY 2009-10. The assessing officer, following the CBDT instruction No.3 of 2010 dated 23.3.2010, took the view that the loss arising on restatement of forward contracts is notional and contingent. He accordingly disallowed the claim of Rs.110.74 crores (referred above). The LD. DRP also confirmed the same by observing that the said loss is only an anticipated/notional loss.

27.3 The Ld A.R submitted that the assessee had disclosed loss arising on restatement of forward contracts as on the Balance sheet in AY 2011-12 and 2012-13 also and the AO has disallowed the same in those two years also. However, there was gain on restatement of forward contract as on the Balance Sheet date in AY 2010-11, 2013-14 and 2014-15, which was offered to tax. The AO has, however, assessed the same as income of the assessee. He submitted that the AO has taken dual stand on same item of income/loss.

27.4 We heard the parties and perused the record. The Ld. A.R. submitted that the assessee is following mercantile system of accounting and it is required to follow accounting standards while preparing its financial statements.As per the accounting standards, the assessee is required to revalue the outstanding forward contracts also and account for the gain/loss arising on such revaluation as at the balance sheet date. It was further submitted the assessee is following this method of revaluation consistently over the years. The Ld. A.R. also placed reliance on the decision rendered by coordinate bench in

the case of Quality Engineering & Software Technologies Pvt. Ltd. (ITA No.257/B/2014) and also the decision rendered by Mumbai Bench of Tribunal in the case of Tata Consultancy Services Ltd. (ITA 2794/Mum/2018).

27.5 We heard Ld. D.R. on this issue and perused the record. We notice that the Tribunal is consistently taking the view that the loss arising on revaluation of outstanding forward contracts entered to safe guard the underlying revenue assets cannot be considered as notional loss and accordingly the same is eligible for deduction while computing total income. The following observations made by the co­ordinate bench in the case of M/s Quality Engineering and software Technologies P Ltd (supra) are relevant:-

“4.5.11 As discussed earlier, in the case on hand, there has been an existing contract with a binding obligation accrued against the assessee when it entered into forex forward contracts. The forward contracts are in respect of consideration for export proceeds, which are revenue items. There is an actual contract for sale of merchandise. In this factual matrix, it is clear in our view that the transaction in question will not qualify to be called as speculative transaction. In view of the facts and circumstances of the case on hand, as discussed above, we hold that the provision on derivative contracts is allowable as expenditure. We, accordingly allow the Grounds at S. Nos. 1 to 9 raised by the assessee.”

We have noticed that the assessee has voluntarily disallowed the loss arising on restatement of foreign hedge transactions and hedging on ECB loans, since both the items are relating to capital account transactions. We also notice that the AO has allowed the loss arising on restatement of trade debtors, trade creditors and other monetary assets. The AO has, however, disallowed the loss arising on restatement of forward contracts.

27.6 The decision rendered by the co-ordinate bench in the case of Quality Engineering and software technologies P Ltd (supra) states that the loss arising on reinstatement of a forward contract, whose underlying assets is a revenue item, then the said loss cannot be considered as speculative loss and also not a notional loss. We notice that the details of underlying assets in respect of outstanding forward contracts are not available on record. There should not be any doubt that the value of underlying assets (in the form of debtors, creditors and other monetary assets) as on the balance sheet date, against which the outstanding forward contracts have been taken, should be more than the value of outstanding forward contracts. In that case, the loss arising on restatement of forward contract is fully allowable as deduction. Since the AO has not examined this aspect, we are of the view that this issue needs to be restored to the file of the AO for the limited purpose of examining as to whether the value of underlying assets is more than the value of the forward contracts. Since the AO has disallowed the loss in AY 2009-10, 2011-12 and 2012-13, this issue is restored to the file of AO in the above said three years alone. The assessee is directed to furnish relevant details to prove that the value of underlying assets is more than the value of outstanding forward contracts as on the balance sheet date.

ISSUE NO.26 relates to addition of amount disallowed u/s 14A of the Act made to the net profit while computing book profit u/s 115JB of the Act.

28.1 This issue arises in assessment year 2014-15 in the appeal of the assessee.

28.2 The facts relating to this issue are that A.O. had computed disallowance u/s 14A of the Act. while determining total income under normal provisions of the Act. The amount so computed by him for the purposes of sec.14A of the Act was adopted by the A.O. for making addition in terms of clause (f) of Explanation 1 to 115JB of the Act while computing book profit u/s 115JB of the Act. The Ld. DRP also confirmed the same.

28.3 We have heard the parties on this issue. We notice that the special bench of ITAT in the case of Vireet Investments Pvt. Ltd. (ITA No.502/Delhi/2012 dated 16.6.2017) has expressed the view that the amount disallowed u/s 14A of the Act cannot be adopted for the purpose of computation of book profit u/s 115JB of the Act and the disallowance to be made u/s clause (f) to explanation 1 has to be computed independently without having regard to the provisions of section 14A of the Act. In view of the above, we are unable to sustain the addition made by the A.O. Since the addition required to be made under clause (f) to explanation 1 is required to be computed independently, we restore this issue to the file of the A.O. for examining it afresh.

30. ISSUE NO.27 relates to disallowance of expenditure by invoking provisions of sec. 115 BBD of the Act. This issue is urged by the assessee in assessment year 2012-13 to 2014-15.

29.1 The facts relating to the issue are stated in brief. The A.O. noticed that the assessee has declared loss under the head “Income from other sources”. On examination of the same, the A.O. noticed that the assessee had borrowed ECB loan and invested the same in its overseas subsidiary named Wipro Cyprus Pvt. Ltd. He noticed that the interest expenditure relating to ECB loan has been claimed as expenditure under the head Income from other sources, even though no foreign dividend income was received from its subsidiary company, cited above. Accordingly, the assessee has claimed loss.

29.2 The A.O. noticed that section 115BBD of the Act provided for taxation of dividend income received from foreign companies at concessional rate, however, subject to the condition that the Indian company should hold 26% or more right in the nominal value of the equity share capital of the foreign company. It is also provided in the said section that no expenditure shall be allowed against the dividend income under any provisions of the Act. The AO noticed that the assessee’s shareholding in the foreign subsidiary was more than 26% and hence the provisions of section 115BBD of the Act are attracted. Accordingly, the A.O. took the view that the interest expenditure claimed by the assessee on the ECB loan is not allowable as deduction u/s 115 BBD of the Act, in view of the specific bar mentioned in that section. Accordingly, the AO disallowed the interest expenditure claimed by the assessee by invoking sec.115BBD of the Act.

29.3 Before Ld. DRP, the assessee placed its reliance on the decision rendered by Hon’ble Supreme Court in the case of Rajendra Prasad Mody (115 ITR 519) and contended that the expenditure is allowable, even if dividend income is not received during the year under consideration. However, the Ld. DRP took the view that the investment made by the assessee is not with the objective of earning dividend income but for the purpose of acquiring controlling interest in the company. It held that the interest expenditure is allowable u/s 57(iii) only if the investment had been made for the purpose of earning dividend income. In support of this proposition, the Ld. DRP placed its reliance on the decision rendered by Hon’ble Bombay High Court in the case of CIT Vs. Smt. Amritaben R. Shaw (238 ITR 777) and held that the expenditure incurred for acquiring controlling interest in the company is not allowable as deduction u/s 57(iii) of the Act. Accordingly, the Ld. DRP also confirmed the disallowance of interest expenditure incurred on ECB Loan. However, in the final assessment order passed for assessment year 2012-13, the A.O. disallowed the interest expenditure by invoking provisions of section 115BBD of the Act only. The AO did not mention about the reasoning of ‘acquiring of controlling interest” or sec. 57(iii) of the Act, while making the disallowance. Hence, we confine ourselves to the applicability or otherwise of sec.115BBD of the Act.

29.4 We heard the parties on this issue and perused the record. The provisions of section 115BBD of the Act reads as under:-

“115BBD. (1) Where the total income of an assessee, being an Indian company, for the previous year relevant to the assessment year beginning on the 1st day of April, 2012 ²⁸[or beginning on the 1st day of April, 2013] ^28a[or beginning on the 1st day of April, 2014] includes any income by way of dividends declared, distributed or paid by a specified foreign company, the income-tax payable shall be the aggregate of—

(a) the amount of income-tax calculated on the income by way of such dividends, at the rate of fifteen per cent; and

(b) the amount of income-tax with which the assessee would have been chargeable had its total income been reduced by the aforesaid income by way of dividends.

(2) Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of this Act in computing its income by way of dividends referred to in sub­section (1).

(3) In this section,—

(i) “dividends” shall have the same meaning as is given to “dividend” in clause (22) of section 2 but shall not include sub-clause (e) thereof;

(ii) “specified foreign company” means a foreign company in which the Indian company holds twenty-six per cent or more in nominal value of the equity share capital of the company.”

The Ld. A.R. submitted that the provisions of section 115BBD are attracted only if the total income of the assessee “includes any income by way of dividend” declared, distributed or paid by a specified foreign company. According to Ld A.R, availability of taxable dividend income during the previous year is the sin-qua-non for invoking the provisions of sec.115BBD of the Act. He submitted that the assessee has not received any dividend income from specified foreign company during the years under consideration and hence the total income of the assessee does not include any taxable dividend income. In fact, the A.O. also has also not included any such dividend income while computing the total income. Accordingly, he submitted that the A.O. was not justified in invoking the provisions of section 115BBD of the Act. The Ld. A.R. submitted that the ratio of decision rendered by Hon’ble High Court of Delhi in the case of Cheminvest Ltd. (ITA 749/2014) is applicable to the facts of the present issue also, even though the said decision was rendered in the context of section 14A of the Act. He submitted that the Hon’ble Delhi High Court has held in the above said case that the provisions of sec.14A are attracted only if the assessee had received exempt income.

29.5 We have heard Ld D.R and perused the record. A careful perusal of provisions of section 115BBD would show that the same begins with the expression “where the total income of assessee, being an Indian company, includes any income by way of dividends declared, distributed or paid by a specified foreign company”. Hence, there is merit in the submissions of Ld A.R that the primary condition to be satisfied for invoking section 115BBD of the Act is that the total income of the assessee should include any dividend income received/declared from/by a specified foreign company. There is no dispute with regard to the fact that the total income of the assessee for the years under consideration does not include any dividend income received/declared from/by a specified foreign company. Hence, the question of invoking provisions of section 115BBD of the Act does not arise. The decision rendered by Hon’ble Delhi High Court in the case of Chem invest Ltd. (supra), though rendered in the context of sec.14A of the Act, brings out the principle of interpretation of a provision. For the sake of convenience, we extract below the following observations made by Hon’ble Delhi High Court in the above said case.

“23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression does not form part of the total income” in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.”

Accordingly, we are of the view that the A.O. was not justified in invoking the provisions of sec. 115BBD of the Act for making the impugned disallowance. Since the AO has not disallowed the interest expenditure on the reasoning given by Ld DRP, we do not find it necessary to address the same.

30. ISSUE NO.28 relates to disallowance of part of advertisement, publicity and sales promotion expenditure treating the same as “brand building expenses”. This issue arises only in assessment year 2012-13 in the appeal of the assessee.

30.1 The facts relating to this issue are stated in brief. The A.O. noticed that the assessee has claimed huge expenses on “advertisement, publicity and sales promotion”. The A.O. took the view that these expenses would confer a “benefit of enduring nature” to the assessee and accordingly, took the view that the same shall constitute capital expenditure in the hands of the assessee. Accordingly, the AO asked the assessee to explain as to why the expenditure claim of the assessee should not be disallowed. The assessee submitted that the advertisement expenses are incurred to promote its “consumer care products” and it is being incurred year to year. It is pertinent to note that the assessee, besides providing IT services, is also producing and marketing consumer care products under the brand name “Santoor”. It was further submitted that the advertisement expenses are necessary for creating awareness of its products amongst consumers and also to retain the current demand for the products.

30.2 The A.O. was not convinced with the submissions made by the assessee. He noticed that the entire expenses have been incurred on promotion of one brand, viz., “Santoor”. Accordingly, he took the view that the advertisement expenses so incurred by the assessee has led to creation of a “brand” and the same would bring enduring benefit to the assessee. Accordingly, the AO took the view that the “brand value” is an intangible asset. However, the AO was of the view that the entire advertisement expenses cannot be considered as incurred towards promotion of brand value. Accordingly, the A.O. estimated that 25% of the aggregate amount of expenses should be treated as having been incurred towards brand building and the same would constitute Capital expenditure in the hands of the assessee. Accordingly, the A.O. disallowed 25% of aggregate advertisement expenses of Rs.51.90 crores, which worked out to Rs.12.98 crores. The Ld. DRP accepted the view taken by the A.O. but directed the A.O. to allow depreciation on the amount so disallowed, since the same is capital in nature.

