Taxes levied overseas which are not eligible for relief either under section 90 or section 91 would not come within the purview of section 40(a)(ii)

 

Short Overview Taxes levied overseas which are not eligible for relief either under section 90 or section 91 would not come within the purview of section 40(a)(ii). Accordingly, AO was directed to verify whether State taxes paid by assessee overseas were eligible for any relief under section 90 and if it was not found to be so, assessee s claim of deduction would be allowed.

Assessee claimed deduction of State taxes paid in overseas countries. AO disallowed deduction under section 40(a)(ii). Assessee s case was that State taxes paid by the assessee in DTAA countries were not eligible for relief under section 90.

It is held that  Taxes levied overseas which are not eligible for relief either under section 90 or section 91 would not come within the purview of section 40(a)(ii). Accordingly, AO was directed to verify whether State taxes paid by assessee overseas were eligible for any relief under section 90 and if it was not found to be so, assessee s claim of deduction would be allowed.

Decision: Matter remanded.

Income Tax Act, 1961, Section 199

Tax deduction at source—Foreign tax credit–Foreign tax paid even in respect of income on which the assessee has not paid tax in India

Conclusion: Where respective tax treaty provides for benefit for foreign tax paid even in respect of income on which the assessee has not paid tax in India, still, it would be eligible for tax credit under section 90, Therefore, foreign tax credit would be available to the assessee in all cases, except the foreign tax paid in Finland and Canada.

Assessee claimed foreign tax credit in respect of income pertaining to section 10A/10AA eligible units in India. AO disallowed assessee s claim of foreign tax credit in respect of income exempt under section 10A/10AA on the reasoning that only such income which was subjected to tax in both the countries would qualify for tax credit. Held: Where respective tax treaty provides for benefit for foreign tax paid even in respect of income on which the assessee has not paid tax in India, still, it would be eligible for tax credit under section 90. Like article 25 of the Indo-USA treaty, treaties with various other countries such as Indo-Denmark, Indo-Hungary, Indo-Norway, Indo-Oman, Indo-US, Indo-Saudi Arabia, Indo-Taiwan also have similar provision providing for benefit of foreign tax credit even in respect of income not subjected to tax in India. However, Indo-Canada and Indo-Finland treaties do not provide for such benefit unless the income is subjected to tax in both the countries. Therefore, foreign tax credit would be available to the assessee in all cases, except the foreign tax paid in Finland and Canada.

Decision: Partly in assessee s favour.

IN THE ITAT, MUMBAI BENCH

PAWAN SINGH, J.M. & RAJESH KUMAR, A.M.

Tata Consultancy Services Ltd. v. DCIT

IT(TP)A No. 3263/Mum/2017, IT(TP) No. 794/Mum/2018, IT(TP)A No. 3746/Mum/2016, IT(TP)A No. 1207/Mum/2018

18 August, 2020

Assessee by: Poras Kaka Sr. Advocate with Manish Kumar Kanth Advocate

Revenue by: Sanjay Singh, CIT (DR), Michal Jarald Sr. DR

Pawan Singh, J.M.

1. These four appeals by the assessee as well as revenue are directed against the order of Commissioner of Income Tax-58 [Ld. CIT(A)], Mumbai, dated 14-2-2017 and 24-11-2017 for the assessment year (A.Y.) 2008-09 & 2010-11 respectively. In both the years the parties have raised certain common grounds of appeal, thus all the appeals are clubbed, heard and are decided by consolidated order. For appreciations’ of facts, with the consent of parties the appeals for assessment year 2010-11 are treated as lead case. The assessee in its appeal in ITA No. 794/Mum/2018, has raised the following grounds of appeal :–

I. Disallowance of Taxes paid overseas to the local/state provincial authorities (“State Taxes”) – Rs. 21,73,23,854

1.1 On facts and in circumstances of the case and in law, the ld. CIT(A) (hereinafter referred to as “the learned Commissioner (Appeals)”) erred in disallowing deduction of Rs. 21,73,23,854 being “State Taxes” paid overseas on the ground that the payment of “State Taxes” cannot be allowed under the provisions of section 40(a)(ii) of the Income Tax Act, 1961 (“the Act”)

1.2 Without prejudice to the above, the learned Commissioner (Appeals) erred in law in not adjudicating that the “State Taxes” paid in the USA, as eligible for the double taxation relief under the provisions of section 90 or 91 of the Act if it is held that the payment of State Taxes is not allowable as deduction.

2. Advertisement expenditure

2.1 On facts and in circumstances of the case and in law, the learned Commissioner (Appeals) erred in treating the advertisement expenditure incurred by the Appellant in respect of experience certainly campaign amounting to Rs. 1,36,46,187 crore as an intangible asset instead of treating it as revenue expenditure.

3. Foreign tax credit (Double Tax Relief) as per the provisions of section 90(1)(a)(ii) of the Act

3.1 On facts and in circumstances of the case and in law, the learned Commissioner (Appeals) erred in not considering the additional ground for allowing foreign tax credit (Double Tax Relief) as per the provisions of section 90(1)(a)(ii) of the Act read with provisions of the applicable Double Tax Avoidance Agreements, for income taxes paid in overseas jurisdictions in relation to income eligible for section 10A/10AA deduction in India.

Grounds related to Transfer Pricing:

4. Transfer pricing adjustments/additions/variations.

4.1 The assessment of income made by the learned assessing officer (‘the ld. A.O.’) in relation to the transfer pricing adjustments/additions/variations based on the transfer pricing order is bad in law and illegal as the transfer pricing order is passed by the Additional Commissioner of Income Tax, without the authority of law as prescribed by the provisions of section 92CA of the Act.

4.2 The learned Commissioner (Appeals) erred in law, on facts and in circumstances of the case in not deleting the transfer pricing adjustments/additions/variations made by the learned assessing officer as being bad in law, illegal and unsustainable on the basis of the following grounds, taken singly or cumulatively.

4.2.1 (a) The learned assessing officer has failed to comply with the mandatory conditions stipulated in section 92C(3) of the Act and has failed to record his satisfaction before making the reference to the Transfer Pricing Officer (‘TPO’).

(b) The learned TPO failed to prove that any of the conditions laid down in section 92C(3) of the Act had been satisfied which made out a case for tax evasion.

4.2.2 The learned assessing officer/TPO failed to arrive at a finding that the intention of the Appellant was to evade tax and shift profits outside of India which is a condition precedent for making the Transfer Pricing Adjustment.

4.2.3 On facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred in not holding the proceedings initiated by the learned TPO as void ab initio since the learned assessing officer erred in making the reference to the learned TPO without proper application of mind to the facts on records, without recording reasons for any necessity or expediency and without a legal and valid approval of the learned CIT and hence the same being not in accordance with the provisions of section 92CA(1) of the Act.

4.2.4 The transfer pricing adjustments are contrary to the principles laid down by the Hon’ble Mumbai Tribunal in the Appellant’s own case for the assessment year 2005-06 (DCIT v. Tata Consultancy Services Limited) and therefore are required to be quashed and deleted. Further, on facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred in not following the principles so laid down and concluding that the above Mumbai Tribunal decision is inconclusive

5. Provision of software consultancy services

5.1 Re-characterization of international transaction

The learned Commissioner (Appeals) erred in law and on facts of the case in not accepting the Appellant as the tested party even though the international transaction during the year under reference was provision of services by the Appellant to its AEs.

5.2 Disregarding the legally binding agreements between the Appellant and its AEs

The learned Commissioner (Appeals) erred in law and on facts, in disregarding the contractual terms of the legally binding agreement/s between the Appellant and the AE(s).

5.3 Rejection of the functional and economic analysis carried out by the Appellant

The learned Commissioner (Appeals) erred in law and on facts, in rejecting the functional and economic analysis carried out by the Appellant and in considering the AEs as the least complex entity.

5.4 Disregarding the benchmarking analysis

The learned Commissioner (Appeals) erred in law and on facts, in disregarding benchmarking analysis undertaken by the Appellant in Transfer Pricing Documentation report.

5.5 Erroneous selection of transfer pricing method and Profit Level Indicator (PLI)

Without prejudice, the learned Commissioner (Appeals) erred in law and on facts in not selecting the PLI as OP/Sales even if the AEs are treated as tested parties.

5.6 Selection of the comparable companies

Without prejudice to the above, the learned Commissioner (Appeals) erred in law and on facts of the case in not accepting the appellant’s fresh bench making considering the AEs as a tested party and gross profit/sales as a the appropriate PLI.

6. Provision of loans to AEs

6.1 The learned Commissioner (Appeals) erred in law and facts of the case in disregarding the fact that the loans given by the Appellant are in substance “quasi-equity” in nature, and as a part of shareholder’s activity on which returns are not expected in the form of interest.

6.2 The learned Commissioner (Appeals) erred in law and on facts in holding that the interest charged on loans outstanding/provided during the year by the Appellant to its AEs are not at arm’s length.

7. Provision of guarantees

7.1 The learned Commissioner (Appeals) erred in law and on facts, in holding that the provision of various guarantees by the Appellant to third parties on behalf of its AEs were international transactions and in making an upward adjustment in this regard.

7.2 The learned Commissioner (Appeals) erred in law and on facts, in not appreciating the fact that provision of guarantee is a shareholder activity and no income is expected to be generated from the same.

7.3 Without prejudice to the above, the learned Commissioner (Appeals) has erred in law and on facts in disregarding the Appellant’s content ion that the guarantee fee should be charged based on the effective rate of insurance premium paid by the Appellant as a percentage of group revenue.

7.4 Without prejudice to the above, the learned Commissioner (Appeals) erred in law and on facts in not considering guarantee fees to be charged on actual rent, for which the lease guarantee was provided.

8. The Appellant submits that each ground of appeal is without prejudice to one another.

9. The Appellant craves leave to add, alter, amend, substitute and/or modify in any manner whatsoever all or any of the foregoing grounds of appeal at or before the hearing of the appeal.

2. Assessee vide its application dated 10-1-2020 has raised following additional grounds of appeal —

“On facts and circumstances of the case and in law, the education cess paid by the appellant during assessment year 2011-12 being not covered by definition of tax under section 40(a)(ii) of the Income Tax Act shall be allowed as a deduction from its income.”

3. The revenue in its appeal in ITA No. 1207/Mum/2018 has raised following grounds of appeal :–

1. On the facts and in the circumstances of the case and in law, learned Commissioner (Appeals) erred in allowing software expenses amounting to Rs. 88,64,96,865 under section 40(a)(i) of the Act, on account of non-deduction of TDS under section 195 of the Act.

2. On the facts and in the circumstances of the case and in law, learned Commissioner (Appeals) erred in allowing the disallowance made by the assessing officer under section 14A of the Act without appreciating the fact that Rule 8D(2)(iii) of the Income Tax Rules clearly demands the inclusion of an amount equal to 0.5% of the average investments made towards earning exempt income while calculating aggregate disallowance under section 14A read with rule 8D of the Act.

3. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in observing that the reasons recorded as meager by the assessing officer are not sufficient to invoke section 14A of the Act when the assessee itself disallowed only expenditure directly relating to income which does not form part of total income.

4. On the fact and in the circumstances of the case, the learned Commissioner (Appeals) erred in treating expenditure incurred for brand building as revenue expenditure disregarding the fact that the same will have long-term benefit to the assessee.

5. On the fact and circumstances of the case and in law, the learned Commissioner (Appeals) erred in holding that the commission paid overseas for getting business outside India of STS/SEZ units of assessee is not liable to tax in India and hence assessee is not liable to deduct tax under section 40(a)(ia) of the Act.

6. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred in not appreciating the fact that the assessee had claimed that the entire revenue was emanating from its STPs/SEZ units in India.

7. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) erred in not upholding the order of the assessing officer on the method of computation of deduction under section 10A of the Income Tax Act.

8. On the facts and circumstances of the case in law, the learned Commissioner (Appeals) erred in not appreciating the fact that 21% of the expenses incurred in foreign currency on account of software development expenditure incurred abroad is in the nature of providing technical services and hence it was rightly reduced from export turnover computed under section 10A.

9. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) is right in deciding the grounds raised by the assessee following the decision given in assessment year 2009-10 without deciding the issue on merit in the year under consideration.

10. On the facts and circumstances of the case and in law, the learned CIT is rightly in following the decision of assessment year 2009-10 wherein it was held that the payments made to TCS are not to be treated as pass through costs and thereby, holding OP/OC to the appropriate PLI instead of OP/VAE as determined by TPO.

11. On the facts and in circumstance of the case and in law, the learned Commissioner (Appeals) has erred in following the decision of assessment year 2009-10 wherein it was held to work out margin (OP/OC) of AE including cost incurred on (offshore) transaction assigned to TCS as against the decision of the TPO of adding margin only on cost incurred by the AE (excluding cost incurred by TCS) though it was held by Commissioner (Appeals) himself in para 19.5 of order for assessment year 2009-10 that AE’s are engaged in marketing and distribution liable to be compensated for limited function.

12. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) has erred in following the decision of assessment year 2009-10 and in rejecting comparables on the ground that third party cost is not excluded in comparables cases.

13. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) has erred in following the decision of assessment year 2009-10 and in directing to charge guarantee commission on amount excluding approximately 58% of the revenue from offshore activities carried out by TCS though it was integral part of total contract amount of AE.

14. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) has erred in following the decision of assessment year 2009-10 and in directing to charge guarantee commission @ 1.14% on lease guarantee in place of 3% charged by TPO on performance guarantee.

15. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) has erred in following the decision of assessment year 2009-10 and in directing to charge guarantee commission @ 1.14% on lease guarantee in place of 3% charged by TPO.

16. On the facts and circumstances of the case and in law, the learned Commissioner (Appeals) has erred in following the decision of assessment year 2009-10 and in directing to charge guarantee commission @0.77% on financial guarantee in place of 3% charged by TPO.

17. On the facts and in circumstances of the case and in law, the learned Commissioner (Appeals) has erred in directing to delete adjustment made on account of interest free loans to AE being excessive valuation paid for shares of AE.

18. The appellant prays that the order of the learned Commissioner (Appeals) on the above ground be set aside and that of the assessing officer restored.

19. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.

4. Brief facts of the case are that the assessee is a company engaged in the business of computer software and management consultancy services. The assessee has a number of overseas branches across the world being its Associated Enterprises (AE’s). The assessee for the year under consideration filed its return of income declaring income of Rs. 1483.18 Crore on 24-9-2019. The assessee declared book profit under section 115JB of Rs. 4473.00 Crore. The assessee filed revised return of income on 16-2-2012 declaring same book profit under section 115JB. In the revised return, the TDS claim was enhanced from Rs. 146.84 Crore to Rs. 161.84 Crore. Along with the return of income, the assessee reported various international transactions with its AEs for more than Rs. 15 Crore and also furnished its Transfer Pricing Study Report in Form-3CEB. The assessing officer after taking necessary approval made reference to the Transfer Pricing Officer (TPO) for computation of Arm’s Length Price (ALP). The TPO after considering the material place before him and considering the submissions of the assessee suggested the adjustment on account of provision of Software, technical & consultancy services of Rs. 113,27,000,00, Interest chargeable from AE of Rs. 41,04,81,573, Corporate guarantee of Rs. 38,47,16,761 and Interest on over valuation of equity shares of subsidiaries of Rs. 1,71,08,999, thereby suggested adjustment of Rs. 1213.93 Crore in its report dated 27-1-2014. The assessing officer on receipt of report of TPO passed the draft assessment order under section 143(3) read with section 144C(3). The assessing officer while passing the draft assessment order also made various addition/disallowance on corporate tax issues. The copy of draft assessment order was served upon the assessee. The assessee instead of filing objection before the Dispute Resolution Panel (DRP), exercised its option for filing appeal before the learned Commissioner (Appeals). The learned Commissioner (Appeals) after considering the facts and the submission placed by assessee passed the impugned Order, dated 24-11-2017 granting partial relief to the assessee. Thereby, aggrieved further the assessee has filed its appeal, similarly the revenue has also filed its cross appeal by raising various grounds of appeal, which we have recorded above.

5. The assessee vide its application dated 10-1-2020 also raised additional ground of appeal which, we have also referred above. In the application for raising additional grounds of appeal, the assessee has stated that the grounds of appeal raised by assessee is purely legal issue and do not require production/appraisal of fresh/details facts. The additional ground has inadvertently not been raised before the Tribunal at the time of filing of appeal. The assessee has raised additional ground in the light of decision of Hon’ble Rajasthan High Court in case of Chambal Fertilizers and Chemicals Ltd. v. JCIT in ITA No. 52/2018 : 2018 TaxPub(DT) 5619 (Raj-HC) and the decision of Delhi Tribunal in Tata Steel v. ACIT in ITA No. 5616/Mum/2012 : 2019 TaxPub(DT) 8357 (Mum-Trib). The assessee further stated that failure to raise this ground was neither deliberate nor intentional. And in view of the decision of Hon’ble Supreme Court in NTPC Ltd. (1998) 229 ITR 383 (SC) : 1998 TaxPub(DT) 0342 (SC), the additional ground of appeal may be admitted and adjudicated on merit. The learned A.R. of the assessee made his submission on similar lines. The learned A.R. of the assessee also relied upon the decision of Hon’ble Bombay High Court in Sesa Goa v. JCIT (2020) 117 taxman.com 96 (Bom) : 2020 TaxPub(DT) 1546 (Bom-HC).

6. On the other hand, the learned D.R. for the revenue strongly objected for admission of additional ground of appeal. The learned D.R. for the revenue further submits that “Education Cess” is not expenditure incurred wholly and exclusively for the purpose of business and hence not allowable. The assessee has not claimed the deduction of education cess in its the return of income. It was neither subject matter of assessment order nor it was raised before the assessing officer or learned Commissioner (Appeals). Hence, this ground of appeal should not be admitted. On merit of the claim, the learned D.R. for the revenue submits that Education Cess is not allowable under section 40(a)(ii) or under section 37(1) as it is not incurred for the purpose of business. It is well settled principle in the Indian context that Income Tax on Education Cess is not allowable as expenditure/deduction from taxable profit/income. The learned D.R. for the revenue referred the provision of section 40(a)(ii) of Income Tax Act and would submit that section 40(a)(ii) mentions of “any rate or tax levied” as not allowable expenses.

7. The learned D.R. further submits that in case of Indian Iron & Steel Company Ltd. v. CIT (1968) 68 ITR 561 (Cal) : 1968 TaxPub(DT) 0161 (Cal-HC), which applied by the Hon’ble Supreme Court in case of Tata Iron & Steel Company Ltd. v. State of Bihar (1963) 48 ITR 123 (SC) : 1963 TaxPub(DT) 0320 (SC), and held that in a Mining business, profit accrued even at the stage of mining and so a cess levied on the basis of profit of mine would not be deductable even though the assessee may not be selling the Ore in the State. The learned D.R. further submits that the Hon’ble Rajasthan High Court in case of Chambal Fertilizers (supra) has not considered the decision of Hon’ble Supreme Court in case of Simith Kline & French India Ltd. (1996) 85 Taxman 683 (SC) : 1996 TaxPub(DT) 1075 (SC) in context of disallowance of surtax under section 40(a)(ii) of the Act. The Hon’ble Supreme Court held that surtax was not allowable under section 40(a)(ii). The learned D.R. submits that Hon’ble Supreme Court also affirmed the decision of Hon’ble Bombay High Court in Lubrizol India Ltd. (1991) 54 Taxman 363 (Bom) : 1991 TaxPub(DT) 0312 (Bom-HC). The learned D.R. further submits that Bombay High Court has not considered the decision of Supreme Court in Smith Kline and French (supra) and thus, the decision of Bombay High Court in Sesa Goa Ltd. in per incuriam to that extent.

8. In the rejoinder submission, the learned A.R. of the assessee submits that this issue about the deduction of education cess is no more res integra as has been settled by Hon’ble jurisdictional High Court in case of Sesa Goa (supra). The decision of Hon’ble jurisdictional High Court is binding on Court subordinate as held by Bombay High Court in CIT v. Lata Mangeshkar Medical Foundation, Notice of Motion Nos. 1779, 1783 of 2017 : 2018 TaxPub(DT) 1232 (Bom-HC). The Hon’ble Bombay High Court also held that it is not open for lower Court, disregard the decision of higher Court. While explaining the claim of deduction of cess, the learned A.R. of the assessee, as an example referred the provision of Chapter-II (rate of taxes) of Finance Act, 2020 and submits that for the assessment year commencing from 1-4-2020, the income tax shall be charged at the rate specified in Part-I of First Schedule and such tax shall be increased by surcharge for the purpose of Union, calculated in each case in the manner provided therein. Education Cess is not included either as a rate or surcharge in Part-I. The legislature has consciously used the word “cess” while introduced Education Cess. Under the First Schedule as mentioned, the Act applies to total income; the word “cess” does not come in proviso to sub-section (2). It comes in sub-section (11) & (12) and to be calculated @ 4% of Income Tax and surcharge. This is levied on total income and not on profit and gains of business. A person would be liable to pay cess even if the person only earns income in the form of dividend and has no income from Profit & Gains from Business. The learned A.R. of the assessee submits that the decision relied by D.R. is not applicable on the issue. The Rajasthan High Court in Chambal Fertilizers (supra) specifically dealt with this issue. The Hon’ble Rajasthan High Court in para-4 of the judgment also referred the CBDT Circular acknowledging omission of word “cess” from section 40(a)(ii) by the Select Committee from the Finance Bill of 1961. The decision of Hon’ble Supreme Court in Simith Kline & French (India) Ltd. (supra) has also been specifically considered by Hon’ble Rajasthan High Court. And after the decision of Hon’ble Bombay High Court in Sesa Goa Ltd., the issue is no longer res integra for the authority and this Tribunal under the territorial jurisdiction of Bombay High Court.

9. We have considered the submission of both the parties and have gone through the orders of authorities below. We have also gone through the various decisions cited by learned Representative of the parties. We have seen that Hon’ble Bombay High Court in Sesa Goa Ltd. (supra) after following the decision of Hon’ble Rajasthan High Court in Chambal Fertilizers (supra) held that Education Cess is allowable deduction. We instead of going further in various submissions of the parties are of the view that after the binding decision of jurisdictional high Court in Sesa Goa Ltd. (supra), the issue of deduction of education cess in no more res integra. Therefore, considering the binding decision of Hon’ble jurisdictional High Court and the fact that no new facts are necessary to be brought on record for considering the additional ground of appeal on merit. Thus, the additional ground of appeal is admitted.

10. Further considering the fact that the assessee has raised additional ground of appeal for the first time before this Tribunal, therefore, this issue is restored back to the file of assessing officer to consider it on merit in accordance with the decision of Hon’ble Bombay High Court in Sesa Goa Ltd. (supra) and allow appropriate relief/deduction with regard to Education Cess to the assessee in accordance with law. We are also in agreement with the submissions of the learned A.R. for the assessee that the income tax is chargeable at the rate specified in Part-I of First Schedule and such tax shall be increased by surcharge for the purpose of Union, calculated in each case in the manner provided therein. Education Cess is not included either as a rate or surcharge in Part-I. The objections raised by learned D.R. for the revenue that the decision of Bombay High Court is per incurium, is not tenable as the decision of Hon’ble Supreme Court in Smith Kline & French (India) Ltd. (supra) has also been specifically considered by Hon’ble Rajasthan High Court in Chambal Fertilizer (supra). In the result, this ground of appeal is allowed for statistical purpose.

11. Now turning the various grounds of appeal raised by the assessee in its appeal and by revenue in its cross appeal. At the outset the learned A.R. for the assessee submits that all the grounds of the appeal raised by the assessee as well as by revenue are covered by the decision of Tribunal in assessee’s case and by the decisions of superior Courts. The learned D.R. for the revenue submits that he has already furnished the detailed written submissions on all the issues and he also rely on the orders of the TPO/AO or the learned Commissioner (Appeals) as the case may be.

12. Ground No. 1 of assessee’s appeal relates to state taxes paid in overseas countries. The learned A.R. of the assessee submits that as per section 40(a)(ii) read with section (r.w.s.) 2(43) of the Act, the deduction is prohibited only for those taxes/credit is allowed under section 90/91 of the Act. Accordingly, provision of section 40(a)(ii) are not applicable to the “State Tax”. The learned A.R. of the assessee further submits that this issue is covered in favour of assessee in assessee’s own case for assessment year 2009-10 in ITA No. 5317/Mum/2016.

13. On the other hand, the learned D.R. for the revenue supported the order of lower authorities.

14. We have considered the submission of both the parties and perused the order of lower authority and the decision of Tribunal in earlier years. We have noted that on identical grounds of appeal, the co-ordinate bench of Tribunal in assessee’s own case for assessment year 2009-10 passed the following order :–

6. We have considered the rival submissions and perused the material on record. From the stage of the assessment proceeding itself, it is the claim of the assessee that the term “tax”, as defined under section 2(43) of the Act would only include taxes chargeable under the Indian Income Tax Act. It is the further case of the assessee that since in respect of the State taxes paid overseas, the assessee is not eligible to claim relief under section 90 or 91 of the Act, it will not be covered under section 40(a)(ii) of the Act. On a perusal of provisions of sub-section (43) of section 2 of the Act, it becomes clear that the term “tax” has been defined to mean any tax paid under the provisions of the Act. Section 40(a)(ii) of the Act says that any rate or taxes levied on the profits or gain in any business or profession would not be allowable as deduction. Explanation-1 to section 40(a)(ii) of the Act inserted by the Finance Act, 2006, with effect from 1-4-2006, further clarifies that any sum eligible for relief of tax either under section 90 or 91 of the Act would not be allowable as deduction under section 40(a)(ii) of the Act. It is the say of the assessee that the tax eligible for relief under section 90 of the Act are only those taxes which are levied by Federal/Central Government and not by any local authority of State, City or County. Thus, it is ineligible for any relief under section 90 of the Act. The aforesaid submissions of leaned Sr. Counsel for the assessee, prima facie, is acceptable if one has to strictly go by the meaning of “tax”, defined under section 2(43) of the Act, as it only refers to tax paid under the provisions of the Act. It is also worth mentioning, the State taxes paid by the assessee in DTAA countries are not eligible for relief under section 90 of the Act. Therefore, the issue which arises is, whether it can be allowed as deduction under section 37 of the Act. No doubt, in assessee’s own case in assessment year 2005-06, the Tribunal in the order referred to above following its own decision in DCIT v. Tata Sons Ltd., (2011) 43 SOT 27 (Mum.) : 2011 TaxPub(DT) 0654 (Mum-Trib), has held that the State taxes paid overseas cannot be allowed as deduction in view of the provisions of section 40(a)(ii) of the Act. However, the aforesaid legal position has substantially changed after the decision of the Hon’ble Jurisdictional High Court in Reliance Infrastructure Ltd. (supra). While interpreting the provisions of section 2(43) of the Act, vis-a-vis section 40(a)(ii) of the Act, the Hon’ble Court held that the tax which has been paid abroad would not be covered within the meaning of section 40(a)(ii) of the Act, since, the meaning of the word “tax” as defined under section 2(43) of the Act would mean only the tax chargeable under the Act. Thus, as per the aforesaid decision of the Hon’ble Jurisdictional High Court, taxes levied overseas which are not eligible for relief either under section 90 or 91 of the Act, would not come within the purview of section 40(a)(ii) of the Act. It is the specific plea of the assessee that the State tax is not covered either under Indo-US or Indo-Canada tax treaty, hence, not eligible for any relief under section 90 of the Act.

Pertinently, unlike section 91 read with Explanation-(iv), section 90 does not provide for inclusion of tax levied by any State/local authority of that country within the expression ‘income tax’. In view of the aforesaid, we direct the assessing officer to verify whether the State taxes paid by the assessee overseas are eligible for any relief under section 90 of the Act and if it is not found to be so, assessee’s claim of deduction should be allowed. In view of our decision above, no separate adjudication of grounds no. 1.2 is required.

15. Considering the decision of Tribunal in appeal for assessment year 2009-10 on identical grounds of appeal, wherein neither variations in facts nor any contrary law is brought to our notice, hence, this ground of appeal is allowed similar directions.

16. Ground No. 2 of assessee’s appeal relates to Advertisement Expenses. The learned A.R. of the assessee submits that expenses incurred in respect of advertisement in newspaper/Magazine in respect Experience Certainty Campaign which is routinely incurred for the ongoing business and not in the nature of Brand Building. The learned A.R. of the assessee further submits that this issue is covered in favour of assessee in assessee’s own case for assessment year 2009-10 in ITA No. 5317/Mum/2016.

17. On the other hand, the learned D.R. for the revenue supported the order of lower authorities.

18. We have considered the submission of both the parties and perused the order of lower authority and the decision of Tribunal in earlier years. We have noted that on identical grounds of appeal, the co-ordinate bench of Tribunal in assessee’s own case for assessment year 2009-10 passed the following order :–

23. We have considered rival submissions and perused the material on record. We have also carefully examined the case laws cited before us. On a detailed analysis of facts on record, we have noted that the reasoning of the assessing officer that the expenditure was incurred for brand building is without any basis. It is to be noted, before the Departmental Authorities the assessee had demonstrated that in no way it is connected with development of Tata brand. The details of expenditure incurred clearly demonstrate that they were basically for the purpose of advertising assessee’s products in print media or through seminar, conferences, etc. As rightly observed by learned Commissioner (Appeals), the assessing officer has brought no material on record to establish that the expenditure is for brand building. As observed earlier, the expenditure relates to advertisement in newspaper, magazine, events, seminars, conferences, exhibitions, etc. Thus, the nature of expenditure incurred by the assessee clearly indicates that it was for promoting its own business. Further, considering the turnover of the assessee, the expenditure incurred on advertisement does not appear to be unusually high. That being the case, the expenditure incurred on advertisement cannot be treated to be in the nature of capital expenditure and amortized over a period of five years. To that extent, we agree with the decision of learned Commissioner (Appeals) on the issue. However, as regards experience certainty expenditure amounting to Rs. 5.28 crore, it appears that learned Commissioner (Appeals) has held it to be of capital nature on the basis that the assessee itself admitted so. However, before us, leaned Sr. Counsel for the assessee has vehemently argued that no such admission was made by the assessee before learned Commissioner (Appeals) and under a misconception; learned Commissioner (Appeals) has come to such conclusion. The leaned Sr. Counsel submitted, the experience certainty campaign was also for the purpose of advertisement only and in this context, he has furnished before us the details of such expenditure through additional evidences.

Since, the additional evidences furnished by the assessee will have a crucial bearing in determining the nature of expenditure; we are inclined to admit the additional evidences. However, considering the fact that these evidences were not furnished before the Departmental Authorities, to afford a fair opportunity to the Department to verify the authenticity of assessee’s claim vis-a-vis the additional evidences furnished before us, we restore the issue to the assessing officer for de novo adjudication after providing reasonable opportunity of being heard to the assessee. We make it clear, our aforesaid direction is only with regard to the experience certainty expenditure of Rs. 5.28 crore. The decision of learned Commissioner (Appeals) on this issue is modified to this extent only.

19. Considering the decision of Tribunal in appeal for assessment year 2009-10 on similar grounds of appeal, wherein neither variations in facts nor any contrary law is brought to our notice, hence, this ground of appeal is allowed similar directions. In the result this ground of appeal is allowed for statistical purpose.

20. Ground No. 3 relates to foreign tax credit in respect of income pertaining to section 10A/10AA eligible units in India. The learned A.R. of the assessee submits that foreign tax credit should also be provided for taxes paid in overseas jurisdiction, in respect of section 10A/10AA eligible income in India, as per the tax credit provisions of respective DTAA. Even under MAT computation, the assessee should be allowed full credit for taxes paid overseas in respect of 10A/10AA income. The learned A.R. of the assessee further submits that this issue is covered in favour of assessee in assessee’s own case for assessment year 2009-10 in ITA No. 5317/Mum/2016. The learned D.R. for the revenue further submits that the learned D.R. in his written submissions has wrongly submitted that the judgment of Karnataka High Court in Wipro Limited (2016) 382 ITR 179 (Karn) : 2016 TaxPub(DT) 0327 (Karn-HC) is followed by the Tribunal in assessment year 2009-10, and that the decision of Wipro has been overruled by Supreme Court. The contention of the learned D.R. is factually incorrect and wrong. In para 48 of Wipro’s case Karnataka High Court considered the decision of Yokogava India Ltd. (2012) 341 ITR 385 (Karn) : 2011 TaxPub(DT) 1778 (Karn-HC). The revenue went in appeal before Supreme Court, wherein it was held that section 10A is deduction provision ((2017) 391 ITR 274 (SC) : 2016 TaxPub(DT) 5139 (SC)). Thus the submissions of the learned D.R. that the decision of Karnataka High Court is contrary to the decision of Supreme Court in Yokogava India is misplaced and wrong.

21. On the other hand, the learned D.R. for the revenue supported the order of lower authorities. The learned D.R. for the revenue in his written submissions after referring the decision of Karnataka High Court in Wipro Ltd. (supra) submitted that the decisions on which decision was rendered is stand overruled by Supreme Court.

22. We have considered the submission of both the parties and perused the order of lower authority and the decision of Tribunal in earlier years. We have noted that on identical grounds of appeal, the co-ordinate bench of Tribunal in assessee’s own case for assessment year 2009-10 passed the following order :–

31. We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. As could be seen, while the assessing officer has disallowed assessee’s claim of foreign tax credit in respect of income exempt under section 10A/10AA of the Act on the reasoning that only such income which is subjected to tax in both the countries would qualify for tax credit, learned Commissioner (Appeals) has restricted the relief of foreign tax credit only in respect of tax paid in USA even in respect of income which is exempt under section 10A/10AA of the Act. The learned Commissioner (Appeals) has come to such conclusion by following the decision of the Hon’ble Karnataka High Court in Wipro Ltd. (supra). The reasoning of the learned Commissioner (Appeals) on the issue is, as per the decision of Hon’ble Karnataka High Court in Wipro Ltd. (supra), the foreign tax credit benefit under section 90(1)(a)(ii) of the Act would only be applicable under Indo-US DTAA and would not be applicable to other DTAA countries and non-DTAA countries. On a careful reading of the decision of the Hon’ble Karnataka High Court in Wipro Ltd. (supra), it is noted, while dealing with identical issue the Hon’ble Court held that in the cases covered under section 90(1)(a)(ii) of the Act, it is not the case of income being subjected to tax or the assessee has paid tax on the income.

The provision applies to a case where the income of the assessee is eligible to tax under the Act as well as in the corresponding law in force in the other country. The Court observed, though, income tax is chargeable under the Act, it is open to the Parliament to grant exemption under the Act from payment of tax for any specified period, normally, to incentivize the assessee the to carry on manufacturing activities or providing services. The Court thereafter referring to the treaty provisions with USA held that it is not the requirement of law that the assessee before he claims credit under the Indo-US convention or under the provision of the Act must pay tax in India on such income. The Court observed, as per the embargo placed in the DTAA, the assessee is entitled to such tax credit only in respect of that income which is taxed in USA. In similar context, the Court also referred to the tax treaty with Canada where the provisions does not allow credit for tax paid in Canada if the income is not subjected to tax in India. With regard to country’s with which India does not have any agreement for avoidance of double taxation, the Court observed that as per section 91 of the Act, the assessee would be eligible to avail tax credit. Thus, on a careful reading of the aforesaid judgment of the Hon’ble Karnataka High Court, it becomes clear that where the respective tax treaty provides for benefit for foreign tax paid even in respect of income on which the assessee has not paid tax in India, still, it would be eligible for tax credit under section 90 of the Act. Like Article 25 of the Indo-USA treaty, treaties with various other countries such as Indo-Denmark, Indo-Hungary, Indo-Norway, Indo-Oman, Indo-US, Indo-Saudi Arabia, Indo-Taiwan also have similar provision providing for benefit of foreign tax credit even in respect of income not subjected to tax in India. However, Indo- Canada and Indo-Finland treaties do not provide for such benefit unless the income is subjected to tax in both the countries. Therefore, the foreign tax credit would be available to the assessee in all cases except the foreign tax paid in Finland and Canada. The assessing officer is directed to grant credit accordingly.

23. Considering the decision of Tribunal in appeal for assessment year 2009-10 on identical grounds of appeal, wherein neither variations in facts nor any contrary law is brought to our notice, hence, respectfully following the order of the coordinate bench, this ground of appeal is allowed similar directions.

24. Next issue, i.e., Ground No. 1 in revenue’s appeal relates to disallowance of payments of software from non-residents venders under section 40(a)(i). The learned A.R. for the assessee submits that similar grounds of appeal in assessment year 2005-06 were decided by Tribunal in favour of assessee and again in assessment year 2009-10. The learned D.R. for the revenue in its submissions have submitted that the revenue has filed appeal before Bombay High Court for assessment year 2005-06, which is still pending decision. The learned A.R. for the assessee submitted that at this point this ground of appeal is covered in favour of the assessee and against the revenue.

25. On the contrary the learned D.R. for the revenue submitted that though similar grounds of appeal was decided by Tribunal in assessment year 2005-06, which was followed in assessment year 2009-10. The learned D.R. further submits that Explanation 4 to section 9(1)(vi) is only clarificatory in nature and the definition of the term Royalty emanates from Explanation-2 of section 9(1)(vi).

26. We have considered the rival submissions of the parties and have gone through the orders of the lower authorities and the order of the Tribunal in earlier years. We have noted that learned Commissioner (Appeals) while granting relief to the assessee followed the order of assessment year 2005-06 in ITA No. 7513/Mum/2010, dated 23-3-2017 (including order in MA order in Order, dated 23-3-2017). We have further seen that again in appeal for assessment year 2009-10 in ITA No. 5713/Mum/2016 : 2019 TaxPub(DT) 7620 (Mum-Trib), the Tribunal on similar issues after detailed discussions passed the following order :–

“15. We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. Undisputedly, in the year under consideration, the assessee has claimed deduction on account of expenditure incurred towards purchase of software products acquired for internal use. The expenditure relating to that has been treated as capital in nature and depreciation has been allowed by the Departmental Authorities. Insofar as software products acquired for re-sale/trading purpose, the assessee’s claim of deduction in respect of expenditure incurred thereon as revenue in nature has been disallowed on the ground that the payment made being in the nature of royalty, the assessee was required to deduct tax at source under section 195 of the Act.

Insofar as the expenditure incurred on the software products acquired in internal use, we, on a perusal of the facts on record are of the view that by incurring such expenditure, the assessee has acquired assets of enduring benefit. Therefore, the expenditure incurred is capital in nature and the assessee would be entitled for depreciation on the cost of such assets. The Tribunal while deciding identical issue in assessee’s own case for the assessment year 2005-06 in ITA No. 7513/Mum./2010, dated 4-11-2015 : 2015 TaxPub(DT) 5395 (Mum-Trib), the Tribunal has expressed similar view.

Thus, following the aforesaid view of the Tribunal in assessee’s own case, we uphold the decision of learned Commissioner (Appeals) on the issue. Insofar as the disallowance of expenditure incurred on acquiring software products for re-sale/trading purpose, it is noted that the assessing officer has not at all deliberated on the factual aspect of the issue. Simply relying upon certain judicial precedents and the statutory provisions, he has concluded that the payment made by the assessee for acquiring these software is in the nature of royalty as per section 9(1)(vi) of the Act, hence, assessee is liable to deduct tax at source under section 195(2) of the Act. Whereas, learned Commissioner (Appeals) has improved upon the reasoning of the assessing officer by observing that the software acquired by the assessee for trading purpose were not sold as it is by the assessee but have been utilized in programs developed by it for its clients. He has observed that the products developed by the assessee using software acquired were then sold to clients with rights and license. Thus, according to the learned Commissioner (Appeals), it is not a case of mere purchase and subsequent sale of software as a re-seller/trader. He observed, assessee’s software package will not be complete without the software acquired for trading purpose. In other words, the software acquired by the assessee is a necessary ingredient of the package being developed and supplied to the client and the assessee is prohibited by agreement to sell the software independently and they can only be supplied as a part of the package. As per section 9(1)(vi) of the Act, income in the nature of royalty shall be deemed to accrue or arise in India even in respect of a non-resident where the royalty is payable in respect of any right, property or information used or services utilized for the purpose of a business or profession carried on by a person in India or for the purpose of making or earning any income from any source in India. Pertinently, the expression “royalty” as per section 9(1)(vi) of the Act in its initial form did not specifically define computer software. By virtue of Explanation-3 to section 9(1)(vi) of the Act inserted by Finance Act with effect from 1-4-2010, computer software was defined to mean any computer program recorded on any disc, tape, perforated media or other information storage device and includes any such program or any customized electronic data. The scope of the term “royalty” was further explained by Explanation-4 to section 9(1)(vi) of the Act inserted by Finance Act, 2012, with retrospective effect from 1-6-1976, wherein, it was clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software including granting of a license irrespective of the medium through which such right is transferred. It is the contention of the assessee that the software acquired by the assessee for the purpose of trading is a copyrighted article and the assessee has sold it to the customers as it is. It has been submitted that while re-selling/trading the software products, there is neither any transfer of right in copyright in favour of the assessee nor the assessee has transferred any right in the copyright. However, the learned Commissioner (Appeals) has recorded a categorical finding that the software products acquired by the assessee cannot be sold independently and can be sold by utilising in the package developed by it. In the aforesaid factual context, it requires examination whether the software products acquired by the assessee for trading purpose was sold as a chattel qua chattel or the assessee has made some value addition to it or has transferred the copyright relating to the software product along with the software product. No doubt, in assessee’s own case for assessment year 2005-06, the Tribunal in ITA No. 7513/Mum./2010, dated 23-3-2017 (after recall of the original appeal order) while dealing with similar issue has held that the payment made by the assessee towards acquiring the software products is not royalty as the assessee has sold a copyrighted article and has not transferred any license or copyright. However, in the facts of the present case, in our considered opinion, further enquiry is required to be made by the assessing officer to factually verify the nature of transaction relating to acquisition of software product for trading purpose to find out whether it is sale of copyrighted article simpliciter or sale of copyright. In case, the payment made by the assessee is found to be royalty in view of Explanation-4 to section 9(1)(vi) of the Act, the contention of the assessee that it could not have withheld tax anticipating the change in law brought with retrospective effect, has to be considered keeping in view the decision of the Hon’ble Jurisdictional High Court in NGC Network India Pvt. Ltd. (supra). Further, assessee’s contention that Explanatino-4 to section 9(1)(vi) of the Act cannot be brought into play while applying section 40(a)(i) of the Act as it only refers to Explanation-2 to section 9(1)(vi) of the Act for the definition of royalty also has to be examined keeping in view the ratio laid down in NGC Networks India Pvt. Ltd. (supra). In case, the payment made by the assessee does not fit into the definition of royalty as provided under the relevant tax treaty, the assessee certainly would get the benefit of the tax treaty and in that event the liability under section 195 of the Act cannot be fastened on the assessee. Since, all these issues have not been properly examined and deliberated upon by the Departmental Authorities; we are inclined to restore the issue to the assessing officer for fresh adjudication in terms with our observations hereinabove. The assessing officer must decide the issue after providing reasonable opportunity of being heard to the assessee.”

27. Considering the decision of Tribunal in appeal for assessment year 2009-10, this ground of appeal is restored to the file of assessing officer to decide the same by following the direction of the Tribunal as mentioned above. In the result this ground of appeal raised by the revenue is allowed for statistical purpose.

28. Ground No. 2 & 3 in revenues appeal relates to disallowance under section 14A. The learned D.R. for the revenue submits that the assessee has earned dividend income of Rs. 15,99,27,954, which is claimed exempted under section 10(34). No suo moto disallowances was offered by the assessee.

