2015 (12) TMI 1547 - AT - Income Tax

Revenue's Appeal Dismissed in Tax Exemption Case for Assessment Year 2009-10

The appeal was filed by the Revenue against the CIT(A)'s order for the assessment year 2009-10, challenging the exemption claimed under section 10A of the ... Exemption u/s. 10A - Held that:- CIT(A) correctly allowed the claim of the assessee observing that the assessee had satisfied the conditions for eligibility to claim exemption under section 10A of the Act. Also observed that the assessee’s claim has also been allowed for the two assessment years following its inception. The assessee has duly proved by various evidences that the business was actually carried out by the assessee and that there were 88 employees employed by the assessee and they were having the requisite expertise and qualification required for the work of the assessee and that the assessee had actually carried out the business during the relevant financial year. All the claims have been duly verified by the AO and in view of this, he deleted the addition. - Decided against revenue ISSUES PRESENTED AND CONSIDERED 1. Whether exemption under section 10A can be denied where the Assessing Officer contends that the assessee showed abnormally high profits, incurred minimal visible operating expenses, and primarily serviced a single related foreign client, suggesting lack of genuine business activity. 2. Whether alleged discrepancies in manpower numbers, low employee remuneration, and certain itemized expenses (foreign travel, partner's remuneration, depreciation on premises, purchase of consumer devices) justify denial of section 10A exemption absent further verification. 3. Whether an appellate authority may admit and rely on additional documentary evidence submitted by the assessee and remand the matter for AO's verification, and whether subsequent AO verification, if affirmative, precludes denial of exemption. 4. Whether the mere existence of common direct control between the assessee and its foreign client (related-party relationship) mandates denial of exemption or a different investigatory standard, in absence of proof of non-genuineness or lack of qualifying activities. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legitimacy of denying section 10A exemption where high profit ratio and sparse visible expenses are contended by AO. Legal framework: Section 10A provides tax exemption for profits of specified new undertakings subject to satisfaction of statutory conditions, including actual conduct of eligible business activity. AO may examine genuineness of claimed exemption by evaluating whether qualifying operations were carried out. Precedent treatment: No specific judicial precedents were relied upon or overruled in the judgment; the Court applied factual appraisal principles rather than overturning any settled law. Interpretation and reasoning: The Tribunal accepted that an AO may challenge a claim where facts suggest improbability of turnover given low expenses. However, such challenge must be grounded in verifiable evidence. The assessee furnished voluminous documentary material (project-wise drawings in paper and CDs, STPI registration and returns, software purchases, internet usage logs, employee records and qualifications). The AO, after remand verification, found the documents authentic and the operational apparatus (software, internet facilities, and employee strength/qualifications) adequate to support the declared turnover and activities. Ratio vs. Obiter: Ratio - An AO's suspicion based on high profit-to-expense ratio is insufficient, by itself, to deny section 10A exemption where documentary evidence and independent verification establish actual qualifying activity and resources commensurate with turnover. Obiter - Skepticism about profit margins or expense patterns remains a permissible auditing angle, but cannot displace verified documentary proof. Conclusions: Denial of exemption solely on the basis of perceived improbability of turnover was not justified where the assessee produced corroborative records and the AO's subsequent verification affirmed their authenticity; allowance of exemption was upheld. Issue 2 - Significance of discrepancies in employee numbers, low pay scales, and certain expense items in assessing genuineness of business for section 10A. Legal framework: Proper inquiry into manpower and expense structure is relevant to determine whether business operations qualifying for exemption were actually carried out; AO may compare claimed operational inputs with documentary records. Precedent treatment: No precedent invoked; the Tribunal applied fact-based evaluation of documentary evidence and verifications. Interpretation and reasoning: The AO noted differences between the transfer-pricing report (80 employees) and salary register (52) and low salaries relative to city norms. The assessee produced detailed employee lists, qualifications, two unit locations (Mumbai and Nashik), and salary records showing total human resources about 88. The AO's remand report accepted the presence of 88 qualified employees and corroborated internet and software expense evidence. The Tribunal therefore treated the earlier apparent discrepancies as resolved by documentary proof and AO's own verification. Ratio vs. Obiter: Ratio - Apparent discrepancies in staffing and expenses must be resolved by reference to documentary evidence and on-the-spot or remand verification; once verified, such discrepancies do not justify denial of relief. Obiter - Low salary levels or specific expense items may justify deeper enquiry but are not independently decisive. Conclusions: The Tribunal found the AO's initial objections to staffing and expenses addressed by the assessee's evidence and AO's remand verification; these factors did not support disallowance of the section 10A claim. Issue 3 - Admissibility and effect of additional evidence supplied on appeal and reliance on AO's remand verification by the appellate authority. Legal framework: Appellate authorities have discretion to admit additional evidence and to remit matters to the AO for verification; findings post-remand are relevant and may be conclusive if they fairly and properly examine the evidence. Precedent treatment: No new legal rule was laid down; the Tribunal applied established practice that remand verification carries weight if properly conducted. Interpretation and reasoning: The CIT(A) forwarded the assessee's additional evidence to the AO for verification. The AO's remand report authenticated the CDs, project documents, STPI filings, software purchases, internet bills, and employee details. The Tribunal emphasized that the appellate allowance was based on evidence and on the AO's own corroborative remand findings, which negated the AO's initial suspicions. Ratio vs. Obiter: Ratio - Properly conducted remand verification that affirms the authenticity and sufficiency of newly produced evidence may conclusively support appellate acceptance of claims such as section 10A exemption. Obiter - Appellate admission of evidence does not license ignoring genuine material discrepancies, but it requires adequate verification. Conclusions: The CIT(A)'s acceptance of the assessee's evidence was justified because it rested on the AO's subsequent positive verification; the Tribunal upheld the appellate action and the resultant deletion of additions. Issue 4 - Relevance of related-party relationship between the assessee and its sole foreign client to entitlement to section 10A exemption. Legal framework: Related-party transactions attract scrutiny for transfer pricing and genuineness; however, relatedness alone does not negate entitlement to statutory exemptions if qualifying conditions and genuine business operations are established. Precedent treatment: No authority was cited altering the standard; the Court treated related-party ownership as a factor for inquiry rather than a determinative bar. Interpretation and reasoning: The Revenue argued that common direct control between the assessee and its sole client warranted detailed investigation into abnormal profits and genuineness. The Tribunal recognized such a concern as legitimate but required supporting evidence of sham or lack of qualifying activity. The assessee produced client-wise project evidence, STPI records, software and internet usage records, and employee qualifications. The AO's remand corroboration of these records meant the related-party relationship did not, by itself, justify denial of section 10A relief. Ratio vs. Obiter: Ratio - Related-party control or single-client dependence requires investigation but is not in itself a ground to deny statutory exemption where independent documentary proof and verification establish genuine qualifying operations. Obiter - Persistent related-party arrangements may warrant closer scrutiny including transfer-pricing analysis, but absent evidence of non-genuineness the exemption stands. Conclusions: The Tribunal held that the existence of common control with the foreign client, without corroborative evidence of sham transactions or absence of qualifying activity, did not permit denial of section 10A exemption once documentary proof and AO's verification supported the assessee's claim. Overall Conclusion The Tribunal dismissed the revenue appeal, concluding that documentary evidence produced by the assessee and the Assessing Officer's own remand verification established that the assessee carried out qualifying business activity with adequate personnel, infrastructure and client projects; consequently, the denial of exemption under section 10A was not sustainable. The decision to allow the exemption was held to be ratio decidendi; related-party status and atypical profit/expense patterns were recognized as investigatory triggers but not as standalone disqualifiers in the absence of contrary proof.