M/s Infosys BPM Limited , Bangalore V. Deputy Commissioner of Income Tax Circle-3(1)(1), Bangalore

ITA 2600/BANG/2018

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 2903 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 1 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-10-2021
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 11-10-2021
• Assessment Year: 2008-2009
• Appeal Filed On: 17-09-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SUMER SINGH MEENA
• Assessee Lawyers: P C KHINCHA
• Keywords: Capital asset; Depreciation; Earning of tax free income; Services rendered outside India; Question of law; Assessment record; Revenue expenditure; Capital expenditure; Rule 8D; Set aside
• Section: 143(3); 10AA; 14A; 274; 13; 32; 11

Judgement Text

ITA NO.2600/BANG/2018 M/S. INFOSYS BPM LIMITED, BANGALORE IN THE INCOME TAX APPELLATE TRIBUNAL ABENCH: BANGALORE BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND SHRI B.R. BASKARAN, ACCOUNTANT MEMBER ITA NO.2600/BANG/2018 ASSESSMENT YEAR: 2008-09 M/S. INFOSYS BPM LIMITED ELECTRONIC CITY HOSUR ROAD BENGALURU 560 100 PAN NO :AACCP4478N VS. DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-3(1)(1) BENGALURU APPELLANT RESPONDENT APPELLANT BY : SHRI P.C. KHINCHA, A.R. RESPONDENT BY : SHRI SUMER SINGH MEENA, D.R. DATE OF HEARING : 11.10.2021 DATE OF PRONOUNCEMENT : 25.10.2021 O R D E R PER B.R. BASKARAN, ACCOUNTANT MEMBER: THE APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINS T THE ORDER DATED 24.7.2018 PASSED BY LD. CIT(A)-3, BENGALURU A ND IT RELATES TO THE ASSESSMENT YEAR 2008-09. THE ASSESSEE IS IN AP PEAL IN RESPECT OF THE FOLLOWING ISSUES:- A) ADDITION OF DEFERRED REVENUE INCOME. B) DISALLOWANCE U/S 14A OF THE INCOME-TAX ACT,1961 ['T HE ACT' FOR SHORT]. C) DISALLOWANCE OF SOFTWARE EXPENSES. D) DISALLOWANCE OF BRAND BUILDING EXPENSES. ITA NO.2600/BANG/2018 M/S. INFOSYS BPM LIMITED, BANGALORE PAGE 2 OF 17 E) REDUCTION OF EXPENSES INCURRED IN FOREIGN CURRENCY FROM THE EXPORT TURNOVER WHILE COMPUTING DEDUCTION U/S 1 0A OF THE ACT. 2. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROVI DING BUSINESS PROCESS OUTSOURCING SERVICES. IT FILED IT S RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION DECLARING INCOME O F RS.9.98 CRORES UNDER NORMAL PROVISIONS AND RS.155.83 CRORES U/S 11 5JB OF THE ACT. THE A.O. COMPLETED THE ASSESSMENT U/S 143(3) OF THE ACT ON 8.12.2010 MAKING VARIOUS ADDITIONS TO THE RETURNED INCOME. THE APPEAL FILED BY THE ASSESSEE BEFORE LD. CIT(A) CHAL LENGING THOSE ADDITIONS WAS PARTLY ALLOWED. STILL AGGRIEVED, THE ASSESSEE HAS FILED THIS APPEAL BEFORE US. 3. THE FIRST ISSUE RELATES TO ADDITION OF DEFERRED REVENUE INCOME. THE A.O. NOTICED THAT THE ASSESSEE HAS NOT RECOGNIZ ED INCOME TO THE TUNE OF RS.11.47 CRORES EVEN THOUGH RELEVANT INVOIC ES HAVE BEEN RAISED BY THE COMPANY AGAINST ITS CLIENTS TO WHOM S ERVICES WERE RENDERED. THE ASSESSEE HAD TREATED THE SAME AS DEFE RRED REVENUE INCOME AND HENCE DID NOT OFFER IT DURING THE YEAR U NDER CONSIDERATION. ACCORDING TO THE ASSESSEE, THE CORRE CT AMOUNT OF DEFERRED INCOME WAS RS.10.70 CRORES. HOWEVER, THE A.O. HAS MADE DISALLOWANCE OF RS.11.47 CRORES. HENCE, THE ASSESS EE BROUGHT TO THE NOTICE OF LD CIT(A) THIS DIFFERENCE AND ACCORDI NGLY, THE LD CIT(A) DIRECTED THE A.O. TO ADOPT CORRECT FIGURE OF RS.10. 70 CRORES. HENCE, THE DISPUTED AMOUNT WITH REGARD TO THIS ISSUE IS ON LY RS.10.70 CRORES. 3.1 THE A.O. ASKED FOR EXPLANATION FROM THE ASSESSE E FOR NOT RECOGNIZING THE ABOVE SAID INCOME. THE LD A.R EXPL AINED THE EXPLANATIONS FURNISHED BY THE ASSESSEE BEFORE THE A O. IT WAS SUBMITTED THAT THE ASSESSEE IS FOLLOWING AN ACCOUNT ING POLICY OF RECOGNIZING THAT REVENUE, ONLY AFTER SIGNING OF STA TEMENT OF ITA NO.2600/BANG/2018 M/S. INFOSYS BPM LIMITED, BANGALORE PAGE 3 OF 17 WORK/TASK ORDERS. ACCORDING TO THE ASSESSEE THAT, W ITHOUT FINALIZING THE STATEMENT OF WORK/TASK ORDERS, THE ASSESSEE WOU LD NOT BE ABLE TO COLLECT THE REVENUE FOR THE SERVICES RENDERED. HOWEVER, BEFORE FINALIZATION OF THE STATEMENT OF WORK/TASK ORDER, THE ASSESSEE WOULD HAVE STARTED RENDERING SERVICE TO ITS CLIENTS AS PER NEGOTIATIONS. IRRESPECTIVE OF FINALIZATION OF THE STATEMENT OF WORK/TASK ORDER, THE COMPUTER SOFTWARE OF THE ASSE SSEE WOULD RAISE BILLS AUTOMATICALLY AT THE END OF EVERY MONTH IF THE WORK HAS BEEN PERFORMED BY THE ASSESSEE. AS PER ACCOUNTING S TANDARD, REVENUE COULD BE RECOGNIZED ONLY WHEN THERE IS CERT AINTY OF ITS RECOVERY. IN THE INSTANT CASES, THE ASSESSEE COULD NOT ENFORCE COLLECTION OF THESE INVOICES WITHOUT FINALIZING ST ATEMENT OF WORK/TASK ORDER. HENCE, THE ASSESSEE HAS TREATED THE SAME AS DEFERRED REVENUE INCOME AND ACCORDINGLY DID NOT O FFER THE SAME AS INCOME DURING THE YEAR UNDER CONSIDERATION. 