30.3 We heard the parties and perused the records. The Ld. A.R. placed his reliance on the decision rendered by Hon’ble Delhi High Court in the case of M/s. Spice Distribution Ltd. (ITA No.597/2014), wherein the High Court has held the advertisement expenditure should be treated as revenue in nature because advertisements do not have long lasting effect. The Ld. A.R. also placed reliance on another decision rendered by Hon’ble Delhi High Court in the case of CIT Vs. Citi Financial Consumer Fin. Ltd. (2011) 335 ITR 29, wherein also identical view has been expressed.

30.4 We find merit in the contentions of the assessee, since the decision rendered by Hon’ble Delhi High Court supports the contentions of the assessee. For the sake of convenience, we extract below the observations made by Hon’ble Delhi High Court in the two cases referred by Ld. A.R. In the case of Spice Distribution Ltd, the Hon’ble Delhi High Court has held as under:-

“4. The Tribunal has rightly noticed and referred to the decision of the Delhi High Court in Commissioner of Income Tax Vs. Pepsico India Cold Drink Ltd. in ITA No. 319/2010, decided on 30.03.2011 wherein, the judgment of the Supreme Court in Madras Industrial Investment Corporation Vs. Commissioner of Income Tax, 225 ITR 802 (SC) was examined and it was observed that the assessee is entitled to claim deferred revenue expenditure but the Assessing Officer cannot treat the revenue expenditure as deferred revenue expenditure. The reason is that the Act itself does not have any concept of deferred revenue expenditure. Even otherwise, there are a number of decisions that the advertisement expenditure normally is and should be treated as revenue in nature because advertisements do not have long lasting effect and once the advertisements stop, the effect thereof on the general public and customer diminishes and vanished soon thereafter. Advertisements do not leave a long lasting and permanent effect in the sense that the product or service has to be repeatedly advertised. Even otherwise advertisement expense is a day to day expense incurred for running the business and improving sales. It is noticeable that every year, the respondent-assessee has been incurring substantial expenditure on advertisements. The Assessing Officer, in the assessment order, had referred to the fact that similar additions were also made in the Assessment Year 2008-09. Keeping in view the nature and character of the respondent-assessee’s business, every year expenditure has to be incurred to make and keep public informed, aware and remain in limelight. This requires continuous and repeated publicity and advertisements to remain in public eye, to do business by attracting customers. It is an expenditure of trading nature. The aforesaid aspect has been highlighted by the Delhi High Court in Commissioner of Income Tax Vs. Salora International Ltd., [2009] 308 ITR 199 (Delhi) and Commissioner of Income Tax Vs. Casio India Ltd., [2011] 335 ITR 196.”

In the case of Citi Financial Consumer Fin Ltd (supra), it has been held as under by Hon’ble Delhi High Court: –

“14. Applying the aforesaid principle to the facts of this case, it clearly emerges that the expenditure on publicity and advertisement is to be treated as revenue in nature allowable fully in the year in which incurred. Concededly, there is no advantage which has accrued to the assessee in the capital field. The expenditure was incurred to facilitate the assessee’s trading operations. No fixed capital was created by this expenditure. We may also add here that in the Income tax law, there is no concept of deferred revenue expenditure. Once the assessee claims the deduction for the whole amount of such expenditure, even in the year in which it is incurred, and the expenditure fulfils the test laid down under section 37 of the Act, it has to be allowed. Only in exceptional cases, the nature mentioned in Madras Industrial Investment Corporation Ltd (1997) (225 ITR 802)(SC), the expenditure can be allowed to be spread over, that too, when the assessee chooses to do so.”

30.5 In the facts of the present case, it is evident that the AO has not demonstrated with cogent evidence, any special circumstances or reasons to hold that the impugned expenditure was capital in nature. It is also note-worthy that no specific instances have been pointed out by the AO in this regard. The assessing officer has also not mentioned the basis for arriving at the conclusion that 25% of expenditure would be for promotion of brand value. Hence, we are of the view that the AO has made the ad-hoc disallowance only on surmises and conjectures. The Ld. CIT- DR, while arguing on behalf of the department, also could not cite any judicial precedents in favour of the Revenue. Accordingly, following the decisions rendered by Hon’ble Delhi High Court, referred above, we hold that the AO was not justified in disallowing part of advertisement expenses and accordingly direct him to allow the entire advertisement expenses claimed by the assessee.

31. ISSUE NO.29 relates to disallowance of fees paid to Registrar of companies for increasing the Authorized capital of the assessee company. The assessee is urging this issue in its appeal filed for assessment year 2011-12.

31.1 During the year relevant to the assessment year 2011-12, the assessee has increased its authorized capital and accordingly, it paid a sum of Rs.31.48 lakhs as fee to Registrar of Companies (ROC). The assessee claimed the same as revenue expenditure. However, the A.O. disallowed the same by following the decision rendered by Hon’ble Supreme Court in the case of Punjab Industrial Corporation Ltd. (225 ITR 792) and Brooke Bond Ltd (225 ITR 798). The Ld. DRP also confirmed the same.

31.2 The Ld. A.R. submitted that the A.O. has treated the impugned payment as capital in nature on the reasoning that the same would confer advantage of enduring nature to the assessee. The Ld. A.R. submitted that payment made to ROC does not give any advantage of enduring nature. Alternatively, he submitted that the assessee may be allowed to amortize this expenditure over a reasonable period of time.

31.3 We heard Ld. D.R. and perused the record. The Hon’ble `Supreme Court in the case of Punjab State Industrial Corporation Ltd. (supra) and Brooke Bond Ltd. (supra) has expressed the view that the fees paid to Registrar of Companies for increasing the authorized capital is capital in nature. Hence, we do not find any infirmity in the decision of A.O. in disallowing the claim of assessee by holding that the same as capital in nature. The contention of the assessee that the expenditure should be allowed by amortised over a reasonable period of time. However, we notice that there is no provision under the Act to accept the claim of the assessee. Accordingly, we confirm the disallowance made by the A.O.

32. ISSUE NO.30 relates to disallowance of payment made to M/s. Gartner Group u/s 40(a)(ia) of the Act for non-deduction of tax at source. This issue arises in assessment years 2010-11 to 2014-15 in the appeal filed by the assessee.

32.1 The facts relating to this issue are that M/s. Gartner Group maintains a data base and the same is allowed to be used by others on payment of license fee. The assessee has obtained license from M/s. Gartner Group for using the data base. The assessee did not deduct tax at source from the licence fee paid to the above said group. The AO, however, took the view that the payment so made is in the nature of royalty and hence the provisions of sec.9(1)(vi) are attracted. Hence the AO took the view that the assessee should have deducted tax at source from the above said payment and accordingly proposed to disallow the payment by invoking provisions of sec.40(a)(i) of the Act. Before the A.O., the assessee submitted that the license was used for the business carried on by the assessee outside India or for the purpose of earning income from any source outside India. Accordingly, it was contended that the payment made for the use of licence would be covered by the exception given u/s 9(1)(vi) of the Act. However, the A.O. noticed that an identical issue has been examined by the jurisdictional Karnataka High Court in the assessee’s own case reported in 355 ITR 284 and the issue has been decided against the assessee. Accordingly, the A.O. held that the payment made to M/s. Gartner Group is in the nature of royalty and assessee is liable to deduct TDS from the said payment u/s 195 of the Act. Since the assessee did not deduct TDS, the A.O. disallowed the payments made to Gartner Group in the years relevant to the assessment years 2010-11 to 2014-15 by invoking provisions of section 40(a)(i) of the Act.

32.2 The Ld. A.R. admitted that an identical issue has been decided against the assessee by Hon’ble Karnataka High Court in its own case referred above. He submitted that the Hon’ble Karnataka High Court, however, did not have occasion to examine the applicability of exceptions provided u/s 9(1)(vi)(b) of the Act to the facts of the assessee’s case. He submitted that the provisions of sec.9(1)(vi)(b) states that if any royalty is paid for the purposes of business carried on outside India or for the purposes of making or earning any income from any source outside India, then the royalty income shall not be deemed to accrue or arise in India. He submitted that the SEZ/STPI units have an obligation to make exports and accordingly earned income outside India. Hence, the export profits received by the assessee from outside India constitute a “source outside India” and accordingly, the exception provided u/s 9(1)(vi) of the Act is applicable to the assessee. Accordingly, the Ld A.R submitted that the royalty given to M/s. Gartner Group shall not be deemed to accrue or arise in India in the hands of M/s Gartner Group. In the absence of any income in the hands of above said person, there is no obligation is placed on the shoulders of the assessee to deduct tax at source u/s 195 of the Act from the payment so made. In support of his contentions, the assessee relied on the decision rendered by Hon’ble Madras High Court in the case of Aktiengesellschaft Kuhnle Koop and Kausch (262 ITR 513). In the above said case, the assessee before the Madras High Court paid royalty outside India out of its export sales. The Hon’ble High Court held that the source for royalty is from the source generated outside India and hence the same is not taxable within the meaning of section 9(1)(vi) of the Act.

32.3 The Ld. A.R., however, fairly conceded that the Hon’ble Delhi High Court has examined the issue of “source of income” in the case of CIT Vs. Havells India Ltd. (ITA No.55/2012 & ITA No.57/2012 dated 21.5.2012) and the decision rendered by Hon’ble Madras High Court in the case of AktiengesellschaftKuhnle Koop and Kausch(supra) was also cited before Hon’ble Delhi High Court. However the Hon’ble Delhi High Court noticed that the Hon’ble Madras High Court, in the above said case, did not consider another decision rendered by it earlier in the case of Anglo-French Textile Ltd.

199 ITR 785, wherein it was held that the source of income is the place where the right to receive the income by the assessee arose. Accordingly, the Delhi High Court held that if the export contracts are concluded in India and the assessee’s products are exported outside India under such contracts, then the source of income would arise in India. The Ld. A.R., however, submitted that there is conflict of view between Madras High Court and Delhi High Court and hence the view in favour of the assessee should be adopted.

32.4 We heard Ld. D.R. on this issue and perused the record. There is no dispute with regard to the fact that identical payments made to M/s Gartner Group has been held to be royalty in the years relevant to assessment years 2001-02 to 2003-04 within the meaning of section 9(1)(vi) of the Act by Hon’ble jurisdictional Karnataka High Court in the assessee’s own case reported in 355 ITR 284. It is the case of the Ld A.R that the Hon’ble Karnataka High Court did not have occasion to examine the applicability of exceptions provided in sec.9(1)(vi) of the Act. Hence, the Ld. A.R. has taken an alternative contention that the royalty was paid for the purpose of earning income from a source outside India. Accordingly, it was contended that the said payment would be covered by exception provided in sec.9(1)(vi). Accordingly, it was contended that the amount so paid to Gartner Group, shall not be deemed to accrue or arise in India within the meaning of section 9(1)(vi) of the Act. Accordingly, it was contended that there is no liability for the assessee to deduct tax from the said payment and hence the A.O. was not justified in disallowing the payment by invoking the section 40(a)(ia) of the Act.

32.5 In effect, the alternative contention of the assessee is that the export proceeds received by it should be considered as an income earned from a source located outside India. There is no dispute with regard to the fact the export of services/products have been done from the SEZ/STPI units located in India. The question as to whether the export proceeds can be treated as a source located outside India was examined by Hon’ble Delhi High Court in the case of Havells India Ltd. (supra) and the same was decided against the assessee with the following observations:-

“13. Section 9(i)(vii)(b) contemplates a source located outside India. It is difficult to conceptualise the place/ situs of the person who make payment for the export sales as the source located outside India from which assessee earned profits. The export contracts obviously are concluded in India and the assessee’s products are sent outside India under such contracts. The manufacturing activity is located in India. The source of income is created at the moment when the export contracts are concluded in India. Thereafter the goods are exported in pursuance of the contract and the export proceeds are sent by the importer and are received in India. The importer of the assessee’s products is no doubt situated outside India, but he cannot be regarded as a source of income. The receipt of the sale proceeds emanate from him from outside India. He is, therefore, only the source of the monies received. The income component of the monies or the export receipts is located or situated only in India. We are making a distinction between the source of the income and the source of the receipt of the monies. In order to fall within the second exception provided in Section 9(1)(vii)(b) of the Act, the source of the income, and not the receipt, should be situated outside India. That condition is not satisfied in the present case. The Tribunal, with respect, does not appear to have examined the case from this aspect. Its conclusion that the technical services were not utilised for the assessee’s business activity of production in India does not bring the assessee’s case within the second exception in Section 9(1)(vii)(b) of the Act. It does not bring the case under the first exception either, because in order to get the benefit of the first exception it is not sufficient for the assessee to prove that the technical services were not utilised for its business activities of production in India, but it is further necessary for the assessee to show that the technical services were utilised in a business carried on outside India. Therefore, we cannot also approve of the Tribunal’s conclusion in para 29 of its order to the extent it seems to suggest that the assessee satisfies the condition necessary for bringing its case under the first exception. Be that as it may, as we have already pointed out, since the source of income from the export sales cannot be said to be located or situated outside India, the case of the assessee cannot be brought under the second exception provided in the Section.”

