INFOSYS LTD.,,BANGALORE vs. ADDL.C.I.T, BANGALORE

Per Shri Jason P Boaz, A.M. : These are cross appeals, by the assessee and Revenue, directed against the order of the Commissioner of Income Tax (Appeals)-I, Bangalore dt.16.11.2012 for Assessment Year 2005-06.

2 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited 2. Briefly stated, the facts of the case relevant for this appeal, are as under : 2.1 The assessee company, engaged in the business of development and export of computer software and technical services, filed its return of income for Assessment Year 2005-06 on 30.10.2005 declaring income of Rs.163,39,66,280. The case was taken up for scrutiny. In view of the international transactions reported by the assessee for the year under consideration, a reference under Section 92CA of the Income Tax Act, 1961 (in short 'the Act') was made by the Assessing Officer to the Transfer Pricing Officer (TPO) for determination of the Arm’s Length Price (ALP) thereof. The TPO passed the order under Section 92A of the Act vide order dt.27.6.2008 in which no TP Adjustment to the ALP of the assessee's international transactions was proposed or made. The Assessing Officer completed the assessment under Section 143(3) of the Act vide order dt.31.12.2008, wherein the assessee's income was determined at Rs.351,52,97,339 in view of various addition / disallowances made to the returned income. 2.2 Aggrieved by the order of assessment dt.31.12.2008 for Assessment Year 2005-06, the assessee preferred an appeal before the CIT (Appeals)-1, Bangalore. The learned CIT (Appeals) disposed off the appeal vide order dt.16.11.2012 allowing the assessee partial relief. 3. Both the assessee and revenue are aggrieved by the order of the learned CIT (Appeals) dt.16.11.2012 for Assessment Year 2005-06 and have filed cross appeals. These appeals will be disposed off hereunder in seriatum.

3 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited Assessee's appeal in IT(TP)A No.102/Bang/2013 for A.Y. 2005-06.

“ 1.1 The order passed by the learned Commissioner of income tax (Appeals) – I, Bangalore, to the extent prejudicial to the appellant is bad in law and liable to be quashed.

2.1 The learned Commissioner of Income tax (Appeals) – I, Bangalore has erred in confirming the disallowance of subscription charges paid to M/s Forester Research totally amounting to Rs. 2,15,26,941/- under section 40(a)(i) of the Act. On facts and circumstances of the case and law applicable, the impugned payments were not chargeable to tax in India, not liable for TDS under section 195 and hence not to be disallowed under section 40(a)(i).

2.2 Even otherwise, since subscription charges were actually paid to M/s Forester Research during the relevant previous year and there was no amount payable as on 31.3.2005, no disallowance is to be made under section 40(a)(i) of the Act.

3.1 The learned Commissioner of Income tax (Appeals) – I, Bangalore has erred in confirming the disallowance of software expenses amounting to Rs. 97,84,35,963/- for the reason that the said expenditure is capital in nature. On facts and in the circumstances and law applicable, the impugned expenditure is revenue in nature and is to be fully allowed as deduction as claimed by the appellant.

3.2 In any case and without prejudice, depreciation is to be allowed in respect of the impugned expenditure at the rate of 60% instead of 25% as confirmed by the learned CIT(A).

4 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited 4.1 The learned Commissioner of Income tax (Appeals) – I, Bangalore has erred in confirming the disallowance of software expenses paid to overseas entities amounting to Rs. 11,94,50,304/- under section 40(a)(i) of the Income tax Act, 1961.

4.2 On facts and circumstances of the case and law applicable, the impugned payments were not chargeable to tax in India, not liable for TDS under section 195 and hence not to be disallowed under section 40(a)(i).

4.3 Even otherwise, the disallowance, if any, should not be made in respect of payments actually made during the relevant previous year.

4.4 In any case and without prejudice, depreciation be allowed at 60% in respect of the impugned expenditure.

5.1 The learned Commissioner of Income tax (Appeals) – I, Bangalore has erred in holding that software expenses paid to Indian entities amounting to Rs. 9,01,36,454/- are eligible for depreciation at 60% after concluding that these payments were not liable for TDS for the AY 2005-06. On facts and in the circumstances and law applicable, the impugned expenditure is to be fully allowed as deduction as claimed by the appellant. 6.1 The learned Commissioner of Income tax (Appeals) – I, Bangalore has erred in holding that overseas branch expenses amounting to Rs. 11,49,721/- is eligible for depreciation at 60% after concluding that the provisions of section 40(a)(i) are not applicable in respect of the impugned expenditure. On facts and in the circumstances and law applicable, the impugned expenditure is to be fully allowed as deduction as claimed by the appellant.

5 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited 7.1 The learned Commissioner of Income tax (Appeals) – I, Bangalore has erred in not giving any finding as to whether provision for software expenses amounting to Rs. 7,36,83,260/- is liable for disallowance under section 40(a)(i) / 40(a)(ia).

7.2 The learned Commissioner of Income tax (Appeals) – I, Bangalore has erred in concluding that provision for software expenses amounting to Rs. 7,36,83,260/- is also not eligible for depreciation.

7.3 On facts and in the circumstances of the case and law applicable, provision for software expenses amounting to Rs. 7,36,83,260/- is not liable for disallowance [either as capital expenditure or under section 40(a)(i) / 40(a)(ia)] and deduction is to be allowed in respect of the same as claimed by the appellant.

7.4 In any case and without prejudice, depreciation is to be allowed in respect of provision for software expenses amounting to Rs. 7,36,83,260/-

8.1 The learned Commissioner of Income tax (Appeals) – I, Bangalore has erred in concluding that brand building expenses amounting to Rs. 33,65,47,924/- would fall under the category of ‘intangible assets’ in part B of depreciation schedule and accordingly eligible for depreciation at the rate of 25%.

8.2 On facts and in the circumstances of the case and law applicable, brand building expenses of Rs. 33,65,47,924/- is to be fully allowed as deduction as claimed by the appellant.

9.1 The learned Commissioner of Income tax (Appeals) – I, Bangalore has erred in confirming disallowance under section 14A amounting to Rs. 35,20,566/- which was taxed separately by the learned assessing officer under the head ‘Income from other sources.

6 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited 9.2 On facts and in the circumstances of the case and law applicable, no disallowance is to be made under section 14A and the disallowance as confirmed by the learned CIT(A) is to be deleted in entirety.

9.3 In any case and without prejudice, the learned CIT(A) has erred in not allowing deduction under section 10A in respect of the disallowance made under section 14A.

10.1 The learned Commissioner of Income tax (Appeals)-I, Bangalore has erred in not allowing double taxation relief under section 90 amounting to Rs. 3,69,70,354/- which was claimed in the return of income.

10.2 The learned Commissioner of Income tax (Appeals)-I, Bangalore has erred in not allowing double taxation relief on account of variation of deduction under section 10A and consequent increase in income, as confirmed / sustained by the appellate order.

11.1 The learned Commissioner of Income tax (Appeals)-I, Bangalore has erred in levying interest under section 234B and 234D of the Act. On facts and in the circumstances of the case and law applicable, interest is not leviable under section 234B and 234D. The appellant denies its liability to pay interest under section 234B and 234D.”

7 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited Rs.2,15,26,941 paid to Forrester Research Inc., USA for non-deduction of tax thereon under Section 195 of the Act. 6.2.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncements cited. We find that the co-ordinate bench of this Tribunal in its orders in the assessee's own case for Assessment Years 2000-01 to 2003-04 in ITA Nos.145 to 148/Bang/2004 dt.11.11.2005 held that similar payments made to Gartner Group were not liable for TDS under Section 195 of the Act. However, the aforesaid decision of the co- ordinate bench (supra) was reversed by the Hon'ble Karnataka High Court in its orders in ITA Nos.613 to 616 of 2006 dt.15.10.2011. The Hon'ble High Court held that software subscription payments made to the Gartner Group constituted royalty and were therefore liable for TDS under Section 195 of the Act, following its own decisions of even date in the cases of Wipro Limited in ITA No.2804/2005 and others and CIT Vs. Samsung Electronics Co. Ltd. (2012) 345 ITR 494 (Kar.). 6.2.2 It is not in dispute that the payments to Forrester Research Inc., USA are similar to the payments made to the Gartner Group. In this factual and legal matrix of the case, the decision of the Hon'ble High Court of Karnataka in the assessee's own case dt.15.10.2011 for Assessment Years 2000-01 to 2003-04 (supra) are squarely applicable to the issue before us in the case on hand. Respectfully following the aforesaid decision of the Hon'ble Karnataka High Court dt.15.10.2011 in the assessee's own case (supra), we uphold the disallowance under Section 40(a)(i) of the Act of the payments made by the assessee to

8 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited Forrester Research Inc., USA for non-deduction of tax at source under Section 195 of the Act. Finding no merit in this Ground No.2.1 raised by the assessee, we dismiss the same.

7.1 In this ground (supra), the assessee's contention is that there was no amount payable as on 31.3.2005 and therefore no disallowance is called for under Section 40(a)(i) of the Act. Before us, the learned Authorised Representative fairly conceded that the Hon'ble Apex Court in the case of Palam Gas Service Vs. CIT (2017) 81 taxmann.com 43 (SC) has held that the word ‘payable’ in Section 40(a)(ia) of the Act not only covers amount payable as on the last day of the previous year but also covers amount actually paid. Respectfully following the aforesaid decision of the Hon'ble Apex Court (supra), we uphold the orders of the authorities below and consequently dismiss ground No.2.2 raised by the assessee.

as capital in nature.

8.1 In this ground, the assessee challenges the disallowance of software expenditure amounting to Rs.97,84,35,963 for the reason that the said expenditure is capital in nature. According to the Assessing Officer, the debate as to whether the expenditure debited on account of software is capital or revenue in nature, has no real meaning as the depreciation table itself specifies that software is an item eligible for

9 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited depreciation @ 60%. However, after having observed as above at para 7.4 of the order of assessment, the Assessing Officer proceeded to allow depreciation @ 25% for the reason that the assessee (i) acquired a ‘right to use’ software which is an ‘intangible asset’ eligible for 25% depreciation and (ii) the assessee took a considered decision in making TDS in respect of the aforesaid sum of Rs.97,84,35,963. On appeal, the learned CIT (Appeals) observed that the aforesaid software expenditure was mainly incurred for software development and the use of software licenses was for a limited period. After this observation, the learned CIT (Appeals) however proceeded to uphold the Assessing Officer’s action in treating software expenditure as capital expenditure and in allowing depreciation thereon at 25%.