3.2 THE A.O. DID NOT ACCEPT THE EXPLANATIONS GI VEN BY THE ASSESSEE. HE NOTICED THAT THE ASSESSEE HAS CARRIED OUT THE WORK FOR ITS CLIENTS AND HENCE, THE AMOUNT IS DUE FROM THE C LIENTS. ACCORDINGLY, HE TOOK THE VIEW THAT THE REVENUE HAS ALREADY ACCRUED TO THE ASSESSEE AS PER THE ACCRUAL SYSTEM OF ACCOUN TING FOLLOWED BY THE ASSESSEE. ACCORDINGLY, THE A.O. ASSESSED THE A MOUNT OF RS.11.47 CRORES WHICH WAS CORRECTED TO RS.10.70 CRO RES BY LD. CIT(A). 3.3 IN THE APPELLATE PROCEEDINGS, THE LD. CIT(A) NO TICED THAT AN IDENTICAL ISSUE WAS EXAMINED BY HIM IN ASSESSMENT Y EAR 2007-08, WHEREIN THE LD. CIT(A) HAS UPHELD THE ADDITION MADE BY THE A.O. THE LD CIT(A) ALSO NOTICED THAT THE ASSESSEE HAD PU T UP AN ALTERNATIVE PLEA BEFORE HIM IN AY 2007-08,I.E., THE ASSESSEE SUBMITTED THAT THE DEFERRED REVENUE INCOME, WHICH W AS DISALLOWED IN AY 2007-08, HAS ALREADY BEEN OFFERED TO TAX BY T HE ASSESSEE ITA NO.2600/BANG/2018 M/S. INFOSYS BPM LIMITED, BANGALORE PAGE 4 OF 17 VOLUNTARILY IN SUCCEEDING ASSESSMENT YEAR 2008-09. ACCORDINGLY, IT WAS CONTENDED THAT THE DISALLOWANCE MADE IN AY 2007 -08 WOULD RESULT IN DOUBLE ASSESSMENT OF SAME INCOME. FINDIN G MERIT IN THIS CONTENTION, THE LD. CIT(A) HAD DIRECTED THE A.O. TO EXCLUDE THE AMOUNT THAT WAS ASSESSED IN ASSESSMENT YEAR 2007-08 FROM THE INCOME OFFERED BY THE ASSESSEE IN ASSESSMENT YEAR 2 008-09, IF IT HAD BEEN OFFERED IN AY 2008-09 ALSO, AFTER VERIFICA TION OF RECORDS. 3.4 THE LD. CIT(A), FOLLOWING HIS DECISION RENDER ED FOR 2007-08, UPHELD THE ADDITION MADE BY THE A.O. IN THE INSTANT YEAR. IN THIS YEAR ALSO, THE ASSESSEE PUT UP AN ALTERNATIVE PLEA BEFORE LD. CIT(A) THAT THIS AMOUNT HAS BEEN OFFERED BY IT IN AY 2009- 10. ACCORDINGLY, THE LD. CIT(A) DIRECTED THE A.O. TO VE RIFY THE CLAIM OF THE ASSESSEE AND EXCLUDE THE SAME IN ASSESSMENT YEA R 2009-10, IF THE SAME INCOME HAS BEEN OFFERED BY THE ASSESSEE IN THAT YEAR, AFTER VERIFICATION OF RECORDS. 3.5 AT THE TIME OF HEARING BEFORE US, THE LD. A.R. BROUGHT TO OUR NOTICE THE DECISION RENDERED BY THE COORDINATE BENC H IN THE ASSESSEES OWN CASE IN ASSESSMENT YEAR 2007-08. HE SUBMITTED THAT THIS ISSUE HAS BEEN EXAMINED BY THE COORDINATE BENCH IN ITA NO.1333/BANG/2014 DATED 27.9.2019, WHEREIN WE NOTIC E THAT THE TRIBUNAL HAS UPHELD THE VIEW TAKEN BY THE LD. CIT(A ) AND ALSO UPHELD THE ALTERNATIVE DIRECTION GIVEN BY LD. CIT(A ) TO THE A.O. TO VERIFY THE ASSESSMENT RECORD OF 2008-09 AND EXCLUDE THE INCOME THAT HAS BEEN OFFERED BY THE ASSESSEE IN THAT YEAR. 3.6 WE HEARD LD. D.R. AND PERUSED THE RECORD. WE NOTICE THAT THE COORDINATE BENCH HAS UPHELD THE VIEW TAKEN BY L D. CIT(A) ON AN IDENTICAL ISSUE IN ASSESSMENT YEAR 2007-08 INCLUDIN G THE VIEW TAKEN BY LD CIT(A) ON ALTERNATIVE CONTENTION OF THE ASSESSEE. FOLLOWING THE SAME, WE UPHOLD THE VIEW TAKEN BY THE LD. CIT(A) ON ITA NO.2600/BANG/2018 M/S. INFOSYS BPM LIMITED, BANGALORE PAGE 5 OF 17 THIS ISSUE IN THIS YEAR ALSO. THE ALTERNATIVE DIRE CTION GIVEN BY LD. CIT(A) TO A.O. IS ALSO UPHELD. 4. THE NEXT ISSUE RELATES TO DISALLOWANCE MADE U/S 14A OF THE ACT. THE A.O. NOTICED THAT THE ASSESSEE HAS EARNED A DIVIDEND INCOME OF RS.4.80 CRORES DURING THE YEAR UNDER CONS IDERATION. HOWEVER, THE ASSESSEE DID NOT MAKE ANY DISALLOWANCE U/S 14A OF THE ACT. THE A.O. NOTICED THAT THE AVERAGE VALUE O F INVESTMENTS HELD BY THE ASSESSEE WAS RS.105.94 CRORES. ACCORDI NGLY, HE DISALLOWED A SUM OF RS.52.97 LAKHS COMPUTED @ 0.5% OF THE AVERAGE VALUE OF INVESTMENT AS PER RULE 8D(2)(III) OF THE I.T. RULES. 4.1. BEFORE LD. CIT(A), THE ASSESSEE CONTENDED THAT THE DISALLOWANCE SHOULD NOT EXCEED RS.2.65 LAKHS BEING ESTIMATED EXPENDITURE COMPUTED @ 5% OF ANNUAL SALARY OF AVP F INANCE AND 50% OF ANNUAL SALARY OF EXECUTIVE. THE ASSESSEE AL SO SUBMITTED THAT IT HAS INVESTED RS.3.50 CRORES AND RS.107.12 C RORES IN TWO FOREIGN SUBSIDIARIES AND DIVIDEND INCOME RECEIVED F ROM THEM IS LIABLE TO TAX. ACCORDINGLY, IT WAS SUBMITTED THAT THE A.O. SHOULD NOT HAVE INCLUDED INVESTMENT MADE IN FOREIGN SUBSIDIARI ES WHILE COMPUTING AVERAGE VALUE OF INVESTMENT. 4.2 THE LD. CIT(A) REJECTED THE CLAIM OF RESTRICTIN G THE DISALLOWANCE TO RS.2.65 LAKHS. REFERRING TO VARIOU S CASE LAWS, THE LD. CIT(A) TOOK THE VIEW THAT THE A.O. WAS JUSTIFIE D IN APPLYING PROVISIONS OF RULE 8D(2)(III). HOWEVER, THE LD. CI T(A) AGREED THAT THE INVESTMENT IN FOREIGN SUBSIDIARIES NOT TO BE EXCLUD ED. ACCORDINGLY, HE GAVE DIRECTIONS TO A.O. TO EXCLUDE INVESTMENT MA DE IN FOREIGN SUBSIDIARIES. 