Aztec Software Technology Ltd., Bangalore V. CIT, Bangalore

ITA 411/BANG/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 0643 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 10 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-02-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 26-06-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 12-04-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: K K CHAITANYA
• Keywords: Assessment record
• Section: 143(3); 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER ITA NO.411/BANG/2011 ASSESSMENT YEAR : 2005-06 AZTEC SOFTWARE TECHNOLOGY LTD., (NOW MERGED WITH MINDTREE LTD.,) GLOBAL VILLAGE, RVCE POST, MYSORE ROAD, BANGALORE 560 059. PAN : AABCA 2122R VS. THE COMMISSIONER OF INCOME TAX, BANGALORE-III, BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI K.K. CHAITANYA, ADVOCATE RESPONDENT BY : SHRI FARAHAT HUSSAIN QURESHI, CIT-II(DR) DATE OF HEARING : 14.02.2013 DATE OF PRONOUNCEMENT : 22.02.2013 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL FILED BY THE ASSESSEE IS AGAINST THE ORDER DATED 31.01.2011 OF THE COMMISSIONER OF INCOME-TAX, BANGA LORE-III, BANGALORE [HEREINAFTER REFERRED TO AS THE CIT] PASSED U/S. 263 OF THE ACT RELATING TO ASSESSMENT YEAR 2005-06. ITA NO.411/BANG/2011 PAGE 2 OF 9 2. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF SOFTWARE DEVELOPMENT SERVICES AND EXPORTS. FOR THE A.Y. 200 5-06, THE ASSESSEE FILED RETURN OF INCOME ON 31.10.05 DECLARING A TOTA L INCOME OF RS.1,27,54,870. THE ASSESSMENT WAS COMPLETED AND O RDER U/S. 143(3) OF THE ACT AND AN ORDER OF ASSESSMENT DATED 26.12.2008 WAS PASSED BY THE ASSESSING OFFICER. ONE OF THE ISSUES THAT THE AO C ONSIDERED IN THE COURSE OF ASSESSMENT PROCEEDINGS WAS THE COMPUTATION OF EX PORT TURNOVER FOR THE PURPOSE OF ALLOWING DEDUCTION U/S. 10A OF THE ACT. THE AO FOUND THAT THE ASSESSEE HAS NOT EXCLUDED SATELLITE LINK CHARGES OF RS.79,50,467 TOWARDS DELIVERY OF SOFTWARE OUTSIDE INDIA. ACCORDING TO T HE AO, THE AFORESAID SUM OUGHT TO HAVE BEEN EXCLUDED FROM THE EXPORT TURNOVE R. THE ASSESSEE IN REPLY SUBMITTED THAT THE DEFINITION OF EXPORT TURNO VER AS CONTAINED IN SECTION 10A OF THE ACT CONTEMPLATES EXCLUDING SATELLITE LIN K CHARGES ONLY IF THE ASSESSEE IS ENGAGED IN PROVIDING TECHNICAL SERVICES OUTSIDE INDIA. THE ASSESSEE POINTED OUT THAT IT WAS A SOFTWARE SERVICE S PROVIDER AND NOT ENGAGED IN PROVIDING TECHNICAL SERVICES OUTSIDE IND IA, THEREFORE THE SATELLITE LINK CHARGES SHOULD NOT BE EXCLUDED FROM THE EXPORT TURNOVER. THE ASSESSEE RELIED ON THE DECISION OF THE BANGALORE BE NCH OF THE TRIBUNAL IN THE CASE OF INFOSYS TECHNOLOGIES LTD. IN ITA NO.50/ BANG/2001 DATED 31.03.2005 AND THE DECISIONS IN THE CASES OF TATA E LXSI LTD., 117 TTJ 423 AND IGATE GLOBAL LTD., 112 TTJ 1002. THE AO WAS, HOWEVER, OF THE VIEW THAT THE AFORESAID DECISIONS