ITO, BANGALORE vs. M/S RELQ SOFTWARE PVT. LTD., BANGALORE

Brief facts of the case are that the assessee-company which is engaged in the business of software validation, testing and verification, filed its return of income for the relevant assessment year. During the assessment proceedings u/s 143(3) read with sec.147 of the Act, the AO examined the assessee’s claim of deduction u/s 10A of the Act. On perusal of the assessee’s claim, the AO observed that the assessee has one STPI unit and another non-STPI unit located at Bangalore. He further observed that the assessee has loss from non-STPI unit and profit from STPI unit and the assessee has claimed deduction u/s 10A of the Act from profits from STPI unit. He held that loss from non-STPI unit is to be set off against profits of the STPI unit before computing deduction u/s 10A of the Act.

Aggrieved, the assessee preferred an appeal before the CIT(A) who allowed the same by following the decision of the Tribunal in the assessee’s own case for the assessment year 2004-05 wherein, after following the decision of the jurisdictional High Court in the case of Yokogawa India Ltd., in it was held that profits or loss of non-STPI cannot & 1382/Bang/2011 M/s.Relq Software Pvt.Ltd. Page 3 of 5 be set off against profits of the STPI unit. Against the relief given by the CIT(A), the revenue is in appeal before us.

After hearing both the parties and after going through the records and also the judicial precedents relied upon by both the parties, we find that the assessee’s own case had come up before the Hon’ble High Court in and by order dated 25/07/2014, the Hon’ble High Court has held that carried forward loss or unabsorbed depreciation of non-STPI unit cannot be set off against the income of the STPI unit for the purpose of computation of deduction u/s 10A of the Act. Therefore, we see no reason to interfere with the order of the CIT(A) on this issue.

As regards the second issue i.e. exclusion of the expenditure incurred by the assessee in foreign exchange outside India, the AO observed that the expenditure incurred in foreign exchange by the assessee pertains to payments made to engineers working on-site, who are engaged in making of computer software. The AO held that the services rendered by the assessee are technical services and therefore these expenses incurred in foreign currency for rendering technical services outside India re to be excluded from the export turnover while reckoning profits u/s 10A of the Act.

Aggrieved, the assessee preferred an appeal before the CIT(A) who allowed the same by following the decision of the Tribunal in the assessee’s own case and directed the AO to & 1382/Bang/2011 M/s.Relq Software Pvt.Ltd. Page 4 of 5 exclude communication charges of Rs.4,59,941/- only as specified by the Tribunal. Aggrieved by the relief given by the CIT(A), the revenue is in appeal before us.

Upon hearing both the parties and upon considering the decision of the Hon’ble Karnataka High Court in assessee’s own case for the earlier assessment year, we find that the Hon’ble High Court had remanded the issue to the file of the AO to decide whether the said technical services rendered were in connection with export of computer software or it is a case of exclusively rendering technical services and based on such factual finding, to compute the liability of tax or exemption. It is the case of the learned counsel for the assessee that for the relevant assessment year, facts are on record and therefore there was no need for any fresh remand to the AO.

Having regard to the rival contentions and also the material on record, it is indeed stated in the assessment order by the AO that the expenditure incurred in foreign currency is towards payment to engineers sent abroad for software development. It is not clear as to whether it relates to computer software exported by the assessee. In view of the same, we deem it fit and proper to remand the issue to the file of the AO for re-examination of facts and if it is found that development of computer software is pursuant to the export of computer software being carried out by the assessee, then the said & 1382/Bang/2011 M/s.Relq Software Pvt.Ltd. Page 5 of 5 expenditure shall not be excluded from the export turnover. The ground of appeal No.3 in both the assessment years is treated as allowed for statistical purposes.

In the result, both the revenue’s appeals are partly allowed for statistical purposes.