4.3 WE HEARD THE PARTIES AND PERUSED THE RECORD. T HE LD. A.R. SUBMITTED THAT DISALLOWANCE OF RS.2.65 LAKHS WORKED OUT BY THE ITA NO.2600/BANG/2018 M/S. INFOSYS BPM LIMITED, BANGALORE PAGE 6 OF 17 ASSESSEE IS ON SCIENTIFIC BASIS AND HENCE THE LD. C IT(A) SHOULD NOT HAVE REJECTED THE SAME. THE LD. D.R. ON THE CONTRAR Y, SUBMITTED THAT THE ASSESSEE HAS NOT FURNISHED ANY DETAILS BEF ORE A.O. AND THE ASSESSEE ALSO DID NOT MAKE DISALLOWANCE ON ITS OWN. HENCE, THE A.O. WAS JUSTIFIED IN MAKING DISALLOWANCE AS PER RU LE 8D OF I.T. RULES. IN THE ALTERNATIVE, THE LD A.R SUBMITTED T HAT THE AO MAY BE DIRECTED TO FOLLOW THE DECISION RENDERED BY SPECIAL BENCH OF DELHI TRIBUNAL IN THE CASE OF VIREET INVESTMENTS P LTD (1 65 ITD 27). 4.4 WE HEARD THE PARTIES ON THIS ISSUE AND PERUSED THE RECORD. WE NOTICE THAT THE A.O. HAS MADE DISALLOWANCE OUT O F ADMINISTRATIVE EXPENSES UNDER RULE 8D(2)(III). AS PER THE DECISION RENDERED BY SPECIAL BENCH, DELHI TRIBUNAL IN THE CA SE OF VIREET INVESTMENTS PVT. LTD. (165 ITD 27), ONLY THOSE INVE STMENTS WHICH HAVE YIELDED EXEMPT INCOME SHOULD BE CONSIDERED FOR COMPUTING AVERAGE VALUE OF INVESTMENTS FOR THE PURPOSE OF RUL E 8D OF I.T. RULES. ACCORDINGLY, WE MODIFY THE DIRECTION GIVEN BY LD. CIT(A) AND DIRECT THE A.O. TO EXCLUDE ALL INVESTMENTS WHICH DI D NOT YIELD ANY EXEMPT INCOME WHILE COMPUTING AVERAGE VALUE OF INVE STMENTS FOR THE PURPOSE OF RULE 8D OF I.T. RULES AND COMPUTE TH E DISALLOWANCE ACCORDINGLY. 5. THE NEXT ISSUE RELATES TO DISALLOWANCE OF SOFTWA RE EXPENSES. THE A.O. NOTICED THAT THE ASSESSEE HAS INCURRED A S UM OF RS.10.33 CRORES ON PURCHASE OF SOFTWARE AND CLAIMED THE SAME AS REVENUE EXPENDITURE. THE A.O. TOOK THE VIEW THAT SOFTWARE PURCHASES ARE IN THE NATURE OF CAPITAL EXPENDITURE. ACCORDINGLY, HE DISALLOWED THE CLAIM OF THE ASSESSEE AND ALLOWED DEPRECIATION @ 60 %/30% DEPENDING UPON THE DATE OF PURCHASE OF SOFTWARE. 5.1 BEFORE LD. CIT(A), THE ASSESSEE PLACED RELIANCE ON THE DECISION RENDERED BY HONBLE KARNATAKA HIGH COURT IN THE CAS E OF CIT VS. ITA NO.2600/BANG/2018 M/S. INFOSYS BPM LIMITED, BANGALORE PAGE 7 OF 17 TOYOTA KIRLOSKAR MOTORS PVT. LTD. (ITA 176 OF 2009) AND SUBMITTED THAT THE SOFTWARE LICENSE FEE PAID FOR USE OF SOFTW ARE FOR LIMITED DURATION OF UP TO 2 YEARS IS HELD AS REVENUE EXPEND ITURE BY HONBLE HIGH COURT. ACCORDINGLY, THE LD. CIT(A) DIRECTED T HE A.O. TO ALLOW THE PURCHASE OF SOFTWARE WHICH ARE VALID FOR A PERI OD OF UP TO 2 YEARS AS REVENUE EXPENDITURE. THE LD. CIT(A) ALSO GAVE FURTHER DIRECTIONS, WHICH ARE EXTRACTED BELOW:- IN CASE THE INVOICE RELATES TO SOME EARLIER YEAR, THE EXPENDITURE NEEDS TO BE DISALLOWED AS PRIOR PERIOD EXPENDITURE. IN CASE RELEVANT INVOICE IS NOT PRODUCED. THE AMOUN T NEEDS TO BE DISALLOWED AS BEING NOT VERIFIABLE. IN RELATION TO EXPENDITURE INCURRED FOR SOFTWARE IM PLEMENTATION, MAINTENANCE SERVICES, SOFTWARE AMC CHARGES AND FEES FOR INCLUDED SERVICES, THE SAME NEEDS TO BE TREATED AS REVENUE EXPENDITURE AND ALLOWED AS SUCH PROVIDED TAX AT SOU RCE HAS BEEN DEDUCTED ON THE SAME. IN CASE OF NON DEDUCTION OF T AX AT SOURCE THE SAME NEEDS TO BE DISALLOWED UNDER SECTION 40(A) OF THE ACT, IN RELATION TO EXPENDITURE INCURRED FOR IT CONSUMAB LES E.G. CDS, PRINTER CARTRIDGES ETC., THE SAME NEEDS TO BE TREAT ED AS REVENUE EXPENDITURE. IN CASE OF SOFTWARE WHERE THE SAME CAN BE USED PERP ETUALLY E.G, OPERATION SYSTEM SOFTWARE LIKE WINDOWS, APPLICATION SOFTWARE LIKE MS OFFICE ETC., THE SAME NEEDS TO BE TREATED A S CAPITAL IN NATURE. THIS IS FOR THE REASON THAT IN CASE OF SUCH SOFTWARE THERE IS NO RESTRICTION OR LIMITATION ON ITS PERIOD OF USE. NEW VERSIONS OF THESE SOFTWARE KEEP ON BECOMING AVAILABLE IN THE MA RKET HOWEVER THERE IS NO RESTRICTION ON THE USE OF THE EARLIER V ERSION AND A PERSON CAN ALWAYS CHOOSE NOT TO BUY THE NEW VERSION AND CONTINUE WITH THE OLD VERSION. A HIGH RATE OF DEPRECIATION, WHICH IS 60%, TAKES CARE OF OBSOLESCENCE OF SUCH SOFTWARE. 6.2 FURTHER IN CASE OF ANY EXPENDITURE BEING TREATE D AS CAPITAL EXPENDITURE, THE DEPREDATION NEEDS TO BE ALLOWED @ 60% OR 30%ON THE BASIS OF DATE OF PURCHASE OF THE SOFTWARE . CONSIDERING ABOVE, THE GROUNDS OF APPEAL 5.1 TO 5.3 OF THE APPE LLANT ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. 5.2 WE HEARD THE PARTIES ON THIS ISSUE AND PERUSED THE RECORD. WE NOTICE THAT AN IDENTICAL ISSUE OF TREATING THE S OFTWARE PURCHASE AS CAPITAL IN NATURE, WAS EXAMINED BY BENGALURU BEN CH OF TRIBUNAL IN THE ASSESSEES OWN CASE IN ITA NO.491/BANG/2018 RELATING TO ITA NO.2600/BANG/2018 M/S. INFOSYS BPM LIMITED, BANGALORE PAGE 8 OF 17 ASSESSMENT YEAR 2011-12 AND THE TRIBUNAL HAS DECIDE D THE ISSUE AS UNDER:- 20. THE NEXT ISSUE CONTESTED BY THE ASSESSEE RE LATES TO DISALLOWANCE OF SOFTWARE EXPENSES TREATING THE SAME AS CAPITAL IN NATURE. S INCE THE LD CIT(A) HAS REMANDED THIS ISSUE TO THE FILE OF THE AO WITH CERTAIN DIREC TIONS, THE REVENUE IS QUESTIONING THE AUTHORITY OF LD CIT(A) TO DO SO. 21. THE FACTS RELATING TO THIS ISSUE ARE DISCUSSE D IN BRIEF. WE NOTICED EARLIER THAT THE ASSESSEE HAD CLAIMED EXPENSES TOWARDS SOFTWARE PURCHASES AS DEDUCTION TO THE TUNE OF RS.24,97,00,999/-. THE AO DISALLOWED FOLLO WING ITEMS OUT OF THE ABOVE SAID CLAIM:- PROVISION FOR SOFTWARE PURCHASES - RS.3,89,30,461 DISALLOWANCE U/S 40(A)(I)/(IA) - RS.1,35,82,093 THE BALANCE AMOUNT WAS RS.19,71,88,445/-. THE AO T REATED THIS AMOUNT AS CAPITAL IN NATURE. THE OBSERVATIONS MADE BY THE AO ARE EXT RACTED BELOW:- 6.3 FOR THE BALANCE AMOUNT OF RS.19,71,88,445/- I T IS SEEN THAT THE COMPANY HAS TREATED IT AS REVENUE EXPENDITURE. IT IS TO BE STATED THAT CONSIDERING THE LIFE OF SOFTWARE, THIS EXPENDITURE HAS BEEN INCLUDED IN SECTION 32 OF THE I T ACT AND ACCORDINGLY DEPRECIAT ION AT THE RATE OF 60% PER YEAR HAS BEEN ALLOWED. THE ASSESSEE HAS NOT GI VEN DATES OF PURCHASES OF THESE LICENSES. HENCE THE DEPRECIATION IS BEING ALLOWED AT THE RATE OF 30% OF RS.5,91,56,534/- AND THE BALANCE AMOUNT OF R S.13,80,31,912/- IS DISALLOWED. THE ASSESSEE WOULD BE ELIGIBLE FOR CLA IMING DEPRECIATION ON THE BALANCE PORTION IN THE FUTURE YEARS. 22. BEFORE LD CIT(A), THE ASSESSEE PLACED ITS REL IANCE ON THE DECISION RENDERED BY HONBLE JURISDICTIONAL KARNATAKA HIGH COURT IN THE CASE OF CIT VS. TOYOTA KIRLOSAKAR MOTORS (P) LTD (ITA NO.176 OF 2009), WHE REIN THE HONBLE HIGH COURT HAD HELD THAT THE SOFTWARE LICENCE FEE PAID FOR USE OF SOFTWARE FOR A LIMITED DURATION UPTO TWO YEARS IS ALLOWABLE AS REVENUE EXPENDITURE. HENCE THE LD CIT(A) ASKED THE ASSESSEE TO FURNISH THE DETAILS OF SOFTWARE PUR CHASES ALONG WITH THEIR PERIOD OF VALIDITY. THE ASSESSEE FURNISHED THE DETAILS AS PE R WHICH A SUM OF RS.17.95 CRORES WAS RELATED TO SOFTWARE LICENSES VALID UP TO 1 YEAR AND THE BALANCE AMOUNT OF RS.1.77 CRORES WAS RELATED TO SOFTWARE IMPLEMENTATI ON, MAINTENANCE SERVICES, SUPPORT SERVICES, SOFTWARE LICENSES HAVING VALIDITY OF 1 YEAR OR MORE, SOFTWARE AMC CHARGES, FEE FOR INCLUDED SERVICES, CONSUMABLES , ETC. THE ASSESSEE ALSO FURNISHED SAMPLE COPIES OF PURCHASE INVOICES. 23. THE LD. CIT (A) NOTICED THAT SOME OF THE INVOIC ES WERE RELATED TO FINANCIAL YEAR 2009-10 AND NOT TO THE YEAR UNDER CONSIDERATIO N. ACCORDINGLY, THE LD. CIT(A) RESTORED THE MATTER TO THE FILE OF THE A.O. WITH TH E FOLLOWING DIRECTIONS. ALL PURCHASE OF SOFTWARE LICENSES, FOR WHICH DETA IL OF LICENSE PERIOD IS AVAILABLE ON THE INVOICES OR IS PRODUCED BY THE APP ELLANT AND IF THE SAME IS FOR A PERIOD UP TO TWO YEARS, THE SAME SHOULD BE ALLOWED AS REVENUE EXPENDITURE, ITA NO.2600/BANG/2018 M/S. INFOSYS BPM LIMITED, BANGALORE PAGE 9 OF 17 PROVIDED THE INVOICE RELATES TO THE FY 2010-11 AND TAX AT SOURCE HAS BEEN DEDUCTED ON THE SAME. IN CASE THE INVOICE RELATES TO SOME EARLIER YEAR, T HE EXPENDITURE NEEDS TO BE DISALLOWED AS PRIOR PERIOD EXPENDITURE. IN CASE RELEVANT INVOICE IS NOT PRODUCED, THE AMOUN T NEEDS TO BE DISALLOWED AS BEING NOT VERIFIABLE. IN RELATION TO EXPENDITURE INCURRED FOR SOFTWARE IM PLEMENTATION, MAINTENANCE SERVICES, SOFTWARE AMC CHARGES AND FEES FOR INCLUDED SERVICES, THE SAME NEEDS TO BE TREATED AS REVENUE E XPENDITURE AND ALLOWED AS SUCH PROVIDED TAX AT SOURCE HAS BEEN DED UCTED ON THE SAME. IN CASE OF NON DEDUCTION OF TAX AT SOURCE TH E SAME NEEDS TO BE DISALLOWED UNDER SECTION 40(A) OF THE ACT. IN RELATION TO EXPENDITURE INCURRED FOR IT CONSUMAB LES E.G. CDS, PRINTER CARTRIDGES ETC., THE SAME NEEDS TO BE TREAT ED AS REVENUE EXPENDITURE. IN CASE OF SOFTWARE WHERE THE SAME CAN BE USED PERP ETUALLY E.G. OPERATION SYSTEM SOFTWARE LIKE WINDOWS, APPLICATION SOFTWARE LIKE MS OFFICE ETC., THE SAME NEEDS TO BE TREATED AS CAP ITAL IN NATURE. THIS IS FOR THE REASON THAT IN CASE OF SUCH SOFTWAR E THERE IS NO RESTRICTION OR LIMITATION ON ITS PERIOD OF USE. NE W VERSIONS OF THESE SOFTWARE KEEP ON BECOMING AVAILABLE IN THE MARKET H OWEVER THERE IS NO RESTRICTION ON THE USE OF THE EARLIER VERSION AN D A PERSON CAN ALWAYS CHOOSE NOT TO BUY THE NEW VERSION AND CONTIN UE WITH THE VERSION. A HIGH RATE OF DEPRECIATION, WHICH IS 60% TAKES CARE OF OBSOLESCENCE OF SUCH SOFTWARE. 24. THE REVENUE IS QUESTIONING THE AUTHORITY OF LD. CIT(A) IN RESTORING THE MATTER TO THE FILE OF A.O. THE ASSESSEE IS CONTEND ING THAT THE ENTIRE AMOUNT OF RS.19.71 CRORES SHOULD BE ALLOWED AS REVENUE EXPEND ITURE. 25. THE LD A.R SUBMITTED THAT THE HONBLE JURISDI CTIONAL KARNATAKA HIGH COURT, IN A SUBSEQUENT DECISION RENDERED IN THE CASE OF CI T VS. IBM INDIA LTD (2013)(357 ITR 88)(KAR), HAS HELD THAT SOFTWARE EXPENSES IS RE VENUE IN NATURE. ACCORDINGLY HE SUBMITTED THAT THE ENTIRE EXPENSES SHOULD BE ALLOWE D AS DEDUCTION. ON THE CONTRARY, THE LD D.R SUBMITTED THAT THE ASSESSEE HA S TO SHOW THAT THE VALIDITY OF SOFTWARE LICENSES IS LESS THAN TWO YEARS. HE SUBMI TTED THAT THE LD CIT(A) SHOULD HAVE DECIDED THE ISSUE HIMSELF INSTEAD OF RESTORING THE SAME TO THE FILE OF AO, SINCE THE LD CIT(A) DOES NOT HAVE POWER TO REMAND THE MAT TERS. 26. WE HEARD THE PARTIES ON THIS ISSUE AND PERUSED THE RECORD. WE NOTICE THAT THE HONBLE KARNATAKA HIGH COURT HAS HELD IN THE CASE O F TOYOTA KIRLOSKAR MOTORS (P) LTD (SUPRA) HAS HELD THAT, WHEN THE LIFE OF A COMPU TER OR SOFTWARE IS LESS THAN TWO YEARS AND THE RIGHT TO USE IT IS FOR A LIMITED PERI OD, THE FEE PAID FOR ACQUISITION OF RIGHT IS ALLOWABLE AS REVENUE EXPENDITURE AND IF TH E SOFTWARE IS LICENSED FOR A PARTICULAR PERIOD, FRESH LICENSE FEE IS TO BE PAID FOR UTILIZING IT FOR SUBSEQUENT YEARS. IN THE CASE OF IBM INDIA LTD (SUPRA), IT WAS DECIDE D BY THE HONBLE JURISDICTIONAL HIGH COURT AS UNDER:- ITA NO.2600/BANG/2018 M/S. INFOSYS BPM LIMITED, BANGALORE PAGE 10 OF 17 9. THE SECOND SUBSTANTIAL QUESTION OF LAW RELATES TO APPLICATION OF THE AMOUNT UTILIZED FOR PROJECTS OF SOFTWARE IN A SUM O F RS.33,14,298/-. THE TRIBUNAL ON CONSIDERATION OF THE MATERIAL ON RE CORD AND THE RIVAL CONTENTIONS HELD, WHEN THE EXPENDITURE IS MADE NOT ONLY ONCE AND FOR ALL BUT ALSO WITH A VIEW TO BRINGING INTO EXISTENCE AN ASSET OR AN ADVANTAGE FOR THE ENDURING BENEFIT, THE SAME CAN BE PROPERLY CLAS SIFIED AS CAPITAL EXPENDITURE. AT THE SAME TIME, EVEN THOUGH THE EXPE NSES ARE ONCE AND FOR ALL AND MAY GIVE AN ADVANTAGE FOR ENDURING BENEFIT BUT IS NOT WITH A VIEW TO BRINGING INTO EXISTENCE ANY ASSET, THE SAME CANNOT BE ALWAYS CLASSIFIED AS CAPITAL EXPENDITURE. THE TEST TO BE APPLIED IS, IS IT A PART OF COMPANY' S WORKING EXPENSES OR IS IT EXPENDITURE LAID OUT AS A PART OF PROCESS OF PROFIT EARNING. IS IT ON THE CAPITAL LAYOUT OR IS I T AN EXPENDITURE NECESSARY FOR ACQUISITION OF PROPERTY OR OF RIGHTS OF A PERMA NENT CHARACTER, POSSESSION OF WHICH IS CONDITION ON CARRYING ON TRA DE AT ALL. THE ASSESSEE IN THE COURSE OF ITS BUSINESS ACQUIRED CERTAIN APPL ICATION SOFTWARE. THE AMOUNT IS PAID FOR APPLICATION OF SOFTWARE AND NOT SYSTEM SOFTWARE . THE APPLICATION SOFTWARE ENABLES THE ASSESSEE TO CARRY OUT HIS BUSINESS OPERATION EFFICIENTLY AND SMOOTHLY. HOWEVER, SUCH S OFTWARE ITSELF DOES NOT WORK ON STAND ALONE BASIS. THE SAME HAS TO BE FITTE D TO A COMPUTER SYSTEM TO WORK. SUCH SOFTWARE ENHANCES THE EFFICIENCY OF T HE OPERATION. IT IS AN AID IN MANUFACTURING PROCESS RATHER THAN THE TOOL ITSEL F. THUS, FOR PAYMENT OF SUCH APPLICATION SOFTWARE, THOUGH THERE IS AN ENDUR ING BENEFIT, IT DOES NOT RESULT INTO ACQUISITION OF ANY CAPITAL ASSET. THE S AME MERELY ENHANCES THE PRODUCTIVITY OR EFFICIENCY AND HENCE TO BE TREATED AS REVENUE EXPENDITURE. INFACT, THIS COURT HAD AN OCCASION TO CONSIDER WHET HER THE SOFTWARE EXPENSES IS ALLOWABLE AS REVENUE EXPENSES OR NOT AN D HELD, WHEN THE LIFE OF A COMPUTER OR SOFTWARE IS LESS THAN TWO YEARS AND A S SUCH, THE RIGHT TO USE IT FOR A LIMITED PERIOD, THE FEE PAID FOR ACQUISITI ON OF THE SAID RIGHT IS ALLOWABLE AS REVENUE EXPENDITURE AND THESE SOFTWARE S, IF THEY ARE LICENSED FOR A PARTICULAR PERIOD, FOR UTILIZING THE SAME FOR THE SUBSEQUENT YEARS FRESH LICENCE FEE IS TO BE PAID. THEREFORE, WHEN THE SOFT WARE IS FITTED TO A COMPUTER SYSTEM TO WORK, IT ENHANCES THE EFFICIENCY OF THE OPERATION. IT IS AN AID IN MANUFACTURING PROCESS RATHER THAN THE TOO L ITSELF. THOUGH CERTAIN APPLICATION IS AN ENDURING BENEFIT, IT DOES NOT RES ULT INTO ACQUISITION OF ANY CAPITAL ASSET. IT MERELY ENHANCES THE PRODUCTIVITY OR EFFICIENCY AND THEREFORE, IT HAS TO BE TREATED AS REVENUE EXPENDIT URE. IN THAT VIEW OF THE MATTER, THE FINDING RECORDED BY THE TRIBUNAL IS IN ACCORDANCE WITH LAW AND DO NOT CALL FOR ANY INTERFERENCE. ACCORDINGLY, THE SECOND SUBSTANTIAL QUESTION OF LAW IS ANSWERED IN FAVOUR OF THE ASSESS EE AND AGAINST THE REVENUE. 