9911796707
TMI Blog2023 (12) TMI 1135X X X X Extracts X X X X X X X X Extracts X X X X ..... law? 38 Whether the re-assessment notice under Section 147 r/w Section 148 amounts to borrowed satisfaction as it places reliance on findings recorded in the assessment proceedings recorded in the Assessment Year 2008-2009? 55 (iv) Whether the bar under third Proviso to Section 147 of the I.T. Act is a legal impediment insofar as the present re-assessment notice is concerned? 60 IV Implication of Circular No. 1/2013 80 The petitioner has filed three Writ Petitions before this Court i.e., W.P. /2013, 43236/2013, 43237/2013. The petitioner who is common in all these Writ Petitions has sought to challenge the re-assessment proceedings initiated pursuant to the notice issued under Section 148 read with Section 147 of the Income Tax Act, 1961 ('I.T. Act'). 2. W.P. No. 15061/2013 pertains to the Assessment Year 2005-2006; W.P. No. 43236/2013 pertains to the Assessment Year 2006-2007; W.P. No. 43237/2013 pertains to the Assessment Year 2007-2008. I. FACTS:- A. W.P. No. 15061/2013 3. The petitioner has sought for a declaration that the proceedings initiated by the respondent No. 1- Deputy Commissioner of Income Tax (DCIT) under Section 147 read with Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10.2011. It is further submitted that the petitioner has preferred an appeal against the order dated 18.10.2011 before the Appellate Tribunal, which is still pending adjudication. 9. During the consideration of such of the proceedings referred to above, the Additional Commissioner of Income Tax Range-11, Bangalore, took up the petitioner's assessment for the Assessment Year 2008-2009 and had disallowed the petitioner's claim for deduction under Section 10A of the I.T. Act substantially. It is the case made out by the petitioner that taking note of the assessment for the Assessment Year 2008-2009, the Assessing Officer issued a notice dated 29.03.2012 under Section 148 r/w Section 147 of the I.T. Act proposing to reassess the petitioner's income for the Assessment Year 2005-2006. 10. Insofar as the reassessment under Section 148 of the I.T. Act, the reasons recorded prior to issuance of notice was responded by filing of detailed objections by the petitioner invoking the provisions under Section 147 of the I.T. Act which came to be rejected by an order dated 13.03.2013. B. W.P. No. 43236/2013 11. The petitioner has sought for a declaration that the proceedings initiated by the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 237/2013 16. The petitioner has sought for a declaration that the proceedings initiated by the respondent No. 1- Assistant Commissioner of Income Tax under Section 147 read with Section 148 of the I.T. Act for the Assessment Year 2007-2008 as being barred by limitation and without jurisdiction. The petitioner has also challenged the notice dated 08.10.2012 (Annexure-'D') under Section 148 r/w Section 147 of the I.T. Act for the Assessment Year 2007-2008. Further, the petitioner has also sought for quashing of the order bearing F.No.DCIT-C-11-4/BGL/13-14 dated 26.08.2013 (Annexure-'J') which is the order passed by respondent No. 2 rejecting the objections filed by the petitioner to the notice issued under Section 148 of the I.T. Act for reopening of assessment in respect of Assessment Year 2007-2008. 17. Petitioner's regular assessment for the Assessment Year 2007-2008 was taken up under Section 143(3) of the I.T. Act. In due course of assessment with regard to certain international transaction and furnishing of Audit Reports under Section 92E reference was made to Transfer Pricing Officer under section 92CA of the I.T. Act. Thereafter, vide order dated 23.12.2010 a draft assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are taken up by the Authority on the basis of valid reasons recorded which satisfies the conditions for invoking reassessment proceedings and such reason is based on the tangible material noticed in the assessment for of the year 2008- 2009. That the materials, such as, Master Service Agreements (MSA), Works Contracts/ Scope of Work (SCW), Invoices and other details related to claim of rebate under Section 10A of the I.T. Act establishes that the assessee has earned income from Deputation of Technical Manpower (DTM) and not from export of software. Such material was not part of the assessment proceedings for the Assessment Years in question. (b) The Tangible material that has come forth during the assessment proceedings for the Assessment Year 2008-2009 was not a part of the records during the earlier assessment proceedings and accordingly, on the basis of such material re-assessment is permissible. (c) That the aspect of deputation of technical manpower was not dealt with by the Assessing Authority in the earlier assessment proceedings and such DTM came to light only in the assessment year 2008-09 and hence subject matter is different and accordingly third proviso to Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year would require that the assessee has failed to disclose fully and truly all material facts necessary for assessment. 26. The relevant extract of Section 147 of I.T. Act prior to its substitution reads as follows:- "147. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) : Provided that where an assessment under sub- section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from them, the authority has to draw the proper legal inferences, and ascertain on a correct interpretation of the taxing enactment, the proper tax leviable. Thus, when a question arises whether certain income received by an assessee is capital receipt, or revenue receipt, the assessing authority has to find out what primary facts have been proved, what other facts can be inferred from them, and taking all these together, to decide what the legal inference should be. 9. There can be no doubt that the duty of disclosing all the primary facts relevant to the decision of the question before the assessing authority lies on the assessee. To meet a possible contention that when some account books or other evidence has been produced, there is no duty on the assessee to disclose further facts, which on due diligence, the Income Tax Officer might have discovered, the legislature has put in the Explanation, which has been set out above. In view of the Explanation, it will not be open to the assessee to say, for example - "I have produced the account books and the documents: You, the assessing officer examine them, and find out the facts necessary for your purpose : My duty is done with dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that with due diligence the Income Tax Officer could have discovered them from the facts actually disclosed. The Explanation has not the effect of enlarging the section, by casting a duty on the assessee to disclose "inferences" to draw the proper inferences being the duty imposed on the Income Tax Officer. 13. We have therefore come to the conclusion that while the duty of the assessee is to disclose fully and truly all primary relevant facts, it does not extend beyond this." 28. From the above, it can be stated as follows:- a) Assessee is to disclose the primary facts in his possession and the Assessing Authority on the basis of such recovery or facts discovered on the basis of facts disclosed or otherwise, could draw inferences regarding such other facts. b) The duty to disclose does not extend beyond full and truthful disclosure of all primary facts. c) It is not the duty of the assessee to tell the Assessing Authority what inferences whether of facts or law should be drawn. d) There is no duty cast on the assessee to disclose inferences which is a duty imposed on the Income Tax Officer. e) The duty to disclose primary facts extends to making a disclosure which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to make a declaration in Form-56F in the form of report of an accountant along with the return of income [Rule 16D has been omitted by IT(21st Amendment) Rules, 2021 w.e.f. 29.07.2021]. The omission of Rule 16D was only later and was in existence on the relevant date when the assessee has filed the return of Income. In terms of the declaration, the accountant has certified that the petitioner was engaged in export of computer software and the relevant details relating to deduction under Section 10A of the I.T. Act has been detailed in Annexure-'A'. The further declaration in Annexure-'1' annexed to Annexure-'A' which provides details relating to claim by the exporter for deduction under Section 10A of the I.T. Act contains a declaration as follows:- Name of the undertaking Software Technology Park Unit-I Software Technology Park (India Development Centre) Unit-II Software Technology Park (India Engineering Centre) Unit-III Software Technology Park Unit-IV Software Technology Park Technical support Contact Centre Unit-V Location and address of undertaking Digital GlobalSoft Limited 45/14 Tumkur Road Yeshwanthpur, Bangalore-560022 Digita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT, Bangalore-1 under Section 263 of the I.T. Act dated 22.12.2009 the assessment proceedings were directed to be re-done by recording a finding as to eligibility of deduction under Section 10A/80HHE of the I.T. Act. In the fresh assessment proceedings initiated culminating in passing of the Assessment Order by the order dated 24.12.2010 as regards the expenditure relating to providing technical services outside India, the material was placed before the Assessing Officer on such aspect as is revealed from the observations at paras-9 and 10 of the order, which are extracted hereinbelow: "9. When the above issues are raised before the AR of the assessee, AR of the assessee made a detailed submission. The gist of the submission made by the assessee are that the activities regarding which the expenditure incurred in foreign exchange do not amount to providing of technical services outside India regarding exclusion of communication expenses from both export turn over and total turn over, the same was claimed to be done on the basis of parity between export turn over and total turn over and also on the basis of definition of total turn over elsewhere in the provisions of the IT Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r only. b. Loss of one 10A unit was set off against the profits of other 10A units 2. Capitalization of Software Expenditure On account of additions and disallowances as above, the deduction of claim under Section 10A had been reduced to Rs. 114,87,47,042/-. Further order u/s 143 (3) rws 263 was passed on 24.12.2010 reducing the expenditure incurred in foreign currency for providing technical services from export turn over only and the deduction u/s 10A was revised to Rs. 74,25,62,786/- 3. During the course of scrutiny proceedings conducted for A.Y. 2008-09 various information including a large number of Master Service Agreements, Work Contracts/Scope of works, Invoices and other details related to the deduction