ACIT, Hyderabad V. M/s Semantic Space Technologies Ltd., Hyderabad

ITA 915/HYD/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 7520 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 8 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-03-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 01-03-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 15-06-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: HARI LAL NAIK
• Assessee Lawyers: V SIVA KUMAR; C S SUBRAHMANYAM
• Keywords: Business income; Transfer pricing; Business expenditure; Residential status; Double taxation relief; Permanent establishment

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI D.KARUNAKARA RAO, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER. ITA NO.824/HYD/2010 (ASSESSMENT YEAR 2006- 07) 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.915/HYD/2010 (ASSESSMENT YEAR 2006- 07) 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 HARILAL NAIK DATE OF HEARING 29 2.2012 DATE OF PRONOUNCEMENT 7.3.2012 O R D E R PER D.KARUNAKARA RAO, ACCOUNTANT MEMBER: THESE CROSS-APPEALS FOR THE ASSESSMENT YEAR 2006- 07 ARE DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF I NCOME-TAX(APPEALS)- IV, HYDERABAD DATED 31.3.2010. ITA NO.824 & 915/HYD/10 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 2 REVENUES APPEAL ITA NO.915/HYD/2010 2. FIRST EFFECTIVE GROUND OF THE REVENUE READS AS FOLLOWS- 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) MISCEL LANEOUS INCOME (II) CREDIT BALANCE WRITTEN BACK; AND (III)NOTICE PERIOD SALARY FOR THE PURPOSES OF ARRIVING AT THE DEDUCTION UNDER S.10A OF THE ACT, A RE COVERED BY THE ORDER OF THIS TRIBUNAL DATED 19 TH AUGUST, 2009 IN ASSESSEES OWN CASE IN THE CROSS-APPEALS FOR 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 CREDIT BALANCE WRITTE N BACK SHOULD BE INCLUDED IN THE PROFIT ELIGIBLE FOR COMPUTATION OF EXEMPTION UNDER S.10A OF THE ACT. WE FIND THAT THE SAID DIRECTION WAS GI VEN BY THE TRIBUNAL, FOLLOWING THE DECISION OF THE MUMBAI BENCH OF THE T RIBUNAL IN THE CASE OF EXTRUSION PROCESSES (P)LTD V/S. ITO (2007) 106 ITD 336. THE TRIBUNAL ALSO NOTED THAT THERE IS NO DECISION TO THE CONTRAR Y BROUGHT 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. THEREFORE, WE ARE OF THE OPINION THAT THE CIT(A) WAS JUSTIFIED IN DECIDING THIS ISSUE IN FAVO UR OF THE ASSESSEE. WE ACCORDINGLY CONFIRM THE ORDER OF 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 SAID ISSUE WAS ALSO DECIDED BY THE TRIBUNAL IN FAVOUR OF THE ASSESSEE. IN THAT REGARD, THE TRIBUNAL RELIED ON ITA NO.824 & 915/HYD/10 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 3 THE DECISION OF THE SUPREME COURT IN THE CASE OF LA KSHMI MACHINE WORKS (290 ITR 667). WE HAVE PERUSED THE FACTS OF THE CA SE ON THIS ISSUE, AND FIND THAT THE ISSUE INVOLVED IN THIS APPEAL IS IDEN TICAL TO THE ONE ALREADY ADJUDICATED BY THE TRIBUNAL. RELEVANT PORTION OF T HE 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 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. 5. NEXT EFFECTIVE GROUND OF THE REVENUE, BEING GRO UND NO.3, RELATES TO INCLUSION OF GAIN ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION OF RS.36,20,165, FOR THE PURPOSE OF COMPUTING ELIGIBLE INCOME UNDER S.10A OF THE ACT. 6. AT THE VERY OUTSET, IT HAS BEEN BROUGHT TO OUR NOTICE THAT THE CIT(A) HAS DECIDED THIS ISSUE RELYING ON THE BOMBAY BENCH OF THE TRIBUNAL IN THE CASE OF RENAISSANCE JEWELLERY P. LT D. V/S. ITO(101 ITD 380). DURING THE PROCEEDINGS BEFORE US, NO DECISIO N TO THE CONTRARY, HAS BEEN BROUGHT TO OUR NOTICE. IN THE CIRCUMSTANCES, WE ARE OF THE OPINION THAT THERE IS NO INFIRMITY IN THE ORDER OF THE CIT( A) ON THIS ISSUE. THE SAME IS ACCORDINGLY CONFIRMED AND THIS GROUND OF TH E REVENUE IS REJECTED. ITA NO.824 & 915/HYD/10 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 4 7. GROUND NO.4 OF THE REVENUE RELATES TO THE DISA LLOWANCE MADE BY THE ASSESSING OFFICER UNDER S.40(A)(IA) OF THE A CT. 8. AT THE OUTSET, THE LEARNED COUNSEL FOR THE ASS ESSEE MENTIONED THAT THIS GROUND HAS BEEN ERRONEOUSLY RAISED BY THE REVENUE FOR THE REASON THAT THE CIT(A) CONFIRMED THE DISALLOWANCE M ADE BY THE ASSESSING OFFICER, WHICH CAN BE SEEN FROM PARA 12.1 OF THE IM PUGNED ORDER OF THE CIT(A). IN FACT, IT IS SUBMITTED, ASSESSEE RAISED GROUNDS IN ITS APPEAL AGAINST DISALLOWANCE SUSTAINED BY THE CIT(A). THE LEARNED DEPARTMENTAL REPRESENTATIVE FAIRLY AGREED TO THE OCCURRENCE FO T HE MISTAKE IN RAISING THIS GROUND. WE HAVE PERUSED THE DISCUSSION IN P ARAS 12 AND 12.1 OF THE IMPUGNED ORDER AND FIND THAT THE CIT(A) HAS IN FACT, DID NOT FIND ANY INFIRMITY IN THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AND ACCORDINGLY CONFIRMED THE DISALLOWANCE OF RS. MADE FOR CONTRAVENTION OF THE PROVISION OF S.195 OF THE ACT. IN SUCH FACTUAL CIRCUMSTANCE, WE FIND THAT THE COMMISSIONER OF INCOME-TAX HAS ERRONEOUSLY AUTHORIZED THE DEPARTMENT TO RAISE THIS GROUND. THIS GROUND IS AC CORDINGLY REJECTED AS MISCONCEIVED. 9. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED. ASSESSEES APPEAL ITA NO.824/HYD/2010 10. SUMMARISED GROUNDS OF THE ASSESSEE IN THIS APP EAL ARE AS UNDER- 1. THE ORDER OF THE LEARNED COMMISSIONER OF INCOME - TAX(APPEALS) IS ERRONEOUS IN LAW AND ON THE FACTS O F THE CASE. 2. THE LEARNED COMMISSIONER OF INCOME-TAX(APPEALS) ERRED IN DIRECTING THE EXCLUSION OF THE INTEREST INCOME OF RS.1,09,0987 FOR PURPOSES OF COMPUTING ELIGIBLE INC OME U/S. 10A. ITA NO.824 & 915/HYD/10 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 5 3. THE LEARNED COMMISSIONER OF INCOME-TAX(APPEALS) ERRED IN UPHOLDING THE EXCLUSION OF THE SUM OF RS.2,58,24,05 1 RECEIVED FROM THE US BRANCH OF THE ASSESSEE FROM E XPORT TURNOVER FOR PURPOSES OF SEC.10A THOUGH THESE ARE COVERED BY NOTIFICATION ISSUED BY CNBDT AND APPROVED BY ST PI. 4. EVEN IF IT IS ASSUMED THAT THE IMPUGNED AGGREGA TE RECEIPT OF RS.2,58,24,051 DID NOT REPRESENT EXPORT TURNOVER , THE LEARNED COMMISSIONER OF INCOME-TAX(APPEALS) ERRED I N UPHOLDING THE ACTION OF THE ASSESSING OFFICER IN EX CLUDING THE ENTIRE TURNOVER FROM THE EXPORT INCOME WHILE CO MPUTING THE INCOME FROM EXPORT OF SOFTWARE. 5. THE LEARNED COMMISSIONER OF INCOME-TAX(APPEALS) ERRED IN CONFIRMING DISALLOWANCE OF RS.2,46,50,958 U/S. 40(A )(IA) ON THE GROUND THAT THE APPELLANT MADE THE SAID PAYMENT TO A FOREIGN ENTITY AND THAT ACCORDINGLY THE APPELLANT O UGHT TO HAVE DEDUCTED TAX AT SOURCE UNDER SEC.1956 OF THE I .T. ACT THOUGH THE IMPUGNED PAYMENT REPRESENTED MOVEMENT OF FUNDS WITHIN THE SAME INDIAN TAXABLE ENTITY. 6. THE LEARNED COMMISSIONER OF INCOME-TAX(APPEALS) FAILED TO APPRECIATE THAT IN ANY CASE, FOREIGN BRANCH IS NOT A NON- RESIDENT AS PER SEC.6(5) OF THE I.T. ACT AND THEREF ORE THE IMPUGNED PAYMENT IS NOT COVERED BY SEC.195 OF THE I T ACT AND IS ALSO EXCLUDED FROM THE PURVIEW OF TAXATION E VEN AS PER DTAA WITH USA. 7. THE LEARNED COMMISSIONER OF INCOME-TAX(APPEALS) FAILED TO APPRECIATE THE SUBMISSIONS OF THE APPELLANT THAT TH E IMPUGNED AMOUNT OF RS.2,46,50,958 HAS NOT BEEN CLAI MED AS A DEDUCTION IN COMPUTING TOTAL INCOME ON THE BAS IS OF THE CONSOLIDATED P&L ACCOUNT WHICH FORMED THE BASIS FOR COMPUTATION OF TAXABLE INCOME AND ACCORDINGLY THE PROVISIONS OF SEC.40(A)(IA) ARE NOT ATTRACTED AT AL L TO THE IMPUGNED AMOUNT. 8. THE LEARNED COMMISSIONER OF INCOME-TAX(APPEALS) RELIED ON THE DECISION OF KARNATAKA HIGH COURT IN THE CASE OF SAMSUNG ELECTRONICS WHICH FACTS AND CIRCUM STANCES ARE ENTIRELY DIFFERENT FROM THE FACTS OF THE CASE OF THE APPELLA NT. 9. FOR THE ABOVE GROUNDS AND SUCH OTHER GROUND THAT MAY BE URGED AT THE TIME OF HEARING, THE APPELLANT PRAYS T HAT THE APPEAL BE ALLOWED. 11. BEFORE ISSUE-WISE ADJUDICATION IS TAKEN UP, T HE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THERE ARE T HREE ISSUES INVOLVED IN THESE GROUNDS, WHICH ARE AS FOLLOWS- ITA NO.824 & 915/HYD/10 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 6 (I) EXCLUSION OF INTEREST INCOME OF RS.1,09,087 FOR THE PURPOSES OF COMPUTING THE ELIGIBLE INCOME UNDER S.1 0A OF THE ACT. (II) EXCLUSION OF A SUM OF RS.2,58,24,051 BEING THE AMOU NT RECEIVED FROM BRANCH OFFICE OF THE ASSESSEE AT US. THE ASSESSING OFFICER IS OF THE OPINION THAT THIS AMOUN T IS NOT TO BE INCLUDED IN THE EXPORT TURNOVER OF THE ASSESSEE FOR THE PURPOSES OF S.10A OF THE ACT. (III) DISALLOWANCE OF RS.2,46,50,958 INVOKING THE PROVISI ONS OF S.40(A)(IA) WHEN THESE PAYMENTS ARE MADE BY THE BRA NCH OFFICE OF THE ASSESSEE AND WHEN SUCH BRANCH OFFICE OF THE ASSESSEE IS NOT NON-RESIDENT. NOW, WE SHALL PROCEED WITH THE ISSUE-WISE ADJUDICAT ION OF THIS APPEAL FILED BY THE ASSESSEE. 12. AS FOR THE FIRST ISSUE RELATING TO INTEREST IN COME 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 R ECEIVED INTEREST AMOUNT OF RS.1,09,087 AND PLEADED FOR INCLUSION OF THE SAM E AS PROFITS OF THE BUSINESS ELIGIBLE FOR EXEMPTION UNDER S.10A OF THE ACT. THE ASSESSING OFFICER HELD THAT THIS INCOME IS OUTSIDE THE OPERAT IONAL INCOME, AND ACCORDINGLY EXCLUDED THE SAME FROM THE SCOPE OF S.1 0A AND TAXED THE SAME AS INCOME UNDER THE HEAD OTHER SOURCES. IN THE PROCESS, THE ASSESSING OFFICER RELIED ON THE DECISION OF THE APE X COURT IN STERLING FOODS (1999)237 ITR 579. BEFORE THE CIT(A), THE ASSESSEE PLEADED THAT THE INTEREST DERIVED ON ACCOUNT OF TEMPORARY PARKING OF BUSINESS FUNDS CONSTITUTES INCOME DERIVED FROM ITS EXPORT ACTIVITY . THE CIT(A) RELYING ON THE MUMBAI BENCH DECISION OF THE TRIBUNAL IN THE CA SE OF RENAISSANCE JEWELLERY P. LTD. V/S.ITO(101 ITD 380), CONFIRMED T HE DISALLOWANCE MADE BY THE ASSESSING OFFICER. AGGRIEVED BY THE SAME, A SSESSEE IS IN APPEAL BEFORE US ON THIS ISSUE. ITA NO.824 & 915/HYD/10 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 7 13. LEARNED COUNSEL FOR THE ASSESSEE, REITERATING THE CONTENTIONS URGED BEFORE THE LOWER AUTHORITIES, SUBMITTED THAT THE INTEREST INCOME DERIVED BY TEMPORARY PARKING OF FUNDS CONSTITUTES E XPORT INCOME OF THE ASSESSEE, AND HENCE IS ELIGIBLE FOR DEDUCTION UNDER S.10A OF THE ACT. 14. ON THE CONTRARY, THE LEARNED DEPARTMENTAL REPR ESENTATIVE STRONGLY SUPPORTED THE ORDERS OF THE CIT(A) AND REL IED ON THE DECISIONS CITED BY HIM IN THE IMPUGNED ORDER. 15. ON HEARING BOTH SIDES, WE FIND THAT THE ISSUE OF GRANTING DEDUCTION ON INTEREST RECEIVED, HAS NOW REACHED FIN ALITY AT THE LEVELS OF THE HIGH COURT, SAY BY THE DECISION OF THE CHATTISG ARH HIGH COURT IN THE CASE OF NAV BHARAT EXPLOSIVES CO. PVT. LTD. (337 IT R 0515), WHEREIN IT WAS HELD THAT THE INCOME BY WAY OF INTEREST ON FIXE D DEPOSITS IS NOT ELIGIBLE FOR SPECIAL DEDUCTION UNDER S.10A. THEREFO RE, WE UPHOLD THE IMPUGNED ORDER OF THE CIT(A) ON THIS ISSUE. THIS I SSUE IS ACCORDINGLY DECIDED AGAINST THE ASSESSEE, REJECTING GROUND NO. 2 OF THE ASSESSEE IN THIS APPEAL. 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 BRANCH OFFICE LOCATED IN US. THE SAID SALES WERE INCLUDED BY THE ASSESSEE IN THE EXPORT T URNOVER OF THE ASSESSEE FOR THE PURPOSES OF COMPUTING DEDUCTION UN DER S.10A. PER CONTRA, THE ASSESSING OFFICER IS OF THE VIEW THA T THE SAID INCLUSION IS NOT PROPER, CONSIDERING THE FACT THAT SALE BY HEAD OFFI CE TO THE BRANCH ITSELF DOES NOT CONSTITUTE SALE PER SE . IT IS MERELY A CASE OF TRANSFER. THEREFORE, THE ASSESSING OFFICER EXCLUDED SUCH SALE S TO ITS BRANCH OFFICE FROM THE EXPORT TURNOVER OF THE ASSESSEE, BEFORE AL LOWING THE SAID DEDUCTION. AT THE END OF THE FIRST APPELLATE PROCE EDINGS, THE CIT(A) NOT ONLY CONFIRMED THE SAID EXCLUSION OF THE SALES FRO M THE EXPORT TURNOVER ITA NO.824 & 915/HYD/10 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 8 OF THE ASSESSEE, BUT ALSO PROCEEDED TO EXCLUDE THE SAID AMOUNT 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 ARE TH AT THE HEAD OFFICE SALES INCLUDE RS.61,77,900 RECEIVED FROM THE BRANCH OFFI CE 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, WH ICH WAS NOT ENTERTAINED BY THE ASSESSING OFFICER AS DISCUSSED E ARLIER. DURING THE FIRST APPELLATE PROCEEDINGS,, THE ASSESSEE SUBMITTED THAT THE SAID RECEIPTS FROM THE BRANCH OFFICE CONSTITUTES EXPORT OF SOFTW ARE SERVICES BY THE ASSESSEE, 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 DATED 26.9 .2000 TO SUPPORT ITS CASE. FURTHER, THE ASSESSEE INCLUDED THE RELEVA NT INCOME IN THE ELIGIBLE PROFITS OF THE ASSESSEE. HOWEVER, TO MAINTAIN HARM ONY OF EXCLUSION FROM THE EXPORT TURNOVER, HE ALSO REDUCED THE SAID AMOUN T FROM THE ELIGIBLE PROFIT OF THE BUSINESS. CONSIDERING THE FACT THAT THE ASSESSEE FAILED TO PRODUCE SEGREGATION OF THE PROFIT RELATABLE TO THE SAID SALES 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 F ROM THE PROFITS OF THE BUSINESS BEFORE DEDUCTION UNDER S.10A WAS DETERMINED. CONSIDERING THE ABOVE SUBMISSIONS OF THE 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 THE RE CANNOT BE SALES BETWEEN THE HEAD OFFICE AND THE BRANCH OFFICE, AS S ALES IMPLY THE TRANSFER OF GOODS AND THE CHANGE OF HANDS OF DIFFER ENT ENTITIES/PERSONS. HE ACCORDINGLY CONFIRMED THE EXCLUSION MADE BY THE ASSESSING OFFICER FROM THE EXPORT TURNOVER. TO BRING PARITY, THE CIT (A) PROCEEDED TO MAKE SIMILAR EXCLUSION FROM THE TOTAL TURNOVER ALSO, AS DISCUSSED IN PARA 10.2 OF ITA NO.824 & 915/HYD/10 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 9 THE IMPUGNED ORDER. FOR THIS PROPOSITION, HE RELIE D 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 SPECIA L 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) SIMPLY CONFIRMED THE DECISION OF THE ASSESSING OFFICER, IN THE ABSENCE OF ANY SEG REGATION OF PROFITS RELATABLE TO THE ABOVE MENTIONED 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 THIS REGARD. ES SENTIALLY, IT CONTAINS NARRATION OF THE FACTS AND REITERATED THE STAND AGA INST EXCLUSION FROM THE EXPORT TURNOVER AS WELL AS TOTAL TURNOVER. HE EMPH ASIZED THE FACT OF EXPORTING THE GOODS TO THE BRANCH OFFICE IN US, WIT H THE APPROVAL OF THE STPI HYDERABAD. FURTHER, HE QUESTIONED THE VALIDIT Y OF EXCLUSION OF THE ENTIRE RECEIPT FROM THE EXPORT INCOME INSTEAD OF RE DUCING ONLY THE PROFIT SEGMENT OF THE SAID SALES TO THE BRANCH OFFICE IN US BY ADOPTING 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 TH E SAID PRINCIPLE THAT THE TOTAL TURNOVER OF THE ASSESSEE SHOULD EXCLUDE T HE TRANSFERS, IF ANY , MADE TO BE BRANCH OFFICE. FURTHER, THE LEARNED CO UNSEL FOR THE ASSESSEE MADE A REFERENCE TO THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF VIRAGE LOGIC INTERNATIONAL V/S. DY. DIRECTOR OF INCOME-TAX (2007)13 SOT 270, FOR THE PROPOSITION THAT TRANSFERS BY THE HEAD OFF ICE CONSTITUTES EXPORT SALES FOR THE PURPOSES OF COMPUTING DEDUCTION UNDER S.10A OF THE ACT. THE TRIBUNAL HELD THAT THE ASSESSING OFFICERS APPR OACH OF TREATING THE ITA NO.824 & 915/HYD/10 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 10 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 THIRD PART Y. FOR ARRIVING AT THE ABOVE PROPOSITION, THE APPROVAL GIVEN BY THE STPI A SSUMED IMPORTANCE AS DISCUSSED IN PARA 3 OF THE SAID ORDER OF THE TRI BUNAL. THE TRIBUNAL WAS SUPPORTED BY THE PROVISION OF S.10A (7) READ WITH S .80IA(8) OF THE IT ACT IN THIS REGARD. 21. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL RE PRESENTATIVE, 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 SUBMISSIONS AND CITATIONS FILED BEFORE US. AS DISCUSSED IN THE PRECEDING PARAS, THE CRUX OF THE ISSUE RELATES TO THE TRANSFERS BETWEEN THE HEAD OFFICE AN D THE BRANCH OFFICE LOCATED IN US, AND WHETHER IT CONSTITUTES EXPORTS F OR THE PURPOSE OF S.10A OF THE ACT. IN THIS REGARD, IN OUR OPINION, THE DE LHI BENCH ORDER IN THE CASE OF VIRAGE LOGIC INTERNATIONAL (SUPRA) HELPS TO ARRIVE AT A CONCLUSION AND IN FAVOUR OF THE ASSESSEE. IN THAT CASE, THE H EAD OFFICE HAS SENT GOODS TO THE ASSESSEE IN INDIA AND THE SAID EXPORT WAS INCLUDED IN THE EXPORT TURNOVER FOR THE PURPOSES OF DETERMINING THE DEDUCTION 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 OFFICER IN THAT CASE WAS SET ASIDE. RELEVANT PORTION OF THE SAID DECISION OF THE TRIBUN AL 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 ITA NO.824 & 915/HYD/10 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 11 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- 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 WITH TH E APPROVAL OF THE STPI CLUBBED WITH SATISFACTION OF OTHER CONDITIONS LIKE REALIZATION OF PROCEEDS IN FOREIGN EXCHANGE, CONSTITUTES EXPORTS FOR THE PURPO SE OF THE DEDUCTION UNDER S.10A OF THE ACT. THUS, WITHOUT GOING INTO T HE OTHER ARGUMENTS RAISED BY THE LEARNED COUNSEL FOR THE ASSESSEE, WE FIND THAT THE ASSESSEE MUST BE GIVEN RELIEF ON THIS ISSUE. ACCORDINGLY TH E DECISION OF THE CIT(A) TO EXCLUDE THE SAID SALES BY THE ASSESSEE TO THE BR ANCH IN US FROM THE TOTAL TURNOVER AND THE OTHER CHANGES MADE BY THE A SSESSING OFFICER ARE REVERSED. ACCORDINGLY, SUMMARIZED GROUNDS AT SL. N O.3 AND 4 OF THE ASSESSEE ARE ALLOWED. 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 T HE INCOME-TAX ACT AND DOUBLE TAXATION AVOIDANCE AGREEMENT(DTAA) WITH USA IN RESPECT OF REMITTANCES MADE BY THE HEAD OFFICE TO BRANCH OFF ICE 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 ACCOUNT OF WO RK SUB-CONTRACTED TO ITA NO.824 & 915/HYD/10 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 12 THEM. THE ASSESSEE DID NOT FURNISH DETAILS OF TDS M ADE IN RESPECT OF SUCH PAYMENTS. THE ASSESSING OFFICER IS OF THE OPINION T HAT THE SAID PAYMENTS TO THE BRANCH OFFICE ATTRACTS THE TDS PROVISIONS UN DER S.194C/195 OF THE ACT, AS THE BRANCH IS A NON-RESIDENT, AND CONSEQUEN TLY THE ASSESSING OFFICER INVOKED THE PROVISIONS OF SECTION 195 READ WITH S.40(A)(IA) OF THE ACT AND DENIED THE BENEFIT OF DEDUCTION UNDER S.10A IN RESPECT OF SUCH PAYMENTS. 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 PROVISIONS OF S.194 /195 ARE ATTRACTED ONLY IF THE PAYEE IS NON-RESIDENT. IN THIS REGARD , LEARNED COUNSEL MENTIONED THAT THE PAYEE IS RESIDENT FOR ALL LEGAL PURPOSES. THE ASSESSEE ARGUED THAT THE STATUS OF A BRANCH OFFICE IS THE SA ME AS THAT OF THE HEAD OFFICE, VIZ. ASSESSEE, CONSIDERING THE VERY NATURE OF THE BRANCH. HE FURTHER MENTIONED THAT THE PERMANENT ESTABLISHMENT FOR THE SAID BRANCH OFFICE IS IN INDIA, WHICH IS UNDISPUTED AND THE CLU BBED INCOME OF THE ASSESSEE IS TAXABLE IN INDIA ONLY. THE LEARNED COU NSEL FOR THE ASSESSEE NOT ONLY EXPLAINED THE PROVISIONS OF S.195 OF THE A CT, BUT ALSO ARTICLE 4(1) OF THE DTAA WITH USA DEALING WITH RESIDENT. IT W AS SUBMITTED THAT THE PROVISIONS OF DTAA READ HARMONIOUSLY WITH THE PROV ISIONS OF THE INDIAN INCOME-TAX ACT, CLEARLY INDICATE THAT THE STATUS O F US BRANCH IS RESIDENT IN INDIA ONLY, AND THEREFORE, THE PROVISIONS OF S.1 95 HAVE NO APPLICATION. THE ASSESSEE ALSO MADE OTHER SUBMISSIONS, WITHOUT PREJUDICE TO THE ABOVE. HE ALSO BROUGHT TO OUR NOTICE THE REVERSAL OF THE JUDGMENT OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT V/S . SAMSUNG ELECTRONICS LTD. (195 TAXMAN 313 = 320 ITR 209). CONSIDERING T HE OTHER SUBMISSIONS NARRATED IN PARA 11 OF THE IMPUGNED ORD ER AS WELL, THE CIT(A) UPHELD THE VIEWS ADOPTED BY THE ASSESSING O FFICER. IN THE PROCESS, HE RELIED ON THE DECISION OF THE KARNATAKA HIGH COURT IN THE CASE OF CIT V/S. SAMSUNG ELECTRONICS LTD. (320 ITR 209), WHICH IS POPULAR AT ITA NO.824 & 915/HYD/10 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 13 THAT TIME FOR THE PROPOSITION THAT TAX HAS TO BE DE DUCTED ON ANY PAYMENT MADE ABROAD. THUS, THE CIT(A) CONFIRMED THE 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. (C) RESIDENTIAL STATUS OF THE ASSESSEE IS RESIDENT BECAUSE S.3 OF THE INDIAN COMPANIES ACT DEFINES THAT COMPANY SAID TO BE A RESIDENT I S 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. ITA NO.824 & 915/HYD/10 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 14 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 INTEREST NOR DIVIDEND UNDER DTAA. AT THE MAXIMUM, THESE PAYMENTS CONSTITUTE FEE FOR INCLUDED SERVICES . IN THAT CASE, THE PROVISIONS OF ARTICLE 12 OF THE D TAA WITH US DO NOT APPLY. APPLYING THE RATIO OF THE MUMBAI BENCH DECI SION OF THE TRIBUNAL IN THE CASE OF RAYMOND LIMITED V/S. DCIT (86 ITD 791) , IT IS SUBMITTED THAT SUCH PAYMENTS ARE OUTSIDE THE PROVISIONS OF S. 195 OF THE ACT. FURTHER, THE LEARNED COUNSEL MENTIONED THAT THE CIT (A) HAS EMPHASISED AND SUBSTANTIALLY RELIED ON THE DECISION OF THE KAR NATAKA HIGH COURT IN THE CASE OF SAMSUNG ELECTRONICS LTD. (SUPRA), BUT THE F ACT IS THAT THE SAID JUDGMENT OF THE KARNATAKA HIGH COURT HAS BEEN REVER SED BY THE SUPREME 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 EXPRESSI ON CHARGEABLE UNDER THE PROVISIONS OF THE ACT IN S.195(1) SHOWS THAT THE REMITTANCES HAVE GOT TO BE TRADING RECEIPT WHOLE OR PART OF WHICH I S LIABLE TO TAX IN INDIA. IF THE TAX IS NOT SO ASSESSABLE, THERE IS NO QUESTI ON OF TAX AT SOURCE BEING DEDUCTED. THE RATIO LAID DOWN BY THE KARNATAKA HIGH COURT JUDGMENT IN THE CITED CASE (320 ITR 209) HAS BEEN SET ASIDE IN THAT CASE. 29. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL R EPRESENTATIVE HAS RELIED ON THE ORDERS OF THE ASSESSING OFFICER A ND 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 O FFICE ABROAD SHOULD BE SUBJECTED TO TDS PROVISION, AS MADE OUT BY THE R EVENUE AUTHORITIES. THE CRUCIAL ARGUMENTS OF THE ASSESSEE IN THIS REGAR D INCLUDE- (A) THESE PAYMENTS ARE OUTSIDE THE SCOPE OF S.195 OF THE ACT FOR THE REASON THAT THE BRANCH OFFICE ABROAD IS PART AND PARCEL OF THE ASSESSEE AND IT IS A ITA NO.824 & 915/HYD/10 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 15 RESIDENT IN STATUS AND NOT NON-RESIDENT, AS MAD E OUT BY THE REVENUE. THE PROVISIONS OF S.195(1) MENTION CLEARLY THAT ON LY THE PAYMENTS TO NON-RESIDENTS ATTRACT PROVISIONS OF S.195 OF THE AC T. THE OTHER ARGUMENT IS THE MISPLACED RELIANCE OF THE CIT(A) ON THE DEC ISION OF THE KARNATAKA 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 T HE STATUS OF THE BRANCH OFFICE OF THE ASSESSEE ABROAD IS NOT NON-RESIDENT . IN SUCH SITUATION, THE PROVISIONS OF S.195 ARE INAPPLICABLE. COMING TO TH E APPLICABILITY OF THE DECISION OF THE KARNATAKA HIGH COURT, IT IS THE ARG UMENT OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE SUPREME COURT HAS SET ASIDE THE OPERATION OF THE JUDGMENT OF THE KARNATAKA HIGH COU RT IN THE CITED CASE, VIDE JUDGMENT REPORTED AT 327 ITR 456. FOR THESE R EASONS, IN OUR OPINION, THE IMPUGNED PAYMENT OF RS.2,46,50,958 MAD E BY THE ASSESSEE TO THE BRANCH OFFICE IN USA, IS OUTSIDE THE SCOPE O F S.195 OF THE ACT. ACCORDINGLY, THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE, ALLOWING GROUNDS NO.5 TO 8 OF THE SUMMARIZED GROUNDS OF APPE AL RAISED BY THE ASSESSEE. 31. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALL OWED. 32. TO SUM UP, WHILE THE REVENUES APPEAL, BEING I TA NO.915/HYD/2010, IS DISMISSED, ASSESSEES APPEAL, B EING ITA NO.824/HYD/2010, IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE COURT ON 7.3.2012 SD/- SD/- (SAKTIJIT DEY) (D.KARUNAKARA RAO) JUDICIAL MEMBER. ACCOUNTANT MEMBER. DT/- 7TH MARCH, 2012 ITA NO.824 & 915/HYD/10 M/S. SEMANTIC SPACE TECHNOLOGIES LTD., HYD ERABAD 16 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. B.V.S.