27. WE NOTICE THAT THE HONBLE HIGH COURT HAS HEL D IN THE CASE OF TOYOTA KIRLOSKAR MOTORS P LTD (SUPRA) THAT THE SOFTWARE EX PENSES ARE ALLOWABLE AS REVENUE EXPENSES, IF THE VALIDITY OF LICENSES IS LE SS THAN TWO YEARS. THE HIGH COURT HAS ALSO LAID DOWN THE TESTS THAT SHOULD BE CONDUCT ED TO DETERMINE THE NATURE OF SOFTWARE EXPENSES IN THE CASE OF IBM INDIA LTD (SUP RA). ACCORDINGLY, WE ARE OF THE VIEW THAT THE NATURE OF SOFTWARE EXPENSES, I.E., WH ETHER IT IS CAPITAL OR REVENUE IN NATURE, HAS TO BE DETERMINED BY FOLLOWING THE TWO D ECISIONS OF HONBLE KARNATAKA ITA NO.2600/BANG/2018 M/S. INFOSYS BPM LIMITED, BANGALORE PAGE 11 OF 17 HIGH COURT REFERRED ABOVE. WE NOTICE THAT THE TAX AUTHORITIES HAVE NOT EXAMINED THIS ISSUE ON THE ABOVE SAID LINES. ACCORDINGLY, W E SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF THE AO FOR EXAMINING IT AFRESH IN THE LIGHT OF DISCUSSIONS MADE SUPRA. 5.3 FOLLOWING THE ABOVE SAID DECISION, WE DIRECT TH E A.O. TO EXAMINE THE ISSUE AFRESH AS PER THE DIRECTIONS GIVE N BY THE TRIBUNAL IN ASSESSMENT YEAR 2011-12 WITH REGARD TO TREATING OF SOFTWARE PURCHASES AS CAPITAL IN NATURE. THE AO SHOULD ALSO EXAMINE THE ISSUE WITH REGARD TO OTHER DIRECTIONS ISSUED BY LD CIT(A). 6. THE NEXT ISSUE RELATES TO DISALLOWANCE OF BRAND BUILDING EXPENSES CLAIMED BY THE ASSESSEE. THE A.O. NOTICED THAT THE ASSESSEE HAS CLAIMED A SUM OF RS.78.32 LAKHS AS BRA ND BUILDING EXPENSES AND CLAIMED THE SAME AS REVENUE EXPENDITUR E. THE A.O. TOOK THE VIEW THAT BRAND BUILDING EXPENSES IS CAPIT AL IN NATURE AND ACCORDINGLY, DISALLOWED THE SAME. HOWEVER, HE ALLO WED DEPRECIATION @ 25% ON THE ABOVE SAID AMOUNT. THE LD. CIT(A) UPH ELD THE DISALLOWANCE BY FOLLOWING HIS DECISION RENDERED IN ASSESSMENT YEAR 2007-08. THE LD. CIT(A) ALSO HELD THAT SOME OF THE INVOICES PRODUCED RELATE TO PERIOD PRIOR TO FINANCIAL YEAR 2 007-08 AND HENCE THE PRIOR PERIOD EXPENSES COULD NOT HAVE BEEN CLAIM ED DURING THE YEAR UNDER CONSIDERATION. HE ALSO DIRECTED THE A.O . THAT IF THE ASSESSEE HAS NOT DEDUCTED TAX AT SOURCE, THEN THE D ISALLOWANCE IS TO BE SUSTAINED U/S 40(A) OF THE ACT. ALSO. 6.1 WE HEARD THE PARTIES ON THIS ISSUE. WE NOTICE THAT AN IDENTICAL ISSUE WAS EXAMINED BY THE COORDINATE BENC H IN THE ASSESSEES OWN CASE IN ASSESSMENT YEAR 2007-08 (SUP RA) AND SAME WAS DECIDED IN FAVOUR OF THE ASSESSEE AS UNDER:- ITA NO.2600/BANG/2018 M/S. INFOSYS BPM LIMITED, BANGALORE PAGE 12 OF 17 25. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SI DES IN THE LIGHT OF THE RECORDS PLACED BEFORE US. IT IS OBSERVED THAT THE EXPENDITURE INCURRED TOWAR DS ADVERTISEMENTS SALES AND MARKETING, HOLDING VARIOUS SEMINARS AND EXHIBITIONS ARE IN RELATION TO ONGOING BUSINESS OF ASSESSEE. AS HELD BY HONBLE BOMBAY HIGH COURT IN CASE OF CIT VS. JEOFFR EY MANNERS & CO. LTD. REPORTED IN (2009) 180 TAXMANN 87 THAT COR RECTED TEST TO BE APPLIED IN RESPECT OF EXPENDITURE INCURRED FOR MAKI NG ADVERTISEMENT FILMS WAS THAT WHEN THE SAME WAS INCURRED IN RESPEC T OF AN ONGOING BUSINESS OF ASSESSEE, IT IS REVENUE. ON THE OTHER HAND, WHEN EXPENDITURES INCURRED IN RESPECT OF A BRAND WHICH I S TO BE USED IN A BUSINESS WHICH IS YET TO BE COMMENCED, IT IS CAPITA L EXPENDITURE. FURTHER, AS HELD BY HONBLE SUPREME COURT IN CASE O F EMPIRE JUTE CO. LTD. VS. CIT REPORTED IN (1980) 3 TAXMANN 69, IT IS NOT APPROPRIATE TO HOLD THAT TEST OF ENDURING BENEFIT IS A CONCLUSIVE TEST IN ALL CASES AND TO HOLD SUCH EXPENDITURE TO BE ALWAYS CAPITAL EXPENDIT URE. IN THE PRESENT FACTS OF CASE, ASSESSEE INCURRED SU CH EXPENSES IN THE PROCESS OF AN ONGOING BUSINESS ACTIVITY AND THE REFORE IT WAS NOT RIGHT ON BEHALF OF AUTHORITIES BELOW TO HOLD SUCH E XPENDITURE TO BE CAPITAL IN NATURE. RESPECTFULLY FOLLOWING DECISIONS OF HONBLE SUPREM E COURT AND HONBLE BOMBAY HIGH COURT REFERRED TO HEREIN ABOVE WE DIRECT LD. AO TO DELETE DISALLOWANCE MADE. 6.2 ACCORDINGLY, FOLLOWING THE ABOVE SAID DECISION, WE HOLD THAT THE BRAND BUILDING EXPENDITURE IS ALLOWABLE AS REVE NUE EXPENDITURE. WE NOTICE THAT THE LD. CIT(A) HAS OBSERVED THAT SOM E OF THE INVOICES PRODUCED BY THE ASSESSEE DO NOT RELATE TO THE YEAR UNDER CONSIDERATION AND FURTHER SOME OF THE EXPENDITURE I S LIABLE FOR TAX DEDUCTION AT SOURCE. ACCORDINGLY, WE RESTORE THIS ISSUE TO THE FILE OF THE A.O. FOR EXAMINING THE ABOVE SAID TWO OBSERVATI ONS MADE BY LD. CIT(A) AND TO TAKE APPROPRIATE DECISION IN ACCORDAN CE WITH LAW. 7. THE LAST ISSUE RELATES TO THE ISSUE RELATED TO COMPUTATION OF DEDUCTION U/S 10A AND 10AA OF THE ACT. THE AO NOTI CED THAT THE DEDUCTION COMPUTED BY THE ASSESSEE UNDER 10A & 10AA IS FLAWED ON THE FOLLOWING POINTS:- ITA NO.2600/BANG/2018 M/S. INFOSYS BPM LIMITED, BANGALORE PAGE 13 OF 17 (A) EXPENDITURE INCURRED IN FOREIGN CURRENCY HAS N OT BEEN EXCLUDED FROM EXPORT TURNOVER. (B) EXPENDITURE INCURRED ON TELECOMMUNICATION CHAR GES HAS BEEN REDUCED FROM BOTH EXPORT TURNOVER AND TOTAL TU RNOVER, WHILE THE REQUIREMENT OF SECTION 10A & 10AA IS TO R EDUCE FROM EXPORT TURNOVER ONLY. ACCORDINGLY, THE AO RE-COMPUTED THE DEDUCTIONS ALLO WABLE U/S 10A & 10AA. 7.1 THE LD CIT(A) HELD THAT THE DECISION RENDER ED BY HON'BLE KARNATAKA HIGH COURT IN THE CASE OF TATA ELXSI LTD (349 ITR 98) IS APPLICABLE TO THE FACTS OF THE PRESENT ISSUE. ACCO RDINGLY, HE OBSERVED THAT THE EXPENDITURE INCURRED IN FOREIGN C URRENCY AND TELECOMMUNICATION CHARGES HAVE TO BE REDUCED FROM B OTH EXPORT TURNOVER AND TOTAL TURNOVER. ACCORDINGLY, HE DIRECT ED THE AO TO FOLLOW THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT. ACCORDINGLY, THE LD CIT(A) DID NOT ADJUDICATE THE C ONTENTION OF THE ASSESSEE THAT THE EXPENDITURE INCURRED IN FOREIGN C URRENCY NEED NOT BE REDUCED FROM EXPORT TURNOVER AT ALL. 7.2 THE LD A.R SUBMITTED THAT THE CLAIM OF THE A SSESSEE THAT THE EXPENDITURE INCURRED IN FOREIGN CURRENCY NEED NOT B E REDUCED FROM EXPORT TURNOVER AT ALL HAS BEEN REJECTED BY THE CO- ORDINATE BENCH IN THE ASSESSEES OWN CASE IN AY 2007-08. HE SUBMITTE D THAT THE EXPENDITURE INCURRED IN FOREIGN CURRENCY IS REQUIRE D TO BE REDUCED ONLY IF THESE EXPENSES ARE INCURRED IN PROVIDING T ECHNICAL SERVICES OUTSIDE INDIA. HE SUBMITTED THAT THE ASSESSEE HAS NOT PROVIDED ANY TECHNICAL SERVICE OUTSIDE INDIA AS CONTEMPLATED IN THE DEFINITION OF EXPORT TURNOVER GIVEN IN SEC.10A & 10AA AND HE NCE THESE EXPENSES NEED NOT BE REDUCED FROM EXPORT TURNOVER A T ALL. IF IT IS NOT REDUCED FROM EXPORT TURNOVER, THEN THE QUESTION OF REDUCING THE SAME FROM TOTAL TURNOVER DOES NOT ARISE. HE SUBMIT TED THAT THE ITA NO.2600/BANG/2018 M/S. INFOSYS BPM LIMITED, BANGALORE PAGE 14 OF 17 TRIBUNAL, IN AY 2007-08, HAS EXTRACTED THE NATURE O F EXPENSES INCURRED BY THE ASSESSEE IN FOREIGN CURRENCY, WHICH CLEARLY SHOW THAT THEY HAVE NOT BEEN INCURRED FOR PROVIDING TEC HNICAL SERVICE. STILL THE TRIBUNAL HAS DECIDED THIS ISSUE AGAINST T HE ASSESSEE. HE SUBMITTED THAT THE CONTENTION OF THE ASSESSEE IS SU PPORTED BY THE DECISION OF JURISDICTIONAL KARNATAKA HIGH COURT REN DERED IN THE CASE OF CIT VS. MPHASIS LTD (2016) (74 TAXMANN.COM 274 (KAR). 7.3 WE HEARD LD D.R ON THIS ISSUE AND PERUSED T HE RECORD. ADMITTEDLY, THE LD CIT(A) HAS NOT ADJUDICATED THIS ISSUE, I.E., WHETHER THE EXPENDITURE INCURRED BY THE ASSESSEE IN FOREIGN CURRENCY IS TOWARDS PROVIDING TECHNICAL SERVICE OUT SIDE INDIA OR NOT. THE CONTENTION OF LD A.R IS THAT ASSESSEE IS PROVID ING BPO SERVICES AND NOT ANY TECHNICAL SERVICE AS CONTEMPLATED IN TH E DEFINITION OF EXPORT TURNOVER GIVEN IN SEC.10A/10AA. ACCORDING LY IT WAS CONTENDED THAT THE EXPENDITURE INCURRED IN FOREIGN CURRENCY IS NOT FOR PROVIDING TECHNICAL SERVICES. THE NATURE OF EX PENSES INCURRED BY THE ASSESSEE IN FOREIGN CURRENCY IS EXPLAINED AS UNDER BEFORE THE AO, WHICH IS EXTRACTED BY AO IN THE ASSESSMENT ORDE R. THE COMPANY HAVING THE FOREIGN CURRENCY ACCOUNTS I N INDIA, US AND UK. THE EXPENSES IN FOREIGN CURRENCY WILL BE C ALCULATED BY BANK PAYMENT WISE, THE HEAD SALARY LEGAL AND PROFES SIONAL CHARGES CONSISTS THE SALARY PAID TO OUR EMPLOYEES BASED IN US AND UK. WE ARE PAYING PROFESSIONAL CHARGES TO CONSULTANT IN US AND UK FOR PAYROLL PROCESSING, FOR HIRING THE EMPLOYEES IN US OFFICE FOR VISA BACK GROUND CHECK IN US ETD. THE HEAD FOREIGN TRAVEL AND RELOCATION EXPENSE CONS IST THE ADVANCE GIVEN TO EMPLOYEES FOR BUSINESS FOREIGN TRIP FOR ON SITE RELATED WORKS AT CLIENT LOCATION AND LOCAL TRAVEL EXPENSE S PENT BY THE EMPLOYEE BASED OUTSIDE INDIA. THE HEAD BANK CHARGES CONSIST, BANK CHARGES DEBITED BY THE BANKS AND OTHER EXPENSES. THE COMMUNICATION EXPENSE CONSIST OF TELEPHONE CHAR GES SPENT BY EMPLOYEES BASED OUTSIDE INDIA AND LEASE LINE CHARGE S PAID TO FOREIGN SERVICE PROVIDER. ITA NO.2600/BANG/2018 M/S. INFOSYS BPM LIMITED, BANGALORE PAGE 15 OF 17 SINCE THE ABOVE EXPENSES ARE INCURRED FOR MANAGING THE BRANCHES OUTSIDE INDIA. THESE EXPENSES ARE NOT INCURRED WHI LE PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA. HENCE THE ABOVE EXPENSES NOT TO BE REDUCED FROM THE EXPORT TURNOVER. SINCE THE ABOVE EXPENSES CAN BE NOTICED THAT THE E XPENSES INCURRED BY THE ASSESSEE ARE NOT FOR PROVIDING TECH NICAL SERVICES IN THE COURSE OF PROVIDING ANY TECHNICAL SERVICES OUTS IDE INDIA. WE NOTICE THAT THE CONTENTION OF THE ASSESSEE IS SUPPO RTED BY DECISION OF JURISDICTIONAL HIGH COURT RENDERED IN THE CASE O F CIT VS. MPHASIS LTD (SUPRA). FOR THE SAKE OF CONVENIENCE, WE EXTRA CT BELOW THE RELEVANT OBSERVATIONS MADE BY HONBLE KARNATAKA HIG H COURT:-. 