ACIT, CHENNAI V. M/s. Zylog Systems Ltd., CHENNAI

ITA 59/CHNY/2011

• Counselvise Citation: [2011] 119 COUNSELVISE.COM (IT) 6510 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 23-06-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 13-01-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K E B RENGARAJAN JR
• Assessee Lawyers: V D GOPAL
• Keywords: Capital asset; Business income; Revenue expenditure; Capital expenditure
• Section: 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHENNAI BENCH D : CHENNAI [BEFORE DR. O.K. NARAYANAN, VICE-PRESIDENT AND SHRI HARI OM MARATHA, JUDICIAL MEMBER] I.T.A NOS. 59 & 60/MDS/2011 ASSESSMENT YEARS : 2006-07 & 2007-08 THE ACIT COMPANY CIRCLE III(3) CHENNAI VS M/S ZYLOG SYSTEMS LTD. 155, THIRUVALLUR SALAI KUMARAN NAGAR SHOLLINGANALLUR CHENNAI 600 119 [PAN - AAACZ1086G] (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI K.E.B RENGARAJAN, JR. STANDING COUNSEL RESPONDENT BY : SHRI V.D.GOPAL O R D E R PER HARI OM MARATHA, JUDICIAL MEMBER: THESE ARE TWO APPEALS PREFERRED BY THE REVENUE, FOR THE ASSESSMENT YEARS 2006-07 AND 2007-08, IN WHICH IDE NTICAL ISSUES REGARDING TREATMENT OF THE FOREIGN EXCHANGE EXPENDI TURE WHETHER TO BE EXCLUDED BOTH FROM EXPORT TURNOVER AND TOTAL TUR NOVER FOR ARRIVING AT THE DEDUCTION U/S 10B OF THE ACT; AND AMORTIZATI ON OF CAPITAL EXPENDITURE, ARE INVOLVED. THEREFORE, FOR THE SAKE OF CONVENIENCE AND BREVITY, WE ARE PROCEEDING TO DECIDE THEM BY A COMM ON ORDER. ITA 59&60/11 :- 2 -: 2. BRIEFLY STATED, THE COMMON FACTS FOR THESE TWO Y EARS, ARE THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS O F COMPUTER SOFTWARE DEVELOPMENT AND IS ELIGIBLE FOR A CLAIM U/ S 10B OF THE ACT. THE COMPANY IS ALSO A 100% EXPORT ORIENTED UNIT [EO U]. THE ASSESSEE IS DEVELOPING SOFTWARE BY WAY OF ONSITE AN D OFFSITE DEVELOPMENT. THE ASSESSEE IS HAVING A BRANCH OFFIC E IN USA . THE ASSESSEE, WHEN SO REQUIRED BY THE ASSESSING OFFICER , FURNISHED DETAILS OF EXPENSES INCURRED IN FOREIGN CURRENCY IN PROVIDI NG TECHNICAL SERVICES OUTSIDE INDIA IN ASSESSMENT YEAR 2006-07 THESE EXPE NSES ARE SHOWN AS ` 9,49,75,456/- AND IN ASSESSMENT YEAR 2007-08, THES E ARE ` 9.74,33,406/-. THE ASSESSING OFFICER EXCLUDED ENTI RE EXPENSES SHOWN FROM THE EXPORT TURNOVER ON THE REASONING THAT THES E EXPENSES WERE INCURRED OUTSIDE INDIA ON SALARY ETC. AND THEY WERE NOTHING BUT SOFTWARE DEVELOPMENT EXPENSES WHICH HAVE TO BE EXCL UDED FROM THE EXPORT TURNOVER. IN DOING SO, HE HAS NOT EXCLUDE D SIMILAR EXPENSES FROM TOTAL TURNOVER. HOWEVER, THE LD. CIT(A) HA S TAKEN A DIFFERENT VIEW BY FOLLOWING THE TRIBUNALS DECISION IN ASSESS EES OWN CASE, AGAINST WHICH THE REVENUE IS IN APPEAL. THIS ISSUE IS COMMON IN BOTH THE APPEALS. ITA 59&60/11 :- 3 -: 3. WE HAVE HEARD THE RIVAL CONTENTIONS. IT IS AN UNDENIABLE FACT THAT THIS BENCH HAS TAKEN A VIEW THAT SUCH EXPENSES HAVE TO BE EXCLUDED BOTH FROM EXPORT AND TOTAL TURNOVER, IF TH EY HAVE TO BE. THUS, THIS ISSUE STANDS COVERED IN FAVOUR OF THE AS SESSEE BY THE DECISION OF THIS BENCH RENDERED IN THE CASE OF THIS VERY ASSESSEE, IN I.T.A.NOS.2297, 2298, 2299 & 2300/MDS/2008, FOR ASS ESSMENT YEARS 2001-02, 2002-03, 2004-05 AND 2005, ORDER DATED 2 8.2.2011, IN WHICH IN PARA 6&7 IT HAS BEEN HELD AS UNDER: 6. THE NEXT ISSUE RAISED VIDE GROUND NO.IV RELAT ES TO CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN EXCLUDING ` 4,43,19,916/- AS NOT FORMING PART OF EX PORT TURNOVER WHO HAS EXCLUDED THIS AMOUNT ON THE REASO NING THAT THE AMOUNT REPRESENTED EXPENSES INCURRED IN FO REIGN EXCHANGE IN PROVIDING TECHNICAL SERVICES OUTSIDE IN DIA. THE FACTS OF THIS ISSUE HAVE ALREADY BEEN NARRATED ABOVE. 