Income Tax Appellate Tribunal - Mumbai
Orbitech Ltd., Mumbai vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH 'H' MUMBAI
BEFORE SHRI A.L.GEHLOT, AM &
SMT. P.MADHAVI DEVI, JM
I.T.A.NOS.3209/M/05 & 6645/M/05
A.Ys. 2001-02 & 2002-03
M/s Orbitech Ltd. [formerly Vs. Dy.Commissioner of I.T.
Citicorp Overseas Software Ltd. Range 8 [2]
133/SDF 5, Seepz, Andheri [E], Mumbai
Mumbai 400 096
AAACC 5736 G
(Appellant) (Respondent)
AND
I.T.A.NOS.3560/M/05 & 6955/M/05
A.Ys. 2001-02 & 2002-03
DY. Commissioner of I.T. vs M/s Orbitech Ltd., [Formerly
Range 8[2], Mumbai Citigroup Overseas Software Ltd.]
Mumbai
(Appellant) (Respondent)
Assessee by : Shri Arvind Sonde.
Revenue by : Shri S.K.Pohwa - CIT
ORDER
Per P.MADHAVI DEVI, JM:
These cross appeals are consolidated and heard together and they are disposed of by this common order.
2. I.T.A.No.3209/M/05 - A.Y 2001-02: In this appeal the assessee has raised the following grounds of appeal-
1) On the facts and in the circumstance of the case and in law, the learned CIT[A] has erred in upholding the order of the Assessing Officer on the erroneous ground that 2 the Appellant is not entitled to deduction under section 10A of the Act in respect of its profits of Rs.11.91 crores derived from the industrial undertaking located at Chennai since in the opinion of the Assessing Officer , there was alleged contravention of the provisions of sub- section [ix] of section 10A of the Income Tax Act.
2) On the facts and in the circumstance of the case and in law, the learned CIT[A] has erred in upholding the order of the Assessing Officer by treating expenditure incurred on the application software of Rs.5,34,86,960/- as capital expenditure and not of a revenue nature, although CIT[A] has given direction for granting depreciation on the said sum of Rs.5,34,86,960/-.
3) On the facts and in the circumstance of the case and in law, the learned CIT[A] whilst holding that reimbursement of expenses incurred on employees for onsite development of computer software is business income, failed to give a finding that the said reimbursement is inextricably linked with the export of computer software, since had the employees not gone abroad after incurring the necessary expenses, the onsite business of computer software would not have materialized.
3. Brief facts of the case are that the assessee is a company which is engaged in the business of export of computer software and its transmission from India to places outside India and is also providing technical services outside India in connection with the development and production of computer software. The assessee filed its return of income for A.Y 2001-02 on 31-10-2001 declaring total income of Rs.4,95,08,280/-. During the assessment proceedings u/s.143[3], assessee vide letter dated 27/11/2003 submitted that the assessee has its business at three different locations, viz., one in Mumbai SEEPZ and the other two in Hyderabad & Chennai in STP Zones respectively and that deduction u/s.80HHE amounting to Rs.14.86 crores pertaining to Mumbai unit was claimed and also that the assessee has claimed 3 exemption u/s.10A of the Act for Hyderabad and Chennai units amounting to Rs.11.91 crores and Rs.15.11 crores respectively. The AO asked the assessee to justify the applicability of sec.10A in its case. The assessee vide its letter dated 27-11-03 replied that the business of the assessee at Hyderabad unit was set up in 1997 and it had commenced its operation on 15th April, 97 and accordingly exemption u/s.80HHE was claimed in the return of income for A.Y 98-99 in respect of Hyderabad unit. As regards the Chennai unit, it was submitted that this unit was set up in 1998 and it had commenced its operation from December 98 and relief u/s.80HHE was also claimed for the Chennai unit for A.Y 99-2000. It was submitted that by virtue of the amendment brought about by the Finance Act, 2000 effective from A.Y 2001-02, the deduction u/s.80HHE has been phased out over a period of 5 years and as regards deduction under sec.10A, no such phasing out was introduced by the Finance Act, 2000. Therefore, the assessee was entitled to claim full exemption u/s.10A for A.Y 01-02 and hence assessee elected to change the method of claiming relief by shifting its claim of deduction to sec.10A instead of u/s.80HHE. As per the scheme of sec.10A, deduction is available for 5 out of 8 years beginning with the initial assessment year of manufacture or production and it was entirely the option of the assessee to specify in writing or otherwise or intimate to the department in any manner that A.Y 98-99 being the initial assessment year of production is the year for which the deduction was claimed u/s.10A of the Act. As the 4 assessee did not make any declaration under sub-sec.[7] of sec.10A to opt out of automotive deduction available to it, assessee was entitled to claim exemption u/s.10A of the Act for any 5 out of 8 years beginning with the initial assessment year i.e. A.Y 98-99 for both the units i.e. Hyderabad and Chennai. The assessee also placed reliance upon various judicial precedents to the effect that when a provision is made in the context of law providing for concessional rate of tax for the purpose of encouraging an industrial activity, a liberal construction should be put upon the language of the statute and where two views are possible, the view that favours the assessee or is beneficial to him should be adopted. The AO was however not convinced with the submissions of the assessee. He observed that sec.10A provides that assessee should fulfill the conditions laid down thereunder for being eligible for claiming the deduction u/s.10A. He observed that the entire shareholding of the assessee company was held by Citi Bank Overseas Investment Corporation [COIC] till A.Y 2000-01 but the same has been transferred to Citicorp Technology Holdings Inc. [CTHI] during the current year. He observed that the name of the assessee in the current year has also been changed from Citicorp Overseas Software Ltd. to CTHI. When the assessee was asked to explain the change in the ownership, it was submitted that since the parent company is common, there is no transfer of ownership or beneficial interest as contemplated by sub-sec.[9] of sec.10A of the Act. However, the AO held that during the relevant previous year, the ownership by virtue of the entire 5 shareholding being transferred has been transferred from COIC to CTHI, and even the beneficial interest in that undertaking has been transferred. He, therefore, concluded that both the conditions of sub- sec.[9] of sec.10A have been fulfilled by the assessee and the assessee is not entitled to claim deduction u/s.10A of the Act.
4. As regards the alternate claim of the assessee in the return of income for deduction u/s.80HHE for the assessee as a whole, AO held that the fact that the assessee has made a claim u/s.10A and also alternative claim u/s.80HHE shows that the assessee was fully aware of the non applicability of the provisions of sec.10A and has claimed it in the return of income to confuse the issue and to evade the incidence of taxation. Thereafter, he worked out and allowed the deduction u/s.80HHE at Rs.39,37,20,619/- by taking into consideration various additions made to the income returned by the assessee. Aggrieved, assessee filed an appeal before the CIT[A] reiterating the submissions made before the AO. However, the CIT[A] confirmed the order of the AO and the assessee is in second appeal before us.
5. The ld. counsel for the assessee while reiterating the submissions made before the authorities below, submitted that sec.10A being a beneficial provision, should be interpreted liberally. He submitted that sub-sec.[9] of sec.10A has been subsequently omitted from the statute book by the Finance Act, 2003 without any saving clause and, therefore, it has to be construed to have never been in existence. As the case is being heard in 2009, when the said provision 6 is not in the statute book any longer, the ld. counsel for the assessee submitted that it cannot be made applicable at this stage. For this proposition he placed reliance upon the decision of 'B' Bench of the Tribunal at Bangalore in the case of M/s GE Thermometrics India Pvt. Ltd. in I.T.A.Nos.257 & 258/Bang/08 for A.Ys. 03-04 and 04-05 dated 30th May, 2008 in support of his contentions. Further on merits also, he submitted that the assessee is a 100% subsidiary of COIC which in turn is 100% subsidiary of Citi group. The transfer of ownership of shares of assessee company is from the parent company to another 100% subsidiary of Citi group and, therefore, according to him there is no transfer of legal ownership as far as the undertaking is concerned, the transfer is only in the ownership of the assessee company and also there is no transfer of beneficial interest as contemplated u/s.10A[9] of the Act. Thus, according to him, the assessee is eligible for deduction u/s.10A of the Act.
6. The ld. DR, on the other hand, supported the orders of the authorities below and submitted that during the relevant period the provision of sub-sec.[9] of sec.10A was very much in force and, therefore, is applicable to the case of the assessee.
