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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 ..... 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 Rs. 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 case, the CIT(A) erred in law and on facts in deleting the disallowance made by the AO u/s 80HHE and 10A of the Income Tax Act, 1961 on account of profits derived from overseas branches. 3. The order of the CIT(A) is erroneous and is not tenable on facts and in law. A.Y. 2005-06: 1. On the facts and in the circumstance of the case, the CIT(A) has erred in deleting the disallowance made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee 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 PROCEEDINGS U/S 143(3) & CONSEQUENTIAL APPELLATE PROCEEDINGS For the relevant assessment year, the return of income was filed by the assessee on 01.11.2004 declaring income of Rs. 16,75,00,900. The assessee claimed, inter alia, deduction u/s 80HHE & 10A. The return was selected for scrutiny and assessment order dated 28.02.2006 was passed under section 143(3) of the Income-tax Act, 1961 ("the Act") wherein, the assessing officer computed deduction u/s 80HHE and u/s 10A. The details of deduction claimed vis-à-vis deduction allowed by the assessing officer in assessment are tabulated as under: Units Deduction claimed u/s 80HHE/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,00,451 after making following disallowances: * Excess claim disallowed u/s 80HHE in respect of Leela Galleria unit - Rs. 3,76,81,835 * Excess claim disallowed u/s 10A in respect of GNR unit - Rs. 11,35,51,884 The assessing officer rejected claim of the assessee qua deduction u/s 80HHE of the Act on the ground that the operations were performed at the customer's location outside India by the foreign branches of the assessee and the same is excluded under Explanation (d) to the said section. @ Reassessment order para 6-21 The deduction claimed u/s 10A qua profits derived from onsite software development services was also disallowed on the ground that the assessee had rendered technical services outside India through its foreign branches and profits derived from rendering technical services outside India were to be excluded from the export turnover while computing deduction u/s 10A of the Act. @ Reassessment order para 6-21 RE: CIT(A) ORDER DATED 01.03.2012 IN APPEAL AGAINST 148 ORDER Reassessment proceedings were illegal and without jurisdiction @ pg 4-15 of the CIT(A) order CIT(A) held that reassessment proceedings were without jurisdiction, being initiated on mere c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ossession of the assessing officer for initiating reassessment. It is respectfully submitted that section 147/ 148 does not confer unrestricted power on the assessing officer to reopen assessment and on failure to pass the aforesaid jurisdictional test, impugned reassessment proceedings are clearly without jurisdiction and liable to be quashed. The Delhi High Court in the case of Donaldson India Filters Systems (P) Ltd vs DCIT: 371 ITR 87 (Del) held as under: "24. It is clear from bare reading of the aforementioned satisfaction note recorded by the assessing authority for reopening the assessment five years after the assessment had been completed under Section 143(3) (on 30.11.2005) that the only indication set out as to the grounds which had triggered such action is through the words "after going through the records". The assessing authority would not elaborate as to which records had been adverted to and what was the event which had occurred that had impelled such perusal of the records for a fresh view to be taken. Noticeably, the Assessing Officer while recording his satisfaction by note dated 19.03.2010 that a case had been made out for the income to be reassessed would no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ued by Chartered Accountant in prescribed Form No.56F which was annexed to the return of income, etc. (@ PB pg 477-484) and the assessing officer has merely referred to the same documents for forming a belief that income of the assessee has escaped assessment. Change of opinion Reassessment has been initiated merely on the basis of change of opinion since the assessing officer during the course of assessment proceedings u/s 143(3) of the Act had already examined the claim of deduction u/s 10A of the Act and disallowed the same partly after thorough deliberation and discussion in the assessment order. Also, deduction u/s 80HHE of the Act was duly examined and allowed by the assessing officer after making certain adjustments. The same is explained as under: Deduction u/s 10A of the Act It is pertinent to note that the assessing officer in assessment finalized u/s 143(3) of the Act had held that the assessee was providing technical services outside India and had, therefore, excluded expenses incurred in foreign currency from the export turnover while computing eligible deduction u/s 10A of the Act. The said action of the assessing officer was challenged and adjudicated in appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 148 of the Act by the assessing officer for assessment year 2004-05, which decision squarely covers the present case. In the said case, reason for initiation of reassessment, inter alia, was allowance of deduction claimed under section 10A of the Act in respect of profits of foreign branches of eligible undertakings. Noting that the assessee had filed Form 56F in support of its claim of deduction and had also filed details of telecommunication expenses and expenses incurred in foreign currency during the course of assessment proceedings u/s 143(3), amongst other details, the Court was of the firm view that there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. It was also held that the reassessment was initiated not on the basis of any tangible material but 'on perusal of the record' (akin to the facts of the present case) and that the said proceedings were essentially invoked on account of change of opinion. For the said reasons, notice issued u/s 148 and consequential proceedings were quashed by the High Court. Reliance is placed on the decision of the Delhi High Court in the case of Moser Baer India Ltd vs D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 609 (Guj) held that where AO initiated reassessment proceedings on ground that deduction under section 10A was wrongly allowed as assessee's units were situated outside STPI, in view of fact that the assessing officer had allowed assessee's claim for deduction after a detailed scrutiny, initiation of reassessment proceedings merely on basis of change of opinion was not justified. Reliance