M/s. Ontrack Systems Ltd., CHENNAI V. ACIT, CHENNAI

CO 111/CHNY/2012

• Counselvise Citation: [2013] 122 COUNSELVISE.COM (IT) 8304 (ITAT-CHENNAI)
• Duration Of Justice: 9 month(s) 5 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 26-03-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 20-02-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 20-06-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Revised return; Unabsorbed depreciation
• Section: 148; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI BEFORE SHRI ABRAHAM P.GEORGE , ACCOUNTANT MEMBER AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER ITA NOS.2098 & 2099/MDS/2011 (ASSESSMENT YEARS: 2002-03 & 2006-07) & CROSS OBJECTION NO.111/MDS/2012 (IN IT A NO.2099/MDS/2011) (ASSESSMENT YEAR : 2006-07) ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE V(1), CHENNAI. VS. M/S. ONTRACK SYSTEMS LTD. BHATAD TOWERS, OFFICE NO.1, 3 RD FLOOR, 30 WEST COTT ROAD, ROYAPETTAH, CHENNAI-600 014. PAN:AAACO0679E (APPELLANT) (RESPONDENT /CROSS OBJECTO R) APPELLANT BY : MR. SHAJI P.JACOB, ADDL. CI T RESPONDENT BY : MR. PHILIP GEORGE, ADVOCATE DATE OF HEARING : 20 TH FEBRUARY, 2013 DATE OF PRONOUNCEMENT : 26 TH MARCH, 2013 O R D E R PER VIKAS AWASTHY, JM: THE PRESENT SET OF TWO APPEALS (ITA NOS.2098 & 2099/MDS/2011) HAVE BEEN FILED BY THE REVENUE IMPU GNING THE ORDERS OF THE CIT(A)-VI, CHENNAI DATED 16.09.2 011 FOR THE ASSESSMENT YEAR 2002-03 & 30.09.2011 FOR THE ASSESSMENT YEAR 2006-07 RESPECTIVELY. THE ASSESSEE HAS ITA NO.2098 & 2099 /MDS/2011 & C.O. NO.111/MDS/2012 2 FILED CROSS OBJECTION NO.111/MDS/2012 IN THE APPEAL OF THE REVENUE FOR THE ASSESSMENT YEAR 2006-07. ITA NO.2098/MDS/2011 (A.Y. : 2002-03): 2. THE ONLY ISSUE INVOLVED IN THE APPEAL IS WITH RE GARD TO SET OFF OF CARRY FORWARD UNABSORBED DEPRECIATION U NDER SECTION 10A OF THE ACT. THE ASSESSEE IS IN THE BUSI NESS OF SOFTWARE DEVELOPMENT. THE ASSESSEE FILED ITS RETUR N OF INCOME ON 31.10.2002 DECLARING ITS TOTAL INCOME OF ` 8,14,050/-. SUBSEQUENTLY, REVISED RETURN WAS FILED BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2002-03 ON 26.3.20 03. THE SAME WAS PROCESSED UNDER SECTION 143(1) ON 31.3 .2003. THE ASSESSEE HAD BROUGHT FORWARD UNABSORBED DEPRECI ATION OF ` 1,09,81,910/- RELATING TO THE ASSESSMENT YEAR 200 1-02. DURING THE ASSESSMENT YEAR 2002-03, THE ASSESSEE EA RNED PROFIT OF ` 1,11,05,882/- OUT OF WHICH ` 36,69,498/- WAS CLAIMED AS DEDUCTION UNDER SECTION 10A AND THE REMA INING PROFIT OF ` 74,36,384/- WAS SET OFF AGAINST BROUGHT FORWARD UNABSORBED DEPRECIATION TO ARRIVE AT BUSINESS LOSS OF ` 35,45,526/-. THEREAFTER NOTICE UNDER SECTION 148 WA S ISSUED TO THE ASSESSEE ON 26.7.2006. THE ASSESSING OFFICER VIDE ITA NO.2098 & 2099 /MDS/2011 & C.O. NO.111/MDS/2012 3 ASSESSMENT ORDER DATED 26.11.2007 REJECTED THE MET HOD OF THE ASSESSEE TO ARRIVE AT BUSINESS LOSS AFTER SETTI NG OFF OF BROUGHT FORWARD UNABSORBED DEPRECIATION FOR CLAIMIN G DEDUCTION UNDER SECTION 10A. AGGRIEVED AGAINST THE ASSESSMENT ORDER, THE ASSESS EE PREFERRED AN APPEAL BEFORE THE CIT(A). THE CIT(A) FOLLOWING THE ORDER OF THE SPECIAL BENCH OF THE TRIBUNAL IN T HE CASE OF SCIENTIFIC ATLANTA INDIA TECHNOLOGY P. LTD. VS. ACI T REPORTED AS 129 TTJ 273(SB) ALLOWED THE APPEAL OF THE ASSESS EE BY REMITTING THE MATTER BACK TO THE ASSESSING OFFICER WITH A DIRECTION TO ALLOW DEDUCTION UNDER SECTION 10A WIT HOUT SETTING OFF OF UNABSORBED DEPRECIATION OF THE EARLIER YEAR. AGGRIEVED AGAINST THE ORDER OF THE CIT(A), THE REVENUE HAS CO ME IN SECOND APPEAL BEFORE THE TRIBUNAL. 3. MR. SHAJI P.JACOB, APPEARING ON BEHALF OF THE RE VENUE SUBMITTED THAT THE CIT(A) HAS ERRED IN HOLDING THAT THE CARRY FORWARD UNABSORBED DEPRECIATION SHOULD BE SET OFF O NLY AFTER GIVING DEDUCTION UNDER SECTION 10A OF THE ACT. THE DR STRONGLY SUPPORTED THE ORDER OF THE ASSESSING OFFIC ER. ITA NO.2098 & 2099 /MDS/2011 & C.O. NO.111/MDS/2012 4 4. ON THE OTHER HAND, MR. PHILIP GEORGE APPEARING O N BEHALF OF THE ASSESSEE SUBMITTED THAT THE ORDER OF THE CIT(A) IS A WELL-REASONED. THE CASE OF THE ASSESSEE IS SQ UARELY COVERED BY THE ORDER OF THE TRIBUNAL IN THE CASE OF SCIENTIFIC ATLANTA INDIA TECHNOLOGY P. LTD(SUPRA) AS WELL AS THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. YOKOGAWA INDIA LTD. REPORTED AS 341 ITR 38 5(KAR). 5. WE HAVE HEARD THE SUBMISSIONS MADE BY BOTH THE PARTIES. WE HAVE PERUSED THE ORDERS OF THE AUTHORIT IES BELOW AND THE JUDGEMENT/ORDER REFERRED TO BY THE COUNSEL FOR THE ASSESSEE. THE ONLY DISPUTE IN THE PRESENT APPEAL IS WITH REGARD TO THE MANNER IN WHICH DEDUCTION UNDER SECTI ON 10A IS TO BE COMPUTED. THE ISSUE HAS ALREADY BEEN CONSIDER ED IN SEVERAL JUDGEMENTS OF THE HONBLE HIGH COURTS AND V ARIOUS BENCHES OF THE TRIBUNAL. THE HONBLE KARNATAKA HIG H COURT IN THE CASE OF YOKOGAWA INDIA LTD.(SUPRA) HAS HELD THAT DEDUCTION UNDER SECTION 10A SHALL BE GIVEN FIRST AN D THE PROCESS OF COMPUTING PROFITS AND GAINS OF BUSINESS OR PROFESSION BEGINS THEREAFTER. IN THE PRESENT CASE THE ASSESSEE HAS RIGHTLY COMPUTED THE DEDUCTION UNDER S ECTION ITA NO.2098 & 2099 /MDS/2011 & C.O. NO.111/MDS/2012 5 10A WITHOUT SETTING OFF OF BROUGHT FORWARD UNABSO RBED DEPRECIATION. AS REGARDS THE QUESTION WHETHER LOSSES OF A NON-EL IGIBLE UNIT ARE REQUIRED TO BE SET OFF AGAINST THE PROFITS OF AN UNDERTAKING ELIGIBLE TO CLAIM DEDUCTION UNDER SECTI ON 10A OF THE ACT. THE SPECIAL BENCH OF THE TRIBUNAL IN THE C ASE OF SCIENTIFIC ATLANTA INDIA TECHNOLOGIES PVT.LTD. VS. ACIT., REPORTED AS 2 ITR 66(CHEN) HAS HELD THAT BUSINESS L OSS OF A NON-ELIGIBLE UNIT CANNOT BE SET OFF AGAINST THE PRO FITS OF AN UNDERTAKING ELIGIBLE FOR DEDUCTION UNDER SECTION 10 A FOR THE PURPOSE OF DETERMINING THE ALLOWABLE DEDUCTION UNDE R SECTION 10A OF THE ACT. ACCORDINGLY, WE UPHOLD THE ORDER O F THE CIT(A) AND DISMISS THE APPEAL OF THE REVENUE BEING DEVOID OF MERIT. ITA NO.2099/MDS/2011 & C.O. NO.111/MDS/2012:- 6. IN THE APPEAL, THE ONLY ISSUE RAISED BY THE REVE NUE IS WITH REGARD TO INTERNET CONNECTIVITY CHARGES TO BE EXCLUDED FROM THE EXPORT TURNOVER. THE