Income Tax Appellate Tribunal - Mumbai
3Dplm Software Solutions Ltd, Mumbai vs Assessee on 20 June, 2013
आयकर अपील य अ धकरण "D" यायपीठ मुंबई म।
IN THE INCOME TAX APPELLATE TRIBUNAL "D" BENCH, MUMBAI
ी डी.मनमोहन, उपा य एवं ी डी. क णाकर राव,ु लेखा सद य के सम ।
BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND
SHRI D. KARUNAKARA RAO, AM
आयकर अपील सं./I.T.A. No.4538/M/2010 (AY: 2005-2006)
आयकर अपील सं./I.T.A. No. ITA No.5839/M/2010 (AY: 2006-2007)
CO No.123/M/2011 (2006-2007)
CO No.178/M/2012 (AY:2007-2008)
3DPLM Software Solutions बनाम/ ITO, Range-10(2)(1),
Ltd., Plant No.6, Vs. Aayakar Bhavan,
Pirojshanagar, Vikhroli, Mumbai - 400 020.
Mumbai - 400 079.
थायी ले खा सं . /PAN : AAACA 1421 B
(अपीलाथ /Appellant) .. ( यथ / Respondent)
ITA No.4932/M/2010 (2005-2006)
ITA No.6003/M/2010 (AY:2006-2007)
ITA No.6194/M/2011 (2007-2008)
ITO, Range-10(2)(1), बनाम/ 3DPLM Software Solutions
Aayakar Bhavan, Vs. Ltd., Plant No.6,
Mumbai - 400 020. Pirojshanagar, Vikhroli,
Mumbai - 400 079.
(अपीलाथ /Appellant) .. ( यथ / Respondent)
अपीलाथ क ओर से / Assessee by : Shri Falee H. Bilimoria
यथ क ओर से/ Respondent by : Shri Rajarshi Dwivedi, DR
सन
ु वाई क तार ख /Date of Hearing : 20.06.2013
घोषणा क तार ख /Date of Pronouncement : 03. 07.2013
आदे श / O R D E R
PER D. KARUNAKARA RAO, AM:
There are seven appeals under consideration. Out of these seven appeals, two appeals and two Cos are filed by the assessee ie ITA No.4538/M/2010 (AY:2005-2006); ITA No.5839/M/2010 (AY: 2006-2007); CO No.123/M/2011 (2006- 2007) and CO No.178/M/2012 (AY:2007-2008). Revenue filed three appeals ie ITA No.4932/M/2010 (2005-2006); ITA No.6003/M/2010 (AY:2006-2007) & ITA No.6194/M/2011 (2007-2008). Since, the identical issue is involved in all these 2 appeals and COs, for the sake of convenience, they are clubbed, heard combinedly and being disposed of in this consolidated order. Appeal wise and ground wise adjudication is given in the following paragraphs.
(A) ITA No. 4538/M/2010 - AY 2005-2006 - Assessee's Appeal and ITA No.4932/M/2010 (AY 2005-2006) - Revenue's Appeal
2. Firstly, we shall take up ITA No. 4538/M/2010, which is filed by the assessee on 2.6.2010 against the order of CIT (A)-21, Mumbai dated 19.3.2010 for the AY 2005-2006 and the grounds raised in this appeal read as under:
"1. The Ld CIT (A) erred in confirming the action of the AO in disallowing expenditure u/s 14A of the Act aggregating to Rs. 2,12,899/- towards the earning of dividend income, by applying clause 2(iii) of Rule-8D.
2. The Ld CIT (A) erred in holding that Rule-8D read with section 14A(2) and 14A(3) of the Act could be applied retrospectively to the assessment year 2005-06."
3. Briefly stated relevant facts of the case are that the assessee is engaged in the business of software development and filed the return of income declaring the total income of Rs. 18,65,361/-. As a result of scrutiny assessment u/s 143(3) of the Act, assessed income of the assessee was determined at Rs.39,05,180/-. During the assessment proceedings, AO invoked the provisions of section 14A of the Act read with Rule-8D of IT Rules, 1962 and made addition of Rs. 2,12,899/-.