32.6 It can be noticed that the Hon’ble Delhi High Court has made distinction between “source of income” and “source of receipt of monies”. So long as the export contracts are concluded in India, the source of income is treated as located or situated only in India. The Ld. A.R. placed his reliance on the decision rendered by Hon’ble Madras High Court in the case of Aktiengesellschaft Kuhnle Koop and Kausch(supra). However, the Hon’ble Delhi High Court has observed that the decision rendered by Hon’ble Madras High Court in the case of Anglo French Textiles Ltd. (supra) earlier to the above said decision was not brought to the notice of Hon’ble Madras High Court. Accordingly, the Delhi High Court refused to follow the decision rendered in the case of AktiengesellschaftKuhnle Koop and Kausch(supra) by Hon’ble Madras High Court. We also notice that the Hon’ble Delhi High Court has also referred to various decisions to understand the meaning of the word “source”. For the sake of convenience, we extract below the observations made by Hon’ble Delhi High Court in this regard.

“12. The question as to what is a source of income has been dealt with in some authoritative pronouncements. The Judicial Committee in Rhodesia Metals Ltd. v. Commissioner of Income Tax, (1941) 9 ITR (Suppl.) 45 observed that a “source” means not a legal concept but one which a practical man would regard as a real source of income. This observation was adopted by Malik, J. in his separate but concurring judgment in the case of Rani Amrit Kaur v. CIT, (1946) 14 ITR 561, a decision of the Full Bench of the Allahabad High Court. A source of income was described by R. S. Pathak, J. (as he then was) in the following words in Seth Shiv Prasad v. CIT, (1972) 84 ITR 15 (All.) at page 18: –“A source of income, therefore, may be described as the spring or fount from which a clearly defined channel of income flows. It is that which by its nature and incidents constitutes a distinct and separate origin of income, capable of consideration as such in isolation from other sources of income, and which by the manner of dealing adopted by the assessee can be treated so.”

The observations of the Judicial Committee (supra) as to what is a source of income have been approved by the Supreme Court in CIT v. Lady Kanchanbai, (1970) 77 ITR 123. The location or situs of a source of income is another aspect. The third aspect is the accrual of the income. Though it is true, as held by Kania, C.J., speaking for a Constitution Bench of the Supreme Court in CIT v. AhmedbhaiUmarbhai, (1950) 18 ITR 472 (SC) at page 479, that the place where the source of income is located may not necessarily be the place where the income also accrues, that question is not material in the present case because herein we are concerned only with the question as to the location of the source. The real question is whether the export sales proceeds received from goods manufactured and exported from India constitute a source inside or outside India. To decide the same we have to take a pragmatic and a practical view and not approach the question from a theoretical perspective.”

Accordingly, following the decision rendered by jurisdictional Hon’ble Karnataka High Court in the assessee’s own case reported in 355 ITR 284 and also the decision rendered by Hon’ble Delhi High Court in the case of Havells India Ltd. (supra) we hold that the A.O. was justified in holding that the payment made to M/s. Gartner Group is in the nature of royalty within the meaning of section 9(1)(vi) of the Act and hence the assessee is liable to deduct tax at source from the said payment u/s 195 of the Act. In view of the default on the part of the assessee in not deducting the tax at source, the A.O. was justified in making the disallowance of payment made to M/s. Gartner Group by invoking provisions of section 40(a)(i) of the Act.

32.7 The assessee has raised one more alternative contention to press that the amount disallowed u/s 40(a)(i) of the Act would go to increase the profits of the undertakings and hence the eligible deduction u/s 10A/10AA/10Bof the Act would also get increased correspondingly. The Ld. A.R. submitted that the alternative contention of the assessee gets support from the circular issued by CBDT. We notice that the alternative contention of the assessee was not considered by the AO and in view of the submissions made by Ld A.R, the same requires examination at the end of AO. Accordingly, we restore the above said alternative contention to the file of the A.O. in all the years i.e. assessment years 2010-11 to 2014-15 for examining it by following the circular of CBDT referred by Ld. A.R.

33. ISSUE NO.31 relates to non-granting of TDS credit as claimed by the assessee. This issue is being contested in all the years by the assessee i.e. in assessment years 2009-10 to 2014-15.

33.1 It is the case of the assessee that it has furnished details of tax deducted at source and submitted all the relevant TDS certificates also to the assessing officer. However, the assessing officer allowed TDS credit only to the extent the claim was matching with data reported in Oltas/AST. The Ld. A.R. submitted that the tax has been deducted from the income reported by the assessee by the payer of income and hence the claim should be allowed in full.

33.2 We heard Ld. D.R. and perused the record. It is the submission of the assessee that it has furnished all TDS certificates in respect of claim made by it. It is also a fact that the deductor of TDS has to file TDS returns to the Income Tax Department. If the TDS return is so filed, then the TDS amount will be reflected in form 26AS (Oltas/AST). In our view, the assessee should not be normally penalised for the failure of the deductor of tax to upload the TDS details to the Income tax department. If the A.O. is having any doubt over the claim made by the assessee, it is always open for him to make due enquiries and to take informed decision. We find support for our view from the decision rendered by Hon’ble Allahabad High Court in the case of Rakesh Kumar Gupta vs. Union of India (Civil Misc. Writ Petition (Tax) No.657 of 2013 dated 06-05-2014, wherein the Hon’ble Allahabad High Court followed the decision rendered by Hon’ble Delhi High Court in the case of Court on its own motion vs. CIT (2013)(352 ITR 273). For the sake of convenience, we extract below the decision rendered by Hon’ble Allahabad High Court in the above said case:-

“The difficulty faced by the tax payers relating to credit of tax deducted at source, i.e., TDS, which stands paid by the deductor was considered by the Delhi High Court in a Public Interest Litigation in Court On its Own Motion vs. Commissioner of Income Tax, 2013 (352) ITR 273. The Court found that a large percentage of cases were coming up where an assessee was entitled to be given the credit of TDS, which had been deducted by the deductor, but, was not being given credit by the Income Tax Department on account of the fact that the TDS was not reflected in Form-26AS for various reasons. The Court noticed that there were cases where the deductor failed to upload the correct and true particulars of the TDS, which had been deducted, as a result of which, the assessee was not given credit of the tax paid. The Court also noticed that there were cases where the details uploaded by the deductor and the details furnished by the assessee in the income tax returns were mismatched and, on this ground, credit was not given to the assessee.

The Delhi High Court also noticed that on account of mismatch, the tax payer was required to approach the income tax authority for rectification of the earlier intimation and based on corrected entries prayed for refund of the TDS. The Court found that the problem was apparent, real and enormous and had escalated because of centralisedcomputerisation and problems associated with incorrect and wrong data, which was uploaded by the tax deductors. The Delhi High Court found that the issue of not giving credit of the TDS deducted by the deductor was one of general governance, failure of administration, fairness and arbitrariness. The Court found that the Income Tax Department admitted that the Central Processing Unit at Bangalore had errors and faults, which was required to be rectified. The Delhi High Court further found that filing of an application under Section 154 of the Act for rectification and correction by the assessee entails substantial expenses on the part of the assessee. The Delhi High Court further observed that rectification and getting corrections made by the deductor and to get them uploaded was not an easy task. Filing a revised return or getting the application under Section 154 processed, was not only daunting, but expensive and that the problem of not getting the credit was being faced by a majority of small and middle class tax payers, including senior citizens. The Delhi High Court, accordingly, issued a mandamus directing the Central Board of Direct Taxes (hereinafter referred to as the “CBDT”) to issue directions with regard to giving credit of unmatched and mismatched TDS certificates.

Pursuant to the said decision of the Delhi High Court, the CBDT issued instruction No.5 of 2013, dated 8.7.2013, directing that where the assessee approaches the assessing officer with requisite details and particulars in the form of TDS certificate as an evidence against any mismatch amount, the assessing officer would verify whether or not the deductor had made payment of the TDS in the government account and, in the event, the payment had been made, credit of the same would be given to the assessee. For facility, the relevant portion of instruction No.5 of 2013 is extracted here under:

“In view of the order of the Hon’ble Delhi High Court (reference: para 50 of the order): it has been decided by the Board that when an assessee approaches the Assessing Officer with requisite details and particulars in the form of TDS certificate as an evidence against any mismatched amount, the said Assessing Officer will verify whether or not the deductor has made payment of the TDS in the Government Account and if the payment has been made, credit of the same should be given to the assessee. However, the Assessing Officer is at liberty to ascertain and verify the true and correct position about the TDS with the relevant AO (TDS). The AO may also, if deemed necessary, issue a notice to the deductor to compel him to file correction statement as per the procedure laid down.”

In the light of the decision of the Delhi High Court and the instructions issued by the CBDT, we find that the admitted position in the instant case is, that the returns were processed and accepted by the Income Tax Department. A sum of Rs.43,740/- was refunded and the balance amount was not refunded on account of the TDS being mismatched. It is also admitted that the TDS certificates were also filed by the assessee. It is also an admitted position that the deductor in the instant case is a Government Department.

We find from a perusal of the counter affidavit that no effort was made by the assessing officer to verify the fact as to whether the deductor had made the payment of the TDS in the government account. On the other hand, the Income Tax Department has shown their helplessness in not refunding the amount on the sole ground that the details of the TDS did not match with the details shown in Form 26AS. The stand of the respondents is, that a refund could be allowed only on matching the TDS with that disclosed in Form 26 AS.

In the instant case, it is apparent that there is a mismatch between the details uploaded by the deductor and the details furnished by the assessee in the income tax returns. The Court finds that when the assessment was processed and a refund of Rs.43,740/- was issued, no intimation was given by the department as to why the balance TDS amount could not be credited in favour of the petitioner. The Court further finds that the assessing officer was under a duty to verify whether or not the deductor had made the payment of the T.D.S. in the government account.

The petitioner has suffered a tax deduction at source, but has not been given due credit inspite of the fact that he has been issued a TDS certificate by a government department. There is a presumption that the deductor has deposited TDS amount in the government account especially when the deductor is a government department. By denying the benefit of TDS to the petitioner because of the fault of the deductor causes not only harassment and inconvenience, but also makes the assessee feel cheated. There is no fault on the part of the petitioner. The fault, if any, lay with the deductor. In the instant case, nothing had been indicated that the fault lay with the petitioner in furnishing false details.

…………………

In the light of the aforesaid, we find from the perusal of the counter affidavit, that the respondents have denied refunding the TDS on the ground that the refund would only be granted when the TDS matches with the details mentioned in Form 26AS. Since the mismatching is not attributable to the assessee and the fault solely lay with the deductor, we find that a case has been made out for grant of a mandamus for refund of the TDS amount. The petitioner has also made out a case for payment of interest since we find that the delay in refunding the amount was attributable solely with the Income Tax Department and there is no fault on the part of the assessee.

For the reasons stated aforesaid, the writ petition is allowed. A writ of mandamus is issued commanding respondent no.2 to refund an amount of Rs. 1,88,631/- along with interest as per the law within three weeks from the date of the production of a certified copy of this order is produced before respondent No. 2.”

Accordingly, we are of the view that this issue requires fresh examination at the end of the A.O. by duly considering the TDS certificates furnished by the assessee and also making due enquiries, if required. Accordingly, we restore this issue to the file of the A.O in all the years under consideration.

34. ISSUE NO.32 relates to tax charged by the assessing officer u/s 115O of the Act, being the tax payable on distributed profits by domestic companies. This issue is being contested by the assessee in A.Y. 2011-12.

34.1 The Ld. A.R. submitted that the A.O., without making any discussion in the draft assessment order, has added a sum of Rs.41.37 crores u/s 115O/115P of the Act in the final assessment order. He submitted that Section 115O of the Act relates to levy of tax on distributed profits by domestic companies and section 115P relates to the interest payable for non payment of tax levied u/s 115O of the Act.

34.2 The Ld. A.R. submitted that the assessee is not liable to pay tax u/s 115O of the Act in view of the exemption given under sub-section 6 of section 115O of the Act. He submitted that the A.O. did not discuss about this issue in the draft assessment order and hence there was no occasion for the assessee to raise any objection on this issue before Ld. DRP.

34.3 We heard Ld. D.R. and perused the record. Having regard to the fact that the A.O. has not afforded any opportunity to the assessee to present its view on the applicability of section 115O of the Act, we deem it proper to restore this issue to the file of the A.O. After affording adequate opportunity of being heard to the assessee the A.O. may take appropriate decision in accordance with the law.

35. ISSUE NO.33 relates to refund adjustment. This issue is being urged in Y. 2011-12 by the assessee. At the time of hearing, the Ld. A.R. submitted that this is a general ground and does not require any adjudication.

36. ISSUE NO.34 relates to transfer pricing adjustment on the short term advances given to foreign subsidiaries. This issue is being urged in all the years i.e. Y. 2009-10 to 2014-15 by the assessee.

36.1 The facts relating to the issue are that the assessee has granted short term advances to its various foreign subsidiaries. The TPO noticed the assessee did not charge any interest on the advance so given by the assessee to its foreign subsidiaries. The TPO proposed to charge interest @ 14.35 % p.a. on the outstanding balances. The assessee contended that the advances were given out of surplus funds available with the assessee and also out of commercial expediency. It was also contended that the proposal of the TPO would result in assessing hypothetical income and not real income. The TPO did not accept the contentions of the assessee. He expressed the view that the assessee did not charge interest on the advances given by it in view of the relationship existing between the assessee and its subsidiaries. The TPO also analysed linking of interest rate with LIBOR rates. Finally he decided that charging of interest @ 14.35 % p.a. would meet the arms length requirement of the Act. Accordingly, the TPO made transfer pricing adjustment by computing interest @ 14.35% in A.Y. 2009-10. In other years, the TPO made slight variation in the rate of interest. The Ld. DRP also confirmed the view taken by TPO by observing that in A.Ys 2006-07 to 2008-09 DRP has rejected the objections of the assessee.

36.2 The Ld. AR submitted that an identical issue was examined by the coordinate bench in A.Y. 2008-09 and ALP rate of interest was fixed at LIBOR rate + 150 basis point. The Ld. A.R. submitted that the revenue has accepted the order passed by Tribunal on this issue by not challenging the same before Hon’ble High Court. The Ld. A.R. further submitted that the TPO himself has adopted libor/Euribor + 150 basis point in A.Y. 2015-16. Accordingly, he submitted that the TPO was not justified in adopting higher rate of interest.

36.3 The Ld. A.R. further submitted that the Hon’ble High Court of Rajasthan has examined an identical issue in the case of Vibhav Gems Limited (ITA No.14/2015 dated 13.10.2017). In the above said case the ITAT had determined the interest rate to be adopted at Libor rate + 200 basis points in respect of interest free loan given by the assessee before High Court to its associated enterprises. The Hon’ble High Court held that the mark up of 200 basis points is not proper. Accordingly, the Ld. A.R. submitted that the ALP of interest rate may be determined at Libor rate only.

36.4 We heard Ld. D.R. on this issue and perused the record. We notice that the decision rendered by Hon’ble Rajasthan High Court in the case of Vibhav Gems Ltd. (supra) is based on facts prevailing in that case. Before us, the assessee did not establish that there is parity of facts. We notice that the coordinate bench of ITAT has determined the ALP rate of interest at Libor + 150 basis point. It is also noticed that the revenue has accepted the decision rendered by ITAT and the TPO has also adopted the same in A.Y. 2015-16. Accordingly, it is noticed that a consistent view is being taken on this issue. Accordingly, we direct the A.O./TPO to adopt the ALP rate of interest at Libor + 150 basis point.

37. ISSUE NO.35 relates to transfer pricing adjustment made by the TPO for guarantee commission in respect of corporate guarantee provided by the assessee to its Associated Enterprises (AEs). This issue is being urged by the assessee in assessment year 2010-11 to 2014-15.

37.1 The assessee has provided corporate guarantee on behalf of its Associated Enterprises (AE) to guarantee the services to be rendered by the A.E. to its customers. In consideration for providing corporate guarantee, the Associated Enterprises has paid commission to the assessee computed at the rate of 0.50% p.a. on the value of corporate guarantee so provided. According to the assessee, it has bench marked this transaction by applying Comparable Uncontrolled Price (CUP) method. However, the TPO was not satisfied with the rate of 0.50% p.a. The TPO discussed about the nature of guarantees provided in the normal course and also various issues that should be considered while determining ALP of corporate guarantee. After discussing all these points the TPO held that the ALP of the corporate guarantee should be taken at 3%. The Ld. DRP also confirmed the same.

37.2 The Ld. A.R. submitted that the TPO has determined the rate of 3% p.a. in respect of corporate guarantee provided by the assessee to its Associated Enterprises without furnishing any basis for arriving @ 3%. The Ld. A.R. submitted that in many cases, the Tribunal has accepted ALP of corporate guarantee @ 0.50%. He submitted that Hon’ble High Court of Bombay has held in the case of Everest Canto Cylinders Ltd. (ITA No.542/Mum/2012) that corporate guarantee cannot be compared with the guarantee provided by banks (named as ‘bank guarantee’) for determining ALP of international transactions. The Ld. A.R. also further submitted that the Hon’ble Supreme Court has upheld the view of Hon’ble High Court in the case of Glenmark Pharmaceuticals Ltd. (Civil appeal No. 12632/2017 dated 11.12.2018) by holding that the TP adjustment made by adopting bank guarantee rate of 3% in respect of corporate guarantee is not justified. Accordingly, the Ld. A.R. submitted that the TP adjustment made by adopting the rate of 3%, which is usually bank guarantee rate, should not be sustained.

37.3 We heard Ld. D.R. on this issue and perused the record. We notice that the assessee has collected guarantee commission @ 0.50% p.a. on the value of corporate guarantee provided by it to its associated enterprises. It is also stated that the above said rate of 0.50% was determined by the assessee under CUP method described in transfer pricing report. We notice that the TPO has adopted the rate of 3% without furnishing any basis or comparables though the assessee has placed its reliance on the decision rendered by Tribunals on this issue. It is stated that the guarantee commission @ 3% is generally charged by banks for providing guarantees. We notice that the TPO has rejected them by observing that those decisions are not of jurisdictional ITAT. We also notice that the various benches of Tribunal have accepted the guarantee commission of 0.50% to be at arm’s length. In this regard a gainful reference may be made to the decision rendered by Mumbai Bench of ITAT in the case of IL&FS Technologies Ltd. (ITA No.4469 & 1551/Mum/2016 dated 27.2.2019), wherein the corporate guarantee commission of 0.50% is held to be at arms length. Accordingly, we are of the view that the TP adjustment made by the AO/TPO by adopting guarantee commission rate @ 3% as applicable to guarantees provided by banks is not justified. Accordingly, we direct the A.O. to delete the TP adjustment made on corporate guarantee in assessment year 2010-11 to 2014-15.

38. ISSUE NO.36 relates to TP adjustment made in respect of Software development services and information technology services provided by the assessee to its Associated Enterprises. This issue is being contested by the assessee in assessment years 2013-14 & 2014­-15.

38.1 The assessee company provides comprehensive IT solutions & services and including systems integration, information systems outsourcing, package implementation, software application development and maintenance &research and development services to various customers globally. The assessee is one of the leaders in providing IT solutions & services in India. The assessee has provided software services to its AEs. The assessee adopted Comparable Uncontrolled Price (CUP) method to bench mark the international transactions of providing software services to its AEs and provided that the transactions with its AEs are at arms length. In addition to the above, the assessee also bench marked the transactions under “Transactional Net Margin Method”(TNMM) also and demonstrated that its international transactions with its AEs are at arms length under TNMM also.

38.2 The assessee submitted that it is raising invoices on both AEs and Non-AEs on the basis of “man-month, man-hours data” for both “onsite services” and “offshore services”. Accordingly the assessee adopted “Internal CUP” and compared the rates charged by it for both AEs and non-AEs. Accordingly, it demonstrated that the international transactions entered with its A.Es in software services activities are at arm’s length. The data provided by the assessee in this regard for assessment year 2013-14 & 2014-15 is extracted below:-

In USD per person month

Particulars	AE	Non-AE
Offshore – India based services	3,800	3,754
Onsite – foreign bases services	11,000	10,599

(as per transfer pricing report of Assessee of AY 2014-15 – Page no. 28)

In USD per person month

Particulars	AE	Non-AE
Offshore – India based services	3,800	3,754
Onsite – foreign bases services	11,000	10,873

38.3 The TPO however took the view that CUP method is not the appropriate method. Hence, he issued a show cause notice to the assessee asking for explanations. The assessee submitted that software services provided to Non-AEs constitute about 97% of the total turnover and the services provided to its AEs constitute only about 3%. Accordingly, it was contended that “Internal CUP” is the most appropriate method to determine ALP of the transactions with A.E. With regard to nature of software services provided to AEs and Non-AEs, the assessee explained the same as under:

• “Manual testing services, which includes:

– Test plan creation;

– Test setup;

– Tracking of schedule sand scope;

– Updation and maintenance of manual test cases;

–  Bug sand results logging, etc.

• Automation services, which includes:

– Running and debugging automation scripts of LTT tools;

–   Automating the test centres;

– Documenting the automation

– Tracking automation issues, etc.”

The assessee also furnished sample copies of invoices to prove that it is providing similar kinds of services both onsite and offshore to both AEs and Non-AEs. However, the TPO rejected the submissions of the assessee with the following observations: –

“8 Analysis by the TPO: The taxpayer has just provided the rates and then compared the rates based on the man hours deployed. CUP can be used as MAM usually where products are being sold. It is a very difficult method to apply when Services are being compared. The taxpayer has not brought out the Services details nor has it compared the services rendered to the AEs with that of the services rendered to the non-AEs. The taxpayer has just adopted only the minimum number of man-hours and man-months as the criteria.

To apply CUP method one of the following conditions should be met:

3 None of the differences between the controlled transaction and uncontrolled transaction would materially affect the price in the open market, or

4. Reasonably accurate judgements can be made to eliminate the material effects of such differences We can apply CUP method only when the controlled transactions and uncontrolled transactions the two transactions which are to be compared – are similar. This means that the product or service, the terms and conditions, and the circumstances of the transaction, must be similar in the two transactions. Further, the data of price in uncontrolled comparable transactions should also be available.

CUP method is not suitable if there are material product differences. Similarity of products is of utmost importance including the qualitative similarity. Here it would be worthwhile to mention of decision of Special Bench of ITAT Bangalore in the case of Aztec Software and Technology Services Ltd. v. ACIT (2007) 107 ITD 141 (ITAT Bangalore – SB) which has been upheld by Karnataka High Court in Aztec Software and Technology Services Ltd. v. ACIT (2011) 209 Taxmann 187 (Karnataka HC). The ITAT held that CUP is essentially a comparison of prices charged for the property or services transferred in a controlled transaction to a price charged for property or services transferred in a comparable uncontrolled transaction. The bedrock of this method is the identification of an identical transaction, in a situation where a price is charged for products or services between unrelated parties. Even minor differences in contractual terms or economic conditions, geographical areas, risks assumed, functions assumed, etc could affect the amount charged in an uncontrolled transaction. Comparability under this method depends on close similarities with respect to various factors.

In the case of UCB India, Hon’ble ITAT Mumbai held that Under the CUP method, the properties of a product and accompanying circumstances and conditions have to be evaluated for comparison and even a minor change in the properties of the product or circumstances of trade (billing period, amount of credit therein, etc) may have a significant effect on the price. Product comparability is absolutely key, in particular physical features such as size, weight, appearance along with volume, reliability/storage requirements, regulatory requirements, etc. Pricing of a product is a very subjective exercise and its true value, as received by the receiver, can differ from that received by others in the market place. Thus, CUP method requires a high degree of comparability along the following dimensions:

• • Quality of the product or service
  • Contractual terms (example, scope and terms of warranties provided, sale or purchase volumes, credit terms, transportation terms, etc.
  • Level of market, i.e. wholesale or retail, etc.
  • Geographical market in which the transaction takes place
  • Intangible property associated with the sale
  • Foreign currency receipt
  • Alternatives realistically available with the buyer and the seller.

The Hon’ble ITAT further says that CUP method can be applicable in the following situations.

c. The taxpayer or any other member of the group sells/buys similar goods, in similar quantities and under similar terms to an independent enterprise in a similar market.

d. An independent enterprise buys/sells the particular product in similar quantities and under similar terms to any other independent enterprise in a similar market.

These conditions have not been satisfied by the taxpayer either in the TP study report nor in the submissions made later. The taxpayer was specifically requested to demonstrate that the CUP was the most appropriate method to be deployed. Since the taxpayer failed to demonstrate the absolute similarity even after giving sufficient opportunity, the TPO rejects the CUP method adopted by the TPO.”

Without prejudice to the above, the TPO holds that the methods are notified in the Rules. The taxpayer is at liberty to choose any one of the methods. The taxpayer prefers a combination of two methods which prima facie is not contemplated under the provisions of the Act and the Rules.”

Accordingly, the TPO rejected the cup method adopted by the assessee. With regard to the TNMM methodology also, the TPO did not accept the T.P study furnished by the assessee. He applied his own filters and selected two comparable companies, viz., M/s Infosys Ltd and M/s L & T Infotech, whose average margin (OP/OC) worked out to 31.18% in AY 2013-14. Accordingly, the TPO made Transfer pricing adjustment of Rs.56.61 crores in AY 2013-14. He also made TP adjustment in AY 2014-15 also under similar methodology. Ld DRP confirmed the order of TPO in both the years.

38.3 The Ld. A.R. submitted that the assessee is following same methodology of bench marking its international transactions with A.Es over the years and it has been accepted by the TPO in the past. He further submitted that the transaction with AEs constitutes only about 3% of the turnover of the assessee. He submitted that in assessment year 2013-14, the total turnover of the assessee was Rs. 33,226 crores, while the turnover with the AEs was Rs.861 crores only. Similarly, in assessment year 2014-15, the total turnover was Rs.38,757 crores and the turnover of the A.E. was only Rs.1,438 crores. The Ld. A.R. submitted that the nature of services provided to AEs and Non-AEs are similar in nature and the assessee has demonstrated the same by furnishing copies of invoices to the TPO. Further, the assessee has also stated that it is charging its customers at man hour basis and also demonstrated that the charges collected from A.Es are more than the charges collected from Non-AEs. In view of the above facts, the assessee has adopted “internal CUP” method to benchmark the international transactions with AEs. The Ld. A.R. submitted that internal CUP (vis-à-vis the external cup) would be the most appropriate method since vagaries of different businesses, functional differences, qualitative/quantitative differences, if any available with external comparables, will not be there under internal CUP. In support of this proposition the Ld. A.R. placed reliance on the decision rendered by Delhi Bench of Tribunal in the case of Hughes Systique India Pvt. Ltd. (ITA No.5420/Del/2011 and 6057/Del/2012), wherein it has been observed as under on internal comparables :-

“6.9. In the case of Gharda Chemicals Limited Vs DCIT, 130 TTJ 556, the Hon’ble Income Tax Appellate Tribunal (“ITAT”), too, held that internal comparable should be preferred over external comparables. The relevant extract of the judgment is reproduced below:

“Internal CUP method envisages comparing the uncontrolled transactions of the appellant itself with other unrelated parties so as to determine the ALP with the AE. However the External CUP method disregards the price charged or paid by the appellant to or from its unrelated parties and contemplates the comparison of the price so charged from or paid to its AE with some external independent reliable price data under similar circumstances of transactions with AE. Ordinarily the Internal CUP method should be preferred over the External CUP method as it neutralizes several distinguishing factors, such as the local factors and the economies available or unavailable to the appellant in particular, having bearing over the comparison of price charged from unrelated parties and AE.”

6.10. In case of the appellant, it would be appreciated, the most direct comparison has been provided by way of comparable uncontrolled transactions entered into by the associated enterprise with unrelated parties, in India, for rendering similar software development services. The aforesaid internal comparison undisputedly provides the most reliable and direct benchmark for establishing the arm’s length price of such international transactions of rendering software development services entered into by the appellant. Therefore, in the case of the appellant, CUP could appropriately be applied considering internal comparable uncontrolled transactions entered into by the appellant with unrelated parties.

6.11. The TPO was not justified in ignoring the aforesaid comparable uncontrolled transactions placed on record and instead embarking upon a less direct benchmarking exercise by resorting to comparison of profits of external comparables.”

The Ld A.R also relied upon the decision rendered by the Bangalore bench of Tribunal in the case of e 4 e Business solutions (IT(TP)A No.324 (B)/2015), wherein also identical view has been expressed.

38.4 The Ld. A.R. further submitted that the assessee has benchmarked its international transactions with its AE under TNMM method also. This exercise was carried out by the assessee, only to strengthen its submission that the transaction with its AEs are at arm’s length. However, the TPO has taken the view that the assessee is combining two methods prescribed under the rules which is not correct understanding of TPO. Accordingly, the Ld. A.R. submitted the internal CUP adopted by the assessee should be accepted. The Ld. A.R. also defended the computations made by the assessee under TNMM method.

38.5 We heard Ld. D.R. and perused the record. We have gone through the observations made by TPO for rejecting the CUP method, which are extracted above. We notice that the TPO has rejected the CUP method by making general observations without critically examining the factual aspects relating to the assessee. We notice that about 97% of the turnover has been achieved by the assessee from Non-AEs only. The transactions with AEs constitute 2.6% of the turnover in assessment year 2013-14 and 3.71% in assessment year 2014-15. The assessee has also furnished the nature of services provided by it to AEs and Non-AEs before the A.O/TPO. The assessee has also furnished copies of invoices to demonstrate that identical services are being provided to AEs and Non-AEs. As already noticed, the TPO has not examined these details at all. Hence the observations of the TPO that the assessee has not brought out details of nature of services provided nor the services to the AEs and non AEs, in our view, lacks credence. In our view, the TPO should have critically examined the details and invoices furnished by the assessee in order to find out the veracity of the explanations given by the assessee. Without pointing out defects, or unreliable nature of the evidences furnished by the assessee, we are of the view that the TPO was not justified in rejecting the TP study conducted under CUP method.

38.6 Since transactions with AEs constitute major portion of the turnover of the assessee, we are of the view that internal CUP adopted by the assessee is justified. The decision rendered by the Delhi Bench of Tribunal in the case of Hughes Systique India Pvt. Ltd. (supra) and also by the co-ordinate bench of Bangalore in the case of e 4 e Business solutions (supra) also support the case of the assessee. Accordingly, we find merit in the contentions of the assessee that internal CUP is the most appropriate method in the facts and circumstances of the case of the assessee.

38.7 We have noticed that the TPO did not examine internal CUP study of the assessee and has proceeded to determine the ALP of international transaction under TNMM method. Since we have held that the internal CUP is the most appropriate method. We have noticed that the assessee has furnished details of fees collected from AEs and Non-AEs, the nature of services provided to both the parties, copies of sample invoices. We have also noticed that the TPO has not examined them at all. Accordingly, we restore this issue to the file of AO/TPO for examining the issue under internal CUP method by considering all the details and information furnished by the assessee. We order accordingly.

39. ISSUE NO.37 relates to transfer pricing adjustment made for Specified Domestic Transactions. This issue is being urged by the assessee in assessment year 2014-15.

39.1 The facts relating to the issue are stated in brief. The assessee is providing software and IT services to its customers through various undertakings located in Special Economic Zone (SEZ) or Software Technology Park (STPI) or other places. Each of the SEZ/STPI/other undertakings are owned by the assessee. These undertakings would independently enter into a contract with each of their customers for providing software and IT services on comprehensive basis. The undertaking which enters into a contract for providing software services is referred to as “Primary Unit”. It may so happen that entire skill sets required for rendering all types software services may not be available with the Primary unit. It may so happen that the required skill sets may be available with any of other undertakings owned by the assessee. In those circumstances, Primary unit shall give the work on sub-contract basis/job work basis to other undertakings, where the required skill sets are available. The undertaking to which work is sub-contracted is referred to as “Secondary Unit”. The work so sub­contracted will be performed by the secondary unit and delivered to the primary unit, which in turn, would provide services to end customer as a single deliverable point.

39.2 The primary unit shall compensate the secondary unit for the sub-contract work performed by it. The secondary unit will account the receipts as part of its “sales turnover”. The payment so made by primary unit is expenditure in its hands and accordingly, it will account the payment as its expenditure. Various undertakings owned by the assessee may be classified into three categories:-

(a) Undertakings eligible for deduction @ 100% u/s 10AA of the Act

(b) Undertakings eligible for deduction @ 50% u/s 10AA of the Act and

(c) Undertakings which are not eligible for deduction u/s 10A/10AA/10B.

For the sake of convenience, we may refer the undertakings which are eligible for deduction u/s 10AA or under any other section as “eligible unit” and the undertakings which are not eligible for such deduction as “non-eligible unit”.

39.3 In case of inter-unit transactions between an eligible unit and non-eligible unit, it may be possible for an assessee to arrange its affairs in such a way that the profits of non-eligible unit are shifted to eligible unit, so that he can claim deduction u/s 10AA or under any other section at a higher amount. In order to prevent such kind of practices, the provisions of sec.80IA(8)/80A(6) have been introduced, which mandate that the value of transactions entered between an eligible unit and non-eligible units shall be determined by adopting “market value” and accordingly, the profits of eligible unit shall be computed by replacing the actual transaction value with the “market value”. The eligible deduction shall be arrived at on the basis of profit so arrived. The provisions of sec.80IA(8) are applicable for computing deduction u/s 10AA of the Act, as per the provisions of sec.10AA(9). Hence the profits of units eligible for deduction u/s 10AA of the Act are required to be computed by determining the profits of the eligible undertaking by substituting “actual consideration” with “market value”. The expression “market value” is also defined in the Explanation given under Sec. 80IA(8) and also in the Explanation given under sec.80A(6) of the Act. In respect of “Specified domestic transactions” covered under sec.92BA of the Act, the market value means the “arm’s length price” as defined in clause (ii) of section 92F.

39.4 Hitherto, only international transactions entered by an assessee with its Associated Enterprises were subjected to Transfer pricing regulations. The provisions of sec.92BA were introduced in order to determine the Arms Length Price of specified domestic transactions, consequent to the suggestions given by Hon’ble Supreme Court in the case of Glaxo Smithkline Asia (P) Ltd (Appeal (civil) No.18121/2007 dated 26-10-2010). It is stated so by the Parliament in the Memorandum to Finance Bill, 2012 when the above said section was introduced in the Income tax Act. Accordingly, under sec.92BA of the Act, certain domestic transactions are also subjected to Transfer pricing regulations. Those transactions are called “Specified domestic transactions” (SDT) and the transfer pricing regulations shall be applicable to an assessee, if the aggregate value of specified domestic transactions entered into by the assessee in the previous year exceeds the prescribed limit. The inter-unit transactions to which the provisions of sec.80IA(8)/80A apply are included under the definition of “Specified Domestic Transactions” as given in sec. 92BA of the Act. The Specific Domestic Transactions entered into by the assessee during the year relevant to AY 2014-15 has exceeded the prescribed limit. Hence the inter-unit transactions entered by various units of the assessee were also subjected to transfer pricing regulation, meaning thereby, the actual consideration of the inter unit transactions shall be substituted by “market value”, which in turn means “Arms Length price” determined u/s 92F(ii) of the Act.

39.5 In compliance with the provisions of sec. 92BA of the Act, the assessee also furnished transfer pricing study in respect of Specified Domestic Transactions. The margin declared in various SEZ units was more than the average margin of the comparable companies. Accordingly, the assessee submitted that the Specified Domestic Transactions have been entered at arms length price. The Transfer Pricing Officer (TPO) noticed that sub-contract work/job work performed by various undertakings of the assessee during the year relevant for AY 2014-15 was Rs.1087.25 crores. The TPO further noticed that the assessee is also claiming exemption u/s 10AA of the Act in respect of 28 of its undertakings. The T.P.O. further noticed that there is huge variation in the net margins declared by various undertakings of the assessee, i.e. that net margins declared by these units were in the range of 21.02% to 159.36%. The TPO noticed that the assessee, in its TP study, has arrived at an arithmetic mean margin of 15.58% in respect of comparable companies chosen by it under TNM method. Accordingly, the TPO took the view that the normal margin earned by companies providing software development and IT services is 15.58%. Hence, the TPO took the view that there was no reason as to why the tax payer should allow some undertakings to get higher margin, far in excess of the average mean margin prevailing in the market, unless there is a tax benefit. Hence, the TPO proposed to make TP adjustment for “Specified domestic transaction” by adopting the net margin @ 15.58% as ALP margin, i.e., the TPO proposed to restrict the profits of the eligible units to 15.58% and assess the profits declared by the undertakings over and above the above said rate as Transfer pricing adjustment.

39.6 The assessee contended that the SEZs have been created by taking into account various business objectives. It was further stated that the assessee company is making healthy margin at entity level under its IT & Non-IT segments. The assessee also submitted that the TPO has considered only those undertakings which have earned healthy margin and has ignored the fact that many of SEZs has also shown negative margin. It was also submitted that aggregate amount of specified domestic transactions between various undertakings constitute a small portion of the total turnover of the assessee at entity level. Accordingly, it was contended that no transfer pricing adjustment in respect of a Specified domestic transaction is warranted.

