Sentini Technologies Private Limited, ... vs Department Of Income Tax

This is an appeal by the Department against the order dated 29-10-2014 passed by Ld. Commissioner of Income Tax (Appeals)-VII, Hyderabad for the Assessment Year (AY) 2009-10.

2. The Department has raised the following effective grounds:

" 1. The Learned CIT(A) erred in law and on facts of the case in directing the AO to reduce the expenditure incurred on 'Netcool' Software from 'Total turnover' even when no such adjustment is allowed as per section 10A of the Income Tax Act, 1961.

2. The Learned CIT(A) erred in law and on facts of the case in not considering the short deduction of tax at source for disallowance u/s. 40(a)(ia) of the IT Act".

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3. Briefly the facts relating to Ground No.1 are, the assessee a private limited company is engaged in the business of providing service management solutions and network management services for its overseas clients. For the assessment year under consideration, assessee filed its return of income on 27-09-2009 declaring total income of Rs. 11,55,984/- after claiming deduction of Rs. 4,49,87,385/- u/s. 10A of the Income Tax Act (Act). In the course of assessment proceedings, the Assessing Officer (AO) while verifying assessee's claim of deduction u/s. 10A of the Act observed that during the previous year assessee had imported Netcool, a software suite worth of Rs. 15,67,71,394/- and the expenditure was incurred in foreign exchange. The AO observed that Netcool is a suite of network management tools and is customized to suit the requirements of the customers depending on the nature of network infrastructure and its components. Such customized solution is then exported for deployment at the clients' network environment. AO observed, the imported software tools seems to have been utilized for the purpose of providing technical services outside India. AO referring to Explanation 2 to Section 10A, which defines export turnover, opined that expenses incurred in foreign exchange for import of the software tools which were utilized for the purpose of providing technical services outside India cannot be part of export turnover for computing deduction u/s. 10A. Though, assessee relying upon number of decisions of the ITAT submitted that the expenditure incurred for importing software is not the same as incurring an expenditure for rendering technical services outside India and further, though assessee alternatively submitted that if at all the expenditure is reduced from the export turnover, then the same should also be reduced from total turnover by applying the matching principle but the AO did not find any merit in the submissions of the assessee. Accordingly, rejecting assessee's submissions, AO proceeded to compute the deduction u/s. 10A of the :- 3 -: I.T.A. No. 1916/Hyd/2014 M/s. Sentini Technologies Pvt. Ltd.

Act after excluding the expenses incurred in foreign exchange for import of Netcool software from the export turnover. Being aggrieved of such action of the AO, assessee preferred an appeal before the Ld.CIT(A). Before the First Appellate Authority, the assessee reiterating the submissions before the AO also stated that in assessee's own case for AY. 2004-05 to 2007-08, the ITAT has held that expenditure incurred by the assessee if reduced from export turnover has also to be reduced from the total turnover. Ld.CIT(A) after considering the fact that in assessee's own case for preceding assessment years, ITAT has held that expenditure incurred on Netcool software if reduced from export turnover is also required to be reduced from total turnover directed the AO to reduce the expenditure incurred on Netcool software from total turnover also for computing deduction u/s. 10A.

4. Having considered the submissions of the parties and perused the materials on record, we do not find any infirmity in the order of Ld.CIT(A) as the issue in dispute is squarely covered not only by the order of ITAT in assessee's own case but also by the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Gem Plus Jewellery India Ltd., [330 ITR 175] and decision of Special Bench of ITAT Chennai in the case of ITO Vs. Sak Soft Ltd., [313 ITR 353 (AT)]. In view of the aforesaid, we uphold the order of Ld.CIT(A) by dismissing ground raised by the department.

5. The next issue as raised in Ground No.2 relates to disallowance made by the AO u/s. 40(a)(ia) of the Act but deleted by the Ld.CIT(A). Briefly, the facts are during the assessment proceedings, AO noticed that assessee has incurred expenditure of Rs. 1,57,06,400/- towards payment made to software consultants for software development charges during the previous year. Further, assessee on such payments has :- 4 -: I.T.A. No. 1916/Hyd/2014 M/s. Sentini Technologies Pvt. Ltd.

deducted tax at source @ 2.26%. AO was of the view that since the expenditure incurred is in the nature of fee for professional/technical services, tax is required to be deducted @ 11.33% and not @ 2.26% as has been done by the assessee. By alleging short deduction of tax by the assessee, AO while allowing proportionate expenditure to the extent of tax deducted at source disallowed, the balance expenditure of Rs. 1,25,73,438/- by applying the provisions of Section 40(a)(ia) of the Act. Being aggrieved of such disallowance, assessee preferred an appeal before the Ld.CIT(A).

6. Before the First Appellate Authority, it was submitted by the assessee that the AO cannot make proportionate disallowance as the statutory provisions do not permit him to do so. It was submitted, either the expenditure claimed has to be disallowed if no TDS is done or it is to be allowed, if TDS is done. In support of such claim assessee relied upon the order of the ITAT in its own case in ITA No. 1205/Hyd/2012 dt. 25-02-2015, wherein the ITAT following the decision of the Calcutta Bench of the Tribunal in the case of DCIT Vs. S.K. Tekriwala in ITA No. 1135/Kol/2010 dt. 21-10-2011 held that no disallowance u/s. 40(a)(ia) can be made for short deduction of tax. Ld.CIT(A) following the decision of the ITAT in assessee's own case, deleted the addition made by the AO by applying the provisions of Section 40(a)(ia) of the ACT.

7. We have heard the parties and perused the orders of the revenue authorities as well as other materials on record. It is manifest from the assessment order that disallowance u/s. 40(a)(ia) of the Act by the AO is on the allegation that deduction of tax at source @ 2.26% by assessee is not appropriate. In other words there is short deduction of tax. However, as can be seen in assessee's own case for AY. 2008-09, the co-

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ordinate bench in ITA No. 1205/Hyd/2012 dt. 25-02-2015, while considering similar disallowance held as under:

"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 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".

Since, Ld.CIT(A) has followed the order of the co-ordinate bench in assessee's own case and Ld. DR has not brought any other contrary decision to our notice, we uphold the order of Ld.CIT(A) by dismissing the grounds.

8. In the result, appeal of the department is dismissed.

Order pronounced in open Court on 30th April, 2015

Sd/- Sd/-

(P.M. JAGTAP) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, Dated 30th April, 2015

TNMM :- 6 -: I.T.A. No. 1916/Hyd/2014 M/s. Sentini Technologies Pvt. Ltd.

Copy to :

1. Dy. Commissioner of Income Tax, Central Circle-2(3), 3rd Floor, Posnett Bhavan, Tilak Road, Hyderabad.

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

3. CIT(Appeals)-VII, Hyderabad.

4. CIT-Central, Hyderabad.

5. D.R. ITAT, Hyderabad