2019 (5) TMI 538 - AT - Income Tax

Reopening of assessment - disallowance of deduction/exemption claimed u/s 10B and 80HHE - HELD THAT - It is not in dispute that the assessing officer has examined the claim of deduction under section 80HHE / 10A of the Act in the original assessment proceedings. In fact, the assessing officer had made adjustments to the computation of deduction under section 80HHE / 10A of the Act, as claimed by the appellant. Further, clause (d) of Explanation to section 80HHE of the Act providing that profit of branch/office of the assessee situated outside India, is to be excluded from the profit of the business as also Explanation to sub-section (1) of section 80HHE of the Act with regard to the on-site software services, did exist in the statute when the original assessment proceedings were in progress before the assessing officer. Therefore, it cannot be anybody s case that the assessing officer was not aware of the factual and legal position with regard to the claim of such deduction by the appellant under section 80HHE and 10A of the Act in respect of profit of the overseas branches, which were contended to be profit derived from on-site software services. In fact, it is noted from the statement of profitability of the overseas branches filed with the return of income that the fact that profit of such branches was on account of on-site software services rendered by the appellant, was clearly evident to the AO in the course of the original assessment proceedings before him. We are not inclined to interfere with the findings of the ld. CIT(A) on the ground of re assessment having been made on the basis of change of opinion. Accordingly, the ld. CIT(A) has rightly quashed the reassessment made by the AO being bad in law ab initio. As a result, the appeal of the Revenue deserves to be dismissed on this score only. Since, we have supported the quashing of re-assessment proceedings being invalid, we need not to enter into other grounds of Revenue s appeal as well as the ground of assessee s cross objection on merits of additions. Addition u/s. 10A and 80HHE - DR held that assessee has not provided any technical services. Therefore, expenditure incurred in foreign exchange need not to be reduced from the export turnover or from total turnover - items on which the higher depreciation was claimed were in the nature of electric installation not eligible for depreciation more than 15% - HELD THAT - No justification in allocating a particular percentage of software development charges towards expenses alleged to have been incurred for providing technical services. We allow this ground of appeal raised by the assessee and reject the ground of appeal raised by the revenue. We direct the assessing officer not to exclude any amount from software development charges under the garb of expenses incurred, towards providing consultancy services. He will not exclude these amounts from the export turnover while computing the deduction admissible under section 10A The overseas branches of the appellant merely act as conduit for rendering of the onsite software development services in relation to software development projects undertaken by the various undertakings located in India. The aforesaid profits of the branches do satisfy the test laid down by the Hon ble Delhi High Court in the case of Interra Software India Pvt. Ltd. 2010 (12) TMI 142 - DELHI HIGH COURT in as much as the overseas branches of the appellant are acting merely as conduit for rendering on site services. The profits of such branches being essentially in the nature of profits derived by the appellant from onsite software development services, is apparently covered by Explanation 3 of Section 10A of the Act and would accordingly qualify for deduction under that Section - Decided against revenue

Issues Involved:

1. Legality of reassessment proceedings under Section 148 based on 'change of opinion'.
2. Disallowance of deductions claimed under Sections 10A, 10B, and 80HHE of the Income Tax Act, 1961.
3. Disallowance of expenses under Section 14A read with Rule 8D.
4. Disallowance of excess depreciation claimed by the assessee.

Issue-wise Detailed Analysis:

1. Legality of Reassessment Proceedings Under Section 148 Based on 'Change of Opinion':

The Revenue challenged the CIT(A)'s decision to quash reassessment proceedings for A.Y. 2002-03 and 2003-04, arguing it was not based on a 'change of opinion'. The Tribunal upheld the CIT(A)'s decision, emphasizing that reassessment cannot be initiated merely on a 'change of opinion'. The Tribunal cited multiple judicial precedents, including the Supreme Court's decision in CIT vs. Kelvinator of India Ltd., which held that reassessment based on the same facts and legal position as the original assessment constitutes a 'change of opinion' and is invalid. The Tribunal found that the assessee's claims under Sections 10A and 80HHE were thoroughly examined during the original assessment, and the reassessment proceedings were initiated without any new tangible material, thus amounting to a 'change of opinion'. Consequently, the reassessment proceedings were quashed.

2. Disallowance of Deductions Claimed Under Sections 10A, 10B, and 80HHE:

A.Y. 2002-03 and 2003-04:

The Revenue argued that the CIT(A) erred in deleting the disallowance of deductions under Sections 10A and 80HHE. The Tribunal upheld the CIT(A)'s decision, noting that the assessee's overseas branches merely acted as conduits for onsite software development services, which are eligible for deduction under Section 10A as per Explanation 3 of the section. The Tribunal referenced the Delhi High Court's decision in the case of Interra Software India Pvt. Ltd., which supported the view that profits from onsite software development services qualify for deduction under Section 10A. The Tribunal also noted that the CIT(A) had properly considered the facts and legal position and had rightly allowed the deductions claimed by the assessee.

A.Y. 2005-06:

The Revenue contended that the CIT(A) erred in allowing deductions under Section 10A for the BPO, GNR, and Chennai units and in not reducing expenses incurred in foreign currency from the export turnover. The Tribunal upheld the CIT(A)'s decision, reiterating that the assessee was engaged in software development services, and the overseas branches were involved in onsite software development services, which qualify for deduction under Section 10A. The Tribunal found no merit in the Revenue's argument and dismissed the appeal.

3. Disallowance of Expenses Under Section 14A Read with Rule 8D:

For A.Y. 2002-03, the Revenue argued that the CIT(A) erred in deleting the disallowance under Section 14A read with Rule 8D. The Tribunal upheld the CIT(A)'s decision, noting that the disallowance was not justified as the assessee had sufficient interest-free funds to cover the investments, and the disallowance was not warranted based on the facts of the case.

4. Disallowance of Excess Depreciation Claimed by the Assessee:

For A.Y. 2005-06, the Revenue challenged the CIT(A)'s decision to delete the disallowance of excess depreciation claimed on computer peripherals. The Tribunal upheld the CIT(A)'s decision, referencing the Delhi High Court's decision in CIT vs. Birlasoft Ltd., which held that depreciation on computer accessories and peripherals is admissible at 60%. The Tribunal found that the CIT(A) had correctly applied the law and deleted the disallowance.

Conclusion:

The Tribunal dismissed all three appeals of the Revenue and the cross-objection of the assessee, upholding the CIT(A)'s decisions on all counts. The reassessment proceedings were quashed as they were based on a 'change of opinion', and the deductions claimed under Sections 10A, 10B, and 80HHE were allowed. The disallowance under Section 14A and the excess depreciation disallowance were also deleted. The Tribunal's decision was pronounced in the open court on 30.04.2019.

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