Income Tax Officer, Ward-3(1), Hyderabad V. M/s. Sentini Technologies Pvt.Ltd., Hyderabad

ITA 1205/HYD/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 87389 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 6 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-02-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 22-01-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 07-08-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAMAKRISHNA BANDI
• Assessee Lawyers: JEELANA BASHA
• Keywords: Difference of opinion
• Section: 143(3); 10

Judgement Text

ITA NO.1205 OF 2012 SENTINI TECHNOLOGIES P LTD HYD. PAGE 1 OF 7 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT M EMBER AND SMT.ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO. 1205/HYD/2012 (ASSESSMENT YEAR: 2008-09) INCOME TAX OFFICER WARD 3(1) HYDERABAD VS. M/S. SENTINI TECHNOLOGIES PRIVATE LIMITED PLOT NO.1229, ROAD NO.60 JUBILEE HILLS, HYDERABAD 500034 PAN: AAFCS 7501 L (APPELLANT) (RESPONDENT) DEPARTMENT BY: SHRI RAMAKRISHNA BANDI, (DR) ASSESSEE BY: SHRI JEELANA BASHA, ADVOCATE DATE OF HEARING: 10/02/2015 DATE OF PRONOUNCEMENT: 25/ 02/2015 O R D E R PER SMT. ASHA VIJAYARAGHAVAN, J.M. THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER OF THE CIT (A)-IV, HYDERABAD DATED 31.05.2012 P ASSED FOR A.Y 2008-09. 2. BRIEFLY STATED, THE ASSESSEE IS A COMPANY, ENGAGED IN THE BUSINESS OF DEVELOPMENT OF SOFTWARE. FOR A.Y 2008-09 , ASSESSEE FILED ITS RETURN OF INCOME ON 29.09.2008 DECLARING IN COME OF RS.16,65,990 AFTER CLAIMING DEDUCTION OF RS.13,15,39, 118 U/S 10A OF THYE ACT. THE INCOME TAX OFFICER WARD 3(1) HY DERABAD COMPLETED THE ASSESSMENT ON 12.12.2011 U/S 143(3) DETE RMINING THE TOTAL INCOME OF THE ASSESSEE AT RS.5,07,38,470 AFTER ALLOWING DEDUCTION OF RS.10,08,24,066 U/S 10A OF THE ACT AS AG AINST INCOME DECLARED OF RS.16,65,910. ITA NO.1205 OF 2012 SENTINI TECHNOLOGIES P LTD HYD. PAGE 2 OF 7 3. AO WHILE COMPUTING THE DEDUCTION ALLOWABLE U/S 10 A OF THE ACT REDUCED EXPENDITURE OF RS.8,62,95,459 INCURRED TO WARDS SOFTWARE TOOLS FROM THE EXPORT TURNOVER OF RS.26,55,85, 517 AND COMPUTED THE DEDUCTION ALLOWABLE U/S 10A OF THE ACT AT RS.10,08,24,066 AS AGAINST RS.13,15,39,111 CLAIMED B Y THE ASSESSEE. 4. IT WAS SUBMITTED BY THE LD COUNSEL FOR THE ASSESSEE DURING THE COURSE OF APPELLATE PROCEEDINGS THAT IDENTICAL ISS UE HAS BEEN DECIDED IN THE ASSESSEES OWN CASE FOR A.YS 2004-05 TO 2006-07 AND 2007-08 BY THE CIT (A)-IV HYDERABAD DIRECTING TH E AO TO EXCLUDE THE COST OF IMPORTED NET COOL SUITES FROM THE TO TAL TURNOVER OF THE ASSESSEE. IT WAS ALSO SUBMITTED THAT THE I TAT VIDE ORDER IN ITA NO.850/HYD/2008 DATED 10.7.2008 FOR A.Y 2004-05 AND ORDER DATED 30.10.2009 IN ITA NO.940/HYD/2009 F OR A.Y 2005-06 DISMISSED THE DEPARTMENTAL APPEALS AND UPHELD THE VIEW OF THE CIT(A)-IV. COPIES OF RELEVANT ORDERS WERE ALSO FURNISHED. IT WAS ALSO SUBMITTED THAT A SIMILAR VIEW HAS BEEN TAKEN BY THE SPECIAL BENCH ITAT CHENNAI IN THE CASE OF INCOME TAX OFFICER VS. SAK SOFT LTD (313 ITR 353). ACCORDING LY IT WAS CONTENDED THAT THE ADJUSTMENTS SO MADE TO THE EXPORT TURNOVER WERE ERRONEOUS. 