TMI Blog2018 (11) TMI 1553X X X X Extracts X X X X X X X X Extracts X X X X ..... ance to the foreign entity. Therefore, the artificial split up of the transaction by the Assessing Officer, that too without any materials on his file, is wholly unsustainable. - decided in favour of assessee Inclusion of the component of unrealised sale proceeds in total turnover while directing the exclusion of the same from export turnover - Held that:- These questions have been answered by the Hon'ble Supreme Court in the decision of the Commissioner of Income Tax, Central-III vs. HCL Technologies Ltd.[2018 (5) TMI 357 - SUPREME COURT] as held as the term 'total turnover' has been defined in the Explanation to Section 80HHC and 80HHE, wherein it has been clearly stated that ''for the purposes of this Section only'', it would be applicable only for the purpose of that Sections and not for the purpose of Section 10A. If denominator includes certain amount of certain type which numerator does not include, the formula would render undesirable results. Setting aside the issue of deduction of expenditure in connection with the earning of dividend income by tribunal - Held that:- Assessee contended that Section 14A(2) could not have been invoked, as d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, the Tribunal was right in law in setting aside the issue of deduction of expenditure in connection with the earning of dividend income and not allowing the same in full since all the required details to decide the same were before the Tribunal? 5.Whether on the facts and in the circumstances of the case, the Tribunal was right in law in not noting that the amendment to Section 14A of the Income Tax Act granting the assessing officer the power to estimate expenditure incurred with the earning of income that was not taxable was prospective and not applicable to assessment years prior to 01.06.2007? 3.We have heard Mr.N.V.Balaji, the learned counsel for the appellant/assessee and Mrs.R.Hemalatha, the learned Senior Standing Counsel for the respondent/Revenue. 4.First we take up the Substantial Question of Law Nos.2 and 3. The learned counsel for the Revenue submits that these questions have been answered by the Hon'ble Supreme Court in the decision of the Commissioner of Income Tax, Central-III vs. HCL Technologies Ltd. [(2018) 93 Taxmann.com 33 (SC)] , wherein, the Hon'ble Supreme Court has held as follows: 14.In the above backdrop, we are of the opi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 64,27,91,100/- for the assessment year 2002-03, respectively, in foreign currency towards onsite software development projects. The Assessing Officer, while determining the deduction under Section 10A of the Act, excluded the expenditure incurred in foreign currency from 'export turnover' by alleging that the same was incurred for the purpose of rendering 'technical services'. The assessee's case was that the expenditure was incurred in connection with the onsite software development services performed by them. The stand taken by the assessee was not accepted by the Assessing Officer and he completed the assessments and adopted the foreign currency expenses from the notes to accounts in the financial statements and excluded the same from the term 'export turnover' to compute deduction under Section 10A of the Act, on the ground that the expenditure incurred on 'onsite development' was 'technical services'. The other issue pertains to allowability of expenses incurred in earning tax free income and the assessee contended that an adhoc estimation should not have been made and in this regard, the assessee referred to the power under Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, as understood in the software industry parlance. The assessee proceeded to explain its activities, as per the agreement with its clients, for developing software, which consisted of eight steps, they are as follows: 1.Scope-Ascertaining the requirement of the customer and undertaking an indepth study on the proposal. 2.Requirements definition Specification of the basic concepts and operation design, in relation to the final deliverable. 3.Designing-Designing of the deliverable, from a macro (overall flow of the integrated software) and micro perspective (designing of each module of the programme). 4.Application development Developing the application (i.e. The modules and the related computer programmes and codes) as per the requirements of the customer. 5.Testing Developer Integration Testing, System Integration testing and User Acceptance Testing; to ensure that the software developed works as required. 6.Defect fixing Rectifying errors that have arisen during the testing process. 7.Production parallel run-Undertaking a dry run of the developed software system. 8.Customer user acceptance Final acceptance of the Software develope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e CITA, we are able to see that the submissions made by the assessee, in the form of paper book, was forwarded to the Assessing Officer and a report was called for and the the Assessing Officer has also submitted his report, but we do not find any reference to such report in the order of the CITA nor it is clear whether the assessee was favoured with a copy of the report of the Assessing Officer. 13.Be that as it may. We may point out that the CITA did not endeavour to examine the scope of the agreement. In fact, certain observations made by the CITA would enure in favour of the assessee. By way of illustration, in paragraph No.10(c) of the Order of the CITA, he would state that computer software cannot be defined or understood in a narrow sense of the term to mean only software in the form of product/goods as claimed. As the assessee is engaged in developing, transmitting and providing software to meet the needs and requirements of the clients, it encompasses providing all the relevant technical services necessary and attendant with the development and export of computer software. If this was the finding of the CITA, the resultant conclusion should have been that the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... development process. There was no material available before the Assessing Officer to split up the transaction into two or to bisect the transaction to find out an element of 'technical services'. As rightly pointed out by the assessee, this exercise has been done by the Assessing Officer based on the notes to the accounts in the financial statements, which would be impermissible. What is required to be examined is the nature of services rendered by the assessee to the foreign entity. Thus, we are fully satisfied that the 'technical services' rendered by the assessee is not on a 'standalone basis', but it is an integral part of the software development and up to step No.(8), as mentioned above, the assessee is bound to render all assistance to the foreign entity. Therefore, the artificial split up of the transaction by the Assessing Officer, that too without any materials on his file, is wholly unsustainable. 17.For the above reasons, we are constrained to set aside the order passed by the Tribunal and answer the Substantial Question of Law No.1 in favour of the assessee. 18.With regard to Substantial Question of Law Nos.(4) and (5) are concerned, they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thority took note of the decision of the Hon'ble Supreme Court in the case of United General Trust (200 ITR 488) and directed the Assessing Officer to restrict the dis-allowance to 2% of the dividend income, which would be 2% of ₹ 2,61,75,567/- (Rs.5,23,511/-). Accordingly, the balance amount of ₹ 1,54,087/- (Rs.6,76,598/- - ₹ 5,23,511/-) was deleted. On appeal before the Tribunal, the Tribunal took note of the decision of the Special Bench, Chandigarh, in the case of Panjab State Industrial Development Corporation Ltd., vs. DCIT (102 ITD 10) , wherein it was held that only actual expenditure incurred in earning exempted income to be disallowed on actual basis and not on adhoc estimate basis. Accordingly, the finding rendered by the Assessing Officer was set aside and the matter was remanded to the Assessing Officer to disallow only actual expenditure incurred in connection with the earning of exempted dividend income. Thus, the order passed by the Tribunal is a remand order to the Assessing Officer for fresh examination. 20.Considering the facts of the case as well as the stand taken by the assessee before the Assessing Officer, vide letter dated 23.05. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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