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2005 (11) TMI 367 - AT - Income TaxValidity of the assessment framed u/s 147 - 100% Export oriented undertaking - Income escaping assessment - Deduction u/s 10B or u/s 80HHE - manufacture of computer software - income derived on export of software out of India to this client - activities of the assessee-company have been carried on the basis of the agreement. HELD THAT - All the details relating to the claim were available in the return. In the light of the same it cannot be said that there had been any escapement of income for assessment. According to him there existed no prima facie material for coming to such a conclusion. The contention of the assessee, as we see in the light of the discussions in the impugned order, the reassessment has no legs to stand. Prima facie the Assessing Officer had no reason to arrive at the conclusion that the income had, in fact, escaped assessment. Moreover, the income was only determined u/s 143(1) of the Act and the Assessing Officer had not issued any notice u/s 143 of the Act and the only way to bring the income escaping the tax is by taking recourse to section 148 of the Act. Thus, the reassessment proceedings have been validly initiated and we decline to interfere. Deduction u/s 10B - We are unable to accept the departmental view that the assessee cannot considered as engaged in the business of manufacture of production of articles or things within the meaning of sections 10B and 10BB of the Act in respect of the profits and gains arising out of this agreement. The denial of such relief, in our view, is on a wrong reasoning that export of articles and things under this agreement with Unisys did not exceed 75% of the total sales. It only results in the miscarriage of justice if such a proposition of the department were to be accepted. We, therefore, direct the Assessing Officer to allow deduction u/s 10B of the Act. The relief u/s 80HHE, in the facts and circumstances of the case, as an alternative prayer, becomes academic. Agreement No. 3 with CTE-BNP - We do not agree with the stand of the revenue that the assessee is not entitled for relief under section 10B of the Act in respect of the exports made to this client. Accordingly, we direct the Assessing Officer to allow relief under section 10B of the Act in respect of the profits and gains derived as admittedly the agreement is an old agreement and on which the revenue has already granted relief under section 80HHE of the Act, which is directed to be withdrawn. Agreement No. 4 with CIC e-worker - In our opinion, having regard to the terms of the agreement, it was clearly for manufacture or production of articles or things within the meaning of section 10B and its extended meaning as spelt out in section 10BB of the Act. We may also mention that merely because the payment is based on the man-hour spent on the job or the employees provided, it does not mean that the assessee was not engaged in the activity of manufacture or production of articles or things within the meaning of the provisions stated above. The complex and highly technical activities in the field of computer software, in our opinion, truly is an act of manufacture or production of articles or things as spelt out in the aforesaid provision. Agreement with SAP Arabia - This is not a case where the assessee has only to do recruitment or training of personnel, but the assessee is engaged in the on-site software development. In this contract with SAP-Arabia the software professionals remained on the payroll of the assessee while they are deputed on-site for carrying out assignment of software development. The relevant copies of the agreement are also placed at pages 10-15 of the paper-book. Having gone through the details contained therein, we are of the opinion that it cannot be said that the assessee is not entitled to relief u/s 10B or u/s 80HHE of the Act. The revenue authorities have denied both the relief but, in our view, the assessee is entitled to relief u/s 10B of the Act in relation to the income derived on export of software out of India to this client. Agreement with Geotronics-UK and Veritema-Sweden . These agreements are of the same nature as has been entered with SAF Arabia. In the light of our decision in relation to the agreement with SAF Arabia, we hold that the assessee is entitled to relief u/s 10B of the Act in respect to the profits and gains derived by the assessee under these agreements. Having regard to all these, it cannot be said that the assessee is only a recruiting and training agent while considering its claim for relief u/s 10B of the Act. We, therefore, in the light of all these discussions, accept the claim of the assessee for relief u/s 10B of the Act. As a result of this, the revenue may have to withdraw the relief granted u/s 80HHE of the Act as a consequence of this order. As regards the claim of deduction u/s 10B on interest income, in the light of the fact that we have held that the assessee is entitled to relief u/s 10B of the Act, the assessee is naturally entitled for relief u/s 10B of the Act in respect of the interest income also, which is admittedly a part of business income. In the result, both the appeals are partly allowed.
Issues Involved:
1. Validity of assessment framed under section 147 of the Income-tax Act. 2. Eligibility for deduction under section 10B or alternatively under section 80HHE of the Income-tax Act. 3. Levy of interest under sections 234C and 234D of the Income-tax Act. 4. Allocation of expenses incurred for earning dividend income. 5. Direction to allow deduction under section 10B or section 80HHE on certain receipts. Detailed Analysis: 1. Validity of Assessment under Section 147: The first ground in the assessee's appeal questioned the validity of the assessment framed under section 147. The return of income was processed under section 143(1) without issuing a notice under section 143(2). The Assessing Officer initiated reassessment proceedings under section 148, believing that income had escaped assessment due to ineligibility for deduction under section 10B. The assessee contended that all details were available in the return, and there was no prima facie material to conclude escapement of income. However, the tribunal upheld the reassessment proceedings as validly initiated. 2. Eligibility for Deduction under Section 10B or Section 80HHE: The next set of disputes related to the assessee's claim for deduction under section 10B or alternatively under section 80HHE. The assessee, a domestic company engaged in software technology, claimed deductions based on agreements with various parties. The Assessing Officer denied the deductions, citing non-fulfillment of conditions for exemption under section 10B. The tribunal examined each agreement in detail: - Agreements with CIC-ATC (old), Domestic, CIC-Recruitment & Training, and CIC-Others: The tribunal confirmed the denial of benefits under section 10B or section 80HHE, as these did not involve eligible exports. - Agreement with Unisys: The tribunal found that the denial of relief under section 10B was based on a misinterpretation of the requirement that exports to all clients, not just one, should constitute at least 75% of total sales. The tribunal directed the Assessing Officer to allow deduction under section 10B. - Agreement with Cresere Inc: The tribunal concluded that the assessee was engaged in the manufacture or production of computer programs, qualifying for relief under section 10B. - Agreement with CTE-BNP: The tribunal directed the Assessing Officer to allow relief under section 10B, as the only ground for denial was the incorrect interpretation of the 75% export condition. - Agreement with CIC e-worker: The tribunal found that this agreement involved the development of e-worker software and directed the Assessing Officer to allow deduction under section 10B. - Agreements with SAP Arabia, Geotronics-UK, and Veritema-Sweden: The tribunal held that these agreements involved on-site software development, qualifying for relief under section 10B. 3. Levy of Interest under Sections 234C and 234D: The tribunal agreed with the assessee that interest under section 234D, which came into force on 1st June 2003, was not applicable to the assessment year under consideration. The levy of interest under section 234C was held to be consequential. 4. Allocation of Expenses for Earning Dividend Income: The tribunal directed the Assessing Officer to follow the ratio laid down by the Delhi Bench of the Tribunal in the case of Maruti Udyog Ltd. v. Dy. CIT, allocating 1% of dividend receipts as expenses incurred for earning the dividend income. 5. Direction to Allow Deduction under Section 10B or Section 80HHE on Certain Receipts: The revenue's appeal challenged the CIT(A)'s direction to allow deductions under section 10B or section 80HHE on certain receipts. The tribunal partly allowed the revenue's ground, confirming the denial of deductions for agreements with CIC-ATC (old), Domestic, CIC-Recruitment & Training, and CIC-Others, and directing the Assessing Officer to withdraw relief granted under section 80HHE for other agreements where section 10B was applicable. Conclusion: Both the appeals were partly allowed, with the tribunal providing detailed directions on the eligibility for deductions under sections 10B and 80HHE, the applicability of interest under sections 234C and 234D, and the allocation of expenses for earning dividend income.
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