M/S. BIRLASOFT LIMITED (FORMERLY KNOWN AS KPIT CUMMINS INFOSYSTEMS LTD.,),PUNE vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-11(5), BANGALORE

Page Assistant Commissioner of Income tax, Circle 11(5), Bangalore. 3.2 The lower income tax authorities have erred in not appreciating that (i) the communication charges were not recovered from the customers and thus did not form part of export turnover so as to exclude the same from export turnover; (ii) the communication charges were incurred in Indian currency and not in foreign currency; (iii) at any rate and without prejudice, only expenses attributable to delivery of computer software outside India is to be reduced from export turnover and not the entire communication expenses. 3.3 On facts and in the circumstances of the case and law applicable, communication charges of Rs. 35,58,833/- should not be reduced from export turnover in computing deduction under section 10A. 3.4 At any rate and without prejudice, the quantum of reduction is very very high. 4.1 Assuming without admitting that communication charges are to be reduced from export turnover, the learned Assistant Commissioner of Income tax, Circle 11(5), Bangalore has erred in not reducing the communication charges from total turnover and the learned Commissioner of Income tax (Appeals) - I, Bangalore has erred in confirming the action of the learned Assistant Commissioner of Income tax, Circle 11(5), Bangalore. 4.2 The lower income tax authorities have erred in not appreciating that expenditure reduced from export turnover should also be reduced from total turnover in computing deduction under section 10A. 5.1 The learned Assistant Commissioner of Income tax, Circle 11(5), Bangalore has erred in disallowing provision for warranty amounting to Rs. 97,89,000/- and the learned Commissioner of Income tax (Appeals) - 1, Bangalore has erred in confirming the action of the learned Assistant Commissioner of Income tax, Circle 11(5), Bangalore. 5.2 The lower income tax authorities have erred in (i) concluding that the determination of provision for warranty is unscientific and unreasonable;

(ii) concluding that provision for warranty is an unascertained and contingent liability; (iii) relying on irrelevant and immaterial facts and observations in support of the impugned conclusions; (iv) not appreciating that provision for warranty is a real, ascertained and crystallized liability the quantification of which was made in the light of the industry practice, empirical data, past experience and on a definite basis. 5.3 On facts and in the circumstances of the case and law applicable, provision for warranty amounting to Rs. 97,89,000/- should be fully allowed as a deduction in computing the income for the year under consideration. 5.4 In any case and without prejudice, the quantum of disallowance is very very high. 6.1 Without prejudice, the lower income tax authorities have erred in not allowing deduction under section 10A in respect of the additions made in the assessment order. On the facts and in the circumstances of the case deduction under section 10A is to be granted on the additions to the total income. 7.1 The learned Assistant Commissioner of Income tax, Circle 11(5). Bangalore has erred in levying interest under section 234D and the learned Commissioner of Income tax (Appeals) — I, Bangalore has erred in confirming the action of the learned Assistant Commissioner of Income tax, Circle 1 1(5), Bangalore. On facts and circumstances of case and law applicable, interest under section 234D is not leviable. The appellant denies its liability to pay interest under section 234D. 8.1 In view of the above and other grounds to be adduced at the time of hearing, the appellant prays that the orders of the lower income tax authorities be quashed. Or in the alternative (a) unabsorbed depreciation allowance of Rs. 43,27,639/- be not considered in quantifying the amount of deduction under section 10A; (b) unabsorbed depreciation allowance of Rs. 43,27,639/- be allowed to be set off against profits of the business of the eligible undertaking after claiming deduction under section 10A;

Page (c) (i) communication charges of Rs. 35,58,833/- be not reduced from export turnover; or in the alternative and without prejudice (ii) communication charges reduced from export turnover be also reduced from total turnover; (d) provision for warranty amounting to Rs. 97,89,000/- be held as an allowable deduction; (e) without prejudice, deduction under section 10A be allowed in respect of the additions made in the assessment order; (e) interest levied under section 234D be deleted. The appellant prays accordingly.”

2.2 The Ld.AO issued notice u/s. 143(2) on 25.09.2006. The assessment has been completed and the order u/s. 143(3) has been passed on 17.12.2007. The said order was received by the assessee on 28.12.2007. In the said order, following variations were made to the income returned. (i) set off of unabsorbed depreciation allowance against the business income has not been allowed. It has been stated that as per the order passed under section 143(3) for the Page 2004-05 dated 31.10.2006, there is no unabsorbed depreciation allowance to be carried forward. The Ld.AO made a reference to the order passed by the Ld.CIT(A) for assessment year 2004-05 in which the appeal filed by the assessee was dismissed.

(ii) Communication expenses of Rs. 35,58,833/- has been excluded from export turnover in the process of computation of deduction under section 10A. The contentions of the assessee that the said expenditure was not separately charged to customers in the invoices raised by the assessee and no amount was separately receivable from customers towards such expenditure, has not been accepted. It was submitted before the Ld.AO that, if communication expenses are to be reduced from export turnover, the same is also to be reduced from total turnover. However, the Ld.AO did not consider the submissions.

(iii) Provision made for contractual and warranty obligations amounting to Rs. 97,89,000/- has not been allowed as a deduction. It was held that, provision for warranty is an unascertained liability. No reasons have been given by the Ld.AO for the impugned conclusion. Also ignored that the said disallowance has resulted in enhancement of business profits leading to increase in deduction allowable to the assessee under section 10A.

2.3 The Ld.AO thus passed the assessment order making an addition in the hands of the assessee at Rs.1,59,40,469/-.

3.1 The Ld.CIT(A) dismissed the appeal by upholding the additions made in the assessment order. It is submitted that the Ld.CIT(A) did not consider the decision of Hon’ble Supreme Court in case of Rotork Controls India Pvt. Ltd. vs. CIT reported in (2009) 314 ITR 62 in respect of warranty provisions. The assessee submitted that in respect of the disallowance computed u/s. 10A the Ld.CIT(A) relied on the decision of Coordinate Bench of this Tribunal in case of M/s. Intellinet Technologies India Pvt. Ltd. vs. ITO.

6.1 The Ld.AR submitted that the authorities below have not appreciated the unabsorbed depreciation, allowance was to be allowed after computation of deduction u/s. 10A of the act. He

Page submitted that the profits of business which is eligible for deduction u/s. 10A are to be considered first.

6.2 He submitted that for A.Y. 2004-05 in assessee’s own case, this issue was considered in favour of assessee by holding that 10A deduction is to be done u/s. 28 to 44B of the act, separately which is independent of computation of profit and gains from eligible business and without factoring unabsorbed depreciation. He thus submitted that, this will result in a carry forward of unabsorbed depreciation to set off against the profits after allowing deduction u/s. 10A of the act. The Ld.AR further submitted that the decision relied by the Ld.CIT(A) of the Coordinate Bench of this Tribunal in case of Intellinet (supra) is no more a good law by virtue of the decision of Hon’ble Supreme Court in case of CIT vs. Yokogawa India Ltd. reported in (2017) 77 taxmann.com 41 wherein question no. (iv) and (v) has been answered on identical issue that reads as under: “(i) Whether Section 10A of the Act is beyond the purview of the computation mechanism of total income as defined under the Act. Consequently, is the income of a Section 10A unit required to be excluded before arriving at the gross total income of the assessee? (ii) Whether the phrase “total income” in Section 10A of the Act is akin and pari materia with the said expression as appearing in Section 2(45) of the Act? (iii) Whether even after the amendment made with effect from 1.04.2001, Section 10A of the Act continues to remain an exemption section and not a deduction section? (iv) Whether losses of other 10A units or non 10A Units can be set off against the profits of 10A units before deductions under section 10A are effected?”

Page 6.3 The Ld.AR submitted that the authorities below misdirected themselves to hold that brought forward losses and unabsorbed depreciation allowance of earlier years should be set off against current year's profits of business, before claiming deduction under section 10A.

6.4 He pointed out that, the income which is eligible for deduction under section 10A, does not form part of total income at all, and hence, it does not enter the normal computation mechanism so as to permit reduction of brought forward business and depreciation losses.

6.5 He submitted that, the profits of business which is eligible for deduction under section 10A should be of a particular year and is, therefore, not to be influenced by business losses and unabsorbed depreciation allowance of the current year as well as previous years. The eligible undertaking for the purpose of computing deduction under section 10A is to be computed for the relevant assessment year uninfluenced by the results of the other units in that year.

6.6 The Ld.DR on the contrary supported the orders passed by the authorities below by arguing that profits of business referred to in section 10A cannot be the profits computed under the head profits and gains of business or profession. The Ld.DR placed reliance on the decision of Hon'ble Karnataka High Court in case of CIT vs. Himatasingika Seide Ltd. reported in (2006) 286 ITR 255 in support of the above submissions.

6.7 We have perused the submissions advanced by both sides in the light of records placed before us.

6.7.1 It is noted that this issue has been squarely covered by the decision of Hon’ble Supreme Court in case of CIT vs. Yokogawa India Ltd. (supra). Hon’ble Supreme Court while considering the issues have observed and held as under: “13. The retention of Section 10A in Chapter III of the Act after the amendment made by the Finance Act, 2000 would be merely suggestive and not determinative of what is provided by the Section as amended, in contrast to what was provided by the un-amended Section. The true and correct purport and effect of the amended Section will have to be construed from the language used and not merely from the fact that it has been retained in Chapter III. The introduction of the word ‘deduction’ in Section 10A by the amendment, in the absence of any contrary material, and in view of the scope of the deductions contemplated by Section 10A as already discussed, it has to be understood that the Section embodies a clear enunciation of the legislative decision to alter its nature from one providing for exemption to one providing for deductions.

7.1. The Ld.AO reduced the expenditure incurred in foreign currency and communication expenses outside India. It is submitted that this issue is squarely covered by the decision of Hon'ble Karnataka High Court in case of CIT v. Mphasis Ltd reported in. (2016) 74 taxmann.com 274 , CIT v. Tata Elxsi Ltd reported in (2012) 17 taxmann.com 100. 7.2 The above decisions have been affirmed by Hon'ble Supreme Court in case of CIT v. HCLTechnologies Ltd. reported in (2008) 93 taxmann.com 33 by observing as under: “17. The similar nature of controversy, akin this case, arose before the Karnataka High Court in CIT v. Tata Elxsi Ltd. [2012] 204 Taxman 321/17/taxman.com 100/349 ITR 98. The issue before the Karnataka High Court was whether the Tribunal was correct in holding that while computing relief under section 10A of the IT Act, the amount of communication expenses should be excluded from the total turnover if the same are reduced from the export turnover? While giving the answer to the issue, the High Court, inter-alia, held that when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to it, the said ordinary meaning is to be in conformity with the context in which it is used. Hence, what is excluded from 'export turnover' must also be excluded from 'total turnover', since one of the components of 'total turnover' is export turnover. Any other interpretation would run counter to the legislative intent and would be impermissible.

18. XXXXXX 19. In the instant case, if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under section 10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature.

7.3. On the contrary, the Ld.DR placed reliance on orders passed by authorities below.

7.4. We note that this issue is no longer resintegra by virtue of the decisions passed by Hon'ble Supreme Court in case of CIT v. Mphasis Ltd. reported in (2020) 113 taxmann.com 74 held that since the services rendered were in respect of software development or production of computer software which are technical in nature, the said expenses incurred in foreign currency for providing technical services outside India, cannot be excluded from the export turnover.

7.5. Respectfully following the above, we direct the Ld.AO to compute the deduction u/s. 10A in accordance with the principles laid down by Hon'ble Supreme Court hereinabove. Accordingly, these grounds raised by assessee stands partly allowed.

Page 29/11/2017, the assessee submitted that, the provision for warranty was created based on the total number of warranty obligations outstanding as of 31-3-20005. It was also submitted that, the methodology of arriving at provision and the computation of provision for warranty based on a scientific method. The Ld.AO however rejected the submissions of assessee and denied the claim by observing that the provision for warranty has been disclosed as a contingent liability under AS 29, by assessee. Aggrieved by the order of the Ld.AO, appeal filed appeal before the Ld.CIT(A). The CIT(A) upheld the order of Ld.AO. Against the order of the Ld..CIT(A), the assessee raised the issue before this Tribunal.

8.2 We have perused the submissions advanced by both sides in light of records placed before us.

8.3 Admittedly, the assessee is engaged in manufacturing and trading of computer system and components thereof. In line with the practice followed by almost all companies in this industry, the cost of providing warranty services is factored into the selling price of the product.

8.4 It is the submissions of Ld.AR that, there are a number of factors affecting the determination of warranty provision to be set aside by the company at the time of sale, which also includes fixed or standing charges for which payments are accrued and payments have been made during the year. He submitted that Page the amount that is set-aside for meeting the warranty obligations of assessee is computed based on a scientific and technical estimate of the costs to be incurred in meeting these obligations over the period of the warranty. On the contrary, the Ld.DR relied on orders passed by authorities below.

8.5 We note that Hon'ble Karnataka High Court in Pr. CIT v. Lenovo India (P.) Ltd. reported in (2021) 127 taxmann.com 487, dealt with identical issue where in the Hon'ble Court held against the revenue and in favour of the assessee. The Ld.AR also relied on decision of Hon’ble Karnataka High Court in case of CIT Vs. M/s.M PAct Technology Services Pvt.Ltd in dated 11/07/2018. The relevant extract of the orders passed by the Hon'ble Court in Pr. CIT v. Lenovo India (P.) Ltd.(supra) is as under : “The Tribunal has rightly relied on the decision rendered by the Supreme Court in RotorkControls India Pvt. Ltd. (supra). Similar view has been taken by a division bench of this court in IBM Ltd. (supra). Therefore, the first and second substantial questions of law are answered against the revenue and in favour of the assessee.”

8.6 We notice that the assessee had placed reliance on the decision rendered by Hon'ble Supreme Court in the case of RotorkControls India (P.) Ltd. reported in (2009) 180 Taxmann 422 . The decision rendered by Hon'ble Delhi High Court in the case of CIT v. Goetze (India) Ltd. (2010) 8 taxmann.com 303 also in on the same issue. The contention of the assessee is that it is following a scientific method for determining the amount to be provided for warranty liability. We notice that the AO has rejected

Page the claim without finding fault with the method adopted by the assessee to determine the quantum of provision. This is not justified. When the assessee is following a scientific method consistently which also approximately corresponds with the actual expenditure incurred subsequently, then there is no reason to disallow the provision for warranty as held by Hon'ble Supreme Court in the case of Rotork Controls India (P.) Ltd. (supra). Accordingly, following the decision rendered by the Coordinate Bench in the assessee's own case for assessment year 2011-12, we restore this issue to the file of the Ld.AO for examining it afresh. We direct the Ld.AO to compute the deduction u/s. 10A as directed hereinabove. In the result, the appeal filed by the assessee stands allowed as indicated hereinabove. Order pronounced in the open court on 14th May, 2024.