4. In connection with the above additions and at the outset, Ld Counsel for the assessee stated that the only issue raised in the appeal relates to the applicability of the provisions of section 14A of the Act read with Rule-8D of Income Tax Rules, 1962 retrospectively for the AY 2005-2006. In this regard, Ld Counsel mentioned that the AO added a sum of Rs. 2,12,899/-, which was quantified by applying @ 0.5% of the average investment amounting to Rs. 4,25,79,840/-. Thus, AO invoked the provisions of Rule-8D(2)(iii) of the IT Rules to quantify the expenditure relatable to the earning of the dividend income of Rs. 12,72,337/-. Thus, the matter relating the said addition travelled to the first appellate authority. During the proceedings 3 before the first appellate authority, CIT (A) relied on the Special Bench decision of the ITAT in the case of Daga Capital Management and confirmed the disallowance.
On these facts, Ld Counsel mentioned that the above manner of invoking the said Rule-8D for making disallowance of Rs. 2,12,899/-, is not in accordance with the cited decision of the Bombay High Court judgment in the case of Godrej & Boyce Mfg. Co. Ltd (supra). Further, Ld Counsel mentioned that no expenditure is actually incurred in connection with the earning of few dividend receipts from few mutual fund companies. Without prejudice, Ld Counsel brought our attention to the facts of relevant for the assessment year 2007-2008 in the assessee's own case and mentioned that the expenditure u/s 14A was restricted to 2% of the total dividend income earned by the assessee in that year. In the process, CIT(A) relied on decision of his colleague in a case relating to a group companies. The said decision being reasonable was accepted by the assessee and thus, the disallowance @ 2% of the dividend income has become final for the said AY 2007-08. In this regard, Ld Counsel relied on the decision of Mumbai Bench of the ITAT in the case of the M/s. Godrej Agrovet Ltd. vs. ACIT vide ITA No.1629/M/2009, which is subsequently confirmed by the High Court vide ITA No.934 / 2011, dated 8.1.2013. Further, he mentioned that the Rule-8D cannot be applied retrospectively to the assessment year 2005-2006 in view of the binding judgment in the case of Godrej Boyce Mfg Co Ltd., 328 ITR 81.
5. On the other hand, Ld DR relied on the orders of the AO / CIT (A).
6. We have heard both the parties and perused the orders of the Revenue Authorities as well as the case laws filed before us. It is a fact that assessee made an investment, whose average investment is to the tune of Rs. 4,25,79,840/-. The assessee earned dividend income of Rs. 12,72,337/-. It is a settled proposition that some expenditure out of the administrative expenses is always incurred and, therefore, it is a matter of method of quantifying such attributable expenditure to the exempt income. It is a judicially finalized position in law that the provisions of Rule-8D read with section 14A cannot be invoked for the assessment years prior to AY 2008-2009. To that extent, assessee's argument raised in ground no.2 is sustainable. Therefore, what is left for adjudication here relates to the issue 4 of quantification of such expenditure relatable to the dividend income but included in such administrative expenses. Now, it is the submission of the assessee that in the assessee's own case, the Revenue has not invoked the Rule-8D for the AY 2007- 2008 and only restricted the disallowance to 2% of the dividend income and which has become finally acceptable to both the parties. In our opinion, restricting the disallowance to 2% of the dividend income for this also must bring the peace between the parties for this AY 2005-2006. Therefore, we direct the Assessing Officer to restrict the disallowance to 2% of the dividend income and compute the disallowance accordingly.
Before us, Ld Counsel raised a new argument that in the assessee's case, which is 100% Export Oriented Unit, invoking the provisions of section 14A of the Act has no tax implication. If any expenditure is disallowed under the said provisions, equalant amount needs to be reduced from the expenditure claimed in the P & L Account. Though the said argument deserves merit for consideration, we shall go into the same here considering the fact that the assessee indicated to adjudicate the impugned issue in lines of the conclusions for the assessment year 2007-2008. Therefore, we dismiss the same. Accordingly, ground no.1 raised is partly allowed.
7. In the result, appeal of the assessee is partly allowed.
ITA No.4932/M/2010 (AY 2005-2006) Revenue's Appeal8. This appeal filed by the Revenue on 14.06.2010 is against the order of CIT (A)-21, Mumbai dated 19.3.2010 for the AY 2005-2006. In this appeal, Revenue raised the following effective ground which read as under:
"1. On the facts and circumstances of the case and in law, the Ld CIT (A) erred in holding that the insurance expenses of Rs. 14,37,288/- and communication expenses of Rs. 41,96,206/- were not to be reduced from the Export Turnover for computing the deduction u/s 10A of the Act.
