1. This is an appeal by the Revenue against the order of the CIT(A) dt.
25th July, 2005 for the asst. yr. 2002-03.
2. In the first ground, the Revenue has assailed the decision of the CIT(A) in allowing deduction under Section 10A of the Act to the assessee in respect of the profits relating to the undertaking of the assessee set up in the Noida Export Processing Zone (in short, NEPZ).
In this regard, the factual position is that the assessee is a company which is engaged in the business of development and export of computer software. For the assessment year under consideration, the assessee filed a return of income declaring income of Rs. 4,60,330 which, inter alia, included the claim of exemption under Section 10A of the Act amounting to Rs. 1,47,48,225. In the assessment completed under Section 143(3) of the Act on 31st March, 2005, the AO denied the claim of exemption under Section 10A of the Act. The claim of the assessee for exemption under Section 10A related to the profits derived in its industrial undertaking at NEPZ. This unit of the assessee was set up and started commercial operations in the previous year relevant to asst. yr. 1997-98. In the initial year i.e. asst. yr. 1997-98, the assessee suffered losses in the said unit and thus no exemption was claimed in that year. In the asst. yr. 1998-99, the assessee claimed deduction under Section 80HHE of the Act in relation to the profits of the said unit. From the asst. yr. 1999-2000 onwards, the assessee claimed exemption under Section 10A of the Act in respect of profits derived from the said unit and the same was allowed till asst. yr.
2001-02. In the assessment year under consideration i.e. asst. yr.
2002-03, the assessee has been denied the exemption under Section 10A of the Act. The exemption has been denied on the ground that since the assessee had claimed and was allowed deduction under Section 80HHE in the asst. yr. 1998-99, thus the assessee became ineligible for claiming exemption under Section 10A of the Act on the basis of the provisions of Sub-section (5) of Section 80HHE of the Act. To facilitate appreciation, we reproduce hereunder the Sub-section (5) of Section 80HHE: Where a deduction under this section is claimed and allowed in respect of profits of the business referred to in Sub-section (1) for any assessment year, no deduction shall be allowed in relation to such profits under any other provision of this Act for the same or any other assessment year.
According to the AO, since the assessee was allowed exemption under Section 80HHE for the asst. yr. 1998-99, no deduction under any other provision of the Act is available to the assessee for any other assessment year. The assessee carried the matter in appeal before the CIT(A). The CIT(A) has since allowed the plea of the assessee on the basis of the decision of the Delhi Bench of the Tribunal in the case of Legato Systems India (P) Ltd. v. ITO (2005) 93 TTJ (Del) 828. In the above background, we have heard the rival parties.
3. The sum and substance of the case of the Revenue is based on the reasoning of the AO adopted with reference to the provisions of Sub-section (5) of Section 80HHE of the Act. The learned Departmental Representative has relied upon the language of Sub-section (5) of s.
80HHE to argue that once the assessee opts to claim the deduction under Section 80HHE then exemption under any other provisions of the Act is not available to the assessee.
4. On the other hand, the learned Counsel appearing for the respondent assessee has submitted that the decision of the Tribunal relied upon by the CIT(A) has since been approved by the Hon'ble Delhi High Court in the case reported as CIT v. Legato Systems (2006) 203 CTR (Del) 101, a copy of which has been placed in the paper book at pp. 156 to 157. The learned Counsel further submitted that the reasoning adopted by the Tribunal in the case of Legato Systems (supra) has also been taken by the Tribunal in the case of Jindal Exports (P) Ltd. v. Asstt. CIT (1989) 31 ITD 217 (Del) and also followed in the case of ITO v. Damco Solutions (P) Ltd. ITA No. 3915/Del/2004, dt. 23rd March, 2007, a copy of which has been placed in the paper book at pp. 167 to 169. The plea of the assessee is that it is eligible for the claim of exemption under Section 10A of the Act since it satisfies all the conditions precedent for claiming such exemption. It is. submitted that the provisions of Section 80HHE (5) merely provide that no deduction under any other provisions of the Act shall be available to such profits on which the deduction has been claimed under Section 80HIIE of the Act. According to the learned Counsel, the emphasis in Section 80HHE(5) was in relation to the profits which are the subject-matter of deduction. The said sub-section merely provided for not allowing of double deduction on the same profits.
5. On careful consideration of the rival submissions and the relevant provisions of the Act, we proceed to dispose of the issue on the following lines. The facts relevant to the impugned dispute have already been noted by us in the earlier paras and are not repeated for the sake of brevity. So, however, it would be pertinent to note that in the initial assessment year of 1997-98, the assessee suffered a loss in its NEPZ unit and, therefore, did not claim exemption under Section 10A of the Act. In the second year i.e., asst. yr. 1998-99, it claimed deduction under Section 80HHE in relation to the profits from NEPZ unit. Thereafter, from asst. yr. 1999-2000 onwards, it claimed exemption under Section 10A on profits from the NEPZ unit. In the assessment year under consideration, for the first time, the claim of exemption under Section 10A has been denied, ostensibly on the strength of the provisions of Section 80HHE(5) of the Act. The issue is whether the said action of the AO is justified or not.
6. At the outset, a brief reference is made to the provisions of Section 10A of the Act as it stands for the year under consideration.
Prior to the amendment made by the Income-tax (Second Amendment) Act, 1998, exemption under Section 10A of the Act upto asst. yr. 1998-99 was available for a period of five consecutive years falling within a period of eight years beginning with the assessment year relevant to the previous year in which the undertaking began to manufacture or produce articles. With effect from asst. yr. 1999-2000, the provisions of Section 10A of the Act have been amended and in view of the amended provisions, the exemption is available for ten consecutive assessment years beginning with the assessment year in which the industrial undertaking begins to manufacture or produce articles or things. Be that as it may, as per the provisions of the Act applicable to the year under consideration, the assessee is entitled to claim exemption under Section 10A of the Act for ten consecutive assessment years, of course beginning with the assessment year of 1997-98, being the assessment year in which it started manufacture. The basic eligibility of the assessee for exemption under Section 10A has not been hit by the AO and the same has also been so specifically noted by the AO. In fact, the CIT(A) in her concluding remarks in para 3.3 notes a finding of the AO to the effect that assessee was eligible for claiming deduction under Section 10A of the Act from the asst. yr. 1997-98 onwards. The said position is not in dispute. The only dispute to be addressed is the import of Sub-section (5) of Section 80HHE of the Act, which we have reproduced elsewhere in our order.
7. Sub-section (5) of Section 80HHE, in our view, seeks to plug a situation whereby an assessee seeks to claim double deduction with reference to same income once under Section 80HHE and secondly under any other provision of the Act. The interpretation placed by the Revenue is that once the assessee has claimed exemption under Section 80HHE of the Act in respect of a business, no deduction shall be allowed under any other provision of the Act either for the same or any other assessment year in relation to the profits of such business. In our humble opinion, this interpretation does not emerge from a plain reading of Section 80HHE(5) of the Act. Sub-section (5) of Section 80HHE merely provides that where a deduction under Section 80HHE has been claimed and allowed in respect of profits of an eligible business, no deduction in relation to such profits be allowed under any other provision of the Act either for the same or any other assessment year.
The interpretation placed by the Revenue, in our view, ignores the presence of the words "such profits" in the Sub-section (5) of s. 80HHE of the Act. The restriction sought to be carved out by the sub-section is that the profits which have been subjected to deduction under Section 80HHE should not again be subjected to any other deduction which the assessee may otherwise be entitled to claim, either for the same assessment year or in any other assessment year. The explicit language of Sub-section (5) of Section 80HHE cannot be read so as to mean that the assessee having once claimed deduction under Section 80HHE in respect to profits of an eligible business, would be debarred for all times to claim deduction under any other provisions of the Act in respect of the profits of such business for any other assessment year. It is in this connection, we find that the assessee has placed reliance on the decision of the Delhi Bench of the Tribunal in the case of Legato Systems (supra). The Tribunal while considering the import of Sub-section (5) of Section 80HHE, observed that it was intended to avoid double deduction inasmuch as the profits calculated in accordance with Sub-section (1) of Section 80HHC for a particular assessment year cannot be claimed as a deduction either for the same or any other assessment year. Similar has been the reasoning adopted by the Delhi Bench of the Tribunal in the case of Jindal Exports (P) Ltd. (supra) wherein it was held that deductions under Section 80HHC cannot be denied to the assessee simply because the assessee enjoyed exemption under Section 10A of the Act. Following the aforesaid discussion, in our considered opinion, the claim of the assessee has been rightly upheld by the CIT(A). In the result, the assessee succeeds on this ground and the Revenue fails.
8. The second ground preferred by the Revenue relates to the action of the AO in not considering the sales aggregating to Rs. 4,07,05,587 as export sales on the ground that the receipt of consideration in foreign exchange within the extended time period was not established. Factual position in this regard is that the AO observed that in respect of certain invoices of exports, the payments were received beyond the stipulated period and there was no proof that the convertible foreign exchange was subsequently received by the assessee within the extension of time granted by the competent authority. The CIT(A), on the other hand, in paras 5.2 and 5.3 of her order records a finding that the assessee had submitted before the AO the copies of approval from the RBI seeking extension of time limit for remittance of foreign exchange beyond the stipulated period. Thereafter, the CIT(A) also records a finding that on going through the papers on record, it was found that the export proceeds in relation to the impugned sales have been brought into India by the assessee within the extended period allowed by the RBI. The CIT(A) has accordingly directed the AO to take into consideration the impugned sales as export sales while allowing exemption under Section 10A of the Act.
9. We find that the aforesaid factual findings arrived at by the CIT(A) remain uncontroverted by the Revenue in the grounds of appeal preferred by it and even in the course of hearing before us, no material or evidence has been brought on record to negate the factual findings of the CIT(A) on this ground. In fact, the findings of the CIT(A) are in line with the material which has been placed in the paper book filed before us by the assessee in this regard. As a consequence, we hereby affirm the decision of the CIT(A) on this issue. Accordingly, the Revenue fails on this ground.
10. The last ground in this appeal relates to the action of the CIT(A) in setting aside the action of the AO in denying exemption under Section 10A with respect to a sum of Rs. 18,51,545 representing the profits earned by the assessee from its Japan branch. We find that the AO in the assessment order has denied the claim of the assessee on the ground that the provisions of s. 10A do not cover the profits of a foreign branch of the assessee. The CIT(A) however has allowed the claim of the assessee on the basis of the Expln. 3 to Section 10A of the Act. In para 6.3 of her order, the CIT(A) makes the following discussion: 6.3 There is no doubt as per Expln. 3 to Section 10A as noted above the profits and gains derived from onsite development of computer software including services of development of software outside India is deemed to be profits and gains derived from the export of computer software outside India w.e.f. 1st April, 2001: There is no doubt the Japan branch has been opened by the appellant as per the agreement with the Japanese company to also provide onsite development service, with the approval of RBI and also noted by Noida Special Economic Zone that the appellant unit located at NSEZ has opened a new trading branch at Tokyo. Therefore, the profits derived by the appellant company from its Japan branch in reference to the onsite services provided qualify for exemption under Section 10A of the IT Act and the AO is directed to consider the same as exempt under Section 10A of the Act.
11. The learned Departmental Representative, apart from placing reliance on the order of the AO, has not made any cogent arguments to rebut the inference drawn by the CIT(A) on this issue. The stand of the assessee before us is merely in support of the aforesaid conclusion drawn by the CIT(A).
12. In this connection, we have perused the relevant provisions and find that the claim of the assessee has been rightly allowed by the CIT(A). Explanation 3 to Section 10A permits exemption under Section 10A on the profits derived by an assessee from a foreign branch with reference to onsite services for development of computer software provided by the said company. In this light, the CIT(A) factually found the assessee to be eligible for the exemption under Section 10A in relation to the profits derived by the Japan branch. There is nothing to controvert the aforesaid finding of the CIT(A) before us. We, therefore, affirm the conclusion drawn by the CIT(A) on this issue.