Case Law Details

Case Name : M/s. Infosys Limited Vs. Addl. Commissioner of Income Tax (ITAT Bangalore)
Appeal Number : I.T. (T.P) A. No. 799/Bang/2015
Date of Judgement/Order : 10/11/2017
Related Assessment Year : 2006- 07
Courts : All ITAT (4421) ITAT Bangalore (212)

M/s. Infosys Limited Vs. Addl. Commissioner of Income Tax (ITAT Bangalore)

Assessee assails the order of the learned CIT (Appeals) for not allowing the assessee in computing the deduction under Section 10A of the Act in respect of rental income of Rs. 10,03,25,495 from Infosys BPO Ltd. and of Rs. 2,50,000 from BSNL, Chennai as being profits from the undertaking. The Assessing Officer was of the view that the aforesaid rental income cannot be regarded as income derived from the business of export of software. On appeal, the learned Authorized Representative submitted before the learned CIT (Appeals) that the rental income received from its subsidiary, Infosys BPO Ltd. was incidental to the business carried on by the assessee as such an arrangement facilitated operations, transactions, policies and procedures in this regard. It was also submitted that out of the rental income received from Infosys BPO Limited, lease rent of Rs. 1,14,21,155 was paid to the landlord of that premises by the assessee and contends that rental income to that extent was a mere recovery of expenditure and therefore cannot be excluded from the profits of 10A units of the assessee. In respect of the letting out of the space to BSNL at Chennai, it was submitted that it was for the purpose of setting up a mini exchange to equip the assessee’s Chennai Unit with telecommunication facilities. It was urged that the letting out of space to Infosys BPO Ltd. and BSNL at Chennai were therefore incidental to the business carried on by the assessee and therefore eligible for deduction under Section 10A of the Act. The learned CIT (Appeals) however did not accept the contention put forth by the assessee and upheld the Assessing Officer’s view that the aforesaid rental incomes are not eligible for deduction under Section 10A of the Act.

We have heard the rival contentions, perused and carefully considered the material on record. The issue as to whether interest income, income from sale of scrap, export incentive, rental income, etc. are eligible for deduction under Section 10A of the Act has been considered by the Hon’ble High Court of Karnataka in the case of Subex Ltd. Vs. ITO in ITA Nos. 46 & 47 of 2009 date 2.10.2014 and it was held that rental income by virtue of sub-section (4) of Section 10 of the Act is deemed to be business of the undertaking for the purpose of extending the benefit of deduction under Section 10A of the Act.

Full Text of the ITAT Order is as follows:-

These are cross appeals, by the assessee and Revenue, directed against the order of the Commissioner of Income Tax (Appeals)-3, Bangalore date 31.03.2015 for Assessment Year 2006-07.2. Briefly stated, the facts of the case relevant for this appeal, are as under :

2.1 The assessee, an Indian company engaged in the business of development and export of computer software, filed its return of income for Assessment Year 2006-07 declaring income of Rs. 215,18,57,570. The return was processed under Section 143(1) of the Income Tax Act, 1961 (in short ‘the Act’) and the case was subsequently taken up for scrutiny. In view of the international transactions reported by the assessee, the Assessing Officer made a reference under Section 92CA of the Act to the Transfer Pricing Officer (TPO) for determination of the Arm’s Length Price (ALP) thereof. The TPO passed the order under Section 92CA of the Act wherein no Transfer Pricing Adjustment was made. The assessment was concluded under Section 143(3) of the Act vide order date 11.12.2009, wherein the income of the assessee was determined at Rs. 479,02,19,330 in view of certain additions / dis allowances made by the Assessing Officer.

2.2 Aggrieved by the order of assessment date 11.12.2009 for Assessment Year 2006-07, the assessee filed an appeal before the CIT (Appeals)-3, Bangalore. The learned CIT (Appeals) disposed off the appeal vide order date 31.03.2015, allowing the assessee partial relief.

3. Aggrieved by the order of CIT (Appeals) for Assessment Year 2006-07 date 31.3.2015, both the assessee and revenue have preferred appeals in respect of findings rendered against them in the impugned order. We now proceed to dispose off these cross appeals in seriatum here under :

Assessee’s appeal in IT(TP)A No. 799/Bang/2015 for A.Y. 2006-07.

4. In the assessee’s appeal, the grounds raised are as under :

“1.1 The order passed by the learned Commissioner of Income Tax (Appeals) – 3, Bangalore, to the extent prejudicial to the appellant is bad in law and liable to be quashed.

Dis allowance of subscription charges paid to M/s Gartner, Forester Research and Meta

2.1 The learned Commissioner of Income tax (Appeals) –3, Bangalore has erred in confirming the dis allowance of subscription charges paid to M/s Gartner, Forester Research and Meta totally amounting to Rs. 8,42,00,399/- under section 40(a)(ia) of the Act.

2.2 On facts and circumstances of the case and law applicable, the impugned payments were not chargeable to tax in India, not liable for TDS under section 195 and hence not to be disallowed under section 40(a)(ia).

