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TMI Blog2015 (4) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... f MAT u/s 115JB at Rs. 5,57,10,026. The AO completed the assessment on 31.03.2005 u/s 143(3) of the Act, determined total income at Rs. 11,15,41,640. The assessee company had claimed exemption u/s 10B amounting to Rs. 20,99,72,961. The assessee company had commenced production during financial year 1992-93 and received approval to start its operations in software development as a software technology park on 26.09.1991 with a letter No.17(4)/9/91-92- STA dated 26.09.1991 from the Department of Electronics, Software Division, Govt. of India. AO denied both the exemptions available u/s 10A and section 10B by holding that the assessee had started production before 01.04.1994 and also holding that the amended provisions of section 10B were not applicable in the case of the assessee. Following reasons were given for holding as above:- "Section 10-A is applicable to the assessees who are carrying on the business activity in Software Technology Park (STP). It is found that no specific approval has been obtained by the assessee company to be categorized as 100% EOU in terms of Explanation (i) to section 10B(7). Even otherwise, the assessee is not entitled to any deduction u/s 10A for carry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emptions in question, were available to it. However, it was admitted that vide order of ITAT Hyderabad in ITA No.51/HYD/2002 dated 31.05.2002 for A.Y 1998-99, the issue had been decided in favour of Revenue. Since the issues are essentially the same and the facts are identical, respectfully following the order of the ITAT and following the principle of stare decisions, CIT held that the aforementioned exemptions are not available to the assessee and order of AO on this issue does not need any interference and the issue was decided in favour of Revenue. 4. Aggrieved by the order of the CIT (A), assessee preferred an appeal in Ground No.2, assessee stated that the ld CIT (A) erred in deciding that the assessee is not entitled for relief u/s 10A or alternatively even u/s 10B of the I.T. Act, 1961. The ld Counsel for assessee submitted before us that the issue is pending before the Hon'ble jurisdictional High Court for adjudication. 5. The issue is covered against the assessee by the order of the ITAT for A.Y 1998-99 in ITA No.51/Hyd/2002. This issue is pending before the Hon'ble A.P. High Court and the ground has been raised by the assessee only to keep the matter alive. 6. Res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ground No.4 is as follows: "4. The ld CIT (A) erred in holding that the amount of Rs. 2,01,40,454 paid by the Appellant to M/s. Infotech Software Solutions Inc (ISSI) USA, the subsidiary of the Appellant is of the nature of technical service fee and is a taxable receipt in the hands of the said non resident company and as no tax was deducted at source u/s 195, the said expenditure is disallowable in terms of section 40(a)(i)". 12. It was submitted that the AO erred in disallowing the expenditure of Rs. 2,01,40,454 paid to the 100% subsidiary of the assessee i.e. InfoTech Software Solutions Inc (ISSI) USA by invoking provisions of 40(a)(i). This issue is covered by the decision of the Tribunal in assessee's own case for A.Ys 2006-07 and 2007-08 in ITA Nos. 115 & 2184/Hyd/2011. Rebutting the contention of the AO that there is a business connection between the assessee company and its foreign subsidiary in terms of Explanation 2 to section 9(1)(i) the Tribunal held as under: "36. With respect to IEAI USA, we find that factually the assessee has secured the orders from PRATT (PWC) for its own benefit and it only parceled out a portion of the work entrusted to it by PRATT & WHITNEY t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms of either section 9(1)(i) of the I.T. Act or the concerned Articles relating to business profits (Article 7 r.w. Article 5) in the respective DTAAs". 13. The Tribunal also considered the position, whether payment in question of Rs. 2,01,40,454 could be considered as fee for technical services received from the foreign subsidiary. It held that even if it were to be considered as fees for technical services, it would not be taxable in India as they are utilized for earning income from a source outside India. Section 9(1)(vii) to the extent relevant for our purpose read as under: (vii) income by way of fees for technical services payable by- (a) .... (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or c............. 14. The Tribunal held that the retrospective amendment brought in by way of Explanation to section 9(1) by Finance Act (No.2) 2010 w.e.f. 1.6.76 does not completely overrule the decision of the Apex Court in the case of "Ishikawajima Harima Heavy Industries Ltd vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the work and it sent its employees to do that job with Pratt & Whitney and received remuneration for it. The job involved on-site work by technical and professional experts of ISSI as a part and parcel of the overall contract of Pratt and Whitney with the Appellant for the development of specialized software. It is important to understand that the original contract was with the Appellant for the development and supply of very specialized software. A certain portion of this contract was subcontracted to ISSI in USA. Therefore, rather than send its own technical experts and employees to USA, the Appellant engaged ISSI to do that work". 19. Having given above findings and agreed that the assessee has given a sub contract, the CIT (A) turns around and holds that the assessee has rendered only technical purposes. In this context, The ld Counsel for the assessee further submitted as follows: "The assessee company has no quarrel with the above remarks of the CIT(A) except that it is not correct to say that only the employees of ISSI were deputed to Pratt & Whitney. Actually, some employees of the Assessee Company were taken off its rolls and were taken on to the rolls of ISSI and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 10A/10B was denied not on the ground that the assessee Company did not export software but on other technical grounds. So, the finding that the ISSI provided technical services in contra distinction to software development services is without basis. Actually, there is a clear distinction between these two activities and the distinction is evident from clauses (i) & (ii) of 80HHE itself. The reliance by the CIT(A) on the decision of the Chennai bench of the Tribunal in the case of Asst. CIT vs Evolv Clothing Co. Pvt. Ltd (142 ITO 0618) for the proposition that the ISSI provided technical services to the assessee Company is misplaced. In that decision, the provider of technical services had to undertake systematic research and the benefits of the research went directly to the recipient of the services. In the present case, ISSI did not undertake any research and, at any rate, the benefit of the research did not accrue to the assessee Company. The CIT(A) has not even considered the plea of the assessee that, even assuming that the amount of Rs. 2.01,40,454/- represents technical services fee paid to ISSI, it is not taxable in India in view of sub- clause (b) of clause (vii) of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It may add to the efficiency of operations. In the scenario of fast changing technology, the software gets outdated very fast. It has been held by the apex court in the case of Empire Jute co. Ltd vs CIT (124 ITR 0001), that enduring benefit is not the only criterion for judging whether an item of expenditure is on capital account or on revenue. The relevant portion of the head note reads as under; "(ii) there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an Appellant that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the Appellant's trading operations or enabling the management and conduct of Appellant's business to be carried on more efficiently or more profitability while leaving the fixed capital u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is dismissed. 27. The next ground is that the CIT(A) erred in holding that the expenditure/ incurred in foreign currency of Rs. 12,08,19,698/- is to be reduced from "export turnover" while granting the deduction under section 80HHE. The breakup of this expenditure is available at page 86 of the annual report for FY 2001-02 it is as under: Expenditure in Foreign Currency:- a) Travelling Rs.9,93,64,053 b) Subscriptions Rs.4,71,156 c) Professional services Rs.2,09,84,489 Total Rs.12,08,19,698 28. The ld Counsel submitted that the definition of export turnover as given in Clause C of the Explanation to 80HHE reads as under: (c) "export turnover" means the consideration in respect of computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section(2), but does not include freight, telecommunication Charges or insurance attributable to the delivery of the computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India". 29. It was further submitted that the above definition doesn't rope in expenditure on travel and subscr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Even otherwise also, the alternative contention of the assessee is not without substance. When any amount being in the nature of freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India are to be excluded from the export turnover, then the same is also required to be excluded from the total turnover for the purpose of computing deduction u/s. 10A of the Act. This view of ours gets support from the decision of Hon'ble Bombay High Court in the case of CIT Gem Plus India Ltd. (330 ITR 175 and Income-tax Appellate Tribunal Chennai Bench in case of Sak Soft Ltd. (30 SOT 55). Hence this ground is allowed for statistical purposes" 32. We have heard both the parties. We are of the opinion that the amount of Rs. 12,08,19,698 can be considered for exclusion, only if it represents expenses incurred in foreign currency while providing technical services. In the present case the assessee has not provided any technical services. Further, it is not charged to the customers and so not included in export turnover. The principle that what is not included cannot be excluded has been accepted by the ITAT in the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the assessee. The expenditure incurred is for development of Software.... Such expenses incurred cannot be said to be expenditure for technical services. If the technical services are rendered independently which are being agreed to be separately charged in addition to the price of the goods, in such circumstances, expenditure incurred could be in the nature of expenditure for the purpose of technical services...... Such expenditure is not in the nature of expenditure for technical services. Since the expenditure is not for technical services, there is no need to exclude these expenditures from consideration received in convertible foreign exchange for the purpose of calculating 'export turnover' as defined in cl. (iv) of Expln 2 to S. 10A". 37. It was also submitted that the amount of Rs. 92,60,349/- is a payment made by the Assessee which has not been charged to the customers. It is not included in the invoices raised by the appellant on the customers. It is separately debited to the Profit & Loss account. It is not included in the export turnover. What is not included in the export turnover cannot be reduced from it for working out the deduction under Section 10A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AY 2004-05 and these amounts were not added by the AO in the impugned order for this assessment year. It was pointed that the AO added these amounts in a re-opened assessment for this assessment year i.e., 2002-03 and this assessment was cancelled by the CIT(A) himself vide his order dated 16th August, 2013 for the AY 2002- 03 in ITA NO.0186/ACAIT 2(1)/CIT(A)-1I1/2007-08 on the ground that the reopening was invalid. It was argued that having, the cancelled the assessment and thus deleting the addition of these two amounts, the CIT(A) assumed jurisdiction to bring these two amounts to tax in this assessment year and thus exposed the assessee Company to double jeopardy. The ld Counsel submitted that the CIT(A) can only adjudicate upon additions made by the Assessing Officer and not make new additions and the CIT(A) has not even issued a notice to the assessee for enhancement and the CIT (A) has not given any direction to AO to add these amounts for the AY 2002-03 and the CIT (A) suo moto made these additions which is totally untenable in law. 44. The ld Counsel submitted that the principle whether a forfeited amount is a capital receipt or a revenue receipt was also considered b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Appellant to M/S Infotech Software Solutions InC (ISSI), USA, the subsidiary of the Appellant, is of the nature of technical service fee and is a taxable receipt in the hands of the said non-resident company and as no tax was deducted at source under section 195, the said expenditure is disallowable in terms of section 40(a)(i). 5. The Ld. CIT(A) erred in holding that the payment of Rs. 67,56,552/-paid by the Appellant mainly to GE Network Solutions, Netherlands, and, to a small extent, to IBM Inc.USA, is under Section 40(a)(i) of the Income tax Act on the ground that this amount represented taxable incomes of the non-residents and, no tax was deducted at source on this amount in terms of section 195 of the Act. 6. The Ld.ClT(A) erred in holding that the amount of Rs. 48,25,974/- claimed under section 35(2AB) as weighted deduction cannot be allowed on the ground that there is no requisite approval from the prescribed authority. 7. The Ld. CIT(A) erred in holding that the communication expenses of Rs. 92,60,349/- are excludible from "export turnover" for granting the deduction under section 80HHE. 8. The Ld. CIT (A) erred in holding that the amount of Rs. 1,46,34,OOO/- rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e CIT(A) erred in holding that the amount of Rs. 2,79,081/- received on account of on-site software services is not part of the business profits. The Assessing Officer excluded this amount with the following remarks; "On verification of the details of export of computer software services, it is observed that the assessee has shown onsite consultancy services of Rs. 2,79,081/- pertaining to Unit-I, Hyderabad and claimed deduction U/s.80HHE on the same. However, as per the provisions of clauses (b) of Explanation to Sec 80HHE of the LT Act, the services rendered that qualifies for exemption as notified by the CBDT vide notification No.11521 dated 26.09.2000 has not specified the consultancy services for the definition of 'Computer Software' for the purposes of Sec 80HHE. Hence, the consultancy services mentioned above does not qualify for exemption/deduction under Sec 80HHE. Accordingly, the same is excluded from the profits of the business while computing the deductions". 5. The ld Counsel submitted that the services provided by the appellant are in the nature of item (v) and (vi) of the above notification which read as under; (v) Engineering and Design; (vi) Geographic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r purchased Software called "Small World software" from the Dutch company and bundled with its own software and thus customized it and sold it to its own customers both in India and abroad. As the payment is made to a nonresident company, the Assessing officer held that the payment represented, not the purchase price of the software but, actually, royalty payment to the Dutch company. He also noticed that no tax was deducted at source on the said royalty payment u/s 195 of the Income tax act, and invoked the provisions of 40(a)(i) and accordingly disallowed the expenditure on the alleged royalty payment. 13. This issue is covered in favour of the assessee by the order of the Tribunal in assessee's own case for the A.Y's 2006-07 & 2007 -08 in ITANo.115/Hyd/2011 in which it has been held as under: "26. Now we address the issue of characterization of these payments as Royalty so as to fall under Section 9(1)(vi) or Article 12 of India- Netherlands DTAA. We find that the assessee has purchased the Small World Software from Netherlands and bundled it with its own software and thus customized it and sold it to its own customers both in India and abroad. The assessee cannot meddle w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he concerned Dept; the disallowance in question is deleted. In the result, this ground of the assessee is allowed. 17. In Ground No. 7, assessee submitted that the CIT(A) erred in holding that the communication expenses of Rs. 92,60,349/- are excludible from "export turnover" for granting the deduction under section 80HHE. It was submitted by the ld Counsel, that this ground has been raised mistakenly, as there is no such addition for this year. Hence, this ground is not pressed and treated as dismissed. 18. Ground No.8 is that the CIT(A) erred in making an addition of Rs. 1,46,34,0001- being the upfront amount paid by Carrier International Mauritius Ltd., in an earlier year by way of subscription to the share warrants of the assessee Company and forfeited during this year. He made the disallowances with the following remarks: "In normal course when a company approaches the public through issue of prospectus for subscription of the amount towards it share capital, the public at large are the contributors but not a specified person. In the instant case it is not a public issue. It is only an offer to one specific company by name Carrier International Mauritius Ltd (CIML) (A group ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eited during financial year 2001-02 will be considered in the appeal order for A.Y 2002-03". This amount refers to Rs. 34,65,000 forfeited from M/s. Callaghan Partners Corp. i) The CIT(A) has assumed powers he does not have by the above unwarranted remark and has artificially extended the time bar limit to consider the above amounts of Rs. 34,65,000 and Rs. 17,50,000 for A.Y 2002-03. 5. The ld CIT (A) ought to have realized that the above two amounts were already brought to tax by the AO in a reopened assessment and the ld CIT (A) has himself cancelled the assessment and that, by virtue of the above remark, he is putting the appellant to double jeopardy". 2. The assessee filed its return of income for A.Y 2004-05 on 1.11.2004 declaring total income of Rs. 10,68,00,650. AO completed the assessment on 30.08.2011 u/s 143(3) r.w.s. 147 of the Act, determined total income at Rs. 20,35,21,590. Aggrieved, assessee filed appeal before the CIT (A). 3. The ld CIT (A) held as under: "4.4 I have seen carefully the facts and evidence. I have also gone through the paper book where the appellant has attached most of the documents which were submitted before the AO. I find that vide letter dt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal is partly allowed". 4. We heard both the parties. The amount of Rs. 17,50,000 and Rs. 34,65,000 were brought to tax in the reopened assessment for the AY 2002-03 and CIT (A) cancelled the assessment on the ground that it was invalid. Hence these amounts cannot be brought to tax for the same AY once again putting the assessee to double jeopardy. Hence these grounds of appeal (i.e Ground Nos. 1 to 5 ) of the assessee are allowed. ITA No.1453/Hyd/2013 - AY 2005-06 1. Ground No.1 is general in nature. 2. Ground No.2 is that the ld CIT (A) erred in holding that the amount of Rs. 60,09,040 paid to M/s G.E.Network Solutions, Netherlands is disallowable u/s 40(a)(i) of the I.T. Act. 3. We find that this issue is covered by order in assessee's own case for AY 2004-05. In Ground No.5 for AY 2004-05, we have decided this issue at Para Nos.17 & 18,which reads as under: 17. This issue is covered in favour of the assessee by the order of the Tribunal in assessee's own case for the A.Y's 2006-07 & 2007 -08 in ITANo.115/Hyd/2011 in which it has been held as under: "26. Now we address the issue of characterization of these payments as Royalty so as to fall under Section 9(1)(vi) or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 2006-07 and 2007-08 in ITA Nos. 115 & 2184/Hyd/2011. This ground is similar to that of Ground No.4 for AY 2002-03 wherein we have adjudicated our conclusions at Para 21 and the same conclusion shall be drawn in the appeal for this year also. This ground is allowed. 6. Ground No.4: The ld CIT (A) erred in holding that the software link service charges amounting to Rs. 57,78,044 is excludible for the purpose of computation of export turnover defined under clause 4 of Explanation 2 u/s 10A of the I.T. Act. 7. We find that this ground is similar to Ground No.7 for AY 2002-03 in assessee's own case. We have decided the issue at Para Nos. 39 & 40 and the same conclusions may be followed in this year also. This ground is allowed. 8. In the result assessee's appeal in ITA No.1453/Hyd/2013 is allowed. ITA No.1455/Hyd/2013 - A.Y 2002-03 Revenue's Appeal 1. Grounds raised by the Revenue read as under: "1.The CIT (A) erred on facts in law in holding that the re assessment is invalid though there was clear incorrect claim on the part of the assessee to disclose amount received on forfeiture of share warrants as income. 2. The CIT (A) erred on facts and in law in holding that the re-ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bad in law. 3. We have gone through the records and are of the opinion that all the material facts were disclosed by the assessee and it was merely a change of opinion on the part of the AO for reopening the assessment u/s 147. Following the ratios of the decision in the case of CIT vs. Kelivinator India (256 ITR 1), we dismiss the Revenue's appeal. 4. Hence, in our opinion, the reopening of the assessment itself is bad in law, therefore, the reopened proceedings are held ab initio void. Hence the Revenue's appeal is dismissed. ITA No.1456/Hyd/2013 - A.Y 2005-06 Revenue's Appeal 1. Before the ld CIT (A), the 6th ground of appeal related to the exclusion of communication charges in the form of software link service charges amounting to Rs. 57,78,044 from the export turnover for the purposes of exemption u/s 10A of the Income Tax Act. The CIT (A) held as follows: "9.1 In the case of Patni Telecom Pvt. Ltd vs. ITO (2008) 22 SOT 26 (Hyd-Trib.), the Hon'ble ITAT Hyderabad has held that telecommunication charges are to be reduced both from the export turnover as well as from the total turnover. The Hon'ble ITAT has stated that with respect to communication and foreign trave ..... 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