TMI Blog2015 (4) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... payment is not hit by section 40(a)(i). As this amount is not taxable in India under the DTAA between India and USA and as no asset is acquired, it is allowable as Revenue expenditure. - Decided in favour of assessee. Technical service fee - amount paid by the Appellant to M/s. Infotech Software Solutions Inc (ISSI) USA, the subsidiary of the Appellant - whether amount of ₹ 2,01,40,454 paid by the Appellant to M/s. Infotech Software Solution - Held that:- Issue is covered in favour of the assessee by the decision of the Tribunal in assessee’s own case for AY 2006-07 & 2007-08 wherein held that no operations have been undertaken by foreign subsidiaries in India and no engineers have been deputed by them to India and even they do not have permanent establishment in India. In terms of the respective DTAA, no income of the foreign subsidiary is taxable in India in terms 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. As no technical knowledge was made available to the assessee company by its foreign subsidiary which is the requirement under the DTAA for payment to qualify as te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2/2003 was filed before the CIT(A) and before the ITAT at page 266 of paper book, thus disallowance in question is deleted. - Decided in favour of assessee. Reopening of assessment - Held 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 (2002 (4) TMI 37 - DELHI High Court ), we dismiss the Revenue’s appeal. - Decided in favour of assessee. Software link service charges are liable for exclusion from both the export turnover as well as the total turnover for the purpose of computing deduction u/s 10A of the IT Act 1961 as relying on Patni Telecom Pvt. Ltd vs. ITO [2008 (1) TMI 452 - ITAT HYDERABAD-A ] - Decided in favour of assessee. - ITA No.1450, 1452, 1451, 1453/Hyd/2013, ITA Nos.1455 & 1456/Hyd/2013 - - - Dated:- 25-3-2015 - Shri P.M. Jagtap And Smt.Asha Vijayaraghavan JJ. For the Appellant : Shri M.V.R. Prasad For the Respondent : Smt. D. Aparna Rao,DR ORDER Per Bench: These are cross appeals preferred by the assessee and the Revenue, directed against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of clause (ia) to sub-section (2) of section 10B w.e.f. 1.4.95 by Finance Act, 1994. This amendment is applicable to undertakings which began to manufacture or produce any article or thing on or after 1.4.94. The amendment was with regard to percentage of exports to be made by the assessee i.e. 100% EOUs. In the instant case, the amended provisions are not applicable since the assessee company had commenced its commercial production w.e.f. 7.9.1992La.before 1.4.94. In view of the above, the assessee is not entitled for any benefit u/s 10B of the I.T. Act, 1961. For A.Y 1998-99, when the similar disallowance was made the CIT (A) III vide order in ITA No.428.JC/RC2JCITA)-111/00-01 dated 17.11.01 had confirmed the disallowances in assessee s own case. On appeal by the assessee the ITAT B Bench Hyderabad vide its order reported in 85 ITD 325 has dismissed the appeal of the assessee. Keeping this in view, the assessee s claim of deduction u/s 10B is not allowed. During the course of assessment proceedings, the assessee company has set up a new unit during financial year ended 31.03.2002 at Bangalore. This unit has been registered as a STPI Unit with the Software Technology Parks o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the takeover of a company M/s AnalyticalSurveys Inc and as the expenditure was incurred in the context of the acquisition of a company, it was of the nature of capital expenditure. He also took the view that the tax was not deducted at source on the payment made to non resident presumably under the provisions of section 194J and so the payment is disallowable under the provisions of section 40(a)(i). 8. It was submitted by the ld Counsel that the services were rendered by the non-resident attorney from outside India, so it is not taxable in India. At any rate under article 15 of the DTAA between India and USA, independent professional charges are to be taxed only in the country of residence unless there is a fixed base in the source country. As there is no such fixed base in India, the payment in question is not taxable in India. So there is no liability for tax deduction at source in terms of section 194J and as such the payment is not hit by section 40(a)(i). 