C.H. Naniwadekar for the Assessee. T.V. Bhaskar Reddy, CIT for the Revenue.

These cross appeals preferred by the assessee and Revenue emanates from the common order of the Ld. CIT(Appeals)-13, Pune dated 15.07.2015 for the assessment year 2010-11 as per the grounds of appeal on record.

2. At the very outset, the Ld. Counsel for the assessee submitted that in the first ground, the assessee wants KALs Information System Ltd. to be excluded from the final list of comparable and the Revenue in its appeal wants Infosys Technologies Ltd. to be included in the final list of comparables.

First, we would adjudicate the exclusion of KALs Information System Ltd. from final list of comparables in assessee‟s appeal.

EXCLUSTION OF KALS IFNORMATION SYSTEM LTD FROM FINAL LIST OF COMPARABLES

(A) KALs Information System Ltd :-

3. At the very opening of the argument, the Ld. Counsel for the assessee appraised the Bench taking us to the TPO‟s order at Page-1, Para-3 wherein brief profile of the company has been given and it is evident that the company is carrying out all IT enabled services and no marketing is done by the assessee, no sale of IT products are done by the assessee. The Ld. Counsel also took us through various agreements filed before us wherein it is evident that the assessee is performing only development services relating to software. These facts are clear from the documents annexed at Pages 30 to 31 of the paper book placed before us. That further, it is the contention of the Ld. Counsel for the assessee that most of the risks are undertaken by the AEs only.

4. That with regard to KALs Information System Ltd., the TPO vide Para 19 of his order has held as follows:

“19. As regards, objection on product development and objection based on judicial pronouncements, inconsistent approach of the assessee has been discussed in the subsequent paragraphs. Objection of the assessee is therefore not accepted.”

Therefore, the TPO retained KALs Information System Ltd. in the final list of comparables companies.

5. The Ld.CIT(Appeals) at Pages 27 to 35 of his order as per various reasoning appearing therein has upheld the TPO‟s order including KALs Information System Ltd. and rejected the objection raised by the assessee. One of the most important point of the Ld. CIT(Appeals)‟s order that he relied on „Safe Harbour Rules‟. The Ld. Counsel for the assessee vehemently objected tothe application of „Safe Harbour Rules‟ by placing reliance on the decision in the case of Rolls Royce India Pvt. Ltd. Vs. Deputy Commissioner of Income Tax, ITA No.1310/Del/2015 for assessment year 2010-11 wherein it has been held that “DRP wrongly invoked Safe Harbour Rule for coming to the conclusion that forex gain/loss was not to be treated as operating income/loss for current assessment year because the Safe Harbour Rules, in any case, were applicable from 18.09.2013 and prior to that the said Rules could not be applied.”

5.1 The Ld. Counsel for the assessee submitted that the Safe Harbour Rules are applicable from 18.09.2013 i.e. A.Y.2014-15 whereas the case of the assessee under consideration is A.Y. 2010-11 and therefore, Safe Harbour Rules is not applicable because prior to 18.09.2013, the said Rules could not have been applied.

5.2 The Ld. Counsel for the assessee further relied on the decision of the Co-ordinate Bench of the Tribunal. Bombay in the case of Accenture Services Pvt. Ltd. Vs. ACIT, IT (TP)A No.7686/Mum/2012 for assessment year 2008- 09 wherein the Tribunal has held as follows:

“KALs Information System Ltd.

From the audited Annual Account of this company placed in the paper book it is evident that the company is also engaged in the development and sale of products. In fact, the learned DRP has also accepted this fact while dealing with the objections of the assessee. However, the DRP has ultimately held that the sale of products do not constitute a major portion of the company's revenue. We are unable to understand on what basis the DRP has given such a finding considering the fact that segmental details as regards sale of products Accenture Services Pvt. Ltd. and services are not available in the Annual Report. That being the case, there can be possibilities of revenue from products sale being included in application software segment. The Transfer Pricing Officer while rejecting the objections of the assessee has simply stated that the company is in the business of application software which is similar to the assessee. It is relevant to note, in a number of decisions of different Benches of the Tribunal for the very same assessment year, this company has been rejected as a comparable to a software service provider on the reasoning that it is also involved in development and sale of product. The ratio laid down in these decisions squarely applies to the facts of the present case. Pertinently, in course of hearing, it was brought to our notice by the learned Sr. Counsel for the assessee that the Transfer Pricing Officer relying upon the information sought by another Transfer Pricing Officer in case of some other assessee has utilized it in the present case. Referring to the copy of the said reply at Page-940 of the paper book the learned Sr. Counsel submitted that the export sales figure mentioned in the said reply does not tally with the export sales figure mentioned in the audited annual account of the assessee for the relevant previous year. On factual verification, it is found that such contention of the learned Sr. Counsel to be correct. Thus, on the basis of such unverified information also, the TPO was not justified in selecting this company as a comparable.”

