Losses from SEZ-eligible undertakings may be offset by revenues from non-SEZ entities

Fact and issue of the case

The appeal filed by the assessee is directed against the order dated 28-05-2021 passed by the Assessing officer, National Faceless Assessment Centre, Delhi [NFAC], Delhi u/s 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income-tax Act,1961 [‘the Act’ for short] for assessment year 2016-17 in pursuance of directions given by Ld Dispute Resolution Panel (DRP) dated 29.03.2021.

The brief facts of the case are that the assessee filed his return of income on 30.11.2016 declaring at income of Rs. 57,51,34,75,210/-after claiming deduction under section 80G of Rs. 4,05,98,408/- and 80IAB of Rs. 585,09,09,819/-. The case was selected for scrutiny and notice u/s 143(2) was issued and other statutory notices were issued to the assessee and assessee also responded to the notices. The assessee claimed exemption u/s 10AA being profit of SEZ units. The total income also comprises income of short term capital gain amounting to Rs. 2,64,33,89,767/- on sales of Mutual Fund and Bonds units and other investments. The assessee had also Long Term Capital gain on sale of bonds and NCDs of Rs. 16,74,12,034/-after setting off of brought forward losses of earlier years. Further the assessee had disclosed loss from other sources of Rs. 9,21,99,128/- being interest expenses on ECB loan taken to invest in foreign subsidiaries company, viz, Wipro Cyprus. The assessee is engaged in different types of business activities, viz., software development services and IT services; manufacture of Vanaspati/Hydro generated oils; toilet soaps; lighting products; pharmaceuticals & Neutraceutical products; leather products; computers, hydraulic and pneumatic equipment; water treatment systems and solutions etc. It is also engaged in trading of servers, routers, networking equipments, spare parts, etc. The assessing officer passed final assessment order on 28.05.2021 in conformity with the directions given by the Ld DRP. The assessee is aggrieved by the order so passed by the AO and hence it has filed this appeal before the Tribunal. The assessee has raised several grounds in a detailed manner. However, the Ld Senior Counsel appearing for the assessee has advanced his arguments on issue-wise on the basis of abridged grounds of appeal. Accordingly, we find it convenient to dispose of the issues, which would, in turn, dispose of relevant grounds of appeal.

The ground No. 01,02,and 03 are general in nature and does not require adjudication.

The fourth issue relates to the capitalisation of Salaries and Wages. The back ground for making this addition is described as under by the AO:-

During the course of assessment proceedings, for AY 2016-17 it was found that the assessee has designed some software tools for undertaking IOT, Block Chain and Machine Learning work. These are futuristic technologies and speculated to be disruptive in nature. Once such sufficiently advanced technologies come into operation, Artificial Intelligence and Machine Learning are expected to take over coding , This will be a major challenge for software service providers. When computers start coding new algorithms on an automated basis, the only requirement for a company that needs such new algorithms, will be to design the software architecture. The labour-intensive work of coding is, as of now, outsourced to Software suppliers in India, Philippines etc. With the advent of these disruptive technologies, India-based Software suppliers will face a steep fall in demand. . Fearing competition from Al bots, many India-based Software exporters, including the assessee company have started developing their own AI bots and Machine Learning Tools.

The AO noticed that the assessee herein has developed certain technologies and software platforms based on AI, IOT and Machine learning. He also noticed that the assessee has not capitalised any such asset in its books of account. During the course of assessment proceedings for the AY 2015-16 a similar issue was raised in the case of the assessee and the ground of addition made by the AO has been upheld by the DRP. In the impugned assessment year the DRP also upheld the addition made by the AO in the same line of assessment for the AY 2015-16. The assesse preferred in appeal before the Income Tax Appellate Tribunal, The facts and observations of the co-ordinate bench are as under:-

The AO noticed from the Chairman’s message given in the Annual report of the assessee that it has developed an Artificial Intelligence Plat form named “Wipro HOLMES”. He also noticed that the assessee has already received trade mark for the above product. In this regard, the AO observed as under:-

