Deputy Commissioner of Income-tax, Bangalore V. IGate Global Solutions Ltd., Bangalore

ITTPA 286/BANG/2013

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 5866 (ITAT-PUNE)
• Duration Of Justice: 6 year(s) 4 month(s) 30 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 05-08-2019
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 02-08-2019
• Assessment Year: 2007-2008
• Appeal Filed On: 06-03-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: EMANATES FROM PASSED
• Keywords: Transfer pricing; International transaction; Earning of tax free income; Deemed export; Rule 8D
• Section: 10AA; 14A; 115JB; 10B; 144C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH C, PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER . / IT(TP)A NO.286/BANG/2013 / ASSESSMENT YEAR : 2007-08 DCIT, CIRCLE-11(4), BANGALORE VS. M/S. IGATE GLOBAL SOLUTIONS LTD., 158-162(P) & 165-170 (P) EPIP PHASE-II, WHITEFIELD, BANGALORE 66 PAN : AABCM4573E (APPELLANT) (RESPONDENT) / ORDER PER R.S.SYAL , VP : THIS APPEAL BY THE REVENUE EMANATES FROM THE ORDER PA SSED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) ON 31-12-2012 IN RELATION TO THE ASSESSMENT YEAR 2007-08. 2. THE FIRST EFFECTIVE ISSUE RAISED IN THIS APPEAL IS AGAINS T THE DIRECTION OF THE LD. CIT(A) TO COMPUTE THE ARMS LENGTH PRICE (ALP) OF THE RATE OF INTEREST CHARGED BY THE ASSESSEE ON LOAN AD VANCED TO ITS ASSOCIATED ENTERPRISE (AE) SITUATED IN GERMANY BY ADOPTING THE ASSESSEE BY SHRI PADAMCHAND KHINCHA REVENUE BY SHRI SANDIP GARG, CIT DATE OF HEARING 02 -08-2019 DATE OF PRONOUNCEMENT 05-08-2019 IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 2 AVERAGE EURIBOR RATE OF 4.42% AS APPLICABLE TO THE ASSES SMENT YEAR 2007-08. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSE E, AN INDIAN COMPANY, IS A SUBSIDIARY OF IGATE INCORPORATED, U SA. IT ACTS AS A SINGLE SOURCE BROAD RANGE OF INFORMATION TECHNOLOGY APPLICATIONS, SOLUTIONS AND SERVICES THAT INCLUDE CLIENT/SERVER POSITION AND DEVELOPMENT. THE ASSESSEE FILED ITS RETURN DEC LARING LOSS OF RS.1.48 CRORE AND ODD. CERTAIN INTERNATIONAL TRANSA CTIONS WERE REPORTED IN FORM NO.3CEB. THE ASSESSING OFFICER (A O) REFERRED THE DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANSACTIONS TO THE TRANSFER PRICING OFFICER (TPO). THE INSTAN T DISPUTE IS ONLY CONCERNED WITH THE INTERNATIONAL TRANSACTION OF `INTEREST INCOME. THE ASSESSEE ADVANCED LOANS TO ITS TWO AES, NAMELY, MASCOT SYSTEMS GMBH, GERMANY, ON WHICH INTEREST OF RS.5,21,928/- WAS CHARGED @ 1.50%; AND M/S. SYMPHONI INTERACTIVE, LLC, USA, ON WHICH INTEREST OF RS.24,54,741/- WAS CHARGED @ 6%. THE ASSESSEE DECLARED SUCH INTERNATIONAL TRANSACTIONS AT ALP. THE TPO OBSERVED THAT THE ARMS LENGTH INTEREST RATE WOULD BE THE ONE WHICH WOULD BE EARNED BY THE ASSESSEE BY ADVANCING LOAN TO AN UNRELATED PARTY IN INDIA. APPLYING THE COMPARABLE UNCONTROLLED PRICE (CUP) METHOD AS THE MOST IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 3 APPROPRIATE METHOD, THE TPO DETERMINED THE ARMS LENGTH RATE INTEREST AT 14%, BEING, THE INTEREST THAT IS EARNED ON BBB BON DS IN INDIA. AS AGAINST THE ACTUAL INTEREST RECEIVED FROM TWO AES A T RS.29,76,669/-, THE TPO DETERMINED ARMS LENGTH INTEREST INC OME AT RS.1,10,33,725/- AND ACCORDINGLY RECOMMENDED TRANSFER P RICING ADJUSTMENT OF RS.80,57,056/-. THE AO, IN HIS ORDER DATE D 21-02- 2011 PASSED U/S.143(3) R.W.S. 144C OF THE INCOME-TAX A CT, 1961 (HEREINAFTER CALLED THE ACT), MADE THE TRANSFER PRICING A DDITION OF THE EQUAL AMOUNT. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A), WHO HELD THAT THE DOMESTIC PRIME LENDING RATE WOULD HAVE NO APPLICATION IN THIS REGARD AND FURTHER THAT AN INTERNATIO NAL RATE LIKE LIBOR OR EURIBOR WOULD COME INTO PLAY AS THE LOAN IN QUESTION WAS DENOMINATED IN EUROS TO A SUBSIDIARY LOCATED IN GERMANY. HE, THEREFORE, HELD THAT EURIBOR WAS THE CORRE CT RATE TO BE ADOPTED FOR EVALUATION OF ARMS LENGTH RATE OF INTEREST A ND NOTED IN PARA 104 OF HIS ORDER THAT THE AVERAGE LIBOR RATE AS PER THE DECISION RENDERED BY THE TRIBUNAL IN ANOTHER CASE WAS 4.42 % FOR THE A.Y. 2007-08. CONSEQUENTLY, HE DIRECTED THE AO TO COMPUTE THE ALP BY ADOPTING THE AVERAGE EUBIBOR RATE OF 4.42%, AGAIN ST WHICH THE REVENUE HAS COME UP IN APPEAL BEFORE THE TRIBU NAL. IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 4 4. WE HAVE HEARD BOTH THE SIDES AND GONE THROUGH THE RELE VANT MATERIAL ON RECORD. IT IS OBSERVED FROM THE ORDER PASSED BY THE TPO THAT THE ASSESSEE ADVANCED LOANS TO ITS TWO AES, ONE IN THE USA AND THE OTHER IN GERMANY. IN SO FAR AS LOAN TO SYMPHONI INTERA CTIVE LLC, AN ASSOCIATED ENTERPRISE IN THE USA IS CONCERNED, THE ASSESSEE CHARGED INTEREST @ 6%. THE LD. CIT(A) HAS REC ORDED THAT THE ASSESSEE ALSO PAID INTEREST TO ANOTHER AE IN THE USA, NAME LY, IGATE CORPORATION, USA AT 5.9% ON ITS EXTERNAL COMMERCIAL BORROWINGS (ECB). HE FURTHER RECORDED IN PARA 57 OF TH E IMPUGNED ORDER THAT THE TPO ACCEPTED THIS TRANSACTION AND MADE NO TRAN SFER PRICING ADJUSTMENT ON THIS SCORE, THEREBY, HE ALSO IMPLIEDLY ACCEPTING THIS TRANSACTION AT ALP. THE VIEW POINT OF THE LD. CI T(A) ON THIS POINT IS NOT FULLY CORRECT. WE HAVE NOTED ABOVE THA T THE TPO WORKED OUT THE TRANSFER PRICING ADJUSTMENT BY CONSIDERING TH E LOANS ADVANCED BY THE ASSESSEE TO BOTH OF ITS AES, INCLUDING SYMPH ONI INTERACTIVE LLC, USA. BE THAT AS IT MAY, IT IS SEEN THAT THE LD. CIT(A) ALSO IMPLIEDLY ACCEPTED THE INTEREST EARNED BY THE AS SESSEE FROM SYMPHONI INTERACTIVE LLC, USA, AT 6% AS AT ALP, AGAIN ST WHICH THE DEPARTMENT HAS NO GRUDGE AS THE ASSAIL IS ONLY TO THE APPLICATION OF EURIBOR OF 4.42%, WHICH RELATES TO THE LOAN ADVANCED BY THE ASSESSEE TO MASCOT GMBH, GERMANY. AS S UCH, WE IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 5 ARE CONFINING OURSELVES ONLY TO INTERNATIONAL TRANSACTION OF REC EIPT OF INTEREST FROM MASCOT GMBH, GERMANY. AS AGAINST THE ASS ESSEE CHARGING INTEREST AT THE RATE OF 1.50% FROM MASCOT GMBH, GERMANY, THE TPO DETERMINED THE ARMS LENGTH RATE OF INTERES T AT 14%, WHICH THE LD. CIT(A) REDUCED TO 4.42% BY TREATING IT AS THE AVERAGE EURIBOR RATE FOR THE YEAR UNDER CONSIDERATION. 5. THERE ARE TWO FACETS OF THE DISPUTE RAISED BY THE REV ENUE ON THIS ISSUE. THE FIRST IS THAT THE RATE OF INTEREST SHOULD BE C ONSIDERED WITH REFERENCE TO THE PRIME LENDING RATE PREVALENT IN INDIA A ND THE SECOND IS THAT THE REDUCTION IN RATE TO 4.42% BY THE LD. CIT(A ) IS NOT JUSTIFIED. 6. AS AGAINST THE TPOS POINT OF VIEW THAT SINCE THE ASSESS EE IN INDIA ADVANCED LOAN TO ITS AE IN GERMANY, WHICH IF NOT GIVEN , WOULD HAVE FETCHED INTEREST @14% IN INDIA, THE LD. CIT(A) HA S HELD THAT INTEREST RATE PREVALENT IN THE COUNTRY IN WHICH THE LOAN IS RECEIVED, SHOULD BE CONSIDERED FOR DETERMINING THE ALP OF TRANSACTION OF INTEREST RECEIVED. WE FIND THAT THERE IS ALMOST JUDICIAL CONSENSUS AD IDEM AT THE HIGHER APPELLATE FORUMS ON THE QUESTION OF WHICH COUNTRY, THAT IS THE BORROWER OR THE LENDER, SHOULD BE CONSIDERED FOR DETERMINING THE ARMS LENGTH RATE OF INTEREST ON LOANS IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 6 ADVANCED TO THE AES. THE HONBLE BOMBAY HIGH COURT IN CIT VS. TATA AUTOCOMP SYSTEMS LTD. (2015) 374 ITR 516 (BOM.) HAS HELD THAT THE ALP IN CASE OF LOAN ADVANCED TO AES SHOULD BE DETE RMINED ON THE BASIS OF RATE OF INTEREST CHARGED IN THE COUNTRY WHE RE LOAN IS RECEIVED. THE HONBLE DELHI HIGH COURT IN CIT VS. COTTON NATURALS (I) PVT. LTD. (2015) 276 CTR 445 (DELHI) HAS ALSO HELD THAT THE CURRENCY IN WHICH THE LOAN IS TO BE REPAID NORMALLY DETER MINES THE RATE OF RETURN ON THE MONEY LENT, I.E. RATE OF INTERES T. THE HONBLE BOMBAY HIGH COURT IN CIT VS. THE GREAT EASTERN SHIPPING COMPANY LTD. (2018) 301 CTR 642 (BOM.) HAS REITERATED THAT THE ARMS LENGTH RATE OF INTEREST IS TO BE CONSIDERED WITH REFERENCE TO THE COUNTRY IN WHICH THE LOAN IS RECEIVED AND N OT FROM WHERE IT IS PAID. IN VIEW OF THESE PRECEDENTS, IT IS PALPABLE THAT THE VIEW POINT OF THE AO IN CONSIDERING THE RATE OF INTEREST PREVA LENT IN INDIA, BEING, THE LENDER COUNTRY, AS DETERMINATIVE OF THE ALP OF RATE OF INTEREST CHARGED BY THE ASSESSEE, IS NOT CORRECT. TO TH IS EXTENT, WE UPHOLD, IN PRINCIPLE, THE VIEW CANVASSED BY THE LD. CIT(A) THAT THE RATE OF INTEREST PREVALENT IN GERMANY, BEING, THE COUNTRY IN W HICH THE LOAN WAS CONSUMED, IS DETERMINATIVE OF THE ARMS LENGTH R ATE OF INTEREST CHARGED BY THE ASSESSEE-LENDER. IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 7 7. NOW WE ESPOUSE THE SECOND FACET OF THE DISPUTE RE LATING TO THE DETERMINATION OF THE ARMS LENGTH RATE OF INTEREST. IT IS SEEN THAT THE LD. CIT(A) HAS HELD THAT AVERAGE EURIBOR FOR THE A.Y. 2007-08 SHOULD BE CONSIDERED AS A BENCHMARK. IN DETERMINING THE A VERAGE EURIBOR AT 4.42%, HE RELIED ON AN ORDER PASSED BY THE T RIBUNAL IN WHICH THE AVERAGE LIBOR WAS CONSIDERED AT 4.42%. IN OTH ER WORDS, THE LD. CIT(A) CONSIDERED EURIBOR AS A COMPARAB LE UNCONTROLLED TRANSACTION FOR THE PURPOSE OF BENCHMARKING THE RATE OF INTEREST CHARGED BY THE ASSESSEE. 8. AT THIS JUNCTURE, WE CONSIDER IT EXPEDIENT TO CLARIFY THAT EURIBOR (EURO INTER-BANK OFFERED RATE) IS NOT A RATE OF INTEREST, IN ITSELF, AT WHICH LOANS ARE ADVANCED BY BANKS IN EUROS TO B ORROWERS. EURIBOR IS A REFERENCE RATE WHICH IS CALCULATED FROM THE AV ERAGE INTEREST RATE AT WHICH EURO ZONE BANKS OFFER LENDING ON INTE R-BANK MARKET. WHILE CALCULATING EURIBOR, 15% OF THE LOWEST AND 15 % OF THE HIGHEST INTEREST RATES COLLECTED BY A PANEL OF EUROPEAN BANKS ARE ELIMINATED AND THE REMAINING 70% FORM THE BASIS FOR ITS CALCULATION. IN SUCH CIRCUMSTANCES, EURIBOR, BEING, NOT AN AVERAGE RATE AT WHICH THE LOANS ARE ADVANCED BY EUROPEA N BANKS TO BORROWERS, CANNOT PER SE BE CHARACTERIZED AS A COMPARABLE IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 8 UNCONTROLLED RATE OF INTEREST AT WHICH LOANS ARE ADVANCED IN GERMANY. 9. ON LINES OF EURIBOR, THERE IS LIBOR (LONDON INTER- BANK OFFERED RATE), ANOTHER RATE WHICH IS APPLIED ON BEHALF OF BRITISH BANKERS ASSOCIATION. SIMILAR TO EURIBOR, LIBOR IS ALSO A RA TE AT WHICH MAJOR GLOBAL BANKS LEND TO ONE ANOTHER IN THE INTERNATIONA L INTER-BANK MARKET ON SHORT-TERM BASIS. IN CALCULATION OF LIB OR, 25% OF LOWEST AND 25% OF THE HIGHEST VALUES ARE ELIMINATED AND THE REMAINING 50% ARE CONSIDERED FOR DETERMINING LIBOR. THERE FORE, LIBOR, AS SUCH, CAN ALSO NOT BE CONSTRUED AS A COMPARA BLE UNCONTROLLED TRANSACTION. THE HONBLE BOMBAY HIGH COURT IN CIT VS. AURIONPRO SOLUTIONS LTD. (2017) 99 CCH 0070 MUM-HC APPROVED THE ACTION OF THE TRIBUNAL IN CONSIDERING LIBOR +2% AS THE ARMS LENGTH RATE AS AGAINST THE TPO APPLYING LIBOR PLUS 3 %. DRAWING AN ANALOGY FROM THIS POSITION, WE HOLD THAT EURIBOR+2 % SHOULD BE CONSIDERED AS ARMS LENGTH RATE OF INTEREST FOR D ETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION OF INTEREST RECEIVED BY THE ASSESSEE FROM MASCOT SYSTEMS GMBH, GERMANY. 10. BEFORE PARTING WITH THIS ISSUE, WE WOULD LIKE TO CLAR IFY THAT THE LD. CIT(A) HAS CONSIDERED 4.42% AS EURIBOR APPLICABLE FOR IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 9 THE ASSESSMENT YEAR UNDER CONSIDERATION BY RELYING ON AN ORDER OF THE TRIBUNAL, IN WHICH THE AVERAGE LIBOR WAS CONSIDERED AT THIS LEVEL. EQUALITY OF LIBOR AND EURIBOR COULD NOT BE SUBSTAN TIATED FROM ANY MATERIAL ON RECORD. IN THE GIVEN CIRCUMSTANCES, WE SET-SIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF THE AO FOR CONSIDERING EURIBOR +2% AS ARMS LENGTH RATE OF INTEREST TO BE APPLIED ON LOAN ADVANCED BY THE ASSESSEE TO MASCOT SYSTEMS GMBH, GERMANY. IN CASE EURIBOR +2% TURNS OUT TO BE LOW ER THAN 4.42% AS DIRECTED TO BE APPLIED BY THE LD. CIT(A) ON THE UNDERSTANDING OF THE SAME BEING EURIBOR SIMPLICITOR, THEN THE ADDITION SHOULD BE RESTRICTED WITH REFERENCE TO 4.42% RATE OF INTEREST, AS THE ASSESSEE IS NOT IN APPEAL ON THIS ISSUE. I N THE OTHERWISE SCENARIO, THE RELIEF ALLOWED BY THE LD. CIT(A) WILL B E RESTRICTED PRO TANTO. 11. THE NEXT ISSUE RAISED BY THE REVENUE THROUGH GROU ND NO. 5 IS QUA THE COMPUTATION OF DEDUCTION U/S.10A OF THE ACT. THE FACTUA L MATRIX IS THAT THAT THE ASSESSEE CARRIED ON ITS BUSINESS FROM SIX STPI UNITS LOCATED AT JAKKASANDRA AND WHITEFIELD IN BENGALURU, CHEN NAI, PUNE, HYDERABAD AND NOIDA. OPERATIONS FROM STPI UNITS AT JAKKASANDRA, PUNE AND NOIDA RESULTED INTO LOSSES, WHEREA S OPERATIONS FROM OTHER THREE UNITS RESULTED INTO PROFITS. THE A SSESSEE IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 10 COMPUTED DEDUCTION U/S.10A OF THE ACT WITH REFERENCE TO THE PROFITS OF THE THREE STPI UNITS WITHOUT SETTING OFF LOSSES FROM THE OTH ER THREE STPI UNITS. THE AO AGGREGATED THE PROFITS AND LOSSES F ROM ALL THE SIX STPI UNITS AND WORKED OUT THE ALLOWABLE DEDUCTION ACCORDINGLY BY MULTIPLYING THE AGGREGATE PROFIT OF BUSINESS BY THE RATIO OF EXPORT TURNOVER TO TOTAL TURNOVER. THE LD. FIRST APP ELLATE AUTHORITY DECIDED THE ISSUE IN ASSESSEES FAVOUR. AGGRIEVE D THEREBY, THE REVENUE HAS APPROACHED THE TRIBUNAL. 