TMI Blog2016 (3) TMI 1350X X X X Extracts X X X X X X X X Extracts X X X X ..... enue : Shri Sunil Chander Sharma, CIT DR ORDER PER A.T. VARKEY, JUDICIAL MEMBER : These cross appeals filed by the assessee and revenue are against the order of the CIT (Appeals)-III, New Delhi dated 28.08.2008 for the assessment year 2005-06. ASSESSEE S APPEAL (ITA No.3265/Del/2008) 2. Ground No.1 is against the order of the CIT (A) confirming the exclusion of ₹ 50,42,717/- being profit from sale of VSAT equipment u/s 80IA of the Income-tax Act, 1961 on the ground that such profits are not derived from eligible business or providing telecommunications services. 3. At the outset itself, the ld. AR pointed out that this issue has been remitted back by the Hon ble Delhi High Court in assessee s own case vide order dated 17th May, 2012 in ITA 284/2011 and took our attention to the question of law framed by the Hon ble High Court as under :- Whether learned ITAT erred in law in holding that income of ₹ 50,42,764/- from trading activities is derived from Industrial undertaking within the meaning of Section 80-IA of the Income Tax Act, 1961? The Hon ble High Court dealt with the issue as under in Paras 10, 11 12 of the said order wherei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore we direct the AO to include the receipt of ₹ 5042717/- representing income from sale of equipment in the eligible receipt for grant of deduction u/s 80IA. 11. Learned counsel for the Revenue, during the course of hearing before us, has drawn our attention to the assessment order and the stand taken by the assessee. It was submitted that the assessee had stated and accepted that the customers could buy the equipment from them or from third parties and had pleaded that entire income, which was inextricably related to business of telecommunication and was exempt. Sale of equipment etc., had close and direct nexus with profit and gains of the stipulated industrial undertaking. 12. The legal contention of assessee is substantially correct. However, what was relevant and required examination was the contracts under which the sales were made. Sale of TV Camera, Air Conditioner, generator sets per se or on standalone basis would not qualify for deduction 80IA read with sub-section (4) clause (ii). On the other hand, in case the assessee has been awarded a contract for providing telecommunication service, network of trunking and broadband/internet services and while and f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court in assessee s own case for AY 2005-06 in ITA 130/2011 dated 17th May, 2012, wherein the question of law was framed as under :- 1. Whether on the facts and in the circumstances of the case, the Tribunal erred in law in holding that income earned by the appellant from development of software upgrades for Network Management Systems for smooth and trouble free working of VSAT service provided by the appellant, as part of business of telecommunication services, was not eligible for deduction under Section 80-IA(4(ii) of the Income Tax Act? The Hon ble High Court dealt with the aforesaid issue in Para 13 to Para 16 wherein it has been held as under :- 13. The question No.1 raised in the appeal of assessee i.e. ITA 130/2011 relates to income earned from development and sale of software and whether the said amount qualifies for deduction under Section 80IA. The tribunal has not treated the proceeds from sale of software declared by the assessee as Eligible for deduction under Section 80IA on the ground that the income derived from the sale of software was not derived from qualifying business i.e. telecommunication services. It has been observed that development of soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch was developed and sold. The exact reasoning given by the tribunal reads as under:- 4.8 In regard to income from software, the development of software is certainly a separate source of business income of the appellant different from providing Telecommunication services. Thus, this income cannot be said to the income derived from the eligible business of providing Telecommunication service. The appellant has shown total receipts of ₹ 61,58,000/- from development and selling of software. The A.O. has allowed expenses on account of salary paid to employees and other administrative expenses of ₹ 4,00,000/- and calculated the net profit from software development at ₹ 57,58,000/-. The A.R. of the appellant submitted that the appellant had incurred higher amount of expenses than ₹ 4,00,000/- on the development of software because apart from personnel/staff, the appellant had incurred various other overhead charges also. But the appellant had not furnished any details of expenses in excess of 4,00,000 incurred for the development of software. In these circumstances, the calculation made by the A.O. does not warrant any interference. Since the income earned fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 10. This issue has been framed by Hon ble High Court in assessee s own case in ITA 130/2011 as under :- 2. Whether on the facts and in the circumstances of the case, the Tribunal erred in law in not directing exclusion of only net interest income, i.e., gross interest income less expenditure incurred for earning such interest income, while computing deduction under Section 80-IA of the Income Tax Act? The Hon ble High Court has dealt with this issue from paras 17 to 23 as under:- 17. The last question is question No.2 in ITA No.130/2011. The findings recorded by the tribunal in this regard are that the assessee had earned interest income on FDRs of ₹ 7,61,584/- and other interest of ₹ 77,042/-. It has been observed by the tribunal that the aforesaid receipts cannot be included in the income derived from the specified activities in view of the decision of this Court in CIT Vs. Shri Ram Honda Power Equip (2007) 289 ITR 475. 18. The assessee has submitted that they had earned this interest of ₹ 8,38,626/- on FDRs pledged with the banks for availing non-fund based credit limits but they had paid interest of ₹ 1,70,99,277/- and, effectively th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a similar nature included in such profits; and (2) the profits of any branch, office, warehouse or any other establishment of the Assessee situate outside India. 12. Explanation (baa) extracted above states that profits of the business means the profits of the business as computed under the head Profits and Gains of Business or Profession as reduced by the receipts of the nature mentioned in clauses (1) and (2) of the Explanation (baa). Thus, profits of the business of an Assessee will have to be first computed under the head Profits and Gains of Business or Profession in accordance with provisions of Sections 28 to 44D of the Act. In the computation of such profits of business, all receipts of income which are chargeable as profits and gains of business under Section 28 of the Act will have to be included. Similarly, in computation of such profits of business, different expenses which are allowable under Sections 30 to 44D have to be allowed as expenses. After including such receipts of income and after deducting such expenses, the total of the net receipts are profits of the business of the Assessee computed under the head Profits and Gains of Business or Profession ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n sub-section (4) to Section 80IA. The words used in Section 80IA(1) and (2A) are profit and gains of eligible business . On the basis of same logic and reasoning, we have to first find out the profit and gains of business from the specified activities. Section 80IA was interpreted and elucidated in Liberty India v. Commissioner of Income Tax, (2009) 9 SCC 328. It was highlighted Section 80IA is a profit linked incentive and only profits derived from eligible business are entitled to deduction. The expression derived from covers sources not beyond the first degree. Devices to inflate or reduce profits from eligible business should be rejected. On DEPB utilization and duty drawback it was held:- 39. Analysing the concept of remission of duty drawback and DEPB, we are satisfied that the remission of duty is on account of the statutory/policy provisions in the Customs Act/Scheme(s) framed by the Government of India. In the circumstances, we hold that profits derived by way of such incentives do not fall within the expression profits derived from industrial undertaking in Section 80-IB. 22. Reliance was placed by the assessee on AS 2 and explaining the same in Liberty In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applied AS-2 as could be seen from the following illustration: Expenditure Opening stock Amount(Rs) 100 Income Sales Amount(Rs) 1000 Purchases (including customs duty paid) 500 Duty drawback Received 100 Manufacturing overheads 300 Closing stock 200 Administrative, selling and distribution expenses 200 Net profit 200 1300 1300 Note : In the above example, the Department is allowing deduction on profit of ₹ 100 under Section 80-IB of the 1961 Act. (emphasis supplied) 23. In view of the aforesaid observations in the case of Liberty India (supra), the aforesaid second question of law in ITA No.130/2011 is answered in negative with an order of remand to the tribunal. In the absence of details, it is directed that the tribunal will examine th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the said satellite was not a domestic satellite‟ as it was owned by Department of Space, Government of India, which was not an Indian company and was being operated by British Telecom (Worldwide), a foreign company. The said view, however, was not accepted by the CIT (Appeals), who held that British Telecom (Worldwide) or INTELSAT did not have ownership right over the satellite. Relying upon the letter dated 21st November, 2007, written by the Director, ISRO, it was held that the satellite was owned by the Department of Space, Government of India and, therefore, the Assessing Officer was not justified in excluding the income earned from the domestic satellite services. The view of the CIT (Appeals) has been affirmed by the tribunal. 8. The Assessing Officer to compute and make the aforesaid addition of ₹ 1,42,34,278/- observed that the assessee had made payment of ₹ 13,42,288/- to British Telecom (Worldwide) and had not shown any income or receipts earned from any third party. The addition was made holding that the income included income from satellite services not in the nature of domestic satellite service as defined for purpose of the Section 80IA. The pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aspect afresh. The tribunal has to examine and clearly decide nature and character of service rendered by the assessee to third parties and whether the same qualifies and is a prescribed/stipulated service under section 80IA. The order of remit is also necessary in view of the ambiguous stand of the assessee before the Assessing Officer and the appellate authorities which has contributed to the confusion. The letter written by the assessee to the Assessing Officer reads:- From the above, it is clear that though the payment to BT is made in USD, yet the same was paid for use of domestic Satellite which is owned and operated by Department of Space, Government of India but leased out by Department of Space (DOS) to INTELSAT, who in-turn have subleased part of it to BT and some of which is used by the assessee Company. Hence, this is no question of disallowance under Section 80IA in this regard. Both sides agree that this issue also should be remitted back to the file of the AO and so, we are inclined to remit back the matter to the file of the AO to be decided afresh as directed by the Hon ble High Court in Para 9 (supra), after giving opportunity to the assessee. 15. Groun ..... X X X X Extracts X X X X X X X X Extracts X X X X
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