claimed u/s 10A of the Income-tax Act were called for. On account of detailed fact finding during the course of this scrutiny proceedings for A.Y. 2008- 09, the following additions/disallowances to the returned income for A.Y. 2008-09, were made a. It is noticed that the assessee company is rendering a large body of work onshore abroad related to software developmental activities. However, it was detected that none of the said software development activities onshor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther, that such activity was known as body shopping and eligible for deduction under Section 80HHE of the I.T. Act and was not an activity that was eligible for deduction as regards expenses under Section 10A of the I.T. Act. 36. It is submitted that this very aspect has been a subject matter of consideration by the Assessing Officer while passing a fresh Assessment Order on 24.12.2010 consequent to the directions made in the order under Section 263 of the I.T. Act dated 22.12.2009 vide F.No. 17/263/CIT-1/2009-10 (Annexure-'C'). It is submitted that in the Assessment Order passed, while computing deduction under Section 10A there was exclusion of expenditure relating to the visits of the Company's employees as well as expenses incurred relating to software development services to the clients amounting to Rs. 263,01,80,361/-. Accordingly, it is contended that the very aspect of profits from rendering technical services in context of export of computer software having been examined and a decision based on legal appreciation having been arrived at, cannot be reconsidered subsequently in reassessment proceedings, as it is impermissible to reopen assessment on the basis of "mere change ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reason to believe", Parliament reintroduced the said expression and deleted the word "opinion" on the ground that it would vest arbitrary powers in the assessing officer. 8. We quote herein below the relevant portion of Circular No. 549 dated 31-10-1989, which reads as follows: "7.2. Amendment made by the Amending Act, 1989, to reintroduce the expression 'reason to believe' in Section 147.-A number of representations were received against the omission of the words 'reason to believe' from Section 147 and their substitution by the 'opinion' of the Assessing Officer. It was pointed out that the meaning of the expression, 'reason to believe' had been explained in a number of court rulings in the past and was well settled and its omission from Section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended Section 147 to reintroduce the expression 'has reason to believe' in the place of the words 'for reasons to be recorded by him in writing, is of the opinion'. Other provisions of the new Section 147, however, remain the same." 38. It must be noticed that, in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indicate that the Assessing Officer had examined the nature of receipts in detail having regard to the nature and extent of technical services rendered outside India during the relevant previous year ended 31.03.2005 irrespective of the nomenclature used for describing such services. In view of the failure of the Assessing Officer to examine this aspect of the matter, the assessment order is held to be erroneous and pre-judicial to the interest of the revenue. With reference to the submissions made by the assessee based on the assessments made for the earlier assessment year, it is necessary to mention that each year's assessment is a separate proceeding and deduction allowable u/s 10A/80HHE depends on the facts of the case for the relevant assessment year." 39. Finally, the order dated 22.12.2009 concludes with a direction as follows:- "17....to allow the deduction/deductions allowable u/s 10A/ 80HHE in accordance with law after making the necessary verification in the light of my observation above after giving the assessee a reasonable opportunity of being heard". 40. Consequent to such direction, the Assessing Officer has taken up the proceedings afresh and has passed an ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elied upon are the MSA's, Works contracts/SCW's, Invoices and other details relating to the deduction claimed under Section 10A of the I.T. Act. All of which is stated to have come to the notice of the Department relating to the Assessment Year 2008-2009. However, even on a perusal of para-2.10 of the Assessment Order relating to the Assessment Year 2008- 2009, "... the assessee as has been asked on innumerable occasions to submit MSAs and SOWs that it had with its clients the assessee has only been able to provide some of the sample MSAs and SOWs...". Similar observation is made at para-2.12, which reads as follows, "... the assessee has not been able to submit all the SOWs and MSAs entered for software contract services...". The finding by the Assessing Authority is by placing the burden on the assessee regarding correlation between the MSA, SOW/ work order vis-a-vis work carried out by STP/SCZ unit. 46. In light of the above, the tangible material sought to be relied upon itself not being complete, it cannot be held that the MSAs and SCWs would demonstrate that the declaration made by the assessee leads to a conclusion that there has been escapement of income. It is also a sett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... related to the undertaking eligible for deduction u/s 10A of the I.T.Act. Such onshore receipts were treated as companywide software receipts not related to the STP Undertakings in India. This had been computed and the deduction claimed u/s 10A of the I.T.Act had been drastically reduced. b. During the course of said fact finding it had also been detected that the assessee company is in the business of deputing technical manpower (DTM) of providing short duration technical manpower abroad. Such business activity commonly known as Body Shopping was eligible for deduction u/s 80HHE of the I.T.Act and was not included as an eligible activity u/s 10A of the I.T.Act. It had been noticed from the contracts and invoices that the assessee company had substantial revenue from such DTM activity and it claimed the revenue receipt from the same as software development activity. It had been detected that assessee had made similar claims for earlier Assessment Years also. 4. During the course of assessment for A.Y. 2008-09, it had been clearly detected that similar issues of additions/disallowances were there for previous Assessment Years also. In fact the assessee company is in the same bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pendency of Appeal/Revision/ Reference Date of institution of column(3) proceedings Remarks 1 2 3 4 5 15061/2013 A.Y. 2005-06 29.03.2012 Appeal No. IT(TP)A No. 162 (Bang )2012 (A.Y. 2005-06) Appeal filed against the order of CIT-(Appeals)-I dt. 18.10.2011. The CIT(Appeals)-I had rejected the appeal challenging the order passed giving effect to Order under Section 263 by the Assessing Officer. 30.01.2012 Appeal pending as on date of 148 notice. 43236/2013 A.Y. 2006-07 13.09.2012 Appeal No. IT(TP)A No. 1455(Bang)(2010) (A.Y. 2006-07) Appeal filed against the Assessment Order dated 11.10.2010. 14.12.2010 Appeal pending as on date of 148 notice. 43237/2013 A.Y. 2007-08 08.10.2012 Appeal No. IT(TPA) No. 1031/Bang/2011 (A.Y. 2007-08) Appeal filed against the Assessment Order dated 30.08.2011. 04.11.2011 Appeal pending as on date of 148 notice. 52. In the above context and looking into the bar under the third proviso to Section 147, the object being to prohibit proceedings under Section 148, when appeal/revision/reference is pending, in the present case, taking note of the details in the Table above, more particularly, noticing pendency of appeals in Column No.(4) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices rendered by the Company are of the nature of technical services and therefore expenditure incurred in providing these services amounting to Rs. 294,66,48,857/- are required to be reduced from the export turn over as per the definition of export turn over contained in the provisions of Section 10A of the I.T. Act. 15. The AR of the assessee further argued that the Company does not recover any amounts from its clients towards any expenses related to provision of technical services outside India. The stand taken by the Assessee is not acceptable. The argument of the AR of the assessee that there was no recovery by the assessee from its customers towards provision of technical services outside India is not acceptable for the reason that assessee need not have to recover from the clients separately for each and every item of the expenditure incurred by the assessee in any contract for services it had entered into with the client. The assessee while pricing a product or service normally arise at the cost of providing the product or service and then adds a margin of profit. In such a case the expenses, incurred in foreign currency in connection with provision of technical service o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany's activities abroad. During the course of investigation conducted, it had been detected on facts as per various contracts/SOW, work orders and invoices that a large body of work related to software development activity conducted onshore abroad had no link whatsoever activity was treated as no related to the undertaking eligible for deduction u/s. 10A of the I.T. Act. Such onshore receipts were treated as Company wide software receipts not related to the STP undertakings in India. This had been concluded and the deduction claimed u/s.10A of the I.T. Act had been drastically reduced. b. During the course of said fact finding it had also been detected that the assessee company is in the business of deputing technical man power (DTM) of providing short duration technical man power abroad. Such business activity commonly known as Body Shopping was eligible for deduction u/s. 80HHE of the I.T. Act and was not included as an eligible activity u/s. 10A of the I.T. Act. It had been noticed from the contracts and invoices that the assessee Company had substantial revenue from such DTM activity and it claimed the revenue receipt from the same as software development activity. It had b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnical services outside India is made out, there would end the duty of the assessee and the question of nexus is a matter that the Assessing Officer ought to have clarified by further investigation. 58. Further, the reliance on documents that has come out as regards the proceedings for the Assessment Year 2008-2009 by way of MSAs, Work Contracts, SCWs and Invoices cannot be sufficient by itself to initiate proceedings for deduction under Section 10A of the I.T. Act in light of absence of nexus. If that were to be so, as the reliance on such documents for the purpose of reducing Section 10A of I.T. Act, the deduction for Assessment Year 2008-2009, itself has not attained finality and is subject to appeal as averred by the petitioner in the pleadings which remains uncontroverted. If that were to be so, the material relied upon in assessment proceedings for the Assessment Year 2008-2009 not having been finally adjudicated so as to indicate requirement to reduce Section 10A deduction, the same cannot be made use of for reassessment proceedings. The requirement that there must be true and full disclosure cannot be stated to have been breached by taking recourse to the material produced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the delivery of software outside India to the extent of Rs. 9,77,74,451/-, has been restricted to export turn over only and accordingly deduction u/s 10A of the IT Act has been computed. 19. As discussed above, the deduction u/s 10A of the IT Act has been computed after excluding the expenses incurred in foreign exchange in respect of providing technical services outside India and expenses on telecommunications attributable to the delivery of software outside India and the competition has been done for all the eligible units under Section 10A disregarding whether the unit is profit making or loss making." 60. It is clear that the Assessing Officer has dealt with expenditure incurred in providing technical services outside India and despite the assertion by the Company that the expenditure incurred on activities in foreign exchange do not amount to providing technical services outside India, the Assessing Officer has concluded that the said expenditure incurred in foreign exchange for visit of the Company's employees to the location of the clients' and providing software development services would not fall within the permissible deduction under Section 10A of the I.T. Act. 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respects to reasons for reopening made out as regards the Assessment Year 2006-2007 and the discussion made supra at paras-57 and 58 relating to the said Assessment Year 2006-07, is adopted to arrive at the conclusion that the assessing officer has not made out grounds for the for the purpose of reopening the assessment. IV Implication of Circular No. 1/2013 [F.No.178/84/2012 - ITA.I - Government of India, Ministry of Finance, Department of Revenue, CBDT dated 17.01.2013.]:- 63. It must be noted that Circular No. 1/2013 has sought to clarify issues relating to export of computer software. The clarifications issued at para-2(ii) specifically deals with the requirement of separate Master Service Agreement. The observations at para- 2(ii) is extracted as hereinbelow: "2(ii) WHETHER IT IS NECESSARY TO HAVE SEPARATE MASTER SERVICE AGREEMENT (MSA) FOR EACH WORK CONTRACT AND TO WHAT EXTENT IT IS RELEVANT. As per the practice prevalent in the software development industry, generally two types of agreement are entered into between the Indian software developer and foreign client. Master Services Agreement (MSA) is an initial general agreement between a foreign client and a Indian soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clearly declare that profits and gains derived from 'services for development of software' outside India would also be deemed as profits derived from export. It is therefore clarified that profits earned as a result of deployment of Technical Manpower at the client's place abroad specifically for software development work pursuant to a contract between the client and the eligible unit should not be denied benefits under sections 10A, 10AA and 10B provided such deputation of manpower is for the development of such software and all the prescribed conditions are fulfilled." 65. It clarifies that the expenditure incurred for services to develop software outside India could be allowed under section 10A of the I.T. Act if deputation is for development of software. 66. Para 2(i)(a) deals with the clarification relating to onsite development of computer software which qualifies as export activity for tax benefit under section 10A. The clarification in that regard at para- 2(i)(a) is extracted below: (a) CBDT had earlier issued a Circular (Circular No. 694 dated 23.11.1994) which provided that a unit should not be denied tax- holiday under sections 10A or 10B on the ground that the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 10A of the I.T. Act merely on the ground that such activities are rendered outside the eligible units c) Tax benefits under Section 10A of the I.T. Act cannot be denied merely on the ground that specific MSA does not exist. Even in the presence of MSA, it is the Statement of works that would prevail. d) Accordingly, the circular further clarifies the position in relation to services of software development activities in the clients' place abroad and widens the scope of allowability of deduction under Section 10A of the I.T. Act itself without claiming deduction under Section 80HHE of the I.T. Act. e) When the present facts are looked into, it is clear that the deductions sought for could fall within the scope of Section 10A of the I.T. Act, which however is a determination to be made on merits while this court is only considering as to whether the Assessing Officer has applied his mind to the issue of deduction under Section 10A of the I.T. Act, whether the assessee has made true and full disclosure of relevant primary facts. In order to come to a conclusion regarding the above two aspects, the circular would throw some light and it is in such context that the circula ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
