Income Tax Appellate Tribunal - Mumbai
Sonata Software Ltd, Mumbai vs Assessee on 20 February, 2015
आयकर अपीलीय अिधकरण,
अिधकरण मुंबई यायपीठ 'एल ' मुंबई ।
IN THE INCOME TAX APPELLATE TRIBUNAL "L" BENCH, MUMBAI
सव ौी नरे ि कुमार ब लै या, लेखा सदःय एवं अिमत शु'ला, याियक सदःय के सम(
BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER &
SHRI AMIT SHUKLA, JUDICIAL MEMBER
आयकर अपील सं./I.T.A. No. 3517/Mum/2012
िनधा रण वष / Assessment Year : A.Y. 2006-2007
(िनधा
M/s. Sonata Software Ltd., बनाम/ बनाम Addl. Commissioner of
207-208, T.V.Industrial Income Tax, Range 7(2),
Vs.
Estate, S.K.Ahire Marg, Aaykar Bhavan, MK Road,
Worli, Mumbai 400 020
Mumbai 400 030
ःथायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : AABCS8459D
(अपीलाथ- /Appellant) .. (ू/यथ- / Respondent)
आयकर अपील सं./I.T.A. No. 3539/Mum/2012
िनधा रण वष / Assessment Year : A.Y. 2006-2007
(िनधा
Addl. Commissioner of बनाम M/s. Sonata Software Ltd.,
बनाम/
Income Tax, Range 7(2), 207-208, T.V.Industrial
Vs.
Aaykar Bhavan, MK Road, Estate, S.K.Ahire Marg,
Mumbai 400 020 Worli,
Mumbai 400 030
ःथायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : AABCS8459D
(अपीलाथ- /Appellant) .. (ू/यथ- / Respondent)
Revenue by Shri Vijay Mehta
Assessee by Smt. S. Padmaja
सुनवाई क0 तार1ख / Date of Hearing :10.02.2015
घोषणा क0 तार1ख /Date of Pronouncement:20.02.2015
I. T . A . N o . 3 5 1 7 & 3 5 3 9 / M u m / 2 0 1 2
A.Y. 2006-07.
2
आदे श / O R D E R
PER N.K.BILLAIYA, JM:
ITA No.3517/Mum/2012 & 3539/Mum/2012 are cross appeals by the
assessee and Revenue against the order of Ld. CIT(A)-13, Mumbai dated 22/03/2012 pertaining to assessment year 2006-07. Both these appeals were heard together and are disposed of by this common order for the sake of convenience.
ITA NO. 3517/MUM/2012' ASSESSEE'S APPEAL:
2. The assessee is aggrieved on two grounds. The first ground relates to the denial of deduction under section 10A of the Income Tax Act, 1961 (the Act) in respect of eight separate undertakings being considered as one undertaking and not separate undertaking. The second ground relates to the disallowance of Rs.6,17,901/- under section 40(a) (i) of the Act in respect of depreciation claim on software purchased by the assessee.
2.1 The assessee is in the business of development and trading of softwares and hardwares. The return of income for the year under consideration was filed on 27/11/2006 declaring total loss of Rs.20.98 crores. The return was selected for scrutiny assessment and accordingly statutory notices were issued and served upon the assessee. A reference under section 92CA(1) was made to the TPO. The TPO passed an order under section 92CA(3) on 22/10/2009 without making any adjustment. During the course of scrutiny assessment proceedings the AO noticed that the assessee has claimed deduction under section 10A at Rs.42,94,66,344/- in respect of five units. The further observed that the deduction under section 10A was disallowed in A.Y 1998-99 and 1999-2000 on the ground that undertaking was formed by splitting or reconstruction of business 2 I. T . A . N o . 3 5 1 7 & 3 5 3 9 / M u m / 2 0 1 2 A.Y. 2006-07.
3already in existence and the undertaking has been carrying on its activities prior to 1995-96. It is further observed that the Tribunal has decided the issue in favour of the assessee and against the Department and in subsequent order, assessment orders of A.Y 1998-99 and 1999-2000 were followed by the AO and the Tribunal followed its own order. The AO proceeded by following his own order for A.Y 1998-99 and 1999-2000. The AO further observed that in the present year the deduction under section 10A is disallowed for two additional ground; (a) 10A eligibility of three units which came into existence after A.Y.1999-2000. The major claim of deduction is in respect of two units which came into existence in A.Y 2005-06; (b) Treating business of the assessee as single integrated unit with complete inter dependence and inter-leasing of funds, resources, management and control.
2.2 Therefore, the present year is not covered by the orders of the Tribunal in earlier years as these issues were not there before the Appellate Authorities in earlier years. The AO further observed that three units which came into existence after 1999-2000, out of which deduction under section 10A has been claimed for two units at Rs. 41,78,00,213/-. These units came into existence in A.Y 2005-06 only and deduction under section 10A claimed is 97% on total deduction. The business from these two units is 67% of total revenue which means that the assessee is transferring business from older units to new units which is nothing but reconstruction of business already in existence. Therefore, even if the order of Tribunal in A.Y 1998-99 and 1999-2000 is followed these three units are not eligible for deduction under section 10A. The AO concluded by observing that the assessee is not eligible for deduction under section 10A on the grounds that all 10 units are an integrated whole, that is not new units and without prejudice to the same three new units are simple restructuring / reconstruction business for transferring business to new units to old units and these issues are not covered by the decision of the Tribunal in A.Y 1998-99 and 3 I. T . A . N o . 3 5 1 7 & 3 5 3 9 / M u m / 2 0 1 2 A.Y. 2006-07.
41999-2000. The AO ultimately denied the claim of deduction under section 10A of the Act. Aggrieved by this the assessee carried the matter before Ld. CIT(A).
2.3 It was contended before Ld. CIT(A) that the issue was squarely covered in favour of the assessee by the order of the Tribunal in assessee's own case for assessment year 1998-99 and 1999-2000 and also by the orders of the Tribunal for A.Y 2000-01 to 2004-05. It was brought to the notice of Ld.CIT(A) that in all these years, the Ld. CIT(A) has held that the assessee was eligible for deduction under section 10A of the Act. After considering the facts and the submissions made by the assessee Ld. CIT(A) observed that the Customs Authorities have recognized only three undertakings and sub-units shown by the assessee have not been recognized as separate undertakings by Custom Authorities /STP. Ld. CIT(A) further observed that all these facts were not earlier before AO/Appellate Authorities. Therefore, earlier finding shall be not applicable to the facts of the case. Ld. CIT(A) finally allowed the claim of deduction in respect of three units. Aggrieved by this the assessee is before us.
3. Ld. Counsel for the assessee reiterated what has been stated before first appellate authority. Ld. Counsel strongly submitted that in earlier years Tribunal has allowed the claim of deduction and, therefore, Ld. CIT(A) has erred in denying the claim of deduction in respect of all the units on frivolous grounds. The Ld. Counsel pointed out that in respect of five units the year of deduction is 9th year. In respect of two units the year of deduction is second year. Out of five units the assessee has claimed deduction in respect of three units only. It is the say of the Ld. Counsel that it is a settled proposition of law that without disturbing the claim of deduction in the initial year of claim the Revenue Authorities cannot deny the claim of deduction in subsequent years. Reliance has been placed on the decision of the Hon'ble Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd., 123 ITR 669 (Guj) and also on 4 I. T . A . N o . 3 5 1 7 & 3 5 3 9 / M u m / 2 0 1 2 A.Y. 2006-07.
5the decision of the Hon'ble Bombay High Court in the case of CIT vs. Paul Brothers, 216 ITR 548 (Bom).
4. Per contra, Ld. DR strongly supported the findings of the lower authorities. It is the say of the Ld. DR that the AO has specifically pointed out the distinguishing facts. Ld. CIT(A) has also elaborately discussed the distinguishing facts and, therefore, findings of earlier years cannot be taken into consideration for the year under consideration.
5. We have carefully perused the orders of the authorities below and the decisions brought to our notice. Let us first see how the claim has been made by the assessee.
Unit Address 10A 10A Profit/Loss for 10A deduction Profit/loss after Year of
Name the year 10A dedn. dedn.
u/s.10A
1 NW ¼, APS Trust Bldg., NO N.A. 5806476 - 5806476 Period
Bull Temple Rd., N.R. expired.
Colony, Bangalore
560019
3SW -Do- YES YES 8218399 8218399 - 9th year
4FL -do- YES NO (29315948) - (29315948) 9th year
5SW -do- YES NO (2812701) - (2812701) 9th year
1SW -do- YES YES 1345589 1345589 - 9th year
5NW -do- YES YES 2102143 2102143 - 9th year
3NW -do- YES NO (22652254) - (22652254) 8th year
BG2 No.193, R.V.Rd., Next YES NO (142604698) - (142604698) 7th year
to Vijaya College,
Basavanagudi,
Bangalore 560004
BG3 No.6, Richmond Rd. YES YES 340679999 340679999 - 2ND year
Bangalore 560 025
HYD #1-10-176, Green YES YES 77120214 77120214 - 2nd year
Towers, Opp.
Hyderabad Public
School, Begumpet,
Hyderabad 500 016
5
I. T . A . N o . 3 5 1 7 & 3 5 3 9 / M u m / 2 0 1 2
A.Y. 2006-07.
6
5.1 Thus, it can be seen that in respect of three units namely 3SW, 1SW and 5NW the year of deduction is 9th year, which makes initial year to be assessment year 1998-99. In the first year of claim of deduction i.e. A.Y 1998-99 the matter travelled upto the Hon'ble Bombay High Court and the Hon'ble Court in Income Tax Appeal No.311 of 2004 had an occasion to consider inter-alia the following question of law:
"(a) Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the assessee was entitled to an exemption in respect of the profit derived from the STP undertaking on the basis of that the condition of section 10A(2) are fulfilled."
And after considering the facts, Hon'ble High Court at para-13 of its order held that the first question of law would have to be ansered in the affirmative in favour of the assessee and against the Revenue. In respect of claim of deduction for units BG3 & HYD the year of deduction is second year which makes initial assessment year 2005-06. The claim of deduction in the initial assessment year was allowed by the Tribunal vide ITA No. 3514/Mum/2010.
5.2 Thus, it can be seen that the claim of deduction in respect of each unit where section 10A deduction has been claimed as per chart mentioned herein above. The assessee was allowed the deduction in the initial assessment year which make fact of the case squarely covered by the decision of the Hon'ble Gujarat High Court in the case of Saurashtra Cement & Chemicals Ltd. (supra), wherein Hon'ble Court has made the following observations:
"The next question to which the Tribunal addressed itself, and in our opinion rightly, was whether the ITO was justified in refusing to continue the relief of tax holiday granted to the assessee company for the assessment year 1968-69, in the assessment year under reference, that is, 1969-70, without disturbing the relief granted for the initial year. It should be stated that there is no provision in the scheme of s. 80 J similar to the one which we find in the case of development rebate which could be 6 I. T . A . N o . 3 5 1 7 & 3 5 3 9 / M u m / 2 0 1 2 A.Y. 2006-07.7
withdrawn in subsequent years for breach of certain conditions. No doubt, the relief of tax holiday under s. 80J can be withheld or discontinued provided the relief granted in the in the initial year of assessment is disturbed or changed on valid grounds. But without disturbing the relief granted in the initial year, the ITO cannot examine the question against and decide to withhold or withdraw the relief which has been already once granted."
5.3 Similarly in the case of Paul Brothers (supra), Hon'ble Bombay High Court has held as under:
"Held, that (i) since the assessment order for the year 1981-82 had merged in the appellate order, revisional jurisdiction could not be exercised; (ii) the Assessing Officer's order based on a binding decision of the High Court, could not be interfered with in revisional jurisdiction; (iii) unless deductions allowed for the assessment year 1980-81 on the same ground were withdrawn, they could not be denied for the subsequent years. Either in section 80 HH or in section 80J there is no provision for withdrawal of special deduction for breach of certain conditions."
5.4 Considering the facts of the case in the light of the judicial decision cited herein above, in our considered opinion the claim of deduction cannot be denied unless claim is withdrawn right from the initial assessment year. Respectfully following the decisions of the Hon'ble Bombay High Court and Hon'ble Gujarat High Court, we set aside the findings of Ld. CIT(A) and direct the AO to allow the claim of deduction as made by the assessee under section 10A of the Act. Ground No.1 is allowed.
6. Ground No.2 is against disallowance of Rs.6,17,901/- under section 40(a)(i) of the Act During the course of the assessment proceedings the AO noticed that the assessee has claimed software purchases expenses of Rs.4,28,65,714/- which includes purchases of Rs.20,59,671/- claimed to be purchased by foreign branches of the assessee. The AO found that no TDS has been made on this amount on the ground that the purchases are outside India for 7 I. T . A . N o . 3 5 1 7 & 3 5 3 9 / M u m / 2 0 1 2 A.Y. 2006-07.
8outside India. In the light of the provisions of section 195(2) of the Act, the AO disallowed a sum of Rs.20,59,671/- under section 40(a)(i) of the Act.
6.1 Aggrieved, assessee carried the matter before Ld. CIT(A). It was pointed out to the Ld. CIT(A) that the assessee has capitalized the said amount of Rs.20,59,619/- and has claimed only depreciation of Rs.6,17,901/-. Therefore, the provisions of section 40(a)(i) of the Act are not applicable for claiming of deduction under section 32 of the Act. After considering the facts and the submissions Ld. CIT(A) observed that the AO is incorrect in holding that the assessee has claimed the entire expenditure of Rs.20,59,671/- as a revenue. Ld. CIT(A), therefore, restricted the disallowance only to the claim of depreciation of Rs.6,17,901/-. Aggrieved by this the assessee is before us.
7. Ld. Counsel for the assessee vehemently submitted that the disallowance have been made under section 40(a)(i) of the Act, which is not at all applicable on the facts of the case. It is the say of the Ld. Counsel that the assessee has only claimed depreciation and, therefore, no disallowance need to be made. The Ld. Counsel further pointed out that TDS on royalty was made applicable from 13/07/2006 and the assessment year is assessment year 2006-07, therefore, there was no TDS liability even if entire amount is treated as royalty. Ld. Counsel referred to the non-discriminatory clause in Indo-US Treaty and submitted that if the domestic transaction would not have attracted any tax liability a similar international transaction cannot be subject to TDS liability.
7.1 Ld. Counsel for the assessee relied upon the decision of the Tribunal Delhi Bench in the case of SMG Demag (P) Ltd., ITA NO.3636/Delhi/2008, A.Y. 2000-01.
8I. T . A . N o . 3 5 1 7 & 3 5 3 9 / M u m / 2 0 1 2 A.Y. 2006-07.
98. Per contra, Ld. DR strongly supported the findings of the Revenue authorities.
9. Having perused the orders carefully we agree with the submissions made by Ld. Counsel. Firstly, it is an undisputed fact that the assessee has only claimed depreciation and not the entire expenditure. The Tribunal Delhi Bench in the case of SMG Demag (P) supra) has held that provisions of section 40(a)
(i) are not applicable for claim of deduction of depreciation under section 32 of the Act. Payments for purchase of software without deduction tax will not be subject to the provisions of Section 40(a)(i) of the Act.
9.1 Further, if a similar domestic transaction was made during the year under consideration, it would not have attracted the liability for TDS. Therefore, in the light of the non-discriminatory clause in the Treaty a similar international transaction would also not attract liability of the TDS. Considering the facts in the light of the judicial decisions and our observations made herein above, the findings of Ld. CIT(A) is set aside and the AO is directed to delete the addition of Rs.6,17,901/-. Ground No.2 is accordingly allowed.
ITA NO.3539/MUM/2012: REVENUE'S APPEAL:
10. The Revenue has raised seven substantial grounds of appeal. Grievance raised vide ground No.1 relates to the claim of deduction under section 10A of the Act. This issue has been discussed by us in detail in assessee's appeal, qua ground No.1 of ITA No.3517/Mum/2012. For the detailed reasons given therein, Ground No.1 is accordingly dismissed.
11. Ground No.2 relates to the deletion of addition of Rs.15,25,91,438/- on account of arbitration settlement claim. The AO has considered this issue at 9 I. T . A . N o . 3 5 1 7 & 3 5 3 9 / M u m / 2 0 1 2 A.Y. 2006-07.
10para-21 of his order. The AO observed that the assessee has made the claim on the basis of International Arbitration Award. The AO further observed that the arbitration award mention payment of Rs.15 lacs Britain Pounds in respect of claim of M/s. New Water Consulting Ltd., including VAT and cost. The AO has further noticed that out of the said amount only 7,50,000 Britain Pounds were to be paid in F.Y. 2005-06 and the remaining amount was to be paid in F.Y. 2006-
07. However, the assessee has claimed the entire amount in A.Y 2006-07. The AO, accordingly, disallowed Rs.15,25,91,238/-. Aggrieved, the assessee carried the matter before Ld. CIT(A).
11.1 Ld. CIT(A) has considered the grievance vide para-9 of his order. It was pointed out before the Ld. CIT(A) that as per arbitration award the settlement sum was payable in three installments, 7.50 lacs Britain Pounds + VAT by 15/04/2006 and 3.75 lacs Pounds + VAT by 15/5/2006. After considering the facts and the submissions, the Ld. CIT(A) was convinced that the liability to pay M/s. New Water Consulting Ltd., had crystallized during the financial year 2005- 06 and since the assessee is following mercantile system of accounting the claim of payment of amount of Rs.12,04,19,094/- is an allowable deduction for A.Y 2006-07. Aggrieved by this Revenue is before us.
12. Ld. DR relied upon the assessment order.
13. Ld. Counsel for the assessee reiterated what has been submitted before lower authorities.
14. It is an undisputed fact that the liability of Rs.15 lacs Britain Pounds is based on arbitration award dated 10/3/2006. Only a time table has been given for making the payment but the liability has been crystallized during the year under consideration itself and, therefore, the assessee is entitlted for the claim of 10 I. T . A . N o . 3 5 1 7 & 3 5 3 9 / M u m / 2 0 1 2 A.Y. 2006-07.
11deduction of the full liability during the year itself. We, therefore, do not find any reason to interfere with the findings of Ld. CIT(A). Ground No.2 is dismissed.
15. Ground No.3, relates to the deletion of the addition made under section 14A r.w. Rule 8D.
16. At the outset, Ld. Counsel for the assessee submitted a detailed chart of earlier years and subsequent years, where no disallowance has been made under section 14A of the Act. The factual matrix is as under:
Sr.No. Assessment Dividend Suo Moto Remarks
Year (Rs.) Disallowance
(Rs.)
1 2004-05 8,29,586 - No disallowance made in assessment
made u/s. 143(3)
2. 2005-06 44,46,572 - No disallowance made in assessment
made u/s. 143(3)
3. 2006-07 62,68,268 3,13,413 Year under consideration.
Disallowance made as per Rule 8D
4. 2007-08 39,04,061 1,95,203 No disallowance made in assessment
made u/s. 143(3)
5. 2008-09 29,14,685 1,45,734 No disallowance made in assessment
made u/s. 143(3)
6. 2009-10 6,10,892 3,91,355 No disallowance made in assessment
made u/s. 143(3) as suo moto
disallowance was as per Rule 8D.
7. 2010-11 24,24,940 4,81,316 No disallowance made in assessment
made u/s. 143(3) as suo moto
disallowance was as per Rule 8D.
Considering the facts of the case in the light of the factual matrix mentioned herein above, we do not find any reason to interfere with the findings of Ld. CIT(A). Ground No.3, is dismissed.
17. Ground No.4 is in relation to the deletion of the addition of Rs.8,15,75,087/- in respect of unbilled software income.
11I. T . A . N o . 3 5 1 7 & 3 5 3 9 / M u m / 2 0 1 2 A.Y. 2006-07.
1218. At the outset Ld. Counsel for the assessee pointed out that this issue is squarely covered in favour of the assessee and against the Revenue by the decision of the Tribunal for A.Y 2002-03. The AO has considered this issue at para 20 of his order. Ld. CIT(A) has considered the grievance at para 8 of his order and at para 8.3 following the decision of the Tribunal, the Ld. CIT(A) has deleted the addition of Rs.8,15,75,087/-. As the Ld. CIT(A) has followed the decision of the Tribunal in assessee's own case in earlier years no interference is called for. Ground No.4 is accordingly dismissed.
19. Ground No.5 relates to the computation of the book profit under section 115JB of the Act. In our considered opinion this issue is consequential to our finding allowing the claim of deduction under section 10A of the Act. The A.O is directed to recompute the book profit under section 115JB of the Act after giving appeal effect to our order. This ground is treated as allowed for statistical purposes.
20. Ground No. 6 relates to the recompilation of deduction under section 10A of the Act. This issue is directly related to our decision in assessee's appeal allowing the claim of deduction under section 10A. As we have allowed the claim of deduction under section 10A, this ground is dismissed.
21. Ground No.7 relates to deletion of the addition on account of service charges recovered from 100% subsidiary. This issue has already been decided in favour of the assessee and against the Revenue by the Tribunal from A.Y 2001- 02 to 2005-06. Ld. CIT(A) has decided this issue at para 7.4 of his order, wherein he has followed the finding of the Tribunal in assessee's own case for .Y 2001-02 to 2006-07. Since Ld. CIT(A) has followed the decision of the Tribunal 12 I. T . A . N o . 3 5 1 7 & 3 5 3 9 / M u m / 2 0 1 2 A.Y. 2006-07.
13in assessee's own case for earlier years we do not find it necessary to interfere with the findings of the Ld. CIT(A). Accordingly, ground No.7 is dismissed.
22. In the result, the appeal filed by the Revenue is partly allowed.
Order pronounced in the open court at the time of hearing on 20th day of Feb. 2015.
Sd/- Sd/-
(AMIT SHUKLA ) (N.K. BILLAIYA)
याियक सदःय/JUDICIAL MEMBER लेखा सदःय / ACCOUNTANT MEMBER
मुंबई Mumbai; 4दनांक Dated : 20. 02.2015
व.िन.स./ VM , Sr. PS
आदे श क0 ूितिल प अमे षत/Copy
षत of the Order forwarded to :
1. अपीलाथ- / The Appellant
2. ू/यथ- / The Respondent.
3. आयकर आयु6(अपील) / The CIT(A)-
4. आयकर आयु6 / CIT
5. वभागीय ूितिनिध, आयकर अपीलीय अिधकरण, मुंबई / DR, ITAT, Mumbai
6. गाड फाईल / Guard file.
आदे शानुसार/ ार BY ORDER, स/या पत ूित //True Copy// उप/सहायक उप सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपीलीय अिधकरण, अिधकरण मुंबई / ITAT, Mumbai 13