Assessee describes Wipro Holmes as “Wipro HOLMES Artificial Intelligence Platform TM”. The platform is ready and it has already received trademark also. One does not have to be a Sherlock Holmes to realize that Wipro Holmes is a capital asset. So where is this platform recognized in fixed asset schedule? Where are the other platforms for lnternet of Things and Blockchain reported? ln the course of hearing on 15.11.2018, this was confronted to the AR. AR argued that it is an industry practice to claim all employee expenses as revenue expenditure. The AR was asked to furnish details of (a) number of man-days of the company in the year, (b) number of man-days that have been utilized in in-house projects, and (c) number of man-days that have been characterized as ‘bench’. ‘Bench’ is an industry nomenclature. An employee who is on the ‘bench’ is not working on any client project at a given time (she might have completed one client project and is awaiting another client project). But companies generally keep these employees busy by giving them some in-house projects. Assessee was also asked to furnish some sample timesheets of persons working on the ‘bench’, so as to verify this fact

The AO noticed that the assessee has claimed all expenses incurred in development of these software products as revenue expenditure. The AO took the view that a portion of expenses relating to these software products should have been capitalised. From the explanations furnished by the assessee, the AO noticed that these software products are developed under the leadership of “Chief Technology Officer” (CTO). He also took the view that the assessee should have used services of ‘bench’ employees also at times in connection thereto. Since salary expenses constitute major portion of expenses in development of software, the AO called for details of man days of employees working under the CTO and also the bench employees.

The AO noticed that the 726343 mandays were spent under CTO. The AO took the view that above said salary expenses should be capitalised. Since services of “bench” employees are also utilised at time, the AO took the view that 25% of bench employees mandays could be taken as used for development of above said software and the same worked out to 24,82,972 mandays. Both the above said mandays constituted 7.96% of the total amount of mandays. Accordingly, the AO took the view that the salary expenses to the extent of 7.96% should be capitalised, which worked out to Rs.1496.67 crores. The assessee contended that these software products have been put to use and hence depreciation @ 60% should be allowed. Since the details of actual date of putting the software to use were not available, the AO agreed to allow depreciation @ 30%, which worked out to Rs.449.00 crores. In view of variation proposed in the total income, the AO issued draft assessment order to the assessee.

The assessee filed objections before Ld DRP against the draft assessment order. The Ld DRP called for a remand report from the AO and also reply from the assessee for the remand report. The Ld DRP determined the cost of mandays for employees under the control of CTO at Rs.314.11 crores and the cost of mandays of bench employees at Rs.287.66 crores. Accordingly, the aggregate amount to be capitalised was determined at Rs.601.77 crores by Ld DRP. With regard to allowability of depreciation, the Ld DRP noticed that the AO has changed his stand in the remand report and observed that the new software/application produced by the assessee are in the nature of “intangibles” and accordingly suggested depreciation @ 25% instead of 60%. Further, since the details of nature of asset created and the details of their usage were not available, the Ld DRP declined to grant depreciation. The relevant observations made by the Ld Dispute Resolution Panel are extracted below:-

With respect to the classification of assets and resultant treatment for applying correct rates the information is not sufficient. The AO initially took the stand that the assets created are software and applied 60% rate (restricted to less than 182 days). However as per the remand report the AO raised alternative argument that the depreciation may be restricted to 25%, as the assessee was creating intangible assets. The information with regard to the nature of assets created and put to use is not made available to the Panel. Hence, it is not possible to grant depreciation to the assessee in the given circumstances.

