Income Tax Appellate Tribunal, Bangalore Bench 'A'
P. Madhavi Devi, Judicial Member
1. This is an appeal filed by the assessee against the order of the Assessing Officer (AO) passed u/s 143(3) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act'] read with sec.144C of the Act.
2. Brief facts of the case are that the assessee- company, which is engaged in the business of software development, had filed its original return for the assessment year 2006-07 declaring a total income of Rs.9,66,218/-. Subsequently, the assessee filed a revised return on 11/01/2008 declaring total income as 'nil'. During the assessment proceedings u/s 143(3) of the Act, the AO observed that there is an international transaction between the assessee and its Associated Enterprises (AEs). In view of the same, determination of the arms' length price (ALP) of the international transaction was referred to the Transfer Pricing Officer (TPO) u/s 92CA of the Act. The TPO determined the arms' length adjustment at Rs.1,55,10,077/-. In consonance with the order of the TPO, the AO proposed the addition of Rs.1,55,10,077/- and also made certain disallowances while computing deduction u/s 10A of the Act in the draft assessment order. Against the said draft assessment order, the assessee preferred objections before the Disputes Resolution Panel (DRP) and vide order dated 17/09/2010, the DRP confirmed the draft assessment order pursuant to which the final assessment order was passed. Against the said final assessment order, the assessee is in appeal before us.
3. In the grounds of appeal raised by the assessee, the first ground is relating to the transfer pricing adjustment while ground Nos. 2 to 4 relate to disallowances in computation of deduction u/s 10A of the Act and ground Nos. 5, 6 and 7 are relating to addition of various amounts as 'income from other sources'.
4. As regards the issue of computation of deduction u/s 10A is concerned; we find the brief facts of the case to be as under:
4.1 The assessee-company is engaged in the business of software development and had claimed Rs.4,60,96,559/- as deduction u/s 10A of the Act. In computing the said deduction, the AO observed that the assessee had brought forward loss from the earlier assessment year 2002-03 onwards and both brought business and depreciation loss put together stand at Rs.8,95,30,264/-(business loss of Rs.2,00,74,914 + depreciation loss of Rs.6,94,55,350/-) which has not been adjusted before claiming deduction. Considering the fact that the issue had been elaborately dealt with, in the assessment order for assessment year 2005-06, the AO held that the assessee should have set off the brought forward loss as well as depreciation loss of the earlier years before claiming deduction u/s 10A of the Act. He, accordingly, computed the deduction u/s 10A after set off of earlier year's brought forward business loss and depreciation and accordingly arrived at the profit for computation of deduction u/s 10A at Rs.2,55,40,802/-. Against the said disallowance and the consequential addition, the assessee is in appeal before us by way of ground of appeal No. 2.
4.2 The learned counsel for the assessee submitted that for computing deduction u/s 10A of the Act, profit and loss of the business eligible for deduction u/s 10A has to be computed on a stand-alone basis and only the loss pertaining to STPI unit can be set off against business profits of the assessee for the relevant assessment year and not the entire loss of both STPI and non-STPI units. In support of this contention, he placed reliance upon the decision of the jurisdictional High Court in the case of CIT v. Yokogawa India Ltd.  341 ITR 385/21 taxmann.com 154 (Kar.). A copy of the said order is filed before us.
4.3 Per contra, the learned Departmental Representative submitted that for computing deduction u/s 10A of the Act, total income of the assessee has to be first determined and thereafter brought forward loss of earlier assessment years has to be set off before computing deduction. In support of this contention, he placed reliance upon the decision of the jurisdictional High Court in the case of CIT v. Himatasingika Seide Ltd.  286 ITR 255/156 Taxman 151 (Kar.), which has been confirmed by the Hon'ble Supreme Court in SLP (Civil) No. 10359-10360 of 2011 and others vide order dated 19th September,2013. He further submitted that the decision of the High Court in the case of Himatasingika Seide Ltd. (supra) was not brought to the notice of the Hon'ble High Court in the case of Yokogawa India Ltd. (supra) and hence the contrary decision in the said case. Thus, according to him, the order of the AO is justified.
4.4 Having regard to the rival contentions and the material on record, we find that it is not clear from the record as to whether brought forward losses and depreciation loss pertain entirely to non-STPI unit only or part of it also pertains to STPI unit. The Hon'ble Karnataka High Court in the case of Himatasingika Seide Ltd. (supra) was considering the case of an assessee which was 100% export oriented unit in terms of sec.10B of the Act and was claiming exemption u/s 10B. In the case of the said assessee, unabsorbed depreciation available to the assessee in the assessment year 1988-89 was carried forward to the assessment year 1994-95 (relevant assessment year) and was claimed by the assessee to be adjusted against income from other sources, thereby reducing the assessee's income for assessment purposes at 'nil'. The AO accepted the said claim of the assessee and assessed the total income at 'nil'. However, the Commissioner of Income-tax (CIT) revised the order u/s 263 stating that the order passed by the AO was erroneous and prejudicial to the interests of the Revenue as exemption u/s 10B was allowed on an inflated amount without deducting unabsorbed depreciation. The CIT directed that unabsorbed depreciation should be adjusted against the income of the export oriented business undertaking and the total income of the assessee should accordingly be recomputed afresh. The assessee therein had appealed to the Tribunal which allowed the same against which the Revenue preferred an appeal before the Hon'ble High Court. The Hon'ble High Court held that sec.10B cannot be read in isolation of other provisions as it is only an exemption provision and exemption provision cannot be fanciful and it has some rationale with other provisions of the Act and therefore after a combined reading of the definition of exemption, total income-tax liability, deductibility etc., one has to come to a conclusion that calculation as far as possible is to be in terms of the Act. To arrive at a profit and gain, one has to necessarily take into consideration total income in terms of the Act and to arrive at the income, one has to take into consideration various additions and deletions in terms of the Act, such as allowability of depreciation for the purpose of calculation of total income. The Hon'ble Supreme Court has dismissed the SLP filed by the assessee against the order of the Hon'ble High Court.
4.5 The Hon'ble High Court of Karnataka, in the case of Yokogawa India Ltd (supra) was considering the case of an assessee which was in the business of manufacture and trading of process controlled instruments and it had filed return of income declaring loss. During the assessment proceedings u/s 143(3), the AO had observed that the assessee had claimed exemption u/s 10A for its STPI unit before set off of brought forward losses and depreciation. The AO, therein, had also observed that 10A benefit can be given only after adjusting brought forward loss and depreciation from the total income of the assessee. Aggrieved, the assessee preferred an appeal before the CIT(A) who granted relief to the assessee and on further appeal by the Revenue to the Tribunal, it was held that business loss of other units cannot be set off against the profits of the undertaking engaged in the business of computer software for purposes of determination of the allowable deduction u/s 10B of the Act. The Revenue, therefore, filed appeal before the Hon'ble High Court and the High Court framed the following question for determination:
"Whether the Tribunal was correct in holding that the deduction u/s 10A or 10B of the Act during the current assessment year has to be allowed without setting off brought forward unabsorbed losses and the depreciation from earlier assessment year or current assessment year either in the case of non-STP units or in the case of the very same undertaking?"
The Hon'ble High court has considered the issue at length and at para 31 of its order has held that as deduction u/s 10A has to be excluded from the total income of the assessee, the question of unabsorbed business loss being set off against such profits and gains of undertaking would not arise and in that view of the matter, the approach of the AO was quite contrary to the aforesaid provision and the appellate Commissioner as well as the Tribunal were fully justified in setting aside the said assessment order and granting the benefit of sec.10A to the assessee. Thus, the question of law was answered in favour of the assessee. Thus, there are two judgments of the Hon'ble Karnataka High Court contrary to each other. When there are two judgments of the very same High Court by benches of equal strength, then the later judgment of the High Court has to be followed as held by the Hon'ble Delhi Court in the case of Bhika Ram v. Union of India  238 ITR 113. The decision of the High Court in the case of Himatasingika Seide Ltd. (supra) is dated 4th August 2006 whereas the decision of the Hon'ble High Court in the case of Yokogawa India Ltd. (supra) is dated 9th August, 2011. As regards the dismissal of the SLP by the Hon'ble Supreme Court against the decision of the Hon'ble Karnataka High Court in the case of Himatasingika Seide Ltd. (supra) is concerned, we find that the Hon'ble Supreme Court has dismissed the appeal in limine without laying down any ratio decidendi therein and, therefore, as held by the Hon'ble Apex Court in the case of Indian Oil Corporation Ltd. v. State of Bihar  167 ITR 897, the decision of the Hon'ble Karnataka High Court in the case of Yokogawa India Ltd. (supra) holds the field. Further, the Hon'ble Apex Court in the case of CIT v. Vegetable Products Ltd.  88 ITR 192 has held that where two reasonable constructions are possible, then the construction in favour of the assessee must be adopted. Respectfully following the said decision, we allow the ground of appeal No. 2.
5. Ground Nos. 3 and 4 relate to the addition of Rs.2,20,14,185/- being the difference between sec.10A deduction claimed by the assessee and sec.10A deduction computed by the AO as business income and further exclusion of tele-communication and insurance expenses amounting to Rs.37,32,651/- from the export turnover and also exclusion of expenditure incurred in foreign currency amounting to Rs.76,34,382/- from the export turnover while computing deduction u/s 10A of the Act.
The learned counsel for the assessee submitted that the AO has given effect to the rectification application filed by the assessee vide order dated 06/05/2011 and therefore the assessee withdraws the ground No. 3. Taking the above contention of the assessee into consideration, the ground No. 3 is rejected as withdrawn.
6. As regards ground No. 4, learned counsel for the assessee submitted that the assessee does not wish to press ground No. 4A against the merit of reducing tele-communication, insurance expenditure and expenditure incurred in foreign currency from the export turnover, in view of the decision of the jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd.  349 ITR 98/204 Taxman 321/17 taxmann.com 100 (Kar.) wherein it was held that where an expenditure is excluded from the export turnover then the same has to be excluded from the total turnover also for the purpose of deduction u/s 10A of the Act which arises as ground of appeal No. 4B.
Upon hearing of both the parties, we find that the issue of reducing expenditure incurred on telecommunication, insurance and in foreign currency both from the export turnover as well as total turnover is covered by the decision of the jurisdictional High Court in the case of Tata Elxsi Ltd. (supra). In view of the same, ground of appeal bearing No. 4(B) is allowed and 4(A) is rejected as not pressed.
7. As regards ground Nos. 5, 6 and 7, brief facts are that the AO, while computing profits of the business undertaking, has considered a sum of Rs. 8,80,883/- as 'other income' and has reduced it from the 'profit' and treated it as 'income from other sources' not eligible for deduction us 10A of the Act, against which the assessee is in appeal by raising ground Nos. 5, 6 and 7.
7.1 Learned counsel for the assessee submitted that these are : (i) interest on deposits which are deposited to obtain bank guarantee issued to the customs authorities, (ii) reimbursement of expenses by the customers on account of certain bills produced by the company on their behalf (iii) recovery from the employees leaving the company without the giving notice period. Learned counsel for the assessee submitted that all these are part of business income and therefore are eligible to be considered as income from business and deduction u/s 10A has to be allowed on the same. In support of this contention, the learned counsel for the assessee has placed reliance upon the following decisions:
(i) Livingstones Jewellery (P.) Ltd. v. Dy. CIT  31 SOT 323 (Mum.) and
(ii) CIT v. Motorola India Electronics (P.) Ltd.  46 taxmann.com 167/225 Taxman 11 (Kar.) (Mag.)
7.2 Learned Departmental Representative, on the other hand, supported the orders of the authorities below.
7.3 Having regard to the rival contentions and the material on record, we find that the Tribunal at Mumbai in the case of Livingstones Jewellery (P.) Ltd. (supra) has considered as to whether all profits which have nexus with the business of an undertaking is qualified for deduction u/s 10A of the Act and particularly in respect of interest income earned on fixed deposits made for obtaining credit facilities, and held that such interest income has nexus with the business undertaking and thus fell under the head 'business or profession' and was eligible for deduction u/s 10A of the Act. In the case of Motorola India Electronics (P.) Ltd. (supra) the Hon'ble Karnataka High Court has held that in view of substitution of sub-sec.(4) of sec.10B by the Finance Act 2001 with effect from 01/04/2001, the assessee is entitled to claim exemption on interest income earned from inter-corporate loans and deposits lying in EEFC account. For coming to the conclusion, the Hon'ble High Court has considered that there is a direct nexus between interest income and the income of the business undertaking and though it does not partake the character of profits and gains from the sale of an article, it is the income which is derived from the consideration realized by export of articles. We find that the facts and circumstances of the case before us are similar to the facts of the case before the Tribunal at Mumbai and also the jurisdictional High Court. Therefore, respectfully following the said decisions, we hold that these are part of the business income of the assessee and have to be considered for computation of deduction u/s 10A of the Act. The AO is directed accordingly. Ground Nos. 5, 6 and 7 are thus allowed.
