ACIT, Bangalore V. Smt. Madhulatha Channaveerappa, Bangalore

ITA 1131/BANG/2011

• Counselvise Citation: 113121114 RSA 2011
• Duration Of Justice: 9 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-09-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2006-2007
• Appeal Filed On: 22-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: B SARAVANAN
• Assessee Lawyers: H N KHINCHA
• Keywords: Wholly owned subsidiary
• Section: 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBNAL BANGALORE BENCH A, BANGALORE BEFORE SHRI N.BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI N.V.VASUDEVAN, JUDICIAL MEMBER ITA NO.1113(B)/2011 (ASSESSMENT YEAR : 2006-07) M/S E4E BUSINESS SOLUTIONS THE ASST. COMMISSION ER OF INCOME TAX, INDIA PVT. LTD., CIRCLE-1(1 ), 4 TH FLOO, MARUTHI CHAMBERS, BANGALORE RUPENA AGRAHARA, HOSUR ROAD, BANGALORE PAN NO.AADM7383F VS APPELLANT RESPONDENT ASSESSEEE BY : SHRI H.N.KHINCHA, CA REVENUE BY : SHRI B. SARAVANAN, JCIT DATE OF HEARING : 17-07-2012 DATE OF PRONOUNCEMENT : 24-07-2012 O R D E R PER SHRI N.V.VASUDEVAN, JM: THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDE R DATED 11-08- 2011 OF CIT(A)-I, BANGALORE, RELATING TO AY: 2006-0 7. 2. GROUND NO.1.1 RAISED BY THE ASSESSEE IS GENERAL IN NATURE AND CALLED FOR NO SPECIFIC ADJUDICATION. 3. GROUND NOS. 2.1 TO 2.4 AND 3.1 READS AS FOLLOWS; ITA NO.1113(B)/2011 2 2.1 THE LD. CIT(A)-I, BANGALORE HAS ERRED IN CON CLUDING THAT THE TELECOMMUNICATION EXPENSES AMOUNTING TO RS.3,21,25,555/- SHOULD BE REDUCED FROM EXPORT TURN OVER IN THE PROCESS OF COMPUTING DEDUCTION UNDER SECTION 10 A. 2.2 THE LD. CIT(A)-I, BANGALORE HAS ERRED IN NOT AP PRECIATING THAT TELECOMMUNICATION EXPENSES AMOUNTING TO RS.3,21,25,555/- DID NOT FORM PART OF EXPORT TURNOV ER SO AS TO EXCLUDE THE SAME FROM EXPORT TURNOVER. 2.3 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SER AND LAW APPLICABLE, TELECOMMUNICATION EXPENSES AMOUNTING TO RS.3,21,25,555/- SHOULD NOT BE REDUCED FROM EXPORT TURNOVER IN THE PROCESS OF COMPUTING DEDUCTION UNDER SECTION 10A. 2.4 IN ANY CASE AND WITHOUT PREJUDICE, TELECOMMUNIC ATION EXPENSES ATTRIBUTABLE FOR THE DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA ALONE IS TO BE REDUCED FROM EXPORT TU RNOVER AND NOT THE ENTIRE EXPENDITURE. 3.1 ASSUMING WITHOUT ADMITTING THAT THE ENTIRE TELECOMMUNICATION EXPENSES OR ANY PORTION THEREOF I S TO BE REDUCED FROM EXP[ORT TURNOVER, THE LD. CIT(A)-I, BA NGALORE HAS ERRED IN CONCLUDING THAT THE EXPENSES REDUCED FROM THE EXPORT TURNOVER SHOULD NOT BE REDUCED FROM TOTAL TURNOVER IN COMPUTING DEDUCTION U/S 10A. 4. THE ASSESSEE COMPANY WAS INCORPORATED ON 27 TH MAY, 2000 AS A WHOLLY OWNED SUBSIDIARY OF ISEVA INC. SUBSEQUENTL Y, ISEVA INC. MERGED WITH AND INTO E4E BUSINESS SOLUTIONS INC. IN JULY 2 007 AND ACCORDINGLY THE ASSESSEE WAS RENAMED E4E BUSINESS SOLUTIONS IND IA PVT.LTD., THE ASSESSEE IS IN THE BUSINESS OF BUSINESS PROCESS O UTSOURCING SERVICES. THE ASSESSEE WAS ENTITLED TO CLAIM DEDUCTION U/S.10 A OF THE INCOME TAX ACT, 1961 (THE ACT). WHILE COMPUTING THE DEDUC TION U/S 10A OF THE ACT, THE AO HAS REDUCED THE TELECOMMUNICATION EXPEN SES OF RS.32,125,555/- INCLUDING TELEPHONE EXPENSES, MOBIL E PHONE EXPENSES ETC., FROM THE EXPORT TURNOVER AS EXPENDITURE ATTRI BUTABLE TO THE DELIVERY OF SERVICES OUT SIDE INDIA. NO CORRESPON DING ADJUSTMENT WAS MADE TO THE TOTAL TURNOVER. ITA NO.1113(B)/2011 3 5. BEFORE THE CIT(A) THE ASSESSEE SUBMITTED THAT T HE AO HAS ERRED IN REDUCING THE TELECOMMUNICATION EXPENSES OF RS.32,12 5,555/- FROM THE EXPORT TURNOVER AS ATTRIBUTABLE TO THE DELIVERY OF SERVICES OUTSIDE INDIA, WHILE COMPUTING THE DEDUCTION U/S 10A OF THE ACT. THE AO ERRED IN MAKING THE ADJUSTMENT OF TELECOMMUNICATION EXPEN SES TO EXPORT TURNOVER NOTWITHSTANDING THAT THE ABOVE TELECOMMUN ICATION EXPENSES WERE NOT INCLUDED IN THE EXPORT TURNOVER OF THE COM PANY IN THE FIRST PLACE. WITHOUT PREJUDICE TO THE ABOVE SUBMISSION IT WAS ALSO SUBMITTED THAT THE AO ERRED IN NOT MAKING A CORRESPONDING RED UCTION OF THE TELECOMMUNICATION EXPENSES IN THE TOTAL TURNOVER. IT WAS SUBMITTED THAT CLAUSE (IV) TO EXPLANATION 2 TO SEC.10A DEFINE S THE TERM EXPORT TURNOVER AS FOLLOWS; EXPORT TURNOVER MEANS THE CONSIDERATION IN RESPEC T OF EXPORT BY THE UNDERTAKING OF ARTICLES O THINGS OR COMPUTER SOFTWARE RECEIVED IN, OR BROUGHT INTO, INDIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE IN ACCORDANCE WITH SUB -SECTION(3), BUT DOES NOT INCLUDE. (I) FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES OR THI NGS OR COMPUTER SOFTWARE OUTSIDE INDIA OR (II) EXPENSES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA.. IT WAS THE PLEA OF THE ASSESSEE THAT A PLAIN READIN G OF THE ABOVE DEFINITION SUGGESTS THAT IF AT ALL ANY EXPENDITURE IS TO BE EXCLUDED FROM THE EXPORT TURNOVER IT IS ONLY THE FREIGHT, TELEC OMMUNICATION CHARGES AND INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE S OFTWARE OUTSIDE INDIA AND NOT THE ENTIRE EXPENDITURE UNDER THE AFORESAID HEADS. THE ASSESSEE SUBMITTED THAT ANY EXPENDITURE REFERRED TO IN CLAUSE(IV) TO EXPLANATION 2 TO SEC.10A CAN BE EXCLUDED FROM THE EXPORT TURNOVER ITA NO.1113(B)/2011 4 ONLY IF SUCH EXPENDITURE IS INCLUDED THEREIN. THE T ELECOMMUNICATION CHARGES INCURRED BY THE ASSESSEE WERE NOT FORMING P ART OF ITS TURNOVER. ACCORDINGLY, THE SAME SHOULD NOT BE REDUCED FROM TH E EXPORT TURNOVER FOR THE PURPOSES OF COMPUTING THE DEDUCTION U/S 10A OF THE ACT. IT WAS ALSO SUBMITTED THAT THE ASSESEEE HAS INCURRED TELEC OMMUNICATION EXPENSES FOR VARIOUS PURPOSES, INCLUDING DELIVERY O F SERVICES OUTSIDE INDIA. THE TELECOMMUNICATION CHARGES INCLUDE COST O F TRANSMISSION WITHIN THE TERRITORIES OF INDIA AND OUTSIDE INDIA. WITHOUT PREJUDICE, THE ASSESSEE SUBMITTED THAT IT IS NOT PRACTICALLY POSSI BLE TO DETERMINE THE TELECOMMUNICATION CHARGES ATTRIBUTABLE ONLY TO THE DELIVERY OF SERVICES OUTSIDE INDIA. EVEN IF IT WERE TO BE ASSUMED THAT IT WAS POSSIBLE TO DETERMINE THE TELECOMMUNICATION CHARGES ATTRIBUTABL E TO THE DELIVERY OF SERVICES, THE AMOUNTS ATTRIBUTABLE TO THE ACTUAL DE LIVERY OF SERVICES WOULD BE A VERY INSIGNIFICANT AMOUNT. IT WAS SUBMIT TED THAT IN ANY CASE, ANY SUCH EXPENSE, IF AT ALL REDUCED FROM THE EXPORT TURNOVER WOULD ALSO HAVE TO BE EXCLUDED FROM THE TOTAL TURN OVER. WITHOUT PREJUDICE TO THE ABOVE SUBMISSION THAT NO ADJUSTMEN T NEEDS TO BE MADE TO THE EXPORT TURNOVER THE ASSESSEE DREW OUR ATTENTION TO THE DECISION OF THE BANGALORE BENCH OF THE ITAT IN THE ASSESSEES OWN CASE ( I SEVA SYSTEMS PVT.LTD., VS ACIT ITA NO.401/BANG/ 2007 FOR AY: 2003- 04, WHEREIN THE TRIBUNAL HAS INTER-ALIA , HELD THAT ONLY 50% OF THE TELECOMMUNICATION EXPENSE SHOULD BE REDUCED FROM TH E EXPORT TURNOVER. 6. THE CIT(A) DID NOT AGREE WITH THE SUBMISSIONS O F THE ASSESSEE AND HE CONFIRMED THE ORDER OF AO GIVING RISE TO THE AFO RESAID GROUNDS OF APPEAL Y THE ASSESSEE BEFORE THE TRIBUNAL. ITA NO.1113(B)/2011 5 7. AT THE TIME OF HEARING OF THIS APPEAL, IT WAS B ROUGHT TO OUR NOTICE THAT THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO. 401/BANG/2007 BY ORDER DATED 07-12-2007 ON AN IDENTICAL ISSUE WAS PL EASED TO HOLD THAT 50% OF THE TELECOMMUNICATION EXPENSES CAN BE ESTIMA TED ATTRIBUTABLE TO THE DELIVERY OF SOFTWARE OUTSIDE INDIA WHICH IT SHOULD BE REDUCED FROM THE EXPORT TURNOVER. THE TRIBUNAL ALSO HELD T HAT TO THE EXTENT OF THE TELECOMMUNICATION EXPENSES REDUCED FROM THE EXP ORT TURNOVER, THE SAME SHOULD ALSO BE EXCLUDED FROM THE TOTAL TURNOVE R. THIS PROPOSITION IS NOW SUPPORTED BY THE DECISION OF THE SPECIAL BEN CH OF THE ITAT, CHENNAI IN THE CASE OF M/S SAK SOFT LTD.,(2009) 313 ITR(AT) 383(CHENNAI). IN VIEW OF THE ABOVE, WE DIRECT THAT 50% OF THE TELECOMMUNICATION EXPENSES BE TREATED AS EXPENSES A TTRIBUTABLE TO THE DELIVERY OF THE COMPUTER SOFTWARE OUTSIDE INDIA AND THIS AMOUNT BE REDUCED FROM THE EXPORT TURNOVER. FOLLOWING THE D ECISION OF THE SPECIAL BENCH IN THE CASE OF M/S SAK SOFT LTD., SUP RA THE SUM SO EXCLUDED FROM THE EXPORT TURNOVER ALSO BE EXCLUDED FROM THE TOTAL TURNOVER. THUS, GROUND NOS.2.4 AND 3.1 RE DECIDED ACCORDINGLY. 8. IN VIEW OF THE AFORESAID DECISION, THE GRIEVANC E PROJECTED BY THE ASSESSEE IN GROUND NO.2.1 TO 2.3, HAS BECOME ACADEM IC AND DOES NOT REQUIRE ANY ADJUDICATION. 9. GROUND NO.4.1 AND 4.2 RAISED BY THE ASSESSEE RE ADS AS FOLLOWS; 4.1 THE LEARNED CIT(A)-I, BANGALORE HAS ERRED IN N OT ADJUDICATING THE GROUND RELATING TO ALLOWABILITY OF DEDUCTION U/S 10A IN RESPECT OF INTEREST FROM FIXED DEPOSIT A MOUNTING TO RS.1,29,299/- HELD AS MARGIN MONEY FOR BANK GUARANT EES GIVEN TO CUSTOMS AUTHORITY. ITA NO.1113(B)/2011 6 4.2 ON FACTS AND CIRCUMSTANCES OF THE CASE AND LAW APPLICABLE INTEREST FROM FIXED DEPOSIT AMOUNTING TO RS.1,29,299/- HELD AS MARGIN MONEY FOR BANK GUARANT EES GIVEN TO CUSTOMS AUTHORITIES FORMS PART OF PROFITS OF THE BUSINESS OF THE UNDERTAKING AND IS ELIGIBLE FOR DED UCTION U/S 10A. 10. THE AO TREATED THE INTEREST EARNED ON DEPOSITS AS INCOME FROM OTHER SOURCES AS AGAINST THE CLAIM OF THE ASSESSEE THAT IT WAS INCOME FROM BUSINESS ON WHICH DEDUCTION U/S 10A OF THE ACT , SHOULD BE ALLOWED. AGAINST THE AFORESAID ORDER OF THE AO, TH E ASSESSEE RAISED SPECIFIC GROUND OF APPEAL BEFORE THE CIT(A) NAMELY GROUND NO.3.2(C). THE CIT(A) HOWEVER, DID NOT ADJUDICATE THE AFORESAI D APPEAL. HENCE, THE ASSESSEE HAS RAISED GROUND NO.4.1 & 4.2 BEFORE THE TRIBUNAL. 11. A THE TIME OF HEARING, THE PARTIES AGREED THAT IT WOULD BE JUST AND PROPER TO DIRECT THE CIT(A) TO CONSIDER THE ISSUE O N MERITS. WE ACCEPT THE SUBMISSIONS MADE BEFORE US AND ACCORDINGLY, DIR ECT THE CIT(A) TO CONSIDER THE AFORESAID GROUND OF APPEAL AND RENDER A DECISION ON THE SAME ON MERITS. FOR STATISTICAL PURPOSES THE GROU NDS ARE TREATED AS ALLOWED. 12. IN THE RESULT, THE APPEAL FILED BY THE ASSESSE E IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 24 TH JULY, 2012. SD/- SD/- (N.BARATHVAJA SANKAR) (N.V.VASUDEVAN) VICE PRESIDENT JUDICIAL MEMBER BANGALORE: D A T E D : 24-07-202 AM* ITA NO.1113(B)/2011 7 COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A)-IV, BANGALORE. 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE (1+1) BY ORDER SENIOR PRIVATE SECRETARY, ITAT, BANGALORE