DCIT 2(3)(1), MUMBAI vs. ZENSAR TECHNOLOGIES LTD, MUMBAI

Based on the facts and circumstances of the case and in law, the learned CIT (A), erred in not granting deduction for expenditure amounting to Rs.63,56,129 incurred prior to commencement of commercial operations of the new Hyderabad unit located in a Special Economic Zone. 5. Based on the facts and circumstances of the case and in law, the learned CIT (A) erred in denying deduction for interest income amounting to Rs.9,66,760 offered to tax in AY 2009-10 but subsequently withdrawn in AY 2011-12 while computing income of the appellant as per the normal provisions of the Act and the Book profits of the appellant. 6. Based on the facts and circumstances of the case and in law, the learned CIT(A) erred in not directing the Assessing Officer to delete the interest of Rs. 1,20,959 under section 234C of the Act since no interest was chargeable on the returned income.” 2. The Ld.AR at the outset submitted that, assessee vide application dated 18/09/2023 filed application seeking admission of additional ground. It is submitted that as per the instruction obtained from the assessee, these grounds are not presses.Endorsement to that effect is made by the authorised representative against theseadditional grounds which is scanned and reproduced as under : “The Appellant seeks to raise the following amongst other Additional Grounds of Appeal in support of the captioned Appeal against the Impugned Final Assessment Order dated 13 May 2015 ('Impugned Order') passed by the Deputy Commissioner of Income-tax -2(3)(1), Mumbai ('Ld. AO') all of which are raised without prejudice and in the alternative to each other: 1. Based on facts and circumstances of the case and in law. The Ld. AO failed to appreciate that expenses of Rs 12.71,973 incurred prior to commencement of new Pune Unit in a Special Economic Zone ought to be added to block of assets and depreciation under Section 32 ought to be granted to the appellant. 2. Based on facts and circumstances of the case and in law. The Ld. AO failed to appreciate that expenses of Rs 63.56.129 incurred prior to commencement of new Hyderabad Unit in a Special Economic Zone ought to be added to block of assets and depreciation under Section 32 ought to be granted to the appellant. A.Y. 2011-12 to 2012-13, Zensar Technologies Ltd

Based on facts and circumstances of the case and in law, expenses of Rs 2.94.62.317 incurred prior to commencement of new Pune Unit in a Special Economic Zone in Assessment Year 2010-11 if added to block of assets and depreciation under Section 32 has been granted to the appellant for Assessment Year 2010-11, consequent tax depreciation be granted under Section 32 on the same for Assessment Year 2011-12.” Based on the submissions of the Ld.AR, the above additional grounds are dismissed as not pressed. Brief facts of the case are as under: 3. The assessee for the year under consideration filed its return of income on 29/11/2011 declaring income of Rs.15,95,73,718/- under normal provisions of the Act and Rs.94,13,30,146/- u/s. 115JB of the Act. The return was processed u/s.143(1) of the Act. Subsequently, the assessee revised its return on 25/03/2013 declaring income of Rs.16,21,39,226/- under the normal provisions of the Act and revised the book profit at Rs. 94,14,21,847 u/s.115JB of the Act. 3.1 The Ld.AO observed that, in the revised return assessee reduced the claim u/s.10A due to nonreceipt of export receipts within 12 months. Thus therewas increase in the disallowance of Rs.91,701/-, while computing the book profit u/s.115JB of the Act. 3.2 The case was selected for scrutiny and notice u/s.143(2) was issued along with notice u/s.142(1) of the act.In response to statutory notices representative of the assessee appeared before the Ld.AO and filed requisite details as called for. The Ld.AO noted that, assessee declared income u/s.10A from various units the details of which are as under : A.Y. 2011-12 to 2012-13, Zensar Technologies Ltd

3 It was noted that, the assessee worked on gross total income of Rs.16,38,89,226/- in the revised return after claiming deduction of Rs.17,50,000/- u/s.80G. Thus declared total income of Rs.16,21,39,226/-. 4. The Ld.AO further noted that, there was international transaction between assessee and its AE, exciding the threshold limit. Thus a reference was made u/s.92CA of the Act to the transfer pricing officer to determine to arms length price of the international transaction. On receipt of the reference the Ld.TPO called for economic details of the transaction entered into between assessee and its AE that in form 3CEB. From the details A.Y. 2011-12 to 2012-13, Zensar Technologies Ltd filed by the assessee the Ld.TPO noted that following were the international transactions entered into by assessee.

Provision of software development services 3,53,24,57,138 3,15,19,92,924 TNMM 2. Guarantee Commission 90,74,268 50,94,776 TNMM 3. Allocation of corporate expenses 7,93,04,405 8,59,71,238 TNMM 4. Interest on Working capital loan given (@5%) 42,81,344 32,95,228 CUP 5. Availing of software development services 9,31,221 - TNMM 6. Receipt of finder fees 4,42,87,390 3,46,66,380 TNMM 7. Recovery of expenses 26,52,56,580 23,41,89,146 TNMM 8. Reimbursement of expenses 61,86,161 - TNMM 9. Subscription of Equity shares 1,15,34,300 - Refer Note A.Y. 2011-12 to 2012-13, Zensar Technologies Ltd

1.The Ld.TPO was not satisfied with the bench marking by the assessee in respect of following transaction: “1.Commisionon guaranteegiven to AE” 2.Interest on working capital loan has giveby 5% 3.Recovery of expenses 4.2. The Ld.TPO rejected the submissions advance by the assessee and proposed and adjustment as under:

The retention of Section 10A in Chapter III of the Act after the amendment made by the Finance Act, 2000 would be merely suggestive and not determinative of what is provided by the Section as amended, in contrast to what was provided by the un-amended Section. The true and correct purport and effect of the amended Section will have to be construed from the language used and not merely from the fact that it has been retained in Chapter III. (The introduction of the word 'deduction' in Section 10A by the amendment, in the absence of any contrary material, and in view of the scope of the deductions contemplated by Section 10A as already discussed, it has to be understood that the Section embodies a clear enunciation of the legislative decision to alter its nature from one providing for exemption to one providing for deductions. 14. The difference between the two expressions 'exemption' and 'deduction', though broadly may appear to be the same i.e. immunity from taxation, the practical effect of it in the light of the specific provisions contained in different parts of the Act would be wholly different. The above implications cannot be more obvious than from the case of Civil Appeal Nos. 8563/2013, 8564/2013 and civil appeal arising out of SLP(C) No. 18157/2015, which have been filed by loss making eligible units and/or by non-eligible assessees seeking the benefit of adjustment of losses against profits made by eligible units. 15. Sub-section 4 of Section 10A which provides for pro rata exemption, necessarily involving deduction of the profits arising out of domestic sales, is one instance of deduction provided by the amendment. Profits of an eligible unit pertaining to domestic sales would have to enter into the computation under the head "profits and gains from business" in Chapter IV and denied the benefit of deduction. The provisions of Sub- section 6 of Section 10A, as amended by the Finance Act of 2003, granting the benefit of adjustment of losses and unabsorbed depreciation etc. commencing from the year 2001-02 on completion of the period of tax holiday also virtually works as a deduction which has to be worked out at a future point of time, namely, after the expiry of period of tax holiday. The absence of any reference to deduction under Section 10A in Chapter VI of the Act can be understand by acknowledging that any such reference or mentionwould have been a repetition of what has already been provided in Section 10A. The provisions of Sections 80HHC and 80HHE of the Act providing for somewhat similar deductions would be wholly irrelevant and redundant if deductions under Section 10A were to be made at the stage of operation of Chapter VI of the Act. The retention of the said A.Y. 2011-12 to 2012-13, Zensar Technologies Ltd provisions of the Act i.e. Section 80HHC and 80HHE, despite the amendment of Section 10A, in our view, indicates that some additional benefits to eligible Section 10A units, not contemplated by Sections 80HHC and 80HHE, was intended by the legislature. Such a benefit can only be understood by a legislative mandate to understand that the stages for working out the deductions under Section 10A and 80HHC and 80HHE are substantially different. This is the next aspect of the case which we would now like to turn to. 16. From a reading of the relevant provisions of Section 10A it is more than clear to us that the deductions contemplated therein is qua the eligible undertaking of an assessee standing on its own and without reference to the other eligible or non-eligible units or undertakings of the assessee. The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee. This is also more than clear from the contemporaneous Circular No. 794 dated 9.8.2000 which states in paragraph 15.6 that, "The export turnover and the total turnover for the purposes of sections 10A and 108 shall be of the undertaking located in specified zones or 100% Export Oriented Undertakings, as the case may be, and this shall not have any material relationship with the other business of the assessee outside these zones or units for the purposes of this provision." 17. If the specific provisions of the Act provide [first proviso to Sections 10A(1); 10A (1A) and 10A (4)] that the unit that is contemplated for grant of benefit of deduction is the eligible undertaking and that is also how the contemporaneous Circular of the department (No. 794 dated 09.08.2000) understood the situation, it is only logical and natural that the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore, immediately after the stage of determination of its profits and gains. At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in Sections 70, 72 and 74 of the Act would be premature for application. The deductions under Section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression "total income of the assessee" in Section 10A has already been dealt with earlier and in the overall scenario unfolded by the provisions of Section 10A the aforesaid A.Y. 2011-12 to 2012-13, Zensar Technologies Ltd discord can be reconciled by understanding the expression "total income of the assessee" in Section 10A as 'total income of the undertaking'. 18. For the aforesaid reasons we answer the appeals and the questions arising therein, as formulated at the outset of this order, by holding that though Section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of the total income under Chapter VI. All the appeals shall stand disposed of accordingly.” 8.1 It is thus clear that provisions u/s.10A prior to it amendment byFinance Act 2000 was an exemption section and subsequent to its amendment it became a deduction, we therefore do not agree with the observation of the Ld.AO that, these expenditures are not allowable u/s. 14A of the Act. 8.2 Now coming to the fact whether units at Pune and Hyderabad in the SEZ were new units or had already commence its activity, based on the details of the expenditure furnished by the assessee. It is noted that the unit at Pune got its approval on 29/05/2008 and started its commencement on 10/04/2010. The year under consideration is the first year,where the assessee could claim deduction u/s. 10AA. However, due to the loss suffered by the Pune unit deduction could not be claim by the assessee. 8.2.1.In so far as Hyderabad unit is concerned, approval was received on 13/08/2009 and itcommenced its operation from 01/07/2011. The assessee had thus claimed deduction u/s.10AA from assessment year 2012-13 being subsequent assessment year to the year under consideration.In our considered opinion assessee cannot be denied expenditure in respect of Hyderabad unit u/s.37(1) as business expenditure.The expenditure incurred A.Y. 2011-12 to 2012-13, Zensar Technologies Ltd by the assessee in respect of the Hyderabad unitis incurred for the purposes of its business and thus qualify to be considered u/s. 37(1). These are directly and intrinsically connected with the business of the assessee, which is admitted fact.This in any case is not disputed by the revenue. Accordingly,we direct the Ld.AO to allowed to this expenditure u/s.37(1) for the year under consideration. Accordingly ground no.3-4 raised by the assessee stands allowed. 9. Ground No.5raised by the assessee is in respect of deduction denied towards interest income amounting to Rs.9,66,760/-. 9.1 The Ld.AR submitted that, during the financial year 2008- 09 relevant to assessment year 2009-10, interest of Rs.18,95,817/- was granted u/s.244A pertaining to assessment year 2006-07 vide intimation u/s.143(1) dated 29/09/2008. It is submitted that, the receipt of the interest was offered to the tax assessment year 2009-10. 9.1.1. Subsequently, the assessment of 2006-07 was completed, vide order dated 08/10/2010 and interest u/s.244A was granted at Rs. 9,29,057/- as against Rs.18,95,817/-, granted for the intimation dated 29/09/2008 issued u/s.143(1) of the Act. 9.1.2. As the assessment order for A.Y. 2006-07 was passed during the financial year relevant to assessment year 2011-12, the interest amounting to Rs.9,66,617/- being difference between the interest allowed in the assessment order vis a vis interest allowed in the intimation issued for A.Y. 2006-07 was debitedunder the head interest expenditure in the profit and loss account for financial year 2011-12. A.Y. 2011-12 to 2012-13, Zensar Technologies Ltd

1.3. The Ld.AR submitted that, the assessee added back the said difference to the computation of income difference as well as to the book profit for A.Y. 2011-12 and did not claim the deduction during A.Y.2011-12. 9.3. Before the authorities below for the year under consideration assessee contended that as the entire interest of Rs.18,95,817/- was already offered tax during the assessment year 2009-10 at the time when the intimation was issued, the same shouldnot be added back to the total income under normal provisions as well as book profits u/s. 115JB of the Act, for assessment year 2011-12.The Ld.AR at the outset submitted that, the Ld. CIT(A) while considering the issue, observed as under: “10.5 I have perused the written submissions furnished by the appellant and the arguments put forth by the AR of the appellant. This issue has been decided by the Special Bench of the Mumbai Tribunal in the case of Avada Trading Co. (P.) Ltd. (104 TTJ 83). In the said case, the Tribunal has held that interest on refund under Section 244A(1) granted to the assessee in the proceedings under Section 143(1)(a) would be assessable in the year in which it is granted and not in the year in which proceedings under Section 143(1)(a) attain finality.” 9.4. He further submitted that, the appeal for assessment year 2009-10 is pending before the Ld.CIT(A). It is further submitted that, the assessing office in any event cannot change the figures to the book profit under 115JB for assessment year 2011-12. He placed reliance on the decision of Apollo tyres by Hon’ble Supreme Court reported in 255 ITA 73 in support of this claim. 9.5. The Ld.DR on the contrary, relied on the orders passed by the authoritiesbelow. He submitted that the issue may be remanded to the Ld.CIT(A), for proper appreciation of facts. A.Y. 2011-12 to 2012-13, Zensar Technologies Ltd

Ground No.6raised by the assessee is on computation of interest u/s.234(C) of the Act. 11.1 The Ld.AR submitted that, as per the return of income thereis no short fall and thus there cannot be any liability cast under section 234( C) of the Act. We have perused submissions advance by both sides on this issue. 11.2 We direct the Ld.AO to consider the claim u/s 234C of the Act inaccordance with law. Accordingly the grounds raised by the assessee for assessmentyear 2011-12 stands partly allowed. Assessment year:2012-13 12. The Ld.AR submitted that for assessment year 2012-13 grounds are identical that with of 2011-12 on similar facts. He submitted that,Ground no.1 raised in the A.Y. 2012- 13 is identical with Ground No. 4 for A.Y.2011-12. 12.1. The Ld.DRdid not object to the submissions. 12.2. We are therefore of the opinionthat,the view taken in Ground no.4 for A.Y. 2011-12 shall apply mutatis mutandis for Ground no.1 raised in A.Y. 2012-13. Accordingly ground no.1 raised by the assessee stands allowed. 13. Ground no.2-3 raised by the assessee is not pressed at the instruction of the assessee. AccordinglyGrounds 2-3 are dismissed as not pressed. A.Y. 2011-12 to 2012-13, Zensar Technologies Ltd

Ground no. 4 raised by the assessee is submitted to be against by the decision of Hon’ble Mumbai Special Bench in case of Deputy Commissioner of Income-tax vs. Total Oil India (P.) Ltd, reportedin [2023] 149 taxmann.com 332. Accordingly Ground no.4 raised by the assessee stands dismissed. Accordingly the grounds raised by the assessee for A.Y. 2012- 13 stands partly allowed. 15. Revenue appeal for assessment year 2012-13 is only on the issue pertaining to intra group services. The Ld.DR submitted that,cost needs to be recovered on such servicesbutLd.CIT(A) allowed the claim of assessee without considering the provisions section 92 of the Act. 15.1 At the outset the Ld.AR submitted that, identical was considered by the first appellate authority for assessment year 2011-12 on similar facts. He submitted that, the revenue hasnot alleged the issue for assessment year 2011-12 and has accepted the view taken therein. He placed reliance on following observation of the Ld.CIT(A) while considering this issues. “Ground No. 9; Adjustment of Rs. 1,70,40,890/- to International Transaction of Recovery of Expenses Background During the course of business and in order to facilitate its operations, Zensar India incurs expenditure on behalf of AEs / it's client. The actual costs incurred such as travelling allowances, travel expenses etc., have been recovered on cost to cost from AEs. These expenses were paid on behalf of AEs and to be borne by the respective AEs and have beenrecovered from AEs at cost. Since, there is no element of services A.Y. 2011-12 to 2012-13, Zensar Technologies Ltd rendered involved in it, these expenses have been recovered at cost without any mark up. However, in the impugned order, the Transfer Pricing Officer considering such reimbursement to be in the nature of provision of services, imputed 10% mark-up on the total recovery made by the Appellant from the AEs. Judicial Precedents. In appellant's own case for assessment year 2011-12, Hon'ble CIT(Appeals) in para 11.5 based on the similar facts of the case, has decided that for recovery in relation to the amount towards travel, visa, salary and travelling expenses of employees sent on secondment and temporary deputation, Appellant has charged finder fees from AEs. Hence, no further charges are due from the AEs with respect to these recovery amount. Similarly, for AY 2012-13, we submit that the Appellant has already charged finder fees from AEs with respect to such activity, Hence, no further charges are due from the AEs. As regards customer paid expenses in appellant's own case for assessment year 2011-12, Hon'ble CIT(Appeals) in para 11.6 and 11.7 based on the similar facts of the case, decided that for recovery in relation to the amount towards transport, travel, shift allowance, incentive, link charges, hardware, software procurement, broadband, mobile and internet expenses etc. has directed to the TPO to include the expenses in the cost base and TNMM to be reworked. As the facts remains same for the AY 2012-13, and even if the said amount of recovery of Rs. 92.36 lacs is added to the cost, the margin of the Appellant would still be significantly higher than the margins of the comparable companies. Thus, no further adjustment is warranted on account of recovery of expenses. As regards common expenses, in appellant's own case for assessment year 2011-12, Hon'ble CIT(Appeals) in para 11.8 based on the similar facts of the case, has decided that for recovery in relation to the amount for certain common expenses, has held that these are pure reimbursements without any service element and do not call for any adjustment. Similarly, for AY 2012-13, we submit that the Appellant has recovered common expense in relation to the insurance premium for global liability A.Y. 2011-12 to 2012-13, Zensar Technologies Ltd insurance policies without markup, hence there is no service element and do not call for any adjustment. We would also like to submit that the Appellant has recovered the overhead cost of the support functions who are involved in obtaining these services from the third parties onbehalf of the AEs. Hence the Appellant submits that no further charges are due from the AEs. Submission of the appellant Net Cost Plus Margin Earned by Appellant has been accepted by the TPΟ The Appellant is offering end-to-end solutions across diverse technology platforms and industry domains through a Global Delivery Model. During the course of business and in order to facilitate its operations, Zensar India incurred expenditure on behalf of AEs and the actual costs incurred such as travelling allowances, travel expenses etc., have been recovered on cost to cost from AEs. The total revenue from software and allied services earned by the Appellant from the AE in FY 2011-12 aggregated to Rs.43,478.66 lacs. The margin earned by the Appellant on the software services provide to the AEs has been accepted by the TPO. The only bone of contention of the TPO is regarding incurrence of cost of Rs. 17.04 crs on behalf of the AEs / its client which as per TPO should be treated as a component of service and involving mark-up of 10%. Without prejudice to the contention that there is no service element in the recovery of expenses, even if it is assumed to be a service, it should be aggregated along with the software services provided to the AE. In such case, the expenses should be included in the operating cost of provision of software and allied services to the AEs and the revenue to be increased correspondingly. The margin of the Appellant would still be significantly higher than the margins of the comparable companies. The TPO has further ignored in appreciating the fact that the profit margin under TNMM would still be higher than the margins of the comparable companies and not get impacted on inclusion of such expenses as an operating cost. Thus, no further adjustment is warranted on account of recovery of expenses. (Rs.in lacs) A.Y. 2011-12 to 2012-13, Zensar Technologies Ltd