THE COMMISSIONER OF INCOME TAX vs. M/S WIPRO LTD

IN THE HIGH COURT OF KARNATAKA AT BENGALURU

DATED THIS THE 25TH DAY OF MARCH 2015

PRESENT

THE HON’BLE MR. JUSTICE N.KUMAR AND THE HON’BLE MR. JUSTICE B.SREENIVASE GOWDA I.T.A.No.879/2008 c/w I.T.A.Nos.882/2008, 907/2008, 909/2008, 880/2008, 881/2008, 904/2008, 905/2008, 108/2009, 109/2009, 210/2009, 211/2009, 209/2009, 333/2009, 334/2009 & 363/2009 In ITA No.879/2008: BETWEEN :

M/s Wipro Limited 76R & 80P, Doddakannelli, Sarjapur Road, Bangalore - 560 035 Rep. by Sri P.V.Srinivasan Authorised Signatory

...APPELLANT

(By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.)

AND :

The Deputy Commissioner of Income Tax Central Circle 1 (3), 3rd Floor, Central Revenue Buildings, Queens Road, Bangalore 560 001.

…RESPONDENT

(By Sri E.R.Indrakumar, Senior Counsel for Sri K.V.Aravind, Adv.)

- 2 - This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 30.05.2008 passed in ITA No.468/BNG/2006, for the assessment year 2001-2002, praying to: I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.468/BNG/2006, dated 30.05.2008 in the interest of justice. In ITA No.882/2008: BETWEEN :

M/s Wipro Limited 76R & 80P, Doddakannelli, Sarjapur Road, Bangalore - 560 035 Rep. by Sri P.V.Srinivasan Authorised Signatory

...APPELLANT

(By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.)

AND :

The Deputy Commissioner of Income Tax Central Circle 1 (3), 3rd Floor, Central Revenue Buildings, Queens Road, Bangalore 560 001.

…RESPONDENT

(By Sri E.R.Indrakumar, Senior Counsel for Sri K.V.Aravind, Adv.)

This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 30.05.2008 passed in ITA No.426(BANG)/2006, for the assessment year 2001-2002, praying to I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.426(BANG)/2006, Dated 30-05-2008 in the interest of justice.

- 3 - In ITA No.907/2008: BETWEEN :

...APPELLANTS

(By Sri E.R.Indrakumar, Senior Counsel for Sri K.V.Aravind, Adv.)

AND :

M/s Wipro Ltd., Doddakannelli, Sarjapur Road Bangalore

…RESPONDENT

(By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.)

This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 30.05.2008 passed in Ita.No.468/BANG/2006, for the assessment year 2001-02, praying to I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.468/BANG/2006, Dated 30.05.2008 confirming the order of the Appellate Commissioner and confirm the order passed by the Deputy Commissioner of Income Tax, Central Circle-1(3), Bangalore, in the interest of justice and equity.

- 4 - In ITA No.909/2008: BETWEEN :

...APPELLANTS

(By Sri E.R.Indrakumar, Senior Counsel for Sri K.V.Aravind, Adv.)

AND :

M/s Wipro Ltd., Doddakannelli, Sarjapur Road Bangalore.

…RESPONDENT

(By Sri Venkataraman, Senior counsel for Dr.R.B.Krishna, Adv.)

This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 30.05.2008 passed in ITA.No.426/BANG/2006, for the assessment year 2001-02, praying to I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.426/BANG/2006, dated 30.5.2008 confirming the order of the Appellate Commissioner and confirm the order passed by the Deputy Commissioner of Income Tax, Central Circle-1(3), Bangalore in the interest of justice and equity.

- 5 - In ITA No.880/2008: BETWEEN :

M/s Wipro Limited 76R & 80P, Doddakannelli, Sarjapur Road, Bangalore - 560 035 Rep. by Sri P.V.Srinivasan Authorised Signatory

...APPELLANT

(By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.)

AND :

The Deputy Commissioner of Income Tax Central Circle 1 (3), 3rd Floor, Central Revenue Buildings, Queens Road, Bangalore - 560 001.

…RESPONDENT

(By Sri E.R.Indrakumar, Senior Counsel for Sri K.V.Aravind, Adv.)

This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 30.05.2008 passed in ITA No.469/BNG/2006, for the assessment year 2002-2003, praying to I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.469/BNG/2006, Dated 30.05.2008 in the interest of justice.

- 6 - In ITA No.881/2008: BETWEEN :

M/s Wipro Limited 76R & 80P, Doddakannelli, Sarjapur Road, Bangalore 560 035, Rep. by Sri P.V.Srinivasan authorised signatory.

...APPELLANT

(By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.)

AND :

The Deputy Commissioner of Income Tax Central Circle 1 (3), 3rd Floor, Central Revenue Buildings, Queens Road, Bangalore 560 001.

…RESPONDENT

(By Sri E.R.Indrakumar, Senior Counsel for Sri K.V.Aravind, Adv.)

This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 30.05.2008 passed in ITA No.427/BANG/2006, for the assessment year 2002-2003, praying to I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.427/Bng/2006, Dated 30-05-2008 in the interest of justice. In ITA No.904/2008: BETWEEN :

- 7 - Queens Road, Bangalore

...APPELLANTS

(By Sri E.R.Indrakumar, Senior Counsel for Sri K.V.Aravind, Adv.)

AND :

M/s Wipro Ltd., Doddakannelli, Sarjapur Road Bangalore.

…RESPONDENT

(By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.)

This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 30.05.2008 passed in ITA No.469/BNG/2006, for the assessment year 2002-03, praying to I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.469/BNG/2006, Dated 30.05.2008 confirming the order of the Appellate Commissioner and confirm the order passed by the Deputy Commissioner of Income Tax, Central Circle-1(3), Bangalore, in the interest of justice and equity. In ITA No.905/2008: BETWEEN :

- 8 - 2. The Deputy Commissioner of Income Tax Central Circle 1(3), C.R.Building, Queens Road, Bangalore.

...APPELLANTS

(By Sri E.R.Indrakumar, Senior Counsel for Sri K.V.Aravind, Adv.)

AND :

M/s Wipro Ltd., Doddakannelli, Sarjapur Road Bangalore.

…RESPONDENT

(By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.)

This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 30.05.2008 passed in ITA No.427/BNG/2006, for the assessment year 2002-2003, praying to I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.427/BNG/2006, Dated 30-05-2008 confirming the order passed by the Deputy Commissioner of Income Tax, Central Circle-1(3), Bangalore, in the interest of justice and equity. In ITA No.108/2009: BETWEEN : M/s Wipro Limited 76R & 80P, Doddakannelli Sarjapur Road, Bangalore 560 035 Rep. by P.V.Srinivasan as authorised signatory

...APPELLANT

(By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.)

- 9 -

AND :

The Deputy Commissioner of Income Tax Central Circle 1(3), 3rd Floor Central Revenue Buildings Queens Road, Bangalore 560 001.

…RESPONDENT

(By Sri E.R.Indrakumar, Senior Counsel for Sri K.V.Aravind, Adv.)

This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 31.10.2008 passed in ITA No.817/BANG/2007, for the assessment year 2003-2004, praying to I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.817/BANG/2007, dated 31/10/2008 in the interest of justice. In ITA No.109/2009: BETWEEN :

M/s Wipro Limited 76R & 80P, Doddakannelli Sarjapur Road, Bangalore 560 035 Rep. by its P.V.Srinivasan as authorised signatory

...APPELLANT

(By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.)

AND :

The Deputy Commissioner of Income Tax, Central Circle (3), 3rd Floor,

- 10 - Central Revenue Building Queens Road, Bangalore 560001.

…RESPONDENT

(By Sri E.R.Indrakumar, Senior Counsel for Sri K.V.Aravind, Adv.) . . . . This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 31.10.2008 passed in ITA No.624/BANG/2007, for the assessment year 2003-2004, praying to I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.624/BANG/2007, Dated 31/10/2008 in the interest of justice. In ITA No.210/2009: BETWEEN :

...APPELLANTS

(By Sri E.R.Indrakumar, Senior Counsel for Sri E.Sanmathi, Adv.)

AND :

M/s Wipro Ltd., Doddakannelli, Sarjapur Road, Bangalore.

…RESPONDENT

(By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.)

- 11 -

This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 31.10.2008 passed in ITA No.624/BANG/2007, for the assessment year 2003-2004, praying to I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.624/BANG/2007, Dated 31/10/2008 in the interest of justice. In ITA No.211/2009: BETWEEN :

(By Sri E.R.Indrakumar, Senior Counsel for Sri E.Sanmathi, Adv.)

AND :

M/s Wipro Ltd., Doddakanneli, Sarjapur Road, Bangalore.

…RESPONDENT

(By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.)

This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 31.10.2008 passed in ITA.No.817/BANG/2007, for the assessment year 2003-04, praying to I) Formulate the substantial questions of law

- 12 - stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.817/BANG/2007, Dated 31-10-2008 and confirm the order passed by the Deputy Commissioner of Income Tax, Central Circle-1(3), Bangalore, in the interest of justice and equity. In ITA No.209/2009: BETWEEN :

...APPELLANTS

(By Sri E.R.Indrakumar, Senior Counsel for Sri E.Sanmathi, Adv.)

AND :

M/s Wipro Ltd., Doddakanneli, Sarjapur Road, Bangalore.

…RESPONDENT

(By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.)

This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 31.10.2008 passed in ITA.No.1178/BANG/2007, for the assessment year 2003-04, praying to I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.1178/BANG/2007, Dated 31-10-2008 and confirm the order of the Appellate Commissioner confirming the order passed by the Deputy

- 13 - Commissioner of Income Tax, Central Circle-1(3), Bangalore, in the interest of justice and equity. In ITA No.333/2009: BETWEEN :

M/s Wipro Limited Rep. by Authorised Signatory P.V.Srinivasan, 76R & 80P, Doddakannelli, Sarjapur Road, Bangalore-560035. ...APPELLANT

(By Sri E.R.Indrakumar, Senior Counsel for Sri E.Sanmathi, Adv.)

AND :

The Deputy Commissioner of Income Tax, Central Circle 1(3), 3rd Floor, Central Revenue Buildings, Queens Road, Bangalore-560001.

…RESPONDENT

(By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.)

This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 30.01.2009 passed in C.O.No.77/BNG/2007, for the assessment year 2004-2005, praying to I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in C.O.No.77/BNG/2007, dated 30-01-2009 in the interest of justice and equity.

- 14 - In ITA No.334/2009: BETWEEN :

M/s Wipro Limited Rep. by Authorised Signatory P.V.Srinivasan, 76R & 80P, Doddakannelli, Sarjapur Road, Bangalore-560035. ...APPELLANT

(By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.)

AND :

The Deputy Commissioner of Income Tax Central Circle 1(3), 3rd Floor, Central Revenue Buildings, Queens Road, Bangalore-560001.

…RESPONDENT

(By Sri E.R.Indrakumar, Senior Counsel for Sri K.V.Aravind, Adv.)

This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 30.01.2009 passed in ITA No.1072/BNG/2007, for the assessment year 2004-2005, praying to I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.1072/BNG/2007, Dated 30-01-2009 in the interest of justice and equity. In ITA No.363/2009: BETWEEN :

- 15 - Bangalore

...APPELLANTS

(By Sri E.R.Indrakumar, Senior Counsel for Sri K.V.Aravind, Adv.)

AND :

M/s Wipro Ltd., Doddakanneli, Sarjapur Road Bangalore.

…RESPONDENT

(By Sri Venkataraman, Senior Counsel for Dr.R.B.Krishna, Adv.)

This I.T.A. is filed under Section 260-A of I.T.Act, 1961 arising out of order dated 30.01.2009 passed in ITA No.1072/BNG/2007, for the assessment year 2004-2005, praying to I) Formulate the substantial questions of law stated therein, II) Allow the appeal and set aside the order passed by the ITAT Bangalore in ITA No.1072/BNG/2007, dated 30-01-2009 confirming the order of the Appellate Commissioner and confirm the order passed by the Deputy Commissioner of Income Tax, Central Circle – 1(3), Bangalore, in the interest of justice and equity.

These I.T.As coming on for hearing, this day, N.Kumar J., delivered the following: J U D G M E N T

These batch of appeals filed by the assessee and the revenue/department arise out of the orders passed by the

- 16 - Bangalore Bench of the Income Tax Appellate Tribunal in the case of the assessee-company, M/s Wipro Limited for the assessment years 2001-02, 2002-03, 2003-04 and 2004-05. The assessee is the appellant in ITA Nos. 879/2008, 880/2008, 881/2008, 882/2008, 108/2009, 109/2009, 333/2009 and 334/2009. The revenue is the appellant in ITA Nos. 907/2008, 909/2008, 904/2008, 905/2008, 209/2009, 210/2009, 211/2009 and 363/2009.

- 17 - business unit. The accounts of the assessee are compiled on the basis of consolidation of all accounts maintained at the business unit levels.