5. THE CIT (A) HELD AS UNDER: 6. THE ORDERS PASSED IN THE CASE OF APPELLANT F OR A.YS 2004-05, 2005-06, 2006-07 AND 2007-08 BESIDES THE ORDERS OF ITAT REFERRED ABOVE HAVE ALSO BEEN PERUSED. IT IS CLEAR THAT EVEN DURING THE YEAR UNDE R CONSIDERATION THERE IS NO CHANGE IN THE FACTS AND CIRCUMSTANCES OF THE CASE. IT IS SEEN THAT THERE IS NO DISPUTE WITH REGARD TO THE FINDING THAT THE BASIC A CTIVITY OF THE APPELLANT IS TO CUSTOMIZE THE NET COOL SUI TE PRODUCTS AS PER THE NEEDS OF ITS END CUSTOMERS. IN ORDER ITA NO.1205 OF 2012 SENTINI TECHNOLOGIES P LTD HYD. PAGE 3 OF 7 TO DO THIS, IT HAD IMPORTED CERTAIN SOFTWARE TOOLS. CONSIDERING THE NATURE OF THE IMPORTED SUITE PRODUC TS, IN LINE WITH THE VIEW TAKEN IN THE EARLIER YEARS, I FI ND SUBSTANTIAL MERIT IN THE FINDING OF THE AO THAT THE IMPORTED GOODS IN APPELLANTS CASE ARE HAVING A DIR ECT NEXUS WITH THEIR RENDERING OF TECHNICAL SERVICES TO THE CUSTOMERS OUTSIDE INDIA. THIS IS ALSO TRUE THAT THE COST OF SUCH GOODS HAD BEEN INCURRED IN FOREIGN CURRENCY. T HE SAME, THEREFORE, CANNOT BE CONSIDERED AS FORMING PA RT OF THE TURNOVER OF THE APPELLANT AND HAS BEEN RIGHTLY SO CONSIDERED BY THE AO. 6.1 HOWEVER, CONTINUING THE STAND TAKEN IN THE EARL IER YEARS AND FOLLOWING THE RATIO LAID DOWN BY THE JURISDICTIONAL ITAT AND OTHER JUDICIAL FORUMS IN TH E CASES SUCH AS, HON'BLE ITAT IN THE CAE OF INCOME TAX OFFI CER VS. DE BLOCK INDIA SOFTWARE (P) LTD IN ITA NO.983 & 984/HYD/2006 AS ALSO IN THE CASE OF M/S EX BAND (INDIA) PVT. LTD VS. INCOME TAX OFFICER IN ITA NO.1102/HYD/2004, IT IS CLEAR THAT ONCE SUCH EXPENDITURE IS EXCLUDED FROM THE EXPORT TURNOVER, T HE SAME HAS TO BE EXCLUDED FROM THE TOTAL TURNOVER ALS O, SINCE THESE DO NOT HAVE ANY ELEMENT OF PROFIT. IT H AS BEEN HELD THAT THE EXCLUSION OF SUCH ITEMS SHOULD BE BOT H FROM THE DENOMINATOR AND THE NUMERATOR, AS OTHERWISE IT WILL INFLATE THE TOTAL TURNOVER ARTIFICIALLY AND REDUCE THE BENEFIT WHICH THE ASSESSEE IS ENTITLED FOR. A SIMIL AR VIEW HAS BEEN TAKEN BY HON'BLE DELHI ITAT B BENCH IN THE CASE OF CIT VS. BINARY SEMANTICS LTD (207) (109 TTJ 556) ALSO. FURTHER IT IS SEEN THAT THE HON'BLE SPECIAL B ENCH OF ITAT CHENNAI IN THE CASE OF INCOME TAX OFFICER VS. SAK SOFT LTD (SUPRA) HAVE ALSO OPINED THAT A PARITY IS TO BE MAINTAINED WITH EXPORT TURNOVER AND THEREFORE, THE ITEMS REQUIRED TO BE EXCLUJDED FROM EXPORT TURNOVER ARE TO BE EXCLUDED FROM THE TOTAL TURNOVER ALSO. THEY N OTED THAT THE RATIO LAID DOWN BY THE HON'BLE SUPREME COU RT IN THE CASE OF LAKSHMI MACHINE WORKS (290 ITR 667) IS AN AFFIRMATION OF THE PRINCIPLE OF PARITY BETWEEN THE EXPORT TURNOVER AND THE TOTAL TURNOVER. APPLYING THE SAME RATIO IN THE APPELLANTS CASE, THEREFORE, I ONCE AGAIN HO LD THAT IF THE EXPENDITURE TOWARDS THE COST OF THE BASIC PL ATFORM FOR THE DEVELOPED SOFTWARE, I.E. THE COST OF NET C OOL SUITE RETAINED BY THE OVERSEAS PARTIES, IS EXCLUDE D FROM THE EXPORT TURNOVER, THE SAME HAS TO BE EXCLUDED FR OM THE TOTAL TURNOVER ALSO. THE AO IS, THEREFORE, DIRE CTED TO RECOMPUTE THE DEDUCTION AFTER REDUCING THE COST OF ITA NO.1205 OF 2012 SENTINI TECHNOLOGIES P LTD HYD. PAGE 4 OF 7 IMPORTED SOFTWARE TOOLS FROM THE TOTAL TURNOVER O F THE APPELLANT ALSO. 6. WE HEARD BOTH THE PARTIES. WE FIND THAT THE ISSUE IS COVERED BY THE DECISION OF THE SPECIAL BENCH OF THE CHENNAI ITAT IN THE CASE OF ITO VS. SAK SOFT LTD (313 ITR 353) WHE REIN IT HAS BEEN OPINED THAT A PARITY IS TO BE MAINTAINED WITH EXP ORT TURNOVER AND THEREFORE, THE ITEMS REQUIRED TO BE EXCLUD ED FROM EXPORT TURNOVER ARE TO BE EXCLUDED FROM THE TOTAL TURNOVER ALSO. 7. THE SECOND ISSUE PERTAINS TO THE DISALLOWANCE OF RS.1,80,17,860 MADE U/S 40(A)(IA) OF THE ACT. AO NOTED THAT THE ASSESSEE HAD PAID THE SAID AMOUNT TO SOFTWARE CONSULTAN TS FOR SOFTWARE DEVELOPMENT CHARGES DURING THE YEAR, DEDUCTIN G TDS @ 2.26%. HE WAS OF THE OPINION THAT SINCE THE EXPENDITUR E INCURRED WAS IN THE NATURE OF FEE FOR PROFESSIONAL/TECHNICAL S ERVICES, TAX WAS REQUIRED TO BE DEDUCTED AT 11.33%. HE FURTHER FELT TH AT AS PER SECTION 40(A)(IA), IF TAX REQUIRED TO BE DEDUCTED O N ANY AMOUNT COVERED UNDER CHAPTER XVII B IS NOT SO DEDUCTE D, THE EXPENDITURE ATTRACT DISALLOWANCE. THE AO FELT THAT IT COU LD NOT BE PLEADED THAT TAX WAS DEDUCTED, ALBEIT AT A LESSER RATE, S O AS TO SAY THAT NO DISALLOWANCE CAN BE MADE. HENCE, THE ENTIR E EXPENDITURE OF RS.1,80,17,860 WAS DISALLOWED U/S 40( A)(IA). 8. THE CIT (A) HELD AS UNDER: 8.. IT IS NOT IN DISPUTE THAT THE APPELLANT HAD SUBJECTED THE PAYMENTS MADE TO SOFTWARE CONSULTANTS TO TDS @ 2.26%. IT WAS NOT THE CASE THAT NO TDS WAS DEDUCTED AT ALL ON THE PAYMENTS SO MADE. HOWEVER, T HE DISALLOWANCE HAS BEEN MADE BY THE AO ON THE ONLY GROUND THAT SUCH DEDUCTION WAS NOT MADE AT THE PRESCRIBED RATE, AND THEREFORE, COULD NOT BE CONSID ERED AS COMPLIANCE WITH THE PROVISIONS OF CHAPTER XVIIB. HOWEVER, THE HON'BLE KOLKATA BENCH OF THE ITAT IN T HE CASE OF DCIT VS. S.K.TEKRIWALA IN ITA ITA NO.1205 OF 2012 SENTINI TECHNOLOGIES P LTD HYD. PAGE 5 OF 7 NO.1135/KOL/2010 DATED 21.10.2011 HAVE OPINED THAT THE CONDITIONS LAID DOWN U/S 40(A)(IA) OF THE ACT F OR MAKING AN ADDITION ARE THAT TAX IS DEDUCTIBLE AT SO URCE FROM ANY PAYMENT AND SUCH TAX HAS NOT BEEN DEDUCTED . THEY NOTED THAT IF BOTH THE CONDITIONS ARE SATISFIE D, THEN A PAYMENT CAN BE DISALLOWED U/S 40(A)(IA). HOWEVER, IN A CASE EVEN WHERE TAX IS DEDUCTED BY AN ASSESSEE, E VEN UNDER BONAFIDE WRONG IMPRESSION, UNDER WRONG PROVISIONS OF TDS, THE PROVISIONS OF SECTION 40(A)( IA) CANNOT BE INVOKED. IN THE SAID CASE, THE ASSESSEE H AD DEDUCTED TAX @ 1% U/S 194C(2), WHEREAS THE AO OPINE D THAT SUCH DEDUCTION SHOULD HAVE BEEN MADE @ 10% U/S 194 I. THE HON'BLE ITAT HELD THAT SECTION 40(A)(IA) HAVE TWO LIMBS, ONE IS WHERE, INTER ALIA, THE ASSESSEE H AS TO DEDUCT TAX AND THE SECOND WHERE AFTER DEDUCTING TAX , INTER ALIA, THE ASSESSEE