DEPUTY COMMISSIONER OF INCOME TAX,, BANGALORE vs. M/S INFOSYS BPO LTD, BANGALORE

PER SMT. BEENA PILLAI, JUDICIAL MEMBER : Present appeal has been filed by assessee as well as revenue against order dated 30/06/14 passed by Ld. CIT (A)-1, Bangalore for assessment year 2007-08 on following grounds of appeal:

ITA Nos.1333 & 1367(B)/2014 2

ITA No.1333/B/2014( Assessment Year : 2007- 08

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

The learned CIT (A) has erred in applying the 2. decision of the Visakapatnam Special bench of the ITAT in the case of Merilyn Shipping & Transports v ACIT 16 ITR (Trib) 1 and in holding that section 40(a)(i) / 40(a)(ia) is applicable only on amounts payable at the end of the relevant year without apppreciating that the provisions of section 40(a)(ia) do not restrict its application to the outstanding amounts as at the end of the previous year but to all such payments made or credited during the year, without deduction of tax at source.

The CIT(A) erred in not appreciating that the 3. Visakapatnam Special bench of the ITAT has made an attempt to write its own statute rather than interpret the statute.

The CIT(A) erred in directing the AO to follow the 4. ratio laid down by the Hon'ble Court in the case of Tata Elxsi Limited 349 ITR 98 and exclude the telecommunication charges incurred in foreign currency from the total turnover also while computing the deduction u/s 10A of the I.T. Act, without appreciating the fact that there is no provision in Section 10A that such expenses should be reduced from the total turnover also, as clause (iv) of the explanation to Section 10A provides that such expenses are to be reduced only from the export turnover.

ITA Nos.1333 & 1367(B)/2014 3 The CIT(A) erred in not appreciating the fact that the 5. jurisdictional High Court's decision in the case of Tata Elxsi Limited 349 ITR 98 has not been accepted by the department and an appeal has been filed before the Hon'ble Supreme Court.

The CIT(A) erred in directing the AO to follow the 6. ratio laid down by the Hon'ble Court in the case of YOKOGAWA INDIA LTD. in 341 ITR 385(Kar) and allow the claim of the assessee of the deduction u/s 10A without setting off the losses of other units without appreciating the fact that the decision of the Karnataka High Court has not reached finality as a SLP has been preferred against the said decision.

The CIT(A) erred hi directing the AO to allow the claim of the assessee of the deduction u/s Section .10A without setting off the losses of other units by relying on the decision of the jurisdictional High Court in the case of yokogawa India Limited without appreciating the fact that the relief allowed is a deduction and not an exclusion from the total income which is also clarified by the Board's Circular No. 7/DV/2013.

For these and such other grounds that may be urged 7. at the time of hearing, it is humbly prayed that the order of the CIT(A) be reversed and that of the Assessing Officer be restored. The appellate craves to ad, to alter, to amend or delete 8. any of the grounds that may be urged at the time of hearing of the appeal. ITA No.1367/B/2014 (Assessment year : 2007-08) 1.The order passed by the learned Commissioner of Income tax (Appeals) to the extent prejudicial to the appellant is bad in law is liable to be quashed.

ITA Nos.1333 & 1367(B)/2014 4 2.The learned CIT(A) erred in not adjudicating the main ground that expenses incurred in foreign currency amounting to Rs. 79,82,10,344/- should not be reduced from export turnover while computing deduction under section 10A.

3.The learned CIT(A) erred in confirming the action of the assessing officer in assessing to tax the deferred revenue of Rs. 11,69,38,859/- for the year under consideration. On facts and in the circumstances of the case and law applicable, deferred revenue of Rs. 11,69,38,859/- is not assessable to tax for the year under consideration.

4.The learned CIT(A) erred in confirming the action of the assessing officer in disallowing a sum of Rs. 23,58,820/- under section 14A read with rule 8D. On facts and in the circumstances of the case and law applicable, disallowance under section 14A read with rule 8D amounting to Rs. 23,58,820/- is to be deleted in entirety.

4.1.Assuming without admitting that disallowance under section 14A is warranted, the same is to be restricted to 5% of salary paid to SVP — Finance and 50% of salary paid to an employee handling treasury functions respectively.

5.The learned CIT(A) erred in not giving any finding as to whether software expenses of Rs. 7,66,68,466/- is liable for disallowance or not as made by the learned assessing officer in the order passed under section 143(3).

6.The learned CIT(A) erred in confirming the action of the learned assessing officer that — losses from forward and option contracts amounting to Rs. 1,72,86,687/- is to be set off while computing business income as against the contention of the appellant that the said losses should be set off while computing the income under the head 'Income from other sources'.