7. AFTER HEARING BOTH SIDES ON THIS ISSUE, WE F IND THAT IN VIEW OF THE SPECIAL BENCH DECISION (SUPRA)IN ASSESS EES OWN CASE, WHEREIN IT HAS BEEN HELD THAT SUCH AMOUNT CANNOT BE EXCLUDED FROM EXPORT TURNOVER, THIS ADDIT ION CANNOT SURVIVE. CONSEQUENTLY, BY FOLLOWING THE SPE CIAL BENCH DECISION(SUPRA) WE ORDER TO DELETE THE IMPUGN ED ADDITION. 4. THEREFORE, BY FOLLOWING THE TRIBUNAL ORDER (SUPRA), WE CONFIRM THE ORDER OF THE LD. CIT(A) ON THIS ISSUE AND DISMI SS THE COMMON GROUND RAISED BY THE REVENUE IN THIS REGARD, IN BOT H THE YEARS. 5. THE SECOND COMMON ISSUE INVOLVED IN THESE APPEALS I S REGARDING THE ADDITION MADE BY THE ASSESSING OFFICER ON ACCOU NT OF AMORTIZATION ITA 59&60/11 :- 4 -: OF CAPITAL EXPENDITURE. THE COMMON FACTS APROPOS T HIS ISSUE ARE THAT UNDER AMORTIZATION OF DEFERRED EXPENDITURE, THE CO MPANY HAS CLAIMED CERTAIN SUMS ON ACCOUNT OF AMORTIZATION OF BUSINESS ACQUISITION EXPENSES. WHEN QUESTIONED, THE ASSESSEE REPLIED TH AT IT HAD NOT TAKEN OVER THE ASSETS/LIABILITIES OF THE ERSTWHILE FIRMS. THE BRANCH OFFICE IN USA HAD ACQUIRED THE CLIENTELE AND HUMAN RESOURCES OF THREE COMPANIES, IN USA, VIZ. SILVER SPRING TECHNOLOGIES INC., SCHUMACHER CONSULTING GROUP AND SCHMIDT SYSTEMS INC., FOR A TO TAL CONSIDERATION OF US $ 1,731,985 [ ` 849.19 LAKHS] RELATING TO ASSESSMENT YEAR 2002- 03. THE COMPANY DID NOT ACQUIRE ANY CAPITAL ASSET AND THE ENTIRE AMOUNT INCURRED WAS CHARGEABLE IN THE ACCOUNTS BUT HAS BEEN SPREAD OVER FIVE YEARS AS PER THE METHOD OF ACCOUNTING SYS TEM FOLLOWED BY THE ASSESSEE. THE COST WAS SPREAD OVER A PERIOD OF FIVE YEARS AS DEFERRED REVENUE EXPENDITURE. SIMILARLY, DURING TH E FINANCIAL YEAR 2005-06, THE ASSESSEE HAD ACQUIRED THE BUSINESS OF TWO COMPANIES VIZ. JDAN SYSTEMS & IMPEKSOFT INC. FOR A TOTAL CONS IDERATION OF US $ 3,171,000 [ ` 13,86,49,848] AND A SUM OF ` 4,59,18,900/- WAS PAID TOWARDS ADVANCE IN THE PREVIOUS YEAR TO ASSESSMENT YEAR 2006-07. THE BALANCE AMOUNT WAS PAID IN INSTALMENTS UPTO SEP TEMBER, 2005. THIS AMOUNT WAS AMORTIZED OVER A PERIOD OF FIVE YEA RS. THE RELEVANT AMOUNT PERTAINING TO SIX MONTHS HAS BEEN CHARGED TO PROFIT & LOSS ACCOUNT FOR ASSESSMENT YEAR 2006-07. BUT THE ASSES SING OFFICER DID ITA 59&60/11 :- 5 -: NOT ACCEPT THE EXPLANATION OF THE ASSESSEE. THE PR OFIT & LOSS ACCOUNT OF THE COMPANY WAS PREPARED INCLUDING THE INCOME AN D EXPENDITURE OF THE US BRANCH OPERATION. FOR INCOME-TAX PURPOSES, THE GLOBAL BUSINESS INCOME INCLUDING THE US BRANCH PROFIT WAS TAXED AND DOUBLE TAXATION BENEFIT IN RESPECT OF THE US BRANCH PROFI TS WAS ALLOWED AGAINST THE TOTAL TAX PAYABLE BY THE ASSESSEE ON TH E GLOBAL INCOME. HENCE, THE AMOUNT CHARGED TO PROFIT & LOSS ACCOUNT WAS ADDED BACK TO THE TOTAL INCOME OF THE US BRANCH OFFICE. HOWE VER, THIS AMOUNT WAS DELETED BY THE LD. CIT(A). 6. AT THE TIME OF HEARING, IT WAS FOUND THAT THIS ISSU E ALSO STANDS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION O F THE SPECIAL BENCH DATED 2.11.2010 IN ASSESSEES OWN CASE. IN THIS RE GARD, WE REPRODUCE HEREIN BELOW RELEVANT PARA NOS. 20 & 21 OF THE ABOV E ORDER: 20. THERE IS NO DISPUTE ABOUT THE FACT THAT THE ASSESSEE IS A COMPANY ENGAGED IN BUSINESS OF DEVELOPMENT OF SOFTWARE BOTH BY WAY OF ON SITE DEVELOPMENT AND OFF SHORE DEVELOPMENT AND ALSO THAT IT HAS BRANCH IN USA FOR WHICH SEPARATE ACCOUNTS WERE MAINTAINED. THERE IS ALSO N O DISPUTE ABOUT THE FACT THAT THERE IS APPROVAL OF TH E AUTHORIZED DEALER NAMELY CENTRAL BANK OF INDIA, CHE NNAI, FOR OPENING THE OVERSEAS BRANCH A NEW JERSY, USA. 21. NOW WE ARE CALLED UPON TO ADJUDICATE WHETHER T HE ASSESSING OFFICER AND THE LD. CIT(A) WERE RIGHT IN EXCLUDING FROM THE EXPORT TURNOVER ` 3,33,46,592/- INCURRED BY THE ASSESSEE OUTSIDE INDIA IN FOREIGN EXCHANGE IN PROVI DING TECHNICAL SERVICES, WHILE COMPUTING DEDUCTION U/S 1 0B OF THE I.T ACT. FOR ADJUDICATING THIS ISSUE FIRST OF ALL WE SHOULD CONSIDER WHAT IS SOFTWARE AND WHAT IS TECHNICAL SERVICES. EXPLANATION (II) TO SUB-SECTION 9A OF S ECTION 10B DEFINES COMPUTER SOFT WARE. EXPLANATION READS AS U NDER: ITA 59&60/11 :- 6 -: CLAUSE (II): FOR THE PURPOSE OF THIS SECTION (I ) COMPUTER SOFTWARE MEANS ( A ) ANY COMPUTER PROGRAMME RECORDED ON ANY DISC, TAPE , PERFORATED MEDIA OR OTHER INFORMATION STORAGE DEVIC E; OR ( B ) ANY CUSTOMIZED ELECTRONIC DATA OR ANY PRODUCT OR SERVICE OF SIMILAR NATURE AS MAY BE NOTIFIED BY THE BOARD, WHICH IS TRANSMITTED OR EXPORTED FROM INDIA TO ANY PLACE OUT SIDE INDIA BY ANY MEANS; CLAUSE (III) OF EXPLANATION (2) TO SUB-SECTION 9A O F SECTION 10B DEFINES EXPORT TURNOVER AS UNDER: ( III )EXPORT TURNOVER MEANS THE CONSIDERATION IN RESPE CT OF EXPORT [BY THE UNDERTAKING] OF ARTICLES OR THINGS OR COMPUTER SOFTWARE RECEIVED IN, OR BROUGHT INTO, INDIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE IN ACCORDANCE WITH SUB -SECTION (3), BUT DOES NOT INCLUDE FREIGHT, TELECOMMUNICATIO N CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE AR TICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA OR EXPENS ES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHN ICAL SERVICES OUTSIDE INDIA; THE COMBINED READING OF THE DEFINITION OF SOFTWARE AS GIVEN IN CLAUSE (I) OF EXPLANATION (2) AND EXPORT TURNOV ER AS DEFINED IN CLAUSE (III) ABOVE, WOULD GO TO SHOW THA T EXPORT TURNOVER OF COMPUTER SOFTWARE MEANS CONSIDERATION RECEIVED IN RESPECT OF EXPORT OF COMPUTER SOFTWARE BUT DOES NOT INCLUDE FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE TO THE DELIVERY OF COMPUTER SOFTWARE OUTS IDE INDIA OR EXPENSES INCURRED IN FOREIGN EXCHANGE IN P ROVIDING TECHNICAL SERVICES OUTSIDE INDIA. 7. IN VIEW OF THE ABOVE, WE RESTORE THIS ISSUE TO TH E FILE OF THE ASSESSING OFFICER FOR DECIDING AFRESH FOLLOWING THE SPECIAL BENCH DECISION (SUPRA) AND ALLOW THIS GROUND FOR STATISTI CAL PURPOSES ONLY, IN BOTH THESE YEARS. ITA 59&60/11 :- 7 -: 8. IN THE RESULT, BOTH THE APPEALS ARE PARTLY ALLO WED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 30.6.2011. SD/- SD/- (DR. O.K. NARAYANAN) VICE-PRESIDENT (HARI OM MARATHA) JUDICIAL MEMBER DATED: 30 TH JUNE, 2011 RD COPY TO: APPELLANT/RESPONDENT/CIT(A)/CIT/DR