Income Tax Appellate Tribunal - Hyderabad
Dy. Commissioner Of Income Tax, ... vs Cyient Limited (Formerly Known As ... on 18 April, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "B", HYDERABAD
BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER
AND
SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
I.T.A. No. 1082/HYD/2017
Assessment Year: 2003-04
Dy. Commissioner of Cyient Limited,
Income Tax, Vs (Formerly Infotech
Circle-1(2), Enterprises Limited)
HYDERABAD HYDERABAD
[PAN: AAACI4487J]
(Appellant) (Respondent)
For Revenue : Shri D. Prasad Rao, DR
For Assessee : Shri Vijay Mehta, AR
Date of Hearing : 26-03-2018
Date of Pronouncement : 18-04-2018
ORDER
PER B. RAMAKOTAIAH, A.M. :
This is an appeal by Revenue against the order of the Commissioner of Income Tax (Appeals)-2, Hyderabad, dated 31-03-2017. Even though assessee has raised cross-appeal in ITA No. 1164/Hyd/2017, it was informed that the issues are entirely different and has no correlation to the issues raised in assessee's appeals. Hence, the Revenue appeal is considered separately and decided by this order.
ITA No. 1082/Hyd/2017:- 2 -:
2. Revenue has raised six grounds on two issues.
These are decided after hearing Ld.DR and Ld. Counsel.
3. Briefly stated facts are that assessee-company is engaged in the business of software development and filed total income declaring an amount of Rs. 14,59,11,210/-. Among the various disallowances made by the Assessing Officer (AO), Revenue is aggrieved on the two amounts, which are given relief by CIT(A). AO has treated an amount of Rs. 20,50,90,678/- as technical services rendered outside India and reduced the same from Export Turnover and Total Turnover for computing deduction u/s. 80HHE of the Income Tax Act [Act]. Ld.CIT(A) on factual verification held that these amounts cannot be reduced in the computation. The other amount involved is an amount of Rs. 9,72,741/- as a disallowance of payments made towards royalty made to foreign company u/s. 40(a)(ia), as AO found out that assessee paid the amounts without deducting tax in violation of provisions of Section 195. Ld.CIT(A) on this also held that the provisions of Section 195 are not applicable and accordingly, disallowance u/s. 40(a)(ia) does not arise. On this Revenue has raised four grounds and Ground Nos. 5 and 6 are general in nature.
4. Ground Nos. 1 & 2 are as under:
1. The Learned CIT(A) erred in directing the A.O not to reduce the expenditure incurred in foreign currency of Rs.20,50,90,768/- in providing the technical services rendered outside India from 'export turnover' and 'total turnover' for computing the deduction u/s 80HHE of the I.T. Act.ITA No. 1082/Hyd/2017
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2. The Learned CIT(A) ought to have appreciated that such expenditure incurred in foreign exchange for technical services rendered outside India has to be excluded from the 'export turnover' and 'total turnover' under clause (c) and clause (e) of Explanation to Sec.80HHE.
While computing the deduction u/s. 80HHE, AO in his brief order has stated that assessee has incurred an amount of Rs. 20,50,90,768/-, representing expenditure in foreign currency and the provisions of Explanation-(c) and (e) of Section 80HHE states that the expenditure incurred in foreign currency has to be reduced from the Export Turnover as well as Total Turnover. Hence, the same must be reduced from the Export Turnover and Total Turnover while computing the deduction u/s. 80HHE.
4.1. Before the Ld.CIT(A), assessee furnished the expenditure in foreign currency, made detailed submissions to state that the amounts are not to be disallowed or adjusted in the turnovers. After examination of the same, Ld.CIT(A) held as under:
"7.2. I have gone through the AO's observations and AR's contentions.
The breakup of this expenditure is available at page 75 of the annual report for FY 2002-03 and it is as under:
Expenditure in Foreign Currency:-
a) Traveling - Rs. 12,12,11,537
b) Subscriptions - Rs. 21,38,733
c) Professional Services - Rs. 7,16,54,475
d) Others - Rs. 1,00,85,933
Total - Rs. 20,50,90,678
ITA No. 1082/Hyd/2017
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It is seen that the AO observed that the provisions of clause (c) and clause (e) of explanation to Section 80HHE lay down that the expenditure incurred in Foreign currency has to be reduced from 'export turnover' as well as the 'total turnover'. And accordingly, the AO reduced the above amount from both the 'export turnover' and 'total turnover' while computing the deduction under section 80 HHE, for STP Unit 1 at Hyderabad.
The definition of export turnover as given in Clause C of the Explanation to 80 HHE reads as under:
(c) "export turnover" means the consideration in respect of computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (2), but does not include freight, telecommunication charges or insurance attributable to the delivery of the computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India".
It may be seen that the above definition doesn't cover expenditure on travel and subscription. So, the reduction from export turnover of Rs. 12,33,50,270/- (Rs. 12,12,11,537+ Rs. 21,38,733) is not correct. The balance of Rs. 8,17,40,408/includes Rs. 7,16,54,475/- paid to 1551 and others for the services rendered by them in the context of the assessee's contractual obligations to Pratt & Whitney and it does not represent expenditure incurred in providing technical services outside India. It is seen from the facts that the assessee Company has not provided technical services to any party outside India or even within India. After havino gone through the above, I am of the considered view that the AO is not justified in disallowing this expenditure simply because it is incurred in foreign currency. So the amount of Rs. 20,50,90,678/- cannot be reduced from export turnover or- total turnover. Further, this amount of Rs. 20,50,90,678/- is not included in the 'export turnover' and so it cannot be reduced from it. It may be mentioned here that this issue is decided in favour of the assessee by the decision of the Hon'ble Tribunal for the A.Y. 2006-07 in ITA No. 775/ Hyd /2013 wherein, while considering the analogous definition of "export turnover" in clause (iv) of Explanation 2 to section 10A, it was held as under:
"If it is really a fact then there cannot be any reduction of the 'said amount from the export turnover when the assessee has not at all included it in the export turnover while computing deduction u/s. 10A of the Act. We therefore direct the ITA No. 1082/Hyd/2017 :- 5 -:
Assessing Officer to verify this fact and if on verification it is found that the assessee has not included the said amount while computing the deduction u/s. 10A then there is no question of reducing it from export turnover for the purpose of computing deduction u/s. 10A of the Act. Even otherwise also, the alternative contention of the assessee is not without substance. When any amount being in the nature of freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India are to be excluded from the export turnover/ then the same is also required to be excluded from the total turnover for the purpose of computing deduction u/s. 10A of the Act. This view of ours gets support from the decision of Hon'ble Bombay High Court in the case of CIT Gem Plus India Ltd. (330 ITR 175 and Income-tax Appellate Tribunal Chennai Bench in case of Sak Soft Ltd. (30 SOT 55). Hence this ground is allowed for statistical purposes".
This issue is also decided in favour of the assessee by the decision of the Hon'ble Tribunal in ITA No. 1450,1452,1451, 1453/Hyderabad/2013 For the A.Ys 200304, 2004-05, 2005-06.
Since the issue involved is similar, the ratio laid down in the earlier years is squarely applicable for the year under appeal. Accordingly, I direct the AO to not to reduce the amount of Rs.20,50,90,678/- from the export turnover and total turnover".
4.2. Since the issue is one of the factual and CIT(A)'s findings have not been contradicted by Revenue in its arguments, we do not find any reason to interfere with the order of the Ld.CIT(A). Moreover, even on principles of law, he has followed the Co-ordinate Bench decisions in earlier years. In view of that, there is no merit in Revenue's grounds. Accordingly, the same are dismissed.
5. Ground Nos. 3 & 4 are as under:
3. The Learned CIT(A) erred in deleting the addition of Rs.9,72,141/- made by the Assessing Officer u/s 40(a)(ia) on account of disallowance of payment made towards royalty made to a foreign ITA No. 1082/Hyd/2017 :- 6 -:
company without deducting tax at source in violation of provisions of Sec.195.
4. The Learned CIT(A) ought to have upheld the action of the Assessing Officer that the software/licenses acquired by the assessee are in the nature of the royalty within the meaning of Sec.9(1)(vi) of the IT. Act and since the payments were made to the foreign companies, the tax was deductable on the said payment u/s 195 of the I.T. Act and failure to do so attracts the provisions of Sec. 40(a)(ia) of the I.T. Act.
Brief facts leading to the above ground is that out of the computer software purchased of Rs. 54,91,096/-, AO held that an amount of Rs. 9,72,141/- is in the nature of royalty within the meaning of Section 9(1)(vi) of the Income Tax Act. Since tax was to be deducted on the above said amount, the amount was disallowed u/s. 40(a)(ia).
5.1. After considering the factual submissions and legal principles on the issue of assessee, Ld.CIT(A) has held as under:
"10.2. I have gone through the AO's observations and AR's contentions. The assessee purchased Software called "Small World software" from the M/s.GE Network Solutions, Netherlands and bundled it with its own software and thus customized it and sold it to its own customers both in India and abroad As the payment is made to a non-resident company, the AO held that the payment represented, not the purchase price of the software but, actually, royalty payment to the Dutch company. As no tax was deducted at source on the said royalty payment u/s 195 of the Act, AO invoked the provisions of 40(a)(i) and, accordingly, disallowed the expenditure on the said payment. It may be mentioned here that similar additions for the two years A.Y's 2006-07 & 2007-08 have been deleted by the order of the Hon'ble ITAT dated 16.01.2014 in ITA No. 115 & 2184/Hyd/2011 (supra). Hence, this issue is squarely covered in favour of the assessee by the said order of the Hon'ble ITAT wherein it was held as under:ITA No. 1082/Hyd/2017
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"26. Now we address the issue of characterization of these payments as Royalty so as to fall under Section 9(1)(vi) or Article 12 of India-Netherlands DTAA. We find that the assessee has purchased the Small World Software from Netherlands and bundled it with its own software and thus customized it and sold it to its own customers both in India and abroad. The assessee cannot meddle with the copies of the software in the process of its customization. We also observe that the assessee has to purchase the said software each time it wanted to sell the bundled software to its customers and if it had got any right to the copyright to the said software it would not have bought it every time when it wanted to sell.
Further, perusing the books of the assessee at page 446 of the paper book, we find that there are multiple purchases of software during the year and each purchase of single item on software is merely one thousand rupees and not huge amount. Hence, we are of the opinion that they are simply purchase cost of trading goods especially when the license in respect of software is not obtained by the assessee and the perpetual license is given directly to the end customer by the vendor company. Copies of the invoices raised by the Net Work Solutions on the assessee and at paper book 447 to 448 supports the view of the assessee where the invoice mentioning name of the end customer supports our view. Hence, in our opinion, when there is no transfer of even the license to the assessee even through it is the purchaser, it cannot be said that there is any royalty payment by the assessee to the vendor company. The amount of Rs. 2,29,78,128/- is simply the cost of imported trading goods and not royalty payment".
This issue is covered by the decision of the Hon'ble Tribunal dt 25/03/2015 in ITA Nos. 1450,1452,1451 and 1453 for the AY's 2002-03, 2004-05 and 2005-06 and also its order dt 30/04/2015 for the AY's 2008-09, 2009-10 in ITA Nos. 1780/ Hyd/2012 and 395/Hyd/2014.
The ratio laid down in the decisions mentioned supra, is squarely applicable for the year under appeal. Therefore, I am of the view that the payment of aggregate amount of Rs. 9,72,741/- cannot be treated as royalty payment and hence the Provisions of Sec. 40(a)(ia) are not attracted. As a result, the grounds raised are allowed".
5.2. Since Ld.CIT(A) has followed the Co-ordinate Bench decision on the issue, which got confirmed by the jurisdictional High Court in the case of assessee in ITTA No. 485 of 2014, dt. 25-07-2014, we do not find any reason to interfere with the ITA No. 1082/Hyd/2017 :- 8 -:
well reasoned order of the Ld.CIT(A). There is no merit in the Revenue grounds. Accordingly, the same are dismissed.
6. In the result, appeal of Revenue is dismissed.
Order pronounced in the open court on 18th April, 2018 Sd/- Sd/-
(P. MADHAVI DEVI) (B. RAMAKOTAIAH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated 18th April, 2018
TNMM
ITA No. 1082/Hyd/2017
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Copy to :
1. Dy. Commissioner of Income Tax, Circle-1(2),
Hyderabad.
2. Cyient Limited (Formerly Infotech Enterprises Limited), 42, Nagarjuna Hills, Punjagutta, Hyderabad.
3. CIT(Appeals)-2, Hyderabad
4. Pr.CIT-2, Hyderabad.
5. D.R. ITAT, Hyderabad.
6. Guard File.