ITA Nos.1333 & 1367(B)/2014 5 7. The learned CIT(A) erred in confirming the action of the learned assessing disallowing the brand building expenses of Rs. 55,93,402/- as capital in nature. 8.The learned CIT(A) erred in not adjudicating the additional ground of appeal filed by the appellant regarding the allowability of foreign tax credit claimed in the return of income amounting to Rs. 1,10,183/- 9.The learned CIT(A) has erred in confirming the levy of interest under section 234B and 234D of the Income tax Act, 1961. The appellant denies its liability to pay interest under section 234B and 234D. 10.In view of the above and other grounds to be adduced at the time of hearing, the appellant prays that the order passed by the CIT(A) to the extent prejudicial to the appellant be quashed or in the alternative expenses incurred in foreign currency amounting to Rs. (i) 79,82,10,344/- be not reduced from export turnover while computing deduction under section 10A. deferred revenue of Rs. 11,69,38,859/- be not (ii) assessed to tax for the year under consideration. disallowance under section 14A read with rule 8D (iii) amounting to Rs. 23,58,820/- be deleted or in the alternative, the impugned disallowance be restricted to 5% of salary paid to SVP — Finance and 50% of salary paid to an employee handling treasury functions respectively. software expenses of Rs. 7,66,68,466/- be held as not (iv) liable for disallowance. losses from forward and option contracts amounting to (v) Rs. 1,72,86,687/- be set off while computing the income under the head 'Income from other sources'. brand building expenses of Rs. 55,93,402/- be allowed (vi) as deduction

ITA Nos.1333 & 1367(B)/2014 6 foreign tax credit of Rs. 1,10,183/- be allowed (vii) levy of interest under section 234B and 234D be (viii) deleted.

ITA Nos.1333 & 1367(B)/2014 7 Ld.AO observed that assessee incurred expenditure of Rs.15,67,08,619/- towards telecommunication charges attributable to delivery of software outside India, which was excluded from both export turnover and total turnover for computation of deduction under section 10A of relevant undertaking. Ld.AO observed that sum of Rs.11,69,38,859/- was treated as deferred revenue not considered in profit and loss account as certain procedural aspects by client in pursuance of contract with them was not fulfilled. Ld.AO disallowed said sum by holding that, assessee is deemed to have received said amount, from its client, and the same is to be recognised in its books of accounts as income for year under consideration. Ld.AO observed that assessee earned non-taxable income amounting to Rs.7,08,50,379/- for which no voluntary disallowance was computed under section 14A. Ld.AO thus computed a sum of Rs.23,58,820/- by invoking section 14 A read with Rule 8D of the Act. Assessing Officer observed that assessee incurred software expenses amounting to Rs.9,36,51,134/-, but in respect of expenses amounting to Rs.7,66,68,466/- it had not deducted tax at source. Accordingly, same was disallowed under provisions of section 40(a) (ia) of the Act. Ld.AO noted that assessee set of loss of Rs.1,72,86,687/- from forward contract, its income from other sources, instead of business income. Ld.AO accordingly re-casted profit and loss account by making necessary adjustment in this regard, thereby

ITA Nos.1333 & 1367(B)/2014 8 setting off loss of Rs.1,72,86,687/- from forward contracts and option contract in computing income from other sources. Ld.AO further observed that assessee claimed sum of Rs.55,93,402/-, as expenses, towards brand building, which was disallowed by Ld.AO by holding it to be capital in nature. However Ld.AO allowed appreciation of 25% thereon. 3. Aggrieved by additions made by Ld.AO, assessee preferred appeal before Ld.CIT (A), who partly allowed the claim of assessee. 4. Aggrieved by order of Ld.CIT(A), both revenue as well as assessee are in appeal before us now. 5.First we shall take up revenue’s appeal in ITA No.1333/B/2014 It has been submitted that Ground No. 1, 7, 8 are general in nature and therefore do not require adjudication. 6. Ground No. 2-3 is on issue of paid vs payable in context of disallowance under section 40(a) (ia). At the outset Ld.AR concedes that, the issue stands squarely covered against assessee by decision of Hon’ble Supreme Court in case of Palam Gas Services vs CIT reported in (2017) 394 ITR 300, Accordingly we allow these grounds raised by revenue. 7.Ground No.4-5 is in respect of direction to reduce telecommunication charges from both export turnover as well as total turnover by Ld.CIT (A) for purposes of computation of deduction under section 10A. At the outset Ld.CIT DR concedes that, issue stands settled in favour of assessee by decision of Hon’able Supreme Court in case of CIT vs HCL Technologies Ltd., reported in (2018) 404 ITR 719, wherein, it is been held that, expenses reduced from export

