DCIT, Hyderabad V. M/s Sankhya Infotech Ltd, Secunderabad

ITA 320/HYD/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 3361 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 1 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-04-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 31-03-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 01-03-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: T VENKATESH REDDY
• Assessee Lawyers: P MURALI MOHAN RAO
• Keywords: Additional evidence; Wholly owned subsidiary; Competent authority
• Section: 147; 6; 10; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD BEFORE SHRI G.C. GUPTA, VICE PRESIDENT AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER ITA NO..316/H/2010 ASSESSMENT YEAR :2002-03 ITA NO.317/H/2010 ASSESSMENT YEAR :2003-04 ITA NO.318/H/2010 ASSESSMENT YEAR :2004-05 ITA NO.319/H/2010 ASSESSMENT YEAR :2005-06 ITA NO.320/H/2010 ASSESSMENT YEAR :2006-07 THE DCIT, CIRCLE 3(1) HYDERABAD VS M/S SANKHYA INFOTECH LTD. SECUNDERABAD. ( PAN AAECS 5855J) APPELLANT RESPONDENT APPELLANT BY :SHRI T. VENKATESH REDDY RESPONDENT BY :SHRI P. MURALI MOHAN RAO ORDER PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THESE FIVE APPEALS PREFERRED BY THE REVENUE IS DIRECTED AGAINST THE COMMON ORDER OF THE CIT(A) TIRUPATHI DATED 3011.2 009 AND PERTAINS TO THE ASSESSMENT YEAR 2002-03 TO 2006-07. SINCE ISSU ES INVOLVED IN THESE APPEALS ARE COMMON IN NATURE, THEY ARE CLUBBED, HEA RD AND DISPOSED OFF TOGETHER FOR THE SAKE OF CONVENIENCE. 2. THE REVENUE RAISED THE FOLLOWING COMMON GROUNDS IN ITS APPEALS IN ITA NOS.316 TO 320/H/2010: 1. THE CIT(A) ERRED IN IGNORING THE PROVISIONS UNDER RULE 46A OF THE IT RULES, 1962 BY NOT REMANDING CERTAIN ISSUES TO THE ASSESSI NG OFFICER. 2. THE CIT(A) ERRED IN ENDORSING THE ASSESSEES CLAIM THAT PROVISIONS OF EXPLANATION (2) TO SECTION 10A(3) ARE NOT APPLICABL E IN THE MATTER OF REPATRIATION OF THE REMITTANCES INTO INDIA. 3. THE CIT(A) OUGHT TO HAVE APPRECIATED THE FACT THAT THE RBIS LETTER OF APPROVAL DATED 31.7.2003 IS APPLICABLE ONLY FOR THO SE INVOICES FOR WHICH EXTENSION OF TIME HAD BEEN GRANTED, BUT NOT FOR THO SE WHICH HAVE NOT FALLEN DUE. 4. THE CIT(A) ERRED IN ALLOWING EXEMPTION CLAIMED ON A MOUNTS CATEGORIZED AS WORK IN PROGRESS (WIP) SINCE AS PER CLAUSE (3) OF R BI LETTER DATED 31.7.2003, ITA NOS.316 TO 320/H/2010 M/S SANKHYA INFOTECHLTD., SECUNDERABAD 2 THE CAPITALISATION IS APPROVED ONLY FOR THOSE FOR W HICH EXTENSION OF TIME IS GRANTED, BUT NOT FOR FUTURE RECEIVABLES. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN SOFTWARE DEVELOPMENT AND THE RETURNS OF INCOME FILE D FOR THE ASSESSMENT YEARS FROM 2002-03 TO 2005-06 HAVE BEEN REOPENED U/ S 147 AND RETURN OF INCOME FOR THE ASSESSMENT YEAR 2006-07 IS COMPLETED U/S 143(3). IN ALL THESE YEARS, THE DEDUCTION CLAIMED BY THE ASSESSEE COMPANY U/S 10A HAS BEEN DENIED FOR THE EXPORT SALES PROCEEDINGS WERE N OT RECEIVED WITHIN SIX MONTHS FROM THE END OF THE RELEVANT FINANCIAL YEARS . WHILE REJECTING THE CLAIM FOR EXEMPTION U/S 10A, THE ASSESSING OFFICER HAS ALSO REJECTED THE INFORMATION FURNISHED BY THE ASSESSEE IN THE FORM O F STATEMENT OF INVOICES AND REALISATION ALONG WITH COPIES OF FOREIGN INWARD REMITTANCE CERTIFICATES (FIRCS). THE ASSESSING OFFICER ALSO REJECTED THE C LAIM ON CAPITALIZATION OF RECEIVABLES IN THE FORM OF INVESTMENTS IN WHOLLY OW NED SUBSIDIARY (WOS) SET UP BY THE ASSESSEE IN FRANCE AS PER THE APPROVA L OF THE RBI STATING THAT THE ASSESSEE HAS NOT FURNISHED ANY EVIDENCE AS TO F ORMATION OF WHOLLY OWNED SUBSIDIARY. IN ADDITION TO REJECTING THE COM MON ISSUE OF CLAIM U/S 10A, THE ASSESSING OFFICER HAS ALSO APPLIED THE PRO VISIONS OF SECTION 40(A)(IA) OF THE IT ACT. THE REVENUE IS IN APPEAL BEFORE US AGAINST ALLOWING THE DEDUCTION U/S 10A OF THE IT ACT BY THE CIT(A). 4. THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS SUBMITTED THAT THE EXPORT PROCEEDING HAS NOT BEEN RECEIVED BY THE ASSESSEE WITHIN THE STIPULATED TIME LIMIT. FURTHER, FORM 56-F SUBMITTE D BY THE ASSESSEE IS DEFECTIVE AND ALSO THERE IS NO REQUEST FOR EXTENSIO N OF TIME BY THE ASSESSEE AND CAPITALISATION OF THE EXPORT REALISATION BY INV ESTMENT IN WHOLLY OWNED SUBSIDIARY IS NOT IN ACCORDANCE WITH THE RULES OF R BI. ACCORDING TO ASSESSING OFFICER, THE ASSESSEE IS NOT ACTUALLY CAP ITALISED THE EXPORT PROCEEDINGS, ON THE OTHER HAND MADE SOME ADJUSTMENT ENTRIES IN THE BOOKS OF ACCOUNTS AS THE AMOUNTS CAPITALISED WITHOUT ACTU ALLY CONTRIBUTING ANY SHARE/EQUITY CAPITAL TO THE WHOLLY OWNED SUBSIDIARY . UNDER THE ITA NOS.316 TO 320/H/2010 M/S SANKHYA INFOTECHLTD., SECUNDERABAD 3 CIRCUMSTANCES, IT CANNOT BE CONSIDERED AS A CAPITAL ISATION OF EXPORT PROCEEDINGS. HE HAS ALSO NOTED THAT THE ASSESSEE H AS NOT FURNISHED EVIDENCE AS TO FORMATION OF WHOLLY OWNED SUBSIDIARY . WITHOUT CONTRIBUTING THE SHARE CAPITAL OF WHOLLY OWNED SUBSIDIARY OUT OF SALE PROCEEDINGS THE ASSESSEE IS CLAIMING THE DEDUCTION U/S 10A. ACCORD ING TO THE ASSESSING OFFICER, THE ASSESSEE HAS TO REALISE EXPORT PROCEED INGS, THEREAFTER IT HAS TO CONTRIBUTE TO THE SHARE CAPITAL WHOLLY OWNED SUBSID IARY, WHICH THE ASSESSEE HAS FAILED TO DO SO. AS SUCH, THE ASSESSE E IS DISENTITLED FOR DEDUCTION U/S 10A. THE DR SUBMITTED THAT ON APPEAL CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE U/S 10A OF THE ACT AND ALSO D ELETED THE ADDITION MADE U/S 40A (IA) OF THE ACT. THE AR RELIED ON THE ORDE R OF THE CIT(A). 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED TH E MATERIALS AVAILABLE ON RECORD. BEFORE THE FIRST APPELLATE AU THORITY, THE ASSESSEE HAS FILED EVIDENCE IN THE FORM TO RBI LETTER FOR EXTEND ING TIME FOR REMITTING THE TIME BEYOND THE STIPULATED PERIOD OF SIX MONTHS AS ADDITIONAL EVIDENCE WHICH WAS CONFRONTED TO THE ASSESSING OFFICER AS TH IS IS THE ADDITIONAL EVIDENCE, THE CIT(A) CALLED FOR THE REMAND REPORT F ROM THE ASSESSING OFFICER. IN THE REMAND REPORT, THE ASSESSING OFFICER HAS COM MENTED AS FOLLOWS: A) REFUSED TO ACCEPT THE FORM 56-F FOR SUPPORTING THE CLAIM U/S 10A(3) AS THE FORM DOES NOT CONTAIN BASIC DETAILS S UCH AS ACTUAL AMOUNT BROUGHT TO INDIA AND BALANCE AMOUNT TO BE BR OUGHT TO INDIA IN CONVERTIBLE FOREIGN EXCHANGE. NO EVIDENCE WAS FURNISHED FOR EXTENSION BEYOND SIX MONTHS PERIOD IN THE FORM 56F. B) COPIES OF THE BANK ACCOUNT STATEMENTS OF ANDHRA BAN K WAS NOT FURNISHED BY THE ASSESSEE WITHOUT WHICH IT IS NOT P OSSIBLE TO VERIFY THE AUTHENTICITY OF RECEIPT OF THE REMITTANC ES IN INDIA. C) THE CAPITALISATION OF EXPORT RECEIVABLES APPROVED B Y THE RBI AS DEEMED REALISATION DO NOT APPLY FOR THE PURPOSE OF SECTION 10A OF THE ACT. 6. SINCE THE CIT(A) HAS CALLED FOR REMAND REPORT ON RECEIPT OF THE ADDITIONAL EVIDENCE IN THE FORM OF EXTENSION OF TIM E FOR RECEIPT OF MONIES BEYOND SIX MONTHS FROM RBI, IT CANNOT BE SAID THAT THERE IS A VIOLATION OF ITA NOS.316 TO 320/H/2010 M/S SANKHYA INFOTECHLTD., SECUNDERABAD 4 RULE 46A. THE CIT(A) AFTER CONSIDERING THE OBJECTI ON OF THE ASSESSING OFFICER CAME TO THE CONCLUSION THAT THE DEFECTS POI NTED BY THE ASSESSING OFFICER IS A PROCEDURAL NATURE AND IT CAN BE CURED BY PERMITTING APPROPRIATE RECTIFICATION AT THE FIRST APPELLATE ST AGE. BEING SO, WE DO NOT FINE ANY INFIRMITY IN ADMITTING THE ADDITIONAL EVID ENCE BY CIT(A) FOR ADJUDICATION. THE CIT(A) DURING THE FIRST APPELLA TE STAGE CALLED FOR THE SUMMARY OF MONIES REMITTED AND RECEIVED THROUGH DIF FERENT MODES BY THE ASSESSEE. THE CIT(A) AFTER EXAMINATION OF DOCUMENT S CAME TO THE CONCLUSION THAT ALL THE REMITTANCE WERE SUPPORTED W ITH FIRCS OR APPROVAL FROM RBI FOR INVESTING IN WHOLLY OWNED SUBSIDIARY O R REMITTANCE INTO APPROVED BANK ACCOUNTS MAINTAINED IN ABROAD. THE A SSESSEE ALSO FURNISHED ALL THE REQUIRED STATEMENTS IN THE FORM O F FIRCS OR RBI APPROVALS. THIS HAS BEEN CONSIDERED BY THE CIT(A) AFTER CONFRONTING THE SAME TO THE ASSESSING OFFICER. ALL THE MONIES RECE IVED BY THE ASSESSEE WERE SUPPORTED BY THE FIRCS. THE ASSESSING OFFICER HAS REJECTED THE BENEFIT U/S 10A(3) ON THE REASON THAT THE PROVISION S OF SECTION 10A(3) ARE SPECIFIC AND DOES NOT INCLUDE THE DEEMING PROVISION S AS PER THE RBI (RELATING TO THE CAPITALISED PROCEEDS/WORK IN PROGR ESS). IN OUR OPINION, THE PROVISIONS OF EXPLANATION 2 TO SECTION 10A(3) I S APPLICABLE FOR A SITUATION WHERE SALE PROCEEDINGS ARE CREDITED TO A SEPARATE ACCOUNT MAINTAINED OUTSIDE INDIA WITH THE APPROVAL OF RBI. IN THE PRESENT CASE, THE REMITTANCE IS WITHIN THE PRESCRIBED TIME LIMIT AND THE EXPLANATION 2 IS IRRELEVANT. FURTHER, FIRCS, BEING ISSUED BY THE APPROVED DEALERS OF THE FOREIGN EXCHANGE WHICH IS GOOD AND SUFFICIENT EVIDE NCE FOR REMITTANCE OF FOREIGN EXCHANGE INTO INDIA AND THE SAME HAS TO BE ACCEPTED. FURTHER, THE APPROVAL FOR CAPITALISATION GRANTED BY THE RBI, THE ASSESSING OFFICER IN HIS REMAND REPORT HAS STATED THAT RECEIVABLE CAN NOT BE DEEMED TO BE ADEQUATE FOR THE PURPOSE OF BENEFIT U/S 10A EVEN TH OUGH THE SAME IS CONSIDERED FOR FOREIGN EXCHANGE LAWS. WE HAVE CARE FULLY GONE THROUGH THE FACTS OF THE CASE. EXPLANATION 1 TO SECTION 10 A(3) WHICH HAS DEFINED THE COMPETENT AUTHORITY AS RBI AND THE COMPETENT AU THORITY BEING RBI ITA NOS.316 TO 320/H/2010 M/S SANKHYA INFOTECHLTD., SECUNDERABAD 5 AUTHORISE THE CAPITALISATION AND THEN SUCH AUTHORIS ATION SHOULD AUTOMATICALLY GET VALIDATED AS THE SAID AUTHORITY S PECIFICALLY AUTHORISED UNDER THE PROVISIONS OF SECTION 10A(3) OF THE IT AC T. FURTHER, THE WHOLLY OWNED SUBSIDIARY HAS BEEN INCORPORATED IN FRANCE BY THE NAME SANKHYA SARI WITH THE APPROPRIATE APPROVAL FROM R BI THAT CERTAIN AMOUNT OF EUROS BE INVESTED INTO THIS COMPANY WITHI N ONE YEAR FROM THE DATE OF APPROVAL. THIS APPROVAL IS RELEVANT FOR TH E ASSESSMENT YEAR 2002- 03 TO 2003-04 AND IN BOTH THE YEARS, IT HAS BEEN PR OVED BY THE ASSESSEE THAT THE SAID MONIES WERE INVESTED INTO THE WHOLLY OWNED SUBSIDIARY WITHIN THE PERIOD OF ONE YEAR FROM THE DATE OF RBI S APPROVAL. HENCE THE CONDITIONS LAID DOWN IS COMPLIED WITH BY THE ASSESS EE AND THE DEPARTMENT HAS NOT BROUGHT ON RECORD THE THAT THE C ONDITIONS LAID DOWN BY RBI HAS NOT COMPLIED WITH. BEING SO, WE ARE IN AGREEMENT WITH THE ORDER OF THE CIT(A). THE REVENUE IS HAVING ALSO OB JECTION REGARDING THAT THE CIT(A) HAS GRANTED DEDUCTION U/S 10A IN RESPECT OF INVOICES WHICH HAS NOT FALLEN DUE AND ACCORDING TO THE DR, THE RBI LETTER OF APPROVAL DATED 31.7.2003 IS APPLICABLE ONLY FOR THOSE INVOIC ES FOR WHICH EXTENSION OF TIME HAD BEEN GRANTED BUT NOT FOR WHICH HAS NOT FALLEN DUE AND IT CANNOT BE GIVEN EXEMPTION FOR FUTURE RECEIVABLES AN D WORK IN PROGRESS. ACCORDING TO LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE, THE PROCESS OF DEVELOPING AND DELIVERING SOFTWARE TO IT S CLIENTS INVOLVE VARIOUS STAGES. SOMETIMES, EVEN WHEN THE SOFTWARE HAS BEEN INCIDENTAL, THE SALE IS NOT COMPLETE AS MANY OTHER JOBS SUCH AS TRAINING , HAND HOLDING ETC. ARE YET TO BE COMPLETED. SUCH EVENTS WERE CONSIDER ED AS WORK IN PROGRESS AND ONLY AFTER THE COMPLETE JOBS ARE DONE, SALE PROCEEDS ARE REALISED FROM SUCH INSTANCES. TILL SUCH TIME, THE AMOUNTS SPENT ON DEVELOPING THIS SOFTWARE HAVE BEEN SHOWN AS WORK IN PROGRESS AND THE SAME ON REALISATION WERE TRANSFERRED TO WHOLLY OWNE D SUBSIDIARY AS INVESTMENT. IN OUR OPINION, THE WORK IN PROGRESS/ FUTURE RECEIVABLES CANNOT BE CONSIDERED FOR DEDUCTION U/S 10A. HOWEVER , WHEN THESE AMOUNTS ON REALISATION WERE ACTUALLY TRANSFERRED TO WHOLLY OWNED ITA NOS.316 TO 320/H/2010 M/S SANKHYA INFOTECHLTD., SECUNDERABAD 6 SUBSIDIARY AS AN INVESTMENT WITHIN THE EXTENDED TIM E BY RBI, IT IS TO BE CONSIDERED FOR EXEMPTION U/S 10A IF THE OTHER CONDI TIONS ARE FULFILLED BY THE ASSESSEE AND SIMILAR IS THE POSITION IN CASE OF WORK IN PROGRESS. THE ASSESSING OFFICER HAS TO RE-COMPUTE DEDUCTION U/S 1 0A CONSIDERING THE WORK IN PROGRESS/FUTURE RECEIVABLES AS NOT ENTITLED FOR EXEMPTION U/S 10A. HOWEVER, AS SOON AS IT IS REALISED AND TRANSF ERRED FROM WORK IN PROGRESS/FUTURE RECEIVABLE ACCOUNT TO WOS IT IS TO BE CONSIDERED AS ENTITLED FOR EXEMPTION U/S 10A IF IT IS WITHIN THE EXTENDED TIME BY RBI. THE ASSESSEE HAS TO RECONCILE WITH REFERENCE TO WOR K IN PROGRESS REALISED AND TRANSFERRED IT INTO INVESTMENT IN WOS TO AVAIL DEDUCTION U/S 10A AND THE ASSESSING OFFICER IS TO GRANT THE DEDUCTION U/S 10A, IF IT IS WITHIN THE EXTENDED TIME. 7. IN THE RESULT, THE REVENUE APPEALS ARE PARTL Y ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 21.4.2011 SD/- G.C. GUPTA SD/- CHANDRA POOJARI VICE PRESIDENT ACCOUNTANT MEMBER DATED 21 ST APRIL, 2011 COPY FORWARDED TO: 1. THE DCIT, CIRCLE 3(1), HYDERABAD 2. M/S SANKHYA INFOTECH LTD., 1-1-39, 2 ND FLOOR, 7 TH HILLS PLAZA, SD ROAD, SECUDARABAD. 3. THE CIT(A) TIRUPATHI 4. THE CIT-HYDERABAD 5. THE DR, ITAT, HYDERABAD NP