M/S TORRY HARRIS BUSINESS SOLUTIONS (P) LTD.,,BANGALORE vs. JCIT, BANGALORE

Per Shri Jason P Boaz, A.M. : These are cross appeals, by the assessee and Revenue, directed against the order of the Commissioner of Income Tax (Appeals)-7, Bangalore dt.23.3.2016 for the Assessment Year 2010-11. 2. Briefly stated, the facts of the case relevant for disposal of these appeals are as under :-

2 ITA Nos.827 & 1082/Bang/2016 2.1 The assessee, a 100% Export Oriented Company engaged in the business of development of computer software, filed its return of income for Assessment Year 2010-11 on 12.10.2010 declaring income of Rs.66,87,400 after claiming deduction of Rs.36,98,88,272 under Section 10A of the Income Tax Act, 1961 (in short 'the Act'). The case was taken up for scrutiny and the assessment was concluded under Section 143(3) r.w.s. 144C (13) of the Act vide order dt.13.3.2014 wherein the assessee's income was determined at Rs.14,72,10,830 in view of the Assessing Officer restricting the deduction claimed under Section 10A of the Act to Rs.13,43,88,005. Book profits under Section 115JB of the Act were computed at Rs.36,02,05,966. 2.2 Aggrieved by the order of assessment dt.13.3.2014 for Assessment Year 2010-11, the assessee preferred appeal before the CIT (Appeals) – 7, Bangalore. The learned CIT (Appeals) disposed off the appeal vide order dt.23.3.2016 allowing the assessee partial relief. 3. Both, the assessee and Revenue, being aggrieved by the order of the CIT (Appeals) dt.23.3.2016 for Assessment Year 2010-11, have filed cross appeals. These appeals will be disposed off in seriatum hereunder. Assessee's appeal in IT)TP)A No.827/Bang/2016 4.1 In its appeal, the assessee has raised the following grounds : “1. The officers below were not justified in excluding provisions written back ofRs.29,03,258 and miscellaneous income of Rs.5,54,020 from the purview of profits of the business for the purpose of computing deduction under Section 10A.

3 ITA Nos.827 & 1082/Bang/2016 2. It was not correct on the part of the officers to hold that the above receipts are not connected with the export business, more so when the appellant is an 100% EOU.”

4.2.1 According to the learned Authorised Representative for the assessee, the authorities below were not justified in excluding provision written back of Rs.29,03,258 and Misc. Income of Rs.5,54,020 from the purview of profits of the business for the purpose of computation of deduction under Section 10A of the Act on the ground that the above items of income are not connected with the export business of the assessee and in this regard placing reliance on the decision of the Hon'ble Apex Court in the case of CIT Vs. Ravindranath which was rendered in the context of Explanation (baa) to Sec. 80HHC of the Act. It is submitted that the assessee is engaged in the business of development and export of computer software and is a 100% EOU; having no other business. It is contended that when admittedly the aforesaid were claimed by assessee and allowed by the Department in the earlier years as part of the assessee's export business, it was now not open to Revenue, when it is written back, to exclude the same from the assessee's business income for the purpose of computing deduction under Section 10A of the Act on the ground that it has no nexus with the assessee's business income. 4.3 Per contra, the learned Departmental Representative for Revenue relied on the orders of the authorities below on this issue.

4 ITA Nos.827 & 1082/Bang/2016 4.4.1 We have heard the rival contentions, perused and carefully considered the material on record. Admittedly, the items comprising the provision written back amounting to Rs.29,03,258 and items comprising of Misc. income of Rs.5,54,020 (as laid out at page 2 of assessee's paper book) were claimed by the assessee and allowed by the Department in the earlier assessment years, as a part of the assessee's export business and have been written back in this year. That the assessee in the case on hand is a 100% EOU and has no other business is not disputed. The case of Revenue is that the aforesaid items not being connected with the assessee's business, the same would not form part of the assessee's business income for the purposes of deduction under Section 10A of the Act and in this context relied on the decision of CIT Vs. Ravindranath (supra); which we observe was rendered in the context of ‘other income’, in Explanation (baa) to Section 80HHC of the Act and not in respect of Sec. 10A of the Act. The case of the assessee is that it being a 100% EOU and having no other business, all income, including incidental income is part of the assessee's business income and would qualify for comprising part of the assessee's business income for the purposes of deduction under Section 10A of the Act. Therefore, the provision written back and miscellaneous income would comprise part of the assessee's business income and consequently qualify for computing the deduction under Section 10A of the Act. In our considered view, the factual and legal position of the assessee in the case on hand on the issue before us would be supported by the ratio of the decisions of the Full Bench of the

5 ITA Nos.827 & 1082/Bang/2016 Hon'ble Karnataka High Court in the case of CIT Vs. Hewlett Packard Global Soft Ltd. (supra); wherein it has been held that in the case of a 100% EOU, all the profits and gains arising thereof, including incidental income, would be entitled to exemption / deduction under Section 10A of the Act. In this view of the matter, and respectfully following the decision of the Full Bench of the Hon'ble Karnataka High Court in the case of CIT Vs. Hewelett Packard Global Soft Ltd. (supra), we direct the Assessing Officer to allow the assessee deduction under Section 10A of the Act in respect of the assessee's 100% EOU business income, including therein, the provision written back of Rs.29,03,258 and miscellaneous income of Rs.5,54,020 which also forms part of the assessee 100% EOU business. We hold and direct accordingly. Consequently the grounds raised by the assessee on this issue are allowed. 5. In the result, the assessee's appaeal for A.Y. 2010-11 is allowed.

Revenue’s Appeal in ITA No.1082/Bang/2016 6. In Revenue’s appeal, the grounds raised are as under :

6 ITA Nos.827 & 1082/Bang/2016

8.2 Per contra, the learned Authorised Representative for the assessee submitted that there was no error in the finding rendered by the learned CIT (Appeals) on this issue, since on similar issue of payment of lease line charges for purchase of bandwidth, a co-ordinate bench of this Tribunal in its order in the assessee's own case in IT(TP)A No.113/Bang/2014 and

7 ITA Nos.827 & 1082/Bang/2016 S.P. No.116/Bang/2014 dt.21.11.2014 for Assessment Year 2009-10, has held that on such expenditure TDS is not called for and therefore Sec. 194C / 194J of the Act are not applicable. Therefore, no disallowance is called for u/s.40(a)(ia) of the Act.

8.3.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncement cited. We find that the similar issue as the one before us, i.e. the applicability of the provisions of Sec. 194C/194J of the Act for making TDS on payments for lease line expenses for purchase of bandwidth, was also before the co-ordinate bench of this Tribunal for consideration in the assessee's own case for Assessment Year 2009-10. The co-ordinate bench in its order in IT(TP)A No.113/Bang/2014 dt.21.11.2014 held as under :

“Their Lordships had followed the decision of the Hon'ble Mumbai High Court in the case of Sky Cell (supra), though for different reasons, assessee here had produced bills to show that payments effected thereof for purchasing inter-net band width. We are therefore, of the opinion that assessee was not bound to deduct tax at source under Section 194J of the Act on the payments effected to the service providers. Vis-à-vis application of Sec. 194C, the Assessing Officer was not able to show that the service provided were based on any specific contract entered by the assessee with the service providers. We are therefore, of the opinion that disallowance under Section 40(ia) of the Act was not warranted. Such a disallowance stands deleted. Ground No.13 of the assessee is allowed.”

8 ITA Nos.827 & 1082/Bang/2016 8.3.2 Respectfully following the decision of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2009-10 (supra), we uphold the finding of the learned CIT (Appeals) that lease line charges paid for bandwidth are not liable for TDS under the provisions of Sec.194C / 194J of the Act and therefore no disallowance under Section 40(a)(ia) of the Act was called for. In that view of the matter, the grounds raised by revenue at S.Nos.2 & 3 are dismissed.

9.1 In the grounds of appeal raised (supra), Revenue contends that the learned CIT (Appeals) has erred in directing the Assessing Officer to exclude the expenditure incurred in foreign currency towards telecom charges attributable to delivery of computer software outside India from both export turnover as well as from total turnover while computing deduction under Section 10A of the Act, following the decision of the Hon'ble Karnataka High Court in the case of Tata Elxsi Ltd. (349 ITR 98). It is contended that in doing so, the learned CIT (Appeals) did not appreciate that there is no provision in Sec. 10A of the Act that mandates that such expenses should be reduced from the total turnover.

9.2 Per contra, the learned Authorised Representative for the assessee submitted that the issue in dispute in this appeal i.e. of the computation of deduction under Section 10A of the Act is squarely covered in favour of the assessee by the decision of the Hon'ble Karnataka High Court in

9 ITA Nos.827 & 1082/Bang/2016 the case of Tata Elxsi Ltd. (349 ITR 98) which holds the ground and is binding.

9.3 We have heard the rival contentions and have perused and carefully considered the material on record. As regards the issue of reduction of expenditure incurred in foreign currency towards telecom charges as are attributable to the delivery of software outside India, the jurisdictional High Court of Karnataka in the case of Tata Elxsi Ltd. (349 ITR 98) has held that when certain expenses are excluded from the export turnover for the purposes of claiming deduction admissible under the Act, like under Section 10A of the Act, such expenses are also to be excluded from total turnover, as export turnover forms part of total turnover. The decision in the case of Tata Elxsi Ltd. (349 ITR 98) has also been followed by the Hon'ble Court in the case of DCIT Vs. Motor Industries Co. Ltd. (ITA No.776/2007 and 1155/2006 dt.13.6.2014), holding that if any expenditure is sought to be reduced from export turnover, then it should also be reduced from total turnover for the purposes of computing the eligible deduction under Section 10A of the Act. In this legal and factual matrix of the case, as discussed above, we find no reason / requirement to interfere with or deviate from the finding rendered by the learned CIT (Appeals) on this issue and therefore, uphold the same. Consequently, finding no merit in the ground No.4 raised by Revenue, we dismiss the same.

10 ITA Nos.827 & 1082/Bang/2016 10. In the result, Revenue’s appeal for the Assessment Year 2010-11 is dismissed.

Order pronounced in the open court on the 31st day of Jan., 2018.

Sd/- Sd/- (LALIT KUMAR) (JASON P BOAZ) Judicial Member Accountant Member Bangalore, Dt.31.01.2018.

*Reddy gp

Copy to : 1 Appellant 4 CIT(A) 2 Respondent 5 DR. ITAT, Bangalore 3 CIT 6 Guard File

Senior Private Secretary Income Tax Appellate Tribunal Bangalore.