ITA Nos.1333 & 1367(B)/2014 9 turnover should also be reduced from total turnover while computing deduction under section 10A. In the light of aforestated submissions, we dismiss these grounds raised by revenue. 8. Ground No. 6 is in respect of allowing deduction under section 10A before setting off brought forward losses and unabsorbed depreciation by Ld.CIT (A). Admittedly, it has been submitted that this issue stands settled in favour of assessee by decision of Hon’able Supreme Court in case of CIT vs Yokogawa India Ltd reported in (2017) 391 ITR 274 and CIT vs JP Morgan services India Pvt.Ltd., reported in (2017) 393 ITR 24 wherein it has been held that deductions under section 10 A, 10 B should be allowed in respect of current year profits of the undertaking before setting off brought forward losses and unabsorbed depreciation. In the light of aforestated submissions we dismiss these grounds raised by revenue. In the result appeal filed by revenue stands partly allowed. 9. ITA No. 1367/B/2014 (assessee’s appeal) It has been submitted that Ground No.1 and 10 is general in nature and therefore do not require any adjudication. 10. Ground No. 2 is in respect of upholding reduction of foreign currency expenses from export turnover by Ld.CIT (A). Ld.AR submitted that expenses incurred in foreign currency amounting to Rs.79,82,10,344/- should not be reduced from export turnover while computing deduction under section 10A, as assessee is not engaged in business of information technology enabled services and is engaged in business of export of computer

ITA Nos.1333 & 1367(B)/2014 10 software outside India. Placing reliance upon the definition of computer software as defined in Explanation 2 to section 10A of the Act. Ld.AR submitted that Ld.AO reduced foreign currency expenditure from export turnover for purposes of computing deduction under section 10A of the Act, on a presumption that, said expenditure was incurred in providing technical services outside India. He submitted that business process outsourcing activities carried on by assessee has been recognised as “computer software” by virtue of clause (b) of definition of the term “computer software” read with CBDT Notification No.SO890 (E) dated 26/09/00. He placed reliance upon various decisions wherein provisions of section 80HHC was under consideration by Hon’ble Court’s. In specific Ld.AR placed reliance upon decision of Hon’ble Karnataka High Court in case of CIT vs Memphis is Ltd in ITA No. 1075/2008 along with ITA No. 196/2009 vide order dated 01/08/14, wherein it has been held that, expenses incurred in foreign currency should not be reduced from export turnover in computing deduction under section 10 B . 11.On the contrary, Ld.CIT DR submitted that, payments received by assessee is not for exclusion of export of computer software but for various other activities and therefore argument advanced by Ld.AR cannot be accepted. He submitted that detailed note on foreign currency expenditure placed at page 132-133 of paper book specifies activities for which, expenditure was incurred outside India by employees of assessee for its clients based outside India. She placed reliance upon page 113 which has been submitted by assessee before Ld.AO vide letter dated 14/10/09 wherein it is

ITA Nos.1333 & 1367(B)/2014 11 categorically mentioned that foreign currency expenses are incurred for paying professional charges to consultants in U.S. and UK for payroll processing for hiring the employees in U.S. office, for background check for obtaining visa in the U.S. etc. It has been submitted that the above expenses are incurred for managing branches outside India and are not incurred while providing the technical services outside India. At this juncture Ld. CIT DR submitted that from the explanation offered by assessee, it is clear that expenditure incurred in foreign currency do not relate to “computer software” as submitted by Ld.AR. Placing reliance upon definition of “computer software” provided in Explanation 2 to section 10 A, Ld.CIT DR submitted that, computer software means, any computer program recorded on any disk, tape, perforated media or other information storage device or any customised electronic data or any product or services of similar nature as may be notified by the board, which is transmitted or exported from India to any place outside India by any means. She thus distinguished decisions relied upon by Ld.AR passed by Hon’ble Karnataka High Court and submitted that, ratio is not applicable to facts of present case, as assessee is not rendering services/activities, as defined to be “computer software”. She thus vehemently supported view taken by Ld. CIT (A). However Ld. CIT DR did not object for same to be excluded from total turnover as held by decision of Hon’ble Supreme Court in case of CIT vs HCL Technologies Ltd., reported in (2018) 404 ITR 719. 12. We have perused submissions advanced by both sides in the light of the records placed before us.

ITA Nos.1333 & 1367(B)/2014 12 It is observed that Explanation 2 (i) defines “Computer Software” to mean; (a) any computer program recorded on any disk, tape, perforated media or other information storage device; or (b) any customised electronic Tata or any product or service of similar nature, as may be notified by the board, which is transmitted or exported from India to any place outside by any means; Further sub clause (iv) of Explanation 2 defines “export turnover” to mean; “export turnover” means the consideration in respect of export of articles or things or computer software received in or brought into India by the assessee in convertible foreign exchange in accordance with subsection (3) but does not include the fright, telecommunication charges or insurance attributable to the delivery of articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India; On co-joint reading of both definition reproduced hereinabove, in our considered opinion, what is to be excluded from export turnover has been specified to be:-  “fright, telecommunication charges or insurance” at attributable to delivery of articles or things or computer software, OR,  “any expenses incurred in foreign exchange in providing technical services outside India”.

ITA Nos.1333 & 1367(B)/2014 13 We refer to detailed note on foreign currency expenditure incurred by assessee that has been reproduced at page 132-133 of paper book relied upon by Ld. CIT DR: “The company (M/s Infosys BPO Ltd.,)is involved in rendering business process services entirely (except to its holding company)s to clients based outside India. It also renders such services to its holding company namely M/s Infosys Limited and received a sum of Rs.12,42,11,029/- during the year relevant to AY: 2007-08. During the year, Assessee company incurred expenditure in foreign currency o the extent of Rs.90,13,27,780/-. The said expenditure is incurred in relation to the following activities of the company outside India by the employees of the company who are about 60 in numbers. Apart from these employees outside India, other employees who stationed in India also go to the client’s location.  Sales and marketing activities: They are basically marketing professional involved in finding prospective customers for business process service for the company. They make effective presentation about how best the company can offer services to the client in reducing its cost and in improving efficiency in its business operations. Once the client satisfies, he will invite for process study and analysis by the experts of the company in the relevant industry segment before entering into business process outsourcing agreement between the client and the company.  Process study and analysis by the experts of the company who visit the client location: The experts (professional) based on the invitation by the client, visit the client’s place and conduct process study on the client’s business activities and submit a report to the client. For this study, the company charges the clients. Once the client satisfies based on the process study that the company will be benefitted by outsourcing the business process to the company, the client will call for transition which is somewhat similar to training of the employees of the company.

ITA Nos.1333 & 1367(B)/2014 14  Transition: This is a process whereby some of the employees of the company are giving training with regard to the business process of the client so that the said trained employees come back to India and handle the client’s business process in India. The company charges the clients for undergoing training by the employees of the company. During the course of transition, negotiations will be conducted for signing Master Service Agreement. On completion of transition, the trained employees come back to India and handle the process independently in India and train other employees for the same process so as to render business process services from India as per the Master Service Agreement. During the year relevant to the AY: 2007-08, the company entered into Master Service Agreement with Ingram Micro Inc. USA and the same has been subcontracted to M/s Vocative Systems, Phillippines and incurred expenditure in foreign currency to the extent of Rs.20,27,95,056/- against the total revenue to the extent of Rs.24,11,17,530/-. Similarly, some services of the clients are subcontracted to the subsidiary namely M/s Infosys BPO S.R.O. Czech Republic and realized Rs.4,26,27,715/- and incurred expenditure to the extent of Rs.3,74,43,733/ On perusal of aforestated note it is quite clear that assessee incurred expenditure in foreign currency in relation to sales and marketing activities, process study and analysis by experts of company who visit client location, expenditure incurred for providing training to employees of assessee in regard to business process of client. These services in our considered opinion cannot be considered to be one falling as defined in definition of “computer software” in Explanation 2 (i) to section 10A of the act. We are therefore unable to concur with arguments advanced byLd.AR. It is also observed that decisions relied upon by Ld.AR by

ITA Nos.1333 & 1367(B)/2014 15 Hon’ble Jurisdictional High Court are on different set of facts and are of no assistance to assessee in present facts. However assessee cannot be denied benefit of exclusion of foreign currency expenses from total turnover as has been held by Hon’ble Supreme Court in case of CIT vs HCL Technologies Ltd (supra). Respectfully following the same, we direct Ld.AO to exclude foreign currency expenditure incurred by assessee from total turnover as well. Accordingly this ground raised by assessee stands dismissed. 13. Ground No.3 has been raised in respect of addition on account of deferred revenue amounting to Rs.11,69,38,859/-. It has been submitted that deferred revenue was in respect of those customers which were legally enforceable contract and has been offered to tax in the subsequent assessment year. Ld.AR submitted that addition made during year under consideration is revenue neutral and hence should be deleted. Ld.AR submitted that, Assessing Officer treated referred revenue as chargeable to tax for year under consideration and deduction under section 10A was allowed in respect of the same. It has been submitted that before Ld.CIT (A), alternative argument was raised of reducing the same from turnover of 2008-09, in the event the same is treated to be deferred revenue for year under consideration, since assessee credited the said amount in P&L account for year ending 31/03/08. Ld.CIT DR submitted that issue may be set-aside to Ld.AO for verification as submitted by Ld.AR. 14. We have perused submissions advanced by both sides in light of records placed before us.

ITA Nos.1333 & 1367(B)/2014 16 15.1 Ld.AR placed reliance upon decision of Co-ordinate Bench of this Tribunal in case of Schneider Electric IT business India Pvt. Ltd., vs JCIT in ITA No. 299/B/2014 vide order dated 30/04/19 and decision of Hon’ble Supreme Court in case of Bilahari Investment Pvt. Ltd reported in (2008) 299 ITR 1. Ld.AR vide his written submission dated 16/07/19, submitted that Assessing Officer in earlier years accepted accounting of deferred revenue and addition has been made by Ld. AO only for assessment years 2007-08 and 2008-09. He placed reliance upon customer wise breakup of deferred revenue along with date of revenue recognition during financial year 2007-08 relevant to assessment year 2008-09 at page 306 of paper book. He also placed reliance upon assessment order passed under section 143 (3) for assessment year 2008-09 to assessment year 2011-12 placed at page 355-421 of paper book to submit that addition of deferred revenue is revenue neutral as corresponding increase in income has been treated as profit of business and deduction under section 10 A has been allowed by Ld.AO for assessment year 2007- 08. He has also submitted that deferred revenue for assessment year under consideration has actually been recognised and accounted for as revenue for assessment year 2008-09 and the same has been considered in computing total income for assessment year 2008-09. It is observed that Ld.CIT (A) directed Ld.AO to verify the amount of Rs.11,69,38,859/- from income for assessment year 2008-09. We therefore set aside this issue to Ld. AO for due verification as per direction and to consider claim of assessee as per law. Needless to

ITA Nos.1333 & 1367(B)/2014 17 say that assessee shall be granted proper opportunity of being heard. Accordingly this ground raised by assessee stands allowed for statistical purposes. 16. Ground No. 4 and 4.1 It has been submitted that assessee, earned dividend from mutual funds amounting to Rs.7,08,50,379/-, against which no suo moto disallowance was made. Ld.AO thus computed disallowance under section 14 A having regards to Rule 8D (iii) of the Act. Ld. CIT DR placed reliance upon order passed by authorities below. 17. We have heard submissions advanced by both sides in the light of the records placed before us. Admittedly, year under consideration is 2007-08 and Rule 8D has been prospectively implemented. Ld.AO thus erred in resorting to computation as per Rule 8D. However considering fact that assessee earned exempt income which do not form part of total income for the year under consideration and no suo moto disallowance has been made by assessee, we direct Ld.AO to restrict disallowance under section 14 A to the extent of Rs. 10,000 only. Accordingly this ground raised by assessee stands partly allowed. 18. Ground No. 5 Ld.AR vide written submission dated 16/07/19 has submitted as under: It is submitted that authorities below has disallowed software expenses of Rs.7,66,68,466/- under section 40(a), for non

ITA Nos.1333 & 1367(B)/2014 18 deduction of TDS. Ld.AR submitted that software expenses were incurred/paid during FY 2006-07 relevant to AY 2007-08. He submitted that decision of Hon’ble Karnataka High Court in CIT v Samsung Electronics Co Ltd reported in [2010] 320 ITR 209 was set aside by Hon’ble Supreme Court in GE India Technology Centre (P) Ltd v CIT reported in [2010] 327 ITR 456. And that, subsequently, vide another decision in CIT v Samsung Electronics Co Ltd reported in [2012] 345 ITR 494, it was held by the Hon’ble Karnataka High Court that software payments are in the nature of 'royalty' and hence liable for TDS. Independently, Hon’ble Karnataka High Court in CIT v Synopsys International Old Ltd reported in 28 taxmann.com 162 held that software payments constituted 'royalty' and liable for TDS.

ITA Nos.1333 & 1367(B)/2014 19  Hewlett Packard (India) (P) Ltd v ITO [2006] 5 SOT 660 (Bang) dt. 31.12.2006 It is submitted that these decisions were in force during year under consideration and that decision of Hon’ble Karnataka High Court in Samsung was not there during FY 2006-07 relevant to AY 2007-08. Ld.AR thus argued that, when software expenses were incurred/paid during the FY 2006-07 relevant to AY 2007-08, by virtue of existing favourable decisions by coordinate bench of this Tribunal, there was no liability on assessee to deduct TDS on software payments. Ld.AR thus argued that, assessee under such circumstances, acted bonafidely, placing reliance upon decisions passed by this Tribunal. 20. On the contrary, Ld.CIT DR placed reliance upon view expressed by authorities below. 21. We have perused submissions advanced by both sides in light of records placed before us. Assessee placed reliance upon decision of this Tribunal in case of Allegis services India Pvt.Ltd vs. DCIT in ITA (TP) No. 1370/B/2014 vide order dated 15/09/17 for assessment year 2009-10, wherein on similar facts the issue has been decided as under: 7. We have considered the rival submissions as well as the relevant material on record. There is no dispute that the transaction in question regarding payment of purchase of software was completed in the F.Y. 2008-09 whereas the decision of Hon'ble jurisdictional High Court in the case of CIT Vs. Samsung Electronics Co. Ltd. (supra) was passed on 15.10.2011 much later than the time of transaction carried out by the assessee. It is also not in dispute that this issue of

ITA Nos.1333 & 1367(B)/2014 20 considering the payment for purchase of software as royalty is a highly debatable issue and various High Courts have taken divergent views on this issue. The co-ordinate Bench of this Tribunal in the case of ACIT Vs. Aurigene Discovery Technologies (P) Ltd. (supra) has considered an identical issue in paras 3 to 5 as under : “ 03. We heard the rival submissions and gone through the relevant orders. The assessee resubmitted the plea taken before the lower authorities and placed on the ruling of the Hon'ble Bangalore ITAT in Sonata Information Technology Ltd v. ACIT (103 ITD 324) which had held that payments for software licenses do not constitute royalty under the provisions of the Act and hence disallowance under section 40(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 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 section 194J/195 of the Act. It is submitted that 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 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)  DCIv. Virola International (20 14(2) TMI 653)  CIT v. Kotak Securities Ltd. (20 taxmann.com 846). 04. The relevant portion of the CIT(A) order is extracted as under : “ Disallowance of expenses under 40(a)(i) / 40(a)(ia) :

