M/S INFOSYS LTD ,BANGALOR E vs. THE ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-3(1)(1), BANGALORE

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 2 of 85 IT(TP)A No.735/Bang/2018 (AY 2013-14):

The order passed by the learned CIT(A) 12, Bangalore to the extent 1. prejudicial to the appellant is bad in law and liable to be quashed.

Disallowance under section 14A:- The learned CIT(A) 12, Bangalore 2. has erred in confirming the action of the learned AO in computing the disallowance under section 14A read with rule 8D(2)(iii) at Rs. 8,02,96,882 and making a disallowance -of Rs. 7,65,80,751. On facts and circumstances of the case and law applicable, computation of disallowance under section 14A read with rule 8D(2)(iii) and the impugned addition is bad in law and liable to be deleted.

Disallowance of subscription charges paid to Forester Research and 3. Gartner:- The learned CIT(A) has erred in confirming the action of the learned AO in making disallowance of expenditure incurred on subscription charges amounting to Rs. 3,18,52,696 and Rs. 1,08,79,768 under section 40(a)(i) which was paid / payable to M/s Forrester Research and M/s Gartner respectively.

On facts and in the circumstances of the case and law applicable, no 4. disallowance should be made under section 40(a)(i) in respect of the subscription charges paid / payable to M/s Forester Research and M/s Gartner respectively.

Disallowance of software expenses of Rs. 1,45,000 for not making TDS:- The 5. learned CIT(A) has erred in confirming the action of the learned AO in disallowing software expenses of Rs. 1,45,000 under section 40(a)(ia) for not making TDS under section 194J.

On facts and circumstances of the case and law applicable, 6. disallowance confirmed under section 40(a)(ia) to the extent of Rs. 1,45,000 is bad in law and liable to be quashed.

Without prejudice, the learned CIT(A) has erred in not restricting the 7. impugned disallowance, if any, to Rs.43,500 being 30% of Rs. 1,45,000 as the amendment to section 40(a)(ia) by the Finance Act, 2014 w.e.f. 1.4.2015 is retrospective in nature.

8. Disallowance of software expenses as capital expenditure:- The learned CIT(A) has erred in concluding that software expenses where life of software is more than 2 years is capital expenditure. On facts and circumstances of the case and law applicable, software expenses

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Page 3 of 85 where life of software is more than 2 years should also be held as revenue expenditure.

Brand building expenditure:- The learned CIT(A) has erred in not 9. allowing aliquot portion of brand building expenditure relating to earlier years. On facts and circumstances of the case and law applicable, an aliquot portion of brand building expenditure should also be allowed for the year under consideration.

Deduction under section 80JJAA:- The learned CIT(A) has erred in 10. confirming the action of the learned assessing officer in disallowing deduction claimed under section 80JJAA amounting to Rs. 445,35,11,127. On facts and circumstances of the case and law applicable, impugned disallowance should be deleted in entirety and deduction under section 80JJAA should be allowed as claimed in the return of income.

Disallowance of payments made to overseas subsidiaries under section 11. 40(a)(i) — The learned CIT(A) has erred in confirming the action of the learned assessing officer in disallowing payments made to overseas subsidiaries totally amounting to Rs. 269,31,41,150 under section 40(a)(i) for not deducting tax at source in respect of the said payments. On facts and circumstances of the case and law applicable, impugned disallowance under section 40(a)(i) should be deleted in entirety.

Levy of interest under section 234B :- The learned CIT(A) has erred in 12. confirming the action of the learned assessing officer in levying interest under section 234B of the Act. On facts $nd circumstances of the case and law applicable, interest under section 234B is not leviable. The appellant denies its liability to pay interest under section 234B.

13. Prayer :- In view of the above and other grounds to be adduced at the time of hearing, the appellant prays that the order passed by the learned CIT(A) to the extent prejudicial to the appellant be quashed or in the alternative, the aforesaid grounds and relief prayed for thereunder be allowed.

The appellant prays accordingly.”

IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 4 of 85 3.1 The second ground in this appeal is regarding disallowance of expenditure in relation to income not includible in total income u/s 14A of the Income-tax Act,1961 ['the Act' for short].

4. Facts of the case are that the assessee is an Indian Company engaged in development and export of computer software. For the year under consideration, original return of income was filed on 30.11.2013 declaring total income of Rs. 8501,13,54,830. A revised return of income was filed on 31.3.2015 declaring total income of Rs. 8456,46,03,950. Notice under section 143(2) was issued and served. Various details, information, clarifications and documents were called for during the assessment and the same was submitted and explained. Reference was made to TPO for verification of computation of ALP of international transactions. The learned TPO vide order passed under section 92CA dated 23.6.2016 did not suggest or make any adjustment under section 92CA in respect of the international transactions. The assessment was completed and the assessment order under section 143(3) was passed on 29.12.2016. Aggrieved by the variations made in the assessment order, the assessee preferred an appeal before the Hon’ble Commissioner of Income Tax (Appeals) – 12, Bangalore. The learned CIT(A) passed the order on 21.12.2017. Aggrieved by the order passed by the learned CIT(A), the assessee has filed this appeal.

4.1 The ld. A.R. submitted that during the year, exempt income comprising off dividends from mutual funds and interest on tax free bonds amounted to Rs. 218,82,49,544. These dividends were directly credited to bank accounts of the appellant and / or reinvested as the case may be. No expenditure was incurred to earn the above exempt income. Nevertheless, the appellant quantified 5% of salary cost of CFO, 50% of salary cost of employees handling treasury functions

IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 5 of 85 and 10% of salary cost of CFC amounting to Rs. 8,06,938, Rs. 24,38,481 and Rs. 4,70,713 respectively totaling to Rs. 37,16,131 as the expenditure relatable to exempt income and the same was disallowed voluntarily in the return of income.

4.2. The AO in his order observed that the assessee company has had substantial amount of dividend investments made. For Asst. Year 2015-14, the assessee company had declared tax exempt dividend income of Rs. 217,87,07,775. However, assessee has shown an expense of Rs. 37,16,131 pertaining to the exempt income. The assessee company had substantial investment in the share of its subsidiary, M/s. Infosys BPO Ltd. The assessee has been a debt free company and there is no interest paid for the year. Considering the tax exempt income received from mutual funds, as well as investments in the share capital of Indian subsidiary, the assessee company was asked to explain the basis of amounts reduced from the dividend income as per section 14A of the Income Tax Act.

4.3 The AO further observed that the assessee's computation for disallowance u/s 14A is not in accordance with the provisions contained in Rule 8D of Income Tax Rules. The crux of section 14A, which is now obligatory in nature reads as under:-

" (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed70 if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provision of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act."

IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 6 of 85 4.4 The AO further stated in his order that on plain reading of the aforesaid provisions, it is evident that the following conditions are required to be satisfied before invoking the provisions of section 14A of the Act: o The assessee should have incurred the expenditure. o Such expenditure should be in relation to income: and o Such income does not form part of the total income under this Act.

4.5 Based on the above, it can be said that the provisions of section 14A of the Act would be attracted only if all the aforesaid conditions are cumulatively satisfied. The provisions of section 14A of the Act can be invoked where the assessee has not incurred any expenditure in relation to exempt income.

4.6 In this regard, the AO referred the decision of Hon'ble High Court of Delhi in the case Maxopp investments Ltd Vs. CIT (TS- 668-HC-2011(HC)), which has upheld the decision of the Hon'ble High Court of Mumbai in the case of Godrej and Boyce Company Ltd. In this case, the Hon'ble High Court has held that 14A disallowance is attracted even4n cases where Assessee Company has made strategic investments in the group companies as well as subsidiary companies. Considering the above, the AO has seen that the assessee company is liable for disallowance u/s. 14A of the Income Tax Act.

4.7 The AO further observed that it also is essential to draw reference to case of Dhanuka & Sons Vs. CIT (339 ITR 319 (Cal) ) wherein the Hon'ble High Court held that when the assessee is not able to show that the investment in shares are out of internal accounts or non-interest bearing funds, disallowance u/s.14A

IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 7 of 85 can be made. Reliance was also placed by the AO on the cases of Cheminvest Ltd. Vs. ITO (ITAT-SB-Del) 121 ITD 318 and Pradeep Kar Vs. ACIT (Kar) 319 ITR 416, wherein it was held that expenditure in relation to exempted income is to be disallowed u/s.14A even when no exempted income is earned during the year. Further, in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. Deputy Commissioner of Income tax, (2010) 234 CTR 1 (Born), High Court of Bombay has held that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of the total income under the Act. This was by virtue of the provisions of S.14A(1) and the provisions of Rule 8D of the IT Rules, which was notified w.e.f. 24.03.2008 and shall apply with effect from A.Y. 2008-09.

4.8 As the computation for the disallowance u/s 14A of the Act is not satisfactory, the assessee company was asked the applicability of Rule 8D of the Income Tax Rules and to furnish the details of the working as per Rule 8D of the Income Tax Rules. The company furnished the same vide letter dated 12/01/2016. On verification of the details filed by the company, the disallowance u/s 14A was by the AO computed as below:

Opening Closing 0.5% of Balance Balance Investments Average Average Mutual Funds 5,00,10,629 1580,49,24,490 792,74,67,560 3,96,37,338 Tax Free Bonds - 307,53,30,134 153,76,65,067 76,88,325 lnfosys BPO 659,42,43,797 659,42,43,797 659,42,43,797 3,29,71,219 Total 8,02,96,882

Total amount to be disallowed 8,02,96,882

IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 8 of 85 Less: amount already disallowed in Return 37,16,131 Balance amount to be disallowed 7,65,80,751 4.9 In view of the above details, a sum of Rs.7,65,80,751/- was disallowed and added back to the returned income of the assessee by the AO.

5. Aggrieved by the above order of the AO, the went in appeal before the ld CIT(A) stating that the assessing officer has erred in computing the disallowance under section 14A read with rule 8D(2)(iii) at Rs. 8,02,96,882/- and erred in making a disallowance of Rs. 7,65,80,751/-. The AO dealt with this issue at page 3 to 5 of the assessment order. He noted that the company had declared tax exempt dividend income of Rs.217.87 crores but only Rs 37.16 lakhs was shown as an expense pertaining to this exempt income. Mentioning that the assessee company had substantial investment in the shares of its subsidiary Infosys BPO Limited, he invoked the provisions of section 14A and computed the total disallowance at Rs. 8,02,96,882/-. Since Rs. 37,16,131/- was already disallowed by the assessee itself in the return, the balance amount i.e. Rs. 7,65,80,751/- was disallowed and added back.

5.1 The assessee’s main arguments are as follows:

• Exempt income comprising of dividends from mutual funds and interest on tax free bonds amounted to Rs. 218,82,49,5441-. These dividends were directly credited to bank accounts of the appellant and / or reinvested, as the IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 9 of 85 case may be. o expenditure was incurred to earn the above exempt income • Nevertheless, the appellant quantified 5% of salary cost of CFO, 50% of salary cost of employees handling treasury functions and 10% of salary cost of CFC amounting to Its. 8,06,938, Rs. 24,38,481 and Rs. 4,70,713 respectively totaling to Rs. 37,16,131, as the expenditure relatable to exempt income and the same was disallowed voluntarily in the return of income. • The appellant does not have any dedicated team or department to monitor, maintain or advise on investments. This job is handled by very few persons in the finance team, who partially devote their time to this aspect. The investment decisions are approved by the SW- Finance. Further, no expenditure was directly or indirectly incurred to earn the exempt income. • If the assessing officer does not demonstrate that the claim of the assessee, in respect of expenditure incurred in relation to exempt income, is incorrect, no disallowance can be made under section 14A. This was the view held in CIT v Hero Cycles Ltd (2010) :323 ITR 0518 (P&H) and Godrej & Boyce Mfg. Co. Ltd v LICIT (2010) 328 ITR 81 (Born). • The Supreme Court in CIT v Walfort Share and Stock brokers P. Ltd [2010] 326 1•1•R 1 has held that for attracting section 14A, there has to be a proximate cause for disallowance, which is in relationship with the tax exempt income. In the present case, there being no expenditure incurred for earning dividend and no proximate cause in relationship with the tax free dividend, no disallowance under section 14A is warranted. • The High Court of Punjab and Haryana in the case of PCIT v State Bank of Pahala 120171 391 ITR 218 held that only expenditure incurred to earn exempt income should be disallowed and expenditure incurred to protect, preserve,

IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 10 of 85 maintain and utilize the tax free investment should not be disallowed under section 14A.

• Infosys Ltd is a fully owned subsidiary of the appellant. Investment in shares of the said company was made for venturing into BPO business through a separate legal entity. The said investment was not made with a view to earn dividend income. The Karnataka High Court in CCI Ltd v JCIT r20121.250 CTR 291,,(Kar) held that notional amount cannot be disallowed under section 14A in the absence of an expenditure incurred in relation to an exempt income.

• The ITAT Delhi Special bench in the case of ACIT v Vireet Investment (P) Ltd 120171 82 taxmann.com 415 also held that only those investments are to be considered for computing average value of investment under rule 8D(2)(iii) which yielded exempt income during the year. In the present case, as explained earlier, no dividends were declared by Infosys BPO Ltd for the year under consideration.

• Investment in shares of subsidiary companies should not be considered while computing disallowance as per rule 8D of Income tax Rules.

• The CBDT aide its Notification No 43 / 2016 / F No 370142/7 / 2016-TPL dated 2.6.2016 amended sub rule (2) of rule 81) which provides for computation of expenditure in relation to income which does not form part of total income. The amended rule was applicable when the assessment order was passed under section 143(3) on 29.12.2106.

• The proviso to new rule 8D seeks to restrict the amount of disallowance u/s 14A read with rule 81) ,to the total expenditure claimed by assessee in this regard.

IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 11 of 85 • Thus, in view of the proviso to amended rule 8D(2), the disallowance under section 14A should be restricted to Rs. 37,16,131 being 5% of salary cost of CFO, 50% of salary cost of employees handling treasury functions and 10% of salary cost of CFC as voluntarily disallowed by the appellant under section 14A.