The assessee raised an alternative contention that the above said disallowance would result in increasing the profits of undertakings, which are eligible for deduction u/s 10AA of the Act and hence enhanced amount of deduction should be given to the assessee. The Ld DRP accepted the same with the following observations:-

The Panel has considered the grounds, the submissions of assessee and the Report of the AO. At the outset it is seen that the assessee made a claim that all revenue expenses including CTO cost and bench cost are proportionately allocated to all units, including 10AA units. Another Remand Report was called from the AO on 11.07.2019 seeking the actual allocation of CTO cost and bench cost among the l0AA units. The Remand Report of AO dated 20.08.2019 is reproduced as under:

In point 3, the Ld Panel has asked the AO to verify whether the CTO cost and Bench cost are actually distributed to l0AA units. The AO called for segmental. Same was furnished as Annexure-3 to assessee’s reply dated 9.08.2019. As regards the veracity of the figures, the CA’s certificate has been relied upon.

The Panel has carefully considered the submissions of the assessee as well as the Reports of the AO. The AO admitted that the claim for additional deduction under l0AA is made by the assessee before the AO during assessment proceedings. The claim made by the assessee is only consequential to the addition proposed. The critical aspect is to examine whether the cost of bench employees and CTO cost is allocated to l0AA units in the first place. This was the specific issue on which the remand report was sought from the AO. The AO states that he obtained information from the assessee including certificate of chartered accountant based on which it can be seen that the bench cost and CTO cost is allocated to various l0AA units. Hence any alteration in the cost would affect the profits of l0AA units. The assessee provided a letter dated 09/08/2019 before the AO along with annexures. Annexure 3 of the letter provides the breakup of unit wise allocation of bench cost. Further a certificate from chartered accountant is produced stating that bench cost and CTO cost were allocated to l0AA units. The panel after careful consideration is of the view that the assessee should be granted additional benefit of l0AA on re-computation of profits of eligible units, consequent to partial capitalization of employee cost. It is seen that some of the 10AA units are eligible for 100% exemption and some units are eligible for 50%o of exemption. Hence AO is directed to recompute the eligible profits of l0AA units and accordingly compute the eligible benefit under l0AA. Directed accordingly.

The assessee also raised a new claim before Ld DRP contending that, if the development of software products mentioned above are considered to be capital in nature, then the same is allowable as deduction u/s 35(1)(iv) of the Act, since it is in the nature of Scientific Research expenses. In this regard, the assessee placed its reliance on the decision rendered by Hon’ble Karnataka High Court in the case of Talisma Corporation P Ltd (ITA 515/2007). The Ld DRP called for a remand report from AO, who opined that the assessee has only created “intangible assets” in the nature of “Software platform” and “software codes” and it cannot qualify as Scientific research activity. He also expressed the view that the decision rendered in the case of Talisma Corporation is distinguishable and cannot be taken support of by the assessee. The assessee strongly refuted the remand report given by the AO and contended that the provisions of sec.35(1)(iv) should be allowed in assessee’s case and accordingly entire expenditure should be allowed. The ld DRP did not accept the contentions of the assessee and accordingly rejected the claim for deduction u/s 35(1)((iv) with the following observations:-

The contention of the assessee are carefully considered. In this regard it is relevant to examine the statutory provisions of Sec 35(1)(iv) reads as under: “in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee, such deduction as may be admissible under the provisions of subsection (2) “ The expenditure is initially claimed by the assessee u/s 37(1) as business expenditure. Sec. 37(l) reads as under: “Any expenditure (not being expenditure of the nature described in section 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profit and gains of business or profession.

As seen from above, any expenditure which is not covered by section 30 to 36 and which is not capital expenditure is claimed under section 37(l). This shows that even as per the assessee this was not an expenditure covered by Sec. 30 to 36 of the Act. That is the reason why assessee chose to make a claim under Sec. 37(1). Hence, the assessee had no intention to claim the expenditure under the head “scientific research

Section 35 relates to allowance of expenditure towards scientific Research. The Act permits the claim of expenditure of scientific research for both inhouse R&D and institutional R&D. For inhouse R&D by the assessee the provisions of 35(1)(i) and 35(1)(iv) provide for revenue expenditure and capital expenditure respectively. Where the assessee is engaged in “scientific Research” the assessee is eligible to claim revenue expenditure u/s 35(1)(i) and capital expenditure u/s 35(l)(iv).

Observation of the court

We heard Ld D.R on this issue and perused the record. We noticed that the co-ordinate bench had confirmed the disallowance following the decision rendered by the jurisdictional Hon’ble Karnataka High Court in the assessee’s own case. It is the submission of the assessee that the Hon’ble High Court has decided an identical issue against the assessee following its own decision rendered in the case of Samsung Electronics Ltd, which has since been revered by Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd. The decision in the above said case has been rendered by Hon’ble Supreme Court subsequent to the passing of the assessment order. Accordingly, we are of the view that this issue requires fresh examination at the end of AO. Accordingly we restore this issue to the file of the AO with the direction to examine this issue afresh applying the principles laid down by Hon’ble Supreme Court in the case, referred above. If the AO comes to the conclusion that the decision rendered by Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence P Ltd is applicable to the payments made to Gartner group and there is no requirement to deduct tax at source, then there is no requirement of making any disallowance u/s 40(a)(i) of the Act. However, if the AO comes to the conclusion that the above said decision of Hon’ble Supreme Court is not applicable and the assessee is liable to deduct tax at source, then the AO shall grant enhanced deduction u/s 10A/10AA/10B of the Act by increasing the profits of undertaking by the amount of disallowance so made. The assessee is given liberty to raise all contentions in this regard before the AO.

Respectfully following the above judgement of the co-ordinate bench of the Tribunal in assessee’s own case cited supra we also send back to the file of the in above terms. The assessee is given liberty to raise all contentions in this regard before the AO.

The ground No. 18 to 18.1 relates to the disallowance of interest expenditure incurred on investment in Foreign Subsidiary u/s 115BBD of the Act of Rs. 9.22 crores. An identical issue has been examined by the co-ordinate bench in AY 2012-13 to 2014-15 and it was decided as under:-

The facts relating to the issue are stated in brief. The A.O. noticed that the assessee has declared loss under the head “Income from other sources”. On examination of the same, the A.O. noticed that the assessee had borrowed ECB loan and invested the same in its overseas subsidiary named Wipro Cyprus Pvt. Ltd. He noticed that the interest expenditure relating to ECB loan has been claimed as expenditure under the head Income from other sources, even though no foreign dividend income was received from its subsidiary company, cited above. Accordingly, the assessee has claimed loss.

The A.O. noticed that section 115BBD of the Act provided for taxation of dividend income received from foreign companies at concessional rate, however, subject to the condition that the Indian company should hold 26% or more right in the nominal value of the equity share capital of the foreign company. It is also provided in the said section that no expenditure shall be allowed against the dividend income under any provisions of the Act. The AO noticed that the assessee’s shareholding in the foreign subsidiary was more than 26% and hence the provisions of section 115BBD of the Act are attracted. Accordingly, the A.O. took the view that the interest expenditure claimed by the assessee on the ECB loan is not allowable as deduction u/s 115 BBD of the Act, in view of the specific bar mentioned in that section. Accordingly, the AO disallowed the interest expenditure claimed by the assessee by invoking sec.115BBD of the Act.

Before Ld. DRP, the assessee placed its reliance on the decision rendered by Hon’ble Supreme Court in the case of Rajendra Prasad Mody (115 ITR 519) and contended that the expenditure is allowable, even if dividend income is not received during the year under consideration. However, the Ld. DRP took the view that the investment made by the assessee is not with the objective of earning dividend income but for the purpose of acquiring controlling interest in the company. It held that the interest expenditure is allowable u/s 57(iii) only if the investment had been made for the purpose of earning dividend income. In support of this proposition, the Ld. DRP placed its reliance on the decision rendered by Hon’ble Bombay High Court in the case of CIT Vs. Smt. Amritaben R. Shaw (238 ITR 777) and held that the expenditure incurred for acquiring controlling interest in the company is not allowable as deduction u/s 57(iii) of the Act. Accordingly, the Ld. DRP also confirmed the disallowance of interest expenditure incurred on ECB Loan. However, in the final assessment order passed for assessment year 2012-13, the A.O. disallowed the interest expenditure by invoking provisions of section 115BBD of the Act only. The AO did not mention about the reasoning of ‘acquiring of controlling interest” or sec. 57(iii) of the Act, while making the disallowance. Hence, we confine ourselves to the applicability or otherwise of sec.115BBD of the Act. 29.4 We heard the parties on this issue and perused the record. The provisions of section 115BBD of the Act reads as under:- “115BBD. (1) Where the total income of an assessee, being an Indian company, for the previous year relevant to the assessment year beginning on the 1st day of April, 2012 28[or beginning on the 1st day of April, 2013] 28a[or beginning on the 1st day of April, 2014] includes any income by way of dividends declared, distributed or paid by a specified foreign company, the income-tax payable shall be the aggregate of— (a) the amount of income-tax calculated on the income by way of such dividends, at the rate of fifteen per cent; and (b) the amount of income-tax with which the assessee would have been chargeable had its total income been reduced by the aforesaid income by way of dividends. (2) Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of this Act in computing its income by way of dividends referred to in sub-section (1). (3) In this section,— (i) “dividends” shall have the same meaning as is given to “dividend” in clause (22) of section 2 but shall not include sub-clause (e) thereof; (ii) “specified foreign company” means a foreign company in which the Indian company holds twenty-six per cent or more in nominal value of the equity share capital of the company.” The Ld. A.R. submitted that the provisions of section 115BBD are attracted only if the total income of the assessee “includes any income by way of dividend” declared, distributed or paid by a specified foreign company. According to Ld A.R, availability of taxable dividend income during the previous year is the sin-qua-non for invoking the provisions of sec.115BBD of the Act. He submitted that the assessee has not received any dividend income from specified foreign company during the years under consideration and hence the total income of the assessee does not include any taxable dividend income. In fact, the A.O. also has also not included any such dividend income while computing the total income. Accordingly, he submitted that the A.O. was not justified in invoking the provisions of section 115BBD of the Act. The Ld. A.R. submitted that the ratio of decision rendered by Hon’ble High Court of Delhi in the case of Cheminvest Ltd. (ITA 749/2014) is applicable to the facts of the present issue also, even though the said decision was rendered in the context of section 14A of the Act. He submitted that the Hon’ble Delhi High Court has held in the above said case that the provisions of sec.14A are attracted only if the assessee had received exempt income. 29.5 We have heard Ld D.R and perused the record. A careful perusal of provisions of section 115BBD would show that the same begins with the expression “where the total income of assessee, being an Indian company, includes any income by way of dividends declared, distributed or paid by a specified foreign company”. Hence, there is merit in the submissions of Ld A.R that the primary condition to be satisfied for invoking section 115BBD of the Act is that the total income of the assessee should include any dividend income received/declared from/by a specified foreign company. There is no dispute with regard to the fact that the total income of the assessee for the years under consideration does not include any dividend income received/declared from/by a specified foreign company. Hence, the question of invoking provisions of section 115BBD of the Act does not arise. The decision rendered by Hon’ble Delhi High Court in the case of Chem invest Ltd. (supra), though rendered in the context of sec.14A of the Act, brings out the principle of interpretation of a provision. For the sake of convenience, we extract below the following observations made by Hon’ble Delhi High Court in the above said case.

In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression does not form part of the total income” in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.” Accordingly, we are of the view that the A.O. was not justified in invoking the provisions of sec.115BBD of the Act for making the impugned disallowance. Since the AO has not disallowed the interest expenditure on the reasoning given by Ld DRP, we do not find it necessary to address the same.” Following the above said decision, we direct the AO to delete the disallowance u/s 115BD of the Act, if the assessee has not received any dividend during the year under consideration.