8.2.1 We have heard the rival contentions, perused and carefully considered the material on record. As per the material on record, out of the total software expenses of Rs.126,27,52,200, the assessee deducted tax at source only in respect of Rs.97,84,35,963. On a perusal of these details, we find that the software licenses are in the nature of generic application software which is used in various stages of software development like design and analysis, coding, development testing, maintenance, etc. The maintenance or renewal of these software applications is recurring in nature; in order to get any updates, support for bug fixing etc. In these circumstances, we find that the software expenses are incurred by the assessee in its day to day business.

8.2.2 In the circumstances as discussed above, we find that the Assessing Officer’s distinction between capital and revenue expenditure

10 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited allowing depreciation at 25% has no basis, in view of 60% depreciation being allowed on computers and computer software. The Hon'ble High Court of Karnataka in the case of CIT Vs. IBM India Limited (2013) 357 ITR 88 has held that payment for an application software does not result in acquisition of any capital asset, even though there is an enduring benefit and that the same merely enhances the productivity or efficiency and hence is to be treated as revenue expenditure. At para 10 of its order, the Hon'ble High Court has held as under :

“ 10. 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 the company's working expenses or is it expenditure laid out as a part of the 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 stand alone 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

11 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited Tribunal is in accordance with law and does not call for any interference. Accordingly, the second substantial question of law is answered in favour of the assessee and against the Revenue.” 8.2.2 We, however, find that in the case on hand that the Assessing Officer has not examined the documentary evidence in respect of the software expenses, like purchase orders, etc or the description, nature or purpose of software payments claimed as revenue expenditure. We, therefore, set aside this issue to the file of the Assessing Officer with a direction to examine and consider the evidence, description, nature and purpose of software expenses and to decide the issue of software expenditure being capital or revenue in the light of the decisions of the Hon'ble Apex Court in the case of Empire Jute Co. Ltd. (1980) 124 ITR 1, Alembic Chemicals Works Co. Ltd. Vs. CIT (1989) 177 ITR 377, the Hon'ble High Court of Karnataka in the case of CIT Vs. IBM India Ltd. (supra) and the Hon'ble High Court of Calcutta in the case of Indian Aluminium Co. Ltd. (2016) Tax Corp (DT) 64980; after affording the assessee adequate opportunity of being heard in the matter. Consequently, Ground No.3.1 of the assessee's appeal is allowed for statistical purposes.

9.1 This ground is raised with respect to the rate of depreciation on software expenses of Rs.97,84,35,963 which are treated as capital by the Assessing Officer and CIT (Appeals). The authorities below have allowed depreciation at 25% on software expenses held to be capital in nature, for the reason that the software expenditure resulted in right to use

12 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited software licenses is an ‘intangible asset’ and therefore eligible for depreciation at 25%.

9.2 Per contra, the learned Authorised Representative of the assessee contends that as per Part A of Depreciation Schedule to IT Rules, 1962. ‘Computers including computer software” are eligible for depreciation @ 60 %. As per Note 7 to the said Depreciation Schedule’ . ‘Computer software’ means any software program recorded on any disc, tape, perforated media or other information storage device.

9.3.1 We have heard the rival contentions, perused and carefully considered the material on record. We have restored the issue of allowability of software expenses as capital or revenue to the file of the Assessing Officer. If the software expenditure is treated as revenue expenditure, then the quantum of claiming depreciation would not arise. The issue of depreciation remains only if the software expenses are held to be capital expenditure. We find from a perusal of the order of assessment that in para 7.4 thereof that the Assessing Officer himself has noted that depreciation of software expenses is to be allowed at 60%, but ultimately allowed the assessee depreciation at 25%. As per Sec. 32(1)(ii) depreciation @ 25% is applicable in respect of know-how, patents, copy rights, trademarks, licenses, franchises or any other business or commercial right of similar nature, being intangible assets, acquired on or after 1.4.1998. In the case of Amway India Enterprises Vs. DCIT (2008) 111 ITD 112 (SB) (Delhi), it was held that ‘computer software’ is eligible for depreciation @ 60% This decision of the ITAT, Delhi (SB) in the case of Amway India Enterprises (supra) has been

13 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited upheld by the Hon'ble High Court of Delhi. In DCIT Vs. Datacraft India Ltd. (2010) 133 TTJ 377 (Mum) (SB) wherein it was held that when a device is used as part of the computer in its functions, like routers, switches, etc., they are eligible for depreciation @ 60%. In the light of the discussion above, we hold that if the software expenses are treated as capital expenditure by the Assessing Officer, then depreciation is to be allowed thereon at 60%. Needless to add, the assessee be afforded opportunity of being heard. Consequently, Ground No.3.2 of the assessee's appeal is allowed for statistical purposes.

10.1 These grounds are raised in respect of the disallowance of software expenses paid to overseas entities amounting to Rs.11,94,50,304 under Section 40(a)(i) of the Act for failure to deduct tax at source thereon under Section 195 of the Act.

10.2.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. We find that the Hon'ble High Court of Karnataka in the case of CIT Vs. Synopsys International Old Ltd. (2012) 28 taxmann.com 162 (Kar) and CIT Vs. Samsung Electronics Co. Ltd. (2011) 16 taxmann.com 141 dt.15.10.2011 has elaborately discussed this issue and held that payments made for import of software constitute ‘Royalty’ and hence liable for TDS under Section 195 of the Act; thereby overruling the decisions of the co-ordinate benches of ITAT, Bangalore that software payments are not liable for TDS under Section 195 of the

14 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited Act. Respectfully, following the aforesaid decisions in the cases of CIT Vs. Synopsys International Old Ltd. (supra) and CIT Vs. Samsung Electronics Co. Ltd. (supra), we uphold the disallowance made by the authorities below, of software expenses of Rs.11,94,50,304 paid to overseas entities under Section 40(a)(i) of the Act for not deducting tax at source under Section 195 of the Act thereon. Consequently, Grounds 4.1 ;and 4.2 raised by the assessee are dismissed.