5.2 The ld CIT(A) in his order stated that the argument of the assessee that the investment in shares of the subsidiary company Infosys BPO Limited are not to be considered for computing the disallowance u/s 14A, the same being for strategic investment, is not acceptable. Similar issue was before Hon'ble Karnataka High Court in the case of United Breweries Limited (ITA 419/2009 dated "1.05.2016). The question of law before the Hon'ble High court was Whether in law, the provisions of section 14A of the Act are applicable to the expenses incurred by the assessee towards interest and others on the loan borrowed for advances made to the subsidiaries in the course of business for its expansion?" The Hon'ble court after considering the following findings of the Hon'ble Tribunal held that no question of law arises: "11; The revenue is in appeal and we have considered the rival contentions. IN our view, the recent judgment of the Special Bench in Bombay in ITO v. Daga Capital Management Pvt. Ltd.(2009) 312 ITR (AT) 1, is applicable to the facts of the present case. In this order, it has been held that section 14A is applicable even where the motive in acquiring the shares was to obtain controlling interest in the companies. The finding of the Commissioner of Income-tax (Appeals) cannot, therefore, be upheld as it is contrary to the decision of the Special Bench. We, accordingly, uphold in principle the applicability of section 14A. However, it is for the Assessing Officer to ascertain from the facts of the Case as to how much interest bearing borrowings was utilized to acquire shares in the companies. It is also necessary to see as to whether any interest bearing borrowed funds were used in making the advances and expenditure in the case of Castle Breweries.

IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 12 of 85 This factual exercise has to he carried out by the Assessing Officer after giving due opportunity to the assess of being heard. The Assessing Officer may make the disallowance of interest u/s.14A only if it is found that interest bearing borrowed funds were used to acquire shares in the companies or for making advances to Castle Breweries. We, therefore, restore this issue to the file of the Assessing Officer with the above directions. The ground is treated as partly allowed."

5.3 Further, the ld CIT(A) observed that the disallowance u/s 14A of the Act nowhere mandates that the exempt income should have been earned during the year. This was made clear by the CBDT in its Circular No. 5/2014 dated 11,02.2014.1n this circular, it is mentioned that:

"Thus, legislative intent is to allow only that expenditure which is relatable to earning of income and it therefore follows that the expenses, which are relatable to earning of exempt income have to be considered for4disallowance, irrespective of the fact whether any such income has been earned during the financial year or not.

4. The above position is further clarified by the usage of term 'includible' in the Heading to section 14A of the Act and also the Heading to "Rule 8D of IT Rules 1962 which indicates that it is not necessary that exempt income should necessarily be included in a particular year's income, for disallowance to be triggered. Also, section 14A of the Act does not the words "income? of the year" but "income under the Act". This also indicates that for invoking disallowance under section 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration."

5.4 In case of Punjab tractors Ltd, the Hon'ble P&H High Court held as under:

Page 13 of 85 expenditure incurred with respect to the exempt income for the purpose of section 14A. For instance, if the assessee claims that he has not incurred any interest expenditure but Ii incurred administrative expenses or vice- versa and the Assessing Officer disagrees with either claim, Rule 8D cannot be applied only in respect of any particular clause of sub-rule (2) of Rule 8D. He must then determine the amount of expenditure incurred in relation to exempt income entirely in accordance with Rule 8D.

In view of the above discussion, the ld CIT(A) upheld the order of the AO on this point and this ground was dismissed by ld. CIT(A).

8.1. During the year under consideration, dividend income from mutual funds which was exempt amounted to Rs. 23,45,95,152. It is also submitted that, no dividends were received in respect of shares of Infosys BPM Ltd (formerly known as Infosys BPO Ltd). Disallowance under section 14A voluntarily made by the assessee amounted to Rs.1,72,86,259/- on the basis of 50% of salary cost of CFO and 50% of salary cost of employees handling treasury function. 8.2. The Ld.AO made the disallowance under section 14A read with rule 8D(2)(iii) totally amounting to Rs.3,30,96,246/-, considering the average value of investments made in mutual funds and shares of Infosys BPM Ltd. After reducing the amount already disallowed by the assessee amounting to Rs. 1,72,86,259, balance sum amounting to Rs.1,58,09,987 was added to income returned by the Ld.AO. The Ld.AO relied on various decisions in support of the impugned conclusion that disallowance under section 14A should be made as per Rule 8D. 8.3. The DRP confirmed the disallowance under section 14A as per Rule 8D(2)(iii) relying on certain decisions and Circular No.5/2014 dated 11.2.2014. Following the DRP directions, the ld.AO has made an addition of Rs.1,58,09,987 under section 14A read with rule 8D(2)(iii).

IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 14 of 85 8.4. The Ld.AR at the outset submitted that the Coordinate Bench of this Tribunal in subsidiary assessee’s case being Infosys BPM Ltd. vs. DCIT in vide order dated 23/08/2021 has deleted the disallowance made under section 14A read with Rule 8D. This was for the reason that no satisfaction was recorded by the AO as to how the disallowance made by the Assessee was incorrect. The Coordinate bench of this Tribunal in assessee's own case for the AY 2006-07 in ITA No 799/B/2015 vide order dated 10.11.2017 deleted the disallowance under section 14A as per rule 8D in the absence of satisfaction of the Ld.AO on incorrectness of the claim made by the assessee. 8.5. Without prejudice, Special bench of Hon’ble Delhi Tribunal in the case of ACIT vs. Vireet Investment (P) Ltd., reported in (2017) 82 taxmann.com 415, among other cases has held that only those investments are to be considered for computing average value of investment under Rule 8D(2)(iii) which yielded exempt income during the year. In the present case, as submitted earlier, no dividends were declared by Infosys BPO Ltd., for the year under consideration. Thus, the investments made in the equity shares of Infosys BPO Limited should not be considered for computation of average value of investments under Rule 8D(2)(iii).

8.6 It is submitted that, if investments made in the equity shares of Infosys BPO Ltd., are excluded for computation of average value of investments under Rule 8D(2)(iii), the disallowance as per Rule 8D(2)(iii) at 0.5% of average value of mutual funds world only be Rs.1,25,027/-, which is less than the disallowance voluntarily made by the assessee amounting to Rs.1,72,86,259/-by Rs.1,71,61,232/-. Thus, the Ld.AR submitted that, if applicability of Rule 8D is to be made, the disallowance should be restricted to Rs.1,25,027/- and consequently the suo moto disallowance made by the assessee amounting to Rs.1,72,86,259/- should be deleted.

8.7. On the contrary, the Ld. St. Councel relied on the observations of the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us.

8.8. Admittedly, the assessee suo moto disallowed Rs.1,72,86,259/- u/s.14A. We note that the Ld.AO while computing disallowance under Rule 8D(2)(iii), included the investments made in Infosys BPO Ltd., that did not yield any exempt income for year under consideration. Going by the submissions of the Ld.AR, ratio laid down in Vireet Investment(supra), the disallowance then computed would be less that the disallowance voluntarily offered to tax by the assessee which is not the right course to be adopted. We therefore uphold the disallowance voluntarily made by the assessee that has been offered to tax by the assessee. We direct the Ld.AO to compute the disallowance as voluntarily offered by the assessee. Needless to say that proper opportunity of being heard mist be granted to the assessee.

Accordingly, this ground raised by the assessee stands partly allowed.”

IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 15 of 85 6.1. Keeping in view of the above, on the similar lines, this issue is remanded to the ld. AO to compute the disallowance by excluding the investment made in Infosys BPO Ltd. that did not yield any exempt income for the year following the ruling of the Special Bench of the Tribunal in Vireet Investment reported in (2017) 82 taxmann.com 415. Accordingly, this ground of appeal is partly allowed.

7. Ground Nos.3 & 4 in assessee’s appeal are regarding disallowance of subscription charges paid to Forrester research at Rs.3,18,52,696/- and Gartner at Rs.1,08,79,768/-.

Page 16 of 85 Rs. 3,18,52,696 paid as subscription to research reports to Forester Inc is disallowed as the assessee has not made TDS thereon. It is also seen that in a recent decision, the Karnataka High Court has upheld a similar disallowance of payments made to M/s. Gartner Research Services holding the same to be payments in the nature of royalty. This amount of 3,18,52,696 is disallowed u/s. 40 of the Income Tax Act. This amount is included in brand building expenses. However, the payment of 3,18,52,696 is separately and protectively disallowed on the merits of what is stated above.

9.1. It is seen that the assessee company had made a payment of Rs.5,45,63,088 towards Gartner Research and Services, out of this amount, TDS was done an amount of Rs.4,36,83,320 and the assessee company had not deducted taxes on an amount of Rs.1,08,79,768. In a recent case of M/s. Wipro Ltd, (TS-701-HC- 2011) the Hon'ble High Court of Karnataka had held that the payments made to Gartner are not eligible to be deducted as the assessee company has not made TDS thereon. The Hon'ble High Court had held that this expenditure was in the nature of royalty and the assessee ought to have made TDS thereon. The assessee company had furnished the details of TDS compliance and stated that for an amount of Rs. 1,08,79,768/- TDS was not deducted.

9.2 On consideration of the assessee's contention, it is seen that this issue has already been considered by the Hon'ble High court of Karnataka and ruled against the assessee. This amount of Rs. 1,08,79,768 is disallowed by the AO u/s. 40 (a)(ia) of the Income Tax Act.

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Page 17 of 85 10. We have heard the rival submissions and perused the materials available on record. This issue came for consideration before this Tribunal in assessee’s own case in earlier assessment year in dated 28.11.2022 for the assessment year 2012-13 wherein it was held as under:

“9. Ground nos. 14-21 are in respect of following two issues. 1) Disallowance u/s. 40(a)(i) in respect of subscription fee paid to M/s. Forrester Research and M/s. Gartner amounting to Rs.2,82,09,462/- and Rs.3,17,31,606/-. 2) Disallowance u/s. 40(a)(ia) / 40(a)(i) in respect of software expenses amounting to Rs.30,23,602/- and Rs.14,65,417/-respectively.

9.1. It was submitted that these expenditure were disallowed by the Ld.AO for non-deduction of TDS u/s.195 of the Act. The Ld.AO followed the decision of Hon’ble Karnataka High Court in case of CIT vs. Samsung Electronics Co. Ltd. reported in (2011) 203 Taxman 477. It is submitted that Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT reported in (2021) 432 ITR 471 as distinguished decision of Hon’ble Karnataka High Court. In our opinion, as the decision of Hon’ble Supreme Court was not available to the revenue authorities in the interest of justice, we remand these issues back to the Ld.AO/TPO to verify these claims in accordance with the principles laid down by Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT (supra). In the event after verifying the relevant agreements / invoices and applying the ratio laid down by the Hon’ble Supreme Court, no TDS is liable to the deducted, the disallowance u/s. 40(a)(i) / 40(a)(ia) deserves to be deleted. The Ld.AO is directed to carry out necessary verifications in accordance with law by granting proper opportunity of being heard to assessee.

Accordingly, ground nos. 14-15 and 17-21 stands allowed for statistical purposes.”

10.1 Keeping in view of the above, on the similar lines, this issue is remanded to the ld. AO to verify the claim as per the decision of Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT reported in (2021) 432 ITR 471. Accordingly, these grounds of appeal are allowed for statistical purposes.

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Page 18 of 85 11. The next grounds in this appeal in ground nos.5 to 7 are regarding disallowance of software expenses of Rs.1,45,000/- u/s 40(a)(ia) of the Act for not making TDS under section 194J of the Act.

"The details of the expenditure on which tax is deducted and not deducted in detailed below:

Tax deducted/ Not deducted Amount in INR SI.No 1 Tax deducted 336,32,93,129 2 Tax not deducted 4,67,690 3 Purchase by overseas 46,02,51,534 branch office 4 TDS not applicable 202,90,08,182 585,30,20,535 Total 13.1. The AO further observed that the assessee company was asked as to why TDS was not deducted on the software expenses. Further, the assessee was asked to explain why the said software expenses were not capitalized as software is one of the capital items on which depreciation is allowed at 25%. The company made its submission regarding the non-compliance of TDS, the assessee company stated that the assessee has deducted tax at source from the payments made to the vendors wherever the provisions of chapter XVII of the Act are applicable. Regarding the capital vs revenue issue, the assessee has argued that payments made

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Page 19 of 85 towards software and revenue expenditure would not partake the character of capital expenditure under any circumstance.

13.2 The AO in his order further observed that the software expenses on which TDS was not made, was held as liable for disallowance u/s. 40(a)(ia) of the Act in view of the provisions of S. 195/194J of the Act. This has also been upheld by the Hon'ble Karnataka High Court in the case, of M/s. Samsung Electronics Ltd. Further, the purchases made by the overseas branch was claimed as expenses by the assessee. The assessee company was liable to deduct TDS at the time of reimbursement of the same expenses; however, it was not done by the assessee company. There is a plethora of judicial pronouncements supporting the fact that TDS compliance is mandatory even if the expenditure is incurred by the way of reimbursement. Where the cost of services was charged and recovered by way of reimbursement, even without any profit element TDS will be applicable as ruled in the case of M/s Arthur Andersen & Co by the Mumbai tribunal reported in 94 TTJ 736 (Mum). Accordingly, the amount of Rs.4,67,690 is held as attracted for disallowance u/s. 40 of the Act.

14. The assessee is aggrieved that the assessing officer has erred in disallowing software expenses of Rs. 4,67,690 under section 40 for not deducting tax at source in respect of the said payments. The AO noted that the assessee had incurred an amount of Rs 4,67,690/- as software expenses on which no tax was deducted at source. Placing reliance on the decision of Hon'ble Karnataka High Court in the case of Samsung Electronics, he disallowed the same u/s 40(a) of the Act.

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Page 20 of 85 14.1 The main arguments of the assessee are that out of the total payments of Rs. 4,67,690/-, the assessee had deducted the tax at source and paid it in respect of a sum of Rs. 3,22,690 and in respect of the balance sum of Rs. 1,45,000 on which TDS was not made, M/s. Ample Technologies (P) Ltd has confirmed that the revenue from Infosys Ltd has been taken into account for determination of its total income. Thus, in view of the above, entire disallowance of Rs. 4,67,690 should be deleted.

14.2. In support of the same, the assessee furnished copies of MS certificates for admission as additional evidence. It also enclosed a letter from Ample Technologies Pvt. Ltd. to substantiate its claim that revenue from Infosys has been taken into account (by M/s. Ample Technologies) for determination of its total income. The assessee referred to explanation to section 191 to state that the payer (i.e. the assessee) cannot be regarded as assessee in default. Reliance was placed on the decision of Hon'ble Allahabad High Court in the case Jagran Prakashan (345 ITR 288) to state that "onus is on the revenue to demonstrate the taxes have not been recovered from the person who had the primarily liability to pay tax and it is only when primary liability is not discharged that vicarious recovery liability can be invoked."

15. The ld. CIT(A) has carefully considered the order of the assessing officer, the arguments made by the assessee and the case laws relied upon. The additional evidence was forwarded to the assessing officer. In his remand report dated 18.12.2017 he has verified and confirmed that "tax has been deducted on Rs 322690/-". The disallowance to this extent was therefore deleted by the ld. CIT(A).

IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 21 of 85 15.1 Regarding the claim of allowability of the balance sum Rs 145000/-, the ld. CIT(A) observed that the same is not acceptable. The assessee has raised the contention that it is the duty of the Revenue to demonstrate that the person concerned has not paid the amount directly. It relied on the decision of Hon'ble Allahabad High Court in case of Jagran Prakash (supra).

15.2 The ld. CIT(A) however observed that this decision was rendered on 23.05.2012. W.e.f. 01.07.2012, a proviso has been added to Section 201, whereby the assessee shall not be deemed to be assessee in default if certain conditions are fulfilled including the payment of tax on the income under consideration by the payee and the person i.e. the deductor furnishes a certificate to this effect from an accountant in the_prescribed form. Thus, the ld CIT(A) opined that the onus lies squarely on the deductor to prove that the payee has paid taxes on such income. The burden cannot be shifted to the Revenue by merely claiming that the taxes have been paid by the payee. In so far the claim of the assessee that Ample Technologies has included this amount in the total income, submission of a letter from the payee does not meet the requirement of proviso to section 201(1). The relevant part of the section is reproduced hereafter: Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a resident or on the sum credited to the account of a resident shall not be deemed to be an assessee in default in respect of such tax if such resident— (i) has furnished his return of income under Section 139;

(ii)has taken into account such sum far computing income in such returns of income; and (iii)has Paid the tax due on the income declared by him in such return of income,

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Page 22 of 85 and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed': This proviso clearly mandates that the onus is on the payer to furnish a certificate from an accountant in the prescribed form and only on fulfilment of the cumulative conditions (i) to (iii), the assessee will not be deemed as assessee in default.

In view of the above, this ground was partly allowed by the ld. CIT(A).

17. The next ground of appeal in ground No.8 is with regard to disallowance of software expenses as revenue expenditure at Rs.15,06,78,646/-.

Page 23 of 85 its business, in a limited manner. The impugned expenditure did not result in acquisition of any asset by the assessee.

Page 24 of 85 Rs.336,32,93,129/-, purchase by overseas branch office of Rs. 46,02,51,534 and software expenses on which TDS was not applicable amounting to Rs. 202,90,08,182/-, as a capital expenditure eligible for 25 percent depreciation amounting to Rs. 146,31,38,211/- and erred in making a net disallowance of Rs. 438,94,14,633/-. The assessee contended that the software expense should be held as revenue expenditure and without prejudice, depreciation should be allowed on the disallowance made for earlier years. 20.1 During the year under consideration, the assessee had incurred an amount of Rs 583.23 crores on software expenditure on which tax was not deducted at source. The AO held that as per the appellant's own contention it has only purchased the "right to use" of the software that it had not purchased the software itself. The AO treated the same as expenditure on acquisition on intangible asset eligible for depreciation at the rate of 25 percent amounting to Rs 146,31,38,211/-. The balance amount of Rs 438,94,14,633/- was disallowed. 20.2 The main arguments of the assessee before the ld. CIT(A) are as under: • software expenses was incurred in relation to the usage of the licensed software. As a result of the outlay, the appellant secured a license to use the software. The license was available for a limited period. The license was renewable, by payment of the lees at pre-defined intervals. • The renewal of these software licenses had to be done yearly in order to get versions, updates, patches or to bug fixes. Some of these software licenses arc used internally for business sustenance and running of inhouse systems/ applications.

IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 25 of 85 • Some software licenses were in the nature of security software used for firewall requirements, software used for optimizing software development by coders, for mechanical design and analysis, for Maintenance of Mainframe tools, testing, application tools used for internal Mainframe environment, for automation of essential business processes, validation, and conversion and completing with multi-channel report generation, software in relation to integrated Marketing providing solutions to enhance marketing performance • The appellant was permitted to use the software for its business, in a limited manner. • The 'ownership test' was therefore not satisfied. The expenditure did not result in enduring benefit or advantage in the capital field. • The utility of purchased software becomes obsolete due to technological changes, advancements, invention and innovation. Recurring expenditure in the form of renewal premium, maintenance, technical support, upgradation etc is incurred in respect of purchased software. • In the present case, the software expenses were for software licenses in respect of application software. It was not in the nature of system software. The appellant had to incur regular expenditure for renewal, upgrades and maintenance of these software licenses. • Without prejudice, depreciation on software expenses held as capital expenditure is to be allowed at 60% and not at 25%. As per New Appendix I to Income tax rules, 1962 which provides the table of rates at which depreciation is admissible, computers including computer software is eligible for depreciation at the rate of 60%.

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Page 26 of 85 20.3 Assessee also placed reliance before the ld. CIT(A) on the decision of Hon'ble Karnataka High Court in the case of IBM India Ltd. (357 ITR 88) and Toyota Kirloskar Motor Ltd (349 ITR 65) and claimed that expenditure be regarded as revenue expenditure when the same is incurred on application software and not system software.

"The amount is paid for application of software WO not system software, The application software enables the assessee to carry out his business operation efficiently and smoothly. However, such software itself does not work on standalone boats. The same has to be fitted to a computer system to work. Such software enhances the efficiency of the operation. It is an aid in manufacturing process rather than the tool itself Thus for payment of such application software, though there is enduring benefit, it does not result into acquisition; of any capital asset. The same merely enhances the productivity or efficiency and hence can be treated as revenue expenditure. In fact, this court had an occasion to consider whether the software expenses are allowable as revenue expenses or not and held when the life, of a computer or software is less than two years and as such, the right to sue it for a limited period, the fee paid for acquisition of the said right is allowable as revenue expenditure” 21.1 The Hon’ble Court therefore held that the right to use the software is for a limited period where the life of software is less than two years in such cases the expenditure will be allowable as revenue expenditure. Considering the above decision of the Hon'ble Karnataka High Court, this ground of the assessee was allowed by IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 27 of 85 the ld. CIT(A) for statistical purposes with the direction to the AO to treat the expenditure as revenue expenditure wherever the life of the software is less than two years. The ld CIT(A) further observed that wherever the life is more than two years, the expenditure cannot be allowed on revenue account and is to be held as capital in nature on which depreciation at the prescribed rate is to be allowed. For statistical purposes this ground was allowed by the ld. CIT(A).

Page 28 of 85 Rs.1,12,79,58,096/-. The net addition made after allowing depreciation amounted to Rs.3,38,38,74,290/-. 11.3. The DRP confirmed the disallowance made by the Ld.AO and also the depreciation rate of 25%. It was held that software are tools of assessee’s business and hence capital in nature. It was also held that the invoices produced do not indicate that software payments are for annual maintenance or for software having life less than 2 years. Following the DRP Directions, the Ld.AO disallowed software expenses of Rs.4,51,18,32,386/- as capital expenditure and allowed depreciation on the same at 25% amounting to Rs.1,12,79,58,096/-. The net addition made after allowing depreciation amounted to Rs.3,38,38,74,290/-.

11.4 Before us, the Ld.AR submitted that the software expenses was incurred in relation to the usage of the licensed software. As a result of the outlay, the assessee secured a license to use the software. The license was available for a limited period. The license was renewable, by payment of the fees at pre-defined intervals. In many cases, the software licenses were used by the employees for software development, maintenance, testing of applications etc. The Ld.AR submitted that Coordinate Bench of this Tribunal in assessee’s own case for AY 2005-06 IT(TP)A No 102/Bang/2013 dated 10.11.2017 set aside the issue of allowability of software expenses to Ld.AO with a direction to verify the nature and purpose of software expenses and decide in the light of decisions in, Empire Jute Co Ltd reported in 124 ITR 1, Alembic Chemicals Works Co Ltd reported in 177 ITR 377, IBM India Ltd 357 ITR 88 etc. The relevant extracts are under.

The Ld.AR submitted that, following the direction of this Tribunal, the Ld.AO passed the OGE to ITAT order on 3.9.2019 and allowed the software expenses as revenue expenditure.

11.5. The Ld.AR submitted that the software expenses were for software licenses in respect of application software. It was not in the nature of system software. The Ld.AR submitted that the assessee incurred regular expenditure for renewal, upgrades and maintenance of these software licenses and if the principles

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Page 29 of 85 enunciated in all the above judicial precedents are applied to the facts of the assessee the whole of the software expenses constituted revenue expenditure and did not in any way partake the character of capital expenditure. He submitted that the approach of the Ld.AO in classifying the software expenses as capital is contrary to law.

11.6. Without prejudice, the Ld.AR also submitted that in the event the expenditure is held to be capital in nature, depreciation on software expenses is to be allowed at 60%. The Ld.AR relied on decision of coordinate bench of this Tribunal in assessee’s own case for the AY 2005-06 wherein it was held that if software expenses are treated as capital expenditure, then, depreciation on the same should be allowed at 60% and not at 25%. Without prejudice, depreciation should also be allowed in respect of software expenses of earlier years held as capital in nature. On the contrary, the Ld.St.Counsel relied on the observations of Ld.AO/DRP. We have perused the submissions advanced by both sides in the light of records placed before us.

11.7. We note that the Ld.AO has not examined the documentary evidences in respect of this claim. We therefore set aside this issue to the Ld.AO with a direction to consider the claim of the assessee in the light of evidences / documents filed. The Ld.AO shall also verify this issue based on the principles laid down by Hon’ble Supreme Court in case of Engineering Analysis (supra). Accordingly, these grounds raised by assessee stands partly allowed.”

22.1 Keeping in view of the above, we remit the issue to the file of AO for re-examination on similar lines. This ground of appeal is partly allowed for statistical purposes.

23. The next ground in this appeal is ground No.9 with regard to disallowance of brand building expenses at Rs.64,13,83,193/-.

23.1 Facts of the case are that during the year, the assessee incurred an amount of Rs. 84,44,61,455/- on account of brand building expenditure. The brand building expenditure were in the nature of subscription to research reports by research agencies and advisory services, participation / sponsorship in seminars, exhibitions, marketing and sales events, retainership amounts paid towards public relations agencies, annual and periodic customer

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Page 30 of 85 and sales meets, sponsorship fees, publishing charges, travel reimbursements, photocopy charges, expenditure incurred for setting up of Booth for exhibition or display of Infosys name, expenditure on conferences, events, sales marketing expenses etc.

"Infosys generates around 98% of its income from overseas clients mainly from the North American, European and Asia Pacific markets. The US for instance is the largest IT spender in the world and is a significant market for the company. We compete for projects with major overseas competitors like Accenture, Bearing point, Cap Gemini etc in addition to the major Indian competitors. In order to create visibility among clients and to retain and sharpen our competitive edge, we incur certain expenses as business development expenses and such expenditure has been termed as "brand building expense? in our books. In fact, these expenses are incurred for the purpose of reaching out to our potential clients and making the potential clients aware of our products and services. Thus, the expenses are incurred for the purpose of business and not just for creating the brand image of Infosys.

The various types of business expenses which are booked under the expenditure head "Brand Building" are as below:  Subscription to research reports by research agencies and advisory services. These research reports contain cutting edge information on developments on the technology front, growth opportunities, markets that are significantly expanding, trends and direction in global, region specific, industry specific IT spending and new services and opportunities shaping the market in which we operate.  Participation/sponsorship in seminars and exhibitions, marketing and sales events. Such sponsorships and participation is with a view of attaining high impact visibility among CIOs (Chief

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Page 31 of 85 Information Officers) and decision makers in global companies that could lead to significant project wins for the company. Annual and periodic Customer and Sales meets for our international client based in the North American, European and Asia Pacific clusters. This is part of our ongoing branding activity of maintaining relations with our clients, and their key decision making executives.

Brand building expense constitute expenditure from accounting perspective Section 145 of the Income-tax Act, 1961("the Act") states that income chargeable under the head 'profits and gains of business or profession' is to be computed in accordance with the method of accounting regularly employed by the assessee which in our case is the accrual system of accounting. The accounts drawn up under this system has to be in conformity with the provisions of the Companies Act, 1956; the generally accepted accounting principles and the accounting standards issued by Institute of Chartered Accountants of India ("ICAO. Accounting Standards-26 on 'Intangible Assets' states that the expenditure is to be recognized as an intangible asset only if (i) the asset resulting from the expenditure is clearly identifiable; (ii) the future economic benefits flow to the enterprise from use of the asset; and (iii) these economic benefits are within the control of the enterprise. Para 17 of the Accounting Standard states as follows: "An enterprise may have a portfolio of customers or a market share and expect that due to its efforts in building customer relationships and loyalty, the customers will continue to trade with the enterprise. However, in the absence of legal rights to protect,. or other ways to control the relationships with customers or the loyalty of the customers Ca the enterprise, the enterprise usually has insufficient control over the economic benefits from customer relationships and loyalty to consider that such items meet the definition of intangible assets: Brand building does not result in any identifiable asset, by nature does not give any legal rights to control customer relationships and does not result in any control of future economic benefits. Hence, Brand building expenditure does not satisfy the very definition of Intangible Asset as given by the accounting standard and hence the conditions of Accounting Standard 26 have not been fulfilled in order to qualify brand building expenditure as an intangible asset. Allowabilily of brand building expenses Claim of brand building expenses as a deduction is to be examined under the head "Profits and gains of business or profession". This head of income is IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 32 of 85 housed in sections 28 to 44DB. Under section 28(i) the profits and gains of any business or profession carried on by the assessee at any time during the previous year is chargeable to tax. As per section 29, the income referred to in section 28 should be computed in accordance with the provisions contained in sections 30 to 43D. Sections 30 to 36 confer specific deductions. Section 37 deals with expenditure which is general in nature and not covered within sections 30 to 36. The allowability of brand building expense would have to be examined under section 37 - the residuary section. To examine eligibility of brand building expenses under section 37, the character of expenditure needs to be examined. If the expenditure is regarded as capital in nature, section 37 would prohibit its deduction. It is expenditure on revenue account that qualifies for deduction. Brand building expenses, by nature, do not result in any identifiable asset in the capital field. The future economic benefit from such expenses cannot be measured with certainty at the time of incurring such expenditure. In a highly competitive and dynamic market environment, such expenses may or may not result in any new business for the company. Moreover, brand building expenses are recurring in nature and have to be incurred every year in order to maintain the visibility in the market place and to ward off competition from our competitors. Brand building expenses thus did not constitute capital expenditure. This is confirmed by the ratio of the Supreme Court ruling in Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 (SC) stating that expenditure is capital in nature, if the expenditure results in an identifiable asset in the capital field. In the case of brand building, there is no identifiable asset in the capital field and hence does not constitute capital expenditure. In CIT v Citi Financial Consumer Finance Ltd(2011) 335 ITR 29, Delhi High Court observed - "the expenditure on publicity and advertisement is to be treated as revenue in nature allowable fully in the year in which it was incurred. Concededly, there is no advantage which has accrued to the assessee in the capital field. The expenditure was incurred to facilitate the assessee's trading operations. No fixed capital was created by this expenditure. We may also add here that in the Income-Tax laws, there is no concept of deferred revenue expenditure. Once the assessee claims the. deduction for whole amount of such expenditure, even in the year in which it is incurred, and the expenditure fulfills the test laid down under Section 37 of the Act, it has to be allowed. Only in exceptional cases, the nature mentioned in Madras Industrial Corporation (supra), the expenditure can be allowed to be spread

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Page 33 of 85 over, that too, when the assessee chooses to do so"(emphasis supplied) In ITO v Spice Communications Ltd. (2010) 35 SOT 78 (Del-ITAT) the assessee was in the business of providing cellular mobile services. The assessee had incurred expenditure towards advertisement and sales promotion in course of carrying on its business activities. The Assessing Officer has allowed 90 per cent of the expenses as revenue expenditure and allocated 10 per cent towards capital by observing that 10 per cent of expenses have been incurred towards brand building. In this context, the tribunal observed as under:

"Since by incurring expenditure on advertisement and sales promotion, the assessee has not acquired any fixed capital asset, but these expenditures were incurred for earning better profits, and for facilitating assessees operation of providing cellular mobile services, there exist direct nexus between the advertisement and sales promotion expenses and the carrying out of the business activity of the assessee. We, therefore, do not find any justification in interfering with the order of the CIT(A) in deleting the disallowance of 10 per cent of expenses towards advertisements and sales promotion incurred by the assessee for smooth functioning and carrying on assessees 'business effectively, proficiently and profitability"

In Fine Jewellery (India) Ltd v ACIT (2014) 8 TaxCorp (A.T.) 37139 (Mum-ITAT) the Mumbai tribunal ruled - "....Just because an expenditure is debited in books as toward brand building, which it purportedly is, and a statutory recognition has since been accorded to such intangible assets, as a 'brand, would not by itself imply that an advantage in the capital field, or of enduring value to the business, has arisen to the assessee upon incurring the expenditure. Rather, the business being competitive, and prudence and conservatism being fundamental accounting assumptions, capitalization of such expenses, or ascribing lasting/abiding value to such expenses, could only be done on sound footings and cogent basis....

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Page 34 of 85 treated by it as revenue expenditure, admissible u/s.37(1) of the Act. We decide accordingly." Brand building expenses to be in the year of incurrence & not in a deferred manner The concept of deferred revenue expenditure is essentially an accounting concept It is alien to the Income-tax Act. Income-tax statute recognizes only capital or revenue expenditure. Deferred revenue expenditure denotes expenditure for which a payment has been made or a liability has been incurred, which is essentially revenue in nature but which for various reasons (like quantum and period of expected future benefit etc.) is written-off over a period of time. Though the nature of such expenditure is 'revenue', yet the benefits there from are 'presumed' to arise over a period of time (stretching sometimes over several accounting years).

The concept was enunciated by the Supreme Court in the case of Madras Industrial Investment Services 225 ITR 802. The case related to discount on debentures. The Supreme Court held that the discount had to be amortized over the life of the debentures, in view of the continuing relationship between the debentures and discount vis a vis the company. To classify expenditure as deferred revenue expenses the benefits derived there from should be ephemeral arid transitory in nature in as much as these are incurred as a part of a continuous process. In the case of brand building expenses, such continuing relationship is absent. The ratio of the Supreme Court decision therefore would not be applicable to expenses on brand building. As a result, no portion of expenditure is required to be capiNlized or amortized or treated as deferred revenue expenditure. Amount offirand Building Expenditure for the current year i.e. AY 2013- During the year under assessment an amount of Rs.84,44,61,455 was debited to Profit and Loss account on account of Brand Building Expenditure. In our computation of taxable income, this was claimed as an allowable expenditure for respective STP/SEZ units as follows:

10AA SEZ 10AA SEZ Other Total units-50% units-100% taxable units 55,71,36,697 84,44,61,455 19,51,84,829 9,21,39,929 IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 35 of 85 24.1 The submissions made by the assessee were considered by the ld. AO. The ld. AO observed that this issue has been duly examined in the earlier years also. It has been already held that the expenditure incurred is giving a benefit over a period of time and that it cannot be allocated entirely in one year as brand building expenditure. It has been held in assessment order for A.Y. 2006-07 that 1/5th of the expenditure should be allowed and the balance 80% should be allowed in the next 4 years in equal proportions.

24.2 Considering the submissions made by the assessee as above, an amount of Rs. 16,03,45,798 was allowed by the AO in this year and the balance amount of Rs. 64,13,83,193 was held as attracted for amortization over the next four years. This does not include the non-TDS portion of the payments made to Gartner (Rs.1,08,79,768) and Forrester (Rs.3,18,52,696) which are disallowed on protective basis in other part of this order. 24.3 Also, as per the direction of DRP in earlier years, an amount of Rs.23,32,95,533 was allowed by the ld. AO towards 20% of the earlier years brand bldg. expenses disallowed, as under:-

[Addition Rs.40,80,87,660] Other Brand Building Relating to (Excluding AY 1/5th of the disallowed u/s 40) same AY 2011-12 63,75,11,543 12,75,02,309 3rd 9,58,71,085 4th 47,93,55,425 AY 2010-11 5th AY 2009-10 4,96,10,695 99,22,139 Total 1 23,32,95,533

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Page 36 of 85 25. The assessee is aggrieved before the ld. CIT(A) that the assessing officer has erred in treating brand building expenses of Rs.80,17,28,991 as deferred revenue expenditure, (erred) in allowing only one fifth of the said expenditure amounting to Rs. 16,03,45,798 and erred in holding that the remaining four fifth of the expenditure amounting to Rs. 64,13,83,193 is allowable as amortization over the next four years.

25.1 The ld. CIT(A) observed that the assesses has incurred an expenditure of Rs 84,44,61,455/- on brand building. The AO held that such expenditure is giving a benefit over a period of time and cannot be allocated entirely in one year. Based on the findings in the assessment year for AY 06.07, he allowed 1/5th of the expenditure during the year and the balance (Rs 64,13,83,193/-) was treated as allowable, amortized over the next 4 years. Further, he gave the benefit of Rs 23,32,95,533/- towards 20 percent of the earlier years brand building expenditure disallowed in earlier years. Thus, a net disallowance of Rs.40,80,87,660/- was made.

25.2 The main arguments of the assessee before the ld. CIT(A) are as under: • The brand building expenditure were in the nature of subscription to research reports by research agencies and advisory services, participation / sponsorship in seminars, exhibitions, marketing and sales events, retainership amounts paid towards public relations agencies, annual and periodic customer and sales meets sponsorship fees, publishing charges, travel reimbursements, photocopy charges.; ,expenditure incurred for setting up of Booth for IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 37 of 85 exhibition or display of Infosys name, expenditure on conferences, events, sales marketing expenses etc. • the expenditure under the head 'brand building expenditure' was regular business expenditure incurred in the course of business • It did not result in acquisition or creation of any asset or brand • The benefits on account of incurring the impugned expenditure, if any, were in revenue field and not on capital account. • In the present case, there is no continuing relationship in respect of the brand building expenses as envisaged by the Supreme court.

25.3 The ld. CIT(A) has carefully considered the order of the assessing officer, the arguments made by the assessee and the case laws relied upon. This issue was also before the ITAT in Assessee’s own case for AY 2005-06 (ITA No. 1O2/Bang/2013 order dated 10.11.2017), wherein it was held as under:

"We have heard the rival contentions, perused and carefully considered the material on record. From a perusal of the break up of brand building expenditure (placed at page 710 of paper book) it is seen that the)' are incurred in respect of subscription charges, sponsorship fees, retainer charges, publishing charges, marketing fees, consulting fees, global meets, trade show fees, exhibition stall space, etc. In our view, this expenditure incurred is in the course of and for the purpose. of assessees business and it cannot be said that the said expenditure has resulted in the acquisition of any 'intangible asset' eligible for depreciation @ 25% as held by the learned C1T (Appeals); which finding is not home out by the facts on record.

15.2.3. On a perusal of the orders of the authorities below, it appears to us that the Assessing Officer and learned CIT (Appeals) in coming to their views have merely gone by the nomenclature 'brand building expenditure' without actually

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Page 38 of 85 examining the nature of each expenditure under the above head. In view of the above, we restore this issue of 'brand building expenditure' back to the file of the Assessing Officer to verify the nature and description of expenditure included under the head' brand building' and decide the issue of allowability of brand building expenditure as revenue expenditure in .the light of our observations and after affording the assessee adequate opportunity of being !lean] and to file details / submissions in this regard, which shall be duly considered. Consequently, grounds 8.1 and 8.2 of the assessee's appeal are treated as allowed for statistical purposes."

25.4 Following the decision of this Tribunal, this ground was allowed for statistical purposes by the ld. CIT(A) with the direction to the AO to consider and verify the nature of the expenditure included under the head brand building.

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Page 39 of 85 12.3. The DRP directed the Ld.AO to consider the expenses of Rs.81,79,53,112/- as capital expenditure incurred for creating intangible asset in the form of ‘brand’, instead of deferred revenue expenditure. However, the Ld.AO was directed to grant depreciation at 25% considering brand as an asset eligible for depreciation. Following the DRP Directions, the Ld.AO treated the brand building expenditure of Rs.81,79,53,112/- as capital expenditure. From this, disallowance of payments made to Forester research and Gartner totally amounting to Rs.5,99,41,068/- was reduced, as they were the subject matter of separate assessment and on the remaining sum of Rs.75,80,11,864/-, the Ld. AO allowed depreciation at the rate of 25% amounting to Rs.18,95,02,966/-, and made addition of Rs.56,85,08,898/-. 12.4. The Ld.AR submitted that, Coordinate Bench of this Tribunal in assessee’s own case for the AY 2006-07 IT(TP)A No 799/B/2015 decision dated 10.11.2017, held that, the brand building expenses is in the course of and for the purpose of assessee’s business and cannot be said that the said expenditure has resulted in the acquisition of any ‘asset’, which finding is not borne out by the facts on record. 12.5. Further the Coordinate Bench of this Tribunal in assessee’s subsidiary i.e., Infosys BPO Ltd v DCIT decision dated 27.9.2019 for AY 2007- 08, allowed the brand building expenses and held as under:

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Page 40 of 85 12.6. It is submitted by the Ld.AR that the nature of expenses incurred by appellant and its subsidiary towards brand building expenses are identical. In view of the same, the aforesaid decision squarely applies to the present case also. The Ld.AR also relied on following decisions in support of this contention: i) Fine Jewellery (India) Ltd v JCIT [2014] 48 taxmann.com 16 (Mum-Trib) (ii) ITO v Spice Communications Ltd [2010] 35 SOT 78 (Delhi) (iii) CIT vs. Brilliant Tutorials Pvt. Ltd. [(2007) 292 ITR 399] (iv) CIT v Geoffrey Manners & Co. Ltd [2009] 315 ITR 134 (Bombay) (v) CIT v Asian Paints (India) Ltd [2016] 75 taxmann.com 152 (Bombay) (vi) DCIT v Polygel Industries (P.) Ltd [2015] 56 taxmann.com 198 (Mumbai - Trib.) (vii) PCIT v Seagram Manufacturing (P.) Ltd [2017] 78 taxmann.com 293 (Delhi) (viii) CIT v Spice Distribution Ltd [2015] 374 ITR 30 (Delhi) 12.7. On the contrary, the Ld.DR relied on observations by Ld.AO.

12.8 We have perused the submissions advanced by both sides in the light of records placed before us. We note that Coordinate Bench in case of the sister concerns of assessee(supra), considered identical issue on similar facts. Nothing has been brought on record by the revenue to the expenses incurred by the assessee is towards any capital asset. Respectfully following the same, we direct the disallowance to be deleted.” 26.1 Keeping in view of the above, on the similar lines, the addition is deleted and accordingly, this ground of appeal is allowed.

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Page 41 of 85 claim for AY 2012-13 and the third year claim for AY 2011-12. The assessee quantified and claimed the deduction under section 80JJAA in respect of each industrial undertaking. Annexure 1 to Form 10DA substantiates the same wherein deduction was claimed in respect of those industrial undertakings for which the eligibility conditions under section 80JJAA were satisfied.

28.1 From the computation filed by the assessee company the AO has observed that the company has claimed deduction u/s 80JJAA to the tune of Rs. 445,35,11,127/-.

The provision of sec. 80JJAAis noted as under :

"80JJAA. (1) Where the gross total income of an assessee, being an Indian company, includes any profits and gains derived from any industrial undertaking engaged in the manufacture or production of article or thing, there shall, subject to the conditions specified in sub-section (2), be allowed a deduction of an amount equal to thirty per cent of additional wages paid to the new regular workmen employed by the assessee in the previous year for three assessment years including the assessment year relevant to the previous year in which such employment is provided".

28.2 From the above the AO observed that the deduction u/s. 80JJAA were applicable only to industrial undertakings which are engaged in the manufacture or production of article or thing. The deduction was to be quantified with respect to additional wages paid to new regular workmen who had been employed in the previous three years. The definitions of additional wages, regular workman and workman have also been given in the Act.

(1) "additional wages" means the wages paid to the new regular workmen in excess of one hundred workmen employed during the previous year :

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Page 42 of 85 Provided that in the case of an existing undertaking, the additional wages shall be nil if the increase in the number of regular workmen employed during the year is less than ten per cent of existing number of workmen employed in such undertaking as on the last day of the preceding year; (ii) "regular workman", does not include— (a) a casual workman; or (b) a workman employed through contract labour; or (c) any other workman employed for a period of less than three hundred days during the previous year; (iii) "workman" shall have the meaning assigned to it in clause (s) of section 2 of the Industrial Disputes Act, 1947 (14 of 1947)]”

28.3 In view of the above, the assessee company was asked by the AO to substantiate its claim, the company furnished its submission vide letter dated 30.09.2016. In support of eligibility of its claim the company has stated as below:

The deduction U/s 80JJAA is available if the following conditions are fulfilled

(i) The eligible assessee should be Indian Company (ii) The gross total income of the assessee should include profits and gains derived from an industrial undertaking engaged in the manufacture of or production of an article or thing The eligible undertaking should employ at least 100 workmen. Further , the additional employees should be in excess of 10% of the workforce as on the last day of the immediately preceding previous year - (iv) The regular workman a. not be a casual workman

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Page 43 of 85 b. not worker employed through contract labour c. be employed for at least 300 days (v) An Audit report should be furnished for the claim of deduction under section 80JJAA. 28.4 The submissions of the assessee are considered, provisions of section 80JJAA as it stood for the relevant assessment year is extracted hereunder:

Where the gross total income of an assessee being an Indian company, includes any profits and gains derived from an industrial undertaking engaged in the manufacture Qr production of article or thing, there shall be subject to the conditions specified in sub section (2) be allowed a deduction of an amount equal to thirty percent of additional wages paid to the new workmen employed by the assessee in previous year for three assessment years including any assessment year relevant to the previous year in which such employment is provided.” (Emphasis supplied) 28.5 The AO in his order stated that it is evident from the above that the section is applicable to only to those assessee's who are manufacturing or producing an article or thing. In the instant case the assessee is a service provider and not a manufacturer. Secondly, wherever the Parliament intended to confer the benefit to a person who is in the business of production of computer software the same has been expressly stated as in the provisions of section 10A, 10B, Explanation in section 10AA, section 80HHE etc. Accordingly, there is an express omission of the term of computer software clearly.