During the assessment the assessee submitted a computation of Rs. 53,18,829 incurred for earning such exempt income. The assessing officer was not satisfied with the working of the assessee and worked out the disallowances as per Rule 8D. The assessing officer computed disallowance @.5% of average value of investment as well as interest expenses attributable to such exempt income. The assessing officer made total disallowances of Rs. 13,59,59,116 in additions to suo moto disallowance offered by the assessee. The learned D.R. further submits that the revenue is not aggrieved by the deletion of interest expenses as the assessee before learned Commissioner (Appeals) claimed that its own funds are in far excess to the investment. The learned D.R. submits that 0.5% of average value of investment is as per law.

29. On the other hand the learned A.R. for the assessee supported the order of the learned Commissioner (Appeals). The learned A.R. for the assessee submits that, since, the revenue is not aggrieved by the deletion of interest expenses as submitted by the learned D.R. in his written synopsis, now the limited issue remained for adjudication of the amount of disallowance of 0.5% of average value of investment. The assessing officer has not made satisfaction regarding incorrectness of the assessee calculation of expenses incurred by the assessee. The onus is on the revenue to show that the claim made by the assessee is incorrect and there exist a direct nexus between the expenses and the exempt income earned by the assessee. In support of his submissions the learned A.R. for the assessee relied on the decision in Maxopp Investment Ltd. (2018) 402 ITR 640 (SC) : 2018 TaxPub(DT) 1403 (SC), Godrej & Boyce Mfg Co. Ltd. (2010) 328 ITR 81 (Bom) : 2010 TaxPub(DT) 2182 (Bom-HC), HDFC Bank Ltd. (2016) 383 ITR 529 (Bom) : 2016 TaxPub(DT) 1316 (Bom-HC).

30. We have considered the rival submissions of the parties and have gone through the orders of the lower authorities. The assessing officer after invoking the provisions of Rule 8D made disallowance of Rs. 14,12,77,945, which consist disallowance under Rule 8D(2)(i) of Rs. 53,18,829 (suo moto offered by assessee), under Rule 8D(2)(ii) of Rs. 14,391 and Rule 8D(2)(iii) of Rs. 13,59,44,725. We have noted that the assessee furnished the working of suo moto disallowance of Rs. 53,18,829, which consist of Rs. 35,92,649 (salary of the employee who is looking after investment functions) and Rs. 17,26,180 (overhead expenses other than his salary). The assessing officer has not examined the correctness of the claim of the assessee.

No reason as to why the assessing officer is not satisfied with the working of the assessee except recording that the expenses are very meager. The learned Commissioner (Appeals) after considering the submissions and the material placed before him directed to delete the disallowance including the disallowance of Rule 8D(iii). The learned D.R. for the revenue failed to bring any material in our notice to take the other view, no contrary decision is also brought to our notice. Thus, we affirm the order of learned Commissioner (Appeals). In the result this ground of appeal is dismissed.

31. Ground No. 4 in revenues appeal relates advertisement expenses. The learned D.R. for the revenue supported the order of the assessing officer. The learned D.R. further submits that the assessee incurred advertisement expenses of Rs. 32,52,13,873. Out of total Rs. 32,52,13,873 and amount of Rs. 26,68,29,174 was treated as expenditure of enduring in nature by assessing officer and treated it capital in nature and allowed depreciation. The learned Commissioner (Appeals) allowed relief by following earlier year order without verifying the facts of the year under consideration.

32. On the contrary the learned A.R. for the assessee submits that expenditure were incurred in respect of advertisement in news paper/magazine for marketing of its product and is routinely incurred for its business and not in brand building. No enduring benefit is occurred by such expenses, which is revenue in nature.

33. We have considered the submissions of both the parties. We have already while discussing the cross appeal of assessee on similar ground of appeal and upheld the order of learned Commissioner (Appeals), therefore this ground of appeal is disposed of accordingly.

34. Ground No. 5 & 6 of revenue’s appeal relates to deleting the disallowance of commission to non-resident, for the want of TDS, under section 40(a)(i). The learned D.R. for the revenue supported the order of the assessing officer. The learned D.R. further submitted that the assessee was either liable to make TDS or to obtain certificate under section 195 of the Act.

35. On the other hand the learned A.R. for the assessee submits that this ground of appeal is covered by the decision of assessment year 2009-10. The Tribunal in assessment year 2009-10 has categorically held that the services were rendered outside India and that the agents have no permanent establishment (PE) in India, thus, their income was not liable to tax in India. Hence, no disallowance under section 40(a)(i) is warranted.

36. We have considered the rival submissions of the parties and have gone through the orders of the lower authorities. We have noted that in appeal for assessment year 2009-10 on identical ground of appeal the Tribunal passed the following order :–

“5. We have considered rival submissions and perused the material on record. The facts on record clearly reveal that commission has been paid to non-resident agents located in their respective countries towards services rendered by them in those countries in relation to obtaining export contracts for the assessee. No material has been brought on record by the assessing officer to demonstrate that the non-resident agents either have any business connection in India or have PE in India so as to bring the commission payment within the tax net. The factual finding recorded by learned Commissioner (Appeals) that the non-resident agents have rendered the services in their respective countries and do not have either any business connection in India or any PE in India has not been controverted by the Revenue. Further, the nature of payment viz. commission has also not been disputed by the Revenue. That being the case, since the commission paid to the non-resident agents is not chargeable to tax in India at their hands, there is no necessity for the assessee to withhold tax under section 195(1) of the Act on such payment. Accordingly, we uphold the decision of learned Commissioner (Appeals) on this issue.”

37. Considering the decision of Tribunal in appeal for assessment year 2009-10 on identical grounds of appeal, wherein neither variations in facts nor any contrary law is brought to our notice, hence, we uphold the order of learned Commissioner (Appeals) on this ground of appeal. In the result this ground of appeal is dismissed.

38. Ground No. 7, 8 & 9 relates to method of computation of deduction under section 10A. The learned D.R. for the revenue supported the order of assessing officer. The learned D.R. for the revenue further submits that learned Commissioner (Appeals) merely relied on the orders of earlier years without discussing and verifying the relevant facts to this year. The learned D.R. for the revenue prayed for restoring the order of the assessing officer.

39. On the contrary the learned A.R. for the assessee relied on the order of the learned Commissioner (Appeals). The learned A.R. for the assessee submits that the first appellate authority while granting relief to the assessee followed the order for assessment year 2005-06, whereby the Tribunal followed the order of Bombay High Court in CIT v. HCL Technology Ltd. (2018) 404 ITR 719 (SC) : 2018 TaxPub(DT) 2138 (SC). The High Court in HCL Technology held that the expenses which are to be excluded from the turnover would also be excluded for the purpose of computing the total turnover. The learned A.R. for the assessee also relied on the decision of Bombay High Court in Tata Infotech Ltd. in ITA No. 3474 of 2020.

40. We have considered the rival submissions of the parties and have gone through the orders of the lower authorities. We have also deliberated on the case law referred by the learned A.R. for the assessee.

We have noted that in appeal for assessment year 2009-10 on identical ground of appeal the Tribunal passed the following order :–

“8. We have considered rival submissions and perused the material on record. Notably, identical issue came up for consideration before the Tribunal in assessee’s own case in assessment year 2005-06 (supra). The Tribunal while deciding the issue has held that foreign currency expenditure has to be reduced both from the export turnover as well as total turnover.

The aforesaid decision of the Tribunal has been upheld by the Hon’ble Jurisdictional High Court while deciding Revenue’s appeal for the assessment year 2005-06 in ITA No. 1778/2016, dated 18-3-2019 : 2019 TaxPub(DT) 3594 (Bom-HC). Respectfully following the decision of the Co-ordinate Bench and the decision of the Hon’ble Jurisdictional High Court as referred to above, we uphold the decision of learned Commissioner (Appeals) on this issue.

Ground raised is dismissed.”

41. Considering the decision of Tribunal in appeal for assessment year 2009-10 on identical grounds of appeal, wherein neither variations in facts nor any contrary law is brought to our notice, hence, we uphold the order of learned Commissioner (Appeals) on this ground of appeal. In the result this ground of appeal is dismissed.

42. Now, turning to the TP issues in both the appeals. Ground No. 5 in assessee’s appeal and Ground No. 10, 11 & 12 in revenue’s appeal relates to provisions of consultancy services. The learned D.R. for the revenue submits that the assessee provided consultancy services, develops and implements products for customers on all the matters covering implementation of computer software and hardware software system, management and data processing, information and data communication system. The assessee has several subsidiaries in India and abroad. The assessee has rendered software development, technical and consultancy services to its AE on the basis of specific request received from AEs. The assessee while making benchmarking considered itself as a tested party as limited risk bearing services provider, whereas the activities performed by the AEs are more complex in nature. The assessee adopted Transaction Net Margin Method (TNMM) as most appropriate method. The assessee had shown its profit level indicator (PLI) on the basis of operating profit/operating cost (OP/OC) at 36.83%. The assessee selected 12 comparable companies with weighted average PLI of 12.13%. The assessee claimed margin earned from the AEs at 30.38% to net margin earned from both AEs and non-AEs. The TPO not accepted the PLI of the assessee and assessee as a tested party.

While doing so the TPO held that the cost incurred by the AEs on the payment of price to assessee are in the nature of past through cost. The TPO held that the PLI to compute the margin would be operating profit/value added expenditure (OP/VAE). The TPO after selecting some of the comparable proceeded to compute the adjustment and suggested adjustment of Rs. 1132.7 Crore. The learned Commissioner (Appeals) allowed relief to the assessee by following the order of Commissioner (Appeals) for assessment year 2009-10 and also directed to accept the comparable selected in assessment year 2009-10. The learned D.R. in his written submissions submits that the revenues ground of appeal are basically against the decision of learned Commissioner (Appeals) on PLI to be applied, consideration of cost incurred by the AEs. Considering AEs in different geographical location as tested parties along with the comparable companies in those geographical locations. The learned D.R. for the revenue submits that OP/VAE is the most appropriate basis for PLI, considering the functions undertaken asset applied and the risk assumed (FAR) analysis of the assessee as well as AEs.

43. On the other hand the learned A.R. for the assessee supported the order of learned Commissioner (Appeals). The learned A.R. for the assessee submits that learned D.R. tried to make attempt to find fault with the order of Commissioner (Appeals) in assessment year 2009-10.

The order learned Commissioner (Appeals) for assessment year 2009-10 was duly examined by Tribunal and upheld the same in a detailed and reasoned order.

Thus, the grounds of appeal raised by the revenue are now squarely covered by the decision of Tribunal for assessment year 2009-10. The learned A.R. for the assessee further submits that in case the grounds of appeals raised by the revenue are dismissed, the adjudication on the grounds of appeal in assessee’s appeal would become academic.

44. We have considered the rival submissions of the parties and have gone through the orders of the lower authorities. We have also deliberated on the decision of Tribunal in assessment year 2009-10. During the TP assessment proceeding the TPO rejected the basis of the PLI shown by the assessee by taking view that the cost incurred by the AEs on the payment of price to assessee are in the nature of past through cost. The TPO held that the PLI to compute the margin would be operating profit/value added expenditure (OP/VAE). The learned Commissioner (Appeals) granted relief to the assessee by following the order of his predecessor/learned Commissioner (Appeals) for assessment year 2009-10. We have noted that the order of learned Commissioner (Appeals) for assessment year 2009-10 has been affirmed by the Tribunal by passing the following order :–

“20. We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. From the grounds raised by the Revenue, the following three issues arise for consideration — (i) what should be the appropriate PLI; (ii) whether cost of outsourcing/sub-contracting to the TCS should be considered for computing the margin; and (iii) whether the alternative benchmarking furnished by the assessee by treating the AEs as tested party with comparables in the same geographical locations is acceptable. On a careful perusal of the facts on record as well as submissions of the learned Counsel for the parties in the course of hearing as well as in the written note, we are of the view that the decision of learned Commissioner (Appeals) on the aforesaid issues are unassailable. As regards the issue of appropriate PLI, we are of the view that considering the nature of activity performed by the assessee as well as the AEs, it cannot be said that the A.Es are not bearing any risk. Rather the facts on record reveal that the AEs performed the role of risk bearing distributors. It is well brought out by learned Commissioner (Appeals) in his order that the AEs are bearing credit risk and risk of default by client. In fact, the assessee through proper evidences has demonstrated instances where the credit risk with reference to part cancellation of contract has been borne by the AEs without compensation from the assessee. The documentary evidences in this regard furnished by the assessee were thoroughly examined not only by learned Commissioner (Appeals) but they were also produced before us.

Thus, from the aforesaid facts, it becomes clear that significant marketing functions are being performed and distribution and marketing risk are being taken by the AEs. On examination of the financials of the subsidiaries it is revealed that some subsidiaries are still making loss at net level which signifies that some risk is being borne by the AEs. It has further been brought on record that the manpower base of AEs performed various functions relating to marketing as well as client co- ordination. The AEs have developed sufficient competency to handle the marketing work independently. The entire contract related work is performed by the AEs, though, in cooperation with the assessee. Thus, it is quite natural that for being a sufficiently motivated work force, the AEs are compensated at return on sales and not merely on value added costs. Therefore, learned Commissioner (Appeals) was justified in directing the Transfer Pricing Officer to adopt the PLI of gross margin on sales. As regards consideration by the Transfer Pricing Officer, the outsourcing/sub- contracting cost to assessee as a pass through cost, learned Commissioner (Appeals) was absolutely correct in observing that the decision of the Transfer Pricing Officer to exclude such costs while computing the margin of the AEs is incorrect. When similar cost incurred by the comparables were not excluded while computing their margin, a different treatment cannot be given to such costs in case of the AEs. Certainly, the aforesaid approach of the Transfer Pricing Officer has resulted in distorting the correct PLI of the AEs. In the aforesaid context, the observations of learned Commissioner (Appeals) are appreciable, wherein, he has observed that the PLI of the AEs and PLI of comparables have not been computed on similar lines by the Transfer Pricing Officer, hence, comparability condition fails. It is further relevant to observe, the alternative benchmarking furnished by the assessee before the Transfer Pricing Officer by considering the AEs in different geographic locations as tested parties with the comparables selected on the basis of the respective geographic locations furnished before the Transfer Pricing Officer were not properly considered. However, in course of appeal proceedings, the learned Commissioner (Appeals) examined them in detail and after a detailed analysis approved some comparables selected by the assessee and also added some new comparables.

Whereas, the comparable selected by the Transfer Pricing Officer were not on the basis of any detailed search process. At least, no such analysis is either forthcoming from the order of the Transfer Pricing Officer or could be brought to our notice by learned Departmental Representative. On the contrary, on a thorough and careful reading of the impugned order of learned Commissioner (Appeals), we are of the view that learned Commissioner (Appeals) has taken pains to examine in detail the alternative benchmarking done by the assessee with foreign comparables and after detailed analysis has shortlisted the final comparables to be considered for comparability analysis. No convincing argument or evidence has been brought on record by the learned Departmental Representative to persuade us to disturb the finding of learned Commissioner (Appeals) on these issues. In view of the aforesaid, we do not find any merit in the grounds raised by the Revenue on the issues. Accordingly, grounds are dismissed.”

45. Considering the decision of Tribunal in appeal for assessment year 2009-10 on identical grounds of appeal, wherein all the contentions as raised by the learned D.R. for the revenue before us, has been considered by the Tribunal, while affirming the order of learned Commissioner (Appeals). No variation in facts nor any contrary law is brought to our notice, hence, we uphold the order of learned Commissioner (Appeals) on this ground of appeal. In the result this ground of appeals raised by revenue are dismissed.

46. Further considering the submissions of the learned A.R. for the assessee that in case the grounds raised by the revenue are dismissed, the ground of appeal raised by the assessee would need no adjudication.

Accordingly, the discussion on the ground of appeal raised by assessee has become academic. In the result the grounds of appeal of revenue are dismissed and the grounds of appeal raised by assessee have become infractious.

47. Ground No. 7 in assessee’s appeal and ground No. 13 to 16 in revenue’s appeal relates to corporate guarantee commissions/fee.

The learned D.R. for the revenue submits that during the relevant period the assessee provided various guarantees such as performance, financial and other guarantees to its AEs without charging any commissions. In TPSR the assessee not benchmarked these transactions. The guarantee provided by the assessee on behalf of its AEs is services rendered and would fall within the meaning of international transaction as defined under section 92B of the Act.

The TPO benchmarked the guarantee commissions @ 1.75% on the basis of information received from State Bank of India. And on financial guarantee the TPO charged commission @ 3% per annum.

The learned Commissioner (Appeals) reduced the guarantees commissions by following the order of Commissioner (Appeals) for assessment year 2009-10. The financial guarantee commissions were reduced to 0.77% per annum and performance guarantee commissions to 1.14% per annum. On further appeal to Tribunal both the guarantee commissions were restricted to 0.5% per annum by following the decisions of Coordinate Bench and Bombay High Court in Everest Kanto Cylinder (2015) 58 taxmann.com 254 (Bom) : 2015 TaxPub(DT) 2547 (Bom-HC). The learned D.R. further submitted that the decision of Tribunal in assessment year 2009-10 and Bombay High Court in Everest Kanto Cylinder (supra) is not acceptable to him as such rate is decided on the basis of facts for 2008-09, it cannot be taken as universal rate to be applied in all the cases and for subsequent years. Further the case law does not deal with the performance/lease guarantee but deal with financial guarantee.

48. On the other hand the learned A.R. for the assessee submits that these grounds of appeal are covered by the decision of Tribunal in assessment year 2009-10, wherein the Tribunal followed the decision of Bombay High Court in Everest Kanto Cylinders (supra) and coordinate bench in WNS Global Services (P) Ltd. v. ITO (2019) 103 taxmann.com 75 (Mum-Trib) : 2019 TaxPub(DT) 2419 (Mum-Trib) and directed the assessing officer to charge guarantee commission @ 0.5% per annum for performance of lease as well as financial guarantee. The learned A.R. for the assessee further submits that the guarantee whether granted for performance or lease or financial lease are all effectively in the nature of financial guarantee only. The learned A.R. for the assessee further submitted that ground No. 13 of revenues appeal is similar to the ground No. 11 raised by revenue in appeal for 2009-10. The ground relates to the decision of Commissioner (Appeals) in restricting the charge of guarantee commission only on 34%, i.e., onsite portion of the contract which was performed by AEs. The Revenue has wrongly mentioned 48% in place of 34% which is correct percentage of onsite work in 2010-11 as against 48% in assessment year 2009-10. The Commissioner (Appeals) followed the same approach as in assessment year 2009-10 and held that the assessee can’t be charged by any guarantee commission on the portion of work performed by assessee itself. The said ground of revenue was dismissed in assessment year 2009-10.

49. We have considered the rival submissions of the parties and have gone through the orders of the lower authorities. We have also deliberated on the decision of Tribunal in assessment year 2009-10. We have noted that as per para 13 of TPSR, the assessee not benchmarked the transactions of corporate guarantees commissions. The TPO after serving the show cause notice and considering the reply of the assessee concluded that the guarantee provided by the assessee on behalf of its AEs would fall within the meaning of international transaction as defined under section 92B of the Act. The TPO benchmarked the guarantee commissions @ 1.75% on the basis of information received from State Bank of India. And on financial guarantee the TPO charged commission @ 3% per annum and suggested adjustment of Rs. 38.47 Crore. The learned Commissioner (Appeals) reduced the guarantees commissions by following the order of Commissioner (Appeals) for assessment year 2009-10. The financial guarantee commissions were reduced to 0.77% per annum and performance guarantee commissions to 1.14% per annum. We have seen that on similar grounds related to the issue of various corporate guarantees the Tribunal in assessment year 2009-10 passed the following order :–

“43. We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. Insofar as the contention of learned Sr. Counsel for the assessee that provision of guarantee is not an international transaction as per section 92B of the Act, we are unable to accept such contention. In our considered opinion, after introduction of Explanation-(i)(c) to section 92B of the Act, with retrospective effect from 1-4-2002, provision of guarantee to AEs has to be considered as an international transaction. Different Benches of the Tribunal have also expressed similar view on the issue. Therefore, we hold that the provision of guarantee to the AEs is an international transaction. In fact, the aforesaid view has been expressed by the Co-ordinate Bench in WNS Global Services Pvt. Ltd. (supra). Therefore, following the aforesaid decision of the Co- ordinate Bench and the decision of the Hon’ble Jurisdictional High Court in Everest Canto Cylinders Ltd. (supra), we direct the assessing officer to charge guarantee commission @ 0.5% per annum both on performance/lease guarantee as well as financial guarantee.”

50. On the basis of aforesaid factual discussion and considering the decision of Tribunal in appeal for assessment year 2009-10 on identical grounds of appeal, wherein all the contentions has been considered by the Tribunal, while affirming the order of learned Commissioner (Appeals). No variation in facts nor any contrary law is brought to our notice, hence, we uphold the order of learned Commissioner (Appeals) on this ground of appeal. In the result the grounds of appeal raised by the assessee are dismissed and the ground of appeal raised by assessee is partly allowed.

51. Ground No. 17 in revenue’s appeal and ground No. 6 in assessee’s appeal relates to TP adjustment on account of interest free loans to AEs. The learned D.R. for the revenue submits that during the TP proceedings, the TPO noted that the assessee provided loan to its AEs without charging any interest. On show cause, the assessee contended that these are quasi capital. The TPO after considering the submissions of the assessee suggested adjustment on account of these loans by charging interest @11% per annum and suggested adjustment of Rs. 41.04 Crore. The learned Commissioner (Appeals) granted partial relief to the assessee by reducing the rate of interest to LIBOR plus 300 bps by following the order for assessment year 2009-10. The Tribunal in assessment year 2009-10 restored the issue to the file of assessing officer for de novo adjudication as per the ratio in case of DLF Hotels Holdings Ltd. [ITA No. 6336/Delhi/2012, dated 30-6-2016] : 2016 TaxPub(DT) 3512 (Del-Trib). The learned D.R. for the revenue submits that following the order of Tribunal these issues may be restored to the file of assessing officer with similar direction.

52. On the other hand the learned A.R. for the assessee submits that so far as issue related with TP adjustment on account of the interest free loans to AEs are concerned, the learned D.R. has not given any comments. The Tribunal in appeal for assessment year 2009-10 has restored the similar issue to the file of assessing officer. The assessee prays that this issue may be restored to assessing officer with similar direction and they may be given opportunity of hearing before passing the order in this year as well. So far as issue related with the adjustment on account of subscriptions of equity shares of AE is concerned, the learned Commissioner (Appeals) has followed the decision of jurisdiction High Court in Vodafone India Services (P) Ltd. v. UOI (2014) 50 taxmann.com 300 (Bom.) : 2014 TaxPub(DT) 3959 (Bom-HC) and held that share subscription is a capital subscription is a capital account transaction, therefore, no transfer pricing adjustment is warranted on such transactions. The decision of Bombay High Court has been accepted by the Government of India as per its Press Release, dated 28-1-2015.

53. We have considered the rival submissions of the parties and have gone through the orders of the lower authorities. We have also deliberated on the decision of Tribunal in assessment year 2009-10. So far as issue related with the adjustment on interest free loan to AEs is concerned, the similar issue in assessment year 2009-10, has been restored by Tribunal to the file of assessing officer with the following order :–

“37. We have considered rival submissions and perused the material on record. We have also carefully gone through the case law cited before us. Notably, right from the stage of transfer pricing proceeding itself the assessee has taken a stand that loans and advances to the AEs are in the nature of quasi equity, hence, cannot be treated as loan simpliciter. It is relevant to observe, the transfer pricing adjustment made on account of interest is in respect of loans advanced to four overseas AEs. From the details available on record, it is noticed that major portion of loans advanced to TCS Ibero America, is for acquisition of downstream subsidiary and about 20% of the advance was for working capital. Money advanced to TCS FNS Pty. Ltd., Australia, was purely for acquisition of downstream subsidiary. Similarly, advance to TCS Asia Pacific Pty. Ltd., is for acquisition of downstream subsidiary. Only the advance made to TCS Morocco is for working capital requirement. It is further noted, major part of advances made to TCS Ibero America, TCS FNS Pty. Ltd. and TCS Morocco have been converted to equity subsequently. It is also a fact on record that before learned Commissioner (Appeals), the assessee has filed a detailed written submission on 27-3-2014, elaborately discussing the nature of advance made to the AEs and the purpose for which such advances were made. It was submitted by the assessee that the advances made to the AEs were as a part of business strategy and not simply to help the AEs with capital infusion. The assessee has advanced detailed argument stating that advances made to the AEs is a shareholder activity and not advancement of loan. In this context, the assessee has referred to OECD Transfer Pricing Guidelines as well as UK and Australian Regulations. It is evident from the impugned order of the learned Commissioner (Appeals), though, he sketchily referred to some of the submissions made by the assessee, however, he has not at all dealt with them in an effective manner. The learned Commissioner (Appeals), though, has observed that the loans advanced were not merely for downstream acquisition but for a variety of purpose including working capital requirement and other business uses, however, he has not elaborated as to for what other purpose loans were advanced. Without properly dealing with the factual aspect of the issue, learned Commissioner (Appeals) has jumped to the legal aspect and has held that the amount advanced by the assessee is in the nature of loan and has to be benchmarked as such. After considering the submissions of the parties and examining the material on record, we are convinced that various submissions made by the assessee before learned Commissioner (Appeals) have not at all been dealt with. The primary contention of the assessee that the advance made to the AEs is in the nature of quasi equity and falls within shareholder’s activity has not been properly addressed by the Departmental Authorities keeping in view the ratio laid down in the relevant case laws. It also requires deliberation whether it can be considered as an international transaction under section 92B read with Explanation-1(c). Since, the aforesaid legal and factual aspects have not been considered properly, we are inclined to restore the issue to the file of the assessing officer for de novo adjudication after due opportunity of being heard to the assessee. The assessing officer must examine all relevant facts to find out the exact nature of the advances made to the AEs.

He should also examine the applicability of the ratio laid down in the case of DLF Hotel Holdings Ltd. (supra) and any other case laws which may be cited before him. The assessee must be afforded reasonable opportunity of being heard. Ground is allowed for statistical purposes.”

54. Considering the order of the Tribunal in assessment year 2009-10, the ground No. 6 in revenues appeal is restored to the file of assessing officer with similar direction. No doubt the assessing officer before passing the order afresh shall grant opportunity of hearing to the assessee.

55. Now adverting to the issues raised by the revenue in its appeal with regard to excessive valuation paid for shares of AE. The learned A.R. for the assessee vehemently submitted before us that the learned Commissioner (Appeals) while granting relief to the assessee has followed the decision of jurisdiction High Court in Vodafone India Services (P) Ltd. v. UOI (2014) 50 taxmann.com 300 (Bom.) : 2014 TaxPub(DT) 3959 (Bom-HC) wherein it was held that share subscription is a capital subscription is a capital account transaction, therefore, no transfer pricing adjustment is warranted on such transactions. We have noted that the learned Commissioner (Appeals) in his order has relied on the order of Bombay High Court in Vodafone India Services (supra) and CBDT Instruction No. 5/2015 accepting the order of Bombay High Court. No contrary facts or law is brought to our notice to deviate from the order of learned Commissioner (Appeals) is brought to our notice, hence, we affirm the order of learned Commissioner (Appeals) on this issue. Resultantly the ground of appeal raised by the revenue is dismissed.

56. Last issue in assessee’s appeal left for adjudication relates to legal issues with regard to reference to TPO without proper application of mind, no intention of shifting of profit etc that is ground No. 4. Considering the facts that all transfer pricing grounds of appeal are basically decided in favour of the assessee, thus, in our view the discussions on this (these) ground of appeal have become academic.

57. In the result, appeal of the assessee as well as revenue both are partly allowed.

(Appeals for assessment year 2008-09 being ITA No. 3263/M/2017 by assessee ITA No. 3746/M/2017 by Revenue)

58. At the outset of hearing the learned A.R. for the assessee submits that all the grounds of appeal raised by the assessee as well as by revenue are identical to the grounds of appeal raised by them in assessment year 2010-11. The learned A.R. for the assessee filed his short written synopsis; however, the learned D.R. adopted the similar submissions as submitted in assessment year 2010-11. Ground No. 1 & 2 in assessee’s appeal relates to the disallowance of State tax and Interest paid in overseas countries. We have noted that part of this ground of appeal so far as it relates to the disallowance of State Taxes is concerned, is identical to the Ground No. 1 in appeal for assessment year 2010-11, which we have allowed in preceding paras of this order by following the order for assessment year 2009-10. Thus, following the principles of consistency this part of ground of appeal is allowed with similar directions.

59. So far as disallowance of Interest paid in overseas countries is concerned, the learned A.R. for the assessee submitted that the payments made on account of interest in delay in payments of Federal or State taxes overseas which is compensatory in nature should be allowed as business expenditure under section 37(1). Considering the submissions of the learned A.R. for the assessee, we are of the view that the general principle of allowability that the expenditure cannot be overlooked and that the accepted principle is that only those expenditure can be allowed which are attributable to the business activity as well as laid out wholly and exclusively for the purposes of the business.

Thus, we direct the assessing officer to allow the interest on delayed payment of State tax or Federal Taxes being compensatory in nature. In the result these grounds of appeal are allowed.

60. Ground No. 3 in assessee’s appeal relates to disallowance under section 40(a)(i) on account of expenditure on imported software. We have noted that this ground of appeal is identical to the ground No. 1 of appeal raised by revenue in assessment year 2010-11, which we have dismissed by following the order of Tribunal for assessment year 2009-10, therefore, following the principles of consistency this ground of appeal is allowed with similar directions. In the result this ground of appeal is allowed.

61. Additional grounds of appeal raised by the assessee vide application dated 10-1-2020, with regard to deduction of education cess, is also identical with the additional ground of appeal raised by assessee in appeal for assessment year 2010-11, which we have admitted and restored to the file of assessing officer, therefore, following the principles of consistency this ground of appeal is also admitted and restored to the file of assessing officer with similar directions. In the result this ground of appeal is allowed for statistical purpose.

62. Next ground that is Ground No. 1 in revenue’s appeal relates to disallowance under section 40(a)(i) on account of non-deduction of TDS on expenditure on imported software. We have noted that this ground of appeal is identical to the ground No. 1 of appeal raised by revenue in assessment year 2010-11, which we have dismissed by following the order of Tribunal for assessment year 2009-10, therefore, following the principles of consistency this ground of appeal is dismissed with similar directions. In the result this ground of appeal is dismissed.

63. Next ground of appeal that is ground No. 2 in revenue’s appeal relates to deduction under section 10A in respect of units on which deduction under section 80HHC was allowed in past. The learned D.R. for the revenue supported the order of the assessing officer.

64. On the other hand the learned A.R. for the assessee submits that nothing in section 10A prohibits assessee from claiming deduction in respect of profits of an undertaking, where deduction under section 80HHE has been claimed in past. The claim for deduction is claimed in respect of residual years remaining in the block 10 years and there is no attempt to extent the period of 10 years of tax holidays by exercising option to claim deduction under section 10 instead of continuing under section 80HHE. The claim of assessee was duly supported by Audit Certificate and date of commencement of manufacture/production has been taken as the initial date and not the date of commencement of claim under section 10A, the learned A.R. of the assessee further submits that CBDT vide Circular No. 1/2005, dated 6-1-2005, clarifies that undertaking set up in Domestic Tariff area and deriving profit from export of computer software and which is subsequently converted in to export oriented unit (EOU) shall be eligible for a deduction under section 10B for the remaining period of 10 consecutive years beginning with the assessment year relevant year relevant to the previous year in which undertaking begins to manufacture or produce computer software as a DTA unit. In other alternative submissions it was submitted that in case the assessee is eligible to claim deduction under two alternative sections, the assessee would be allowed deduction under such as section which is more beneficial to the assessee. Finally, the learned A.R. for the assessee submits that similar deduction under section 10A was allowed to the assessee by Bombay High Court in assessment year 2005-06 in ITA No. 1778 of 2016 and by Tribunal in assessment year 2009-10.

65. We have considered the rival submissions of the parties and have gone through the orders of the lower authorities. We have also deliberated on the decision of Tribunal in assessment year 2005-06 and 2009-10.

