Semco Electric Pvt. Ltd., Pune vs Department Of Income Tax

Semco Electric Pvt. Ltd., Gat No.154/1, Mahalunge, Post Chakan, Taluka Khed, Pune - 510401 .... Appellant

PAN: AADCS9493H

Vs.

The Asst. Commissioner of Income Tax, Circle 10, Nigdi, Pune .... Respondent

ITA No.1126/PN/2011 Assessment Year: 2004-05

The Asst. Commissioner of Income Tax, Circle 10, Pune .... Appellant

Vs.

Semco Electric Pvt. Ltd., Gat No.154/1, Mahalunge, Post Chakan, Taluka Khed, Pune - 510401 .... Respondent

PAN: AADCS9493H

ITA No.718/PN/2012 Assessment Year: 2006-07

Semco Electric Pvt. Ltd., Gat No.154/1, Mahalunge, Post Chakan, Taluka Khed, Pune - 510401 .... Appellant

PAN: AADCS9493H

Vs.

The Asst. Commissioner of Income Tax, Circle 10, Pune .... Respondent

ITA No.946/PN/2012 Assessment Year: 2006-07

The Asst. Commissioner of Income Tax, Circle 10, Pune .... Appellant

Vs. 2 ITA Nos.1125, 1126/PN/2011 ITA Nos.718, 719/PN/2012 ITA Nos.946, 947/PN/2012 Semco Electric Pvt Ltd.

Semco Electric Pvt. Ltd., Gat No.154/1, Mahalunge, Post Chakan, Taluka Khed, Pune - 510401 .... Respondent

PAN: AADCS9493H

ITA No.719/PN/2012 Assessment Year: 2007-08

Semco Electric Pvt. Ltd., Gat No.154/1, Mahalunge, Post Chakan, Taluka Khed, Pune - 510401 .... Appellant

PAN: AADCS9493H

Vs.

The Asst. Commissioner of Income Tax, Circle 10, Pune .... Respondent

ITA No.947/PN/2012 Assessment Year: 2007-08

The Asst. Commissioner of Income Tax, Circle 10, Pune .... Appellant

Vs.

Semco Electric Pvt. Ltd., Gat No.154/1, Mahalunge, Post Chakan, Taluka Khed, Pune - 510401 .... Respondent

PAN: AADCS9493H

Assessee by : Shri Sharad Shah Revenue by : Shri B.C. Malakar

Date of hearing : 30-01-2015 Date of pronouncement : 31-03-2015

ORDER

PER SUSHMA CHOWLA, JM:

Out of this bunch of six appeals, there are three cross appeals filed by

the assessee and Revenue against the separate orders of CIT(A)-V, Pune,

dated 28.06.2011, 20.02.2012 and 20.02.2012 relating to assessment year

2004-05, 2006-07 and 2007-08 respectively against separate orders passed 3 ITA Nos.1125, 1126/PN/2011 ITA Nos.718, 719/PN/2012 ITA Nos.946, 947/PN/2012 Semco Electric Pvt Ltd.

under section 143(3) r.w.s. 147, 143(3) and 143(3) of the Income Tax Act,

1961, respectively.

2. All the appeals relating to the same assessee were heard together and

are being disposed of by this consolidated order for the sake of convenience.

3. First we shall take up the cross appeals in assessment year 2004-05.

4. The assessee in ITA No.1125/PN/2011 has raised the following

grounds of appeal:-

1) The learned A.O. erred in assuming jurisdiction u/s 147 and learned CIT (A) erred in upholding the AO's contention.

2) The learned A.O. erred in increasing the depreciation @ 60% instead of @ 25% in respect of computers software license cost and learned CIT (A) erred in upholding the AO's contention.

3.1) While making the reassessment, the learned A.O. has erred in not giving effect to the order passed by Hon. ITAT in our case while passing order u/s 147.

3.2) The Learned CIT (A) erred in holding that this ground is not within the scope and ambit of appealable orders as provided u/s 246A of the IT Act.

4) The learned A.O. has erred in computing interest u/s 234A and 234B and learned CIT (A) erred in upholding the AO's contention.

5) The appellant craves its right to add to or alter the Grounds of Appeal at any time before or during the course of hearing of the case.

5. The Revenue in ITA No.1126/PN/2011 has raised the following grounds

of appeal:-

1. On the facts and circumstances of the case, and in law the Ld.CIT(A) erred in allowing assessee's claim in not reduction the amount of Rs.1.31 crores from the export turnover, being the professional consultancy fees paid in foreign exchange form the export turnover for the purpose of computation of exemption u/s 10B of the IT Act, 1961.

2. The Ld. CIT(A) erred in not considering the fact that as per explanation 2(iii) to Sec 10B of the I. T Act, 1961, "export turnover"

means the consideration in respect of export (by the undertaking) of articles or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub- sec(3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or 4 ITA Nos.1125, 1126/PN/2011 ITA Nos.718, 719/PN/2012 ITA Nos.946, 947/PN/2012 Semco Electric Pvt Ltd.

computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India'.

3. The Ld. CIT(A) erred in not holding that the expenditure of Rs. 131.10 lakhs being the outflow of foreign currency on account of consultancy fees) was incurred in foreign exchange in India and such outflow of foreign exchange has to be accounted for in accordance with the provisions of explanation 2(iii) to Sec 10B to the IT. Act.

4. The appellant craves leave to add, amend or alter any of the above grounds of appeal.

6. The ground of appeal No.1 raised by the assessee is against the

assumption of jurisdiction under section 147 of the Act.

7. The brief facts relating to the issue are that the assessee had furnished

return of income declaring total income of Rs.1,21,600/- on 30.10.2004. The

assessment under section 143(3) of the Act was completed vide order dated

29.12.2006 on assessed income of Rs.1,18,80,840/-. Thereafter, the

Assessing Officer recorded reasons for re-opening the assessment under

section 147 of the Act and notice under section 148 of the Act was issued on

31.03.2009. Thereafter, notice under section 143(2) was issued on

14.11.2009 and the assessee complied with the statutory notice.

