9911796707
TMI Blog2016 (5) TMI 1014X X X X Extracts X X X X X X X X Extracts X X X X ..... igible business, export turnover and total turnover; therefore, principally accepting the claim of the assessee, we send this issue back to the file of the AO to find out whether these amounts have been correctly computed by the assessee. Thus, for the limited purpose of verification of these facts, this issue is sent back to the file of the AO for which adequate opportunity of hearing shall be provided to the assessee. The assessee is free to raise all legal and factual issues before the AO. The AO shall pass the order afresh after taking into account all the details and evidences as may be brought on record by the assessee. License paid for Logistics Tracking Software (LTS) - revenue v/s capital expenses - Held that:- In view of these findings of Ld. CIT(A) as well as submissions of both the sides, we find that there is nothing wrong in the findings of Ld. CIT(A) and the impugned expenses have been rightly held to be revenue expenditure in the hands of the assessee company. Disallowance on account of deferred revenue expenditure - Held that:- The treatment of these expenses under the income tax law cannot be decided merely on the basis of manner of recording by the assessee in it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thorised Representative (AR) on behalf of the Assessee and Shri Jasbir Chauhan, Departmental Representative (DR) on behalf of the Revenue. First we shall take up assessee's appeal in ITA No.5161/Mum/2001 for A.Y. 1998-99: The assessee has filed this appeal on the following grounds: "On the facts and circumstances of the case, the Ld. CIT(A) has erred in upholding the Assessing Officer's view that deduction u/s 80HHE is not allowable on the basis of separate books of account maintained by the Appellant for Software Export Division. The deduction under section 80HHE therefore merits to be allowed as claimed by the assessee." 3. The solitary issue raised in its appeal by the assessee is with regard to allowing the deduction claimed by the assessee u/s 80HHE of the Act at ₹ 26,74,856/- instead of ₹ 6,65,03,172/- as was claimed by the assessee in the return of income. It was noted by AO that the assessee had exported income from many business units and one of the unit was engaged in the business of export of software. The assessee maintained separate books of accounts for the unit engaged in the export of software and accordingly claimed deduction on the amount of prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the Sub-Section shall be the amount which bears to the profits of the business, the same proportion as the export turnover bears to the total turnover of the business carried on the assessee." The provisions do not mention the maintenance of different books of accounts for different divisions. The Section envisages the carriage of business, which could be of local sales and exports. The Section underlines the indivisibility of business and does not talk of the division of separate divisions as two businesses. In view of the specified, provisions, the concept of the maintenance of separate books of accounts cannot be imported for the purpose of deduction under Section 80HHE of the Income-tax Act. The appellant has relied on certain Tribunal decisions. But these decisions are all regarding the interpretation of Section 80HHC of the Income-tax Act and are not in respect of the provisions of Section 80HHE of the Income-tax Act. Though the two Sections are similar and relate to exports but there is a difference in the two Sections. The assessing officer has therefore correctly held that the decisions of the ITAT under Section 80HHC cannot be applied for Section 80HHE. Consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e article 'the', it seems to us that the expression 'prof its of the business' appearing in sub-section (3) refers only to the profits of the eligible business which is referred to in sub-section (1). In other words, it is only the profits of the business of back office support services which have to be split in the same proportion as the export turnover in the said business bears to the total turnover in the said business. Explanation (d), which defines the expression "profits of the business" refers to the profits of the business as computed under the head Profits and gains of business". Under the Income Tax Act, having regard to the provisions of Chapter IV read with section 70 and section 71, it seems to us that in the case of an assessee carrying on more than one business, each business is considered as a separate source falling under the head "Prof its and gains of business" The net result of the computation in respect of any source of business, if it is a loss, can be adjusted against the income from any other business as provided in section 70(1). Therefore, when Explanation (d) provides that the expression "profits of the business" me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clusive of each other. 