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Income Tax Appellate Tribunal, Hyderabad ‘B’ Bench, Hyderabad
Before: SHRI LALIET KUMAR & SHRI MADHUSUDAN SAWDIA
आदेश/ORDER PER SHRI MADHUSUDAN SAWDIA, A.M: These cross appeals filed by M/s. HSBC Electronic Data Processing India Pvt. Ltd. (“assessee”) and Revenue, against the order dated 30/05/2017 of the learned Commissioner of Income Tax (Appeals)-9, Hyderabad (“Ld. CIT(A)”) relating to A.Y.2010-
11. For the sake of convenience, we decide these appeals by way of this common order.
First, we take up appeal of the assessee in ITA No.1613/Hyd/2017. The revised / modified grounds of appeal raised by the assessee read as under: “Based on the facts and circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) - 9 ['CIT(A)’/ AO, has on facts and in law: Excluding provision for doubtful debts in computing Book profits under section 115JB of the Income tax Act, 1961 ('the Act'): 1. erred in upholding the AO's action of adding back the provisions for doubtful debts amounting to Rs. 11,29,70,000 to the book profits under clause (c) to Explanation 1 of section 115JB of the Act without appreciating the facts of the Appellant. 1.1. erred in not following the principles of Apollo Tyres Ltd. vs Commissioner of Income Tax, Kochi (255 ITR 273) wherein the Hon'ble Supreme Court of India held that Minimum Alternative Taxes (MAT) under section 115]B of the Act is a self-contained code and the AO has no jurisdiction to alter the book profit except to the extent provided in the explanation to section 115JB of the Act;
Disallowances of expenditures:
2. erred in upholding the AO's action of disallowing the expenses claimed under section 37(1) of the Act amounting to Rs. 12,77,839; 3. erred in upholding the disallowance of expenses amounting to Rs. 10,00,000 as determined by the Ld. AO on ad-hoc basis; Additional Ground 3.1. erred in disallowing the expenses pertaining to AY 2010-11 amounting to Rs. 11,51,001 without appreciating the facts of the Appellant; 3.2. Without prejudice to ground, the Ld. CIT(A) erred in law and on facts in setting-aside the matter and directing the Ld. AO to look into the expenditure item-wise for its admissibility, which is not a permissible action under the provisions of Section 251(1)(a) of the Act. Treatment of Unclaimed Liabilities: 4. erred in facts and in law by treating the unclaimed liabilities as income under section 41(1) of the Act, without considering the fact that the liabilities were neither written back in the books of account nor credited to the profit & loss account; 4.1. erred in adding back balances of unclaimed liabilities appearing under Current Liabilities in the balance sheet as 'deemed income chargeable to tax' under section 41(1) of the Act amounting to Rs.45,93,627; Additional Ground 4.2. Without prejudice to the above, erred in law and on facts in setting-aside the matter and remanding back the same to the Ld. AO to review the taxability of unclaimed
liabilities, which is not permitted under the provisions of Section 251(1)(a) of the Act. Expenses pertaining to purchases of computer software as Capital Expenditure: Revised Ground 5. erred in holding that the payment for purchase of software and software maintenance, amounting to Rs. 19,24,31,255 incurred for efficient running of business and claimed as expenses, are actually capital in nature and depreciation should be claimed on the same. Computation of deduction under section 10A of the Act 6. (a) erred in excluding the gross amount of foreign exchange gain on hedging with forward contracts / marked to market gains of Rs. 106,68,32,843 from the export turnover of ITES for the purpose of computing the deduction under section 10A of the Act, contending the same to be speculation /notional gain. (b) Without prejudice to the above, erred in not excluding the foreign exchange hedging gain from the total turnover for the purpose of computation of deduction under section 10A of the Act. (c) Without prejudice to the above, erred in reducing the hedging gain of Rs. 106,68,32,843 from the profits of the business instead of considering the net amount of Rs. 63,66,53,406 credited to profit & loss account for the purpose of computing deduction under section 10A of the Act. Computing incorrect amount of interest under section 234D of the Act.
The Ld. AO erred in computing incorrect amount of interest under section 234D of the Act on the excess refund issued amounting to Rs. 39,11,505. - Initiating penalty proceedings 8. Initiation of penalty proceedings under section 271(1) (c) of the Act. Additional Grounds: Deduction in respect of education cess and secondary and higher secondary education cess paid under section 37(1) of the Act 9. The Appellant prays that the education cess and higher secondary education cess on income tax paid for the year under consideration ought to be allowed as a deduction under Section 37(1) of the Act while computing the total income. To restrict and refund the Dividend Distribution Tax ('DDT) deposited on dividend distributed / paid to the Non-resident shareholders in terms of applicable Double Taxation Avoidance Agreement ('DTAA') 10. The Ld.AO/ CIT(A) ought to have appreciated that dividend paid/ distributed to its non-resident shareholders namely HSBC Holdings BV Netherlands, UK (a tax resident of United Kingdom), HSBC Finance, Netherlands (a tax resident of United Kingdom) and HSBC Group Nominees UK Limited (a tax resident of United Kingdom), is liable to be taxed under Article 11 of the India - United Kingdom DTAA (i.e. 15%) and not as per section 115-0 of the Act at 16.995%.
11. The Ld.AO/ CIT(A) ought to have held that if tax is paid on Dividend paid/ distributed over and above the rate provided in the DTAA, then such excess tax ought to refunded to is the Appellant. Appellant craves leave to consider each of the above grounds of appeal without prejudice to each other and craves leave to add, alter, delete or modify all or any of the above grounds of appeal.”
Ld. AR filed some additional grounds also, which have been consolidated under the revised/modified grounds of appeal
. Ld. AR submitted that the additional grounds so filed are admissible in view of judgment rendered by the Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC). The prayer for admission of additional grounds which were not in memorandum of appeal are being admitted for adjudication in terms of Rule 11 of the Income Tax (Appellate Tribunal) Rules, 1963 owing to the fact that objections raised in additional grounds are legal in nature for which relevant facts are stated to be emanating from the existing records.
4. Facts of the case, in brief, are that the assessee company e-filed Return of Income for A.Y. 2010-11 on 27.09.2010 declaring total income of Rs.18,95,31,020/- under normal provisions and book profit of Rs.4,31,77,24,345/- u/s.115JB of the income tax Act,1961 (“ the Act”). The learned Assessing Officer (Ld. AO) completed assessment u/s.143(3) of the Act assessing the total income under normal provisions of the Act at Rs.52,67,13,550/- and u/s.115JB of the Act at Rs.4,43,80,68,016/-.
5. The assessee raised as many as 11 grounds in this appeal. During the appellate proceedings the Ld. AR withdraw Ground No.9, hence the same is not required to be separately adjudicated. Further Ground No.8 of the assessee relates to initiation of penalty proceedings under section 271(1) (c) of the Act. This ground is held to be raised prematurely and hence not adjudicated separately.
6. Ground No.1 of the assessee relates to addition of provision for doubtful debts amounting to Rs.11,29,70,000/- in computing the book profits u/s 115JB of the Act. The brief facts with regard to this ground are that, the Ld. AO made an addition on account of provision for doubtful debts amounting to Rs.11,29,70,000/- to the total income of the assessee and added the same in computing the book profits u/s 115JB of the Act. 6.1 Feeling aggrieved by the order passed by Ld. AO, the assessee filed appeal before the Ld. CIT(A) who dismissed the claim of the assessee as per his observation under para no. 4.1 of his order, which is reproduced as under: “ I have considered the arguments of the assessee and have gone through the relevant provisions of the act and the Hon'ble supreme court decision cited above. As per the explanation 2, 115JB clause (c) any amount set aside to provisions made for meeting liabilities other than ascertained liability can be added back to the book
profits, Therefore, as long as the provision is made on adhoc basis it becomes an unascertained liability and hence Apollo Tyres Ltd. decision will not be of any help to the assessee. Even during the appellate proceedings assessee could not substantiate that the provision for doubtful debts is an ascertained liability. Assessee was not able to provide any basis for the calculation of above liability. It could not be stated by the assessee as to which accounts this bad debt provision pertains. On consideration of the facts of the case, it is seen that the assessee provided certain liability towards bad debt without any basis. It is also noticed that during the assessment proceedings the assessee admitted that due to oversight the provision was not added back, Considering all these aspects it is held that the provision made is an unascertained liability and hence adding the same to the book profits u/s. 115JB as well as under normal provisions is upheld. Ground No. 10 and additional ground No.1a are dismissed.”
6.2 Feeling aggrieved with the order of Ld. CIT(A), the assessee is in appeal before us. The Ld.AR submitted that the Ld. AO added Rs.11,29,70,000/- on account of provision for doubtful debts in computing the book profits u/s 115JB of the Act, contending that it was not an ascertained liability. He also submitted that the assessee had not made the provisions for doubtful debts of Rs.11,29,70,000/- on adhoc basis and hence the same is ascertained liability liable for deduction for computation of the book profits u/s 115JB of the Act. To justify that the provisions were not made on adhoc basis, the assessee submitted party-wise details of provision for bad and doubtful debts as an additional evidence during the appellate proceedings before us. The Ld. AR requested the bench to accept the additional evidence as the same will go to the root of the matter and for this he relied on ITAT’s decisions in the cases of Nuziveedu Seeds Ltd. (196 ITD 53) (Hyd.), Toyota Kirloskar Auto Parts Pvt. Ltd. in Dt.5.1.2012 and in the case of Dipti Garg in ITA No.633/Jp/2023 Dt.30.04.2024. Therefore the Ld. AR also contended that the provisions made for doubtful debts of Rs.11,29,70,000/- is ascertained liability and should be deducted from the computation of the book profits u/s 115JB of the Act. Hence he prayed that this ground raised by the assessee be allowed.
6.3 Per contra, the Ld. DR placed heavy reliance on the order of authorities below and requested to uphold the order of the revenue authorities. He opposed to the admission of the additional evidence filed by the assessee. 6.4 We have heard the rival contentions and gone through the record in the light of submissions made by the either side. At the outset Ld. AR during the course of argument had submitted party wise details of provision made for doubtful debts without application for admission of additional evidence supported by any affidavit. The admission of these documents at this stage after lapse of 10 years is not justified and hence cannot be considered.
Otherwise also the party wise list submitted by the assessee without any supporting evidence or reasons for making the provisions and without writing off their balances in the books of accounts, in our opinion can not be treated as an ascertained liability. As per the provisions contained under Explanation-1(c) to section 115JB of the Act, only provisions in the nature of ascertained liability can only be deducted for the purpose of calculation of book profit. In our opinion the provisions for doubtful debts amounting to Rs.11,29,70,000/-created by the assessee should not be deducted for the purpose of computation of the book profits u/s 115JB of the Act. Hence upholding the order of revenue authority, we dismiss this ground of the assessee . 6.5 Hence the Ground No.1 of the assessee is dismissed.
7. Ground Nos.2, 3 and 3.1 of the assessee relates to disallowance of the expenses claimed under section 37(1) of the Act amounting to Rs.12,77,839/-, disallowance of the expenses of Rs.10,00,000/- determined by the Ld. AO on ad-hoc basis and disallowance of expenses pertaining to AY 2010-11 amounting to Rs.11,51,001/-. All these disallowances were made by the Ld. AO due to reason that no details/evidences in support of these expenses were produced by the assessee before the Ld. AO. 7.1 Feeling aggrieved by the order passed by Ld. AO, the assessee filed appeal before the Ld.CIT(A) who dismissed the claim of the assessee due to the same reason that no details/evidences in support of these expenses were produced by the assessee before the Ld. CIT(A) also. 7.2 Feeling aggrieved with the order of Ld. CIT(A), the assessee is in appeal before us. The Ld.AR submitted that the assesee made provisions on accounts of various expenditure for Rs.12,77,839/- and Rs.11,51,001/- on scientific methodology or based on past trend or on estimation basis and the same should be allowed. However with regards to disallowance of expenditure of Rs.10,00,000/- on adhoc basis, the assessee submitted that, after expenditure is held to be for the purpose of business, then the adhoc disallowances cannot be made treating the same as non business expenditure. Hence he prayed that all these expenses should be allowed to the assessee .
7.3 Per contra, the Ld. DR placed heavy reliance on the order of authorities below and requested to uphold the order of the revenue authorities. 7.4 We have heard the rival contentions and gone through the record in the light of submissions made by the either side.
As far as disallowance on accounts of various expenditure for Rs.12,77,839/- and Rs.11,51,001/- are concerned, there is no dispute with regards to the fact that no details as well as any evidence/vouchers were produced before the revenue authorities in support of the expenditure claimed as deduction, in absence of which the revenue authorities have made the disallowances. We are also of the same opinion that no expenditure can be claimed as deduction, without any proper details or evidence/vouchers in support of the expenditure claimed as deduction. Hence we upheld the action of the Revenue Authority with regards to disallowance on accounts of various expenditure for Rs.12,77,839/- and Rs.11,51,001/- . As far as adhoc disallowance of Rs. 10,00,000/- is concerned, no details as well as any evidence/vouchers were produced before the revenue authorities in support of the expenditures claimed as deduction in case each of the expenditure were less than Rs.1,00,000/-. Hence the Ld. AO made an adhoc disallowance of Rs. 10,00,000/- on this account. In our considered view once an expenditure have been decided to be allowed, without rejecting the books of accounts of the assessee, no disallowance can be made on adhoc basis. Hon’ble Supreme court in the case of Principal Commissioner of Income Tax v. R.G. Buildwell Engineers Ltd, 99 taxmann.com 284(2018), dismissed the SLP filed against the order of hon’ble High Court, wherein the hon’ble high court upheld the order of Tribunal setting aside adhoc disallowance of expenses claimed on ground that assessee's books of account were not rejected. Hence respectfully relying on the said findings of the hon’ble court in the case of Principal Commissioner of Income Tax v. R.G. Buildwell Engineers Ltd (Supra), we hereby delete the adhoc disallowance of Rs. 10,00,000/- made by the Ld. AO. Therefore, we partly allowed these grounds of the assessee . 7.5 Hence the Ground Nos.2, 3 and 3.1 of the assessee are partly allowed.
Ground No.4 of the assessee relates to additions made on account of balances of unclaimed liabilities appearing under Current Liabilities in the balance sheet as 'deemed income chargeable to tax' under section 41(1) of the Act amounting to Rs.45,93,627/-. The said additions u/s.41(1) of the Act was made by the Ld. AO due to the reason that no details of the creditors to whom the amount was payable was produced by the assessee before the Ld. AO. 8.1 Feeling aggrieved by the order passed by Ld. AO, the assessee filed appeal before the Ld. CIT(A), who remanded the matter for verification to the Ld. AO as per his observation under para no. 7 & 7.1 of his order, which is reproduced as under: “ 7. Disallowance of unclaimed liabilities u/s. 41(1) (Rs.1,45,76,035/-): Assessee reflected unclaimed liabilities of Rs.1.45 crores. Assessee was asked to file the details of such unclaimed expenses. As per the details filed it is seen that there is an opening balance of Rs.81,44,795/- for which no break up or details are filed. Similarly, with regard to amount of Rs.32,08,629/- no details are filed. An amount of Rs,2,57,956/- was shown as expenditure for which also no details could be filed, other amounts of Rs.36,31,701/-, Rs.5,57,942/-, Rs.2,706/- and Rs. 1,385/- referred to as "direct cash journal" also could not be identified. Therefore, Assessing Officer held that not even the creditors are identified and hence there is no way that the assessee could make payment even at a future date. Therefore, Assessing officer added back the entire amount of Rs.1,45,76,035/- u/s. 41(1). During the appellate proceedings it is submitted by the assessee that the company makes various credit purchases / expenses form a number of vendors and issues cheques. The cheques which are not encashed within six months get transferred to unclaimed liabilities account. The assessee, during the appellate proceedings furnished the details of these unclaimed liabilities as additional evidence and the same was sent to Assessing officer for factual report. However, till date no report is received. 7.1 On perusal of the details furnished it is seen that in case of many entries there is not even a mention of the name of the person to whom the cheque was issued. Further, it is also observed that in case of various entries only description written is "miscellaneous vendor"' From these details it is clear that, as pointed by Assessing Officer, there can be no further claim by the creditors whose names are also not known. When the creditor itself is not identifiable there is no doubt that such unclaimed liability can be treated as remission of liability u/s. 41(1).
Therefore, Assessing Officer is directed to add back the amounts which do not have any name or a description of “miscellaneous vendor.” With regard to the entries where the names of the creditors are available assessee is directed to prove before the Assessing Officer with cogent evidence that the liability still exists. ln case the assessee is not able to prove the same to the satisfaction of the Assessing Officer. Assessing officer is directed to add back the relevant amount' Assessing Officer would delete the addition in respect of the amount pertaining to the parties who could be identified and in whose cases the assessee is able to prove that the liability still exists. In all remaining cases the addition made u.41(1) stands confirmed. In the result Ground No.2 relating to this issue is treated as partly allowed.”
Finally after the direction of Ld. CIT(A), the Ld. AO reduced the income added u/s 41(1) of the Act relating to unclaimed liabilities to Rs.45,93,627/-. 8.2 Feeling aggrieved with the order of Ld.CIT(A), the assessee is in appeal before us. The Ld.AR submitted that for any addition to be made u/s 41(1) of the Act, there should be entry in the books of accounts as cessation of his liability. However no such entry towards cessation of liability had been made by the assessee in the books of accounts. Hence he prayed that the addition made on account of unclaimed liabilities of Rs. 45,93,627/- should be deleted.
8.3 Per contra, the Ld. DR placed heavy reliance on the order of authorities below and requested to uphold the order of the revenue authorities.
8.4 We have heard the rival contentions and gone through the record in the light of submissions made by the either side. There is no dispute with regards to the fact that no entry towards cessation of liability had been made by the assessee in the books of accounts. But it is also a fact that no details of the creditors to whom the amount was payable, was produced by the assessee before the revenue authorities. The assessee has relied on many judicial decisions in support of his claim that no addition can be made without cessation of liability in the books of the assessee. However in the present case the facts are something different as the assessee did not able to file any details of the creditors to whom the amount was payable by the assessee. Hence under such a situation, we are of the opinion that no relief can be to given to the assessee in the absence of any details of the creditors to whom the amount is payable. Hence we upheld the action of the Revenue Authority. Therefore, we dismiss this ground of the assessee.
8.5 Hence the Ground No.4 of the assessee is dismissed.
Ground No.5 of the assessee relates to payment for purchase of software and software maintenance, amounting to Rs.19,24,31,255/-. The Ld. AO disallowed the claim of the assessee on account of purchase of software and software maintenance, amounting to Rs.19,24,31,255/- as revenue expenditure and treated the same as capital expenditure and held that the same is eligible for depreciation @ 25%. 9.1 Feeling aggrieved by the order passed by Ld. AO, the assessee filed appeal before the Ld.CIT(A), who also treated the expenditure as capital expenditure and held that the same is eligible for depreciation @ 60%, as per his observation under para no. 8 & 8.1 of his order, which is reproduced as under: “ 8. Disallowance of computer software expenses by treating them as capital expenditure (Rs.19,24,31,255/); During the assessment proceedings it is observed that the assessee purchased certain software and claimed the expenditure as revenue. When questioned as to why the same should not be treated as capital expenditure, it was stated that the expenditure was incurred for running the business more efficiently and hence the same qualifies as revenue expenditure. Assessee in support relied on the decisions in the case of Asahi India Safety Glass (245 CTR 529), Southern Roadways Ltd., (183 Taxmann 234), IBM India Ltd (290 ITR 183). Assessing Officer, after considering the explanation of the assessee and after examining the nature of software purchased, held that the purchases are capital in nature and further held that the same is eligible for depreciation @ 25%. During the appellate proceedings it is submitted by the assessee that they are in ITES business and use various computer software and maintenance services. Most of the above expenses relating to software and maintenance services are incurred by the parent company and are proportionately allocated to all group companies. As these software help in efficient running of the business, the expenditure is revenue in nature. lt is also argued that there is no enduring benefit as most of the licenses are for software usage. 8.1 Assessee in support of its argument relied on the decision of Hon'ble Bangalore Tribunal in case of Wipro Ltd., (2009 -TIOL -72 - ITAT - Bang) and also on the decision of Hon'ble SC in the case of Empire Jute Co Ltd., (124 ITR 1). Without prejudice to the above, it is also argued that even if the expenditure is considered as capital expenditure depreciation should be allowed at 60% as the software expenditure falls under the block computers. I have considered the arguments of the assessee and have gone through the details of items purchased. It is seen that most of the items purchased are license for software usage which can be used over a period of more than one year. As there is enduring benefit to the assessee, these purchases were rightly treated as capital expenses by the Assessing Officer. However, as pointed out by the a. these assets come under 60%. In the result ground No.4 pertaining to this issue is treated as partly allowed.”
9.2 Feeling aggrieved with the order of Ld.CIT(A), the assessee is in appeal before us. The Ld.AR filed a written submission on 06/06/2024 in support of his argument that the expenditure incurred for purchase of software and software maintenance, amounting to Rs.19,24,31,255/-, incurred for efficient running of business and are in the nature of revenue expenditure. The relevant portion of the written submission of the assessee are reproduced as under : “ B. Ground No.5 – Payment for obtaining licenses of software and software maintenance, amounting toRs.19,24,31,255 considered as capital expenses : 10. The company provides information Technology ('IT') enabled services and in this regard uses a number of computer software and IT maintenance services. During the year the Appellant has incurred expenses of Rs.52.32 crores on software and maintenance services. Most of the software and maintenance services are made by the parent company and allocated to all group companies using such software licenses and services. These software expenses help in efficient running of the business and hence revenue in nature. with the ever-changing technology, the software requires regular up- gradation and maintenance (generally on annual basis). Hence, the expenditure cannot be considered to result in enduring benefit or capital in nature.
11. The detailed break up of the expenditure of Rs.19,24,31,255 incurred towards IT Equipment and Maintenance charges were furnished before the Ld. AO on 8 October 2013 and enclosed as Page 114 to 1 1 6 of the factual paper Book.
The Ld. AO has considered the payment for purchase of software and software maintenance as purchases in the nature of profit earning apparatus or enhancement of such apparatus because they are used in server virtualization and cloud computing and therefore, the purchases are capital in nature. The Ld. AO has treated the licenses as intangible assets, which are eligible for depreciation of 25%.
13. The Hon'ble CIT(A) has opined that most of the items purchased are license for software usage which can be used over a period of more than one year and thus the expenditure incurred towards computer software expenses will be resulting in enduring benefit to the assessee company and thereby increasing the efficiency of the business. Hence the same has been held to be capital expenditure. However, the Hon'ble ClT(A) has pointed that the same will be considered under 60% brock for the purpose of claiming the depreciation.
14. Reference is placed on the following decisions of Wipro as stated by your Honours. Name of the decision Issue in dispute Findings of the court Wipro Ltd. (ITA Assessee had made The Hon'ble Tribunal after considering the No.1215/Bang/2014) payments to various non- various decisions of Tribunal and High Court dated 21 June 2019 – resident companies towards including the decision of Karnataka High Bangalore Tribunal. purchase of licensed Court of Wipro Ltd noted that there was no software. discussion before any forums on the applicability of the provisions of section The issue in the present case 9(1)(vi) and hence those decisions were not was whether tax was to be applicable. The Tribunal thereafter relying on deducted at source on such the payments which was decision of Karnataka High Court in case of considered as royalty under Samsung Electronics Co Ltd held that the section 9(1)(vi) of the Act. payment for purchase of licensed software was royalty and tax was required to be deducted. Wipro Ltd. (ITA The Assessee company The High Court noted that issue before the No.507/2002) dated imports software pre loaded Tribunal was whether expenditure on 25 August 2010 into hardware for retail imported software per se is capital in nature Karnataka HC. trading and for inhouse use. and not whether the payment is royalty or not. The High Court held that this issue was not argued before the lower authorities and hence it could not be contested before the Tribunal and therefore the order was upheld. The present case of Appellant is not on whether the payment can be constituted as royalty or not and hence this case is not applicable. Wipro Ltd. (382 ITR Whether depreciation claimed The High Court following the decision of 179) (Kar HC) 25 on software imported for in earlier bench decided the question of law in March 2015. house utilisation and treated favour of the Assessee. as part of block of assets However, the dispute in Appellant’s case is should be allowed, despite not on whether the payment made the same being in the nature constituted royalty or not and whether TDS of royalty as per Explanation was applicable on the same. to section 9(1)(vi) of the Act The dispute in Appellant’s case is whether and no TDS u/s.194 of the the software maintenance expenses paid Act having been deducted, were revenue in nature and not capital section 40(a)(i) of the Act. nature.
Accordingly, it is stated that the issue in case of Wipro Ltd. was whether the payment was for computer software amounted to royalty and whether TDS was applicable on the same. However, in the present facts of the Appellant, the issue is not whether the payment for obtaining licenses of software and software maintenance would be royalty or not and whether there would be any tax required to be deducted at source. The issue here is whether the expenditure incurred would be revenue or capital in nature.
Also it is submitted that considering the nature of business of the Appellant which is IT enabled services segment and captive banking and financial services off shoring entity of HSBC group, it was very routine for Appellant to incur maintenance charges and the useful life of the same is normally less than an year (this was also brought to the notice of the Ld. AO vide letter 03 December 2013 — page 130 of Factual Paper Book) 17. It is also pertinent to note that the Appellant has incurred similar expenditure year on year. The Appellant humbly submits that the characterisation of the software maintenance expenditure incurred by the Appellant year-on-year has not been challenged in the prior years as well as the subsequent years. 18. In this regard, the Appellant wishes to place reliance on the decision of the Hon'ble High Court of Bombay in the case of CIT vs. Raychem RPG Ltd [2021] 21 taxmann.com 507 (Bombay) (Refer page 621 to 622 of Legal Paper Book) wherein it has been held that where enterprise resource planning (ERP) package software facilitated assessee's trading operations or enabling management to conduct assessee's business more efficiently or more profitably but it was not in nature of profit-making apparatus, software expenditure was allowable as revenue expenditure. Further, the Appellant wishes to place reliance on the decision Special Bench of Tribunal in the case of Amway India Enterprises (114 TTJ 476) (SB) (Refer page 623 to 655 of Legal Paper Book) affirmed by Hon'ble Delhi HC in (ITA Nos. 1344 & 1363/09) dated 15 February 2008 (Refer page 656 to 661 of Legal Paper Book). In this case, the assessee in respect of applications (MS Office Software, Anti Virus software, Lotus Notes Software and Message Exchange applications) acquired a licence to use the said applications on payment of consideration. The question before the Special Bench was whether expenditure on computer software is capital or revenue in nature. The expenditure was incurred on purchase of software applications. The Special Bench had held that whether it is revenue or capital expenditure cannot be decided solely based on ownership test. The expenditure can be treated as capital expenditure only when it results in accrual of advantage of enduring nature to the assessee in the capital field. The relevant tests applied to determine the nature of expenditure in such a situation are the functional tests and the test of enduring benefit. An advantage is to be considered as of enduring nature if the benefit accruing is not of a transient nature but is of such durability as to justify it being treated as a capital asset. It is, thus, necessary that in order to treat any expenditure as capital expenditure, the same should result in accrual of advantage of enduring nature and such benefit should accrue to the assessee in the capital field. What exactly is meant by accrual of benefit in the capital field is that the said benefit should form part of the profit- making apparatus of the assessee's business. The decision of Special Bench has been confirmed by the Delhi High Court.
19. Further, Appellant also wishes to place reliance on the following decisions wherein it is held that software expenses or software and IT maintenance expenses are allowable as revenue expenditure: Asashi India Safety Glass Limited (ITA Nos. 1110 & 1111/2006) dated 04 November 2011 (Delhi HC) (Refer page 662 to 669 of Legal Paper Book) ITC Infotech India Ltd. (I.T.A No.4851Ko112019) dated 23 October 2019 (Kolkata Tribunal) (Refer page 670 to 680 of Legal Paper Book) Rain Commodities Ltd (ITA 158/Hyd/2014) dated 28 September 2016 (Hyderabad Trib) Reliance Global Services (P) Ltd (ITA 1054/Hyd/2012) dated 16 July 2013 (Hyderabad Tribunal)
In view of the above, the Appellant respectfully submits that the expenses of INR 19,24,31,255 incurred for obtaining licenses of software and maintenance of the software, should be allowed as revenue expenses.”
9.3 Per contra, the Ld. DR placed heavy reliance on the order of authorities below and requested to uphold the order of the revenue authorities. 9.4 We have heard the rival contentions and gone through the record in the light of submissions made by the either side. The Ld. AR submitted that the expenditure incurred for purchase of software and software maintenance, amounting to Rs. 19,24,31,255/-, incurred for efficient running of business and are in the nature of revenue expenditure . He also submitted that it was very routine for the assessee to incur maintenance charges every year and the useful life of the software were normally less than one year and the same facts were also brought to the notice of the Ld. AO. He also submitted that the assessee had incurred similar expenditure every year and the allowability of the same were not challenged in earlier years as well as the subsequent years. However as per the findings of the revenue authority most of the items purchased were license for software usage which can be used over a period of more than one year and were in the nature of enduring benefit to the assessee. Hence there is contradiction on the stand of both the side. However in our considered view whether the expenditure incurred for purchase of software will be treated as capital expenditure or revenue expenditure is depends on the nature and purpose of the software. The purchase of software is treated as Revenue Expenditure, if the software provides benefits for a short period, typically within the same financial year or if the expenditure is recurring, such as annual license fees or subscription costs or if Costs incurred for regular maintenance, minor updates, or enhancements that do not extend the software’s useful life significantly. On the other hand, the purchase of software is treated as Capital Expenditure, if the software provides benefits over multiple years and has an enduring advantage or if the cost incurred for the initial purchase or development of the software or if expenditures that result in substantial upgrades or enhancements that significantly increase the software’s efficiency or extend its useful life or if the entity owns the software outright and can use it for an extended period. Hence, the classification is primarily based on the nature of the benefit derived from the software and the duration over which it is expected to provide those benefits, which require the verification of the vouchers along with the books of accounts. Therefore we remand the matter back to the file of the Ld. AO to verify the each & every vouchers and decide as per law whether the expenditure are in the nature of revenue expenditure or capital expenditure in accordance with our observation made as above after providing an opportunity of being heard to the assessee. Accordingly, we allow this ground of the assessee for statistical purpose.
9.5 Hence the Ground No.5 of the assessee is allowed for statistical purpose.
Ground No.6 of the assessee relates to excluding the gross amount of foreign exchange gain on hedging with forward contracts / marked to market gains of Rs. 106,68,32,843 from the export turnover for the purpose of computing the deduction under section 10A of the Act. The brief facts with regard to this ground are that, the Ld. AO treated the gross amount of foreign exchange gain on hedging with forward contracts / marked to market gains of Rs.106,68,32,843/- as not derived from the regular export activity of the assessee and hence did not considered the same for the purpose of computing the deduction u/s 10A of the Act. 10.1 Feeling aggrieved by the order passed by Ld. AO, the assessee filed appeal before the Ld.CIT(A) who also concluded that, the gross amount of foreign exchange gain on hedging with forward contracts/marked to market gains of Rs.106,68,32,843/- are not derived from the regular export activity of the assessee and dismissed the claim of the assessee as per his observation under para no. 12.1 & 12.2 of his order, which is reproduced as under: “ I have considered the arguments of the assessee and find that the Hon,ble ITAT special bench in the case of Sri Prakash L shah (115 ITD 167) held that the foreign exchange gain emanating from export is integral part of export proceeds, However, the facts in the present case are different. The gains realized are not derived from export of ITES but are either hedging gains or marked to market notional gains as per the accounting standards. These gains, as observed by the Assessing officer, are not related to the realization of export proceeds but are out of a separate activity of hedging. There is a thin line separating the gains derived out of fluctuation in foreign exchange due to late realization of export proceeds and gains arising out of hedging in foreign exchange. It is not disputed that hedging is an insurance to the assessee against fluctuations in foreign exchange but the resultant gains cannot be treated as part of export turnover, They are basically sort of speculation gains / notional gains which are not part and parcel of export activity. The Hon’ble Bangalore Tribunal in the case of K. Mohan & Co. (Exports) (P.) Ltd. [126 ITD 59], held as under: "ln order to avoid risk of loss due to foreign exchange fluctuation it entered into forward contracts in respect of foreign exchange to be received aa result of export – During relevant assessment year, assessee claimed deduction u/s.10B in respectof its entire income including profitsderivedfrom forward contracts – Whether since
forward contracts had been taken in repect of 46 per cent of export turnover and it was not an isolated transaction. In Predi view of Explanation 2 to section 28, profit from forward 6 contracts was to be assessed as profit from speculation business – cted 3 Held, yes – Whether since for purpose of computing deduction hedgi , u/s.10B, speculation business cannot be considered as business of ng 6 undertaking. Assessing Officer was justified in rejecting assessee’s gain 6 claim for deduction in respect of profits derived from forward /(Los contracts – Held, yes.” s) 12.2 As the exchange gain in the present case is also from forward T contracts or marked to market difference, the gain in basically in the o form of speculation / notional gain and hence is not eligible for t deduction u/s. 10A. Coming to the other argument of the assessee a that the Assessing Officer ignored the net result of foreign exchange l gain by not reducing the losses incurred it is seen that the other gain / losses are not hedging losses but are related to foreign exchange f realisation loss /gain, arising out of export proceeds as against the o hedging gains / MTM gains considered by the Assessing Officer. In r short, the assessee had loss in realisation of export proceeds due toforeign exchange fluctuation whereas it had gains due to hedging. e These two items stand on different footing. The exchange loss/gain i in realisation of export proceeds becomes part of export proceeds g whereas the hedging / marked to market gains would not part of n export turnover. Therefore I am of the considered opinion that the Assessing Officer has correctly reduced the hedging gains from the e purview of 10A deduction and hence there is no need to interfere x with the decision of Assessing Officer on this aspect. In the result ground No.8 is dismissed.” c h 10.2 Feeling aggrieved with the order of Ld.CIT(A), the assessee is a n g in appeal before us. The Ld.AR filed written submission on e 06/06/2024 in support of his argument that the gross amount of g a foreign exchange gain on hedging with forward contracts / marked to i n market gains of Rs. 106,68,32,843/- are related to the regular export , activity of the assessee and prayed before the Bench to allow the claim 5 3 , of the assessee. The relevant portion of the written submission of the 4 0 6 assessee are reproduced as under : “ C. Ground no. 6: Exclusion of foreign exchange gain on hedging with forward contracts of Rs.106,68,32,843 from the export turnover of ITES for purpose of computing deduction u/s 10A of the Act
During the year, the company had a net foreign exchange gain as under :
Particulars Amount in INR Hedging gain/(Loss) 69,33,66,456 Relz Transaction Gain /(Loss) (295,082,910) Transaction gain/(loss) account 11,165 Transaction gain/(loss) account (115,916,541) Forex fluctuation loss (19,191,601) Unrelz Predicted hedging gain/(Loss) 373,466,837 Total foreign exchange gain 63,66,53,406
The Ld. AO treated the hedging gain as amount attributable to the business and derived from financial management of currency and not relating to business of export of software/ITES. The Ld. AO ignoring the net results, has reduced the foreign exchange gain of Rs 1,06,68,32,843 from export turnover not `derived `from export activity, without considering the foreign exchange fluctuation loss and considering only the net foreign exchange gain of Rs.63,66,53,406.
The Hon'ble CIT(A) in para 12 of its order held that the assessee had loss in realisation of export proceeds due to foreign exchange fluctuation and the gain is due to hedging operations to cover the risk of variations in forex. Since these two items are on different footing, the Hon'ble CIT(A) has held that the Ld. AO has rightly treated the exchange loss in realisation of export proceeds as part of the export proceeds whereas the hedging gain would not form part of the export turnover. The Hon'ble CIT(A) has held that the hedging gains are basically sort of speculation gains/notional gains which are not part and parcel of export activity.
At the outset, it is submitted, that the forex gain entered into by Appellant on forward contract is not speculative in nature and are closely linked to the Appellant's export of services to its AEs. The said fact has been affirmed by Hon'ble Jurisdictional Tribunal in Appellant's own case for AY 2012-13 (Refer page 456 to 467 of Factual Paper Book) and AY 2014-15 (Refer page 434 to 455 of Factual Paper Book), wherein following the decision of Hon'ble Supreme Court in case of Woodward Governor India Pvt Ltd, ITAT has allowed hedging loss as deduction from the Assessee's business income. Relevant extract from the order is reproduced below:
"32...Having regard to the rival contentions and the material on record, we find that the Supreme Court in the case of Woodward Governor India Pvt Ltd has held that the loss suffered by an assessee on account of foreign exchange difference as on date of Balance Sheet is an item of expenditure u/s 37(1) of the Act. Respectfully following the same, this ground of the assessee is allowed." 25. The Tribunal in earlier years have held that the term gain and loss are to be taken into equal parlance, since, the forex loss on hedging contract was held to be non-speculative, similarly, forex gain is to be considered as not for speculative purposes.
The issue in the year under consideration is not whether it's a business income or not, the dispute is whether it is derived from the business of the undertaking for purpose of exemption under section 10A of the Act.
Section 10A specifically provides a formula for computation of 'profits derived from export of articles or things or computer software' and section 10A(4) of the Act, uses the expression "profits of the business of the undertaking, being the unit" which is unlike the deductions specified in sections 801, 80IA, 801B, etc which do not provide for a specific formula to arrive at the qualifying profits i.e. 'profits and gains derived by/from an undertaking'.
Further, we also wish to submit that the term "profits of the business of the undertaking" is far wider in its scope than 'profits and gains derived by/from an undertaking'. Accordingly, forex gain earned on hedging contracts would fall within ambit of the same.
In this regard, the Appellant submits that the Forex Gain on Forward contracts to business of undertaking or income offered to tax in return of the income forms a part of the "profits and gains derived from the export of services" by an entrepreneur and thus eligible for deduction under section 10A of the Act. 30. The conjoint reading of the provisions of sub-section (7) of section 10A read with subsection (1) of section 10A gives the conclusion that section 10A provides for deduction in case of 'profits of the business'. Thus, profit of any nature related to the business of the undertaking would be eligible for deduction under section 10A of the Act. There must be a relation between the item and the business to be eligible for deduction u/s 10A.
Accordingly, Section 10A specifically provides a formula for computation of profits derived from export of articles or things or computer software' and section 10AA(7) of the Act. uses the expression "profits of the business of the undertaking. being the unit.' which is unlike the deductions specified in sections 801, 80IA, 80IB, etc which do not provide for a specific formula to arrive at the qualifying profits i.e. 'profits and gains derived by/from an undertaking'.
We also wish to submit that the term "profits of the business of the undertaking" is far wider in its scope than 'profits and gains derived by/from an undertaking'.
In this regard, the Appellant wishes to place reliance on the decision of the Full Bench decision of Hon'ble Karnataka High Court in case of Hewlett Packard Global Soft Ltd. [2018] 403 ITR 453 (Karnataka) (FB) .wherein the Hon'ble High Court has held that the word "derived by an undertaking of the business" in Section 10A and 10B are far wider to include ancillary income as well within its ambit. The relevant observation of Jurisdictional High Court is as under: "35. The Scheme of Deductions under Chapter VI-A in Sections 80-HH. 80-HHC. 80-IB, etc from the 'Gross Total Income of the Undertaking', which may arise from different specified activities in these provisions and other incomes may exclude interest income from the ambit of Deductions under these provisions, but exemption under Section 10-A and 10-B of the Act encompasses the entire income derived from the business of export of such eligible Undertakings including interest income derived from the temporary parking of funds by such Undertakings in Banks or even Staff loans. The dedicated nature of business or their special geographical locations in STPI or SEZs. etc. makes them a special category of assessees entitled to the incentive in the form of 100% Deduction under Section 10-A or 10-B of the Act, rather than it being a special character of income entitled to Deduction from Gross Total Income under Chapter VI- A under Section 80-HH, etc. The words 'derived by an Undertaking' in Section 10-A or 10-B are different from 'derived from' employed in Section 80-HH etc. Therefore all Profits and Gains of the Undertaking including the incidental income by way of interest on Bank Deposits or Staff loans would be entitled to 100% exemption or deduction under Section 10-A and 10-B of the Act. Such interest income arises in the ordinary course of export business of the Undertaking even though not as a direct result of export but from the Bank Deposits etc., and is therefore eligible for 100% deduction."
In this regard, the Appellant wishes to place reliance on the decision of Special Bench of Hon'ble Tribunal in case of Maral Overseas Limited [2012] 136 ITD 177 (Indore - Trib.) (SB) (Refer page 699 to 728 of Legal Paper Book) wherein it has been held that the word "derived by an undertaking of the business" in Section 10A and 10B are far wider to include ancillary income as well within its ambit. The relevant findings of the Hon'ble Special Bench is as under: "It is clear from the plain reading of section 10B(1) of the Act that the said section allows deduction in respect of profits and gains as are derived by a 100% EOU. Further, section 108(4) of the Act stipulates specific formula for computing the profit derived by the undertaking from export. Thus, the provisions of sub-section (4) of section 10B of the Act mandate that deduction under that section shall be computed by apportioning the profits of the business of the undertaking in the ratio of export turnover by the total turnover. Thus, even though sub-section (1) of section 10B refers to profits and gains as are derived by a 100% EOU, the manner of determining such eligible profits has been statutorily defined in sub-section (4) of that section. Both sub-sections (1) and (4) are to be read together while computing the eligible deduction u/s 10B of the Act. We cannot ignore sub- section (4) of section 10B which provides specific formula for computing the profits derived by the undertaking from export. As per the formula so laid down, the entire profits of the business are to be determined which are further multiplied by the ratio of export turnover to the total turnover of the business. In case of Liberty India (supra), the Hon'ble Supreme Court has dealt with the provisions of section 80-IA of the Act wherein no formula was laid down for computing the profits derived by the undertaking which has specifically been provided under sub-section (4) of section 10B while computing the profits derived by the undertaking from the export. Thus, the decision of the Hon`ble Supreme Court is of no help to the revenue in determining the claim of deduction u/s 10B in respect of export incentives.
Thus, sub-section (4) of section 10B stipulated that deduction under that section shall be computed by apportioning the profits of the business of the undertaking in the ratio of turnover to the total turnover. Thus, notwithstanding the fact that sub-section (1) of section 10B refers the profits and gains as are derived by a 100% EOU, yet the manner of determining such eligible profits has been statutorily defined in sub-section (4) of section 10B of the Act. As per the formula stated above, the entire profits of the business are to be taken which are multiplied by the ratio of the export turnover to the total turnover of the business. Sub-section (4) does not require an assessee to establish a direct nexus with the business of the undertaking and once an income forms part of the business of the undertaking, the same would be included in the profits of the business of the undertaking. Thus, once an income forms part of the business of the eligible undertaking, there is no further mandate in the provisions of section 10B to exclude the same from the eligible profits. The mode of determining the eligible deduction u/s 10B is similar to the provisions of section 80HHC inasmuch as both the sections mandates determination of eligible profits as per the formula contained therein. The only difference is that section 80HHC contains a further mandate in terms of Explanation (baa) for exclusion of certain income from the "profits of the business" which is, however, conspicuous by its absence in section 10B on the basis of the aforesaid distinction, sub- section (4) of section 10A/108 of the Act is a complete code providing the mechanism for computing the "profits of the business" eligible for deduction u/s 108 of the Act. Once an income forms part of the business of the income of the eligible undertaking of the assessee, the same cannot be excluded from the eligible profits for the purpose of computing deduction u/s 108 of the Act. As per the computation made by the Assessrng Officer himself, there is no dispute that both these incomes have been treated by the Assessing Officer as business income. The CBDT Circular No. 564 dated 5th July, 1990 reported in 184 ITR (St.) 137 explained the scope and ambit of section 80HHC and the mode of determination of profits derived by an assessee from the export of goods. I.T.A.T., Special Bench in the case of lnternational Research Park Laboratories Ltd. (supra), after following the aforesaid Circular, held that straight jacket formula given rn sub-section (3) has to be followed to determine the eligible deduction. The Hon'ble Supreme Court in the case of P.R. Prabhakar v. CIT [2006] 284 ITR 584/154 Taxman 503 had approved the principle laid down in the Special Bench decision in lnternational Research Park Laboratories Ltd. (supra). ln the assessee's own case the l.T.A.T. in the preceding years, after considering the decision in the case of Liberty lndia (supra) held that provisions of section 108 are different from the provisions of section 80-IA wherein no formula has been laid down for computing the eligible business profit.
In view of the above discussion, question No.2 is answered in affirmative and in favour of the assessee. Accordingly, the assessee is eligible for claim of deduction on export incentive received by it in terms of provisions of section 10B(1) read with section 10B(4) of the Act.
In this regard, reliance is also placed on the following decisions : * Motorola India Electronics (P) Ltd (2014) 265 CTR 94 (Karnataka) * Riviera Home Furnishing (2016) 65 taxmann.com 287 (Delhi) (Refer page 693 to 698 of Legal Paper Book) * Hrithik Exports (P) Ltd. (IT Appeal No.219 of 2014 dated 13 November 2014. * Mercer Consulting (India) (P) Ltd. (2014) 150 ITD 1 (Delhi-Trib) * Tech Mahindra Business Services (2021) 130 taxmann.com 64 (Mumbai- Trib) 36. Accordingly, it is submitted that since the foreign exchange gain earned on forward contract is part of Appellant’s export business, Appellant is eligible to claim deduction of the same under section 10A of the Act.”
10.3 Per contra, the Ld. DR placed heavy reliance on the order of authorities below and requested to uphold the order of the revenue authorities. 10.4 We have heard the rival contentions and gone through the record in the light of submissions made by the either side. As per section 10A of the Act, the deduction under this section is available only if the profit is derived from the activity of export. Section 10A is intended to promote export activities by providing tax exemption on profits derived from exports and therefore to qualify for exemption u/s 10A, the receipt/gains must be directly attributable to the exports. However the profit or gains earned by the assessee from hedging with forward contracts / marked to market gains cannot be considered as profit derived from the activity of export, as it has no direct nexus with the export activity. As no such direct nexus have been proved by the assessee, in our consider view the profit and the gains earned by the assessee from hedging with forward contracts / marked to market gains is not eligible for deduction under section 10A of the Act. Therefore, we dismiss this ground of the assessee. 10.5 Hence the Ground No.6 of the assessee is dismissed.
Ground No.7 of the assessee relates to computation of incorrect amount of interest u/s 234D of the Act on the excess refund issued amounting to Rs. 39,11,505. As this ground is of consequencial in nature, we make a direction to the Ld. AO to recalculate the interest u/s 234D of the Act as per law while giving effect to the appellate order. Accordingly, the ground no. 7 of the assessee is allowed for statistical purposes.
11.1 Hence the ground no. 7 of the assessee is allowed for statistical purposes.
12. Ground No.10 & 11 of the assessee relates to refund of excess Dividend Distribution Tax (“ DDT”). This ground has been raised by the assessee as an additional ground. The fact related to this ground are that the assessee has paid dividend of Rs. 153.61 crore to its UK based non resident shareholders and paid the DDT to the tune of Rs. 26.10 crores on the same. The Ld. AR submitted that the assessee has paid DDT u/s 115O of the Act, which is in excess of the rate prescribed under DTAA. The Ld. AR further submitted that the coordinate bench of ITAT in assessee’s own case in dated 16/04/2021 held in favour of the assesee. Hence relying on the decision of the ITAT, the Ld. AR prayed before the bench to restore the matter to file of the Ld. AO for refund of excess DDT paid by the assessee.
12.1 Per contra, the Ld. DR opposed the submission of the Ld. AR and opposed to grant of any refund to the assessee.
12.2 We have heard the rival contentions and gone through the record in the light of submissions made by the either side. There is no dispute about the facts that under the similar issue, the coordinate bench of ITAT in the case of the assessee in dated 16/04/2021 held in favour of the assesee. Hence respectfully following the decision of the ITAT(Supra) we restore the matter to file of the Ld. AO with a direction to verify and work out the excess DDT paid by the assessee as per law and if there is any excess payment of DDT, allow the refund to the assessee as per law, after giving an opportunity of being heard to the assessee. Accordingly, the ground of the assessee is allowed for statistical purposes.
12.3 Hence the Ground No.10 & 11 of the assessee is allowed for statistical purposes.
In the result, the appeal filed by the assessee in is partly allowed for statistical purposes.
The grounds of appeal raised by the Revenue read as under:
“1) The CIT(A) erred both on facts of the case and in law.
2) In the facts and circumstances of the case, whether the CIT(A) is correct in holding that discount on issue of ESOP (Employee Stock Options) is allowable as deduction in computing the income under the head profits and gains of business.
3) Any other ground that may be urged at the time of hearing.”
15. The solitary ground of appeal of the revenue is with regards to allowability of discount on issue of employees stock options (“ESOP”) as deduction in computing the income under the head profit and gains of business. The brief facts with regards to this ground are that, the assessee had claimed amount of Rs. 11,01,27,108/- as expenditure in computing the income under the head profit and gains of business on account of discount on issue of ESOP. The Ld. AO during the assessment u/s 143(3) disallowed the said expenditure and added the same to the total income of the assessee, contending that it was notional and contingent in nature. However during the appellate proceeding before Ld. CIT(A), the Ld. CIT(A) deleted the addition made by the Ld. AO. Aggrieved by such deletion of Ld. CIT(A), the revenue is in appeal before us.
16. Ld. DR submitted that, the expenditure claimed by the assessee on account of discount on issue of ESOP of Rs. 11,01,27,108/- is notional and contingent in nature and therefore should not be allowed as expenditure in computing the income under the head profit and gains of business. In support of his argument the Ld. DR relied on the decision of Delhi Tribunal in the case of Ranbaxy laboratories Ltd. Vs. ACIT (124 TTJ 771), in which the ITAT held that, “issue of shares at below market price results into short receipt of share premium. Accordingly, it was held that since it is not an actual loss for which no liability is incurred, the same is not allowable under the provisions of the Act.” He also submitted that subsequently Mumbai Tribunal in the case of M/s. VIP Industries Ltd. (2010-TIOL-654) and Hyderabad Tribunal in the case of Medha Servo Drivers (P) Ltd. Vs. ACIT (IT.A 1099/ Hyd/2006, A.Y. 2003-04, I.T.A. 1114/Hyd/2008, A.Y. 2004-05, ITA 749/Hyd/2006, A.Y. 2003-04) followed the decision of Delhi Tribunal and held that the difference between the market price and grant price, being contingent in nature and a notional loss, is therefore not allowable. Hence relying on all the case laws cited above, Ld. DR prayed before the bench to disallow such expenditure and upheld the order of the Ld. AO.
17. Per Contra the Ld. AR relying on the decision of the Ld. CIT(A) submitted that the special bench of ITAT in the case of Biocon Ltd (ITA No. 1206/Bang/2010 dated 16/07/2013) held that, discount on issue of ESOP is an allowable expenditure in computing the income under the head profit and gains of business. The Ld. AR also submitted that the decision of Special Bench of ITAT in case of Biocon Ltd (supra) has been upheld by Hon'ble Karnataka High Court in dated 11 November 2020. Therefore he submitted that, the decision of Karnataka High Court will preside over the ruling of Hon'ble Hyderabad Tribunal in case of Medha Servo Drivers (P) Ltd (supra). He also submitted that, the coordinate bench of Hyderabad Tribunal in assessee's own case for AY 2012-13 on 16 April 2021 and AY 2014-15 on 17 July 2019 has by placing reliance on the Special Bench(supra) and High Court(supra) ruling decided the issue in favour of the assessee. Accordingly, he submitted that, since the issue has already been decided in favour of the assessee in assessee’s own case for subsequent year, the contention of Ld. DR that ESOP expenses are notional and contingent in nature is not tenable. Hence the Ld. AR prayed before the bench to sustain the order of Ld. CIT(A) and to dismiss the appeal of the Revenue.
We have heard the rival contentions and gone through the record in the light of submissions made by the either side. As submitted by the Ld. AR that there are decisions of Special bench(supra) of ITAT and Honorable High Court(supra) stating that the discount on issue of ESOP is an allowable expenditure in computing the income under the head profit and gains of business. Further the coordinate bench of Hyderabad Tribunal in assessee's own case for AY 2012-13 on 16 April 2021 and AY 2014-15 on 17 July 2019 has by placing reliance on the rulings of Special Bench(supra) and High Court(supra) decided the issue in favour of the assessee. Hence respectfully following the decisions of Hon'ble Karnataka High Court in dated 11 November 2020, special bench of ITAT in the case of Biocon Ltd(Supra) and coordinate bench of Hyderabad Tribunal in assessee's own case for AY 2012-13 on 16 April 2021 and AY 2014-15 on 17 July 2019, we held that the discount on issue of ESOP is an allowable expenditure in computing the income under the head profit and gains of business. Therefore upholding the order of Ld. CIT(A), we dismiss the appeal of the Revenue. Accordingly, the appeal of the Revenue is dismissed. In the result, the appeal filed by the Revenue is dismissed.
To sum up, the appeal filed by the assessee is partly allowed for 20. statistical purposes and the appeal filed by the Revenue is dismissed. Order pronounced in the open Court on 5th Aug., 2024. Sd/- Sd/- (LALIET KUMAR) (MADHUSUDAN SAWDIA) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad. Dated: 05.08.2024. * Reddy gp Copy of the Order forwarded to :
1. 1. M/s. HSBC Electronic Data Processing India Pvt. Ltd., Plot Nos.3 & 4, Survey No.64, Hitech City, Hyderabad- 500 081 2. Addl. CIT, Range-2, /DCIT, Circle 2(2), Hyderabad.
3. Pr. CIT-2, Hyderabad.