M/S INFOSYS BPM LIMITED ,BANGALORE vs. JOINT COMMISSIONER OF INCOME TAX SPECIAL RANGE-3 , BANGALORE

PER B.R. BASKARAN, ACCOUNTANT MEMBER:

The assessee has filed his appeal challenging the order dated 12.10.2018 passed by Ld. CIT(A)-3, Bengaluru and it relates to assessment year 2009-10. The grounds of appeal urged by the assessee give rise to following issues:- a) Disallowance of mark to market loss arising on revaluation of forward contracts while computing total income. b) Disallowance of mark to market loss on revaluation of forward contracts while computing book profit u/s 115JB of the Income-tax Act,1961 ['the Act' for short].

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore Page 2 of 32 c) Setting off of mark to market losses on forward contracts against “business income” instead of “income from other sources”. d) Disallowance of software expenses u/s 40(a)(i)/40(a)(ia) of the Act. e) Disallowance of software expenses as capital expenditure on alternative basis. f) Disallowance of brand building expenses treating the same as capital in nature. g) Disallowance of provision for software expenses. h) Disallowance u/s 14A of the Act. i) Reduction of expenses incurred in foreign currency from export turnover while computing deduction u/s 10A of the Act.

3.1 The Ld. CIT(A) noticed that the assessee has claimed MTM loss as under:-

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore

Page 3 of 32 Loss on actual settlement of forward contracts – 75,37,08,771 Loss on revaluation of forward contracts as on Balance sheet date 10,82,14,587 ------------------ 86,19,23,358 ============ The Ld CIT(A) noticed that the AO has allowed the claim of loss of Rs.75.37 crores arising on actual settlement of forward contracts. Before Ld CIT(A), the assessee submitted that the forward contracts are entered into in respect of export sales. It was also stated that the all foreign exchange receivables and pending forward contracts are restated as on the Balance sheet data. The assessee also submitted that it could not do one to one mapping of forward contracts with outstanding receivables.

3.2 The Ld CIT(A) took the view that the assessee has claimed loss pertaining to foreign exchange receivables and also forward contracts. By placing reliance on the decision rendered by Delhi bench of Tribunal in the case of Bechtel India (P) Ltd vs. ACIT (2017)(82 taxmann.com 301), the Ld CIT(A) held that MTM loss arising on revaluation of forward contracts is an unascertained liability and hence not allowable. Before Ld CIT(A), the assessee had placed its reliance on the decision rendered by Bangalore bench of Tribunal in the case of Quality Engineering & Software Technologies (P) Ltd (52 taxmann.com 515). The Ld CIT(A) held that the above said decision is distinguishable on facts. Accordingly, he confirmed the disallowance made by AO.

3.3 Before us, the Ld A.R placed his reliance on the decision rendered by co-ordinate bench in the case of ACIT vs. Acer India P Ltd (2020) (Taxcorp (A.T) 87234) in support of his contention that the loss arising on revaluation of forward contracts as on Balance Sheet date is allowable as deduction.

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore

Page 4 of 32 3.4 We heard Ld D.R on this issue and perused the record. The assessee has furnished the details of aggregate loss arising on revaluation of forward contracts and also on actual settlement amounting to Rs.86,19,23,358/- at pages 248 to 261 of paper book. The detailed working of MTM loss on forward contracts is given at page 468 of paper book.

3.5 We notice that the Bangalore bench, in the case of Acer India P Ltd (supra), has followed the decision rendered by co-ordinate bench in the case of Quality Engineering & Software Technologies P Ltd (supra), wherein it has been held that the revaluation of forward contracts as on valuation date (balance sheet date) is allowable as deduction.

3.6 We noticed that the ld CIT(A) has placed his reliance on the decision rendered by Delhi bench of Tribunal in the case of Bechtel India (P) Ltd (supra). In this case, the ITAT noticed that the assessee has not revalued its outstanding receivables as on Balance Sheet date and it has revalued only forward contracts. The facts have been discussed by the Tribunal in paragraph 4.5.6 to 4.5.7 of its order. Under these set of facts, the Tribunal held that the assessee instead of measuring the receivables on balance sheet date at foreign exchange rate contracted, has measured the pending forward contracts and such loss is not allowable as deduction.

3.7 However, in the instant case, the assessee has reported to Ld CIT(A) that it has revalued its receivables as well as forward contracts. This fact distinguishes the present case from that of the facts prevailing in the case of Bechtel India (P) Ltd (supra).

3.8 The principles that emerge from various case law are that

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore

Page 5 of 32 (a) Forward contract should relate to revenue item, whether it is receivable or payable. (b) Both the forward contract and the underlying receivables/payables should have been revalued as on the Balance Sheet date. (c) The gains arising on such revaluation should have been accounted for or netted off against the loss arising on revaluation of forward contracts (both in the case of forward contracts and underlying receivables/payables). In that case, the net loss is allowable as deduction and net gain is taxable as income. (d) Generally forward contract should be related to underlying receivables/payables on one to one basis. However, in the instant case, it has been admitted that the assessee could not make one to one mapping of forward contract with the receivables. In that case, it is the duty of the assessee to show that the aggregate amount of forward contracts does not exceed the aggregate amount of trade receivables/payables. If there is any excess, then the loss relating to such excess cannot be treated as normal business loss.

3.9 We notice that the tax authorities had no occasion to examine the claim of the assessee applying above principles. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO to examine the claim of the assessee applying above principles.