2.3 Without prejudice, when credit / payments were made to M/s Gartner, Forester Research and Meta during the FY 2005-06, there was no liability to deduct tax at source and the subsequent decisions / retrospective amendments to law does not alter this position.

2.4 Even otherwise, subscription charges actually paid to M/s Gartner, Forester Research and Meta during the relevant previous year cannot be disallowed under section 40(a)(ia) of the Act.

Dis allowance of software expenses –payments to non residents

3.1 The learned Commissioner of Income tax (Appeals) –3, Bangalore has erred in confirming the dis allowance of software expenses paid to non residents amounting to Rs. 10,21,31,856/- under section 40(a)(ia) of the Income tax Act, 1961.

3.2 On facts and circumstances of the case and law applicable, the impugned payments were not chargeable to tax in India, not liable for TDS under section 195 and hence not to be disallowed under section 40(a)(ia).

3.3 Without prejudice, when credit / payments were made to non residents during the FY 2005-06, there was no liability to deduct tax at source and the subsequent decisions / retrospective amendments to law does not alter this position.

3.4 Even otherwise, software expenses actually paid to non residents during the relevant previous year cannot be disallowed under section 40(a)(ia) of the Act.

Dis allowance of software expenses –payments to residents

4.1 The learned Commissioner of Income tax (Appeals) –3, Bangalore has erred in confirming the dis allowance of software expenses paid to residents amounting to Rs. 55,90,949/- under section 40(a)(ia) of the Income tax Act, 1961.

4.2 The learned AO and CIT(A) has erred in not appreciating that in respect of software payments made to residents amounting to Rs. 55,90,949/- there was no liability to deduct tax at source under section 194J since the term ‘royalty’ was introduced into section 194J by the Taxation Laws (Amendment) Act, 2006 w.e.f. 13.7.2006.

4.3 On facts and circumstances of the case and law applicable, there was no liability to deduct tax at source in respect of the impugned payments during the previous year, and hence the said payments cannot to be disallowed under section 40(a)(ia).

4.4 Even otherwise, software expenses actually paid during the relevant previous year cannot be disallowed under section 40(a)(ia) of the Act.

Dis allowance of brand building expenses

5.1 The learned Commissioner of Income tax (Appeals) –3, Bangalore has erred in confirming the dis allowance of brand building expensesamounting to Rs. 30,36,80,000/- for the impugned reason that the sameconstitutes ‘deferred revenue expenditure’.

5.2 On facts and in the circumstances of the case and law applicable, brand building expenses of Rs. 30,36,80,000/- is to be fully allowed as deduction as claimed by the appellant.

Deduction under section 10A in respect of rental income

6.1 The learned Commissioner of Income tax (Appeals) –3, Bangalore has erred in not allowing deduction under section 10A in respect of rental income of Rs.10,05,84,495/- On facts and circumstances of the case and law applicable, rental income of Rs. 10,05,84,495/- constituted profits of business of STPI units andconsequently the said income is eligible for deduction under section 10A.”

5. Ground No. 1.1 being general in nature, no adjudication is called for thereon.

6. Ground Nos. 2.1 to 2.4 Dis allowance of Subscription charges.

6.1 These grounds (supra) are raised in respect of the dis-allowance of subscription charges paid to M/s. Gartner, Forrester Research Inc., USA and Meta amounting to Rs. 8,42,00,399 under Section 40(a)(i) of the Act for non-deduction of tax thereon under Section 195 of the Act.

6.2.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncements cited. We find that the co-ordinate bench of this Tribunal in its orders in the assessee’s own case for Assessment Years 2000-01 to 2003-04 in ITA Nos. 145 to 148/Bang/2004 date 11.11.2005 held that similar payments made to Gartner Group were not liable for TDS under Section 195 of the Act. However, the aforesaid decision of the co- ordinate bench (supra) was reversed by the Hon’ble Karnataka High Court in its orders in ITA Nos.613 to 616 of 2006 date 15.10.2011. The Hon’ble High Court held that software subscription payments made to the Gartner Group constituted royalty and were therefore liable for TDS under Section 195 of the Act, by following its own decisions of even date in the cases of Wipro Limited in ITA No.2804/2005 and others and CIT Vs. Samsung Electronics Co. Ltd. (2012) 345 ITR 494 (Kar.).

6.2.2 It is not in dispute that the payments to Forrester Research Inc., USA and Meta are similar to the payments made to the Gartner Group. In this factual and legal matrix of the case, the decision of the Hon’ble High Court of Karnataka in the assessee’s own case date 15.10.2011 for Assessment Years 2000-01 to 2003-04 (supra) are squarely applicable to the issue before us in the case on hand. Respectfully following the aforesaid decision of the Hon’ble Karnataka High Court date 15.10.2011 in the assessee’s own case (supra), we uphold the dis allowance under Section 40(a)(i) of the Act of the payments made by the assessee to Forrester Research Inc., USA and Meta for non-deduction of tax at source under Section 195 of the Act. Finding no merit in this Ground No. 2.1 to 2.4 raised by the assessee, we dismiss the same.

7. Ground No. 3.1 to 3.4 Software expenses paid to overseas entities.

7.1 These grounds are raised in respect of the dis allowance of software expenses paid to overseas entities amounting to Rs. 10,21,856 under Section 40(a)(i) of the Act for failure to deduct tax at source thereon under Section 195 of the Act.

7.2.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. We find that the Hon’ble High Court of Karnataka in the case of CIT Vs. Synopsys International Old Ltd. (2012) 28 taxmann.com 162 (Kar) and CIT Vs. Samsung Electronics Co. Ltd. (2011) 16 taxmann.com 141 date 15.10.2011 has elaborately discussed this issue and held that payments made for import of software constitute ‘Royalty’ and hence liable for TDS under Section 195 of the Act; thereby overruling the decisions of the co-ordinate benches of ITAT, Bangalore that software payments are not liable for TDS under Section 195 of the Act. Respectfully, following the aforesaid decisions in the cases of CIT Vs. Synopsys International Old Ltd. (supra) and CIT Vs. Samsung Electronics Co. Ltd. (supra), we uphold the dis allowance made by the authorities below, of software expenses of Rs. 10,21,856 paid to overseas entities under Section 40(a)(i) of the Act for not deducting tax at source under Section 195 of the Act thereon. Consequently, Grounds 3.1 to 3.4 raised by the assessee are dismissed.

8. Ground Nos. 4.1 to 4.3

In these grounds, the assessee contends that the learned CIT (Appeals) has erred in concluding that software expenses paid to Indian entities amounting to Rs. 55,90,949 are also liable for dis allowance under Section 40(a)(ia) of the Act for non-deduction of TDS thereon. We find that in the F.Y. 2005-06 relevant to A.Y. 2006-07, the year under consideration, there was no liability to deduct tax at source under Section 194J of the Act in respect of software expenses paid to Indian entities as the term ‘royalty’ in Sec. 194J of the Act was introduced by the Taxation Laws Amendment Act, 2006 w.e.f. 13.7.2006. Therefore, in our view, the dis allowance under Section 40(a)(ia) of the Act, in respect of software expenses paid to Indian entities amounting to Rs. 55,90,949 is bad in law and therefore deleted. Consequently, Grounds 4.1 to 4.3 of the assessee’s appeal are allowed.

9. Ground No. 4.4

This ground (supra) is raised with regard to the issue that the dis allowance under Section 40(a)(i) of the Act, if any, should not be made in respect of payments actually made during the year under consideration. This issue is no longer res integra as the Hon’ble Apex Court in the case of Palam Gas Service Vs. CIT (supra) has held that the word ‘payable’ in section 40(a)(ia) of the Act not only covers amount payable on the last day of the previous year but also covers amounts actually paid. Consequently, Ground No. 4.4 of the assessee’s appeal is dismissed.

10. Ground Nos. 5.1 and 5.2- Brand Building Expenses.

10.1 These grounds (supra) are raised in respect of the issue of brand building expenses incurred by the assessee. In the order of assessment the Assessing Officer treated the brand building expenses as ‘deferred revenue expenditure’ and held that they were to be allowed over a period of five years as he was of the view that these expenses result in long term enduring benefit which is not limited to the year under consideration alone. On appeal, the learned CIT (Appeals) upheld the Assessing Officer’s order in treating the brand building expenses as ‘deferred revenue expenditure’.

10.2.1 We have heard the rival contentions, perused and carefully considered the material on record. From a perusal of the break up of brand building expenditure, it is seen that they are incurred in respect of subscription charges, sponsorship fees, retainer charges, publishing charges, marketing fees, consulting fees, global meets, trade show fees, exhibition stall space, etc. In our view, this expenditure incurred is in the course of and for the purpose of assessee’s business and it cannot be said that the said expenditure has resulted in the acquisition of any ‘asset’; which finding is not borne out by the facts on record.

10.2.2 On a perusal of the orders of the authorities below, it appears to us that the Assessing Officer and learned CIT (Appeals) in coming to their views have merely gone by the nomenclature ‘brand building expenditure’ without actually examining the nature of each expenditure under the above head. In view of the above, we restore this issue of ‘brand building expenditure’ back to the file of the Assessing Officer to verify the nature and description of expenditure included under the head ‘brand building’ and decide the issue of allow ability of brand building expenditure as revenue expenditure in the light of our observations and after affording the assessee adequate opportunity of being heard and to file details / submissions in this regard, which shall be duly considered. Consequently, grounds 5.1 and 5.2 of the assessee’s appeal are treated as allowed for statistical purposes.

11. Ground No. 6.1 Deduction u/s. 10A in respect of rental income.

11.1 In this ground, the assessee assails the order of the learned CIT (Appeals) for not allowing the assessee in computing the deduction under Section 10A of the Act in respect of rental income of Rs. 10,03,25,495 from Infosys BPO Ltd. and of Rs. 2,50,000 from BSNL, Chennai as being profits from the undertaking. The Assessing Officer was of the view that the aforesaid rental income cannot be regarded as income derived from the business of export of software. On appeal, the learned Authorized Representative submitted before the learned CIT (Appeals) that the rental income received from its subsidiary, Infosys BPO Ltd. was incidental to the business carried on by the assessee as such an arrangement facilitated operations, transactions, policies and procedures in this regard. It was also submitted that out of the rental income received from Infosys BPO Limited, lease rent of Rs. 1,14,21,155 was paid to the landlord of that premises by the assessee and contends that rental income to that extent was a mere recovery of expenditure and therefore cannot be excluded from the profits of 10A units of the assessee. In respect of the letting out of the space to BSNL at Chennai, it was submitted that it was for the purpose of setting up a mini exchange to equip the assessee’s Chennai Unit with telecommunication facilities. It was urged that the letting out of space to Infosys BPO Ltd. and BSNL at Chennai were therefore incidental to the business carried on by the assessee and therefore eligible for deduction under Section 10A of the Act. The learned CIT (Appeals) however did not accept the contention put forth by the assessee and upheld the Assessing Officer’s view that the aforesaid rental incomes are not eligible for deduction under Section 10A of the Act.

11.2.1 We have heard the rival contentions, perused and carefully considered the material on record. The issue as to whether interest income, income from sale of scrap, export incentive, rental income, etc. are eligible for deduction under Section 10A of the Act has been considered by the Hon’ble High Court of Karnataka in the case of Subex Ltd. Vs. ITO in ITA Nos. 46 & 47 of 2009 date 2.10.2014 and it was held that rental income by virtue of sub-section (4) of Section 10 of the Act is deemed to be business of the undertaking for the purpose of extending the benefit of deduction under Section 10A of the Act. At paras 8 & 9 thereof, the Hon’ble Court, explaining the interplay of section 10A(1) and 10A(4) of the Act, has held as under :

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11.2.2 Similarly, the Hon’ble High Court of Karnataka in the case of Wipro Ltd. Vs. DCIT in its order reported in (2016) 382 ITR 179 before whom the substantial question of law No.16 for consideration was in respect of income from sale of scrap, export incentive, rent received, interest income and gain on exchange rate fluctuation, held that these items were eligible for deduction under Section 10A of the Act. At para 166 thereof; the Hon’ble Court followed its own earlier order in the case of Wipro Ltd. in ITA No. 507 / 2002 date 25.8.2010, in respect of income from sale of scrap, export incentive and rent received to hold as under :

“166. This Court had occasion to consider the substantial question of law in assessee’s case itself in ITA 507. 2002 decided on 25.8.2010 while dealing with the income from sale of scrap, export incentive and rent received, answered the question in favour of the assessee ;and against the revenue.”

At para 169 thereof the Hon’ble Court held as under :

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

11.2.3 Respectfully following the decisions of the Hon’ble High Court of Karnataka in the case of Subex Ltd. Vs. ITO (supra) and Wipro Ltd. Vs. DCIT (supra), as discussed above, we hold that rental income received from Infosys BPO Limited and BSNL, Chennai cannot be excluded from the profits of the business of the undertaking while computing the deduction under Section 10A of the Act in the case on hand. In this view of the matter, we set aside the orders of the authorities below on this issue and therefore allow Ground No. 6.1 raised by the assessee.

ADDITIONAL GROUNDS OF APPEAL

12. By way of petition date 26.4.2016, the assessee has prayed for admission of the following additional grounds of appeal :

“1. The ld. Assessing Officer be directed to allow the claim of foreign tax credit under Section 90 of the Income Tax Act, 1961 even in respect of income which is exempt under Section 10A of the Income Tax Act, 1961 on the basis of and in conformity with the decision of the jurisdictional High Court in the case of Wipro Limited V. DCIT date 25.3.2015 (2016) 382 ITR 179.

2. The ld. Assessing Officer be directed to allow the claim of credit for state taxes paid outside India either as a deduction in computing the total income or as relief under Section 91 of the Income Tax Act, 1961 even in respect of income which is exempt under Section 10A and 10AA of the Income Tax Act, 1961 on the basis of and in conformity with the decision of the jurisdictional High Court in the case of Wipro Limited Vs. DCIT date 25.3.2015 (2016) 382 ITR 179.”

13. We have heard the rival contentions in respect of the admission of the aforesaid additional grounds of appeal raised by the assessee (supra). Taking into account the facts and circumstances involved and the principles laid down in the decision of Hon’ble Apex Court in the case of NTPC Ltd. Vs. CIT (1998) 229 ITR 383, which has held that the ITAT has jurisdiction to examine additional grounds of appeal raised for the first time involving question of law and having a bearing on tax liability of the assessee, we, in the interest of justice and equity, admit the aforesaid additional grounds raised by the assessee for consideration in this appeal.

14. Additional Ground No. 1.

We have heard the rival contentions on this issue and perused the material on record. In respect of this additional ground, we deem it appropriate to remand the same to the file of the Assessing Officer for verification of details and documents in respect of the issue of whether allow-ability of foreign tax credit in respect of income eligible for deduction under Section 10A of the Act is also allowable under Section 90 of the Act in the light of the decision of the Hon’ble Karnataka High Court in the case of Wipro Ltd. Vs. DCIT (supra) and adjudication thereon after affording the assessee adequate opportunity of being heard and to file details and submissions in this regard that shall be duly considered. The Assessing Officer is accordingly directed. Consequently, additional ground No. 1 is treated as allowed for statistical purposes.

15. Additional Ground No. 2.

15.1 This additional ground raises the issue of the allow ability of state taxes paid outside India either as a deduction in computing the total income or as credit under Section 91 of the Act in the light of the decision of the Hon’ble Karnataka High Court in the case of Wipro Ltd. Vs. DCIT (supra).

15.2 In this context, the learned Departmental Representative for revenue placed reliance on the decision of the Hon’ble Bombay High Court in the case of Reliance Infrastructure Ltd. (2016) 76 taxmann.com 257 (Bom) and contended that the observations of the Hon’ble Karnataka High Court with regard to Sec. 91 of the Act are in the nature of obiter as it was not at all necessary for the Hon’ble Karnataka High Court to deal with Sec. 91 of the Act when the question for consideration before them was for relief under Section 90 of the Act.

15.3 In rejoinder, the learned Authorized Representative for the assessee submitted that in any case deduction should be allowed in respect of state taxes paid outside India. In this regard, the learned Authorized Representative of the assessee also placed reliance on the decision in the case of Reliance Infrastructure Ltd. (supra) cited by the ld. DR.

15.4 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. Taking into consideration the facts and circumstances of the case and also our decision in restoring the additional ground No. 1 to the file of the Assessing Officer for consideration and adjudication, we remand the issue raised in additional ground No. 2 to the file of the Assessing Officer for verification of details and documents in respect of the assessee’s claim for state taxes paid outside India under Section 91 of the Act in the light of the aforesaid decisions of the Hon’ble Karnataka High Court in the case of Wipro Ltd. Vs. CIT (supra) and of the Hon’ble Bombay High Court in the case of Reliance Infrastructure Ltd. (supra) and to adjudicate thereon. Needless to add, the assessee shall be afforded adequate opportunity of being heard and to submit details / submissions required, which shall be duly considered before coming to a decision in the matter. The Assessing Officer is accordingly directed. Consequently, additional ground No. 2 is treated as allowed for statistical purposes.

16. In the result, the assessee’s appeal for Assessment Year 2005-06 is partly allowed.

Revenue’s appeal in IT(TP)A No. 942/Bang/2015 for A.Y. 2006-07.

17. The Grounds raised in Revenue’s appeal are as under :

“1. The order of the learned CIT (Appeals) is opposed to law and facts of the case.

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18. Grounds at S. Nos .1, 7 & 8.

18.1 Grounds at S. Nos. 1, 7 & 8 (supra) being general in nature, no adjudication is called for thereon.

19. Ground No. 2Dis allowance u/s. 14A of the Act.

19.1 In this ground (supra), Revenue assails the action of the learned CIT (Appeals) in directing the Assessing Officer to disallow expenditure incurred for earning of exempt income under Section 14A of the Act as per the estimation proposed by the Assessing Officer rather than in following the procedure laid down under Rule 8D of the IT Rules, 1962.

19.2 We have heard the rival contentions, perused and carefully considered the material on record. In the course of assessment proceedings, the assessee offered an amount of Rs. 33,43,422 asdis allowance under Section 14A of the Act which comprised 50% of the salary of an employee and 50% of the salary of the Sr. Vice President. The Assessing Officer, however, did not accept the assessee’s submissions and computed the dis allowance under Section 14A r.w. Rule 8D at Rs. 4,63,00,000 and added this amount as ‘Income from other sources’. On appeal, the learned CIT (Appeals) restricted the dis allowance under Section 14A of the Act to Rs.33,43,422 and following the decision of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT (2010) 328 ITR 81 (Bom.). The Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT (supra) held that Rule 8D which was notified from 24.3.2008 shall apply prospectively w.e.f. A.Y. 2008-09. In that view of the matter, the plea of Revenue before us that the dis allowance under Section 14A for the year 2006-07, is to be computed under Rule 8D of the IT Rules, 1962 is not tenable and is accordingly dismissed. Further, before us, Revenue has not been able to demonstrate that the dis allowance of Rs. 33,43,422 under Section 14A of the Act as upheld by the learned CIT (Appeals) was incorrect. In this factual and legal matrix of the case, we find no reason to interfere with the finding of the learned CIT (Appeals) and consequently dismiss ground No. 2 raised by Revenue.

20. Ground No. 3 –Commission paid to non-residents.

20.1 In this ground, Revenue has assailed the order of the learned CIT (Appeals) for allowing the expenses of Rs. 31 Crores claimed as commission paid to foreign entities.

