ACIT, Circle-16(3), Hyderabad V. M/s. Patni Telecom Solutions (P) Ltd, Hyderabad

ITA 2040/HYD/2011

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 6032 (ITAT-HYDERABAD)
• Duration Of Justice: 4 year(s) 11 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-11-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 05-10-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 08-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P CHANDRA SEKHAR
• Assessee Lawyers: A V RAGHURAM
• Keywords: Business income
• Section: 43B; 80HHC; 201(1); 28; 10

Judgement Text

1 ITA.NO.1988/H/2011 & ITA.NO.2040/H/2011 M/S. PATNI TELECOM SOLUTIONS P. LTD., (NOW KNOWN AS M/S. IGATE INFORMATION SERVICES P. LTD.,) HYDERABAD. IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A : HYDERABAD BEFORE SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER AND SMT. P. MADHAVI DEVI, JUDICIAL MEMBER ITA.NO.1988/HYD/2011 ASSESSMENT YEAR 2007-2008 M/S. PATNI TELECOM SOLUTIONS P. LTD., (NOW KNOWN AS M/S. IGATE INFORMATION SERVICES P. LTD.,) HYDERABAD- 580081. PAN AACCA4255G VS. THE INCOME TAX OFFICER, WARD-16(2), HYDERABAD. (APPELLANT) (RESPONDENT) ITA.NO.2040/HYD/2011 ASSESSMENT YEAR 2007-2008 THE INCOME TAX OFFICER, WARD-16(3), HYDERABAD. VS. M/S. IGATE INFORMATION SERVICES P. LTD., (FORMERLY KNOWN AS PATNI SOLUTIONS P. LTD., HYDERABAD- 580081. PAN AACCA4255G (APPELLANT) (RESPONDENT) FOR ASSESSEE : MR. A.V. RAGHURAM FOR REVENUE : MR. P. CHANDRASEKHAR DATE OF HEARING : 08.11.2016 DATE OF PRONOUNCEMENT : 16.11.2016 ORDER PER J. SUDHAKAR REDDY, A.M. THESE ARE CROSS-APPEALS FILED BY THE ASSESSEE AND REVENUE FOR THE A.Y. 2007-2008 AGAINST THE ORDER OF THE CIT(A)-V, HYDERABAD DATED 31.10.2011. 2 ITA.NO.1988/H/2011 & ITA.NO.2040/H/2011 M/S. PATNI TELECOM SOLUTIONS P. LTD., (NOW KNOWN AS M/S. IGATE INFORMATION SERVICES P. LTD.,) HYDERABAD. 2. THE ASSESSEE IS A COMPANY AND IS IN THE BUSINESS OF SOFTWARE DEVELOPMENT. IT HAS TWO UNDERTAKINGS ONE LOCA TED AT HYDERABAD AND THE OTHER LOCATED AT PUNE. IT HAS CLAIMED DEDUCTION UNDER SECTION 10A OF THE I.T. ACT, 1961 (HERE INAFTER REFERRED TO AS ACT). THE TOTAL TURNOVER OF THE ASSESSEE -COMPANY, IS ITS EXPORT TURNOVER. IN OTHERWORDS, THE ASSESSEE H AS NO DOMESTIC TURNOVER. 3. WE HAVE HEARD SHRI A.V. RAGHURAM, LEARNED COUNS EL FOR THE ASSESSEE AND SHRI P. CHANDRASEKHAR, LD. D.R. ON BEHALF OF THE REVENUE. ON A CAREFUL CONSIDERATION OF THE FACTS AN D CIRCUMSTANCES OF THE CASE AND PERUSAL OF THE PAPERS ON RECORD AND THE ORDERS OF THE AUTHORITIES BELOW AS WELL AS THE CASE LAWS CITED, WE HOLD AS FOLLOWS. 5.1. FIRST WE TAKE-UP ASSESSEES APPEAL. THE GROUNDS OF APPEAL READS AS FOLLOWS : IN THE FACT AND THE CIRCUMSTANCES OF CASE, AND IN LAW, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) - V, HYDERABAD, ERRED: 1. IN RESPECT OF UNBILLED REVENUE OF RS.9,55,76,699. A) IN CONFIRMING THAT SAID AMOUNT IS REQUIRED TO BE INCLUDED IN THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION UNDER SECTION.10A B) WITHOUT PREJUDICE TO ABOVE, IF THE AMOUNT OF UNBILL ED REVENUE IS INCLUDED IN THE TOTAL TURNOVER, IN NOT DIRECTING THAT TO THE EXTENT OF SUBSEQUENT REALIZAT ION, THE REALIZED AMOUNT OUGHT TO BE INCLUDED IN THE EXP ORT TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION UND ER SECTION 10A. 3 ITA.NO.1988/H/2011 & ITA.NO.2040/H/2011 M/S. PATNI TELECOM SOLUTIONS P. LTD., (NOW KNOWN AS M/S. IGATE INFORMATION SERVICES P. LTD.,) HYDERABAD. C) IN NOT APPRECIATING THAT WHILE COMPUTING DEDUCTION U/S 10A, UNBILLED REVENUE WAS NOT CONSIDERED EVEN IN EXPORT TURNOVER BY THE APPELLANT. D) IN CONCLUDING THAT THE APPELLANT HAS INCLUDED IMAGINARY SALES AND IMAGINARY PROFITS TO CLAIM HIGH ER DEDUCTION UNDER SECTION 10A 2. IN RESPECT OF CHARGING OF INTEREST UNDER SECTION 2 34A. A) IN NOT ADJUDICATING THE GROUND RELATING TO CHARGING OF INTEREST UNDER SECTION 234A. B) SINCE THERE WAS NO DELAY IN FILING OF TAX RETURN BY THE APPELLANT, HE OUGHT TO HAVE DIRECTED FOR DELETION O F INTEREST U/S 234A CHARGED BY THE ASSESSING OFFICER. 3. THE APPELLANT CRAVES LEAVE TO ADD, MODIFY OR WITHDR AW ANY OF THE GROUNDS OF APPEAL AT THE TIME OF HEARING . 6. GROUND NO.1 IS ON THE ISSUE OF COMPUTATION OF DEDUCTION UNDER SECTION 10A OF THE ACT. THE ASSESSEE IN ITS BOOKS OF ACCOUNT HAS DISCLOSED TOTAL TURNOVER WHICH INCLUDE U NBILLED REVENUE OF RS.9,55,76,699. THIS AMOUNT WAS BILLED BY THE ASSESSEE IN THE IMMEDIATELY SUCCEEDING FINANCIAL YEAR AND AMOUNTS WERE REALISED. WHILE COMPUTING THE DEDUCTION UN DER SECTION 10A OF THE ACT, THE ASSESSEE EXCLUDED THIS UNBI LLED REVENUE, BOTH FROM ITS TOTAL TURNOVER AND EXPORT TURNOVE R. THE ASSESSING OFFICER WHILE AGREEING WITH THE ASSESSEE TH AT IT IS NOT PART OF THE EXPORT TURNOVER, INCLUDED THIS AMOUNT IN THE TOTAL TURNOVER. THE SUBMISSIONS OF THE ASSESSEE BEFORE THE L D. ASSESSING OFFICER ARE EXTRACTED FOR READY REFERENCE : 5. NATURE OF REVENUE ACCRUALS : THE TOTAL TURNOVER OF THE HYDERABAD UNIT IS RS.102,92,36,724. THIS AMOUNT OF TURNOVER INCLUDES AN 4 ITA.NO.1988/H/2011 & ITA.NO.2040/H/2011 M/S. PATNI TELECOM SOLUTIONS P. LTD., (NOW KNOWN AS M/S. IGATE INFORMATION SERVICES P. LTD.,) HYDERABAD. AMOUNT OF RS.8,23,48,491 WHICH REPRESENTS NET REVEN UE RECOGNIZED FOR WHICH BILLS WERE NOT RAISED AS ON 31 .3.2007 AS THE BILLABLE MILESTONES WERE NOT REACHED (THE AM OUNT IS NET OF REVERSAL OF OPENING REVENUE ACCRUALS OF RS.1,30,92,788). SIMILARLY, THE TOTAL TURNOVER OF T HE PUNE UNIT IS RS,44,52,44,862. THIS AMOUNT OF TURNOVER INCLUDE S AN AMOUNT OF RS.1,32,28,208 WHICH REPRESENTS NET REVEN UE RECOGNIZED FOR WHICH BILLS WERE NOT RAISED AS ON 31 .3.2007 AS THE BILLABLE MILESTONES WERE NOT REACHED. THE AMOUNT OF REVENUE ACCRUAL REPRESENTS ESTIMATED COST INCURRED FOR WORK DONE FROM THE DATE OFF LAST BILLA BLE MILESTONE TO THE YEAR-END DATE. THIS AMOUNT IS AKIN TO 'WORK-IN-PROGRESS' IN A MANU FACTURING CONCERN. THIS AMOUNT IS NOT INCLUDED IN DEBTORS BUT IS SHOWN SEPARATELY AS 'COST AND ESTIMATED EARNINGS IN EXCES S OF BILLING' UNDER THE HEAD 'CURRENT ASSETS'. SINCE THI S AMOUNT DOES NOT REPRESENT ACTUAL BILLING, THE SAME IS NOT CONSIDERED IN TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 10A. IT CAN BE CONTENDED THAT SINCE THIS AMOUNT REPRESEN TS COST INCURRED SUBSEQUENT TO LAST BILLABLE MILESTONE VIZ. IN THE NATURE OF WORK-IN-PROGRESS, IT CAN BE SHOWN AS REDU CTION FROM TOTAL EXPENDITURE INSTEAD OF INCLUDING THE AMO UNT IN TOTAL TURNOVER. IN ANY CASE, THIS AMOUNT IS INCLUDED IN THE BILLING OF SUBSEQUENT YEAR AND IS INCLUDED IN THE TURNOVER OF NEXT YEAR. IF THIS AMOUNT IS INCLUDED IN THE TURNOVER OF THE C URRENT YEAR. IN THE NEXT YEAR IT WILL BE AGAIN INCLUDED IN THE T URNOVER OF THAT YEAR AND THUS THE SAME AMOUNT WILL BE CONSIDER ED IN THE TURNOVER TWICE. IN VIEW OF ABOVE SUBMISSIONS, IT IS SUBMITTED THAT THE AMOUNT OF RS.9,55,76,699 (RS.8,23,48,491 + RS.1,32,28.208) IS NOT REQUIRED TO BE INCLUDED IN THE TOTAL TURNOVER FOR T HE PURPOSE OF COMPUTING DEDUCTION UNDER SECTION 10A FOR AY 2007-0 8. WITHOUT PREJUDICE TO ABOVE SUBMISSIONS, IT IS FURTH ER SUBMITTED THAT THIS AMOUNT IS INCLUDED IN THE BILLI NGS OF NEXT YEAR TO THE EXTENT OF RS.8,67,88.581. THE DETAILS O F THE SAME ARE SUBMITTED HEREWITH WITH A REQUEST THAT IF THIS AMOUNT IS 5 ITA.NO.1988/H/2011 & ITA.NO.2040/H/2011 M/S. PATNI TELECOM SOLUTIONS P. LTD., (NOW KNOWN AS M/S. IGATE INFORMATION SERVICES P. LTD.,) HYDERABAD. INCLUDED IN THE TOTAL TURNOVER THEN THE SAME SHOUL D BE INCLUDED IN EXPORT TURNOVER ALSO SINCE THE AMOUNT I S IN RESPECT OF EXPORT SALES ONLY AND IS ALSO REALIZED A ND BROUGHT INTO INDIA. 6.1. THESE SUBMISSIONS WERE REJECTED BY THE ASSESSI NG OFFICER. WHEN THE MATTER TRAVELLED BEFORE THE LD. CIT(A ), THE LD. CIT(A) AT PARAS 7.2 TO 7.6 AGREED WITH THE VIEW OF THE A SSESSING OFFICER AND REJECTED THE GROUND OF THE ASSESSEE. 7. THE LD. A.R. REITERATED THE SUBMISSIONS MADE BY HIM BEFORE THE LD. CIT(A). 8. THE LD. D.R. SUBMITTED AS FOLLOWS : 8.1. WITH REGARD TO ASSESSEE'S GROUND ON THE ISSUE O F INCLUSION OF UNBILLED REVENUE IN THE EXPORT TURNOVER TO THE EXTENT OF RS.9,55,76,699, IT IS SUBMITTED THAT THE SAID AMOUNT SHOULD NOT BE INCLUDED IN THE EXPORT TURNOVER AS THE SAME WAS N OT REALIZED BY THE ASSESSEE IN THE CONVERTIBLE FOREIGN EX CHANGE WITHIN THE DUE DATES PRESCRIBED UNDER SECTION 10A OF THE I.T. ACT. 8.2. ALTERNATIVELY, IT IS SUBMITTED THAT IF IT IS CONSIDE RED TO BE EXCLUDED BOTH FROM EXPORT TURNOVER AND TOTAL TURNOVER , THEN THE SAID AMOUNT SHOULD BE REDUCED FROM THE PROFITS OF THE BUSINESS BEFORE ALLOWING DEDUCTION UNDER SECTION 10A. THIS IS PRECISELY BECAUSE OF THE REASON THAT AS CONTENDED BY THE ASSESSEES COUNSEL, THIS AMOUNT WAS NOT ACTUALLY BILLE D IN THE FY 2006-07 RELEVANT TO A Y 2007-08 UNDER APPEAL AND THE S AME WAS ACTUALLY INCLUDED IN THE TOTAL TURNOVER AS WELL AS EXPOR T TURNOVER OF THE SUBSEQUENT FY I.E. FY 2007-08 RELEVANT TO A Y 20 08-09. 6 ITA.NO.1988/H/2011 & ITA.NO.2040/H/2011 M/S. PATNI TELECOM SOLUTIONS P. LTD., (NOW KNOWN AS M/S. IGATE INFORMATION SERVICES P. LTD.,) HYDERABAD. ACCORDINGLY, BOTH THE UNBILLED REVENUE INCLUDED IN TH E CREDIT SIDE OF THE PROFIT & LOSS ACCOUNT AND THE CORRESPONDING E XPENDITURE INCURRED WHICH IS DEBITED TO THE PROFIT & LOSS ACCOUNT IN THE FY 2006-07 RELEVANT TO AY 2007-08 UNDER APPEAL SHOULD BE EXCLUDED FROM THE PROFIT & LOSS ACCOUNT. THIS EXERCISE WILL EXC LUDE PROFIT INCLUDED ON ACCOUNT OF UNBILLED REVENUE AND, THEREFOR E, DEDUCTION UNDER SECTION 10A ON SUCH PROFIT RELATED TO U NBILLED REVENUE CAN BE DENIED. IN THIS VIEW OF THE MATTER, THE I SSUE MAY BE REMITTED BACK TO THE AO FOR ASCERTAINING THE REAL P ROFITS OF THE BUSINESS AFTER EXCLUDING THE UNBILLED REVENUE AND C ORRESPONDING EXPENDITURE FROM THE PROFIT & LOSS ACCOUNT AND THEREAFTE R TO APPLY THE PROVISIONS OF SECTION 10A. 9. WE ARE NOT CONVINCED WITH THESE FINDINGS OF THE FIR ST APPELLATE AUTHORITY FOR THE FOLLOWING REASONS : A. THE YARDSTICK ADOPTED FOR DETERMINING THE TOTAL TURNOVER AND EXPORT TURNOVER SHOULD BE THE SAME. B. IN CASE THE SALE IN QUESTION IS EXCLUDED FROM THE TOTAL TURNOVER ON THE GROUND THAT, IT IS YET TO BE BILLED, THEN ON THE SAME LOGIC, THIS SALE SHOULD NOT FORM PART OF THE TOTA L TURNOVER. C. HENCE, LD. CIT(A) HAS COMMITTED AN ERROR IN GIVING A FINDING THAT, UNBILLED AMOUNT SHOULD BE PART OF TOTAL TURNOVER BUT CANNOT BE PART OF EXPORT TURNOVER. 9.1. WE ALSO FIND THAT THE ASSESSEE IN THIS CASE HAS INCLUDED UNBILLED REVENUES IN ITS TOTAL TURNOVER IN I TS ANNUAL ACCOUNTS. SO TO CLAIM OTHERWISE, WHILE COMPUTING DEDU CTION 7 ITA.NO.1988/H/2011 & ITA.NO.2040/H/2011 M/S. PATNI TELECOM SOLUTIONS P. LTD., (NOW KNOWN AS M/S. IGATE INFORMATION SERVICES P. LTD.,) HYDERABAD. UNDER SECTION 10A OF THE ACT IN OUR VIEW IS NOT CORRECT. UNDER THESE CIRCUMSTANCES, THE CORRECT POSITION WOULD BE TO INC LUDE THIS UNBILLED AMOUNT, BOTH IN TOTAL TURNOVER AS WELL AS I N EXPORT TURNOVER. THE ASSESSEE HAS SPECIFICALLY SUBMITTED THAT U NBILLED TURNOVER WAS SUBSEQUENTLY BILLED AND SUBSTANTIAL AMOUNT HAS BEEN REALISED IN THE IMMEDIATELY SUBSEQUENT YEAR, WI THIN THE STATUTORY PERIOD PERMITTED FOR CLAIM OF EXEMPTION UNDER SECTION 10A OF THE ACT. ALL THE DETAILS WERE FILED BOTH BEFORE THE ASSESSING OFFICER AND THE LD. CIT(A). BOTH THESE AUTHORITIES IGNO RED THESE SUBMISSIONS. ASSESSING OFFICER AS WELL AS THE CIT(A) SHOULD HAVE CONSIDERED THESE DETAILS AND GRANTED RELIEF ON THE AMO UNT OF FOREIGN EXCHANGE REALISED BY THE ASSESSEE WITHIN THE STIPULATED PERIOD AS PER LAW. ANY HOW, WE DO NOT DIRECT THE ASSES SING OFFICER TO DO SO IN VIEW OF OUR FINDING IN THE NEXT PARAGRAPHS . 9.2. ONE OTHER ASPECT IN THIS CASE IS THAT THE ASSESSEE FOR ALL THE PREVIOUS ASSESSMENT YEARS AND IN THE SUCCEEDIN G ASSESSMENT YEARS, HAS CONSISTENTLY FOLLOWED A METHOD OF COMPUTATION OF DEDUCTION UNDER SECTION 10A WHEREIN UNB ILLED TURNOVER WAS DEDUCTED BOTH FROM EXPORT TURNOVER AND TOTAL TURNOVER. WE ONCE AGAIN REPEAT THE OBSERVATION THAT, IN THE CASE OF THIS ASSESSEE, THE EXPORT TURNOVER IS EQUAL TO THE TOTA L TURNOVER. THE ASSESSEE HAS BEEN CLAIMING DEDUCTION UN DER SECTION 10A ON THIS BASIS AND THE REVENUE HAS BEEN ALL OWING THE SAME, BY ACCEPTING THE CLAIM OF THE ASSESSEE. THOUGH TH E LD. D.R. SUBMITTED THAT THERE IS NO RES JUDICATA IN TAX PROCEEDINGS, FOR THE SAKE OF CONSISTENCY AND TO AVOID CHAIN REACTIO N IN FUTURE ASSESSMENT YEARS, AND AS THE TAX RATES FOR ALL THE YEA RS ARE SAME AND AS THE ASSESSEE HAS CLAIMED DEDUCTION UNDER SEC TION 10A ON 8 ITA.NO.1988/H/2011 & ITA.NO.2040/H/2011 M/S. PATNI TELECOM SOLUTIONS P. LTD., (NOW KNOWN AS M/S. IGATE INFORMATION SERVICES P. LTD.,) HYDERABAD. THIS YEAR UNBILLED REVENUES IN THE NEXT ASSESSMENT YEAR AND AS THE REVENUE HAS ACCEPTED THIS CLAIM, WE ARE OF THE OPI NION THAT THE UNBILLED REVENUES HAVE TO BE ELIMINATED FROM THE TO TAL TURNOVER AS WELL AS THE EXPORT TURNOVER IN THIS YEAR AND THE DEDUCTION UNDER SECTION 10A BE COMPUTED. WE DIRECT THE ASSESSING OFFICER ACCORDINGLY. HENCE, WE ALLOW THIS GROUND OF THE ASSESSEE. 10. GROUND NO.2 IS ON THE ISSUE OF CHARGING OF INTER EST UNDER SECTION 234A OF THE ACT. THE RETURN OF INCOME IN THIS CASE WAS FILED WELL WITHIN TIME I.E., ON 30.10.2007. THUS THE LEVY OF INTEREST UNDER SECTION 234A IS BAD IN LAW. GROUND NO.2 OF THE ASSESSEE IS ALLOWED. 11. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED. ITA.NO.2040/HYD/2011 REVENUE APPEAL : 12. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS IN ITS APPEAL : 1. THE HONBLE COMMISSIONER OF INCOME TAX (APPEALS)-V , HYDERABAD ERRED BOTH IN FACTS AND LAW. 2. THE CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER TO CONSIDER THE EXPENSES OF DATA LINK CHARGES, EXPENDI TURE INCURRED IN FOREIGN CURRENCY ON TRAVELLING, PAYMENT OF PROFESSIONAL FEES AND OTHER EXPENSES IN THE EXPORT TURNOVER FOR THE PURPOSE OF COMPUTATION OF DEDUCTIO N UNDER SECTION 10A WHICH IS NOT ENVISAGED EXPLANATIO N 2(IV) OF SECTION 10A. 3. THE CIT(A) OUGHT TO HAVE OBSERVED THAT IF IT IS THE INTENTION OF THE LEGISLATURE TO EXTEND TO SIMILAR TREATMENT T O TOTAL 9 ITA.NO.1988/H/2011 & ITA.NO.2040/H/2011 M/S. PATNI TELECOM SOLUTIONS P. LTD., (NOW KNOWN AS M/S. IGATE INFORMATION SERVICES P. LTD.,) HYDERABAD. TURNOVER, IT SHOULD HAVE EXPLICITLY PROVIDED TO EXC LUDE FREIGHT INSURANCE AND TELECOMMUNICATION CHARGES ATTRIBUTABLE TO THE EXPORT OF SOFTWARE EVEN FROM TH E TOTAL TURNOVER AS WAS DONE IN THE CASE OF SECTION 80HHC WHEREIN IN THE LEGISLATURE WAS CLEAR AT EXPLANATION (BAA) TO SUB-SECTION 4C. 4. THE CIT(A) OUGHT TO HAVE OBSERVED THAT SECTION 43B AND 40A(IA) ARE PENAL IN NATURE FOR VIOLATING SPECIFIED TIME LIMITS IN PAYMENT OF STATUTORY LIABILITIES. 5. ANY OTHER GROUND THAT MAY BE URGED AT THE TIME OF H EARING BEFORE THE HONBLE ITAT. 13. GROUND NO.1 IS GENERAL IN NATURE. GROUND NOS.2 AND 3 ARE COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT (CENTRAL), HYDERABAD VS. M/S. AUROBINDO PHARMA LTD., HYDERABAD IN ITTA.NO .502 OF 2014 JUDGMENT DATED 31.07.2014. SIMILAR ISSUE HAS BEE N ALLOWED BY US IN THE ASSESSEES APPEAL IN THE EARLIE R ASSESSMENT YEAR. RESPECTFULLY FOLLOWING THE SAME, WE DISMISS G ROUND NO.2 OF THE REVENUE. 13. ON GROUND NO.4, THE LD. D.R. SUBMITTED AS FOLLOW S : 13.1. AS SEEN FROM THE FACTS OF THE CASE, IN THE STATE MENT OF TOTAL INCOME FILED BY THE ASSESSEE ALONG WITH RETURN OF INCOME, THE ASSESSEE ITSELF HAS DISALLOWED A SUM OF RS. 31,99 ,845/- IN TERMS OF SEC. 40(A)(IA) OF THE I.T. ACT AS THE ASSESS EE HAS FAILED TO DEDUCT TAX AT SOURCE UNDER CHAPTER XVII OF INCOME TAX ACT. AS SUCH, THERE IS NO DISPUTE WITH REGARD TO NON-DEDUCTION O F TAX AT SOURCE BY THE ASSESSEE ON THE PAYMENT MADE TO OUTSIDE P ARTIES TO THE EXTENT OF RS.31,99,845/-. THE ONLY ISSUE UNDER DI SPUTE IS WHETHER THE ASSESSEE IS ELIGIBLE TO CLAIM DEDUCTION U /S.10A ON 10 ITA.NO.1988/H/2011 & ITA.NO.2040/H/2011 M/S. PATNI TELECOM SOLUTIONS P. LTD., (NOW KNOWN AS M/S. IGATE INFORMATION SERVICES P. LTD.,) HYDERABAD. THIS DISALLOWED AMOUNT INCLUDING THE SAME IN THE TOTAL PR OFITS OF THE BUSINESS. IN THIS REGARD, THE ASSESSEES COUNSEL H AS PLACED RELIANCE ON BOARD CIRCULAR (SUPRA). HOWEVER, THE SAI D CIRCULAR IS NOT APPLICABLE TO THE FACTS OF THE ASSESSEES CASE INASM UCH AS THE SAID CIRCULAR WAS ISSUED IN RESPECT OF ALLOWABILITY OF CHAPTER VIA DEDUCTION ON ENHANCED PROFITS. TO BE PRECISE, THE CIRC ULAR HAS CLARIFIED THAT ANY INCREASE IN THE PROFITS ON ACCOUNT OF DISALLOWANCE MADE U/S. 32, SEC. 40(A)(IA), SEC. 40A (3), SEC. 43B ETC., WOULD INCREASE THE TOTAL PROFITS OF THE BUSINESS AN D, ACCORDINGLY, THE ASSESSEE IS ENTITLED TO CLAIM DEDUCTION UNDER CHAPTER VIA ON SUCH ENHANCED PROFITS. AS SUCH, THE BO ARD CIRCULAR IS NOT ON THE ISSUE OF ALLOWABILITY OF DEDUC TION U/S.10A WITH REGARD TO ENHANCED PROFITS ON ACCOUNT OF DISALLOW ANCE MADE U/S.32, SEC. 40(A)(IA), SEC. 40A(3), SEC. 43B ETC. A CCORDINGLY, THE SAID CIRCULAR CANNOT BE TAKEN INTO CONSIDERATION IN THE INSTANT CASE. 13.2. THE LD. D.R. FURTHER SUBMITTED THAT IN ORDER TO DE NY DEDUCTION U/S.10A ON THE ENHANCED PROFITS ON ACCOUNT OF DISALLOWANCE MADE U/S. 40(A)(IA) IN THE CASE OF ASSE SSEE : I) SEC.40(A)(IA) IS A DEEMING PROVISION BY VIRTUE OF W HICH, THE ASSESSEE IS NOT ENTITLED TO CLAIM CERTAIN EXPENDITURE AS DEDUCTION WHILE COMPUTING THE INCOME THOUGH THE SAID EXPENDITURE IS ALREADY INCURRED IN TH E RELEVANT PREVIOUS YEAR ON THE BASIS OF THE METHOD OF ACCOUNTING FOLLOWED, BUT DUE TO FAILURE ON ITS PART IN DEDUCTING TAX AT SOURCE IN TERMS OF THE PROVISIONS CONTAINED UNDER CHAPTER XVII OF I.T. ACT, 1961. AS 11 ITA.NO.1988/H/2011 & ITA.NO.2040/H/2011 M/S. PATNI TELECOM SOLUTIONS P. LTD., (NOW KNOWN AS M/S. IGATE INFORMATION SERVICES P. LTD.,) HYDERABAD. SUCH, THE INCREASE IN THE BUSINESS INCOME OF THE ASSESSEE ON ACCOUNT OF SUCH DISALLOWANCE IS 'NOTIONAL IN NATURE' WITHOUT HAVING ANY REAL INFLOW OR ACCRUAL OF INCOME TO THAT EXTENT. IN CASE OF EXPORT ORIENTED COMPANIES, INCREASE IN BUSINESS INCOME ON ACCOUNT OF 40(A)(IA) DISALLOWANCE WILL HAVE NO NEXUS WITH EXPOR T EARNINGS. ACCORDINGLY, WITHOUT THERE BEING ACTUAL INCREASE IN EXPORT EARNINGS AND CORRESPONDING EXPORT PROFITS BROUGHT INTO INDIA IN CONVERTIBLE FOREIGN EXCHANGE, THE ASSESSEE MAY CLAIM DEDUCTION U/S. 10A. AS SUCH, LEGAL FICTION CREATED BY VIRTUE OF SEC . 40(A)(IA) CANNOT BE EXTENDED TO DETERMINE THE PROFITS OF THE BUSINESS FOR THE PURPOSE OF COMPUTING DEDUCTION UNDER SECTION 10A. II) THE INTENTION OF LEGISLATURE IN INTRODUCING PROVISION S OF SEC. 40(A)(IA) IS TO PENALISE SUCH ASSES SEES WH O FAIL TO FOLLOW THE TDS PROVISIONS SCRUPULOUSLY, WHERE TDS BEING ONE OF THE MAJOR SOURCE OF REVENUE I.E. 40% TO 45% OF THE TOTAL DIRECT TAX REVENUES COMES THROUGH TDS PROVISIONS. AS SUCH, THE PURPOSE OF DISALLOWANC E U/S. 40(A)(IA) IS TO MAKE THE ASSESSEE AWARE THAT HE/I T SHOULD FACE MULTIPLE CONSEQUENCES ON ACCOUNT OF NON- DEDUCTION OF TAX INCLUDING LEVY OF DEMAND U/S. 201(1) , INTEREST 201(1A), PENALTY U/S.221(1), AND THEREBY FORCING TO ABIDE BY THE TDS PROVISIONS. III) AS SUCH, THE DISALLOWANCE OF SUCH EXPENDITURE MADE U/S. 40(A)(IA) AS A MEASURE OF PUNISHMENT/PENALTY 12 ITA.NO.1988/H/2011 & ITA.NO.2040/H/2011 M/S. PATNI TELECOM SOLUTIONS P. LTD., (NOW KNOWN AS M/S. IGATE INFORMATION SERVICES P. LTD.,) HYDERABAD. CANNOT GIVE RISE TO BENEFIT TO THE ASSESSEE BY WAY OF CLAIMING DEDUCTION U/S.10A ON SUCH AMOUNT DISALLOWED. OTHERWISE, IT WOULD LEAD TO ABSURD SITUATION WHERE, EVEN AFTER DISALLOWANCE OF HUGE AMOUNT FOR NON DEDUCTION OF TDS, THE ASSESSEE WILL NOT PAY ANY TAX OR PENALTY BY VIRTUE OF CLAIMING THE ENTIRE AMOUNT OF DISALLOWANCE AS DEDUCTION U/S.10A ACCORDINGLY, THE REAL INTENTION OF THE LEGISLATURE BEHIND THE INSERTION OF SEC. 40(A)(IA) WILL BE DEFEAT ED IN CASE THE ASSESSEE IS ALLOWED DEDUCTION U/S.10A ON THE DISALLOWED AMOUNT/ENHANCED PROFITS AND THEREBY GOES SCOTFREE WITHOUT PAYING ANY TAX/PENALTY ON SUCH DISALLOWANCE. THE LD. D.R. PLACED RELIANCE ON THE DECISION OF HON 'BLE ITAT, AHMEDABAD 'C' BENCH IN THE CASE OF DCIT VS., RAMESH BHAI C PRAJAPATI (29 TAXMANN.COM 64). 14. THE LD. A.R. RELIED ON THE ORDER OF THE LD. CIT( A) AS WELL AS THE CIRCULAR OF THE CBDT NO.37/2016 DATED 02.1 1.2016. 15. AFTER HEARING RIVAL CONTENTIONS, WE FIND THAT THE LD. CIT(A) HELD AS FOLLOWS : 5.1. DURING APPEAL PROCEEDINGS, THE APPELLANT RELIED ON THE DECISION OF THE WORTHY CIT(A)-III IN ITS OWN CASE F OR ASST. YEAR 2005-06 VIDE ORDER IN ITA.NO.0076/CIT(A) - III/09-10 DATED 14.03.2011. FROM THE ABOVE FACTS, I FIND THAT IDENTICAL ISSUE IN THE CASE OF THE APPELL ANT HAS BEEN DECIDED BY CIT(A)-III IN THE AFOREMENTIONED OR DER. THE FOLLOWING REASONS HAVE BEEN GIVEN BY THE C1T(A) IN 13 ITA.NO.1988/H/2011 & ITA.NO.2040/H/2011 M/S. PATNI TELECOM SOLUTIONS P. LTD., (NOW KNOWN AS M/S. IGATE INFORMATION SERVICES P. LTD.,) HYDERABAD. UPHOLDING THE DISALLOWANCE U/S 40(A)(IA) AND THEREA FTER ALLOWING THE DEDUCTION UNDER SECTION 10A. '8. IN GROUND NO.3, IT IS STATED THAT THE AO ERRED IN DISALLOWING EXPENDITURE OF RS.2,91,450/- UNDER SECTION 40(A)(IA) AND TAXING IT SEPARATELY AND NOT ALLOWING DEDUCTION UNDER SECTION 10A IN RESPECT OF THE SAME. 8.1.WITH REFERENCE TO THE ABOVE GROUND, IN THE WRIT TEN SUBMISSIONS FILED BY THE LD. AR, IT WAS SUBMITTED T HAT THE DISALLOWANCE IS MADE IN THE COMPUTATION OF TOTA L INCOME UNDER THE HEAD INCOME FROM BUSINESS'. IT WAS STATED THAT PROFITS OF THE BUSINESS OF THE UNDERTAKINGS ARE REQUIRED TO BE COMPUTED AND THE PROPORTION OF EXPORT TURNOVER TO TOTAL TURNOVER HAS TO BE APPLIED TO SUCH PROFITS OF THE BUSINESS. PROFITS OF THE BUSINESS ARE REQUIRED COMPUTED AND THE PROPORTION OF EXPORT TURNOVER TO TOTAL TURNOVER HAS TO BE APPLIED TO SUCH PROFITS OF THE BUSINESS. PROFITS OF THE BUSINESS ARE REQUIRED TO BE COMPUTED AS PER THE PART 0 OF CHAPTER IV VIZ. AS PER THE PROVISIONS OF SECTION 28 TO 44DB. THE ABOVE DISALLOWANCE IS MADE U/S.40(A)(IA). THUS, WHILE COMPUTING DEDUCTION U/S.10A, FIRST INCOME FROM BUSINESS HAS TO BE COMPUTED AND THEN DEDUCTION U/S.10A HAS TO BE COMPUTED BY CONSIDERING THE ENTIRE INCOME FROM BUSINESS INCLUDING FROM DISALLOWANCE U/S.40(A)(IA). STATING THAT SUCH DISALLOWANCE U/S.40(A)(IA) IS MAD E UNDER THE HEAD 'INCOME FROM BUSINESS', IT WAS SUBMITTED THAT HENCE THE SAME IS ELIGIBLE FOR DEDUCTION U/S.10A. 8.2. ON CAREFUL CONSIDERATION OF THE SUBMISSIONS OF THE ID. AR AND AFTER GOING THROUGH THE PROVISIONS OF SECTION 28 AND 29 OF THE ACT, I AGREE WITH THEIR SU CH CONTENTION. PROFITS AND GAINS OF BUSINESS OR PROFESSION IS DEFINED IN SECTION 28 AND U/S.29, IT SAYS, THE INCOME REFERRED TO IN SECTION 28, SHALL BE COMPUTED IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SECTIONS 30 TO 430. THUS, THE SAME COVERS THE DISALLOWANCE TO BE MADE U/S 40(A)(IA)/ SINCE, SUCH DISALLOWANCE OF CONSULTANCY CHARGES MADE U/S.40(A)(IA) IN THIS CASE, PERTAINS TO THE 14 ITA.NO.1988/H/2011 & ITA.NO.2040/H/2011 M/S. PATNI TELECOM SOLUTIONS P. LTD., (NOW KNOWN AS M/S. IGATE INFORMATION SERVICES P. LTD.,) HYDERABAD. BUSINESS INCOME OF THE UNDERTAKING IN THE CASE OF T HE APPELLANT COMPANY, THE SAID ADDITIONAL INCOME, ARISING FROM SUCH DISALLOWANCE, IS ELIGIBLE FOR DEDUCTION U/S.10A. IN THIS REGARD, RELIANCE IS ALSO PLACED ON THE ORDER DATED 29-08-2008 IN ITA.NO.1016/HYD/07 OF THE HON'BLE ITAT, HYDERABAD, IN THE CASE OF DCIT VS., M/S. PLANET ONLINE PVT. LT D., FOR THE ASST. YEAR 2004-05, WHEREIN IT WAS HELD THA T EXEMPTION U/S.10B HAS TO BE COMPUTED ON THE PROFITS DETERMINED, AFTER TAKING INTO ACCOUNT THE DISALLOWANCE TO BE MADE UNDER SECTION. 43B OF THE ACT. THEREFORE, WHILE UPHOLDING THE SAID DISALLOWAN CE MADE IN THE ASSESSMENT, FOR THE REASONS STATED ABOVE, I DIRECT THE AO TO ALLOW DEDUCTION U/S.10A I N RESPECT OF THE SAME.' 5.2 SINCE THE ISSUE INVOLVED IN THE CURRENT YEAR I S IDENTICAL, RESPECTFULLY FOLLOWING THE AFOREMENTIONED ORDER, I TOO HOLD THAT EXEMPTION UNDER SECTION.10A IS TO BE ALLO WED IN RESPECT OF THE AMOUNTS IN QUESTION RELATING TO T HE DISALLOWANCE U/S 40(A)(IA). 16. THE FINDING OF THE LD. CIT(A) IS IN LINE WITH THE CIRCULAR OF CBDT NO.37/2016. HE FOLLOWED THE PROPOSI TION OF LAW LAID DOWN BY A COORDINATE BENCH OF THE TRIBUNAL. WE S EE NO INFIRMITY IN THE ORDER OF THE LD. CIT(A). HENCE, WE U PHOLD THE SAME AND DISMISS THIS GROUND OF REVENUE. 17. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSE D AND ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 16.11.2016. SD/- SD/- (SMT. P. MADHAVI DEVI) (J.SUDHAKAR REDDY) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED 16 TH NOVEMBER, 2016. VBP/- 15 ITA.NO.1988/H/2011 & ITA.NO.2040/H/2011 M/S. PATNI TELECOM SOLUTIONS P. LTD., (NOW KNOWN AS M/S. IGATE INFORMATION SERVICES P. LTD.,) HYDERABAD. COPY TO 1. M/S. PATNI TELECOM SOLUTIONS P. LTD., (NOW KNOWN AS M/S. IGATE INFORMATION SERVICES P. LTD.,) HYDERABAD- 58008 1. C/O. SHRI K. VASANT KUMAR & SHRI A.V. RAGHURAM, ADVOCATES, 610, BABUKHAN ESTATE, BASHEERBAGH, HYDERABAD 1. 2. THE INCOME TAX OFFICER,WARD-16(2), 6 TH FLOOR, AAYAKAR BHAVAN, BASHEERBAGH, HYDERABAD. 3. CIT(A)-V, HYDERABAD. 4. CIT-IV, HYDERABAD. 5. D.R. ITAT A BENCH, HYDERABAD. 6. GUARD FILE.