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]
