Ita/10/2010 Of M/S. Ivl India Pvt. Ltd v. The Commissioner Of Income Tax, Tvpm

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE M.L.JOSEPH FRANCIS WEDNESDAY, THE 5TH JANUARY 2011 / 15TH POUSHA 1932 ITA.No. 10 of 2010() -------------------- ITA.626/COCH/2007 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/APPELLANT ----------------------------- M/S.IVL INDIA PVT. LTD., 131-135, 'NILA' TECHNOPARK CAMPUS, KARIAVATTOM, THIRUVANANTHAPURAM-695 581, REP. BY ITS DIRECTOR, SHRI.SUNIL GUPTA. BY ADV. SRI.T.M.SREEDHARAN RESPONDENT/RESPONDENT: --------------- THE COMMISSIONER OF INCOME TAX, THIRUVANANTHAPURAM. ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX FOR R THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 05/01/2011, THE COURT ON 05/01/2011 DELIVERED THE FOLLOWING: C.N.RAMACHANDRAN NAIR &M.L.JOSEPH FRANCIS, JJ.....................................................................I.T.Appeal No.10 of 2010....................................................................Dated this the 5th day of January, 2011. C.R. JUDGMENT Ramachandran Nair, J. The appellant-assessee is a private limited company engaged inbusiness of export of computer software. Besides being engaged in theexport of computer software, the assessee is also engaged in renderingconsultancy services in India, from which it earns substantial income.During the assessment year 1999-2000 the assessee claimed benefit ofSection 80HHE which entitles it for deduction of the profit earned fromthe export of computer software. Sub-section (3) of Section 80HHEprovides that the deduction admissible on the profit on export ofcomputer software is the amount which bears to the profit of thebusiness as the same proportion as the export turnover bears to the totalturnover of the business carried on by the assessee. Even thoughExplanation (d) to Section HHE specifically provide that eligiblededuction of profit on export should be computed by reducing from the ITA No.10/2010 total profit 90% of the receipts by way of brokerage, commission, rent,charges or any other receipt of a similar nature included in such profit,the assessee did not exclude 90% of the consultancy charges receivedfrom local customers, which is the profit from the local business inrendering consultancy services. Even though the claim so made wasallowed in the original assessment completed by the Assessing Officer,later on noticing the mistake of including profit received for localbusiness by way of consultancy charges in the export profit in violationof the above statutory provision, the Assessing Officer revised theassessment in exercise of powers conferred under Section 147 of theIncome Tax Act. The revised assessment limiting the claim ofdeduction on export of software by excluding profit attributable toconsultancy services rendered within India, was challenged by theassessee in appeal before the CIT(Appeals), who allowed the claim.On second appeal filed by the Revenue, the Tribunal noticed that theissue is settled by decision of the Supreme Court inK.RAVINDRANATHAN NAIR'S CASE reported in 295 ITR 228 and ITA No.10/2010 based on the said decision, the Tribunal reversed the order of the firstappellate authority and restored the revised assessment. It is against thisorder the assessee has filed this appeal. We have heard Adv.Sri.T.M.Sreedharan appearing for the appellant and Standing Counselfor the respondent. ITA No.10/2010 based on the said decision, the Tribunal reversed the order of the firstappellate authority and restored the revised assessment. It is against thisorder the assessee has filed this appeal. We have heard Adv.Sri.T.M.Sreedharan appearing for the appellant and Standing Counselfor the respondent. 2. Even though validity of reassessment completed under Section147 was not subject matter of contest before the Tribunal and the issuedoes not arise from the orders of the Tribunal, counsel appearing forthe assessee raised a contention that being a pure legal questiontouching upon the jurisdiction of the officer to revise assessment underSection 147, the assessee be permitted to raise this ground in the appealfiled before this court under Section 260A of the Income Tax Act. Wehave permitted counsel for the assessee to advance arguments on thevalidity of reassessment and we have heard him on this issue as well. 3. On the merits counsel for the appellant contended that thedecision of the Supreme Court referred above relied on by the Tribunalis not applicable to the facts of this case because what was considered ITA No.10/2010 was processing charges received by cashew exporter and 90% thereofwas ordered to be reduced by the Supreme Court by relying onExplanation (baa) to Section 80 HHC of the Income Tax Act. StandingCounsel on the other hand contended that the consultancy chargereceived by the assessee for consultancy services in India is similar tothe processing charge received by cashew exporter which is forservices rendered to parties within the country. 3. After hearing both sides and after going through the statutoryprovisions and the decision of the Supreme Court abovereferred, wefeel the above decision is squarely applicable to the facts of this case.This is because Explanation (d) to Section 80HHE is similar toExplanation (baa) to Section 80HHC of the Act, with reference towhich the Supreme Court rendered the above judgment. Explanation(baa) to Section 80HHC states as under: "Profits of the business" means the profits of the businessas computed under the head "Profits and gains of business orprofession" as reduced by -- (1) ninety per cent of any sum referred to in clauses(iiia), (iiib), (iiic), (iiid) and iii(e) of section 28 or of anyreceipts by way of brokerage, commission, interest, rent,charges or any other receipt of a similar nature included insuch profits; and (2) the profits of any branch, office, warehouse or anyother establishment of the assessee situate outside India;" The findings of the Supreme Court in the abovereferred decision are in the following lines: "Processing charges, which are part of gross totalincome, form an item of independent income like rent,commission, brokerage, etc., and therefore 90% of theprocessing charges has also to be reduced from the grosstotal income to arrive at the business profits." 4. While considering the issue we have to keep in mind that the deduction admissible is only the profit derived from export business. Ifthe assessee is engaged only in export business, then the entire profit isallowable as deduction, whether it be under Section 80HHC or underSection 80HHE. However, dispute arises only when assessee isengaged in local business as well as export business and it has commonprofit and loss account. The whole exercise provided in the statutoryprovisions is to determine as precisely as possible the profit attributable ITA No.10/2010 4. While considering the issue we have to keep in mind that the deduction admissible is only the profit derived from export business. Ifthe assessee is engaged only in export business, then the entire profit isallowable as deduction, whether it be under Section 80HHC or underSection 80HHE. However, dispute arises only when assessee isengaged in local business as well as export business and it has commonprofit and loss account. The whole exercise provided in the statutoryprovisions is to determine as precisely as possible the profit attributable ITA No.10/2010 to export business which in the case of the assessee is export of computer software. What is specifically provided is that 90% of theitems of income which have no relation to export business have to beexcluded. All items of income, 90% of which have to be excluded inthe computation of eligible export profit for deduction underExplanation (baa) to Section 80 HHC and Explanation (d) to Section80HHE, are not specifically mentioned in the clauses even thoughsome of the items like rent, commission and brokerage are specificallycovered. The question, therefore, to be considered is what is themeaning of "any other charges or receipt of a similar nature" includedin the profits. Necessarily what is to be considered is the nature ofincome the exclusion of which from the profit can be treated as anincome similar to brokerage, commission, interest or rent. All theseitems of income like brokerage, commission, interest and rent are notattributable to export business. Assessee itself has no case thatconsultancy charges received by the assessee in India has anything todo with it's export business or earning of income on the export of ITA No.10/2010 computer software. In this context it is to be noted that rendering oftechnical services by the assessee outside India in connection withdevelopment or production of software also is specifically madeeligible for deduction under sub-clause (ii) of sub-section (1) ofSection 80 HHE. The exclusion clause contained in Explanation (d)specifically makes it clear that income by way of consultancy chargesreceived for consultancy services rendered in India, which has noconnection export of software, is an item of income similar to otherincomes like brokerage, commission and rent which are not attributableto export business. So much so, we feel the Tribunal rightly held thatthe decision of the Supreme Court in RAVINDRANATHAN NAIR'scase referred above applies to consultancy charges received in Indiawhich is unrelated to the business of export of computer software andso much so, 90% of the income by way of consultancy charges receivedin India should be excluded under Explanation (d) to Section 80HHE inthe computation of eligible deduction under the Act. Therefore, on themerits, we uphold the order of the Tribunal and dismiss the assessee's ITA No.10/2010 appeal. 5. The next question to be considered is only an additionalground which we permitted the assessee to raise during hearing whichis on the validity of reopening of assessment made under Section 147of the Act. Even though counsel for the assessee contended that all thematerial facts are available on record and the reassessment underSection 147 is on account of change of opinion, we do not think theposition canvassed is any longer available after the amendment toSection 147 of the Act by which any escapement of income can beassessed within four years by invoking Section 147 of the Act and forperiod beyond four years, reopening is possible only if the assesseesuppressed material facts. What is seen in this case is that assesseewhile working out the eligible deduction did not exclude 90% of theincome received by way of consultancy charges which is to bespecifically excluded by virtue of mandatory provision contained inExplanation (d) of Section 80HHE of the Act. In fact, since there is anomission to apply the statutory provision in the working out of eligible ITA No.10/2010 ITA No.10/2010 deduction of profit on export of software, the assessment could even be rectified through rectification proceedings under Section 154. In anycase when the mandatory provision is not followed leading to evasionof tax by way of excess relief granted to the assessee, the remedy opento the officer is to revise the assessment by invoking powers underSection 147. So much so, we reject the challenge against reopening ofthe assessment under Section 147 which is confirmed by the Tribunal.Accordingly the appeal filed by the assessee is dismissed. Sd/-C.N.RAMACHANDRAN NAIRJudge Sd/-M.L.JOSEPH FRANCISJudge True copy P.S. to Judge