Sasken Technologies Limited, Bangalore V. Assistant Commissioner Of Income Tax, Circle-6(1)(1), Bangalore

ITTPA 788/BANG/2022

• Counselvise Citation: [2022] 103 COUNSELVISE.COM (IT) 8675 (ITAT-BANGALORE)
• Duration Of Justice: 2 month(s) 3 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 10-11-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: A
• Next Hearing Date: 08-11-2022
• Assessment Year: 2011-2012
• Appeal Filed On: 06-09-2022
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Transfer pricing; Earning of tax free income; Question of law; TDS; Rule 8D
• Section: 143(3); 10AA; 80HHC; 14A; 260A; 143(2); 113; 13; 119; 22; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER IT(TP)A No.788/Bang/2022 Assessment year : 2011-12 Sasken Technologies Ltd., # 139/25, Amarjyothi Layout, Ring Road, Domlur, Bangalore – 560 071. PAN: AAECS 6424R Vs. The Assistant Commissioner of Income Tax, Circle 6(1)(1), Bangalore. APPELLANT RESPONDENT Appellant by : Shri Padam Chand Khincha, CA Respondent by : Shri K. Sankar Ganesh, Jt.CIT(DR)(ITAT), Bengaluru. Date of hearing : 09.11.2022 Date of Pronouncement : 11.11.2022 O R D E R Per Padmavathy S., Accountant Member This appeal of the assessee is against the final assessment order passed u/s. 143(3) r.w.s. 254 of the Income-tax Act, 1961 [the Act] dated 27.7.2022 for the assessment year 2011-12. The assessee is engaged in the business of software development and has e-filed the return of income for the said asst year on 28.11.2011, declaring an income of Rs.25,33,10,603/- The Book profit arrived at by the Assessee is Rs.66,03,30,573/-. In the first round of IT(TP)A No.788/Bang/2022 Page 2 of 27 assessment proceedings, notice under section 143(2) was issued and served on the Assessee on 11.09.2012 and the assessee filed revised return with income of Rs.23,72,94,572/- on 20.03.2013. Since the assessee had international transaction reference under section 92CA was made. The Deputy Commissioner of Income Tax (Transfer Pricing)-2(2)(1), Bangalore (‘TPO’) after taking into consideration the submissions of the Company, concluded the proceedings under section 92CA(3) and passed the transfer pricing order on 30.1.2015 by making the following adjustments:- a) Interest on loan provided to Sasken Inc. amounting to Rs. 1,35,24,952. b) Corporate Guarantee provided to subsidiary amounting to Rs. 97,11,364. 2. The AO passed the draft assessment order was making the following adjustments to total income in addition to the TP adjustment. a) Excess Deduction u/s 10A/10AA: Rs.29,59,03,223/- b) Disallowance u/s 14A: Rs.1,04,91,588/- 3. Aggrieved by the draft assessment order the assessee filed the objections with the Hon’ble DRP. The DRP after considering the submissions of the rejected the contentions of the assessee and affirmed the orders of the AO and TPO. However, in respect of the ground raised by the assessee with respect to exclusion of foreign currency expenses from export turnover under section 10A, the DRP directed the AO to follow the order of the Hon’ble ITAT is the Company’s own case for AY 2004-05, 2006-07 and AY 2008-09. IT(TP)A No.788/Bang/2022 Page 3 of 27 4. Pursuant to the above directions the final assessment order u/s 143(3) r.w.s. 144C(13) of the Act was passed on 29.01.2016 with an assessed income of Rs.53,70,20,322/- where the following additions were made:- a) Excess Deduction u/s 10A/10AA: Rs.26,59,97,846/- b) Disallowance u/s 14A: Rs.1,04,91,588/- c) Transfer Pricing Adjustment: Rs.2,32,36,316/- 5. Aggrieved by the above order, the assessee and the revenue filed the appeals before the Hon’ble ITAT. The Hon’ble ITAT vide Order dated 16-11-2018 in IT(TP)A 550/Bang/2016 (Assessee’s appeal), IT(TP) A No. 627/Bang/2016 (Revenue’s appeal) partly allowed the Assessee’s appeal and dismissed the revenue’s appeal. The Assessee filed a miscellaneous petition to ITAT and vide Miscellaneous Petition Order in MP No. 38/Bang/2019 dated 28-06-2019, certain grounds were recalled by the ITAT and the appeal was again posted for hearing on these issues. The revenue’s MP for rectification of MP order dated 28.6.2019 was dismissed by the ITAT vide order dated 18.3.2020 in MP No. 11/Bang/2020. The recalled matter was heard by the ITAT and order in IT(TP)A 550/Bang/2016 dated 14-01-2020 was passed by the ITAT. The directions of the Hon’ble ITAT in its initial order dated 16.11.2018 and in its subsequent order dated 14.1.2020 were as follows:- a) Interest on loan to Sasken Inc: This issue was remanded back to the TPO to with a direction to consider the analysis and bench mark the transaction by adopting legal position as enunciated in CIT vs. IT(TP)A No.788/Bang/2022 Page 4 of 27 Tata Auto Comp. System Ltd. (374 ITR 316) Bombay High Court. This issue was not a subject matter of ITAT MP order 28.6.2019 and the subsequent ITAT order dated 14.1.2020. b) Corporate Guarantee Fees: This issue was also remanded back to the TPO to reconsider the issue for fresh adjudication after analyzing the transaction of corporate guarantee commercial and economic factors. It was also directed that the TPO shall benchmark the transactions of corporate guarantee by adopting comparable unrelated transactions. In addition, it was stated that issuance of Corporate Guarantee is distinct from Bank Guarantee. Therefore, Bank Guarantee Commission cannot