TaxTMI 
TaxTMI 
TaxTMI 
2025 (10) TMI 299
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....ueries were raised which were replied by the assessee. The assessee is engaged in the business of development and export of software and 100% EOU registered with Director Software Technology Park of India in terms of registration certificate dated 31.03.1999. The major shareholder in the assessee company is Shri Anil Gutpa who is having 99% shareholding and is taking substantial interest in day-to-day affairs of the assessee and also in its Associate Enterprises ("AE") at US who is the sole buyer of the software developed by the assessee. 3. During the year under appeal, assessee has shown net profit @ 80% and claimed deduction u/s 10A of the Act. The AO based on the Schedule 12 to the financial accounts wherein INR 49,33,50,421/- was shown as "Arbitration Award" held that this award is not the software sales and excluded the same from the claim of exemption u/s 10A of the Act and further, denied the exemption u/s 10A of the Act on the gain on account of currency fluctuation of INR 1,23,33,934/- by holding the same being not earned from the eligible business. 4. Besides this, AO made the disallowance of INR 3,55,47,260/- by invoking the provision of section 40(a)(ia) of the A....
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....-section 10 of Section 801A when the assessee had failed to prove by adducing necessary evidence that the sale proceeds of alleged source code and the income therefrom were eligible for deduction u/s. 10A. (c) That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that invoking of Section 10A(7), for allocating the cost of services rendered by Dr. Anil Gupta was without sufficient evidence despite there being extraordinary percentage of NP ratio of 87%. Dr. Anil Gupta happens to be major shareholder of the company (99%) and proprietor of CAE Solution, USA to which entire sales are being made. (d) Was the Ld. CIT(A) justified in allowing extraordinary amount of deduct ion of Rs. 43.49 crores without the assessee discharging the onus that the profit so claimed were genuine and not extraordinary giving assessee all the benefits of doubt. when the onus was fully & squared on the assessee to prove that the extraordinary profits were genuine & eligible for deduction u/s. 10A. 5. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in holding that foreign exchange fluctuation gain is a business rec....
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....spect to the services rendered by Shri Anil Gupta which clearly proved that by not recording any expenses on account of services rendered by Shri Anil Gupta, the assessee had tried to inflate its profits. Ld.CIT DR further submits that during the year under appeal, assessee company has buy back its 471 equity shares and paid a sum of INR 7,10,94,521/- which incidentally were bought from Shri Anil Gupta thus, by doing so, assessee has transferred its tax free income in the hands of Shri Anil Gupta which further proves that it is a device developed to transfer the profits on which exemption was claimed in the hands of the assessee company to Shri Anil Gupta. Ld. CIT DR further placed reliance on the submissions made in this regard which reads as under:- Chronology of events • Assessment order u/ s 143(3) was passed on 31.12.2010. • CIT(A) deleted all the additions made by AO vide his order dt. 15.03.2011. • Revenue filed appeal on 29.07.2011 before ITAT and assessee filed cross-objections on 11.09.2011. • In the meantime, notice u/s 147/148 dt.29.03.2012 was issued to assessee for AY 2007-08 and against this, assessee filed....
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.... In view of the foregoing, exemption claimed u/s 10A for arbitration award of Rs. 43,49,83,092/- was withdrawn by AO. (Pg 6). Findings of CIT(A) * AO has accepted NP of 80% in immediately preceding year i.e. AY 06-07 without any adverse finding. (Pg 23) * No transfer pricing adjustment was made by TPO. (Pg 23) * No defect in the valuation report of sharesdt.01.12.06 was pointed out by AO. (Pg 24) * "Arbitration Award" as mentioned in notes to accounts is on account of "typographical error" which is also proved by perusal of all the documents filed by assessee, report of TPO and report u/s 10A from auditors filed along with the return of assessee. (Pg 31) * Arbitration award represents value of source code supplied by company to its associate enterprise and source code is nothing but part and parcel of computer software as defined in Sec 10A. (Pg 32) * AO disallowed the deduction without any corroborative evidence. (Pg 33) Conclusion: Decision of CIT(A),deleting the disallowance of deduction claimed u/s 10A of Rs. 43,49,83,092/-, is perverse since: * The said amount represents "arbitration awa....
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....are sales only which was so stated on Affidavit of the Director at PB 193. It was further submitted that following documents including return with STPI authorities endorsing the copies of relevant invoices were filed before Ld. AO which clearly mention the subject amount as Computer Software sale. PB 27 - 30 is CA Certificate in Form 3CEB (Report from an accountant to be furnished u/s. 92E relating to international transactions) certifying export turnover as per clause 8B - b & c filed with ITR. PB 31 - 33 Form no. 56F (Report u/s. 10A of Income Tax Act, 1961), confirming the export turnover at Rs. 56,36,07,721/- as per para 15 b of Annexure 15 b of Annexure - A, certified by the CA filed with ITR. PB 196 - 321 Copy of SOFTEX form filed and accepted by STPI confirming sale of software submitted before AO vide letter dated 10.12.2010 along with photocopies of all sale invoices. PB 322 - 329 are the copies of FIRC confirming advance receipt against export sales filed before Ld. AO vide letter dated .... 12.2010. Therefore, it was not Arbitration award as contended in the departmental grounds of appeal and this fact was correctly a....
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....tion services to its associate enterprise namely CAE Solutions Inc. USA since 2002. As the appellant has been new in the business in the initial years that is why up till A.Y. 2005-06, the export turnover were not substantial and were in the vicinity of 5-6 crores of rupees per annum on which the appellant company made marginal net profit to the tune of around 12% as is evident from the chart appearing on page 4 of the impugned assessment order. Thereafter during immediate succeeding year viz. A.Y. 2006-07, its exports turnover touched at a figure of Rs. 30.67 Crores which resulted in higher net margin @ 80% in comparison to 12% during previous assessment years. It is not out of place to submit that the entire export of software & services during A.Y. 2006-07 was to M/s. CAE Solutions Inc., USA who was the only customer in the impugned year also. Admittedly and apparently, the profits were substantial (at 87%) in the year under appeal in terms of percentage but it is equally important to submit at the same time that, it was reasonably comparable to the net margin of immediate preceding assessment year (at 80%). It may please seen as the appellant company had developed tail....
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....non distributable right attached therewith. Well known theory of marginal costing that after meeting the fixed expenses, whatever contribution is there resulting from the sale is bound to give higher net profits on progressive basis has also its own role. The Ld. Transfer Pricing Officer being specialist on subject has accepted the Arm Length Price of international transaction with associate concern M/s CAE Solutions Inc., USA at the rates on which invoices were raised as submitted in our replies to Ld. TPO & Ld. AO (PB 121-125 & 126-127). As per the amended provision of law w.e.f. 01.04.2007 once a transfer pricing Officer certifies the value of transaction between associate concern, the A.O. has to pass his order in conformity with the order of TPO. The Ld. A.O. himself in the para 8 at page No. 11 of impugned assessment order considered the order of TPO U/S 92CA(3) and held that no transfer pricing adjustment is required in this case. Once the export sales were the subject of transfer pricing audit and Transfer Pricing Proceedings U/S 92CA and there is no adverse observation, the argument of Ld. A.O. about any alleged excessive profit is neither here nor there and is li....
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.... which the transaction had taken place in the absence of which any indirect imputation is nothing but surmise and conjecture which has to be dismissed as such as held by Hon'ble Supreme Court in the case Dhakeshwari Cotton Mills Ltd. vs. CIT: 26 ITR 775 (SC). This is such settled law that the appellant does not want to burden the written submissions with more case laws on such plain law. 2. The appellant could not file copy of balance sheet and profit & Loss Account of CAE Solutions Inc. USA during the course of assessment proceedings as mentioned by the A.O. in para 4.11 of the impugned assessment order. In reply it is submitted that due to the reason that under the Federal Law of USA assessee is required to keep assessment records for three previous calendar year only. Therefore, these were not available with Dr. Anil Gupta. However, he kept on trying with his counsel at USA in anticipation that he might have copy of the same. Unfortunately, the tax Consultant could not look into the records in the month of December, (US Financial year ending) as he was also pre-occupied in finalisation of US LT. Returns. With the result, it was not available with Dr. Anil G....