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore

Page 6 of 32 as “unascertained liability”. In the case of Quality Engineering & Software technologies (P) Ltd (2014)(52 taxmann.com 515), the Bangalore bench of Tribunal has categorically held as under:- “4.5.2 The term 'Marked to Market' losses (MTM) refers to losses computed as on a particular date with reference to prevailing exchange rate in respect of contracts that have not matured (i.e. open contracts). As per the prescribed Accounting Standards, companies are required to account for the MTM losses in their books of account despite the fact that the contract has not yet matured as on the Balance Sheet date. 4.5.3 Foreign Exchange Forward Contract means an agreement to exchange different currencies at a forward rate. Forward rate is the specified rate for exchange of currency at a specified future date. The assessee, in the case on hand, entered into a forward contract with the Bank to buy or sell foreign exchange at an agreed price on a future date in order to hedge against possible future financial loss due to fluctuation in the rate of foreign currency. Therefore; (i) Firstly, the foreign exchange forward contract created a continuing, binding obligation on the date of contract against the assessee to fulfill the same on the date of maturity; and (ii) Secondly, it is in the nature of a hedging contract because it is a contract entered into against possible future financial losses. It follows from the above that while it is true that the assessee would come to know of the actual profit / loss only on the date of maturity, unless there is any premature cancellation of the contract, it is equally true that the assessee could anticipate the loss on the valuation date, say 31st March, with reasonable accuracy. Prudent accounting and commercial principles require that all accrued losses have to be taken into account. 4.5.4 Having considered the nature of the contract, it needs to be examined whether on account of the existing obligation arising out of the contract, a liability accrued as per the provisions of the Income Tax Act. In this regard, it is necessary to consider and take into account some of the settled principles regarding accounting propositions, which are as under :—

(i) Income is to be accounted for only when the right to receive the same has accrued in favour of the assessee, thereby creating a realisable debt in its favour; i.e. a legally enforceable right; (ii) All anticipated losses, which accrued on the date of balance sheet have to be accounted for as per prudent accounting policies; (iii) Stock-in-trade is valued at the end of the previous year in accordance with the matching principle in order to find out the true profit / loss. (iv) The method of accounting consistently followed by the assessee should not

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore

Page 7 of 32 be discarded casually without having good and sound reasons for the same.

4.5.5 The assessee contends that the forward contract was to be revalued in accordance with the Accounting Standards (AS) - 11 and therefore he has no option but to determine the profit / loss in regard to unmatured foreign exchange forward contracts in accordance with the currency rates as on the valuation date viz. March 31st. This contention of the assessee is not disputed. The Assessing Officer, however, is of the view that such treatment in the books of account per se did not give the assessee the right to claim the loss under the Income Tax Act. It is this contention of the Assessing Officer that requires to be examined, having regard to the fundamental commercial principles which have received judicial recognition. It is a settled principle, upheld in several decisions of the Courts, that deduction is allowable under the Act in respect of liabilities that have crystallised during the year. If an anticipated future liability is coupled with a present obligation, then that results in crystallised liability, even though the quantification may vary depending upon the terms of contract. A contingent liability depends purely on the happening or not happening of an event. Whereas, if an event has taken place, which in the case on hand was of entering into the contract and undertaking of the obligation to meet the liability, and only the consequential effect of the same is to be determined, then it cannot be said that it is in the nature of contingent liability. It is to be borne in mind that the issues relating to the accrual of income cannot be decided on the same footing and considerations on which issues relating to losses are to be decided. In the case of loss / expenditure, the concept of reasonable certainty to meet an existing obligation comes into play; which in legal terminology is referred to as "crystallisation of liability". This is in keeping and consonance with the principle of prudence as considered by the Hon'ble Apex Court in the case of Woodward Governor India (P.) Ltd. (supra). The substantial questions of law before the Hon'ble Apex Court for consideration as extracted from para 3 of its order is as under :— "3. In this batch of civil appeals, the following question arises for determination: (i) Whether, on the facts and circumstances of the case and in law, the additional liability arising on account of fluctuation in the rate of exchange in respect of loans taken for revenue purposes could be allowed as deduction under s. 37(1) in the year of fluctuation in the rate of exchange or whether the same could only be allowed in the year of repayment of such loans? (ii) Whether the assessee is entitled to adjust the actual cost of imported assets acquired in foreign currency on account of fluctuation in the rate of exchange at each balance sheet date, pending actual payment of the varied liability?"

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore

Page 8 of 32 The above questions of law were elaborated by their Lordships at para 4 of the order which is extracted as under :— "4. At the outset, for the sake of convenience, we may state that in this batch of civil appeals broadly we have before us two categories. In the first category, we are concerned with exchange differences arising in foreign currency transaction on revenue items. In such category, we are concerned with the assessee(s) incurring loss on revenue account. In that category, we are concerned with the provisions of ss. 28, 29, 37(1) and 145 of the IT Act, 1961 ("1961 Act"). In the second category of cases, we arc concerned with exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets. In other words, in the second category of cases, we are concerned with the assessee(s) incurring liabilities on capital account. In such cases, we are required to consider the provisions of s. 43(1), 43A (both, before and after amendment vide Finance Act, 2002)." 4.5.6 The Hon'ble Apex Court after it considered and examined the issue, decided as at paras 13 to 21 of its order which are extracted as under :— '13. As stated above, one of the main arguments advanced by the learned Addl. Solicitor General on behalf of the Department before us was that the word "expenditure" in s. 37(1) connotes "what is paid out" and that which has gone irretrievably. In this connection, heavy reliance was placed on the judgment of this Court in the case of Indian Molasses Company. Relying on the said judgment, it was sought to be argued that the increase in liability at any point of time prior to the date of payment cannot be said to have gone irretrievably as it can always come back. According to the learned counsel, in the case of increase in liability due to foreign exchange fluctuations, if there is a revaluation of the rupee vis-a-vis foreign exchange at or prior to the point of payment, then there would be no question of money having gone irretrievably and consequently, the requirement of "expenditure" is not met. Consequently, the additional liability arising on account of fluctuation in the rate of foreign exchange was merely a contingent/notional liability which does not crystallize till payment. In that case, the Supreme Court was considering the meaning of the expression "expenditure incurred" while dealing with the question as to whether there was a distinction between the actual liability in praesenti and a liability de futuro. The word "expenditure" is not defined in the 1961 Act. The word "expenditure" is, therefore, required to be understood in the context in which it is used. Sec. 37 enjoins that any expenditure not being expenditure of the nature described in ss. 30 to 36 laid out or expended wholly and exclusively for the purposes of the business should be allowed in computing the income chargeable under the head "Profits and gains of business". In ss. 30 to 36, the expressions "expenses incurred" as well as "allowances and depreciation" has also been used. For example, depreciation and allowances are dealt with in s. 32. Therefore, Parliament has used the expression "any expenditure" in s. 37 to cover both. Therefore, the expression

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore

Page 9 of 32 "expenditure" as used in s. 37 may, in the circumstances of a particular case, cover an amount which is really a "loss" even though the said amount has not gone out from the pocket of the assessee.

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore

Page 10 of 32 stock is not brought into account, as no prudent trader would care to show increase profits before actual realization. This is the theory underlying the rule that closing stock is to be valued at cost or market price, whichever is the lower. As profits for income-tax purposes are to be computed in accordance with ordinary principles of commercial accounting, unless, such principles stand superseded or modified by legislative enactments, unrealized profits in the shape of appreciated value of goods remaining unsold at the end of the accounting year and carried over to the following years account in a continuing business are not brought to the charge as a matter of practice, though, as stated above, loss due to fall in the price below cost is allowed even though such loss has not been realized actually. At this stage, we need to emphasise once again that the above system of commercial accounting can be superseded or modified by legislative enactment. This is where s. 145(2) comes into play. Under that section, the Central Government is empowered to notify from time to time the Accounting Standards to be followed by any class of assessees or in respect of any class of income. Accordingly, under s. 209 of the Companies Act, mercantile system of accounting is made mandatory for companies. In other words, Accounting Standard which is continuously adopted by an assessee can be superseded or modified by legislative intervention. However, but for such intervention or in cases falling under s. 145(3), the method of accounting undertaken by the assessee continuously is supreme. In the present batch of cases, there is no finding given by the AO on the correctness or completeness of the accounts of the assessee. Equally, there is no finding given by the AO stating that the assessee has not complied with the Accounting Standards.

……………… 4.5.7 As can be seen from the extractions reproduced above, the decision in the case of Woodward Governor India (P.) Ltd. (supra) has been rendered in respect of "monetary items", denominated in foreign currency which include to mean money held and assets and liabilities to be received or paid in fixed amounts, e.g. cash, foreign currency notes, balance in bank accounts denominated in a foreign currency, receivables / payables and loans denominated in a foreign currency, sundry creditors, etc. are all monetary items. The decision is also related to transactions in which a legal liability has been incurred before it is actually disbursed. We are therefore unable to concur or agree with the view of the learned CIT (Appeals), that liability could arise only when the contract would have matured, as such a stand is totally divorced from the accounting principles

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore

Page 11 of 32 and is in variance with the principle upheld by the Hon'ble Apex Court in the case of Woodward Governor India (P.) Ltd. (supra). It can also be seen that the decision in the case of Woodward Governor India (P.) Ltd. (supra) (as extracted above) has been rendered with regard to items in the revenue account and capital account. Therefore, the view of the learned CIT (Appeals) that this decision of the Hon'ble Apex Court relates to only restatement of existing currency liabilities and assets is not correct. 4.5.8 In the case on hand, it is not in dispute that the forward contracts have been entered into by the assessee in order to protect its interest against fluctuations in foreign currency, in respect of consideration for export proceeds, which is a revenue item. Therefore, in sum and substance, it has the trappings of stock-in-trade and the assessee has to restate or revalue the same as on the Balance Sheet date. The consequent effect of this accounting treatment was to recognize the exchange fluctuation gain or loss in the profit and loss account as on the valuation date. In view of the facts and circumstances of the case as discussed above, we are of the considered view that the appeal of the assessee on this issue, succeeds for the following reasons :— (i) A binding obligation accrued against the assessee when it entered into foreign exchange forward contracts; (ii) The forward contracts are in respect of consideration for export proceeds, which are revenue items; (iii) The liability is determinable with reasonable certainty when an obligation is pending on the balance sheet date and such a liability cannot be said to be a contingent liability. (iv) The accounting treatment is as per Accounting Standards and the ICAI Guidelines. (v) The principles enunciated by the Hon'ble Apex Court in the case of Woodward Governor India (P.) Ltd. (supra) are applicable to the facts of the case on hand.

4.5.9 We had earlier observed that the Assessing Officer had relied on the CBDTs Instruction No.3/2010. Paras 1 and 3 of this Instruction reads as under :—

"1.Foreign Exchange derivative transactions entered into by the corporate sector in India have witnessed a substantial growth in recent years. This combined with extreme volatility in the foreign exchange market in the last financial year is reported to have resulted in substantial losses to an assessee on account of trading in forex-derivatives. A large number of assesses are said to be reporting such losses on 'marked to market' basis either suo motu or in compliance of the Accounting Standard or advisory circular issued by the Institute of Chartered Accountants. The issue whether such losses on account of forex-derivatives can be allowed against the taxable income of an assessee has been considered by the Board. In this

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore

Page 12 of 32 connection, I am directed to say that the Assessing Officers may follow the guidelines given below: 2....... 3. Treatment of loss from actual transactions in forex-derivatives. In a case where a loss on a forex-derivative transaction arises on actual settlement / conclusion of contract and is not a notional or marked to market book entry, a further question will arise as to whether such a loss is on account of a speculative transaction as contemplated in Section 43(5) of the Income tax Act. For determining whether loss from a transaction in respect of a forex-derivative is a speculation loss or not, the Assessing Officers may refer to Proviso (d) below sub-section (5) of Section 43 inserted by the Finance Act, 2005, with effect from 1.4.2006. It lays down that any 'eligible transaction' in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956, that has been carried out in a recognized stock exchange shall not be treated as a speculative transaction. Further, an 'eligible transaction' for this purpose would be one that fulfils the conditions laid down in Explanation to Section 43(5)(d). Any loss in a speculative transaction can be set off only against profit from speculative transactions. In the case on hand, as discussed earlier, a contract has been concluded and a liability has crystallized. In this factual matrix, from the wordings of the Instruction, it follows that the loss arising out of the forward contract is not notional. In such a case, the CBDT Instruction requires the Assessing Officer to examine whether such a loss is on account of a speculative transaction as contemplated in section 43(5) of the Act."