ASSESSEE HAS FILED CROSS OBJECTION RAISING TWO ISSUES. THE FIRST ISSUE IN TH E CROSS OBJECTION RELATES TO INSURANCE EXPENSE WHICH THE AS SESSEE ITA NO.2098 & 2099 /MDS/2011 & C.O. NO.111/MDS/2012 6 HAS CLAIMED OUGHT NOT TO HAVE BEEN EXCLUDED FROM TH E EXPORT TURNOVER FOR THE PURPOSE OF CALCULATION OF DEDUCTIO N UNDER SECTION 10A OF THE ACT. THE SECOND GROUND OF THE CR OSS OBJECTION IS WITH REGARD TO DISALLOWANCE OF OPERATI NG AND ADMINISTRATIVE EXPENSES INCURRED BY WHOLLY OWNED SUBSIDIARIES OF THE ASSESSEE. 7. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT HE IS NOT PRESSING THE SECOND GROUND OF THE CROSS OBJE CTION. ACCORDINGLY, THE SECOND GROUND OF THE CROSS OBJECTI ON IS DISMISSED AS NOT PRESSED. 8. NOW, THE GROUND OF APPEAL OF THE REVENUE AND T HE CROSS OBJECTION RAISED BY THE ASSESSEE RELATES TO E XPENDITURE INCURRED BY THE ASSESSEE TOWARDS DEVELOPMENT OF COM PUTER SOFTWARE. THE ASSESSING OFFICER IN THE ASSESSMENT O RDER DATED 21.12.2009 HAS STATED THAT THE ASSESSEE HAS N OT GIVEN BREAK-UP FOR EXPENSES INCURRED ON TELEPHONE/INTERNE T CONNECTIVITY CHARGES. THE ENTIRE EXPENSES HAVE BEE N CLAIMED BY THE ASSESSEE UNDER THE HEAD COMMUNICATI ONS, THEREFORE, THEY ARE EXCLUDED FROM THE EXPORT TURNOV ER FOR THE PURPOSE OF CALCULATION UNDER SECTION 10A. SIMILARLY , FOR THE ITA NO.2098 & 2099 /MDS/2011 & C.O. NO.111/MDS/2012 7 EXPENSES INCURRED TOWARDS INSURANCE CHARGES, THE AS SESSEE HAS NOT SUBMITTED THE DETAILS AND THEREFORE, INSURA NCE EXPENDITURE IS ALSO EXCLUDED FROM THE EXPORT TURNOV ER FOR THE PURPOSE OF CALCULATION UNDER SECTION 10A OF THE ACT . 9. THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT (A) INTER-ALIA ASSAILING THE ASSESSMENT ORDER ON THE AD DITION MADE ON THE ABOVE SAID COUNTS. THE CIT(A) CONCLUD ED THAT THE ASSESSEE IS IN THE BUSINESS OF DEVELOPMENT FOR COMPUTER SOFTWARE FOR OVERSEAS CLIENTS ESSENTIALLY REQUIRE I NTERNET AND TELECOMMUNICATION INFRASTRUCTURE TO CARRY ON ITS CO RE BUSINESS ACTIVITIES AND HENCE THEY DO NOT FALL UNDER EXPLANA TION 2 TO SECTION 10 OF THE ACT AND THEREFORE, DIRECTED THE A SSESSING OFFICER NOT TO EXCLUDE EXPENDITURE TOWARDS INTERNE T AND TELECOMMUNICATION CHARGES. AS REGARDS INSURANCE, TH E CIT(A) HELD THAT NO EVIDENCE WAS LED BY THE ASSESSEE THERE FORE, THE SAME FALLS WITHIN EXPLANATION 2 TO SECTION 10A OF T HE ACT. 10. THE DR SUBMITTED THAT THE CASE OF THE ASSESSEE IS SQUARELY COVERED BY THE ORDER OF THE TRIBUNAL IN TH E CASE OF RR DONNELLEY INDIA OUTSOURCE PVT. LTD. IN C.O. NO. ITA NO.2098 & 2099 /MDS/2011 & C.O. NO.111/MDS/2012 8 16/MDS/2009 IN ITA NO.1302/ MDS/2008 RELEVANT TO TH E ASSESSMENT YEAR 2004-05 DECIDED ON 19.8.2011. 11. WE HAVE HEARD THE SUBMISSIONS MADE BY BOTH THE PARTIES AND HAVE PERUSED THE ORDERS OF THE AUTHORIT IES BELOW. BEFORE PROCEEDING FURTHER, IT WOULD BE ESSENTIAL TO RECAPITULATE THE MEANING OF EXPORT TURNOVER AS DEFINED IN EXPL ANATION 2 TO SECTION 10A OF THE ACT. THE SAME IS REPRODUCED H EREIN BELOW:- SECTION 10A: XXXXXXXXXXXXXX EXPLANATION 2.FOR THE PURPOSES OF THIS SECTION, (I) XXXXXXXXX (II) XXXXXXXXX (III) XXXXXXXX (IV) 'EXPORT TURNOVER' MEANS THE CONSIDERATION IN RESPE CT OF EXPORT [BY THE UNDERTAKING] OF ARTICLES OR THINGS OR COMPU TER SOFTWARE RECEIVED IN, OR BROUGHT INTO, INDIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE IN ACCORDANCE WITH SUB-SECTION (3) , BUT DOES NOT INCLUDE FREIGHT, TELECOMMUNICATION CHARGES OR INSUR ANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES OR THI NGS OR COMPUTER SOFTWARE OUTSIDE INDIA OR EXPENSES, IF ANY, INCURRE D IN FOREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSID E INDIA; 12. A PERUSAL OF THE MEANING OF EXPORT TURNOVER D EFINED IN EXPLANATION 2 CLEARLY SHOWS THAT EXPORT TURNOVER DO ES NOT INCLUDE FREIGHT, TELECOMMUNICATION CHARGES, INSURAN CE ATTRIBUTABLE TO THE DELIVERY OF ARTICLE OR THINGS OR COMPUTER ITA NO.2098 & 2099 /MDS/2011 & C.O. NO.111/MDS/2012 9 SOFTWARE OUTSIDE INDIA OR EXPENSES, IF ANY, INCURRE D IN FOREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSI DE INDIA. IN THE INSTANT CASE, IT HAS NOT BEEN BROUGHT OUT WHICH PART OF THE EXPENDITURE TOWARDS INTERNET /TELECOMMUNICATION CHA RGES AND INSURANCE CHARGES ARE ATTRIBUTABLE TO DELIVERY OF THE COMPUTER SOFTWARE DEVELOPED BY THE ASSESSEE. IT CAN NOT BE ASCERTAINED AS TO WHAT PERCENTAGE OF THE EXPENDITUR E CLAIMED BY THE ASSESSEE IN RESPECT OF TELECOMMUNICATION/INT ERNET CHARGES IS ATTRIBUTABLE TOWARDS DELIVERY OF COMPUTE R SOFTWARE OUTSIDE INDIA. SIMILARLY, FOR THE INSURANCE EXPENSE S CLAIMED BY THE ASSESSEE NOTHING HAS BEEN MENTIONED AS TO WH AT PERCENTAGE OF THE INSURANCE CHARGES ARE ATTRIBUTABL E TOWARDS DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA. THEREF ORE, WE REMIT THIS ISSUE BACK TO THE ASSESSING OFFICER TO D ETERMINE THE PROPORTION IN WHICH THE EXPENDITURE TOWARDS INTERNET/TELECOMMUNICATION CHARGES AND INSURANCES C HARGES HAVE BEEN INCURRED FOR DELIVERY OF COMPUTER SOFTWAR E DEVELOPED BY THE ASSESSEE OUTSIDE INDIA. THE ASSES SING OFFICER SHALL DETERMINE THE SAME ON THE BASIS OF TH E INFORMATION AND DOCUMENTS FURNISHED BY THE ASSESSEE . THE ITA NO.2098 & 2099 /MDS/2011 & C.O. NO.111/MDS/2012 10 ASSESSEE IS ALSO DIRECTED TO FURNISH THE INFORMATIO N WITH DETAILS/DOCUMENTS AND EXPLANATION TO THE SATISFACTI ON OF THE ASSESSING OFFICER TO ENABLE HIM TO DECIDE THIS ISSU E AFRESH. ACCORDINGLY, THIS GROUND OF APPEAL OF THE REVENUE A S WELL AS THE CROSS OBJECTION RAISED BY THE ASSESSEE ARE ALL OWED FOR STATISTICAL PURPOSES. 13. IN THE RESULT, THE APPEAL OF THE REVENUE IN ITA NO.2098/MDS/2011 IS DISMISSED AND ITA NO.2099/MDS/ 2011 OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. THE CROSS OBJECTION NO.111/2012 OF THE ASSESSEE IS PARTLY ALL OWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON TUESDAY T HE 26 TH DAY OF MARCH, 2013 AT CHENNAI. SD/- SD/- (ABRAHAM P.GEORGE ) (VIKAS AWASTHY) ACCOUNTANT MEMBER JUDICIAL MEMBER CHENNAI, DATED THE 26 TH MARCH, 2013. SOMU COPY TO: (1) APPELLANT (4) CIT(A) (2) RESPONDENT (5) D.R. (3) CIT (6) G.F.