DCIT, Bangalore V. M/s Tech Mahindra Limited, Bangalore

ITA 748/BANG/2010

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 1538 (ITAT-BANGALORE)
• Duration Of Justice: 8 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-02-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 17-02-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 02-06-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Tax effect
• Section: 142(1); 147; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH A BEFORE SMT. P.MADHAVI DEVI, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ITA NOS.748, 749 AND 750(BANG)/2010 (ASSESSMENT YEARS: 2002-03, 2004-05 & 2005-06) DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 12(4), BANGALORE. VS. APPELLANT M/S.TECH MAHINDRA LTD., NO.9/7, HOSUR ROAD, BANGALORE-29. RESPONDENT AND C.O. NOS.1, 2 AND 3(BANG)/20111 ITA NOS.748, 749 AND 750(BANG)/2010 (ASSESSMENT YEARS: 2002-03, 2004-05 & 2005-06) (BY THE ASSESSEE) ***** REVENUE BY : SHRI G.V.GOPALA RAO. ASSESSEE BY : SHRI PADAMCHAND KHINCHA . PER BENCH : THE APPEALS BY THE REVENUE AND THE CROSS OBJECTION S BY THE ASSESSEE ARE DIRECTED AGAINST THE RESPECTIVE OR DERS OF THE CIT(A)-III, BANGALORE, FOR THE ASSESSMENT YEARS 200 2-03, 2004-05 AND 2005-06. AS THE FACTS AND ISSUES INVOL VED IN ALL ITA NOS.748 TO 750(BANG)/2010 & CO NOS.1 TO 3(BANG)/ 2011 PAGE 2 OF 10 THE APPEALS OF THE REVENUE AND THE CROSS OBJECTIONS BY THE ASSESSEE ARE SIMILAR, THEY ARE HEARD TOGETHER AND D ISPOSED OF BY THIS COMMON AND CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2. ITA NO.748(BANG)/2010 : BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE-COMPANY IS ENGAGED IN THE BUS INESS OF DEVELOPMENT AND EXPORT OF COMPUTER SOFTWARE. IT FIL ED ITS RETURN OF INCOME DECLARING TOTAL INCOME OF RS.11,28 ,600/-. THE RETURN WAS PROCESSED U/S 143(1) OF THE INCOME-T AX ACT, 1961 [HEREINAFTER REFERRED TO AS 'THE ACT'] ON 18-2 -2003. SUBSEQUENTLY, THE CASE WAS REOPENED U/S 147 ON 13-7 -2007 ON THE GROUND THAT THE ASSESSEE, WHILE COMPUTING DE DUCTION U/S 10A OF THE ACT, HAS ADOPTED TOTAL TURNOVER AND HAS NOT EXCLUDED DATA COMMUNICATION EXPENSES WHICH RESULTED IN EXCESS DEDUCTION U/S 10A OF THE ACT TO THE EXTENT O F RS.9,69,30,990/-. NOTICE U/S 148 WAS ISSUED AND SUB SEQUENTLY NOTICE U/S 142(1) WAS ALSO ISSUED. DURING THE COUR SE OF ASSESSMENT PROCEEDINGS, THE AO OBSERVED THAT THE AS SESSEE HAS INCLUDED WITHIN EXPORT TURNOVER THE FOLLOWING E XPENSES: A) FREIGHT NIL B) TELECOMMUNICATION RS.39,02,121/- C) INSURANCE RS.51,90,128/- RS.90,92,249/- ========= ITA NOS.748 TO 750(BANG)/2010 & CO NOS.1 TO 3(BANG)/ 2011 PAGE 3 OF 10 HE OBSERVED THAT IN ACCORDANCE