ITAT BANGALORE BENCH ‘B’
Infosys BPO Ltd.
versus
Assistant Commissioner of Income-tax
IT Appeal No. 222 (Bang.) of 2011
[Assessment year 2006-07]
MAY 25, 2012
ORDER
Jason P. Boaz, Accountant Member
This appeal is directed against the order passed by the Commissioner of Income Tax, Bangalore-I, Bangalore dt. 20.01.2011 under section 263 of the Income Tax Act, 1961 (herein after referred as ‘the Act’) for the Assessment Year 2006-07.
2. The facts of the case, in brief, are as under :
2.1 The assessee is an Indian company engaged in the business of Business Process Outsourcing (BPO). The return of income for the Assessment Year 2006-07 was filed on 29.11.2006 declaring total income of Rs. 2,21,60,408. The case was taken up for scrutiny by issue of notice under section 143(2) on 15.10.2007. In the course of assessment proceedings, the assessee was inter alia asked to furnish a note on expenses incurred in foreign currency. The said explanation as to the nature of foreign currency expenses and the purpose for which it was incurred was furnished by the assessee to the Assessing Officer on 5.11.2008 (pages 1 to 5 of paper book). The assessee was also asked to furnish an explanation on the activities carried out abroad, break up of the foreign currency expenses for each quarter and a note on foreign currency expenses. These were furnished to the Assessing Officer on 26.11.2008 (pages 19 to 21 of paper book). The Assessing Officer completed the assessment passing an order under section 143(3) of the Act on 31.12.2008 determining the income of the assessee at Rs. 8,44,77,660. The difference between the income returned and income assessed was on account of disallowance under section 14A, disallowance of software expenses and variation in computation of deduction allowed under section 14A.
2.2 The assessee filed an appeal against the order of assessment passed under section 143(3) on 31.12.2008 before the CIT(A) which is said to be pending disposal.
2.3 The learned CIT, Bangalore I, Bangalore (herein after referred to as CIT) issued a notice proposing action. 263 on 29.11.2010 (copy on pages 22 and 23 of paper book), stating that the assessment order passed under section 143(3) is both erroneous and prejudicial to the interest of the Revenue within the meaning of section 263 of the Act for the reasons mentioned below :
“1. The assessment was completed by allowing deduction under section 10A of the IT Act wrongly without deducting expenses amounting to around Rs. 31.06 crores incurred in foreign currency for rendering technical services outside India, from the export turnover, which has resulted in excess allowance of deduction u/s. 10A.
2. Loss of Rs. 74.57 lakhs incurred by one of the STPI units was not set off against the business profits while computing the deduction allowable under section 10A.”
2.4 The assessee was provided an opportunity of hearing and filed detailed written submissions dt. 9.12.2010 against the proposal to pass an order under section 263 of the Act (copy of written submissions on pages 24 to 85 of paper book). The assessee submitted that the requirements of section 263 were not satisfied and that the assessment order under section 143(3) dt.31.12.2008 was passed after verification of all the details. It was submitted that the Assessing Officer examined the aspects of (i) reduction of foreign currency expenses from export turnover and (ii) the computation of deduction under section 10A without setting off the losses of other STPI units, before passing the order under section 143(3). It was further submitted that the order passed under section 143(3) cannot be regarded as erroneous in so far as it is prejudicial to the interest of Revenue under section 263 since the Assessing Officer has taken a correct view as also a possible view in respect of the issues dealt in the notice under section 263. The assessee placed reliance on the decision in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 and other decisions in support of the contention that when an Assessing Officer has adopted one of the courses permissible in law and it has resulted in loss of Revenue, or where two views are possible and the Assessing Officer has taken one view with which the CIT does not agree, it cannot be treated as an order erroneous in so far as it is prejudicial to the interest of Revenue. It was, therefore, submitted that the proposal to pass an order under section 263 is without jurisdiction.
2.5 On the merits of the case, it was submitted as to why foreign currency expenses should not be reduced from ‘export turnover’ in computing deduction under section 10A. It was submitted that the appellant is engaged in the business of BPO and the activity is regarded as ‘computer software’ under clause (b) of the definition of the term ‘computer software’ as per Explanation 2 to section 10A read with CBDT’s Notification No. SO 890(E) dt. 26.9.2000. It was submitted that the assessee is engaged in the business of ‘computer software’ and not in rendering of technical services. The assessee placed reliance on the decisions of the co-ordinate bench of the Tribunal in the case of Asstt. CIT v. Infosys Technologies Ltd. [2008] 172 Taxman 134 (Chennai) (Mag.) and of the decision of Special Bench in the case of Zylog Systems Ltd. v. ITO [2011] 128 ITD 105 in support of the proposition that foreign currency expenses should not be reduced from ‘export turnover’ in computing the deduction under section 10A. It was also submitted that since foreign currency expenses were not recovered from the customers, the same cannot be excluded from ‘export turnover’ in computing deduction under section 10A. Alternatively and without prejudice, it was submitted that if foreign currency expenses are reduced from ‘export turnover’, the same should also be reduced from ‘total turnover’ in computing deduction under section 10A. The assessee placed reliance on the decision in the case of Infosys Technologies Ltd. (supra), I-Gate Global Solutions Ltd. v. Asstt. CIT [2008] 24 SOT 3 (Bang.) (URO), Tata Elxsi Ltd. v. Asstt. CIT [2008] 115 TTJ 423 and other similar decisions in support of the above proposition.
2.6 In respect of the deduction under section 10A and losses of other STPI units, the assessee submitted that deduction under section 10A should be computed and allowed in respect of current years profit of each of the STPI units without setting off the losses of other STPI units. In support of this contention, the assessee relied on the decisions in the cases of I-Gate Global Solutions Ltd. (supra) and KPIT Cummins Infosystems (Bangalore) (P.) Ltd. v. Asstt. CIT [2008] 26 SOT 529 (Bang.) among others. The assessee also made submissions as to why the decision of the Hon’ble jurisdictional High Court in the case of CIT v. Himatasingike Seide Ltd. [2006] 286 ITR 255 is distinguishable both in facts and law and also referred to decisions of the co-ordinate bench of the Tribunal and High Court decisions which had distinguished this case. In view of the above submissions, the assessee requested the CIT to drop the proceedings initiated under section 263 of the Act.
2.7 The CIT passed the order under section 263 holding that the Assessing Officer had passed the order under section 143(3) without proper application of mind with reference to the facts of the case and relevant provisions of law and without recording any finding in respect of reduction of foreign currency expenses from ‘export turnover’ and computation of deduction under section 10A without setting off the losses of other STPI units. The learned CIT relied on the decision of the Hon’ble Apex Court in the case of Malabar Industrial Co. Ltd. (supra) in support of the proposition that no application of mind makes an order erroneous and prejudicial to the interest of Revenue.
2.8 On the merits of the case, the learned CIT held that deduction under section 10A is to be computed after setting off losses of STPI units. It was held that since the expression appearing in section 10A is ‘total income of the assessee’ and not ‘total income of the undertaking’, the losses of STPI unit should be set off from profits of other STPI units while computing the deduction under section 10A. The learned CIT relied on the decision of the jurisdictional High Court in the case of Himatasingike Seide Ltd. (supra) and the decision of the co-ordinate bench of the Tribunal in the case of Intellinet Technologies India (P.) Ltd. v. ITO [2010] 134 TTJ 744 (Bang.) in support of the view that deduction under section 10A is to be computed and allowed after setting off losses of other STPI units, brought forward losses and unabsorbed depreciation. The learned CIT in the order under section 263 observed that even though the assessee referred to a number of Tribunal decisions not following or impliedly distinguishing the decision of the Hon’ble Karnataka High Court in the case of Himatasingike Seide Ltd. (supra), the assessee had not referred to the decision of the co-ordinate bench of the Tribunal in the case of Intellinet Technologies India (P.) Ltd. (supra) which followed the decision in Himatasingike Seide Ltd. (supra) and also held that the decision of the Tribunal in the case of KPIT Cummins Infosystems (Bangalore) (P.) Ltd. (supra) did not reflect the correct position of law.
2.9 In respect of reduction of foreign currency expenses from ‘export turnover’, the learned CIT held that there is no requirement under law that the expenditure incurred in foreign currency for rendering technical services outside India should be separately recovered from customers in addition to the consideration received on account of export of computer software. On the issue of reduction of foreign currency expenses from both ‘export turnover’ and ‘total turnover’, the learned CIT held that in the absence of the definition of the term ‘total turnover’ in section 10A, expenses reduced from ‘export turnover’ cannot be reduced from ‘total turnover’.
2.10 Lastly, the learned CIT held that it was necessary for the Assessing Officer to ascertain the nature and character of the expenses of Rs. 31.06 crores with reference to the facts of the assessee’s case and clause (iv) of Explanation 2 to section 10A of the Act and to verify the submissions made by the assessee. In view of the above, the learned CIT set aside the order of the assessment passed by the Assessing Officer under section 143(3) of the Act with the direction to make a fresh assessment and to allow the deduction claimed under section 10A in accordance with law and in the light of his observation after giving the assessee reasonable opportunity of being heard.
3. Aggrieved by the order of learned CIT, the assessee has filed this appeal. The grounds of appeal raised are as under :
“1.1 The learned Commissioner of Income Tax, Bangalore 1, Bangalore has erred in assuming jurisdiction under section 263 of the IT Act, 1961 and in passing the revisional order. The conditions precedent for assumption/ exercise of jurisdiction. 263 not being satisfied, the order passed under section 263 is bad in law and liable to be quashed.
2.1 Without prejudice, the learned Commissioner of Income Tax, Bangalore 1, Bangalore has erred in
(i) concluding that foreign currency expenses should be reduced from ‘export turnover’ in computing deduction under section 10A.
(ii) not giving any reasons as to why foreign currency expenses should be reduced from ‘export turnover’ in computing deduction under section 10A.
2.2 The learned Commissioner of Income Tax, Bangalore 1, Bangalore has erred in not appreciating that
(i) foreign currency expenses were not included in the figure of ‘export turnover’ so as to exclude/reduce the same from figure of ‘export turnover’;
(ii) even otherwise, expenses incurred in foreign currency were not for providing technical services outside India;
(iii) the appellant, during the relevant previous year, was engaged in development of computer software and not in providing technical services outside India;
(iv) the jurisdictional ITAT as also the Special Bench of ITAT has held that development of computer software cannot be regarded as rendering of technical services and no reduction of foreign currency expenses should be made from ‘export turnover’ in computing deduction under section 10A.
2.3 On facts and circumstances of the case and law applicable, expenses incurred in foreign currency should not to be reduced from ‘export turnover’ in the process of computation of deduction under section 10A.
2.4 Assuming without admitting that expenses incurred in foreign currency is to be reduced from ‘export turnover’, learned Commissioner of Income Tax, Bangalore 1, Bangalore has erred in concluding that the said expenditure should not be reduced from ‘total turnover’ in computing deduction under section 10A.
2.5 The learned Commissioner of Income Tax, Bangalore 1, Bangalore has erred in not appreciating that ‘export turnover’ being part and parcel of ‘total turnover’, expenses reduced from ‘export turnover’ should also be reduced from ‘total turnover’ in computing deduction under section 10A.
3.1 The learned Commissioner of Income Tax, Bangalore 1, Bangalore has erred in
(i) concluding that losses of 2nd STPI unit at Bangalore should be set off against the profits of other STPI units in computing the deduction under section 10A.
(ii) stating that deduction under section 10A is to be allowed from ‘total turnover’ computed after setting off the losses.
(iii) relying on the decisions in Himatasingike Seide Ltd. and Intellinet Technologies India (P.) Ltd. which are distinguishable on both facts and law.
3.2 The learned Commissioner of Income Tax, Bangalore 1, Bangalore has erred in not appreciating that
(i) deduction under section 10A is ‘undertaking specific’ and is to be allowed in respect of profits of each eligible unit without setting off the losses of other eligible units;
(ii) ‘total income’ in the context of section 10A refers to total income of the eligible undertaking and not total income of the assessee.
3.3 On facts and circumstances of the case and law applicable, deduction under section 10A is to be computed and allowed in respect of profits of each eligible unit without setting off the losses of other units.
4.1 In view of the above and other grounds to be adduced at the time of hearing, the appellant prays that the order passed by the learned CIT, Bangalore 1, Bangalore be quashed, or in the alternative
(i)(a) foreign currency expenses be not reduced from ‘export turnover’ in computing deduction under section 10A. Or in the alternative
(b) foreign currency expenses, if reduced from ‘export turnover’, be also reduced from ‘total turnover’ in computing deduction under section 10A.
(ii) losses of 2nd STPI unit at Bangalore be not set off against profits of other STPI units in computing deduction under section 10A. (iii) deduction under section 10A be allowed as claimed by the appellant. The appellant prays accordingly.”
4.1 The learned counsel for the assessee argued the appeal both on the aspect of jurisdiction and on the merits of the case. On the aspect of jurisdiction, the learned counsel for the assessee filed a ‘Compilation of relevant material and decisions’ in support of his arguments. Page 1 of the said compilation contains a list of decisions in favour of the assessee as on the date of issue of notice under section 263. The contents are reproduced here under :
“Infosys BPO Limited – AY 2006-07
