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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI N. V. VASUDEVAN & SHRI A. K. GARODIA
IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI N. V. VASUDEVAN, VICE PRESIDENT AND SHRI A. K. GARODIA, ACCOUNTANT MEMBER
ITA Nos. and APPELLANT RESPONDENT Assessment Year 2810/Bang/2017 M/s. Sasken Communication Deputy Commissioner of Income Tax, Technologies Ltd., Circle 6(1)(1), 139/25, Amarjyothi Layout, Bengaluru-560001. Ring Road, Domlur, Bangalore – 560 071. PAN: AAECS 6424 R 882/Bang/2018 Deputy Commissioner of M/s. Sasken Communication Income Tax, Technologies Ltd., Circle 6(1)(1), Bangalore – 560 071. Bengaluru-560001. PAN: AAECS 6424 R Revenue by : Smt. Neera Malhotra, CIT DR Assessee by : Shri. Padam Chand Khincha, CA Date of hearing : 20.11.2019 Date of : 20.12.2019 Pronouncement O R D E R Per A. K. Garodia, Accountant Member These are cross appeals filed by the Revenue and the assessee and these are directed against the order of learned CIT(A)-6, Bengaluru, dated 30.10.2017 for Assessment Year 2005-06.
First, we take up the appeal of the Revenue. The grounds raised by the Revenue are as under:-
The order of the CIT (Appeals) is opposed to law and the facts and circumstances of the case.
ITA Nos.2810/Bang/2017 and 882/Bang/2018 Page 2 of 15 2. On the facts and circumstances of the case, the CIT(A) erred in directing the assessing officer to treat expenditure on software development as allowable expenditure. 3. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT(A), in so far as it relates to the above grounds may be reversed and that of the Assessing Officer be restored. 4. The appellant craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal. 3. The learned DR of the Revenue supported the assessment order whereas the learned AR for the assessee supported the order of the CIT(A). He also submitted that this issue is squarely covered in favour of the assessee by the Tribunal order in assessee’s own case for Assessment Year 2004-05 in ITA No. 1736/Bang/2013 dated 11.10.2013. It was submitted that copy of this tribunal order is available on pages 801 to 820 of the Paper Book and the relevant page is page 809 of the Paper Book.
We have considered the rival submissions. In this regard, we find that it is noted by the AO on page Nos.2 and 3 of the assessment order that the assessee’s explanation revolves around the argument that the software expenses were incurred to acquire right to access to use software for a limited duration and the payment represent the payment for the use of copyright. In the light of these facts of the present case, we examine the applicability of the Tribunal order cited by the learned AR of the assessee. In para 7.3.3 of this Tribunal order, it is noted by the Tribunal that in that year also, the AO disallowed the software expenses for the reason that the expenditure resulted in the enduring benefit to the assessee and learned CIT(A) was of the view that software expenses having licence validity period of 1 year alone are allowable as a deduction. And he held that software expenses having licence period of 1 to 2 years are capital in nature and in this regard, he directed the AO to allow depreciation thereon and recompute the disallowance
ITA Nos.2810/Bang/2017 and 882/Bang/2018 Page 3 of 15 accordingly. The Tribunal has referred to the judgment of the Hon’ble Karnataka High Court rendered in the case of CIT Vs. Toyota Kirloskar Ltd., 349 ITR 65 wherein it was held that software expenses for licence up to 2 years is revenue in nature and is fully allowable as a deduction. Respectfully following this judgment, the Tribunal held in that year that the AO is directed to allow the deduction in respect of software expenses having licence period up to 2 years after considering and verifying the details furnished by the assessee. In the present year, as per para 27 of his order, it is noted by the learned CIT(A) that the Tribunal in the assessee’s own case for Assessment Years 2004-05 and 2006-07 held that software expenses up to 2 years are allowable as deduction and directed the AO to allow the same. Learned CIT(A) has followed this Tribunal’s order and decided the issue in favour of the assessee. In view of this, we find no reason to interfere in the order of the CIT(A) on this issue.
In the result, appeal of the Revenue is dismissed.
Now we take up the appeal of the assessee. Grounds raised by the assessee are as under:
General Ground 1. The learned CIT(A) 6, Bangalore has erred in passing the order in the manner passed by her. The order passed to the extent prejudicial to the appellant is bad in law and liable to be quashed. Exclusions from profits of 10A unit 2. The learned assessing officer has erred in excluding (a) interest on loans to subsidiary company amounting to Rs. 27,80,000/-; (b) deemed income under section 41(1) amounting to Rs. 1,07,62,841/-
ITA Nos.2810/Bang/2017 and 882/Bang/2018 Page 4 of 15 from profits of the business of the undertaking in the process of computation of deduction under section 10A and the learned CIT(A) has erred in confirming the action of the learned AO. Amount wrongly reduced from export turnover under the caption 'sale proceeds received in kind' 3. The learned assessing officer has erred in reducing a sum of Rs. 1,57,14,000/- from the figure of export turnover for the reason that the above amount represents sale proceeds received in kind and the Id. CIT(A) has erred in confirming the action of the Id. AO. The above sum and the transaction happened during FY 2003-04 relevant to AY 2004-05 and has no relevance for the year under consideration. On facts and in the circumstances of the case and law applicable, the above amount should not be reduced from export turnover in computing deduction under section 10A. Export sale proceeds realised late reduced from export turnover 4. The learned assessing officer has erred in excluding export sale proceeds realized after 6 months from the end of relevant previous year amounting to Rs. 1,35,83,760/- from the figure of export turnover in computing deduction under section 10A and the learned CIT(A) has erred in confirming the action of the learned AO. Expenses incurred in foreign currency reduced from export turnover The learned assessing officer has erred in excluding expenditure 5. incurred in foreign currency (including travelling expenses of Rs. 55,90,154/-) amounting to Rs. 30,46,47,210/- from the figure of export turnover in computing deduction under section 10A and the learned CIT(A) has erred in not adjudicating the said Ground while passing the appellate order. Expenses reduced from export turnover also to be reduced from total turnover Assuming without admitting that expenditure incurred in foreign 6. currency (including travelling expenses of Rs. 55,90,154/-) amounting to Rs. 30,46,47,210/- is to be reduced from the figure of export turnover, the learned assessing officer has erred in not reducing the said expenditure from total turnover in computing deduction under section 10A and the learned CIT(A) has erred in not adjudicating the said Ground while passing the appellate order.
ITA Nos.2810/Bang/2017 and 882/Bang/2018 Page 5 of 15 Disallowance of brokerage charges The learned assessing officer has erred in disallowing the expenditure 7. incurred on brokerage charges amounting to Rs. 7,46,000/- and the learned CIT(A) has erred in confirming the action of the Id. AO. Disallowance of interest on debonding charges The learned assessing officer has erred in disallowing the 8. expenditure incurred on interest on debonding charges paid to customs authorities for debonding of assets amounting to Rs. 43,05,015 and the ld. CIT(A) has erred in confirming the action of the ld. AO. Levy of interest under section 234B and 234D The learned assessing officer has erred in levying interest under 9. section 234B and 234D of the Act amounting to Rs. 60,31,872/- and Rs. 5,83,548/- respectively. On facts and in the circumstances of the case and law applicable, interest under section 234B and 234D is not leviable. The appellant denies its liability to pay interest under section 234B and 234D. Prayer 10. In view of the above and other grounds to be adduced at the time of hearing, the appellant prays that the order passed by the learned assessing officer under section 143(3) be quashed or in the alternative the additions/disallowances/variation to income returned and tax payable as sustained by the Id. CIT(A) be deleted. 7. In course of hearing, it was submitted by learned AR of the assessee that ground No.1 is general and regarding ground No.2, reliance was placed on the judgment of the Hon’ble Karnataka High Court rendered in the case of CIT Vs. Hewlett Packard Global Ltd., as reported in 403 ITR 453, copy available on pages 570 to 584 of the Paper Book. Our attention was drawn to para Nos.31 and 37 of this judgment and it was pointed out that it was held by Hon’ble Karnataka High Court in this case that the assessee is entitled to 100% exemption/deduction under section 10A of the IT Act in respect of interest income earned by it on the deposits made by it with the banks in the ordinary course of business and also interest earned by it from the staff loans
ITA Nos.2810/Bang/2017 and 882/Bang/2018 Page 6 of 15 and such interest income would not be taxable as income from other sources under section 56 of the IT Act.
It was pointed out that it is also held by the Hon’ble Karnataka High Court in para 37 of the judgment that the incidental activity of parking of surplus funds with the banks or advancing of staff loans by such special category of assessee covered under sections 10A or 10B of the IT Act is integral part of their export business activity. When our attention was drawn to this finding of Hon’ble court, it was observed by the Bench that this fact has to be examined by the AO as to whether loan to subsidiary company of on which interest income of Rs.27.80 lakhs was earned by the assessee company were given by the assessee company in ordinary course of its business or not. In reply, it was submitted by learned AR of the assessee that for this factual verification, the matter may be restored back to the file of the AO. The learned DR of the Revenue supported the orders of the authorities below.
Regarding the second aspect that deemed income under section 41(1) of the IT Act amounting to Rs.107,62,841/- also, same argument was advanced by both sides. Learned AR of the assessee placed reliance on the judgment of the Hon’ble Karnataka High Court rendered in the case of CIT Vs. Wipro Ltd., in ITA No.3202/2005 dated 28.02.2002, copy available on pages 669 to 685 of the Paper Book and in particular, our attention was drawn to para Nos.2 and 3 of this judgment of Hon’ble Karnataka High Court.
We have considered the rival submissions. First of all, we reproduce para Nos.2 and 3 of this judgment of Hon’ble Karnataka High Court rendered in the case of CIT Vs. Wipro Ltd., (supra). These two paras are as under:-
ITA Nos.2810/Bang/2017 and 882/Bang/2018 Page 7 of 15 “2. The assessinq officer took up the matter for scrutiny assessment. The assessee had claimed an exemption in respect of the issue of premium on sale of special import licence. The premium on sale on special import licence was held to be a not an income attributable to software export and therefore has not allowed the assessee from claiming exemption on imported software. It was also disallowed on the ground that the payments made or account of software import for in house utilization are in the nature of royalty. On these grounds the assessee had not deducted TDS. Therefore, the assessing officer disallowed the expenditure. The assessed had claimed warranty expenses as deduction. The same was also disallowed on the ground that it was only a provision to be treated as a contingent liability. The assessee had claimed a sum of Rs.2,36,04,319 as deduction on excise duty under Section 43B of the Act. It was also rejected on the ground that the working made by the assessee is not correct. When the assessing officer allowed reduction under Section 10-A he excluded certain receipts/income not related to 10- A activity arid has also allocated certain expenses not allocated to 10-A units as under liquidated damages recovered from suppliers, write back of credit balances in customer account scrap sales of newspapers, battery and expenses like corporate headquarters while computing deduction. The assessment came to be completed by the order dated 28-3-2001. Aggrieved by the said order the assessee preferred an appeal to the Commissioner of Income-Tax (Appeals). The Commissioner granted relief on some counts and rejected on other grounds. Aggrieved by the same, the Revenue as well as the assessee preferred independent appeals before the Tribunal. The appeal preferred by the Revenue was dismissed and the appeal preferred by the assessee was allowed. Aggrieved by the said order, the Revenue has preferred two appeals against the order dismissing their appeal as well as the order partly allowing the assessee's appeal. 3. The 1st substantial question of law which arises for consideration reads as under:- " 1) Whether Tribunal was correct in holding that income from sale of scrap i7ewspaper, stationery and battery etc., should be treated as profits and gains from exports and deduction under Section 10,4 of the Act should be allowed?"
ITA Nos.2810/Bang/2017 and 882/Bang/2018 Page 8 of 15 This question also arose for consideration in the assessee's appeal in ITA No.507/2002 disposed off on 25th August, 2010, where it was held that the assessee was entitled to deductions as income derived therefrom from the aforesaid business. For the reasons set out therein, this substantial question of law is answered in favour of the assessee and against the Revenue.”
From the facts noted by the Hon’ble Karnataka High Court in these paras reproduced above, it is seen that in that case also, one of the issues involved was regarding write back of credit balance in customer account and allowability of exemption / deduction under section 10A of the IT Act, 1961 in respect of such income and this issue was decided by Hon’ble Karnataka High Court in favour of the assessee. Although learned CIT(A) in that case decided some issues in favour of the assessee and some issues against the assessee and the assessee and the Revenue both were in appeal before the Tribunal and the Tribunal in that case dismissed the appeal filed by the Revenue and allowed the appeal filed by the assessee and when the Revenue carried the matter before the Hon’ble Karnataka High Court, Hon’ble Karnataka High Court dismissed the appeals of the Revenue.
We have considered the rival submissions. In view of above discussion, regarding the first aspect of interest amounting to Rs.27.80 lakhs, we restore the matter back to the file of the AO for fresh decision, after examining the factual aspect as to whether the loan given to subsidiary is a loan given in ordinary course of business or not. We do so by following the judgment of Hon’ble Karnataka High Court rendered in the case of CIT Vs. Hewlette Packard Global Ltd., (supra). We have noted that in para No. 37 of this judgment, relief was allowed by the Hon’ble Karnataka High Court with this observation that incidental activity of parking of surplus funds with the banks or advancing of staff loans by such special category of assessee covered under sections 10A or 10B of the IT Act is integral part of their export
ITA Nos.2810/Bang/2017 and 882/Bang/2018 Page 9 of 15 business activity but the factual aspect noted by Hon’ble Karnataka High Court was this that parking of surplus funds with the bank or advancing of staff loans was in ordinary course of business of the assessee in that case. On this aspect, there is no finding of any of the authorities below in the present case as to whether the loan given to subsidiary company and staff advances were given by the assessee in ordinary course of business or not and hence, the AO has to examine this factual aspect and if it is found that such loan and staff advances are given by the assessee in ordinary course of business, then on resultant interest income earned by the assessee, deduction should be allowed under section 10A. Regarding the second aspect in respect of deemed income under section 41(1) of the IT Act, 1961, amounting to Rs.107,62,841/-, we allow the claim of the assessee by following the judgment of Hon’ble Karnataka High Court rendered in the case of CIT Vs. Wipro Ltd., (supra).
Regarding ground No.3, learned AR of the assessee submitted that as per note No.3 (i) of the audited accounts for the year ended 31.03.2004, it was reported that the company entered into agreement for services rendered to one of its customers where the customer has agreed to settle the consideration by transferring certain software programmes and annual maintenance services amounting to Rs.157.14 Crores and the assessee company had considered these transactions to be a non-monetary exchange. Thereafter, he submitted that on pages 94 to 128 of the Paper Book is the audit report along with audited statements of accounts for the present year ended 31.03.2005 and in particular, our attention was drawn to page 116 of the Paper Book and it was pointed out that in note No.3 (h), it was reported that during the year ended 31.03.2004, the company entered into agreement for the services and the customers agreed to settle the considerations by transferring certain software programs and annual maintenance services amounting to Rs.157.14 lakhs and the company considered these transactions to be a non-monetary exchange. It was
ITA Nos.2810/Bang/2017 and 882/Bang/2018 Page 10 of 15 submitted that this transaction of Rs.157.14 lakhs was undertaken in Assessment Year 2004-05 and not in the present year and therefore, the adjustment made by the AO in the present year is not justified because these transactions has no relevance for the year under consideration. In this regard, he drew our attention to para No.17 of page 11 of the order of the CIT(A) and pointed out that in paras 17 to 21 of his order, the learned CIT(A) has not considered the assessee’s explanation properly and hence, the matter may be restored back to the file of the CIT(A) for fresh decision. The learned DR of the Revenue supported the orders of the authorities below.
We have considered the rival submissions. We find that this is true that note was there in the audited accounts for the year ended 31.03.2004 and present year both. In this note, only it was stated that one of the customers have agreed to settle consideration in respect of services rendered by assessee by transferring certain software programs along with annual maintenance services which amounted to Rs.157.14 lakhs. Similar note is there in the audited account for the present year also and hence, the confusion has arisen as to whether this sale transaction of Rs.157.14 lakhs is pertaining to Assessment Year 2004-05 or the present year or similar transaction is there in both years. Hence, we feel it proper to restore this matter to the file of the CIT(A) for fresh decision after examining the facts in this regard carefully and after providing reasonable opportunity of being heard to both sides and he should decide this issue by way of a speaking and reasoned order and accordingly, ground No.3 is allowed for statistical purposes.
Regarding ground No.4, it was submitted by learned AR of the assessee that on page No.168 of the Paper Book is a detail regarding realisation of export proceeds in respect of invoice Nos.1299 and 1226/2004-05. He pointed out that as per these details, invoice No.1299 for Rs.131.22 lakhs was realised on 19.01.2007 and the second invoice of Rs.461,760/- was realised
ITA Nos.2810/Bang/2017 and 882/Bang/2018 Page 11 of 15 on 19.12.2005 and these invoices are dated 31.03.2005 and 30.03.2005 respectively. Thereafter, he submitted that on pages 257 to 273 of the Paper Book is a rejoinder filed with CIT(A) on 21.07.2009 and in particular, our attention was drawn to para No.3.3 and 3.4 of this submission available on pages 261 and 262 of the Paper Book. It was pointed out that before the learned CIT(A), it was submitted that as per RBI’s Master Circular No.9.2006-07 dated 01.07.2006 and Circular No.50 dated 03.06.2008 and Circular No.70 dated 30.06.2009, it was prescribed by RBI that unit set up under STPI Schemes are permitted to realize value of export proceeds within a period of 12 months from the date of export in respect of exports made on or after 01.09.2004. It was also pointed out that this was explained before the CIT(A) that these two invoices were realized within 12 months of export and therefore, in view of this Master Circular of RBI, this amount should not be reduced from the figure of export turnover but in para 22 of the order of the CIT(A), he decided this issue without considering this Master Circular of RBI and held that since sales proceeds were realized after 6 months, the same has to be reduced from export turnover for the purpose of computing deduction allowable to the assessee under section 10A of the IT Act. He submitted that in view of this RBI’s Circular, the order of CIT(A) should be reversed and relief should be allowed to the assessee. The learned DR of the Revenue supported the order of the CIT(A).
We have considered the rival submissions. We find that before the learned CIT(A), various Circulars were pointed out by the assessee as per para 3.3 of the written submissions filed before the CIT(A), copy of which is available on page 26 of the Paper Book but as per the impugned order of the CIT(A), he has not considered the same and decided about the applicability of the RBI Master Circular. Hence, we feel it proper to restore this matter to the CIT(A) for fresh decision by way of a speaking order, after providing
ITA Nos.2810/Bang/2017 and 882/Bang/2018 Page 12 of 15 reasonable opportunity of being heard to both sides. Accordingly, ground No.4 is allowed for statistical purposes.
Regarding ground Nos.5 and 6 in the assessee’s appeal, it was submitted by learned AR of the assessee that this issue was not decided by the learned CIT(A) and hence, it should be restored to his file for fresh decision. The learned DR supported the order of the CIT(A) but since this issue was not decided by the learned CIT(A), we restore this matter back to his file for decision in this aspect. Accordingly ground Nos.5 and 6 are allowed for statistical purposes.
Regarding ground No.7, it was submitted by learned AR of the assessee that similar issue was there before CIT(A) in Assessment Year 2004-05 and the order of the CIT(A) for Assessment Year 2004-05 is available on pages 545 to 565 of the Paper Book and in particular, our attention was drawn to page 554 of the Paper Book and it was pointed out that in that year, AO disallowed brokerage charges claimed which was paid towards procuring residences to the employees and pointed out that in para 7.1 of the his order for Assessment Year 2004-05, it was noted by the learned CIT(A) that the amount of Rs.19.07 lakhs was considered by the AO mistakenly as brokerage when the actual brokerage paid was only Rs.420,632/-. He submitted that since in Assessment Year 2004-05, the brokerage was allowed by the CIT(A) and since no appeal was filed by the Revenue before the Tribunal against this order of CIT(A), in the present year also, the claim of brokerage should be allowed. The learned DR for the Revenue supported the order of the CIT(A).
We have considered the rival submissions. We find that in Assessment Year 2004-05 in para 7.1 of his order, it is noted by the learned CIT(A) that the actual brokerage is only Rs.420,632/- but the AO has disallowed Rs.19.70 lakhs by mistake and this amount was incurred on employees referral bonus and only this is the finding given by the learned CIT(A) that this employee’s
ITA Nos.2810/Bang/2017 and 882/Bang/2018 Page 13 of 15 referral bonus is an expenditure incurred in connection with the business and the same is therefore allowable and there is no finding by the learned CIT(A) in that year regarding brokerage charges and hence, the order of the CIT(A) for Assessment Year 2004-05 has no relevance in the present year. We find that in para Nos.29 and 30 of his order, it is noted by the learned CIT(A) that it was explained by the assessee before him that the assessee has incurred this amount as brokerage charges for securing residential accommodation for its employees but no documentary evidence has been furnished by the assessee to support his claim. Before us also, no documentary evidence has been submitted by the learned AR of the assessee and hence, on this issue, we find no reason to interfere in the order of the CIT(A) and accordingly, ground No.7 is rejected.
Regarding ground No.8, it was submitted by learned AR of the assessee that this issue was decided by learned CIT(A) as per paras 31 to 33 of his order and the disallowance of Rs.103,25,109/- on account of debonding charges was deleted by learned CIT(A). But as per para No.34 of his order, the learned CIT(A) has decided the issue in respect of interest amounting to Rs. 43,05,015/- on this basis that no documentary evidence has been furnished by the assessee except it is stated that it is compensatory in nature. He submitted that since the interest paid on debonding charges is compensatory in nature, the same should be allowed as deduction. The learned DR supported the order of the CIT(A).
We have considered the rival submissions. We find that disallowance of Rs.43,05,015/- in respect of interest on debonding charges was upheld by learned CIT(A) with a categorical finding that the assessee has not furnished any documentary evidence in this regard. Before us also, no documentary evidence has been brought on record and hence, on this issue also, we find no
ITA Nos.2810/Bang/2017 and 882/Bang/2018 Page 14 of 15 reason to interfere in the order of the CIT(A). Accordingly, ground No.8 is also rejected.
Ground No.9 is regarding interest under sections 234B and 234D of the Income Tax Act, 1961. This issue is consequential in nature and hence, no adjudication is called for.
In the result, the appeal of the assessee is partly allowed in the terms indicated above.
In the combined result, the appeal of the Revenue is dismissed and the appeal of the assessee is partly allowed.
Pronounced in the open court on the date mentioned on the caption page.
Sd/- Sd/- (N. V. VASUDEVAN) (A. K. GARODIA) Vice President Accountant Member Bangalore. Dated: 20th December, 2019. /NS/
ITA Nos.2810/Bang/2017 and 882/Bang/2018 Page 15 of 15 Copy to: 1. Appellants 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file By order Assistant Registrar, ITAT, Bangalore.