5.3 The Ld. Counsel for the assessee further relied on the decision in the case of Bindview India (P) Ltd. Vs. Deputy Commissioner of Income Tax, ITA No.1386/PN/2010 for assessment year 2006-07 wherein the Tribunal has held and observed as follows:

“16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds.”

6. We have perused the case records and analyzed the judicial pronouncements placed before us. We observe that a particular finding is consistently being arrived at by the Co-ordinate Bench of the Tribunal stating that TPO is not justified in selecting this company i.e. KALs Information System Ltd. as comparable. We, therefore, respectfully following our decisions in earlier years, direct the AO/TPO to exclude KALs Information System Ltd. from the final list of comparables.

7. The grievance of the Revenue in appeal is with regard to exclusion of Infosys Technologies Ltd. wherein the prayer of the Revenue is that this company should be included in the final list of comparable with that of the assessee.

(B) Infosys Technologies Ltd:-

8. The TPO has given his findings on this issue at Page 15 onwards of his order and has held that the objection of the assessee on Infosys Technologies Ltd. is not comparable because it is providing services to some other segment is not acceptable and it was included in the final set of comparable companies.

9. The Ld. CIT(Appeals) at Page 30 of his order Para 2.2.6.1 starts his observation and the assessee also filed written submission which has been reproduced and finally at Para 2.2.6.2 & 2.2.6.3, the Ld. CIT(Appeals) has held as follows:

“2.2.6.2 I have carefully considered the assessee's submission. I find that the learned TPO has not applied the upper turnover filter presumably following the decisions of the honourable Tribunal, which have held that turnover filter is of no relevance in the software industry and there is no relationship of turnover with profit of the company as company with lower turnover has also earned higher profit than the 'company with higher turnover. i agree with the view that turnover may not be a factor in a service industry, however, according to me, size of the company makes difference in undertaking risks. Bigger sized company is in the position to undertake more risks in the business as compared to the smaller size companies. The size of the company can be categorized either on the basis of capital or asset or on the basis of turnover. In this connection, it may not be out of place to mention that the Rule 10TD of the Income Tax Rules provide higher profitability for the companies having turnover of more than Rs 500 cr. Further, turnover is an important criterion in the industrial policies and other commercial policies. Further, the honourable Delhi High Court in the case of CIT Vs. Agnity India Technologies Private Limited has discussed several aspects of the 'giant' companies such as Infosys Limited and Wipro Limited and held that such companies cannot be compared with the smaller sized companies.

2.2.6.3 In this connection, I find that the Company's turnover is of Rs. 22,742 crore as against the Appellant's turnover of Rs 805 cr. Turnover of this company is 28 time more than the Appellant's international transaction. I do not consider this company as comparable with the Appellant. In view of this discussion, I direct the learned AO to exclude Infosys Technologies Limited from the list of the comparable companies.”

10. We have perused the case records and analyzed the facts and circumstances in this case. We have also given considerable thought to the findings of the First Appellate Authority. We find that the First Appellate Authority has come to a logical conclusion on the issue of excluding Infosys Technologies Ltd from the final list of comparable companies with that of the assessee. This is primarily because of the fact that there is huge difference of turnover wherein Infosys Technologies Ltd. turnover is Rs.22,742 crore, the assessee turnover is Rs.805 Crore and therefore, it is obvious that bigger sized company is in the position to undertake more risks in the business as compared to the smaller size companies. Therefore, we do not find any infirmity with the findings of the Ld. CIT(Appeals) and relief provided to the assessee is hereby sustained. Thus, this ground of appeal raised by the Revenue is dismissed.

11. Ground No.2 of the assessee‟s appeal and Ground No.2 of the Revenue‟s appeal pertains to “Telecommunication expenses u/s.10A and 10AA of the Act”.

Telecommunication Expenses u/s.10A & 10AA of the Act :

12. The Assessing Officer stated that the assessee company has incurred certain telecommunication expenses with respect to the delivery of software abroad. According to the provisions of section 10A and section 10AA, telecommunication expenses should be reduced from the assessee‟s export turnover. The Assessing Officer reduced the telecom charges of Rs.5,31,46,894/- and internet usage expenses of Rs.3,51,30,538/- totaling Rs.8,82,77,432/- from the export turnover while working out the deduction u/s.10A and u/s.10AA of the Act.

