2023 (12) TMI 456 - AT - Income Tax

Reopening of assessment u/s 147 - deduction u/s 10A disallowed - reason to believe that issue of escapement is established in the A.Y 2009-10 - As argued software development expenses including cost incurred outside India were fully disclosed and the computation of deduction u/s.10A was one of the subject matter of scrutiny before the AO who after analysing the details has even made disallowance out of claim of such deduction - HELD THAT - The case of the AO is that, the issue of escapement is established in the A.Y 2009-10 when the fact came to light that the assessee is not eligible for deduction u/s 10A to the extent and in view of the same it was found that the assessee has been allowed excess deduction for the A.Y. 2006-07. There is no whisper that any material or information has come on record that assessee was not incurring expenditure for software development outside India, but doing body shopping by deputing the personnel for the outside clients, albeit, from same set of facts a different view has been taken in A.Y. 2009-10 that revenue generated from such employees and branches cannot be considered as export services from India and derived from STPI located in India, which inference of the AO on same fact ultimately has been found to be incorrect by Tribunal. Consequently the whole premise of reopening gets vitiated. Thus, reopening has been done merely on the basis of inference drawn by the AO on same facts and is not based on any material coming on record which can prove that there was failure on part of the assessee in so far as disclosure of correct facts are concerned. A different view taken on same set of facts which was part of the record in subsequent years does not tantamount to failure on part of the assessee. Accordingly, we hold that, there is no failure on the part of the assessee to disclose truly and fully material facts required for the assessment and the reopening has been done simply on the basis of a different view taken by the Assessing Officer in A.Y. 2009-10 and there is nothing tangible material which has been found in A.Y. 2009-10 pertaining to A.Y. 2006-07 or 2007-08. Otherwise, on merits also, the Tribunal has reversed finding of the DRP/AO in A.Y. 2009-10 which is the entire basis of reopening and addition in these years. This itself goes to show that there was no failure on the part of the assessee albeit, the claim of the assessee itself was allowable - Decided in favour of assessee.

Summary

Issues Involved:
1. Legality of reopening the assessment under Section 147 after four years.
2. Classification of onsite software development services as "supply of manpower" or "body shopping" instead of "export of software."
3. Treatment of revenue generated from overseas branches for deduction under Section 10A.
4. Non-issuance of mandatory notice under Section 143(2) before reassessment.
5. Alleged violation of principles of natural justice.

Summary of Judgment:

1. Legality of Reopening the Assessment:
The assessee challenged the reopening of assessment under Section 147 after four years, arguing that there was no failure to disclose material facts fully and truly. The Tribunal observed that the original assessment under Section 143(3) had already scrutinized the deduction under Section 10A, and no new tangible material had come to light. The Tribunal held that reopening based on a different view taken in a subsequent year (A.Y. 2009-10) does not justify reopening beyond four years. Thus, the reopening was deemed invalid and the reassessment order was quashed.

2. Classification of Onsite Software Development Services:
The Assessing Officer (AO) had treated the onsite software development services as "supply of manpower" or "body shopping," thereby disallowing a portion of the deduction under Section 10A. The Tribunal, relying on the contracts and the nature of services provided, concluded that the assessee was engaged in software development services and not in body shopping. The Tribunal referred to the decision in A.Y. 2009-10, which had already settled this issue in favor of the assessee, affirming that the services were integral to software development and eligible for deduction under Section 10A.

3. Revenue from Overseas Branches:
The AO had argued that revenue generated from overseas branches could not be considered as export services from India and thus not eligible for deduction under Section 10A. The Tribunal, however, found that the services provided by the overseas branches were part of the overall software development process managed from India. The Tribunal held that such revenue qualifies for deduction under Section 10A as it is derived from the eligible units located in India.

4. Non-Issuance of Mandatory Notice:
The assessee contended that the reassessment order was invalid due to the non-issuance of a mandatory notice under Section 143(2). The Tribunal did not explicitly address this issue in detail, as the primary ground of reopening being invalid had already quashed the reassessment proceedings.

5. Violation of Principles of Natural Justice:
The assessee argued that the AO violated principles of natural justice by passing the reassessment order within four days of disposing of the objections. The Tribunal noted that the entire reassessment proceedings were vitiated due to invalid reopening, thereby rendering this issue moot.

Conclusion:
The Tribunal allowed the appeals for both A.Y. 2006-07 and A.Y. 2007-08, quashing the reassessment orders and holding that the assessee was entitled to the deductions claimed under Section 10A. The Tribunal's findings were based on the invalidity of the reopening, the nature of the services provided, and the revenue generated from overseas branches being part of the eligible business units in India.