ADDL CIT RG 8(2), MUMBAI vs. ORACLE FINANCIAL SERVICES SOFTWARE LTD ( FORMERLY KNOWN M.S, I-FLEX SOLUTIONS LTD), MUMBAI

Briefly stated facts necessary for consideration and adjudication of the issues at hand are : the assessee company is into the business of providing comprehensive information technology solution to banks and financial institutions worldwide. The comprehensive range of solution includes Panaji application for the financial services industry, custom application software development, deployment for financial institutions. Assessing Officer (AO) after examining the appropriate issues as well as ITA No.4489/M/2010 & 5 M/s. Oracle Financial Services Software Ltd.

The AO held that the interest income of Rs.10,88,36,054/- is not eligible for deduction under section 10A of the Income Tax Act, 1961 (for short 'the Act' ) for the reason that interest income has not been derived from exempt industrial undertaking. The Ld. CIT(A) by relying upon the decision rendered by Honourable Supreme Court in case of Liberty India 317 ITR 218 held that while claiming a deduction the receipts beyond the first degree cannot be considered and as such interest income cannot be said to be derived from business of development of software being not of first degree thus upheld the findings returned by the AO that interest income by the assessee is income from other sources. The Ld. AR for the assessee at the very outset contended that this issue is already covered in favour of the assessee in its own case for A.Y. 2003-04 and 2004-05 in & 5023/M/2007 & ITA Nos.4488 & 5078/M/2010.

The assessee carried the matter before the Ld. CIT(A) by way of filing appeal who has confirmed the addition by dismissing the appeal. Feeling aggrieved with the impugned order passed by the Ld. CIT(A) the assessee has come up before the Tribunal by way of filing present appeal.

We have heard the Ld. Authorised Representatives of the parties to the appeal, perused the orders passed by the Ld. Lower Revenue Authorities and documents available on record in the light of the facts and circumstances of the case and law applicable thereto.

We have perused para 15 of the order passed by the co-ordinate Bench of Tribunal in assessee's own case for A.Y. 2003-04 and 2004-05 (supra), copy of which is available at page 1 to 16 of the case law paper book, which is on identical grounds, the operative para of which is extracted for ready perusal as under:

Since the facts and grounds are identical having not been controverted by Ld. D.R. following the order passed by the co-ordinate Bench of the Tribunal in assessee's own case (supra), we are of the considered view that earning interest from the surplus funds deposited with bank, bonds as well as loans to the employees and subsidiaries are eligible for deduction under section 10A of the Act subject to the quantification and attribution of such interest to 10A units by the AO. The assessee shall furnish evidence to established its claim under section 10A of the act which is to the tune of Rs.10,88,36,054/- derived from business of Software Technology Park of India (STPI) units. So ground No.1 of the assessee is allowed subject to the verification and quantification by the AO.

It is categoric case of the assessee that the entire investment on which the assessee has earned interest income at the rate of 6.75% tax free US – 64 bond was made earlier in the year 1998 and no expenditure has been incurred for earning the same and further contended that disallowance under rule 8D is not applicable in this case.

First of all it is settled principle of law that rule 8D is prospective in nature and is not applicable in respect of assessment years prior to 2007 as held by Hon'ble Supreme Court in case of Maxopp Investment Limited (2018) 91 taxmann.com 154 and Essar Technology limited (2018) 90 taxmann.com 2.

Furthermore, when the assessee has come up with categoric plea that UTI bonds were received as part of restructuring of UTI against the unit originally held in 1998 and were required to be held till maturity no direct or indirect expenses were incurred for earning such interest income nor any market research or any day to day analysis was required in the present case, disallowance confirmed by the Ld. CIT(A) is not sustainable.

Honourable High Court of Bombay in case of CIT vs. Sociedade De Fomento Industrial (P.) Ltd. (2021) 123 taxmann.com 38 (Bombay) held that "no doubt expenditure under section 14A includes both direct and indirect expenditure but that expenditure must have a proximate relationship with exempt

The Ld. CIT(A) however by following the order passed by his predecessor in assessee's own case for A.Y. 2004 – 05 allowed the same which is under challenge before the Tribunal.