be applied. This issue was not a subject matter of ITAT MP order 28.6.2019 and the subsequent ITAT order dated 14.1.2020. c) Disallowance under section 14A: This issue was a subject matter of ITAT MP order 28.6.2019 and the subsequent ITAT order dated 14.1.2020 by which it was remanded back to the AO with a direction to exclude investments which do not yield exempt income in light of the decision of the Special Bench of the Delhi Tribunal in ACIT vs. Vireet Investments (P) Ltd (2017) 82 Taxmann.com 415(SB). d) Reduction of Royalty from 10A/AA profits: This issue was a subject matter of ITAT MP order 28.6.2019 and the subsequent ITAT order dated 14.1.2020 by which it was remanded back to the AO with a direction to verify the claim of the Company for the year under consideration in light of the ratio laid down by Hon’ble Karnataka High Court in case of CIT vs. Wipro Ltd in ITA Nos. 503 and 507 of 2002. IT(TP)A No.788/Bang/2022 Page 5 of 27 e) Reduction of expenses incurred in foreign currency from export turnover: This issue was a subject matter of ITAT MP order 28.6.2019 and the subsequent ITAT order dated 14.1.2020. The ITAT noted that the DRP while considering the issue held that Tribunal in the Company’s own case in AY 2004-05, 2006-07 and AY 2008-09 held that the foreign currency expenditure incurred towards travelling and salary of employees involved in the project outside India are not to be excluded for computing deduction under section 10A. However, there was a typographical error in the order of the DRP and accordingly the AO was directed to recompute the export turnover in light of the ratio laid down by Hon’ble Jurisdictional High Court in case of Tata Elxsi Ltd vs CIT 349 ITR 98. f) Foreign Tax credit, TDS credit and advance tax: This issue was a subject matter of ITAT MP order 28.6.2019 and the subsequent ITAT order dated 14.1.2020 through which it was directed to verify the claim of the Company and allow as per the law. 6. In pursuance of the order of the ITAT dated 14.1.2020, the reference under section 92CA was made. In the remanded proceedings after considering the submissions of the assessee the TPO made the revised TP adjustments towards corporate guarantee fees at the rate of 2% amounting to Rs. 2,15,55,360 and the adjustment in relation to interest on loan given to Sasken Inc. was deleted in its entirety. On the corporate issued remanded back, the AO called for various from the assessee. The assessee filed submissions dated 21.09.2021 along with relevant annexures with respect to the disallowance under section 14A, IT(TP)A No.788/Bang/2022 Page 6 of 27 deduction under section 10A, reduction of expenses incurred in foreign currency from export turnover under section 10A and claim of foreign tax credit along with various documentary evidence. After considering the submissions of the assessee the AO passed the draft assessment order under section 143(3) read with section 254 of the Act on 30.09.2021 making the following adjustments: i. TP adjustment for corporate guarantee at 2% amounting to Rs. 2,15,55,360. ii. Disallowance under section 14A amounting to Rs. 62,12,501 ignoring the disallowance already made by the Assessee of Rs. 8,32,564 . iii. Disallowance under section 10A by excluding Royalty income, forex loss on repayment of loan and expenditure in foreign currency amounting to Rs. 22,25,27,655. iv. Disallowance of Foreign Tax Credit amounting to Rs. 3,72,69,000 7. Aggrieved by the draft assessment order the assessee filed the objections with the ld. DRP. The DRP rejected the contentions of the Company and affirmed the orders of the AO and TPO. However, in respect of TP adjustment for corporate guarantee, the DRP directed the AO to adopt the rate at 0.92% as determined by the TPO in the first round of proceedings. The AO passed the final assessment order u/s 143(3) r.w.s. 144C(13) of the Act arriving at an assessed income of Rs.51,30,15,092/- in line with directions of the DRP in which the following additions were made:- IT(TP)A No.788/Bang/2022 Page 7 of 27 a) Excess Deduction u/s 10A/10AA: Rs.22,25,27,655/- b) Disallowance u/s 14A: Rs.62,12,501/- c) Transfer Pricing Adjustment: Rs.97,11,364/- d) Disallowance of Foreign Tax Credit: Rs. 3,72,69,000 8. Aggrieved by the above final order of assessment in the second round of assessment proceedings, the assessee is in appeal before the Tribunal. The assessee raised grounds pertaining to the following issues a) Ground No. 1 (Ground 1.1) – General ground b) Ground No.2 (Ground 2.1 to 2.2) – Validity of draft assessment order c) Ground No.3 (Ground 3.1 to 3.3) – TP adjustment on Corporate Guarantee d) Ground No.4 (Ground 4.1 to 4.5) – Exclusion of royalty income from profits eligible for deduction u/s.10A and 10AA) e) Ground no.5 (Ground 5.1 to 5.4) – Reduction of expenses incurred in foreign currency from export turnover while computing deduction u/s.10A and 10AA f) Ground no.6 (Ground 6.1 to 6.3) – Foreign Tax Credit g) Ground No.7 – Levy of interest u/s.234B h) Ground No. 8 – Prayer with regard to various additions / disallowances. 9. The assessee also filed an additional ground with regard to disallowance made u/s.14A where exclusion of average value of investment in joint venture which had not yielded dividends was sought. The ld AR prayed for the admission of the additional ground during the course of hearing. 