2013 (11) TMI 427 - AT - Income Tax

Re-opening of assessment u/s 147 of the Income Tax Act Reasons to believe to be mentioned in Notice issued u/s 148 of the Income Tax Act Held that - While completing the assessment u/s. 143(3) of the Act, the AO has gone into the question of excluding the sum of Rs.38,51,45,781 from the export turnover on the ground that it was expenditure incurred in foreign exchange for providing technical services outside India - Stand taken by the AO in the reasons recorded before issuing notice u/s. 148 of the Act is a different facet of allowing deduction under section 10A of the Act, yet it cannot be disputed that this is a stand which the AO ought to have taken while he completed the assessment proceedings u/s. 143(3) of the Act initially. Having failed to look into a different dimension on which the deduction u/s. 10A could be disallowed to the assessee, the AO cannot be permitted to take recourse to reassessment proceedings u/s. 147 of the Act - Assuming there was a failure on the part of the AO in this regard, the appropriate action can only be under section 263 of the Act - Initiation of reassessment proceedings is not valid Decided in favor of Assessee.

Issues Involved:
1. Validity of reassessment proceedings under section 147 of the Income Tax Act.
2. Exclusion of expenditure incurred in foreign exchange from export turnover for the purpose of deduction under section 10A.
3. Allocation of expenditure between software development and technical services.

Issue-wise Detailed Analysis:

1. Validity of reassessment proceedings under section 147 of the Income Tax Act:
The core issue here is whether the reassessment proceedings initiated by the Assessing Officer (AO) under section 147 were valid. The assessee argued that the reassessment was merely a change of opinion, which is not permissible under section 147. The AO had initially allowed the deduction under section 10A but later issued a notice under section 148, claiming that the deduction was incorrectly allowed. The Tribunal observed that the AO had already examined the issue of excluding certain expenditures from the export turnover during the original assessment under section 143(3). The Tribunal held that the AO cannot initiate reassessment proceedings based on a mere change of opinion without any new tangible material. This position is supported by the Supreme Court's decision in CIT v. Kelvinator of India Ltd., 320 ITR 561 (SC), which states that reassessment cannot be initiated on a mere change of opinion. Therefore, the reassessment proceedings were deemed invalid, and the reassessment order was annulled.

2. Exclusion of expenditure incurred in foreign exchange from export turnover for the purpose of deduction under section 10A:
The dispute centered on whether the expenditure incurred in foreign exchange for providing technical services outside India should be excluded from the export turnover while computing the deduction under section 10A. The AO had excluded a portion of the expenditure, deeming it as incurred for providing technical services, and allocated it among the five Software Technology Park Units (STP Units). The CIT(A) upheld this view, stating that such expenditures were not part of export turnover and thus not eligible for deduction under section 10A. The Tribunal noted that the exclusion of such expenditures from export turnover is governed by Explanation 2(iv) to section 10A, which excludes freight, telecommunication charges, insurance, and expenses incurred in foreign exchange for providing technical services outside India. However, the Tribunal did not delve into the merits of this issue due to the annulment of the reassessment proceedings.

3. Allocation of expenditure between software development and technical services:
The AO allocated 25% of the expenditure incurred in foreign exchange towards employees' salary and overseas travel as attributable to providing technical services outside India. This allocation was based on the functional analysis provided by the assessee, which indicated that the company was engaged in providing support services, including technical services. The CIT(A) agreed with this allocation, noting that the assessee's activities involved both software development and providing technical services. The Tribunal, however, did not address this issue in detail due to the annulment of the reassessment proceedings.

Conclusion:
The Tribunal concluded that the reassessment proceedings initiated by the AO were invalid as they were based on a mere change of opinion without any new tangible material. Consequently, the reassessment order was annulled. As a result, the other issues raised by the assessee and the revenue did not require further consideration. The appeal by the assessee was allowed, and the appeal by the revenue was dismissed.

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