Whether income earned from development of software upgrades for Network Management Systems for smooth working of VSAT service, as part of business of telecommunication, is eligible for deduction u/s 80-IA(4) - YES: HC

 THE issues before the Bench are - Whether the income earned from development of software upgrades for Network Management Systems for smooth and trouble free working of VSAT service provided by the assessee, as part of business of telecommunication services, is eligible for deduction u/s 80-IA(4)(ii) of the Act and whether the INSAT 2E is a domestic satellite within the meaning of sub-clause (ii) of Clause (4) of Section 80-IA of the Act, despite the fact that British Telecom had leased it to the assessee. And the verdict goes in favour of the assessee.

Facts of the case

assessee is a public limited company and was providing satellite based telecommunication solutions including VSAT services, up-linking services, play out services and broadband service through satellite. It had earned income from the said services, besides rental income and income from other sources. In the return of income, it had claimed deduction u/s 80IA of the Act of Rs.4,88,29,013/- and after the adjustment, had declared total taxable income of Rs. 5,45,89,013/-.

The AO treated Rs.1,42,34,278/- as income earned by the assessee from domestic satellite service. The AO referred to notes on accounts in which the assessee had disclosed that payment of Rs.13,42,288/- was made for space segment charges in foreign currency. This payment was made to British Telecom (Worldwide) for use of satellite service in the Indian Satellite INSAT 2E. The AO held that the said satellite was not a 'domestic satellite' as it was owned by Department of Space, Government of India, which was not an Indian company and was being operated by British Telecom (Worldwide), a foreign company. The AO to compute and make the aforesaid addition of Rs.1,42,34,278/- observed that the assessee had made payment of Rs.13,42,288/- to British Telecom (Worldwide) and had not shown any income or receipts earned from any third party. The addition was made holding that the income included income from satellite services not in the nature of domestic satellite service as defined for purpose of the Section 80IA. The profit/income disclosed by the assessee was notionally on proportionate basis treated as profit/income earned from satellite services, not being domestic satellite services.

The said view, however, was not accepted by the CIT (Appeals), who held that British Telecom (Worldwide) or INTELSAT did not have ownership right over the satellite. Relying upon the letter dated 21stNovember, 2007, written by the Director, ISRO, it was held that the satellite was owned by the Department of Space, Government of India and, therefore, the AO was not justified in excluding the income earned from the domestic satellite services. The view of the CIT (Appeals) was affirmed by the tribunal.

The AO also noticed that the assessee had shown sales of Rs.2,12,28,512/-. On scrutiny of details, it was noticed that major sales were in respect of Antenna, RFT and other miscellaneous items, which included computer printer, UPS, CTV, air conditioner, hand camera, generator sets, telephone instruments, video conferencing systems, monitor etc. He held that the said equipments could be bought and procured from the Original Equipment Manufacturers (OEMS, for short) including the foreign vendors. Accordingly, Rs.50,42,717/- was excluded from the deduction claimed u/s 80IA of the Act as income not derived from specified services, after noticing that the cost of material was Rs.1,61,85,795/-. The CIT (Appeals) upheld the said addition holding that this was income derived from trading in goods. The tribunal has deleted the said addition.

On further appeal, the High Court held that,

The

++ Clause (ii) to Section 80IA (4) quoted above can be bifurcated and divided into several parts. It applies to an undertaking which had started or was providing; (i) telecommunication services whether basic or cellular, (ii) radio paging (iii) domestic satellite service (iv) network of trunking, (v) broadband network and (vi) Internet service. The dates during which the said services should be started/provided is stipulated. Any company/assessee providing the said services was entitled to claim benefit in respect of income earned i.e., profits and gains derived from the said services. Therefore, the first and the foremost requirement, when a deduction is claimed with reference to clause (ii) of Section 80IA (4), is to determine and decide whether activity undertaken by the assessee is covered by any of categories mentioned in clause (ii) to Section 80IA(4). This aspect has somehow escaped notice of the authorities as well as the tribunal. This has resulted in confusion as the AO has made several additions including addition for software sales, domestic satellite services etc. There is no clear and direct finding on the precise nature of the activity undertaken resulting in income earned and whether or not they fall within one of the aforesaid specified categories. To some extent, the assessee is also responsible for the said confusion because of their reply in the course of the assessment proceedings. The AO had not appreciated and understood the issue and the proper legal affect of clause (ii) of Section 80IA (4);

++ the assessee holds a VSAT license to establish, maintain and operate closed users group, an Internet license to establish, maintain and operate internet services and a license/permission from the Ministry of Information and Broadcasting for providing uplinking services. The case of the assesse is that they have incurred an expenditure for utilization of space segment on a satellite to provide the said services. It is not their case that they are in the business of providing lease/ sale of space segment or satellite services or that they were providing domestic satellite services. Contention of the assessee was/is that as a broadband/internet service provider etc. it had procured space segment in the satellite and paid charges in foreign currency for utilizing space segment. It was an expense, which was incurred and not that any income was earned. The question is not whether any expense was incurred in respect of the services stipulated in clause (ii) of Section 80IA (4), but whether the assessee has earned income derived from the specified services. It is not the case of the assessee that it was providing domestic satellite services and earning income from the said activity. The term “domestic satellite” as defined in the explanation means the satellite owned and operated by an Indian company for providing telecommunication services. The assessee is not an owner of the domestic satellite and nor is it operating the satellite. On the other hand, it is apparent that the assessee is claiming benefit/coverage under the said section on the basis that it is providing broadband/internet services etc. As long as it was providing the stipulated services and had received payments for the specified services, the income earned would qualify for deduction u/s 80IA(4)(ii). In case the assessee incurs expenditure to buy and utilize space segment on a satellite for providing the qualifying services, the expenditure incurred cannot be disallowed and no notional income can be computed or reduced from the income earned/derived from the qualifying service. In view of the said position and in the absence of details, we have no option, but to remit the matter to the tribunal to examine the said aspect afresh. The tribunal has to examine and clearly decide nature and character of service rendered by the assessee to third parties and whether the same qualifies and is a prescribed/stipulated service u/s 80IA. The order of remit is also necessary in view of the ambiguous stand of the assessee before the AO and the appellate authorities which has contributed to the confusion;

++ the legal contention of assessee is substantially correct. However, what was relevant and required examination was the contracts under which the sales were made. Sale of TV Camera, Air Conditioner, generator sets per se or on standalone basis would not qualify for deduction 80IA read with sub-section (4) clause (ii). On the other hand, in case the assessee has been awarded a contract for providing telecommunication service, network of trunking and broadband/internet services and while and for executing the said contract, generator sets, air conditioner etc. were sold as a part of a complete package, then the income earned may qualify for deduction u/s 80IA. Therefore, each contract and nature thereof has to be examined. It has to be ascertained whether it was a case of supply of goods or it was a case where the assessee was providing qualifying services which mandated and required inextricably or as an necessary requirement, (under the same contract or under a different contract), sale/supply goods to operationalize and use/provide the telecommunication services. In case, the sale of goods was inextricably linked, had nexus and was connected with the primary purpose of providing or starting telecommunication services, the assessee will be entitled to benefit u/s 80IA. Otherwise, the assessee will not be entitled to exemption u/s 80IA on the transaction. Whether the commodities/goods could have been also purchased from a third party may not relevant and the determinative factor in many a case. It is the predominant or primary reason or purpose why the contract was entered into, and whether it has direct nexus and is inextricably linked with providing the qualifying activities, is and would be the determinative factor. The substantial question of law is accordingly answered. An order of remit is passed, with a direction to the tribunal to decide the issue/question afresh in the light of the above observation/ratio