Income Tax Appellate Tribunal - Hyderabad
M/S. Semantic Space Technologies Ltd, ... vs Department Of Income Tax on 7 March, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'B', HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER.
ITA No.458/Hyd/2011
(Assessment Year 2007-08)
M/s. Semantic Space V/s Dy. Commissioner of Income-tax,
Technologies Ltd., Hyderabad Circle 3(1), Hyderabad.
(PAN - AAGCS 6868 P )
(Appellant) (Respondent)
AND
ITA No.474/Hyd/2011
(Assessment Year 2007-08)
Asst. Commissioner of Income- V/s M/s. Semantic Space Technologies
tax, Circle 3(1), Hyderabad. Ltd., Hyderabad
(PAN - AAGCS 6868 P )
(Appellant) (Respondent)
Assessee by : Shri C.S.Subrahmanyam &
Shri V.Sivakumar
Department by : Shri M.S. Rao
Date of Hearing 30/05/2012
Date of Pronouncement
ORDER
Per Chandra Poojari, A.M.,
These are the cross-appeals directed against the order of the Commissioner of Income-tax(Appeals)-IV, Hyderabad, passed on 30/12/2010, for the assessment year 2007-08.
2 ITA Nos. 458 & 474/Hyd/11M/s. Semantic Space Technologies Ltd., Hyderabad ITA NO. 458/HYD/2011 - APPEAL BY THE ASSESSEE
2. Originally the assessee filed its grounds of appeal from 1 to 4, 5 to 5.7, 6 to 6.2, 7 to 7.2, 8 & 8.1 and 9, which were summarized as ground Nos. 1 to 12. Therefore, this appeal is disposed off based on the summarized grounds of appeal.
3. Ground No. 1 is general in nature.
4. Ground No. 2 is directed against the action of the CIT(A) in directing the exclusion of the interest income of Rs. 1,57,409 for purposes of computing eligible income u/s 10A of the Act.
5. We have heard the arguments of both the parties, perused the record and gone through the orders of the authorities below. We find that similar issue, on identical facts and circumstances, came up for consideration before the Tribunal in assessee's own case for AY 2006-07 in ITA No.s 824/Hyd/10 and 915/Hyd/10 vide order dated 07/03/2012 wherein the coordinate bench vide paras 12 to 15 held as under:-
"12. As for the first issue relating to interest income of Rs.1,09,087, mentioned in ground No.2 of the summarized grounds of appeal, the facts in brief are that the assessee received interest amount of Rs.1,09,087 and pleaded for inclusion of the same as profits of the business eligible for exemption under S.10A of the Act. The assessing officer held that this income is outside the operational income, and accordingly excluded the same from the scope of S.10A and taxed the same as income under the head 'other sources'. In the process, the assessing officer relied on the decision of the Apex Court in Sterling Foods (1999)237 ITR 579. Before the CIT(A), the assessee pleaded that the interest derived on account of temporary parking of business funds constitutes income derived from its export activity. The CIT(A) relying on the Mumbai Bench decision of the Tribunal in the case of Renaissance Jewellery P. Ltd. V/s.ITO(101 ITD 380), confirmed the disallowance made by the assessing officer. Aggrieved by the same, assessee is in appeal before us on this issue.3 ITA Nos. 458 & 474/Hyd/11
M/s. Semantic Space Technologies Ltd., Hyderabad
13. Learned counsel for the assessee, reiterating the contentions urged before the lower authorities, submitted that the interest income derived by temporary parking of funds constitutes export income of the assessee, and hence is eligible for deduction under S.10A of the Act.
14. On the contrary, the Learned Departmental Representative strongly supported the orders of the CIT(A) and relied on the decisions cited by him in the impugned order.
15. On hearing both sides, we find that the issue of granting deduction on interest received, has now reached finality at the levels of the High Court, say by the decision of the Chattisgarh High Court in the case of Nav Bharat Explosives Co. Pvt. Ltd. (337 ITR 0515), wherein it was held that the income by way of interest on fixed deposits is not eligible for special deduction under S.10A. Therefore, we uphold the impugned order of the CIT(A) on this issue. This issue is accordingly decided against the assessee, rejecting ground No.2 of the assessee in this appeal."
6. Since the issue under consideration is materially identical to that of the ground No. 2 in AY 2006-07, respectfully following the decision of the Tribunal, we uphold the order of the CIT(A) and dismiss ground No. 2 raised by the assessee.
7. Ground Nos. 3 & 4 are as follows:-
"3. The learned CIT(A) ought to have concluded that the profits on sales to the US Branch of the appellant are entitled to be treated a part of eligible profits for the purpose of deduction u/s 10A.