20.2 The facts of the matter as emanate from the record are that in the course of assessment proceedings, the Assessing Officer called for details of commission paid to non-residents and TDS thereon. According to the assessee TDS was not applicable on such payments. The Assessing Officer did not accept the assessee’s explanation and proceeded to disallow the commission paid to non-residents under Section 40(a)(i) of the Act since no tax was deducted at source thereon as he was of the opinion that since CBDT Circulars No. 23 date 23.7.1969 and 786 date 2.7.2000 had been withdrawn by Circular No. 7 of 2009 date 22.10.2009, the assessee could not place reliance on these circulars any more. On appeal, the learned CIT (Appeals) held that Circular No.786 was in force when the said commission was paid in the year under consideration and withdrawal of the Circular No. 786 w.e.f. 22.10.2009 cannot be held to be retrospective. The CIT (Appeals) at paras 11.1 and 11.2 of the impugned order also placed reliance on the directions issued by the DRP in assessee’s own case for Assessment Year 2010-11 to hold that commission paid to non-residents were not liable for TDS under Section 195 of the Act and consequently not liable for dis allowance under Section 40(a)(i) of the Act.

20.3.1 We have heard the rival contentions, perused and carefully considered the material on record. There is no dispute that the services rendered by the non-resident commission agents outside India was to procure new business and to strengthen existing business of the assessee from overseas clients. CBDT Circular No. 23 date 23.7.1969 (copy placed at pages 835 to 838 of compilation of decisions) held that a foreign agent of Indian exporter operates in his own country and no part of his income arises in India. ; Circular No. 786 date 2.7.2000 (copy placed at page 839 compilation of decisions) further stated that the relevant sections 5(2) and 9 of the Act had not undergone any change in this regard and therefore the clarification in Circular No.23 still holds good. These circulars were in force when the commission expenditure was incurred during the F.Y. 2005-06 relevant to A.Y. 2006-07; the year under consideration. Subsequently, Circular No. 7 of 2009 date 22.10.2009 (copy placed at pages 841 & 842 of compilation of decisions) has withdrawn Circular Nos.23 & 786. In this regard, the Hon’ble High Court of Delhi in the case of CIT Vs. Angelique International Limited (2013) 38 taxmann.com 425 (Delhi) has held that the withdrawal of Circular No. 23 and 786 vide Circular No. 7 of 2009 w.e.f. 22.10.2009 will not have retrospective effect. The Hon’ble Court also held that where export commission was paid outside India to non-residents prior to the applicability of Circular No.7 of 2009, the same was not exigible to tax in India under Section 9(1)(vii) of the Act. The operative portions of the aforesaid decision of the Hon’ble High Court of Delhi (supra) at paras 9 & 10 thereof are extracted here-under :

“9. First circular in question had been in force for a long time, from 1969. The Board may have withdrawn this circular and other circulars vide Circular No. 7 dated 22nd October, 2009 but the said withdrawal cannot be retrospective. Circular No. 7 of 2009 cannot be classified as explaining or clarifying the earlier circulars issued in 1969 and 2000. This assertion in the assessment order is far-fetched and does not merit acceptance. Circular No. 7 does not clarify the earlier circulars but withdraws them. This is obvious and apparent. Circulars in force in the relevant assessment year have to be taken into consideration and should not be ignored.

10. So long as the circulars were in force, it aided in uniform and proper administration and application of the provisions of the Act. Read in this manner, we do not think the respondent- assessee was in default and had failed to deduct at source, though it was mandated and required. The respondent was entitled to rely upon the circulars. In light of the judgments of the Supreme Court in CIT v. Eli Lilly & Co.(India) (P.) Ltd. [2009] 312 ITR 225/178 Taxman 505 and G.E India Technology Center (P.) Ltd. v. CIT [2010] 327 ITR 456/193 Taxman 234/7 taxmann.com 18 (SC), once the income was not exigible or chargeable to tax, TDS was not required to be deducted. Money paid to the third parties, who did not have any office or permanent establishment in India, was exempt and not chargeable to tax. Thus on the said payments or income, TDS was not required to be deducted. We also note that the payments in question were made prior to circular No. 7/2009. On this aspect, there is no dispute. We, therefore, do not find any reason to interfere with the order passed by the tribunal deleting the addition made by the Assessing Officer under Section 40(a)(i) of the Act. The appeal, being devoid of merit, is dismissed.”

20.3.2 Respectfully following the decision of the Hon’ble High Court of Delhi in the case of CIT Vs. Angelique International Limited (supra), we uphold the finding of the learned CIT (Appeals) that in the year under consideration the commission paid to non-residents was not liable for TDS and therefore not liable for dis allowance under Section 40(a)(i) of the Act. Consequently, Ground No. 3 of Revenue’s appeal is dismissed.

21. Ground No. 4 Computation of deduction u/s. 10A of the Act.

21.1 In this ground, Revenue contends that the learned CIT (Appeals) erred in directing the Assessing Officer not to exclude expenses incurred in foreign currency related to technical services rendered abroad from export turnover for computation of deduction under Section 10A of the Act without appreciating the reasons cited by the Assessing Officer in the order of assessment.

