Commissioner Of Income Tax v. Essel Shyam Communication Ltd

I' :t' 'l tN THE HIGH COURT OF +INCOME TAX APPEAL NOS [27912011 ][& ][28412011] Reserved on [:]%Date of Decision [:] 17tn Mav. 2012. COMMISSIONER OF INCOME TAX .... AppellantThrough Mr. N.P. Sahni, Sr. [Standing]Counsel. VERSUS ESSEL SHYAM COMMUNICATION LTD. ...Respondent Through Mr. Ajay Vohra, Ms. [Kavita ][Jha, ][Mr.]Somnath Shukla, Advocates. CORAM:HON'BLE MR. JUSTICE SANJIV HONI'BLE MR. JUSTICE R.V. SANJIVKFIANNA. J.: For detailed order see ITA 13012011 [titled Esse/ ][Shyam]Communication Ltd, Vs. Commissioner [of ][Income ][Tax]pronounced today. .4 rra -'l( -.(sl\NJrv KHANNA)JUDGE hlv_v.l q.(R.V.EASWAR)JUDGE .i@: May 17th,2012NA \ 2011 INCOME TAX [NO. ][1] Reserved: 15th March, [2012.]Date ofision tte UAV-ZO1Z ... APPellantL.SSEL SHYAM [LTD']Through Mr. [AjaY ][Voh]a, Ms. Kavita [Jha, ][Mr.]Somnath [Sh]kla, Advocates. VERSUS .....ResPondentahni, Sr. [Standing] i;OMfulISSIONER Through Mr. [N.P.]Counsel' 7912011 &[2B4t?-fi11] TNCOME TAX APPEAL AppellantCOIV|MTSSIONER Through Mr. [N.P-]StandingCounsei. VERSUS ... ResPondentISSEL SHYAM CO\4MUNICATION Mr. [AjaY ][V]ra, Ms. Kavita [.Jha, Mr.]Through Somnath Shla, Advocates ORAM:HCN'BLE MR. JUSTICE ,'ION'BLE MR. JUSTICE R.V. EASWAR sAhIJiAhlJlvKHANNA. [J.] hyam Communication011 preferred [bY ][the]ated 31"March ,2010,ribunal [(for ][short, ][the] ITA 13012011 Preferred [bY Essel]I td. and ITA Nos.2B4l2O11 and [27'Al]:-revenue arise [out ][of ][the ][common order]:assed by the [Income ][Tax ][APPellate]: i Al\o. [130/201 1 ]. l'agc I of'2J ii'rbunal). The appeals [perlain ][to the ][as]ent year 2005-06"ILV/e may note that the [Revenue ][has ][pre]rred two appeals [as]there were cross aPPeals [bY ][the ][R]ue and one by theassessee before the tribunal [against]e order of the firstappellate authority. 2 By order dated 12th July, [2011,]following substantialciuestions of law were framed [in ][the] i r-A 13012011 "1. Whether on the factsnd in thecircumstances of the case, theribunal erredin law in holding that incomerned by theappellant from develoPmentof softwareupgrades for Network Manageent Systemsfor smooth and trouble freeing of VSATservice provided by the [aPPella]as part ofbusiness of telecommunicationCTVICCS, WASnot eligible for deduction undeSection B0-lA(4(ii) of the lncome Tax [Act?]circumstances of the case, theribunal erredin law in holding that incomerned by theappellant from develoPmentof softwareupgrades for Network Manageent Systemsfor smooth and trouble freeing of VSATservice provided by the [aPPella]as part ofbusiness of telecommunicationCTVICCS, WASnot eligible for deduction undeSection B0-lA(4(ii) of the lncome Tax [Act?] 2. Whether on the factsnd in thecircumstances of the case, theribunal erredln law in not directing exclusiof only netinterest income, i.e., [gross ][in]rest incomeless expenditure incurred [for]rning suchinterest income, while [comPU]g deductionunder Section B0-lA of the [I]e Tax Act?" t@ "Whether learned ITATin law inholding that INSAT 2E is a domtic satellitewithin the meaning of sub-cse (ii) ofClause @) of Section B0-lA [of][ the ][Income]holding that INSAT 2E is a domtic satellitewithin the meaning of sub-cse (ii) ofClause @) of Section B0-lA [of][ the ][Income] l'i-ANo.1 30/20 I I Pagc 2 ol'23 Tax Act, 1961, [desPite ][the ][fac][ that ][British]2"Telecom has [leased ][it ][to ][the ][ass] tTA [No,,284/2011] "Whetller learned ITAT [e]in law inthat [income ][of ][Rs.50,][ 2.7641- ][from]holding trading activities is [derived]lndustrialundertaking within [the ][meaning]f Section B0-IA of thelncomeTax Act,1961?" The assessee is a Public assessee is a Public is a Public a Public Public [[limit]] t@ "Whether learned ITATin law inholding that INSAT 2E is a domtic satellitewithin the meaning of sub-cse (ii) ofClause @) of Section B0-lA [of][ the ][Income]holding that INSAT 2E is a domtic satellitewithin the meaning of sub-cse (ii) ofClause @) of Section B0-lA [of][ the ][Income] l'i-ANo.1 30/20 I I Pagc 2 ol'23 Tax Act, 1961, [desPite ][the ][fac][ that ][British]2"Telecom has [leased ][it ][to ][the ][ass] tTA [No,,284/2011] "Whetller learned ITAT [e]in law inthat [income ][of ][Rs.50,][ 2.7641- ][from]holding trading activities is [derived]lndustrialundertaking within [the ][meaning]f Section B0-IA of thelncomeTax Act,1961?" The assessee is a Public assessee is a Public is a Public a Public Public [[limit]] 3 The assessee is a Public assessee is a Public is a Public a Public Public [[limit]]company and [was]providing satellite based [telecommuni]n solutions includingVSAT services, [up-linking ][servlces,]ay out services [and]earned income [from]i.,,roadband service [through ][satellite. lt ][h]nd income from [other]rhe said services, [besides rental ][income]itources. In the return [of ][income ][filed ][o]28th October, [2005, ][it]lA of the lncome [Tax]had claimed deduction [under ][Section]9,0'13/- and after [the]Act, [1961 ][(Act, ][for ][short) ][of ][Rs.4,BB,]adjustment, had [declared ][total]ble income of [Rs.]under Section [115J8]5,45,89,013/-. [The total ][taxable ][it]was Rs.6,90,32,5331-. 4. As section [B0lA ][is ][required]be interpreted [and]'examined, we deem it appropriate toroduce the relevantportion of the said [provision, as ][it exis]during the assessmentyear period in question:- I'l'ANo. l30l20ll Pagc 3 ol'23 '80-lA Deductions in resPect of Pfit and [gains]in certainfrom industrial [undertakings ][e]cases.-(1) [WhPre ][the]stof anived bise finsafter rrredthewitht to therovlof thisctioncomputithencome{gl [of ][an]tohand [qatns]fromassessment vears. tained in sub-deduction [in]undertakingproviding telecommunication [serv], [specified ][In]clause (ii) of sub-sectlon [(42), ][shall]hundred Percent of the Profits [and gains ][of ][the]igible bustnessfor the first five [assessment ][years]ncing atfied in sub-any time during [the ]Periods [as ][s]section [(2) ]and [thereafter, ][thirtY]cent of suchprofits and gains for [further five ][a]ent [years"] (3) xxxxxxxx rted or starts(4) (ii) any undertaking [which ][has]whether bastsproviding telecommunication [servlce]estic satelltteor cellular, including [radio paging, ][d]d network andservice, network [of trunking, ][broadb]internet services [on ][or after ][the ][1" ][d]of April, 1995,but on or before [the ][31" ][daY ][of ][M]2005 Explanation.- For the PurPosethis clause,"domestic satellite" means a satowned andoperated bY an [Indian ][compan]for provtdingtelecommunication [service."] asis supp/iedl Clause (ii) to Section [B0lA ][(4)]oted above can [be]i:ifurcated and [divided]severaltt applies to [an]urndertaking which [had]startedwas Providing; [(i)]ielecommunication [services]r,nrhether baor cellular, [(ii) ][radio]Pagc 4 ol'23l'l'ANo.13012011 (3) xxxxxxxx rted or starts(4) (ii) any undertaking [which ][has]whether bastsproviding telecommunication [servlce]estic satelltteor cellular, including [radio paging, ][d]d network andservice, network [of trunking, ][broadb]internet services [on ][or after ][the ][1" ][d]of April, 1995,but on or before [the ][31" ][daY ][of ][M]2005 Explanation.- For the PurPosethis clause,"domestic satellite" means a satowned andoperated bY an [Indian ][compan]for provtdingtelecommunication [service."] asis supp/iedl Clause (ii) to Section [B0lA ][(4)]oted above can [be]i:ifurcated and [divided]severaltt applies to [an]urndertaking which [had]startedwas Providing; [(i)]ielecommunication [services]r,nrhether baor cellular, [(ii) ][radio]Pagc 4 ol'23l'l'ANo.13012011 paging (iii) ciomestic satellite [service ][(iv)]twork of trunking, (v) [;]broadband network [and ][(vi) ][Internet ][serv]" [The ][dates ][during]which the said services [should be start]ided is stipulated.services was entitledAny company/assessee [providing ][the ][sai]to claim benefit in [respect ][of ][income ][e]rned i.e., [profits ][and]gains derived from the said [services']efore, the first and [the]foremost requirement, [when ][a ][dedu][ ion ][is ][claimed ][with]reference to clause [(ii) ][of ][Section B0lA ][(]), [is ][to ][determine ][and]decided whether [activity undertaken ][by]assessee is covered(ii) to Section B0lA(4)by any of categories [mentioned in ][clau]This aspect has somehow [escaped ][noti]of the authorities [as]well as the tribunal. [This has ][result]in confusion as [the]Assessing Officer [has made several ][addi][ ions ][including ][addition]ices etc. There is [no]for software sales, [domestic satellite]clear and direct finding [on ][the ][preci]nature of the activitYundertaken resulting [in ][income ][earned]whether or not [theY]fall within one of [the ][aforesaid ][specified][ categories. ][To ][some]extent, the assessee [is also ][responsi]for the said confusionbecause of their [rePlY ][in ][the ][co]of the assessmentproceedings. The Assessing [Officer ][h]not appreciated [and]understood the'issue [and ][the ][proper ][leg][ I ][affect of clause ][(ii) ][of]I'IANo.l 30/20 [I]['agc 5 of'23 tions, this aspect this aspect aspect ( Section B0lA [(4) ][As we ][answer ][the]tions, this aspect this aspect aspect becomes aPParent.6. Question [No. ][1 in ] [No. ][13Ol2O]1 and the Questionsraised in ITA [Nos. ][27912011 and ][2841201]are inter-related [and]are being taken [up ][first. ][Question ][No' 2 ][r]by the assesseein lTANo. 1301201'1 [wilt be ][taken ][up ][in ][the] 7. Question [raised ][in ] [27912011 ][a]as the Assessingncome earned [bY the]Officer had treated [Rs.1,42,34,2781- ][as]assessee from [domestic satellite ][service]The reasoning [given]tand and somewhatby the Assessing [Officer is difficult ][to ][u]to notes on [accounts]The [Assessing ][Officer ][refe]ingenious. in which the [assessee ][had ][dis]that paYment [of]charges in foreignRs.13,42,2881- [was ][made ][for ][space ][seg]to British [Telecom]currency. This PaYment [was ][made](Worldwide) for use of satellite [service]in the Indian [Satellite]INSAT 2E. [The ][Assessing ][Officer ][hel]that the said satellitewas not a ['domestic satellite' ][as ][it was]by Department [of]not an lndian [company]Space, Government [of ][lndia, which ][was]and was being [opdrated ][by ][British ][-f]m (Worldwide), [a]foreign company. [The ][satd ][view' ][how], was [not ][accePted ][bY]elecom [(Worldwide) ][or]the CIT [(Appeals), ][whto ][held ][that ][British]over the satellite.INTELSAT did [not ][have ][ownershiP]ght Pagc 6 of'23I'l'ANo. 13012011 t t Retying upon [the ][letter dated ][21'tNovembelfr, 2007, ][written ][by ][the]Director, ISRO, [it ][was ][held ][that ][the ][satelllite ][was ][owned ][by ][the]of [Space, ][Government ][of ][tnlfia and' ][therefore' ][the]Department Assessing [Officer ][was ][not justified ][in ]lpxcluding [the ][income]earned from [the ][domestic satellite servicelp. The view of the ] (Appeals) has been [affirmed ][by ][the ][tribu]d make the [aforesaid]B. The Assessing [Officer to ][comPute]t the assessee [had]addition of [Rs.1,42,34,278l- observed ][t]Telecom [(Worldwide)]made [payment ][of ][Rs.13'42,2881 ][to ][Briti]earned from [anY ][third]and had not [shown any income ][or ][recel]the income [included]party. The addition [was ][made ][holding]income from [satellite services ][not ][in]nature of [domestic]the Section [B0lA ][The]satellite service [as defined ][for ][purpose]e was notionallY [on]profit/income disclosed [bY ][the ][as]proportionate basis treated [as ][profiVi]e earned from [satellite]services, not [being domestic ][satellite] 9. The assessee [holds ][a ] [lice]to establish, [maintain]license to [establish,]and operate [closed users ][grouP, ][an ][I]maintain and [operate internet ][services]a license/permissionfrom the [Ministry ][of ][lnformation ][and ][Br]ing for Providingsse is that [theY ][have]uplinking services. [The ][case ][of the ][as]incurred an [expenditure ][for ][utilization]space segment [on ][a]Pagc 7 ol'23l'l'ANo. 13012011 satellite to provide the said services. lt istheir case that thevare in the business of providing lease/ se of space segment orsatellite services or that they were pring domestic satelliteservices. Contention of the aswas/is that as abroadband/internet service provider etc.it had procured spacesegment in the satellite and paid chargein foreign currency forutilizing space segment. lt was an expe. which was incurredand not that anv income was earned.The question is notwhether any expense was incurred inspect of the servicesstipulated in clause (ii) of Section B0l(4), but whether theassessee has earned income derifrom the specifiedservices. lt is not the case of thethat it was providingdomestic satellite services and earningincome from the saidactivity. The term ["domestic ]satelliteas defined in theexplanation means the satellite ownand operated by anlndian company for providing telecommication services. Theassessee is not an owner of the domessatellite and nor is itoperating the satellite. On the other ha, [it ][is ][apparent that ][the]assessee is claiming benefiVcoverage [u]the said section onthe basis that it is providing broadband/iernet services etc. Aslong as it was providing the stipulated [se]ices and had i'eceivedpayr^nents for the specified services,income earned wouldI'l'ANo. l30l20l lI)agc 8 ol'23 qualify for deduction under Section BA(4Xii). In case th$-assessee incurs expenditure to [buy ][and]utilize space segmenton a satellite for [providing ]the [q]lifying services, theexpenditure incurred cannot be [disal]and no notionalincome can be computed or [redu]from the incomeearned/derived from the [qualifying ]serv. ln view of the saidposition and in the absence of details,have no option, but toremit the matter to the tribunal tomine the said aspectafresh. The tribunal has to examine [an]clearly decide natureand character of service rendered [by]he assessee to thirdparties and whether the sameualifies and is aprescribed/stipulated service undern B0lA. The order ofremit is also necessary in view of thebiguous starrd of theassessee before the Assessing [Otfi]and the appellateauthorities which has contributed to [th]confusion. The letterwritten by the assessee to the [Assessing]fficer reads:- "From the above, it is clear tt though thepayment to BT is made in USD,the same waspaid for use of domestic Satellite [whi]is owned andoperated by Department [of ][SPace,]Government oflndia but leased out bY [DePartment]f Space (DOS)to INTELSAT, who in-turn [have ][subl]part of tt toBT and some of which is [used][he [assessee]Company. Hence, this [is ][no questi]of disallowanceunder Section B0lA [in ][this ][regard."]payment to BT is made in USD,the same waspaid for use of domestic Satellite [whi]is owned andoperated by Department [of ][SPace,]Government oflndia but leased out bY [DePartment]f Space (DOS)to INTELSAT, who in-turn [have ][subl]part of tt toBT and some of which is [used][he [assessee]Company. Hence, this [is ][no questi]of disallowanceunder Section B0lA [in ][this ][regard."] l'l'ANo.130l20l [I] Pagc 9 ol'23 10. The [questicln ]raised in [2B4l2O]1 again requires [an]order or remit, The [Assessing Officer ][noti]that the assesseehad shown sales of Rs.2,12,28,5121--scrutiny of details, [it]was noticed that majol sales [were ][in]resof Antenna, RFTand other miscellaneous [items, ][which]nclted computer [printer,]UPS, CTV, air conditioner, [hand ][ca], [generator ][sets,]telephone instruments, [video conferencing]ystems, monitor etc.l-le held that the said equipments [could]bought and [procured]from the Original Equipment [Manufactu](OEMS, for short)including the foreign [vendors. ][According], Rs.50,42,7171- [was]excluded from the deduction [claimed ][un]Section B0lA of theAct as income not derived [from ][specified]rvices, after noticingthat the cost of material [was ][Rs.1,61]85,7951-. The CIT(Appeals) upheld the said addition [holdin]that this was incomederived from trading in [goods. ][The ][tribun]I has deleted the saidaddition, inter alia, holding [:-] " 11 . Let us have a look onnature ofnumber 29-40equipments. We [have ]Perusedof the [paper ]book. On Page [29-31]copy of theimport license for imPort [of C ][band]ndant 1 1 UpConverter and Down [Converter ][have]n placed onrecord. These are the [technical]Similarly onpage 32-33 are the import [license ][on]ge 34 is thedescription of the [items ][which ][are ][to]imported. Atpage 34 the description of the [iterrs ][is]arr 40 WkuBand BUC. According [to ][the ][a]essee theseequipments are [essential ][equipmen]for enabling,assessee to the [telecommunication]ices. TheGovt. has [put ][uP various ][restricti]on import ofnumber 29-40equipments. We [have ]Perusedof the [paper ]book. On Page [29-31]copy of theimport license for imPort [of C ][band]ndant 1 1 UpConverter and Down [Converter ][have]n placed onrecord. These are the [technical]Similarly onpage 32-33 are the import [license ][on]ge 34 is thedescription of the [items ][which ][are ][to]imported. Atpage 34 the description of the [iterrs ][is]arr 40 WkuBand BUC. According [to ][the ][a]essee theseequipments are [essential ][equipmen]for enabling,assessee to the [telecommunication]ices. TheGovt. has [put ][uP various ][restricti]on import of I)agc 10 o['23 I'l'ANo.13012011 such items because of securityns. lf theassessee is unable to [provide ]thitems to itscustomer then it might not be [possible]it to providetelecommuntcation services. lt wasout at thetime of hearing that these equlpmcannot beused for availrng the services from another serviceprovider. The customer hasavail thetelecommunication services throughthese itemsnecessarily from the assessee only.sidering thenature of equipments and their relato the natureof services provided by the assessee,rn our opinionthe receipt received by the asfor supply ofthese items is inextricably links to theusiness of itstelecommunication services. The AOs not [justified]rn excluding these receipts. Therwe direct theAO to include the receipt ofRs.50427171-representing income from sale of eq ipment in theeligible receipt for grant of deduction80tA ["] 11. Learned counsel for the Revenue.ring the course ofhearing before us, has drawn our attento the assessmentorder and the stand taken by the asses e. lt was submittedthat the assessee had stated andthat the customerscould buy the equipment from them or frothird parties and hadpleaded that entire income, which wasextricably related tobusiness of telecommunication and waexempt. Sale ofequipment etc., had close and direct nexwith profit and gainsof the stipulated industrial undertaking.'12. The legal contention of assessee issubstantially correct.examination was the,However, [what ][was ][relevant ][and ][required]contracts under which the sales were mad. Sale of TV Camera,Air Conditioner, generator sets per se oron standalone basislTANo.13012011Pagc ll ol-23 {-would not qualify for deduction [B0lA ][re]with sub-section [(4)]fclause (ii). On the other [hand, in ][case]assessee has beenawarded a contract for [providing ][te]mmunication service,network of trunking and broadband/intnet services and whileand for executing the said [contra], [generator ][sets, ][air]conditioner etc. were sold as a [part ]of [a]plete package, thenthe income earned may [qualifY ][for ][d]uction under SectionB0lA. Therefore. each contract and [n]ure thereof has to beexamined. lt has tc be ascertainedther it was a case ofsupply of goods or it was a casere the assessee waspr"oviding qualifying services whichndated and requiredinextricably or as an necessary requtrnt, (rrnder the samecontract or under a different contract)sale/supply goods tooperationalize and use/provide the temmunication services.ln case, the sale of goods was inextriy linked, had nexusand was connected with the PrimarYrpose of providing orstarting telecommunication services,he assessee will beentitled to benefit under Section B0lA.erwise, the assesseer,vill not be entitled to exemption undSection B0lA on the. transaction. Whether the commodities/s could have beenalso purchased from a third [party ][ma]not relevant and thedeterminatirre factor in manyis tlre [predominant ]orI'l'z\No. l30l20l IPagc tr2 ol'23 was entered [into,,]extricably linked [with]and would be [the]question of law isit is passed, with [a] primary reason or [purpose ][why ][the ][con]and whether it [has direct ][nexus ][and ][is]providing the qualifying [activities, ][is]determinative factor. The [substantial]accordingly answered. [An ][order ][of ][re] question afresh in the direction to the tribunal [to decide ][the ][iss]light of the above observation/ratio' 13. The [question ][No.1 raised ][in ][the]peal of assessee l.e.ITA 13012011 relates to [income ][earned]from developrnent [and]sale of software and [whether ][the ][sai]amount qualifies fordeduction under Section [B0lA- ][The ][trib]al has not treated [the]proceeds from sale of software [decla]by the assessee [as]eligible for deduction [under Section ] on the ground that [the]income derived from the [sale ][of ][softwa]was not derived fromqualifying business i.e. telecommunicatiservices. lt has beenobserved that development [of ][software]/asa separate sourceof business income. [AccordinglY,]thetotal receipt [of]Rs.61,58,000/- from [the ][sale ][of ][softw]should be excludedfrom the deduction claimed [under Sectio]B0lA of the Act. hich is recorded [in ][the]14. The contention [of the ][assessee,]order passed by the [tribunal, ][is ][that ][the]ftware developed [was]for upgrading [the ][Network ][Man]t System [(NMS, ][for]l'l-ANo.13012011I'agc 1.3 ol'23 shorl), to enable smooth working of VT service under'the 0;technology from Via Sat and HSN athe request and onconfirmed purchase orders from TVCdia Pvt. Ltd. Thejustification given by the assessee to treand regard the saidincome as eligible for deduction under StonB0lA, reads asunder.- hich is recorded [in ][the]14. The contention [of the ][assessee,]order passed by the [tribunal, ][is ][that ][the]ftware developed [was]for upgrading [the ][Network ][Man]t System [(NMS, ][for]l'l-ANo.13012011I'agc 1.3 ol'23 shorl), to enable smooth working of VT service under'the 0;technology from Via Sat and HSN athe request and onconfirmed purchase orders from TVCdia Pvt. Ltd. Thejustification given by the assessee to treand regard the saidincome as eligible for deduction under StonB0lA, reads asunder.- The Hub controls the entioperatrons ofthe communication network throughNMS, which.continuously accumulates data on thsystem so astc provide regular'health checks' forremotes anddetermine the level of activitv for billipurpose. TheNMS, which is pnncipally a software,is an rntegralpart of Hub station for running Vservices atvarious remotes. The NMS needsbe regularlyuodated and maintained for a smand troublefree service. Since TVC could not hathe upgradesof these NMS's through the OEMs,the appellantprovided the upgrades so that asmooth anduninterrupted service on the VSAs located atvarious remotes could be provided, its argued thatthe software developed by the appellt is a part ofthe satellite based telecommunion servtcesrendered by it. The appellant hthe reqursiteexpertise for the software develment. Theappellant under the impugned sore develooedfour modules for TVC. Each moduledevelopedto orovide wide time window fort transfersbetween TVC and Bank of Tokyo& Mitsubishi,Ludhiana Stock Exchange, EIHand BNPrespectively. Without this software,chent of theappellant (TVC) could not have sateconnectionwith the abovementioned companiesd the signalcould not be transmitted thereto. Theole motive ofdeveloping the software wasfurther itstelecommunication operations andwas thus,inextricablv linked to the business ofappellant ofproviding telecommunication services. ["] 15. We findthat the tribunal has [not ][e]ined the said aspectand questionwith reference to the [con]ntion raised by theassessee. on the nature [and ][character]the software,whichwas developed and sold. [The ][exact ][re]grvenby thetribunal reads as under:- "4.8 In regard to income from software, thedevelopment of software [is ][ce]a separatesource of business income [of the ][aP]llant differentfrom [providing ]TelecommunicationThus,this income cannot be [said ][to ][the]me derivedfrom the eligible [business]f providingTelecommunication service. [The]ppellant hasshown total receiPts of [Rs.61,],000/- [from]development and selling of [software.]The A.O hasallowed expenses on account [of]lary patd toemployees and other [administrati]expenses ofRs.4.00.000/- and calculated [the]t profrt fromsoftware development at [Rs.57,58,]-. The A.R ofthe appellant submitted that [the]ppellant hadincurred higher amount of [e]nses thanRs.4,00,0004 on the [develoPme]of softwarebecause apart from [personnel/staff,]appellant hadincurred vanous other overhead [cha]also. Butthe appellant had not [furnished]ny details ofexpenses in excess of [4,00,000 ][|]rred for thedevelopment of software. [In ][these]rcumstances,the calculatton made bv the A.O. [d]not warrantany interference. Since the [inco]earned fromdevelopment of software was [not]t and [gains]derived from the eltgible [busi]of providingTelecommunication service, [the ][A.O]justified inexcluding the income from [software]lopment forcomputing deduction u/s [B0lA."] 16. We find that the Assessing We find that the Assessing find that the Assessing that the Assessing [[Officer]] 16. We find that the Assessing We find that the Assessing find that the Assessing that the Assessing [[Officer]]as the appellateauthorities have not examined the [issu]question keeping inmind the mandate of the [section and ][con]ntion of the assessee.Nature, character and type [of ][the ][softwar]and whether or not [it]l]-ANo.13012011[)agc l5 o1'23 (q'+\L' [/] 16. We find that the Assessing We find that the Assessing find that the Assessing that the Assessing [[Officer]] 16. We find that the Assessing We find that the Assessing find that the Assessing that the Assessing [[Officer]]as the appellateauthorities have not examined the [issu]question keeping inmind the mandate of the [section and ][con]ntion of the assessee.Nature, character and type [of ][the ][softwar]and whether or not [it]l]-ANo.13012011[)agc l5 o1'23 (q'+\L' [/] ' could be treated and regarded as [i]earned from [the]I / l.t[.- ]I(ii) to Section [B0lA]business referred [to ][in sub-section ][(4) cla]ithout examining [the]has not been [examined and considered']ng nature [and ][tYPe ][of]said aspect [and ][the factual position ][regar]the [Assessing ][Cfficer and ][th]appellate [authorities]software, proceeds fromwere not [justified ][in ][excluding ][the]lA. The Assesslngcomputation [of ][deduction under ][Section]ee had [furnished]Officer has [merely ][recorded ][that ][the]raised and [in view ][of]of the [work ][orders as ][well ][as ][the ][bi]copy m selling [of ][software]the [jucJicial ][pronouncements' income f]cannot be [considered ][as ][income ][earn]or derived [from ][the]the Act. [This ][issue ][is]activities specified [in Section ][B0lA(4Xii)]fresh decision. [The]accordingly [remitted ][to ][the ][tribunal ][for]and character [of ][the]tribunal will [examine ][the ][nature, ][type]software oi [whether ][it ][was ][inextricably]nd directlY [connected]use [(ii) ]to [sub-section]with the activities/services [stipulated in ][c](a) of Section B0lA. [This is a ][technical]spect and [if ][required,]ion of exPerts. [The]the tribunal [can ][take ][help ][and/or ][opi]nd establish [tlreir ][claim]assessee will [be also at ][liberty to ][justify]ion No.1 is [accordinglY]by filing [opinion ][from the ][experts' ][Ques]answered [with an order of ][remit'] ITA No.13012011.17. The [last ][question ][is ][question ][No]Page | 6 [o1'23]I'I'ANo.1 30/201| The findings recorded [by ][the tribunal ][in]is regard are [that ][the]assessee had earned [interest income ][on]Rs of Rs.7,61 ,5841-and other interest [of ][Rs.77,0421-. ][lt ][has]observed by [the]tribunal that the [aforesaid receipts ][can]be included in [the]ities in view of [the]income derived [from ][the ][sPecified]decision of this Court [in CIT ][Vs. ][Shri]Honda Power [EquiP](2007) 2Be ITR 475. 18. The assessee [has ][submitted ][that]hey had earned [this]interest of Rs.B,38,626l- [on ][FDRs ][ple]with the banks foravailing non- fund [based credit limits ][but]ey had [paid ][interest]of Rs.1,7O,99,2771- [and, ][effectively the]interest paid was thess income [directlY]expense. Interest [earned ][was ][busi]connected with the [qualifying service ][a]therefore should [be]ted that the [interest]set off from the [interest ][paid. ][lt ][was]earned had direct [nexus ][with the ][busi]of the assessee [slnce]the FDRs were Pledged [as ][margin]ey for availing [credit]limits. The Assessing [Officer, ][however,]id not agree [with ][the]with assessee [and]said contention. [The CIT ][(Appeals) ][ag]held that the interest [on ][deposit ][was]taxable as ["business]income" and not under [the ][head ]["inco]from other sources"and therefore the [assessee ][\/vas enti]to deduction undertribunal has [reversed]Section BOlA(4Xii) [As ][noticed ][above,]ITANo. i30l20llPage l7 ol'23 with the Assessin t (:, the findings of [the ][ClT(Appeals) ][and ][ag] Officer. with the Assessin t (:, the findings of [the ][ClT(Appeals) ][and ][ag] Officer. 19. Decision of [this Court ][in ][Shri ][Ram](supra) consistsof two parts. In the [first ][part ][it ][has]en held that [interest]income is not [income derived ][from ][expo]as it is not a Part [of]export proceeds and [is ][not ][a ][direct ][an]proximate result ofeposit of moneY [and]exports earning [but ][earning made ][from]payment by the bank. [The ][second ]Paof the said [judgment]deals with computation [under ][Explana]n (bba) to SectionBOHHC. For the PurPose [of ][the ][said ][e]anation, it has [been]held that interest refers [to ][and means ][ne]interest and not [gross]able under the [head]interest, [provided ][the ][interest ][earned ][is]"income from business" and not under [t]head ["income ]fromother sources." [This ][view has ][been ][u]eld by the SuPremeCourt in its recent [decision ][in ] ssociafed CaPsuleslncome Tax [(2012) ][3]Private Limited. [Vs- ][Commissioner]the said [judgment ][has]SCC 321" The [Supreme Court ][approvin]referred to their [earlier ][Constittltion]Bench's decisiontnDistrihutors [(Baroda) (P) ][Ltd. Vs' ][U]n of lndia [(1986)]1 SCC 43 and observed [as ][under:-] "11. Before we deal [with ][the]contentions [of]Learned Counsel [for the ]Parties,may extractf the Act.Explanatton [(baa) to Section 80HHC]l'agc 18 ol'23 l'l-ANo. 13012.011 (baa) ["profits ]of the b" meansof theoustness aunder"Profits ains of bus tsooninety [per ]cent [of ][anY sum]to in clauses(iiia), (iiib), (iiic), (iiid) and [(iiie) ][of]ection 28 or ofany receipts by way of [broker], [commtssion,]interest, rent, charges or [anY]r receipt of asimilar nature included [in ][such ]Prits; and (2) the profits of any branch, office, the profits of any branch, office, profits of any branch, office, [[wa]]ouse or anvother establishment of the establishment of the of the the [[Assessee]]tuate outsidelndia.4atzExplanation (baa) extrabove statesthat ["profits ]of the [business" means]profits of thebusiness as comPuted under [the]d ["Profits ]andGains of Business or Profession" [as]ced by thereceipts of the nature mentioned [in]auses (1) and(2) of the Explanation [(baa).]ofits ofof ansee willto be firstcomoutedhe headGainBusinesssion" innce wrthSIONSns 28 to 44Act. In thecomputation of such [profits of ][busines], [all receipts of]income which are chargeable [as ][profi]and gains ofbusiness under Section [28 of the ][Act]I have to beincluded. Similarly, in computation [of]ch profits ofbusiness, different expenses [whtch]are allowableunder Sections 30 to 44D [have ][to]allowed asexpenses. After including [such]of incomeand after deducting [such ][exPenses,]total of thenet receipts are Profits of [the]iness of theAssessee computed under [the]"Profits andGains of Business or [Prdfession]fronr whlchdeductions are to made [under ][Cla](1) and (2) ofExplanation [(baa).] (2) the profits of any branch, office, the profits of any branch, office, profits of any branch, office, [[wa]]other establishment of the establishment of the of the the [[Assessee]]lndia. 4?XXXXXXX 14.XXXXXXX 15Section BOM of theprovided fordeduction in resPect of [certain]intercorporatedividends and it Provided [in ][S]ion (1) ofSection 80M that ["where ][the ][gross]I income of an Pagc l9 ol-23 l1'ANo.130l20ll (2) the profits of any branch, office, the profits of any branch, office, profits of any branch, office, [[wa]]other establishment of the establishment of the of the the [[Assessee]]lndia. 4?XXXXXXX 14.XXXXXXX 15Section BOM of theprovided fordeduction in resPect of [certain]intercorporatedividends and it Provided [in ][S]ion (1) ofSection 80M that ["where ][the ][gross]I income of an Pagc l9 ol-23 l1'ANo.130l20ll Assessee being a [company ][includes]income byway of dividends [received bY ][it]a domesticcompany, there [shall, ][in ][accordance]h and sublectto the [provisions ]of [this ][Section,]allowed, lncomputing the total [income ][of ][the][ Assessee, ][a]deduction from such [income ][bY waY]dividends anamount equal to" [a ][certain]of the incomementioned tn thrs Section. [The ][C]itution Benchheld that the Court [must construe]80M on itsown language and [arrive ][at ][its]interpretationaccording to the [plain naturai ][meani]of the wordsused by the legislature [and ][so ][cons]the words"such income by way of dividends" [in]b-section [(1)]of Section BOM must [be ][referable]only to thecategory of income [included ][in the]s total incomebut also to the [quantum ][of ][the income]included toSimilarly, Explanation [(ba]has to beconstrued on its own [language ][and]per the plainnatural meaning of [the words ][used]n Explanation(baa), the words ["receiPts ][bY ][way]of brokerage,commission, interest, [rent, ][charges]or any otherreceipt of a similar [nature included ][in]profits" willnot only refer to [the ][nature ][of ][receip]but also to thequantum of receiPts included [in]profits of thebusiness as computed [under ][the ][he]"Profits andGarns of Business or [Profession"]to in thefirst part of the Explanation [(baa).]ingly, if anyquantum of anY receiPt of the [na]mentioned [tn]Clause (1) of ExPlanation [(baa)]s not beenincluded in the [profits ][of ][business of]Assessee ascomputed under the [head ]["Profits]and Gains ofBusiness or Profession", [ninety ][pe]cent of suchquantum of the receiPt cannot [be]ucted underExplanation (baa) to Section [80HHC'"] 2A. The Supreme [Court]in ACGsociated CaPsu/es(supra), did not aPProve theview of theHigh Court inCIT Vs. Asian Sfar [Company ][Ltd.(2010 326 ][rTR]56 (Bom.).above. For21. We have [quoted Section ][80lA ][(1)][ and ][(2A)]determining the [income derived by ][an ][un]rtakingor enterprise,we have to compute [ihe total ][income of]e assessee from [the]l1'ANo.130l20llPagc 20 of'23 n B0lA. The words/ t1business referred in [sub-section ][( ]) [to](-used in Section B0lA(1) [and (2A) are ]["pro]and gains of eligiblebusiness". On the basis [of ][same ][logic ][an]reasoning, we haveto first find out the [profit and gains of ][busi]s from the specifiedactivities. Section [B0lA ][was ][interpret]and elucidated [in]l-iberty tndia v. Commissioner [of ][Inc]Tax, (2009i I SCCit linked incentive32B.lt was highlighted [Section B0lA ][is ][a]and only [profits ]["derived ][from" ][eligible]iness are entitled [to]deduction. The [expression "derived ][fro]covers sources notbeyond the first degree. [Devices ][to ][inflate]reduce [profits ][from]eligible business should [be ][rejected. ][On]DEPB utilization andduty drawback it [was ][held:-] "39. Analysing [the concept of remissio]of duty drawbackand DEPB, we [are ][satisfied ][that ][the ][remi]on of duty ts onaccount of the [statutory/policy ][provisi]in the CustomsAcUScheme(s) framed [by the ][Governme]of lndia. ln thecircumstances, we hold that [profits ][deri]by way of suchincentives do not fall within [the ][expres]n ["profits ]dertvedfrom industrial undertaking" [in ][Section ][B0-l] 22. Reliance was Placed [bY ][the]ee on AS 2 [and] it was held;-explaining the [same ][in ][Liberty India ][(sup] "39. Analysing [the concept of remissio]of duty drawbackand DEPB, we [are ][satisfied ][that ][the ][remi]on of duty ts onaccount of the [statutory/policy ][provisi]in the CustomsAcUScheme(s) framed [by the ][Governme]of lndia. ln thecircumstances, we hold that [profits ][deri]by way of suchincentives do not fall within [the ][expres]n ["profits ]dertvedfrom industrial undertaking" [in ][Section ][B0-l] 22. Reliance was Placed [bY ][the]ee on AS 2 [and] it was held;-explaining the [same ][in ][Liberty India ][(sup] "40. Since reliance [was ][placed'on ][behalf]f the assessee(s)on AS-2 we need to [analYse ][the said ][s]ard. AS-2 dealswith valuation of [inventories. Inventories]re assets held [for]sale in the course [of ][business; ][in ][the]uction for suchsale or in the form [of ][materials ][or ][suppli]to be consumedlued at the [lower]in the production ["lnventory" ][should ][be]of cost and net [realisable ][value ][(N]). [The ][cost ][of]all [costs ][of]rchase, costs [of]"inventory" should comprise conversion and other [costs ][including]osts incurred [In]Pagc 2l ol-23 l'l-ANo.13012011 location andbringingthe ["inventorY" ][to ][their ]Precondition4',1-costurcnaincln those suandxdirattribtheuisitimilarheetc.not breatedshould bearate rtems [q[]gqa_.LPblndiaD'Souza).CENVAT credits42. Therefore, [for the ][purposes ][of ] ould notinclof [purchase]Accountants [of]in"entories' [Even ][the ][Institute ][of ][Charter]fnOia 1tCAtl has [issued ][Guidance ][No]on AccounttngTreatment for [u]which the [tn]consumed [and ][the]inputsld be valued--Llbasisnet ofdutv on tnputsi.e. dutv [r]hlatheat a latel staqe)awback, -reing [on ][account ][of ][rebates, ][dutY]account of [cost]Oenefit, etc. [Profit generation could ][be]cutting, cost [rationalisation, ][business]ructurtng, taxback, hquidationplanning on sundry [balances being writt]of current assets, [etc']43. Therefore, we [are of the view that ][du]drawback, gainst the cost [of]benefits, rebates, [etc. cannot be credited]and loss accountmanufacture [of goods debited in the]such remtsslonsfor purposes [of ][Sections 80-1fu80-lB ][z](credits) would [constitute ][independent]rce of incomebeyond the [first ][degree ][nexus]profits and [the]industrial undertakin [g.] ITANo.13012011 23. In view of the [aforesaid ][observati]s in the case [of ][LibertY]India (supra), the [aforesaid second ][q]tion of law in ITA [No.]order of remand [to ][the]13012011 is answered [in ][negative with]tribunal. In the [absence ][of details, it ][is]irected that the tribunalwill examine the [factual ][matrix of ][the ][pr]nt case including [the]balance-sheet and [accounts ][of ][the]sessee, to decrde [the]question. lt will be open [to ][the tribunal ][t]examine and considerthe contention of the [assessee, if ][raised]nd supported [bY ][facts,]the quantum of [expenditure ][incurred/]tributed to earning [of]exempt income under [Section ][B0lA of ][t]Act.24. The appeal is [accordinglY ][dis]d of. There will be [no]order as to costs. nnav -,+Llf ,2012NA --'/C- lr ,/l I ,/l(. ^ (\ SANJIV KHANNA)JUDGE f. Wl;"---''. tn.v. [lnswAR)]JUDGE l'l'ANo.l30/201 [I] Paltc 23 ot'23