DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - 1(2),, PUNE vs. FIS SOLUTIONS SOFTWARE PVT. LTD,(EARLIER KNOWN AS SUNGARD SOLUTIONS INDIA PVT. LTD.), BANGALORE

This appeal preferred by the Revenue emanates from the order of the Ld. CIT(Appeals)-4, Pune dated 26.12.2016 for the assessment year 2009-10 as per the following grounds of appeal on record:

The brief facts with regard to this ground are that the assessee during the scrutiny proceedings, produced Form No.56F for Unit II and in the said Form No.56F, against column No. 8, it was mentioned that it is 2nd year of the claim. However, it was also observed during the scrutiny assessment proceedings for the previous year i.e. A.Y. 2008-09, the assessee had no where mentioned about another Unit of the assessee company. To show the current year‟s claim as 2nd year, the assessee should have made a claim for the same in the previous assessment year i.e. A.Y. 2008-09. On such an observation, the assessee was asked to submit details about the 2nd Unit vide the office of the Assessing Officer and notice u/s.142(2) dated 07.03.2013 was issued wherein the Assessing Officer show caused the assessee by stating as follows:

Being further aggrieved, the assessee took up this matter before the Ld. CIT(Appeals) wherein detailed written submissions were filed which are on record. The CIT(Appeals) after considering the submissions of the assessee, assessment order and facts of the case has observed and held from Para 5.3 to Para 5.3.3 of his order by analyzing in detailed the facts and circumstances of the case and given reasons for his decision and finally held that the assessee was eligible to claim deduction u/s.10A of the Act on the profits of Unit II separate from deduction u/s.10A of the Act on profits of Unit I and the addition made by the Assessing officer was therefore, deleted by the Ld. CIT(Appeals). Para 5.3.2 and Para 5.3.3 of the CIT(Appeals)‟s order are relevant for extraction which are as follows:

At the time of hearing, the Ld. DR vehemently argued that the assessee should have made a claim of deduction u/s.10A of the Act in the previous year i.e. A.Y. 2008-09. However, in the scrutiny assessment proceedings, for A.Y. 2008-09, the assessee had no where mentioned about another unit of the assessee company. The Ld. DR further invited our attention Para 4.5.7 of Assessing Officer‟s order wherein the Assessing Officer observed that vide letter dated 25.04.2007, the STPI had given approval only for expansion as sought for by the assessee. That further, the assessee has not furnished any separate Master Service Agreement and statement of work which would have necessitated the purposes/work assignment of Unit II. This Agreement was not furnished before the Department instead as evident from Para 4.5.9 of the Assessing Officer‟s order that the assessee had enclosed a few sample copies of purchase orders for the relevant assessment year which are enclosed at Page 66 to 70 of the paper book. That on perusal of these purchase orders, nothing is clear whether Unit II is new unit of the assessee or is expanded of the earlier unit which was being carried out for assessment year 2008-09. The assessee himself disclosed that they had not claimed deduction u/s.10A of the Act during that period i.e. A.Y. 2008-09. Therefore, there was ambiguity in the submissions of the assessee. The Ld. DR further submitted that the assessee never furnished this relevant agreement before the Assessing Officer for verification.

Per contra, the Ld. AR of the assessee took up to the remand report issued by the Assessing Officer himself which is enclosed at Page 645 onwards of the Paper book. The Ld. AR drew our attention at Para 5 of the remand report wherein the Assessing Officer writes the following:

Unit 1- Located at 1st Floor, DS Chambers, No.11 O‟Shaugnessy Road, Bengaluru engaged in creating products for higher education industry.

Unit 2- Located at 3rd Floor, DS Chambers, No.11, O‟Shaugnessy Road, Bengaluru engaged in creating products for banking and finance industry.

The AR claimed that the main reason given by the AO to hold that Unit 2 is part of Unit 1 and not a separate and independent unit is reference given by STPI in the approval dated 5 February 2008 to its approval dated 25 April 2007 for expansion of Unit 1. The AR has contended that since the letter dated 5 February 2008 was again rectified by the STPI on 10 June 2008, wherein the STPI has categorically mentioned that the approval is for expansion for Unit 2.

We have perused the case records and heard the rival contentions. We have also analyzed the facts and circumstances of this case. That on perusal of the remand report placed on record, it is absolutely clear that there were existence of two units i.e. Unit 1 is for creating products for higher education industry and Unit 2 is for creating products for banking and finance industry. That apart, the STPI has confirmed that Unit 2 exists separate and independent of Unit 1 of which approval, the Assessing Officer in his remand report arrived at findings that the same is free for any mistakes. The Ld. AR further submitted that STPI being an independent authority would accord its approval to a new unit only after due verification of the application and credentials of an applicant. In the case of the assessee, the approval was granted by STPI only after due verification of the facts of the case. The Ld. AR addressed another objection raised by the Assessing Officer that most of the employees of both units are same and with regard to this, the Ld. AR submitted that the skill set/qualification required by the software developers for the finance and banking industry are completely different as compared to that required for higher education industry. The Ld. AR further submitted that as on 31st March, 2008 (end of first financial year), out of 32 employees in Unit II, only 7 were old employees. This further justifies the contention of the assessee that Unit II was to be a new and independent unit. It is admitted fact as appearing in the remand report of the Assessing Officer that STPI itself has held Unit 2 to be a new unit and granted requisite approval. The facts herein further demonstrate that Unit 1 and Unit 2 are basically two different and distinct units of the assessee. There is neither expansion nor splitting one unit into another. The Ld. DR was unable to bring on record any material/document in support of the Revenue substantiating that both units are one and the same. The Ld. DR relied on the observation of the Assessing Officer that Master Service Agreement was not furnished but how that agreement could have helped the revenue additionally was not substantiated by the Ld. DR because of the fact that as on record in the order of the Ld. CIT(Appeals) at Para 5.3.2 and Para 5.3.3, it is mentioned by the First Appellate Authority that various documents/returns such as separate custom bonded warehouse licenses, separate annual reports filed with STPI, separate monthly reports submitted to Superintendent of Customs for Unit I and Unit II further confirm that Unit II is separate and independent from Unit I. These facts were not disputed by the Ld. DR before us.

The brief facts with regard to this issue are that the Assessing Officer during assessment proceedings found that as against the export turnover, the total turnover is not defined in the Act. Hence, the Assessing Officer contended that the intention of the legislature was to consider the turnover in its totality without any exclusion. The very fact that the total turnover is not defined in comparison with export turnover proves this and hence, as per provisions of section 10A of the Act, there is no scope for any adjustment to total turnover. Further any reference to section 80HHC is not acceptable as they are specifically applicable to section 80HHC and principles enunciated therein, if any cannot be stretched to the other provisions of the Act to purport any meaning not defined by the Act and not intended by the legislature as such. Hence, the total turnover for the sake of computation of deduction under section 10A of the Act will be Rs.50,38,94,398/- and whatever reduced above from the export turnover cannot be excluded from the total turnover as it is not specifically provided by the Act.

Before the Ld. CIT(Appeals), the assessee filed detailed written submissions which are on record and the Ld. CIT(Appeals) after considering the submissions of the assessee, assessment order and facts on the issue held as follows:

The Ld. AR of the assessee placed strong reliance on the findings of the Ld. CIT(Appeals) and also submitted that this issue is covered by the decision of the Hon‟ble Supreme Court of India in the case of CIT Vs. HCL Technologies Ltd. 404 ITR 719 wherein the Hon‟ble Apex Court has held that “when object of formula in section 10A for computation of deduction is to arrive at profit from export business, expenses excluded from export turnover have to be excluded from total turnover also; otherwise, any other interpretation makes formula unworkable and absurd and hence, such deduction shall be allowed from total turnover in same proportion as well.” The decision is rendered in favour of the assessee.

We take guidance from the decision of the Hon‟ble Supreme Court as referred above and respectfully, following this decision, we are of the considered view that the Ld. CIT(Appeals) was correct in directing the Assessing Officer to calculate deduction u/s.10A of the Act after reducing the expenses which are reduced from export turnover, from total turnover as well. Thus, relief provided to the assessee by the Ld. CIT(Appeals) is hereby sustained. Thus, ground No.2 raised in appeal by the Revenue is dismissed.

Ground No.3 pertains to “whether the Ld. CIT(Appeals) erred in holding that interest income is eligible for deduction u/s.10A of the Act when the facts of the case are that interest was earned on bank deposits.

The facts relating to Ground No.3 are that in financial year 2008-09, the assessee received following interest income:

That before the Ld. CIT(Appeals), the assessee submitted that interest income would form part of profits of the business of the undertaking and would be eligible for deduction u/s.10A of the Act. In this regard, the assessee has placed reliance on the decision of Karnataka High Court in the case of CIT & Anrs. Vs. Motorola India Electronics P. Ltd. (265 CTR 94) (2014) where the assessee had earned interest income on account of deposits with EFFC account and inter corporate advances. The Hon‟ble High Court held as follows:

We have perused the case records and given considerable thought to the findings of the Ld. CIT(Appeals). We find the Ld. CIT(Appeals) has based his decision following the judgment of the Hon‟ble Karnataka High Court (supra.) and the decision of the Co-ordinate Bench of the Tribunal, Bangalore in assessee‟s own case (supra.) while directing the Assessing Officer to allow deduction u/s.10A of the Act on interest income of Rs.42,86,469/-. The Ld. DR could not bring any contrary decision of any Higher Forum in support of the Revenue nor could bring any relevant documents/materials opposing the already established facts in favour of the assessee. Therefore, we do not find any infirmity with the findings of the Ld. CIT(Appeals) which is thereby upheld. Thus, ground No.3 raised in appeal by the Revenue is dismissed.

Ground No.4 pertains to “whether the Ld. CIT(Appeals) had erred in holding that foreign exchange gain is eligible for deduction u/s.10A relying on the decision of the Hon‟ble Bombay High Court in the case of Jem Plus Jewellery India Ltd. (supra.)”

The brief facts relating to this ground are that the during the assessment proceedings, the Assessing Officer found that the assessee had arrived at Rs.18,41,35,472/- as profit from the business. However, it was observed that the assessee had not reduced the „other income‟ which was not having any direct nexus with the profit of the undertaking for the purpose of computation of deduction u/s.10A of the Act. Other income included Rs.2,95,28,156/- which represented exchange gain and Rs.42,86,469/- which was from bank and other interest. The assessee in its Form 56F had shown profit of the undertaking at Rs.18,41,35,472/- without reducing other income to the tune of Rs.3,38,14,625/- which was not forming part of profit of the undertaking. The Hon‟ble Supreme Court while considering the legislative intent behind the use of the word „derived from‟ in the case of Pandian Chemicals Limited Vs. CIT( 262 ITR 78) had affirmed that what is eligible for the deduction is strictly the income derived by the undertaking and not any other income that may be incidental or attributable to, even though such income is computed under the head “business”. Further the Hon‟ble Supreme Court had considered the legislative intent behind the use of the word “derived from” in the case of Liberty India and Others Vs. CIT (317 ITR 218) and reaffirmed that the word “derived from” are narrower in connotation as compared to the words “attributable to”. In other words by using the expression “derived from”, the Parliament intended to cover sources not beyond the first degree. Hence, the said amount of Rs.3,38,14,625/- was reduced from the profit of the undertaking and the eligible profit of the undertaking was arrived at Rs.15,03,20,847/-. Accordingly, after exclusion of the said other income, the profit of the undertaking would be Rs.15,03,20,847/- (Rs.18,41,35,472/- (-) Rs.3,38,14,625/-).

Before the Ld. CIT(Appeals), the Ld. AR of the assessee filed detailed written submissions which are on record. The Ld. CIT(Appeals) after considering the submissions of the assessee, assessment order and facts of the case has held as follows:

We have perused the case records and given considerable thought to the findings of the Ld. CIT(Appeals). We find the Ld. CIT(Appeals) has based his findings relying on the decision of Hon‟ble Jurisdictional High court in the case of CIT Vs. Gem Plus Jewellery India Ltd. (330 ITR 175) wherein the Hon‟ble Bombay High Court has held as follows:

In the result, appeal of the Revenue is dismissed.