M/s. Semantic Space Technologies Ltd, Hyderabad V. The DCIT, Cirlce - 3(1), Hyderabad

ITA 458/HYD/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61902 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 2 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-06-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 18-03-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAO
• Assessee Lawyers: V SIVA KUMAR; C S SUBRAHMANYAM
• Keywords: Business income; Transfer pricing; Business expenditure; Residential status; Double taxation relief; Permanent establishment; Non-deduction of tax
• Section: 143(3); 194C; 201(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMB ER. ITA NO.458/HYD/2011 (ASSESSMENT YEAR 2007- 08) M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYDERABAD (PAN - AAGCS 6868 P ) V/S DY. COMMISSIONER OF INCOME-TAX, CIRCLE 3(1), HYDERABAD. (APPELLANT) (RESPONDENT) AND ITA NO.474/HYD/2011 (ASSESSMENT YEAR 2007- 08) ASST. COMMISSIONER OF INCOME- TAX, CIRCLE 3(1), HYDERABAD. V/S M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYDERABAD (PAN - AAGCS 6868 P ) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI C.S.SUBRAHMANYAM & SHRI V.SIVAKUMAR DEPARTMENT BY : SHRI M.S. RAO DATE OF HEARING 30/05/2012 DATE OF PRONOUNCEMENT O R D E R PER CHANDRA POOJARI, A.M., THESE ARE THE CROSS-APPEALS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX(APPEALS)-IV, HYDERABAD, PASSED ON 30/12/2010, FOR THE ASSESSMENT YEAR 2007-08. ITA NOS. 458 & 474/HYD/11 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 2 ITA NO. 458/HYD/2011 APPEAL BY THE ASSESSEE 2. ORIGINALLY THE ASSESSEE FILED ITS GROUNDS OF APP EAL FROM 1 TO 4, 5 TO 5.7, 6 TO 6.2, 7 TO 7.2, 8 & 8.1 AND 9, WHICH WERE SUMMARIZED AS GROUND NOS. 1 TO 12. THEREFORE, THIS APPEAL IS DISPOSED OF F BASED ON THE SUMMARIZED GROUNDS OF APPEAL. 3. GROUND NO. 1 IS GENERAL IN NATURE. 4. GROUND NO. 2 IS DIRECTED AGAINST THE ACTION OF T HE CIT(A) IN DIRECTING THE EXCLUSION OF THE INTEREST INCOME OF R S. 1,57,409 FOR PURPOSES OF COMPUTING ELIGIBLE INCOME U/S 10A OF TH E ACT. 5. WE HAVE HEARD THE ARGUMENTS OF BOTH THE PARTIES, PERUSED THE RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITI ES BELOW. WE FIND THAT SIMILAR ISSUE, ON IDENTICAL FACTS AND CIRCUMSTANCES , CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2006-07 IN ITA NO.S 824/HYD/10 AND 915/HYD/10 VIDE ORDER DA TED 07/03/2012 WHEREIN THE COORDINATE BENCH VIDE PARAS 12 TO 15 HE LD AS UNDER:- 12. AS FOR THE FIRST ISSUE RELATING TO INTEREST I NCOME OF RS.1,09,087, MENTIONED IN GROUND NO.2 OF THE SUMMA RIZED GROUNDS OF APPEAL, THE FACTS IN BRIEF ARE THAT THE ASSESSEE RECEIVED INTEREST AMOUNT OF RS.1,09,087 AND PLEADED FOR INCL USION OF THE SAME AS PROFITS OF THE BUSINESS ELIGIBLE FOR EXEMPT ION UNDER S.10A OF THE ACT. THE ASSESSING OFFICER HELD THAT THIS IN COME IS OUTSIDE THE OPERATIONAL INCOME, AND ACCORDINGLY EXCLUDED THE SA ME FROM THE SCOPE OF S.10A AND TAXED THE SAME AS INCOME UNDER T HE HEAD OTHER SOURCES. IN THE PROCESS, THE ASSESSING OF FICER RELIED ON THE DECISION OF THE APEX COURT IN STERLING FOODS (1999 )237 ITR 579. BEFORE THE CIT(A), THE ASSESSEE PLEADED THAT THE IN TEREST DERIVED ON ACCOUNT OF TEMPORARY PARKING OF BUSINESS FUNDS C ONSTITUTES INCOME DERIVED FROM ITS EXPORT ACTIVITY. THE CIT(A) RELYING ON THE MUMBAI BENCH DECISION OF THE TRIBUNAL IN THE CASE O F RENAISSANCE JEWELLERY P. LTD. V/S.ITO(101 ITD 380), CONFIRMED T HE DISALLOWANCE MADE BY THE ASSESSING OFFICER. AGGRIEVED BY THE SA ME, ASSESSEE IS IN APPEAL BEFORE US ON THIS ISSUE. ITA NOS. 458 & 474/HYD/11 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 3 13. LEARNED COUNSEL FOR THE ASSESSEE, REITERATING THE CONTENTIONS URGED BEFORE THE LOWER AUTHORITIES, SUB MITTED THAT THE INTEREST INCOME DERIVED BY TEMPORARY PARKING OF FUN DS CONSTITUTES EXPORT INCOME OF THE ASSESSEE, AND HENCE IS ELIGIBL E FOR DEDUCTION UNDER S.10A OF THE ACT. 14. ON THE CONTRARY, THE LEARNED DEPARTMENTAL REPRESENTATIVE STRONGLY SUPPORTED THE ORDERS OF THE CIT(A) AND RELIED ON THE DECISIONS CITED BY HIM IN THE IMPUGNE D ORDER. 15. ON HEARING BOTH SIDES, WE FIND THAT THE ISSUE OF GRANTING DEDUCTION ON INTEREST RECEIVED, HAS NOW RE ACHED FINALITY AT THE LEVELS OF THE HIGH COURT, SAY BY THE DECISION O F THE CHATTISGARH HIGH COURT IN THE CASE OF NAV BHARAT EXPLOSIVES CO. PVT. LTD. (337 ITR 0515), WHEREIN IT WAS HELD THAT THE INCOME BY W AY OF INTEREST ON FIXED DEPOSITS IS NOT ELIGIBLE FOR SPECIAL DEDUC TION UNDER S.10A. THEREFORE, WE UPHOLD THE IMPUGNED ORDER OF THE CIT( A) ON THIS ISSUE. THIS ISSUE IS ACCORDINGLY DECIDED AGAINST T HE ASSESSEE, REJECTING GROUND NO.2 OF THE ASSESSEE IN THIS APPE AL. 6. SINCE THE ISSUE UNDER CONSIDERATION IS MATERIALL Y IDENTICAL TO THAT OF THE GROUND NO. 2 IN AY 2006-07, RESPECTFULLY FOLLOW ING THE DECISION OF THE TRIBUNAL, WE UPHOLD THE ORDER OF THE CIT(A) AND DIS MISS GROUND NO. 2 RAISED BY THE ASSESSEE. 7. GROUND NOS. 3 & 4 ARE AS FOLLOWS:- 3. THE LEARNED CIT(A) OUGHT TO HAVE CONCLUDED THAT THE PROFITS ON SALES TO THE US BRANCH OF THE APPELLANT ARE ENTITLE D TO BE TREATED A PART OF ELIGIBLE PROFITS FOR THE PURPOSE OF DEDUCTI ON U/S 10A. 4. THE LEARNED CIT(A) OUGHT TO HAVE CONCLUDED THAT THE RELEVANT SALES TO US BRANCH OF THE APPELLANT ARE TO BE TREAT ED AS FORMING PART OF EXPORT TURNOVER AS WELL AS THE TOTAL TURNOV ER. 8. BRIEFLY, THE FACTS RELATING TO RAISE THESE GROUN DS ARE THAT THE AO FOUND THAT THE ASSESSEE HAD INCLUDED AN AMOUNT OF R S. 66,60,400/- IN THE INCOME FROM SOFTWARE DEVELOPMENT CHARGES. HE WAS OF THE VIEW THAT SINCE THE EXPORT OF SUCH SOFTWARE WAS TO THE BRANCH OFFICE IN THE USA ONLY, THE INCOME COULD NOT BE CONSIDERED AS EXPORT OF SOFTWARE ACCORDINGLY, HE EXCLUDED THE SAME FROM THE ASSESSEE S INCOME FOR THE ITA NOS. 458 & 474/HYD/11 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 4 PURPOSE OF CALCULATION OF DEDUCTION U/S 10A. ON APP EAL, THE CIT(A) CONFIRMED ACTION OF THE AO. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. 9. AFTER HEARING THE ARGUMENTS OF BOTH THE PARTIES AND PERUSING THE RECORD, WE FIND THAT SIMILAR GROUNDS WERE RAISED BY THE ASSESSEE IN AY 2006-07 (SUPRA), WHEREIN THE TRIBUNAL HELD AS UNDER :- 16. THE SECOND ISSUE, COVERED BY GROUNDS NO.3 AND 4 OF THE SUMMARIZED GROUNDS OF APPEAL OF THE ASSESSEE, RELA TES TO THE TREATMENT TO BE GIVEN TO THE SALES MADE TO THE BRAN CH OFFICE LOCATED IN US. THE SAID SALES WERE INCLUDED BY THE ASSESSE E IN THE EXPORT TURNOVER OF THE ASSESSEE FOR THE PURPOSES OF COMPUT ING DEDUCTION UNDER S.10A. PER CONTRA, THE ASSESSING OFFICER I S OF THE VIEW THAT THE SAID INCLUSION IS NOT PROPER, CONSIDERING THE F ACT THAT SALE BY HEAD OFFICE TO THE BRANCH ITSELF DOES NOT CONSTITUT E SALE PER SE. IT IS MERELY A CASE OF TRANSFER. THEREFORE, THE ASSESS ING OFFICER EXCLUDED SUCH SALES TO ITS BRANCH OFFICE FROM THE EXPORT TURNOVER OF THE ASSESSEE, BEFORE ALLOWING THE SAID DEDUCTION . AT THE END OF THE FIRST APPELLATE PROCEEDINGS, THE CIT(A) NOT ON LY CONFIRMED THE SAID EXCLUSION OF THE SALES FROM THE EXPORT TURNOV ER OF THE ASSESSEE, BUT ALSO PROCEEDED TO EXCLUDE THE SAID AM OUNT FROM THE TOTAL TURNOVER OF THE ASSESSEE, TO MAINTAIN THE PRINCIPLE OF PARITY . 17. RELEVANT FACTS OF THE ISSUE ARE GIVEN IN PARAS 8 TO 10 OF THE IMPUGNED ORDER. BRIEFLY, THE RELEVANT FACTS AR E THAT THE HEAD OFFICE SALES INCLUDE RS.61,77,900 RECEIVED FROM TH E BRANCH OFFICE ON ACCOUNT OF SOFTWARE DEVELOPMENT CHARGES AND ANOTHER SUM OF RS.1,96,46,151 ON ACCOUNT OF HR AND MARKETING SERVICES . THE ASSESSEE INCLUDED THEM AS PART OF THE EXPORT OF SOFTWARE SERVICES, WHICH WAS NOT ENTERTAINED BY THE ASSESSIN G OFFICER AS DISCUSSED EARLIER. DURING THE FIRST APPELLATE PROC EEDINGS,, THE ASSESSEE SUBMITTED THAT THE SAID RECEIPTS FROM THE BRANCH OFFICE CONSTITUTES EXPORT OF SOFTWARE SERVICES BY THE ASS ESSEE, CONSIDERING THE FACT THAT THE SAID EXPORT WAS DONE WITH DUE APPROVAL OF STPI, HYDERABAD. IN THIS REGARD, HE RELIED ON THE BOARDS NOTIFICATION NO.0890E/F NO.142/49200-TPL DA TED 26.9.2000 TO SUPPORT ITS CASE. FURTHER, THE ASSESSE E INCLUDED THE RELEVANT INCOME IN THE ELIGIBLE PROFITS OF THE ASSE SSEE. HOWEVER, TO MAINTAIN HARMONY OF EXCLUSION FROM THE EXPORT TURNO VER, HE ALSO REDUCED THE SAID AMOUNT FROM THE ELIGIBLE PROFIT OF THE BUSINESS. CONSIDERING THE FACT THAT THE ASSESSEE FAILED TO P RODUCE ITA NOS. 458 & 474/HYD/11 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 5 SEGREGATION OF THE PROFIT RELATABLE TO THE SAID S ALES OF THE HEAD OFFICE AND THE BRANCH OFFICE, THE ASSESSING OFFICER PROCEEDED TO EXCLUDE BOTH THE SUMS OF RS.61,77,900 AND RS.1,96, 46,151 FROM THE PROFITS OF THE BUSINESS BEFORE DEDUCTION UNDER S.10A WAS DETERMINED. CONSIDERING THE ABOVE SUBMISSIONS OF TH E ASSESSEE, THE CIT(A) ANALYSED AND HELD THAT THE ABOVE SUMS DO NOT CONSTITUTE THE ELIGIBLE SUMS FOR INCLUSION. HE HELD IT SO ON THE REASONING THAT THERE CANNOT BE SALES BETWEEN THE HEAD OFFICE AND T HE BRANCH OFFICE, AS SALES IMPLY THE TRANSFER OF GOODS AND T HE CHANGE OF HANDS OF DIFFERENT ENTITIES/PERSONS. HE ACCORDINGL Y CONFIRMED THE EXCLUSION MADE BY THE ASSESSING OFFICER FROM THE EX PORT TURNOVER. TO BRING PARITY, THE CIT(A) PROCEEDED TO MAKE SIMIL AR EXCLUSION FROM THE TOTAL TURNOVER ALSO, AS DISCUSSED IN PARA 10.2 OF THE IMPUGNED ORDER. FOR THIS PROPOSITION, HE RELIED ON THE DECISION OF THE HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF ITO VS. DE BLOCK INDIA SOFTWARE PVT. LTD. (CITATION NOT GIVEN ) AND SPECIAL BENCH (CHENNAI) OF THE TRIBUNAL IN THE CASE OF ITO V/S. SAK SOFT LTD. (313 ITR (AT)353). 18. SO FAR AS THE ISSUE OF EXCLUSION OF THE ABOV E SUMS FROM THE PROFITS OF BUSINESS IS CONCERNED, THE CIT(A) SI MPLY CONFIRMED THE DECISION OF THE ASSESSING OFFICER, IN THE ABSEN CE OF ANY SEGREGATION OF PROFITS RELATABLE TO THE ABOVE MENTI ONED SUMS. 19. AGGRIEVED WITH THE ABOVE DECISION OF THE CIT (A), ASSESSEE IS IN APPEAL BEFORE US ON THIS ISSUE. 20. LEARNED COUNSEL FOR THE ASSESSEE FILED WRITTEN SUBMISSIONS, OUT OF WHICH PARA 3 IS RELEVANT IN THI S REGARD. ESSENTIALLY, IT CONTAINS NARRATION OF THE FACTS AND REITERATED THE STAND AGAINST EXCLUSION FROM THE EXPORT TURNOVER AS WELL AS TOTAL TURNOVER. HE EMPHASIZED THE FACT OF EXPORTING THE GOODS TO THE BRANCH OFFICE IN US, WITH THE APPROVAL OF THE STPI HYDERABAD. FURTHER, HE QUESTIONED THE VALIDITY OF EXCLUSION OF THE ENTIRE RECEIPT FROM THE EXPORT INCOME INSTEAD OF REDUCING ONLY THE PROFIT SEGMENT OF THE SAID SALES TO THE BRANCH OFFICE IN US BY AD OPTING SOME ESTIMATED PROFIT, IF ANY. REGARDING THE EXCLUSION O F THE SAID SALES TO BRANCH OFFICE IN US FROM THE TOTAL TURNOVER, THE LE ARNED COUNSEL WAS OF THE VIEW THAT THE SAME IS NOT IN ACCORDANCE WITH THE SAID PRINCIPLE THAT THE TOTAL TURNOVER OF THE ASSESSEE S HOULD EXCLUDE THE TRANSFERS, IF ANY , MADE TO BE BRANCH OFFICE. FURT HER, THE LEARNED COUNSEL FOR THE ASSESSEE MADE A REFERENCE TO THE D ELHI BENCH OF THE TRIBUNAL IN THE CASE OF VIRAGE LOGIC INTERNATIO NAL V/S. DY. DIRECTOR OF INCOME-TAX (2007)13 SOT 270, FOR THE PR OPOSITION THAT TRANSFERS BY THE HEAD OFFICE CONSTITUTES EXPORT S ALES FOR THE PURPOSES OF COMPUTING DEDUCTION UNDER S.10A OF THE ACT. THE TRIBUNAL HELD THAT THE ASSESSING OFFICERS APPROACH OF TREATING THE ITA NOS. 458 & 474/HYD/11 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 6 SALES BETWEEN THE ASSESSEE AND THE HEAD OFFICE DOES NOT CONSTITUTES TRANSFERS WAS NOT APPROVED FOR THE PURPOSE OF COMP LETION OF THE SALE, IT IS NOT NECESSARY THAT THERE MUST BE ANY T HIRD PARTY. FOR ARRIVING AT THE ABOVE PROPOSITION, THE APPROVAL GIV EN BY THE STPI ASSUMED IMPORTANCE AS DISCUSSED IN PARA 3 OF THE SA ID ORDER OF THE TRIBUNAL. THE TRIBUNAL WAS SUPPORTED BY THE PROVISI ON OF S.10A (7) READ WITH S.80IA(8) OF THE IT ACT IN THIS REGARD. 21. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE, FOR THE REVENUE RELIED HEAVILY ON THE ORDERS OF THE LOWER AUTHORITIES. 22. WE HEARD BOTH THE PARTIES, PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AND THE WRITTEN SUBMISSION S AND CITATIONS FILED BEFORE US. AS DISCUSSED IN THE PRECEDING PARA S, THE CRUX OF THE ISSUE RELATES TO THE TRANSFERS BETWEEN THE HEAD OFF ICE AND THE BRANCH OFFICE LOCATED IN US, AND WHETHER IT CONSTIT UTES EXPORTS FOR THE PURPOSE OF S.10A OF THE ACT. IN THIS REGARD, I N OUR OPINION, THE DELHI BENCH ORDER IN THE CASE OF VIRAGE LOGIC INT ERNATIONAL (SUPRA) HELPS TO ARRIVE AT A CONCLUSION AND IN FAV OUR OF THE ASSESSEE. IN THAT CASE, THE HEAD OFFICE HAS SENT G OODS TO THE ASSESSEE IN INDIA AND THE SAID EXPORT WAS INCLUDED IN THE EXPORT TURNOVER FOR THE PURPOSES OF DETERMINING THE DEDUCT ION UNDER S.10A OF THE ACT. ON THESE FACTUAL MATRIX OF THAT CASE, THE DELHI BENCH OF THE TRIBUNAL HAS COME TO THE CONCLUSION THAT THE SA ID EXPORTS CONSTITUTES SALES. THE ORDER OF THE ASSESSING OFFI CER IN THAT CASE WAS SET ASIDE. RELEVANT PORTION OF THE SAID DECISI ON OF THE TRIBUNAL IS REPRODUCED BELOW- 13. IN THE PRESENT CASE THERE IS NO DISPUTE THAT THE ASSESSEE DEVELOPED COMPUTER SOFTWARE AND TRANSMIT TED ELECTRONICALLY TO ITS HEAD OFFICE. THE ASSESSEE IS AN APPROVED 100 PER CENT EXPORT ORIENTED UNIT FOR DEVELOPMENT OF CO MPUTER SOFTWARE DULY APPROVED BY THE STP OF INDIA. THE EX PORT OF SOFTWARE DURING THE PREVIOUS YEAR IS EVIDENCED BY T HE SOFTEX FORM DULY CERTIFIED BY THE COMPETENT OFFICER OF STPI. T HE CONSIDERATION HAS BEEN RECEIVED BY THE ASSESSEE IN THE FORM OF C ONVERTIBLE FOREIGN EXCHANGE. THE ONLY REASON ASSIGNED BY THE R EVENUE AUTHORITIES FOR DENYING EXEMPTION UNDER SECTION 10A OF THE ACT IS THAT THERE HAS BEEN NO EXPORT SALE BY THE ASSESSEE, SINCE THE COMPUTER SOFTWARE WAS TRANSMITTED TO HEAD OFFICE AN D SINCE THE ASSESSEE AND THE HEAD OFFICE WERE ONE ENTITY, THERE WAS NO SALE TO ANY THIRD PARTY. THIS APPROACH OF THE REVENUE AUTHO RITIES WERE NOT CORRECT IN VIEW OF THE PROVISIONS OF SECTION 10A(7) OF THE ACT. THE LEGAL FICTION OF TREATING AN ASSESSEE AS A SEPARATE ENTITY VIS--VIS SALE BY IT OR TRANSFER BY IT FROM AN ELIGIBLE BUSIN ESS OR TO AN ELIGIBLE BUSINESS HAS BEEN RECOGNISED UNDER SECTION 10A(7) OF THE ACT. A PLAIN READING OF THE PROVISIONS OF SECTION 10A(7) TOGETHER WITH THE PROVISIONS OF SECTION 80-IA(8) OF THE ACT, WHICH READS AS FOLLOWS REVEALS THE STATUTORY RECOGNITION OF SUCH L EGAL FICTION- ITA NOS. 458 & 474/HYD/11 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 7 10A. ..***************** 14. IN THE PRESENT CASE, THERE CANNOT BE ANY DOUBT ABOUT THE MARKET PRICE ALSO SINCE THE TRANSFER PRICING OFFIC ER HAS ALREADY HELD THAT THE PRICE AT WHICH THE ASSESSEE TRANSMITT ED THE COMPUTER SOFTWARE TO THE HEAD OFFICE WAS AT ARMS L ENGTH PRICE. ON THIS BASIS, THE CLAIM OF THE ASSESSEE DESERVES T O BE ACCEPTED. THE ABOVE EXTRACT DEMONSTRATES THAT THE TRANSFERS B ETWEEN THE HEAD OFFICE AND THE BRANCH OFFICE AND VICE VERSA WI TH THE APPROVAL OF THE STPI CLUBBED WITH SATISFACTION OF OTHER CON DITIONS LIKE REALIZATION OF PROCEEDS IN FOREIGN EXCHANGE, CONSTI TUTES EXPORTS FOR THE PURPOSE OF THE DEDUCTION UNDER S.10A OF THE ACT . THUS, WITHOUT GOING INTO THE OTHER ARGUMENTS RAISED BY THE LEARNE D COUNSEL FOR THE ASSESSEE, WE FIND THAT THE ASSESSEE MUST BE GIV EN RELIEF ON THIS ISSUE. ACCORDINGLY THE DECISION OF THE CIT(A) TO E XCLUDE THE SAID SALES BY THE ASSESSEE TO THE BRANCH IN US FROM THE TOTAL TURNOVER AND THE OTHER CHANGES MADE BY THE ASSESSING OFFICER ARE REVERSED. ACCORDINGLY, SUMMARIZED GROUNDS AT SL. NO.3 AND 4 O F THE ASSESSEE ARE ALLOWED. 10. AS THE ISSUES UNDER DISPUTE BEFORE US ARE IDEN TICAL TO THAT OF THE GROUND NOS. 3 & 4 IN AY 2006-07 (SUPRA), RESPECTFUL LY FOLLOWING THE DECISION OF THE TRIBUNAL IN THAT YEAR, WE SET ASIDE THE ORDER OF THE CIT(A) AND ALLOW GROUND NOS. 3 & 4 OF THE ASSESSEE. 11. GROUND NOS. 5 TO 8 ARE AS FOLLOWS:- 5. THE LEARNED CIT(A) ERRED IN CONFIRMING DISALLOWANCE OF RS. 89,70,751/- U/S 40(A)(IA) ON THE GROUND THAT THE AP PELLANT MADE THE SAID PAYMENT TO A NON-RESIDENT ENTITY AND THAT ACCORDINGLY THE APPELLANT OUGHT TO HAVE DEDUCTED TAX AT SOURCE UNDE R SEC. 195 OF THE IT ACT THOUGH THE IMPUGNED PAYMENT REPRESENTED MOVEMENT OF FUNDS WITHIN THE SAME INDIAN TAXABLE ENTITY. 6. THE LEARNED CIT(A) FAILED TO APPRECIATE THAT IN ANY CASE, FOREIGN BRANCH OF AN INDIAN COMPANY IS NOT A NON-RESIDENT A S PER SECTION 6(5) OF THE IT ACT AND THE DTAA WITH USA AND THEREF ORE THE IMPUGNED PAYMENT IS NOT COVERED BY SEC. 195 OF THE IT ACT. 7. THE LEARNED CIT(A) FAILED TO APPRECIATE THE SUBM ISSIONS OF THE APPELLANT THAT THE IMPUGNED AMOUNT OF RS. 89,70,751 HAS NOT BEEN CLAIMED AS A DEDUCTION IN COMPUTING TOTAL INCOME ON THE BASIS OF THE CONSOLIDATED P&L ACCOUNT WHICH FORMED THE BASIS FOR COMPUTATION OF TAXABLE INCOME AND ACCORDINGLY THE P ROVISIONS OF SECTION 40(A)(IA) ARE NOT ATTRACTED AT ALL TO THE I MPUGNED AMOUNT. ITA NOS. 458 & 474/HYD/11 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 8 8. THE LEARNED CIT(A) RELIED ON THE DECISION OF KAR NATAKA HIGH COURT IN THE CASE OF SAMSUNG ELECTRONICS WHICH FACT S AND CIRCUMSTANCES ARE ENTIRELY DIFFERENT FROM THE FACTS OF THE CASE OF THE APPELLANT. 12. THE AO FOUND THAT THE ASSESSEE HAD PAID AN AMOU NT OF RS. 89,70,751/- TO ITS US BRANCH ON ACCOUNT OF WORK SUB -CONTRACTED TO THEM. THE ASSESSEE COULD NOT FURNISH ANY DETAILS REGARDIN G TDS MADE ON SUCH PAYMENTS. THE AO WAS OF THE OPINION THAT THE SAID S UB CONTRACT PAYMENTS ATTRACTED TDS U/S 194C/SECTION 195, AS THE US BRANC H IS A NON-RESIDENT, CONCLUDING THAT THE ASSESSEE HAD NOT MADE ANY SUCH TDS, THE AO DISALLOWED THE CLAIM OF EXPENDITURE OF RS. 89,70,75 1/- U/S 40(A)(I) OF THE ACT. ON APPEAL, THE CIT(A) AFTER CONSIDERING THE S UBMISSIONS OF THE ASSESSEE, EXAMINED THE ISSUE WITH CASE AND LAWS AND CONFIRMED THE ACTION OF THE AO. AGGRIEVED, THE ASSESSEE IS IN APP EAL BEFORE US. 13. WE HAVE HEARD THE ARGUMENTS OF BOTH THE PARTIES , PERUSED THE RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITI ES BELOW. WE FIND THAT SIMILAR ISSUES CAME UP FOR CONSIDERATION IN ASSESSE ES OWN CASE FOR AY 2006-07(SUPRA) AS GROUND NOS. 5 TO 8, WHEREIN THE T RIBUNAL HELD AS UNDER:- 23. THE THIRD ISSUE, COVERED BY GROUNDS NO.5 TO 8 OF THE SUMMARIZED GROUNDS OF THE ASSESSEE, RELATES TO THE DISALLOWANCE MADE INVOKING THE PROVISIONS OF S.195 READ WITH S.9 OF THE INCOME- TAX ACT AND DOUBLE TAXATION AVOIDANCE AGREEMENT(DTA A) WITH USA IN RESPECT OF REMITTANCES MADE BY THE HEAD OFFICE TO BRANCH OFFICE IN US. 24. BRIEF FACTS OF THIS ISSUE ARE THAT THE ASSESSE E MADE PAYMENT OF RS.2,46,50,958 TO THE US BRANCH ON ACCOU NT OF WORK SUB-CONTRACTED TO THEM. THE ASSESSEE DID NOT FURNIS H DETAILS OF TDS MADE IN RESPECT OF SUCH PAYMENTS. THE ASSESSING OFF ICER IS OF THE OPINION THAT THE SAID PAYMENTS TO THE BRANCH OFFICE ATTRACTS THE TDS PROVISIONS UNDER S.194C/195 OF THE ACT, AS THE BRAN CH IS A NON- RESIDENT, AND CONSEQUENTLY THE ASSESSING OFFICER IN VOKED THE PROVISIONS OF SECTION 195 READ WITH S.40(A)(IA) OF THE ACT AND DENIED THE BENEFIT OF DEDUCTION UNDER S.10A IN RESP ECT OF SUCH PAYMENTS. ITA NOS. 458 & 474/HYD/11 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 9 25. DURING THE FIRST APPELLATE PROCEEDINGS, THE A SSESSEE ARGUED STATING THAT THE BRANCH OFFICE IN USA IS NOT A NON-RESIDENT, AS IT IS PART AND PARCEL OF THE ASSESSEE. THE PROVI SIONS OF S.194/195 ARE ATTRACTED ONLY IF THE PAYEE IS NON-RESIDENT. IN THIS REGARD, LEARNED COUNSEL MENTIONED THAT THE PAYEE IS RESIDEN T FOR ALL LEGAL PURPOSES. THE ASSESSEE ARGUED THAT THE STATUS OF A BRANCH OFFICE IS THE SAME AS THAT OF THE HEAD OFFICE, VIZ. ASSESSEE, CONSIDERING THE VERY NATURE OF THE BRANCH. HE FURTHER MENTIONED TH AT THE PERMANENT ESTABLISHMENT FOR THE SAID BRANCH OFFICE IS IN INDIA, WHICH IS UNDISPUTED AND THE CLUBBED INCOME OF THE A SSESSEE IS TAXABLE IN INDIA ONLY. THE LEARNED COUNSEL FOR THE ASSESSEE NOT ONLY EXPLAINED THE PROVISIONS OF S.195 OF THE ACT, BUT A LSO ARTICLE 4(1) OF THE DTAA WITH USA DEALING WITH RESIDENT. IT WAS SUBMITTED THAT THE PROVISIONS OF DTAA READ HARMONIOUSLY WITH THE PROVISIONS OF THE INDIAN INCOME-TAX ACT, CLEARLY INDICATE THAT T HE STATUS OF US BRANCH IS RESIDENT IN INDIA ONLY, AND THEREFORE, THE PROVISIONS OF S.195 HAVE NO APPLICATION. THE ASSESSEE ALSO MADE OTHER SUBMISSIONS, WITHOUT PREJUDICE TO THE ABOVE. HE AL SO BROUGHT TO OUR NOTICE THE REVERSAL OF THE JUDGMENT OF THE HON BLE KARNATAKA HIGH COURT IN THE CASE OF CIT V/S. SAMSUNG ELECTRON ICS LTD. (195 TAXMAN 313 - 320 ITR 209). CONSIDERING THE OTHER S UBMISSIONS NARRATED IN PARA 11 OF THE IMPUGNED ORDER AS WELL, THE CIT(A) UPHELD THE VIEWS ADOPTED BY THE ASSESSING OFFICER. IN THE PROCESS, HE RELIED ON THE DECISION OF THE KARNATAKA HIGH COU RT IN THE CASE OF CIT V/S. SAMSUNG ELECTRONICS LTD. (320 ITR 209), WH ICH IS POPULAR AT THAT TIME FOR THE PROPOSITION THAT TAX HAS TO BE DEDUCTED ON ANY PAYMENT MADE ABROAD. THUS, THE CIT(A) CONFIRMED T HE VIEWS OF THE ASSESSING OFFICER. 26. AGGRIEVED BY THE AFORESAID DECISION OF THE CIT (A), ASSESSEE RAISED THIS ISSUE BEFORE US, VIDE GROUNDS NO.5 TO 8 OF THE SUMMARISED GROUNDS OF APPEAL. 27. ON THIS ISSUE, ARGUMENTS OF THE LEARNED COUNSE L FOR THE ASSESSEE IN THE WRITTEN SUBMISSIONS ARE BRIEFLY AS FOLLOWS- (A) BRANCH OFFICE IN USA IS PART AND PARCEL OF THE ASSESSEE COMPANY AND THEREFORE, THE PAYMENT IS NOTHING BUT P AYMENT TO ITSELF. THEREFORE THE PROVISIONS OF S.195 OF TH E ACT, WHERE THE PAYER AND PAYEE ARE NOT SEPARATE, ARE NOT APPL ICABLE. (B) FOR THE FOREIGN BRANCH OF THE ASSESSEE SHARES T HE SAME STATUS AS THAT OF THE ASSESSEE, CONSIDERING THE RELEVANT P ROVISIONS OF DTAA AS WELL AS THE INCOME-TAX ACT. WHEN THE PAYEE IS A BRANCH OF INDIAN COMPANY, SUCH BRANCH CANNOT BE NON - RESIDENT IN STATUS. THEREFORE, THE IMPUGNED PAYMENT IS OUTSIDE THE SCOPE OF S.195 OF THE ACT. ITA NOS. 458 & 474/HYD/11 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 10 (C) RESIDENTIAL STATUS OF THE ASSESSEE IS RESIDENT BECAUSE S.3 OF THE INDIAN COMPANIES ACT DEFINES THAT COMPANY SAI D TO BE A RESIDENT IS AN INDIAN COMPANY OR THE CONTROL AND MANAGEMENT OF ITS AFFAIRS IS SITUATED WHOLLY IN IND IA. SAME IS THE CASE WITH THE ASSESSEE. THEREFORE, THE BRANC H OFFICE OF THE ASSESSEE CANNOT BE TREATED AS NON-RESIDENT IN T HE CIRCUMSTANCES. THE PROVISIONS OF DTAA ALSO SUPPORT THE ABOVE VIEWS. 28. THE WRITTEN SUBMISSIONS ALSO MENTION THAT THE PAYMENTS/REMITTANCES IN QUESTION DO NOT ATTRACT THE PROVISIONS OF S.195 OF THE ACT, AS THEY REPRESENT NEITHER INTERES T NOR DIVIDEND UNDER DTAA. AT THE MAXIMUM, THESE PAYMENTS CONSTIT UTE FEE FOR INCLUDED SERVICES. IN THAT CASE, THE PROVISIONS O F ARTICLE 12 OF THE DTAA WITH US DO NOT APPLY. APPLYING THE RATIO OF T HE MUMBAI BENCH DECISION OF THE TRIBUNAL IN THE CASE OF RAYMO ND LIMITED V/S. DCIT (86 ITD 791), IT IS SUBMITTED THAT SUCH PAYME NTS ARE OUTSIDE THE PROVISIONS OF S.195 OF THE ACT. FURTHER, THE L EARNED COUNSEL MENTIONED THAT THE CIT(A) HAS EMPHASISED AND SUBSTA NTIALLY RELIED ON THE DECISION OF THE KARNATAKA HIGH COURT IN THE CASE OF SAMSUNG ELECTRONICS LTD. (SUPRA), BUT THE FACT IS THAT THE SAID JUDGMENT OF THE KARNATAKA HIGH COURT HAS BEEN REVERSED BY THE S UPREME COURT VIDE ITS JUDGMENT DATED 9.9.2010 IN THE CASE OF GE INDIA TECHNOLOGIES PT. LTD. V/S. CIT AND OTHERS(327 ITR 4 56). THE SUPREME COURT EXPLAINED IN THE SAID JUDGMENT THAT EXPRESSION CHARGEABLE UNDER THE PROVISIONS OF THE ACT IN S.1 95(1) SHOWS THAT THE REMITTANCES HAVE GOT TO BE TRADING RECEIPT WH OLE OR PART OF WHICH IS LIABLE TO TAX IN INDIA. IF THE TAX IS NOT SO ASSESSABLE, THERE IS NO QUESTION OF TAX AT SOURCE BEING DEDUCTED. THE RATIO LAID DOWN BY THE KARNATAKA HIGH COURT JUDGMENT IN THE CITED C ASE (320 ITR 209) HAS BEEN SET ASIDE IN THAT CASE. 29. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS RELIED ON THE ORDERS OF THE ASSE SSING OFFICER AND THE CIT(A). 30. WE HEARD BOTH THE PARTIES ON THIS ISSUE. THE ISSUE IN SHORT IS THE REMITTANCE MADE BY THE ASSESSEE TO ITS BRANCH OFFICE ABROAD SHOULD BE SUBJECTED TO TDS PROVISION, AS MAD E OUT BY THE REVENUE AUTHORITIES. THE CRUCIAL ARGUMENTS OF THE A SSESSEE IN THIS REGARD INCLUDE- (A) THESE PAYMENTS ARE OUTSIDE THE SCOPE OF S.195 OF THE ACT FOR THE REASON THAT THE BRANCH OFFICE AB ROAD IS PART AND PARCEL OF THE ASSESSEE AND IT IS A RESIDENT IN ST ATUS AND NOT NON- RESIDENT, AS MADE OUT BY THE REVENUE. THE PROVISI ONS OF S.195(1) MENTION CLEARLY THAT ONLY THE PAYMENTS TO NON-RESI DENTS ATTRACT PROVISIONS OF S.195 OF THE ACT. THE OTHER ARGUMENT IS THE MISPLACED ITA NOS. 458 & 474/HYD/11 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 11 RELIANCE OF THE CIT(A) ON THE DECISION OF THE KARN ATAKA HIGH COURT IN THE CASE OF SAMSUNG ELECTRONICS LTD. (SUPRA), IN VIEW OF THE SUBSEQUENT DECISION OF THE APEX COURT IN THE CASE O F GE INDIA TECHNOLOGIES PT. LTD. V/S. CIT AND OTHERS (SUPRA). IN SO FAR AS THE FIRST ARGUMENT IS CONCERNED, IT IS A DECIDED ISSUE THAT THE STATUS OF THE BRANCH OFFICE OF THE ASSESSEE ABROAD IS NOT NO N-RESIDENT. IN SUCH SITUATION, THE PROVISIONS OF S.195 ARE INAPPLI CABLE. COMING TO THE APPLICABILITY OF THE DECISION OF THE KARNATAKA HIGH COURT, IT IS THE ARGUMENT OF THE LEARNED COUNSEL FOR THE ASSESSE E THAT THE SUPREME COURT HAS SET ASIDE THE OPERATION OF THE JU DGMENT OF THE KARNATAKA HIGH COURT IN THE CITED CASE, VIDE JUDGME NT REPORTED AT 327 ITR 456. FOR THESE REASONS, IN OUR OPINION, TH E IMPUGNED PAYMENT OF RS.2,46,50,958 MADE BY THE ASSESSEE TO T HE BRANCH OFFICE IN USA, IS OUTSIDE THE SCOPE OF S.195 OF THE ACT. ACCORDINGLY, THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE, AL LOWING GROUNDS NO.5 TO 8 OF THE SUMMARIZED GROUNDS OF APPEAL RAISE D BY THE ASSESSEE. 14. SINCE THE GROUNDS 5 TO 8 IN THE PRESENT APPEAL ARE MATERIALLY IDENTICAL TO THAT OF AY 2006-07, RESPECTFULLY FOLLO WING THE DECISION OF THE TRIBUNAL IN THAT YEAR, WE SET ASIDE THE ORDER OF TH E CIT(A) AND ALLOW THE GROUNDS 5 TO 8 OF THE GROUNDS OF APPEAL. 15. GROUND NOS. 9 & 10 READ AS UNDER:- 9. THE LEARNED CIT(A) OUGHT TO HAVE DIRECTED DELETI ON OF THE DISALLOWANCE OF EXPENDITURE OF RS. 31,48,566/- ON L EASED LINE CHARGES TO BSNL BY HOLDING THAT THE IMPUGNED PAYMEN T DOES NOT ATTRACT TDS PROVISIONS. 10. THE LEARNED CIT(A) ERRED IN HOLDING THAT DISALL OWANCE U/S 40(A)(IA) IS ATTRACTED IN THIS CASE THOUGH TAX IS D EDUCTED UNDER SECTION 194C ON THE GROUND THAT TAX OUGHT TO HAVE B EEN DEDUCTED U/S 194I WHICH IS CONTRARY TO THE LETTER AND SPIRIT OF PROVISIONS OF SECTION 40(A)(IA) WHICH CAN BE INVOKED ONLY IN CASE S OF ABSOLUTE FAILURE TO DEDUCT TAX. 16. THE AO NOTED THAT THE ASSESSEE WAS REQUIRED TO DEDUCT TAX U/S 194I IN RESPECT OF THE LEASED LINE CHARGES DEBITE D RS. 31,48,566/-. SINCE THE ASSESSEE HAD FAILED TO COMPLY WITH THE SAID PRO VISIONS, THE AO DISALLOWED THE SAID EXPENDITURE. ON APPEAL BEFORE T HE CIT(A), IT WAS SUBMITTED THAT THE ASSESSEE HAD DEDUCTED TAXES U/S 194C IN RESPECT OF ITA NOS. 458 & 474/HYD/11 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 12 SUCH PAYMENTS. HOWEVER, THE AO PROCEEDED TO MAKE TH E DISALLOWANCE WITHOUT AFFORDING ANY OPPORTUNITY TO EXPLAIN THE FA CTS. HE ARGUED THAT SINCE TDS WAS MADE IN RESPECT OF THE IMPUGNED AMOUN T, THERE IS NO DEFAULT CAUGHT BY THE MISCHIEF OF SECTION 40(A)(IA) . HE RELIED UPON THE DECISION OF THE HONBLE CALCUTTA TRIBUNAL IN THE CA SE OF HUTCHISON TELECOM EAST LTD. VS ACIT, 16 SOT 404. AFTER CONSIDERING TH E SUBMISSIONS OF THE ASSESSEE, THE CIT(A) CONFIRMED THE DISALLOWANCE MAD E BY THE AO BY HOLDING THAT THE DEFAULT OF THE ASSESSEE IN NOT MAK ING APPROPRIATE TDS AS PER THE PROVISIONS OF SECTION 194 I DOES NOT GET MI TIGATED BY THE FACT THAT IT HAD MADE TDS U/S 194C. AGGRIEVED, THE ASSESSEE I S IN APPEAL BEFORE US. 17. WE HAVE HEARD THE ARGUMENTS OF THE PARTIES, PER USED THE RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELO W. WE FIND THAT SIMILAR ISSUE CAME UP FOR CONSIDERATION BEFORE THE JURISDIC TIONAL TRIBUNAL IN THE CASE OF M/S USHODAYA ENTERPRISES PVT. LTD., HYDERAB AD IN ITA NO. 1706 TO 1708/HYD/2008 VIDE ORDER DATED 22/03/2012 WHEREIN T HE TRIBUNAL HELD AS UNDER:- 23. THE NEXT GROUND IS PAYMENT OF DATA CIRCUIT RENTAL CHARGES: THE PAYMENTS RELATE TO DATA CIRCUIT RENTALS CHARGES . IN THE ASSESSMENT ORDER, THE AO HAS OBSERVED THAT THE ASSE SSEE HAS MADE PAYMENTS TO BSNL TOWARDS USE OF DATA CIRCUIT LINES ON WHICH TAX WAS NOT DEDUCTED AT SOURCE. THE AO (TDS) REFERRED TO T HE ASSESSMENT ORDER DATED 26.12.2007 PASSED U/S 143(3) BY THE JURISDICT IONAL AO WHEREIN IT WAS HELD THAT THE PAYMENTS ARE TOWARDS CONTRACTUAL OBLIGATION AND ARE LIABLE TO TDS. APPARENTLY NO EXPLANATION WAS OFFER ED BY THE ASSESSEE EITHER DURING THE ASSESSMENT OR DURING THE TDS PROC EEDINGS. THE AO THEREFORE HELD THE PAYMENTS TO BE OF THE FEES FOR T ECHNICAL SERVICES AND HELD THAT THE ASSESSEE TO BE AN ASSESSEE IN DEFAULT FOR NON DEDUCTION OF TAX AT SOURCE U/S 194J OF THE IT ACT. 24. IN THE STATEMENT OF FACT THE ASSESSEE SUBMI TTED THAT IT HAS TAKEN DATA CIRCUIT LINE ON LEASE FROM BSNL FOR TRANSMITTI NG DATA/NEWS IN ITS OFFICE FROM VARIOUS PLACES WHERE THE REPORTERS OR C ONTRIBUTORS COLLECT NEWS FROM VARIOUS EVENTS ACROSS THE COUNTRY. THESE DATA CIRCUIT LINES ARE AKIN TO TELEPHONE LINES AND HENCE THE PROVISION S OF SECTION 194J IS NOT ATTRACTED SINCE BSNL IS ONLY PROVIDING THE LINE AND NOT ANY PROFESSIONAL OR TECHNICAL SERVICES TO THE ASSESSEE. DURING THE APPELLATE PROCEEDINGS, THE AR OF THE ASSESSEE REITERATED THE FACT STATED EARLIER IN ITA NOS. 458 & 474/HYD/11 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 13 THE STATEMENT OF FACT AND RELIED ON THE DECISION IN THE CASE OF CIT VS. ESTEL COMMUNICATIONS P LTD. 217 CTR 102 (DEL.) AND THE DECISION OF HONBLE MADRAS HIGH COURT IN THE CASE OF SKYCELL CO MMUNICATIONS LTD. VS. DCIT. THE AR ALSO FILED COPIES OF THE INVOICES OF BSNL FOR THE PERIOD 1.7.04 TO 30.9.04 IN RESPECT OF THE CIRCUIT LINES T AKEN ON LEASE. 25. THE CIT(A) HELD THAT THE PAYMENT FOR SUCH C ONNECTIVITY CHARGES WILL NOT COME UNDER THE PURVIEW OF TECHNICAL OR PRO FESSIONAL SERVICES AS HELD BY AO SINCE THE PAYMENT IS NOTHING BUT STANDAR D TARIFF DEPENDING ON THE SPEED AND USAGE OF THE DEDICATED LEASED LINE S. 26. THE CIT(A) RELYING ON THE DECISION OF CIT VS. ESTEL COMMUNICATIONS P LTD. HELD THAT THE PAYMENT MADE TO BSNL FOR TAKIN G ON LEASE OF DEDICATED CIRCUIT LINES WILL NOT COME UNDER THE PUR VIEW OF SECTION 194J AND THEREFORE THE ASSESSEE CANNOT BE HELD TO BE IN DEFAULT U./S 201(1) FOR NON DEDUCTION OF TAX ON SUCH PAYMENTS MADE TO B SNL. 27. AGGRIEVED THE REVENUE IS IN APPEAL BEFORE US. 28. WE HEARD BOTH PARTIES. RELYING ON THE DECI SION OF CIT VS. ESTEL COMMUNICATION P. LTD. 217 CTR 102 DELHI AND THE MAD RAS HIGH COURT DECISION IN THE CASE OF SKYCELL COMMUNICATIONS P LT D. VS. DCIT, WE UPHOLD THE ORDER OF THE CIT(A) THAT THE CONNECTIVIT Y CHARGES CANNOT COME UNDER THE PURVIEW OF TECHNICAL/PROFESSIONAL SERVICE S. IT IS SIMILAR TO TELEPHONE CONNECTION AND THEREFORE, PROVISIONS OF S ECTION 194C ARE INAPPLICABLE. THE REVENUES APPEAL ON THIS ISSUE I S DISMISSED. 18. SINCE THE ISSUE UNDER CONSIDERATION IS IDENTICA L TO THE ONE DECIDED BY THE TRIBUNAL IN THE CASE OF USHODAYA ENTERPRISES (SUPRA), RESPECTFULLY FOLLOWING THE SAME, WE SET ASIDE THE ORDER OF THE C IT(A) AND DELETE THE DISALLOWANCE OF EXPENDITURE OF RS. 31,48,566/- MADE BY THE AO AND SUSTAINED BY THE CIT(A), ON LEASED LINE CHARGES TO BSNL. 19. GROUND NOS. 11 & 12 ARE AS FOLLOWS:- 11. THE LEARNED CIT(A) ERRED IN CONCLUDING THAT THE AMOUNT OF RS. 12,57,269/- BEING EXPENDITURE TOWARDS DUE DILIGENCE SERVICES IN USA AND PAID TO US FIRMS, IS DISALLOWABLE U/S 40(A) (IA) THOUGH IMPUGNED SUM FALLS OUTSIDE THE PURVIEW OF SECTION 1 95 IN THE LIGHT OF THE RESIDENTIAL STATUS AND ABSENCE OF PE IN INDI A FOR THE PAYEE AND ALSO THE APPLICABILITY OF THE PROVISIONS OF DTA A BETWEEN INDIA AND USA. 12. THE LEARNED CIT(A) OUGHT TO HAVE CONSIDERED THE EVIDENCE PRODUCED SHOWING THAT THE PROVISION MADE FOR THE IM PUGNED ITA NOS. 458 & 474/HYD/11 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 14 AMOUNT IN THE CURRENT YEAR WAS REVERSED IN THE NEXT YEAR AND ALLOWED RELIEF ACCORDINGLY. 20. THE AO EXCLUDED AN AMOUNT OF RS. 12,57,269/- FR OM THE EXPORT TURNOVER ELIGIBLE FOR BENEFIT U/S 10A OF THE ACT ON THE GROUND THAT THE SAID PAYMENT IS IN FOREIGN CURRENCY AND HENCE LIABLE TO BE EXCLUDED FROM THE EXPORT TURNOVER. ON APPEAL, IT WAS CONTENDED BEFORE THE CIT(A) THAT THE PAYMENT IS NOT TOWARDS TECHNICAL SERVICES AND HENCE THE SAME NEED NOT BE DEDUCTED FROM ELIGIBLE EXPORT TURNOVER AS PER CL AUSE (IV) OF EXPLANATION 2 TO SECTION 10A. THE CIT(A) ACCEPTED T HE CONTENTION OF THE ASSESSEE AND DIRECTED THE AO NOT TO EXCLUDE THE IMP UGNED AMOUNT FROM EXPORT TURNOVER. HOWEVER, HE OPINED THAT THE PAYMEN T HAVING BEEN MADE TO A FOREIGN ENTITY WAS LIABLE FOR DISALLOWANCE IF TAX WAS DEDUCTED IS NOT MADE. HE DIRECTED ACCORDINGLY. AGGRIEVED BY THE ORD ER OF THE CIT(A) THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 21. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE CIT(A) ERRED IN CONCLUDING THAT THE EXPENDITURE INC URRED BY THE ASSESSEE TOWARDS DUE DILIGENCE SERVICES IN USA AND PAID TO U S FIRMS IS LIABLE FOR DISALLOWANCE U/S 40(A)(IA). HE FURTHER SUBMITTED TH AT THE CIT(A) OUGHT TO HAVE CONSIDERED THE APPLICABILITY OF THE DTAA BETWE EN INDIA AND USA AS PER WHICH THE IMPUGNED PAYMENTS WOULD CONSTITUTE B USINESS PROFITS AS PER ARTICLE 7 OF THE INDO-USA DTAA AND HENCE ARE NO T CHARGEABLE TO TAX IN INDIA IN THE ABSENCE OF A PE IN INDIA FOR THE PA YEE. IT IS SUBMITTED THAT THE CIT(A) FAILED TO APPRECIATE THE FACTUAL SUBMISS ION THAT THE SAID AMOUNT WAS ONLY A PROVISION MADE IN THE YEAR ENDING 31/03/2007 AND AS THE SAME WAS NOT REQUIRED, IT WAS REVERSED IN THE N EXT YEAR I.E. THE YEAR ENDING 31/03/08. HE STATED THAT THE REVERSAL WOULD NOT MAKE ANY DIFFERENCE. HE POINTED OUT THAT THE RELEVANT JOURNA L VOUCHERS WERE ALSO PRODUCED BEFORE THE CIT(A). THE LEARNED COUNSEL FOR THE ASSESSEE FINALLY SUBMITTED THAT IN THE LIGHT OF THE FACT THAT THE EX PENDITURE PROVISION WAS REVERSED AND THE EXPENDITURE NEVER REALLY INCURRED, THE DISALLOWANCE IF ITA NOS. 458 & 474/HYD/11 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 15 UPHELD IN THE CURRENT YEAR, A SIMILAR AMOUNT REVERS ED IN THE NEXT YEAR, IS LIABLE TO BE DELETED FROM THE COMPUTATION OF TOTAL INCOME. 22. ON THE OTHER HAND, THE LEARNED DR RELIED UPON T HE ORDERS OF THE AUTHORITIES BELOW. 23. WE HAVE HEARD THE ARGUMENTS OF BOTH THE PARTIES AND PERUSED THE RECORD AS WELL AS GONE THROUGH THE ORDERS OF THE AU THORITIES BELOW. WE DO NOT FIND ANY MERIT IN THE SUBMISSIONS OF THE LEARNE D COUNSEL FOR THE ASSESSEE THAT THE EXPENDITURE PROVISION WAS REVERSE D AND THE EXPENDITURE NEVER REALLY INCURRED, THE DISALLOWANCE IF UPHELD IN THE CURRENT YEAR, A SIMILAR AMOUNT REVERSED IN THE NEXT YEAR, IS LIABLE TO BE DELETED FROM THE COMPUTATION OF TOTAL INCOME. IN OU R CONSIDERED OPINION, THE VIEW TAKEN BY THE CIT(A) IS JUSTIFIED AND, THER EFORE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A). ACCORDING LY THE ORDER OF THE CIT(A) IS UPHELD AND THE GROUND RAISED BY THE ASSES SEE IS DISMISSED. 24. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ITA NO. 474/HYD/2011 REVENUES APPEAL 25. GROUND NO. 1 IS GENERAL IN NATURE. 26. GROUND NO. 2 READS AS UNDER:- THE CIT(A) OUGHT TO HAVE UPHELD THE DISALLOWANCE MA DE BY THE AO U/S 10A AS OTHER INCOME IS NOT ELIGIBLE FOR CALCU LATION OF DEDUCTION U/S 10A AS THE SAME ARE NOT DERIVED BY THE ASSESSEE COMPANY FROM BUSINESS. 27. THE AO FOLLOWING THE DECISIONS IN THE CASES OF CIT VS. RAJA BHAHADUR KAMAKHYA NARAYAN SINGH, 16 ITR 325 (SC) MR S. BACHA F. GUZDAR VS. CIT, 27 ITR 1 (SC), CAMBAY ELECTRIC SUPP LY INDUSTRIAL CO. LTD. ITA NOS. 458 & 474/HYD/11 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 16 VS. CIT, 113 ITR 84 AND CIT VS. STERLING FOODS LTD. , 237 ITR 579 (SC), HELD THAT ANY PROFITS OR GAINS WHICH ARE NOT DERIVE D FROM AN INDUSTRIAL UNDERTAKING, THOUGH THEY MAY BE ATTRIBUTABLE TO ITS BUSINESS, WOULD NOT BE ENTITLED TO DEDUCTION. ACCORDINGLY, HE DID NOT C ONSIDER THE FOLLOWING INCOMES, TOTALING TO RS. 1,41,61,613/- INCLUDED UND ER THE HEAD OTHER INCOME FOR THE PURPOSE OF COMPUTATION OF INCOME U/ S 10A: I) INTEREST INCOME RS. 1,57,409/- II) DIVIDEND RECEIVED RS. 1,33,39,340/- III) CREDIT BALANCES WRITTEN BACK RS. 53,970 /- IV) NOTICE PERIOD SALARY RS. 6,10,984/- TOTAL RS.1,41,61,613/- ========== 28. ON APPEAL, THE CIT(A) FOLLOWING THE DECISION OF THE TRIBUNAL, HELD THAT INCOME IN THE FORM OF CREDIT BALANCE WRITTEN BACK AND NOTICE PERIOD SALARY SHALL BE INCLUDED IN THE ELIGIBLE PROFITS F OR RELIEF U/S 10A OF THE ACT. AS REGARDS, INTEREST INCOME OF RS. 1,57,409/-, THE CIT(A) HELD THAT THE SAME IS REQUIRED TO BE EXCLUDED FROM THE PROFITS AN D GAINS DERIVED FROM THE EXPORT ACTIVITY OF THE UNDERTAKING. 29. AGGRIEVED BY THE ORDER OF THE CIT(A) HOLDING TH AT THE INCOME IN THE FORM OF CREDIT BALANCE WRITTEN BACK AND NOTICE PERI OD SALARY SHALL BE INCLUDED IN THE ELIGIBLE PROFITS FOR RELIEF U/S 10A OF THE ACT, THE REVENUE IS IN APPEAL BEFORE US. 30. WE HAVE HEARD THE ARGUMENTS OF BOTH THE PARTIES , PERUSED THE RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITI ES BELOW. WE FIND THAT THE ISSUE UNDER CONSIDERATION IS COVERED BY THE DEC ISION OF TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2006-07 (SUPRA), WHEREIN THE COORDINATE BENCH HELD AS UNDER:- 2. FIRST EFFECTIVE GROUND OF THE REVENUE READS AS FOLLOWS- ITA NOS. 458 & 474/HYD/11 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 17 2. THE CIT(A) ERRED IN INCLUSION OF (I) MISC. INCO ME (II)CREDIT BALANCE WRITTEN BACK AND NOTICE PERIOD SALARY FOR T HE PURPOSE OF ARRIVING DEDUCTION U/S. 10A. 3. AT THE OUTSET, THE LEARNED COUNSEL FOR THE ASSE SSEE MENTIONED THAT THE ISSUES RELATING TO INCLUSION OF (I) MISCELLANEOUS INCOME (II) CREDIT BALANCE WRITTEN BACK; AND (III)N OTICE PERIOD SALARY FOR THE PURPOSES OF ARRIVING AT THE DEDUCTION UNDER S.10A OF THE ACT, ARE COVERED BY THE ORDER OF THIS TRIBUNAL DATE D 19 TH AUGUST, 2009 IN ASSESSEES OWN CASE IN THE CROSS-APPEALS FO R THE ASSESSMENT YEAR 2005-06, VIZ. IN ITA NOS.397 AND 536/HYD/20008.. IN THIS REGARD, THE LEARNED COUNSE L TOOK US THROUGH PARA 8 OF THE SAID ORDER DATED 19 TH AUGUST, 2009 FOR THE PROPOSITION THAT MISCELLANEOUS INCOME AND THE CRED IT BALANCE WRITTEN BACK SHOULD BE INCLUDED IN THE PROFIT ELIGI BLE FOR COMPUTATION OF EXEMPTION UNDER S.10A OF THE ACT. W E FIND THAT THE SAID DIRECTION WAS GIVEN BY THE TRIBUNAL, FOLLOWING THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF EXT RUSION PROCESSES (P)LTD V/S. ITO (2007) 106 ITD 336. THE TRIBUNAL ALSO NOTED THAT THERE IS NO DECISION TO THE CONTRARY BRO UGHT TO ITS NOTICE AND FINALLY DECIDED THE ISSUE IN FAVOUR OF THE ASSE SSEE. WE HAVE CONSIDERED THE FACTS OF THE PRESENT CASE IN RELATIO N TO THIS ISSUE AND FIND THAT THEY ARE ANALOGOUS TO THOSE CONSIDERED BY THE TRIBUNAL IN THE ABOVE DECISION FOR THE PRECEDING YEAR. THEREFOR E, WE ARE OF THE OPINION THAT THE CIT(A) WAS JUSTIFIED IN DECIDING T HIS ISSUE IN FAVOUR OF THE ASSESSEE. WE ACCORDINGLY CONFIRM THE ORDER O F THE CIT(A) ON THIS ISSUE. 4. FURTHER, ON THE ASPECT OF NOTICE PERIOD SALARY, THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO PARA 7 OF THE SAID ORDER OF THE TRIBUNAL AND MENTIONED THAT THE S AID ISSUE WAS ALSO DECIDED BY THE TRIBUNAL IN FAVOUR OF THE ASSES SEE. IN THAT REGARD, THE TRIBUNAL RELIED ON THE DECISION OF THE SUPREME COURT IN THE CASE OF LAKSHMI MACHINE WORKS (290 ITR 667). W E HAVE PERUSED THE FACTS OF THE CASE ON THIS ISSUE, AND FI ND THAT THE ISSUE INVOLVED IN THIS APPEAL IS IDENTICAL TO THE ONE ALR EADY ADJUDICATED BY THE TRIBUNAL. RELEVANT PORTION OF THE ORDER OF THE TRIBUNAL IN THIS REGARD READS AS FOLLOWS- 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE MATERIAL AVAILABLE ON RECORD. AS FOR THE NOTICE PE RIOD SALARY RECOVERED FROM EMPLOYEES OF RS.1,40,548, WE ARE OF THE VIEW THAT THE LOWER AUTHORITIES ARE NOT JUSTIFIED IN EXCLUDIN G THE SAME FROM THE ELIGIBLE PROFITS OF THE BUSINESS WHILE CALCULAT ING THE DEDUCTION UNDER S.10A OF THE ACT. SINCE THE SAID AMOUNT REPRE SENTS RECOVERY OF THE BUSINESS EXPENSES EARLIER INCURRED BY THE AS SESSEE IN ITA NOS. 458 & 474/HYD/11 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 18 RECRUITING AND TRAINING OF THE EMPLOYEES CONCERNED, THE INCOME ARISING ON ACCOUNT OF SUCH RECOVERY ALSO REPRESENTS THE BUSINESS INCOME OF THE ASSESSEE CONSIDERING THE ABOVE REASONING GIVEN BY THE TRIBUN AL, WE FIND NO INFIRMITY IN THE IMPUGNED ORDER OF THE CIT(A) ON TH IS ASPECT. WE ACCORDINGLY UPHOLD THE SAME, REJECTING THE GROUND O F THE REVENUE IN THIS APPEAL. 31. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIB UNAL, WE UPHOLD THE ORDER OF THE CIT(A) AND DISMISS THE GROUND RAISED B Y THE REVENUE. 32. GROUND NO. 3 READS AS UNDER:- THE CIT(A) OUGHT TO HAVE UPHELD THE DISALLOWANCE MA DE BY THE AO AS AMOUNTS DISALLOWED U/S 40(A)(IA) AND 40A(7) ARE NOT ELIGIBLE FOR CALCULATION OF DEDUCTION U/S 10A OF THE ACT. 32. WE HAVE HEARD THE PARTIES AND PERUSED THE RECOR D. WE FIND THAT IN THE CASE OF CIT V. GEM PLUS JEWELLERY INDIA LTD. RE PORTED IN (2010) 233 CTR (BOM) 248, THE HONBLE HIGH COURT OF BOMBAY HAS RULED THAT ASSESSEE IS ENTITLED TO EXEMPTION U/S 10A WITH REF ERENCE TO ADDITION OF DISALLOWANCE OF PF/ESIC PAYMENTS AS PLA IN CONSEQUENCE OF DISALLOWANCE AND ADD BACK MADE BY THE ASSESSING OFFICER IS AN INCREASE IN THE BUSINESS PROFITS OF THE ASSESSEE. IN VIEW OF THE SAID DECISION OF BOMBAY HIGH COURT THE ADDITIONS MADE ON ACCOUNT OF DISALLOWANCE U/S 40A(IA) AND 40A (7) TO BE CONSIDERED AS BUSINESS INCOME. THEREFORE, THIS GROUND OF APPEA L OF THE REVENUE IS DISMISSED. 33. GROUND NO. 3 IS DIRECTED AGAINST THE ACTION OF THE CIT(A) IN DIRECTING THE AO TO EXCLUDE SOFTWARE DEVELOPMENT AN D SERVICE CHARGES FROM BOTH TOTAL TURNOVER AND EXPORT TURNOVER AS THE SAME DOES NOT FORM PART OF EXPORT TURNOVER. ITA NOS. 458 & 474/HYD/11 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 19 34. AFTER HEARING BOTH THE PARTIES WE ARE OF THE OP INION THAT THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2006-07(SUPRA) THIS GROUND IS INTER-LINKED W ITH GROUND NOS. 3 & 4 OF ASSESSEES APPEAL AND FOLLOWING THE PARAS 16 TO 22 OF THE TRIBUNAL ORDER IN ITA NO. 824 & 915/HYD/10 DATED 7 TH MARCH, 2012, WE DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE. 35. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALL OWED AND REVENUE APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE COURT ON 8 TH JUNE, 2012 SD/- SD/- (ASHA VIJAYARAGHAVAN ) (CHANDRA POOJARI ) JUDICIAL MEMBER. ACCOUNTANT MEMBER. HYDERABAD, DT/- 8 TH JUNE, 2012. KV COPY FORWARDED TO: 1. M/S. SEMANTIC SPACE TECHNOLOGIES LTD., PLOT NO.26, ROAD NO.17, JUBILEE HILLS, HYDERABAD 2. DY. COMMISSIONER OF INCOME - TAX CIRCLE 3 ( 1 ), HYDERABAD 3. COMMISSIONER OF INCOME - TAX(APPEALS)I V HYDERABAD 4. COMMISSIONER OF INCOME - TAX I II, HYDERABAD 5. THE D.R., ITAT, HYDERABAD. S.NO. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON 30/05/12 SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR 04/06/12 SR.P.S/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S./P.S 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER