DCIT, Bangalore V. M/s Honeywell Technologies Solutions Lab Pvt. Ltd., Bangalore

ITA 943/BANG/2015

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 8720 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-07-2019
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 15-06-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; Additional evidence; Wholly owned subsidiary; Non-deduction of tax; TDS; Set aside
• Section: 143(3); 234B; 40(a)(ia); 195; 250

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, BENGALURU BEFORE SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER ITA NO .977 /BANG/201 5 (ASSESSMENT YEAR: 2009-10) M/S.HONEYWELL TECHNOLOGY SOLUTIONS LAB PVT. LTD., BOGANAHALLI VILLAGE, SURVEY NO.72/5, DODDAKANANAHALLI VILLAGE, VARTHUR HOBLI, BENGALURU EAST TALUK, BENGALURU-560103. PAN:AAACH 4151 J VS. APPELLANT ASST. COMMISSIONER OF INCOME-TAX, CIRCLE 3(1)(2),[EARLIER ADDL. COMMISSIONER OF INCOME-TAX, RANGE-11], BENGALURU. RESPONDENT AND ITA NO.943/BANG/2015 (ASSESSMENT YEAR: 2009-10) (BY REVENUE ) ***** ASSESSEE BY : SHREYA L, CA REVENUE BY : SHRI C.H.SUNDAR RAO, CIT(DR) DATE OF HEARING: 07/05/2019 DATE OF PRONOUNCEMENT: 12/07/2019 O R D E R PER PAVAN KUMAR GADALE, JM : THESE ARE CROSS APPEALS FILED BY THE ASSESSEE AND THE REVENUE AGAINST THE ORDER OF THE CIT(A), BENGALURU, PASSED U/S ITA NOS.977 & 943/BANG/2015 PAGE 2 OF 16 143(3) AND 250 OF THE INCOME-TAX ACT,1961 ['THE ACT ' FOR SHORT], DATED 10/03/2015. 2. FIRST, WE SHALL TAKE UP THE ASSESSEES APPEAL VI Z. ITA NO.977/BANG/2015 AND THE FACTS NARRATED THEREIN. T HE ASSESSEE HAS RAISED 8 GROUNDS OF APPEAL BUT AT THE TIME OF HEARING, LD. AR HAS NOT PRESSED GROUNDS OF APPEAL N O.4, 5 AND 6 AND TREATED AS WITHDRAWN AND DISMISSED. HENCE, TH E EFFECTIVE GROUNDS OF APPEAL ARE 1, 2, 3, 7 AND 8 WHICH READ A S UNDER: 1. THE LEARNED CIT(A) ERRED, IN LAW AND IN FACTS, BY DISALLOWING ANNUAL MAINTENANCE CONTRACT ('AMC') EXPENSES AND SO FTWARE PURCHASES INCURRED DURING THE FINANCIAL YEAR 2008-0 9 UNDER SECTION 40(A)(IA) OF THE ACT AMOUNTING TO RS 2,58,6 4,790 WITHOUT APPRECIATING THE FACTUAL AND TECHNICAL SUBMISSIONS MADE BY THE COMPANY IN THIS REGARD. 2. THE LEARNED CIT(A) ERRED, IN LAW AND IN FACTS, I N CAPITALISING THE SOFTWARE EXPENSES AMOUNTING TO RS 5,41,11,457 AFTER PROVIDING DEPRECIATION AT THE RATE OF 45% WITHOUT APPRECIATIN G THE DETAILED SUBMISSIONS MADE BY THE COMPANY THAT SUCH EXPENSES DO NOT RESULT IN ANY ENDURING BENEFIT TO THE COMPANY AND S UCH EXPENSES ARE REVENUE IN NATURE. 3. THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN FACT S, BY DISALLOWING MARKED TO MARKET ('M2M') LOSS AMOUNTING TO RS 14,40 ,59,736 ON THE BASIS THAT THE SAID LOSS IS NOTIONAL AND CON TINGENT IN NATURE AND HAS NOT APPRECIATED THE FACTUAL AND TECH NICAL SUBMISSIONS MADE BY THE APPELLANT. 7. THE LEARNED CIT(A) HAS ERRED, IN LAW AND IN F ACTS, IN DIRECTING THE ASSESSING('AO') TO LEVY INTEREST UNDER SECTION 234B OF THE ACT. 8. THE LEARNED AO HAS ERRED, IN LAW AND IN FACTS, IN L EVYING INTEREST UNDER SECTION 234C OF THE ACT ON THE ASSES SED INCOME OF THE COMPANY WHEREAS THE SAME HAS TO COMPUTED ON THE RETURNED INCOME OF THE COMPANY. ITA NOS.977 & 943/BANG/2015 PAGE 3 OF 16 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN SOFTWARE DEVELOPMENT AND TECHNICAL SERVICES AND IS A WHOLLY OWNED SUBSIDIARY OF HONEYWELL INTERNATIONAL USA AND THE SAME IS PRIMARILY ENGAGED IN THE BUSINESS OF SOFTWARE DE VELOPMENT FOR HONEYWELL GROUP. THE ASSESSEE HAS FILED THE RE TURN