Subex Limited, Bangalore V. DCIT, Bangalore

ITA 373/BANG/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 8573 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-03-2016
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 07-04-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 16-03-2015
• Court: TRIBUNAL
• Department Lawyers: NEERA MALHOTRA CITIIDR
• Assessee Lawyers: RAGHUNATHAN S
• Keywords: Capital asset; Business income; Depreciation; Transfer pricing; International transaction; Non-deduction of tax; Speculation loss; Capital receipt; Revised return
• Section: 143(3); 10AA; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI NARENDRA KUMAR CHOUDHURY, JUDICIAL MEMBER IT(TP)A NO. 373/BANG/2015 ASSESSMENT YEAR : 2010-11 M/S. SUBEX LIMITED, RMZ ECOWORLD, OUTER RING ROAD, DEVARABISANAHALLI, BANGALORE. PAN: AABCS 9255R VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 6(1)(2), BANGALORE. APPELLANT RESPONDENT IT(TP)A NO. 374/BANG/2015 ASSESSMENT YEAR : 2010- 11 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 6(1)(2), BANGALORE. VS. M/S. SUBEX LIMITED, BANGALORE. PAN: AABCS 9255R APPELLANT RESPONDENT ASSESSEE BY : SHRI RAGHUNATHAN S., ADVOCATE REVENUE BY : MS. NEERA MALHOTRA, CIT-II(DR) DATE OF HEARING : 08.03.2016 DATE OF PRONOUNCEMENT : 18.03.2016 O R D E R PER B. RAMAKOTAIAH, ACCOUNTANT MEMBER THESE CROSS APPEALS ARE BY ASSESSEE AND REVENUE AGA INST THE ORDERS OF ASSESSING OFFICER (AO) U/S. 143(3) R.W.S. 144C, CONSEQUENT TO THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL [DRP]. IT(TP)A NOS.373 & 374/BANG/2015 PAGE 2 OF 27 2. BRIEFLY STATED ASSESSEE IS A PUBLIC LIMITED COMPANY PRIMARILY ENGAGED IN SOFTWARE DEVELOPMENT SERVICES WITH ITS PRIMARY F OCUS AND TELECOMMUNICATION INDUSTRY. FOR THE AY. 2010-11, A SSESSEE FILED A REVISED RETURN OF INCOME ON 29-03-2012 DECLARING NIL INCOME AFTER CLAIMING DEDUCTION OF RS. 29.5 CRORES U/S. 10AA OF THE ACT. AS ASSESSEE HAS INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTE RPRISE (AE), THE AO REFERRED THE MATTER TO TRANSFER PRICING OFFICER (TP O) AND THE TPO DETERMINED THE TP ADJUSTMENT OF RS. 3,18,09,842/-. THIS ADJUSTMENT HAS BEEN PROPOSED ON ADVANCES GIVEN TO ITS SUBSIDIARY A ND ACCORDING TO THE TPO, SINCE THE LOANS ARE ADVANCED FROM INDIA BOND RATE OF BB RATING SHOULD BE CONSIDERED AS AGAINST THE 6% PA RECEIVED BY ASSESSE E. HE ADOPTED A RATE OF 14.74% IN RESPECT OF THE LOANS ADVANCED AND PROPOSE D AN ADDITION. ON ASSESSEES OBJECTIONS, THE DRP DEFERRED FROM ITS FI NDINGS IN EARLIER YEAR AND ACCEPTED THE TPOS ADJUSTMENT, HENCE THE GROUNDS UN DER TP ADJUSTMENTS. AO IN ADDITION HAS ALSO RAISED VARIOUS ISSUES PERTA INING TO SECTION 35D, FOREIGN EXCHANGE FLUCTUATIONS, DEPRECIATION ON COMP UTER SOFTWARE AND WORKING OUT DEDUCTION U/S. 10AA AS AGAINST ASSESSEE S CLAIMS. ANOTHER ISSUE ON NON-GRANTING OF FOREIGN TAX CREDIT IS ALSO INVOLVED. AGGRIEVED ON THE DRPS ORDERS, ASSESSEE IS IN APPEAL AND RAISED AS MANY AS 32 GROUNDS. LIKEWISE, REVENUE IS ALSO AGGRIEVED ON THE DRPS DI RECTIONS ALLOWING SOME IT(TP)A NOS.373 & 374/BANG/2015 PAGE 3 OF 27 OF THE CONTENTIONS OF ASSESSEE AND ACCORDINGLY, REV ENUE HAS RAISED FOUR MATERIAL GROUNDS IN ITS APPEAL. 3. WE HAVE HEARD THE LD. COUNSEL FOR ASSESSEE AND THE LD. DR AND PERUSED THE PAPER BOOKS PLACED ON RECORD. ASSESSEES APPEAL IN IT(TP)A NO. 373/BANG/2015 : 4. GROUND NOS. 1 TO 8 ARE GENERAL IN NATURE AND DOES N OT REQUIRE ANY ADJUDICATION. 5. TP ISSUE : GROUND NOS. 9 TO 11 PERTAINS TO DETERMINATION OF ARMS LENGTH INTEREST RATE BY THE TPO. DURING THE FY. 20 09-10, ASSESSEE RECEIVED INTEREST ON LOANS GIVEN TO ITS AE AMOUNTING TO RS. 2.18 CRORES. IT WAS SUBMITTED THAT INTEREST SO RECEIVED WAS AT ARMS LE NGTH PRICE (ALP), HOWEVER, TPO ADOPTED THE RATE OF 14.74% IN RESPECT OF LOANS ADVANCED BY ASSESSEE TO ITS AE. ASSESSEE CONTENDED BEFORE THE DRP THAT THE DETERMINATION OF BENCH MARK RATE OF INTEREST IS WIT HOUT ANY BASIS. THE DRP DID NOT FOLLOW THE ORDER PASSED IN EARLIER YEAR WHE REIN THE DRP DIRECTED THAT INTEREST RATES OF THAT COUNTRY SHOULD BE ADOPTED AN D EFFECTIVE INTEREST RATE SHOULD BE VERIFIED FROM THE LOAN CONNECTOR DATA B ASE. IT(TP)A NOS.373 & 374/BANG/2015 PAGE 4 OF 27 6. IT WAS THE CONTENTION THAT DRP SHOULD HAVE FOLLOWED ITS FINDINGS IN PREVIOUS ASSESSMENT YEAR I.E., AY. 2009-10 AND IF T HOSE ARE ADOPTED, ASSESSEES INTEREST RATE IS WITHIN THE ALP VERIFIE D EITHER ON THE BASIS OF LIBOR+ OR ANY OTHER METHOD. IT WAS FAIRLY ADMITTED THAT THIS ISSUE WAS SIMILAR TO THE ISSUE IN LAST YEAR WHEREIN, EVEN AFT ER DRP DIRECTIONS, AO DID NOT IMPLEMENT THE DIRECTIONS. 7. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE RECORD. THIS ISSUE IS SIMILAR TO THE ISSUE RAISED IN EARLIE R YEAR, WHEREIN THE DRP HAS DIRECTED THE AO TO ADOPT THE INTEREST RATES OF THE LOANEE COUNTRY AND TO SEARCH IN THE LOAN CONNECTOR DATA BASE WHICH WAS NOT DONE BY THE AO/TPO. THE ISSUE IS DEALT WITH AS UNDER IN AY. 20 09-10: 13. THE THIRD ISSUE FOR CONSIDERATION IN THE TP I SSUES IS WITH REFERENCE TO DETERMINATION OF ALP OF INTEREST RECEIVED. DURING THE IMPUGNED YEAR, ASSESSEE HAD RECEIVED INTEREST ON LOANS TO AN EXTENT OF RS.4 ,94,11,033. IT WAS SUBMITTED TO THE TPO THAT THE LOAN WAS ADVANCED IN FOREIGN CURRE NCY USD @ 6% P.A. BY USING CUP METHOD AS AN APPROPRIATE METHOD TO BENCH MARK I NTEREST RATE ON LIBOR BASIS. IT WAS ALSO SUBMITTED THAT INTEREST RECEIVE D WAS WITHIN THE REGULATORY FRAMEWORK LAID DOWN BY RBI. HOWEVER, THE AO DID NO T AGREE AND CONSIDERED THAT ASSESSEE HAVING ADVANCED FUNDS FROM INDIA SHOULD AN ALYSE COMPARABILITY ON THE INTEREST RATES PREVAILING IN INDIA. HE HAS ADOPTED BOND RATING OF BB AT 17.22% IN RESPECT LOANS ADVANCED AND PROPOSED AN ADDITION. 13.1 ON ASSESSEES OBJECTIONS, THE DRP WHILE ACCEPT ING THE CREDIT RATING AT BB, DIRECTED THE TPO TO ADOPT AVERAGE CREDIT RISK SPREA D FROM THE LOAN CONNECTOR DATABASE. THE TPO, AS STATED EARLIER, DID NOT DO S UCH EXERCISE AND ADOPTED THE SAME RATE OF INTEREST AND MADE ADDITION. 13.2. IT WAS SUBMITTED BY THE LD. COUNSEL THAT ASSE SSEES RATE OF INTEREST IS ON PAR WITH LIBOR RATES WHICH IS GENERALLY BEING ACCEP TED BY THE ITAT IN A NUMBER IT(TP)A NOS.373 & 374/BANG/2015 PAGE 5 OF 27 OF CASES. FURTHER, IT WAS SUBMITTED THAT THOMSON R EUTERSS LOAN CONNECTOR DATABASE WAS MENTIONING 2.53% BEING PAID BY COMPANI ES RATED AS BB IN COMPARABLE TRANSACTIONS AND IF 1% LIBOR RATE IS INC REASED, THE EFFECTIVE INTEREST RATE WOULD BE 3.53% WHICH IS STILL LESSER THAN 6% R ATE RECEIVED BY THE ASSESSEE. 13.3 IT WAS FURTHER SUBMITTED THAT THE HONBLE BOMB AY HIGH COURT IN THE CASE OF TATA AUTOCOMP SYSTEMS LTD., 56 TAXMAN.COM 206 (BOM) HAS UPHELD THE INTEREST RATE BEING CHARGED IN THE COUNTRY WHERE THE LOAN IS RECEIVED/CONSUMED. ACCORDINGLY, IT WAS SUBMITTED THAT USD LIBOR RATE I S AN AVERAGE OF 2.854%. ACCORDINGLY, ASSESSEES INTEREST RECEIVED BEING AT 6% SHOULD BE CONSIDERED AT ARMS LENGTH. 13.4 WE HAVE CONSIDERED THE CONTENTIONS AND PERUSED THE ORDERS OF AUTHORITIES. AS NOTED ABOVE, THE AO DID NOT IMPLEMENT THE DRP DI RECTION, THEREFORE TO THAT EXTENT, ASSESSEES GRIEVANCE IS VALID. IT WAS SUB MITTED THAT IF THE DRP DIRECTIONS ARE IMPLEMENTED, THE EFFECTIVE INTEREST RATE ON THE LOAN CONNECTOR DATABASE WOULD COME TO 3.53% AND ON THE BASIS OF DECISION OF THE HONBLE BOMBAY HIGH COURT, IF AVERAGE RATE PREVAILING IN USD IS CONSIDE RED, THAT WOULD COME TO 2.85%. SINCE THE ABOVE INTEREST RATES ARE LESS THAN THE RA TE OF INTEREST RECEIVED BY THE ASSESSEE AT 6%, THERE IS NO NEED TO MAKE ANY ADJUST MENT IN THE GIVEN FACTS OF THE CASE. HOWEVER, SINCE THE AO DID NOT UNDERTAKE THE EXERCISE OF GIVING EFFECT TO DRP ORDER, WE ARE OF THE OPINION THAT THE DETAILS F URNISHED BY THE ASSESSEE WITH REFERENCE TO THE ABOVE AVERAGE RATES BASED ON LOAN CONNNECTOR DATABASE SHOULD BE EXAMINED AND IF THEY ARE FOUND TO BE LESS THAN 6 %, WE DIRECT THAT NO ADJUSTMENT NEED BE MADE ON THE INTEREST RECEIVED BY THE ASSESSEE. WITH THIS, GROUNDS NO.1.5 AND 7 IS CONSIDERED AS ALLOWED FOR S TATISTICAL PURPOSES. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE TPO TO FOLLOW ACCORDINGLY IN THIS YEAR ALSO AND EXAMINE THE ALP ON SIMILAR LINES . WITH THIS, GROUND NOS. 9 TO 11 ARE CONSIDERED ALLOWED FOR STATISTICAL PURP OSES. CORPORATE TAX ISSUES : 8. GROUND NOS. 12 AND 13 PERTAIN TO DEDUCTION CLAIMED U/S. 35D OF THE ACT. THIS ISSUE IS ALSO COVERED BY THE ORDER OF IT AT IN ITA NO. 223/BANG/2014, WHEREIN IT WAS HELD AS UNDER: IT(TP)A NOS.373 & 374/BANG/2015 PAGE 6 OF 27 15. AS FAR AS CLAIM U/S. 35D IS CONCERNED, THIS I SSUE WAS RAISED BY THE ASSESSEE IN GROUND NO.10. THIS IS NOT THE FIRST YE AR OF CLAIM AND ORIGINAL CLAIM WAS MADE DURING AY 2007-08, IN WHICH ASSESSEE ACQUIRED TWO COMPANIES AND HAS RAISED CAPITAL TO THROUGH GDR AND FCCBS. ASSESSEE HAS INCURRED EXPENDITURE OF RS.61,62,65,172 DURING THAT YEAR AND CLAIMED 1/5 TH OF SUCH EXPENDITURE AS DEDUCTION U/S. 35D. SUBSEQ UENTLY, ASSESSEE RECEIVED A REFUND OF RS.3,83,74,819 WITH RESPECT TO THE AFORESAID EXPENSES AND ACCORDINGLY ASSESSEE REDUCED THE CLAIM U/S. 35D FROM AY 2008-09 ONWARDS. AS IN EARLIER YEARS, THE AO RESTR ICTED THE CLAIM TO AN AMOUNT OF RS.11,72,873 AND DISALLOWED THE BALANCE C LAIM OF RS.11,24,86,458 MAINLY ON INTERPRETING THE TERM CA PITAL EMPLOYED IN THE BUSINESS OF THE COMPANY. 15.1 IT WAS SUBMITTED THAT THIS ISSUE HAD BEEN EXAM INED IN ASSESSEES OWN CASE IN ITA NO.689/BANG/2014 FOR AY 2008-09 AND THE TRIBUNAL DIRECTED THAT FCCBS ARE IN THE NATURE OF DEBENTURES AND HENCE ARE ELIGIBLE TO BE CALCULATED AS PART OF CAPITAL EMPLOYED IN TH E BUSINESS OF THE COMPANY FOR ALLOWING DEDUCTION 35D OF THE ACT. EV EN THOUGH ITAT DID NOT AGREE ON THE OTHER ISSUE OF EXCLUDING SECURITIES PR EMIUM AND ASSESSEE IS IN APPEAL BEFORE THE HONBLE KARNATAKA HIGH COURT, THE ASSESSEE SUBMITTED THAT THE ELIGIBLE AMOUNT BASED ON THE ITA T ORDER IN THIS REGARD AS UNDER:- SL. NO. PARTICULARS AMOUNT (IN INR) 1. GDR FACE VALUE (AS ALREADY ALLOWED BY AO) 117,287, 280 2. FCCBS (AS PER TRIBUNALS ORDER AT PARA 35 AND 36) 7,807,500,000 3. CAPITAL EMPLOYED 7,924,787,280 4. 5% OF CAPITAL EMPLOYED 396,239,365 5. 1/5 TH OF 5% OF CAPITAL EMPLOYED (CLAIM ALLOWABLE CONSEQUENT TO TRIBUNALS ORDER) 79,247,872* * AS AGAINST THE CLAIM OF INR 1,172,873 COMPUTED BY THE LD. AO. WE DIRECT THE AO TO EXAMINE THE ABOVE AND ALLOW REL IEF AS IN EARLIER YEARS, SINCE CLAIM IS ARISING IN EARLIER YEARS. WITH THIS , THIS GROUND IS CONSIDERED AS ALLOWED. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE AO T O EXAMINE AND ALLOW AS IN EARLIER YEARS AND THESE GROUNDS ARE CONSIDERED A S ALLOWED. IT(TP)A NOS.373 & 374/BANG/2015 PAGE 7 OF 27 9. GROUND NOS. 14 TO 19 PERTAINS TO ADJUSTMENT MADE BY THE AO UNDER THE HEAD FOREIGN EXCHANGE LOSS AS IN EARLIER YEAR S. AO REFERRED TO THE BOARD CIRCULAR AND TREATED THE MARK TO MARKET GAINS /LOSSES AND SOME OF THE OPTION CONTRACTS, FORWARD CONTRACTS ETC., AS SPECUL ATIVE LOSS. WHILE DOING SO, HE ALSO DID NOT ALLOW THE FOREIGN EXCHANGE GAIN ON RESTATEMENT OF FCCB AS WELL AS EXCHANGE GAIN ADJUSTED WITH COST OF ASSETS WHILE COMPUTING THE INCOME. ASSESSEE IS CONTESTING THE ISSUES UNDER TH ESE GROUNDS. 10. THE BRAKE-UP OF EXCHANGE FLUCTUATION LOSS ULTIMATEL Y DISALLOWED BY THE AO AND DEBITED TO P&L A/C AS UNDER: SR. NO. DESCRIPTION GAIN / (LOSS) IN RS. 1. MARK - TO - MARKET (MTM) GAIN ON OUTSTANDING OPTION CONTRACTS 9,28, 75,309 2. GAIN ON RESTATEMENT OF FORWARD CONTRACTS 12,76,10,419 3. REALISED FOREIGN EXCHANGE GAIN ON SETTLEMENT OF REVENUE ITEMS (DEBTORS AND CREDITORS) 3,25,62,589 4. UNR E ALISED FOREIGN EXCHANGE LOSS ON REVENUE ITEMS (DEBTORS/CREDITORS) (28,93,95,416) 5. TOTAL FOREIGN EXCHANGE FLUCTUATION LOSS (3,63,47 ,099) AS CAN BE SEEN FROM THE ABOVE, ASSESSEE HAS GAIN UN DER THREE HEADS AND LOSS ON REVENUE ITEMS OF DEBTORS AND CREDITORS WHICH WAS NETTED OFF AND CLAIMED THE NET FOREIGN EXCHANGE FLUCTUATION LOSS. AO FOLL OWING THE ORDERS IN EARLIER YEARS, TREATS THE ENTIRE LOSS AS SPECULATIVE IN NAT URE WITHOUT EXAMINING THE NATURE OF THE CONTRACT/ITEM ON WHICH GAIN OR LOSS H AS COME. IT WAS SUBMITTED THAT ASSESSEE HAS CONSISTENTLY OFFERED THE INCOMES OR LOSSES OF THE BUSINESS IT(TP)A NOS.373 & 374/BANG/2015 PAGE 8 OF 27 INCOMES AND THESE WERE TAXED IN EARLIER YEARS. THE ARGUMENTS ARE SIMILAR TO THE ARGUMENTS RAISED IN EARLIER YEAR WHEREIN THESE WERE EXAMINED AND CONCLUDED AS UNDER: MTM LOSSES (GROUND NO.8) 16. SINCE THE ASSESSEE IS ENGAGED IN THE BUSINESS O F SOFTWARE DEVELOPMENT AND RELATED SERVICES, ITS EARNINGS ARE PRIMARILY IN FOREIGN EXCHANGE. IN ORDER TO SECURE A STUDY FLOW OF RUPEE TO MEET ITS OPERATING EXPENSES, ASSESSEE ENTERED INTO VARIOUS HEDGING CONTRACTS WITH THE BANKS IN TH E NATURE OF OPTION/FORWARD CONTRACTS. THESE CONTRACTS ARE BOTH SHORT TERM AND LONG TERM. ASSESSEE AGREES TO SELL A SPECIFIED AMOUNT OF FOREIGN CURRENCY WHIC H IT ANTICIPATES TO RECEIVE OVER A PERIOD TO THE BANK. THE RATE WAS DETERMINED AT THE INCEPTION OF THE CONTRACT ITSELF AND IT BECOMES THE OBLIGATION ON THE PART OF ASSESS EE TO SELL THE DESIGNATED AMOUNT OF FOREIGN CURRENCY TO THE CONTRACTING BANK AT A DATE AND RATE SPECIFIED IN THE AGREEMENT. SINCE THE PERIOD OF CONTRACT IS SPR EAD OVER SOME TIMES INTO THE NEXT ACCOUNTING YEAR, FOLLOWING THE ACCOUNTING STAN DARDS AS-11, MARK-TO-MARKET (MTM) LOSSES OR GAINS ARE DETERMINED AND ACCOUNTED FOR UNDER THE HEAD FOREIGN EXCHANGE GAINS/LOSSES. 