36. As rightly contended by the learned counsel, section 80HHC speaks of deduction in respect of profits derived by the assessee from export of such goods or merchandise: whereas section 80HHE speaks of such business. Such business' only could mean the business of export of computer software. The scope of consideration has been narrowed down. In other words, whether the assessee derives income from any other business or not, is not a cri teria and i t is whol ly extraneous whi le granting deduction under section 80HHE, which is exclusively for computing deduction in respect of prof i t f rom export of computer sof twar e e tc . For the reasons s tated hereinabove, we al low the claim of the assessee on this ground." In coming to the above conclusion the Tribunal has referred to two judgments of the Madras High Court, in the case of CIT vs. Rathore Brothers (2002) 254 ITR 656 (Mad) and in the case of CIT vs. Madras Motors/M M Forgings Ltd. (2002) 257 ITR 60 (Mad). These two judgments were concerned with section 80HHC of the Act. However, there was similarity between section 80HHC and section 80HHE in the sense that while working out the eligible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision in a manner consistent with the intent of according the benefit there-under only to the profits from the specified, qualifying activity. Accordingly, it is only the profits of the assessee's computer software business, christened as 'the eligible business', that would stand to be apportioned u/s.80-HHE(3). As a natural corollary, it is only the total turnover of such eligible business that would stand to be taken in the denominator figure, with the export turnover having been already defined to be the qualifying export turnover of such business only. The assessee's manner of computation of deduction u/s. 80-HHE, thus, merits approval. We may before parting with the order, also clarify that in arriving at the said decision, we have duly perused and considered all the decisions cited by both the parties, even as a specific reference to some of them may not have found place in our discussion, finding it as being covered by the ratio of other decisions, or as being not directly on the point. No inference as to our having not considered those decisions, thus, may be drawn. We decide accordingly." 3.6. We have gone through the aforesaid judgments and facts of this case, and respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of ₹ 3,76,553/- made on account of miscellaneous and other expenses holding the same as non-business expenses. 5.On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in directing the A.O. not to delete 90% of lease and service charges for calculating the profits of the business in accordance with clause (d) of the explanation to section 80HHE of the I.T. Act 6. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the A.O. not to exclude the miscellaneous income from the business profits and not to include the same in the total turnover of the assessee. The Ld. CIT(A) has further erred directing the A.O. to exclude the dividend income from the- total turnover of the business." In addition to the above, the revenue has filed following additional grounds: i) "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not considering the finding of the Assessing Officer with regard to provisions of section 163 of the I.T. Act wherein the assessee was treated as an "agent" of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pressed. Therefore, the same is dismissed. 9. Ground Nos.1 (of the main Grounds) and Ground nos. (ii), (iii) & (iv) of the Additional grounds: These grounds address the common issue of correct treatment of amount of ₹ 15,92,74,120/-, being the license paid for Logistics Tracking Software (LTS) which was disallowed by the AO by treating the same as capital expenses. 9.1. During the year under consideration, the assessee company was mainly engaged in the business of trading and distribution of telecom equipments. In the assessment order, the AO made disallowance of ₹ 15,92,74,120/-, being the amount of license fee paid for acquiring Logistics Tracking Software (LTS). The facts as noted by the lower authorities with respect to the said disallowance are that the assessee had claimed these expenses as part of its deduction from its total income. During the year under consideration, the assessee had entered into an agreement with M/s GElS International Inc, a U.S. company. According to the agreement, the assessee was a licensee of certain software relating to the logistics tracking of cargo. The U.S. Company had granted the licence to the assessee for a consideration of 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 720 (Bom) c) C.I.T. v Gilbert & Barker Mfg. Co. 111 ITR 529 (Bom) d) Rolls Royce Ltd. V. Jetfrey, 56 ITR 580 (House of Lords) e) C.I.T. v. Ahmedabad Mfg. & Calico Printing Co. 139 ITR 896 (Gujarat) f) C.I.T. v Ralliwolf Ltd. 143 ITR 720 (Bom) g) N.V.Phillips v C.I.T. 172 ITR 520 (Cal) & h) C.I.T. v Davy Ashmore India Ltd. 190 ITR 626. 9.3. The assessing officer also relied on the ratio laid down in the case of Peerless Consultancy Pvt. Ltd. 164 CTR 194 (SC), wherein it was held that processing of data amounts to processing of goods and is manufacturing activity and therefore the assessee was an industrial company. The assessing officer also relied on the decision of the I.T.A.T., Mumbai in the case of Tangerine Exports 49 ITD 386 wherein it was held that the sale of software was hit by the Sale of Goods Act. The assessing officer held that 1/6th of the amount paid by the assessee was allowable but as such a claim had not been made by the assessee, the claim cannot be allowed. The assessing officer further found that in the agreement there was no provision in the agreement for referring the source code to the U.S. Company. The agreement was for perpetuity as no time limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware was held to be a revenue expenditure as it was likely to become obsolete very fast. The software acquired by the assessee was downloaded from the internet. The assessing officer held that the main purpose of acquiring the program was to incorporate it into its existing Goba1 Net Services. The assessing officer further held that the amount payable was royalty as defined in Section 9(1)(vi) of the Income-tax Act. He also held that as no tax was deducted under Section 195 of the Income-tax Act, in view of Section 40(a)(i) of the Income Tax Act, the amount cannot be allowed as a deduction. 9.4. Being aggrieved, the assessee filed the appeal before the Ld. CIT(A) wherein detailed submissions were made, challenging that impugned expenses were revenue in nature and that the same did not fall within the definition of royalty u/s 9(1)(vi) of the Act and no tax was required to be deducted at source on the said payment. The Ld. CIT(A) partly accepted the submissions of the assessee and deleting the addition he allowed the appeal. Being aggrieved, the revenue has filed an appeal wherein it has taken ground no.1 as part of main grounds and three more additional grounds. First we take gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se some machinery was purchased which was utilized for increasing the efficiency of production. The Supreme Court held that as new product was manufactured the expenditure laid out had to be treated as revenue expenditure. Therefore, considering these two landmark judgments of the Supreme Court are has to be held that the expenditure incurred for the purchase of software is revenue expenditure in the hands of the appellant." 10.2. It is noted by us that Ld. CIT(A) has carefully analysed the facts of this case and applied the judgments of the Supreme Court correctly. Thus, in view of these findings of Ld. CIT(A) as well as submissions of both the sides, we find that there is nothing wrong in the findings of Ld. CIT(A) and the impugned expenses have been rightly held to be revenue expenditure in the hands of the assessee company. Thus, order of the Ld. CIT(A) to this extent on this issue is upheld and ground no.1 (of the main grounds) is dismissed. Now we take up Additional Grounds Nos. (ii), (iii) and (iv) of the Revenue: 11. In these grounds the revenue has contended that the impugned expenditure was in the nature of royalty as defined in section 9(1)(vi) as well as Article 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is owner qua Indian Territory. 11.3. Lastly, the Ld. Counsel has made a claim to take the benefit of non-discrimination clause of Indo US Treaty. Our attention has been drawn on para 3 of Article 26 of the Treaty. It is submitted that with respect to the resident assessees, an amendment was brought u/s 194J w.e.f. 01.07.2006 for creating obligation to deduct tax at source on the amount of royalty. Thus, prior to the said date, a resident in India was not liable to deduct tax at source on the amount of royalty paid by it. Under these circumstances, no discrimination should be done with the non-resident assessee's by creating obligation to deduct tax at source on the amount of royalty, in view of specific provisions of para 3 of Article 26 of the Treaty, and for this purpose reliance has been placed on the judgment of the Delhi Bench of ITAT reported in Herbal Life International India (P) Ltd. vs ACIT 101 ITD 450 and Millennium Infocom Technologies Ltd. Vs. ACIT 117 TTJ 456 (Del.). Further reliance was placed on various judgments wherein it was held that similar kind of payments did not fall within the definition of royalty in the year under consideration and in any cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tered Accountants of India. But in the income tax return, the assessee claimed the expenses in its entirety. It was argued before the assessing officer that the expenses were allowable under Section 37 and should be allowed. The assessing officer relied on the decision in the case of Madras Industrial Investment Co. Ltd. 25 ITR 802 (SC). In that case the company had issued debentures at a discount for a period of 12 years and the entire discount was claimed as a deduction in one year. The Supreme Court held that such a claim gives a distorted picture and therefore the discount which was nothing but interest was to be spread over a number of years. According to the assessing officer claiming the entire expenditure in one year would give a distorted picture and therefore in view of the ratio laid down in the case of Madras Industrial Investment Co. Ltd. (supra) the expenditure was allowable on a deferred revenue basis. He therefore disallowed the entire claim of ₹ 3,79,64,689/-. 13.2. Being aggrieved, the assessee filed an appeal before the Ld. CIT(A) wherein detailed submissions were made and it was contended that in fact these expenses were purely revenue in nature expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laimed the same as deferred revenue expenditure. We find that there is no concept of deferred revenue expenditure under the income tax Act except under specific sections i.e. where amortization is specifically provided e.g. u/s 35D of the Act. It has not been disputed that these expenses were incurred during the year under consideration and pertain to the same year and these have been incurred for the purpose of business of the assessee. Under these circumstances we find no reason to disallow these expenses. Our view finds support from the judgment of Hon'ble Supreme Court in the case of Taparia Tools Ltd. (supra) as well as various other judgments which have been referred to by the Ld. CIT(A) in its order. For the sake of ready reference, relevant portion of the order of the Ld. CIT(A) is reproduced below: "The appellant claimed the entire expenses relying on the ratio laid down in the case of Kedrnath Jute Manufacturing Co. Ltd. 82 ITP 363 (SC), Hindustan Commercial Bank 21 ITR 353 (All), HIMT Ltd. 203 ITR 820 (Kar), India Cements Ltd. 60 ITR 52 (SC), Empire Jute Co.Ltd. 124 ITR 1. It was argued that the ratio laid down in the case of Madras Industrial Investments Co. (supra) wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal had held that the established principles of accountancy is that interest on borrowed funds was required to be capitalised to the cost of the assets which were purchased out of the borrowed funds. The assessing officer held that the assessee cannot take two different stands in its books of accounts and in its return of income. In his opinion, the entries in the books of accounts are binding on the assessee. In his view the assessee could have claimed the interest as a deduction if it could prove that the entries in the books of accounts were against the normal legal position. The assessing officer also relied on Section 43(1) of the income-tax Act wherein it has been mentioned that the interest paid on borrowing has to be added to the cost of the assets if the purchase of the assets are from the borrowed funds. In his view, there was no basis to hold that the provisions of Section 36(1)(iii) overrule the provisions of Section 43(1) of the Income-tax Act. He therefore did not accept the claim of the assessee for the deduction of interest. 