Income Tax Appellate Tribunal - Kolkata
Binani Industries Ltd., Kolkata vs Department Of Income Tax
आयकर अपीलीय अधीकरण, Ûयायपीठ - " ऐ", कोलकाता,
IN THE INCOME TAX APPELLATE TRIBUNAL "A" BENCH : KOLKATA
(सम¢) Before ौी डȣ.
डȣ. के. ×यागी,
×यागी, Ûयायीक सदःय एवं/and ौी सी. सी.डȣ.
डȣ.राव,
राव लेखा सदःय
[Before Hon'ble Sri D. K. Tyagi, JM & Hon'ble Sri C. D. Rao, AM]
आयकर अपील संÉया / I.T.A No. 1383/Kol/2008
िनधॉरण वषॅ/Assessment Year : 2004-05
Income-tax Officer, Wd-2(3), Kolkata. -Vs- M/s. Great Media Technologies
(PA No. AABCG 9430 G)
(अपीलाथȸ/APPELLANT ) (ू×यथȸ/RESPONDENT)
For the Appellant: Sri Sumant Sinha
For the Respondent : Sri S. K. Tulsiyan
आदे श/ORDER
ौी डȣ.
Per D. K. Tyagi, JM (ौी डȣ. के. ×यागी,
×यागी, Ûयायीक सदःय) The appeal preferred by the revenue is directed against the order of the Ld. CIT(A), Kolkata dated 30.04.2008 for the assessment year 2004-05.
2. Briefly stated facts of the case are that the assessee company was engaged in export of computer software development and obtained approval from Director of Software Technology Park, Kolkata as a 100% export oriented unit for the development of software and execution of I. T. enabled services. The assessee company filed its return of income disclosing a nil total income after claiming deduction u/s. 10A of the I. T. Act, 1961 of Rs.93,25,871/- for having earned profit from the export of software development. Book profit u/s. 115JB of the Act was computed as Rs.4,500/-. The Assessing Officer in the assessment order computed the total income of the assessee company at Rs.1,13,65,758/- making certain disallowances u/s. 10A of the Act as claimed by the assessee. The first disallowance made by the Assessing Officer related to the exemption u/s. 10A of the Act as claimed by the assessee. The Assessing Officer has denied the claim of the assessee u/s. 10A of the I. T. Act on the following grounds :
"From a study of the agreements with its clients as well as the invoices raised by it on its clients, it is seen that the assessee did not export programmes on any physical information storage device. The exports on which the assessee claims deduction u/s. 10A consist of export of data/services uploaded/exported over internet. Thus, its claims of software development does not involve sub-clause (a) of the definition quoted above. For the claim to be considered to be eligible, thus, it was necessary that the services 2 rendered by it were, firstly "customized electronic data or any product or service of similar nature", and that the same were "notified by the Board". Specific requisition was made of the particular Board's notification which enlists the services rendered by the assssee as an eligible service. However, till date, the assesee has failed to produce the same. Thus, the entire claim stands liable to be rejected on this ground."
However, the Assessing Officer also considered the claim of the assessee on merits as well. From an examination of documents produced on requisition, the Assessing Officer noted as follows :
(a) Inadmissible amounts :
In its computation of deduction claim u/s. 10A, the assesee has adopted Export Turnover to be Rs.1,24,40,567/-, which is the entire recorded sales. As per Explanation 2(iv) below sub-section 8 of sec. 10A defines export turnover to be "the consideration in respect of export by the undertaking of articles or things or computer software received in, or brought into India by the assesee in convertible foreign exchange...". However, evidence of receipt of foreign exchange in India shows that only Rs.1,06,02,955/- has been received in India during the relevant financial year or in the six months after the expiry of the same. No evidence of receipts received later was filed, nor was evidence of extensions allowed for any such belated repatriation by the RBI produced before me.
When the assessee was asked to show cause why deduction would not be restricted to the extent of repatriation received, it wrote to claim that it had received the remaining sums in the following year. It also submitted a schedule, claiming that the entire balance amounts in respect to three separate invoices had been received on 24.05.2004. However, the assesee neither produced evidence in support of such payment, nor was it possible to accept its claims of invoice wise settlement, since, as the evidence that was produced showed no details of invoices against which such payments were allegedly being paid, nor did the amounts tally, as discussed in detail in para 7(iv) below.
The benefit of deduction u/s. 10A has to be therefore limited to the amount of Rs.1,06,02,955/- as export turnover, in terms of stipulations of sub-section 3 of section 10A.
(b) Inadmissible periods :
As noted earlier, the assessee company received its recognition as a 100% EOU by an agreement signed on 15.09.2003. It is seen that the company received the following proceeds prior to that date.
No. Party Date Amount in US$ Amount in INR
1 Kents Pvt. Ltd. 18.06.2003 100 4,618
2. DO 25.06.2003 2000 92,500
3 DO 04.07.2003 5000 2.,30,000
Further from the narration on the invoices produced by the assessee, it is seen that the following relate to services rendered in the months of June, July and August 2003, i.e., periods prior to the agreement.
3 No. Party Invoiced Amount in US$ Amount in INR
services for
1 Kents Pvt. Ltd. June 2003 7100 3,20,281
2. Great Mdia July 2003 36020 16,24,862
Technologies LLC
3 DO August 2003 44194 19,93,591
Total 39,35,734
Therefore, in the absence of any provision in the said agreement in respect of export made earlier to the agreement, all these exports of services etc., made prior to the agreement has to be excluded from the benefits allowable u/s. 10A.
In response to the query in the show cause notice in respect of this issue, the assessee claimed that the date of recognition as an STP Unit did not matter, the entire export made in the year that the unit gains recognition is eligible for deduction. This claim is not found acceptable. The statute grants deduction made by a recognized unit in a year. However, the exports made earlier to the date of recognition cannot be considered as constituting exports made by an STP Unit. Hence the claim of deduction has to reduce to the extent mentioned in the schedule above.
Therefore, in sum, in computing eligible deduction u/s. 10A, the assessee's export turnover is to be considered at the figure claimed by it as reduced by Rs.39,35,734 and subject to the overall ceiling of Rs.1,06,02,955/-."
c) High profitability -
According to Assessing Officer the deduction u/s. 10A cannot be allowed because of high profit shown by the assessee. As against the total turnover of sales of Rs.1,24,40,567/-, it has incurred expenses only Rs.37,74,310/- in aggregate, thus earning the profit of Rs.86,71,205/- at a rate of 69.7% of turnover and 229.7% of the expenses incurred to earn it. Considering the nature of business and services rendered, , it might be expected that relatively high degrees of expenditure on account of technical staff and technological assets and services would have to be employed. However, the assessee has incurred only Rs.3,93,010/- on salaries. Total fixed assets employed in this business, all acquired during the relevant financial year 2003-04, stands at Rs.3,23,463/- only of which only Rs.2,68,394/- relates to plant in fhe form of computers and peripherals.
d) The Assessing Officer has also tried to establish the link of close connection between the company and the overseas concern.
In sum and substance, the Assessing Officer's contention was that the assessee filed the return of income on 30.10.2004 showing Nil income. The assesee claimed deduction u/s. 10A amounting to Rs.93,25,871/-. The Assessing Officer, in course of proceedings u/s. 143(3) examined the claim in detail. She found that the mainstay of its export was providing services rather than software development as such. She was of the opinion that the assessee was not eligible to the deduction u/s. 10A since the assessee's consisted of export of data/services uploaded/exported over internet and the same was 4 not notified by the Board for the purpose of the claim u/s. 10A. She on facts also examined the claim of the assesee. She found that out of the total export turnover of Rs.1,24,40,567/- the foreign exchange received within the year or within six months of the close of the year was Rs.1,06,02,955/-. Therefore, according to her the assessee was entitled to claim the deduction, if any, on the sum of Rs.1,06,02,955/- only as per Explanation 2(iv) below sub-section 8 of section 10A. She further found that the recognition to the assessee company as 100% EOU was received by an agreement signed on 15.9.2003 and therefore any amount received before that date during inadmissible period and was out side the purview of the claim u/s. 10A. She also opined that in this export the assessee had remarkable degree of profitability. She found that out of the total export of Rs.1,24,40,567/- the assessee incurred expenses of Rs.3,74,310/- in aggregate and earned a remarkable profit of Rs.69.7%. She opined that the fixed assets employed in the form of computer and peripheral were very low. She also opined that the importer and the assesee were closely connected and according to her the arrangement between the two required to be examined more circumspectly. She also found that there was mis-match between raising of the bills and receipt of payments of the export price and the payments were received on ad hoc basis or in advance which according to her were not acceptable. Finally she was of the opinion that -
a) the assessee was not equipped in terms of plant & machinery or staff to render the services it claims to have exported,
b) the assessee was receiving moneys from a foreign company in ad hoc sums well before it raised any bills as such for any services purportedly rendered,
c) the assesee claimed that the said payments were in pursuance of an alleged agreement which is unilateral, not signed by any director of said GMTLLC, and not authenticated with any trade control authority, whether in India or the USA.
The only and obvious explanation that appears to emerge from the set of circumstances detailed above is that the assesee was receiving sums from its own associate KPL, as well as the foreign company GMTLLC for undisclosed purposes and by way of a collusive arrangement between the assessee and such companies during the period June, 2003 onwards; and that, as an afterthought, the said receipts were given the garb of export receipts only in December, 2003.
In view of the above, the Assessing Officer held that the receipts do not represent export proceeds from any activity which was permissible to it by the terms of its agreement with the STP, nor export profits eligible for deduction u/s. 10A in terms of the 5 provisions of that section of the I. T. Act, 1961. The claims of the deduction u/s. 10A, therefore, was disallowed and treated the same as income of unexplained nature.
Apart from disallowance of the deduction u/s. 10A the Assessing Officer also disallowed the commission payment of Rs.16,91,140/- paid to Tracy Louie. While disallowing the claim the Assessing Officer stated that the invoices raised by the said person on the assessee company were examined and these were found to bear the narration "Branding, Marketing, consulting and liaison work done with various companies" as the description of services rendered. On requisition, the assesee also produced an undated and unilateral agreement signed by the director of the assessee company in this regard. The said agreement was "for providing us with consultancy services....:", as well as "working for the Indian Company as a liasioning officer with the clients in the USA and will also advice the Indian company on the methods and dealing with the USA clients and giving us leads to acquire new clients". In pursuance of this agreement, the Assessing Officer noted that the said person is seen to have raised regular monthly bills for such alleged services. However, the Assessing Officer stated that the assesee worked only for two clients, one of which was a concern under common management control as itself, and the other was represented, as agent, by Vikas Kedia, a director of the said associate company. That is, for the FY 2003-04, no liaison work of any person outside the company was utilized for the business of the company. Therefore, any payments to any person in connection with the same cannot be considered as expenditure laid out in its business interest. Hence the said amount was disallowed.
In appeal, the Ld. CIT(A) in respect of disallowance u/s. 10A, held that the Assessing Officer was not justified in treating the some of Rs.1,24,40,567/- as incomes of unexplained nature. The Assessing Officer was directed to treat the said receipt as sale proceeds of computer software and allow deduction u/s. 10A. In respect of commission payment, the Ld. CIT(A) held that there is no basis to dispute such payment. Therefore, the addition made was deleted.
Aggrieved by the said order, the revenue is in appeal before us. Though the revenue has taken six grounds of appeal but the issues involved are only two i.e. (i) claim of deduction u/s. 10A of the I. T. Act and (ii) commission payment amounting to Rs.16,91,140/- to Tracy Louie.
63. In respect of first issue, the Ld. DR placed heavy reliance on the assessment order, the relevant portion of which we have already reproduced earlier.
4. On the other hand, the Ld. Counsel for the assessee while reiterating his same submissions as submitted before the Ld. CIT(A) relied on his order and urged before the bench to confirm the same.