4. The learned CIT(A) ought to have concluded that the relevant sales to US branch of the appellant are to be treated as forming part of export turnover as well as the total turnover."
8. Briefly, the facts relating to raise these grounds are that the AO found that the assessee had included an amount of Rs. 66,60,400/- in the income from software development charges. He was of the view that since the export of such software was to the branch office in the USA only, the income could not be considered as export of software Accordingly, he excluded the same from the assessee's income for the 4 ITA Nos. 458 & 474/Hyd/11 M/s. Semantic Space Technologies Ltd., Hyderabad purpose of calculation of deduction u/s 10A. On appeal, the CIT(A) confirmed action of the AO. Aggrieved, the assessee is in appeal before us.
9. After hearing the arguments of both the parties and perusing the record, we find that similar grounds were raised by the assessee in AY 2006-07 (supra), wherein the Tribunal held as under:-
"16. The second issue, covered by grounds No.3 and 4 of the summarized grounds of appeal of the assessee, relates to the treatment to be given to the sales made to the branch office located in US. The said sales were included by the assessee in the export turnover of the assessee for the purposes of computing deduction under S.10A. Per contra, the assessing officer is of the view that the said inclusion is not proper, considering the fact that sale by head office to the branch itself does not constitute sale per se. It is merely a case of transfer. Therefore, the assessing officer excluded such sales to its branch office from the export turnover of the assessee, before allowing the said deduction. At the end of the first appellate proceedings, the CIT(A) not only confirmed the said exclusion of the sales from the export turnover of the assessee, but also proceeded to exclude the said amount from the total turnover of the assessee, to maintain the 'principle of parity'.
17. Relevant facts of the issue are given in paras 8 to 10 of the impugned order. Briefly, the relevant facts are that the head office sales include Rs.61,77,900 received from the branch office on account of 'software development charges' and another sum of Rs.1,96,46,151 on account of 'HR and marketing services'. The assessee included them as part of the export of software services, which was not entertained by the assessing officer as discussed earlier. During the first appellate proceedings,, the assessee submitted that the said receipts from the branch office constitutes export of software services by the assessee, considering the fact that the said export was done with due approval of STPI, Hyderabad. In this regard, he relied on the Board's Notification No.0890E/F No.142/49200-TPL dated 26.9.2000 to support its case. Further, the assessee included the relevant income in the eligible profits of the assessee. However, to maintain harmony of exclusion from the export turnover, he also reduced the said amount from the eligible profit of the business. Considering the fact that the assessee failed to produce 5 ITA Nos. 458 & 474/Hyd/11 M/s. Semantic Space Technologies Ltd., Hyderabad segregation of the profit relatable to the said sales of the head office and the branch office, the assessing officer proceeded to exclude both the sums of Rs.61,77,900 and Rs.1,96,46,151 from the 'profits of the business' before deduction under S.10A was determined. Considering the above submissions of the assessee, the CIT(A) analysed and held that the above sums do not constitute the eligible sums for inclusion. He held it so on the reasoning that there cannot be sales between the head office and the branch office, as sales imply the transfer of goods and the change of hands of different entities/persons. He accordingly confirmed the exclusion made by the assessing officer from the export turnover. To bring parity, the CIT(A) proceeded to make similar exclusion from the total turnover also, as discussed in para 10.2 of the impugned order. For this proposition, he relied on the decision of the Hyderabad Bench of the Tribunal in the case of ITO Vs. De Block India Software Pvt. Ltd. (citation not given) and Special Bench (Chennai) of the Tribunal in the case of ITO V/s. SAK Soft Ltd. (313 ITR (AT)353).
18. So far as the issue of exclusion of the above sums from the profits of business is concerned, the CIT(A) simply confirmed the decision of the assessing officer, in the absence of any segregation of profits relatable to the above mentioned sums.
19. Aggrieved with the above decision of the CIT(A), assessee is in appeal before us on this issue.
20. Learned counsel for the assessee filed written submissions, out of which para 3 is relevant in this regard. Essentially, it contains narration of the facts and reiterated the stand against exclusion from the export turnover as well as total turnover. He emphasized the fact of exporting the goods to the branch office in US, with the approval of the STPI Hyderabad. Further, he questioned the validity of exclusion of the entire receipt from the export income instead of reducing only the profit segment of the said sales to the branch office in US by adopting some estimated profit, if any. Regarding the exclusion of the said sales to branch office in US from the total turnover, the learned counsel was of the view that the same is not in accordance with the said principle that the total turnover of the assessee should exclude the transfers, if any , made to be branch office. Further, the learned counsel for the assessee made a reference to the Delhi Bench of the Tribunal in the case of Virage Logic International V/s. Dy. Director of Income-tax (2007)13 SOT 270, for the proposition that transfers by the head office constitutes export sales for the purposes of computing deduction under S.10A of the Act. The Tribunal held that the assessing officer's approach of treating the 6 ITA Nos. 458 & 474/Hyd/11 M/s. Semantic Space Technologies Ltd., Hyderabad sales between the assessee and the head office does not constitutes transfers was not approved for the purpose of completion of the sale, it is not necessary that there must be any third party. For arriving at the above proposition, the approval given by the STPI assumed importance as discussed in para 3 of the said order of the Tribunal. The Tribunal was supported by the provision of S.10A (7) read with S.80IA(8) of the IT Act in this regard.
