Income Tax Appellate Tribunal - Bangalore
M/S I Gate Global Solutions Ltd.,, ... vs Department Of Income Tax on 1 May, 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.427/Bang/2012
Assessment year : 2004-05
M/s. iGate Global Solutions Ltd., Vs. The Deputy Commissioner of
No.158-162 & 165-170, Income Tax,
EPIP Phase II, Circle 11(4),
Whitefield, Bangalore.
Bangalore - 560 066.
PAN : AABCM 4573E
APPELLANT RESPONDENT
ITA No. 429/Bang/2012
Assessment year : 2004-05
The Deputy Commissioner of Vs. M/s. iGate Global Solutions Ltd.,
Income Tax, No.158-162 & 165-170,
Circle 11(4), EPIP Phase II,
Bangalore. Whitefield,
Bangalore - 560 066.
PAN : AABCM 4573E
APPELLANT RESPONDENT
Assessee by : Shri H.N. Khincha, C.A.
Revenue by : Shri Farahat Hussain Qureshi, CIT-II(DR)
Date of hearing : 01.05.2013
Date of Pronouncement : 10.05.2013
ITA No.427 & 429/Bang/2012
Page 2 of 28
ORDER
Per N.V. Vasudevan, Judicial Member
ITA 427/B/12 is an appeal by the assessee, while ITA 429/B/12 is a cross appeal by the revenue. Both these appeals are directed against the order dated 30.12.2011 of the CIT(Appeals)-I, Bangalore relating to A.Y. 2004-05.
2. Grounds 1 to 4 raised by the revenue in its appeal and grounds No.1.1 and 2.1 raised by the assessee in its appeal can be conveniently decided together. These grounds read as follows :-
Revenue's grounds 1 to 4
1. The order of the Learned CIT (Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case.
2. The learned CIT (Appeals) was not justified in directing the AO to recompute the deduction allowable u/s. 10A of I.T.Act, 1961 after reducing the expenditure incurred in foreign currency in respect of link charges, payment to employees, travelling, legal & professional charges and power charges, both from the export turnover and from the total turnover, without appreciating the facts and circumstances of the case.
3. The learned CIT (Appeals) has erred in not appreciating that there is no provision in section 10A, which requires the above mentioned expenses to be reduced from the total turnover.
4. The learned CIT(A) erred in allowing the relief, relying on the decision of the Hon'ble High Court in ITA No. 349 of 2010 (clubbed in consolidated order in ITA No. 70/2009 & others), which has not reached its finality and SLP has been recommended to be filed before the Hon'ble Supreme Court u/s 261 of the I T Act, 1961 against such order.
ITA No.427 & 429/Bang/2012 Page 3 of 28 Assessee's grounds 1.1 & 2.1 1.1 The 1earned Commissioner of Income tax (Appeals) I, Bangalore has erred in concluding that Rs. 46,57,114/- being 50% of link charges should be reduced from export turnover in computing deduction under section 10A. On the facts and in the circumstances of the case and law applicable, link charges, not having been recovered and included in the export turnover, should not be reduced from export turnover in computing deduction under section 10A.
2.1 The learned Commissioner of Income tax (Appeals) I, Bangalore has erred in concluding that Rs. 105,21,19,075/- being 50% of expenses incurred in foreign currency should be reduced from export turnover in computing deduction under section 10A. On the facts and in the circumstances of the case and law applicable, expenses incurred in foreign currency should not be reduced from export turnover in computing deduction under section 10A.
3. The assessee is a company engaged in the business of development and export of software. The assessee filed return of income for the A.Y. 2004-05 on 30.10.2004 i.e., within the due date u/s. 139(1). The assessee declared total income of Rs.1,66,35,494. Subsequently the assessee filed a revised return of income on 24.03.2006 declaring a loss of Rs.10,15,02,275. The assessee had five STP units. In the original return, the assessee claimed deduction u/s. 10A of the Act in respect of the profits of three STP units. There was a loss in the other two STP units. The loss in the other two STP units was not set off against the profits of the three STP units which made profits. The loss in the two STP units was set off against the other income and the assessee claimed a right to carry forward the remaining unabsorbed losses. This was the reason why a revised return of income was filed by the assessee.
ITA No.427 & 429/Bang/2012 Page 4 of 28
4. As far as the disputes raised by the assessee and the revenue in the grounds set out above are concerned, it relates to the computation of deduction u/s. 10A of the Act. While allowing deduction u/s. 10A of the Act, the AO reduced the following items of expenditure incurred in foreign currency from export turnover:-
(a) Rs.46,57,114 being 50% of link charges;
(b) Rs.105,21,19,075 comprising of the following amounts:
Rs.99,85,47,768 being 50% of payments to employees + Rs.76,80,691 being 50% of legal & professional charges + Rs.4,53,63,500 being 50% of travelling + Rs.5,27,116 being 50% of power.
5. The plea of the assessee was that Explanation 2 to section 10A defines 'export turnover' to mean consideration in respect of export 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.