5. After hearing both the parties and perusing the material available on record, we find that the Ld. CIT(A) keeping in view the contention of the Assessing Officer and the submissions of the assessee has analysed the facts of this case and the provisions of law on this issue as under :
"14 Firstly, I shall deal with the issue with regard to the applicability of section 10A of the I.T. Act. In this connection it will be relevant to look into Explanation 2 to section 10A of the I.T. Act and Board's notification No. SO 890(E) dated 26.9.2000 which are as under:
"Explanation 2 to section 10A defines "Computer Software" as under:
Explanation 2- For the purposes of this section -
(i) "Computer software" means-
(a) any computer programme recorded on any disc, tape, perforated media or other information storage device; or
(b) any customized electronic data or any product or service of similar nature, as may be notified by the Board which is transmitted or exported from India to any place outside India by any means."
The Notification of the Board as mentioned in (b) was as under:-
"In exercise of the powers conferred by clause (b) of item (i) Of Exp. 2 of section10A, clause(b) of item (i) of Exp. 2 of section l0B and clause (b) of Exp. To section 80HHE of the I.T. Act, 1961(43 of 1961), the Central Board of Direct Taxes hereby specifies the following information Technology enabled products or services as the case may be, for the purpose of said clauses, namely:
(i) Back office operations
(ii) Call Centres
(iii) Content development or animation
(iv) Data Processing
(v) Eng. And Design
(vi) Geographic Information System Services
(vii) Human Resources Services
(viii) Insurance claim Processing
(ix) Legal Databases
(x) Medical transcription
(xi) Payroll
7
(xii) Remote Maintenance
(xiii) Revenue Accounting
(xiv) Support Centres ana
(xv) Website Services-Notification No. SO 890(E) dated
26.9.2000
15 Looking to the aforesaid definition of Computer Software coupled with the notification it is evident that the word Computer Software includes various Software Development Activities including Website services. The subject is highly Technical. Development of Computer software and services related thereto and website services can extend to huge area of information technology services f the assessee's products are considered in the light of the vide definition covering almost all the information technology services it will be clear from the agreement between the Soft Ware Export Technology Part dated 15th Sept.2003 wherein it is mentioned that the assessee have been recognised as the producer of Computer Software and execution of I.T. enabled services. Under the said agreement the assessee was required to submit the monthly declarations of its products and dispatches the Government and such declarations in soft ware Export declaration (Soft Tax Form)were in fact submitted as required by the Government for which evidences including the agreement have been placed in the paper book filed before me. The Web site/Data Computer services were provided through Inter net which is also mentioned in the declarations mentioned above. The bills raised by the assessee for export also shows the export of Website application as architecting of programming of the Website application installing optimizing and securing the services at Data Centre etc. All these declarations have been accepted as full compliance of the agreement with the approving authority and no eye brow have been raised. In fact, it appears from the details filed that the Government of India , Ministry of Information Technology has granted Green Card as 100% Export Oriented Unit for computer soft ware to the assessee vide its communication dated l6th March 2004 which proves that the approving authority has considered and accepted that the assessee was 100% export oriented unit for Computer Software. Therefore it cannot be said that the assessee export was not of computer software. The notification mentioned above includes website services as mentioned in column 15 of the notification. Not only that the AO herself while narrating the nature of business of the assessee in Col. 10 of the assessment order has mentioned the nature of business as software development. The AO herself has also admitted that the assessee's business consisted of export of Data/Services up loaded /exported or Internet. The AO has not properly appreciated the provisions of the Income tax Act and the notification of the Board wherein the Web Services have been considered to be the services within the meaning the ExpI. 2 of section 10A. Considering the facts of the case including recognition of the Government of India as exporter of computer Software I have no hesitation in holding that the assessee is entitled to t1e deduction as provided U/s. 10A as exporter of Computer Software.
16 On merits it appears that the AO was to the opinion that a part of the export turnover was not realised or received within six months from the end of the year in which the export was made. The AO mentions that the assessee neither produced any evidence in support of such payment nor was it possible for her to accept its claim of invoice-wise statement since the evidence that was produced showed no evidences or details of invoices against of such payment allegedly being paid nor did the amount tally. I find that the assessee vide its letter dated 29.12.2006 para 2 has mentioned that the payments were received and the evidences were again enclosed along with the said letter. Earlier the assessee also filed two letters giving details of the payments received, copy of which have also been filed before me. It appears that the assessee was receiving 8 payments from the importer from time to time and as on 31.3.2004 the outstanding balance was Rs. 48873 $ against which the assessee received a payment of Rs. 84600 $ on 5.5.04. The said payment was cleared on 24.5.04. There was no other outstanding as on the said date. The assessee right from the beginning have been contending that the payments were received in advance ad hoc basis from time to time and is adjusted against the bills to be raised or bills outstanding if there be any such bill pending. The Assessing Officer has also taken note of the same in the assessment order. It also appears that finally the entire payments received are adjusted against the bills. Therefore the AO was not correct in holding that the payments were not received within the six months of the close of the year and the deduction cannot be restricted to the export receipts to the extent of Rs. 10602955/- only as has been held by the AO.
17 The AO was further of the view that the agreement with the Soft Ware Export Technology Park was entered into on 15th Sept. 2003 and therefore any export made before that date cannot be taken into account for the purpose of allowing deduction U/s. 10A. I have not been able to find any provision in the I.T. Act to hold that the deduction is allowable only from the date on which the agreement as mentioned above was entered into. It will be useful to quote section 10A(l) which is as under:
(1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee.
18. It will be apparent from the aforesaid wordings in the section that the deduction is allowable for the whole hear beginning with the year in which the under taking begins the manufacture or products Computer Software. There was no dispute that the Computer Software were started manufactured during the year itself. Therefore the AO was not correct; in taking with the view that the computer software though exported during the year but before the agreement entered into with STP was not entitled to the deduction. The assessee was therefore entitled to the deduction on the export of the Computer Software during the entire previous year.
19 The A.O has also doubted or disputed the high profitability of the assessee company. The AO has supported his finding on the ground that the signatory to the agreement were the persons of the same group and therefore there was close connection between the importer and the assessee. He was of the view that such high profit was not expected in the business. The AC was also of the view that the expenses incurred were too low to justify such high receipts. According to the AO the plant and machinery installed or the staff employed were quite inadequate to carry of such business of export of computer software. He further held that in ordinary course of business it was not expected that the importer will make the payment on Ad hoc basis to be adjusted against the bills finally raised. She therefore concluded that the entire arrangement was fictitious collusive arrangement, the arrangement cannot be treated to be genuine and the foreign exchange received by the assessee was money received for some other purposes. She treated the same as income from undisclosed sources thereby she made the addition of Rs. 12440567."
After this analysis the Ld. CIT(A) has given his finding as under :
9"20 It appears to me that the AO was not happy with such a huge margin and have tried to make out her case on the basis of suppositions. As discussed by me in earlier paragraphs, the assessee has filed the declaration of the export to the approving authority of software export technology park and the same have not been doubted our disputed. The rates of the export materials is not disputed or found to be excessive. The export itself is also not disputed. The AO has not found that the assesee itself has taken services from outside to do the job exported. The fact remains that the export earning have been received against the bills raised which has not been disputed by any of the government agencies or foreign exchange department. The WBHIDC was satisfied with the working of the assessee company and in later years even allotted plot of land in Knowledge Corridor in Action Area ID in Rajarhat New Town Kolkata. Federation of Indian Export Organisation has also granted membership to the assessee company for IT enabled services and software implementation services. The assessee's submission that the assessee company was not at all having any connection with the importer company except that the brother of one of the director was an executive officer in the said company. The AO has not brought on record any evidence to prove to the contrary. No doubt, high profitability may give rise to suspicion but suspicion alone is not sufficient to come to conclusions and have to be backed by some evidence. In view of the above the AO was not justified in treating the some of Rs.12440567/- as incomes of unexplained nature. The AO is directed to treat the said receipt as sale proceeds of computer software and allow deduction u/s. 10A."
From the above, it is clear that the Ld. CIT(A) has properly appreciated the facts of this case and has given the above finding which remained uncontroverted by the revenue by producing any cogent material/evidence on record, therefore, we feel no need to interfere with the order passed by him and the same is hereby upheld. This ground of appeal of the revenue is dismissed.
6. In respect of the other issue regarding commission payment made to Tracy Louie amounting to Rs.16,91,140/-, the Ld. DR relying on the order of the Assessing Officer submitted that the Assessing Officer has rightly opined that the commission paid should not be allowed as an expenses. The Assessing Officer has rightly mentioned in the assessment order that "the assesee worked only for two clients .... That is for the financial year 2003-04, no liaison work of any person outside the company was utilized for the business of the company. Therefore, any payments to any person in connection with the same cannot be considered as expenditure laid out in its business interests. Hence, he rightly disallowed the same amount. He lastly concluded that the order of the Ld. CIT(A) may be reversed and that of Assessing Officer is restored.
7. On the other hand, the Ld,. Counsel for the assessee while reiterating his same submissions as submitted before the lower authorities relied on the order of the Ld. CIT(A) and submitted that the Ld. CIT(A) while giving relief to the assessee has held as under :
10"the Assessing Officer has disallowed the commission paid to Tracy Louie of California USA on the ground that the assesee worked out only for two clients and therefore no liaison work was done by any person. I find that the commission was paid for branding marketing consulting and liaison work and have been paid after deduction of tax and the permission of the RBI. There is no basis to dispute such payment. Therefore the addition mad is deleted."
In this regard the Ld. Counsel submitted that the payment made to Tracy Louie was made for branding, marketing, consulting and liaison work done with various companies. The Assessing Officer had claimed that the assessee had earlier admitted that Tracy Loui had not rendered any service to earn such commission relevant to any of the assessee's business transactions made during the relevant year. The statement made by the assessee had been wrongly interpreted by the Assessing Officer. The assessee had earlier stated that the ground work done by the lady has yielded the results in subsequent years. This has been wrongly interpreted by the A.O as her service did not render any service to earn such commission during the relevant year. It should be noted that for any new company it is pertinent to keep the concern going. In order to increase its turnover the company has to explore new areas, make new customers and acquire day to day knowledge of the market and it is possible only through a local representative. It was for this purpose that Tracy Louie was employed. It is not necessary that for allowing this expense her services yield results in the same year. As mentioned earlier, her services yielded results in the subsequent years and hence are liable as a deduction. He also submitted that the said payment was made through RBI and necessary deductions on account of tax payable were duly made. The A.O has produced no evidence the said expense should be allowed as an expense. He lastly concluded that the order of the Ld. CIT(A) in this regard be upheld.
8. We have heard the rival submissions and perused the material available on record. We find force in the submissions of the assessee that the commission payment made to Tracy Loui as she rendered services to earn such commission. In order to increase turnover the assessee has to explore new areas, make new customers and acquire day to day knowledge of the market and for that reasons Tracy Loui was employed. We also find that the said payment was made through RBI and necessary deductions on account of tax payable were duly made. In absence of any evidence brought on record on behalf of the revenue authorities to the contrary, the expenses 11 incurred by the assessee towards commission payment is allowed in full. This ground of the revenue is also dismissed.
9. In the result, the appeal of the revenue is dismissed.
10. The order is announced in the open court on 14.12.10 Sd/- Sd/-
सी.
सी.डȣ.
डȣ.राव,
राव लेखा सदःय डȣ. के. ×यागी, Ûयायीक सदःय
(C. D. Rao) (D. K. Tyagi)
Accountant Member Judicial Member
तारȣख)
तारȣख) Dated : 14th December, 2010
(तारȣख
वǐरƵ िनǔज सिचव Jd.(Sr.P.S.)
आदे श कȧ ूितिलǒप अमेǒषतः- Copy of the order forwarded to:
1. अपीलाथȸ/APPELLANT -ITO, Ward-2(3), Kolkata.
2 ू×यथȸ/ Respondent, M/s. Great Media Technologies, AE-665, Sector-1,
Saltlake City, Kolkata-64.
3. आयकर किमशनर/The CIT, Kolkata
4. आयकर किमशनर (अपील)/The CIT(A), Kolkata.
5. वभािगय ूितनीधी / DR, Kolkata Benches, Kolkata
स×याǒपत ूित/True Copy, आदे शानुसार/ By order,
उप पंजीकार/Deputy Registrar.