10. The additional grounds raised are pure legal issue, which does not require investigation of new facts. Hence, placing reliance on the judgment of the Hon’ble Apex Court in the case of National Thermal IT(TP)A No.788/Bang/2022 Page 8 of 27 Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC), we admit the additional grounds. 11. Ground nos. 1 and 8 are general in nature. Ground no.7 is consequential not warranting separate adjudication. During the course of hearing the ld AR submitted that if the issues are considered on merits and adjudicated, the legal issue raised vide Ground No.2 can be left open. Accordingly we will consider the issues on merits in the following paras. Grounds No. 3.1 to 3.3 – Ground with respect to addition of corporate guarantee fees 12. In the second round of TP proceedings, the TPO has made TP adjustment at 2% without considering any comparable unrelated transaction and on a notional basis. The DRP directed the AO to adopt the rate at 0.92% as determined by the TPO in the first round of proceedings. 13. The ld AR submitted that the TPO has passed the order without considering any comparable and on notional basis thereby not following the directions of the Tribunal in the remanded proceedings. The ld AR without prejudice submitted that the quantification of arm’s length rate at 0.92% of the loan is also excessive. The ld AR further submitted that the judiciary has consistently held that the arm’s length price of a corporate guarantee transaction ranges between 0.20% to 0.5% of the loan amount. The ld AR in this connection relied on the following decisions :– IT(TP)A No.788/Bang/2022 Page 9 of 27 a. Ad. CIT v Asian Paints Limited [2016] 75 taxmann.com 152 (Bom.) b. Laqshya Media (P.) Ltd. V DCIT [2017] 80 taxmann.com 309 (Mumbai - Trib.) c. Medreich Limited v. ACIT ITA Nos. 1574-1576/Bang/2019 dated 12.4.2021 d. ACIT v Tejas Networks Ltd. [2022] 139 Taxmann.com 430 (Bangalore Trib.) 14. The ld AR with respect to the amount of corporate guarantee on which the interest rate is to be applied submitted that the adjustment has been made on the entire amount of corporate guarantee whereas it should be made only in respect of loan outstanding payable to Nordea Bank as on 31st March 2011, as the risk of default, if any, will be limited to the amount actually payable by the overseas subsidiary to Nordea Bank. The ld AR drew our attention to the fact that for the assessment year 2012-13, in Assessee’s own case the TPO vide order u/s 92CA rws 154 dated 22.2.2016 [Page 591, 592 of the paper book] had made the adjustment at 0.92% on the outstanding balance of the loan amount. The ld AR therefore prayed that the revenue cannot take a different stand for the year under consideration. 15. The ld DR supported the orders of the lower authorities and argued that 0.92% as directed by the DRP is a very reasonable rate. The ld DR further submitted that the rate of interest should be levied on the average of opening and closing balance of the corporate guarantee and not only on the closing balance. IT(TP)A No.788/Bang/2022 Page 10 of 27 16. We heard the rival submissions and perused the material on record. We notice that this issue is covered by the orders of the Tribunal in Medrich Ltd. v. Asstt. CIT [ITA No. 1574 (Bang.) of 2019, dated 12-4-2021], in the case of Manipal Global Education Services (P.) Ltd. v. Dy. CIT [2018] 95 taxmann.com 94 (Bang - Trib.), in the case of Xchanging Solutions Ltd. v. Dy. CIT [2017] 78 taxmann.com 54 (Bang - Trib.) and in the case of ACIT v Tejas Networks Ltd. [2022] 139 Taxmann.com 430 (Bangalore Trib.), wherein it was directed to AO/TPO to make TP adjustments in respect of corporate guarantee at 0.50% for the assessment years under consideration. With respect to the balance on which the TP adjustment needs to be made, we see merit in the contention of the ld AR that the TPO himself has applied the rate on the closing balance of the outstanding guarantee in assessee’s own case for AY 2012-13 and we therefore direct the AO to apply the rate @ 0.50% on the closing balance the of the corporate guarantee as of 31.03.2011 for the purpose of TP adjustment. It is ordered accordingly. Grounds No. 4.1 to 4.5 – Ground with respect to exclusion of royalty income while computing deduction under section 10A/10AA 29. During the year, the Assessee had earned royalty income of Rs 25,63,61,309 as consideration towards use software products developed by the Assessee. The unit wise break-up of the said income was as under. IT(TP)A No.788/Bang/2022 Page 11 of 27 SL NO PARTICULARS ROYALTY INCOME 1 Bangalore SEZ 35,97,545 2 Pune STPI 1,00,31,625 3 Bangalore STPI 24,27,32,139 Total 25,63,61,309 17. The Assessee accordingly included the above royalty income as part of the profits and gains of the business eligible for exemption under section 10A / 10AA. In the first round of appellate proceedings the ITAT remanded the matter with a direction to verify the claim of the Company for the year under consideration in light of the ratio laid down by Hon’ble Karnataka High Court in case of CIT vs. Wipro Ltd in ITA Nos. 503 and 507 of 2002. During the remand proceedings before the AO, the Assessee submitted the details of export invoices raised during the financial year 2010-11 relating to royalty and the related invoices issued from the STPI and SEZ units, the annual performance report filed with the STPI authorities and the export realization statements justifying that the royalty income belonged to STPI/SEZ units [Page 632 to 703 of the paper book]. 