M/S. ZENSAR TECHNOLOGIES LTD ( FORMERLY INTERNATIONAL COMPUTERS (INDIA) LTD ),MUMBAI vs. THE CIT -2,

आदेश / O R D E R PER M. BALAGANESH (A.M):

1. The Commissioner of Income-tax-2, Mumbai [hereinafter referred to as the CIT] erred in holding that the provisions of section 263 of the Income-tax Act, 1961 (the Act) were applicable to the facts of the appellants case. The CIT erred in issuing notices dated 08.03.2006 and 12.03.2007 under section 263.

The order of the CIT is bad in law, void, in excess of and/or in want of jurisdiction and otherwise illegal. The appellants submit that the original order dated 29.12.2004 passed by the Assessing Officer (AO) was not erroneous and was not prejudicial to the interest of the revenue within the meaning of section 263 of the Act. The appellants therefore pray that the order of the CIT passed under section 263 of the Act be quashed. 2.(a) The CIT erred in holding that the appellants were not entitled to deduction under section 80HHE after setting off brought forward losses from the earlier years for the purpose of computing business profits under the said section. The appellants submit that deduction under section 80HHE is permissible from the Gross Total Income. Once the Gross Total Income is determined the character of the income is lost. It is also submitted that deduction under section 80HHE has to be computed on the business income by taking into account, the provisions of section 28 to 43D and before setting off the brought forward losses, 2.(b) Without prejudice, the CIT ought to have held that deduction under section 80HHE has to be computed by considering the book profits under section 115JB. 3.(a) The CIT erred in holding that the AO was in error in not disallowing the losses of the 10A units in computing the profits and gains of business or profession.

(b) The CIT erred in not appreciating that the provisions of the amended section 10A operative from the assessment year 2001-02 are provisions for deduction from the total income and as there was a loss, no deduction under that section had been claimed by the appellants with respect to the above units. (c) The CIT erred in invoking the provisions of section 14A in disallowing the aforesaid loss incurred with respect to section 10A units even though the said provisions were inapplicable. 4. (a) The CIT erred in setting aside the matter to the AO without indicating how excess deduction under section 10A had been allowed to the appellants by the AO. (b) The CIT erred in holding that deduction under section 10A has been claimed in excess by alleged allocation of disproportionate higher common expenses to the non-STP units, without giving the appellants an adequate opportunity of being heard in the matter.

5. The CIT erred in holding that the AO failed to take into account the finding of the Transfer Pricing Officer (TPO) while allowing the deduction under section 10A. The appellants submit that the salary of the software personnel deputed overseas on the basis of which the addition has been made by the TPO, are neither relatable nor debited to the 10A units. In view thereof no adjustment is required to be made with regard to the above issue.

6. The CIT erred in holding that the losses pertaining to section 10A units should be added back while computing book profits under section 115JB. 7. The CIT erred in setting aside the matter to the AO without indicating how the following provisions were towards meeting liability other than ascertained liabilities:- Rs. (i) Deferred tax liability 440.42 lakhs (ii) Provision for doubtful debts 5.91 lakhs (iii) Provision for diminution in value of assets 0.05 lakhs (iv) Provision for doubtful recovery 56.92 lakhs 8.(a) The CIT erred in holding that as there were no eligible profits for the purpose of deduction under section 80HHE such deduction was not available for reduction from book profits under section 115JB. (b) Without prejudice, the CIT ought to have held that deduction under section 80HHE has to be computed by considering the book profits. Your appellants crave leave to add to, alter, amend, vary, omit or substitute the aforesaid grounds of appeal or add a new ground or grounds of appeal at any time before or at the time of hearing of the appeal as they may be advised.

3. The ground No.1 raised by the assessee is general in nature and does not require any specific adjudication.

6.1. We find that in the assessment order dated 29/12/2004 u/s.143(3) of the Act, the ld. AO had computed the profits eligible for deduction u/s.80HHE of the Act at Rs.7,65,20,042/-. Since, the gross total income of the assessee was only Rs.2,05,57,787/-, the deduction u/s.80HHE of the Act was restricted to the said amount of gross total income. However, while computing the gross total income, the brought forward business loss of Rs.12,29,01,688/- from previous year was sought to be adjusted by the ld. AO against the business income. We find that provisions of Section 80HHE of the Act allows deduction of profit derived from the business of export out of India of computer software for providing all technical services outside India in connection with development or production of computer software. It is not in dispute that the assessee is eligible for deduction u/s.80HHE of the Act in the present case. As per Section 80HHE(3) of the Act, the said profit derived shall be the amount which bears to the profits of the business, the same proportion as the export turnover bears to the total turnover. We find from the perusal of the provisions of Section 80HHE of the Act, as per Clause(d) of the explanation below the said Section, the starting point for computation of profits of the business is the profits of the business as computed under the head ‘profits and gains of business or profession.’ It is pertinent to note that Section 29 of the Act mandate that the business income shall be computed in accordance with the provisions contained in Section 30-43D of the Act. Hence, the profit qualifying for deduction u/s.80HHE of the Act is the profit of the current year. The set off of brought forward business loss is governed by the provisions of Section 72 of the Act and it has no relevance for this purpose. Hence, in our considered opinion, the eligible profits u/s.80HHE cannot be reduced by the brought forward business loss.

6.2. We find that the ld. CIT had held that the profits of the business for the year under consideration has to be reduced by the brought forward losses from earlier year for the purpose of computing profits eligible for deduction u/s.80HHE of the Act. The ld. DR before us placed reliance on the decision of the Hon’ble Madhya Pradesh High Court in the case of Vippy Solvex Products Ltd., vs. CIT reported in 273 ITR 107 and also on the decision of the Hon’ble Supreme Court in the case of Ipca Laboratories vs. DCIT reported in 266 ITR 521, in support of the contentions of the ld. CIT. We find there are two stages of computation of deduction u/s.80HHE of the Act. The first stage is the profits eligible for deduction u/s.80HHE has to be computed in the following formula:-

Profits of the business x export turnover Total Turnover 6.3. As stated supra, profits of the business is to be computed as per Section 29 of the Act which in turn stipulates that business income shall be computed in accordance with the provisions contained in Section 30- 43D of the Act. The second phase is the said deduction so computed above is to be restricted to the extent of gross total income as the same is to be allowed from gross total income. In the facts before the Hon’ble Madhya Pradesh High Court, in the second stage of computation, the gross total income was nil and therefore, no deduction u/s.80HHE of the Act was allowed. In the facts before the Hon’ble Supreme Court in Ipca Laboratories referred to supra, the loss from export of trading goods was higher than the profits of self-manufactured goods resulting into net negative income. The Hon’ble Supreme Court was not concerned with brought forward business loss as the issue is arising in the present case. Hence, the deduction u/s.80HHE of the Act was denied. Hence, it could be safely concluded that the two case laws relied upon by the ld. DR does not advance the case of the Revenue as they are factually distinguishable from the present case.

6.4. We find that the issue in dispute is squarely addressed by the decision of the Hon’ble Supreme Court in the case of Reliance Energy Ltd., in Civil Appeal No.1327 of 2021 with Civil Appeal No.1328 of 2021; Civil Appeal No.1329 of 221; Civil Appeal No.2537 of 2015; Civil Appeal No.1408 of 2021; Civil Appeal No.1508 and Civil Appeal No.1509 of 2021 dated 28/04/2021. We find that the facts of the case and the issue in dispute which went before the Hon’ble Supreme Court has been duly addressed in para 3 & 4 of the said decision. In that case, the Hon’ble Supreme Court was concerned with the deduction u/s.80IA of the Act. Based on the interpretation of Section 80IB and 80IA of the Act, it was held that in para 12 & 13 thereon that the profit eligible for deduction would be net profit made by the assessee from the eligible business and such deduction is to be allowed from gross total income. We find that similar view has been taken by the Hon’ble Jurisdictional High Court in the following cases:- a) CIT vs. Tridoss Laboratories reported in 328 ITR 448 b) V.M.Salgaocar & Brothers (P) Ltd., vs. ACIT reported in 81 taxmann.com 357. c) CIT vs. Eskay Knit (India) Pvt. Ltd., in Income Tax Appeal No.184 of 2007 dated 25/03/2010. d) CIT vs. J.B.Boda & Co., Pvt. Ltd., in Income Tax Appeal No.3224 of 2009 dated 18/10/2010.

6.5. In the instant case, we find that if the set off of brought forward business loss was not taken into account, the assessee would have been entitled to deduction of the entire amount of profit eligible for deduction u/s.80HHE of the Act of Rs.7,65,2,042/-. But since the deduction under 80HHE of the Act is restricted to gross total income and such gross total income is to be computed after setting off the brought forward business losses, the assessee’s claim of deduction got reduced. Hence, there cannot be any error in the ld. AO allowing deduction under 80HHE of the Act in the instant case. Hence no adjustment is warranted in the instant case as proposed by the ld. CIT.

6.6. We further find that the ld. DR vehemently placed reliance on the decision of Hon’ble Jurisdictional High Court in the case of Rohan Dyes and Intermediates Ltd., vs. CIT reported in 142 Taxman 503. In this case, the first issue which arose before the Hon’ble Court was similar to that as arose in the case of Ipca Laboratories Ltd., referred to supra coupled with further issue that if the combined net profit from the self-manufactured export and the trading export was the loss, then the deduction in respect of export incentives was to be allowed without setting off such net loss. We find that in this case also, the issue as arising in the present case of the assessee before us i.e. the computation of profit eligible for deduction by setting off brought forward business loss, did not arise for consideration and therefore, the decision rendered in Rohan Dyes and Intermediates Ltd., also becomes factually distinguishable with that of the assessee case. Accordingly, we hold that the ld. CIT grossly held in holding with the profits of the business for the year under consideration has to be reduced by the brought forward losses from earlier year for the purpose of computing profit eligible deduction u/s.80HHE of the Act. Accordingly, the ground No.2(a), 2(b) by the assessee are allowed.

6.7. The ground No.8 raised by the assessee was stated to be not pressed by the ld. AR, as no adjustment has been made by the ld. AO in the order giving effect to Section 263 proceedings. Hence, ground No. 8 is dismissed as not pressed.

7.1. We have heard rival submissions and perused the materials available on record. We find that assessee earned profits in its Ashok Plaza Unit at Pune which was eligible for deduction u/s.10A of the Act. The assessee also had three other units which incurred losses during the year and such losses were set off against the income from non-STP Unit. This was allowed by the ld. AO. The ld. CIT was of the opinion that the losses incurred in three other units should be set off with Pune unit and on the net amount, deduction u/s.10A of the Act should be allowed to the assessee. This was challenged by the assessee before us. We find that this issue is no longer res integra in view of the decision of the Hon’ble Supreme Court in the case of CIT vs. Yokogawa India Ltd., reported in 77 taxmann.com 41 wherein it has been held that Section 10A of the Act provides that the deduction contemplated therein is qua profits of eligible undertaking on a stand alone basis and without set off of losses of eligible or non-eligible unit or undertaking of the assessee. The relevant operative portion of the said judgment is reproduced hereunder:-

“16. From a reading of the relevant provisions of Section 10A it is more than clear to us that the deductions contemplated therein is qua the eligible undertaking of an assessee standing on its own and without reference to the other eligible or non-eligible units or undertakings of the assessee. The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee. This is also more than clear from the contemporaneous Circular No. 794 dated 9.8.2000 which states in paragraph 15.6 that, "The export turnover and the total turnover for the purposes of sections 10A and 10B shall be of the undertaking located in specified zones or 100% Export Oriented Undertakings, as the case may be, and this shall not have any material relationship with the other business of the assessee outside these zones or units for the purposes of this provision."

7.2. Respectfully following the same, the ground Nos. 3(a) to 3(c ) raised by the assessee are allowed.

9.1. We have heard rival submissions and perused the materials available on record. In the instant case, we find that assessee has claimed deduction u/s.10A of the Act in the sum of Rs.1,34,13,648/- in the return of income. Only this sum was allowed as deduction by the ld. AO while computing the income of the assessee. We find from the computation of income enclosed in the attached assessment order, no deduction u/s.10A has been allowed in respect of transfer pricing adjustment by the ld. AO. We find that the ld. CIT has proceeded on the basis that deduction u/s.10A of the Act has been allowed by the ld. AO in the present case on higher profit after adding the transfer pricing adjustment in the eligible unit. We find that the ld. CIT has purely proceeded on incorrect assumption of facts. Hence, we have no hesitation in allowing ground No.5 raised by the assessee on the aforesaid facts.

10. The ground No.6 raised by the assessee is challenging the action of the ld. CIT(A) in holding that book profit u/s.115JB of the Act has to be increased by the losses pertaining to unit eligible for deduction u/s.10A of the Act.

10.1. We have heard the rival submissions and perused the materials available on record. We find from the computation of book profit u/s.115JB of the Act in the assessment order, the ld. AO had already carried out this adjustment as required by Clause-f of Explanation-1 to Section 115JB(2) of the Act. Hence, here also the ld. CIT had proceeded purely on incorrect assumption of facts. Hence, the ground No.6 raised by the assessee is allowed.

Deferred Tax Liability – Rs.440.42 lakhs:-

We find that the order of ld. CIT u/s.263 of the Act was passed on 30/03/2007 in the instant case. We find that Clause(h) of Explanation 1 to Section 115JB(2) of the Act which mandated deferred tax provision to be added back while computing book profits u/s.115JB of the Act was introduced in the statute vide Finance Act, 2008 with retrospective from 01/04/2001. Hence, while the ld. CIT passed the order on 30/03/2007, this amendment had not been brought in the statute which means, on the date of passing of the order by the ld. CIT, this amendment could not have been foreseen by the ld. CIT. However, we find that the assessee before us has not challenged the validity of assumption of jurisdiction by the ld. CIT u/s.263 of the Act. The grounds raised by the assessee merely challenged the issues sought to be revised by the ld. CIT on merits. Hence, on merits, this deferred tax provision is required to be added back while computing book profit u/s.115JB of the Act as per Clause(h) of Explanation 1 to Section 115JB(2) of the Act which is retrospectively applicable from 01/04/2001.

Provision for doubtful debts Rs.5.91 lakhs; Provision for diminution in value of Asset- Rs. 0.05 lakhs & Provision for doubtful recovery- Rs. 56.92 lakhs We find that Clause(i) of Explanation 1 to 115JB(2) of the Act was introduced in the statute by Finance (No.2) of the Act 2009, with retrospective effect from 01/04/2001 which provides that any amount of provision made for diminution in value of any asset is required to be added back while computing book profits u/s.115JB of the Act. The same argument as advanced for provision for deferred tax liability was argued by the ld. AR for these three items also. But as stated for deferred tax liability supra, the assessee before us has not challenged the validity of assumption of jurisdiction u/s. 263 of the Act by the ld. CIT. Hence we have to address this issue only on merits. On merits, in view of the retrospective amendment brought in the statute, these three items would have to be added back while computing book profits u/s.115JB of the Act. Hence, all the case laws relied upon by the ld. AR before us would not be applicable in the instant case, in view of the retrospective amendment. Accordingly, the ground 7 raised by the assessee is dismissed.

Order pronounced on 17/05/2022 by way of proper mentioning in the notice board.