21.2 On a perusal of the record before us, it is seen that in the course of assessment proceedings, the Assessing Officer reduced 30% of the expenses incurred in foreign currency from export turnover while computing the deduction under Section 10A of the Act on the ground that said expenditure was incurred in connection with the rendering of technical services outside India. On appeal, the learned CIT (Appeals) relying on the findings of the DRP in the assessee’s own case for Assessment Year 2010-11 held that expenses incurred in foreign currency for providing technical services abroad for development or production of computer software should not be reduced from export turnover while computing the deduction under Section 10A of the Act.

21.3 The assessee’s contention that the activity of software development cannot be regarded as technical services under Section 10A was rejected by the Hon’ble Karnataka High Court in the assessee’s own case vide order in ITA Nos. 2972 to 2974 of 2005 date 4.11.2011 rendered in the context of computing the deduction under Section 80HHE of the Act. Subsequently, the Hon’ble Court recalled its aforesaid order date 4.11.2011 (supra) vide order in Review Petition (RP) Nos. 14, 15 & 75 of 2012 date 19.3.2012. Thereafter the Hon’ble Karnataka High Court in its order on merits in the assessee’s case reported in 32 taxmann.com 399 (Kar) for Assessment Years 1994-95 to 1996-97 held, in the context of deduction under Section 80HHE of the Act, that in respect of actual export or deemed export of computer software only freight, telecommunication or insurance charges attributable to the delivery of computer software outside India should be reduced from export turnover only if it is a situation of receiving amounts in connection with the development or production of computer software.

21.4 The Hon’ble Karnataka High Court in its order in the case of CIT Vs. Motor Industries Co. Ltd. (2015) 55 taxmann.com 377 (Kar) in the context of deduction under Section 80HHE at para 19 of its order held that expenses incurred in foreign exchange for rendering of technical services in connection with the development and production of computer software outside India cannot be excluded in computing the export turnover as it formed part of export turnover. Para 19, the operative portion of the aforesaid order is extracted here under :

“19. If the assessee is engaged in the business of providing technical services outside India in connection with the development or production of computer software then expenses if any incurred in foreign exchange in providing technical services outside India is liable to be deducted out of export turnover. The said provision has no application in the case of export out of India of computer software or its transmission from India to a place outside India by any means. The law makes a distinction between technical services rendered in connection with export of computer software and export of technical services for the purpose of development or production of computer software outside India. If the technical services rendered by the assessee’s Engineers is in connection with the export of computer software for the purpose of testing, installation and monitoring of software such a turnover do not fall within clause (ii) of subsection (1) of section 80HHE of the Act. Such a turnover falls within sub-clause (i) of subsection (1) of Section 80HHE of the Act, that is export out of India of computer software or its transmission from India to a place outside India by any means. The expenditure incurred in the form of foreign exchange for such services cannot be excluded in computing the export turnover as it forms part of the export turnover. In the instant case as is clear from the order of the Assessing Authority, he proceeds on the assumption that the assessee is a company engaged in rendering technical services outside India in connection with production of said software. Therefore the expenditure incurred in foreign exchange in providing such technical services outside India of Rs. 62.7 lakhs was excluded in computing the export turnover and total turnover for arriving at deduction under Section 80HHE of the Act. The assessee is engaged in the business of export out of India of computer software and its transmission to places from India outside India. Before a computer software is exported, the Software Engineers of the assessee would have initial discussion with regard to the requirements, specifications etc. Thereafter computer software is manufactured and then it is transmitted from India to a place outside India. The software Engineers deputed abroad who among other things have to do testing, installation and monitoring of software supplied to the client. Though the said services are technical in nature it does not fall within clause (ii) of sub-section (1) of section 80HHE of the Act of providing technical services outside India in connection with the development or production of computer software. It falls under sub clause (i) of sub-section (1) of Section 80HHE of the Act. Therefore, the said expenditure cannot be excluded in computing export turn over. In that view of the matter we do not see any merit in this appeal. Accordingly, the said question of law is answered in favour of the assessee and against the revenue. Ordered accordingly.”

21.5 The aforesaid decision of the Hon’ble Karnataka High Court in the case of Motor Industries Co. Ltd. (supra) was followed in the case of CIT Vs. Mphasis Ltd. in ITA No. 1075/2008 c/w ITA No. 196/2009 date 1.8.2014 wherein it was held, in the context of Section 10B of the Act, that expenditure incurred in foreign currency for development and providing software development services outside India should not be reduced from export turnover for the purposes of computing deduction under Section 10B of the Act.