9. The next question is whether the payment represents revenue expenditure or capital expenditure in the hands of the assessee company. As the expenditure was incurred in the context of a failed proposal for the acqui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 179 to 196 of the paper book. Similarly, we have perused intercompany agreement entered into by the assessee with its subsidiaries placed in the paper book at page 197 to 222. This proves that the assessee obtained orders on its own behalf and it has only parceled out a portion of its work to its foreign subsidiaries. As per the terms of the agreement, the assessee shall release the work order before the commencement of the work by IEAI USA and each work order shall be supported by end customers order copy. Clause 3 of the agreement reads as under : Commencing on the date(s) specified in each Work Order, IEAI will allocate qualified personnel through Software Services requirements statements and regular project meetings, which may be modified from time to time by IEL. IEAI shall inform IEL at the time of the request, or as soon thereafter as that the information becomes available, should it be unable to deliver the qualified personnel specified in the Work Order. Parties shall within 30 days negotiate in good faith a revised Work Order mutually agreeable to both parties, however if no such agreement can be reached either party may terminate that work order according to provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... longer valid in view of the provisions of Explanation to section 9 which has been substituted retrospectively w.e.f. 1.6.1976 by Finance Act 2010, it has to be noticed that the requirement mentioned at 1 above still holds the field. Tribunal also observed that the retrospective amendment by way of Explanation to 9(1) introduced by Finance Act 2010 could not have been visualized by the assessee company for deducting tax at source u/s 195 of the IT Act. 16. The Tribunal also found that even if the payment to ISSI were technical service fee, it would not be taxable in India in terms of Article 12 of the DTAA between India and USA. In Para 43 of its order the Tribunal observed as under: We also point that even under the India-USA and India-UK treaties (not the India-Germany treaty though) due to the presence of the make available clause in these two Treaties the payments made by the assessee will not fall under FTS. This is because no technical knowledge has been made available by the non-resident to the assessee. Further, no technical plan or technical design placement has been transferred by US subsidiary to the assessee. What IEAI did was only in fulfillment of contractual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsidiary has provided technical services to the assessee. Before that, he attributes a position to the Appellant which it has never taken before him or elsewhere. In Para 8.17 of his order, he observes as under: Firstly, it is very important to appreciate that contrary to what the Appellant claims the work done by ISSI had absolutely no nexus with any relationship or contract of ISSI with Pratt Whitney. In fact ISSI only worked on behalf of the Appellant. Its employees were sent to the premises of Pratt Whitney at the behest of the Appellant and to provide technical work and expertise on behalf of the Appellant. Therefore, it is absolutely incorrect on the part of the Appellant to state that it never had any contract with IS SI and the work done by ISSI was its own contract with Pratt Whitney. This is totally contrary to the facts on record . It was submitted by the assessee that the assessee never claimed that it had no contract with ISSI and the work done by ISSI was its own contract with Pratt Whitney . The CIT(A) has totally misconstrued the position of the assessee Company. Having, thus, misconstrued and misrepresented the Appellant's position, the CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax, International taxation, Circle 1(1), Bangalore [IT Appeal No.759 (Bang) of 2011 S.P.No.50 (Bang) of 2012 AY 2007-08 dated 13th April, 2012] each separate contract constitutes a 'source' of income . 20. We have heard both the parties and are of the opinion that the issue is covered in favour of the assessee by the decision of the Tribunal in assessee s own case for AY 2006-07 2007-08. Further the Department filed appeal before the Hon'ble High Court against the Tribunal s order, however, no ground was raised against this issue. Hence, this ground of the assessee is allowed. 21. The next ground is with respect to extra depreciation claimed on computer software of ₹ 4,13,14,674. The fact is that aassessee bought some new computers and also some software and calculated depreciation @60% on both the assets. The AO granted depreciation @ 60% on the opening WDV of the computers and value of additions to computers, but restricted it to @25% on the additions to the software. The AO held that, in terms of Item 2(b) under Machinery and Plant (Item III of Part A of the Depreciation schedule) relevant for the assessment years 1988-89 to 2002-03, the depreciation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Appellant that software does not improve the production capacity but only increases the efficiency is not acceptable because any increase in efficiency invariably gives rise to greater production. Further, worldwide the introduction of specialized software has greatly reduced the production time, thereby vastly improving the quantum of production. I find that the assessing officer is correct in allowing depreciation at the rate of 25% in the current year . 24. On appeal before us, the ld Counsel submitted that the above reasoning of the CIT(A) goes exactly counter to the ratio of the decision of the apex court in the case of Empire Jute Co. Ltd (supra) and so deserves to be rejected. He further pointed out that in the case of CIT vs. Varinder Agro Chemicals Ltd. (309 ITR 272 (PUN)), the Hon'ble Punjab and Haryana high court held, as per the head note, as under; Held that there was nothing to show that the software used by the Appellant was of enduring nature and would not become outdated. Since technology is fast changing and day-by-day systems are being developed in a new way, software may be needed like raw material. The view taken by the Tribunal was certainly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered in the context of the assessee contractual obligations to Pratt Whitney. The amount of ₹ 2,09,84,489/- represents expenditure in foreign currency incurred in providing software development services which is the main activity of the assessee Company. This expenditure was not incurred in providing technical services by the assessee outside India. It is not at all the case of either the AO or the CIT(A) that the Appellant was in the business of providing technical services. What the CIT(A) held was only that the amount paid by the assessee to USA subsidiary i.e. ISSI, i.e., ₹ 2,01,40,454/- is for technical services received from that entity. It is not the case of even the CIT(A) that the assessee company provided technical services to ISSI. The definition of export turnover covers only expenditure incurred in foreign exchange in providing the technical services outside India and not expenditure incurred while receiving technical services or providing software services. So there is no basis for reducing this amount of even ₹ 2,09,84,489/- from export turnover while granting a deduction under section 80HHE. 30. It was also pointed out that this amount of &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion expenses of ₹ 92,60,349 are excludible from export turnover for granting deduction u/s 80HHE. Export turnover is defined under clause (iv) of Explanation 2 to sec.1 OA of the IT Act and it reads as under: export turnover means the consideration in respect of export [by the undertaking] of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses ,if any, incurred in foreign exchange in providing the technical services outside India; 34. The ld Counsel submitted that what the assessee incurred are actually soft link charges for availing a dedicated cable link from the internet service provider. What are to be excluded in terms of the definition of the export turnover in clause (iv) of Explanation 2 to section 10A is telecommunication charges and not soft link charges. Telecommunication charges cannot, it is submitted, be identified with soft link charges. The former relates to telephonic ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtible foreign exchange cannot be reduced from the export turnover. 38. It was pointed out that when the AO excluded the said amount of ₹ 92,60,349/- from export turnover, he should have, in the interest of fairness, excluded it from the total turnover also for computing the deduction U/s. 10A(4). 39. In this context, reliance is placed on the decision of the Hon'ble High Court of Karnataka in the case of Commissioner of Income-tax Vs. Tata Elxsi Ltd ([2012] 17 Taxmann.com 100 (Kar.)) which follows the decision of the Apex Court in the case of CIT v. Lakshmi Machine Works ([2007] 290 ITR 667 I 160 Taxman 401) In view of the above, the exclusion of ₹ 92,60,349/- from the export turnover may be deleted and the deduction U/s.10A may be allowed without such exclusion. 40. We heard both the parties. We find that this amount is not charged to the customer and so not included in the export turnover and so cannot be reduced from it. This issue is covered in favour of the assessee by the order of the Tribunal in the assessee s own case for AYs 2006-07 2007-08 (supra). This ground is allowed. 41. The next ground is that the AO erred in adjudicating in this ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce is also placed upon the following decisions. i. Deputy Commissioner of Income Tax vs Brijlaxmi Leasing Finance Ltd (118 ITD 546). ii. Sunita Gupta Share Brokers Limited vs ACIT, Circle-9(1), New Delhi (ITA No.4188(Del)201 0, [G Bench]). iii. CNB Finwiz Ltd, New Delhi vs Department of Income Tax (IT NO.3756/DeI/2010 [B Bench]). iv. Haryana Financial Corporation vs Department of Income Tax (ITA NO.751/Chd/2011 [Chandiqhar Bench). 