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TMI Blog2012 (6) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... escribed/stipulated service u/s 80IA. Exclusion of sales of equipments from the deduction claimed u/s 80IA on ground that income is not derived from specified services - Held that:- Nature of each contract has to be examined. It has to be ascertained whether it was a case of supply of goods or was it composite contract of providing equipments with telecommunication services. In case, the sale of goods was inextricably linked, had nexus and was connected with the primary purpose of providing or starting telecommunication services, the assessee will be entitled to benefit u/s 80IA - Remitted back to Tribunal. Income earned from development and sale of software upgrades for smooth and trouble free working of VSAT service provided by the appellant - whether qualify for deduction u/s 80IA - Held that:- Nature, character and type of the software and whether or not it could be treated and regarded as income earned from the business referred to in sub-section (4) clause (ii) to Section 80IA has not been examined and considered, therefore, this issue is accordingly remitted to the tribunal for a fresh decision. Exclusion of Interest income on FDR and other income - Held that:- In L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it to the assessee? ITA No.284/2011 Whether learned ITAT erred in law in holding that income of Rs.50,42,764/- from trading activities is derived from Industrial undertaking within the meaning of Section 80-IA of the Income Tax Act, 1961? 3. The assessee is a public limited company and was providing satellite based telecommunication solutions including VSAT services, up-linking services, play out services and broadband service through satellite. It had earned income from the said services, besides rental income and income from other sources. In the return of income filed on 28th October, 2005, it had claimed deduction under Section 80IA of the Income Tax Act, 1961 (Act, for short) of Rs.4,88,29,013/- and after the adjustment, had declared total taxable income of Rs. 5,45,89,013/-. The total taxable income under Section 115JB was Rs.6,90,32,533/-. 4. As section 80IA is required to be interpreted and examined, we deem it appropriate to reproduce the relevant portion of the said provision, as it existed during the assessment year period in question:- 80-IA Deductions in respect of profit and gains from industrial undertakings etc., in certain cases.-(1) Where the gross t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A(4). This aspect has somehow escaped notice of the authorities as well as the tribunal. This has resulted in confusion as the Assessing Officer has made several additions including addition for software sales, domestic satellite services etc. There is no clear and direct finding on the precise nature of the activity undertaken resulting in income earned and whether or not they fall within one of the aforesaid specified categories. To some extent, the assessee is also responsible for the said confusion because of their reply in the course of the assessment proceedings. The Assessing Officer had not appreciated and understood the issue and the proper legal affect of clause (ii) of Section 80IA (4). As we answer the questions, this aspect becomes apparent. 6. Question No. 1 in ITA No. 130/2011 and the Questions raised in ITA Nos. 279/2011 and 284/2011 are inter-related and are being taken up first. Question No. 2 raised by the assessee in ITANo. 130/2011 will be taken up in the end. 7. Question raised in ITA 279/2011 arises as the Assessing Officer had treated Rs.1,42,34,278/- as income earned by the assessee from domestic satellite service. The reasoning given by the Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvice provider etc. it had procured space segment in the satellite and paid charges in foreign currency for utilizing space segment. It was an expense, which was incurred and not that any income was earned. The question is not whether any expense was incurred in respect of the services stipulated in clause (ii) of Section 80IA (4), but whether the assessee has earned income derived from the specified services. It is not the case of the assessee that it was providing domestic satellite services and earning income from the said activity. The term domestic satellite as defined in the explanation means the satellite owned and operated by an Indian company for providing telecommunication services. The assessee is not an owner of the domestic satellite and nor is it operating the satellite. On the other hand, it is apparent that the assessee is claiming benefit/coverage under the said section on the basis that it is providing broadband/internet services etc. As long as it was providing the stipulated services and had received payments for the specified services, the income earned would qualify for deduction under Section 80IA(4)(ii). In case the assessee incurs expenditure to buy and u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... import of C band redundant 1:1 Up Converter and Down Converter have been placed on record. These are the technical device. Similarly on page 32-33 are the import license on page 34 is the description of the items which are to be imported. At page 34 the description of the items is Codan 40 Wku Band BUC. According to the assessee these equipments are essential equipments for enabling, assessee to the telecommunication services. The Govt. has put up various restrictions on import of such items because of security reasons. If the assessee is unable to provide these items to its customer then it might not be possible for it to provide telecommunication services. It was pointed out at the time of hearing that these equipments cannot be used for availing the services from any other service provider. The customer has to avail the telecommunication services through these items necessarily from the assessee only. Considering the nature of equipments and their relation to the nature of services provided by the assessee, in our opinion the receipt received by the assessee for supply of these items is inextricably links to the business of its telecommunication services. The AO is not justifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd is inextricably linked with providing the qualifying activities, is and would be the determinative factor. The substantial question of law is accordingly answered. An order of remit is passed, with a direction to the tribunal to decide the issue/question afresh in the light of the above observation/ratio. 13. The question No.1 raised in the appeal of assessee i.e. ITA 130/2011 relates to income earned from development and sale of software and whether the said amount qualifies for deduction under Section 80IA. The tribunal has not treated the proceeds from sale of software declared by the assessee as eligible for deduction under Section 80IA on the ground that the income derived from the sale of software was not derived from qualifying business i.e. telecommunication services. It has been observed that development of software was a separate source of business income. Accordingly, the total receipt of Rs.61,58,000/- from the sale of software should be excluded from the deduction claimed under Section 80IA of the Act. 14. The contention of the assessee, which is recorded in the order passed by the tribunal, is that the software developed was for upgrading the Network Management ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmunication service. The appellant has shown total receipts of Rs.61,58,000/- from development and selling of software. The A.O. has allowed expenses on account of salary paid to employees and other administrative expenses of Rs.4,00,000/- and calculated the net profit from software development at Rs.57,58,000/-. The A.R. of the appellant submitted that the appellant had incurred higher amount of expenses than Rs.4,00,000/- on the development of software because apart from personnel/staff, the appellant had incurred various other overhead charges also. But the appellant had not furnished any details of expenses in excess of 4,00,000 incurred for the development of software. In these circumstances, the calculation made by the A.O. does not warrant any interference. Since the income earned from development of software was not profit and gains derived from the eligible business of providing Telecommunication service, the A.O. was justified in excluding the income from software development for computing deduction u/s 80IA. 16. We find that the Assessing Officer as well as the appellate authorities have not examined the issue/question keeping in mind the mandate of the section and co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer, however, did not agree with the said contention. The CIT (Appeals) agreed with assessee and held that the interest on deposit was taxable as business income and not under the head income from other sources and therefore the assessee was entitled to deduction under Section 80IA(4)(ii). As noticed above, the tribunal has reversed the findings of the CIT(Appeals) and agreed with the Assessing Officer. 19. Decision of this Court in Shri Ram Honda (supra) consists of two parts. In the first part it has been held that interest income is not income derived from exports as it is not a part of export proceeds and is not a direct and proximate result of exports earning but earning made from deposit of money and payment by the bank. The second part of the said judgment deals with computation under Explanation (bba) to Section 80HHC. For the purpose of the said explanation, it has been held that interest refers to and means net interest and not gross interest, provided the interest earned is taxable under the head income from business and not under the head income from other sources. This view has been upheld by the Supreme Court in its recent decision in ACG As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y income by way of dividends received by it from a domestic company, there shall, in accordance with and subject to the provisions of this Section, be allowed, in computing the total income of the Assessee, a deduction from such income by way of dividends an amount equal to a certain percentage of the income mentioned in this Section. The Constitution Bench held that the Court must construe Section 80M on its own language and arrive at its true interpretation according to the plain natural meaning of the words used by the legislature and so construed the words such income by way of dividends in Sub-section (1) of Section 80M must be referable not only to the category of income included in the gross total income but also to the quantum of the income so included. 16. Similarly, Explanation (baa) has to be construed on its own language and as per the plain natural meaning of the words used in Explanation (baa), the words receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits will not only refer to the nature of receipts but also to the quantum of receipts included in the profits of the business as comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be valued at the lower of cost and net realisable value (NRV). The cost of inventory should comprise all costs of purchase, costs of conversion and other costs including costs incurred in bringing the inventory to their present location and condition. 41. The cost of purchase includes duties and taxes (other than those subsequently recoverable by the enterprise from taxing authorities), freight inwards and other expenditure directly attributable to the acquisition. Hence trade discounts, rebate, duty drawback, and such similar items are deducted in determining the costs of purchase. Therefore, duty drawback, rebate, etc. should not be treated as adjustment (credited) to cost of purchase or manufacture of goods. They should be treated as separate items of revenue or income and accounted for accordingly (see p. 44 of Indian Accounting Standards GAAP by Dolphy D‟Souza). 42. Therefore, for the purposes of AS-2, CENVAT credits should not be included in the cost of purchase of inventories. Even the Institute of Chartered Accountants of India (ICAI) has issued Guidance Note on Accounting Treatment for CENVAT/MODVAT under which the inputs consumed and the inventory of i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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