13. The assessee has filed detailed written submissions before the Ld. CIT(Appeals) which was duly considered by the Ld. CIT(Appeals) and thereafter vide Para 2.3.3 & 2.3.4, the Ld. CIT(Appeals) confirmed the decision of the Assessing Officer to reduce the telecommunication expenses from the total turnover. The Assessing Officer was also directed to reduce the telecommunication expenses from the export turnover as well as from the total turnover and the relevant findings of the Ld. CIT(Appeals) is as follows:

“2.3.3 I have considered the arguments of the Appellant. The Appellant on the basis of the decision of the Honourable Supreme Court in the case of George Oakes has argued that if all inclusive consolidated sale price is charged then specific category of expenses cannot be reduced from the sale price, when such price is not separately charged in the invoice. I consider this decision of the Honourable Supreme Court is rendered on the dispute on levy of indirect tax, is not helpful in deciding this issue. According to me, provisions of the clause (iv) of Explanation 2 are very clear. The argument that the Appellant has not separately recovered telecommunication charges in invoice is irrelevant because the sections 10A and 10AA seek to provide incentive to the net foreign exchange brought it to India. It has nothing to do with how the assessee has recovered its costs from its clients. Accordingly I confirm the decision of the AO to reduce the telecommunication expenses from the total turnover.

2.3.4 As far as reduction of the amount from the export turnover and total turnover is concerned, this issue is now settled by the decision of Bombay High Court in the case of Sudarshan Chemicals Limited the ratio of which, is approved by the SC in the case of Laxmi Machine Works. The honourable courts have laid down the law in these decisions that if certain amount is reduced from the numerator, than the same should also be reduced from the denominator as well. Accordingly, the learned AO is directed to reduce the telecommunication expenses from the export turnover as well as from the total turnover.”

14. The Ld. Counsel for the assessee submitted that this issue is covered in favour of the assessee by the decision of the Co-ordinate Bench of the Tribunal in ITA No.342/PUN/2014 for assessment year 2009-10 in assessee’s own case wherein vide Para 43 and 44, the Tribunal on the issue has held as follows:

“43. Ground No.5 of the assessee‟s appeal is against reducing telecommunication charges and internet usage charges totalling Rs.9,82,28,337/- from only the „Export turnover‟ in computing deduction u/s.10A. Ground No.1 of the Revenue‟s appeal is against the direction of the ld. CIT(A) that link charges and internet usage charges be reduced from „Export turnover‟ and also from „Total turnover‟. 44. This issue also came up for consideration before the Tribunal in relation to the A.Y 2007-08. Vide its order dated 05-08-2019 in IT(TP)A. No.286/Bang/2013, the Tribunal has held that any amount reduced from „Export turnover‟ should also be reduced from the amount of „Total turnover‟ in the computation of deduction u/s.10A of the Act. Following the same, we allow the assessee‟s ground and dismiss that of the Revenue.” Respectfully following the decision mentioned herein above, we allow ground No.2 raised by the assessee and dismiss ground No.2 of appeal of the Revenue on this count. 15. Ground No.3 of the assessee‟s appeal and Ground No.3 of the Revenue‟s appeal pertains to “exclusion of expenditure on providing technical services abroad from the turnover while computing deduction u/s.10A/10AA of the Act”. Treatment of Expenditure on providing technical services abroad: 16. The Assessing Officer vide Para at Page 7, Para 9 of his order on the issue has held as follows: “09. Treatment of expenditure on providing technical services abroad The assessee has incurred certain expenses in relation to the providing of technical services abroad. These expenses incurred in foreign exchange need to be: reduced from the Export Turnover computed. The assessee has not done the same. On the contrary, the assessee has claimed that it is not in the business of rendering technical services abroad and that there are no expenses to be reduced from Export Turnover. This issue has come from last many year following my predecessors, it is hereby ordered that the expenses incurred in relation to providing technical services need to be reduced from the Export Turnover. The expenses in foreign currency in relation to providing technical services has been given by the assessee at Rs.1,066,663,964/-. This amount of foreign currency expenses is reduced from the Export Turnover for the purpose of computation of deduction u/s. 10A/10AA of the Income Tax Act. It is so ordered and the apportioning of disallowances and subsequent deduction u/s. 10A/10AA of the Income Tax Act is computed as under:

9.1 The apportioning of disallowance made are added to the profit of the eligible unit u/s.10A/10AA as under:

Particulars Whitefield (311) Chennai (312) Hyderaba d (314) Chennai II (316) Noida (320) Hyd SEZ (410) Chennai SEZ (400) Total IGate

Taxable income as per the return filed 884,369,447 39,749,698 252,572,695 172,702,424 52,456,618 101,130,187 89,575,603 1,482,886,884

Percentage of turnover 71.23% 2.11% 7.79% 7.27% 2.66% 3.76% 5.19% 100%

Additional disallowance under section 14A 95,72,365 283,815 1,047,014 976,399 356,969 504,719 697,625 1,34,38,906 Revised business profit 893,941,812 40,033,512 253,619,709 173,678,824 52,099,649 101,634,906 90,273,228 1,496,325,779

The computation of deduction u/s.10A/10AA is given below

Total turnover of the units 9,074,259,586

Export turnover of the units eligible for tax holiday 8,877,392,151

Less : a) Expenses for technical services 1,066,663,964

b) Telecom expenses 88,277,431

c) Domestic turnover 65,90,160

Revised export turnover 7,715,860,596

Deductable profits Profits of the business X export turnover

Total turnover

Rs.1,553,181,990 X

Rs.7,715,860,596

9,074,259,586

=13,22,935,443

17. The Ld. CIT(Appeals) discussed this issue at Page 35, Para 2.4.3 to 2.4.6 and held that the amount of Rs.106,66,63,964/- should be reduced from the total turnover by observing as follows:

“2.4.3 I have carefully considered the facts, arguments of the appellant and legal provision. I find that this issue has been decided against the Appellant by the honourable Karnataka High Court, in the case of CIT vs. Infosys Technology Ltd (2012) 349 ITR 588 (Kar). The honourable High Court has held that the amount spent in foreign currency towards the provision of the technical services rendered outside India, in connection with the development and production of software, should be reduced from the export turnover.

2.4.4 The Appellant has argued that the decision in the case of Infosys is not applicable to the facts of its case, as in the case of Infosys, the honourable High Court held that the certificate issued by the CA showed that the said amounts was received for providing technical services whereas the Appellant does not render technical services. In other words, the Appellant has argued that the provision of the software development service is not a technical service.

2.4.5 I do not agree with the Appellant's argument that the decision in the case of Infosys is not applicable to it or that the software development service is not a technical service. For this purpose, it may be necessary to appreciate the meaning of the expression 'technical service', which is used in the clause (iv) to Explanation 2 of Section 10A. Honourable Mumbai ITAT in the case of TUV Bayren (India) Ltd vs DCIT (2012) 23 taxmann.com 127 (Mum) has held that 'technical service' means a service requiring scientific knowledge or experience. Honourable AAR in the case of CAT Geodata GmBh, in re (2012) 346 ITR 549 (AAR) has held that the services are technical in nature, when special skills or knowledge or education are required for the provision of such services. Example 5 in the MOU to India-USA DTAA provides that computer software development is a technical service, technical explanation to India- Australia DTAA also provide the same. Honourable AAR in the case of Airports Authority of India, in re (2005) 273 ITR 437 (AAR) and (2011) 323 ITR 211 (AAR) has held that modification of software is also a technical service. In view of the decisions of the number of judicial authorities, it is clear that software development is also a technical service and hence, expenditure incurred in foreign currency for providing technical service or computer software development service should be reduced from the export turnover. Accordingly, I hold that the learned AO has correctly reduced Rs 106,66,63,964 from the export turnover for computing the deduction u/s.10A and u/s10AA.

2.4.6 For the same reasons mentioned in my findings on Ground of Appeal 2 above, I hold that the amount of Rs.106,66,63,964 also should be reduced from the total turnover.”

18. The Ld. Counsel for the assessee submitted that this issue is covered in favour of the assessee by the decision of the Co-ordinate Bench of the Tribunal in ITA No.342/PUN/2014 for assessment year 2009-10 in assessee’s own case wherein vide Para 45, the Tribunal on the issue has held as follows:

“45. Ground No.6 of the assessee‟s appeal is against excluding Foreign currency expenses amounting to Rs.1,07,63,08,980/- from the „Export turnover‟ in the process of computation of deduction u/s.10A. The ld. AR fairly agreed that the full amount of foreign currency expenses has been rightly held to be excludible from the amount of „Export turnover‟. It was, however, prayed that the same amount may also be excluded from the amount of „Total turnover‟. Following similar view taken by us in relation to Ground No.5 of the assessee‟s appeal and Ground No.1 of the Revenue‟s appeal above, we hold that the amount of Foreign currency expenses to the tune of Rs.107.63 crore be excluded from the „Export turnover‟ as well as „Total turnover‟.”

Respectfully following the decision mentioned herein above, we allow ground No.3 raised by the assessee and dismiss ground No.3 of appeal of the Revenue on this count.

19. That apart, the Revenue in Ground No.4 of appeal has raised an issue pertaining to “disallowance u/s.14A r.w.r.8D of the Income Tax Rules, 1962”.

Disallowance u/s.14A r.w.r.8D of the I T Rules:

20. The Assessing Officer discussed this issue at page 8 onwards of his order and given his finding at Page 8.1 wherein the disallowance worked out at Rs.13,759,414/- u/s.14A read with rule 8D. Out of this amount Rs.3,20,508/- was already disallowed by the assessee and hence, the balance amount of Rs.1,34,38,906/- was disallowed out of the total expenses claimed by the assessee.

21. The Ld. CIT(Appeals) discussed this issue vide Para 2.6.1 onwards of his order and given his final findings at Para 2.6.5 and 2.6.6 by observing as follows:

“2.6.5 I have considered the facts and relevant provisions of the law. I find that the learned AO has invoked the provisions of the Rule 8D without discussing as to why he is not satisfied on the correctness of the claim of the deduction of Rs 3,20,508. It is settled that invoking of the provisions of the Rule 8D is not automatic and section 14A(2) require the AO to record his satisfaction for invoking the Rule 8D. Further, the satisfaction of the AO has to be an objective satisfaction and cannot be his subjective satisfaction. According to me, the AO's satisfaction need not be express as there is no provision in the Act for recording express satisfaction in the assessment Order. However, if the AO's satisfaction cannot even be gathered from the assessment Order, then the Rule 8D cannot be invoked.

2.6.6 In this case, I find that the learned AO in the para 8.1 of the assessment Order has merely stated that the Appellant should have made the correct disallowance u/s 14A however, he has not mentioned the grounds on which, he concluded that the Appellant's claim of the disallowance of Rs 3,20,508 is not correct. Therefore, according to me, the learned AO cannot invoke the Rule 8D. I consider that he was not correct in invoking the Rule 80 and making' the disallowance. Therefore, I delete the disallowance of Rs 1,34,38,904 made by the learned AO.”

22. The Ld. Counsel for the assessee drew our attention to the fact that this issue was already covered one in favour of the assessee with respect to 14A read with rule 8D(2)(ii) whereas, in respect of Rule 8D(2)(iii), the issue was remanded to the file of Assessing Officer for re-computing the disallowances in assessee‟s own case in ITA No.342/PUN/2014 for assessment year 2009-10 (supra.) Wherein vide Para 35 to 40, the Tribunal on the issue has held and observed as follows:

“35. Ground No.2 of the assessee‟s appeal is against the confirmation of disallowance u/s.14A of the Act read with Rule 8D of the Income-tax Rules, 1962 (hereinafter also called `the Rules‟) at Rs.80,93,070/-.

36. Briefly stated, the facts of the case are that the assessee claimed dividend income amounting to Rs.8,74,13,850/- earned on mutual funds as exempt from tax. The Assessing Officer (AO) observed that no disallowance was offered by the assessee u/s.14A of the Act. On being called upon to explain the reasons for not offering the disallowance, the assessee submitted that a suo motu disallowance of Rs.3,13,492/- was offered. The AO, not satisfied, computed the disallowance u/s.14A r.w. Rule 8D at Rs.80,93,070/-. The ld. CIT(A) echoed the assessment order on this point.

37. We have heard both the sides and gone through the relevant material on record. The assessment year under consideration is 2008-09. Unlike earlier years, Rule 8D is applicable for the purpose of making disallowance u/s.14A. The disallowance made by theAO is in two parts, viz., Rs.5,49,818/- under Rule 8D(2)(ii) and Rs.75,43,252/- under Rule 8D(2)(iii). In so far as the disallowance of Rs.5,49,8198/- is concerned, it is seen from the assessee‟s Balance sheet, whose copy has been placed in the paper book, that as against Investments of Rs.176.57 crore, the assessee‟s Shareholders‟ fund stands at Rs.509.29 crore. Thus, it is evident that the Shareholders‟ fund is far in excess of the amount ofinvestments. The Hon'ble Karnataka High Court in CIT & Anr vs. Microlabs (2016) 383 ITR 490 (Kar) has held that when investments are made from a common pool and non-interest bearing funds are more than the investment in tax free securities, no disallowance of interest expenditure u/s 14A can be made. This view has been taken by following the judgment of the Hon'ble Bombay High Court in CIT vs. HDFC Bank Ltd. (2014) 366 ITR 515 (Bom). It is further observed that this issue is now no more res integra in view of the judgment delivered by the Hon'ble Supreme Court in Godrej & Boyce Manufacturing Company Ltd. vs. DCIT (2017) 394 ITR 449 (SC), upholding the view of the lower authorities that when interest free funds in the form of share capitaland reserves etc. are more than the amount of investment, then no disallowance of interest can be made u/s 14A. Respectfully following the precedents, we order to delete the disallowance under Rule 8D(2)(ii) to the tune of Rs.5,49,818/-.

38. Now we come to the disallowance made under Rule 8D(2)(iii) amounting to Rs.75,43,252/-. It is seen that the same has been worked out by the AO at 0.50% of average amount of investments. This computation is strictly in accordance with the mandate of Rule8D(2)(iii). Since Rule 8D is applicable from the assessment year under consideration, the disallowance has to be made and sustained in accordance with the prescription of such rule only.

39. Here we would like to clarify that the Hon'ble Delhi High Court in ACB India Ltd. vs. CIT (2015) 374 ITR 108 (Del) has held that the average value of investments, for the purposes of Rule 8D(2)(iii), should be confined to those securities in respect of which exempt income is earned and not the total investments. Similar view has been taken by the Special Bench of the Tribunal in the case of ACIT vs. Vireet Investments (P) Ltd. (2017) 165 ITD 27 (Del) (SB) holding that only those investments should be considered for computing average value of investments which yield exempt income during the year. In view of the afore referred precedents, we set aside the impugned order to this extent and remit the matterto the file of Assessing Officer for re-computing the disallowance under Rule 8D(2)(iii) by considering only such investments in calculating the average value of investments, which have yielded exempt income during the year. The assessee will be allowed hearing opportunity in the fresh proceedings.

40. The ld. AR further contended that a suo motu disallowance of Rs.3,13,492/- was offered by the assessee under section 14A. The AO is directed to verify this claim and then accordingly compute the amount disallowable u/s.14A r.w. Rule 8D(2)(iii).”

Respectfully, following our decision mentioned herein above, in respect of disallowance u/s.8D(2)(ii), it is deleted whereas, in respect of disallowance u/s.8D(2)(iii), it is restored to the file of the Assessing Officer with similar directions as mentioned in the order (supra.). Thus, ground No.4 raised in appeal by the Revenue is partly allowed for statistical purposes.

23. The assessee in Ground No.4 has raised an issue pertaining to “Deputation of Technical Manpower (DTM)” Deputation of Technical Manpower (DTM) :-

24. The Assessing Officer discussed the issue of deputation of Technical Manpower (DTP) vide Para 10.1 onwards and the assessee filed detailed submissions before the Assessing Officer which reads as under:

“Based on the above facts it can be concluded that the services rendered at onsite were at all times integral part of servies rendered offshore and belonged to the STPI/ SEZ undertakings situated in India. It was the STPI/ SEZ undertakings situated in India which were responsible for the software development, coding, testing and delivery. Further, it can also be seen that all the profits ascribed towards on site software services were related to and formed integral part of STPI/SEZ undertakings in India as all the resources who were deputed onsite always belonged to the STPI/SEZ undertakings situated in India. Hence, it can be established that there is a direct and intimate nexus between the onsite employees and the Indian STPIs/SEZs executing the project which in turn establishes the direct and intimate connection to the development of software done abroad. Based on the above facts it can be concluded that all the profits' ascribed towards onsite software services were related to and formed integral part of STP / SEZ undertakings in India and hence we request your honour to conclude the assessment by allowing 10A/10AA deduction in full without making any adjustments towards onsite profits”

24.1 After considering the submissions of the assessee, the Assessing Officer held the eligible profit for deduction u/s.10A/10AA will reduce by Rs.3,42,46,639/- by observing as follows:

“10.44 However, the CIT(A) in the assessee‟ own case for the AY 2009-10 has concluded as below:

“I have considered the facts of the case and am of the considered view that the profits in question have no nexus with the activity of export of computer software by which the assessee gains eligibility for deduction u/s.10A. I am also forfeited by the principles laid down by the Madras High Court in the Penta Media Graphica Ltd and such profits cannot form part of the business profits for the purposes of computation of deduction under section 10A". 10.45 As per the submissions made, the assessee company has now admitted that there has been total revenue of Rs.63.10 Crores from 100% onsite/DTM projects for AY 2010-11 by reducing a direct cost of Rs.46.64 crores, the assessee company had a gross margin of Rs.16.46 crores. The assessee has further reduced the operating expenses with its indirect cost taken at 20 % of the revenue admitted. After subtracting the same, the assessee has come out with a profit figure of Rs.3.4 crores (34,246,639) as net profit derived from the 100% onsite/DTM project executed. This net profit now offered includes both DTM projects as well as 100% onshore/DTM projects.

10.46 For A.Y 2007-08, similar issue had been taken up with the assessee concern. The assessee had asked to give soft copies of all the SOWs executed for the year. Out of the SOWs and invoices produced, the Assessing Officer had large number of DTM projects and 100 % onshore projects. However, the detection of DTM and 100 % onshore projects was not completed. Considering the same, the Assessing Officer had taken an estimate of DTM projects and 100% onshore projects executed for the year and reduced the deduction available to the assessee u/s. 10A of the Income Tax Act.

For A.Y. 2008-09 also, the assessee company had submitted softcopies of all SOWs and invoices. The Assessing officer had identified a large number of DTM and 100 % onshore SOWs executed for the year. Once the DTM and 100 % onshore projects had been put across to the assessee during the course of assessment proceedings, the assessee had given a complete list of all 100%onshore projects which included DTM projects also. The revenue thereon had been identified at Rs.36.07 crores and the profit from such DTM and 100% onshore activities had been worked out at Rs.4,66,96,777/- for AY.2008-09. This amount had been disallowed form the 10A claimed by the assessee for AY 2008-09. A.Y. 2009-10, the revenue has not had to identify specific SOWs containing DTM and onshore projects. The assessee has itself come forward to identify all such 100% onshore and DTM projects. As such, the factual identification of DTM and 100% onshore projects has not been required. The assessee has submitted the facts of Rs.63.26crores of revenue from 100% onshore projects which included the DTM projects also. As such, the task before revenue has become simpler.

For A.Y. 2010-11, the revenue has not had to identity specific SOWs containing DTM and onshore projects. The assessee has itself come forward to identify all such 100 % onshore and DTM projects. As such, the factual identification of DTM and 100 % onshore projects has not been required. The assessee has submitted the facts of Rs.63 crores of revenue from 100 % onshore projects which included the DTM projects also. As such, the task before revenue has become simpler.

10.47 The final computation of deduction u/s.10A/10AA of the Income Tax Act is given as under:

Thus, eligible profit for deduction u/s.10A/10AA will reduce by Rs.3,42,46,639/-”

10A/10AA computation in Chapter II 1,322,935,443

Less : Net profit worked out from 100% 34,246,639

1,288,688,805

25. The Ld. CIT(Appeals) after considering the submissions of the assessee, assessment order and facts of the case has confirmed the decision of the Assessing Officer by observing as follows:

“2.5.24 Therefore, in facts of the case, is it to be ascertained as to whether the appellant has derived profits from supplying manpower or not. The Appellant has identified that the amount of Rs.3,42,46,639 pertaining to be the profit earned from 100% on-site software development. As I have stated earlier, mere fact that entire software developed on-site, will not make profit earned from such activity ineligible for claiming the deduction. Such situation will be covered by the Explanation 3 and Circular 694. However, if the profit is earned by the appellant from the bodydhopping contract a contract for supply of technical manpower profit earned from such activity would not be eligible to claim the deduction u/s.10A or 10AA.

2.5.25 Secondly, the learned AO in Para 10.24, 10.24(f), 10.34 and 10.35 of the assessment Order has stated that the Appellant has not even attempted to establish the direct and intimate nexus of the software developed at the client's site with the SEZ unit. It may be mentioned that Circular 01 of 2013 provides additional condition of the establishment of direct and immediate nexus of the SOW executed and SEZ.

The learned AO has stated that the invoices raised by the Appellant do not mention the SEZ Unit or STP Unit, from which software is stated to have been developed. On the contrary, the invoice mentions its branch office either in USA or Europe. Further, the learned AO in para 10.35 has stated that the Appellant has failed to link its most of its on-site employees with the particular SEZ or STP Unit. I derive support from the cases of CIT v Motor General Finance Ltd (2002) 254 ITR 449 (Delhi) and CIT v Krshnaveni Ammal (1986) 158 ITR 826, 829 In these cases, the Courts have held that non-production of the documents can lead to drawing of adverse inference u/s 114 of the Evidence Act. Therefore, in the case of the failure to establish the direct and intimate nexus with the SEZ such contracts could be presumed to be of bodydhopping contracts.

2.5.26 In view of the above discussion and in absence of the supporting evidence produced by the Appellant, I hold that the amount of Rs 3,42,46,639 is the body shopping activity, which is derived from the supply of technical manpower and not derived from the export of software. Therefore, the deduction u/s 10A or u/s 10AA is not available on such profits. Accordingly, I confirm the decision of the learned AO to deny the deduction u/s.10A or u/s.10AA on Rs.3,42,46,639/-

26. The Ld. Counsel for the assessee submitted that this issue is covered by the decision in assessee‟s own case in ITA No.342/PUN/2014 for assessment year 2009-10 (supra.) wherein vide Para 46 and 47, the Tribunal has held as follows:

“46. Ground No.7 of the assessee‟s appeal is against reduction in the amount of deduction u/s.10A by a sum of Rs.2,41,23,133/- on the premise that the assessee is in the business of Deputation of Technical Manpower (DTM) and/or rendering of technical services outside India and hence income from providing onsite development of computer software is not eligible for deduction u/s.10A.

47. Similar issue has been determined by the Tribunal in the assessee‟s own case for the A.Y. 2007-08 holding that the amount relatable to DTM and onsite software services should be considered as eligible for deduction u/s.10A of the Act. Since facts and circumstances are admittedly similar, following the view taken for the A.Y. 2007-08, we determine this issue in favour of assessee.”

26.1 Further, the Ld. Counsel for the assessee submitted that on the issue of DTM in assessee‟s own case for assessment year 2007-08, ITA No.286/Bang/2013, the Co-ordinate Bench of the Tribunal, Bangalore has decided this issue in favour of the assessee by observing as follows:

“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 software outside India'. The second is that sub-section (1) of section 10A containing the words `derived from' is not an exhaustive provision in itself. The expression `profits ... derived ...from .. export of ... computer software' employed in sub-section (1) of section 10A 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 such 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, 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 provision 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 as correct that income from DTM and onsite software services rendered abroad cannot be considered as derived from the export of computer software, it, in any case, will have to be regarded as `profits of the business of the undertaking'. In view of the foregoing discussion, we uphold the impugned order on this score.” Respectfully following the decisions of the Tribunal mentioned hereinabove on the issue, we set aside the order of the Ld. CIT(Appeals) on this issue and allow this ground of the assessee. Thus, ground No.4 raised in appeal by the assessee is allowed.

27. Ground No.5 of the assessee‟s appeal relates to “foreign exchange fluctuation gain directly credited to the reserves”.

Foreign exchange fluctuation gain directly credited to the reserves:-

28. The Assessing Officer discussed this issue vide Para 12 of his order and held the amount of forex gain Rs.2,01,99,730/- as taxable in the current year and accordingly, liable to be included in the total income of the current year by holding as follows:

“12. Exchange fluctuation gain directly credited to the reserves From the perusal of the annual accounts filed by the assessee, it was observed that amount of Rs.202.00 thousands is directly credited to the Foreign Currency Monetary Item Translation Difference Account in the balance sheet. Apparently, this amount of foreign exchange fluctuation gains is not credited to the profit and loss account but directly taken to the reserves. In this regards, following question was raised vide Notice u/s 142(1) dt. 13/3/2014:

"From the balance sheet of the company it is seen that the Foreign Currency Monetary Item Translation Difference Account is Rs.2,02,00,000/-. Please furnish the breakup of the same and its effect on computation of income of the company." The assessee has filed a detailed note in this regards and the same is perused. It is submitted that this exchange gain is in respect of foreign branches which are treated as 'non-integral foreign operations' and the amount of foreign exchange gain represents the difference on year-end conversion of assets, liabilities, income and expenditure of the respective foreign branches. It is submitted that this treatment is in accordance with the Accounting Standards. The contention of the assessee cannot be accepted for the following reasons:

Admittedly, the forex gain is on account of foreign branches. In my opinion, the foreign branches cannot be treated as 'non-integral foreign operations' since they are part and parcel of the overall company‟s operations and cannot be regarded as separate or independent operations. Further, up to last year the company has treated these branches as 'integral operations' and the resulting forex gain/loss was included in the profit and loss account. It is not clear how the position in the current year is any different from last year. Hence, this amount of forex gain Rs.2,01,99,730/- as taxable in the current year and accordingly, liable to be included in the total income of the current year. Accordingly, addition of Rs.2,01,99,730/- is made to the total income.”

29. The Ld. CIT(Appeals) discussed this issue vide Paras 2.7.1 onwards and after considering the submissions of the assessee, assessment order and facts of the case has given his final finding at Page 55 vide Para 2.7.6 which is extracted as follows:

“2.7.6 In this case, the learned AO has not examined as to how much fluctuation gain is on the capital account and how much is on the revenue account. The Appellant is also not forthcoming on this issue. Therefore, I direct the learned AO to ascertain the amount of the foreign exchange gain towards the capital account and towards the revenue account. Accordingly, the addition pertaining to the foreign exchange gain on the capital account would be deleted and addition pertaining to the foreign exchange gain on the revenue account would be confirmed.”

30. The Ld. Counsel for the assessee submitted that this issue may be restored to the file of the AO/TPO for fresh adjudication as per law.

31. The Ld. DR did not raise any objection with regard to the prayer of the Ld. AR of the assessee.

32. We have perused the case records and analyzed the facts and circumstances in this case. We have also given considerable thought to the findings of the First Appellate Authority wherein at the very outset, the Ld. CIT(Appeals) observed that Assessing Officer has not examined as to how much fluctuation gain is on the capital account and how much is on the revenue account. Therefore, in the interest of justice, we set aside the order of the Ld. CIT(Appeals) and restore the matter to the file of the AO/TPO for proper verification and adjudication after complying with the principles of natural justice. Thus, Ground No.5 of the assessee’s appeal is allowed for statistical purposes.

33. In the combined result, appeal of the assessee in ITA No.1166/PUN/2015 is allowed for statistical purposes and appeal of the Revenue in ITA No.1341/PUN/2015 is partly allowed for statistical purposes.

Order pronounced on 05th day of March, 2020.