2. THE FIRST SUBSTANTIAL QUESTION OF LAW AROSE FOR CONSIDERATION BEFORE THIS COURT IN ITA NO.776/2007 DISPOSED OF ON 13.06.2014, WHEREIN THIS COURT HAS HELD AT PARAS 18 AND 19 AS UNDER:- 18. FROM THE AFORESAID PROVISION IT IS CLEAR THAT T HE CONSIDERATION IN RESPECT OF COMPUTER SOFTWARE RECEIVED IN OR BROUGHT INTO INDIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE IS DEDUCTE D FROM THE PROFITS OF THE SAID BUSINESS. IN OTHER WORDS THE ASSESSEE IS N OT LIABLE TO PAY ANY INCOME TAX ON SUCH CONSIDERATION RECEIVED FROM EXPO RT OF COMPUTER SOFTWARE. HOWEVER THE SAID EXPORT TURNOVER DOES NOT INCLUDE FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA OR EXPENSES IF ANY INCURRED IN FOREIGN EXCHANGE IN PROVIDING TECHNICAL SERVICE OUTSIDE IND IA. IN OTHER WORDS OUT OF THE SAID EXPORT TURNOVER THE FOLLOWING AMOUN TS HAVE TO BE DEDUCTED; A. FREIGHT B. TELECOMMUNICATION CHARGES C. INSURANCE ATTRIBUTABLE TO THE DELIVERY OF COMPUT ER SOFTWARE OUTSIDE INDIA; D. EXPENSES, IF ANY, INCURRED IN FOREIGN EXCHANGE I N PROVIDING TECHNICAL SERVICES OUTSIDE INDIA; 19. IF THE ASSESSEE IS ENGAGED IN THE BUSINESS OF P ROVIDING TECHNICAL SERVICES OUTSIDE INDIA IN CONNECTION WITH THE DEVEL OPMENT OR PRODUCTION OF COMPUTER SOFTWARE THEN EXPENSES IF ANY INCURRED IN FOREIGN EXCHANGE IN PROVIDING TECHNICAL SERVICES OUTSIDE INDIA IS LI ABLE TO BE DEDUCTED OUT OF EXPORT TURNOVER. THE SAID PROVISION HAS NO APPLI CATION IN THE CASE OF EXPORT OUT OF INDIA OF COMPUTER SOFTWARE OR ITS TRA NSMISSION FROM INDIA TO A PLACE OUTSIDE INDIA BY ANY MEANS. THE LAW MAKE S A DISTINCTION BETWEEN TECHNICAL SERVICES RENDERED IN CONNECTION W ITH EXPORT OF COMPUTER SOFTWARE AND EXPORT OF TECHNICAL SERVICES FOR THE PURPOSE OF ITA NO.2600/BANG/2018 M/S. INFOSYS BPM LIMITED, BANGALORE PAGE 16 OF 17 DEVELOPMENT OR PRODUCTION OF COMPUTER SOFTWARE OUTS IDE INDIA. IF THE TECHNICAL SERVICES RENDERED BY THE ASSESSEE'S ENGIN EERS IS IN CONNECTION WITH THE EXPORT OF COMPUTER SOFTWARE FOR THE PURPOS E OF TESTING, INSTALLATION AND MONITORING OF SOFTWARE SUCH A TURN OVER DO NOT FALL WITHIN CLAUSE (II) OF SUBSECTION (1) OF SECTION 80H HE OF THE ACT. SUCH A TURNOVER FALLS WITHIN SUB-CLAUSE (I) OF SUBSECTION (1) OF SECTION 80HHE OF THE ACT, THAT IS EXPORT OUT OF INDIA OF COMPUTER SOFTWARE OR ITS TRANSMISSION FROM INDIA TO A PLACE OUTSIDE INDIA BY ANY MEANS. THE EXPENDITURE INCURRED IN THE FORM OF FOREIGN EXCHANG E FOR SUCH SERVICES CANNOT BE EXCLUDED IN COMPUTING THE EXPORT TURNOVER AS IT FORMS PART OF THE EXPORT TURNOVER. IN THE INSTANT CASE AS IS CLEA R FROM THE ORDER OF THE ASSESSING AUTHORITY, HE PROCEEDS ON THE ASSUMPTION THAT THE ASSESSEE IS A COMPANY ENGAGED IN RENDERING TECHNICAL SERVICES O UTSIDE INDIA IN CONNECTION WITH PRODUCTION OF SAID SOFTWARE. THEREF ORE THE EXPENDITURE INCURRED IN FOREIGN EXCHANGE IN PROVIDING SUCH TECH NICAL SERVICES OUTSIDE INDIA OF RS.62.7 LAKHS WAS EXCLUDED IN COMP UTING THE EXPORT TURNOVER AND TOTAL TURNOVER FOR ARRIVING AT DEDUCTI ON UNDER SECTION 80HHE OF THE ACT. THE ASSESSEE IS ENGAGED IN THE BU SINESS OF EXPORT OUT OF INDIA OF COMPUTER SOFTWARE AND ITS TRANSMISSION TO PLACES FROM INDIA OUTSIDE INDIA. BEFORE A COMPUTER SOFTWARE IS EXPORT ED, THE SOFTWARE ENGINEERS OF THE ASSESSEE WOULD HAVE INITIAL DISCUS SION WITH REGARD TO THE REQUIREMENTS, SPECIFICATIONS ETC. THEREAFTER CO MPUTER SOFTWARE IS MANUFACTURED AND THEN IT IS TRANSMITTED FROM INDIA TO A PLACE OUTSIDE INDIA. THE SOFTWARE ENGINEERS DEPUTED ABROAD WHO AM ONG OTHER THINGS HAVE TO DO TESTING, INSTALLATION AND MONITORING OF SOFTWARE SUPPLIED TO THE CLIENT. THOUGH THE SAID SERVICES ARE TECHNICAL IN NATURE IT DOES NOT FALL WITHIN CLAUSE (II) OF SUBSECTION (1) OF SECTIO N 80HHE OF THE ACT OF PROVIDING TECHNICAL SERVICES OUTSIDE INDIA IN CONNE CTION WITH THE DEVELOPMENT OR PRODUCTION OF COMPUTER SOFTWARE. IT FALLS UNDER SUB- CLAUSE (1) OF SUB-SECTION (1) OF SECTION 80 HHE OF THE ACT. THEREFORE, THE SAID EXPENDITURE CANNOT BE EXCLUDED IN COMPUTING EX PORT TURN OVER. IN THAT VIEW OF THE MATTER WE DO NOT SEE ANY MERIT IN THIS APPEAL. ACCORDINGLY, THE SAID QUESTION OF LAW IS ANSWERED I N FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. ORDERED ACCORDING LY. FOLLOWING THE BINDING DECISION OF HONBLE KARNATAKA HIGH COURT, WE DIRECT THE AO NOT EXCLUDE THE EXPENDITURE INCURRED IN FOREIGN CURRENCY FROM EXPORT TURNOVER. ITA NO.2600/BANG/2018 M/S. INFOSYS BPM LIMITED, BANGALORE PAGE 17 OF 17 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 25 TH OCT, 2021 SD/- (GEORGE GEORGE K.) JUDICIAL MEMBER SD/- (B.R. BASKARAN) ACCOUNTANT MEMBER BANGALORE, DATED 25 TH OCT, 2021. VG/SPS COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.