21. On the other hand, the learned Departmental Representative, for the Revenue relied heavily on the orders of the lower authorities.
22. We heard both the parties, perused the orders of the Revenue authorities and the written submissions and citations filed before us. As discussed in the preceding paras, the crux of the issue relates to the transfers between the head office and the branch office located in US, and whether it constitutes exports for the purpose of S.10A of the Act. In this regard, in our opinion, the Delhi Bench order in the case of Virage Logic International (supra) helps to arrive at a conclusion and in favour of the assessee. In that case, the head office has sent goods to the assessee in India and the said export was included in the export turnover for the purposes of determining the deduction under S.10A of the Act. On these factual matrix of that case, the Delhi Bench of the Tribunal has come to the conclusion that the said exports constitutes sales. The order of the assessing officer in that case was set aside. Relevant portion of the said decision of the Tribunal is reproduced below-
"13. In the present case there is no dispute that the assessee developed 'Computer Software' and transmitted electronically to its head office. The assessee is an approved 100 per cent export oriented unit for development of computer software duly approved by the STP of India. The export of software during the previous year is evidenced by the Softex form duly certified by the competent officer of STPI. The consideration has been received by the assessee in the form of convertible foreign exchange. The only reason assigned by the Revenue authorities for denying exemption under section 10A of the Act is that there has been no export sale by the assessee, since the computer software was transmitted to head office and since the assessee and the head office were one entity, there was no sale to any third party. This approach of the Revenue authorities were not correct in view of the provisions of section 10A(7) of the Act. The legal fiction of treating an assessee as a separate entity vis-à-vis sale by it or transfer by it from an eligible business or to an eligible business has been recognised under section 10A(7) of the Act. A plain reading of the provisions of section 10A(7) together with the provisions of section 80-IA(8) of the Act, which reads as follows reveals the statutory recognition of such legal fiction-7 ITA Nos. 458 & 474/Hyd/11
M/s. Semantic Space Technologies Ltd., Hyderabad "10A. .....*****************"
14. In the present case, there cannot be any doubt about the market price also since the transfer pricing officer has already held that the price at which the assessee transmitted the computer software to the head office was at arm's length price. On this basis, the claim of the assessee deserves to be accepted."
The above extract demonstrates that the transfers between the Head Office and the Branch Office and vice versa with the approval of the STPI clubbed with satisfaction of other conditions like realization of proceeds in foreign exchange, constitutes exports for the purpose of the deduction under S.10A of the Act. Thus, without going into the other arguments raised by the learned counsel for the assessee, we find that the assessee must be given relief on this issue. Accordingly the decision of the CIT(A) to exclude the said sales by the assessee to the branch in US from the total turnover and the other changes made by the assessing officer are reversed. Accordingly, summarized grounds at Sl. No.3 and 4 of the assessee are allowed."
10. As the issues under dispute before us are identical to that of the ground Nos. 3 & 4 in AY 2006-07 (supra), respectfully following the decision of the Tribunal in that year, we set aside the order of the CIT(A) and allow ground Nos. 3 & 4 of the assessee.
11. Ground Nos. 5 to 8 are as follows:-
"5. The learned CIT(A) erred in confirming disallowance of Rs. 89,70,751/- u/s 40(a)(ia) on the ground that the appellant made the said payment to a non-resident entity and that accordingly the appellant ought to have deducted tax at source under sec. 195 of the IT Act though the impugned payment represented movement of funds within the same Indian taxable entity.
6. The learned CIT(A) failed to appreciate that in any case, foreign branch of an Indian company is not a non-resident as per section 6(5) of the IT Act and the DTAA with USA and therefore the impugned payment is not covered by sec. 195 of the IT Act.
7. The learned CIT(A) failed to appreciate the submissions of the appellant that the impugned amount of Rs. 89,70,751 has not been claimed as a deduction in computing total income on the basis of the consolidated P&L account which formed the basis for computation of taxable income and accordingly the provisions of section 40(a)(ia) are not attracted at all to the impugned amount.8 ITA Nos. 458 & 474/Hyd/11
M/s. Semantic Space Technologies Ltd., Hyderabad
8. The learned CIT(A) relied on the decision of Karnataka High Court in the case of Samsung Electronics which facts and circumstances are entirely different from the facts of the case of the appellant."
