Case Law Details
Gujarat Info Petro Ltd Vs DCIT (ITAT Ahmedabad)
ITAT Ahmedabad held that as the revenue from selling of bandwidth business of the assessee is shared between the assessee and its parent company, profits eligible to deduction under section 80IA(4)(ii) of the Income Tax Act is reducible.
Facts- The assessee-company is engaged in the business of selling internet bandwidth and other value added services like webhosting, designing, development and maintenance of websites etc. During the impugned assessment year i.e.Asst.Year 2008-09, the assessee had claimed deduction u/s. 80lA(4)(ii) of the Act amounting to Rs. 1,56,59,743/-. The deduction u/s. 80IA is available to the undertakings which are engaged in providing telecommunication services, where basic of cellular, including radio paging, domestic satellite services, network of trunk, broad-bandnet-work and internet services at any time after 31st March, 1995 before 31st March, 2005, subjected to fulfillment of certain conditions as specified in section 80IA of the Act.
AO denied the claim u/s 80IA(4)(ii) on account of not having filed requisite form no. 10CCB. The denial of claim of deduction u/s 80IA was upheld by CIT(A).
Conclusion- We find that the Ld. CIT(A) had categorically noted that the satellite equipment, navigation equipment and other linked equipments admittedly owned by the promoter company i.e. GSPL were all vital not only for the satellite business of the assessee, but also for optic figure business. He has categorically noted that the navigation equipment and other linked equipments were necessary for providing services through optical fibre also. The assessee has been unable to controvert this fact before us. Further, we have noted that the ld.CIT(A) has considered allocation of revenue sharing in both the satellite and optic fibre bandwidth selling business, considering ownership of all these equipments by GSPL and considering business activities by the assessee.
In view of the above, we see no reason to interfere in the order of the ld.CIT(A) reducing profits of the assessee by directing the Revenue from selling of bandwidth business of the assessee to be shared between the assessee and its parent company in the ratio of 30:70 for the satellite and 15:85 ratio from the optic fibre business; thus reducing the profits eligible to deduction under section 80IA(4)(ii) of the Act. Thus, the appeal of the assessee is dismissed.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
Present appeal has been filed by the assessee against order of the ld.Commissioner of Income-tax (Appeals), Gandhinagar dated 16.6.2017 passed under section 250(6) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for the Asst. Year 2008-09.
2. The effective grounds raised in the appeal are as under:
“1.1 The learned CIT (A) has grossly erred on the facts and circumstances of the case and in the law in directing the learned A. 0. to re-work the profit from eligible business to arrive at afigure of claim of deduction U/s. 80-IA of the Act by applying the provisions of Section 80-IA (1 0) of the Act.
1.2 The learned CIT(A) has failed to appreciate that the appellant has rightly allocated expenses as well as rightly shared revenue and in turn arrived at a correct figure of claim of deduction U/s. 80IA of the Act Rs. 1,56,59,743/- and hence question of reworking of profit from eligible business does not arise.
1.3 The learned CIT(A) has grossly erred in directing to rework profit from eligible business and also erred in directing that reasonable revenue sharing would be 30:70 in respect of business of selling bandwidth through Satellites. The learned CIT(A) has grossly erred in deriving the revenue sharing ratio on random basis.
1.4 The learned CIT(A) has failed to appreciate that out of total Bandwidth charges of Rs.4,27,26,671/-, appellant has earned bandwidth from satellite amounting to Rs. 34,22,903/- which is 8% of the total revenue from Bandwidth charges. The learned CIT(A) has further failed to appreciate that appellant has retained 90% of the income from selling bandwidth through satellite as the appellant was the actual service provider and GSPC did not participate in the business carried on by the appellant in any manner except lending satellite equipments for use. The learned CIT(A) has further failed to appreciate that the payment to GSPC equivalent to 10% of revenue is nothing but remittance of lease charges for satellite equipments hence question of sharing revenue in the ratio of 30:70 instead of 10:90 from the business of selling bandwidth through satellite does not arise and in turn question of reworking of profit from eligible business does not arise.
3. Sole grievance of the assessee in the present appeal relates to restriction of assesses claim of deduction under section 80IA(4)(ii) of the Act.
4. This is second round of litigation before us and the facts of the case are that the assessee-company is engaged in the business of selling internet bandwidth and other value added services like webhosting, designing, development and maintenance of websites etc. During the impugned assessment year i.e. Asst. Year 2008-09, the assessee had claimed deduction under section80lA(4)(ii) of the Act amounting to Rs. 1,56,59,743/-. The deduction under section 80IA is available to the undertakings which are engaged in providing telecommunication services, where basic of cellular, including radio paging, domestic satellite services, network of trunk, broad-bandnet-work and internet services at any time after 31st March, 1995 before 31st March, 2005, subjected to fulfillment of certain conditions as specified in section 80IA of the Act.
5. In the first round, the assessment order under section 143(3) of the Act was made on 29.10.2010 and the assessee’s entire claim for deduction under section80lA(4)(ii) was denied for the following reasons:
a) Non-existence of valid licence for major part of the impugned assessment year i.e. Asst.Year 2008-09;
b) On account of applicability of sub-section(10) of section 80IA, and as per which owing to close connection between the assessee carrying on eligible business, to which the section applies, and any other person, it being found that the course of business between them was arranged so as to produce more than ordinary profits to the assessee. The AO had noted that the total revenue from the Internet Service Provider (ISP) business was Rs.4,90,56,453/- out of which major portion related to bandwidth charges of 4,27,26,671/-. The AO noted that the assessee did not have requisite equipment to achieve this revenue from bandwidth charge and major equipments relating to the business i.e. satellite equipments and navigations equipments and other linked equipments, were owned by its holding company .e . Gujarat State Petroleum Corporation (GSPL); that despite the same, only 10% of the total revenue from bandwidth business was shared by the assessee with GSPC while it had retained 90% of the income. From the same, the AO arrived at a conclusion that owing to close connection between the assessee and GSPC, the assessee had been showing more than ordinary profits from its business and for this reason, section 80IA(4)(ii) was denied to the assessee;
c) The business of the assessee could only be termed as works contract, and therefore, on account of Explanation below sub-section 13 of section 80IA, works contract being not eligible to deduction under section 80IA of the Act, the assessee was denied deduction;
d) Necessary audit report in form No. 10CCB was not filed during the assessment proceedings.
6. For the above reasons, the claim of deduction under section 80IA(4) of Rs. 1,56,59,743/- was entirely denied to the assessee.
7. The matter was carried in appeal before the ld.CIT(A) who vide his order dated 18.5.2011 dealt with all the grounds of the AO for denial of deduction under section 80IA(4)(ii) of the Act and held that existence of valid licence was not imperative for claiming deduction under section 80IA(4) of the Act; that filing of audit report in form 10CCB before the AO was mandatory and the assessee having not filed report to the AO, he was not eligible to claim deduction under section 80IA(4) (ii) of the Act. With respect to the applicability of section 80IA(10) of the ld.CIT(A), the ld.CIT(A) held that considering the facts of the case, the revenue sharing arrangement between the GSPC and the assessee was to be in the ratio of 30:70 for selling bandwidth through satellite and in the ratio of 15:85 for selling bandwidth through optic fibre. On the issue of assessee’s activity classified as work contracts by the AO, the ld.CIT(A) held it to be a mere academic exercise, since he had already upheld order of the AO holding the assessee not eligible to claim deduction under section 80IA(4)(ii) of the Act on account of not having been filed requisite form no. 10CCB before the AO. Thus the denial of claim of deduction u/s 80IA was upheld by the Ld.CIT(A) as above.
8. The matter was accordingly carried in appeal by the assessee, before the ITAT, who vide their order dated 6-2-2015 in ITA No.211 6/Ahd/20 11 for Asst.Year 2008-09, noted that the assessee had been denied claim of deduction for not having filed necessary form No. 10CCB to the AO, and finding this condition to be mere directory, the ITAT restored the issue back to the file of the AO to be considered afresh on merits. The relevant findings of the ITAT at para 17 are as under:
“17. We have heard rival submissions and perused the orders of the lower authorities and material on record. We find that in the instant case, the assessee claimed deduction under section 80IA of Rs. 1,56,59,743/- in respect of profit derived from internet telephony service business. The AO did not accept the claim for want of audit report in prescribed Form No.1 0CCB. The assessee filed the said audit report for the first time before the CIT(A). The CIT(A) refused to admit the said audit report and confirmed the disallowance of the claim made by the assessee. We find that Hon’ble Gujarat High Court in the case of Mayur Foundation Vs. CIT, (2015)274 ITR 562 (Guj) held that the appeal would be continuation of the assessment proceedings. The Court approved the decision of the Tribunal under section 11(2) of the Act when necessary support for the claim was presented at the appellate stage before the Tribunal. Further, the Hon’ble Madras High Court in the case of CIT Vs. Medicaps Ltd., (2010) 323 ITR 554 held that furnishing of audit-report for claim of deduction under section 80IA of the Act was not mandatory and the same can be filed even at the appellate stage. Still further, the Hon’ble Apex Court in the case of Aurangabad Electricals Ltd vs Commissioner Of Central Excise & Customs, (201 1)(1) SCC 121 observed that keeping in view the well settled principles laid down by this Court that technicalities should not defeat rendering of complete justice to a litigant, and remanded the matter to the Tribunal to verify and consider whether the certificate which is already placed on record by the appellant, would assist them in support of their defence.
9. Thereafter, the matter came up in second round before the AO, where the disallowance was upheld by the AO noting that apart from the requirement of filing of Form no. 10CCB in the earlier assessment year, the facts remained unchanged, and there was no reasons therefore for arriving at a difference conclusion. Accordingly, the AO in the second round also denied the claim of deduction under section 80IA(4)(ii) of the Act to the extent of Rs. 1,56,59,743/-.
10. The matter was carried in second round before the ld.CIT(A) who noting there was no change in material facts on this issue, upheld the finding of the ld.CIT(A) in the first round, that reasonable revenue sharing arrangement between the assessee and its closely connected entity i.e. GSPL, in selling bandwidth through satellite was in the ratio of 30:70 and selling bandwith through optic fibre was in the ratio of 15:85. The relevant finding of the ld . CIT(A) at page no.21 of his order is as under:
“On careful consideration of entire facts, it is observed that while passing original assessment order, AO had disallowed deduction under Section 80- IA mainly on four grounds as discussed herein above. The Hon’ble Ahmedabad ITAT has set aside the issue to the file of AO for fresh consideration wherein both AO as well as Appellant has relied upon observations/submission made in original Assessment Proceedings hence said issue is dealt with as under:
(i) So far as non-submission of audit report before AO is concerned, leading to disallowance, AO has accepted the contention of Appellant that same can be submitted before CIT (Appeals) in Appellate Proceedings as held by Hon’ble Ahmedabad ITAT at para-1 7 and 18 of order dated 6th February, 2015. Thus, this issue is now resolved in favour of Appellant.
(ii) So far as issue whether Appellant was having valid licence for major part of the year is concerned and its impact on claim of deduction, it is observed that CIT (Appeals), GNR, has dealt with observations of AO and argument of Appellant at para-4.2.2 of his order dated 18th May, 2011 and as there are no material facts on this issue, following the observations made by CIT (Appeals), GNR, deduction under Section 80-IA cannot be denied to Appellant on this ground.
(iii) so far as issue whether the Appellant is a work contractor or not is concerned, it is observed that CIT (Appeals), GNR, has dealt with observations of AO and argument of Appellant at para – 4.2.4 of his order dated 18th May, 2011 and as there are no material facts on this issue, following the observations made bf CIT (Appeals) GNR, deduction under Section 80-IA cannot be denied to Appellan on this ground.
So far as applicability of provisions of Section 80-IA (1 0) is concerned, it is observed that CIT (Appeals), GNR, has dealt with observations of AO and argument of Appellant at para-4.2.3 of his order dated 18th May, 2011 and as there are no material facts on this issue, following the observations made by CIT (Appeals), GNR, AO is directed to rework profit of eligible business on following basis:
a) In the case of business of selling bandwidth through satellites, the reasonable revenue sharing arrangement would be 30:70. I have considered the ownership of Satellite Equipment, Navigation Equipment and other Link Equipment, etc., by the CSPC Ltd., in favour of share of GSPC Ltd., and carrying out of business activities by Appellant in its favour.
b) In the case of business of selling bandwidth through optical fibres, the reasonable revenue sharing arrangement would be 15:85. I have considered the ownership of vital navigation equipment and other link equipment, etc., by CSPC Ltd., in favour of share of GSPC Ltd., and carrying out of business activities by Appellant and ownership of optical fibres in its favour.
It is observed that in Appellate Proceedings, on this issue Appellant at para-1.16 has stated that Hon ‘ble Ahmedabad ITAT at para 19.2 has observed that “this unilateral act of Ld. CIT (Appeals) being illegal, bad in law and uncalled for deserves to be quashed.” However, on careful consideration of order of Ahmedabad ITAT submitted by Appellant, it is observed that in para 19.2, Hon’bie Ahmedabad ITAT has reproduced the grounds taken by Appellant itself and nowhere has given such direction. On the contrary, Appellant in its ground has taken such plea before Hon’bie Ahmedabad ITAT. Thus, submission made by Appellant on this ground is fallacious and cannot be accepted. Thus, AO is directed to recompute deduction under Section 80-IA as per observation made herein above. This ground of appeal is partly allowed.”
11. Aggrieved by the above order, the assessee has come up in appeal before us.
12. Solitary contention of the ld . counsel for the assessee before us was to the effect that in subsequent assessment years ,i.eAsst.Year 2009-10, 2010-11 and 2012-13, the AO had disallowed claim of deduction under section 80IA(4) of the Act for similar reasons by invoking provisions of section80IA(10) of the Act. But the disallowance had been deleted consistently in all three years by the CIT(A). Inthis regard, our attention was drawn to the order of the ld.CIT(A) for Asst.Year 2009-10 dated 9.1.2014 more particularly, page no.22 of the order wherein the issue of denial of deduction on account of section 80IA( 10) was dismissed as under:
“The AO has referred to provision of Section 80IA(1 0) of the Act and contended that Appellant and GSPC have entered into arrangement wherein Appellant is selling the bandwidth generated by asset owned by GSPC and revenue arising from such activities are shared with GSPC in the ratio of 90:10 which means that Appellant is getting 90% share which means that Appellant is receiving more than ordinary profit expected from such business, However, this argument of AO cannot be accepted as out of the total income earned by Appellant from ISP income of Rs. 4,30,98,089/-, income through satellite bandwidth was only Rs. 8,19,585/- which means that Appellant has earned negligible Income from assets owned by GSPC. Substantial income has been earned by Appellant from assets owned by Appellant which is duly reflected in audited annual accounts, AO has completely ignored Appellant’s investment in fixed assets for Rs.22.23 crores including Rs. 1.36 crores in plant and machinery, computers and peripherals.
While finalizing the assessment order, AO has miced ISP income generated from providing fibre bandwidth with ISP income generated from providing satellite bandwidth from use of assets owned by GSPC and failed to appreciate that Company has already requested DoT to cancel WPC license for providing satellite bandwidth. As ratio, of income earned from satellite bandwidth is just 2% of total ISP income, application of Section 80IA(1 0) made by AO in the year under consideration is not relevant as major Income has not been earned through any arrangement made with GSPC In any case, provision of subsection (3) to Section 80IA never stipulates any condition on Appellant to own entire plant and machinery and in present case, income earned through asset owned by GSPC is 2% hence this argument of AO for not allowing deduction under Section 80IA(4) is rejected.”
13. Referring to the above, the ld.counsel for the assessee contended that the ld.CIT(A) had noted that out of total bandwidth income earned by the assessee, majority of it related to the income earned from optical figure and only 2% was earned from selling bandwidth through satellite. The ld.CIT(A) noted that GSPC is holding primary equipments related to the satellite bandwidth business and income from the same being negligible, provision of section 80IA(10) could not be attracted in the present case.
He thereafter drew our attention to the ld.CIT(A) order for Asst.Year 2010-11 dated 9.1.2014 wherein for identical reasons, the disallowance made by the AO of deduction under section80IA(4)(ii) of the Act was deleted by the ld.CIT(A).
14. The ld.counsel for the assessee fairly admitted, though, that the Revenue’s appeal against order of the ld.CIT(A) was dismissed by the ITAT on account of low tax effect involved, and the issue was not dealt with on merits. Our attention was drawn to the order of the ITAT in ITA NO.1018& 1019/Ahd/2014 dated 12.6.2020 (copy of which was placed before us).
15. The ld.DR on the other hand relied on the order of the ld.CIT(A) in the first round, which was followed by the ld.CIT(A) in the second round, also noting there being no change on the facts of the issue. Our attention was drawn it his regard to the finding of the ld.CIT(A) in the first round at para 4.2.3 as under:
16. We have heard rival contentions. We have also gone through order of the ld.CIT(A) in the first round, which has been reiterated by the ld.CIT(A) in the second round also, noting no change in the facts and which order is in challenge before us.
17. Short dispute before us is, with respect to the claim of deduction under section 80IA(4)(ii) of the Act, which the assessee had claimed at Rs. 1,56,59,743/-. The same had been claimed by the assessee in business of providing bandwidth services through two modes i.e. selling through satellite and through optic figure. The assessee has shown revenue to the extent of Rs.4.27 crores from its business of providing bandwidth services. The case of the Revenue is that the assessee does not have sufficient assets to carry out activities of providing bandwidth through satellite or optic fibre, and major assets of providing these services are owned by its holding company i.e. GSPC. In the light of these facts, the assessee having shared its revenue from the business of providing bandwidth services in the ratio of 90:10 with its holding company, the case of the Revenue is that the assessee has shown more than normal profits in its business, since apparatus for carrying out assets being held by the holding company, the revenue sharing arrangement of 90:10 ratio was highly biased towards the assessee and hence invocation of section 80IA( 10) of the Act.
18. We have gone through the order of the ld.CIT(A) who has held that admittedly the important equipments for carrying out this activity being satellite equipments, navigation equipments and other linked equipments were acquired by the promoter company i.e. GSPC Ltd., and the assessee was permitted to use it only under an arrangement. The ld.CIT(A) after considering the ownership of the equipments held that the ideal revenue sharing arrangement in the case of sale of bandwidth through satellite should be 30:70 and selling through optic figure equipment ought to be in the ratio of 15:85.
19. Before us, there is no challenge to the finding of the fact that the assessee company is a subsidiary of GSPL Ltd., and the two are closely connected companies in terms of section 80IA( 10) of the Act. It is also an admitted fact that the satellite equipments, navigation equipment and other linked equipments were owned by the promoter company i.e. GSPC Ltd. The only contention of the counsel for the assessee before us was that the equipments owned by the GSPC were for the purpose of selling bandwidth through satellite and the assessee having earned revenue from this sector of itsbusiness of only Rs.34,22,900/- out of total revenue of Rs.4.27 crores, there was no need to disturb the allocation of revenue between the assessee and its wholly owned subsidiary and there was no case for invocation of provisions of section 80IA( 10) of the Act.
20. We have considered contention of the ld.counsel for the We find that the Ld.CIT(A) has categorically noted that the satellite equipment, navigation equipment and other linked equipments admittedly owned by the promoter company i.e. GSPL were all vital not only for the satellite business of the assessee, but also for optic figure business. He has categorically noted that the navigation equipment and other linked equipments were necessary for providing services through optical fibre also. The assessee has been unable to controvert this fact before us. Further, we have noted that the ld.CIT(A) has considered allocation of revenue sharing in both the satellite and optic fibre bandwidth selling business, considering ownership of all these equipments by GSPL and considering business activities by the assessee. Noting the two, he has allocated revenue between the assessee and the GSPL in the ratio of 30:70 for satellite business and 15:85 in the optic figure business. The assessee has been unable to controvert this finding of the ld.CIT(A) before us. He has filed details of equipments owned by the assessee and its parent company i.e. GSPL , being schedule of fixed assets of the said two concerns for the concerned year ending 31-3-2008, but has not been able to explain from the same how it helps the case of the assessee for revenue distribution with its parent in the ratio of 90: 10.What at most can be derived from the figures reflected therein is that the Plant and Machinery owned by the assessee was to the tune of Rs.35.98 lacs ,while that owned by its parent was to the tune of Rs.4.92 crores,i.e approx. in the ratio of 10:90,which definitely does not help the case of the assessee.
21. In view of the above, we see no reason to interfere in the order of the ld.CIT(A) reducing profits of the assessee by directing the Revenue from selling of bandwidth business of the assessee to be shared between the assessee and its parent company in the ratio of 30:70 for the satellite and 15:85 ratio from the optic fibre business; thus reducing the profits eligible to deduction under section 80IA(4)(ii) of the Act. Thus, the appeal of the assessee is dismissed.
22. In the result, the appeal of the assessee is dismissed.
Order pronounced in the Court on 12th May, 2023 at
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