INFOSYS LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-3(1)(1), BANGALORE

2.3. On facts and circumstances of the case and law applicable, the losses and turnover of the loss making 10AA unit should not be adjusted with the profit making 10AA eligible units for the claim of deduction under section 10AA of the Act.

3. Ground relating to disallowance of deduction under section 10AA:

3.1. The learned NAC and the CIT(A) has erred in reducing the following incomes from profits of the business of SEZ units in computing deduction under section 10AA for the reason that the said incomes are not derived from the activity of software development and export. i) Interest on non-convertible debentures (NCDs) amounting to Rs. 259,59,73,228 ii) Insurance claim received in respect of flood in Chennai during the FY 2016-17 amounting to Rs. 3,07,45,374 iii) Interest on loans to subsidiaries amounting to Rs.13,35,23,830

Page 3 of 34 iv) Interest on Govt Securities amounting to Rs.4,34,11,632 v) Interest on debentures amounting to Rs.141,07,93,441 vi) Interest on tax refunds amounting to Rs.7,67,71,216 vii) Incentive from airlines amounting to Rs.7,63,88,054 viii) Rental income from BSNL amounting to Rs.12,000

3.2. On facts and circumstances of the case and law applicable, the appellant is entitled for the claim of deduction under section 10AA of the Act on the above incomes included in the profits of eligible SEZ units.

4. Foreign tax credit relating to income eligible for deduction under section 10AA and foreign tax credit in respect of foreign tax paid presently under dispute with Australian tax authorities

4.1 The learned CIT(A) erred in not adjudicating the ground pertaining to disallowance of foreign tax credit of Rs. 218,16,32,251 including Rs. 52,10,92,957 on account of foreign tax credit in respect of taxes presently under dispute with Australian tax authorities (ATO)) in respect of income on which deduction under section 10AA has been claimed.

4.2 The learned CIT(A) erred in not appreciating that foreign tax credit in respect of income on which deduction under section 10A / 10AA has been claimed has been allowed in appellant's own case for the earlier years by the High Court of Karnataka and ITAT, Bangalore.

4.3 Further, the learned CIT(A) erred in not appreciating that as per section 155(14A) read with rule 128(4), foreign tax credit in respect of disputed foreign tax is allowed when the dispute is finally settled. Therefore, appellant is eligible for the claim of FTC in respect of taxes presently under dispute with Australian tax authorities (ATO) amounting to Rs 154,36,96,035 (including Rs. 52,10,92,957 in relation to income on which deduction under section 10AA was claimed) once the dispute is settled

5.1. The levy of interest under section 234B is bad in law and liable to be quashed.

6. Prayer:

6.1. Based on the above grounds and other grounds adduced at the time of hearing, the appellant prays that the order passed under section 250 to the Page 4 of 34 extent prejudicial to the appellant be quashed or in alternative the above grounds and relief prayed thereof be allowed.

The appellant prays accordingly.”

2. The CIT(A) erred in directing the assessing authority to delete disallowance made under section 14A r.w. Rule 8D (iii) of ignoring that conditions for invoking said section are fully satisfied in instant case and CIT(A) has also ignored the circular No.5/2014, dated 11 February 2014 which has clarified that Rule 8D of the Rules read with section 14A of the Act provides for disallowance of expenditure even where taxpayer has not earned any exempt income in a particular year"

3. The CIT(A) erred in allowing the brand building expenditure incurred by the assessee the expenditure cannot be considered as a revenue expenditure since it indirectly gives the assessee benefit for a long run.

4. The CIT(A) erred in deleting the disallowance made under section 10AA of the Act ignoring that since no new master service agreement was made, the benefit of claim u/s 10AA from the old SEZ cannot be allowed.

5. The CIT(A) erred in remitting the matter to assessing officer on issue relating to section 80G of the Act ignoring that in instant case assessee has not satisfied conditions set out in said section to get the said deduction'? 6. The CIT(A) erred in allowing the claim of Rs.276,67,93,689/- as deduction from overseas revenue on account of state taxes paid outside India.

7. The CIT(A) erred in considering the amount of Rs.10,78,69,095/- as deemed income u/s 32AC in the present year without considering the fact that in the assessee's own case. CIT(A) and ITAT had upheld the addition made u/s 32AC for AY 2013-14, 2014-15 and 2015-16.

8. For these and other grounds that may be urged upon, the order of the CIT(A) may be referred and that assessment order to be restored.?

Page 5 of 34 under section 90 or 91 of the Act which is reproduced below for ease of reference & convenience-

Page 6 of 34 9. First, we take up the appeal of the assessee in ITA No. 881/B/2023.

9.1. The issue raised by the assessee vide ground No.1 of its appeal, is general in nature and does not require any separate adjudication.

9.2 The issue raised by the assessee vide ground No. 2 of appeal deals with Adjustment of loss and turnover (export turnover & total turnover) of loss making 10AA unit with the profit making 10AA units.

9.3 We take a note of the fact that in the assessment order, loss of 10AA-100% eligible unit (Hubballi) i.e. amounting to Rs. 4,18,33,225/- is reduced from the profit of 10AA-100% eligible units while computing deduction u/s 10AA without proving any reasons. The export turnover & total turnover of the loss making 10AA unit (Hubballi) is also added in the export turnover and total turnover of 10AA-100% eligible units cluster respectively while computing deduction u/s 10AA. This resulted in lower deduction u/s 10AA as compared to the manner in which the assessee company had computed the deduction.

9.4 Before the ld. CIT(A)/NFAC, the assessee relied on the decision of the Apex Court in the case of CIT v Yokogawa India Ltd [2017] 391 ITR 274 and submitted that the deduction under section 10AA should be computed in respect of profits of each of the SEZ units by taking into account the export turnover and total turnover of the respective unit without setting off the losses of other units and similarly without merging the export turnover and total turnover of other units. The CIT(A) relied on the Explanation below sub-section 1 of section 10AA of the Act and held that the deduction under section 10AA should be allowed from the total income of the assessee. Hence, the action of the AO in adjusting the loss of Hubballi unit with profits of other units and export turnover and total turnover of Hubballi unit with other SEZ units was upheld.

Page 7 of 34 9.5 The AR submitted that the explanation below sub-section 1 of section 10AA does not disturb the computation of deduction under section 10AA of the Act to be made at the unit level. It only shifts the stage of deduction under section 10AA of the Act. The deduction is now to be claimed from the total income of the assessee. The computation of total income was submitted, and it was shown that the above explanation has been given effect to in the computation itself by claiming the deduction under section 10AA of the Act from the total income of the assessee. It was submitted that the deduction under section 10AA of the Act should be computed in respect of profits of SEZ unit without setting off the losses of other units as per the ratio of the decision of the Supreme Court in the case of CIT v Yokogawa India Ltd [2017] 391 ITR 274.

9.6 The ld. DR however heavily relied on the order of the ld. CIT(A)/NFAC.

9.7 We have heard the rival submissions and perused the material on record. The Hon’ble Supreme Court in the case of CIT v Yokogawa India Ltd [2017] 391 ITR 274, inter alia, considered the followed question of law for adjudication.

(IV) Whether losses of other 10A Units or non 10A Units can be set off against the profits of 10A Units before deductions under Section 10A are effected?

The Hon’ble Supreme Court in the above decision held as under - “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 Page 8 of 34 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 mention would 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 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.”

"The export turnover and the total turnover for the purposes of sections 10A and 10B 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."

Page 9 of 34 9.8 Thus, it is evident from the above decision that the losses of a unit cannot be set off against the profits of the eligible undertakings at the stage of computation of deduction under section 10A, 10AA. The deduction under section 10AA should be allowed in respect of profits of each of the SEZ units without set off the losses of other units (SEZ or non SEZ).

9.9 Further the Explanation to section 10AA(1) inserted by the Finance Act 2017 w.e.f. 1.4.2018 is reproduced hereunder-

“Explanation.—For the removal of doubts, it is hereby declared that the amount of deduction under this section shall be allowed from the total income of the assessee computed in accordance with the provisions of this Act, before giving effect to the provisions of this section and the deduction under this section shall not exceed such total income of the assessee.

The relevant extract of Memorandum to the Finance Act, 2017 clarifying the intent of insertion of the said explanation is reproduced here under:

Rationalisation of provisions of Section 10AA Under the existing provisions of the section 10AA, deduction is allowed from the total income of an assessee, in respect of profits and gains from his Unit operating in SEZ, subject to fulfilment of certain conditions. Section 10AA allows deduction in computing the total income of the assessee, hence the deduction is to be allowed for the total income of the assessee as computed in accordance with the provision of the Act before giving effect to the provisions of section 10AA. However, courts have taken a view (while deciding the matter pertaining to section 10A which also contains similar provision) that the deduction is to be allowed from the total income of the undertaking and not from the total income of the assessee. In view of the above, it is proposed to clarify that the amount of deduction referred to in section 10AA shall be allowed from the total income of the assessee computed in accordance with the provisions of the Act before giving effect to the provisions of the section 10AA and the deduction under section 10AA in no case shall exceed the said total income. This amendment will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent assessment years.

9.10 We are of the opinion that the above Explanation only addresses the allowability of deduction under section 10AA. It does not deal with the computation of deduction under section 10AA. The said Explanation states

Page 10 of 34 that the amount of deduction under section 10AA shall be allowed from the total income of the assessee computed in accordance with the provisions of the Act. It also states that deduction under section 10AA shall not exceed such total income. The above Explanation does not overrule the ratio of the decision of the Supreme court in Yokogawa’s case that the deduction should be computed with reference to profits of each eligible units without setting off the losses of other units. Thus, the deduction under section 10AA is to be computed as per the decision of the Supreme Court in Yokogawa India Ltd (supra) in respect of profits of each SEZ unit without setting off the losses of other units. The deduction so computed as per the decision of the Supreme Court in Yokogawa India Ltd (supra) is to be claimed from the total income of the assessee as per the above Explanation.

9.11 In view of the above, the ld. CIT(A)/NFAC was not correct in holding that the losses of Hubballi unit should be adjusted with profits of other units and turnover of Hubballi unit should be aggregated with turnover of other units. The AO is directed to compute deduction under section 10AA without setting off the losses of 10AA unit (Hubballi) from the profits of other units and without aggregating the export turnover and total turnover of Hubballi SEZ units with similar turnover of other units. Further, the 10AA deduction shall be computed unit wise. Accordingly, the ground No 2 of the assessee is allowed.

1. 1. Rental income from BSNL 2. Interest on GLES (Group Leave Encashment Scheme) deposits with LIC 3. Interest on loans given to employees 4. Receipts from sale of scrap 5. Income from scrip sale 6. Other business income comprising hostel rent recovery, license fees etc.

7. Insurance claim received 8. Incentive received 9. Interest on deposits with Banks 10. Interest on security deposits 11. Interest on loan to subsidiaries 12. Interest on debenture 13. Interest on government securities 14. Interest on tax refunds 15. Interest on non-convertible debentures (NCDs) 16. Net realization on exchange gain on forward contracts During the assessment proceedings, the deduction claimed under section 10AA in respect of these incomes were justified by the assessee relying on the decision of full bench decision of the High Court of Karnataka in CIT v Hewlett Packard Global Soft Ltd [2017] 87 taxmann.com 182 and other similar decisions. In the computation of total income, these incomes were allocated to various units under section 10A & 10AA, based on the respective turnover. The AO is of the opinion that these decisions are not acceptable as are pending before the Supreme Court. It was held that merely because these incomes have been assessed as business income will not automatically confer the benefits of the particular deductions once there is a stipulation that such income should be derived from a particular source. It was held that the above incomes are only attributable to the business but are not derived from the activity of the software development and export.

Page 12 of 34 Accordingly, it was held by the AO that the above-mentioned incomes are to be excluded from the business profit for the purpose of deduction under section 10AA.

10.1 The CIT(A)/NFAC however followed the decision of this Tribunal in assessee’s own case for AY 2014-15 and AY 2015-16 in & 126/B/2019 dated 31.1.2023 and allowed deduction under section 10AA in respect of interest on GLES, interest on loans given to employees and receipts from sale of scrap.

10.2 The CIT(A)/NFAC by following the decisions of Karnataka High Court in the case of CIT v Hewlett Packard Global Soft Ltd [2017] 87 taxmann.com 182, DCIT v Motorola India Electronics P Ltd [2014] 46 taxmann.com 167, Green Agro Pack (P) Ltd v CIT in dated 13.4.2010, Green Agro Pack (P) Ltd v CIT in dated 26.8.2014 as well as Wipro Ltd v DCIT [2016] reported in 382 ITR 179 allowed the deduction under section 10AA in respect of interest on deposits with Banks, interest on security deposits, realized gain on forward contracts and license fees comprising of rental income.

10.3 Further, the deduction under section 10AA of the Act was also allowed by the CIT(A)/NFAC in respect of other business income comprising of hostel rent and income from scrip sale. We take a note of the fact that the Revenue has not challenged the above reliefs allowed by the CIT(A)/NFAC in its appeal filed before this Tribunal in ITA No 245/B/2024.

10.4 However, in respect of interest on non-convertible debentures (NCDs), it was held by the CIT(A)/NFAC that considering the very nature of NCDs, investment in NCDs and deriving interest income thereon cannot be held to be an activity that is directly arising out of the business of the assessee and does not have any nexus to the business of the assessee. The interest income from NCDs basically is an income that is arising from a planned decision of the assessee to earn a certain amount of secured income

Page 13 of 34 by investment of its funds. Accordingly, interest on NCDs was held to be not eligible for claim of deduction under section 10AA.

10.5 Further the insurance claim received in respect of cyclone and flood in Chennai during the FY 2016-17, it was held by the ld. CIT(A)/NFAC that the said income does not have nexus with the business of software development and export. Accordingly, it was held that the above income is not eligible for deduction under section 10AA.

10.6 In respect of interest on loan to Subsidiaries, interest on debentures, interest on Govt securities and interest on tax refunds, it was held that these incomes fall under the head Income from other sources and have also been declared by the assessee in its return of income as such. It was held that these incomes do not constitute business income of the assessee and also do not have nexus with the business operations of the assessee. Accordingly, the said incomes were held to be not qualifying for a deduction under section 10AA.

10.7 Similarly, relying on the ITAT order in assessee’s own case for AY 2014-15 and AY 2015-16, the CIT(A)/NFAC held that incentive from airlines and rental income from BSNL is not eligible for deduction under section 10AA.

10.8 Before us, the ld. AR of the assessee relied on the decision of the full bench of Karnataka High Court in the case of CIT v Hewlett Packard Global Soft Ltd [2017] 87 taxmann.com 182 which has been followed by the Hon’ble Karnataka High Court and this Tribunal in assessee’s own case for AY 2014-15 & AY 2015-16, to justify the allowability of deduction under section 10AA in respect of the incomes which are held to be not eligible for deduction under section 10AA by the CIT(A)/NFAC. The statement of computation of total income for the AY under consideration was submitted and it was shown that all the above incomes were offered to tax as business income and not as income from other sources as held by the CIT(A)/NFAC.

Page 14 of 34 It was argued by the ld. AR of the assessee that when the CIT(A)/NFAC has allowed deduction under section 10AA in respect of interest on GLES, interest on loans given to employees, receipts from sale of scrap, interest on deposits with Banks, interest on security deposits, realized gain on forward contracts, income from scrip sale and other business income comprising of hostel rent etc. the remaining incomes like Interest on NCDs, insurance claim, interest on loan to Subsidiaries, interest on debentures, interest on Govt securities, interest on tax refunds, incentive and airlines and rental income from BSNL pertaining to SEZ units are also eligible for deduction under section 10AA.

10.9 The ld. DR on the other hand strongly relied on the findings as per the order of the CIT(A)/NFAC.

10.10 We have heard the rival contentions and perused the material on record. The CIT(A)/NFAC has allowed deduction under section 10AA of the Act in respect of interest on GLES, interest on loans given to employees, receipts from sale of scrap, interest on deposits with Banks, interest on security deposits, realized gain on forward contracts, income from scrip sale and other business income comprising of hotel rent pertaining to SEZ Units by following the decisions of the Karnataka High Court in the case of CIT v Hewlett Packard Global Soft Ltd [2017] 87 taxmann.com 182, DCIT v Motorola India Electronics P Ltd [2014] 46 taxmann.com 167, Green Agro Pack P Ltd v CIT dated 13.4.2010, Green Agro Pack P Ltd v CIT dated 26.8.2014, Wipro Ltd v DCIT [2016] 382 ITR 179. The Revenue has also not challenged the reliefs allowed by the CIT(A)/NFAC in respect of these incomes in its appeal filed with this Tribunal in ITA No 245/B/2024.

10.10.1 The ld. CIT(A)/NFAC has not allowed the deduction under section 10AA of the Act in respect of interest on NCDs for the reason that it is not a business income. In respect of other incomes like interest on loan to Subsidiaries, interest on debentures, interest on Govt securities, interest on Page 15 of 34 tax refunds, it is held by CIT(A)/NFAC that these incomes are offered to tax under the head Income from other sources and hence do not constitute business income of the assessee and also do not have nexus with the business operations of the assessee.

10.10.2 However, before us, the ld. AR of the assessee has submitted the computation of total income of the assessee and drew our attention that all the incomes on which deduction under section 10AA of the Act was claimed was offered to tax as business income and not under the head income from other sources. From the computation of total income, the incomes offered under the head income from other sources are only guarantee income, dividend income and income from venture capital fund. Thus, it is evident that interest on NCDs, interest on loan to Subsidiaries, interest on debentures, interest on Govt securities, interest on tax refunds, insurance claim, incentive from airlines and rental income from BSNL are offered to tax under the head Profits and gains of business and not under the head Income from other sources. The AO has also assessed these incomes under the head Profits and gains of business or Profession.

10.10.3 The full bench of the Hon’ble Karnataka High Court in the case of CIT v Hewlett Packard Global Soft Ltd reported in [2017] 87 taxmann.com 182 held that the interest income from fixed deposits and staff loans are eligible for deduction under section 10A. It was held that section 10A and 10B are special provisions and complete code in themselves and deals with profits and gains derived by the assessee of a special nature and character like 100% EOUs situated in SEZ, STPI etc. It was held that dedicated nature of business or their special geographical locations in STPI or SEZs. etc. makes them a special category of assessee entitled to 100% deduction, rather than it being a special character of income entitled to deduction from Gross Total Income under Chapter VI-A under Section 80-HH, etc. It was held that where the entire profits and gains of the entire undertaking making 100% exports of articles

Page 16 of 34 including software, the assessee is given 100% deduction of profit and gains of such export business and therefore the incidental income of such undertaking by way of interest on the temporarily parked funds in Banks or even interest on staff loans would constitute part of profits and gains of such special Undertakings. Relevant extracts from the decision is as under- “35. The Scheme of Deductions under Chapter VI-A in Sections 80-HH, 80-HHC, 80-IB, etc from the 'Gross Total Income of the Undertaking', which may arise from different specified activities in these provisions and other incomes may exclude interest income from the ambit of Deductions under these provisions, but exemption under Section 10-A and 10-B of the Act encompasses the entire income derived from the business of export of such eligible Undertakings including interest income derived from the temporary parking of funds by such Undertakings in Banks or even Staff loans. The dedicated nature of business or their special geographical locations in STPI or SEZs. etc. makes them a special category of assessees entitled to the incentive in the form of 100% Deduction under Section 10-A or 10-B of the Act, rather than it being a special character of income entitled to Deduction from Gross Total Income under Chapter VI-A under Section 80-HH, etc. The computation of income entitled to exemption under Section 10-A or 10-B of the Act is done at the prior stage of computation of Income from Profits and Gains of Business as per Sections 28 to 44 under Part-D of Chapter IV before 'Gross Total Income' as defined under Section 80-B(5) is computed and after which the consideration of various Deductions under Chapter VI-A in Section 80HH etc. comes into picture. Therefore analogy of Chapter VI Deductions cannot be telescoped or imported in Section 10-A or 10-B of the Act. The words 'derived by an Undertaking' in Section 10-A or 10-B are different from 'derived from' employed in Section 80-HH etc. Therefore, all Profits and Gains of the Undertaking including the incidental income by way of interest on Bank Deposits or Staff loans would be entitled to 100% exemption or deduction under Section 10-A and 10-B of the Act. Such interest income arises in the ordinary course of export business of the Undertaking even though not as a direct result of export but from the Bank Deposits etc., and is therefore eligible for 100% deduction. 36. …….

Page 17 of 34 from export of computer software and other incidental and ancillary incomes derived in the normal course of business. It is not in dispute that the incomes on which deduction under section 10AA of the Act was not allowed by the CIT(A)/NFAC are generated out of the business carried on by the SEZ units. As held by the Karnataka High Court, the dedicated nature of business of development and export of computer software carried out by the assessee from the special geographical locations in SEZs. etc. makes it a special category entitled to the incentive in the form of 100% deduction under section 10AA of the Act which is akin to section 10-A or 10-B of the Act. The words ‘derived by an undertaking’ in section 10AA means all profits and gains of the SEZ unit including the incidental incomes arising in the ordinary course of business even though not as a direct result of export. All incidental activities resulting in incidental incomes in the SEZ units are earned out of business decisions and in view of commercial expediency cannot be de-linked from the profits and gains derived by the SEZ Units from export of computer software and cannot be taxed separately under income from other sources. Therefore, the offering of the various incomes by the assessee as income from other sources should not come in the way of putting forth a claim of deduction. Consequently, all these incomes are an integral part of SEZ unit’s activity and hence eligible for deduction under section 10AA of the Act. Having allowed deduction under section 10AA of the Act in respect of various categories of incomes, the CIT(A)/NFAC was not right in disallowing deduction under section 10AA of the Act in respect of other categories of incomes like interest on NCDs, interest on debentures, interest on loan to Subsidiaries, interest on Govt securities, interest on tax refunds, insurance claim, incentive from airlines and rental income from BSNL.

10.10.5 Further, the decision of the full bench of the Hon’ble Karnataka High Court in the case of CIT v Hewlett Packard Global Soft Ltd [2017] 87 taxmann.com 182 was followed by the Karnataka High Court in assessee’s

Page 18 of 34 own case for the AY 2005-06 in 349 of 2019 vide decision dated 22.11.2022 and deduction under section 10A of the Act was allowed in respect of rental income from Infosys BPO Ltd and BSNL Chennai. Similarly, the decision of this Tribunal in assessee’s own case for the AY 2014-15 and AY 2015-16 has allowed deduction under section 10AA of the Act on interest and other incomes.

10.10.6 Further, the insurance claim received in respect of flood in Chennai during the FY 2016-17 and incentive from airlines are in the nature of abatement or reimbursement of expenses incurred by the SEZ units. Since these expenses are allowed as business expenditure in computing the profits of SEZ units for deduction under section 10AA of the Act, the reimbursement thereof in the form of insurance claim and incentives from airlines are to be regarded as business income under section 41(1) of the Act and consequently these incomes are also eligible for deduction under section 10AA of the Act. Similarly, having allowed the deduction under section 10AA of the Act in respect of hostel rent, there is no reason as to why the said deduction should not be allowed from rental income from BSNL especially when Hon’ble Karnataka High Court in assessee’s own case has allowed deduction under section 10A of the Act in respect of rental income from Infosys BPO Ltd and BSNL Chennai for the earlier year.

10.10.7 In view of the above, we hold that interest on NCDs, interest on debentures, interest on loan to Subsidiaries, interest on Govt securities, interest on tax refunds, insurance claim received in respect of flood in Chennai during the FY 2016-17, incentive from airlines and rental income from BSNL are also eligible for deduction under section 10AA of the Act. The AO is directed to allow the deduction under section 10AA of the Act in respect of these incomes. Accordingly, the ground No 3 of the assessee is allowed.

11.1 The AO disallowed the foreign tax credit related to incomes eligible for deduction under section 10AA for the reason that the decision of Karnataka High Court in the case of Wipro Ltd v DCIT 382 ITR 179 which has allowed the foreign tax credit related to incomes eligible for deduction under section 10AA has been challenged before the Hon’ble Supreme Court and the case is pending before the Apex Court. Further the remaining foreign tax credit of Rs. 531,54,92,612 was allowed in the assessment order but the same was not reduced from tax payable in the computation sheet. An application under section 154 of the Act for rectification of the computation was filed with the AO on 31.7.2023. The rectification order under section 154 of the Act dated 4.8.2023 was passed by the AO allowing FTC of Rs. 531,54,92,612 in the computation of tax. However, the foreign tax credit pertaining to incomes eligible for deduction under section 10AA was not allowed in the assessment order as well as rectification order.

11.2 The CIT(A)/NFAC instead of adjudicating the issue of allowability of foreign tax credit pertaining to incomes eligible for deduction under section 10AA, held that the said issue has been rectified under section 154 and accordingly dismissed the ground as infructuous.

11.3 The issue of allowability of foreign tax credit pertaining to incomes eligible for deduction under section 10AA has been decided in favour of the assessee by the judgment of Hon’ble Karnataka High Court in the case of Wipro Ltd v DCIT 382 ITR 179. The decision in Wipro’s case was followed by the Hon’ble Karnataka High Court and by this Tribunal in assessee’s own case for the earlier years and the foreign tax credit pertaining to 10AA income was allowed. Thus, the AO is directed to allow the foreign tax credit with respect to income on which deduction under section 10AA has been claimed as per the decision of the Karnataka High Court in Wipro

Page 20 of 34 Ltd v DCIT 382 ITR 179. Accordingly, the Ground No 4 of the assessee is also allowed.

13.1 The DR strongly objected to the admission of additional grounds of appeal.

13.2 The additional ground on allowability of deduction under section 37(1) of the Act in respect of foreign taxes paid which is not eligible for relief under section 90 or 91 of the Act is a pure question of law. The quantum of taxes paid overseas is available on record. The relief under section 90 has been claimed and allowed. It is only in respect of the quantum of overseas taxes paid, but not qualifying for relief under section 90 of the Act, that the claim of deduction under section 37 of the Act is now being made. The facts being on record, and the claim being purely legal in nature, merits admission for adjudication. However, we are of the opinion that the additional ground of appeal needs verification and examination by the AO.

Page 21 of 34 13.3 This Tribunal in assessee’s own case for the AY 2014-15 and AY 2015-16 in 136, 226 and 227/Bang/2019 decision dated 31.1.2023 has remanded the issue of deduction under section 37 in respect of state taxes paid outside India to the file of the AO for fresh examination of facts and the AO was directed to keep in mind the ratio laid down by the Hon’ble Bombay High Court in the case of Reliance Infrastructure Ltd (supra) which is followed in the decision of the coordinate bench in the case of Onmobile Global Ltd. v ACIT [IT(TP)A Nos. 139 & 2560/Bang/2019 dated 10.08.2022].

13.4 Respectfully, following the same, the additional ground of appeal in respect of the claim of deduction under section 37(1) of the Act in respect of foreign taxes paid amounting to Rs. 16,67,20,749 which is not eligible for relief under section 90 or 91 of the Act, is also remanded to the file of the AO for fresh examination and verification. The AO is directed to decide the said claim in the light of the decisions in the case of Reliance Infrastructure Ltd [2016] 76 taxmann.com 257 (Bom), Onmobile Global Ltd. v ACIT [IT(TP)A Nos. 139 & 2560/Bang/2019 dated 10.08.2022] which were followed in assessee’s own case for the AY 2014-15 and AY 2015-16. Thus, the additional ground of appeal is allowed for statistical purposes.

15.1 At the outset, there is a delay of 70 days in filing the appeal by the Revenue. Perused the record and having heard the respective parties, it is perceived that the explanation offered in the condonation application is plausible and sufficient cause being shown by the Revenue, which prevented them from filing the appeal within the specified period u/s 253 of the Act

Page 22 of 34 and accordingly we inclined to condone the delay and admit the appeal for adjudication on merits.

16. The Ground No 1 is general in nature and does not require any adjudication.

16.1 The Ground No 2 deals with disallowance under section 14A read with rule 8D. The brief facts of the case are as under- During the year, the assessee earned exempt income being interest on tax free bonds and dividend from mutual funds amounting to Rs. 138,93,86,176/-. The expenditure incurred to earn the exempt income was identified and computed at Rs. 36,52,525/- and accordingly it was disallowed in the return of income under section 14A. The said expenditure was computed on the basis of 1%, 2%, 5%, and 10%, respectively of the salary cost of CFO & Deputy CFO, SVP-Global Head – Taxation and corporate accounting, Treasury Head and other employees.

16.2 In the assessment order, a sum of Rs. 19,09,13,241/- has been computed as the disallowance under section 14A read with rule 8D. After reducing the voluntarily disallowance amounting to Rs. 36,52,525/-, a sum of Rs. 18,72,60,716 was additionally disallowed and added back to business income.

16.3 The CIT(A)/NFAC relied on the decision of this Tribunal in assessee’s own case for AY 2014-15 and AY 2015-16 wherein under similar facts and circumstances, the disallowance made under section 14A read with rule 8D was deleted for the reason that the AO has not expressed any satisfaction in the assessment order as to why the suo moto disallowance made by the assessee under section 14A is not correct having regard to the books of account of the assessee. The CIT(A)/NFAC accordingly deleted the Page 23 of 34 disallowance under section 14A read with rule 8D by holding that the facts of the present case are similar to the Appellant’s own case for AY 2014-15 and AY 2015-16 and also relied upon the decision of the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. V. CIT [2018] 91 taxmann.com 154 (SC) which also make it clear that before applying the apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance u/s 14A of the Act is not correct. 16.4 The DR heavily relied on the findings of the assessment order and vehemently submitted that the ld. CIT(A)/NFAC grossly erred in ignoring circular No. 5/2014, dated 11/02/2014 which has clarified that rule 8D of the rules read with section 14A of the Act provides for disallowance of expenditure even where taxpayer has not earned any exempt income in a particular year. The AR on the other hand relied on the order of the CIT(A)/NFAC and the decision in assessee’s own case for the earlier years. It was also submitted that the impugned finding in the assessment order that management and administrative expenses towards earning exempt income are not allocated is factually incorrect since the assessee has voluntarily disallowed the salary costs of CFO & Deputy CFO, SVP-Global Head – Taxation and other employees. 16.5 We have considered the rival contentions and perused the material on record. We take a note of the fact that the AO has only stated that the assessee company has failed to allocate management and administrative expenses towards earning of the exempt dividend income and therefore there is no fault with for applying rule 8D. However, no justification has been given by the AO as to how and why the voluntary disallowance made by the assessee under section 14A on the basis of 1%, 2%, 5%, and 10%, respectively, of the salary cost of CFO & Deputy CFO, SVP-Global Head – Taxation and corporate accounting, Treasury Head and other employees is not correct having regard to the accounts of the assessee. It is an undisputed fact that the assessee company, having regard to expenses incurred for earning the exempt income, has disallowed a sum of Page 24 of 34 Rs. 36,52,525 under section 14A. We also take a note of the fact that the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. V. CIT [2018] 91 taxmann.com 154 (SC) also make it clear that before applying the apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance u/s 14A of the Act is not correct. Further, as held by this Tribunal in assessee’s own case for AY 2014-15 and AY 2015-16, the disallowance under section 14A of the Act cannot be computed as per rule 8D without first demonstrating that the suo moto disallowance made by the assessee is incorrect having regard to the accounts of the assessee company. Relevant extracts from this decision are as under- “15. Further it is noticed from the perusal of the records that the AO has also not called for any details from the assessee or analysed the workings of the disallowance. In this regard we notice that the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT [2018] 91 taxmann.com 154 (SC) has held as follows:-

“41. Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO.”

16. In view of the above Hon'ble Apex Court judgment, it is clear that no disallowance can be made u/s 14A of the Act read with Rule 8D of the IT Rules, where the A.O. failed to record dissatisfaction of correctness of the claim of the assessee. Therefore the disallowance made under section 14A r.w.r 8D(2)(iii) is deleted. This ground is allowed in favour of the assessee.”

16.6 The AO in the present case has failed to satisfy the requirements of section 14A(2) before applying the computation mechanism as per rule 8D. The generic statement in the assessment order that the assessee company has failed to allocate management and administrative expenses towards earning of the exempt dividend income is factually

Page 25 of 34 incorrect as the salary expenses of CFO & Deputy CFO, SVP-Global Head – Taxation and corporate accounting, Treasury Head and other employees have been disallowed and further the AO has not given any finding as to what are the management and administrative expenses incurred by the assessee company to earn the exempt income. Thus, respectfully following the decision of this Tribunal in assessee’s own case for AY 2014-15 and AY 2015-16 in 136, 226 and 227/Bang/2019 decision dated 31.1.2023, we uphold the order of CIT(A)/NFAC in deleting the disallowance under section 14A rws 8D. Accordingly the Ground No 2 as raised by the Revenue is dismissed.

17. The Ground No 3 deals with disallowance of brand building expenditure which was deleted by the ld. CIT(A)/NFAC. The brief facts in this regard are as under- During the year under consideration, the assessee incurred expenditure of Rs. 261,86,95,393/- under the nomenclature ‘Brand building expenditure’. The said expenditure comprised of 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. The same was recurring in nature and incurred during the course of existing business carried on by the assessee & claimed as a revenue expenditure.

17.1 In the assessment order, 20% of brand building expenses of FY 2018-19 amounting to Rs. 52,37,39,078/- and the aliquot brand building expenses of earlier years amounting to Rs. 132,61,62,024/- totaling to Rs. 184,99,01,102 was allowed as deduction. The said amount of Rs. 52,37,39,078/- is reduced from total brand building expenditure of FY

Page 26 of 34 2018-19 amounting to Rs. 261,86,95,393/- and the remaining expenditure of Rs. 209,49,56,314 is amortized over the next 4 years and thus added back to business income.

17.2 The CIT(A)/NFAC relying on the decision of this Tribunal in assessee’s own case for AY 2014-15 and AY 2015-16 in 136, 226 and 227/Bang/2019 decision dated 31.1.2023, deleted the disallowance of brand building expenditure.

17.3 The DR relied on the assessment order and vehemently submitted that the brand building expenditure incurred by the assessee cannot be considered as a revenue expenditure since it indirectly gives the assessee benefit for the long run. The ld. AR however relied on the above decision and submitted that there is no change in the facts and circumstances of this year as compared to earlier year.

17.4 We have considered the rival contentions and perused the material on record. The issue as to whether brand building expenditure is allowable as revenue expenditure is decided in favour of the assessee in the above decision wherein it is held as under- “35. 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:

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.”

Page 27 of 34 17.5 As there is no change in facts and circumstances of the present claim as compared to earlier years, We respectfully following the above decision uphold the decision of CIT(A)/NFAC on this issue. Accordingly, the Ground No 3 as raised by the Revenue is dismissed.

18. The Ground No 4 deals with the disallowance under section 10AA in respect of SEZ units for the reason that since no new master service agreement was made, the benefit of claim under section 10AA from the old SEZ cannot be allowed. The brief facts of the issue are as under- In the assessment order, the deduction claimed under section 10AA in respect of the 4 SEZ units viz., Chennai SEZ Unit 1, Chandigarh SEZ unit, Mangalore SEZ Unit 1 and Pune SEZ unit 1, was disallowed for the reason that the master service agreement (MSA) pertaining to these units were entered prior to establishment of these units and hence these units have been formed by splitting up and reconstruction of already existing business and therefore not eligible for deduction under section 10AA of the Act. For similar reasoning, the deduction claimed under section 10AA of the Act in respect of 2 new SEZ units viz., Hyderabad SEZ unit 4 and unit 6 which commenced the operations during the year was disallowed. 18.1 The CIT(A)/NFAC deleted the disallowance in respect of the 4 SEZ units viz., Chennai SEZ Unit 1, Chandigarh SEZ unit, Mangalore SEZ Unit 1 and Pune SEZ unit 1, for the reason that the ITAT in assessee’s own case has allowed deduction under section 10AA for the very same units and for other years, the deduction allowed by the CIT(A)/NFAC for the very same units was not challenged by the revenue before the ITAT. In respect of Hyderabad SEZ unit 4 and unit 6, the CIT(A)/NFAC held that the matter with regard to allowance of deduction u/s 10AA of the Act with respect to the Hyderabad SEZ unit 04 & 06 is identical to the other SEZ units on which the deduction u/s 10AA of the Act has been allowed by the Department/ITAT in earlier years. The matter being identical, deduction u/s Page 28 of 34 10AA with respect to Hyderabad SEZ unit 04 & Hyderabad SEZ unit 06 was allowed. 18.2 The DR was unable to controvert the findings of the ITAT and CIT(A) for the earlier years. The disallowance of deduction under section 10AA of the Act for the reason that the MSAs are entered into prior to formation of SEZs started from AY 2007-08 onwards. The CIT(A)/NFAC in assessee’s own case for the AY 2007-08 to AY 2009-10 allowed the said deduction relying on Circular No 1 of 2013 which provided that merely because the MSAs are entered into prior to formation of SEZs, deduction claimed under section 10AA of the Act cannot be disallowed. The relief allowed by the CIT(A)/NFAC for these years was not challenged by the revenue before the ITAT. For AY 2010-11 to AY 2012-13, the DRP did not allow the said relief and the assessee company challenged the disallowance before this Tribunal for these years. The Tribunal for AY 2012-13 in IT(TP)A No 718/B/2017 dated 28.11.2022 in assessee’s own case held as under- “6.15. We have referred to the observations by the Ld.CIT(A) for assessment years 2007-08 to 2009-10 wherein there is a categorical finding that these units have not been formed by splitting up or restructuring. This observation has not been challenged by the revenue in appeals filed in for AY 2007-18, for AY:2008-09 and ITA No.1848/B/2017 for AY: 2009-10. And thus this issue has attained finality. For sake of convenience, we reproduce the relevant observation by the Ld CIT(A) has been tabulated by the Ld.AR. We therefore direct the Ld.AO to grant the deduction claimed by the assessee in respect of the Chennai SEZ Unit I, Chandigarh unit, Mangalore Unit I and Pune Unit I.”

18.3 The above decision was followed by the ITAT in its decision for AY 2010-11 and AY 2012-13. For all the subsequent years, the disallowance made by the AO on this issue was deleted by the CIT(A) and the revenue has not contested the same before the Tribunal. Even in respect of AY 2020-21 and AY 2021-22, the revenue has not challenged the relief allowed by the CIT(A)/NFAC. Thus, the revenue’s ground of appeal only for the AY 2019-20 is misplaced and liable to be dismissed. As per Instruction No 17/2013 dated 19.11.2013 issued by the CBDT, further appeals should not be filed in cases where orders were passed prior to issue of circular but the issues

Page 29 of 34 giving rise to the disputes have been clarified by the Circular. However, in the present case, even after CIT(A)/NFAC allowing the relief following Circular No 1 of 2013, the revenue is still challenging the same before this Tribunal. In respect of Hyderabad SEZ unit 4 and unit 6 also the disallowance under section 10AA is made for the same reason that MSAs are entered into prior to formation of SEZs. Thus, the conclusion of the CIT(A) and ITAT for the earlier years in respect of 4 SEZ units equally apply to these SEZ units. The relief allowed by CIT(A)/NFAC in respect of these units in AY 2020-21 and AY 2021-22 have also not been challenged by the revenue. In view of the above, we affirm the findings of the CIT(A)/NFAC in allowing deduction under section 10AA of the Act in respect of Chennai SEZ Unit 1, Chandigarh SEZ unit, Mangalore SEZ Unit 1, Pune SEZ unit 1, Hyderabad SEZ unit 4 and unit 6. Hence Ground No 4 of the Revenue is also dismissed.

Page 30 of 34 “99. We notice that the coordinate bench of Tribunal in the case of M/s Goldman Sachs Services Pvt. Ltd. v JCIT [IT(TP)A No.2355/Bang/2019 dated 15.06.2020 has considered a similar issue where it is held that – Whereas, the assessee company has made a claim for deduction of CSR expenses u/s. 80G of the Income Tax Act, 1961. But the assessing officer has rejected the assesses claim without verifying the nature of contributions and observed that it is not a donation, and was not spent voluntarily for the eligibility of claim u/s. 80G of the Act but due to legal obligation prescribed u/s. 135 r.w. Schedule VII of Companies Act, 2013. We find that the A.O has allowed deduction u/s. 80G of the Act in respect of contribution made to PM Relief Fund which is not disputed. We are of the opinion that the A.O. has not made his observations clear that no CSR expenses are eligible for deduction u/s. 80G of the Act. We consider it appropriate to refer to the Clauses (iiihk) & (iiihl) of sub-section 2 of section 80G of the Act which are read as under:

“(iiihk) the Swachh Bharat Kosh, set up by the Central Government, other than the sum spent by the assessee in pursuance of Corporate Social Responsibility under sub-section (5) of Section 135 of the Companies Act, 2013 (18 of 2013); or (iiihl) the Clean Ganga Fund, set up by the Central Government, where such assessee is a resident and such sum is other than the sum spent by the assessee in pursuance of Corporate Social Responsibility under subsection (5) of Section 135 of the Companies Act, 2013) (18 of 2013).” Where these two exceptions are provided in Section 80G of the Act, it can be inferred that the other contributions made u/s. 135(5) of the Companies Act are also eligible for deduction u/s. 80G of Income Tax Act subject to assessee satisfying the requisite conditions prescribed for deduction u/s.80G of the Act. In the present case the A.O. has not dealt on these aspects, prima facie, considered the contributions as not voluntary but a legal obligation and has accepted the genuineness of the contributions. We are of the opinion, that the matter has to be considered for examination and verification of facts subject to the assessee satisfying the requirements of claim u/s.80G of the Act.

19.2 We respectfully by following the above decision, affirm the decision and finding of CIT(A)/NFAC in this regard and accordingly dismiss this ground of the Revenue.

20.1 The CIT(A)/NFAC following the decision of this Tribunal in assessee’s own case for AY 2014-15 and AY 2015-16 in 136, 226 and 227/Bang/2019 decision dated 31.1.2023, directed the AO to allow the same after verification. In the above decision of this Tribunal in assessee’s own case, the decision of the Hon’ble Bombay High Court in the case of Reliance Infrastructure Ltd [2016] 76 taxmann.com 257 and the decision of the coordinate bench in the case of Onmobile Global Ltd. v ACIT

Page 32 of 34 [IT(TP)A Nos. 139 & 2560/Bang/2019 dated 10.08.2022] was followed and it was held as under- 94. In assessee’s case it is noticed that the lower authorities have looked into the issue only from section 90/91 perspective and has not discussed anything with regard to the allowability u/s.37. This fact has been admitted by the CIT(A) in para 18.2 of the appellate order. We are therefore of the considered view that this issue should be remitted back to the AO for fresh examination of facts and the AO is directed to keep in mind the ratio laid down by the Hon’ble Bombay High Court in the case of Reliance Infrastructure Ltd (supra) which is followed in the decision of the coordinate bench in the case of Onmobile (supra). The assessee is directed to provide necessary information to the AO and cooperate with the proceedings. It is ordered accordingly. This ground is allowed in favour of the assessee for statistical purposes.”

20.2 The CIT(A)/NFAC has followed the above decision and directed the AO to compute the said amount after verification of facts of the case. Thus, there is no infirmity in the order of the CIT(A)/NFAC on this issue. Ground No 6 as raised by the Revenue is also dismissed.

21.1 Further in the order of the CIT(A)/NFAC for AY 2014-15 & AY 2015-16, the CIT(A)/NFAC had not allowed the deduction claimed u/s 32AC of the Act. Since, the deduction was not allowed in the AY 2014-15, AY 2015-16, AY 2016-17 & AY 2017-18, it was claimed by the assessee that the sale/transfer of these assets should also not be considered as deemed income chargeable under the head “profits and gain of business or profession”.

21.2 The CIT(A)/NFAC considered the said issue and held as under- “4.12.1 The submission of the appellant has been considered. It is held that since deduction u/s 32AC has not been allowed to the appellant in earlier years with respect to the assets sold/transfer during the year of Rs. 10,78,69,095 the said amount cannot be considered as deemed income during the current year. However, considering the fact that the matter with regard to allowability u/s 32AC with respect to the said assets is sub-judice before the Hon’ble High Court in earlier years, in case of reversal of the decision of the Tribunal by the Hon’ble High Court, the said amount shall be held to be deemed income u/s 32AC in the present year. The ground of appeal is allowed subject to the outcome of the decision of the Hon’ble High Court.”

21.3 The aforesaid finding of the CIT(A)/NFAC is just and proper according to facts and circumstances of the case. The disallowance of deduction under section 32AC of the Act in earlier years by the ITAT has resulted in taxation of the amount of Rs. 10,78,69,095/-. In case if the High Court were to allow deduction under section 32AC of the Act, the aforesaid sum would be liable for tax. Without properly appreciating the above, revenue’s ground no 7 seeks to challenge the relief allowed by CIT(A)/NFAC amounting to Rs. 10,78,69,095/- for the reason that the disallowance of deduction under section 32AC of the Act is confirmed by CIT(A) and ITAT for Page 34 of 34 the earlier years. Thus, there is no merit in the revenue’s Ground No 7 and is accordingly dismissed.

In the result, appeal filed by the assessee is partly allowed and the appeal filed by the revenue is dismissed.