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Case Number

I.T.A No. 16.Hyd/2013, Assessment Year 2008-09

Disposition

in part

Advocates

Appellant by: Sri Ravi Bhardwaj
Respondent by: Sri D. Sudhakar Rao

Judges

Chandra Poojari, A.M
Saktijit Dey, J.M

Acts

FINANCE ACT 2012
u/s. 143(3) r.w.s. 144C(13) of the Income- tax Act, 1961
section 29 income referred to in section 28
section 40(a)(ia) of the Income-tax Act, 1961 ('the Act')

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Smart Summary

Tribunal Opinion Summary: ITA No. 16/Hyd/2013 (Assessment Year 2008-09)

Factual and Procedural Background

Source: Order dated 9 October 2013, Income Tax Appellate Tribunal, Hyderabad Bench 'B'. Members: Chandra Poojari (Accountant Member) & Saktijit Dey (Judicial Member).

This appeal was filed by the assessee, M/s. Virtusa (India) Pvt. Ltd., against an assessment order passed under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 following directions of the Dispute Resolution Panel (DRP), Hyderabad for the assessment year 2008-09. The assessee raised multiple grounds of appeal challenging various aspects of the assessment, including the characterization of a Chennai unit relative to the Hyderabad unit, disallowance under section 40(a)(ia) for annual software license fees, treatment of certain charges and reimbursements for computation of deduction under section 10A, and related matters.

The assessee subsequently filed a letter dated 8 October 2013 informing the Tribunal that certain grounds (specifically ground Nos. 3, 4(a), 5, 8 and 9 as enumerated in the grounds) were not pressed; those grounds were dismissed as not pressed. The Tribunal proceeded to adjudicate ground Nos. 1 and 2 (relating to formation/character of the Chennai unit) and certain other grounds that remained pressed (including ground 4(b), ground 6 and ground 7).

Legal Issues Presented

Whether the Chennai unit was formed by splitting up of the Hyderabad unit or by reconstruction, and whether the Chennai unit is a distinct and independent unit or merely a continuation/expansion of the Hyderabad unit (grounds 1 and 2).
Whether statutory disallowances (specifically disallowance under section 40(a)(ia)) should nonetheless be treated as business profits eligible for deduction under section 10A (ground 4(b)).
Whether amounts such as communication charges, insurance charges and reimbursement of expenses (including reimbursement to Virtusa Corporation, USA) that are attributable to delivery of computer software outside India should be reduced from export turnover alone or from both export turnover and total turnover when computing deduction under section 10A (grounds 6 and 7).

Arguments of the Parties

Appellant's Arguments (as presented in the grounds of appeal)

The Chennai unit was formed by splitting up of the Hyderabad unit for the subject assessment year; the Assessing Officer had taken inconsistent views in earlier assessment years (2006-07 and 2007-08) by treating it as reconstruction for those years, indicating inconsistency and lack of proper application of mind (ground 1).
The DRP erred by holding that the Chennai unit was not formed by reconstruction and then concluding (without stated reasons) that the Chennai unit was not a distinct and independent unit but a continuation/expansion of the Hyderabad unit (ground 2).
The Assessing Officer erred in disallowing annual software license fees of Rs. 3,98,51,957 paid to Ingram Micro India Pvt. Ltd. under section 40(a)(ia) on the ground that the payment was in the nature of royalty taxable under section 194J (ground 3) — though this ground was later not pressed.
Without prejudice, the assessee contended that any retrospective imposition of withholding liability (by way of explanation inserted later) could not be visited upon it, and that statutory disallowances ought to be considered for the purposes of computing deduction under section 10A (ground 4(b)).
The assessee challenged the reduction of communication and insurance charges (and certain reimbursements) from export turnover for computing deduction under section 10A and contended that if these amounts are reduced from export turnover they should also be reduced from total turnover (grounds 5, 6 and 7).

