Income Tax Appellate Tribunal - Bangalore
Hewlett - Packard Global Soft Private ... vs Assessee on 23 September, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" BENCH : BANGALORE
BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER
AND
SHRI JASON P.BOAZ, ACCOUNTANT MEMBER
ITA No.283/Bang/2012
Assessment year : 2003-04
Hewlett-Packard Globalsoft Vs. The Assistant Commissioner of
Private Ltd., Income Tax,
39/40, Electronic City, Circle 11(4),
Phase-II, Hosur Road, Bangalore.
Bangalore - 560 100.
PAN : AAACD 4078L
APPELLANT RESPONDENT
ITA No.267/Bang/2012
Assessment year : 2003-04
The Deputy Commissioner of Vs. Hewlett-Packard Globalsoft
Income Tax, Private Ltd.,
Circle 11(4), 39/40, Electronic City,
Bangalore. Phase-II, Hosur Road,
Bangalore - 560 100.
PAN : AAACD 4078L
APPELLANT RESPONDENT
Assessee by : Shri Sriram Seshadri, C.A.
Revenue by : Shri Priscilla Singsit, CIT-III(DR)
Date of hearing : 23.09.2013
Date of Pronouncement : 30.09.2013
ITA Nos.283 & 267/Bang/2012
Page 2 of 14
ORDER
Per N.V. Vasudevan, Judicial Member
ITA No.283/B/2012 is an appeal by the assessee, while ITA
No.267/Bang/2012 is an appeal by the revenue. Both these appeals are directed against the order dated 28.11.2011 of the CIT(Appeals)-I, Bangalore relating to assessment year 2003-04.
2. First we shall take up for consideration the assessee's appeal. Ground No.1 raised by the assessee reads as follows:-
"1. Invalidity of re-assessment proceedings 1.1 The learned CIT(A) has erred in law in upholding the Assistant Commissioner of Income-tax, Circle - 11(4) ("AO") has validly assumed jurisdiction under section 148 of the Act.
1.2 The learned CIT(A) has erred in law and on facts by not quashing the order passed by the AO under section 143(3) read with section 147 of the Act."
3. The above ground relates to challenge of the validity of initiation of the reassessment proceedings u/s. 147 of the Act by the AO. The facts that are relevant for adjudication of the aforesaid grounds of appeal are as follows.
ITA Nos.283 & 267/Bang/2012 Page 3 of 14
4. The assessee is a company. It is engaged in the business of rendering software development services. As a software developer, the assessee was entitled to claim deduction u/s. 10A of the Act for the A.Y. 2003-04. The assessee filed return of income in which a claim for deduction u/s. 10A was made.
5. Deduction u/s. 10A(1) of the Act is allowed on profits and gains derived by an undertaking from export of articles or things or computer software. Section 10(4) lays down that the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. Explanation 2(iv) defines 'export turnover' to mean consideration in respect 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, telecommunication charges or insurance attributable to the delivery of articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India.
6. The Assessee had five Software Technology Park Units (STP Units), which were entitled to claim benefit of deduction u/s.10A of the Act. The ITA Nos.283 & 267/Bang/2012 Page 4 of 14 total expenditure incurred in foreign currency by the Assessee for all the 5 STP units was Rs.7,03,50,677 towards Telecommunication charges for delivery of software and Employees' salary Rs.128,75,49,201, Overseas travel Rs.25,30,33,924 in all totaling Rs. 154,05,83,125 towards expenditure incurred in foreign currency for rendering technical services outside India. In the computation of deduction u/s. 10A of the Act, the assessee took a stand that expenditure incurred in foreign currency which is to be excluded as per the definition of export turnover referred to above, should also be excluded from the total turnover. The assessee also submitted that such exclusion of expenditure should only be with reference to the communication expenses and not other expenses incurred in foreign currency. In other words, the assessee took a stand that expenses incurred in foreign exchange in providing technical services outside India, should not be excluded from the export turnover. The AO completed the assessment by rejecting the claim of the assessee and by making the following observations:-
2.5 In the papers submitted before the Transfer Pricing Officer, the assessee has done a functional analysis of the transactions carried out by it. An extract from the same is reproduced below:-
"Contracting DGS enters into contracts with HP Group entities for providing technical call centre and support services.
HP Group entities enter into contracts with its various clients for providing product and services. The HP Group entities contracts ITA Nos.283 & 267/Bang/2012 Page 5 of 14 with clients for providing support services, parts/portions of which are subcontracted to DGS.