6. The assessee submitted that expenditure of Rs.105,21,19,075 being 50% of expenditure incurred in foreign currency towards payment to employees, legal & professional charges, travelling and power charges are not expenses in providing technical services outside India. The assessee pointed out that it was not engaged in the business of providing technical ITA No.427 & 429/Bang/2012 Page 5 of 28 services outside India, but was in the business of development and export of software. The assessee relied on the decision of the ITAT Bangalore Bench in the case of M/s. Infosys Technology Ltd. v. JCIT (ITA Nos. 50, 793 to 795, 742 & 732 to 734, order dated 31.03.2005, wherein the Tribunal had taken the view that no reduction is to be made of any sum from export turnover on the ground that it is expenditure in foreign currency incurred in connection with technical services outside India in the case of a software developer. The Tribunal held that development of computer software does not amount to rendering of technical services. The assessee pointed out that the aforesaid decision was followed by the Tribunal in assessee's own case in the A.Y. 2001-01 in ITA No.2291/Bang/2004 dated 11.08.2006 and in A.Ys. 2002-03 & 2003-04 in ITA Nos.390 & 391/Bang/2007.
7. With regard to the action of the Assessing Officer in excluding 50% of the link charges from export turnover, the assessee pointed out that whatever is excluded from the export turnover is also to be excluded from the total turnover while computing deduction u/s. 10A of the Act. In this regard, the assessee relied on the decision of the Hon'ble High Court of Karnataka in the case of Tata Elxsi Ltd., 349 ITR 98.
8. The CIT(A) on the aforesaid issues, following the decision of the Hon'ble High Court of Karnataka in the case of Tata Elxsi Ltd. (supra) directed the AO to exclude the link charges as well as the payment to employees, legal & professional charges, travelling and power charges ITA No.427 & 429/Bang/2012 Page 6 of 28 both from the export turnover and total turnover. He did not decide the question as to whether (a) Rs.46,57,114 being 50% of link charges cannot be excluded from the export turnover; and (b) expenditure of Rs.105,21,19,075 being 50% of expenditure incurred in foreign currency towards payment to employees, legal & professional charges, travelling and power charges are not expenses in providing technical services outside India and therefore cannot be excluded from the export turnover.
9. Aggrieved by the order of the CIT(A) in excluding the link charges as well as the payment to employees, legal & professional charges, travelling and power charges both from the export turnover and total turnover, the revenue has raised grounds No.1 to 4 before the Tribunal. Aggrieved by the order of the CIT(Appeals) in not deciding the question as to whether (a) Rs.46,57,114 being 50% of link charges cannot be excluded from the export turnover; and (b) expenditure of Rs.105,21,19,075 being 50% of expenditure incurred in foreign currency towards payment to employees, legal & professional charges, travelling and power charges are not expenses in providing technical services outside India and therefore cannot be excluded from the export turnover excluding the link charges and employee charges and other charges from the export turnover, the assessee has raised grounds 1.1 and 2.1 before the Tribunal.
10. As far as ground No.2.1 is concerned, it has been held in assessee's own case in A.Ys. 2001-02 to 2003-04 that the expenses referred to in the aforesaid ground cannot be said to be expenses incurred outside India for rendering technical services. Following the decision in assessee's own ITA No.427 & 429/Bang/2012 Page 7 of 28 case, we hold that the aforesaid sum should not be excluded from the export turnover.
11. As far as grounds 1 to 4 raised by the revenue is concerned, we are of the view that the issue stands squarely covered by the decision of the Hon'ble High Court of Karnataka in the case of Tata Elxsi Ltd. (supra) wherein it has been held that whatever is excluded from the export turnover is also to be excluded from the total turnover. The fact that the revenue has preferred an appeal against the decision of the Hon'ble High Court of Karnataka before the Hon'ble Supreme Court cannot be the basis to interfere with the order of the CIT(Appeals). Consequently grounds 1 to 4 raised by the revenue are dismissed. In view of dismissal of grounds 1 to 4 raised by the revenue, ground No.1.1 raised by the assessee does not require any adjudication.
12. Grounds 3.1 to 3.3 raised by the assessee are in its appeal read as follows:-
"3.1 The learned Commissioner of Income tax (Appeals) I, Bangalore has erred in concluding that deduction under section 10A should be allowed in respect of profits of the STPI units remaining after setting off the losses of the STPI unit at Pune. The comments, findings and various averments of the learned CIT(A) I, Bangalore are perverse, incorrect, contrary to law, bad in law and liable to be quashed.
3.2 The learned Commissioner of Income tax (Appeals) I, Bangalore has erred in concluding that
(i) the revised return filed by the appellant is an invalid return;
(ii) loss as per the revised return cannot be carried forward since the same was not filed within the time limit prescribed under section 139(3) of the Act.
ITA No.427 & 429/Bang/2012 Page 8 of 28 3.3 On facts and in the circumstances of the case and law applicable, the revised return was a valid return and the loss as per the revised return is eligible for carry forward and set off as per the provisions of Chapter VI of the Income tax Act, 1961.
13. As already stated, during the previous year relevant to A.Y. 2004-05, the assessee had 5 units/undertakings set up under the STPI Scheme. The profits of the STP units were eligible for exemption/deduction under section 10A of the Act. During the previous year relevant to the assessment year under consideration, the operation of 3 STP units resulted in profit and the operation of 2 STP units resulted in loss.
14. In the original return of income filed on 30.10.2004, deduction u/s. 10A was claimed in respect of profits of STP units remaining after setting off losses of 2 STP units. However, in the revised return filed on 24.03.2006, the assessee claimed deduction u/s. 10A in respect of the profits of the business of 3 STP units without setting off the losses of 2 STP units. In the assessment order, the AO allowed the deduction u/s. 10A in respect of income computed after setting off the loss of 2 STPI units from profits of other 3 STPI units / undertakings. In other words, the deduction / exemption under section 10A has been allowed from income assessed under the head 'profits and gains of business' which was computed after setting off the loss of 2 STP units from profits of other 3 units / undertakings. On the above claim made by the assessee in the revised return of income, the AO held as follows:-
ITA No.427 & 429/Bang/2012 Page 9 of 28 "The assessee's method of computation in the revised return of income is not acceptable. The deduction envisaged in Sec. l0A is to be given out of the profits from business available in the total income. The total income has to be computed as per the provisions of law and then the provisions of Sec. 10A have to be applied. This has been discussed and approved by the Hon'ble High Court of Karnataka in the case of M/s. Himatsingka Seide Ltd. Therefore, the profits or losses of all the business units - STP or Non-SIP have to be considered to arrive at the profits and gains of business or profession. Then the income or loss under the other heads have to be taken into consideration to arrive at gross total income. Any Chapter VIA deduction has to be given and then the total income has to be arrived. Out of this total income, the deduction u/s.10A is to be allowed to the extent the profits from STP units is available in the total Income. Therefore, the assessee's computation in the revised return of Income is not correct and is not followed. After discussion with the representative, the original return flied on 30/10/2004 is based for computation of total income."
15. Before the CIT(A), the assessee submitted that deduction u/s. 10A is available in respect of each undertaking. It was submitted that the provisions of Sec.10A of the Act are undertaking specific and in this regard pointed out that the said stand is discernible from the following:-
(i) Under sub-section 1 of Section 10A of the Act, profits derived by the undertaking from the export of articles and things qualify for deduction;
(ii) Sub-section 2 of Sec.10A of the Act prescribes certain conditions to be fulfilled by the undertaking for being eligible to the benefits of section 10A;
(iii) Under sub-section 4 of Sec.10A of the Act, it is profits of the business of the undertaking that qualify for deduction.
Similarly, the definition of export turnover refers to the sale proceeds of the exports made by the undertaking;
(iv) Under sub-section 5 of Sec.10A of the Act, an audit report is to be furnished in support of claim of deduction. Such an audit report is to be submitted for each eligible undertaking.
ITA No.427 & 429/Bang/2012 Page 10 of 28
16. It was argued that upto A.Y. 2000-01, section 10A was an "exemption section". The income was exempted at source. As the income was exempted at source, it never entered the computation provisions. However, with effect from A.Y. 2001-02, section 10A provides for a "deduction" from total income. Despite the change in terminology, it still remains an exemption section, particularly because of it continuing to remain a part of Chapter - III, which deals with what is popularly called as "exempt income". It was pointed that under section 10A, as it stood prior to its amendment w.e.f. 1.4.2001, it was provided that the profits shall not be included in the total income. At the time of substitution of section 10A w.e.f. 01.04.2001, it was stated by the CBDT in its Circular No.794 dated 9/8/2000 [245 ITR (St.) (1)] that the substitution has been effected with a view to rationalize the provisions of section 10A. In para 15.2 of the Circular No.794, it is stated as follows, "with a view to rationalize the concession and to phase these out by the end of the assessment year 2009-10, the provisions of sections 10A and 10B have been substituted by new provisions." There is no mention in the aforesaid Circular that the basic character of section 10A is being changed from an exemption to a deduction section.
17. It was pointed out that Circular No.308 dated 29.06.1981 [131 ITR (St.) 119] which explains the provisions of the Finance Act, 1981, had clarified that "the income of STPI unit shall be exempt from tax ...............". The above intent of the Legislature has not been withdrawn or amended in section 10A as substituted by the Finance Act, 2000.
ITA No.427 & 429/Bang/2012 Page 11 of 28
18. It was argued that since section 10A continues to remain an exemption section, the same would have to be given effect to at the eligible undertaking level without considering losses of other units or brought forward losses or unabsorbed depreciation allowance.
19. It was submitted that in the case of ACIT v. Yokogawa India Ltd., ITA No.1802/Bang/2005 dated 04.08.2006 A.Y. 2002-03, [2007] 111 TTJ (Bang.) 548, the Bangalore Tribunal held that exemption under section 10A is to be allowed without set off of loss of non- 10A units. This decision was followed by the Bangalore Tribunal ACIT v. Yokogawa India Ltd. for the A.Y. 2004-05 in ITA No.1157/B/07 dated 29.08.2008. These decisions were later approved by the Hon'ble High Court of Karnataka. Following the above decision reported in 111 TTJ 548, the Bangalore Bench of ITAT in the case of ACIT v. Webspectrum Software (P) Ltd., in ITA No.387(Bang)/06 dated 26.06.2007 for A.Y. 2003-04, held that deduction u/s. 10A is to be allowed without setting off brought forward loss and current year losses of non 10A unit. The Tribunal in the above case referred to and applied the principles of Supreme Court's judgment in the case of CIT v. Canara Workshop Pvt. Ltd. [ 1986] 161 ITR 320 (SC). The ratio of this decision was followed by the ITAT in assessee's own case in ITA No.248 & 249/Bang/2007 dated 27.11.2007 reported in (2008) 24 SOT 3, wherein the Tribunal observed that deduction u/s. 10A is to be ITA No.427 & 429/Bang/2012 Page 12 of 28 calculated independently in respect of each unit / undertaking without considering the losses of other units.
20. It was pointed out that the AO has relied on the decision in CIT v. Himatasingike Seide Ltd. [2006] 286 ITR 255 (Kar.). This decision was distinguishable both on facts and law. It was pointed out that the case before the Hon'ble Karnataka High Court pertained to A.Y. 1994-95. Section 10B at the relevant time excluded certain incomes in the process of arriving at the total income. Section 10B, at the relevant time operated as an exemption section. The terminology of section 10B has now been changed. The section currently provides for a deduction from total income. This change was brought about when section 10B was substituted. The decision of the Karnataka High Court having been rendered in the context of old section 10B of the Act, cannot be made applicable to a case arising under the substituted regime.
21. The CIT(A) however noticed that in A.Y. 2003-04, similar issue had come up for consideration before the ITAT Bangalore in the case of the assessee in ITA No.248 to 249/Bang/2009. The Tribunal considered similar issue wherein loss of one STP unit was sought to be set off from profits of other STP units before allowing deduction under section 10A. The assessee company was having three STP(I) units located at Bangalore, Chennai, and Pune. From Pune unit, the assessee had shown loss. The AO has set off loss from Pune unit from the profits of Bangalore and Chennai units and allowed deduction on the resultant profit. Before the learned CIT(A), it was contended that loss of unit at Pune should be ITA No.427 & 429/Bang/2012 Page 13 of 28 disregarded and deduction under s. 10A should be allowed in respect of profits of other two units. Before the teamed CIT(A), it was argued that the computation of deduction under section is undertaking specific and has to be computed in isolation of other similar units. The learned CIT(A) referred to s. 10A(6), according to which, the loss of s. 10A unit is to be carried forward and set off against profits of subsequent years. The learned CIT(A) referred to the decision of the jurisdictional High Court in the case of CIT vs. Himatasingike Seide Ltd. (2006) 286 ITR 255 (Kar). In that case before the learned High Court, the assessee adjusted the unabsorbed depreciation against other business income. The learned High Court held that unabsorbed depreciation is to be set of against the profit eligible for deduction against s. 10B. The calculation of exemption cannot be at whims and fancies of the assessee for exemption of tax. The learned CIT(A) also referred to the decision of this Bench in the case of Sun Micro Systems and mentioned that the Tribunal has clearly held that section 70 and 71 are to be applied in arriving at eligible profit for the purposes of section 10A. The learned CIT(A), therefore, held that provisions of section 70 and 71 are applicable for determining profits of the business for the purposes of section 10A/10B. The Tribunal however reversed the order CIT(A) and held as follows:
"17. We have heard both the parties. Before proceeding further, it will be relevant to reproduce section 10A(1).
"Sec. 10A. Special provision in respect of newly established undertakings in free trade zone, etc."
(1) Subject to the provisions of this section a deduction of such profits and gains as are derived by an undertaking ITA No.427 & 429/Bang/2012 Page 14 of 28 from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee:
Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to deduction referred to in this sub- section only for the unexpired period of the aforesaid ten consecutive assessment years :
Provided further that where an undertaking initially located in any free trade zone or export processing zone is subsequently located in a special economic zone, by reason of conversion of such free trade zone or export processing zone into a special economic zone, the period of ten consecutive assessment years referred to in this sub-section shall be reckoned from the assessment year relevant to the previous year in which the (undertaking began to manufacture or produce such articles or things or computer software) in such free trade zone or export processing zone :
Provided also that for the assessment year beginning on the 1st day of April, 2003, the deduction under this sub- section shall be ninety per cent of the profits and gains derived by an undertaking from the export of such articles or things or computer software :
Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, 2010 and subsequent years."
18. Section 10A(4) has also been amended with effect from 1-4-2001. Before amendment, the profit derived from export of articles or things was the amount which bears to the profit of the ITA No.427 & 429/Bang/2012 Page 15 of 28 business, the same, proportion as the export turnover in respect of such article or thing or computer software, bears to the total turnover of the business. With effect from 1-4-2001, instead of profits of the business, the words 'profit of the business of the undertaking have been substituted. The word 'undertaking' has not been defined under section 10A. The words 'industrial undertaking' have been defined in the book Law Lexicon by Venkataramiya, at p. 1133 it has been defined as under:
"The expression 'industrial undertaking' must have a technical and economic content. An industrial undertaking would normally be in its ordinary acceptation some industrial concern or enterprise for adventure which is undertaking to be done by the person concerned. The definition of 'industrial undertaking in s. 3(d) of the Industrial Development and Regulation Act. 1951, means any undertaking pertaining to a scheduled industry carried on in one or more factories by any person or authority including Government. CIT vs. Textile Machinery Corpn. Ltd. (1971) 11 ITJ 105 at pp. 112, 113 (Cal) 75 CWN 186 (Cal): AIR 1971 Cal 1, see also Union of India vs. Sakseria Cotton Mills Ltd. (1973) 75 Bom. L.R. 100 at p. 105."
19. Industrial undertaking has been defined in s. 33B of the IT Act for that section. As per this definition, industrial undertaking' means an undertaking, which is mainly engaged in the business of generation or distribution of electricity or another form of power or in the construction of ships or in the manufacture or processing of goods or in mining. Hence, the meaning of 'industrial undertaking' is not restricted to one unit. The undertaking is to be considered as consisting of a number of units provided all the units are engaged in any of the activities mentioned in Explanation to section 33B. Industrial undertaking has also been defined in Explanation to section 10(15).
20. Before us, it has not been clarified that Pune unit is an independent unit and is in no way related with the activities carried out at Bangalore or Chennai unit. In absence of the facts, it is not possible to say that Pune unit was an independent undertaking engaged in the business of software development, which was in no way related to the software development done at Bangalore or Chennai unit. In case, the Pune unit is found to be independent, then loss from such unit is to be independently calculated. In case such unit is associated with the activities, which are carried out at Bangalore or Chennai unit, then Pune unit will be considered as part of that undertaking. Hence, the issue of ascertaining as to whether Pune unit was an independent unit or a unit associated with activities of ITA No.427 & 429/Bang/2012 Page 16 of 28 other two units is restored back on the file of the Assessing Officer. In case it is found that it is part of the other two units and is associated with the activities done in other two units, then it will be considered as part of the same undertaking and loss will be adjusted. However, in case, if it is found, it is an independent unit, then it will be treated as independent undertaking and the assessee cannot be forced to have exemption in respect of such independent undertaking. In that case the loss will (not) be adjusted against other income."
(emphasis supplied)
22. After noticing the Tribunal's direction in A.Y. 2003-04 referred to above, the CIT(A) noticed that in A.Y. 2003-04 the AO held that the Pune unit was a separate undertaking and passed orders giving effect to the order of the Tribunal. The CIT(A), however, did not accept the view of the AO and he held as follows:-
"4.5 The above shows that the A.O. has failed to the act of verification in the letter and spirit of the judicial direction given by the Learned ITAT and had given the effect mechanically without going deep into the contents of the order. Hence, the effect given to such order suffers and can be declared as void. In fact the assessee has all along considered all these three units as part and parcel of one undertaking and therefore had shown profit originally by setting off the loss of two units with the profits of one unit even shown as such in the original return dated 30-10-2004. However, it became wise in the light of discussions made in ITAT during hearing stage and changed its stand and acted promptly to file the revised return claiming loss. However, the AO's stand of not accepting revised return of loss is upheld. Even if A.O. has failed to carry out the verification as per the direction of the Hon'ble ITAT which the A.O. can do now because no time limit is prescribed in the Act for giving effect to a judicial direction. The revised loss return is not considered a valid return because such has not been filed voluntarily but only being pointed out by the A.O. Return u/s. 139(5) of the Act can be held valid only when the assessee himself discovers mistake or omission which is not the case here. Thus, it is held as an invalid return. Even otherwise, the loss return not being filed within the time limit prescribed u/s. 139(3) ITA No.427 & 429/Bang/2012 Page 17 of 28 the losses shown therein is not eligible for carry forward to be set off against the profits of subsequent year/s. Hence, this issue is decided against the appellant."
(emphasis supplied)
23. Aggrieved by the order of the CIT(A), the assessee has raised ground Nos.3.1 to 3.3 referred to above.
24. The ld. counsel for the assessee firstly submitted that the conclusions of the CIT(A) on the order of the AO giving effect to the directions of the Tribunal in A.Y. 2003-04 are false. It was his argument that the order of the AO in AY 03-04 giving effect to the directions of the Tribunal was passed after detailed enquiry and after duly considering material produced by the Assessee. In this regard, our attention was drawn to the fact that pursuant to order dated 27.11.2007 of ITAT in A.Y. 2003-04, the AO issued a letter to the assessee dated 24.03.2008 calling for details/explanation. The assessee vide letter dated 02.05.2008 gave all the details. The same are at pages 695 go 706 of assessee's paperbook. After considering all the details, the AO accepted the assessee's stand that Pune, Chennai and Bangalore units were different undertakings. Consequently, the claim of the assessee in A.Y. 2003-04 was allowed in the order giving effect to the Tribunal's order passed by the AO. The date of the order is however wrongly mentioned as 21.02.2008 instead of 21.05.2008. This is evident from the fact that the refund due has been adjusted for demand outstanding as on 31.03.2008. It is obvious that in an order dated 21.02.2008, there cannot be adjustment of demand on a later date i.e., 31.03.2008. Therefore this is an error in mentioning the date.
ITA No.427 & 429/Bang/2012 Page 18 of 28
25. The ld. DR submitted that the matter may be remanded to the AO for fresh investigation.
26. We have considered the rival submissions and the conclusions of the CIT(Appeals) regarding order giving effect passed by the AO pursuant to the directions of the ITAT in A.Y. 2003-04. As rightly pointed out by the ld. counsel for the assessee, the AO has after obtaining all the details accepted the claim of the assessee. Apart from the above, the CIT(A) in an appeal for the A.Y. 2004-05 cannot doubt or challenge the correctness of the order of the AO giving effect to the order of ITAT for another assessment year viz., A.Y. 2003-04. That order can be challenged by the revenue only in a manner provided for under the Act and not by the CIT(A) in an appeal filed by the Assessee against an order of AO in AT 04-05. We therefore hold that the conclusions of the CIT(A) on the issue are erroneous and therefore the three units at Pune, Chennai and Bangalore were independent undertakings.
27. The next aspect to be considered is with regard to the conclusion of the CIT(A) regarding the revised return of income declaring loss return being invalid. In this regard, the point to be kept in mind is that the original return of income was filed within the due date u/s. 139(1) of the Act and revised return of income declaring loss was filed on 24.03.2006. On an identical issue, this Tribunal in the A.Y. 2004-05 in assessee's own case in ITA No.46/Bang/2010 had held that once the original return of income is filed within time declaring positive income, then the revised return of income will replace the original return of income and be valid for all ITA No.427 & 429/Bang/2012 Page 19 of 28 purposes. The Tribunal held that revised return of income filed within the time permitted u/s. 139(5) of the Act is valid. The following were the relevant observations:-
"However, the prime question now is - whether the revised return furnished on 24.3.2006 was a valid return for the AY under dispute?
Let us now turn our attention to have a glimpse of s.139 (5) of the Act.
Section 139(5) of the Act:
"S.139 (5): If any person having furnished a return under sub- section (1), or in pursuance of a notice issued under sub- section (1) of section 142, discovers any omission or any wrong statement therein, he may furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier."
As per the provisions of s.139(5)of the Act, the assessee was obliged to furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever was earlier. In the case on hand, the assessment year under dispute was 2004- 05 [for the period from 1.4.2003 to 31.3.2004] and according to the provisions of s.139(5) of the Act, the last date for filing a revised return was 31.3.2006 whereas the assessee had furnished its revised return on 24.3.2006 which was within the stipulated time frame. Incidentally, the assessment for the AY under dispute was concluded only on 29.12.2006. Thus, we are of the firm view that the revised return furnished on 24.3.2006 was a valid return and the AO had grossly erred in lodging the same as an invalid return.
7.2. In taking into account all these relevant facts and the circumstances of the issue and also in conformity with the ruling of the Hon'ble Apex Court referred supra, we are of the unanimous view that the AO was not justified in refusing to act upon the revised return furnished by the assessee.
ITA No.427 & 429/Bang/2012 Page 20 of 28 7.3. In a nut-shell -
The revised return furnished on 24.3.2006 by the assessee was within the time limit prescribed u/s 139(5) of the Act for the reasons recorded in the fore-going paragraphs and, thus, the AO was not justified in concluding the assessment on the basis of original return, lodging the revised return as invalid. We, therefore, remit back the entire issue on the file of the AO with specific directions:
(i) to entertain the revised return furnished on 24.3.2006 as a valid return;
(ii)to extend the benefit of carry forward of business loss and unabsorbed depreciation provided the assessee was entitled to such benefit as per the provisions of the Act at that relevant time;
(iii) the AO shall, however, carry out the above directions of this Bench after affording a reasonable opportunity to the assessee of being heard.
It is ordered accordingly."
28. Similar ruling has also been given by the ITAT, Mumbai 'D' Bench in the case of Mr. Ramesh R. Shah v. ACIT in ITA No.4312/Mum/2009 dated 29.07.2011 wherein the Tribunal held as follows:-
"8. The A.O. has reservation for treating the revised return, filed by the assessee as valid return as per sec.139(5) as in the revised return, the assessee claimed the long term capital loss and to give benefit of carry forward of said loss. The A.O. placed his reliance on sub-sec.(3) to sec.139, which is already reproduced hereinabove and also sec.80 of the Act., which reads as under:-
"Notwithstanding anything contained in this Chapter, no loss which has not been determined in pursuance of a return filed [in accordance with the provisions of sub- sec.(3) of sec.139], shall be carried forward and set off under sub-sec.(1) of sec.72 or sub-sec.(2) of sec.73 or ITA No.427 & 429/Bang/2012 Page 21 of 28 sub-sec.(1) [or sub-sec.(3)] of sec.74 [or sub-sec.(3) of sec.74A]."
9. In the background of these facts, we have to examine whether the assessee is entitled to claim of the carry forward of the long-term-capital loss as per the revised return filed on 28.3.2006. We have already stated that the original return was filed by the assessee is well within the time and there is no controversy on this aspect. Subsequently, the assessee filed the revised return and claimed that same is filed under sub-sec.(5) to sec.139. As per the provisions of sec.139(5) if the assessee has furnished the return u/s.139(1) and subsequently discloses any wrong statement therein or which in his opinion is wrong then he can revise the return at any time before the expiry of the one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier. So far as the time limit prescribed under sub-sec.(5) to sec.139 is concerned, the A.O. is not disputing the same. Only issue is in respect of interpretation of sub-sec.(3) of sec.80. As per provisions of sub- sec.(3) of sec.139, if the assessee incurred loss in any previous year under the head 'profit and gains of business or profession' or 'capital gain' and claims that the said loss or part thereof should be carried forward under sections 72, 73 or 74 etc. then he should file the said return within a time stipulated u/s.139(1) of the Act. As per Sec.80, to claim the carry forward of the loss, there are two conditions:-
(1) the return of income claiming the loss must be filed within the time limit prescribed u/s.139(3) r.w.s.
139(1) and;
(2) the said loss must have been determined.
10. In the present case, the A.O. has serious reservation for allowing the assessee to carry forward long-term-capital-loss by interpreting the provisions of sec.80 read with sec.139(3). In this background, can it be said that the assessee has not fulfilled conditions laid down in sec. 80 and hence, it is not permissible to allow to carry forward of the capital loss. In the present case, the assessee filed original return u/sec.139(1) in which the positive income was declared. Even as per the assessment order positive income is determined as the assessee could not set off the loss on the sale of the shares of Pholx Pharma Ltd. in the year itself. He claimed the same to be carry forward. In our humble opinion correct interpretation of sec.80, as per the language used by the ITA No.427 & 429/Bang/2012 Page 22 of 28 Legislature, condition for filing revised return of loss under sec. 139(3) is confined to the cases where there is only a loss in the original return filed by the assesse and no positive income and assesse desires to take benefit of carry forward of said loss. Once, assesse declares positive income in original return filed under sec. 139(1) but subsequently finds some mistake or wrong statement and files revised return declaring loss then can he be deprived of the benefit of carry for ward of such loss? In our humble opinion, if we accept interpretation given by the authorities below, it would frustrate the object of sec. 80. Sec. 80 is a cap on the right of the assesse, when the assessee claims that he has no taxable income but only a loss but does not file the return of income declaring the said loss as provided in sub-sec.(3) of sec.139. It is pertinent to note here that Legislature has dealt with two specific situations (i) u/s.139(1), if the assessee has a taxable income chargeable to tax then it is a statutory obligation to file the return of income within the time allowed u/s.139(1). So far as sec.139(3) is concerned, it only provides for filing the return of loss if the assessee desires that the same should be carried forward and set off in future. As per the language used in sub-sec.(3) to sec.139, it is contemplated that when the assessee files the original return, at that time, there should be loss and the assessee desires to claim said loss to be carried forward and set off in future assessment years. Sub-sec.(1) of sec.139 cast statutory obligation on the assesse when there is positive income. In the present case, admittedly, the assessee filed the return of income declaring the positive income and even in the revised return, the assessee has declared the positive income as the loss in respect of the sale of shares, which could not be set off, inter- source or inter-head u/s.70 or 71 of the Act.
11. We have to interpret the provisions of any statute to make the same workable to the logical ends. As per the provisions of sub-sec.(5) to sec.139, in both the situations where the assessee has filed the return of positive income as well as return of loss at the first instance as per the time limit prescribed and subsequently, files the revised return then the revised return is treated as valid return. In the present case, as the assessee filed its original return declaring the positive income and hence, in our opinion, subsequent revised return is valid return also and the assesse is entitled to carry forward of 'long-term capital loss'. Sub-sections (1) and (3) of sec.139 provides for the different situations and in our opinion, there is no conflict in applicability of both the provisions as both the provisions are applicable in the different situations. We are, therefore, of the opinion that there is no justification to deny the assessee to carry forward the loss.
ITA No.427 & 429/Bang/2012 Page 23 of 28 We, accordingly, direct the A.O. to allow the assessee to carry forward the loss."
29. In view of the law as laid down in the decisions referred to above, we are of the view that the revised return of income is valid and the assessee is entitled to the benefit of carry forward of loss declared in the revised return of income. We order and hold accordingly. Ground Nos.3.1 to 3.3 are allowed.
30. What now remains for consideration is grounds 5 to 8 of the revenue's appeal, which reads as follows:-
"5. The learned CIT (Appeals) was not justified in directing the AO to recompute the deduction allowable u/s. 10A of I.T.Act, 1961 after including the Transfer Price adjustment in the business income, without appreciating the facts and circumstances of the case.
6. The learned CIT(Appeals) allowed relief without appreciating the position of law as enshrined in sub-section (4) of Section 92C wherein it is specifically laid down that the Assessing Officer shall have to compute total income having regard to the arms length price determined by the Transfer pricing officer, that the emphasis is on computation of total income which is arrived at, inter-alia, after allowing deduction u/s 10A of the Act.
7. The learned CIT (Appeals) has erred in not appreciating the provisions of the first proviso to sub-section (4) of Section 92C of the I T Act, which specifically lays down that no deduction u/s 10A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section.
8. The learned CIT(A) erred in allowing the relief, relying on the decisions of the Hon'ble Tribunal in the assessee's own case, which have not reached their finality and appeal u/s 260A have been filed before the Hon'ble High Court against such orders."
ITA No.427 & 429/Bang/2012 Page 24 of 28
31. The facts with regard to the aforesaid grounds are as follows. During the year, the appellant had transactions with its associated enterprise as defined in section 92A of the Income-tax Act. Payment was received on account of services rendered to the associated enterprise. A study was conducted to find out and determine the arm's length price for the services rendered. On the basis of the study it was ascertained that the appellant had short charged the associated enterprise, a sum of Rs. 7,30,699/-. In other words, the price charged to the associated enterprise was short of the arms length price by the aforesaid figure. While computing total income in the return of income filed by the Assessee, the assessee offered the said sum of Rs. 7,30,699/- as income from operations. As the said income was derived from operations attributable to the export activity of the appellant, deduction under section 10A was claimed on the said income of Rs. 7,30,699/- also. The report of the accountant issued under section 10A also included the above figure. The AO however did not accept the claim of the Assessee for deduction u/s.10A of the Act in respect of the amount which was found to be short of the arms length price and on which the Assessee claimed deduction u/s. 10A of the Act.
32. Before the CIT(A), it was submitted on behalf of the assessee that in the assessment order passed, the AO has not considered the said income while computing deduction under section 10A. This is presumably under the proviso 2 section 92C(4). The Proviso reads as follows:
"Provided that no deduction under section 10A (or section 10AA) or section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the ITA No.427 & 429/Bang/2012 Page 25 of 28 assessee is enhanced after computation of income under this sub- section."
