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TMI Blog2019 (5) TMI 538X X X X Extracts X X X X X X X X Extracts X X X X ..... and legal position with regard to the claim of such deduction by the appellant under section 80HHE and 10A of the Act in respect of profit of the overseas branches, which were contended to be profit derived from on-site software services. In fact, it is noted from the statement of profitability of the overseas branches filed with the return of income that the fact that profit of such branches was on account of on-site software services rendered by the appellant, was clearly evident to the AO in the course of the original assessment proceedings before him. We are not inclined to interfere with the findings of the ld. CIT(A) on the ground of re assessment having been made on the basis of change of opinion. Accordingly, the ld. CIT(A) has rightly quashed the reassessment made by the AO being bad in law ab initio. As a result, the appeal of the Revenue deserves to be dismissed on this score only. Since, we have supported the quashing of re-assessment proceedings being invalid, we need not to enter into other grounds of Revenue s appeal as well as the ground of assessee s cross objection on merits of additions. Addition u/s. 10A and 80HHE - DR held that assessee has not provided a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.Y. 2002-03: 1. On the facts and in the circumstance of the case, the CIT(A) has erred in not appreciating the facts that none of the issues taken up in assessment proceedings had been taken up in assessment order u/s 143(3) of the Act, hence, it is not based on change of opinion . 2. On the facts and in the circumstance of the case, the CIT(A) has erred in deleting the disallowance made by the AO on account of deduction/exemption claimed u/s 10B and 80HHE of the Income Tax Act, 1961. 3. On the facts and in the circumstance of the case, the CIT(A) has erred in deleting the disallowance of ₹ 2,46,557/- made by AO in view of the provisions of Section 14A of Income Tax Act read with Rule 8D of the Income Tax Rules. 4. The order of the CIT(A) is erroneous and is not tenable on facts and in law. A.Y. 2003-04: 1. On the facts and in the circumstances of the case, the CIT(A) has erred in law and on facts in quashing the reassessment proceedings u/s 148 by holding that the same is based on change of opinion . 2. On the facts and in the circumstances of the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... situated outside India. It was submitted that this action of the AO would not amount to change of opinion, as observed by the ld. CIT(A) in the impugned order. He, therefore, urged to hold the re-assessment order as legally valid. 5. On the other hand, the ld. Counsel for the assessee, relying on the impugned order, submitted a written synopsis on this score, which reads as under : The assessee is a public limited company, engaged in the business of software development, maintenance services and business process outsourcing services and had three units in operation: (a) Software development unit in respect of which deduction u/s 80HHE was claimed ( Leela Galleria unit ). The Leela unit has three foreign branches, located in the US, UK Singapore; (b) BPO unit in respect of which deduction u/s 10A was claimed ( BPO unit ) with no branches outside India; (c) Software development unit in respect of which deduction u/s 10A was claimed ( GNR unit ) with branches in US UK. The assessee stood amalgamated with HCL Technologies Ltd w.e.f. 01.04.2005. RE: BACKGROUND OF ASSESSMENT PRO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... initiating reassessment proceedings. @ PB pg 40 Vide letter dated 09.08.2007 (@ PB pg 41-42), the assessee requested for original return to be treated as return pursuant to the re-assessment notice. Assessee also requested for reasons for initiation of reassessment which are reproduced @ pg 1 of the reassessment order/ pg 119 of the PB). The reasons are briefly discussed as under: (i) Eligible profits for computing deduction u/s 80HHE of the Act was taken by the assessing officer as ₹ 25,10,26,060 whereas the same should have been taken as ₹ 17,54,14,629 by reducing ₹ 7,56,11,431 in respect of profits of branches outside India (ii) Eligible profits for computing deduction under section 10A of the Act in respect of the BPO and GNR units of the assessee should only include profits from export of software and not the profits earned by providing technical services outside India Detailed objections to the initiation of reassessment proceedings along with reply on the merits of the proposed disallowances were filed vide letter dated 08.02.2008, 29.05.2008 17.09.2008. (@ PB pg 47-99) Reassessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices. It was held that the overseas branches merely act as conduit for rendering of onsite software development services in relation to projects undertaken by undertakings of the assessee located in India. Therefore, CIT(A) held that profits of foreign branches were essentially in the nature of profit derived by the assessee from onsite software development services and were, therefore, eligible for deduction under section 10A and 80HHE of the Act. Reference was made by the CIT(A) to the following decisions: Interra Software India Pvt Ltd: ITA No.507/2008 160/2009 (Del HC) HCL Technologies AY 2004-05 in ITA No.3199 3344/Del/2007 HCL Technologies AY 2003-04 in ITA No.1320 1446/Del/2008 HCL Technologies AY 2004-05 in ITA No.3203 3204/Del/2007 OUR SUBMISSIONS I. Reassessment proceedings are without jurisdiction, bad in law and illegal No fresh tangible material The reasons recorded for reopening assessment do not disclose the tangible material on the basis of which assessing officer formed a belief that income of the assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nized in the original assessment proceedings. The case at hand is concededly not covered by other exceptions as indicated by second and third proviso or explanation to Section 147 quoted earlier. 