18. The AO did not accept the claim of the assessee for the reason that fresh position of law had emerged considering the judgement of the Supreme Court in Engineering Analysis Centre of Excellence (P.) Ltd vs. CIT [2021] 125 taxmann.com 42 (SC). Relying on the said decision, the AO held that ownership of software for which royalty had been received, vested with the corporate entity and not with the specific SEZ/STPI undertaking. For this reason, the royalty income IT(TP)A No.788/Bang/2022 Page 12 of 27 was reduced from profits while computing deduction under section 10A/10AA. 19. The DRP concurred with the views of the AO by stating that the decision of the Karnataka High Court in Wipro Ltd (supra) is distinguishable on facts as it pertains to interpretation of profits of business under section 80HHC and not under sections 10A/10AA 20. The ld AR made a detailed submission as extracted below – (a) Under section 10A(1)/10AA(1), profits and gains derived from the export of, inter alia, computer software is eligible for deduction under section 10A. Subsection (1) of section 10A/10AA begins with the expression ‘subject to the provisions of this section’. The said expression means that the deduction eligible under subsection (1) should be computed having regard to and in conformity with the provisions of other subsections of section 10A/10AA. (b) Subsection (4) to section 10A and subsection 7 of section 10AA provides the mechanism for computation of deduction provided under subsection (1). It begins with the expression ‘for the purposes of subsection (1)’. Thus, the deduction enshrined in subsection (1) with regard to profits and gains derived from the export of, inter alia, computer software should be computed in accordance with the provisions of subsection (4). As per subsection (4), the deduction is with reference ‘profits of the business of the undertaking’ as a proportion of export turnover to total turnover. The usage of the word ‘shall’ in subsection (4) mandates the computation of deduction in the above manner. There is no requirement and is also not permitted under section 10A / 10AA to separately compute the profits derived from the export of, inter alia, computer software. The deduction computed having regard to subsection (4) is considered as profits derived from the export IT(TP)A No.788/Bang/2022 Page 13 of 27 of, inter alia, computer software and the same would be allowable as deduction. (c) Section 10A(4) / 10AA(7) used the expression ‘Profits of the business of the undertaking’. There is a distinction between the two terms “Profits derived from industrial undertaking” and “Profits derived from the business of industrial undertaking”. In the former case, there has to be a direct nexus between the profits and gains and the industrial undertaking. In the latter case the profits include not only those having a direct nexus with the industrial undertaking but also include incidental and ancillary activities connected with the undertaking. The usage of the words “business of” makes this difference. (d) The Karnataka High Court appreciating this proposition in CIT v Motorola India Electronics (P) Ltd IT Appeal No 428 of 2007 which is upheld by the full bench of Karnataka High Court in CIT v Hewlett Packard Global Soft Ltd [2018] 403 ITR 453 where it was held that all profits and gains of the eligible unit including the interest on bank deposits and staff loans are eligible for deduction under section 10A. (e) Without prejudice, the learned AO also erred in allocating the royalty income on the basis of turnover of all units even though the royalty income was only pertaining to Bangalore – SEZ, Pune – STPI and Bangalore – STPI as mentioned above at para 29 (supra). The Appellant submits that royalty income should be considered as profits of Bangalore – SEZ, Pune – STPI and Bangalore – STPI as mentioned above table (supra) and deduction under section 10A/10AA should be allowed as claimed in the return of income IT(TP)A No.788/Bang/2022 Page 14 of 27 21. The ld AR also brought to our attention that though the decision of the Hon’ble High Court in the case of Wipro (supra) was held in the context of section 80HHC, there are subsequent decisions rendered in the context of 10A in the case of CIT v WIPRO Ltd ITA No 507 of 2002 (decision dated 1.9.2010) where it is held that special import license premium income and other miscellaneous income should be considered as income derived from the industrial undertaking eligible for exemption under section 10A of the Act. The ld AR also submitted that following these two decisions, the Karnataka High Court in CIT v Wipro Ltd ITA No. 3204 of 2005 decision dated 28.2.2012, at page 5 to 7 of its decision, [Page 806 to 808 of case laws filed on 31.10.2022] held that income from sale of scrap newspaper, income received by the assessee from write back of credit balance in customers accounts, reversal of sundry creditors / stale cheques, employee credit balances reversed should be treated as profits and gains from exports and deduction under section 10A should be allowed on the same. It was also