Tribunal Remands Assessment Issue; AO Directed on Section 10A Deductions; On-Site Expenses Partially Excluded from Export Turnover.

The appeal was partly allowed. The Tribunal remanded the issue of reopening the assessment to the CIT(A) for further adjudication. It directed the AO not to set off the business loss or unabsorbed depreciation of the non-STPI unit against the STPI unit's income for section 10A deductions. Additionally, the Tribunal ruled that on-site expenses for software development should not be excluded from the export turnover, except for specific technical service charges and ascertainable telecommunication charges.

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Issues Involved:
1. Reopening of the assessment.
2. Adjustment of brought forward loss of non-STPI unit against profit of STPI unit.
3. Reduction of on-site payments for arriving at the export turnover.

Detailed Analysis:

Reopening of the Assessment:
The first grievance of the assessee was that the learned CIT(A) did not adjudicate the issue of reopening the assessment. The assessee argued that the condition precedent for reopening was absent. The assessment order indicated that the case was selected for scrutiny and notices under sections 143(2)/142(1) were issued. However, the assessment order did not provide the reasons for issuing a notice under section 148. The assessee did not request a copy of the reasons recorded for issuing the notice. Since the learned CIT(A) did not dispose of this ground of appeal, the Tribunal found no alternative but to set aside this issue and remand it back to the learned CIT(A) for proper adjudication as per law.

Adjustment of Brought Forward Loss of Non-STPI Unit Against Profit of STPI Unit:
The second grievance was regarding the confirmation by the learned CIT(A) of the AO's finding that the brought forward loss of the non-STPI unit should be adjusted against the profit of the STPI unit before allowing the deduction under section 10A. The AO had set off the entire brought forward loss from the profit of the assessee's 2003-04 income, reducing the deduction under section 10A. The learned CIT(A) annulled the order under section 154 for the assessment year 2003-04, recognizing a brought forward loss of Rs. 52,33,728 and held that unabsorbed loss must be adjusted against the profit of the STPI unit for allowing the deduction under section 10A.

Before the Tribunal, the assessee's representative cited several decisions, including those of the Bangalore Bench, which supported the view that section 10A allows a deduction from total income without setting off brought forward and current year's loss of non-section 10A units. The Tribunal, referencing the decision in Yokogawa India Ltd. and other cases, concluded that section 10A allows a deduction from the total income of the specific undertaking without setting off losses from non-STPI units. The Tribunal directed the AO not to set off business loss or unabsorbed depreciation of the non-STPI unit from the income of the STPI unit for computing the deduction under section 10A.

Reduction of On-site Payments for Arriving at the Export Turnover:
The last grievance was that the learned CIT(A) confirmed the reduction of on-site payments for arriving at the export turnover. The AO excluded Rs. 5,05,16,068 from the export turnover, considering it as expenditure incurred in providing technical services outside India. The assessee argued that on-site expenses should not be excluded from the export turnover as they were for the development of software, not technical services.

The Tribunal noted that computer software development involves both off-site and on-site expenses. Payments made to engineers for on-site development are not considered technical services under section 10A. The Tribunal referenced CBDT Circular No. 694, which clarified that computer programs developed on-site are not physical goods but intellectual property. Therefore, the AO was not justified in excluding Rs. 4,86,63,187 from the export turnover.

Regarding the Rs. 78,975 debited as technical service charges, the Tribunal upheld the AO's exclusion from the export turnover, as the expenditure was explicitly labeled as technical service charges. For the Rs. 17,73,906 debited as communication charges, the Tribunal directed the AO to ascertain the telecommunication charges attributable to the delivery of software and reduce that amount from the export turnover, in line with the decision in I Gate Global Solutions Ltd.

Conclusion:
The appeal filed by the assessee was partly allowed. The issue of reopening the assessment was remanded to the learned CIT(A) for proper adjudication. The Tribunal directed the AO not to set off business loss or unabsorbed depreciation of the non-STPI unit from the income of the STPI unit for computing the deduction under section 10A. The Tribunal also ruled that on-site expenses for software development should not be excluded from the export turnover, except for specific technical service charges and ascertainable telecommunication charges.

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