Income Tax Appellate Tribunal - Hyderabad
M/S. Virtusa India Pvt Ltd, Hyderabad vs Assessee on 30 December, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'B', HYDERABAD
BEFORE SHRI D.KARUNAKARA RAO, ACCOUNTANT MEMBER
AND Sri SAKTIJIT DEY, JUDICIAL MEMBER
ITA No.268/Hyd/2011 : Assessment year 2006-07
M/s. Virtusa (I) P Ltd, V/s Dy. Commissioner of Income-tax
Hyderabad. Circle 3(3), Hyderabad
(PAN - AABCV 4077 E )
(Appellant) (Respondent)
ITA No.482/Hyd/2011 : Assessment year 2006-07
Asstt. Commissioner of Income- V/s M/s. Virtusa (I) P Ltd, Hyderabad.,
tax Circle 3(3), Hyderabad
(PAN - AABCV 4077 E )
(Appellant) (Respondent)
Appellant by : S/Shri C R Pathi and
Gnana Prakash CITs-DR
Respondent by : Sri Rajan Vora,
Sri Naven Agarwal and
Ms Divya Santhanam
Date of Hearing 5.7.2012
Date of Pronouncement 24.8.2012
ORDER
Per D.Karunakara Rao, Accountant Member:
These are cross appeals -one each filed by the assessee and the revenue- against the order of the Commissioner of Income- tax(Appeals) IV, Hyderabad dated 30.12.2010 for the assessment year 2006-07. Since common issues are involved, these appeals are disposed off with this common order for the sake of convenience.
2. Briefly facts of the case leading to the filing of the present cross-appeals before us, are that that the assessee (in short VIPL) is 2 ITA No.268 & 482/Hyd/2011 M/s. Virtusa (I) P Ltd, Hyderabad.
engaged in the business of rendering software development services and registered under STPI scheme. It has two units namely Hyderabad Unit approved by STPI on 20.10.2000 and this is the 6th year of operation and second one is Chennai Unit approved by STPI on 26.12.2003 and therefore, this is the 3rd year of operation. Assessee filed the return of income declaring the total income of Rs 23,65,024/-. The same was scrutinized u/s 143(3) after making TP reference u/s 92CA(1) of the Act. Assessment was completed determining the assessed income at Rs.6,35,08,666/-. Reasons for the said increase is due to (i) denial of deduction of Rs 4.14 cr (rounded off) in respect of the Chennai Unit on the ground that it is formed out of split or reconstruction of the existing unit at Hyderabad; (ii) exclusion adjustment to the Export Turnover on account of communication charges amounting to Rs 2.39-Cr (rounded off) and insurance of Rs 16.80 lakhs (rounded off) and reimbursement of expense of Rs 33.96 lakhs (rounded off); (iii) adjustments of Rs 6.81 crores (rounded off) to the total turnover; and finally, the adjustments to the profits of the undertaking invoking the provisions of sections 40A(7) and 43B of the Act. For denial of exemption u/s 10A of the Act, the assessing officer mentioned various reasons and they include that both Hyderabad and Chennai units render services to the same clients; total sales are made to the group/related companies, commonness of the services and service agreements by both the units with holding and subsidiary companies etc; the assessee failed to prove correctness of the profits of both the units separately and failed to furnish separate financial statements and audit reports as required u/s 44AB of the Act; diversion of employees of the Hyderabad unit for software manufactured in Chennai unit; the assessee claimed exemption u/s 10A for the first time in this year, despite the fact that it is third year of registration under STPI scheme, and it may be due to incurring of losses in the preceding two years i.e. assessment years 2004-05 & 2005-06. Aggrieved with the 3 ITA No.268 & 482/Hyd/2011 M/s. Virtusa (I) P Ltd, Hyderabad.
above additions and reasons, the assessee filed the appeal before the CIT(A).
3. The Commissioner of Income-tax(Appeals) concurred with the assessing officer in holding that the Chennai unit is separate only in form, but it is same in substance. Reasons of advantages to the assessee vide availability of concessions to the assessee in matters of location of clients, resources, manpower, should not influence decision in matters of cases of 'split and reconstruction'. Mere investment in assets in Chennai unit alone is not a determining and conclusive factor and such investment cannot be equated with the one in Plant and Machinery of any regular manufacturing units. Further, the CIT(A) holds that the assessee failed to demonstrate the business necessities of starting an unit at Chennai. Further, CIT(A) is of the view that mere acquiring of licence under the STPI provisions is not adequate to prove that the Chennai unit is aimed at the production of different product and set up.
4. Regarding the other additions, the reasons of the CIT(A) include the following:
• The Chennai unit is set up by splitting up the business of the odl unit at Hyderabad and is not eligible to claim deduction under section 10A of the Act.
• The communication and insurance charges are attributable to the delivery of software outside India. However, the same has to be reduced from both the export turnover and total turnover. • The reimbursement of expenses to associated enterprises has to be excluded from the export turnover as the Appellant has not been able to prove that the expenses do not form part of 'other expenses' incurred for rendering technical services outside India.4 ITA No.268 & 482/Hyd/2011
M/s. Virtusa (I) P Ltd, Hyderabad.
However, the same has to be reduced from both export turnover and total turnover.
• The reimbursement of expenses from associated enterprises should not be added total turnover, and • The amount of statutory disallowances should be considered as business profits eligible for deduction under S.10A of the Act.
Thus, the CIT(A) granted reliefs to the assessee on some counts, and thus partly allowed the appeal of the assessee.
5. Aggrieved with the above order of the CIT(A), both the revenue as well as the assessee have preferred the present cross-appeals before us. We shall take up the assessee's appeal first for adjudication.
Assessee's Appeal: ITA No.268/Hyd/2011
6. The effective grounds of the assessee read as follows-
"On the facts and in the circumstances of the case, the Learned Commissioner of Income-tax(Appeals) IV, Hyderabad (CIT(A))
1. Erred in law and on facts in disallowing the deduction under S.10A of the Income-tax Act, 1961('the Act' ) for the Chennai unit by upholding that the Chennai unit is established by splitting up/reconstruction of the Hyderabad unit of the Appellant.
2. Erred in law and on facts in disallowing the deduction under section 10A of the Act for the Chennai unit on the ground that the Appellant has not demonstrated the business necessity of splitting up of a new unit in Chennai.
3. Having held at para 8 of the order that deduction under section 10A of the Act cannot be denied on account of non-maintenance of separate books of account, erred in dismissing the ground no.4 raised by the Appellant on requirement of maintenance of separate books of accounts for each of the STPI undertakings for claiming deduction under section 10A of the Act.
4. Failed to adjudicate on ground no.3 raised by the Appellant in relation to disallowance of deduction under section 10A of the Act for the Chennai unit on the ground that the Appellant has not furnished tax 5 ITA No.268 & 482/Hyd/2011 M/s. Virtusa (I) P Ltd, Hyderabad.
audit report under section 44AB of the Act for each of the STPI undertakings separately.
5. Without prejudice to ground 1 to 4 above, erred in law and on facts in not allowing the deduction under section 10A of the Act on the combined profits of both the units by considering that the Chennai unit is an extension of the Hyderabad unit of the Appellant.
6. Without prejudice to ground 1 to 4 above, having held that the Chennai unit is formed by reconstruction/splitting up of the existing Hyderabad unit of the Appellant, ought to have directed the Learned Assessing officer to compute the deduction under section 10-A of the Act by considering the combined export turnover of both the units in accordance with clause (iv) of Explanation 2 to section 10A of the Act.
7. Erred in law and on facts in considering the communication charges and insurance charges incurred by the Appellant as attributable to the delivery of computer software outside India and accordingly upheld the action of the Learned Assessing officer in reduction of the same from the export turnover for the computation of deduction under section 10A of the Act for the Hyderabad unit.
8. Erred in law and on facts in confirming the action of the learned Assessing officer to reduce the amount of reimbursement of expenses to Virtusa Corporation USA of R.33,96,032 from the export turnover for the computation of deduction under section 10A of the Act.
9. Erred in law in confirming the levy of interest under section 234B of the Act by completely disregarding the provisions of the Act and the judicial precedents."
Thus, the main issue discussed in grounds No.1 to 4 relates to the denial of deduction u/s. 10A of the Act. Grounds 5 and 6 relates to an alternate claim of deduction under S.10A on the combined profits of both the units. The issues raised in grounds No.7 and 8 are independent issues. Finally ground 9 is general and consequential in nature and it does not call for specific adjudication. Issuewise adjudication is given in the succeeding paragraphs.
7. The first issue in this appeal, covered by grounds No.1 to 6 above, relates to denial of exemption under S.10A of the Act to the assessee. During the proceedings before us, the learned counsel brought to our notice the factual as well as the legal permutations, which are narrated in the succeeding paras. So far as the factual submissions 6 ITA No.268 & 482/Hyd/2011 M/s. Virtusa (I) P Ltd, Hyderabad.
are concerned, the learned counsel mentioned that registrations of both the units under STPI are separate and distinctly made both in respect of jurisdiction and the STPI as well as customs ad bonding authorities. Assessee invested on fixed assets of Chennai Unit to the tune of Rs.5.19 crores as on March, 2006. Employees in Chennai unit grew from 44 in March, 2004 to 1035 in March, 2008, as against growth of employee strength at Hyderabad Unit from 1048 in March 2004 to 1637 in March, 2008. The business processes of Chennai Unit and Hyderabad Unit are different. While Hyderabad unit deals with the projects requiring business process management(BPM) and enterprise process management(EPM) services, the Chennai unit services the projects requiring data warehouse services. As mentioned in the written submissions of the assessee, in both the units, the books are maintained separately and filed Forms No.56F separately. Regarding the business turnover of both the units the learned counsel brought to our notice that the turnover of the Chennai Unit grew from Rs.1.92 crores (March, 2005 ) to Rs.16.02 crores(March, 2009), as against turnover growth of the Hyderabad Unit from Rs. 62.07 Crores(March, 2004) to Rs.166.79 crores(March, 2009).
8. On the technical/legal submissions front, the learned counsel took us through the provisions of S.10A of the Act and mentioned that the assessee's entitlement to the deduction provisions should be at the undertaking level of its operations. Referring to the conditions of S.10A in general and with specific reference to the expression 'splitting or reconstruction', learned counsel mentioned that the deductions are available through an industrial undertaking and not to an undertaking, which is formed by way of splitting or reconstruction. The expression 'splitting' implies severance of one part of business from the other, which involves breaking up of the integrity of the business, which is not the case here. Referring to the expression 'reconstruction', learned counsel 7 ITA No.268 & 482/Hyd/2011 M/s. Virtusa (I) P Ltd, Hyderabad.
mentioned that the said expression means 'an act of constructing again' or 'to form again' or 'to restore again as an entity' or 'destroy'. Relying on the Apex Court decision in the case of Textile Machinery Corporation Ltd. V/s. CIT(107 ITR 195) and CIT V/s Indian Aluminum Co. Ltd. (108 ITR 367), learned counsel mentioned that the following principles are relevant for deciding a case of 'split' or 'reconstruction'-
"- Reconstruction is the rejuvenation or rehabilitation of an exiting undertaking.
- In order that the new undertaking can be said to be not formed out of the already existing business, there must be a new emergence of a physically separate industrial unit which may exist on its own as a viable unit.
- Once the new undertakings were separate and independent production units in the sense that the commodities produced were commercially tangible products and the undertakings could be set up separately without complete absorption and loss of identity with the old business, they were not to be treated as being formed by reconstruction of the existing business.
- Even when there is substantial expansion of business, but with establishment of new unit, new capital the same cannot be said to be reconstruction of the old business, merely because the new unit is producing the same commodity as produced by the old unit.
- Manufacture or production of articles yielding additional profit attributable to the new outlay of 8 ITA No.268 & 482/Hyd/2011 M/s. Virtusa (I) P Ltd, Hyderabad.
capital in a separate and distinct unit is the crux of the matter to get exemption."
Further, the learned counsel mentioned that there is a need for material to demonstrate that either some assets of existing business are diverted or that both the businesses are the same, and the new unit is integral part of earlier one (DSM Soft Pvt. Ltd. (115 ITD 1)-ITAT (Chennai). Relying on another decision of the Chennai Bench of the Tribunal in the case of Servion Global Solutions Ltd. (115 ITD 95), learned counsel mentioned that exemption cannot be denied, even when there is commonness in the product between the old one and the new one or there are some old employees or common customers working in the new unit. In this regard, learned counsel relied on the decision of the Hon'ble Bombay High Court in the case of Associated Cement Companies Ltd. (118 TR 406); and Abbas Nabi Shaikh V/s. ACIT( ITA No.1496 & 2586/Ahd/2007), for the proposition that carrying on the same business in the new unit or stoppage of business of old business cannot be the criteria to hold that it is a case of reconstruction of business already in existence. Further, the learned Authorised Representative relied on the Mumbai Bench decision of the Tribunal in the case of DCIT V/s. Classic Diamonds (I) Ltd. (ITA 5120/Mum/2007) for the proposition that there is no case of reconstruction or split of existing unit merely because a new unit is opened at different location with installation of new plant and machinery after obtaining necessary approvals of various Government departments and maintaining separate books of account.
9. In the light of the above technical as well as factual matrix of the instant case, the learned counsel argued vehemently stating that the Chennai Unit is a separate and independent undertaking and not extension of the existing Hyderabad unit and summed up his submissions, vide para 27 of the written submissions, as follows-
9 ITA No.268 & 482/Hyd/2011M/s. Virtusa (I) P Ltd, Hyderabad.
"27. In view of the above facts and judicial precedents, the term 'splitting up', 'reconstruction' and 'transfer' has no application to the formation of the Chennai unit of the Appellant. Hence, the Chennai unit is a new and separate independent undertaking and not an extension of the exiting Hyderabad unit which is evident from the following facts-
• The Chennai unit has been formed by fresh recruitment of employees. Further, there is a substantial increase in the number of personnel employed by the Appellant both in the Hyderabad and the Chennai units on independent basis;
• The Chennai unit was set-up with its sown assets and the Appellant had invested significant sum of money for setting up the business in Chennai' • Setting up of Chennai unit has not in any way reduced the scale of operations of the Hyderabad unit in the subsequent years;
• The Hyderabad unit had not ceased functioning after the development of the Chennai unit' • The Chennai unit is an independent unit and can exist even after cessation/closure of Hyderabad unit of the Appellant; and • Broadly, both the units renders software development activities. However, the Hyderabad unit services the projects requiring business process management and enterprise process management services and the Chennai unit services the projects requiring data ware house services."
10. Further, the learned counsel also has given a detailed write up against each of the objections of the assessing officer as well as the CIT(A), meeting the criticism made by them, while denying the claim of the assessee for exemption under S.10A of the Act. The learned counsel summed up by stating that it is enough if the intention of the assessee was to set up a new unit at Chennai to claim the extended tax holiday for additional year. The said setting up of Chennai Unit is driven by the business and commercial considerations and not merely to claim the tax holiday as alleged by the Revenue authorities. Therefore, the learned counsel was critical of the inference drawn by the lower authorities that the Chennai unit is formed by split up and reconstruction of the Hyderabad unit only for availing relief under S.10A of the Act.
10 ITA No.268 & 482/Hyd/2011M/s. Virtusa (I) P Ltd, Hyderabad.
11. Per contra, the Learned Departmental Representative for the Revenue relied on the orders of the Revenue authorities and maintained that the customers of both the units are one and the same, and some of the employees who are working in the Chennai Unit were earlier working in the Hyderabad unit of the assessee. Considering the similarity of services rendered by the employees of both the units of the assessee to the common customers abroad, assessee's case falls within the meaning of 'split' or 'reconstruction' of the existing business. Therefore, the Revenue authorities have rightly denied the benefit of S.10A to the assessee.
12. We heard both the parties and perused the orders of the Revenue and the information filed before us. The prime question to be decided revolves around the issue whether the assessee's case falls within the mischief of 'splitting up, or the reconstruction, of a business already in existence' within the meaning of expression used in S.10A of the Act. Revenue is under the belief that considering the common services agreement, and common clientele, assessee is not entitled for exemption under S.10A of the Act. In the process, the assessing officer preferred to ignore the fact that Chennai unit obtained separate and independent approvals and licences of the Government authorities under STPI related rules for setting up of a separate business at Chennai. Assessee invested huge amounts of capital in acquiring separate infrastructure and plant and machinery for Chennai Unit. He also ignored the fact that the assessee is still entitled to exemption, even if the business of both the units is one and the same. On the other hand, the case of the assessee is that when the assessee invested capital separately and distinctly for creating infrastructure for Chennai unit, and when it has built up separate infrastructure, such as building, furniture, computers and other infrastructure, like employees etc. and when the assessee has separately complied with all the legal as well as 11 ITA No.268 & 482/Hyd/2011 M/s. Virtusa (I) P Ltd, Hyderabad.
administrative requirements for starting a separate business unit at Chennai, in view of plethora of decisions which support the case of the assessee, the denial of exemption under S.10A of the Act is illegal and unjustified.
15. We understood the divergence in the opinions of both the parties to the litigation. It is an undisputed fact that distinct capital was invested in creating a new unit at Chennai, without comprising the employees strength of the Hyderabad Unit, Chennai unit also started raising its employees from 44 in number in March, 2004 to 1035 in March 2008, and thus the growth of number of employees is phenomenal by the end of March, 2008. There is no relocation of transfer of plant and machinery in any form from Hyderabad Unit to Chennai Unit. So, this being the strength of the new unit, so far as the infrastructural matters are concerned, we also examined the other areas of business activity of the assessee, to find out if the Chennai Unit cut into the business of the Hyderabad unit. In this regard, we have perused the business activities of the assessee both of Chennai Unit and Hyderabad Unit and find that the nature of services rendered by the assessee through both these units are classified into three categories, (1) BPM, (2)ECM and (3) Data warehousing. So far as the data warehousing/business intelligence is concerned, the Chennai Unit alone renders this service. This data warehousing/intelligence provides an eco system to transform raw data into actionable information, thus facilitating strategic and technological and operational decision making. The Chennai Unit addresses to these challenges by offering holistic, business and result oriented approach of the customer. These hyper specialised services of the Chennai unit were not properly appreciated by the Revenue authorities, who were merely carried away by the common service agreement for coming to the conclusion that the business of both the units are same. But, the fact is that the services of both the units are distinct and separable. Therefore, 12 ITA No.268 & 482/Hyd/2011 M/s. Virtusa (I) P Ltd, Hyderabad.
from the infrastructure point of view which involves land and building, plant and machinery and employees, etc., as well as from the business processes/activities point of view, both the units are separate and distinct with different objects and challenges of the clients. Thus, commonness of the projects/services should not be the basis of rejection of claim of exemption in principle. As such, the services of both the units are different, for different purposes and thus, the conclusions of the assessing officer and CIT(A) are not as per the law in force. Relevant decisions are discussed in the preceding paragraphs. In our opinion, the Revenue has stepped into wrong decision making area, while denying exemption under S.10A of the Act in respect of the projects of Chennai Unit. Further, we also examined the available judicial pronouncement on the subject. It is a settled issue that existence of some old employees in the new undertaking is not a disqualification for granting exemption benefit to the assessee under S.10A of the Act as long as larger chunck of HR Department has not moved to the new unit from the old one. So long as both the units are existing and doing the declared business and are nto formed out of the existing business, the assessee must not be denied the benefits of S.10A of the Act. It is also settled position that the old as well as new unit engaged in the same business with identical product shall not contribute to the denial of the beneficial exemption to the assessee.
16. Therefore, the Revenue'/s objections that similar agreements, common services, induction or migration of few employees of the Hyderabad Unit into the Chennai Unit, are not adequate enough to deny the exemption benefits to assessee in view of the case-laws relied upon and discussed in the preceding paragraphs of this order.
17. In principle, the undertaking is not entitled to the benefits of the provisions of section 10A of the Act if the same is formed by the 13 ITA No.268 & 482/Hyd/2011 M/s. Virtusa (I) P Ltd, Hyderabad.
splitting up or the reconstruction of business already in existence and when the same is not formed by the transfer of plant or machinery previously used for any purpose to a new business. There is no issue about the transfer of the Plant or Machinery from Hyderabad to Chennai Unit and therefore, this limb of the provisions is unquestioned by the revenue. The objections of the revenue revolve around existence of similar agreements/similar services and migration of some of the employees to the Chennai unit. These issues have been already attended to by us in the preceding paragraphs and described how these objections in this case are not sustainable by us. It is not the case of the revenue that the Database Warehousing related services rendered by the assessee to the Principle/clients are not different from those services rendered by the Hyderabad Unit. In the light of the above discussion, we hold that the Revenue authorities are not justified in denying the benefit under S.10A of the Act to the assessee, treating the Chennai Unit as having been created merely by splitting up, or reconstruction of the Hyderabad unit of the assessee. Accordingly, grounds No.1 to 4 of the assessee in this appeal are allowed.
18. In view of our decision on grounds No.1 to 4 of the assessee, ground No.5 and 6, which only makes an alternative claim, are rendered academic. As such, they are dismissed.
19. Ground No.7 in assessee's appeal relates to treatment to be given to the communication charges and insurance charges incurred by the assessee, while computing the relief under S.10A of the Act. Similarly, Ground No.8 relates to exclusion of the amount of reimbursement of expenses to Virtusa Corporation , USA of Rs.33,96,032 from the export turnover for the purpose of computation of deduction under S.10A of the Act for the Hyderabad unit. In this regard, the 14 ITA No.268 & 482/Hyd/2011 M/s. Virtusa (I) P Ltd, Hyderabad.
assessee informed that an identical issues are adjudicated by the Tribunal for the assessment year 2003-04.
20. Learned counsel for the assessee that the assessee develops computer software in synchronization with other development teams across the globe and requires to be networked with the other teams on a continuous basis. Further, the assessee has obtained the data link services from service providers. The communication charges are largely incurred for inter office and intra office communication (i.e. since the nature of the business of the assessee is such that it requires substantial interaction between the personnel of the assessee and personnel of other entities across the globe) in addition to being marginally incurred for export/delivery of computer software outside India. It is further pleaded that the assessee is remunerated on a cost plus basis of the export of computer software and does not recover the communication charges and insurance charges separately and there is no separate disclosure of the said expenditure under the service agreements or in the invoice/softex form. The communication and services charges are merely one of the components of the entire cost, which is being used to arrive at the revenue figure and the cost plus model is only a mechanism to arrive at the revenue. The CIT(A) held that the expenses should be reduced from the export turnover since the communication charges and insurance charges were incurred for export/delivery of computer software outside India. Of course, he reduced he reduced the said expenses both from the total turnover, having held that the same have to be reduced from the export turnover on principle of parity.
