Xalted Information Systems Pvt. Ltd. Vs ITO (ITAT Banglore)
Section 80IC deduction allowed for service charges based on direct nexus between service rendered & product
The issue under consideration is that whether deduction u/s 80-IC will be allowed against service charges since services rendered were part of business and also involved manufacturing activity?
The assessee is a company engaged in telecommunication software development and trading in telecommunication hardware required mainly to run their software that are being supplied to the prospective consumers. Assessee has claimed deduction u/s 80-IC in its return. The income received from service charges is also included in the Total Eligible Turnover for calculation of deduction u/s 80-IC which is disallowed by A.O.
The assessee in this regard pointed out the nature of service fees is such that the assessee needs to render the services even after the sale of product, to meet the complete scope of work which includes services like Integration testing, Validation/System testing and Acceptance testing, changes requirements, etc. Hence it becomes part and parcel of the software being developed and supplied by the assessee. Hence, the same should be considered while calculation deduction u/s 80-IC of the Act. In other words it was submitted that service fee received like installation, training, support services etc form integral part of the products supplied by the assessee, therefore have nexus between the products supplied and services provided by the assessee in connection with the said products.
In our opinion, this will not be conclusive to hold that there were two segments or verticals and is contrary to the Agreements under which the Assessee had to perform certain obligations in the form of supply of software, hardware, installation and maintenance thereof. As we have already seen, the agreement it is very clear that the supply of software and hardware necessary to support the software supply, installation & commissioning as well as rendering support services were to be done on a turnkey basis. Though the services agreement is separately entered into by the assessee, it has a direct nexus and connection with the agreement for supply of software. In these circumstances, the decisions cited by the Id. counsel for assessee, clearly supports the case of the assessee. ITAT therefore is of the view that the claim made by the assessee for deduction u/s. 80IC of the Act ought to have been allowed by the AO/CIT(A). ITAT therefore hold that the assessee is entitled to claim deduction u/s. 80IC of the Act on service charges. Hence this ground is allowed accordingly.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal by the assessee is against the order dated 22.02.2019 of the CIT(Appeals)-7, Bengaluru relating to AY 2014-15.
2. Grounds 2 to 6 raised by the assessee in the appeal read as follows:-
2. The learned Commissioner of Income-tax (A) ought to have considered the explanation offered by the appellant with respect to the deduction computed under section 80-IC of the Act.
3. The learned Commissioner (A) failed to appreciate the fact that the appellant had claimed deduction under section 80-IC of the Act only out of profits and gains derived by the business of the undertaking that was set up in the State of Himachal Pradesh wherein a detailed working of such deductions claimed were submitted by the appellant.
4. The learned Commissioner (A) erred in upholding the order of the Assessing Officer by wrongly concluding that the income from service are not eligible for deduction under section 80-IC of the Act. Further the learned Commissioner (A) failed to consider the fact that the scheme of deduction under sec 80-IC provides that the benefit of deduction is available to the profits and gains derived by the undertaking from the business carried and to the extent of percentage provided under sub-section (3) to Sec.80-IC of the Act. The deduction shall be 100% of such profits and gains derived from such undertaking.
5. The learned CIT(A) failed to appreciate the profits and gains derived from business included the service charges since the services rendered were part of business and also involved manufacturing activity.
6. The learned Commissioner (A) grossly erred in upholding the observations made by the AO and as such erred in interpreting the provisions by restricting the deductions only to the profits and gains from manufacturing activities and not considering the profits and gains derived from the business of the undertaking.
3. The grievance of the assessee by the aforesaid grounds is against the action of the revenue authorities in denying the benefit of deduction u/s. 80IC of the Income-tax Act, 1961 [the Act]. The assessee is a company engaged in telecommunication software development and trading in telecommunication hardware required mainly to run their software that are being supplied to the prospective consumers. For the AY 2014-15, the assessee filed return of income claiming deduction u/s. 80IC of the Act of a sum of Rs.4,93,84,285. The computation of deduction u/s. 80IC as filed by the assessee is as follows:-
XALTED INFORMATION SYSTEMS PVT. LTD.
PROFIT & LOSS STATEMENT FOR THE YEAR ENDED ON 31ST MARCH 2014