held that royalty income should form part of export turnover for the purposes of section 10A. 22. We heard the rival submissions and perused the material on record. We notice that the Hon’ble Karnataka High Court in assessee’s own case for the AY 2009-10 (ITA No 55/2021 decision dated 3.9.2021) held that royalty income constitutes profits and gains of business and eligible for deduction under section 10A. The relevant extract of the decision is as given below :- IT(TP)A No.788/Bang/2022 Page 15 of 27 “ This appeal is filed by the revenue under section 260A of the Income Tax Act, 1961 assailing the order of the Income Tax Appellate Tribunal, "C" Bench, Bangalore (Tribunal' for short), dated 16.10.2019 passed in ITA No.1731/Bang/2018 relating to the assessment year 2009-10, raising following substantial questions of law:- "1. Whether on the facts and in the circumstances of the case, the Tribunal is right in law confirming the order passed by CIT(A) holding that Royalty Income has to be treated as Income from business even when Royalty Income was not derived from business carried by assessee but was only attributable to business of the assessee? 2. Whether on the facts and in the circumstances of the case, the Tribunal's order can be said as perverse in nature in confirming the order passed by CIT(A) holding that Royalty Income has to be treated as Income from business even when Royalty Income was not derived from business carried by assessee but was only attributable to business?" 2. At the outset, the learned counsel for the assessee placing reliance on the judgment of the co-ordinate bench of this Court passed in the case of very same assessee in ITA No.264/2017 dated 05.11.2018 would contend that the very identical substantial questions of law raised by the revenue were considered and answered by this Court. This Court, recording that the substantial questions of law raised being covered by the judgment of this Court in the case of Commissioner of Income- tax, Central Circle vs. Motorola India Electronics (P) Ltd., reported in (2014) 46 taxmann.com 167 (Karnataka) was pleased to dismiss the appeal. Hence, the substantial questions of law raised herein, being identical, the appeal deserves to be dismissed answering the substantial questions of law raised, against the revenue and in favour of the assessee. 3. Learned counsel for the revenue made an endeavor to distinguish the judgments of the co-ordinate bench decision in the very same assessee's case referred to supra, referring to the following judgments:- 1) Commissioner of Income-tax US. Meghalaya Steels Ltd., [(2016) 67 taxmann.com 158 (SC)]; IT(TP)A No.788/Bang/2022 Page 16 of 27 2) Commissioner of Income-tax us. Sasken Communication Technologies Ltd., [(2014) SO taxmann.com 134 (Karnataka)];” 3) Commissioner of Income-tax vs. Yokogawa India Ltd., [(2017) 77 taxmann.com 41 (SC)]; 4) Commissioner of Income-tax, Central Circle vs. Motorola India Electronics (P.) Ltd., [(2014) 46 taxmann.com 167 (Karnataka)]; 5) Commissioner of Income-tax - VII, New Delhi vs. Punjab Stainless Steel Industries [(2014) 46 taxmann.com 68 (SC)]; 6) Commissioner of Income-tax vs. Hewlett Packard Global Soft Ltd., [(2017) 87 taxmann.com 182 (Karnataka) (FB)]; 7) Commissioner of Income tax, Central - III vs. HCL Technologies Ltd., [(2018) 93 taxmann.com 33 (SC)]; 8) M/ s. Tata Elxsi Limited vs. The Assistant Commissioner of Income Tax, Bangalore (ILR 2015 KAR 1739). 4. It is not in dispute that the judgment of this Court in ITA No.264/2017 dated 05.11.2018 has been carried by the revenue in appeal before the Hon'ble Apex Court in SLP No.21055/ 2019 which is pending consideration. In view of the aforesaid, we are not inclined to either differ from the judgment of the co-ordinate bench or venture to sit in judgment over the said decision to adjudicate upon the issues fully covered and decided, referring to the judgments now cited by the revenue. Accordingly, answering the substantial questions of law raised herein, against the revenue and in favour of the assessee, we dismiss the appeal.” IT(TP)A No.788/Bang/2022 Page 17 of 27 23. The fact that royalty income was out of licensing of software products developed by the STPI /SEZ units has been accepted by the revenue in the earlier years and for the year under consideration the AO and the DRP have not disputed the fact that the royalty income was out of software products developed from the STPI and SEZ units. It is submitted by the ld AR that the nexus with the STPI/SEZ units has been established by submitting the details of royalty income, invoices, annual performance report etc. and that the revenue has not brought any contrary evidence on record to justify the exclusion of royalty income from business profits. We also see merit in the argument of the ld AR that the assessee does not have a non-STPI or non-SEZ units and by submitting the relevant documents, the nexus of royalty income with the STPI/SEZ units are established. Given that there is no change in facts in the year under consideration as compared to earlier years, in our view the decision of the Hon’ble High Court in assessee’s own case is applicable for the year under consideration. Therefore respectfully following the same and considering the ratio laid down in other judicial pronouncements discussed herein above, we