ABB Global Industrial and Services Limited, Bangalore v. DCIT, Bangalore

ITA 1353/BANG/2011 | 2006-2007
Pronouncement Date: 31-10-2013 | Result: Partly Allowed

Appeal Details

RSA Number 135321114 RSA 2011
Assessee PAN AADCA3217B
Bench Bangalore
Appeal Number ITA 1353/BANG/2011
Duration Of Justice 1 year(s) 10 month(s) 4 day(s)
Appellant ABB Global Industrial and Services Limited, Bangalore
Respondent DCIT, Bangalore
Appeal Type Income Tax Appeal
Pronouncement Date 31-10-2013
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted A
Tribunal Order Date 31-10-2013
Date Of Final Hearing 23-10-2013
Next Hearing Date 23-10-2013
Assessment Year 2006-2007
Appeal Filed On 26-12-2011
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN JUDICIAL MEMBER AND SHRI JASON P. BOAZ ACCOUNTANT MEMBER ITA NO.1353/BANG/2011 ASSESSMENT YEAR : 2006-07 ABB GLOBAL INDUSTRIES AND SERVICES LIMITED (FORMERLY KNOWN AS ABB GLOBAL SERVICES LTD.) KHANIJA BHAVAN RACE COURSE ROAD 2 ND FLOOR EAST WING BANGALORE 560 001. PAN : AADCA 3217B VS. THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 11(1) BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI PERCY PARDIWALA SR. ADVOCATE RESPONDENT BY : SHRI BIJOY KUMAR PANDA ADDL. CIT(DR) DATE OF HEARING : 23.10.2013 DATE OF PRONOUNCEMENT : 31.10.2013 O R D E R PER N.V. VASUDEVAN JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DATED 21.10.2011 OF THE CIT(APPEALS)-I BANGALORE RELATING TO ASSESSMEN T YEAR 2006-07. ITA NO.1353/BANG/2011 PAGE 2 OF 19 2. GROUND NO.1 AND ADDITIONAL GROUND RAISED BY THE ASSESSEE ARE INTERLINKED AND ARE TAKEN UP TOGETHER FOR CONSIDERA TION. THE GRIEVANCE PROJECTED BY THE ASSESSEE IN GR.NO.1 IS AGAINST THE ACTION OF THE CIT(A) IN EXCLUDING TELECOMMUNICATION EXPENSES OF RS.40 79 92 1 FROM THE EXPORT TURNOVER. IT IS THE PLEA OF THE ASSESSEE THAT THE AFORESAID EXPENSES ARE NOT REQUIRED TO BE EXCLUDED FROM THE EXPORT TURNOVER OR IN THE ALTERNATIVE ONLY TELECOMMUNICATION EXPENSES INCURRED IN FOREIGN EXCH ANGE ATTRIBUTABLE TO DELIVERY OF SOFTWARE OUTSIDE INDIA ALONE OUGHT TO H AVE BEEN EXCLUDED FROM THE EXPORT TURNOVER. 3. THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN TH E BUSINESS OF SOFTWARE DEVELOPMENT SERVICES FOR INDUSTRIAL IT AND DEPLOYMENT FOR GROUP COMPANIES. IN THE COURSE OF ASSESSMENT PROCEEDINGS THE AO NOTICED THAT WHILE CLAIMING DEDUCTION U/S. 10A OF THE ACT THE A SSESSEE HAD INCLUDED A SUM OF RS.40 79 921 WHICH WAS EXPENSES INCURRED ON TELECOMMUNICATION FOR DELIVERY OF SOFTWARE OUTSIDE INDIA AS PART OF T HE EXPORT TURNOVER. ACCORDING TO THE AO THE DEFINITION OF EXPORT TURN OVER AS GIVEN IN EXPLN.2(I) TO SEC.10A OF THE ACT MEANS CONSIDERATION IN RESPEC T OF ARTICLES OF THINGS OR COMPUTER SOFTWARE RECEIVED IN OR BROUGHT INTO INDI A BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE IN ACCORDANCE WITH SUB -RULE (3) BUT DOES NOT INCLUDE FREIGHT TELECOMMUNICATION CHARGES OR INSUR ANCE ATTRIBUTABLE TO THE DELIVERY OF ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA. IN TERMS OF THE AFORESAID EXPLANATION 2(I)(B) OF SECTION 10A OF THE ACT THE AO HELD THAT WHILE COMPUTING DEDUCTION U/S. 10A OF THE ACT THE EXPORT TURNOVER SHOULD ITA NO.1353/BANG/2011 PAGE 3 OF 19 BE REDUCED BY TELECOMMUNICATION EXPENSES AND DEDUCT ION U/S. 10A RECOMPUTED. ACCORDINGLY DEDUCTION U/S. 10A CLAIMED BY THE ASSESSEE AT RS.12 46 75 479 WAS REDUCED TO RS.12 32 03 236. 4. AGGRIEVED BY THE ORDER OF THE AO THE ASSESSEE P REFERRED APPEAL BEFORE THE CIT(APPEALS). THE ASSESSEE CONTENDED BE FORE THE CIT(A) THAT THE TELECOMMUNICATION CHARGES INCURRED WERE NOT IN CONNECTION WITH THE DELIVERY OF SOFTWARE OUTSIDE INDIA AND THEREFORE TH E SAME SHOULD NOT BE REDUCED FROM THE EXPORT TURNOVER. ALTERNATIVELY T HE ASSESSEE ALSO RAISED A GROUND BEFORE THE CIT(A) THAT IF THE TELECOMMUNICAT ION CHARGES ARE EXCLUDED FROM THE EXPORT TURNOVER THEN THE SAME SH OULD ALSO BE REDUCED FROM THE TOTAL TURNOVER WHILE COMPUTING DEDUCTION U /S. 10A OF THE ACT FOLLOWING THE PRINCIPLE OF PARITY. 5. THE CIT(APPEALS) REJECTED BOTH THE CONTENTIONS O F THE ASSESSEE. 6. AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSESS EE RAISED GROUND NO.1 IN ITS APPEAL. THE ASSESSEE HAS FILED AN APPL ICATION FOR ADMITTING AN ADDITIONAL GROUND. THE ADDITIONAL GROUND IS AN ALT ERNATIVE SUBMISSION IN RELATION TO GROUND NO.1. IN THE ADDITIONAL GROUND THE ASSESSEE HAS RAISED A PLEA THAT IF TELECOMMUNICATION CHARGES ARE EXCLUD ED FROM THE EXPORT TURNOVER THEN THE SAME SHOULD ALSO BE REDUCED FROM THE TOTAL TURNOVER WHILE COMPUTING DEDUCTION U/S. 10A OF THE ACT FOLL OWING THE PRINCIPLE OF PARITY. SUCH A PLEA WAS RAISED BEFORE THE CIT(A) B Y THE ASSESSEE AND HAD BEEN DECIDED AGAINST THE ASSESSEE. INADVERTENTLY THIS WAS NOT TAKEN IN ITA NO.1353/BANG/2011 PAGE 4 OF 19 THE ORIGINAL GROUNDS OF APPEAL. WE ARE OF THE VIEW THAT THE ADDITIONAL GROUND OF APPEAL ARISES OUT OF THE ORDER OF THE CIT (A) AND THEREFORE THE SAME IS ADMITTED FOR ADJUDICATION. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS. AS FAR AS THE ALTERNATIVE CLAIM IS CONCERNED WE FIND THAT THE HONBLE HIGH C OURT OF KARNATAKA IN THE CASE OF TATA EIXSI LTD. [2012] 349 ITR 98 (KARN) HAS HELD THAT WHILE COMPUTING DEDUCTION UNDER SECTION 10A OF THE INCOME TAX ACT 1961 (THE ACT) EXPENDITURE INCURRED BY THE ASSESSEE IF EX CLUDED FROM THE EXPORT TURNOVER (ET) SHOULD ALSO BE EXCLUDED FROM THE T OTAL TURNOVER (TT). IT HAS BEEN HELD THAT THE TT WOULD HAVE TWO COMPONENTS ET AND DOMESTIC TURNOVER. THEREFORE IF THE ET IN THE NUMERATOR IS TO BE ARR IVED AT AFTER EXCLUDING CERTAIN EXPENSES THESE SHOULD ALSO BE EXC LUDED IN COMPUTING ET AS A COMPONENT OF TT IN THE DENOMINATO R. THOUGH THERE IS NO DEFINITION OF TT IN SECTION 10A OF THE ACT THERE IS NOTHING IN THE SAID SECTION TO MANDATE THAT WHAT IS EXCLUDED FROM THE NUMERATOR AND WOULD NEVERTHELESS FORM PART OF THE D ENOMINATOR. THE PRINCIPLE LAID OUT IN JUDGEMENTS RENDERED IN CO NTEXT OF SECTION 80HHC OF THE ACT WILL EQUALLY APPLY WHILE INTERPRET ING SECTION 10A OF THE ACT SINCE THE PRINCIPLE UNDERLYING BOTH THESE P ROVISIONS IS THE SAME. 8. IN VIEW OF THE AFORESAID DECISION OF THE HONBLE HIGH COURT OF KARNATAKA WE ARE OF THE VIEW THAT THE GRIEVANCE OF THE ASSESSEE PROJECTED IN THE ADDITIONAL GROUND WOULD GET REDRESSED IF TH E AO IS DIRECTED TO REDUCE THE TELECOMMUNICATION EXPENSES FROM THE EXPORT TURN OVER AS WELL AS THE ITA NO.1353/BANG/2011 PAGE 5 OF 19 TOTAL TURNOVER WHILE COMPUTING DEDUCTION U/S. 10A OF THE ACT. WE HOLD AND DIRECT ACCORDINGLY. 9. IN VIEW OF THE FACT THAT THE ALTERNATE CONTENTIO N RAISED BY THE ASSESSEE IS SUPPORTED BY THE DECISION OF THE HONBL E JURISDICTIONAL HIGH COURT IN THE CASE OF TATA EIXSI LTD. (SUPRA) AND IN VIEW OF THE FACT THAT THE SUM INVOLVED IN GR.NO.1 WAS VERY SMALL HAVING I NSIGNIFICANT TAX IMPLICATIONS THE LD. COUNSEL FOR THE ASSESSEE SUBM ITTED THAT THE MAIN GROUND RAISED IN GROUND NO.1 IS NOT PRESSED FOR ADJ UDICATION. 10. GROUND NO.2 RAISED BY THE ASSESSEE READS AS FOL LOWS:- 2. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ATT RIBUTION OF INTEREST INCOME AMOUNTING TO RS.413 000/- AS INCOME FROM OTHER SOURCES WITHOUT CONSIDERING THE FACT THE SAME WAS E ARNED OUT OF BUSINESS PROFITS OF THE COMPANY FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 10A OF THE INCOME TAX ACT. IT IS SUBMITTED THAT THE LEARNED CIT(A) OUGHT TO HA VE APPRECIATED THE FACT THAT ANY INVESTMENT MADE OUT OF TEMPORARY FUND AVAILABLE FROM BUSINESS OF DELIVERY OF SOFTWARE CANNOT BE TRE ATED AS INCOME FROM OTHER SOURCES AS THE COMPANY IS NOT IN THE LIN E OF INVESTMENT BUSINESS FOR THE PURPOSE OF COMPUTING U/S. 10A OF T HE INCOME TAX ACT. 11. THE ASSESSEE EARNED INCOME FROM SHORT TERM DEPO SITS. THE AFORESAID INTEREST INCOME OF RS.4 13 000 WAS CLAIME D BY THE ASSESSEE TO BE PART OF THE BUSINESS INCOME OF THE ASSESSEE. TH E AO WAS OF THE VIEW THAT INTEREST INCOME EARNED ON DEPOSITS HAD TO BE A SSESSED UNDER THE HEAD INCOME FROM OTHER SOURCES AND ACCORDINGLY H E EXCLUDED THE INTEREST ITA NO.1353/BANG/2011 PAGE 6 OF 19 INCOME FROM INCOME FROM BUSINESS WHILE COMPUTING DEDUCTION U/S. 10A OF THE ACT. 12. ON APPEAL BY THE ASSESSEE THE CIT(APPEALS) CON FIRMED THE ORDER OF THE AO. IN COMING TO THE AFORESAID CONCLUSION THE CIT(A) PRINCIPALLY RELIED ON THE FACT THAT THE PROFITS THAT ARE ELIGIBLE FOR DEDUCTION U/S. 10A OF THE ACT HAVE TO BE DERIVED FROM THE BUSINESS OF EXPORT AND INTEREST INCOME CANNOT BE SAID TO BE PROFITS DERIVED FROM THE BUSINESS OF EXPORT. 13. AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSES SEE HAS PREFERRED GROUND NO.2 BEFORE THE TRIBUNAL. 14. THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTEN TION TO PAGE 16 OF THE PAPERBOOK (PB) WHICH CONTAINS THE DETAILS OF TH E INTEREST INCOME. HE POINTED OUT THAT SURPLUS BUSINESS FUNDS NOT IMMEDIA TELY REQUIRED HAD BEEN TEMPORARILY PARKED IN FDS. IN THIS REGARD HE DREW OUR ATTENTION TO THE FACT THAT THE FDS WERE MADE FOR PERIODS RANGING FROM 6 D AYS TO 53 DAYS WHICH ITSELF WOULD GO TO SHOW THAT BUSINESS FUNDS TEMPORA RILY NOT REQUIRED WERE PARKED TEMPORARILY IN FDS. IT WAS HIS SUBMISSION T HAT THE CONCLUSIONS OF THE CIT(A) THAT SURPLUS PROFITS OF THE ASSESSEE WER E PARKED IN FDS RESULTING IN INTEREST INCOME CANNOT BE CONSIDERED AS BUSINESS INCOME ARE NOT CORRECT. 15. THE LD. COUNSEL FOR THE ASSESSEE ALSO DREW OUR ATTENTION TO PAGE 29 OF THE PB WHICH IS A FORM NO.56F WHICH IS REQUIRED TO BE FILED BY THE ITA NO.1353/BANG/2011 PAGE 7 OF 19 ASSESSEE FOR CLAIMING DEDUCTION U/S. 10A OF THE ACT . OUR ATTENTION WAS DRAWN TO THE NOTES GIVEN TO THE SAID FORM WHICH REA DS THUS:- A) THE AMOUNT REPORTED IN POINT 11 12 17 INCLUD ES BANK INTEREST EARNED ON THE SHORT TERM DEPOSIT MAINTAINE D WITH BANKS & FOREIGN EXCHANGE GAIN THE ASSESSEE SUBMITS THAT THESE ARE IN THE NATURE OF BUSINESS PROFITS AND THUS ENTITLED FO R EXEMPTION U/S. 10A OF THE INCOME TAX ACT 1961. ASSESSEE WITH REGA RDS TO THE FOREIGN EXCHANGE GAIN HAS RELIED UPON DECISION OF T HE SUPREME COURT OF INDIA IN M/S. SUTLEJ COTTON MILLS LIMITED V COMMISSIONER OF INCOME TAX WEST BENGAL REPORTED IN VOLUME 116 ITR 1. 16. OUR ATTENTION WAS ALSO DRAWN TO THE LETTER DATE D 18.08.2009 FILED BY THE ASSESSEE BEFORE THE AO IN WHICH THE ASSESSEE HA D CONTENDED AS FOLLOWS:- .. THE INTEREST ON DEPOSIT IS PART OF THE BUSINESS ACT IVITIES AS IT IS RELATING TO REMITTANCE RECEIVED FROM ABROAD AND KEP T TEMPORARILY AS DEPOSIT IN THE BANK. AS THE REMITTANCES RECEIVED FROM ABROAD FORMS PART OF THE BUSINESS INCOME AND GETS ACCUMULA TED AS PART OF WORKING CAPITAL THIS WORKING CAPITAL CANNOT BE KEPT IDLE AND NEEDS TO BE PUT TO REVENUE EARNING USE. SINCE BANK DEPOSITS FACILITY ARE AVAILABLE FOR A FLEXIBLE PERIOD OF TIM E THE SAME HAS BEEN UTILIZED AND THE REMITTANCE RECEIVED FROM ABRO AD WHICH FORMS PART OF WORKING CAPITAL HAS BEEN PARKED AS DE POSITS WITH BANK TILL THE NEED FOR WORKING CAPITAL FOR BUSINESS PURPOSE ARISES. IN SHORT AS THE MONEY PARKED IN DEPOSITS ARE OUT OF REMITTANCES RECEIVED FROM ABROAD THE INTEREST EARNED FROM THE BANK DEPOSITS FORMS PART OF THE BUSINESS INCOME. HENCE THE SAME N EEDS NOT BE EXCLUDED WHILE COMPUTING THE DEDUCTION U/S 1OA OF T HE ACT. ITA NO.1353/BANG/2011 PAGE 8 OF 19 17. THEREAFTER THE LD. COUNSEL FOR THE ASSESSEE DRE W OUR ATTENTION TO JUDICIAL PRONOUNCEMENTS IN WHICH IN THE CONTEXT OF DEDUCTION U/S. 10A VARIOUS BENCHES OF THE TRIBUNAL HAVE TAKEN A VIEW T HAT INTEREST INCOME IS ELIGIBLE FOR DEDUCTION U/S. 10A OF THE ACT. REFER ENCE WAS MADE TO THE DECISION OF ITAT KOLKATTA BENCH IN THE CASE OF HINDUSTAN GEM & CHEMICALS LTD. V. ITO [ 2008] 23 SOT 143 (CAL) . OUR ATTENTION WAS ALSO DRAWN TO THE DECISION OF THE ITAT BANGALOR E BENCH IN THE CASE OF ACIT V. MOTOROLA ELECTRONICS PVT. LTD. 114 ITD 387 (BANG) WHEREIN THE TRIBUNAL TOOK THE VIEW THAT INTEREST IN COME SHOULD BE ASSESSED UNDER THE HEAD INCOME FROM BUSINESS AND HAS TO BE C ONSIDERED AS PROFITS OF BUSINESS FOR ALLOWING DEDUCTION U/S. 10A OF THE ACT. 18. OUR ATTENTION WAS ALSO DRAWN TO THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT V. PRODUCIN PVT. LTD. 290 ITR 598 WHEREIN THE HONBLE JURISDICTIONAL HIGH COURT CONSI DERED THE QUESTION WHETHER THE TRIBUNAL WAS RIGHT IN HOLDING THAT INTEREST RECEIVED BY THE ASSESSEE ON THE SURPLUS FUNDS KEPT WITH THE BAN KS AS SHORT TERM DEPOSITS SHOULD BE TREATED AS BUSINESS INCOME. THE HONBLE HIGH COURT HELD AS FOLLOWS:- IT IS NOW A WELL-SETTLED POSITION IN LAW THAT WHAT IS BUSINESS INCOME AND WHAT IS NOT BUSINESS INCOME HAS TO BE DE TERMINED ON THE FACTS OF EACH CASE. IN THE INSTANT CASE THE MA IN ACTIVITY OF THE ASSESSEE IS EXPORT BUSINESS AND NOT THAT OF EARNING INTEREST ON SHORT-TERM FIXED DEPOSITS. IF THE EARNING OF INTERE ST IS CONNECTED WITH THE CARRYING ON OF THE ASSESSEES BUSINESS AND IF THE FIXED ITA NO.1353/BANG/2011 PAGE 9 OF 19 DEPOSITS ARE UTILISED IN SUCH A MANNER SO AS TO PRO VIDE A SUFFICIENTLY PERCEPTIBLE LINK WITH THE BUSINESS ACT IVITIES OF THE ASSESSEE THERE SHOULD BE NO OBJECTION TO THE TREAT MENT OF THE INTEREST AS BUSINESS INCOME. IN THE INSTANT CASE T HE DEPOSITS IN THE BANK WERE MADE WITH THE MONEY RECEIVED AS ADVANCE I N THE EXPORT BUSINESS. THE AMOUNT SO DEPOSITED IS THE AMO UNT PAID BY THE FOREIGN BUYER BY WAY OF ADVANCE AMOUNT TO THE A SSESSEE FOR THE PART PERFORMANCE OF THE AGREEMENT FOR EXPORT OF THE GOODS. THE ASSESSEE INSTEAD OF KEEPING THAT AMOUNT IDLE SINCE IT DID NOT REQUIRE THE SAME FOR ITS IMMEDIATE BUSINESS ACTIVIT Y HAD DEPOSITED THAT AMOUNT BY WAY OF SHORT-TERM DEPOSIT IN THE BANK AND THE AMOUNT SO DEPOSITED IS ONLY THE FUNDS WHICH IT HAD RECEIVED TOWARDS THE EXPORT TO BE MADE BY IT AND TH E AMOUNTS SO DEPOSITED IN THE BANK AND THE INTEREST INCOME DERIV ED BECAUSE OF SUCH DEPOSIT HAVE CLOSE LINK WITH THE BUSINESS ACTI VITY OF THE ASSESSEE-COMPANY AND THEREFORE IN OUR OPINION THE FIRST APPELLATE AUTHORITY AND THE TRIBUNAL WERE JUSTIFIED IN HOLDING THAT THE INTEREST ON BANK DEPOSITS WAS ASSESSABLE AS BUS INESS INCOME. 19. THE LD. DR ON THE OTHER HAND POINTED OUT THAT IN THE PRESENT CASE THE AO HAS TREATED INTEREST INCOME AS INCOME FROM OTHER SOURCES WHEREAS IN THE DECISIONS CITED BY THE LD. COUNSEL F OR THE ASSESSEE THE AO HAD TREATED INTEREST INCOME AS INCOME FROM BUSINESS BUT WHEN IT CAME TO ALLOWING DEDUCTION U/S. 10A TREATED INTEREST INCOM E AS INCOME FROM OTHER SOURCES. THE LD. DR THUS SUBMITTED THAT THE DECISI ONS RELIED UPON BY THE LD. COUNSEL FOR THE ASSESSEE DO NOT SUPPORT THE CAS E PLEADED BY THE ASSESSEE. 20. IT WAS ALSO ARGUED THAT SURPLUS FUNDS WERE PUT IN DEPOSITS. IT WAS CONTENDED THAT THE DECISION OF THE HONBLE KARNATAK A HIGH COURT IN THE CASE OF PRODUCIN PVT. LTD. (SUPRA) WAS A DECISION RENDERED IN THE ITA NO.1353/BANG/2011 PAGE 10 OF 19 CONTEXT OF SECTION 80HHC OF THE ACT AND THEREFORE N OT RELEVANT TO THE PRESENT CASE. THE LD. DR ALSO FILED BEFORE US A CO PY OF THE DECISION OF THE ITAT BANGALORE BENCH IN THE CASE OF M/S. KEANE INDIA LTD. V. ACIT ITA NO.1182/BANG/2011 DATED 25.05.2011 AND POINTED OUT THAT THE TRIBUNAL IN THE AFORESAID DECISION HAD CONSIDERED I NTEREST INCOME AS NOT PART OF BUSINESS INCOME ELIGIBLE FOR DEDUCTION U/S. 10A OF THE ACT. 21. THE LD. COUNSEL FOR THE ASSESSEE POINTED OUT TH AT THE DECISIONS RELIED ON BY HIM WERE DIRECTLY APPLICABLE IN THE CONTEXT O F DEDUCTION U/S. 10A OF THE ACT. HE POINTED OUT THAT BEFORE THE AO THE DE TAILS OF SURPLUS FUNDS DEPOSITED IN THE BANK FD WERE GIVEN AND THE AO HAS ACCEPTED THE POSITION THAT SURPLUS FUNDS NOT TEMPORARILY REQUIRED WERE PA RKED IN FD. IT WAS SUBMITTED THAT THE LD. DR CANNOT AT THIS STAGE TAKE A STAND THAT SURPLUS FUNDS OF THE ASSESSEE IN THE FORM OF RESERVES AND S URPLUS HAVE BEEN PARKED IN FD. 22. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IN O UR VIEW THE ISSUE RAISED BY THE ASSESSEE IN GROUND NO.3 IS NO LONGER RES INTEGRA AND HAS BEEN DECIDED BY THE ITAT IN THE CASE OF HINDUSTAN GEM & CHEMICALS LTD. (SUPRA) . THE FACTS OF THE CASE WERE THAT WHILE COMPUTING T HE PROFITS OF THE BUSINESS OF THE 100 PER CENT EOU THE AO EXCLUD ED INTEREST INCOME OF RS. 28 74 473 EARNED BY THE ASSESSEE BY KEEPING SUR PLUS BUSINESS FUNDS OF THE 100 PER CENT EOU WITH BANKS FOR SHORT PERIOD S ON THE GROUND THAT SUCH INTEREST WAS INCOME IN THE NATURE OF OTHER SOU RCE. THE QUESTION ITA NO.1353/BANG/2011 PAGE 11 OF 19 BEFORE THE TRIBUNAL WAS AS TO WHETHER THE INTEREST INCOME CAN FORM PART OF THE BUSINESS INCOME FOR THE PURPOSE OF ALLOWING DED UCTION U/S.10B OF THE ACT. THE TRIBUNAL HELD THAT PROFITS AND GAINS DERI VED BY THE UNDERTAKING FROM EXPORT FOR THE PURPOSES OF S. 10B ARE REQUIRED TO BE COMPUTED IN ACCORDANCE WITH SUB-S. (4) OF S. 10B. SUB-S. (4) SP EAKS OF PROFITS OF THE BUSINESS OF THE UNDERTAKING. TO SUCH FIGURE OF PRO FITS THE RATIO OF THE EXPORT TURNOVER TO THE TOTAL TURNOVER OF THE BUSIN ESS CARRIED ON BY THE UNDERTAKING IS TO BE APPLIED TO DETERMINE THE PROF ITS ELIGIBLE FOR DEDUCTION. THERE IS NO REQUIREMENT FOR THE PURPOSES OF S. 10B TO ESTABLISH DIRECT NEXUS BETWEEN THE INCOME AND THE UNDERTAKING. THE ENTIRE BUSINESS INCOME OF THE 100 PER CENT EOU WILL BE THE PROFITS OF THE BU SINESS OF THE UNDERTAKING. THE INTEREST EARNED ON TEMPORARILY SURPLUS BUSINESS FUNDS OF THE 100 PER CENT EOU DEPOSITED WITH BANKS FOR SHORT PERIODS IS BUSINESS INCOME AND HAS IN FACT BEEN SO ASSESSED. IT IS NOT IN DISPUTE THAT THE SURPLUS FUNDS WERE OF THE 100 PER CENT EOU. AS SUCH THE INTEREST EARNED THEREON HAS TO BE REGARDED AS PART OF THE PROFITS OF THE BUSINESS OF THE UNDERTAKING. THE AO WAS DIRECTED TO TREAT THE INTEREST OF RS. 28 74 473 AS PART OF THE PROFITS OF THE BUSINESS OF THE 100 PER CENT EOU ELIGIBLE FO R DEDUCTION UNDER S. 10B AND COMPUTE THE DEDUCTION ACCORDINGLY THE TRIBUNAL ALSO DISTINGUISHED THE DECISION OF THE HONBLE SUPREME COURT IN THE CA SE OF CIT VS. STERLING FOODS 237 ITR 579 (SC). SO ALSO THE DECISION OF T HE BANGALORE BENCH OF ITAT IN THE CASE OF ACIT V. MOTOROLA ELECTRONICS PVT. LTD. ( SUPRA) SUPPORTS THE PLEA OF THE ASSESSEE. THE QUESTION TH AT AROSE FOR ITA NO.1353/BANG/2011 PAGE 12 OF 19 CONSIDERATION IN THE AFORESAID CASE WAS AS TO WHETH ER INTEREST INCOME DERIVED FROM DEPOSITS IN THE EEFC ACCOUNT AND THE I NTEREST INCOME EARNED ON INTER-CORPORATE DEPOSITS HAVE TO BE ASSESSED UN DER THE HEAD INCOME FROM BUSINESS. THE ASSESSEE ALSO CLAIMED THAT TH E INTEREST INCOME IS DERIVED FROM THE BUSINESS OF EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE AND THAT THE SAME IS ELIGIBLE FOR EXEMPTI ON UNDER S. 10A OF THE ACT FOR THE ASST. YRS. 1997-98 AND 1998-99. FOR THE ASST. YR. 2001-02 THE ASSESSEE CLAIMED THAT THE ACT HAS UNDERGONE A CHANG E AND THE ENTIRE CONCEPT AND BASIS OF S. 10A HAS CHANGED AND THUS AS PER THE PROVISIONS OF LAW AS APPLICABLE TO THE ASST. YR. 2001-02 THE INT EREST INCOME FORMS PART OF PROFITS FROM THE BUSINESS OF INDUSTRIAL UNDERTAKING AND ONCE THE FORMULA IS APPLIED AS SPECIFIED IN SUB-S. (4) OF S. 10A THE A SSESSEE WOULD BE ENTITLED FOR DEDUCTION ON INTEREST INCOME INCLUDED AS PART O F BUSINESS INCOME. THE TRIBUNAL HELD THAT FROM AY 2001-02 THE ACT HAS UND ERGONE A CHANGE. SEC. 10B HAS UNDERGONE A CHANGE. EARLIER IT WAS AN EXEM PTION SECTION AND INCOME FROM THESE UNDERTAKINGS WHICH ARE COVERED BY THIS SECTION DID NOT FORM PART OF TOTAL INCOME. FROM THIS PARTICULAR YEA R THOUGH THE SECTION APPEARS IN CHAPTER III WHICH CLASSIFIES INCOMES WH ICH DO NOT FORM PART OF TOTAL INCOME A DEDUCTION FROM BUSINESS INCOME FROM THE UNDERTAKING IS GRANTED BY INCLUDING THE SPECIAL PROVISION. ANOTHER IMPORTANT FEATURE IN SUB-S. (4) OF S. 10B WAS THAT THE METHODOLOGY OF AR RIVING AT THE EXPORT PROFITS OF THE BUSINESS OF THE UNDERTAKING WAS GIVE N IN A FORMULA AS IN THE CASE OF S. 80HHC. THE TERMINOLOGY USED IN SUB-S. (4 ) OF S. 10B IS 'PROFITS OF ITA NO.1353/BANG/2011 PAGE 13 OF 19 THE BUSINESS' OF THE UNDERTAKING IN CONTRADISTINCTI ON TO THE WORDS 'PROFITS AND GAINS DERIVED BY THE ASSESSEE' FROM A 100 PER C ENT EXPORT ORIENTED UNDERTAKING. THE TERM 'FROM THE BUSINESS OF' IS MUC H WIDER THAN THE TERM 'DERIVED FROM INDUSTRIAL UNDERTAKING'. KEEPING THIS DISTINCTION IN MIND THE ENTIRE PROFITS DERIVED FROM THE BUSINESS OF UNDERTA KING SHOULD BE TAKEN INTO CONSIDERATION WHILE COMPUTING THE ELIGIBLE DEDUCTI ON UNDER S. 10B/10A BY APPLYING THE MANDATORY FORMULA. IF THE LEGISLATURE INTENDED TO EXCLUDE INTEREST FROM THE TERM 'PROFIT OF BUSINESS OF UNDER TAKINGS' UNDER S. 10A/10B A SIMILAR PROVISION AS IN THE CASE OF EXPL N. (BAA) TO S. 80HHC WOULD HAVE BEEN INSERTED. NO SUCH EXPLANATION HAS B EEN INTRODUCED IN S. 10A/10B. THUS THE AO WAS DIRECTED TO RECOMPUTE THE DEDUCTION UNDER SS. 10A AND 10B ON THE LINES INDICATED ABOVE FOR THE AS ST. YEAR 2001-02. 23. IN LIGHT OF THE AFORESAID DECISIONS WE ARE OF THE VIEW THAT THE CLAIM MADE BY THE ASSESSEE DESERVES TO BE ACCEPTED. AS F AR AS THE DECISION OF BANGALORE BENCH OF TRIBUNAL IN THE CASE OF KEANE INDIA LTD. (SUPRA) IS CONCERNED WE FIND THAT IN THE AFORESAID DECISION THE ASSESSEE HIMSELF EXCLUDED INTEREST INCOME FROM BUSINESS INCOME WHILE COMPUTING DEDUCTION U/S. 10A OF THE ACT. MORE OVER THE DECISION OF TH E TRIBUNAL WAS ONLY RESTRICTED TO CARVING OUT FOREIGN EXCHANGE GAIN WH ICH IS INCLUDED IN THE INTEREST INCOME AND MISCELLANEOUS INCOME AND TREAT THE SAME AS PART OF THE PROFITS OF THE BUSINESS FOR ALLOWING DEDUCTION U/S. 10A OF THE ACT. WE ARE THEREFORE OF THE VIEW THAT THE DECISION IN THE AFORESAID CASE WILL NOT BE ITA NO.1353/BANG/2011 PAGE 14 OF 19 OF ANY ASSISTANCE TO THE STAND TAKEN BY THE REVENUE . THUS GROUND NO.2 RAISED BY THE ASSESSEE IS ALLOWED. 24. GROUND NO.3 WITH REGARD TO CHARGING OF INTEREST U/S. 234B & 234C OF THE ACT IS PURELY CONSEQUENTIAL THE AO IS DIRECTED TO GIVE CONSEQUENTIAL RELIEF. 25. GROUND NO.4 RAISED BY THE ASSESSEE READS AS FOL LOWS:- 4. THE LEARNED CIT(A) ERRED IN NOT GIVING CLEAR D IRECTION TO THE AO TO ALLOW CREDIT FOR TAX DEDUCTED AT SOURCE F OR A SUM OF RS. 1 970/- AS AGAINST RS. 90 522/- CLAIMED BY THE APPE LLANT FOR WHICH NECESSARY CERTIFICATES WERE FILED BEFORE THE OFFICE R. 26. ON THIS ISSUE THE CIT(APPEALS) HAS ALREADY DIR ECTED THE AO TO VERIFY THE CLAIM OF THE ASSESSEE AND ALLOW CREDIT FOR TDS AFTER DUE VERIFICATION. WE ARE OF THE VIEW THAT THE AFORESAID DIRECTION OF THE CIT(A) WOULD SUFFICIENTLY ADDRESS THE GRIEVANCE OF THE ASSESSEE IN THIS REGARD. 27. GROUND NO.5 RAISED BY THE ASSESSEE READS AS FOL LOWS:- 5. THE LEARNED CIT(A) ERRED IN DECIDING THAT THE APPELLANT IS IN THE BUSINESS OF MAN POWER DEPLOYMENT WITHOUT GIV ING AN OPPORTUNITY TO THE APPELLANT TO PRESENT THE CASE BE FORE THE CIT(A) AND THEREBY THE LEARNED CIT(A) ERRED IN GIVING A DI RECTION TO AO TO RECOMPUTE THE DEDUCTION U/S 10AOF THE ACT AFTER REDUCING THE PROFIT ATTRIBUTABLE TO BUSINESS OF MAN POWER DEPLOY MENT. HENCE THE ORDER OF CIT(A) IS BAD ON FACTS AND IN L AW AND IS IN VIOLATION OF THE PRINCIPLES OF NATURAL JUSTICE. ITA NO.1353/BANG/2011 PAGE 15 OF 19 28. THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTEN TION TO PAGE 39 OF THE ASSESSEES PB WHICH CONTAINS THE PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31.03.2006. HE POINTED OUT THAT THE MAIN SOUR CE OF INCOME IS INCOME FROM SOFTWARE DEVELOPMENT SERVICES. OUR ATTE NTION WAS ALSO DRAWN TO PAGE 44 OF THE PB WHICH IS SCHEDULE-10: NOTES TO ACCOUNTS WHEREIN THE NATURE OF OPERATIONS OF THE ASSESSEE HAS BEEN CLEAR LY GIVEN AS PROVIDING HIGH QUALITY SOFTWARE FOR INDUSTRIAL IT DEVELOPMENT AND DEPLOYMENT FOR THE ABB GROUP GLOBALLY. OUR ATTENTION WAS DRAWN TO PAG E 1 OF AOS ORDER IN WHICH IN COLUMN 10 THE AO HAS ACCEPTED THE NATURE OF BUSINESS OF THE ASSESSEE AS SOFTWARE DEVELOPMENT SERVICES FOR INDUS TRIAL IT AND DEPLOYMENT FOR GROUP COMPANIES. SIMILAR OBSERVATIO NS WERE ALSO FOUND IN PARA 1 OF THE AOS ORDER ACCEPTING THE NATURE OF TH E BUSINESS OF THE COMPANY. OUR ATTENTION WAS DRAWN TO THE FACT THAT THE AO WHILE COMPLETING THE ASSESSMENT ALLOWED DEDUCTION U/S. 10A OF THE AC T BY CONSIDERING PROFIT AS PER P&L ACCOUNT AS PROFITS DERIVED FROM THE BUSI NESS OF SOFTWARE DEVELOPMENT SERVICES. 29. THE CIT(A) HOWEVER IN PARA 6 OF HIS ORDER WIT HOUT A PROPER NOTICE REGARDING ENHANCEMENT BY WAY OF REDUCING THE CLAIM U/S. 10A OF THE ACT ALREADY ALLOWED BY THE AO PROCEEDED TO CONCLUDE TH AT THE ASSESSEE WAS IN THE BUSINESS OF MANPOWER DEPLOYMENT. IN THIS RE GARD THE CIT(A) HAS REFERRED TO SCHEDULE-8 TO THE ACCOUNTS IN WHICH THE BREAK-UP OF THE PERSONNEL COST DEBITED TO THE P&L ACCOUNT IS GIVEN. THE BREAK-UP SO GIVEN IS AS FOLLOWS:- ITA NO.1353/BANG/2011 PAGE 16 OF 19 ___________________________________________________ __________ 31-MAR-06 31-MAR-05 RS.000 RS.000 SCHEDULE 8: PERSONNEL COST SALARIES WAGES AND BONUS 104 902 49 961 CONTRIBUTION TO PROVIDENT AND OTHER FUNDS 7 33 2 3 543 GRATUITY 1 975 1 085 STAFF WELFARE EXPENSES 5 950 2 201 STAFF TRAINING AND SEMINARS 2 864 761 RECRUITMENT AND RELOCATION 3 890 2 584 ----------------------------- ------- 126 993 60 135 ------------------------------------ 30. BASED ON THE ABOVE THE CIT(A) CAME TO THE CONC LUSION THAT THE ASSESSEE HAD INCURRED AND SPENT ON RECRUITMENT AND RELOCATION A SUM OF RS.38 90 000 FOR SENDING PERSONNEL TO FOREIGN COMPA NIES. ACCORDING TO THE CIT(A) THE ASSESSEE WAS IN THE BUSINESS OF MAN POWER DEPLOYMENT AND TO THE EXTENT THE PROFITS AS DISCLOSED IN THE P &L ACCOUNT ARE ATTRIBUTABLE TO MANPOWER DEPLOYMENT THE ASSESSEE W AS NOT ELIGIBLE TO DEDUCTION U/S. 10A OF THE ACT. THE CIT(A) THEREAFT ER REFERRED TO THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF CYBERTECH SYSTEMS & SOFTWARE PVT. LTD. V. DCIT (2007) 106 TT J WHEREIN IT WAS HELD THAT INCOME BY RECRUITING AND TRAINING PRO FESSIONAL FOR PLACING THEM IN THE EMPLOYMENT OF ASSOCIATED ENTERPRISES AB ROAD IS NOT EQUIVALENT TO MANUFACTURING OR PRODUCING COMPUTER PROGRAMS FOR EXPORT AND ITA NO.1353/BANG/2011 PAGE 17 OF 19 CONSEQUENTLY DEDUCTION U/S. 10B WAS DENIED TO THE A SSESSEE. THE FINAL CONCLUSIONS OF THE CIT(A) IN THIS REGARD WERE AS FO LLOWS:- 6.2. THE ASSESSEE HAS NOT SHOWN SEPARATE PROFIT F ROM THE BUSINESS OF BODYSHOPPING. THEREFORE PRINCIPLE OF P ROPORTION IS FOLLOWED TO DETERMINE SUCH PROFIT PROFIT OF THE UNDERTAKING RS.12 44 03 212/- TOTAL EXPENDITURE AS PER PROFIT & LOSS A/C RS.37 39 62 000/- TOTAL EXPENDITURE RELATED TO RECRUITMENT AND DEPLOYMENT RS. 38 90 000/- THUS THE PROFIT OF THE UNDERTAKING RELATED TO BODY SHOPPING IS DETERMINED AT - (RS.38 90 000/RS.37 39 62 000) X RS.12 44 03 212 RS.12 94 057/- 6.3. THE A.O. IS DIRECTED TO REDUCE THE ABOVE FROM THE PROFIT OF THE UNDERTAKING TO RECOMPUTE THE DEDUCTION U/S.10A OF I.T.ACT AND THE SUM OF RS.12 94 057/- SHOULD BE ADDED AS BU SINESS INCOME NOT ELIGIBLE FOR DEDUCTION. 31. THE LD .COUNSEL FOR THE ASSESSEE SUBMITTED THA T THE ASSESSEE HAS REPORTED INTERNATIONAL TRANSACTION OF RENDERING SOF TWARE DEVELOPMENT SERVICES TO ITS AE AND THE TPO DID NOT MAKE ANY ADJ USTMENTS TO THE PRICE PAID BY THE ASSESSEE TO ITS AE AND ACCEPTED THAT TH E PRICE PAID BY THE ASSESSEE TO ITS AE WAS FOR RENDERING SOFTWARE DEVEL OPMENT SERVICES. IT WAS ALSO BROUGHT TO OUR NOTICE THAT THE CIT(A) DID NOT GIVE ANY NOTICE OF ENHANCEMENT AND HAS ONLY BASED HIS CONCLUSIONS ON T HE FACT THAT THERE ITA NO.1353/BANG/2011 PAGE 18 OF 19 WAS AN ITEM OF EXPENSE IN THE P&L ACCOUNT UNDER THE HEAD PERSONNEL COST TOWARDS RECRUITMENT AND RELOCATION. IT WAS SUBMITT ED BY HIM THAT THE FINDINGS OF THE CIT(A) THAT THE ASSESSEE WAS IN THE BUSINESS OF MANPOWER DEPLOYMENT ARE PERVERSE AND CANNOT BE SUSTAINED. W ITHOUT PREJUDICE TO THE ABOVE SUBMISSION IT WAS SUBMITTED THAT THE FOL LOWING DECISIONS AND CIRCULARS WILL SHOW THAT THE ASSESSEE WAS ENTITLED TO DEDUCTION U/S. 10A EVEN IN RESPECT OF RECRUITMENT FEES:- - CBDT NOTIFICATION NO. 11521 DATED 26-9-2000 - ACIT V MERIDIAN ENTERPRISES COMPUTING SOLUTIONS P LTD MUMBAI ITAT (2011) 5 TAXCORP (A.T.) 24096 (MUMBAI) - M L OUTSOURCING SERVICES P LTD V ITO DELHI TRIBU NAL ITA NO.1204/DEL/11 DTD. 27.5.2011. - ITO V ACCURAM INDIA P LTD [2010] 126 LTD 69 (CHEN NAI TRIBUNAL) 32. THE LD. DR RELIED ON THE ORDER OF THE CIT(A). IT WAS SUBMITTED BY HIM THAT ALTERNATIVELY THE ISSUE SHOULD BE SENT BAC K TO THE CIT(A) FOR FRESH CONSIDERATION FOR AFFORDING DUE OPPORTUNITY TO THE ASSESSEE. 33. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IN O UR VIEW THE ORDER OF THE CIT(A) DOES NOT GIVE ANY BASIS FOR COMING TO TH E CONCLUSION THAT THE ASSESSEE WAS IN THE BUSINESS OF MANPOWER DEPLOYMENT . IT IS NOT UNDERSTANDABLE AS TO HOW SUCH CONCLUSION CAN BE ARR IVED AT ON THE BASIS OF PERUSAL OF P&L ACCOUNT AND THE COMPOSITION OF PERSO NNEL COST FOUND IN THE P&L ACCOUNT. THE CONCLUSIONS ARE WITHOUT ANY BASIS AND IN OUR VIEW ITA NO.1353/BANG/2011 PAGE 19 OF 19 CANNOT BE SUSTAINED. WE THEREFORE ALLOW GROUND NO. 5 RAISED BY THE ASSESSEE. 34. IN THE RESULT THE APPEAL BY THE ASSESSEE IS PARTLY ALLOWED . PRONOUNCED IN THE OPEN COURT ON THIS 31 ST DAY OF OCTOBER 2013. SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVA N ) ACCOUNTANT MEMBER JUDICIAL MEMBE R BANGALORE DATED THE 31 ST OCTOBER 2013. /D S/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ITAT BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR ITAT BANGALORE.