This ground (supra) is raised with regard to the issue that the disallowance under Section 40(a)(i) of the Act, if any, should not be made in respect of payments actually made during the year under consideration. This issue is no longer res integra as the Hon'ble Apex Court in the case of Palam Gas Service Vs. CIT (supra) has held that the word ‘payable’ in section 40(a)(ia) of the Act not only covers amount payable on the last day of the previous year but also covers amounts actually paid. Consequently, Ground No. 4.3 of the assessee's appeal is dismissed.

12.1 In Ground 4.4 (supra) the assessee contends that without prejudice, depreciation be allowed at 60% in respect of the software expenses of Rs.11,94,50,304 paid to overseas entities. In our considered view, this ground is liable to be dismissed as the Assessing Officer has disallowed the expenditure under Section 40(a)(i) and not as capital

15 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited expenditure. Consequently, finding no merit in Ground NO.4.4 raised by the assessee, the same is dismissed.

13.1 In these grounds (supra), the assessee contends that the learned CIT (Appeals) has erred in concluding that software expenses of Rs.9,01,36,459 paid to Indian entities and software expenses of Rs.11,49,721 related to overseas branches are eligible for depreciation at 60% after holding that these payments were not liable for TDS and therefore not liable for disallowance under Section 40(a)(i) of the Act.

13.2 We have heard the rival contentions, perused and carefully considered the material on record. The Assessing Officer disallowed both the aforesaid payments (supra) u/s.40(a)(i) / 40(a)(ia) for not deducting tax at source thereon. During the period relevant to Assessment Year 2005-06, there was no liability to deduct tax at source under Section 194J of the Act in respect of software expenses paid to Indian entities as the term ‘Royalty’ in Section 194J was introduced by the Taxation Laws Amendment Act, 2006 w.e.f. 13.7.2006. Therefore, the learned CIT (Appeals) has rightly held that software expenses paid to Indian entities amounting to Rs.91,01,36,454 are not liable for disallowance under Section 40(a)(ia) of the Act. Similarly, the learned CIT (Appeals) also held that since software expenses of Rs.11,49,721 are related to overseas branch offices, these payments are not liable for TDS and therefore not liable for disallowance under Section 40(a)(i) of the Act. Having held so, it is seen that the learned CIT (Appeals) has

16 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited erroneously treated both these expenses as ‘capital expenditure’ and allowed depreciation at 60%. In our view, since the Assessing Officer has disallowed the above payments under Section 40(a)(ia) of the Act for not making TDS thereon, treatment of the same payments as capital expenditure by the learned CIT (Appeals) is not correct. The learned CIT (Appeals) having already held that the above expenses i.e. software expenses paid to Indian entities and software expenses related to overseas branch offices are not liable for disallowance under Section 40(a)(ia) of the Act, and consequently these payments would be eligible for deduction in computing the business income and as a result, the question of allowing depreciation at 60% thereon does not arise. Ground Nos.5.1 and 6.1 of the assessee's appeal are accordingly allowed.

14.1 These grounds are raised by the assessee in respect of the correctness of the finding of the Assessing Officer that provision for software expenses amounting to Rs.7.36,83,260 is also liable for disallowance under Section 40(a)(i) of the Act for not deducting tax at source thereon and the correctness of the finding of the learned CIT (Appeals) that the aforesaid provision is not eligible for any depreciation as the amount was only a provision. In support of these grounds (supra), the learned Authorised Representative placed reliance on the decision of the Hon'ble High Court of Karnataka in the case of KPTCL Vs. DCIT (2016) 383 ITR 59 (Kar) and the decision of the co-ordinate bench of this Tribunal in the case of TE Connectivity India P. Ltd. Vs. ITO in ITA No.3/Bang/2015 dt.25.5.2016 and contended that provisions are not

17 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited liable for TDS and therefore not liable for disallowance under Section 40(a)(ia) of the Act.

14.2 Per contra, the learned Departmental Representative for revenue supported the order of the learned CIT (Appeals) and placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of IBM India P. Ltd. Vs. ITO (TDS) in ITA Nos.749 to 752/Bang/2012 & 1588 to 1591/Bang/2012 dt.14.5.2015 to contend that provisions are liable for TDS.

