The Joint Commissioner of Income Tax Special Range-3 , Bangalore V. M/s Infosys Limited , Bangalore

ITA 227/BANG/2019

AI Insights

The case involves cross appeals by Infosys Limited and the Joint Commissioner of Income Tax, Bengaluru, against the orders of the Commissioner of Income Tax (Appeals)-3, Bengaluru, for the assessment years 2014-15 and 2015-16. The appeals addressed various grounds including disallowances under sections 14A, 32AC, 80G, and issues related to deductions under sections 10A and 10AA. The Tribunal's decision involved a detailed examination of the legal provisions and precedents, leading to the remanding of several issues to the Assessing Officer for re-evaluation in light of judicial decisions and statutory amendments.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 124571 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 11 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-01-2023
• Appeal Filed By: Department
• Order Result: PartlyAllowedPartlyAllowed
• Bench Allotted: A
• Next Hearing Date: 10-01-2023
• Assessment Year: 2015-2016
• Appeal Filed On: 06-02-2019
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation; Transfer pricing; Business expenditure; Rectification of order; Double taxation relief; Opportunity of being heard; Additional depreciation; Earning of tax free income; Retrospective amendment; Permanent establishment; Question of law; Non-deduction of tax; Benefit of exemption; Revised return; Revenue expenditure; TDS; Rule 8D; Set aside
• Section: 32; 147; 12; 90; 154; 11; 139; 143(3); 10AA; 14A; 260A; 40(a)(ia); 32(1)(iia); 37(1); 80G; 139(5); 10B; 201(1); 195; 250; 251; 80HH; 143(2); 208; 139(1); 64; 113; 43; 48; 194J; 73; 72; 13; 119; 22; 101; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER ITA Nos.125 & 126/Bang/2019 Assessment years : 2014-15 & 2015-16 Infosys Limited, Plot No.44 and 97A Konappana Agrahara, Hosur Road, Electronics City, Phase 1, Bangalore – 560 100. PAN: AAACI 4798L Vs. The Joint Commissioner of Income Tax, Special Range 3, Bengaluru. APPELLANT RESPONDENT & ITA Nos.226 & 227/Bang/2019 Assessment years : 2014-15 & 2015-16 The Joint Commissioner of Income Tax, Special Range 3, Bengaluru. Vs. Infosys Limited, Bangalore – 560 100. PAN: AAACI 4798L APPELLANT RESPONDENT Assessee by : Shri B.R. Sudheendra, CA Respondent by : Shri Sankar K. Ganeshan, CIT(DR)(ITAT), Bengaluru. Date of hearing : 11.01.2023 Date of Pronouncement : 31.01.2023 ITA Nos.125, 126, 226 & 227/Bang/2019 Page 2 of 129 O R D E R Per Bench These cross appeals by the assessee and the revenue are against the orders of the Commissioner of Income Tax (Appeals)-3, Bengaluru, dated 03.12.2018 for assessment years 2014-15 & 2015-16. These appeals are heard together and disposed by this common order for the sake of convenience and brevity. 2. The common issues contented in these appeals through various grounds raised by the assessee and the revenue are as listed below – Issue AY 2014-15 AY 2015-16 Ground No. Ground No. Assessee’s appeal Assessee’s appeal Disallowance u/s. 14A 2 2 Disallowance of subscription charges paid to Forester Research and Gartner 3 3 Disallowance of software expenses for not deducting TDS - 4 Disallowance of software expenses as capital expenditure 4 5 Disallowance of Brand Building expenditure 5 6 Disallowance of commission paid to non residents for not deducting tax at source u/s. 195 6 7 Deduction u/s. 10A, 10AA in respect of onsite activities 7 8 Deduction u/s. 80JJAA 8 9 Disallowance of payments made to overseas subsidiaries viz., Infosys China, Infosys Mexico, Infosys BPO Poland and Infosys BPO Czech Republic u/s. 40(a)(i) [AY 2014-15] viz., Infosys China, Infosys Mexico, Infosys BPO Poland and Infosys BPO Czech Republic, Future 9 - ITA Nos.125, 126, 226 & 227/Bang/2019 Page 3 of 129 Focus Infotech, UAE AND Pt Maya International, Indonesia u/s. 40(a)(i) [AY 2015-16] - 10 Disallowance of payments made to US authorities 10 - Disallowance of deduction claimed u/s. 32AC 11 11 Partial disallowance u/s. 35(2AB) 12 - Relief/deduction for foreign tax credit, state tax paid outside India as per Karnataka HC decision in Wipro Ltd. 13 (Assessee’s appeal) 3 (Revenue’s appeal) 12 (Assessee’s appeal) 3 (Revenue’s appeal) Deduction u/s. 10AA in interest income etc. 2 (Revenue’s appeal) 2 (Revenue’s appeal) Deduction u/s. 80G in respect of CSR expenses - 13 3. We will first take up the appeal of the assessee (ITA No.126/Bang/2019) and the revenue (ITA No.227/Bang/2019) filed for AY 2015-16 for adjudication ITA No.126/Bang/2019 – Assessee’s appeal 4. The Assessee is an Indian Company engaged in development and export of computer software. For the year under consideration, original return of income was filed on 26.11.2015 declaring total income of Rs. 11170,33,18,710.A revised return of income was filed on 31.3.2017 declaring total income of Rs. 11191,68,71,750. Notice under section 143(2) was issued and served. Details called for from time to time were submitted. The assessment was completed and the order under section 143(3) was passed on 29.12.2017. As there were certain mistakes apparent from record, a rectification application was filed under section 154. The learned AO passed the rectification order under section 154 on 24.1.2018. Aggrieved by the variations made in ITA Nos.125, 126, 226 & 227/Bang/2019 Page 4 of 129 the assessment order, the Assessee preferred an appeal before the Hon’ble Commissioner of Income Tax (Appeals) – 3, Bangalore. The learned CIT(A) passed the order on 03.12.2018. Aggrieved by the order passed by the learned CIT(A), the Assessee has filed this appeal. 5. Ground No 1 and 16 are general and does not warrant a separate adjudication. Ground No. 2 – Disallowance under section 14A read with rule 8D(2)(iii) 6. During the year, exempt income comprising off dividends from mutual funds and interest on tax free bonds amounted to Rs. 243,08,97,714. These dividends were directly credited to bank accounts of the Assessee and / or reinvested as the case may be. No expenditure was incurred to earn the above exempt income. Nevertheless, the Assessee quantified 5% of salary cost of CFO, 50% of salary cost of employees handling treasury functions and 10% of salary cost of CFC amounting to Rs. 23,60,756, Rs. 45,74,983 and Rs. 12,03,238 respectively totalling to Rs. 81,38,977 as the expenditure relatable to exempt income and the same was disallowed voluntarily in the return of income. Before the AO the Assessee submitted the computation of disallowance of Rs. 81,38,977 voluntarily made by the Assessee and without prejudice to the same also submitted the computation as per rule 8D excluding and including the investment made in the shares of Infosys BPO Ltd. The Assessee relied on various decisions in support of the contention that since no dividend was ITA Nos.125, 126, 226 & 227/Bang/2019 Page 5 of 129 received from Infosys BPO Ltd and since Infosys BPO Ltd is a subsidiary of the Assessee, investment made in the shares of the said Company should not be considered for computing the disallowance under section 14A. 7. The learned AO relied on the decision of the Delhi High Court in the case of Maxopp Investments Ltd v CIT [2011] 15 taxmann.com 390 in support of the view that disallowance under section 14A is attracted even in cases where assessee company has made strategic investments in the group companies as well as subsidiary companies. The AO then relied on the decision of the Calcutta High court in the case of Dhanuka & Sons v CIT 339 ITR 319 wherein it was held that when the assessee is not able to show that the investment in shares is out of internal accounts or non-interest bearing funds, disallowance u/s 14A can be made. The AO also relied on the decision in Cheminvest Ltd v ITO ITAT DEL SB 121 ITD 318 and Pradeep Kar v ACIT 319 ITR 416 (Kar) in support of the contention that disallowance under section 14A should be made even when no exempt income is earned during the year. After noting the above, the AO has directly concluded that the Assessee’s computation of disallowance under section 14A is not satisfactory and quantified the disallowance under section 14A as per old rule 8D(2)(iii) [as existed before its substitution w.e.f 2.6.2016] by considering 0.5% of average value of mutual funds, tax free bonds and equity shares of Infosys BPO Ltd. The disallowance so quantified amounted to Rs. 17,16,55,167. After reducing the disallowance voluntarily made by the Assessee amounting to Rs. ITA Nos.125, 126, 226 & 227/Bang/2019 Page 6 of 129 81,38,977, the remaining sum of Rs. 16,35,16,190 has been disallowed by the learned AO under section 14A read with rule 8D(2)(iii). 8. Aggrieved the assessee preferred appeal before the CIT(A). The CIT(A) held that the action of the learned AO in invoking provisions of section 14A and applying rule 8D cannot be faulted with. However, the CIT(A) directed the AO to recompute the disallowance under rule 8D by considering only those investments which yielded exempt income during the year by following the Special Bench of ITAT in Vireet Investment (2017) 82 taxmann.com 415. 9. The assessee is in appeal before the Tribunal against the order of the CIT(A). The ld AR submitted that The Hon’ble ITAT in Assessee’s own case for AY 2012-13 in ITA No. 718/B/2017 dated 28.11.2022 has considered the issue of disallowance u/s. 14A on similar contentions, remanded this issue to the Ld.AO to compute the disallowance by excluding the investment made in Infosys BPO Ltd. that did not yield any exempt income for the year following the ruling of the Special Bench of the Tribunal in Vireet Investment reported in (supra). The ld AR further submitted that for the year under consideration, the disallowance u/s.14A is contended on the additional issue of the AO not recording any satisfaction as to how the voluntary disallowance made by the Assessee under section 14A is not correct having regard to the accounts of the Assessee. The reason as submitted by the ld AR for raising this additional contention during the year ITA Nos.125, 126, 226 & 227/Bang/2019 Page 7 of 129 under consideration is that the Hon’ble ITAT in AY 2012-13 did not decide the issue of ‘satisfaction’ under section 14A for the reason that the disallowance computed as per rule 8D after excluding investments not yielding exempt income was less than the disallowance voluntarily offered by the Assessee in AY 2012-13 and therefore the voluntary disallowance was therefore accepted in AY 2012-13. 10. In this regard the ld AR submitted that the Assessee voluntarily disallowed a sum of Rs. 81,38,976 under section 14A. The said disallowance was computed on the basis of 5% of salary cost of CFO, 50% of salary cost of employees handling treasury functions and 10% of salary cost of CFC. However, the learned AO has invoked rule 8D for the purpose of making disallowance under section 14A(2) without recording any satisfaction as to how the voluntary disallowance made by the Assessee under section 14A is not correct having regard to the accounts of the Assessee. 3.11. The ld AR also submitted that the Supreme Court in Maxopp Investment Ltd v CIT [2018] 91 taxmann.com 154 held that before invoking rule 8D, the assessing officer needs to record requisite satisfaction with regard to correctness of the claim of the assessee regarding the amount disallowed under section 14A. The ld AR also submitted that the AO in the assessment order has discussed only the provisions relating to section 14A and has directly proceeded to conclude that the computation of disallowance by the assessee is not satisfactory which is not correct as per the ratio laid down by the Hon’ble Apex Court. The ld AR drew our attention to the decision of the coordinate bench in the case of Infosys BPM Ltd v ITA Nos.125, 126, 226 & 227/Bang/2019 Page 8 of 129 DCIT ITA No 493/Bang/2018 dated 23.8.2021, where on identical facts and circumstances the Tribunal has deleted the disallowance made by the AO. 11. The ld DR relied on the orders of the lower authorities. 12. We heard the rival submissions and perused the material on record. For the year under consideration the assessee has made a suo moto disallowance of Rs. 81,38,976 under section 14A. We notice that the coordinate bench in assessee’s own case for AY 2012-13, while considering a similar issue remanded the issue back to the AO for exclusion of the investment made in Infosys BPO Ltd. that did not yield any exempt income for the year following the ruling of the Special Bench of the Tribunal in Vireet Investment reported in (2017) 82 taxmann.com. It is also noticed that the Tribunal did not adjudicate the issue of AO not recording satisfaction for the reason that the amount voluntarily disallowed by the assessee for AY 2012-13 would be more than the disallowance computed as per Rule 8D(2)(iii) excluding the investment made in Infosys BPO Ltd. However during the year under consideration, the Ld AR contended the legal issue of the AO not recording the satisfaction by stating that the decision of the Tribunal for AY 2012-13 cannot be directly applied since the disallowance under Rule 8D(2)(iii) even after excluding the investment in Infosys BPO Ltd is more than the suo moto disallowance made by the assessee. Accordingly the ld AR submitted that the AO has invoked rule 8D for the purpose of making disallowance under section 14A(2) ITA Nos.125, 126, 226 & 227/Bang/2019 Page 9 of 129 without recording any satisfaction as to how the voluntary disallowance made by the assessee under section 14A is not correct having regard to the accounts of the assessee and in this regard relied on the decision of the Hon’ble Supreme Court in Maxopp Investment Ltd v CIT [2018] 91 taxmann.com 154 13. Before we go into the facts of the case, we will look at the provisions of section 14Aand Rule 8D which are reproduced as follows:- “Expenditure incurred in relation to income not includible in total income. 14A. (1) For the purposes of computing the total income under this Chapter, 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 this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act :] Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.] ITA Nos.125, 126, 226 & 227/Bang/2019 Page 10 of 129 Rule 8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with— (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:— (i) the amount of expenditure directly relating to income which does not form part of total income; and (ii) an amount equal to half per cent of the annual average of the monthly average of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income : Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the assessee.” 14. From the combined reading of the above provisions, it is clear that for the purpose of application of section 14 r.w.r 8D(2)(iii) the AO has to record reasons as to why he is not satisfied with the correctness of the claim of expenditure by the assessee. We notice that the AO in the order of assessment has not brought anything on record to factually state that the computation of disallowance made by the assessee and the relevant observations of the AO is extracted below – ITA Nos.125, 126, 226 & 227/Bang/2019 Page 11 of 129 3.2.1. The taxpayer company has had substantial amount of dividend from investments. For Asst. Year 2015-16, the taxpayer company had declared tax exempt dividend income of Rs. 145,59,41,065. However, taxpayer has shown an expense of Rs. 81,38,976/-pertaining to the exempt income. It is seen that the taxpayer company had substantial investment in the share of its subsidiary, M/s. lnfosys RPM Ltd. The taxpayer company has been a debt free company and there is no interest paid for the year. Considering the tax-exempt income received from mutual funds, as well as investments in the share capital of Indian subsidiary, the taxpayer company was asked to explain the basis of amounts reduced from she dividend income as per section 14A of the Income Tax Act. 3.2.2. It is seen that the taxpayer's computation for disallowance u/s 14A is not in accordance with the provisions contained in Rule 80 of Income Tax Rules. The crux of section 14A, which Is now obligatory in nature reads as under:- "(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed if the Assessing Officer, having regard to the accounts of the taxpayer, is not satisfied with the correctness of the claim of the taxpayer in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provision of sub-section (2) shall also apply in relation to a case where an taxpayer claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act." 3.2.3 On plain reading of the aforesaid provisions, It is evident that the following conditions are required to be satisfied before invoking the provisions of section 14A of the Act: • The taxpayer should have incurred the expenditure. • Such expenditure should be in relation to income: and • Such income does not form part of the total income under this Act. ITA Nos.125, 126, 226 & 227/Bang/2019 Page 12 of 129 3.2.4 Based on the above, it can be said that the provisions of section 14A of the Act would be attracted only if all the aforesaid conditions are cumulatively satisfied. The provisions of section 14A of the Act can be invoked where the taxpayer has not incurred any expenditure in relation to exempt income. 3.2.5 In this regard, the decision of Hon'ble High Court of Delhi in the case Maxopp investments Ltd Vs. CIT [TS-668-HC- 2011(HC)], which has upheld the decision of the Hon'ble High Court of Mumbai in the case of Godrej and Boyce Company Ltd. In this case, the Hon'ble High Court has held that 14A disallowance is attracted even in cases where Taxpayer Company has made strategic investments in the group companies as well as subsidiary companies. Considering the above, it is seen that the taxpayer company is liable for disallowance u/s. 14A of the Income Tax Act. 3.2.6 It also is essential to draw reference to case of Dhanuka & Sons Vs. CIT (339 ITR 319 (Cal) ) wherein the Hon'ble High Court held that when the taxpayer is not able to show that the investment in shares are out of internal accounts or non-interest bearing funds, disallowance u/s.14A can be made. Reliance is also placed on the cases of Cheminvest. Ltd. Vs. ITO (ITAT- SB-Del) 121 ITD 318 and Pradeep Kar Vs. ACIT (Kar) 319 ITR 416, wherein it was held that expenditure in relation to exempted income is to be disallowed u/s.14A even when no exempted income is earned during the year. Further, in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. Deputy Commissioner of Income tax, (2010) 234 CTR 1 (Bom), High Court of Bombay has held that no deduction shall be allowed in respect of expenditure incurred by the taxpayer In relation to such income which does not form part of the total income under the Act. This was by virtue of the provisions of S.14A(1) and the provisions of Rule 80 of the IT Rules, which was notified w.e.f. 24.03.2008 and shall apply with effect from A.Y. 2008-09.Further, the Hon'ble CBDT's circular no. S of 2014, also clarifies that the Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income. 3.2.7 As the computation for the disallowance u/s 14A is not satisfactory, the taxpayer company was asked the applicability of ITA Nos.125, 126, 226 & 227/Bang/2019 Page 13 of 129 Rule 8D of the Income Tax Rules and to furnish the details of the working as per Rule 80 of the Income Tax Rules. The company furnished the same vide letter dated 12/01/2016. On verification of the details filed by the company, the disallowance u/s 14A is computed as below: Investments Opening Balance Closing Balance Average 0.5% of Average Mutual Funds 18,661,870,484 7,488,578,61 8 13,075224,551 65,376,123 Tax Free Bonds 12,350,069,926 1234,46,60,0 26 12,347 364,976 61,736,825 Edgeverve 10,000,000 461,84,00,00 0 2,314,200,000 11,571,000 Infosys BPO 6,594,243,797 6,594,243,79 7 6,594,243,797 171,655,167 Total Total amount to be disallowed 171,655,167 Less: amount already disallowed in Return 8,130,976 Balance amount to be disallowed 163,516,190 15. Further it is noticed from the perusal of the records that the AO has also not called for any details from the assessee or analysed the workings of the disallowance. In this regard we notice that the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT [2018] 91 taxmann.com 154 (SC) has held as follows:- “41. Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO.” ITA Nos.125, 126, 226 & 227/Bang/2019 Page 14 of 129 16. In view of the above Hon'ble Apex Court judgment, it is clear that no disallowance can be made u/s 14A of the Act read with Rule 8D of the IT Rules, where the A.O. failed to record dissatisfaction of correctness of the claim of the assessee. Therefore the disallowance made under section 14A r.w.r 8D(2)(iii) is deleted. This ground is allowed in favour of the assessee. Ground No. 3 – Disallowance of subscription charges paid to Forester Research and Gartner 17. During the year under consideration, the Assessee incurred expenditure on subscription charges amounting to Rs. 4,31,68,300 and Rs. 5,42,67,126 which was paid to two non-resident entities viz., Forester research and Gartner. The aforesaid payments were made without deduction of tax at source under section 195 of the IT Act, 1961. The Assessee vide letter filed on 21.12.2017 submitted the details of payments made to Forester Research, Gartner before the AO [Page 779 of Paper book 2] and the explained the reasons as to why the same was not liable for TDS under section 195. The AO noted that this issue is under dispute for several years and similar disallowances were made in the previous years. It was also noted by the AO that in a recent decision (without disclosing the case details), the Karnataka High Court upheld a similar disallowance of payments made to M/s. Gartner Research Services holding the same to be in the nature of royalty. Therefore the AO disallowed the aforesaid payments under section ITA Nos.125, 126, 226 & 227/Bang/2019 Page 15 of 129 40(a)(i) for not deducting tax at source under section 195 on such payments. 18. On further appeal the CIT(A) upheld the addition made by the ld. AO relying on the decision of the jurisdictional High Court in Assessee’s own case in ITA No. 613 to 616 of 2006 dated 15.10.2011. 19. The ld AR submitted that a similar issue is considered by the coordinate bench in assessee’s own case where the issue has been remitted back to the AO to verify the claim as per the decision of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT reported in (2021) 432 ITR 471. The ld AR prayed for a similar direction for the year under consideration also. The ld DR did not raise objections to the same. 20. We notice that the coordinate bench of the Tribunal while considering the same issue for AY 2012-13 in assessee’s own case has held that – 9.1. It was submitted that these expenditure were disallowed by the Ld.AO for non-deduction of TDS u/s.195 of the Act. The Ld.AO followed the decision of Hon’ble Karnataka High Court in case of CIT vs. Samsung Electronics Co. Ltd. reported in (2011) 203 Taxman 477. It is submitted that Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT reported in (2021) 432 ITR 471 as distinguished decision of Hon’ble Karnataka High Court. In our opinion, as the decision of Hon’ble Supreme Court was not available to the revenue authorities in the interest of justice, we remand these issues back to the Ld.AO/TPO to verify these claims in accordance with the principles laid down by Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT (supra). In the event after verifying the relevant agreements / invoices and applying the ratio laid ITA Nos.125, 126, 226 & 227/Bang/2019 Page 16 of 129 down by the Hon’ble Supreme Court, no TDS is liable to the deducted, the disallowance u/s. 40(a)(i) /40(a)(ia) deserves to be deleted. The Ld.AO is directed to carry out necessary verifications in accordance with law by granting proper opportunity of being heard to assessee. 21. We also notice that the Hon’ble Karnataka High Court in Assessee’s own case vide order dated 20.9.2021 in ITA No 281/2018 c/w ITA No 279/2018 for AY 2005-06 and AY 2006-07, has deleted the identical disallowance following the decision of Hon’ble Supreme Court in Engineering Analysis (supra). 22. In view of the above discussion and respectfully following the decision of the coordinate bench of the Tribunal this issue is remanded to the ld. AO to verify the claim as per the decision of Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd (supra). Accordingly, these grounds of appeal are allowed for statistical purposes. Ground No. 4 – Disallowance of software expenses for not deducting tax at source 23. During the year under consideration, the Assessee incurred an amount of Rs. 797,19,52,409 towards purchase of software. Out of the said sum, the Assessee had not deducted tax at source on expenses amounting to Rs. 16,91,300. The Assessee submitted before the AO the party-wise details of software expenditure on which TDS had not been made along with supporting invoices and a detailed submission giving reasons for not deducting tax at source. The AO has disallowed ITA Nos.125, 126, 226 & 227/Bang/2019 Page 17 of 129 a sum of Rs. 5,07,390 being 30% of software expenses of Rs. 16,91,300, under section 40(a)(ia) for not deducting tax at source under section 194J of the Act. The AO in this regard relied on the decision of the Karnataka High Court in CIT v Samsung Electronics Co Ltd (2011) 203 Taxman 477 (Kar). Aggrieved the assessee filed an appeal before the CIT(A) who upheld the action of the AO relying on the decision of the Karnataka High Court in Samsung Electronics case (supra). 24. We have heard the rival submissions and perused the materials available on record. We notice that this issue is remanded to the ld. AO to verify the claim as per the decision of Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd (supra) in assessee’s own case for AY 2012-13 (supra). Respectfully following the decision of the coordinate bench we remit the issue for the year under consideration also with a similar direction. Accordingly, these grounds of appeal are allowed for statistical purposes. Ground No. 5 – Disallowance of software expenses as capital expenditure 25. The Assessee is engaged in the business of development and export of computer software. During the year, the Assessee incurred a sum of Rs. 797,19,52,409 towards software expenses representing the license fees for usage of licensed software/services for maintenance of licensed software. The assessee submitted before the AO a detailed note on allowability of expenditure on purchase of computer software as revenue expenditure along with statement showing in detail the type ITA Nos.125, 126, 226 & 227/Bang/2019 Page 18 of 129 of computer software and useful life along with purchase order copies for the same vide letter filed on 22.12.2017 [Page 1064 to 1347 of Paper book 3]. 26. After considering the submissions of the assessee the AO noted that this issue has been elaborately discussed in the assessment order passed for AY 2006-07 in Assessee’s case wherein it was held that software expenses were in the nature of capital expenditure. Accordingly the AO has treated software expenses of Rs. 797,02,61,109 as a capital expenditure. The AO however allowed depreciation u/s 32 at 25% amounting to Rs. 199,25,65,277 and made a net disallowance of Rs. 597,76,95,832. 27. On further appeal the CIT(A) relying on the decision of the Karnataka High Court in CIT v Toyota Kirloskar Motors (P) Ltd (2009) 349 ITR 65 (Kar), concluded that where the life of a computer software is less than 2 years, the amount paid towards the same should be allowed as revenue expenditure. The CIT(A) further, held that in case of software which can be used perpetually (e.g., Operation system software like Windows, Application software like MS Office), the same should be treated as capital in nature. Accordingly, the CIT(A) directed the AO to verify all the invoices relating to the software expenditure to ascertain the life and nature of computer software. With respect to the alternative contention of depreciation rate, the CIT(A) held that the applicable rate should be 60%. ITA Nos.125, 126, 226 & 227/Bang/2019 Page 19 of 129 28. In the said order, the AO after considering the submissions of the Assessee, has granted relief amounting to Rs. 725,91,02,036, out of the total claim of Rs. 797,02,61,109. Out of the balance an amount of Rs. 11,66,99,893 paid to Microsoft Corporation was disallowed following the direction of CIT(A) to treat application software as capital in nature and the remaining amount of Rs. 59,44,59,180 was disallowed for the reason that details of vendors were not specified. 