39.7 In the alternative, the assessee submitted that the TPO has proposed the Transfer pricing adjustment at entity level for each of SEZ units. It was submitted that the adjustment, if any, should be restricted to the aggregate amount of related party transactions only.

39.8 The TPO did not agree with the contentions of the assessee. He observed that the purpose of introducing T.P provisions for Specified Domestic Transactions is to prevent shifting of profits between two undertakings of the assessee in order to gain tax advantage. He also observed that the T.P adjustment is made with reference to individual SDT, i.e., each transaction with the AE is to be evaluated with reference to the margin prevailing in the market and the transfer pricing adjustment has to be determined accordingly. The TPO, accordingly, rejected the contentions relating to “loss making SEZ units” and also the “higher margin declared by the assessee at the entity level”. Accordingly, he observed that the if there is an excess profit attributed to the eligible units, then the position of law and the intention of legislation clearly justify an adjustment under the provisions of Sec.92CA(3). The TPO also observed that the assessee has not furnished any details or data relating to quantum of transactions of the SEZ units with the tax payer and with others. Accordingly, the TPO determined the Arm’s Length margin of SDT transactions at 15.58%. Accordingly, the TPO made adjustment of Rs.135.42 crores in respect of specified domestic transactions. The workings in this regard are furnished by the TPO in Annexure B to the TP order. We notice that the TPO has adopted following methodology:-

(a) The TPO has first computed the ratio of income received from AE to the total operating income for each of the SEZ undertakings.

(b) The TPO applied the Arm’s Length PLI of 15.58% on the total operating income of the SEZ unit. The profit declared by the SEZ unit over and above the rate of 15.58% is treated as “excess profit” for each of the SEZ unit.

(c) The % arrived in step (a) above was applied to the Excess
profit arrived in step (b) above and the same is taken as the “Amount to be adjusted”. The same was added to the total income of the assessee.

39.9 Before Ld. DRP, the assessee raised various contentions and hence the Ld DRP called for a remand report from the TPO. In the remand report, the TPO expressed the view that the ALP has to be determined in respect of all inter-unit transactions including the transactions entered between one SEZ unit and another SEZ unit. He further submitted that, as per the proviso to sec.92C(4), the deduction u/s 10AA will not be available in respect of Transfer pricing adjustments made by adopting the Arms length price (ALP). Accordingly, the TPO submitted that the entire T.P adjustment has been considered as income in the hands of the assessee. One of the contentions raised by the assessee was that the TPO has not considered all SEZ units, i.e., the TPO has ignored loss making SEZ units. The TPO has replied as under in respect of this contention:-

“3.4.6 Out of 28 SEZ units, TPO has considered 21 units for determination of ALP which has higher profit margin compared to the comparables margin, i.e. 15.58%. It means that units declaring higher profits and having Specific Domestic transaction are clear indication that profits were shifted from taxable units to non-taxable units. Hence, adjustment made only for units having higher profit margin and having specific Domestic transaction. Details of units having SDT as well as their profit margin & their adjustment as per 92CA order and reason for determining ALP is enclosed in Annexure-A.

3.4.7 As mentioned in Annexure, ALP was determined only for the units having income AE only. As per 92CA order out of 28 units, ALP was determined only for 17 units. Out of that 17 units, 7 units have claimed 100% exemption, whereas 11 units were into 50% exemption. It means, only 50% is exempted from tax and remaining 50% is taxable. Hence, transaction between SEZ to SEZ is not having full tax incentive to restrict the benchmarking only for taxable units.

3.4.8 Further, Taxpayer also claiming that TPO has not considered loss making SEZ units. As per the provisions of Act, ALP will (be) determined, if tax payer margin is higher or within +/- 3% range then the declared profit is accepted as within ALP and there is no reverse impact (benefit will be given for having higher margin).

3.4.9 Notwithstanding above statement, ALP will be determined only where transaction with AE is determined. Out of 28 units, only 3 units are loss making, i.e., Pune SEZ-3, Bhubaneshwar SEZ & Noida SEZ-2. There is no income from AE in these units. Hence, there is no question of determination of ALP. Hence TPO has not considered those units.”

The TPO also reported that the total profit eligible for deduction u/s 10AA is 4614.52 crores. He also reported that out of 28 units, 13 units are eligible for deduction @ 50% and 11 units are eligible for deduction @ 100%. Accordingly, he submitted that the units claiming 50% is more in number. Since there is huge volume of transactions between SEZ units, the TPO opined that there is a clear picture of shifting of profit from taxable to non-taxable units and it may be between SEZ units also.

39.10 In response to the remand report, the assessee, inter alia, submitted the following:-

(a) There should be no adjustment for SDT transactions for services provided by one SEZ unit to another SEZ unit or STPI unit, as both the units shall fall under the category of “eligible units”, i.e., eligible for deduction u/s 10A/10AA/10B of the Act.

(b) ALP adjustment determined in SDT transaction in respect of SEZ units can’t be mechanically added to Total Income. The adjustment should be made in relevant turnover and profits in the formula prescribed in Section 10AA(7) of the Act and the deduction u/s 10AA should be accordingly recomputed.

(c) If the service providing units are not allowed deduction u/s 10AA of the Act, then the addition made by the TPO would result in double taxation.

(d) There is no tax arbitrage in respect of service provided by a –

(i) 50% SEZ unit to another 50% SEZ unit

(ii) 50% SEZ unit to a 100% SEZ unit

(iii) 100% SEZ unit to another 100% SEZ unit.

(e) If the transactions between above said units are removed and if adjustments are considered in respect of remaining transactions between other units (i.e., eligible unit and non-eligible units; 100% SEZ units to 50% SEZ units), the addition to be made shall come down to Rs.9.71 crores as against the addition of Rs.135.42 crores made by the TPO.

(f) If the revenue of “service providing unit” is reduced, then the same results in corresponding reduction of cost in the hands of “service receiving unit”. Accordingly, corresponding reduction of cost should be made in the hands of service receiving unit and the deduction u/s 10AA should be recomputed. It was submitted that there is no bar for making this corollary adjustment.”

The Ld DRP did not agree with contentions of the assessee and concurred with the views of the TPO. At the remand stage, the TPO reported to Ld. DRP that profit of one SEZ unit named Hiranandani SEZ unit requires TP adjustment of Rs.25.69 lakhs. After considering various submissions of the assessee, the Ld. DRP upheld the TP adjustment made by the TPO for SDT and also enhanced the same by Rs.25.69 lakhs relating to Hiranandani SEZ unit.

39.11 Before us, the Ld A.R raised various contentions and they are summarized below:-

(a) Section 92BA of the Act, which provide for making of transfer pricing adjustment in respect of Specified Domestic Transaction was introduced by the Parliament accepting the suggestion given by Hon’ble Supreme Court in the case of Glaxo Smithkline Asia (P) Ltd (Appeal (civil) No.18121/2007 dated 26-10-­2010). In the above said case, the Hon’ble Supreme Court directed the Government to consider appropriate provisions in law to make transfer pricing regulations applicable to related party domestic transactions.

(b) The Hon’ble Supreme Court also observed in the above said case that, in case of domestic transactions, the under-invoicing of sales and over-invoicing of expenses ordinarily would be revenue neutral except in two circumstances involving tax arbitrage:

(i) If one of the related companies is loss making and the other is profit making, and profit is shifted to the loss making concern; and

(ii) If there are different rates for two related units (on account of different status, area basis incentives, nature of activity etc.) and if profit is diverted to the unit on the lower side of tax arbitrage.

Hence the intent behind introduction of Transfer pricing provisions for Specified Domestic Transaction is to curb the practice of shifting of profits where there is tax arbitrage.

(c) Reference in sec. 80IA(8) is to the cases of transfer of goods or services from eligible business to any other business and vice versa. Hence transfer of goods or services between two eligible units are outside the scope of provisions of sec.80IA(8) and consequently sec.92BA.

(d) Even if it is held that section 92BA is applicable to transfer between two eligible undertakings, yet there is no tax arbitrage as mentioned by Hon’ble Supreme Court in the cases where service is provided by a –

(i) 50% SEZ unit to another 50% SEZ unit

(ii) 50% SEZ unit to a 100% SEZ unit

(iii) 100% SEZ unit to another 100% SEZ unit. The tax arbitrage may be there where the service is provided by 100% SEZ unit to a 50% SEZ unit or where the services are provided by a SEZ unit to a non-SEZ unit.

(e) The TPO has determined the SDT adjustment for “Service providing units only”, i.e., on revenue receiving units only. The ALP amount determined by TPO should be adopted in respect of “Service receiving unit” also, since the same would result in corresponding reduction of costs. This principle of corresponding adjustment is provided in Article 9(2) of DTAA, which is applied in transactions between AEs based on treaty provisions. Hence the DTAA principles should be applied in respect of SDT involving two units of same assessee. This is also based on the principle that one cannot generate income out of himself.

(f) Requirement of determination of market value or ALP value u/s 80IA(8) is there for both service provider and service receiver, if both the units are eligible units.

(g) Restriction is placed in the first proviso to sec.92C (4) of the Act denying deduction u/s 10A/10AA/10B of the Act in respect of amount of T.P adjustment by which total income is enhanced. However, this restriction should not be narrowly read to deny re­computing the deduction u/s 10AA of each of the undertaking. Also this provision applies only to income of eligible undertaking is enhanced by applying the provision of section 92C and not in a case where such income is reduced.

(h) Any ALP adjustment on SDT should not be directly added to total income. The requirement of sec.80IA(8) is to re-compute the export turnover, total turnover and profits of eligible units and also the deduction allowable u/s 10AA of the Act. Accordingly, after ALP adjustment, the deduction u/s 10AA should be recomputed.

(i) The margin arrived at for international transactions should be adopted for the purposes of SDT also and the same would meet the ends of justice.

39.12 We heard Ld D.R and perused the record. We shall first have regard to various applicable provisions of the Act. The provisions of sec.92BA of the Act was introduced by Finance Act, 2012 w.e.f. 1.4.2013 to determine Arm’s length price of Specified domestic transactions (SDT), when the aggregate value of such transactions exceeds the prescribed limit. Sec.92BA reads as under:-

“92BA. For the purposes of this section and sections 92, 92C, 92D and 92E, “specified domestic transaction” in case of an assessee means any of the following transactions, not being an international transaction, namely:—

(i) any expenditure in respect of which payment has been made or is to be made to a person referred to in clause (b) of sub-section (2) of section 40A; *

(ii) any transaction referred to in section 80A;

(iii) any transfer of goods or services referred to in sub-section (8) of section 80-IA;

(iv) any business transacted between the assessee and other person as referred to in sub-section (10) of section 80-IA;

(v) any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of sub­section (8) or sub-section (10) of section 80-IA are applicable; or

(vi) any other transaction as may be prescribed, and where the aggregate of such transactions entered into by the assessee in the previous year exceeds a sum of (twenty crore)** rupees. (* Omitted by Finance Act, 2017 w.e.f. 1-4-2017. ** Substituted for “five” by Finance Act, 2015 w.e.f. 1.4.2016)”

Section 92 of the Act mandates computation of income from international transaction or specified domestic transaction having regard to arm’s length price. The said section 92 reads as under:-

“Section 92. (1) Any income arising from an international transaction shall be computed having regard to the arm’s length price.

Explanation.-For the removal of doubts, it is hereby clarified that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arm’s length price.

(2) Where in an international transaction or specified domestic transaction, two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm’s length price of such benefit, service or facility, as the case may be.

(2A) Any allowance for an expenditure or interest or allocation of any cost or expense or any income in relation to the specified domestic transaction shall be computed having regard to the arm’s length price.

(3) The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or sub­section (2A) or the determination of the allowance for any expense or interest under sub-section (1) or sub-section (2A), or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under sub­section (2) or sub-section (2A), has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction or specified domestic transaction was entered into.”

39.13 The different undertakings owned by the assessee have entered into inter unit transactions and many of those undertakings have claimed deduction u/s 10AA of the Act. The aggregate value of those transactions has also exceeded the threshold limit prescribed in sec.92BA of the Act. Accordingly, it is submitted that the provisions of sec.92BA(v) relating to Specified Domestic Transaction are applicable to the assessee. At the cost of repetition, we extract below clause (v) of sec.92BA:-

“(v) any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of sub­section (8) or sub-section (10) of section 80-IA are applicable;”

Hence, it is pertinent to refer to the provisions of sec.80IA(8), which read as under:-

“80IA(8) Where any goods or services held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods or services held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date:

Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner herein before specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit.

Explanation.—For the purposes of this sub-section, “market value”, in relation to any goods or services, means—

(i) the price that such goods or services would ordinarily fetch in the open market; or

(ii) the arm’s length price as defined in clause (ii) of section 92F, where the transfer of such goods or services is a specified domestic transaction referred to in section 92BA.”

The provisions of sub.sec (9) of sec.10AA specifically states that the provisions of sub-section (8) and sub-section (10) of section 80IA shall, so far as may be, apply in relation to the undertaking referred to in this section as they apply for the purpose of the undertaking referred to in section 80-IA. The provisions of sec. 80IA(8) mandates substitution of actual price with “market value” when there is transfer of goods or services

(a) from “eligible business” to “any other business” carried on by the assessee or

(b) from “any other business” to “eligible business” carried on by the assessee.

Section 10A/10AA/10B, 80IA etc., grants income tax concession by way of granting deduction to certain specified undertakings from gross total income (or) at the point of computation itself, meaning thereby, the same results in income-tax benefit to the assessee. It may so happen that an assessee may be having more than one undertaking, out of which only some units may be eligible for deduction/benefit prescribed in those sections. Hence, there may arise a tendency to shift profits from “non-eligible” undertaking to “eligible” undertaking by under invoicing/over invoicing of transactions of transfer of goods or services, so that the assessee could avail higher tax benefits. Hence, sub-sec. (8) was introduced in sec. 80IA and the same was made applicable to other incentive provisions also. The purpose of introducing sub-sec. (8) was to prevent claim of excess deduction or benefit granted to certain “eligible undertakings”. The modality adopted in se.80IA(8) is to substitute “market value” to the transactions of transfer of goods or services between eligible unit and non-eligible unit, if the said transfer of goods or services between the undertakings did not occur at “market value”. The AO, for the purpose of computing deduction under respective section, shall compute the “profits and gains” of the eligible undertaking by substituting the “actual price” with “market value”.

39.14 Though the above said provisions empowered AO to examine and determine the Fair Market Value of certain transactions mentioned therein, yet the Act did not prescribe any method to compute FMV of these transactions. Hence it has resulted in disputes between taxpayers and AO in determining FMV of transactions. The Hon’ble Supreme Court in the case of Glaxo Smithkline Asia (P) Ltd (supra) has examined the complications which arise in cases where fair market value is to be assigned to transactions between domestic related parties and suggested that Ministry of Finance should consider appropriate provisions in law to make transfer pricing regulations applicable to such related party domestic transactions. Accordingly sec.92BA was introduced along with corresponding amendment in sec.80IA of the Act. Under these provisions, the transfer pricing regulations were extended to cover Specified Domestic Transactions. Accordingly, under the Explanation to sec.80IA(8) of the Act, the “market value” for specified domestic transactions is meant as the “arms’ length price” as defined in clause (ii) of section 92F. Under section 92F(ii), the term “arm’s length price” has been defined as under:-

“arm’s length price” means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions.”

Accordingly, for the purpose of sec. 10A/10AA/10B/80-IA and other incentive provisions, the “market value” of the transaction shall mean “Arm’s length price” as determined in sec. 92 of the Act. Section 92C of the Act prescribes the modes of computation of arm’s length price.

39.15 Under section 92C(4), where an arm’s length price is determined by the AO under sub-section (3), the AO may compute the total income of the assessee having regard to the arm’s length price so determined. It is further provided that no deduction u/s 10A or section 10AA or section 10B or under Chapter VIA shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under sec. 92C(4).

39.16  As per provisions of sec.92(3), the transfer pricing provision of sec.92 shall not apply in a case where the computation of income/expenses under sub. sec (1) or (2) or (2A) of sec.92 has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the Specified Domestic Transaction was entered into.

39.17 It can be noticed that the provisions of sec.92C(4) requires computation of total income by adopting arm’s length price determined by the AO and further, if the total income is enhanced on account of adoption of ALP, then the deduction u/s 10A/10AA/10B/Chapter VIA will not be available for such enhanced income. At the same time, while computing the deduction u/s 10A/10AA/10B/Chapter VIA, the AO has to compute the “Profits and gains of business” by substituting ALP and this exercise has to be carried out for the purpose of computing the quantum of deduction.

39.18 We have noticed earlier that the assessee has entered into inter-unit transactions with different units. It included transactions between

(a) SEZ units and SEZ units,

(b) SEZ units and non-SEZ units.

In between SEZ units also, the transactions have taken place between SEZ units enjoying 100% tax deduction and SEZ units enjoying 50% tax deduction. Accordingly, one unit shall be providing services and another unit shall be receiving services. The inter-unit transaction would result in “generation of income” for “Service provider”, while it would constitute “expenditure” for the “Service receiver”.

39.19 Before us, the assessee has raised many important contentions, which would impact the exercise of determination of ALP. They have been summarised by us in the earlier paragraphs. We notice that many of the contentions have not been examined by the TPO/AO. We have noticed earlier, the TPO has determined the ALP of Profit ratio at 15.58% and has actually added the excess profit declared by the undertaking. The provisions of sec.10AA requires re-computation of deduction by substituting the actual value with market value. We notice that the AO/TPO did not carry out this exercise of recomputing the quantum of deduction allowable u/s 10AA of the Act by recasting the profit and loss account with the ALP, which is the “market value” of inter-unit transactions. It is also pertinent to remember here that the ALP of transactions could be determined under any of the prescribed methods only.

39.20 Before us, the assessee has raised many contentions. We shall address below some of the contentions, which are legal in nature.

(A) One of the contentions of the assessee is that the inter-unit transactions between two eligible units should not be subjected to ALP adjustment. We notice that the provisions of sec.80IA(8) refer to the transactions between “eligible units” and “non-eligible units”. We have noticed earlier that, in the case of the assessee, various eligible units, inter se, have also entered into transactions. We have noticed earlier that the TPO has expressed the view in his remand report that the transactions between two SEZ units (eligible units) have also been included for the purpose of determining ALP of the transactions. However, we notice that the provisions of sec. 80IA(8) cover only the transactions entered between “eligible units” and “non-eligible units”, i.e., it does not take into its ambit the transactions entered between two eligible units. Accordingly, we are of the view that there is merit in the contentions of the assessee that the transactions entered between two eligible units would not be covered by the provisions of sec. 80IA(8) of the Act. Even if the rate of deduction allowable to two eligible units differ and such inter-unit transactions between two eligible units may result in tax arbitrage, yet, we are of the view that the same shall be outside the scope of provisions of sec.10AA/Transfer pricing provisions, since the provisions of sec.80IA(8) do not cover transactions between two eligible units. This may be a lacunae in the Income tax Act, but the said lacunae could be cured only by the Parliament. Hence, on a strict interpretation of law, the transactions between two eligible units are not covered by sec.80IA(8) of the Act. Consequently, the transactions entered between two eligible units are outside the scope of “specified domestic transactions” mentioned in sec.92BA of the Act. Accordingly, this view of the tax authorities is set aside.

(B) The assessee also contended that Arms length price should be applied to both the eligible unit and non-eligible unit. This  contention of the assessee is liable to rejected for the purpose of computing deduction u/s 10AA of the Act. This is so because, as per the provisions of sec.80IA(8) of the Act, the profits and gains of “eligible unit” alone is mandated to be recast by adopting “market value” for the purpose of computing deduction u/s 10AA of the Act. Since deduction u/s 10AA is not allowed for “non-eligible unit”, the question of recasting the profit and loss account of that unit shall not arise.

(C) However, in our view, the above said contention of the assessee will hold good for sec. 92 of the Act, since the provisions of sec.92(2A) mandates that any income in relation to the SDT shall be computed having regard to the “arms’ length price”. Further, as per the provisions of sec.92C(4), the assessing officer may compute the “total income” of the assessee having regard to the arms’ length price so determined. Accordingly, unless the ALP is adopted in both the “service providing unit” and “service receiving unit” in respect of their inter-unit transactions, the total income cannot be computed having regard to the arms’ length price. Accordingly, the ALP of the inter-unit transactions should be applied in both the eligible and non-eligible unit for the purpose of sec.92 of the Act.

(D) In our view, provisions of sec.92(3) shall not apply to inter-unit transactions. Sec.92(3) of the Act prescribes a condition that, where the T.P adjustment required to be made consequent to determination of ALP has the effect of reducing income chargeable to tax or increasing loss, then the T.P provisions shall not apply. In respect of international transactions, the transaction is entered between the assessee and its Associated Enterprises. Both are two different tax entities. However, in the instant cases, the transactions are entered between two units belonging to the same assessee. Hence both the units are two arms of the same tax entity. We have earlier expressed the view that the ALP value of inter-unit transactions has to be applied in both the transacting units for the purposes of sec. 92 of the Act. Hence the substitution of ALP value (market value) in respect of inter-unit transactions u/s 92 of the Act is tax neutral exercise. However, the effect will be seen in this regard while computing deduction u/s 10A/10AA/10B of the Act. Accordingly, the “reduction”, if any, in the quantum of deduction under above sections after application of the ALP, in our view, is the Transfer pricing adjustment contemplated in sec.92 of the Act.

39.21 We have prepared certain illustrations in order to explain above points. They are given below:-

There are two situations in which the profits of eligible business are inflated. They are

(a) Over invoicing revenue

(b) Under invoicing expenses

Let us give some illustrations in order to explain the effect of adoption of ALP u/s 92 and also while computing deduction u/s 10AA of the Act. The illustrations are given in sets, i.e., for units eligible for deduction @ 100% and units eligible for deduction @ 50%. Within the above said examples, illustrations are given for both the situations, viz., over invoicing of revenue and under invoicing of expenses by eligible units.

EXAMPLE A: –

Eligible Unit – eligible for deduction u/s 10AA of the Act @ 100%.

ILLUSTRATION 1 (Over invoicing revenue)

Transaction between an Eligible unit, which is eligible for deduction @ 100% and a non-eligible unit.

Eligible unit is Service Provider and accordingly earns revenue from non-eligible unit.

Transaction Price – 1,00,000

Arms Length Price- 50,000

	Actual Transaction			SDT Adjustment
	Eligible Unit	Non-eligible	Total	Eligible	Non-	Total
		unit		Unit	eligible
					unit
Sales Revenue	10,00,000	5,00,000	15,00,000	10,00,000	5,00,000	15,00,000
Less: Adjustment for ALP	–	–	–	-50,000		-50,000
Adj Rev	10,00,000	5,00,000	15,00,000	9,50,000	5,00,000	14,50,000
Cost	-9,00,000	-4,25,000	-13,25,000	-9,00,000	-4,25,000	-13,25,000
Add: Corresponding Adjustment for	–	–	–	–	50,000	50,000
ALP
Adj Cost	-9,00,000	-4,25,000	-13,25,000	-9,00,000	-3,75,000	-12,75,000
Net Income	1,00,000	75,000	1,75,000	50,000	1,25,000	1,75,000
Deduction u/s 10AA – 100%	-1,00,000		-1,00,000	-50,000		-50,000
Total Income			75,000			1,25,000
SDT adjustment						50,000

In this illustration,

(a) the “net income” remains at Rs.1,75,000/- before and after ALP adjustments u/s 92 of the Act, since adjustment to the inter-unit transactions have to be done in the hands of both eligible and non-eligible units u/s 92 of the Act.

(b) The amount of deduction u/s 10AA worked out to Rs.1,00,000/-prior to ALP adjustment. However, it has fallen down to Rs.50,000/-after ALP adjustment in terms of sec.80IA(8).

(c) Accordingly, the Total income has increased from Rs.75,000/-(prior to ALP adjustment) to Rs.1,25,000/- after ALP adjustment. On this increase of Rs.50,000/-, the assessee is not eligible for deduction u/s 10AA of the Act.

(c) It can be noticed that the reduction in the quantum of deduction u/s 10AA, i.e., Rs.50,000/- is also the adjustment made u/s 92 of the Act in respect of Specified domestic transaction, i.e. the net effect is the addition of SDT adjustment of Rs.50,000/-.

ILLUSTRATION 2 (Under invoicing expenses)

Transaction between an Eligible unit, which is eligible for deduction @ 100% and a non-eligible unit.

(B) Eligible unit is Service receiver and accordingly pays money to non-eligible unit. The said payment constitutes expenditure in the hands of Eligible Unit.

Transaction Price – 1,00,000

Arms Length Price – 1,50,000

	Actual Transaction			SDT Adjustment
	Eligible Unit	Non-eligible unit	Total	Eligible Unit	Noneligible unit	Total
Sales Revenue Less: Adjustment for ALP	10,00,000 –	5,00,000 –	15,00,000 –	10,00,000 –	5,00,000 50,000	15,00,000 50,000
Adj Rev	10,00,000	5,00,000	15,00,000	10,00,000	5,50,000	15,50,000
Cost Add: Corresponding Adjustment for ALP	-9,00,000 –	-4,25,000 –	-13,25,000 –	-9,00,000 -50,000	-4,25,000 –	-13,25,000 -50,000
Adj Cost	-9,00,000	-4,25,000	-13,25,000	-9,50,000	-4,25,000	-13,75,000
Net Income Deduction u/s 10AA – 100%	1,00,000 -1,00,000	75,000	1,75,000 -1,00,000	50,000 -50,000	1,25,000 –	1,75,000 -50,000
Total Income			75,000			1,25,000
SDT adjustment						50,000

In this illustration,

(a) the “net income” remains at Rs.1,75,000/- before and after ALP adjustments u/s 92 of the Act, since adjustment to the inter-unit transactions have to be done in the hands of both eligible and non-eligible units.