14.3.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. We find that the Hon'ble Karnataka High Court in the case of KPTCL Vs. DCIT (supra) held that there would be no liability to deduct tax at source on the amount of provision in the absence of accrual of income to the payees. The observations of the Hon'ble High Court in this regard at para 26 of its order is extracted hereunder :

“ 26. We have examined the applicability of Section 194A of the Act to the present case. Section 194A of the Act mandates the tax deductor to deduct 'income tax' on 'any income by way of interest other than income by way of interest on securities'. The phrase 'any income' and 'income tax thereon' if read harmoniously, it would indicate that the interest which finally partakes the character of income, alone is liable for deduction of the income tax on that income by way of interest. If the said interest is not finally considered to be an income of the deductee, as per reversal entries of the provision in the present case, Section 194A[1] of the Act would not be made applicable. In other words, if no income is attributable to the payee, there is no liability to deduct tax at source in the hands of the tax deductor. In view of the admitted fact that interest being not paid to the payees [suppliers] being reversed in the books of account, we are of the considered opinion that there would be no liability to deduct tax as no income accrued to the payees [suppliers]. It is true that in the case of Ericsson Communication Ltd. (supra), the Delhi High Court was dealing

18 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited with the case of Section 195 of the Act wherein obligation of a person to deduct tax at source would be applicable to the 'income chargeable under the Act'. Absence of such words 'chargeable to tax' under the provisions of Section 194-A of the Act would not empower the authorities to invoke the provisions of Sections 201 and 201(1A) of the Act ignoring the words 'any income by way of interest'.” 14.3.2 The aforesaid decision of the Hon'ble Karnataka High Court (supra), was followed by the co-ordinate bench of this Tribunal in the case of TE Connectivity India P. Ltd. (supra) to hold that the provision amount is not liable for TDS as no income accrues in the hands of the payees. We are inclined to follow the decision of the Hon'ble Karnataka High Court in the case of KPTCL (supra) which have been rendered subsequent to the decision of the co-ordinate bench in the case of IBM India P. Ltd. (supra). The Assessing Officer is accordingly directed to examine and decide the issue of TDS on provisions for software expenses amounting to Rs.7,36,83,260 and consequent disallowance, if any, u/ 40(a)(i) of the Act, following the aforesaid decisions of the Hon'ble Karnataka High Court in the case of KPTCL Vs. DCIT (supra) and of the co- ordinate bench in the case of TE Connectivity India P. Ltd. (supra) after affording the assessee adequate opportunity of being heard. Consequently, ground Nos.7.1 to 7.4 of the assessee's appeal are partly allowed for statistical purposes.

15.1 These grounds are raised in respect of the issue of brand building expenses of Rs.33,65,47,924 incurred by the assessee. In the order of assessment the Assessing Officer treated the brand building expenses as ‘deferred revenue expenditure’ and held that they were to

19 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited be allowed over a period of five years as he was of the view that these expenses result in long term enduring benefit which is not limited to the year under consideration alone. On appeal, the learned CIT (Appeals) noted that the brand building expenditure were incurred towards marketing and sales events, subscription to research agencies, participation in seminars, etc. which provided benefits in terms of growth in income in excess of industry average rates and increase in clientele. Though these expenses are revenue in nature they had resulted in creation of an ‘intangible asset’ falling under the category of ‘intangible assets’ in Part B of Depreciation Schedule and entitled for depreciation @ 25%. Thereby, the learned CIT (Appeals) modified the allowability of brand building expenditure from ‘deferred revenue expenditure’ as held by the Assessing Officer to ‘capital expenditure’.

15.2.1 We have heard the rival contentions, perused and carefully considered the material on record. From a perusal of the break up of brand building expenditure (placed at page 710 of paper book) it is seen that they are incurred in respect of subscription charges, sponsorship fees, retainer charges, publishing charges, marketing fees, consulting fees, global meets, trade show fees, exhibition stall space, etc. In our view, this expenditure incurred is in the course of and for the purpose of assessee's business and it cannot be said that the said expenditure has resulted in the acquisition of any ‘intangible asset’ eligible for depreciation @ 25% as held by the learned CIT (Appeals); which finding is not borne out by the facts on record.

20 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited 15.2.2 On a perusal of the orders of the authorities below, it appears to us that the Assessing Officer and learned CIT (Appeals) in coming to their views have merely gone by the nomenclature ‘brand building expenditure’ without actually examining the nature of each expenditure under the above head. In view of the above, we restore this issue of ‘brand building expenditure’ back to the file of the Assessing Officer to verify the nature and description of expenditure included under the head ‘brand building’ and decide the issue of allowability of brand building expenditure as revenue expenditure in the light of our observations and after affording the assessee adequate opportunity of being heard and to file details / submissions in this regard, which shall be duly considered. Consequently, grounds 8.1 and 8.2 of the assessee's appeal are treated as allowed for statistical purposes.

16.1 In these grounds, the assessee ;challenges the disallowance of Rs.35,20,566 u/s. 14A of the Act by the Assessing Officer. We have heard both parties in the matter and carefully considered material on record and judicial pronouncements cited. In the course of assessment proceedings the assessee worked out the disallowance u/s. 14A of the Act at Rs.9,22,131; comprising 50% of salary of employee plus 5% of salary of Senior Vice President. The Assessing Officer, however, computed the disallowance under Section 14A of the Act at Rs.35,20,566; which comprised 50% of the salary of both the employee s and the Senior Vice President and added the same as ‘Income from other sources’. Before us, the learned Authorised Representative of the

21 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited assessee submitted that while it had no grievance with respect to the disallowance under Section 14A of the Act computed by the Assessing Officer at Rs.35,20,566, it is aggrieved by the Assessing Officer’s action of treating the same as ‘Income from other sources’ rather than in disallowing the same from assessee's business income.

