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TMI Blog2013 (11) TMI 427X X X X Extracts X X X X X X X X Extracts X X X X ..... relates to challenge of the validity of initiation of the reassessment proceedings u/s. 147 of the Act by the AO. The facts that are relevant for adjudication of the aforesaid grounds of appeal are as follows. 4. The assessee is a company. It is engaged in the business of rendering software development services. As a software developer, the assessee was entitled to claim deduction u/s. 10A of the Act for the A.Y. 2003-04. The assessee filed return of income in which a claim for deduction u/s. 10A was made. 5. Deduction u/s. 10A(1) of the Act is allowed on profits and gains derived by an undertaking from export of articles or things or computer software. Section 10(4) lays down that the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. Explanation 2(iv) defines 'export turnover' to mean consideration in respect of export by the undertaking of articles or things or computer software received in or brought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncurred for both development of software and providing technical services. However, the assessee has not been able to furnish a break up of the expenditure incurred for development of software and providing technical services. It has taken a stand that no technical services are provided and the entire expenditure is for development of software. Taking the functional analysis reproduced above into account, and in the absence of any break-up of the expenditure, 25% of the expenditure incurred under the following heads in foreign exchange is deemed to be the expenditure incurred in foreign exchange for providing technical services outside India. Employees' salary Rs.128,75,49,201 Overseas travel Rs. 25,30,33,924 Total Rs. 154,05,83,125 2.7 Hence, the expenditure incurred in foreign currency for providing technical services is adopted at Rs.38,51,45,781/- and is allocated between the five STP Units in the ratio of the export sales. Similarly, from out of the communication expenses incurred in foreign currency of Rs.3,21,66,847/-, an amount of Rs.7,03,50,677/- (as quantified by the assessee) is taken as attributable to the delivery of computer software and is allocat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... towards Employees' salary Rs.128,75,49,201, Overseas travel Rs. 25,30,33,924 in all totaling Rs. 154,05,83,125 towards expenditure incurred in foreign currency for rendering technical services outside India ought to have been considered as not profits derived by an undertaking from export of articles or things or computer software u/s.10A(1) of the Act and that the same should be totally excluded from the computation of deduction u/s.10A of the Act and that his action in considering Rs.38,51,45,781/- as part of the Export turnover while computing deduction u/s.10A of the Act was incorrect. 8. In the reassessment proceedings, the assessee submitted before the AO that the proceedings u/s. 147 of the Act that the reassessment proceedings u/s. 147 have been initiated merely on change of opinion. In this regard, the assessee pointed out that the assessment u/s. 143(3) of the Act, the AO had already gone into specific issues arising u/s. 10A of the Act. It was submitted by him that when an order of assessment is made u/s. 143(3) of the Act, there is a presumption that there is an application of mind by the AO on all issues including the question as to whether the sum of Rs.38,51,45,781 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of - California Software Co. Ltd., Vs. ACIT (2008) 118 TTJ (Chennai-Trib) it had been held in specific terms that the payment, by a software company registered as STPI in foreign currency as salary or travel expenses to technically qualified employees outside India does not form part of export turnover at all but because of specific provision of case such is rededucted from E.T. to do the netting in relation to foreign exchange inflow and outflow. Besides the above I observe the A.Y. involved here is 2003-04 Explanation 3 to S.10A was inserted by F.A. 2003 w.e.f. 01-04- 2004 i.e., A.Y. 2004-05which reads as under - "For the removal of doubts, it is hereby declared that the profits and gains derived from onsite development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India" 12. In other words, from the A.Y.2004-05, the onsite development of software outside India was brought into the net of E.T. by a deeming provision. In toto, actually such activity is not an export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India for the purpose of Sec.10A of the Act. 11. It can be seen from the order of the CIT(A) that he has taken a view that while completing the original proceedings u/s. 143(3) of the Act, the AO ought to have considered the profits from providing technical services as profits not derived from export of articles or things or computer software. The CIT(A), however, has not addressed the issue as to whether the AO, having failed to do so in the original assessment, can resort to proceedings u/s. 147 of the Act by merely changing his opinion, without any material coming to his possession and on the basis of the same record that was available when the proceedings u/s. 143(3) was completed by the AO. 12. Before us, the ld. counsel for the assessee reiterated the submissions as were made before the CIT(A). In particular our attention was drawn to Explanation-3 to section 10A of the Act, which was inserted by the Finance Act, 2003 w.e.f. 1.4.2004, in which it has been clarified that profits and gains derived from on site development of computer software (inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edings u/s. 147 of the Act. Assuming there was a failure on the part of the AO in this regard, the appropriate action can only be under section 263 of the Act. We may clarify that the observation as above may not be construed as any direction by us. The law is well settled that to assume jurisdiction u/s. 147 of the Act, there should be reason to believe that income chargeable to tax has escaped assessment. Such reason to believe cannot be on a mere change of opinion. This position is well settled by the decision of the Hon'ble Supreme Court in the case of CIT v. Kelvinator of India Ltd., 320 ITR 561 (SC). 15. In the present case, the AO has sought to initiate reassessment proceedings by merely changing his opinion without any tangible material that has come to his knowledge after the proceedings u/s. 143(3) of the Act. We therefore accept the contention on behalf of the assessee that initiation of reassessment proceedings is not valid. In view of the aforesaid conclusion, the order of reassessment is annulled. In view of the annulment of the order of reassessment, the other issues raised by the assessee in its grounds of appeal and the issues raised by the revenue in its appeal d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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