HC quashed reassessment notice u/s 148 against Infosys Ltd.

Infosys limited Vs DCIT (Karnataka High Court)

Conclusion:

Reopening of assessment on basis of withdrawal of deduction allowed under Section 10A relating to the assessment year 2007-08 was without application of mind and nothing but the change of opinion, which tantamounted to review and the same was not permissible to initiate the proceedings under Section 147/148.

Held:

Assessee had challenged the proceedings initiated by Department under Section 147 r/w section 148 relating to the assessment years 2004-05, 2005-06 and 2006-07 as Addl. Commissioner by taking clue form the order relating to assessment year 2007-08  wherein assessee’s claim for deduction under Section 10-A had been disallowed substantially  issued notices under Section 148 proposing to re-assess assessee for the assessment years in question on the ground that certain income had escaped assessment. Assessee contended that the proceedings initiated was against the third proviso to Section 147 and was without jurisdiction while the issue of deduction under Section 10-A was in appeal. The re-assessment proceedings were time-barred as assessee had not failed to disclose any material facts for the assessment and the reasons recorded for issuing the notice under Section 148 were furnished to assessee only after the expiry of the extended period of six years. It was held ‘Note’ on Software development projects and the various stages of software development placed by assessee before AO disclosed the stages wherein assessee was required to carry out the project at the customer’s site/onsite and the same were reflected in the Annual Reports. Considering these materials, deduction under Section 10A was allowed in the order passed under Section 143[3]. In such circumstances, it was presumed that AO had examined the entitlement of deduction under Section 10A by assessee in all angles. Withdrawal of deduction allowed under Section 10A based on the assessment order relating to the assessment year 2007-08 was without application of mind and nothing but the change of opinion, which tantamounted to review and the same was not permissible to initiate the proceedings under Section 147/148 of the Act. There was no iota of material available in the reasons recorded by AO to believe escapement of tax on any such agreement where assessee had received the revenue from foreign companies for deputing the technical members independent of software development work. Thus, AO had no jurisdiction to invoke Section 147 and 148 for the assessment years in question.

FULL TEXT OF THE HIGH COURT ORDER /JUDGEMENT

These petitions involving similar and akin issues, have been considered together and are disposed of by this common order.

2. Petitioner has challenged the proceedings initiated by the respondent under Section 147 r/w section 148 of the Income Tax Act, 1961 [‘Act’ for short] relating to the assessment years 2004-05, 2005-06 and 2006-07.

3. The petitioner’s regular assessments under the provisions of the Act relating to the aforesaid assessment years were concluded by the respondent whereby the respondent authority allowed the petitioner’s claim for deduction under Section 10-A while disallowing a small portion of the deduction on certain grounds. To the extent of disallowance of a portion of the deduction under Section 10-A in the original assessment orders, the matters were
taken in appeal and the appeals were pending.

4. In the meanwhile, the Addl. Commissioner took up the petitioner’s assessment relating to the assessment year 2007-2008 and concluded the same under the provisions of Section 143(3) of the Act by order dated 28.12.2010 wherein the petitioner’s claim for deduction under Section 10-A has been disallowed substantially. Taking clue form the above order relating to assessment year 2007-08, the respondent issued notices under Section 148 proposing to re-assess the  petitioner for the assessment years in question on the ground that certain income had escaped assessment. It transpires that the petitioner had replied to the said notices asserting that there is no escapement of assessment of any income and requested the respondent to furnish a copy of the reasons recorded, if any. In response to the same, the respondent issued a letter along with the reasons recorded under Section 148. It is the contention of the petitioner that the reasons recorded for issue of notice has been furnished after the expiry of the extended period of limitation of six years for invoking the provisions of section 147. Further the respondent issued notices under Sections 142(1) and 143(2) calling upon the petitioner to produce certain documents and appear before him. The petitioner submitted detailed reply questioning the jurisdiction of the respondent and raising the plea of limitation and accordingly requested the respondent to dispose of the objections on these issues treating the same as Preliminary Issue. The respondent passed an order negating all the objections raised.

5. It is the contention of the petitioner that the proceedings initiated by the respondent to re-assess the petitioner for the assessment years in question, while the issue of deduction under Section 10-A was in appeal, is against the third proviso to Section 147 and is without jurisdiction. The re-assessment proceedings are time barred as the petitioner has not failed to disclose any material facts for the assessment and the reasons recorded for issuing notice under Section 148 were furnished to the petitioner only after the expiry of extended period of six years.

6. Learned counsel Sri.T.Suryanarayana appearing for the petitioner has raised four grounds, namely,

1. All material facts were fully and truly disclosed by the assessee. Initiation of proceedings by the Assessing Officer under Section 147/148 of the Act is without jurisdiction.

2. The re-assessment notices issued under Section 147 r/w 148 of the Act are barred by limitation and it is only change of opinion of the Assessing Officer.

3. Reasons recorded by the Assessing Officer indicates that there was no independent application of mind but it was only a borrowed satisfaction based on the assessment order of the year 2007-2008 passed under Section 143(3) of the Act.

4. The issues relating to Section 10-A were pending before the Appellate Forum and as such re-assessment proceedings initiated  under Section 147 r/w 148 are contrary to the third proviso to section 147 of the Act.

7. Elaborating the arguments on these points, learned counsel argued that ‘reason to believe’ is an essential prerequisite for exercise of powers under Section 147 and such belief regarding escapement of assessment cannot be formed on mere suspicion, surmises or conjectures.

8. The phrase ‘reason to believe’ envisages the presence of some material, a nexus between such material and the belief of escapement of income from assessment, application of mind by the officer to such material and an inference based on reason drawn by the officer that income has escaped assessment. Such ‘reason to believe’ could not be borrowed satisfaction and the same do not confer any jurisdiction to initiate re- assessment proceedings. It was argued that the notices issued to withdraw Section 10A benefits considering the profits from onsite development of computer software as  deputation of technical manpower is nothing but change of opinion. There was no failure on the part of the petitioner in disclosing all material facts, fully and truly. ‘Note’ on expenditure incurred in Foreign Countries and Annual Report were referred to. Reference was made to the order of Dispute Resolution Panel relating to the A.Y.2010-11.

9. Learned counsel Sri.E.I. Sanmathi appearing for the Revenue argued that Master Service Agreements, Work Orders, Scope of Works and invoices were not placed before the Assessing Officer at the time of the original assessment. It is only during the scrutiny proceedings conducted for the assessment year 2007- 2008 on their visit at the Head Office of the petitioner’s company, various information including large number of Master Service Agreements, Work Contracts, Scope of Works, Invoices and other details related to the deduction claimed under Section 10-A and 10-AA of the Act were called for. It was noticed that the petitioner’s company is deputing technical man power onshore abroad relating to software development activity which has no link whatsoever with the STP/SEZ undertakings in India. The said revenue receipt from onshore activity  was treated as not related to the undertaking eligible for deduction under Sections 10-A/10-AA of the Act. Business of Deputing Technical Manpower (DTM) abroad was eligible for deductions under Section 80- HHE of the Act and could not be included as an eligible activity under Section 10-A and 10-AA of the Act. The petitioner’s company had claimed the revenue receipt from such DTM as software development activity and deductions were allowed under Section 10-A as claimed which being wrongly allowed, the same called for initiation of reassessment proceedings. It was argued that the subject mater of the appeal which was pending before this Court was on a different issue, not related to the issue on hand. The Assessing Officer being of clear satisfaction that there is reason to believe the escapement of tax during the relevant assessment years, proceeded with the re-assessment proceedings. Preliminary order was passed rejecting the objections. The assessment order passed for the assessment year 2007-2008 disallowing the deductions under Section 10-A for this DTM activities has been confirmed by the  first Appellate Authority. Thus, it was argued that the
writ petition is not maintainable.

10. Both the learned counsel have placed reliance on host of judgements in their support.

11. I have carefully considered the rival submissions of the learned counsel appearing for the parties and perused the material on record.

12. It is the contention of the petitioner that the note on software development and the note on expenditure incurred in foreign currency as well as details of expense incurred in foreign currency were placed before the Assessing Officer pursuant to the query made. The said note clearly indicates the different stages of the software development project. Requirement analysis indicates that this stage is typically carried out at the customer’s site. After requirement analysis, the next stage of proto typing which is a stage to gather complete requirements and the execution of the stage could happen either at the client site or offshore location. Then at the stage of design it is executed either at the client site or at the offshore development centre. Running the system for a restricted set of users parallel with the existing system exposing the critical functionality of the system i.e., the private stage is executed either at the client site or at the offshore development centre. Similarly in a programming language, the build stage produces the source code, executables and the test data is carried out either at the customer’s site or at the offshore development centre. All these activities are carried at customer’s site or at offshore software development centre.

13. Note on expenditure incurred in foreign currency reads thus:

“Infosys incurs expenditure in foreign currency in connection with the execution of software development projects abroad for its global client base. The expenditure in foreign currency can be categorized into two sets viz., a] Direct expenditure incurred and  attributable to the software development contracts executed and b] expenditure incurred on sales and marketing and general  administrative activities abroad. Both these categories are discussed in detail in the following section.

a] Direct Expenditure incurred on software development projects

As mentioned in the earlier section, a software development projects undergoes  various stages and some or all of the stages are executed at the onsite location of the client. Here, the company incurs expenditure in foreign currency that are directly related and attributable to the software development project carried out. These costs are included in the pricing of the projects that are billed to the clients.

The major heads of expenditure under this category are as follows:

a) Maintenance allowance paid to employees who are deputed abroad,

b) Company’s contribution to social security and taxes on the maintenance allowances paid to employees,

c) Medical insurance costs of the employees,

d) Expenditure on travel abroad,

e) Data communication costs,

f) Software for own use that are required for specific projects,

g) Other expenses.

b] Expenditure incurred on sales and marketing general administrative activities abroad:

In order to support and market the software development projects, it is necessary for the company to incur expenditure on administrative and sales and marketing activities. These activities are critical for providing support to the execution of software development projects and maintaining the competitive edge of the company in a highly competitive global market environment.

The major heads of expenses under this category are as follows:

a) Maintenance allowances paid to employees in support and sales functions,

b) Rentals, maintenance and related costs of offices maintained abroad for support and sales activities,

c) Expenditure on traveling and conveyance etc abroad by these functions,

d) Other expenses.”

14. The Annual Report discloses the Revenue by location. For eg., Annual Report [2003-04]

15. The Dispute Resolution Panel while considering the issue relating to Sections 10A and 10AA vis-à-vis the onsite activity of the assessee company’s STPI/SEZ units amounted to manpower supply and hence not eligible for deduction relating to assessment year 2010-11 has observed that the Assessing Officer’s conclusions is not based on the critical analysis of the voluminous documents filed by the assessee in support of the claim that none of the revenue attributed to the exempt units could be said to be related to DTM activity, or to wholesale onsite activity. …. There is no bar under the provisions of Section10A/10AA that no part of the  contract for export of software service could be performed onsite. ……… The deductions curtailed /restricted in an ad-hoc manner based on the estimate
across the units, without reference to the eligible profits, eligible export turnover, and without identifying the
revenue which could not be said to be part of eligible business.

16. The reasons recorded by the Assessing Officer for issue of notice [assessment year – 2004-05] under Sections 147/148 reads thus:

“The assessee company had filed its return of income declaring an income of Rs.99,21,78,620/-. The details of return filed by the assessee are as under:

Deduction claimed u/s. 10A

2. The said return had been taken up for scrutiny and an order u/s 143[3] dated 29.12.2006 had been passed arriving at a total income of Rs.426,24,51,540/-. The various issues of additions and disallowances made in the
assessment order as below:

1. Payment made to foreign companies towards bandwidth charges Rs.10,37,42,694/-.

2. Subscriptions paid to Gartner group & other [u/s 40[a][i]] Rs.7,75,87,889/-.

3. Provision for post sale customer support Rs.29,87,075/-.

4. Recomputation of deduction u/s 10A

a) Communication expenses incurred in connection with delivery of software not reduced from total turnover.

b) Reduction of expenses in foreign currency and providing technical services outside India from export turnover – Rs.1041,17,04,887/-

c) Reduction of bad debts written off amounting to Rs.14,16,04,817/- from export turnover.”

“3. During the course of scrutiny proceedings conducted for A.Y. 2007-08, as visit was carried out at the head office of Infosys Technology Limited on 1.12.2010. Various information including a large number of Master Service Agreements, Work Contracts/Scope of works, Invoices and other details related to the deduction claimed u/s 10A and 10AA of the Income Tax Act were called for. On account of detailed fact finding during the course of this scrutiny proceedings for A.Y. 2007-08, the following additions/disallowances to the returned income for A.Y. 2007-08, were made

a) It is noticed that the assessee company is rendering a large body of work onshore abroad related to software developmental activities. However, it was detected that none of the said software development activities onshore abroad had any link whatsoever with the STP/SEZ undertakings in India. It had been noticed that the assessee had claimed all revenue from software developmental activities under STPs/SEZs based in India only. No part of the income had ever been admitted as generated out of the company’s activities abroad. During the course of investigation conducted, it had been detected on facts as per various contracts/SOW, work orders and invoices that a large body of work related to software development with the STP/SEZ units in India. The said revenue receipt from onshore activity was treated as not related to the undertaking eligible for deduction u/s 10A/10AA of the I.T. Act. Such onshore receipts were treated as company wide software receipts not related to the STP/SEZ undertakings in India. This had been computed and the deduction claimed u/s 10A/10AA of the I.T. Act had been drastically reduced.

b) During the course of said fact finding it had also been detected that the assessee company is in the business of deputing technical man power (DTM) of providing short duration technical man power abroad. Such business  activity commonly known as Body Shopping was eligible for deduction u/s 80HHE of the I.T. Act and was not included as an eligible activity u/s 10A/10AA of the I.T. Act. It had been noticed from the contracts and invoices that the assessee company had substantial revenue from such DTM activity and it claimed the revenue receipt from the same as software development activity. It had been detected that assessee had made similar claims for earlier Assessment Year also.

c) Assessee was also seen claiming capital expenses incurred on DG installation, landscaping done for first time, curtain glazing and similar such civil expenditure as revenue expenses under the head repair and  maintenance of buildings. This had been detected as capital expenses as treated as such thereby reducing the revenue expenses claimed.

During the course of assessment for A.Y. 2007-08, it had been clearly detected that similar issues of additions/disallowances were there for previous Assessment Year also. In fact the assessee company is in the same business for the last few years and the business agreements and business practices of A.Y. 2007-08 had actually continued from the last several years. This had been noticed with respect of the MSAs, Work orders, SOWs and Invoices called for and seen during the course of assessment proceedings for A.Y.
2007-08. A good number of MSAs executed by the assessee had been entered into from 1.4.2000 to 31.3.2003.

The details of revenues declared by the assessee onsite and offshore and the expenditure incurred by the assessee in foreign currency are as below for the assessment year 2004-05:

xxx
xxx

As per A.Y. 2007-08, 10% of the total onsite revenues by the assessee have been held to be out of deputation of technical man power receipts. Similarly 20% of the total onsite receipts of the assessee have been held to be on account of onshore revenues not related to the STP undertakings in India. As per this preliminary estimation and considering similar percentages of DTM activity and onshore revenue activities for the year, more than Rs.224 crores of software services revenue claimed by the assessee for the year is not eligible for deduction u/s 10A of the I.T. Act.

None of these facts of DTM activity conducted, onshore revenues earned without any link to the STP undertakings in India and capital expenditure for building constructions claimed as revenue expenditures have been disclosed by the assessee in the return of income and the Annual Reports submitted. It is also seen, that failure on the part of assessee to disclose fully and truly all material facts with regard to deduction u/s 10A has resulted in allowing excess deduction u/s 10A for AY 2004-05 and  allowing of capital expenditure as revenue expenditure.

Similar reasons are recorded for the other assessment years in question.

“147. Income escaping assessment. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) :

Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year.

Provided further that nothing contained in the first proviso shall apply in a case where any income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment for any assessment year:

Provided also that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment.”

18. The twin conditions to be satisfied to reopen the assessment beyond four years are that [i] the assessing officer has reason to believe that the income chargeable to tax has escaped assessment [ii] no full and true disclosure of the material facts at the time of original assessment was made by the assessee.

19. To confer jurisdiction under this section in respect of assessment beyond the period of four years but from the end of the relevant assessment year, the pre-requisite condition is that the Assessing officer must have ‘reason to believe’ that any income chargeable to tax has escaped assessment

20. The third proviso contemplates that the Assessing Officer is conferred with a jurisdiction to assess or reassess such income, other than the income involving matters which are the subject matter of any appeal, reference or revision, which is chargeable to tax and has escaped assessment.

21. The notice issued by the Assessing Officer under Section 148 of the Act reads thus:

“Notice under Section 148 of the Income-tax Tax 1961

To,

M/s. Infosys Technologies Ltd
Electronics City, Hosur Road.,
Bangalore-560100.

Whereas I have reason to believe that your income chargeable to tax for the assessment year 2004-05 has escaped assessment within the meaning of Section 147 of the Income-Tax Act.

I, therefore propose to reassess the income under section for the said assessment year and hereby require you to deliver to me a return in the prescribed form of your income for the said assessment year within 30 days
from the date of service of this notice.

This Notice is being issued after obtaining the necessary approval of the Commissioner of Income-tax.”

22. The Hon’ble Bombay High Court in Multiscreen Media P. Ltd., V/s. Union of India and Another [No.1]1 , [authored by Hon’ble Justice Dr.D.Y.Chandrachud as his lordship then was] has observed thus:

“12) The notice issued by the Assessing Officer under section 148 does not state that there was a failure on the part of the assessee to fully and truly disclose all material facts necessary for the assessment for assessment year 2002-03. The assessment was sought to be reopened after the expiry of a period of four years from the end of the relevant assessment year. In such a case the jurisdictional condition precedent stipulated by the proviso to Section 147 is a failure on the part of the assessee to fully and truly disclose all material facts necessary for assessment for that assessment year consequent upon which income chargeable to tax has escaped assessment. That has not been fulfilled. The notice does not even purport to state so. The ground furnished in the notice for reassessment would at the highest indicate that according to the Assistant Commissioner of Income Tax, allocation of expenses as between the petitioner and the foreign principal ought to have been originally considered by the Assessing Officer when the order of assessment was passed under section 143(3). That however would not give a valid reason to reopen the assessment beyond a period of four years, even assuming that the Assessing Officer had erred in not doing so, unless there was a failure on the part of the assessee to fully and truly disclose all material facts necessary for assessment. Absent the existence of the jurisdictional condition precedent, assessment cannot be reopened beyond a period of four years after the expiry of the relevant assessment year, as has been done in the present case. In the circumstances, the notice for reassessment is liable to be quashed and set aside solely on the ground that the Revenue has failed to establish the existence of the jurisdictional condition precedent to the exercise of the power to reopen an assessment beyond a period of four years of the expiry of the relevant assessment year.”

23. Thus, it can be held that the notice issued under Section 148 of the Act does not fulfil the jurisdictional condition precedent stipulated by the proviso to section 147 of the Act in as much as the failure on the part of the assessee to fully and truly disclose all material facts has resulted in escapement of assessment of the income chargeable to tax.

24. As aforesaid, it is the contention of the petitioner that all the material facts were fully and truly disclosed in terms of the notes referred to above and the annual report of the company wherein income from software services and products is shown as overseas and domestic as well as revenues by location onsite and offshore. These aspects were considered by the assessing officer at the time of original assessment. The Assessing Officer based on the material facts has concluded the assessments allowing the deduction under Section 10-A of the Act. Subsequently on the garb of assessment order passed for the assessment year treating the onsite revenue as revenue collected from DTM activities, revenue is intending to disallow Section 10A deduction, invoking Section 147/148 of the Act.

25. The next question would be whether such information collected by the assessing officer through the assessments concluded for the assessment year 2007-08 would be construed as reason to believe escapement of tax or borrowed satisfaction.

26. The Hon’ble High Court of Rajasthan in the case of Commissioner of Income Tax Vs. Shree Rajasthan Syntex Limited2, dealing with the question about validity of assumption of jurisdiction under Sections 147 and 148 by the Assessing Officer, held that, the prerequisite condition which is said to be sine qua non is that the Assessing Officer ‘has reason to believe’ that income chargeable to tax has escaped assessment. The Assessing Officer had taken the decision after considering all the facts and reopening proceedings on account of the opinion of another Assessing Officer and came to the conclusion that the opinion of the Assessing Officer cannot replace the opinion of another Assessing Officer. In such a case, law does not permit re-assessment on change of opinion and it was a ‘borrowed satisfaction’ under the opinion of the Assessing Officer at Mumbai, not sufficient to confer power on the Assessing Officer at Rajasthan to initiate re-assessment proceedings. It is observed that if the Assessing Officer at Mumbai had not allowed depreciation allowance to the lessee based on the very lease deeds, the re-assessment proceedings would not have been initiated at Rajasthan.

27. The Division Bench of this Court in the case of Commissioner of Income Tax & another Vs. Hewlett-Packard Globalsoft Pvt. Limited3, while considering the substantial question of law that, Whether on the facts and circumstances of the case, the Tribunal was correct in holding that the reopening of assessment is by mere change of opinion, without appreciating the fact that the expenditure related to on- site development of computer software was not examined in the original assessment and as such is not a deemed opinion to hold change of opinion, held that, while completing the assessment under Section 143(3) of the Act, the Assessing Officer has gone into the question of excluding certain sum from the export turnover on the ground that it was expenditure incurred in foreign exchange for providing technical services outside India. The Assessing Officer had examined the claim of expenditure incurred in foreign currency for providing technical services by allocating the sum between the five STP units in the ratio of export sales. Certain queries were raised and considering the detail reply given by the assessee, the issue was thoroughly addressed, considered and the plea of the assessee came to be accepted. In that view of the matter, it cannot be construed that there was either non- disclosure by the assessee or the Assessing Officer had obtained material subsequent to framing of the assessment order so as to arrive at a conclusion that there was escapement of income from tax. In such circumstances it was held that, the Tribunal was justified in arriving at a conclusion that the re-opening of assessment was ‘change of opinion’ and the issue regarding eligibility of the income derived from rendering technical services abroad to be eligible for deduction under Section 10-A or not, had already been considered by the Assessing Officer in the assessment concluded under Section 143 (3) of the Act.

28. The Cognate Bench of this Court in the case of M/s. Kotarki Constructions Pvt. Ltd., V/s. The Asst. Commissioner of Income Tax and Another, 4 has observed thus:

“…….. the deduction allowed to the extent of 68.75% only for the works which fell within the four corners of Section 80-IA[4] of the Act could not have been disallowed or intended to be disallowed by resort to Section 147/148 of the Act under the garb of subsequent Assessment order passed for the subsequent A.Y.2013-14, which also prima-facie indicates that the Assessing  Authority has been swayed by the words “Improvement, repairs and widening [SIC !]………………..”

29. The assessments concluded for the subsequent year 2007-08 would not be construed as the independent satisfaction of the assessing officer in as much as the reason to believe that income chargeable to tax has escaped assessment. The fact that the petitioner was rendering technical services was considered by the assessing officer at the time of original assessment. It is observed in the assessment order as thus:

“Hence, the telecommunication charges attributable to the delivery of computer software outside India and expenses in foreign exchange in providing technical services outside India are to be reduced from the export turnover. The assessee company submitted that in its own case, the Bangalore Tribunal in ITA No.50/793 to 795, 742 and 732 to 734 has confirmed that Infosys is not involved in rendering of technical services and therefore, no exclusion can be made of any expenditure incurred in foreign currency is to be made other than that already excluded by the assessee company. However, the contention of the assessee company is not acceptable since on the same issue, the department has appealed before the Hon’ble High Court in the assessee’s own case. Also the assessee company stated that there is no element of technical services involved. However, this submission of the assessee company is not acceptable since there might be certain exclusive contracts for providing technical services and also certain element of providing technical services in every contract. This issue is a recurring one and is pending before the appellate authorities.

Out of the total expenditure of Rs.1926,63,15,664/- incurred in foreign exchange by the assessee company, an amount of Rs.1923,96,68,110/- relates to the 10A unit and the balance amount of Rs.2,66,47,554/- relates to 80HHE units. The assessee company has furnished a break-up of the expenditure of Rs.1923,96,68,110/- which is enclosed to this order as Annexure A. As per the details furnished, an amount of Rs.872,42,20,529/- is in relation to marketing expenses and other expenses. The balance of Rs.1051,54,47,581/- [including telecommunication charges] was further bifurcated as under:

At the same time, the assessee company could not categorize/quantify the above sum as per the definition of the Export Turnover …………”

30. In the case of Commissioner of Income Tax, Gujarat Vs. Bhanji Lavji5, the Hon’ble Apex Court while considering Section 34[1] [a] of the Income Tax Act, 1922, observed that it is not for the assessee to satisfy the Income-tax Officer that there was no concealment with regard to any question; it is for the Income-tax Officer, if that issue is raised, to establish that the assessee had failed to disclose fully and truly certain facts material to the assessment of income which had escaped assessment. Section 34[1][a] does not cast any duty upon the assessee to instruct the Income-tax Officer on questions of law. Income-tax Officer may, if he is satisfied that on account of failure on the part of the assessee to disclose fully and truly all material facts necessary for the purpose of assessment, income has escaped assessment, he may assess or reassess the income. But when the primary facts necessary for assessment are fully and truly disclosed, he is not entitled on change of opinion to commence proceedings for the reassessment.

31. It is beneficial to refer to the case Indian Oil Corporation Vs. Income Tax Officer, Central Circle V, Calcutta and Others 6, wherein the Hon’ble Apex Court has observed thus:

“As is well-settled now by the several authorities of this court and of several High Courts, there must be materials to come to the conclusion that there was “omission or failure to disclose fully and truly all material facts necessary for the assessment of the year”. It postulates a duty on every assessee to disclose fully and truly all material facts  necessary for the assessment. Therefore, an obligation is to disclose facts; secondly, those which are material; thirdly, the disclosure must be full and, fourthly, true. What facts are material and necessary for assessment will differ from case to case. In every assessment proceeding, for computing or determining the proper tax due from the assessee, it is necessary to know all the facts which help the assessing authority in coming to the correct conclusion. From the primary facts in his posn, whether on disclosure by the assessee, or discovered by him on the basis of the facts disclosed, or otherwise, the assessing authority has to draw inferences as to certain other facts. But on the primary fact, it is for the taxing authority to drawn inferences. It is not necessary for the  assessee to drawn inferences for him. See, in this connection, the observations in Calcutta  Discount Co., Ltd.,’s case [1961] 41 ITR 191 [SC]].

In this case, it is necessary……………………….. The facts, viz., what was done, what was being claimed by the London office and the difficulties in producing the accounts or the opinion of the auditors for which the Income-tax Officers had called upon the assessee, were all known to the Income-tax Officers at the time of making the original assessments. In spite of the same, the Income-tax Officer chose to assess the assessee in the manner he did.”

32. In the case of Income Tax Officer, I Ward, Distt. VI, Calcutta & others Vs. Lakhmani Mewal Das7 , the Hon’ble Apex Court has observed thus:

“As stated earlier, the reasons for the formation of the belief must have a rational connection with or relevant bearing on the formation of the belief. Rational connection postulates that there must be a direct nexus or live link between the material coming to the notice of the Income-tax Officer and the formation of his belief that there has been escapement of the income of the assessee from assessment in the particular year because of his failure to disclose fully and truly all material facts. It is no doubt true that the court cannot go into the sufficiency or adequacy of the material and substitute its own opinion for that of the Income-tax Officer on the point as to whether action should be initiated for reopening assessment. At the same time we have to bear in mind that it is not any and every material, howsoever vague and indefinite or distant, remote and far- fetched, which would warrant the formation of the belief relating to escapement of the income of the assessee from assessment. The fact that the words “definite information” which were there in section 34 of the Act of 1922 at one time before its amendment in 1948 are not there in section 147 of the Act of 1961 would not lead to the conclusion that action cannot be taken for reopening assessment even if the information is wholly vague, indefinite, far-fetched and remote. The reason for the formation of the belief must be held in good faith and should not be a mere pretence.

The powers of the Income-tax Officer to reopen assessment though wide are not plenary. The words of the statute are “reason to believe” and not “reason to suspect”. The reopening of the assessment after the lapse of many years is a serious matter. The Act, no doubt, contemplates the reopening of the assessment if grounds exist for believing that income of the assessee has escaped assessment. The underlying reason for that is that instances of concealed income or other income escaping assessment in a large number of cases come to the notice of the income-tax authorities after the assessment has been completed. The provisions of the Act in this respect depart from the normal rule that there should be, subject to right of appeal and revision, finality about orders made in judicial and quasi- judicial proceedings. It is, therefore, essential that before such action is taken the requirements of the law should be satisfied. The live link or close nexus which should be there between the material before the Income-tax Officer in the present case and the belief which he was to form regarding the escapement of the income of the assessee from assessment because of the latter’s failure or omission to disclose fully and truly  all material facts was missing in the case. In any event, the link was too tenuous to provide  a legally sound basis for reopening the assessment. The majority of the learned Judges in the High Court, in our opinion, were not in error in holding that the said material could not have led to the formation of the belief that the income of the assessee respondent had escaped assessment because
of his failure or omission to disclose fully and truly all material facts.”

33. In the case of Commissioner of Income Tax vs. Kelvinator of India Ltd., (2010) 320 ITR 561 (SC), the Hon’ble Supreme Court held as under:-

“6. On going through the changes, quoted above, made to Section 147 of the Act, we find that, prior to the Direct Tax Laws (Amendment) Act, 1987, reopening could be done under the above two conditions and fulfillment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in Section 147 of the Act (with effect from 1st April 1989), they are given a go-by and only one condition has remained, viz., that where the Assessing Officer has reason to believe that income has escaped assessment, confers jurisdiction to reopen the assessment. Therefore, post-1st April 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words “reason to believe” failing which, we are afraid, Section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of “mere change of opinion”, which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review; he has the power to reassess. But reassessment has to be based on fulfillment of certain precondition and if the concept of “change of opinion” is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of “change of opinion” as an in-  built test to check abuse of power by the Assessing Officer. Hence, after 1st April 1989, the Assessing Officer has power to reopen, provided there is “tangible material” to come to the conclusion that there is escapement of income from assessment. Reasons must have a live link with the formation of the belief. Our view gets support from the changes made to section 147 of the Act, as quoted hereinabove. Under the Direct Tax Laws (Amendment) Act, 1987, Parliament not only deleted the words “reason to believe” but also inserted the word “opinion” in Section 147 of the Act. However, on receipt of representations from the companies against omission of the words “reason to believe”, Parliament reintroduced the said expression and deleted the word “opinion” on the ground that it would vest arbitrary powers in the Assessing Officer. We quote hereinbelow the relevant portion of Circular No. 549 dated
October 31, 1989, ([1990] 182 ITR (St.), 1, 29), which reads as follows:

“7.2. Amendment made by the Amending Act, 1989, to reintroduce the expression ‘reason to believe’ in Section 147.—A number of representations were received against the omission of the words ‘reason to believe’ from Section 147 and their substitution by the ‘opinion’ of the Assessing Officer. It was pointed out that the meaning of the expression, ‘reason to believe’ had been explained in a number of court rulings in the past and was well settled and its omission from Section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended section 147 to reintroduce the expression ‘has reason to believe’ in the place of the words ‘for  reasons to be recorded by him in writing, is of the opinion’. Other provisions of the new Section 147, however, remain the same.” For the afore-stated reasons, we see no merit in these civil appeals filed by the Department; hence, dismissed with no order as to costs.

34. In the case of Assistant Commissioner of  Income Tax V/s. Rajesh Jhaveri Stock Brokers [P] Ltd. 8, the Hon’ble Apex Court has held thus:

“Sec. 147 authorises and permits the AO to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word “reason” in the phrase “reason to believe” would mean cause or justification. If the AO has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the AO should have finally ascertained the fact by legal evidence or conclusion. The scope and effect of s. 147 as substituted w.e., 1st April, 1989, as also ss. 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of s. 147, separate cls. [a] and [b] laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under s. 147[a] two conditions were required to be satisfied firstly the AO must have reason to believe that income profits or gains chargeable to income-tax have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of either omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the AO could have jurisdiction to issue notice under s. 148 r/w s. 147[a]. But under the substituted s. 147 existence of only the first conditions suffices. In other words if the AO for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is however to be noted that both the conditions must be fulfilled if the case falls within the ambit of  the proviso to s. 147. The case at hand is covered by the main provision and not the proviso. So long as the ingredients of s. 147 are fulfilled, the AO is free to initiate  proceeding under s. 147 and failure to take steps under s. 143[3] will not render the AO powerless to initiate reassessment proceedings even when intimation under s.143[1] had been issued.”

35. The present case falls within the ambit of the proviso to Section 147 and hence both the conditions must be fulfilled to confer jurisdiction under Section 147 of the Act. The Hon’ble Apex Court was dealing with the case of an intimation under Section 143[1][a] and not an order of assessment. Hence, it is held that there being no assessment under section 143[1][a] of the Act, the question of change of opinion does not arise.

36. This Court in TTK Prestige Ltd., V/S. The deputy commissioner of Income Tax, Circle 7[1][1] Bengaluru9, has held thus:

“18. The reasons recorded by the AO discloses that on the material available on record, it was noticed that the Assessee- Petitioner has claimed an amount of Rs.1,98,97,036/- towards the licence fees/logo which is in the nature of goodwill, having enduring benefit needs to be capitalized. It is true that the material facts can be ascertained from the assessment records also and not necessarily from any other extraneous source. But, the Revenue has to establish that the Assessee had stated incorrect and wrong material facts during the assessment proceedings, culminating into an assessment order escaping the income to assessment. Presumption can be raised with respect to an assessment order passed in terms of Section 143[3] that such an order has been passed on application of mind which is well known presumption in terms of Section 114[e] of the Indian Evidence Act, 1872. Merely if the assessment order is silent or does not record the reasons, would not lead to the conclusion of non application of mind by the AO. On the contrary, it is a presumption that the AO has applied his mind to all the material facts available at the time of passing of the assessment order if it could be inferred impliedly from the order or the existing circumstances.”

37. It is apt to refer to Income Tax Officer Ward No.16[2] V/s. M/s. TechSpan India Private Ltd., & Another10, wherein the Hon’ble Apex Court has held thus:

“9] Section 147 of the IT Act does not allow the re-assessment of an income merely  because of the fact that the assessing officer has a change of opinion with regard to the interpretation of law differently on the facts that were well within his knowledge even at the time of assessment. Doing so would have the effect of giving the assessing officer the power of review and Section 147 confers the power to re-assess and not the power to
review.

10) To check whether it is a case of change of opinion or not one has to see its meaning in literal as well as legal terms. The word change of opinion implies formulation of opinion and then a change thereof. In terms of assessment proceedings, it means formulation of belief by an assessing officer resulting from what he thinks on a particular question. It is a result of understanding, experience and reflection.

13) The fact in controversy in this case is with regard to the deduction under Section 10A of the IT Act which was allegedly allowed in excess. The show cause notice dated 10.02.2005 reflects the ground for re- assessment in the present case, that is, the deduction allowed in excess under Section 10A and, therefore, the income has escaped assessment to the tune of Rs.57,36,811. In the order in question dated 17.08.2005, the reason purportedly given for rejecting the  objections was that the assessee was not maintaining any separate books of accounts for the two categories, i.e., software development and human resource development, on which it has declared income separately. However, a bare perusal of notice dated 09.03.2004 which was issued in the original assessment proceedings under Section 143 makes it clear that the point on which the re-assessment proceedings were  initiated, was well considered in the original proceedings. In fact, the very basis of issuing the show cause notice dated 09.03.2004 was that the assessee was not maintaining any separate books of account for the said two categories and the details filed do not reveal proportional allocation of common expenses be made to these categories. Even the said show cause notice suggested how proportional allocation should be done. All these things leads to an unavoidable conclusion that the question as to how and to what extent deduction should be allowed under Section 10A of the IT Act was well considered in the original assessment proceedings itself. Hence, initiation of the re- assessment proceedings under Section 147 by issuing a notice under Section 148 merely  because of the fact that now the Assessing Officer is of the view that the deduction under Section 10A was allowed in excess, was based on nothing but a change of opinion on the same facts and circumstances which were already in his knowledge even during the original assessment proceedings.”

38. It is beneficial to refer to the CBDT circular dated 17.01.2013 issued by the Government of India, Ministry of Finance, Department of Revenue wherein, it is clarified thus:

“[b] It has also been brought to notice that it is a common practice in the software industry to depute Technical Manpower abroad [at the client’s place] for software development activities [like upgradation, testing, maintenance, modification, trouble- shooting etc.,], which often require frequent interaction with the clients located outside India. Due to the peculiar nature of software development work, it has been suggested that such deputation of Technical Manpower abroad should not be considered detrimental to the benefits of the exemption under Sections 10A, 10AA and 10B merely because such activities are rendered outside the eligible units/undertakings.

The matter has been examined. Explanation 3 to sections 10A and 10B and Explanation 2 to section 10AA clearly declare that profits and gains derived from ‘services for development of software’ outside India would also be deemed as profits derived from export. It is therefore clarified that profits earned as a result of deployment of Technical Manpower at the client’s place abroad specifically for software development work pursuant to a contract between the client and the eligible unit should not be denied benefits under sections 10A, 10AA and 10B provided such deputation of manpower is for the development of such software and all the prescribed conditions are fulfilled.”

39. Though the aforesaid circular was not available before the Assessing Authority at the time of  issue of notice under Section 147/148 of the Act, the same throws light on the aspect of deployment of technical manpower vis-à-vis deduction under Section 10A of the Act. This circular clarifies that the profits earned as a result of deployment of technical manpower at the client’s place specifically for software development work pursuant to contract between the client and the eligible unit should not be denied benefits under Section 10A of the Act provided such deputation of manpower is for the development of such software. It is not in dispute that the notices impugned were issued during the pendency of the appeals relating to the assessment years in question.

40. To sum up, it is held that ‘Note’ on Software development projects and the various stages of software development placed by the assessee before the Assessing Authority discloses the stages wherein the petitioner – assessee was required to carry out the project at the customer’s site/onsite and the same are reflected in the Annual Reports. Considering these materials, deduction under Section 10A was allowed in the order passed under Section 143[3] of the Act. In such circumstances, it is presumed that Assessing Authority has examined the entitlement of deduction under Section 10A of the Act by the assessee in all angles. Withdrawal of the deduction allowed under Section 10A of the Act based on the assessment order relating to the assessment year 2007-08 is without application of mind and nothing but change of opinion, which tantamounts to review and the same is not permissible to initiate the proceedings under Section 147/148 of the Act.

41. It is also significant to note that there is no iota of material available in the reasons recorded by the assessing officer to believe escapement of tax on any such agreement where the petitioner has received the revenue from foreign companies for deputing the technical members independent of software development work.

42. For the reasons aforesaid, this Court is of the opinion that there was no material on record before the Assessing Authority to establish failure on the part of the assessee to disclose truly and fully the relevant material while passing the original assessment order under Section 143[3] of the Act and as such the respondent authority had no jurisdiction to invoke Section 147 and 148 of the Act for the assessment years in question.

Writ petitions are allowed.

The impugned notices at Annexure-E dated 30.03.2011 [Assessment Year 2004-05], Annexure-F dated 01.03.2012 [Assessment Year 2005-06] and Annexure-E dated 13.09.2012 [Assessment Year 2006-07] issued under Section 148 read with Section 147 of the Act as well as the orders passed by the respondent – Deputy Commissioner of Income Tax, Circle-11[4], Bengaluru rejecting the preliminary objection as to his jurisdiction in the respective writ petitions are quashed.

No orders as to costs.