5.1. As regards disallowance of expenses under 40(a)(i)/40(a)(ia), it has been submitted that the company had determined the rate of tax to be

ITA Nos.1333 & 1367(B)/2014 21 deducted and following the judgments that were prevalent at the time of tax deduction, Supreme Court in the case of Tata Consultancy Services and jurisdictional Tribunal in the case of Samsung Electronics Co. Ltd, the appellant submitted that the said judgment shall not be applicable since it was pronounced on 15/10/2011 and Velankani Mauritius Ltd., whereas the liability to deduct tax for the appellant was the F.Y. 2010- 11. The appellant has relied on the judgment of Cochin Tribunal in the case of Kerala Vision Ltd and Agra Tribunal in the case of Virola International, wherein it was held that – "The law amended was undoubtedly retrospective in nature but so far as tax withholding liability is concerned, it depends on the law as it existed at the point of time when payments, from which taxes ought to have been withheld, were made. The tax- deductor cannot be expected to have clairvoyance of knowing how the law will change in future." Further, software payment was included in definition of royalty only vide Explanation to section 9(1)(vi)inserted retrospectively vide Finance Act, 2012 and when the purchase was made, the appellant did not have the benefit of clarification brought by the retrospective amendment. It is impossible to fasten liability for deducting tax at source retrospectively as tax is to be deducted at source at the time when the payment is credited or made. This view has been upheld by the Bangalore Tribunal in the case of DCIT vs M/s WS Atkins India Pvt Ltd (ITA No 14671Bang12014 and the Mumbai Tribunal in the case of Channel Guide India Ltd. vs ACIT ([2012] 25 taxmann.com 25). 5.2 The ITAT 'C' Bench in the case M/s WS Atkins India Pvt. Ltd and in the case of Infotech Enterprises Ltd of the Hyderabad Bench of the Tribunal wherein it has been held that section 40(a)(ia) would not apply to disallow payments when TDS was not done and subsequently become taxable on account o f a retrospective legislation. It has also referred to in the case of Sonic Biochem Extractions Pvt. Ltd. (supra), identical issue was considered and decided by the Mumbai Tribunal. Following were the relevant observations:- "The assessee purchased software, capitalized the payment to the computers account as the software came along with the hardware of computers and claimed depreciation. On the ground that purchase of software is essentially purchase of copyright which attracts tax deduction at source under section 194J, the Assessing Officer involved the provisions of section 40(a)(ia) and disallowed the depreciation claimed. The Commissioner (Appeals), confirmed the action of the Assessing Officer on the ground that the purchase of software amounted to acquisition of intangible asset and therefore, the payment was royalty and disallowable. On appeal:

ITA Nos.1333 & 1367(B)/2014 22 Held, (i) that mere purchase of software, a copyrighted article, for utilisation of computers cannot be considered as purchase of copyright and royalty. The assessee did not acquire any rights for making copies, selling or acquiring which generally could be considered within the definition of "royalty". Explanation 2 to section 9(1)(vi) cannot be applied to purchase of a copyrighted software, which does not involve any commercial exploitation thereof. The assessee simply purchased software delivered along with computer hardware for utilization in the day-to-day business." 5.3 Relying on the above decision, the ITAT 'C' Bench, Bangalore upheld the order of the CIT(A) who had observed that the a s s e s s e e did not have the benefit o f the clarification brought about by the retrospective amendment that the payments tantamount to payment for royalty and consequently tax was to be deducted u/s 194J. The law as extant o n the date when the payment for obtaining the software was made, has not categorically laid down that tax is required to be deducted. It is impossible to fasten liability for deducting tax at source retrospectively. 5.4 In view of the above decisions, it is correct to say that it is not possible to fasten liability for deducting tax at source retrospectively as tax is to be deducted at source at the time when the payment is credited or made. When purchase of software was made the assessee did not have the benefit of the clarification brought about b y the retrospective amendment. The contention of the appellant is correct that the software payment disallowed by the AO did not warrant withholding of the tax u/s 40(a)(ia) and 40(a)(ia) (by an order of corrigendum dt 20.11.2015) of the Act. Therefore disallowance made by the AO on account of software payment want of withholding of tax is hereby deleted.” 05.The CIT(A) followed the decision of this Tribunal in M/s WS Atkins India Pvt. Ltd, supra, which referred the decisions of Hyderabad Bench of the Tribunal in Infotech Enterprises Ltd in ITA 115/HYD/2011 wherein it has been held that section 40(a)(ia) would not apply to disallow payments when TDS was not done and subsequently become taxable on account o f a retrospective legislation. It has also referred to the decisions of the Delhi & Mumbai Tribunal in SMS Demag Pvt Ltd , 132 ITJ 498 & Sonic Biochem Extractions Pvt. Ltd. 23 ITR (Trib) 447, respectively. We uphold the decision of the CIT(A) and dismiss the grounds raised by the Revenue.” Thus it is clear that the co-ordinate Bench of this Tribunal while deciding this issue has taken note of various decisions in favour of the assessee on the point that the payment for purchase of software does not fall in the definition of royalty. Respectfully following the decision of co-ordinate

ITA Nos.1333 & 1367(B)/2014 23 Bench of this Tribunal, we delete the di sallowance made by the Assessing Officer”. Article 141 lays downs binding nature of decisions of Hon’ble High Courts. It is a settled position that when Hon’ble High Courts gives decision on question of law, it should be followed by Co-ordinate Benchs, as well as by lower courts. It is implicit in power of supervision conferred on Tribunal that Tribunals subject to Jurisdictional High Court, would confirm to law laid down by Jurisdictional High Court. This view has been expressed by Hon’ble Supreme Court in case of East India Commercial Co. Ltd. v. Collector of Customs, reported in 1963 3 SCR 388;

"We, therefore, hold that the law declared by the highest court in the State is binding on authorities or Tribunals under its superintendence, and they cannot ignore it......."

This Principle is called as “Doctrine of Stare Decisis”. In our considered opinion Hon’ble Karnataka High Court expressed its view on interpretation of provisions, which has binding force. We are also aware of the fact that there is a contrary decision by Hon’ble Delhi High Court on similar point. However, judicial discipline as well as “Doctrine of Stare Decisis”, calls upon us to follow view laid down by Hon’ble jurisdictional High Court in case of Samsung Electronics Co Ltd reported in [2012] 345 ITR 494, within the state of Karnataka, while deciding identical issue.

ITA Nos.1333 & 1367(B)/2014 24 Hence we prefer to follow decision of Hon’ble jurisdictional High Court over orders of coordinate bench, referred to by Ld.AR, hereinabove. Accordingly this ground raised by assessee stands dismissed. 22. Ground No. 6 is in respect of confirming action of Ld. AO in setting off loss from forward option contract while computing business income as against income from other sources contended by assessee. Ld.AR submitted that, assessee took forward cover from banks in respect of foreign exchange rates for purpose of foreign currency transactions that enables assessee to mitigate exchange risk due to fluctuation in foreign exchange rate. It was submitted that under forward contract the forward rate is applied in respect of foreign currency transactions irrespective of actual foreign exchange rate at the time of foreign currency transaction takes place. He submitted that this may result in profit or loss as the case may be. Ld.AR submitted that during the year it was loss from forward contract amounting to Rs.1,72,86,687/- that was set of income Putin income under the head income from other sources. He also submitted that forward contract and option contracts were entered into by assessee in respect of all 5 STPI unit, as a whole, and not at undertaking level, and therefore said loss could not be identified to any particular undertaking. It was thus submitted that loss that arose from such contract was to be set off in computing income under the head income from other sources. Ld.AR submitted that, for assessment year 2006-07, 2008-09 and 2010-11 to 2011-12, revenue authorities accepted gain/loss on forward contracts to be income from other sources. He placed

ITA Nos.1333 & 1367(B)/2014 25 reliance upon the chart at page 341 of paper book wherein, details of assessment order passed under section 143(3) for these assessment years have been given. Assessee also placed assessment orders in paper book at pages 343-419 of paper book in support of consistent view taken by Ld.AO. It has been submitted that, there is no nexus between gain or loss earned by assessee from forward contract with eligible unit under section 10A, and therefore, cannot be part for purpose of computing deduction under section 10A of the Act. He placed reliance upon decision of Hon’ble Bombay High Court in case of Zandhu Pharmaceuticals Works Ltd vs CIT reported in 350 ITR 366, wherein, it has been held that, expenses which do not relate to an industrial undertaking/unit under consideration, and they relate to other units or to head office of assessee, such expenses cannot be taken into consideration while computing deduction under the said provisions. He also placed reliance upon decision of Hon’ble Karnataka High Court in case of Wipro Ltd vs DCIT reported in 382 ITR 179, wherein, it has been held that, expenditure incurred by corporate division should not be allocated to various other units. Ld.AR alternatively submitted that such loss may be set off against the profits of eligible units before computing deduction under section 10 A. 23. On the contrary, Ld.DR placed reliance upon orders passed by authorities below. She placed reliance upon categorical observation made by Ld. CIT (A) in para 7.4 as under: “7.4. In the instant case, the appellant is not a dealer in foreign exchange. The appellant is a business process outsourcing with non- resident company. In order to hedge against losses, the appellant