We have perused the order passed by the co-ordinate Bench of the Tribunal in assessee's own case for A.Y 2003 – 04 which is on identical facts and decided in favour of the assessee by returning following findings: “7. We have considered rival submissions and perused the materials on record. The issue arising for consideration is, whether the income derived from training activity would qualify for deduction under section 10A of the Act. In fact, learned Commissioner (Appeals) has decided the issue against the assessee following his predecessor’s decision in assessee’s own case in assessment year 2002-03. Pertinently, assailing the decision of the First Appellate Authority on the disputed issue in assessment year 2002-03, assessee had preferred an appeal before the Tribunal. While deciding the issue in and CO 366/Mum/2006 vide order dated 31.08.2010, the Tribunal held that income derived from training given to customers for use of the software developed by the company being intricately connected to the export of software, it has to form part of both total turnover and export turnover for computing deduction under section 10A of the Act. In other words, the Tribunal in the preceding assessment year has allowed assessee’s claim of deduction under section 10A of the Act in respect of the income derived from training activity. It is relevant to observe, aforesaid decision of the provision has been upheld by the Hon’ble jurisdictional High Court while dismissing revenue’s appeal in Income Tax Appeal No. 2352 of 2011 vide order dated 24.03.2014. Facts being identical, respectfully following the decision of the co-ordinate Bench and the Hon’ble jurisdictional High Court in assessee’s own case, as referred to above, we direct the AO to allow assessee’s claim of deduction under section 10A of the Act by including it both in the total turnover as well as export turnover. This ground is allowed.”

So following the order passed by the co-ordinate Bench of the Tribunal in assessee's own case on identical issue qua which no distinguishable facts have been brought on record by the Ld. D.R. for the Revenue, the AO is directed to allow the assessee's claim of deduction under section 10A of the Act by including the same both in the total turnover as well as export turnover. So ground No.1 is determined against the Revenue.

The Ld. CIT(A) deleted the addition of the losses of Chennai unit and Goregaon unit which is under challenge before the Tribunal by returning following findings: “7.2. This issue raised in appeal was also before my learned predecessor in office and in his order No. CIT(A)-VIII/DCIT- 8(2)/IT- 390/2007-08 dated 21.07.2009 for the AY 2004-05 this ground of the Appellant was allowed in favour of the Appellant. 7.3. Further, the Counsel for Appellant has brought to my notice the recent judgment of the Chennai Special Bench of the Tribunal in the case of Scientific Atlanta India Technology (P) Ltd vs. ACIT [ITA 536/Mds/2007] wherein the Honourable Tribunal has held that the section 10A is a deduction section and not an exemption section. Further, it held that the deduction has to be computed undertaking-wise while computing income under the head "profits and gains of business and profession and loss to be set-off against the profits of other units. 7.4. I have gone through the order of the Additional CIT, the submissions made by the Appellant's Counsel, the order of my predecessors in office and the judgment of the Chennai Special Bench in the case of Scientific Atlanta. The facts being the same for the year under appeal and being squarely covered by the judgment of the Chennai Special Bench, and accordingly this ground is fully allowed in favour of the Appellant. The Assessing Officer is directed to delete the addition of the losses of Chennai Unit and Goregaon Unit. Accordingly the ground of the Appellant stands fully allowed.”

Since the issue is no longer res-integra having been covered by the order passed by Chennai Special Bench (supra) and this ITA No.4489/M/2010 & 14 M/s. Oracle Financial Services Software Ltd.

However, the Ld. CIT(A) allowed the inclusion of telecommunication expenses in the export turnover for the purpose of calculating deduction under section 10A of the Act by returning following findings: “9.3. I have verified the invoice copy. In the present case, the Appellant has received consideration against software i.e. goods. The sample invoices submitted by the Appellant clearly shows that it did not recover any such expenditure from the customers. 9.4 Further, in the case of Patni Telecom (P) Ltd (22-SOT 26), the Hyderabad bench of the Tribunal, on the similar facts has held that "If such expenses are not included in the consideration received in ITA No.4489/M/2010 & 15 M/s. Oracle Financial Services Software Ltd.

Since this issue has already been thrashed by the special Bench of the Tribunal in case of Patni Telecom (supra) we find no scope to interfere in the findings returned by the Ld. CIT(A). Hence ground No.5 raised by the Revenue is dismissed.

The Ld. CIT(A), by following the earlier years' order passed in favour of the assessee in its own case, allowed the claim of the assessee. The Ld. A.R. for the assessee contended that this issue has also been decided in favour of the assessee in its own case for A.Y. 2002 – 03, 2003 – 04 and 2004-05.

We have perused the order passed by the co-ordinate Bench of the Tribunal passed in assessee's own case for A.Y. 2002 – 03

Aforesaid order passed by the Tribunal has also been confirmed by the Honorable Bombay High Court vide order dated 24.03.2014 passed in CIT vs. M/s. I-Flex Solutions Ltd. in Income Tax Appeal No.2352 of 2011 by returning following findings: “8. As far as the last question is concerned, what has been found by the Commissioner of Income Tax (Appeals) as also the Income Tax Appellate Tribunal is that the computation of Arm's Length Pri along with the price in relation to international transactions entered in by the assessee with it's subsidiaries is concerned, commission has been paid on customisation fees which was computed at Rs.5,35,03,798/-a against Rs.4,81,53,418/- which resulted into upward adjustment to the income of the assessee. The argument was that the assessee has subsidiaries which act as a sale and marketing office of the assessee The nature of the transaction is essentially of re-sale. The ultimate sale prices are negotiated by the subsidiaries directly with the end-custom and assessee's offers are negotiated. Therefore, when there are subsidiaries, but local independent distribution agents to whom a commission has been given then, the ultimate margin offered and paid to the subsidiaries is only 10%. In other words, there has not been found to be a variation of such nature as would enable the Assessing Officer to question the payment. In such circumstances, the finding of fact which has been rendered cannot be said to be vitiated by any perversity or any error of law apparent on the face of record. 9. The reasons assigned by the Tribunal in paragraph no.15 of the order are based essentially on the nature of the dealings. Once the subsidiaries are found to be collecting the customization work and which work was not being done by independent distributors, then, the justification has been rightly accepted.”

So we are of the considered view that the Ld. CIT(A) has passed a valid order and we find no scope to interfere into the same hence the ground number 6 raised by the Revenue is dismissed.

The Ld. A.R. for the assessee contended that this issue has already been decided in favour of the assessee in its own case for A.Y. 2003-04 and 2004-05, which fact has not been controverted by the Ld. D.R.

We have perused the order passed by the co-ordinate Bench of the Tribunal in assessee's own case for A.Y. 2003-04 in which is on identical facts. It is contended by the Ld. D.R. for the Revenue that Ld. CIT(A) has failed to appreciate the facts inter-alia that the result of overseas subsidiaries not having collected the amount from final end customers and do not represent any advantage conferred on the overseas subsidiaries.

The Ld. CIT(A) decided the issue in favour of the assessee by returning following findings :

The coordinate Bench of the Tribunal decided the identical issue in favour of the assessee in its own case for A.Y. 2003-04 and 2004 – 05 by returning following findings: “20. We have considered rivals submissions and perused the materials on record. As could be seen, while explaining the cause of delay in remittance by overseas subsidiaries, the assessee has submitted that such delay was because of delay in remittance by the end customers to the overseas subsidiaries. To establish such claim, the assessee had furnished reconciliation statement, bank statement of subsidiaries and some other evidences. Notably, learned Commissioner (Appeals), in fact has appreciated assessee’s contention that there could be delay/considerable time gap in remittance of receivables by the overseas subsidiaries and the third party distributors, as the AEs are not the end customers, whereas, the third party distributors are themselves the customers. He has also appreciated the fact that some of the subsidiaries in USA and Netherland are incurring losses. Thus, when the AEs themselves are not the end customers and their remittance to the assessee, in turn, depends upon the remittances by the end customers, it cannot be said that the AEs have benefitted because of delay in remitting the receivables. 21. It is also observed, before the TPO the assessee had furnished certain evidences including the bank statements of subsidiaries and reconciliation statement reconciling the time gap in amounts receivable from subsidiaries and from third parties. These evidences furnished by the assessee, certainly, support assessee’s claim that the delay in receivables was purely because of the delay in receipt from end customers. In fact, learned Commissioner (Appeals) has also appreciated this fact. Thus, after taking into consideration the entire factual aspect, we are of the view that the adjustment made on account of delayed receivables has to be deleted. Accordingly, we do so. This ground is allowed.”

So following the order passed by the co-ordinate bench of the Tribunal in assessee's own case for A.Y. 2003 – 04, we are of the considered view that when undisputedly AEs are not the end customers and their remittance to the assessee in turn depends upon the remittances by the end customers it cannot be said that the AEs

The Ld. A.R. for the assessee contended that this ground is also covered by the order passed by the Tribunal in assessee's own case for A.Y. 2004 – 05 available at page 1 to 16 of the paper book.

It is undisputed fact on record that the assessee has charged interest at different rates from its AEs at USA and Mauritius that is at the rate of 2.44% and 3.54% respectively. The Ld. TPO/AO proceeded to hold that interest should have been charged at 3.275% and not 2.44%. The Ld. CIT(A) thrashed the facts and reached the conclusion that when the interest rate charged by the assessee from its AEs in America during financial year 2004 – 05 was ranging from 1.66% to 3.275% with average of 2.44%, the Ld. TPO stuck to the rate charged in the last quarter i.e. January 25th to March 2005 where the rate applicable was 3.275% and has not sought any clarification from the assessee. So the Ld. CIT(A) reached the ITA No.4489/M/2010 & 21 M/s. Oracle Financial Services Software Ltd.

Similarly Ld. CIT(A) deleted the addition/adjustment made by the Ld. TPO/AO on account of guarantee cost on the ground that the AEs have taken loan from the assessee directly and there is no question of guarantee. This issue has already been decided by the co-ordinate Bench of the Tribunal in assessee's own case for A.Y. 2004 – 05 (supra) by returning following findings: “40. Briefly the facts are, in course of proceeding before him the TPO found that the assessee had advanced loans to its AEs by charging interest at LIBOR+basis points. When called upon to justify the arm’s length nature of interest charged, the assessee submitted a letter from HDFC Bank showing the interest charged by the Bank on loan advanced to one of the subsidiaries, M/s I-Flex Solution Inc. Applying the said interest rate as CUP, the assessee submitted that the interest charge is at arm’s length. The Transfer Pricing Officer, however, was not convinced with the submissions of the assessee. He observed, the loan to the subsidiary by the Bank would have been possible only upon a corporate guarantee being provided by the assessee. Thus, the assessee would be required to provide a benchmark of guarantee commission. He observed, in a third party situation a guarantee provided would have entailed cost. Thus, ultimately, he concluded that the assessee should have charged guarantee commission of 1.75% on the loan amount. Accordingly, he proposed an adjustment of Rs. 22,21,000/-. Assessee challenged the aforesaid adjustment before learned Commissioner (Appeals). After considering the submissions of the assessee, learned Commissioner (Appeals) deleted the adjustment. 41. We have considered rival submissions and perused the material on record. As rightly observed by learned Commissioner (Appeals), question of providing a corporate guarantee will arise in a situation where the borrower has obtained debt from third party lender. In the facts of the present case, the assessee itself has advanced the loans to the AEs and has charged interest at the appropriate rate of LIBOR + certain basis points. No material has been brought on record by the TPO to demonstrate that the rate of interest charged by the assessee on the loans advanced is not at the appropriate rate prevailing in the countries, where the AEs are located. Therefore, in the aforesaid factual position, when the assessee has charged interest on the loans advance, there is no question of additionally charging guarantee commission for provision of corporate guarantee. In view of the aforesaid, we do not find any infirmity in the decision of learned Commissioner (Appeals). This ground is dismissed. In the result, appeal is dismissed.”

Following the order passed by the co-ordinate Bench of the Tribunal, we are of the considered view that the Ld. CIT(A) has rightly reached the conclusion that when the interest has already been charged by the average LIBOR rate as discussed in the impugned order the adjustment made by the Ld. TPO/AO on account of arms length is not sustainable in the eyes of law and similarly adjustment made by the assessee on account of guarantee fees also not sustainable as AEs have directly taken the loan from the assessee and as such there is no question of making payment of guarantee fee. So we find no ground to interfere into the findings returned by the Ld. CIT (A). Hence ground No.8 is determined against the Revenue.

Resultantly, the appeal filed by the Revenue is dismissed and the appeal filed by the assessee is allowed. Order pronounced in the open court on 16.01.2023.