Income Tax Appellate Tribunal - Bangalore
Aztec Software Technology Ltd.,, ... vs Assessee on 14 February, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" BENCH : BANGALORE
BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER
AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER
ITA No.411/Bang/2011
Assessment year : 2005-06
Aztec Software Technology Ltd., Vs. The Commissioner of Income Tax,
(now merged with Mindtree Ltd.,) Bangalore-III,
Global Village, RVCE Post, Bangalore.
Mysore Road,
Bangalore - 560 059.
PAN : AABCA 2122R
APPELLANT RESPONDENT
Appellant by : Shri K.K. Chaitanya, Advocate
Respondent by : Shri Farahat Hussain Qureshi, CIT-II(DR)
Date of hearing : 14.02.2013
Date of Pronouncement : 22.02.2013
ORDER
Per N.V. Vasudevan, Judicial Member
This appeal filed by the assessee is against the order dated 31.01.2011 of the Commissioner of Income-tax, Bangalore-III, Bangalore [hereinafter referred to as "the CIT"] passed u/s. 263 of the Act relating to assessment year 2005-06.
ITA No.411/Bang/2011Page 2 of 9
2. The assessee is a company engaged in the business of software development services and exports. For the A.Y. 2005-06, the assessee filed return of income on 31.10.05 declaring a total income of Rs.1,27,54,870. The assessment was completed and order u/s. 143(3) of the Act and an order of assessment dated 26.12.2008 was passed by the Assessing Officer. One of the issues that the AO considered in the course of assessment proceedings was the computation of export turnover for the purpose of allowing deduction u/s. 10A of the Act. The AO found that the assessee has not excluded satellite link charges of Rs.79,50,467 towards delivery of software outside India. According to the AO, the aforesaid sum ought to have been excluded from the export turnover. The assessee in reply submitted that the definition of export turnover as contained in section 10A of the Act contemplates excluding satellite link charges only if the assessee is engaged in providing technical services outside India. The assessee pointed out that it was a software services provider and not engaged in providing technical services outside India, therefore the satellite link charges should not be excluded from the export turnover. The assessee relied on the decision of the Bangalore Bench of the Tribunal in the case of Infosys Technologies Ltd. in ITA No.50/Bang/2001 dated 31.03.2005 and the decisions in the cases of Tata Elxsi Ltd., 117 TTJ 423 and iGate Global Ltd., 112 TTJ 1002. The AO was, however, of the view that the aforesaid decisions of the Tribunal have not been accepted by the department and appeals have been filed before the Hon'ble High Court. He therefore excluded the satellite link charges from the export turnover while computing deduction u/s. 10A of the Act.
ITA No.411/Bang/2011Page 3 of 9
3. The CIT in exercise of his powers u/s. 263 of the Act and on scrutiny of assessment records of the assessee for the A.Y. 2005-06 was of the view that the aforesaid order of the AO was erroneous and prejudicial to the interests of the revenue. In this regard, the CIT noticed that the assessee had incurred travelling expenses of Rs.3,70,87,289, professional charges of Rs.11,51,308 and onsite service charges of Rs.7,17,77,477. According to the CIT, all these expenses had been incurred in foreign currency aggregating to Rs.11,00,16,074 and they ought to have been excluded from the export turnover for the purpose of deduction u/s. 10A of the Act. Accordingly, a show cause notice was issued to the assessee. In reply, the assessee pointed out as follows:-
1. That the company Aztec Software and Technology Ltd., has merged with Mind Tree Ltd., from 01/04/2009 consequent to the order of High Court of Karnataka. The company is not in existence as on day of issue of notice u/s 263 of the Act and no proceedings can be initiated against a non-existent company. If at all proceedings have to be initiated it can only be against the entity which survives after the merger. Consequently, proceedings may be dropped at the outset as no purpose will be served in perpetuating a notice which is patently without jurisdiction.
2. That the Assessee is engaged in the business of computer software development and services. The expenditure incurred in foreign currency on Travelling, professional charges and Onsite service charges are for development of software at client's site outside India. The assessee is neither rendering any technical services nor earned any receipt from rendering technical services, therefore there is no need to exclude the expenditure incurred in foreign currency from the export turnover. The Assessee pointed out that the legal position as stated above has been laid down in the following cases:
(1) Patani Telecom (P) Ltd., V. ITO (2008) 22 SOT 26 (Hyd) (2) CHancepond Technologies (0) Ltd., V Asst. CIT (2008) 22 SOT 220 (Chennai) ITA No.411/Bang/2011 Page 4 of 9 (3) Wipro Ltd., V DClT OCC1(3)-ITA.No.624/B/2007, (4) ACIT V lnfosys Ltd., in ITA.No.653&969/B/2006, and other decisions The Assessee also pointed out that in the assessment order, the nature of business carried on by the assessee has been accepted as "Software Development Services and Exports" and this finding of the AO is based on the details and information submitted and available on record.
3. Without prejudice to the above, it was submitted that if it is held that the said expenditure has to be excluded from export turnover then similar amount also requires to be reduced from the total turnover. Since, total turnover is not defined under the Income Tax Act, it is to be understood in the context of export turnover. After all, total turnover is a derivative of export turnover. Hence, what applied to export turnover must also apply to total turnover. On the basis of parity principle, the same has to be excluded from the total turnover. The Assessee pointed out that the above view has been upheld by ITAT in the following cases I) I Gate Global Solutions Ltd., V ACIT 0112 TTJ 1002
ii) Tata Elxsi Ltd., V ACIT -- 115 TTJ 423
iii) ACIT V Infosys Ltd., - ITA No.653&969/Bang/2006
iv) ITO V Sak Soft Ltd. --20 DTR 0514 (SB)"
4. The CIT was, however, not convinced with the explanation offered by the assessee. On the question that Aztech Software and Technology Ltd. had already merged with Mindtree Ltd. w.e.f. 1.4.2009 and therefore is no longer in existence, the CIT held that proceedings u/s. 263 was with reference to the period prior to the amalgamation of the assessee with M/s. Mindtree Ltd. and in respect of the said period, the revenue has to be proceed only against the company, Aztech Software & Technology Ltd. ITA No.411/Bang/2011 Page 5 of 9
5. With regard to the stand of the assessee on the question, whether the expenses in question have to be excluded from the export turnover or not, there were two views prevalent and therefore the issue was debatable; the CIT held that the AO in the course of assessment proceedings did not examine this issue at all and therefore the existence of two views on the issue is not relevant.
6. Thereafter, the CIT was of the view that as per Explanation 2(iv) to section 10A of the Act, export turnover means the 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 technical services outside India. Thereafter the CIT(A) noticed that the assessee was doing both offshore and onsite software development and its customers were mainly located in USA. Providing software development services, according to the CIT, was providing technical services and therefore the aforesaid expenses ought to be excluded from the export turnover.
7. With regard to the contention of the assessee that if the aforesaid expenses are excluded from the export turnover, the same should also be excluded from the total turnover; the CIT was of the view that section 10A of the Act does not contain any definition of "total turnover" and therefore it is not possible to exclude the expenses in question from the total turnover. ITA No.411/Bang/2011 Page 6 of 9 For the above reasons, the CIT directed the AO to exclude a sum of Rs.11,16,00,074 from the export turnover and compute deduction u/s. 10A of the Act.
8. Aggrieved by the aforesaid order of the CIT, the assessee has preferred the present appeal before the Tribunal.
9. We have considered the submissions of the ld. counsel for the assessee and the ld. DR. The ld. counsel for the assessee submitted that clearly two views are possible on the issue. In this regard, he reiterated the submissions as were made in the proceedings before the CIT. Apart from the above, he also drew our attention to the decision of the Special Bench of the ITAT in the case of Zylog Systems Ltd. v. ITO, 128 ITD 105 (Chennai)(SB), wherein the SB took the view that in respect of software service provider, expenses incurred on travelling, onsite service charges, etc. cannot be said to be expenses incurred outside India in foreign exchange for rendering technical services outside India. Reference was also made to the decision of ITAT Bangalore Bench in the case of DCIT v. Subex Ltd, ITA No.673 & 674/Bang/2010 taking identical view.
10. The ld. DR, on the other hand, submitted that Hon'ble Karnataka High Court in the case of Tata Elxsi Ltd. (349 ITR 98) (Karn.) has taken a view that whatever is excluded from the export turnover, should also be excluded from the total turnover and in the light of the aforesaid decision, the AO should be directed to examine the case afresh. In this regard, a modification to the order of the CIT u/s. 263 should be made, as ITA No.411/Bang/2011 Page 7 of 9 other conditions for exercise of jurisdiction u/s. 263 of the Act were duly fulfilled. In this regard, it was submitted by him that while completing assessment u/s. 143(3) of the Act, the AO has not applied his mind on this issue.
11. We have considered the rival submissions. We are of the view that the order u/s. 263 of the Act cannot be sustained. The order of the AO was passed on 26.12.2008. On this date, there were decisions of the Tribunal in which a view has been expressed that expenditure in foreign currency on travelling, professional charges and onsite service charges which are incurred for development of software at client's site outside India, cannot be said to be expenses incurred in foreign currency outside the country for rendering of any technical services outside India. In other words, Explanation 2(iv) of section 10A of the Act which defines export turnover has been interpreted by the Tribunal to mean that the aforesaid charges are to be excluded only in a case of a person who renders independent technical services de hors computer software development services. It can thus be seen from the aforesaid orders of the Tribunal, which we have referred to in the earlier part of this order, that the view of the assesse which was accepted by the AO in the order passed u/s.143(3) of the Act, on the definition of export turnover, is a plausible view. In fact, the AO while completing assessment u/s. 143(3) of the Act, had gone into the definition of export turnover, but with reference to the satellite link charges and not with regard to the expenses incurred in foreign currency referred to by the CIT in his order u/s. 263 of the At. It can thus be seen that in the light of the view expressed by the Tribunal, the action of the AO cannot be ITA No.411/Bang/2011 Page 8 of 9 said to be erroneous. At best it was a debatable issue on which there were two views possible. Thus when the CIT exercised jurisdiction u/s. 263 of the Act, two views were possible. The law is well settled that when two views are possible on an issue and the AO has taken one of the possible views, no action u/s. 263 will lie. In this regard, we may also make a reference to the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd., 243 ITR 43 (SC) and the Bombay High Court decision in the case of CIT v. Gabriel India Ltd. ,203 ITR 108 (Bom) wherein it was held that jurisdiction u/s.263 of the Act cannot be exercised where there were two views possible on an issue and the view expressed by the CIT was one of the possible view. It has been held that jurisdiction u/s.263 of the Act cannot be exercised to substitute a possible view of the AO with that of another contrary possible view of the CIT.
12. Apart from the above, we find that the Hon'ble Karnataka High Court in the case of Tata Elxsi Ltd., 349 ITR 98 (Karn), has taken a view that whatever is excluded from the export turnover has to be excluded from the total turnover as well. If the aforesaid decision is applied, then there would be no effect on the claim of deduction u/s. 10A of the Act, as allowed by the AO. In other words, the order of the AO cannot be said to be erroneous or prejudicial to the interests of the revenue. Thus even on this ground, action u/s. 263 of the Act cannot be sustained.
13. For the reasons given above, we quash the order u/s. 263 of the Act and allow the appeal of the assessee.
ITA No.411/Bang/2011Page 9 of 9
14. In the result, the appeal of the assessee is allowed.
Pronounced in the open court on this 22nd day of February, 2013.
Sd/- Sd/-
( JASON P. BOAZ ) ( N.V. VASUDEVAN )
Accountant Member Judicial Member
Bangalore,
Dated, the 22nd February, 2013.
Ds/-
Copy to:
1. Appellant
2. Respondent
3. CIT
4. DR, ITAT, Bangalore.
5. Guard file
By order
Senior Private Secretary
ITAT, Bangalore.