7. Having heard both the parties and having considered their rival contentions, we find that this issue is covered by the decision of the co-ordinate Bench of the Bangalore ITAT in the case of M/s GE Therometrics India Pvt. Ltd. vs. Dy. CIT in I.T.A.Nos.257 & 258/Bang/2008, dated 30th May, 2008 wherein while dealing with the 7 provisions of sub sec.(9) of sec.10B of the Income Tax Act, the co- ordinate Bench relied upon the decisions of the Hon'ble Supreme Court in the cases of Kolhapur Canesugar Works Ltd. vs. UOI (2 SCC 536) and Rayala Corporation P. Ltd. vs. Director of Enforcement (2 SCC 412) and also in the case of General Finance Co. vs. ACIT 257 ITR 328 for coming to the following conclusion:
"11. Therefore, even though the Finance Act, 2003 mentions that the aforesaid sub-section (9) is omitted with effect from 1-4-2004, in view of the fact that the said omission is different from repeal, the saving clause provided in section 6 of the General Clauses Act is not applicable. Therefore, the learned CIT[A] is not justified in not appreciating the fact that section 10B should be read as though it never had the said sub-section (9) in it in all proceedings under the Act. as the appellate proceedings are continuation of the assessment proceedings, as held by the Hon'ble Supreme Court in the case of Jute Corporation of India Ltd., (187 ITR 686), even for assessment year 2003-04 the aforesaid section 10B has to be read without the impugned sub-section (9). Therefore, we find much force in the stand taken by the assessee in view of the decision of the Supreme Court. Even on this issue, the assessee is bound to succeed. It is ordered accordingly."
8. As the ld. DR has not brought to our notice any decision to the contrary, we are inclined to follow the decision of the co-ordinate Bench of the ITAT Bangalore. In the case before us the issue is with regard to the applicability of the omitted sub-sec.(9) of sec.10A of the Act which is similarly worded as sub-sec.(9) of sec.10B and the same decision is applicable to the issue before us also. In view of the same, we are constrained to follow the decision of the co-ordinate Bench of the Tribunal at Bangalore and hold that sub-sec.(9) of sec.10A cannot be applied to the case of the assessee in the relevant assessment year also. Accordingly, ground of appeal No.1 is allowed. 8
9. As regards ground No.2, both the parties agreed that this issue needs to be reconsidered in the light of the decision of the Special Bench of the Tribunal in the case of Amway India Enterprises reported in 111 ITD 112 [S.B] [Del]. Accordingly, we remand the issue to the file of the AO for fresh examination in the light of the guidelines prescribed in the above decision of the Special Bench of the Tribunal. This ground is accordingly allowed for statistical purposes.
10. As regards ground No.3, brief facts are that the assessee company had incurred certain expenses on behalf of its customers for software development outside India which were reimbursed to the assessee by the customers. The total amount spent by the company is Rs.1,50,21,296/-, while the assessee had recovered an excess of Rs.59,24,923/-. The assessee was asked to give details of expenses incurred on behalf of the customers and the accounting treatment given to this transaction. The assessee vide letter dated 25/1/2004 stated that the assessee company first meets the expenses of its employees who go outside India to perform on-site projects and then recovers such expenses from the customers and there can be some marginal differences between the amount spent by the company and the amount recovered and this difference is included in other income shown under the head 'excess recoveries over reimbursable expenses' as the expenses relate to the employees stay expenses, visa processing charges etc., it has resulted in excess recovery of Rs.59,24,923/- and has been treated as business income. AO however 9 was not satisfied with the assessee's explanation and held that the word 'reimbursement' denotes the payments made for business expenses actually incurred on behalf of some one but as the assessee has made profits by staking an excess claim over the actuals, it cannot be said to be attributable to either export of software or providing technical services as mentioned in sec.80HHE(1) of the Act. He therefore treated the same as income from other sources and added it back to the total income of the assessee. He also reduced the claim of deduction u/s.80HHE to this extent.
11. Aggrieved assessee filed an appeal before the CIT[A] who agreed with the assessee's contention that the receipt of expenses over actuals are part of business profits. However he directed the AO to apply on the said receipts, provisions of clause (d) of the Explanation to sec.80HHE in working out the deduction thereunder. Aggrieved by this direction of the CIT[A] the assessee is in appeal before us, and aggrieved by the direction of the CIT[A] to treat it as business receipt, the revenue is also in appeal before us vide ground No.2 of its appeal in I.T.A.No.6645/M/05.
12. Both the parties reiterated the submissions made before the authorities below and after considering the same, we are satisfied that the reimbursement of the expenses incurred by the assessee on behalf of its customers is not disputed by any of the authorities below. Further, the issue of application of provisions of sec.80HHE would arise only if the deduction u/s.10A is not allowable. We have already held 10 that the deduction u/s.10A is allowable to the assessee. In view of the same, the issue needs no adjudication as it is only academic. Therefore, both the assessee's ground of appeal and the revenue's ground of appeal are rejected.
13. In the result, assessee's appeal in I.T.A.No.3209/M/05 for A.Y 01-02 is partly allowed.
14. I.T.A.No.3560/M/05 - A.Y 01-02 [revenue's appeal]: The revenue has raised the following grounds of appeal-
1. On the facts and in the circumstances of the case and in law, the CIT[A] erred in directing the AO to allow the depreciation at 60% on computer software instead of at 25% without appreciating the facts of the case.
2. On the facts and in the circumstances of the case and in law, the CIT[A] erred in holding that the receipt arising out of reimbursement of expenses amounting to Rs.59,24,923/- is a part of business profit and thereby directing the AO to consider the said amount eligible for deduction u/s.80HHE of the Act without appreciating the facts of the case.
15. As regards ground No.1, we find that this issue also needs reconsideration in the light of the Special Bench of the Tribunal in the case of Amway India Enterprises reported in 111 ITD 112 [S.B] [Del]. Therefore, this issue is remanded to the file of the AO for fresh examination in the light of the guidelines prescribed in the said judgment. This ground is accordingly allowed for statistical purposes. 15A. As regards ground No.2, for the reasons given in para 12 above, it is rejected.
16. In the result, revenue's appeal is partly allowed for statistical purposes.
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17. I.T.A.No.6645/M/05 - A.Y 02-03 [assessee's appeal]: The assessee has raised the following grounds of appeal-
1. On the facts and in the circumstances of the case and in law, the CIT[A] had erred in confirming the order of the Assessing Officer by holding that the expenditure on acquisition of application of software of Rs.97,32,900/- was in the nature of capital expenditure although the entire expenditure is purely of a revenue nature.
2. On the facts and in the circumstances of the case and in law, the CIT[A], while agreeing with the appellant that reimbursement of expenses incurred on employee on on-sight development of computer software is business profit, has subsequently erred in holding that the provision of clause
(d)(1) of the Explanation to sub-section 5 of section 80HHE is applicable ignoring the fact that the recovery of reimbursable expenses were part and parcel of export turnover and that in the circumstances no deduction of 90% is warranted from profits of the business.
18. Ground No.1 is rejected as not pressed as depreciation has already been granted to the assessee.
19. As regards ground No.2, we find that this ground of appeal is similar to ground No.3 in assessee's appeal for A.Y 2001-02 and for the reasons given therein this ground of appeal is rejected.
22. In the result, assessee's appeal is dismissed.
21. I.T.A.No.6955/M/05 - A.Y 2002-03 [revenue's appeal] : The revenue has raised the following grounds of appeal-
1. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax [Appeals] erred in directing the AO to allow the depreciation at 60% on computer software instead of at 25%, without appreciating the facts of the case.
2. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax [Appeals] erred in holding that the receipt arising out of reimbursement of expenses amounting to Rs.27,32,170/- is a part of business profit and thereby directing the AO to consider the said amount eligible for deduction u/s.80HHE of the Act, without appreciating the facts of the case.
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22. Ground No.1 is similar to ground No.1 in revenue's appeal for A.Y 2001-02 and for the reasons given therein, this ground is also remanded to the AO for reconsideration in the light of the decision of the Special Bench of the Tribunal in the case of Amway India Enterprises reported in 111 ITD 112 [S.B] [Del]. This ground is accordingly allowed for statistical purposes.
23. As regards ground No.2, we find that this ground is also similar to ground No.2 of revenue's appeal for A.Y 01-02 and for the reasons given therein this ground of appeal is rejected.
24. In the result, revenue's appeal is partly allowed for statistical purposes.
Order pronounced on this 9th day of February, 2010.
Sd/- Sd/-
(A.L.GEHLOT) (P.MADHAVI DEVI)
Accountant Member Judicial Member
Mumbai: 9th February, 2010.
P/-*
Copy to-
1) Appellant
2) Respondent
3) CITA Mumbai.
4) CIT City Mumbai
5) DR Bench Mumbai
True Copy By Order
Dy/Asst.Registrar,ITAT MUMBAI.
13
Sr.No. Particulars Date Initials
1 Draft dictated on 25-1-10 P
2 Draft placed before author 25-1-10 P
3 Draft proposed & placed before the
second Member
4 Draft discussed/approved by second
Member
5 Approved draft comes to Sr.PS/PS
6 Order kept for pronouncement
7 File sent to Bench Clerk
8 Date on which file goes to the Head
Clerk
9 Date of dispatch of order