The written record in the opinion does not contain a detailed, point-by-point presentation of the Respondent's counter-arguments; the Order records hearings and references to legal precedents relied upon by the Tribunal in reaching its decision.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Tribunal decision in assessee's own case: ITA No.1962/Hyd/2011 (order dated 30.8.2013)	Held that Chennai Unit and Hyderabad Unit are not two distinct and independent units; directed AO to allow benefit under section 10A to the Chennai Unit.	The Tribunal in the present appeal followed the coordinate Bench decision and, on that basis, allowed the assessee's ground relating to the character of the Chennai unit and directed the AO to allow benefit under section 10A to the Chennai Unit.
ITO vs. Keval Construction (354 ITR 13) (Guj)	Held that the ultimate profit of the assessee, even after making disallowances under section 40(a)(ia), would qualify for deduction as provided under section 80IB (principle on recomputed profits).	Relied upon as authority for the proposition that statutory disallowances (such as under section 40(a)(ia)) do not preclude the recomputed profit from qualifying for deduction under provisions analogous to section 10A; used to support allowing ground 4(b).
Bartronics India Ltd. vs. Assistant Commissioner of Income-tax (52 SOT 188) (Hyd)	Supported the view that recomputed profits (after disallowances) are to be considered for the purpose of computing deduction (discussed in context of section 10B).	Cited in support of the general rule that disallowances made by the AO should be considered in recomputed profits for computing statutory deductions (applied by analogy to section 10A in the present matter).
DCIT vs. Planet Online Pvt. Ltd. (ITA No.1016/Hyd/07) (Tribunal)	Held that exemption under section 10B must be computed on profits determined after taking into account disallowances under section 43B (i.e., recomputed profits are to be used).	Used as supporting authority for the proposition that exemption/deduction is to be computed on recomputed profits after statutory disallowances; applied analogously to deduction under section 10A.
ITO vs. M/s. Sahasra Electronics Private Limited (2010-TIOL-89-ITAT-DEL)	Held that when the assessee's profit from eligible business is recomputed by the AO, the deduction under section 10A is to be allowed on the recomputed profit.	Cited as a settled proposition reinforcing that recomputed profits (after disallowances) are eligible for deduction under section 10A.
M/s. International Gold Co. Ltd. vs. Income-tax Officer (2010-TIOL-652-ITAT-MUM)	Held that even if a disallowance is sustained, it increases the business profits which are then eligible for exemption under section 10A (citing Hon'ble Bombay High Court in Gem Plus).	Relied upon to support the conclusion that disallowances, when added back, can increase the business profits that qualify for deduction under section 10A.
CIT vs. Gem Plus Jewellery India Ltd. [(2010) 233-CTR(Bom)-24 : 42-DTR-73]	Held that disallowance of certain contributions/payments results in an increase in business profits and that exemption under section 10A is allowable with reference to such enhanced income.	Applied to hold that statutory disallowances should be treated as part of business profits for computing deduction under section 10A.
Gem Plus Jewellery (330 ITR 175) (Bombay High Court) (SB)	Referred to in relation to the principle that if certain components (communication, insurance, reimbursements attributable to delivery of software outside India) are to be reduced from export turnover, they should also be reduced from total turnover while computing deduction under section 10A.	Relied upon (along with Sak Soft) to direct the AO to reduce the impugned amounts both from export turnover and total turnover when computing deduction under section 10A.
Sak Soft (313 ITR (AT) 353) (Special Bench)	Held that communication charges, insurance charges and reimbursement of expenses attributable to delivery of computer software outside India should be reduced from both export turnover and total turnover for the purpose of computing deduction under section 10A.	Followed by the Tribunal to direct the AO to reduce the impugned amounts from both export turnover and total turnover while computing deduction under section 10A.

Court's Reasoning and Analysis

The Tribunal proceeded by addressing the grounds that were pressed and summarized the legal reasoning as follows (limited strictly to the content of the opinion):

Grounds not pressed: The Tribunal recorded that ground Nos. 3, 4(a), 5, 8 and 9 were not pressed by the assessee (letter dated 8 October 2013) and accordingly those grounds were dismissed as not pressed.
Character of the Chennai unit (Grounds 1 & 2): The Tribunal observed that a coordinate Bench (ITA No.1962/Hyd/2011, order dated 30.8.2013) had already considered the same issue in the assessee's own case for AY 2007-08 and had held that the Chennai Unit and Hyderabad Unit were not two distinct and independent units, directing allowance of benefit under section 10A to the Chennai Unit. The Tribunal followed this decision, stating that the issue had been set at rest by the coordinate Bench, and allowed the assessee's ground on this point, directing the AO to allow benefit under section 10A to the Chennai Unit.
Statutory disallowances and section 10A (Ground 4(b)): The Tribunal noted that the question whether statutory disallowances (for example under section 40(a)(ia)) should nevertheless be considered for the purpose of computing deduction was squarely covered by a series of authorities. The Tribunal cited ITO vs. Keval Construction, Bartronics, Planet Online, Sahasra Electronics, International Gold Co. Ltd. and the Bombay High Court decision in Gem Plus Jewellery to support the proposition that recomputed profits (after disallowances) are to be used for computing the statutory deduction. On that basis, the Tribunal concluded that the amount of statutory disallowance has to be considered as business profit eligible for deduction under section 10A and allowed the assessee's ground.
Communication, insurance charges and reimbursements (Grounds 6 & 7): For the issue whether such components attributable to delivery of computer software outside India should be reduced from export turnover and/or total turnover, the Tribunal relied on the Special Bench decision in Sak Soft and the Bombay High Court decision in Gem Plus Jewellery. Applying those authorities, the Tribunal directed the AO to reduce the impugned amounts both from export turnover as well as from total turnover while computing deduction under section 10A. The Tribunal also clarified that the assessee shall not get double benefit (i.e., the benefit claimed under ground No. 6 should not be duplicated under ground No. 7) and that findings on ground No. 7 were subject to the findings given in ground No. 6.
Disposition: Having applied the above principles and followed the cited authorities and the coordinate Bench decision in the assessee's own earlier appeal, the Tribunal allowed the contested grounds in favour of the assessee in the manner indicated and directed the Assessing Officer to recompute the deduction and adjust turnover figures as directed.

Holding and Implications

APPEAL PARTLY ALLOWED

Direct consequences from the Tribunal's order (as stated in the opinion):

The Tribunal allowed the grounds relating to the character of the Chennai unit (grounds 1 & 2) and directed the Assessing Officer to allow the benefit under section 10A of the Income-tax Act to the Chennai Unit, following the earlier coordinate Bench decision (ITA No.1962/Hyd/2011 dated 30.8.2013).
On ground 4(b), the Tribunal held that statutory disallowances (such as under section 40(a)(ia)) are to be considered as business profits eligible for deduction under section 10A and directed the AO to recompute the deduction accordingly.
On grounds 6 and 7, the Tribunal directed the AO to reduce the impugned amounts (communication charges, insurance charges and reimbursements attributable to delivery of software outside India) from both export turnover and total turnover while computing deduction under section 10A, following Sak Soft and Gem Plus Jewellery. The Tribunal cautioned that the assessee should not receive double benefit from the same adjustments.
Overall, the appeal was partly allowed and the Assessing Officer was directed to recompute the relevant figures and deductions consistent with the Tribunal's directions.

The opinion does not elaborate on broader legal or policy implications beyond the direct effects specified above; it principally applies and follows existing Tribunal and High Court authorities and a coordinate Bench decision in the assessee's own case.

Order pronounced in open court on 9 October 2013. (Signed by Saktijit Dey, Judicial Member and Chandra Poojari, Accountant Member)

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M/S. Virtusa (India) Pvt. Ltd. Hyderabad v. The Deputy Commissioner Of Income-Tax, Circle-3(3) Hyderabad .

IN THE INCOME TAX APPELLATE TRIBUNAL

HYDERABAD BENCH 'B', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER and

SHRI SAKTIJIT DEY, JUDICIAL MEMBER

ITA No. 16/Hyd/2013

Assessment year 2008-09

M/s. Virtusa (India) Pvt. Ltd. Hyderabad

PAN: AABCV4077E

vs. The Deputy Commissioner of Income-tax, Circle-3(3) Hyderabad

Appellant Respondent

Appellant by: Sri Ravi Bhardwaj Respondent by: Sri D. Sudhakar Rao Date of hearing: 09.10.2013 Date of pronouncement: 09.10.2013

O R D E R

PER CHANDRA POOJARI, AM:

This appeal by the assessee is directed against the assessment order passed u/s. 143(3) r.w.s. 144C(13) of the Income- tax Act, 1961 on the direction of dispute resolution Panel (DRP), Hyderabad for A.Y. 2008-09.

2. The assessee raised the following grounds:

Each of the grounds given below is independent and without prejudice to the other grounds of appeal preferred by the Appellant.

Based on the facts and circumstances of the case and in law, the learned Assessing Officer (" AO") erred in:

1. Contending that the Chennai unit is formed by splitting up of the Hyderabad unit for the subject assessment year. Whereas on the identical set of facts, the learned AO for assessment year 2006-07 and 2007-08 held that the Chennai unit is formed by reconstruction of the Hyderabad unit. The approach adopted by the learned AO for framing the assessment for different assessment years on identical set of facts clearly indicates an

inconsistency in approach and lack of proper application of mind.

Based on the facts and circumstances of the case and in law, the learned AO and the Hon'ble Dispute Resolution Panel ("DRP") erred in:

2. Having held that the Chennai unit is not formed by reconstruction of the Hyderabad unit, the Hon'ble DRP erred in law and on facts by holding that the Chennai unit is not a distinct and independent unit but a continuation/expansion of the Hyderabad unit of the Appellant without stating any reasons.

3. Disallowing the annual software license fees of Rs. 3,98,51,957 paid to Ingram Micro India Private Limited under section 40(a)(ia) of the Income-tax Act, 1961 ('the Act') on the ground that the payment is in the nature of royalty liable to tax deduction at source under section 194J of the Act.

4. Without prejudice to ground 3 above, assuming but not admitting that, payment made towards annual software license fees is considered as royalty under section 194J of the Act:

(a) Failed to appreciate that the Appellant did not deducted tax at source based on the law as existed at the time of payment/ credit to Ingram Micro India Private Limited. The Explanation 4 to section 9(1)(vi) of the Act was inserted by the Finance Act 2012 with retrospective effect from June 1, 1976. Hence, the Appellant cannot be fastened with retroactive liability to withhold tax which leads to impossibility of performance.

(b) Ought to have considered the amount of statutory disallowances as business profits eligible for deduction under section 10A of the Act.

5. Considering the communication charges and insurance charges incurred by the Appellant as attributable to the delivery of computer software outside India and deducting the same from the export turnover for the computation of deduction under section l0A of the Act.

6. Considering the amount of reimbursement of expenses to Virtusa Corporation, USA of Rs.

1,08,82,616 as expenditure incurred in foreign exchange in providing technical services outside India and deducting the same from the export turnover for the computation of deduction under section 10A of the Act.

7. Without prejudice to ground 5 and 6 above, ought to have appreciated that the communication charges, insurance charges and reimbursement of expenses to Virtusa Corporation, USA, if reduced from the export turnover are also to be reduced from the total turnover.

8. Adding the amount of reimbursement of expenses by associated enterprises of Rs. 4,41,42,852 to the total turnover and export turnover for computation of deduction u/s. 10A of the Act.

9. Reducing the amount of statutory disallowances under the Act from the business profits for computation of deduction under section 10A of the Act.

3. Before us the assessee filed a letter dated 8^thOctober, 2013 informing that ground Nos. 3, 4(a) and 9, 5, 8 are not pressed. Accordingly, these grounds are dismissed as not pressed.

