DCIT Vs. M/s. Value Labs (ITAT Hyderabad)
It has been held that where the assessee is registered under the STPI as a 100% EOU, it is entitled for deduction u/s 10B of the Act. The issue involved in this appeal is whether for becoming eligible to the deduction under S.10B of the Act, whether it is enough if the assessee is registered with Software Technology Park of India as a 100% EOU or it is also necessary for the assessee to have the approval of the Board constituted by the Central Government under S.14 of the Industries (Development and Regulation) Act, 1951. Consistent with the view taken by various Bench of the Tribunal, including the Benches at Hyderabad, in similar matters, we hold that the assessee, having been registered with the STPI, is entitled for deduction under S.10B of the Act.
FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-
Above appeals are filed by the Revenue as well as the assessee for the A.Ys 2004-05, 2007-08 to 2009-10 & 20 12-13.
ITA No. 836/Hyd/2016 A.Y 2004-05
2. This appeal is filed by the Revenue against the order of the CIT (A)-2, Hyderabad, dated 26.2.20 16 directing the AO to allow expenditure claimed by the assessee u/s 10B of the Act, even though the assessee has not been approved as a 100% EOU by the Board appointed in this behalf by the central Govt.
3. Brief facts of the case are that the assessee is engaged in the business of rendering software development services to its Associate Enterprises (AE) located in various places outside India. For the A.Y 2004-05, the assessee filed its return of income on 1.11.2014 declaring an income of Rs. 1,66,03,779. An order u/s 143(3) was passed on 29.12.2006 determining the taxable income of the firm at Rs. 2,55,79,796 after disallowing the excess of the exemption claimed u/s 10B of the Act aggregating to Rs. 65,95,053. Thereafter, the AO noticed that the claim made by the assessee firm u/s 10B of the Act is not correct. Therefore, the assessment was reopened u/s 147 of the Act by issuance of the notice u/s 148 dated 28.3.2011. During the re-assessment proceedings, the AO observed that u/s 10B of the Act, the assessee should be an undertaking which has been approved as a 100% “export oriented undertaking” by the Board appointed in this behalf by the Central Govt. in exercise of the powers conferred by Section 14 of the Industries (Development and Regulation) Act, 1951 and the rules made there under. The AO also observed that the assessee is only registered as a 100% EOU by STPI. Therefore, he disallowed the claim of deduction u/s 10B of the Act and brought to tax. Aggrieved, the assessee filed an appeal before the CIT (A) who allowed the same and aggrieved by the relief granted by the CIT (A), the Revenue is in appeal before us.
4. The learned DR relied upon the order of the AO while the learned Counsel for the assessee supported the order of the CIT (A) and has also placed reliance upon the decision of the Coordinate Bench in the case of Secunderabad Software Services Pvt. Ltd vide ITA No. 1501/Hyd/2011, dated 10.04.2012 wherein, under similar set of facts and after following the various decisions of the Coordinate Benches of this Tribunal, it has been held that where the assessee is registered under the STPI as a 100% EOU, it is entitled for deduction u/s 10B of the Act. Relevant paragraphs are reproduced here under for ready reference:
“6. We heard the parties and perused the impugned orders of the lower authorities. The only question that clinches the issue involved in this appeal is whether for becoming eligible to the deduction under S.10B of the Act, whether it is enough if the assessee is registered with Software Technology Park of India as a 100% EOU or it is also necessary for the assessee to have the approval of the Board constituted by the Central Government under S.14 of the Industries (Development and Regulation) Act, 1951. The CIT(A) has decided this issue in favour of the assessee, and held the assessee as eligible for deduction under S.10B of the Act, following the decisions of the co-ordinate Benches of the Tribunal in the following cases-
(a) VSN Makro Technology P. Ltd. V/s. ACIT (ITA No. 1057/Hyd/2010) dated 13.1.2011, wherein the still earlier decision of the Tribunal in the case of Infotech Enterprises Ltd. (supra), relied by the assessing officer in the impugned assessment order has been considered and the same has been held to be inapplicable as the same has been rendered prior to issuance of Instruction No. 1 dated 31.3.2006 by the CBDT and letter dated 23.3.2006 issued by the Ministry of Communications and Technologies.
(b) DCIT V/s. Valliant Communication Ltd. (ITA 2706/Del/2008 dated 23.4.2010) (2010-TIOL -452- ITAT-Del), wherein the still earlier decision of the Delhi Bench in the case of ITO Vs. Regency Creations Ltd. (ITA No. 4006/Del/2006) dated 13.4.2006 has been followed.
(c) Smt. K.Sudha Rani V/S. ITO (ITA No.1750/Hyd/2008) date 30.10.2009.
Consistent with the view taken by various Bench of the Tribunal, including the Benches at Hyderabad, in similar matters, we hold that the assessee, having been registered with the STPI, is entitled for deduction under S.10B of the Act. In that view of the matter, we find no infirmity in the impugned order of the CIT(A), which is accordingly confirmed and the grounds of the Revenue are rejected.
7. In the result, appeal of the Revenue is dismissed”.
Respectfully following the same, the ground of appeal is rejected and consequently, the Revenue’s appeal is dismissed.
ITA Nos. 815 to 817/Hyd/2016 & ITA No. 916/Hyd/2017
A.Ys 2007-08 to 2009-10
5. ITA No. 815/Hyd/2016 is for the A.Y 2007-08, 816/Hyd/2016 is for the A.Y 2008-09 and ITA Nos. 817/Hyd/2016 and ITA No. 916/Hyd/2017 are for A.Y 2009- 10. All these are the appeals filed by the Revenue for the respective A.Ys. ITA No. 817/Hyd/2016 is an appeal for the A.Y 2009-10 for the assessment order passed u/s 143(3) of the Act, while for the same A.Y 2009-10, ITA No. 916/Hyd/2017 is for the re-assessment order passed u/s 143(3) r.w.s. 147 of the Act. In all these appeals, the common ground raised by the Revenue is against the direction of the CIT (A) to reduce the communication charges and Band Width VOIP charges both from export turnover as well as the total turnover for computing deduction u/s 10A of the Act. According to the Revenue, it should be excluded only from the export turnover and not from the total turnover.
6. Having regard to the rival contentions and the material on record, we find that this is covered in favour of the assessee by the decision of the Hon’ble Karnataka High Court in the case of CIT vs. Tata Elxsi Ltd, reported in 349 ITR 98 and also the Hon’ble jurisdictional High Court in the case of A.Continuum reported in ITTA No. 440/2017. We find that the CIT (A) has followed various decisions of the ITAT which are in consonance with the decision of the Hon’ble Karnataka High Court (cited Supra) wherein it has been held that for the purpose of computation of deduction u/s 10B of the Act, if any expenditure is excluded from the export turnover, then the same should also be excluded from the total turnover. Respectfully following the same, we do not see any reason to interfere with the order of the CIT (A) for all the A.Ys and the Revenue’s appeals are accordingly dismissed.
ITA No. 475/Hyd/2017 (Assessee’s appeal) for A.Y 2012-13
7. This is assessee’s appeal for the A.Y 2012-13. In this appeal, though the assessee has raised as many as seven grounds of appeal and a number of sub-grounds under each of the ground, we find that only two issues are arising in this The issues are (i) (ALP adjustment in respect of software development services; and (ii) interest on receivables.
8. As regards the first issue, the learned Counsel for the assessee submitted that the AO has not followed the direction of the DRP to take the “profit before depreciation” of both the assessee as well as comparable companies for determining the ALP, as the assessee is a partnership firm, while the comparables taken by the TPO are companies and the rate of depreciation is high in the case of the firm. He has drawn our attention to the directions of the DRP at para 2.4 at page 5 of its order wherein the DRP has directed the AO to consider the margin in the case of the assessee as well as the margins of the comparable companies after excluding the depreciation. He submitted that the AO has not followed the said direction while passing the final assessment order.
9. The learned DR however, supported the orders of the authorities below.
10. Having regard to the rival contentions and the material on record, we find that the DRP, by following the decision of the Hon’ble jurisdictional High Court in the case of BA Continuum in ITTA No. 440/2017, has directed the AO to consider the margins of the assessee as well as the comparables after excluding the depreciation. Since the AO has not followed the said method while computing the ALP, we direct the AO to re-compute the ALP after taking the margins of the assessee as well as the comparables after excluding the depreciation, in accordance with the directions of the DRP. The grounds on this issue are therefore, treated as allowed for statistical purposes.
11. As regards second issue of interest on receivables is concerned, the learned Counsel for the assessee submitted that the assessee had transactions with both the AEs and non- AEs and has not charged “interest on the receivable” from the AEs as well as the non- AEs and therefore, it should not be treated as an international transaction. He submitted that the AO has charged interest @ 14.75% on the amount receivable after allowing credit period of 30 days, whereas the DRP has extended the period to 60 He submitted that when the assessee is not charging interest on receivable from non- AEs also and since the credit period allowed by the assessee is not extended beyond six months in most of the cases and beyond 12 months in one case, the interest charged by the Department at 14.75% on the total of the receivables is not sustainable. Even otherwise, he submitted that since the payments are from AEs outside India, the interest rates prevalent in India should not have been charged.
12. The learned DR, however, supported the orders of the authorities below.
13. Having regard to the rival contentions and the material on record, we find that in most cases of the AE’s, the amounts were received within a period of six months except in one case where it was received after 12 months. We find that the Coordinate Bench of this Tribunal in the case of GSS Infotech Ltd in ITA No. 497/Hyd/2015 has considered similar issue and at Para 10 to 12 of its order has held as under:
“10. Assessee relied on the following case law that no interest can be charged on credit which are given in the course of business.
10.1. The DR however, while accepting that levy was for the period beyond the accounting year, however, justified the levy of interest on receivables.
11. We have considered the issue and examined the contentions. As seen from assessee’s contentions, assessee is neither charging interest on any of the receivables outstanding. There is also no basis for adopting only two months as credit period. RBI itself allows an year for the amounts to be realized, if they are in foreign exchange. Whether it is AE or non-AE, it is in the interest of business that assessee receives the foreign exchange early so that it can claim deduction u/s. 10A. Therefore, in our view, putting a limit of two months of credit period itself is arbitrary. Moreover, as seen from the calculation provided in page 7 of the assessment order, the date of realization was shown as 02- 02-2011 and interest was levied from 01-04-2010 to 02-02-2011 which is not pertaining to the year under consideration. As far as this year is concerned, the invoices raised on 31-12- 2009 were outstanding only for a period of three months by the end of the accounting year. We are of the opinion that this period is reasonable and so no interest can be levied, just because amounts are shown as ‘outstanding’. Accordingly, we cancel the interest levied and allow assessee’s contentions. Grounds are considered allowed”.
12. In the result, appeal is considered allowed for statistical purposes”.
14. Respectfully following the same, we hold that where the assessee is not charging interest on both AE and non- AE transactions and the receivables are outstanding for a period of less than six months, no interest can be charged. For the receipts beyond six months also, we find that the interest is not chargeable because the assessee has not charged any interest on receivable from the non- AEs. Therefore, the grounds of appeal relating to this issue are also treated as allowed.
15. In the result, assessee’s appeal is partly allowed for statistical purposes.
16. To sum up, Revenue’s appeals for all the A.Ys are dismissed and assessee’s appeal for A.Y 2012-13 is treated as partly allowed for statistical purposes.
Order pronounced in the Open Court on 15th December, 2017.