8. Coming to ground No. 1 relating to transfer pricing adjustment, brief facts of the case are that it is observed by the TPO in his order u/s 92CA of the Act that the assessee has paid management fee of Rs.1,55,10,767/- to its AE. After considering the assessee's contentions at length, the TPO came to the conclusion the assessee has failed to produce any evidence regarding expenditure incurred by the AE on behalf of the tax-payer and the commensurate tangible benefits thereof and also that the assessee has not shown whether such services were rendered except producing invoice copy and describing the nature of services. The TPO was of the opinion that the tax payer did not pay any management fee in the preceding financial year 2004-05 or in the earlier year but has paid the same only in the financial year 2005-06 and that the assessee has not shown tangible and substantial commercial benefit derived by such payment of Rs.1.55 crore when compared to Nil payment made during the earlier assessment year. He, therefore, held that payment of management fee is nothing but siphoning off of profits from India with minimum incidence of tax. He, accordingly, treated the entire sum of Rs.1.55 crore as unjustified payment and made arms' length adjustment accordingly. The AO, in the draft assessment order proposed to make an addition to the returned income of the assessee against which the assessee preferred objections before the DRP who confirmed the order of the AO and consequently, the final assessment order was passed making addition of the adjusted arms' length price.
8.1 In appeal before us, the assessee has placed various decisions of Hon'ble High Court as well as the Tribunal in support of its contention that the AO is not authorized to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous loss but can only examine the quantum of expenditure and the allowability thereof as a business expenditure. In support of the said contentions, the learned counsel for the assessee placed reliance upon the following decisions:
(i) EKL Appliances v. Dy. CIT [IT Appeal Nos. 1068 & 1070 of 2011] (Delhi)
(ii) Dresser-Rand India (P.) Ltd. v. Addl. CIT  13 taxmann.com 82/47 SOT 423 (Mum.)
(iii) Festo Controls (P.) Ltd. v. Dy. CIT  30 taxmann.com 16/ 150 ITD 305/62 SOT 1 (Bang.) (URO)
(iv) Mc Cann Erickson India (P.) Ltd. v. Addl. CIT  24 taxmann.com 21 (Delhi)
(v) Platinum Guild India (P.) Ltd. v. Dy. CIT  43 taxmann.com 271 (Mum.)
(vi) Reebok India Co. v. Addl. CIT  146 ITD 469/ 35 taxmann.com 578 (Delhi) and
(vii) Dy. CIT v. Diebold Software Services (P.) Ltd.  151 ITD 463/48 taxmann.com 26 (Mum.)
8.2 The learned Departmental Representative, on the other hand, supported the orders of the authorities below.
8.3 Having regard to the rival contentions and the material on record, we agree with the contentions of the learned counsel for the assessee that the AO cannot make/disallow the entire expenditure claimed by the asse
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ssee to be management fee on the ground that the assessee has not proved the commercial benefit from such payment. As held by the Hon'ble Delhi High Court in the case of EKL Appliances (supra), it is not necessary for the assessee to show that any legitimate expenditure incurred by him was incurred out of necessity or that it has resulted in any profit or income either in the same year or in any of the subsequent years but the only condition to be satisfied is that the expenditure should have been incurred wholly and exclusively for the purpose of business and nothing more. In the case before us, though the learned counsel for the assessee has drawn our attention to various invoices raised by the AE on the assessee, we find that the documents filed by the assessee as evidence before the DRP and also before us in support of his contention that the AE has rendered services to the assessee for which management fee has been paid has not been verified or considered by them. When the assessee claims that the assessee has paid the management fee to the AE, no doubt the burden is on the assessee to prove that it has received services from its AE. But when the assessee has produced such material before any of the authorities below it is also the duty of the authorities to consider the same before coming to any conclusion on merits. In view of the same, without verification of proper evidence, it not justified to come to the conclusion that payment of management fee of Rs.1.55 crore is unwarranted. In view of the same, we set aside the order of the AO on this issue and remit the issue to the file of the AO/TPO for re-adjudication of the issue and re-determination of the arm's length price in accordance with law. The assessee shall also be given an opportunity to produce all the relevant materials before the AO and the assessee shall co-operate with the AO for early determination of the arm's length price by the AO/TPO. Needless to mention, the assessee shall be given a fair opportunity of hearing. 9. In the result, the ground of appeal No. 1 is allowed for statistical purposes.