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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI ABRAHAM P. GEORGE
IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE
BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
ITA No. 1520/Bang/2013 Assessment year : 2010-11
The Assistant Commissioner Vs. M/s. Gumbi Software Pvt. Ltd. of Income Tax, No.202, IInd Floor, Circle 1(1), NCM, Centre Point Building, Hubli. New Cotton Market, Hubli. PAN : AACCG 7830R APPELLANT RESPONDENT
Appellant by : Shri T.S.N. Murthy, CIT-III(DR) Respondent by : Shri H. Shambhu Sharma, CA
Date of hearing : 11.06.2015 Date of Pronouncement : 23.06.2015
O R D E R Per N.V. Vasudevan, Judicial Member
This appeal by the Revenue is against the order dated 30.8.2013 of the CIT(Appeals), Hubli relating to assessment year 2010-11.
Ground Nos. 1 to 3 read as follows:- 2.
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“1. In the circumstances of the case and in law. whether the CIT(A) is right upholding the assessees claim of net off of exports and import payments in the absence of permission from the Competent Authority before the due date (one year from the date of export) to bring in the export receipts. 2. In the circumstances of the case and in law, whether the assessee is eligible for claim of deduction u/s 10A on netting off exports receipts against import payments in view of the specific provisions provided u/s 10A to bring in the export proceeds within the stipulated time. 3. In the circumstances of the case and in law, whether the CIT(A) was right in admitting the additional evidences and allowing relief to the assessee in view of the provisions of Rule 46A.”
The assessee is a company engaged in software development. It was having a unit registered under Software Technology Park of India Scheme (STPI), income from which was eligible for deduction u/s. 10A of the Income-tax Act, 1961 [“the Act”] which was worked out by the Assessee as under:- Gross Exports in STPI Unit (US $ 6,00,000) : Rs.269,46,000 Expenditure in STPI Unit : Rs. 21,77,319 Net Income in STPI Unit : Rs.247,68,631
The assessee exported software worth US$ 6,00,000 on 29-03-2010 to Evergo Technology Limited, Hongkong, which was evidenced by STPI certified softex form & invoice. However, the said export proceeds could not be received within 6 months from the date of export; and accordingly as per RBI Circular, the assessee sought extension upto 31-03-2011 as per letter dated 21-09-2010 filed before the Authorised Dealer of Reserve Bank of
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India, i.e., Union Bank of India. Incidentally Reserve Bank of India also unilaterally extended for realisation of export proceeds upto 31-03-2011 as per its circular No. RBI/2009-10/513 A.P.(DIR Series) Circular No. 57 dated June,29,2010.
Subsequently, the assessee imported software on 18-03-2011 from the same customer i.e., Evergo Technology Limited, Hongkong, amounting to US $ 9,94,500. In effect on 18-03-2011, the status of the account of customer Evergo Technology Limited, Hongkong, instead of receivable, turned into payable to the tune of US $ 3,94,500; in view of imports from the same customer.
The assessee had two alternate options:-
First Option:- Receiving the export proceeds of US $ 6,00,000 from Evergo Technology; and repatriating for payment of import cost of US$ 9,94,500 to Evergo Technology, thereby unnecessary effecting two-way traffic of foreign exchange; or Second Option:- Setting off export proceeds of US $ 6,00,000 from Evergo Technology; against the import cost of US$ 9,94,500 to Evergo Technology, thereby avoiding unnecessary effecting two-way traffic of foreign exchange; AND resulting in amount payable US$ 3,94,500 to Evergo Technology.
The assessee, based on advice of experts and also keeping in view judicial decisions (which decisions specifically permitted setoff without adversely affecting tax benefits), opted for the second option of set off of imports with exports. In effect, on 18-03-2011, within extended period of
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31-03-2011, the entire export proceeds of financial year 2009-10 of US$ 6,00,000 was effectively received by the assessee by way set off against imports. Subsequently on 24-03-2011, the assessee exported software to Evergo Technology, Hongkong to the tune of US $ 7,50,000. On this date in view of mutual exports & imports, the assessee was to receive an amount of US $ 3,55,500 from Evergo Technology, Hongkong. Accordingly, the assessee applied to Authorised Dealer, Union Bank of India, requesting for Netting off the bills and also asking for extension of time for getting balance amount upto 31-03-2012 as per the letter dated 26- 03-2011. The details of transactions with Evergo Technology, Hongkong over a period 3 financial years were as under:
Date of Nature of transactions Amount Net effect Invoice in US $ in US $ or Bill 29.03.2010 Export 6,00,000 Receivable 6,00,000 18.03.2011 Import 9,94,500 Payable 3,94,500 21.03.2011 Export 7,50,000 Receivable 3,55,000 15.06.2011 Import 3,55,500 NIL
The assessee had applied for setoff as per Reserve Bank of India instructions and as per the procedure applied through the Authorised Dealer Union Bank of India. There was no denial for request for permission for setoff either by the Union Bank of India or by Reserve Bank of India, at the time of hearing of the case by the Assessing Officer. Subsequently, Union Bank of India through its letter dated 13.8.2013 acknowledged set-off of imports & exports.
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The AO, however, denied the claim of assessee for deduction u/s. 10A for the following reasons:-
“The assessee’s plea cannot be accepted. In view of the assessee’s submission it is evident that the assessee has not received or brought in the export proceeds as provided u/s 10A of the Act. The assessee has not been permitted by the Authorised Dealer to receive the export proceeds beyond six months, as provided u/s 10A, on fulfilling the conditions as per the guidelines prescribed by the Reserve Bank of India. The assessee has also not furnished any evidences for having permitted the company by the Competent Authority to net off its export proceeds against import payments. Even presuming that the assessee was allowed to net off the export proceeds against import payments under the FEMA regulations, the assessee is not entitled for claiming deduction u/s 10A as the provisions of section 10A(3) specifically provides that “This section applies to the undertaking, if the sale proceeds of articles or things or computer software exported out of India are received in, or brought into, India by the assessee in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf”. Hence the assessee’s claim of deduction u/s 10A is disallowed.”
Before the CIT(Appeals); the assessee, apart from reiterating the claim of the assessee as made before the AO; filed a letter of Union Bank of India dated 13.8.2013 permitting the net off. The CIT(Appeals) after consideration of the above evidence, held that the assessee should be allowed the benefit of deduction u/s. 10A. Before the CIT(A), the assessee had placed reliance on the decision of the Hon’ble Allahabad High Court in CIT v. Henna Jebrat (2012) 21 taxman.com 314, wherein on an identical plea by the assessee, who imported gold bars from foreign clients,
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exported gold ornaments after conversion, claimed deduction on the amount of exports, though he had received only the net amount payable by the foreign party. The Hon’ble Allahabad High Court relying on the decision of the Hon’ble Supreme Court in J.B. Boda & Co. Pvt. Ltd., 223 ITR 271 (SC), held that exemption u/s. 10A cannot be denied to the assessee. In the case of J.B. Boda & Co. Pvt. Ltd. (supra), the Hon’ble Supreme Court observed that two way traffic is unnecessary and the assessee can adjust the receivable against payments. The CIT(A) on a consideration of the above submissions, allowed the claim of the assessee and observed as follows:-
“ I have gone through the facts of the case, contents of the assessment order and written submissions of the assessee. As explained above in detail though the assessee was not received the receipts within the stipulated time of six months but within the time has approached the RBI or Authorised Bank to permit to receive the sale proceeds beyond six months and the RBI has given general permission through it circular dated 29.06.2010 where it is mentioned that “Attention of Authorised Dealer Category-1 (AD Category-1) banks is invited to increasing the period of realization and repatriation to India of the amount representing the full export value of goods or software exported, from six months to twelve months from the date of export, subject to review after one year. The issue has since been reviewed and it has been decided, in consultation with the Govt. of India, to extend the above relaxation up to March 31, 2011.” Regarding the import payments to be made to Evergo Technology, Hongkong. Accordingly, the Appellant applied to Authorised Dealer, Union Bank of India requesting for Netting off the bills. The Hon’ble Supreme Court in the Case of J B Boda & Co Pvt. Ltd. 223 ITR 271 has observed that two way traffic is unnecessary and the assessee can adjusted the receivable against the payments. Hence the contention of the AO that export receipts were not received within six months of the stipulated
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period is not justifiable as the assessee has approached the RBI to receive the receipts beyond six months of the stipulated period and the RBI has given general permission to receive the export proceeds beyond the stipulated time. Hence the disallowance made by the AO is dismissed and the assessee’s ground of appeal is allowed.”
Aggrieved by the order of CIT(Appeals), the Revenue has preferred grounds No.1 to 3 before the Tribunal.
We have heard the submissions of the ld. DR, who reiterated the stand of the Revenue as reflected in the grounds of appeal filed before the Tribunal. The ld. counsel for the assessee relied on the order of CIT(Appeals). We are of the view that the order of the CIT(Appeals) on this issue does not require any interference. As far as ground No.1 is concerned, it is seen that the export proceeds of Rs.6,00,000 US $ should have been realized by the assessee before 29.3.2011 within one year from the date of export. The same was realized by the assessee on 18.3.2011, since the assessee imported from Evergreen Technology Ltd. goods to the value of Rs.9,94,500 US $. In other words, within the period of one year from the date of export, the assessee is deemed to have realized the export proceeds and to have made payment to the foreign party equivalent to 3,94,500 US $. The assessee also applied to the competent authority i.e., Union Bank of India, authorised dealer of RBI, for giving a formal approval for net off of exports receivable against import payable. The competent authority did not reject the application for net off within the
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stipulated period of one year or till the passing of the assessment order by the AO. In such circumstances, it has been held in several decisions that the permission applied is deemed to have been allowed. In this regard, the decision of the ITAT Bangalore in the case of Wipro Ltd. v. DCIT in ITA Nos. 426 & 427/Bang/2006 for A.Y. 2001-02 & 2002-03, has been rightly relied upon by the ld. counsel for the assessee before the CIT(A). Besides the above, on 13.8.2013, Union Bank of India allowed the claim of assessee for net off. The said letter is placed at page 59 of assessee’s paperbook. In fact, the RBI Exchange Control Department has in its Circular No.91 dated 1.4.2003 laid down the following conditions for netting off:-
“D. Netting off of export receivables against import payments It has been decided that authorised dealers may allow requests received from exporters for ‘netting off’ of export receivables against import payments for units located in Special Economic Zones subject to the following: (i) The ‘netting off’ of export receivables against import payments is in respect of the same Indian entity and the overseas buyer / supplier ( bilateral netting ). The netting may be done as on date of balance sheet of the unit in SEZ. (ii) The details of export of goods is documented in GR(O) forms/DTR as the case may be while details of import of goods / services is recorded through Al/A2 form as the case may be. The relative GR / SDF forms will be treated as complete by the designated authorised dealer only after the entire proceeds are adjusted / received. (iii) Both the transactions of sale and purchase in ‘R’ Returns under FET-ERS are reported separately.
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(iv) The export / import transactions with ACU countries are kept outside the arrangement. (v) All the relevant documents are submitted to the concerned authorised dealer who should comply with all the regulatory requirements relating to the transactions.”
It is in accordance with this Circular that the authorised dealer has granted the requisite permission to the assessee. In such circumstances, we are of the view that there is no merit in ground No.1 raised by the Revenue.
As far as ground No.2 is concerned, the decision of the Allahabad High Court in the case of Henna Jebart (supra) and the decision of the Hon’ble Supreme Court in the case of J.B. Boda & Co. Pvt. Ltd. (supra) referred to in the earlier part of this order, clearly support the conclusions arrived at by the CIT(Appeals).
With regard to ground No.3, the order of assessment was passed on 11.3.2013, whereas the permission of Union Bank of India, the authorised dealer, allowing net off is dated 13.8.2013. This document could not have been filed before the AO. In such circumstances, the provisions of Rule 46A(1)(b) or (c) will be applicable. Even otherwise, under the provisions of Rule 46A(4), the Commissioner had power to call for evidence necessary for adjudication of the appeal. Accordingly, no fault can be found with the order of CIT(Appeals) on the ground that additional evidence ought not to have been admitted.
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For the reasons given above, we confirm the order of the CIT(Appeals) and dismiss grounds No.1 to 3 raised by the Revenue.
Ground Nos. 4 & 5 read as follows:-
“4. In the circumstances of the case and in law whether the CIT(A) is right in holding that the provisions of section 40(a)(ia) cannot he invoked in respect of default in short deduction of tax. 5. In the circumstances of the case and in law, whether the CIT(A) is right in holding that purchase of UPS Batteries are in the nature of revenue expenses.”
The facts necessary for adjudication of the aforesaid grounds are as follows. The Govt. of Karnataka through Karnataka State Electronics Development Corporation Ltd. (KEONICS) was implementing CET Rural Training Programme 2009-10. The assessee has developed technology for providing online classes to the CET catalyst course. The assessee was accordingly engaged by the State of Karnataka to implement the CET Rural Training Programme. The assessee engaged M/s. Ken Computek Pvt. Ltd. [KCPL] to carry out its obligation under the agreement with the State of Karnataka. KCPL rendered services and raised bills for payment for the services rendered. Assessee paid a sum of Rs.5,85,25,180 to KCPL. Assessee deducted the tax at source on the said payment to KCPL @ 2% as required u/s. 194C of the Act. According to the AO, the services rendered by KCPL was in the nature of fees for professional or technical services, falling within the ambit of section 194J of the Act, and therefore
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the assessee ought to have deducted tax at source @ 10% on the payment. The AO therefore invoked the provisions of section 40(a)(ia) of the Act and disallowed a sum of Rs.4,68,20,140 and added the same to the total income of the assessee. The following were the observations of the AO in this regard:-
“ ……… Thus in accordance with the provisions of section 194J (under Chapter XVII-B), the assessee was required to deduct tax @ 10% on the aggregate amount of Rs. Rs. 5,85,25,180/-, which works out to Rs. 58,52,518/-. But the assessee has only deducted tax of Rs. 11,70,504/-. Hence the tax of Rs. 46,82,014/-, which is deductible at source under Chapter XVII-B, and such tax has not been deducted, as provided u/s 40(a)(ia) of the Act. In view of the specific provisions of section 40(a)(ia), the assessee has failed to deduct tax u/s 194J to the extent Rs.46,82,014/- against the payments made to M/s. Ken Computek , which are in the nature of fees for professional and technical services within the meaning of the provisions of section 194J of the Act, and hence the corresponding payments of Rs. 4,68,20,140/- is disallowed in accordance with the provisions of section 40(a)ia) of the Act.”
Apart from the above, the assessee as a part of implementation of the said CET Rural Training Programme 2009-10 installed UPS in various training centres. As per the agreement, UPS was also to be provided to the training centres and was part of the services to be rendered by the assessee. According to the assessee, since the UPS had to be provided on a permanent basis at the training centres, it had purchased UPS and shown the cost in the debit side of the P&L account and the amounts paid for the services rendered by the assessee were shown in the credit side. According to the assessee, it was a case of purchase and sale of UPS and
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therefore the expenditure was purely revenue expenditure as far as the assessee is concerned. The assessee also made it clear that UPS was not its trading apparatus. The AO, however, disallowed the cost of UPS as a capital expenditure and accordingly disallowed a sum of Rs.7,80,091. This sum was arrived at by disallowing the entire capital expenditure of Rs.9,18,789 and reducing depreciation allowed by the AO of Rs.1,37,818.
On appeal by the assessee, on the question, whether disallowance can be made u/s. 40(a)(ia) of the Act in a case where there has been short deduction of tax at source, the CIT(Appeals) was of the view that for short deduction of tax at source, there cannot be any disallowance u/s. 40(a)(ia). In coming to the aforesaid conclusion, the CIT(Appeals) relied on the decision of the Hon’ble Calcutta High Court in the case of CIT v. S.K. Tekriwal, ITA No.183/2012, wherein it was held that disallowance u/s. 40(a)(ia) cannot be made when there is a short deduction of tax at source and can be made only when there is non-deduction of tax at source.
With regard to the cost of UPS which was treated as capital expenditure by the AO, the CIT(Appeals) allowed the claim of the assessee observing as follows:-
“I have gone through the facts of the case, contents of the assessment order and written submission of the assessee. The assessee has produced a letter issued by Karnataka State Electronics Development Corporation Ltd, the Govt. of Karnataka issued on 16.10.2009 where it is mentioned that as per the agreed terms we hereby inform you that the batteries with UPS to be installed for power back up at rural PU colleges for
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CET rural training programe 2009-10 and shall be handed over to the respective colleges after the completion of the training programme. Kindly inform the nodal executives regarding the same. The assessee had claimed the batteries that were purchased are to be handed over with UPS to the respective rural PU colleges and batteries are no longer with the assessee and the same may be considered as a revenue expenditure. As the same information not available with the AO at the time of passing the scrutiny assessment order, the contention of the assessee that the expenditure incurred for purchase of batteries as which were handover along with UPS and the instrument was no longer with the assessee and the same has to be considered as a revenue expenditure as contended by the assessee. The assessee’s contention is agreed and the addition made by the AO is deleted.”
Aggrieved by the order of CIT(Appeals), the Revenue has raised grounds 4 & 5 before the Tribunal.
We have heard the submissions of the ld. DR, who relied on the order of the AO.
We have considered his submissions, As far as disallowance u/s. 40(a)(ia) of the Act is concerned, we are of the view that disallowance u/s 40(a)(ia) shall not be made merely because TDS has been deducted u/s 194C instead of Section 194J. In ADIT, International Taxation vs. Express Drilling Systems LLC (ITAT Delhi), ITA no.751/Del/2013, dated 09th January, 2015, it was held that the provisions of section 40(a)(ia) of the Act has two limbs; one is where, inter alia, assessee has to deduct tax; and the second where after deducting tax, inter alia, the assessee has to pay into Government Account. There is nothing in the said section to treat, inter alia,
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the assessee as defaulter where there is a short fall in deduction. With regard to the short fall, it cannot be assumed that there is a default as the
deduction is not as required by or under the Act, but the facts is that this expression, ‘on which tax is deductible at source under Chapter XVll-B and
such tax has not been deducted or, after deduction has not been paid on or
before the due date specified in sub section(1) of section 139”. Thus section 40(a)(ia) of the Act refers only to the duty to deduct tax and pay to
government account. If there is any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling
under various TDS provisions, the assessee can be declared to be an assessee in default u/s 201 of the Act and no disallowance can be made by
invoking the provisions of section 40(a)(ia) of the Act. The law has
however been prospectively amended w.e.f. AY 2015-16. In view of the above legal position, we are of the view that no fault can be found with the
order of the CIT(A) on this issue.
As far as the expenditure on purchase of UPS is concerned, UPS cannot be claimed back by the assessee from the rural colleges in which it
is installed as a part of the CET Rural Training Programme and as per the terms of agreement between the assessee and state of Karnataka. This
was made very clear by the Director, Department of Pre-University Education, Govt. of Karnataka in its communication dated 7.10.2009. UPS,
therefore, was not an apparatus with which the assessee carried on its
business, but had been given to the rural colleges as a part and parcel of
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the services rendered by the assessee. It is on this basis that the CIT(Appeals) has treated the expenditure as revenue expenditure.
We are of the view that the conclusions drawn by the CIT(Appeals) in this regard are acceptable and calls for no interference.
For the reasons given above, grounds No. 4 & 5 are also dismissed.
In the result, the appeal by the Revenue is dismissed.
Pronounced in the open court on this 23rd day of June, 2015.
Sd/- Sd/-
( ABRAHAM P. GEORGE ) ( N.V. VASUDEVAN ) Accountant Member Judicial Member
Bangalore, Dated, the 23rd June, 2015. /D S/
Copy to: 1. Appellant 2. Respondents 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file By order
Assistant Registrar / Senior Private Secretary ITAT, Bangalore.