ITA Nos.1333 & 1367(B)/2014 26 had booked foreign exchange in the forward market with the bank. From the decisions of the Hon’ble ITAT, it is impliedly clear that loss on foreign exchange in the forward trading is a business loss. Therefore I’m not inclined to interfere with the AO’s observation in treating the loss on foreign contract as business loss and considered against business income only. The appeal in this ground, therefore, fails.” Alternatively, she submitted that apportionment of such loss against units in ratio of turnover can be granted to assessee. She thus vehemently submitted that, any loss/gain earned by assessee on such forward/option contracts, cannot be anything other than, connected to export activity, which is the only source of income under the head “Income from Business” in the hands of assessee. 16. We have perused submissions advanced by both sides in the light of the records placed before. Notably, assessing officer vide Questionnaire -V, (placed at page 7-9 of Part-II in paper book), called upon assessee to explain loss incurred due to forward contracts, and to furnish documents/correspondences, relevant bank statement etc., in respect of the same. Assessee wide letter dated 10/11/09 (placed at page 27 Part-II in paper book) filed reply (which is placed at page 40 of Part-II in paper book) as under: “Explanation for setting off of loss on forward contracts against income from other sources Infosys BPO Ltd generates 98% of the revenue from exporting the BPO services to USA and European countries. The company covers currency fluctuation risk through entering the forward contract with the authorised dealer. During the year under consideration company

ITA Nos.1333 & 1367(B)/2014 27 has incurred Rs.1.72 crores the loss on forward contracts. The company is not in the business of trading in forward contracts, the profit or loss on such contracts in foreign exchange is not considered as derived from the business of the undertaking. Forward contracts in foreign exchange partakes the character of treasury operations. In accordance with the internationally accepted accounting standards. The company obliged to value the outstanding contracts as at the end on Mark-to-market basis and recognise the income/loss accordingly. The net profit/loss from such transactions are offered to tax under the income from other sources.” Authorities below rejected submissions of assessee and held it to be business loss. Admittedly, assessee is not a dealer in foreign exchange. What is necessary to be analysed is, dominant purpose for entering into forward contract and option contracts. As we analyse reply filed by assessee on query raised by Ld. AO(referred to herein above), it is observed that forward contract was entered into by assessee in respect of all 5 units as a whole, to hedge against currency fluctuation in respect of receipts (98%) in view of services rendered by assessee to USA and European countries. It has been submitted in written submission dated 16/07/19 by Ld.AR that such contract was entered into by assessee to safeguard its interest. It is very clear that loss has been incurred by assessee upon hedging transaction of export, being business activity carried on by assessee. We therefore do not find force in submissions made by Ld.AR regarding forward contract in foreign exchange partaking character of treasury operations.

ITA Nos.1333 & 1367(B)/2014 28 In our considered opinion, forward contract has been entered by assessee in relation to business income and therefore any loss or gain earned by assessee on account of such contract would partake nature of business income. In our view merely because Assessing Officer in preceding years and some of succeeding assessment years has not observed the issue does not mean, same should be allowed to perpetuate. Any claim made by assessee has to be analysed having regard to law applicable. Further, decisions relied upon by assessee has been decided on a different context and are factually not similar or even seemingly identical with that of assessee. Accordingly, ratio laid down in these decisions are of no assistance to assessee under present factual matrix. However, alternative plea of Ld.AR in considering such loss to be set off against profits of 10A units before allowing deduction under section 10A cannot be ignored. Accordingly, we direct Ld.AO to apportion such loss against the profits of STPI unit’s in ratio of turnover and to grant set of against such profit before computing deduction under section 10 A in respect of such unit. Accordingly this ground raised by assessee stands partly allowed. 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

ITA Nos.1333 & 1367(B)/2014 29 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. 25. We have perused submissions advanced by both sides in the light of the records placed before us. It is observed that the expenditure incurred towards advertisements, sales and marketing, holding various seminars

ITA Nos.1333 & 1367(B)/2014 30 and exhibitions are in relation to ongoing business of assessee. As held by Hon’ble Bombay High Court in case of CIT vs Jeoffrey Manners & Co. Ltd reported in (2009) 180 Taxmann 87 that corrected test to be applied in respect of expenditure incurred for making advertisement films was that when, the same was incurred in respect of an ongoing business of assessee, it is revenue. On the other hand, when expenditures incurred in respect of a brand which is to be used in a business which is yet to be commenced, it is 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. 26. Ground No. 8 is in respect of foreign tax credit. It has been submitted that during the year assessee claimed foreign tax credit amounting to Rs.1,10,183/-as double taxation relief under section 90 in the process of computing income tax. We direct Ld. AO to verify the same and allow the claim of assessee as per law.

ITA Nos.1333 & 1367(B)/2014 31 Accordingly this ground raised by assessee stands allowed for statistical purposes. 27.Ground No. 9 is in respect of interest on 234B and 234D which is consequential in nature and therefore do not require any adjudication. In the result appeal filed by assessee stands partly allowed. Conclusion: Appeal filed by revenue stands dismissed and appeal filed by assessee stands partly allowed as indicated hereinabove. Order pronounced in the open court on

(J.SUDHAKAR REDDY) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: the *am Copy of the Order forwarded to: 1.Appellant; 2.Respondent; 3.CIT; 4.CIT(A); 5. DR 6. ITO (TDS) 7.Guard File By Order Asstt.Registrar