OF THE TRIBUNAL HAVE N OT BEEN ACCEPTED BY THE DEPARTMENT AND APPEALS HAVE BEEN FILED BEFORE THE H ONBLE HIGH COURT. HE THEREFORE EXCLUDED THE SATELLITE LINK CHARGES FR OM THE EXPORT TURNOVER WHILE COMPUTING DEDUCTION U/S. 10A OF THE ACT. ITA NO.411/BANG/2011 PAGE 3 OF 9 3. THE CIT IN EXERCISE OF HIS POWERS U/S. 263 OF TH E ACT AND ON SCRUTINY OF ASSESSMENT RECORDS OF THE ASSESSEE FOR THE A.Y. 2005-06 WAS OF THE VIEW THAT THE AFORESAID ORDER OF THE AO WAS ERRONEO US AND PREJUDICIAL TO THE INTERESTS OF THE REVENUE. IN THIS REGARD, THE CIT NOTICED THAT THE ASSESSEE HAD INCURRED TRAVELLING EXPENSES OF RS.3,7 0,87,289, PROFESSIONAL CHARGES OF RS.11,51,308 AND ONSITE SERVICE CHARGES OF RS.7,17,77,477. ACCORDING TO THE CIT, ALL THESE EXPENSES HAD BEEN I NCURRED IN FOREIGN CURRENCY AGGREGATING TO RS.11,00,16,074 AND THEY OU GHT TO HAVE BEEN EXCLUDED FROM THE EXPORT TURNOVER FOR THE PURPOSE O F DEDUCTION U/S. 10A OF THE ACT. ACCORDINGLY, A SHOW CAUSE NOTICE WAS ISSU ED TO THE ASSESSEE. IN REPLY, THE ASSESSEE POINTED OUT AS FOLLOWS:- 1. THAT THE COMPANY AZTEC SOFTWARE AND TECHNOLOGY LTD ., HAS MERGED WITH MIND TREE LTD., FROM 01/04/2009 CONSEQU ENT TO THE ORDER OF HIGH COURT OF KARNATAKA. THE COMPANY IS NO T IN EXISTENCE AS ON DAY OF ISSUE OF NOTICE U/S 263 OF T HE ACT AND NO PROCEEDINGS CAN BE INITIATED AGAINST A NON-EXISTENT COMPANY. IF AT ALL PROCEEDINGS HAVE TO BE INITIATED IT CAN ONLY BE AGAINST THE ENTITY WHICH SURVIVES AFTER THE MERGER. CONSEQUENT LY, PROCEEDINGS MAY BE DROPPED AT THE OUTSET AS NO PURP OSE WILL BE SERVED IN PERPETUATING A NOTICE WHICH IS PATENTLY W ITHOUT JURISDICTION. 2. THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF COM PUTER SOFTWARE DEVELOPMENT AND SERVICES. THE EXPENDITURE INCURRED IN FOREIGN CURRENCY ON TRAVELLING, PROFESSIONAL CHARGE S AND ONSITE SERVICE CHARGES ARE FOR DEVELOPMENT OF SOFTWARE AT CLIENTS SITE OUTSIDE INDIA. THE ASSESSEE IS NEITHER RENDERING AN Y TECHNICAL SERVICES NOR EARNED ANY RECEIPT FROM RENDERING TECH NICAL SERVICES, THEREFORE THERE IS NO NEED TO EXCLUDE THE EXPENDITU RE INCURRED IN FOREIGN CURRENCY FROM THE EXPORT TURNOVER. THE ASSE SSEE POINTED OUT THAT THE LEGAL POSITION AS STATED ABOVE HAS BEE N LAID DOWN IN THE FOLLOWING CASES: (1) PATANI TELECOM (P) LTD., V. ITO (2008) 22 SOT 26 (HYD) (2) CHANCEPOND TECHNOLOGIES (0) LTD., V ASST. CIT (2008) 22 SOT 220 (CHENNAI) ITA NO.411/BANG/2011 PAGE 4 OF 9 (3) WIPRO LTD., V DCLT OCC1(3)-ITA.NO.624/B/2007, (4) ACIT V LNFOSYS LTD., IN ITA.NO.653&969/B/2006, AND OTHER DECISIONS THE ASSESSEE ALSO POINTED OUT THAT IN THE ASSESSMEN T ORDER, THE NATURE OF BUSINESS CARRIED ON BY THE ASSESSEE HAS B EEN ACCEPTED AS SOFTWARE DEVELOPMENT SERVICES AND EXPORTS AND THI S FINDING OF THE AO IS BASED ON THE DETAILS AND INFORMATION S UBMITTED AND AVAILABLE ON RECORD. 