Income Tax Appellate Tribunal - Bangalore
Joint Commissioner Of Income Tax (Ltu) , ... vs M/S Dell International Services India ... on 13 July, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" BENCH : BANGALORE
BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND
SHRI ARUN KUMAR GARODIA, ACCOUNTANT MEMBER
IT(TP)A No. 53/Bang/2014
Assessment Year :2009-10
M/s. Dell International
Services India Pvt. Ltd.,
The Joint Commissioner of No. 12/1, 12/2A, 13/1A,
Income Tax, Divyashree Greens,
Vs.
LTU, Challaghatta Village,
Bangalore. VarthurHobli,
Bangalore - 560 071.
PAN: AABCD1741M
APPELLANT RESPONDENT
IT(TP)A No. 86/Bang/2014
Assessment Year : 2009-10
M/s. Dell International
Services India Pvt. Ltd.,
No. 12/1, 12/2A, 13/1A, The Joint Commissioner
Divyashree Greens, of Income Tax,
Vs.
Challaghatta Village, LTU,
VarthurHobli, Bangalore.
Bangalore - 560 071.
PAN: AABCD1741M
APPELLANT RESPONDENT
Assessee by : Shri K.R. Vasudevan, Advocate
Revenue by : Ms. Neera Malhotra, CIT (DR)
Date of hearing : 14.06.2018
Date of Pronouncement : 13.07.2018
ORDER
Per Shri A.K. Garodia, Accountant Member
These are cross appeals filed by the assessee and revenue and these are directed against the assessment order dated 23.12.2013 passed by the AO u/s.
IT(TP)A Nos. 53 & 86/Bang/2014 Page 2 of 27 143(3) r.w.s. 144C of IT Act for Assessment Year 2009-10 as per the directions of DRP.
2. The revised grounds raised by the assessee are as under.
"I. Transfer Pricing
1. The learned Assessing Officer ("learned AO") and the learned Additional Commissioner of Income Tax (Transfer Pricing-I), Bangalore (-Transfer Pricing Officer" or -learned TPO") grossly erred in determining an adjustment to the Arm's Length Price (*ALP') of the Appellant's international transactions with Associated Enterprises (-AEs-) of Rs.948,385,734 with respect to the IT Enabled services ("ITeS") rendered by the tax payer u/s 92CA of the Income Tax Act.
2. The learned AO / 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 Act contending that the information or data used in the computation of the arm's length price is not reliable or correct. In doing so:
2.a the learned AO / learned TPO erred in rejection of comparability analysis carried in the TP documentation and in conducting a fresh comparability analysis by introducing various filters in determining the arm's length price.
2.b the learned AO / learned TPO erred in rejecting companies that are comparable to the Appellant while performing the comparability analysis. Specifically, the Appellant believes that the following companies should have been included as comparable • Lee & Nee Software (Exports) Limited • Caliber Point Business Solutions Limited • R Systems International Limited
2.c the learned AO / learned TPO erred in including companies that do not satisfy the test of comparability. Specifically, the Appellant believes that the following companies selected as comparable by the learned AO/ learned TPO should be rejected • Infosys BPO Ltd • Accentia Technologies Ltd • Cosmic Global Ltd • Eclerx Services Ltd
3. The learned AO / learned TPO erred in computing mark-up for Allsec Technologies Limited. The learned TPO has erroneously considered the provision for bad and doubtful debts as non-operating in nature.
4. The learned AO / learned TPO erred in not considering the multiple IT(TP)A Nos. 53 & 86/Bang/2014 Page 3 of 27 year / prior year financial data of comparable companies while determining the arm's length price.
5. The learned AO / learned TPO erred in using data as at the time of assessment proceedings, instead of that available as on the date of preparing the TP documentation for comparable companies while determining arm's length price.
6. The learned AO / learned TPO erred in ignoring the limited risk nature of the contractual services provided by the Appellant and in not providing an appropriate adjustment towards the risk differential, even when the full- fledged entrepreneurial companies are selected as comparable companies.
7. The learned AO / learned TPO erred in not considering the corrected segmental profit and loss account submitted by the appellant during the course of the assessment proceedings.
8. The learned AO / learned TPO erred in making transfer pricing adjustment to domestic transaction which the appellant had entered with its AE.
II. Corporate tax Relinquishment of Lease Option
1. The learned AO and the Hon'ble DRP erred in holding that the amount received on relinquishment of lease option is taxable as Capital Gains by concluding that, lease option and tenancy rights are one and the same, without appreciating the fact that the appellant was never a tenant in respect of additional area which was yet to be built.
2. The learned AO and Hon'ble DRP erred in considering the cost of acquisition of the asset to be Nil, by invoking the provisions of section 55(2) of the Act. They ought to have appreciated the fact that, the definition of capital assets provided under section 55(2) does not specifically cover the capital asset in the nature of lease option.
3. The Hon'ble DRP erred in concluding that the decision of Supreme court in the case of CIT v. BC Srinivasa Shetty (128 ITR 294) is distinguishable, whereas the principle arising therefrom. is squarely applicable to the case of the Appellant.
4. The learned AO has erred on facts in concluding that the Appellant has suppressed or concealed one of the crucial agreements executed on 8.5.2008, without appreciating the fact that, the information relating to such agreement is disclosed in the notes to accounts of the financial statements and the supplementary agreement dated 15.9.2008 furnished during the assessment proceedings summarizes the main terms of the alleged crucial agreement.
IT(TP)A Nos. 53 & 86/Bang/2014 Page 4 of 27
5. Without prejudice to the above, the learned AO has erred in considering Rs.349,000,000/-being the initial compensation agreed upon, as consideration, without appreciating the fact final settlement amount received by the Appellant was Rs.284,000,000.
The appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided."
3. The grounds raised by the revenue are as under.
"1. The Order of DRP is opposed to law and facts of the case.
2. The DRP erred in directing the AO to deduct freight, insurance and telecommunication from total turnover and export turnover while computing the eligible deduction U/s 10 A. as this is against the provisions of section 10A.
3. The DRP ought not to have admitted regularized FIRC's/ Softex forms of Rs.14,84,16,444/- without calling for remand report.
4. The DRP erred in treating the 'bonus on ink' and 'toner' of Rs.11,37,70,621/- as part export turnover of Software without there being any evidence that theamount was received in connection with export activity of eligible STPI unit.
5. The DRP ought to have rejected assessee's appeal on disallowances of 10A of Pune STPI on the fact that the unit did not engage in software development where the invoices were raised for reimbursement of service charges.
6. For these and such other grounds that may be urged at the time of hearing."
4. At the very outset, it was submitted by ld. AR of assessee that the TP issue in respect of international taxation with US AE is already settled under MAP and he submitted a copy of MAP settlement dated 28.10.2015 and it was pointed out that for the present year i.e. Assessment Year 2009-10, as against TP adjustment for US transactions of Rs. 63,61,77,150/-, the sustained adjustment is Rs. 6,62,31,271/- only. Thereafter, he submitted that as per the Tribunal order in assessee's own case for Assessment Year 2006-07 in IT(TP)A No. 1302/Bang/2010 dated 22.07.2016, copy available on pages 26 to 45 of case law compilation, it was held that the matter may be restored back to the file of IT(TP)A Nos. 53 & 86/Bang/2014 Page 5 of 27 TPO/AO for fresh analysis on the lines between US and non-US transactions and if it is found that factors influencing the price are similar between US and non-US transaction, the price adopted for US transaction may be adopted for non-US transactions also. In this regard, our attention was drawn to paras 5, 9 and 10 of this Tribunal order. It was submitted that therefore, for the entire TP issue in assessee's appeal, the matter may be decided on similar line. The ld. DR of revenue supported the draft assessment order of AO and the directions of DRP.
5. We have considered the rival submissions and in view of this fact that in respect of TP adjustment for US transactions, the issue has been finalized as per MAP and now this is the request of ld. AR of assessee before us that the price adopted for US transactions may be adopted for non-US transactions also and in support of this contention, reliance has been placed on Tribunal order rendered in assessee's own case for Assessment Year 2006-07. We, therefore first reproduce the relevant paras of this Tribunal order being para nos. 5, 9 and 10 and these paras are as under.
"5. Use of contemporaneous data
a) The Honourable DRP and the learned AO erred in concluding that the appellant ought to have employed contemporaneous data in the preparation of the Transfer Pricing report.
b) The Honourable DRP and the learned AO erred in interpreting the word "Shall" in Rule 10B (4) to mean that data for the same Financial Year in which the international transaction was actually entered into is a mandatory requirement. Also the Honourable DRP and the learned AO ought to have appreciated that the transfer pricing regulations provide contemporaneous documentation to be mandatory, and not use of data for the same financial year.
c) The Honourable DRP and the learned AO ought to have appreciated the fact that the objective underlying the use of multiple-year data was to ensure that the outcomes of the international transactions for the year under consideration were based on all the earlier periods which were relevant for determination of transfer price.
9. The employee cost filter of 25% of revenue needs to be applied by the TPO IT(TP)A Nos. 53 & 86/Bang/2014 Page 6 of 27
b) The learned DRP as well as the learned AO failed to appreciate the fact that the logic of application of this filter to the IT segment should have been extended to the ITES segment as well as even in the ITES segment, employees constitute the predominant asset.
c) The Honorable DRP and the learned AU have erred in not eliminating the following comparables:
• Cosmic Global Ltd • Vishal Information Technologies Ltd • Asit C Mehta Financial Services Ltd • Goldstone lnfratech Ltd • Spanco Ltd • Ace Software Exports Ltd
a) Companies eliminated erroneously citing inadequate information should be accepted as comparables.
a) The Honourable DRP and the learned AU have erred in upholding TPO's contention of rejecting the following comparables on the grounds of inadequate information:
• Nittany Outsourcing Services Pvt. Ltd • Cameo Corporate Services Ltd
b) The Honourable DRP and the learned AU ought to have appreciated that the learned TPU failed to be consistent in his approach by not issuing the requisite notices under the provisions of Section 133(6) of the Act notices to these companies as well.
10. Datamatics Financial Services Ltd (Datamatics) should be Rejected
a) The Honourable DRP and the learned AU have erred in accepting the learned TPU's contention of taking Datamatics as a comparable ignoring the submission made by the appellant.
b) The Honourable DRP and the learned AU ought to have appreciated that Datamatics should be rejected based on the following reasons-
• The company does not have segmental information pertaining to the ITES segment of the company for FYE 2006.
• The ITES revenue comprises 28.04% of the total revenues and does not qualify the revenue filter postulated by the learned Transfer Pricing Officer."
6. From the above paras reproduced from the Tribunal order in assessee's own case for Assessment Year 2006-07, it is seen that in that year also, the prices were fixed under MAP in respect of US AEs and this was the claim of the assessee before the Tribunal that the same price may be adopted in respect of non-US AEs. The Tribunal has restored back the matter to the file of AO/TPO IT(TP)A Nos. 53 & 86/Bang/2014 Page 7 of 27 for fresh decision with the direction that the matter should be analyzed by AO/TPO on the same line for non-US transactions and if it is found that factors influencing the price are similar between US and non-US transactions, the price adopted for US transactions may be adopted for non-US transactions also. This was also directed by Tribunal that it was open to TPO to examine the validity of the proposition that price adopted under MAP mechanism can be adopted in respect of other countries also where MAP was not resorted to. Respectfully following this Tribunal order, we restore the TP matter back to the file of AO/TPO for fresh decision with the same directions. The TP issue stands decided in this manner.
7. Regarding the corporate tax issues in assessee's appeal, it was submitted by ld. AR of assessee that the only issue involved in assessee's appeal is regarding the addition made by the AO of Rs. 34.90 Crores in respect of relinquishment and compensation received for such relinquishment of lease option. In this regard, it was submitted by ld. AR of assessee that this issue is discussed and decided by DRP as per para nos. 20 to 20.19. Thereafter, he submitted that even if it is held that relinquishment of lease option is taxable as capital gains, it should be held that the said gain is not taxable as per the judgement of Hon'ble Apex Court rendered in the case of CIT v. B.C. Srinivasa Setty (1981) 128 ITR294 (SC). He also raised one more contention that the AO has erred in considering Rs. 34.90 Crores as the consideration received / receivable because the assessee has in fact received only Rs. 28.40 Crores. Regarding the copy of lease agreement as per which the assessee was granted lease option, he submitted that the copy of lease deed is available on pages 637 to 676 of paper book and in particular, our attention was drawn to clause 4 of this lease deed as per which it was specified that the assessee has an option to retain 28,000 sq.ft. of chargeable area for its use and additional 1,81,000 sq.ft. of chargeable area in Plot-A and Plot-B together on lease from Vipul. Thereafter he submitted that relinquishment agreement is available on pages 677 to 687 of paper book as per which it was specified that the assessee being the lessee offered for relinquishment of lease option together with all its rights benefits arising for a consideration of Rs. 34.90 Crores. Thereafter he IT(TP)A Nos. 53 & 86/Bang/2014 Page 8 of 27 submitted that a supplementary agreement dated 15.09.2008 is available on pages 689 to 693 of paper book and the amended and restated supplementary agreement dated 27.04.2009 is available on pages 695 to 713 of paper book. It was pointed out that in this agreement, it was noted that out of the agreed consideration of Rs. 34.90 Crores, an amount of Rs. 4.90 Crores was paid and thereafter Rs. 6 Crores was paid and the balance of Rs. 24 Crores was remaining unpaid. This amount of Rs. 24 Crores was agreed to be paid during October to December 2008 and against this outstanding demand of Rs. 24 Crores, it was agreed between the parties that the payable amount should be reduced to Rs. 16.95 Crores and out of that, the assessee received payment of Rs. 5 Crores by way of DD No. 146818 dated 25.04.2009 drawn on ICICI Bank Ltd. and out of the balance amount of Rs. 11.95 Crores, it was agreed that Vipul Infracon will pay Rs. 5.95 Crores on 31.05.2009 and Rs. 6 Crores on 30.06.2009. He submitted that as per supplementary agreement and the amended and restated supplementary agreement, the total consideration received by the assessee has been reduced and therefore, such amount should be considered and not initially agreed amount.
8. As against this, the ld. DR of revenue supported the order of AO and DRP. Our attention was drawn to pages 13 to 22 of the final assessment order and it was pointed out that as per the agreement dated 08.05.2008, it is stated that the lessee i.e. the present assessee in consideration of the compensation of Rs. 34.90 Crores payable by the lessor has expressed its willingness to relinquish the lease option as envisaged in the Memorandum of Agreement dated 31.01.2006 and reaffirmed vide Lease Deed dated 10.08.2007. She submitted that in fact, the assessee has expressed its willingness to relinquish the lease option and it is not a fact that the lessor has violated the terms of lease option and paid amount as damages. She also drawn our attention to MOU dated 31.01.2006 available on pages 605 to 635 of paper book and pointed out that granting of lease option has been agreed as per this agreement dated 31.01.2006 and the area agreed for Lease option was of 2,50,000 sq.ft. She submitted that the order of AO and DRP on this issue should be upheld.
IT(TP)A Nos. 53 & 86/Bang/2014 Page 9 of 27
9. We have considered the rival submissions. First of all, we reproduce para no.
20 to 20.19 of the directions of DRP for ready reference because the DRP has discussed and decided the issue regarding lease option in these paras. These paras are as under.
"20. Ground of objection - Amount received on relinquishment of lease option considered as capital gain 20.1 The AO contended that, relinquishment of lease option is nothing but surrender of tenancy rights and hence capital gains have to be computed in accordance with the provisions of the section 48 of the Act.
20.2 On the other hand the assessee submitted that the AO ought to have appreciated the fact that, the definition of capital assets provided under section 550 does not specifically cover the capital asset in the nature of lease option and that, the company was never a tenant in respect of the additional area which was yet to be built but it had only an option to take such additional area on lease once the building is complete. Further, no costs were incurred to acquire the lease option. The assessee further placed reliance on the judgement of Hon'ble Supreme Court CIT v. B.C. Srinivasa Shetty [128 ITR 294(SC)]. The assessee claimed that the assessee has not incurred any cost of acquisition on a capital asset and such capital asset does not fall in the category of the capital assets specified in section 55(2), then the judgment of the Supreme Court ruling in the case of B C Srinivasa Shetty (Supra) shall apply and no capital gain would arise.
20.3 Notwithstanding the above grounds of objection, the assessee contended that the AO has erred in considering Rs 349,000,000 being the initial compensation agreed upon and has ignored the settlement agreement dated 24th February 2010 where the final settlement amount received by the company was Rs 284,000,000/.
20.4 The ground of objection along with all the material placed on record has been perused. In this regard the panel is of the view that there are two types of tenancy agreements in India, Lease Agreements which are covered by rent control laws and Lease and License Agreement which are not. Thus tenancy or a lease is an arrangement whereby the owner of land, the landlord or the lessor, agrees to grant the right to exclusive possession of his land/building to the tenant or the lessee, for a fixed period, on the payment of rent. However, if the arrangement only gives a person a nonexclusive right to occupy another's land, it is a licence. The main difference between a tenancy/lease and a licence is that tenancy/lease creates an interest in land, whereas a licence does not. A licensee has only a personal interest and this interest can be revoked by the landowner at any time.
IT(TP)A Nos. 53 & 86/Bang/2014 Page 10 of 27 20.5 To further clarify that tenancy and lease are essentially the same. Reference is invited to the provisions of Transfer of Property Act, 1882, wherein lease is defined as under:
"Lease defined: A lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accepts the transfer on such terms."
And tenancy is understood as a contract by which the owner of real property (the landlord), grants exclusive right to enjoy such property to another person (tenant), in exchange for the tenat's periodic payment of some sum of money (rent). "The essence of a tenancy is the right to possess and occupy immovable property belonging to another." The relationship of landlord and tenant is created by a contract expressed or implied, by which one person who is possessed with an interest in real property, and who is called the landlord or lessor, confers on another person, called the tenant or lessee, the right to exclusive possession of the real property or some part of it for a period of time which is definite or can be made definite by either party, usually in consideration of a periodical payment of rent either in money or its equivalent.
20.6 Thus in essence the lease and tenancy are same and both create a right to exclusive possession of land/building of lessor in favour of lessee.
20.7 Now coming to lease options it is stated that a lease option is an option that is associated with a lease contract and is used for the purpose of granting the lessee the exclusive right to extend the lease-period beyond its original time frame.
20.8 It is also defined as a type of contract used in both residential and commercial real estate in which the lessee acquires the right, at the end of a specified rental period for a given property, of purchasing the property from the land owner. However in the case of the assessee it was in the nature of exclusive right to extend the lease to additional area.
20.9 A lease option is different from a lease purchase, in the sense that a lease purchase binds both parties to the sale, whereas in a lease-option the buyer has the option but the seller does not. Thus in the instant case it is the asssessee who had the exclusive right to extend the lease to additional area but the seller had no right to refuse. In addition the assessee also had, to quote from the agreement "the right to sub lease and to reap any benefit arising thereof'.
20.10 Thus from the above discussion it is clear that lease option IT(TP)A Nos. 53 & 86/Bang/2014 Page 11 of 27 arises from the lease contract and the nature of lease option, lease and tenancy are same and all the above create a right to exclusive possession of land/building of lessor in favour of lessee.
20.11 Having clarified as above it is further stated that it is not in dispute that lease option is a capital asset as per the provisions of the act. The only dispute is as follows:
1. The definition of capital assets provided under section 55(2) does not specifically cover the capital asset in the nature of lease option.
2. The company was never a tenant in respect of the additional area which was yet to be built but it had only an option to take such additional area on lease once the building is complete.
Further, no costs were incurred to acquire the lease option.
20.12 As discussed above the lease rights, tenancy rights as well as rights originatingfrom lease options are same and all of the above create a right to exclusive possession ofland/building oflessorin favourof lessee. Thustenancy rightsare inclusive of allsuch exclusive rights, including lease option rights, created in favour of lessee in the property of the lessor. Since section 55(2) provides for ascertaining the cost of tenancy rights therefore the capital asset in the nature of lease option does fall within the purview of section 55(2). The option to take such additional area on lease once the building is complete is also an exclusive right which restricts the possession of the property of the lessor in the same manner as other tenancy rights and, therefore, transfer of such an asset is liable to capital gains as per the scheme of the Act.
20.13 The mode of computation and deductions set forth in section 48(ii) provides the principal basis for quantifying the income chargeable under the head "Capital gains". The section provides that the income chargeable under that head shall be computed by deducting from the full value of the consideration received or accruing as a result of a transfer of the capital asset :
"(ii) the cost of acquisition of the capital asset. . . ."
20.14 Thus capital gain is leviable if the machinery provisions do not fail i.e. if the cost of acquisition is ascertainable. In the instant case assessee itself in its submission states that cost of acquisition to acquire lease option is NIL. Therefore cost of acquisition is ascertainable. Thus capital gains are leviable.
20.15 Without prejudice to the above that tenancy right includes lease option rights it is further stated that Section 55 prescribes cost of acquisition in respect of certain capital assets only and it is not exhaustive. For levy of capital gains on transfer of capital asset what is to be seen is whether computation provision IT(TP)A Nos. 53 & 86/Bang/2014 Page 12 of 27 contained in section 48 can be given effect to or not. Even if it is assumed that the lease option rights are any different from tenancy rights even then since cost of acquisition and fair market value and other ingredients to give effect to the machinery provisions for computation of capital gain are available, therefore, capital gains are leviable in the instant case.
20.16 Further the decision of Hon'ble SC in the case of BC Srinivas Shetty is distinguishable for the following reasons:
• It was in the context of Goodwill not lease options. • It was held that goodwill was not taxable because it is not an asset within the meaning of section 45 because "The date of acquisition of asset is a material factor in applying the computation provision pertaining to capital gains. Having regard to the nature of goodwill, it will be impossible to determine its cost of acquisition' But in the case of the assessee it is not in dispute that lease option rights are capital assets and it is not impossible to determine its cost of acquisition because the cost of acquisition is clearly ascertainable as assessee itself in its submission states that cost of acquisition to acquire lease option is NIL. Further the date on which such a lease option right was created is also ascertainable in the instant case.
20.17 So far as the alternative claim of the assessee that the full value of consideration should be taken as Rs. 28.4 crores being the final settlement amount and not Rs. 34.9 Crores is concerned, it is noted that the company has not received the entire compensation of Rs. 34.9 Crores as agreed in the relinquishment agreement dated 8th May 2008, and the assessee has received Rs.15.9 Crores during the year under consideration and the final additional settlement amount of Rs.12.5 Crores has been received during F.Y. 2009- 10.
20.18 Considering the above factual points, the AO is directed to verify the final consolidated amount of full value of consideration claimed at Rs.28.4 Crores only and compute the capital gains based on the actual figure of the entire compensation received at Rs. 28.4 Crores only.
20.19 Thus considering the above position of law and facts, the stand of AO is justified and this objection is rejected subject to re-
computation of capital gains based on final figure of full value of considered at Rs. 28.4 Crores subject to verification."
10. We also reproduce sub section 14 of section 2 of IT Act because the same contains the meaning of the term capital asset. The same is as under.
IT(TP)A Nos. 53 & 86/Bang/2014 Page 13 of 27 "(14) "capital asset" means--
(a) property of any kind held by an assessee, whether or not connected with his business or profession;
(b) any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 (15 of 1992), but does not include--
(i) any stock-in-trade other than the securities referred to in sub-clause (b), consumable stores or raw materials held for the purposes of his business or profession ;
(ii) personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes--
(a) jewellery;
(b) archaeological collections;
(c) drawings;
(d) paintings;
(e) sculptures; or
(f) any work of art.
Explanation 1.--For the purposes of this sub-clause, "jewellery" includes--
(a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel;
(b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel. Explanation 2.--For the purposes of this clause--
(a) the expression "Foreign Institutional Investor" shall have the meaning assigned to it in clause (a) of the Explanation to section 115AD;
(b) the expression "securities" shall have the meaning assigned to it in clause
(h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);
(iii) agricultural land in India, not being land situate--
(a) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand; or
(b) in any area within the distance, measured aerially,--
(I) not being more than two kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten thousand but not exceeding one lakh; or (II) not being more than six kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than one lakh but not exceeding ten lakh; or (III) not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten lakh.
IT(TP)A Nos. 53 & 86/Bang/2014 Page 14 of 27 Explanation.--For the purposes of this sub-clause, "population" means the population according to the last preceding census of which the relevant figures have been published before the first day of the previous year;
(iv) 6 per cent Gold Bonds, 1977, or 7 per cent Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government;
(v) Special Bearer Bonds, 1991, issued by the Central Government ;
(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 3[or deposit certificates issued under the Gold Monetisation Scheme, 2015] notified by the Central Government.
Explanation.--For the removal of doubts, it is hereby clarified that "property" includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever;"
11. From the provisions of section 2(14), it is seen that property of any kind held by assessee is included in the term capital asset except certain specific items which are exclusively excluded from the definition of capital asset as per this section. The lease option is not one of such exclusions and therefore, lease option is also one of the capital asset. The provisions of section 55(2) are also relevant for the dispute in present case and hence, the provisions of sub section 2 of section 55 are also relevant and is reproduced hereinbelow for ready reference.
"(2) For the purposes of sections 48 and 49, "cost of acquisition",--
(a) in relation to a capital asset, being goodwill of a business or a trade mark or brand name associated with a business or a right to manufacture, produce or process any article or thing or right to carry on any business 97[or profession], tenancy rights, stage carriage permits or loom hours,--
(i) in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price; and
(ii) in any other case [not being a case falling under sub-clauses (i) to (iv) of sub-
section (1) of section 49], shall be taken to be nil ; (aa) in a case where, by virtue of holding a capital asset, being a share or any other security, within the meaning of clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) (hereafter in this clause referred to as the financial asset), the assessee--
(A) becomes entitled to subscribe to any additional financial asset ; or (B) is allotted any additional financial asset without any payment, then, subject to the provisions of sub-clauses (i) and (ii) of clause (b),--
(i) in relation to the original financial asset, on the basis of which the assessee becomes entitled to any additional financial asset, means the amount actually paid for acquiring the original financial asset ;
(ii) in relation to any right to renounce the said entitlement to subscribe to the financial asset, when such right is renounced by the assessee in favour of any person, shall be taken to be nil in the case of such assessee ;
IT(TP)A Nos. 53 & 86/Bang/2014 Page 15 of 27
(iii) in relation to the financial asset, to which the assessee has subscribed on the basis of the said entitlement, means the amount actually paid by him for acquiring such asset ;
(iiia) in relation to the financial asset allotted to the assessee without any payment and on the basis of holding of any other financial asset, shall be taken to be nil in the case of such assessee ; and
(iv) in relation to any financial asset purchased by any person in whose favour the right to subscribe to such asset has been renounced, means the aggregate of the amount of the purchase price paid by him to the person renouncing such right and the amount paid by him to the company or institution, as the case may be, for acquiring such financial asset ;
(ab) in relation to a capital asset, being equity share or shares allotted to a shareholder of a recognised stock exchange in India under a scheme for demutualisation or corporatisation approved by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), shall be the cost of acquisition of his original membership of the exchange:
Provided that the cost of a capital asset, being trading or clearing rights of the recognised stock exchange acquired by a shareholder who has been allotted equity share or shares under such scheme of demutualisation or corporatisation, shall be deemed to be nil;98
[(ac) subject to the provisions of sub-clauses (i) and (ii) of clause (b), in relation to a long-
term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust referred to in section 112A, acquired before the 1st day of February, 2018 shall be higher of--
(i) the cost of acquisition of such asset; and
(ii) lower of--
(A) the fair market value of such asset; and (B) the full value of consideration received or accruing as a result of the transfer of the capital asset.
Explanation.--For the purposes of this clause,--
(a) "fair market value" means,--
(i) in a case where the capital asset is listed on any recognised stock exchange as on the 31st day of January, 2018, the highest price of the capital asset quoted on such exchange on the said date:
Provided that where there is no trading in such asset on such exchange on the 31st day of January, 2018, the highest price of such asset on such exchange on a date immediately preceding the 31st day of January, 2018 when such asset was traded on such exchange shall be the fair market value;
(ii) in a case where the capital asset is a unit which is not listed on a recognised stock exchange as on the 31st day of January, 2018, the net asset value of such unit as on the said date;
(iii) in a case where the capital asset is an equity share in a company which is--
(A) not listed on a recognised stock exchange as on the 31st day of January, 2018 but listed on such exchange on the date of transfer; (B) listed on a recognised stock exchange on the date of transfer and which became the property of the assessee in consideration of share which is not listed on such exchange as on the 31st day of January, 2018 by way of transaction not regarded as transfer under section 47, IT(TP)A Nos. 53 & 86/Bang/2014 Page 16 of 27 an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the financial year 2017-18 bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the first day of April, 2001, whichever is later;
(b) "Cost Inflation Index" shall have the meaning assigned to it in clause (v) of the Explanation to section 48;
(c) "recognised stock exchange" shall have the meaning assigned to it in clause (ii) of Explanation 1 to clause (5) of section 43;]
(b) in relation to any other capital asset,--
(i) where the capital asset became the property of the assessee before the 1st day of April, 99[2001], means the cost of acquisition of the asset to the assessee or the fair market value of the asset on the 1st day of April, 1[2001], at the option of the assessee ;
(ii) where the capital asset became the property of the assessee by any of the modes specified in sub-section (1) of section 49, and the capital asset became the property of the previous owner before the 1st day of April, 2[2001], means the cost of the capital asset to the previous owner or the fair market value of the asset on the 1st day of April, 2[2001], at the option of the assessee ;
(iii) where the capital asset became the property of the assessee on the distribution of the capital assets of a company on its liquidation and the assessee has been assessed to income-tax under the head "Capital gains" in respect of that asset under section 46, means the fair market value of the asset on the date of distribution ;
(iv) [***]
(v) where the capital asset, being a share or a stock of a company, became the property of the assessee on--
(a) the consolidation and division of all or any of the share capital of the company into shares of larger amount than its existing shares,
(b) the conversion of any shares of the company into stock,
(c) the re-conversion of any stock of the company into shares,
(d) the sub-division of any of the shares of the company into shares of smaller amount, or
(e) the conversion of one kind of shares of the company into another kind, means the cost of acquisition of the asset calculated with reference to the cost of acquisition of the shares or stock from which such asset is derived."
12. From the above provisions of section 55(2) (a), it comes out that 'Tenancy Right' is one such capital asset for which it has been specified that its cost of acquisition should be taken at Nil if the same is not acquired by the assessee by way of purchase from the previous owner. In the present case, the tenancy or lease option has not been purchased by assessee from any previous owner and therefore, this is the case of the department that the tenancy/lease option is nothing but tenancy right and therefore, its cost of acquisition should be taken as Nil as per section 55(2) (a) of IT Act. The objection of the assessee is IT(TP)A Nos. 53 & 86/Bang/2014 Page 17 of 27 this that the lease option is not a tenancy right and therefore, section 55(2) is not applicable. In support of this contention, it was submitted that in case of tenancy right, property is in existence and the same is occupied by the tenant with a right to occupy the property as tenant but in the present case, the property is not even in existence and it is hypothetical right given to the assessee that in case the property is built by the developer, the lessee being the assessee will have an option to take an extra area on lease and therefore, this lease option cannot be equated with tenancy right. Hence we find that we have to decide first this aspect as to whether the lease option is a capital asset or not and the second issue to be decided is this as to whether the lease option can be equated to tenancy right and therefore covered by section 55(2). Regarding the first aspect as to whether the lease option is a capital asset or not, we are of the considered opinion that as per the definition of capital asset in section 2(14) as reproduced above, property of any kind held by the assessee whether or not connected with his business or profession is covered by the definition of the term capital asset. There are some exclusions such as stock in trade andconsumable stores or raw materials held for the purposes of his business or profession, personal effects excluding jewellery, archaeological collections, drawings, paintings, sculptures or any work of art and agricultural land situated at some places. These are excluded from the definition of capital asset and in addition to that, certain Gold Bonds, Special Bearer Bonds, 1991 and Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 are also excluded from the definition of term capital asset but lease option is not an exclusion and therefore, lease option is definitely a capital asset because lease option is a valuable right in our opinion. Hence the first aspect of the issue is decided against the assessee and we hold that lease option is a capital asset.
13. Now the second aspect of matter to be decided by us is whether lease option is equivalent to tenancy right and therefore, section 55(2) of IT Act is applicable. In this regard, we find that the term tenancy right is not defined under IT Act, 1961 and therefore, we have to go by the general definition of this term. In our humble opinion, the essence of tenancy right is the right to possess and occupy a land or building belonging to some other person This was the IT(TP)A Nos. 53 & 86/Bang/2014 Page 18 of 27 submission of ld. AR of assessee that since in the present case, the lease option granted to the assessee is given for a non-existing building and in the present case, lease option is given for a building which may be constructed in future by the land lord, it is not a tenancy right. In our considered opinion, tenancy right can be given by the landlord to any other person in respect of an existing property or in respect of the property which the landlord is willing to build in future. We hold so because even in case of existing property, the landlord can confer tenancy right to the tenant from a future date. It may be like this also that a property is existing and it is occupied by some other tenant at present but the landlord may enter into a tenancy agreement with some other person also and as per the same agreement, it can be agreed that the existing tenant is likely to vacate the property say within six months from the date of this agreement and therefore, the landlord agreed with the new person to grant him tenancy right after the property is vacated by the existing tenant. Similarly a person is holding/occupying a land and on the same land, he is constructing a building and it is expected that the building will be completed in a given period and will be available within a specific time period and under that situation, the landlord can enter into tenancy agreement for such building being constructed or to be constructed with an understanding that the tenant will get the occupation of the building within a given point of time. Hence in our considered opinion, this argument of the ld. AR of assessee that in the present case, lease option is given in respect of a building which is not in existence and therefore, this cannot be equated with tenancy right has no merit. In our considered opinion, the granting of lease option is equal to the granting of tenancy option of an existing property with the understanding that the actual possession will be given to the tenant within a specified time period. In the present case also, the assessee was given lease option which could be exercised within 24 months from 01.12.2006. As per the agreement dated 08.05.2008, it is stated that the lease option under the MOU and the lease Deed is supposed to expire on 01.09.2008 and the lessee in consideration of the compensation of Rs. 34.90 Crores payable by the lessor has expressed its willingness to relinquish the lease option as envisaged in the Memorandum of Agreement dated 31.01.2006 and reaffirmed vide lease deed dated 10.08.2007. Hence it is seen that in the IT(TP)A Nos. 53 & 86/Bang/2014 Page 19 of 27 present case, the lease option has expiry date which means that the lease option can be exercised only up to this date i.e. 01.09.2008 and hence, in our considered opinion, whether the property is in existence or not has no relevance because the builder i.e. M/s. Vipul Ltd. has given an option to the assessee to acquire, exact area on lease and assessee decided to surrender and relinquish lease option for a consideration. It is also seen that the lease option was along with all rights and benefits arising there from, including but not limited to any right to sub-lease and any other right, interest benefit etc. consequential in nature, both under the Memorandum of Agreement dated 31.01.2006 and the lease deed dated 10.08.2007 and all these rights were relinquished by the assessee for a consideration of Rs. 34.90 Crores as per agreement dated 08.05.2008. Under these facts, in our considered opinion, the lease option granted to the assessee by the developer is nothing but tenancy right and therefore section 55(2) is applicable in the facts of present case.
14. The third aspect to be decided is this as to what is the amount of consideration received. It is seen that as per the agreement dated 08.05.2008, consideration fixed is Rs. 34.90 Crores. The same is the amount as per supplementary agreement dated 15.09.2008. As per the amended and restated supplementary agreement dated 27.04.2009, it was agreed upon between the parties that the outstanding consideration should be reduced to Rs. 16.95 Crores as against Rs. 24 Crores. This supplementary agreement has been executed between the parties in the next Financial Year i.e. Financial Year 2009-10 relevant to Assessment Year 2010-11 whereas we are dealing with Assessment Year 2009-10. As per section 48 of IT Act, income chargeable under the head capital gains shall be computed by deducting from the full value of consideration received or accruing as a result of the transfer of capital asset, some amounts being cost of acquisition, cost of transfer and cost of improvement. Hence for the purpose of computing capital gains, consideration received or accrued both are relevant. As per the relinquishment agreement dated 08.05.2008, consideration of Rs. 34.90 Crores has accrued to the assessee and assessee has also received part payment of it and has relinquished its rights of lease option. By a subsequent event of reduction in IT(TP)A Nos. 53 & 86/Bang/2014 Page 20 of 27 agreed consideration, the accrued consideration does not get reduced and such reduction in accrued consideration in future has no relevance for the purpose of determining the capital gain in the present year. Hence on this aspect of the matter also, we find no merit in the claim of the assessee. Accordingly this issue is decided against the assessee.
15. The appeal filed by the assessee is partly allowed for statistical purposes.
16. Now we take up the appeal of the revenue. It was submitted by ld. DR of revenue that ground no. 1 is general. Regarding ground no. 2, she fairly conceded that this issue is covered in favour of the assessee by the judgement of Hon'ble Karnataka High Court rendered in the case of CIT vs. Tata Elxsi Ltd., 349 ITR 98. Ground No. 2 is rejected by respectfully following this judgment of Hon'ble Karnataka High Court.
17. Regarding ground no. 3, she submitted that this issue was decided by the DRP as per para 16.3 of its directions available on page no. 39 of DRP directions. She pointed out that from this para of DRP directions, it is clear that the endorsed FIRCs were placed before the DRP for the first time and DRP has decided the issue without obtaining remand report from the AO and therefore, on this issue, the matter should be restored back to the file of DRP for fresh decision after obtaining remand report from the AO. In reply, the ld. AR of assessee supported the DRP directions.
18. We have considered the rival submissions. First of all, we reproduce para 16.3 from the DRP directions for ready reference. The same is as under.
"16.3 The ground of objections along with all the material placed on record has been perused. The AO disallowed the value of unendorsed FIRCs amounting to Rs.148,416,444 from export turnover of the company on the only ground that the same have not been endorsed by the Authorised Dealer ("AD") bank as on date. The assessee has submitted the endorsed FIRC's before the panel. On perusal of the same it is clear that the company has realised the said amount and it has been duly endorsed by the Authorised Dealer ("AD") bank. Thus, the reason for addition does not survive."
IT(TP)A Nos. 53 & 86/Bang/2014 Page 21 of 27
19. From the above para reproduced from the directions of DRP, it is clear that the disallowance was made by the AO for this reason that FIRCs amounting to Rs. 14,84,16,444/- had not been endorsed by authorized dealer bank as on date and before DRP, the assessee submitted that the endorsed FIRCs and DRP has decided the issue in favour of the assessee without obtaining any remand report from AO in this regard. In this view of the matter, we find force in the submission of ld. DR of revenue that the matter should go back to the file of DRP for fresh decision after obtaining remand report from the AO. Accordingly we set aside the order of DRP and consequently the order of AO on this issue and this issue is restored back to the file of DRP for fresh decision after obtaining remand report from the AO. In this manner, ground no. 3 of the revenue's appeal is allowed for statistical purposes.
20. Regarding ground nos. 4 and 5, it was submitted by ld. DR of revenue that the issue regarding disallowance of deduction u/s. 10A for Pune STPI unit by assessee company has been discussed and decided by DRP as per para 19 to 19.5 of the order of DRP. Thereafter she pointed out that as per draft assessment order, it is noted by the AO in para IV on page no. 7 that the invoice copies and SOFTEX submitted by the assessee company did not mention about the particulars of computer software / IT enabled service. She further pointed out that this is also noted by AO in the same para that RBI has given certain codes to regularize the SOFTEX and export of computer software. As per the RBI code, the export computer software and IT enabled service are governed under the Code 907. But as per the SOFTEX submitted by assessee company of Pune unit, it did not mention about the nature of service rendered and the columns were not duly filled. She further pointed out that it is also noted by the AO that none of the invoices were raised against any IT enabled service listed in the notification SO890[E] dated 26.09.2000 and all the invoices were raised towards software solution. Thereafter she drawn our attention to page no. 11 of the draft assessment order and it was pointed out that it is noted by the AO on this page of the draft assessment order that in order to claim the tax benefit u/s. 10A of IT Act, the assessee company should have either developed software or rendered IT enabled service given in the notification IT(TP)A Nos. 53 & 86/Bang/2014 Page 22 of 27 referred on the same page of the draft assessment order but it is noted by the AO that in the present case, the invoices submitted by assessee company has revealed the fact that the company has charged some service charges for software solutions from the sister concerns and this particular item was not listed as IT enabled service in the notification referred to by the AO. She submitted that in spite of this categorical finding of AO in the draft assessment order, the DRP has decided the issue in favour of the assessee on this basis that the assessee company had claimed deduction on profits earned from the Pune unit u/s. 10A for the earlier years also and the same has not been questioned. Thereafter the DRP has given a finding in para 19.4 that mere error of not completing the information sought in the Softex forms cannot be considered as the ultimate test to disallow the deduction under section 10A of the Act. She submitted that the order of DRP should be reversed and that of AO in the draft assessment order should be restored. As against this the ld. AR of assessee supported the order of DRP. It was submitted by ld. AR of assessee that copy of letter dated 26.03.2013 is available on pages 451 to 463 of paper book and in particular, our attention was drawn to page no. 455 of the paper book where the assessee's claim regarding deduction u/s. 10A for Pune unit has been explained and it was pointed out that in the copy of invoices submitted before the AO, it was noticed by the AO that certain invoices have a component of "bonus on ink and toner" and in this regard, the AO asked for clarification on the nature of such component in the invoices and it was submitted by assessee before the AO that the company has raised the invoices based on the call log report, wherein the bill amount would be worked out as number of minutes of call multiplied by fixed rate and subsequently at the end of the year in March, an additional component being referred to as "bonus" would be billed for the services rendered and billed already. He further pointed out that this was explained that this is an additional billing done for services already rendered and regarding the description as "ink and toner" it was explained that the same is based on the name of cost center under which the concerned transactions are recorded. He also submitted that on page no. 577 of the paper book is the relevant invoices wherein there is an item "Bonus on IT(TP)A Nos. 53 & 86/Bang/2014 Page 23 of 27 Ink and Toner" relating to $3,18,150. He submitted that under these facts, the order of DRP should be affirmed.
21. We have considered the rival submissions. First of all we reproduce the relevant para from the draft assessment order which reads as under.
"IV. As far as Pune unit is concerned it is to be mentioned here that this unit was registered initially on 5.3.2006. On 31.3.2007 i.e. 1.4.2007 the company has acquired net assets of ACS Info Solution Pvt Ltd and god fresh registration from 31.3.2007. The invoice copies and softex submitted by the company did not mention about the particulars of computer software / IT enabled service. The RBI has given certain codes to regularize the softex and export of computer software. As per the RBI code the export computer software and IT enabled service are governed under the Code 907. The softex submitted by assessee company of Pune unit did not mention about the nature of service rendered and the columns were not duly fined. Further it is also noticed that none of the invoices were raised against any IT enabled service Listed in the notification S0890[E] dated 26.9.2000. All the invoices were raised towards software solution. It is also noticed that the invoice did not mention about the purchase orders or contract agreements.
The discrepancies listed above are discussed in detail with the AR of the assessee company on 5.3.2013 by reporting the case to 11.3.2013. However, neither the company nor the AR has appeared on the date of hearing. Hence a specific show cause notice dated 20.3.2013 was issued to the company by posted the hearing on 26.3.2012. On the date of hearing the AR of the assessee company has appeared and made further submissions:
1.2 Analysis of written submission:
1. As far as the bonus on ink and toner is concerned the assessee company has furnished the following reply:
"In point "a" of the notice dated 20th March 2013, in the copy of invoices submitted your goodself has noticed certain invoices have a component of "bonus on ink and toner". Subsequently your goodself has sought clarifications on the nature of such component in the invoices.
In this regards we submit that, in the concerned case the company has raised the invoices based on the call log report, wherein the bill amount would be worked out as number of minutes of call multiplied by a fixed rate. Subsequently at the end of the year in March, an additional component (being referred to as bonus) would be billed for the services rendered and billed already. Thus this is an additional billing done for services already rendered. Further the description is IT(TP)A Nos. 53 & 86/Bang/2014 Page 24 of 27 given as "ink and toner" based the name of cost center under which the concerned transactions are recorded.
However the above said reply is not acceptable. The invoices are clearly revealed a fact that the company was received certain bonus on ink and toner. The said amount was received as a bonus only in the Month of April and May. All the invoice copies are enclosed as Annexure-1 to the order. When the company has raised the invoice bonus on ink and toner the other submission given by the company are not acceptable. As far as realization of export proceeds are concerned in many cases the softex were not endorsed. Each and every softex, invoice and the realization are thoroughly examined in the presence of the AR.
In case of guargaon unit one invoice dated 30.07.2008 for a sum of 414,613 US$ of Rs.2,04,32,078/- was realized in the month of October 2009. As discussed above, the invoice raised by the company has to be realized within 12 months from the end of the month. Hence this amount is also not eligible as export turnover."
22. Now we reproduce the reply of the assessee regarding its explanation in respect of "Bonus on Ink and Toner" from page no. 455 of paper book. The same is as under.
"5. Bonus on Ink and toner In point "a" of the notice dated 20th March 2013, in the copy of invoices submitted your goodself has noticed certain invoices have a component of "bonus on ink and toner". Subsequently your goodself has sought clarifications on the nature of such component in the invoices.
In this regards we submit that, in the concerned case the Company has raised the invoices based on the call log report, wherein the bill amount would be worked out as number of minutes of call multiplied by a fixed rate. Subsequently at the end of the year in March, an additional component (being referred to as "bonus") would be billed for the services rendered and billed already. Thus this is an additional billing done for services already rendered. Further the description is given as "ink and toner" based on the name of cost center under which the concerned transactions are recorded."
23. Now we also reproduce the finding of DRP in this regard from pages 46 & 47 of the order of DRP being paras 19 to 19.5 of such directions. The same is as under.
"19. Ground of objection - Disallowance of deduction under Section 10A claimed for Pune STP unit of the company.
19.1 The AO disallowed the deduction claimed under section 10A for Pune STP unit of the company amounting to Rs 46,735,360 on the IT(TP)A Nos. 53 & 86/Bang/2014 Page 25 of 27 ground that the software solution services rendered from such unit is not in the nature of IT enabled services listed in the notification S0890[E] dated 26th September 2000.
19.2 On the other hand the assessee claimed that AO ought to have appreciated that the software solution services are in the nature of computer software as defined in explanation (2) (i) to section 10A of the Act. The assessee further claimed that the learned AO has failed to appreciate that the unit is providing software solution services after obtaining valid registration from STPI authorities. The AO ought to have considered the fact that the STPI authorities have accepted the Softex forms submitted and the endorsement made by the authority confirms software services being rendered from the unit and that a procedural lapse like not ticking the code in the Softex form cannot be the basis to disallow the entire claim of deduction.
19.3 On perusal of the ground of objection along with all the material placed on record it is clear that the AO has not appreciating the fact that the company had claimed deduction of profits earned from the Pune unit under section 10A-for-the earlier AY/s and the same has not been questioned. The AO has also not appreciated the fact that the export of computer software and IT enabled service falls within the code 907 provided in point 9 of the Softex form without appreciating that all the codes in point 9 of the Softex are for export of software. The Pune unit of the company provides software solutions to Dell global BV Singapore and such services include services like software quality assurance, software testing etc. which are in the nature of computer software as defined in explanation (2)(i) to section 10A of the Act. The nature of services rendered to Dell global BV Singapore is detailed in the service agreement of the company.
19.4 In view of the facts above it is clear that mere error of not completing the information sought in the Softex forms cannot be considered as the ultimate test to disallow the deduction under section 10A of the Act. The software solution services are being rendered from Pune unit and the same is acknowledged and endorsed by the STPI authorities. Further it could be noted from the FIRC and Invoice mapping annexure submitted by the assessee that the Company has realized the entire amount against the invoices raised by the Pune unit. In view of the above, deduction claimed under section 10A of the Act, for the Pune unit is allowable.
19.5 In view of the above, the grounds of objections are accepted."
24. From the draft assessment order as reproduced above, we find that from the reply submitted by assessee before the AO which is reproduced by the AO also on pages 7 and 8 of draft assessment order as reproduced above, it is seen that this is the reply of the assessee that initially the company has raised the IT(TP)A Nos. 53 & 86/Bang/2014 Page 26 of 27 invoices based on the call log report, wherein the bill amount was computed on the basis of number of minutes of call multiplied by a fixed rate and subsequently at the end of the year in March, an additional component being referred to as bonus would be billed for the services rendered and billed already. Now in the light of this reply, we examine the relevant invoices which is available on page no. 577 to 591 of paper book and we find that all these invoices are raised in the month of April and May, 2008. When as per the assessee's reply itself, the invoices for difference raised in the month of March, then the said explanation of the assessee is not relevant in respect of these invoices which are raised in the month of April and May 2008. Further this is also not clear from the invoices as to when the services were actually rendered for which Bonus is billed in the month of April and May 2008, what are the nature of services which were rendered for which these bonus invoices are raised is also not clear. It is also noted by the AO in the draft assessment order that in the present case, from the invoices submitted by assessee company, it is revealed that the assessee company has charged some service charges from sister concerns and this was not listed as ITES in the relevant notification. The AO has also noted that the SOFTEX did not specify about any ITES. When these objections were raised by AO before the assessee, the assessee has submitted reply dated 26.03.2013 as per which the assessee has given a vague reply that the Pune unit of assessee company provides software solutions to Dell global BV Singapore and such service include services like software quality assurance, software testing etc. and the same would be categorized under Others (IT and ITES) in point 9(a) of the Softex forms. It is also submitted by assessee before the AO that assessee company has inadvertently missed to tick the appropriate nature of services provided through the Pune STPI unit. This is also submitted by assessee before the AO that 12 Softex forms were submitted by assessee company with the Pune STPI authorities out of which 9 Softex forms are endorsed by the Pune STPI authorities and in respect of the remaining Softex forms, the assessee filed a letter seeking the endorsed copy of Softex filed. This was the submission of the assessee before the AO that mere inadvertent error of not completing the information sought in the Softex forms should not be considered as the ultimate IT(TP)A Nos. 53 & 86/Bang/2014 Page 27 of 27 test to allow the deduction u/s. 10A of the Act. The DRP has simply reproduced these submissions of assessee before the AO and decided the issue in favour of the assessee and even the result of submission of the assessee before STPI authorities for endorsing of the Softex forms which were having mistakes as per the assessee was not insisted upon. Even before us, this is not shown that the STPI authorities of Pune has endorsed such Softex forms which were defective as per the assessee. Under these facts, we are of the considered opinion that the assessee has not satisfied the requirement of law regarding allowability of deduction u/s. 10A for Pune unit. Hence we reverse the order of DRP on this issue and restore the order of AO in draft assessment order on this issue. Accordingly, ground nos. 4 and 5 of the revenue's appeal are allowed.
25. In the result, the appeal filed by the revenue is partly allowed in the terms indicated above.
26. In the combined result, the appeals filed by the assessee and revenue are partly allowed in the terms indicated above.
Order pronounced in the open court on the date mentioned on the caption page.
Sd/- Sd/-
(SUNIL KUMAR YADAV) (ARUN KUMAR GARODIA)
Judicial Member Accountant Member
Bangalore,
Dated, the 13th July, 2018.
/MS/
Copy to:
1. Appellant 4. CIT(A)
2. Respondent 5. DR, ITAT, Bangalore
3. CIT 6. Guard file
By order
Senior Private Secretary,
Income Tax Appellate Tribunal,
Bangalore.