9. In this appeal, Ld DR explained that the ground relates to computation of deduction u/s 10A of the Act qua the exclusion of entire insurance and telecommunication expenses from the export turnover (ETO). Ld DR mentioned that assessee debited insurance expenses of Rs. 14,37,288/- and communication 5 expenses of Rs. 41,96,206/-. During the assessment proceedings, AO invoked the provisions of Explanation (2) to section 10A of the Act and proposed to adjust the Export Turnover (ETO) qua the insurance and telecommunication expenses for the purpose of computing the deduction u/s 10A of the Act.
10. During the assessment proceedings, assessee submitted that for downword revision of the ETO, the expenses are in the nature of freight telecommunication charges or insurance must be attributable to the said computer software outside India and only then such expenditure can be reduced from the export turnover. Further, he explained that no such expenditure is required to be reduced in this case for the reason that expense on telecommunication and insurance expenses incurred for software development were not incurred in foreign exchange attributable to the delivery of stocks outside India. Assessee also explained that the said expenditure was not incurred in foreign currency by the assessee and they are incurred in local currency for carrying on day-to-day software development work from the locations within India. As per the assessee, these expenses are not attributable to the computer software outside India and no expenses in foreign currency for rendering any technical services outside India. It is the case of the assessee that the said communication and insurance expenses were incurred and they are attributable to the delivery of computer software in India and the insurance of the employees. Therefore, the export turnover need not be adjusted qua telecommunication expenses.
11. During the first appellate proceedings, assessee reiterated the submissions and demonstrated that these expenses are not incurred outside India. In this regard, the assessee filed relevant details in support of the said claim. Assessee submitted that the telecommunication expenses and insurance expenses are nothing but the expenses relating to the insurance of the fixed assets, claim on personal expenditure for employees, medical and travelling expenses for employees.Regarding telephone expenses, the same were paid to the Indian companies and therefore, export turnover need not be reduced accordingly. On considering the submissions of the assessee, CIT (A) appreciated that the impugned expenses were not incurred outside India and they are attributable to the delivery of articles within India. He 6 also appreciated the fact that while making disallowance, AO should have come to a clear finding as to why the telecommunication and insurance expenses were attributable to the said computer software outside India. On the above said facts, CIT (A) granted relief to the assessee.
12. During the proceedings before us, Ld DR fairly mentioned that for making the proposed adjustment to the Export Turnover, the expenditure must be incurred not only outside India but also in the foreign exchange. In the instant case, AO has not made out a clear case as to how these expenses were incurred outside India. However, without giving up the case, Ld DR fairly relied on the order of the AO.
13. On the other hand, Ld Counsel for the assessee relied on the order of the CIT (A) in general and contents of para 3.3 of the impugned order which contains the decision of the CIT (A).
14. We have heard both the parties and perused the orders of the Revenue Authorities and the material placed before us. The issue for adjudication relates to the applicability of the provisions of clause-(iv) to the Explanation-2 to section 10A of the Act. Clause (iv) provides for definition of "export turnover". The said clause-
(iv) reads as follows:
(iv) "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 the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India:"
14.1. From the above, it is evident that the export turnover means consideration in respect of the export received by the assessee in convertible foreign exchange. But it does not include freight telecommunication charges or insurance attributable to the delivery of the stocks outside India or expenses incurred in foreign exchange in providing technical services outside India. Thus, the expenses incurred in local currency in India on account of telecommunications and insurance are outside the scope of the above said definition given in clause-(iv). It is not the case of the assessee that such expenses on account of telecommunication insurance are incurred outside India. In fact, it is an admitted position that the said expenditure 7 was incurred in local currency in connection with different location within India. Therefore, in our opinion, the order of the CIT (A) on this issue is reasonable and the same does not call for any interference. Accordingly, grounds raised by the Revenue are dismissed.
15. In the result, appeal of the Revenue is dismissed.
(B) ITA No.6003/M/2010 (AY:2006-2007) By Revenue CO No.123/M/2011 (AY:2006-2007) By Assessee ITA No.5839/M/2010 (AY: 2006-2007) By Assessee
16. The appeal ITA No.6003/M/2010 is filed by the Revenue on 2.8.2010 is against the order of CIT (A)-21, Mumbai dated 25.5.2010 for the AY 2006-07. In this appeal, Revenue raised the following effective ground which read as under:
"1. On the facts and circumstances of the case and in law, the Ld CIT (A) erred in holding that the insurance expenses of Rs. 21,77,791/- and communication expenses of Rs. 52,70,734/- were not to be reduced from the Export Turnover for computing the deduction u/s 10A of the Act.
