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2013 (7) TMI 163 - AT - Income TaxSoftware maintenance service - whether eligible for deduction u/s. 80IB though the transaction is in the nature of trading activity and not manufacturing activity - CIT(A) allowed the claim - Held that - CIT (A) has rightly held that sale of software need to be taken for the purpose of deduction under section 80IB whereas service charges are not to be taken for the purpose of deduction under section 80IB. No infirmity in the Order of the CIT (A) as the sale of software consists of sales which are effected of the articles produced by the industrial undertaking and are derived from the industrial undertaking and are first degree source and therefore, eligible for the purpose of deduction under section 80IB as per the decision of the Liberty India 2009 (8) TMI 63 - SUPREME COURT . In the case of service charges as decided in Unicorn Appliances Ltd. vs. CIT 2009 (1) TMI 764 - ITAT MUMBAI has held that receipts by way of service charges is classified as other income which cannot be held as income derived from the industrial undertaking. Thus service charges are not profits derived from the industrial undertaking and therefore, receipts on account of service charges to be excluded while computing the profit eligible for deduction under section 80IB - Decided against the revenue.
Issues:
1. Eligibility of service charges for deduction u/s. 80IB. 2. Classification of software sales and service charges. 3. Treatment of software development expenses. Analysis: 1. The appeal by the Revenue was against the Order of the CIT (A)-II, Hyderabad for the assessment year 2004-2005. The Revenue raised grounds of appeal questioning the eligibility of service charges for deduction u/s. 80IB, arguing that the activity was trading, not manufacturing. The Assessing Officer contended that service charges were not derived from the industrial undertaking, leading to the dispute. The CIT (A) clarified that the sale of software, included in service charges, was eligible for deduction under section 80IB as it was derived from the industrial undertaking. 2. The assessee clarified that the invoices for software were included under "Service Charges" in the ledger account, emphasizing that software sales were distinct from service charges. They provided a breakdown showing software sales and service charges separately. The CIT (A) directed the Assessing Officer to consider sales of software, on which sales tax was paid, for deduction under section 80IB. However, service charges were to be excluded while computing the profit eligible for deduction under section 80IB, as per the fundamental principles established by the Apex Court. 3. The CIT (A) differentiated between the treatment of sale of software and service charges, aligning with the decision in Liberty India vs. CIT. The Tribunal held that receipts from service charges were not profits derived from the industrial undertaking, thus excluding them from the deduction under section 80IB. The issue was remitted to the Assessing Officer to verify and consider only the sale of software for the purpose of deduction. Additionally, the treatment of software development expenses as revenue expenditure was upheld, dismissing the department's contention that it should be treated differently from the sale of software for section 80IB deduction. 4. The CIT (A) followed the decision of the Hon'ble Supreme Court in the case of Liberty India vs. CIT for the issue raised in ground No.5, ultimately dismissing the ground raised by the department. The appeal of the Revenue was ultimately dismissed, affirming the Order of the CIT (A) in its entirety. In conclusion, the judgment dealt comprehensively with the eligibility of service charges, classification of software sales, treatment of software development expenses, and adherence to legal precedents in determining deductions under section 80IB.
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