Infotech Enterprises Ltd., Hyderabad V. Dy. Commissioner of Income Tax, Circle-2(1), Hyderabad

ITA 1451/HYD/2013

• Counselvise Citation: 145122514 RSA 2013
• Duration Of Justice: 1 year(s) 4 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-03-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 13-01-2015
• Assessment Year: 2004-2005
• Appeal Filed On: 31-10-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D APARNA RAODR
• Assessee Lawyers: M V R PRASAD
• Keywords: Reopening of assessment; Capital asset; Depreciation; Transfer pricing; Double taxation relief; Retrospective amendment; Permanent establishment; Question of law; Cost of acquisition; Difference of opinion; Capital receipt; Change of opinion; Revenue expenditure; Capital expenditure
• Section: 143(3); 115JB; 10B; 148

Judgement Text

ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 1 OF 42 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH, HYDERABAD BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER & SMT.ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO.1450, 1452, 1451, 1453/HYD/2013 (ASSESSMENT YEARS: 2002-03, 2004-05 & 2005-06 ) M/S. CYIENT LIMITED (FORMERLY INFOTECH ENTERPRISES LTD), 4 TH FLOOR, A WING, PLOT NO.11 SOFTWARE UNITS LAYOUT, INFOCITY, MADHAPUR, HYDERABAD 500082 PAN-AAACI 4487 J VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 2(1) I.T.TOWERS, MASAB TANK, HYDERABAD 500004 ( APPELLANT) (RESPONDENT) ITA NOS.1455 & 1456/HYD/2013 (A.Y 2002-03 & 2005-06) DY. COMMISSIONER OF INCOME TAX, CIRCLE 2(1) I.T.TOWERS, MASAB TANK, HYDERABAD 500004 VS. M/S. CYIENT LIMITED (FORMERLY INFOTECH ENTERPRISES LTD), 4 TH FLOOR, A WING, PLOT NO.11 SOFTWARE UNITS LAYOUT, INFOCITY,MADHAPUR, HYDERABAD 500082 PAN-AAACI 4487 J (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI M.V.R. PRASAD FOR REVENUE : SMT. D. APARNA RAO,DR DATE OF HEARING : 13/01/2015 DATE OF PRONOUNCEMENT : 25 /03/ 2015 O R D E R PER BENCH: THESE ARE CROSS APPEALS PREFERRED BY THE ASSESSEE A ND THE REVENUE, DIRECTED AGAINST SEPARATE ORDERS OF THE CO MMISSIONER OF INCOME-TAX(APPEALS)-III, HYDERABAD, FOR THE ASSE SSMENT YEARS 2002-03, 2004-05, 2005-06, 2008-09 AND 2009-10. SIN CE CERTAIN COMMON ISSUES ARE INVOLVED, THESE APPEALS ARE BEING DISPOSED OF WITH THIS COMMON CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 2 OF 42 ITA NO.1450/HYD/2013- A.Y. 2002-03. 2. FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESSEE IS A COMPANY, ENGAGED IN THE BUSINESS OF SOFTWARE DEVELO PMENT AND OTHER ALLIED ACTIVITIES. FOR A.Y 2002-03, IT FILED ITS RETURN OF INCOME FOR THE A.Y 2002-03 ON 31.10.2002 DECLARING A TOTAL INCOME OF RS.1,01,68,297 AND BOOK PROFITS FOR THE P URPOSE OF COMPUTATION OF MAT U/S 115JB AT RS.5,57,10,026. THE AO COMPLETED THE ASSESSMENT ON 31.03.2005 U/S 143(3) O F THE ACT, DETERMINED TOTAL INCOME AT RS.11,15,41,640. THE ASS ESSEE COMPANY HAD CLAIMED EXEMPTION U/S 10B AMOUNTING TO RS.20,99,72,961. THE ASSESSEE COMPANY HAD COMMENCED PRODUCTION DURING FINANCIAL YEAR 1992-93 AND RECEIV ED APPROVAL TO START ITS OPERATIONS IN SOFTWARE DEVELOPMENT AS A SOFTWARE TECHNOLOGY PARK ON 26.09.1991 WITH A LETTER NO.17(4 )/9/91-92- STA DATED 26.09.1991 FROM THE DEPARTMENT OF ELECTRO NICS, SOFTWARE DIVISION, GOVT. OF INDIA. AO DENIED BOTH T HE EXEMPTIONS AVAILABLE U/S 10A AND SECTION 10B BY HOLDING THAT T HE ASSESSEE HAD STARTED PRODUCTION BEFORE 01.04.1994 AND ALSO H OLDING THAT THE AMENDED PROVISIONS OF SECTION 10B WERE NOT APPL ICABLE IN THE CASE OF THE ASSESSEE. FOLLOWING REASONS WERE GIVEN FOR HOLDING AS ABOVE:- SECTION 10-A IS APPLICABLE TO THE ASSESSEES WHO AR E CARRYING ON THE BUSINESS ACTIVITY IN SOFTWARE TECHNOLOGY PARK (STP). IT IS FOUND THAT NO SPECIFIC APPROVAL HAS BEEN OBTAINED BY THE ASSESSEE COMPANY TO BE CATEGORIZED AS 100% EOU IN TERMS OF EXPLANATION (I) TO SECTION 10B(7). EVEN OTHERWISE, THE ASSESSEE IS NOT ENTITLED TO ANY DEDUCTION U/S 10A F OR CARRYING ON ACTIVITY IN THE SOFTWARE TECHNOLOGY AS THE EXEMPTION TO CARRY ON OPERATION IN STP APPLICABLE F OR ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 3 OF 42 ASSESSEES WHO COMMENCED MANUFACTURE OR PRODUCTION IN STP ON OR AFTER 1.4.94. IN THIS CASE, THE ASSESSEE HAD COMMENCED ITS PRODUCTION PRIOR TO 1.4.94. HENCE, THE BENEFIT OF SECTION 10A WHICH WAS EXTENDED TO STP UNITS W.E.F. 1.4.94 IS NOT AVAILABL E TO THE ASSESSEE. SECTION 10B IS APPLICABLE TO ASSESSEES WHO ARE 100% EOUS. THE PROVISIONS OF LAW WAS EFFECTIVE UP TO A.Y 1994-95. SECTION 10B WAS AMENDED WITH THE INSERTION OF CLAUSE (IA) TO SUB-SECTION (2) OF SECT ION 10B W.E.F. 1.4.95 BY FINANCE ACT, 1994. THIS AMENDMENT IS APPLICABLE TO UNDERTAKINGS WHICH BEGAN TO MANUFACTURE OR PRODUCE ANY ARTICLE OR THIN G ON OR AFTER 1.4.94. THE AMENDMENT WAS WITH REGARD TO PERCENTAGE OF EXPORTS TO BE MADE BY THE ASSESSEE I.E. 100% EOUS. IN THE INSTANT CASE, THE AMENDED PROVISIONS ARE NOT APPLICABLE SINCE THE ASSESSEE COMPANY HAD COMMENCED ITS COMMERCIAL PRODUCTION W.E.F. 7.9.1992LA.BEFORE 1.4.94. IN VIEW OF THE ABOVE, THE ASSESSEE IS NOT ENTITLED FOR ANY BENEFIT U/S 10B OF THE I.T. ACT, 1961. FOR A.Y 1998-99, WHEN THE SIMIL AR DISALLOWANCE WAS MADE THE CIT (A) III VIDE ORDER IN ITA NO.428.JC/RC2JCITA)-111/00-01 DATED 17.11.01 HAD CONFIRMED THE DISALLOWANCES IN ASSESSEES OWN CASE. ON APPEAL BY THE ASSESSEE THE ITAT B BENCH HYDERABAD VIDE ITS ORDER REPORTED IN 85 ITD 325 HAS DISMISSED THE APPEAL OF THE ASSESSEE. KEEPING THIS IN VIEW, THE ASSESSEES CLAI M OF DEDUCTION U/S 10B IS NOT ALLOWED. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE COMPANY HAS SET UP A NEW UNIT DURING FINANCIAL YEAR ENDED 31.03.2002 AT BANGALORE. THIS UNIT HAS BEEN REGISTERED AS A STPI UNIT WITH THE SOFTWARE TECHNOLOGY PARKS OF INDIA, BANGALORE. THE UNIT COMMENCED OPERATIONS DURING THE FINANCIAL YEAR 2001-02 AND IS ELIGIBLE FOR EXEMPTION U/S 10A OF TH E I.T. ACT. DURING THE YEAR UNDER CONSIDERATION, THE UNIT MADE A TURNOVER OF RS.50.75 LAKHS AND INCURRED A NET LOSS OF RS.91.75 LAKHS. IN THE COMPUTATION OF T OTAL ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 4 OF 42 INCOME, THE TOTAL LOSS FROM THIS UNIT AFTER ADJUSTM ENTS WAS SHOWN AT RS.1,22,60,881. HOWEVER, THE ASSESSEE COMPANY HAS OPTED NOT TO CLAIM EXEMPTION U/S 10A OF THE I.T. ACT AND CHOSEN TO CLAIM DEDUCTI ON U/S 80HHE FOR THIS A.Y. SINCE THE PROFIT OF THE BUSINESS FROM THE BANGALORE UNIT IS A LOSS, NO DEDUCTION U/S 80HHE IS ALLOWABLE. 3. BEFORE THE CIT (A), ASSESSEE CONTENDED THAT THE EXEMPTIONS IN QUESTION, WERE AVAILABLE TO IT. HOWEVER, IT WAS ADMITTED THAT VIDE ORDER OF ITAT HYDERABAD IN ITA NO.51/HYD/2002 DATED 31.05.2002 FOR A.Y 1998-99, THE ISSUE HAD BEEN DECI DED IN FAVOUR OF REVENUE. SINCE THE ISSUES ARE ESSENTIALLY THE SAME AND THE FACTS ARE IDENTICAL, RESPECTFULLY FOLLOWING THE ORDER OF THE ITAT AND FOLLOWING THE PRINCIPLE OF STARE DECISIONS, CIT HELD THAT THE AFOREMENTIONED EXEMPTIONS ARE NOT AVAILABLE TO THE ASSESSEE AND ORDER OF AO ON THIS ISSUE DOES NOT NEED ANY INTERFE RENCE AND THE ISSUE WAS DECIDED IN FAVOUR OF REVENUE. 4. AGGRIEVED BY THE ORDER OF THE CIT (A), ASSESSEE PREFERRED AN APPEAL IN GROUND NO.2, ASSESSEE STATED THAT THE LD CIT (A) ERRED IN DECIDING THAT THE ASSESSEE IS NOT ENTITLED FOR R ELIEF U/S 10A OR ALTERNATIVELY EVEN U/S 10B OF THE I.T. ACT, 1961. T HE LD COUNSEL FOR ASSESSEE SUBMITTED BEFORE US THAT THE ISSUE IS PENDING BEFORE THE HON'BLE JURISDICTIONAL HIGH COURT FOR ADJUDICAT ION. 5. THE ISSUE IS COVERED AGAINST THE ASSESSEE BY THE OR DER OF THE ITAT FOR A.Y 1998-99 IN ITA NO.51/HYD/2002. THI S ISSUE IS PENDING BEFORE THE HONBLE A.P. HIGH COURT AND THE GROUND HAS BEEN RAISED BY THE ASSESSEE ONLY TO KEEP THE MATTER ALIVE. ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 5 OF 42 6. RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNAL FO R THE A.Y 1998-99 IN ITA NO.51/HYD/2002, WE DECIDE THE ISSUE AGAINST THE ASSESSEE. THIS GROUND OF APPEAL IS DISMISSED. 7. THE NEXT GROUND (GROUND NO.3) IS THAT THE AO DISALL OWED AN AMOUNT OF RS.1,09,385 BY INVOKING THE PROVISIONS OF SECTION 40(A)(I). THIS AMOUNT REPRESENTS THE FEE PAID TO BA RNES & THORNBURG, ATTORNEYS AT LAW, USA. AO OBSERVED THAT THIS AMOUNT WAS PAID TO THE SAID ATTORNEYS FOR THE SERVI CES RENDERED BY THEM IN CONNECTION WITH THE TAKEOVER OF A COMPAN Y M/S ANALYTICALSURVEYS INC AND AS THE EXPENDITURE WAS IN CURRED IN THE CONTEXT OF THE ACQUISITION OF A COMPANY, IT WAS OF THE NATURE OF CAPITAL EXPENDITURE. HE ALSO TOOK THE VIEW THAT THE TAX WAS NOT DEDUCTED AT SOURCE ON THE PAYMENT MADE TO NON RESID ENT PRESUMABLY UNDER THE PROVISIONS OF SECTION 194J AND SO THE PAYMENT IS DISALLOWABLE UNDER THE PROVISIONS OF SEC TION 40(A)(I). 8. IT WAS SUBMITTED BY THE LD COUNSEL THAT THE SERVICE S WERE RENDERED BY THE NON-RESIDENT ATTORNEY FROM OUTSIDE INDIA, SO IT IS NOT TAXABLE IN INDIA. AT ANY RATE UNDER ARTICLE 15 OF THE DTAA BETWEEN INDIA AND USA, INDEPENDENT PROFESSIONAL CHA RGES ARE TO BE TAXED ONLY IN THE COUNTRY OF RESIDENCE UNLESS TH ERE IS A FIXED BASE IN THE SOURCE COUNTRY. AS THERE IS NO SUCH FIX ED BASE IN INDIA, THE PAYMENT IN QUESTION IS NOT TAXABLE IN IN DIA. SO THERE IS NO LIABILITY FOR TAX DEDUCTION AT SOURCE IN TERMS O F SECTION 194J AND AS SUCH THE PAYMENT IS NOT HIT BY SECTION 40(A) (I). 9. THE NEXT QUESTION IS WHETHER THE PAYMENT REPRESENTS REVENUE EXPENDITURE OR CAPITAL EXPENDITURE IN THE H ANDS OF THE ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 6 OF 42 ASSESSEE COMPANY. AS THE EXPENDITURE WAS INCURRED I N THE CONTEXT OF A FAILED PROPOSAL FOR THE ACQUISITION OF A COMPANY, NO ASSET OF ENDURING BENEFIT HAS ACCRUED TO THE ASSESS EE COMPANY AND, AS SUCH, IT REPRESENTS ONLY REVENUE EXPENDITUR E. FOR THIS PROPOSITION, THE ASSESSEE RELIED UPON THE DECISION OF THE HON'BLE PUNJAB & HARYANA HIGH COURT DATED 7 TH MARCH, 1989 IN THE CASE OF HINDUSTAN MILK FOOD MFRS. LTD VS. CIT (IT REFERE NCE NO.135 OF 1979) IN WHICH LEGAL EXPENSES INCURRED FOR THE PURP OSE OF ACQUISITION OF A CAPITAL ASSET WAS HELD ALLOWABLE A S THE PROPOSAL FOR ACQUISITION FAILED. 10. WE ARE OF THE OPINION THAT THIS AMOUNT IS NOT T AXABLE IN INDIA UNDER THE DTAA BETWEEN INDIA AND USA AND AS N O ASSET IS ACQUIRED, IT IS ALLOWABLE AS REVENUE EXPENDITURE. A CCORDINGLY GROUND NO.3 IS ALLOWED. 11. GROUND NO.4 IS AS FOLLOWS: 4. THE LD CIT (A) ERRED IN HOLDING THAT THE AMOUNT OF RS.2,01,40,454 PAID BY THE APPELLANT TO M/S. INFOTECH SOFTWARE SOLUTIONS INC (ISSI) USA, THE SUBSIDIARY OF THE APPELLANT IS OF THE NATURE OF TECHNICAL SERVICE FEE AND IS A TAXABLE RECEIPT IN T HE HANDS OF THE SAID NON RESIDENT COMPANY AND AS NO TAX WAS DEDUCTED AT SOURCE U/S 195, THE SAID EXPENDITURE IS DISALLOWABLE IN TERMS OF SECTION 40(A)(I). 12. IT WAS SUBMITTED THAT THE AO ERRED IN DISALLOWI NG THE EXPENDITURE OF RS.2,01,40,454 PAID TO THE 100% SUBS IDIARY OF THE ASSESSEE I.E. INFOTECH SOFTWARE SOLUTIONS INC (ISSI ) USA BY INVOKING PROVISIONS OF 40(A)(I). THIS ISSUE IS COVE RED BY THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.YS 2006-07 ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 7 OF 42 AND 2007-08 IN ITA NOS. 115 & 2184/HYD/2011. REBUTT ING THE CONTENTION OF THE AO THAT THERE IS A BUSINESS CONNE CTION BETWEEN THE ASSESSEE COMPANY AND ITS FOREIGN SUBSIDIARY IN TERMS OF EXPLANATION 2 TO SECTION 9(1)(I) THE TRIBUNAL HELD AS UNDER: 36. WITH RESPECT TO IEAI USA, WE FIND THAT FACTUALLY THE ASSESSEE HAS SECURED THE ORDERS FROM PRATT (PWC) FOR ITS OWN BENEFIT AND IT ONLY PARCELED OUT A PORTION OF THE WORK ENTRUSTED TO IT BY PRATT & WHITNEY TO IEAI USA. THE SAID EXPLANATION TO SECTION 9(1)(I) CAN BE INVOKED ONLY WHEN THE INDIAN COMPANY SECURES ORDERS FOR THE BENEFIT OF NON-RESIDENT. IN THE PRESENT CASE, THE ASSESSEE HAS NOT CANVASSED / SECURED ANY ORDERS FOR ITS NONRESIDENT SUBSIDIARIES. HENCE, SECTION 9(1)(I) CANNOT BE INVOKED. 37. WE HAVE GONE THROUGH THE COPY OF THE 'MASTER TERMS AGREEMENT' (IN SHORT 'MTA') ENTERED INTO BY THE ASSESSEE WITH UNITED TECHNOLOGY CORPORATION (PWC) WHICH IS FILED AT PAGES 179 TO 196 OF THE PAPER BOOK. SIMILARLY, WE HAVE PERUSED INTERCOMPANY AGREEMENT ENTERED INTO BY THE ASSESSEE WITH ITS SUBSIDIARIES PLACED IN THE PAPER BOOK AT PAGE 197 TO 222. THIS PROVES THAT THE ASSESSEE OBTAINED ORDERS ON ITS OWN BEHALF AND IT HAS ONLY PARCELED OUT A PORTION OF ITS WORK TO ITS FOREIGN SUBSIDIARIES. AS PER THE TERMS OF THE AGREEMENT, THE ASSESSEE 'SHALL RELEASE THE WORK ORDER' BEFORE THE COMMENCEMENT OF THE WORK BY IEAI USA AND EACH WORK ORDER SHALL BE SUPPORTED BY END CUSTOMERS ORDER COPY. CLAUSE 3 OF THE AGREEMENT READS AS UNDER : ' COMMENCING ON THE DATE(S) SPECIFIED IN EACH WORK OR DER, IEAI WILL ALLOCATE QUALIFIED PERSONNEL THROUGH SOFT WARE SERVICES REQUIREMENTS STATEMENTS AND REGULAR PROJEC T MEETINGS, WHICH MAY BE MODIFIED FROM TIME TO TIME BY IEL. IEA I SHALL INFORM IEL AT THE TIME OF THE REQUEST, OR AS SOON T HEREAFTER AS THAT THE INFORMATION BECOMES AVAILABLE, SHOULD IT B E UNABLE TO DELIVER THE QUALIFIED PERSONNEL SPECIFIED IN THE WO RK ORDER. PARTIES SHALL WITHIN 30 DAYS NEGOTIATE IN GOOD FAIT H A REVISED ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 8 OF 42 WORK ORDER MUTUALLY AGREEABLE TO BOTH PARTIES, HOWE VER IF NO SUCH AGREEMENT CAN BE REACHED EITHER PARTY MAY TERM INATE THAT WORK ORDER ACCORDING TO PROVISIONS OF SECTION 1. OB LIGATIONS OF IEL AND IEAI UNDER THIS AGREEMENT ARE DETAILED IN T HE ANNEXURE.' 38. FURTHER, WE FIND THAT THE TPO HAS FOUND THAT THE OPERATION TRANSACTION WERE EFFECTED AT ARMS LENGTH PRICE. WE ALSO OBSERVE THAT THE FOREIGN SUBSIDIARIE S DO NOT WORK EXCLUSIVELY FOR THE ASSESSEE AND THEY OBTA IN ORDERS ON THEIR OWN FROM OTHER FOREIGN PARTIES AND ALSO SUB CONTRACT THE WORK TO THE ASSESSEE DEPENDIN G ON EXIGENCIES. 39. WE ALSO FIND THAT NO OPERATIONS HAVE BEEN UNDERTAKEN BY FOREIGN SUBSIDIARIES IN INDIA AND NO ENGINEERS HAVE BEEN DEPUTED BY THEM TO INDIA AND EVEN THEY DO NOT HAVE PERMANENT ESTABLISHMENT IN INDIA. IN TERMS OF THE RESPECTIVE DTAA, NO INCOME O F THE FOREIGN SUBSIDIARY IS TAXABLE IN INDIA IN TERMS OF EITHER SECTION 9(1)(I) OF THE I.T. ACT OR THE CONCE RNED ARTICLES RELATING TO BUSINESS PROFITS (ARTICLE 7 R. W. ARTICLE 5) IN THE RESPECTIVE DTAAS. 13. THE TRIBUNAL ALSO CONSIDERED THE POSITION, WHET HER PAYMENT IN QUESTION OF RS.2,01,40,454 COULD BE CONS IDERED AS FEE FOR TECHNICAL SERVICES RECEIVED FROM THE FOREIG N SUBSIDIARY. IT HELD THAT EVEN IF IT WERE TO BE CONSIDERED AS FEES FOR TECHNICAL SERVICES, IT WOULD NOT BE TAXABLE IN INDIA AS THEY ARE UTILIZED FOR EARNING INCOME FROM A SOURCE OUTSIDE INDIA. SECTION 9(1)(VII) TO THE EXTENT RELEVANT FOR OUR PURPOSE READ AS UNDER: ( VII) INCOME BY WAY OF FEES FOR TECHNICAL SERVICES P AYABLE BY- (A) . (B) A PERSON WHO IS A RESIDENT, EXCEPT WHERE THE FEES ARE PAYABLE IN RESPECT OF SERVICES UTILISED IN A BUSINESS OR PR OFESSION CARRIED ON BY SUCH PERSON OUTSIDE INDIA OR FOR THE PURPOSES OF MAKING OR EARNING ANY INCOME FROM ANY SOURCE OUTSIDE INDIA; O R C. ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 9 OF 42 14. THE TRIBUNAL HELD THAT THE RETROSPECTIVE AMENDM ENT BROUGHT IN BY WAY OF EXPLANATION TO SECTION 9(1) BY FINANCE ACT (NO.2) 2010 W.E.F. 1.6.76 DOES NOT COMPLETELY OVERR ULE THE DECISION OF THE APEX COURT IN THE CASE OF ISHIKAWA JIMA HARIMA HEAVY INDUSTRIES LTD VS. DIRECTOR OF INCOME TAX MUM BAI (288 ITR 408) IN WHICH IT WAS HELD THAT THE PAYMENTS FOR THE TECHNICAL SERVICES MUST SATISFY THE FOLLOWING TWO REQUIREMENT S TO BE TAXABLE IN INDIA IN TERMS OF SECTION 9(1)(VII) OF T HE IT ACT. A) THE SERVICES MUST BE UTILIZED IN INDIA B) THE SERVICES MUST BE RENDERED IN INDIA. 15. THE TRIBUNAL IN PARA 42 OF ITS ORDER UPHELD THE PLEA OF THE ASSESSEE THAT, EVEN IF THE REQUIREMENT MENTIONED AT 2 ABOVE IS HELD TO BE NO LONGER VALID IN VIEW OF THE PROVISION S OF EXPLANATION TO SECTION 9 WHICH HAS BEEN SUBSTITUTED RETROSPECTI VELY W.E.F. 1.6.1976 BY FINANCE ACT 2010, IT HAS TO BE NOTICED THAT THE REQUIREMENT MENTIONED AT 1 ABOVE STILL HOLDS THE FI ELD. TRIBUNAL ALSO OBSERVED THAT THE RETROSPECTIVE AMENDMENT BY W AY OF EXPLANATION TO 9(1) INTRODUCED BY FINANCE ACT 2010 COULD NOT HAVE BEEN VISUALIZED BY THE ASSESSEE COMPANY FOR DE DUCTING TAX AT SOURCE U/S 195 OF THE IT ACT. 16. THE TRIBUNAL ALSO FOUND THAT EVEN IF THE PAYMEN T TO ISSI WERE TECHNICAL SERVICE FEE, IT WOULD NOT BE TAXABLE IN INDIA IN TERMS OF ARTICLE 12 OF THE DTAA BETWEEN INDIA AND U SA. IN PARA 43 OF ITS ORDER THE TRIBUNAL OBSERVED AS UNDER: ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 10 OF 42 WE ALSO POINT THAT EVEN UNDER THE INDIA-USA AND INDIA-UK TREATIES (NOT THE INDIA-GERMANY TREATY THOUGH) DUE TO THE PRESENCE OF THE 'MAKE AVAILABLE' CLAUSE IN THESE TWO TREATIES THE PAYMENTS MADE BY THE ASSESSEE WILL NOT FALL UNDER FTS. THIS IS BECAU SE NO TECHNICAL KNOWLEDGE HAS BEEN MADE AVAILABLE BY THE NON-RESIDENT TO THE ASSESSEE. FURTHER, NO TECHN ICAL PLAN OR TECHNICAL DESIGN PLACEMENT HAS BEEN TRANSFERRED BY US SUBSIDIARY TO THE ASSESSEE. WHAT IEAI DID WAS ONLY IN FULFILLMENT OF CONTRACTUAL REQUIREMENT WITH PRATT & WHITNEY AND NOT FOR THE BENEFIT OF THE ASSESSEE. THE NON-RESIDENT HAS SIMPL Y EXECUTED THE PORTION OF WORK PARCELED OUT TO IT BY THE ASSESSEE. 17. AS NO TECHNICAL KNOWLEDGE WAS MADE AVAILABLE TO THE ASSESSEE COMPANY BY ITS FOREIGN SUBSIDIARY WHICH IS THE REQUIREMENT UNDER THE DTAA FOR PAYMENT TO QUALIFY A S TECHNICAL SERVICES FEE, THE TRIBUNAL HELD THAT PAYMENT IN QUE STION OF RS.2,01,40,454 IS NOT TAXABLE IN INDIA AND SO THERE IS NO REQUIREMENT FOR DEDUCTION OF TAX AT SOURCE O THE PA YMENT AND SO THE ASSESSEE COMPANY IS NOT HIT BY PROVISIONS OF SE CTION 40(A)(I). 18. IN PARA 8.15 OF THE IMPUGNED ORDER, CIT (A) OB SERVES AS UNDER: 'FROM THE FACTS OF THE CASE, IT IS CLEAR THAT ISSI, USA WAS SUB- CONTRACTED A PORTION OF THE WORK AND IT SENT ITS EMPLOYEES TO DO THAT JOB WITH PRATT & WHITNEY AND RECEIVED REMUNERATION FOR IT. THE JOB INVOLVED ON-S ITE WORK BY TECHNICAL AND PROFESSIONAL EXPERTS OF ISSI AS A PART AND PARCEL OF THE OVERALL CONTRACT OF PRATT AND WHITNEY WITH THE APPELLANT FOR THE DEVELOPMENT OF SPECIALIZED SOFTWARE. IT IS IMPORTANT TO UNDERSTAND THAT THE ORIGINAL CONTRACT WAS WITH THE APPELLANT FOR THE DEVELOPMENT AND SUPPLY OF VERY SPECIALIZED ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 11 OF 42 SOFTWARE. A CERTAIN PORTION OF THIS CONTRACT WAS SUBCONTRACTED TO ISSI IN USA. THEREFORE, RATHER THA N SEND ITS OWN TECHNICAL EXPERTS AND EMPLOYEES TO USA , THE APPELLANT ENGAGED ISSI TO DO THAT WORK'. 19. HAVING GIVEN ABOVE FINDINGS AND AGREED THAT THE ASSESSEE HAS GIVEN A SUB CONTRACT, THE CIT (A) TURNS AROUND AND HOLDS THAT THE ASSESSEE HAS RENDERED ONLY TECHNICAL PURPO SES. IN THIS CONTEXT, THE LD COUNSEL FOR THE ASSESSEE FURTHER SU BMITTED AS FOLLOWS: THE ASSESSEE COMPANY HAS NO QUARREL WITH THE ABOVE REMARKS OF THE CIT(A) EXCEPT THAT IT IS NOT CORRECT TO SAY THAT ONLY THE EMPLOYEES OF ISSI WERE DEPUTED TO PRA TT & WHITNEY. ACTUALLY, SOME EMPLOYEES OF THE ASSESSEE COMPANY WERE TAKEN OFF ITS ROLLS AND WERE TAKEN ON TO THE ROLLS OF ISSI AND ASSIGNED TO THE CONTRACTUAL W ORK WITH PRATT & WHITNEY. THIS WAS DONE FOR OPERATIONAL REASONS LIKE THE DIFFICULTY IN GETTING WORK PERMITS , VISAS AND TO FACILITATE LOCAL SUPERVISION. HAVING, THUS, AGREED THAT THE ASSESSEE COMPANY IS INTO THE DEVELOPMENT O F SPECIALIZED SOFTWARE AND IT PARCELLED OUT A PORTION OF ITS CONTRACTUAL WORK AGREED WITH PRATT & WHITNEY TO ITS FOREIGN SUBSIDIARIES, THE CIT (A) TURNS ROUND AND H OLDS THAT THE FOREIGN SUBSIDIARY HAS PROVIDED TECHNICAL SERVICES TO THE ASSESSEE. BEFORE THAT, HE ATTRIBUTE S A POSITION TO THE APPELLANT WHICH IT HAS NEVER TAKEN BEFORE HIM OR ELSEWHERE. IN PARA 8.17 OF HIS ORDER, HE OBS ERVES AS UNDER: 'FIRSTLY, IT IS VERY IMPORTANT TO APPRECIATE THAT C ONTRARY TO WHAT THE APPELLANT CLAIMS THE WORK DONE BY ISSI HAD ABSOLUTELY NO NEXUS WITH ANY RELATIONSHIP OR CONTRA CT OF ISSI WITH PRATT & WHITNEY. IN FACT ISSI ONLY WORKED ON BEHALF OF THE APPELLANT. ITS EMPLOYEES WERE SENT TO THE PREMISES OF PRATT & WHITNEY AT THE BEHEST OF THE APPELLANT AND TO PROVIDE TECHNICAL WORK AND EXPERTI SE ON BEHALF OF THE APPELLANT. THEREFORE, IT IS ABSOLU TELY INCORRECT ON THE PART OF THE APPELLANT TO STATE THA T IT NEVER HAD ANY CONTRACT WITH IS SI AND THE WORK DONE BY ISSI WAS ITS OWN CONTRACT WITH PRATT & WHITNEY. THIS IS ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 12 OF 42 TOTALLY CONTRARY TO THE FACTS ON RECORD'. IT WAS SUBMITTED BY THE ASSESSEE THAT THE ASSESSEE NEVER CLAIMED THAT IT HAD 'NO CONTRACT WITH ISSI AN D THE WORK DONE BY ISSI WAS ITS OWN CONTRACT WITH PRATT & WHITNEY'. THE CIT(A) HAS TOTALLY MISCONSTRUED THE POSITION OF THE ASSESSEE COMPANY. HAVING, THUS, MISCONSTRUED AND MISREPRESENTED THE APPELLANT'S POSITION, THE CIT(A) HELD THAT THE WORK DONE BY ISS I FOR THE ASSESSEE WAS PROVISION OF TECHNICAL SERVICES. T HIS FINDING GOES AGAINST THE ENTIRE RECORD OF THE ASSES SEE COMPANY. AS ONLY A PORTION OF THE CONTRACTUAL WORK WITH PRATT & WHITNEY HAS BEEN PARCELLED OUT TO ISSI , IT MEANS THAT, IF ISSI HAS PROVIDED TECHNICAL SERVICES TO THE ASSESSEE, THE ASSESSEE HAS ALSO PROVIDED TO PRA TT & WHITNEY, NOT SOFTWARE DEVELOPMENT SERVICES BUT TECHNICAL SERVICES. ACTUALLY, THE ASSESSEE COMPANY HAS BEEN ALLOWED RELIEF U/S.80HHE WHICH IS AVAILABL E ONLY FOR EXPORT OF SOFTWARE. THE ASSESSEE COMPANY WAS ALSO ALLOWED FOR SOME OF ITS UNITS RELIEF U/S 10A/10B WHICH IS ALSO AVAILABLE ONLY FOR EXPORT OF SOFTWARE AND NOT PROVISION OF TECHNICAL SERVICES. F OR SOME YEARS OR UNITS, THE RELIEF UNDER SECTION U/S 10A/10B WAS DENIED NOT ON THE GROUND THAT THE ASSESSEE COMPANY DID NOT EXPORT SOFTWARE BUT ON OTHER TECHNICAL GROUNDS. SO, THE FINDING THAT THE I SSI PROVIDED TECHNICAL SERVICES IN CONTRA DISTINCTION T O SOFTWARE DEVELOPMENT SERVICES IS WITHOUT BASIS. ACTUALLY, THERE IS A CLEAR DISTINCTION BETWEEN THES E TWO ACTIVITIES AND THE DISTINCTION IS EVIDENT FROM CLAU SES (I) & (II) OF 80HHE ITSELF. THE RELIANCE BY THE CIT(A) ON THE DECISION OF THE CHENNAI BENCH OF THE TRIBUNAL IN THE CASE OF ASST. CIT VS EVOLV CLOTHING CO. PVT. LTD (142 ITO 0618) FOR T HE PROPOSITION THAT THE ISSI PROVIDED TECHNICAL SERVIC ES TO THE ASSESSEE COMPANY IS MISPLACED. IN THAT DECISION , THE PROVIDER OF TECHNICAL SERVICES HAD TO UNDERTAKE SYSTEMATIC RESEARCH AND THE BENEFITS OF THE RESEARC H WENT DIRECTLY TO THE RECIPIENT OF THE SERVICES. IN THE PRESENT CASE, ISSI DID NOT UNDERTAKE ANY RESEARCH A ND, AT ANY RATE, THE BENEFIT OF THE RESEARCH DID NOT AC CRUE TO THE ASSESSEE COMPANY. ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 13 OF 42 THE CIT(A) HAS NOT EVEN CONSIDERED THE PLEA OF THE ASSESSEE THAT, EVEN ASSUMING THAT THE AMOUNT OF RS.2.01,40,454/- REPRESENTS TECHNICAL SERVICES FEE PAID TO ISSI, IT IS NOT TAXABLE IN INDIA IN VIEW OF SUB- CLAUSE (B) OF CLAUSE (VII) OF SECTION 9(1) AS THE SERVICES ARE USED BY THE APPELLANT IN A BUSINESS CARRIED ON BY IT OUT SIDE INDIA OR USED FOR THE PURPOSE OF EARNING INCOME FRO M A SOURCE OUTSIDE INDIA AND ARE NOT 'UTILIZED' IN INDI A. THE PAYMENT IN QUESTION HAS BEEN MADE FOR EARNING INCOM E FROM THE CONTRACT WITH PRATT & WHITNEY WHICH IS A 'SOURCE' OUTSIDE INDIA. AS PER THE DECISION OF THE TRIBUNAL IN IBM WORLD TRADE CORPN. VS DEPUTY DIRECT OR OF TAX, INTERNATIONAL TAXATION, CIRCLE 1(1), BANGAL ORE [IT APPEAL NO.759 (BANG) OF 2011 S.P.NO.50 (BANG) OF 2012 AY 2007-08 DATED 13 TH APRIL, 2012] EACH SEPARATE CONTRACT CONSTITUTES A 'SOURCE' OF INCOME . 20. WE HAVE HEARD BOTH THE PARTIES AND ARE OF THE O PINION THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY T HE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2006-07 & 2007-08. FURTHER THE DEPARTMENT FILED APPEAL BEFORE THE HON' BLE HIGH COURT AGAINST THE TRIBUNALS ORDER, HOWEVER, NO GRO UND WAS RAISED AGAINST THIS ISSUE. HENCE, THIS GROUND OF TH E ASSESSEE IS ALLOWED. 21. THE NEXT GROUND IS WITH RESPECT TO EXTRA DEPREC IATION CLAIMED ON COMPUTER SOFTWARE OF RS.4,13,14,674. THE FACT IS THAT AASSESSEE BOUGHT SOME NEW COMPUTERS AND ALSO SOME S OFTWARE AND CALCULATED DEPRECIATION @60% ON BOTH THE ASSETS . THE AO GRANTED DEPRECIATION @ 60% ON THE OPENING WDV OF TH E COMPUTERS AND VALUE OF ADDITIONS TO COMPUTERS, BUT RESTRICTED IT TO @25% ON THE ADDITIONS TO THE SOFTWARE. THE AO HE LD THAT, IN TERMS OF ITEM 2(B) UNDER MACHINERY AND PLANT (ITEM III OF PART A OF THE DEPRECIATION SCHEDULE) RELEVANT FOR THE ASSE SSMENT YEARS 1988-89 TO 2002-03, THE DEPRECIATION IS ALLOWABLE @ 60% ONLY ON ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 14 OF 42 COMPUTERS AND NOT ON SOFTWARE. IT IS ONLY FROM A.Y 2003-04 TO 2005-06, THE DEPRECIATION IS ALLOWABLE 'ON COMPUTER S INCLUDING COMPUTER SOFTWARE' @60% IN TERMS OF ITEM 4 UNDER MA CHINERY AND PLANT (ITEM III OF PART A OF THE DEPRECIATION S CHEDULE). APPARENTLY, BASED ON THIS DISTINCTION BETWEEN THE T WO SCHEDULES, THE ASSESSING OFFICER RESTRICTED THE GRANT OF DEPRE CIATION @60% TO COMPUTERS AND ALLOWED DEPRECIATION ON SOFTWARE AT O NLY 25% WHICH IS THE GENERAL RATE APPLICABLE TO PLANT & MAC HINERY. HE ADDED THE DIFFERENCE OF RS. 4,13,14,874/- AS EXCESS DEPRECIATION CLAIMED. 22. THE LD COUNSEL SUBMITTED BEFORE THE CIT (A) THA T THE ASSESSING OFFICER HAS MISSED THE POINT THAT PURCHAS E OF SOFTWARE DOESN'T ADD TO THE PRODUCTION CAPACITY OF THE ASSES SEE. IT MAY ADD TO THE EFFICIENCY OF OPERATIONS. IN THE SCENARI O OF FAST CHANGING TECHNOLOGY, THE SOFTWARE GETS OUTDATED VER Y FAST. IT HAS BEEN HELD BY THE APEX COURT IN THE CASE OF EMPIRE J UTE CO. LTD VS CIT (124 ITR 0001), THAT ENDURING BENEFIT IS NOT TH E ONLY CRITERION FOR JUDGING WHETHER AN ITEM OF EXPENDITURE IS ON CA PITAL ACCOUNT OR ON REVENUE. THE RELEVANT PORTION OF THE HEAD NOT E READS AS UNDER; '(II) THERE MAY BE CASES WHERE EXPENDITURE, EVEN IF INCURRED FOR OBTAINING AN ADVANTAGE OF ENDURING BENEFIT, MAY, NONE THE LESS, BE ON REVENUE ACCOUNT AND THE TEST OF ENDURING BENEFIT MAY BREAK DOWN. IT IS NOT EVERY ADVANTAGE OF ENDURING NATURE ACQUIRED BY AN APPELLANT THAT BRINGS THE CASE WITHIN THE PRINCIPLE LAID DOWN IN THIS TEST. WHAT IS MATERIAL TO CONSIDER IS THE NATURE OF THE ADVANTAGE IN A COMMERCIAL SENSE AND IT IS ONLY WHERE THE ADVANTAGE IS IN THE CAPITAL FIELD THAT THE EXPENDITURE WOULD BE DISALLOWABLE ON AN APPLICATION OF THIS TEST. IF THE ADVANTAGE CONSISTS MERELY IN FACILITATING THE ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 15 OF 42 APPELLANT'S TRADING OPERATIONS OR ENABLING THE MANAGEMENT AND CONDUCT OF APPELLANT'S BUSINESS TO BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITABILITY WHILE LEAVING THE FIXED CAPITAL UNTOUCHED, THE EXPENDITURE WOULD BE ON REVENUE ACCOUNT, EVEN THOUGH THE ADVANTAGE MAY ENDURE FOR AN INDEFINITE FUTURE. THE TEST OF ENDURING BENEFIT IS, THEREFORE, NOT CERTAIN OR CONCLUSIVE TE ST AND IT CANNOT BE APPLIED BLINDLY AND MECHANICALLY WITHOUT REGARD TO THE PARTICULAR FACTS AND CIRCUMSTANCE OF A GIVEN CASE. ' 23. THE CIT(A) HAS CONFIRMED THE DISALLOWANCE WITH THE FOLLOWING REMARKS: ' THE ARGUMENT OF THE APPELLANT THAT SOFTWARE DOES NO T IMPROVE THE PRODUCTION CAPACITY BUT ONLY INCREASES THE EFFICIENCY IS NOT ACCEPTABLE BECAUSE ANY INCREA SE IN EFFICIENCY INVARIABLY GIVES RISE TO GREATER PRODUCTION. FURTHER, WORLDWIDE THE INTRODUCTION OF SPECIALIZED SOFTWARE HAS GREATLY REDUCED THE PRODUCTION TIME, THEREBY VASTLY IMPROVING THE QUANTUM OF PRODUCTION. I FIND THAT THE ASSESSING OFFICER IS CORRECT IN ALLOWING DEPRECIATION AT THE RATE OF 25% IN THE CURRENT YEAR'. 24. ON APPEAL BEFORE US, THE LD COUNSEL SUBMITTED THAT T HE ABOVE REASONING OF THE CIT(A) GOES EXACTLY COUNTER TO THE RATIO OF THE DECISION OF THE APEX COURT IN THE CASE OF EMPIR E JUTE CO. LTD (SUPRA) AND SO DESERVES TO BE REJECTED. HE FURTHER POINTED OUT THAT IN THE CASE OF CIT VS. VARINDER AGRO CHEMICALS LTD. (309 ITR 272 (PUN)), THE HON'BLE PUNJAB AND HARYANA HIGH COU RT HELD, AS PER THE HEAD NOTE, AS UNDER; 'HELD THAT THERE WAS NOTHING TO SHOW THAT THE SOFTWARE USED BY THE APPELLANT WAS OF ENDURING NATURE AND WOULD NOT BECOME OUTDATED. SINCE TECHNOLOGY IS FAST CHANGING AND DAY-BY-DAY SYSTEMS ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 16 OF 42 ARE BEING DEVELOPED IN A NEW WAY, SOFTWARE MAY BE NEEDED LIKE RAW MATERIAL. THE VIEW TAKEN BY THE TRIBUNAL WAS CERTAINLY A POSSIBLE VIEW. THUS, NO SUBSTANTIAL QUESTION OF LAW AROSE'. 25. IT WAS ARGUED THAT IN THE CASE OF CIT VS ASAHI INDIA SAFETY GLASS LTD. (203 TAXMAN 277), IT WAS HELD THAT EXPEN DITURE INCURRED TO ENABLE MANAGEMENT TO RUN ITS BUSINESS E FFECTIVELY, EFFICIENTLY AND PROFITABLY, LEAVING FIXED ASSETS UN TOUCHED, WOULD BE AN EXPENDITURE IN NATURE OF REVENUE EXPENDITURE EVEN THOUGH ADVANTAGE MAY LAST FOR AN INDEFINITE PERIOD. ACCORD INGLY, IT WAS HELD THAT EXPENDITURE ON PURCHASE OF APPLICATION SO FTWARE BEING ORACLE WAS ALLOWABLE AS REVENUE EXPENDITURE. IT WAS ALSO SUBMITTED THAT THE EXPENDITURE INCURRED BY THE ASSE SSEE, BEING ON APPLICATION SOFTWARE LIKE CAD, CATIA, UNIGRAPHIC S ETC, IS SIMILAR. 26. HOWEVER, IN THE COURSE OF HEARING THE LD COUNSE L CONCEDED THIS GROUND. ACCORDINGLY THIS GROUND IS DI SMISSED. 27. THE NEXT GROUND IS THAT THE CIT(A) ERRED IN HOL DING THAT THE EXPENDITURE/ INCURRED IN FOREIGN CURRENCY OF RS.12, 08,19,698/- IS TO BE REDUCED FROM 'EXPORT TURNOVER' WHILE GRANT ING THE DEDUCTION UNDER SECTION 80HHE. THE BREAKUP OF THIS EXPENDITURE IS AVAILABLE AT PAGE 86 OF THE ANNUAL REPORT FOR FY 2001-02 IT IS AS UNDER: EXPENDITURE IN FOREIGN CURRENCY:- A) TRAVELLING RS.9,93,64,053 B) SUBSCRIPTIONS RS.4,71,156 C) PROFESSIONAL SERVICES RS.2,09,84,489 ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 17 OF 42 TOTAL RS.12,08,19,698 28. THE LD COUNSEL SUBMITTED THAT THE DEFINITION OF EXPORT TURNOVER AS GIVEN IN CLAUSE C OF THE EXPLANATION TO 80HHE READS AS UNDER: (C) 'EXPORT TURNOVER' MEANS THE CONSIDERATION IN RESPECT OF COMPUTER SOFTWARE RECEIVED IN, OR BROUGH T INTO, INDIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE IN ACCORDANCE WITH SUB-SECTION(2), BUT DOES NOT INCLUDE FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE COMPUTER SOFTWARE OUTSIDE INDIA OR EXPENSES, IF ANY , INCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA'. 29. IT WAS FURTHER SUBMITTED THAT THE ABOVE DEFINITION DOESN'T ROPE IN EXPENDITURE ON TRAVEL AND SUBSCRIPTIONS. SO , THE REDUCTION FROM EXPORT TURNOVER OF RS. 9,98,35,209/- (RS.9,93,64,053 + RS.71,156/- IS NOT AT ALL WARRANT ED. THE BALANCE OF RS.2,09,84,489/- INCLUDES RS.2,01,40,454 /- PAID TO ISSI FOR THE SERVICES RENDERED IN THE CONTEXT OF TH E ASSESSEE CONTRACTUAL OBLIGATIONS TO PRATT & WHITNEY. THE AMOUNT OF RS.2,09,84,489/- REPRESENTS EXPENDITURE IN FOREIGN CURRENCY INCURRED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES WHICH IS THE MAIN ACTIVITY OF THE ASSESSEE COMPANY. THIS EXPENDI TURE WAS NOT INCURRED IN PROVIDING TECHNICAL SERVICES BY THE ASS ESSEE OUTSIDE INDIA. IT IS NOT AT ALL THE CASE OF EITHER THE AO O R THE CIT(A) THAT THE APPELLANT WAS IN THE BUSINESS OF PROVIDING TECH NICAL SERVICES. WHAT THE CIT(A) HELD WAS ONLY THAT THE AM OUNT PAID BY THE ASSESSEE TO USA SUBSIDIARY I.E. ISSI, I.E., RS. 2,01,40,454/- IS FOR TECHNICAL SERVICES RECEIVED FROM THAT ENTITY. I T IS NOT THE CASE ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 18 OF 42 OF EVEN THE CIT(A) THAT THE ASSESSEE COMPANY PROVID ED TECHNICAL SERVICES TO ISSI. THE DEFINITION OF EXPORT TURNOVER COVERS ONLY 'EXPENDITURE INCURRED IN FOREIGN EXCHANGE IN PROVID ING THE TECHNICAL SERVICES OUTSIDE INDIA' AND NOT EXPENDITU RE INCURRED WHILE RECEIVING TECHNICAL SERVICES OR PROVIDING SOF TWARE SERVICES. SO THERE IS NO BASIS FOR REDUCING THIS AMOUNT OF EV EN RS.2,09,84,489/- FROM EXPORT TURNOVER WHILE GRANTIN G A DEDUCTION UNDER SECTION 80HHE. 30. IT WAS ALSO POINTED OUT THAT THIS AMOUNT OF RS.2,09,84,489/- OR EVEN THE ENTIRE AMOUNT OF RS.12,08,19,698/- HAS NOT BEEN CHARGED TO THE CUSTO MERS AND SO IS NOT INCLUDED IN EXPORT TURNOVER AND SO THERE IS NO JUSTIFICATION FOR REDUCING IT FROM EXPORT TURNOVER. 31. THE LD COUNSEL PLACED RELIANCE ON THE DECISION OF THE TRIBUNAL FOR THE AY 2006-07 IN ITA NO. 775/HYD/2013 WHEREIN, WHILE CONSIDERING THE ANALOGOUS DEFINITION OF 'EXPO RT TURNOVER' IN CLAUSE (IV) OF EXPLANATION 2 TO SECTION 10A, IT WAS HELD AS UNDER: 'IF IT IS REALLY A FACT THEN THERE CANNOT BE ANY REDUCTION OF THE SAID AMOUNT FROM THE EXPORT TURNOVER WHEN TH E ASSESSEE HAS NOT AT ALL INCLUDED IT IN THE EXPORT TURNOVER WHILE COMPUTING DEDUCTION U/S. 10A OF THE ACT. WE THEREFORE DIRECT THE ASSESSING OFFICER TO VERIFY THIS FACT AND IF ON VERIFICATION IT IS FOUND THAT THE ASSESSEE HAS NOT INCLUDED THE SAID AMOUNT WHILE COMPUTING THE DEDUCTION U/S. 10A THEN THERE IS NO QUESTION OF REDUCING IT FROM EXPORT TURNOVER FOR TH E PURPOSE OF COMPUTING DEDUCTION U/S. 10A OF THE ACT. EVEN OTHERWISE ALSO, THE ALTERNATIVE CONTENTION OF THE ASSESSEE IS NOT WITHOUT SUBSTANCE. WHEN ANY AMOUNT BEING IN THE NATURE OF FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES OR THINGS OR COMPUTER ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 19 OF 42 SOFTWARE OUTSIDE INDIA ARE TO BE EXCLUDED FROM THE EXPORT TURNOVER, THEN THE SAME IS ALSO REQUIRED TO BE EXCLUDED FROM THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION U/S. 10A OF THE ACT. THIS VIEW OF OURS GETS SUPPORT FROM THE DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT GEM PLUS INDIA LTD. (330 ITR 175 AND INCOME-TAX APPELLATE TRIBUNAL CHENNAI BENCH IN CASE OF SAK SOFT LTD. (30 SOT 55). HENCE THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES' 32. WE HAVE HEARD BOTH THE PARTIES. WE ARE OF THE O PINION THAT THE AMOUNT OF RS.12,08,19,698 CAN BE CONSIDERED FOR EXCLUSION, ONLY IF IT REPRESENTS EXPENSES INCURRED IN FOREIGN CURRENCY WHILE PROVIDING TECHNICAL SERVICES. IN THE PRESENT CASE T HE ASSESSEE HAS NOT PROVIDED ANY TECHNICAL SERVICES. FURTHER, IT IS NOT CHARGED TO THE CUSTOMERS AND SO NOT INCLUDED IN EXPORT TURNOVE R. THE PRINCIPLE THAT WHAT IS NOT INCLUDED CANNOT BE EXCLU DED HAS BEEN ACCEPTED BY THE ITAT IN THE ASSESSEES OWN CASE AS REPRODUCED AT PARA NO.32 ABOVE. HENCE THIS GROUND RAISED BY TH E ASSESSEE IS ALLOWED. 33. THE NEXT GROUND IS THAT THE LD CIT (A) ERRED IN HOLDING THAT THE COMMUNICATION EXPENSES OF RS.92,60,349 ARE EXCL UDIBLE FROM EXPORT TURNOVER FOR GRANTING DEDUCTION U/S 8 0HHE. EXPORT TURNOVER IS DEFINED UNDER CLAUSE (IV) OF EXP LANATION 2 TO SEC.1 OA OF THE IT ACT AND IT READS AS UNDER: 'EXPORT TURNOVER' MEANS THE CONSIDERATION IN RESPEC T OF EXPORT [BY THE UNDERTAKING] OF ARTICLES OR THING S OR COMPUTER SOFTWARE RECEIVED IN, OR BROUGHT INTO, IND IA BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE IN ACCORDANCE WITH SUB-SECTION (3), BUT DOES NOT INCLUDE FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES OR THI NGS OR ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 20 OF 42 COMPUTER SOFTWARE OUTSIDE INDIA OR EXPENSES ,IF ANY , INCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHN ICAL SERVICES OUTSIDE INDIA;' 34. THE LD COUNSEL SUBMITTED THAT WHAT THE ASSESSEE INCURRED ARE ACTUALLY SOFT LINK CHARGES FOR AVAILING A DEDIC ATED CABLE LINK FROM THE INTERNET SERVICE PROVIDER. WHAT ARE TO BE EXCLUDED IN TERMS OF THE DEFINITION OF THE 'EXPORT TURNOVER' IN CLAUSE (IV) OF EXPLANATION 2 TO SECTION 10A IS 'TELECOMMUNICATION CHARGES' AND NOT SOFT LINK CHARGES. TELECOMMUNICATION CHARGES CA NNOT, IT IS SUBMITTED, BE IDENTIFIED WITH SOFT LINK CHARGES. TH E FORMER RELATES TO TELEPHONIC EXPENDITURE WHEREAS THE LATTER RELATE S TO INTERNET. STRICTLY, THEY ARE DIFFERENT AND SO THE SOFT LINK C HARGES INCURRED BY THE ASSESSEE ARE NOT LIABLE TO BE EXCLUDED IN TE RMS OF THE SAID DEFINITION. 35. IT WAS FURTHER SUBMITTED THAT AMOUNT OF RS.92,6 0,349/-. IF IT CANNOT BE CONSIDERED EVEN AS EXPENSES INCURRED IN F OREIGN CURRENCY IN PROVIDING THE TECHNICAL SERVICES OUTSID E INDIA. THE OBJECTION AGAINST SUCH CONSIDERATION IS THAT THE AS SESSEE HAS NOT PROVIDED ANY TECHNICAL SERVICES. THE ASSESSEE HAS O NLY RENDERED SOFTWARE DEVELOPMENT SERVICES OR EXPORTED SOFTWARE TO ITS CUSTOMERS OUTSIDE INDIA AND HAS NOT RENDERED ANY TE CHNICAL SERVICES. 36. THE LD COUNSEL RELIED ON IN CASE OF PATNI TELEC OM (P) LTD. VS ITO 120 ITO 105, THE ITAT, HYDERABAD BENCH HAS MADE TH E FOLLOWING DISTINCTION: 'THE ASSESSEE DID NOT RENDER ANY INDEPENDENT TECHNICAL SERVICES. IT DEVELOPED SOFTWARE ON CONTRA CT BASIS AS PER THE AGREEMENT AND HANDED OVER THE SAME TO THE CUSTOMER........ THERE IS ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 21 OF 42 SOFTWARE DEVELOPMENT AGREEMENT BETWEEN THE CLIENT AND THE ASSESSEE. THE EXPENDITURE INCURRED IS FOR DEVELOPMENT OF SOFTWARE.... SUCH EXPENSES INCURRED CANNOT BE SAID TO BE EXPENDITURE FOR TECHNICAL SERVICES. IF THE TECHNICAL SERVICES ARE RENDERED INDEPENDENTLY WHICH ARE BEING AGREED TO BE SEPARATELY CHARGED IN ADDITION TO THE PRICE OF THE GOODS, IN SUCH CIRCUMSTANCES, EXPENDITURE INCURRED COULD BE IN THE NATURE OF EXPENDITURE FOR THE PURPOSE OF TECHNICAL SERVICES...... SUCH EXPENDITURE IS NOT IN THE NATURE OF EXPENDITURE FOR TECHNICAL SERVICES. SINCE THE EXPENDITURE IS NOT FOR TECHNICA L SERVICES, THERE IS NO NEED TO EXCLUDE THESE EXPENDITURES FROM CONSIDERATION RECEIVED IN CONVERTIBLE FOREIGN EXCHANGE FOR THE PURPOSE OF CALCULATING 'EXPORT TURNOVER' AS DEFINED IN CL. (IV) OF EXPLN 2 TO S. 10A'. 37. IT WAS ALSO SUBMITTED THAT THE AMOUNT OF RS.92, 60,349/- IS A PAYMENT MADE BY THE ASSESSEE WHICH HAS NOT BEEN C HARGED TO THE CUSTOMERS. IT IS NOT INCLUDED IN THE INVOICES R AISED BY THE APPELLANT ON THE CUSTOMERS. IT IS SEPARATELY DEBITE D TO THE PROFIT & LOSS ACCOUNT. IT IS NOT INCLUDED IN THE EXPORT TURNOVER. WHAT IS NOT INCLUDED IN THE EXPORT TURNOV ER CANNOT BE REDUCED FROM IT FOR WORKING OUT THE DEDUCTION UNDER SECTION 10A. IN THE CASE OF PATNI TELECOM PVT LTD VS INCOME TAX OFFICER (SUPRA). THE TRIBUNAL HELD THAT EXPENSES WHICH ARE NOT INCLUDED IN THE CONSIDERATION RECEIVED IN CONVERTIBLE FOREIG N EXCHANGE CANNOT BE REDUCED FROM THE EXPORT TURNOVER. 38. IT WAS POINTED OUT THAT WHEN THE AO EXCLUDED TH E SAID AMOUNT OF RS.92,60,349/- FROM EXPORT TURNOVER, HE S HOULD HAVE, IN THE INTEREST OF FAIRNESS, EXCLUDED IT FROM THE T OTAL TURNOVER ALSO FOR COMPUTING THE DEDUCTION U/S. 10A(4). 39. IN THIS CONTEXT, RELIANCE IS PLACED ON THE DECI SION OF THE ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 22 OF 42 HON'BLE HIGH COURT OF KARNATAKA IN THE CASE OF COMM ISSIONER OF INCOME-TAX VS. TATA ELXSI LTD ([2012] 17 TAXMANN.CO M 100 (KAR.)) WHICH FOLLOWS THE DECISION OF THE APEX COUR T IN THE CASE OF CIT V. LAKSHMI MACHINE WORKS ([2007] 290 ITR 667 I 160 TAXMAN 401) IN VIEW OF THE ABOVE, THE EXCLUSION OF RS.92,60,349/- FROM THE EXPORT TURNOVER MAY BE DELE TED AND THE DEDUCTION U/S.10A MAY BE ALLOWED WITHOUT SUCH EXCLU SION. 40. WE HEARD BOTH THE PARTIES. WE FIND THAT THIS A MOUNT IS NOT CHARGED TO THE CUSTOMER AND SO NOT INCLUDED IN THE EXPORT TURNOVER AND SO CANNOT BE REDUCED FROM IT. THIS IS SUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE TRIBU NAL IN THE ASSESSEES OWN CASE FOR AYS 2006-07 & 2007-08 (SUPR A). THIS GROUND IS ALLOWED. 41. THE NEXT GROUND IS THAT THE AO ERRED IN ADJU DICATING IN THIS ASSESSMENT YEAR UPON THE TAXABILITY OF RS.36,65,000 /- AND RS.17,50,000/- BEING THE AMOUNTS THAT ACCRUED TO TH E AASSESSEE COMPANY ON FORFEITURE OF CONVERTIBLE SHARE WARRANTS . IT WAS SUBMITTED BY THE LD COUNSEL THAT THE AO GROSSLY ERR ED IN HOLDING THESE AMOUNTS REPRESENTS REVENUE RECEIPTS OF THE AA SSESSEE COMPANY. 42. THE CIT(A) MENTIONED IN PARA 14.1 OF HIS ORDER THAT 'THE ASSESSEE HAD ALSO STATED THAT THE ISSUE WAS TO BE A DJUDICATED IN THIS YEAR AND NOT IN THE AY 2004-05'. IN THE COURSE OF THE APPEAL BEFORE THE CIT(A) FOR THE AY 2004-05 IN ITA NO.0133 /2011/2012 THE APPELLANT COMPANY PLEADED THAT THE ABOVE AMOUNT S WERE NOT TAXABLE IN THE AY 2004-05 AS THE FORFEITURE OF THE SHARE ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 23 OF 42 WARRANTS IN QUESTION TOOK PLACE IN THE FY 2001-02 A ND SO THESE AMOUNTS WERE NOT ASSESSABLE FOR THE AY 2004-05. 43. IT WAS SUBMITTED THAT THE ASSESSEE HAD NOT AGRE ED FOR THE ADJUDICATION OF THEIR TAXABILITY OR THEIR ADDITION FOR THE ASSESSMENT YEAR 2002-03 AS STATED BY THE CIT(A). IT WAS ARGUED THAT THE CIT (A) HAD MISREPRESENTED THE STAND TAKEN BY THE ASSESSEE FOR THE AY 2004-05 AND THESE AMOUNTS WERE NOT ADDED BY THE AO IN THE IMPUGNED ORDER FOR THIS ASSESSMENT YEAR. IT WAS POINTED THAT THE AO ADDED THESE AMOUNTS IN A RE-OPE NED ASSESSMENT FOR THIS ASSESSMENT YEAR I.E., 2002-03 A ND THIS ASSESSMENT WAS CANCELLED BY THE CIT(A) HIMSELF VIDE HIS ORDER DATED 16 TH AUGUST, 2013 FOR THE AY 2002- 03 IN ITA NO.0186/ACAIT 2(1)/CIT(A)-1I1/2007-08 ON THE GROUND THAT THE REOPENING WAS INVALID. IT WAS ARGUED THAT HAVING, T HE CANCELLED THE ASSESSMENT AND THUS DELETING THE ADDITION OF TH ESE TWO AMOUNTS, THE CIT(A) ASSUMED JURISDICTION TO BRING T HESE TWO AMOUNTS TO TAX IN THIS ASSESSMENT YEAR AND THUS EXP OSED THE ASSESSEE COMPANY TO DOUBLE JEOPARDY. THE LD COUNSEL SUBMITTED THAT THE CIT(A) CAN ONLY ADJUDICATE UPON ADDITIONS MADE BY THE ASSESSING OFFICER AND NOT MAKE NEW ADDITIONS AND TH E CIT(A) HAS NOT EVEN ISSUED A NOTICE TO THE ASSESSEE FOR ENHANC EMENT AND THE CIT (A) HAS NOT GIVEN ANY DIRECTION TO AO TO AD D THESE AMOUNTS FOR THE AY 2002-03 AND THE CIT (A) SUO MOTO MADE THESE ADDITIONS WHICH IS TOTALLY UNTENABLE IN LAW. 44. THE LD COUNSEL SUBMITTED THAT THE PRINCIPLE WHE THER A FORFEITED AMOUNT IS A CAPITAL RECEIPT OR A REVENUE RECEIPT WAS ALSO CONSIDERED BY THE SUPREME COURT IN THE DECISION OF TRAVANCORE RUBBER AND TEA CO., VS. CIT [243 ITR 158] ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 24 OF 42 45. THE LD COUNSEL ALSO PLACED RELIANCE IS ALSO PLA CED UPON THE FOLLOWING DECISIONS. I. DEPUTY COMMISSIONER OF INCOME TAX VS BRIJLAXMI LEAS ING & FINANCE LTD (118 ITD 546). II. SUNITA GUPTA SHARE BROKERS LIMITED VS ACIT, CI RCLE-9(1), NEW DELHI (ITA NO.4188(DEL)201 0, [G BENCH]). III. CNB FINWIZ LTD, NEW DELHI VS DEPARTMENT OF IN COME TAX (IT NO.3756/DEI/2010 [B BENCH]). IV. HARYANA FINANCIAL CORPORATION VS DEPARTMENT OF INCOME TAX (ITA NO.751/CHD/2011 [CHANDIQHAR BENCH). 46. WE FIND THAT THE HONBLE SUPREME COURT APPLIED THE PRINCIPLE ENUNCIATED IN THE CASE OF LONDON AND THAM ES HAVEN OIL WHARVES LTD., VS. ATTWOLL (INSPECTOR OF TAXES) (70 ITR 460) IN THE CASE OF TRAVANCORE RUBBER & CO VS. CIT (243 ITR 158) WHEREIN IT WAS HELD AS UNDER: 'WHERE, PURSUANT TO A LEGAL RIGHT, A TRADER RECEIVE S FROM ANOTHER PERSON COMPENSATION FOR THE TRADER'S FAILURE TO RECEIVE A SUM OF MONEY WHICH, IF IT HAD BEEN RECEIVED, WOULD HAVE BEEN CREDITED TO THE AMOUNT OF PROFITS (IF ANY)ARISING IN ANY YEAR FROM THE TRADE CARRIED ON BY HIM AT THE TIME WHEN THE COMPENSATION IS SO RECEIVED, THE COMPENSATION IS TO BE TREATED FOR INCOME TAX PURPOSES IN THE SAME WAY AS THAT SUM OF MONEY WOULD HAVE BEEN TREATED IF IT HAD BEEN RECEIVED, INSTEAD OF THE COMPENSATION'. 47. HENCE, WE ARE OF THE OPINION THAT THE FORFEITED AMOUNTS ARE TO BE TREATED AS CAPITAL RECEIPTS. FURTHER, THESE A MOUNTS WERE NOT ADDED BY THE AO IN THE ASSESSMENT AND SO THE CI T (A) HAS NO JURISDICTION TO INCLUDE THIS AMOUNT IN THE ASSESSME NT. HENCE, THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 25 OF 42 48. IN THE RESULT APPEAL IN ITA NO.1450/HYD/2013 FO R AY 2002-03 IS PARTLY ALLOWED. ITA NO.1452/HYD/2013-A.Y 2004-05. 1. GROUNDS RAISED BY THE ASSESSEE READ AS UNDER: 1. THE ORDER OF THE CIT(A) DATED 20TH AUGUST2013 I S CONTRARY TO THE LAW AND FACTS OF THE CASE. 2. THE LD. CIT(A) ERRED IN HOLDING THAT THE EXPENDI TURE INCURRED IN FOREIGN CURRENCY OF RS.20,85,23,625 IS TO BE REDUCED FROM 'EXPORT TURNOVER' WHILE GRANTING THE DEDUCTION UNDER SECTION 80HHE. 3. THE LD. CLT(A) ERRED IN HOLDING THAT THE AMOUNT OF RS.2,79,081/-,BEING ON-SITE SOFTWARE SERVICES IS NO T A PART OF THE BUSINESS PROFITS FOR THE PURPOSE OF CAL CULATING THE RELIEF UNDER SECTION 80HHE. 4. THE LD. CIT(A) ERRED IN HOLDING THAT THE AMOUNT OF RS.11,99,94,156/- PAID BY THE APPELLANT TO M/S INFOTECH SOFTWARE SOLUTIONS INC (ISSI), USA, THE SUBSIDIARY OF THE APPELLANT, IS OF THE NATURE OF TE CHNICAL SERVICE FEE AND IS A TAXABLE RECEIPT IN THE HANDS O F THE SAID NON-RESIDENT COMPANY AND AS NO TAX WAS DEDUCTED AT SOURCE UNDER SECTION 195, THE SAID EXPENDITURE IS DISALLOWABLE IN TERMS OF SECTION 40( A)(I). 5. THE LD. CIT(A) ERRED IN HOLDING THAT THE PAYMENT OF RS.67,56,552/-PAID BY THE APPELLANT MAINLY TO GE NETWORK SOLUTIONS, NETHERLANDS, AND, TO A SMALL EXT ENT, TO IBM INC.USA, IS UNDER SECTION 40(A)(I) OF THE IN COME TAX ACT ON THE GROUND THAT THIS AMOUNT REPRESENTED TAXABLE INCOMES OF THE NON-RESIDENTS AND, NO TAX WA S DEDUCTED AT SOURCE ON THIS AMOUNT IN TERMS OF SECTI ON 195 OF THE ACT. 6. THE LD.CLT(A) ERRED IN HOLDING THAT THE AMOUNT O F RS.48,25,974/- CLAIMED UNDER SECTION 35(2AB) AS WEIGHTED DEDUCTION CANNOT BE ALLOWED ON THE GROUND ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 26 OF 42 THAT THERE IS NO REQUISITE APPROVAL FROM THE PRESCR IBED AUTHORITY. 7. THE LD. CIT(A) ERRED IN HOLDING THAT THE COMMUNICATION EXPENSES OF RS.92,60,349/- ARE EXCLUDIBLE FROM 'EXPORT TURNOVER' FOR GRANTING THE DEDUCTION UNDER SECTION 80HHE. 8. THE LD. CIT (A) ERRED IN HOLDING THAT THE AMOUNT OF RS.1,46,34,OOO/- RECEIVED BY WAY OF FORFEITURE OF CONVERTIBLE SHARE WARRANTS IS TAXABLE AS A REVENUE RECEIPT . 6. 2. GROUND 1 IS GENERAL IN NATURE; HENCE NO SPECIFIC ADJUDICATION IS CALLED FOR. 3. GROUND NO.2 IS COVERED BY THE DECISION IN ASSESSEE S OWN CASE FOR AY 2002-03 WHEREIN AT PARA NOS. 32 & 33, W E HAVE ADJUDICATED AS FOLLOWS: 32. THE LD COUNSEL PLACED RELIANCE ON THE DECISION OF THE TRIBUNAL FOR THE AY 2006-07 IN ITA NO. 775/HYD/2013 WHEREIN, WHILE CONSIDERING THE ANALOGOUS DEFINITION OF 'EXPORT TURNOVER' IN CLAUSE (IV) OF EXPLANATION 2 TO SECTION 10A, IT WAS HELD AS UND ER: 'IF IT IS REALLY A FACT THEN THERE CANNOT BE ANY RE DUCTION OF THE SAID AMOUNT FROM THE EXPORT TURNOVER WHEN THE ASSESSEE HAS NOT AT ALL INCLUDED IT IN THE EXPORT T URNOVER WHILE COMPUTING DEDUCTION U/S. 10A OF THE ACT. WE THEREFORE DIRECT THE ASSESSING OFFICER TO VERIFY TH IS FACT AND IF ON VERIFICATION IT IS FOUND THAT THE ASSESSEE HA S NOT INCLUDED THE SAID AMOUNT WHILE COMPUTING THE DEDUCT ION U/S. 10A THEN THERE IS NO QUESTION OF REDUCING IT F ROM EXPORT TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCT ION U/S. 10A OF THE ACT. EVEN OTHERWISE ALSO, THE ALTER NATIVE CONTENTION OF THE ASSESSEE IS NOT WITHOUT SUBSTANCE . WHEN ANY AMOUNT BEING IN THE NATURE OF FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES OR THINGS OR COMPUTER SOFT WARE OUTSIDE INDIA ARE TO BE EXCLUDED FROM THE EXPORT TU RNOVER, THEN THE SAME IS ALSO REQUIRED TO BE EXCLUDED FROM THE TOTAL ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 27 OF 42 TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION U/S . 10A OF THE ACT. THIS VIEW OF OURS GETS SUPPORT FROM THE DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT GEM PLUS INDIA LTD. (330 ITR 175 AND INCOME-TAX APPELLA TE TRIBUNAL CHENNAI BENCH IN CASE OF SAK SOFT LTD. (30 SOT 55). HENCE THIS GROUND IS ALLOWED FOR STATISTICAL P URPOSES' 33. WE HAVE HEARD BOTH THE PARTIES. WE ARE OF THE OPINION THAT THE AMOUNT OF RS.12,08,19,698 CAN BE CONSIDERED FOR EXCLUSION, ONLY IF IT REPRESENTS EXP ENSES INCURRED IN FOREIGN CURRENCY WHILE PROVIDING TECHNI CAL SERVICES. IN THE PRESENT CASE THE ASSESSEE HAS NOT PROVIDED ANY TECHNICAL SERVICES. FURTHER, IT IS NOT CHARGED TO THE CUSTOMERS AND SO NOT INCLUDED IN EXP ORT TURNOVER. THE PRINCIPLE THAT WHAT IS NOT INCLUDED C ANNOT BE EXCLUDED HAS BEEN ACCEPTED BY THE ITAT IN THE ASSESSEES OWN CASE AS REPRODUCED AT PARA NO.32 ABOVE. 4. IN GROUND NO. 3 ASSESSEE SUBMITTED IS THAT THE C IT(A) ERRED IN HOLDING THAT THE AMOUNT OF RS.2,79,081/- RECEIVE D ON ACCOUNT OF ON-SITE SOFTWARE SERVICES IS NOT PART OF THE BUS INESS PROFITS. THE ASSESSING OFFICER EXCLUDED THIS AMOUNT WITH THE FOLLOWING REMARKS; 'ON VERIFICATION OF THE DETAILS OF EXPORT OF COMPUT ER SOFTWARE SERVICES, IT IS OBSERVED THAT THE ASSESSEE HAS SHOWN ONSITE CONSULTANCY SERVICES OF RS.2,79,081/- PERTAINING TO UNIT-I, HYDERABAD AND CLAIMED DEDUCTION U/S.80HHE ON THE SAME. HOWEVER, AS PER THE PROVISIONS OF CLAUSES (B) OF EXPLANATION TO SEC 80HHE OF THE LT ACT, THE SERVICE S RENDERED THAT QUALIFIES FOR EXEMPTION AS NOTIFIED B Y THE CBDT VIDE NOTIFICATION NO.11521 DATED 26.09.2000 HA S NOT SPECIFIED THE CONSULTANCY SERVICES FOR THE DEFINITION OF 'COMPUTER SOFTWARE' FOR THE PURPOSES OF SEC 80HHE. HENCE, THE CONSULTANCY SERVICES MENTIONED ABOVE DOES NOT QUALIFY FOR EXEMPTION/DEDUCTION UNDE R SEC 80HHE. ACCORDINGLY, THE SAME IS EXCLUDED FROM THE PROFITS OF THE BUSINESS WHILE COMPUTING THE DEDUCTIONS'. ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 28 OF 42 5. THE LD COUNSEL SUBMITTED THAT THE SERVICES PROVI DED BY THE APPELLANT ARE IN THE NATURE OF ITEM (V) AND (VI) OF THE ABOVE NOTIFICATION WHICH READ AS UNDER; (V) ENGINEERING AND DESIGN; (VI) GEOGRAPHIC INFORMATION SYSTEM SERVICES; 6. HE FURTHER SUBMITTED THAT THE SERVICES RENDERED TO OUR CUSTOMER PRATT & WHITNEY ETC. FALL UNDER ITEM (V) ABOVE AND TO OTHER CLIENTS LIKE TOM TOM ETC. FALL UNDER ITEM (VI ) ABOVE. CONSIDERING THE ABOVE FACTS, THE GROUND MAY BE ALLO WED. THE CIT(A) OUGHT TO HAVE REALIZED THAT THE RECEIPT IN Q UESTION IS FOR ONSITE SOFTWARE SERVICES AND SUCH SERVICES QUALIFY AS EXPORTS AS PER THE CLARIFICATION GIVEN BY THE CBDT VIDE ITS CI RCULAR DT. 17.01.2013 (F. NO. 178/84/2012-ITA-1). 7. WE HEARD BOTH THE PARTIES. WE ARE OF THE OPINI ON THAT THIS AMOUNT HAS TO BE INCLUDED IN PROFITS OF BUSINESS BY VIRTUE OF THE EXPLANATION TO SECTION 80HHE AND ALSO BY THE CB DT CIRCULAR DATED 17.01.2013. 8. IN GROUND NO. 4 ASSESSEE SUBMITTED THAT THE CIT( A) ERRED IN HOLDING THAT THE PAYMENT OF RS.11 ,99,94, 156/- PAID TO ISSI, THE 100% US SUBSIDIARY OF THE APPELLANT, IS DISALLO WABLE UNDER SEC 40(A)(I) OF THE INCOME TAX ACT ON THE GROUND TH AT THIS AMOUNT REPRESENTED TAXABLE INCOME OF THE NON-R ESIDENT AND NO TAX WAS DEDUCTED AT SOURCE ON THE PAYMENT IN TER MS OF SECTION 195(1) OF THE ACT. 9. REGARDING THE ALLOWABILITY OF THIS ISSUE, THE WR ITTEN SUBMISSIONS FILED FOR THE AY 2002-03 IN ITA NO.1450 /HYD/13 ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 29 OF 42 HAS BEEN FILED BY THE LD COUNSEL FOR THE ASSESSEE. 10. WE FIND THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN C ASE FOR THE AY'S 2006-07 AND 2007-08 IN ITA NO.S 115 & 2184/HYD /2011. THIS GROUND IS SIMILAR TO THAT OF GROUND NO.4 FOR T HE A.Y 2002- 03 WHEREIN WE HAVE ADJUDICATED AT PARA 21 AND THE S AME CONCLUSION SHALL BE DRAWN IN THE APPEAL FOR THIS YE AR ALSO. THIS GROUND IS ALLOWED. 11. GROUND NO.5 IS THAT THE CIT(A) ERRED IN HOLDING THAT THE AMOUNT OF RS.67,56,552/- PAID TO G E NETWORK SOLUTI ONS, NETHERLANDS AND IBM INC, USA ARE DISALLOWABLE UNDER SECTION 40(A)(I) OF THE I T ACT AS RELEVANT REMITTANCES TO THEM WERE MADE WITHOUT DEDUCTION OF TAX AT SOURCE IN TERMS OF SECTION 195(1) OF THE ACT. 12. THE ASSESSEE HAS PURCHASED COMPUTER SOFTWARE OF RS.67,56,552/- AND ALSO WRITTEN OFF RS.1,95,38,471/ - AND THUS DEBITED RS.2,62,95,023/- TO THE PROFIT & LOSS ACCOU NT (INCLUDED IN SCHEDULE 14 TO PROFIT & LOSS ACCOUNT). THE A 0 ALLOWED AMOUNT WRITTEN OFF OF RS.1,95,38,471/-. THE MAJOR PORTION OF RS.67,56,552/- REPRESENTS THE PAYMENT MADE TO A FOR EIGN COMPANY, M/S.GE NETWORK SOLUTIONS, NETHERLANDS. THE TAX PAYER PURCHASED SOFTWARE CALLED 'SMALL WORLD SOFTWA RE' FROM THE DUTCH COMPANY AND BUNDLED WITH ITS OWN SOFTWARE AND THUS CUSTOMIZED IT AND SOLD IT TO ITS OWN CUSTOMERS BOTH IN INDIA AND ABROAD. AS THE PAYMENT IS MADE TO A NON- RESIDENT COMPANY, THE ASSESSING OFFICER HELD THAT T HE PAYMENT REPRESENTED, NOT THE PURCHASE PRICE OF THE SOFTWARE BUT, ACTUALLY, ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 30 OF 42 ROYALTY PAYMENT TO THE DUTCH COMPANY. HE ALSO NOTIC ED THAT NO TAX WAS DEDUCTED AT SOURCE ON THE SAID ROYALTY PAYM ENT U/S 195 OF THE INCOME TAX ACT, AND INVOKED THE PROVISIONS O F 40(A)(I) AND ACCORDINGLY DISALLOWED THE EXPENDITURE ON THE ALLEG ED ROYALTY PAYMENT. 13. THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE A.Y' S 2006-07 & 2007 -08 IN ITANO.115/HYD/2011 IN WHICH IT HAS BEEN HELD AS UNDER: '26. NOW WE ADDRESS THE ISSUE OF CHARACTERIZATION OF THESE PAYMENTS AS ROYALTY SO AS TO FALL UNDER SECTION 9(1)(VI) OR ARTICLE 12 OF INDIA- NETHERLANDS DTAA. WE FIND THAT THE ASSESSEE HAS PURCHASED THE SMALL WORLD SOFTWARE FRO M NETHERLANDS AND BUNDLED IT WITH ITS OWN SOFTWARE AN D THUS CUSTOMIZED IT AND SOLD IT TO ITS OWN CUSTOMERS BOTH IN INDIA AND ABROAD. THE ASSESSEE CANNOT MEDDLE WITH T HE COPIES OF THE SOFTWARE IN THE PROCESS OF ITS CUSTOM IZATION. WE ALSO OBSERVE THAT THE ASSESSEE HAS TO PURCHASE T HE SAID SOFTWARE EACH TIME IT WANTED TO SELL THE BUNDLED SOFTWARE TO ITS CUSTOMERS AND IF IT HAD GOT ANY RIG HT TO THE COPYRIGHT TO THE SAID SOFTWARE IT WOULD NOT HAVE BO UGHT IT EVERY TIME WHEN IT WANTED TO SELL. FURTHER, PERUSIN G THE BOOKS OF THE ASSESSEE AT PAGES 170 TO 175 OF THE PAPER BOOK, WE FIND THAT THERE ARE MULTIPLE PURCHASES OF SOFTWARE DURING THE YEAR AND EACH PURCHASE OF SINGL E ITEM ON SOFTWARE IS MERELY ONE THOUSAND RUPEES AND NOT H UGE AMOUNT. HENCE, WE ARE OF THE OPINION THAT THEY ARE SIMPLY PURCHASE COST OF TRADING GOODS ESPECIALLY WHEN THE LICENCE IN RESPECT OF SOFTWARE IS NOT OBTAINED BY THE ASSES SEE AND THE PERPETUAL LICENCE IS GIVEN DIRECTLY TO THE END CUSTOMER BY THE VENDOR COMPANY. COPIES OF THE INVOICES RAISE D BY THE NET WORK SOLUTIONS ON THE ASSESSEE AND AT PAPER BOO K 261 TO 265 SUPPORT THE VIEW OF THE ASSESSEE WHERE THE INVOICE MENTIONING NAME OF THE END CUSTOMER SUPPORT S OUR VIEW. HENCE, IN OUR OPINION, WHEN THERE IS NO TRANS FER OF EVEN THE LICENSE TO THE ASSESSEE EVEN THROUGH IT IS THE ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 31 OF 42 PURCHASER, IT CANNOT BE SAID THAT THERE IS ANY ROYA LTY PAYMENT BY THE ASSESSEE TO THE VENDOR COMPANY. THE AMOUNT OF RS. 52, 55, 881/- IS SIMPLY THE COST OF IMPORTED TRADING GOODS AND NOT ROYALTY PAYMENT'. 14. WE ALSO FIND THAT THE APPEAL FILED BY THE DEPAR TMENT AGAINST THE ORDER OF THE TRIBUNAL HAS BEEN DISMISSE D BY THE JURISDICTIONAL H.C IN ITTA NO.485 OF 2014 DATED 25. 7.2014. THEREFORE, FOLLOWING THE ORDER OF THE TRIBUNAL FOR AY 2006-07 AND 2007-08 IN ASSESSEES OWN CASE, WE ALLOW GROUND NO. 5 RAISED BY THE ASSESSEE. 15. GROUND NO.6 IS AS FOLLOWS: THE LD CIT(A) ERRED IN HOLDING THAT THE AMOUNT OF RS.48,25,974/- CLAIMED AS WEIGHT ED DEDUCTION U/S 35 (2AB) CANNOT BE ALLOWED ON THE GRO UND THAT THERE IS NO REQUISITE APPROVAL FROM THE PRESCRIBED AUTHORITY. IT WAS SUBMITTED BY THE LD COUNSEL THAT THE ASSESSEE H AD THE NECESSARY APPROVAL OF THE DEPT. OF SCIENTIFIC AND I NDUSTRIAL RESEARCH FOR THE LAST SO MANY YEARS AND IT HAS BEEN RENEWED PERIODICALLY. THE RECOGNITION FOR THE RELEVANT PERI OD DATED 11 MAR 2003 BEARING NO. TU/IV-RD/1812/2003 WAS FILED BEFOR E THE CIT(A) AND BEFORE THE ITAT AT PAGE 266 OF PAPER BOO K. 16. WE HAVE PERUSED THE APPROVAL FROM THE PRESCRIB ED AUTHORITY AT PAGE NO.266 OF THE PAPER BOOK AND IN V IEW OF THE APPROVAL OF THE CONCERNED DEPT; THE DISALLOWANCE IN QUESTION IS DELETED. IN THE RESULT, THIS GROUND OF THE ASSESSE E IS ALLOWED. 17. IN GROUND NO. 7, ASSESSEE SUBMITTED THAT THE CI T(A) ERRED IN HOLDING THAT THE COMMUNICATION EXPENSES OF RS.92,60,349/- ARE EXCLUDIBLE FROM 'EXPORT TURNOVER' FOR GRANTING THE DEDUCTION ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 32 OF 42 UNDER SECTION 80HHE. IT WAS SUBMITTED BY THE LD COU NSEL, THAT THIS GROUND HAS BEEN RAISED MISTAKENLY, AS THERE IS NO SUCH ADDITION FOR THIS YEAR. HENCE, THIS GROUND IS NOT P RESSED AND TREATED AS DISMISSED. 18. GROUND NO.8 IS THAT THE CIT(A) ERRED IN MAKING AN ADDITION OF RS.1,46,34,0001- BEING THE UPFRONT AMOUNT PAID BY CARRIER INTERNATIONAL MAURITIUS LTD., IN AN EARLIER YEAR BY WAY OF SUBSCRIPTION TO THE SHARE WARRANTS OF THE ASSESSEE COMPANY AND FORFEITED DURING THIS YEAR. HE MADE THE DISALLOWANC ES WITH THE FOLLOWING REMARKS: ' IN NORMAL COURSE WHEN A COMPANY APPROACHES THE PUBL IC THROUGH ISSUE OF PROSPECTUS FOR SUBSCRIPTION OF THE AMOUNT TOWARDS IT SHARE CAPITAL, THE PUBLIC AT LARGE ARE T HE CONTRIBUTORS BUT NOT A SPECIFIED PERSON. IN THE INSTANT CASE IT IS NOT A PUBLIC ISSUE. IT IS ONLY A N OFFER TO ONE SPECIFIC COMPANY BY NAME CARRIER INTERNATIONAL MAUR ITIUS LTD (CIML) (A GROUP COMPANY OF UNITED TECHNOLOGIES CORPORATION ACTING THROUGH ITS PRATT & WHITNEY DIVISION). MOREOVER, ON EXAMINATION OF THE STOCK PURCHASE AGREEMENT COPY BETWEEN THE ASSESSEE COMPAN Y AND CIML DATED 31.01.2002 CLEARLY STATES THAT PRATT & WHITNEY IS A STRATEGIC CUSTOMER AND CONSUMER OF THE ASSESSEE COMPANY AND CERTAIN SERVICES. IT IS ALSO MENTIONED IN IT THAT BOTH THE PARTIES AGREED THAT T HE ASSESSEE COMPANY'S ABILITY TO DELIVER SUCH SERVICES TO PRATT & WHITNEY WOULD BENEFIT FROM A CLOSER AFFILIATION BETWEEN PRA TT & WHITNEY AND THE ASSESSEE COMPANY. THIS SHOWS THAT T HE ENTIRE TRANSACTION OF ISSUING WARRANTS THAT REPRESENTS A RIGHT TO ACQUIRE EQUITY SHARES OF THE ASSESSEE CO MPANY IN FUTURE IS NOTHING BUT A TRANSACTION WHICH HAS THE I MPACT OF IMPROVING BUSINESS/BUSINESS PROMOTION. THEREFORE, A S THE VERY PURPOSE OF THIS TRANSACTION IS RELATED TO THE BUSINESS, WHATEVER AMOUNT, BY WHATEV ER NAME MAY BE CALLED, RECEIVED IN THIS RESPECT CAN BE CONS TRUED AS REVENUE RECEIPT AND WILL BE SUBJECTED TO INCOME TAX . ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 33 OF 42 IN VIEW OF THE ABOVE, THE AMOUNT CREDITED TO THE PR OFIT & LOSS ACCOUNT UNDER APPROPRIATION IS TREATED AS INCOME AN D ADDED TO THE INCOME RETURNED.' 19 . THE CIT(A) AGREED WITH THE ASSESSING OFFICER AND HE LD THAT SHARE WARRANT IS NOT A CAPITAL INSTRUMENT AND THAT THE PURPOSE OF ISSUING OF CONVERTIBLE SHARES WAS NOT TO RAISE C APITAL BUT TO IMPROVE THE PERFORMANCE OF THE COMPANY AND THAT THE SUBSCRIBER TO THE SHARE WARRANTS I.E., CARRIER INTERNATIONAL M AURITIUS LTD (CIML) IS A GROUP COMPANY OF PRATT & WHITNEY. 20. THIS ISSUE HAS ALREADY BEEN DECIDED IN ASSESSEE S OWN CASE IN THE AY 2002-03 AT PARA NOS.46 & 47 . 21. IN THE RESULT, APPEAL IN ITA NO.1452/HYD/2013 I S ALLOWED. ITA NO.1451/HYD/2013- A.Y.2004-05. 1. GROUNDS RAISED BY THE ASSESSEE READ AS UNDER: 1. THE ORDER OF THE LD CIT (A) DT. 20.8.2013 IS CO NTRARY TO THE LAW AND FACTS OF THE CASE. 2. THE LD CIT (A) ERRED IN NOT CONSIDERING VARIOUS GROUNDS RAISED TO THE EFFECT THAT REOPENING OF ASSESSMENT AFTER FOUR YEARS ON A MERE CHANGE OF OPI NION WHEN THERE IS NO FAILURE ON THE PART OF THE APPELLA NT TO DISCLOSE ALL MATERIAL FACTS IS INVALID. 3. THE LD CIT (A) OUGHT TO HAVE NOTICED THAT UNDER SIMILAR CIRCUMSTANCES, HE CANCELLED THE REOPENED ASSESSMENT FOR A.Y 2002-03. 4. THE LD CIT (A) GROSSLY ERRED IN GIVING THE FINDI NG TO THE FOLLOWING EFFECT: ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 34 OF 42 THIS AMOUNT ALONG WITH THE AMOUNT OF RS.17,50,000 ALSO FORFEITED DURING FINANCIAL YEAR 2001-02 WILL B E CONSIDERED IN THE APPEAL ORDER FOR A.Y 2002-03. THIS AMOUNT REFERS TO RS.34,65,000 FORFEITED FROM M /S. CALLAGHAN PARTNERS CORP. I) THE CIT(A) HAS ASSUMED POWERS HE DOES NOT HAVE BY THE ABOVE UNWARRANTED REMARK AND HAS ARTIFICIALLY EXTENDED THE TIME BAR LIMIT TO CONSIDER THE ABOVE AMOUNTS OF RS.34,65,000 AND RS.17,50,000 FOR A.Y 2002-03. 5. THE LD CIT (A) OUGHT TO HAVE REALIZED THAT THE A BOVE TWO AMOUNTS WERE ALREADY BROUGHT TO TAX BY THE AO I N A REOPENED ASSESSMENT AND THE LD CIT (A) HAS HIMSELF CANCELLED THE ASSESSMENT AND THAT, BY VIRTUE OF THE ABOVE REMARK, HE IS PUTTING THE APPELLANT TO DOUBLE JEOPARDY. 2. THE ASSESSEE FILED ITS RETURN OF INCOME FOR A.Y 2004-05 ON 1.11.2004 DECLARING TOTAL INCOME OF RS.10,68,00,650 . AO COMPLETED THE ASSESSMENT ON 30.08.2011 U/S 143(3) R .W.S. 147 OF THE ACT, DETERMINED TOTAL INCOME AT RS.20,35,21, 590. AGGRIEVED, ASSESSEE FILED APPEAL BEFORE THE CIT (A) . 3. THE LD CIT (A) HELD AS UNDER: 4.4 I HAVE SEEN CAREFULLY THE FACTS AND EVIDENCE. I HAVE ALSO GONE THROUGH THE PAPER BOOK WHERE THE APPELLANT HAS ATTACHED MOST OF THE DOCUMENTS WHICH WERE SUBMITTED BEFORE THE AO. I FIND THAT VIDE LETT ER DT. 13.12.2007 AND ADDRESSED TO THE ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE 2(1) HYDERABAD, THE APPELLANT HAS STATED IN PARA 9 OF ITS REPLY THAT AS PER THE AGREEMENT THE AMOUNT PAYABLE TO THE APPELLANT BY CALLAGHAN PARTNERS (CP) IN RESPECT OF SHARE OPTIONS WAS DUE ON 14.05.2001 I.E. IN THE FINANCIAL YEAR 20 01- 02. THIS IS QUOTED BELOW: 7. THEREFORE, THE FORFEITURE WAS IN TERMS OF THE STATUTORY GUIDELINES OF SEBI. IT WAS NOT OPEN TO TH E ASSESSEE TO REFUND THE ENTIRE AMOUNT ORIGINALLY INVESTED TOWARDS FUTURE PURCHASE OF SHARES OF THE ASSESSEE COMPANY. HAD CP EXERCISED THE OPTION, THE ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 35 OF 42 AMOUNT PAID IN ADVANCE WOULD HAVE BEEN ADJUSTABLE AND ADJUSTED TOWARDS THE SHARE CAPITAL ACCOUNT. 8. APART FROM THE ABOVE STATUTORY OBLIGATION, THERE IS SPECIFIC CONDITION IN THE AGREEMENT BETWEEN THE ASSESSEE AND CP AS UNDER: USE OF PROCEEDS: THE AMOUNT SHALL BE UTILIZED FOR ACQUISITION, CAPITAL EXPENDITURE, WORKING CAPITAL REQUIREMENTS AND OTHER DIRECT CORPORATE REQUIREMENT S. 9. THE QUOTED VALUE OF THE SHARES WHICH ARE QUOTED IN THE STOCK EXCHANGE AS ON THE DATE OF ISSUE OF OP TION TO THE ABOVE SHARE HOLDERS I.E. 15-11-1999 WAS RS.128500 & RS.1179.05 (OPEN AND CLOSE RESPECTIVELY). THE OFFER WAS AT THE RATE OF RS.350 PER SHARE ON......... 4.5 FROM THE ABOVE IT IS CLEAR THAT THE FORFEITURE IF ANY HAD TO BE DONE IN THAT YEAR AND NOT IN THE CURRENT YEAR. 4.6 DURING APPEAL PROCEEDINGS THE APPELLANT WAS CONFRONTED WITH PARA 4 OF THE ASSESSMENT ORDER WHEREIN THE AO HAS QUOTED FROM THE REPLY OF THE AR DURING THE COURSE OF ASSESSMENT PROCEEDINGS MENTIONING CLEARLY THAT THE AMOUNTS WERE FORFEITED IN F.Y 2003-04. THE APPELLANT REPLIED THAT THIS WAS A TYPOGRAPHICAL ERROR AND IT IS AMPLY EVIDENCED BY AL L THE FINANCIAL REPORTS AND OTHER DOCUMENTS SUBMITTED TO THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS. 4.7. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES, THE AO IS DIRECTED TO VERIFY THE CONTENTION OF THE APPE LLANT THAT THE FORFEITURE ACTUALLY TOOK PLACE IN THE FY 2 001- 02. IF SUCH IS THE CASE THEN NO AMOUNT IS TAXABLE I N THE CURRENT YEAR. THIS AMOUNT ALONG WITH THE AMOUNT OF RS.17,50,000 ALSO FORFEITED DURING FY 2001-02 WILL BE CONSIDERED IN THE APPEAL ORDER FOR AY 2002-03. 5. THE OTHER GROUNDS REGARDING REOPENING U/S 147 AN D MERITS OF THE ADDITION ARE NOT BEING ADJUDICATED UP ON BECAUSE THE ONLY ADDITION IN QUESTION HAS BEEN DELETED AS DISCUSSED ABOVE. 6. IN THE RESULT APPEAL IS PARTLY ALLOWED. ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 36 OF 42 4. WE HEARD BOTH THE PARTIES. THE AMOUNT OF RS.17,5 0,000 AND RS.34,65,000 WERE BROUGHT TO TAX IN THE REOPENE D ASSESSMENT FOR THE AY 2002-03 AND CIT (A) CANCELLED THE ASSESSMENT ON THE GROUND THAT IT WAS INVALID. HENC E THESE AMOUNTS CANNOT BE BROUGHT TO TAX FOR THE SAME AY ON CE AGAIN PUTTING THE ASSESSEE TO DOUBLE JEOPARDY. HENCE THES E GROUNDS OF APPEAL (I.E GROUND NOS. 1 TO 5 ) OF THE ASSESSEE AR E ALLOWED. ITA NO.1453/HYD/2013 - AY 2005-06 1. GROUND NO.1 IS GENERAL IN NATURE. 2. GROUND NO.2 IS THAT THE LD CIT (A) ERRED IN HOLDING THAT THE AMOUNT OF RS.60,09,040 PAID TO M/S G.E.NETWORK SOLU TIONS, NETHERLANDS IS DISALLOWABLE U/S 40(A)(I) OF THE I.T . ACT. 3. WE FIND THAT THIS ISSUE IS COVERED BY ORDER IN ASSESSEES OWN CASE FOR AY 2004-05. IN GROUND NO.5 FOR AY 2004 -05, WE HAVE DECIDED THIS ISSUE AT PARA NOS.17 & 18,WHICH R EADS AS UNDER: 17. THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE A.Y'S 2006-07 & 2007 -08 IN ITANO.115/HYD/2011 IN WHICH IT HAS BEEN HELD AS UNDER: '26. NOW WE ADDRESS THE ISSUE OF CHARACTERIZATION O F THESE PAYMENTS AS ROYALTY SO AS TO FALL UNDER SECTION 9(1 )(VI) OR ARTICLE 12 OF INDIA- NETHERLANDS DTAA. WE FIND THAT THE ASSESSEE HAS PURCHASED THE SMALL WORLD SOFTWARE FRO M NETHERLANDS AND BUNDLED IT WITH ITS OWN SOFTWARE AN D THUS CUSTOMIZED IT AND SOLD IT TO ITS OWN CUSTOMERS BOTH IN INDIA AND ABROAD. THE ASSESSEE CANNOT MEDDLE WITH T HE COPIES OF THE SOFTWARE IN THE PROCESS OF ITS CUSTOM IZATION. ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 37 OF 42 WE ALSO OBSERVE THAT THE ASSESSEE HAS TO PURCHASE T HE SAID SOFTWARE EACH TIME IT WANTED TO SELL THE BUNDLED SOFTWARE TO ITS CUSTOMERS AND IF IT HAD GOT ANY RIG HT TO THE COPYRIGHT TO THE SAID SOFTWARE IT WOULD NOT HAVE BO UGHT IT EVERY TIME WHEN IT WANTED TO SELL. FURTHER, PERUSIN G THE BOOKS OF THE ASSESSEE AT PAGES 170 TO 175 OF THE PAPER BOOK, WE FIND THAT THERE ARE MULTIPLE PURCHAS ES OF SOFTWARE DURING THE YEAR AND EACH PURCHASE OF SINGL E ITEM ON SOFTWARE IS MERELY ONE THOUSAND RUPEES AND NOT H UGE AMOUNT. HENCE, WE ARE OF THE OPINION THAT THEY ARE SIMPLY PURCHASE COST OF TRADING GOODS ESPECIALLY WHEN THE LICENCE IN RESPECT OF SOFTWARE IS NOT OBTAINED BY THE ASSES SEE AND THE PERPETUAL LICENCE IS GIVEN DIRECTLY TO THE END CUSTOMER BY THE VENDOR COMPANY. COPIES OF THE INVOICES RAISE D BY THE NET WORK SOLUTIONS ON THE ASSESSEE AND AT PAPER BOO K 261 TO 265 SUPPORT THE VIEW OF THE ASSESSEE WHERE THE INVOICE MENTIONING NAME OF THE END CUSTOMER SUPPORT S OUR VIEW. HENCE, IN OUR OPINION, WHEN THERE IS NO TRANS FER OF EVEN THE LICENSE TO THE ASSESSEE EVEN THROUGH IT IS THE PURCHASER, IT CANNOT BE SAID THAT THERE IS ANY ROYA LTY PAYMENT BY THE ASSESSEE TO THE VENDOR COMPANY. THE AMOUNT OF RS. 52, 55, 881/- IS SIMPLY THE COST OF I MPORTED TRADING GOODS AND NOT ROYALTY PAYMENT'. 18. WE ALSO FIND THAT THE APPEAL FILED BY THE DEPARTMENT AGAINST THE ORDER OF THE TRIBUNAL HAS BEEN DISMISSED BY THE JURISDICTIONAL H.C IN ITTA NO.485 OF 2014 DATED 25.7.2014. THEREFORE, FOLLOWING THE ORDER OF THE TRIBUNAL FOR AY 2006-07 AND 2007-08 IN ASSESSEES OWN CASE, WE ALLOW GROUND NO.5 RAISED BY THE ASSESSEE. HENCE, FOLLOWING THE ABOVE ORDER, THIS GROUND IS AL LOWED. 4. GROUND NO.3: THE LD CIT (A) ERRED IN HOLDING THA T THE AMOUNT OF RS.13,53,35,718 PAID TO ISSI, USA, 100% S UBSIDIARY OF THE APPELLANT IS HIT BY THE PROVISIONS OF SEC.40 (A)(I) OF THE I.T. ACT BY FAILING TO REALISE THAT THE AMOUNT WAS NOT A SUM CHARGEABLE UNDER THE I.T. ACT. ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 38 OF 42 5. WE FIND THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN C ASE FOR AYS 2006-07 AND 2007-08 IN ITA NOS. 115 & 2184/HYD/2011 . THIS GROUND IS SIMILAR TO THAT OF GROUND NO.4 FOR AY 200 2-03 WHEREIN WE HAVE ADJUDICATED OUR CONCLUSIONS AT PARA 21 AND THE SAME CONCLUSION SHALL BE DRAWN IN THE APPEAL FOR THIS YE AR ALSO. THIS GROUND IS ALLOWED. 6. GROUND NO.4: THE LD CIT (A) ERRED IN HOLDING THAT T HE SOFTWARE LINK SERVICE CHARGES AMOUNTING TO RS.57,78 ,044 IS EXCLUDIBLE FOR THE PURPOSE OF COMPUTATION OF EXPORT TURNOVER DEFINED UNDER CLAUSE 4 OF EXPLANATION 2 U/S 10A OF THE I.T. ACT. 7. WE FIND THAT THIS GROUND IS SIMILAR TO GROUND NO.7 FOR AY 2002-03 IN ASSESSEES OWN CASE. WE HAVE DECIDED THE ISSUE AT PARA NOS. 39 & 40 AND THE SAME CONCLUSIONS MAY BE F OLLOWED IN THIS YEAR ALSO. THIS GROUND IS ALLOWED. 8. IN THE RESULT ASSESSEES APPEAL IN ITA NO.1453/HYD/ 2013 IS ALLOWED. ITA NO.1455/HYD/2013 A.Y 2002-03 REVENUES APPEAL 1. GROUNDS RAISED BY THE REVENUE READ AS UNDER: 1.THE CIT (A) ERRED ON FACTS IN LAW IN HOLDING THA T THE RE ASSESSMENT IS INVALID THOUGH THERE WAS CLEAR INCORR ECT CLAIM ON THE PART OF THE ASSESSEE TO DISCLOSE AMOUN T RECEIVED ON FORFEITURE OF SHARE WARRANTS AS INCOME. 2. THE CIT (A) ERRED ON FACTS AND IN LAW IN HOLDING THAT THE RE-ASSESSMENT IS INVALID THOUGH AS PER EXPLANAT ION 1 TO SECTION 147 PRODUCTION BEFORE THE AO OF ACCOUNT BOOKS OR OTHER EVIDENCE FROM WHICH MATERIAL EVIDENCE COUL D WITH DUE DILIGENCE HAVE BEEN DISCOVERED BY THE AO W ILL NOT NECESSARILY AMOUNT TO DISCLOSURE WITHIN THE MEA NING OF THE FOREGOING PROVISO. ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 39 OF 42 2. THE FACTS ARE THAT THE ASSESSEE COMPANY FILED IT S RETURN OF INCOME FOR THE A.Y 2002-03 ON 31.10.2002 DECLARING TOTAL INCOME UNDER NORMAL PROVISIONS OF RS.11,15,41,644. THE AO COMPLETED THE ASSESSMENT ON 28.12.2007 U/S 143(3) R.W.S. 147 OF THE ACT AND DETERMINED TOTAL INCOME AT RS.11,55,64,714. TH E NOTICE U/S 148 WAS ISSUED ON 13.6.2007. 3. THE CIT (A) HAS HELD AS FOLLOWS: 4.13 THE A.Y ENDED ON 31.03.2003. AS PER PROVISO T O SECTION 147 DISCUSSED SUPRA THE CONDITIONS FOR REOPENING OF THE ASSESSMENT CHANGE AFTER 31.03.2007 , I.E. AFTER 4 YEARS FROM THE END OF THE ASSESSMENT Y EAR. IF THE ASSESSMENT WAS NOW TO BE REOPENED, IT WAS TH E DUTY OF THE AO TO PROVE THAT THERE WAS DEFAULT ON T HE PART OF THE APPELLANT TO FULLY AND TRULY DISCLOSE A LL MATERIAL FACTS AND INCOME HAD ESCAPED ASSESSMENT BECAUSE OF THIS DEFAULT. THE NOTICE UNDER SECTION 1 48 WAS ISSUED ON 13.06.2007 I.E. BEYOND THE TIME PERIO D OF 4 YEARS. 4.14. A LOOK AT THE RECORD SHOWS THAT THE APPELLAN T HAD ATTACHED ALL THE RELEVANT MATERIAL WITH THE RET URN OF INCOME AND HAD CLEARLY PROVIDED THE PROFIT & LOS S A/C FOR THE CURRENT YEAR AND FOR THE PRECEDING YEAR . THE SAME HAD BEEN CERTIFIED BY THE CHARTERED ACCOUNTANT . THEREAFTER THERE BEING NO COLLECTION OF ANY FURTHER INFORMATION ON RECORD, THE AO ONCE AGAIN ISSUED NOT ICE U/S 148 OF THE ACT AS DISCUSSED SUPRA. 4.15 THERE IS NO NEW INFORMATION ON RECORD AND THE AO HAS NOT BROUGHT OUT ANY DETAILS SHOWING HOW INCOME HAD ESCAPED ASSESSMENT AND WHAT WAS THE DEFAULT COMMITTED BY THE APPELLANT AND WHAT INACCURATE INFORMATION HAD BEEN PROVIDED BY THE APPELLANT. THE RECORD DOES NOT SHOW ANY DEFAULT COMMITTED BY THE APPELLANT IN THIS REGARD. 4.16 FROM ABOVE IT IS CLEAR THAT THE AO HAD TAKEN A CONSCIOUS DECISION REGARDING THE ISSUE AT HAND AND HE HAS NOT FULFILLED THE MANDATE OF THE RELEVANT SECTI ON BY SHOWING HOW THE ASSESSEE HAD NOT FULLY AND TRULY DISCLOSED ALL MATERIAL FACTS NECESSARY FOR THE ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 40 OF 42 ASSESSMENT. AS ALREADY DISCUSSED IN DETAIL SUPRA, UNDER THE CIRCUMSTANCES THE ASSESSMENT COULD NOT BE REOPENED. THEREFORE, I HOLD THAT THE REOPENING OF T HE ASSESSMENT BY THE AO IS BAD IN LAW. 3. WE HAVE GONE THROUGH THE RECORDS AND ARE OF THE OPINION THAT ALL THE MATERIAL FACTS WERE DISCLOSED BY THE A SSESSEE AND IT WAS MERELY A CHANGE OF OPINION ON THE PART OF THE A O FOR REOPENING THE ASSESSMENT U/S 147. FOLLOWING THE RAT IOS OF THE DECISION IN THE CASE OF CIT VS. KELIVINATOR INDIA ( 256 ITR 1), WE DISMISS THE REVENUES APPEAL. 4. HENCE, IN OUR OPINION, THE REOPENING OF THE ASSE SSMENT ITSELF IS BAD IN LAW, THEREFORE, THE REOPENED PROCE EDINGS ARE HELD AB INITIO VOID. HENCE THE REVENUES APPEAL IS DISM ISSED. ITA NO.1456/HYD/2013 A.Y 2005-06 REVENUES APPEAL 1. BEFORE THE LD CIT (A), THE 6 TH GROUND OF APPEAL RELATED TO THE EXCLUSION OF COMMUNICATION CHARGES IN THE FORM OF S OFTWARE LINK SERVICE CHARGES AMOUNTING TO RS.57,78,044 FROM THE EXPORT TURNOVER FOR THE PURPOSES OF EXEMPTION U/S 10A OF T HE INCOME TAX ACT. THE CIT (A) HELD AS FOLLOWS: 9.1 IN THE CASE OF PATNI TELECOM PVT. LTD VS. ITO (2008) 22 SOT 26 (HYD-TRIB.), THE HON'BLE ITAT HYDERABAD HAS HELD THAT TELECOMMUNICATION CHARGES ARE TO BE REDUCED BOTH FROM THE EXPORT TURNOVER AS WELL AS FROM THE TOTAL TURNOVER. THE HON'BLE ITAT HAS ST ATED THAT WITH RESPECT TO COMMUNICATION AND FOREIGN TRAV EL CHARGES, IF AN AMOUNT IS REDUCED FROM THE EXPORT TURNOVER, THEN IT ALSO SHOULD BE REDUCED FROM TOTAL TURNOVER. ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 41 OF 42 9.2 RESPECTFULLY FOLLOWING THE AFOREMENTIONED JUDGMENT OF THE HON'BLE ITAT HYDERABAD, I HOLD THAT THE AO IS TO REDUCE THE SOFTWARE LINK SERVICE CHARG ES FROM BOTH THE EXPORT TURNOVER AS WELL AS THE TOTAL TURNOVER. 2. AGGRIEVED, THE DEPARTMENT HAS COME UP ON APPEAL RAISING THE FOLLOWING GROUNDS: 1. THE ORDER OF THE CIT (A) IS ERRONEOUS ON FACTS A ND LAW. 2. THE CIT (A) ERRED IN HOLDING THAT THE COMMUNICAT ION CHARGES I THE FORM OF SOFTWARE LINK SERVICE CHARGES ARE LIABLE FOR EXCLUSION FROM BOTH THE EXPORT TURNOVER AS WELL AS THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 10A OF THE IT ACT 1961. 3. THE CIT (A) OUGHT TO HAVE OBSERVED THAT IT HAS N OT BEEN CONTEMPLATED UNDER THE IT ACT THAT THE DISALLOWANCES FROM THE EXPORT TURNOVER ALSO SHOULD BE REDUCED FROM THE TOTAL TURNOVER . 2. WE CONFIRM THE ORDER OF THE CIT (A) WHEREIN HE H AS FOLLOWED THE DECISION OF THE ITAT IN THE CASE OF PATNI TELEC OM PVT. LTD VS. ITO (2008) 22 SOT 26, (HYD-TRIB), WE HOLD THAT THE AO HAS TO REDUCE THE SOFTWARE LINK SERVICE CHARGES FROM BOTH THE EXPORT TURNOVER AS WELL AS THE TOTAL TURNOVER. 3. IN THE RESULT, REVENUES APPEAL IS DISMISSED. 4. TO SUM UP, ASSESSEES APPEALS (ITA NO.1451/HYD/1 3 ALLOWED, 1452/HYD/2013 ALLOWED, 1450/HYD/2013 PARTL Y ITA NOS.1450 TO 1456 1780 395 INFOTECH PAGE 42 OF 42 ALLOWED, 1453/HYD/2013 ALLOWED AND REVENUES APPEAL S (ITA NOS.1444 & 1456/HYD/2013) ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 25 TH MARCH, 2015. SD/ - SD/ - (P.M. JAGTAP) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED 25 TH MARCH, 2015. VNODAN/SPS COPY TO: 1. M/S. CYIENT LIMITED (FORMERLY INFOTECH ENTERPRISES LTD), 4 TH FLOOR, A WING, PLOT NO.11 SOFTWARE UNITS LAYOUT, INFOCITY, MADHAPUR, HYDERABAD 500082 2. DY. COMMISSIONER OF INCOME TAX, CIRCLE 2(1) I.T.TOW ERS, MASAB TANK, HYDERABAD 500004 3. THE CIT (A)-III HYDERABAD 4. THE CIT - HYDERABAD 5. THE DR, ITAT, HYDERABAD 6. GUARD FILE BY ORDER