The assessee claimed deduction in respect of two units, (i) Chennai Sholinganallur STP and (ii) Delhi Noida I STP. The assessee claimed that its claim is duly supported by Audit Certificate and date of commencement of manufacture/production has been taken as the initial date and not the date of commencement of claim under section 10, the assessee relied on the CBDT vide Circular No. 1/2005, dated 6-1-2005, which clarifies that undertaking set up in Domestic Tariff area and deriving profit from export of computer software and which is subsequently converted in to export oriented unit (EOU) shall be eligible for a deduction under section 10B for the remaining period of 10 consecutive years beginning with the assessment year relevant year relevant to the previous year in which undertaking begins to manufacture or produce computer software as a DTA unit. The assessing officer during the assessment disallowed the deduction under section 10A by taking view that commencement of unit (eligible for benefit of section 10A) is not available to the assessee. The assessing officer also held that by opting out of 80HHE and claiming deduction under section 10A, the assessee is trying to claim which in not available to the unit in the light of phasing out of section 80HHE form assessment year 2001-02. The learned Commissioner (Appeals) allowed relief to the assessee by noting that claim was to the assessee by Commissioner (Appeals) in assessment year 2005-06, which has been upheld by Tribunal in ITA No. 6820/Mum/2010 : 2016 TaxPub(DT) 0639 (Mum-Trib). We have noted that in appeal for assessment year 2009-10 the Tribunal allowed the similar deduction under section 10A by passing the following order :–

“53. We have considered rival submissions and perused the material on record. As noted, identical issue arising in assessee’s own case for the assessment year 2005-06 came up for consideration before the Tribunal in ITA No. 6820/Mum./2010 dated 4-11-2015. While deciding the issue, the Tribunal held that since both, section 80HHE and section 10A of the Act entitle the assessee for benefit, the assessee would legitimately be entitled to the benefit of that provision of law which enables a larger benefit being earned by him. It is also noticed that the aforesaid decision of the Tribunal has been upheld by the Hon’ble Jurisdictional High Court while deciding Revenue’s appeal in ITA No. 1778/2016, vide Judgment, dated 18-3-2019. The observation of the Hon’ble Jurisdictional High Court on the issue is as under :–

“6. Section 80HHE of the Act pertains to deduction in respect of profits from export of computer software etc. Sub-section (5) of section 80HHE provides that where deduction under said section is claimed and allowed in respect of the profits of the business referred in sub-section (1) for any assessment year, no deduction shall be allowed in relation to such profits under any other provision of the Act for the same or any other assessment year. What sub-section (5) of section 80HHE thus prohibits is the claim of deduction allowed under section 80HHE under any other provision, be it in the same assessment year or in other assessment year. In the present case, it is not even the ground of the revenue that the deduction under section 10A of the Act claimed by the assessee in the present year is in relation to profit for which the assessee was granted deduction under section 80HHE.

Sub-section 5 of section 80HHE of the Act, therefore, in the present case would have no applicability. We are fortified in our view by a division bench judgment of Delhi High Court in the case of Commissioner Income Tax v. Damco Solutions Pvt. Ltd., (2011) 200 Taxman 26 (Del) in which it was observed as under :–

“2. This stand of the assessing officer was repelled by the Commissioner (Appeals) holding that the purpose of sub-section (5) of section 80HHE was to avoid double benefit and that would not mean that if the assessee for a particular assessment year wanted relief only under section 10A of the Act that would be denied to the assessee. The only embargo was not to give relief under both the provisions.”

7. Coming to the revenue’s second objection to the assessee’s claim of deduction under section 10A of the Act, we may recall, that the assessee had admittedly started manufacturing computer software for export prior to 1-4-2001, when section 10A was substituted by the Finance Act of 2000. It was under this amendment that the profit and gains derived by an undertaking from export of computer software came to be covered for deduction under section 10A. The revenue contends that this benefit would not be available to an industry which was already existing and engaged in such activity. However, the interpretation of the revenue would render the first proviso to sub-section (1) of section 10A wholly redundant. This proviso reads as under :–

“10A(1) 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 deduction referred to in this sub-section only for the unexpired period of the aforesaid ten consecutive assessment years.”

As per this proviso, therefore, while computing total income of the undertaking for any assessment year, the profit and gain which had not been included prior to the introduction of Finance Act, 2000, such an undertaking would be entitled to deduction as per sub-section (1) only for the unexpired period of 10 consecutive assessment years. In plain terms, therefore, this proviso would apply to an industry which was already in existence, engaged in manufacturing and export of computer software when the said amendment was made in section 10A.

However, such an industry would be eligible to claim that deduction in relation to profit and gain arising out of such activity only for remainder of the period of 10 assessment years, which could be claimed for consequent assessment years alone.

9. If the revenue’s interpretation of sub-section (1) of section 10 were to be accepted, then, this proviso would be rendered redundant —

“1. Coming to the revenue’s contention in relation to the computation of benefit of section 10A of the Act, this issue is squarely covered by the judgment of Supreme Court in the case of Commissioner of Income Tax v. HCL Technologies, (2018) 404 ITR 719 (SC) : 2018 TaxPub(DT) 2138 (SC), in which the Court held that the total turnover for the purpose of section 10 of the Act cannot be understood as defined for the purpose of section 80HHE. It was further held that thus the expenses which are to be excluded from the export turnover, would also have to be excluded for the purpose of computing total turnover.

2. Thus, respectfully following the decision of the Co-ordinate Bench and the decision of the Hon’ble Jurisdictional High Court in assessee’s own case as referred to above, we uphold the decision of learned Commissioner (Appeals) on the issue. This ground is dismissed.”

66. Considering the decision of Bombay High Court in ITA No. 1778 of 2016 which was followed by Tribunal in assessment year 2009-10 as extracted above, thus, respectfully following the same, the grounds of raised by the revenue is dismissed.

67. Next grounds of appeal in revenue’s appeal, i.e., ground No. 3 to 6 which relates to disallowance under section 40(a)(i) on account on non deduction of TDS on expenditure on commission to non-resident. We have noted that this ground of appeal is identical to the ground No. 5 to 6 of revenue’s appeal for assessment year 2010-11, which we have dismissed on the basis of decision of Tribunal for assessment year 2009-10. Hence, following the principles of consistency these grounds of appeal are dismissed.

68. Next grounds of appeal in revenue’s appeal, i.e., ground No. 7 to 9 relates to method of computation of deduction under section 10A. We have noted that this ground of appeal is identical to the ground No. 7, 8 & 9 of revenue’s appeal for assessment year 2010-11, which we have dismissed on the basis of decision of Tribunal for assessment year 2009-10. Hence, following the principles of consistency these grounds of appeal are dismissed.

69. Next grounds of appeal in revenue’s appeal, i.e., ground No. 10 relates to disallowance of deduction under section 10A/10AA. The learned D.R. for the revenue supported the order of assessing officer.

70. On the other hand the learned A.R. for the assessee submits that this ground of appeal is completely covered by the CBDT Circular No. 1/2013, dated 17-1-2013 and the same has been accepted by the department in subsequent years.

71. We have considered the rival submissions of the parties and have gone through the orders of the lower authorities. Considering the submissions of the learned A.R. for the assessee that the assessee was allowed deduction under section 10A/10AA in subsequent years and that this issue is covered by the CBDT Circular No. 1/2013, dated 17-1-2013, wherein it was clarified that the software developed abroad at a client’s place would be eligible for benefits under the respective provisions, because these would amount to ‘deemed export’ and tax benefits would not be denied merely on this ground. It was also clarified that the benefits under these provisions can be availed of only by the units or undertakings set up under specified schemes in India, it is necessary that there must exist a direct and intimate nexus or connection of development of software done abroad with the eligible units set up in India and such development of software should be pursuant to a contract between the client and the eligible unit. CBDT also clarified that Circular No. 694, dated 23-11-1994 stands further clarified. We have also noted that learned Commissioner (Appeals) while passing the impugned order followed various CBDT Circulars and granted relief to the assessee. In the result this ground of appeal is dismissed.

72. Now turning to the various grounds of appeal related with the TP issues.

Ground No. 12 to 15 in revenue’s appeal relates to provision of software consultancy services. The basic and primary issue in these grounds of appeal is if the GP/Sales is the appropriate PLI or not. We have noted similar grounds of appeal was raised by the revenue in appeal for assessment year 2010-11 vide ground No. 9 to 12, which we have dismissed in earlier part of this order, by following the order of Tribunal for assessment year 2009-10. Thus, following the principles of consistency these grounds of appeal are dismissed with similar observation.

73. Ground No. 17 & 18 in revenues appeal and ground No. 9.3 in assessee’s appeal relates to provision of various guarantees. We have seen that these grounds of appeal are identical as ground No. 13 to 16 in revenues appeal and 7.3 in assessee’s appeal for assessment year 2010-11, which we have decided in earlier paras of this order. Thus, following the principles of consistency these grounds of appeal are by revenue is dismissed with similar observation and the ground in assessee’s appeal is partly allowed.

74. Ground No. 16 in revenue’s appeal relates to charging of guarantee fee on the entire amount. The learned D.R. for the revenue supported the order of the AO/TPO.

75. On the other hand the learned A.R. for the assessee for the performance guarantee submits that part of the activity was performed by the assessee itself while the remaining services were rendered by AE. If the performance guarantee is treated as chargeable services, the charges should be levied only on the component of services performed by the AE. With regard to lease guarantee, the learned A.R. submits that part of the premises (40% during the year) was occupied by the assessee. Thus, if the lease guarantee is treated as chargeable services, the charges should be levied only for the balance 60% during the year under consideration.

76. We have considered the rival submissions of the parties and have gone through the order of the lower authorities. The TPO suggested the adjustment by taking view that provision of guarantee results in measurable and material credit enhancement for the borrower. The TPO noted that Allahabad Bank id charging guarantee fee at 2.4%, the TPO applied mark up of .6% to cover up risk and treated 3% for financial guarantee at arm’s length. Before, learned Commissioner (Appeals) the assessee made exhaustive written submissions as recorder by learned Commissioner (Appeals). The learned Commissioner (Appeals) granted relief to the assessee by holding that lease guarantee is similar to performance guarantee. The learned Commissioner (Appeals) noted that 58% of the premises for which guarantee was given was occupied by the assessee and the fee if payable be restricted to remaining amount as the assessee has shown evidenced to that effect as no guarantee fee can be levied to the self occupied property. Before, us the learned A.R. for the assessee vehemently submitted that if the performance guarantees is treated as chargeable services, the charges should be levied only on the component of services performed by the AE and if the lease guarantee is treated as chargeable services, the charges should be levied only for the 60% during the year under consideration. We find convincing force in the submission of the learned A.R. for the assessee and accept the same. In the result this ground of appeal is dismissed.

77. Ground No. 10 in assessee’s appeal relates to corporate guarantee rate. The learned A.R. for the assessee submits that guarantee fee rate determined in case of performance guarantee is found at the arm’s length in case of undertaking by learned Commissioner (Appeals).

78. On the other hand the learned D.R. for the revenue supported the order of the lower authorities.

79. We have considered the rival submissions of the parties and have gone through the order of tax authorities below. We have noted that this ground of appeal is identical to the ground No. 7.3 of appeal by assessee in assessment year 2010- 11, wherein we have restricted the guarantee commission to 0.5% by following the order of Tribunal in assessment year 2009-10, therefore, following the principles of consistency this ground of appeal is partly allowed with similar directions.

80. Ground No. 8 in assessee’s appeal relates to provision of inter-company loans. We have noted that this ground of appeal is identical to the ground No. 6 of appeal by assessee in assessment year 2010-11, wherein we have restored the issue to the file of assessing officer, therefore, following the principles of consistency this ground of appeal is partly allowed with similar directions.

81. Now a last ground of appeal in assessee’s is ground No. 6, which relates to alleged procedural irregularity in making reference to TPO. Considering the fact that we have allowed all TP related grounds of appeal in favour of the assessee, hence, this ground and all remaining parts of various grounds of appeal by assessee have become infructuous.

82. In the result the appeal of the assessee in assessment year 2008-09 is partly allowed and the appeal of the revenue is dismissed.