hold that the royalty income from licensing of software products should be considered as profits of business of eligible units for the purposes of providing deduction under section 10A and 10AA of the Act. Grounds No. 5.1 to 5.4 – Ground relating to exclusion of expenses incurred in foreign currency while computing deduction under section 10A IT(TP)A No.788/Bang/2022 Page 18 of 27 24. During the course of assessment the AO excluded the expenses incurred in foreign currency from the export turnover of the 10A units to the tune of Rs. 7329.94 lakhs. The amount is arrived at based on the break-up of the expenses incurred in foreign currency for Rs.7550.06 lakhs taken from notes to accounts forming part of the audited financial statements for the year under consideration as reduced by an amount of Rs. 2,20,66,228/- already reduced by the assessee from the export turnover of the 10AA unit in the return of income in view of the definition of ‘export turnover’ as contained in clause (i) of explanation 1 to section 10AA. 25. The ld AR submitted that the ITAT in Assessee’s own case for the AY 2004-05, 2006-07 and 2008-09 vide order dated 04.03.2015 held that expenses incurred in foreign currency should not be reduced from export turnover while computing deduction under section 10A for the reason that the Appellant is engaged in development and export of computer software and not into technical services. However while passing the OGE orders for these years, the AO did not reduce the expenses incurred in foreign currency from the export turnover. The ld AR further submitted that similar view is held by the, the ITAT in Assessee’s own case for the 2010-11 where the Tribunal directed the AO to follow the decisions of Karnataka High Court in Motor Industries Co Ltd, Mphasis Ltd, Kshema Technologies Ltd and other cases. The ld AR drew our attention to the fact that the CIT(A) followed the above decision in disposing the appeal for AY 2009-10 and revenue’s appeal was also dismissed by the ITAT for AY 2009-10. IT(TP)A No.788/Bang/2022 Page 19 of 27 It is therefore contended that the ratio of these decisions squarely applies for the year under consideration also as there is no change in facts. The ld AR prayed that the expenses incurred in foreign currency amounting to Rs. 59,17,26,385/-, Rs. 3,96,11,607/- and Rs. 5,86,69,011/- should not be reduced from export turnover of STPI units at Bangalore, Pune and Chennai in computing deduction under section 10A. 26. In respect of computation of deduction under section 10AA, the ld AR submitted that the assessee has voluntarily reduced expenses incurred in foreign currency for development of computer software amounting to Rs. 2,20,66,228/- from the export turnover of SEZ unit and thus, the action of the learned assessing officer in allocating and reducing an additional sum of Rs. 3,99,38,783/- and Rs. 19,10,397/- from export turnover of SEZ units at Bangalore and Pune is incorrect and liable to be quashed. 27. Before proceeding we will look at the definition of ‘export turnover’ as per section 10A and section 10AA: Section 10A (iv) "export turnover" means the consideration in respect of export by the undertaking of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India; IT(TP)A No.788/Bang/2022 Page 20 of 27 Section 10AA “export turnover" means the consideration in respect of export by the undertaking, being the Unit of articles or things or services received in, or brought into, India by the assessee but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things outside India or expenses, if any, incurred in foreign exchange in rendering of services (including computer software) outside India;”(emphasis supplied) 28. From the plain reading of the above two definitions under section 10AA and 10A, it is clear that the definition of export turnover under section 10AA is different from the definition of export turnover under section 10A. Section 10A does not warrant exclusion of expenses incurred in foreign currency attributable to rendering of services in connection with development of computer software. However, section 10AA specifically warrants exclusion of expenses incurred in foreign currency attributable to rendering of services in connection with computer software. Similar prescription is absent in section 10A. The exclusion from ‘Export turnover’ under section 10A is of expenses incurred in foreign currency in providing technical services outside India. “Technical services” would mean making available specialized knowledge or information to a third person. The recipient of such knowledge or information is then enabled to apply and use such knowledge and information for the purpose of carrying out any work. Technical services would therefore mean and refer to the usage or deployment of specialized skills in rendering any services of a consultancy nature. IT(TP)A No.788/Bang/2022 Page 21 of 27 29. So the next question to be considered is whether the services rendered by the assessee in terms of software development is to be regarded as technical services. We notice that the Hon’ble Karnataka High Court in the case of CIT v Mphasis Ltd [2016] 74 taxmann.com 274 has considered a similar issue and held as under”- “Whether the Tribunal was correct in reversing the finding recorded by the Assessing Officer that the foreign currency for providing software development services outside India should be excluded from the export turnover for the purpose of computation of deduction u/s.10B of the Act, which was confirmed by the Appellate Commissioner? 2. The first substantial question of law arose for consideration before this Court in ITA No. 776/2007 disposed of on 13.06.2014, wherein this Court has held at paras 18 and 19 as under:- 18. From the aforesaid provision it is clear that the consideration in respect of computer software received in or brought into India by the assessee in convertible foreign exchange is deducted from the profits of the said business. In other words the assessee is not liable to pay any income tax on such consideration received from export of computer software. However the said export turnover does not include freight, telecommunication charges or insurance attributable to the delivery of computer software outside India or expenses if any incurred in foreign exchange in providing technical service outside India. In other words out of the said export turnover the following amounts have to be deducted; a. freight; b. telecommunication charges; c. insurance attributable to the delivery of computer software outside India; d. expenses, if any, incurred in foreign exchange in providing technical services outside India. 19. If the assessee is engaged in the business of providing technical services outside India in connection with the development or production of computer software then expenses if any incurred in IT(TP)A No.788/Bang/2022 Page 22 of 27 foreign exchange in providing technical services outside India is liable to be deducted out of export turnover. The said provision has no application in the case of export out of India of computer software or its transmission from India to a place outside India by any means. The law makes a distinction between technical services rendered in connection with export of computer software and export of technical services for the purpose of development or production of computer software outside India. If the technical services rendered by the assessee's Engineers is in connection with the export of computer software for the purpose of testing, installation and monitoring of software such a turnover do not fall within clause (ii) of sub-section (1) of section 80HHE of the Act. Such a turnover falls within sub-clause (i) of sub-section (1) of section 80HHE of the Act, that is export out of India of computer software or its transmission from India to a place outside India by any means. The expenditure incurred in the form of foreign exchange for such services cannot be excluded in computing the export turnover as it forms part of the export turnover. In the instant case as is clear from the order of the Assessing Authority, he proceeds on the assumption that the assessee is a company engaged in rendering technical services outside India in connection with production of said software. Therefore the expenditure incurred in foreign exchange in providing such technical services outside India of Rs. 62.7 lakhs was excluded in computing the export turnover and total turnover for arriving at deduction under section 80HHE of the Act. The assessee is engaged in the business of export out of India of computer software and its transmission to places from India outside India. Before a computer software is exported, the Software Engineers of the assessee would have initial discussion with regard to the requirements, specifications etc. Thereafter computer software is manufactured and then it is transmitted from India to a place outside India. The software Engineers deputed abroad who among other things have to do testing, installation and monitoring of software supplied to the client. Though the said services are technical in nature it does not fall within clause (ii) of sub-section (1) of section 80HHE of the Act of providing technical services outside India in connection with the development or production of computer software. It falls under sub-clause (1) of sub-section (1) of section 80HHE of the Act. Therefore, the said expenditure cannot be excluded in computing export turnover. In that view of the matter we do not see any merit in this appeal. Accordingly, the said IT(TP)A No.788/Bang/2022 Page 23 of 27 question of law is answered in favour of the assessee and against the revenue. Ordered accordingly. 3. In view of the said judgment, the substantial question of law is answered in favour of the assessee and against the Revenue.” 30. It is also noticed that the SLP against the decision of the Karnataka High Court in Mphasis case was dismissed by the Supreme Court in CIT v Mphasis Ltd [2020] 113 taxmann.com 74 (SC). Similar view is held in the case of CIT vs. Aztec Software Technology Ltd [2020] 119 taxmann.com 318 (Karnataka). 31. We further notice that the coordinate bench in assessee’s own case has held that the Assessee is engaged in development and export of computer software and not into technical services. Considering the facts of the case in the light of the decision of the Hon’ble High Court and the decision of the coordinate bench in assessee’s own case, in our considered view the assessee is not into technical services and going by the definition of ‘export turnover’ in section 10A, we hold that the expenses incurred in foreign currency should not be reduced from export turnover while computing deduction under section 10A. 32. We notice that the assessee has already reduced a sum of Rs. Rs. 2,20,66,228 towards expenses incurred in foreign currency for the purpose of deduction u/s.10AA. However the AO while reducing the expenses incurred in foreign currency has done it for the SEZ units also. In view of the fact that the expenses incurred in foreign currency being already reduced, in our considered view reducing the expenses based on the breakup in notes to accounts would amount to double IT(TP)A No.788/Bang/2022 Page 24 of 27 reduction and not warranted. It is further noticed that the AO has made the similar reduction from the total turnover also while computing the deduction u/s.10A and 10AA (Refer para 4.3.2 page 13 of AO’s final order). We therefore direct the AO to delete the deduction of Rs.7329.94 lakhs made in the export turnover and total turnover. It is ordered accordingly. Grounds No. 6.1 to 6.3 – Ground with respect to addition of withholding taxes and income tax amounting to Rs. 3,27,69,000 33. In the computation of total income for the year under consideration, the assessee added back of withholding tax and income tax of Rs. 3,72,68,820 to net profit after tax as per profit and loss account in order to arrive at net profit before tax as per profit and loss account. However the AO proposed an addition of Rs. 3,27,69,000 stating that the computation of income should begin with the figure constituting profit before tax whereas the Assessee has started with the amount of profit after tax. The assessee vide letter dated 12.5.2022 made submission before the DRP that the amount added by the AO is already disallowed by the assessee in the computation of income and that the same amounts to double disallowance. The DRP directed the AO to verify the assessee’s claim that it had already disallowed an amount of Rs. 3,72,68,820. The AO was directed to obtain the breakup of this amount and give credit for the TDS component of the disallowance made. The assessee reiterated submissions once again before the AO. The AO retained the addition with the following observations – IT(TP)A No.788/Bang/2022 Page 25 of 27 “It is seen from the assessee’s submissions, the same has been added by the assessee in computation by making adjustment to profit after tax instead of profit before tax. Hence, the disallowance made in para no 4.5 above is found in order.” 34. The ld AR submitted that despite the above finding that withholding tax and income tax of Rs. 3,72,68,820 has been added back to net profit after tax as per profit and loss account to arrive at net profit before tax as per profit and loss account, the AO has added back the aforesaid amount to income returned in the final assessment order. 35. We heard both the parties. From the perusal of records it is noticed that the taxable income is computed by the assessee by making additions and deletions to profit after tax and a sum of Rs. 3,72,68,820 is disallowed by the Assessee under the head ‘Expenses debited to P&L account’ and ‘Withholding taxes and income taxes, net’ to profit after tax to arrive at profit before tax. Therefore we see merit in the argument that the addition made by the AO is not correct. We remit the issue back to the AO to verify and delete the addition. Additional ground – Disallowance under section 14A 36. In the first round of appellate proceedings while adjudicating the disallowance u/s.14A, the ITAT directed the AO to consider only those investments that had yielded exempt income in the hands of the assessee while computing the disallowance u/s.14A r.w.r 8D(2)(iii). Pursuant to the above the assessee filed a letter date 21.09.2021 with the AO submitting the computation of disallowance u/s.14A by IT(TP)A No.788/Bang/2022 Page 26 of 27 excluding the investments which had not yielded any dividend income for the year under consideration. 37. The ld AR submitted that in the computation filed before the AO, the assessee had inadvertently missed to exclude the investment in joint ventures which had not yielded any dividend income for the year under consideration for the purpose of computation of average value of investments under section 14A. The ld AR prayed for a direction to the AO in this regard. 38. We heard the DR. We direct the AO to verify whether the investment in joint ventures which had not yielded any dividend income for the year under consideration and exclude the same for the purpose of computation of average value of investments under section 14A and for computation of disallowance under section 14A read with rule 8D in accordance with the decision of the Special bench of ITAT in the case of ACIT v Vireet Investment P Ltd [2017] 82 taxmann.com 415 (Delhi – SB). It is ordered accordingly. 39. In the above paragraphs we have adjudicated the issues on merits and therefore the legal issue contented through Ground no.2 is left open. IT(TP)A No.788/Bang/2022 Page 27 of 27 40. In the result, the appeal by the assessee is partly allowed. Pronounced in the open court on this 11 th day of November, 2022. Sd/- Sd/- ( GEORGE GEORGE K. ) ( PADMAVATHY S. ) JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore, Dated, the 11 th November, 2022. / Desai S Murthy / Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore.