DEPUTY COMMISSIONER OF INCOME-TAX,, PUNE vs. M/S. IGATE COMPUTER SYSTEM LTD.,, PUNE

The cross appeals filed by assessee and Revenue were heard together and are being disposed of by this consolidated order for the sake of convenience.

The assessee in ITA No.74/PUN/2016 has raised the following grounds of appeal:- 1. In respect of deduction u/s 10A/10AA in respect of certain eligible undertakings of the Company: a. In not allowing deduction u/s 10A/10AA of Rs.240,14,52,340 in respect of various eligible undertakings established after A.Y. 2005- 06, viz. Airoli, Noida SEZ, Hyderabad and Gandhinagar SEZ. b. In assuming jurisdiction to disallow the deduction u/s 10A/10AA in respect of such undertakings by observing and holding that the new units/undertakings have been formed by splitting up of a business already in existence since the 1980s, and that the profits and gains of the units/undertakings subsequently setup by the Company are not eligible for deduction u/s 10A/10AA of the Income-tax Act 1961. c. In denying the deduction u/s 10A/10AA in respect of such eligible undertakings on the basis of the nature of business etc. d. In re-examining the conditions of eligibility of deduction u/s 10A/10AA in respect of various undertakings established in earlier years. The Assessing Officer ought to have appreciated that the eligibility conditions in respect of splitting up of business already in

The Revenue in ITA No.299/PUN/2016 has raised the following grounds of appeal:- 1. The DRP has erred in allowing deduction u/s 10A in respect of 6 units including the two units namely Akurti and Millennium Business Park without appreciating the fact that the approving authority i.e. Software Technology Park of India (STPI) had approved the above two units as expansion of existing units on the basis of the assessee's application stating these units to be expansion of the existing units, thereby, not fulfilling the condition laid down u/s 10A(2) of the Act. The dept had filed SLP against the order of Hon'ble High Court in respect of these two units on the issue for the A.Yrs 2002-03 to 2004-05. 2. The DRP erred in directing the Assessing Officer to delete the disallowance made u/s 14A r.w. Rule. 8D even though the assessee has earned substantial amount of tax free dividend and has disallowed meager amount u/s 14A on estimated basis. 3. The DRP erred in directing the Assessing Officer to delete the ESOP cost on the basis of the special Bench of ITAT Bangalore decision in the case of Biocon Limited even though the issue has not reached finality and being notional.

The learned Authorized Representative for the assessee pointed out that major of the issues raised in cross appeals are covered by the order of Tribunal in assessee’s own case relating to assessment year 2010-11.

The ground of appeal No.1 raised by assessee and the Revenue are linked and in respect of deduction claimed under section 10A/10AA of the Act in respect of certain eligible undertakings of the company. The assessee had established different undertakings in different assessment years and had claimed them to be independent new units / undertakings. However, the case of Revenue was that the new units / undertakings were formed by splitting of business already in existence since 1980 and hence the profits and gains of the said units / undertakings subsequently set up by the assessee company were not eligible for deduction under section 10A/10AA of the Act. As part of ground of appeal No.1 raised by assessee vide clause (f), the assessee is aggrieved in not allowing the aforesaid claim of deduction in respect of new unit at Gandhi Nagar SEZ, set up during the year under consideration. The grievance of Revenue on the other hand, is against order of DRP in allowing deduction under section 10A of the Act in respect of six units including two units at Akurti and Millennium Business Park. The learned Authorized Representative for the assessee has taken us through the issue decided by Tribunal in assessee’s

The facts and issue arising in the present appeal are similar to the facts and issue in earlier years and following the same parity of reasoning, we hold that the assessee is entitled to the claim of deduction under section 10A of the Act in respect of various undertakings which were established by the assessee from year to year except the new undertaking at Hyderabad. Further, the Tribunal also held that BPO unit is entitled to the claim of deduction under section 10A of the Act. So, the assessee is thus, held to be eligible to claim the deduction in respect of BPO undertaking and out of 11 undertakings in respect of 10 undertakings, the said claim is allowed.

Now, coming to the claim of deduction in respect of eleventh undertaking i.e. unit at Hyderabad. The Tribunal vide paras 16 and 17 held that the claim of assessee is not correct and the assessee is not entitled to the claim of deduction under section 10A of the Act. However, vide para 18, the alternate plea raised by the assessee on without prejudice was allowed that the undertaking at Hyderabad may be treated as expansion of the existing unit at Pune, from where the employees were transferred. The Tribunal thus, directed the Assessing Officer to allow the said deduction under section 10A of the Act to Hyderabad unit being expansion of Pune unit, for the remaining period as eligible to the Pune unit. We similarly, direct the Assessing Officer to follow the directions of Tribunal in para 18 in this regard.

Now, the last undertaking which is to be adjudicated is the new undertaking established in Gandhi Nagar.

The learned Authorized Representative for the assessee pointed out that new unit at Gandhi Nagar was established independently and was not formed by splitting of any of the old units. He also pointed out from the list of new assets purchased, were totaling ₹ 4.23 crores, copy of which is placed at page 14 of Paper Book. The learned Authorized Representative for the assessee then referred to pages 19 to 22 of Paper Book and pointed out that only 15% of employees were transferred from old unit, whereas the limit prescribed by CBDT is 50%.

The learned Departmental Representative for the Revenue on the other hand, pleaded that substantial number of employees have been transferred, hence it cannot be said to be case of new unit being established.

We have heard the rival contentions and perused the record. In order to avail the deduction under section 10A of the Act, requirement for the assessee was to fulfill the conditions laid down by the CBDT vis-à-vis employees transferred from existing undertaking. However, no such condition is imposed under the Act, but the CBDT had prescribed that where more than 50% employees are transferred, then it is case of splitting up or re-construction of business already in existence. During the year under consideration, the assessee had established new unit at Gandhi Nagar, wherein it made investment in the fixed assets to the tune of ₹ 4.23 crores. Further, the assessee had also filed list of employees, wherein the employees to the extent of 15% were transferred from old unit to Gandhi Nagar unit. Since it had fulfilled the conditions laid down by CBDT, then it cannot be said to be formed by splitting up or re-construction of business already in existence.

Now, coming to the next claim of assessee vide ground of appeal No.2 in respect of TTC BPO being separate and independent undertaking, entitled to claim the benefit under section 10A of the Act. The said issue has also been decided by the Tribunal in assessment year 2010-11 and following the same parity of reasoning, we allow the claim of assessee vis-à-vis TTC BPO unit.

Further, the assessee has raised grounds of appeal No.3 to 5, which are not pressed as the issue has been rectified vide order passed under section 154 of the Act. Consequently, the said grounds of appeal are dismissed as not pressed.

Now, coming to balance grounds of appeal raised by the Revenue, wherein vide ground of appeal No.2 the Revenue is aggrieved by deletion of disallowance made under section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 (in short ‘the Rules’). The Assessing Officer had made the aforesaid disallowance under section 14A of the Act read with Rule 8D of the Rules. However, the DRP vide para 6 had deleted the said disallowance on the ground of lack of satisfaction.

The learned Authorized Representative for the assessee pointed out that similar issue was decided by the Tribunal in assessee’s own case for assessment year 2010-11 i.e. for lack of satisfaction recorded by the Assessing Officer, disallowance made was deleted.

The perusal of draft assessment order reflects the Assessing Officer to have noted that the assessee had earned tax free dividend income of ₹ 50.41 crores. The assessee in computation of income had disallowed sum of ₹ 50 lakhs under section 14A of the Act. The perusal of assessment order does not reflect the Assessing Officer to have recorded satisfaction as to why suo motu disallowance made by the assessee at ₹ 50 lakhs is not sufficient to cover disallowance of expenditure relatable to exempt income, in view of the provisions of section 14A(2) of the Act. The Assessing Officer has noted the fact that similar disallowance was made in earlier year which was though allowed by DRP, but the appeal is pending before the Tribunal and hence, he computed disallowance under section 14A of the Act read with Rule 8D of the Rules at ₹ 6,02,73,236/-. Since the assessee had already disallowed sum of ₹ 50 lakhs, the additional disallowance was worked out at ₹ 5,52,73,236/-. The DRP had allowed the said claim of assessee in turn, relying on its order for earlier year. The Tribunal in assessee’s own case relating to assessment year 2010-11 (supra) had decided the issue vide paras 34 and 35 and had held that in the absence of any satisfaction being recorded by the Assessing Officer before making aforesaid disallowance under section 14A of the Act, then there is no merit in the disallowance made by the Assessing Officer. Reliance in this regard was placed upon the ratio laid down by the Hon'ble Supreme Court in Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT & Anr. (2017) 394 ITR 449

Following the same parity of reasoning and since the issue was also decided by the Assessing Officer on the basis that similar disallowance was made in earlier year, we allow the claim of assessee in entirety and dismiss the ground of appeal No.2 raised by Revenue.

The issue in ground of appeal No.3 raised by Revenue is against deletion of disallowance made of ESOP cost. The Assessing Officer had noted the fact that similar disallowance was made in earlier year. Though the DRP had allowed the said claim but since the Department had filed an appeal against the order of DRP, disallowance was made of ₹ 16,78,25,399/-.

The learned Authorized Representative for the assessee pointed out that the said issue has also been decided by the Tribunal in assessee’s own case and the claim has been allowed in entirety. The Tribunal had remitted the issue back to the file of Assessing Officer to follow the directions of Tribunal in assessment year 2009-10 and decide the issue accordingly. Applying the same, we remit this issue also back to the file of Assessing Officer to decide the same in line with directions of Tribunal in assessment year 2009-10. The ground of appeal No.3 raised by Revenue is thus, dismissed.

Now, coming to the next issue i.e. against order of DRP in allowing disallowance made under section 10A(7) r.w.s. 80IA(10) of the Act.

The case of assessee before us is that the said issue stands covered by the order of Tribunal from assessment year 2006-07 to 2009-10. The case of Assessing Officer was that as against net profit margins of assessee at 31.34%, the mean margins of comparables selected for benchmarking

In the facts of present case also the Assessing Officer noted that net profit margins earned by assessee were 31.77%. However, the profit margins earned by 7 companies were 9.33% (mean margins). The Assessing Officer thus, had invoked provisions of section 10A(7) r.w.s. 80IA(10) of the Act and held the assessee to have earned more than average profits than its comparable companies and where 26% of export of services were provided by the assessee to its group companies, there was close business connection between group companies which enabled the assessee to show more than ordinary profits. The Assessing Officer thus, computed disallowance of BPO business carried out from NDA-58, TTC BPO and also from Noida, SEZ and

The Tribunal had already decided this issue in assessee’s own case in assessment year 2010-11 vide paras 24 to 26 and applying the same ratio, we find no merit in ground of appeal No.4 raised by Revenue.

Now, coming to next issue which is in respect of disallowance made on account of FBT paid in Australia.

Brief facts relating to the issue are that the assessee had claimed sum of ₹ 48,17,580/- as deduction on account of Fringe Benefit Tax (FBT) paid in foreign country. The said amount was added back in the computation of income but note was attached to the computation of income stating that the amount was in the nature of employees cost and the same is to be allowed as deduction at the time of assessment. The assessee also explained the nature of FBT tax in Australia and stressed that FBT was not tax on income. The Assessing Officer rejected the claim of assessee holding that FBT paid in Australia was nothing but income tax.

The DRP allowed the claim of assessee holding as under:-

The Revenue is in appeal against the order of DRP.

The learned Departmental Representative for the Revenue pointed out that FBT paid in Australia is against remuneration paid to employees deputed in India.

The learned Authorized Representative for the assessee pointed out that FBT paid under Chapter XIIH is paid in India and is covered by provisions of section 40(a)(ic) of the Act. However, there is no provision under the Act to disallow foreign FBT tax paid and it is simile drawn from the provisions of section 40(a)(i) of the Act and pointed out that since the assessee was entitled to Double Taxation Relief, so foreign tax paid was not to be disallowed in the hands of assessee.

We have heard the rival contentions and perused the record. Under clause (ic) of section 40(a) of the Act, it is provided that fringe benefit tax paid under Chapter XIIH is not to be allowed as deduction while computing income under the head ‘Profits & gains or profession’. In other words, FBT paid in India under the provisions of the Act is not to be allowed as deduction but there is no such embargo in respect of FBT paid in Australia. We uphold the findings of

Similar is the proposition laid down by Mumbai Bench of Tribunal in ACIT Vs. Shipping Corporation of India in ITA No.5556/Mum/2007, along with CO No.294/Mum/2007, relating to assessment year 2003-04, order dated 23.12.2010. Accordingly, the ground of appeal No.5 raised by Revenue is dismissed.

Now, coming to last issue raised by Revenue i.e. deletion of disallowance made under section 40(a)(ia) of the Act in respect of overseas payments. The issue raised by Revenue is in respect of non deduction of tax at source out of certain payments made by the assessee to its associated enterprises. The assessee had not deducted tax at source out of following payments:- a) AMC Charges Rs. 16,76,325 b) Consultancy Fees Rs. 81,54,754 c) Purchase of software licenses Rs.1,51,00,945 d) Data link charges Rs.8,75,36,820 e) Other payments Rs. 7,14,007

The Assessing Officer relying on the orders of earlier years had held the assessee liable to deduct tax at source out of aforesaid payments and for such non deduction, had disallowed the expenditure in the hands of assessee.

The DRP in turn, relying on the order of Tribunal in ITA Nos.1636 & 1637/PN/2014, relating to assessment years 2011-12 and 2012-13, order dated 29.04.2015 in respect of data link charges had held that the assessee was not required to deduct tax at source on payment of data link charges and hence, the assessee had not defaulted in not deducting tax at source on the payments

Now, coming to balance payments which have been allowed by the DRP. Reliance was placed on the order of Tribunal for assessment years 2008-09 to 2010-11 in ITA Nos.1172 to 1174/PN/2013, dated 10.04.2015. The Tribunal had held that no liability to deduct tax could be fastened on the assessee to deduct tax at source on the basis of subsequent amendments made in the Act in relation to payments made to non residents, this was the view of Tribunal while deciding the appeals against order passed under section 201(1) / 201(1A) of the Act.

Further, the Tribunal in the case of John Deere India Pvt. Ltd. Vs DDIT (International Taxation) in ITA Nos.905 to 908/PUN/2015, relating to assessment years 2007-08 and 2008-09, order dated 23.01.2019 have also elaborately discussed the issue in paras 45 to 89 and the Tribunal in final analysis has held as under:- “90. In conclusion, we hold that purchase of software by the assessee being copyrighted article is not covered by the term „royalty‟ under section 9(1)(vi) of the Act. Where the assessee did not acquire any copyright in the software, is not covered under Explanation 2 to section 9(1)(vi) of the Act. We further hold that amended definition of „royalty‟ under the domestic law cannot be extended to the definition of „royalty‟ under DTAA, where the term „royalty‟ originally defined has not been amended. As per definition of „royalty‟ under DTAA, it is payment received in consideration for use or right to use any copyright of literary, artistic or scientific work, etc.; thus, purchase of copyrighted article does not fall in realm of „royalty‟. We also hold that since the provisions of DTAA overrides the provisions of Income Tax Act and are more beneficial and the definition of „royalty‟ having not undergone any amendment in DTAA, the assessee was not liable to deduct tax for payments made for purchase of software. In such scenario, the assessee cannot be held to be in default and the demand created under section 201(1) and interest charged under section 201(1A) of the Act is thus, cancelled.”

In view of the issue being settled, we find no merit in the ground of appeal No.6 raised by the Revenue. The assessee was not obliged to deduct tax out of aforesaid payments made to associated enterprises and hence, has not defaulted in not deducting tax at source. Consequently, the assessee is entitled to the said claim and no disallowance is to be made under section 40(a)(ia) of the Act. The grounds of appeal raised by Revenue are thus, dismissed.

In the result, the appeal of assessee is partly allowed and appeal of Revenue is dismissed.