16.1 IT WAS SUBMITTED THAT DURING THE FINANCIAL YEA R RELEVANT TO AY 2009-10, ASSESSEE HAS ENTERED INTO HEDGING CONTRACTS WITH VA RIOUS BANKS. SOME OF THESE ABOVE CONTRACTS DID NOT MATURE TILL 31.3.2009. ACC ORDINGLY, THE MTM LOSSES TO AN EXTENT OF RS.9,72,32,040 WAS BOOKED IN THE BOOKS OF ACCOUNT ON THE BASIS OF EXCHANGE RATES PREVAILING ON 31.3.2009 IN ACCORDANC E WITH AS-11. 16.2 THE AO TREATED THE LOSSES AS SPECULATIVE IN NA TURE AND CONTINGENT IN NATURE AND DISALLOWED THE SAME. THE DRP ALSO ACCEP TED THE OPINION OF THE AO. 16.3 IT WAS SUBMITTED THAT ASSESSEE HAS CONSISTENTL Y FOLLOWED THE SAME METHOD OF ACCOUNTING WITH REGARD TO MTM GAINS/LOSSES ON OP TION CONTRACTS. FOR THE YEARS WHERE THERE IS MTM GAIN, ASSESSEE HAD DULLY OFFERED THE GAIN TO TAX AND IN YEARS WHERE THERE HAS BEEN MTM LOSSES, ASSESSEE CLAIMED T HE SAME AS DEDUCTION. THE DETAILS SUBMITTED BY THE ASSESSEE ARE AS UNDER: - SL. NO. A.Y. MTM GAIN/ (LOSS) ON OPTION APPELLANTS TREATMENT OF MTM GAIN/MTM LOSS ON OPTION CONTRACTS DEPARTMENTS TREATMENT OF MTM GAIN/MTM LOSS ON OPTION CONTRACTS 1. 2008-09 (5,500,000) CLAIMED AS A DEDUCTION NO ADJUSTMENT MADE 2. 2009-10 (97,231,040) CLAIMED AS A DEDUCTION DISALLOWED 3. 2010-11 92,875,309 OFFERED TO TAX NO ADJUSTMENT FOR THE SAID GAIN HAS BEEN MADE. HOWEVER, FOREX LOSSES PERTAINING TO DEBTORS/ CREDITORS WERE ALLEGED TO BE MTM LOSSES AND IT(TP)A NOS.373 & 374/BANG/2015 PAGE 9 OF 27 ACCORDINGLY DISALLOWED. 4. 2011-12 954,666 OFFERED TO TAX. NO ADJUSTMENT MADE. 16.4 IT WAS SUBMITTED THAT DEPARTMENT HAS ACCEPTED THE GAINS IN THE YEARS ASSESSEE HAD POSITIVE INCOME AND NOW THE DEPARTMENT OUGHT NOT TO HAVE CHANGED THE TREATMENT ON THE BASIS OF CONSISTENCY. RELIANCE WAS PLACED ON THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF CI T V. WOODWARD GOVERNOR (P) LTD., 179 TAXMAN 326 (SC). IT WAS FURTHER SUBMITTE D THAT THE AO PASSED HIS ORDER ON CBDT INSTRUCTION NO.3/2010 WHICH IS NOT APPLICAB LE TO THE ASSESSEES FACTS OF THE CASE. IT WAS SUBMITTED THAT THE CBDT INSTRUCTI ONS ARE INTERNAL TO THE OFFICERS AND ARE NOT BINDING ON THE ASSESSEE. FOR THIS PROP OSITION, THE LD. COUNSEL RELIED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF MINWOOL ROCK FIBRES LTD., (2012) 3 SCC 518 SC AND CIT V. HERO CYCLES, 2 28 ITR 463 (SC). 16.5 IT WAS FURTHER SUBMITTED THAT ACCOUNTING STAND ARDS ISSUED BY INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) ARE MANDATORY AND THERE IS NO DEVIATION FROM THE SAME. THE LD. COUNSEL REFERRED TO NOTES T O THE ACCOUNTS AND STATEMENTS MADE BY THE AUDITORS TO SUBMIT THAT ASSESSEE HAS NO T HEDGED FOREIGN CURRENCY EXPOSURE TO AN EXTENT OF RS.60 CRORES AS THAT WAS I NCREMENTAL FOREIGN EXCHANGE RECEIVABLES AND THE BALANCE AMOUNT WAS ON THE BASIS OF LAST YEARS TURNOVER. THEREFORE, ASSESSEE HAS ENTERED INTO HEDGING TRANSA CTIONS ONLY TO THE EXTENT OF FOREIGN EXCHANGE RECEIVED IN THE EARLIER YEAR AND E VEN THOUGH THERE CANNOT BE ANY ONE TO ONE MATCH TO THE SALE INVOICES, BUT ANT ICIPATED RECOVERABLES OVER A PERIOD OF TIME, ASSESSEE HEDGED FOREIGN EXCHANGE RI SK BY ENTERING INTO ABOVE CONTRACTS. IT WAS SUBMITTED THAT JUDICIAL PRECEDEN TS AS LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF CIT V. WOODWARD GOVERN OR (P) LTD. (SUPRA) AND ONGC V. DCIT, 322 ITR 180 IN FACT SUPPORT THE ASSES SEES CONTENTIONS THAT THESE TRANSACTIONS ARE NOT CONTINGENT IN NATURE. IT WAS FURTHER SUBMITTED THAT THESE ARE ALSO NOT SPECULATIVE IN NATURE. 16.6 THE LD. DR, HOWEVER, RELIED ON THE ORDER OF AO AND READ OUT THE INSTRUCTION AS ISSUED BY THE BOARD AND ANALYSED THAT TRANSACTIO NS ENTERED INTO BY THE ASSESSEE ARE BOTH SPECULATIVE IN NATURE AND THE LOS SES BOOKED ARE CONTINGENT IN NATURE. 16.7 WE HAVE CONSIDERED THE RIVAL CONTENTIONS. AS STATED BY THE AUDITORS, ASSESSEE HAS ENTERED INTO OPTION CONTRACTS/FORWARD CONTRACTS FOR THE PURPOSE OF HEDGING THE RISK ASSOCIATED WITH FOREIGN EXCHANGE E XPOSURE ONLY TO THE EXTENT OF RECEIPTS IN THE EARLIER YEARS, WHICH IS LESS BY RS .60 CRORES OF TOTAL FOREIGN CURRENCY RECEIVED DURING THE YEAR. THIS INDICATES THAT ASSESSEE HAS ENTERED INTO CONTRACTS ON THE ANTICIPATED RECEIVABLES IN ORDER T O PROTECT THE VARIATIONS IN FLUCTUATION MARKET. THE HONBLE SUPREME COURT IN T HE CASE OF ONGC V. DCIT, 322 ITR 180, HAS CONSIDERED SIMILAR CLAIMS. IN FAC T, IN THAT CASE, ASSESSEE WAS ENGAGED IN CAPITAL INTENSIVE EXPLORATION AND PRODUC TION OF PETROLEUM PRODUCTS FOR WHICH IT HAD TO HEAVILY DEPEND ON FOREIGN LOANS TO COVER UP ITS EXPENSES, BOTH CAPITAL AND REVENUE. IT HAD TAKEN THREE TYPES OF F OREIGN EXCHANGE BORROWINGS: - (I) IN REVENUE ACCOUNT; (II) IN CAPITAL ACCOUNT; AND (I II) FOR GENERAL PURPOSES. AS PER TERMS & CONDITIONS OF THE FOREIGN EXCHANGE BORROWIN GS, SOME OF THE LOANS BECAME REPAYABLE IN THE YEAR UNDER CONSIDERATION, BUT DATE OF PAYMENT OF SOME LOANS FELL AFTER THE END OF THE RELEVANT ACCOUNTING YEAR. THE ASSESSING OFFICER DISALLOWED IT(TP)A NOS.373 & 374/BANG/2015 PAGE 10 OF 27 THE ASSESSEES CLAIM ON BOTH THE COUNTS ON THE GROU ND THAT SUCH A LOSS COULD BE ALLOWED TO THE ASSESSEE ON DISCHARGE OF LIABILITY A T THE TIME OF ACTUAL REPAYMENT OF THOSE LOANS. ON APPEAL, THE CIT(A) AFFIRMED THE VIE W TAKEN BY THE AO ON THE GROUND THAT IT WAS A NOTIONAL LIABILITY AND THE SAM E HAD NOT CRYSTALLIZED OR ACCRUED IN THE RELEVANT ASSESSMENT YEAR. THE HONBLE SUPRE ME COURT, PLACED RELIANCE IN THE CASE OF CIT V. WOODWARD GOVERNOR (P) LTD. (SUPR A) AND HELD THAT LOSS CLAIMED BY THE ASSESSEE ON ACCOUNT OF FLUCTUATION IN RATE O F FOREIGN EXCHANGE AS ON DATE OF BALANCE-SHEET WAS ALLOWABLE AS AN EXPENDITURE UN DER SECTION 37(1). IN THE CASE OF BADRIDAS GAURIDU (P.) LTD. V. CIT, 261 ITR 256 (BOM), THE HONBLE BOMBAY HIGH COURT HELD THAT HEDGING CONTRACTS WERE INCIDENTAL TO ASSESSEES BUSINESS OF EXPORT OF COTTON, AND THEREFORE LOSSES REPRESENTED A BUSINESS LOSS TO THE ASSESSEE. FOLLOWING THE PRINCIPLES LAID DOWN BY THE HONBLE S UPREME COURT IN THE CASE OF ONGC (SUPRA) AND BY THE HONBLE BOMBAY HIGH COURT I N THE CASE OF BADRIDAS GAURIDU (P.) LTD. (SUPRA), WE HOLD THAT THE CLAIM O F ASSESSEE ON FOREIGN EXCHANGE LOSS IS NOT CONTINGENT IN NATURE AND ALSO NOT SPECU LATIVE IN NATURE. AO IS DIRECTED TO ALLOW LOSSES AS BUSINESS LOSSES. IF ANY DEDUCTI ON U/S. 10A / 10AA WAS COMPUTED BY DISALLOWING ANY PART OF THE ABOVE LOSS, THEN THE AO IS DIRECTED TO MAKE NECESSARY MODIFICATION IN THE CLAIMS U/S. 10A / 10AA. GROUND NO.8 IS ACCORDINGLY ALLOWED. RESPECTFULLY FOLLOWING THE DECISION TAKEN IN EARLIE R YEAR, WE DIRECT THE AO TO ALLOW THE LOSS AS CLAIMED. MOREOVER, AS SEEN F ROM THE ORDER OF THE DRP, THE DRP ALSO DIRECTED THE AO TO INCLUDE THE FOREIGN EXCHANGE LOSS OR GAIN AS PART OF OPERATING COST VIDE PARA 4 & 5 WITH REFEREN CE TO FOREIGN EXCHANGE FLUCTUATION GAIN ON RESTATEMENT OF FCCBS. WHEN THE DRP DIRECTED THE AO TO TREAT THE FOREIGN EXCHANGE FLUCTUATION AS AN OPE RATIONAL COST REVENUE/COST VIDE PARA 8.3, WE ARE UNABLE TO UNDERSTAND HOW THE AO CAN TAKE A DECISION NOW TREATING IT AS A SPECULATIVE LOSS, CONTRARY TO THE DIRECTION OF THE DRP. IN VIEW OF THIS, GROUND NOS. 14 & 15 IS ALLOWED. 10.1. COMING TO THE ISSUE IN GROUND NOS. 16 & 17, T HE FACTS ARE THAT ASSESSEE HAS ISSUED FCCBS AMOUNTING TO RS. 780.75 C RORES FOR THE PURPOSE IT(TP)A NOS.373 & 374/BANG/2015 PAGE 11 OF 27 OF ACQUISITION OF SUBEX AMERICA INC, A OVERSEAS SUB SIDIARY. THE INVESTMENT IN SUBEX AMERICAS INC AMOUNTING TORS. 7 74.95 CRORES APPEARS IN SCHEDULE G TO THE FINANCIAL STATEMENTS. ASSES SEE HAS RECOGNIZED UN- REALISED FOREIGN EXCHANGE FLUCTUATION GAIN AMOUNTIN G TO RS. 91.88 CRORES ON RESTATEMENT OF FCCBS AND CREDITED THE SAME TO ITS P &L A/C. HOWEVER, RESTATEMENT GAIN BEING RELATED TO INVESTMENT IN SUB EX AMERICA WAS NOT OFFERED TO TAX IN THE RETURN OF INCOME. AO HAS NO T ALLOWED THE EXCLUSION FROM THE COMPUTATION OF INCOME. THE DRP IT SEEMS ALLOWED THE SAID INCOME TO BE OPERATIONAL INCOME WHILE CONSIDERING T HE TP ADJUSTMENTS. ASSESSEE HAS NOT QUESTIONED THE ABOVE ORDER OF THE DRP IN TP MATTER. HOWEVER, AS FAR AS THE ISSUE WHETHER UN-REALIZED FO REIGN EXCHANGE GAIN ON FCCBS SHOULD BE TREATED AS INCOME OR NOT HAS BEEN CONCLUDED IN FAVOUR OF ASSESSEE BY THE ORDERS OF CO-ORDINATE BENCH IN ITA NO. 689/BANG/2014 DT. 19-06-2015, WHEREIN IT WAS HELD AS UNDER: 37. THE LAST ISSUE THAT ARISES FOR CONSIDERATION IS AS TO WHETHER UNRE ALISED FOREIGN EXCHANGE GAIN SHOULD BE TREATED AS INCOME OR NOT? 38. THE STAND OF THE ASSESSEE IN THIS REGARD WAS TH AT THE GAIN IS ON CAPITAL ACCOUNT AND CANNOT BE REGARDED AS INCOME. THE ASSESSEE ALSO POINTED OUT THAT IN THE SUBSEQUENT YEAR, THERE WAS A LOSS ON ACCOUNT OF RES TATEMENT OF THE ASSESSEES LIABILITY ON ACCOUNT OF ADVERSE FLUCTUATION OF FORE IGN EXCHANGE AND CONSEQUENT LIABILITY ON ACCOUNT OF FCCBS AND IN THAT YEAR THE ASSESSEE D ID NOT CLAIM THE LOSS AS IT WAS ON CAPITAL ACCOUNT. THE ASSESSEE HAS THEREFORE BEEN CO NSISTENT AND NOT INCONSISTENT AS HAS BEEN OBSERVED BY THE CIT IN THE IMPUGNED ORDER U/S.263 OF THE ACT. THE LEARNED COUNSEL FOR THE ASSESSEE HAS BEFORE US PLACED RELIA NCE ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNORS 312 ITR 254 AND THE DECISION OF THE DECISION OF THE HONBLE MADRAS HIGH COURT IN TH E CASE OF CIT VS. PVP VENTURES LTD. (2012) 23 TAXMANN.COM 286 (MAD.) . 39. THE FACTUAL POSITION THAT THE EXCHANGE FLUCTUAT ION IS OWING TO RESTATEMENT OF FCCBS IS NOT DISPUTED. THE ADMITTED POSITION IS THA T FCCBS WERE ISSUED FOR PURPOSE IT(TP)A NOS.373 & 374/BANG/2015 PAGE 12 OF 27 OF ACQUISITION OF A NEW INDUSTRIAL UNDERTAKING AND WAS THEREFORE ON CAPITAL ACCOUNT. THE HONBLE SUPREME COURT IN THE CASE OF WOODWARD G OVERNOR (SUPRA) LAID DOWN THE PRINCIPLES IN THIS REGARD. THE HONBLE COURT IN PAR A-4 OF ITS JUDGMENT OBSERVED AS FOLLOWS:- AT THE OUTSET, FOR THE SAKE OF CONVENIENCE, WE MAY STATE THAT IN THIS BATCH OF CIVIL APPEALS BROADLY WE HAVE BEFORE US TWO CATEGORIES. I N THE FIRST CATEGORY, WE ARE CONCERNED WITH EXCHANGE DIFFERENCES ARISING IN FORE IGN CURRENCY TRANSACTION ON REVENUE ITEMS. IN SUCH CATEGORY, WE ARE CONCERNED W ITH THE ASSESSEE(S) INCURRING LOSS ON REVENUE ACCOUNT. IN THAT CATEGORY, WE ARE C ONCERNED WITH THE PROVISIONS OF SS. 28, 29, 37(1) AND 145 OF THE IT ACT, 1961 (' 1961 ACT'). IN THE SECOND CATEGORY OF CASES, WE ARE CONCERNED WITH EXCHANGE D IFFERENCES ARISING ON REPAYMENT OF LIABILITIES INCURRED FOR THE PURPOSE O F ACQUIRING FIXED ASSETS. IN OTHER WORDS, IN THE SECOND CATEGORY OF CASES, WE ARE CONC ERNED WITH THE ASSESSEE(S) INCURRING LIABILITIES ON CAPITAL ACCOUNT. IN SUCH C ASES, WE ARE REQUIRED TO CONSIDER THE PROVISIONS OF S. 43(1), 43A (BOTH, BEFORE AND A FTER AMENDMENT VIDE FINANCE ACT, 2002). THEREAFTER IN PARA 22 OF ITS JUDGMENT IT DEALT WITH CASES WHERE THE FLUCTUATION IS ON ACCOUNT OF CAPITAL ITEMS AS FOLLOWS:- FACTS IN M/S HONDA SIEL POWER PRODUCTS LTD. (CIVIL APPEAL ARISING OUT OF SLP(C) NO. 7632/08) CA PITAL ACCOUNT CASE : 22. THE MAIN ISSUE WHICH ARISES FOR DETERMINATION I N THIS BATCH OF CIVIL APPEALS IS : WHETHER THE ASSESSEE WAS ENTITLED TO ADJUST THE ACT UAL COST OF IMPORTED ASSETS ACQUIRED IN FOREIGN CURRENCY ON ACCOUNT OF FLUCTUAT ION IN THE RATE OF EXCHANGE AT EACH BALANCE SHEET DATE PENDING ACTUAL PAYMENT OF T HE VARIED LIABILITY. IN THIS BATCH OF CIVIL APPEALS, WE ARE CONCERNED WITH INCRE ASE IN THE EXISTING LIABILITY ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATIONS ON 'CAPITA L ACCOUNT'. 40. AFTER CONSIDERING THE PROVISIONS OF SEC.43A OF THE ACT, THE HONBLE SUPREME COURT HELD THAT SEC. 43A(1) APPLIES WHERE AS A RESULT OF CHANGE IN RATE OF EXCHANGE THERE IS AN INCREASE OR REDUCTION IN THE LIABILITY OF THE AS SESSEE IN TERMS OF INDIAN RUPEES TO PAY THE PRICE OF ANY ASSET PAYABLE IN FOREIGN EXCHA NGE OR TO REPAY MONEYS BORROWED IN FOREIGN CURRENCY SPECIFICALLY FOR THE PURPOSE OF ACQUIRING THE ASSET. 43A(1) HAS NO APPLICATION UNLESS THE ASSET IS ACQUIRED AND THE LI ABILITY EXISTED, BEFORE THE CHANGE IN THE RATE OF EXCHANGE TAKES EFFECT. INCREASE OR DECR EASE IN LIABILITY FOR REPAYMENT OF FOREIGN LOAN SHOULD BE TAKEN INTO ACCOUNT TO MODIFY THE FIGURE OF ACTUAL COST IN THE YEAR IN WHICH THE INCREASE OR DECREASE IN LIABILITY ARIS ES ON ACCOUNT OF FLUCTUATION IN THE RATE OF EXCHANGE, IRRESPECTIVE OF THE DATE OF ACTUAL PAY MENT IN FOREIGN CURRENCY. 41. IN THE CASE OF PVP VENTURES LTD. (SUPRA) , THE FACTS WERE THAT THE ASSESSEE GAINED FROM EXCHANGE FLUCTUATION. THE FLUCTUATION W AS ON FOREIGN EXCHANGE RECEIVED PURSUANT TO ISSUE OF SHARES IN THE FORM OF GDS. THE ASSESSEE KEPT A PART OF THE MONEY ABROAD. WHEN THE MONEY WAS BROUGHT TO INDIA, DUE TO STRONG DOLLAR POSITION, THE ASSESSEE GAINED ON THE REPATRIATED AMOUNT. THIS WAS CLAIMED AS A CAPITAL RECEIPT. THE AMOUNT HAD DIRECT NEXUS WITH THE CAPITAL RAISED AND CONSEQUENTLY THE ASSESSEE IT(TP)A NOS.373 & 374/BANG/2015 PAGE 13 OF 27 CONTENDED THE SAME WAS A CAPITAL RECEIPT. THE COMMI SSIONER OF INCOME TAX POINTED OUT THAT THERE WAS NO DISPUTE WITH REGARD TO THE FA CT THAT THE EXCHANGE FLUCTUATION INCOME RELATED TO THE DEPOSIT OF MONEY RAISED BY TH E ASSESSEE FROM THE GDS ISSUE. POINTING OUT THE PRINTED PROSPECTUS TO THE ISSUE OF GDS, THE COMMISSIONER VIEWED THAT THE AGGREGATE NET PROCEEDS RECEIVED WERE USED PRINCIPALLY TO FUND THE ESTABLISHMENT OF OFFSHORE SOFTWARE DEVELOPMENT AND THE BALANCE WAS USED FOR WORKING CAPITAL AND FOR OTHER GENERAL CORPORATE PUR POSES. THE COMMISSIONER VIEWED THAT THE ASSESSEE HAD KEPT FDS OF THE GDS PROCEEDS ON ITS OWN AND NOT BECAUSE OF ANY COMPULSION. CONSEQUENTLY, THE AMOUNT RECEIVE D ON ACCOUNT OF EXCHANGE FLUCTUATION TO THE TUNE OF RS.16,35,77,977/- WAS TO BE TREATED AS REVENUE RECEIPT AND THE ASSESSING OFFICER ERRED IN REDUCING IT IN THE I NCOME OF THE ASSESSEE WHILE COMPUTING THE DEDUCTION UNDER SECTION 80HHE. THE HO NBLE MADRAS HIGH COURT HELD THAT THE CLAIM OF THE REVENUE WAS UNSUSTAINABLE. TH E HONBLE COURT HELD THAT SINCE THE AMOUNT HAD DIRECT NEXUS WITH THE CAPITAL RAISED, TH E ASSESSEES CLAIM THAT THE SAME WAS CAPITAL RECEIPT AND HENCE NOT TAXABLE WAS CORRE CT. 42. IN OUR VIEW THE FACTS OF THE CASE IN THE DECISI ON OF THE MADRAS HIGH COURT IN THE CASE OF PVP VENTURES LTD. (SUPRA) , IS IDENTICAL TO THE FACTS OF THE CASE OF THE ASSESSEE IN THIS APPEAL. FCCBS ARE INSTRUMENTS ISSU ED TO INVESTORS FOR RAISING FUNDS WHICH IS REPAYABLE AFTER CERTAIN PERIOD. IT IS A DE BT INSTRUMENT. THE INCREASE OR DECREASE IN LIABILITY ON ACCOUNT OF FLUCTUATION IN FOREIGN EXCHANGE AS ON THE DATE OF THE BALANCE SHEET WOULD INCREASE OR DECREASE THE LIABIL ITY OF THE ASSESSEE AND SUCH LIABILITY WOULD BE ON CAPITAL ACCOUNT. THEREFORE TH E GAIN OR LOSS WOULD BE ON CAPITAL ACCOUNT AND NOT TAXABLE. WE ACCORDINGLY HOLD IN FAV OUR OF THE ASSESSEE ON THIS ISSUE. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE AO T O TREAT THE ABOVE AMOUNT AS ON CAPITAL ACCOUT, TO BE ADJUSTED IN CAPITAL AC COUNTS. HOWEVER, IF ANY BENEFIT WAS OBTAINED BY ASSESSEE IN THE TP PROVISIO NS BY TREATING THIS AMOUNT AS OPERATIONAL INCOME, WE DIRECT THE AO/TPO TO EXAMINE THE WORKING AGAIN, SO AS TO EXCLUDE THE AMOUNT FROM THE COMPUTATION AND IF ANY ADJUSTMENT IS REQUIRED. ASSESSEE CANNOT TAKE ADVAN TAGE OF ITS OWN STAND TO THE DETRIMENT OF REVENUE IN TP PROVISIONS. THERE S HOULD BE A CONSTANT APPROACH. TREATMENT OF THIS GAIN AS OPERATIONAL IN COME DOES NOT ARISE AS THE SAME WAS NOT TREATED AS INCOME, THEREFORE ANY COMPU TATION BASED ON THAT HAS TO BE REEXAMINED. THIS ISSUE CAN BE CONSIDERED BY THE TPO AFRESH AND IF IT(TP)A NOS.373 & 374/BANG/2015 PAGE 14 OF 27 NECESSARY, NECESSARY PROCEEDINGS CAN BE INITIATED U NDER THE TP PROVISIONS AS A DIRECTION BY THE BENCH. WITH THESE DIRECTIONS, T HESE GROUNDS ARE ALLOWED. 10.2. THE LAST OF THE ISSUE IS WITH REFERENCE TO RE ALISED FOREIGN EXCHANGE FLUCTUATION OF RS. 3,36,176/- PERTAINING TO ASSETS AS BUSINESS INCOME. THIS GAIN ALSO IS DIRECTLY PERTAIN TO LOANS ON CAPITAL ASSETS AND ASSESSEE HAS ADJUSTED THE COST OF ASSETS IN ACCORDANCE WITH THE PROVISIONS OF SECTION 43A AND ACCORDINGLY STATES THAT DEPRECIATION WAS CLAIME D ON REDUCED COST. THE AO HOWEVER, WITHOUT GIVING ANY COGENT REASONS HAS D ENIED THE REDUCTION FROM THE COMPUTATION OF INCOME. 11. THESE ISSUES ARE COVERED IN FAVOUR OF ASSESSEE BY VARIOUS PRINCIPLES ESTABLISHED ON THE ISSUE AND ALSO SIMILAR TO THE IS SUE CONSIDERED IN GROUND NOS. 16 AND 17 ABOVE. AO IS DIRECTED TO ALLOW THE CLAIM FROM THE COMPUTATION OF INCOME TO ADJUST THE SAME FROM THE C OST OF ASSETS IN ACCORDANCE WITH THE PROVISIONS OF SECTION 43A. THE SE GROUNDS ARE ALSO TREATED AS ALLOWED. IN THE RESULT, GROUND NOS. 14 TO 19 ARE ALLOWED. 12. GROUND NOS. 20 TO 22 PERTAIN TO DISALLOWANCE OF DEPRECIATION ON COMPUTER SOFTWARE AMOUNTING TO RS. 36,35,280/- ON A CCOUNT OF NON- DEDUCTION OF TAX AT SOURCE. THE AO NOTICED THAT AS SESSEE HAS PURCHASED SOFTWARE AMOUNTING TO RS. 60,58,801/- (INCLUDING RS . 16,55,390/- PAID TO NON-RESIDENTS WHICH WAS CAPITALIZED FOR TAX PURPOSE S AND DEPRECIATION @ IT(TP)A NOS.373 & 374/BANG/2015 PAGE 15 OF 27 60% AND THEREON). THE AO DISALLOWED THE DEPRECIATI ON CLAIMED TO AN EXTENT OF RS. 36,35,280/- ON THE REASON THAT ENTIRE AMOUNT OF SOFTWARE PURCHASE WAS TO BE DISALLOWED U/S. 40(A)(IA) ON ACCOUNT OF NON-D EDUCTION OF TAX AT SOURCE ON THE SAID SOFTWARE PURCHASES. DRP HOWEVER, APPRO VED THE STAND OF THE AO. 13. WHILE SUBMITTING THAT PURCHASES OF SOFTWARE PUR CHASES WHICH ARE CAPITALISED DOES NOT COME WITHIN THE PURVIEW OF SEC TION 40(A)(IA), IT WAS FURTHER SUBMITTED THAT ASSESSEE HAS NOT DEDUCTED TA X ONLY ON SOFTWARE PURCHASES AMOUNTING TO RS. 35,86,893/-. THE DETAIL S OF WHICH WERE PROVIDED ON RECORD. IT WAS SUBMITTED THAT DISALLOW ANCE CLAIMED U/S. 32 CANNOT BE DISALLOWED INVOKING THE PROVISIONS OF SEC TION 40(A)(IA). ASSESSEE RELIED ON THE FOLLOWING CASE LAW: A. ITO (INTERNATIONAL TAXATION), WARD 1(2), BANGAL ORE V. M/S. KAWASAKI MICRO ELECTRONICS INC. [CROSS OBJECTION NO . 18/BANG/2015 IN I.T. (IT) A. NO. 1221/BANG/2014 (BANGALORE TRIBU NAL)]; B. SMS DEMAG (P) LTD. V. DCIT [(2010) 132 TTJ 498 ( DELHI TRIBUNAL)]; C. CIT V. MARK AUTO INDUSTRIES LIMITED [ITA NO. 57 OF 2009 UNREPORTED (PUNJAB AND HARYANA HIGH COURT]; AND IT(TP)A NOS.373 & 374/BANG/2015 PAGE 16 OF 27 D. SKOL BREWERIES LTD. V. ACIT [(2013) 29 TAXMANN.C OM 111 (MUMBAI TRIBUNAL)], ETC. 13.1. ANOTHER CONTENTION RAISED IS THAT THE AO WRON GLY CALCULATED THE DEPRECIATION @ 60% CONSIDERING THE ASSETS TO BE USE D FOR MORE THAN 180 DAYS. IT WAS SUBMITTED THAT AN AMOUNT OF RS. 1,23, 240/- WAS PERTAINING TO PURCHASES OF LESS THAN 180 DAYS ON WHICH, THEE WAS EXCESS DISALLOWANCE OF RS. 36,972/-. 14. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND EX AMINED THE PROVISIONS OF SECTION 40(A)(IA). AS PER THE PROVIS IONS OF SECTION 40(A)(IA), WHAT THE AO CAN DISALLOW INVOKING THE SAID PROVISIO N IS ONLY WITH REFERENCE TO INTEREST, COMMISSION/BROKERAGE, RENT, ROYALTY, F EES FOR PROFESSIONAL SERVICES OR FEES FOR TECHNICAL SERVICES OR AMOUNTS PAYABLE TO A CONTRACTOR OR SUB-CONTRACTOR. IT IS NOT KNOWN HOW THE AO CAN TRE AT THE SOFTWARE PURCHASES AS PART OF THE ABOVE AMOUNTS. IN FACT THE DEFINITI ON OF ROYALTY AS PROVIDED IN EXPLANATION-VI TO THE ABOVE SUB-SECTION ALSO DOE S NOT COVER THE SOFTWARE PURCHASES AS HELD BY THE CO-ORDINATE BENCH IN THE C ASE OF SONATA INFORMATION TECHNOLOGY LTD., VS. DCIT [25 TAXMANN.C OM 125 (MUMBAI)]. NOT ONLY THAT, IF ASSESSEE CLAIMS DEPRECIATION ON A PARTICULAR ITEM, THE CLAIM OF DEPRECIATION IS ALLOWABLE U/S. 32. THERE IS NO ADJUSTMENT TO BE MADE U/S. 43(6) TOWARDS THE COST OF ASSETS WHICH ARE CAPITALI SED, IN CASE OF FAILURE TO DEDUCT TAX. THE PROVISIONS OF SECTION 40(A)(IA), T HEREFORE CANNOT BE IT(TP)A NOS.373 & 374/BANG/2015 PAGE 17 OF 27 EXTENDED TO THE DISALLOWANCE OF DEPRECIATION WHICH IS ALLOWABLE U/S. 32. IN CASE ANY DEFAULT IS THERE FOR NON-DEDUCTION OF TAX, AO COULD HAVE INVOKED THE PROVISIONS OF SECTION 201/201(1A), BUT CANNOT RESORT TO DISALLOWANCE OF DEPRECIATION U/S. 40(A)(IA) ON AN ASSET WHICH WAS C APITALISED IN THE BOOKS OF ACCOUNT AND DEPRECIATION WAS CLAIMED. THE ACTION O F THE AO CANNOT BE UPHELD. ACCORDINGLY, HE IS DIRECTED TO ALLOW DEPRE CIATION AS CLAIMED BY ASSESSEE IN ITS COMPUTATION. THE ALTERNATE CONTENT ION OF EXCESS DISALLOWANCE BECOMES ACADEMIC. THE DISALLOWANCE SO MADE BY THE A O IS DELETED. 15. GROUND NO. 23 TO 26 PERTAIN TO ISSUE OF ADJUSTM ENTS MADE TO THE EXPORT TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCT ION U/S. 10AA OF THE ACT. THE AO HAS REDUCED THE FOLLOWING ITEMS FROM T HE EXPORT TURNOVER FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S. 10AA O F THE ACT. A. COMMUNICATION COSTS INCURRED AMOUNTING TO RS. 1, 46,71,497/-; B. INSURANCE EXPENSE INCURRED AMOUNTING TO RS. 1,1 6,30,388/-; C. TRAVELLING EXPENSES INCURRED IN FOREIGN CURRENCY AMOUNTING TO RS. 5,04,12,543/- AND D. PRODUCT MARKETING EXPENSES INCURRED IN FOREIGN C URRENCY AMOUNTING TO RS. 1,91,54,500/-; IT(TP)A NOS.373 & 374/BANG/2015 PAGE 18 OF 27 15.1. IT WAS SUBMITTED THAT : A. OF THE TOTAL COMMUNICATION COST OF RS. 1,46,71,497/ - ONLY RS. 15,76,290/- WAS INCURRED TOWARDS INTERNET CHARGES W HICH IS USED FOR INWARD AND OUTWARD TRANSMISSION OF DATA, AS WELL AS FOR TRANSMISSION OF DATA WITHIN THE TERRITORIES OF INDIA; B. THE AFORESAID COMMUNICATION COSTS WERE NOT ATTRIBUT ABLE TO DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA AND HEN CE NO ADJUSTMENT WAS WARRANTED TO THE EXPORT TURNOVER; C. NO EXPENDITURE WAS INCURRED IN FOREIGN CURRENCY FOR RENDERING ANY TECHNICAL SERVICES OUTSIDE INDIA AND HENCE NO R EDUCTION OF FOREIGN CURRENCY EXPENDITURE WAS WARRANTED FROM THE EXPORT TURNOVER; AND D. THE EXPORT INVOICES OF THE APPELLANT DO NOT INCLUDE ANY EXPENSE TOWARDS COMMUNICATION COSTS, INSURANCE OR E XPENSES INCURRED IN FOREIGN CURRENCY AND HENCE, THE SAID EX PENSES OUGHT NOT TO BE REDUCED FROM THE EXPORT TURNOVER. 15.2. IT WAS BROUGHT TO THE NOTICE OF THE AO THAT, THE AFORESAID EXPENSES RELATE TO BOTH THE SEZ UNITS AND NOT SEZ UNIT 2 AL ONE AND ALSO FOR REASONS STATED ABOVE, NONE OF THE AFORESAID EXPENSES WERE R EQUIRED TO BE REDUCED FROM THE EXPORT TURNOVER. AO, HOWEVER, PROCEEDE D TO REDUCE ALL THE IT(TP)A NOS.373 & 374/BANG/2015 PAGE 19 OF 27 AFORESAID EXPENSES FROM THE EXPORT TURNOVER OF SE Z UNIT 2 FOR THE PURPOSE OF COMPUTING DEDUCTION UNDER SECTION 10AA OF THE AC T. 16. WE HAVE CONSIDERED THIS ISSUE ALSO IN THE APPEA L FOR AY. 2009-10 IN IT(TP)A NO. 223/BANG/2014 AND DECIDED AS UNDER: 18.4 WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE ARGUMENTS PLACED ON RECORD. AS FAR AS DEFINITION OF EXPORT T URNOVER AS PROVIDED IN EXPLANATION 1 TO SECTION 10AA IS CONCERNED, THE SAM E IS SLIGHTLY DIFFERENT FROM EXPLANATION 2 TO SECTION 10A WHICH WAS ALREADY CONS IDERED IN VARIOUS CASES EARLIER. IN FACT, DECISION OF PATNI TELECOM (P.) LT D. (SUPRA) AND WILLIS PROCESSING SERVICES (SUPRA) ARE GIVEN IN THE CONTEXT OF SECTIO N 10A. EXPLANATION 1 TO SECTION 10AA IS AS UNDER:- EXPLANATION 1 : FOR THE PURPOSES OF THIS SECTION, (I) 'EXPORT TURNOVER' MEANS THE CONSIDERATION IN RE SPECT OF EXPORT BY THE UNDERTAKING, BEING THE UNIT OF ARTICLES OR THINGS O R SERVICES RECEIVED IN, OR BROUGHT INTO, INDIA BY THE ASSESSEE BUT DOES NOT IN CLUDE FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES OR THINGS OUTSIDE INDIA OR EXPENSES, IF AN Y, INCURRED IN FOREIGN EXCHANGE IN RENDERING OF SERVICES (INCLUDING COMPUT ER SOFTWARE) OUTSIDE INDIA; (II) . 18.5 EVEN THOUGH THE MAJOR PART OF THE DEFINITION I S SIMILAR TO EXPLANATION 2 TO SECTION 10A, THE DIFFERENCE IS WITH REFERENCE TO US AGE OF WORDS EXPENSES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN PROVIDING TECHNICAL SERVICES OUTSIDE INDIA. THIS SENTENCE IS NOT EXACTLY PROVIDED IN EXPLANATION 1 T O SECTION 10AA. THEREFORE, THERE IS A VARIATION IN THE SENSE THAT SECTION PROV IDES EXPENSES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN RENDERING OF SERVICES (INCLUDIN G COMPUTER SOFTWARE) OUTSIDE INDIA. THUS, THERE IS NO NEED FOR RENDERING TECHN ICAL SERVICES, BUT RENDERING OF ANY SERVICES INCLUDING COMPUTER SOFTWARE OUTSIDE IN DIA IS COVERED AS PART OF DEFINITION OF EXPORT TURNOVER. THUS, ANY EXPENDITU RE ON FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO DELIVERY OF AR TICLES OR THINGS OUTSIDE INDIA OR EXPENSES, IF ANY, INCURRED IN RENDERING OF SERVICES OUTSIDE INDIA, ARE TO BE EXCLUDED. THE ABOVE PROVISIONS POSTULATES THAT FRE IGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE WHICH HAS WIDER MEANING THAN INCURRED IN RENDERING SERVICES. THE WORD ATTRIBUTABLE WAS AN ALYSED IN ASSESSEES OWN CASE IN ITA NOS.673, 674, 676 AND 677/BANG/2010 FOR THE AYS 2002-03 AND 2005-06 AS UNDER:- IT(TP)A NOS.373 & 374/BANG/2015 PAGE 20 OF 27 11. HAVING HEARD BOTH THE PARTIES AND HAVING CONSI DERED THE RIVAL CONTENTIONS, WE FIND THAT CLAUSE (IV) OF EXPLANATIO N 2 TO SECTION 10A HAS DEFINED EXPORT TURNOVER AND HAS CLEARLY BEEN PROV IDED THAT EXPORT TURNOVER DOES NOT INCLUDE FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA OR EXPENSES INCURRED IN FOREIGN EXCHANGE IN P ROVIDING TECHNICAL SERVICES OUTSIDE INDIA. THUS FROM THE DEFINITION IT IS CLEAR THAT TELECOMMUNICATION CHARGES AND INSURANCE ARE NOT TO BE DIRECTLY INCURRED FOR THE PURPOSE OF DELIVERY OF ARTICLES OR THINGS OR CO MPUTER SOFTWARE OUTSIDE INDIA BUT IT IS SUFFICIENT IF THE SAME IS ATTRIBUTA BLE TO THE SAID PURPOSE. THE ASSESSEES BUSINESS BEING DEVELOPMENT AND EXPORT OF COMPUTER SOFTWARE, ALL THE EXPENDITURE INCURRED BY IT IS ATTRIBUTABLE TO T HE DELIVERY OF ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA. IF THE L EGISLATURE HAS INTENDED THAT THE SAID CHARGES SHOULD BE DIRECTLY INCURRED F OR THE PURPOSE OF DELIVERY OF ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA, THEN THE LEGISLATURE WOULD NOT HAVE USED THE WORD ATTRIBUTABLE BUT WOU LD HAVE USED THE WORD INCURRED FOR THE DELIVERY OF ARTICLES OR THINGS A S HAS BEEN DONE IN THE SECOND PART OF THE SAID DEFINITION WITH REGARD TO THE EXPE NDITURE INCURRED IN FOREIGN EXCHANGE IN PROVIDING TECHNICAL SERVICES OUTSIDE IN DIA. IN VIEW OF THE SAME, WE ARE OF THE OPINION THAT THE TELECOMMUNICATION CH ARGES AND INSURANCE CHARGES ARE INDIRECTLY INCLUDED IN THE EXPORT TURNO VER OF THE ASSESSEE AND THEREFORE IT HAS TO BE NECESSARILY REDUCED FROM THE EXPORT TURNOVER FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S 10A OF THE ACT. 18.6 THEREFORE, THE EXPENSES WHICH ARE ATTRIBUTABLE TO DELIVERY OF ARTICLES OR THINGS OUTSIDE INDIA ARE TO BE EXCLUDED FROM THE EX PORT TURNOVER. HOWEVER, THE AO HAS EXCLUDED TRAVELING, PRODUCT MARKETING EXPENS ES AND MARKETING & ALLIED SERVICES, WITHOUT GIVING ANY FINDING WHETHER THESE EXPENSES CAN BE CATEGORIZED UNDER FREIGHT, TELECOMMUNICATION OR INSURANCE. AS SEEN FROM THE NATURE OF EXPENDITURE, THEY ARE NOT ATTRIBUTABLE TO THE ABOVE THREE ITEMS. 18.7 THAT LEAVES US WITH THE SECOND PART OF THE EXP ENSES, I.E., EXPENSES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN RENDERING OF SERVIC ES OUTSIDE INDIA. THESE EXPENDITURES ARE NOT IN THE NATURE OF ATTRIBUTABLE TO DELIVERY OF ARTICLES. THE WORDS EXPENSES IF ANY, INCURRED IN CONTRAST TO ATTRIBUTAB LE USED EARLIER DO INDICATE THAT THE EXPENDITURE MUST BE DIRECT EXPENDITURE FOR REND ERING SERVICES. FURTHER USE OF IF ANY QUALIFY THE INCURRED USED IN THE PROVISION. TH E INTENTION OF LEGISLATURE IS VERY CLEAR THAT THESE ARE TO BE DIRECT EXPENSES IN RENDE RING OF SERVICES. THE EXPENDITURES CONSIDERED BY AO MAY BE RELATABLE TO A SSESSEES BUSINESS, BUT WHAT THE PROVISION SPECIFIES IS TO EXCLUDE EXPENS ES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN RENDERING OF SERVICES. EVEN THOUGH SER VICES NEED NOT BE TECHNICAL SERVICES, BUT THERE SHOULD BE A DIRECT NEXUS WITH R EFERENCE TO RENDERING OF SERVICES OUTSIDE INDIA. THERE IS NO SUCH FINDING B Y THE AO WHILE DISALLOWING THESE EXPENDITURE FROM THE EXPORT TURN OVER. AS ALREADY STATED, THE THREE HEADS UNDER WHICH EXPENDITURE WAS INCURRED ARE NOT ATTRIBUTABLE TO DELIVERY OF ARTICLES OR THINGS, AS THEY ARE NOT IN THE NATURE OF FREIGHT, TELECOMMU NICATION CHARGES OR INSURANCE. SINCE THE AO HAS NOT GIVEN ANY FINDING THAT THESE A RE DIRECT EXPENDITURE FOR RENDERING SERVICES OUTSIDE INDIA, WE ARE NOT IN A P OSITION TO UPHOLD SUCH EXCLUSION IT(TP)A NOS.373 & 374/BANG/2015 PAGE 21 OF 27 FROM THE EXPORT TURNOVER. MORE OVER, AS FAR AS TRA VELING EXPENDITURE IS CONCERNED, THE ITAT IN ITA NO.1430/BANG/2010 VIDE ORDER DATED 13.11.203 FOR AY 2006-07 HAS HELD THAT FOREIGN TRAVELING EXPENSES CANNOT BE REDUCED FROM EXPORT TURNOVER. IN VIEW OF THIS, WE ARE OF THE OPINION THAT THE EXP ENDITURES OF THE ABOVE NATURE DISALLOWED BY THE AO CANNOT BE EXCLUDED AS PER DEFI NITION OF EXPORT TURNOVER PROVIDED IN EXPLANATION 1 TO SECTION 10AA OF THE AC T. 18.8 EVEN THOUGH THE DRP HAS CONSIDERED THE ALTERNA TE CONTENTION THAT THIS EXPENDITURE HAS TO BE REDUCED FROM TOTAL TURNOVER AND IN THE CONSEQUENTIAL ORDER PASSED AO THESE WERE EXCLUDED FROM EXPORT TURNOVER AND TOTAL TURNOVER, THE ASSESSEE HAD IN FACT BECAME ELIGIBLE FOR 100% DEDUC TION U/S. 10AA PROFIT AS QUANTIFIED BY THE AO. WE FIND THAT THE ABOVE DISCU SSION IS PURELY OF ACADEMIC NATURE, AS PRACTICALLY THERE IS NO GRIEVANCE OF THE ASSESSEE, SINCE DEDUCTION WAS ALLOWED AT 100% ON THE ALTERNATIVE GROUND ACCEPTED BY THE DRP. SINCE THE ASSESSEE HAS CONTESTED THE ISSUE IN THE GROUNDS AND SINCE WE FIND THAT THESE EXPENDITURES ARE NOT RELATED TO THE EXPENDITURE OF THE NATURE AS SPECIFIED IN EXPLANATION 1, WE ADJUDICATED THIS CONTENTION ON ME RITS. THE GROUNDS ARE CONSIDERED AS ALLOWED. RESPECTFULLY FOLLOWING THE ABOVE, WE DIRECT THE TPO TO EXCLUDE THE AMOUNTS WHICH ARE CONSIDERED FOR DISALLOWANCE, OTHER THAN T HOSE EXPENSES PERTAINING TO FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF ARTICLES OR THINGS OUTSIDE INDIA OR DIR ECTLY RELATABLE TO SERVICE OUT- SIDE INDIA. GROUNDS ARE CONSIDERED ALLOWED ACCORDI NGLY. 17. GROUND NO. 27 PERTAINS TO THE ISSUE OF NON-GRAN T OF FOREIGN TAX CREDIT TO THE EXTENT OF RS. 1,18,35,826/-. IT WAS CLAIMED THAT ASSESSEE PAID TAXES IN FOREIGN JURISDICTIONS BY WAY OF TAXES WITH HELD BY THE CUSTOMERS IN OVERSEAS JURISDICTIONS AND IS THEREFORE ELIGIBLE TO CLAIM FTC AMOUNTING TO RS. 1,18,35,826/-. SINCE THE TAXABLE INCOME AS PER THE RETURN OF INCOME WAS NIL, ASSESSEE DID NOT CLAIM THE FTC IN ITS RETURN O F INCOME. WHILE MAKING THE VARIOUS DISALLOWANCES, AO WAS INFORMED ABOUT TH E DETAILS OF FTC BUT IT(TP)A NOS.373 & 374/BANG/2015 PAGE 22 OF 27 AO DID NOT CONSIDER THE SAME. IT WAS THE SUBMISSIO N THAT AO SHOULD EXAMINE THE FTC ENTITLEMENT IN CASE, THERE IS ANY T AXABLE INCOME WHILE GIVING EFFECT TO THE ORDER OF THE ITAT. AFTER CONS IDERING THE RIVAL CONTENTIONS, WE AGREE WITH ASSESSEES CONTENTIONS. IN CASE, ASSESSEES CLAIM OF TOTAL INCOME BEING NIL WAS NOT ACCEPTED BY THE A O AND ANY DISALLOWANCES OR ADJUSTMENTS ARE MADE, THEN, ASSESS EES CLAIM FOR FTC ALSO SHOULD BE EXAMINED, BEFORE RAISING ANY TAX DEMAND O N ASSESSEE. 17.1. WITH THESE DIRECTIONS, THE GROUND IS CONSIDER ED ALLOWED FOR STATISTICAL PURPOSES. IN THE RESULT, ASSESSEES APPEAL IS AL LOWED FOR STATISTICAL PURPOSES. REVENUES APPEAL IN IT(TP)A NO. 374/BANG/2015: 18. AGGRIEVED ON THE DIRECTIONS OF THE DRP, AO HAS COME IN APPEAL ON FOUR ISSUES. 18.1. THE FIRST ISSUE CONTESTED IN GROUND NO. 2 IS WITH REFERENCE TO DISALLOWANCE OF YEAR END PROFESSIONAL CHARGES AMOUN TING TO RS. 43,52,820/- ON ACCOUNT OF NON-DEDUCTION OF TAX AT SOURCE. AO N OTICED THAT ASSESSEE HAS CREDITED THE AMOUNT AS A PROVISION TOWARDS PROFESSI ONAL CHARGES AND SINCE TDS WAS NOT DEDUCTED ON THESE AMOUNTS, HE DISALLOWE D THE AMOUNT INVOKING THE PROVISIONS OF SECTION 40(A)(IA). BEFORE THE DR P, IT WAS CONTENDED THAT YEAR END PROFESSIONAL CHARGES HAVE NOT BEEN CREDITE D TO ANY PARTICULAR IT(TP)A NOS.373 & 374/BANG/2015 PAGE 23 OF 27 ACCOUNT AND THEREFORE, TDS NEED NOT BE MADE. FURTH ER, IT WAS SUBMITTED THAT WITHOUT PREJUDICE TO THE GENERALITY OF THE ABOVE, T HE SAME AMOUNT IF DISALLOWED WOULD BE ELIGIBLE FOR DEDUCTION OF SECTI ON 10AA OF THE ACT. THE DRP HOWEVER, ACCEPTED ASSESSEES CONTENTIONS AND DI RECTED THE AO NOT TO MAKE THE DISALLOWANCE BY STATING AS UNDER: 9.1 THE GROUND OF OBJECTION ALONG WITH ALL THE MAT ERIAL PLACED ON RECORD HAS BEEN PURSUED. THE AO DISALLOWED THE YEAR END P ROFESSIONAL CHARGES ACCRUED IN THE BOOKS ON ACCOUNT OF NON-DEDUCTION OF TAX AT SOURCE. IN THIS REGARD IT IS STATED THAT WHEN AN INCOME IS CREDITED TO ANY ACCOU NT IN THE BOOKS OF ACCOUNT OF THE PERSON LIABLE TO PAY SUCH INCOME, SUCH CREDITIN G SHALL BE DEEMED TO BE CREDIT OF SUCH INCOME TO THE ACCOUNT OF THE PAYEE, BUT THE FACT THAT THE CREDIT TO ANY ACCOUNT IS TO BE DEEMED TO BE CREDIT TO THE ACCOUNT ALSO PRESUPPOSES THAT IDENTITY OF THE PAYEE CAN BE ASCERTAINED. THEREFORE, THIS D EEMING FICTION CAN ONLY BE ACTIVATED WHEN THE IDENTITY OF THE PAYEE CAN BE ASC ERTAINED. THEREFORE, THIS DEEMING FICTION CAN ONLY BE ACTIVATED WHEN THE IDEN TITY OF THE PAYEE CAN BE ASCERTAINED. THEREFORE, TDS PROVISIONS CANNOT BE I NVOKED IN A CASE WHERE THE PERSON WHO IS TO RECEIVE THE PROFESSIONAL CHARGES C ANNOT BE IDENTIFIED AT THE STAGE AT WHICH THE PROVISIONS FOR PROFESSIONAL CHARGES AC CRUED BUT NOT DUE IS MADE. ACCORDINGLY, NO TAX WAS REQUIRED TO BE DEDUCTED AT SOURCE IN RESPECT OF THE PROVISION FOR PROFESSIONAL CHARGES PAYABLE MADE BY THE ASSESSEE WHICH REFLECTED PROVISION FOR PROFESSIONAL CHARGES ACCRUED BUT NOT DUE IN A SITUATION WHERE THE ULTIMATE RECIPIENT OF SUCH PROFESSIONAL CHARGES AC CRUED BUT NOT DUE COULD NOT HAVE BEEN ASCERTAINED AT THE POINT OF TIME WHEN THE PROVISIONS WAS MADE. THEREFORE, THE ASSESSEE DID NOT HAVE ANY LIABILITY TO DEDUCT TAX AT SOURCE IN RESPECT OF PROVISION FOR PROFESSIONAL FEES ACCRUED BUT NOT DUE. 9.2 IN VIEW OF THE ABOVE THE OBJECTION RELATING TO DISALLOWANCE OF PROFESSIONAL CHARGE U/S. 40(A)(IA) ON ACCOUNT OF NO N DEDUCTION OF TDS IS HEREBY ACCEPTED. 18.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS, THE ORDER OF THE DRP CANNOT BE ACCEPTED. FIRST OF ALL, DRP SHOULD HAVE SEEN WH ETHER THE AMOUNTS ARE CREDITED TO INDIVIDUAL ACCOUNTS OR GENERAL PROVISIO N WAS MADE. NOT ONLY THAT EXPLANATION TO THE SECTION 194J SPECIFIES TH AT CREDIT IN THE BOOKS OF IT(TP)A NOS.373 & 374/BANG/2015 PAGE 24 OF 27 ACCOUNT ALSO ATTRACTS TDS. SINCE THE DIRECTION OF T HE DRP IS NOT IN ACCORDANCE WITH THE PROVISIONS OF THE ACT, WE HAVE NO HESITATION IN REVERSING THE SAID DECISION. THE AOS ACTION IS UP HELD. HOWEVER, AO IS DIRECTED TO EXAMINE WHETHER THE AMOUNTS SO DISALLOW ED ARE PERTAINING TO THE UNIT IN WHICH ASSESSEE HAS CLAIMED 10AA DEDUCTION A ND IF SO, THE DISALLOWANCE WOULD INCREASE THE PROFITS OF SUCH UNI T. ACCORDINGLY, DEDUCTION U/S. 10AA MAY HAVE TO BE INCREASED. THIS ASPECT REQUIRES EXAMINATION BY THE AO. SUBJECT TO THAT, REVENUES GROUND IS TREATED AS ALLOWED. 19. THE NEXT ISSUE FOR CONSIDERATION IN GROUND NO. 3 IS REGARDING THE DISALLOWANCE OF DEPRECIATION ON SERVERS AMOUNTING T O RS. 25,91,516/- BY TREATING THEM AS PLANT & MACHINERY AND NOT COMPUTER SOFTWARE. THE AO TREATED THE SERVERS AS NOT PART OF THE COMPUTERS BU T TREATED IT AS PLANT & MACHINERY. DEPRECIATION THEREFORE ACCORDINGLY MODI FIED AND RESTRICTED. ON THE SUBMISSIONS OF ASSESSEE, THE DRP HAS ALLOWED TH E CONTENTIONS OF ASSESSEE BY STATING AS UNDER: 10.1 THE GROUND OF OBJECTION ALONG WITH ALL THE MAT ERIAL PLACED ON RECORD HAS BEEN PERUSED. THE WORD COMPUTER HAS NOT BEEN DEFINED IN THE INCOME-TAX ACT OR INCOME-TAX RULES. IN ORDER TO DETERMINE WHE THER A PARTICULAR MACHINE CAN BE CLASSIFIED AS A COMPUTER OR NOT COMMON PARLANCE UNDERSTANDING WOULD HAVE TO BE TAKEN INTO ACCOUNT. A COMPUTER, IN COMMON SENSE AND AS POPULARLY UNDERSTOOD, REFERS TO ANY ELECTRONIC OR OTHER HIGH SPEED DATA PROCESSING DEVICE WHICH PERFORMS LOGICAL, ARITHMETIC AND MEMORY FUNC TIONS ON DATA AND INCLUDES ONLY THOSE INPUT AND OUTPUT DEVICES WITHOUT WHICH T HE COMPUTER CANNOT FUNCTION. DEVICES SUCH AS SERVERS ARE DEVICES WITHOUT WHICH T HE COMPUTER CANNOT FUNCTION AND SUCH DEVICES ARE INTEGRAL PART OF COMPUTERS. M OREOVER THE SERVERS ARE PART OF IT(TP)A NOS.373 & 374/BANG/2015 PAGE 25 OF 27 COMPUTER EQUIPMENT AND CANNOT WORK IN ISOLATION AND ACCORDINGLY FALL UNDER THE PURVIEW OF THE TERM COMPUTER & SOFTWARE AND ARE E LIGIBLE FOR DEPRECIATION AT THE RATE OF 60%; THEREFORE DEPRECIATION ON SERVERS WILL BE ALLOWED AT THE RATE APPLICABLE TO COMPUTERS I.E. 60%. 19.1. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE D O NOT SEE ANY REASON TO INTERFERE WITH THE ORDER OF THE DRP. THE SERVERS A RE THE PART OF COMPUTER EQUIPMENT AND CANNOT WORK IN ISOLATION. ACCORDINGL Y, THE DIRECTIONS ARE UPHELD. REVENUES GROUND ON THIS ISSUE IS REJECTED . 20. NEXT ISSUE FOR CONSIDERATION IN GROUND NOS. 4 & 5 IS WITH REFERENCE TO ADJUSTMENTS MADE TO EXPORT TURNOVER FOR THE PURP OSE OF DEDUCTION OF SECTION 10AA. AO HAS DISALLOWED CERTAIN EXPENDITUR E PERTAINING TO DELIVERY OF GOODS OUTSIDE INDIA AND RE-WORKED OUT T HE EXPORT TURNOVER WHILE CALCULATING DEDUCTION U/S. 10AA. HOWEVER, HE HAS N OT REDUCED THE SAME FROM THE TOTAL TURNOVER. DRP WHILE UPHOLDING THE E XCLUSION OF CERTAIN EXPENDITURE (WHICH WAS CONSIDERED IN ASSESSEES APP EAL ABOVE), DIRECTED THE AO TO TREAT THE SAME FOR THE PURPOSE OF TOTAL TURNO VER ALSO AND TO EXCLUDE THEM, FOLLOWING THE DECISION OF ITAT IN M/S. SAK SO FT LTD., AND ALSO CO- ORDINATE BENCH DECISION IN THE CASE OF TATA ELXSI. REVENUE IS AGGRIEVED ON THAT. IT IS ADMITTED THAT ON A PARITY OF COMPARISO N, WHATEVER IS REDUCED FROM THE EXPORT TURNOVER HAS TO BE REDUCED FROM THE TOTA L TURNOVER AND THIS PRINCIPLE WAS ACCEPTED BY THE JURISDICTIONAL KARNAT AKA HIGH COURT IN THE CASE OF CIT VS. TATA ELXSI LTD., WHICH THE DRP HAS FOLLOWED. WE DO NOT IT(TP)A NOS.373 & 374/BANG/2015 PAGE 26 OF 27 SEE ANY REASON TO INTERFERE WITH THE ABOVE PRINCIPL E, HOWEVER, WE HAVE ALREADY DIRECTED IN ASSESSEES APPEAL TO EXCLUDE CE RTAIN EXPENDITURE WHICH WAS DISALLOWED BY THE AO FROM THE EXPORT TURNOVER. CONSEQUENTLY, THERE WILL BE ADJUSTMENTS TO BE MADE TO THE TOTAL TURNOVE R ALSO. SUBJECT TO THOSE ADJUSTMENTS, THE DRPS DIRECTION THAT WHATEVER IS E XCLUDED FROM THE EXPORT TURNOVER SHOULD ALSO BE EXCLUDED FROM THE TOTAL TUR NOVER IS UPHELD. REVENUES GROUNDS ON THIS ISSUE ARE ACCORDINGLY DIS MISSED. 20.1. IN THE RESULT, REVENUES APPEAL IS PARTLY ALL OWED. 21. TO SUM-UP, ASSESSEES APPEAL IN IT(TP)A NO. 373 /BANG/2015 IS ALLOWED FOR STATISTICAL PURPOSES AND REVENUES APPE AL IN IT(TP)A NO. 374/BANG/2015 IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 18 TH DAY OF MARCH, 2016 SD/- SD/- (NARENDRA KUMAR CHOUDHURY) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTA NT MEMBER BANGALORE, DATED, THE 18 TH MARCH, 2016. /D S/ TNMM IT(TP)A NOS.373 & 374/BANG/2015 PAGE 27 OF 27 COPY TO: 1. APPELLANT 2. RESPONDENTS 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.