Assessment Year 2001-02 - ITA Nos. 879 & 882/2008; 907 & 909/2008

The appellant filed its return of income for the assessment year 2001-02 on 30.10.2001 disclosing a total income of Rs.135,51,15,000/- after claiming deduction under Section 10A of the Income Tax Act (for short, hereinafter referred to as the ‘Act’) to the extent of Rs.620,17,27,569/-.

- 18 - 19.02.2002 and the income was determined at Rs.114,72,43,817/- u/s 143(1) read with Section 154. Notice u/s 142(1) was issued on 21.12.2001 with a questionnaire. Further notices u/s 142 (1) were issued on various dates beginning from 7.10.2003 to 8.3.2004. The assessee- company filed written replies along with enclosures from time to time. The return furnished on 30.10.2001 was processed u/s 143(3) of the I.T.Act on 24.03.2004 and order was passed after making certain allowances/ disallowances. The total income of the assessee-company was determined at Rs.598,69,89,110/- for assessment year 2001-02. The demand, after making adjustments for interest, advance tax and tax refunded, was quantified at Rs.261,45,68,657/-.

- 19 -

Assessment Year – 2002-03 - ITA Nos. 880 & 881/2008; 904 & 905/2008

- 20 -

Assessment Year 2003-04 – ITA Nos. 108 & 109/2009; 210 & 211/2009

- 21 - and notice u/s 143(2) was issued on 15.07.2004. A questionnaire was issued on 16.8.2005 calling for certain details and the compliance was fixed on 22.8.2005. The assessee-company also had international transactions with Associated Enterprises, which were referred to the Transfer Pricing Officer for determination of arms’ length price, who passed an order u/s 92CA. Assessment u/s 143(3) was completed and orders dated 28.03.2006 for assessment year 2003-04 was passed after making certain allowances/ disallowances, re-computation of deductions u/s 10A and 80-IB leading to a taxable income of Rs.740,10,34,452/.

Assessment Year 2004-05 – ITA No. 333 & 334/2009; 363/2009

- 22 -

- 23 - making certain allowances/ disallowances, re-computation of deductions u/s 10A and 80-IB leading to a taxable income of Rs.846,77,24,943/-.

- 24 -

(d) in ITA No. 108/2009 (Assessee’s appeal)]

“Whether the Tribunal was right in holding that credit for income tax paid in a country outside India in relation to income eligible for deduction under section 10A would not be available under section 90(1)(a)?”

[Question of law No. 18 in ITA Nos. 210 & 211/2009 (Department’s Appeal)]

- 25 -

“Whether the appellate authorities were correct in reversing the finding of the AO that the credit for taxes paid in foreign countries being income which falls u/s 10A of the Act does not fall part of the total income to the extent of 90% for which deduction is allowable as it falls under Chapter III and does not therefore partake the nature of total income chargeable to tax as per provisions of section 4 of the Act and therefore not entitled to?”

- 26 - countries. The assessee being an Indian Company as defined in Section 2(26) of the Act and is a tax resident in India in terms of Section 6 of the Act, it is, therefore, liable to tax in India on its worldwide income including the profits attributable to its Permanent Establishments in foreign countries and also the incomes which are subjected to withholding tax in foreign countries.

- 27 - was granted by the CIT(A) which the Department has accepted. Since the claim for foreign tax credit is an entitlement like any other pre-paid tax, no revised return as contemplated under Section 139(5) was required. The limitations of the domestic tax law, if any, would also not apply where relief is to be allowed as per the provisions of DTAA.

- 28 - 17. Thereafter, the Assessing Authority proceeded to decide the claim on merits also. Insofar as assessment year 2001-02 is concerned, as the assessee has not filed any detailed break-up of the income being taxed in India and other countries, he has held that he is not in a position to allow tax rebate at this juncture. However, in the assessment order passed for the assessment year 2002-03, where break-up figures were furnished, he has discussed this question at length. After considering the said break-up figures, the assessing authority held that the assessee’s claim of foreign tax credit is on the ground that the entire earnings in respect of claim under Section 10A has been included in computing the total income. Section 10A which is appearing under Chapter III refers to “incomes which do not form part of total income”. It is, therefore, clear in the first instance income falling under Section 10A did not form part of total income of the assessee in India. Since Section 10A falls under Chapter III, it does not therefore partake of the nature of total income chargeable to tax as per the

- 29 - provisions of Section 4 of the Act. In the second instance, no tax was paid on this income. The credit is being claimed under the provisions of Section 90, which is applicable for the grant of relief in respect of income on which have been paid both income tax under this Act and Income Tax in the foreign country. The issue of credit under Section 90 clearly does not arise. Then, after referring to agreements with various countries and after referring to the judgments on which reliance was placed it was held the claim made by the assessee for foreign tax credit is not admissible. The assessee has also made a claim for tax relief against the State Taxes paid in USA and Canada. A perusal of the DTAA with USA and Canada shows that the claim is admissible only for the taxes paid under the Income Tax Act in India and Federal tax in USA and Canada. Therefore, the claim for relief for the State Taxes paid is not admissible. The assessee’s claim is only admissible for the income for which deduction has been rejected under Section10-A i.e.,

- 30 - for the unit at Bangalore and a proportionate claim for the foreign tax payment is being considered.

- 31 - head profit and gains of business or profession. In respect of the income of the unit qualifying for deduction under Section 10-A, income tax is neither paid nor incurred. The Apex Court in the case of CIT –vs- Williamson Financial Services & Ors. (297 ITR 17) dealing with computation of deduction under Section 80HHC in respect of profits from export of tea held that Section 10 groups in one place various incomes which are exempt from tax. In respect of incomes on which deductions under Chapter VI-A are allowed, such incomes are wholly or partly tax free incomes. Section 10-A provides deduction out of the total income and it is not the income which is exempt from tax. Hence, the deduction which is allowed under Section 10-A is an item of income on which tax is not paid. After referring to the Judgment of the Madras High Court in the case of CIT –vs- K.S.Vaidyanathan (1985) 153 ITR 11(FB) under the Wealth Tax Act, it was held credit for income tax paid in other country in relation to income under Section 10-A will not be available under Section 90(1)(a). Under Section 90(1)(b), the Central

- 32 - Government may enter into an agreement with the Government of any country outside India for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country. For application of Section 90(1)(b), one is required to go with the DTAA. Though the assessing officer has discussed this issue in detail in his order but the CIT(A) has not considered the arguments advanced by the assessing officer for not allowing the tax credit. Therefore, the Tribunal felt that the issue requires to be reconsidered by the CIT(A) in view of the facts and arguments considered by the assessing officer in his order. Hence, the issue was restored back to the file of the CIT(A).

- 33 -

- 34 - of Section 4 of the Act. However, subject to the assessee satisfying the conditions prescribed income under Section 10-A is exempted from making such payment. Once the assessee is made to pay tax on such exempted income in the other contracting State then Section 90(1)(a)(ii) enables him to claim credit of the tax paid in the contracting country. Though this provision 90(1)(a)(ii) came on the statute book from 01.04.2004, it is clarificatory in nature. As per Section 90(2) of the Act, the assessee-company was always entitled to the said benefit as the provisions of the agreement was more beneficial than the statutory provisions. India has entered into DTAA with various countries. The expression used in some of the agreements is “subjected to tax”. The other expression used is “chargeable to tax” . Therefore, the benefit to which the assessee is entitled to is dependant on the expressions used in these contracts in the background of Section 90(1)(a)(ii). He further submitted that in cases where income is subjected to tax, there is no difficulty. The entire amount subjected to tax is given credit

- 35 - which is known as “ordinary tax credit”. Further, in the case of the agreements where expression used is subjected to tax on income derived, if the entire export income is not exempted from payment of tax, to the extent the income is subjected to tax, the assessee would be entitled to foreign tax credit. He further pointed out that in the instant case the tax paid by the assessee towards the State tax in USA and Canada has been disallowed on the ground that the DTAA with USA and Canada shows that the claim is admissible only for the taxes paid under Income Tax Act in India and Federal tax in USA and Canada. In coming to the said conclusion the authorities have failed to notice Section 91 of the Act. Statutorily the assessee would be entitled to deduction from the Indian Income Tax payable by him on a sum calculated on such doubly taxed income at the Indian rate of tax or rate of tax of the said country whichever is lower or at the Indian rate of tax if both the rates are equal. The word “country” has been explained in Explanation (iv) where it provides that the expression “Income Tax” in

- 36 - relation to any country includes any excess profit tax or business profit tax charged on the profits by the Government of any part of that country or a local authority in that country. Lastly, it was contended that if for any reason the foreign tax relief is not given either under Section 90(1)(a)(i) or (ii) or 91, then the said amount of tax paid in the contracting country is liable for deduction under Section 37 r/w Section 40(a)(ii) r/w Explanation 1 of the Act. Therefore, he submits that seen from any angle the assessee is entitled to the benefit of credit of tax paid in the contracting country.

- 37 - forth the claim in the return he cannot be denied this benefit. Decision pertaining to mandatory filing of a revised returns is with reference to claim for deductions and not with reference to tax relief/credit for prepaid taxes.

- 38 - entire profit under Section 10A is not exempted as only that part of profit which pertains to export turnover is exempted under the Act. The foreign tax credit cannot be permitted on profit pertaining to domestic turnover because the domestic profit of Section 10A has not suffered double taxation. He also pointed out that Section 14A of the Act categorically states no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act and therefore, he submits no case for interference with the judgment of the Tribunal is made out. Section 90(1)(a)(ii) came into effect from 01.04.2004. It is not retrospective in operation nor it is clarificatory as sought to be made out and therefore, at any rate the assessee is not entitled to any benefit under this provision for the assessment years prior to 01.04.2004. Further, he contended that tax paid or tax payable cannot be deducted under Section 37 of the Act as is clear from the opening words of Section 40a(ii) of the Act. He also contended that the arguments which were canvassed

- 39 - before this Court were not canvassed before the lower authorities and therefore, they had no opportunity to consider the same and therefore on that score those orders cannot be found fault with. As the matter has already been remanded to the CIT(A), it is open to the assessee to urge all these grounds before the appellate authorities and it is not necessary for this Court to decide these legal issues in this appeal.

- 40 - “90. Agreement with foreign countries.-(1) The Central Government may enter into an agreement with the Government of any country outside India- (a) for the granting of relief in respect of income on which have been paid both income-tax under this Act and income-tax in that country; or…”

- 41 - It is proposed to substitute clause (a) of sub-section (1) of the said section to provide that the Central Government may enter into an agreement with the Government of any country outside India for the granting of relief, inter alia, in respect of income-tax chargeable under the Income-tax Act or under the corresponding law in force in that country to promote mutual economic relations, trade and investment.”

Under the existing section 90, the Central Government may enter into an agreement with the Government of any country outside India for granting of relief in respect of income on which have been paid both income-tax under the Income-tax Act and income-tax in that country, or for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, etc

- 42 -

In order to encourage international trade and commerce, it is proposed to insert a new clause in sub-section (1) of Section 90 so as to provide that the Central Government may also enter into an agreement with the Government of any country outside India, for granting relief in respect of income-tax chargeable under this Act or under the corresponding law in that country to promote mutual economic relations, trade and investment.”

The amended Section 90 reads as under :- “Agreement with foreign countries or specified territories. 90 (1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India, – (a) for the granting of relief in respect of – (i) income on which have been paid both income tax under this Act and income-tax in that country or specified territory, as the case may be, or (ii) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be,

- 43 - to promote mutual economic relations, trade and investment, or (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be, or (c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or (d) for recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory, as the case may be, and may, by notification in the Official Gaxette, make such provisions as may be necessary for implementing the agreement. (2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies,

- 44 - the provisions of this Act shall apply to the extent they are more beneficial to that assessee. (2A) Notwithstanding anything contained in sub- section (2), the provisions of Chapter X-A of the Act shall apply to the assessee even if such provisions are not beneficial to him. (3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf.”

- 45 - force in that country. Clauses (c) and (d) essentially deals with the agreements made for the exchange of information, investigation of cases and recovery of income tax. With effect from 1.4.2004, clause (a)(ii) was substituted to provide for entering into an agreement for granting relief in respect of income tax chargeable under this Act and under corresponding law in force in that country, to promote mutual economic relations, trade and investment. With this amendment the power of the Central Government has been greatly widened and it can now enter into agreement not only for avoidance of double taxation, but also for granting relief for income exempt from taxation.

- 46 - 32. Prior to the amendment, the relief was granted in respect of income on which the income tax is paid under the Income Tax Act in the contracting country. Therefore to get the benefit of the said provision, payment of income tax in both the countries was sine qua non. However, by the amendment made by the Finance Act 2003, the benefit of granting the relief was extended to even in respect of income tax chargeable under the Act. Therefore, the payment of income tax in both jurisdictions is not sine qua non any more for granting the relief. This provision was introduced with the object of promoting mutual economic relations, trade and investment. In other words, it was a policy of the Government.

- 47 - Clause (b) for the avoidance of double taxation; the assessee must show that the identical income has been doubly taxed and that he has paid tax both in India and in the foreign country on the same income. Section 91 makes it clear that if a person who is residing in India has paid tax in any country with which, there is no agreement under Section 90 for the relief or avoidance of double taxation, income tax if deducted or otherwise paid as per law in force in that Country, then he shall be entitled to the deduction from the Indian Income Tax payable by him in a sum computed on such doubly taxed income, at the Indian rate of tax or the rate of tax of the said country, whichever is lower or the Indian rate of tax, if both the rates are equal.

- 48 - over the general provisions contained in the Income Tax Act, 1961. In fact the Double Taxation Avoidance Agreements which have been entered into by the Central Government under Section 90 of the Income Tax Act, 1961, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective country except where provisions to the contrary have been made in the agreement. Thus where a Double Taxation Avoidance Agreement provided for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income Tax Act. Where there is no specific provision in the agreement, it is the basic law i.e., Income tax Act that will govern the taxation of income.”

- 49 - 36. The Apex Court had an occasion to go into the validity of the agreements entered into under these provisions and their enforceability in the case of UNION OF INDIA AND ANOTHER VS. AZADI BACHAO ANDOLAN AND ANOTHER reported in 263 ITR 706. Dealing with the purpose of provisions for avoidance of double taxation, the Supreme Court at page 721 held as under :- “Every country seeks to tax the income generated within its territory on the basis of one or more connecting factors such as location of the source, residence of the taxable entity, maintenance of a permanent establishment, and so on. A country might choose to emphasise one or the other of the aforesaid factors for exercising fiscal jurisdiction to tax the entity. Depending on which of the factors is considered to be the connecting factor in different countries, the same income of the same entity might become liable to taxation in different countries. This would give rise to harsh consequences and impair economic development. In order to avoid such an anomalous and incongruous situation, the Governments of different countries enter into bilateral treaties,

- 50 - Conventions or agreements for granting relief against double taxation. Such treaties, conventions or agreements are called double taxation avoidance treaties, conventions or agreements.

The power of entering into a treaty is an inherent part of sovereign power of the State. By Article 73, subject to the provisions of the Constitution, the executive power of the Union extends to the matters with respect to which the Parliament has power to make laws. Our Constitution makes no provision making legislation a condition for the entry into an international treaty in time either of war or peace. The executive power of the Union is vested in the President and is exercisable in accordance with the Constitution. The Executive is qua the State competent to represent the State in all matters international and may by agreement, convention or treaty incur obligations which in international law are binding upon the State. But the obligations arising under the agreement or treaties are not by their own force binding upon Indian nationals. The power to legislate in respect of treaties lies with the Parliament under entries 10 and 14 of List I of the

- 51 - Seventh Schedule. But making of law under that authority is necessary when the treaty or agreement operates to restrict the rights of the citizens or others or modifies the law of the State. If the rights of the citizens or others which are justiciable are not affected, no legislative measure is needed to give effect to the agreement or treaty.

When it comes to fiscal treaties dealing with double taxation avoidance, different countries have varying procedures. In the United States such a treaty becomes a part of municipal law upon ratification by the Senate. In the United Kingdom such a treaty would have to be endorsed by an order made by the Queen in Council. Since in India such a treaty would have to be translated into an Act of Parliament, a procedure which would be time consuming and cumbersome, a special procedure was evolved by enacting section 90 of the Act.”

- 52 - Firstly, Section 90 (1)(b) of the Act speaks about avoidance of double taxation i.e., Central Government may enter into an agreement with the Government of any country for the avoidance of double taxation of income under this Act and under the corresponding law in force in other country i.e., when tax is payable on income under this Act as well as under the corresponding law in that country they could agree to tax in one country. This happens even before payment of any tax. By virtue of such agreement, tax is paid only in one country, that is how the benefit of double taxation relief by way of avoidance is granted to the assessee in both the countries.

- 53 - relief by way of credit in respect of the tax paid in the foreign jurisdiction.

- 54 - other country could be given credit to the assessee. Thus for the payment of income tax in the foreign jurisdiction, the assessee gets the benefit of its credit in this country.

- 55 - only the assessee can have the benefit of tax credit in respect of the tax paid in foreign jurisdiction. In respect of exemption under Section 10A, the income derived is not included in the total income. It is not charged to income tax. Therefore, Section 90 of the Act has no application at all.

Sub-section (2) of Section 4 provides, “In respect of income chargeable under sub- section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act”.

- 56 -

Section 2(45) of the Act defines total income as under:- “Total income” means the total amount of income referred to in section 5, computed in the manner laid down in this Act.

Section 5 deals with the scope of total income. It reads as under :- (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived, which - (a) is received or is deemed to be received in India in such year by or on behalf of such person;or (b) accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) accrues or arises to him outside India during such year”.

The proviso speaks about a person not ordinarily resident.

- 57 - 43. Chapter III deals with Incomes which do not form part of Total Income. One such income which does not form part of a total income is contained in Section 10A; i.e. income of newly established undertakings in free trade zone, etc. Section 10A(1) provides, “Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee.”

- 58 - assessee is having several undertakings, one of which falls under Section 10A, the assessee’s entire income from all the undertakings is computed to arrive at the total income. However, the income from such undertaking falling under Section 10A has to be deducted from the total income.

- 59 - “A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a double taxation avoidance agreement. When that happens, the provisions of such an agreement, with respect to cases to which where they apply, would operate even if inconsistent with the provisions of the Income-tax Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the legislature to make a departure from the general principle of chargeability to tax under section 4 and the general principal of ascertainment of total income under section 5 of the Act, then there was no purpose in making those sections “subject to the provisions” of the Act. The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under section 90 towards implementation of the terms of the DTAAs which would automatically override the provisions of the Income-tax Act in the matter of ascertainment of chargeability to income tax and ascertainment of

- 60 - total income, to the extent of inconsistency with the terms of Double Taxation Avoidance Contract.

- 61 - Section 5 and computed in the manner laid down in the IT Act. Section 5 defines the scope of total income and it is subject to the provisions of IT Act. Section 14 provides that “save as otherwise provided by the IT Act, all income shall, for the purpose of charge of income-tax and the computation of total income, be classified under the following heads of income.” Therefore, the total income in its strict sense requires computation for the purpose of levy of tax. The computation of total income begins only with Chapter IV and as Section 10A is covered in Chapter III, the phrase “total income” used in S.10A cannot be understood in the same sense as in S.2(45).

- 62 - the same. The computation of relief as provided in S.10A(4) is also with reference to the undertaking. A business might have several undertakings and S.28 does not envisage computation of income of each such undertaking. In other words, the profits of the business of the undertaking cannot be computed in isolation. The profits are computed under the head “profits and gains of business or profession”, as under the above head, the income from business as a whole has to be computed. The phrase “total income” used in Section 10A(1) is, therefore, to be understood as the total income of the STP unit. This is clear from the first proviso to Section 10A(1) which makes a reference to the total income of the undertaking and not to the total income of assessee. The definition of any term given in Section 2 will apply only when the context does not otherwise require. The placement, language and setting of Section 10A cannot mean the total income computed in accordance with the provisions of the Act. Instead, such a phrase, in the context of Section 10A, means profits and gains of the STP undertaking as understood in its commercial sense.

- 63 -

- 64 - at the earliest stage of business income computation almost blurs the difference between the commercial profits and tax profits.

- 65 - and gains of business or profession”. Under the above head, the income from business as a whole has to be computed. The phrase “total income” used in section 10A(1) is, therefore, to be understood as the total income of the STP unit. This is clear from the first proviso to section 10A(1) which makes a reference to the total income of the undertaking and not to the total income of the assessee. The definition of any term given in section 2 will apply only when the context does not otherwise require. The placement, language and setting of section 10A cannot mean the total income computed in accordance with the provisions of the Act. Instead, such a phrase in the context of section 10A, means profits and gains of the STP undertaking as understood in its commercial sense.

- 66 - incomes which do not form part of total income. If Parliament intended that the relief under section 10A should be by way of deduction in the normal course of computation of total income, it could have placed the same in Chapter VI- A which houses the sections like 80HHC, 80-IA, etc. Parliament was aware of the various restrictions and limitations of provisions like section 80A and section 80AB which is in Chapter VI-A which do not appear in Chapter III. The fact that even after its recast, the relief has been retained in Chapter III indicates that the intention of Parliament is that it has to be regarded as an exemption and not a deduction. The act of Parliament in consciously retaining this section in Chapter III indicates its intention that the nature of relief continues to be an exemption. Chapter III deals with the incomes forming part of the total income on which no income-tax is payable. These are the incomes which are exempted from charge, but are included in the total income of the assessee. Parliament, despite

- 67 - being conversant with the implications of this Chapter, has consciously chosen to retain section 10A in Chapter III.

- 68 - 52. Section 10A (1) speaks of “deduction”. The deduction is of profits and gains for a period of ten consecutive assessment years. The said deduction is from the total income of the assessee. Therefore, the total income before allowing the said deduction includes the profits and gains from the business referred to in Section 10A(1). Section 5 of the Act explains the scope of total income to mean all income from whatsoever source derived. Section 4 of the Act charges this total income. However, Section 10A (1) provides that, subject to the provisions of the said Section, profits and gains derived by an undertaking referred to in that Section shall be allowed as deduction from the total income of the assessee. Therefore, by virtue of the aforesaid statutory provision namely Section 10A of the Act, the income of the assessee from exports in respect of the said unit is exempted from payment of income tax. The very fact that it is exempted from payment of tax means but for that exemption such income is chargeable to tax. This relief under Section 10A is in the nature of exemption although termed as

- 69 - deduction. But for this exemption, the said income namely profits and gains derived by an undertaking, is chargeable to tax under the Act. The said exemption is only for a period of ten years. After the expiry of the said ten years the said income is taxable. When such exemption is given under the Act, but the said income is taxed in foreign jurisdiction, there is no relief to the assessee at all. Therefore, to promote mutual economic relations, trade and investment, the Act was amended by way of Finance Act, 2003 which came into force from 1.4.2004. By insertion of a new clause (ii) in sub- section (1)(a) of Section 90 the Central Government has been vested with the power to enter into an agreement with the Government of any country outside India for the granting of relief in respect of income tax chargeable under the Income Tax Act or under the corresponding law in force in that country, to promote mutual economic relations, trade and investment. Therefore, the statute by itself is not granting any relief. But, by virtue of the statute, if an agreement is

- 70 - entered into providing for such relief, then the assessee would be entitled to such relief.

- 71 - same. The liability to pay customs duty or additional duty under the Act arises when the taxable event occurs. They are then subject to the payment of duty as prevalent on the date of the entry of the goods. An exemption notification issued under Section 25 of the Act had the effect of suspending the collection of customs duty. It does not make items which are subject to levy of customs duty etc. as items not leviable to such duty. It only suspends the levy and collection of customs duty, etc. wholly or partially and subject to such conditions as may be laid down in the notification by the Government in “public interest”. Such an exemption by its very ;nature is susceptible of being revoked or modified or subjected to other conditions. The supersession or revocation of an exemption notification in the “public interest” is an exercise of the statutory power of the State under the law itself as is obvious from the language of Section 25 of the Act.”

- 72 - Division III reported in 44 ELT 598 at para 4 has held as under: “Excise is a duty on manufacture or production. But the realization of the duty may be postponed for administrative convenience to the date of removal of goods from the factory. Rule 9A of the said Rules merely does that. That is the scheme of the Act. It does not, in our opinion, make removal the taxable event. The taxable event is the manufacture. But the liability to pay the duty is postponed till the time of removal under Rule 9- A of the said Rules. In this connection, reference may be made to the decision of the Karnataka High Court in Karnataka Cement Pipe Factory v. Supdt. Of Central Excise (1986 23 ELT 313) (Karn HC)), where it was decided that the words `as being subject to a duty of excise’ appearing in section 2(d) of the Act are only descriptive of the goods and do not relate to the actual levy. “Excisable goods”, it was held, do not become non-excisable goods merely by reason of the exemption given under a notification.

- 73 - total income under Section 5, but no tax is charged because of the exemption given under Section 10A only for a period of 10 years. Merely because the exemption has been granted in respect of the taxability of the said source of income, it cannot be postulated that the assessee is not liable to tax. The said exemption granted under the statute has the effect of suspending the collection of income tax for a period of 10 years. It does not make the said income not leviable to income tax. The said exemption granted under the statute stands revoked after a period of 10 years. Therefore, the case falls under Section 90(1)(a)(ii).

(1) INDO-US AGREEMENT: 58. Article 25 of the Indo – US Double Taxation Agreement deals with Relief from double taxation. Clause 2(a) is the relevant provision. It reads as under:

- 74 - “2.(a) Where a resident of India derives income which, in accordance with the provisions of this Convention, may be taxed in the United States, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income-tax paid in the United States, whether directly or by deduction. Such deduction shall not, however, exceed that part of the income-tax (as computed before the deduction is given) which is attributable to the income which may be taxed in the United States.”

- 75 - tax being paid by the resident Indian under the Income-tax Act as a condition precedent for claiming the said benefit. Where the Indian resident pays no tax on such income derived, whereas the said income is taxed in the United States, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income-tax paid in the United States. Therefore, this provision is in conformity with Section 90(1)(a)(ii) of the Act i.e., the income tax chargeable under the income-tax Act and in the corresponding law in force in United States of America. Therefore, it is not the requirement of law that the assessee, before he claims credit under the Indo – US convention or under this provision of Act should pay tax in India on such income. However, the said provision makes it clear that such deduction shall not, however, exceed that part of the income tax (as computed before the deduction is given) which is attributable to the income which is to be taxed in United States. Therefore, an embargo is prescribed for giving such tax credit. In other words, the assessee is entitled to

- 76 - such tax credit only in respect of that income, which is taxed in the United States. This provision became necessary because the accounting year in India varies from the accounting year in America. The accounting year in India starts from 1st of April and closes on 31st of March of the succeeding year. Whereas in America, the 1st of January is the commencement of the assessement year and ends on 31st of December of the same year. Therefore, the income derived by an Indian resident, which falls within the total income of a particular financial year when it is taxed in United States, falls within two years in India. Therefore, while claiming credit in India, the assessee would be entitled to only the tax paid for that relevant financial year in America, i.e., the income attributable to that year in America. In other words, the income tax paid in the same calendar year in United States of America is to be accounted for two financial years in India. Of course, this exercise should be done by the assessing authority on the basis of the material to be produced by the assessee.

- 77 -

(2) INDO-CANADA AGREEMENT:

“(a) The amount of Canadian tax paid, under the laws of Canada and in accordance with the provisions of the Agreement, whether directly or by deduction, by a resident of India, in respect of income from sources within Canada which has been subjected to tax both in India and Canada shall be allowed as a credit against the Indian Tax payable in respect of such income but in an amount not exceeding that proportion of Indian Tax, which such income bears to the entire income chargeable to Indian tax.”

- 78 - 61. A reading of the aforesaid provision makes it clear that the benefit of Article 23 would be available to an assessee in India only in respect of the income from sources within Canada, which has been subjected to tax both in India and Canada, which forms part of the total income of the assessee and has suffered tax in India under the Income tax Act and has suffered tax in Canada also i.e., assessee has paid tax both in India as well as in Canada on the same income. Then the agreement provides the tax paid in Canada shall be allowed as a credit against the Indian tax payable in respect of such income. However, the said benefit is confined only to the extent of an amount not exceeding that proportion of Indian tax, which such income bears to the entire income chargeable to Indian tax. In other words if the income tax paid in India is less than the income tax paid in Canada, the assessee would be entitled to relief only to the extent of tax paid in India and not to the extent of tax paid in Canada. Therefore, this clause is in conformity with Section 90(1)(a)(i) of the Act. As a corollary if the assessee is exempted from

- 79 - payment of tax in India, then if the same income is subjected to tax in Canada, according to the treaty, there is no double taxation. Therefore, the benefit of this treaty is not available to the Indian assessee.

- 80 - notwithstanding the aforesaid provision, if any portion of the income falling under Section 10-A is subjected to tax then, by virtue of aforesaid provision, the tax paid in Canada corresponding to the income subjected to tax in India, the assessee would be entitled to credit of the tax paid in Canada. However, this exercise has to be done by the assessing authority on the basis of materials to be produced by the assessee and after giving effect to the formulae prescribed under Section 10-A(4) of the Act.

(3) NO AGREEMENT WITH STATES:

“91. Countries with which no agreement exists: - (1) If any person who is resident in India in any previous year proves that, in respect of his income which accrued or

- 81 - arose during that previous year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is no agreement under section 90 for the relief or avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country whichever is the lower, or at the Indian rate of tax if both the rates are equal.

(2)…. (3)….”

Explanation (i) …. …. (ii) …. … (iii) …….. (iv) the expression ‘income tax’ in relation to any country includes any excess profits tax or business profits tax charged on the profits by the Government of any part of that country or a local authority in that country.

- 82 - 66. The said provision provides for deduction of the tax paid in any country from the Indian Income tax payable by him of a sum calculated on such doubly taxed income even though there is no agreement under Section 90 for the relief or avoidance of double taxation. Explanation (iv) defines the expression income tax in relation to any country includes any excess profit tax or business profits tax charged on the profits by the Government of any part of that country or a local authority in that country. Therefore the intention of the Parliament is very clear. The Income Tax in relation to any Country includes Income Tax paid in any part of the country or a local authority. It applies to cases where in a Federal structure a citizen is made to pay Federal Income tax and also the State Income Tax. The Income tax in relation to any country includes income tax paid not only to the Federal Government of that Country, but also any income tax charged by any part of that country meaning a State or a local authority, and the assessee would be entitled to the relief of double taxation benefit with respect to the latter

- 83 - payment also. Therefore, even in the absence of an agreement under Section 90 of the Act, by virtue of the statutory provision, the benefit conferred under Section 91 of the Act is extended to the income tax paid in foreign jurisdictions. India has entered into agreement with the Federal Country and not with any State within that country. In order to extend the benefit of this, relief or avoidance of double taxation, aforesaid explanation explicitly makes it clear that income tax in relation to any country includes the income tax paid to the Government of any part of that country or a local authority in that country. Therefore, even though, India has not entered into any agreement with the State of a Country and if the assessee has paid income tax to that State, the income tax paid in relation to that State is also eligible for being given credit to the assessee in India. Therefore, the argument that in the absence of an agreement between India and the State, the benefit of Section 90 is not available to the assessee is ex-facie illegal and requires to be set aside.

- 84 -

RETROSPECTIVE OR PROSPECTIVE 67. Whether the amendment to Section 90(1) vide Finance Act, 2003 is retrospective in operation or is clarificatory in nature. The Indo-US Treaty was entered into on 20.12.1990 vide notification GSR 199(E) dated 20.12.1990. The substituted section came into force from 1.4.2004. Now the question is whether provision is retrospective in operation or clarificatory in nature? Sub-section (2) of Section 90 which has a bearing on this question reads as under: “Where the Central Government has entered into an agreement with the Government of any Country outside India or specified territory outside India, as the case may be, under sub- section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee”

- 85 - terms in the agreement by India with the Government of any country outside India then, notwithstanding such agreement, the provisions of the Act to the extent they are beneficial to that assesseee apply. The benefit claimed by the assessee is by virtue of the terms of the agreement. The agreement came into existence in 1990. The amended provision came into existence from 1.4.2004. In fact, the amendment is giving effect to the terms of agreement of 1990. In other words, the terms of agreement was more beneficial than the provision of the Act prior to amendment. After amendment, the amended provision is in conformity with the benefit agreed to be given under the agreement. In fact, the Apex Court (in Azadi Bachao Andolan) dealing with the aforesaid amended provisions has held as under: “…………said clause is to enable the Central Government to issue a notification under Section 90 towards implementation of the terms of DTAs which would automatically over-ride the provisions of Income Tax Act in the matter of ascertainment of chargeability to income tax and

- 86 - ascertainment of total income, to the extent of inconsistency with the terms of DTAC”.

(5) of the Act claiming the relief under Section 90 of the Act

- 87 - read with Double Taxation Avoidance Agreement. Only a letter claiming the said relief was filed before assessment and the same cannot be taken into consideration.

- 88 - income and if it is sought to be corrected, then it could be done only by resorting to a revised return under Section 139 (5) of the Act. The income contemplated by Section 139 (1) of the Act can only be the income which the assesee bona fide believes to be his income and not the income as finally assessed by the assessing officer. On the discovery of omission or wrong statement in the earlier return filed by the assessee he can safely file a revised return without recourse to the assessing officer in any way. Once such a revised return is filed under Section 139 (5), the effective return for the purpose of the assessment is thus the return which is ultimately filed by the assessee on the basis of which he wants his income to be assessed. In this context one should notice the issue on hand is not with regard to a claim that would vary the income of the assessee. The issue is with regard to allowing a credit on account of tax paid outside India in respect of which particulars were furnished to the assessing authority during the course of assessment proceedings before the assessment is passed. It is bound to

- 89 - be entertained and dealt with on merits. Once the return is filed and the income tax officer commences the assessment proceedings, the assessing authority is not the tax payer’s opponent, in the strictly procedural sense of the term. The assessment functioning involves the adjustment of the tax liability of the assessee in accordance with the facts on record and in accordance with the law laid down by the legislature. The assessment is nothing but another name for adjustment of the tax liability to accord with the taxable event in the particular tax payer’s case. While determining the tax liability of the assessee, the assessing authority shall allow the credit for all prepaid taxes referred to in Section 234B.

- 90 - forth a claim for relief, he cannot be estopped from getting the tax relief if he is entitled to in law. The omission in the return filed under Section 139 (1) of the Act is not about non-disclosing of income. Income is disclosed. The omission is claiming tax relief out of the income which the assessee is entitled to under Section 10A of the Act. Realising this mistake before the assessment proceedings concluded, the assessee has filed a letter putting forth such claim. Therefore, the assessing authority is legally bound to take into consideration the said letter where the assessee is claiming tax credit/relief and decide whether the assessee is entitled to such relief out of the tax liability on the total income in respect of which he has filed the return under Section 139(1) of the Act. As the tax liability is fastened on the assessee on the basis of the statutory provisions, if any statutory provision gives the assessee the tax benefit, the assessing authority is legally bound to consider the same and grant him relief. In the course of assessment the said claim cannot be rejected on the ground that the same is not

- 91 - made in the return filed under Section 139 (1) and on the ground that no revised return is filed under Section 139 (5) of the Act. What the assessee is claiming by way of a letter is to bring to notice of the assessing authority the statutory provisions as well as the provisions of the Double Taxation Avoidance Agreement under which the assessee is entitled to claim tax benefit, as the said benefit of tax was not claimed in the return filed under Section 139 (1) of the Act. Once the assessee files the necessary particulars and claims relief under the provisions of the Double Taxation Avoidance Agreement, the limitation placed by domestic law would yield to the tax relief provided for under the Double Taxation Avoidance Agreement. Therefore, the assessing authority was not justified in rejecting the said claim on the ground that no revised return is filed under Section 139 (5) of the Act. In fact, probably the assessing authority was conscious that it is not a valid ground to reject the claim, he proceeded to consider the claim of the assessee on merits and has rejected the claim on merits also.

- 92 -

Substantial question No.2 “Whether the Tribunal was right in directing that only that part of the MODVAT credit that is availed of prior to the due date for filing the return of income is deductible under Section 43B when it is apparent that MODVAT credit availed on goods purchased by the appellant is not a sum payable by the appellant and accordingly Section 43B itself is not applicable to the MODVAT credit?”

[Question of law No. (c) in ITA Nos. 879/2008, 880/2008 and 108/2009; Question of law No. (d) in ITA 334/2009 – (assessee’s appeal))

- 93 - manufactured. Under the scheme, the excise duty paid on the purchase of raw materials and components is held as advance i.e., as MODVAT credit. In other words the purchase of raw-materials and components is accounted for as part of cost without the excise duty components. The excise duty receivable is adjusted against the excise duty payable at the time of clearance of the finished goods manufactured by the company. Thus, the MODVAT credit did not form part of cost of purchase. As the valuation of stock of raw-material, work in progress and finished goods is at cost, the effect of MODVAT credit which is not a part of the cost was not included in the said stock. However, it was made clear that even if the MODVAT credit is included in cost of purchase such accounting practice will not alter the profit of the year. The assessing authority did not accept the case of the assessee in view of Section 145A of the Income- tax Act which was inserted with effect from assessment year 1999-2000. The said provision states that the valuation of stock should include the amount of any tax duty, cess or fee

- 94 - actually paid or incurred to bring the goods to its present location and condition. The Department has followed a consistent stand of including it in view of the amended Section 145A. Therefore, the assessing authority directed that unavailed value of MODVAT credit to the extent of Rs.7,11,43,455/- be added to the value of the closing stock of the raw-materials. As the assessee had an opening balance of unavailed MODVAT credit to the extent of Rs.5,78,92,690/-, the MODVAT credit was adjusted accordingly. Still a balance of Rs.1,32,50,765/- MODVAT credit was available and that was directed to be added back to the total income on account of the impact of unavailed MODVAT credit on the closing stock. It is this adding back of unavailed MODVAT credit to the total income which was challenged by the assessee by preferring an appeal. The Commissioner of Income-tax (Appeals), following the earlier orders passed in the assessee’s case and also following the decision of the Tribunal for earlier years reversed the said order of the assessing authority. Aggrieved by the same, the

- 95 - Revenue preferred an appeal. The Tribunal, relying on the judgment of the Special Bench in DCIT V/s. Glaxo Simthkline Consumer Healthcare Limited reported in 299 ITR(1) ITAT (CHA) held that the unavailed MODVAT credit cannot be allowed as deduction under Section 43B. It further held that if the excise duty paid by the assessee is to be included in the closing stock, then the same is to be considered in purchase as the closing stock is a figure to balance the item of purchase left at the end of the year. If MODVAT credit available on closing stock is set-off before the due date of filing of return, then such amount is available for deduction and not restricted under Section 43B of the Act. It means the unavailed MODVAT credit of Rs.1,32,50,765/- is availed before the due date of filing of returns, then there will be no addition. Therefore for re- computation, the matter was restored back to the assessing officer. Aggrieved by the said order, the assessee is in appeal.

- 96 - 76. The learned Senior counsel appearing for the assessee submitted that if excise duty is included in the cost of raw- materials and as such reflected in the opening balance, then the same is to be reflected in the closing balance as well as in the opening balance of the next year. Though earlier they were maintaining accounts on the basis of net value of raw- material without including the Excise duty, in view of Section 145A if excise duty is added it makes difference insofar as the valuation of the goods are concerned but no difference in the profit for the year. But the question is whether the unavailed MODVAT credit can be added back as the income of the assessee. In this regard, he relies on the judgment of the Apex Court in the case of CIT V/s. INDO NIPPON CHEMICAL INDUSTRIES LIMITED., reported in 261 ITR page 275 and contends that unavailed MODVAT credit cannot be construed as income for the purpose of levying tax under the Act and including the unavailed MODVAT credit to the closing balance is different from adding it to the total income.

- 97 -

- 98 - “In each of these cases, the assessing officer took the view that the MODVAT credit that is available should be treated as an income or an advantage in the nature of income, and, therefore, added back the said amount to the income of each of these assessees.”

Answering the said question it was held as under: “We are unable to accept the view of the assessing officer that merely because the MODVAT credit is an irreversible credit available to the manufacturers upon purchase of duty paid on raw-materials, it would amount to income which is liable to be taxed under the Act.

- 99 - the goods to the place of its location and condition as on the date of valuation. Therefore, prior to this introduction of the provision, if the assessee has followed a particular accounting practice where the cost of raw-material is taken into consideration as net value, even while determining the value of the finished products that net value could have been adopted. There was no obligation to include any tax, duty, cess or fee in the cost of raw-material. Having regard to the confusion on the conflicting views expressed by various Courts, the Parliament thought it fit to amend the law and introduce Section 145A taking away the decision which was in favour of the assessee. Now it is made clear that whatever may be the accounting practice adopted by the assessee, the cost price of the raw-material should include tax, duty, cess or fee and correspondingly, the said amount should be reflected in the opening stock as well as in the closing stock. Under the MODVAT scheme, once an assessee pays excise duty when the finished goods are liable for excise duty, he is entitled to set-off that duty payable by him as against the

- 100 - duty he has paid while purchasing the raw-material. If for any reason, the assessee is not able to exhaust the said MODVAT credit available it continues in his accounts. He can avail the benefit whenever he makes sale and the liability to pay the duty arises. But that amount i.e., the unavailed MODVAT credit cannot be treated as an income till it is availed by the assessee. Section 43B provides that if a deduction is claimed of duty, unless the duty is paid, he would not be entitled to claim deduction. Now, the question before this Court is not claiming deduction as an expenditure. The question is whether the unavailed credit constitutes income which is liable to income-tax in the hands of the assessee. It is clear from the aforesaid pronouncement of the Apex Court that the unavailed MODVAT credit cannot be construed as income and there is no liability to pay tax on such unavailed MODVAT credit. Therefore, in terms of the order of the Tribunal, it is open to the assessing authority to recompute the opening and closing balance by adding the duty paid and duty availed but

- 101 - on the unavailed MODVAT credit, there is no liability to pay any tax. Therefore, the substantial question of law is answered in favour of the assessee and against the Revenue.

Substantial question of law No.3 “Whether the Tribunal is right in holding that the allocation of commission made by the respondent had to be upheld?”

[Question of law No. (a) in ITA Nos. 879/2008, 880/2008 and 334/2009 – (assesse’s appeal)]

- 102 - on the services rendered on the basis of percentage of profit earned. The commission paid to its directors was allocated by the assessee to the units which these directors are heading as whole time directors. The assessing authority was of the view that allocation of this commission should be on the basis of the profits earned by each unit. Therefore the assessing authority re-allocated the said commission on the basis of profits earned by each unit. The following table shows the allocation made by the assessee and re-allocation made by the assessing authority. Name Commission Payment (Rs.) Unit allocated to Allocation to Wipro Technologies (Rs.) Remark/Bas is Azim H. Premji 3,16,74,625 Corporate 259,73,500 82% Vivek Paul 2,37,61,102 Wipro Technologies 1,9484,103 18% reduced from Wipro Technologies Arun Thyagarajan 52,33,294 Wipro Infotech 4291301.08 82% P.S. Pai 79,18,656 Wipro Consumer Care 6493297.9 82%

- 103 - 81. Aggrieved by the said re-allocation of the commission, the assessee preferred an appeal to the Commissioner of Income-tax appeals.

- 104 - heading as whole time directors. Commission is a part of salary. The ability of earning profits in the future in a competitive environment depends on the strategies and the investment decisions made on an ongoing basis. Such decisions are taken up by the directors of the company collectively. Even though credit should go to all directors collectively irrespective of the unit which is making profit, it cannot be ignored that each one of them is in-charge of the respective unit exclusively. When salary is paid to them irrespective of the profits earned by the units it follows that the commission paid which is part of the salary should also be allocated to each unit, which they are heading. This concept that commission is directly debitable to the profits of the unit and therefore it should be allocated to the profit making unit to the extent of profit made has no legal basis.

- 105 - allocated to the said unit, otherwise the profit margin of the unit which is exempted from payment of tax would be huge and such determination is improper and therefore he submits the allocation of commission to 10A unit made by the authorities is legal and valid and did not call for any interference.

The accounts of the assessee are consolidation of units accounts. Each unit has separate profit and loss account and balance-sheet. There are four directors in the assessee company. Each one of the directors are full time directors who are managing these units. The salary is paid by the assessee and the salary so paid admittedly is allocated to each unit which they are heading. Section 198 of the Companies Act 1956 deals with overall maximum managerial remuneration payable to the directors which reads as under:

- 106 - “[198. Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits. (1) The total managerial remuneration payable by a public company or a private company which is a subsidiary of a public company, to its directors and its managing agent, secretaries and treasurers or manager in respect of any financial year shall not exceed eleven per cent. of the net profits of that company for that financial year computed in the manner laid down in sections 349, 350 and 351, except that the remuneration of the directors shall not be deducted from the gross profits: Provided that nothing in this section shall affect the operation of sections 352 to 354 and 356 to 360.

(2) The percentage aforesaid shall be exclusive of any fees pay- able to directors under sub- section (2) of section 309.

(3) Within the limits of the maximum remuneration specified in sub- section (1), a company may pay a monthly remuneration to its managing or whole- time director in accordance

- 107 - with the provisions of section 309 or to its manager in accordance with the provisions of section 387.

(4)2 Notwithstanding anything contained in sub- sections (1) to (3), but subject to the provisions of section 269, read with Schedule XIII, if, in any financial year, a company has no profits or its profits are inadequate, the company shall not pay to its directors, including any managing or whole- time director or manager, by way of remuneration any sum [exclusive of any fees payable to directors under sub- section (2) of section 309], except with the previous approval of the Central Government.]

Explanation.- “For the purposes of this section and sections 309, 310, 311, 348, 352, 381 and 387,” remuneration" shall include,- (a) any expenditure incurred by the company in providing any rent- free accommodation, or any other benefit or amenity in respect of accommodation free of charge, to any of the persons specified in sub- section (1); (b) any expenditure incurred by the company in providing any other benefit or amenity free of

- 108 - charge or at a concessional rate to any of the persons aforesaid; (c) any expenditure incurred by the company in respect of any obligation or service which, but for such expenditure by the company, would have been incurred by any of the persons aforesaid; and (d) any expenditure incurred by the company to effect any insurance on the life of, or to provide any pension, annuity or gratuity for, any of the persons aforesaid or his spouse or child.]

- 109 -

(ii) any annuity or pension;

(iii) any gratuity;

(iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages;

(v) any advance of salary;

(va) any payment received by an employee in respect of any period of leave not availed of by him;

(vi) the annual accretion to the balance at the credit of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under rule 6 of Part A of the Fourth Schedule;

(vii) the aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule(2) of rule 11 of Part A

- 110 - of the Fourth Schedule of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under sub-rule(4) thereof; and

(viii) the contribution made by the Central Government (or any other employer) in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD.”

- 111 - Though there are four units and each unit is carrying on different activities, assessee maintained separate accounts, preparing separate balance-sheets and also preparing profit and loss account, but in law it is the consolidation of four accounts which would be the account of the assessee. It is from the profits derived by the assessee that the salary is paid. The payment of the salary as it is not dependent on the profit earned by any unit, the basis of commission payable by the assessee to its directors also cannot be made subject to the profit making ability of a unit. Merely because by such allocation the profit margin of 10A unit is going to increase cannot be the basis to allocate the commission paid to the directors proportionately to the profit making unit. In that view of the matter we do not see any justification to deny the benefit which the assesseee is entitled to. The impugned orders passed by the authorities has no legal basis. On the contrary it runs counter to the statutory provisions.

- 112 - 90. In that view of the matter the substantial question of law is answered in favour of the assessee and against the revenue. Substantial question of law No.4:

[Question of law No. ‘a’ in ITA Nos.881 & 882/2008, 109/2009 & 333/2009 – (assesse’s appeal)]

“Whether the Tribunal was right in concluding that purchase and sales of monitors constituted a trading activity and thus excludable from the profits of the Pondicherry units for the purposes of computing deduction under Section 80-IB of the Act, when such monitors were part of the computers manufactured and sold by the units?”

- 113 -

[Question of law No. ‘b’ in ITA Nos.881 & 882/2008, 109/2009 & 333/2009 – (assesse’s appeal)]

- 114 - to conclude that AMC income is integrally connected with those units. Accordingly, he excluded AMC income and re- computed deduction under Section 80IB of the Act. Both the Commissioner of Income Tax (Appeals) and the Tribunal have upheld the said order of the assessing officer. Aggrieved by the said orders, the assessee is before us.

- 115 - Court in the very same judgment, they are not eligible for deduction.

- 116 - industrial undertakings other than infrastructure development undertakings. Section 80IB (1) reads as under: 80-IB Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings.

(1) Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub-sections (3) to(11), (11A) and (11B) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section.

- 117 - such an industrial undertaking is entitled to out of the profits and gains derived from such industrial undertaking for a period of ten consecutive assessment years. Sub- section (4) provides for the benefit being extended to an industrially backward State specified in the Eighth Schedule.

- 118 - derived from such industrial undertaking after specified dates(s). This is the importance of the words “derived from industrial undertaking” as against “profits attributable to industrial undertaking”.

- 119 - manufacturer and export of the products and it falls within the first degree and benefit was extended.

(P) LIMITED [(2011) 332 ITR 471] where it was held that, converting raw fish into tinned fish did not amount to manufacturing and, therefore, the assessee is not entitled to deduction under Section 80-IB. There the question was, whether conversion of raw fish into tinned fish constitutes a manufacturing activity and not whether the income derived there from is an income from the business.

- 120 - does not constitute manufacture and production and Section 80-IB is not attracted.

- 121 - of the sale consideration of the computer, the services rendered under the AMC contract is in continuation of the sale of computers manufactured by them. Though it does not represent the cost of manufacturing, it is a part of the business income of the undertaking. Any manufacturing product without warranty/after sale maintenance may not have high standing in the market. Customers would get attracted to a product because of the warranty and the after sales maintenance and hence warranty/after sales maintenance is integral to the manufacturing and business of the undertaking. When the consideration paid for three year warranty is treated as an income eligible for benefit under Section 80IB, we do not see any justification not to extend the same benefit to the income derived from one year warranty + two years AMC for the computer which is sold. The said income has a direct nexus with the manufacturing activity. The said income constitute the income of eligible business. It is an income derived from the eligible business in respect of an industrial undertaking which is involved in

- 122 - the manufacture of computers. Therefore, the assessing authority was not justified in not extending the benefit of Section 80IB to the profits derived from AMC contract in relation to the computers manufactured by the assessee. However, it is to be made clear that, if the assessee is deriving any profit under an AMC contract in respect of computers which are not manufactured by them in the industrial unit at Pondicherry the said income does not form part of the eligible business and, therefore, to that extent they are not eligible for benefit under Section 80IB.

MONITORS 104. The assessee sells computers manufactured at Pondicherry unit. The monitor attached to the computer is a part of the system and the system cannot be used without the monitor. Although some monitors were bought and sold, the majority of the monitors purchased have been sold as part of the computers. The assessing officer took a similar stand as in the case of AMC income and directed that sale of monitors cannot be said to have an integral link with

- 123 - manufacturing activities of the appellant and is, therefore, not includable for computation under Section 80IB of the Act. Both the Commissioner of Income Tax (Appeals) and the Tribunal upheld the said contention. Aggrieved by the said order, the assessee is before this Court.

Quantitative details of Monitors (for assessment year 2002-2003)

Industrial undertaking Opening Stock Purchases Sales of only monitors Sales along with computers Closing Stock

- 124 - Industrial undertaking at Thirubuvanai, Pondicherry 2451 54114 25681 27736 3148 Value - 257082167 194693,285 Note - Industrial undertaking at Thattanchavady, Pondicherry 363 50 - 413 - Value 337500 - - - - Total

Note: Breakup cannot be given as they form part of composite value of computers.

- 125 - as monitors and the value of the same is given and the assessee has not claimed benefit under Section 80IB in respect of the said amount. He has also given the particulars of the monitors sold along with the computers. 27,736 monitors were sold as a part of the computer. The assessee has pleaded its inability to give the value of the said monitor because the said monitor was sold as a part of the composite value of the computers and the assessee is claiming benefit under Section 80IB in respect of the total consideration. As set out earlier the assessee is carrying on the manufacturing of computers and sale of computers. He has satisfied all the requirements stipulated in sub-section (2) of Section 80IB and he is eligible for the said exemption. The monitors which he has purchased from outside is used as a spare part in the manufacture of computer and it is sold to the customers as such. In other words, those monitors which are used in the computers are not the traded commodities. Therefore, it is a part of the computer and the total consideration of the computer includes the value of this

- 126 - monitor. The profit derived from the said computer includes the sale of the monitor which is a part of the said computer which falls within the first degree. In view of the aforesaid judgments the profit derived from the said sale of monitor as a part of the computer is also eligible for benefit under Section 80IB. However, it is made clear the assessee is not entitled to the benefit of Section 80IB in respect of monitors which are purchased and sold separately as a traded commodity. In fact, the assessee has not claimed any benefit in respect of those monitors. Therefore, the finding recorded by the authorities that the assessee is not entitled to the benefit of deduction under Section 80IB in respect of the monitors which form part of the computer is hereby set aside. Both the substantial questions are answered in favour of the assesee and against the revenue. Substantial Question of law No.5 :

“Whether the Tribunal was right in excluding VAT/GST from export turnover and total turnover for the purpose of computing deduction under Sec.10A of the Act ?”

- 127 -

[Question of Law No.’d’ in ITA Nos.881 & 882/2008, 109/2009 & 333/2009 – (assesse’s appeal)]

- 128 - 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 sub-sec. (3) is eligible for exemption. What are to be excluded are also specified in the said proviso. They are freight, tele-communication charges or insurance attributable to the delivery of articles or things or computer software outside India which are to be excluded. VAT and GST therefore is included in the export turnover. The finding of the assessing authority that as VST and GST do not represent profit and it is tax collected and paid to the concerned Government, the same cannot be taken into consideration while granting benefit under Section 10A, is contrary to the express provision contained in the statutes.

- 129 - Therefore, the authorities rightly excluded the said amount from export turnover and therefore he submits that no case for interference is made out.

“(iv) “export turnover” means the consideration in respect of export [by the undertaking] of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India,”

- 130 - under the Act in respect of other provisions or under any other statutes would be of no assistance in determining what the export turnover is in clause (iv) of Explanation 2 of Sec.10A. A reading of the said provision makes it clear that export turnover means, the consideration in respect of export by the undertaking of articles or things or computer software received in or brought into India by the assessee in convertible foreign exchange in accordance with sub-Sec.(3). Therefore, in order to appreciate the said definition it is necessary to look into sub-Sec.(3) which reads as under:

“(3) This section applies to the undertaking, if the sale proceeds or articles or things or computer software exported out of India are received in, or brought into India by the assessee in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf.”

- 131 - foreign exchange. It is that foreign exchange which was received in or brought into India which is eligible for the said exemption. However, clause (iv) of explanation 2 explicitly excludes certain aspects such as freight, telecommunication charges or insurance. Even though the assessee receives in or brings into India amount by way of convertible foreign exchange for the aforesaid purposes, the same shall not be taken into consideration for granting the benefit under Sec. 10A. The argument is, the foreign exchange should be received in India or brought into India. In respect of GST and VAT, though the assessee collected the same as part of the sale consideration in foreign jurisdiction, it was paid to the appropriate Government in that jurisdiction and it was neither received in or brought into India and therefore that amount cannot be included in the export turnover.

“the sale proceeds referred to in this sub- section shall be deemed to have been received in

- 132 - India where such sale proceeds are credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India.”

- 133 - word used is `received in India’. Once the sale proceeds are received in India by the assessee by virtue of the said legal fiction, then it falls within the definition of export turnover, unless expressly excluded, and the amount so received is eligible for benefit under Section 10A.

- 134 - by the above fraction/ratio of export turnover which constitutes 80HHC concession (deduction). Income in the nature of “business profits” was, therefore, apportioned. The above formula fixed a ratio in which “business profits” under Section 28 of the Act had to be apportioned. Therefore, one has to give weightage not only to the words “total turnover”, but also to the words “export turnover”, “total export turnover” and “business profits”. That is the reason why we have quoted herein above extensively the illustration from the Direct Taxes (Income Tax) Ready Reckoner of the relevant word. In the circumstances, we cannot interpret the words “total turnover” in the above formula with reference to the definition of the word “turnover” in other laws like Central Sales Tax or as defined in the accounting principles. Goods for export do not incur excise duty liability. As stated above, even commission and interest formed a part of the profit and loss account, however, they were not eligible for deduction under section 80HHC. ….. Even if the assessee was an exclusive dealer in exports, the said commission was not includible as it did not spring from the “turnover”. Just as interest, commission

- 135 - etc. did not emanate from the “turnover”, so also excise duty and sales tax duty did not involve any such turnover. Since excise duty and sales tax duty did not involve any turnover, such tax had to be excluded. … In our view, sales tax and excise duty also do not have any element of “turnover” which is the position even in the case of rent, commission, interest, etc. It is important to bear in mind that excise duty and sales tax are indirect taxes”.

- 136 - been included in the turn over or export turnover or total turnover.

- 137 - 118. That was the case where the question for consideration was, whether purchase tax to be levied on turnover which includes sales tax paid. That is not the contention in this case. In this case, we are dealing with granting of exemption to the assessee as an incentive under Sec. 10A of the Act. As such, the said judgment has no application.

- 138 -

- 139 - leviable on the market fee. As such, it has no application to the facts of the case.

- 140 - a price which includes the tax if he desires to pass it on to the buyer. If the buyer agrees to the price, it is not for him to consider how it is made up, or whether the seller has included tax or not.”

(1961) 12 STC 476, 484 ( SC ), observed as under : “We think that these observations are apposite even in the context of the provisions of the Acts we are considering now, and there is nothing in those provisions which would indicate that when the dealer collects any amount by way of tax, that cannot be part of the sale price. So far as the purchaser is concerned, he pays for the goods what the seller demands, viz., price even though it may include tax. That is the whole consideration for the sale and there is no reason why the whole amount paid to the seller by the purchaser should not be treated as the consideration for the sale and included in the turnover.”

- 141 - 125. Following the said judgment, the Apex Court in the case of Sinclair Murray and Co. Pvt. Ltd., vs. CIT reported in 97 ITR 615 held that : sales tax should not be treated to be a part of the price realized by the assessee from the purchaser .is not well founded. Sales tax should be treated as a part of the price realized by the assessee from the purchaser.

Therefore, ultimately in order to find out whether a tax paid is included in the sale consideration or not has to be decided in the light of the definition used in the statute and also in the context for which it is used.

- 142 - That is the whole consideration for the sale and there is no reason why the whole amount paid to the seller by the purchaser should not be treated as the consideration for the sale and included in the turnover.Tax should be treated as a part of the price realized by the assessee from the purchaser. Therefore, ultimately in order to find out whether a tax paid is included in the sale consideration or not has to be decided in the light of the definition used in the statute and also in the context for which it is used.

- 143 - 128. In the instant case, VAT and GST is payable by the purchaser. It is a part of the sale price. The assessee collects the tax and remits it to the Government. It is an indirect tax. The definition of export turnover expressly says what is excluded from export turnover i.e., freight, telecommunication charges or insurance. It has not excluded the VAT and GST payable by the assessee in the foreign jurisdiction. The test to be applied in the light of the aforesaid definitions is excluding the aforesaid three charges from the sale consideration received, sale proceeds received in or brought into India in convertible foreign exchange constitutes the export turnover. If the sale proceeds are credited to a separate account maintained for the purpose by the assessee with any Bank outside India with the approval of the Reserve Bank of India, though the said proceeds are not actually received in India or brought into India, it is deemed to have been received in India and forms part of the export turnover.

- 144 - 129. In that view of the matter, the finding recorded by the authorities is contrary to law. They have not taken into consideration explanation 2 to sub-sec. (3) of Sec. 10A and thus committed an error. Hence, the said finding requires to be set aside. Accordingly, it is set aside. The substantial question of law is answered in favour of the assessee against the Revenue.

Substantial question of law No.6:

“Whether the Tribunal was right in holding that the transfer of stock took place during the year ended 31.03.2001 and not during the years when the execution and registration of the sale deeds took place?”

[Question of Law No.(h) in ITA Nos.879/2008 – (assesse’s appeal)]

- 145 - accounted and reported as part of capital assets in the balance sheet. On 31st March 1995, the assessee converted/treated the immovable property as stock in trade. The fair market value on the date of the conversion was Rs.45 crores. Stock in trade of Rs.45 crores was reported as inventory in the balance sheet. Capital reserve of Rs.43.03 crores was shown under reserves and surplus in the balance sheet. Over the period, the value of the land declined from Rs.45 crores to Rs.17.70 crores. The closing stock in trade year to year was valued at lower of cost or market price. As on 31st March 1999, the closing stock was valued at Rs.17.70 crores. Amounts were drawn down from capital reserve to the extent of reduction in the value of land, i.e., stock in trade. On 09.02.2000, the assessee entered into an agreement to sell the aforesaid immovable property for Rs.12.50 crores with Prestige Estate Projects Private Limited. A sum of Rs.2 crores was received along with the agreement and the schedule for payment of the balance of Rs.10.50 crores was contracted. The closing stock-in-trade as at 31st

- 146 - March 2000 was valued at Rs.12.50 crores. A further sum of Rs.5.20 crores was drawn down from the capital reserve consequent to valuing the closing stock in trade at 12.50 crores against the opening stock in trade at 17.70 crores. On 22.01.2001, a general power of attorney was issued to the promoters of M/s.Prestige Estates Projects Private Limited. The power of attorney authorized the said attornies to sell or otherwise dispose of the immovable property by way of sale or otherwise in whole or in the form of undivided shares or in any other manner and on such terms and conditions as the attornies deem it fit in favour of any predecessors or in favour of his/her nominee (assesses). In the accounts, stock in trade was recorded as sold. They released the capital of Rs.10.07 crores drawn down from the capital reserve to the profit and loss account. A deed of transfer came to be executed for the assessment year 2004- 05 conferring an area to the extent of 8,344 square feet of land in favour of the buyers identified by the power of attorney holder. Capital gain of Rs.7,93,63,680/- computed

- 147 - as per Section 48 read with Section 45(2) was declared in the return of income for assessment year 2004-05. In the subsequent year, i.e., assessment year 2005-06, the remaining extent of 35,635 square feet of land was transferred by way of a deed of conveyance in favour of buyers identified by the power of attorney holder. A sum of Rs.33,89,40,021 computed as per Section 48 read with Section 45(2) was declared in the return of income. Accordingly, the assessee filed his return declaring the capital gains of the aforesaid amount for the assessment years 2004-05 and 2005-06, respectively. However, the assessing authority taxed the capital gain of Rs.41,83,08,696/- in the assessment year 2001-02 itself on the basis that general power of attorney was issued to contractors and entries were recorded in books of accounts as a sale. In appeal, the Commissioner of Income Tax (Appeals) held that there is no transfer within the meaning of Section 45(2) of the Act and the capital gains of conversion of the property into stock in trade cannot be taxed in the

- 148 - assessment year 2001-02 and that it has to be taxed on the date of execution of the deed of conveyance, i.e., in 2004-05 and 2005-06. Aggrieved by the said order, the revenue preferred an appeal to the Tribunal.

- 149 - transfer of a stock in trade or a business asset. It is Section 45(2) of the Act which is attracted in the case of profits or gains arising from the transfer by way of conversion by the owner of a capital asset into stock in trade of business or it is the treatment by him as a stock in trade in business and the same is chargeable to income tax as his income of the previous year in which such stock in trade is sold. By execution of the power of attorney, the assessee received the consideration due to him for sale of the land. As in law there was no transfer, the said amount is liable to tax only when the said stock in trade is sold and therefore, the order passed by the lower appellate Court was in accordance with law and the Order passed by the Tribunal is erroneous and as such, the same is liable to be set aside.

- 150 - 45(1) is not attracted, Section 45(2) contemplates two instances. One, when stock in trade is sold. The second, otherwise transferred by him. The words otherwise transferred by him as incorporated under the Act includes the interest in an immovable property transferred by way of a power of attorney. In the instant case, by virtue of the power of attorney, the power of attorney holder was authorized to execute the sale deed, to collect the entire sale consideration and to dispose of the property in the manner he liked and therefore, on the day the said power of attorney was executed, the transfer otherwise took place and that is the assessment year which is to be reckoned for levying tax and the Tribunal as well as the assessing authority were justified in levying tax in the assessment year 2001-02. He further submits Section 2(47) includes transfer of a stock in trade.

- 151 -

“By execution of a power of attorney by the assessee, is there a transfer of stock in trade so as to attract capital gains under Section 45(2) of the Act on the date of execution of the power of attorney, i.e., in the assessment year 2001-02?”

- 152 - payable on sale of such stock in trade and the year in which the tax is payable. In order to answer the said question, we have to look at Section 45 which deals with capital gains. It reads as under:

“Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H be chargeable to income-tax under the head “Capital Gains”, and shall be deemed to be the income of the previous year in which the transfer took place.

(1A) Notwithstanding anything contained in sub- section (1), where any person receives at any time during any previous year any money or other assets under an insurance from an insurer on account of damage to, or destruction of, any capital asset, as a result of – (i) flood, typhoon, hurricane, cyclone, earthquake or other convulsions of nature; or (ii) riot or civil disturbance; or (iii) accidental fire or explosion; or

- 153 - (iv) action by an enemy or action taken in combating an enemy (whether with or without a declaration of war), then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the head “Capital gains” and shall be deemed to be the income of such person of the previous year in which such money or other asset was received and for the purposes of section 48, value of any money or the fair market value of other assets on the date of such receipt shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset.

(2) Notwithstanding anything contained in sub- section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as stock-in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock-in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of

- 154 - the consideration received or accruing as a result of the transfer of the capital asset.

(2A) Where any person has had at any time during previous year any beneficial interest in any securities, then, any profits or gains arising from transfer made by the depository or participant of such beneficial interest in respect of securities shall be chargeable to income-tax as the income of the beneficial owner of the previous year in which such transfer took place and shall not be regarded as income of the depository who is deemed to be the registered owner of securities by virtue of sub-section (1) of Section 10 of the Depositories Act, 1996, and for the purposes of – (i) section 48; and (ii) proviso to clause (42A) of section 2, the cost of acquisition and the period of holding of any securities shall be determined on the basis of the first-in-first-out method.

- 155 - of the capital asset shall be chargeable to income tax under the head ‘capital gains’ and shall be deemed to be the income of the previous year in which the transfer took place. It is here that the definition of transfer under Section 2(47) assumes importance. The definition of transfer contemplated in the provision is only in relation to the capital asset and not in relation to the stock in trade or a business asset. However, sub-section (2) contains a non-obstante clause by saying not withstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into or its treatment by him as stock in trade of business carried on by him shall be chargeable to income tax as his income of the previous year in which such stock in trade is sold or otherwise transferred by him. Therefore, in so far as stock in trade is concerned, the relevant year in which the capital gain tax is leviable is the previous year in which such stock in trade is sold. The word used is sold or otherwise transferred by him. In view of the expressed words used in

- 156 - Section 45(2), it is clear that Section 45(1) deals with capital gains on transfer of capital asset, Section 45(2) deals with payment of capital gains in a transaction where stock in trade is sold or otherwise transferred by him.

- 157 - used is sold, not transferred. However, if the stock-in-trade is not sold, but is transferred otherwise, which has the effect of a sale, then the capital gains is chargeable to income tax in the previous year in which such stock-in-trade is otherwise transferred. Having regard to the scheme of the entire section and the express words used in sub-section (2) of Sec. 45, the case of considering stock-in-trade otherwise transferred, would arise only if stock-in-trade is not sold. If stock-in-trade is sold, the question of considering whether the stock-in-trade is otherwise transferred would not arise for consideration. The object of using the words `otherwise transferred’ as it is in the other provisions in the same section is to prevent avoidance of payment of capital gains by the owners thereof by resorting to modes which are not recognized in law, but which in substance has the same effect. In other words, if the owner by such transfer ceases to have any interest in the property and transfers all his interest in the property to the transferee and earns profits and gains, but declines to pay the capital gain, on the

- 158 - ground that such transfer is not one such transfer recognized in law, then the law in such cases to plug the loop hole has used the term otherwise transferred. Once it is sold, the question of considering whether it has been otherwise transferred would not arise.

- 159 - empower the purchasers to claim any prospective rights in the schedule property. In the power of attorney executed, there is no whisper of delivery of possession of the schedule property to the power of attorney holder. Under Sec. 2(47), any transaction involving the allowing of possession of immovable property be taken or retained in part performance of a contract of the nature referred to in Sec. 53A of the Transfer of Property Act is a deemed transfer in relation to a capital asset. Therefore even if the stock-in-trade which was prior to its conversion a capital asset, as treated by the Tribunal as a capital asset, as possession is not delivered, it would not become a transfer and question of payment of capital gains would not arise.

- 160 - of attorney arrangement. The practice in such cases is adopted normally where transfer of ownership is not legally permitted. A person holding the power of attorney is authorized the power of owner, including that of making construction. The legal ownership in such case continues to be with the transferor. Therefore, with that object and in respect of such persons, clause (vi) was inserted which reads as under : “2(47)(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a cooperative society, company of other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of any immovable property.”

- 161 - 13917/2009 explaining the scope of power of attorney has held as under : “a power of attorney is not an instrument of transfer in regard to any right, title or interest in an immovable property. A power of attorney is creation of an agency whereby the grantor authorises the grantee to do the acts specified therein, on behalf of grantor, which when executed will be binding on the grantor as if done by him (Sec. 1A and 2 of Power of Attorney Act, 1882). It is revocable or terminable at any time unless it is made irrevocable in a manner known to law. Even an irrevocable attorney does not have the effect of transferring title to the grantee.”

- 162 - person. A deed of power of attorney is executed by the principal in favour of the agent. The agent derives a right to use his name and all acts, deeds and things done by him and subject to the limitations contained in the said deed, the same shall be read as if done by the donor. A power of attorney is as is well known, a document of convenience”.

- 163 - the effect of transferring or enabling the enjoyment of any immovable property, it would not amount to a transfer.

- 164 - not confer the power of transferring the stock-in-trade in favour of the power of attorney holder or in favour of the purchasers unless he has executed the sale deed on behalf of the purchasers. Therefore, in view of sec. 45(2) of the Act, the capital gains is not chargeable on receipt of the consideration in the year in which that consideration was received under Sec. 45(2). The income tax is charged in the previous year in which such stock-in-trade is sold. Sale took place in the assessment year 2004-05 and 2005-06. The power of attorney had been executed in assessment year 2001-02. When stock-in-trade is sold by executing a deed for conveyance and duly registered, the question of the said stock-in-trade being otherwise transferred would not arise at all. Therefore, the argument of the Revenue, that on the day the power of attorney was executed when the entire consideration due under the agreement of sale was received and by virtue of the power of attorney, the power of attorney holder is authorized to develop the property, to sell the property and to receive the entire consideration, it amounts

- 165 - to the stock-in-trade being otherwise transferred leading to the said income being chargeable to income tax in the previous year in which the power of attorney is executed is without any substance. As the stock-in-trade is sold by way of a registered deed, there is no intention to avoid payment of capital gains. On receipt of such capital gains, the capital gain tax has been paid in the previous year in which the stock-in-trade was sold and therefore the order of the Tribunal as well as the order of the assessing authority is contrary to the aforesaid statutory provisions. As such, it is unsustainable in law. Accordingly, the said two orders are set aside. The order passed by the Appellate Commissioner is restored.

REVENUE’S APPEAL – QUESTION No.7: “Whether the Appellate Authorities were correct in holding that the assessee will be entitled to claim deduction u/s 10A of the Act in respect of foreign

- 166 - exchange which is yet to be received during the current assessment year for sale of software i.e., within six months contrary to Section 10A(3) of the Act as an application for extension had been filed and Section 155(11A) of the Foreign Exchange Management Act 1999 and RBI Rules were applicable?”

[Question of law No.28 in ITA Nos.907 & 909/2008; Question of law No.24 in ITA Nos.904 & 905/2008; Question of law No.8 in ITA Nos.210 & 211/2009 and Question of law No.12 in ITA No.363/2009 (Department’s appeal)]

- 167 - the Reserve Bank of India. It is in this context merely because the written approval of extension is not passed by the Reserve Bank of India, whether the assessee could be denied the benefit of Section 10A. The Tribunal on consideration of the entire material on record, taking note of the statutory provisions and the object underlying this provision, has come to the conclusion that notwithstanding the fact there is no express order granting approval by the Reserve Bank of India, as it has not been rejected and foreign exchange is received and remitted through the proper channel, the assessee is entitled to the benefit of Section 10A. In the facts of the case, we do not find any error committed by the Tribunal. Therefore, the said substantial question is answered in favour of the assessee and against the revenue. Substantial Question No.8: “Whether the Tribunal was right in excluding the computer software sales made to STP units in India from “export turnover” for the

- 168 - purpose of computing deduction under section 10A of the Act?”

[Question of law No. ‘c’ in ITA Nos.881 & 882/2008, 109/2009 & 333/2009 – (assessee’s appeal)]

Substantial Question No.9:

“Whether appellate authority were correct in holding that the expenses incurred by the Corporate Division cannot be allocated in respect of various business units of the assessee based on the turn over, but at an ad hoc percentage of 20% as held in the earlier assessment years?”

[Question of law No.20 in ITA Nos.907 & 909/2008; Question of law No.16 in ITA Nos.904

- 169 - & 905/2008; Question of law No.3 in ITA Nos.210 & 211/2009 and Question of law No.11 in ITA No.363/2009 - (Department’s appeal)]

- 170 - and directed the Assessing Authority to consider only such expenses for allocation as admitted by the assessee during the assessment process. Aggrieved by the said order the revenue preferred an appeal to the Tribunal. The Tribunal held that the allocation of common expenditure cannot be made on the basis of revenue generated. The assessee himself has agreed to an allocation of 20% of its expenditure and the same has been confirmed by the CIT (A). Therefore, the Tribunal felt that the allocation at the rate of 20% of common expenses is in order. Thus the ITAT upheld the order of the Appellate Authority. Aggrieved by the said order the revenue is in appeal.

- 171 - orders passed by the Appellate Authority requires to be set aside.

- 172 - Either it should be actual expenditure incurred or expenditure which is distributed equally to all the units of the assessee. In the instant case when department did not accede to the allocation of the actual expenditure, the assessee has come forward to distribute the entire expenditure equally to all the units and the said procedure is followed consistently by the assessee for more than a decade now. In the aforesaid judgment of the assessee’s cases, this Court after considering very same point accepted actual allocation of expenditure. The relevant observations of this Court is at para Nos.27 and 28. “27. A perusal of the aforesaid statement shows the Corporate Office has spent a sum of Rs.7,37,98,774/- towards the expenses consisted of salaries etc., excluding interest less revenues. They allocated a sum of Rs.4,93,49,416/- to the various sub-divisions other than the software export sub-division. Similarly they have recovered a sum of Rs.3,70,00,000/- from software exports sub-division in the process the excess recoveries is 1,25,50,642/-. Further, a sum of Rs.20,11,34,657/- is the interest out go to intra

- 173 - business and external agencies. The interest earned from deployment of funds intra-business and with external agencies is Rs.9,38,24,255/-. The net interest outgo is 10,73,10,402/-.

- 174 - Substantial question No. 10 “Whether the Appellate Authorities were correct in reversing the finding of the Assessing Officer that the selling, administrative and general expenses and loss in respect of some units having not been correctly arrived at was allocated on proportion of sales and worked out the loss when computing deduction u/s.80IB of the Act?”

[Question of law No.15 in ITA No.363/2009 - (Department’s appeal)]

“Whether the Appellate Authorities were correct in holding that the allocation made in the assessment order of allocation of expenditure under the head ‘selling and general administration’ of Wipro Infotech Division and lighting factory to the eligible undertaking claiming deduction under Section 80-1B of the Act was to be deleted?”

[Question of Law No.17 in ITA Nos.210 & 211/2009 (Department’s appeal)]

- 175 - in ITA 507/02 dated 25.8.2010 in the case of assessee itself has answered the said substantial question of law in favour of the assessee and against the revenue and accordingly, the said substantial question of law is answered in favour of the assessee and against the revenue.

Substantial Question No.11: “Whether the Appellate Authorities were correct in holding that units which had got approval from STPI as expansion of old undertakings commenced operations prior to 01.04.1993 will also be entitled to claim u/s 10A of the Act as a new industrial undertaking?”

[Question of law No.24 in ITA Nos.907 & 909/2008; Question of law No.20 in ITA Nos.904 & 905/2008; Question of law No.10 in ITA Nos.210 & 211/2009 and Question of law No.13 in ITA No.363/2009 - (Department’s appeal)].

- 176 - in the case of Wipro GE Medical Systems Ltd., in ITA Nos.391 and 392/2008 and substantial question of law was answered in favour of the assessee and against the revenue.

Substantial question No.12: [Question of law No.33 in ITA Nos.907 & 909/2008 – (Department’s appeal)]

“Whether the Tribunal was correct in reversing the finding of the Assessing Officer which was confirmed by the Appellate Commissioner who had held that the difference in the price of shares of Wipro Finance Limited, purchased at market value and sold to assessee’s advocate and ex- employee at a subsidized price being a colorable devise to avoid tax should be allowable as a capital loss?”

- 177 - 1394/2006 decided on 5.11.2013. It was held at para 53 of the said judgment as under : - 53. In the facts and circumstances of the case, we are satisfied that it is not a real scheme. It is not a legitimate tax planning. It is a devise adopted to evade payment of tax on the capital gains earned by the assessee company. Though the proximity of the date between the sale of shares and purchase of shares and disinvestment alone cannot be a criteria to hold the transaction is a sham transaction and the profit earned from sale of shares in Wipro Net Limited is real and loss incurred by the sale of shares is also real and though there was no bar for sale of shares at throw away price and sometimes, the businessman act in undue exercise and hasty and without any rationale any one of them is not sufficient to hold a transaction as sham transaction. But the cumulative effect of all these instances unequivocally points out the real intention behind this transaction and leads to a irresistible conclusion that this tax planning is done with the intention to avoid payment of tax on capital gains and it is not a case of legitimate tax planning but a devise to avoid payment of

- 178 - tax. Therefore, the Tribunal was not justified in characterizing this transaction as a legitimate tax planning. The observation of the Tribunal that the shares transactions of Wipro Finance Limited had happened at different times in the past is not factually correct. It is not a case where the assessing authority came to such a conclusion merely because of the proximity of the dates and it was done hurriedly but the assessing authority on careful consideration of the entire material on record, in particular, the explanation offered by the assessee for his queries has arrived at the finding that it is a colourable devise and a sham transaction which finding has been affirmed by the Appellate Commissioner on re-appreciation of the entire material on record after making note of the entire case law on the point. It is the Tribunal which has interfered with such a concurrent finding of fact without properly appreciating the mechanism adopted by the assessee to avoid payment of tax. In that view of the matter the finding of the Tribunal on this issue requires interference and accordingly, the same is set aside. The said substantial question of law is

- 179 - answered in favour of the revenue and against the assessee.

- 180 - earlier and, therefore, following the said reasoning, the finding recorded by the Appellate Tribunal is hereby set aside.

Total 99,13,18,970 102,59,01,03 3 * Short-term capital loss

- 181 -

Substantial QUESTION No.13: [Question of law No. ‘e’ in ITA No.333/2009 – (Assessee’s appeal)].

- 182 - “Whether the Tribunal erred in not disposing off the ground pertaining to deductibility of net receipts of the software development centres located outside India, under Section 10A? Whether the appellant is entitled to such deduction?”

Substantial Question of law No.14: “Whether the Tribunal was right in directing that losses of a 10A unit, which are already set-off against other business income of the appellant,

- 183 - should be again carried forward and set-off against eligible profits of the same unit in a subsequent year?”

[Question of law No. (b) in ITA Nos.879/2008, 880/2008 and 108/2009 and Question of law No. ‘c’ in ITA No.334/2009 – (assessee’s appeal)] .

“Whether the Tribunal was correct in holding that income of each undertaking should be taken independently and losses of Section 10A units cannot be set off against profits of Section 10A units, when computing deduction u/s 10A of the Act?”

[Question of law No.22 in ITA Nos.907 & 909/2008 and Question of law No.18 in ITA Nos.904 & 905/2008 – (Department’s Appeal)].

“Whether the Appellate Authorities failing to take into consideration the amendment provision of section 10A(6)(ii) of the Act, which clearly contemplated that the loss of the undertaking can be carried forward and adjusted against other income?”

[Question of law No.23 in ITA Nos.907 & 909/2008, Question of law No.19 in ITA Nos.904

- 184 - & 905/2008 and Question of law No.9 in ITA Nos.210 & 211/2009 – (Department’s Appeal)].

“Whether the Appellate Authorities were correct in holding that the finding recorded by the AO that in view of the amendment to section 10A (6)(ii) w.e.f. 01.04.2001 the loss of the STP units should be carried forward at the end of the 10 years, tax holiday period u/s 10A of the Act and should be set off against profits in respect of Madivala R&D unit by treating the cost of development of shrink wrap computer software as work in progress and therefore cannot set off the loss?”

[Question of law No.16 in ITA Nos.210 & 211/2009 – (Department’s Appeal)].

- 185 - Court by its order dated 5.11.2013 following the Judgment of the Supreme Court answered the said substantial question of law in favour of the assessee and against the revenue. Therefore, aforesaid questions of law are answered in favour of assessee and against the revenue.

Substantial Question of Law No.15: “Whether the Appellate Authorities were correct in holding that the items like difference in foreign exchange, royalty, provision for doubtful debts written off, scrap sales, sundry creditors written back etc., should be included when computing deduction/s 80HHC of the Act?”

[Question of law No.32 in ITA Nos.907 & 909/2008 and Question of law No.25 in ITA Nos.904 & 905/2008 – (Department’s Appeal)].

[Question of law No.27 in ITA Nos.907 & 909/2008; Question of law No.23 in ITA Nos.904 & 905/2008; Question of law No.12 in ITA Nos.210 & 211/2009 and Question of law No.14 in ITA No.363 /2008 – (Department’s Appeal)].

[Question of law No.29 in ITA Nos.907 & 909/2008 – (Department’s Appeal)].

- 186 - [Question of law No.31 in ITA Nos.907 & 909/2008 and Question of law No.13 in ITA Nos.210 & 211/2009 – (Department’s Appeal)].

[Question of law No.14 in ITA Nos.210 & 211/2009 – (Department’s Appeal)].

Substantial Question No.16: “Whether the Appellate Authorities were correct in holding that income earned from sale of

- 187 - scrap export incentive, rent received, interest income and gain on exchange rate fluctuation should be treated as profits and gains derived from export and exempted u/s.10A of the Act contrary to the judgment of the Apex Court in Sterling Sea Foods 237 ITR 579?”

[Question of law No.21 in ITA Nos.907 & 909/2008; Question of law No.17 in ITA Nos.904 & 905/2008; Question of law Nos.4, 5, 6, 7 in ITA Nos.210 & 211/2009 – (Department’s Appeal)].

- 188 - said question was answered in favour of the assessee and against the revenue.

Substantial Question No.17: “Whether the Appellate Authorities were correct in holding that the provision for warranty claim is an allowable deduction despite the same having not been expended during the current assessment

- 189 - year and the assessee not following actuarial method of accounting?” [Question of law No.25 in ITA Nos.907 & 909/2008; Question of law No.21 in ITA Nos.904 & 905/2008; Question of law No.11 in ITA Nos.210 & 211/2009 and Question of law No.10 in ITA No.363/2009 – (Department appeal)]

“Whether the Appellate Authorities were correct in holding that the provision for warranty was held to be an allowable deduction despite the unit was on the brink of closure as no manufacturing activity was carried on?”

[Question of law No.15 in ITA Nos.210 & 211/2009 – (Department’s appeal)]

Substantial Question No.18: “Whether the Appellate Authorities were correct in holding that the payments made by the assessee

- 190 - for import of software cannot be disallowed u/s 40(a)(i) of the Act for failing to deduct tax at source u/s 195 of the Act as such payments did not constitute royalty u/s 9(1)(vi) of the Act?

[Question of law No.26 in ITA Nos.907 & 909/2008, Question of law No.22 in ITA Nos.904 & 905/2008 and Question of law No.9 in ITA No.363/2009 – (Department’s appeal)]

“Whether the Appellate Authorities were correct in holding depreciation claimed on software imported for in house utilization and treated as part of block of assets should be allowed, despite the same being in the nature of royalty as per Explanation to section 9(1)(vi) of the Act and no TDS u/s 194 of the Act having been deducted, section 40(a)(i) of the Act?”

[Question of law No.2 in ITA Nos.210 & 211/2009 – (Department’s appeal)]

- 191 - against the revenue. Accordingly, the said question of law is answered in favour of the assessee and against the revenue.

Substantial Question No.19: “Whether the Appellate Authorities were correct in holding that excise duty and sales tax should be included in the total turnover for the purpose of computation of deduction u/s 80 HHC of the Act?”

[Question of law No.27 in ITA Nos.907 & 909/2008; Question of law No.23 in ITA Nos.904 & 905/2008; Question of law No.12 in ITA Nos.210 & 211/2009 and Question of law No.14 in ITA No.363/2009 – (Department’s appeal)]

- 192 - Substantial Question No.20 : “Whether the tribunal was right in referring to another decision and fixing an exclusion of 80% of uplinking charges when the appellant and the respondent has agreed upon an exclusion of 5% of telecommunication expenses or attributable to delivery of computer software outside India for the later assessment years?”

[Question of law No. ‘f’ in ITA Nos.879/2008, 880/2008; Question of law No.’a’ in ITA No.108/2009 and Question of law No.’b’ in ITA No.334/2009 – (Assessee’s appeal)]

- 193 - afresh taking into consideration the consistent practice followed by the authorities in the case of the assessee itself. That would meet the ends of justice. Substantial Question No.21: ”Whether the Tribunal was right in remanding the issue pertaining to prior period items without noting the submissions of the appellant?”

[Question of law No.’g’ in ITA No.879/2008 – (Assessee’s appeal)]

[Question of law No. ‘e’ in ITA Nos.881 & 882/2008 and Question of law No.’f’ in ITA No.333/2009 – (Assessee’s appeal)]

- 194 - Section 234D is not applicable as it came into force with effect from 1-6-03. However, the assessing officer levied interest under Sec. 234D of the Act. Both the CIT (Appeal) and the Tribunal upheld the levy of interest. It is against the said order, the present appeal is filed.

(2) to Sec. 234D was not on the statute book. It was inserted by the Finance Act, 2003, which came into effect from 01-06- 2003. This provision has not been considered by the Tribunal while passing the impugned order. Therefore, it is appropriate that the findings recorded by the Tribunal be set aside and the matter is remitted back to the Tribunal for fresh consideration after taking note of the explanations inserted and then decide whether it is prospective in nature or retrospective in nature and whether the said provision applies to the factual situation in the assessee’s case. That would meet the ends of justice.

- 195 - Substantial Question No.23: “Whether the Tribunal was correct in holding that expenditure towards termination of rent agreement with BSNL (A communication link provider) Rs.3 crores, termination of internet band width agreement with Local Cyberstar Rs.2.07 crores and termination of purchase commitment of Rs.5.6 crores, is an allowable deduction when no details about the transactions were furnished by the assessee nor examined by the Tribunal and consequently recorded a perverse finding?”

[Question of law No.1 in ITA Nos.210 & 211/2009 – (Department’s appeal)]

“Whether the Tribunal was correct in reversing the finding of the Commissioner exercising jurisdiction u/s 263 of the Act that the expenses of Rs.18.15 crores had been explained by the assessee under a letter dated 11.11.2005 which did not reflect the correct details to consider the expenses and therefore the details sought in the subsequent letters by the department dated 13.12.2005 and 25.01.2006 were not considered by the Tribunal and consequently recorded a perverse finding?

- 196 -

[Question of law No.1 in ITA No.209/2009 – (Department’s appeal)]

“Whether the Tribunal was correct in reversing the finding of the CIT (A) u/s 263 of the Act, when the assessee itself had taken a contention in the appeal (CIT) against the assessment order that the AO had allowed a sum of Rs.19.68 crores (without examining the details) and the expenses of Rs.10.67 crores (issue remitted back to AO by CIT(A) to examine the details furnished by the assessee and allow expenses in accordance with law) being similar in nature should also be allowed?”

[Question of law No.2 in ITA No.209/2009 – (Department’s appeal)]

- 197 - do not constitute substantial questions of law. We decline to answer the same. Substantial Question No.24: “Whether the Tribunal was right in holding that interest received under Section 244-A would be taxable in the year of receipt of the said interest without considering the fact that the tax granted as a refund on which interest is computed itself is disputed in appeals by the respondent?”

[Question of law No.(d) in ITA Nos.879 & 880/2008 – (Assessee’s appeal)]

- 198 - the benefit of the said amount that interest is levied paid under various provisions under the Income-Tax Act. It is not dependent on the claim in any legal proceedings when admittedly the assessee has received the money by way of interest on refund and the said amount ought to have been shown in the returns as an income and was liable to pay tax. The offering of the said amount for tax is not dependent on the fact whether the said interest has become irrevocable under the Act or refundable under the Act. In that view of the matter, the said finding in our view is contrary to law and cannot be sustained. Accordingly, it is set aside. As the matter is already remitted to the assessing authority he shall first calculate the interest refunded and the amount of refund on the subsequent orders by which the said benefit is sought to be withdrawn and thereafter calculate the interest taxable under the aforesaid Act. That would meet the ends of justice. Thus question no.4 is disposed off.”

- 199 - 180. Accordingly, following the aforesaid Judgment the finding of the authorities is set aside and the matter is remitted to the Assessing Authority with a direction that he shall first calculate the interest received and amount of refund on the subsequent orders by which the said benefit is sought to be withdrawn and thereafter, calculate the interest taxable under the aforesaid act.

Question No.24 is disposed of accordingly.

All the appeals stand disposed of, accordingly.

No costs.

Sd/- JUDGE

Sd/- JUDGE

sps/sbs/nsu/tl/ksp/ng/sk/mgn/ckl/bnv/-