8. The Assessing Officer noted that for the year under consideration, the

assessee had claimed exemption under section 10B of the Act as it was 100%

export oriented unit. On scrutiny of the return of income and the computation

of income filed by the assessee, it was noted by the Assessing Officer that the

assessee had claimed exemption under section 10B at Rs.21,12,82,530/- for

Unit A-1 and Unit A-2. Further, it was noted by the Assessing Officer that

under Schedule U of significant Accounting policies and Notes to accounts,

the assessee had shown outflow of Rs.131.10 lakhs in foreign currency on

account of consultancy fees. However, while arriving at the export turnover,

this amount was not reduced, in terms of provision of item (iii) of Explanation 2

below section 10B (9A) of the Act. After the said adjustment, the export

turnover would arrive at Rs.1,35,24,46,241/-. Further, the Assessing Officer 5 ITA Nos.1125, 1126/PN/2011 ITA Nos.718, 719/PN/2012 ITA Nos.946, 947/PN/2012 Semco Electric Pvt Ltd.

noted that under depreciation schedule, the assessee had claimed less

depreciation on computer software in both the units and which has resulted in

over statement of profit and excess claim of deduction under section 10B of

the Act. The Assessing Officer thus, recorded reasons for re-opening the

assessment as there was an escapement of income towards excess

exemption claimed by the assessee under section 10B of the Act. During the

course of hearing, copy of reasons to believe recorded were handed over to

the assessee, in response to which, the assessee raised four objections,

which were disposed of and were recorded in the order sheet. The relevant

portion of order sheet is as under:-

"1. Notice being time barred- The AR informed that the notice was issued on 31/03/2009 and u/s 149, it is not time barred. Objection withdrawn by the AR.

2. Notice issued without approval of JCIT- The AR was shown a copy of letter dated 31/03/2009 from JCIT, R-10 granting approval for reopening. Hence, objection was withdrawn by the AR.

3. Action u/s 154 initiation- The AR objected that without completion of 154 proceedings, notice u/s 148 was issued. However, the AR was informed that the then AO vide an order sheet entry 24/03/2008 has dropped the proceedings u/s 154 since it was not a mistake apparent from records. Thus, this objection is not in order.

4. The AR submitted that he has furnished all the relevant details and has nothing more to say on the said issues. Thus, this is not an objection per se & hence need no comments.

Thus, all the objections raised by the ARs to the reopening proceedings stand disposed."

9. The Assessing Officer thereafter, computed income in the hands of the

assessee after considering the explanation filed by the assessee. The plea of

the assessee in respect of outflow of Rs.131.10 lakhs in foreign currency was

that the expenses were incurred in the regular course of business of export of

goods and it had neither provided any technical services outside India nor

earned any income by providing any technical services outside India. The

Assessing Officer rejecting the same and in view of the provisions of the Act,

observed that Rs.131.10 lakhs representing outflow in foreign currency on 6 ITA Nos.1125, 1126/PN/2011 ITA Nos.718, 719/PN/2012 ITA Nos.946, 947/PN/2012 Semco Electric Pvt Ltd.

account of consultancy fees was to be reduced from export turnover, which

was eligible for deduction under section 10B of the Act. The alternate plea of

the assessee to reduce the amount of expenses from the total turnover also, in

order to work out the deduction under section 10B of the Act, was rejected by

the Assessing Officer.

10. In respect of the second claim of allowability of lesser depreciation on

computer software, the Assessing Officer noted that the assessee had claimed

depreciation @ 25% instead of eligible rate of 60%. The plea of the assessee

was that it had claimed the depreciation on computer software @ 25% by

treating it as an intangible asset. The alternate plea raised by the learned

Authorized Representative for the assessee was that even if higher rate of

depreciation @ 60% was applied, then the taxable income as well as the

quantum of deduction under section 10B of the Act would get reduced and as

such, there would be no impact on the chargeable income for the current year.

The Assessing Officer still rejected the plea of the assessee and held that the

rate of depreciation for computer software was 60% and the depreciation on

computers was to be computed accordingly. In respect of the alternate plea of

the assessee that it would have any impact on the chargeable income for the

current year, the Assessing Officer observed that the issue would certainly

have impact on the chargeable income for future years once the eligible

undertaking exhausts its period of exemption under section 10B of the Act.

11. Before the CIT(A), the plea of the assessee was that the issues raised

by way of recording reasons for reopening were same as the issues raised in

the rectification proceedings initiated under section 154 of the Act. The CIT(A)

observed that under section 154 of the Act, the Assessing Officer had limited

powers and in all fairness, the Assessing Officer initiated the proceedings

under section 147 of the Act by recording reasons for re-opening the 7 ITA Nos.1125, 1126/PN/2011 ITA Nos.718, 719/PN/2012 ITA Nos.946, 947/PN/2012 Semco Electric Pvt Ltd.

assessment which cannot be faulted with. Reliance in this regard was placed

by the CIT(A) on the ratios laid down in the following cases.

(i) CIT Vs India Sea Foods ITA No.128/2010, order dated 17.01.2011 (Kerala High Court),

(ii) Honda Siel Power Products Ltd. Vs. DCIT & Another WP (Civil) No.9036/2007, order dated 14.2.2011 of Delhi High Court.