(b) The amount of deduction u/s 10AA worked out to Rs.1,00,000/-prior to ALP adjustment. However, it has fallen down to Rs.50,000/-after ALP adjustment in terms of sec.80IA(8).

(c) Thus the reduction in the quantum of deduction u/s 10AA, i.e., Rs.50,000/- is also the adjustment made u/s 92 of the Act in respect of Specified domestic transaction.

(d) Hence the total income has increased from Rs.75,000/- (prior to ALP adjustment) to Rs.1,25,000/- after ALP adjustment. The net effect is the addition of SDT adjustment of Rs.50,000/-.

(B) Eligible Unit – eligible for deduction u/s 10AA of the Act @ 50%.

ILLUSTRATION 3 (Over invoicing of revenue)

Transaction between an Eligible unit, which is eligible for deduction @ 50% and a non-eligible unit.

Eligible unit is Service Provider and accordingly earns revenue from non-eligible unit.

Transaction Price – 1,00,000

Arms Length Price  – 50,000

	Actual Transaction			SDT Adjustment
	Eligible Unit	Non-eligible unit	Total	Eligible Unit	Noneligible unit	Total
Sales Revenue Less: Adjustment for ALP	10,00,000 –	5,00,000 –	15,00,000 –	10,00,000 -50,000	5,00,000	15,00,000 -50,000
Adj Rev	10,00,000	5,00,000	15,00,000	9,50,000	5,00,000	14,50,000
Cost Add: Corresponding Adjustment for ALP	-9,00,000 –	-4,25,000 –	-13,25,000 –	-9,00,000	-4,25,000 –50,000	-13,25,000 50,000
Adj Cost	-9,00,000	-4,25,000	-13,25,000	-9,00,000	-3,75,000	-12,75,000
Net Income Deduction u/s 10AA – 100%	1,00,000 50,000	75,000 –	1,75,000 -50,000	50,000 –25,000	1,25,000 –	1,75,000 -25,000
Total Income			1,25,000			1,50,000
SDT adjustment						25,000

In this illustration,

(a) the “net income” remains at Rs.1,75,000/- before and after ALP adjustments u/s 92 of the Act, since adjustment to the inter-unit transactions have to be done in the hands of both eligible and non-eligible units.

(b) The amount of deduction u/s 10AA worked out to Rs.50,000/-prior to ALP adjustment. However, it has fallen down to Rs.25,000/-after ALP adjustment in terms of sec.80IA(8).

(c) Thus the reduction in the quantum of deduction u/s 10AA, i.e., Rs.25,000/- is also the adjustment made u/s 92 of the Act in respect of Specified domestic transaction.

(d) Hence the total income has increased from Rs.1,25,000/- (prior to ALP adjustment) to Rs.1,50,000/- after ALP adjustment. The net effect is the addition of SDT adjustment of Rs.25,000/-.

ILLUSTRATION 4 (Under invoicing expenses)

Transaction between an Eligible unit, which is eligible for deduction @ 50% and a non-eligible unit.

Eligible unit is Service receiver and accordingly pays money to non-eligible unit. The said payment constitutes expenditure in the hands of Eligible Unit.

Transaction Price – 1,00,000

Arms Length Price – 1,50,000

	Actual Transaction			SDT Adjustment
	Eligible Unit	Non-eligible unit	Total	Eligible Unit	Noneligible unit	Total
Sales Revenue Less: Adjustment for ALP	10,00,000 –	5,00,000 –	15,00,000 –	10,00,000 -50,000	5,00,000	15,00,000 -50,000
Adj Rev	10,00,000	5,00,000	15,00,000	9,50,000	5,00,000	14,50,000
Cost Add: Corresponding Adjustment for ALP	-9,00,000 –	-4,25,000 –	-13,25,000 –	-9,00,000	-4,25,000 –50,000	-13,25,000 50,000
Adj Cost	-9,00,000	-4,25,000	-13,25,000	-9,00,000	-3,75,000	-12,75,000
Net Income Deduction u/s 10AA – 100%	1,00,000 50,000	75,000 –	1,75,000 -50,000	50,000 –25,000	1,25,000 –	1,75,000 -25,000
Total Income			1,25,000			1,50,000
SDT adjustment						25,000

In this illustration,

(a) the “net income” remains at Rs.1,75,000/- before and after ALP adjustments u/s 92 of the Act, since adjustment to the inter-unit transactions have to be done in the hands of both eligible and non-eligible units.

(b) The amount of deduction u/s 10AA worked out to Rs.50,000/-prior to ALP adjustment. However, it has fallen down to Rs.25,000/-after ALP adjustment in terms of sec.80IA(8).

(c) Thus the reduction in the quantum of deduction u/s 10AA, i.e., Rs.25,000/- is also the adjustment made u/s 92 of the Act in respect of Specified domestic transaction.

(d) Hence the total income has increased from Rs.1,25,000/- (prior to ALP adjustment) to Rs.1,50,000/- after ALP adjustment. The net effect is the addition of SDT adjustment of Rs.25,000/-.

39.22 We notice that the TPO has not carried out these exercises. Hence, in our view, this issue requires fresh examination at the end of TPO/AO by duly considering various other contentions of the assessee and also by considering the discussions made supra. Accordingly, we set aside the order passed by A.O. on this issue and restore the same to the file of the AO/TPO for examining it afresh.

40. Issue No.38 relates to the transfer pricing adjustment in respect of liquidated damages. This issue is being urged by the assessee in AY 2010-11.

40.1 The facts relating to this issue are stated in brief. The assessee along with its subsidiary named Wipro Inc., USA had entered into a contract with another company named M/s ACS State Healthcare LLC, USA for providing IT services. In this regard a Master Service Agreement dated 5^th March, 2008 was entered into by M/s Wipro Inc. USA along with the assessee with M/s ACS State Healthcare LLC, USA. It is also pertinent to note that the assessee and M/s Wipro Inc., USA has also entered into an agreement dated 1^st April, 2005 titled as “Mutual Sub-contractor Agreement”, for provision of software services.

40.2 The entire work of performing contract won by M/s Wipro Inc., USA from M/s ACS State healthcare LLC, USA was allotted to the assessee herein on back to back basis as per the agreement dated 1st April, 2005, referred above. Accordingly, the assessee also performed entire work. M/s Wipro Inc., raised invoices on the above said Customer and paid 90% of the invoices value to the assessee. It is pertinent to note that the said receipt has been accepted to be at arms length.

40.3 M/s ACS State Healthcare LLC found out certain deficiencies in the services performed by the assessee and also pointed out certain violations of terms of contract while performing the services. It notified the same to M/s Wipro Inc. Thereafter a settlement was reached between the parties in order to avoid litigations. In terms of the same M/s Wipro Inc., paid liquidated damages of Rs.62,68,00,573/-to M/s ACS State Healthcare LLC. Since the entire services have been performed by the assessee, M/s Wipro Inc., claimed from the assessee the amount of liquidated damages so paid by it. The assessee also paid the same to M/s Wipro Inc., USA and claimed it as expenditure. In its Transfer pricing report, the assessee claimed the above said payment as “reimbursement of expenses”.

40.4 However, the TPO took the view that there was no obligation on the part of the assessee to pay any liquidated damages to its AE and hence it is not required to reimburse the same to its AE. The observations made by TPO in this regard are extracted below:-

“5.1 The Taxpayer Wipro India is paying liquidated damages to Wipro Inc for the litigation matters involving Wipro Inc and US customers. For any litigation between Wipro Inc USA and US customers, the damages should be paid by US entity and not by the Indian entity. As per the submission made by the Assessee, the Indian entity Wipro India is paying the liquidity damages as per an agreement between Wipro Inc and Wipro India Ltd, vide agreement dated 1^st April, 2005. The said agreement is invalid for the current AY 2010-11. The tax payer has not furnished any agreement renewal documents or evidence to substantiate the claim for payment of Liquidated damages. In an uncontrolled transactions scenario no Indian entity will pay for the litigation matters for its foreign entity. The tax payer has used nomenclature as reimbursement of expenses which is incorrect and inappropriate. It is actually an expenditure which shifts the profits from Indian entity to US entity.”

The TPO also noticed that the assessee has not used any method for determining Arms’ length price of this payment. Accordingly, the TPO applied CUP method and determined the ALP at NIL. Accordingly, the TPO made Transfer pricing adjustment of Rs.62,68,00,573/-. The Ld DRP also confirmed the same.

40.5 We heard the parties on this issue and perused the record. The Ld A.R submitted that the assessee has reimbursed the liquidated damages paid by its foreign subsidiary on actual basis and hence there is no scope for making any transfer pricing adjustment. He submitted that entire software services were provided by the assessee to M/s ACS State healthcare LLC. Accordingly, he submitted that the assessee is liable for the deficiencies, if any, in providing the services. Accordingly, he submitted that the liquidated damages initially paid by M/s Wipro Inc., USA has been reimbursed by the assessee to M/s Wipro Inc. He further submitted that the assessee and M/s Wipro Inc., USA has entered an agreement titled as “Mutual Sub-contractor Agreement” dated 01^st April, 2005 and the same has not been terminated yet. Accordingly, he submitted that the TPO was not correct in observing that the said agreement is not valid for the year relevant to AY 2010-11 without understanding that the said “Mutual sub-contractor Agreement” has not been terminated.

40.6 We notice that the assessee did not determine the Arm’s length Price of the payment of liquidated damages, since it claimed the same to be mere reimbursement of expenses incurred by its foreign subsidiary. However, the TPO has taken the view that, in an uncontrolled transactions scenario, no Indian entity will pay for the litigation matters for its foreign entity. He has also further observed that the agreement entered on 1^st April, 2005 cannot be taken support for the payment made in AY 2010-11 without showing that the said agreement was renewed. Accordingly, by applying CUP method, the TPO has determined the ALP at NIL.

40.7 We notice that the observations so made by the TPO are general observations without appreciating properly the facts surrounding the issue. According to the assessee, the software services were provided by the assessee to M/s ACS State healthcare services LLC, USA as per the “Mutual subcontractor Agreement” entered between the assessee and its subsidiary Wipro Inc., USA. It is
pertinent to note that M/s Wipro Inc., USA had actually entered into a contract for providing software services with M/s ACS State healthcare services LLC, USA. It is stated that the entire contract was given to the assessee herein on back to back basis. According to the assessee, it has received 90% of the invoice value from M/s Wipro Inc., USA. Since there were deficiencies in the provision of services and also there was violation of terms, M/s ACS State health care services LLC has claimed damages from M/s Wipro Inc., USA, which was finally settled between themselves on payment of liquidated damages. Since entire software services have been provided by the assessee, M/s Wipro Inc., USA has, in turn, claimed the liquidated damages so paid by it from the assessee. According to the assessee, it is required to pay the liquidated damages to M/s Wipro Inc., USA as per the Mutual subcontracting agreement.

40.8 We notice that these factual aspects have not been considered by the TPO, while determining the ALP of liquidated damages at NIL. We are also of the view that the TPO has feel into error in not recognizing the Mutual subcontracting agreement dated 01^st April, 2005 entered between the assessee and M/s Wipro Inc., USA, since it is the claim of the assessee that the said agreement has not been terminated. Without examining the said claim of the assessee, it may not be correct on the part of the TPO to observe that the said agreement was not valid in the year relevant to AY 2010-11. We also notice that the TPO has not brought any material on record in support of his observations that, in an uncontrolled transaction, no third party would have paid such kind of liquidated damages in respect of dispute between its subsidiary and a third party. We are of the view that, without examining the Mutual subcontracting agreement, the TPO could not have come to such kind of conclusion. Accordingly, we are of the view that this issue has not been properly examined by TPO in terms of transfer pricing provisions. Accordingly, this issue requires fresh examination at the end of AO/TPO by properly considering the factual aspects relating to the same and properly applying the transfer pricing provisions. Accordingly, we set aside the order passed by the AO on this issue and restore the same to the file of AO/TPO for examining it afresh.

41. In the result, all the appeals of the assessee are treated as partly allowed and all the appeals of the revenue are also treated as partly allowed.

Order pronounced in the open court on 5th Oct’ 20.