DCIT, BANGALORE vs. M/S HONEYWELL TECHNOLOGIES SOLUTIONS LAB PVT. LTD.,, BANGALORE

revenue against the order of the CIT(A), Bengaluru, passed u/s 143(3) and 250 of the Income-tax Act,1961 ['the Act' for short], dated 10/03/2015.

1. “The learned CIT(A) erred, in law and in facts, by disallowing Annual Maintenance Contract ("AMC") expenses and software purchases incurred during the Financial Year 2008-09 under section 40(a)(ia) of the Act amounting to Rs 2,58,64,790 without appreciating the factual and technical submissions made by the Company in this regard.

2. The learned CIT(A) erred, in law and in facts, in capitalising the software expenses amounting to Rs 5,41,11,457 after providing depreciation at the rate of 45% without appreciating the detailed submissions made by the Company that such expenses do not result in any enduring benefit to the Company and such expenses are revenue in nature.

3. The learned CIT(A) has erred, in law and in facts, by disallowing Marked to Market ("M2M") loss amounting to Rs 14,40,59,736 on the basis that the said loss is notional and contingent in nature and has not appreciated the factual and technical submissions made by the Appellant.

7. The learned CIT(A) has erred, in law and in facts, in directing the Assessing("AO") to levy interest under section 234B of the Act.

8. The learned AO has erred, in law and in facts, in levying interest under section 234C of the Act on the assessed income of the Company whereas the same has to computed on the returned income of the Company.”

Whereas the TPO has accepted the ALP without transfer pricing adjustment. The AO dealt on the submissions on the claim u/s 80JJ(AA) at page 2 to 8 of the order and disallowed the claim.

Similarly AO disallowed expenditure towards computer license purchase for non-deduction of TDS of Rs.2,58,64,790/- and in respect of software expenses disallowed Rs.6,17,93,171/- and allowed depreciation, disallowed loss on marked to market foreign exchange of Rs.14,40,59,739/- and further restricted the claim of deduction us/ 10A and assessed the total income of Rs.87,79,22,043/- and passed the order u/s 143(3) dated 12/3/2013.

5. Aggrieved by the order, the assessee has filed the appeal with the Tribunal. The ld. AR has argued on the ground of capitalization of software expenses and submitted that similar issue was considered in the assessee’s case for assessment year 2006-07 in dated 5/9/2014, and for assessment year 2008-09 in ITA No.862/Bang/2013 dated 14/11/2014.

5.1 On the second disputed issue with respect to disallowance for non-deduction of tax on the annual maintenance contract and software purchase, the ld. AR submitted that on purchase of software there is no requirement of deduction of tax at source and AMC charges are revenue in nature and supported with voluminous paper book to substantiate the claim.

5.2 On the third disputed issue the ld. AR submitted that the CIT(A) has erred in confirming disallowance of Marked to Market loss amounting to Rs.14,40,736/- on the ground that the loss is notional and arise on account of re-statement of contract and contingent in nature. The ld. AR submitted that the assessee is following system of entering into hedging contracts for hedging its purely foreign currency receivables in order to mitigate the risk of foreign exchange fluctuations. The AO has relied on the CBDT instruction which is clearly not applicable and relied on the evidence and judicial decisions.

5.3 Contra, the learned DR supported the order of the CIT(A) and submitted that the claim of the assessee of AMC expenses has to be verified and assessee could not substantiate in assessment proceedings on notional loss on MTM.

“6.2 Per contra, the learned Departmental Representative supported the finding of the learned CIT(Appeals) in the impugned order on this issue.

6.3 We have heard both parties and perused and carefully considered the material on record, including the judicial decisions cited and placed reliance on. On careful & 943/Bang/2015 Page 6 of 16 consideration of the assessee's petitions for filing additional evidence under Rule 29 of the ITAT Rules, 1963; we feel that in the interest of equity and justice the additional evidence be admitted as it is material and necessary, for an examination thereof could have a bearing and impact on the factual position and outcome of the case. In this view of the matter, we admit the additional evidence filed for consideration. We find this very issue of software expenses has been examined and considered in the assessee's own case for Assessment Year 2007-08 by a co-ordinate bench of this Tribunal. In this order in IT(TP)A No.1344/Bang/2011 dt.28.3.2013, the co-ordinate bench at para 31 of its order has held as under:

“ 31. We have heard the rival submissions and considered the facts and materials on record. We deem it fit and proper to restore this issue back to the file of the Assessing Officer to reappraise the expenditure in respect of Rs.10 lakhs and above and decide the issue in accordance with the decisions of the Delhi Special Bench in Amway India Enterprises (supra) and the decision of the Karnataka High Court in Toyota Kirloskar Motors P. Ltd. (supra), after giving effective opportunity of hearing to the assessee. Thus, this issue is allowed for statistical purpose. It is ordered accordingly.”

