M/s Financial Software and Systems P Ltd v. The Dy. Commissioner of Income tax Company Circle II(1), Chennai
[Citation -2016-LL-0930-162]

Citation 2016-LL-0930-162
Appellant Name M/s Financial Software and Systems P Ltd
Respondent Name The Dy. Commissioner of Income tax Company Circle II(1), Chennai
Court ITAT-Chennai
Relevant Act Income-tax
Date of Order 30/09/2016
Assessment Year 2011-12
Judgment View Judgment
Keyword Tags services rendered outside india • convertible foreign exchange • export of computer software • telecommunication charges • development of software • business expenditure • investment allowance • business connection • computing deduction • gross total income • foreign currency • data processing • export turnover • total turnover • labour welfare • non-resident
Bot Summary: The assessee s case is not a case where the assessee had rendered the services outside India and incurred the expenditure in Foreign currency. No deduction under sub-section shall be allowed- if the industrial undertaking is formed by splitting up or reconstruction of an existing undertaking or amalgamation with another industrial undertaking ; unless the assessee furnishes along with the return of income the report of the accountant, as defined in the Explanation below sub-section of section 288 giving such particulars in the report as may be prescribed. CIT v. Texas Instruments India Ltd. 2009 27 SOT 72(URO), has held that a company that is engaged in development, design and manufacture of software should be considered as being an industrial undertaking for the purposes of section 80JJAA. As the assessee is engaged in the development and manufacture of software, the assessee is covered within the definition of industrial undertaking. Para 6.5.4 :-14-: ITA Nos.1070 1177/16 As the facts of the assessee in the case on hand are similar to the facts of the cited case of Texas Instruments India Ltd., the deduction under section 80JJAA is allowed on the basis of the following facts :- The business of the assessee falls within the definition of the term 'industrial undertaking'; The assessee is engaged in providing Information Technology enabled services; The assessee has claimed deduction of only those payments made to 'workmen' who are not employed in supervisory capacity. On going through the agreement entered into between the assessee and the Corporation, in the instant case, it was evident that the assessee was a skilled person and was given work of a technical and supervisory nature. The assessee went in appeal before the CIT(A) and the Ld CIT(A) allowed the assessee s appeal by observing that the revenue has been generated where ever the subsidiary marketing companies had operated. To summarize, the appeal of the assessee is partly allowed and that of the Revenue is dismissed.


IN INCOME TAX APPELLATE TRIBUNAL BENCH, CHENNAI BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER] I.T.A.No.1070/Mds/2016 Assessment year : 2011-12 M/s Financial Software and Vs. Dy. Commissioner of Income tax Systems P Ltd Company Circle II(1) G-4, I Cross Street Chennai SIPCOT IT Park Rajiv Gandhi Salai (OMR) Siruseri, Navalur Chennai 603 103 [PAN AAACP 2351 C (Appellant) ( Respondent) I.T.A.No.1177/Mds/2016 Assessment year : 2011-12 Dy. Commissioner of Vs. M/s Financial Software and Systems Income tax P Ltd Company Circle II(1) G-4, I Cross Street, SIPCOT IT Park Chennai Rajiv Gandhi Salai (OMR) Siruseri, Navalur Chennai 603 103 (Appellant) ( Respondent) Assessee by : Shri Sriram Seshadri, Shri Ashik Shah & Ms.Amrita Ranganathan, CAs Department by : Shri Shiva Srinivas, JCIT Date of Hearing : 20-09-2016 Date of Pronouncement : 30-09-2016 :-2-: ITA Nos.1070 & 1177/16 O R D E R PER D.S. SUNDER SINGH, ACCOUNTANT MEMBER These cross appeals of assessee and Revenue are directed against order of Commissioner of Income-tax (Appeals)-6, Chennai, dated 17.2.2016 for assessment year 2011- 12. 2. Ground No.1 is general in nature which do not require specific adjudication. 3. Ground No. 2 and 3 are related to exclusion of travel expenses by Assessing Officer from export turnover. assessee-company is engaged in providing software services in Banking and Financial sector. assessee is having offices at Mumbai and Chennai. While Mumbai is non STPI unit dealing with purchase and installation of ATM machines, Chennai Branch has got both STPI and non STPI units. For A.Y.2011- 12 assessee has claimed amount of `1,01,53,363/- as expenditure under travel expenses relating to 100% STPI unit. Since expenditure towards travelling amounting to Rs. 1,01,53,363/- incurred outside India in Foreign Currency, assessing officer presumed that assessee should have rendered services outside India and excluded amount of :-3-: ITA Nos.1070 & 1177/16 foreign travel from export turnover for purpose of computing deduction u/s 10A. 4. assessee went in appeal to CIT(A) and Ld. CIT(A) held that impugned expenditure was incurred in foreign exchange therefore, Assessing Officer rightly excluded expenditure from export turnover. Aggrieved by order of CIT(A) assessee filed appeal before us. 5. Ld. A.R submitted that foreign travel expenditure should not be excluded from export turnover since act does not provide for exclusion of foreign travel expenditure unless it is incurred in rendering services outside India. He has taken our attention to explanation Expln-2(iii) of section 10A wherein export turnover was defined. Further A.R referred decisions of Hon'ble Special Bench decision in case of Zylog systems reported in 8 Taxmann.com 276(Chennai) Bench and circular No.693 dated 23/11/1994. A.R argued that prima facie Assessing Officer is incorrect in excluding theForeign travel expenditure from export turnover and even if is to be excluded it should be excluded both from export turnover as well as total turnover. :-4-: ITA Nos.1070 & 1177/16 6. On other hand learned DR argued that expenditure was spent outside India and same was not brought in into India. Act provides for exemption of income relating to Foreign exchange brought in to country. Therefore he contended that Assessing Officer has rightly excluded Foreign travel expenditure from export turnover and CIT(A) has rightly confirmed order of Assessing Officer and submitted that there is no need to disturb order of CIT(A). DR defended orders of Lower Authorities. 7. We have heard rival submissions and perused material placed before us. Assessing Officer excluded foreign travel expenditure incurred for purpose of business from export turnover. export turnover is defined in Expln-2(iii) of section 10A as under: "export turnover" means consideration in respect of export 40[by undertaking] of articles or things or computer software received in, or brought into, India by assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to delivery of articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing technical services outside India; 8. From above definition what is to be excluded from total turnover is freight, telecommunication charges or :-5-: ITA Nos.1070 & 1177/16 insurance attributable to delivery of articles or things or computer software outside India or expense, if any incurred in foreign exchange in providing technical services out side India, but not business expenses incurred outside India. Foreign travel expenditure is business expenditure which should be allowed as deduction unless it is attributable to services rendered outside India and said expenditure incurred in foreign currency. assessee s case is not case where assessee had rendered services outside India and incurred expenditure in Foreign currency. Assessing Officer has not made out case that expenditure was incurred for services rendered outside India and did not relate to assessee s business. assessee relied on Honble Special Bench judgment in case of Zylog systems v. Income- tax Officer, Company Ward- III reported in [2010] 8 taxmann.com 276 (Chennai) (SB). Special Bench held that There was no dispute about fact that assessee was company engaged in business of development of software both by way of onsite development and offshore development and also that it had branch in USA for which separate accounts were maintained. There was also no dispute about fact that there was approval of authorized dealer namely C Bank for opening overseas branch in USA. [Para 20] Now it was necessary to adjudicate whether Assessing Officer and Commissioner (Appeals) were right in excluding from export turnover expenses incurred by assessee outside India in foreign exchange in providing technical services, while computing deduction under section 10B. For adjudicating this issue first of all it was essential to consider what is software and what is technical services . combined reading of definition of software as given in clause (i) of Explanation (2) and export turnover as defined in clause (iii) of sub-section (9A) of section 10B would go to show that export turnover of computer software means consideration :-6-: ITA Nos.1070 & 1177/16 received in respect of export of computer software but does not include freight, telecommunication charges or insurance to delivery of computer software outside India or expenses incurred in foreign exchange in providing technical services outside India. [Para 21] In instant case, assessee pleaded that it had not rendered any technical services outside India to third party. Whatever services were rendered in foreign country and expenses incurred as pay roll etc., were incurred in connection with staff of foreign branch. [Para 22] department had not brought anything on record to show, that assessee- company was involved in rendering any mana- gerial or consultancy services at foreign country. Also it was not brought on record that company was involved in providing technical services to other personnel or any outside agency. All services rendered by company were to its staff located in USA for fulfilment of objects namely development of software. There was force in contention of assessee that person cannot provide services to self. There was also force in contention of assessee that in case of California Software Co. Ltd. v. Asstt. CIT [2009] 27 SOT 51 (Chennai)(URO), there was presumption by Bench that technical services were rendered by assessee to self. Circular No. 621, dated 19-12-1991, Circular No. 694, dated 23-11- 1994 also shows that expenditure incurred on site abroad was eligible for deduction under section 10B. [Para 23] To sum up, in instant case expenditure had been incurred on foreign soil in connection with development of software by employees of assessee- company at foreign branch and nothing had been incurred on managerial or technical services rendered to any outsiders in foreign soil. In view of this discussion, it was to be held that said expenditure could not be excluded from export turnover for computing deduction under section 10B. [Para 24] 9. Special Bench held in case law cited supra that expenditure incurred for purpose of business in Foreign soil should not be excluded from export turnover for purpose of deduction u/s 10B. In assessee s case expenditure was incurred for purpose of business and should not be excluded from export turnover. assessee s case is squarely covered by special bench decision. Therefore respectfully following Hon ble special bench decision cited, we delete addition made by AO and set aside Lower :-7-: ITA Nos.1070 & 1177/16 authorities orders. Accordingly ground No.2&3 of assessee s appeal are allowed. 10. Ground No.4 is related to exclusion of unrealized export proceeds from export turnover. AO excluded amount of Rs. 23,89,578/- representing unrealized export proceeds from export turnover and CIT(A) confirmed AO s order. A.R of assessee has not made any argument on this issue. Therefore this ground is dismissed. 11. Ground No.5 to 9 are related to deduction u/s 80JJAA. Assessing Officer disallowed claim of assessee amounting to `3,23,94,721/- made u/s 80JJAA. Assessing Officer was of view that company was engaged in business of software and its employees cannot be called as workmen. For ready reference we reproduce relevant part of assessment order which reads as under: Company has made claim of deduction u/s 80JJAA amounting to Rs.3,23,94,721 during year. This deduction is available to industrial undertakings employing new workmen. Company being engaged in business of software its employees cannot be called as workmen. term is primarily meant to indicate blue collared workers employed in manufacturing industries. When this was put to AR, he filed his submissions stating that - Though term "industrial undertaking" has not been defined in Section 80JJAA, provisions of Section 10(15) speak about industrial undertaking which includes undertaking engaged in manufacture of computer software; - In absence of specific term, definition :-8-: ITA Nos.1070 & 1177/16 provided in other sections in same legislation can be borrowed to have reasonable interpretation; - Beneficial provisions are to be construed liberally; Assessing Officer considered above explanation but not convinced with explanation offered by aaseessee and disallowed deduction claimed by assessee u/s 80JJA. 12. assessee went on appeal before Ld.CIT(A) but not succeeded in first appeal. Ld. CIT(A) confirmed addition holding that intention of legislature is to allow deduction to benefit of Indian companies in manufacturing sector who are generating new employment in factories to blue collared workers of factory. CIT(A) also held that Finance Act 2013 has been amended by substituting word factory in place of undertaking and it is clarificatory in nature and accordingly sustained addition made by Assessing Officer. 13. Ld A.R argued that in section 80JJAA words used are Industrial undertaking and workmen as defined in Industrial Disputes Act. As per Expln-1 of section10(15) , definition of Industrial undertaking includes computer software and as per decided case Laws work force of computer :-9-: ITA Nos.1070 & 1177/16 software are also covered under definition of workmen as per Industrial Disputes Act 1947. Therefore he argued that assessee is entitled for deduction u/s 80JJAA . He has referred following decisions: (i)ACIT vs Texs Instruments(India) P. Ltd 27 SOT 72 (Bang) (ii) P.L. Goel vs ITO, 12 ITD 137(Delhi) (iii) CIT vs Comp-Help Services P. Ltd, 246 ITR 722 (iv) OnMobiole global Ltd. (2014)45 taxmann.com346 ld. AR also referred Tamilnadu Government letter No.9172/K2/2015-6 dated 30.5.2016 addressed to Puthiya Jananayaga Thozhilalar Munnani on subject of employees of IT industry. 14. On other hand, ld. DR argued that sec. 80JJAA of Act specifically provides for industrial undertaking engaged in manufacture or production of article or thing. words computer software are missing in section. If intention of legislature is to extend benefit to companies engaged in business of software, legislature should have specifically mentioned and included word computer software also. Since legislature does not want benefit to be extended to computer software business, it was excluded :-10-: ITA Nos.1070 & 1177/16 from sec. 80JJAA. ld. DR supported orders of lower authorities. 15. We have considered rival submissions and perused material placed on record. For ready reference, we reproduce hereunder sec. 80JJAA of Act: Deduction in respect of employment of new workmen (1)Where gross total income of assessee, being Indian company, includes any profits and gains derived from any industrial undertaking engaged in manufacture or production of article or thing, there shall, subject to conditions specified in sub-section (2), be allowed deduction of amount equal to thirty per cent. of additional wages paid to new regular workmen employed by assessee in previous year for three assessment years including assessment year relevant to previous year in which such employment is provided. (2) No deduction under sub-section (1) shall be allowed- (a) if industrial undertaking is formed by splitting up or reconstruction of existing undertaking or amalgamation with another industrial undertaking ; (b) unless assessee furnishes along with return of income report of accountant, as defined in Explanation below sub-section (2) of section 288 giving such particulars in report as may be prescribed. Explanation For purposes of this section, expressions, (i) additional wages means wages paid to new regular workmen in excess of one hundred workmen employed during previous year : Provided that in case of existing undertaking, additional wages shall be nil if increase in number of regular workman employed during year is less than ten per cent. of existing number of workmen employed in such undertaking as on last day of preceding year ; (ii) regular workman , does not include-- (a) casual workman ; or (b) workman employed through contract labour; or (c) any other workman employed for period of less than three hundred days during previous year ; (iii) workman shall have meaning assigned to it in clause (s) of section 2 of Industrial Disputes Act, 1947 (14 of 1947). :-11-: ITA Nos.1070 & 1177/16 16. expression industrial undertakings is not defined in sec. 80JJAA. However, in Explanation 1 of sec. 10(15) of Act industrial undertaking is defined as under: Explanation 1. For purposes of this sub-clause, expression "industrial undertaking" means any undertaking which is engaged in - (a) manufacture or processing of goods; or (aa) manufacture of computer software or recording of programme on any disc, tape, perforated media or other information device ; or; 17. Since industrial undertaking is not defined in sec. 80JJAA of Act, we have taken help of Explanation 1 of sec. 10(15) of Act. In said section, expression industrial undertaking includes manufacture of computer software or recording of programme on any disc, tape, perforated media or other information device. 18. From above definition it is clear that manufacturing of computer software was also included in definition of industrial undertaking and industries carrying on business of manufacture of computer software are entitled for deduction u/s 80JJAA. 19. meaning of workmen for purpose of deduction u/s 80JJAA is according to definition in Industrial Disputes Act, :-12-: ITA Nos.1070 & 1177/16 1947. workmen is defined in Industrial Dispute Act as under: workman" means any person (including apprentice) employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward, whether terms of employment be express or implied, and for purposes of any proceeding under this Act in relation to industrial dispute, includes any such person who has been dismissed, discharged or retrenched in connection with, or as consequence of, that dispute, or whose dismissal, discharge or retrenchment has led to that dispute, but does not include any such person- (i) Who is subject to Air Force act, 1950 (45 of 1950) or Army Act 1950(46 of 1950) or Navy Act, 1957 (62 of 1957) or (ii) Who is employed in police service or as officer of other employee of prison or (iii) Who is employed mainly in managerial or administrative capacity or (iv) Who, being employed in supervisory capacity, draws wages exceeding one thousand six hundren rupees per mensem or exercises, either by nature of duties attached to office or by reason of powers vested in him, functions mainly of managerial nature] 20. aseessee relied on decision of ITAT Bangalore Bench B in case of Texas Instruments (India)(P)Ltd. reported in (2009) 27 SOT 72 where in it was held that Form order of CIT(A), it is seen that he had taken note of notification issued by Government of Kartnataka and concluded that as per notification issued. assessee company engaged in development of software is covered by Industral disputes sact 1947. 21. Bangalore Bench also in case of OnMobiole global Ltd. (2014)45 taxmann.com346 has taken similar view and :-13-: ITA Nos.1070 & 1177/16 allowed deduction u/s 80JJAA. In cited case ITAT held that Section 80JJAA allows for deduction of additional wages paid to new workmen for industrial undertaking. While term "industrial undertaking" has not been defined in section 80JJAA, it has been defined in other provisions; like sections 10(15) and 72A so as to include undertaking which is engaged, inter alia, in : - manufacture of computer software - manufacture of computer software or recording of programme on any disc, tape, perforated media or other information device. [Para 6.5.1] co-ordinate bench of this Tribunal in case of Asstt. CIT v. Texas Instruments India (P.) Ltd. [2009] 27 SOT 72 (Bang.)(URO), has held that company that is engaged in development, design and manufacture of software should be considered as being industrial undertaking for purposes of section 80JJAA. As assessee is engaged in development and manufacture of software, assessee is covered within definition of industrial undertaking. [Para 6.5.2] Another condition stipulated under Act is that assessee should be engaged in manufacture or production of article or thing. definition of "industrial undertaking" as stipulated in section 10(15) and section 72A extends to undertakings that are engaged, inter alia, in manufacture of computer software or recording of programme on any disc, tape, perforated media or other information devices. [Para 6.5.3] Section 80JJAA refers to "workmen" as defined in section 2(5) of Industrial Disputes Act, 1947. above definition includes employment of workmen having technical skill but excludes any workmen in managerial or administrative or supervisory capacity. In case on hand, persons in respect of which deduction under section 80JJAA is being claimed would fall within above definition of term 'workmen' as defined in Industrial Disputes Act, 1947. [Para 6.5.4] :-14-: ITA Nos.1070 & 1177/16 As facts of assessee in case on hand are similar to facts of cited case of Texas Instruments India (P.) Ltd. (supra), deduction under section 80JJAA is allowed on basis of following facts :- (i) business of assessee falls within definition of term 'industrial undertaking'; (ii) assessee is engaged in providing Information Technology enabled services (computer software); (iii) assessee has claimed deduction of only those payments made to 'workmen' who are not employed in supervisory capacity. In view of above, decision of Commissioner (Appeals) in allowing assessee deduction under section 80JJAA is allowed. [Para 6.5.5] 22. Delhi Bench of Tribunal in case of P.L. Goel(supra) has also expressed similar view in respect of definition of workmen. It has held that It is trite to say that Industrial Disputes Act is legislation intended to bring about and harmony between labour and management in industry and for that purpose, it makes provision for investigation and settlement of industrial disputes and it is, therefore, necessary to interpret definitions of industry , workman , industrial dispute , etc., so as not to whittle down, but to advance object of Act. words any skilled, or unskilled manual, supervisory, technical or clerical work used in definition of workman given in section 2(s) of Industrial Disputes Act are not intended to limit or narrow amplitude or definition of workman. On other hand, they indicate and emphasise broad sweep of definition which is designed to cover all manner of persons employed in industry, irrespective of whether they are engaged in skilled work or unskilled work, manual work, supervisory work, technical work or clerical work. Quite obviously, broad intention is to take in entire labour force and exclude managerial force . On going through agreement entered into between assessee and Corporation, in instant case, it was evident that assessee was skilled person and was given work of technical and supervisory nature. He had no authority whatsoever, to bind Corporation in any way. It was clear that :-15-: ITA Nos.1070 & 1177/16 consultant, as assessee was, could not, by any stretch of imagination, be said to be engaged in any administrative or managerial work. Hence, assessee was workman within meaning of section 2(s) of Industrial Disputes Act, and, as such, amount of retrenchment compensation received by him was exempt from tax under section 10(10B). 23. Similarly, in case of Comp-Help Services P. Ltd.(supra), Hon ble Madras High Court while answering question relating to Investment allowance u/s 32A held that When data is processed with aid of computers and processing complicated steps which can only be performed with speed in computer and end-product is analysis and presentation of data in desired format such as balance sheet, it can be said in broad terms that there is production. word "production" in s. 32A comprehends processing activity and word "article" in that provision includes movables. data processing computers involve processing and, therefore, capable of being regarded as part of process of production. balance sheet, sales analysis, statements, etc. obtained as result of processing are movables and are different from data that was initially fed into computer though based upon data so fed in. use to which end-product is put is different from one to which raw data is put at time it is fed into computer. end-product obtained as result of data processing such as balance sheets, etc. are therefore, capable of being regarded as new articles. data processing activity is organised activity. machines have to be operated by employing persons trained for that purpose. employee and employer relationship in running data processing company inevitably exists as between those who operate system and company which runs business. term "industry" is not defined in s. 32A, and is therefore, required to be understood in sense in which word is ordinarily understood. term "industry" is term of wide amplitude. "Industry" as used in s. 32A refers to industries which are engaged in manufacture or production of goods or articles or things. data processing company must be held to be industrial company engaged in production of articles. 24. Tamilnadu Government vide letter No.9172/K2/2015-6 dated30.5.2016 addressed to Puthiya Jananayaga Thozhilalar Munnani on subject of employees of IT industry clarified that IT industry is not exempted from ID Act 1947. For ready reference, we reproduce below contents of letter dated 30.5.2016: :-16-: ITA Nos.1070 & 1177/16 2. On above demands I am to inform you as follows: (i) All Labour Welfare Legislations are applicable to all IT and ITES companies and they are being monitored by enforcement officials for proper implementation of Labour legislations and thereby ensures welfare of employees. IT company employees also are free to form trade union and can redress their grievances through evoking provisions of Industrial Disputes Act 1947. It is also informed that, no IT industry has been exempted from provisions of Industrial Disputes Act 1947. affected employees can approach conciliation officers to redress their problems regarding retrenchment or termination or for any other grievance. Any trade union with IT employees as its members can rise industrial disputes under section 2(k) of Act and seek remedy. (ii) Inspectors of Labour are inspecting IT companies. In case of any contravention of provisions of Act, ITemployee may approach concerned conciliation officer through their union and file Industrial Dispute against erring employer. (iii) It is also informed that routine inspections are being carried out by Inspectors. In case of emergent situation, team of officials will inspect IT firm depending upon magnitude of problem. As trade union, union will be informed by its members regarding any grievance. trade union can represent it to Labour Department I Government. (iv) Government cannot organize public hearing, since alternate remedies through different forums are statutorily available. It is open for, employee and trade union to approach appropriate forums and seek remedy. (v) It is pertinent to note that already 9 IT employees have sought remedy for their non-employment issue under Industrial Disputes Act, 1947. Hence no further action in this regard is required at Government Level. 25. As per memorandum to Finance Act, 1988, sec. 80JJAA, Government of India considered it necessary to provide fiscal incentives in Income-tax Act, in order to encourage employers to :-17-: ITA Nos.1070 & 1177/16 create more and more employment opportunities. When assessee is creating new employment opportunities, beneficial provisions should not be summarily rejected. Though assessee is engaged in manufacture of computer software Firstly it is covered by Explanation 1 of sec. 10(15) of Act within meaning of industrial undertaking and it is supported by Hon ble Madras High court judgment in case of 246 ITR 722. Secondly employees working in companies engaged in computer software are also covered as workmen within meaning of Industrial Dispute act as per decisions of coordinate benches of Bangalore and Delhi cited supra. Government of Tamilnadu vide letter dated 30/05/2016 clarified that IT industry is not exempted from provisions of Industrial Disputes Ac 1947. assessing officer s case is not that assessee is not satisfying eligibility conditions for deduction u/s 80JJAA. learned DR did not place any material controverting above decisions. Therefore, we hold that assessee is entitled for deduction u/s 80JJAA and accordingly, we set aside orders of lower authorities and allow deduction u/s 80JJAA. assessee s grounds on this issue are allowed. 26. Ground No.10 relates to giving short credit for TDS. As per grounds, assessee claimed TDS of Rs. 14,82,45,072/- and Assessing Officer has allowed only Rs. 14,19,47,495/-. Assessing Officer is directed to verify assessee s claim and give credit for :-18-: ITA Nos.1070 & 1177/16 shortfall. assessee s groungd on this issue is allowed for stastical purposes. 27. In result, appeal of assessee is partly allowed. 28. Now coming to Revenue s appeal I.T.A.No.1177/Mds/2016. Ground No.1.1 to 1.5 are related to exclusion of travel and communication expenditure incurred in foreign currency from total turnover. 29. Ld. CIT(A) directed A.O to exclude Travel and communication expenses from export turnover as well as total turnover while computing deduction u/s 10A. Aggrieved by order of CIT(A) Revenue is in appeal before us. Ld.D.R relied on order of AO and Ld.DR relied on order of CIT(A). 30. We have considered rival submissions and perused material placed on record. CIT(A), while deleting addition, followed decision of Special Bench in ITO vs Sak Soft, 313 ITR 353. ld. DR during appeal did not place any decision controverting decision relied up on by ld.CIT(A). Therefore, we do not find any infirmity in order of Ld.CIT(A) and ground raised by Revenue on this issue is dismissed. 31. Ground No.2 is related to TDS on software. In course of assessment, Assessing Officer found that assessee-company :-19-: ITA Nos.1070 & 1177/16 made software purchase to tune of `13,99,575/- for which TDS was not made. Assessing Officer sought explanation, and assessee has explained that it was only purchase and no TDS is applicable. Assessing Officer disallowed expenditure relying on judgment of Karnataka High Court in case of Samsung on same issue. citation and ratio of above case was not discussed in assessment order. assessee went on appeal before CIT(A) and ld.CIT(A) deleted addition relying on decision of this Tribunal in assessee s own case in I.T.A.No. 2190-2196 and 2199/Mds/2013 dated 5.6.2013 wherein it was held that transaction with non-resident towards purchase of software cannot be held as royalty for use of copyrights u/s 9(1)(vi) r.w. Explanation 2, clause(v). 32. During appeal, ld. DR relied on assessment order and ld. AR relied on CIT(A) s order. However, ld. DR could not place any decision controverting decision of Tribunal in assessee s own case. ld. DR also did not cite any High Court judgment supporting decision of Assessing Officer. Therefore, we do not find any infirmity in order of ld.CIT(A) and same is upheld. ground on this issue stands dismissed. 33. Ground No.3 is related to marketing expenditure to subsidiaries. :-20-: ITA Nos.1070 & 1177/16 34. During assessment proceedings, Assessing Officer found that assessee-company has two foreign subsidiaries in US and Australia and company has made payment during year to these subsidiary companies to extent of ` 2,80,00,000/-. assessee has not earned any revenue from these countries. Therefore, Assessing Officer was of opinion that there was no business exigency to incur said expenditure. Accordingly, he added sum of ` 2,80,00,000/- to income of assessee. assessee went in appeal before CIT(A) and Ld CIT(A) allowed assessee s appeal by observing that revenue has been generated where ever subsidiary marketing companies had operated. Further CIT(A) obseerved that it is not necessary that revenue need to be generated every year failing which allowance for expenditure will be denied as it is totally discretion of assessee to run its business and utilize its resources. As per CIT(A) in present case Australian subsidiary had been successfully generating revenues for assessee through its activities and accordingly deleted addition. 35. During appeal, ld. DR argued that assessee-company made payment to Australian company. Since there was no income earned and expenditure incurred in Australia and US companies has no business connection, hence there is no business expediency. Ld. DR supported order of Assessing :-21-: ITA Nos.1070 & 1177/16 Officer. On other hand ld. AR has heavily placed reliance on order of CIT(A). 36. Further, ld. DR has objected for entertaining fresh evidence by ld CIT(A) in form of agreement under Rule 46A. ld. AR argued that no fresh evidence was placed before CIT(A). He further submitted that CIT(A) is capable of calling for any information and examine same as per sec. 250(4) of I.T. Act and issue is settled by judgment of Hon ble Supreme Court in case of CIT vs Rajendra Prasad Moody, 115 ITR 519. Therefore, ld. AR was of opinion that order of CIT(A) should be confirmed. 37. We have heard rival submissions and perused material placed on record. assessee has made payment of ` 280 lakhs to subsidiaries of company towards marketing expenditure. Assessing Officer has not disputed fact that expenditure was not business expenditure and genuineness of payment was also not doubted by him. marketing expenditure is always incurred in advance and returns are expected subsequently in business. Therefore, it is not correct to disallow expenditure since there was no income. Sometimes even if expenditure is incurred it will take lot of time to make sales and to expect business receipts. prudent businessman has to incur business expenditure in shape of marketing and product :-22-: ITA Nos.1070 & 1177/16 promotion in advance. In case of assessee, CIT(A) found that payment was made for compensation at instance of Australian subsidiaries at Arm s length basis at mark up of 10% on operating expenses. operating expenses also had been defined in clause 4.3 of marketing support service agreement dated 1.7.2009 which was produced before CIT(A). CIT(A) called for details of expenses incurred in connection with transactions between assessee and subsidiary companies for period of four years and verified and then held that disallowance has been made without examining transactions perse. CIT(A) also observed that revenues have been generated in subsequent years, therefore, we agree with order of Ld. CIT(A) and uphold same. 38. Revenue has raised objection under Rule 46A and Bench has asked nature of additional evidence produced by assessee before Ld. CIT(A). ld. DR has replied that agreement and details of expenses. agreement was placed before Assessing Officer and books of account were also produced by assessee before Assessing Officer. Therefore, we do not find any additional evidence produced by assessee before CIT(A) which requires fresh opportunity to Assessing Officer. Therefore, there is no merit in ground raised :-23-: ITA Nos.1070 & 1177/16 by Revenue in relation to Rule 46A. Accordingly, we dismiss ground raised by Revenue on this issue. 39. In result, appeal of Revenue is dismissed. 40. To summarize, appeal of assessee is partly allowed and that of Revenue is dismissed. Order pronounced on 30th September, 2016, at Chennai. Sd/- Sd/- (N.R.S. GANESAN) (D.S. SUNDER SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER Chennai Dated: 30th September, 2016 RD Copy to: 1. Appellant 4. CIT 2. Respondent 5. DR 3. CIT(A) 6. GF M/s Financial Software and Systems P Ltd v. Dy. Commissioner of Income tax Company Circle II(1), Chennai
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