OF INCOME ON 30/09/2009 DISCLOSING TOTAL INCOME OF RS.349,767,254/- AFTER CLAIMING DEDUCTIONS U/SS 10A AND 80JJA OF THE ACT. SINCE THERE ARE INTERNATIONAL TRANSACT IONS WITH AES, THE MATER WAS REFERRED TO THE TRANSFER PRICING OFFI CER (TPO). WHEREAS THE TPO HAS ACCEPTED THE ALP WITHOUT TRANSF ER PRICING ADJUSTMENT. THE AO DEALT ON THE SUBMISSIONS ON THE CLAIM U/S 80JJ(AA) AT PAGE 2 TO 8 OF THE ORDER AND DISALLOWED THE CLAIM. SIMILARLY AO DISALLOWED EXPENDITURE TOWARDS COMPUTE R LICENSE PURCHASE FOR NON-DEDUCTION OF TDS OF RS.2,58,64,790 /- AND IN RESPECT OF SOFTWARE EXPENSES DISALLOWED RS.6,17,93, 171/- AND ALLOWED DEPRECIATION, DISALLOWED LOSS ON MARKED TO MARKET FOREIGN EXCHANGE OF RS.14,40,59,739/- AND FURTHER R ESTRICTED THE CLAIM OF DEDUCTION US/ 10A AND ASSESSED THE TOT AL INCOME OF RS.87,79,22,043/- AND PASSED THE ORDER U/S 143(3 ) DATED 12/3/2013. 4. AGGRIEVED BY THE ORDER, THE ASSESSEE HAS FI LED AN APPEAL WITH THE CIT(A). WHEREAS THE CIT(A), CONSIDERING T HE GROUNDS OF APPEAL, SUBMISSIONS AND FINDINGS OF THE AO CONFI RMED THE ITA NOS.977 & 943/BANG/2015 PAGE 4 OF 16 CLAIM OF DISALLOWANCE OF SOFTWARE PURCHASES AS PER PROVISIONS OF 40(A)(IA) OF RS.2,58,64,790/- AND ALSO CONFIRMED THE CAPITALIZATION OF SOFTWARE EXPENSES AND THE ACTION OF THE AO IN DISALLOWING LOSS ON MARKED-TO-MARKET(M2M) AND PARTL Y ALLOWED THE APPEAL. 5. AGGRIEVED BY THE ORDER, THE ASSESSEE HAS FIL ED THE APPEAL WITH THE TRIBUNAL. THE LD. AR HAS ARGUED ON THE GR OUND OF CAPITALIZATION OF SOFTWARE EXPENSES AND SUBMITTED T HAT SIMILAR ISSUE WAS CONSIDERED IN THE ASSESSEES CASE FOR ASS ESSMENT YEAR 2006-07 IN ITA NO.668/BANG/2013 DATED 5/9/2014 , AND FOR ASSESSMENT YEAR 2008-09 IN ITA NO.862/BANG/2013 DATED 14/11/2014. 5.1 ON THE SECOND DISPUTED ISSUE WITH RESPECT T O DISALLOWANCE FOR NON-DEDUCTION OF TAX ON THE ANNUAL MAINTENANCE CONTRACT AND SOFTWARE PURCHASE, THE LD. AR SUBMITTED THAT ON PURCHASE OF SOFTWARE THERE IS NO REQUIREMENT OF DEDUCTION OF TAX AT SOURCE AND AMC CHARGES ARE REVENUE IN NATURE AND SU PPORTED WITH VOLUMINOUS PAPER BOOK TO SUBSTANTIATE THE CLAI M. 5.2 ON THE THIRD DISPUTED ISSUE THE LD. AR SUBMI TTED THAT THE CIT(A) HAS ERRED IN CONFIRMING DISALLOWANCE OF MARK ED TO MARKET LOSS AMOUNTING TO RS.14,40,736/- ON THE GROU ND THAT THE LOSS IS NOTIONAL AND ARISE ON ACCOUNT OF RE-STA TEMENT OF ITA NOS.977 & 943/BANG/2015 PAGE 5 OF 16 CONTRACT AND CONTINGENT IN NATURE. THE LD. AR SUBMI TTED THAT THE ASSESSEE IS FOLLOWING SYSTEM OF ENTERING INTO H EDGING CONTRACTS FOR HEDGING ITS PURELY FOREIGN CURRENCY R ECEIVABLES IN ORDER TO MITIGATE THE RISK OF FOREIGN EXCHANGE FLUC TUATIONS. THE AO HAS RELIED ON THE CBDT INSTRUCTION WHICH IS CLEA RLY NOT APPLICABLE AND RELIED ON THE EVIDENCE AND JUDICIAL DECISIONS. 5.3 CONTRA, THE LEARNED DR SUPPORTED THE ORDER OF T HE CIT(A) AND SUBMITTED THAT THE CLAIM OF THE ASSESSEE OF AMC EXPENSES HAS TO BE VERIFIED AND ASSESSEE COULD NOT SUBSTANTI ATE IN ASSESSMENT PROCEEDINGS ON NOTIONAL LOSS ON MTM. 6. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. ON THE FIRST DISPUTED ISSUE WITH RESPECT TO CAPITALIZATION OF SOFTWARE EXPENSES AND ALLOWING OF DEPRECIATION, WE FOUND THE ISSUE AS ENVISAGED BY THE LD. AR IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE CO-ORDINATE BENCH O F TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2008 -09 IN ITA NO.862/BANG/2013 WHEREIN PARAS. 6.2 AND 6.3 PAGE 4 WHICH READ AS UNDER: 6.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESE NTATIVE SUPPORTED THE FINDING OF THE LEARNED CIT(APPEALS) I N THE IMPUGNED ORDER ON THIS ISSUE. 6.3 WE HAVE HEARD BOTH PARTIES AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD, INCLUDING THE JU DICIAL DECISIONS CITED AND PLACED RELIANCE ON. ON CAREFUL ITA NOS.977 & 943/BANG/2015 PAGE 6 OF 16 CONSIDERATION OF THE ASSESSEE'S PETITIONS FOR FILIN G ADDITIONAL EVIDENCE UNDER RULE 29 OF THE ITAT RULES, 1963; WE FEEL THAT IN THE INTEREST OF EQUITY AND JUSTICE THE ADDI TIONAL EVIDENCE BE ADMITTED AS IT IS MATERIAL AND NECESSA RY, FOR AN EXAMINATION THEREOF COULD HAVE A BEARING AND IMPACT ON THE FACTUAL POSITION AND OUTCOME OF THE CASE. IN THIS VIEW OF THE MATTER, WE ADMIT THE ADDITIONAL EVIDENCE FILED FOR CONSIDERATION. WE FIND THIS VERY ISSUE OF SOFTWARE EXPENSES HAS BEEN EXAMINED AND CONSIDERED IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2007-08 BY A CO-ORDINATE B ENCH OF THIS TRIBUNAL. IN THIS ORDER IN IT(TP)A NO.1344/BANG/2011 DT.28.3.2013, THE CO-ORDINATE BEN CH AT PARA 31 OF ITS ORDER HAS HELD AS UNDER: 31. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSIDERED THE FACTS AND MATERIALS ON RECORD. WE DEEM IT FIT AND PROPER TO RESTORE THIS ISSUE BACK T O THE FILE OF THE ASSESSING OFFICER TO REAPPRAISE THE EXPENDITURE IN RESPECT OF RS.10 LAKHS AND ABOVE AND DECIDE THE ISSUE IN ACCORDANCE WITH THE DECISIONS O F THE DELHI SPECIAL BENCH IN AMWAY INDIA ENTERPRISES (SUPRA) AND THE DECISION OF THE KARNATAKA HIGH COUR T IN TOYOTA KIRLOSKAR MOTORS P. LTD. (SUPRA), AFTER GIVING EFFECTIVE OPPORTUNITY OF HEARING TO THE ASSE SSEE. THUS, THIS ISSUE IS ALLOWED FOR STATISTICAL PURPOSE . IT IS ORDERED ACCORDINGLY. FOLLOWING THIS DECISION OF THE CO-ORDINATE B ENCH OF THIS TRIBUNAL IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2007-08, WE ALSO DEEM IT PROPER TO RESTORE THIS ISS UE BACK TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE AND REAPPRAISE THE ADDITIONAL EVIDENCE FILED BY THE ASS ESSEE IN RESPECT OF EXPENDITURE INCURRED ON PURCHASE OF SOFT WARE OF RS.10 LAKHS AND ABOVE AND DECIDE THE ISSUE IN ACCOR DANCE WITH THE DECISIONS OF THE HON'BLE HIGH COURT OF KAR NATAKA IN THE CASE OF TOYOTA KIRLOSKAR MOTORS P. LTD. (SUP RA) AND OF THE HON'BLE HIGH COURT OF DELHI IN THE CASE OF A MWAY INDIA ENTERPRISES (SUPRA), AFTER AFFORDING THE ASSE SSEE ADEQUATE OPPORTUNITY OF HEARING AND TO FILE REQUIRE D DETAILS IN THE MATTER. IT IS ORDERED ACCORDINGLY. THUS, T HE ASSESSEE'S GROUND NO.2 IS TREATED AS ALLOWED FOR STATISTICAL P URPOSES. ITA NOS.977 & 943/BANG/2015 PAGE 7 OF 16 7. WE, FOLLOW THE RATIO OF DECISION AND JUDICIAL PROCEDURE AND RESTORE THIS DISPUTED ISSUE OF PURCHASE OF SOFTWARE EXPENSES, TO THE FILE OF THE AO WITH DIRECTIONS TO EXAMINE AN D CONSIDER THE EVIDENCES FILED BY THE ASSESSEE AND THIS GROUND OF APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. 7.1 ON THE SECOND DISPUTED ISSUE OF DISALLOWANCE U/ S 40(A)(IA), THE CONTENTION OF THE LD. AR IS THAT ASS ESSEE HAS PURCHASED SOFTWARE AND DOES NOT REQUIRED TDS AND AM C EXPENSES DO NOT COME WITHIN THE PURVIEW OF APPLICAB ILITY OF TDS PROVISIONS. WHEREAS, THE LEARNED DR SUBMITTED THAT SOFTWARE EXPENSES OF AMC ARE SUBJECT TO TDS AND THE LD. AR F ILED MATERIAL AND EXPLAINED THAT THE COMPANY HAS NOT BEE N GRANTED ANY RIGHTS IN THE SOFTWARE PURCHASE AND ONLY OBTAIN ED LIMITED RIGHTS FOR USAGE. WE FOUND THAT THESE ASPECTS AND I NFORMATION WERE NOT DEALT IN THE ASSESSMENT PROCEEDINGS. THERE FORE, WE REMIT THIS ISSUE TO THE FILE OF THE AO TO VERIFY AN D EXAMINE THE APPLICABILITY OF TDS PROVISIONS WITH MATERIAL EVIDE NCE FILED AND JUDICIAL DECISIONS AND THE GROUND OF APPEAL IS ALLO WED FOR STATISTICAL PURPOSES. 7.2 THE LD. AR MADE SUBMISSIONS ON LOSS BEING MARKE D TO MARKET, THE CONTENTION OF THE LD. AR IS THAT IT IS ARGUED THAT IT IS NOTIONAL LOSS AND FILED DETAILS AND JUDICIAL DEC ISIONS IN SUPPORT ITA NOS.977 & 943/BANG/2015 PAGE 8 OF 16 OF CLAIM. THE LD. AR RELIED ON THE OBSERVATIONS OF THE TRIBUNAL IN THE CASE OF (2013) 35 TAXMANN.COM 553 WHERE THE ASSESSEE ENTERED INTO FOREIGN EXCHANGE CONTRACT AND SUCH CON TRACTS ARE INCIDENTAL TO THE EXPORT BUSINESS AND INCURRED LOSS AND SUCH CONTRACTS ARE CONTRACT LOSS WHICH ARE NOT SPECULATI VE BUT BUSINESS LOSS. THE CONTENTION OF THE LD. AR IS THA T THIS IS ALLOWABLE WHEREAS WE ARE OF THE OPINION THAT HEDGIN G SHOULD NOT BE MORE THAN THE RECEIVABLES. WHEREAS THE LD. AR SUBMITTED THAT IT IS WITHIN LIMITS OF EXPORTS AND S UBSTANTIATED WITH MATERIAL IN THE PAPER BOOK. THE LEARNED DR SU BMITTED THAT THESE FACTS ARE TO BE VERIFIED AND THE MATTER HAS T O BE EXAMINED WHETHER EXPORT PROCEEDS HAVE BEEN RECEIVED WITHIN T IME ALLOWED FOR FILING OF RETURN BY THE INCOME-TAX ACT. ACCORDINGLY, WE ARE OF THE SUBSTANTIVE OPINION THAT THE MATTER H AS TO BE RESTORED BACK TO THE FILE OF THE AO FOR VERIFICATIO N OF FACTS AND RECEIPT OF EXPORT PROCEEDS AS ENVISAGED IN THE COUR SE OF HEARING. ACCORDINGLY, THIS GROUND OF APPEAL IS ALL OWED FOR STATISTICAL PURPOSES. 7.3 WHEREAS CHARGING OF INTEREST U/S 234B AND 234C OF THE ACT ARE CONSEQUENTIAL AND DIRECT THE AO ACCORDINGLY . 7.4 IN THE RESULT, THE ASSESSEES APPEAL IS PART LY ALLOWED FOR STATISTICAL PURPOSES. ITA NOS.977 & 943/BANG/2015 PAGE 9 OF 16 8. NOW WE SHALL TAKE UP THE REVENUES APPEAL IN ITA NO.943/BANG/2015. THE REVENUE HAS RAISED THE FOLLOW ING GROUNDS OF APPEAL: 1. THE ORDER OF THE LEARNED CIT(A) IS OPPOSED TO LAW AND FACTS OF THE CASE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE T HE LEARNED CIT(A) ERRED IN LAW IN DIRECTING THE AO TO ALLOW THE DEDUCTION U/S 10A ON THE AMOUNTS CAPITALIZED AS SOFTWARE EXPENSES BY THE AO DESPITE CONFIRMING THE CAPITALIZATION AND WITHOUT APPRECIATING THE FACT TH AT IT WOULD BE ABSURD THAT AT ONE HAND THE DISALLOWANCE I S MADE AND PENAL PROCEEDINGS ARE BEING INITIATED AND ON THE OTHER HAND BENEFIT IS BEING GIVEN TO THE ASSESS EE WITHOUT CONCRETE KNOWLEDGE OF INTENTION OF THE NON- COMPLIANCE OF STATUTORY PROVISIONS OF THE IT ACT. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE T HE LEARNED CIT(A) ERRED IN HOLDING THAT THE ASSESSEE COMPANY IS ELIGIBLE FOR DEDUCTION U/S 80JJAA IN RES PECT OF ADDITIONAL WAGES PAID TO SOFTWARE ENGINEERS EMPLOYE D WITHOUT APPRECIATING THE FACT THAT THE SOFTWARE ENG INEERS CANNOT BE EQUATED WITH 'WORKMEN' AS ENVISAGED UNDER RULE 2(S) OF INDUSTRIAL DISPUTES ACT 1947 BY PLACIN G RELIANCE ON THE ORDERS OF ITAT WHICH ARE NOT APPLIC ABLE TO THE FACTS OF THE CASE. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE T HE LEARNED CIT(A) ERRED IN LAW IN DIRECTING THE AO TO EXCLUDE REIMBURSEMENT OF SPECIFIC EXPENDITURE BOTH FROM THE EXPORT TURNOVER AS WELL AS FROM TOTAL TURN OVER FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S 10A , WITHOUT APPRECIATING THE FACT THAT THE STATUTE ALLO WS EXCLUSION OF SUCH EXPENDITURE ONLY FROM EXPORT TURN OVER BY WAY OF SPECIFIC DEFINITION OF EXPORT TURNOVER AS ENVISAGED BY SUB-CLAUSE (4) OF EXPLANATION 2 BELOW SUB- SECTION (8) OF SECTION 10A AND THE TOTAL TURNOVER H AS NOT BEEN DEFINED IN THIS SECTION. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE T HE LEARNED CIT(A) ERRED IN DIRECTING THE AO TO COMPUTE DEDUCTION U/S 10A IN THE ABOVE MANNER BY PLACING RELIANCE ON THE DECISION OF HON'BLE HIGH COURT OF KARNATAKA IN THE CASE OF M/S TATA ELXSI LTD., WHICH HAS NOT BECOME FINAL SINCE THE SAME HAS NOT BEEN ACCEPT ED BY THE DEPARTMENT AND SLPS ARE PENDING BEFORE THE ITA NOS.977 & 943/BANG/2015 PAGE 10 OF 16 HON'BLE SUPREME COURT. 6. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT TH E TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE CIT(A) IN SO FAR AS IT RELATES TO THE ABOVE GROUNDS MAY BE REVERSED AND THAT OF THE ASSESSING OFFICER MAY BE RESTORED. 7. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND AND / OR DELETE ANY OF THE GROUNDS MENTIONED ABOVE. 8.1 WITH REGARD TO GROUND NO.2, THE LEARNED D R ARGUED THAT THE CIT(A) HAS ERRED IN DIRECTING THE AO TO AL LOW DEDUCTION U/S 10A ON THE CAPITALIZATION OF SOFTWARE EXPENSES WHEREAS THE LD. AR SUPPORTED THE ORDER OF THE CIT(A) AND RELIED ON THE CBDT CIRCULAR ON THIS PARTICULAR ISSUE. WE PERUSED THE ORDER OF THE CIT(A), DEALT AT PARA.8 PAGE 9 WHERE THE CIT(A) HAS CONSIDERED THE ALTERNATIVE SUBMISSION OF THE ASSESSEE THAT IN CASE DISALLOWANCE IN REGARD TO CAPITALIZATION OF SOFTWAR E EXPENDITURE, THE SAME HAS TO BE CONSIDERED FOR DEDUCTION U/S 10A OF THE ACT AND THE AO WAS DIRECTED TO RE-WORK. WHEREAS THE LE ARNED DR SUPPORTED THE ORDER OF THE AO AND NO NEW MATERIAL W AS FILED TO CONTROVERT THE OBSERVATIONS OF THE CIT(A). ACCORDI NGLY, WE UPHOLD THE ORDER OF THE CIT(A) ON THIS ISSUE AND DI SMISS THE GROUND OF APPEAL OF THE REVENUE. 8.2 THE THIRD GROUND OF APPEAL ARGUED BY THE LEARN ED DR IS THAT THE CIT(A) ERRED IN HOLDING THAT THE ASSESSEE IS ELIGIBLE FOR DEDUCTION U/S 80JJA IN RESPECT OF ADDITIONAL WAGES PAID TO ITA NOS.977 & 943/BANG/2015 PAGE 11 OF 16 SOFTWARE ENGINEER WITHOUT CONSIDERING THE FACT THAT SOFTWARE ENGINEERS CANNOT BE COMPARED WITH WORKMEN AS ENVISA GED UNDER RULE 2(S) OF THE INDUSTRIAL DISPUTES ACT. WE FOUND THAT THE CO-ORDINATE BENCH OF TRIBUNAL IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2006-07 IN ITA NO.668/BANG/2013 DATED 05/09/2013 HAS DEALT ON THIS ISSUE AT PARAS 12 TO 1 4 WHICH READS AS UNDER: 12. WE HAVE PERUSED THE ORDERS AND HEARD THE RI VAL CONTENTIONS. THE AO SIMPLY REJECTED THE CLAIM OF THE ASSESSEE WITH AN O BSERVATION THAT ASSESSEE COULD NOT SHOW SUCH CLAIM TO BE RELATED TO WORKMEN, AS DEFINED UNDER THE INDUSTRIAL DISPUTES ACT, 1947. IT IS TRUE THAT THE CIT(A) RELIED ON THE DECISION OF THE CO-ORDINATE BENCH IN THE CASE OF M/S TEXAS I NSTRUMENTS INDIA PVT. LTD., (SUPRA), FOR GIVING RELIEF TO THE ASSESSEE. THOUGH, THE DEPARTMENT HAS VEHEMENTLY ARGUED THAT M/S TEXAS INSTRUMENTS PVT. L TD., WAS ONLY A CHIP MANUFACTURER AND NOT IN A LINE OF THE BUSINESS SIMI LAR TO THAT OF THE ASSESSEE, NOTHING WAS PRODUCED TO SUBSTANTIATE THIS CONTENTIO N. IN ANY CASE, A CLAIM OF SEC.80JJA OF THE ACT WHETHER IT RELATES TO A CHIP M ANUFACTURER OR IT RELATES TO AN IT ENABLED SERVICES FIRM HAS TO BE SEEN FROM THE PARAMETERS LAID DOWN UNDER THAT SECTION FOR GIVING SUCH DEDUCTION. IN O UR OPINION, THERE CANNOT BE ANY DISPUTE THAT DEVELOPMENT OF COMPUTER SOFTWARE TANTAMOUNTS TO PRODUCTION OF AN ARTICLE OR THING. AS MENTIONED BY THE LEARNED AR, FINANCE ACT, 2013 AMENDED SUB-SEC.80JJAA, THE WORDS 'MANUFACTURE OR PRODUCTION OF AN ARTICLE NR THING' WAS SUBSTITUTED WITH MANUFACTURE OF GOODS FROM FACTORY'. HENCE, DENYING SUCH DEDUCTION FOR AN