29. The ld AR submitted that the revenue’s case all along was that the software payments are in the nature of ‘royalty’ which means that the said payments are intrinsically revenue expenditure and that no material is brought on record by the revenue to demonstrate that the software payments are to be regarded as capital in nature. The ld AR drew our attention to the decision the Karnataka High Court in CIT v IBM India Ltd [2013] 357 ITR 88 where it is held that payment for purchase of application software is allowable as revenue expenditure and accordingly prayed that the AO be directed to verify the nature of the software, duration of license and allow the deduction of software expenses if the nature of the software is application software or if the duration of software license is less than 2 years. 30. We heard the DR. We notice that in case of IBM India Ltd (supra) the Hon`ble Karnataka High Court has considered the issue of allowability of expenses incurred towards software expenses and held that - ITA Nos.125, 126, 226 & 227/Bang/2019 Page 20 of 129 "The amount is paid for application of software WO not system software, The application software enables the assessee to carry out his business operation efficiently and smoothly. However, such software itself does not work on standalone boats. The same has to be fitted to a computer system to work. Such software enhances the efficiency of the operation. It is an aid in manufacturing process rather than the tool itself Thus for payment of such application software, though there is enduring benefit, it does not result into acquisition; of any capital asset. The same merely enhances the productivity or efficiency and hence can be treated as revenue expenditure. In fact, this court had an occasion to consider whether the software expenses are allowable as revenue expenses or not and held when the life, of a computer or software is less than two years and as such, the right to sue it for a limited period, the fee paid for acquisition of the said right is allowable as revenue expenditure” 31. In the year under consideration in the order giving effect the AO has disallowed a sum of Rs. 11,66,99,893 as capital in nature and an amount of Rs.59,44,59,180 was disallowed for the reason that details of vendors were not specified. We notice that in assessee’s own for AY 2012-13, has remanded the same issue to the Ld.AO to verify the claim in the light of the evidences/documents filed and respectfully following the said decision we remit the issue for the year under consideration also to the AO with similar direction. The AO is also directed to keep in mind the ratio laid down by the jurisdictional High Court in the case of Toyota Kirloskar Motors (P) Ltd (supra) and IBM India Ltd (supra) while deciding revenue or capital nature of the software spends. This ground is accordingly allowed for statistical purposes. Ground No. 6 – Disallowance of brand building expenditure 32. During the year, the Assessee incurred an amount of Rs. 93,60,16,466 on account of brand building expenditure. The assessee ITA Nos.125, 126, 226 & 227/Bang/2019 Page 21 of 129 submitted a note on allowability of brand building expenses as revenue expenditure wherein it is explained that the brand building expenditure were in the nature of subscription to research reports by research agencies and advisory services, participation / sponsorship in seminars, exhibitions, marketing and sales events, retainership amounts paid towards public relations agencies, annual and periodic customer and sales meets, sponsorship fees, publishing charges, travel reimbursements, photocopy charges, expenditure incurred for setting up of Booth for exhibition or display of Infosys name, expenditure on conferences, events, sales marketing expenses etc. [Page 588 to 593 of Paper book 2]. Sample invoice copies to establish the nature of expenditure incurred were also submitted in this regard [Page 801 to 814 of Paper book 2]. 33. The AO has noted that this issue has been duly examined in the assessment order passed for earlier years in Assessee’s case wherein it was concluded that expenditure incurred granted an enduring benefit. Accordingly the AO has treated brand building expenses of Rs. 91,60,44,081 as deferred revenue expenditure, allowed only one fifth of the said expenditure amounting to Rs. 18,32,08,816 and held that the remaining four fifth of the expenditure amounting to Rs. 73,28,35,264 is allowable as amortization over the next four years. On further appeal the CIT(A) upheld the action of the AO for the reason that the Assessee advanced generic statements and arguments rather than producing the details regarding the nature of the expenditure. ITA Nos.125, 126, 226 & 227/Bang/2019 Page 22 of 129 34. The ld AR submitted that the coordinate bench of the Tribunal in assessee’s own case for AY 2012-13 in ITA No. 718/B/2017 dated 28.11.2022 has allowed the issue in favour of the Assessee by following the decision of Coordinate Bench of this Tribunal in case of Infosys BPO Ltd v DCIT in ITA No. 1367/Bang/2014 by order dated 27.09.2019. The ld AR submitted that the facts are identical for the year under consideration also and accordingly contended that the issue is covered by the above decision. 35. We have heard the rival submissions and perused the materials available on record. This issue came for consideration before this Tribunal in assessee’s own case in earlier assessment year in ITA No.718/Bang/2017 dated 28.11.2022 for the assessment year 2012-13 wherein it was held as under: 12.8 We have perused the submissions advanced by both sides in the light of records placed before us. We note that Coordinate Bench in case of the sister concerns of assessee(supra), considered identical issue on similar facts. Nothing has been brought on record by the revenue to the expenses incurred by the assessee is towards any capital asset. Respectfully following the same, we direct the disallowance to be deleted.” 36. Considering that there is no change in the facts, circumstances and nature of brand building expenses incurred during the year under consideration as compared to the earlier years, we respectfully follow the decision of the coordinate bench and hold that the brand building expenditure incurred during the year should be allowed and the addition is deleted accordingly. This ground is allowed. ITA Nos.125, 126, 226 & 227/Bang/2019 Page 23 of 129 Ground No. 7 – Disallowance of commission paid to non-residents 37. The Assessee generates substantial part of its business from overseas clients mainly from the North American, European and Asia Pacific markets. In order to procure new business outside India and strengthen its existing business outside India and continually meet the demands and requirements of its existing clients outside India, the Company solicits help from agencies operating outside India. These agencies are termed Business Alliance partners (BAP). For the services rendered by these Business Alliance Partners outside India, a commission is paid to them in accordance with the terms of the agreement entered with them. During the year, the Assessee had incurred an amount of Rs. 50,87,88,787 towards commission charges. No tax was deducted at source in respect of the impugned payments. 38. The Assessee vide letter filed on 21.12.2017 submitted party wise details for cases where tax had not been deducted along with a note giving detailed reasons for not deducting tax wherein it is submitted that the BAP render services outside India and they do not render services from India or in India. BAP are also ‘non-residents’ under section 2(30) read with section 6 of the Act. Hence, no tax was deducted at source in respect of the commission paid to these non- residents. [Page 781-800 of Paper book 2]. 39. The AO did not accept the submissions of the assessee and disallowed commission paid to non-resident entities amounting to Rs. 50,87,88,787 under section 40(a)(i) for not deducting tax at source in ITA Nos.125, 126, 226 & 227/Bang/2019 Page 24 of 129 respect of the said payments under section 195. The AO placed reliance on the decision of the Karnataka High Court in Samsung Electronics Co. Ltd and others [2010] 320 ITR 209 in this regard. 40. Aggrieved the assessee preferred an appeal before the CIT(A). The CIT(A), relying on the appellate orders passed for AY 2007-08 to 2009-10 in Assessee’s case, concluded that the impugned payments made by the Assessee constitute ‘fees for technical services’ and therefore the Assessee was required to deduct tax at source on the same. Accordingly the CIT(A) confirmed the disallowance made by the AO. 41. The ld AR submitted that the coordinate bench in assessee’s own case has considered the same issue for AY 2012-13 and facts being identical for the year under consideration also, the issue is covered by the said decision. The ld AR relied inter alia on the decision of the Delhi High Court in DIT(IT) v Panalfa Autoelektrik Ltd (2014) 49 taxmann.com 412 and submitted that, commission paid to foreign agent for arranging export sales cannot be regarded as ‘fees for technical services’ under section 9(1)(vii). Additionally, it was argued that the position under the treaty law would prevail over the Act and accordingly a table giving country-wise break-up of payments made and their respective taxability under relevant treaty was submitted. The ld AR wherever appropriate, raised the contention of ‘make available’ test being not satisfied under the relevant treaty. The ld AR also submitted that the same arguments were presented during the course of ITA Nos.125, 126, 226 & 227/Bang/2019 Page 25 of 129 hearing for AY 2012-13 and the arguments were considered by the Hon’ble Tribunal in paras 13.4 to 13.10 (page 41 to 47) of the aforesaid order. 42. For the year under consideration the ld AR submitted detailed written submissions in support of the above contentions which is extracted below – 1.1. For the year under consideration, details of commission paid are as follows: Name of Vendor Vendor Country Amount in INR Nature Computer Warehouse Limited Nigeria 22,39,64,688 BAP commission WAREEF UNITED COMPANY Saudi Arabia 28,25,224 Towards commission on License sale Millennium Information Te Sri Lanka 3,60,12,883 Towards License commission Egabi FSI Egypt 18,72,754 Towards commission on License sale SIMBA TECHNOLOGY LIMITED, Kenya 2,29,50,530 BAP commission CAS TRADING HOUSE PVT.LTD Nepal 29,58,248 BAP commission TOTAL INFORMATION MANAGEM Philippines 3,63,97,415 BAP commission Bowin Consultancy Service Taiwan 33,68,076 Commission/ License fees for BCI project ITA Nos.125, 126, 226 & 227/Bang/2019 Page 26 of 129 Ohnishi Legal office Japan 6,860 Commission Taldor Isreal 46,40,249 Commission fees PT Business Intelligence Indonesia 5,58,437 Commission CELER CONSULTING S.A. de Mexico 3,46,124 Agency commission SegmentistYazilimve Dan Turkey 7,43,914 License fees commission Trevally Financial Softwa South Africa 13,93,21,694 Fees commission KUWAIT COMPUTER SERVICES Kuwait 59,96,000 Towards commission on License sale Al Futooh Consultancies E UAE 36,38,800 Towards commission on License sale Nihon Unisys Ltd. Japan 7,15,299 Fees commission MDSL SAL (Offshore) Lebanon 21,01,555 Fees commission MKTY Information Technolo Ethiopia 22,86,167 Towards License commission Hypertek Company Limited Vietnam 1,55,15,650 Towards commission on License sale Computech Zambia Ltd Zambia 15,40,193 Towards commission on License sale Crown Commercial Services United Kingdom 93,379 Commission Enterprise Business Syste Japan 9,34,650 Sales commission 50,87,88,787 ITA Nos.125, 126, 226 & 227/Bang/2019 Page 27 of 129 1.2. Payment of commission to non-resident BAP(s) does not constitute ‘fees for technical services’ under section 9(1)(vii) of the Act: Income by way of ‘fee for technical services’ payable by a resident is deemed to accrue or arise in India by virtue of section 9(1)(vii)(b). The expression ‘fees for technical services’ is defined in Explanation 2 to section 9(1)(vii). The said definition refers to rendering of managerial, technical or consultancy services. 1.3. The terms ‘technical’, ‘consultancy’ and ‘managerial’ are not defined both under the Act. Therefore, these terms have to be understood in their natural or popular sense. 1.4. The Shorter Oxford English Dictionary defines these terms as follows: Technical= 1. having knowledge of or expertise in a particular art, science, or other subject, 2. Pertaining to, involving or characteristic of a particular art, science, profession or occupation or the applied arts and science generally; 3. using or dealing with terms that belong to a particular subject or field; requiring specialist knowledge to be understood; treating a subject in a specialist way; Consultancy = the work or position of a consultant; a department of consultants; Consultant = A person who gives professional advice or services in a specialist field; the dictionary has used the term ‘consulting’ along with prefix such as “consulting architect, consulting engineer, consulting physician”. Managerial = of, pertaining to, or characteristic of a manager, esp. a professional manager of or within an organization, business, establishment etc., Manager = 1. A person who manages something, 2. ...... 3. A skilled in managing house hold affairs, money etc., ..... 4. A person whose office it id to manage an organization, business establishment, or public institution or part of one; a person with a primarily executive or supervisory function within an organization etc.; a person controlling the activities of a person or team in sports, entertainment, etc; the dictionary has used the term ‘manager’ along with prefix such ITA Nos.125, 126, 226 & 227/Bang/2019 Page 28 of 129 as “bank manager, factory manager, floor manager, football manager, hotel manager, personnel manager, stage manager, team manager, theatre manager, etc.,” 1.5. In the present case, the services rendered outside India by BAP were not in the nature of managerial, technical or consultancy services. The said services were rendered to assist the Assessee in locating customers or for booking orders. The said services were not retable to management of the company. Similarly, no advice or consultancy was rendered by BAP so as to treat the services as consultancy services. Further, the services of BAP were not technical in nature. The payment of commission to BAP therefore did not constitute fees for technical services under section 9(1)(vii). 1.6. In the following decisions it has been held that commission paid for procurement of orders, business etc. cannot be regarded as ‘fees for technical services’ since the services are not managerial, technical or consultancy in nature. a) CIT v Faizan Shoes P Ltd [2014] 48 taxmann.com 48 (Madras) – Page 3879-3886 of case law compilation b) Apsara Silks v ITO [2016] 69 taxmann.com 399 (Bangalore - Trib.) – Page 3887-3890 of case law compilation c) CIT v Farida Leather Company [2016] 66 taxmann.com 321 (Madras) – Page 3891-3898 of case law compilation d) DIT v Credit Lyonnais [2016] 67 taxmann.com 199 (Bombay) – Page 3899-3905 of case law compilation e) DIT v PanalfaAutoelektrik Ltd [2014] 49 taxmann.com 412 (Delhi) – Page 3906-3918 of case law compilation f) CIT v Grup Ism (P) Ltd [2015] 57 taxmann.com 450 (Delhi) – Page 3919-3929 of case law compilation Provisions of DTAA overrides the provisions of the Act: 1.7. In respect of persons to whom the Double Taxation Avoidance Agreements are applicable, the provisions of the Income Tax Act, 1961 ITA Nos.125, 126, 226 & 227/Bang/2019 Page 29 of 129 would apply only to the extent they are beneficial to the assessee. This is provided in subsection 2 to section 90 of the Income Tax Act, 1961. 1.8. The list of recipients of commission and their respective countries are given under para 7.8 (supra). India has entered into DTAA with the countries mentioned earlier except Nigeria. The position of taxability of commission paid to BAP(s) under the Act and DTAA is depicted in the table below followed by detailed submissions. Vendor name Country Taxability under the Act Taxability under the Treaty Computer Warehouse Ltd Nigeria Payment is not in the nature of Managerial, consultancy or technical in nature. Even otherwise, payment was for business carried on outside India or for making or earning source of Income outside India. Hence, not liable for TDS. NO DTAA WAREEF UNITED COMPANY Saudi Arabia Same as above No FTS clause under the Treaty; No PE in India; Other income chargeable to tax only in Saudi Arabia and not in India. Hence payment not taxable under the Treaty Millennium Information Technologies Sri Lanka Same as above New DTAA is applicable only from 1.4.2014. Definition of FTS is similar to s. 9(1)(vii); Payment not in the nature of managerial, technical or consultancy; no PE in India; hence not taxable under the treaty Egabi FSI Egypt Same as above No FTS clause under the Treaty; No PE in India; Other income chargeable to tax only in Saudi Arabia and not in India. Hence payment not taxable under the Treaty ITA Nos.125, 126, 226 & 227/Bang/2019 Page 30 of 129 Simba Technology Limited, Kenya Same as above New Treaty with Kenya is applicable only from 1.4.2018. Under the old treaty with Kenya, definition of FTS is similar to s. 9(1)(vii); Payment not in the nature of managerial, technical or consultancy; further services were not rendered in India; no PE in India; hence not taxable under the treaty CAS Trading House Pvt. Ltd. Nepal Same as above No FTS clause under the Treaty; No PE in India; further, other income taxable only in Nepal and not in India; hence payment not taxable under the Treaty Total Information Management (Tim) Philippines Same as above No FTS clause under the Treaty; No PE in India; further, other income taxable only in Philippines and not in India; hence payment not taxable under the Treaty Bowin Consultancy Services Taiwan Same as above DTAA u/s 90A vide notification no. 48/2011 w.e.f. 2.9.2011 Definition of FTS is similar to s. 9(1)(vii); Payment not in the nature of managerial, technical or consultancy; no PE in India; hence not taxable under the treaty Ohnishi Legal office Japan Same as above Definition of FTS is similar to s. 9(1)(vii); Payment not in the nature of managerial, technical or consultancy; no PE in India; hence not taxable under the treaty Taldor Israel Same as above Payment does not ‘make available’ any technology, skills, process, know how etc as per the protocol to Treaty. Hence, payment not ITA Nos.125, 126, 226 & 227/Bang/2019 Page 31 of 129 taxable under the Treaty. PT Business Intelligence Indonesia Same as above New Treaty applicable from 1.4.2016. As per old treaty applicable for the year, there is no FTS clause in the Treaty. No PE in India; further, other income taxable only in Philippines and not in India; hence payment not taxable under the Treaty CELER CONSULTING S.A. de Mexico Same as above Definition of FTS is similar to s. 9(1)(vii); Payment not in the nature of managerial, technical or consultancy; no PE in India; hence not taxable under the treaty SegmentistYazi limveDanisman lik L Turkey Same as above Definition of FTS is similar to s. 9(1)(vii); Payment not in the nature of managerial, technical or consultancy; further services were not rendered in India; no PE in India; hence not taxable under the treaty Trevally Financial Software South Africa Same as above Definition of FTS is similar to s. 9(1)(vii); Payment not in the nature of managerial, technical or consultancy; further services were not rendered in India; no PE in India; hence not taxable under the treaty KUWAIT COMPUTER SERVICES Kuwait Same as above No FTS clause under the Treaty; No PE in India; further, other income taxable only in Philippines and not in India; hence payment not taxable under the Treaty ITA Nos.125, 126, 226 & 227/Bang/2019 Page 32 of 129 Al Futooh Consultancies E UAE Same as above No FTS clause under the Treaty; No PE in India; further, other income taxable only in Philippines and not in India; hence payment not taxable under the Treaty Nihon Unisys Ltd Japan Same as above Definition of FTS is similar to s. 9(1)(vii); Payment not in the nature of managerial, technical or consultancy; no PE in India; hence not taxable under the treaty MDSL SAL (Offshore) Lebanon Same as above DTAA limited to double taxation of income of enterprises operating aircraft with Lebanon. In the absence of comprehensive DTAA, provisions of the IT Act will be applicable, as per which, commission paid is not liable for TDS u/s 195. MKTY Information Technology Service Ethiopia Same as above DTAA applicable w.e.f. 1.4.2013. Definition of FTS is similar to s. 9(1)(vii); Payment not in the nature of managerial, technical or consultancy; no PE in India; hence not taxable under the treaty Hypertek Company Limited Vietnam Same as above No FTS clause under the Treaty; No PE in India; further, other income taxable only in Philippines and not in India; hence payment not taxable under the Treaty Computech Zambia Ltd Zambia Same as above Definition of FTS is similar to s. 9(1)(vii); Payment not in the nature of managerial, technical or consultancy; no PE in India; hence not taxable under the treaty ITA Nos.125, 126, 226 & 227/Bang/2019 Page 33 of 129 Crown Commercial Services United Kingdom Same as above Payment does not ‘make available’ any technology, skills, process, know how etc as per the protocol to Treaty. Hence, payment not taxable under the Treaty. Enterprise Business System Japan Same as above Definition of FTS is similar to s. 9(1)(vii); Payment not in the nature of managerial, technical or consultancy; no PE in India; hence not taxable under the treaty 1.9. Submissions in detail as to why payment of commission to BAP’s were not taxable under the DTAA is as under. Make available test not satisfied with respect to India-UK treaty and India-Israel treaty 1.10. India – UK Treaty:-As per Article 13(4)(c) of the India – UK DTAA, a payment is considered as ‘fees for technical services’ if both of the following conditions are satisfied. (a) payment is made as a consideration for rendering of technical or consulting services; (b) such services should ‘make available’ technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. 1.11. In the present case, payment of commission to BAP in UK did not ‘make available’ technology, knowledge, skills, process etc. Hence, the said payment was not chargeable to tax under the Treaty with UK.As a result, commission paid to BAP of UK was not liable for TDS under section 195 and consequently the said payments cannot be disallowed under section 40(a)(i). 1.12. India-Israel Treaty: The definition of ‘Fees for technical services’ as per Article 13 of India – Israel Treaty is as under. ITA Nos.125, 126, 226 & 227/Bang/2019 Page 34 of 129 The term "fees for technical services" as used in this Article means payments of any kind received as a consideration for services of a managerial, technical or consultancy nature, including the provision of services by technical or other personnel, but does not include payments for services mentioned in Article 16 of this Convention. 1.13. Para 2 of Protocol between India – Israel Treaty is as under.[omitted by Notification No. SO 441(E) [No.10/2017 (F.No.500/14/2004-FTD-II)], dated 14-2-2017, w.e.f. 14-2-2017] 2. The competent authorities of the Contracting States shall initiate the proper procedure to review the provisions of Articles 12 and 13 (Royalties and fees for technical services, respectively) after a period of five years from the date of entry into force of this Convention. However, if under any Convention or Agreement between India and any third State which enters into force after 1-1-1995, India limits its taxation at source or Royalties or Fees for Technical Services or Interest or Dividends to a rate lower or a scope more restricted than the rate or scope provided for in this Convention, the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention with effect from the date on which the present Convention comes into force or the relevant Indian Convention or Agreement, whichever enters into force later. 2.1. The protocol to India – Israel Treaty permits an automatic curtailment of the scope of the definition or a reduction in the rate of tax on the basis of the provisions of a Treaty with any country entered into after 1.1.1995. In this regard, it would be relevant to examine the DTAA between India and the Portugal Republic. This is because the DTAA between India and Portuguese Republic, was notified vide Notification: No. GSR 542(E), dated 16-6-2000, as corrected by Notification Nos. SO 673(E), dated 25-8-2000 and No. GSR 597(E), dated 20-9-2005. The definition of “fees for included services” as per Article 12(4) of this Treaty is as follows: “For the purposes of this Article, “fees for included services” means payments of any kind, other than those mentioned in Articles 14 and ITA Nos.125, 126, 226 & 227/Bang/2019 Page 35 of 129 15 of this Convention, to any person in consideration of the rendering of any technical or consultancy services (including through the provisions of services of technical or other personnel) if such services : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received, or (b) make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or technical design which enables the person acquiring the services to apply the technology contained therein.” 2.2. By virtue of the protocol to India – Israel Treaty read with FTS clause of India – Portugal republic Treaty, payment to Israel resident for services would not be regarded ‘fees for technical services’ unless the payment would make available technical knowledge, experience, skill, know how etc., and the payee acquiring the services is enabled to apply the technology contained therein. 2.3. In the present case, payment of commission to BAP in Israel did not ‘make available’ technology, knowledge, skills, process etc. Hence, the said payment was not chargeable to tax under the Treaty with Isreel. As a result, commission paid to BAP of Israel was not liable for TDS under section 195 and consequently the said payments cannot be disallowed under section 40(a)(i). 2.4. DTAA with Saudi Arabia, Egypt, Nepal, Philippines, Indonesia, Kuwait, UAE, Vietnam, Lebanon These treaties do not have an Article relating to ‘Fees for technical services’. In the absence of the article dealing with ‘fees for technical services’ clause, the payment would constitute ‘business profit’ under Article 7 of the above Treaties. The Bangalore ITAT in JCIT v WiFi Networks P Ltd ITA Nos. 189 & 190/Bang/2012 and CO Nos. 60 & 61/Bang/2012 decision dated 8.3.2013, Exotic Fruits P Ltd v ACIT ITA Nos. 1008 to 2013/B/12 decision dated 40.10.2013, IBM India P Ltd v DDIT (IT) ITA Nos. 489 to 498/B/13 decision dated 24.1.2014 and the Madras High Court in Bangkok Glass Industry Co Ltd v ACIT [2013] 257 CTR 326 held that in the absence of FTS clause in the ITA Nos.125, 126, 226 & 227/Bang/2019 Page 36 of 129 treaty, payment for services rendered by the non-resident in the course of his business would be regarded as ‘business profits’ under Article 7 and in the absence of a PE in India, such payments would not be taxable in India. As stated already the non-resident BAP(s) provided services outside India and did not have a permanent establishment in India. As a result, commission paid to BAP(s) of the aforesaid countries would not be chargeable to tax in India. 2.5. In respect of commission paid to BAP’s situated in Sri Lanka, Kenya, Taiwan, Japan, Turkey, South Africa, Ethiopia, Zambia, and Mexico, the definition of the term ‘Fees for technical services’ as per the Treaty between India and these countries is similar to section 9(1)(vii) of the Income tax Act, 1961. Submissions have already been made as to why commission paid to BAP’s is not liable for TDS under the Income Tax Act. These submissions would therefore apply in the context of the definition of ‘FTS’ under the Treaties with the above countries. As a result, commission paid to BAP’s situated in these countries are not liable for TDS u/s 195 and consequently the said payments cannot be disallowed u/s 40(a)(i). 