12. The AO found that the assessee had paid an amount of Rs. 89,70,751/- to its US Branch on account of work sub-contracted to them. The assessee could not furnish any details regarding TDS made on such payments. The AO was of the opinion that the said sub contract payments attracted TDS u/s 194C/section 195, as the US branch is a non-resident, Concluding that the assessee had not made any such TDS, the AO disallowed the claim of expenditure of Rs. 89,70,751/- u/s 40(a)(i) of the Act. On appeal, the CIT(A) after considering the submissions of the assessee, examined the issue with case and laws and confirmed the action of the AO. Aggrieved, the assessee is in appeal before us.
13. We have heard the arguments of both the parties, perused the record and gone through the orders of the authorities below. We find that similar issues came up for consideration in assessee's own case for AY 2006-07(supra) as ground Nos. 5 to 8, wherein the Tribunal held as under:-
"23. The third issue, covered by grounds No.5 to 8 of the summarized grounds of the assessee, relates to the disallowance made invoking the provisions of S.195 read with S.9 of the Income- tax Act and Double Taxation Avoidance Agreement(DTAA) with USA in respect of remittances made by the head office to Branch Office in US.
24. Brief facts of this issue are that the assessee made payment of Rs.2,46,50,958 to the US Branch on account of work sub-contracted to them. The assessee did not furnish details of TDS made in respect of such payments. The assessing officer is of the opinion that the said payments to the branch office attracts the TDS provisions under S.194C/195 of the Act, as the Branch is a non- resident, and consequently the assessing officer invoked the provisions of Section 195 read with S.40(a)(ia) of the Act and denied the benefit of deduction under S.10A in respect of such payments.9 ITA Nos. 458 & 474/Hyd/11
M/s. Semantic Space Technologies Ltd., Hyderabad
25. During the first appellate proceedings, the assessee argued stating that the branch office in USA is not a non-resident, as it is part and parcel of the assessee. The provisions of S.194/195 are attracted only if the payee is non-resident. In this regard, learned counsel mentioned that the payee is resident for all legal purposes. The assessee argued that the status of a branch office is the same as that of the head office, viz. assessee, considering the very nature of the branch. He further mentioned that the Permanent Establishment for the said branch office is in India, which is undisputed and the clubbed income of the assessee is taxable in India only. The learned counsel for the assessee not only explained the provisions of S.195 of the Act, but also Article 4(1) of the DTAA with USA dealing with 'resident'. It was submitted that the provisions of DTAA read harmoniously with the provisions of the Indian Income-tax Act, clearly indicate that the status of US Branch is 'resident' in India only, and therefore, the provisions of S.195 have no application. The assessee also made other submissions, without prejudice to the above. He also brought to our notice the reversal of the judgment of the Hon'ble Karnataka High Court in the case of CIT V/s. Samsung Electronics Ltd. (195 Taxman 313 - 320 ITR 209). Considering the other submissions narrated in para 11 of the impugned order as well, the CIT(A) upheld the views adopted by the assessing officer. In the process, he relied on the decision of the Karnataka High Court in the case of CIT V/s. Samsung Electronics Ltd. (320 ITR 209), which is popular at that time for the proposition that tax has to be deducted 'on any payment' made abroad. Thus, the CIT(A) confirmed the views of the assessing officer.
26. Aggrieved by the aforesaid decision of the CIT(A), assessee raised this issue before us, vide grounds No.5 to 8 of the summarised grounds of appeal.
27. On this issue, arguments of the learned counsel for the assessee in the written submissions are briefly as follows-
(a) Branch office in USA is part and parcel of the assessee company and therefore, the payment is nothing but payment to itself. Therefore the provisions of S.195 of the Act, where the payer and payee are not separate, are not applicable.
(b) For the foreign branch of the assessee shares the same status as that of the assessee, considering the relevant provisions of DTAA as well as the Income-tax Act. When the payee is a branch of Indian company, such branch cannot be non-
resident in status. Therefore, the impugned payment is outside the scope of S.195 of the Act.
10 ITA Nos. 458 & 474/Hyd/11M/s. Semantic Space Technologies Ltd., Hyderabad
(c) Residential status of the assessee is 'resident' because S.3 of the Indian Companies Act defines that 'company said to be a resident' is an 'Indian company' or '...the control and management of its affairs is situated wholly in India'. Same is the case with the assessee. Therefore, the branch office of the assessee cannot be treated as non-resident in the circumstances. The provisions of DTAA also support the above views.