in this regard is also placed on the following decisions: * Usha International Limited: 348 ITR 485 (Del)(FB) * Manjusha Estate (P) Ltd vs ITO: 314 ITR 263 (Guj) - SLP dismissed by SC * Satnam Overseas Ltd & Anr vs ACIT: 329 ITR 237 (Del) * Jal Hotels Co Ltd vs ADIT: 184 Taxman 1 (Del) * CIT vs Feather Foam Ent (P) Ltd: 296 ITR 342 (Del) * CIT vs Eicher Ltd: 294 ITR 310 (Del) * KLM Royal Dutch Airlines vs ACIT: 292 ITR 49 (Del), SLP there against dismissed: CC 13507 of 2008 * CIT vs Goetze Ltd: 321 ITR 431 (Del) * Carlton Overseas (P) Ltd vs ITO: 318 ITR 295 (Del) * Jindal Photofilms Ltd vs DCIT: 234 ITR 170 (Del) * Northern Strips Ltd vs ITO: WP 8265 of 2008 (Del) * CIT vs Batra Bhatta & Co: 321 ITR 526 (Del) * Shipra Srivastava vs ACIT: 319 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (including the profits from onsite operations accounted as profit of the overseas branches to the extent attributable to the Leela Unit) at Rs. 12,60,85,082, whereas deduction was claimed under section 10A in respect of the profits of GNR and BPO units at Rs. 27,68,45,650 and Rs. 50,33,378. respectively. The assessing officer in the assessment completed under section 143(3) of the Act, computed deduction under section 80HHE of the Act in respect of Leela Galleria unit at Rs. 12,51,01,752 (as against Rs. 12,60,85,082 computed by the appellant), considering profit of the undertaking at Rs. 25,10,26,060 after reducing therefrom miscellaneous income to Rs. 13,72,907. The assessing officer has however, in the impugned re-assessment order completed under section 147, allowed deduction under section 80HHE of the Act in respect of Leela Galleria unit at Rs. 8,74,19,917 (as against Rs. 12,51,01,752 allowed in the original assessment order after excluding from the said profits of Leela Galleria unit the profits of the branches outside India amounting to Rs. 7,56,11,431. The assessing officer has now held that in terms of Explanation (d) of section 80HHE of the Act, profits of the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had made adjustments to the computation of deduction under section 80HHE / 10A of the Act, as claimed by the appellant. Further, clause (d) of Explanation to section 80HHE of the Act providing that profit of branch/office of the assessee situated outside India, is to be excluded from the profit of the business as also Explanation to sub-section (1) of section 80HHE of the Act with regard to the on-site software services, did exist in the statute when the original assessment proceedings were in progress before the assessing officer. Therefore, it cannot be anybody's case that the assessing officer was not aware of the factual 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. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, expenditure incurred in foreign exchange need not to be reduced from the export turnover or from total turnover. The ld. CIT(A) while deleting the addition u/s. 10A and 80HHE, has not properly considered the above aspect of the case. The deletion of depreciation is also not justified for the reason that the items on which the higher depreciation was claimed were in the nature of electric installation not eligible for depreciation more than 15%. 10. On the other hand, the ld. AR, relying on the impugned order, submitted a written synopsis before us, 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 four units in operation: (a) Software development unit ("Leela Galleria unit") - no deduction claimed as unit suffered losses; (b) BPO unit in respect of which deduction u/s 10A was claimed ("BPO unit"); (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 Techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction u/s 10A, the assessee preferred appeal before the CIT(A). In order passed by the CIT(A), it was held that activities of the assessee are to be regarded as that of developing and supplying software and the overseas 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not eligible for deduction u/s 10A. It was also held by the assessing officer that 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als 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 into a Master Service agreement ("MSA") with its only customer, viz., Deutche Bank AG (DB) for rendering software development services. Software development services required to be rendered by the appellant, in terms of the MSA, include o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant 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 placed on the decision of the Delhi Bench of the Tribunal in the case of DCIT vs. Interra Software India (P) Ltd. 112 TTJ 982 in the context of section 10A of the Act, wherein the Tribunal upheld the order of the CIT (A) allowing deduction in respect of profits derived a foreign branch, which was regarded as an extens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to have an effective presence in that country and establish a non-trading branch in Japan...". From this, it is amply clear that the Assessee wanted to enter and capture Japanese market by opening a branch office there and its revenues from the branch office are not covered under Explanation 3 to Section 10A of the Act. 7. Mr. Vohra, learned Counsel appearing for the Assessee, on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputer 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 enterprise and the Indian customers and vice versa. Wherever, such foreign office is working as a separate branch carrying on full-fledged marketing operations that would not be treated as onsite development. 12. We are in agreement with this interpretation suggested by learned Counsel for the Revenue. However, what we find from the record that matter is not examined in this perspective by the authorities below. 15. Before us an attempt was made by counsel for both the sides to interpret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 material brought on record by the assessing officer which can exhibiting that it was providing technical services. There are no receipt under that head. If the assessee was in the business of providing consultancy services, then assessing officer could have lay his hands on some agreement executed between the assessee and the entity who availed the consultancy charges. The assessing officer could also investigate from the receipts whether these were received by the assessee in lieu of any consultancy agreement or they are related to export of software developed by it. In view of the above, we do not find any justification in allocating a particular p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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