33. It was also submitted before the CIT(A) that u/s. 92C(3), power is available to an assessing officer to compute the arms length price in relation to the international transaction. When the assessing officer invokes such power and determines the arms length price, the consequences under the proviso to section 92C(4) would arise. Under the proviso, the assessing officer could deny certain benefits to the assessee in respect of the additions made by him in the course of re-determining the price charged for the transaction. In the instant case, the transfer pricing officer has found no occasion to make any adjustment to the income returned. In other words, the transfer pricing officer on a reference made to him accepted the figure of arms length price (inclusive of the adjustments voluntarily made). There has thus been no occasion for the assessing officer to re-determine the arms length price. Section 92C(4) was therefore not invoked. The consequence under the proviso to section 92C(4) would therefore not be attracted. The denial of section 10A benefits on the adjustments voluntarily made by the appellant is therefore incorrect and deserves to be ignored.
34. The CIT(Appeals) deleted the addition made by the AO following the decision of the Tribunal in assessee's own case for the A.Y. 2003-04 in ITA No.248 & 249/Bang/2008 dated 27.11.2007 wherein the ITAT held that deduction u/s. 10A is allowable even on transfer pricing adjustment, provided it does not enhance the returned income.
ITA No.427 & 429/Bang/2012 Page 26 of 28
35. Aggrieved by the order of the CIT(A), the revenue has raised grounds 5 to 8 before the Tribunal.
"5. The learned CIT (Appeals) was not justified in directing the AO to recompute the deduction allowable u/s. 10A of I.T.Act, 1961 after including the Transfer Price adjustment in the business income, without appreciating the facts and circumstances of the case.
6. The learned CIT(Appeals) allowed relief without appreciating the position of law as enshrined in sub-section (4) of Section 92C wherein it is specifically laid down that the Assessing Officer shall have to compute total income having regard to the arms length price determined by the Transfer pricing officer, that the emphasis is on computation of total income which is arrived at, inter-alia, after allowing deduction u/s 10A of the Act.
7. The learned CIT (Appeals) has erred in not appreciating the provisions of the first proviso to sub-section (4) of Section 92C of the I T Act, which specifically lays down that no deduction u/s 10A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section.
8. The learned CIT(A) erred in allowing the relief, relying on the decisions of the Hon'ble Tribunal in the assessee's own case, which have not reached their finality and appeal u/s 260A have been filed before the Hon'ble High Court against such orders."
36. At the time of hearing, it was noticed that identical issue was considered by the Tribunal in assessee's own case in ITA No.248 & 249/Bang/2007 for A.Ys. 2002-03 and 2003-04 and this Tribunal held as follows:-
"21. The last grievance is in respect of not allowing deduction under section 10A on the adjustment made by the assessee to the arm's length price.
22. In the instant case, the assessee company entered into transaction with associated enterprise. The assessee company ITA No.427 & 429/Bang/2012 Page 27 of 28 determined arm's length price and accordingly made adjustment to the income because arm's length price determined was more than the consideration, at which the transactions were shown in the books of account. The deduction under section 10A has not been allowed as per proviso to section 92C(4). As per this proviso, no deduction under section 10A or 10B or under Chapter VI-A is to be allowed in respect of amount of income, by which the total income of the assessee is enhanced after computation of income under the sub-section. The learned Authorised Representative during the course of proceedings has referred to the word 'enhanced'. In case the income is enhanced, then deduction is not permissible. However, in the instant case, income has not been enhanced because the same was already returned by the assessee. In the Memo Explaining the Provisions of Finance Bill, 2006, it has been mentioned as under :"
[2006] 201 CTR (St) 147: [2006] 281 ITR (St) 196 "Under sub-section (4), it has been provided that on the basis of arm's length price so determined, the Assessing Officer may compute the total income of an assessee. The first proviso to sub-section (4) provides that where the total income of the assessee as computed by Assessing Officer is higher than the income declared by the assessee, no deduction under section 1OA or section 10B or under Chapter VI-A will be allowed in respect of the amount of income, by which the total income of the assessee is enhanced after computation of income under sub-section."
23. From the Memo Explaining the Provisions of Finance Bill, 2006 as well as from the literal meaning of the word 'enhanced', it is clear that if income increased, as a result of computation of arm's length price, then such increase is not to be considered for deduction under section 10A. In the instant case, the assessee himself has computed the arm's length prices and has disclosed the income on the basis of arm's length prices. It is not a case, where there is an enhancement of income due to determination of arm's length price. Hence, it is held that assessee was entitled to deduction under section 10A in respect of income declared in the return of income on the basis of computation of arm's length price."
ITA No.427 & 429/Bang/2012 Page 28 of 28
37. In view of the aforesaid decision of the Tribunal, we do not find any merits in the grounds of the revenue and consequently the same are dismissed.
38. In the result, the appeal by the assessee is partly allowed, while the appeal by the revenue is dismissed.
Pronounced in the open court on this 10th day of May, 2013.
Sd/- Sd/-
( JASON P. BOAZ ) ( N.V. VASUDEVAN )
Accountant Member Judicial Member
Bangalore,
Dated, the 10th May, 2013.
Ds/-
Copy to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT, Bangalore.
6. Guard file
By order
Senior Private Secretary
ITAT, Bangalore.