Geometric Software Solutins Co. Ltd ( ... vs Assessee

सव ौी नरे ि कुमार ब लै!या, लेखा सदःय एवं ववेक वमा , याियक सदःय के सम&

BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER AND

SHRI VIVEK VARMA, JUDICIAL MEMBER

आयकर अपील सं./I.T.A. No. 5974/Mum/2010 िनधा रण वष / Assessment Year : 2002-03 (िनधा आयकर अपील सं./I.T.A. No. 2672/Mum/2010 िनधा रण वष / Assessment Year : 2004-05 (िनधा

AND

आयकर अपील सं./I.T.A. No. 2750/Mum/2011 िनधा रण वष / Assessment Year : 2006-07 (िनधा

M/s. Geometric Software बनाम The ACIT, Range 10(2), बनाम/ Solutions Co. Ltd. Aayakar Bhavan, Vs. (Now Geometric Ltd.), Mumbai-400 020 C/o Kalyaniwalla & Mistry, Army & Nav y Bldg., 148 M.G. Road, Fort, Mumbai-400 001 ःथायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : AABCG 0066A (अपीलाथ* /Appellant) .. (ू,यथ* / Respondent) अपीलाथ* ओर से/ Appellant by: Shri F.V. Irani

ू,यथ* क. ओर से/Respondent by: Shri Pavan Kumar Beerla

सुनवाई क. तार0ख / Date of Hearing :03.03.2015 घोषणा क. तार0ख /Date of Pronouncement :11.03.2015 2 M/s. Geometric Ltd.

आदे श / O R D E R

PER N.K. BILLAIYA, AM:

These three appeals by the assessee are preferred against separate orders of the Ld. CIT(A)-21, Mumbai for assessment years 2002-03, 2004-05 and 2006-07. All these appeals have common issues, therefore they were heard together and disposed of by this common order for the sake of convenience and brevity.

2. The Ld. Counsel for the assessee stated that facts of A.Y. 2004-05 would cover the issues involved in all three appeals.

3. The Ld. Departmental Representative fairly conceded to this.

4. We have heard these appeals on the basis of the facts of A.Y. 2004- 05 in ITA No. 2672/M/2010. The assessee has raised 11 substantive grounds of appeal.

5. Ground No. 1,2 and 3 relate to the treatment of income claimed by the assessee under the head "Profits & Gains of Business or Profession but assessed by the AO and confirmed by the Ld. CIT(A) under the head "Income from House Property" thereby denying the claim for depreciation on the same.

5.1. The assessee is in the business of software development. While scrutinizing the return of income for the year under consideration, the Assessing Officer noticed that the assessee has received Rs. 1,37,26,637/- towards lease rental from two companies out of which one company is subsidiary of assessee company. The assessee was asked as to why lease 3 M/s. Geometric Ltd.

rent received of Rs. 1.37 crores be not assessed as Income from House Property. The assessee filed a detailed reply claiming that the assessee has leased out the part of the office building, since there was surplus area in the said building, which was not immediately required by the company for its own use, the same was leased out with a view to ensure the effected utilization of the business assets and to ensure an income stream from the use of the said office buildings. In support, the assessee relied upon certain judicial decisions.

5.2. The explanation of the assessee was not accepted by the AO. Relying upon the object clause in the Memorandum of Association of the assessee, the AO came to the conclusion that letting out of property cannot be considered as assessee's business objective. Further, it is not the assessee's case that the said let out was incidental or ancillary to the attainment of the main objects of the company, hence it is the case of leasing out of surplus office place. After considering various decisions of the Hon'ble Supreme Court and Hon'ble High Court, the AO finally held that income from business has to be assessed under the head 'Income from House Property'.

6. Aggrieved by this, the assessee carried the matter before the Ld. CIT(A). After considering the facts and the submissions, the Ld. CIT(A) observed that activity of leasing out surplus area was not a business activity but was simply an act of letting out of property. The letting out of surplus area was in no manner incidental or ancillary to the attainment of the main objects of the assessee, hence the AO correctly held that letting out of property could not be considered as the assessee's main object.

4 M/s. Geometric Ltd.

6.1. Before the Ld. CIT(A), the assessee took an alternative plea that in any event if the income is not assessed under the head 'Business Income', the same should be considered under the head 'Income from other sources'. After giving a thoughtful consideration to this claim of the assessee, the Ld. CIT(A) dismissed the same by holding that there was no machinery or plant which were let out alongwith the building. The Ld. CIT(A) also dismissed the claim of depreciation.

7. Aggrieved by this, the assessee is before us.

8. The Ld. Counsel for the assessee reiterated what has been submitted before the lower authorities. In support of its claim, the Ld. Counsel relied upon the decision of the Hon'ble Supreme Court in the case of Laxmi Silk Mills in 20 ITR 451.

9. We have carefully perused the orders of the authorities below and the decision of the Hon'ble Supreme Court relied upon by the Ld. Counsel. At the outset, the decision of the Hon'ble Supreme Court relied upon by the Ld. Counsel is misplaced and do not match with the facts of the case in hand because in the case of the Hon'ble Supreme Court, the commercial asset of the business were temporarily put out of use and let out to another person and on this temporary let out, the Hon'ble Supreme Court held that the yield of income by way of commercial asset is the profit of the business. However, in the case in hand, the let out was not temporary , more so the leased out premises were never got vacated but were sold subsequently therefore the decision of the Hon'ble Supreme Court do not support the case of the assessee. The assessee has also not submitted the copy of lease agreement neither before the Revenue authorities nor before us.

5 M/s. Geometric Ltd.

9.1. The Ld. Counsel for the assessee reiterated its alternative claim that the income should be taxed under the head 'Other Sources'. It is the say of the Ld. Counsel that the Ld. CIT(A) has himself contradicted his own evaluation of facts. On the one hand, the Ld. CIT(A) has observed that the provisions of Sec. 56(2)(iii) are applicable where the machinery, plant or furniture are let out alongwith building and letting out of building is inseparable from the letting out of said machinery, plant or furniture and on the other hand the Ld. CIT(A) observed that there was no machinery or plant which were let out alongwith the building. The Ld. Counsel further stated that the Ld. CIT(A) has dismissed the claim of depreciation holding that the items like UPS, Plant and machinery and furniture and fixtures are part of the business premises let out. The Ld. Counsel pleaded that the income should be taxed under the head "other sources"

and accordingly depreciation should be allowed.

10. The Departmental Representative strongly submitted that there is no contradiction in the findings of the Ld. CIT(A). The Ld. CIT(A) has very categorically stated that provisions of Sec. 56(2)(iii) are not applicable on the facts of the case.

11. We have given a thoughtful consideration to the submissions of the rival parties. The Hon'ble Supreme Court in the case of CIT Vs Shambu Investment Pvt. Ltd. 249 ITR 47 has held as under:

"Where prime object of the assessee under the agreement was to let out the portion of the said property to various occupants by giving them additional right of using the furniture and fixtures and other common facilities for which rent was being paid month by month. Income derived from the said property is an income from property and should be assessed as such."

6 M/s. Geometric Ltd.

12. Considering the facts of the case in the light of the decision of the Hon'ble Supreme Court in the case of Shambu Investment (supra), we do not find any reason to interfere with the findings of the Ld. CIT(A). Ground No. 1,2 & 3 are accordingly dismissed.

13. Ground No. 4,5 & 6 relate to the claim of deduction u/s. 10A of the Act.

14. While scrutinizing the return of income, the AO observed that in the computation of deduction claimed by the assessee u/s. 10A of the Act export turnover and total turnover were included on gross basis. The assessee was asked to explain the calculation of export turnover vis-à-vis freight, telecommunication charges, insurance attributable to the delivery of the articles or things or computer software outside India, expenses if any incurred in foreign exchange in providing the technical services outside India. The assessee was also asked to bifurcate sales software packages and services with supporting sample bills of export sales. The assessee filed a detailed reply in the light of the provisions of Section 10A(iv) r/w Explanation 2 and claimed that there is no freight, telecommunication charges or insurance included in either the export turnover or total turnover.

14.1. After considering the submissions made by the assessee, the AO observed that if turnover of the assessee does not include freight, telecommunication charges or insurance charges separately, then why it should not be assumed that the said charges/bill amount include delivery costs. According to the AO, unless and until assessee delivers said product/software to the foreign buyer, the said buyers is not going to pay bills raised by the assessee. The AO was of the firm belief that even if no separate charges are charged by the assessee, it does not mean that same 7 M/s. Geometric Ltd.

are not included within invoice. The AO finally computed the deduction allowable u/s. 10A and computed the disallowance at Rs. 14.80 lakhs.

15. Aggrieved by this, the assessee carried the matter before the Ld. CIT(A). The Ld. CIT(A) observed that the AO has made adjustment on account of expenses attributable to the delivery of computer software outside India and expenses incurred in foreign currency for providing technical services outside India.

15.1. In so far as the expenses attributable to the delivery of computer software are concerned, it was explained before the Ld. CIT(A) that the sale of software packages and services pertains solely to production and development of computer, software and there were no freight, telecommunication charges and insurance included in either export turnover or the total turnover. After considering the facts and the submissions, the Ld. CIT(A) observed that though these expenses were denied to have been incurred but they must have been incurred and the expenses must have been recovered from the foreign customer by making adjustment in the sale bills itself. However, at the same time, the Ld. CIT(A) was of the opinion that the total amount allocated by the AO at Rs. 84,14,013/- is on the higher side. The Ld. CIT(A) reduced the same to 25% and restrict the allocation at Rs. 21,03,503/-.

15.2. In so far as the expenditure incurred on technical services outside India are concerned, it explained that the assessee did not provide any technical services and was not in the field of ERP software implementation, management consultancy and any other related filed where technical services to be provided to the client. It was explained that the assessee was purely engaged in the development of computer 8 M/s. Geometric Ltd.

software and therefore there was no occasion for incurring any expenditure for providing any technical services outside India.

15.3. After considering the facts and the submissions, the Ld. CIT(A) observed that it cannot be totally accepted that the assessee did not render any technical services outside India pertaining to the computer software exported. The Ld. CIT(A) was convinced that professional fees of Rs. 19,61,324/-, royalty Rs. 49,806/-, exhibition expenses Rs. 6,74,877/- and other expenses at Rs. 1,12,85,960/- cannot be considered as attributable to providing of technical services outside India. At the same time, the Ld. CIT(A) was not convinced that travelling expenses, salary on-site employees, software package & tools and sales and marketing expenses were also not attributable to providing of technical services outside India. The Ld. CIT(A) finally directed the AO not to consider professional fees, exhibition expenses, royalty and other expenses as pertaining to providing of technical services. In respect of other expenses, the Ld. CIT(A) reduced the allocation to 25% as pertaining to incurred for the purpose of providing technical services outside India and accordingly directed the AO to recomputed the deduction u/s. 10A of the Act.

16. Before us, the Ld. Counsel for the assessee explained the provisions of Sec. 10A(iv) r.w. Explantion -2 of the Act. Clause (iv) reads as under:

"Export turnover" means 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 9 M/s. Geometric Ltd.

expenses, if any, incurred in foreign exchange in providing the technical services outside India."

17. It is the say of the Ld. Counsel that the assessee has not recovered any of the expenses nor these expenses were reimbursable by the foreign party. Further, the Ld. Counsel pointed out that the second limb of clause

(iv) to Explanation-2 is independent and the issue has been decided in favour of the assessee by the Tribunal in assessee's own case in ITA No. 3464/M/08 for A.Y. 2003-04.

18. The Ld. Departmental Representative strongly supported the findings of the lower authorities.

19. We have carefully perused the orders of the authorities below. It is an undisputed fact that there is no specific finding in so far as the recoveries of expenditure by the assessee from its foreign parties are concerned. It is also not the case of the AO that the invoice amount is inclusive of such expenses. It is also not a case of the Revenue that all these expenses are reimbursable. The Tribunal in assessee's own case in ITA No. 3464/M/08 inter alia considered the following grounds:

Ground No. 4: The Ld. CIT erred in holding that the assessee had claimed excess deduction u/s. 10A in respect of its software units."

Ground No. 8: The Ld. CIT erred in holding that the aggregate expenses in foreign currency were to be entirely reduced from the Export turnover for the purposes of computing the deduction u/s. 10A of the Act."

20. The Tribunal at para-7 of its order has considered the following facts:

10 M/s. Geometric Ltd.

As regards second proposition regarding the merits of computation of deduction u/s. 1OA of the Act, the Ld counsel for the assessee drew our particular attention to the definition of 'export turnover' given in clause

(iv) of sub-section (2) of section 1OA of the I.T. Act and submitted that the expenditure incurred by the assessee in foreign currency were as follows:

(i) Software packages and tools - Rs. 58,89,375/-

(ii) Travelling-expenses - Rs. 1,10,35,099/-

(iii) Professional fees - Rs. 18,72,157/- (iv) Sales & marketing expenses - Rs.7,70,56,613/ (v) Exhibition expenses - Rs. 14,48,572/- (vi) Royalty - Rs 51,41,R67/- (vii) Other expenses (net of reimbursement include foreign office expenses) - Rs.1,67,70,596/- - Rs.11,92,14,246/-

21. The Tribunal observed as under:

"As regards the ground on which the revision was sought to be made, we find that section 1OA is a special provision relating to newly established undertaking in trading zones and the clause (iv) of Explanation (2) of the section 1OA defines the export turnover, according to which, it is the consideration in respect of the export by the undertaking 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) i.e. within a period of six months from the end of the previous year or within such further period as the competent authority may allow in this behalf and it does not include freight, telecommunication charges or insurance charges attributable to the delivery of articles or things or computer software outside India. . From the facts of the case, it can be seen that the expenditure sought to be reduced from the export turnover is not in the nature of freight, telecommunication charges or insurance charges attributable to the delivery of the software outside India. The other expenditure which can be reduced is the expenditure incurred in foreign exchange in providing the technical services outside India. The nature of the expenditure incurred by the assessee is not in the nature of technical expenditure for providing the technical services outside India.

11 M/s. Geometric Ltd.

Therefore, the assessee has correctly not reduced the same from the export turnover While computing the deduction u/s. 1OA of the Act. This view is also fortified by the decision of the ITAT Bangalore in the case of Infosys Technologies P. Ltd. (supra) and also ITAT, Hyderabad in the case of Patni Telecom (P.) Ltd. (supra). Further these decisions also were already delivered when the assessment order was passed on 20.03.2006 and the view adopted by the Assessing Officer is inconsonance with the said decision as held by the Hon'ble Supreme Court in the case of Max India Ltd. (supra) and Malabar Industrial Co. (supra). When two different views existed when the commissioner was passing the order, it had to be taken into account and the commissioner has no jurisdictional power to revise u/s. 263. Similar view has also been expressed by the various other Hon'ble High Courts in the decisions relied upon by the Ld counsel for the assessee. Even the decision relied upon by the Ld DR points to legal proposition that the better wisdom lower counts must yield to the higher wisdom' of the court above, meaning that the Commissioner of Income-tax should follow the decisions of the Tribunal.

In view of the same, we hold that the CIT has no jurisdiction to revise the order u/s. 263 of the I.T. Act. In view of our decision relating to proposition no. 1 and also proposition no. 2, we do not see any reason to adjudicate the proposition no. 3 advanced by the Ld. Counsel for the assessee.

21. The expenditures as per Ground No. 6 read as under:

Expenditure in Foreign Currency Amount Rs. Travel Expenses 55,64,008/- Salary onsite employees 76,76,341/- Software package & Tools 13,27,805/- Sales & Marketing Expenses 66,80,683/- Total 2,12,48,837/- 12 M/s. Geometric Ltd.

22. It can be seen that the expenditures considered in the immediately preceding assessment years are identical to the expenditure considered during the year under consideration. A similar issue was considered by the Tribunal, Hyderabad Bench in the case of Patni Telecom (P) Ltd. Vs ITO 22 SOT 26 (Hyd) wherein the issue was that the assessee had incurred certain expenditure on account of travelling allowance for the purpose of development of Software at clients cited outside India and had also incurred certain expenditure on the delivery of software booked under Internet Service Provider (ISP), since it got leased ISP line exclusively. It was explained by the Tribunal that if the quoted price is inclusive of such expenses, then consolidated value of the goods is only mentioned in the invoice. In a case where only value of goods is quoted, expense is borne by the supplier. The logic and reason behind this have been explained by the CBDT vide its Circular No. 564 dt. 5.7.1990 that the delivery of the goods should be free on Board.

22.1. In respect of expenses incurred in foreign exchange in providing technical services outside India, the Tribunal observed that on reading of clause (iv) of Explanation -2 to Sec. 10A, it is evident that all expenses need not be reduced from consideration received in convertible foreign exchange for the purpose of calculation of 'export turnover' u/s. 10A of the Act. Only those expenses which are incurred in foreign exchange in providing technical services outside India are required to be reduced. Considering the facts of the case in hand, in the light of the decision of the Tribunal discussed hereinabove, we set aside the findings of the Ld. CIT(A) and direct the AO to allow the claim of deduction u/s. 10A as computed by the assessee. Ground No. 4,5 & 6 are accordingly allowed.

13 M/s. Geometric Ltd.

23. Ground No. 7 & 8 relate to the claim of deduction u/s. 10A on the profits in respect of Units I & II by claiming that the loss of Unit-III be set off against the income computed under the head "Profits & Gains of Business or Profession".

24. It is the claim of the assessee that the loss of one eligible unit cannot be set off against the profits of other two eligible units. At the very outset, the Ld. Counsel for the assessee stated that the issues involved in ground Nos. 7 & 8 are squarely covered in favour of the assessee and against the Revenue by the decision of the Hon'ble Bombay High Court in the case of Hindustan Unilever Ltd. Vs DCIT & Another 325 ITR 102.

25. The Ld. DR could not bring any distinguishing decision in favour of the Revenue.

26. We have carefully perused the orders of the authorities below and the decision of the Hon'ble Jurisdictional High Court. We find force in the contention of the Ld. Counsel wherein the Hon'ble High Court has held that all the four units of the assessee were eligible u/s. 10B of the Act. Three units had returned a profit during the course of the assessment year, while one unit had returned a loss. Hon'ble High Court held that the assessee was entitled to deduction in respect of the profits of the three eligible units while the loss sustained by the fourth units could be set off against the normal business income. Facts being identical to the facts of the case in hand, respectfully following the decision of the Honb'ble jurisdictional High Court, we set aside the findings of the Ld. CIT(A) and direct the AO not to set off eligible unit with the profits of the ineligible unit. Ground No. 7 & 8 are accordingly allowed.

14 M/s. Geometric Ltd.

27. Ground No. 9,10 & 11 relate to the disallowance u/s. 14A r.w. Rule 8D of the Act.

28. The Ld. Counsel for the assessee stated that because of the smallness of the amount involved, he is not pressing these grounds. Ground No. 9,10 & 11 are accordingly dismissed as not pressed for the smallness of the amount involved.

29. In the result, the appeal filed by the assessee is partly allowed.

ITA No. 2750/M/2011 - A.Y. 2006-07 30. The assessee has raised 5 grounds of appeal. Grievance raised vide ground No. 1 is identical to the grievance raised vide ground No. 4,5 & 6 in ITA No. 2672/M/2010. For the detailed reasons given therein, ground No. 1 is decided in favour of the assessee and against the Revenue.

31. Grievance raised vide ground No. 2 is identical to the grievance raised vide ground No. 7 & 8 in ITA No. 2672/M/2010. For the detailed reasons given therein, ground No. 2 is allowed.

32. Grievance raised vide ground No. 3,4 & 5 are similar to the issues taken vide ground No. 1,2 & 3 in ITA No. 2672/M/2010. For the detailed reasons given therein, ground No. 3,4 & 5 are dismissed.

33. In the result, the appeal filed by the assessee is partly allowed.

ITA No. 5974/M/2010 - A.Y. 2002-03 34. The assessee has raised 17 substantive grounds of appeal.

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35. Grievance raised vide ground No. 5 & 6 are similar to the grounds raised vide ground No. 4,5 & 6 in ITA No. 2672/M/2010. For the detailed reasons given therein, ground No. 5 & 6 are allowed.

36. Grievance raised vide ground No. 7 to 10 are similar to the issues taken vide ground No. 1,2 & 3 in ITA No. 2672/M/2010. For the detailed reasons given therein, these grounds are dismissed.

37. Grievance raised vide ground No. 11 to 15 relate to the computation of disallowance made u/s. 14A of the Act r.w. Rule 8D.

38. A perusal of the assessment record shows that the AO has computed the disallowance u/s. 14A r.w. Rule 8D of the Act. It is a settled proposition of law that application of Rule 8D is w.e.f 2008-09 as held by the Hon'ble High Court of Bombay in the case of Godrej & Boyce Manufacturing Co. Ltd. Vs DCIT 328 ITR 81. Therefore, the action of the AO is not as per the settled position of the law. In our considered opinion, disallowance of Rs. 1,00,000/- would meet the ends of justice. We, accordingly direct the AO to restrict the disallowance u/s. 14A of the Act at Rs. 1,00,000/-. Ground No. 11 to `15 are partly allowed.

39. Ground No. 16 & 17 relate to the computation of Book Profit u/s. 115JB of the Act.

40. We restore this issue to the file of the AO to recompute the Book profit u/s. 115JB of the Act qua our findings to ground No. 11 to 15. Ground No. 16 & 17 are treated as allowed for statistical purpose.

41. Ground No. 1 to 4, the assessee has challenged the reopening of the assessment u/s. 147 of the Act. Since we have proceeded by deciding 16 M/s. Geometric Ltd.

the appeal on merits of the case, we do not find it necessary to decide this grievance of the assessee.

42. In the result, the appeals filed by the assessee are partly allowed

Order pronounced in the open court on 11th March, 2015

Sd/- Sd/-

(VIVEK VARMA ) (N.K. BILLAIYA) याियक सदःय/JUDICIAL MEMBER लेखा सदःय / ACCOUNTANT MEMBER मुंबई Mumbai; 4दनांक Dated : 11th March, 2015 व.िन.स./ RJ , Sr. PS

आदे श क. ूितिल प अमे षत/Copy षत of the Order forwarded to : 1. अपीलाथ* / The Appellant 2. ू,यथ* / The Respondent. 3. आयकर आयु6(अपील) / The CIT(A)- 4. आयकर आयु6 / CIT 5. वभागीय ूितिनिध, आयकर अपीलीय अिधकरण, मुंबई / DR, ITAT, Mumbai 6. गाड फाईल / Guard file. आदे शानुसार/ ार BY ORDER, स,या पत ूित //True Copy// उप/सहायक उप सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपीलीय अिधकरण, अिधकरण मुंबई / ITAT, Mumbai