The ITO, Ward-4(1), Ahmedabad V. Elegant Microweb Tech. Pvt. Ltd., Ahmedabad

ITA 2138/AHD/2006

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 0256 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-10-2009
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 08-10-2009
• Assessment Year: 2003-2004
• Appeal Filed On: 09-10-2006
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NEETA SHAH
• Assessee Lawyers: A C SHAH
• Keywords: Business income

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH B BEFORE SHRI T.K.SHARMA, JUDICIAL MEMBER AND SHRI D.C.AGRAWAL, ACCOUNTANT MEMBER DATE OF HEARING : 08/10/09 DRAFTED ON: 21/1 0/09 1. ITA NO.2138/AHD/2006 2. ITA NO.2509/AHD/2007 ASSESSMENT YEARS : 2003-04 & 2004-05 RESPECTIVELY THE INCOME TAX OFFICER WARD-4(1) AHMEDABAD VS. ELEGANT MICROWEB TECHNOLOGIES PVT.LTD. A-305, SHAPATH-IV OPP: KARNAVATI CLUB SG HIGHWAY AHMEDABAD PAN/GIR NO. : AAACE 3459 J (APPELLANT) .. (RESPONDENT) APPELLANT BY : SMT. NEETA SHAH, SR.DR RESPONDENT BY: SHRI A.C. SHAH O R D E R PER D.C.AGRAWAL , ACCOUNTANT MEMBER :- BOTH THESE APPEALS FILED BY THE REVENUE ARE AGAINS T THE ORDER OF THE LEARNED CIT(APPEALS)-VIII, AHMEDABAD DATED 2 4/07/2006 PASSED FOR ASSESSMENT YEARS 2003-04 & 2004-05, BY R AISING EFFECTIVE FOLLOWING COMMON GROUND AS UNDER:- FROM ITA NO.2138/AHD/2006 FOR ASSESSMENT YEAR 2003 -04 1. THE LD.CIT(A) ERRED IN LAW AND ON THE FACTS OF THE CASE IN ALLOWING THE CLAIM OF THE ASSESSEE FOR DEDUCTION U/S.10A OF THE ACT AMOUNTING TO RS.27,93,391/-. ITA NOS.2138/AHD/ 2006 & 2509/AHD/2007 ITO VS. ELEGANT MICROWEB TECHNOLIGIES PVT.LTD. ASST.YEAR -2003-04 & 2004-05 - 2 - 2. SINCE BOTH THE APPEALS INVOLVE COMMON ISSUE, THE Y ARE DISPOSED OF TOGETHER FOR THE SAKE OF CONVENIENCE. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE-COMPANY IS ENGAGED IN THE BUSINESS OF DEVELOPMENT OF SOFTWARE AND IS REGISTERED WITH SOFTWARE TECHNOLOGY PARK OF INDIA, GANDHINAGAR (STPI). IT IS EXPORTING SOFTWARE AND IS CLAIMED TO BE 100% EXPORT ORIENTED UNIT. THE ASSESSING OFFICER EXAMINED THE CASE AND DISALLOWED THE CLAIM OF THE ASSESSEE MADE U/S.10A OF THE I.T. ACT, 1961. THE REASONS ADVANCED BY THE ASSESSING OFFICER WERE AS UNDER:- (I) FOR PRODUCING SOFTWARE THE ASSESSEE HAD HIRED CONSULTANTS ON JOB BASIS BUT DID NOT MANUFACTURE OR PRODUCE THE M AT ITS OWN FACTORY AND, THEREFORE, SOFTWARE INCOME CANNOT BE CONSIDERED AS DERIVED FROM THE MANUFACTURE OR PRODU CTION OF SOFTWARE MADE BY THE ASSESSEE. (II) THE ACTUAL TRANSMISSION OF SOFTWARE IS NOT PRO VED. THERE ARE CERTAIN DISCREPANCIES IN ACCESS LOG DATA THEREBY TRANSMISSION OF THE SOFTWARE TO THE CLIENTS IS NOT PROVED. ITA NOS.2138/AHD/ 2006 & 2509/AHD/2007 ITO VS. ELEGANT MICROWEB TECHNOLIGIES PVT.LTD. ASST.YEAR -2003-04 & 2004-05 - 3 - (III) THE ASSESSEE-COMPANY FAILED TO SUBMIT AUDIT R EPORT U/S.10A OF THE I.T. ACT, 1961 IN THE PRESCRIBED F ORM IN TIME. FURTHER, ASSESSEE HAS NOT COMPLIED WITH THE CONDITIONS LAID DOWN U/S.10A OF THE I.T. ACT, 1961. 4. THE LEARNED CIT(APPEALS) ALLOWED THE CLAIM OF TH E ASSESSEE BY HOLDING THAT SOFTWARE WAS DEVELOPED IN THE PREMISES OF THE ASSESSEE BUT WITH THE PARTIAL HELP OF CONSULTANTS BORROWED FROM SISTER-CONCERN. SECONDLY, SOFTWARES WERE TRANSFERRED TO THE FOREIGN CLIENTS THROUGH INTERNET. IT IS CERTIFIED BY STPI AND, THIRDLY, THAT ASSESSEE HAS FURNISHED STATUTORY REPORT IN FORM NO.56F ON 18/07/2005 BEFOR E FINALIZATION OF ASSESSMENT. EARLIER IT HAD SUBMITTED THE REPORT IN FORM NO.56G WHICH WAS THE FORM REQUIRED FOR CLAIM OF EXEMPTION U/S.10 B OF THE I.T. ACT, 1961. THE MISTAKE WAS CORRECTED AND FRESH REPORT IN FORM NO.56F WAS SUBMITTED BEFORE COMPLETION OF THE ASSESSMENT. 5. THE LEARNED DEPARTMENTAL REPRESENTATIVE ARGUED V EHEMENTLY AND SUBMITTED THAT ASSESSEE HAS FAILED TO PROVE THAT MA NUFACTURING OF PRODUCTION WAS DONE BY THE ASSESSEE ITSELF AND LD .CIT(A) HAS FAILED TO MEET THE ARGUMENTS OF THE ASSESSING OFFICER THAT EM PLOYEES OF SISTER- ITA NOS.2138/AHD/ 2006 & 2509/AHD/2007 ITO VS. ELEGANT MICROWEB TECHNOLIGIES PVT.LTD. ASST.YEAR -2003-04 & 2004-05 - 4 - CONCERN WERE DEPLOYED TO DEVELOP THE SOFTWARE. SEC ONDLY, TRANSMISSION OF THE SOFTWARE TO THE CLIENTS HAS NOT BEEN PROVED AND FINALLY THAT AUDIT REPORT WAS NOT SUBMITTED IN TIME. 6. AGAINST THIS, LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT IT ITS TRUE THAT SOFTWARE WAS DEVELO PED BY THE ASSESSEE WITH THE HELP OF CONSULTANTS OF THE SISTER-CONCERN, BUT ONLY PARTIAL HELP WAS TAKEN AND FOR WHICH PAYMENT WAS MADE TO THE SIS TER-CONCERN. HE DREW OUR ATTENTION TO PAGE NOS.2 TO 14 OF THE PAPER -BOOK OF THE ASSESSEE, WHEREIN SISTER-CONCERN HAS RAISED THE BILL ON THE A SSESSEE FOR UTILIZING THEIR CONSULTANTS BY THE ASSESSEE. THE LEARNED AUT HORISED REPRESENTATIVE OF THE ASSESSEE FURTHER SUBMITTED TH AT THE ASSESSEE HAS UTILIZED THE SERVICES OF EMPLOYEES OF THE SISTER-CO NCERN ONLY TO PARTIAL EXTENT AND MOST OF THE WORK HAS BEEN CARRIED OUT TH ROUGH ASSESSEES OWN STAFF ONLY. THE ASSESSEE HAS PAID THE SERVICE CHAR GES TO THE SISTER-CONCERN FOR UTILIZING THEIR MAN-POWER AND RELEVANT BILLS AR E PLACED AT PAGE NOS.8, 9 & 10 OF THE PAPER-BOOK. THE SOFTWARES WERE DEVEL OPED AT THE PREMISES OF THE ASSESSEE WHICH IS APPARENT FROM THE AGREEME NT MADE BY THE ASSESSEE WITH THE SISTER-CONCERN, NAMELY, M/S.ELEGA NT MICROWEB SYSTEM PVT.LTD. (EMSPL). HE REFERRED TO CLAUSE NOS.9 & 11 WHICH INDICATED ITA NOS.2138/AHD/ 2006 & 2509/AHD/2007 ITO VS. ELEGANT MICROWEB TECHNOLIGIES PVT.LTD. ASST.YEAR -2003-04 & 2004-05 - 5 - THAT AFTER COMPLETING THE WORK, THE EMPLOYEES OF EM SPL WOULD RETURN ALL RECORDS, MATERIALS, KEYS COMPUTER HARD-WARE, SO FTWARE, DOCUMENTS, PAPERS, ETC. TO THE ASSESSEE I.E. EMTPL. THERE IS NO BAR IN OUTSOURCING CERTAIN PORTION OF THE WORK AND FOR THAT MATTER THE ASSESSEE CANNOT BE DENIED THE BENEFIT U/S.10A OF THE I.T. ACT, 1961. IT IS INCORRECT TO SAY THAT ASSESSEE HAS OUTSOURCED THE SOFTWARE DEVELOPME NT WORK. IT IS ONLY SOME PART OF THE SOFTWARE WHICH WAS DEVELOPED IN-H OUSE WITH THE HELP OF CONSULTANT OF THE SISTER-CONCERN. IT IS NOT DEN IED BY THE REVENUE THAT ASSESSEE IS 100% EXPORT ORIENTED UNIT AND ALL THE P RODUCT IS EXPORTED. THE TOTAL SALES MADE BY THE ASSESSEE DURING THE YEA R AMOUNTED TO RS.69,72,782/- OUT OF WHICH SOFTWARES VALUED AT R S.22,78,960 + RS.24,899 WERE GOT DEVELOPED WITH THE HELP OF CONSU LTANT OF THE SISTER- CONCERN. THE ASSESSING OFFICER WRONGLY DENIED TH E BENEFIT U/S.10A OF THE I.T. ACT, 1961 TO THE ENTIRE INCOME EARNED BY T HE ASSESSEE. REGARDING TRANSMISSION OF THE SOFTWARE TO FOREIGN COUNTRIES, LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT THEY WERE TRANSMITTED THROUGH INTERNET AND SERVER OF STPI A CENTRAL GOVER NMENT AUTHORITY. THE BANK HAS ALSO GIVEN CERTIFICATE REGARDING EXPO RT REALIZATION OF THE SALES. A LETTER DATED 18/12/2005 ISSUED BY STPI G IVES THE DETAILS OF ITA NOS.2138/AHD/ 2006 & 2509/AHD/2007 ITO VS. ELEGANT MICROWEB TECHNOLIGIES PVT.LTD. ASST.YEAR -2003-04 & 2004-05 - 6 - ACCESS LOG DATA, FOR EXPORTING THE SOFTWARE. THE FACT THAT THE ASSESSEE HAS RECEIVED THE MONEY SHOWS THAT FOREIGN CLIENTS H AVE RECEIVED THE PRODUCT AND, THEREFORE, IT IS INCORRECT TO SAY THA T THE SOFTWARES SO DEVELOPED WERE NOT TRANSMITTED. REGARDING AUDIT R EPORT, THE LD.AR HAS SUBMITTED THAT AUDIT REPORT WAS PREPARED IN FORM NO .56G WHICH IS MEANT FOR EXEMPTION U/S.10B OF THE I.T. ACT, 1961 B UT WHEN POINTED OUT BY THE ASSESSING OFFICER, THE ASSESSEE FILED AUDIT REPORT ON 18/07/2005 IN FORM NO.56F, I.E. BEFORE THE ASSESSMENT. THE FI LING OF AUDIT REPORT IS DIRECTORY AND NOT MANDATORY AND, THEREFORE, IF IT I S FILED BEFORE ASSESSMENT IS MADE, THEN NO ADVERSE INFERENCE CAN B E DRAWN. HE REFERRED TO THE DECISION OF HON'BLE GUJARAT HIGH COURT IN TH E CASE OF ZENIT PROCESSING MILLS VS. CIT 219 ITR 721 (GUJ.) AND OF CIT VS. SHIVANAND ELECTRONICS 209 ITR 63 (BOM.). 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABLE ON RE CORD. IN OUR CONSIDERED VIEW, THERE IS NO CASE FOR INTERFERENCE IN THE ORDE R OF THE LEARNED CIT(APPEALS). THE BASIS ON WHICH THE ASSESSING OFF ICER HAS DENIED THE ITA NOS.2138/AHD/ 2006 & 2509/AHD/2007 ITO VS. ELEGANT MICROWEB TECHNOLIGIES PVT.LTD. ASST.YEAR -2003-04 & 2004-05 - 7 - EXEMPTION TO THE ASSESSEE ARE SUPERFLUOUS AND CANNO T STAND TO REASON AND ARE NOT SUPPORTED BY ANY MATERIAL FACT. 8. THE FACTS AS POINTED OUT BY THE LEARNED AUTHORIS ED REPRESENTATIVE OF THE ASSESSEE CLEARLY INDICATES THAT THE SOFTWARE WERE DEVELOPED IN- HOUSE BY THE ASSESSEE. THERE IS NO BAR IN APPOINTI NG CONSULTANT ON THE JOB AND, FURTHER, MERELY BECAUSE CONSULTANTS ARE EM PLOYEES OF SISTER- CONCERN, ASSESSEE CANNOT BE DENIED THE BENEFIT OF E XEMPTION U/S.10A OF THE I.T. ACT, 1961 BY HOLDING THAT SOFTWARE WERE NO T DEVELOPED INHOUSE. FOR THE PURPOSE OF DEVELOPMENT OF SOFTWARE, THE ASS ESSEE IS REQUIRED TO HIRE EMPLOYEE / PROFESSIONALS OR MAY OUTSOURCE PAR T OF THE JOB. MOST IMPORTANT IS THAT THE BASIC DESIGN, THEME, STRUCTUR E SHOULD BELONG TO THE ASSESSEE. THE NEGOTIATIONS WITH THE CLIENTS; HOW TH E PAYMENT ARE RECEIVED BY THE ASSESSEE, AND LEGAL ACCOUNTABILITY FOR CORRECTNESS OF THE SOFTWARE SHOULD VEST ON THE ASSESSEE. MERELY BECAU SE PART OF THE SOFTWARE WAS DEVELOPED INHOUSE WITH THE HELP OF CON SULTANT OF SISTER- CONCERN, IT IS INCORRECT TO INFER THAT ASSESSEE HA S HIMSELF NOT DEVELOPED THE SOFTWARES. THE ASSESSING OFFICER HAS CONVENIEN TLY IGNORED OTHER FACTORS, SUCH AS, INHOUSE DEVELOPMENT OF THE SOFTWA RE, AGREEMENT WITH ITA NOS.2138/AHD/ 2006 & 2509/AHD/2007 ITO VS. ELEGANT MICROWEB TECHNOLIGIES PVT.LTD. ASST.YEAR -2003-04 & 2004-05 - 8 - SISTER-CONCERN, PAYMENT OF THE CONSULTANCY CHARGES BY THE ASSESSEE TO THE SISTER-CONCERN FOR UTILIZING ITS CONSULTANTS AND, F URTHER, THAT ONLY PART OF THE TOTAL EXPORTS WERE DEVELOPED WITH THE HELP OF C ONSULTANTS OF THE SISTER-CONCERN AND, THEREFORE, ENTIRE EXPORT RECEIP TS AND INCOME THEREFROM SHOULD NOT BE SUBJECTED TO DISALLOWANCE OF EXEMPTIO N. NOTWITHSTANDING, WE DO NOT UPHOLD THE STAND OF THE ASSESSING OFFICER AND OF LEARNED D.R. THAT ASSESSEE HAS NOT HIMSELF DEVELOPED THE SOFTWAR E. THE ASSESSEE IS RECOGNIZED SOFTWARE DEVELOPING CONCERN. ACCORDINGL Y, THE FIRST REASON ADVANCED BY THE LD D.R. DISALLOWING THE EXEMPTION I S REJECTED. REGARDING NON-TRANSMISSION OF SOFTWARES, IT IS WORT HWHILE TO POINT OUT THAT THE ASSESSEE HAS RECEIVED PAYMENTS IN CONVERTI BLE FOREIGN EXCHANGE WHICH IS CERTIFIED BY RBI. IT IS, THEREFORE, DIFF ICULT TO HOLD THAT THE SOFTWARES SO DEVELOPED BY THE ASSESSEE WERE NOT TRA NSMITTED TO FOREIGN CLIENTS. FURTHER, THE DATA SUBMITTED BY THE ASSESS EE AS TO HOW AND WHEN SOFTWARES SO DEVELOPED WERE TRANSMITTED WERE CONVEN IENTLY IGNORED BY THE ASSESSING OFFICER. THE FACT OF TRANSMISSION OF THE DATA AND SOFTWARE IS ALREADY PLACED ON RECORD AND THERE IS NOTHING BR OUGHT ON BY THE ASSESSING OFFICER TO COUNTER THE DATA SUBMITTED BY THE ASSESSEE. EVEN ITA NOS.2138/AHD/ 2006 & 2509/AHD/2007 ITO VS. ELEGANT MICROWEB TECHNOLIGIES PVT.LTD. ASST.YEAR -2003-04 & 2004-05 - 9 - STPI HAS CONFIRMED THE TRANSMISSION OF SOFTWARE TO FOREIGN CLIENTS. ACCORDINGLY, THIS REASON OF THE ASSESSING OFFICER I S ALSO REJECTED. 9. REGARDING AUDIT REPOT, WE ARE SATISFIED THAT ONC E THE AUDIT REPORT IS SUBMITTED BEFORE THE COMPLETION OF THE ASSESSMEN T, THERE IS A COMPLIANCE OF STATUTORY PROVISIONS. NOTWITHSTANDIN G, THE AUDIT OF THE ACCOUNTS WAS ALREADY DONE, AND REPORT WAS PREPARED IN THE PRESCRIBED FORMAT FOR EXEMPTION U/S.10B OF THE I.T. ACT, 1961. THIS CAN ONLY BE A MISTAKE AND IT WAS RECTIFIED ON BEING POINTED OUT B Y THE ASSESSING OFFICER AND SECOND REPORT WAS SUBMITTED IN A CORREC T FORMAT BUT PRIOR TO COMPLETION OF THE ASSESSMENT. THEREFORE, THERE IS NO DEFAULT ON THIS SCORE ALSO. ACCORDINGLY, WE UPHOLD THE ORDER OF THE LEAR NED CIT(APPEALS) AND DISMISS THE APPEAL FILED BY THE REVENUE IN ITA NO.2 138/AHD/2006. REVENUES APPEAL, ITA NO.2509/AHD/2009 FOR ASSESSME NT YEAR 2004-05 10. THE FACTS IN THIS CASE ARE SIMILAR TO THE FACTS IN THE ASSESSMENT YEAR 2003-04 IN REVENUES APPEAL (SUPRA). THE GROUNDS R AISED BY THE REVENUE ARE ALSO SIMILAR EXCEPT THE CHANGE IN THE FIGURES I N THE ASSESSMENT YEAR 2004-05, WHEN EXEMPTION U/S.10A WAS CLAIMED AT RS. 47,72,321/-. ITA NOS.2138/AHD/ 2006 & 2509/AHD/2007 ITO VS. ELEGANT MICROWEB TECHNOLIGIES PVT.LTD. ASST.YEAR -2003-04 & 2004-05 - 10 - 11. FOLLOWING OUR DECISION FOR ASSESSMENT YEAR 2003 -04 IN REVENUES APPEAL (SUPRA), WE UPHOLD THE DECISION OF LEARNED C IT(APPEALS) IN THIS ASSESSMENT YEAR ALSO. ACCORDINGLY, APPEAL FILED B Y THE REVENUE FOR ASSESSMENT YEAR 2004-05 IS ALSO DISMISSED. 12. IN THE RESULT, BOTH THE APPEALS OF THE REVE NUE ARE DISMISSED. ORDER SIGNED, DATED AND PRONOUNCED IN THE COURT ON 23/10/2009. SD/- SD/- ( T.K.SHARMA ) ( D.C.AGRAWAL ) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; DATED 23/ 10 /2009 T.C. NAIR COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT(APPEALS)-VIII, AHMEDABAD 5. THE DR, AHMEDABAD BENCH 6. THE GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT.REGISTRAR), ITAT, AHMEDABAD