TaxTMI 
TaxTMI 
2022 (8) TMI 512
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.... group company's products. It is engaged in the business of trading, leasing and financing of computer hardware, maintenance of computer equipment. It also provides software related services. The AO proposed various additions in the draft assessment orders of both the years, which were objected to by the assessee before Ld DRP. After receipt of directions from Ld DRP, the assessing officercompleted the assessments of both the yearsby making various additions.The assessee has preferred these appeals against the assessment orders so passed by the AO for both the years. The revenue has filed appeal for AY 2010-11 challenging relief granted by Ld DRP in that year. ASSESSEE'S APPEAL FOR AY 2010-11 3. We shall first take up the appeal filed by the assessee for AY 2010-11. The Ground no.1 raised by the assessee is general in nature and hence it does not require any adjudication. 4. In Ground no.2, the assessee is questioning the wisdom of the AO in placing reliance on the "draft assessment order" passed for AY 2009-10 in drawing adverse conclusions in AY 2010-11. However, at the time of hearing, the ld A.R did not press this ground. Accordingly, the ground no.2 is dismissed as no....
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....ent order as under:- "As MSA was the only document registered with all the STPI/SEZ units invariably it is evident tat the units commenced its business activities in the year 2005-06, 2006-07 and 2007- 08 are nothing but splitting up or reconstruction of existing business. It is a clear cut case with ample evidences on record that such units were not new undertaking to claim the tax benefit. Prima facie such DOU and ICA cannot be admitted as evidence on the ground that it was not certified and registered in any of the STPI/SEZ unit....." Accordingly, the AO held that modus operandi of business, violation of SEZ Act, violation of foreign trade policy etc are similar to section 10A. The company has not given any of the software development agreement to SEZ authorities. The MSA is the prima facie evidence that they have violated sub-section 4 of section 10AA of the IT Act. In the present case, the assessee has continued the business already in existence without having any new contract agreement of alleged export of computer software. Hence the assessee is not eligible for deduction u/s 10AA of the Act. (d) EXISTENCE OF TWO TYPES OF INVOICES AND NONFURNISHING....
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....deduction u/s 10A/10AA of the Act. (h) NON-SATISFACTORY REPLY RECEIVED FROM VARIOUS COUNTRIES:- The AO made requests through the competent authority of CBDT seeking information under DTAA from various Countries described in Form No.3CEB. The purpose of request was to verify genuineness of various details furnished by the assessee during assessment proceedings. The AO received replies from various Countries, but they had followed uniform pattern and further replies were not satisfactory. Accordingly, the AO concluded that the assessee has ensured that standard reply was provided by all the AEs so as to avoid submission of various details sought. He also held that no AE has confirmed that IBM India is providing software development service to them. He also held that no ledger in the name of IBM India and Bank account is available with AEs' which can support genuineness of payments made to IBM India. 5.1 In view of the above discussed discrepancies, the AO held that the assessee is not entitled for deduction of Rs.793.18 crores u/s 10A and Rs.99.07 crores u/s 10AA of the Act. The AO has summarised his conclusion paragraph 1.5.8 at page 41 of the assessment order:-....
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.... the submission of the assessee that the issue of splitting and reconstruction of the business can be examined only in the first year of the commencement of the undertaking. This view finds support from the rationale of the decision of Hon'ble Delhi High Court in the case of CIT vs. Tata Communication Internet Services Ltd 17 taxmann.com 241 (Delhi HC) and the decision of the Hon'ble Karnataka High Court in the case of Nippon Electronics (India) P Ltd 181 ITR 518, however, the issue becomes academic in nature due to our directions (supra) confirming the denial of deduction u/s 10A and 10AA of the I T Act." 5.3 With regard to other discrepancies noticed by AO, the Ld DRP has referred to the notice u/s 142(1) issued on 02-12-2014 by the AO, wherein the AO had asked the assessee to furnish following information which are necessary to ascertain the correctness of claim of deductions u/s 10A and 10AA of the I T Act:- 1. Copy of bank book/bank ledger of all the bank accounts including the HSBC account maintained at New Yorkby explaining nature and sources of each credit and debit which was shown to the CA who has audited the books of accounts. 2. Reflect all the cred....
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.... India for the year under consideration. (f) Authenticity of information received from various Associated enterprises. (g) Authenticity of unit wise Profit and Loss account prepared by the assessee for claiming deduction. In effect, the Ld DRP has given its directions with regard to the allegation of splitting/reconstruction of existing undertakings, the reconciliation of payments received with the turnover reported by the assessee, compliance on reporting requirements of turnover through statutory forms. 5.5 We notice that many of the alleged violations pointed out by the AO have been addressed by the Tribunal in the assessee's own case in IT(TP)ANo.725/Bang/2018 dated 31.7.2020 relating to AY 2013-14. Relevant discussions made by the Tribunal are extracted below in the same seriatim discussed in Paragraph 5 supra:- (A) NON-SUBMISSION OF STATEMENT OF WORK (SOW) WITH STPI/SEZ AUTHORITIES:- This objection has been addressed by the co-ordinate bench in AY 2013-14 as under:- "A.5 We have perused submissions advanced by both sides in light of records placed before us. Objection raised by authorities below is that, assessee did not establi....
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....ote that, each form consist enclosures, like copies of export contract, royalty agreement, communication from foreign customers. Submissions by Ld. Standing Counsel for revenue is thus found to be contrary to SEZ approvals placed at page 782 onwards of paper book volume 3. Ld. Standing Counsel for revenue also placed reliance on Circular no.1/2013 dated 17/01/2013 issued by CBDT, which addresses various requirements for being eligible to claim deduction under section 10AA of the Act, but did not bring to our notice, anything contrary except for saying that assessee did not file separate SOW with SEZ." (B)ASSESSEE DID NOT PROVIDE SOFTWARE DEVELOPMENT SERVICES:- This objection has been addressed by the co-ordinate bench in AY 2013-14 as under:- "A.5 ................... Ld. Counsel submitted that, assessee claimed deduction under section 10AA of the Act for year under consideration, however, for purposes of definition of 'computer software', one has to refer to Explanation 2 to Section 10A(8) of the Act. Ld. Counsel submitted that 'computer software' for purposes of section 10AA would mean: " (i) "computer software" means,- (a) any co....
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....s across the globe, procure businesses from various end customers. Part of the contractual commitments of IBM group entity is sub contracted to assessee on need basis. Services rendered by assessee based on nature of work assigned, could be carried either from offshore or on-site. He submitted that IBM overseas entities sub-contracts work in a composite form and assessee determines the basis of servicing the project. * Ld. Counsel submitted that assessee uses common intercompany accounting system and Internet Labour Clocking System, to record time utilised for software development work, person went to DOU's with other IBM group entities and to generate invoices for services rendered to IBM group companies. * Ld. Counsel submitted that, when IBM overseas entity enters into an ICA/SOW/DOU with assessee, a unique Account ID is created for assessee. For each Account ID created by IBM overseas entity, sub ID's in the form of work items are created based on nature of work items assigned and work deliverables for each project. He submitted that employees are assigned to each of these Account ID's and work items, wherein labour time is recorded via Internet labour clockin....
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....ve complex procedure for invoicing, Ld. Counsel submitted that, it would not be possible to identify each invoices qua services rendered by assessee. C.5. On the contrary, Ld. Standing Counsel for revenue, submitted that, there may be no denying of fact that, whatever work assessee carried out, may have been done at various units, but, the main question still remains is, whether, such work was software development work or other works. He also contended that, none of the units were registered with SEZ Authority, and therefore eligibility of such units has also not been established by assessee. C.6. In rejoinder, Ld. Counsel for assessee submitted that assessee submitted relevant documents to establish granting of approval by SEZ Authorities in respect of units for which relief was claimed under section 10AA of the Act. He referred to pages 782-783, 791, being extension received or fresh approval and various other letters from authorities for setting up of new unit placed at pages 784-790 and 792- 807 of paper book volume 3. C.7. Ld. Counsel, without prejudice, submitted that, compliance with SEZ regulations is not a mandatory condition for eligibility of b....
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....rought on record by Ld. Standing Counsel to show that alleged units ceases to be an eligible unit registered with SEZ authority. Further we refer to the decision relied upon by Ld. Counsel in case of CIT vs Nippon Electronics (supra) by Hon'ble Karnataka High Court and CIT vs Tata Communications Internet services Ltd (supra) by Hon'ble Delhi High Court. C.8.4. Respectfully following afore stated decision we agree with submissions of Ld. Counsel that, in absence of any adverse action by SEZ Authorities, no presumption could be drawn that assessee violated any requirements under the scheme. We refer to decision of Ahmedabad Tribunal in case of ITO vs E-Infotech Ltd reported in (2009) 124 TTJ 176, to support the afore stated view. This Tribunal in the said case has held as under: "As regards violation of norms of STPI, we are of the view that unless violation of conditions of approval, impinge on conditions for grant of deduction under the relevant provisions of the Act, there is no ground for denial of deduction. In this case the status of tax bear as hundred percent EOU and under STPI scheme continues. For the default, already penalty has been imposed by concerned ....
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.... its group companies across the globe through multiprotocol switched shared backbone. However, Ld. Counsel also emphasized that, this is not a requirement to be satisfied for being eligible to claim deduction under section 10AA of the Act. B.3. On the contrary, Ld. Standing Counsel appearing for revenue submitted that, replies filed by assessee with SEZ Authority regarding details of service provider who rendered services for transmission of data exported by assessee is inconsistent with submissions made by assessee for year under consideration. He vehemently supported observations of authorities below. B.4. In rejoinder, Ld. Counsel for assessee submitted that, authorities below have relied on replies filed by assessee, relating to export of software for year 2008-09. He submitted that, authorities below reproduced replies filed by assessee and notice issued by SEZ authorities calling for details of service provider who assisted assessee for transmission of data. Referring to letter dated 10/10/2013 filed by assessee before Ld.AO reproduced at page 28 of impugned order, Ld. Counsel submitted that, for year under consideration, datacom service provider fo....
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....ed 07/09/2015 filed before Ld.AO during assessment proceedings under section 144C (1), Ld. Counsel submitted that, section 10A(3), allow assessee to either; (i) directly receive export proceeds in India, or (ii) bring export proceeds to India after the same is received outside India. D.2. Ld. Counsel submitted that, as per Explanation 2 to Section 10A(3), sale proceeds referred to therein, shall be deemed to have been received to India, where such sale proceeds are credited to a separate account maintained for the purpose, by assessee, with any bank outside India, with approval of RBI. D.3. It has been submitted that, even otherwise, an unapproved bank account maintained by assessee outside India, in which export sale proceeds are deposited, still assessee would be entitled to benefits of section 10A, to the extent that, it is brought into India in convertible foreign exchange as per section 10A(3)(i) of the Act. D.4. However, Ld. Counsel submitted that, vide letters dated 24/08/2012 and 04/01/2013, RBI granted permission to assessee, to hold and maintain foreign currency account outside India, which was placed before authorities below. ....
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....gular intervals after the last renewal given in November 2001 (copy of letters enclosed as Annexure 12). April 2013 RBI requested additional information following notices issued/ enquiries conducted by the erstwhile Assessing Officer. 8 May 2013 RBI revoked the approval granted vide letters in August 2012 and January 2013 (copy enclosed as Annexure 13). 23/26 August 2013 Deutsche Bank ('DB) received a letter (copy enclosed as Annexure 14) from RBI instructing it to conduct a transactional audit of export transactions undertaken by IBM India by the DB officers or by an external statutory auditor. Pursuant to this, DB appointed Deloitte Haskins and Sells ('DHS') as the independent auditor to perform the transactional audit, the scope of which was us follows: a. Transactional audit highlighting transparently the trail of each and every export transaction pertaining to the exporter from 2001 to 2012; b. Contract wise matching of repatriation of 30% onsite revenue for the period till February 2007) / profit (February 2007 onwards); and C. Certify that the actions of the Company are in accordance with FEMA and relevant guid....
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....enefit of Explanation 2 to Section 10A(3) of the Act. At the outset we also note that this is not a requirement to be fulfilled under section 10AA of the Act. Even otherwise, considering this objection, assessee is anyways not barred from claiming deduction under main provisions of section10A(3) of the Act, whereby, it can satisfy Ld.AO regarding receipt of sale proceeds out of India being brought into India in convertible foreign exchange within the period stipulated in the provisions of the Act. D.9.2. At this juncture, we understand the apprehension of revenue regarding the question as to whether, foreign exchange remittances were in relation to export of computer software outside India.Assessee has placed on record SOFTEX forms at pages 536 of volume 2. Category mentioned in Column 9 in the form indicates that proceeds have been received for software exported under. However, from the reasoning by authorities below, it is noted that it has not verified, as to whether, convertible foreign exchange brought into India, represents consideration received towards export of computer software. D.9.3. We note that, Hon'ble Bench of this Tribunal in assessee's own case f....
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....n 10A(3) of the Act, whereby it can satisfy the AO about the receipt of sale proceeds of computer software exported out of India being brought into India in convertible foreign exchange within the period stipulated in the provisions u/s 10A(3) of the Act. As rightly submitted on behalf of the assesses, deduction u/s. 10/10AA of the Act cannot be totally denied. The fact that the assessee has exported computer software out of India and brought convertible foreign exchange into the country is not disputed. The quantum has lo be arrived at on the deduction which the assessee is entitled to has to be allowed. 3.87 We are therefore of the view that it would be just and appropriate to set aside the order of the DRP and remand the issue to the DRP for fresh consideration and direct the DRP to examine the claim of the assessee on the basis of evidence that the assessee may lead to prove the receipt of sale proceeds of computer software exported out of India being brought into India in convertible foreign exchange. The DRP will be at liberty to examine as to whether the convertible foreign exchange was brought Into India and that they represent consideration received for export of ....
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....ut the receipt of sale proceeds of computer software exported out of India being brought into India in convertible foreign exchange within the period stipulated in the provisions u/s 10A(3) of the Act. As rightly submitted on behalf of the assesses, deduction u/s. 10/10AA of the Act cannot be totally denied. The fact that the assessee has exported computer software out of India and brought convertible foreign exchange into the country is not disputed. The quantum has to be arrived at on the deduction which the assessee is entitled to has to be allowed. 3.87 We are therefore of the view that it would be just and appropriate to set aside the order of the DRP and remand the issue to the DRP for fresh consideration and direct the DRP to examine the claim of the assessee on the basis of evidence that the assessee may lead to prove the receipt of sale proceeds of computer software exported out of India being brought into India in convertible foreign exchange. The DRP will be at liberty to examine as to whether the convertible foreign exchange was brought Into India and that they represent consideration received for export of computer software. The AO in the set aside proceedings....
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....oks of account with regard to each STPI unit. This Tribunal after elaborate discussion on the issue held that, there was no requirement of maintenance accepted separate books of account for various STPI units. At page 23 of Tribunal's order revenue has accepted the identification of sales turnover of various STPI unit was possible. This decision of Tribunal has been followed in assessee's own case for assessment year 2002- 03 in ITA No. 1151/B Angel/2009 by order dated 24/06/2011. ............. 3.81 . Another basis given by the AO in para 3.4 of his order is that there is no system of identifying expenses and revenues and that books of accounts are written without primary documents being in existence. On the various books of account maintained by the assessee, we have already elaborated as to how the assessee has explained before the AO its method of maintaining books of account and arriving at the profits of various STP units. The order of assessment as well as the order of the DRP is absolutely silent on the plea put forth by assessee in this regard. We have to therefore proceed on the basis that the revenue has found no fault whatsoever with the various system ....
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.... E.4.4. In view of the above, respectfully following observations by this Tribunal in asst. year 2008-09, we are of the view that there is no requirement for maintaining separate books of account for claiming deduction under section 10A/10AA of the Act, and books of account maintained by assessee is sufficient to enable computation of profits of various SEZ units. Further the circular issued by CBDT dated 17/01/2013 (supra) also clarifies that there is no requirement in law to maintain separate books of account and the same cannot be insisted upon. We therefore do not find any merit in this objection raised by Ld.AO. (H) NON-SATISFACTORY REPLY RECEIVED FROM VARIOUS COUNTRIES:- This is new issue during the year under consideration. We notice that the Ld DRP has also not addressed this objection of the AO. Accordingly, we restore this objection to the file of Ld DRP. 5.6 Accordingly, following the order passed by the Tribunal in AY 2013-14 and in accordance with the discussions made supra, we restore three issues, viz., (a) Approval for foreign bank account (b) Nature of receipt of proceeds (c) Enquiries made through CBDT on genuin....
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....of details relating to these expenses. From the submissions made before Ld DRP, we notice that the above said expenses represent year end provisions made by the assessee company as on 31.3.2010. 6.3 There is no dispute with regard to the fact that the assessee is following "mercantile system of accounting". Under the mercantile system of accounting and also as per the requirement of AS-29 issued by the Institute of Chartered Accountants of India (ICAI), a provision for expenses should be made when:- a. an enterprise has a present obligation as a result of past event. b. it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and c. a reliable estimate can be made of the amount of obligation. Hence it is imperative for a concern, following mercantile system of accounting, to provide for all known expenses and losses as at the year end, even if the relevant bills have not been received. As per standard accounting practices, not providing for known expenses/losses would, in fact, distort the operating results of the business concern and it would not reflect true and fair profit of the year. It ....
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.... High Court in the case of Samsung & Others (ITA No.2808/2005). Accordingly, the Ld DRP confirmed the disallowance of Rs.278.69 crores. 7.3 We heard the parties on this issue and perused the record. The ld A.R submitted that this issue has been restored back to the file of Ld DRP by the Tribunal in AY 2013-14 with the following observations:- "8.7.6. Ld. Counsel, however submitted that voluminous details were submitted by assessee, which has not been considered by Ld.AO, while passing impugned order. We have perused observations of this Tribunal for assessment year 2008-09 wherein, Hon'ble Bench remanded the issue to DRP for fresh consideration and decision. Respectfully, following the same, we remand the issue to DRP with similar direction to consider the claim of assessee in light of evidences filed, after affording opportunity of being heard in accordance with law. Assessee is directed to file invoices raised in support of payments made by assessee to relevant parties. Assessee is at liberty to file all relevant details/evidences to substantiate its claim. DRP is then directed to verify nature of payment in the light of invoices filed by assessee. DRP is als....