3. WITHOUT PREJUDICE TO THE ABOVE, IT WAS SUBMITTE D THAT IF IT IS HELD THAT THE SAID EXPENDITURE HAS TO BE EXCLUDED F ROM EXPORT TURNOVER THEN SIMILAR AMOUNT ALSO REQUIRES TO BE RE DUCED FROM THE TOTAL TURNOVER. SINCE, TOTAL TURNOVER IS NOT DEFINE D UNDER THE INCOME TAX ACT, IT IS TO BE UNDERSTOOD IN THE CONTE XT OF EXPORT TURNOVER. AFTER ALL, TOTAL TURNOVER IS A DERIVATIVE OF EXPORT TURNOVER. HENCE, WHAT APPLIED TO EXPORT TURNOVER MU ST ALSO APPLY TO TOTAL TURNOVER. ON THE BASIS OF PARITY PRINCIPLE , THE SAME HAS TO BE EXCLUDED FROM THE TOTAL TURNOVER. THE ASSESSEE POINTED OUT THAT THE ABOVE VIEW HAS BEEN UPHELD BY ITAT IN THE FOLLOWING CASES I) I GATE GLOBAL SOLUTIONS LTD., V ACIT 0112 TTJ 10 02 II) TATA ELXSI LTD., V ACIT 115 TTJ 423 III) ACIT V INFOSYS LTD., - ITA NO.653&969/BANG/200 6 IV) ITO V SAK SOFT LTD. 20 DTR 0514 (SB) 4. THE CIT WAS, HOWEVER, NOT CONVINCED WITH THE EX PLANATION OFFERED BY THE ASSESSEE. ON THE QUESTION THAT AZTECH SOFTW ARE AND TECHNOLOGY LTD. HAD ALREADY MERGED WITH MINDTREE LTD. W.E.F. 1 .4.2009 AND THEREFORE IS NO LONGER IN EXISTENCE, THE CIT HELD THAT PROCEEDIN GS U/S. 263 WAS WITH REFERENCE TO THE PERIOD PRIOR TO THE AMALGAMATION O F THE ASSESSEE WITH M/S. MINDTREE LTD. AND IN RESPECT OF THE SAID PERIOD, TH E REVENUE HAS TO BE PROCEED ONLY AGAINST THE COMPANY, AZTECH SOFTWARE & TECHNOLOGY LTD. ITA NO.411/BANG/2011 PAGE 5 OF 9 5. WITH REGARD TO THE STAND OF THE ASSESSEE ON THE QUESTION, WHETHER THE EXPENSES IN QUESTION HAVE TO BE EXCLUDED FROM T HE EXPORT TURNOVER OR NOT, THERE WERE TWO VIEWS PREVALENT AND THEREFORE T HE ISSUE WAS DEBATABLE; THE CIT HELD THAT THE AO IN THE COURSE OF ASSESSMEN T PROCEEDINGS DID NOT EXAMINE THIS ISSUE AT ALL AND THEREFORE THE EXISTEN CE OF TWO VIEWS ON THE ISSUE IS NOT RELEVANT. 6. THEREAFTER, THE CIT WAS OF THE VIEW THAT AS PER EXPLANATION 2(IV) TO SECTION 10A OF THE ACT, EXPORT TURNOVER MEANS THE C ONSIDERATION IN RESPECT OF EXPORT (BY THE UNDERTAKING) OF ARTICLES OR THING S OR COMPUTER SOFTWARE RECEIVED IN, OR BROUGHT INTO, INDIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE IN ACCORDANCE WITH SUB-SECTION (3), BUT DO ES NOT INCLUDE FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE IND IA OR EXPENSES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN PROVIDING TECHNICAL SERVICES OUTSIDE INDIA. THEREAFTER THE CIT(A) NOTICED THAT THE ASSESSEE WAS DOING BOTH OFFSHORE AND ONSITE SOFTWARE DEVELOPMENT AND ITS CUSTOMERS W ERE MAINLY LOCATED IN USA. PROVIDING SOFTWARE DEVELOPMENT SERVICES, ACCO RDING TO THE CIT, WAS PROVIDING TECHNICAL SERVICES AND THEREFORE THE AFOR ESAID EXPENSES OUGHT TO BE EXCLUDED FROM THE EXPORT TURNOVER. 7. WITH REGARD TO THE CONTENTION OF THE ASSESSEE TH AT IF THE AFORESAID EXPENSES ARE EXCLUDED FROM THE EXPORT TURNOVER, THE SAME SHOULD ALSO BE EXCLUDED FROM THE TOTAL TURNOVER; THE CIT WAS OF T HE VIEW THAT SECTION 10A OF THE ACT DOES NOT CONTAIN ANY DEFINITION OF TOTA L TURNOVER AND THEREFORE IT IS NOT POSSIBLE TO EXCLUDE THE EXPENSES IN QUESTION FROM THE TOTAL TURNOVER. ITA NO.411/BANG/2011 PAGE 6 OF 9 FOR THE ABOVE REASONS, THE CIT DIRECTED THE AO TO E XCLUDE A SUM OF RS.11,16,00,074 FROM THE EXPORT TURNOVER AND COMPUT E DEDUCTION U/S. 10A OF THE ACT. 8. AGGRIEVED BY THE AFORESAID ORDER OF THE CIT, THE ASSESSEE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 9. WE HAVE CONSIDERED THE SUBMISSIONS OF THE LD. CO UNSEL FOR THE ASSESSEE AND THE LD. DR. THE LD. COUNSEL FOR THE A SSESSEE SUBMITTED THAT CLEARLY TWO VIEWS ARE POSSIBLE ON THE ISSUE. IN TH IS REGARD, HE REITERATED THE SUBMISSIONS AS WERE MADE IN THE PROCEEDINGS BEFORE THE CIT. APART FROM THE ABOVE, HE ALSO DREW OUR ATTENTION TO THE DECISI ON OF THE SPECIAL BENCH OF THE ITAT IN THE CASE OF ZYLOG SYSTEMS LTD. V. ITO, 128 ITD 105 (CHENNAI)(SB) , WHEREIN THE SB TOOK THE VIEW THAT IN RESPECT OF SOFTWARE SERVICE PROVIDER, EXPENSES INCURRED ON TRAVELLING, ONSITE SERVICE CHARGES, ETC. CANNOT BE SAID TO BE EXPENSES INCURRED OUTSIDE INDIA IN FOREIGN EXCHANGE FOR RENDERING TECHNICAL SERVICES OUTSIDE I NDIA. REFERENCE WAS ALSO MADE TO THE DECISION OF ITAT BANGALORE BENCH I N THE CASE OF DCIT V. SUBEX LTD, ITA NO.673 & 674/BANG/2010 TAKING IDENTICAL VIEW. 10. THE LD. DR, ON THE OTHER HAND, SUBMITTED THAT H ONBLE KARNATAKA HIGH COURT IN THE CASE OF TATA ELXSI LTD. (349 ITR 98) (KARN.) HAS TAKEN A VIEW THAT WHATEVER IS EXCLUDED FROM THE EXP ORT TURNOVER, SHOULD ALSO BE EXCLUDED FROM THE TOTAL TURNOVER AND IN THE LIGHT OF THE AFORESAID DECISION, THE AO SHOULD BE DIRECTED TO EXAMINE THE CASE AFRESH. IN THIS REGARD, A MODIFICATION TO THE ORDER OF THE CIT U/S. 263 SHOULD BE MADE, AS ITA NO.411/BANG/2011 PAGE 7 OF 9 OTHER CONDITIONS FOR EXERCISE OF JURISDICTION U/S. 263 OF THE ACT WERE DULY FULFILLED. IN THIS REGARD, IT WAS SUBMITTED BY HIM THAT WHILE COMPLETING ASSESSMENT U/S. 143(3) OF THE ACT, THE AO HAS NOT A PPLIED HIS MIND ON THIS ISSUE. 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE AR E OF THE VIEW THAT THE ORDER U/S. 263 OF THE ACT CANNOT BE SUSTAINED. THE ORDER OF THE AO WAS PASSED ON 26.12.2008. ON THIS DATE, THERE WERE DEC ISIONS OF THE TRIBUNAL IN WHICH A VIEW HAS BEEN EXPRESSED THAT EXPENDITURE IN FOREIGN CURRENCY ON TRAVELLING, PROFESSIONAL CHARGES AND ONSITE SERVICE CHARGES WHICH ARE INCURRED FOR DEVELOPMENT OF SOFTWARE AT CLIENTS SI TE OUTSIDE INDIA, CANNOT BE SAID TO BE EXPENSES INCURRED IN FOREIGN CURRENCY OU TSIDE THE COUNTRY FOR RENDERING OF ANY TECHNICAL SERVICES OUTSIDE INDIA. IN OTHER WORDS, EXPLANATION 2(IV) OF SECTION 10A OF THE ACT WHICH D EFINES EXPORT TURNOVER HAS BEEN INTERPRETED BY THE TRIBUNAL TO MEAN THAT T HE AFORESAID CHARGES ARE TO BE EXCLUDED ONLY IN A CASE OF A PERSON WHO R ENDERS INDEPENDENT TECHNICAL SERVICES DE HORS COMPUTER SOFTWARE DEVELOPMENT SERVICES. IT CAN THUS BE SEEN FROM THE AFORESAID ORDERS OF THE TRIBU NAL, WHICH WE HAVE REFERRED TO IN THE EARLIER PART OF THIS ORDER, THAT THE VIEW OF THE ASSESSE WHICH WAS ACCEPTED BY THE AO IN THE ORDER PASSED U/ S.143(3) OF THE ACT, ON THE DEFINITION OF EXPORT TURNOVER, IS A PLAUSIBL E VIEW. IN FACT, THE AO WHILE COMPLETING ASSESSMENT U/S. 143(3) OF THE ACT, HAD GONE INTO THE DEFINITION OF EXPORT TURNOVER, BUT WITH REFERENCE T O THE SATELLITE LINK CHARGES AND NOT WITH REGARD TO THE EXPENSES INCURRED IN FOR EIGN CURRENCY REFERRED TO BY THE CIT IN HIS ORDER U/S. 263 OF THE AT. IT CAN THUS BE SEEN THAT IN THE LIGHT OF THE VIEW EXPRESSED BY THE TRIBUNAL, THE AC TION OF THE AO CANNOT BE ITA NO.411/BANG/2011 PAGE 8 OF 9 SAID TO BE ERRONEOUS. AT BEST IT WAS A DEBATABLE I SSUE ON WHICH THERE WERE TWO VIEWS POSSIBLE. THUS WHEN THE CIT EXERCISED JU RISDICTION U/S. 263 OF THE ACT, TWO VIEWS WERE POSSIBLE. THE LAW IS WELL SETTLED THAT WHEN TWO VIEWS ARE POSSIBLE ON AN ISSUE AND THE AO HAS TAKEN ONE OF THE POSSIBLE VIEWS, NO ACTION U/S. 263 WILL LIE. IN THIS REGARD , WE MAY ALSO MAKE A REFERENCE TO THE DECISION OF THE HONBLE SUPREME CO URT IN THE CASE OF MALABAR INDUSTRIAL CO. LTD., 243 ITR 43 (SC) AND THE BOMBAY HIGH COURT DECISION IN THE CASE OF CIT V. GABRIEL INDIA LTD. ,203 ITR 108 (BOM) WHEREIN IT WAS HELD THAT JURISDICTION U/S.263 OF T HE ACT CANNOT BE EXERCISED WHERE THERE WERE TWO VIEWS POSSIBLE ON AN ISSUE AND THE VIEW EXPRESSED BY THE CIT WAS ONE OF THE POSSIBLE VIEW. IT HAS BEEN HELD THAT JURISDICTION U/S.263 OF THE ACT CANNOT BE EXERCISED TO SUBSTITUTE A POSSIBLE VIEW OF THE AO WITH THAT OF ANOTHER CONTRARY POSSIB LE VIEW OF THE CIT. 12. APART FROM THE ABOVE, WE FIND THAT THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF TATA ELXSI LTD., 349 ITR 98 (KARN) , HAS TAKEN A VIEW THAT WHATEVER IS EXCLUDED FROM THE EXPORT TURNOVER HAS TO BE EXCLUDED FROM THE TOTAL TURNOVER AS WELL. IF THE AFORESAID DECIS ION IS APPLIED, THEN THERE WOULD BE NO EFFECT ON THE CLAIM OF DEDUCTION U/S. 1 0A OF THE ACT, AS ALLOWED BY THE AO. IN OTHER WORDS, THE ORDER OF THE AO CAN NOT BE SAID TO BE ERRONEOUS OR PREJUDICIAL TO THE INTERESTS OF THE RE VENUE. THUS EVEN ON THIS GROUND, ACTION U/S. 263 OF THE ACT CANNOT BE SUSTAI NED. 13. FOR THE REASONS GIVEN ABOVE, WE QUASH THE ORDER U/S. 263 OF THE ACT AND ALLOW THE APPEAL OF THE ASSESSEE. ITA NO.411/BANG/2011 PAGE 9 OF 9 14. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. PRONOUNCED IN THE OPEN COURT ON THIS 22 ND DAY OF FEBRUARY, 2013. SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVAN ) ACCOUNTANT MEMBER JUDICIAL MEMBE R BANGALORE, DATED, THE 22 ND FEBRUARY, 2013. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. DR, ITAT, BANGALORE. 5. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.