28. The written submissions also mention that the payments/remittances in question do not attract the provisions of S.195 of the Act, as they represent neither interest nor dividend under DTAA. At the maximum, these payments constitute 'fee for included services'. In that case, the provisions of Article 12 of the DTAA with US do not apply. Applying the ratio of the Mumbai Bench decision of the Tribunal in the case of Raymond Limited V/s. DCIT (86 ITD 791), it is submitted that such payments are outside the provisions of S.195 of the Act. Further, the learned counsel mentioned that the CIT(A) has emphasised and substantially relied on the decision of the Karnataka High Court in the case of Samsung Electronics Ltd. (supra), but the fact is that the said judgment of the Karnataka High Court has been reversed by the Supreme Court vide its judgment dated 9.9.2010 in the case of GE India Technologies Pt. Ltd. V/s. CIT and Others(327 ITR 456). The Supreme Court explained in the said judgment that expression 'chargeable under the provisions of the Act' in S.195(1) shows that the remittances have got to be trading receipt whole or part of which is liable to tax in India. If the tax is not so assessable, there is no question of tax at source being deducted. The ratio laid down by the Karnataka High Court judgment in the cited case (320 ITR
209) has been set aside in that case.
29. On the other hand, the learned Departmental Representative has relied on the orders of the assessing officer and the CIT(A).
30. We heard both the parties on this issue. The issue in short is the remittance made by the assessee to its branch office abroad should be subjected to TDS provision, as made out by the Revenue authorities. The crucial arguments of the assessee in this regard include- (a) these payments are outside the scope of S.195 of the Act for the reason that the branch office abroad is part and parcel of the assessee and it is a 'resident' in status and 'not non- resident', as made out by the Revenue. The provisions of S.195(1) mention clearly that only the payments to non-residents attract provisions of s.195 of the Act. The other argument is the misplaced 11 ITA Nos. 458 & 474/Hyd/11 M/s. Semantic Space Technologies Ltd., Hyderabad reliance of the CIT(A) on the decision of the Karnataka High Court in the case of Samsung Electronics Ltd. (Supra), in view of the subsequent decision of the Apex Court in the case of GE India Technologies Pt. Ltd. V/s. CIT and Others (supra). In so far as the first argument is concerned, it is a decided issue that the status of the branch office of the assessee abroad is not 'non-resident'. In such situation, the provisions of S.195 are inapplicable. Coming to the applicability of the decision of the Karnataka High Court, it is the argument of the learned counsel for the assessee that the Supreme Court has set aside the operation of the judgment of the Karnataka High Court in the cited case, vide judgment reported at 327 ITR 456. For these reasons, in our opinion, the impugned payment of Rs.2,46,50,958 made by the assessee to the branch office in USA, is outside the scope of S.195 of the Act. Accordingly, this issue is decided in favour of the assessee, allowing grounds No.5 to 8 of the summarized grounds of appeal raised by the assessee."
14. Since the grounds 5 to 8 in the present appeal are materially identical to that of AY 2006-07, respectfully following the decision of the Tribunal in that year, we set aside the order of the CIT(A) and allow the grounds 5 to 8 of the grounds of appeal.
15. Ground Nos. 9 & 10 read as under:-
"9. The learned CIT(A) ought to have directed deletion of the disallowance of expenditure of Rs. 31,48,566/- on leased line charges to BSNL by holding that the impugned payment does not attract TDS provisions.
10. The learned CIT(A) erred in holding that disallowance u/s 40(a)(ia) is attracted in this case though tax is deducted under section 194C on the ground that tax ought to have been deducted u/s 194I which is contrary to the letter and spirit of provisions of section 40(a)(ia) which can be invoked only in cases of absolute failure to deduct tax."
16. The AO noted that the assessee was required to deduct tax u/s 194I in respect of the 'leased line charges' debited Rs. 31,48,566/-. Since the assessee had failed to comply with the said provisions, the AO disallowed the said expenditure. On appeal before the CIT(A), it was submitted that the assessee had deducted taxes u/s 194C in respect of 12 ITA Nos. 458 & 474/Hyd/11 M/s. Semantic Space Technologies Ltd., Hyderabad such payments. However, the AO proceeded to make the disallowance without affording any opportunity to explain the facts. He argued that since TDS was made in respect of the impugned amount, there is no default caught by the mischief of section 40(a)(ia). He relied upon the decision of the Hon'ble Calcutta Tribunal in the case of Hutchison Telecom East Ltd. Vs ACIT, 16 SOT 404. After considering the submissions of the assessee, the CIT(A) confirmed the disallowance made by the AO by holding that the default of the assessee in not making appropriate TDS as per the provisions of section 194 I does not get mitigated by the fact that it had made TDS u/s 194C. Aggrieved, the assessee is in appeal before us.
17. We have heard the arguments of the parties, perused the record and gone through the orders of the authorities below. We find that similar issue came up for consideration before the jurisdictional Tribunal in the case of M/s Ushodaya Enterprises Pvt. Ltd., Hyderabad in ITA No. 1706 to 1708/Hyd/2008 vide order dated 22/03/2012 wherein the Tribunal held as under:-
23. The next ground is Payment of Data Circuit Rental Charges:
The payments relate to Data Circuit Rentals charges. In the assessment order, the AO has observed that the assessee has made payments to BSNL towards use of data circuit lines on which tax was not deducted at source. The AO (TDS) referred to the assessment order dated 26.12.2007 passed u/s 143(3) by the jurisdictional AO wherein it was held that the payments are towards contractual obligation and are liable to TDS. Apparently no explanation was offered by the assessee either during the assessment or during the TDS proceedings. The AO therefore held the payments to be of the fees for technical services and held that the assessee to be an assessee in default for non deduction of tax at source u/s 194J of the IT Act.
24. In the statement of fact the assessee submitted that it has taken Data Circuit line on lease from BSNL for transmitting data/news in its office from various places where the reporters or contributors collect news from various events across the country. These data circuit lines are akin to telephone lines and hence the provisions of section 194J is not attracted since BSNL is only providing the line and not any professional or technical services to the assessee. During the appellate proceedings, the AR of the assessee reiterated the fact stated earlier in 13 ITA Nos. 458 & 474/Hyd/11 M/s. Semantic Space Technologies Ltd., Hyderabad the statement of fact and relied on the decision in the case of CIT Vs. Estel Communications P Ltd. 217 CTR 102 (Del.) and the decision of Hon'ble Madras High Court in the case of Skycell Communications Ltd. Vs. DCIT. The AR also filed copies of the invoices of BSNL for the period 1.7.04 to 30.9.04 in respect of the circuit lines taken on lease.
25. The CIT(A) held that the payment for such connectivity charges will not come under the purview of technical or professional services as held by AO since the payment is nothing but standard tariff depending on the speed and usage of the dedicated leased lines.
26. The CIT(A) relying on the decision of CIT Vs. Estel Communications P Ltd. held that the payment made to BSNL for taking on lease of dedicated circuit lines will not come under the purview of section 194J and therefore the assessee cannot be held to be in default u./s 201(1) for non deduction of Tax on such payments made to BSNL.
27. Aggrieved the revenue is in appeal before us.
28. We heard both parties. Relying on the decision of CIT Vs. Estel Communication P. Ltd. 217 CTR 102 Delhi and the Madras High Court decision in the case of Skycell Communications P Ltd. Vs. DCIT, we uphold the order of the CIT(A) that the connectivity charges cannot come under the purview of technical/professional services. It is similar to telephone connection and therefore, provisions of section 194C are inapplicable. The revenue's appeal on this issue is dismissed."
18. Since the issue under consideration is identical to the one decided by the Tribunal in the case of Ushodaya Enterprises (supra), respectfully following the same, we set aside the order of the CIT(A) and delete the disallowance of expenditure of Rs. 31,48,566/- made by the AO and sustained by the CIT(A), on leased line charges to BSNL.
19. Ground Nos. 11 & 12 are as follows:-
"11. The learned CIT(A) erred in concluding that the amount of Rs. 12,57,269/- being expenditure towards due diligence services in USA and paid to US firms, is disallowable u/s 40(a)(ia) though impugned sum falls outside the purview of section 195 in the light of the residential status and absence of PE in India for the payee and also the applicability of the provisions of DTAA between India and USA.
12. The learned CIT(A) ought to have considered the evidence produced showing that the provision made for the impugned 14 ITA Nos. 458 & 474/Hyd/11 M/s. Semantic Space Technologies Ltd., Hyderabad amount in the current year was reversed in the next year and allowed relief accordingly."
20. The AO excluded an amount of Rs. 12,57,269/- from the export turnover eligible for benefit u/s 10A of the Act on the ground that the said payment is in foreign currency and hence liable to be excluded from the export turnover. On appeal, it was contended before the CIT(A) that the payment is not towards technical services and hence the same need not be deducted from eligible export turnover as per clause (iv) of Explanation 2 to section 10A. The CIT(A) accepted the contention of the assessee and directed the AO not to exclude the impugned amount from export turnover. However, he opined that the payment having been made to a foreign entity was liable for disallowance if tax was deducted is not made. He directed accordingly. Aggrieved by the order of the CIT(A) the assessee is in appeal before the Tribunal.