Following this decision of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08, we also deem it proper to restore this issue back to the file of the Assessing Officer to examine and reappraise the additional evidence filed by the assessee in respect of expenditure incurred on purchase of software of Rs.10 lakhs and above and decide the issue in accordance with the decisions of the Hon'ble High Court of Karnataka in the case of Toyota Kirloskar Motors P. Ltd. (supra) and of the Hon'ble High Court of Delhi in the case of Amway India Enterprises (supra), after affording the assessee adequate opportunity of hearing and to file required details in the matter. It is ordered accordingly. Thus, the assessee's Ground No.2 is treated as allowed for statistical purposes.”

7.1 On the second disputed issue of disallowance u/s 40(a)(ia), the contention of the ld. AR is that assessee has purchased software and does not required TDS and AMC expenses do not come within the purview of applicability of TDS provisions. Whereas, the learned DR submitted that software expenses of AMC are subject to TDS and the ld. AR filed material and explained that the company has not been granted any Rights in the software purchase and only obtained limited Rights for usage. We found that these aspects and information were not dealt in the assessment proceedings. Therefore, we remit this issue to the file of the AO to verify and examine the applicability of TDS provisions with material evidence filed and judicial decisions and the ground of appeal is allowed for statistical purposes.

7.2 The ld. AR made submissions on loss being Marked to Market, the contention of the ld. AR is that it is argued that it is notional loss and filed details and judicial decisions in support of claim. The ld. AR relied on the observations of the Tribunal in the case of (2013) 35 taxmann.com 553 where the assessee entered into foreign exchange contract and such contracts are incidental to the export business and incurred loss and such contracts are contract loss which are not speculative but business loss. The contention of the ld. AR is that this is allowable whereas we are of the opinion that hedging should not be more than the receivables. Whereas the ld. AR submitted that it is within limits of exports and substantiated with material in the paper book. The learned DR submitted that these facts are to be verified and the matter has to be examined whether export proceeds have been received within time allowed for filing of return by the Income-tax Act. Accordingly, we are of the substantive opinion that the matter has to be restored back to the file of the AO for verification of facts and receipt of export proceeds as envisaged in the course of hearing. Accordingly, this ground of appeal is allowed for statistical purposes.

7.3 Whereas Charging of interest u/s 234B and 234C of the Act are consequential and direct the AO accordingly.

7.4 In the result, the assessee’s appeal is partly allowed for statistical purposes.

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

2. On the facts and in the circumstances of the case the learned CIT(A) erred in law in directing the AO to allow the deduction u/s 10A on the amounts capitalized as software expenses by the AO despite confirming the capitalization and without appreciating the fact that it would be absurd that at one hand the disallowance is made and penal proceedings are being initiated and on the other hand benefit is being given to the assessee without concrete knowledge of intention of the non- compliance of statutory provisions of the IT Act.

3. On the facts and in the circumstances of the case the learned CIT(A) erred in holding that the assessee company is eligible for deduction u/s 80JJAA in respect of additional wages paid to software engineers employed without appreciating the fact that the software engineers cannot be equated with 'workmen' as envisaged under Rule 2(s) of Industrial Disputes Act 1947 by placing reliance on the orders of ITAT which are not applicable to the facts of the case.

4. On the facts and in the circumstances of the case the learned CIT(A) erred in law in directing the AO to exclude reimbursement of specific expenditure both from the export turnover as well as from total turnover for the purpose of computation of deduction u/s 10A, without appreciating the fact that the statute allows exclusion of such expenditure only from export turnover by way of specific definition of export turnover as envisaged by Sub-clause (4) of Explanation 2 below Sub- section (8) of Section 10A and the total turnover has not been defined in this Section.

5. On the facts and in the circumstances of the case the learned CIT(A) erred in directing the AO to compute deduction u/s 10A in the above manner by placing reliance on the decision of Hon'ble High Court of Karnataka in the case of M/s Tata Elxsi Ltd., which has not become final since the same has not been accepted by the Department and SLPs are pending before the Hon'ble Supreme Court.

6. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored.

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

8.1 With regard to ground No.2, the learned DR argued that the CIT(A) has erred in directing the AO to allow deduction u/s 10A on the capitalization of software expenses whereas the ld. AR supported the order of the CIT(A) and relied on the CBDT circular on this particular issue. We perused the order of the CIT(A), dealt at para.8 page 9 where the CIT(A) has considered the alternative submission of the assessee that in case disallowance in regard to capitalization of software expenditure, the same has to be considered for deduction u/s 10A of the Act and the AO was directed to re-work. Whereas the learned DR supported the order of the AO and no new material was filed to controvert the observations of the CIT(A). Accordingly, we uphold the order of the CIT(A) on this issue and dismiss the ground of appeal of the revenue.

8.2 The third ground of appeal argued by the learned DR is that the CIT(A) erred in holding that the assessee is eligible for deduction u/s 80JJA in respect of additional wages paid to software engineer without considering the fact that software engineers cannot be compared with workmen as envisaged under rule 2(s) of the Industrial Disputes Act. We found that the co-ordinate bench of Tribunal in the assessee’s own case for assessment year 2006-07 in dated 05/09/2013 has dealt on this issue at paras 12 to 14 which reads as under:

12. We have perused the orders and heard the rival contentions. The AO simply rejected the claim of the assessee with an observation that assessee could not show such claim to be related to workmen, as defined under the Industrial Disputes Act, 1947. It is true that the CIT(A) relied on the decision of the Co-ordinate Bench in the case of M/s Texas Instruments India Pvt. Ltd., (supra), for giving relief to the assessee. Though, the department has vehemently argued that M/s Texas Instruments Pvt. Ltd., was only a chip manufacturer and not in a line of the business similar to that of the assessee, nothing was produced to substantiate this contention. In any case, a claim of Sec.80JJA of the Act whether it relates to a chip manufacturer or it relates to an IT enabled services firm has to be seen from the parameters laid down under that section for giving such deduction. In our opinion, there cannot be any dispute that development of computer software tantamounts to production of an article or thing. As mentioned by the learned AR, Finance Act, 2013 amended Sub-sec.80JJAA, the words manufacture or production of an article nr thing" was substituted with manufacture of goods from factory". Hence, denying such deduction for an assessment year prior to assessment year 2013-14, only for a reason that the assessee was engaged in production of computer software may not be proper. Now the only question that remains is whether the claim of the assessee could be considered from the perspective of the definition of workman as given in the Industrial Disputes Act, 1947. Sec.2(5) of Industrial Disputes Act, 1947 defines a workman as under;

"Workman means any person (including an apprentice) employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward, whether the terms of employment be express or implied, and for the purposes of any proceeding under this Act in relation to an industrial dispute, includes any such person who has been dismissed, discharged ore retrenched in connection with or as a consequence of that dispute, or whose dismissal, discharge or retrenchment has led to that dispute, but does not include any such person- i. Who is subject to the Air Force Act, 1950(45 of 1950), or the Army Act, 1956 (56 of 1950), or the Navy Act, 1957 (62 of 1957); or ii. Who is employed in the police service or an officer or other employee of a person; or iii. Who is employed mainly in a managerial or administrative capacity; iv. Who, being employed in. a supervisory capacity, draws wages exceeding one thousand six hundred rupees per mensem or exercises either by the nature of the duties attached to the office or by reason of the powers vested in. him, functions mainly of a managerial nature".

"6. We have heard the rival submissions and carefully perused the records. Considering the factual position after referring to the various documents filed by the assessee, the learned CIT(A) held as under : "According to the AO if an employee or workman is getting a salary of more than Rs. 1,600 per month he is not covered by the definition of workman. However as per cl. (iv) of s. 2(s) of the Industrial. Disputes Act a worker, employed in supervisory capacity and getting a salary of more than Rs. 1,600 per month only be excluded from the definition of workman. In appellant's case the software engineers in respect of whom deduction under s. 8011AA has been claimed have not been employed in a supervisory capacity even though they may be getting a salary of more than Rs. 1,600 per month. As the software engineers were not employed in supervisory capacity they cannot be excluded from the definition of workman. Further as per the notification of the Karnataka Government, the appellant company engaged in the development of software is covered by the Industrial Disputes Act. As such, I am of the considered opinion that the appellant has satisfied all the conditions for claiming relief under s. 80JJAA. However, I find that the appellant has claimed deduction of Rs. 2,55,81,220 with reference to the additional wages of Rs.4,87,64,029,70,736 which included the wages of Rs. 4,87,64,029 in respect of the new workmen employed during the year ended 31st March, 2000 relevant to the asst. yr. 2000-01. As there was no claim for relief under s. 80JJAA for the asst. yr. 2000-01, the relief in respect of the workers employed in asst. yr. 2000-01 cannot be considered for relief under s. 80JJAA in the asst. yr. 2001-02. As such the appellant will be entitled for relief under s. 80JJAA of Rs. 1,09,52,012 being 30 per cent of the additional wages of Rs. 3,65,06,707 (Rs. 8,52,70,736 - Rs. 4,87,64,029) in respect of the new workmen employed during the previous year relevant to the asst. yr. 2001-02. Similarly, for asst. yr. 2002-03 the appellant has claimed deduction of Rs. 4,78,05,176 being 30 per cent of the wages of Rs. 1,59,30,588 which also included the wages of Rs. 4,38,68,182 pertaining to the new workers employed in the previous year 1999-2000. For the reasons mentioned above the appellant is not entitled for relief under s. 80JJAA in respect of the wages pertaining to the workers employed in the previous year 1999-2000. As such the appellant would be eligible for relief of Rs. 3,46,44,722 being 30 per cent of the additional wages of Rs. 11,54,82,406 (Rs. 15,93,50,588 - Rs. 4,38,68,182) in respect of the workmen employed in previous years 2000-01 and 2001-02. The learned Authorised Representatives of the appellant vide order- sheet noting dt. 24th Aug., 2004 agreed that the relief under s. 80JJAA in respect of the employees who joined in the previous year relevant to the asst. yr. 2001-02 onwards only may be considered and in respect of the employees who joined in earlier years the appellant is not pressing for relief under s. 80JJAA. In the circumstances, the AO is directed to allow the relief under s. 80JJAA of Rs. 1,09,52,012 and Rs. 3,46,44,722 for asst. yrs. 2001-02 and 2002-03 respectively."

7. As stated earlier the assessee had filed the details of the software engineers employed during the years under consideration containing the names of the employees, designation and date of joining. Further, in the same list the details of total number of employees joined during both the assessment years, number of employees without supervisory roles, workmen joined, number of supervisors joined and workmen joined and relieved during the years under consideration. A cursory perusal of this list shows that the assessee had claimed deduction in respect of employees, who had joined as engineers in their respective field such as systems engineer, test engineer, software design engineer, IC design engineer, lead engineer etc. A cursory perusal of those lists establishes that the assessee had claimed deduction in respect of the engineers employed not in the category of supervisory control. All these details were filed before the AO during assessment proceedings. These facts were not properly considered by the AO. Further, from the order of the CIT(A), it is seen that he had taken note of the notification issued by the Government of Karnataka and concluded that as per the notification issued, the assessee company engaged in the development of software is covered by the Industrial Disputes Act, 1947. Further it is not the case of the Revenue that the assessee did not fulfil the conditions extracted elsewhere in this order. Considering all those factual matters we do not find any infirmity in the order of CIT(A) according relief to the assessee. In fact he had clarified the relevant portions related to Industrial Disputes Act, 1947 and IT Act while granting relief to the asssessee which are extracted at pp. 5 and 6 of this order. After carefully considering the same, we are inclined to accept the reasons shown by the learned CIT(A). The learned CIT-

Departmental Representative could not assail the finding reached by the learned CIT(A) by bringing in any valid materials. The order of the CIT(A) is confirmed. It is ordered accordingly.

No doubt, in assessee's own case for the assessment year 2007-08, this Tribunal in relation to a claim of similar deduction had held as under;

We, applying the ratio of the decision to the present case, set aside the order of the CIT(A) on this disputed issue and remit the entire mater to the file of the AO for fresh consideration in accordance with law and allow the ground of appeal of the revenue for statistical purposes.

9. In respect of grounds No.4 and 5, learned DR argued that the CIT(A) has erred in directing the AO to exclude data link charges and other expenditure both from export turnover as well as total turnover and Revenue has challenged the decision in higher forum. The ld. AR supported the order of the CIT(A) and relied on the decision of the Hon’ble Karnataka High Court in the case of CIT vs. Tata Elxsi (349 ITR 98).

10. We heard rival submissions and perused material on record. We found that the CIT(A) has dealt on this issue at para.10 which reads as under:

“10. Grounds no.8 to 13 are against the reworking of deduction under sec.10A by excluding data link charges and other expenditure incurred in foreign currency from the export turnover without correspondingly reducing the same from the total turnover. In this regard appellant has relied on the decision of the Karnataka High court in its own case in dt.30.08.2011. In the said decision it has been held as follows.

" In other words, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term 'total turnover' in section 10A, there is nothing in the said section to mandate that what is excluded from the numerator that is export turnover would nevertheless form part of the denominator".

10.1 Following the decision of the Jurisdictional High Court the AO is directed to delete the addition made. This ground is allowed.”

We found that the CIT(A) has considered the decision of the Hon’ble Karnataka High Court in the case of Tata Elxsi (supra) and passed a reasoned order which cannot be interfered and uphold the same and dismiss the ground of appeal.

Order pronounced in the open court on 12th July, 2019.