ASSESSMENT YEA R PRIOR TO ASSESSMENT YEAR 2013-14, ONLY FOR A REASON THAT THE ASSESSEE W AS ENGAGED IN PRODUCTION OF COMPUTER SOFTWARE MAY NOT BE PROPER. NOW THE ONL Y QUESTION THAT REMAINS IS WHETHER THE CLAIM OF THE ASSESSEE COULD BE CONSI DERED FROM THE PERSPECTIVE OF THE DEFINITION OF WORKMAN AS GIVEN IN THE INDUST RIAL DISPUTES ACT, 1947. SEC.2(5) OF INDUSTRIAL DISPUTES ACT, 1947 DEFINES A WORKMAN AS UNDER; 'WORKMAN MEANS ANY PERSON (INCLUDING AN APPRENTICE) EMPLOYED IN ANY INDUSTRY TO DO ANY MANUAL, UNSKILLE D, SKILLED, TECHNICAL, OPERATIONAL, CLERICAL OR SUPERVISORY WOR K FOR HIRE OR REWARD, WHETHER THE TERMS OF EMPLOYMENT BE EXPRESS OR IMPLIED, AND FOR THE PURPOSES OF ANY PROCEEDING UND ER THIS ACT IN RELATION TO AN INDUSTRIAL DISPUTE, INCLUDES ANY SUCH PERSON WHO HAS BEEN DISMISSED, DISCHARGED ORE RETRENCHED IN CO NNECTION WITH OR AS A CONSEQUENCE OF THAT DISPUTE, OR WHOSE DISMISSAL, DISCHARGE OR RETRENCHMENT HAS LED TO THAT DISPUTE, BUT DOES NOT INCLUDE ANY SUCH PERSON- I. WHO IS SUBJECT TO THE AIR FORCE ACT, 1950(45 OF 195 0), OR ITA NOS.977 & 943/BANG/2015 PAGE 12 OF 16 THE ARMY ACT, 1956 (56 OF 1950), OR THE NAVY ACT, 1 957 (62 OF 1957); OR II. WHO IS EMPLOYED IN THE POLICE SERVICE OR AN OFFICER OR OTHER EMPLOYEE OF A PERSON; OR III. WHO IS EMPLOYED MAINLY IN A MANAGERIAL OR ADMINIST RATIVE CAPACITY; IV. WHO, BEING EMPLOYED IN. A SUPERVISORY CAPACITY, DRA WS WAGES EXCEEDING ONE THOUSAND SIX HUNDRED RUPEES PER MENSEM OR EXERCISES EITHER BY THE NATURE OF THE DUT IES ATTACHED TO THE OFFICE OR BY REASON OF THE POWERS V ESTED IN. HIM, FUNCTIONS MAINLY OF A MANAGERIAL NATURE'. 13. WHAT WAS HELD IN THE DECISION OF M/S TEXAS INSTRUMENTS INDIA PVT. LTD., (SUPRA) IS REPRODUCED BY US, HEREUNDER; '6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFUL LY PERUSED THE RECORDS. CONSIDERING THE FACTUAL POSITION AFTER REF ERRING TO THE VARIOUS DOCUMENTS FILED BY THE ASSESSEE, THE LEARNE D CIT(A) HELD AS UNDER : 'ACCORDING TO THE AO IF AN EMPLOYEE OR WORKMAN IS G ETTING 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 SUPE RVISORY CAPACITY AND GETTING A SALARY OF MORE THAN RS. 1,600 PER MON TH ONLY BE EXCLUDED FROM THE DEFINITION OF WORKMAN. IN APPELLA NT'S CASE THE SOFTWARE ENGINEERS IN RESPECT OF WHOM DEDUCTION UND ER S. 8011AA HAS BEEN CLAIMED HAVE NOT BEEN EMPLOYED IN A SUPERV ISORY CAPACITY EVEN THOUGH THEY MAY BE GETTING A SALARY O F MORE THAN RS. 1,600 PER MONTH. AS THE SOFTWARE ENGINEERS WERE NOT EMPLOYED IN SUPERVISORY CAPACITY THEY CANNOT BE EXCLUDED FRO M THE DEFINITION OF WORKMAN. FURTHER AS PER THE NOTIFICATION OF THE KARNATAKA GOVERNMENT, THE APPELLANT COMPANY ENGAGED IN THE DE VELOPMENT OF SOFTWARE IS COVERED BY THE INDUSTRIAL DISPUTES A CT. AS SUCH, I AM OF THE CONSIDERED OPINION THAT THE APPELLANT HAS SA TISFIED ALL THE CONDITIONS FOR CLAIMING RELIEF UNDER S. 80JJAA. HOW EVER, I FIND THAT THE APPELLANT HAS CLAIMED DEDUCTION OF RS. 2,55,81, 220 WITH REFERENCE TO THE ADDITIONAL WAGES OF RS.4,87,64,029 ,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 RELI EF 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 APPELLANT WILL BE ENTITLED FOR RELIEF UNDER S. 80JJ AA OF RS. 1,09,52,012 BEING 30 PER CENT OF THE ADDITIONAL WAG ES 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 RELEV ANT TO THE ITA NOS.977 & 943/BANG/2015 PAGE 13 OF 16 ASST. YR. 2001-02. SIMILARLY, FOR ASST. YR. 2002-03 THE APPELLANT HAS CLAIMED DEDUCTION OF RS. 4,78,05,176 BEING 30 PER C ENT OF THE WAGES OF RS. 1,59,30,588 