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TMI Blog2018 (1) TMI 709X X X X Extracts X X X X X X X X Extracts X X X X ..... veloper) or a collaborator for the Cornelius or its group and it has undertaken the services required by them for which the assesse was compensated and hence it’s business can be considered as a Research Collaborator “ rendering technical services” which is not within the scope of s. 10B . The Cornelius or its group own the entire property including the assessee’s output or it’s so called product etc as defined in the “Foreground Information, IPR” etc under clause 1.1. Thus, the assessee owns nothing which could be exported. When the assessee has not established that its output is an independent product or article or thing or computer software, it is owner of it, it has exported them and earned the impugned income, the questions whether it manufactured or produced articles or things or computer software, whether it exported them etc as required u/s10B is nowhere in the realm and hence its claim of deduction u/s 10B is not allowable - Decided against assessee. - ITA Nos.1810 And 1811/Bang/2017 - - - Dated:- 14-12-2017 - SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER For The Assessee : Shri. Tata Krishnan, CA For The Revenue : Shri. M. Rajasekhar, Addl. CIT ORDER ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer having no reason to believe that the income has escaped assessment: 3.1. The Learned CIT(A) is not justified in upholding the re-assessment on the basis of reasons which failed the test of 'reason to believe'. 3.2. The Learned CIT(A) has failed to appreciate that the Learned Assessing officer had recorded the nature of activity of the Appellant based on which the claim under section 10B was allowed in the assessment under section 143(3) of the Act. Such being the case the Learned CIT(A) is not justified in perversely stating that the nature of business activity was not brought on record during the proceedings under section 143(3) and in sustaining re-assessment on the basis of very same nature of activity which clearly amounted to change of opinion. 3.3. The Learned CIT(A) is not justified in upholding issue of notice under Section 148 when the reasons recorded are based on the findings and borrowed satisfaction of the Learned Addl. CIT given under Section 144A of the Act for the assessment year 200910. 4. The Learned Commissioner (Appeals) is not justified in upholding the action of the Learned Assessing Officer in disallowing the deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Notification No. SO 890(E) dated 26.09.2000. 4.7. Without prejudice to the above, the Learned CIT(A) is not justified in failing to appreciate that the activities carried out by of the Appellant would fall within the ambit of clause (a) of item (i) of Explanation 2 to Section 10B of the IT Act, i.e., any computer programme recorded on any disc, tape, perforated media or other information storage device , by virtue of the extended meaning of 'computer programme' provided under Section 10BB and therefore includes the processing and management of electronic data so as to qualify to be regarded as an eligible activity for the purpose of Section 10B. The final output produced by the Appellant is in an electronic format using IT enabled devices which is capable of causing a computer to perform a particular task or achieve a particular result. 4.8. Without prejudice to the above, the Learned CIT(A) is not justified in failing to appreciate that the activities of engineering and design of the Appellant are regarded as IT enabled services by NASSCOM in its publication titled as the IT Industry in India (Strategic Review 2002) and CII-KPMG study of IT enabled service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tention with regard to ground No. 2 through which he assailed the validity of the reopening of the assessment. It was further contended that the assessment for impugned assessment year 2006-07 was reopened after 4 years without making out the case that income has escaped assessment on account of failure on the part of the assessee to disclose the material relevant for the assessment. Therefore, reopening is bad. In support of his contention he has placed reliance upon the order of the Tribunal in the case of M/s. DHFL Vysya Housing Finance Ltd., Vs. Assistant Commissioner of Income Tax in ITA No.1416/Bang/2010 of this Tribunal in which the Tribunal, after following the various judicial pronouncements included judgments of various High Courts and Apex Court has held that if the assessment is reopened after 4 years without pointing out that income has escaped assessment on account of failure on the part of the assessee, the reopening is bad in law, therefore, the assessment framed consequent thereto deserves to be quashed. The learned DR on the other hand has contended that since the assessee has joined the assessment proceedings, the reopening of the assessment cannot be held to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the NIL income declared. Subsequently, in the course of assessment proceedings for the A.Y.2009-10 in the case of the assessee itself the case selected for directions U/s 144A. In the course of 144A proceedings the Addl. CIT had brought on records lots of information about business activity of the assessee and also a statement of one of the Directors Sri. Nishant Kulkarrni was recorded. The information brought on record subsequent to completion of the assessment for A.Y.2006-07 reveal that the business activity of the assessee was in fact research and development in the field of refrigeration engineering, mechanical engineering or electrical engineering and it had not carried out any export of computer software nor carried out any notified ITES. Hence, the assessee company is not eligible for deduction U/s 10B and the same is wrongly allowed in the order U/s 143(3). Hence, I have reason to believe that the income of the assessee company chargeable to tax for the assessment year 2006-07 has escaped assessment within the meaning of section 147 of the I.T. Act. 5. My attention was also invited to the order of the Tribunal in the case of M/s. DHFL Vysya Housing Finance Ltd., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome, the assessee has not discharged its responsibility of furnishing full disclosure of facts. As set out above, the note clearly sets out the interest income earned by the STP unit and the claim of the assessee for exemption under Section 10A. It is not the requirement of law that further the assessee should show the nexus between the amount claimed and 10A unit. When he has categorically stated that the interest, which is earned from STP unit, is eligible for exemption under Section 10A, even that ITA No. 1416/Bang/2010 nexus is manifest. The Assessing Authority has not properly applied his mind towards the statutory provisions and has not taken into consideration that the original assessment passed under Section 143(3) which was also reopened once and adjustment was made. It is for the second time, he was raising all these objections. When admittedly the second reopening of the assessment is beyond four years, under law, it is barred by time and the findings recorded by the Tribunal is legal and valid and does not suffer from any legal infirmity. In that view of the matter, no substantial question of law arises for consideration in these appeals. Accordingly, the appeals are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that for A.Y. 1996-97, an assessment u/s. 143(3) had already been made in the case of the assessee by an order of assessment dated 31.03.1998. Admittedly notice u/s. 148 of the Act was issued on 17.03.2003 which is beyond the period of four years from the end of the relevant assessment year (1996-97). The proviso to section 147 was therefore clearly attracted. It is clear from the decision of the Hon'ble Bombay High Court as well as the Hon'ble Karnataka High Court, referred to by the ld. counsel for the assessee before us, that there should be a specific averment in the reasons recorded that escapement of income chargeable to tax was by ITA No. 1416/Bang/2010 reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that assessment year. Such an allegation is admittedly absent in the reasons recorded. The ld. CIT(A) has in his order has attempted to give different reasons for resorting to reassessment proceedings. The law is well settled that validity of initiation of reassessment proceedings have to be judged on the basis of reasons recorded by the AO and it is not possible to substitute, delete or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) having recorded that the Appellant is engaged in the work of engineering and development involving research and development as per the specifications provided by the clients is not justified in rejecting the claim under section 10B on the premise that the said activity does not involve manufacture/ production of computer software or providing any IT enabled services. 2.4. The Learned CIT(A) is not justified in failing to consider Board Circular No. 1/2013, dated 17.01.2013 wherein it is clarified that the 'Engineering and Design' has the in-built elements of Research and Development and that any Research and Development activity embedded in the 'Engineering and Design, would also be covered under the said Notification No. 50 890(E) for the purpose of Explanation 2 to Section 10B. 2.5. The Learned CIT(A) is not justified in perversely and contrary to records, stating that the director of the company has confirmed in the statement recorded on 1.8.2011 that the appellant's activity could not be held to be in the nature of manufacturing computer software or providing any IT enabled services 2.6. Without prejudice to the above, the Learned CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered by the Appellant to its customers contribute to the customers' productivity/ business activities and hence support the business activities of its customers, thereby qualifying as a 'Support Centre' or 'Back Office Operations' or data processing services within the meaning of Notification No. SO 890 (E) dated 26 September 2000 for the purpose of Section 10B of the Act. 2.10. Without prejudice to the above, the Learned CIT(A) has erred in holding that the Appellant is not engaged in the manufacture or production of any article or thing. The Learned Commissioner (Appeals) has failed to appreciate that the result of the activities carried out by the Appellant are captured in CAD and other software platforms in the form of drawings and reports, bring into existence a distinct 'article or thing' so as to be entitled to deduction under Section 10B as the export of computer software . 2.11.The Learned CIT(A) is not justified in failing to consider the acknowledgement issued by the Development Commissioner, Cochin, SEZ to the effect that the Appellant exported computer software. 2.12. The Learned CIT(A) is not justified in failing to appre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing areas: Beverage dispensing Pneumatics actuators Valves controls Display Systems For which, the input came in the form of specification document, the assessee might have carried out the testing, validation etc and gave its output ie summarized report with recommendations. For which, it was paid service charges in billable hours. On the facts and circumstances and from the above evidences, it is clear that at best the nature of the assessee s business can be considered as a Research Collaborator rendering technical services which is not within the scope of S.10B. When the assessee has not established that its output is an independent product, it is owner of it, it has exported them and earned the impugned income, the question whether it manufactured or produced articles or things or computer software etc in accordance with the requirement of S10B is nowhere in the realm and hence its claim of deduction 10B is not allowable. 08. The assessee s claim can be examined from another angle also. The assessee has furnished a copy of development agreement dt 08.12.2005. The relevant portion is extracted as under : THIS AGREEMENT is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cope of the Project and all specific details in relation to the Project including but not limited to project specification, work programme, development fees. Project Term the period from the Commencement Date down to the completion date of a Project set out in the Project Proposal under Schedule 1 Technology Protocol the terms relating to the protection of Foreground Information set out at Schedule 2; Third Parties any person whether incorporated or not or other recognised legal entity other than the parties including without limitation consultants, suppliers, self-employed researchers and other academics or academic organisations; 2 . DEVELOPER'S OBLIGATIONS The Developer shall: 2.1 Undertake the Project(s) as identified by Cornelius and meet the Milestones, Such detail of Project(s) shall be contained in the Project Proposal under schedule 1; 3 . TERM 3.1 Subject to the provisions for earlier termination set out herein this Agreement, this Agreement shall remain in force until the parties mutually agree to terminate it. 4. CO-ORDINATION AND REPORTING 4.1 The work under a Project shall be carried out throughout ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g into existence and full details of such Foreground Information including without limitation supporting documentation information and results shall be disclosed promptly to Cornelius by the Developer upon its coming into being in accordance with the Technology Protocol, Cornelius shall he entitled to seek protection in its own name in respect of the Foreground Information anywhere in the world as it shall decide in its sole discretion. 8.2 For the avoidance of doubt all Foreground Information is and shall be treated as Confidential Information of Cornelius notwithstanding that it is conceived, developed or reduced to practice by the Developer or a Third Party. . 12. CONSEQUENCES OF TERMINATION 12.1 All rights and obligations of the parties under this Agreement shall cease to have effect immediately upon the expiry or termination of this Agreement for any reason whatsoever except that expiry or termination shall not affect 12.1.1 the accrued rights and obligations of the parties in relation to this Agreement at the date of ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm of development work to Cornelius, as per recitals B- The assessee to carry out on Cornelius behalf certain development work on the terms set out in the agreement and as per recitals D Cornelius and Developer agree that these terms and conditions shall apply to all work undertaken by Developer (the assessee) to Cornelius . As per clauses 2 3, the assessee shall undertake the Project(s) as identified by Cornelius and meet the Milestones, Such detail of Project(s) shall be contained in the Project Proposal under schedule 1 etc as per payment term in clause 5. Clause 8 specifies that the Intellectual property ie all Foreground Information shall vest in and be owned by Cornelius immediately on its coming into existence and full details of such Foreground Information including without limitation supporting documentation information and results shall be disclosed promptly to Cornelius by the Developer upon its coming into being in accordance with the Technology Protocol, Cornelius shall he entitled to seek protection in its own name in respect of the Foreground Information anywhere in the world as it shall decide in its sole discretion. Clause 8.1 states that for the avoidance of dou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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