12. In respect of the issue raised on merits, the CIT(A) while adjudicating

the issue of exclusion of consultancy fees of Rs.131.10 lakhs from export

turnover for the purpose of calculation of deduction under section 10B of the

Act observed as under:-

"13. I have considered the above referred explanation of the appellant vis-a-vis the AO's reasoning. It is noticed that out of Rs.1.31 crores under the head foreign exchange outflow, there was an amount of Rs.8,22,618/- for foreign travel and Rs.2,66,809/- for bank charges, LC charges, etc.; which in any case wouldn't come under the purview of Explanation 2(iii). So far as the remaining items are concerned, the major payment is to TBM consulting group for Kaizen programs for process improvement, which has been explained to be for improvement in system of production in the appellant's case. It is not for providing any technical services outside India, but for obtaining program for implementing of various system improvements for productivity, reduction in cost of production, improvement in quality and lead time, etc. in the manufacturing process. The appellant is a manufacturer and exporter of electrical goods and the Kaizen program has been utilized for this purpose. Similar explanation has been given for other main expenditure of ERP training of appellant's employees in India and for procurement of components from Taiwan/China. On a careful perusal of the same, it is noticed that the nature and purpose of these items of expenditure are not for providing any technical services outside India, the appellant being an exporter of electrical goods. Accordingly, it is held that these expenditures do not qualify within the scope of Explanation-2(iii) to Sec.10B, and cannot be reduced from the export turnover. This ground of appeal is accordingly allowed."

13. The second issue considered by the CIT(A) was the claim of

depreciation on the computer software. The plea of the assessee before the

CIT(A) was that the said computer software was licensed software rather than

owned software and hence, was covered by the entry in Appendix-1 to the

Rules defining intangible assets. The CIT(A) observed that after the

amendment in the Income Tax Rules from assessment year 2003-04 wherein

rate of 60% for computer software was introduced, the assessee was entitled 8 ITA Nos.1125, 1126/PN/2011 ITA Nos.718, 719/PN/2012 ITA Nos.946, 947/PN/2012 Semco Electric Pvt Ltd.

to depreciation @ 60%. Consequently, this issue was decided against the

assessee.

14. The assessee is in appeal against the invoking of jurisdiction under

section 147 of the Act and also against the allowance of depreciation @ 60%

on computer software.

15. The Revenue is in appeal against the order of CIT(A) in holding that the

expenditure of Rs.131.10 lakhs is not to be reduced from export turnover while

computing the deduction under section 10B of the Act.

16. The learned Authorized Representative for the assessee pointed out

that the assessee was engaged in manufacturing of electrical components,

which in turn were exported to USA. The Assessing Officer had reopened the

assessment by recording reasons under section 147 of the Act, which as per

the learned Authorized Representative for the assessee, was invalid. The first

reason recorded for reopening the assessment was with regard to consultancy

charges paid by the assessee, which was an outflow and the second reason

recorded was for the claim of depreciation at a lower rate and hence, the

reason for holding that there was an escapement of income, was missing.

With regard to the merits of the appeal, the learned Authorized Representative

for the assessee pointed out that the said asset was an intangible asset and

since the assessee had only a license to operate, then as per the ratio laid

down by the Delhi Bench of the Tribunal in Sony India (P) Ltd. Vs. Accl.CIT

(2011) 56 DTR 156 (Delhi), depreciation @ 25% is to be allowed in the hands

of the assessee.

17. The ground of appeal No.3 raised by the assessee was not pressed

and the ground of appeal No.4 regarding charging of interest under section

234A and 234B of the Act were claimed to be consequential. 9

ITA Nos.1125, 1126/PN/2011 ITA Nos.718, 719/PN/2012 ITA Nos.946, 947/PN/2012 Semco Electric Pvt Ltd.

18. As against the appeal of the assessee, the Revenue is in appeal

against the order of CIT(A) in allowing the claim of the assessee in not

reducing sum of Rs.1.31 crores from the export turnover while computing

exemption under section 10B of the Act.

19. We have heard the rival contentions and perused the record. The first

issue raised by the assessee is against the assumption of jurisdiction under

section 147 of the Act. The original assessment in the case was completed

under section 143(3) of the Act and thereafter, reasons were recorded for

reopening the assessment under section 147 of the Act. The Assessing

Officer noted that the assessee had claimed an expenditure of foreign

consultancy fees of Rs.1.31 crores and the Assessing Officer was of the view

that the same should be reduced from the export turnover while computing the

deduction under section 10B of the Act. The second reason recorded for

reopening the assessment was that the depreciation on computer software,

merits to be allowed at 60% instead of 25%, before working out the admissible

deduction under section 10B of the Act. The first objection raised by the

assessee was that the said issues were part of the proceedings initiated under

section 154 of the Act and consequently, the assessment could not be

reopened under section 147 of the Act.

20. The first aspect of the issue was the proceedings under section 154 of

the Act had been dropped by the Assessing Officer and simultaneously,

reasons were recorded for reopening assessment under section 147 of the

Act. The second aspect of the issue is whether once notice under section 154

of the Act was issued, can a later notice under section 148 of the Act could be

issued to the same assessee. We find that the said issue is squarely covered

by the ratio laid down by the Hon'ble Kerala High Court in CIT Vs India Sea

Foods in ITA No.128/2010, order dated 17.01.2011 and which has been relied 10 ITA Nos.1125, 1126/PN/2011 ITA Nos.718, 719/PN/2012 ITA Nos.946, 947/PN/2012 Semco Electric Pvt Ltd.

upon by the CIT(A) and relevant observations of the Hon'ble High Court of

Kerala have been reproduced, which read as under:-

"7. In the first case decided by the Kerala High Court, initially the AO issued notice u/s 154 for rectification of a computation u/s 80HHC. The assessee objected to the rectification and the AO did not proceed with the rectification and let the time limit expire. Afterwards, notice u/s 148 was issued for the same point for excess relief granted u/s 80HHC. Again, the assessee in that case objected to reopening by citing the same judgment of Madras High Court in the case of E.I.D. Parry Ltd. (supra) which has been relied upon by the appellant here also. The Hon'ble Kerala High Court in this case overturned the decision of the ITAT in favour of the assessee, and observed that the question to be considered was whether the initiation of proceedings u/s 154 and dropping of the same without issuing an express order in that regard will affect the validity of reassessment u/s 147. It was observed as under :