Considering the rival submissions and in assessee’s own case cited supra , we are of the view that the A.O. was not justified in invoking the provisions of sec.115BBD of the Act for making the impugned disallowance, accordingly, we direct the AO to delete the disallowance u/s 115BBD of the Act, if the assessee has not received any dividend during the year under consideration.

Ground No. 19 relates to claim for deduction of Education Cess as expenditure. This ground is liable to rejected in view of the amendment brought in by Finance Act 2022 inserting specific provision in the Income tax Act providing for disallowance of Education Cess. A similar issue has been decided against the assessee by the co-ordinate bench of the Tribunal in assessee’s own case, In view of this, we also dismiss the ground No. 19 raised by the assessee.

Ground No. 20 relates to the AO not following the directions issued by the DRP vide its Directions. This ground urged in the appeal has two aspects to it.

Firstly, the assessee is contending that although the DRP directed that the deduction under S.10AA ought to be recomputed by adding back the disallowance of wages capitalized, the AO did not give effect to the said direction. On examining the DRP’s directions, we find that such a direction was in fact issued by the DRP vide para 3.7 at page 8 of the directions. However, we find that while computing the deduction allowable under S.10AA, the said direction of the DRP has not been given effect to. We, therefore, direct the AO to comply with the aforesaid direction of the DRP vide para 3.7 at page 8 of the directions and to, accordingly, recompute the deduction allowable to the assessee under S.10AA of the Act.

The second aspect of ground No.20 pertains to the DRP’s direction that foreign taxes in the nature of VAT or GST have not been added back to the Export Turnover while computing the deduction under S.10AA which has however not been given effect to by the AO in the final assessment order. On examining the DRP’s directions, we find that such a direction was in fact issued by the DRP vide para 13 at page 61 of the directions. However, we find that while computing the deduction allowable under S.10AA, the said direction of the DRP has not been given effect to. We, therefore, direct the AO to comply with the aforesaid direction of the DRP vide para 13.1 at page 61 of the directions and to, accordingly, recompute the deduction allowable to the assessee under S.10AA of the Act.

Ground No. 21 relates to claim for credit of TDS credit on the basis of additional TDS certificates. The A did not grant TDS credit on the reasoning that the said TDS amount were not reflected in Form 26AS and the ld. DRP has also rejected the objection filed before them. If the deductor of TDS has filed the Statement of TDS with the Income tax department, then the said TDS will automatically reflect in Form 26AS. If there is failure on the part of the deductor to file statement of TDS, then it will not be reflected in Form 26AS. In our considered view, the assessee cannot be penalised for the fault of the TDS deductor in not filing statement of TDS. It is also possible that the deductor of TDS would have filed the statement of TDS belatedly. Accordingly, we are of the view that this issue requires verification at the end of AO. Accordingly, we restore this issue to the file of AO with the direction to examine the claim of the assessee and allow TDS credit in accordance with law.

Ground No. 22 relates to the Assessee’s claim that the AO did not grant MAT credit of brought forward losses from the previous years when the tax liability was determined under the normal provisions of the Act. We find that when this issue was raised before the DRP, the DRP did not examine the Assessee’s claim on the ground that it did not amount to a variation made by the AO to the returned income and that, therefore, it could not adjudicate upon the same. Without going into the merits of the matter, we find that this is an issue that requires to be examined by the AO afresh. Accordingly, we are of the view that this issue requires verification at the end of AO. Accordingly, we restore this issue to the file of AO with the direction to verify the claim of the assesse and accordingly grant MAT credit in accordance with law.

Ground No. 23 is consequential in nature.

In the result, the appeal filed by the assessee is partly allowed for statistical purposes. Pronounced in the open court on this 14th day of June, 2023.