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.... of Ld. AO as was held by Hon'ble Supreme Court in the following cases in which Hon'ble apex court have said that it is not for the AO to sit in the armchair of the businessman and dictate as to how the business is to be done. The test of prudence by substituting its own view in place of the businessman's view has not been approved by the Supreme Court in the decisions of CIT vs. Walchand & Co. (P) Ltd. 65ITR 381 and J.K. Woolen Manufactures Vs. CIT 72 ITR 612. It is not for the revenue to question the commercial expediency of the expenditure as the commercial expediency is a matter which is entirely left to the judgment of the assessee as was held by Hon'ble Madras High Court in the case of CIT Vs. Gobald Motor Service (P) Ltd. 100 ITR 240, 242. Held, that under fiscal laws, authorities have no right to re-write a transaction unless it is held that it is sham or bogus or entered into by the parties in bad faith to avoid and evade taxes. Sony India P. Ltd. v/s. DCIT (2008) 114 ITD 448 -ITAT Delhi. The Hon'ble ITAT Bench of Chennai vide its order dated 18.03.2009 reported as 2009 TOIL - 271 ITAT (Mad) has held A.O. cannot decid....
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.... the local associated enterprises of the country. The Ld. AO also alleged that even after allocating the cost of Dr. Anil Gupta, the net profit ratio of 45.2% which had arisen, is much higher to other comparative companies of the similar nature. With due respect, the Assessing Officer would be expected to use a comparable case to determine the possible ordinary profit which the assessee could be expected to generate from his business. In the absence of the same or any other substantial evidence available with him, the assessee's own past performance would obviously be the best comparable. The Hon'ble ITAT Chennai in a similar case of Tweezerman (India) Pvt. Ltd. v/s ACIT (2010) 004 ITR (Trib) 0130 held as under: Where Assessing Officer denied assessee deduction uls. 10B of profits in excess of Arm's Length Price by invoking provisions of section 10B(7) read with section 801A(l), and a perusal of order of Transfer Pricing Officer for relevant assessment year showed that TPO had verified Arm Length Price and had confirmed that no adjustment on account of transfer pricing was required to be made under these circumstances, reduction of eligible pr....
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....at the transfer by the industrial undertaking does not correspond with the market price and it is the A.O. who is required to find out to market price. 10.1. In the last, it is prayed by ld. AR that Ld. CIT(A) has rightly deleted the additions which order deserves to be uphold. 11. Heard the contentions of both the parties and perused the material available on record. From the series of events submitted by Ld. CIT DR, it is seen that in the instant case, issue of exemption u/s 10A was raised by Ld. Pr.CIT in the order passed u/s 263 dated 28.03.2013 which was quashed by the Co-ordinate Bench of Tribunal and further appeal of the Revenue against the said order was dismissed by the Jurisdictional High Court vide its order dated 27.02.2024 in ITA No.171/2022. 12. Further the assessment for preceding assessment years were completed u/s 143(3) where in AY 2005-06, the assessee has shown net profit margin of 12% and in AY 2006-07, the net profit margin of 80% was declared by the assessee. The revenue had accepted such a sharp increase in the profit margin in the order passed u/s 143(3) of the Act and never doubted the claim of exemption u/s 10A by the assessee. Once the substant....
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....t was a typographical error by filing necessary details such as CA certificate in Form 3CEB certifying export turnover, Form 56F i.e. report for claiming exemption u/s 10A of the Act confirming the export turnover of INR 56,36,07,721/-, copy of SOFTEX form filed and accepted by STPI confirming the sale of software, copy of FIRC duly confirming the advance received against the export sales and most important fact that in the order passed by TPO u/s 92CA, export turnover of software of INR 56,36,07,721/- was accepted by the TPO thus now raising doubts by the AO is contrary to the accepted fact by TPO. 15. All these facts, leads to believe that there was a typographical error wherein sale of software was inadvertently stated as "Arbitration Award". It is also a matter of fact that on one hand, AO has alleged the higher profit when he tried to establish that assessee has claimed excess exemption u/s 10A where AO himself computed the margin of net profits by taking the export turnover at INR 56,36,07,721/-and further in para 4.15 while computing the net profit after reducing the profit of "Arbitration Award", the AO has not reduced the amount of "Arbitration Award" from the gross exp....
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....rate fluctuation cannot be considered as profit derived from export as these being the result of post export events or scenario. Further the Ld. A.O. relying upon the decision of Supreme Court Pandian Chemicals v/s. CIT (2003) ITR 278 has alleged that the same cannot be said to have been derived from basic and core activity of export. It is respectfully submitted that the appellant company is in the business of export of software and is eligible to claim exemption u/ s 10A which has been accepted by Ld. AO also in the year under appeal and in earlier years. During the year under review, the appellant company earned foreign exchange gain amounting to Rs. 1,23,33,934/- on realization of various export invoices as per detail annexed at (PB 330). The appellant company through oversight while filing its original I.T. Return did not include this figure into gross sales credited to Profit & Loss Account. However, while finalizing the balance sheet for the subsequent financial year ended on 31.03.2008, the appellant company realized its mistake and accordingly revised the return along with letter dated 23.08.2008 copy at (PB 26) treating the same as part and parcel of net....
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....herefore foreign exchange gain is includible in the profits eligible for deduction under section 104/ 10B of the Act. Further reliance can be placed on the following judicial pronouncements :- a) Smt. Sujatha Grover v. Deputy CIT (2002) 74 TTJ 347 (Delhi) b) Priyanka Gems v. Asst. CIT [2005] 94 TTJ 557 (And) c) CIT v. Rane (Madras) Ltd. [1999] 238 ITR 377 (Mad), where even a forward contract in foreign exchange, which had nexus with the export of goods could be treated as relating to the activity eligible for deduction in the context of sections 80E and 80-I. In fact, the case of the appellant is also covered by the decision of Hon'ble Supreme Court in the case of CIT v/ s. Woodward Governor P Ltd. 312 ITR 254. It is pertinent to mention here that gain on account of foreign exchange during A.Y. 2006-07 has been accepted as export profit u/s 143(3) of the Act. Copy of I.T. Assessment for the A. Y. 2006-07 and profit & loss account as on 31.03.2006 are enclosed at (PB 101-113 & 99) respectively. Therefore, it is prayed that deduction w/s 104 on account of foreign exchange gain as claimed by the assessee in the revised return may please be allowed." 2....
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.... 245 ITR 849 (Bom) • CIT v. Rane (Madras) Ltd. [1999] 238 ITR 377 (Mad). The appellant succeeds on these grounds of appeal." 21. From the perusal of the order of Ld.CIT(A), it is seen that Ld.CIT(A) observed that gains from foreign exchange fluctuations is directly relatable to the article and things exported by the assessee where the payments were received in convertible foreign exchange and due to timing difference, fluctuation gains earned by the assessee. It is also seen that in preceding assessment years, revenue has accepted foreign exchange fluctuation gain of identical nature as profit derived from the business eligible for exemption u/s 10A od the Act thus, by following the principle of consistency also, we find no error in the order of Ld.CIT(A) who has rightly held the foreign exchange fluctuation gain as income derived from export of software. 22. In view of the above facts and discussion made, we uphold the order of Ld.CIT(A) on this issue. Accordingly, Ground of appeal No. 5 raised by the Revenue is dismissed. 23. Ground of appeal No.6 raised by the Revenue is with respect to the deletion of addition of INR 3,55,47,260/- by invoking the ....
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....s discussed this issue in Para 4 at Page 2-7 of the Assessment Order whereas Ld. CIT (A) has discussed this issue in Para 3 from Page 5 to 33 of the Appeal Order. (Pgs-7 Vos) (Pg 7-12 Adverse obs of to met) (Pg 13-22 Remand Report & RRrej) (Pg 22-33 CIT(A) finding) PB 1-15 is written submissions before Ld. CIT (A) submitting that assessee company is exporting software exclusively to its AE and was subject to transfer pricing law on year to year basis and that assessment proceedings for last three years were completed u/s 143(3) after considering TPO's report without any adverse finding and that the impugned income was derived from software business. Document 2 PB 12 - 14 are the submissions before Ld. CIT (A) submitting that no question was asked by AO during assessment proceedings regarding this typographical error (PB 51) as would be evident from para 4.14 to 4.20 of the assessment order and vide PB 348 - 350, 351 - 353 and vide PB DPB Pg 5C being show cause on 14.12.2010 and further that it was typographical error in the Balance Sheet (PB 51) and in fact this was on account of export of Software Source Code. Document 3 PB 114 - 175 is the order u/s 92CA....