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....ssee on test check basis and found that a sum of Rs.152.49 crores are re-classified entries, which are also subjected to TDS. It also noticed that a sum of Rs.7.68 crores and Rs.11.50 crores paid to IBM Philippines were not Subjected to TDS and both the sums have already been disallowed. The Ld DRP also noticed that a further sum of Rs.12.13 crores is in the nature of reversal of entries. In effect, the assessee could not reconcile a sum of Rs.41,12,780/-. Accordingly, the ld DRP confirmed the same. 8.2 The Ld A.R submitted that the AO has not made similar kind of disallowances in other years. However, we notice that the assessee has claimed a sum of Rs.184.22 crores as Reclassification of expenses, but it could not fully furnished details reconciling the above said amount. We notice that the ld DRP has granted relief to the extent of details furnished and confirmed disallowance of Rs.41,12,780/- for want of details. Before us, the assessee could not furnish the details for the above said amount. Accordingly, we have no other option, but to confirm the disallowance of Rs.41,12,780/-. 9.0 Ground No.7 relates to the disallowance of depreciation claimed on leased assets. The AO ....
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.... that the request for proof/item-wise details to justify the loss on foreign exchange debited to the profit and loss account is absurd. In our view, onus is on the assessee to produce the evidences to the satisfaction of the assessing officer, in regard to any deduction or expenditure claimed from the income, as the assessee failed to furnish such evidences to the satisfaction of the assessing officer, we do not find any infirmity in the disallowance made, the objection is accordingly rejected." 10.2 The Ld A.R submitted that the assessee has furnished the details of foreign exchange loss at pages 1028, 1029, 1705 to 1711 of Paper book 4. However, it is seen that the said explanations are mainly legal submissions and explanations. 10.3 We heard ld D.R and perused the record. We notice that the AO had requested the assessee to furnish:- (a) break-up details of item wise loss/gain in respect of each of the foreign assets/liabilities. (b) the details to show that all the foreign assets/liabilities are revenue assets/liabilities. There should not be any quarrel that the loss arising on account of revaluation of the foreign assets/liabilities in revenue field ....
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....ed with CBDT. Accordingly, the grounds urged by the revenue in respect of Transfer pricing issue shall become infructuous and accordingly, we dismiss them. 15. With regard to the relief granted in respect of payment of Rs.9,45,16,809/- made to M/s IBM Philippines treating the same as "Fee for technical services", we notice that assessee has submitted before Ld DRP that the payments were made to the above said AE towards rendering payroll related services and the ITAT, vide its order passed in IT(IT)A Nos. 489 to 498/Bang/2013 for AYs 2007-08 to 2011-12 has quashed the proceedings initiated u/s 201 holding that the payments made to IBM Philippines is not liable to TDS.Accordingly, following the above said decision rendered by ITAT in the assessee's own case, has directed the AO to delete the disallowance. 15.1 The contention of the revenue in its ground of appeal is that the above said decision rendered by the ITAT has not reached finality. However, since the Ld DRP has followed the decision rendered by the Tribunal in respect of very same issue in the proceeding initiated u/s 201 of the Act and held that the payments made to IBM Philippines is not liable to TDS in the assesse....
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....ordingly, we confirm the disallowance made by the AO. 21. Ground No.7 relates to the disallowance of depreciation on leased assets. In the earlier year, we have restored this issue to the file of AO with the direction to follow the decision rendered by Hon'ble Supreme Court in the case of ICDS Ltd (2013)(29 Taxmann.com 129)(SC) . Following the same, we restore this issue to the file of AO with similar directions. 22. Ground no.8 relates to the disallowance of foreign exchange loss. We have restored this issue to the file of AO in AY 2010-11 in the earlier paragraphs with certain directions. Following the same, we restore this issue in this year also to the file of AO with similar directions. 23. Ground No.9 to 12 relate to the addition relating to Transfer pricing adjustment. At the time of hearing, the Ld A.R submitted that the assessee is withdrawing these grounds, since the assessee has entered into APA agreement with CBDT. Accordingly, we dismiss these grounds as withdrawn. 24. Ground no.13 relates to the disallowance made u/s 14A of the Act. The AO noticed that the assessee has made huge investments in shares, but did not make any disallowance u/s 14A of the Act. W....