THE COMMISSIONER OF INCOME TAX V. M/S EVERSHINE INFOTECH PVT LTD

ITA/1068/2008

AI Insights

The case involves M/s. Evershine Infotech Pvt. Ltd., a company engaged in providing medical transcription services, which subcontracted part of its work. The Income Tax Department denied the benefit under Section 10A of the Income Tax Act, arguing that the subcontracting did not qualify for the deduction as the work was not carried out within the customs bonded area. However, both the Appellate Authority and the Tribunal found that substantial value was added by the assessee before the products were exported, justifying the deduction under Section 10A. The revenue's appeal to the High Court was dismissed, affirming the lower authorities' decisions.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 736299 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 07-07-2014
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: S PARTHASARATHI
• Assessee Lawyers: K V ARAVIND
• Keywords: Income Tax; Medical transcription; Section 10A; Sub-contracting; Value addition
• Section: 10A; 260-A

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 7TH DAY OF JULY 2014 PRESENT THE HON'BLE MR. JUSTICE N. KUMAR AND THE HON’BLE MR. JUSTICE B MANOHAR ITA No.1068 OF 2008 c/w ITA.No.108/2010 BETWEEN; 1. The Commissioner of Income-Tax, C R Building, Queens Road, Bangalore. 2.The Income Tax Officer, Ward-11(1), C R Building Queens Road, Bangalore. ...APPELLANTS COMMON (By Sri K V Aravind, Advocate) AND: M/s.Evershine Infotech Pvt. Ltd., No.15, 2nd Floor, Vittal Mallya Road Bangalore-560 001. ...RESPONDENT COMMON (By Sri S Parthasarathi, Advocate) 2 These ITAs are filed under Section 260-A of I.T. Act, 1961 arising out of order dated 18.7.2008 passed in ITA.No.798/BNG/2007 and ITA.No.611/Bang/2009, for the Assessment Year 2003-04 and 2005-06, praying to formulate the substantial questions of law stated therein and to allow the appeal and set aside the order passed by the ITAT, Bangalore in ITA No.798/BNG/2007 and ITA.No.611/Bang/2009, dated 18.7.2008 and 30.10.2009 confirming the orders of the Appellate Commissioner and confirm the order passed by the Income Tax Officer, Ward-11(1), Bangalore. These appeals coming on for hearing this day, N. KUMAR, J. delivered the following:- JUDGMENT These two appeals are preferred by the revenue relating to two assessment years of the same assessee where the Tribunal upholding the order passed by the appellate authority held that the assessee had made substantial value addition before the product is delivered and therefore entitled to benefit under Section 10A of the Income Tax Act. 3 2. The assessee is in the business of providing medical transcription facilities. It is an I.T. enabled service. The case of the assessee was taken up for scrutiny. The assessing authority noticed that a sum of Rs.53,92,523/- was debited in the accounts as technical service charges. These charges were paid to Target Transcriptions (P) Ltd, Infy communications (P) Ltd., and Xen Call Centre. The assessing Officer therefore concluded that the services were not rendered in the STPI facility but were rendered out side since the work was sub-contracted. He was of the view that the activity of the assessee should be carried out in the customs bonded area only. Therefore, the assessing authority denied deduction under Section 10A. Aggrieved by the said order, the assessee preferred an appeal to the Commissioner of Income Tax(Appeals). The Appellate Authority noticed that the total expenditure on administration and development was Rs.73,42,562/-. Out of this payments aggregating Rs.53,95,232/- were made to three companies referred 4 to supra. The total payment made to sub contractors comes to Rs.53,95,533/-. A payment of Rs.22,75,381/- was made to Target Transcriptions (P) Limited who carried out the activity in the premises of the assessee. The balance payment of Rs.31,20,152/- was made to Xen Call Centre and Infy Communications (P) Limited, who carried out the work outside. Therefore, only payment of Rs.31,20,152/- was made to sub- contractors who carried out the work outside the premises. The transcription work done by sub- contractors is in crude form and cannot be delivered in such form to the overseas customers. Subsequently, processing is done which involves preparation of preliminary/basic medical records, proofing/editing etc. To ensure quality a number of checks are employed. This involves a lot of work. Besides checking the medical records prepared as aforesaid for errors in the formats, details relating to medical language and the name of the drugs, selection in a systematic/cyclical random manner of online/offline files from specific 5 accounts are vetted and verified. Only after all the transcription work is double checked and verified properly the product is fit for export. The material and files are sent to sub contractors for transcription. On completion of work the same are returned to the assessee. The product cannot be exported without final processing, proofing, quality check and converting the material into uploadable export quality work. Therefore, only one portion of the payment made to sub- contractors is in respect of work done outside the facility. Therefore, the appellate authority was of the view that substantial value addition was made before the product is delivered. Therefore, the appeal was allowed and the benefit of Section 10A was extended to the assessee. Aggrieved by the said order, the revenue preferred an appeal to the Tribunal. The Tribunal on re-appreciation of the entire material on record, after taking note of the discussion made by the appellate authority was of the view that the products made by sub-contractors cannot be delivered 6 in such form to overseas customers. In other words, the assessee has to process it before exporting it. Therefore, the assessee has made substantial value addition before the product is delivered. Therefore, the appellate authority was justified in extending the benefit of Section 10A to the assessee. Accordingly, the appeal came to be dismissed. Aggrieved by the said order, the revenue is in appeal. 3. The substantial questions of law which were framed at the time of admitting these appeals are as under:- “(a)Whether the appellate authorities were correct in holding that assessee would be entitled to claim deduction under Section 10A of the Act in respect of products manufactured and produced by third parties as there was value addition to the same by relying on the Board circular No.1/05 dated 6.1.2005 which was applicable to provisions of Section 10B of the Act? 7 (b)Whether the appellate authorities were correct in holding that the assessee would be entitled to deduction under Section 10A of the Act there was value addition to the producted manufactured by third parties which was exported by the assessee without there being any proof to substantiate the same and especially when STPI approval was granted to the assessee to manufacture and produce within the custom bonded area?” 4. Substantial question of law No.2:- From the aforesaid material on record it is clear that the assessee is in the business of transcribing medical transcription. It has outsourced portion of its work and made payment of Rs.31,20,152/-. The work done by the sub contractor is in crude form and cannot be delivered in such form to the overseas customers. The assessee has to process the said product so as to make it marketable. In other words, as rightly pointed out by the appellate authorities value addition has to be done. 8 It is only when that value addition is made, the said product is exported, foreign exchange is earned. The manufacture or production done by the assessee, which is eligible for exemption under Section 10A would be applicable because the transaction done by the sub- contractors in the crude form undergoes a change in the process of the assessee. Therefore, both the authorities on careful examination of the facts of the case have rightly held that the assessee is entitled to the benefit of Section 10A. We do not see any justification to interfere with the said finding of fact concurrently recorded by the appellate authorities. Therefore, the above substantial question of law is answered in favour of the assessee and against the revenue. 5. In the light of our finding on question No.2, question No.1 does not arise for consideration in this appeal. Accordingly, the said question is not answered. 6. Hence, we pass the following:- 9 ORDER There is no merit in these appeals. Accordingly, the appeals are dismissed. Sd/- JUDGE. Sd/- JUDGE. *alb/-. "