4. Now, we take ground Nos. 1 and 2 for adjudication which read as follows:

1. Contending that the Chennai unit is formed by splitting up of the Hyderabad unit for the subject assessment year. Whereas on the identical set of facts, the learned AO for assessment year 2006- 07 and 2007-08 held that the Chennai unit is formed by reconstruction of the Hyderabad unit. The approach adopted by the learned AO for framing the assessment for different assessment years on identical set of facts clearly indicates an inconsistency in approach and lack of proper application of mind.

the Hyderabad unit of the Appellant without stating any reasons.

5. After hearing both the parties, were of the opinion that similar issue was considered by this Tribunal in assessee's own case for A.Y. 2007-08 vide order dated 30.8.2013 in ITA No. 1962/Hyd/ 2011 wherein the Tribunal held in para 25 as follows:

"25. We have considered the submissions of the parties on this issue. As can be seen from the order of the DRP, though they have accepted the fact that the Chennai unit is not formed by reconstruction of the Hyderabad unit, but, they ultimately held that Chennai Unit and Hyderabad Unit are not two distinct and independent units. However, on perusal of the aforesaid order of the coordinate Bench, we find that the issue in dispute has been set at rest and decided in favour of the assessee. Therefore, following the decision of the coordinate Bench, we allow the ground of the assessee and direct the AO to allow benefit u/s. 10A of the Act to the Chennai Unit."

6. In view of the above order of the Tribunal, we are inclined to decide the issue in favour of the assessee. This ground of the assessee is allowed.

7. The next ground for our consideration is ground No. 4(b) which reads as follows:

4(b) Ought to have considered the amount of statutory disallowances as business profits eligible for deduction under section 10A of the Act.

8. After hearing both the parties, we are of the opinion that this issue is squarely covered by the judgement of ITO vs. Keval Construction (354 ITR 13) (Guj) wherein held that ultimate profit of the assessee as computed even after making disallowance u/s. 40(a)(ia) would qualify for deduction as provided under section 80IB. Further same view was taken in the case of Bartronics India Ltd. vs. Assistant Commissioner of Income-tax (52 SOT 188) (Hyd) wherein held as under:

"10. We have heard the rival submissions and perused the materials on record. It is the well established fact that as per the provisions of section 10B recomputed profits shall be considered for the purpose of computation of deduction u/s 10B. In view of various Tribunals & High Courts have held that disallowances of expenditure should be computed for the purpose of deduction u/s 10B accordingly if the assessing Officer recomputes the profit from eligible business by disallowing certain expenditure and liability u/s 40(a) (ia) and 43B, such recomputed profit shall be considered for the purpose of deduction u/s 43B. The assessee has placed his reliance on the following judgments which support the claim of the assessee:

(a) The decision of this Tribunal in the case of DCIT vs. Planet Online Pvt. Ltd. in ITA No. 1016/Hyd/07 where it has been held: "Profits and gains of business is defined in section 28 and as per section 29 income referred to in section 28 shall be computed in accordance with the provisions of section 30 to 43D. From the above provisions in the statute, it thus clear that the profit of the undertaking in the case of the appellant has to be computed in accordance with the provisions of the section 30 to 43D., i.e., including the provisions of section 43B of the Act. In view of the above legal provisions in my considered view, exemption under section 10B has to be computed on the profits determined after taking into account the disallowances to be made under section 43B of the Act."

(b) The Delhi Tribunal in the case of ITO vs. M/s. Sahasra Electronics Private Limited (2010-TIOL-89- ITAT-DEL) held that it is a settled proposition that when the assessee is claiming exemption under section 10A and assessee's profit from eligible business by the AO is recomputed the deduction under section 10A is also to be allowed on the recomputed profit under section 10A.

(c) Delhi Tribunal in the case of M/s. International Gold Co. Ltd. vs. Income tax officer 2010-TIOL-652-ITAT- MUM) held that even if the disallowance is sustained, it will only go to increase the business profits of the assessee which is exempt under section 10A as per the decision of the Hon'ble Bombay High Court in the case of Gemplus

Jewellery India Ltd and allowed the assessee's appeal.

(d) Hon'ble Bombay High Court in the case of CIT Vs. Gem Plus Jewellery India Ltd [(2010) 233- CTR(Bom)-24 : 42-DTR-73] held that exemption under section 10A - profits and gains derived from exports - Addition on account of disallowance of employer's and employees' contribution towards PF/ESIC - Disallowance of the PF/ESIC payments has been made because of the statutory provisions i.e. Sec. 43B in the case of the employer's contribution and Sec. 36(1)(v) r.w.s. 2(24)(x) in the case of the employees' contribution which have been deemed to be the income of the assessee - plain consequence of the disallowance and the add back that has been made by the AO is an increase in the business profits of the assessee - Exemption under section lOA is allowable with reference to such enhanced income.

11. In view of the above discussion, the assessing officer is directed to consider the additions made above while calculating deduction u/s 10B. Accordingly the AO is directed to recompute the deduction after taking into account disallowances made above. Accordingly these grounds of the assessee are allowed."

9. In view of the above discussion, we are inclined to hold that amount of statutory disallowance has to be considered as business profit eligible for deduction u/s. 10A of the Act. This ground is allowed.

10. The next ground for adjudication is ground No. 6 which reads as follows:

6. Considering the amount of reimbursement of expenses to Virtusa Corporation, USA of Rs. 1,08,82,616 as expenditure incurred in foreign exchange in providing technical services outside India and deducting the same from the export turnover for the computation of deduction under section 10A of the Act.

11. This issue is covered by the order of the Tribunal in the case of Sak Soft (313 ITR (AT) 353) and also by the judgement of Bombay High Court in the case of Gem Plus Jewellery (330 ITR 175) (SB) wherein held that if communication charges, insurance charges and reimbursement of expenses attributable to the delivery of computer software outside India, are to be reduced from the export turnover then the same should as well be reduced from total turnover while computing deduction u/s. 10A of the Act. Therefore, following the aforesaid ratio laid down in the said decisions, we direct the AO to reduce this impugned amount both from the export turnover as well as total turnover while computing deduction u/s. 10A of the Act. Accordingly, this ground is decided in favour of the assessee.

12. The next ground is Ground No. 7 which reads as under:

13. This ground is covered in favour of the assessee by the order of the Special Bench in the case of Sak Soft (313 ITR (AT) 353) wherein held that the above components are to be reduced in export turnover as well as in total turnover. However, we make it clear that the assessee shall not get double benefit once vide Ground No. 6 and another vide ground No. 7. Our findings in Ground No. 7 are subject to the findings given in ground No. 6.

14. In the result, assessee's appeal is partly allowed. Order pronounced in the open court on 9^thOctober, 2013. Sd/-

(SAKTIJIT DEY)

JUDICIAL MEMBER

Sd/-

(CHANDRA POOJARI)

ACCOUNTANT MEMBER

Hyderabad, dated the 9^thOctober, 2013 tprao

Copy forwarded to:

1. M/s. Virtusa (India) Pvt. Ltd., 6-3-1192, 1^stFloor, My Home Tycoon, Begumpet, Kundanbagh, Hyderabad-500 016.

2. The Deputy Commissioner of Income-tax, Circle-3(3), 7^th Floor, 'B' Block, IT Towers, AC Guards, Hyderabad-500 004.

3. The Dispute Resolution Panel, 2^ndFloor, IT Towers, 10-2-3, AC Guards, Hyderabad-4.

4. The Addl. Commissioner of Income-tax, Transfer Pricing, 6^th Floor, 'B' Block, IT Towers, 10-2-3, AC Guards, Hyderabad-4.

5. The Director of Income-tax (International Taxation), IT Towers, 10-2-3, AC Guards, Hyderabad-4.

6. The DR - 'B' Bench, ITAT, Hyderabad

M/S. Virtusa (India)... v. The Deputy Commissio...