2012 (6) TMI 34 - HC - Income Tax

Deduction u/s 80IA - assessee engaged in providing satellite based telecommunication solutions - AO on observing that payment was made to British Telecom (Worldwide) and no income or receipts was shown as earned from any third party made addition holding that the income included income from satellite services not in the nature of domestic satellite service - Held that - As long as assessee was providing broadband/internet services and had received payments for the specified services, the income earned would qualify for deduction u/s 80IA(4)(ii). In case the assessee incurs expenditure to buy and utilize space segment on a satellite for providing the qualifying services, the expenditure incurred cannot be disallowed and no notional income can be computed or reduced from the income earned from the qualifying service. In view of absence of details, we remit the matter to the tribunal to examine the said aspect afresh. Tribunal has to examine and clearly decide nature and character of service rendered by the assessee to third parties and whether the same qualifies and is a prescribed/stipulated service u/s 80IA. Exclusion of sales of equipments from the deduction claimed u/s 80IA on ground that income is not derived from specified services - Held that - Nature of each contract has to be examined. It has to be ascertained whether it was a case of supply of goods or was it composite contract of providing equipments with telecommunication services. In case, the sale of goods was inextricably linked, had nexus and was connected with the primary purpose of providing or starting telecommunication services, the assessee will be entitled to benefit u/s 80IA - Remitted back to Tribunal. Income earned from development and sale of software upgrades for smooth and trouble free working of VSAT service provided by the appellant - whether qualify for deduction u/s 80IA - Held that - Nature, character and type of the software and whether or not it could be treated and regarded as income earned from the business referred to in sub-section (4) clause (ii) to Section 80IA has not been examined and considered, therefore, this issue is accordingly remitted to the tribunal for a fresh decision. Exclusion of Interest income on FDR and other income - Held that - In Liberty India v. CIT 2009 (8) TMI 63 (SC) it is held that highlighted Section 80IA is a profit linked incentive and only profits derived from eligible business are entitled to deduction. The expression derived from covers sources not beyond the first degree. Devices to inflate or reduce profits from eligible business should be rejected. Therefore, in absence of details, matter remitted back to tribunal to examine quantum of expenditure incurred/attributed to earning of exempt income u/s 80IA.

Issues Involved:
1. Eligibility of income from software upgrades for deduction under Section 80-IA(4)(ii) of the Income Tax Act.
2. Computation of deduction under Section 80-IA regarding net interest income.
3. Classification of INSAT 2E as a domestic satellite.
4. Eligibility of income from trading activities for deduction under Section 80-IA.

Detailed Analysis:

1. Eligibility of Income from Software Upgrades for Deduction under Section 80-IA(4)(ii):
The tribunal held that income earned by the appellant from the development of software upgrades for Network Management Systems (NMS) for smooth and trouble-free working of VSAT services was not eligible for deduction under Section 80-IA(4)(ii). The tribunal observed that the development of software was a separate source of business income and not derived from the business of telecommunication services. The High Court remitted the matter to the tribunal to examine the nature, character, and type of software developed and sold, and whether it was inextricably linked with the activities/services stipulated in clause (ii) to sub-section (4) of Section 80-IA.

2. Computation of Deduction under Section 80-IA Regarding Net Interest Income:
The tribunal observed that the assessee had earned interest income on FDRs and other interest, which could not be included in the income derived from the specified activities. The High Court referred to the decision in CIT Vs. Shri Ram Honda Power Equip, which held that interest income is not derived from exports and should be computed as net interest if taxable under the head "income from business." The High Court remanded the matter to the tribunal to examine the factual matrix, including the balance sheet and accounts of the assessee, to decide the question of net interest income computation.

3. Classification of INSAT 2E as a Domestic Satellite:
The Assessing Officer treated income earned from domestic satellite services as not qualifying under Section 80-IA, arguing that INSAT 2E was not a domestic satellite since it was owned by the Department of Space, Government of India, and operated by British Telecom (Worldwide). The CIT (Appeals) and the tribunal disagreed, holding that the satellite was owned by the Department of Space, Government of India, and thus qualified as a domestic satellite. The High Court remitted the matter to the tribunal to examine the nature and character of services rendered by the assessee and whether they qualified under Section 80-IA.

4. Eligibility of Income from Trading Activities for Deduction under Section 80-IA:
The Assessing Officer excluded income from trading activities, such as sales of Antenna, RFT, and other miscellaneous items, from the deduction claimed under Section 80-IA, considering it as income derived from trading in goods. The CIT (Appeals) upheld this view. However, the tribunal deleted the addition, holding that the sale of equipment was inextricably linked to the business of telecommunication services. The High Court remitted the matter to the tribunal to examine each contract's nature and whether the sale of goods was inextricably linked with providing the qualifying telecommunication services.

Conclusion:
The High Court remitted multiple issues back to the tribunal for a fresh examination, emphasizing the need to determine the exact nature of the activities and income sources to ascertain their eligibility for deductions under Section 80-IA. The tribunal was instructed to consider the technical aspects and the factual matrix of each issue, including the nature of software development, the computation of net interest income, the classification of domestic satellite services, and the linkage of trading activities with telecommunication services.

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