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2015 (8) TMI 1217 - KARNATAKA HIGH COURT

2015 (8) TMI 1217 - KARNATAKA HIGH COURT - [2016] 380 ITR 386 - Reopening of assessment - Eligibility of the income derived from rendering technical services abroad to be eligible for deduction under Section 10-A or not - Held that:- As from the original assessment records that the claim of the assessee under Section 10A of the Act was thoroughly scrutinized, the assessing Officer had examined the claim of expenditure incurred in foreign currency for providing technical services by allocating th .....

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disclosure by the assessee or the assessing Officer had obtained material subsequent to the framing of the assessment order on 27.03.2006 so as to arrive at a conclusion that there was escapement of income from tax.

For the reasons aforestated, we are of the considered view that the Tribunal was fully justified in arriving at a conclusion that the re-opening of assessment was by change of opinion and the issue regarding eligibility of the income derived from rendering technical servi .....

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question the order passed by the Income Tax Appellate Tribunal, "C" Bench, Bangalore in ITA Nos. 283/BANG/2012 and 267/Bang/2012 dated 30.09.2013 whereunder the Tribunal, while examining the validity of re-opening of the assessment, has set aside the same on the ground that Assessing Officer, on mere change of his opinion and without any tangible material, could not have reopened the concluded assessment and as such held that reopening is invalid. 2. We have heard the arguments of Sri .....

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omputer software was not examined in the original assessment and as such is not a deemed opinion to hold change of opinion? (2) Whether on the facts and in the circumstances of the case the tribunal was correct in holding that reopening of assessment is mere change of opinion, when the assessing officer has not considered the eligibility of the income derived from rendering technical services abroad to be eligible for deduction under Section 10-A or not?" 4. Briefly stated facts are: Assess .....

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ed on 27.03.2006. While claiming deduction under Section 10A of the Act, the assessee had excluded the expenses incurred in foreign currency for providing technical services and had included the profits derived from technical services in the eligible profits for deduction under section 10A of the Act. Hence, notice under section 148 came to be issued for reopening the concluded assessment on the ground that claim made by the assessee under Section 10A of the Act by including the profits derived .....

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the validity of re-opening of assessment under Section 148 of the Act, partial relief was granted to the assessee on merits by order dated 28.11.2011. Hence, assessee as well as revenue filed separate appeals before the Tribunal against the order of CIT(A). The assessee challenged the confirmation of validity of re-opening of assessment. The revenue challenged the partial relief granted by the appellate Commissioner to the assessee. The Tribunal annulled the re-assessment proceedings and held i .....

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o onsite development of computer software and same had not been examined in the original assessment and as such, it is not a deemed opinion. He would submit that when the assessing Officer has not examined the eligibility of the income derived from rendering technical services abroad to be eligible for deduction under Section 10A or not, question of change of opinion did not arise. He would submit that eligibility of income derived from technical services was not to be included in the eligible p .....

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ion to Section 147 of the Act was attracted and it would amount to deemed escapement of income to tax. Hence, he contends that the re-opening of the concluded assessment is valid. 6. He would further submit that the assessing Officer had not expressed any opinion on the controversy regarding inclusion of profits derived from rendering technical services into the eligible profits and as such, no opinion had been expressed during assessment proceedings and thereby change of opinion would not arise .....

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iv) (2011) 242 CTR 425 Commissioner of Income Tax & Another vs. Rinku Chakraborthy (v) (2013) 350 ITR 651 Export Credit Guarantee Corporation of India Ltd. vs. Additional Commissioner of Income Tax (vi) (2014) 265 CTR 540 Commissioner of Income Tax & Another vs. Sasken Communication Technologies Ltd. 7. Per contra, Sri Suryanarayana, learned Advocate would support the order passed by the Tribunal and contends that the assessing Officer at the first instance had examined the issue of excl .....

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nder Section 10A which itself amounts to change of opinion and even if there was a failure on the part of the assessing Officer with regard to computation of export turnover, the only course of action left to the revenue was to take recourse under Section 263 of the Act. Hence, he prays for dismissal of the appeals. In support of his submissions, he has relied upon the following judgments: (i) (2002) 256 ITR 1 Commissioner of Income Tax vs. Kelvinator of India Ltd. (ii) (2001) 116 Taxman 274 (Ka .....

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g income of ₹ 15,00,92,060/- after claiming deduction of ₹ 99,67,71,161/- under Section 10A of the Act. Assessment order came to be framed under Section 143(3) of the Act on 27.03.2006. The Assessing Officer reduced the claim of deduction from ₹ 99,67,71,161/- to ₹ 89,08,86,778/-. Notice under Section 148 of the Act was issued on the ground that excess deduction under Section 10A has been claimed and hence the deduction has to be recomputed. After considering the reply gi .....

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appeals came to be taken up together by the Tribunal and by the impugned order set aside the reopening of the assessment on the ground that it is change of opinion and consequently allowed the appeal filed by the assessee and dismissed the appeal filed by the revenue. Hence, revenue has preferred these two appeals. RE: SUBSTANTIAL QUESTIONS OF LAW Nos.1 & 2: 9. The validity of initiation of reassessment proceedings under Section 147 of the Act by the Assessing Officer was challenged by the a .....

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on 10A. Actually profits from providing technical services abroad should be excluded while computing deduction u/s 10A. In the instant case the expenditure for providing technical services at 11.71% of the total expenditure and the profits from providing technical services is to be estimated at 11.71% of the total profits, which is eligible for deduction u/s 10A. Consequent short levy of tax and surcharge works out to ₹ 1,76,39,326/-. Therefore, I have reasons to believe that income charge .....

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ad already gone into specific issues arising under Section 10A of the Act. It can be noticed that from the reasons recorded for issue of notice under Section 148 of the Act, the assessing Officer wanted to hold that the entire sum towards employee s salary, overseas travel, in all totaling ₹ 154,05,83,125/- towards expenditure incurred in foreign currency for rendering technical services outside India ought to have been considered as not profits derived by an undertaking from export of art .....

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estion as to whether the sum of ₹ 38,51,45,781/- is not profit derived by the assessee from the export of articles or things or computer software. The assessing Officer while completing the assessment under Section 143(3) of the Act, has gone into the question of excluding the sum of ₹ 38,51,45,781/- from the export turnover on the ground that it was expenditure incurred in foreign exchange for providing technical services outside India. However, the reasons recorded for reopening th .....

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s reason to believe that income chargeable to tax has escaped assessment. However, such reason to believe cannot be based on a mere change of opinion. It is not in dispute that the assessing Officer does not have jurisdiction to review his own order. The power of rectification of mistakes conferred on the assessing Officer is circumscribed by the provisions of Section 154 of the Act. 12. From the perusal of the provisions contained in Section 147 of the Act, as it stood up to 31.03.1999, it is e .....

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y and truly all material facts necessary for his assessment for that year. Both conditions are cumulative and in the given circumstances of the case, if these two conditions are not fulfilled, then necessarily notice issued by the assessing Officer would be wholly without jurisdiction. 13. The effect of amendment to Section 147 came to be examined by the Hon ble Apex Court in CIT vs KELVINATOR OF INDIA LIMITED reported in (2010) 320 ITR 561 and observed as under: "4. On going through the ch .....

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essment, confers jurisdiction to reopen the assessment. Therefore, post 1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words "reason to believe" failing which, we are afraid, Section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of "mere change of opinion", which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to revi .....

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pril, 1989, Assessing Officer has power to reopen, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to Section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words "reason to believe" but also inserted the word "opinion" i .....

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und in Section 147 of the Act came up for scrutiny before the Hon ble Apex Court in the matter of ASSISTANT COMMISSIONER OF INCOME TAX vs RAJESH JHAVERI reported in (2007) 291 ITR 500 (SC) and held that the said expression cannot be read to mean that the assessing Officer should have finally ascertain the fact by legal evidence or conclusion of the fact of escapement of income from tax. It came to be held as under: "16. Section 147 authorises and permits the Assessing Officer to assess or r .....

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ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Delhi High Court in Central Provinces Manganese Ore Co. Ltd. v. ITO (1991) 98 CTR (SC) 161: (1991) 191 ITR 662 (SC), for initiation of action under Section 147(a) (as the provision stood at the relevant time) fulfillment of the two requisite conditions in that regard is e .....

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formation of belief by the Assessing Officer is within the realm of subjective satisfaction (see ITO v. Selected Dalurband Coal Co. Pvt. Ltd. [(1996) 132 CTR (SC) 162: (1996) 217 ITR 597 (SC)]; Raymond Woollen Mills Ltd. v. ITO [(1999) 152 CTR (SC) 418: (1999) 236 ITR 34 (SC)]. 17. The scope and effect of section 147 as substituted with effect from 1st April, 1989, as also Sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old .....

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eason of either (i) omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under Section 148 read with Section 147(a). But under the substituted Section 147 existence of only the first condition suffices. In other words if the Assessing Officer for whatever reason has reason to believ .....

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under Section 147 of the Act. 16. Keeping the above dicta in mind, when the facts on hand are re-examined, it would indicate that while completing the assessment under Section 143(3) of the Act, the assessing Officer has gone into the question of excluding the sum of ₹ 38,51,45,781/- from the export turnover on the ground that it was expenditure incurred in foreign exchange for providing technical services outside India. However, for re-opening the assessment the assessing Officer has int .....

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er: "Based on the above definition, it may be appreciated that only such expenses by way of freight, telecommunication charges or insurance attributable to the delivery of computer software outside India, needs to be excluded from the export turnover in case of a company engaged in software development activities and expenses, if any, incurred in foreign exchange would need to be reduced only in the case of a company engaged in rendering technical services outside India. In this context, we .....

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g support services, which are nothing but technical services. The expenditure in foreign exchange is incurred for both development of software and providing technical services. However, the assessee has not been able to furnish a break-up of the expenditure incurred for development of software and providing technical services. It has taken a stand that no technical services are provided and the entire expenditure is for development of software. Taking the functional analysis reproduced above int .....

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ocated between the five STP Units in the ratio of the export sales. Similarly, from out of the communication expenses incurred in foreign currency of ₹ 3,21,66,847/- an amount of ₹ 7,03,50,677/- (as quantified by the assessee) is taken as attributable to the delivery of computer software and is allocated between the five STP Units in the same ratio of the Export Sales. Both these amounts are reduced from the export turnover in accordance with the definition of ETO given in sec.10A.&q .....

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