WITH THE PROVISO TO EXPLANATION 2(IV) OF SECTION 10A(8) OF THE ACT, THE EXPENSES TOWARDS FREIGHT, TELECOMMUNICATION AND INSURANCE AT TRIBUTABLE TO THE DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA IS TO BE REDUCED FROM THE EXPORT TURNOVER. HE ALSO OBSERVED THAT THE ASSESSEE-COMPANY HAS INCLUDED WITHIN THE EXPORT TUR NOVER PER DIEM EXPENSES OF RS.24,57,536/- IN FOREIGN EXCHANGE WHICH, ACCORDING TO HIM, WAS TOWARDS PROVIDING TECHNICAL S ERVICES OUTSIDE INDIA WHICH IS TO BE REDUCED IN ACCORDANCE WITH PROVISO TO EXPLANATION 2(IV) OF SEC.10A(8) OF THE A CT. ACCORDINGLY, THE ASSESSEES EXPLANATION WAS CALLED FOR AND THE ASSESSEE SUBMITTED THAT THESE EXPENSES WERE NOT ATT RIBUTABLE TO PROVIDING TECHNICAL SERVICES OUTSIDE INDIA. HOW EVER, THE AO OBSERVED THAT THE TERM TECHNICAL SERVICES HAS NOT BEEN DEFINED WITHIN SECTION 10A OF THE ACT. THEREFORE, RECOURSE CAN BE TAKEN TO EXPLANATION 2 TO CLAUSE (VII) OF SUB-SE CTION (1) OF SECTION 9 OF THE ACT, WHICH DEFINES TECHNICAL SERVI CE TO MEAN ANY CONSIDERATION (INCLUDING ANY LUMP SUM CONSID ERATION) FOR RENDERING OF ANY MANAGERIAL, TECHNICAL OR CONSU LTANCY SERVICES (INCLUDING THE PROVISION OF SERVICES OF TE CHNICAL OR OTHER PERSONNEL). HE, THEREFORE, CONCLUDED THAT P ROVIDING SERVICES RELATING TO COMPUTER SOFTWARE DEVELOPMENT FALLS WITHIN THE MEANING OF TECHNICAL SERVICE AS DEFINED ABOVE AND ITA NOS.748 TO 750(BANG)/2010 & CO NOS.1 TO 3(BANG)/ 2011 PAGE 4 OF 10 THUS REDUCED THE TOTAL AMOUNT OF RS.1,15,49,785/- F ROM THE EXPORT TURNOVER AND COMPUTED THE EXEMPT INCOME ACCORDINGLY. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) WHO DIRECTED THE AO TO REDUCE THE SAME FROM THE TOTAL TURNOVER ALSO FOR COMPUTING THE DEDU CTION U/S 10A. AGGRIEVED BY THE ORDER OF THE CIT(A) IN GIVIN G RELIEF TO THE ASSESSEE BY DIRECTING THE AO TO REDUCE THESE EX PENSES FROM THE TOTAL TURNOVER ALSO THE REVENUE IS IN APPE AL BEFORE US WHILE BY THE ORDER OF THE CIT(A) CONFIRMING THE DIS ALLOWANCE OF THESE EXPENSES BY THE AO, THE ASSESSEE IS IN APPEAL BEFORE US. 2.1 SHRI PADAMCHAND KHINCHA, THE LEARNED COUNSEL F OR THE ASSESSEE WHILE REITERATING THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW SUBMITTED THA T THE EXPENDITURE RELATING TO TELECOMMUNICATION CHARGES T O THE EXTENT OF RS.39,02,121/- CAN BE ATTRIBUTABLE TO DEL IVERY OF COMPUTER SOFTWARE OUTSIDE INDIA AND THEREFORE IT SH OULD BE REDUCED FROM THE EXPORT TURNOVER AND CONSEQUENTLY F ROM THE TOTAL TURNOVER ALSO. HOWEVER, WITH REGARD TO THE I NSURANCE EXPENSES AMOUNTING TO RS.51,90,128/- HE SUBMITTED T HAT THIS SUM WAS INCURRED BY THE ASSESSEE DURING THE RELEVAN T PREVIOUS YEAR TOWARDS EMPLOYEE OVERSEAS