16.2 In our considered view, the action of the Assessing Officer in making the disallowance under the head ‘Income from other sources’ is not correct since the facts show that the disallowance under Section 14A of the Act represents the business expenditure incurred by the assessee in relation to exempt income. Such disallowance would go to increase the assessee's business income and consequently the assessee would be entitled to proportionate deduction under Section 10A of the Act in respect of such increase in business income. In coming to this view, we draw support from the decision of the Hon'ble Bombay High Court in the case of Gemplus Jewellery India Ltd (supra), we direct the Assessing Officer to allow proportionate deduction under Section 10A of the Act on account of the disallowance of Rs.35,20,566 made under Section 14A of the Act. Consequently, Grounds 9.1 and 9.2 of assessee's appeal are dismissed and Ground No.9.3 is allowed.

In this ground, the assessee contends that the learned CIT (Appeals) erred in not allowing double taxation relief under Section 90 of the Act amounting to Rs.3,69,70,354 which was claimed in the return of income. In the course of hearings before us, the learned Authorised

22 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited Representative submitted that the Assessing Officer has allowed foreign tax credit of Rs.3,69,70,354 which was claimed in the assessee's return of income for the year under consideration while giving effect to the impugned order of the learned CIT (Appeals). Therefore, Ground No.10.1 was not pressed and consequently being rendered infructuous is accordingly dismissed.

This Ground is raised in respect of the non-allowance of double taxation relief on account of variation in deduction under Section 10A of the Act consequent to the increase in income as confirmed / sustained by appellate orders. This ground is consequential in nature and is therefore remanded to the file of the Assessing Officer for consideration while passing the order giving effect to these orders.

and 234D of the Act.

In this ground, the assessee denies itself liable to be charged interest under Sections 234B & 234D of the Act. The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition was upheld by the Hon'ble Apex Court in the case of Anjum H Ghaswala (252 ITR 1) (SC), and we therefore uphold the action of the Assessing Officer in charging the said interest under Section 234B and 234D of the Act. The Assessing Officer is, however,

23 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited directed to recompute the interest chargeable, if any, under Section 234B & 234D of the Act while giving effect to this order.

ADDITIONAL GROUNDS OF APPEAL

“1. The ld. Assessing Officer be directed to allow the claim of foreign tax credit under Section 90 of the Income Tax Act, 1961 even in respect of income which is exempt under Section 10A of the Income Tax Act, 1961 on the basis of and in conformity with the decision of the jurisdictional High Court in the case of Wipro Limited V. DCIT dt.25.3.2015 (2016) 382 ITR 179. 2. The ld. Assessing Officer be directed to allow the claim of credit for state taxes paid outside India either as a deduction in computing the total income or as relief under Section 91 of the Income Tax Act, 1961 even in respect of income which is exempt under Section 10A and 10AA of the Income Tax Act, 1961 on the basis of and in conformity with the decision of the jurisdictional High Court in the case of Wipro Limited Vs. DCIT dt.25.3.2015 (2016) 382 ITR 179.”

24 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited additional grounds raised by the assessee for consideration in this appeal.

We have already set aside the issue of allowability of foreign tax credit to the file of the Assessing Officer while disposing off Ground of appeal No.10.2 (supra). In respect of this additional ground also, we remand the same to the file of the Assessing Officer for verification of details and documents in respect of the issue of allowability of foreign tax credit in respect of income eligible for deduction under Section 10A of the Act is also allowable under Section 90 of the Act in the light of the decision of the Hon'ble Karnataka High Court in the case of Wipro Ltd. Vs. DCIT (supra) and adjudication thereon after affording the assessee adequate opportunity of being heard and to file details and submissions in this regard that shall be duly considered. The Assessing Officer is accordingly directed. Consequently, additional ground No.1 is treated as allowed for statistical purposes.

23.1 This additional ground raises the issue of the allowability of state taxes paid outside India either as a deduction in computing the total income or as credit under Section 91 of the Act in the light of the decision of the Hon'ble Karnataka High Court in the case of Wipro Ltd. Vs. DCIT (supra).

25 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited 23.2 In this context, the learned Departmental Representative for revenue placed reliance on the decision of the Hon'ble Bombay High Court in the case of Reliance Infrastructure Ltd. (2016) 76 taxmann.com 257 (Bom) and contended that the observations of the Hon'ble Karnataka High Court with regard to Sec. 91 of the Act are in the nature of obiter as it was not at all necessary for the Hon'ble Karnataka High Court to deal with Sec. 91 of the Act when the question for consideration before them was for relief under Section 90 of the Act. 23.3 In rejoinder, the learned Authorised Representative for the assessee submitted that in any case deduction should be allowed in respect of state taxes paid outside India. In this regard, the learned Authorised Representative of the assessee also placed reliance on the decision in the case of Reliance Infrastructure Ltd. (supra) cited by the ld. DR. 23.4 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. Taking into consideration the facts and circumstances of the case and also our decision in restoring the additional ground No.1 to the file of the Assessing Officer for consideration and adjudication, we remand the issue raised in additional ground No.2 to the file of the Assessing Officer for verification of details and documents in respect of the assessee's claim for state taxes paid outside India under Section 91 of the Act in the light of the aforesaid decisions of the Hon'ble Karnataka High Court in the case of Wipro Ltd. Vs. CIT (supra) and of the Hon'ble Bombay High Court in the case of Reliance Infrastructure Ltd. (supra) and to adjudicate thereon. Needless to add, the assessee shall be afforded adequate opportunity of being heard and to submit details / submissions required, which shall be duly considered before coming to a decision in the matter. The Assessing

26 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited Officer is accordingly directed. Consequently, additional ground No.2 is treated as allowed for statistical purposes. 24. In the result, the assessee's appeal for Assessment Year 2005-06 is partly allowed. Revenue’s appeal for A.Y. 2005-06 in IT(TP)A No.233/Bang/2013. 25. The Grounds raised in Revenue’s appeal are as under :

27 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited

26.1 Grounds at S.Nos.1, 13 & 14 (supra) being general in nature, no adjudication is called for thereon.

28 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited 27. Ground Nos.2 to 5 – Provision for warranty.