HAS TO PAY INTO THE GOVT. ACCOUNT. THEY NOTED THAT THERE IS NOTHING IN THE SAID SECTIO N TO TREAT, INTER ALIA, THE ASSESSEE AS A DEFAULTER WHER E THERE IS A SHORTFALL IN DEDUCTION AND IF THERE IS ANY SHO RTFALL DUE TO ANY DIFFERENCE OF OPINION AS TO THE TAXABILI TY OF ANY ITEM OR THE NATURE OF PAYMENTS FALLING UNDER VA RIOUS TDS PROVISIONS, THE ASSESSEE CAN BE DECLARED TO BE AN ASSESSEE IN DEFAULT U/S 201 OF THE ACT AND NO DISALLOWANCE CAN BE MADE BY INVOKING THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT. 8. IF WE CONSIDER THE FACTS OF THE CASE OF THE PRES ENT APPELLANT, IT IS CLEAR THAT TDS HAD INDEED BEEN MAD E ON THE PAYMENTS OF RS.1,80,17,860 TO SOFTWARE CONSULTA NTS AND SUCH TDS HAD EVEN BEEN DEPOSITED INTO THE GOVT. ACCOUNT. THEREFORE, EVEN IF THERE WAS A SHORT DEDUC TION IN VIEW OF THE AO, IN THE LIGHT OF THE ABOVE REFERR ED DECISION OF THE HON'BLE ITAT MENTIONED ABOVE, NO DISALLOWANCE OF EXPENSES COULD HAVE BEEN MADE U/S 40(A)(IA) OF THE ACT. DELETING THE DISALLOWANCE OF RS.1,80,17,860/- 9. WE HEARD BOTH THE PARTIES AND PERUSED THE RECORDS. W E FIND NO INFIRMITY IN THE ORDER OF THE CIT(A) WHEREIN HE HA S FOLLOWED THE DECISION OF THE ITAT KOLKATA BENCH IN THE CASE OF DCIT VS. S.K. TEKRIWALA IN ITA NO.1135/KOL/2010 DATED 21.10.2 011. IN THAT DECISION IT HAS BEEN HELD THAT THERE IS NOTHING IN THE SAID SECTION TO TREAT, INTER ALIA, THE ASSESSEE AS A DEF AULTER WHERE THERE ITA NO.1205 OF 2012 SENTINI TECHNOLOGIES P LTD HYD. PAGE 6 OF 7 IS A SHORTFALL IN DEDUCTION AND IF THERE IS ANY SHO RTFALL DUE TO ANY DIFFERENCE OF OPINION AS TO THE TAXABILITY OF ANY I TEM OR THE NATURE OF PAYMENTS FALLING UNDER VARIOUS TDS PROVISIONS, T HE ASSESSEE CAN BE DECLARED TO BE AN ASSESSEE IN DEFAULT U/S 20 1 OF THE ACT AND NO DISALLOWANCE CAN BE MADE BY INVOKING THE PRO VISIONS OF SECTION 40(A)(IA) OF THE ACT. HENCE WE DISMISS THE DEPARTMENTAL APPEAL ON THIS ISSUE. 10. IN THE RESULT, APPEAL FILED BY THE REVENUE IS DISM ISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 25 TH FEBRUARY, 2015. SD/- SD/- (B. RAMAKOTAIAH) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED 25 TH FEBRUARY, 2015. VNODAN/SPS COPY TO: 1. THE INCOME TAX OFFICER WARD 3(1) 7 TH FLOOR, B BLOCK, IT TOWERS AC GUARDS HYDERABAD 2. M/S SENTINI TECHNOLOGIES PVT LTD PLOT NO.1229 ROAD NO.60, JUBILEE HILLS, HYDERABAD 500034 3. THE CIT(A)-IV HYDERABAD 4. THE CIT-III HYDERABAD 5. THE DR, ITAT, HYDERABAD 6. GUARD FILE BY ORDER ITA NO.1205 OF 2012 SENTINI TECHNOLOGIES P LTD HYD. PAGE 7 OF 7 S.NO. DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 17-2-15 SR. PS/PS 2 DRAFT PLACED BEFORE AUTHOR 17-2-15 SR. PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 19-2-15 JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM/AM 5 APPROVED DRAFT COMES TO THE SR. PS/PS SR. PS/PS 6 KEPT FOR PRONOUNCEMENT SR. PS/PS 7 FILE SENT TO BENCH CLERK SR. PS/PS 8 DATE ON WHICH THE FILE GOES TO HEAD CLERK 9 DATE ON WHICH FILE GOES TO A.R. 10 DATE OF DISPATCH OF ORDER