Case Law Details
RELEVANT PARAGRAPH
3. The brief facts of the case are that the assessee is a software development company, situated at Infotech Park, Pune and having extension at Mumbai. It filed its return of income for A.Y. 2003-04 on 01.12.2003 declaring total income of Rs.3,29,54,277/ – as per normal provisions of the IX Act and book profits u/s. 115JB of the IX. Act at Rs.5,77,34,729/ -. The return of income was initially processed u/s. 143(1) of the Act and subsequently proceedings u/s. 143(3) were taken up by issuing necessary notices. The Assessing Officer considered the expenditure relatable to earning of dividend income and subsequently computed the business income as per the income tax provisions at Rs.3,30,33,027/ – and book profits at Rs.5,77,34,729/ -. Since the tax payable on the total income @ 35% is higher than the tax payable on book profits computed u/s. 115JB @ 7.5%, he assessed the total income as per Income Tax Act. Subsequently, the CIT issued a show cause notice dated 31.10.2007 stating that from the perusal of the assessment order u/s. 143(3) dated 20.03.2006 or A.Y. 2003-2004, it has been noticed that the Assessing Officer has allowed deduction u/s. 10A without carrying any adjustment in export turnover thereby resulting in excess deduction amounting to Rs.158.98 lakhs resulting in short levy of tax of Rs.58.42 lakhs. It was stated that the assessee company is engaged in exporting software services and development thereof and has incurred the expenses in foreign currency to the extent of Rs.11,33,24, 871/- in the A.Y. 2003-04, which are mainly in the nature of travel expenses (net of reimbursement) and sales and marketing expenses and as such these items should be excluded while working out the deduction u/s. 10A and not doing so has resulted in excess allowance of deduction u/s. 10A. He observed that the Assessing Officer has failed to apply the provisions of section 10A of the Act correctly and called for the assessee’s explanation as to why the assessment order passed by the Assessing Officer u/s. 143(3) dated 20,03.2006 for A.Y. 2003-04 should not be set aside with a direction to re-examine the exemption given u/s. 10A of the I.T. Act. In response to the same, the assessee submitted its reply dated 15.01.2008 stating that section 10A of the Act provides for the deduction of such profits and gains as are derived by an undertaking from the export of computer software for a period of 10 consecutive years, beginning with the assessment year relevant to the previous year in which undertaking begins to manufacture or produce computer software and this deduction is to be allowed from the total income of the eligible undertakings of the assessee. It was submitted that the clause IV of Explanation 2 to section 10A of the Art has defined the term “export turnover” 😮 mean the consideration in respect of export by the undertaking of articles or things or computer software received in, or brought into India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India. It was submitted that the expenses incurred in foreign currency by the assessee are for carrying on day to day software development work at the two units of the assessee company and are not in the nature of freight, telecommunication charges or insurance expenses which are attributable to the delivery of computer software outside India nor are they expenditure incurred for providing technical services outside India. Thus, it was submitted that the deduction u/s. 10A was rightly allowed by the assessee. However, without prejudice to the above claim, it was also submitted that if the expenditure is required to be reduced from the export turnover, then the same may also be reduced from the total turnover while computing the deduction u/s. 10A of the I.T. Act. The CIT after considering the assessee’s explanation proceeded to revise the assessment order u/s. 263 of the I.T. ACT on the following two grounds:
(1) The expenditure incurred in foreign currency has not been reduced while computing the deduction u/s. 10A of the I.T. Act.
(2) The sale proceeds of Rs.45,18,739/ – has not been received in India as per the note to the audit report dated 28.11.2003, to the effect that the assessee had made an application to the competent authority for granting approval for extension of the period for collection of the sales proceeds.
3.1 He therefore, held that the order of the Assessing Officer is erroneous in so far as it is prejudicial to the interests of revenue within the meaning of section 263 and set aside the same to the extent of deciding the claim of deduction u/s. 10A afresh after applying the section 10A in totality and after giving an opportunity of hearing to the assessee. Against this order of the CIT, the assessee is in appeal before us.
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