ACIT, Bangalore V. M/s. Honeywell Technology Solutions Lab Pvt. Ltd., Bangalore

ITA 345/BANG/2009

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 9388 (ITAT-BANGALORE)
• Duration Of Justice: 3 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-08-2009
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 04-08-2009
• Assessment Year: 2004-2005
• Appeal Filed On: 20-04-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PREETI GARG
• Assessee Lawyers: VISHWESHWAR MUDIGONDA
• Keywords: Business income; Wholly owned subsidiary
• Section: 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE A BENCH, BANGALORE BEFORE SHRI SHAILENDRA KUMAR YADAV, JM AND SHRI A. MOHAN ALANKAMONY, AM ITA NOS.344 & 345(BANG.)/2009 (ASSESSMENT YEARS : 2003-04 & 2004-05) THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-11(4), BANGALORE APPELLANT VS M/S HONEYWELL TECHNOLOGY SOLUTIONS LAB.PVT.LTD., NO.151/1, DORAISANIPALYA, BANNERGHATTA ROAD, BANGALORE RESPONDENT REVENUE BY SMT. PREETI GARG ASSESSEE BY : SHRI VISHWESHWAR MUDIGONDA O R D E R PER SHAILENDRA KUMAR YADAV,JM: BOTH THESE APPEALS ARE BY THE SAME ASSESSEE FOR THE ASSESSMENT YEARS 2003-04 & 2004-05 ON ALMOST COMMON ISSUE, SO THESE ARE BEING DISPOSED OF BY A COMMON ORDER FOR THE SAKE OF CONVE NIENCE. 2. ITA NO.344(B)/2009 IN THIS APPEAL THE REVENUE HAS RAISED THE FOLLOWIN G GROUNDS: 1. THE LEARNED CIT(A) WAS NOT CORRECT IN HOLDIN G THAT THE EXPENDITURE INCURRED IN FOREIGN CURRENCY ON TRA VEL REDUCED FROM THE EXPORT TURNOVER, HAS TO BE REDUCED FROM ITA NO.344 & 345(B)/09 2 THE TOTAL TURNOVER ALSO FOR THE PURPOSE OF COMPUTIN G DEDUCTION U/S 10A 2. THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED THAT THERE IS NO PROVISION IN SECTION 10A WHICH REQUIRES THE CONCERNED EXPENSES, WHICH ARE REQUIRED TO BE REDUCE D FROM THE EXPORT TURNOVER AS PER CLAUSE (IV) OF THE EXPLANATION TO SECTION 10A, TO BE REDUCED FROM THE TOTAL TURNOVER ALSO. 3. THE LEARNED CIT(A) WAS NOT JUSTIFIED IN DIRECTI NG THE AO TO ALLOW EXEMPTION U/S 10A WITHOUT SETTING OFF T HE LOSS OF THE NON-STPI UNIT AT MADURAI AND ALSO DIRECTING THE AO TO CARRY FORWARD THE LOSS OF THE NON 10A UNIT. 3. THE FIRST ISSUE IS WITH REGARDS TO REDUCTION OF THE EXPENDITURE INCURRED IN FOREIGN CURRENCY ON TRAVEL FROM THE EXP ORT TURNOVER AS WELL AS TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 10A OF THE IT ACT. THE AO NOTICED THAT THE ASSESSEE HAS INCURRED EXPEN DITURE IN FOREIGN CURRENCY ON TRAVEL AMOUNTING TO RS.8,84,85,536/-. THE AO WAS OF THE VIEW, THAT SUCH EXPENDITURE SHOULD BE REDUCED FROM THE EX PORT TURNOVER FOR THE PURPOSES OF CALCULATING DEDUCTION U/S 10A OF THE IT ACT. IN APPEAL, THE CIT(A) DIRECTED THE AO TO EXCLUDE THE EXPENDITURE I NCURRED BY THE ASSESSEE IN FOREIGN CURRENCY ON TRAVEL FROM THE TOTAL TURNOV ER AS WELL. THE SAME HAS BEEN OPPOSED BY REVENUE BEFORE US. 4. THE ASSESSEE COMPANY, A WHOLLY OWNED SUBSIDIARY OF HONEYWELL INTERNATIONAL INC. USA ENGAGED IN THE BUSINESS OF P ERFORMING HIGH QUALITY SOFTWARE DEVELOPMENT, OFFER TESTING AND SUPPORT SER VICES TO OTHER UNITS OF ITA NO.344 & 345(B)/09 3 THE HONEYWELL GROUP. THE AO REJECTED THE CLAIM OF EXEMPTION U/S 10A BY REDUCING AN AMOUNT OF RS.8,84,85,536/- BEING EXPEND ITURE INCURRED IN FOREIGN CURRENCY ON TRAVEL FROM THE FIGURE OF EXPOR T TURNOVER. UNDER THE PROVISIONS OF SECTION 10A, THE TOTAL TURNOVER OF TH E DEFINITION OF THE TERM TOTAL TURNOVER AS CONTAINED IN A SIMILAR PROVISIO N OF THE ACT I.E. 80HHE SHOULD BE APPLIED. ACCORDING TO WHICH, IN CASE EXPE NDITURE INCURRED IN FOREIGN CURRENCY ON TRAVEL IS TO BE REDUCED FROM TH E EXPORT TURNOVER, A SIMILAR REDUCTION SHOULD BE MADE TO CALCULATE TOTA L TURNOVER FOR THE PURPOSES OF COMPUTATION OF DEDUCTION U/S 10A. THE EXPENDITURE INCURRED ON FOREIGN TRAVEL FOR DELIVERY OF SOFTWARE SHOULD B E REDUCED FROM THE EXPORT TURNOVER AND CORRESPONDING REDUCTION SHOULD ALSO BE MADE FROM THE TOTAL TURNOVER, WHILE COMPUTING THE DEDUCTION U/S 10A IN VIEW OF THE DECISIONS OF THE AP HIGH COURT IN CIT VS DREDGING CORPORATION OF INDIA (1988) 174 ITR 682 AND THE DECISION OF THE ITAT, CHENNAI BENCH IN THE CASE OF M/S NEYVELI LIGNITE CORPORATION LTD., VS ACIT (2004) 93 TTJ 68 5 THIS VIEW IS FORTIFIED BY THE DECISION OF ITAT, BANGALORE BENCH IN CASE O F M/S TATA ELXSI LTD., VS ACIT, IN ITA NO.315(B)/2006 DATED 16-10-2007, W HEREIN THE TRIBUNAL HELD THAT THE FORMULA PRESCRIBED FOR COMPUTING DED UCTION U/S 10A OF THE ACT IS THE SAME AS PRESCRIBED IN SECTION 80HHE OF T HE IT ACT. SECTION 10A OF THE IT ACT, INCORPORATED THE ENTIRETY THE PHILOS OPHY OF SECTION 80HHE OF THE ACT. THE DEFINITION OF THE TERM COMPUTER SOFTW ARE AND CONVERTIBLE FOREIGN EXCHANGE IN SECTION 10A ARE THE SAME AS IN SECTION 80HHE. HOWEVER, FROM OUT OF THE THREE TERMS RELEVANT FOR A PPLYING THE FORMULA, ITA NO.344 & 345(B)/09 4 SEC.10A DEFINES ONLY ONE TERM NAMELY EXPORT TURNOV ER. THE OTHER TWO TERMS PROFITS OF THE BUSINESS AND TOTAL TURNOVER ARE NOT DEFINED. SINCE THE SECTION PROCEEDS BROADLY ON LINES SIMILAR TO SE CTION 80HHE, SO IN THE ABSENCE OF THE DEFINITION OF ANY TERM IN SECTION 10 A, ONE COULD REFER TO THE DEFINITION OF A SIMILAR TERM IN SECTION 80HHE. THUS THE TERM TOTAL TURNOVER FOR SEC.10A PURPOSES SHOULD BE THE SAME AS UNDERSTO OD FOR THE PURPOSES OF SECTION 80HHE. THE TERM TOTAL TURNOVER WOULD BE A N ENLARGEMENT OF THE TERM EXPORT TURNOVER. IN OTHER WORDS, THE SUM TO TAL OF EXPORT TURNOVER AND DOMESTIC TURNOVER WOULD CONSTITUTE TOTAL TURNOVER . THE FORMULA FOR COMPUTATION OF THE DEDUCTION U/S 10A, WHEREIN RE-ST ATED IN THE ABOVE MANNER, WOULD BE AS UNDER: EXPORT TURNOVER PROFITS OF THE BUSINESS X ------------------ ------------- EXPORT TURNOVER + DOMESTIC TURNOVER THE TERM EXPORT TURNOVER WOULD THEN BE A COMPONEN T OR PART OF THE DENOMINATOR, THE OTHER COMPONENT BEING DOMESTIC TUR NOVER. IN OTHER WORDS, TO THE EXTENT OF EXPORT TURNOVER, THERE WO ULD BE A COMMONALITY BETWEEN THE NUMERATOR AND THE DENOMINATOR OF THE FO RMULA. IN VIEW OF THE COMMONALITY, THE UNDERSTANDING SHOULD ALSO BE THE S AME. IN CASE EXPORT TURNOVER IN THE NUMERATOR IS TO BE ARRIVED AT AFTER EXCLUDING CERTAIN EXPENSES, THE SAME SHOULD ALSO BE EXCLUDED IN COMPU TING THE TOTAL TURNOVER IN THE DENOMINATOR. SO IN CASE SOME EXPEN SES, FOR ANY REASON ARE EXCLUDED IN ARRIVING AT EXPORT TURNOVER THE SAME SHOULD BE REDUCED FROM THE TOTAL TURNOVER ALSO. THE ITAT BANGALORE BENC H, IN CASE OF ACIT VS M/S ITA NO.344 & 345(B)/09 5 INFOSYS TECHNOLOGIES LTD., BANGALORE IN ITA NOS.653 & 969(B)/2006 DATED 17-10-2007 HAS ALSO TAKEN A SIMILAR VIEW. FACTS BE ING SAME, SO FOLLOWING THE SAME REASONING, WE ARE NOT INCLINED TO INTERFER E WITH THE FINDINGS OF CIT(A) WHO HAS DIRECTED THE AO TO EXCLUDE EXPENDITU RE INCURRED BY THE ASSESSEE IN FOREIGN CURRENCY ON TRAVEL FROM THE T OTAL TURNOVER AS WELL. THE SAME IS UPHELD. THIS VIEW IS FORTIFIED BY THE DECISION OF CHENNAI SPECIAL BENCH IN ITA NOS.691 & 1953(MDS.) 2007 IN T HE CASE OF ITO VS SAK SOFT LD., CHENNAI DATED 06-03-2009. 5. THE NEXT ISSUE IS WITH REGARDS TO ALLOWABILITY OF EXEMPTION U/S 10A WITHOUT SETTING OFF OF LOSS OF THE NON-STPI UNIT DU RING THE YEAR 2003-04. THE ASSESSEE FIRM FILED A DECLARATION IN WRITING TO THE EFFECT THAT THEY WERE OPTING OUT OF SEC.10A AS PER PROVISIONS OF SUB-SECT ION(8) OF THE IT ACT IN RESPECT OF MADURAI UNIT. THE STAND OF THE ASSESSEE IS THAT THE AO OUGHT TO HAVE OBSERVED THAT THE 10A DIVISION IS A SEPARATE U NDERTAKING, WHICH IS A 100% SOFTWARE DEVELOPMENT EXPORT ORIENTED UNDERTAKI NG UNDER THE SOFTWARE TECHNOLOGY PARKS SCHEME OF GOVERNMENT OF I NDIA, ELIGIBLE FOR DEDUCTION/NON-INCLUSION IN THE TOTAL INCOME U/S 10A OF THE IT ACT. THE DEDUCTION U/S 10A IS AVAILABLE TO AN UNDERTAKING IN RESPECT OF THE PROFITS AND GAINS DERIVED BY THE UNDERTAKING FROM THE EXPOR T OF ARTICLE OR THINGS OR COMPUTER SOFTWARE. THE ASSESSEE PLACED RELIANCE ON THE JUDGMENT OF THE HONBLE ITAT, BANGALORE BENCH IN THE CASE OF ITO V S M/S SCT SOFTWARE SOLUTIONS INDIA PVT. LTD., IN ITA NO.1014(B)/2004, WHEREIN THE TRIBUNAL UPHELD THE ORDER OF CIT(A) WHO HELD THAT EXEMPTION U/S 10A COMES UNDER ITA NO.344 & 345(B)/09 6 CHAPTER III OF THE ACT AND THE INCOME GOVERNED BY S EC.10A WOULD NOT FORM PART OF TOTAL INCOME. FURTHER, THE TRIBUNAL HELD T HAT THE BUSINESS INCOME OF AN STPI UNIT CANNOT BE SET OFF AGAINST THE LOSS OF A NON-STPI UNIT FOR ALLOWING EXEMPTION U/S 10A AND ACCORDINGLY, DIRECTE D THE AO TO ALLOW EXEMPTION U/S 10A WITHOUT SET OFF OF LOSS OF STP UN IT. SIMILAR VIEW WAS TAKEN BY THE ITAT IN THE CASE OF ACIT VS M/S YOKOGA WA INDIA LTD.,(2007) 111 TTJ 548: 13 SOT 470. 6. ACCORDING TO US, SECTION 10A WAS PLACED UNDER C HAPTER III WHICH ONLY RELATES TO INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME AND CHAPTER HEADING IS INDICATIVE OF THE DRIFT OF THE S ECTION AND THROWS LIGHT ON THE INTENTION OF THE LEGISLATURE. IN M/S YOKOGAWAS CASE (SUPRA), THE HONBLE ITAT OBSERVED THAT SEC.10A SPECIFICALLY STATES THAT A DEDUCTION IS TO BE GIVEN IN RESPECT OF PROFITS AND GAINS AND THE WORD SUCH REFERS TO THE PROFITS AND GAINS OF THE UNDERTAKING WHICH IS ENGAGED IN TH E EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE AND THE WORD AN QUALIFY ING THE WORD UNDERTAKING MEANS THAT IT REFERS TO A SINGLE UNDERT AKING. AS PER SEC.29, PROFIT AND GAINS OF BUSINESS OR PROFESSION ARE TO B E COMPUTED IN ACCORDANCE WITH THE PROVISIONS CONTAINED U/S 30 TO 43D. SECTI ON 70 ON THE OTHER HAND, GOVERNS SETTING OFF OF A LOSS FROM ONE SOURCE AGAINST INCOME FROM ANOTHER SOURCE UNDER THE SAME HEAD OF INCOME. SECTI ON 10A, NOT FORMING ART OF THE SECTIONS MENTIONED IN SEC.29, BUSINESS L OSSES OF THE UNDERTAKING WHOSE INCOME IS NOT EXEMPT U/S 10A CANNOT BE SET OF F TO ASCERTAIN THE PROFITS AND GAINS DERIVED BY AN UNDERTAKING FROM TH E EXPORT OF COMPUTER ITA NO.344 & 345(B)/09 7 SOFTWARE. HENCE, BUSINESS LOSSES OF OTHER UNITS WI LL NOT BE SET OFF AGAINST THE PROFITS OF THE UNDERTAKING ENGAGED IN EXPORT OF COMPUTER SOFTWARE FOR THE PURPOSES OF DETERMINING ALLOWABLE DEDUCTION U/S 10A. BRIEFLY, THE PROFITS AND GAINS OF THE SOFTWARE SERVICES DIVISION WILL BE EXEMPT U/S 10A WITHOUT SETTING OFF THE LOSS OF OTHER DIVISIONS. A SIMILAR VIEW HAS BEEN TAKEN BY THE ITAT BANGALORE BENCH IN THE CASE OF M/ S NOUS INFOSYSTEMS (P) LTD., VS ITO IN ITA NO.1042(B)/2007 DATED 03-06-200 8, WHEREIN ON AN IDENTICAL ISSUE THE JURISDICTIONAL TRIBUNAL HELD: WE ARE INCLINED TO HOLD THAT THE LAW IS VERY CLEAR REGARDING INCOMES NOT TAXABLE UNDER CHAPTER III IN THE INCOME-TAX ACT WHICH ONLY RELATES TO THE INCOMES FO RMING PART OF THE TOTAL INCOME FOR CONSIDERATION IN THE S PIRIT OF THE LEGISLATION HAS TO BE CONSIDERED WHEN THE ASSES SEE HAS BEEN ABLE TO ESTABLISH THE INCOME OF THE STPI UNIT AS WAS AVAILABLE TO THE AO REMAINS UNDISPUTED. IN VIEW OF THE ABOVE, THE CIT(A) WAS JUSTIFIED IN DIRECTING THE AO TO ALLOW EXEMPTION U/S 10A WITHOUT SETTING OFF OF LOSS OF NON-STPI UNIT AND CONSEQUENTLY, ALLOW THE CARRY FORWARD OF SUCH LOSSE S OF NON-STPI UNIT. THE SAME IS UPHELD. 7. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. ITA NO.345(B)/2009 8. THE ONLY ISSUE IN THIS APPEAL IS WITH REGARDS T O THE EXPENDITURE INCURRED IN FOREIGN CURRENCY ON TRAVEL AND COMMUNIC ATION REDUCED FROM THE EXPORT TURNOVER AS WELL AS TOTAL TURNOVER. ITA NO.344 & 345(B)/09 8 9. SINCE WE HAVE DECIDED THE ISSUE IN FAVOUR OF AS SESSEE IN ITS OWN CASE FOR THE ASSESSMENT YEAR 2003-04, VIDE PARA-4 O F THIS ORDER, WHEREIN WE HAVE HELD THAT THE EXPENDITURE INCURRED IN FOREIGN CURRENCY ON TRAVEL AND TELECOMMUNICATION REDUCED FROM EXPORT TURNOVER HAS TO BE REDUCED FROM THE TOTAL TURNOVER AS WELL FOR THE PURPOSE OF COMPU TING DEDUCTION U/S 10A ITA NO.344 & 345(B)/09 9 ITA NO.344 & 345(B)/09 10 OF THE IT ACT. FACTS BEING SAME, SO FOLLOWING THE SAME REASONING, WE HOLD SO. 10. IN THE RESULT, BOTH THE APPEALS FILED BY THE R EVENUE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE DATE OF HEARING. (A. MOHAN ALANKAMONY) (SHAILENDRA KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER PLACE: BANGALORE DATED: AM * COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3. CIT(A) 4. CIT 5. DR 6. GF(BLORE) 7. GF(DELHI AR, ITAT, BANGALORE FIT FOR PUBLICATION (A. MOHAN ALANKAMONY) (SHAILENDRA KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER