N.V.VASUDEVAN, JM:-This is an appeal by the Revenue against the order dated 28.2.2012 of CIT(A)-I, Bangalore, relating to AY 2007-08.
2. Grounds No.1, 9 & 10 raised by the revenue in this appeal are general in nature and does not call for any specific adjudication.
3. Ground No.2 to 4 raised by the Revenue relates to one and the same issue, viz., computation of deduction u/s.10A of the Income Tax Act, 1961 (Act). The assessee is a company primarily engaged in the software development and testing services in healthcare sector. The Assessee was entitled to claim deduction u/s.10A of the Act on profits derived from the business of export of computer software. Sec.10A(4) provides that profits derived from export of computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of computer software bears to the total turnover of the business carried on by the undertaking. Expln.(2) to Sec.10A of the Act defines Export turnover to mean the consideration in respect of export by the undertaking of computer software received in, or brought into, India by the Assessee in convertible foreign exchange, but does not include freight, telecommunication charges or insurance attributable to delivery of the computer software outside India or expenses, if any, incurred in foreign exchange in providing technical services outside India.
4. In computing the deduction, the assessee had not reduced telecommunication expenses of Rs.2,84,24,850/- and expenses incurred in foreign currency of Rs.3,86,21,949/- from the export turnover, as according to the Assessee, no part of the expenditure was attributable to the delivery of software outside India or for providing technical services outside India. The Assessing Officer, however, proceeded to re-compute the deduction by reducing the said amounts from export turnover as according to the AO, those expenses have to be excluded from the Export turnover in view of the definition of export turnover given in Expln.(2) to Sec.10A of the Act. The AO did not however reduce the said sums from total turnover and thereby allowed the 10A deduction to the extent of Rs.6,01,16,662 as against a much higher claim of deduction u/s.10A of the Act, made by the Assessee .
5. The assessee's submission was that no part of the above expenditure was attributable to the delivery of software outside India or for providing technical services outside India. In the alternative, if the same is reduced from export turnover, it should also be reduced from total turnover. The alternative submission was supported by the decision of the Hon'ble High Court of Karnataka in CIT v. Tata EIxsi Ltd [2012] 349 ITR 98 (Karn). The CIT(A) allowed the alternative claim made by the Assessee by following the decision of the Hon'ble Karnataka High Court in the case of Tata Elxsi (supra). Aggrieved by the order of the CIT(A), the revenue has raised ground No.2 to 4 in this appeal before the Tribunal.
6. We have heard the rival submissions. As far as the alternative claim is concerned, we find that the Hon'ble High Court of Karnataka in the case of Tata EIxsi Ltd (supra) has held that while computing deduction under section 10A of the Income Tax Act, 1961 (the "Act"), expenditure incurred by the assessee, if excluded from the export turnover ("ET"), should also be excluded from the total turnover ("TT"). It has been held that, • The TT would have two components - ET and Domestic Turnover. Therefore, if the ET in the numerator is to be arrived at after excluding certain expenses these should also be excluded in computing ET as a component of TT in the denominator.
• Though there is no definition of TT in section 10A of the Act, there is nothing in the said section to mandate that what is excluded from the numerator and would nevertheless form part of the denominator. • The principle laid out in judgements rendered in context of section 80HHC of the Act will equally apply while interpreting section 10A of the Act since the principle underlying both these provisions is the same.
7. In view of the aforesaid decision of the Hon'ble High Court of Karnataka, we are of the view that the grievance of the revenue as projected in the aforesaid grounds is without any substance. The fact that the revenue is likely to prefer appeal against the decision of the Hon'ble Karnataka High Court by filing a Special Leave Petition before the Hon'ble Supreme Court under Article 136of the Constitution of India, cannot be the basis not to follow the decision of the jurisidictional High Court. We therefore dismiss ground No.2 to 4 raised by the revenue.
8. Ground No.5 to 8 raised by the revenue reads as follows:
"5. The learned CIT(Appeals) has erred in deleting the addition of Rs.3,87,19,625/- made by invoking the provisions of section 40(a)(ia) of the Act without appreciating the facts and circumstances of the case.
6. The learned CIT(Appeals) has erred in arriving at his findings that these payments are mere reimbursement of expenses and not liable for TDS, without examining into nature of the transaction and nature of the payment made by the assessee.
7. The learned CIT(Appeals) has erred in deleting the addition without appreciating the findings recorded by the AO to the effect that these expenses would fall under 'fees for technical services' that on such payments, tax was required to be deducted at source u/s 194H of the IT Act, 1961, and that since no tax was deducted at source, such payments became not deductible in terms of section 40(a)(ia) for the purpose of computing profits and gains of business.
8. The learned CIT(Appeals) erred in allowing the relief, relying on the decision of the Hon'ble Tribunal on the issue in assessee's own case for earlier year, which has not reached its finality and appeal u/s 260A has been filed before the Hon'ble High Court 1961 against such order. "
9. The Assessee is a subsidiary of Cerner Innovations Inc., USA (Cerner US) and is engaged in carrying out software development and testing services to its holding company in respect of healthcare solutions that are designed and developed by Cerner group using Cerner Millennium architecture. There is no dispute that the transaction of rendering software development services by the Assessee to its holding company was an international transaction with an Associated Enterprise(AE) and therefore income from transaction had to be computed u/s.92 of the Act having regard to Arm's Length Price(ALP). There is no dispute that the Transfer Pricing Officer to whom a reference was made by the AO had accepted the price charged in the international transaction with it's AE was at Arm's Length.
9. During the previous year the Assessee made a payment of Rs.3,87,19,625/- to Cerner US. The break-up of the payment so made was as follows:
1. Corporate Card Payments Rs.68,82,509
2. Payment made towards professional Expenses Rs.10,75,794
3. Payment made towards relocation expenses Rs.3,50,970
4. Payment made towards salaries Rs.65,49,000 Payment towards communication expenses Rs.2,38,61,351 Rs.3,87,19,625 The Assessee submitted that the aforesaid payment were payments which Cerner US had made on behalf of the Assessee and which the Assessee is reimbursing to Cerner US. The Assessee pointed out that no portion of the reimbursement account for by the Assessee as payable to Cerner US includes any mark-up or profit element. The Assessee also pointed out that Cerner US is not rendering any services to the Assessee but it was only the Assessee that was providing software development and testing services to Cerner US. The Assessee also pointed out that in so far as reimbursement of salaries paid by Cerner US is concerned, the Assessee had deducted tax at source on such salaries u/s.192 of the Act. The Assessee pointed out that there was no obligation to deduct tax at source on the payment made to Cerner US u/s.195 of the Act as there was no income in the aforesaid payment which is chargeable to tax in India. The Assessee also took a stand that the payment in question cannot be said to be a payment of fees for technical services (FTS) rendered by Cerner US to the Assessee within the meaning of Sec.9(1)(vii) of the Act. Even assuming that the payment in question is in the nature of FTS, there was no obligation to deduct tax at source because as per Article 12(4) of the India-US DTAA, FTS is chargeable to tax in India only if such services make available technical knowledge, experience, skill, know-how or processes or consists of the development or transfer of a technical plan or technical design. The Assessee thus pleaded that the payment in question cannot be disallowed u/s.40(a)(ia) of the Act for non-deduction of tax at source.
10. The AO however held that the payment in question was made to employees of Cerner US who were seconded to work for the Assessee. Having accepted the fact that the persons to whom payments were made worked for the Assessee, the AO proceeded to further observe that it was the liability of Cener US to pay remuneration and other benefits to its employees. Therefore Cerner US has no right to ask for reimbursement of the sum from any other person. Therefore the sum in question cannot be said to be reimbursement.
11. The AO went on to further hold that even assuming that the sums in question were reimbursement yet the Assessee ought to have deducted tax at source u/s.195 of the Act, as that section imposes an obligation to deduct tax wherever payments are made to non-residents. Taxability of the sums paid to non-resident is not relevant. In coming to the above conclusion, the AO relied on the decision of the Hon'ble Supreme Court in the case of Transmission Corporation of AP and another Vs. CIT 239 ITR 587 (SC). The AO also came to the conclusion that the payment in question was a payment in the nature of FTS within the meaning of Sec.9(1)(vii) of the Act and that services rendered made available technical knowledge, experience, skill to the Assessee. The AO accordingly disallowed a sum of Rs.3,87,19,625 u/s.40(a)(ia) of the Act for non-deduction of tax at source on payments made to Cerner US.
12. Aggrieved by the order of the AO, the Assessee preferred appeal before CIT(A). Before CIT(A) apart from reiterating the submissions made before the AO, the Assessee also specifically raised a ground before CIT(A) viz., ground No.4.2 wherein the Assessee contended as follows:
"4.2 Without prejudice to the above, even assuming, while denying, that the disallowance was warranted, the ITO ought to have given effect to the above disallowance before arriving at the profits eligible for deduction under section 10A of the Act, rather than making an adjustment after granting deduction under section 10A of the Act."
The CIT(A) however decided ground No.4.1 in which the Assessee challenged the disallowance of Rs.3,87,19,625 only and did not decide ground No.4.2. The CIT(A) held that the payment in question was reimbursement and therefore there was no obligation to deduct tax at source on the part of the Assessee. Hence the disallowance u/s.40(a)(ia) of the Act was deleted by the CIT(A). The following were the relevant observations of the CIT(A) in this regard:
"5. The ground No.4 is relating to the disallowance of Rs.3,87,19,625/- relating to certain expenses u/s 40(a)(ia) of the Act. During the course of the assessment proceedings, the AO found that certain expenses which were in the nature of corporate credit card payments, medical insurance expenses, professional fees, relocating expenses, salary payable to expatriates and other expenses amounting to Rs.3,87,19,625/-payable to Cerner Corporation, USA claimed as deduction. When the A.O. proposed to invoke Sec.40(a)(i) as there was no TDS made on these payments, the appellant objected on the ground that these expenses were mere reimbursement of expenses and not liable for TDS. However, the A.O. examined the claim in detail with reference to the double taxation agreement (DTAA) with USA and held that these expenses would fall under 'fees for technical services' and thus chargeable under the provisions of Indian Income tax Act. Therefore, the A.O. considered the said amount for disallowance u/s.40(a)(i) of the Act. During the appeal proceedings, the appellant seriously contested the said disallowance in their detailed submissions by way of letter dated 02-02-12. The appellant argued that reimbursement of expenses do not qualify as fees for technical service( FTS) under the Indian Income-tax Act and also as per the DTAA of India-US, as the company was not availing any services from Cerner US and the withholding tax provisions would not apply accordingly. It was also argued that the expenses were made by Cerner, US on behalf of the appellant company for purely administrative convenience and they were mere reimbursements and do not contain any element of income. The appellant also stated that on an identical issue, in their own case for the A.Y.06-07 the Hon'ble ITAT, Bangalore 'B' Bench vide their order in ITA No.627(Bang)/2011 dated 16-12-11 granted relief relying on the decision in the case of IDS Software Solutions (India) Pvt. Ltd. (122 TTJ 410). The Hon'ble ITAT after considering the exactly identical issue for the
A.Y.06-07 held that decision in the case of IDS Software Solutions (India) Pvt. Ltd was applicable to the facts of the case and accordingly allowed the appellant's claim in this regard. Therefore, the disallowance of Rs.3,87,19,625/- is hereby deleted by respectfully following the decision of the Honble ITAT, Bangalore 'B' Bench in the appellant's own case for the AY 06-07 cited above as the facts are exactly identical. "
13. Aggrieved by the order of the CIT(A) the revenue has raised grounds No.5 to 8 before the Tribunal. The learned DR relied on the order of the AO. The learned counsel for the Assessee reiterated submissions made before CIT(A)/AO and relied on the order of the CIT(A). He filed an application under Rule 27 of the Income Tax Appellate Tribunal Rules (ITAT Rules). Under Rule 27 of the ITAT Rules a respondent in an appeal, even though he has not filed any appeal, may support the order appealed against on any grounds decided against him. Since ground No.4.2 raised by the Assessee before CIT(A) was not decided by the CIT(A), it is the stand of the Assessee that the said ground is deemed to have been decided against the Assessee and hence the Assessee in the petition filed under Rule 27 the Assessee seeks to raise the same issue which he had raised as ground No.4.2 before the CIT(A). In support of the application under Rule 27 of the ITAT Rules, the learned counsel for the Assessee relied on the following decisions: i. CIT Vs. Sundaram and Co.Pvt.Ltd. 52 ITR 763 (Mad) ii. CIT Vs. Edward Keventer (successors)Pvt.Ltd. 123 ITR 200 (Del) iii. CIT Vs.Bhumraddi (T.M) 33 ITR 82 (Mum) iv. Marolia and sons Vs. CIT 129 ITR 475 (All) v. Dy.CIT Vs. Hind Industries Ltd. 14 DTR 561 (Del)(ITAT) vi. CIT Vs. Gilbert and Barker Manufacturing Co.USA 11 ITR 529 (Mum) vii. CIT Vs. Mahalakshmi Textile Mills Ltd. 66 ITR 710 (SC) viii. CIT Vs. Nelliappan 66 ITR 722 ix. ACIT Vs. M/S.Bank of Tokyo-Mitsubishi UJF Ltd. (2009-TIOL-
51-ITAT-DEL)
14. On merits of the ground raised in the application under Rule 27 of the ITAT Rules, the learned counsel for the Assessee submitted that as per section 10A(1) of the Act "Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking beings to manufacture or produce such articles or things or computer software as the case may be shall be allowed from the total income of the assessee .......". As per section 1OA(4) "For the purposes of sub-sections (1) and (1A), the profits derived from the export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking.'' It was submitted that the deduction undersection 10A of the Act is to be WW1 computed as under --
Profits of the business of the undertaking = Export Turnover of the business of the undertaking Total Turnover of the business of the undertaking It was submitted that the term 'profits of the business of the undertaking' has not been defined in the Act. It was submitted that the legislature has made specific reference to accounting profits in the Act and laid down the manner of computing such profits, wherever the intent was to use accounting profits as measure for tax/ deduction, for instance section 115JB of the Act. In the absence of any specific definition of the profits of the business of the undertaking in section 10A of the Act, such profits should be computed in accordance with the provisions of the Act (applicable for computation of income from any business source) rather than adopting 'accounting profits'. It was argued that under the Act, as per section 28 read with section 29 of the Act, profits of a business is required to be computed after giving effect to the provisions of Section 30 to Section 43D of the Act. Accordingly, it is necessary that for the computation of the profits of the business of the undertaking, due effect is required to be given to the provisions of Section 40(a)(i) of the Act.
15. The learned counsel for the Assessee placed reliance on the decision of the Hon'ble Bombay High Court, rendered in a similar context, in the case of CIT vs Gem Plus Jewellery India Ltd(330 ITR 175). He pointed out that the Honourable Bombay High Court held that "..in the present case, it cannot be disputed that the net consequence of the disallowance of the employer's and employee's contribution is that the business profits have to that extent been enhanced. There was, as we have already noted, an add-back by the Assessing Officer to the income. All profits of the unit of the assessee have been derived from manufacturing activity. The salaries paid by the assessee, it has not been disputed related to the manufacturing activity. The disallowance of the Provident Fund/ESIC payments has been made because of the statutory provisions -- Section 438in the case of the employer's contribution and Section 36(v) read with section 2(24)(x) in the case of the employees contribution which has been deemed to be the income of the assessee. The plain consequence of the disallowance
and the add back that has been made by the Assessing Officer is an increase in the business profits of the assessee. The contention of the Revenue that in computing the deduction underSection 10A, the additional made on account of the disallowance of the Provident Fund/ESIC payments ought to be ignored cannot be accepted. No statutory provision to that effect having been made, the plain conseq,ience of the disallowance made by the Assessing Officer must follow." It was pointed out that similar views have been held by the Mumbai Tribunal in the cast of International Gold Co Ltd vs ITO (ITA No 597/ MUM/2010/2006-07), the Delhi Tribunal in the case of ITO vs Sahasra Electronics Pvt Ltd (ITA No.1951/Del/2009/ 2005-06), the Hyderabad Tribunal in the case of Zavata India (P) Ltd (ITA No. 1100/Hyd/2009) and the Hyderabad Tribunal in the case of Planet Online (P) Ltd (ITA No. 1016/Hyd/2007).
16. We have given a very careful consideration to the rival submissions. In our view it would be unnecessary to go into the question whether the payment in question is reimbursement of expenses or in the nature of FTS or the question whether the services rendered made available technology to the Assessee in terms of Article 12(4) of the India USA DTAA, because even assuming the sum in question is to be disallowed u/s.40(a)(ia) of the Act, the disallowance will only go to enhance the profits derived by the Assessee from the business of export of computer software and on such enhanced profits deduction u/s.10A of the Act has to be allowed, thereby rendering tax implication on the Assessee insignificant. Therefore the prayer made in the application under Rule 27 of the ITAT Rules requires consideration.
17. In Deep Chand Kothari Vs. CIT 171 ITR 381 (Rajasthan) & Mewar Sugar Mills Ltd. Vs. CIT 119 CTR 161 (Raj.) following the decision of the Hon'ble Supreme court in the case of Mahalskhmi Textile Mills Ltd. (Supra) held that respondent in an appeal has a right to support the order on any grounds decided against him. In the aforesaid decision, the Assessee a respondent had challenged the jurisdiction of the ITO before the AAC but the AAC decided the appeal in favour of assessee on merits without touching upon the point of jurisdiction. Though the assessee may not have appealed against the order of AAC he may support the order appealed against on any of the grounds decided against him. Assessee could therefore raise the plea of jurisdiction before the Tribunal in an appeal filed by the Revenue.
18. We therefore permit the Assessee to raise the plea as projected in the application under Rule 27 of the ITAT Rules.
19. As rightly contended on behalf of the Assessee the consequence of disallowance u/s.40(a)(ia) of the Act will be that the business profits of the Assessee to that extent will stand enhanced. In the case of CIT Vs. Gem Plus Jewellery India Ltd. (supra), the Hon'ble Bombay High Court had to answer the following question of law:
"Whether on the facts and in the circumstances of the case, the Tribunal was justified in directing the Assessing Officer to grant the exemption u/s.10A of the Act on the assessed income, which was enhanced due to disallowance of employer's as well as employee's contribution towards PF / ESIC;"
The Hon'ble Bombay High Court held on the above question of law as follows:
"12. By reason of the judgment of the Supreme Court in Commissioner of Income Tax v. Alom Extrusions Limited the employer's contribution was liable to be allowed, since it was deposited by the due date for the filing of the return. The peculiar position, however, as it obtains in the present case arises out of the fact that the disallowance which was effected by the Assessing Officer has not, the Court is informed, been challenged by the assessee. As a matter of fact the question of law which is formulated by the Revenue proceeds on the basis that the assessed income was enhanced due to the disallowance of the employer's as well as the employees' contribution towards Provident Fund /ESIC and the only question which is canvassed on behalf of the Revenue is whether on that basis the Tribunal was justified in directing the Assessing Officer to grant the exemption under Section 10A. On this position, in the present case it cannot be disputed that the net consequence of the disallowance of the
employer's and the employee's contribution is that the business profits have to that extent been enhanced. There was, as we have already noted, an add back by the Assessing Officer to the income. All profits of the 4 (2009) 319 ITR 306 unit of the assessee have been derived from manufacturing activity.
The salaries paid by the assessee, it has not been disputed, relate to the manufacturing activity. The disallowance of the Provident Fund/ ESIC payments has been made because of the statutory provisions - Section 43B in the case of the employer's contribution and Section 36(v) read withSection 2(24)(x) in the case of the employee's contribution which has been deemed to be the income of the assessee. The plain consequence of the disallowance and the add back that has been made by the Assessing Officer is an increase in the business profits of the assessee. The contention of the Revenue that in computing the deduction under Section 10A the addition made on account of the disallowance of the Provident Fund / ESIC payments ought to be ignored cannot be accepted.
No statutory provision to that effect having been made, the plain consequence of the disallowance made by the Assessing Officer must follow. The second question shall accordingly stand answered against the Revenue and in favour of the assessee."
20. In view of the aforesaid decision of the Hon'ble Bombay High Court which hs been followed in several decisions rendered by ITAT Benches of Delhi, Hyderabad and Bangalore referred to in the submissions made by the learned counsel for the Assessee, we are of the view that the order of the CIT(A) on this issue does not call for any interference. Consequently, grounds No. 5 to 8 raised by the revenue are dismissed.
21. In the result, the appeal by the revenue is dismissed.