2020 (10) TMI 711 - AT - Income Tax

Assessee wins appeal for service fees deduction under Section 80IC

M/s Xalted Information Systems Pvt. Ltd. Versus The Deputy Commissioner of Income Tax, Circle 7 (1) (2) Bengaluru.

The Tribunal allowed the appeal by the assessee, holding that the service fees had a clear nexus with the supply of software and were integral to the ... Deduction u/s. 80IC - service fees income - Whether deduction should be allowed on the services fees also as it has a close nexus with the supply of software and hence has to be regarded as part of the profits derived from the eligible business? - Conclusion of the CIT(Appeals) was that service activity was separate and independent and had nothing to do with the supply of software by the assessee - HELD THAT:- the contracts are with 3 different parties. It is clear from the submissions made before the CIT(A) that the service income in respect of which the Assessee claimed deduction u/s.80IC of the Act had a clear nexus with the supply of software and providing services were inter-linked and therefore the service fees received was to be regarded as profits derived by the industrial undertaking from manufacture of goods. As decided in own case [2020 (5) TMI 14 - ITAT BANGALORE] the claim made by the assessee for deduction u/s. 80IC of the Act on service income ought to have been allowed by the AO/CIT(A) and they fell into an error in not allowing the said claim. We therefore hold that the assessee is entitled to claim deduction u/s. 80IC of the Act on service income - Decided in favour of assessee. Issues Involved:1. Whether the revenue authorities were justified in refusing to allow deduction under Section 80IC of the Income-tax Act, 1961, for a sum of Rs. 62,13,596.Issue-wise Detailed Analysis:Issue 1: Eligibility for Deduction under Section 80IC:The core issue in this appeal is whether the revenue authorities were justified in refusing the deduction under Section 80IC of the Income-tax Act, 1961, for a sum of Rs. 62,13,596. The assessee, a company engaged in telecommunication, software development, and trading in telecommunication hardware, claimed this deduction in its return for the assessment year 2013-14.Facts and Circumstances:The assessee initially claimed a deduction of Rs. 14,52,171 under Section 80IC, which was allowed by the Assessing Officer (AO) in the assessment order dated 22.2.2016. However, the Principal Commissioner of Income Tax (Pr.CIT) set aside this order under Section 263 and directed the AO to re-examine the claim. Upon re-examination, the AO disallowed the deduction on service fees amounting to Rs. 62,13,596, stating that service fees cannot be equated with the manufacture of computer software.Nature of Services:The assessee provided a breakdown of the service fees received from three entities: Nepal Telecom, Satyam Computer Services Limited, and Ericsson India Private Limited. The assessee argued that these services, which included installation, training, support services, and testing, were integral to the software supplied and thus should be considered part of the profits derived from the eligible business under Section 80IC.Contracts and Payment Terms:1. Nepal Telecom: The contract involved supply, delivery, installation, and commissioning of the GSM Roaming and NRTRDE System Upgrade. Payment terms linked the completion of services to the acceptance of the software, indicating that services were integral to the supply of the product.2. Ericsson India Private Limited: Similar to the Nepal Telecom contract, this agreement involved supply and services, with payment terms contingent on the completion of validation and acceptance tests.3. Satyam Computer Services Limited: The contract was for providing interim support to Bharat Electronics Limited (BEL) and Mahanagar Telecom Nigam Limited (MTNL), related to software previously supplied by the assessee.CIT(Appeals) Decision:The CIT(A) concluded that the service activities were separate and independent from the supply of software and thus did not qualify for the deduction under Section 80IC. The CIT(A) emphasized that the service fees were invoiced separately and could be performed by any other company, indicating a lack of nexus with the software sales.Tribunal's Analysis:The Tribunal referenced its previous decision in the assessee’s own case for AY 2014-15, where it was held that the supply of software and the provision of services were interlinked, and service fees should be regarded as profits derived from the industrial undertaking. The Tribunal also cited several judicial precedents supporting the view that service income related to the supply of manufactured goods qualifies for deduction under Section 80IC.Conclusion:The Tribunal concluded that the service fees had a clear nexus with the supply of software and were integral to the business. Therefore, the assessee was entitled to the deduction under Section 80IC for the service income of Rs. 62,13,596. The appeal by the assessee was allowed.Judgment:The appeal by the assessee is allowed, and the assessee is entitled to claim the deduction under Section 80IC on the service income of Rs. 62,13,596. The judgment was pronounced in the open court on 14th October 2020.