14.2. Being aggrieved, the assessee filed appeal before the Ld. CIT(A), wherein detailed submissions were made. It was submitted that the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided that the capital is used for business purpose irrespective of what may be the result of using the capital which the assessee has borrowed. "Actual cost" of an asset has no relevancy in relation to section 36(1)(iii). The proviso inserted in section 36(1)(iii) by the Finance Act, 2003, with effect from April 1, 2004, will operate prospectively. Held accordingly, that the assessee was entitled to deduction under section 36(1)(iii) prior to its amendment by the Finance Act, 2003, in relation to money borrowed for purchase of machinery even thou h the assessee had not used the machinery in the year of borrowing." 14.5. It is further noted by us that Ld. CIT(A) has also decided this issue after carefully examining the facts of the case. Relevant portion of his order is reproduced below: "I have considered the facts of the case. In the case of Tata Chemicals Ltd. 72 lTD 1, this very issue came up before the I.T.A.T., Mumbai. Tata Chemicals Ltd. had an existing unit at Gujarat. It had borrowed funds for the purpose of setting up another unit at Babrala. The question arises as to whether the interest on the borrowings for the new unit could be allowed against the inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these grounds back to the file of the AO who shall readjudicate these issues after deciding the grounds raised by the assessee in its appeal. Accordingly, this may be treated as partly allowed for statistical purposes. 17. As a result appeal of revenue is partly allowed. Now we shall take up appeal filed by the Revenue for A.Y. 1998-99 in ITA No.193 & 194/Mum/2003. The revenue has filed appeal on the following grounds: On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in- 1.deleting the addition made by the Assessing Officer in view of the findings given in the appeal u/s. 163 order dated 22.102002; and 2.holding that the license fee received by GEIS is a business income because it is a transfer of copy righted article rather than the copy right itself as against the view of the Assessing Officer that the amount is taxable in India as 'royalty' under Article 12 of the DTAA between India and USA." 18. In this case, the addition was made in the hands of the assessee on account of payment made for acquiring software from M/s GEIS, USA by treating the assessee as agent of GEIS u/s 163 of the Act. 18.1. It is noted that grounds with reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r which separate books of accounts are maintained, and therefore deduction U/s 80HHE was correctly claimed by the appellant on the basis of profits of the software export division. 2.On the facts and circumstances of the case and in law, the Ld. CIT (A) has erred in ignoring that section 80HHE allows deduction specifically for export of computer software, and hence appellant is eligible for deduction on the basis of appellant's software export division. 3. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in ignoring that provisions of Section 80HHE are incentive provisions, and should be construed liberally. 4. On the facts and circumstances of the case and in law, the CIT (A) has erred in confirming the inclusion of lease and service charges of ₹ 26,02,93,865/- in the total turnover for the purpose of deduction under section 80HHE of the Act. 5. On the facts and circumstances of the case and in law, the CIT (A) has erred in excluding following items of miscellaneous income from business profit while computing deduction U/s 80HHE of the Act:- a. Sale of papers/cartons/scrap ₹ 9,245/- b. Waiver of hire purchase liability on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total turnover of the assessee." The appellant prays that the order of the CIT (A) on the above grounds be set aside. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary. 22. Ground No. 1: This ground deals with the issue of deferred revenue expenditure. This issue has already been decided in favour of the assessee in Ground no.2 of appeal of the revenue for A.Y. 1998-99 vide our order in ITA No.5018/Mum/2001, therefore, following our order we dismiss the ground of revenue. 23. Ground No.2: This ground pertain to allowing the deduction of interest which is similar to ground no.3 of assessment year 1998-99. Thus, following our order we dismiss the ground of revenue. 24. Ground Nos. 3 & 4: These grounds pertain to computation to deduction u/s 80HHE. These are similar to ground nos. 5 & 6 of Revenue's appeal for A.Y. 1998-99, wherein these have been sent back to the file of the AO, therefore, following our order we send these grounds back to the file of the AO with similar directions as were given for A.Y. 1998-99. 25. In the result, this appeal may be treated as partly allowed. Order pronounced in the open court on 20th Apr ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
