Delhi High Court

Commissioner Of Income Tax vs Interra Software India Pvt. Ltd. on 24 December, 2010

Author: A.K.Sikri

*                   IN THE HIGH COURT OF DELHI AT NEW DELHI

+                                          ITA No.507 of 2008
                                                   &
                                          ITA No.160 of 2009

%                                             Reserved On: November 10, 2010
                                              Pronounced On: December 24, 2010


(1)       ITA No. 507 of 2008

COMMISSIONER OF INCOME TAX                                        . . . APPELLANT
                 Through :                             Mr. N.P. Sahni, Sr. Standing
                                                       Counsel.

                                             VERSUS

INTERRA SOFTWARE INDIA PVT. LTD.         . . .RESPONDENT
                    Through:   Mr. Ajay Vohra, Advocate
                               with Ms. Kavita Jha, Advocate
                               and Mr. Somnath Shukla,
                               Advocate.
 (2) ITA No.160 of 2009

COMMISSIONER OF INCOME TAX                                        . . . APPELLANT
                 Through :                             Mr. N.P. Sahni, Sr. Standing
                                                       Counsel.

                                             VERSUS

INTERRA SOFTWARE INDIA PVT. LTD.          . .RESPONDENT
                Through:       Mr. Ajay Vohra, Advocate
                               with Ms. Kavita Jha, Advocate
                               and Mr. Somnath Shukla,
                               Advocate.
CORAM :-

          HON'BLE MR. JUSTICE A.K. SIKRI
          HON'BLE MR. JUSTICE SURESH KAIT

          1.        Whether Reporters of Local newspapers may be allowed
                    to see the Judgment?
          2.        To be referred to the Reporter or not?
          3.        Whether the Judgment should be reported in the Digest?


A.K. SIKRI, J.

1. In these appeals preferred by the Revenue as many as six

questions of law are proposed. However, it can be taken into

following three categories:-

(1) Issue relating to permissibility of allowing deduction to

the assessee under Section 10A of the Act when in the

previous years, the assessee had claimed deduction

under Section 80HHE of the Income Tax Act.

To put it otherwise, the issue is as to whether sub-Section

(5) of Section 80 HHE of the Act would bar the assessee

from seeking benefit under Section 10A of the Act if the

preceding year, benefit was claimed under Section 80HHE

to Section 10A is not permissible?

(2) Whether finding recorded by the ITAT that the sale

proceeds in convertible foreign exchange had been

brought by the assessee in India within the extended time

is based on correct facts and relevant material and

thereby suffers from factual perversity?

(3) Whether ITAT was correct in law in allowing exemption

under Section 10A of the Act to the assessee in respect of

profit of Japan Branch?

2. Insofar as issue No.(1) is concerned, vide our orders passed in

ITA 1233 of 2007, we have decided this issue in favour of the

assessee. We may additionally mention that in the present case, the

assessee had claimed deduction under Section 80HHE of the Act in

the Assessment Year 1998-99 and thereafter in the assessment years

1999-2000, 2000-01 and 2001-02. He claimed exemption under

Section 10A of the Act, which was duly allowed by the assessee. It is

only in the succeeding assessment years i.e. 2002-03 with which we

are concerned, the Assessing Officer disallowed the same. That

would be additional ground to hold that the assessee was entitled to

such deduction claimed by the assessee under Section 10A of the

Act.

3. In so far as issue No. (2) is concerned, it is factual inasmuch as

the assessee submitted documentary evidence before the CIT (A) to

prove that it had brought in India the foreign exchange within the

extended time.

4. Accordingly, the appeal was heard on 3rd question of law at

length. The counsel for both the parties filed their written synopsis

as well.

5. We now propose to decide this question of law. As is clear from

the aforesaid question, it pertains to allowing the deduction under

Section 10A of the Income-Tax Act (hereinafter referred to as „the

Act‟), in respect of Japan Branch to the respondent assessee. The

Assessing Officer had denied the exemption under Section 10A of the

Act on the entire claim and, in particular, in respect of Japan Branch,

on the ground that the said branch is not covered under Section

10A(2) of the Act. The assessee had relied upon many documents

which were furnished before the Assessing Officer in the course of

assessment proceedings vide letter dated 27th March, 2006 but the

Assessing Officer did not accept the explanation of the assessee and

denied the exemption on revenues of Japan Branch. The CIT (A)

however allowed the expenses accepting the submissions of the

assessee and observed "there is no doubt the Japan Branch has been

opened by the appellant as per the agreement with the Japanese

Company to also provide onside Development service with approval

of RBI and also noted by NSEZ that the appellant unit located at

NSEZ has opened a new trading branch at Tokyo" and directed the

Assessing Officer to consider the same as exempt under Section 10A.

The Revenue‟s appeal to ITAT against the order of CIT (A) was again

dismissed.

6. The submission of Mr. Sahni, learned counsel appearing for the

Revenue is that the ITAT and CIT (A) did not appreciate the document

furnished before the Assessing Officer and relied only on explanation

3 to Section 10A of the Act which according to the ITAT „permits

exemption under Section 10A on profits derived by an assessee from

a foreign branch with reference to onsite services for development of

computer software provided by the said company". His argument

was that the relevant documents would clearly demonstrate that the

trading branch at Tokyo is an independent and separate branch

office and, therefore, profits incurred in respect of that branch would

not qualify for deduction under Section 10A of the Act. He drew

distinction between a branch office and a liaison office submitting

that a branch office is one which may meet all commercial

requirements. A liaison office is only permitted to do what its name

suggests - act as an intermediary between the foreign principal

enterprise and the India customers and vice-versa. It may not

engage in any other commercial activity with the objective to earn

profit. The assessee has been carrying on full-fledged marketing

operations in Tokyo, Japan, as per the approval of RBI. It has been

incurring all sorts of expenses for maintaining its Branch Office. The

assessee is thus not entitled to deduction u/s 10A on the revenues of

the Tokyo Branch Office under 10A/80 HHE of the Act. It is submitted

that the nature of the operations of the said branch office can be

gathered from various letters filed by the assessee to Development

Commissioner, Noida Export Processing Zone, the General Manager,

RBI, etc. In fact, the submission of the appellant becomes crystal

clear by referring to the letter of the assessee addressed to the

Manager, Bank of America which leads, "...in view of the current slide

down which has hit the US software market most, Japan is emerging

as a critical market in the International software trade. With a view,

therefore, to expanding our market in Japan, we have decided to

have an effective presence in that country and establish a non-

trading branch in Japan...". From this, it is amply clear that the

assessee wanted to enter and capture Japanese market by opening a

branch office there and its revenues from the Branch Office are not

covered under explanation 3 to Section 10A of the Act.

7. Mr. Vohra, learned counsel appearing for the assessee, on the

other hand, argued that a pure finding of fact was arrived at by the

two authorities below that the Japan Branch was an onsite office.

There was no development of computers software provided by the

assessee company and, therefore, profits derived from the said unit

were entitled to exemption under Section 10A of the Act. He

submitted that it was clear from the facts that the assessee had

sought permission from the Reserve Bank of India to open non-

trading branch in Tokyo, Japan to facilitate communication between

NEPZ unit and the company in Japan, assist in marketing efforts, help

procure orders, render assistance to professionals deputed there on

off-shore assignments, attend to validation and testing of the

products, if required and providing other requisite comforts to

customers. He also argued that the Revenue was trying to make out

a totally new case before this Court and that too on presumptions,

namely, the assessee may have engaged in other activities contrary

to permission granted by the RBI which was not backed by any

evidence.

8. In order to appreciate the rival contentions, it is necessary to

note of the provisions contained in Section 10A of the Act. This

Section carves out special provision in respect of newly established

100% export oriented undertakings. It, inter alia, stipulates that

deduction of such profits and gains as are derived by an undertaking

for export of articles or computer software shall be allowed from the

total income of the assessee for a period of ten consecutive

assessment years.

9. The assessee is dealing with the export of computer software, it

is 100% export oriented unit. There is no dispute that the assessee

is engaged in the business of development or development of

software through its unit located in NEPZ. It is also not in dispute

that for this reason, the NEPZ is entitled to deduction under Section

10A/10B of the Act in respect of profits derived from the said unit.

The question relates to the profits derived by the assessee‟s branch

in Japan. Answer to that would depend on Explanation 3 of Section

10A which reads as under:-

"Explanation 3.-For the removal of doubts, it is hereby declared that the profits and gains derived from on site development of computer software (including services for development of software) outside India shall be deemed to

be the profits and gains derived from the export of computer software outside India."

10. As per this Explanation, even if the profits and gains derived

from on site development of computer software outside India, they

are also treated as profits and gains from the export of computer

software outside India. In the backdrop of this provision, what is to

be examined is as to whether Japan Office of the assessee would be

treated as an onsite development of computer software or it is to be

treated as separate branch functioning independently.

11. As noted above, the submission of learned counsel for the

Revenue is that to qualify the "on site development", it should be

only a Liaison Office acting as an intermediary between the foreign

principal enterprise and the India customers and vice-versa.

Wherever, such foreign office is working as a separate branch

carrying on full-fledged marketing operations, that would not be

treated as on site development.

12. We are in agreement with this interpretation suggested by

learned counsel for the Revenue. However, what we find from the

record that matter is not examined in this perspective by the

authorities below. The Assessing officer while rejecting the claim of

the assessee observed as under:-

"It may further be mentioned that the assessee has claimed 10A in respect from its branch at Japan for an amount of ` 1851545/-. The provisions of Section 10A are only applicable in case of an industrial undertaking manufacturing or producing articles as approved in the sub Section set up in a free trade zone/electronic hardware technology park/software technology park after

certain due dates. The export from Japan branch of the assessee is clearly not covered u/s 10A (2) of the Act."

13. The CIT (A) while reversing the aforesaid view of the assessee

gave the following reasons:-

"6.3 there is no doubt as per Explanation 3 to Section 10A as noted above the profits and gains derived from outside development of computer software including services of development of software outside India is deemed to be profit and gains derived from the export of computers software outside India w.e.f. 1-4-2001. There is no doubt the Japan Branch has been opened by the appellant as per the agreement with the Japanese company to also provide onside development service with 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 that profit derived by the appellant company from its Japan Branch in reference to the onsite service provided quality for exemption u/s 10A of the IT act and the AO is directed to consider the same as exempt u/s 10A of the Act."

14. The ITAT simply reproduced the above quoted order of the CIT

(A) and affirmed the same without viewing this issue on right

perspective.

15. Before us an attempt was made by counsel for both the sides to

interpret the documents filed by the assessee including RBI

permission in their favour, that is, on the basis of some documents

the assessee claims that Explanation 3 of Section 10A of the Act is

satisfied whereas the Revenue feels otherwise. However, since

proper exercise is not done by any of the authority below, we set

aside the orders and remit the case back to the Assessing Officer to

decide the issue afresh in the light of documents produced and

having regard to the principles laid down in this order.