21. Before us, the learned counsel for the assessee submitted that the CIT(A) erred in concluding that the expenditure incurred by the assessee towards due diligence services in USA and paid to US firms is liable for disallowance u/s 40(a)(ia). He further submitted that the CIT(A) ought to have considered the applicability of the DTAA between India and USA as per which the impugned payments would constitute 'business profits' as per article 7 of the Indo-USA DTAA and hence are not chargeable to tax in India in the absence of a PE in India for the payee. It is submitted that the CIT(A) failed to appreciate the factual submission that the said amount was only a provision made in the year ending 31/03/2007 and as the same was not required, it was reversed in the next year i.e. the year ending 31/03/08. He stated that the reversal would not make any difference. He pointed out that the relevant journal vouchers were also produced before the CIT(A). The learned counsel for the assessee finally submitted that in the light of the fact that the expenditure provision was reversed and the expenditure never really incurred, the disallowance if 15 ITA Nos. 458 & 474/Hyd/11 M/s. Semantic Space Technologies Ltd., Hyderabad upheld in the current year, a similar amount reversed in the next year, is liable to be deleted from the computation of total income.
22. On the other hand, the learned DR relied upon the orders of the authorities below.
23. We have heard the arguments of both the parties and perused the record as well as gone through the orders of the authorities below. We do not find any merit in the submissions of the learned counsel for the assessee that the expenditure provision was reversed and the expenditure never really incurred, the disallowance if upheld in the current year, a similar amount reversed in the next year, is liable to be deleted from the computation of total income. In our considered opinion, the view taken by the CIT(A) is justified and, therefore, we do not find any infirmity in the order of the CIT(A). Accordingly the order of the CIT(A) is upheld and the ground raised by the assessee is dismissed.
24. In the result, appeal of the assessee is partly allowed.
ITA NO. 474/HYD/2011 - REVENUE'S APPEAL
25. Ground No. 1 is general in nature.
26. Ground No. 2 reads as under:-
"The CIT(A) ought to have upheld the disallowance made by the AO u/s 10A as 'other income' is not eligible for calculation of deduction u/s 10A as the same are not derived by the assessee company from business."
27. The AO following the decisions in the cases of CIT Vs. Raja Bhahadur Kamakhya Narayan Singh, 16 ITR 325 (SC) Mrs. Bacha F. Guzdar Vs. CIT, 27 ITR 1 (SC), Cambay Electric Supply Industrial Co. Ltd.
16 ITA Nos. 458 & 474/Hyd/11M/s. Semantic Space Technologies Ltd., Hyderabad Vs. CIT, 113 ITR 84 and CIT Vs. Sterling Foods Ltd., 237 ITR 579 (SC), held that any profits or gains which are not derived from an industrial undertaking, though they may be attributable to its business, would not be entitled to deduction. Accordingly, he did not consider the following incomes, totaling to Rs. 1,41,61,613/- included under the head 'other income' for the purpose of computation of income u/s 10A:
i) interest income Rs. 1,57,409/-
ii) dividend received Rs. 1,33,39,340/-
iii) Credit balances written back Rs. 53,970/-
iv) Notice period salary Rs. 6,10,984/-
Total Rs.1,41,61,613/-
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28. On appeal, the CIT(A) following the decision of the Tribunal, held that income in the form of 'credit balance written back' and 'notice period salary' shall be included in the eligible profits for relief u/s 10A of the Act. As regards, interest income of Rs. 1,57,409/-, the CIT(A) held that the same is required to be excluded from the profits and gains derived from the export activity of the undertaking.
29. Aggrieved by the order of the CIT(A) holding that the income in the form of credit balance written back and notice period salary shall be included in the eligible profits for relief u/s 10A of the Act, the revenue is in appeal before us.
30. We have heard the arguments of both the parties, perused the record and gone through the orders of the authorities below. We find that the issue under consideration is covered by the decision of Tribunal in assessee's own case for AY 2006-07 (supra), wherein the coordinate bench held as under:-
"2. First effective ground of the Revenue reads as follows-17 ITA Nos. 458 & 474/Hyd/11
M/s. Semantic Space Technologies Ltd., Hyderabad "2. The CIT(A) erred in inclusion of (i) misc. income (ii)credit Balance written back and notice period salary for the purpose of arriving deduction u/s. 10A."
3. At the outset, the learned counsel for the assessee mentioned that the issues relating to inclusion of (i) miscellaneous income (ii) credit balance written back; and (iii)notice period salary for the purposes of arriving at the deduction under S.10A of the Act, are covered by the order of this Tribunal dated 19th August, 2009 in assessee's own case in the cross-appeals for the assessment year 2005-06, viz. in ITA Nos.397 and 536/Hyd/20008.. In this regard, the learned counsel took us through para 8 of the said order dated 19th August, 2009 for the proposition that miscellaneous income and the credit balance written back should be included in the profit eligible for computation of exemption under S.10A of the Act. We find that the said direction was given by the Tribunal, following the decision of the Mumbai Bench of the Tribunal in the case of Extrusion Processes (P)Ltd V/s. ITO (2007) 106 ITD 336. The Tribunal also noted that there is no decision to the contrary brought to its notice and finally decided the issue in favour of the assessee. We have considered the facts of the present case in relation to this issue and find that they are analogous to those considered by the Tribunal in the above decision for the preceding year. Therefore, we are of the opinion that the CIT(A) was justified in deciding this issue in favour of the assessee. We accordingly confirm the order of the CIT(A) on this issue.
4. Further, on the aspect of notice period salary, the learned counsel for the assessee drew our attention to para 7 of the said order of the Tribunal and mentioned that the said issue was also decided by the Tribunal in favour of the assessee. In that regard, the Tribunal relied on the decision of the Supreme Court in the case of Lakshmi Machine Works (290 ITR 667). We have perused the facts of the case on this issue, and find that the issue involved in this appeal is identical to the one already adjudicated by the Tribunal. Relevant portion of the order of the Tribunal in this regard reads as follows-
"7. We have considered the rival submissions and perused the material available on record. As for the notice period salary recovered from employees of Rs.1,40,548, we are of the view that the lower authorities are not justified in excluding the same from the eligible profits of the business while calculating the deduction under S.10A of the Act. Since the said amount represents recovery of the business expenses earlier incurred by the assessee in 18 ITA Nos. 458 & 474/Hyd/11 M/s. Semantic Space Technologies Ltd., Hyderabad recruiting and training of the employees concerned, the income arising on account of such recovery also represents the business income of the assessee......"
Considering the above reasoning given by the Tribunal, we find no infirmity in the impugned order of the CIT(A) on this aspect. We accordingly uphold the same, rejecting the ground of the Revenue in this appeal."
31. Respectfully following the decision of the tribunal, we uphold the order of the CIT(A) and dismiss the ground raised by the revenue.
32. Ground No. 3 reads as under:-
"The CIT(A) ought to have upheld the disallowance made by the AO as amounts disallowed u/s 40(a)(ia) and 40A(7) are not eligible for calculation of deduction u/s 10A of the Act.
32. We have heard the parties and perused the record. We find that in the case of CIT v. Gem Plus Jewellery India Ltd. reported in (2010) 233 CTR (Bom) 248, the Hon'ble High Court of Bombay has ruled that -
"Assessee is entitled to exemption u/s 10A with reference to addition of disallowance of PF/ESIC payments as plain consequence of disallowance and add back made by the Assessing Officer is an increase in the business profits of the assessee."
In view of the said decision of Bombay High Court the additions made on account of disallowance u/s 40a(ia) and 40A(7) to be considered as business income. Therefore, this ground of appeal of the revenue is dismissed.
33. Ground No. 3 is directed against the action of the CIT(A) in directing the AO to exclude software development and service charges from both total turnover and export turnover as the same does not form part of export turnover.
19 ITA Nos. 458 & 474/Hyd/11M/s. Semantic Space Technologies Ltd., Hyderabad
34. After hearing both the parties we are of the opinion that this issue is squarely covered by the decision of the Tribunal in assessee's own case for AY 2006-07(supra) This ground is inter-linked with ground Nos. 3 & 4 of assessee's appeal and following the paras 16 to 22 of the Tribunal order in ITA No. 824 & 915/Hyd/10 dated 7th March, 2012, we decide the issue in favour of the assessee.
35. In the result, assessee's appeal is partly allowed and Revenue appeal is dismissed.
Order pronounced in the court on 8th June, 2012
Sd/- Sd/-
(Asha Vijayaraghavan) (Chandra Poojari)
Judicial Member. Accountant Member.
Hyderabad, Dt/- 8th June, 2012.
kv
Copy forwarded to:
1. M/s. Semantic Space Technologies Ltd., Plot No.26, Road No.17, Jubilee Hills, Hyderabad
2. Dy. Commissioner of Income-tax Circle 3(1), Hyderabad
3. Commissioner of Income-tax(Appeals)IV Hyderabad
4. Commissioner of Income-tax III, Hyderabad
5. The D.R., ITAT, Hyderabad.
Description Date Intls
S.No.
1. Draft dictated on 30/05/12 Sr.P. S./P.S
2. Draft placed before author 04/06/12 Sr.P. S/PS
Draft proposed & placed before JM/AM
3 the second Member
4 Draft discussed/approved by JM/AM
second Member
5 Approved Draft comes to the Sr.P. S./P.S
Sr.P.S./PS
6. Kept for pronou ncement on Sr. P.S./P.S.
7. File sent to the Bench Clerk Sr.P. S./P.S
8 Date on which file goes to the
Head Clerk
9 Date of Dispatch of order