DCIT, CHENNAI V. DSM Soft Private Limited, CHENNAI

ITA 2059/CHNY/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 86372 (ITAT-CHENNAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-03-2015
• Appeal Filed By: Department
• Bench Allotted: B
• Next Hearing Date: 13-01-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 16-10-2015
• Court: TRIBUNAL
• Department Lawyers: A B KOLI IRS
• Assessee Lawyers: HEMALATHA K ACA
• Keywords: Business income; Deemed to accrue or arise in india; Retrospective amendment; Commercial expediency; Reason to believe
• Section: 10B

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI , . ! ' , #'$ BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A. NOS.2059 & 2062/MDS/2015 # % &% / ASSESSMENT YEARS :2008-2009 & 2009-2010 THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 1(1) CHENNAI 600 034. VS. M/S. DSM SOFT PRIVATE LIMITED, NO.1, 15 TH CROSS STREET, SHASTRI NAGAR, ADAYAR, CHENNAI 600 020 [PAN AAACD 3149A] ( / APPELLANT) ( /RESPONDENT) '( ) * / APPELLANT BY : SHRI. A.B. KOLI, IRS, JCIT. +,'( ) * /RESPONDENT BY : MS. HEMALATHA, K. ACA. ! ) - / DATE OF HEARING : 13-01-2016 ./& ) - / DATE OF PRONOUNCEMENT : 30-03-2016 / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER : THE APPEALS FILED BY THE REVENUE ARE DIRECTED AGAI NST DIFFERENT ORDERS OF COMMISSIONER OF INCOME TAX (APPEALS)-1, CHENNAI DATED 27.07.2015 FOR THE ABOVE ASSESSMENT YEARS PASSED U /S.143(3) R.W.S. 147 AND 250 OF THE INCOME TAX ACT, 1961 (HEREIN AFT ER REFERRED TO AS THE ACT). SINCE THE ISSUE IN THESE APPEALS ARE COMMON IN NATURE, ITA NOS.2059 & 2062/MDS/2015 :- 2 -: THESE APPEALS ARE CLUBBED, HEARD TOGETHER, AND DISP OSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS:- 2.1 THE LEARNED CIT(A) ERRED IN DELETING THE DISALLOWANCE OF INTEREST ON BORROWED CAPITAL DIVERTED FOR GIVING INTEREST FREE LOANS TO THE GROUP CONCERNS OF THE ASSESSEE AND FOR INVESTMENT IN THE EQUITY SHARES OF THE ASSESSEE'S SUBSIDIARY COMPANY APPLYING THE DECISION OF THE SUPREME COURT IN 288 ITR 1 WITHOUT CONSIDERING THE DIFFERENCE IN THE FACTS CONTAINING IN THE ASSESSEE'S CASE. 3.1 THE LEARNED CIT(A) ERRED IN NOT APPRECIATING THE LEGAL FICTION CREATED BY THE CLARIFICATORY EXPLANATION INSERTED BY THE FINANCE ACT, 2012 GIVING THE SAME RETROSPECTIVE EFFECT FROM 01.06.1976. THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED THE INTENT OF THE LEGISLATURE. 4.1 THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN HOLDING THAT THE BUSINESS LOSSES OF A UNIT WHICH IS NOT ELIGIBLE FOR DEDUCTION U/S.10A OF THE ACT COULD NOT BE SET OFF AGAINST THE PROFITS OF THE UNDERTAKING ELIGIBLE FOR DEDUCTION U/S.10A FOR THE PURPOSE OF DETERMINING THE ALLOWABLE DEDUCTION U/S.10A OF THE ACT. SINCE THE ISSUES IN THESE TWO APPEALS ARE COMMON IN NATURE, WE TAKE UP ITA NO. 2059/MDS/2015 OF ASSESSMENT YEAR 2008-2 009 FOR ADJUDICATION. ITA NOS.2059 & 2062/MDS/2015 :- 3 -: 3. THE BRIEF FACTS OF THE CASE ARE THE ASSESSEE IS IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND EXPORT AND FILED RETURN OF INCOME FOR THE ASSESSMENT YEAR 2008-2009 ON 30.09.2008 DECLARING LOSS OF A57,15,918/- AND WAS PROCESSED U/S.143(1) OF THE AC T. SUBSEQUENTLY NOTICE U/S.148 WAS ISSUED FOR REASON TO BELIEVE THA T INCOME HAS ESCAPED ASSESSMENT. IN COMPLIANCE TO NOTICE, THE LD . AUTHORISED REPRESENTATIVE OF THE ASSESSEE APPEARED ON VARIOUS DATES AND FILED DETAILS. THE ASSESSING OFFICER ON PERUSAL OF THE F INANCIAL STATEMENTS OF THE COMPANY FOUND THAT ASSESSEE BORROWED SECURED LO ANS FROM BANKS AND UNSECURED LOANS FROM DIRECTORS AND OTHERS PAID VARYING INTEREST RATES. AS PER BALANCE SHEET THE ASSESSEE IS HAVING SECURED LOANS OF A15,73,90,542/- AND UNSECURED LOANS AND ASSESSEE AL SO PAYING INTEREST ON ABOVE LOANS AS PER PAGE 2 OF ASSESSING OFFICER ORDER AS UNDER:- ON BANK LOANS 1,46,15,759/- ON OTHER LOANS 27,88,064/- AS PER THE INFORMATION, THE ASSESSEE HAS GIVEN INTE REST FREE LOANS TO SUBSIDIARIES AND ALSO INVESTED IN GROUP CONCERNS AS UNDER:- DSM GEODATA LTD. A5,55,69,765/- (LOAN/ADVANCE) DSM INFOSYSTEMS P. LT A2,21,72,376/- (LOAN/ADVANC E) DCS BPO PVT. LTD A1,79,45,150/- (LOAN/ADVANCE) DCS BPO PVT. LTD A49,58,877/- (INVESTMENT) THE LD. AUTHORISED REPRESENTATIVE EXPLAINED THAT TH E ASSESSEE COMPANY MADE INVESTMENT IN SUBSIDIARY COMPANY DSM G EODATA LTD ITA NOS.2059 & 2062/MDS/2015 :- 4 -: SCOTLAND A2,52,85,072/-. ON PERUSAL OF THE TRANSAC TION WITH RELATED PARTIES, THE ASSESSEE HAS NOT RECEIVED ANY INTEREST FROM ASSOCIATE COMPANIES. ON FURTHER VERIFICATION IT WAS FOUND TH AT INTEREST OF A22,70,805/- WAS RECEIVED FROM SUBSIDIARY COMPANY F ROM DCS GEODATA LTD WHICH HAS WORKED OUT TO A4.26% INTEREST RATE ON AMOUNT OUTSTANDING BALANCE AND INTEREST OF A1,59,252/- FRO M D.S.M. INFOSYSTEMS P. LTD WORKED OUT 0.76% ON THE OUTSTAND ING BALANCE AND THERE WAS NO INCOME FROM OTHER GROUP CONCERNS. THE ASSESSING OFFICER HAS MADE A COMPARISON THAT THE ASSESSEE COM PANY IS PAYING INTEREST AT A HIGHER RATE THAN THE INTEREST RECEIVE D FROM ITS GROUP CONCERNS. SO WITH THESE PARAMETERS OF APPLICATION O F LOAN FUNDS FROM GROUP CONCERNS AND ALSO NOT CHARGING INTEREST MADE IN SUBSIDIARY CONCERNS. THE ASSESSING OFFICER ANALYZED BASED ON THE FINANCIAL STATEMENTS THAT THE ASSESSEE COMPANY HAS OBTAINED L OANS FROM BANK, DIRECTORS, SHAREHOLDERS AND OTHERS AND PAYING HIGHE R RATE OF INTEREST WEREAS NO INTEREST INCOME WAS RECEIVED FROM SUBS IDIARIES EXCEPT CONCESSIONAL RATE OF INTEREST RECEIPT FROM DSM GEO DATA LTD AND DSM INFOSYSTEMS P. LTD AND ISSUED SHOW CAUSE NOTICE TO THE ASSESSEE COMPANY FOR PROPORTIONATE DISALLOWANCE OF INTEREST ON BORROWED FUNDS. IN RESPONSE TO SHOW CAUSE NOTICE, THE LD. AUTHORISE D REPRESENTATIVE FILED DETAILED SUBMISSIONS AND ALSO RELIED ON THE D ECISION OF CO- ORDINATE BENCH TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT ITA NOS.2059 & 2062/MDS/2015 :- 5 -: YEAR 2004-05 AND 2005-06 WERE THE TRIBUNAL HAS ACCE PTED THE CONTENTION THAT THE LOANS AND ADVANCE TO THE GROUP CONCERNS OR SUBSIDIARIES IS FOR COMMERCIAL EXPEDIENCY AND NO IN TEREST DISALLOWANCE IS WARRANTED ON SUCH INVESTMENTS IN SUBSIDIARIES. THE LD. ASSESSING OFFICER PERUSED THE TRIBUNAL ORDER AND FOUND THE DE PARTMENT HAS NOT ACCEPTED THE DECISION OF THE TRIBUNAL AND CONTESTIN G AT HIGHER FORUM IN HIGH COURT. THE LD. ASSESSING OFFICER HAS NOT RELI ED ON THE DECISION AND CALCULATED PROPORTIONATE DISALLOWANCE OF INTERE ST ON THE ADVANCE MADE TO GROUP CONCERNS AND WORKED OUT THE CALCULATI ON OF INTEREST COMPONENT IN IS ORDER AND DISALLOWED A58,87,623/-. AGGRIEVED BY THE ORDER, THE ASSESSEE FILED AN APPEAL BEFORE THE COMM ISSIONER OF INCOME TAX (APPEALS). 4. IN THE APPELLATE PROCEEDINGS, THE LD. AUTHORISED REPRESENTATIVE MADE SUBMISSIONS ON DISALLOWANCE AN D THE ASSESSEE COMPANY HAS ADVANCED AND INVESTED IN THE SUBSIDIAR Y COMPANIES. THE LD. ASSESSING OFFICER WITHOUT CONSIDERING THE P ROVISIONS OF SEC. 36(1)(III) OF THE ACT ON THE BORROWED FUNDS AND DE CISION OF TRIBUNAL MADE DISALLOWANCE. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) CONSIDERED THE SUBMISSIONS OF THE ASSESSEE AND OBSE RVED THE FINDINGS OF THE ASSESSING OFFICER ON SIMILAR ISSUE, THE ITA T DECISION IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2004-05 AND 2005-06 OBSERVED AT PARA 5.1 OF HIS ORDER AS UNDER:- ITA NOS.2059 & 2062/MDS/2015 :- 6 -: I HAVE CAREFULLY CONSIDERED THE FACTS, ORDER OF T HE AO, SUBMISSIONS OF THE APPELLANT AND MATERIAL ON RECORD . THE ITAT ORDER ARISING FROM CROSS APPEALS IN ITA NOS.11 & 12/MDS/2010 FOR THE A.YS 2004-05 AND 2005-06 AS ALSO ITA NOS.366 & 367/MDS/2010 RELIED UPON IN THE APPELLANT'S OWN CASE HAS BEEN CAREFULLY PERUSED BY ME. THE FACTS OBTAINING THEREI N RELATED TO DISALLOWANCE OF INTEREST ON BORROWED CAPITAL. THESE RELATED TO INTEREST-FREE ADVANCE OR ADVANCE ON NOMINAL RATES O F (I) 1 CRORE GIVEN TO ITS GROUP CONCERN M/S MORGAN INDUSTRIES LT D., (II) RS.49.14 LAKHS TO ANOTHER GROUP CONCERN M/S DSM INFOSYSTEMS P LTD, (III) BESIDES NET ADVANCE OF 1,54,52,372/- TO ANOTHER GROUP COMPANY M/S DSM GEODATA LTD. THE APPELLANT HAD DURING THE R ELEVANT PREVIOUS YEAR BORROWED FRESH LOAN OF .2.65 CRORES. THE ITAT ON THE PLEAS MADE BY THE APPELLANT HAD OBSERVED AFTER TAKING INTO CONSIDERATION THE FINDINGS OF THE CIT(A) IN THIS MA TTER, THAT THE ASSESSEE HAD USED INTEREST FREE FUNDS AS ADVANCES T O THE THREE COMPANIES MENTIONED ABOVE BESIDES MAKING INVESTMENT IN EQUITY SHARES OF THE SUBSIDIARY MLS DSM GEODATA LTD. THE I TAT HELD THAT THE LOANS WERE GIVEN BY THE ASSESSEE TO THE COMPANI ES ON ACCOUNT OF COMMERCIAL EXPEDIENCY AND THAT REVENUE , COULD NOT BRING ANY EVIDENCE ON RECORD TO SHOW THAT AMOUNTS A DVANCED OR INVESTED WERE USED FOR PERSONAL BENEFIT I PURPOSE. IN A SPEAKING ORDER, THE HON'BIE ITAT DELETED THE DISALLOWANCE MA DE BY THE AO ON ACCOUNT OF INTEREST IN RELATION TO THE LOANS GIV EN BY IT TO ITS GROUP CONCERNS AND INVESTMENTS MADE IN EQUITY SHARE S IN ITS SUBSIDIARY COMPANY. RESPECTFULLY FOLLOWING THE DECI SION OF THE HON'BLE ITAT AND HAVING REGARD TO THE FACT THAT THE MATTER IS IDENTICAL IN THE YEAR UNDER CONSIDERATION IN APPEAL , I HOLD THAT THE DISALLOWANCE MADE BY THE AO CANNOT BE UPHELD AND DI RECT THE AO TO DELETE THE DISALLOWANCE THUS MADE. THE GROUND IS ALLOWED. THE LD. CIT(A) FOLLOWING THE ITAT DECISION ALLOWED THE APPEAL OF THE ASSESSEE. AGGRIEVED BY THE ORDER OF THE COMMISSIONE R OF INCOME TAX (APPEALS), THE REVENUE HAS ASSAILED AN APPEAL BEFOR E TRIBUNAL. 5. BEFORE US, THE LD. DEPARTMENTAL REPRESENTATIVE REI TERATED THE FINDINGS OF THE ASSESSING OFFICER, THE COMMISSI ONER OF INCOME TAX (APPEALS) HAS DELETED THE DISALLOWANCE OF INTEREST ON BORROWED CAPITAL UTILIZED FOR GROUP CONCERNS AND RELIED ON THE SUPRE ME COURT DECISION ITA NOS.2059 & 2062/MDS/2015 :- 7 -: WITHOUT CONSIDERING THE FACT THAT THE REVENUE HAS N OT ACCEPTED THE DECISION RELIED BY THE COMMISSIONER OF INCOME TAX ( APPEALS) IN ASSESSEES OWN CASE FOR EARLIER ASSESSMENT YEARS A ND APPEAL HAS BEEN FILED IN HIGH COURT AND PRAYED FOR SETTING ASIDE T HE COMMISSIONER OF INCOME TAX (APPEALS) ORDER. 6. CONTRA, THE LD. AUTHORISED REPRESENTATIVE OF THE AS SESSEE MADE SUBMISSIONS AND RELIED ON THE ORDER OF COMMIS SIONER OF INCOME TAX (APPEALS) AND DECISION OF ITAT IN ASSESSEES O WN CASE FOR THE ASSESSMENT YEARS 2004-05 AND 2005-06 WHERE THE TRIB UNAL HAS ALLOWED THE APPEAL IN FAVOUR OF THE ASSESSEE. 7. WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERI AL ON RECORD AND JUDICIAL DECISIONS CITED. THE LD. DEPAR TMENTAL REPRESENTATIVE CONTESTED THE ISSUES THAT THE COMMI SSIONER OF INCOME TAX (APPEALS) HAS NOT CONSIDERED THE FACTS ON THE B ORROWED CAPITAL AND INVESTMENT IN EQUITY OF SUBSIDIARY COMPANIES A ND APPLIED THE DECISION OF APEX COURT AND ALSO TRIBUNAL DECISION W HICH HAS NOT ATTAINED FINALITY FOR EARLIER ASSESSMENT YEARS AS DEPARTMENT HAS CONTESTED THE ISSUE AT HIGHER FORUM. THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT MERE PENDENCY OF APPEAL BEFORE THE HIG HER FORUM CANNOT BE A REASON TO TAKE A DIFFERENT VIEW. SO RESPECTFU LLY FOLLOWING THE ITA NOS.2059 & 2062/MDS/2015 :- 8 -: DECISION IN ASSESSEES OWN IN ITA NOS.11 & 12/MDS/2 010 AND ITA NOS.366 & 367/MDS/2010 UPHELD THE ORDER OF THE COM MISSIONER OF INCOME TAX (APPEALS) AND DISMISS THE GROUND OF THE REVENUE. 8. THE SECOND GROUND RAISED BY THE DEPARTMENT THAT COMMISSIONER OF INCOME TAX (APPEALS) HAS DELETED TH E DISALLOWANCE U/S.40(A)(I) OF THE ACT ON SOFTWARE EXPENSES WITHOU T APPRECIATING THE LEGAL FICTION AS PER THE FINANCE ACT, 2012. 9. THE LD. ASSESSING OFFICER ON PERUSAL FOUND THAT AN AMOUNT OF A44,85,800/- WAS PAID TO SOFTWARE MAINTENANCE TO M/ S. BENTLEY SYSTEMS. THE LD. AUTHORISED REPRESENTATIVE FILED DE TAILED EXPLANATIONS AND CLARIFYING THAT THE AMOUNT PAID TO THE M/S. BEN TLEY SYSTEMS TOWARDS SUBSCRIPTION/ANNUAL LICENSE FEE FOR PROVIDI NG SERVICES SUCH AS GEOGRAPHIC INFORMATION SYSTEMS AND ENGINEERING AND NOT ANY PURCHASE OF ASSET. THIS PAYMENT IS IN THE NATURE OF SUBSCRI PTION BUT THE LD. ASSESSING OFFICER HAS ASSUMED THAT THE PAYMENT IS M ADE FOR SPECIALIZED SERVICES IN THE NATURE OF TECHNICAL SER VICES AND KNOWHOW FOR THE USAGE OF THE PRODUCT WHERE THE PROVISIONS O F SEC.195 ARE APPLICABLE. THE ASSESSEE SUBMITTED THAT SOFTWARE I S USED FOR PROVIDING SERVICES TO CLIENT OUTSIDE INDIA AND AS PER SEC.9(1 )(VI)(B) SHALL NOT FALL UNDER THE CATEGORY OF ROYALTY PAYMENTS WERE TDS PRO VISIONS APPLY. THE LD. ASSESSING OFFICER FOUND THAT EXPLANATIONS A RE NOT SATISFACTORY ITA NOS.2059 & 2062/MDS/2015 :- 9 -: AND FALL UNDER THE CATEGORY OF ROYALTY AND TECHNICA L KNOWHOW AND USAGE OUTSIDE INDIA CANNOT BE A GROUND AS THE PAYME NTS ARE MADE OUTSIDE INDIA HAVING LICENSE FEE FOR THE USE OF SOF TWARE. THE LD. AO CATEGORIZED PAYMENTS AS ROYALTY AND RELIED ON THE DECISION OF GRACEMAC CORP. VS. ACIT, 134 TTJ 257 WERE PAYMENTS OF ROYALTY OF NONRESIDENT IS DEEMED TO ACCRUE OR ARISE IN INDIA I RRESPECTIVE OF THE FACT WHETHER NON RESIDENT HAS A RESIDENCE OR PLACE OF BUSINESS IN INDIA AND CONCLUDES THAT THE PROVISIONS OF TDS SHALL COMP LY AND MADE DISALLOWANCE U/S.40(A)(I) OF THE ACT OF A44,85,800/ -. AGGRIEVED BY THE ORDER, THE ASSESSEE FILED AN APPEAL BEFORE THE COMM ISSIONER OF INCOME TAX (APPEALS). 10. IN THE APPELLATE PROCEEDINGS, THE COMMISSIONER OF I NCOME TAX (APPEALS) CONSIDERED THE GROUNDS, SUBMISSIONS OF THE ASSESSEE AND ALSO FINDINGS OF THE ASSESSING OFFICER WERE AN AMOUNT OF A44,85,800/- PAID BY THE ASSESSEE TO M/S. BENTLEY SYSTEMS, A RESIDENT OF AUSTRALIA. THE LD. COMMISSIONER OF INCOME TAX ( APPEALS) CONSIDERED THE SUBMISSIONS OF THE ASSESSEE AND OBSE RVED THE FINDINGS OF THE ASSESSING OFFICER AND RELIED ON JURISDICTION AL ITAT DECISION FINANCIAL SOFTWARE SERVICES P. LTD VS. DCIT 47 TAXM AN.COM 410 AT PAGE 6 PARA 6.2 OF THE ORDER AS UNDER AND ALLOWED T HE GROUND I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE, OR DER OF THE AO, SUBMISSIONS MADE BY THE APPELLANT AND MATERIAL ON RECORD. THE APPELLANT IS ENGAGED IN BUSINESS OF SOFTWARE DE VELOPMENT ITA NOS.2059 & 2062/MDS/2015 :- 10 -: AND EXPORT. IT OPERATES ALSO THROUGH ITS OWN SUBSID IARY AND ASSOCIATE COMPANIES DSM GEODATA LTD, SCOTLAND, DSM INFOSYSTEMS P LTD AND DSM BPO P LTD. FOR THE PURPOS ES OF ITS BUSINESS IT IS REQUIRED TO USE A SOFTWARE ON A YEAR TO YEAR BASIS. THE SOFTWARE IS USED TO OFFER SERVICES TO ITS CLIEN T OVERSEAS. THE SOFTWARE IN QUESTION HAS BEEN LICENSED FOR USE BY M LS BENTLEY SYSTEMS PTY LTD, AN NON- RESIDENT. FROM THE OPTIONS AVAILABLE, THE APPELLANT HAS OPTED TO PAY CERTAIN PRICE FOR EA CH LICENCE FOR THE USER OF THE SOFTWARE. IT IS ALSO POSSIBLE THAT THE APPELLANT WOULD HAVE TO PAY SUCH LICENCE FEE FOR EACH OF THOS E APPLICATIONS AS AND WHEN THE NEED ARISES. THE SECOND OPTION AVAI LABLE TO THE APPELLANT WAS TO OBTAIN ENTERPRISE LICENCES FOR A Y EAR AT DIFFERENT PRICE WHEREBY IT HAD THE OPTION OF USING AS MANY LI CENCES AS IT WANTS AND ALSO USE THE OTHER APPLICATIONS OF BENTLE Y WITHIN THE SAME PRICE. IN THIS OPTION THE APPELLANT WAS REQUIR ED TO PAY A LUMP SUM AMOUNT TO THE SUPPLIER OF THE APPLICATION. BASED ON PRUDENCE, THE APPELLANT OPTED FOR THE SECOND OPTION . 6.2.1 BE THAT AS IT MAY THE TAX INVOICE RAISED BY T HE SUPPLIER OF THE SOFTWARE ACKNOWLEDGES PAYMENT TOWARDS LICENCE F EE FOR THE USE OF SUCH SOFTWARE. THE PROVISIONS OF S.9(1 )(VI) PROVIDES THROUGH A DEEMING PROVISION INCOME TO ACCRUE OR ARI SE IN INDIA AND INCLUDES INCOME BY WAY OF ROYALTY. EXPLANATION 2 FURTHER DEFINES ROYALTY FOR USE OR RIGHT TO USE ANY INDUSTR IAL COMMERCIAL OR SCIENTIFIC EQUIPMENT. EXPLANATION 4 FURTHER CLAR IFIES THAT TRANSFER OF ALL OR ANY RIGHTS IN RESPECT OF ANY RIG HT, PROPERTY OR INFORMATION INCLUDES AND AS ALWAYS INCLUDED TRANSFE R OF ALL OR ANY RIGHT FOR USE OR RIGHT TO USE A COMPUTER SOFTWARE, INCLUDING GRANTING OF A LICENCE, IRRESPECTIVE OF THE MEDIUM T HROUGH WHICH SUCH RIGHT IS TRANSFERRED. THE EXPLANATION INSERTED BY FINANCE ACT, 2012 IS WITH RETROSPECTIVE EFFECT FROM 1.6.197 6. AS THE EXPLANATION SUGGESTS IT IS CLARIFICATORY IN NATURE AND DOES NOT SUBSTANTIVELY LEGISLATE ON A NEW ITEM OF INCOME. IN MY CONSIDERED VIEW, FROM THE FACTS OBTAINING IN THIS C ASE THE CONSIDERATION PAID TO M/S BENTLEY SYSTEMS PTY LTD, A NON- RESIDENT, FOR USE OF THE IMPUGNED SOFTWARE WOULD CO NSTITUTE PAYMENT IN THE NATURE OF ROYALTY U/S 9(1 )(VI) R.W. ARTICLE 12(3) OF THE DT AA WITH AUSTRALIA ATTRACTING WITHHOLDING TAX U/S 195. FURTHER, THE TAXABILITY OF ROYALTY IN THE SOURCE STATE DOES NOT DEPEND ON, UNLIKE THE TAXABIL ITY IN THE RESIDENT STATE TO WHOM THE ROYALTIES ARE PAID. THES E ARE TAXED ACCORDING TO THE DOMESTIC LAWS. IN INDIA INCOME IS TAXABLE ON RECEIPT OR CASH BASIS BUT ALSO ON ACCRUAL BASIS. TH US, WHEN AN INCOME IS CREDITED TO FOREIGN COMPANY, IT BECOMES T AXABLE AND TAX IS REQUIRED TO BE DEDUCTED IN TERMS OF S. 195(1 ) OF THE I.T. ACT. THE ORDER OF THE AO DOES NOT SUFFER ANY INFIRM ITY. HOWEVER, NOTWITHSTANDING THE SAME AND HAVING RESPECT TO THE PLEA OF THE ITA NOS.2059 & 2062/MDS/2015 :- 11 -: APPELLANT AND RELIANCE PLACED IN THE RATIO OF THE J URISDICTIONAL BENCH OF ITAT IN THE CASE OF FINANCIAL SOFTWARE SER VICES P LTD (SUPRA), I HOLD THAT THE PLEA TAKEN BY THE APPELLAN T MUST SUCCEED. THIS GROUND OF APPEAL IS ALLOWED. AGGRIEVED BY THE ORDER OF THE COMMISSIONER OF INCOM E TAX (APPEALS), THE REVENUE HAS ASSAILED AN APPEAL BEFORE TRIBUNAL. 11. BEFORE US, THE LD. DEPARTMENTAL REPRESENTATIVE RE ITERATED THE FINDINGS OF THE ASSESSING OFFICER AND VEHEMENT LY ARGUED THAT THE REVENUE HAS NOT ACCEPTED THE DECISION RELIED BY THE COMMISSIONER OF INCOME TAX (APPEALS) AND APPEAL HAS BEEN FILED IN HIGH COURT AND PRAYED FOR SETTING ASIDE THE COMMISSIONER OF INCOM E TAX (APPEALS) ORDER. 12. CONTRA, THE LD. AUTHORISED REPRESENTATIVE OF THE AS SESSEE MADE HIS SUBMISSIONS AND RELIED ON THE ORDER OF COM MISSIONER OF INCOME TAX (APPEALS) AND DECISION OF THE ITAT. 13. WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERI AL ON RECORD AND JUDICIAL DECISIONS CITED. THE LD. DEPAR TMENTAL REPRESENTATIVE CONTESTED THAT THE TRIBUNAL DECISI ON HAS NOT ATTAINED FINALITY FOR EARLIER ASSESSMENT YEARS AS DEPARTMENT HAS CONTESTED THE ISSUE AT HIGHER FORUM. THIS TRIBUNAL IS OF THE CON SIDERED OPINION THAT MERE PENDENCY OF APPEAL BEFORE THE HIGHER FORUM CAN NOT BE A REASON ITA NOS.2059 & 2062/MDS/2015 :- 12 -: TO TAKE A DIFFERENT VIEW. SO RESPECTFULLY FOLLOWIN G THE DECISION IN FINANCIAL SOFTWARE & SYSTEMS (P) LTD IN ITA NOS.219 0 TO 2196 & 2199/MDS/2013 UPHELD THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) AND DISMISS THE GROUND OF THE REVENUE. 14. THE DEPARTMENT HAS RAISED THIRD GROUND WHERE THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN HOLDI NG THAT BUSINESS LOSSES OF A UNIT CANNOT BE SET OFF AGAINST PROFIT UNDERTAKING ELIGIBLE FOR DEDUCTION U/S.10A OF THE ACT AND ALLOWED THE SAME. 15. THE ASSESSEE DURING THE FINANCIAL YEAR 2007-08 DERI VED INCOME FROM EXPORT OPERATIONS AND DOMESTIC OPERATIO NS. THE LD. ASSESSING OFFICER ON PERUSAL OF THE COMPUTATION OF INCOME FOUND THAT THE ASSESSEE HAS CLAIMED EXEMPTION OF A1,09,85,430/ - AS EXEMPTED INCOME U/S.10A AND AT THE SAME TIME ASSESSEE HAS LO SS FROM THE DOMESTIC OPERATIONS A57,16,767/- AND CLAIMED TO BE CARRIED TO SUBSEQUENT YEARS. THE MAIN DISPUTE ARISE WITH RESP ECT OF CLAIM OF DEDUCTION U/S.10A ON PROFIT OF EXPORT OPERATION WIT HOUT SET OFF LOSS FROM DOMESTIC OPERATIONS. THE LD. ASSESSING OFFICE R REFERRED TO THE AMENDMENT U/S.10A EFFECTIVE FROM 01.04.2001 AVAIL ABLE ONLY TO THE TOTAL INCOME OF THE ASSESSEE WITH PROSPECTIVE TO PR OVISIONS IN ADJUSTMENT OF LOSS WITH PROFIT OF EXPORT UNIT. THE LD. AUTHORISED ITA NOS.2059 & 2062/MDS/2015 :- 13 -: REPRESENTATIVE SUBMITTED THE DETAILS AND ALSO SUPPO RTED HIS SUBMISSIONS WITH DECISIONS IN ASSESSEE OWN CASE BY TRIBUNAL FOR THE ASSESSMENT YEAR 2007-08 WERE THE TRIBUNAL HAS ALLOW ED THE DEDUCTION U/S.10A OF THE ACT. THE ENTIRE PROFITS OF STPI UNI TS WITHOUT SETTING OFF OF THE LOSS OF NON STPI UNITS. BUT THE ASSESSING OFFICER CONSIDERED THOUGH THE TRIBUNAL HAS ACCEPTED THE ASSESSEES CON TENTION BUT THE DEPARTMENT HAS CONTESTED THE TRIBUNAL ORDER OF THE ASSESSEE AT HIGHER FORUM TO KEEP THE ISSUE ALIVE, THE LD. ASSESSING OF FICER DEFERRED THE DECISION OF ASSESSEES OWN CASE AND MADE THAT ELABO RATE FINDINGS ON THE PROVISIONS WERE THE TRIBUNAL RELIED ON THE SPEC IAL BENCH DECISION IN THE CASE OF SCIENTIFIC ATLANTA TECHNOLOGY PVT. LTD VS. ACIT 129 TTJ 273 AND THE DEPARTMENT IS CONTESTING THE DECISION OF SPECIAL BENCH AT HIGHER FORUM. CONSIDERING BOTH THE DECISIONS CONTE STED BY THE DEPARTMENT, THE ASSESSING OFFICER DISCUSSED THE PRO VISIONS APPLICABLE FOR CLAIMING DEDUCTION U/S.10A EFFECTIVE FROM 01.04 .2001 AND MADE A ELABORATE SUBMISSIONS AND RELIED ON THE TRIBUNAL DE CISION AND DISTINGUISHED THE TRIBUNAL ORDER. THE COMPUTATION O F U/S.10A DEDUCTION SHALL BE WORKED OUT IN THE MANNER LAID DO WN IN THE ACT AND APPLICATION OF PROVISIONS OF SECS.70 AND 72 OF THE ACT. THE DEDUCTION U/S.10A HAS TO BE ALLOWED ONLY AFTER ADJUSTMENT OF LOSS OF DOMESTIC UNIT WITH PROFITS OF THE EOU AND MADE ADDITION AND DISALLOWED EXCESS ITA NOS.2059 & 2062/MDS/2015 :- 14 -: CLAIM OF THE ASSESSEE. AGGRIEVED BY THE ORDER, THE ASSESSEE FILED AN APPEAL BEFORE THE TRIBUNAL. 16. IN THE APPELLATE PROCEEDINGS, THE LD. AUTHORISED REPRESENTATIVE REITERATED HIS SUBMISSIONS MADE IN T HE ASSESSMENT PROCEEDING. THE LD. ASSESSING OFFICER HAS NOT ACCE PTED THE ASSESSEE CONTENTION FOR CLAIM OF DEDUCTION U/S.10A AND ALSO THE TRIBUNAL ORDER APPLICABLE TO ASSESSEES OWN CASE FOR THE ASSESSMEN T YEAR 2007-08 AND THE ASSESSING OFFICER FURTHER MADE A DISTINCTIO N BASED ON THE PROVISIONS APPLICABLE AND ALSO DEPARTMENT HAS NOT A CCEPTED THE DECISION AND CONTESTING IN HIGHER FORUM AND RELIED ON THE DECISION OF THE TRIBUNAL IRRESPECTIVE OF THE FACT THAT COMMISSI ONER OF INCOME TAX (APPEALS) AND TRIBUNAL IN ASSESSEES OWN CASE ALLOW ED BASED ON THE SPECIAL BENCH DECISION OF ITAT, CHENNAI IN SCIENTIFIC ATLANTA INDIA TECHNOLOGY P. LTD VS. ACIT 129 TTJ 273 . THE LD. COMMISSIONER OF INCOME TAX (APPEALS) CONSIDERING THE GROUNDS SUBMIS SIONS OF THE AUTHORISED REPRESENTATIVE AND ALSO FINDINGS OF THE ASSESSING OFFICER HAS ALLOWED THE GROUND OF THE ASSESSEE OBSERVING AT 8.2 OF THE ORDER AS UNDER:- I HAVE CAREFULLY CONSIDERED THE FACTS, ORDER OF TH E ASSESSING OFFICER, SUBMISSIONS MADE BY THE APPELLAN T AND MATERIAL ON RECORD. THE ITAT ORDER IN ITA NO.890/MDS/2010 FOR THE A.Y. 2007-08 RELIED UPON IN THE APPELLANTS OWN CASE HAS BEEN CAREFULLY PERUSED BY ME. THE HONBLE ITAT HAS HELD AS UNDER:- ITA NOS.2059 & 2062/MDS/2015 :- 15 -: 5. WE HAVE PERUSED THE ORDER AND HEARD THE PARTIES. IN VIEW OF THE DECISION OF THE SPECIAL BENCH OF THIS TRIBUNAL IN THE CASE OF SCIENTIFIC ATLANTA TECHNOLOGY P. LTD (SUPRA), REPRODUCED BY THE LD.CIT(A) AT PARAS 5 AND 5.1 OF HIS ORDER, THE ASSESSEE WAS WELL ELIGIBLE FOR CLAIMING DEDUCTION F OR ITS UNIT ON WHICH SEC.10A CLAIM WAS ALLOWABLE, WITHOUT SETTING OFF OF THE LOSSES OF ITS DOMESTIC UNIT. AGGRIEVED BY THE ORDER OF THE COMMISSIONER OF INCOM E TAX (APPEALS), THE REVENUE ASSAILED AN APPEAL BEFORE THE TRIBUNAL. 17. THE LD. DEPARTMENTAL REPRESENTATIVE RELIED ON THE ORDER OF THE ASSESSING OFFICER AND VEHEMENTLY ARGUED FOR AL LOWING THE APPEAL. 18. CONTRA, THE LD. AUTHORISED REPRESENTATIVE OF THE AS SESSEE RELIED ON THE ORDER OF COMMISSIONER OF INCOME TAX ( APPEALS) AND TRIBUNAL DECISION IN ASSESSEES OWN CASE, PRAYED FO R DISMISSING THE APPEAL. 19. WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATER IAL ON RECORD AND JUDICIAL DECISIONS CITED. THE LD. DEPART MENTAL REPRESENTATIVE EXPLAINED THAT THE ITAT DECISION HA S NOT ATTAINED FINALITY AND BEING CONTESTED AT HIGHER FORUMS. THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ALLOWED THE GROUND OF THE ASSESSEE BASED ON ASSESSEES EARLIER YEAR ORDER RELYING ON THE S PECIAL BENCH DECISION OF SCIENTIFIC ATLANTA TECHNOLOGY PVT. LTD (SUPRA) WERE DEDUCTION U/S.10A OF THE ACT WAS ALLOWED WITHOUT SETTING OFF OF LOSS OF DOMESTIC ITA NOS.2059 & 2062/MDS/2015 :- 16 -: UNIT. THE DECISION OF THE TRIBUNAL WAS BASED ON PRE VAILING LAW AND WE KNOW RELY ON THE DECISION OF MADRAS HIGH COURT IN T HE CASE OF CIT VS. HI TECH ARAI LTD 321 ITR 477 WHERE IT WAS HELD THAT MERELY BECAUSE A CO-ORDINATE BENCH OF THE TRIBUNAL HAD EARLIER TAKEN A DIFFERENT VIEW, THE TRIBUNAL NEED NOT BLINDLY FOLLOW THE EARLIER DE CISION EVEN IF THE EARLIER DECISION DID NOT REFLECT THE CORRECT POSITI ON OF LAW. THE CLAIM OF DEDUCTION U/S. 10A SHOULD BE CONSIDERED BASED ON THE AMENDMENT EFFECTIVE FROM 01.04.2001 WERE THE DEDUCTION IN RE SPECT OF PROFIT AND GAINS DETERMINED FOR ELIGIBLE INDUSTRIAL UNDERTAKIN G FOR EXPORT OF ARTICLES OR THINGS. THE PROFIT AND GAINS FROM ELIG IBLE UNDERTAKING CALCULATED IN PROPORTION OF EXPORT TURNOVER TO TOTA L TURNOVER AND ALLOWED AS DEDUCTION WHILE COMPUTING THE TAXABLE IN COME ONLY TO THE EXTENT OF INCOME FROM SUCH UNDERTAKING AS INCLUDED IN THE TOTAL INCOME. CONSEQUENTLY, THE DEDUCTION WOULD BE WORKE D OUT ON THE TOTAL INCOME OF THE ASSESSEE, AND ARRIVED AFTER SET -OFF OF THE PROFIT FROM EXPORT DIVISION AGAINST LOSS OF THE OTHER UNIT /BUSINESS, IF ANY, AS PER SEC.70 & 72 OF THE INCOME TAX ACT. SO, CONSIDER ING THE PROVISIONS OF LAW, AMENDMENT AND DECISION OF MADRAS HIGH COU RT, WE RELY ON THE DECISION OF DELHI HIGH COURT IN THE CASE OF CIT VS. KEI INDUSTRIES LTD 373 ITR 574 WERE LOSS OF A UNIT ENTITLED FOR EXEMPTION NOT TO BE SET OFF AGAINST INCOME FROM UNIT NOT ELIGIBLE FOR S UCH EXEMPTION. THE ITA NOS.2059 & 2062/MDS/2015 :- 17 -: LORDSHIP HAS REFERRED THE CASES WHICH WERE RELIED B Y THE LD. AUTHORISED REPRESENTATIVE. THE QUESTION OF SET OFF OF LOSS UND ER PROVISIONS OF SECTION 10B OF THE ACT HAS SAME PARAMETERS FOR DED UCTION UNDER SEC. 10A OF THE ACT. THE LOSS OF EOU UNIT CANNOT BE SET OFF AGAINST BUSINESS INCOME OF NON EOU UNIT BY APPLYING THE RATIO TO TH E PRESENT CASE, GIVES A RAY OF ADJUSTMENT TO CIRCUMSTANCES WERE EOU UNIT HAS PROFIT AND NON EOU HAS LOSSES. ON THE SAME ANALOGY OF FAC TS AND RATIO, WE FIND THAT THE LD. COMMISSIONER OF INCOME TAX (APPEA LS) HAS ALLOWED THE CLAIM OF THE ASSESSEE WITHOUT SET OFF OF LOSS OF DOMESTIC OPERATIONS, RELYING ON EARLIER YEAR ORDER IS NOT CO RRECT. WE ARE OF THE OPINION THAT CLAIM OF DEDUCTION U/S.10A IS ALLOWABL E AFTER SET OFF OF LOSSES IN ACCORDANCE WITH THE PROVISIONS OF SEC. 70 & 72 OF THE ACT AND THE DEDUCTION OF 10A HAS TO BE CONSIDERED ONLY AFTE R SET OFF OF LOSSES OF DOMESTIC OPERATIONS. THEREFORE, WE DIRECT THE A SSESSING OFFICER TO ALLOW THE DEDUCTION U/S.10A OF THE ACT AFTER SET O FF ADJUSTMENT OF LOSSES OF DOMESTIC OPERATIONS WITH THE INCOME OF EX PORT OPERATIONS. THIS GROUND OF THE REVENUE IS ALLOWED. 20. IN THE RESULT, THE APPEAL OF THE REVENUE IN ITA NO.2059/MDS/2015 FOR THE ASSESSMENT YEAR 2008-09 IS PARTLY ALLOWED AND REVENUE APPEAL IN ITA NO.2062/MDS/2015 FOR THE ASSESSMENT ITA NOS.2059 & 2062/MDS/2015 :- 18 -: YEAR 2009-2010 IS ALSO DISMISSED. ORDER PRONOUNCED ON WEDNESDAY, THE 30TH DAY OF M ARCH, 2015, AT CHENNAI. SD/- SD/- ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER ( . ! ' ) (G. PAVAN KUMAR) /JUDICIAL MEMBER / CHENNAI 1 / DATED:30.03. 2016 KV 2 ) +#-34 54&- / COPY TO: 1 . '( / APPELLANT 3. ! 6- () / CIT(A) 5. 4 9: +#-# / DR 2. +,'( / RESPONDENT 4. ! 6- / CIT 6. :;% < / GF