TaxTMI 
TaxTMI 
2019 (4) TMI 1770
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.... rendering of Research and Development Services by the Assessee to its Associate Enterprise (AE). These Grounds read as follows: Grounds of Appeal raised by assessee: 1. The learned Assessing Officer ("learned AO") and the learned Dispute Resolution Panel (learned DRP) erred in law and in facts in upholding the adjustment to the transfer price of the Appellant in the contract software development services by Rs. 9,819,200 and in the contract Research and Development (R&D) services by Rs. 28,882,400. 2. The learned AO, the learned DRP and the learned TPO erred in rejecting the Transfer Pricing ('TP') documentation maintained by the Appellant on invoking provisions of sub-section (3) of 92C of the Income Tax Act, 1961 contending that the information or data used in the computation of the arm's length price is not reliable or correct. 3. The learned AO, learned DRP and the learned TPO erred in rejection of comparability analysis carried in the Transfer Pricing documentation and in conducting a fresh comparability analysis on application of additional filters for determination of the arm's length price for contract software development and ....
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....iled to appreciate that the Appellant is a limited risk contract service provider rendering software services and R&D services. Thereby, the learned AO, learned DRP and the learned TPO erred in not providing appropriate adjustment towards the risk differential, when the comparables selected are full-fledged entrepreneurial companies. Grounds of Appeal raised by Revenue: 1. The order of Hon'ble DRP is opposed to law and facts of the case. 2. The Hon'ble DRP has erred in including M/s FCS Solutions and M/s Thinksoft Global Services Ltd which TPO has excluded under rule 18B(3) of IT Rules being not comparable companies. SOFTWARE DEVELOPMENT SERVICES SEGMENT: 3. First we shall take up for consideration the determination of ALP in the SWD services segment. The Assessee is engaged in the business of providing software development services to its overseas Associated Enterprises ('AE' for short). It is not in dispute that the transaction of rendering of software development services by the Assessee to its AE was an international transaction and in view of the provisions of sec. 92 of the Income Tax Act, 1961 (Act), income arising from such interna....
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....in of these 11 comparable companies and the addition to be made to the total income on account of determination of ALP by the TPO. Comparables selected by the TPO and their arithmetic mean: Sl. No. Name of the Company Mark up Unadjusted (%) 1 Kals Information Systems Ltd. 13.89 2 Akshay Software Technologies Ltd. 8.11 3 Bodhtree Consulting Ltd. 62.27 4 R S Software (India) Ltd. 9.97 5 Tata Elxsi Ltd. (segmental) 20.28 6 Sasken Communication Technologies Ltd. (segmental) 27.91 7 Persistent Systems Ltd. 41.40 8 Zylog Systems Ltd. 7.81 9 Mindtree Ltd. (segmental) 5.52 10 Larsen and Toubro infotech 24.72 11 Infosys Ltd. 45.61 ARITHMETIC MEAN 24.32 Computation of arm's length price by the TPO and the adjustment made towards the SWD services provided by the Assessee: Arm's Length Mean Margin 24.32% Less: Working Capital Adjustment* - Adjusted mean margin of the comparables 24.32% Operating Cost 7,30,00,000/- Arm's Length Price (ALP) 119.35% of Operating Cost 9,07,53,600/- Price Received 8,00,00,000/- Shortfall being adjust....
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....a Pvt. Ltd. Vs. DCIT IT(TP)A.No.1311/Bang/2014 for AY 2009-10. The learned DR could not point out any difference in facts. We therefore hold that these two comparables should be included in the final list of comparables by respectfully following the judgment cited by ld. AR of assessee and find no merit in the appeal by the revenue and dismiss the same. 10. As far as the appeal of the Assessee is concerned, the first aspect is with regard to exclusion of some of the comparable companies chosen by the TPO and retained by the DRP as comparable companies. The learned counsel for the Assessee submitted before us that the comparability of the following 5 comparable companies out of the 13 companies that remain after the order of the DRP viz., (i) Kals Information Systems Ltd., (ii) Bodhtree Consulting Ltd., (iii) Tata Elxsi Ltd., (iv) Persistent Systems Ltd. and (v) Infosys Ltd. was considered by the Tribunal in the case of Infinera India (P) Ltd. Vs. ITO (2016) 72 taxmann.com 68 (Bang-Tribunal). The said decision was also in relation to AY 2009-10. In the aforesaid decision the issue raised was against including the aforesaid five companies as comparable companies. The plea of the A....
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....f several companies chosen by the TPO and retained by the DRP only 6 companies remain as comparable companies and the arithmetic profit margin of these companies without working capital adjustment is 10.78% which would be within the profit margin of 5% (+) (-) permissible under the proviso to Sec.92(2) of the Act. Therefore, we dismiss the plea of the Assessee in this regard. We make it clear that we have not decided on the merits of the claim of the Assessee on this issue. The TPO is directed to compute the ALP as per the directions given above after affording Assessee opportunity of being heard to the Assessee. RESEARCH AND DEVELOPMENT SERVICES SEGMENT: 14. As far as determination of ALP in this segment is concerned, the disputes raised by the Assessee are that the nature of services rendered by the Assessee to its AE was SWD services and it is not correct to characterize the same as R& D Services. Though this was the basis on which the TP study was undertaken by the Assessee, the Assessee submits that there is no estoppels in the matter of determination of ALP. The learned counsel in this regard has also pointed out that the TPO in AY 10-11 & 2011-12 accepted the claim of ....
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....he conclusion that the services rendered were in the nature of R & D and not SWD services, then the issue with regard to comparability of companies already chosen by the TPO/DRP on the basis of assumption that the Assessee is rendering R & D services and working adjustment to be made to the profit margin of comparable companies chosen on that basis are left open for consideration de novo by the TPO in the set aside proceedings. 17. Gr.No.10 (Gr.No.10.1. to 10.7) raised by the Assessee in its appeal is with regard to the action of the AO/DRP in disregarding the revised computation of total income whereby the loss declared in the original computation filed along with the return of income at loss of Rs. 9,40,42,566/- under the head business (copy of the return is at page 345 of Assessee's paper book) was revised to loss of Rs. 12,44,94,273/- by filing a revised computation of total income (copy of which is at page- 541 of Assessee's paper book along with reasons for filing revised computation of total income contained in submission filed before AO dated 16.10.2012 which is at 518 to 540 along with annexure at page 542 to 567). Admittedly, no revised return of income was filed. The ....
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....c, which resulted in an additional loss amounting to Rs. 3,04,51,707/-. 19. The main reason assigned by the AO for not accepting the revised computation of total income is on the basis that a revised return of income was not filed within the time limit permitted u/s.139(5) of the Act and by placing reliance on the decision of the Hon'ble Supreme Court in the case of Goetz India Ltd. Vs. CIT 284 ITR 232(SC). In the said decision the Hon'ble Supreme Court held that the AO cannot examine a claim made before him that is contrary to or in modification of the claim as made in the original return filed, without a revised return of income being filed making a new or modified claim. The conclusion of the AO on this aspect is contained in page-12 of the impugned order at Paragraph 2.2. Though there are allegations by the AO that the Assessee has filed several revised computations and doubted the genuineness of claim made in a revised computation of income, the basis on which the AO refused to examine the revised computation of income is by placing reliance on the decision of the Hon'ble Supreme Court in the case of Goetz (India) Ltd.(supra). The DRP upheld the order of the AO. 20. The ....
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....e assessment was made. It is on account of amendment of S.143(1) with effect from 1.4.1989, that the aforesaid change in S.139(5) was necessitated. If a return of income is accepted u/s. 143(1) by issue of an intimation, then a time limit had to be prescribed for revision of such a return of income, if it was not subjected to scrutiny u/s. 143(3) of the Act. No such time limit is required to be prescribed in respect of an assessment u/s. 143(3) of the Act. A revised return may not save penalty or prosecution in relation to the originally filed return of income. In other words, cases of concealment and false statements are not covered u/s. 139(5). The very purpose of assessment proceedings before the taxing authority is to correctly assess the tax liability of an assessee in accordance with law. Therefore it is not correct on the part of the AO to refuse to scrutinize the revised computation of total income. His action in this regard which was confirmed by the DRP is unsustainable and is hereby held to be not in accordance with law. 23. We may also add that the decision rendered in the case of Goetz India Pvt.Ltd. (supra) based on which the revenue authorities drew their conclusi....
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....cess would result into undue hardships, delay and multiplicity of proceedings. The Hon'ble Apex Court, on numerous occasions has laid the proposition that the Assessing Authorities are bound to compute the correct income only and collect only legitimate tax, hence, merely for a procedural lapse or technicalities, in our opinion, the assessee should not be compelled to pay more tax than what is due from him. Therefore, this situation has necessarily to be looked upon from the angle of duties of Assessing Authorities as stated earlier, CEDT is the Apex body for tax administration and it can also issue directions which are for the benefit of the assessee's though such directions may not be inconsonance with the provisions of law, hence, if a circular is now issued directing the assessing authorities to grant reliefs/refunds while completing the assessment proceedings, even though such circular may be at variance with the law, as pronounced by the Hon'ble Supreme Court, but the same would be binding on the subordinate income-tax authorities. In our opinion, therefore, circulars of same nature which have been already issued would not become irrelevant or can be ignored. Admi....
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....utation of total income. The relevant grounds are treated as allowed. 26. Gr.Nos.11 & 12 raised by the Assessee in its appeal can be decided together. These grounds read as follows: 11. Rejection of export turnover of IDF 1 unit as per the books of accounts 11.1 The learned AO/DRP has erred in considering the export sales for IDF 1 as per the Annual Performance Report (APR) and the excise return amounting to Rs. 1,787,926,281 resulting in a lower export sales being considered. 11.2 The learned AO/DRP has erred in rejecting the invoice wise listing provided to the AO along with the invoice copies, shipping bills and Foreign inward remittances certificate (FIRC) for the entire export sales and computing the sales as per the APR and excise return filed, despite acknowledging and placing the same on record. 11.3 The learned AO/DRP has erred in rejecting the invoice-wise listing placed on record by the Appellant for export sales on the grounds that: * There are certain invoices dated prior to 1 April 2008 * Export turnover earned through raising of Transfer Pricing (TP) debit notes is on account of TP adjustments under section ....
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....for the balance invoices FIRC copies have been provided substantiating the realizations. 11.14 Notwithstanding and without prejudice to the above, the Appellant submits that the amount of Rs. 1,21,36,381 should be reduced from the export turnover for AY 2009-10 and when this amount is realized by the Appellant the same should be treated as export turnover for AY 2009-10 in line with the provisions of the Act. 12. Rejection of export turnover of IDF 2 unit as per the books of accounts 12.1 The learned AO/DRP has erred in considering the export sales for the IDF 2 unit as per the APR and the excise return amounting to Rs. 1415,76,49,095 resulting in a lower export sales being considered. 12.2 The learned AO/DRP has erred in rejecting the invoice wise listing provided to the AO along with the invoice copies, shipping bills and Foreign inward remittances certificate (FIRC) for the entire export sales and computing the sales as per the APR and excise return filed despite acknowledging and placing the same on record. 12.3 The learned AO/DRP has erred in rejecting the invoice-wise listing placed on record by the assessee for export sales on the....
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....rading of UPS and other power protection devices which are procured either locally or through imports. The sales of this unit is only in domestic market. (iv) Software development business for Schneider Electric IT Corporation, USA (earlier known as American Power Power Conversion Corporation, USA (APCC USA) (Parent company). This unit only exports software to Schneider Electric IT Corporation, USA earlier known as APCC USA (parent company). 28. With respect to export sales in IDF1 and IDF 2 units, the Assessee is a contract manufacturer for Schneider Electric IT Corporation, USA (formerly known as American Power Conversion Corporation, USA) and other overseas affiliates. The Assessee is entitled to a consideration of 15% on approved costs in respect of the above. IDF1 and IDF2 unit are entitled to claim benefit of deduction on their profits u/s.10A of the Act. The AO was of the view that the Assessee has shown more profits in IDF1 and IDF2 units whereas he has shown loss in MAG unit because the profits of MAG unit are taxable. With this approach he has proceeded to examine the claim of the Assessee for deduction u/s.10A of the IDF 1 and IDF2 units. The approach of the AO was in....
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....tes issued to customers 6,297,848 498,296 Less: Errors in APR due to wrong punching of amounts and due to non- inclusion of certain sales not required to be reported in APR 42,306,045 Sales reported in APR 1,787,926,281 * The export sales Rs. 248.87 crores has been substantiated with documentary evidences as obtained from third parties. In light of the above, we submit that the company has not made any incorrect submissions/replies with regard to its export sales. * Accordingly, we submit that the correct export turnover for the purpose of 10A ought to be Rs. 248.87 crores. For IDF 2 Unit Particulars EHTP 1/IDF 2 (Rs) Export sales as per Sales Listing 14,295,387,959 Add: Items not in Sales Listing but reported in APR a. Sales reversed in sales listing on CIF terms for revenue recognition 38,726,658 Less: Errors in APR due to wrong punching of amounts and due to non- inclusion of certain sales not required to be reported in APR 176,465,522 Sales reported in APR 14,157,649,095 * The export sales of Rs. 1,429.53 crores has been substantiated with....
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....e 689 (relevant page 692) of File 3 and listing at page nos. 1898 to 1979 - File 8) 14th February 2013 100% Invoice and shipping bill copies obtained from Clearing House Agents ("CHA") and Authorized Dealer Bank (Citibank) [Submission at page 689 (relevant page 692-694) of File 3] 14th February 2013 FIRC for realization of the export proceeds obtained from the Citibank (Submission at page 689 (relevant page 695) of File 3 and copies of the FIRCs at page nos 739 to 1059 - File 4) 14th February 2013 Invoices, sales listings and FIRCs also given vide submission dated 13th December 2012 (submission at page 636, relevant portion at page 641) 13th December 2012 The above Reconciliation according to him explains the difference between the APR and segmental P & L. He laid emphasis on the fact that the AO in page 27 of assessment order acknowledges that the above evidence was furnished and does not doubt the genuineness of these documents. 34. On the observations of the AO in the order of Assessment regarding recognition of sale of AY 2008-09 in AY 2009-10, he submitted that Accounting for invoices are made following th....
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....tract manufacturing activities is determined. The shortfall in invoicing, if any, is made up by raising a TP debit note so that the consideration on contract manufacturing is met at 15 % on costs. The amounts reflected in the TP debit notes represent the differential consideration for the export sales made during FY 2008-09 and accordingly the sum of Rs. 66,53,41,264/- should form part of the Export Turnover while considering the deduction under section 10A of the Income-tax Act 1961 (the Act). In this context it may be mentioned that if the above consideration were to have been billed as part of the export invoices (i.e., in the situation if Assessee were to have estimated its manufacturing costs correctly at the inception of the year itself), these would have formed part of the respective export invoices and hence eligible for Export Turnover under section 10A. The fact that these have been raised as part of a separate TP debit note does not in any way take away the fact that these are directly linked to the export of goods made during FY 2008-09 and is hence eligible as part of export turnover for section 10A purposes. The term 'export turnover' as defined in Section 10A of the ....
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....as under: Particulars Amount In Crs. Refer Note USD Invoice value- INR Realization value-INR Realized till 30th September 2009 29.29 1288.64 1359.08 1 Realized post 30th September 2009 but within 12 months of invoicing as per FEMA regulations 2.77 134.99 142.87 2 Realized post 30th September 2009 but after 12 months of invoicing 0.02 0.49 0.61 3 Total realized till date 32.07 1424.12 1502.55 Unrealized till date 0.12 5.41 - 4 Export sales as per sales listing 32.19 1429.54 1429.54 (chart available in submission dated 14 February 2013 at page 695 - Paper Book 3) Note 1: This amount has been fully realized and therefore is completely eligible for Section 10A. Note 2: Invoices which were realized beyond 6 months from the end of the FY but within 12 months from the date of the invoice. Note 3: • Invoices which were realized post 6 months from the end of FY and also from the 12 months from the date of invoicing • As per provision of section 10A export proceeds should be realized within 6 months fr....
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....F terms ownership is transferred when goods reach the buyer. Errors in punching of wrong amounts (which is because APR is a manual procedure) was demonstrated with actual invoice copies. The learned counsel for Assessee submitted that the above discrepancies have been explained to the learned AO vide submissions dated 13th December 2012 (Submission page number 636 and explanation in Appendix 1, relevant pages 642 to 644 - File 3) and 14th February 2013 along with invoices and FIRCs demonstrating realization of the export (Submission page no. 689 and Explanation in Annexure 1 page 690 to 702- file 3, relevant page 696; supporting FIRCs submitted there under at Page nos. 739 to 1059 - File 4). It was further submitted that for preparation of excise return APR was used a basis. Thus, there was a discrepancy between export sales as per excise return and segmental profit and loss account, which was also explained in the submission dated 14 February 2013 (Submission page number 689 and Explanation in Annexure 1 page 690 to 702- file 3). It was also submitted that the AO was not right in his observations that for export of components the Assessee has not furnished any details. The invoice....
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....of the Act, would therefore depend on the quantum considered as Turnover of an Assessee. So also the deduction u/s.10A would depend on export turnover i.e., consideration in respect of export being received in, or brought into, India in convertible foreign exchange in accordance with section 10A (3). Turnover of IDF-1 Unit: 41. In so far as turnover of IDF-1 unit is concerned, the first dispute is with regard to non-inclusion by the revenue authorities of a sum of Rs. 66,53,41,262/- under the name TP debit notes as part of the export turnover of the Assessee for computing deduction u/s.10A of the Act. It is undisputed that the Assessee is a contract manufacturer and is entitled to a consideration of 15% on approved costs in respect of its manufactured export sales. It is also not disputed that the Assessee initially invoices the export sales on the basis of estimates or applying the 15% markup on standard costing. At the time of raising the invoice, the actual cost of production is not determinable and hence standard cost is used for the purposes of determining the amount to be charged as manufacturing fees. Periodically and definitely at the end of the year, the actual expen....
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....on of sales of Rs. 4,98,296 as turnover of AY 2009-10. The claim of the Assessee is that it had issued credit notes to the customers for recognizing sales for the relevant AY 2009-10 but the evidence to substantiate the same is not discernible from the material filed before us. So also the fourth component of dispute of turnover viz., a sum of Rs. 4,23,06,045 which is stated to be owing to wrong punching of amounts due to non-inclusion of certain sales not required to be reported in APR. We therefore remand the issue to the AO for consideration de novo with liberty to the Assessee to substantiate its case with necessary evidence. 44. The next aspect of turnover is the non-realization of Export proceeds in convertible foreign currency in India within the time limit specified in Sec.10A(3) of the Act. A sum of Rs. 1,26,34,663/- was stated to be Invoices pending realizations and therefore was disregarded for the purpose of considering export turnover of the Assessee for IDF-1 UNIT. The Assessee has filed the following reconciliation to show that the amount to be excluded from export turnover is only a sum of Rs. 1.19 crores as per the following chart. Particulars Amount In Cr....
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.... sales) by the AO on the basis of the dates of sales invoice that was prior to 1.4.2008. The Assessee's method of Accounting for invoices are made following the principles of the AS - 9 Revenue recognition. In case of free-on-board (FOB) sales, the date of sale is recognized as the date on which the goods are handed over to the carrier and in the case of CIF sales the date of delivery is recognized as the date of sale. The Bills of lading/Airway Bills along with sales invoices produced in support of the claim of the Assessee which are at pages 3551-4008, Files 15 and 16 of the paper book substantiates the case of the Assessee for inclusion of the aforesaid sum as part of the turnover for AY 2009-10. We hold accordingly. 46. The next component of the turnover which is in dispute is the non- inclusion of sales of Rs. 17,64,65,522 as turnover of AY 2009-10. The claim of the Assessee is that owing to wrong punching of amounts which are not required to be reported as sales to APR. The evidence to substantiate this claim is not discernible. We therefore remand the issue to the AO for consideration de novo with liberty to the Assessee to substantiate its case with necessary evidence. ....
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.... the Assessee in this regard and therefore the same is accepted. We therefore hold that what is to be excluded from turnover on the ground of non-realization of sale proceeds u/s.10A(3) is a sum of Rs. 5.41 crores. However the Assessee is permitted to claim the deduction as regards the same once the same has been realized in terms of Section 155 (11A) of the Act. 48. Thus Gr.Nos.11 & 12 are partly allowed. 49. Ground No.13 & 14 raised by the Assessee is with regard to the action of the AO and the CIT(A) in recomputing the income from IDF1 and IDF 2 units from domestic sales by these units by adopting sales as per excise returns of IDF1 and IDF2 units. "13. Considering domestic sales of IDF 1 and IDF 2 as per excise return 13.1. The learned AO/DRP has erred in considering the domestic sales for the IDF 1 and IDF 2 unit as per the excise return amounting to Rs. 1,882,165,998. 13.2. The learned AO/DRP ought to have provided the reasons for rejecting the domestic sales as per the books of accounts. 13.3. The learned AO/DRP ought to have provided the assessee an opportunity of being heard before rejecting the domestic sales as per books of accou....
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....and 2 units. While re-computing the profits, the AO has considered the domestic sales as per the excise return and not the sales register. Scrap sales, which is already part of excise returns, was once again brought to tax. No specific reasons have been assigned for adopting this approach, except a passing reference to the fact that export sales of the Assessee have been inflated and that discussion will hold good for domestic sales as well (para 3.10 of the draft order of assessment at page-37 of the said order). 53. On the above approach of the AO which was reflected in the draft assessment order, the Assessee filed objections before the DRP. The DRP upheld the order of the AO, except in the case of double taxation of scrap sales wherein, the DRP has asked the AO to verify and provide relief if scrap sales are already part of domestic sales as per the excise return. However, the AO in the final order of assessment did not follow the directions of the DRP for the reason that as per provisions of Sec.144C of the Act, the DRP does not have power to request the AO to verify the details and hence upheld his addition para 27.4 at page 61 of the final order of assessment. 54. The ....
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....de submissions before the DRP on the non-consideration of the aspect of trade discount in the excise return (submission on page nos. 4878 and 4910 of File 20 for EHTP 2 and EHTP 1 respectively). 55. As far as the action of the AO in considering sales as per excise return and including the scrap sale value again as an addition while computing total income, the learned counsel submitted that the sales declared in the excise return includes scrap sale value and making addition of sale value of scrap again in the computation of total income amounts to double addition of the same income. Scrap sales has been separately shown in the Assessee's segmental P&L (Rs. 1,27,94,809/- for EHTP 2 and Rs. 2,72,97,710/- for EHTP 1) page 548 in File 3 of the Paper book. The AO has considered the sales as per the excise return (which includes the scrap sales) + scrap sales reported in the segmental P&L. our attention was drawn to the AO's computation at Pages 33 and 34 of the Draft Assessment order. It was submitted that scrap sale has been subject to tax twice. The learned counsel for the Assessee brought to our attention Assessee's submission dated 16th October 2012 (pages 518-540, at page 524 of....
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....le expenditure while computing income MAG unit and determining the profits of the said unit accordingly. In doing so, the AO refused to recognize the figure of sales as reported in the segmental profit and loss account of MAG unit at Rs. 1,27,09,37,458 and cost of sales at Rs. 206,47,39,851 and treating foreign exchange currency fluctuation loss of Rs. 92,78,67,516 as allowable expenditure and arriving at the profit of MAG unit in the segmental profit and loss account. 59. We have already seen while dealing with Gr.No.11 & 12 that the Assessee has four units viz., IDF1 unit, IDF 2 unit, MAG Unit and SWD services unit. IDF1/EHTP2 unit (hereinafter referred to as IDF 1 Unit) which manufactures and sells UPS systems and other power protection devices. The products manufactured in this unit is sold in the domestic as well as export market. (ii) IDF2 unit /EHTP1 unit (hereinafter referred to as IDF2 unit) also manufactures and sells UPS systems and other power protection devices. The products manufactured in this unit is sold in the domestic as well as export market. (ii) MAG unit which is engaged in the business of trading of UPS and other power protection devices which are procured....
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....9 is the correct amount of sales in MAG unit. In this regard, we have attached the domestic sales listing of IDF 1 and IDF 2 as per Annexure 3. f. We submit that purchase account expenses amounting to Rs. 206,47,39,851 pertains to MAG unit and it is forming part of the cost of goods sold amounting to Rs. 1,136,872,335. g. Notwithstanding and without prejudice to our above submissions, should your goodself consider the net domestic sale as per Trial Balance of MAG unit, we submit that - * The total expenses attributable to domestic sales should also be reduced while determining the profits derived from domestic sales. * While computing the total turnover of IDF1 and IDF2 no domestic sales to be reckoned as part of total turnover. Accordingly, we submit that the deduction under section 10A of the Act would correspondingly go up". 61. After extracting the reconciliation, the AO in page-41 of his order para-1 observed as follows: "As per the reconciliation a sum of Rs. 1,75,22,53,520 was reduced as IDF1/ IDF-2 domestic sales. However, in the same sheet only a sum of Rs. 54,99,40,665/- and Rs. 61,27,06,304 was reduced as DTA sales....
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....s: Sl no. Adjustment made Amount (Rs.) 1 Turnover for MAG unit considered from Trial Balance at Rs. 3,02,31,90,978 instead of the segmental P&L at Rs. 1,27,09,37,458 1,75,22,53,519 2 Cost of sales considered from Trial Balance at Rs. 206,47,39,851/- instead of segmental P & L at Rs. 113,68,72,335/- 92,78,67,516 3 Loss on account of foreign exchange fluctuation disallowed 30,18,63,653 As already stated it is the plea of the Assessee that the amounts booked in the sales of MAG unit in the Trial Balance pertains to (i) MAG Trading (ii) IDF 1 ( EHTP 2) domestic sales and (iii) IDF 2 (EHTP 1) domestic sales. It is the plea of the Assessee that on account of considering the turnover of the MAG unit as reflected in the Trial Balance and not as per the segmental P & L of the Assessee, there is double taxation of the domestic sales of IDF1 and 2 and MAG unit. The foreign exchange loss is allowable deduction. 64. The DRP in its directions gave limited relief to the Assessee by directing the AO to verify the claim of double taxation and allow the claim if found correct. (Page 71 of the DRP Directions). However, in t....
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.... being the domestic sales of IDF 1 and 2 had already been offered to tax (at page 636, relevant page 642 of File 3). Vide submission dated 4th March 2013 (File14 of the paper book, pages 3256 to 3389), the Assessee reiterated its earlier submission and gave an entire listing of the domestic sales of IDF 1 and 2 (at page 3257) and sample invoices (at pages 3328-3332). Vide its submission dated 13th December 2012, the Assessee had submitted to the AO the books of account of the Assessee in soft version (Page 3174 - File 14 of the paper book). The double taxation can be verified by examining any of the sample invoices, which will figure both in the domestic sales listing of IDF 1 and 2 (which can be correlated to the excise return of that unit) and in the sales ledger of MAG unit as per the Trial Balance. Vide submission dated 14th March 2013 (Pages 4020-4153 of the paperbook- File 17, relevant page 4028), the Assessee once again explained the concept and resubmitted the entire domestic sales listing of IDF 1 and 2, as required by the AO. 67. The learned counsel thus submitted that sales as per the segmental P&L account for MAG unit amounting to Rs. 1,27,09,37,458/- should be consi....
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....hich is Gr.No.22 & 23 of the grounds of appeal of the Assessee in this appeal. In the result Gr.No.15 is treated as allowed. 70. Gr.No.16 & 17 raised by the Assessee were not pressed for adjudication because in rectification proceedings, the AO has allowed relief to the Assessee in respect of the grievance projected in those grounds. Hence, Gr.No.16 & 17 are dismissed as not pressed. 71. Gr.No.18 raised by the Assessee is with regard to claim of deduction on account of provisions for warranty. The relevant ground of appeal of the Assessee reads thus: "18. Disallowance of provision for warranty : Rs. 67,25,51,172 Break-up of the above expenses is as under: * Actual expense - Rs. 51,27,80,127 * Provision for warranty - Rs. 15,97,71,045 18.1. The learned AO/DRP has erred in disallowing the actual warranty expense debited to the profit and loss account....
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....ofits and gains from business and profession" of the respective units. 18.10. The learned AO/DRP erred in not considering the increased 'Profits and Gains of Business' consequent to the above disallowance in computing the tax holiday benefit under section 10A of the Act for IDF 1 and IDF 2 units". 72. The claim of the Assessee for deduction on account of provision for warranty comprises of three elements, viz., (i) Post Warranty expenses (actually incurred in the previous year) Rs. 6,13,26,593/- (ii) in warranty expenses (actually incurred during the previous year) Rs. 45,14,60,360/- and (iii) Provision for warranty of Rs. 15,97,40,517/. The total of the aforesaid three sums is a sum of Rs. 67,25,27,470/-. These figures are evident from Annexure-16 to the reply dated 13.12.2012 filed by the Assessee before the AO. This letter of the Assessee along with annexure is at page-636 to 688 of paper book no.3 filed by the Assessee. Annexure-16 to this letter which explains the basis of provision for warranty is at pages- 685 to 688 of paper book No.3 filed by the Assessee. The AO in making the disallowance has mentioned in the order of Assessment that the Assessee has not furni....
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.... -purchase/charging of battery, purchase of raw materials for support of service business, purchase of packing material, purchase of carton bozes, imported raw material (all from group company) and payment of Import duty for procurement of material. In-Warranty expenses: The items booked under this head of expenses mainly relates to -Authorized services provider (ASP) claims settled by APC for inwarranty service support, RMA (returned material authorization) relates to expense for returned material received from vendor/ASP, and Cover freight from warehouse to ASP locations, to customer location and freight from customer locations. These expenses are debited to MAG unit. Post Warranty Expenses: Post warranty expenses pertain to the provision of services by the Assessee after the expiry of the warranty period to the customers. These services are provided to the customers based on certain Annual Maintenance contracts (AMCs) between the customer and the company. The post warranty expenses mainly comprises of expenses incurred by the company or through ASP and comprises of the following: - ASP claims-call based expenses claim done by ASP's to APC, Te....
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....reation entry) 5 Profit and loss account Dr 850,227,470 To warranty expenses Account 451,460,360 To Post Warranty Exp 61,326,593 To Provision for Warranty 337,440,517 (Being the transfer of the warranty expense to the Profit and loss account) Further, we wish to submit that the provision created for warranty for the relevant financials year amounting to Rs. 33.7 crores has been expended in the immediately subsequent year. In warranty accounting: The amount booked as expenses in the MAG unit is then passed on to the other units to which the original sale pertains. It may be noted that on an average the Company receives around 20,000 service requests per month. In view of the voluminous nature of the transactions the Company it is difficult to track the warranty expense customer-wise or order wise. Post warranty expenses: The income received from the provision of these services is booked in the MAG unit under Schedule 11 - Income from annual maintenance an....
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.... 2013 (page number 4154 to 4555-file 18). Detailed party wise breakup of the expense (approx. 14000 individual line items (pages 4166-4530) were filed by the Assessee. Sample invoices for the expenses incurred (pages 4531-4555) were also filed by the Assessee. Despite such evidence having been filed, the AO has observed that no evidence was filed by the Assessee in support of the claim for deduction. The invoices that were destroyed in fire has nothing to do with invoices relating to actual incurring of warranty expenses. These invoices were produced before the AO. It was submitted that actual expenditure incurred on providing warrant claims was an expenditure of revenue nature incurred wholly and exclusively for the purpose of business of the Assessee and had to be allowed as deduction under section 37(1) of the Act. As per the warranty policy of the Assessee, warranty services are provided only in respect of domestic sales made by the Assessee. The learned counsel for the Assessee pointed out that since the post warranty income is booked and reflected on the MAG unit, the corresponding cost is also booked in the MAG unit and also brought to our notice that this aspect was explain....
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....its case. Principles laid down for provision for warranty to be treated scientific Applicability to the Assessee 1 Present obligation out of obligating events which involves outflow of resources There is present obligation on the Company to meet cost for warranty in event of defects in products which would involve outflow of resources 2 A reliable estimate can be made Repair cost and MLO cost incurred is multiplied by actual FFR rate and number of products sold to compute provision. Thus, estimate made by Company can be considered reliable 3 Warranty cost was an integral part of that sale price Warranty provided for domestic sales at time of sale. Thus, warranty cost is an integral part of sales 4 A historical trend used as a basis for creation of provision Provision created is based on the field failure rate of the products in past. Thus, a historical trend of actual failure of products has been used as a basis for creating the provision 5 Reversal of unutilized provisions In case of Company the entire provision is reversed in next y....
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....book). The method of creation of provision for warranty is a robust method of determination of provision for warranty. The same is as follows: (i) Provisions for the previous year is reversed completely at the beginning of the current year. (ii) At the year end, the Company reviews the amount required to be provided as warranty based on the warranty policy of the Company. (iii) The sales register for the past 3 years are taken as basis for creation of the provisions for warranty. (iv) The provision is created on the basis of Field Failure Rate (FFR) identified per product for the past one year (i.e. 2008 for 2009 expenses). Further adjustments are made to either increase or decrease this provision based on the assessment of risk exposure. (v) The provision is created as under : FFR * Cost per product* Number of products sold. Cost refers to following: o Material, Labor and Overhead (MLO) cost for products fully replaced; o Repairs and freight costs for the products repaired. 83. It is also clear that the methodology followed by the Assessee was held to be scientific for AY 2008-09. AO's order dated ....
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....penditure is already debited into the profit and loss account. 19.7. The learned AO/DRP ought to have observed that no services were rendered and no cost to this effect was incurred during the year". 86. The facts as far as Gr.No.19 are concerned are that the Assessee is principally engaged in the business of manufacture and trading of UPS systems and other power protection devices. The Assessee is also engaged in providing repairs and maintenance services to the customers based on Annual maintenance contracts ("AMCs"). The Assessee enters into AMCs for provision of repairs and maintenance services. This is done for the period after expiry of the warranty period. The AMCs are period specific - e.g 1 year contract, 2 year contract etc. The income in respect of the same is booked in the MAG unit. The revenue recognition policy of the Assessee in recording revenues from AMC are given in Schedule 18 to the notes to accounts (Note 2(h) (b) ) and is as follows: "Service income primarily comprises income from support and maintenance contracts and is recognized on a pro-rata basis over the period of the contracts, over which the service is rendered." According to th....
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....be undisclosed income. His submission was that the Assessee was justified in deferring recognizing income because the income deferred was rightfully income of another AY. In this regard he drew our attention to the working of deferred service income furnished before the AO in Assessee's submissions dated 16th October 2012 containing, inter-alia, the following (Submission page - 518 to 540 at page 523 of File - 3. Connected workings at Annexure 9 thereto are available at Page nos. 1620 to 1897 - File 7): (i) Party names (ii) Invoice number (iii) Invoice period (iv) Contract value (v) Number of days within FY 2009 (vi) The amount of income which falls outside FY 2009, etc. 89. On the observation of the AO whether expenses have also been deferred, the learned counsel for the Assessee submitted that there will be no deferred cost such income as the same has not been incurred and will be incurred only in the subsequent period when the AMC is performed by the Assessee. There will be no opening balance in service income ledger because that deferred expenses because it is transferred to Profit & Loss Account will be closed. The openi....
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....erefore there can be no dispute that the income deferred did not pertain to AY 2009- 10, if one were to accept that deferral of income, though it has accrued to an Assessee, is possible. The principal question therefore that needs to be addressed is regarding whether deferring revenue is permissible under the mercantile system of accounting followed by the Assessee where income that accrues or arises to an Assessee has to be regarded as income. 92. The learned counsel for the Assessee in his rejoinder submitted that the decision of the Tribunal rendered in the case of M/s. Optum Health & Technology (India) Pvt.Ltd. (supra) is clearly distinguishable because in that case not only was the revenue received but also services were rendered and still the Assessee chose to defer revenue recognition and it was in those circumstances, the Tribunal held that deferring revenue was not proper and had to be regarded as income of the relevant year. 93. We have given a very careful consideration to the rival submissions. Similar issue had arisen for consideration in the case of Punjab Tractors Co-op. Multipurpose Society Ltd. (supra) before the Hon'ble Punjab & Haryana High Court. In that c....
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....n his hands. It bears the character of income at the time when it accrues in the hands of the assessee and then it becomes eligible to tax. What is relevant to determine whether money received is income or simply an advance, is the initial character of the receipt and not the head under which the amount is credited in the books of account. If no income has resulted, it cannot be said that income accrued merely on the ground that the assessee has been following the mercantile system of accounting." The Hon'ble Court accordingly upheld the stand of the Assessee. Holding that the Assessee did not become owner of the money received unless the services are rendered and was not entitled to appropriate the same till service was rendered in lieu of which the same was received in advance. 94. The Hon'ble Madras High Court in the case of Coral Electronics (P) Ltd. (supra) also dealt with similar case. The assessee is a private limited company carrying on business in television sets. In the previous year ending 31st March, 1983, and 31st March, 1988 corresponding to the assessment years 1983-84 and 1988-89, respectively, the assessee had collected service charges, which were bifurcated ....
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.... the Tribunal in the case of M/s.Optum Health & Technology (India) Pvt. Ltd., is concerned, as rightly contended by the learned counsel for the Assessee the facts were that the sums were received in advance and in respect of the sums received services were also performed but still the Assessee did not recognize revenue but postponed recognition based on the bills raised on the clients for services performed. Though there are observations in the order of the Tribunal that postponement of recognition of income is not possible on the basis of AS-9 of ICAI when income accrues or arises under the mercantile system of accounting, those observations have to be confined as decision on the facts of that case. In the light of the decision of the Hon'ble High Courts of Punjab & Haryana and the Hon'ble Madras High Court, we are of the view that the claim made by the Assessee deserves to be accepted. Accordingly the addition made by the AO and confirmed by the DRP is directed to be deleted. Gr.No.19 is accordingly allowed. 97. In Gr.No.20, the Assessee has projected its grievance against the action of the revenue authorities in taxing deferred income of Rs. 2,90,49,991/-. The relevant ground....
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....sed by debiting the service income account. The Assessee also pointed out that this sum was booked as revenue of AY 2010-11 and was offered to tax. 100. The DRP however did not discuss any of the above submissions and held that the Assessee has not provided any details and confirmed the order of the AO. 101. Before the tribunal the learned counsel for the Assessee submitted the following details with regard to the contract for installation between the Assessee and Bharti Airtel Ltd. PO number/ Date Invoice number/ Date Invoice amount (Rs.) Details furnished before the learned DRP BAL MO U.P/ West/ PUR/ 5548 dated 23-Oct 2008 BANG/ IDC/ SI- 0826 dated 31st Mar 2009 1,54,52,141 * PO * Invoice * Ledger for service income * Ledger for Bharti Airtel Limited * Journal entry for the transaction BAL MO U.P/ West/ PUR/ 5572 dated 05-Nov 2008 BANG/ IDC/ SI- 0827 dated 31st Mar 2009 1,35,97,800 * PO * Invoice * Ledger for service income * Ledger for Bharti Airtel Limited * Journal entry for the transaction * Ledger for Sundry debtors Total ....
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....o be deleted. Gr.No.20 is accordingly allowed. 104. Gr.No.21 raised by the Assessee projects its grievance in the action of the revenue authorities in disallowing claim of deduction u/s.10A of the Act for the software unit of Rs. 8,80,48,316/-. The aforesaid sum was treated as "Income from other sources" rather than income of the unit which was eligible for deduction u/s.10A of the Act. The relevant grounds of appeal of the Assessee reads thus: 21. Disallowance of deduction under section 10A for the software unit: Rs. 88,048,316 21.1. The learned AO/ DRP have erred in denying the deduction under section 10A of the Act for the software unit. 21.2. The learned AO/ DRP has erred in holding that there is no export of software services during the FY 2008-09. 21.3. The learned AO/DRP ought to have appreciated that the Appellant has furnished all documents evidencing export of software including invoices, softex, FIRC's, bank statements for the receipt of foreign exchange on export of software, etc. 21.4. The learned AO/DRP has erred in holding that the sale proceeds was not brought into India as convertible foreign exchange within the p....
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.... (ii) There was no evidence of having exported the computer software. (iii) The income from developing Software was never shown in the service tax returns filed by the Assessee. (iv) The Software Service development agreement was entered into with APCC, USA on 1.1.2001 i.e., prior to amendment of Sec.10A of the Act. A new Section 10A was substituted by the Finance Act, 2000 W.e.f. 1.4.2001 (v) The sale proceeds are not brought into the country in convertible foreign exchange within the time limit prescribed in Sec.10A(3) of the Act. 107. According to the AO, the Assessee filed submission on 14.2.2013 to the aforesaid queries but without setting out what the reply was, the AO proceeded to hold that the Assessee was not entitled to deduction under section 10A for the software unit on the grounds that: * There is no export of software services during the FY 2008-09 * Commencement of business by software unit is before introduction of amended section 10A of the Act. * Agreement for activities undertaken by software unit has been entered after commencement of operations and before the introduction of section 10A in the Act ....
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....m that the conclusion of the AO that the Assessee never exported software is therefore incorrect. 110. With regard to the finding of the AO that the Agreement dated 1.1.2001 entered into by the Assessee with APCC, USA prior to introduction of amended provisions of Sec.10A of the Act, the learned counsel submitted that the date of agreement being before amendment of section 10A has no relevance for the purpose of determining the eligibility under section 10A He brought to our notice that the first proviso to section 10A(1) allows benefit under section 10A by extending the benefit of deduction u/s.10A of the Act to undertakings which were entitled for such benefit before the substitution of section by Finance Act, 2000 for unexpired period of aforesaid ten consecutive assessment years. Therefore it was submitted that the Software unit of the Assessee was eligible for deduction under the provisions of section 10A prior to its amendment. Hence, by the virtue of the proviso, the Company would be entitled to claim deduction under section 10A post its amendment too. 111. The learned counsel for the Assessee submitted that the observations of the AO that the agreement for rendering t....
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....ty as is authorized for regulating payments and dealings in foreign exchange. Vide Notification No. FEMA 176 / 2008-RB issued by the RBI, the time limit for realization of export proceeds for software was enhanced from 6 months to 12 months from date of export (Page No. 5408-5409 of the Case law paper book). It was submitted that extension of time limit for realization of export proceeds by competent authority under FEMA can be said to be approval granted under section 10A. For export proceeds amounting to Rs. 8,56,88,735, since export proceeds bought into India after said period of 12 months are via a FIRC duly received from the Authorized Dealer, same should be deemed to be allowed by the Competent Authority and ought to be allowed in terms of Section 155(11A) of the Act. It was submitted that in the light of the above submissions and evidence, it should be held that the Assessee is eligible for benefit under Section 10A of the Act for the amount of sale proceeds realized. 114. The learned counsel also submitted that the action of the AO in treating the income of the software unit as income from other sources was unsustainable. According to him once it is admitted that there w....
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....88 (SC) 116. He prayed that it should be held that: a. Profits of the software unit should be considered as business income b. Such profits should be allowed deduction under section 10A 117. The learned DR relied on the order of the DRP. 118. We have carefully considered the contentions of the Assessee and the grounds on which the revenue authorities denied the benefit of deduction u/s.10A of the Act to the Assessee on profits of the software unit. The evidence in the form of Softex furnished by the Assessee which were in the paper book and referred to in the table given in the earlier paragraphs dealing with this issue, clearly shows that there was export of computer software by the Assessee. In fact the TPO has in the order passed u/s.92CA of the Act has proceeded on the basis that the Assessee exported computer software and determined the ALP for that transaction. It is therefore not correct on the part of the AO/DRP to conclude that the Assessee never exported computer software. Such conclusions are contrary to material on record and in complete disregard to such material. On the aspect of the Agreement with APCC, USA and the Assessee for development ....
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.... Reserve Bank of India ("RBI") or such other authority as is authorized for regulating payments and dealings in foreign exchange. Notification No. FEMA 176 / 2008-RB issued by the RBI wherein time limit for realization of export proceeds was enhanced from 6 months to 12 months from date of export. Therefore realization within 12 months from the date of export has to be considered as proper realization. The export proceeds bought into India after said period of 12 months are via a FIRC duly received from the Authorized Dealer, same should be deemed to be allowed by the Competent Authority and thus is to be allowed in terms of Section 155(11A). The decision of ITAT Bangalore Bench in the case of HCL EAI Services Ltd. Vs. DCIT (supra) supports the plea of the Assessee in this regard and therefore the same is accepted. 120. In view of the aforesaid conclusions, nothing turns on the finding of the AO that the income that was claimed as deduction of software unit u/s.10A of the Act, being considered as "Income from other sources" by the AO and such finding in the light of the material brought to our notice by the Assessee noted in the earlier paragraphs dealing with this issue clearly....
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....of Income from Other Sources 22.7. The learned AO/ DRP erred in not considering the Supreme Court decision in the case of CIT v. Woodward Governor India (P) Limited and Honda Siel Power Products Ltd (312 ITR 254) and Sutlej Cotton Mills Ltd. v. CIT (116 ITR 1) on the said issue". 23. Disallowance of foreign exchange loss of MAC unit - Rs. 30,18,63,653 23.1. The learned AO/DRP has erred in disallowing the foreign exchange loss of MAG unit 23.2. The learned AO/DRP has erred in comparing the total goods imported of this unit for the current year with the foreign exchange loss of Rs. 30,18,63,653 of the unit. 23.3. The learned AO/DRP has failed to appreciate the fact that the foreign exchange loss amounting to Rs. 30,18,63,653 comprises of imports for the current year wherein payments have been made, yearend unpaid import payments reinstatement and payment of the invoices pertaining to the past years. 23.4. The learned AO/DRP has failed to appreciate the fact that the assessee has produced the ledgers and the workings for the foreign exchange loss along with detailed workings for the same highlighting the party wise details. ....
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....bles of prior years it has been claimed as an allowable loss while computing taxable income for the MAG unit. 126. The AO while considering the claim of the Assessee for considering foreign exchange gain as profit of the business of the Sec.10A units IDF 1 and IDF 2 respectively and allowing loss on foreign exchange fluctuation in respect of MAG unit, acknowledged that the Assessee had furnished the forex fluctuation profit/loss working (vide paragraph 4.2 at page-46 of the AO's order) but without commenting on the correctness of the statements so submitted held that annexure 10,11 and 12 given on the date of hearing was not supported with any bills and invoices and that what was given was a computed generated document where postings were made indiscriminately for which no material evidences are placed on record. Since it was not established that the forex gain/loss had connection with the business of the Assessee, the AO treated the gain as income from other sources and consequently the deduction claimed u/s.10A of the Act would also be denied on this sum of Rs. 126,48,37,681/-. With regard to the loss on account of foreign exchange fluctuation claimed by the Assessee in the MA....
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.... counsel for the Assessee also drew our attention to the fact that AO has acknowledged fact that the Assessee has furnished export invoices obtained from 3rd party in his order on page number 27 of the assessment order. However, these invoices have been ignored while discussing the adjustment for foreign exchange. It was argued that the AO foreign exchange gain in case of IDF1, IDF 2 and Software unit is majorly on account of exports due to the increase in the value of USD against rupee. He drew our attention to the Foreign exchange gain snapshots for AY 2009-10: Particulars Amount 127 Export turnover (excludes foreign exchange) 1,703 % of foreign exchange to export turnover 7% [available at page 4764 of File No. 20 of the paperbook] 130. Depreciation of the INR vis-a-vis USD Particulars USD INR As on 31.03.2008 1 40.26 As on 31.03.2009 1 51.43 Depreciation % 28% [available at page 4764 of File No. 20 of the paper book] 131. The learned counsel for the Assessee submitted that the foreign exchange gain of IDF1, IDF2 and software unit is on account of business transactions and hence, the same should....
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....at page 4772 of File No. 20 of the paper book) It was submitted that due to the rate fluctuation, the amount payable toward import purchases has increased. 134. It was submitted that the AO has erred in holding that there is lack of evidence for the foreign exchange loss. Our attention was brought to the fact that the Assessee has submitted detailed workings of foreign exchange loss as evidence vide Annexure number 12 to submissions dated 13th December 2012 ( at pages 636-649 of File No. 3 of the paper book, relevant page 646 to be read with File no. 14 of the paper book) (detailed workings of approximately 2500 individual line items). Our attention was also drawn to the revenue recognition policy the Assessee consistently followed as per AS- 11 and made submissions vide its submission dated 4th March 2013 (at pages 728- 729 of File No. 3 of the paper book). It was submitted that the AO has accepted the fact that there is a gain but refuses to allow deduction on such gain u/s.10A of the Act and brings it to tax under the head "Income from Other sources" and when it comes to foreign exchange loss, the AO realizing that such loss will bring down the profits of the MAG unit whic....
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.... 3) gave the following reply for foreign exchange gain in IDF1 unit and loss in MAG Unit: "Please find enclosed the forex gains workings for IDF!/EHTP 2 and software units vide Annexure 10 & 11 respectively. Please find enclosed the forex loss workings for MAG unit Vide Annexure-12." Similarly in a reply dated 4th March, 2013 (copy at page 719 to 729 paper book No.3) the Assessee gave the following details (at page- 719); "1.Foreign Exchange gain/loss of IDF1 and IDF 2 unit: 1.1. Break up of Foreign Exchange fluctuation: The unit wise break-up of forex gain/loss linked to the amount credited to the profit and loss account for the financial year ended March, 2009 are provided below: (Amount in Rs.) IDF1/EHTP2 IDF2/EHTP1 MAG Software Total 761,217,996 461,437,736 (301,863,653 42,181,949 902,974,029 In this regard, we refer to our submissions dated 13 Decdember, 2012 wherein we have furnished the workings for Software unit and IDF unit 1. In continuance to the same, please find enclosed the foreign exchange workings for IDF unit 2 for your reference vide Annexure." 138. Similarly in a letter date....
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....rded as income of IDF1 and IDF 2 units respectively and the Assessee would be entitled to deduction u/s.10A of the Act on those incomes also. We hold and direct accordingly and allow Gr.No.22 raised by the Assessee. 142. As far as foreign exchange loss in MAG unit is concerned, the profits of MAG unit are taxable and it does not enjoy deduction or exemption. Therefore the loss in this unit will go to reduce the income of this unit which is otherwise taxable. The AO therefore came to the conclusion that the loss on foreign exchange claimed in this unit is not allowable because it was a domestic unit in which there cannot be forex loss and secondly he found that the proportion of loss claimed compared to the turnover was very high. These were the two reasons assigned by the AO for treating the loss as not proved and bogus. Another reason that weighed with the AO was that Tax exempt unit IDF 1 and IDF 2 were making a gain on account of forex currency while taxable unit MAG unit is making a loss, which is not probable. It has to be clarified that the IDF1 and IDF 2 unit exports and therefore increase in the foreign exchange value vis-à-vis Indian rupee will result in gain. Wh....
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.... account of MAG unit but the AO gave a different treatment and as a result, reversal of prior period revenue of MAG unit resulted in the loss claimed by the Assessee in this unit being reduced. The following chart explains the position in this regard: Rs. In Crores: Treatment by Assessee in the segmental P&L of MAG unit Treatment by AO (Page 43 of the assessment order) Expenses Reduction from profits Actual depiction Net amount being Gross profit less operating expenses, less depreciation and less finance expenses : Rs. (47.21) Less: Expenses being prior period revenue reversed : (Rs. 2.45) Net profit / (loss) : Rs. (49.66) [excluding other expenses] Revenue Addition to profits AO's depiction Net amount being Gross profit less operating expenses, less depreciation and less finance expenses : Rs. 64.36 Add: prior period revenue : Rs. 2.45 Net Profit / (loss) : Rs. 66.81 The AO considered expense under the head prior period income amounting to Rs. 2,44,90,252 as an income rather than an expense. The learned DRP has upheld the order of the learned AO. 146. In the submissions bef....