2008 (5) TMI 372 - AT - Income Tax

Validity of re-assessment proceedings under section 147 - condition precedent for reopening is absent - Computation deduction u/s 10A - set off business loss or unabsorbed depreciation of non-STPI unit from the income of the STPI unit for computing deduction u/s 10A - Computation of Export Turnover - Export (sic-expenses) incurred in foreign exchange. HELD THAT - In the case of Yokogawa India Ltd. It has been held that s. 10A allows deduction from total income and does not allow exemption from total income as s. 10A has been amended w.e.f. 1st April 2001. Deduction is undertaking specific as the word an undertaking is used. Income of that undertaking is to be computed as per provisions of the Act as if it was the only undertaking. The jurisdictional High Court in the case of CIT vs. Siddaganga Oil Extractions (P) Ltd 1992 (11) TMI 65 - KARNATAKA HIGH COURT held that loss in respect of hydrogenation plant cannot be set off from the profits of the solvent plant for computing deduction under s. 80HH in respect of solvent plant. Hence if there are brought forward losses (including unabsorbed depreciation) of STPI unit then the same is to be considered for the purpose of computing deduction under s. 10A. Following the orders of Tribunal in the case of Huawei Technologies (India) (P) Ltd. held that for computing deduction u/s 10A one has to ascertain the total income as per provision of the Act in respect of that undertaking and the amount so determined to be reduced from the total income meaning thereby the s. 10A deduction is to be allowed from the total income without setting off of brought forward and current year s loss of non-s. 10A unit. Therefore AO is directed not to set off business loss or unabsorbed depreciation of non-STPI unit from the income of the STPI unit for computing deduction u/s 10A. Export (sic-expenses) incurred in foreign exchange - CIT(A) confirmed that on site payments should be reduced for the purposes of arriving at the export turnover - HELD THAT - The CBDT Circular No. 694 stated that computer programmes are not physical goods but are developed as a result of an intellectual analysis of the system and method followed by the purchaser of the programme. It is often prepared on site with the software personnel going to the clients premises. Hence when the expenditure is in respect of payments on site development. the same cannot be excluded from the export turnover by holding it as technical services. When export of services only is not entitled to deduction under s. 10A then the legislature made clear that foreign exchange relating to technical services will be excluded. If there is export of goods as well as services then only that portion will be eligible for deduction which relates to goods. Hence. the AO is not justified in excluding from export turnover. Technical service charges - Words mentioned in respect of debit of expenditure are to be considered unless it is established by the assessee that the expenditure does not relate to that issue. Hence the AO was justified in excluding a sum from the export turnover. Disallowance on Communication charges - This Bench while deciding the appeal in the case of I Gate Global Solutions Ltd. 2007 (11) TMI 444 - ITAT BANGALORE upheld the finding of the learned CIT(A) that 80 per cent of the uplinking charges be reduced from the export turnover. Hence the AO will ascertain the telecommunication charges attributable to the delivery of the software. To that extent the amount will be reduced from the export turnover. In the result the appeal filed by the assessee is partly allowed.

Summary

Issues Involved:
1. Reopening of the assessment.
2. Adjustment of brought forward loss of non-STPI unit against profit of STPI unit.
3. Reduction of on-site payments for arriving at the export turnover.

Detailed Analysis:

Reopening of the Assessment:
The first grievance of the assessee was that the learned CIT(A) did not adjudicate the issue of reopening the assessment. The assessee argued that the condition precedent for reopening was absent. The assessment order indicated that the case was selected for scrutiny and notices under sections 143(2)/142(1) were issued. However, the assessment order did not provide the reasons for issuing a notice under section 148. The assessee did not request a copy of the reasons recorded for issuing the notice. Since the learned CIT(A) did not dispose of this ground of appeal, the Tribunal found no alternative but to set aside this issue and remand it back to the learned CIT(A) for proper adjudication as per law.

Adjustment of Brought Forward Loss of Non-STPI Unit Against Profit of STPI Unit:
The second grievance was regarding the confirmation by the learned CIT(A) of the AO's finding that the brought forward loss of the non-STPI unit should be adjusted against the profit of the STPI unit before allowing the deduction under section 10A. The AO had set off the entire brought forward loss from the profit of the assessee's 2003-04 income, reducing the deduction under section 10A. The learned CIT(A) annulled the order under section 154 for the assessment year 2003-04, recognizing a brought forward loss of Rs. 52,33,728 and held that unabsorbed loss must be adjusted against the profit of the STPI unit for allowing the deduction under section 10A.

Before the Tribunal, the assessee's representative cited several decisions, including those of the Bangalore Bench, which supported the view that section 10A allows a deduction from total income without setting off brought forward and current year's loss of non-section 10A units. The Tribunal, referencing the decision in Yokogawa India Ltd. and other cases, concluded that section 10A allows a deduction from the total income of the specific undertaking without setting off losses from non-STPI units. The Tribunal directed the AO not to set off business loss or unabsorbed depreciation of the non-STPI unit from the income of the STPI unit for computing the deduction under section 10A.

Reduction of On-site Payments for Arriving at the Export Turnover:
The last grievance was that the learned CIT(A) confirmed the reduction of on-site payments for arriving at the export turnover. The AO excluded Rs. 5,05,16,068 from the export turnover, considering it as expenditure incurred in providing technical services outside India. The assessee argued that on-site expenses should not be excluded from the export turnover as they were for the development of software, not technical services.

The Tribunal noted that computer software development involves both off-site and on-site expenses. Payments made to engineers for on-site development are not considered technical services under section 10A. The Tribunal referenced CBDT Circular No. 694, which clarified that computer programs developed on-site are not physical goods but intellectual property. Therefore, the AO was not justified in excluding Rs. 4,86,63,187 from the export turnover.

Regarding the Rs. 78,975 debited as technical service charges, the Tribunal upheld the AO's exclusion from the export turnover, as the expenditure was explicitly labeled as technical service charges. For the Rs. 17,73,906 debited as communication charges, the Tribunal directed the AO to ascertain the telecommunication charges attributable to the delivery of software and reduce that amount from the export turnover, in line with the decision in I Gate Global Solutions Ltd.

Conclusion:
The appeal filed by the assessee was partly allowed. The issue of reopening the assessment was remanded to the learned CIT(A) for proper adjudication. The Tribunal directed the AO not to set off business loss or unabsorbed depreciation of the non-STPI unit from the income of the STPI unit for computing the deduction under section 10A. The Tribunal also ruled that on-site expenses for software development should not be excluded from the export turnover, except for specific technical service charges and ascertainable telecommunication charges.