12. WE HAVE HEARD BOTH THE SIDES AND GONE THROUGH TH E RELEVANT MATERIAL ON RECORD. ADMITTEDLY, ALL THE SIX UNITS OF THE ASSES SEE ARE ELIGIBLE FOR DEDUCTION U/S.10A OF THE ACT. THE MOOT POINT IS W HETHER THE ASSESSEE SHOULD BE ALLOWED DEDUCTION IN RESPECT OF UNITS YIELDING PROFIT ON STANDALONE BASIS OR THE NET RESULTANT FIGURE OF PRO FITS/LOSSES FROM ALL THE SIX UNITS SHOULD BE SO CONSIDERED. THIS ISSUE IS NO MORE RES INTEGRA IN VIEW OF THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. YOKOGAWA INDIA LTD. (2017) 291 CTR 1 (SC) IN WHICH THE HONBLE SUMMIT COURT HAS HELD THAT THE STAGE OF DEDUCTION U/S 10A WOULD BE AT THE TIME OF COMPUTING GROSS TOTA L INCOME OF THE ELIGIBLE UNDERTAKING UNDER CHAPTER IV OF THE A CT AND NOT AT THE STAGE OF COMPUTATION OF TOTAL INCOME UNDER CHAPTER VI OF THE ACT. THE NET EFFECT OF THIS JUDGMENT IS THAT THE DEDUCTION IS TO IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 11 BE ALLOWED QUA THE ELIGIBLE UNDERTAKING STANDING ON ITS OWN WITHOUT ANY REFERENCE TO THE OTHER ELIGIBLE OR NON-ELIGIBLE UNITS OR UNDERTAKINGS OF THE ASSESSEE. IN OTHER WORDS, ONE NEED S TO ASCERTAIN THE PROFITABILITY OF THE ELIGIBLE UNITS ON STAND-ALONE BASIS. IF THER E IS A PROFIT IN ONE OR MORE ELIGIBLE UNITS, DEDUCTION U/S 10A SHOU LD BE ALLOWED ON THE SAME NOTWITHSTANDING LOSS IN OTHER ELIGIBLE OR NON- ELIGIBLE UNITS. IN VIEW OF THIS BINDING PRECEDENT FROM THE HON BLE APEX COURT, IT IS VIVID THAT THE LD. CIT(A) HAS TAKEN AN UNEXCEPTIONABLE VIEW ON THIS POINT, WHICH CANNOT BE INTERFERED WITH. 13. THE LD. DR ARGUED THAT IF THAT IS THE CASE, THEN TH E AO SHOULD BE DIRECTED TO FIND OUT IF THERE IS SOME LINK BETWEEN THE UNIT S EARNING PROFIT AND UNITS SUFFERING LOSSES SO THAT IN SUCH A S CENARIO THE PROFIT/LOSS FROM SUCH CONNECTED OR LINKED UNITS COULD BE AGGREGATED. THERE CANNOT BE ANY DISPUTE ON THE CORRECTNE SS OF THE PROPOSITION PUT FORTH ON BEHALF OF THE REVENUE. HOWEVER, IT IS FOUND ON FACTS THAT THE AO HAS NOWHERE HELD THAT SOME ELIGIBLE UNITS HAVING PROFITS HAD ANY LINKAGE WITH SOME OTHER ELIGIBLE UNITS SUFFERING LOSSES. NEITHER IT HAS BEEN THE CONTENTION OF THE AS SESSEE AT ANY STAGE. IN SUCH CIRCUMSTANCES, WE CANNOT PERMIT THE LD. DR TO SET IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 12 UP A NEW CASE. WE, THEREFORE, APPROVE THE VIEW TAKEN BY THE LD. CIT(A) ON THIS ISSUE AND DISMISS THIS GROUND OF APPEAL. 14. THE NEXT ISSUE URGED BY THE REVENUE THROUGH GR OUND NO.6 IS AGAINST THE EXCLUSION OF TELECOMMUNICATION CHARGES AND PAYMEN T TO EMPLOYEES AT FOREIGN BRANCHES FROM THE AMOUNT OF EXPORT TURNOVER IN THE COMPUTATION OF DEDUCTION U/S.10A OF THE ACT. RELYING O N THE JUDGMENT IN THE CASE OF CIT VS. TATA ELXSI LTD. AND ORS (2012) 247 CTR 334(KARN) AND THE ORDER PASSED BY THE TRIBUNAL IN ASSESSEES OWN CASE, THE LD. CIT(A) OVERTURNED THE ASSESSMENT ORDER ON THIS POINT. 15. HAVING HEARD BOTH THE SIDES AND GONE THROUGH TH E RELEVANT MATERIAL ON RECORD, IT IS SEEN THAT THE AO WHILE COMPUTING DED UCTION U/S.10A EXCLUDED TELECOMMUNICATION CHARGES ETC. AMOUNTING TO RS.2,16,03,079/- FROM `EXPORT TURNOVER WITHOUT GIVING A NY CORRESPONDING EFFECT TO THE AMOUNT OF `TOTAL TURNOVER. FORM ULA FOR COMPUTATION OF DEDUCTION HAS BEEN SET OUT IN SUB-SECTION (4) OF SECTION 10A PROVIDING THAT COMPUTATION OF THE AMOUNT OF PRO FITS DERIVED FROM EXPORT OF THE ELIGIBLE PRODUCTS SHALL BE DONE BY CONSIDERING THE SAME PROPORTION AS EXPORT TURNOVER IN RESPE CT OF SUCH PRODUCTS BEARS TO THE TOTAL TURNOVER TO THE PROFITS OF T HE IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 13 BUSINESS OF THE UNDERTAKING. THERE ARE THREE COMPONENTS INVOLVED IN THE COMPUTATION OF ELIGIBLE PROFITS. APART FROM THE PROFITS OF THE BUSINESS OF THE UNDERTAKING, THERE IS A ONE COMPONENT OF E XPORT TURNOVER AND ANOTHER OF TOTAL TURNOVER. THE TERM EXPORT TURNOVER HAS BEEN DEFINED IN EXPLANATION 2(IV) TO SECTION 10A AS CONSIDERATION IN RESPECT OF EXPORT OF ARTICLES OR THINGS ETC. R ECEIVED OR BROUGHT INTO IN INDIA BUT DOES NOT INCLUDE FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVER Y OF ARTICLES OR THINGS ETC. OUTSIDE INDIA INCURRED IN FOREIGN E XCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA. THE TERM TOTAL TURNOVER HAS NOT BEEN SPECIFICALLY DEFINED IN THE DEFINITION CLAUSE OF SECTION 10A CONTAINED IN EXPLANATION 2. HOWEVER, IT GOES WITHOUT SAYING THAT `TOTAL TURNOVER COMPRISES OF `EXPORT TURNOV ER AND DOMESTIC TURNOVER. FOR EXAMPLE, IF EXPORT TURNOVER IS RS.100 AND DOMESTIC TURNOVER IS RS.80, THEN TOTAL TURNOVER WOULD BE RS.180 (RS.100 + RS.80), WHICH IS SUM TOTAL OF BOTH THE EXPORT A ND DOMESTIC TURNOVERS. IF CERTAIN PORTION RELEVANT TO EXPORT OF GOODS, SAY RS.10, IS NOT TO BE CONSIDERED AS PART OF EXPORT TURN OVER OF RS.100, IT IS BUT NATURAL THAT THE AMOUNT OF EXPORT TURNOVER W OULD COME DOWN TO RS.90. IN THAT CASE, TOTAL TURNOVER WOULD BE RS.170 (RS.90 AS EXPORT TURNOVER + RS.80 AS DOMESTIC TURNOVER). ADVERTING IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 14 TO THE FACTS OF THE INSTANT CASE, WE FIND THAT SINCE THE AMOUNT OF TELECOMMUNICATION CHARGES ETC. HAS BEEN HELD BY THE AO HIMS ELF AS NOT FORMING PART OF `EXPORT TURNOVER, THE SEQUITUR IS THAT TH E SAME WOULD ALSO NOT FORM PART OF `TOTAL TURNOVER, AS THERE CANN OT BE TWO DIFFERENT FIGURES OF `EXPORT TURNOVER, ONE AS AN INDEPEN DENT NUMERATOR IN THE FORMULA AND THE OTHER CONSTITUTING PART OF TOTAL TURNOVER IN THE DENOMINATOR. TO PUT IT SIMPLY, TELECOMMUNICATION EXPENSES ETC. WHICH HAVE BEEN EXCLUDED BY THE AO FROM TH E AMBIT OF `EXPORT TURNOVER WOULD ALSO REQUIRE EXCLUSION FROM `TOTA L TURNOVER. APART FROM THE HONBLE KARNATAKA HIGH COURT IN TATA ELXSI LTD. (SUPRA) , THE HONBLE DELHI HIGH COURT IN CIT VS. GENPACT INDIA (2011) 203 TAXMAN 632 (DEL) HAS ALSO HELD THAT COMMUNICATION EXPENSES REDUCED FROM EXPORT TURNOVER SHOU LD ALSO BE REDUCED FROM TOTAL TURNOVER FOR THE PURPOSE OF DEDUCT ION U/S.10A. WE, THEREFORE, HOLD THAT THE LD CIT(A) HAS TAKEN AN UNIMPE ACHABLE VIEW ON THIS ISSUE WHICH CANNOT BE TINKERED WITH. THIS GROUND FAILS. 16. GROUND NOS.7 TO 9 DEAL WITH ANOTHER ASPECT OF COMPUTA TION OF DEDUCTION U/S.10A OF THE ACT, BEING, THE DELETION OF DISALLOWA NCE OF RS.14,61,44,712/- TOWARDS REDUCTION OF INCOME FROM D EPUTATION OF TECHNICAL MANPOWER (DTM) AND ONSITE ACTIVITIES FROM THE PURVIEW OF ELIGIBLE INCOME U/S.10A OF THE ACT. SUCCINCTLY, THE F ACTS IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 15 OF THIS ISSUE ARE THAT THE AO REQUIRED THE ASSESSEE TO SUB MIT THE SCOPE OF WORKS (SOWS) IN RESPECT OF AGREEMENTS FOR SOF TWARE DEVELOPMENT FOR WHICH DEDUCTION WAS CLAIMED U/S 10A. THE ASSESSEE FILED THE SAME, ON PERUSAL OF WHICH THE AO OBSER VED THAT THE MAJORITY WERE ONSITE CONTRACTS WITHOUT ANY STP/SEZ LINK TO THE INDIAN BUSINESS AND FURTHER INFERRED THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF DEPUTATION OF TECHNICAL MANPOWER TO ITS CLIE NTS. THE ASSESSEE TENDERED A REPLY FURNISHING COPIES OF MASTER SERVICE AGREEMENTS (MSAS) ALONG WITH SOWS AND THEIR CORRELATION WITH SEVERAL INVOICES, WHICH DID NOT FIND FAVOUR WITH THE AO. TH E OFFICER NOTICED THAT DTM CONTRACT RECEIPTS WERE ONE OF THE MA JOR COMPONENTS OF THE REVENUE RECEIPTS OF THE ASSESSEE, UNDE R WHICH SOFTWARE ENGINEERS WERE SENT TO THE US OR EUROPE FOR WORK ING IN COMPANIES ON SHORT TERM BASIS. HE FURTHER OBSERVED THAT ON AN AVERAGE, SUCH COMPANIES ABROAD WERE PAYING TO THE ASSES SEE US$ 6000 FOR EACH OF THE SOFTWARE PROFESSIONALS, AGAINST WHIC H THE ASSESSEE WAS PAYING EQUIVALENT OF APPROXIMATELY US$ 4000 TO THEM. HE FURTHER HELD THAT THE SERVICES RENDERED BY THE PROFESSIO NALS AT LOCATIONS ABROAD WERE NOT UNDER THE CONTROL AND SUPERVISION OF THE ASSESSEE. IN THE ULTIMATE ANALYSIS, THE AO RECOMPUTED THE AMOUNT OF DEDUCTION U/S.10A BY CONSIDERING THE AMOUNT OF DEDUCTION IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 16 ORIGINALLY WORKED AT RS.62,06,33,422/-, FROM WHICH A SUM OF RS.2,43,57,452/-, BEING 4% OF PROFITS ASCRIBED TO DEPUTATIO N OF TECHNICAL MANPOWER BUSINESS WAS REDUCED AND A FURTHER S UM OF RS.12,17,87,260/-, BEING 20% OF PROFITS ASCRIBED TO ONSITE SOFTWARE SERVICES NOT RELATED TO STP UNDERTAKINGS IN INDIA WAS REDUCE D, WHICH BROUGHT DOWN THE AMOUNT OF REVISED DEDUCTION U/S.10A TO RS.47,44,88,710/-. THE LD. CIT(A) ACCEPTED THE ASSESS EES CLAIM AND OVERTURNED THE ACTION OF THE AO ON THIS POINT. 17. HAVING HEARD BOTH SIDES AND GONE THROUGH THE RELE VANT MATERIAL ON RECORD, IT IS OBSERVED THAT THE AO REDUCED PROFIT RELATABLE TO DEPUTATION OF TECHNICAL MANPOWER (DTM) AND ONSITE SOFTWARE SERVICES ALLEGEDLY NOT RELATED TO STP UNDERTAKINGS IN I NDIA AT AD HOC 4% AND 20% OF THE ELIGIBLE SOFTWARE DEVELOPMENT INCOME U/S 10A OF THE ACT AS COMPUTED BY HIM. PRIMARILY, NO REA SON HAS BEEN ATTRIBUTED BY THE AO AS TO HOW 4% AND 20% RATES WERE DETERMINED FOR REDUCING THE AMOUNT OF DEDUCTION ON ACCOU NT OF DTM AND ONSITE ACTIVITIES. 18. THE ASSESSEE EARNED INCOME FROM SOFTWARE DEVELO PMENT ACTIVITY IN ALL OF ITS SIX ELIGIBLE UNITS. THE QUESTION WHICH FALLS FOR OUR CONSIDERATION IS AS TO WHETHER THE AO WAS RIGHT IN HOLDING THAT A IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 17 PART OF CONSIDERATION RECEIVED BY THE ASSESSEE FROM THE DEPUTATION OF TECHNICAL MANPOWER (DTM) ACTIVITIES AND ONSITE ACTIVITIES SHOULD BE EXCLUDED FROM THE ELIGIBLE REVENUE? 19. SECTION 10A IS A SPECIAL PROVISION IN RESPECT OF NEWLY ESTABLISHED UNDERTAKINGS IN FREE TRADE ZONES ETC. SUB-SECTION (1) OF THIS SECTION PROVIDES FOR A DEDUCTION OF PROFITS AND GAINS A S ARE DERIVED BY AN UNDERTAKING FROM THE EXPORT, INTER ALIA, OF COMPUTER SOFTWARE FOR A SPECIFIED PERIOD. IT IS NOT DISPUTED THAT TH E ASSESSEE SATISFIED ALL THE REQUISITE CONDITIONS FOR BECOMING ELIGIBLE TO DEDUCTION UNDER THIS SECTION, WHICH IS APPARENT FROM THE ACTION OF THE AO IN HIMSELF ALLOWING DEDUCTION TO SOME EXTENT. THE DISPUTE IS ONLY TO RESTRICTING THE AMOUNT OF DEDUCTION IN RESPECT OF THE ALLE GED PROFITS DERIVED BY THE ASSESSEE FROM DTM AND ONSITE CHARG ES, WHICH IN THE OPINION OF THE AO, WERE NOT DERIVED FROM EXPORT OF COMPUTER SOFTWARE. 20. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF COMPU TER SOFTWARE DEVELOPMENT FROM ITS ELIGIBLE UNITS. AT THIS STAGE, IT WOULD BE APPOSITE TO CONSIDER THE MEANING OF `COMPUTER SOFTWARE GIVE N IN EXPLANATION 2(I) OF SECTION 10A AS: `( A ) ANY COMPUTER PROGRAMME RECORDED ON ANY DISC, TAPE, PERFORATED MEDIA OR OTHER IN FORMATION IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 18 STORAGE DEVICE; OR ( B ) ANY CUSTOMIZED ELECTRONIC DATA OR ANY PRODUCT OR SERVICE OF SIMILAR NATURE, AS MAY BE NOTIFIED BY THE BO ARD, - WHICH IS TRANSMITTED OR EXPORTED FROM INDIA TO ANY PLACE OU TSIDE INDIA BY ANY MEANS. IT TRANSPIRES FROM THE DEFINITION OF THE `COMPUTER SOFTWARE THAT IT HAS TWO CLAUSES. THE FIRST CLAUSE DEALS WITH A COMPUTER PROGRAMME WHICH IS RECORDED ON ANY DISC O R TAPE ETC., WHICH MAY USUALLY BE OFF THE SHELF PRODUCT OR IN OTHER WORDS, A PRODUCT WHICH IS AVAILABLE AS SUCH WITH THE ASSESSEE AND IS N OT REQUIRED TO BE CUSTOMIZED. THE SECOND CLAUSE DEALS WITH A CUSTOMIZED ELECTRONIC DATA OR ANY PRODUCT, WHICH IS REQUIRED TO BE TAILOR-MADE. WHEREAS THE FIRST CLAUSE ENCOMPASSES A COMPUTE R PROGRAMME WHICH HAS ALREADY BEEN DEVELOPED BY THE ASSES SEE ON A STANDARD BASIS AND IS EXPORTED AS SUCH, THE SECOND CLAUSE COVERS DEVELOPING A NEW COMPUTER SOFTWARE AS PER THE SPECIFIC REQUIREMENTS OF THE CUSTOMER. 21. ONE HAS TO PASS THROUGH VARIOUS STAGES TO DEVELOP A COMPUTER SOFTWARE, SUCH AS, CONCEPTUALIZATION, PLANNING, DESIGNING, DEVELOPING, TESTING AND THEN MAINTAINING. IN THE CONCEPTUA LIZATION STAGE, THE REQUIREMENTS OF THE CUSTOMER ARE FIRST IDENTIFIED TO FORM A VIEW OF THE WORK TO BE DONE. IN THE PLANNING STAGE, AN OVE RALL PLAN OF PROCEEDING WITH IS FORMALIZED. IN THE DESIGNING STAGE, B LUEPRINT IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 19 OF THE WORK TO BE DONE IS DRAWN. IN THE DEVELOPMENT STAGE , WHICH IS ALSO CALLED CODING STAGE, THE ACTUAL WORK IS STARTED FOR TRANS LATING THE PLAN INTO ACTION. IT IS ONE OF THE MOST IMPORTANT STAGES OF SO FTWARE DEVELOPMENT. IN THIS STAGE, THE WORK IS DIVIDED INTO SEVERAL MODULES/PROGRAMMES, EACH OF WHICH IS INDEPENDENTLY DEVELO PED AND CODED. THIS ACTIVITY OF DEVELOPMENT OF MODULES AND COD ING MAY BE DONE SIMULTANEOUSLY OR ONE AFTER ANOTHER, DEPENDIN G UPON THE NATURE OF MODULE AND ITS PLACEMENT OR SETTING WITHIN THE OVER ALL PRODUCT. THE DEVELOPMENT STAGE PRODUCES A FINAL SOFTWAR E PRODUCT, WHICH IS THEN TESTED ON STRINGENT STANDARDS TO ENSURE THAT IT MEA SURES UP TO THE REQUIRED SPECIFICATIONS. ONCE THE COMPUTER SOFTWAR E OR THE PRODUCT PASSES THROUGH THE TESTING STAGE, IT IS GIVEN TO THE CU STOMER FOR ACTUAL USE. ANY PRODUCT SO DEVELOPED MAY NEED MAINTEN ANCE AND THEN UPGRADATION WITH THE PASSAGE OF TIME. A CLOSE SC RUTINY OF THE LIFE CYCLE OF A CUSTOMIZED SOFTWARE, AS DISCUSSED ABOVE , DISCERNS THAT A LOT OF INTERACTION IS REQUIRED BETWEEN THE COMPUTER SOFTWA RE DEVELOPER AND THE CUSTOMER, WHICH IS ALMOST PRESENT IN MOST OF THE STAGES OF SOFTWARE DEVELOPMENT, STARTING WITH CONCEPTUALIZATION ITSELF. IN DEVELOPING A COMPUTER SOFTWARE OF LARGE MAGNITUDE , IT IS QUITE POSSIBLE THAT A SOFTWARE DEVELOPER MAY HAVE TO VISIT THE SITE OF THE CUSTOMER SEVERAL TIMES FOR HAVING AN ON THE SPOT INF ORMATION IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 20 AND PROPERLY APPRECIATING THE NEEDS SO AS TO MAKE THE FINA L PRODUCT COMPLIANT WITH THE REQUIREMENTS. THERE CAN BE SEVERAL OTHER REASONS NECESSITATING A CUSTOMER ABROAD INSISTING A SOFTWARE DEVELOPER IN INDIA TO DEVELOP SOFTWARE FULLY OR PARTLY AT HIS SITE OVERSEAS. THE STAGE OF TESTING IN A CUSTOMIZED SOFTWARE CAN BE PROPERLY DO NE ONLY AT THE SITE OF THE CUSTOMER. THE NITTY-GRITTY OF THE MATTER IS THAT A CUSTOMIZED SOFTWARE CANNOT BE ORDINARILY DEVELOPED WITHOUT SPENDING SOME TIME ON SITE WITH THE CUSTOMER. CONSIDERING THE OBJECTIVE OF DEDUCTION U/S 10A AND REALIZING PRACTICAL ISSUES A ND DIFFICULTIES, THE FINANCE ACT, 2001 INSERTED EXPLANATION 3 W.E. F. 1.4.2001 PROVIDING: `FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT THE PROFITS AND GAINS DERIVED FROM ON SITE DEVE LOPMENT OF COMPUTER SOFTWARE (INCLUDING SERVICES FOR DEVELOPMENT OF SOFTWARE) OUTSIDE INDIA SHALL BE DEEMED TO BE THE PROFITS AND GAINS DERIVED FROM THE EXPORT OF COMPUTER SOFTWARE OUTSIDE INDIA. THE EXPLANATION CONTAINS A DEEMING PROVISION AND GIVES A PRACTICA L SOLUTION TO THE PROBLEM BY PROVIDING THAT PROFITS FROM ON SITE DEVELOPMENT OF COMPUTER SOFTWARE AND SERVICES FOR DEVELOP MENT OF SOFTWARE OUTSIDE INDIA SHALL BE DEEMED TO BE THE PROFITS AND GAINS DERIVED FROM THE EXPORT OF COMPUTER SOFTWARE OUTSIDE INDIA . UNDETERRED BY THE EXPLANATION 3, SOME OF THE AUTHORITIES KEPT ON IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 21 REFUSING THE CLAIM OF THE ASSESSES U/S 10A, AS IS THE CAS E UNDER CONSIDERATION, TO THE EXTENT OF THE PROFITS DERIVED FROM ONSITE DEVELOPMENT OF COMPUTER SOFTWARE AND RENDERING OF SERVICE S BY TECHNICAL MANPOWER OUTSIDE INDIA. THE CBDT HAD TO STEP IN B Y ISSUING A CIRCULAR NO.1/2013 DATED 17.1.2013 PROVIDING THAT (A) : `IT IS CLARIFIED THAT THE SOFTWARE DEVELOPED ABROAD AT A CLIENTS PLA CE WOULD BE ELIGIBLE FOR BENEFITS UNDER THE RESPECTIVE PROVISIONS , BECAUSE THESE WOULD AMOUNT TO 'DEEMED EXPORT AND TAX BEN EFITS WOULD NOT BE DENIED MERELY ON THIS GROUND AND (B) `THAT P ROFITS EARNED AS A RESULT OF DEPLOYMENT OF TECHNICAL MANPOWER AT THE CLIENTS PLACE ABROAD SPECIFICALLY FOR SOFTWARE DEVELOPMENT WO RK PURSUANT TO A CONTRACT BETWEEN THE CLIENT AND THE ELIGIBLE UNIT SH OULD NOT BE DENIED BENEFITS UNDER SECTIONS 10A, 10AA AND 10B P ROVIDED SUCH DEPUTATION OF MANPOWER IS FOR THE DEVELOPMENT OF SUCH SOFTWARE AND ALL THE PRESCRIBED CONDITIONS ARE FULFILLED. IT WAS BROUGHT TO THE NOTICE OF THE CBDT THAT THE AOS WERE NOT EVEN FOLLOWING THE CLARIFICATION GIVEN IN THE CIRCULAR DATED 17.1.201 3. ONCE AGAIN, THE CBDT ISSUED INSTRUCTION NO. 17/2013 DATED 19.11.2013 CLARIFYING THAT: `THE UNDERSIGNED IS DIRECTED TO C ONVEY THAT THE FIELD AUTHORITIES ARE ADVISED TO FOLLOW THE CONTENTS OF TH E CIRCULAR IN LETTER AND SPIRIT. IT IS ALSO ADVISED THAT FURTHER APP EALS IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 22 SHOULD NOT BE FILED IN CASES WHERE ORDERS WERE PASSED PR IOR TO ISSUE OF CIRCULAR BUT THE ISSUES GIVING RISE TO THE DISPUTES HAVE BE EN CLARIFIED BY THE CIRCULAR. THERE IS HARDLY ANY NEED TO ACCE NTUATE THAT INCOME-TAX AUTHORITIES ARE MERE IMPLEMENTING AGENCIES OF THE PARLIAMENT INTENT EXPRESSED THROUGH THE ENACTMENT. THEY CA NNOT SUO MOTU USURP THE POWER TO INDIRECTLY LEGISLATE BY NOT FOLLOWING THE MANDATE OF THE PROVISIONS. OTHER INCOME-TAX AUTHORITIES ARE BOUND TO FOLLOW THE COMMAND OF THE CBDT GIVEN THROUGH CIRCULARS, EVEN IF THEY ARE NOT PERSONALLY AGREEABLE WITH THE SAME. 22. ON GOING THROUGH THE DIRECTIVE OF THE EXPLANATION 3 A ND THE CIRCULARS ISSUED BY THE CBDT, WHICH ARE BINDING ON THE AUTH ORITIES UNDER THE ACT, IT IS VIVID THAT THE BENEFIT OF DEDUCTION UNDER SE CTION 10A CATERS NOT ONLY TO PROFITS EARNED FROM EXPORT SIMPLICITOR OF COMPUTER SOFTWARE BUT ALSO TO ANY PROFITS AND GAINS DERIVED FROM ONSITE DEVELOPMENT OF COMPUTER SOFTWARE AND ALSO SERVICES F OR DEVELOPMENT OF SOFTWARE RENDERED OUTSIDE INDIA. SO LONG AS THERE REMAINS A LIVE LINK BETWEEN ONSITE DEVELOPMENT OF COMPUTER SOFTWARE AND SERVICES FOR DEVELOPMENT OF SOFTWARE WITH THE DEVELOPMENT OF SOFTWARE FROM THE ELIGIBLE UNDERTAKING, THE CONSIDERATION AWARDED FOR ONSITE DEVELOPMENT FOR COMPUTER SOFTWARE AND RENDERING SERVICES FOR DEVELOPMENT OF SERVIC ES OUTSIDE IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 23 INDIA CANNOT BE EXCLUDED FROM THE PURVIEW OF DEDUCTION U/S. 10A. HOWEVER, WHAT IS ESSENTIAL FOR SUCH ONSITE DEVELOPMENT OR RE NDERING OF SOFTWARE DEVELOPMENT SERVICES OUTSIDE INDIA TO QUALIFY FO R THE BENEFIT OF DEDUCTION IS THAT THESE SHOULD BE IN FURTHERANCE OF THE DEVELOPMENT OF THE SOFTWARE PRODUCT UNDERTAKEN BY THE ELIGIBLE ENTERPRISE. IF ONSITE SERVICES ARE DE HORS THE PRODUCT WHICH THE ASSESSEE UNDERTOOK TO DELIVER TO THE FOREIGN CUSTOMER, THEN ANY PROFIT AND GAIN ARISING FROM SUCH SERVICES CANNOT BE CONS IDERED AS ELIGIBLE FOR DEDUCTION. THE DETERMINATIVE TEST TO QUALIFY FOR TH E BENEFIT OF DEDUCTION, IN OUR CONSIDERED OPINION, IS THAT THE RENDITION OF ONSITE SERVICES ETC. OUTSIDE INDIA BY THE ASSESSEE SHOULD BE AN INTEGRAL PART OF THE OVERALL COMPUTER SOFTWARE DEVELOPMENT P ROJECT, WHICH THE ASSESSEE UNDERTOOK TO DO FOR ITS FOREIGN CUSTOM ER. SO LONG AS THE ONSHORE ACTIVITIES ETC. PERFORMED OUTSIDE INDIA REMAIN IN FURTHERANCE OF THE FINAL PRODUCT TO BE DELIVERED, THERE CAN BE NO DOUBT ON THE ELIGIBILITY OF PROFIT FROM SUCH ACTIVITIES FOR DEDUCTIO N. 23. THE AO HAS DRAWN A TABLE ON PAGE 24 OF HIS ORDE R WHICH GIVES A COMPARATIVE NUMBER OF PROFESSIONALS WORKING ONSITE AND OFFSHORE TOTALLING 5062. OUT OF THIS, ONLY 725 PROFESSIONALS WORKED OU TSIDE INDIA ONSITE AND REMAINING 4337 WORKED OFFSHORE IN INDIA O NLY. NO EVIDENCE HAS BEEN PLACED ON RECORD TO DEMONSTRATE THAT THE IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 24 EMPLOYEES OF THE ASSESSEE SENT ABROAD FOR RENDERING ONS ITE SERVICES WERE WORKING UNDER THE DIRECT CONTROL AND SUPERVISION OF TH E OVERSEAS CUSTOMERS AND FURTHER THAT THEIR SERVICES WERE ALIE N TO THE AGREEMENTS FOR SOFTWARE DEVELOPMENT PROJECTS WHICH THE ASSE SSEE HAD UNDERTAKEN TO PERFORM, GENERATING THE INCOME OTHERWIS E DEDUCTIBLE U/S 10A OF THE ACT. RATHER THE POSITION OF THE EMP LOYEES OF THE ASSESSEE WORKING OUTSIDE INDIA UNDER ITS OWN CONTRO L AND GUIDANCE HAS BEEN ACKNOWLEDGED BY THE AO IN HIS ORDER FO R THE A.Y. 2009-10 AND THE LD. DR COULD NOT CONTROVERT THAT THE NA TURE OF BUSINESS IN SUCH LATER YEAR WAS ANY DIFFERENT FROM THAT FOR THE YEAR UNDER CONSIDERATION. 24. TO FORTIFY THE VIEW POINT OF THE AO, THE LD. DR P LACED ON RECORD A COPY OF THE SAMPLE AGREEMENT BETWEEN THE ASSES SEE AND ITS CUSTOMERS. THIS CONSULTING SERVICE AGREEMENT WAS ENTERED INTO BETWEEN THE ASSESSEE AND ROYAL BANK OF CANADA ON 15-05 -2006. CLAUSE 1 OF THE AGREEMENT GIVES DESCRIPTION OF SERVICES AND STATES THAT THE ASSESSEE HAS AGREED TO PERFORM THE SERVICES OF: `TECHNICAL SYSTEM ANALYSIS FOR CAPITAL MARKETS CLIENT AUTHENTICATION INFRASTRUCTURE CONSOLITATION AS WELL AS RBC EXPRESS TRUEPASS UPGRADE PROJECTS. DATES OF COMMENCEMENT AND COMPLETION H AVE BEEN GIVEN AS 15-05-2006 AND 31-10-2006 RESPECTIVELY. CHARGES IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 25 HAVE BEEN GIVEN IN CLAUSE 3 OF THE AGREEMENT AS HOURLY RATES BELOW $66 FOR TWO TECHNICAL SYSTEM ANALYSTS. CLAUSE 3.2 PROVIDES TH AT THE ASSESSEE MAY INVOICE THE BANK MONTHLY FOR WORK PERFORMED DURING THE PREVIOUS MONTH. CLAUSE 4 STATES THE NUMBER OF PERSONNE L ASSIGNED TO PERFORM THE SERVICES, WHICH THE ASSESSEE MAY REPLACE WITH THE BANKS APPROVAL. PLACE FOR SERVICE HAS BEEN GIVEN AS TORONTO, ONTARIO. 25. A PERUSAL OF THE ABOVE CLAUSES OF THE AGREEMEN T DIVULGES THAT THE ASSESSEE UNDERTOOK TO PERFORM TECHNICAL SYSTEMS ANALYS IS FOR CAPITAL MARKETS CLIENT AUTHENTICATION INFRASTRUCTURE CONSOLITATION AS WELL AS RBC EXPRESS TRUEPASS UPGRADE PROJECTS OF ITS CU STOMER NAMELY, RBC. THE DURATION FOR COMPLETION OF THE PROJECT WAS FIXED AT 5 MONTHS. ENTIRE SERVICES WERE TO BE PROVIDED ONSH ORE AT THE PREMISES OF THE CUSTOMER IN CANADA. `BACKGROUND AND SCOP E OF THE AGREEMENT SHOWS THAT ROYAL BANK OF CANADA REQUIRED TWO RESOURCES IN THE ROLE OF TSAS FROM THE ASSESSEE TO WORK O N THE MIGRATION OF THE EXISTING SECURITY/CLIENT AUTHORIZATION AND AUTHENTICATION AND INFRASTRUCTURE FROM CAPITAL MARKETS PLATFORM TO A CENTRALIZED RBC PLATFORM. NEXT PARA PROVIDES THAT ONE IGATE RESOURCE WILL BE WORKING ON EXISTING RBC EXPRESS PROJECTS U NTIL END OF AUGUST AND THE OTHER IGATE RESOURCE WILL BE WORKING O N CM IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 26 STAGE 1. THEN BOTH THE PERSONS WERE TO WORK TOGETHER ON CM STAGE 2 PROJECT FOR DELIVERING THE NEEDFUL. A CAREFUL PERUSAL OF TH E AGREEMENT REVEALS THAT DTM AND ONSITE SOFTWARE SERVICES R ENDERED THROUGH THE 2 IGATE RESOURCES WHOLLY RELATED TO THE PROJECT UNDERTAKEN BY THE ASSESSEE PURSUANT TO THE AGREEMENT. TH IS DECIPHERS THAT THE DTM AND ONSITE SOFTWARE SERVICES RENDERE D BY THE ASSESSEE WERE IN RELATION TO THE MAIN SERVICE UNDERTAKEN BY IT TO BE PERFORMED AS PER THE FIRST CLAUSE OF THE AGREEMENT, INC OME FROM WHICH HAS BEEN OTHERWISE HELD AS ELIGIBLE FOR DEDUCTION. NOTWITHSTANDING THAT, THE LD. AR, IN REPLY TO LD. DRS RELIANCE ON CONSULTING SERVICE AGREEMENT WITH ROYAL BANK OF CANADA, INVITE D OUR ATTENTION TOWARDS ANOTHER AGREEMENT WITH ROYAL BANK OF CANADA DATED 16-06-2005 IN WHICH SERVICES WERE TO BE REN DERED WHOLLY IN INDIA. SHOWING TO THE SAME REFERENCE NUMBER OF 2005164 IN BOTH THE AGREEMENTS, VIZ., THE ONE RELIED BY THE LD. DR AND THE ONE SUBMITTED BY HIM, THE LD. AR EXPLAINED THAT THER E IS ONE UMBRELLA AGREEMENT WITH ROYAL BANK OF CANADA AND THESE ARE SUB- AGREEMENTS, UNDER WHICH SOME PART OF THE SERVICES WERE R ENDERED IN INDIA WHILE OTHERS ONSHORE OUTSIDE INDIA. THIS FORTIFIES THE VIEW POINT OF THE ASSESSEE THAT EVEN THE ONSHORE SERVICES RENDE RED ABROAD HAVE LINK WITH AGREEMENT FOR SERVICES FROM ELIGIBLE UNITS IN IN DIA. IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 27 26. ON CIRCUMSPECTION OF THE SAMPLE COPY OF THE AGRE EMENT, FILED BY THE LD. DR, BETWEEN THE ASSESSEE AND ROYAL BANK O F CANADA AS A REPRESENTATIVE OF ALL SUCH SIMILAR AGREEMENTS, IT TURNS OUT THAT THE ASSESSEE ENTERED INTO MASTERS SERVICE AGREEMENT WITH SE VERAL CUSTOMERS OUTSIDE INDIA. THERE WAS A SPECIFIC TENURE WITHIN WHICH THE ASSESSEE WAS TO DEVELOP AND DELIVER COMPUTER SOFTWARE OR RENDER THE ELIGIBLE SERVICE. A TOTAL CONSIDERATION WAS RECEIVED BY THE ASSESSEE UNDER SUCH MASTER SERVICE AGREEMENTS. THE AO HAS EXCLUDED A PART OF SUCH TOTAL CONSIDERATION AS ATTRIBUTABLE TO DT M AND ONSITE SOFTWARE SERVICES BY TREATING THE SAME AS UNRELATE D TO STP UNDERTAKINGS IN INDIA. THE TWO AMOUNTS DISQUALIFIED BY THE AO AT RS.2.43 CRORE AND RS.12.17 CRORE ARE PART OF THE TO TAL CONSIDERATION AGREED BETWEEN THE ASSESSEE AND ITS OVERSEAS CUSTOMER FOR DEVELOPMENT OF COMPUTER SOFTWARE OR RENDERING OF THE ELIGIBLE SERVICE, INCOME FROM WHICH HAS OTHERWISE BEEN HELD TO BE ELIGIBLE FOR DEDUCTION U/S.10A. WE FAIL TO COMPREHEND AS TO HOW A P ART OF THE TOTAL CONSIDERATION AS PER MASTER SERVICE AGREEMENT WITH SEVERAL CUSTOMERS CAN BE SEPARATED AS RELATABLE TO DEPUTA TION OF TECHNICAL MANPOWER BUSINESS AND ONSITE SOFTWARE DEVELOPMEN T SERVICES UNRELATED TO STP UNDERTAKINGS. SUCH DTM AND ONSITE SOFTWARE SERVICES ARE PART AND PARCEL OF THE OVERALL COMPU TER IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 28 SOFTWARE DEVELOPMENT PROJECTS WHICH THE ASSESSEE UNDERTOOK AND INCOME FROM WHICH HAS BEEN OTHERWISE HELD TO BE ELIGIBLE FOR DEDUCTION U/S.10A. SUCH DISQUALIFIED AMOUNTS ARE NOT INDEPEND ENT OF CONSIDERATION FOR COMPUTER SOFTWARE DEVELOPMENT OR REND ERING OTHER ELIGIBLE SERVICE, WHICH HAS OTHERWISE BEEN CONFERRED W ITH DEDUCTION U/S.10A OF THE ACT. THE SITUATION WOULD HAVE BEEN OTHERWISE IF THE ASSESSEE HAD RENDERED ONSITE SOFTWARE SER VICES OR SENT SOME MANPOWER ON DEPUTATION TO CUSTOMERS OUTSIDE INDIA WITHOUT HAVING ANY LINKAGE WITH THE COMPUTER SOFTWARE DEVELOPMENT PROJECTS UNDERTAKEN BY IT. AS IN THE FACTS UN DER CONSIDERATION, THERE IS ONLY ONE COMPOSITE AMOUNT OF CONSIDER ATION FOR THE ELIGIBLE COMPUTER SOFTWARE DEVELOPMENT, IN OUR CONSIDE RED OPINION, THE LD. CIT(A) WAS FULLY JUSTIFIED IN REJECTING THE AOS POINT OF VIEW IN BIFURCATING SUCH CONSIDERATION INTO TWO PARTS, NAMELY, THE ONE WHICH IS ELIGIBLE TOWARDS COMPUTER SOFTWARE A ND THE OTHER WHICH IS NOT ELIGIBLE TOWARDS DTM AND ONSITE SOFTWARE SERVICES. 27. THERE IS ANOTHER ASPECT OF THE MATTER. THE LD. DR . HARPED ON THE LANGUAGE OF SECTION 10A(1) OF THE ACT TO CONTEND THAT O NLY THE PROFITS AND GAINS `DERIVED BY THE ELIGIBLE UNDERTAKING FROM EXPORT OF COMPUTER SOFTWARE ETC. ARE ELIGIBLE FOR DEDUCTION. HE LAID A GREAT IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 29 DEAL OF EMPHASIS ON THE EXPRESSION `DERIVED FROM USED IN THE PROVISION AS AN OPENING GATE FOR ELIGIBILITY OF DEDUCTION. IT WAS CONTENDED THAT SINCE INCOME FROM DTM AND ONSITE SERVICES WA S NOT DERIVED FROM EXPORT OF COMPUTER SOFTWARE, THE SAME DID NO T QUALIFY FOR THE BENEFIT OF DEDUCTION. 28. THIS CONTENTION, IN OUR CONSIDERED, IS SANS MERIT. THERE ARE TWO REASONS. THE FIRST IS THAT THE EXPLANATION 3 IS A DEEMING PROVISION, WHICH SPECIFICALLY BRINGS PROFITS AND GAINS DERIVED FROM ON SITE DEVELOPMENT OF COMPUTER SOFTWARE AND SERVICES FOR DEVELOPMENT OF SOFTWARE OUTSIDE INDIA WITHIN THE MEANING OF ` THE PROFITS AND GAINS DERIVED FROM THE EXPORT OF COMPUTER SOF TWARE OUTSIDE INDIA. THE SECOND IS THAT SUB-SECTION (1) OF SECTIO N 10A CONTAINING THE WORDS `DERIVED FROM IS NOT AN EXHAUSTIVE P ROVISION IN ITSELF. THE EXPRESSION `PROFITS DERIVED ...FROM .. EXP ORT OF COMPUTER SOFTWARE EMPLOYED IN SUB-SECTION (1) OF SECTION 1 0A OF THE ACT HAS BEEN FURTHER ELABORATED IN SUB-SECTION (4) TO MEAN: `THE AMOUNT WHICH BEARS TO THE PROFITS OF THE BUSINESS OF THE UNDERTAKING , THE SAME PROPORTION AS THE EXPORT TURNOVER IN RESPECT OF SU CH ARTICLES OR THINGS OR COMPUTER SOFTWARE BEARS TO THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING. THE EXPRESSION ` PROFITS OF THE BUSINESS OF THE UNDERTAKING AS USED IN SUB-SECTION (4), IN FACT, IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 30 GIVES MEANING TO THE EXPRESSION `DERIVED FROM EXPORT OF COMPUTER SOFTWARE AS USED IN SUB-SECTION (1) AND AMPLIFIES THE SCOPE OF THE LATTER BY MITIGATING THE RIGOR AND MAKING THE PROV ISION LIBERAL AND MORE INCLUSIVE. THERE IS NO GAINSAYING THAT ` PROFITS OF THE BUSINESS OF THE UNDERTAKING ARE NOT ONLY THE PROFITS DERIVED FROM THE EXPORT OF COMPUTER SOFTWARE BUT ALSO THOSE WHICH ARE ATTRIBUTABLE TO THE BUSINESS OF UNDERTAKING. SO LONG AS THERE EXISTS A DIRECT LINK BETWEEN THE ELIGIBLE UNDERTAKING AND SOME INCOME, THE SAME IS PROFIT OF THE BUSINESS OF UNDERTAKING, EVEN IF MAY NOT BE DERIVED FROM THE EXPORT OF COMPUTER SOFTWARE ETC. WITHOUT ACCEPTING, EVEN IF WE PRESUME THE CONTENTION OF THE LD. DR A S CORRECT THAT INCOME FROM DTM AND ONSITE SOFTWARE SERVICES RENDERED ABROAD CANNOT BE CONSIDERED AS DERIVED FROM TH E EXPORT OF COMPUTER SOFTWARE, IT, IN ANY CASE, WILL HAVE TO BE REGARDED AS `PROFITS OF THE BUSINESS OF THE UNDERTAKING. IN VIEW OF T HE FOREGOING DISCUSSION, WE UPHOLD THE IMPUGNED ORDER ON THIS SCORE. 29. THE NEXT GROUND TAKEN IN THIS APPEAL IS AGAINST RESTRICTIN G THE DISALLOWANCE U/S. 14A OF THE ACT TO RS.10,16,255/- AS AGAIN ST RS.40,39,994/- MADE BY THE AO. IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 31 30. FACTUAL PANORAMA OF THIS GROUND IS THAT THE ASSESSEE EARNED EXEMPT DIVIDEND INCOME OF RS.64,14,050/- ON INVESTMENTS AMOUNTING TO RS.32.48 CRORE AND ODD. THE AO OBSERVED THAT IN THE PRECEDING YEAR, 25% OF SALARY PAID TO FINANCE EXECUTIVE AMOUNTING TO APPROXIMATELY RS.7.00 LAKH, WAS DISALLOWED UNDER SECTION 14A, WHICH DISALLOWANCE CAME TO BE UPHELD IN THE FIRST AND SECON D APPEALS. FOR THE YEAR UNDER CONSIDERATION, THE AO RESOR TED TO THE PROVISIONS OF RULE 8D FOR COMPUTING DISALLOWANCE U/S.14A A T RS.40,39,994/-. THE LD. CIT(A) RESTRICTED THE DISALLOWANCE TO RS.10,70,255/-. 31. WE HAVE HEARD BOTH THE SIDES AND GONE THROUGH THE RE LEVANT MATERIAL ON RECORD. IN SO FAR AS THE APPLICATION OF RULE 8D IS CONCERNED, WE FIND THAT THE ASSESSMENT YEAR UNDER CONSIDE RATION IS A.Y. 2007-08. RULE 8D HAS BEEN PRESCRIBED AS EFFECTIVE FROM THE A.Y. 2008-09. THE HONBLE SUPREME COURT IN CIT VS. ESSAR TELEHOLDINGS LTD. (2018) 401 ITR 455 (SC) HAS HELD THAT RULE 8D IS PROSPECTIVE. IN VIEW OF THIS PRECEDENT, WE ACCORD OUR IM PRIMATUR TO THE CONCLUSION DRAWN BY THE LD. CIT(A) ON NON-APPLICABILITY OF RULE 8D TO THE YEAR UNDER CONSIDERATION. IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 32 32. AS REGARDS THE QUANTUM OF DISALLOWANCE U/S.14A, IT IS FO UND THAT FOR THE PRECEDING YEAR THE AO MADE DISALLOWANCE AT 25% OF SALARY PAID TO FINANCIAL CONTROLLER AS ATTRIBUTABLE TO THE EXEMPT INCOME, WHICH CAME TO BE COUNTENANCED UP TO THE TRIBUNAL LEVEL. IF THE SAME YARDSTICK IS APPLIED, 25% OF SALARY PAID TO THE FINAN CIAL CONTROLLER FOR THE YEAR UNDER CONSIDERATION COMES TO RS.10, 16,255/-. IN ADDITION TO THIS, THE ASSESSEE HIMSELF OFFERED DISALLOWAN CE AT RS.54,000/-. CONSIDERING THE FACTS IN TOTALITY, WE ARE OF THE CONSIDERED OPINION THAT THE SUSTENANCE OF ADDITION BY THE LD. CIT(A) AT RS.10,70,255/- ON THIS SCORE IS IN ORDER, WHICH DOES N OT WARRANT ANY FURTHER INTERFERENCE. THIS GROUND IS, THEREFORE, NOT ALLOWED. 33. GROUND NO. 11 DEALS WITH DISCOUNT ON LAPSED ESOPS AMOUNTING TO RS.57,71,000/- TAKEN TO GENERAL RESERVE INSTEA D OF TRANSFERRING IT TO THE PROFIT AND LOSS ACCOUNT IN THE COMPUTATION OF `BOOK PROFIT U/S.115JB OF THE ACT. GROUND NO. 12 IS CO NNECTED WITH THIS GROUND, UNDER WHICH THE REVENUE IS AGGRIEVED BY THE DIRECTION OF THE LD. CIT(A) TO APPLY THE PROVISIONS OF SECTION 41(1) TOWARDS VALUE OF LAPSED ESOPS BECOMING CHARGEABLE TO TAX IN THE YEAR IN WHICH DEDUCTION WAS CLAIMED. IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 33 34. SUCCINCTLY, THE FACTS OF THIS GROUND ARE THAT THE REGISTRAR OF COMPANIES, BANGALORE SENT A REFERENCE TO THE AO INDICATING TH AT A SUM OF RS.57,71,000/-, BEING, DISCOUNT ON ESOP ON LAPSE O F OPTION WAS TRANSFERRED BY THE ASSESSEE TO GENERAL RESERVE ACCO UNT INSTEAD OF TRANSFERRING IT TO THE PROFIT AND LOSS ACCOUNT. THE AO NOTIC ED THAT AT THE TIME OF ISSUANCE OF ESOPS ON DISCOUNT, THE ASSESSEE CLAIMED DEDUCTION BY WAY OF DEBIT TO ITS PROFIT AND LOSS ACCOUNT. SINCE IT WAS REVERSAL OF SUCH DISCOUNT ON THE LAPSING OF ESOPS, THE AO OPINED THAT SUCH AN AMOUNT OUGHT TO HAVE BEEN CREDITED TO TH E PROFIT AND LOSS ACCOUNT INSTEAD OF TAKING IT DIRECTLY TO THE BALANCE S HEET IN GENERAL RESERVE ACCOUNT. THE ASSESSEES CONTENTION OF THE APPLICABILITY OF THE JUDGMENT OF HONBLE SUPREME COURT IN THE CA SE OF APOLLO TYRES LTD. VS. CIT (2002) 255 ITR 273 (SC) WAS FOUND TO BE NOT TENABLE. THIS IS HOW, THE AO ADDED RS.57,71,000 /- TO THE `BOOK PROFIT OF THE ASSESSEE COMPANY U/S.115JB OF TH E ACT. THE LD. CIT(A) OVERTURNED THE ASSESSMENT ORDER ON THIS POINT. HE HOWEVER, DIRECTED THAT SECTION 41(1) OF THE ACT SHOULD BE AP PLIED QUA THIS AMOUNT BECAUSE AT THE TIME OF ISSUING ESOP, THE CLAIM OF DEDUCTION MADE BY THE ASSESSEE TOWARDS DISCOUNT WAS ALLOWED BY WAY OF DEBIT TO THE PROFIT AND LOSS ACCOUNT. SINCE NOW THERE IS A REVERSAL OF SUCH DISCOUNT ON LAPSE OF ESOP, THE AMOUNT SHO ULD BE IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 34 CHARGED TO TAX U/S.41(1) IN THE YEARS IN WHICH DEDUCTION WAS ALLOWED. 35. HAVING HEARD BOTH THE SIDES AND GONE THROUGH THE RELE VANT MATERIAL ON RECORD, IT IS SEEN AS AN ADMITTED POSITION THAT THE ASSESSEE, AT THE TIME OF ISSUANCE OF ESOPS ON DISCOUNT, DEBITED ITS PROFIT AND LOSS ACCOUNT AND ACCORDINGLY CLAIMED DEDUCTION. HOWEVER, WHEN SUCH ESOPS LAPSED, THE AMOUNT OF DISCOUNT E ARLIER CLAIMED AS DEDUCTION WAS TAKEN DIRECTLY TO THE GENERAL RESER VE ACCOUNT WITHOUT ROUTING IT THROUGH THE PROFIT AND LOSS ACCOUNT. IT GOES WITHOUT SAYING THAT THAT WHEN ESOPS LAPSE, THE COST OF WHICH WAS CLAIMED BY THE APPELLANT AS EXPENSE IN THE PROFIT AND LOS S ACCOUNT AT THE TIME OF THEIR GRANT, THERE IS CESSATION OF LIABILITY TOWARDS POSSIBLE EXERCISE OF THE ESOPS AND HENCE, THE VALUE OF THE LAPSED ESOPS BECOMES CHARGEABLE TO TAX IN THE ASSESSMENT YE AR IN WHICH THE EVENT OF LAPSE OCCURS. IT IS THE LETTER AND SPIRIT O F SECTION 41(1) OF THE ACT. THE LD. CIT(A) IN PARA 261 OF HIS ORD ER HAS ALSO CORRECTLY OBSERVED THAT THE PROVISIONS OF SECTION 41(1) ARE ATTRACTED IN THIS CASE. HE, HOWEVER, DIRECTED: THE AO TO OBTAIN THE ASSESSMENT YEAR WISE DETAILS OF THE DEBITS MADE BY THE APPE LLANT ON ACCOUNT OF ESOPS AND DISALLOW SUCH AMOUNTS AS WERE CLAIMED AS DEDUCTION IN EACH ASSESSMENT YEAR CONCERNED. THE VIEW P OINT OF IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 35 THE LD. CIT(A) THAT SECTION 41(1) GETS ATTRACTED ON THE FACTS A ND IN CIRCUMSTANCES OF THE INSTANT CASE IS CORRECT. HOWEVER, HIS DIRECTION TO THE AO FOR DISALLOWING SUCH AMOUNT IN THE YEAR OF DEDUCTION , IN OUR OPINION, IS NOT SUSTAINABLE. SUCH AMOUNT IS CHARGEABLE TO TAX IN THE YEAR IN WHICH THE REMISSION OR CESSATION OF LIABILITY TAKES PLA CE AND NOT EARLIER YEAR IN WHICH DEDUCTION WAS CLAIMED. AS AD MITTEDLY, THE AMOUNT OF RS.57,71,000/- CEASED TO BECOME PAYABLE IN THE YEAR UNDER CONSIDERATION, WE HOLD THAT SUCH AMOUNT SHOULD BE TAKE N AS INCOME FOR THE YEAR UNDER CONSIDERATION. THE LD. AR FAI RLY ACCEPTED THIS POSITION. 36. NOW WE TAKE UP THE OTHER CONNECTED GROUND BY WHICH THE CHALLENGE HAS BEEN LAID TO THE DIRECTION OF THE LD. CIT(A) IN NOT ADDING SUCH AN AMOUNT IN THE COMPUTATION OF `BOOK PROFIT U /S 115JB OF THE ACT. IT IS PERTINENT TO NOTE THAT SECTION 115JB IS A SPECIAL PROVISION FOR PAYMENT OF TAX BY CERTAIN COMPANIES. S UB- SECTION (1) STARTING WITH NON-OBSTANTE CLAUSE PROVIDES THAT WHE RE IN THE CASE OF AN ASSESSEE, BEING A COMPANY, THE INCOME-TAX , PAYABLE ON THE TOTAL INCOME AS COMPUTED UNDER THIS ACT IN RESPECT OF A NY PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR IS LESS THAN A SPECIFIED PER CENT OF ITS BOOK PROFIT, SUCH BOOK PROFIT SHALL BE DEE MED TO BE THE TOTAL INCOME OF THE ASSESSEE AND THE TAX PAYABLE BY THE ASSESSEE IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 36 ON SUCH TOTAL INCOME SHALL BE THE AMOUNT OF INCOME-TAX AT THE SPECIFIED RATE. THE TERM `BOOK PROFIT, AS USED IN THIS DEE MING PROVISION, HAS BEEN DEFINED IN EXPLANATION 1 TO MEAN THE PRO FIT AS SHOWN IN THE STATEMENT OF PROFIT AND LOSS FOR THE RELEVANT PREV IOUS YEAR PREPARED UNDER SUB-SECTION (2), AS INCREASED AND DECREASED BY CERTAIN ITEMS GIVEN THEREIN. THUS IT IS EVIDENT THAT THE STARTING POIN T FOR THE COMPUTATION OF `BOOK PROFIT UNDER THIS SECTION IS THE AMOUNT OF PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT IN ACCORD ANCE WITH THE PROVISIONS OF PART II OF SCHEDULE VI TO THE COMPANIES ACT . 1956. THE AMOUNT OF PROFIT SO DETERMINED BECOMES SACROSA NCT AND CANNOT BE ALTERED. 37. THE HONBLE SUPREME COURT IN APOLLO TYRES LTD. (SUPRA) HAS HELD IN THE CONTEXT OF SECTION 115J OF THE ACT THAT IN THE COMPUTATION OF `BOOK PROFIT U/S.115J, THE AO HAS NO POWER TO QUESTION THE CORRECTNESS OF THE PROFIT AND LOSS ACCOUNT DR AWN BY THE ASSESSEE IN ACCORDANCE WITH THE PROVISIONS OF PARTS II AND III OF SCHEDULE VI TO THE COMPANIES ACT. IT HAS FURTHER BEEN LAID DOWN THAT WHILE ASSESSING THE COMPANY FOR INCOME-TAX U/S.115J OF THE ACT, THE CORRECTNESS OF THE PROFIT AND LOSS ACCOUNT PREPARE D BY THE COMPANY AND CERTIFIED BY THE STATUTORY AUDITORS AS HAVING BE EN PREPARED IN ACCORDANCE WITH THE REQUIREMENTS OF PARTS II A ND III OF IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 37 SCHEDULE VI TO THE COMPANIES ACT CANNOT BE EXAMINED BY THE AO EXCEPT TO THE EXTENT OF GIVING EFFECT TO THE PRESCRIPTION GIVEN IN EXPLANATION 1 TO SECTION 115J. SIMILAR VIEW HAS BEEN REITERATE D BY THE HONBLE APEX COURT IN CIT VS. HCL COMNET SYSTEMS AND SERVICES PVT. LTD. (2008) 305 ITR 409 (SC) IN THE CONTEXT OF SECTION 115JA OF THE ACT. THE HONBLE BOMBAY HIGH COURT IN CIT VS. ADBHUT TRADING COMPANY PVT. LTD. (2011) 338 ITR 94 (BOM.) HAS ALSO LAID DOWN THE SAME PROPOSITION IN THE CONTEXT OF SECTION 11 5JB BY HOLDING THAT ONCE THE ACCOUNTS INCLUDING THE PROFIT AND LOSS ACCOUNT ARE CERTIFIED BY THE AUTHORITIES UNDER THE COMPANIES ACT, IT IS NOT OPEN TO THE AO TO CONTEND THAT THE PROFIT AND LOSS ACCOU NT HAS NOT BEEN PREPARED IN ACCORDANCE WITH THE PROVISIONS OF THE COMPANIES ACT AND MAKING ADDITION TOWARDS BOOK PROFIT U/S.115 JB OF THE ACT. IN VIEW OF THE ABOVE PRECEDENTS, IT IS EVIDENT TH AT, FIRSTLY, THE ACCOUNTS ARE REQUIRED TO BE MADE IN ACCORDANCE WITH PARTS II AND III OF SCHEDULE VI TO THE COMPANIES ACT AND S ECONDLY, ONCE THE ACCOUNTS ARE DRAWN IN SUCH A WAY AND THEN APPR OVED IN THE ANNUAL GENERAL MEETING, THEN THE AO IS BOUND TO ACCEPT THE AMOUNT OF NET PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT, AS STARTING POINT FOR COMPUTING BOOK PROFIT AS PER EXPLANATION 1 TO SECTION 115JB OF THE ACT. IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 38 38. NOW LET US EXAMINE THE TREATMENT TO BE GIVEN IN ACCO UNTS ON REVERSAL OF LAPSED ESOPS. IT IS FOUND THAT THE SEBI GUIDELINES, AS CLARIFIED, AND ICAI GUIDANCE NOTE NOW PROVIDE FOR TAKING S UCH AMOUNT TO GENERAL RESERVE ACCOUNT. INITIALLY, THERE WAS SOME NON- MEETING POINT BETWEEN THE SEBI GUIDELINES AND THE ICAI GUIDANCE NOTE ON THE TREATMENT TO DISCOUNT ON LAPSE OF THE ESOPS. VIDE PARA (II)(B) OF ITS LETTER NO. SEBI/CFD/DIL/ESOP/4/2008/04-08, DATED 04-08-2008, THE SEBI HAS CLARIFIED THE POSITION BY AMENDING THE SEBI GUIDELINES WITH IMMEDIATE EFFECT SO THAT IT IS IN LINE WITH THE ACCOUNTING TREATMENT PROVIDED BY ICAI. THIS POSITION HAS BE EN DISCUSSED BY THE LD. CIT(A) IN PARA 256 OF THE IMPUGNED ORDER, WHICH HAS REMAINED UNCONTROVERTED. THUS, IT IS SEEN THAT BOTH THE SEBI AND ICAI GUIDELINES ARE NOW ALIKE AND PROVIDE THAT THE AMOUNT OF DISCOUNT ON LAPSE OF ESOPS SHOULD BE CREDITED TO TH E GENERAL RESERVE ACCOUNT. 39. IN THIS REGARD, IT IS NOTICED THAT THE HONBLE SUPREME COURT IN CIT VS. VIRTUAL SOFT SYSTEMS LTD. (2018) 404 ITR 409 (SC) HAS HELD THAT THE GUIDANCE NOTE ISSUED BY THE ICAI CARRIES GREAT WEIG HT. THE METHOD OF ACCOUNTING PRESCRIBED IN SUCH A GUIDANCE NOTE, IN ORDER TO COMPUTE REAL INCOME AND OFFERING THE SAME FOR TAXATION, C ANNOT BE DISREGARDED BY THE AO UNLESS SUCH ACTION FALLS WITHIN THE S COPE IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 39 AND AMBIT OF SECTION 145(3) OF THE IT ACT. SIMILAR VIEW HAS BEEN TAKEN BY THE HONBLE BOMBAY HIGH COURT IN HDFC BANK LTD. VS. ACIT (2019) 410 ITR 247 (BOM) BY HOLDING THAT THE GUIDANCE NOTE OF THE ICAI, THOUGH NOT BINDING, SHOULD BE FOLLOWED AS AN E XTERNAL AID. IN THIS VIEW OF THE MATTER, WE SEE NO REASON IN NOT A PPROVING THE ACTION OF THE LD. CIT(A) IN HOLDING THAT SUCH AMOUNT OF RS.57,71,000/- WAS RIGHTY TAKEN TO THE GENERAL RESERVE AC COUNT INSTEAD OF CREDITING IT TO THE PROFIT AND LOSS ACCOUNT AND HENCE THE SAME CANNOT BE ADDED TO THE AMOUNT OF NET PROFIT SHOWN BY THE ASSESSEE FOR COMPUTING `BOOK PROFIT U/S 115JB OF THE ACT . 40. IN SO FAR AS THE ARGUMENT OF LD. DR TO THE APPLICABILITY OF CLAUSE (B) OF EXPLANATION 1 TO SECTION 115JB IS CONCERNED, THE SAME, IN OUR OPINION, DOES NOT ADVANCE THE CASE OF THE REVENUE BECAUSE WHAT IS REQUIRED TO BE ADDED TO THE NET PROFIT IS THE AMOUNT C ARRIED TO ANY RESERVE WHICH IS OTHERWISE DEBITED TO THE PROFIT AND LOSS ACCOUNT. SINCE THE AMOUNT IN QUESTION WAS NOT DEBITED TO THE PR OFIT AND LOSS ACCOUNT FOR THE YEAR, THE SAME CANNOT BE ADDED TO THE NET PROFIT FOR COMPUTING `BOOK PROFIT U/S.115JB OF THE ACT. WE, THEREFORE, APPROVE THE VIEW TAKEN BY THE LD. CIT(A) ON THIS SCORE. THUS, THE GROUND CONCERNING SECTION 41(1) IS ALLOWED AND TH AT CONCERNING SECTION 115JB IS NOT ALLOWED. IT(TP)A NO.286/BANG/2013 M/S. IGATE GLOBAL SOLUTIONS LTD. 40 41. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 05 TH AUGUST, 2019. SD/- SD/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE P RESIDENT PUNE; DATED : 05 TH AUGUST, 2019 / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. THE CIT(A)-V, BENGALURU 4. 5. 6. THE CCIT-II, BENGALURU , , / DR C, ITAT, PUNE; / GUARD FILE. / BY ORDER, / TRUE COPY // SENIOR P RIVATE SECRETARY , / ITAT, PUNE DATE 1. DRAFT DICTATED ON 02-08-2019 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 05-08-2019 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. DATE OF UPLOADING ORDER SR.PS 8. FILE SENT TO THE BENCH CLERK SR.PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK 10. DATE ON WHICH FILE GOES TO THE A.R. 11. DATE OF DISPATCH OF ORDER. *