WHICH ALSO INCLUDED THE WA GES OF RS. 4,38,68,182 PERTAINING TO THE NEW WORKERS EMPLOYED IN THE PREVIOUS YEAR 1999-2000. FOR THE REASONS MENTIONED ABOVE THE APPELLANT IS NOT ENTITLED FOR RELIEF UNDER S. 80JJA A IN RESPECT OF THE WAGES PERTAINING TO THE WORKERS EMPLOYED IN THE PRE VIOUS YEAR 1999-2000. AS SUCH THE APPELLANT WOULD BE ELIGIBLE FOR RELIEF OF RS. 3,46,44,722 BEING 30 PER CENT OF THE ADDITIONAL WAG ES OF RS. 11,54,82,406 (RS. 15,93,50,588 - RS. 4,38,68,182) I N RESPECT OF THE WORKMEN EMPLOYED IN PREVIOUS YEARS 2000-01 AND 2001 -02. THE LEARNED AUTHORISED REPRESENTATIVES OF THE APPELLANT VIDE ORDER- SHEET NOTING DT. 24TH AUG., 2004 AGREED THAT THE RE LIEF UNDER S. 80JJAA IN RESPECT OF THE EMPLOYEES WHO JOINED IN TH E PREVIOUS YEAR RELEVANT TO THE ASST. YR. 2001-02 ONWARDS ONLY MAY BE CONSIDERED AND IN RESPECT OF THE EMPLOYEES WHO JOINED IN EARLI ER YEARS THE APPELLANT IS NOT PRESSING FOR RELIEF UNDER S. 80JJA A. IN THE CIRCUMSTANCES, THE AO IS DIRECTED TO ALLOW THE RELI EF UNDER S. 80JJAA OF RS. 1,09,52,012 AND RS. 3,46,44,722 FOR ASST. YR S. 2001-02 AND 2002-03 RESPECTIVELY.' 7. AS STATED EARLIER THE ASSESSEE HAD FILED THE DET AILS 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 T OTAL 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 THI S LIST SHOWS THAT THE ASSESSEE HAD CLAIMED DEDUCTION IN RESPECT OF EM PLOYEES, WHO HAD JOINED AS ENGINEERS IN THEIR RESPECTIVE FIELD S UCH AS SYSTEMS ENGINEER, TEST ENGINEER, SOFTWARE DESIGN ENGINEER, IC DESIGN ENGINEER, LEAD ENGINEER ETC. A CURSORY PERUSAL OF T HOSE LISTS ESTABLISHES THAT THE ASSESSEE HAD CLAIMED DEDUCTION IN RESPECT OF THE ENGINEERS EMPLOYED NOT IN THE CATEGORY OF SUPER VISORY CONTROL. ALL THESE DETAILS WERE FILED BEFORE THE AO DURING A SSESSMENT PROCEEDINGS. THESE FACTS WERE NOT PROPERLY CONSIDER ED BY THE AO. FURTHER, FROM THE ORDER OF THE CIT(A), IT IS SEEN T HAT HE HAD TAKEN NOTE OF THE NOTIFICATION ISSUED BY THE GOVERNMENT O F KARNATAKA AND CONCLUDED THAT AS PER THE NOTIFICATION ISSUED, THE ASSESSEE COMPANY ENGAGED IN THE DEVELOPMENT OF SOFTWARE IS C OVERED BY THE INDUSTRIAL DISPUTES ACT, 1947. FURTHER IT IS NO T THE CASE OF THE REVENUE THAT THE ASSESSEE DID NOT FULFIL THE CONDIT IONS EXTRACTED ELSEWHERE IN THIS ORDER. CONSIDERING ALL THOSE FACT UAL MATTERS WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF CIT(A) AC CORDING RELIEF TO THE ASSESSEE. IN FACT HE HAD CLARIFIED THE RELEVANT PORTIONS RELATED TO INDUSTRIAL DISPUTES ACT, 1947 AND IT ACT WHILE G RANTING RELIEF TO THE ASSSESSEE WHICH ARE EXTRACTED AT PP. 5 AND 6 OF THIS ORDER. AFTER CAREFULLY CONSIDERING THE SAME, WE ARE INCLINED TO ACCEPT THE REASONS SHOWN BY THE LEARNED CIT(A). THE LEARNED CI T- ITA NOS.977 & 943/BANG/2015 PAGE 14 OF 16 DEPARTMENTAL REPRESENTATIVE COULD NOT ASSAIL THE FI NDING REACHED BY THE LEARNED CIT(A) BY BRINGING IN ANY VALID MATE RIALS. THE ORDER OF THE CIT(A) IS CONFIRMED. IT IS ORDERED ACCORDING LY. NO DOUBT, IN ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 2007-08, THIS TRIBUNAL IN RELATION TO A CLAIM OF SIMILAR DEDUCTIO N HAD HELD AS UNDER; 36. WE ALSO FIND THAT THE TRIBUNAL IN THE CASE OF TEXAS INSTRUMENTS PVT.LTD., IN 1TA NO.1/ BANG/2011, DATED 07-09-2012, FOR THE ASSESSMENT YEAR 2005-06, AT PARA-10.7, HAS REMITTED THE MATTER BACK TO THE CIT(A) FOR FRESH CONSIDERATION. HENCE, WE ARE INCLINED TO RESTORE THIS ISSUE BACK TO THE FILE OF THE AO WITH A DIRECTION TO REDEDICATE THE ISSUE BY PASSING A SPEAKING ORDER, O F COURSE, AFTER GIVING EFFECTIVE OPPORTUNITY OF HEARING TO THE ASSE SSEE. THE ASESSSEE IS ALSO HEREBY DIRECTED TO COOPERATE WITH THE AO BY PRODUCING THE DETAILS AS CALLED FOR BY HIM'. 14. IN THE LIGHT OF THE FACTS HERE AND THE LAW I N THIS REGARD, WE ARE OF THE OPINION, THAT THE MATTER REQUIRES A FRESH LOOK BY A O. THE CIT(A) HAD GIVEN RELIEF TO THE ASSESSEE, DESPITE THE REMAND REPORT O F THE AO IN WHICH HE HAD MENTIONED THE NON-ELIGIBILITY OF THE ASSESSEE IN VI EW OF THE NOTIFICATION ISSUED BY GOVERNMENT OF KARNATAKA UNDER INDUSTRIAL EMPLOYM ENT ACT. WE THEREFORE, SET ASIDE THE ORDER OF THE AUTHORITIES BELOW AND RE MIT THIS ISSUE TO THE FILE OF THE AO FOR FRESH CONSIDERATION AFRESH IN ACCORDANCE WITH LAW. WE, APPLYING THE RATIO OF THE DECISION TO THE PRESE NT CASE, SET ASIDE THE ORDER OF THE CIT(A) ON THIS DISPUTED ISSU E AND REMIT THE ENTIRE MATER TO THE FILE OF THE AO FOR FRESH CO NSIDERATION IN ACCORDANCE WITH LAW AND ALLOW THE GROUND OF APPEAL OF THE REVENUE FOR STATISTICAL PURPOSES. 9. IN RESPECT OF GROUNDS NO.4 AND 5, LEARNED DR ARG UED THAT THE CIT(A) HAS ERRED IN DIRECTING THE AO TO EXCLUDE DATA LINK CHARGES AND OTHER EXPENDITURE BOTH FROM EXPORT TURN OVER AS WELL AS TOTAL TURNOVER AND REVENUE HAS CHALLENGED T HE DECISION IN HIGHER FORUM. THE LD. AR SUPPORTED THE ORDER OF THE CIT(A) ITA NOS.977 & 943/BANG/2015 PAGE 15 OF 16 AND RELIED ON THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. TATA ELXSI (349 ITR 98). 10. WE HEARD RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. WE FOUND THAT THE CIT(A) HAS DEALT ON THIS ISSUE AT PARA.10 WHICH READS AS UNDER: 10. GROUNDS NO.8 TO 13 ARE AGAINST THE REWORKI NG OF DEDUCTION UNDER SEC.10A BY EXCLUDING DATA LINK CHAR GES AND OTHER EXPENDITURE INCURRED IN FOREIGN CURRENCY FROM THE EXPORT TURNOVER WITHOUT CORRESPONDINGLY REDUCING TH E SAME FROM THE TOTAL TURNOVER. IN THIS REGARD APPELLANT H AS RELIED ON THE DECISION OF THE KARNATAKA HIGH COURT IN ITS OWN CAS E IN ITA NO.818/2009 DT.30.08.2011. IN THE SAID DECISION IT HAS BEEN HELD AS FOLLOWS. ' IN OTHER WORDS, IF THE EXPORT TURNOVER IN THE NUMERATOR IS TO BE ARRIVED AT AFTER EXCLUDING CERTA IN EXPENSES, THE SAME SHOULD ALSO BE EXCLUDED IN COMPUTING THE EXPORT TURNOVER AS A COMPONENT OF TOTAL TURNOVER IN THE DENOMINATOR. THE REASON BEING THE TOTAL TURNOVER INCLUDES EXPORT TURNOVER. THE COMPONENTS OF THE EXPORT TURNOVER IN THE NUMERATOR AND THE DENOMINATOR CANNOT BE DIFFERENT. THEREFORE, THOUGH THERE IS NO DEFINITION OF THE TERM 'TOTAL TURNOVER' IN SECTION 10A, THERE IS NOTHING IN THE S AID SECTION TO MANDATE THAT WHAT IS EXCLUDED FROM THE NUMERATOR THAT IS EXPORT TURNOVER WOULD NEVERTHELESS FORM PART OF THE DENOMINATOR'. 10.1 FOLLOWING THE DECISION OF THE JURISDICTIONA L HIGH COURT THE AO IS DIRECTED TO DELETE THE ADDITION MADE. THI S GROUND IS ALLOWED. WE FOUND THAT THE CIT(A) HAS CONSIDERED THE DECISIO N OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF TATA ELXSI (SUPRA) AND PASSED A REASONED ORDER WHICH CANNOT BE INTERFE RED AND UPHOLD THE SAME AND DISMISS THE GROUND OF APPEAL. ITA NOS.977 & 943/BANG/2015 PAGE 16 OF 16 11. IN THE RESULT, THE REVENUES APPEAL AND THE AS SESSEES APPEAL ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH JULY, 2019. SD/- SD/- (B.R. BASKARAN) (PAVAN KUMAR GADALE) ACCOUNTANT MEMBER JUDICIAL MEMBER PLACE : BENGALURU D A T E : 12/07/2019 SRINIVASULU, SPS COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A)- 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME-TAX APPELLATE TRIBUNAL BANGALORE