4.1 Following the above said decision, we hold that the loss arising on revaluation of forward contracts cannot be considered as unascertained liability. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the addition made to the Net profit while computing book profit u/s 115JB of the Act.

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore

Page 13 of 32 against business income. Accordingly, he apportioned the loss against various units of the assessee on the basis of turnover of the units. The Ld CIT(A) confirmed the action of the AO.

5.1 We heard the parties on this issue and perused the record. We notice that the Ld CIT(A) has decided this issue against the assessee with the following observations:- “7.2 The submissions of the appellant have duly been considered. There is no merit in the submissions of the appellant. The foreign exchange transactions are arising out of the export activities of various units and so any allowable loss in relation to settlement of forward or option contracts in relation to the same is part and parcel of the business activity and the same cannot be allowed to be set off against the income from other sources. So the action of the AO is found to be correct. As regards claim of the appellant that the profits on account of forward contracts should be considered as eligible for deduction under Section 10A/10AA of the Act for the AY 2008-09, the issue does not relate to the year under consideration and as such the same cannot be adjudicated here. Considering above the grounds of appeal 4.1 to 4.3 of the appellant are dismissed.”

5.2 We notice that the Ld CIT(A) has observed that the foreign exchange transactions are arising out of the export activities of various units and so any allowable loss in relation to settlement of forward or option contracts in relation to the same is part and parcel of the business activity and the same cannot be allowed to be set off against the income from other sources. In our view, the above said observation of Ld CIT(A) is just and reasonable one. Before us, the Ld A.R reiterated that the MTM loss should be set off against the income declared under income from other sources, yet he could not furnish credible reasons to interfere with the reasoning given by Ld CIT(A). Accordingly, we uphold the view taken by Ld CIT(A) on this issue.

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore

Page 14 of 32 was noticed that the assessee has not deducted tax at source. The AO also noticed that the jurisdictional Hon'ble Karnataka High Court has held in the case of Samsung Electronics Ltd (245 ITR 481) that the software expenditure is in the nature of royalty payment and the TDS provisions shall apply. Hence the AO disallowed the above said expenditure u/s 40(a)(ia) of the Act. The Ld CIT(A) also confirmed disallowance.

6.1 We notice that an identical issue has been examined by the Tribunal in the assessee’s own case relating to AY 2011-12 in ITA No.491/Bang/2018 dated 11.12.2020 and it has been decided in favour of the assessee as under:-

"25. We have carefully considered the rival submissions. The payment in question was made to the non-resident in the previous year relevant to AY. 10-11. Therefore the law as on 31.3.2010 the last date of the previous year was that payment for purchase of off shelf software was not in the nature of royalty. In Sonata Information Technology Ltd. v. ACIT (103 ITD 324) decision rendered on 31.1.2006, it was held that payments for software licenses do not constitute royalty under the provisions of the Act and hence disallowance under section40(a) (ia) of the Act would not be applicable. The change in the legal position on taxation of computer software was on account of the ruling of the Karnataka High Court in CIT v. Samsung Electronics Co. Ltd. (320 ITR 209), which was pronounced on 15.10.11 that is much later than the closure of the FY 2010-11. Subsequently, the Finance Act 2012 also introduced, retrospectively, Explanation 4 to section 9(1 (vi) of the Act to clarify that payments for, inter alia. License to use computer software would qualify as royalty. During the FY 10-11, the assessee did not have the benefit of clarification brought by the respective amendment. As such, for the FY 2010-11, in light of the

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore Page 15 of 32 provisions of section 9(1)(vi) of the Act read with judicial guidance on the taxation of computer software payments, tax was not required to be deducted at source. Given the practice in prior assessment years, the assessee was of the bona fide view that the payment of software license fee was not subject to tax deduction at source under section1941/195 of the Act. Liability to deduct tax at source cannot be fastened on the assessee on the basis of retrospective amendment to the Act (Finance Act 2012 amendment the definition of royalty with retrospective effect from 01.04.1976) or a subsequent ruling of a court (the Karnataka HC IT(TP)A Nos.405 & 474/Bang/2015 in CIT v Samsung Electronics Co. Ltd. (16 taxmann.com 141) was passed on October 15, 2011). Courts have consistently upheld this principle as seen in: ♦ ITO v. Clear Water Technology Services (P.) Ltd. (52 taxmann.com 115) ♦ Kerala Vision Ltd. v. ACIT (46 taxmann.com 50) ♦ Sonic Biochem Extractions (P.) Ltd. v. ITO (35 taxmann.com 463) ♦ Channel Guide India Ltd. v. ACIT (25 taxmann.com 25) ♦ DCI v. Virola International (20 14(2) TMI 653) ♦ CIT v. Kotak Securities Ltd. (20 taxmann.com 846). 26. The above decisions have been considered and discussed in the case of Ingersoll Rand (India) Ltd. (supra) by the Bangalore Bench of the ITAT and it was held therein that prior to the decision of Hon'ble jurisdictional High Court in the case of CIT v. Samsung Electronics Co. Ltd. (supra) which was passed on 15.10.2011 transactions carried out on purchase of off the shelf software are not liable to TDS and hence there can be no disallowance u/s.40(a)(ia) of the Act based on subsequent development of law after the date on which payments are made. 27. we are of the view that in the light of law as laid down by this Tribunal in the case of Ingersoll Rand (I) Ltd. (supra), there cannot be a retrospective obligation to deduct tax at source and therefore as on the date when the assessee made payments to the non-resident for acquiring off-the-shelf software cannot be regarded as in the nature of royalty and therefore there was no obligation on the part of assessee to deduct tax at source. The payment would be in the nature of business profits in the hands of non-resident and since admittedly the non-resident does not have a Permanent Establishment in India, the sum in question is not chargeable to tax in the hands of non-resident. Consequently, the disallowance made u/s. 40(a)(ia) of the Act has to be deleted. We direct accordingly. Ground No.14 by the assessee is accordingly allowed." 18. Following the above said decision of coordinate bench, we hold that the disallowance made by the AO u/s 40(a)(i) is liable to be deleted for the

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore

Page 16 of 32 year under consideration. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance.

6.2 The financial year under consideration is 1.4.2008 to 31.3.2009, i.e., period falling prior to the date of judgement by Hon'ble Karnataka High Court in the case of Samsung Electronics Ltd (supra). Accordingly, following the ratio of the above cited decision, we hold that there cannot be a retrospective obligation to deduct tax at source and hence the disallowance u/s 40(a)(ia) cannot be sustained. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance.

7.1 We notice that an identical issue has been considered in the assessee’s own case relating to AY 2011-12 in ITA No.491/Bang/2018 (referred supra) and it was decided as under:-

“20. The next issue contested by the assessee relates to disallowance of software expenses treating the same as capital in nature. Since the Ld CIT(A) has remanded this issue to the file of the AO with certain directions, the revenue is questioning the authority of Ld CIT(A) to do so.

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore

Page 17 of 32 Provision for software purchases - Rs.3,89,30,461 Disallowance u/s 40(a)(i)/(ia) -Rs.1,35,82,093 The balance amount was Rs.19,71,88,445/-. The AO treated this amount as capital in nature. The observations made by the AO are extracted below:-

"6.3 For the balance amount of Rs.19,71,88,445/- it is seen that the company has treated it as revenue expenditure. It is to be stated that considering the life of software, this expenditure has been included in section 32 of the I T Act and accordingly depreciation at the rate of 60% per year has been allowed. The assessee has not given dates of purchases of these licenses. Hence the depreciation is being allowed at the rate of 30% of Rs.5,91,56,534/- and the balance amount of Rs.13,80,31,912/- is disallowed. The assessee would be eligible for claiming depreciation on the balance portion in the future years."

"All purchase of software licenses, for which detail of license period is available on the invoices or is produced by the appellant and if the same is for a period up to two years, the same should be allowed as revenue expenditure, provided the invoice relates to the FY 2010-11 and tax at source has been deducted on the same.

• In case the invoice relates to some earlier year, the expenditure needs to be disallowed as prior period expenditure.

• In case relevant invoice is not produced, the amount needs to be disallowed as being not verifiable.

• In relation to expenditure incurred for software implementation, maintenance services, software AMC charges and fees for included

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore

Page 18 of 32 services, the same needs to be treated as revenue expenditure and allowed as such provided tax at source has been deducted on the same. In case of non deduction of tax at source the same needs to be disallowed under Section 40(a) of the Act.

• In relation to expenditure incurred for IT consumables e.g. CDs, printer cartridges etc., the same needs to be treated as revenue expenditure.

• In case of software where the same can be used perpetually e.g. Operation system software like Windows, Application software like MS Office etc., the same needs to be treated as capital in nature. This is for the reason that in case of such software there is no restriction or limitation on its period of use. New versions of these software keep on becoming available in the market however there is no restriction on the use of the earlier version and a person can always choose not to buy the new version and continue with the version. A high rate of depreciation, which is 60% takes care of obsolescence of such software."

"9. The second substantial question of law relates to application of the amount utilized for projects of Software in a sum of Rs.33,14,298/-.

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore

Page 19 of 32 The Tribunal on consideration of the material on record and the rival contentions held, when the expenditure is made not only once and for all but also with a view to bringing into existence an asset or an advantage for the enduring benefit, the same can be properly classified as capital expenditure. At the same time, even though the expenses are once and for all and may give an advantage for enduring benefit but is not with a view to bringing into existence any asset, the same cannot be always classified as capital expenditure. The test to be applied is, is it a part of company's working expenses or is it expenditure laid out as a part of process of profit earning. Is it on the capital layout or is it an expenditure necessary for acquisition of property or of rights of a permanent character, possession of which is condition on carrying on trade at all. The assessee in the course of its business acquired certain application software. The amount is paid for application of software and not system software. The application software enables the assessee to carry out his business operation efficiently and smoothly. However, such software itself does not work on standalone basis. The same has to be fitted to a computer system to work. Such software enhances the efficiency of the operation. It is an aid in manufacturing process rather than the tool itself. Thus, for payment of such application software, though there is an enduring benefit, it does not result into acquisition of any capital asset. The same merely enhances the productivity or efficiency and hence to be treated as revenue expenditure. In fact, this Court had an occasion to consider whether the software expenses is allowable as revenue expenses or not and held, when the life of a computer or software is less than two years and as such, the right to use it for a limited period, the fee paid for acquisition of the said right is allowable as revenue expenditure and these softwares if they are licensed for a particular period, for utilizing the same for the subsequent years fresh licence fee is to be paid. Therefore, when the software is fitted to a computer system to work, it enhances the efficiency of the operation. It is an aid in manufacturing process rather than the tool itself. Though certain application is an enduring benefit, it does not result into acquisition of any capital asset. It merely enhances the productivity or efficiency and therefore, it has to be treated as revenue expenditure. In that view of the matter, the finding recorded by the Tribunal is in accordance with law and do not call for any interference. Accordingly, the second substantial question of law is answered in favour of the assessee and against the Revenue."

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore

Page 20 of 32 following the two decisions of Hon'ble Karnataka High Court referred above. We notice that the tax authorities have not examined this issue on the above said lines. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO for examining it afresh in the light of discussions made supra.”

7.2 Following the decision rendered in AY 2011-12, we restore this issue to the file of AO with similar directions.

8.1 The Ld CIT(A) noticed that the AO had made identical disallowance in AY 2007-08 and the said disallowance has been upheld by Ld CIT(A) in that year observing that the expenses incurred on brand building is an intangible asset. He also accepted the contentions of the assessee that depreciation @ 25% is allowable on the amount so disallowed. The Ld CIT(A) also agreed with the contentions of the assessee that the similar disallowance made in the earlier years would become opening WDV and depreciation should be allowed thereon.

8.2 Besides the above, the Ld CIT(A) expressed without prejudice view that if this expenditure is considered as revenue in nature as contended by the assessee, then the applicability of TDS provisions are required to be examined and disallowance u/s 40(a) is required to be made if there is failure to deduct TDS.

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore

Page 21 of 32 8.3 Before us, the Ld A.R submitted that identical issue was examined by the co-ordinate bench in AY 2007-08 and it was decided in favour of the assessee. We notice the co-ordinate bench has decided this issue in favour of the assessee in AY 2007-08 in ITA No.1333 & 1367 (Bang) 2014 dated 27-09-2019 as under:- “24. Ground No. 7 is in respect of brand building expenses claimed by assessee.

The authorities below has held the brand building to be capital in nature as assessee has derived enduring benefits. However depreciation at 25% has been granted to assessee in respect of the same. Ld.AR submitted that expenses were shown to be incurred on advertisements, sales and marketing, seminars and exhibitions etc which has been held to be brand building expenses. He placed reliance upon decisions of: Hon’ble Delhi High Court in case of DCIT vs Seagram Manufacturing Pvt.Ltd., reported in (2017) 78 Taxmann.com 293; Hon’ble Bombay High Court in case of CIT vs Asian paints India Ltd reported in (2016) 75 Taxmann.com 152 Coordinate bench of Mumbai Tribunal in case of Fine Jewellary India Ltd vs ACIT reported in (2014) 48 Taxmann.com 16 Ld.AR submitted that in all the aforestated decisions expenditure incurred on brand building was allowed as business expenditure. He also submitted that as per 26 A-S and intangible assets should be recognized, if and only if, it is probable that future economic benefits that are attributable to assets will flow into the enterprise and cost of asset can be measured reliably. It has been submitted by Ld.AR that in present facts of case expenditure was of revenue in nature and did not result in acquisition or creation of any asset or brand as contended by authorities below.

Ld. CIT DR placed reliance upon observations of Ld.CIT (A) in para 8.5 that assessee had not furnished any details as how expenses have been incurred on intangible assets if not acquired. It has been submitted that in absence of complete details Ld. CIT (A) upheld disallowance by Ld.AO.

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore

Page 22 of 32 capital expenditure. Further as held by Hon’ble Supreme Court in case of Empire Jute Co. Ltd vs CIT reported in (1980) 3 Taxmann 69, it is not appropriate to hold that test of enduring benefit is a conclusive test in all cases and to hold such expenditure to be always capital expenditure.

In the present facts of case, assessee incurred such expenses in the process of an ongoing business activity and therefore it was not right on behalf of authorities below to hold such expenditure to be capital in nature.

Respectfully following decisions of Hon’ble Supreme Court and Hon’ble Bombay High Court referred to herein above we direct Ld. AO to delete disallowance made. Accordingly this ground raised by assessee stands allowed.”

8.4 We notice that the decision rendered in AY 2007-08 was followed in the assessee’s own case in AY 2008-09 in ITA No.2600/Bang/2018 dated 25-10-2021. As in the current year, the Ld CIT(A) has made identical observations with regard to applicability of TDS provisions on the payments made by the assessee. Hence the Tribunal has restored this issue to the file of AO in AY 2008-09 for examining the details of deduction of TDS. In the current year also, the Ld CIT(A) has made similar observations and accordingly, we restore this issue to the file of AO for examining the details of deduction TDS and to take appropriate decision in accordance with law.

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore

Page 23 of 32 9.1 We notice that an identical issue has been considered by the co-ordinate bench in the assessee’s own case relating to AY 2011- 12 in ITA No.491/Bang/2018 dated 11.12.2010, wherein it was decided as under:-

“9. We shall now take up the appeal filed by the assessee. The first issue relates to disallowance of provision of Rs.3.89 crores towards software expenses. The assessee has claimed deduction of Rs.24.97 crores as expenses incurred towards software purchases. The above said amount included provision for software expenses amounting to Rs.3.89 crores. The A.O. disallowed the provision for software expenses by observing that it is only provision in nature. It appears that the A.O. has taken the view that the "provision for software expenses" is a contingent liability.

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore

Page 24 of 32 12. The Ld. A.R. submitted that the Ld. CIT(A) was not right in invoking the provisions of section 40(a)(i) of the Act for the year under consideration. He submitted that the financial year under consideration is 1.4.2010 to 31.3.2011. The Hon'ble Jurisdictional Karnataka High Court has held in the case of Samsung Electronics Company Ltd. (2012) 345 ITR 494 that the payment made for obtaining software licenses are in the nature of royalty and hence it is liable for deduction of tax at source. However the above said decision came to be rendered on 15.10.2011. Prior to that, there were certain Tribunal decisions holding that the payment made for purchase of software licenses are not in the nature of royalty and hence not liable for deduction of tax at source. Accordingly the assessees were under bonafide belief that they were not liable to deduct tax at source from payments made for software purchases. Under these set of facts, the various Benches of Tribunal have taken a view that the assessee cannot be fastened with the TDS liability on account of subsequent amendment or subsequent ruling of courts. Accordingly, the Tribunal has deleted the disallowance made u/s 40(a)(i) of the Act. In support of this proposition, the Ld. A.R. relied on the decision rendered by Bangalore bench of Tribunal in the case of M/s. Acer India Pvt. Ltd. Vs. DCIT (IT(IT)A Nos.107 to 114/Bang/2018 dated 5.10.2020). Accordingly, the Ld. A.R. submitted that the disallowance made u/s 40(a)(i) should be deleted in respect of provision for software expenses for the year under consideration, since it pertained to the period prior to the date of rendering of decision by Hon'ble Karnataka High Court in the case of Samsung Electronics Ltd. (supra).

"Prudence: Provision should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of the available information."

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore

Page 25 of 32 Further, the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd. (supra) has explained the nature of provision for expenses created by the assessee as under:

"A provision is a liability which can be measured by using a substantial degree of estimation. A provision is recognised when; (a) an enterprise has a present obligation as a result of a past event; (b) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognised."

"During appellate proceedings the appellant was asked to provide the basis of estimating the provision and whether tax at source was deducted on the same (Order sheet entry dt. 8.11.2017). In response to the same the appellant made submissions vide letter submitted on 4.12.2017. The breakup of the vendors to whom payment was to be made and for which provision was created is as follows:

Sl.No. Particulars Amount in (Rs.) 1. CA (India)Technologies P. Ltd. 98,12,314 2. Wipro Limited 9,34,510 3. Sonata Information 79,92,715 Technologies Ltd. 4. Select Softwares (I) P Ltd. 6,000 5. Microsoft Corporation 15,94,890 6. Skelta Software Private Ltd. 1,52,070 7. Ariba India Private Ltd. 12,50,000 8. Thomson Financial 1,33,424 9. BIQ LLC 5,52,000 10. Hewlett Packard Singapore 32,790 11. Oracle Corporation 45,57,088 12. EMC Information Systems 1,08,810 13. Tungsten Network 1,18,03,850 Total 3,89,30,461

6.1 The appellant also made following submissions: 2. Provision for software expenses amounting to Rs.3,89,30,461 was made in respect of software licenses used, license updates,

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore

Page 26 of 32 support services, software implementation services, software AMC charges etc availed/utilized during the year from various vendors. In the absence of invoices received from vendors for these services, at year end, the respective user dept's provide the likely payments to be made for the software licenses/services utilized during the year. The appellant made provision for the said expenditure and included the same under the head 'software expenses' for the year ending 31st March, 2011."

9.2 We notice that during the year under consideration also the assessee has furnished the details of provision for software expenses and the said details have been extracted by Ld CIT(A) at page 33 of his order. Following the decision rendered in AY 2011- 12, we hold that the provision for software expenses cannot be considered as contingent liability. Accordingly, we set aside the order passed tax authorities in this regard. With regard to the issue of disallowance u/s 40(a)(ia) for non-deduction of tax at source, we have already adjudicated the same in paragraphs 6 to 6.2 (supra). Following the same, we hold that the assessee is not liable to deduct tax at source and accordingly there is no requirement of making any disallowance u/s 40(a) of the Act.

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore

Page 27 of 32 “13.15 Considering above, the action of the AO in making disallowance under section 14A as per rule 8D(2) of the IT Rules is upheld.

13.16 However as regards computation of disallowance there is merit in the submission of the appellant that its investment in foreign subsidiaries need to be excluded as the income from the same is not exempt. Further credit for the disallowance already made by the appellant in its computation of income needs to be given. The AO is directed to re- compute the disallowance under Section 14A of the Act after excluding the investments in foreign subsidiaries and giving credit for disallowance already made by the appellant in its computation of income.

13.17 Considering above the grounds of appeal 8.7 of the appellant is allowed, the grounds of appeal 8.3 to 8.6 of the appellant are dismissed and the grounds of appeal 8.1 and 8.2 of the appellant are partly allowed.”

10.1 The Ld A.R submitted that the assessee has computed disallowance @ 5% of the dividend income, i.e., Rs.13,17,478/-. However, the AO has computed disallowance under rule 8D(2)(iii) without finding fault with the workings made by the assessee. The Ld A.R submitted that the Tribunal has deleted an identical disallowance made in AY 2013-14 in the assessee’s own case in ITA No.493/Bang/2018 dated 23-08-2021 observing that the disallowance made by the AO without examining the correctness of workings given by the assessee having regard to the accounts was not justified.

10.2 We heard Ld D.R on this issue and perused the record. We notice that, in AY 2013-14, the assessee has computed disallowance u/s 14A of Act on a particular basis. However, during the year under consideration, the AO has made disallowance @ 5% of the exempt income. Hence we are of the view that the decision rendered in AY 2013-14 by the Tribunal cannot be followed, as the

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore

Page 28 of 32 disallowance made by the assessee is adhoc and did not have regard to the accounts of the assessee. We notice that the Ld CIT(A) has already directed the AO to exclude non-exempt dividend income. Besides the above, we also direct the AO to exclude investments which did not yield dividend income for computing average value of investments as held by Special bench of ITAT in the case of Vireet Investments P Ltd (165 ITD 27)(Delhi)(SB). Accordingly, this issue is restored to the file of AO.

11.1 The Ld A.R submitted that an identical issue has been adjudicated by the co-ordinate bench in the assessee’s own case relating to AY 2008-09 in ITA No.2600/Bang/2018 dated 25.10.2021.