17. The only issue raised in this appeal relates to the adjusted made to the export turnover (ETO) qua the insurance and communication expenditure. The Ld Representatives of both the parties are concord with the submissions that the issue involved in this appeal is identical in substance to the one raised for the AY 2005-06 in the Revenue's appeal, ITA No.4932/M/2010 and adjudicated against the revenue. We have held in the said appeal that the order of the CIT (A) is reasonable and accordingly ground raised by the revenue was dismissed. On observing the facts and the law, we find but for the figures, the issues are identical to that of Revenue's appeal for the AY 2005-2006. Accordingly, ground raised in this appeal is dismissed too for the same reasons.
18. In the result, appeal of the Revenue is dismissed.
CO No.123/M/2011 (Arising from ITA No. 6003/M/2010) (AY: 2006-2007) By Assessee
19. This Cross Objection filed by the assessee on 7.8.2011 for the AY 2006-2007. In this CO, assessee raised the following ground which read as under:8
"Without prejudice to the contention of the Cross Objector that the insurance and telecommunication expenses are not to be reduced from Export Turnover for the purposes of computing the deduction under section 10A of the Act, even assuming though not conceding that any expenditure was to be reduced from the Export Turnover, then such expenditure is to be reduced from the Total Turnover also for the purposes of computing the deduction under section 10A of the Act."
20. Before us, both the parties pointed out that the only issue raised in the CO relates to the downward adjustment made by the AO to the export turnover qua insurance and telecommunication expenses without making similar adjustment to the total turnover of the assessee. In the CO, assessee argues that when adjustment is made in export turnover, the total turnover is also to be adjusted considering the principle of parity. We have adjudicated this issue in attending to the Revenue's appeal vide ITA No.6003/M/2010 vide para 17 of this order and dismissed the appeal of the revenue. Therefore, at the end of the appeal, the ETO as claimed by the assessee is restored. Accordingly, the issue raised in the CO becomes academic. Accordingly, ground raised in CO is dismissed as academic.
21. In the result, CO of the assessee is dismissed.
ITA No.5839/M/2010 (AY: 2006-2007) By Assessee22. This appeal filed by the assessee on 20.7.2010 is against the order of the CIT (A)- 21, Mumbai dated 25.5.2010 for the AY 2006-2007. In this appeal, assessee raised the following grounds which read as under:
"1. Ld CIT (A) erred in confirming the action of the Assessing Officer in disallowing expenditure u/s 14A of the Act aggregating to Rs. 4,53,507/- towards the earning of dividend income, by applying clause 2(iii) of Rule-8D.
2. Ld CIT (A) erred in holding that Rule-8D read with section 14A(2) and 14A(3) of the Act could be applied retrospectively to the assessment year 2006- 2007."
23. The issues raised in this appeal are similar to the one raised in the assessee's appeal for the AY 2005-2006. In that appeal, we have held that the provisions of Rule-8D should not be applied for the AYs prior to AY 2008-2009 in view of the binding judgment of the jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd (supra). Further, we have also upheld that in view of the agreed position between the parties for the AY 2007-2008 on the quantification of the disallowable 9 expenditure relatable to the exempt income, 2% of dividend income is the expenditure disallowable under section 14A of the Act. We have adjudicated this issue after providing detailed discussion for the AY 2005-2006. Accordingly, we direct the AO to restrict the disallowance to 2% of the exempt income for this year also on par with the decisions for the AY 2005-06. Accordingly, grounds raised by the assessee are partly allowed.
24. In the result, appeal of the assessee is allowed partly allowed.
(C) ITA No.6194/M/2011 (AY 2007-2008) By Revenue
&
CO No.178/M/2012 (AY 2007-2008) By Assessee
25. This appeal ITA No.6194/M/2011, filed by the Revenue on 7.9.2011, is against the order of CIT (A)-21. Mumbai dated 3.6.2011 for the assessment year 2007-2008. In this appeal, Revenue raised the following grounds which read as under:
"1. On the facts and in the circumstances of the case and in law, the Ld CIT d(A) erred in directing the AO not to deduct the telecommunication expenses of Rs. 93,25,650/- and insurance expenses of Rs. 26,95,650/- from the export turnover while computing deduction u/s 10A.
2. On the facts and in the circumstances of the case and in law, the Ld CIT (A) erred in deleting the disallowance of Rs. 3,59,823/-made u/s 14A r.w.Rule 8D in respect of exempt dividend income without appreciating the fact that in the assessment order, administrative and managerial expenses had been correctly computed at the average value of investments where whole value is exempt as provided under clause (iii) of Rule -8D (2).
26. Ground no.1 relates to the downward adjustment of the export turnover (ETO) qua the insurance and communication expenses. The Ld Representatives of both the parties are concurred with the submission that the issue involved in this appeal is identical to the one raised for the AY 2005-06 in the Revenue's appeal, ITA No.4932/M/2010, wherein the order of the CIT (A) was held reasonable. Accordingly, the ground was dismissed and the revenue's appeal was dismissed. On observing the facts and the law relating to the present issue, we find that but the figures, the issues are identical to that of Revenue's appeal for the AY 2005-2006 and the same have to be dismissed here too for the reasons given for the AY 2005- 2006. Accordingly, ground no.1 raised in this appeal is dismissed.
1027. The issue raised in ground no.2 relating to the disallowance of expenditure u/s 14A of the Act, is similar to the one raised in the assessee's appeal for the AY 2005-2006. In that appeal, we have held that the provisions of Rule-8D should not be applied for the AYs prior to AY 2008-2009 in view of the binding judgment of the jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd (supra). Further, we have also held that in view of the agreed position between the parties for the AY 2007-2008 in the group cases of the assessee, the quantification of the disallowable expenditure relatable to the exempt income at the rate of 2% of dividend/exempt income is reasonable for the AY 2005-2006 and 2006-2007. We have adjudicated this issue after providing detailed discussion for the AY 2005-2006. We direct the AO to restrict the disallowance to 2% of the exempt income for this year also. Accordingly, grounds raised by the assessee are partly allowed.
28. In the result, appeal of the Revenue is allowed partly allowed.
CO No.178/M/2012 (Arising from ITA No. 6194/M/2011) (AY: 2007-2008) By Assessee
29. This Cross Objection filed by the assessee on 7.8.2012 for the AY 2007-2008. In this CO, assessee raised the following ground which read as under:
"Without prejudice to the contention of the Cross Objector that the insurance and telecommunication expenses are not to be reduced from Export Turnover for the purposes of computing the deduction under section 10A of the Act, even assuming though not conceding that any expenditure was to be reduced from the Export Turnover, then such expenditure is to be reduced from the Total Turnover also for the purposes of computing the deduction under section 10A of the Act."
30. Before us, both the parties pointed out that the only issue raised in the CO relates to the downward adjustment made by the AO to the export turnover qua insurance and telecommunication expenses without making similar adjustment to the total turnover of the assessee. In the CO, assessee argues that when adjustment is made in export turnover, the total turnover is also to be adjusted considering the principle of parity. We have adjudicated this issue in attending to the Revenue's appeal vide ITA No.6003/M/2010 vide para 17 of this order and dismissed the appeal of the revenue. Therefore, at the end of the appeal, the ETO as claimed by the assessee is restored. Accordingly, the issue raised in the CO becomes academic. Accordingly, ground raised in CO is dismissed as academic.
1131. In the result, CO of the assessee is dismissed.
32. Finally, revenue's appeals ITA No.4932/M/2010 (2005-2006); ITA No.6003/M/2010 (AY:2006-2007) are dismissed and ITA No.6194/M/2011 (2007- 2008) is partly allowed. As well, assessee's appeals ITA No.4538/M/2010 (AY:2005- 2006); ITA No.5839/M/2010 (AY: 2006-2007) are partly allowed and CO No.123/M/2011 (2006-2007) & CO No.178/M/2012 (AY:2007-2008) are dismissed.
Order pronounced in the open court on 03. 07.2013
Sd/- Sd/-
(D. MANMOHAN ) (D. KARUNAKARA RAO )
उपा य / VICE PRESIDENT लेखा सद य / ACCOUNTANT MEMBER
मंब
ु ई Mumbai; दनांक 03. 07.2013
व. न.स./ OKK , Sr. PS
आदे श क त ल प अ े षत/Copy
षत of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. आयकर आयु (अपील) / The CIT(A)-
4. आयकर आयु / CIT
5. वभागीय त न ध, आयकर अपील य अ धकरण, मंब
ु ई / DR,
ITAT, Mumbai
6. गाड फाईल / Guard file.
स या पत त //True Copy//
आदे शानुसार/
ार BY ORDER,
उप/सहायक
उप सहायक पंजीकार (Dy./Asstt. Registrar)
आयकर अपील य अ धकरण,
धकरण मुंबई / ITAT, Mumbai