MEDICAL INS URANCE POLICIES WHILE VISIT TO CLIENT PREMISES AT USA AND ARE NOT RELATED TO EXPENDITURE ATTRIBUTABLE TO DELIVERY OF COMPUTER ITA NOS.748 TO 750(BANG)/2010 & CO NOS.1 TO 3(BANG)/ 2011 PAGE 5 OF 10 SOFTWARE AND HENCE SHOULD NOT BE REDUCED FROM THE E XPORT TURNOVER. WITH REGARD TO DISALLOWANCE OF RS.27,57, 536/- IN FOREIGN CURRENCY INCURRED RELATING TO ONSITE DEVELO PMENT, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT EX PLANATION TO SECTION 10A ITSELF PROVIDES THAT ONSITE DEVELOPM ENT NEEDS TO BE CONSIDERED AS DEVELOPMENT OF COMPUTER SOFTWARE I N INDIA ONLY AND THEREFORE IT HAS TO BE CONSIDERED AS EXPOR T OF SOFTWARE. ACCORDING TO HIM, RENDERING OF TECHNICAL SERVICES WOULD MEAN ADVISORY SERVICES WHICH, IN THE CASE BEF ORE US, ARE NOT OF THE SAME NATURE. IN SUPPORT OF HIS CONT ENTION, HE PLACED RELIANCE UPON THE FOLLOWING DECISIONS: I) INFOSYS TECHNOLIGIES LTD. ITA NO.50, 793 TO 795, 742, 732 TO 734/BANG/1998 DATED 31-3- 2005 II) INFOSYS TECHNOLIGIES LTD. VS. JCIT, ITA NO.1922/BANG/2003 DATED 7-4-2006 (109 TTJ 631) III) INFOSYS TECHNOLIGIES LTD. VS. JCIT, ITA NO.140 & 149/BANG/2001 (108 TTJ 282) IV) ACIT VS. INFOSYS TECHNOLIGIES LTD. ITA NO.653 & 969/BANG/06 DT.17-10-2007 V) ACIT VS. INFOSYS TECHNOLIGIES LTD. ITA NO.635/BANG/06 DT.2-11-2007 VI) INFOSYS TECHNOLOGIES LTD. VS DCIT (ITA NO.3086/B/95 & 5703/B/96 (DECISION REFERRED TO IN THE ORDER DATED 2-11-2007 VII) INFOSYS TECHNOLIGIES LTD. VS. JCIT (ITA NO.627/B/03 (DECISION REFERRED TO IN THE ORDER ITA NOS.748 TO 750(BANG)/2010 & CO NOS.1 TO 3(BANG)/ 2011 PAGE 6 OF 10 DATED 2-11-07 VIII) I-GATE GLOBAL SOLUTIONS LTD. V. ACIT (ITA NO.2291/B/2004 DT.11-8-2006) VIII) DCIT VS. I-GATE GLOBAL SOLUTIONS LTD. (ITA 391 & 392/B/07 DATED 30-11-2007) IX) ACIT VS. HEWLETT PACKARD GLOBAL SOFT LTD.DT. 19-9-2008 - (2208)TAX CORP(ITAT)18026 X) M/S.RELQ SOFTWARE PVT. LTD. IN ITA NO.767/BANG/2007 DT.16-5-2008 (DECISION REFERRED TO IN HEWLETT PACKARDS CASE) XI) CHANGEPOND TECHNOLOGIES P.LTD. VS. ACIT (2008) 22 SOT 220(CHENNAI) XII) PATNI TELECOM (P) LTD. VS. ACIT (2008) 22 SOT 26 (HYD) XIII) DCIT VS. SOFTSIL INDIA LTD.(2008) 22 SOT 271(HYD) XIV) RELQ SOFTWARE P.LTD. VS. ITO (123 TTJ 856)(BANG) HE DREW OUR PARTICULAR ATTENTION TO THE DECISION OF THE TRIBUNAL IN THE CASE OF INFOSYS TECHNOLOGIES (ITA NOS.50/BAN G/2001, 793 TO 795, 742, 732 TO 734/BANG/1998 DATED 31-3-20 05 WHEREIN THE TRIBUNAL HAS HELD THAT IF A PERSON IS I NVOLVED IN COMPUTER PROGRAMME CREATION, HE SHOULD BE REGARDED AS BEING ENGAGED IN THE DEVELOPMENT OF COMPUTER SOFTWA RE AND NOT AS ENGAGED IN THE BUSINESS OF RENDERING TECHNIC AL SERVICES OUTSIDE INDIA. THUS, ACCORDING TO HIM, BOTH THE IN SURANCE EXPENSES AND THE PER DIEM EXPENSES ARE NOT TO BE EX CLUDED FROM THE EXPORT TURNOVER. HOWEVER, HE ALSO REITERA TED THE ITA NOS.748 TO 750(BANG)/2010 & CO NOS.1 TO 3(BANG)/ 2011 PAGE 7 OF 10 ALTERNATIVE SUBMISSION THAT IN CASE IF THESE EXPENS ES ARE TO BE REDUCED FROM THE EXPORT TURNOVER THEN THEY SHOULD A LSO BE REDUCED FROM THE TOTAL TURNOVER AS HELD BY THE SPEC IAL BENCH OF THE TRIBUNAL IN THE CASE OF ITO VS. SAK SOFT INDIA LTD. (313 ITR (AT) 353). 2.2 SHRI GOPALA RAO, THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, SUPPORTED THE OR DERS OF THE AO AND SUBMITTED THAT THAT THE CIT(A) HAS RELIE D UPON THE DECISIONS OF THE TRIBUNAL IN THE CASES OF M/S.INFOSYS LTD AND M/S.MPHASIS LTD., WHILE THESE DECISIONS HAVE BEEN A PPEALED AGAINST BY THE DEPARTMENT BEFORE THE HONBLE HIGH C OURT OF KARNATAKA AND ARE STILL PENDING FOR DECISION. 2.3. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDERED THE RIVAL CONTENTIONS, WE FIND THAT THE ISSUE OF TELE- COMMUNICATION CHARGES AND INSURANCE FOR DELIVERY OF SOFTWARE OUTSIDE INDIA AND EXPENSES IN FOREIGN CURRENCY FOR RENDERING TECHNICAL SERVICES OUTSIDE INDIA ARE TO BE REDUCED FROM THE EXPORT TURNOVER AS WELL AS THE TOTAL TURNOVER FOR C OMPUTING THE DEDUCTION U/S 10A OF THE ACT AS HELD BY THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF SAK SOFT LTD . (CITED SUPRA). IN THE CASE BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSE E HAS PARTICULARLY DRAWN OUR ATTENTION TO THE NATURE OF T HE EXPENDITURE TO INSIST THAT THE INSURANCE EXPENSES A RE NOT ITA NOS.748 TO 750(BANG)/2010 & CO NOS.1 TO 3(BANG)/ 2011 PAGE 8 OF 10 RELATABLE TO EXPORT OF COMPUTER SOFTWARE OUTSIDE IN DIA AND ALSO THAT PER DIEM EXPENSES ARE NOT TOWARDS RENDERI NG OF TECHNICAL SERVICES OUTSIDE INDIA. WE FIND THAT THE SE ISSUES ARE MORE OR LESS COVERED BY THE DECISIONS RELIED ON BY THE CIT(A). ONLY THOSE EXPENSES WHICH ARE RELATABLE TO EXPORT O F COMPUTER SOFTWARE ARE TO BE REDUCED FROM THE EXPORT TURNOVER AND AS PER THE DECISION OF THE SPECIAL BENCH OF THE TRIBUN AL IN THE CASE OF SAK SOFT LTD., (CITED SUPRA) FROM THE TOTAL TURNOVER ALSO. THE CONTENTION OF THE ASSESSEE THAT INSURANC E EXPENDITURE IS NOT RELATABLE TO THE EXPORT OF COMPU TER SOFTWARE BUT THAT IT RELATES TO MEDICAL INSURANCE OF THE EMP LOYEES OF THE ASSESSEE ON THEIR VISIT TO THE CLIENTS PREMISES HAS NOT BEEN VERIFIED EITHER BY THE AO OR THE CIT(A). THE VERAC ITY OF THIS STATEMENT AS ALSO THE EXPENDITURE CLAIMED HAS TO BE VERIFIED BY THE AO. IN VIEW OF THE SAME, WE REMAND THIS ISS UE TO THE FILE OF THE AO WITH A DIRECTION TO VERIFY THE SAME AND IF IT IS FOUND TO BE NOT RELATABLE TO THE