"3. On going through the decision of the Madras High Court, what ITA 128/2010 we notice is apparently an income escaping assessment was first completed under Section 147 and during pendency of the appeal before the first appellate authority, the officer initiated rectification proceedings under Section 154. The Madras High Court held that when recourse open to the Assessing Officer to bring to tax escaped income is either by rectification or by way of income escaping assessment, it is for the officer to choose between one of the two and proceed to pass one order. We do not think there can be any controversy because for the very same purpose, the Assessing Officer cannot issue two proceedings, one under Section 154 and the other under Section 147. However, we are unable to uphold the principle of constructive res judicata made applicable by the High Court in income tax proceedings in respect of proceedings one after another initiated by the Assessing Officer successively. The fact that the Assessing Officer initiated rectification proceedings under Section 154 does not mean that he should stick to the same only and proceed to issue orders as proposed.

The very purpose of issuing a notice to the assesses is to give him opportunity to raise objection against the proceeding which includes the assessee's right to question the maintainability of the ITA 128/2010 rectification proceedings. If the assessee convinces the officer that rectification is not permissible, the Assessing Officer is absolutely free to give up the same and see whether there is any other recourse open to him to achieve the purpose i.e. to bring to tax escaped income. In this case even though the Assessing Officer did not issue any specific order dropping the proceeding initiated under Section 154 based on the objection filed by the assessee, the only inference possible after expiry of the time provided for completion of proceedings under Section 154 is that the Assessing Officer has given up the proposal. Further, when a notice is issued under Section 148 for making income escaping assessment, the Assessing Officer obviously made it clear that the proceedings under Section 154 is dropped and he proposes to proceed with reassessment under Section 147. In fact, even if the Assessing Officer had proceeded with the rectification proceedings under Section 154 which was 11 ITA Nos.1125, 1126/PN/2011 ITA Nos.718, 719/PN/2012 ITA Nos.946, 947/PN/2012 Semco Electric Pvt Ltd.

not sustainable, it was open to the Commissioner of Income Tax to exercise his powers under Section 263, set aside the order issued under Section 154 and direct the Assessing Officer to consider income escaping assessment under Section 147 which the Assessing Officer is free to initiate. In this case the Assessing Officer IT A 128/2010 8 himself realised the mistake of initiating rectification proceedings and when he noticed that the correct recourse open to him under the Act is to make an income escaping assessment, he is entirely free to do it and in our view, there was nothing wrong in the Assessing Officer giving up rectification proceedings, though initiated by him based on reply filed by the assessee and then initiating an income escaping assessment by issuing notice under Section 148 within the statutory period. We, therefore, allow the appeal by vacating the orders of the Tribunal and that of the first appellate authority."

21. Further, the CIT(A) had also relied upon the decision of Hon'ble Delhi

High Court in Honda Siel Power Products Ltd. Vs. DCIT & Another WP (Civil)

No.9036/2007, judgment dated 14.02.2011 and the relevant observations of

the Hon'ble Delhi High Court have been reproduced under para 8, which read

as under:-

"8. In the second judgment of the Delhi High Court mentioned above, the petitioner had relied upon Damadhar H. Shah (2000) 245 ITR 774 (Guj.) and also Berger Paints India ltd. of Calcutta High Court (supra) which has also been cited by the appellant here. The Hon'ble Delhi High Court observed as under:

"20. The aforesaid judgments do not state that once notice under Section 154 of the Act is issued, resort to Section 147 is barred or prohibited under the Act. What is highlighted by the Gujarat High Court is the distinction between Sections 154 and 14 of the Act. It is further pointed out that if Section 154 of the Act is applicable then the Assessing Officer should not arbitrarily and in a wanton manner resort to process of reopening the assessment under Section 147 of the Act. This reasoning is contrary and goes against the plea and argument of the petitioner as it accepts the difference in scope and ambit of the said provisions. It has been held that when mistakes are apparent, the Assessing Officer should invoke Section 154 of the Act but in cases where mistakes are not apparent from the record, the Assessing Officer can reopen assessments under Section 147 of the Act when the pre-conditions are satisfied.

21. Rectification of a mistake apparent from the record cannot be equated with the power of reopening under Sections 147 and 148 of the Act, which is conferred on the Assessing officer to reopen cases under assessment when conditions mentioned in the said Section are satisfied. The object and purpose of the two provisions is separate and the preconditions and requirements are different. The words reasons to believe " when income 12 ITA Nos.1125, 1126/PN/2011 ITA Nos.718, 719/PN/2012 ITA Nos.946, 947/PN/2012 Semco Electric Pvt Ltd.

chargeable to tax as escaped assessment has a different connotation and requirements and cannot be equated with the power under Section 154 to rectify mistakes apparent from the record. In some cases albeit not in all cases, Sections 154 and 147 both may be applicable and, therefore, the aforesaid decisions suggest that recourse to Section 154 may be justified rather than recourse to the provisions of Section 147/148 of the Act for reopening of assessments. But this is different from stating that if notice under Section 154 is issued, then notice under Section 147/148 is barred or prohibited. Per se and ex facie the language of Section 147 shows that the pre-requisites of the said provision are not controlled, curbed and regulated with the requirement of mistake which is apparent from the record.

22. In the present case, the assessee in response to the notice under Section 154 of the Act had objected to the rectification proceedings. It was submitted that rectification proceedings under Section 154 of the Act were not justified and without jurisdiction as there was no mistake or error apparent from the record. We have examined the second ground. The Assessing Officer could not have resorted to Section 154 proceedings to disallow expenditure under Section 14A of the Act. This was not possible in 154 proceedings as it was not an error or mistake apparent from the record."

22. The provisions of section 147 / 148 of the Act can be invoked by the

Assessing Officer, where he has a reason to believe that the income had

escaped assessment. In the case of the assessee before us, the assessee

had claimed deduction under section 10B of the Act and in view of allowing the

said expenditure i.e. an amount of Rs.1.31 crores on consultancy fees, as per

the Assessing Officer, there was an excess claim of deduction allowed under

section 10B of the Act and further, by not allowing the depreciation @ 60% on

the computer software, further, there was under-assessment of the claim of

deduction under section 10B of the Act, in the instant assessment, but in the

later years, when no deduction under section 10B of the Act was available to

the assessee, there was escapement of income. Hence, it was a consequent

effect and in view of the above said reasons, we find no merit in the plea of the

assessee that there was no basis for invoking the jurisdiction under section

147 of the Act. We uphold the issue of notice for reassessment under section

148 of the Act.

13

ITA Nos.1125, 1126/PN/2011 ITA Nos.718, 719/PN/2012 ITA Nos.946, 947/PN/2012 Semco Electric Pvt Ltd.

23. The second aspect of the issue as referred by the CIT(A) was whether

in cases, where the notice under section 154 of the Act for rectification was

issued, can on same reasons, the notice under section 148 of the Act for re-

assessment could be issued. The Hon'ble Delhi High Court in Honda Siel

Power Products Ltd. Vs. DCIT (supra) had considered the said issue and in

view of the said ratio laid down, we find no merit in the plea of the assessee in

this regard. Further, reference was made to ratio laid down by jurisdictional

High Court in Hindustan Unilever Ltd. Vs. DCIT & Another (2010) 325 ITR 102

(Bom), wherein it was held that an issue which was accounted for in the

computation of income by the assessee and the same being capable of

rectification under section 154(1) of the Act, then recourse to provisions of

section 147 of the Act was not warranted. The Hon'ble Bombay High Court

had held that where the Revenue had an efficacious remedy open to it in the

form of rectification under section 154 of the Act for correcting the

computational error and consequently, recourse to the provisions of section

147 of the Act was not warranted. It was further held by the Hon'ble High

Court that the provisions of statute laid down overlapping remedies which are

available to the Revenue, but the exercise of these remedies must

commensurate with the purpose that is sought to be achieved by the

legislation. It was further held by the Hon'ble High Court that the exercise of

powers vested by a statute must equally be consistent with constitutional

norms. The remedies which the law provides are tailored to be proportional to

the situation which the remedy resolves. Where the statute provides for

several remedies, the choice of the remedy must be appropriate to the

underlying basis and object of the conferment of the remedy. A simple

computational error can be resolved by rectifying an order of assessment

under section 154(1). It would be entirely arbitrary for the Assessing Officer to

reopen the entire assessment under section 147 of the Act to rectify an error

or mistake which can be rectified under section 154. An arbitrary exercise of 14 ITA Nos.1125, 1126/PN/2011 ITA Nos.718, 719/PN/2012 ITA Nos.946, 947/PN/2012 Semco Electric Pvt Ltd.

power is certainly not a consequence which Parliament contemplates.

However, in the facts of the present case, the recording of reasons for

reopening the assessment under section 147 of the Act was warranted and

thereafter, issue of notice under section 148 of the Act was correct, as the

reasons recorded do not establish that there were any computational errors or

mistakes, which could be rectified by invoking the provisions of section 154 of

the Act. In the entirety of the above said facts and circumstances, we uphold

the order of CIT(A) and confirm the reopening of the assessment under

section 147 / 148 of the Act. The ground of appeal No.1 raised by the

assessee is thus, dismissed.

24. The second issue raised by the assessee is with regard to the rate of

depreciation to be allowed on computer software. The plea of the assessee

before us was that as per the entry in Appendix-1 to the Income Tax Rules,

1962 (in short 'Rules') i.e. reference to Part B - intangible assets, it is provided

that know-how, patents, copy rights, trade marks, licenses, franchises or any

other business or commercial rights of similar nature are to be taken as

intangible assets. As against the entry No.5 in Part A, tangible assets reads

as computers including the computer software. Further, the claim of the

assessee was that the software was licensed software rather than owned

software and once when there was specific entry for copy rights, licenses or

other business or commercial rights of similar nature, the general entry for

computer software should be understood for owned software, which once

purchased and there was no question of renewal of license. Reliance in this

regard was placed on series of decisions by the learned Authorized

Representative for the assessee, but special reliance was placed on the ratio

laid down by the Delhi Bench of the Tribunal in Sony India Pvt. Ltd. Vs.

Addl.CIT (2011) 56 DTR 156 (Delhi). It was pointed out by the learned

Authorized Representative for the assessee that in case of license for use of 15 ITA Nos.1125, 1126/PN/2011 ITA Nos.718, 719/PN/2012 ITA Nos.946, 947/PN/2012 Semco Electric Pvt Ltd.

computer software, it was held that the license was an intangible asset as per

Part B of Appendix-1 to Rules, which prescribes uniform rate of 25% for

depreciation on all intangible assets. In the Schedule to Income Tax Rules,

under Part A in block of assets and plant & machinery at serial No.5, it is

provided that depreciation at 60% would be allowed on computers including

computer software. The said definition to include computer software was

introduced w.e.f. assessment year 2006-07. Under Part B i.e. intangible

assets, it is provided that know-how, patents, copy rights, trade marks,

licenses, franchises or any other business or commercial rights of similar

nature are to be allowed depreciation @ 25%. While interpreting the term

license for use of computer software, the Delhi Bench of the Tribunal in Sony

India Pvt. Ltd. Vs. Addl.CIT (supra), had held that the same was an intangible

asset. The ratio laid down by the Delhi Bench of Tribunal was with regard to

license for use of computer software. The Act itself recognized the distinction

between the computer software perse and the license, wherein the computer

along with computer software is termed as a tangible asset and the license is

covered as intangible asset. The Delhi Bench of Tribunal has held that the

license for use of computer software is an intangible asset entitled to

depreciation @ 25%. However, in the facts of the present case before us, the

nature of acquisition of computer software is not clear whether the assessee

has purchased computer software perse or has obtained license for use of any

computer software. In case the asset acquired by the assessee is in the form

of computer software, then the same is entitled to the depreciation @ 60% and

in case, it is the license for use of computer software, then the assessee is

only entitled to depreciation @ 25% as claimed in the return of income. In

order to establish the nature of acquisition by the assessee in the field of

computer software, we deem it fit to restore the issue back to the file of

Assessing Officer, who shall determine the same and consequently, allow the

depreciation on the same. The assessee shall furnish the necessary evidence 16 ITA Nos.1125, 1126/PN/2011 ITA Nos.718, 719/PN/2012 ITA Nos.946, 947/PN/2012 Semco Electric Pvt Ltd.

in this regard before the Assessing Officer and who in turn, shall decide the

issue. The ground of appeal No.2 raised by the assessee is thus, allowed for

statistical purposes.

25. The ground of appeal No.3 is not pressed, hence, the same is

dismissed as not pressed.

26. The issue in ground of appeal No.4 i.e. charging of interest under

sections 234A and 234B of the Act is consequential in nature and hence,

ground of appeal No.4 is dismissed.

27. Now, coming to the issue raised by the Revenue in grounds of appeal

against reduction of sum of Rs.1.31 crores from the export turnover while

computing exemption under section 10B of the Act. Section 10B of the Act

lays down the special provisions in respect of newly established 100% export

oriented undertakings. The Explanation under section 10B of the Act of clause

(iii) defines export turnover and it lays down that the consideration in respect

of export of articles or things or computer software received in or brought into

India by the assessee, in convertible foreign exchange, in accordance with the

sub-section (3) is to be taken as export turnover, but it does not include freight,

telecommunication charges or insurance attributable to the delivery of articles

or things or computer software outside India or expenses, if any, incurred in

foreign exchange in providing the technical services outside India. Thus, for

claiming the deduction under section 10B of the Act, the meaning of the term

'export turnover' has been prescribed in clause (iii) under Explanation 2 to

section 10B of the Act, which includes the consideration to be received in

respect of export of articles or things and the computer software, but it does

not include certain expenditure incurred outside India in foreign exchange in

providing technical services outside India. The Assessing Officer had invoked

the said provision for holding that the consultancy fees of Rs.1.31 crores is to 17 ITA Nos.1125, 1126/PN/2011 ITA Nos.718, 719/PN/2012 ITA Nos.946, 947/PN/2012 Semco Electric Pvt Ltd.

be excluded from the export turnover for the purpose of calculation of

deduction under section 10B of the Act. The claim of the assessee before the

Assessing Officer was that it was not engaged in provision of any technical

services outside India and no expenditure was incurred in foreign exchange

for providing such technical services outside India. The expenditure of

Rs.1.31 crores included under-mentioned items:-

Payments to/for :-

a) TBM Consulting Group - Rs.95,35,237/- b) JD Edwards (Asia Pacific) PTE Ltd. - Rs.17,09,608/- c) Warren Chu - Rs.6,63,602/- d) Mcclintic & Associates - Rs.1,11,926/- e) Foreign Travel - Rs.8,22,618/- f) Others - (Bank charges) - Rs.2,66,809/-

28. The said Explanation of assessee is reproduced by the CIT(A) under

para 12 at pages 12 and 13 of the appellate order. The first item under

consideration is TBM consulting group, which was for implementing various

Kaizen programmes in the assessee company. The purpose of the said

Kaizen programme was to provide inputs for improved productivity, reduction

in lead line, improvement in cost of production, reducing inventory and

improved quality. The assessee had paid a sum of Rs.95.35 lakhs to the said

concern for obtaining programme for implementing systems improvements,

which in turn would result in improvement in production, reduction in

inventories and improved quality of the products, etc. The expenditure

incurred by the assessee though in foreign exchange, was not in the nature of

providing technical services outside India. The appellant was manufacturer

and exporter of electrical goods and the said programme was utilized for the

purpose of business of the assessee and was not an expenditure in the nature

of a provision for technical services outside India and hence, the said

expenditure could not be excluded from the export turnover while computing

exemption under section 10B of the Act.

18 ITA Nos.1125, 1126/PN/2011 ITA Nos.718, 719/PN/2012 ITA Nos.946, 947/PN/2012 Semco Electric Pvt Ltd.

29. Similarly, the expenditure of Rs.17,09,608/- incurred for giving training

to its employees on J E Edwards ERP Solutions was in the similar line of

activity and for providing more control and efficiency in the management of

activities through implementation of ERP package and could not be said to

have been incurred for providing technical services outside India. These in

turn were related to the operational activities of the assessee company and

could not be held to be an expenditure incurred on providing technical services

outside India. Another expenditure of Rs.6,63,602/- was incurred by the

assessee by way of payment to Mr. Warren Chu for registering the company

for procurements in Taiwan / China, which under no circumstances could be

held to have been incurred for providing technical services outside India. The

assessee also incurred an expenditure of Rs.1,11,926/- for the development of

tools (die) for production and for the purpose, had appointed Mcclintic &

Associates for rendering the requisite advise, which was relatable to its

production activities and could not be said to be relatable to the export of the

assessee company. Further, the assessee had incurred an expenditure of

Rs.8,22,618/- for overseas travel, which could not be termed as professional

technical services and also expenditure incurred on bank charges of

Rs.2,66,809/- could not be termed as payment for technical services. In the

entirety of the above said facts and circumstances, we find merit in the

observations of the CIT(A) that the nature and purpose of items of expenditure

were not for providing any technical services outside India as the assessee

was an exporter of electrical goods. Accordingly, we uphold the order of

CIT(A) in holding the said expenditure did not qualify within the scope of

Explanation 2(iii) to section 10B of the Act and could not be reduced from the

export turnover. Accordingly, the grounds of appeal raised by the Revenue

are dismissed.

19

ITA Nos.1125, 1126/PN/2011 ITA Nos.718, 719/PN/2012 ITA Nos.946, 947/PN/2012 Semco Electric Pvt Ltd.

30. The assessee in ITA No.718/PN/2012 has raised the following grounds

of appeal:-

1) The learned A.O. has erred (and the learned CIT (A) erred in upholding) by recomputing WDV of "Computer Software" (comprising of license fees paid for use of software) by allowing Depreciation @ 60% instead of @ 25%.

1.1) The learned A.O. has erred (and the learned CIT (A) erred in upholding) that the rate of depreciation applicable to licensed software is that of tangible assets instead that of intangible assets.

1.2) The learned A.O. has erred (and the learned CIT (A) erred in upholding) by reducing the WDV of licensed software by increasing the rate of depreciation to 60% instead of 25%,

2) The learned A.O. has erred (and learned CIT (A) erred in upholding) by denying the benefit of tax holiday under section 10B of the Income Tax Act, 1961 on the Interest from Bank Deposits Rs.1,13,93,655/-

3) The learned A.O. has erred (and learned CIT (A) erred in upholding) by not accepting the taxable income (that is Rs. NIL) as declared by the assessee.

4) The appellant craves its right to add to or alter the Grounds of Appeal at any time before or during the course of hearing of the case.

31. The issue in ground of appeal No.1 raised by the assessee is arising

out of ground of appeal No.2 raised in assessment year 2004-05 and the

same has been set-aside by us to the file of Assessing Officer to determine

the nature of expenditure incurred on acquisition of computer software. The

assessee vide ground of appeal No.1 is aggrieved by the order of authorities

below in re-computing the WDV of the computer software by allowing

depreciation @ 60% instead of 25%. The issue in this ground of appeal is

consequential to the issue to be decided vide ground of appeal No.2 in ITA

No.1125/PN/2011. Accordingly, we direct the Assessing Officer to decide the

issue of allowability of depreciation whether at 60% or 25% after adjudicating

the issue in assessment year 2004-05. The ground of appeal No.1 raised by

the assessee is thus, allowed for statistical purposes. 20

ITA Nos.1125, 1126/PN/2011 ITA Nos.718, 719/PN/2012 ITA Nos.946, 947/PN/2012 Semco Electric Pvt Ltd.

32. The issue in ground of appeal No.2 raised by the assessee is against

the treatment of bank interest of Rs.1,13,93,655/- while determining the

exemption under section 10B of the Act.

33. It was pointed out by the learned Authorized Representative for the

assessee that the issue is covered by the ratio laid down by the Hon'ble

Karnataka High Court in CIT & Another Vs. Motorola India Electronics (P) Ltd.

in ITA No.428/2007, judgment dated 11.12.2013. In the facts of the case

before the Hon'ble Karnataka High Court, the assessee had earned interest

from deposits lying in EEFC account and advancing of inter-corporate loans

out of funds of undertaking of which, the assessee had claimed that since the

said income related to its business, the assessee was entitled to the

exemption under section 10A and 10B of the Act. The Hon'ble High Court

held that the said income since took part take of the nature of profits and gains

of business, hence, the same was construed as income of the business

undertaking and the assessee was entitled to the claim of deduction under

section 10A and 10B of the Act. The learned Authorized Representative for

the assessee further pointed out that the Tribunal in assessee's own case

relating to assessment year 2008-09 had considered the alternate plea of the

assessee for netting off of interest income and set-aside the issue back to the

file of Assessing Officer.

34. The learned Departmental Representative for the Revenue placed

reliance on the orders of authorities below.

35. We have heard the rival contentions and perused the record. The

Tribunal in assessee's own case in ITA No.114/PN/2013 relating to

assessment year 2008-09 vide order dated 12.09.2014 had considered the

issue of computation of quantum of eligible exemption under section 10B of

the Act on account of the receipts of interest of Rs.1.05 crores and sale of 21 ITA Nos.1125, 1126/PN/2011 ITA Nos.718, 719/PN/2012 ITA Nos.946, 947/PN/2012 Semco Electric Pvt Ltd.

scrap of Rs.23,58,831/-. After deliberating upon the issue and after

considering the submissions of the assessee that the interest in question was

on account of deposits, which has arisen only from the surplus of eligible

business and there was direct nexus of profits of eligible business and also the

alternate plea of the assessee that the only net interest income should be

disallowed for claim of deduction under section 10B of the Act, the matter was

restored back to the file of Assessing Officer vide para 8, which reads as

under:-

"8. We have considered the rival arguments made by both the sides, perused the order of the AO/TPO and the DRP on this issue and the paper book filed on behalf of the assessee. We have also considered the various decisions relied on by the Ld. Counsel for the assessee. Since the assessee has not justified before the AO the reasons for not excluding the other income while working out the exemption u/s.10B and since nothing is coming out of the records as to what has happened finally in the preceding assessment years, therefore, we deem it proper to restore this issue to the file of the AO for passing a speaking order on this issue. It is not known whether the stand of the department in the past has been accepted by the assessee or not. If not, then what is the outcome in appeal. The AO is therefore directed to adjudicate the issue afresh and in accordance with law. He is also directed to consider the alternate argument of the Ld. Counsel for the assessee for netting off of interest income. The AO shall decide the issue in accordance with law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. Ground of appeal No.2 by the assessee is accordingly allowed for statistical purposes."

36. The issue raised before us is identical to the issue in assessee's own

case relating to assessment year 2008-09 and following the same parity of

reasoning, we remit this issue also back to the file of Assessing Officer to

decide the same in accordance with the directions of Tribunal (supra) relating

to assessment year 2008-09. The appeal of the assessee is thus, partly

allowed.

37. The Revenue in ITA No.946/PN/2012 has raised the following grounds

of appeal:-

1. Whether on the facts and in the circumstance of the case and in law, the Ld.CIT (A) is right in holding that Sales Tax set off is in the nature of business income representing profit derived from eligible 22 ITA Nos.1125, 1126/PN/2011 ITA Nos.718, 719/PN/2012 ITA Nos.946, 947/PN/2012 Semco Electric Pvt Ltd.

business of 100% EOU and are eligible for deduction u/s. 10B of the IT Act, 1961.

2. Whether on the facts and circumstances of the case and in law, the Ld.CIT (A) is right in holding that receipts from sale of scrap is to be netted out from purchase, while determining the quantum of deduction u/s. 10B of the IT Act, 1961 when infact the income on sale of scrap is not eligible for the deduction because it is not in proximity with export activity of the assessee.

3. The appellant craves leave to add, amend or alter any of the above grounds of appeal.

38. The Revenue vide ground of appeal No.1 is aggrieved by the order of

CIT(A) in holding that the sales tax set off was in the nature of business

income and was eligible for deduction under section 10B of the Act.

39. The second issue raised by the Revenue is that the receipts from sale

of scrap were to be netted off while determining the quantum of deduction

under section 10B of the Act.

40. It was the case of assessee before us that both the issues were

covered by the order of Tribunal relating to assessment year 2004-05, wherein

it has been held that both the receipts on account of sale of scrap and sales

tax set off were in the nature of profit derived from business of eligible EOU

and was eligible for grant of deduction under section 10B of the Act. We find

that the said issue has been decided in favour of the assessee by the Tribunal

in assessee's own case in assessment year 2001-02 in ITA

Nos.1075/PN/2005 and 1374/PN/2005, order dated 25.03.2008 and for

assessment year 2003-04 in ITA No.944/PN/2006, order dated 28.03.2008

and also in ITA No.1328/PN/2007 relating to assessment year 2004-05, vide

order dated 26.02.2009. Following the same parity of reasoning, we hold that

the amount on account of sales tax set off and sale of scrap is to be

considered as profit derived from the business of the eligible EOU unit on

which the assessee is entitled to the claim of deduction under section 10B of

the Act. Both the grounds of appeal raised by the Revenue are dismissed. 23

ITA Nos.1125, 1126/PN/2011 ITA Nos.718, 719/PN/2012 ITA Nos.946, 947/PN/2012 Semco Electric Pvt Ltd.

41. The assessee in ITA No.719/PN/2012 has raised the following grounds

of appeal:-

1) The learned A.O. has erred (and the learned CIT (A) erred in upholding) by recomputing WDV of "Computer Software" (comprising of license fees paid for use of software) by allowing Depreciation @ 60% instead of @ 25%.

1.1) The learned A.O. has erred (and the learned CIT (A) erred in upholding) that the rate of depreciation applicable to licensed software is that of tangible assets instead that of intangible assets.

1.2) The learned A.O. has erred (and the learned CIT (A) erred in upholding) by reducing the WDV of licensed software by increasing the rate of depreciation to 60% instead of 25%,

2) The learned A.O. has erred (and learned CIT (A) erred in upholding) by denying the benefit of tax holiday under section 10B of the Income Tax Act, 1961 on the Interest from Bank Deposits Rs.1,28,17,094/-

3) The learned A.O. has erred (and learned CIT (A) erred in upholding) by not accepting the taxable income (that is Rs. NIL) as declared by the assessee.

4) The appellant craves its right to add to or alter the Grounds of Appeal at any time before or during the course of hearing of the case.

42. The grounds of appeal Nos.1 and 2 raised by the assessee are

identical to the grounds of appeal Nos.1 and 2 raised in ITA No.718/PN/2012

and our decision in ITA No.718/PN/2012 shall apply mutatis mutandis to ITA

No.719/PN/2012. Thus, the grounds of appeal raised by the assessee are

partly allowed.

43. The Revenue in ITA No.947/PN/2012 has raised the following grounds

of appeal:-

1. Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) is right in holding that receipts from sale of scrap is to be netted out from purchase, while deterring the quantum of deduction u/s.10B of the I.T. Act 1961 when in fact the income on sale of scrap is not eligible for the deduction because it is not in proximity with export activity of the assessee.

2. The appellant craves leave to add, amend or alter any of the above grounds of appeal.

24 ITA Nos.1125, 1126/PN/2011 ITA Nos.718, 719/PN/2012 ITA Nos.946, 947/PN/2012 Semco Electric Pvt Ltd.

44. The ground of appeal No.1 raised by the Revenue is identical to the

ground of appeal No.1 raised by the Revenue in ITA No.946/PN/2012 and our

decision in ITA No.946/PN/2012 shall apply mutatis mutandis to ITA

No.947/PN/2012. Thus, the ground of appeal raised by the Revenue is

dismissed.

45. In the result, the appeals of the assessee are partly allowed and the

appeals of the Revenue are dismissed.

Order pronounced on this the 31st day of March, 2015.

Sd/- Sd/- (G.S. PANNU) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER

Pune, Dated: 31 st March, 2015.

GCVSR

Copy of the order is forwarded to: - 1) The Assessee; 2) The Department; 3) The CIT(A)-V, Pune; 4) The CIT-V, Pune; 5) The DR "B" Bench, I.T.A.T., Pune; 6) Guard File. By Order //True Copy// Assistant Registrar I.T.A.T., Pune