2.6 It is clear from the assessee's above submissions that the assessee is engaged in providing support services, which are nothing but technical services. The expenditure in foreign exchange is incurred for both development of software and providing technical services. However, the assessee has not been able to furnish a break up of the expenditure incurred for development of software and providing technical services. It has taken a stand that no technical services are provided and the entire expenditure is for development of software. Taking the functional analysis reproduced above into account, and in the absence of any break-up of the expenditure, 25% of the expenditure incurred under the following heads in foreign exchange is deemed to be the expenditure incurred in foreign exchange for providing technical services outside India.
Employees' salary Rs.128,75,49,201 Overseas travel Rs. 25,30,33,924 Total Rs. 154,05,83,125 2.7 Hence, the expenditure incurred in foreign currency for
providing technical services is adopted at Rs.38,51,45,781/- and is allocated between the five STP Units in the ratio of the export sales. Similarly, from out of the communication expenses incurred in foreign currency of Rs.3,21,66,847/-, an amount of Rs.7,03,50,677/- (as quantified by the assessee) is taken as attributable to the delivery of computer software and is allocated between the five STP Units in the same ratio of the Export Sales. Both these amounts are reduced from the export turnover in accordance with the definition of 'ETO' given in sec.10A.
2.8 In para 2 of its letter dt. 6.3.06, the assessee has stated that the export sale proceeds of Rs.35,23,392/- relating to Unit IV have not been received. Accordingly, this amount is reduced from the export turnover of Unit IV for the purpose of computing the deduction u/s. 10A.
ITA Nos.283 & 267/Bang/2012 Page 6 of 14 2.9 The assessee contends that expenditure in foreign exchange reduced from the ETO should also be reduced from the TTO. In the assessee's own case for the asst. year 2002-03, this contention of the assessee has not been accepted for the detailed reasons given in the asst. order dated 29-03-2005. For the same reasons, the expenditure incurred in foreign exchange which is reduced from the export turnover cannot be reduced from the total turnover.
2.10 Based on the above discussion, the Unit-Wise deduction is computed in Annexure A to this Order as per which the deduction is computed at Rs.89,08,86,778/-."
6. On 5.9.2006, the AO on the basis of reasons recorded issued a notice u/s. 148 of the Act for making assessment of income that has escaped assessment. The reasons recorded before issue of the aforesaid notice were as follows:-
" The 'a' company filed return of income on 30/10/2004 declaring an income of Rs. 15,00,92,060/-. The order u/s 143(3) was passed on 27-03-2006 assessing the total income at Rs. 27,64,39,400/-.
While computing deduction u/s l0A the export turnover was recomputed after reducing the expenditure incurred in foreign currency on travel abroad for providing technical services at Rs. 34,51,45,781/-. This means that deduction u/s 10A has been allowed on profits from rendering technical services abroad. Since explanation 2(1) u/s. 10A and Boards Notification No.890(E) dated 26/9/00 pertains only to the term "computer software", deduction u/s. l0A on profits from providing technical services abroad should be excluded while computing deduction u/s. 10A. The same may be eligible for deduction u/s 80.HHE only.
Therefore notice u/s. 148 has been issued to reassess the income."
ITA Nos.283 & 267/Bang/2012 Page 7 of 14
7. It can be seen from the reasons recorded for issue of notice u/s.148 of the Act, that the AO wanted to hold that the entire sum towards Employees' salary Rs.128,75,49,201, Overseas travel Rs. 25,30,33,924 in all totaling Rs. 154,05,83,125 towards expenditure incurred in foreign currency for rendering technical services outside India ought to have been considered as not profits derived by an undertaking from export of articles or things or computer software u/s.10A(1) of the Act and that the same should be totally excluded from the computation of deduction u/s.10A of the Act and that his action in considering Rs.38,51,45,781/- as part of the Export turnover while computing deduction u/s.10A of the Act was incorrect.
8. In the reassessment proceedings, the assessee submitted before the AO that the proceedings u/s. 147 of the Act that the reassessment proceedings u/s. 147 have been initiated merely on change of opinion. In this regard, the assessee pointed out that the assessment u/s. 143(3) of the Act, the AO had already gone into specific issues arising u/s. 10A of the Act. It was submitted by him that when an order of assessment is made u/s. 143(3) of the Act, there is a presumption that there is an application of mind by the AO on all issues including the question as to whether the sum of Rs.38,51,45,781 is not profit derived by the assessee from the export of articles or things or computer software. The AO rejected the stand of the assessee for the following reasons:-
ITA Nos.283 & 267/Bang/2012 Page 8 of 14 "3. It is the contention of the AR that there was a change of opinion and hence there does not exist a case for reassessment u/s
147. In the instant case there is no change of opinion. The records showed that excess deduction was allowed u/s 10A to the assessee by not excluding the profits from technical services from the profits eligible for deduction u/s 10A. Further the assessee itself has admitted that it provides technical services outside India. It is therefore clear that the profits from technical services should be determined and excluded from the profits from development of computer software. Hence the contention of the AR is not acceptable."
9. Before the CIT(Appeals), the contentions put forth before the AO were reiterated by the assessee. The CIT(A) held as follows:-
"11.2 I find such explanation is only an afterthought. To the TPO it had been explained that it is engaged in the business of call centres in foreign countries which is an ITES; hence eligible for deduction u/s. 10A of I.T. Act. The AO found such unbelievable because had it been so, the employees would not move frequently from one place to another resulting in overseas travel expenses of Rs.25,30,33,924/- Obvious inference, therefore, he held that employees were being sent abroad in large numbers in large frequency to different places to render technical assistance and services to the clients which is not covered as ITES in Notification No. S.O. 890 (E) dated September 26, 2000. Therefore neither receipt nor expenditure on account of providing technical services form part of export turnover and hence not eligible for deduction u/s.10A of I.T.Act. Therefore, I see no reason in the above argument of the A.R. Section 10A provides for deduction from the profits of the undertaking engaged in export of the computer software and ITES (so far this case is concerned). No doubt the appellant claims to have done both but it is half truth. It is only exporting software developed by it in India. It is not engaged in ITES. But it is engaged in sending technical personal to develop software in their clients place outside India. Such is sometimes called technically onsite development of software. In the case of -
ITA Nos.283 & 267/Bang/2012 Page 9 of 14 California Software Co. Ltd., Vs. ACIT (2008) 118 TTJ (Chennai-Trib) it had been held in specific terms that the payment, by a software company registered as STPI in foreign currency as salary or travel expenses to technically qualified employees outside India does not form part of export turnover at all but because of specific provision of case such is rededucted from E.T. to do the netting in relation to foreign exchange inflow and outflow.
Besides the above I observe the A.Y. involved here is 2003-04 Explanation 3 to S.10A was inserted by F.A. 2003 w.e.f. 01-04- 2004 i.e., A.Y. 2004-O5which reads as under -
"For the removal of doubts, it is hereby declared that the profits and gains derived from onsite development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India"
12. In other words, from the A.Y.2004-05, the onsite development of software outside India was brought into the net of E.T. by a deeming provision. In toto, actually such activity is not an export activity. The reason is simple. Export means sending something from India to outside India. In providing technical services or doing software development outside India at the doorsteps of clients does not involve anything produced or developed in India being sent out of India. Hence the necessity of such deeming provisions because by such activity also some CFE is earned even if no actual export activity is involved in it. But such is applicable only from A.Y. 2004-05 and not applicable to the presently involved 2003-04 A.Y. Hence also services provided by the appellant outside India cannot be considered as export activity at all.
13. The above reasoning also leads me to the conclusion that the reopening of the assessment good in law. Deduction u/s.10A is available only from that portion of the profits of the Undertaking relating to export activity. Here it is a mixed one both software export and also providing technical service outside India not considered as export business then. Thus the profits of the undertaking relating to export activity required determination. The AO has applied the theory of proportion to the expenditure to arrive at such profit. Such is a reliable method in ITA Nos.283 & 267/Bang/2012 Page 10 of 14 the absence of specific details as to profits earned from software export alone. In fact I observe the AO should have done that in the original assessment itself but this does not debar him to resort to provisions of S. 147 because it is a clear case of underassessment and such could have been done even by resort to S.154 of I.T.Act. Nevertheless I find detailed reasons has been given for reopening the assessment and therefore I consider the reassessment is not at all bad in law. Thus the major issue Nos. (ii) and No.(iv) vide page 6 (para 9) of this order are decided against the appellant."
(emphasis supplied)
10. In short, the reasoning of the CIT(A) is that the charges paid for employee cost and their travel by the Assessee in foreign currency was for development of software at the clients place overseas (Onsite Development of software) and that income derived by such services were also entitled to deduction u/s.10A of the Act only after insertion of Explanation 3 to S.10A by F.A. 2003 w.e.f. 01-04-2004 i.e., A.Y. 2004-05, which provides that the profits and gains derived from onsite development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India for the purpose of Sec.10A of the Act.
11. It can be seen from the order of the CIT(A) that he has taken a view that while completing the original proceedings u/s. 143(3) of the Act, the AO ought to have considered the profits from providing technical services as profits not derived from export of articles or things or computer software.
ITA Nos.283 & 267/Bang/2012 Page 11 of 14 The CIT(A), however, has not addressed the issue as to whether the AO, having failed to do so in the original assessment, can resort to proceedings u/s. 147 of the Act by merely changing his opinion, without any material coming to his possession and on the basis of the same record that was available when the proceedings u/s. 143(3) was completed by the AO.
12. Before us, the ld. counsel for the assessee reiterated the submissions as were made before the CIT(A). In particular our attention was drawn to Explanation-3 to section 10A of the Act, which was inserted by the Finance Act, 2003 w.e.f. 1.4.2004, in which it has been clarified that profits and gains derived from on site development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India on which deduction u/s.10A of the Act has to be allowed. It was brought to our notice that the aforesaid amendment being clarificatory for removal of doubts, receipts on account of providing on site development of software outside India was also eligible for deduction u/s. 10A of the Act. It was his submission that even on merits, the claim of the assessee deserves to be accepted. It was submitted by him that as far as validity of initiation of reassessment proceedings are concerned, it is clearly a change of opinion. In this regard, the observations of the Hon'ble Delhi High Court in the case of CIT v. Kelvinator of India Ltd., 256 ITR 1 (Del)(FB) was relied upon, wherein the Hon'ble Court after making a ITA Nos.283 & 267/Bang/2012 Page 12 of 14 reference to clause (e) of section 114 of Indian Evidence Act, has observed that when a regular order of assessment is passed in terms of section 143(3) of the Act, a presumption can be raised that such an order has been passed on application of mind. It was also pointed out that the AO does not have the power of review and cannot do so by resorting to the provisions of section 147 of the Act.
13. The ld. DR relied on the order of the CIT(Appeals).
14. We have considered the rival submissions. The admitted factual position is that while completing the assessment u/s. 143(3) of the Act, the AO has gone into the question of excluding the sum of Rs.38,51,45,781 from the export turnover on the ground that it was expenditure incurred in foreign exchange for providing technical services outside India. In the reasons recorded for reopening the assessment, he has taken the view that the aforesaid sum cannot be considered as income derived from export of articles or things or computer software at all. Though the stand taken by the AO in the reasons recorded before issuing notice u/s. 148 of the Act is a different facet of allowing deduction under section 10A of the Act, yet it cannot be disputed that this is a stand which the AO ought to have taken while he completed the assessment proceedings u/s. 143(3) of the Act initially. Having failed to look into a different dimension on which the deduction u/s. 10A could be disallowed to the assessee, the AO cannot be permitted to take recourse to reassessment proceedings u/s. 147 of the ITA Nos.283 & 267/Bang/2012 Page 13 of 14 Act. Assuming there was a failure on the part of the AO in this regard, the appropriate action can only be under section 263 of the Act. We may clarify that the observation as above may not be construed as any direction by us. The law is well settled that to assume jurisdiction u/s. 147 of the Act, there should be reason to believe that income chargeable to tax has escaped assessment. Such reason to believe cannot be on a mere change of opinion. This position is well settled by the decision of the Hon'ble Supreme Court in the case of CIT v. Kelvinator of India Ltd., 320 ITR 561 (SC).
15. In the present case, the AO has sought to initiate reassessment proceedings by merely changing his opinion without any tangible material that has come to his knowledge after the proceedings u/s. 143(3) of the Act. We therefore accept the contention on behalf of the assessee that initiation of reassessment proceedings is not valid. In view of the aforesaid conclusion, the order of reassessment is annulled. In view of the annulment of the order of reassessment, the other issues raised by the assessee in its grounds of appeal and the issues raised by the revenue in its appeal do not require any consideration.
16. In the result, the appeal by the assessee is allowed, while the appeal by the revenue is dismissed.
ITA Nos.283 & 267/Bang/2012 Page 14 of 14 Pronounced in the open court on this 30th day of September, 2013.
Sd/- Sd/-
( JASON P.BOAZ ) ( N.V. VASUDEVAN )
Accountant Member Judicial Member
Bangalore,
Dated, the 30th September, 2013.
/D S/
Copy to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT, Bangalore.
6. Guard file
By order
Assistant Registrar,
ITAT, Bangalore.