EXPORT OF COMPUTER SOFTWARE BUT RELATABLE TO MEDICAL INSURANCE OF THE ASSESSEE S EMPLOYEES ON THEIR VISIT TO THE CLIENTS PREMISES FOR ONSITE DEVELOPMENT, IT SHOULD BE TREATED AS PART OF EXPORT TURNOVER AND CA NNOT BE REDUCED THERE-FROM. HOWEVER, IF IT IS FOUND TO BE OTHERWISE, IT HAS TO BE REDUCED BOTH FROM EXPORT TURNOVER AS WELL AS TOTAL TURNOVER. AS REGARDS THE ISSUE OF THE EXPENDITURE INCURRED ON ITA NOS.748 TO 750(BANG)/2010 & CO NOS.1 TO 3(BANG)/ 2011 PAGE 9 OF 10 THE EMPLOYEES FOR DEVELOPMENT OF COMPUTER SOFTWARE ON SITE, WE FIND THAT THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF THIS TRIBUNAL IN VARIOUS DECISIONS MORE PARTICULARL Y IN THE CASE OF M/S.INFOSYS LTD. AND RESPECTFULLY FOLLOWING THE SAME, WE HOLD THAT ONSITE DEVELOPMENT OF COMPUTER SOFTWARE C ANNOT BE HELD TO BE RENDERING OF TECHNICAL SERVICES OUTSIDE INDIA AND IT CANNOT BE REDUCED FROM THE EXPORT TURNOVER. THE AO IS DIRECTED ACCORDINGLY. IN THE RESULT, THE REVENUES APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AND THE ASS ESSEES CROSS OBJECTION IS ALSO PARTLY ALLOWED. 3. FOR ASSESSMENT YEARS 2004-05 AND 2005-06 THE ISSUES ARE SIMILAR. HOWEVER, THE LEARNED COUNSEL FO R THE ASSESSEE SUBMITTED THAT THE TAX EFFECT IN THE YEAR 2004-05 IS ONLY RS.1,40,557/- AND THEREFORE THE REVENUES APPE AL MUST BE DISMISSED ON THE GROUND THAT ITS TAX EFFECT IS L ESS THAN THE PRESCRIBED LIMIT BY THE CBDT. THE LEARNED DEPARTMEN TAL REPRESENTATIVE, HOWEVER, SUBMITTED THAT THE CBDT, W HILE FIXING THE TAX LIMIT FOR FILING AN APPEAL BEFORE TH E TRIBUNAL AND THE HIGH COURT, HAS CLEARLY DIRECTED THAT WHERE THE ISSUES ARE REPETITIVE, APPEAL CAN BE FILED TO KEEP THE MATTER ALIVE. COPY OF THE CIRCULAR HAS BEEN FILED BEFORE US. 4. HAVING HEARD BOTH THE PARTIES, WE FIND THAT THE ISSUE IS REPETITIVE AND IN SOME YEARS THE TAX EFFECT IS L ESS WHILE IN ITA NOS.748 TO 750(BANG)/2010 & CO NOS.1 TO 3(BANG)/ 2011 PAGE 10 OF 10 SOME OTHER YEARS, THE TAX EFFECT IS MORE. THEREFOR E, WE ARE NOT INCLINED TO DISMISS THE REVENUES APPEAL ON THE GROUND OF TAX EFFECT. AS THE ISSUES ARE COMMON, DIRECTION GI VEN TO THE AO FOR ASSESSMENT YEAR 2003-04 ALSO IS APPLICABLE T O THE ASSESSMENT YEARS 2004-05 AND 2005-06. 5. IN THE RESULT, THE REVENUES APPEALS AS WELL AS THE CROSS OBJECTIONS OF THE ASSESSEE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 24 TH FEBRUARY, 2011. SD/- SD/- (A. MOHAN ALANKAMONY) ACCOUNTANT MEMBER (SMT. P.MADHAVI DEVI) JUDICIAL MEMBER PLACE : BANGALORE DATED: 24 TH FEBRUARY, 2011. EKS COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) CONCERNED 4. CIT 5. DR, ITAT, BANGALORE 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE