M/S. Sentini Technologies Pvt.Ltd.,, ... vs Department Of Income Tax

2. Briefly stated, the assessee is a company, engaged in the business of development of software. For A.Y 2008-09, assessee filed its return of income on 29.09.2008 declaring income of Rs.16,65,990 after claiming deduction of Rs.13,15,39,118 u/s 10A of thye Act. The Income Tax Officer Ward 3(1) Hyderabad completed the assessment on 12.12.2011 u/s 143(3) determining the total income of the assessee at Rs.5,07,38,470 after allowing deduction of Rs.10,08,24,066 u/s 10A of the Act as against income declared of Rs.16,65,910.

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3. AO while computing the deduction allowable u/s 10A of the Act reduced expenditure of Rs.8,62,95,459 incurred towards software tools from the export turnover of Rs.26,55,85,517 and computed the deduction allowable u/s 10A of the Act at Rs.10,08,24,066 as against Rs.13,15,39,111 claimed by the assessee.

4. It was submitted by the ld Counsel for the assessee during the course of appellate proceedings that identical issue has been decided in the assessee's own case for A.Ys 2004-05 to 2006-07 and 2007-08 by the CIT (A)-IV Hyderabad directing the AO to exclude the cost of imported "Net Cool Suites" from the total turnover of the assessee. It was also submitted that the ITAT vide order in ITA No.850/Hyd/2008 dated 10.7.2008 for A.Y 2004-05 and order dated 30.10.2009 in ITA No.940/Hyd/2009 for A.Y 2005-06 dismissed the departmental appeals and upheld the view of the CIT(A)-IV. Copies of relevant orders were also furnished. It was also submitted that a similar view has been taken by the Special Bench ITAT Chennai in the case of Income Tax Officer vs. Sak Soft Ltd (313 ITR 353). Accordingly it was contended that the adjustments so made to the export turnover were erroneous.

5. The CIT (A) held as under:

6. ......... the orders passed in the case of appellant for A.Ys 2004-05, 2005-06, 2006-07 and 2007-08 besides the orders of ITAT referred above have also been perused. It is clear that even during the year under consideration there is no change in the facts and circumstances of the case. It is seen that there is no dispute with regard to the finding that the basic activity of the appellant is to customize the 'Net cool' suite products as per the needs of its end customers. In order

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to do this, it had imported certain software tools. Considering the nature of the imported suite products, in line with the view taken in the earlier years, I find substantial merit in the finding of the AO that the imported goods in appellant's case are having a direct nexus with their rendering of technical services to the customers outside India. This is also true that the cost of such goods had been incurred in foreign currency. The same, therefore, cannot be considered as forming part of the turnover of the appellant and has been rightly so considered by the AO.

6.1 However, continuing the stand taken in the earlier years and following the ratio laid down by the jurisdictional ITAT and other judicial forums in the cases such as, Hon'ble ITAT in the cae of Income Tax Officer vs. DE Block India Software (P) Ltd in ITA No.983 & 984/Hyd/2006 as also in the case of M/s Ex Band (India) Pvt. Ltd vs. Income Tax Officer in ITA No.1102/Hyd/2004, it is clear that once such expenditure is excluded from the export turnover, the same has to be excluded from the total turnover also, since these do not have any element of profit. It has been held that the exclusion of such items should be both from the denominator and the numerator, as otherwise it will inflate the total turnover artificially and reduce the benefit which the assessee is entitled for. A similar view has been taken by Hon'ble Delhi ITAT B Bench in the case of CIT vs. Binary Semantics Ltd (207) (109 TTJ 556) also. Further it is seen that the Hon'ble Special Bench of ITAT Chennai in the case of Income Tax Officer vs. Sak Soft Ltd (Supra) have also opined that a parity is to be maintained with 'export turnover and therefore, the items required to be exclujded from export turnover are to be excluded from the total turnover also. They noted that the ratio laid down by the Hon'ble Supreme Court in the case of Lakshmi Machine Works (290 ITR 667) is an affirmation of the principle of parity between the export turnover and the total turnover. Applying the same ratio in the appellant's case, therefore, I once again hold that if the expenditure towards the cost of the basic platform for the developed software, i.e. the cost of 'Net Cool Suite' retained by the overseas parties, is excluded from the export turnover, the same has to be excluded from the total turnover also. The AO is, therefore, directed to recompute the deduction after reducing the cost of

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imported 'software tools' from the total turnover of the appellant also".

6. We heard both the parties. We find that the issue is covered by the decision of the Special Bench of the Chennai ITAT in the case of ITO vs. Sak Soft Ltd (313 ITR 353) wherein it has been opined that "a parity is to be maintained with 'export turnover and therefore, the items required to be excluded from export turnover are to be excluded from the total turnover also".

7. The second issue pertains to the disallowance of Rs.1,80,17,860 made u/s 40(a)(ia) of the Act. AO noted that the assessee had paid the said amount to software consultants for software development charges during the year, deducting TDS @ 2.26%. He was of the opinion that since the expenditure incurred was in the nature of fee for professional/technical services, tax was required to be deducted at 11.33%. He further felt that as per section 40(a)(ia), if tax required to be deducted on any amount covered under Chapter XVII B is not so deducted, the expenditure attract disallowance. The AO felt that it could not be pleaded that tax was deducted, albeit at a lesser rate, so as to say that no disallowance can be made. Hence, the entire expenditure of Rs.1,80,17,860 was disallowed u/s 40(a)(ia).

8. The CIT (A) held as under:

"8........ It is not in dispute that the appellant had subjected the payments made to software consultants to TDS @ 2.26%. It was not the case that no TDS was deducted at all on the payments so made. However, the disallowance has been made by the AO on the only ground that such deduction was not made at the prescribed rate, and therefore, could not be considered as compliance with the provisions of Chapter XVIIB. However, the Hon'ble Kolkata Bench of the ITAT in the case of DCIT vs. S.K.Tekriwala in ITA

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No.1135/Kol/2010 dated 21.10.2011 have opined that the conditions laid down u/s 40(a)(ia) of the Act for making an addition are that tax is deductible at source from any payment and such tax has not been deducted. They noted that if both the conditions are satisfied, then a payment can be disallowed u/s 40(a)(ia). However, in a case even where tax is deducted by an assessee, even under bonafide wrong impression, under wrong provisions of TDS, the provisions of section 40(a)(ia) cannot be invoked. In the said case, the assessee had deducted tax @ 1% u/s 194C(2), whereas the AO opined that such deduction should have been made @ 10% u/s 194 I. The Hon'ble ITAT held that section 40(a)(ia) have two limbs, one is where, inter alia, the assessee has to deduct tax and the second where after deducting tax, inter alia, the assessee has to pay into the govt. account. They noted that there is nothing in the said section to treat, inter alia, the assessee as a defaulter where there is a shortfall in deduction and if there is any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various TDS provisions, the assessee can be declared to be an assessee in default u/s 201 of the Act and no disallowance can be made by invoking the provisions of section 40(a)(ia) of the Act.

8. If we consider the facts of the case of the present appellant, it is clear that TDS had indeed been made on the payments of rs.1,80,17,860 to software consultants and such TDS had even been deposited into the govt. account. Therefore, even if there was a short deduction in view of the AO, in the light of the above referred decision of the Hon'ble ITAT mentioned above, no disallowance of expenses could have been made u/s 40(a)(ia) of the Act. Deleting the disallowance of Rs.1,80,17,860/-"...

9. We heard both the parties and perused the records. We find no infirmity in the order of the CIT(A) wherein he has followed the decision of the ITAT Kolkata Bench in the case of DCIT vs. S.K. Tekriwala in ITA No.1135/Kol/2010 dated 21.10.2011. In that decision it has been held that "there is nothing in the said section to treat, inter alia, the assessee as a defaulter where there

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is a shortfall in deduction and if there is any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various TDS provisions, the assessee can be declared to be an assessee in default u/s 201 of the Act and no disallowance can be made by invoking the provisions of Section 40(a)(ia) of the Act". Hence we dismiss the Departmental appeal on this issue.

10. In the result, appeal filed by the Revenue is dismissed.

Order pronounced in the Open Court on 25th February, 2015.

Sd/- Sd/- (B. Ramakotaiah) (Asha Vijayaraghavan) Accountant Member Judicial Member

Hyderabad, dated 25th February, 2015.

Vnodan/sps Copy to:

1. The Income Tax Officer Ward 3(1) 7th Floor, B Block, IT Towers AC Guards Hyderabad

2. M/s Sentini Technologies Pvt Ltd Plot No.1229 Road No.60, Jubilee Hills, Hyderabad 500034

3. The CIT(A)-IV Hyderabad

4. The CIT-III Hyderabad

5. The DR, ITAT, Hyderabad

6. Guard File

By Order

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S.No. Details Date Initials Designation 1 Draft dictated on 17-2-15 Sr. PS/PS 2 Draft placed before author 17-2-15 Sr. PS/PS Draft proposed & placed before the 19-2-15 3 JM/AM Second Member Draft discussed/approved by Second 4 AM/AM Member 5 Approved Draft comes to the Sr. PS/PS Sr. PS/PS 6 Kept for pronouncement Sr. PS/PS 7 File sent to Bench Clerk Sr. PS/PS Date on which the file goes to Head 8 Clerk

9 Date on which file goes to A.R. 10 Date of Dispatch of order

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