28. The reopening of the assessment in the case at hand through notice under Section 148 of Income Tax Act issued on 22.03.2010 fails to pass the muster on both the tests. The satisfaction note does not disclose the foundation of reasons to believe as it vaguely refers to the perusal of the records without specifying the fresh tangible material that had come to light giving rise to a need for such action. Since the assessment had earlier been concluded under Section 143(3) by order dated 21.09.2007, the restrictions on the exercise of the power of reassessment as contained in the first proviso to Section 147 would inhibit further action in absence of material showing default by the assessee to fully or truly disclose. 29. In the above facts and circumstances, we concur with the view taken by the CIT(A) that it is a case of impermissible change of opinion. The order whereby the proceedings have been reopened for assessment under Section 147/148 of Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id issue was carried in appeal and was finally decided in favour of the assessee by this Hon ble Tribunal in order dated 31.03.2009 (@ pg 26-38 of the PB). In view of the aforesaid, the action of the assessing officer in initiating reassessment to reconsider the claim of deduction u/s 10A/ 80HHE of the Act tantamount to review of view earlier taken/ change of opinion and deserves to be quashed. The Supreme Court in the case of CIT vs Foramer France: 264 ITR 567 (SC), affirmed the decision of the Allahabad High Court in the case of Foramer France vs CIT: 247 ITR 463 (All), wherein it was, inter alia, held by the Court in the context of the provisions of section 147/ 148 of the Act, as amended with effect from 1.4.1989, that reassessment cannot be based on a mere change of opinion and that the law that an assessment could not be reopened on a change of opinion was the same before and after the amendment by the Direct Tax Laws (Amendment) Act, 1987. The Full Bench decision of the Delhi High Court in the case of CIT vs Kelvinator of India Ltd: 256 ITR 1 (Del) held that section 147 of the Act does not postulate conferment of power upon the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct was examined during the course of assessment proceedings and certain disallowance was also made after considering audit report in Form 10CCA, it was not open for the assessing officer to turn around and take a different stand qua deduction claimed u/s 80IC by invoking reassessment proceedings. Similarly, in the case of Velingkar Brothers: [2017] 85 taxmann.com 8 (Bom), the Bombay High Court held that where while disposing of scrutiny proceedings, the assessing officer after examining reply filed by assessee concluded that establishment of assessee was an export oriented unit and, thus, entitled for exemption under section 10B, subsequent notice under section 147 on ground that assessee was not entitled for said deduction was mere change of opinion. In the case of Fairfield Atlas vs ACIT [WP(C) 13421 of 20170], the Bombay High Court vide order dated 26.03.2018 held that when assessee placed reliance on Form 56G, which discloses all particulars in support of its claim under section 10B of the Act, notice issued u/s 148 is without jurisdiction. In the case of Gujarat Enviro Protection Infrastructure Ltd vs DCIT: [2018] 91 taxmann.com 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Writ petition No. 8562/2007 (Del) Parveen P Bharucha vs DCIT and UOI: 348 ITR 325 (Bom) Ranbaxy Laboratories Ltd vs DCIT: 351 ITR 23 (Del) NDT Systems vs ITO: 255 CTR 113 (Bom) Rambagh Palace Hotels P Ltd vs Dy CIT: 350 ITR 660 (Del) 3rd proviso Merger of issue with CIT(A) ITAT order The claim of deduction was already disallowed by the assessing officer during the course of original assessment proceedings and thereafter, adjudicated in appeal by the CIT(A) as well as the ITAT. In light of 3rd proviso to section 147, reassessment initiated to adjudicate issues which had already merged in orders passed by the appellate authorities, is invalid and unsustainable. Reliance in this regard is placed on decisions in context of section 263 which also provides that issues which have merged with orders of appellate authorities cannot be subjected to revision: Oil India Ltd vs CIT: 138 ITR 836 (Cal HC) CIT vs Shashi Theatre (P) Ltd: 248 ITR 126 (Guj HC) CIT vs Mehsana District Co-op Mil Producers Union Ltd: 263 ITR 546 (Guj HC) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0HHE of the Act, profits of the business eligible for deduction should be reduced by the profit of the branch, situated outside India and accordingly a sum of ₹ 7,56,11,431 was reduced from the total profits for computing deduction under section 80HHE of the Act. The provisions of section 147 of the Act, as applicable from f day of April, 1989, confer on the assessing officer the powers to reopen the assessment, if the assessing officer has reason to believe that income chargeable to tax has escaped assessment. Such power is, however, not unfettered. That the power to reopen an assessment has been conferred by the Legislature not with the intention to enable the Assessing Officer to reopen the final decision made against the Revenue in respect of questions that directly arose for decision in earlier proceedings. If that were not the legal position, it would result in placing an unrestricted power in the hands of the assessing authorities. Thus, where the reasons recorded by the Assessing Officer disclose no more than mere change of opinion, the reassessment proceedings are liable to be quashed. The settled position in this regard has been c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... site software services rendered by the appellant, was clearly evident to the AO in the course of the original assessment proceedings before him. In the aforesaid view of the matter, I am of the view that the initiation of the impugned reassessment proceedings under section 147 of the Act is on the basis of the re-appraisal of the same facts and information which were available at the time of original assessment proceedings. Relying on the ratio of the decision of the Supreme Court in the case of Kelvinator of India Ltd. (supra) and also various other decisions cited by the appellant it is held that the reassessment proceedings initiated by the assessing officer is based on change of opinion and therefore, is directed to be quashed. Ground of Appeal Nos. 2, 3 4 are consequently allowed. 7. The ld. DR could not be able to controvert the findings of the ld. CIT(A) nor could he place before us such authorities which are counter to the catena of decisions relied by the assessee in its written submissions. We, therefore, are not inclined to interfere with the findings of the ld. CIT(A) on the ground of re assessment having been made on the basis of change of opinion. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ); (c) Software development unit in respect of which deduction u/s 10A was claimed ( GNR unit ); (d) Software development unit in respect of which deduction u/s 10A was claimed ( Chennai unit ); The assessee stood amalgamated with HCL Technologies Ltd w.e.f. 01.04.2005. For the relevant assessment year, the return of income was filed by the assessee on 30.10.2005 declaring income of ₹ 2,57,02,830. The assessee claimed, inter alia, deduction u/s 10A of the Act. The assessee filed a revised return declaring an income of ₹ 2,57,02,830 on 30.03.2007. The return was selected for scrutiny and assessment order dated 15.12.2008 was passed under section 143(3) of the Income-tax Act, 1961 ( the Act ) wherein, the assessing officer recomputed deduction u/s 10A in respect of the BPO, GNR and Chennai units holding that the assessee had rendered technical services outside India through its foreign branches and, therefore, (i) profits derived from rendering technical services outside India, i.e., from foreign branches, were to be excluded from the export turnover while computing deduction u/s 10A, (Assessment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verseas branches of the assessee cannot be construed as being engaged in any activity other than rendering onsite software development services. It was held that the overseas branches merely act as conduit for rendering onsite software development services in relation to projects undertaken by undertakings of the assessee located in India. Therefore, CIT(A) held that (i) profits of foreign branches were essentially in the nature of profit derived by the assessee from onsite software development services and were, therefore, eligible for deduction under section 10A of the Act, and (ii) since assessee is not engaged in rendering technical services, no adjustment clause (iv) of Explanation 2 to section 10A is warranted Reference made to ITAT order in own case for AY 2003-04 2004-05. CIT(A) order @ pg 80-81 Reference was made by the CIT(A) to the following decisions: Interra Software India Pvt Ltd: ITA No.507/2008 160/2009 (Del HC) Assessee s own case passed by Delhi Bench of tribunal for AY 2004-05 in ITA Nos. 3203 3204/Del/2007 Assessee s own case passed by Delhi Bench of tribunal for AY 2003-04 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred by the assessee in foreign currency for rendering alleged technical services outside India were to be reduced from export turnover while computing deduction u/s 10A of the Act. The findings of the assessing officer in this regard, in the assessment order, are summarized as follows: (i) since export of computer software and providing technical services in connection with development of software are distinguishable from each other, the profits for providing technical services abroad is to be excluded while computing deduction under section 10A of the Act; (ii) section 10A of the Act provides for deduction from the total income only in respect of profit from export of computer software and profit from rendering of technical services is not included therein; (iii) expenses incurred by the assessee in foreign currency for rendering alleged technical services outside India were to be reduced from export turnover while computing deduction u/s 10A of the Act. In appeal, the CIT(A) held that overseas branches of the assessee merely constitute a liaison office for rendering of onsite software development ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lhi) dated 24.08.2012 - HCL Technologies BPO Services Ltd vs ACIT: ITA No.5622/Del/2010 In view of the aforesaid, depreciation on computer and peripherals is to be allowed @ 60% thereon. Accordingly, disallowance made by the assessing officer has been rightly deleted by the CIT(A). 11. We have heard the rival submissions and have gone through the entire material available on record. We find that the ld. CIT(A) has given cogent reasons on the issues under consideration, which could not properly controverted on behalf of the Revenue. For ready reference, the findings of the ld. CIT(A) are reproduced as under : 2.1 I have considered the facts stated by the assessee in his submission and the grounds raised in appeal. 2.2 These Grounds of Appeal deal with disallowance of deduction u/s 10A of the Act in respect of profits of overseas branches. The appellant has submitted vide his reply filed during the appellate proceedings that it is engaged in the business of rendering software development services, which involves off shore as well as onsite software services. That the appellant has entered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 10A of the Act in respect of the profits of its STPI Units, namely, BPO Unit and GNR Unit (including the profits from onsite operations Accounted as profit of the overseas branches to the extent attributable to these STPI Units). However, the deduction so claimed by the appellant was rejected by the AO in the impugned assessment order against which the appellant in the appeal. 2.6 Section 10A of the Act allows deduction for profits derived from export of software. The deduction under that section is calculated with reference to profits of the eligible undertaking and not with reference to profits of all businesses carried on by the assessee. The said section provides that provision of onsite services would be deemed to be export of software from India in view of Explanation 3 of Section 10A of the Act. Further, unlike Section 80HHE of the Act, there is no provision in section 10A of the Act for excluding profits of a foreign branch, considering the scheme of that section, where the deduction is allowed, qua profits of the eligible undertaking and not the profits of the total businesses carried on by the assessee. 2.7 Reliance has been place ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aison office is only permitted to do what its name suggests-act as an intermediary between the foreign principal enterprise and the Indian customers and vice versa. It may not engage in any other commercial activity with the objective to earn profit. The Assessee has been carrying on full-fledged marketing operations in Tokyo, Japan, as per the approval of RBI. It has been incurring all sorts of expenses for maintaining its branch office. The Assessee is thus not entitled to deduction under Section 10A on the revenues of the Tokyo branch office under Section 10A/80HHE of the Act. It is submitted that the nature of the operations of the said branch office can be gathered from various letters filed by the Assessee to Development Commr., Noida Export Processing Zone, the general manager, RBJ, etc. In fact, the submission of the Appellant becomes crystal clear by referring to the letter of the Assessee addressed to the manager, Bank of America which leads, ... in view of the current slide down which has hit the US software market most, Japan is emerging as a critical market in the international software trade. With a view, therefore, to expanding our market in Japan, we have decided t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. The question relates to the profits derived by the Assessee's branch in Japan. Answer to that would depend on Expln. 3. of Section 10A which reads as under. Explanations. -For the removal of doubts, it is here by 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. 10. As per this Explanation, even if the profits and gains are derived from onsite development of computer software outside India, they are also treated as profits and gains from the export of computer software outside India. In the backdrop of this provision, what is to be examined is as to whether Japan office of the Assessee would be treated as an onsite development of computer software or it is to be treated as separate branch functioning independently. 11. As noted above, the submission of learned Counsel for the Revenue is that to qualify the onsite development , it should be only a liaison office acting as an intermediary between the foreign principal enterp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e view that there is an element of technical services involved in such activity and accordingly held that the appellant was engaged in the business of providing technical services at the customer s location through it s overseas branches. 2.12 Further the Hon ble Delhi Bench of the Tribunal vide order dated 2301-2009 in appellant s own case for assessment year 2004-05 (ITA Nos. 3199 3344/Del/07) has while reversing the action of the Assessing Officer in holding 60% of the expenditure incurred in foreign currency was for rendering technical services outside India [which was reduced to 10% by the CIT (A)] held as under: QUOTE 5. From perusal of this finding, it reveals that CIT (Appeals) has principally agreed with the contentions of the assessee that it was not providing technical services outside India. However, while concluding his finding, somehow he estimated 10% of software development charges towards expenses attributable for providing technical services outside India. The AO has totally misconstrued the activities of the assessee from its website. The assessee was not providing any technical services and there is no mate ..... X X X X Extracts X X X X X X X X Extracts X X X X
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