27.1 In these grounds (supra), Revenue has challenged the action of the learned CIT (Appeals) in deleting the disallowance made by the Assessing Officer in respect of the provision for warranty by following the decision of the Hon'ble Apex Court in the case of Rotork Controls India (P) Ltd. (314 ITR 62) which was not applicable to the case on hand.

27.2.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. The facts of the case as emanate from the record is that in the year under consideration, the assessee made a provision for warranty at 2% of revenue amounting to Rs.22,03,64,446. The Assessing Officer allowed the actual expenditure of Rs.6,64,97,678 incurred on warranty and disallowed the remaining amount of Rs.15,38,66,768 as he was of the view that the actual expenditure being only 1/3 rd of the estimate, when the books were finalized at the end of the year the actual expenditure only ought to be claimed. On appeal, the learned CIT (Appeals) allowed the assessee's claim by deleting the disallowance made by the A.O. in respect of provision for warranty, following the decision of the co-ordinate bench of this Tribunal in the assessee's own case in ITA No.471/Bang/2003 dt.17.4.2012, wherein the co-ordinate bench had allowed the assessee's claim for provision of warranty after considering the decision of the Hon’ble Apex Court in the case of Rotork Controls India P. Ltd. (supra) and holding that this decision of Hon’ble Apex Court was squarely applicable to the assessee's case. The co-ordinate Bench of this Tribunal restored the matter to the

29 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited file of the Assessing Officer for examination of the facts in connection with the claim made and expenditure actually incurred towards warranty obligation in accordance with the observations of the Hon’ble Apex Court in the case of Rotork Controls India P. Ltd. (supra).

27.2.2 Respectfully following the decision of the co-ordinate Bench of this Tribunal in the assessee's own case in ITA No.471/Bang/2003 dt.17.4.2012, which was rendered after considering the decision of the Hon’ble Apex Court in the case of Rotork Controls India P. Ltd. (supra), we uphold in principle the assessee's claim of provision for warranty and remand this issue to the file of the Assessing Officer for examination of the basis of provision towards warranty, the claim made and the expenditure incurred towards warranty obligation in accordance with the observations of the Hon'ble Apex Court in the case of Rotork Controls India P. Ltd. (supra). Consequently, Ground Nos.2 to 5 of Revenue’s appeal are allowed for statistical purposes.

In these grounds (supra), Revenue contends that the learned CIT (Appeals) erred in allowing depreciation @ 60% in respect of software payments made to Indian entities of Rs.9,01,36,454 and related to overseas branches of Rs.11,49,721. While dealing with Ground Nos.5.1 and 6.1 of the assessee's appeal, we have held that the learned CIT (Appeals) erroneously treated both the above payments as ‘capital expenditure’ and allowed depreciation @ 60% thereon. In our view the Assessing Officer disallowed the above payments under Section 40(a)(i) /

30 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited (ia) of the Act for not making TDS, treatment of the same payments as capital expenditure and allowing depreciation @ 60% by the learned CIT (Appeals) is not correct and hence bad in law. We therefore reverse the order of the learned CIT (Appeals) on this issue and restore the finding of the Assessing Officer in the matter. Consequently, Ground Nos.6 & 7 of Revenue’s appeal are allowed.

29.1 In this ground, Revenue contends that the learned CIT (Appeals) erred in not appreciating that the review petition of the assessee before the Hon'ble High Court on the issue of software development as technical service, has only been admitted and not yet decided and till such time, the order of the ITAT is final.

29.2.1 The facts as emerge from a perusal of the record is that in the order of assessment, the Assessing Officer reduced an amount of Rs.509,60,40,847; being 30% of foreign currency expenses; from export turnover while computing deduction under Section 10A of the Act, as he was of the view that such expenditure is incurred in connection with the rendering of technical services outside India. On appeal, the learned CIT (Appeals), while considering the assessee's contention that the activity of software development cannot be regarded as technical services and the orders of the Hon'ble Karnataka High Court in ITA Nos.2972 to 2974 of 2005 dt.4.11.2011 and RP No.14, 15 & 75 of 2012 dt.19.3.2012, was of the view that foreign currency expenses should not be reduced from

31 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited export turnover while computing the deduction under Section 10A of the Act.

29.2.2 Subsequent to the recalling of its order in ITA Nos. 2972 to 2974 of 2005 dt.4.11.2011 vide its order RP No.14, 15 & 75 of 2012 dt.19.3.2012, the Hon'ble Karnataka High Court passed an order on merits in the assessee's own case, reported in 32 taxmann.com 399 (Kar). The Hon'ble Court at para 20 of its decision held that the amount to be arrived at as export turnover in so far as the actual export or deemed export of computer software is concerned, it is required to exclude freight charges, telecommunication charges or insurance attributable to the delivery of computer software outside India and only if it is a situation of receiving amount for providing technical services outside India in connection with development or production of computer software, export turnover is computed after excluding the expenditure if any incurred in foreign exchange in providing technical services outside India. After having held so, the Hon'ble High Court remanded the matter to the file of the Assessing Officer to record a finding as to the nature of activity, keeping in view the legal position as discussed in its order, its observations thereon and to answer the question of reduction of expenses from export turnover. In view of the above, we set aside the issue of reduction of foreign currency expenditure from export turnover while computing the deduction under Section 10A of the Act to the file of the Assessing Officer for examination and verification of the issue afresh based on factual evidence and in the light of the decisions of the Hon'ble

32 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited High Court of Karnataka as discussed above. Consequently, ground No.8 of Revenue’s appeal is allowed for statistical purposes.

30.1 In this ground (supra), Revenue assails the order of the learned CIT (Appeals) in allowing the assessee's claim for inclusion of rental income from Infosys BPO Ltd. and BSNL, Chennai as profits of the business in computing deduction under Section 10A of the Act, when these incomes were not derived from the export of computer software.

30.2 In the order of assessment, the Assessing Officer held that the aforesaid rental income from Infosys BPO Limited and BSNL, Chennai cannot be regarded as income derived from the business of export of software. On appeal, before the learned CIT (Appeals), it was submitted by the assessee that inter alia, the rental income received from its subsidiary, Infosys BPO Limited, was incidental to the business carried on by the assessee as it facilitated operations, transactions, policies and procedures. In respect of the letting out of space to BSNL, in Chennai, it was for the purpose of setting up of Mini Exchange to equip the assessee's Chennai unit with telecommunication facilities. It was urged that the letting of space to Infosys BPO Limited and BSNL at Chennai were therefore incidental to the business carried on by the assessee and therefore eligible for deduction under Section 10A of the Act.

30.3.1 We have heard the rival contentions, perused and carefully considered the material on record. The issue as to whether interest income, income from sale of scrap, export incentive, rental income, etc.

33 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited are eligible for deduction under Section 10A of the Act has been considered by the Hon'ble High Court of Karnataka in the case of Subex Ltd. Vs. ITO in ITA Nos.46 & 47 of 2009 dt.2.10.2014 held that rental income by virtue of sub-section (4) of Section 10 of the Act is deemed to be business of the undertaking for the purpose of extending the benefit of deduction under Section 10A of the Act. At paras 8 & 9 thereof, the Hon'ble Court, explaining the interplay of section 10A(1) and 10A(4) of the Act, has held as under :

34 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited

35 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited

30.3.2 Similarly, the Hon'ble High Court of Karnataka in the case of Wipro Ltd. Vs. DCIT in its order reported in (2016) 382 ITR 179 before whom the substantial question of law No.16 for consideration was in respect of income from sale of scrap, export incentive, rent received, interest income and gain on exchange rate fluctuation. The Hon'ble Court held that these items were eligible for deduction under Section 10A of the Act. At para 166 thereof; the Hon'ble Court followed its own earlier order in the case of Wipro Ltd. in ITA No.507 / 2002 dt.25.8.2010, in respect of income from sale of scrap, export incentive and rent received to hold as under :

“166. This Court had occasion to consider the substantial questionof law in assessee's case itself in ITA 507 . 2002 decided on 25.8.2010 while dealing with the income from sale of scrap, export incentive and rent received, answered the question in favour of the assessee ;and against the revenue.”

36 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited

At para 169 thereof the Hon'ble Court held as under :

“169. As all these questions are decided and answered in favour of the assessee in the aforesaid case, this question of law is answered in favour of the assessee and against revenue.”

30.3.3 Respectfully following the decisions of the Hon'ble High Court of Karnataka in the case of Subex Ltd. Vs. ITO (supra) and Wipro Ltd. Vs. DCIT (supra), as discussed above, we are of the view that rental income received from Infosys BPO Limited and BSNL, Chennai cannot be excluded from the profits of the business of the undertaking while computing the deduction under Section 10A of the Act in the case on hand. Consequently, Ground No.9 of the revenue’s appeal is dismissed.

31.1 In these grounds (supra), the revenue assails the order of the learned CIT (Appeals) in holding that communication expenses are to be reduced from total turnover by following the decision of the Hon'ble High Court of Karnataka in the case of CIT Vs. Tata Elxsi Limited (supra) which has not attained finality as the Department’s SLP is pending before the Hon'ble Apex Court.

31.2 We have heard the rival contentions, perused and carefully considered the material on record. In our considered view, the issue raised in these grounds are covered against revenue by the decision of the Hon'ble High Court of Karnataka in the case of CIT Vs. Tata Elxsi Limited (supra), wherein it is held that communication expenses reduced

37 IT(TP)A Nos.102 & 233/Bang/2013 Infosys Limited from export turnover should also be reduced from total turnover while computing the deduction under Section 10A of the Act. Respectfully following the aforesaid decision of the Hon'ble Karnataka High Court in CIT Vs. Tata Elxsi Limited (supra), we dismiss ground Nos.10 to 12 raised by revenue.

Order pronounced in the open court on the 10th day of Nov. 2017.

Sd/- Sd/- (SUNIL KUMAR YADAV) (JASON P BOAZ) Accountant Member Judicial Member Bangalore, Dt. 10.11.2017.

*Reddy gp

Copy to : 1 Appellant 4 CIT(A) 2 Respondent 5 DR. ITAT, Bangalore 3 CIT 6 Guard File

Senior Private Secretary Income Tax Appellate Tribunal Bangalore.