2020 (8) TMI 196 - AT - Income Tax

Tribunal partially allows appeal, remands issues for verification. Directions emphasize compliance with legal principles.

The Tribunal partially allowed the appeal, remanding various issues for further verification and consideration by the DRP. Specific directions were given ... Validity of reliance on draft assessment order - Deduction under section 10AA for SEZ units - Effect of Advance Pricing Agreement and assessment under section 92CD - Remand to Dispute Resolution Panel for verification of receipt of convertible foreign exchange - Disallowance under section 40(a) and reclassification under section 37(1) - Disallowance under section 40(a) for payments to non-residents and associated enterprises - Depreciation on leased assets (finance lease) and ownership test - Depreciation rate for computer software (computers including computer software) - Disallowance under section 14A and Rule 8D - Liability for interest under section 234B on incremental income post-APAValidity of reliance on draft assessment order - Objection to the assessing officer/DRP placing reliance on a draft assessment order for earlier assessment year was rejected. - HELD THAT: - The Tribunal considered the plea that the AO/DRP impermissibly relied on the draft assessment order for AY 2009-10 (set aside by Karnataka High Court by consent). It noted that the AO/TPO had referred to enquiries and material from earlier assessment years because the issues were common and that the AO issued contemporaneous show-cause notices and independently examined evidence for the year under consideration. The Tribunal found that the matter was already comprehensively dealt with by the Tribunal in the assessee's own case for AY 2008-09 and that it would be futile to remit the issue where the earlier Tribunal order squarely covered the matters in great detail. The preliminary objection was therefore rejected and reliance on earlier materials held not to vitiate the present assessment.Objection rejected; reliance on earlier draft/final orders for common issues held permissible and not fatal to the assessment.Deduction under section 10AA for SEZ units - Claim for deduction under section 10AA for AY 2013-14 was allowed for statistical purposes subject to verification of evidences and related conditions. - HELD THAT: - The Tribunal examined revenue objections (non-registration of SOW/DOU, alleged failure to match SOFTEX forms and invoices, alleged non compliance with SEZ/STPI procedures, unit wise P&L reliability, and ownership/form of undertakings) and applied CBDT Circular No.1/2013 and earlier Tribunal decisions in the assessee's own cases (notably AY 2008-09). It held that (i) benefit under section 10AA cannot be denied merely because separate SOWs were not filed where SOWs/other documents establish scope of work; (ii) SOFTEX declarations and SEZ approvals on record negate revenue's presumption of non-compliance; (iii) unit wise profit allocation methodology and accounting system adopted by the assessee were acceptable following earlier Tribunal findings; and (iv) in absence of any adverse action/revocation by SEZ authorities, compliance could not be presumed to have been violated. On these bases the Tribunal allowed the ground for statistical purposes but directed focused verification (see separate remand issue regarding convertible foreign exchange).Deduction under section 10AA allowed for statistical purposes; assessee directed to file supporting documents and AO/DRP to verify and compute admissible deduction.Remand to Dispute Resolution Panel for verification of receipt of convertible foreign exchange - Issue whether the sale proceeds of exported computer software were brought into India in convertible foreign exchange (for the purposes of section 10A/10AA and Explanation 2 to section 10A(3)) was remanded to the DRP for verification. - HELD THAT: - Following the Tribunal's review of the record and earlier Tribunal decisions (AY 2008-09), it observed that the AO/DRP had not verified whether convertible foreign exchange representing consideration for exported computer software had been brought into India. The Tribunal directed the DRP to examine the assessee's evidence (including documents referred to in the Deutsche Bank/transactional audit and any invoices/receipts) to establish whether convertible foreign exchange was brought into India and whether such receipts represent consideration for export of software. The DRP was given liberty to examine and the AO to rebut the assessee's claims; the issue was remanded for fresh consideration and quantification.Remanded to DRP for verification of receipts and to decide admissible deduction on that basis.Effect of Advance Pricing Agreement and assessment under section 92CD - Deduction under section 10AA is available on incremental income arising from an APA and assessments under section 92CD must give effect to the APA; the Tribunal directed the DRP to grant the 10AA deduction in respect of the APA driven incremental income subject to verification of receipt/bringing in of convertible foreign exchange. - HELD THAT: - The Tribunal followed the reasoning in analogous Tribunal decisions: an APA determines arm's length price and the modified return filed under section 92CD is to be assessed as a return furnished under section 139 so that other provisions of the Act (including deduction provisions like section 10AA) apply. The proviso to section 92C(4) (which restricts allowance of certain deductions where income is enhanced by transfer pricing adjustments made by AO/TPO) does not apply to additional income offered voluntarily in a modified return pursuant to an APA. The APA's critical assumptions (including invoicing/realisation clauses and rollback provisions) were noted; the Tribunal held that the assessee is entitled to claim deduction under section 10AA on the APA incremental income, but directed DRP to verify realisation/bringing into India of the related convertible foreign exchange before allowing the deduction.Assessee entitled to section 10AA deduction on APA incremental income; matter remitted to DRP to verify and allow deduction in accordance with the APA and proof of realisation.Disallowance under section 40(a) and reclassification under section 37(1) - Issues concerning year end provisions (suo moto disallowed by the assessee under section 40(a)) and the AO's reclassification/disallowance under section 37(1) were set aside to the DRP for detailed verification and fresh decision. - HELD THAT: - The Tribunal observed that the assessee maintained mercantile accounting, created year end provisions on a reasonable/estimative basis, and had in many instances reversed provisions when invoices were received in the subsequent year with tax deducted then. Supreme Court authority was cited for accrual/accrued liabilities principles. The AO had not verified the submissions, TDS compliance, ledger entries, reconciling payments and TDS deposits. The DRP had earlier directed verification; the Tribunal directed the assessee to file detailed reconciliations (opening/closing provision balances, mapping of payments to provisions, proof of TDS deduction/deposit, CA certificate where applicable) and remitted the matter to the DRP to verify nature of provisions, applicability of TDS, existence of lower/NIL withholding certificates, and allow relief to the extent payments/TDS were established.Set aside to DRP for fresh verification and decision after specified documentary verification; relief may be allowed to the extent payments/TDS are proved.Disallowance under section 40(a) for payments to non-residents and associated enterprises - The Tribunal remitted the disallowance under section 40(a) in respect of payments to non residents and associated enterprises to the DRP for fresh consideration after verification of invoices, nature of payments (reimbursements v. taxable receipts), and applicability of TDS provisions/Explanation 2 to section 195. - HELD THAT: - The AO had disallowed significant foreign payments for non deduction of tax at source, treating some payments as taxable (e.g., royalty) and rejecting CA certificates as unreliable based on earlier years. The Tribunal noted that the nature of many payments (reimbursements, purchase of goods, insurance, distributed software) required detailed verification of invoices and supporting documents. Following prior Tribunal practice in the assessee's own cases, the Tribunal remitted the matter to the DRP with directions that the assessee be permitted to file all relevant invoices and evidence, and that DRP/AO analyse the payments in light of the invoices and the legal tests for withholding under section 195 (including Explanation 2) before making any disallowance.Remitted to DRP for verification and fresh decision; assessee to be given opportunity to produce invoices and evidence.Depreciation on leased assets (finance lease) and ownership test - Claim for depreciation on assets under finance leases was remitted to the Assessing Officer for verification in the light of the contractual ownership rights and Supreme Court precedent; the Tribunal indicated the assessee may be entitled to depreciation if the ownership/right to retain legal title exists. - HELD THAT: - The assessee claimed depreciation on assets given on finance lease; the AO disallowed on the view that the assessee was not the legal owner. The Tribunal noted the accounting and tax treatment divergence and that the question turns on the ownership/rights under lease documents and the Supreme Court decision relied upon (holding that an assessee who retains legal title/right to retain title may be owner for depreciation purposes). The Tribunal remitted the issue to the AO for detailed verification of lease agreements, schedules, invoices and related documents and directed the AO to apply the Supreme Court ratio and afford the assessee a hearing.Remitted to Assessing Officer for verification and decision in accordance with law; proper opportunity to be given to assessee.Depreciation rate for computer software (computers including computer software) - Where computer software is capitalised, depreciation is to be allowed at 60%; the matter was remitted to the AO to determine which software expenditures are capital and to allow 60% on capitalised software. - HELD THAT: - The AO restricted depreciation on acquired software to 25% treating it as intangible/license; the Tribunal followed coordinate bench precedents (e.g., Infosys line of authority and Amway/Datacraft decisions) holding that 'computers including computer software' attract 60% where the software is capitalised. The Tribunal directed the AO to verify whether particular software expenditure is capital or revenue; if capitalised, depreciation at 60% is to be allowed and the assessee be given an opportunity of hearing.AO to reconsider; allow 60% depreciation on capitalised computer software; verify and exclude revenue items.Disallowance under section 14A and Rule 8D - Disallowance under section 14A (and Rule 8D) was deleted as the assessee had not earned any exempt income in the year. - HELD THAT: - The Tribunal accepted the assessee's submission and followed the Delhi High Court authority cited (Cheminvest Ltd.) that Rule 8D/section 14A disallowance is not applicable where no exempt income is earned in the relevant year. On that factual basis the Tribunal set aside the disallowance.Disallowance under section 14A deleted.Liability for interest under section 234B on incremental income - Assessee is liable to pay interest under section 234B on incremental income assessed pursuant to the APA; the claim to the contrary was dismissed. - HELD THAT: - The Tribunal reviewed the statutory scheme for interest on shortfall of advance tax and held that incremental income arising from the APA (and resulting assessed tax) attracts section 234B interest where advance tax paid falls short of the assessed tax. The Tribunal distinguished authorities relied on by the assessee and followed higher court precedent (including Bombay High Court decisions) that interest under section 234B is mandatory where assessed tax exceeds advance tax; issues of waiver/reduction of interest lie under the statutory waiver provisions and not by interpretation to avoid levy. The plea that incremental income arose post return did not absolve the assessee of section 234B liability.Claim dismissed; interest under section 234B payable on assessed tax including APA incremental income.Final Conclusion: The appeal is partly allowed. The Tribunal rejected the challenge to reliance on earlier draft/final orders, allowed the assessee's section 10AA claim in principle (subject to DRP/AO verification of convertible foreign exchange receipts) and held that APA driven incremental income can qualify for section 10AA relief (to be verified and given effect by DRP). Several factual and documentary issues were remitted to the DRP or Assessing Officer for detailed verification (receipt/realisation of export proceeds, mapping of provisions and TDS compliance, foreign payments and invoices, leased asset ownership and depreciation computation, and quantification of reliefs). Disallowance under section 14A was deleted, and the assessee was held liable for interest under section 234B on the APA incremental income. Issues Involved:1. Validity of the assessment order.2. Reliance on the Draft Assessment Order (DAO) of AY 2009-10 for making adjustments for AY 2013-14.3. Denial of relief under section 10AA of the Act.4. Disallowance under section 37(1) of the Act.5. Disallowance under section 40(a) of the Act in respect of payments to non-resident Associated Enterprises (AEs) and Non-AEs.6. Disallowance of claim under section 40(a) of the Act pertaining to AY 2012-13.7. Disallowance of depreciation on leased assets.8. Disallowance under section 14A of the Act.9. Restriction of depreciation on computer software from 60% to 25%.10. Initiation of penalty proceedings under section 271 of the Act.11. Levy of interest under section 234B of the Act.12. Other grounds and reliefs.Issue-wise Detailed Analysis:1. Validity of the Assessment Order:The Tribunal did not specifically address this issue as it was general in nature and did not require adjudication.2. Reliance on the DAO of AY 2009-10:The Tribunal noted that the reliance on the DAO of AY 2009-10 was inappropriate as it was set aside by the Karnataka High Court. The Tribunal emphasized that the issues should be analyzed based on the evidence filed for the current year. The objection raised by the assessee was rejected, following the Tribunal's previous decisions for earlier years.3. Denial of Relief under Section 10AA of the Act:The Tribunal examined various objections raised by the authorities, including non-registration of documents with SEZ authorities, non-submission of accounting invoices, and non-approval of units by SEZ authority. The Tribunal referred to its previous decisions and the Supreme Court's rulings, concluding that the objections did not hold merit. The Tribunal remanded the issue to the DRP to verify the receipts of sale proceeds of computer software exported out of India, being brought into India in convertible foreign exchange.4. Disallowance under Section 37(1) of the Act:The Tribunal noted that the assessee followed a consistent accounting procedure and created provisions based on scientific methodology. The Tribunal emphasized that business liabilities should be allowed as expenditure, even if they are to be discharged in the future. The Tribunal remanded the issue to the DRP for verification of the details filed by the assessee and to consider the claim in accordance with law.5. Disallowance under Section 40(a) of the Act:The Tribunal observed that the payments made by the assessee to non-resident entities required detailed verification. The Tribunal remanded the issue to the DRP to verify the nature of payments and the applicability of TDS provisions, considering the evidence filed by the assessee.6. Disallowance of Claim under Section 40(a) of the Act Pertaining to AY 2012-13:The Tribunal noted that the issue required proper verification. The Tribunal directed the DRP to verify the details filed by the assessee regarding the disallowances made under section 40(a) for non-deduction of TDS and to consider the claim in accordance with law.7. Disallowance of Depreciation on Leased Assets:The Tribunal observed that the assessee was eligible for depreciation on leased assets, provided the ownership was established. The Tribunal remanded the issue to the AO for verification of the details filed by the assessee and to consider the claim in accordance with the Supreme Court's decision in ICDS Ltd vs CIT.8. Disallowance under Section 14A of the Act:The Tribunal noted that the assessee did not earn any exempt income during the year. Following the Delhi High Court's decision in Cheminvest Ltd vs CIT, the Tribunal deleted the disallowance under section 14A.9. Restriction of Depreciation on Computer Software:The Tribunal directed the AO to verify if the software purchased fell in the category of revenue expenditure. For capitalized software, the Tribunal directed the AO to grant depreciation at 60%, following the Tribunal's decision in Infosys Ltd vs ACIT.10. Initiation of Penalty Proceedings:The Tribunal did not adjudicate this issue as it was premature.11. Levy of Interest under Section 234B of the Act:The Tribunal held that the assessee was liable to pay interest under section 234B on the incremental income pursuant to the APA, following the Supreme Court's decision in CIT vs. Anjum.M.H.Ghaswala and the Bombay High Court's decision in E.Merk (India) Ltd vs CIT.12. Other Grounds and Reliefs:The Tribunal directed the DRP to grant all such reliefs arising from the preceding grounds and consequential reliefs.Conclusion:The Tribunal allowed the appeal partly, remanding several issues to the DRP for verification and fresh consideration, while providing specific directions for each issue. The Tribunal emphasized the need for proper verification of details and adherence to legal principles and precedents.