IVL India (P) Ltd. vs CIT

C.N. Ramachandran Nair, J.—The appellant-assessee is a private limited company engaged in business of export of computer software. Besides being engaged in the export of computer software, the assessee is also engaged in rendering consultancy services in India, from which it earns substantial income. During the assessment year 1999-2000 the assessee claimed benefit of s. 80HHE which entitles it for deduction of the profit earned from the export of computer software. Sub-s. (3) of s. 80HHE provides that the deduction admissible on the profit on export of computer software is the amount which bears to the profit of the business as the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. Even though Expln. (d) to s. 80HHE specifically provides that eligible deduction of profit on export should be computed by reducing from the total profit 90 per cent of the receipts by way of brokerage, commission, rent, charges or any other receipt of a similar nature included in such profit, the assessee did not exclude 90 per cent of the consultancy charges received from local customers, which is the profit from the local business in rendering consultancy services. Even though the claim so made was allowed in the original assessment completed by the AO, later on noticing the mistake of including profit received for local business by way of consultancy charges in the export profit in violation of the above statutory provision, the AO revised the assessment in exercise of powers conferred under s. 147 of the IT Act. The revised assessment limiting the claim of deduction on export of software by excluding profit attributable to consultancy services rendered within India, was challenged by the assessee in appeal before the CIT(A), who allowed the claim. On second appeal filed by the Revenue, the Tribunal noticed that the issue is settled by decision of the Supreme Court in Commissioner, Income Tax, Thiruvananthapuram Vs. K. Ravindranathan Nair, and based on the said decision, the Tribunal reversed the order of the first appellate authority and restored the revised assessment. It is against this order the assessee has filed this appeal. We have heard advocate Sri T.M. Sreedharan appearing for the appellant and standing counsel for the respondent.

Even though validity of reassessment completed under s. 147 was not subject-matter of contest before the Tribunal and the issue does not arise from the orders of the Tribunal, counsel appearing for the assessee raised a contention that being a pure legal question touching upon the jurisdiction of the officer to revise assessment under s. 147, the assessee be permitted to raise this ground in the appeal filed before this Court under s. 260A of the IT Act. We have permitted counsel for the assessee to advance arguments on the validity of reassessment and we have heard him on this issue as well.

On the merits counsel for the appellant contended that the decision of the Supreme Court referred above relied on by the Tribunal is not applicable to the facts of this case because what was considered was processing charges received by cashew exporter and 90 per cent thereof was ordered to be reduced by the Supreme Court by relying on Expln. (baa) to s. 80HHC of the IT Act. Standing counsel on the other hand contended that the consultancy charge received by the assessee for consultancy services in India is similar to the processing charge received by cashew exporter which is for services rendered to parties within the country.

After hearing both sides and after going through the statutory provisions and the decision of the Supreme Court above-referred, we feel the above decision is squarely applicable to the facts of this case. This is because Expln. (d) to s. 80HHE is similar to Expln. (baa) to s. 80HHC of the Act, with reference to which the Supreme Court rendered the above judgment. Explanation (baa) to s. 80HHC states as under :

Profits of the business means the profits of the business as computed under the head Profits and gains of business or profession as reduced by-

(1) ninety per cent of any sum referred to in els. (iiia), (iiib), (iiic), (iii)and (iiie) of s. 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and

(2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India;

The findings of the Supreme Court in the above-referred decision are in the following lines :

Processing charges, which are part of gross total income, form an item of independent income like rent, commission, brokerage, etc., and therefore 90 per cent of the processing charges has also to be reduced from the gross total income to arrive at the business profits.

While considering the issue we have to keep in mind that the deduction admissible is only the profit derived from export business. If the assessee is engaged only in export business, then the entire profit is allowable as deduction, whether it be under s. 80HHC or under s.80HHE. However, dispute arises only when assessee is engaged in local business as well as export business and it has common P and L a/c. The whole exercise provided in the statutory provisions is to determine as precisely as possible the profit attributable to export business which in the case of the assessee is export of computer software. What is specifically provided is that 90 per cent of the items of income which have no relation to export business have to be excluded. All items of income, 90 per cent of which have to be excluded in the computation of eligible export profit for deduction under Expln. (baa) to s. 80HHC and Expln. (d) to s. 80HHE, are not specifically mentioned in the clauses even though some of the items like rent, commission and brokerage are specifically covered. The question, therefore, to be considered is what is the meaning of "any other charges or receipt of a similar nature" included in the profits. Necessarily what is to be considered is the nature of income the exclusion of which from the profit can be treated as an income similar to brokerage, commission, interest or rent. All these items of income like brokerage, commission, interest and rent are not attributable to export business. Assessee itself has no case that consultancy charges received by the assessee in India have anything to do with its export business or earning of income on the export of computer software. In this context it is to be noted that rendering of technical services by the assessee outside India in connection with development or production of software also is specifically made eligible for deduction under sub-cl. (ii) of sub-s. (1) of s. 80GHHE. The exclusion clause contained in Expln. (d) specifically makes it clear that income by way of consultancy charges received for consultancy services rendered in India, which has no connection with export of software, is an item of income similar to other incomes like brokerage, commission and rent which are not attributable to export business. So much so, we feel the Tribunal rightly held that the decision of the Supreme Court in K. Ravindranathan Natrs case (supra) referred above applies to consultancy charges received in India which are unrelated to the business of export of computer software and so much so, 90 per cent of the income by way of consultancy charges received in India should be excluded under Expln. (d) to s. 80HHE in the computation of eligible deduction under the Act. Therefore, on the merits, we uphold the order of the Tribunal and dismiss the assessees appeal.

The next question to be considered is only an additional ground which we permitted the assessee to raise during hearing which is on the validity of reopening of assessment made under s. 147 of the Act. Even though counsel for the assessee contended that all the material facts are available on record and the reassessment under s. 147 is on account of change of opinion, we do not think the position canvassed is any longer available after the amendment to s. 147 of the Act by which any escapement of income can be assessed within four years by invoking s. 147 of the Act and for period beyond four years, reopening is possible only if the assessee suppressed material facts. What is seen in this case is that assessee while working out the eligible deduction did not exclude 90 per cent of the income received by way of consultancy charges which is to be specifically excluded by virtue of mandatory provision contained in Expln. (d) of s. 80HHE of the Act. In fact, since there is an omission to apply the statutory provision in the working out of eligible deduction of profit on export of software, the assessment could even be rectified through rectification proceedings under s. 154. In any case when the mandatory provision is not followed leading to evasion of tax by way of excess relief granted to the assessee, the remedy open to the officer is to revise the assessment by invoking powers under s. 147. So much so, we reject the challenge against reopening of the assessment under s. 147 which is confirmed by the Tribunal.

Accordingly the appeal filed by the assessee is dismissed.