21.6 Subsequently, the Hon’ble Karnataka High Court in the case of CIT Vs. Kshema Technologies Ltd. (2016) 66 taxmann.com 165 (Kar) date 8.1.2016 in the context of computation of deduction under Section 10A of the Act, following its decision in the case of Motor Industries Co. Ltd. (supra) has held that the expenditure incurred in foreign exchange for rendering of technical services for development and export of computer software services outside India cannot be excluded from export turnover. At paras 12 to 14 thereof the Hon’ble High Court has held as under :

“12. On substantial question No. 1, the Assessing Authority has extensively considered whether the activity carried on by the assessee is software development or technical service. It is an admitted fact, as per the assessment order, the role of the assessee is of developer of software and not a consultant to any project. It is also categorically held by the assessing authority that the purpose of business of the assessee is to develop the software and in such process, expenditure is incurred in foreign currency to provide technical services outside India. Having held so, the assessing authority proceeded to conclude that the nature of expenditure and the nature of business are two different and distinct concepts and as per the statute, what is to be excluded is the expenses in foreign exchange for rendering technical services, though the same is forming an integral part as embedded in the process of on site development of software. This view is upheld by the Appellate Commissioner.

13. We have perused the relevant provisions of the Act i.e., ‘export turnover’ as defined under explanation (2)(iv) to section 10A of the Act. The said export  turnover as per explanation (2)(iv) to section 10A of the Act 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. What is relevant to be noticed as per this provision is that the consideration in respect of export of computer software received in or brought into India by the assessee in convertible foreign exchange is an export turnover and what is excluded from this clause is [a] freight, [b] telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India [c] expenses, if any, incurred in foreign exchange in providing the technical services outside India. Explanation (3) inserted by Finance Act, 2001 with effect from 1.4.2001 explains that the profits and gains derived from on site development of computer software including services for development of software, outside India shall be deemed to be the profits and gains derived from the export of computer software outside India. Thus, it is clarified by the legislature by inserting explanation (3) to section 10A that the profits and gains derived from on site development of computer software including services for the development of such software outside India is deemed to be the profits and gains derived from the export of computer software outside India. In other words, the services rendered by the assessee relating to the development of computer software is deemed to be part of export turnover of computer software outside India.

14. An identical issue relating to section 80HHE of the Act was considered by this court in the case of CIT v. Motor Industries Co. Ltd. [2015] 55 taxmann.com 377 (Kar.) and this court has held that though the services rendered in deputing the software engineers abroad who among other things have to do testing, installation and monitoring of software supplied to the client, appears to be technical in nature, it does not fall within the clause of providing technical service outside India in connection with the development or production of computer software and accordingly such expenditure cannot be excluded in computing export turnover. To decide the question on hand, the Tribunal has placed reliance on the Judgment passed by the Tribunal in the case of Mphasis Ltd. (supra). The very same Judgment was subjected to judicial scrutiny before this court in ITA No. 1075/2008 connected with ITA No. 196/2009, wherein this court, following the Judgment of Motor Industries Co. Ltd. (supra), answered the substantial question of law in favour of the assessee and against the revenue. This court has held that the expenditure incurred in the development or production of computer software though is in the nature of technical services, is not so, for the purposes of the Act and the said expenditure cannot be excluded in computing export turnover. Thus, we are of the view that the said Judgment is squarely applicable to the facts of the present case. Accordingly, we answer the first question in favour of the assessee and against the revenue.”

21.7 We find from a perusal of the orders of the authorities below that the Assessing Officer has only relied on certain extracts from the Annual Report in support of contentions; rather than examining the agreements, contracts, invoices and other relevant evidences in the matter. In view of the above, we set aside the issue of reduction of expenditure incurred in foreign currency from export turnover while computing the deduction under Section 10A of the Act to the file of the Assessing Officer for examination based on factual evidence and in the light of the aforesaid judicial pronouncements of the Hon’ble Karnataka High Court as discussed above which stipulate that expenditure incurred in foreign currency for rendering of technical services abroad for development, production and provision of computer software services are not to be excluded from export turnover while computing the deduction under Section 10A of the Act. Consequently, Ground No. 4 is treated as allowed for statistical purposes.

22. Ground Nos.5 & 6.

In these ground the issue raised by Revenue is with respect to the issue that expenses reduced from export turnover should not be reduced from total turnover while computing deduction under Section 10A of the Act. The issue raised in these grounds is covered against revenue by the decision of the Hon’ble Karnataka High Court in the case of CIT Vs. Tata Elxsi Limited (2012) 349 ITR 98 (Kar), wherein it is held that expenses reduced from export turnover should also be reduced from total turnover while computing the deduction under Section 10A of the Act. Respectfully following the aforesaid decision of the Hon’ble Karnataka High Court in CIT Vs. Tata Elxsi Limited (supra), we dismiss ground Nos. 5 & 6 raised by revenue.

23. In the result, Revenue’s appeal for Assessment Year 2006-07 is partly allowed for statistical purposes.

24. To sum up, both the assessee’s appeal for Assessment Year 2006-07 and Revenue’s cross appeal are partly allowed for statistical purposes.

Order pronounced in the open court on the 10th day of Nov. 2017.

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Category : Income Tax (25488)
Type : Judiciary (10240)
Tags : ITAT Judgments (4601) section 10a (88) section 10b (56)

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