DCIT, CHENNAI vs. DSM SOFT PRIVATE LIMITED, CHENNAI

आदेश / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER:

The appeals filed by the Revenue are directed against different orders of Commissioner of Income Tax (Appeals)-1, Chennai dated 27.07.2015 for the above assessment years passed u/s.143(3) r.w.s. 147 and 250 of the Income Tax Act, 1961 (herein after referred to as ‘’the Act’’). Since the issue in these appeals are common in nature,

ITA Nos.2059 & :- 2 -: 2062/Mds/2015

these appeals are clubbed, heard together, and disposed of by this

common order for the sake of convenience.

The Revenue has raised the following grounds:- 2.

‘’2.1 The learned CIT(A) erred in deleting the disallowance of interest on borrowed capital diverted for giving interest free loans to the group concerns of the assessee and for investment in the equity shares of the assessee's subsidiary company applying the decision of the Supreme Court in 288 ITR 1 without considering the difference in the facts containing in the assessee's case.

3.1 The learned CIT(A) erred in not appreciating the legal fiction created by the clarificatory explanation inserted by the Finance Act, 2012 giving the same retrospective effect from 01.06.1976. The learned CIT(A) ought to have appreciated the intent of the legislature. 4.1 The learned Commissioner of Income Tax (Appeals) erred in holding that the business losses of a unit which is not eligible for deduction u/s.10A of the Act could not be set off against the profits of the undertaking eligible for deduction u/s.10A for the purpose of determining the allowable deduction u/s.10A of the act’’.

Since the issues in these two appeals are common in nature, We take

up ITA No. 2059/Mds/2015 of assessment year 2008-2009 for

adjudication.

ITA Nos.2059 & :- 3 -: 2062/Mds/2015

The brief facts of the case are the assessee is in the business of 3.

software development and export and filed return of income for the

assessment year 2008-2009 on 30.09.2008 declaring loss of

�57,15,918/- and was processed u/s.143(1) of the Act. Subsequently

notice u/s.148 was issued for reason to believe that income has

escaped assessment. In compliance to notice, the ld. Authorised

Representative of the assessee appeared on various dates and filed

details. The Assessing Officer on perusal of the financial statements of

the company found that assessee borrowed secured loans from banks

and unsecured loans from Directors and others paid varying interest

rates. As per Balance sheet the assessee is having secured loans of

�15,73,90,542/- and unsecured loans and assessee also paying

interest on above loans as per page 2 of Assessing Officer order as

under:-

On Bank loans 1,46,15,759/- On other loans 27,88,064/-

As per the information, the assessee has given interest free loans to

subsidiaries and also invested in group concerns as under:-

‘’DSM Geodata Ltd. �5,55,69,765/- (loan/advance) DSM Infosystems P. Lt �2,21,72,376/- (loan/advance) DCS BPO Pvt. Ltd �1,79,45,150/- (loan/advance) DCS BPO Pvt. Ltd �49,58,877/- (investment) ’’ The ld. Authorised Representative explained that the assessee

company made investment in subsidiary company DSM Geodata Ltd –

ITA Nos.2059 & :- 4 -: 2062/Mds/2015

Scotland �2,52,85,072/-. On perusal of the transaction with related

parties, the assessee has not received any interest from associate

companies. On further verification it was found that interest of

�22,70,805/- was received from subsidiary company from DCS

Geodata Ltd which has worked out to �4.26% interest rate on amount

outstanding balance and interest of �1,59,252/- from D.S.M.

Infosystems P. Ltd worked out 0.76% on the outstanding balance and

there was no income from other group concerns. The Assessing

Officer has made a comparison that the assessee company is paying

interest at a higher rate than the interest received from its group

concerns. So with these parameters of application of loan funds from

group concerns and also not charging interest made in subsidiary

concerns. The Assessing Officer analyzed based on the financial

statements that the assessee company has obtained loans from bank,

directors, shareholders and others and paying higher rate of interest

wereas no interest income was received from subsidiaries except

concessional rate of interest receipt from DSM Geodata Ltd and DSM

infosystems P. Ltd and issued show cause notice to the assessee

company for proportionate disallowance of interest on borrowed funds.

In response to show cause notice, the ld. Authorised Representative

filed detailed submissions and also relied on the decision of Co-

ordinate Bench Tribunal in assessee’s own case for the assessment

ITA Nos.2059 & :- 5 -: 2062/Mds/2015

year 2004-05 and 2005-06 were the Tribunal has accepted the

contention that the loans and advance to the group concerns or

subsidiaries is for commercial expediency and no interest disallowance

is warranted on such investments in subsidiaries. The ld. Assessing

Officer perused the Tribunal order and found the Department has not

accepted the decision of the Tribunal and contesting at higher forum in

High Court. The ld. Assessing Officer has not relied on the decision

and calculated proportionate disallowance of interest on the advance

made to group concerns and worked out the calculation of interest

component in is order and disallowed �58,87,623/-. Aggrieved by the

order, the assessee filed an appeal before the Commissioner of Income

Tax (Appeals).

In the appellate proceedings, the ld. Authorised 4.

Representative made submissions on disallowance and the assessee

company has advanced and invested in the subsidiary companies.

The ld. Assessing Officer without considering the provisions of Sec.

36(1)(iii) of the Act on the borrowed funds and decision of Tribunal

made disallowance. The ld. Commissioner of Income Tax (Appeals)

considered the submissions of the assessee and observed the findings

of the Assessing Officer on similar issue, the ITAT decision in

assessee’s own case for assessment year 2004-05 and 2005-06

observed at para 5.1 of his order as under:-

ITA Nos.2059 & :- 6 -: 2062/Mds/2015

‘’I have carefully considered the facts, order of the AO, submissions of the appellant and material on record. The ITAT order arising from cross appeals in ITA Nos.11 & 12/Mds/2010 for the A.Ys 2004-05 and 2005-06 as also ITA Nos.366 & 367/Mds/2010 relied upon in the appellant's own case has been carefully perused by me. The facts obtaining therein related to disallowance of interest on borrowed capital. These related to interest-free advance or advance on nominal rates of (i) ₹1 crore given to its group concern M/s Morgan Industries Ltd., (ii) Rs.49.14 lakhs to another group concern M/s DSM Infosystems P Ltd, (iii) besides net advance of ₹1,54,52,372/- to another group company M/s DSM Geodata Ltd. The appellant had during the relevant previous year borrowed fresh loan of ₹.2.65 crores. The ITAT on the pleas made by the appellant had observed after taking into consideration the findings of the CIT(A) in this matter, that the assessee had used interest free funds as advances to the three companies mentioned above besides making investment in equity shares of the subsidiary Mls DSM Geodata Ltd. The ITAT held that the loans were given by the assessee to the companies on account of commercial expediency and that revenue , could not bring any evidence on record to show that amounts advanced or invested were used for personal benefit I purpose. In a speaking order, the Hon'bie ITAT deleted the disallowance made by the AO on account of interest in relation to the loans given by it to its group concerns and investments made in equity shares in its subsidiary company. Respectfully following the decision of the Hon'ble ITAT and having regard to the fact that the matter is identical in the year under consideration in appeal, I hold that the disallowance made by the AO cannot be upheld and direct the AO to delete the disallowance thus made. The ground is allowed.’’

The ld. CIT(A) following the ITAT decision allowed the appeal of the

assessee. Aggrieved by the order of the Commissioner of Income Tax

(Appeals), the Revenue has assailed an appeal before Tribunal.

Before us, the ld. Departmental Representative reiterated 5.

the findings of the Assessing Officer, the Commissioner of Income Tax

(Appeals) has deleted the disallowance of interest on borrowed capital

utilized for group concerns and relied on the Supreme Court decision

ITA Nos.2059 & :- 7 -: 2062/Mds/2015

without considering the fact that the Revenue has not accepted the

decision relied by the Commissioner of Income Tax (Appeals) in

assessee’s own case for earlier assessment years and appeal has been

filed in High Court and prayed for setting aside the Commissioner of

Income Tax (Appeals) order.

made submissions and relied on the order of Commissioner of Income

Tax (Appeals) and decision of ITAT in assessee’s own case for the

assessment years 2004-05 and 2005-06 where the Tribunal has

allowed the appeal in favour of the assessee.

We heard the rival submissions, perused the material on 7.

record and judicial decisions cited. The ld. Departmental

Representative contested the issues that the Commissioner of Income

Tax (Appeals) has not considered the facts on the borrowed capital

and investment in equity of subsidiary companies and applied the

decision of Apex Court and also Tribunal decision which has not

attained finality for earlier assessment years as Department has

contested the issue at higher forum. This Tribunal is of the considered

opinion that mere pendency of appeal before the higher forum cannot

be a reason to take a different view. So respectfully following the

ITA Nos.2059 & :- 8 -: 2062/Mds/2015

decision in assessee’s own in ITA Nos.11 & 12/Mds/2010 and ITA

Nos.366 & 367/MDS/2010 upheld the order of the Commissioner of

Income Tax (Appeals) and dismiss the ground of the Revenue.

The second ground raised by the Department that 8.

Commissioner of Income Tax (Appeals) has deleted the disallowance

u/s.40(a)(i) of the Act on Software expenses without appreciating the

legal fiction as per the Finance Act, 2012.

The ld. Assessing Officer on perusal found that an amount of 9.

�44,85,800/- was paid to software maintenance to M/s. Bentley

Systems. The ld. Authorised Representative filed detailed explanations

and clarifying that the amount paid to the M/s. Bentley Systems

towards subscription/annual license fee for providing services such as

geographic information systems and engineering and not any purchase

of asset. This payment is in the nature of subscription but the ld.

Assessing Officer has assumed that the payment is made for

specialized services in the nature of technical services and knowhow

for the usage of the product where the provisions of Sec.195 are

applicable. The assessee submitted that software is used for providing

services to client outside India and as per Sec.9(1)(vi)(b) shall not fall

under the category of royalty payments were TDS provisions apply.

The ld. Assessing Officer found that explanations are not satisfactory

ITA Nos.2059 & :- 9 -: 2062/Mds/2015

and fall under the category of royalty and technical knowhow and

usage outside India cannot be a ground as the payments are made

outside India having license fee for the use of software. The ld. AO

categorized payments as royalty and relied on the decision of

Gracemac Corp. vs. ACIT, 134 TTJ 257 were payments of royalty of

nonresident is deemed to accrue or arise in India irrespective of the

fact whether non resident has a residence or place of business in India

and concludes that the provisions of TDS shall comply and made

disallowance u/s.40(a)(i) of the Act of �44,85,800/-. Aggrieved by the

order, the assessee filed an appeal before the Commissioner of Income

Tax (Appeals).

In the appellate proceedings, the Commissioner of Income 10.

Tax (Appeals) considered the grounds, submissions of the assessee

and also findings of the Assessing Officer were an amount of

�44,85,800/- paid by the assessee to M/s. Bentley Systems, a resident

of Australia. The ld. Commissioner of Income Tax (Appeals)

considered the submissions of the assessee and observed the findings

of the Assessing Officer and relied on jurisdictional ITAT decision

Financial Software Services P. Ltd vs. DCIT 47 taxman.com 410 at

page 6 para 6.2 of the order as under and allowed the ground

‘’I have carefully considered the facts of the case, order of the AO, submissions made by the appellant and material on record. The appellant is engaged in business of software development

ITA Nos.2059 & :- 10 -: 2062/Mds/2015

and export. It operates also through its own subsidiary and associate companies DSM Geodata Ltd, Scotland, DSM Infosystems P Ltd and DSM BPO P Ltd. For the purposes of its business it is required to use a software on a year to year basis. The software is used to offer services to its client overseas. The software in question has been licensed for use by Mls Bentley Systems Pty Ltd, an non- resident. From the options available, the appellant has opted to pay certain price for each licence for the user of the software. It is also possible that the appellant would have to pay such licence fee for each of those applications as and when the need arises. The second option available to the appellant was to obtain enterprise licences for a year at different price whereby it had the option of using as many licences as it wants and also use the other applications of Bentley within the same price. In this option the appellant was required to pay a lump sum amount to the supplier of the application. Based on prudence, the appellant opted for the second option.

6.2.1 Be that as it may the tax invoice raised by the supplier of the software acknowledges payment towards licence fee for the use of such software. The provisions of s.9(1 )(vi) provides through a deeming provision income to accrue or arise in India and includes income by way of royalty. Explanation 2 further defines royalty for use or right to use any industrial commercial or scientific equipment. Explanation 4 further clarifies that transfer of all or any rights in respect of any right, property or information includes and as always included transfer of all or any right for use or right to use a computer software, including granting of a licence, irrespective of the medium through which such right is transferred. The explanation inserted by Finance Act, 2012 is with retrospective effect from 1.6.1976. As the explanation suggests it is clarificatory in nature and does not substantively legislate on a new item of income. In my considered view, from the facts obtaining in this case the consideration paid to M/s Bentley Systems Pty Ltd, a non- resident, for use of the impugned software would constitute payment in the nature of royalty u/s 9(1 )(vi) r.w. Article 12(3) of the DT AA with Australia attracting withholding tax u/s 195. Further, the taxability of royalty in the source state does not depend on, unlike the taxability in the resident state to whom the royalties are paid. These are taxed according to the domestic laws. In India income is taxable on receipt or cash basis but also on accrual basis. Thus, when an income is credited to foreign company, it becomes taxable and tax is required to be deducted in terms of s. 195(1) of the I.T. Act. The order of the AO does not suffer any infirmity. However, notwithstanding the same and having respect to the plea of the

ITA Nos.2059 & :- 11 -: 2062/Mds/2015

appellant and reliance placed in the ratio of the jurisdictional bench of ITAT in the case of Financial Software Services P Ltd (supra), I hold that the plea taken by the appellant must succeed. This ground of appeal is allowed’’.

Aggrieved by the order of the Commissioner of Income Tax (Appeals),

the Revenue has assailed an appeal before Tribunal.

Before us, the ld. Departmental Representative reiterated 11.

the findings of the Assessing Officer and vehemently argued that the

Revenue has not accepted the decision relied by the Commissioner of

Income Tax (Appeals) and appeal has been filed in High Court and

prayed for setting aside the Commissioner of Income Tax (Appeals)

order.

Contra, the ld. Authorised Representative of the assessee 12.

made his submissions and relied on the order of Commissioner of

Income Tax (Appeals) and decision of the ITAT.

We heard the rival submissions, perused the material on 13.

record and judicial decisions cited. The ld. Departmental

Representative contested that the Tribunal decision has not attained

finality for earlier assessment years as Department has contested the

issue at higher forum. This Tribunal is of the considered opinion that

mere pendency of appeal before the higher forum cannot be a reason

ITA Nos.2059 & :- 12 -: 2062/Mds/2015

to take a different view. So respectfully following the decision in

Financial Software & Systems (P) Ltd in ITA Nos.2190 to 2196 &

2199/Mds/2013 upheld the order of the Commissioner of Income Tax

(Appeals) and dismiss the ground of the Revenue.

The Department has raised third ground where the 14.

Commissioner of Income Tax (Appeals) erred in holding that business

losses of a unit cannot be set off against profit undertaking eligible for

deduction u/s.10A of the Act and allowed the same.

The assessee during the financial year 2007-08 derived 15.

income from export operations and domestic operations. The ld.

Assessing Officer on perusal of the computation of income found that

the assessee has claimed exemption of �1,09,85,430/- as exempted

income u/s.10A and at the same time assessee has loss from the

domestic operations �57,16,767/- and claimed to be carried to

subsequent years. The main dispute arise with respect of claim of

deduction u/s.10A on profit of export operation without set off loss

from domestic operations. The ld. Assessing Officer referred to the

amendment u/s.10A effective from 01.04.2001 available only to the

total income of the assessee with prospective to provisions in

adjustment of loss with profit of export unit. The ld. Authorised

ITA Nos.2059 & :- 13 -: 2062/Mds/2015

Representative submitted the details and also supported his

submissions with decisions in assessee own case by Tribunal for the

assessment year 2007-08 were the Tribunal has allowed the deduction

u/s.10A of the Act. The entire profits of STPI units without setting off

of the loss of non –STPI units. But the Assessing Officer considered

though the Tribunal has accepted the assessee’s contention but the

Department has contested the Tribunal order of the assessee at higher

forum to keep the issue alive, the ld. Assessing Officer deferred the

decision of assessee’s own case and made that elaborate findings on

the provisions were the Tribunal relied on the Special Bench decision

in the case of Scientific Atlanta Technology Pvt. Ltd vs. ACIT 129 TTJ

273 and the Department is contesting the decision of Special Bench at

higher forum. Considering both the decisions contested by the

Department, the Assessing Officer discussed the provisions applicable

for claiming deduction u/s.10A effective from 01.04.2001 and made a

elaborate submissions and relied on the Tribunal decision and

distinguished the Tribunal order. The computation of u/s.10A

deduction shall be worked out in the manner laid down in the Act and

application of provisions of Secs.70 and 72 of the Act. The deduction

u/s.10A has to be allowed only after adjustment of loss of domestic

unit with profits of the EOU and made addition and disallowed excess

ITA Nos.2059 & :- 14 -: 2062/Mds/2015

claim of the assessee. Aggrieved by the order, the assessee filed an

appeal before the Tribunal.

Representative reiterated his submissions made in the assessment

proceeding. The ld. Assessing Officer has not accepted the assessee

contention for claim of deduction u/s.10A and also the Tribunal order

applicable to assessee’s own case for the assessment year 2007-08

and the Assessing Officer further made a distinction based on the

provisions applicable and also Department has not accepted the

decision and contesting in higher forum and relied on the decision of

the Tribunal irrespective of the fact that Commissioner of Income Tax

(Appeals) and Tribunal in assessee’s own case allowed based on the

Special Bench decision of ITAT, Chennai in Scientific Atlanta India

Technology P. Ltd vs. ACIT 129 TTJ 273. The ld. Commissioner of

Income Tax (Appeals) considering the grounds submissions of the

Authorised Representative and also findings of the Assessing Officer

has allowed the ground of the assessee observing at 8.2 of the order

as under:-

“I have carefully considered the facts, order of the Assessing Officer, submissions made by the appellant and material on record. The ITAT order in ITA No.890/Mds/2010 for the A.Y. 2007-08 relied upon in the appellant’s own case has been carefully perused by me. The Hon’ble ITAT has held as under:-

ITA Nos.2059 & :- 15 -: 2062/Mds/2015

Aggrieved by the order of the Commissioner of Income Tax (Appeals),

the Revenue assailed an appeal before the Tribunal.

The ld. Departmental Representative relied on the order of 17.

the Assessing Officer and vehemently argued for allowing the appeal.

Contra, the ld. Authorised Representative of the assessee 18.

relied on the order of Commissioner of Income Tax (Appeals) and

Tribunal decision in assessee’s own case, prayed for dismissing the

appeal.

record and judicial decisions cited. The ld. Departmental

Representative explained that the ITAT decision has not attained

finality and being contested at higher forums. The Commissioner of

Income Tax (Appeals) has allowed the ground of the assessee based

on assessee’s earlier year order relying on the Special Bench decision

of Scientific Atlanta Technology Pvt. Ltd (Supra) were deduction

u/s.10A of the Act was allowed without setting off of loss of domestic

ITA Nos.2059 & :- 16 -: 2062/Mds/2015

unit. The decision of the Tribunal was based on prevailing law and we

know rely on the decision of Madras High Court in the case of CIT vs.

Hi Tech Arai Ltd 321 ITR 477 where it was held ‘’that merely because a

Co-ordinate Bench of the Tribunal had earlier taken a different view,

the Tribunal need not blindly follow the earlier decision even if the

earlier decision did not reflect the correct position of law’’. The claim

of deduction u/s. 10A should be considered based on the amendment

effective from 01.04.2001 were the deduction in respect of profit and

gains determined for eligible industrial undertaking for export of

articles or things. The Profit and gains from eligible undertaking

calculated in proportion of export turnover to total turnover and

allowed as deduction while computing the taxable income only to the

extent of income from such undertaking as included in the total

income. Consequently, the Deduction would be worked out on the

total income of the assessee, and arrived after set-off of the profit

from export division against loss of the other unit/business, if any, as

per Sec.70 & 72 of the Income Tax Act. So, considering the provisions

of law, Amendment and decision of Madras High Court, we rely on

the decision of Delhi High Court in the case of CIT vs. KEI Industries

Ltd 373 ITR 574 were loss of a unit entitled for exemption not to be

set off against income from unit not eligible for such exemption. The

ITA Nos.2059 & :- 17 -: 2062/Mds/2015

lordship has referred the cases which were relied by the ld. Authorised

Representative. The question of set off of loss under provisions of

section 10B of the Act has same parameters for deduction under Sec.

10A of the Act. The loss of EOU unit cannot be set off against business

income of non EOU unit by applying the ratio to the present case,

gives a ray of adjustment to circumstances were EOU unit has profit

and non EOU has losses. On the same analogy of facts and ratio, we

find that the ld. Commissioner of Income Tax (Appeals) has allowed

the claim of the assessee without set off of loss of domestic

operations, relying on earlier year order is not correct. We are of the

opinion that claim of deduction u/s.10A is allowable after set off of

losses in accordance with the provisions of Sec. 70 & 72 of the Act and

the deduction of 10A has to be considered only after set off of losses

of domestic operations. Therefore, we direct the Assessing Officer to

allow the deduction u/s.10A of the Act after set off adjustment of

losses of domestic operations with the income of export operations.

This ground of the Revenue is allowed.

In the result, the appeal of the Revenue in ITA 20.

No.2059/Mds/2015 for the assessment year 2008-09 is partly allowed

and Revenue appeal in ITA No.2062/Mds/2015 for the assessment

ITA Nos.2059 & :- 18 -: 2062/Mds/2015

year 2009-2010 is also dismissed.

Order pronounced on Wednesday, the 30th day of March, 2015, at Chennai.

Sd/- Sd/- (चं� पूजार�) (जी. पवन कुमार) (CHANDRA POOJARI) (G. PAVAN KUMAR) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य /ACCOUNTANT MEMBER

चे�नई/Chennai �दनांक/Dated:30.03. 2016 KV

आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF