Ita/286/2010 Of The Commissioner Of Income Tax v. M/S Ibm Global Services India Pvt Ltd

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 3RD DAY OF NOVEMBER 27072PRESENT| THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD1LT.A. NO. 286 OF 2010 BETWEEN: 1.|THE COMMISSIONER OF INCOME TAX LTU, C.R.BUILDING QUEENS ROAD, BANGALORE. 2.|THE DY. COMMISSIONER OF INCOME TAX CIRCLE - 11(1), C.R.BUILDING QUEENS ROAD, BANGALORE. (BY SRI. K.V. ARAVIND, ADV.,) .., APPELLANTS~ AND* M/S IBM GLOBAL SERVICES INDIA PVT. LTD.NO,172 SUBRAMANYA ARCADEBANNERGHATTA ROADBANGALORE - 560 029. (BY SRI. PERCY PARDIWALLA, SR. COUNSEL A/W SMT. VANI H, ADV.,). ~. RESPONDENT THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT,|1961L ARISING OUT OF ORDER DATED 31.10.200/7 PASSED IN ITNO.3464/BANG/2004 FOR THE ASSESSMENT YEAR 2000-01,PRAYING TO: (1) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW.STATED THEREIN.» (II) ALLOW THE APPEAL AND SET ASIDE THE ORDERS.PASSED BY THE ITAT, BANGALORE IN ITA NO.3464/BANG/2004DATED 31-1L0-200/7 CONFIRMING THE ORDER OF THE APPELLATCOMMISSIONER AND CONFIRM THE ORDER PASSED BY THEDEPUTY.COMMISSIONEROF.INCOME|TAX,|CIRCLE-11(1),BANGALORE. THIS|ITACOMING|ONFOR.HEARING,THISALOK ARADHE J.,DELIVERED THE FOLLOWING: | DAY, | JUDGMENT This appeal under Section 260A of the Income TaxAct, 1961 (nereinafter referred to as the Act for short)nas been preferred by the revenue. The subject matterof the appeal pertains to the Assessment year 2000-01.The appeal was admitted by a bench of this Court videorder dated 28.03.2012 on the following substantialquestion of law: (1)Whnetner the Appellate Authoritywere correct in holding that estimatedoverhead expenses of STP units and non STPunits should be taken Into account forcomputing exemption u/s 10A of the Act.despite the assessee having willfully chosen.not to segregate the same in order to claimexemption as stated in his letter dated18.03.7003 and as worked out for the earlier Assessment Years 1998-99 and 1999-002? (ii) Whetner the appellate authoritywere correct in accepting the estimation inrespect of payments to sub contractors,royalties,technicalfees,communication expenses based on the turnover when theaccounts originally rendered and subsequent.to survey was found to be inaccurate andespecially when the cost of materials andservices in respect of STP units and non STP.units had been correctly worked out? (iii) Whether the appellate authoritywere correct in holding that maintenance ofseparate accounts for STP units and non STPunits was only airectory and not manaatoryIn|accordancewith RB]conditionsGovernment Notification and Income TaxAct? (iV) Whether the appellate authoritywere correct in holding that payments madeto sub contractors wno Nnave_ separatelexported and nave been issued_ foreigninward remittance certificate and nave also claimed 10A exemption will also be entitledto double exemption under Section 10A ofthe Act In hands of the assessee? (Vv)Whether the appellate authority|were correct in holding that the assesseewould beentitled to}exemption UnderSection 10A of the Act when the export(56.056%) is less than 75% of the totalsalesas|contemplatedUnderSection10OA(2)(1a) of the Act? 2D The factual Dackground in which the aforesaidsubstantial questions of law arise for consideration ofthis court need mention. The assessee is in the business|of export of software solutions and maintenanceservices. Tne assessee filed tne return of Income on!30.11.2000 for the Assessment Year ZOOO-O1 wherein itadmitted loss to the extent of Rs.28,55,17,27/75/-. Threturn was processed under Section 143(1) of the ActWNICNresultedIn|refundofal?amountofRs.3,92,44,964/-. Tnereafter, the case was taken up forscrutiny and a notice under Section 143(2) of the Act (Vv)Whether the appellate authority|were correct in holding that the assesseewould beentitled to}exemption UnderSection 10A of the Act when the export(56.056%) is less than 75% of the totalsalesas|contemplatedUnderSection10OA(2)(1a) of the Act? 2D The factual Dackground in which the aforesaidsubstantial questions of law arise for consideration ofthis court need mention. The assessee is in the business|of export of software solutions and maintenanceservices. Tne assessee filed tne return of Income on!30.11.2000 for the Assessment Year ZOOO-O1 wherein itadmitted loss to the extent of Rs.28,55,17,27/75/-. Threturn was processed under Section 143(1) of the ActWNICNresultedIn|refundofal?amountofRs.3,92,44,964/-. Tnereafter, the case was taken up forscrutiny and a notice under Section 143(2) of the Act was issued on 22.06.2001. The Assessing Officer by an.order dated 31.03.2003 inter alia held that assessee NadSoftware Technology Park (STP) unit as well as non STP.unit and all over head expenses Nave been charged inrelation to non STP unit and no expenditure is claimed in-respect of STP unit for which exemption under Section10A of the Act has been claimed. It was further held.that in respect of Assessment Years 1998-99 and 1999-OO, the assessee Nas drawn up separate profit and lossaccount for STP as well as non STP units. It was also!held that after survey, the assessee bifurcated the overheads between STP units and non STP units, in respectof cost of materials / services. However, in respect ofpayments to sub contractors, royalties, tecnnical fees,communication expenses, the assessee estimated on thebasis of turnover instead of actuals. It was also held that.revisedcomputationfurnishedby theaSS@C@SSCcontradicts itself the correct STP turnover and turnover|Under Section 8OHHE as well as domestic turnover nas been suppressed. It was also held that the assessee hasnot fulfilled the stipulations laid down in SoftwareTechnology Parks of India Scheme (STPI) and the.conditions laid down by Reserve Bank of India regardingmaintenance of separate accounts and other conditionsand therefore, the assessee is not entitled to exemptionUnder Section 10A of the Act. It was further held that.the audit report does not exclude payment made to subcontractors or other expenses incurred aboard. It wasalso held that turnover brought into the country is.56.056% which is below 75% as_ stipulated underSection 10A of the Act. Accordingly, the claim forexemption under Section 10A of the Act was denied. 3.0Tne assessee thereupon approached theCommissioner of Income Tax (Appeals) by filing an.appeal, who by an order dated 08.09.2004 inter alia heldthat there is no provision under Section 10A of the Actthat 50% of the sales from STP units have to be!exported and similarly, the statute does not lay down any condition that the assessee should maintainseparate accounts in respect of STP units and non STPunits. Accordingly, it was held that the condition laiddown by the Reserve Bank of India is only directory innature and the assessee is entitled to exemption underSection 10A of the Act. It was further held that subcontractors Nave exported the goods on the basis of.foreign inward remittance certificates and even if they.Nave|claimed|exemption, tneSamewouldnottantamount to double exemption as it is permissible inlaw. Being aggrieved, the assessee as well as therevenue preferred appeals before the Income TaxAppellate Tribunal (hereinafter referred to as ‘thetribunal for short). Tne tridDunal by an order dated31.10.2007 dismissed the appeal preferred by therevenue and allowed the appeal preferred by theassessee in part. Being aggrieved, the revenue is in.appeal before us.4Learned|counsel|for.tnerevenuewnile referring to substantial question of law Nos.1 and 2submitted that the finding recorded by the tribunal thatallocation of overhead expenses is on turnover basis isnot based on any material on record. With reference tosubstantial question of law No.3, it is argued that the.Commissioner of Income Tax (Appeals) as well as thetribunal grossly erred in holding that maintenance of.separate accounts by the assessee is directory. It ought.to have been appreciated that the unit of the assesseewas registered as STP under STPI scheme and wasSubject to conditions imposed in the registration.scheme. The registration certificate issued to theassessee itself imposes the condition to maintainseparate accounts. It is contended that STPI scnemeitself mandates maintenance of separate accounts,which is mandatory and under the provisions of the Act,if an undertaking is registered as STP it has to complywith the conditions imposed under the scheme and theregistration certificate. 5.It is argued that substantial question of lawNo.4 has to be answered in favour of the revenue as theCommissioner of Income Tax (Appeals) as well as thetribunal have failed to consider that the assessee as wellas sub contractors have claimed exemption underSection 10A of the Act, whereas, scheme of Section 10Aof the Act provides for exemption / exemption only tomanufacturing activity and it ought to have beenappreciated that the assessee had entrusted themanufacturing activity to sub contractor and subcontractor has also claimed exemption under Section10A of the Act, which does not provide for the benefit to.the multiple assesses on the same manufacturingactivity. It is also urged that even the EXIM policy issuedby the Government, which was considered by this courthas permitted benefit under Section 10A / 10B of theAct. Only in the circumstances where the assessee hasproduced certificate to the effect that other contractmanufacturer has not claimed the exemption under Section 10A of the Act on the same manufacturingactivity. It is pointed out that no finding on the aforesaidaspect has been recorded by the Commissioner ofIncome Tax (Appeals). With reference to substantialquestion of law No.5, it is argued that the assessee has.to export 75% of the total manufactured items and inthe instant case, the assessee has only exported to56.056% and since, the assessee had violated theprovision of Section 10A(2)(1a) of the Act, therefore, itis not entitled to exemption under Section 10A of theAct. It Is also submitted that the Commissioner of Income Tax (Appeals) as well as the tribunal have notrecorded any finding on this issue and the aforesaidaspect of the matter requires examination. In support ofaforesaid submissions, reference nas been made to theprovisions of STPI Registration Scheme and STPScheme.activity. It is pointed out that no finding on the aforesaidaspect has been recorded by the Commissioner ofIncome Tax (Appeals). With reference to substantialquestion of law No.5, it is argued that the assessee has.to export 75% of the total manufactured items and inthe instant case, the assessee has only exported to56.056% and since, the assessee had violated theprovision of Section 10A(2)(1a) of the Act, therefore, itis not entitled to exemption under Section 10A of theAct. It Is also submitted that the Commissioner of Income Tax (Appeals) as well as the tribunal have notrecorded any finding on this issue and the aforesaidaspect of the matter requires examination. In support ofaforesaid submissions, reference nas been made to theprovisions of STPI Registration Scheme and STPScheme. J.On tne other nand, learned Senior counsel forthe assessee while inviting the attention of this court to J.On tne other nand, learned Senior counsel forthe assessee while inviting the attention of this court to para 2.24 of the order passed by the Commissioner ofIncome Tax (Appeals) as well as paras 18 to 22 of theorder passed by the tribunal submitted that with regard.to first two substantial questions of law, concurrentfindings of fact have been recorded by the Commissionerof Income Tax (Appeals) as well as the tribunal, which isbased on meticulous appreciation of evidence on recordand it has rightly been held that allocation of overheadexpenses has to be made on turnover basis. Tneaforesaid finding cannot be said to be perverse. It is also.urged that the assessee's claim for exemption underSection 10A of the Act is dependant on fulfillment ofconditions prescribed in Sub-Section (2) of Section 10A.of tne Act and the conditions prescribed in sub-Section(2) no wnere provide that the assessee has to maintainseparate accounts. Therefore, the finding recorded by.the Commissioner of Income Tax (Appeals) and thetribunalthat|thecompliancewith theconditionsprescribedIn|STPIRegistrationScnemeand.tne conditions prescribed by the Reserve Bank of India aredirectory in nature does not call for any interference. Itis also contended that the aforesaid finding evenotherwise has no bearing on the issue of eligibility of theassessee to claim exemption under Section 10A of theAct. It is also urged that there is no question of doubleexemption being claimed as to the extent the assessee.has paid the sub contractors the profit it has claimedNave stood reduced and even when tne assessee nadcomputed the exemption of Rs.96,97,50,443/-, it hastaken into consideration the payments made to the subcontractors and therefore, at no point of time, thebenefit of double exemption have been obtained by thetwo assesses on the same manufacturing activity. In thisconnection, our attention nas been invited to the findingrecorded in para 2.25 of the order of the Commissionerof Income Tax (Appeals). It is also argued that the.finding recorded by the Assessing Officer that assesseeNas violated the conditions prescribed in Section 10A(2)(ia) of the Act is erroneous. It is stated that all.the sales of the assessee from its STP units are exportsales and there are no sales to domestic tariff area and|therefore, it cannot be stated that exemption is notavailable on account of violation of the condition. It js/!also pointed out that Section 10A as it was in existenceat the relevant time did not require that 75% of the totalsales have to be exported under Section 10A(2)(ia) ofthe Act. In support of aforesaid submissions, reliancehas been placed on Circular dated 17.01.2013 issuedUnder Section 10A read with Section 10AA and Section—10B of the Act by the Central Board of Direct Taxes.(CBDT) as well as decision of Supreme Court in'T_R.F. LTD. VS. COMMISSIONER OF INCOME-TAX, (2010)323 ITR 397 (SC)and decisions of tnis court In‘COMMISSIONEROF.INCOME-TAX,CENTRAL CIRCLE VS. FUSION SOFTWARE ENGG. (P.) LTD.',(2012)18TAXMANN.COM|5 7(KARNTAKA),‘COMMISSIONER OF INCOME TAX, BANGALORE VS. MILENNIA DEVELOPERS (P.) LTD.', (2018) 100TAXMANN,.COM369(KARNATAKA)and"COMMISSIONER OF INCOME-TAX III VS. M/SQUINTILESRESEARCH",I.T.A.NO.282/2014DECIDED ON 14.12.2070. 8.We have considered the submissions made bylearned counsel for the parties and have perused therecord. We propose to deal with substantial questions oflawad serfatum. The substantial question of law No.1and 2 are related to each other, therefore, we proposeto deal with the same together. The Commissioner of.Income Tax (Appeals) in paragraph 2.24 of its order hasneid tnat in the remand report dated 27.02.2004, theAssessing Officer has reported tnat the assessee hasbeen able to bifurcate STPI receipts, 8O0HHE receipts anddomestic receipts. It has further been held that directexpenses relating to domestic receipts and exportreceipts nave also been segregated and direct expensesof export turnover are apportioned on the basis of 8.We have considered the submissions made bylearned counsel for the parties and have perused therecord. We propose to deal with substantial questions oflawad serfatum. The substantial question of law No.1and 2 are related to each other, therefore, we proposeto deal with the same together. The Commissioner of.Income Tax (Appeals) in paragraph 2.24 of its order hasneid tnat in the remand report dated 27.02.2004, theAssessing Officer has reported tnat the assessee hasbeen able to bifurcate STPI receipts, 8O0HHE receipts anddomestic receipts. It has further been held that directexpenses relating to domestic receipts and exportreceipts nave also been segregated and direct expensesof export turnover are apportioned on the basis of percentage turnover of STPI and 80HHE receipts. TheAssessing Officer in its remand report has accepted thefact that identification was possible and it has beencorrectly shown by the assessee. The Commissioner ofIncome Tax (Appeals) has concluded that since, theassessee has identified the turnover relating to STPI.units and there is a reasonable basis for quantifyingdirect and indirect expenses pertaining to STPI units, theincome|pertainingtOSTPIunits|anatherefore,exemption under Section 10A of the Act can be workedout. The tribunal in para 22 of its order has held thatthe assessee has units spread over various part of thecountry and may be abroad, the only plausible methodof reasonable of allocating the overnead expenses is byrelating them to the turnover. Thus, the tribunal hasaffirmed the finding that the aforesaid exercise would.result in determination of the profit to a near accuratefigure or a reasonable figure and has upheld the order ofthe Commissioner of Income Tax (Appeals) to the extent: of Rs.68,72,88,/748/- holding the same to be areasonable figure. The aforesaid concurrent findings offact are based on meticulous appreciation of evidenceon record. The tribunal has rightly held that theallocation of the overhead expenses Nave to be made onturnover basis. No perversity in the aforesaid concurrentfindingsoffact|couldbe|pointedOUT. For|theaforementioned reasons, we answer the first and secondsubstantial question of law against the revenue and infavour of the assessee. orNow we may advert to the third substantialquestion of law which pertains to requirement of holdingof separate accounts for STP and non STP units. It ispertinent to note that assessee is entitled to exemptionunder Section 10A of the Act, which is a special provision|in respect of newly established undertakings in FreeTrade Zone (FIZ). Section 10A of the Act wassubstituted by Finance Act, 2000 with effect from01.04.2001. The exemption under Section 10A of the Act is dependant on fulfillment of conditions mentionedin Sub-Section (2) of the Act. Sub-Section (2) of the Act,which was in existence at the relevant time, reads asunder:| 10(2) This section applies to any financial|undertaking which fulfils all the followingconditions, namely :—undertaking which fulfils all the followingconditions, namely :— (i) it nas begun or begins to manufacture orproduce articles or things auring theprevious year relevant to the assessmentYealr—produce articles or things auring theprevious year relevant to the assessmentYealr— (a) commencing on or after the ist.day of April, 1981, in any free|trade zone; orday of April, 1981, in any free|trade zone; or (b) commencing on or after the ist|day|Of|April,1994,|In|allyelectronic hardware technologypark, or, as the case may be,software technology park; day|Of|April,1994,|In|allyelectronic hardware technologypark, or, as the case may be,software technology park; (ia) in relation to an undertaking|whicn begins to manufacture orproduce any article or tning onwhicn begins to manufacture orproduce any article or tning on or after the 1st day of April,1995, its exports of such articles|or things are not less than:seventy-five per cent of the totalsales thereof during the PreviousYear. (a) commencing on or after the ist.day of April, 1981, in any free|trade zone; orday of April, 1981, in any free|trade zone; or (b) commencing on or after the ist|day|Of|April,1994,|In|allyelectronic hardware technologypark, or, as the case may be,software technology park; day|Of|April,1994,|In|allyelectronic hardware technologypark, or, as the case may be,software technology park; (ia) in relation to an undertaking|whicn begins to manufacture orproduce any article or tning onwhicn begins to manufacture orproduce any article or tning on or after the 1st day of April,1995, its exports of such articles|or things are not less than:seventy-five per cent of the totalsales thereof during the PreviousYear. (ii) it is not formed by the splitting up, or thereconstruction, of a business already inexistence :.reconstruction, of a business already inexistence :. Providedthat this condition sheal|not apply in respect of any inaustrialundertaking which is formed as a result ofthe re-establishment, reconstruction orrevival by the assessee of the business ofany such industrial undertaking as_ Isreferredto.in section533B,In|thecircumstances|and|WIthnintheperiodspecified in that section; (iii) it is not formed by the transfer to a new|business of machinery or plant previouslyused for any purpose.business of machinery or plant previouslyused for any purpose. ExplanationTheDrovisionsof Explanation 1 and Explanation 2 to sub-section (2) of section 80-I shall apply forthe purposes of clause (ili) of this sub-section as they apply for the purposes ofclause (ii) of that sub-section. 10. Thus, from perusal of Sub-Section (2), it isevident that it does not contain any requirement withregard to maintenance of separate accounts. It ispertinent to note tnat wherever the legisiature intendedto incorporate the requirement of maintenance of eitherseparate accounts or separate books of accounts, it hasexpressly said so. In this connection, reference may bemade to Section 11(4A), Section 80HHB and SectionSOHHBA of the Act, where the legislature has clearlyprescribed the requirement of maintenance of separatebooks of accounts. In the instant case, in sub-Section|(2) of Section 10A of the Act, there is no requirement ofmaintenance of separate accounts and the assessee isentitled to exemption under Section 10A of the Act. Therefore, the assessee cannot be deprived of thebenefit of Section 10A of the Act, on the ground that ithad not maintained separate accounts. It is pertinent tonote that even in the substituted section viz., underSection 10(2) of the Act, there is no requirement tomaintainseparateaccounts.Therequirement.OF maintenance of separate accounts has been provided inSTPI Registration Scheme and no consequences for its.non compliance Nave been prescribed. Therefore, theSame has rightly been held to be directory. Thus, the.third substantial question of law is also answered against.the revenue and in favour of the assessee. 11. Tne.fourtn|substantialquestionoflawpertains to double deduction. Tne Commissioner ofIncome Tax (Appeals) in para 2.25 has held that subcontractor has given software support activity to the.assessee and not to tne customers of tne assessee. It!nas further been held that the employees of the subcontractors are operating from the STP unit itself and the sub contractors have claimed exemption underSection 10A of the Act on the basis of foreign inwardremittance certificate, which has no bearing with regardto assessee's claim of exemption under Section 10A ofthe Act. It has further been held that the question ofdouble deduction being claimed does not arise as to the.extent the assessee has paid to the sub contractors theprofits claimed as exempt by the assessee_ standreduced. The aforesaid finding has been affirmed by thetribunal in para 22 of its order. Therefore, in the factsituation of the case, the question of double deduction.does not arise. For the aforementioned reasons, thefourth substantial question of law is also answeredagainst the revenue and in favour of the assessee. the sub contractors have claimed exemption underSection 10A of the Act on the basis of foreign inwardremittance certificate, which has no bearing with regardto assessee's claim of exemption under Section 10A ofthe Act. It has further been held that the question ofdouble deduction being claimed does not arise as to the.extent the assessee has paid to the sub contractors theprofits claimed as exempt by the assessee_ standreduced. The aforesaid finding has been affirmed by thetribunal in para 22 of its order. Therefore, in the factsituation of the case, the question of double deduction.does not arise. For the aforementioned reasons, thefourth substantial question of law is also answeredagainst the revenue and in favour of the assessee. 12. This brings us to the last substantial question|of law, which pertains to violation of the conditionprescribed under Section 10A(2)(ia) of the Act. Fromperusal of Section 10A(2)(ia), wnicn has been quotedsupra, it is evident that the undertaking wnhicn beings to manufacture or produce any article or thing on or after01.04.1995, its export of such articles or things are notless than 75% of the total sales thereof during thePrevious Year. Thus, the total export has to be not lessthan 75% of the total sales. However, the Commissionerof Income Tax (Appeals) has held that there is noprovision under Section 10A of the Act, which requiressuch a condition to be fulfilled and no finding in this.regard has been recorded by the tribunal. Therefore,the order passed by the tribunal to the extent offulfillment of the requirement under Section 10A(2)(ia).of the Act cannot be sustained. Accordingly, the fifth.substantial question of law is answered. In view of preceding analysis, the order passed Dy the tribunal to the extent it pertains to requirement ofcompliance of the condition mentioned in Section10A(2)(ia) of the Act is hereby quasned and the matter.is remitted to tne tribunal to decide tne tIssue ofrequirement of compliance of the condition mentioned in �������������������������������������������������������������� ������������������������������������������ ����� ������ ��� ����� ������