28.6 The assessee has during assessment has made the claim based on the following contentions

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Page 44 of 85 a) Assessee is an Indian company b) Section 10(15) and 33B of Income tax Act define the term "industrial undertaking" c) The Industrial Disputes Act, 1947 defines the term "industrial undertaking" d) Manufacture involves deployment of men and material to convert raw material into a commodity of distinct commercial nature, character and use e) Production when juxtaposed with manufacture would take in bringing into existence new goods by a process which may or may not amount to manufacture and includes all by products, intermediates and residuals f) Thing refers to real or immovable, personal or movable, comprehending goods and chattels: and mixed, partaking of the characteristics of the two former as a title deed, a term for years g) "New Workman" means freshly recruited personnel h) Workman cannot be defined by merely considering the wages fact that Industrial Amendment Standing Order Act, Karnataka, 1946 has excluded professionals is irrelevant for the purposes of section 8OJJAA j) "Regular Workman" excludes only seasonal industries k) Any employee employed after 5th of June would not be working for 300 days and the statute cannot expect a person to perform an impossible thing 1) Quantum of wages paid to the new workmen determines the quantum of deduction m) Use of term wages does not exclude salaries n) Additional wages paid to new regular workmen will include such wages paid to all new regular workmen

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Page 45 of 85 o) Reliance is placed on a plethora of case laws 28.7 The contentions of the assessee have been carefully considered by the AO. From the provisions of section 10(15) and section 33B of the Act that the provisions defining the term "industrial undertaking" read as under:

10(15) Explanation 1 For the purposes of this sub-clause, the expression "industrial undertakings means any undertaking which is engaged in………………………….

Section 33B Explanation In this section, "industrial undertaking" means any undertaking which is mainly engaged in………….. 28.8 A perusal of the above by the AO revealed that while the former restricts the applicability of the definition only to references made in section 10(15)(iv) of the Act, the latter restricts the meaning to the section. The definitions are not omnibus in nature as the plain language of the statute restricts the meaning to the specified context does not permit their usage anywhere else. For example in the instances wherein the scope was to be extended, the Parliament has chosen to clearly mention with references as is normally made to the provisions of section 801 in the provisions of section 10A etc. Thus, the attempt of the assessee to extrapolate the meaning from a specifically restricted proviso is untenable. The AO also mentioned that wherever the Parliament had contemplated the benefit to be extended to the software sector, specific reference has been made as in section 10A or 10B where the words used are "export of articles or things or computer software" or in section 10AA where the words are "to manufacture or produce articles or things or IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 46 of 85 provide any services" followed by Explanation 1 which specifically mentions "computer software" as an addendum to rendering services. This when read with the meaning for the term computer programmes as defined in section 10BB reveals that there is an expansion of the term only for the purposes of section 10B and not for any other section. Thus, it becomes clear that the Parliament has always envisaged this sector to be one of rendering services and not a manufacturer. In fact, in the provisions of section 1OBB also the term used is only "undertaking" and not "industrial undertaking". Further, the fact that the Parliament has also chosen to bring this sector under the ambit of the provisions of the Service tax also reveals the intent to hold it only in the service sector and not one of manufacturer. Thus, on this ground also the claim of the assessee found to be untenable.

28.9 The next contention is that it fulfills the criteria laid out under the Industrial Disputes Act, 1947. The assessee also admits that by the Standing Order issued by the Government of Karnataka the software sector has been exclude, 1 but terms it to be irrelevant. Firstly, the Act distinguishes an undertaking manufacturing or producing an article or thing and another which is in the business of software. This stand has also been further strengthened by the fact that the State Government has also excluded it from the manufacturing sector. This being the case its claim to being a manufacturer becomes untenable.

28.10 The assessee has in its submissions stated that a) Manufacture involves deployment of men and material to convert raw material into a commodity of distinct commercial nature, character and use

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Page 47 of 85 b) Production when juxtaposed with manufacture would take in bringing into existence new goods by a process which may or may not amount to manufacture and includes all by products, intermediates and residuals c) Thing refers to real or immovable, personal or movable, comprehending goods and chattels: and mixed, partaking of the characteristics of the two former as a title deed, a term for years 28.11 The AO observed that it is clear that the definition of, manufacture requires two aspects to be fulfilled namely deployment of men and material and secondly to convert a raw material into a distinct commodity. Admittedly, this is not the case with the assessee. In the case of production it only brings under it ambit all byproducts, intermediates and residuals and brings in a process which ought to bring into existence new goods. The case of the assessee is not that it has brought into existence any fresh goods. In fact, the software developed are defined as intellectual property rights which are not goods. 'vase of any other service being rendered the same falls directly under the ambit of the term services and hence it does not meet its own definition of production. The definition provided by the Hon'ble Apex Court relied upon by the assessee for the term "Things" would also show that a total intangible would not qualify for a word coming under the ambit or the term “thing” when read with the phrase "manufacture or produce".

28.12 The AO further observed that the Parliament amending the provisions to specifically restrict it to industries covered under the Factories Act and the Explanatory notes to the amendment make it clear that the Parliament never intended to extend such benefits to IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 48 of 85 white collared job creation. In addition to the above the provision were also examined the light of the term new regular workmen. Considering the explanatory note to the introduction or the provisions of section 80JJAAto give impetus to creation of new employment opportunities the details of fresher who were employed during the year were also called for and examined. The details furnished are exacted here under. Undertaking/Unit Freshers Employees No. of new with regular previous workmen experience of entitled for more than a deduction year Bangalore SEZ 25 121 146 Chennai SEZ-2 369 1279 1648 Hyderabad SEZ-1 508 887 1395 Hyderabad SEZ-2 431 689 1120 Jaipur SEZ , 114 109 223 Mysore SEZ 338 225 563 Mysore SEZ -2 331 53 384 Pune SEZ -2 195 519 714 48 54 Mangalore SEZ-2 102 Grand Total ' 2359 3936 6295 28.13 The AO observed from the above that most of the persons recruited were persons with previous experience there by providing avenues for attrition in other entities rather than new employment opportunity. Therefore, in essence the purpose of the giving the benefit u/s.80JJAA was in itself being defeated.

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Page 49 of 85 28.14 Further as per provisions of Sec 80JJAA, the term "additional wages" means the wages paid to the new regular workmen in excess of one hundred workmen employed during the previous year. Provided that in the case of an existing undertaking, the additional wages hall be nil if the increase in the number of regular workmen employed during the year is less than ten per cent of existing number of workmen employed in such undertaking as on last day of the previous year”

28.15 Hence the provision is applicable if there is an increase of workmen to extent of 10% over and above the workmen employed as on last day of the previous year. As per the details submitted the number of employees as on 31.03.2012 was 1,13,879 and the number of employees as on 31.03.2013 was 1,13,694, hence instead increase in number of employees, there is actual decrease in the number of employees employed during the financial year 2012-13. Here also in essence the purpose of the giving the benefit tils.80JJAA was in itself being defeated. For the reasons stated above the contention of the assessee company was not acceptable to the AO. Accordingly, the deduction claimed u/s 80JJAA of Rs. 445,35,11,127 was disallowed by the ld. AO.

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Page 50 of 85 stated as in the provision of section 10A , 10B, explanation in section 10AA, section 80HHE etc.

29.1 The assessee contended before the ld. CIT(A) as follows : • that section 80JJA was introduced to encourage employers to generate more employment opportunities; • that the term "industrial undertaking" is wide and exhaustive and covers any undertaking engaged in any systematic activity; • that the terms "articles" or "things" are wide in nature and include "computer software”. • That production or manufacture of computer software results in production or manufacture of "articles" or "things": • That the jurisdictional ITAT in DCIT vs OnMobile Global Ltd. [20141 31 ITR (Trib) 248 (Bangalore) allowed deduction under section 80JJA for a company which was engaged in the business of software services.

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Page 51 of 85 enabled services. Deduction u/s.8oJJAA of the Act was allowed on the basis of the following facts, specific to that assessee:-

"i) The business of the assessee fills within the definition of the term "industrial undertaking"; ii) The assessee is engaged in providing Information Technology enabled services (computer software); iii) The assessee has claimed deduction of only those payments made to ‘workmen’ who are not employed in supervisory capacity."

30.1 There is no finding in this case as to whether production of computer software amounts to production of article or thing. In view of the above, the ld. CIT(A) upheld the order of the AO and this ground was dismissed accordingly.

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Page 52 of 85 17.2. The Ld.AO however held that, the assessee is not eligible for deduction under section 80JJAA for the following reasons:

1. 1. The assessee is not an industrial undertaking and is engaged in the business of development of computer software and export thereon. The activities of IT company cannot be considered as manufacturing or production. The intent of section 80JJAA has been clarified by the amended provisions which provides that the deduction is available to an Indian company deriving profit from manufacture of goods in a factory.

2. The assessee does not produce any articles or things.

3. The assessee does not pay ‘wages’ to its employees; but pays salary to its regularly employed engineers. Salary does not come within the definition of ‘wages’.

4. The assessee does not employ any workman within the definition of Industrial Disputes Act, 1947. The definition of workman provided therein does not include software professionals.

5. Section 10B uses the phrase ‘articles or things or computer software’ and therefore ‘articles or things’ do not include ‘computer software’. 17.3. The DRP held that the assessee is not engaged in manufacture or production of article or thing and therefore not eligible for deduction under section 80JJAA. It was held that manufacture or production of article or thing cannot be equated with software development. The Ld.AR submitted that the decision of coordinate bench of this Tribunal in the case of DCIT v OnMobile Global Ltd reported in (2014) 31 ITR (Trib) 348 which allowed the deduction under section 80JJAA for a Company engaged in providing IT enabled services (Computer software), has not been accepted by the revenue and appeal has been filed before Hon’ble Karnataka High Court. The DRP for these reason, up he;d the addition proposed by the Ld.AO in the draft assessment order. Following the DRP directions, the Ld. AO disallowed the deduction claimed under section 80JJAA. 17.4. The Ld.AR submitted that, the assessee is engaged in the business of development, designing and manufacture of computer software. He elide on the decision of Coordinate Bench of this Tribunal in case of DCIT v OnMobile Global Ltd and vice versa reported in [2014] 31 ITR (Trib) 348 that allowed the deduction under section 80JJAA for a company which was engaged in the business of software services, i.e., business of providing mobile value added services and products such as caller and ring back tones, dynamic voice mail, missed call alert service and other interactive media solutions like tele -voting, interactive programming by observing as under: Relevant observations of the ITAT are as under. “Held, that as the assessee was engaged in the development and manufacture of software, the assessee was covered within the definition of industrial undertaking. The IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 53 of 85 definition of "industrial undertaking" as stipulated in section 10(15) and section 72A of the Act extended to undertakings that were engaged, inter alia, in the manufacture of computer software or recording of programmes on discs, tapes, perforated media or other information devices. The assessee was one such undertaking. The assessee had claimed deduction of only those payments made to "workmen" who were not employed in supervisory capacity. Therefore, the assessee was entitled to the deduction under section 80JJAA of the Act.”

17.5 He submitted that, the question as to whether the software industry can be regarded as an ‘industrial undertaking’ was considered by the Hon’ble Karnataka High Court in the case of CIT v Texas Instruments India P Ltd reported in [2021] 127 taxmann.com 59. The Hon’ble Karnataka High Court held as under. 16.6 In our considered view, the concept of the workman has undergone a drastic change and is no longer restricted to a blue collared person but even extends to white- collared person. A couple of decades ago, an industry would have meant only a factory, but today industry includes software and hardware industry, popularly known as the Information technology industry. Thus the undertaking of the Assessee being an industrial undertaking, the persons employed by the Assessee on this count also would satisfy the requirement of a workman under section 2(s) of the ID Act. We have perused the submissions advanced by both sides in the light of records placed before us.

17.6 We note that identical issue was considered by the Coordinate Bench of this Tribunal in case of SAP Labs India Pvt. Ltd. in IT(TP)A Nos. 623, 566/Bang/2016 for Assessment Year 2011-12 by order dated 29/11/2021 by observing as under: “13. As far as corporate tax grounds are concerned, Grd.No.6 to 6.4 is with regard to deduction u/s.80JJA of the Act and these grounds read thus: 6. While doing so, the learned DRP/AO erred in: 6.1. Not appreciating the fact that deduction under section 8oJJAA of the Act is Assessee specific and not undertaking / unit specific. [corresponding to ground no. 6.1] 6.2. Invoking the provisions of section 8oA(4) in the context of deduction under section 8oJJAA for 10A units [corresponding to ground no. 6.2] 6.3. Not appreciating the fact that the amendment made in the Finance Act 2013, restricting the deduction to an Indian Company deriving profits from the manufacture of goods in a factory, is applicable with effect from IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 54 of 85 April 1, 2014 and is prospective in nature. [corresponding to ground no. 6.3] 6.4. Considering the orders for earlier years while disallowing the deduction u/s 80JJAA of the Act without considering the fact that each year should be considered separately. [corresponding to ground no. 6.4]

“7.5 Apart from the above, I would like to highlight the fact that as per the provisions of section 80JJAA, deduction is allowable taking each unit as a basis rather than the assessee as an undertaking. Accordingly, the assessee is required to compute deduction u/s 80JJAA in respect of each eligible unit separately. While doing so, all the conditions stipulated would be applied taking each unit as the reference point, i.e The additional wages are required to be restricted by excluding the additional wages payable to 100 workmen in respect of each unit. There should be increase in workmen in each year to the extent of minimum 10% of the existing workmen at each unit level. It is required to be seen that the workmen employed for less than 300 days during the previous year under reference to be excluded from the computation of additional wages payable. In the instant case, the assessee has not considered each unit as a basis for the purpose of fulfillment of conditions enumerated above as per working given in Form 10DA. In a sense, the assessee has considered total number of employees/workmen working in all the units put together as basis in order to reckon 10% increase in workforce during the year under reference, inclusion of only 100 employees in respect of all the units for the purpose of quantifying the additional wages paid instead of considering 100 employees for inclusion in each and every unit.

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Page 55 of 85 7.6 In view of the above, I am of the opinion that in the absence of furnishing unit wise certificate in respect of fulfillment of conditions stipulated u/s 80JJAA, the assessee is rot eligible to claim deduction u/s 80JJAA. On this specific ground itself, I have no hesitation to deny the deduction u/s 80JJAA for the current year also.”

“25. However coming to the second limb of the reasoning given by the lower authorities, which is section 80A(4), the said section is reproduced hereunder :

“(4) Notwithstanding anything to the contrary contained in Section 10A of section 10AA or section 10B or section 10BA or in any provisions of this Chapter under the heading ‘C.-Deductions in respect of certain incomes”, where, in the case of an assessee, any amount of profits and gains of an undertaking or unit of enterprise or eligible business is claimed and allowed as a deduction under any of those provisions for any assessment year, deduction in respect of, and to the extent of, such profits and gains shall not be allowed under any other provisions of this Act for such assessment year and shall in no case exceed the profits and gains of such undertaking or unit or enterprise or eligible business, as the case may be.”

However coming to the second limb of the reasoning given by the lower authorities, which is section 80A(4), the said section is reproduced hereunder : As per the assessee even if deduction under section 10A of the Act is allowed for these units, a further deduction u/s.80JJA of the Act, is also allowable. Argument of the assessee's counsel is that the limitation put in by Section 80A(4) of the Act, would apply only to profit linked deductions. There can be no dispute that deduction under Section 10A of the Act, is profit linked. In so far as deduction u/s.80JJA is concerned, a look at sub-section (1) of the said section is required, which is reproduced below : 80JJAA(1) : Where the gross total income of an assessee, being an Indian company, includes any profits and gains derived from any industrial undertaking engaged in the manufacture of production of article or thing, there shall, subject to IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 56 of 85 the conditions specified in sub-section (2)m be allowed a deduction of an amount equal to thirty per cent of additional wages paid to the new regular workmen employed by the assessee in the previous year for three assessment years including the assessment year relevant to the previous year in which such employment is provided.

A reading of the above sub-section would clearly show that the deduction is given on profits and gains derived from industrial undertaking engaged in manufacture of production of article or thing. It is only for quantification of the amount that 30% is applied. In our opinion the deduction is very much linked to the profits of the undertaking. We are therefore unable to accept this line of argument taken by the counsel. In the result, we hold that assessee is not eligible for deduction u/s.80JJAA of the Act, in respect of its units 2 , 3 and 4. However, denial of such claim in respect of unit-1, where it was not claiming any deduction, in our opinion is incorrect. We, therefore set aside the orders of authorities below for the limited purpose of quantifying the eligible deduction u/s.80JJA in respect of Unit-

1. 1. In the result, ground no.6 is treated as partly allowed for statistical purpose.”

16. As far as ground No.6.3 is concerned, the issue has been decided in Assessment Year 2007-08 in the order referred to above and this Tribunal held that the employees engaged in software industry cannot be regarded as workmen for the purpose of section 80JJAA of the Act. The following were the relevant observations of the Tribunal: “24. We have perused the orders and considered the rival contentions. The claim of assessee with regard to additional wages paid to new workman was denied for a reason that engineers who were newly employed by the assessee were not considered as workers by the lower authorities. However, in a similar situation in the case of Texas Instruments India P. Ltd, (supra), it was held by the coordinate bench at para 6 and 7 of its order, as under : 6. We have heard the rival submissions and carefully perused the records. Considering the factual position after referring to the various documents filed by the assessee, the learned CIT(A) held as under : "According to the AO if an employee or workman is getting a salary of more than Rs. 1,600 per month he is not covered by the definition of workman. However as per cl. (iv) of s. 2(s) of the Industrial. Disputes Act a worker, employed in supervisory capacity and getting a salary of more than Rs. 1,600 per month only be excluded from the definition of workman. In appellant's case the software engineers in respect of whom deduction under s. 80JJAA has been claimed have not been employed in a supervisory capacity even though they may be getting a salary of more than Rs. 1,600 per month. As the software engineers were not employed in supervisory capacity they cannot be excluded from the definition of workman. Further as per the notification of the Karnataka Government, the appellant

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Page 57 of 85 company engaged in the development of software is covered by the Industrial Disputes Act. As such, I am of the considered opinion that the appellant has satisfied all the conditions for claiming relief under s. 80JJAA. However, I find that the appellant has claimed deduction of Rs. 2,55,81,220 with reference to the additional wages of Rs. 8,52,70,736 which included the wages of Rs. 4,87,64,029 in respect of the new workmen employed during the year ended 31st March, 2000 relevant to the asst. yr. 2000-01. As there was no claim for relief under s. 80JJAA for the asst. yr. 2000-01, the relief in respect of the workers employed in asst. yr. 2000-01 cannot be considered for relief under s. 80JJAA in the asst. yr. 2001-02. As such the appellant will be entitled for relief under s. 80JJAA of Rs. 1,09,52,012 being 30 per cent of the additional wages of Rs. 3,65,06,707 (Rs. 8,52,70,736 Rs. 4,87,64,029) in respect of the new workmen employed during the previous year relevant to the asst. yr. 2001-02. Similarly, for asst. yr. 2002-03 the appellant has claimed deduction of Rs. 4,78,05,176 being 30 per cent of the wages of Rs. 1,59,30,588 which also included the wages of Rs. 4,38,68,182 pertaining to the new workers employed in the previous year 1999- 2000. For the reasons mentioned above the appellant is not entitled for relief under s. 80JJAA in respect of the wages pertaining to the workers employed in the previous year 1999-2000. As such the appellant would be eligible for relief of Rs. 3,46,44,722 being 30 per cent of the additional wages of Rs.11,54,82,406 (Rs.15,93,50,588 Rs.4,38,68,182) in respect of the workmen employed in previous years 2000-01 and 2001-02. The learned Authorised Representatives of the appellant vide order-sheet noting dt. 24th Aug., 2004 agreed that the relief under s. 80JJAA in respect of the employees who joined in the previous year relevant to the asst. yr. 2001-02 onwards only may be considered and in respect of the employees who joined in earlier years the appellant is not pressing for relief under s. 80JJAA. In the circumstances, the AO is directed to allow the relief under s. 80JJAA of Rs. 1,09,52,012 and Rs. 3,46,44,722 for asst. yrs. 200102 and 2002-03 respectively."

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Page 58 of 85 by the AO. Further, from the order of the CIT(A), it is seen that he had taken note of the notification issued by the Government of Karnataka and concluded that as per the notification issued, the assessee company engaged in the development of software is covered by the Industrial Disputes Act, 1947. Further it is not the case of the Revenue that the assessee did not fulfil the conditions extracted elsewhere in this order. Considering all those factual matters we do not find any infirmity in the order of CIT(A) according relief to the assessee. In fact he had clarified the relevant portions related to Industrial Disputes Act, 1947 and IT Act while granting relief to the assessee which are extracted at pp. 5 and 6 of this order. After carefully considering the same, we are inclined to accept the reasons shown by the learned CIT(A). The learned CIT-Departmental Representative could not assail the finding reached by the learned CIT(A) by bringing in any valid materials. The order of the CIT(A) is confirmed. It is ordered accordingly.

There is no case for the Revenue that assessee had failed to file details of software engineers employed by it. In our opinion software engineers newly employed by it fell within the meaning of the word 'workmen'.”

17.7. The facts and circumstances under which the disallowance is made in the year under consideration is similar with the case referred above. Respectfully following the above view, we direct the Ld.AO to consider the claim in accordance with the observations and principles laid down by this Tribunal in herein above. Needless to say that proper opportunity of being heard is to be granted to the assessee.

Accordingly, this ground raised by assessee stands allowed for statistical purposes.

31.1. Keeping in view of the above, on the similar lines, this ground is remitted to AO and the ground of appeal is allowed for statistical purposes.

IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

SL NO NAME OF OVERSEAS SUBSIDIARY COUNTRY AMOUNT PAID 1 Infosys Technologies China Co Ltd China 237,85,11,947 2 Infosys Technologies S de R L de C V Mexico 12,47,38,961 3 Infosys Technologia DO Brasil LTDA Brazil 2,31,28,399 4 Infosys BPO Poland Sp Zoo Poland 7,77,96,047 5 Infosys BPO s.r.o Czech 8,89,65,805 Republic 33.1. The aforementioned payments were made without deduction of tax at source under section 195. Vide order passed under section 201(1)/(1A) dt. 22.1.2015, the ld. DCIT (IT), Circle 1(1), Bangalore treated the assessee as an ‘assessee in default’ for not deducting tax at source under section 195 in respect of the aforesaid payments. The appeal against the said order is pending before the CIT(A) 12, Bangalore.

33.2. During the course of the assessment proceedings, the AO observed that the assessee company submitted the details of proceedings completed by the DCIT [International Taxation], Circle - 1(1) , Bengaluru, that in the case of the assessee for the F.Y.2012-13 , the proceedings u/s 201(1) & 201(1A) of the Income Tax Act, 1961 was completed, wherein payments of Rs. 269,31,41,150 made by the assessee to M/s Infosys China Pvt. Ltd towards 'sub - contract charges' was considered as 'Fee for Technical Services' both under the Act and also under the DTAA. Consequently, these payments attract the TDS provisions of the IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore Page 60 of 85 section 40(a)(i). Hence, these payments amounting to Rs. 269,31,41,150 were disallowed by the ld AO.

“18.1. The Ld.AR very fairly submitted that an order u/s. 201(1)&(1A) dated 28.2.2014 was passed by the Ld.AO for the year under consideration holding the assessee to be an ‘assessee in default’ under section 201(1) of the Act, for non deduction of TDS and levied interest under section 201(1A) of the Act. Against this order the assessee appealed before the Ld.CIT(A) who confirmed the action of the Ld.AO. Assessee had preferred appeal before this Tribunal. He submitted that pursuant to the order dated 28/03/22 passed by this Tribunal, assessee did not have any merit on this issue. The Ld.AR though have submitted various arguments, does not have any merit. Accordingly we dismiss this ground raised by the assessee.

Accordingly, these grounds raised by assessee stands dismissed.” 35.1. Keeping in view of the above, this ground of appeal is dismissed. IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

ITA 809/Bang/2018 (2013-14): 37. Now we take up the revenue’s appeal. The revenue has raised following grounds of appeal:-

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

2. The Id.C1T(A) erred in following the ratio laid down by the Hon'ble High Court in the case of M/s. Tata Elxsi Ltd. (ITA No.70/2009) as the SLP filed against this decision before the Hon'ble Supreme Court has not been adjudicated upon.

3. The Id.CIT(A) erred in holding that the expenses reduced from the Export Turnover must also be reduced from the Total Turnover as total turnover has not been defined in the Act and also since there is no provision under Sec. 10A which provides for exclusion of such expenses from Total Turnover.

4. The CIT(A) erred in following the decision of the Hon'ble High Court in the case of M/s Wipro Ltd Vs QCIT, since this judgement has been challenged before the Apex Court and not reached finality.

8. The appellant craves leave to add, alter, amend and / or delete. any of the grounds mentioned above.”

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Page 62 of 85 38. Ground No.1 & 8 are general in nature. Ground Nos.2 & 3 are with regard to expenses reduced from export turnover which should not be reduced from total turnover.

IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore 40.1. Keeping in view of the above order of the Hon’ble Supreme Court we dismiss this ground of appeal of the revenue.

41. In Ground No.4 the revenue alleged that the ld. CIT(A) erred in following the decision of Hon’ble High Court in case of Wipro Ltd. Vs. Deputy Commissioner of Income-tax.

42.1 Without prejudice to the above, the assessee submitted that the following assuming that the Revenue has challenged both the above discussed issues wherein the CIT(A) had granted relief to the IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 64 of 85 assessee by following the decision of the Karnataka High Court in Wipro’s case (supra).

42.2 First issue – Eligibility of incomes being interest income from GLES deposits and employee loans; sale of scrap; and incentives from airlines, for a deduction under section 10AA Facts of the issue: Interest on GLES Deposit: During the year under consideration, the assessee earned Rs. 50,06,79,519 as interest from GLES deposits. The assessee had offered the same for tax under the head ‘Profits and gains from business or profession’.

42.3 GLES stands for Group Leave Encashment Scheme. Assessee gets actuarial valuation done on quarterly basis to know its liability toward un-encashed leave credits of its employees. Assessee made the provision for the same based on actuarial valuation. An amount equivalent to the liability is kept as a deposit with LIC of India under GLES policy to fund this liability. Whenever there is encashment of leave credits by employees on account of retirement etc. Appellant makes the payment to its employees and withdraws an equal amount from the deposit with LIC on a regular basis. This deposit is not generic in nature. Funding to this deposit happens based upon actuarial valuation and withdrawals are permitted only for payment of leave encashment. LIC of India credits interest on such GLES deposit which is accounted as income in the profit and loss account. The LIC gives interest on such GLES deposit/premium and the same has been offered to tax under business income head as there is a nexus of GLES deposit with the business liability towards accumulated unused leave credits.

42.4 Interest on employee loans: During the year under consideration, the Appellant earned Rs. 3,21,52,103 as interest from IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 65 of 85 employee loans. The assessee had offered the same for tax under the head ‘Profits and gains from business or profession’.

42.5 As an employee welfare measure, the assessee extended loans to its employees. There were 3 types of loans- Soft loan, salary loans and salary advance. The soft loan carried an interest of 4% p.a., whereas salary loans and salary advances were interest free. The soft loan is recovered in 12/24 months (depending on eligibility), salary advance in the same month of disbursal and salary loan in 12 months. The perquisite value for soft loans and salary loans was taxed in the hands of the employees.

42.6 Sale of scrap and incentive from airlines – During the year under consideration, the assessee earned Rs. 4,42,01,732 from sale of scrap and Rs. 3,99,089 as incentive from airlines. The assessee had offered the same for tax under the head ‘Profits and gains from business or profession’.

42.7 Few airline companies such as Lufthansa, Qatar Airways, Indigo, Spicejet etc., provided incentive amount for travelling of employees, officers etc., regularly.

42.8 The learned AO has reduced the interest income on GLES deposits with LIC relating to SEZ units eligible for 100% and 50% deduction amounting to Rs. 5,45,08,973 and Rs. 11,53,46,485 respectively from profits of the business of SEZ units for the reason that the said income is not derived from the activity of software development and export.

42.9 Similarly, the learned AO has reduced the receipts from sale of scrap, interest income from loans given to employees and incentive from airlines relating to SEZ units eligible for 100% and 50% deduction totally amounting to Rs. 90,76,993 and Rs. 1,24,28,805

IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 66 of 85 respectively from profits of the business of SEZ units for the reason that the said income is not derived from the activity of software development and export.

42.10 The ld. CIT(A) granted relief to the assessee on this issue by following the decision of the Karnataka High Court in Wipro’s case (supra).

23.1. It is submitted that Foreign tax credit was claimed in the revised return of income amounted to Rs. 336,90,86,298.. During the assessment, vide letter dated 29.2.2016 filed with the Ld.AO on 4.3.2016, the assessee requested the Ld.AO to allow foreign tax credit of Rs.6,80,43,71,180/- as against the claim of Rs.3,36,90,86,298/- as made in the revised return of income. The increase in the claim was, in view of the decision of the Hon’ble Karnataka High Court in the case of Wipro Ltd v DCIT reported in 382 ITR 179, which held that Foreign tax credit relating to income eligible for deduction under section 10A is also allowable under section 90. It is submitted that, along with the said letter, the assessee filed the copy of the aforesaid decision and the evidences for payment of tax in foreign countries.

23.2 The Ld.AO after verification of all details and evidences allowed the claim of foreign tax credit at Rs. 680,43,71,180 in the draft assessment order.

23.3 The Ld.Ar submitted that, as the foreign tax credit was allowed in the draft assessment order, there was no occasion for the assessee to file objections before the DRP in this regard. However, the details of foreign tax credit, letters, evidences regarding tax paid in foreign countries were all filed with the DRP as paper books. The DRP after noticing that foreign tax credit was allowed at Rs.6,80,43,71,180/- as against the claim of Rs.3,36,90,86,298/- made in the revised return of income, directed the Ld.AO to verify and rectify the mistake in computation, if any, while giving effect to the DRP directions. In the final assessment order, the Ld.AO held that as the claim of the assessee has to be allowed based on the return of income

IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 67 of 85 filed, the additional credit allowed in the draft assessment order is not allowed in the final assessment order. The Ld.AO was of the view that as the additional claim did not form part of the original return of income, the assessing officer could not have allowed such additional claim. The Ld.AO relied on the decision of Hon’ble Supreme Court in the case of Goetze India Ltd v CIT reported in (2006) 157 Taxman 1.

23.4. Before us the Ld.AR submitted that the DRP was not correct in directing the AO to verify and rectify the mistake in computation of foreign tax credit, if any, as allowed by the Ld.AO in the draft assessment order. This is because, the Ld.AO allowed the foreign tax credit after verification of all details and evidences on record. These details and evidences were also on record before the DRP. Hence, the direction of the DRP to Ld.AO to verify and rectify the mistake in computation of Foreign tax credit, if any, is invalid, bad in law and liable to be quashed.

We have perused the submissions advanced by both sides in the light of records placed before us.

23.5 We note that the DRP has relied on the decision of Hon’ble Supreme Court in case of Goetze India Ltd. vs. CIT (supra). There is no denial of the claim made by the assessee for any want of evidence or on a mistaken claim. The Ld.AO has already verified the foreign tax credit claimed by assessee during the draft assessment proceedings. This issue was not a subject matter of objections filed before the DRP and the DRP suo moto cannot consider an issue which is not filed by assessee. The DRP is only directed to consider those objections raised by assessee and to pass necessary directions to the Ld.AO. This act of suo moto considering an issue which was allowed by the Ld.AO in the draft assessment proceedings is not in accordance with law.

We also note that Hon’ble Supreme Court in case of Goetz India Ltd.,(supra) has also held as under:“4. The decision in question is that the power of the Tribunal under section 254 of the Income-tax Act, 1961, is to entertain for the first time a point of law provided the fact on the basis of which the issue of law can be raised

IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 68 of 85 before the Tribunal. The decision does not in any way relate to the power of the Assessing Officer to entertain a claim for deduction otherwise than by filing a revised return. In the circumstances of the case, we dismiss the civil appeal. However, we make it clear that the issue in this case is limited to the power of the assessing authority and does not impinge on the power of the Income-tax Appellate Tribunal under section 254 of the Income-tax Act, 1961. There shall be no order as to costs.

23.6 Respectfully following the above, we direct the Ld.AO to consider the assessee’s claim and grant credit of foreign taxes paid for the year under consideration that has been verified during the draft assessment proceedings. Needless to say that proper opportunity of being heard must ne granted to the assessee Accordingly, this ground raised by assessee stands allowed.”

43.1. Keeping in view of the above order in assessee’s own case cited (supra), we decide the issue on similar lines.

IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 69 of 85 45.1 The learned CIT(A) held in favour of the assessee by relying on the decision of the Karnataka High Court in CIT v Mphasis Software and Service India Pvt Ltd [2015] 62 taxmann.com 165 (Karnataka). The only ground of revenue before the ITAT is that the above decision has been challenged before the Apex court and has not attained finality. This ground cannot be the reason for not following the binding judgment of Jurisdictional High Court. Hence, the ld. A.R. alleged that this ground should therefore be rejected.

“16. Ground nos. 41 & 42 - Reduction of deduction under section 10AA in respect of pure onsite revenue 16.1 It was submitted that a software development project typically goes through the stages of requirement analysis, prototyping, design, pilots, programming, testing and installation and maintenance. A software development activity proceeds over various stages. It can assume various forms. Infosys was at all times during the year engaged in the creation and development of computer programs. The software development in the year under consideration happened partly in India and partly outside India. A part of the software development project was carried outside India as per the requirements of the project and also due to various other reasons e.g. to integrate the work done by the company with the work done by another, testing, business compulsions, absence of adequate telecommunication links etc.

16.2. It was submitted that the total number of employees as on 31-03-2012 was 1,24,789. The average number of employees which were deputed to overseas location at the year end was 30,322. Thus, around 24.3% of assessee’s employees were deputed onsite for various durations during the year. Considering the fact that over 97% of the assessee’s revenue is from export, the presence of employees’ onsite is not material. Few employees and support staff of the assessee are also stationed abroad at marketing offices and branches located in overseas jurisdictions. Majority of employees are sent onsite on deputation for a limited period as per the requirement of software development project being carried out from offshore locations in India.

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Page 70 of 85 16.3. Thus, it was submitted that, the presence of the employees outside the country was in the course of developing and creating software programs as also for the purpose of marketing the product and skill sets of the company. The Ld.AR submitted that various details in respect of the claim were filed during the assessment proceedings vide letter dated 02/03/2016 which is paced at pages 2039 to 2054 of paper book 4. The Ld.AR also submitted that assessee had submitted the master service agreements and statement of work along with invoices in respect of the developments carried out by assessee before the Ld.AO vide letter dated 04/03/2016 which is placed at page 2549 to 2856 of paper book 5. He submitted that at page 39, para 5.7, the Ld.AO in the assessment order stated that the assessee company has furnished very voluminous data including the copy of several SOWs during the assessment proceedings. It is stated that going through all the SOWs is practically not possible. The Ld.Ar submitted that, Ld.AO merely relied on the earlier assessment orders for making addition. The Ld.Ar thus Submitted that addition was made without properly considering the factual details on record and by relying on the earlier years’ assessment orders. The DRP thought directed the Ld.AO to consider reduction of deduction under section 10AA in respect of profits from onsite development of computer software, on a protective basis, for the reason that the decision of Hon’ble Karnataka High Court in case of CIT v Mphasis Software and Service India Pvt. Ltd reported in (2015) 62 taxmann.com 165 that allowed the deduction under section 10A in respect of onsite development of computer software. However it was also noted that the revenue has not been accepted by the department and a SLP has been filed before Hon’ble Supreme Court. 16.4. The Ld.AO while passing the final assessment order, reduced sum of Rs.1,02,27,137 from deduction computed u/s 10AA for the reason that 1.08% (pure onsite revenue) of 50.8% (onsite revenue percentage) with a profit margin of 10.59% relating to 5 SEZs [viz., Chennai (unit 2), Trivandrum, Mysore, Hyderabad and Jaipur in respect of which deduction under section 10AA has been allowed] are not eligible for deduction under section 10AA. Disallowance in relation to other SEZ units viz., Chennai (Unit No 1), Chandigarh, Pune and Mangalore, has not been quantified as the entire deduction claimed under section 10AA in respect of these units has been denied by the ld. AO. 16.5. Before us, the Ld.AR submitted that the DRP directed the Ld.AO to consider reduction of deduction under section 10AA in respect of profits from onsite development of computer software, on a protective basis, for the reason that, the decision of the Hon’ble Karnataka High Court in CIT v Mphasis Software and Service India Pvt. Ltd(supra).

16.6. Referring to Explanation 2 to section 10AA, the Ld.AR submitted that, the explanation clarifies that the profits and gains derived from on-site development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 71 of 85 computer software outside India. He referred to the relevant observations of Hon’ble Karnataka High Court in case of CIT v Mphasis Software and Service India Pvt. Ltd(supra) that observed as under: “According to the learned counsel for the revenue, the production or manufacture should be in any free trade zone and if the same is not done in the free trade zone, the assessee would not get benefit of such manufacture or production. The benefit is site specific and not project specific. According to him, only such production or manufacture which is carried at the site of the assessee’s unit in the free trade zone would alone be eligible for the benefit under section 10A and not such production or manufacture which has been carried outside or by a third party. A mere reading of subsection (2) would not be sufficient. The entire section has to be read in conjunction with Explanation 3, which clarifies that profits and gains derived from ‘on-site’ development of software outside India shall also be deemed to be profits and gains derived from the export of software outside India, and same would also be entitled to such benefit. If the interpretation, as contended by the revenue is accepted, the very purpose of inserting Explanation 3 to section 10A of the Act would be lost.”

He also placed reliance on the CBDT Circular No. 01/2013 dated 17/01/2013 which is placed at pages 5156-5159 of paper book. 16.7. The Ld.AR submitted that, the Circular further clarifies regarding the software developed abroad at a client's place being eligible for benefits under the respective provisions, as it amount to 'deemed export' and tax benefits would not be denied merely on this ground. The Ld.AR thus, submitted that the deduction claimed under section 10A and 10AA cannot be denied in respect of profits from onsite development of computer software.

16.8. He further stated that as per Circular since 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. The Ld.AR submitted that, there is no denial of nexus or connection of work performed onsite with the eligible units set up in India. He referred to the decision of Hon’ble Pune Tribunal in case of DCIT v iGate Global Solutions Ltd IT(TP)A No 286/Bang/2013 vide order dated 5.8.2019, wherein it is held that, the profit from onsite development of computer software and deputation of technical manpower for the purposes of export of computer software qualify for deduction under section 10A. It was also held that, income from deputation of technical manpower and onsite software services

IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 72 of 85 rendered abroad will have to be regarded as `profits of the business of the undertaking’ and hence eligible for deduction under section 10A. 16.9. The Ld.AR at the outset submitted that assessing officer denied the claim of assessee, without verifying the details filed by holding that it is voluminous data.

16.10. On the contrary, the Ld.Standing Counsel relied on the orders passed by authorities below.

We have perused the submissions advanced by both sides in the light of records placed before us.

16.11. At the outset, we note that the denial of the exemptions claimed is purely due to the reason that the Ld.AO did not verify the details furnished by assessee. There is no doubt expressed by the Ld.AO regarding the nexus or any shortfall of evidence or materials in support of the assessee’s claim as argued by the Ld.AR, the disallowance made on adhoc basis, without any justification and the reasoning for such disallowance is absolutely uncalled for. However in the interest of justice, the Ld.AR suggested the issue may be remanded to the Ld.AO for due verification. We direct the Ld.AO to verify the details filed and to consider the claim of assessee in accordance with law. Needless to say that proper opportunity of being heard is to be granted to the assessee.

Accordingly, these grounds raised by assessee stands allowed for statistical purposes.”

46.1 Keeping in view of the above order of the Tribunal this issue is remanded to the ld AO to verify the documents filed by the assessee and consider the claim in accordance with law.

47. In Ground No.6, the revenue stated that the CIT(A) has no power to set aside the issue for verification to the AO (Brand Building Expenditure).

Page 73 of 85 expenditure amounting to Rs. 64,13,83,193 is allowable as amortization over the next four years.

48.1 The learned CIT(A), relied on the decision of the ITAT in assessee’s own case for AY 2005-06, directed the AO to consider and verify the nature of expenditure incurred under the hear ‘brand building’.

48.2 The AO has passed the order giving effect to CIT(A) order on 29.03.2019 (i.e., subsequent to the appeal filed before the Hon’ble ITAT). During the course of the proceedings, the assessee submitted full details of invoices/purchase orders for verification purposes. The learned AO rejected the same for the reason that there were no new facts or submissions brought out. Further, the AO held that since the issue had already been considered at the time of passing the assessment order, no relief was granted to the assessee in this issue.

“The Ld.CIT(A) decided similarly with a direction to the Ld.AO to consider and verify the nature of the expenditure included under the head brand building. I agree with the decision and the same may be upheld.”

IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 74 of 85 “12. Ground No.25: Disallowance of ‘brand building expenditure 12.1. During the relevant previous year, the assessee had incurred brand building expenses of Rs.81,79,53,112/-. The brand building expenditure were in the nature of subscription to research reports by research agencies and advisory services, participation/sponsorship in seminars, exhibitions, marketing and sales events, retainership amounts paid towards public relations agencies, annual and periodic customer and sales meets, sponsorship fees, publishing charges, travel reimbursements, photocopy charges, expenditure incurred for setting up of Booth for exhibition or display of Infosys name, expenditure on conferences, events, sales marketing expenses etc. Brand building expenses are included and shown under 'Selling and Marketing expenses' in the financial statements and claimed as revenue expenditure.

12.2. In the draft assessment order, the Ld.AO treated the brand building expenses of Rs.81,79,53,112/-, as deferred revenue expenditure, and allowed 20% of the said expenditure amounting to Rs.16,35,90,622/- and held that the balance sum of Rs.65,43,62,490/- constituting 80% of the expenditure will be amortized over the next 4 years.

12.3. The DRP directed the Ld.AO to consider the expenses of Rs.81,79,53,112/- as capital expenditure incurred for creating intangible asset in the form of ‘brand’, instead of deferred revenue expenditure. However, the Ld.AO was directed to grant depreciation at 25% considering brand as an asset eligible for depreciation. Following the DRP Directions, the Ld.AO treated the brand building expenditure of Rs.81,79,53,112/- as capital expenditure. From this, disallowance of payments made to Forester research and Gartner totally amounting to Rs.5,99,41,068/- was reduced, as they were the subject matter of separate assessment and on the remaining sum of Rs.75,80,11,864/-, the Ld. AO allowed depreciation at the rate of 25% amounting to Rs.18,95,02,966/-, and made addition of Rs.56,85,08,898/-.

12.4. The Ld.AR submitted that, Coordinate Bench of this Tribunal in assessee’s own case for the AY 2006-07 IT(TP)A No 799/B/2015 decision dated 10.11.2017, held that, the brand building expenses is in the course of and for the purpose of assessee’s business and cannot be said that the said expenditure has resulted in the acquisition of any ‘asset’, which finding is not borne out by the facts on record.

12.5. Further the Coordinate Bench of this Tribunal in assessee’s subsidiary i.e., Infosys BPO Ltd v DCIT decision dated 27.9.2019 for AY 2007- 08, allowed the brand building expenses and held as under:

IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore 12.6. It is submitted by the Ld.AR that the nature of expenses incurred by appellant and its subsidiary towards brand building expenses are identical. In view of the same, the aforesaid decision squarely applies to the present case also. The Ld.AR also relied on following decisions in support of this contention: i) Fine Jewellery (India) Ltd v JCIT [2014] 48 taxmann.com 16 (Mum-Trib) (ii) ITO v Spice Communications Ltd [2010] 35 SOT 78 (Delhi) (iii) CIT vs. Brilliant Tutorials Pvt. Ltd. [(2007) 292 ITR 399] (iv) CIT v Geoffrey Manners & Co. Ltd [2009] 315 ITR 134 (Bombay) (v) CIT v Asian Paints (India) Ltd [2016] 75 taxmann.com 152 (Bombay) (vi) DCIT v Polygel Industries (P.) Ltd [2015] 56 taxmann.com 198 (Mumbai - Trib.) (vii) PCIT v Seagram Manufacturing (P.) Ltd [2017] 78 taxmann.com 293 (Delhi)

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Page 76 of 85 (viii) CIT v Spice Distribution Ltd [2015] 374 ITR 30 (Delhi) 12.7. On the contrary, the Ld.DR relied on observations by Ld.AO. 12.8 We have perused the submissions advanced by both sides in the light of records placed before us. We note that Coordinate Bench in case of the sister concerns of assessee(supra), considered identical issue on similar facts. Nothing has been brought on record by the revenue to the expenses incurred by the assessee is towards any capital asset. Respectfully following the same, we direct the disallowance to be deleted.”

50.1 Keeping in view of the above order of the Tribunal this ground of the appeal of the revenue is dismissed.

IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 77 of 85 They do not render services from India or in India. BAP are also ‘non- residents’ under section 2(30) read with section 6 of the Act. Hence, no tax was deducted at source in respect of the commission paid to these non-residents.

52.1 The learned AO has disallowed commission paid to non- resident entities amounting to Rs. 31,61,02,585 under section 40(a)(ia) for not deducting tax at source in respect of the said payments under section 195. Reliance has been placed on the decision of the Karnataka High Court in Samsung Electronics Co. Ltd and others decision dated 24.9.2009 (1st decision) reported in [2010] 320 ITR 209 in support of the impugned conclusion.

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Page 78 of 85 13.2. The Ld.AO relying on the decision of the Hon’ble Karnataka High Court in case of CIT v Samsung Electronics Co Ltd., reported in (2010) 320 ITR 209 held that, the assessee should have either made TDS on commission paid or should have obtained an exemption certificate from the IT Dept. It was held that, in the absence of action taken on both these counts, commission paid is liable for disallowance under section 40(a)(ia) of the IT Act. 13.3. The DRP referred to its own directions for AY 2010-11 and AY 2011-12, wherein it was held that commission paid is not liable for TDS under section 195. However, it is submitted that the DRP refused to follow the same for the reason that the view has not been accepted by the department and an appeal to ITAT has been filed on this issue. It was therefore held that there is no infirmity in the proposed disallowance by the Ld.AO. The Ld.AO disallowed the commission paid to non residents amounting to Rs.23,68,35,533/- under section 40(a)(ia) of the Act for non deduction of tax at source. 13.4. The Ld.AR at the outset filed a list showing break up of commission paid to non residents during the year was as under: Vendor Amount in Name of Vendor INR Remarks Country Partner Commission payment for National Bank Almoayyed Computers Bahrain 2,75,791 of Bahrain internet banking project. BAHWAN Oman 4,29,990 BAP Commission CYBERTEK LLC Bowin Consultancy Commission/License Fees Taiwan Services for BCI Project 31,57,339 CAS TRADING HOUSE Nepal 23,16,864 BAP Commission PVT.LTD. CELER Agency Commission CONSULTING S.A. & Other Charges Mexico de C.V 4,38,133 --- CSK Service Misc Commission Egypt 311 Towards License EGABI SOLUTIONS, Commission (20,73,900) Millennium Information Towards License Srilanka Technologies Commission 1,04,96,289 Fee Commissioning Nihon Unisys Ltd. Japan Charges 72,36,445 Provision reversal of Towards Provision & Misc ---- 2,33,433 previous year Commission

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Page 79 of 85 OCEANIC BANK INT Towards License Nigeria (NIGERIA) Commission 2,56,19,058 FIRST BANK OF Towards License Nigeria NIGERIA PLC Commission 1,43,53,056 FIRST CITY Towards License Nigeria MONUMENT BANK Commission 46,66,014 Towards License SPRING BANK PLC Nigeria Commission 1,34,86,672 Towards License FIDELITY BANK PLC Nigeria Commission 1,20,14,044 KAKAWA DISCOUNT Towards License Nigeria HOUSE LIMITED Commission 5,76,153 Towards License BPI BANK Ghana Commission 6,87,728 UNITED BANK FOR Towards License Nigeria AFRICA PLC Commission 2,97,49,999 UNION HOMES Towards License Nigeria SAVINGS AND 26,90,280 Commission LOANS PLC Towards License WEMA BANK PLC. Nigeria Commission 2,23,98,439 Segmentist Yazilim ve Turkey License Fees Commission Danismanlik 40,29,941 SIMBA TECHNOLOGY Kenya 86,21,565 BAP Commission LIMITED, Square IT Corporation Japan 43,23,811 Fees Commission & Subscription Taldor Israel 32,67,330 Commission Fees TALDOR COMPUTER Commission Fees ATS Israel SYSTEMS (1986)LTD Project 15,67,500 THE TRIZETTO GROUP Trizetto Referral Fees & USA INC 1,56,41,366 revenue share TOTAL INFORMATION Philippines BAP Commission MANAGEMENT (TIM) 1,86,46,433 Trevally Financial South 3,15,57,928 Fees Commission Software Africa TREVALLY FINANCIAL South 35,15,794 Fees Commission SOFTWARE Africa WAREEF UNITED Saudi BAP Commission COMPANY, Arabia (30,88,272)

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Page 80 of 85 TOTAL 23,68,35,533 13.5. The Ld.AR relied on the decision of Hon’ble Delhi High Court in case of DIT(IT) v Panalfa Autoelektrik Ltd reported in (2014) 49 taxmann.com 412 and submitted that, commission paid by assessee to its foreign agent for arranging of export sales and recovery of payments cannot be regarded as fee for technical services under section 9(1)(vii). He also relied on following decisions holding that export commission is not Fees for technical services under section 9(1)(vii). (i) CIT v Faizan Shoes P Ltd [2014] 48 taxmann.com 48 (Madras) (ii) Apsara Silks v ITO [2016] 69 taxmann.com 399 (Bangalore - Trib.) (iii) CIT v Farida Leather Company [2016] 66 taxmann.com 321 (Madras) (iv) DIT v Credit Lyonnais [2016] 67 taxmann.com 199 (Bombay) (v) CIT v Grup Ism (P) Ltd [2015] 57 taxmann.com 450 (Delhi) He thus submitted that, there was no liability to deduct tax at source under section 195 in respect of the commission paid to non residents. 13.6. The next proposition submitted by the Ld.AR is that, the taxability of commission under the DTAA must be there in order to cast liability on the assessee to deduct TDS. In support, he relied on the decision of Hon’ble Supreme Court in case of Engineering Analysis (supra). He submitted that, the list of recipients of commission and their respective countries arethose with whom India has entered into DTAA. He submitted that with the countries mentioned except Bahrain, Ghana, Nigeria and Taiwan. The position of taxability of commission paid to BAP’s under the Act and DTAA is depicted in the table below.

Taxability under the Taxability under the Vendor name Country Act Treaty

Payment not in the nature of managerial, technical or Almoayyed Bahrain No DTAA consultancy; outside Computers the scope of s. 9(1)(vii) due to exception; hence not taxable under the IT(TP)A No.735/Bang/2018 & M/s. Infosys Limited, Bangalore

Page 81 of 85 Definition of FTS is similar to s. 9(1)(vii); Payment not in the nature Oman of managerial, BAHWAN technical or Same as above CYBERTEK LLC consultancy; no PE in India; hence not taxable under the treaty Bowin No DTAA. Same as Taiwan Same as above Consultancy above Services No FTS clause under the Treaty; No PE in India; further, other CAS Trading income taxable only in Nepal Same as above House Pvt.Ltd. Nepal and not in India; hence payment not taxable under the Treaty Definition of FTS is similar to s. 9(1)(vii); Payment not in the nature of managerial, CELER technical or Consulting S.A. Mexico Same as above consultancy; no PE in de C.V India; hence not taxable under the treaty

EGABI Solutions Egypt Same as above No FTS clause under the Treaty; No PE in India; further, other income taxable only in Nepal and not in India; hence payment not No FTS clause under the Treaty; No PE in India; further, other Millennium Sri Lanka Same as income taxable only in Information above Srilanka and not in Technologies India; hence payment not taxable under the Treaty

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Page 82 of 85 Definition of FTS is similar to s. 9(1)(vii); Payment not in the nature (i) Nihon of managerial, Unisys Ltd, (ii) Same as technical or Japan Square IT above consultancy; no PE in Corporation India; hence not taxable under the treaty (i) Oceanic Bank Int (Nigeria), First (ii) Bank of Nigeria PLC, (iii) First City Monumnet Bank, (iv) NO DTAA. Same as Spring Bank Nigeria Same as above PLC, (v) above Fidelity Bank PLC, (vi) Kakawa Discount House Limited (vii) United Bank for Africa NO DTAA. Same as BPI Bank Ghana Same as above above Definition of FTS is similar to s. 9(1)(vii); Payment not in the nature of managerial, Segmentist technical or Same as Yazilim ve Turkey consultancy; further above Danismanlik L services were not rendered in India; no PE in India; hence not taxable under the treaty

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Page 83 of 85 Definition of FTS is similar to s. 9(1)(vii); Payment not in the nature of managerial, Simba technical or Kenya Same as Technology consultancy; further above Limited, services were not rendered in India; no PE in India; hence not taxable under the Payment does not (i) Taldor, ‘make available’ any (ii technology, skills, Israel ) Taldor process, know how etc Same as Computers as per the protocol to above Systems (1986) Treaty. Hence, Ltd payment not taxable Payment does not ‘make available’ any technology, skills, The Trizetto USA Same as process, know how etc. Group Inc above Hence, payment not taxable under the No FTS clause under the Treaty; No PE in Total India; further, other Information income taxable only in Philippines Same as Management Philippines and not in above (Tim) India; hence payment not taxable under the Definition of FTS is similar to s. 9(1)(vii); Payment not in the nature of managerial, technical or Trevally South Same as consultancy; further Financial Africa above services were not Software rendered in India; no PE in India; hence not taxable under the treaty 13.7. The Ld.AR further submitted that the commission paid to agent in USA, did not ‘make available’ technology, knowledge, skills, process etc. He submitted that, as per the definition of ‘Fees for included services under the India – USA DTAA unless the make available clause is not satisfied, the payment cannot be treated as FTS. He relied on the decision of coordinate bench of this Tribunal in case of CIT v

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Page 84 of 85 De Beers India Minerals P. Ltd reported in (2012) 346 ITR 467 for this proposition. Similarly, by virtue of the protocol to India – Israel Treaty read with FTS clause of India – Portugal republic Treaty, payment to Israel resident for services would not be regarded ‘fees for technical services’ as there was no making available of technical knowledge, experience, skill, know how etc.

12.8 The Ld.AR submitted that, as per the DTAA with Philippines, Nepal, Srilanka, Egypt Article relating to ‘Fees for technical services’ is absent. In the absence of the article, the payment for services rendered by the non resident in the course of his business would be regarded as ‘business profits’ under Article 7. And in the absence of a PE in India, such payments cannot not be held to be taxable in India. The Ld.AR submitted that the non resident BAP’s provided services outside India and did not have a permanent establishment in India is an admitted fact and therefore, the same is not taxable in India. He relied on following decisions in support: decision of Hon’ble Madras High Court in Bangkok Glass Industry Co Ltd v ACIT reported in (2013) 257 CTR 326; Decision of Hon’ble Mumbai Tribunal in Channel Guide India Ltd v ACIT reported in (2012) TaxCorp (INTL) 50, Decision of coordinate bench of this Tribunal in case of JCIT v WiFi Networks P Ltd & 190/Bang/2012 and CO Nos. 60 & 61/Bang/2012 decision dated 8.3.2013, Decision of coordinate bench of this Tribunal in case of Exotic Fruits P Ltd v ACIT ITA Nos. 1008 to 2013/B/12 decision dated 40.10.2013, Decision of coordinate bench of this Tribunal in case of IBM India P Ltd v DDIT (IT) ITA Nos. 489 to 498/B/13 decision dated 24.1.2014. The Ld.AR thus submitted that, commission paid to BAP’s of Philippines, Nepal, Srilanka and Egypt would not be chargeable to tax in India.

13.9 The Ld.AR submitted that in respect of commission paid to BAP’s situated in Mexico, Kenya, South Africa, Japan, Turkey and Oman, the definition of the term ‘Fees for technical services’ as per the Treaty between India and these countries is similar to section 9(1)(vii) of the Act. As a result, commission paid to BAP’s situated in Kenya, South Africa, New Zealand and Turkey are not liable for TDS u/s195 and consequently the said payments cannot be disallowed u/s 40(a)(i).

13.10. The Ld.AR in respect of commission paid to Bahrain, Taiwan, Nigeria and Ghana submitted that India has not entered DTAA. Submissions have already been made as to why commission paid to BAP’s is not liable for TDS under the Income Tax Act. The commission paid to companies based in Mexico and Egypt would therefore not be chargeable to tax in India and hence outside the purview of section 195.

On the contrary, the Ld.St.Counsel relied on the observations of Ld.AO/DRP.

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Page 85 of 85 We have perused the submissions advanced by both sides in the light of records placed before us. 13.11 The above arguments/submissions by the Ld.AR has not been verified by the Ld.AO. We accordingly remand this issue to the Ld.AO to verify the above submissions. There is no quarrel that the benefit available to assessee as per DTAA must be granted as per the ratio of Hon’ble Supreme Court in case of Engineering Analysis (supra). The Ld.AO shall verify and consider the claim in accordance with law. Needless to say that proper opportunity of being heard mist be granted to the assessee. Accordingly, these grounds raised by assessee stands allowed.”

54.1 Keeping in view of the above order of the Tribunal this ground of the appeal of the revenue is remitted to AO as decided in assessee’s own case cited (supra).