TaxTMI 
TaxTMI 
2019 (12) TMI 1409
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.... the deduction of 70% of the profits u/s 10A. For the A.Y.2007-08 to 2010-11, the department raised one more issue i.e. deletion of addition made protectively in respect of the receipts of VLS IT services for H1B visa processing which were substantively assessed in the hands of the VLS IT Services. In the assessee's appeal, the assessee agitated for restricting the deduction u/s 10A only to the extent of 70% of the profits instead of allowing 100%. For the sake of convenience, these appeals are clubbed, heard together and a common order is being passed as under. 2. First issue in these appeals is related to the deduction u/s 10A of the Income Tax Act, 1961 (in short 'Act'). Brief facts of the case are that a search and seizure operation u/s 132 of Income tax Act ('act' in short) was conducted in the case of M/s Annapurna Business Solutions (in short 'ABS') on 16.09.2010. M/s ABS is the partnership firm instituted by partnership deed dated 02.01.2002. The firm has four partners with equal share of 25% each, namely Smt. Tunuguntla Annapurna, Smt.Tunuguntla Saritha, Sri Tunuguntla Jagan Mohan Rao and Sri Tunuguntla Nanda Kishore. The firm is engaged in the business of software d....
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.... agreement, the services to be rendered was reproduced as per which, on the request of VLS Systems Inc.( in short 'VLS'), vendors are required to provide services or persons recommended by vendor and selected by VLS (collectively 'contractors') to perform services. From the agreement, the AO further found that no product development, i.e. software development is envisaged in the said contract. However, for the purpose of the registration/renewal with STPI the assessee firm has submitted another agreement called 'Master Services Agreement' dated 06.06.2002 and in the said agreement there was a provision for development of software and IT Enabled services to the vendee(VLS). The AO observed that the said agreement dated 06.06.2002 was not available at the time of original registration or in the immediate years thereof. According to the AO this agreement of 06.06.2002 was an afterthought to support his claim for deduction u/s 10A as software developer. The AO came to conclusion that the agreement dated 06/06/2002 was neither originally available nor submitted to the STPI. The AO drawn such conclusion on the basis of the correspondence retrieved by the Investigation team from the se....
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.... of Hari Babu. 2.7. The AO has asked the details of products developed by the assessee, Shri Nanda Kishore in his deposition stated that M/s ABS has developed number of projects over the years as per clients order. One of such product was ITRM, an applicant tracking and customer relationship management system. He stated that ITRM was developed in USA in the year 1997, later a newer version was developed starting in the year 2002 by the assessee firm. However, the AO disbelieved the assessee's submissions, and viewed that the assessee received foreign remittances from export of man power supply but not from software development. The AO further stated in the assessment order that there were evidences to believe that no software was developed by M/s ABS as there were lots of discrepancies with regard to product development and the year in which it was stated to be developed. The AO reproduced the Email correspondence in the assessment order between Kris Nanda and Hari Babu dated 07.10.2008 which reads as under : "Attached is the updated project details document. The same has been updated in our website. Based on this, you can print the 7010 and any other invoices usi....
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....ations to its clients, as well as assisting to identify and obtain new clients / new client business and assist employer in getting new solutions / IT contract staffing business, identify prospective candidates for project assignments at client sites as well as to identify prospective candidates for India operations and Employer desires to employer employee..." From the agreement, the AO observed that the bonuses are linked to dollar margin that the parent US company makes on placement of candidate selected by these technical recruiters of ABS. The AO further observed that the candidates selected by recruiters are taken to USA on H1B Visa. They are subsequently placed with various organizations on hourly rate. Part of this hourly compensation is retained by M/s VLS and the balance is paid to the candidates. The candidate who opt to go to USA on H1B Visa have to pay certain amount as deposit for visa processing and the said amounts were collected and deposited into the bank accounts of Shri Hari Babu, employee of VLS IT Services and Shri R.Naresh, brother-inlaw of Shri Nanda Kishore.. The AO observed that M/s VLS IT Services was created to enter into agreements with prospec....
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....doption of returned income Except for A.Y.2004-05 and A.Y.2006-07, mistakes were crept in computation of assessed income. It appears that while computing the total income, the AO has adopted incorrect returned income. Hence, the AO is directed verify the computation of total income and pass necessary rectifications at the time of giving effect to this order. 3. Against the order of the AO, the assessee went on appeal before the CIT(A) and submitted point-wise clarifications before the Ld.CIT(A) with regard to various issues raised by the AO in the assessment order. The assessee submitted that it has never indulged in malpractices or the manipulations and it is a genuine software company. With regard to agreement dated 08.01.2002 between VLS Systems Inc., and the assessee firm, inrespect of signature of Shri T.Nanda Kishore he he could not give immediate reply due to the fear of legal repercussions if any though signed genuinely. He stated that his name is T Nanda Kishore and he is one of the partners of the assessee firm and he is also called as Kris Nanda in USA. Hence he submitted that he had signed the agreement with Indian name for the Indian firm and the other o....
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....claimed to have supplied the software to Megasoft India Ltd. The assessee further questioned the authority of the Indian Chartered Accountant to issue such letter without having any evidence. The assessee also furnished the information regarding the receipt of US$1,41,458 from Megasoft USA, for supply of it's products. The assessee furnished the breakup of the payments stating that US$11,650 was paid by Megasoft USA towards ITRM software product license and its customization and US $127808 towards employees of VLS who worked in the sites of Megasoft, USA. Thus submitted that neither the amount nor nature of work / services rendered by VLS to Megasoft, USA were matching with the information furnished by the Indiand Chartered Accountant to the department, hence there is no truth in the information furnished by Megasoft India Ltd. 3.3. Regarding the allegation of AO on the use of Monster India.com, the assessee submitted that ABS has developed multiple products by hiring software engineers who are provided salary, benefits like 2 weeks vacation, one week sick leave, health and dental insurance, 401K and profit sharing and make work on client projects in USA. VLS is not a placement ....
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....O in the remand report objected for admission of additional evidence under Rule 46A with regard to registration of Monster.com. After considering the remand report, rejoinder and the arguments of the assessee, the Ld.CIT(A) given a finding stating that the AO did not bring any evidence which has impact on the activity of the assessee by signing differently as Nanda Kishore and Krish Nanda. 3.7. With regard to second issue of singing the agreement, the Ld.CIT(A) observed that by keeping the document with assessee itself, whom the assessee was misleading, is not clarified by the AO. Similarly, the Ld.CIT(A) observed that the AO mentioned that the agreement was only for supply of manpower and he had ignored the opening words of the sentence which starts with 'services'. The Ld.CIT(A) further observed that the AO should have examined what inference can be drawn from the membership of Monster.com., with regard to software development. Sale of software to Megasoft, anamoly in invoices , discrepancies regarding the development of product in different years etc., were given undue weightage by the AO for holding that the assessee is not exporting the software, which according to the Ld.C....
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....ubmitted the details of break up given to IT and ITES worked hours linking to the purchase order and invoice number for all the assessment years. The assessee furnished list of employees salary paid. The Ld.CIT(A) examined the above details and the sworn statements recorded from Sri Kishore Kumar on 16.09.2010 and source control logs for the A.Ys. 2008-09 and 2009-10 furnished by the assessee. The Ld.CIT(A) also verified the FTP logs for transmission of the export of the software which was furnished by the assessee in 6000 pages by way of example for few logs for different years. The proof of transmission of software by FTP was part of initial filing of 1206 pages in 11 annexures. Before the Ld.CIT(A), the assessee stated that the observation of the AO with regard to firm having only machinery worth Rs. 5.09 lakhs and air conditions worth Rs. 12,000/- is wrong and it has filed the complete details of the assets worth 39.37 lakhs as against 5 lakhs mentioned by the AO. The Ld.CIT(A) verified the copies of export clearance certificate from STPI, agreement between VLS and its clients and association communication by email and the email communication to show software development and IT....
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.... Addition made 2007-08 40,97,000 2008-09 50,65,620 2009-10 57,48,994 2010-11 47,64,850 2011-12 19,74,116 5. Aggrieved by the order of the Ld.CIT(A), the department has filed appeals for allowing exemption u/s 10A to the extent of 70% instead of denying the entire exemption claimed by the assessee and the assessee filed appeals challenging the order of the Ld.CIT(A) for taxing the profits to the extent of @30%. 6. During the appeal hearing, the Ld.DR assailing the order of the Ld.CIT(A) submitted that the assessee has neither developed any software nor it has infrastructure to develop the software as claimed by the assessee. The Ld.DR further submitted that in fact the assessee is engaged in the recruitment of manpower and supply of manpower to the parent company, VLS Systems Inc, therefore, argued that the claim made by the assessee with regard to software export is bogus. Referring to the statement recorded from Vaka Hari Babu, employee dated 16.11.2010, the Ld.DR argued that the assessee company is engaged in the processing of H1B visas but not in export of software. Referring to question No.12 of V.Hari Babu in statement dt.16.11.2010, the Ld....
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....e of search operations, the assessee was asked to explain the reasons for signing the agreement in two different names giving impression that two different persons had signed the agreements and the assessee has given very vague and evasive reply initially and later on submitted that he is known as Kris Nanda in USA and T.Nanda Kishore in India, thus, he has signed in two different names. The Ld.DR argued that VLS Sytems Inc. and the ABS are owned by Shri T.Nanda Kishore and T.Saritha and the assessee is showing 100% identity mapping. During the course of search, another agreement was found in the premises of the assessee dated 06.06.2002, for project assignment services for providing business process outsourcing call centre and other related services. The DR submitted that the said agreement was signed by Shri Nanda Kishore and it does not bear signature of the second part. In the post search proceedings, the assessee signed the agreement on the same date of 06.06.2002 showing the signature of Nanda kishore and T.Jagan Mohan Rao to mislead the government authorities at various stages and the Ld.DR submitted that the agreement was also contrary to the invoices produced by the assess....
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....tment / supply as that of export of software services. The Ld.DR further submitted that the entity by name VLS IT Services was created to enter into agreements with prospective H1B visa holders. There are no employees in India on the rolls of M/s VLS, USA or VLS IT Services and all the related work is being done by the assessee. On the day of search statements of various employees was recorded and they stated that they are into recruitment work and not into the development of any software. Shri T.Nanda Kishore also failed to produce the details of any sale of software by VLS, USA from the software claimed to be exported by the assessee to VLS, USA. 6.2. The Ld.DR argued that the trading results of VLS Systems Inc. was not made available by the assessee to the AO and the assessee was showing more than 80% of the net profit out of the turnover which is highly impossible in this line of business. The AO collected the trading results of reputed companies listed in stock exchange, wherein, the profit margins were ranging from 10% to 66%. The Ld.DR further submitted that to earn such abnormal profits, the assessee must be in a possession of unique premium product or service but the sa....
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.... of software by VLS Inc. at USA and linkage of development of such software by employees of the assessee. The Ld.CIT(A) tabulated the segment wise (IT and ITES) breakup of total turnover, total expenses, total income including interest income, claimed u/s 10A, taxable income for different years, while doing so, the Ld.CIT(A) failed to appreciate employee cost as the percentage of revenue is very low. The STPI logs and e-mails no way provide conclusive proof of claims of the assessee. 6.5. The Ld.CIT(A) invoked the provisions of 10A(7) r.w.s. 80IA(10) because the transaction is between the two parties, arranged in such a way that the assessee derived more than the ordinary profits expected in this line of business. The Ld.DR argued that the Ld.CIT(A) restricted the claim of exemption u/s 10A to 70%, however, the Ld.CIT(A) ought to have appreciated the fact that the assessee being engaged in the manpower services, not entitled for deduction u/s 10A of the Act. The Ld.CIT(A) overlooked the fact that the affairs of the VLS Inc and its financials were not disclosed by the assessee to prove the activity of software development or sale or licensing at USA. More so, when there is cogent....
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....allowed the claim of deduction u/s 10A of the assessee on surmises and conjectures without any valid evidence. The assessee is engaged in the software development and Information Technology Enabled Services, registered with STPI, Hyderabad, granted permission to the assessee firm in setting up of 100% export oriented unit vide letter dated 16.01.2002. Change in address was permitted by the STPI. The STPI granted extension of approval vide letter dated 12.06.2008 from 24.10.2007 to 23.10.2012. The grant of approval by STPI was based on the Master Service Agreement entered into between the assessee and VLS Systems Inc. USA. According to the Master Service Agreement, the assessee has software engineering resources and personnel to perform such software development services. The amount realized by the assessee for supply of software developed by it under ITES was received through banking channels and is certified by the STPI. The assessee supplied the software developed by it to VLS Systems Inc. It has developed the Information Technology Resource Management System (ITRM). The scope of project included in the following features besides HR application... A) Quick TS/eIPS/Time T....
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....m Hyderabad to USA was recoded and submitted to STPI. The Ld.AR submitted that the activities of the assessee firm are approved by STPI to be software development and IT enabled services. The entire turnover is from supply of software development. No receipt in connection with the supply of personnel was admitted as its income. In fact the activity of supply of personnel i.e. VLS IT Services and the income from the said source is assessed in the assessment of VLS IT services. Therefore, the Ld.AR submitted that the income derived by the assessee is from software development of ITES and not from supply of manpower. With regard to allegation that profit margin is higher, the Ld.AR submitted that utilization of 100% capabilities of employees without allowing the employees on Bench and quantum of rent contributed for increase in the income. The assessee further submitted that there was substantial interest income on its deposits and the assessee did not debit any interest as there were no borrowings. No financial charges were debited to P&L account and the managing partner himself is qualified and capable of rendering technical services and is able to manage the affairs of the firm and....
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.... in the assessee's case and the entire expenditure was debited to the P&L account. Neither the AO nor the Ld.CIT(A) has made out a case that the assessee suppressed the expenses or shifted the expenses to the other concern to claim such deduction. In fact the AO taxed the entire income claimed as deduction u/s 10A and the Ld.CIT(A) blindly estimated the income without bringing any arrangement or the defects in the books of accounts of the assessee. The Ld.AR further submitted that even it is presumed that expenditure relatable to VLS IT systems has to be considered in the hands of the assessee firm, the same required to be allowed as deduction in the hands of VLS IT systems. The AO assessed the entire receipts as income in the hands of VLS IT Systems. Hence, argued that the Ld.CIT(A) committed an error in restricting the exemption to the extent of 70% and requested to set aside the order of the Ld.CIT(A) and dismiss the appeal of the revenue and allow the appeal of the assessee. 9. With regard to financials of VLS Inc., the assessee submitted that there is no provision to call for the financials of the VLS Inc since it is a foreign organization and it is for the department to ma....
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....lso in the course of appeal hearing before the ITAT. The activities of the assessee are export of software and no receipt in connection with the supply of personnel was admitted as its income. Even with regard to Mega Soft, the Ld.AR submitted that the assessee had admitted the income of one thousand dollars and claimed deduction u/s 10A on one thousand dollars only, but not one lakh dollars as alleged by the department. The activity of supply of personnel is that of VLS IT Services and the income from the said sources was assessed in the hands of VLS IT Services by the AO substantially which was also confirmed by the Ld.CIT(A). Therefore, the issue with regard to supply of personnel is put at rest by assessing the income in the hands of VLS IT Systems. The Ld.AR argued that the assessee is in the activity of development and export of software, but not for the supply of personnel. Therefore, requested to allow the appeal of the assessee and set aside the orders of the Ld.CIT(A). 10. We have heard both the parties and perused the material placed on record. A search u/s 132 was carried out in the case of the assessee on 16.09.2010 and during the course of search, certain material ....
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....ce the assessee has lost it's copy of the original agreement and it has to submit the copy of the agreement to STPI for renewal, he has asked the employee Mr.Hari to get the signature of Jagan Mohan Rao on the agreement on behalf of the ABS firm. This signed agreement was submitted to the STPI for renewal of registration. The original agreement was stated to be lost by VLS also in fire accident. The agreement signed by both the parties was furnished during the post search proceedings. The correspondence shows that the agreement was signed by Sri T.Jagan Mohan Rao during 2008. The assessee clarified that the original agreement was submitted to the STPI at the time of registration and subsequently copy of agreement was prepared only for renewal of licence. As discussed the copy of agreement was available in the seized material in soft form. The department did not make any enquiries with the STPI and did not bring any evidence to show that the said agreement dated 06.06.2002 was not submitted to the STPI originally. Therefore, there is no reason to disbelieve the copy of the Services Agreement dated 06.06.2002 as fabricated one or made as an afterthought. 12. The third issue is wit....
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....ation and no such material was brought on record. Therefore, on this issue, neither the department brought any evidence prohibiting the assessee to make exports or importing company to import the software. Though the Ld.AO held that the assessee is engaged in the body shopping, the entire receipts on account of recruitment of personnel were assessed in the hands of VLS IT Services substantively on the basis of agreements, thus the department has accepted that recruitment of manpower and personnel supply was the activities of VLS IT Services, but not of the assessee. Though the AO has alleged that the profit was abnormally high, the AO has not computed the income on account of export activity, referred the issue to TPO for Arms length and brought on record comparables and made the T.P.study. Instead taxed the entire income declared by the assessee, thus, there is no reason for justification to tax the entire income earned by the assessee denying the deduction claimed. Once, the AO has taxed the entire income admitted by the assessee without computing the income or estimating the income, there is no reason to disbelieve the income earned by the assessee from the export activity. From....
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....this activites was given to Ld.CIT(A) from the seized hard disk. On an average, there were 38 to 40 employees working in product development and support employees who provided IT Enabled Services. The salaries of all these employees are deposited in their account and PF was paid. The proof of payment of PF was also provided to the AO. 14. During the appeal hearing, the Ld.AR submitted that for initial products, Visual Source Safe-VSS was used later on TFS was used. All the applications were developed by using Microsoft Technologies including Visaual Studio, C#Net, ASP.NET, Ajax, J Query, JavaScript, HTMS, XML, TFS (Team Foundation Servicer) and SQL server and all these products are transferred using FTP (File Transfer Protocol), a tool to transfer the software and its associated documents from one computer/server in Hyderabad, to a server in VA, USA. Each of these computers are assigned an IP address, which is a unique number given to a computer servicer. Each IP address is unique to each country and each state within the country. The logs of these can be found on each of the server which tracks the date and time of each FTP transfer along with duration of transfer. Log is simil....
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....bjective of STPI is encouraging, promoting and boosting the software exports from India. It also maintains internal engineering resources to provide consulting, training and implementation services. The salient features of STPI scheme was approval under single window clearance mechanism, 100% foreign export oriented scheme for undertaking software development for software export using data communication link or in the form of physical exports including professional services. Once the unit is located in STPI, the assessee can make export in single window using the lines and infrastructure of STPI. As rightly held by CIT(A), the documentation prescribed by the STPI is sufficient to hold that the assessee made the exports. Softex forms are proof of transmission of data. Ld.DR also argued that Softex forms are proof of transmission of data. Mere transmission of data from India to outside India is sufficient to hold that the assessee has made the exports. In this case the assessee submitted the bundles of information with regard to transmission of data as observed from the order of Ld.CIT(A). Hence, the responsibility is more on the AO to prove that there was no software export with dir....
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....036223 34051709 59609675 25765542 37904129 47240308 11.0 in course of the appellate proceedings, clarifications were also sought regarding the number of hours billed and its feasibility (page 18 of the asst. order for the AY 2010-11). The appellant submitted the details giving a break up of IT & ITES worked hours linking it to the purchase order and invoice number as well for all the asst. years in appeal. The relevant statement for AY 2010-11 is enclosed as Annexure A (one page). {page 31 of this order}. 12.0 The appellant also furnished the list of employees and salary paid along with details of PF credited for the AYs under question. Letters sent to the bank regarding salary and the salary sheet of April, 2008 is enclosed for the sake of immediate reference as Annexure B (5 pages). -(pages 32, 33, 34, 35, & 36 of this order}. The appellant had also filed copies of employment letters and employment agreement in support of the claim. All the details filed by the appellant are placed on record. 13.0 As claimed in the written submissions reproduced supra, the appellant also furnished copies of sworn statements from the employees of the....
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....PI (121 pages), agreement between VLS and its clients and association communication by email (166 pages) email communication to show software development and ITES provided (683 pages) in product information for five products namely ITRM, Parent Update, MEMS etc., (60 pages), AS and VLS Employees letters (19 pages) were all part of submissions running into 1206 pages which was sent to the AO and where remand report was called for. 18.0 On going through the various documents filed and the trial left in the computer (prior to the date of search in most of the cases and part of seized hard disc and hence not an afterthought / insertion) through the emails and the time and date log and which was furnished through FTP log sheets, the software related activity and it export of the appellant cannot be denied. Thus, questions raised in para 8 at (a), (b) and (c) given hereunder for ready reference have to be answered in favour of the appellant. (a) The act of development as shown in source codes. (b) The act of export as evidenced in log sheets, STPI forms. (c) The adequacy or otherwise of infrastructure and expenditure to support the incomes." 1....
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....ed that the assessee company utilized 100% capabilities of employees without allowing the employees on bench. The assessee has no idle employees on its rolls. Rent paid by the assessee is 0.5% of the revenue, whereas, in many other cases, it was about 5%. Apart from the above, the assessee has no interest costs since there were no borrowings. The department did not controvert the submissions of the assessee. The AO also did not refer the transactions to TPO at the time of assessment to determine the Arms Length Price. The issue with regard to determination of higher percentage of margin and invoking the provisions of section 10A(7) and 80IA(10) was considered by ITAT Hyderabad in the case of DCIT Circle-8(1), Hyderabad Vs. Quick MD, Hyderabad in I.T.A. No.97/hyd/2015 in the order dated 26.08.2015 and dismissed the appeal of the department. For the sake of clarity and convenience, we extract relevant part of the order of the Tribunal from para 8 to 8.2 which reads as under : "8. We have considered the submissions of the parties and perused the orders of revenue authorities as well as other materials on record. We have also carefully applied our mind to the decisions cited a....
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....the tax holiday has already expired. Considered in the aforesaid perspective, AO's conclusion that only for the purpose of claiming higher exemption u/s 10A, assessee enhanced its profit margin, cannot be accepted. 8.1. As far as legal aspect is concerned, on plain reading of section 80IA(10), which is referred to in section 10A(7) of the Act, it is very much clear that the basic condition to be satisfied by AO is, he must establish it on record that assessee and its related party have arranged the business transaction in such a way that it produces more than the ordinary profit to the assessee carrying on the eligible business. Only when AO establishes on record such arrangement, he can proceed to estimate the profit of assessee at a reasonable rate. In the facts of the present case, on careful reading of the assessment order, we do not find any conclusive finding of AO that assessee and its AE have arranged business transactions in a manner to generate more than ordinary profit to assessee. At least, there is nothing mentioned in the assessment order to suggest that AO has satisfied such condition. Therefore, without establishing through positive evidence that assessee a....
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....ing on eligible business. If AO is satisfied with the aforesaid two conditions, then, as per the third condition, he may take the amount of profits as may be reasonably deemed to have been derived from transactions of such business in computing profits of such eligible business for the purpose of deduction under the said section. Considering the facts of the present case in the light of the aforesaid statutory provisions, it is to be seen that the first condition is fulfilled as assessee and its AE are related parties. However, as far as the second condition i.e. existence of arrangement between assessee and its related party by which these transactions so arranged has to produce more than the ordinary profits in the hands of assessee, whether has been fulfilled or not needs to be examined. On perusal of the assessment order, it is very much evident that only relying upon TP document of assessee wherein it is stated that average profit margin of comparable company is 15% as against 50% of assessee, AO has concluded that profit earned by assessee is not at arm's length. AO has not given a conclusive finding as to whether earning of such excess profit is as a result of business arran....
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....hereon, the location which would affect the cost of transportation as also the cost of labour, cost of power and fuel would have to be seen. The ITAT, Delhi Bench in case of AT Keatney India Ltd. Vs. Addl. CIT (supra), the facts of which are more or less identical to the facts of the present case, while deciding similar issue held as under: "11. Adverting to the facts of the extant case, we find that the AO simply relied on the TP study report submitted by the assessee to form a bedrock for the disallowance of the part of the amount of deduction u/s 10A, without firstly showing that there existed any arrangement between the assessee and its overseas related party, by which the transactions were so arranged as to produce more than the ordinary profits in the hands of the assessee. The assessment year under consideration is 2009-10. Neither the proviso to sub-section (10) existed at that time, nor such a proviso can be applied as we are dealing with an international transaction and not specified domestic transaction. Under these circumstances, we are of the considered opinion that the impugned order upholding the invocation of sub-sec. (10) of sec. 80IA cannot be countenance....