IN THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCH ‘B’
ITA No. 401/Bang/2007
Assessment Year : 2003-04
ISEVA SYSTEMS PVT LTD Vs THE ASSTT COMMISSIONER OF INCOME TAX
Dated : December 7, 2007
Appellant Rep. by : Shri K.P. Girish
Respondent Rep. by : Shri K.P. Rao
Per : K.K. Gupta, AM :
This appeal by the assessee agitates the action of the ld. CIT(Appeals) on the following grounds:
“2. The CIT(A) erred in concluding that the order passed by the ACIT is not barred by limitation of time.
3. In the facts and circumstances of the case, the CIT(A) erred in holding that for the purpose of computing deduction under section 10A of the Act, an adjustment needs to be made to the ‘export turnover’ on account of expenditure attributable to the delivery of software outside India.
4. The CIT(A) erred in holding that for computing the deduction under section 10A of the Act, 75% of the telecommunication expenditure should be treated as being attributable to the delivery of software outside India, and should be reduced from the ‘export turnover’.
5. The CIT(A) erred in holding that the adjustment of telecommunication expenses to be made to the ‘export turnover’ need not be made to ‘the total turnover’.
6. The CIT(A) erred in not holding that:
– Interest under section 234B of the Act should be computed on the basis of the returned income; and
– Interest under section 234B of the Act should be computed applying the rate of 1% per month, being the rate prevailing on the date of the assessment order.
7. The CIT(A) erred in not holding that there is no basis for the ACIT to initiate penalty proceedings under section 271(1)(c) of the Act.”
2. The brief facts of the case of the assessee are that the assessee is a company primarily engaged in the services of live-email response, real time collaborative chat and voice response, which in common language is described as a call centre. The Assessing Officer while framing the assessment u/s. 143(3) considered the assessee’s case of claiming of telecommunication expenditure amounting to Rs.2.01 crores by apportioning 89.2% thereof as incurred for the export activity in the ratio of export turnover to domestic turnover. He therefore excluded a sum of Rs.1.80 crores from the export turnover in allowing deduction u/s. 10A. He also did not consider the same deduction in the total turnover for the purposes of claiming deduction u/s. 10A. He framed the assessment by recomputing the deduction and levying interest u/s. 234B and also initiating penalty proceedings u/s. 271(1)(c). Aggrieved, the assessee appealed before the first appellate authority, who in his detailed order considered the case of the assessee-appellant before him by opining that instead of 89.2% of the telecommunication expenditure for the export activity, 70% thereof could be treated as being attributable to delivery of software services in the call centre and directed the AO to revise the deduction claimed by the assessee on this score u/s. 10A as well. He, however, did not consider the appellant’s case for levy of interest u/s. 234B and initiation of penalty provisions u/s. 271(1)(c). Aggrieved, the assessee has appealed before us on the grounds mentioned above.
3. The ld. counsel for the assessee submitted that the assessee’s case is squarely covered by the decision of the Tribunal in the case of I Gate Global Solutions Ltd. in ITA No. 248 & 249/Bang/2007 = for the assessment years 2002-03 & 2003-04 wherein on the basis of similar considerations, the Tribunal was pleased to hold that 50% of telecommunication expenses which in the cited case was relating to uplinking charges obtaining Wide Area Network facility. The Tribunal was pleased to hold that the ld. CIT(Appeals) consideration thereof that estimation of 80% of data link charges as attributable to delivery of software could be considered reasonable, which he had discussed the business model of software development with a number of representatives of various companies. He pointed out that along with this estimation, the Tribunal was pleased to hold that the amount estimated for deduction from the export turnover would likewise be reduced from the total turnover for the purpose of deduction u/s. 10A. He pointed out that in the assessee’s case, being a call centre, 50% estimation of the expenditure for incoming and outgoing calls would be justified insofar as there is no scientific or pre-determined method of obtaining actual expenditure incurred for earning the export earnings.
4. With respect to the next issue regarding adjustment of telecommunication expenses to export turnover, which the ld. CIT(Appeals) has held, need not be made to the total turnover, is purely covered by the cited decision of the Tribunal in the case of I Gate Global Solutions Ltd. as quoted above. The ld. CIT(Appeals) did not give any direction for the levy of interest u/s. 234B and also for initiating penalty proceedings u/s. 271(1)(c) which may kindly be considered as of now.
5. The ld. DR pointed out that the AO in view of absence of any method of apportioning telecommunication expenses claimed by the assessee having been incurred for the purpose of export turnover was rightly computed at 89.2% by the AO as can be perused in his order. Before the ld. CIT(Appeals) the assessee had agreed to 70% of those expenses being incurred for the purpose of export is now being reduced to 50% as claimed by the ld. counsel before the Bench. There is no method to consider the expenses incurred f
or telecommunication insofar as the assessee being a call centre, has to incur expenses of telecommunication inbound as well as outbound and therefore was rightly considered by the ld. CIT(Appeals) which should not be disturbed as was also considered by the Tribunal Bangalore Bench in the cited case of I Gate Global Solutions Ltd. The ld. CIT(Appeals) also considered the claim of deduction of expenses incurred for earning the export earnings to be reduced from the total turnover elaborately and after verifying with the definition of total turnover for the purpose of arriving at deduction u/s. 10A has not been satisfied, the deduction of telecommunication expenses from export turnover therefore could not be considered separately for the purpose of deduction u/s. 10A. With respect to grounds relating to levy of interest u/s. 234B and AO’s initiating penalty provisions u/s. 271(1)(c), the ld. CIT(Appeals) considered it premature to adjudicate the same has rightly not been considered by him.
6. We have heard the rival submissions and perused the material available on record. On a careful perusal of the facts and circumstances relating to agitation by the assessee before us, the facts of the case of the assessee’s case leading to claim of deduction u/s. 10A cannot be lost sight of at any point of time. In the case relied upon by the ld. counsel before us, the assessee therein had obtained link lines using Wide Area Network which provided video, data and voice connectivity services across a large geographical area from the assessee’s locations in India. In the case before us, it is undisputed that telecommunication charges have to be necessarily incurred being part of the assessee’s business activity. There is no pre-determined method or scientific reflection of the business activity in order to narrow down the expenditure incurred by the assessee on the telecommunication for assigning the same. With the wide increase of telecommunication services and the thrust of the assessee in running a call centre, it becomes important to note that once the expenses incurred are for the business, it will be nobody’s case to disallow the same as having not been incurred for rendering the services as a call centre by the assessee, who has claimed deduction u/s. 10A, which the AO verified as another provision of section 10A compared to section 80HHE. Once this exercise has been undertaken, it becomes important to consider the overall impact of the disallowance of the telecommunication expenses not for the purpose of business. Here the second issue agitated by the assessee comes to the rescue of the assessee insofar as the Tribunal in the cited case had after various deliberations to the definition and also the various case laws relied upon, decided that the uplinking charges which were reduced for ascertaining the export turnover are not to be considered for the purpose of total turnover in view of the fact that the total turnover is the sum total of export turnover and internal turnover, meaning thereby that whatever is reduced from the export turnover has to be reduced from the total turnover for the purpose of computing deduction u/s. 10A. In view thereof, we are of the considered view that the telecommunication expenses which have been estimated at 70% by the ld. CIT(Appeals) is pertaining to having been incurred for the export turnover be estimated at 50% in view of the incoming and outgoing expenses continuously from a call centre. In other words, 75% of the telecommunication expenditure as estimated by the ld. CIT(Appeals) is reduced to 50% to be considered as attributable to the delivery of software outside India which should be reduced from the export turnover.
7. The next issue therefore automatically follows that 50% expenses so reduced from the export turnover is to be reduced from the total turnover for the purpose of computing deduction u/s. 10A, which issue stands covered as relied upon by the ld. counsel in the case of I Gate Global Solutions Ltd.
8. The ground relating to limitation not being pressed by the ld. counsel for the assessee is dismissed as not pressed.
9. The grounds relating to levy of interest u/s. 234B has not been considered by the ld. CIT(Appeals) . However, we are inclined to hold that levy of such interest is to be mandatorily levied in accordance with the mandatory provisions of the section, which the AO is directed to levy. The agitation with respect to initiation of penalty proceedings u/s. 271(1)(c) is premature and is dismissed as rightly not considered by the ld. CIT(Appeals) as well.
10. In the result, the appeal filed by the assessee is partly allowed.
Also See: Export Turnover” for Sec- 10A of Income Tax