Vildirect: IncomeTax-caselaws-2015-VIL-1050-ITAT-HYD

2015-VIL-1050-ITAT-HYD

Income Tax Appellate Tribunal HYDERABAD

ITA No.1450, 1452, 1451, 1453/Hyd/2013, ITA Nos.1455 & 1456/Hyd/2013

Date: 25.03.2015

M/s . CYIENT LIMITED (FORMERLY INFOTECH ENTERPRISES LTD) & OTHERS

DY. COMMISSIONER OF INCOME TAX & OTHERS

For the Appellant : Shri M.V.R. Prasad

BENCH

Shri P.M. Jagtap And Smt.Asha Vijayaraghavan JJ.

JUDGMENT

Per Bench:

These are cross appeals preferred by the assessee and the Revenue, directed against separate orders of the Commissioner of Income-tax(Appeals)-III, Hyderabad, for the assessment years 2002-03, 2004-05, 2005-06, 2008-09 and 2009-10. Since certain common issues are involved, these appeals are being disposed of with this common consolidated order for the sake of convenience.

ITA No.1450/Hyd/2013- A.Y. 2002-03.

2. Facts of the case in brief are that the assessee is a company, engaged in the business of software development and other allied activities. For A.Y 2002-03, it filed its return of income for the A.Y 2002-03 on 31.10.2002 declaring a total income of Rs. 1,01,68,297 and book profits for the purpose of computation of MAT u/s 115JB at Rs. 5,57,10,026. The AO completed the assessment on 31.03.2005 u/s 143(3) of the Act, determined total income at Rs. 11,15,41,640. The assessee company had claimed exemption u/s 10B amounting to Rs. 20,99,72,961. The assessee company had commenced production during financial year 1992-93 and received approval to start its operations in software development as a software technology park on 26.09.1991 with a letter No.17(4)/9/91-92- STA dated 26.09.1991 from the Department of Electronics, Software Division, Govt. of India. AO denied both the exemptions available u/s 10A and section 10B by holding that the assessee had started production before 01.04.1994 and also holding that the amended provisions of section 10B were not applicable in the case of the assessee. Following reasons were given for holding as above:-

“Section 10-A is applicable to the assessees who are carrying on the business activity in Software Technology Park (STP). It is found that no specific approval has been obtained by the assessee company to be categorized as 100% EOU in terms of Explanation (i) to section 10B(7). Even otherwise, the assessee is not entitled to any deduction u/s 10A for carrying on activity in the software technology as the exemption to carry on operation in STP applicable for assessees who commenced manufacture or production in STP on or after 1.4.94. In this case, the assessee had commenced its production prior to 1.4.94. Hence, the benefit of section 10A which was extended to STP units w.e.f. 1.4.94 is not available to the assessee.

Section 10B is applicable to assessees who are 100% EOUs. The provisions of law was effective up to A.Y 1994-95. Section 10B was amended with the insertion of clause (ia) to sub-section (2) of section 10B w.e.f. 1.4.95 by Finance Act, 1994. This amendment is applicable to undertakings which began to manufacture or produce any article or thing on or after 1.4.94. The amendment was with regard to percentage of exports to be made by the assessee i.e. 100% EOUs.

In the instant case, the amended provisions are not applicable since the assessee company had commenced its commercial production w.e.f. 7.9.1992La.before 1.4.94. In view of the above, the assessee is not entitled for any benefit u/s 10B of the I.T. Act, 1961. For A.Y 1998-99, when the similar disallowance was made the CIT (A) III vide order in ITA No.428.JC/RC2JCITA)-111/00-01 dated 17.11.01 had confirmed the disallowances in assessee’s own case. On appeal by the assessee the ITAT B Bench Hyderabad vide its order reported in 85 ITD 325 has dismissed the appeal of the assessee. Keeping this in view, the assessee’s claim of deduction u/s 10B is not allowed.

During the course of assessment proceedings, the assessee company has set up a new unit during financial year ended 31.03.2002 at Bangalore. This unit has been registered as a STPI Unit with the Software Technology Parks of India, Bangalore. The unit commenced operations during the financial year 2001-02 and is eligible for exemption u/s 10A of the I.T. Act. During the year under consideration, the unit made a turnover of Rs. 50.75 lakhs and incurred a net loss of Rs. 91.75 lakhs. In the computation of total income, the total loss from this unit after adjustments was shown at Rs. 1,22,60,881. However, the assessee company has opted not to claim exemption u/s 10A of the I.T. Act and chosen to claim deduction u/s 80HHE for this A.Y. Since the profit of the business from the Bangalore Unit is a loss, no deduction u/s 80HHE is allowable”.

3. Before the CIT (A), assessee contended that the exemptions in question, were available to it. However, it was admitted that vide order of ITAT Hyderabad in ITA No.51/HYD/2002 dated 31.05.2002 for A.Y 1998-99, the issue had been decided in favour of Revenue. Since the issues are essentially the same and the facts are identical, respectfully following the order of the ITAT and following the principle of stare decisions, CIT held that the aforementioned exemptions are not available to the assessee and order of AO on this issue does not need any interference and the issue was decided in favour of Revenue.

4. Aggrieved by the order of the CIT (A), assessee preferred an appeal in Ground No.2, assessee stated that the ld CIT (A) erred in deciding that the assessee is not entitled for relief u/s 10A or alternatively even u/s 10B of the I.T. Act, 1961. The ld Counsel for assessee submitted before us that the issue is pending before the Hon'ble jurisdictional High Court for adjudication.

5. The issue is covered against the assessee by the order of the ITAT for A.Y 1998-99 in ITA No.51/Hyd/2002. This issue is pending before the Hon’ble A.P. High Court and the ground has been raised by the assessee only to keep the matter alive.

6. Respectfully following the order of the Tribunal for the A.Y 1998-99 in ITA No.51/Hyd/2002, we decide the issue against the assessee. This ground of appeal is dismissed.

7. The next ground (Ground No.3) is that the AO disallowed an amount of Rs. 1,09,385 by invoking the provisions of section 40(a)(i). This amount represents the fee paid to Barnes & Thornburg, Attorneys at Law, USA. AO observed that this amount was paid to the said Attorneys for the services rendered by them in connection with the takeover of a company M/s AnalyticalSurveys Inc and as the expenditure was incurred in the context of the acquisition of a company, it was of the nature of capital expenditure. He also took the view that the tax was not deducted at source on the payment made to non resident presumably under the provisions of section 194J and so the payment is disallowable under the provisions of section 40(a)(i).

8. It was submitted by the ld Counsel that the services were rendered by the non-resident attorney from outside India, so it is not taxable in India. At any rate under article 15 of the DTAA between India and USA, independent professional charges are to be taxed only in the country of residence unless there is a fixed base in the source country. As there is no such fixed base in India, the payment in question is not taxable in India. So there is no liability for tax deduction at source in terms of section 194J and as such the payment is not hit by section 40(a)(i).

9. The next question is whether the payment represents revenue expenditure or capital expenditure in the hands of the assessee company. As the expenditure was incurred in the context of a failed proposal for the acquisition of a company, no asset of enduring benefit has accrued to the assessee company and, as such, it represents only revenue expenditure. For this proposition, the assessee relied upon the decision of the Hon'ble Punjab & Haryana High Court dated 7th March, 1989 in the case of Hindustan Milk Food Mfrs. Ltd vs. CIT (IT reference No.135 of 1979) in which legal expenses incurred for the purpose of acquisition of a capital asset was held allowable as the proposal for acquisition failed.

10. We are of the opinion that this amount is not taxable in India under the DTAA between India and USA and as no asset is acquired, it is allowable as Revenue expenditure. Accordingly ground No.3 is allowed.

11. Ground No.4 is as follows:

“4. The ld CIT (A) erred in holding that the amount of Rs. 2,01,40,454 paid by the Appellant to M/s. Infotech Software Solutions Inc (ISSI) USA, the subsidiary of the Appellant is of the nature of technical service fee and is a taxable receipt in the hands of the said non resident company and as no tax was deducted at source u/s 195, the said expenditure is disallowable in terms of section 40(a)(i)”.

12. It was submitted that the AO erred in disallowing the expenditure of Rs. 2,01,40,454 paid to the 100% subsidiary of the assessee i.e. InfoTech Software Solutions Inc (ISSI) USA by invoking provisions of 40(a)(i). This issue is covered by the decision of the Tribunal in assessee’s own case for A.Ys 2006-07 and 2007-08 in ITA Nos. 115 & 2184/Hyd/2011. Rebutting the contention of the AO that there is a business connection between the assessee company and its foreign subsidiary in terms of Explanation 2 to section 9(1)(i) the Tribunal held as under:

“36. With respect to IEAI USA, we find that factually the assessee has secured the orders from PRATT (PWC) for its own benefit and it only parceled out a portion of the work entrusted to it by PRATT & WHITNEY to IEAI USA. The said Explanation to Section 9(1)(i) can be invoked only when the Indian company secures orders for the benefit of non-resident. In the present case, the assessee has not canvassed / secured any orders for its nonresident subsidiaries. Hence, section 9(1)(i) cannot be invoked.

37. We have gone through the copy of the "Master Terms Agreement" (in short "MTA") entered into by the assessee with United Technology Corporation (PWC) which is filed at pages 179 to 196 of the paper book. Similarly, we have perused intercompany agreement entered into by the assessee with its subsidiaries placed in the paper book at page 197 to 222. This proves that the assessee obtained orders on its own behalf and it has only parceled out a portion of its work to its foreign subsidiaries. As per the terms of the agreement, the assessee "shall release the work order" before the commencement of the work by IEAI USA and each work order shall be supported by end customers order copy. Clause 3 of the agreement reads as under :

"Commencing on the date(s) specified in each Work Order, IEAI will allocate qualified personnel through Software Services requirements statements and regular project meetings, which may be modified from time to time by IEL. IEAI shall inform IEL at the time of the request, or as soon thereafter as that the information becomes available, should it be unable to deliver the qualified personnel specified in the Work Order. Parties shall within 30 days negotiate in good faith a revised Work Order mutually agreeable to both parties, however if no such agreement can be reached either party may terminate that work order according to provisions of section 1. Obligations of IEL and IEAI under this agreement are detailed in the Annexure."

38. Further, we find that the TPO has found that the operation transaction were effected at arm’s length price. We also observe that the foreign subsidiaries do not work exclusively for the assessee and they obtain orders on their own from other foreign parties and also sub contract the work to the assessee depending on exigencies.

39. We also find that no operations have been undertaken by foreign subsidiaries in India and no engineers have been deputed by them to India and even they do not have permanent establishment in India. In terms of the respective DTAA, no income of the foreign subsidiary is taxable in India in terms of either section 9(1)(i) of the I.T. Act or the concerned Articles relating to business profits (Article 7 r.w. Article 5) in the respective DTAAs”.

13. The Tribunal also considered the position, whether payment in question of Rs. 2,01,40,454 could be considered as fee for technical services received from the foreign subsidiary. It held that even if it were to be considered as fees for technical services, it would not be taxable in India as they are utilized for earning income from a source outside India. Section 9(1)(vii) to the extent relevant for our purpose read as under:

(vii) income by way of fees for technical services payable by-

(a) ….

(b) a person who is a resident, except where the fees are payable

in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or

c………….

14. The Tribunal held that the retrospective amendment brought in by way of Explanation to section 9(1) by Finance Act (No.2) 2010 w.e.f. 1.6.76 does not completely overrule the decision of the Apex Court in the case of “Ishikawajima Harima Heavy Industries Ltd vs. Director of Income Tax Mumbai (288 ITR 408) in which it was held that the payments for the technical services must satisfy the following two requirements to be taxable in India in terms of section 9(1)(vii) of the IT Act.

a) The services must be utilized in India

b) The services must be rendered in India.

15. The Tribunal in Para 42 of its order upheld the plea of the assessee that, even if the requirement mentioned at 2 above is held to be no longer valid in view of the provisions of Explanation to section 9 which has been substituted retrospectively w.e.f. 1.6.1976 by Finance Act 2010, it has to be noticed that the requirement mentioned at 1 above still holds the field. Tribunal also observed that the retrospective amendment by way of Explanation to 9(1) introduced by Finance Act 2010 could not have been visualized by the assessee company for deducting tax at source u/s 195 of the IT Act.

16. The Tribunal also found that even if the payment to ISSI were technical service fee, it would not be taxable in India in terms of Article 12 of the DTAA between India and USA. In Para 43 of its order the Tribunal observed as under:

“We also point that even under the India-USA and India-UK treaties (not the India-Germany treaty though) due to the presence of the "make available" clause in these two Treaties the payments made by the assessee will not fall under FTS. This is because no technical knowledge has been made available by the non-resident to the assessee. Further, no technical plan or technical design placement has been transferred by US subsidiary to the assessee. What IEAI did was only in fulfillment of contractual requirement with PRATT & WHITNEY and not for the benefit of the assessee. The non-resident has simply executed the portion of work parceled out to it by the assessee”.

17. As no technical knowledge was made available to the assessee company by its foreign subsidiary which is the requirement under the DTAA for payment to qualify as technical services fee, the Tribunal held that payment in question of Rs. 2,01,40,454 is not taxable in India and so there is no requirement for deduction of tax at source o the payment and so the assessee company is not hit by provisions of section 40(a)(i).

18. In Para 8.15 of the impugned order, CIT (A) observes as under:

"From the facts of the case, it is clear that ISSI, USA was sub- contracted a portion of the work and it sent its employees to do that job with Pratt & Whitney and received remuneration for it. The job involved on-site work by technical and professional experts of ISSI as a part and parcel of the overall contract of Pratt and Whitney with the Appellant for the development of specialized software. It is important to understand that the original contract was with the Appellant for the development and supply of very specialized software. A certain portion of this contract was subcontracted to ISSI in USA. Therefore, rather than send its own technical experts and employees to USA, the Appellant engaged ISSI to do that work".

19. Having given above findings and agreed that the assessee has given a sub contract, the CIT (A) turns around and holds that the assessee has rendered only technical purposes. In this context, The ld Counsel for the assessee further submitted as follows:

“The assessee company has no quarrel with the above remarks of the CIT(A) except that it is not correct to say that only the employees of ISSI were deputed to Pratt & Whitney. Actually, some employees of the Assessee Company were taken off its rolls and were taken on to the rolls of ISSI and assigned to the contractual work with Pratt & Whitney. This was done for operational reasons like the difficulty in getting work permits, visas and to facilitate local supervision. Having, thus, agreed that the Assessee company is into the development of specialized software and it parcelled out a portion of its contractual work agreed with Pratt & Whitney to its foreign subsidiaries, the CIT (A) turns round and holds that the foreign subsidiary has provided technical services to the assessee. Before that, he attributes a position to the Appellant which it has never taken before him or elsewhere. In Para 8.17 of his order, he observes as under:

"Firstly, it is very important to appreciate that contrary to what the Appellant claims the work done by ISSI had absolutely no nexus with any relationship or contract of ISSI with Pratt & Whitney. In fact ISSI only worked on behalf of the Appellant. Its employees were sent to the premises of Pratt & Whitney at the behest of the Appellant and to provide technical work and expertise on behalf of the Appellant. Therefore, it is absolutely incorrect on the part of the Appellant to state that it never had any contract with IS SI and the work done by ISSI was its own contract with Pratt & Whitney. This is totally contrary to the facts on record".

It was submitted by the assessee that the assessee never claimed that it had "no contract with ISSI and the work done by ISSI was its own contract with Pratt & Whitney". The CIT(A) has totally misconstrued the position of the assessee Company. Having, thus, misconstrued and misrepresented the Appellant's position, the CIT(A) held that the work done by ISSI for the assessee was provision of technical services. This finding goes against the entire record of the assessee Company. As only a portion of the contractual work with Pratt & Whitney has been parcelled out to ISSI, it means that, if ISSI has provided technical services to the assessee, the assessee has also provided to Pratt & Whitney, not software development services but technical services. Actually, the Assessee Company has been allowed relief U/s.80HHE which is available only for export of software. The assessee Company was also allowed for some of its Units relief u/s 10A/10B which is also available only for export of software and not provision of technical services. For some years or Units, the relief under section u/s 10A/10B was denied not on the ground that the assessee Company did not export software but on other technical grounds. So, the finding that the ISSI provided technical services in contra distinction to software development services is without basis. Actually, there is a clear distinction between these two activities and the distinction is evident from clauses (i) & (ii) of 80HHE itself.

The reliance by the CIT(A) on the decision of the Chennai bench of the Tribunal in the case of Asst. CIT vs Evolv Clothing Co. Pvt. Ltd (142 ITO 0618) for the proposition that the ISSI provided technical services to the assessee Company is misplaced. In that decision, the provider of technical services had to undertake systematic research and the benefits of the research went directly to the recipient of the services. In the present case, ISSI did not undertake any research and, at any rate, the benefit of the research did not accrue to the assessee Company. The CIT(A) has not even considered the plea of the assessee that, even assuming that the amount of Rs. 2.01,40,454/- represents technical services fee paid to ISSI, it is not taxable in India in view of sub- clause (b) of clause (vii) of section 9(1) as the services are used by the Appellant in a business carried on by it outside India or used for the purpose of earning income from a source outside India and are not "utilized' in India. The payment in question has been made for earning income from the contract with Pratt & Whitney which is a 'source' outside India. As per the decision of the Tribunal in IBM World Trade Corpn. Vs Deputy Director of Tax, International taxation, Circle 1(1), Bangalore [IT Appeal No.759 (Bang) of 2011 S.P.No.50 (Bang) of 2012 AY 2007-08 dated 13th April, 2012] each separate contract constitutes a 'source' of income”.

20. We have heard both the parties and are of the opinion that the issue is covered in favour of the assessee by the decision of the Tribunal in assessee’s own case for AY 2006-07 & 2007-08. Further the Department filed appeal before the Hon'ble High Court against the Tribunal’s order, however, no ground was raised against this issue. Hence, this ground of the assessee is allowed.

21. The next ground is with respect to extra depreciation claimed on computer software of Rs. 4,13,14,674. The fact is that aassessee bought some new computers and also some software and calculated depreciation @60% on both the assets. The AO granted depreciation @ 60% on the opening WDV of the computers and value of additions to computers, but restricted it to @25% on the additions to the software. The AO held that, in terms of Item 2(b) under Machinery and Plant (Item III of Part A of the Depreciation schedule) relevant for the assessment years 1988-89 to 2002-03, the depreciation is allowable @60% only on computers and not on software. It is only from A.Y 2003-04 to 2005-06, the depreciation is allowable "on computers including computer software" @60% in terms of Item 4 under Machinery and Plant (Item III of Part A of the Depreciation schedule). Apparently, based on this distinction between the two schedules, the Assessing officer restricted the grant of depreciation @60% to computers and allowed depreciation on software at only 25% which is the general rate applicable to Plant & Machinery. He added the difference of Rs. 4,13,14,874/- as excess depreciation claimed.

22. The ld Counsel submitted before the CIT (A) that the Assessing officer has missed the point that purchase of software doesn't add to the production capacity of the assessee. It may add to the efficiency of operations. In the scenario of fast changing technology, the software gets outdated very fast. It has been held by the apex court in the case of Empire Jute co. Ltd vs CIT (124 ITR 0001), that enduring benefit is not the only criterion for judging whether an item of expenditure is on capital account or on revenue. The relevant portion of the head note reads as under;

"(ii) there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an Appellant that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the Appellant's trading operations or enabling the management and conduct of Appellant's business to be carried on more efficiently or more profitability while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstance of a given case. "

23. The CIT(A) has confirmed the disallowance with the following remarks:

"The argument of the Appellant that software does not improve the production capacity but only increases the efficiency is not acceptable because any increase in efficiency invariably gives rise to greater production. Further, worldwide the introduction of specialized software has greatly reduced the production time, thereby vastly improving the quantum of production. I find that the assessing officer is correct in allowing depreciation at the rate of 25% in the current year".

24. On appeal before us, the ld Counsel submitted that the above reasoning of the CIT(A) goes exactly counter to the ratio of the decision of the apex court in the case of Empire Jute Co. Ltd (supra) and so deserves to be rejected. He further pointed out that in the case of CIT vs. Varinder Agro Chemicals Ltd. (309 ITR 272 (PUN)), the Hon'ble Punjab and Haryana high court held, as per the head note, as under;

"Held that there was nothing to show that the software used by the Appellant was of enduring nature and would not become outdated. Since technology is fast changing and day-by-day systems are being developed in a new way, software may be needed like raw material. The view taken by the Tribunal was certainly a possible view. Thus, no substantial question of law arose".

25. It was argued that in the case of CIT vs Asahi India Safety Glass Ltd. (203 Taxman 277), it was held that expenditure incurred to enable management to run its business effectively, efficiently and profitably, leaving fixed assets untouched, would be an expenditure in nature of revenue expenditure even though advantage may last for an indefinite period. Accordingly, it was held that expenditure on purchase of application software being Oracle was allowable as revenue expenditure. It was also submitted that the expenditure incurred by the assessee, being on application software like CAD, Catia, Unigraphics etc, is similar.

26. However, in the course of hearing the ld Counsel conceded this ground. Accordingly this ground is dismissed.

27. The next ground is that the CIT(A) erred in holding that the expenditure/ incurred in foreign currency of Rs. 12,08,19,698/- is to be reduced from "export turnover" while granting the deduction under section 80HHE. The breakup of this expenditure is available at page 86 of the annual report for FY 2001-02 it is as under:

Expenditure in Foreign Currency:-

a) Travelling	Rs.9,93,64,053
b) Subscriptions	Rs.4,71,156
c) Professional services	Rs.2,09,84,489
Total	Rs.12,08,19,698

28. The ld Counsel submitted that the definition of export turnover as given in Clause C of the Explanation to 80HHE reads as under:

(c) "export turnover" means the consideration in respect of computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section(2), but does not include freight, telecommunication Charges or insurance attributable to the delivery of the computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India".

29. It was further submitted that the above definition doesn't rope in expenditure on travel and subscriptions. So, the reduction from export turnover of Rs. 9,98,35,209/- (Rs.9,93,64,053 + Rs. 71,156/- is not at all warranted. The balance of Rs. 2,09,84,489/- includes Rs. 2,01,40,454/- paid to ISSI for the services rendered in the context of the assessee contractual obligations to Pratt & Whitney. The amount of Rs. 2,09,84,489/- represents expenditure in foreign currency incurred in providing software development services which is the main activity of the assessee Company. This expenditure was not incurred in providing technical services by the assessee outside India. It is not at all the case of either the AO or the CIT(A) that the Appellant was in the business of providing technical services. What the CIT(A) held was only that the amount paid by the assessee to USA subsidiary i.e. ISSI, i.e., Rs. 2,01,40,454/- is for technical services received from that entity. It is not the case of even the CIT(A) that the assessee company provided technical services to ISSI. The definition of export turnover covers only "expenditure incurred in foreign exchange in providing the technical services outside India" and not expenditure incurred while receiving technical services or providing software services. So there is no basis for reducing this amount of even Rs. 2,09,84,489/- from export turnover while granting a deduction under section 80HHE.

30. It was also pointed out that this amount of Rs. 2,09,84,489/- or even the entire amount of Rs. 12,08,19,698/- has not been charged to the customers and so is not included in export turnover and so there is no justification for reducing it from export turnover.

31. The ld Counsel placed reliance on the decision of the Tribunal for the AY 2006-07 in ITA No. 775/Hyd/2013 wherein, while considering the analogous definition of "export turnover" in clause (iv) of Explanation 2 to section 10A, it was held as under:

"If it is really a fact then there cannot be any reduction of the said amount from the export turnover when the assessee has not at all included it in the export turnover while computing deduction U/s. 10A of the Act. We therefore direct the Assessing Officer to verify this fact and if on verification it is found that the assessee has not included the said amount while computing the deduction U/s. 10A then there is no question of reducing it from export turnover for the purpose of computing deduction u/s. 10A of the Act. Even otherwise also, the alternative contention of the assessee is not without substance. When any amount being in the nature of freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India are to be excluded from the export turnover, then the same is also required to be excluded from the total turnover for the purpose of computing deduction u/s. 10A of the Act. This view of ours gets support from the decision of Hon'ble Bombay High Court in the case of CIT Gem Plus India Ltd. (330 ITR 175 and Income-tax Appellate Tribunal Chennai Bench in case of Sak Soft Ltd. (30 SOT 55). Hence this ground is allowed for statistical purposes"

32. We have heard both the parties. We are of the opinion that the amount of Rs. 12,08,19,698 can be considered for exclusion, only if it represents expenses incurred in foreign currency while providing technical services. In the present case the assessee has not provided any technical services. Further, it is not charged to the customers and so not included in export turnover. The principle that what is not included cannot be excluded has been accepted by the ITAT in the assessee’s own case as reproduced at Para No.32 above. Hence this ground raised by the assessee is allowed.

33. The next ground is that the ld CIT (A) erred in holding that the communication expenses of Rs. 92,60,349 are excludible from “export turnover” for granting deduction u/s 80HHE. Export turnover is defined under clause (iv) of Explanation 2 to sec.1 OA of the IT Act and it reads as under:

"export turnover" means the consideration in respect of export [by the undertaking] of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses ,if any, incurred in foreign exchange in providing the technical services outside India;"

34. The ld Counsel submitted that what the assessee incurred are actually soft link charges for availing a dedicated cable link from the internet service provider. What are to be excluded in terms of the definition of the "export turnover" in clause (iv) of Explanation 2 to section 10A is "telecommunication charges" and not soft link charges. Telecommunication charges cannot, it is submitted, be identified with soft link charges. The former relates to telephonic expenditure whereas the latter relates to internet. Strictly, they are different and so the soft link charges incurred by the assessee are not liable to be excluded in terms of the said definition.

35. It was further submitted that amount of Rs. 92,60,349/-. If it cannot be considered even as expenses incurred in foreign currency in providing the technical services outside India. The objection against such consideration is that the assessee has not provided any technical services. The assessee has only rendered software development services or exported software to its customers outside India and has not rendered any technical services.

36. The ld Counsel relied on in case of Patni Telecom (P) Ltd. Vs ITO 120 ITO 105, the ITAT, Hyderabad bench has made the following distinction:

"The assessee did not render any independent technical services. It developed software on contract basis as per the agreement and handed over the same to the customer........ There is software development agreement between the client and the assessee. The expenditure incurred is for development of Software.... Such expenses incurred cannot be said to be expenditure for technical services. If the technical services are rendered independently which are being agreed to be separately charged in addition to the price of the goods, in such circumstances, expenditure incurred could be in the nature of expenditure for the purpose of technical services...... Such expenditure is not in the nature of expenditure for technical services. Since the expenditure is not for technical services, there is no need to exclude these expenditures from consideration received in convertible foreign exchange for the purpose of calculating 'export turnover' as defined in cl. (iv) of Expln 2 to S. 10A".

37. It was also submitted that the amount of Rs. 92,60,349/- is a payment made by the Assessee which has not been charged to the customers. It is not included in the invoices raised by the appellant on the customers. It is separately debited to the Profit & Loss account. It is not included in the export turnover. What is not included in the export turnover cannot be reduced from it for working out the deduction under Section 10A. In the case of Patni Telecom Pvt Ltd vs Income tax officer (supra). The Tribunal held that expenses which are not included in the consideration received in convertible foreign exchange cannot be reduced from the export turnover.

38. It was pointed out that when the AO excluded the said amount of Rs. 92,60,349/- from export turnover, he should have, in the interest of fairness, excluded it from the total turnover also for computing the deduction U/s. 10A(4).

39. In this context, reliance is placed on the decision of the Hon'ble High Court of Karnataka in the case of Commissioner of Income-tax Vs. Tata Elxsi Ltd ([2012] 17 Taxmann.com 100 (Kar.)) which follows the decision of the Apex Court in the case of CIT v. Lakshmi Machine Works ([2007] 290 ITR 667 I 160 Taxman 401) In view of the above, the exclusion of Rs. 92,60,349/- from the export turnover may be deleted and the deduction U/s.10A may be allowed without such exclusion.

40. We heard both the parties. We find that this amount is not charged to the customer and so not included in the “export turnover” and so cannot be reduced from it. This issue is covered in favour of the assessee by the order of the Tribunal in the assessee’s own case for AYs 2006-07 & 2007-08 (supra). This ground is allowed.

41. The next ground is that the AO erred in adjudicating in this assessment year upon the taxability of Rs. 36,65,000/- and Rs. 17,50,000/- being the amounts that accrued to the Aassessee Company on forfeiture of convertible share warrants. It was submitted by the ld Counsel that the AO grossly erred in holding these amounts represents revenue receipts of the Aassessee Company.

42. The CIT(A) mentioned in Para 14.1 of his order that "the assessee had also stated that the issue was to be adjudicated in this year and not in the AY 2004-05". In the course of the appeal before the CIT(A) for the AY 2004-05 in ITA NO.0133/2011/2012 the Appellant Company pleaded that the above amounts were not taxable in the AY 2004-05 as the forfeiture of the share warrants in question took place in the FY 2001-02 and so these amounts were not assessable for the AY 2004-05.

43. It was submitted that the assessee had not agreed for the adjudication of their taxability or their addition for the assessment year 2002-03 as stated by the CIT(A). It was argued that the CIT (A) had misrepresented the stand taken by the assessee for the AY 2004-05 and these amounts were not added by the AO in the impugned order for this assessment year. It was pointed that the AO added these amounts in a re-opened assessment for this assessment year i.e., 2002-03 and this assessment was cancelled by the CIT(A) himself vide his order dated 16th August, 2013 for the AY 2002- 03 in ITA NO.0186/ACAIT 2(1)/CIT(A)-1I1/2007-08 on the ground that the reopening was invalid. It was argued that having, the cancelled the assessment and thus deleting the addition of these two amounts, the CIT(A) assumed jurisdiction to bring these two amounts to tax in this assessment year and thus exposed the assessee Company to double jeopardy. The ld Counsel submitted that the CIT(A) can only adjudicate upon additions made by the Assessing Officer and not make new additions and the CIT(A) has not even issued a notice to the assessee for enhancement and the CIT (A) has not given any direction to AO to add these amounts for the AY 2002-03 and the CIT (A) suo moto made these additions which is totally untenable in law.

44. The ld Counsel submitted that the principle whether a forfeited amount is a capital receipt or a revenue receipt was also considered by the Supreme Court in the decision of Travancore Rubber and Tea Co., Vs. CIT [243 ITR 158]

45. The ld Counsel also placed reliance is also placed upon the following decisions.

i. Deputy Commissioner of Income Tax vs Brijlaxmi Leasing & Finance Ltd (118 ITD 546).

ii. Sunita Gupta Share Brokers Limited vs ACIT, Circle-9(1), New Delhi (ITA No.4188(Del)201 0, [G Bench]).

iii. CNB Finwiz Ltd, New Delhi vs Department of Income Tax (IT NO.3756/DeI/2010 [B Bench]).

iv. Haryana Financial Corporation vs Department of Income Tax (ITA NO.751/Chd/2011 [Chandiqhar Bench).

46. We find that the Hon’ble Supreme Court applied the principle enunciated in the case of London and Thames Haven Oil Wharves Ltd., Vs. Attwoll (Inspector of Taxes) (70 ITR 460) in the case of Travancore Rubber & Co vs. CIT (243 ITR 158) wherein it was held as under:

"Where, pursuant to a legal right, a trader receives from another person compensation for the trader's failure to receive a sum of money which, if it had been received, would have been credited to the amount of profits (if any)arising in any year from the trade carried on by him at the time when the compensation is so received, the compensation is to be treated for income tax purposes in the same way as that sum of money would have been treated if it had been received, instead of the compensation".

47. Hence, we are of the opinion that the forfeited amounts are to be treated as capital receipts. Further, these amounts were not added by the AO in the assessment and so the CIT (A) has no jurisdiction to include this amount in the assessment. Hence, this ground of appeal of the assessee is allowed.

48. In the result appeal in ITA No.1450/Hyd/2013 for AY 2002-03 is partly allowed.

ITA No.1452/Hyd/2013-A.Y 2004-05.

1. Grounds raised by the assessee read as under:

“1. The order of the CIT(A) dated 20th August2013 is contrary to the law and facts of the case.

2. The Ld. CIT(A) erred in holding that the expenditure incurred in foreign currency of Rs. 20,85,23,625 is to be reduced from "export turnover" while granting the deduction under section 80HHE.

3. The Ld. ClT(A) erred in holding that the amount of Rs. 2,79,081/-,being on-site software services is not a part of the business profits for the purpose of calculating the relief under section 80HHE.

4. The Ld. CIT(A) erred in holding that the amount of Rs. 11,99,94,156/- paid by the Appellant to M/S Infotech Software Solutions InC (ISSI), USA, the subsidiary of the Appellant, is of the nature of technical service fee and is a taxable receipt in the hands of the said non-resident company and as no tax was deducted at source under section 195, the said expenditure is disallowable in terms of section 40(a)(i).

5. The Ld. CIT(A) erred in holding that the payment of Rs. 67,56,552/-paid by the Appellant mainly to GE Network Solutions, Netherlands, and, to a small extent, to IBM Inc.USA, is under Section 40(a)(i) of the Income tax Act on the ground that this amount represented taxable incomes of the non-residents and, no tax was deducted at source on this amount in terms of section 195 of the Act.

6. The Ld.ClT(A) erred in holding that the amount of Rs. 48,25,974/- claimed under section 35(2AB) as weighted deduction cannot be allowed on the ground that there is no requisite approval from the prescribed authority.

7. The Ld. CIT(A) erred in holding that the communication expenses of Rs. 92,60,349/- are excludible from "export turnover" for granting the deduction under section 80HHE.

8. The Ld. CIT (A) erred in holding that the amount of Rs. 1,46,34,OOO/- received by way of forfeiture of convertible share warrants is taxable as a revenue receipt “. 6.

2. Ground 1 is general in nature; hence no specific adjudication is called for.

3. Ground No.2 is covered by the decision in assessee’s own case for AY 2002-03 wherein at Para Nos. 32 & 33, we have adjudicated as follows:

32. The ld Counsel placed reliance on the decision of the Tribunal for the AY 2006-07 in ITA No. 775/Hyd/2013 wherein, while considering the analogous definition of "export turnover" in clause (iv) of Explanation 2 to section 10A, it was held as under:

33. We have heard both the parties. We are of the opinion that the amount of Rs. 12,08,19,698 can be considered for exclusion, only if it represents expenses incurred in foreign currency while providing technical services. In the present case the assessee has not provided any technical services. Further, it is not charged to the customers and so not included in export turnover. The principle that what is not included cannot be excluded has been accepted by the ITAT in the assessee’s own case as reproduced at Para No.32 above.

4. In Ground No. 3 assessee submitted is that the CIT(A) erred in holding that the amount of Rs. 2,79,081/- received on account of on-site software services is not part of the business profits. The Assessing Officer excluded this amount with the following remarks;

"On verification of the details of export of computer software services, it is observed that the assessee has shown onsite consultancy services of Rs. 2,79,081/- pertaining to Unit-I, Hyderabad and claimed deduction U/s.80HHE on the same. However, as per the provisions of clauses (b) of Explanation to Sec 80HHE of the LT Act, the services rendered that qualifies for exemption as notified by the CBDT vide notification No.11521 dated 26.09.2000 has not specified the consultancy services for the definition of 'Computer Software' for the purposes of Sec 80HHE. Hence, the consultancy services mentioned above does not qualify for exemption/deduction under Sec 80HHE. Accordingly, the same is excluded from the profits of the business while computing the deductions".

5. The ld Counsel submitted that the services provided by the appellant are in the nature of item (v) and (vi) of the above notification which read as under;

(v) Engineering and Design;

(vi) Geographic Information System Services;

6. He further submitted that the services rendered to our customer Pratt & Whitney etc. fall under item (v) above and to other clients like Tom Tom etc. fall under item (vi) above. Considering the above facts, the ground may be allowed. The CIT(A) ought to have realized that the receipt in question is for onsite software services and such services qualify as exports as per the clarification given by the CBDT vide its Circular Dt. 17.01.2013 (F. No. 178/84/2012-ITA-1).

7. We heard both the parties. We are of the opinion that this amount has to be included in “profits of business” by virtue of the Explanation to section 80HHE and also by the CBDT Circular dated 17.01.2013.

8. In Ground no. 4 assessee submitted that the CIT(A) erred in holding that the payment of Rs. 11 ,99,94, 156/- paid to ISSI, the 100% US subsidiary of the appellant, is disallowable under Sec 40(a)(i) of the Income tax act on the ground that this amount represented taxable income of the non-resident and no tax was deducted at source on the payment in terms of section 195(1) of the Act.

9. Regarding the allowability of this issue, the written submissions filed for the AY 2002-03 in ITA NO.1450/Hyd/13 has been filed by the ld Counsel for the assessee.

10. We find that the issue is covered in favour of the assessee by the decision of the Tribunal in assessee’s own case for the AY's 2006-07 and 2007-08 in ITA No.s 115 & 2184/Hyd/2011. This ground is similar to that of Ground No.4 for the A.Y 2002- 03 wherein we have adjudicated at Para 21 and the same conclusion shall be drawn in the appeal for this year also. This ground is allowed.

11. Ground No.5 is that the CIT(A) erred in holding that the amount of Rs. 67,56,552/- paid to G E Network Solutions, Netherlands and IBM Inc, USA are disallowable under section 40(a)(i) of the I T Act as relevant remittances to them were made without deduction of tax at source in terms of section 195(1) of the Act.

12. The assessee has purchased computer software of Rs. 67,56,552/- and also written off Rs. 1,95,38,471/- and thus debited Rs. 2,62,95,023/- to the profit & loss account (included in schedule 14 to profit & loss account). The A0 allowed amount written off of Rs. 1,95,38,471/-. The major portion of Rs. 67,56,552/- represents the payment made to a foreign company, M/s.GE Network Solutions, Netherlands. The tax payer purchased Software called "Small World software" from the Dutch company and bundled with its own software and thus customized it and sold it to its own customers both in India and abroad. As the payment is made to a nonresident company, the Assessing officer held that the payment represented, not the purchase price of the software but, actually, royalty payment to the Dutch company. He also noticed that no tax was deducted at source on the said royalty payment u/s 195 of the Income tax act, and invoked the provisions of 40(a)(i) and accordingly disallowed the expenditure on the alleged royalty payment.

13. This issue is covered in favour of the assessee by the order of the Tribunal in assessee’s own case for the A.Y's 2006-07 & 2007 -08 in ITANo.115/Hyd/2011 in which it has been held as under:

"26. Now we address the issue of characterization of these payments as Royalty so as to fall under Section 9(1)(vi) or Article 12 of India- Netherlands DTAA. We find that the assessee has purchased the Small World Software from Netherlands and bundled it with its own software and thus customized it and sold it to its own customers both in India and abroad. The assessee cannot meddle with the copies of the software in the process of its customization. We also observe that the assessee has to purchase the said software each time it wanted to sell the bundled software to its customers and if it had got any right to the copyright to the said software it would not have bought it every time when it wanted to sell. Further, perusing the books of the assessee at pages 170 to 175 of the paper book, we find that there are multiple purchases of software during the year and each purchase of single item on software is merely one thousand rupees and not huge amount. Hence, we are of the opinion that they are simply purchase cost of trading goods especially when the licence in respect of software is not obtained by the assessee and the perpetual licence is given directly to the end customer by the vendor company. Copies of the invoices raised by the Net Work Solutions on the assessee and at paper book 261 to 265 support the view of the assessee where the invoice mentioning name of the end customer supports our view. Hence, in our opinion, when there is no transfer of even the license to the assessee even through it is the purchaser, it cannot be said that there is any royalty payment by the assessee to the vendor company. The amount of Rs. 52, 55, 881/- is simply the cost of imported trading goods and not royalty payment".

14. We also find that the appeal filed by the Department against the order of the Tribunal has been dismissed by the jurisdictional H.C in ITTA No.485 of 2014 dated 25.7.2014. Therefore, following the order of the Tribunal for AY 2006-07 and 2007-08 in assessee’s own case, we allow Ground No.5 raised by the assessee.

15. Ground No.6 is as follows: The ld CIT(A) erred in holding that the amount of Rs. 48,25,974/- claimed as weighted deduction u/s 35 (2AB) cannot be allowed on the ground that there is no requisite approval from the prescribed authority. It was submitted by the ld Counsel that the assessee had the necessary approval of the Dept. of Scientific and Industrial Research for the last so many years and it has been renewed periodically. The recognition for the relevant period dated 11 Mar 2003 bearing No. TU/IV-RD/1812/2003 was filed before the CIT(A) and before the ITAT at page 266 of paper book.

16. We have perused the approval from the prescribed authority at page No.266 of the paper book and in view of the approval of the concerned Dept; the disallowance in question is deleted. In the result, this ground of the assessee is allowed.

17. In Ground No. 7, assessee submitted that the CIT(A) erred in holding that the communication expenses of Rs. 92,60,349/- are excludible from "export turnover" for granting the deduction under section 80HHE. It was submitted by the ld Counsel, that this ground has been raised mistakenly, as there is no such addition for this year. Hence, this ground is not pressed and treated as dismissed.

18. Ground No.8 is that the CIT(A) erred in making an addition of Rs. 1,46,34,0001- being the upfront amount paid by Carrier International Mauritius Ltd., in an earlier year by way of subscription to the share warrants of the assessee Company and forfeited during this year. He made the disallowances with the following remarks:

"In normal course when a company approaches the public through issue of prospectus for subscription of the amount towards it share capital, the public at large are the contributors but not a specified person. In the instant case it is not a public issue. It is only an offer to one specific company by name Carrier International Mauritius Ltd (CIML) (A group company of United Technologies Corporation acting through its Pratt & Whitney Division). Moreover, on examination of the Stock Purchase Agreement copy between the Assessee Company and CIML dated 31.01.2002 clearly states that Pratt & Whitney is a strategic customer and consumer of the assessee company and certain services. It is also mentioned in it that both the parties agreed that the assessee company's ability to deliver such services to Pratt& Whitney would benefit from a closer affiliation between Pratt & Whitney and the assessee company. This shows that the entire transaction of issuing Warrants that represents a right to acquire Equity shares of the assessee company in future is nothing but a transaction which has the impact of improving business/business promotion. Therefore, as the very purpose of this transaction is related to the business, whatever amount, by whatever name may be called, received in this respect can be construed as Revenue Receipt and will be subjected to income tax. In view of the above, the amount credited to the Profit & Loss account under appropriation is treated as income and added to the income returned."

19. The CIT(A) agreed with the Assessing Officer and held that share warrant is not a capital instrument and that the purpose of issuing of convertible shares was not to raise capital but to improve the performance of the company and that the subscriber to the share warrants i.e., Carrier International Mauritius Ltd (CIML) is a group company of Pratt & Whitney.

20. This issue has already been decided in assessee’s own case in the AY 2002-03 at Para Nos.46 & 47.

21. In the result, appeal in ITA No.1452/Hyd/2013 is allowed.

ITA No.1451/Hyd/2013- A.Y.2005-06

1. Grounds raised by the assessee read as under:

“1. The order of the ld CIT (A) dt. 20.8.2013 is contrary to the law and facts of the case.

2. The ld CIT (A) erred in not considering various grounds raised to the effect that reopening of assessment after four years on a mere change of opinion when there is no failure on the part of the appellant to disclose all material facts is invalid.

3. The ld CIT (A) ought to have noticed that under similar circumstances, he cancelled the reopened assessment for A.Y 2002-03.

4. The ld CIT (A) grossly erred in giving the finding to the following effect:

“This amount along with the amount of Rs. 17,50,000 also forfeited during financial year 2001-02 will be considered in the appeal order for A.Y 2002-03”. This amount refers to Rs. 34,65,000 forfeited from M/s. Callaghan Partners Corp.

i) The CIT(A) has assumed powers he does not have by the above unwarranted remark and has artificially extended the time bar limit to consider the above amounts of Rs. 34,65,000 and Rs. 17,50,000 for A.Y 2002-03.

5. The ld CIT (A) ought to have realized that the above two amounts were already brought to tax by the AO in a reopened assessment and the ld CIT (A) has himself cancelled the assessment and that, by virtue of the above remark, he is putting the appellant to double jeopardy”.

2. The assessee filed its return of income for A.Y 2004-05 on 1.11.2004 declaring total income of Rs. 10,68,00,650. AO completed the assessment on 30.08.2011 u/s 143(3) r.w.s. 147 of the Act, determined total income at Rs. 20,35,21,590. Aggrieved, assessee filed appeal before the CIT (A).

3. The ld CIT (A) held as under:

“4.4 I have seen carefully the facts and evidence. I have also gone through the paper book where the appellant has attached most of the documents which were submitted before the AO. I find that vide letter dt. 13.12.2007 and addressed to the Asstt. Commissioner of Income Tax, Circle 2(1) Hyderabad, the appellant has stated in Para 9 of its reply that as per the agreement the amount payable to the appellant by Callaghan Partners (CP) in respect of share options was due on 14.05.2001 i.e. in the financial year 2001- 02. This is quoted below:

“7. Therefore, the forfeiture was in terms of the statutory guidelines of SEBI. It was not open to the assessee to refund the entire amount originally invested towards future purchase of shares of the assessee company. Had CP exercised the option, the amount paid in advance would have been adjustable and adjusted towards the share capital account.

8. Apart from the above statutory obligation, there is specific condition in the agreement between the assessee and CP as under:

“Use of proceeds: The amount shall be utilized for acquisition, capital expenditure, working capital requirements and other direct corporate requirements”.

9. The quoted value of the shares which are quoted in the stock exchange as on the date of issue of option to the above share holders i.e. 15-11-1999 was Rs. 128500 & Rs. 1179.05 (open and close respectively). The offer was at the rate of Rs. 350 per share on.........

4.5 From the above it is clear that the forfeiture if any had to be done in that year and not in the current year.

4.6 During appeal proceedings the appellant was confronted with Para 4 of the assessment order wherein the AO has quoted from the reply of the AR during the course of assessment proceedings mentioning clearly that the amounts were forfeited in F.Y 2003-04. The appellant replied that this was a typographical error and it is amply evidenced by all the financial reports and other documents submitted to the AO during the course of assessment proceedings.

4.7. In view of the above facts and circumstances, the AO is directed to verify the contention of the appellant that the forfeiture actually took place in the FY 2001- 02. If such is the case then no amount is taxable in the current year. This amount along with the amount of Rs. 17,50,000 also forfeited during FY 2001-02 will be considered in the appeal order for AY 2002-03.

5. The other grounds regarding reopening u/s 147 and merits of the addition are not being adjudicated upon because the only addition in question has been deleted as discussed above.

6. In the result appeal is partly allowed”.

4. We heard both the parties. The amount of Rs. 17,50,000 and Rs. 34,65,000 were brought to tax in the reopened assessment for the AY 2002-03 and CIT (A) cancelled the assessment on the ground that it was invalid. Hence these amounts cannot be brought to tax for the same AY once again putting the assessee to double jeopardy. Hence these grounds of appeal (i.e Ground Nos. 1 to 5 ) of the assessee are allowed.

ITA No.1453/Hyd/2013 - AY 2005-06

1. Ground No.1 is general in nature.

2. Ground No.2 is that the ld CIT (A) erred in holding that the amount of Rs. 60,09,040 paid to M/s G.E.Network Solutions, Netherlands is disallowable u/s 40(a)(i) of the I.T. Act.

3. We find that this issue is covered by order in assessee’s own case for AY 2004-05. In Ground No.5 for AY 2004-05, we have decided this issue at Para Nos.17 & 18,which reads as under:

17. This issue is covered in favour of the assessee by the order of the Tribunal in assessee’s own case for the A.Y's 2006-07 & 2007 -08 in ITANo.115/Hyd/2011 in which it has been held as under:

18. We also find that the appeal filed by the Department against the order of the Tribunal has been dismissed by the jurisdictional H.C in ITTA No.485 of 2014 dated 25.7.2014. Therefore, following the order of the Tribunal for AY 2006-07 and 2007-08 in assessee’s own case, we allow Ground No.5 raised by the assessee. Hence, following the above order, this ground is allowed.

4. Ground No.3: The ld CIT (A) erred in holding that the amount of Rs. 13,53,35,718 paid to ISSI, USA, 100% subsidiary of the Appellant is hit by the provisions of sec.40(a)(i) of the I.T. Act by failing to realise that the amount was not a sum chargeable under the I.T. Act.

5. We find that this issue is covered in favour of the assessee by the decision of the Tribunal in assessee’s own case for AYs 2006-07 and 2007-08 in ITA Nos. 115 & 2184/Hyd/2011. This ground is similar to that of Ground No.4 for AY 2002-03 wherein we have adjudicated our conclusions at Para 21 and the same conclusion shall be drawn in the appeal for this year also. This ground is allowed.

6. Ground No.4: The ld CIT (A) erred in holding that the software link service charges amounting to Rs. 57,78,044 is excludible for the purpose of computation of export turnover defined under clause 4 of Explanation 2 u/s 10A of the I.T. Act.

7. We find that this ground is similar to Ground No.7 for AY 2002-03 in assessee’s own case. We have decided the issue at Para Nos. 39 & 40 and the same conclusions may be followed in this year also. This ground is allowed.

8. In the result assessee’s appeal in ITA No.1453/Hyd/2013 is allowed.

ITA No.1455/Hyd/2013 - A.Y 2002-03 Revenue’s Appeal

1. Grounds raised by the Revenue read as under:

“1.The CIT (A) erred on facts in law in holding that the re assessment is invalid though there was clear incorrect claim on the part of the assessee to disclose amount received on forfeiture of share warrants as income.

2. The CIT (A) erred on facts and in law in holding that the re-assessment is invalid though as per explanation 1 to section 147 production before the AO of account books or other evidence from which material evidence could with due diligence have been discovered by the AO will not necessarily amount to disclosure within the meaning of the foregoing proviso.

2. The facts are that the assessee company filed its return of income for the A.Y 2002-03 on 31.10.2002 declaring total income under normal provisions of Rs. 11,15,41,644. The AO completed the assessment on 28.12.2007 u/s 143(3) r.w.s. 147 of the Act and determined total income at Rs. 11,55,64,714. The notice u/s 148 was issued on 13.6.2007.

3. The CIT (A) has held as follows:

“4.13 The A.Y ended on 31.03.2003. As per proviso to section 147 discussed supra the conditions for reopening of the assessment change after 31.03.2007, i.e. after 4 years from the end of the assessment year. If the assessment was now to be reopened, it was the duty of the AO to prove that there was default on the part of the appellant to fully and truly disclose all material facts and income had escaped assessment because of this default. The notice under section 148 was issued on 13.06.2007 i.e. beyond the time period of 4 years.

4.14. A look at the record shows that the appellant had attached all the relevant material with the return of income and had clearly provided the profit & loss a/c for the current year and for the preceding year. The same had been certified by the Chartered Accountant. Thereafter there being no collection of any further information on record, the AO once again issued notice u/s 148 of the Act as discussed supra.

4.15 There is no new information on record and the AO has not brought out any details showing how income had escaped assessment and what was the default committed by the appellant and what inaccurate information had been provided by the appellant. The record does not show any default committed by the appellant in this regard.

4.16 From above it is clear that the AO had taken a conscious decision regarding the issue at hand and he has not fulfilled the mandate of the relevant section by showing how the assessee had not fully and truly disclosed all material facts necessary for the assessment. As already discussed in detail supra, under the circumstances the assessment could not be reopened. Therefore, I hold that the reopening of the assessment by the AO is bad in law.

3. We have gone through the records and are of the opinion that all the material facts were disclosed by the assessee and it was merely a change of opinion on the part of the AO for reopening the assessment u/s 147. Following the ratios of the decision in the case of CIT vs. Kelivinator India (256 ITR 1), we dismiss the Revenue’s appeal.

4. Hence, in our opinion, the reopening of the assessment itself is bad in law, therefore, the reopened proceedings are held ab initio void. Hence the Revenue’s appeal is dismissed.

ITA No.1456/Hyd/2013 - A.Y 2005-06 Revenue’s Appeal

1. Before the ld CIT (A), the 6th ground of appeal related to the exclusion of communication charges in the form of software link service charges amounting to Rs. 57,78,044 from the export turnover for the purposes of exemption u/s 10A of the Income Tax Act. The CIT (A) held as follows:

“9.1 In the case of Patni Telecom Pvt. Ltd vs. ITO (2008) 22 SOT 26 (Hyd-Trib.), the Hon'ble ITAT Hyderabad has held that telecommunication charges are to be reduced both from the export turnover as well as from the total turnover. The Hon'ble ITAT has stated that with respect to communication and foreign travel charges, if an amount is reduced from the export turnover, then it also should be reduced from total turnover.

9.2 Respectfully following the aforementioned judgment of the Hon'ble ITAT Hyderabad, I hold that the AO is to reduce the software link service charges from both the export turnover as well as the total turnover”.

2. Aggrieved, the Department has come up on appeal raising the following grounds:

1. The order of the CIT (A) is erroneous on facts and law.

2. The CIT (A) erred in holding that the communication charges I the form of software link service charges are liable for exclusion from both the export turnover as well as the total turnover for the purpose of computing deduction u/s 10A of the IT Act 1961.

3. The CIT (A) ought to have observed that it has not been contemplated under the IT Act that the disallowances from the export turnover also should be reduced from the total turnover”.

2. We confirm the order of the CIT (A) wherein he has followed the decision of the ITAT in the case of Patni Telecom Pvt. Ltd vs. ITO (2008) 22 SOT 26, (Hyd-Trib), we hold that the AO has to reduce the software link service charges from both the export turnover as well as the total turnover.

3. In the result, Revenue’s appeal is dismissed.

4. To sum up, assessee’s appeals (ITA No.1451/Hyd/13 allowed, 1452/Hyd/2013 partly allowed, 1450/Hyd/2013 partly allowed, 1453/Hyd/2013 allowed and Revenue’s appeals (ITA Nos.1444 & 1456/Hyd/2013) are dismissed.

Order pronounced in the Open Court on 25th March, 2015.

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