46. We find that the Hon ble Supreme Court applied the principle enunciated in the case of London and Thames Haven Oil Wharves Ltd., Vs. Attwoll (Inspector of Taxes) (70 ITR 460) in the case of Travancore Rubber Co vs. CIT (243 ITR 158) wherein it was held as under: Where, pursuant to a legal right, a trader receives from another person compensation for the trader's failure to receive a sum of money which, if it had been received, would have been credited to the amount of profits (if any)arising in any year from the trade carried on by him at the time when the compensation is so received, the compensation is to be treated for income tax purposes in the same way as that sum of money would have been treated if it had been receive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able as a revenue receipt . 6. 2. Ground 1 is general in nature; hence no specific adjudication is called for. 3. Ground No.2 is covered by the decision in assessee s own case for AY 2002-03 wherein at Para Nos. 32 33, we have adjudicated as follows: 32. The ld Counsel placed reliance on the decision of the Tribunal for the AY 2006-07 in ITA No. 775/Hyd/2013 wherein, while considering the analogous definition of export turnover in clause (iv) of Explanation 2 to section 10A, it was held as under: If it is really a fact then there cannot be any reduction of the said amount from the export turnover when the assessee has not at all included it in the export turnover while computing deduction U/s. 10A of the Act. We therefore direct the Assessing Officer to verify this fact and if on verification it is found that the assessee has not included the said amount while computing the deduction U/s. 10A then there is no question of reducing it from export turnover for the purpose of computing deduction u/s. 10A of the Act. Even otherwise also, the alternative contention of the assessee is not without substance. When any amount being in the nature of freight, telecommunicatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. He further submitted that the services rendered to our customer Pratt Whitney etc. fall under item (v) above and to other clients like Tom Tom etc. fall under item (vi) above. Considering the above facts, the ground may be allowed. The CIT(A) ought to have realized that the receipt in question is for onsite software services and such services qualify as exports as per the clarification given by the CBDT vide its Circular Dt. 17.01.2013 (F. No. 178/84/2012-ITA-1). 7. We heard both the parties. We are of the opinion that this amount has to be included in profits of business by virtue of the Explanation to section 80HHE and also by the CBDT Circular dated 17.01.2013. 8. In Ground no. 4 assessee submitted that the CIT(A) erred in holding that the payment of ₹ 11 ,99,94, 156/- paid to ISSI, the 100% US subsidiary of the appellant, is disallowable under Sec 40(a)(i) of the Income tax act on the ground that this amount represented taxable income of the non-resident and no tax was deducted at source on the payment in terms of section 195(1) of the Act. 9. Regarding the allowability of this issue, the written submissions filed for the AY 2002-03 in ITA NO.1450/Hyd/13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot meddle with the copies of the software in the process of its customization. We also observe that the assessee has to purchase the said software each time it wanted to sell the bundled software to its customers and if it had got any right to the copyright to the said software it would not have bought it every time when it wanted to sell. Further, perusing the books of the assessee at pages 170 to 175 of the paper book, we find that there are multiple purchases of software during the year and each purchase of single item on software is merely one thousand rupees and not huge amount. Hence, we are of the opinion that they are simply purchase cost of trading goods especially when the licence in respect of software is not obtained by the assessee and the perpetual licence is given directly to the end customer by the vendor company. Copies of the invoices raised by the Net Work Solutions on the assessee and at paper book 261 to 265 support the view of the assessee where the invoice mentioning name of the end customer supports our view. Hence, in our opinion, when there is no transfer of even the license to the assessee even through it is the purchaser, it cannot be said that there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... International Mauritius Ltd (CIML) (A group company of United Technologies Corporation acting through its Pratt Whitney Division). Moreover, on examination of the Stock Purchase Agreement copy between the Assessee Company and CIML dated 31.01.2002 clearly states that Pratt Whitney is a strategic customer and consumer of the assessee company and certain services. It is also mentioned in it that both the parties agreed that the assessee company's ability to deliver such services to Pratt Whitney would benefit from a closer affiliation between Pratt Whitney and the assessee company. This shows that the entire transaction of issuing Warrants that represents a right to acquire Equity shares of the assessee company in future is nothing but a transaction which has the impact of improving business/business promotion. Therefore, as the very purpose of this transaction is related to the business, whatever amount, by whatever name may be called, received in this respect can be construed as Revenue Receipt and will be subjected to income tax. In view of the above, the amount credited to the Profit Loss account under appropriation is treated as income and added to the income return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttached most of the documents which were submitted before the AO. I find that vide letter dt. 13.12.2007 and addressed to the Asstt. Commissioner of Income Tax, Circle 2(1) Hyderabad, the appellant has stated in Para 9 of its reply that as per the agreement the amount payable to the appellant by Callaghan Partners (CP) in respect of share options was due on 14.05.2001 i.e. in the financial year 2001- 02. This is quoted below: 7. Therefore, the forfeiture was in terms of the statutory guidelines of SEBI. It was not open to the assessee to refund the entire amount originally invested towards future purchase of shares of the assessee company. Had CP exercised the option, the amount paid in advance would have been adjustable and adjusted towards the share capital account. 8. Apart from the above statutory obligation, there is specific condition in the agreement between the assessee and CP as under: Use of proceeds: The amount shall be utilized for acquisition, capital expenditure, working capital requirements and other direct corporate requirements . 9. The quoted value of the shares which are quoted in the stock exchange as on the date of issue of option to the above sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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 with the copies of the software in the process of its customization. We also observe that the assessee has to purchase the said software each time it wanted to sell the bundled software to its customers and if it had got any right to the copyright to the said software it would not have bought it every time when it wanted to sell. Further, perusing the books of the assessee at pages 170 to 175 of the paper book, we find that there are multiple purchases of software during the year and each purchase of single item on software is merely one thousand rupees and not huge amount. Hence, we are of the opinion that they are simply purchase cost of trading goods especially when the licence in respect of software is not obtained by the assessee and the perpetual licence is given d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncorrect 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-assessment is invalid though as per explanation 1 to section 147 production before the AO of account books or other evidence from which material evidence could with due diligence have been discovered by the AO will not necessarily amount to disclosure within the meaning of the foregoing proviso. 2. The facts are that the assessee company filed its return of income for the A.Y 2002-03 on 31.10.2002 declaring total income under normal provisions of ₹ 11,15,41,644. The AO completed the assessment on 28.12.2007 u/s 143(3) r.w.s. 147 of the Act and determined total income at ₹ 11,55,64,714. The notice u/s 148 was issued on 13.6.2007. 3. The CIT (A) has held as follows: 4.13 The A.Y ended on 31.03.2003. As per proviso to section 147 discussed supra the conditions for reopening of the assessment change after 31.03.2007, i.e. after 4 years from the end of the assessment year. If the assessment was now to be reopened, it was the duty of the AO to prove that there was default on the part of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 travel charges, if an amount is reduced from the export turnover, then it also should be reduced from total turnover. 9.2 Respectfully following the aforementioned judgment of the Hon'ble ITAT Hyderabad, I hold that the AO is to reduce the software link service charges from both the export turnover as well as the total turnover . 2. Aggrieved, the Department has come up on appeal raising the following grounds: 1. The order of the CIT (A) is erroneous on facts and law. 2. The CIT (A) erred in holding that the communication charges I the form of software link service charges are liable for exclusion from both the export turnover as well as the total turnover for the purpose of computing deduction u/s 10A of the IT Act 1961. 3. The CIT (A) ought to have observed that it has not been contemplated under the IT Act that the disallowances from the export turnover also should be reduced from the total turnover . 2. We confirm the order of the CIT (A) wherein ..... X X X X Extracts X X X X X X X X Extracts X X X X
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