21. On the same analogy, it is also submitted that during the year under appeal, Virtusa Corporation USA has incurred certain expenses like travel, etc. amounting to Rs.33,96,032 on behalf of the assessee and these expenses were recharged to the assessee at actual cost without any 15 ITA No.268 & 482/Hyd/2011 M/s. Virtusa (I) P Ltd, Hyderabad.
mark up. These transactions were reviewed and assessed by the assessing officer to be within the arm's length, whereas the CIT(A) held that the reimbursement of expenses to associated enterprises has to be exclude from export turnover, as the assessee has not been able to prove that the expense do not form part of 'other expenses' incurred for rendering t4echncial services outside India. However, it is claimed that as these expenses are in the nature of reimbursement, no profit element is embedded therein and hence, the reimbursement of expenses has to be reduced from the export turnover and total turnover. While disputing the action of the CIT(A) in upholding reduction of the charges in question from the export turnover, he supported the CIT(A) in directing the reduction of the same from total turnover as well on principles of parity.
22. In support of the above submissions on the disputes involved in these two grounds, the learned counsel for the assessee took us through the definition of the term 'export turnover' in clause (iv) of Explanation 2 to S.10A. It is submitted on the basis of the said definition that the items sought to be covered within the exclusion are those items which are incidental expenses recovered by the exporter and which do not have a profit element therein. In this behalf, reference is also invited to the provisions relating to incentives under S.80HHC and 80HHE of the Act and reference is also made to the decisions of the Bombay High Court in the case of CIT V/s. Sudarshan Chemicals Industries Ltd. (245 ITR
769).; Calcutta High Court decision in the case of CIT V/s. Chloride India Ltd. (256 ITR 625(Cal); as well as the Karnataka High Court in the case of CIT V/s. Bharat Earth Movers Ltd. (268 ITR 232), and it is submitted that the principle which emerges from the above decisions is that to constitute export turnover the consideration should have a nexus with the sale proceeds from export of goods or computer software and that there should be an element of profit in such consideration. Reference in this 16 ITA No.268 & 482/Hyd/2011 M/s. Virtusa (I) P Ltd, Hyderabad.
behalf is also made to the decision of the Hyderabad Bench of the Tribunal in the case of Patni Telecom (P) Ltd V/s. ITO(129 ITD 105). Further reference, more specifically in relation to treatment in respect of reimbursement of expenses disputed, is also invited to the decision of the Chennai Bench of the Tribunal in the case of California Software Co. Ltd. V/s. ACIT(118 TTJ 842).
23. The Learned Departmental Representative on the other hand, while supporting the impugned order of the CIT(A) insofar as exclusion of the specific items from the export turnover, submitted that he is not justified in directing their exclusion from the figure of total turnover as well, in the absence of any specific statutory provision in that behalf.
24. We herd both the sides and perused the impugned orders of the lower authorities. We also have gone through the elaborate written submissions of the asessee and other material brought on record by the parties. Considering totality of facts and circumstances of the case, we are of the view that impugned order of the CIT(A) has to be set aside and the matter in relation to the disputes involved in both grounds No.7 and 8 should be set aside to the file of the assessing officer for fresh consideration in the light of the Hyderabad Bench decision of the Tribunal in Patni Telecom P. Ltd. (supra); of the Madras Bench of the Tribunal in the case of California Sotware Co. Ltd. V/s. ACIT (supra) and other case law on the points, which may be brought to his notice during the course of further proceedings before him. The assessing officer shall reconsider the entire issue in accordance with law, duly bearing in mind the principle of parity, after giving reasonable opportunity of hearing to the assessee, by passing a speaking order on all the aspects relevant to the points in dispute. These grounds are accordingly allowed for statistical purposes.
25. In the result, assessee's appeal is partly allowed.
17 ITA No.268 & 482/Hyd/2011M/s. Virtusa (I) P Ltd, Hyderabad.
Revenue's Appeal : ITA 482/Hyd/2011:
26. Effective grounds of the Revenue in this appeal are as follows-
"(i) .....
(ii) The CIT(A) has erred in holding that if the (i)
communication charges of Rs.2,39,47,853/- and
(ii)Insurance Charges of Rs.16,80,632/- were excluded from the export turnover, the same have to be excluded from the total turnover also, when such an adjustment to the 'total turnover' is not contemplated in the provisions laid down below sec.10A.
(iii) The CIT(A) erred in holding that having not considered the
(i) reimbursement of expenses at Rs.33,96,032/- and (ii) reimbursement of expenditure by Virtusa Corpn. USA (Rs.3,81,47,701/-), Virtusa UK(P)Ltd. (Rs.42,88,632/-) and Virtusa (P)Ltd., Colombo(Rs.2,57,09,133/-), aggregating to Rs.6,81,45,466/- as part of the export turnover, the same is also not includible in the total turnover.
(iii) The CIT(A) has erred in directing to consider Rs.31,44,491/-
representing statutory disallowances u/s. 40A(3), u/s. 40A(7) and u/s. 43B in the eligible business profits for computation of deduction u/s. 10A, since the provisions of sec.10A(1) provides that the income should have been "derived from" the export of articles or things or computer software.
(iv) .... "
26. We heard both sides and perused the impugned orders of the lower authorities and other material available on record. As for grounds No.(ii) regarding exclusion of communication charges and insurance from total turnover, the same having been excluded from the export turnover, in view of our findings on these aspects while dealing with the grounds of the assessee in relation to these very items, for the reasons discussed in that context, these grounds of the Revenue also stand allowed for statistical purposes for being decided afresh by the assessing officer, while redeciding the same in accordance with our directions in the context of the assessee's appeal on the corresponding grounds of the assessee.
18 ITA No.268 & 482/Hyd/2011M/s. Virtusa (I) P Ltd, Hyderabad.
27. As for ground (iv) relating to the grievance of the Revenue on account of CIT(A)'s direction to consider Rs.31,44,491 representing statutory disallowances u/s. 40A(3), 40A(7) and 43B as eligible business profits for computation of deduction under S.10A, we find that the impugned order of the CIT(A) on this issue is in consonance with the consistent view taken by the Tribunal in similar matters, as in Planet On- line (P)Ltd. in ITA No.1016/Hyd/07 and Zawata India P. Ltd. in ITA No.1100/Hyd/.2009. In the absence of any decision to the contrary brought to our notice, following the consistent view taken by the Tribunal in the cases referred to above, we find no infirmity in the impugned order of the CIT(A) on this issue also. The same is accordingly confirmed and this ground of the Revenue is also dismissed.
28. In the result, Revenue's appeal is partly allowed for statistical purposes.
29. To sum up, while the appeal of the assessee, being ITA No.268/Hyd/2011 is partly allowed, Revenue's appeal, being ITA No.482/Hyd/2011 is partly allowed for statistical purposes.
Order pronounced in the Court on 24th August 2012.
Sd/- Sd/-
(Saktijit Dey) (D.Karunakara Rao)
Judicial Member. Accountant Member.
Dt/- 24th August, 2012
Copy forwarded to:
1. M/s. Virtusa (I) P Ltd, 6-3-1192 3rd Floor, My HomeTycoon Kundnbagh, Begumpet, Hyderabad.
2. Asst./Dy. Commissioner of Income-tax Circle 3(3), Hyderabad
3. Commissioner of Income-tax(Appeals)-IV, Hyderabad 19 ITA No.268 & 482/Hyd/2011 M/s. Virtusa (I) P Ltd, Hyderabad.
4. Commissioner of Income-tax III, Hyderabad
5. Departmental Representative ITAT, Hyderabad B.V.S.