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore

Page 29 of 32 11.2 We heard Ld D.R on this issue and perused the record. We notice that an identical issue has been adjudicated by the Tribunal in the assessee’s own case in AY 2008-09 and it was decided as under:-

“7. The last issue relates to the issue related to computation of deduction u/s 10A and 10AA of the Act. The AO noticed that the deduction computed by the assessee under 10A & 10AA is flawed on the following points:- (a) Expenditure incurred in foreign currency has not been excluded from “export turnover”.

(b) Expenditure incurred on telecommunication charges has been reduced from both Export turnover and Total turnover, while the requirement of section 10A & 10AA is to reduce from Export turnover only. Accordingly, the AO re-computed the deductions allowable u/s 10A & 10AA.

7.1 The Ld CIT(A) held that the decision rendered by Hon'ble Karnataka High Court in the case of Tata Elxsi Ltd (349 ITR 98) is applicable to the facts of the present issue. Accordingly, he observed that the expenditure incurred in foreign currency and telecommunication charges have to be reduced from both export turnover and total turnover. Accordingly, he directed the AO to follow the decision of Hon'ble jurisdictional High Court. Accordingly, the Ld CIT(A) did not adjudicate the contention of the assessee that the expenditure incurred in foreign currency need not be reduced from Export turnover at all.

7.2 The Ld A.R submitted that the claim of the assessee that the expenditure incurred in foreign currency need not be reduced from Export turnover at all has been rejected by the co-ordinate bench in the assessee’s own case in AY 2007-08. He submitted that the expenditure incurred in foreign currency is required to be reduced only if these expenses are incurred in “providing technical services outside India.” He submitted that the assessee has not provided any technical service outside India as contemplated in the definition of “export turnover” given in sec.10A & 10AA and hence these expenses need not be reduced from Export turnover at all. If it is not reduced from export turnover, then the question of reducing the same from total turnover does not arise. He submitted that the Tribunal, in AY 2007-08, has extracted the nature of expenses incurred by the assessee in foreign currency, which clearly show that they have not been incurred for “Providing technical service”. Still the Tribunal has decided this issue against the assessee. He submitted that the contention of the assessee is supported by the decision of jurisdictional Karnataka High Court rendered in the case of CIT vs. Mphasis Ltd (2016) (74 taxmann.com 274 (Kar).

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore

Page 30 of 32 7.3 We heard Ld D.R on this issue and perused the record. Admittedly, the Ld CIT(A) has not adjudicated this issue, i.e., whether the expenditure incurred by the assessee in foreign currency is towards providing technical service outside India or not. The contention of Ld A.R is that assessee is providing BPO services and not any technical service as contemplated in the definition of “export turnover” given in sec.10A/10AA. Accordingly it was contended that the expenditure incurred in foreign currency is not for providing technical services. The nature of expenses incurred by the assessee in foreign currency is explained as under before the AO, which is extracted by AO in the assessment order. “The company having the foreign currency accounts in India, US and UK. The expenses in foreign currency will be calculated by bank payment wise, The head salary legal and professional charges consists the Salary paid to our employees based in US and UK. We are paying professional charges to consultant in US and UK for payroll processing, for hiring the employees in US office for visa back ground check in US Etd.

The head foreign travel and relocation expense consist the advance given to employees for business foreign trip for on site related works at client location and local travel expense spent by the employee based outside India.

The head bank charges consist, bank charges debited by the banks and other expenses.

The communication expense consist of telephone charges spent by employees based outside India and Lease line charges paid to foreign service provider.

Since the above expenses are incurred for managing the branches outside India. These expenses are not incurred while providing the Technical services outside India. Hence the above expenses not to be reduced from the export turnover”.

Since the above expenses can be noticed that the expenses incurred by the assessee are not for providing technical services in the course of providing any technical services outside India. We notice that the contention of the assessee is supported by decision of jurisdictional High Court rendered in the case of CIT vs. Mphasis Ltd (supra). For the sake of convenience, we extract below the relevant observations made by Hon’ble Karnataka High Court:-.

“2. The first substantial question of law arose for consideration before this Court in ITA No.776/2007 disposed of on 13.06.2014, wherein this Court has held at paras 18 and 19 as under:-

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore

Page 31 of 32 assessee in convertible foreign exchange is deducted from the profits of the said business. In other words the assessee is not liable to pay any income tax on such consideration received from export of computer software. However the said export turnover does not include freight, telecommunication charges or insurance attributable to the delivery of computer software outside India or expenses if any incurred in foreign exchange in providing technical service outside India. In other words out of the said export turnover the following amounts have to be deducted; a. freight b. telecommunication charges c. insurance attributable to the delivery of computer software outside India; d. expenses, if any, incurred in foreign exchange in providing technical services outside India;

ITA No.2884/Bang/2018 M/s. Infosys BPM Limited, Bangalore Page 32 of 32 have to do testing, installation and monitoring of software supplied to the client. Though the said services are technical in nature it does not fall within clause (ii) of subsection (1) of section 80HHE of the Act of providing technical services outside India in connection with the development or production of computer software. It falls under sub- clause (1) of sub-section (1) of Section 80 HHE of the Act. Therefore, the said expenditure cannot be excluded in computing export turn over. In that view of the matter we do not see any merit in this appeal. Accordingly, the said question of law is answered in favour of the assessee and against the revenue. Ordered accordingly.” Following the binding decision of Hon’ble Karnataka High Court, we direct the AO not exclude the expenditure incurred in foreign currency from export turnover.”

Following the view taken in AY 2008-09 by the Tribunal, we direct the AO not to exclude the expenditure incurred in foreign currency from export turnover while computing deduction u/s 10A of the Act.

Sd/- Sd/- (George George K.) (B.R. Baskaran) Judicial Member Accountant Member

Bangalore, Dated 22nd Nov, 2021. VG/SPS Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order

Asst. Registrar, ITAT, Bangalore