2.6. India has not entered into DTAA with Nigeria. Submissions have already been made as to why commission paid to BAP’s is not liable for TDS under the Income Tax Act. The commission paid to company based in Nigeria would therefore not be chargeable to tax in India and hence outside the purview of section 195. 2.7. On the facts and in the circumstances of the case and law applicable, commission paid to overseas entities totally amounting to Rs. 50,87,88,787 was not liable for TDS under section 195 and as a result such payments were not liable for disallowance under section 40(a)(i). The deduction claimed in respect of commission paid is to be fully allowed. 43. We heard the rival submissions and perused the material on record. We notice that the ld AR during the hearing of assessee’s case ITA Nos.125, 126, 226 & 227/Bang/2019 Page 37 of 129 for AY 2012-13 has made similar submissions and that the coordinate bench of the Tribunal after considering the submissions held that – We have perused the submissions advanced by both sides in the light of records placed before us. The above arguments/submissions by the Ld.AR has not been verified by the Ld.AO. We accordingly remand this issue to the Ld.AO to verify the above submissions. There is no quarrel that the benefit available to assessee as per DTAA must be granted as per the ratio of Hon’ble Supreme Court in case of Engineering Analysis (supra). The Ld.AO shall verify and consider the claim in accordance with law. Needless to say that proper opportunity of being heard mist be granted to the assessee. 44. Considering that the facts are identical, respectfully following the decision of the coordinate bench in assessee’s own case (supra), we remit the issue back to the AO with similar directions. This ground is allowed for statistical purposes. Ground No. 8 – Deduction under section 10AA in respect of onsite activities 45. The assessee had claimed expenses which is incurred in respect of onsite activities as deduction for the purpose of section 10AA. The assessee filed the details of revenue along with onsite percentage relatable to exempt units before the AO during the course of assessment. [Page 736-738 of paper book 2]. The assessee also furnished statement showing computation of onsite profit margin of the Assessee for the year under consideration along with a detailed note ITA Nos.125, 126, 226 & 227/Bang/2019 Page 38 of 129 explaining why profit on such projects shall be allowed as deduction under section 10AA before the AO [Page 738-776 of paper book 2]. 46. The AO has reduced a sum of Rs. 3,89,96,270 and Rs. 11,74,53,619 from the deduction allowable under section 10AA in respect of 12 SEZ units and the remaining 4 SEZ units (for which deduction under section 10AA was not allowed) for the reason that the said amount is the profit margin on pure onsite revenues and hence not eligible for deduction under section 10AA. The AO in this regard has relied on the similar additions made in the earlier assessment orders for making addition. 47. Before the CIT(A) the Assessee submitted that even in the absence of the offshore revenue and offshore efforts there exists a nexus of the onsite software development work with the offshore team, as most of these projects are ongoing projects and we expect offshore efforts in future. Further, there will be project managers at offshore locations who handle the projects. In any case and without prejudice, as per Explanation 2 to section 10AA, profits from onsite development of computer software are eligible for deduction under section 10AA. The pure onsite revenue was 3.58% of total revenue of all 16 SEZ units. 48. The Assessee relied on the decision of the Jurisdictional High Court in the case of CIT v Mphasis Software and Service India Pvt. Ltd decision dated 29th July 2015 62 taxmann.com 165 in support of ITA Nos.125, 126, 226 & 227/Bang/2019 Page 39 of 129 the contention that onsite profits are eligible for deduction under section 10AA. 49. The CIT(A) did not accept the contentions of the assessee and upheld the action of the AO by relying on the appellate orders passed for AY 2007-08 to 2009-10. The CIT(A) declined to follow the jurisdiction High Court decision in Mphasis Software (supra) by stating that it is factually distinguishable. 50. The ld AR submitted that similar issue in assessee’s own case for AY2012-13 is considered by the coordinate bench where the issue was remitted back to the AO for verification. The ld AR for the year under consideration argued that the required details have already been submitted before the AO and therefore the issue need not be remitted for the current year. The ld AR submitted that the AO has merely relied on the fact that similar additions were made in the earlier years and accordingly made the same for current year also. The ld AR also submitted that the lower authorities have not followed the decision of the jurisdictional High Court in the case of Mphasis (supra), where the it is held that – A mere reading of subsection (2) would not be sufficient. The entire section has to be read in conjunction with Explanation 3, which clarifies that profits and gains derived from ‘on-site’ development of software outside India shall also be deemed to be profits and gains derived from the export of software outside India, and same would also be entitled to such benefit. If the interpretation, as contended by the revenue is accepted, the very purpose of inserting Explanation 3 to section 10A of the Act would be lost. ITA Nos.125, 126, 226 & 227/Bang/2019 Page 40 of 129 51. The ld AR in respect of the revenue’s argument that there is no nexus between ‘offshore’ production by the assessee in India and ‘on- site’ production by the AE outside India, further submitted that the Karnataka High Court held that the MSA provides for onsite work to be carried out under the supervision and control of the assessee and as per the specifications given by the assessee and in view of the same, it was held that profits and gains from onsite software development which was sub contracted to the AE’s was eligible for deduction under section 10A of the Act. The ld AR relied on the decision of the Pune Bench of the Tribunal in the case DCIT v M/s iGate Global Solutions Ltd [2019] 109 taxmann.com 48 (Pune - Trib.) in this regard. 52. The ld DR relied on the orders of the lower authorities. 53. We heard the rival submissions and perused the material on record. We notice that the Hon’ble Karnataka High Court in the case of Mphasis (supra) has considered a similar issue and held that – 20. The question which now remains to be answered by this Court is that would it be permissible for the benefit under Section 10A to be given to the assessee if the 'on-site' work carried outside the country is not done through its own personnel. For this, we may refer to Explanation-3 to Section 10A, which is clarificatory in nature and does not limit the benefit provided by Section 10A but only enlarges its scope. In the said explanation, it is provided that the profits and gains derived from 'on- site' development of computer software outside India would be deemed to be profits and gains from the export of computer software outside India. By this explanation, it is clear that the profits and gains which are derived from 'on-site' development of computer software would also be covered under Section 10A of the Act. What we notice is that the main Section 10A no where provides that the 'on-site' work of software development should be carried out by the own personnel of the assessee. ITA Nos.125, 126, 226 & 227/Bang/2019 Page 41 of 129 As such, it would be wrong to deny the benefit under the said section merely because the 'on-site' work was not done by the personnel of the assessee as we are of the firm view that authorities or Courts are not to read something into the provision of law which is not there in the Section or its Explanation; more so, in the case of a beneficial piece of legislation, as is the present one. 21. With regard to denial of benefit of Section 10A because of the personnel of the assessee having not performed the 'on-site' work, emphasis has been laid by the learned counsel for Revenue on the Circular No.694 dated 23.11.1994 issued by the Central Board of Direct Taxes (CBDT). The relevant paragraph 7 of the said Circular is reproduced below: "Similarly, for the purpose of s.10A or 10B, as long as a unit in the EPZ/EOU/STP itself produces computer programmes and exports them, it should not matter whether the programme is actually written within the premises of the unit. It is, accordingly, clarified that, where a unit in the EPZ/EOU/STP develops software sur place, that is, at the client's site abroad, such unit should not be denied the tax holiday under s.10A or 10B on the ground that it was prepared on site, as long as the software is a product of the unit, i.e., it is produced by the unit." 22. In our view, the said Circular is in favour of the assessee and not against it. Learned counsel for Revenue has laid much stress on the wordings that the assessee unit should have produced the computer programme by itself or that it should be produced by the unit of the assessee itself. There is no denial of the fact that even the 'on-site' work of computer software development has been done under the direct supervision and control of the assessee through the AE, which would be nothing but on behalf of the assessee 'itself'. As indicated in the said Circular, 'itself' would not mean that personnel of the assessee will have to carry out the work. However, it should be the product of the assessee and since in the present case, the ownership of the product (software), after payment by the assessee for the work done by the AE, would be of the assessee, the same would be nothing but the product of the assessee and not a product of AE. The other Circular dated 17.1.2013 on which the learned counsel for Revenue has relied upon, also does not any where specify that the personnel of the assessee should only be deputed for carrying on the work. Even otherwise, the Circulars issued by the CBDT cannot over ride the provisions of the Act. If the main Section of the Act does not provide for the benefit to be given only to such units or ITA Nos.125, 126, 226 & 227/Bang/2019 Page 42 of 129 exporters who carry out 'on-site' work through its own personnel, the same cannot be read into the provisions of Section 10A of the Act. 23. The sole ground for denying the benefit of section 10A by the Assessing Officer or the appellate Commissioner is that 'on-site' development of computer software has not been executed by the assessee itself through its own personnel. Such interpretation of the Section cannot be accepted because what is not there in the Section or the Explanation, cannot be read into by the authorities or by this Court. 24. Learned counsel for the Revenue has also submitted that the conditions laid down in sub-section (2) of Section 10A of the Act have not been fulfilled by the assessee, which have to be strictly construed and as such, the assessee would not be entitled to the benefit of Section 10A. According to the learned counsel for the Revenue, the production or manufacture should be in any free trade zone and if the same is not done in the free trade zone, the assessee would not get benefit of such manufacture or produce. The benefit is site specific and not project specific. According to him, only such production or manufacture which is carried at the site of the assessee's unit in the free trade zone would alone be eligible for the benefit under section 10A and not such production or manufacture which has been carried outside or by a third party. A mere reading of sub-section (2) would not be sufficient. The entire section has to be read in conjunction with Explanation 3, which clarifies that profits and gains derived from 'on-site' development of software outside India shall also be deemed to be profits and gains derived from the export of software outside India, and same would also be entitled to such benefit. If the interpretation, as contended by the Revenue is accepted, the very purpose of inserting Explanation 3 to Section 10A of the Act would be lost or frustrated. 25. Lastly, learned counsel for the Revenue has contended that there is no nexus between 'off-shore' production by the assessee in India and 'on- site' production by the AE outside India. He relies on the finding of the Assessing Officer given in this regard, which is as under: "Hence the profits and gains derived from Model No.2 cannot be deemed to be the profits and gains of the assessee company w.r. to export of computer software outside India. To be precise, the deduction is available only if the on-site development of computer software is executed by the assessee itself through its own personnel. The sub- contracting of "On site" part of the software development to other entity and the resultant profit is not covered in Explanation 3 to Section 10A of ITA Nos.125, 126, 226 & 227/Bang/2019 Page 43 of 129 IT Act and such profits and gains would not qualify for deduction under section 10A of IT Act. ** ** ** From the discussion on relevant paras of the MSA, it is further brought on record that the execution of off-shore part of the contract had got nothing to do with the on site work executed from abroad by the AEs. The execution of off shore part of the contract was on a separate channel and the AEs were never involved in any implementation of the product developed by the assessee in India. The AEs worked independently with its own personnel and created its own intellectual properties i.e., software product (Deliverables). Hence it is abundantly clear that the assessee never involved either directly or indirectly in the on-site software development activity executed by the AEs. Even if it is involved administratively for co- ordination between the AEs and its clients in getting the contract executed, the assessee shall not be eligible for deduction since the core function of software development function was executed by the AEs. Neither the plant and machinery nor the employees of the STP Unit were utilized in developing the software in On-site Locations abroad. The Sub-contract work executed by AEs did not have any Indian connection on these works executed by it. The assessee has attempted to claim exemption on the work executed by a foreign entity over which the provisions of Indian Income Tax Act, 1961 are not applicable." 26. The Tribunal has considered this aspect and has come to the conclusion that the assessee company was solely responsible for the risks and rewards arising out of the sub-contract to the AE. It has given a clear finding that "the assessee is solely responsible for the discharge of its obligations under the contract to the customer and the sub-contractor has no say in the matter. It is seen from the Master Services Agreement that it is the assessee which is under an obligation to discharge its obligation of specific requirement of the customer and in pursuance thereof, to pass on the specification of the products to the AE and also to reserve right to reject the product if the AE does not produce the product in conformity with the product as given in the task order. Therefore, it can be safely concluded that the development of the software by the AE is under the supervision and control of the assessee". 27. From the record it is not borne out that the entire 'on-site' work has been sub-contracted to the AE. The MSA provides for the AE to work ITA Nos.125, 126, 226 & 227/Bang/2019 Page 44 of 129 under total supervision and control of the assessee. The software to be produced by the assessee during its 'on-site' development has to be as per the specifications given by the assessee. The AE has no concern or direct dealing with the end customer. The assessee provides all relevant information and inputs to the AE on behalf of the end customer. The AE is admittedly answerable to the assessee and not the end customer. In such nature of the work which is carried on by the AE on behalf of the assessee, it cannot be said that there is no nexus between 'off-shore' development and 'on-site' development. 28. In view of the above discussion, we are of the opinion that in the facts of the present case, the income earned by the assessee through 'on- site' development of software by the AE on behalf of the assessee, would be eligible for deduction under Section 10A of the Act. 54. The various grounds on which revenue has denied the benefit of section 10AA in earlier year is absence of nexus with the Indian undertaking, to which STPI Unit the revenue belongs, detailed summary of works / projects that have been executed from assessee’s various centres abroad and SOW has not been entered between the foreign client and the eligible unit etc. We notice that the AO while denying the benefit of deduction u/s.10AA, has extracted the findings on this issue for AY 2010-11. It is further noticed that the details furnished by the assessee has been perused by the AO only to arrive at the percentage of on-site revenue to compute the disallowance and the AO did not examine the facts in the light of various grounds basis which the allowability of deduction u/s.10AA was denied. We also notice that the coordinate bench in assessee’s own case, for AY 2012- 13, under similar circumstances has held that – 16.11. At the outset, we note that the denial of the exemptions claimed is purely due to the reason that the Ld.AO did not verify the details furnished by assessee. There is no doubt expressed by the Ld.AO ITA Nos.125, 126, 226 & 227/Bang/2019 Page 45 of 129 regarding the nexus or any shortfall of evidence or materials in support of the assessee’s claim as argued by the Ld.AR, the disallowance made on adhoc basis, without any justification and the reasoning for such disallowance is absolutely uncalled for. However in the interest of justice, the Ld.AR suggested the issue may be remanded to the Ld.AO for due verification. We direct the Ld.AO to verify the details filed and to consider the claim of assessee in accordance with law. Needless to say that proper opportunity of being heard is to be granted to the assessee. 55. Considering the above decision and facts of the year under consideration we remit the issue back to the AO for verification of details and consider the claim of the assessee in accordance with law. The AO is directed to keep in mind the ratio laid down by the jurisdictional High Court in the case of Mphasis (supra) while deciding the issue on merits after giving a reasonable opportunity of being heard to the assessee. Ground No. 9 – Deduction under section 80JJAA 56. During the year under consideration, the Assessee claimed a deduction under section 80JJAA amounting to Rs. 86,97,65,436. The deduction claimed pertains to the 3rd year claim in respect of services of employees who joined in financial year 2012-13. The Assessee quantified and claimed deduction under section 80JJAA in respect of each industrial undertaking as per details given in Annexure 1 to Form 10DA – Audit report under section 80JJAA substantiates the same. ITA Nos.125, 126, 226 & 227/Bang/2019 Page 46 of 129 57. The AO has disallowed the deduction claimed under section 80JJAA amounting to Rs. 86,97,65,436 stating that the Assessee is not eligible for deduction under section 80JJAA for the following reasons: (a) The Assessee is a service provider and not a manufacturer. (b) The Assessee does not produce any articles or things. (c) The Parliament never intended to extend such benefits to white collared job creation. 58. The AO also held that since there is a decrease in the number of employees as on 31.03.2013 (1,13,694) as compared to the number of employees as on 31.03.2012 (1,13,879) at the entire company level, the Assessee is not eligible for a deduction under section 80JJAA. 59. The learned AO has also relied on the decision in the case of LG Electronics India P Limited v ACIT (2013) 33 taxmann.com 465 (Del - Trib) and ACIT v Texas Instruments (India) P Limited [ITA Nos. 273 & 274/Bang/2005] dt.29.12.2016 to state that deduction will be available only if the new workmen is employed for a period of 300 days in the previous year. 60. Aggrieved the assessee filed appeal before the CIT(A). The CIT(A) noted that the claim of the Assessee under section 80JJAA had been rejected in the first year of claim, i.e., AY 2013-14, and therefore the question of allowing subsequent instalments for such claim would not arise. Without prejudice, the CIT(A) examined the claim made by the Assessee during the FY 2012-13 being the initial years of claim. ITA Nos.125, 126, 226 & 227/Bang/2019 Page 47 of 129 The CIT(A) held that the Assessee cannot claim a deduction in respect of those employees employed in technical or supervisory role. It was also held that employees who had not completed 300 days during the respective financial years, though who had completed said period in the subsequent financial year, cannot be considered for the purposes of the claim. In this regard the CIT(A) relied on the decision of the coordinate bench of the Tribunal in the case of DCIT(LTU) vs Bosch Ltd (2017) 87 taxmann.com 351 (Bang Trib), decision of the Delhi Tribunal in the case of LG Electronics India (P) Ltd vs ACIT (2013) 33 taxmann.com 465 (Delhi Trib) and in the case of Panacea Biotec Ltd., vs ACIT (2008) 25 SOT 1 (Del). Thus, in view of all the above, the CIT(A) upheld the action of the AO. 61. Aggrieved the assessee is in appeal before the Tribunal. 62. The ld AR during the course of hearing submitted a detailed written submissions contending the various grounds including those with regard to Software development activity amount to manufacture or production of article or thing. The ld DR also presented a similar written submission in which various arguments with regard to assessee being a service provider and not engaged in manufacture or production and that a service provider is not eligible for deduction u/s.80JJAA. We have taken on record both the written submissions on record. However we notice that the CIT(A) while rejecting the claim of deduction u/s.80JJAA has done so on the ground of type of employees eligible, the percentage increase in regular workmen, number of days ITA Nos.125, 126, 226 & 227/Bang/2019 Page 48 of 129 of working of the eligible employees etc., but had not rejected the claim on the assessee not being an industrial undertaking engaged in manufacturing. Though the CIT(A) has extracted the relevant contentions presented before the AO by the assessee and the relevant findings of the AO in the appellate order, the CIT(A) has rejected the claim on a different ground. Accordingly, we will consider the only those relevant submissions to adjudicate the allowability of deduction u/s.80JJAA on the various grounds on which CIT(A) has rejected the claim. The arguments and written submissions taken on record is left open with regard to whether the assessee is an industrial undertaking engaged in manufacture of an article or thing and accordingly whether eligible for the deduction u/s.80JJAA. 63. We heard the rival submissions and perused the material on record. We notice that the similar issue has been considered by the coordinate bench in the case of SAP Labs India Pvt Ltd [IT(TP)A Nos. 623, 566/Bang/2016 dated 29.11.2021]. In the case of SAP Labs case (supra), the following issues concerning section 80JJAA were considered and adjudged i) Whether the deduction under section 80JJAA is applicable to the assessee as a whole or unit wise? ii) Whether application of 80A(4) in the context of section 80JJAA for 10A units is correct or not? iii) Whether employees engaged in software industry could be regarded as workmen for the purposes of section 80JJAA? 64. The ld AR during the course of hearing submitted that the issue in (ii) above is not a matter of dispute in the present case and there is ITA Nos.125, 126, 226 & 227/Bang/2019 Page 49 of 129 no ground before the Hon’ble ITAT on this aspect by the revenue and by the Assessee. Therefore the ld AR submitted the order of the coordinate bench need to be followed only for issues in (i) and (iii) above. On perusal of records we see merit in the contentions of the ld AR that the issue in (ii) above is not before us for consideration. As far as the other two issues are concerned the CIT(A) has denied the deduction u/s.80JJAA mainly on these grounds and therefore in our view assessee’s case would be covered by the decision of the coordinate bench in SAP Labs (Supra) with regard to (i) and (iii) above where it is held that – “14. As far as the aforesaid ground of appeal are concerned, the assessee claimed deduction under section 80JJAA of the Act a sum of Rs.4,26,67,792/-. The AO denied the claim of the assessee for deduction on 2 grounds namely: (1) that persons working in software units cannot be regarded as workmen as contemplated by the provisions of section 80JJAA of the Act. (2) Deduction under section 80JJAA cannot be allowed in respect of additional wages paid to employees who are working in 10A units because under the provisions of 80A(4) of the Act, the assessee cannot enjoy benefits both under sections 10A and 80JJAA of the Act in respect of the same income. On objections by the assessee before the DRP, the DRP rejected the claim of the assessee. The DRP also took the view that, the assessee has not given Form 10DA for each 10A unit separately. The AO in the order giving effect to the order of the DRP on this aspect has observed as follows: “7.5 Apart from the above, I would like to highlight the fact that as per the provisions of section 80JJAA, deduction is allowable taking each unit as a basis rather than the assessee as an undertaking. Accordingly, the assessee is required to compute deduction u/s 80JJAA in respect of each eligible unit separately. While doing so, all the conditions stipulated would be applied taking each unit as the reference point, i.e The additional wages are required to be restricted by excluding the additional wages payable to 100 workmen in respect of each unit. ITA Nos.125, 126, 226 & 227/Bang/2019 Page 50 of 129 There should be increase in workmen in each year to the extent of minimum 10% of the existing workmen at each unit level. It is required to be seen that the workmen employed for less than 300 days during the previous year under reference to be excluded from the computation of additional wages payable. In the instant case, the assessee has not considered each unit as a basis for the purpose of fulfillment of conditions enumerated above as per working given in Form 10DA. In a sense, the assessee has considered total number of employees/workmen working in all the units put together as basis in order to reckon 10% increase in workforce during the year under reference, inclusion of only 100 employees in respect of all the units for the purpose of quantifying the additional wages paid instead of considering 100 employees for inclusion in each and every unit. 7.6 In view of the above, I am of the opinion that in the absence of furnishing unit wise certificate in respect of fulfillment of conditions stipulated u/s 80JJAA, the assessee is rot eligible to claim deduction u/s 80JJAA. On this specific ground itself, I have no hesitation to deny the deduction u/s 80JJAA for the current year also.” 15. **** 16. As far as ground No.6.3 is concerned, the issue has been decided in Assessment Year 2007-08 in the order referred to above and this Tribunal held that the employees engaged in software industry cannot be regarded as workmen for the purpose of section 80JJAA of the Act. The following were the relevant observations of the Tribunal: “24. We have perused the orders and considered the rival contentions. The claim of assessee with regard to additional wages paid to new workman was denied for a reason that engineers who were newly employed by the assessee were not considered as workers by the lower authorities. However, in a similar situation in the case of Texas Instruments India P. Ltd, (supra), it was held by the coordinate bench at para 6 and 7 of its order, as under : 6. We have heard the rival submissions and carefully perused the records. Considering the factual position after referring to the ITA Nos.125, 126, 226 & 227/Bang/2019 Page 51 of 129 various documents filed by the assessee, the learned CIT(A) held as under : "According to the AO if an employee or workman is getting a salary of more than Rs. 1,600 per month he is not covered by the definition of workman. However as per cl. (iv) of s. 2(s) of the Industrial. Disputes Act a worker, employed in supervisory capacity and getting a salary of more than Rs. 1,600 per month only be excluded from the definition of workman. In Assessee's case the software engineers in respect of whom deduction under s. 80JJAA has been claimed have not been employed in a supervisory capacity even though they may be getting a salary of more than Rs. 1,600 per month. As the software engineers were not employed in supervisory capacity they cannot be excluded from the definition of workman. Further as per the notification of the Karnataka Government, the Assessee company engaged in the development of software is covered by the Industrial Disputes Act. As such, I am of the considered opinion that the Assessee has satisfied all the conditions for claiming relief under s. 80JJAA. However, I find that the Assessee has claimed deduction of Rs. 2,55,81,220 with reference to the additional wages of Rs. 8,52,70,736 which included the wages of Rs. 4,87,64,029 in respect of the new workmen employed during the year ended 31st March, 2000 relevant to the asst. yr. 2000-01. As there was no claim for relief under s. 80JJAA for the asst. yr. 2000-01, the relief in respect of the workers employed in asst. yr. 2000-01 cannot be considered for relief under s. 80JJAA in the asst. yr. 2001-02. As such the Assessee will be entitled for relief under s. 80JJAA of Rs. 1,09,52,012 being 30 per cent of the additional wages of Rs. 3,65,06,707 (Rs. 8,52,70,736 Rs. 4,87,64,029) in respect of the new workmen employed during the previous year relevant to the asst. yr. 2001-02. Similarly, for asst. yr. 2002-03 the Assessee has claimed deduction of Rs. 4,78,05,176 being 30 per cent of the wages of Rs. 1,59,30,588 which also included the wages of Rs. 4,38,68,182 pertaining to the new workers employed in the previous year 1999- 2000. For the reasons mentioned above the Assessee is not entitled for relief under s. 80JJAA in respect of the wages pertaining to the workers employed in the previous year 1999-2000. As such the Assessee would be eligible for relief of Rs. 3,46,44,722 being 30 per cent of the additional wages of Rs.11,54,82,406 ITA Nos.125, 126, 226 & 227/Bang/2019 Page 52 of 129 (Rs.15,93,50,588 Rs.4,38,68,182) in respect of the workmen employed in previous years 2000-01 and 2001-02. The learned Authorised Representatives of the Assessee vide order-sheet noting dt. 24th Aug., 2004 agreed that the relief under s. 80JJAA in respect of the employees who joined in the previous year relevant to the asst. yr. 2001-02 onwards only may be considered and in respect of the employees who joined in earlier years the Assessee is not pressing for relief under s. 80JJAA. In the circumstances, the AO is directed to allow the relief under s. 80JJAA of Rs. 1,09,52,012 and Rs. 3,46,44,722 for asst. yrs. 200102 and 2002-03 respectively." 7. As stated earlier the assessee had filed the details of the software engineers employed during the years under consideration containing the names of the employees, designation and date of joining. Further, in the same list the details of total number of employees joined during both the assessment years, number of employees without supervisory roles, workmen joined, number of supervisors joined and workmen joined and relieved during the years under consideration. A cursory perusal of this list shows that the assessee had claimed deduction in respect of employees, who had joined as engineers in their respective field such as systems engineer, test engineer, software design engineer, IC design engineer, lead engineer etc. A cursory perusal of those lists establishes that the assessee had claimed deduction in respect of the engineers employed not in the category of supervisory control. All these details were filed before the AO during assessment proceedings. These facts were not properly considered by the AO. Further, from the order of the CIT(A), it is seen that he had taken note of the notification issued by the Government of Karnataka and concluded that as per the notification issued, the assessee company engaged in the development of software is covered by the Industrial Disputes Act, 1947. Further it is not the case of the Revenue that the assessee did not fulfil the conditions extracted elsewhere in this order. Considering all those factual matters we do not find any infirmity in the order of CIT(A) according relief to the assessee. In fact he had clarified the relevant portions related to Industrial Disputes Act, 1947 and IT Act while granting relief to the assessee which are extracted at pp. 5 and 6 of this order. After carefully considering the same, we are inclined to accept the ITA Nos.125, 126, 226 & 227/Bang/2019 Page 53 of 129 reasons shown by the learned CIT(A). The learned CIT- Departmental Representative could not assail the finding reached by the learned CIT(A) by bringing in any valid materials. The order of the CIT(A) is confirmed. It is ordered accordingly. There is no case for the Revenue that assessee had failed to file details of software engineers employed by it. In our opinion software engineers newly employed by it fell within the meaning of the word 'workmen'.” 17. We are of the view that ground Nos.6 and 6.4 should be decided in the light of the directions given above by the AO afresh after affording opportunity of being heard to the assessee.” 65. We notice that the coordinate bench of the Tribunal in assessee’s own case for AY 2012-13 and AY 2013-14 has followed the decision of Sap Labs (supra) and has remitted the issue back to the AO to consider the claim in accordance with the observations and principles laid down by the Hon’ble Tribunal in the said decision. Respectfully following the decision in assessee’s own case, we remit the issue for the year under consideration also back to the AO to examine the issue afresh keeping in mind the ratios laid down by the coordinate bench in Sap Labs (supra) and in assessee’s own case (supra). Needless to say that the assessee be given a reasonable opportunity of being heard. This ground is allowed for statistical purposes. Ground No. 10 – Disallowance of payments made to overseas subsidiaries 66. During the previous year 2014-15 relevant to AY 2015-16, the Assessee made various payments totaling to Rs. 167,11,32,938 to its associated enterprises and two other vendors which are non-associated ITA Nos.125, 126, 226 & 227/Bang/2019 Page 54 of 129 enterprises outside India. These payments were made without deduction of tax at source under section 195. The details of such payments are as under: SL NO NAME OF OVERSEAS SUBSIDIARY COUNTRY AMOUNT in Rs 1 Infosys Technologies China Co Ltd China 139,19,71,980 2 Infosys Technologies S de R L de C V Mexico 10,29,82,345 3 Infosys Technologia DO Brasil LTDA Brazil 6,68,71,324 4 Infosys BPO Poland Sp Zoo Poland 44,07,287 5 Infosys BPO s.r.o Czech Republic 10,10,41,150 67. In accordance with the sub-contracting agreement entered into with the aforesaid overseas subsidiaries, Assessee availed the services and made aforesaid payments to overseas subsidiaries for the year under consideration. No tax was deducted at source in respect of the above payments for the reason that the said payments were not chargeable to tax in India and consequently not liable for TDS under section 195. The payments were made after obtaining certificate from the Chartered Accountant in the prescribed form. Additionally, payments were also made to following non-AE’s during the FY 2014-15. 6 Future Focus Infotech UAE 3,37,102 7 Pt Maya International Indonesia 35,21,750 68. No tax was deducted in respect of the aforesaid payments also as the said payments were not chargeable to tax in India under the Act / Treaty. ITA Nos.125, 126, 226 & 227/Bang/2019 Page 55 of 129 69. The assessee submitted that the control and management of the affairs of these overseas entities is not wholly in India and these overseas entities are therefore ‘non-residents’ under the Act. The assessee also submitted the details of payments made to related concerns vide letter filed on 25.10.2016 [Page 53 of Paper book 1]. 70. The AO noticed that vide order passed under section 201(1)/(1A) dt. 29.1.2016, the ld. DCIT (IT), Circle 1(1), Bangalore treated the Assessee as an ‘assessee in default’ for not deducting tax at source under section 195 in respect of the aforesaid payments. The appeal against the said order is pending before the Hon’ble CIT(A) 12, Bangalore. Relying on order passed under section 201(1) and 201(1A) for AY 2015-16, the learned AO has disallowed the aforesaid payments under section 40(a)(i) for non-deduction of tax at source under section 195. 71. The assessee during the assessment proceedings made a new claim of deduction under section 40(a)(i) for TDS paid during current financial year for similar disallowance made in the assessment order for AY 2013-14 amounting to Rs. 269,31,41,150 [Page 1419-1423 of paper book 3] and the same was not considered by the AO. 72. On further appeal the CIT(A) upheld the action of the AO with regard to disallowance of Rs. 167,11,32,938 for the reason that the appeal against the order passed under section 201(1)/201(1A) for AY 2015-16 is pending for adjudication before the CIT(A) – 12,Bangalore and that if the Assessee succeeds in the said appeal, consequential ITA Nos.125, 126, 226 & 227/Bang/2019 Page 56 of 129 relief in the assessment order would follow subsequently. With regard to the claim of Rs. 269,31,41,150, the CIT(A) held that the assessee cannot make any fresh claim before the AO which is not done through a revised return and the CIT(A) relied on the decision of the Supreme Court in the case of Goetz (India) Ltd vs CIT (2006) 284 ITR 323 (SC). 73. Aggrieved the assessee is in appeal before the Tribunal. During the course of hearing the ld AR submitted that out the payments made to subsidiaries as given in the table above, the similar payments made to Infosys China in earlier years has been a subject matter of appeal before the coordinate bench of the Tribunal where the it was held that – 18.1. The Ld.AR very fairly submitted that an order u/s. 201(1)&(1A) dated 28.2.2014 was passed by the Ld.AO for the year under consideration holding the assessee to be an ‘assessee in default’ under section 201(1) of the Act, for non deduction of TDS and levied interest under section 201(1A) of the Act. Against this order the assessee appealed before the Ld.CIT(A) who confirmed the action of the Ld.AO. Assessee had preferred appeal before this Tribunal. He submitted that pursuant to the order dated 28/03/22 passed by this Tribunal, assessee did not have any merit on this issue. The Ld.AR though have submitted various arguments, does not have any merit. Accordingly we dismiss this ground raised by the assessee. 74. Therefore the ld AR fairly conceded that the payments made to Infosys China is covered by the above decision of the Hon’ble Tribunal. The ld AR further submitted the definition of ‘Fees for technical services’ as per the Treaties with Czech Republic, Mexico and Poland are similar to the definition of the said term under section ITA Nos.125, 126, 226 & 227/Bang/2019 Page 57 of 129 9(1)(vii) of the Act and therefore, the ratio of the decision of the Hon’ble ITAT in Assessee’s own case in IT(IT)A Nos. 4&1182/Bang/2014 for AY 2011-12 and 2012-13 dated 28.03.2022 would govern the payments made to subsidiaries in the aforesaid countries 75. With regard to payments made to rest of the subsidiaries the ld AR submitted written submissions the extract of which is as given below – Payment of sub-contracting charges to Infosys Technologia do BrasilLtda; Future Focus Infotech, UAE and Pt Maya International, Indonesia - Fees for technical services • As mentioned above, in respect of persons to whom the Double Taxation Avoidance Agreements are applicable, the provisions of the Income Tax Act, 1961 would apply only to the extent they are beneficial to the assessee. This is provided in subsection 2 to section 90 of the Income Tax Act, 1961. • The Assessee has made payments for onsite services to Infosys Technologia do Brasil Ltd a, Brazil (‘Infosys Brazil’), Future Focus Infotech, UAE and Pt Maya International, Indonesia. The tax treaties between India and the aforesaid countries (i.e., Brazil, UAE, and Indonesia ) do not have a clause for fees for technical services (FTS). • Payment of fees for technical services rendered by non-residents will not be taxable in India, if the relevant Treaty does not contain the clause on fees for technical services. Where, the Article on fees for technical services is absent in a Tax Treaty, such a payment is classifiable as “Business Profit” under Article 7 of the relevant Tax Treaty. If the payee does not have a Permanent Establishment in India in terms of Article 5 of the Tax Treaty, the same will not be liable to tax in India. ITA Nos.125, 126, 226 & 227/Bang/2019 Page 58 of 129 • The Bangalore ITAT in JCIT v WiFi Networks P Ltd ITA Nos. 189 & 190/Bang/2012 and CO Nos. 60 & 61/Bang/2012 decision dated 8.3.2013, Exotic Fruits P Ltd v ACIT ITA Nos. 1008 to 2013/B/12 decision dated 40.10.2013, IBM India P Ltd v DDIT (IT) ITA Nos. 489 to 498/B/13 decision dated 24.1.2014 and the Madras High Court in Bangkok Glass Industry Co Ltd v ACIT [2013] 257 CTR 326 held that in the absence of FTS clause in the treaty, payment for services rendered by the non-resident in the course of his business would be regarded as ‘business profits’ under Article 7 and in the absence of a PE in India, such payments would not be taxable in India. • In the absence of article for taxability of FTS in the tax treaties between India and the aforesaid countries (i.e., Brazil, UAE, and Indonesia), such payments are taxable as business income of the respective overseas entities in the absence of a PE in India. Since, the aforesaid overseas entities do not have a permanent establishment in India, thus, the income in their hands, being business earnings are not liable to be taxed in India. 76. The ld DR relied on the decision of the lower authorities. 77. We heard the rival submissions and perused the material on record. We notice that the payments made to Infosys China is covered by the decision of the coordinate bench of the Tribunal in assessee’s own case where the Tribunal held that the payment made by the Assessee to Infosys China constitutes ‘fees for technical services’ under section 9(1)(vii) of the Act. The Tribunal also held that the exception provided under section 9(1)(vii)(b) which includes the payment by a resident for services utilized in a business carried on by such person outside India or for the purpose of earning any income ITA Nos.125, 126, 226 & 227/Bang/2019 Page 59 of 129 from any source outside India, is not applicable in the case of the Assessee. The conclusion that the impugned payment constitutes fees for technical services under the Act was also sustained under the Treaty between India and China. With regard to Infosys BPO S.R.O. Czech Republic, Infosys Technologies S De Rl De Cv, Mexico and Infosys BPO Poland Sp, it is noticed that the definition of ‘Fees for technical services’ as per the Treaties with Czech Republic, Mexico and Poland are similar to the definition of the said term under section 9(1)(vii) of the Act and therefore the ratio of the decision of the Hon’ble ITAT in Assessee’s own case in IT(IT)A Nos. 4&1182/Bang/2014 for AY 2011-12 and 2012-13 dated 28.03.2022 in our view would cover the payments made to subsidiaries in the aforesaid countries. Therefore respectfully following the above decision we hold that the tax ought to have been deducted on payments made to Infosys China, Infosys BPO S.R.O. Czech Republic, Infosys Technologies S De Rl De Cv, Mexico and Infosys BPO Poland Sp, and accordingly, the disallowance of payments made to these subsidiaries u/s.40(a)(i) for non-deduction of tax at source is upheld. 78. With regard to payments made to other subsidiaries, on perusal of the above submissions of the ld AR it is clear that the Treaties of these countries have not looked into by the lower authorities. We see merit in the submission of the ld AR that in the absence of a specific clause fees for technical services the impugned payments need to be looked into from the angle Business Profits and the taxability accordingly as per the said treaties and the Act. We therefore remit the ITA Nos.125, 126, 226 & 227/Bang/2019 Page 60 of 129 issue of the payments made to Infosys Technologia do BrasilLtda; Future Focus Infotech, UAE and Pt Maya International, Indonesia, back to the AO for a fresh consideration. 79. With regard to the claim of Rs. 269,31,41,150, we will first look at the proviso to section 40(a)(i) which reads as follows – Provided that where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid: 80. We notice that the CIT(A) has acknowledged the fact that the assessee has made the payment of TDS into the Government account on 20.02.2015 but has denied the claim for the reason that the deduction is not claimed through a revised return. Therefore there is no dispute that the assessee is entitled to claim the deduction towards the expenditure disallowed u/s.40(a)(i) for the reason that tax was not deducted at source in the particular year, in the year in which the TDS demand is paid by the Assessee. In assessee’s case the TDS towards on Rs. 269,31,41,150 is remitted into the Government account by the assessee in the relevant financial pertaining to AY 2015-16. Therefore if the said amount had been a subject matter of disallowance earlier, the same should be allowed as a deduction in year under consideration since the tax has been remitted during the year under consideration. We therefore remit this issue back to the AO for verification of the above facts and allow the deduction in accordance with law. ITA Nos.125, 126, 226 & 227/Bang/2019 Page 61 of 129 81. With regard to the question whether the assessee can claim for a lawful deduction which was not claimed in the return of income filed u/s 139(1) during the course of assessment, this issue is well settled now and there are plethora of judgments discussing this issue where it has been held that the assessee cannot be denied the deduction. The courts have clearly brought out the distinction between a fresh claim and revised claim. 82. In the case of PCIT vs E-Funds International India Pvt Ltd, [2015] 379 ITR 292 (Del) this principle of assessee making a revision to the original claim and not fresh claim is clearly laid out by the Hon’ble Delhi High Court. The assessee in E-Funds International (supra) through a letter filed before the AO submitted a revised computation for the claim u/s.80HHE. The Delhi Hon’ble High Court in this case held that “The Court noted that "Courts have taken a pragmatic view and not a technical view as what is required to be determined is the taxable income of the Assessee in accordance with law." In Influence v. Commissioner of Income Tax (supra) a similar approach was adopted when the AO in that case refused to accept the revised computation submitted beyond the time limit for filing the revised return under Section 139(5) of the Act. This Court noted that the decision in Goetze (India) Ltd. (supra) "would not apply if the Assessee had not made a new claim but had asked for re-computation of the deduction." 83. Therefore the principle laid down by the Hon’ble Apex Court in the case of Goetz India (Supra) will not have application on the facts of the instance case since the assessee had already made a claim u/s.37 the Act towards payments made to overseas entities in the original ITA Nos.125, 126, 226 & 227/Bang/2019 Page 62 of 129 return but for a wrong amount which was rectified during the course of the asst. proceedings. WIPRO Ltd., Vs. DCIT (2015) 62 taxmann.com 26 (Kar) has held in this context that “71 It was contended on behalf of the revenue that, no revised return was filed by the assessee under section 139 (5) of the Act claiming the relief under Section 90 of the Act 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. 72. Section 139(5) of the Act provides that, if any person, having furnished a return under sub-section (1), or in pursuance of a notice issued under sub-section (1) of Section 142, discovers any omission or any wrong statement therein, he may furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier. The said provision refers to a return under sub- section (1). Sub-section (1) of Section 139 provides for filing of a return of income on or before the due date, furnishing a return of his income or the income of such other person during the previous year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed. If in such return the assessee discovers any omission or any wrong statements therein which has to be necessarily with reference to his 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 assessee 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 ITA Nos.125, 126, 226 & 227/Bang/2019 Page 63 of 129 bound to 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, Assessing officer to make available to the assessee any legitimate and legal tax relief to which the assessee is entitled, but has omitted to claim for one reason or another. Merely because the assessee in the return filed under Section 139(1) has not put forth a claim for relief, he cannot be estopped in 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 1OA of the Act. Realizing this mistake before the assessment proceedings concluded, the assessee has filed a letter pitting 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 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 ITA Nos.125, 126, 226 & 227/Bang/2019 Page 64 of 129 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. 74. In view of the aforesaid discussions, the said substantial question of law is answered in favour of the assessee and against the revenue and the assessee is entitled to the tax benefit to the extent set out above).” 84. In the light of the various judicial pronouncements, we are of the considered view that the assessee cannot be denied the additional deduction claimed during the course of assessment towards payments made to overseas entities on the ground that the same is not made by filing revised return. Accordingly the AO is directed to consider these claims and decide the allowability of the claim on merits as directed in para 80 of this order. Ground No. 11 –Disallowance of deduction claimed under section 32AC 85. The same issue is contented by the assessee in the appeal filed for AY 2014-15 and the same is adjudicated in the later part of this order and accordingly this ground of the assessee is dismissed. Ground No. 12 – Deduction for state taxes paid outside India 86. For the year under consideration, the Assessee claimed a deduction for state tax paid outside India to local municipal authorities ITA Nos.125, 126, 226 & 227/Bang/2019 Page 65 of 129 of Japan in the revised return of income amounting to Rs.1,60,29,026. A note giving detailed reasons for allowability of state taxes paid outside India as a business expenditure under section 37 of the Act, was submitted vide letter filed on 22.12.2017 [Page 1348 to 1355 of Paper book 3]. In the said note, it was submitted that the said state taxes paid to local authorities of Japan are not covered in Article 2 of the DTAA entered with Japan and thus are not eligible for relief under section 90 of the Act. Therefore, since the said expenditure related to the business of the Assessee, a claim under section 37 was made. In the said note, an alternate contention was raised to allow the same under section 91 of the Act following the decision of the Karnataka High Court in Wipro Ltd v CIT (2016) 382 ITR 179 (Kar). The list of states/cities in which the taxes were paid to local authorities in Japan was submitted vide letter filed on 28.12.2017 [Page 1389 to 1393 of Paper book 3]. 87. The AO has protectively restricted the aforesaid deduction to NIL in the assessment order for the reason that the favourable decision of the Karnataka High Court in the case of Wipro Ltd v DCIT [2015] 62 taxmann.com 26 is appealed before the Supreme Court and the SLP is pending. In the assessment order the allowability of the claim under section 37 of the Act as was claimed by the Assessee has not been considered nor commented upon by the AO. ITA Nos.125, 126, 226 & 227/Bang/2019 Page 66 of 129 88. The CIT(A) rejected the claim of the Assessee under section 37 of the Act by relying on the decision of ITAT, Ahmedabad Bench in DCIT v Elitecore Technologies (P.) Ltd (2017) 80 taxmann.com 6. 89. The ld AR submitted that the allowability of the claim under section 37 of the Act as was claimed by the Assessee has not been considered nor commented upon by the AO or the CIT(A). It is submitted that the state taxes paid to local authorities of foreign countries are not covered in Article 2 of the respective agreements entered by India under section 90 of the Act and are not eligible for relief under section 90 of the Act. Therefore, since the said expenditure related to the business of the Assessee, a claim under section 37 was made. The ld AR further submitted that it would be pertinent to note that the aforesaid taxes cannot be disallowed u/s 40(a)(ii), as the aforesaid taxes are not eligible for relief under section 90 and hence does fall within the ambit of Explanation 1 to Section 40(a)(ii). The ld AR drew our attention to the relevant extract of Section 40 which is reproduced below – (ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains. Explanation 1.—For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91. ITA Nos.125, 126, 226 & 227/Bang/2019 Page 67 of 129 90. The ld AR submitted that the Bombay High Court in Reliance Infrastructure Ltd v CIT [2016] 76 taxmann.com 257 held that tax paid outside India which is not eligible for relief under section 90/91 should be allowed as a deduction while computing the business income. The ld AR also submitted that following the above decision in Reliance Infrastructure (supra), various benches of the Hon’ble ITAT as listed below including the jurisdictional Bangalore bench, have allowed the deduction for state taxes paid under section 37 of the Act – • Onmobile Global Ltd. v ACIT [IT(TP)A Nos. 139 & 2560/Bang/2019 dated 10.08.2022] – ITAT, Bangalore Bench – Page 30 to 36, Para 49 • Bank of India v. ACIT [2021] 125 taxmann.com 155 – ITAT, Mumbai Bench • Tata Consultancy Services Ltd v Ad. CIT [2020] 121 taxmann.com 190– ITAT, Mumbai Bench • Virmati Software & Telecommunication Ltd. v. DCIT [IT Appeal No. 1135 (Ahd.) of 2017, dated 15-3-2020] – ITAT, Ahmedabad Bench 91. Accordingly the ld AR prayed that deduction for state taxes paid outside India should be fully allowed as claimed. 92. The ld DR relied on the orders of the lower authorities. 93. We heard the rival submissions and perused the material on record. We notice that the coordinate bench of the Tribunal in the case of Onmobile Global Ltd (supra) has considered a similar issue and held that – ITA Nos.125, 126, 226 & 227/Bang/2019 Page 68 of 129 48. We heard the ld DR. We notice that the Hon’ble Bombay High Court in the case of Reliance Infrastructure Ltd (supra) has considered a similar issue and held that – (h) Before dealing with the rival contentions, it would be useful to reproduce the statutory provision arising for our consideration to decide this issue. "Definitions 2. In this Act, unless the context otherwise requires, - (1) to (42)** ** ** 43. "tax" in relation to the assessment year commencing on the 1st day of April, 1965, and any subsequent assessment year means income tax chargeable under the provisions of this Act, and in relation to any other assessment year income-tax and super-tax chargeable under the provisions of this Act prior to the aforesaid date [and in relation to the assessment year commencing on the 1st day of April, 2006, and any subsequent assessment year includes the fringe benefit tax payable under Section 115WA] "Amounts not deductible 40. Notwithstanding anything to the contrary in Section 30 to the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession". (a) In the case of any assessee – (i), (ia), (ib), (ic)** ** ** (ii) Any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits and gains. ITA Nos.125, 126, 226 & 227/Bang/2019 Page 69 of 129 [Explanation 1. - For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under Section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91.] [Explanation 2. - For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under Section 90A.]" (i) We have considered the rival submissions. So far as the question relating to the Tribunal not following its order in the case of the applicant itself for A.Y. 1979-80, we find that there is a justification for the same. This is so as the decision of this Court in S. Inder Singh Gill (supra) was noted by the Tribunal on an identical issue while passing the order for the subject assessment year. Thus, the Tribunal had not erred in not following its order for A.Y. 1979- 80. In fact, the decisions of this Court in South East Asia Shipping Co. (supra) and Tata Sons Ltd. (supra), which are being relied upon in preference to Inder Singh Gill (supra) cannot be accepted as both the orders being relied upon by the applicant was rendered not at the final hearing but on applications under Section 256(2) of the Act and at the stage of admission under Section 260A of the Act. This unlike the judgment rendered in a Reference by this Court in S. Inder Singh Gill (supra). Moreover, the decision in South East Asia Shipping Co. (supra) is not available in its entirety. Therefore, it would not be safe to rely upon it as all facts and on what consideration of law, it was rendered is not known. Similarly, the decision of this Court in Tata Sons (supra) being Income Tax Appeal No.209 of 2001 produced before us, dismissed the appeal of the Revenue by order dated 2nd April, 2004 by merely following its order dated 23rd March, 1993 rejecting the Revenue's application for Reference under Section 256(2) of the Act. Thus, it also cannot be relied upon to decide the controversy. Moreover, the order of this ITA Nos.125, 126, 226 & 227/Bang/2019 Page 70 of 129 Court in Tata Sons Ltd. (supra) as produced before us for Assessment Year 1985-86 had not noticed the decision of this Court in S. Inder Singh Gill (supra) on a Reference. Therefore, it is rendered per incuriam. (j) This Court in S. Inder Singh Gill (supra) was required to answer the question whether for the purpose of computing total world income of the assessee as defined in Section 2(15) of the I. T. Act, the income accruing in Uganda has to be reduced by the tax paid to the Uganda Government in respect of such income? The Court while answering the question in the negative observed that it is not aware of any commercial principle/practice which lays down that the tax paid by one on one's income is allowed as a deduction in determining the income for the purposes of taxation. (k) It is axiomatic that income tax is a charge on the profits/ income. The payment of income tax is not a payment made/incurred to earn profits and gains of business. Therefore, it cannot be allowed an as expenditure to determine the profits of the business. Taxes such as Excise Duty, Customs Duty, Octroi etc., are incurred for the purpose of doing business and earning profits and/or gains from business or profession. Therefore, such expenditure is allowable as a deduction to determine the profits of the business. It is only after deducting all expenses incurred for the purpose of business from the total receipts that profits and/or gains of business/ profession are determined. It is this determined profits or gains of business/profession which are subject to tax as income tax under the Act. The main part of Section 40(a)(ii) of the Act does not allow deduction in computing the income i.e. profits and gains of business chargeable to tax to the extent, the tax is levied/ paid on the profits/ gains of business. Therefore, it was on the aforesaid general principle, universally accepted, that this Court answered the question posed to it in S. Inder Singh Gill (supra) in favour of the Revenue. (l) We would have answered the question posed for our consideration by following the decision of this Court in S. Inder ITA Nos.125, 126, 226 & 227/Bang/2019 Page 71 of 129 Singh Gill (supra). However, we notice that the decision of this Court in S. Inder Singh Gill (supra) was rendered under the Indian Income Tax Act, 1922 and not under the Act. We further note that just as Section 40(a)(ii) of the Act does not allow deduction on tax paid on profit and/or gain of business. The Indian Income Tax Act, 1922 Act also contains a similar provision in Section 10(4) thereof. However, the Indian Income Tax Act, 1922 contains no definition of "tax" as provided in Section 2(43) of the Act. Consequently, the tax paid on income/profits and gains of business/profession anywhere in the world would not be allowed as deduction for determining the profits/gains of the business under Section 10(4) of the Indian Income Tax Act, 1922. Therefore, on the state of the statutory provisions as found in the Indian Income Tax Act, 1922 the decision of this Court in S. Inder Singh Gill (supra) would be unexceptionable. However, the ratio of the aforesaid decision in S. Inder Singh Gill (supra) cannot be applied to the present facts in view of the fact that the Act defines "tax" as income tax chargeable under the provisions of this Act. Thus, by definition, the tax which is payable under the Act alone on the profits and gains of business are not allowed to be deducted notwithstanding Sections 30 to 38 of the Act. (m) It therefore, follows that the tax which has been paid abroad would not be covered within the meaning of Section 40(a) (ii) of the Act in view of the definition of the word 'tax' in Section 2(43) of the Act. To be covered by Section 40(a)(ii) of the Act, it has to be payable under the Act. We are conscious of the fact that Section 2 of the Act, while defining the various terms used in the Act, qualifies it by preceding the definition with the word "In this Act, unless the context otherwise requires" the meaning of the word 'tax' as found in Section 2(43) of the Act would apply wherever it occurs in the Act. It is not even urged by the Revenue that the context of Section 40(a)(ii) of the Act would require it to mean tax paid anywhere in the world and not only tax payable/ paid under the Act. ITA Nos.125, 126, 226 & 227/Bang/2019 Page 72 of 129 (n) However, to the extent tax is paid abroad, the Explanation to Section 40(a)(ii) of the Act provides/clarifies that whenever an Assessee is otherwise entitled to the benefit of double income tax relief under Sections 90 or 91 of the Act, then the tax paid abroad would be governed by Section 40(a)(ii) of the Act. The occasion to insert the Explanation to Section 40(a)(ii) of the Act arose as Assessee was claiming to be entitled to obtain necessary credit to the extent of the tax paid abroad under Sections 90 or 91 of the Act and also claim the benefit of tax paid abroad as expenditure on account of not being covered by Section 40(a)(ii) of the Act. This is evident from the Explanatory notes to the Finance Act, 2006 as recorded in Circular No.14 of 2006 dated 28th December, 2006 issued by the CBDT. The above circular inter alia, records the fact that some of the assessee who are eligible for credit against the tax payable in India on the global income to the extent the tax has been paid outside India under Sections 90 or 91 of the Act, were also claiming deduction of the tax paid abroad as it was not tax under the Act. In view of the above, Explanation inserted in 2006 to Section 40(a)(ii) of the Act, would require in the context thereof that the definition of the word "tax" under the Act to mean also the tax which is eligible to the benefit of Sections 90 and 91 of the Act. However, this departure from the meaning of the word "tax" as defined in the Act is only restricted to the above and gives no license to widen the meaning of the word "tax" as defined in the Act to include all taxes on income/profits paid abroad. (o) Therefore, on the Explanation being inserted in Section 40(a)(ii) of the Act, the tax paid in Saudi Arabia on income which has accrued and/or arisen in India is not eligible to deduction under Section 91 of the Act. Therefore, not hit by Section 40(a)(ii) of the Act. Section 91 of the Act, itself excludes income which is deemed to accrue or arise in India. Thus, the benefit of the Explanation would now be available and on application of real income theory, the quantum of tax paid in Saudi Arabia, attributable to income arising or accruing in India would be reduced for the purposes of computing the income on which tax is payable in India. ITA Nos.125, 126, 226 & 227/Bang/2019 Page 73 of 129 (p) It is not disputed before us that some part of the income on which the tax has been paid abroad is on the income accrued or arisen in India. Therefore, to the extent, the tax is paid abroad on income which has accrued and/or arisen in India, the benefit of Section 91 of the Act is not available. In such a case, an Assessee such as the applicant assessee is entitled to a deduction under Section 40(a)(ii) of the Act. This is so as it is a tax which has been paid abroad for the purpose of arriving global income on which the tax payable in India. Therefore, to the extent the payment of tax in Saudi Arabia on income which has arisen/accrued in India has to be considered in the nature of expenditure incurred or arisen to earn income and not hit by the provisions of Section 40(a)(ii) of the Act. (q) The Explanation to Section 40(a)(ii) of the Act was inserted into the Act by Finance Act, 2006. However, the use of the words "for removal of doubts" it is hereby declared "...." in the Explanation inserted in Section 40(a)(ii) of the Act, makes it clear that it is declaratory in nature and would have retrospective effect. This is not even disputed by the Revenue before us as the issue of the nature of such declaratory statutes stands considered by the decision of the Supreme Court in CIT v. Vatika Township (P) Ltd. [2014] 367 ITR 466/227 Taxman 121/49 taxmann.com 249 and CIT v. Gold Coin Health Foods (P.) Ltd. [2008] 304 ITR 308/172 Taxman 386 (SC). (r) In the above facts and circumstances, question (iii)(a) is answered in the negative i.e. against the Revenue and in favour of the applicant assessee. Question (iii)(b) is answered in the negative i.e. against the Revenue and in favour of the applicant assessee. 49. The Hon’ble Bombay High Court in the case of Reliance Infrastructure Ltd (supra) has laid down the ratio that to the extent tax paid in foreign country on income which has arisen/accrued in India, has to be considered in the nature of expenditure incurred or arisen to earn income and is to be allowed as a deduction. In the given case it is submitted that out of the foreign taxes paid no credit was claimed to an extent of Rs.9,32,85,133/-. Of the said foreign tax paid how much is ITA Nos.125, 126, 226 & 227/Bang/2019 Page 74 of 129 attributable to the income accrues / arises in India needs to be verified in order to arrive at the extent of allowability. This issue is raised as additional ground before the Tribunal and the issue is not factually verified by the lower authorities. We therefore remit this issue back to the AO. The AO is directed to verify the amount of foreign tax credit paid that is attributable to the income accruing / arising in India and allow the same accordingly in the light of the decision of the Hon’ble Bombay High Court in the case of Reliance Infrastructure Ltd (supra) after giving reasonable opportunity of being heard. The assessee is directed to provide necessary information to the AO and cooperate with the proceedings. It is ordered accordingly. This ground is allowed in favour of the assessee for statistical purposes. 94. In assessee’s case it is noticed that the lower authorities have looked into the issue only from section 90/91 perspective and has not discussed anything with regard to the allowability u/s.37. This fact has been admitted by the CIT(A) in para 18.2 of the appellate order. We are therefore of the considered view that this issue should be remitted back to the AO for fresh examination of facts and the AO is directed to keep in mind the ratio laid down by the Hon’ble Bombay High Court in the case of Reliance Infrastructure Ltd (supra) which is followed in the decision of the coordinate bench in the case of Onmobile (supra). The assessee is directed to provide necessary information to the AO and cooperate with the proceedings. It is ordered accordingly. This ground is allowed in favour of the assessee for statistical purposes. Ground No. 13 – Deduction under section in respect of donation made under Corporate Social Responsibility (CSR) 95. During the year, the Assessee made a donation to Infosys Foundation amounting to Rs. 235,94,00,000 and accordingly claimed a deduction under section 80G of Rs. 1,17,97,00,000 (50% of Rs. ITA Nos.125, 126, 226 & 227/Bang/2019 Page 75 of 129 235,94,00,000) in respect of the said donation. The said donation to Infosys Foundation also constituted CSR expenditure under the provisions of the Companies Act, 2013. In response to a specific query, the Assessee justified the claim of deduction under section 80G in respect of donation made as part of CSR expenditure [Page 627-629 of Paper book 2]. It was submitted that CSR expenditure was promptly disallowed under section 37 of the Act in the return of income. A deduction under section 80G was thereafter made after satisfying the eligibility criteria provided under the said section. 96. The AO has disallowed the deduction claimed under section 80G amounting to Rs. 1,17,97,00,000 for the reason that as per section 135 read with section 198 of the Companies Act, 2013, CSR expenses should be incurred out of tax paid profits and hence the Assessee’s claim to allow CSR expenses under section 80G defeats the very purpose of CSR expenses which must be incurred out of tax paid profits. 97. The learned CIT(A) upheld the action of the AO by observing that CSR donations are not made voluntarily but on compulsion of law and that the sum paid by the Assessee cannot be considered as “donation”. Therefore, such payments are not eligible for a deduction under section 80G. 98. Aggrieved the assessee is in appeal before the Tribunal. ITA Nos.125, 126, 226 & 227/Bang/2019 Page 76 of 129 99. We notice that the coordinate bench of Tribunal in the case of M/s Goldman Sachs Services Pvt. Ltd. v JCIT [IT(TP)A No.2355/Bang/2019 dated 15.06.2020 has considered a similar issue where it is held that – Whereas, the assessee company has made a claim for deduction of CSR expenses u/s. 80G of the Income Tax Act, 1961. But the assessing officer has rejected the assesses claim without verifying the nature of contributions and observed that it is not a donation, and was not spent voluntarily for the eligibility of claim u/s. 80G of the Act but due to legal obligation prescribed u/s. 135 r.w. Schedule VII of Companies Act, 2013. We find that the A.O has allowed deduction u/s. 80G of the Act in respect of contribution made to PM Relief Fund which is not disputed. We are of the opinion that the A.O. has not made his observations clear that no CSR expenses are eligible for deduction u/s. 80G of the Act. We consider it appropriate to refer to the Clauses (iiihk) & (iiihl) of sub-section 2 of section 80G of the Act which are read as under: “(iiihk) the Swachh Bharat Kosh, set up by the Central Government, other than the sum spent by the assessee in pursuance of Corporate Social Responsibility under sub-section (5) of Section 135 of the Companies Act, 2013 (18 of 2013); or (iiihl) the Clean Ganga Fund, set up by the Central Government, where such assessee is a resident and such sum is other than the sum spent by the assessee in pursuance of Corporate Social Responsibility under sub- section (5) of Section 135 of the Companies Act, 2013) (18 of 2013).” Where these two exceptions are provided in Section 80G of the Act, it can be inferred that the other contributions made u/s. 135(5) of the Companies Act are also eligible for deduction u/s. 80G of Income Tax Act subject to assessee satisfying the requisite conditions prescribed for deduction u/s.80G of the Act. In the present case the A.O. has not dealt on these aspects, prima facie, considered the contributions as not voluntary but a legal obligation and has accepted the genuineness of the contributions. We are of the opinion, that the matter has to be considered for examination and verification of facts subject to the assessee satisfying the requirements of claim u/s.80G of the Act. ITA Nos.125, 126, 226 & 227/Bang/2019 Page 77 of 129 100. It is also noticed that a similar view has been taken in the case of Allegis Services (India) (P.) Ltd. v. ACIT [IT Appeal No. 1693 (Bang.) of 2019, dated 29-4-2020] where it is held that – For claiming benefit under section 80G, deductions are considered at the stage of computing “Total taxable income”. Even if any payments under section 80G forms part of CSR payments(keeping in mind ineligible deduction expressly provided u/s.80G), the same would already stand excluded while computing, Income under the head, “Income form Business and Profession”. The effect of such disallowance would lead to increase in Business income. Thereafter benefit accruing to assessee under Chapter VIA for computing “Total Taxable Income” cannot be denied to assessee, subject to fulfillment of necessary conditions therein. "In present facts of case, Ld.AR submitted that all payments forming part of CSR do not form part of profit and loss account for computing Income under the head, "Income from Business and Profession". It has been submitted that some payments forming part of CSR were claimed as deduction under section 80G of the Act, for computing "Total taxable income", which has been disallowed by authorities below. In our view, assessee cannot be denied the benefit of claim under Chapter VI A, which is considered for computing 'Total Taxable Income". If assessee is denied this benefit, merely because such payment forms part of CSR, it would lead to double disallowance, which is not the intention of Legislature.” 101. In assessee’s case the reason for denying the deduction u/s.80G is that the deduction is not available for donations which are part of CSR expenditure. The CIT(A) while upholding the order of the AO stated that the CSR spend is not voluntary and therefore cannot be treated as donation. In our view, the assessee’s case is therefore covered by the decision of the coordinate bench in the case of Goldman Sachs Services Pvt. Ltd (supra) and respectfully following the same we remit this issue back to the AO for verification of CSR ITA Nos.125, 126, 226 & 227/Bang/2019 Page 78 of 129 spends in the light of the said decision. The AO is also directed to consider the ratio laid down by the coordinate bench in the case of Allegis Services (India) (P.) Ltd (supra) and allow a proper opportunity of being heard to the assessee. Ground No. 14 – Disallowance of deduction under section 80G in respect of other donations 102. During the year, the Assessee donated the following sums which were eligible for deduction under section 80G. Sl. No Donation paid to Amount in Rs. 1 Akanksha Foundation 6,00,000 2 Crafts Council of India 15,00,000 Total 236,15,50,000 103. The Assessee claimed deduction under section 80G computed at 50% of the aforesaid donations paid. During the course of assessment had no occasion to submit details pertaining to donations which did not form part of CSR expenditure and the AO while disallowing the deduction u/s.80G with respect to CSR expenditure had disallowed the above donations which were not forming part of CSR expenditure. The CIT(A) upheld the action of the AO without appreciating the fact that donations made to Akanksha Foundation and Crafts Council of India did not constitute CSR expenditure. 104. The ld AR submitted that the lower authorities have erred in disallowing the deduction under section 80G in respect of donations made to Akanksha Foundation and Crafts Council of India, for the ITA Nos.125, 126, 226 & 227/Bang/2019 Page 79 of 129 incorrect reason that such donations constituted CSR expenditure. The ld AR further submitted that the lower authorities have erred in not appreciating the fact that the aforesaid donations did not form part of CSR expenditure and that the claim of the Assessee in respect of donations made to Akanksha Foundation and Crafts Council of India satisfies the conditions prescribed under section 80G. 105. We heard the parties. We notice that the donations made to the above organisations by the assessee are not part of CSR expenditure and the lower authorities have not verified the details pertaining to these donations separately. We also noticed that the lower authorities have considered these donations along with CSR spend while disallowing deduction u/s.80G which according to the ld AR needs to examined separately for the purpose of allowability. Accordingly we remit this issue back to the AO to verify these donations in the light of the provisions of sections 80G and decide the allowability of the deduction accordingly. This ground is allowed for statistical purposes. 106. Ground 15 is consequential not warranting a separate adjudication. ITA No.227/Bang/2019- Revenue’s appeal. 107. We will now take up the appeal of the revenue for adjudication. Grounds No. 1, 4 and 5 are general in nature Ground No. 2 – Deduction under section 10AA in respect of interest income on GLES deposits with LIC, receipts from sale of ITA Nos.125, 126, 226 & 227/Bang/2019 Page 80 of 129 scrap, interest income from loans given to employees and incentives from airlines. 108. During the year under consideration, the Assessee earned Rs. 95,07,75,764 as interest from GLES deposits, . Rs.4,07,40,415 as interest from employee loans, Rs. 8,08,04,033 from sale of scrap and Rs. 5,38,800 as incentive from airlines. The Assessee had offered these to tax under the head ‘Profits and gains from business or profession’. Accordingly the assessee claimed deduction u/s.10AA including these incomes. 109. The AO reduced the interest income on GLES deposits with LIC relating to SEZ units eligible for 100% and 50% deduction amounting to Rs. 13,50,96,470 and Rs. 23,68,91,036 respectively from profits of the business of SEZ units for the reason that the said income is not derived from the activity of software development and export. Similarly, the AO has reduced the receipts from sale of scrap, interest income from loans given to employees and incentive from airlines relating to SEZ units eligible for 100% and 50% deduction totally amounting to 1,51,73,388 and Rs. 1,74,94,176 respectively from profits of the business of SEZ units for the reason that the said income is not derived from the activity of software development and export. 110. The CIT(A) held that the issue is covered by the decisions of the jurisdictional High Court in Green Agro Pack P Ltd v CIT ITA No. 230/2008 decision dated 26.8.2014 and in Wipro Limited v DCIT[2016] 382 ITR 179 (Kar). The CIT(A) also noted that the issue was decided by the CIT(A) in Assessee’s favour in its own case for AY ITA Nos.125, 126, 226 & 227/Bang/2019 Page 81 of 129 2013-14. In view of the same, the CIT(A) allowed relief of deduction under section 10AA for the aforementioned incomes. 111. Aggrieved the revenue is in appeal before the Tribunal. 112. The ld AR presented the below arguments for our consideration with regard to the impugned issue – Under section 10AA(1), profits and gains derived from the export of, inter alia, computer software is eligible for deduction under section 10AA. Subsection (7) to section 10AA provides the mechanism for computation of deduction provided under subsection (1). It begins with the expression ‘for the purposes of subsection (1)’. Thus, the deduction enshrined in subsection (1) with regard to profits and gains derived from the export of, inter alia, computer software should be computed in accordance with the provisions of subsection (7). Section 10AA(7) uses the expression ‘Profits of the business of the undertaking’. There is a distinction between the two terms “Profits derived from industrial undertaking” and “Profits derived from the business of industrial undertaking”. In the former case, there has to be a direct nexus between the profits and gains and the industrial undertaking. In the latter case the profits include not only those having a direct nexus with the industrial undertaking but also include incidental and ancillary activities connected with the undertaking. The usage of the words “business of” makes this difference. The phrase ‘profits of the business’ is of wider import and encompasses all the activities which are considered ancillary, incidental and subservient to carrying on of the business of the undertaking (Supreme Court ruling in the case of Continental Construction Ltd, 195 ITR 81). The interest income on GLES deposit and other income as explained above constitutes income from incidental and ancillary activity and is subservient to carrying on of the main business of the company and hence forms part of the business profits of the company. In Green Agro Pack P Ltd v CIT ITA No. 3112/2005 decision dated 13.4.2010, the Jurisdictional High Court held that interest from margin ITA Nos.125, 126, 226 & 227/Bang/2019 Page 82 of 129 money fixed deposit which was offered as security to bank is business income. It was also held by the Court that such interest would be eligible for deduction under section 10A / 10B. In DCIT v Motorola India Electronics (P) Limited 46 taxmann.com 167, the jurisdictional High Court had an occasion to adjudge whether interest from EEFC account and fixed deposits and inter company loans was eligible for a deduction under section 10B. In this context, the High Court observed – “There is a direct nexus between this income and the income of the business of the undertaking. Though it does not par take the character of a profit and gains from the sale of an article, it is the income which is derived from the consideration realized by export of articles. In view of the definition of ‘Income from Profits and Gains’ incorporated in Subsection (4), the assessee is entitled to the benefit of exemption of the said amount as contemplated under Section 10B of the Act. Therefore, the Tribunal was justified in extending the benefit to the aforesaid amounts also.” The Karnataka High Court in Green Agro Pack P Ltd v CIT ITA No. 230/2008 decision dated 26.8.2014 held that Interest on fixed deposits, interest on staff loans, fines collected from staff and insurance claim are eligible for deduction under section 10A/10B. Similarly, the Karnataka High Court in Wipro Limited v DCIT ITA No. 879/2008 and other connected appeals – dt. 25.3.2015 reported in [2016] 382 ITR 179 following its earlier order in Wipro’s case in ITA 507/2002 decided on 25.8.2010, held that Income from sale of scrap, export incentive, rent received, interest income and gain on exchange rate fluctuation are eligible for deduction u/s 10A/10B. Relevant extracts from the decision are as under. Substantial Question No.16: "Whether the Appellate Authorities were correct in holding that income earned from sale of 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?" ITA Nos.125, 126, 226 & 227/Bang/2019 Page 83 of 129 [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)]. 166. This Court had an occasion to consider the substantial question of law in assessee's case itself in ITA 507/2002 decided on 25.8.2010 while dealing with the income earned from sale of scrap, export incentive & rent received, answered the question in favour of the assessee and against the revenue. 167. In so far as gain on exchange rate fluctuation is concerned, it was subject matter of ITA 3202/05 which was decided on 28.2.2012 in the assessee's case itself, where the said question was answered in favour of the assessee and against the revenue. 168. In so far as income earned from interest is concerned that was subject matter of this Court in the case of CIT v. Motorola India Electronics (P.) Ltd. [2014] 225 Taxman 11 (Mag.)/46 taxmann.com 167 while dealing with exemption under Section 10B. It is in pari materia with Section 10A and has answered the said question in favour of the assessee and against the revenue. 169. As all these questions are decided and answered in favour of assessee in the aforesaid case, this question of law is answered in favour of the assessee and against the revenue The decision in Motorola India Electronics case (supra) has been affirmed by the Full Bench of the Karnataka High Court in CIT v Hewlett Packard Global Soft Ltd [2017] 87 taxmann.com 182. The Full Bench held that all profits and gains of 100 percent EOU including incidental income by way of interest on bank deposits or staff loans would be entitled to 100% exemption or deduction under sections 10-A or 10-B. The relevant portion of the decision is as follows: Exemption under sections 10-A and 10-B 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 ITA Nos.125, 126, 226 & 227/Bang/2019 Page 84 of 129 assessees entitled to the incentive in the form of 100 per cent deduction under sections 10-A or 10-B. The computation of income entitled to exemption under section 10-A or 10-B is done at the prior stage of computation of Income from profits and gains of business as per sections 28 to 44 under Part-D of Chapter IV before 'Gross Total Income' as defined under section 80-B(5) is computed and after which the consideration of various deductions under Chapter VI-A in section 80HH etc. comes into picture. Therefore, all profits and gains of the 100 percent EOU including the incidental income by way of interest on bank deposits or staff loans would be entitled to 100 per cent exemption or deduction under section 10-A and 10- B. 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 per cent deduction. (Emphasis supplied) A reading of the above would make it amply clear that all the incomes arising from the business of the undertaking – whether primary or incidental, should be considered for computing the deduction under section 10AA. The Hon’ble ITAT, Bangalore Bench in Assessee’s own case for AY 2005-06 [IT(TP)A No. 102/B/13 dated 10.11.2017] and AY 2006-07 [IT(TP)A No. 799/B/15 dated 10.11.2017] has held that rental income is eligible for deduction u/s 10A. Following this decision, the ITAT Bangalore bench in Assessee’s own case for AY 2007-08 to AY 2011- 12, vide common order in IT(TP)A Nos. 449, 509/Bang/2015, 613 & 532/Bang/2016 & ITA Nos. 1530 to 1532, 1557, 1848 & 1849/Bang/2017 dated 30.11.2022 internal page 26 to 29, para 8.1 to 8.3 allowed deduction under section 10A in respect of rental income. The aforesaid decisions, especially the ratio of the decision of the jurisdictional High Court in the case of CIT v Hewlett Packard (supra) have not been considered by the Hon’ble ITAT in Assessee’s own case for AY 2012-13 (supra), even though relied upon by the Assessee. 113. We heard the parties and perused the material on record. Before proceeding we will look at the relevant provisions of section 10AA ITA Nos.125, 126, 226 & 227/Bang/2019 Page 85 of 129 under which the assessee has claimed the deduction which reads as under - 10AA. (1) Subject to the provisions of this section, in computing the total income of an assessee, being an entrepreneur as referred to in clause (j) of section 2 of the Special Economic Zones Act, 2005, from his Unit, who begins to manufacture or produce articles or things or provide any services during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2006, but before the first day of April, 2021, the following deduction shall be allowed— (i) hundred per cent of profits and gains derived from the export, of such articles or things or from services for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the Unit begins to manufacture or produce such articles or things or provide services, as the case may be, and fifty per cent of such profits and gains for further five assessment years and thereafter; (ii) for the next five consecutive assessment years, so much of the amount not exceeding fifty per cent of the profit as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the "Special Economic Zone Re-investment Reserve Account") to be created and utilized for the purposes of the business of the assessee in the manner laid down in sub-section (2). Explanation.—For the removal of doubts, it is hereby declared that the amount of deduction under this section shall be allowed from the total income of the assessee computed in accordance with the provisions of this Act, before giving effect to the provisions of this section and the deduction under this section shall not exceed such total income of the assessee. (2) **** (3) **** (4) **** (5) **** (6) **** ITA Nos.125, 126, 226 & 227/Bang/2019 Page 86 of 129 (7) For the purposes of sub-section (1), the profits derived from the export of articles or things or services (including computer software) shall be the amount which bears to the profits of the business of the undertaking, being the Unit, the same proportion as the export turnover in respect of such articles or things or services bears to the total turnover of the business carried on by the undertaking : Provided that the provisions of this sub-section [as amended by section 6 of the Finance (No. 2) Act, 2009 (33 of 2009)] shall have effect for the assessment year beginning on the 1st day of April, 2006 and subsequent assessment years. (8) **** (9) **** (10) **** 114. From the plain reading of the section it is clear that the profits “derived” from export of article or thing is eligible for a deduction u/s.10AA. It is the contention of the revenue that the impugned income which have considered for the purpose of deduction are not derived from the export of article or thing but are one incidental to the business of the assessee. The Hon’ble Supreme Court in the case of CIT Sterling Foods, [1999] 237 ITR 579/104 Taxman 204 (SC) which is relied on by the revenue has held in the context of section 80IA/80IB deduction that income earned should not be incidental to the business, but should be derived from the business and that there should be a direct nexus between the income earned and the business. Therefore it is the contention of the revenue that it is important to test whether profits and gains emanate directly from the business itself and that income earned is inseparably connected with the business carried on by the assessee in ITA Nos.125, 126, 226 & 227/Bang/2019 Page 87 of 129 order to be eligible to get a deduction u/s.10AA which uses the similar language as in section 80IA. 115. However we notice that in the Full Bench decision of the Hon’ble Karnataka High Court, in the case of Hewlett Packard Global Soft Ltd., has distinguished the decision of Sterling Foods by stating that – “34. We are of the considered opinion that the above referred decisions relied upon by the learned counsel for the Revenue, Mr. Aravind do not cover the cases under Sections 10-A and 10-B of the Act which are special provisions and complete code in themselves and deal with profits and gains derived by the assessee of a special nature and character like 100% Export Oriented Units (EOUs.) situated in Special Economic Zones (SEZs), STPI, etc., where the entire profits and gains of the entire Undertaking making 100% exports of articles including software as is the fact in the present case, the assessee is given 100% deduction of profit and gains of such export business and therefore incidental income of such undertaking by way of interest on the temporarily parked funds in Banks or even interest on staff loans would constitute part of profits and gains of such special Undertakings and these cases cannot be compared with deductions under Sections 80-HH or 80-IB in Chapter VI-A of the Act where an assessee dealing with several activities or commodities may inter alia earn profits and gains from the specified activity and therefore in those cases, the Hon'ble Supreme Court has held that the interest income would not be the income "derived from" such Undertakings doing such special business activity”. 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 ITA Nos.125, 126, 226 & 227/Bang/2019 Page 88 of 129 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 computation of income entitled to exemption under Section 10-A or 10-B of the Act is done at the prior stage of computation of Income from Profits and Gains of Business as per Sections 28 to 44 under Part-D of Chapter IV before 'Gross Total Income' as defined under Section 80- B(5) is computed and after which the consideration of various Deductions under Chapter VI-A in Section 80HH etc. comes into picture. Therefore analogy of Chapter VI Deductions cannot be telescoped or imported in Section 10-A or 10-B of the Act. 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. 36. **** 37. On the above legal position discussed by us, we are of the opinion that the Respondent assessee was entitled to 100% exemption or deduction under Section 10-A of the Act in respect of the interest income earned by it on the deposits made by it with the Banks in the ordinary course of its business and also interest earned by it from the staff loans and such interest income would not be taxable as 'Income from other Sources' under Section 56 of the Act. The incidental activity of parking of Surplus Funds with the Banks or advancing of staff loans by such special category of assessees covered under Section 10-A or 10- B of the Act is integral part of their export business activity and a business decision taken in view of the commercial expediency and the ITA Nos.125, 126, 226 & 227/Bang/2019 Page 89 of 129 interest income earned incidentally cannot be de-linked from its profits and gains derived by the Undertaking engaged in the export of Articles as envisaged under Section 10-A or Section 10-B of the Act and cannot be taxed separately under Section 56 of the Act. 116. We also notice that the coordinate bench in assessee’s own case for AY 2007-08 to AY 2011-12, vide common order in IT(TP)A Nos. 449, 509/Bang/2015, 613 & 532/Bang/2016 & ITA Nos. 1530 to 1532, 1557, 1848 & 1849/Bang/2017 dated 30.11.2022 has considered the issue of eligibility of rental income to be part of profits eligible to be claimed as a deduction u/s.10AA and held that – 8.2 The Ld.AR submitted that assessee had received rental income from its subsidiary companies that constituted income from incidental and ancillary activities that was subservient to carrying on the business of the assessee. The said rental income was claimed by the assessee as deduction u/s. 10A which was denied by the Ld.AO, based on the turnover of the SEZ units. The Ld.AR submitted that the rental income pertained only to STPI units and therefore it was an income that was generated out of the undertaking. It is the submission of the Ld.AR that the revenue is not doubting the origin of the rental income because the disallowance was made by the Ld.AO based on the turnover of these units. At the outset however, the Ld.AR submitted that this issue has been considered by Coordinate Bench of this Tribunal for A.Y. 2005-06 in assessee’s own case in IT(TP)A No. 102/Bang/2013. This Tribunal vide order dated 10/11/2017 considered the issue by observing as under: “30. Ground No.9. 30.1 In this ground (supra), Revenue assails the order of the learned CIT (Appeals) in allowing the assessee's claim for inclusion of rental income from Infosys BPO Ltd. and BSNL, Chennai as profits of the business in computing deduction under Section 10A of the Act, when these incomes were not derived from the export of computer software. ITA Nos.125, 126, 226 & 227/Bang/2019 Page 90 of 129 30.2 In the order of assessment, the Assessing Officer held that the aforesaid rental income from Infosys BPO Limited and BSNL, Chennai cannot be regarded as income derived from the business of export of software. On appeal, before the learned CIT (Appeals), it was submitted by the assessee that inter alia, the rental income received from its subsidiary, Infosys BPO Limited, was incidental to the business carried on by the assessee as it facilitated operations, transactions, policies and procedures. In respect of the letting out of space to BSNL, in Chennai, it was for the purpose of setting up of Mini Exchange to equip the assessee's Chennai unit with telecommunication facilities. It was urged that the letting of space to Infosys BPO Limited and BSNL at Chennai were therefore incidental to the business carried on by the assessee and therefore eligible for deduction under Section 10A of the Act. 30.3.1 We have heard the rival contentions, perused and carefully considered the material on record. The issue as to whether interest income, income from sale of scrap, export incentive, rental income, etc. are eligible for deduction under Section 10A of the Act has been considered by the Hon'ble High Court of Karnataka in the case of Subex Ltd. Vs. ITO in ITA Nos.46 & 47 of 2009 dt.2.10.2014 held that rental income by virtue of sub-section (4) of Section 10 of the Act is deemed to be business of the undertaking for the purpose of extending the benefit of deduction under Section 10A of the Act. At paras 8 & 9 thereof, the Hon'ble Court, explaining the interplay of section 10A(1) and 10A(4) of the Act, has held as under : 8. As could be seen from the aforesaid provisions, the opening words of Section 10A of the Act assumes importance. It commences with the words “subject to the provisions of this section”. The opening words of sub section 4 of the Act clearly state that “for the purposes of [sub-sections (1) and (1A], the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking”. If the assessee is entitled to ITA Nos.125, 126, 226 & 227/Bang/2019 Page 91 of 129 deduction only profit derived under Section 10A(1) of the Act, the sub section (4) would be redundant. The sub section which came into effect on 01-04-2002 by Finance Act 2001 recognizes that the profits of the business of the undertaking would be, not only the profits and gains Page 28 IT(TP)A Nos. 449, 509/Bang/2015, 613 & 532/Bang/2016 & ITA Nos. 1530 to 1532, 1557, 1848 & 1849/Bang/2017 from the exports of articles or things or computer, in addition to that, the undertaking may have some other profits also, which is derived from business of the undertaking. 9. In the instant case, the assessee took the premises on lease. Assessee has paid a sum of Rs.43,38,350/- as rent from April 2002 to March 2003. It is shown as ‘business expenses’, as against the ‘expenses incurred’. The assessee has received a sum of Rs.17,27,385/- as rent receipt for the relevant period. Assessee is not the owner of the said premises. Assessee is carrying on the business of development of Software in Canada. The said premises was taken for the aforesaid business purpose. As a portion of the said premises was not used for business purpose, instead of keeping it vacant and suffering loss, it was rented out. Therefore, the said income derived from lease of the said premises constitutes “income from business”. Neither it would be ‘income from house property’ nor ‘income from other sources’. In view of the explanation used in sub Section (4) of Section 10A of the Act for the purpose of Sub section 1, the profit derived from export of articles or things or computer software shall be the amount which bears to the profits of business of the undertaking. Though the said profits are not derived from export of articles or things or computer software, by virtue of sub Section (4) it is deemed to be the profits of the business of the undertaking for the purpose of extending the benefit of exemption of payment of tax under Section 10A of the Act to a newly established undertaking in a free trade zone. 30.3.2 Similarly, the Hon'ble High Court of Karnataka in the case of Wipro Ltd. Vs. DCIT in its order reported in (2016) 382 ITR 179 ITA Nos.125, 126, 226 & 227/Bang/2019 Page 92 of 129 before whom the substantial question of law No.16 for consideration was in respect of income from sale of scrap, export incentive, rent received, interest income and gain on exchange rate fluctuation. The Hon'ble Court held that these items were eligible for deduction under Section 10A of the Act. At para 166 thereof; the Hon'ble Court followed its own earlier order in the case of Wipro Ltd. in ITA No.507 / 2002 dt.25.8.2010, in respect of income from sale of scrap, export incentive and rent received to hold as under : "166. This Court had occasion to consider the substantial question of law in assessee's case itself in ITA 507 . 2002 decided on 25.8.2010 while dealing with the income from sale of scrap, export incentive and rent received, answered the question in favour of the assessee ;and against the revenue." At para 169 thereof the Hon'ble Court held as under : "169. As all these questions are decided and answered in favour of the assessee in the aforesaid case, this question of law is answered in favour of the assessee and against revenue." 30.3.3 Respectfully following the decisions of the Hon'ble High Court of Karnataka in the case of Subex Ltd. Vs. ITO (supra) and Wipro Ltd. Vs. DCIT (supra), as discussed above, we are of the view that rental income received from Infosys BPO Limited and BSNL, Chennai cannot be excluded from the profits of the business of the undertaking while computing the deduction under Section 10A of the Act in the case on hand. Consequently, Ground No.9 of the revenue's appeal is dismissed.” 8.3 There is nothing on record that is brought by the revenue in order to take a contrary view. Respectfully following the above view, we direct the Ld.AO to include the rental income received from the SEZ units for the purposes of computing profits u/s. 10A. 117. The ld AR during the course of hearing also submitted a detailed note with respect to the nature of GLES deposits with LIC, receipts ITA Nos.125, 126, 226 & 227/Bang/2019 Page 93 of 129 from sale of scrap, interest income from loans given to employees and incentives from airlines which reads as follows – Interest on GLES Deposit: During the year under consideration, the Assessee earned Rs. 95,07,75,764 as interest from GLES deposits. The Assessee had offered the same for tax under the head ‘Profits and gains from business or profession’. Assessee gets actuarial valuation done on quarterly basis to know its liability toward un-encashed leave credits of its employees. Assessee makes the provision for the same based on actuarial valuation. An amount equivalent to the liability is kept as a deposit with LIC of India under GLES policy to fund this liability. Whenever there is encashment of leave credits by employees on account of retirement etc. Assessee makes the payment to its employees and withdraws an equal amount from the deposit with LIC on a regular basis. This deposit is not generic in nature. Funding to this deposit happens based upon actuarial valuation and withdrawals are permitted only for payment of leave encashment. LIC of India credits interest on such GLES deposit which is accounted as income in the profit and loss account. The LIC gives interest on such GLES deposit/premium and the same has been offered to tax under business income head as there is a nexus of GLES deposit with the business liability towards accumulated unused leave credits. Interest on employee loans: During the year under consideration, the Assessee earned Rs. 4,07,40,415 as interest from employee loans. The Assessee had offered the same for tax under the head ‘Profits and gains from business or profession’. As an employee welfare measure, the Assessee extends loans to its employees. There were 3 types of loans- Soft loan, salary loans and salary advance. The soft loan carried an interest of 4% p.a., whereas salary loans and salary advances were interest free. The soft loan is recovered in 12/24 months (depending on eligibility), salary advance in the same month of disbursal and salary loan in 12 months. The perquisite value for soft loans and salary loans was taxed in the hands of the employees. ITA Nos.125, 126, 226 & 227/Bang/2019 Page 94 of 129 Sale of scrap– During the year under consideration, the Assessee earned Rs. 8,08,04,033 from sale of scrap and Rs. 5,38,800 as incentive from airlines. The Assessee had offered the same for tax under the head ‘Profits and gains from business or profession’. 118. From the perusal of facts in assessee’s case, we are of the considered view that GLES deposits with LIC, receipts from sale of scrap, interest income from loans given to employees are covered by the decision of the Hon’ble High Court in the case of Hewlett Packard Global Soft Ltd (supra) and assessee’s own case for AY 2007-08 to 2011-12 (supra). Accordingly we hold that these income should be included for the purpose of computing the profits eligible for deduction u/s.10AA. 119. With respect to incentives from airlines, we notice that the same is received from few airline companies such as Lufthansa, Qatar Airways, Indigo, Spicejet etc., as incentive amount for travelling of employees, officers etc., regularly. In our considered view, the income is not directly arising out of the business of the assessee and do not have any nexus to the business of the assessee. The income is arising for the reason that some of the employees are frequently travelling in these airlines and the income thus earned is incidental to the business. Therefore applying the ratio laid down by the Hon’ble Supreme Court in the case of Sterling Food (supra) we hold that incentives received from airlines are not eligible for deduction u/s.10AA. It is ordered accordingly. This ground of the revenue is partially allowed. Ground No. 3 – Foreign tax credit ITA Nos.125, 126, 226 & 227/Bang/2019 Page 95 of 129 120. During the year under consideration, the assessee claimed foreign tax credit in the revised return of income for an amount of Rs. 1171,93,23,388. The AO has protectively restricted the aforesaid claim to NIL in the assessment order for the reason that the favourable decision of the Karnataka High Court in the case of Wipro Ltd v DCIT [2015] 62 taxmann.com 26 is appealed before the Supreme Court and the SLP is pending. 121. The CIT(A) followed the order passed by his predecessor in Assessee’s own case for AY 2007-08 to AY 2009-10. In the order passed by the CIT(A) for AY 2007-08 to AY 2009-10, the CIT(A) directed the AO to ascertain the correct amount of onsite revenue and income taxed abroad on the basis of the tax returns filed by the Assessee in the respective foreign jurisdictions and then compute the relief considering the DTAA with respective countries. It was held that this decision of the CIT(A) would apply to the year under consideration. 122. The AO passed the order giving effect to CIT(A) order on 13.12.2019. During the course of proceedings, the Assessee submitted that with respect to the claim of Foreign Tax Credit on account of dispute with Australian Tax Authorities, appropriate direction may be issued to allow the same once the dispute gets settled and matter attain its finality in accordance with the provisions of section 155(14A) read with rule 128(4). Further it was submitted by the Assessee that claim of Foreign Tax Credit attributable to income on which deduction under ITA Nos.125, 126, 226 & 227/Bang/2019 Page 96 of 129 section 10AA may be allowed once the Supreme Court decides revenue’s SLP against the Karnataka High Court in the case of Wipro Limited v DCIT[2016] 382 ITR 179. Accordingly, the AO recording the above reservations of the Assessee, foreign tax credit amounting to Rs. 376,69,73,928 has been allowed. 123. The ld AR submitted that the claim for foreign tax credit amounting to Rs. 376,69,73,928 as has been granted by the AO in the order giving effect to CIT(A) order, should be fully allowed. The ld AR also submitted that the foreign tax credit on income on which deduction under section 10AA is claimed as per Wipro decision (supra) is also allowable subject to the outcome of the revenue’s SLP before the Supreme Court. Similarly, FTC on taxes which are under dispute with the ATO is also allowable when the dispute is finally settled in accordance with the provisions of section 155(14A) read with rule 128(4). 124. Without prejudice to the above, the Assessee requests that state taxes paid in US and Canada be allowed as a deduction under section 37 of the Act following the decisions Reliance Infrastructure Ltd v CIT [2016] 76 taxmann.com 257 (Bombay) and Onmobile Global Ltd v ACIT IT(TP)A Nos 139 & 2560/Bang/2019 – AY 2014-15 & 2015-16 – 10.8.2022. 125. We heard the parties. We notice that the Hon’ble ITAT in Assessee’s own case for AY 2005-06 [IT(TP)A No. 102/B/13 dated 10.11.2017] and AY 2006-07 [IT(TP)A No. 799/B/15 dated ITA Nos.125, 126, 226 & 227/Bang/2019 Page 97 of 129 10.11.2017] admitted the additional grounds of appeal pertaining to claim of relief under section 90, 91 and directed the AO to consider the said claim in the light of the decision of the Karnataka High Court in the case of Wipro Limited v DCIT decision dated 25.3.2015 [2016] 382 ITR 179 after verification of necessary details and documents. Accordingly we remit the issue back to the AO with a direction to keep in mind the above decision of the coordinate Assessee’s own case for AY 2005-06 and AY 2006-07 while considering the issue from allowability u/s.90/91 perspective. The AO is further directed to keep in mind the directions given in the earlier part of this order (Ground 12 in assessee’s appeal) with regard to the allowability u/s.37 of the foreign tax credit and the additional foreign tax claimed by assessee in respect of state taxes paid. Needless to say that the assessee be given a reasonable opportunity of being heard. It is ordered accordingly. 126. Now we will consider the appeals filed for AY 2014-15 by the assessee (ITA No.125/Bang/2019) and the revenue (ITA No.226/Bang/2019) for adjudication. ITA No.125/Bang/2019 – Assessee’s appeal 127. For AY 2014-15 original return of income was filed on 29.11.2014 declaring total income of Rs. 9466,45,56,580. A revised return of income was filed on 31.3.2016 declaring total income of Rs. 9312,39,90,460. Notice under section 143(2) was issued and served. Details called for from time to time were submitted. The assessment was completed and the order under section 143(3) was passed on ITA Nos.125, 126, 226 & 227/Bang/2019 Page 98 of 129 29.12.2017. Aggrieved by the variations made in the assessment order, the Assessee preferred an appeal before the Hon’ble Commissioner of Income Tax (Appeals) – 3, Bangalore. The learned CIT(A) passed the order on 03.12.2018. Aggrieved by the order passed by the learned CIT(A), the Assessee has filed this appeal. 128. The issues contended vide Ground Nos.2 to 9 for AY 2014-15 are covered by the decision as given in the earlier part of this order for AY 2015-15. Ground No.11 pertaining to deduction disallowance of deduction u/s.32(AC) (Ground No.11) which is common to AY 2014- 15 and 2015-16 and the issues unique to AY 2014-15 with respect to disallowance of payments made to US authorities (Ground No.10) and disallowance u/s. 35(2AB) (Ground No.12) are adjudicated in the following paragraphs. Ground No.1 is general not warranting separate adjudication. Disallowance of payments made to US authorities (Ground 10) 129. The brief facts in relation to this issue are that during the course of assessment proceedings, it was noticed that the assessee had paid a sum of Rs.208.93 crore (34 Million USD) to certain authorities of United States of America (hereinafter referred to as “US Authorities”) towards settlement of visa violation. The assessee had debited the settlement paid of the aforesaid sum under the head “other expenses” and claimed the said payment as an allowable business expenditure. During the course of assessment proceedings, the assessee was asked to substantiate the claim of settlement amount so paid as an allowable ITA Nos.125, 126, 226 & 227/Bang/2019 Page 99 of 129 expenditure. The assessee vide letter dated 08.12.2017, submitted the details of the impugned payment made to the US Authorities along with note giving detailed reasons for allowability of such expenditure as a business expenditure. A copy of the settlement agreement with the US Authorities was also submitted as part of the said letter. However, the submission of the assessee was rejected by the A.O. The A.O. relied on certain clauses of the settlement agreement with reference to the terms of settlement wherein the assessee agreed that it had committed certain civil violation. The A.O. disallowed the payment made to the US Authorities for the reason that the said payment is in the nature of a fine paid on certain civil violation and hit by Explanation 1 to section 37(1) of the I.T.Act (refer para 10.1 to 10.9 of the assessment order for assessment year 2014-2015). 130. Aggrieved, the assessee raised this issue before the first appellate authority. The CIT(A) affirmed the disallowance made by the A.O. The CIT(A) held that the settlement agreement with US Authorities is akin to compounding of offence and cannot be allowed as expenditure u/s 37 of the I.T.Act. 131. Aggrieved by the order of the first appellate authority, the assessee has raised this issue before the Tribunal. The learned AR’s primary contention is that even assuming without admitting that the impugned payment is an offence of a law, the law violated is a foreign law and not a law in India. It was submitted that for the relevant assessment year, Explanation 1 to section 37(1) of the I.T.Act only ITA Nos.125, 126, 226 & 227/Bang/2019 Page 100 of 129 provides for contravention of those laws which are in force in India and not of any foreign country. In this context, the learned AR relied on the judgment of the Hon’ble Supreme Court in the case of Oxford University Press v. CIT reported in (2001) 115 Taxman 69 (SC) and the decision of the Hyderabad Bench of the Tribunal in the case of Mylan Laboratories Ltd. v. DCIT reported in (2020) 113 taxmann.com 6 (Hyderabad-Tribunal). As regards the insertion of new Explanation 3 to section 37 of the I.T.Act by the Finance Act, 2022, the learned AR submitted that the above said Explanation is prospective in nature and not retrospective, hence, not applicable for the relevant assessment year. As regards the prospective of application of the Explanation, the learned AR relied on the judgment of the Hon’ble Supreme Court in the case of Sedco Forex International Drill. Inc. v. CIT reported in (2005) 279 ITR 310 (SC) and the judgment of the Hon’ble Delhi High Court in the case of PCIT v. Infrastructure India Ltd. reported in 448 ITR 674 (Delhi). 132. The learned Departmental Representative, on the other hand, submitted that Explanation 1 is independent of Explanation 3. It was submitted that by virtue of Explanation 1, the expenditure claimed ought to be disallowed. The learned DR sought to distinguish the Hyderabad Bench order of the Tribunal relied on by the learned AR. It was submitted by the learned DR that the Hyderabad Bench order was rendered by placing reliance on various Court’s rulings / judgments concerning interpretation of domestic law and rules, whereas, the Income-tax Act deals with global income and corresponding ITA Nos.125, 126, 226 & 227/Bang/2019 Page 101 of 129 expenditure incurred globally. The learned DR placed reliance on the explanatory memorandum for introduction of Explanation 3 to section 37 and the Finance Minister’s speech to contend that the above said Explanation 3 is retrospective in nature and not prospective. It was also contended that the emphasis has been given to the words “shall not deemed to have been incurred for the purpose of business or profession” and not to the word “law”. It was submitted that the intend of the Legislature is to treat an expenditure for violation of law as an expenditure that would not have incurred wholly and exclusively for the purpose of business. Further, the learned DR by placing reliance on the judgment of the Hon’ble Supreme Court in the case of Haji Aziz Brothers v. CIT reported in 41 ITR 350 (SC) submitted that it is not necessary for the application of Explanation for making disallowance of an expenditure incurred for violation of law. Lastly, it was contended that the introduction of Explanation 3 only makes clear provisions as it stood earlier. Therefore, it was submitted that the same needs to be having retrospective operation and cannot be prospective. 133. We have heard rival submissions and perused the material on record. Admittedly, the impugned payment is towards an offence of a foreign law and not any laws in India. The Co-ordinate Bench of the Tribunal in the case of Mylan Laboratories Ltd. v. DCIT (supra) had held that the amount disallowed under Explanation 1 to section 37(1) of the I.T.Act are of those for contravention of law in force in India and not in any foreign country. ITA Nos.125, 126, 226 & 227/Bang/2019 Page 102 of 129 134. The ITAT Hyderabad Bench in Mylan Laboratories Ltd. v. DCIT [2020] 13 taxmann.com 6 (Hyd. Trib.) has held that amounts to be disallowed under Explanation 1 to section 37(1) of the Act are for those for contravention of laws in force in India and not of any foreign country. The relevant observations of the Tribunal are as under:- 8.9 Thus, from the above decisions, it is clear that what has to be disallowed under Explanation 1 to Sec.37(1) of the Act is a payment made, for contravention of laws in force in India and not of any foreign country. The laws are specific to each of the countries according to their rules and regulations and an offence in one country may not be so in another country. Therefore, we agree with the contentions of Ld.Counsel for the assessee that it is only payment made for contravention of laws in force in India that disallowance under Explanation 1 to Sec.37(1) of the Act is to be made. 135. The Hon’ble Apex Court in the case of Oxford University Press v. CIT (supra) had held that the word “India” in relation to the word `law’ is implicit. The Hon’ble Supreme Court in the said case interpreted the expression `any law for the time being in force’ appearing u/s 10(29) of the I.T.Act. In this context, the Hon’ble Apex Court held that though the words `Indian law’ are not used in the said section, in order to claim exemption, the authority therein has to be constituted under any law for the time being in force in `India’. 136. However, the Finance Act, 2002 has introduced a new Explanation 3 to section 37 of the I.T.Act, which reads as follows:- “Explanation 3.—For the removal of doubts, it is hereby clarified that the expression "expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law" under Explanation 1, ITA Nos.125, 126, 226 & 227/Bang/2019 Page 103 of 129 shall include and shall be deemed to have always included the expenditure incurred by an assessee,— (i) for any purpose which is an offence under, or which is prohibited by, any law for the time being in force, in India or outside India; or (ii) to provide any benefit or perquisite, in whatever form, to a person, whether or not carrying on a business or exercising a profession, and acceptance of such benefit or perquisite by such person is in violation of any law or rule or regulation or guideline, as the case may be, for the time being in force, governing the conduct of such person; or (iii) to compound an offence under any law for the time being in force, in India or outside India.” 137. The amendment clarifies that expenses incurred towards an offence under any law in India or outside shall not allowed as a deduction. The memorandum explaining the provisions of Finance Bill, 2022 gave the following reason for the aforesaid amendment:- “7. Further, some taxpayers are seen to be claiming deduction on expenses incurred for a purpose which is an offence under foreign law or for compounding of an offence for violation of foreign law, claiming that provisions of Explanation 1 to sub-section (1) of section 37 of the Act applies only to offences which are prohibited by the domestic law of the country. In some case this view has also been accepted by the tribunal. These judgements are also against the intention of the legislation as the legislation does not say that the Explanation 1 applies only to the violation of domestic law.” 138. The memorandum explicitly says that the aforesaid amendment will have effect from 01.04.2022. The Board Circular No. 23/2022 [F. NO. 370142/48/2022-TPL] dated 03.11.2022 has also ITA Nos.125, 126, 226 & 227/Bang/2019 Page 104 of 129 stated that the aforesaid amendment takes effect from 1st of April, 2022. 139. The Hon’ble Supreme Court of India in Sedco Forex International Drill. Inc. v. CIT [2005] 149 Taxman 352/279 ITR 310 (SC) held as follows: “18. As was affirmed by this court in Goslino Mario [2000] 241 ITR 314, a cardinal principle of the tax law is that the law to be applied is that which is in force in the relevant assessment year unless otherwise provided expressly or by necessary implication (see also : Reliance Jute and Indus- tries Ltd. v. CIT [1979] 120 ITR 921 (SC) ; [1980] 1 SCC 139). An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section**. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force***. But if it changes the law it is not presumed to be retrospective irrespective of the fact that the phrases used are “it is declared” or “for the removal of doubts”. 140. The law prior to the amendment was that expenses towards offence under domestic laws of India alone would not be allowed as a deduction under section 37. This proposition was affirmed by the Tribunal which has also been noted in the Memorandum as reproduced above. Therefore, the aforesaid amendment alters the law as it stood earlier. Therefore, as per the above decision of the Hon’ble Supreme Court, the Explanation cannot be considered retrospective in nature. 141. Relying on the above judgment of the Hon’ble Supreme Court, the Hon’ble Delhi High Court in PCIT v Era Infrastructure [2022] 141 ITA Nos.125, 126, 226 & 227/Bang/2019 Page 105 of 129 taxmann.com 289 (Delhi), held that a provision in the Act which is “for the removal of doubts” cannot be presumed to be retrospective if it alters or changes the law as it stood earlier. In this case, the Hon’ble High Court dealt with the amendment to section 14A by the Finance Act, 2022 by way of insertion of an Explanation to the said section. The opening portion of the newly inserted Explanation read “For the removal of doubts...”. The High Court noted that the Memorandum of the Finance Bill, 2022 explicitly stated that the amendment made to section 14A will take effect from 1st April, 2022 and will apply in relation to the assessment year 2022-23 and subsequent assessment years. Despite noting the same, the High Court observed the following: “8. Consequently, this Court is of the view that the amendment of section 14A, which is "for removal of doubts" cannot be presumed to be retrospective even where such language is used, if it alters or changes the law as it earlier stood.” 142. The learned DR relied on the judgment of the Hon’ble Supreme Court in Checkmate Services (P.) Ltd v CIT (2022) 448 ITR 518 (SC) to contend that the provisions of section 37(1) should be interpreted bereft the newly inserted Explanation 3 to the said section. In the said case, the Hon’ble Supreme Court interpreted the existing provision of section 36(1)(va) of the I.T. Act without considering the amendment made to it by the insertion of a new Explanation 2 to the said section, which essentially clarified the same conclusion as was decided by the Hon’ble Supreme Court in that case. Further, the learned DR had contended that the provision of section 37 read with Explanation 1 and without considering the newly inserted Explanation 3, is clear to the ITA Nos.125, 126, 226 & 227/Bang/2019 Page 106 of 129 effect that the word ‘law’ should necessarily be associated with the word ‘India’. As discussed above, the Hon’ble Supreme Court in Oxford University case and the Tribunal in Mylan’s case (supra) have clarified the said proposition. 143. For the aforesaid reasoning and judicial pronouncements on the facts and circumstances of the case and law application, we hold that settlement amount paid to US authorities amounting to Rs. 208,93,00,000 should be allowed as deduction for the relevant assessment year. It is ordered accordingly. Disallowance u/s 32AC (Ground No.11) 144. For the relevant assessment year, the assessee had claimed deduction u/s 32AC of the I.T.Act amounting to Rs.132,13,18,483 on account of investment in new plant and machinery. Working of the aforesaid deduction claimed was submitted to the A.O. vide letter dated 28.09.2017. A brief submission giving the reasons for the allowability of deduction claimed was submitted vide letter dated 08.12.2017. The A.O. however disallowed the claim u/s 32AC of the I.T.Act for the reason that the activity of software development falls within the purview of service sector, whereas section 32AC of the I.T.Act has been inserted by the Legislature to give impetus to the manufacturing sector only. Further, the A.O. had held that the total of the addition to the plant and machinery block during the year amounted to only Rs.413.11 crore. Consequently, the A.O. was of the view that if at all deduction is to be granted u/s 32AC of the I.T.Act, only a sum of ITA Nos.125, 126, 226 & 227/Bang/2019 Page 107 of 129 Rs.61.97 crore ought to be granted, instead of Rs.132 crore as claimed by the assessee. 145. The CIT(A) upheld the disallowance made by the A.O. The CIT(A) held that the software development activity cannot be considered as “manufacture” as defined in section 2(29BA) of the I.T.Act. As regards the issue of quantum of deduction, the CIT(A) held that the same is academic in nature and did not require any adjudication. 146. Aggrieved, the assessee has raised this issue before the Tribunal. The ld. AR has contended that the software development activities are to be considered in the nature of manufacture or production of article or thing. The ld. AR has relied on various decisions to support his contentions. 147. The ld. DR has filed a brief written submissions. The essence of the submissions of the ld. DR is that deduction u/s. 32AC of the I.T. Act is given as an impetus to the manufacturing sector only and assessee being predominantly in the service sector would not be entitled to the deduction. 148. We have heard the rival submissions and perused the material on record. The assessee is engaged in the business of software development activity. In the written submissions of the assessee it is stated that in the software business, parties may enter into a contract for the creation or modification of software by a software house or ITA Nos.125, 126, 226 & 227/Bang/2019 Page 108 of 129 computer programmer. This is frequently the way in which customized software is developed and acquired by the user/purchaser. The level of activities/services rendered will vary with each contract. At one end of the spectrum, the customers needs may require that a programme be created virtually from scratch. At the other end of spectrum, a minor modification to an existing or standard program may be sufficient to meet the customers requirements. In the current economic and business scenarios, the creation of computer programs to assist the various business functions is a complex process. The software to be ultimately created is broken into different drivers or modules. These different modules or even sub-segments thereof are normally developed by different persons because the expertise and wherewithal to develop the software may not be available with a single person. For each module, specifications are developed. The performance level to be achieved including the stress levels, security levels and recovery levels are defined. 149. Therefore, the software development activity performed by the assessee involves various activities like developing a software from the scratch, modification of existing software, maintenance of existing software or software testing. 150. Before proceeding further, there is necessity to examine the background under which section 32 of the I.T. Act was introduced. It is generally felt in the academic arena that the structure of Indian economy is skewed towards or dominated by service sector and the ITA Nos.125, 126, 226 & 227/Bang/2019 Page 109 of 129 base of manufacturing sector is inadequate. India transitioned from agriculture dominated country to service sector dominated country. This is an unusual path of development whereas most of the world countries treaded the path of agriculture dominated economy to manufacturing dominated economy then came to be dominated by the service sector. This unusual development path of India led to a question whether India can sustain its economic development. This is evident from OECD (2007) (Economic Survey of India, Paris, www.oecd.org/eco/surveys/india), Dougherty, S. and R. Herd and T. Chalaux (2009) (“What is Holding Back Productivity Growth in India? Recent Microevidence” OECD Journal: Economic Studies Volume 2009, ISSN 1995-2848) and Kochhar et al. (2006) (“India’s Pattern of Development: What Happened, What Follows?’ Journal of Monetary Economics, Vol. 53 No.5, pp. 981-1019). Few expressed skeptical view (OECD 2007) as an answer to this question. The relevant paras are extracted below: From Dougherty, S. and R. Herd and T. Chalaux (2009) The slow take-off of India's manufacturing sector compared with many of its Asian neighbours is the source of a considerable amount of consternation and mystery. Manufacturing's share of value added has barely risen over the past three decades, and India's goods exports have remained below 1% of corresponding world trade. At the same time, services trade has expanded rapidly and the decline in the share of agriculture in the economy has found its counterpart in services rather than manufacturing (OECD, 2007). In apparent contradiction, the literature on economic development has long argued that production shifts first from agriculture into manufacturing and — only at a later stage of development — from ITA Nos.125, 126, 226 & 227/Bang/2019 Page 110 of 129 manufacturing into services. This so-called Three-Sector (or Fisher-Clark-Kuznets) Hypothesis appears consistent with much cross-country evidence, and has been associated with demand shifts and productivity differentials: the resource shift out of low- productivity agriculture into higher-productivity manufacturing boosts overall productivity in converging economies. Two recent studies have attempted to answer the question of whether India can bypass a manufacturing stage. Kochhar et al. (2006) look across India's states and at industry-level evidence, and argue that the distortions in skill-intensity and scale that have emerged are persistent and may allow it to bypass the more traditional development path that other countries have followed. OECD (2007) takes a more skeptical view, noting that few countries have not relied heavily on manufacturing at some stage for their development. (Ref page 438 of DRPB) Scale, capital intensity and productivity Extremely small scale Perhaps the most dominant characteristic of India's manufacturing sector is the extraordinarily small scale of establishments relative to any OECD or major emerging country when measured in terms of employment and output (Figure 3). About 87% of manufacturing employment is in micro-enterprises of less than 10 employees, a smallness of scale that is unmatched, with the closest comparator being Korea, where less than half of employment is in micro-enterprises. While there is a fairly high share of very large companies — making for a bimodal distribution — there are few enterprises of intermediate size. ............ ............ Given the relatively small size of many manufacturing firms, India is reaping far smaller gains from scale economies than many other countries. Larger establishments often use newer technologies and thus achieve higher productivity, while smaller establishments are much less productive. Accordingly, although small firms' share in manufacturing employment is almost 90%, they produce only about a third of manufacturing output. An estimate of scale effects for plants, based on individual establishments in the Annual Survey of Industries, shows them to be very large and persistent. Even after controlling for technology, ITA Nos.125, 126, 226 & 227/Bang/2019 Page 111 of 129 industry, region and firms' age, total factor productivity (TFP) is about twice as high in firms with more than 250 employees than in those with only up to 10 employees (Figure 4). (refer p 443-444 of DRPB) From Kochhar et al. (2006) Abstract India has followed an idiosyncratic pattern of development, certainly compared with other fast growing Asian economies. (refer p 457 of DRPB) While China, the world's manufacturing powerhouse, appears to be absorbing surplus labor from agriculture into manufacturing, there is growing concern that India has failed to match its neighbor in this process. To many India's emergence as a world- class services hub offers shows them to be very large and persistent. Even after controlling for technology, industry scant comfort because of the relatively limited prospects of such skill- based development for employment growth. In addition, worries are mounting about the uneven distribution of opportunities across states (the fast—growing peninsula versus the slow- moving hinterland), sectors (services versus manufacturing or agriculture), and skill and education levels. Will India foster growth in labor-intensive manufacturing? If yes, how? If not, how can jobs be provided for India's vast, growing, pool of low-skilled labor? (refer p 458 of DRPB) 3.2. Manufacturing versus services in the cross-section The traditional perspective of Kuznets or Chenery would predict a rapid increase in the share of manufacturing, a decline in agriculture and an uncertain or modest effect on services. However, between 1980 and 2002, India's share of services in value added exploded from 37 percent to 49 percent. Its share of manufacturing in value added remained broadly unchanged at 16 percent, while the decline in agriculture mirrored the performance of services. The corresponding numbers for employment were 19 percent to 22 percent and 14 percent to 18 percent (Table 1). .......... .......... Furthermore, in the regressions using the change in the share of manufacturing value-added to overall growth (column 1, Panel B), the India indicator is negative. Thus, the data suggest a relative slowing in manufacturing growth. ITA Nos.125, 126, 226 & 227/Bang/2019 Page 112 of 129 What is indisputable is the performance of services over this period. India has been unusual in this regard. India’s share in service is a significant 3.8 percent higher than in other countries in 2000 (Table 5, panel A, column 4). This is broadly confirmed in the change regressions (panel B), where India records an increase in the size of the services sector that is 10 percentage points of GDP greater than that of the average country. Finally, note in Table 5 (column 8, panel A), that India is again a negative outlier in terms of the employment share in services, falling below other countries by a huge 17 percentage points in 2000. Gordon and Gupta (2004) have also observed that, unlike other countries, Indian labor's share in services employment has been flat rather than growing with income. The huge increase in value added in services without a commensurate increase in employment, must have come from tremendous gains in labor productivity in services. (refer p 472-473 of DRPB) 151. Hence, it was felt that the unusual path may lead to vulnerability of Indian Economy to ups and downs of global economy. The reason being service industries are foot loose industries where as manufacturing industries are not. In addition, employment growth is inadequate and is not matching with the output of service sector. It means service sector led to jobless growth. To ward off this problem, the necessity to increase the manufacturing base with large scale manufacturing firms was felt and there is an urge among the policy makers of India to increase the manufacturing base. Under this context only Sec.32AC was also introduced. To quote Hon'ble Finance Minister of India in this context, attention is invited to para 136 and 59 of Budget speech of Budget 2013-14. The relevant paras are reproduced below: ITA Nos.125, 126, 226 & 227/Bang/2019 Page 113 of 129 "136. No large economy can become truly developed without a robust manufacturing sector. Hence, as stated in part A of my speech, I propose to provide an investment allowance at the rate of 15 percent to a manufacturing company that invests more than '100 crore in plant and machinery during the period 1.4.2013 to 31.3.2015." "59. To attract new investment and to quicken the implementation of projects, I propose to introduce an investment allowance for new high value investments. A company investing '100 crore or more in plant and machinery during the period 1.4.2013 to 31.3.2015 will be entitled to deduct an investment allowance of 15 percent of the investment. This will be in addition to the current rates of depreciation. There will be enormous spill-over benefits to small and medium enterprises." 152. So, the intention is very much clear that Sec. 32AC was introduced to boost the manufacturing sector vis-à-vis service sector. Particularly the intention was to boost large manufacturing firms that is why initial investment allowance is given to those manufacturing firms belonging to manufacturing sector investing more than 100 Crore. It is without dispute known that Infosys Ltd, the appellant in the present case is a giant and one of the leaders in the service sector. A detailed reading of Annual Report clearly shows that the assessee is into service sector. Viewed from the above factual background of introduction of section 32AC of I.T. Act, let us analyse the section and the contention of both the parties. 153. Section 32AC of the I.T. Act provides for deduction for investment allowance where an assessee, being a company, engaged in the business of manufacture or production of any article or thing, acquires and installs new asset after the 31st day of March, 2013 but before the 1st day of April, 2015 and the aggregate amount of actual ITA Nos.125, 126, 226 & 227/Bang/2019 Page 114 of 129 cost of such new assets exceeds one hundred crore rupees. Thus, the main question to be considered is whether the software development activity of the assessee qualifies as "business of manufacture or production of any article or thing". The word manufacture is defined in section 2(29BA) to mean "manufacture", with its grammatical variations, means a change in a non-living physical object or article or thing,— (a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or 154. (b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure; 155. To qualify as 'manufacture', as per above definition, the change should be in a non-living physical object or article or thing. Software is intangible and not physical object or article or thing. So, at the threshold, software development activity cannot qualify as 'manufacture'. Further, it cannot be said that, creating or maintenance of software programs, results in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure. 156. The words production, article or thing are not defined in the IT Act. The Hon’ble Supreme Court in the case of CIT v. N.C. Budharaja & Co [1993] 70 Taxman 312 (SC) has dealt with the meaning of these words. The Hon’ble Supreme Court observed that the ITA Nos.125, 126, 226 & 227/Bang/2019 Page 115 of 129 word production' has a wider connotation than the word 'manufacture' while every manufacture can be characterised as production, every production need not amount to manufacture. The word 'production' or 'produce' when used in juxtaposition with the word 'manufacture' takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the byproducts, intermediate products and residual products which emerge in the course of manufacture of goods. It was further held that the word 'article' is not defined in the Act or the Rules. It must, therefore, be understood in its normal connotation - the sense in which it is understood in commercial world. It was further observed that the expressions 'manufacture' and 'produce' are normally associated with movables - articles and goods, big and small - but they are never employed to denote the construction activity of the nature involved in the construction of a dam or for that matter a bridge, a road or a building. 157. As can be seen from the above decision, the expressions 'manufacture' and 'produce' are normally associated with movables - articles and goods, big and small. Whereas in the instant case the activity is software development, which is intangible. Further, in the case of CIT v. Madgul Udyog [1994] 208 ITR 541 (CAL.) it was observed as follows: Learned counsel for the assessee sought to make much capital of the fact that the dictionary meaning of the word "article" (vide the Shorter Oxford English Dictionary) includes the word, "property". The expression "property" is a highly abstract concept. It is of no ITA Nos.125, 126, 226 & 227/Bang/2019 Page 116 of 129 aid unless it is specifically indicated that the property referred to also includes immovable property. There are various classes of properties. In the present day world of technology even the expertise and technical know-how, data, designs, patents and copyrights are accepted as intellectual property but on that score, such property could not be an "article". 158. Thus, it was held that intellectual property could not be an 'article'. The AR has relied on the decision of the Karnataka High Court in the case of CIT v Datacons (P.) Ltd (1985) 155 ITR 66 wherein it was held as follows "It will be clear from these activities that the assessee receives vouchers and statement of accounts from the customer and they are converted into the required balance sheet, stock account, sales analysis, etc. They are got printed as per the requirements of the customer. In all these activities, the assessee has to play an active role by co-ordinating the activities and collating the information. Such activities, in our opinion, could fairly fall within the concept of processing of goods, if not manufacture of goods." 159. The Karnataka High Court has held that the activity of receiving vouchers, etc. and converting into balance sheet, stock statement, etc. can be treated as processing of goods. Thus, such activity can be treated as processing activity but not manufacture or production activity. 160. The learned AR has relied on the decision in the case of Texas Instruments India P Ltd v ACIT (2020) 115 taxmann.com 154 (Bangalore Trib) where in the Tribunal allowed additional depreciation under section 32(1)(iia) to the assessee being engaged in the business ITA Nos.125, 126, 226 & 227/Bang/2019 Page 117 of 129 of software development. The relevant findings of the tribunal in the context of section 32(1)(iia) is as below: 19. A bare reading of the aforesaid provisions shows that the new machinery or plant should be used by an assessee engaged in the business of manufacture or production of any article or thing and the new machinery or plant need not be used in manufacture or production of any article or thing. The learned counsel has before us relied on the decision of the Hon'ble Madras High Court High Court in the case of CIT v. VTM Ltd. [2010] 187 Taxman 319/12009] 319 ITR 336 (Mad.) wherein the assessee-company was engaged in the business of manufacture of textile goods. During the relevant assessment year, it had set up a wind mill for generation of power and claimed additional depreciation thereon under section 32(1)(iia). The Assessing Officer disallowed the claim on the ground that the assessee was engaged only in the manufacture of textile goods and the setting up of a wind mill had absolutely no connection with the manufacture of textile goods. However, the Commissioner (Appeals) as well as the Tribunal allowed the assessee's claim of additional depreciation. On appeal to the High Court, the Hon'ble High Court held that for application of section 32( I)(iia ) what is required to be satisfied in order to claim the additional depreciation is that a new machinery or plant, which has been set up, should have been acquired and installed after 31-3-2002 by an assessee, who was already engaged in the business of manufacture or production of any article or thing. The said provision does not state that the setting up of a new machinery or plant, which was acquired and installed after 31-3-2002 should have any operational connectivity to the article or thing that was already being manufactured by the assessee. Therefore, the contention that the setting up of a windmill had nothing to do with the manufacture of textile goods was totally not germane to the specific provision contained in section 32(1)(iia ). In the light of the aforesaid decision, we are of the view that one of the basis on which the revenue authorities disallowed the claim of the Assessee for disallowance of additional depreciation cannot be sustained. 20. As far as the question whether the assets on which the Assessee claimed additional depreciation should be regarded as "Plant" or "Office Equipment", we do not find sufficient material before the revenue authorities to come to a conclusion one way or ITA Nos.125, 126, 226 & 227/Bang/2019 Page 118 of 129 the other. The learned counsel for the Assessee submitted in the course of his arguments that the assets on which additional depreciation is claimed were used for testing process while designing semi-conductors which was also a business which the Assessee was carrying on. These details have not been brought on record by the Assessee before the lower authorities nor before us. He also placed reliance on the decision of the Hon'ble Bombay High Court in the case of CIT v. I.B.M. World Trade Corpn. [1981] 130 ITR 739 (Born.) wherein the Hon'ble Bombay High Court held the expression "office equipment" used in Sec. 33 should be construed in context of appliances which are generally used in office as an aid for proper function of office and that EA machines, data processing machines installation and operation of which is on scientific basis, and which has their roles to play cannot be equated with office appliances and therefore such machines are "Plant" and not "Office appliances". As we have already observed there is complete lack of details to decide whether the assets in question are "Plant" or "Office equipment" in the absence of the role these assets perform and purpose for which these assets are used by the Assessee. We therefore set aside the order of CIT(A) on this limited issue of determining whether the assets on which additional depreciation is claimed by the Assessee can be regarded as Plant. The Assessee is directed to furnish the details and description to the AO in this regard, who shall decide the issue afresh in accordance with law, after affording Assessee opportunity of being heard. In the event of the AO coming to the conclusion that the assets in question are in the nature of plant, the claim for additional depreciation should be allowed. With these observations we allow the relevant grounds of appeal for statistical purpose . 161. As is clear from the above extract, the Tribunal was dealing with the question whether the new machinery or plant should be used by an assessee engaged in the business of manufacture or production of any article or thing and the new machinery or plant need not be used in manufacture or production of any article or thing. The aspect of whether the software development activity is in the nature of manufacture or production of article or thing was not discussed in that ITA Nos.125, 126, 226 & 227/Bang/2019 Page 119 of 129 decision. Even otherwise, the decision relates to AY 2008-09, when the definition of term 'manufacture' is applicable from AY 2009-10. Similarly, reliance on the decision of Gujarat High Court in the case of CIT v. Professional Information Systems & Management [2005] 146 Taxman 673 (GUJ.) for AY 1983-84 cannot be applicable in light of definition of term 'manufacture'. 162. The learned AR has contended that 4% of total revenue of the assessee during the year is derived from sale of software products and thus its claim u/s 32AC should be allowed. In our opinion, 4% of total revenue is miniscule and cannot change the character of the assessee of being engaged in the business of software development. The predominant activity of the assessee is software development. Accepting the contentions of the learned AR will lead to absurd result, wherein even a small revenue of 0.1% from the activity of manufacturing or production of article or thing, will lead to a conclusion that the entire investment in plant and machinery from a non-eligible business will be eligible for investment allowance under section 32AC of I.T.Act. 163. Further, the learned AR had submitted that the prescribed authority i.e., DSIR had granted approval for deduction u/s. 35(2AB) of the I.T. Act. Section 35(2AB) of the I.T. Act deals with weighted deduction in respect of expenditure incurred on scientific research on in-house research and development facility. The said emphasis is on expenditure incurred on scientific research. Moreover, the approval ITA Nos.125, 126, 226 & 227/Bang/2019 Page 120 of 129 given by DSIR is section specific i.e., section 35 of the I.T. Act. However, looking at the background of introduction of section 32AC, the definition of the term “manufacture” u/s. 2(29BA) of I.T. Act, we are of the firm view that benefit deduction is available to only manufacturing sector and not the service sector. For the aforesaid reasoning and judicial pronouncements cited supra, we hold that the assessee is not eligible for deduction u/s. 32AC. It is ordered accordingly. Deduction u/s. 35(2AB) – Ground No.12 164. During the AY 2014-15, the assessee has claimed an amount of Rs.521,11,36,156/- being 200% weighted deduction u/s. 35(2AB) of the Act. The assessee filed the relevant forms and submissions before the AO in this regard. The assessing officer noticed that as per form 3CL dated 19/05/2017 as issued by DSIR, the eligible expenditure for the purpose of deduction u/s. 35(2AB) was Rs. 245.8 Crores. The AO also noticed that the assessee had claimed the 200% deduction on an amount of 260.56 crores, therefore the assessing officer held that the differential amount of Rs. 14.71 crores is not eligible for weighted deduction at 200% and accordingly disallowed Rs. 29.44 crores. Before the CIT(A), the assessee argued that the expenditure as reported by DSIR in form 3CL could not alter the quantum of deduction available to the assessee u/s. 35(2AB) and the expenditure noted to be allowed but the basis of actual expenditure incurred. The assessee in this regard relied on the following decisions. ITA Nos.125, 126, 226 & 227/Bang/2019 Page 121 of 129 165. The CIT(A) did not accept the submissions of the assessee confirming the disallowance made by the AO by relying on the decision of Hon’ble Karnataka High Court in case of Tejas Networks Ltd. vs. DCIT (2015) 60 taxmann.com 309 (Karn.) The CIT(A) also did not accept the alternate submission of the assessee that differential amount of Rs. 14.71 crores should be allowed as regular scientific research expenditure u/s. 35(1)(i). 166. Aggrieved the assessee is in appeal before the Tribunal. 167. Before us, the Ld.AR reiterated the submissions made before the lower authorities. It is submitted by the Ld.AR that prior to 01.07.2016, form 3CL has no sanctity and only with effect from 01.07.2016 with the amendment to Rule 6(7A)(b) of the Income Tax Rules with the quantification of weighted deduction u/s. 35(2AB) has significance. In this regard, the Ld.AR relied on the decision of Coordinate Bench of the Tribunal in case of Mahindra Electric Mobility Ltd. vs. ACIT in ITA No. 641/Bang/2017 dated 14.09.2018. The Ld.DR relied on the order of the lower authorities. 168. We heard the rival submissions and perused the material on record. 169. We noticed that the Coordinate Bench of the Tribunal in case of Mahindra Electric Mobility Ltd. vs. ACIT (supra) has considered the issue of legal sanctity of the amount mentioned in Form 3CL prior to ITA Nos.125, 126, 226 & 227/Bang/2019 Page 122 of 129 01.07.2016 being eligible for weighted deduction u/s. 35(2AB) and held that “13. We have heard the rival submissions. The learned DR relied on the order of the AO/CIT(A). The learned counsel for the Assessee reiterated submissions as were made before the revenue authorities and placed reliance on some judicial precedents on identical issue rendered by various benches of ITAT and Hon'ble High Courts. 14. For AY 2012-13, the previous year is FY 2011-12 i.e., the period from 1.4.2011 to 31.3.2012. The facts on record go to show that the Assessee's in-house R & D facilities was approved by the DSIR, Govt. of India, Ministry of Science and Technology for AY 2012-13 vide their letter dated 20.5.2009, a copy of which is placed at Page-30 of the Assessee's paper book. The approval is for the period 1.4.2009 upto to 31.3.2012. Therefore, the condition for allowing deduction u/s.35(2AB) of the Act has been fulfilled by the Assessee. The claim of the revenue, however, is that the approval by the prescribed authority in form No.3CM is not final and conclusive and the quantum of expenditure on which deduction is to be allowed is to be certified by DSIR in form No.3CL. There is no statutory provision in the Act which lays down such a condition. We shall therefore examine what is Form No.3CL. 15. DSIR has framed guidelines for approval u/s.35(2AB) of the Act. The guidelines as on May, 2010 which is relevant for AY 2012-13, in so far as it is relevant for the present appeal, was as given below. (i) As per guideline 5 (iv) of the guidelines so framed, every company which has obtained an approval from the prescribed authority should also submit an undertaking as per Part C of Form No. 3CK to maintain separate accounts for each R&D centre approved under Section 35(2AB) by the Prescribed Authority, and to get the accounts duly audited every year by an Auditor as defined in sub- section (2) of section 288 of the IT Act 1961. (The statutory auditors of the Company should audit the ITA Nos.125, 126, 226 & 227/Bang/2019 Page 123 of 129 R&D accounts. To facilitate this audit separate books of accounts for R&D should be maintained. Also, the statutory auditors should sign the auditors' certificate in the details required to be submitted as per annexure- IV of the guidelines to facilitate submission of Report in Form 3CL). (ii) As per guideline 5(vi) of the guidelines, the audited accounts for each year maintained separately for each approved centre shall be furnished to the Secretary, Department of Scientific & Industrial Research by 31st day of October of the succeeding year, along with information as per Annexure-IV of the Guidelines. (iii) As per guideline 5(ix) Expenditures, which are directly identifiable with approved R&D facility only, shall be eligible for the weighted tax deduction. However, expenditure in R&D on utilities which are supplied from a common source which also services areas of the plant other than R&D may be admissible, provided they are metered/measured and subject to certification by a Chartered Accountant. (iv) As per guideline 5 (x) Expenditure on manpower from departments, other than R&D centre, such as manufacturing, quality control, tool room etc. incurred on such functions as attending meetings providing advice / directions, ascertaining customer choice/response to new products under development and other liaison work shall not qualify for deduction under section 35(2AB) of I.T. Act 1961. (v) As per guideline 10 Documents required to be submitted by 31st October of each succeeding year of approved period to facilitate submission of Report in Form 3CL (2 sets) are Complete details as per annexure-IV of DSIR guidelines. 16. The Assessee applied for issue of Form No.3CL to the appropriate authority on 24.3.2017, after the order of the CIT(A). The application so made by the Assessee is at page 43 to 65 of the Assessee's paper book. According to the Assessee, it has complied with all the requirements of the guidelines for issue of Form No.3CL, but the DSIR has issued Form No.3CL dated 5.4.2018 for AY 2014 & 15 & 2015-16 but no Form No.3CL was issued for AY 2012-13. Though there has been no ITA Nos.125, 126, 226 & 227/Bang/2019 Page 124 of 129 communication to the Assessee in this regard, the learned counsel for the Assessee submitted that since the audited accounts were not submitted by 31st October of the succeeding AY, as is required under Guideline 5 (vi), the Assessee's application would not have been considered by the DSIR. 17. Rule-6(7A)(b) of the Rules specifying the prescribed authority and conditions for claiming deduction u/s.35(2AB) of the Act has been amended by the Income Tax (10th Amendment) Rules, 2016 w.e.f. 1.7.2016, whereby it has been laid down that the prescribed authority, i.e., DSIR shall quantify the quantum of deduction to be allowed to an Assessee u/s.35(2AB) of the Act. Prior to such substitution, the above provisions merely provided that the prescribed authority shall submit its report in relation to the approval of in-house R & D facility in Form No.3CL to the DGIT (Exemption) within 60 days of granting approval. Therefore prior to 1.7.2016 there was legal sanctity for Form No.3CL in the context of allowing deduction u/s.35(2AB) of the Act. 18. The issue as to whether deduction u/s.35(2AB) of the Act can be denied for absence of Form No.3CL by the DSIR was subject matter of several judicial decisions rendered by various Benches of ITAT. (i) The Pune ITAT in the case of Cummins India Ltd. Vs. DCIT in ITA No.309/Pun/2014 for AY 2009-10 order dated 15.5.2018 had an occasion to consider a case where part of the claim for deduction u/s.35(2AB) of the Act was claimed supported by Form No.3CL but part of it was not supported by Form No.3CL. The Pune ITAT held as follows:- "45. The issue which is raised in the present appeal is that whether where the facility has been recognized and necessary certification is issued by the prescribed authority, the assessee can avail the deduction in respect of expenditure incurred on in- house R&D facility, for which the adjudicating authority is the Assessing Officer and whether the prescribed authority is to approve expenditure in form No.3CL from year to year. Looking into the provisions of rules, it stipulates the filing of audit report before the prescribed authority by the persons availing the deduction under section 35(2AB) of the Act but the provisions of ITA Nos.125, 126, 226 & 227/Bang/2019 Page 125 of 129 the Act do not prescribe any methodology of approval to be granted by the prescribed authority vis-à-vis expenditure from year to year. The amendment brought in by the IT (Tenth Amendment) Rules w.e.f. 01.07.2016, wherein separate part has been inserted for certifying the amount of expenditure from year to year and the amended form No.3CL thus, lays down the procedure to be followed by the prescribed authority. Prior to the aforesaid amendment in 2016, no such procedure / methodology was prescribed. In the absence of the same, there is no merit in the order of Assessing Officer in curtailing the expenditure and consequent weighted deduction claim under section 35(2AB) of the Act on the surmise that prescribed authority has only approved part of expenditure in form No.3CL. We find no merit in the said order of authorities below. 46. The Courts have held that for deduction under section 35(2AB) of the Act, first step was the recognition of facility by the prescribed authority and entering an agreement between the facility and the prescribed authority. Once such an agreement has been executed, under which recognition has been given to the facility, then thereafter the role of Assessing Officer is to look into and allow the expenditure incurred on in-house R&D facility as weighted deduction under section 35(2AB) of the Act. Accordingly, we hold so. Thus, we reverse the order of Assessing Officer in curtailing the deduction claimed under section 35(2AB) of the Act by ₹ 6,75,000/-. Thus, grounds of appeal No.10.1, 10.2 and 10.3 are allowed." (ii) The Hyderabad ITAT in the case of M/S. Sri Biotech Laboratories India Ltd. Vs. ACIT ITA No.385/Hyd/2014 for AY 2009-10 order dated 24.9.2014 took the view (vide Paragraph-13 of the order) that when the Assessee's R & D facility is approved the deduction u/s.35(2AB) of the Act cannot be denied merely on the ground that prescribed authority has not submitted report in Form 3CL. 19. The question of allowing deduction u/s.35(2AB) of the Act was considered by the Hon'ble Delhi High Court in the case of CIT vs. Sadan Vikas (India) Ltd. (2011) 335 ITR 117 (Del) where AO refused to accord the benefit of the weighted deduction to the assessee under s. 35(2AB) on the ground that recognition and approval was given by the DSIR in ITA Nos.125, 126, 226 & 227/Bang/2019 Page 126 of 129 February/September, 2006, i.e., in the next assessment year and, therefore, the weighted deduction cannot be allowed. The CIT(A) confirmed the order of the AO. The Tribunal held that the assessee would be entitled to weighted deductions of the aforesaid expenditure incurred by the assessee in terms of the s. 35(2AB) of the Act and in coming to this conclusion, the Tribunal relied upon the judgment of Gujarat High Court in CIT vs. Claris Lifesciences Ltd. 326 ITR 251 (Guj). In its decision the Hon'ble Gujarat High Court held that the cut-off date mentioned in the certificate issued by the DSIR would be of no relevance. What is to be seen is that the assessee was in indulging in R&D activity and had incurred the expenditure thereupon. Once a certificate by DSIR is issued, that would be sufficient to hold that the assessee fulfils the conditions laid down in the aforesaid provisions. The Hon'ble Delhi High Court followed the decision of the Hon'ble Gujarat High Court and upheld the decision of the Tribunal. The Hon'ble Delhi High Court quoted the following observations of the Hon'ble Gujarat High Court and agreed with the said view: "7. ... The lower authorities are reading more than what is provided by law. A plain and simple reading of the Act provides that on approval of the research and development facility, expenditure so incurred is eligible for weighted deduction. 8. The Tribunal has considered the submissions made on behalf of the assessee and took the view that section speaks of : (i) development of facility; (ii) incurring of expenditure by the assessee for development of such facility; (iii) approval of the facility by the prescribed authority, which is DSIR; and (iv) allowance of weighted deduction on the expenditure so incurred by the assessee. 9. The provisions nowhere suggest or imply that research and development facility is to be approved from a particular date and, in other words, it is nowhere suggested that date of approval only will be cut-off date for eligibility of weighted deduction on the expenses incurred from that date onwards. A plain reading clearly manifests that the assessee has to develop facility, which ITA Nos.125, 126, 226 & 227/Bang/2019 Page 127 of 129 presupposes incurring expenditure in this behalf, application to the prescribed authority, who after following proper procedure will approve the facility or otherwise and the assessee will be entitled to weighted deduction of any and all expenditure so incurred. The Tribunal has, therefore, come to the conclusion that on plain reading of s. itself, the assessee is entitled to weighted deduction on expenditure so incurred by the assessee for development of facility. The Tribunal has also considered r. 6(5A) and Form No. 3CM and come to the conclusion that a plain and harmonious reading of rule and Form clearly suggests that once facility is approved, the entire expenditure so incurred on development of R&D facility has to be allowed for weighted deduction as provided by s. 35(2AB). The Tribunal has also considered the legislative intention behind above enactment and observed that to boost up research and development facility in India, the legislature has provided this provision to encourage the development of the facility by providing deduction of weighted expenditure. Since what is stated to be promoted was development of facility, intention of the legislature by making above amendment is very clear that the entire expenditure incurred by the assessee on development of facility, if approved, has to be allowed for the purpose of weighted deduction." 20. From the above discussion it is clear that prior to 1.7.2016 Form 3CL had no legal sanctity and it is only w.e.f 1.7.2016 with the amendment to Rule 6(7A)(b) of the Rules, that the quantification of the weighted deduction u/s.35(2AB) of the Act has significance. In the present case there is no difficulty about the quantum of deduction u/s.35(2AB) of the Act, because the AO allowed 100% of the expenditure as deduction u/s.35(2AB)(1)(i) of the Act, as expenditure on scientific research. Deduction u/s.35(1)(i) and Sec.35(2AB) of the Act are similar except that the deduction u/s.35(2AB) is allowed as weighted deduction at 200% of the expenditure while deduction u/s.35(1)(i) is allowed only at 100%. The conditions for allowing deduction u/s.35(1)(i) of the Act and under Sec.35(2AB) of the Act are identical with the only difference being that the Assessee claiming deduction u/s.35(2AB) of the Act should be engaged in manufacture of certain articles or things. It is not in dispute that the Assessee is engaged in business to which Sec.35(2AB) of the Act applied. The other condition required to be fulfilled for ITA Nos.125, 126, 226 & 227/Bang/2019 Page 128 of 129 claiming deduction u/s.35(2AB) of the Act is that the research and development facility should be approved by the prescribed authority. The prescribed authority is the Secretary, Department of Scientific Industrial Research, Govt. Of India (DSIR). It is not in dispute that the Assessee in the present case obtained approval in Form No.3CM as required by Rule 6 (5A) of the Rules. In these facts and circumstances and in the light of the judicial precedents on the issue, we are of the view that the deduction u/s.35(2AB) of the Act ought to have been allowed as weighted deduction at 200% of the expenditure as claimed by the Assessee and ought not to have been restricted to 100% of the expenditure incurred on scientific research. We hold and direct accordingly and allow the appeal of the Assessee.” 170. In assessee’s own case, the expenditure incurred by the assessee with respect to expenditure incurred during financial year 2013-14 i.e. prior to 01.07.2016. Therefore respectfully following the decision of the Coordinate Bench in case of Mahindra Electric Mobility Ltd. vs. ACIT (supra), we held that the entire expenditure incurred by the assessee with respect to R&D facility, is eligible for deduction u/s. 35(2AB). Accordingly, the disallowance made by the assessing officer is deleted. ITA 226/Bang/2019 171. The grounds raised by the revenue for AY 2014-15 pertain to deduction under section 10AA in respect of interest income on GLES deposits with LIC, receipts from sale of scrap, interest income from loans given to employees and incentives from airlines (Ground No.2) and Foreign tax credit (Ground No.3). These issues are covered by the decision in the revenue appeal for 2015-16 which is adjudicated in the ITA Nos.125, 126, 226 & 227/Bang/2019 Page 129 of 129 earlier part of this order. Accordingly the appeal of the Revenue is partly allowed. 172. In the result, the appeals of both the assessee and the revenue are partly allowed for AY 2014-15 and 2015-16. Pronounced in the open court on this 31 st day of January, 2023. Sd/- Sd/- ( GEORGE GEORGE K. ) ( PADMAVATHY S. ) JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore, Dated, the 31 st January, 2023. / Desai S Murthy / Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore.