Income Tax Appellate Tribunal - Chandigarh
Bebo Technologies Pvt. Ltd.,, Mohali vs Assessee on 28 November, 2008
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIGARH BENCHES 'A' CHANDIGARH
BEFORE SHRI D.K.SRIVASTAVA, ACCOUNTANT MEMBER
AND MS SUSHMA CHOWLA, JUDICIAL MEMBER
ITA No. 1115/Chd/2008
Assessment Year: 2005-06
M/s Bebo Technologies Pvt Ltd., Vs. The JCIT, Range-V,
Mohali Chandigarh
PAN No. AABCB9492R
ITA No. 116/Chd/2009
Assessment Year: 2005-06
The DC IT, Circle 6(1), Vs. M/s Bebo Technologies Pvt Ltd.,
Mohali Mohali
PAN No. AABCB9492R
&
C.O.No. 22/Chd/2009
(in ITA No. 116/Chd/2010)
Assessment Year: 2005-06
M/s Bebo Technologies Pvt Ltd., Vs. The DC IT, Circle 6(1),
Mohali Mohali
PAN No. AABCB9492R
ITA No. 1066/Chd/2009
Assessment Year: 2006-07
M/s Bebo Technologies Pvt Ltd., Vs. The DC IT, Circle 6(1),
Mohali Mohali
PAN No. AABCB9492R
ITA No. 294/Chd/2010
Assessment Year: 2007-08
M/s Bebo Technologies Pvt Ltd., Vs. The DC IT, Circle 6(1),
Mohali Mohali
PAN No. AABCB9492R
(Appellant) (Respondent)
2
Appellant By : Shri Tej Mohan Singh
Respondent By: Shri S.S.Khemwal
ORDER
PER SUSHMA CHOWLA, JM
Out of these four appeals, three appeals filed by the same assessee are against the different orders of CIT(A), Chandigarh dated 28.11.2008, 25.9.2009 and 26.2.2010 relating to assessment years 2005-06 to 2007-08 respectivel y against the orders passed under section 143(3)of the I.T. Act, 1961. The Revenue has also filed an appeal in ITA No.116/Chd/2010 relating to assessment year 2005-06 against which the assessee has filed Cross objection being C.O. No. 22/Chd/2010.
2. All the appeals / cross objection relating to the same assessee and appeal of the Revenue having similar grounds were heard together and are being disposed of by this consolidated order for the sake of convenience.
3. The assessee in ITA No.1115/Chd/2008 relating to assessment year 2005-06 has raised the following grounds of appeal:-
1. That the Ld. CIT(A) has further erred in holding that the assessee's reasonable profit for the period 1.10.2004 to 31.1.2005 is the cost + @ 17% as against the profit shown at 49% merely on the suspicious premise holding it to be mode of computation of excessive profit which is arbitrary and unjustified.
2. That the Ld. CIT(A) has further erred in holding that the assessee would not be eligible for deduction under section 10B on the difference of profit shown by the assessee and the profit taken cost + @ 17% holding it to be taxable which otherwise is exempt under section 10B of the Act and as such is arbitrary and unjustified.3
3. That the Ld. CIT(A) has further erred in upholding the disallowance of Rs. 5,54,752/- invoking the provisions of section 14A of the Act which is arbitrary and unjustified.
4. The Revenue in ITA No. 116/Chd/2009 relating to assessment year 2005-06 has raised the following grounds of appeal:-
1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in allowing appeal of the assessee without appreciating the facts of the case.
2. Whether On the facts and circumstances of the case, the Ld. CIT(A) has erred in allowing exemption us/ 10B of the Income Tax Act.
3. Whether On the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition made by the Assessing Officer on account of expenditure incurred by the assessee to the tune of Rs. 48,22,679/- u/s 69C r/w with section 10B(7) and disallowance of an expenditure of Rs. 5,54,752/- incurred by the assessee company u/s 14A of the Income Tax Act, 1961.
5. The following grounds have been raised by assessee in the Cross objections in C.O. 22/Chd/2000 relating to assessment year 2005-06.-
1. That the exemption under section 10B of the Income Tax Act is allowable to the assessee which has also been allowed by the Assessing Officer himself in the subsequent assessment year i.e. 2006-07 and now to say that the Ld. CIT(A) has erred in allowing exemption under section10B of the Act is wholly warranted.
2. That the Ld. CIT(A) has rightly deleted the addition of Rs. 48,22,679/- made under section 69C r.w.s. 10B(7) of the Act made by the Ld. Assessing Officer allegedly on account of expenditure incurred by the appellant outside the books of account.
3. That the Ld. CIT(A) has wrongly upheld the disallowance of an expenditure of Rs. 5,54,752/- under section 14A of the Act while the assessee did not claim any such deduction by way of expenditure. As a matter of fact no such relief has been allowed by the Ld. CIT(A) and the ground of appeal of the Department is untenable.4
6. The assessee in ITA No 1066/Chd/2010 relating to assessment year 2006-07 and in ITA No.294/Chd/2010 relating to assessment year 2007-08 has raised the following common grounds of appeal:-
4. That the Ld. CIT(A) has erred in holding that the assessee's reasonable profit during the year is the cost + @ 22% as against the profit shown at Rs. 54.14% (assessment year 2006-07) and 52.70% (assessment year 2007-08) merely on the suspicious premise holding it to be mode of computation of excessive profit which is arbitrary and unjustified.
5. That the Ld. CIT(A) has further erred in holding that the assessee would not be eligible for deduction under section 10B on the difference of profit shown by the assessee and the profit taken cost + @ 22% holding it to be taxable which otherwise is exempt under section 10B of the Act and as such is arbitrary and unjustified.
7. The ground No.1 raised by the Revenue in ITA No. 116/Chd/2009 being general is dismissed.
8. The issue in ground No.2 raised by the Revenue is in connection with the exemption claimed 10B of the Income Tax Act. The assessee vide ground Nos. 1 & 2 in ITA No. 115/Chd/2008 is aggrieved by estimation of profits of the business which in turn are eligible for deduction u/s 10B of the Act.
9. The brief facts of the case are that during the year under consideration the assessee had claimed its income from business as exempt u/s 10B of the Act. The assessee was engaged in providing varieties of services of software development, qualit y assurance and testing services, support services. During the course of assessment proceedings, on the perusal of the invoices issued by the assessee, the Assessing Officer noted that the said invoices were issued for providing 5 qualit y assurance services and code testing. The Assessing Officer further noted the provisions of section 10B of the Income Tax Act allowing deduction to 100% export oriented undertaking and also took note of the notification dated 26.9.2000, under which information technology enabled products or services for the purpose of Explanation 2(i)(b) of section 10B were notified. The Assessing Officer was of the view that the qualit y assurance services and code testing services provided by the assessee were not covered within the purview of the said notification; hence, the exemption claimed u/s 10B of the Act was found to be not justified. The second aspect was whether the services of the assessee were production. During the course of assessment proceedings, the assessee vide letter dated 26.12.2007 stated that it was engaged in the field of software development and other related activities and hence not maintaining production records. The Assessing Officer was of the view that in the absence of the production records, it was not possible to conclude whether the assessee company was actuall y engaged in the production or manufacture of the computer software or not. It was observed by the Assessing Officer that claim of exemption u/s 10B of the Act was not justified on this ground. The next aspect noticed by the Assessing Officer was that the assessee had started its business activities from its initial location at 491, Phase IV, Sector 59, Mohali and had opened Unit at Spic Centre, Sector 12, Chandigarh vide lease agreement dated 4.3.2003. Another unit of the assessee was started at SCO 156-157, 4 t h floor, Sector 34, Chandigarh on 24.9.2004, as per the information obtained form Customs and Excise Department. The Assessing Officer noted the assessee not to have purchased any new computers during the year but had incurred expenditure on additions to the existing assets, being, hard disk for laptop, cable ropes, misc. networking items, modem and fractional 6 converters, UPS, etc. The Assessing Officer found the assessee not to have purchased any computer after 24.9.2004 and as such held that it had not started any new unit at Sector 34, Chandigarh, but the same was formed by restructuring of the old Unit of the assessee company. Thus, the Assessing Officer held that by virtue of section 10B (2)(ii) of the Act which provides that an undertaking in order to be eligible for exemption should not be formed by splitting or reconstruction of business already in existence, disabled the assessee to the exemption claimed u/s 10B of the Act. The next objection of the Assessing Officer was that as per section 10B of the Act, the profits and gains of 100% export oriented undertaking are exempt i.e. an undertaking which has been approved as 100% export oriented undertaking by the Board, appointed in this behalf by the Central Government, in exercise of powers conferred vide section 14 of the Industries (Development & Regulation) Act, 1951 and Rules there under. In response to the abovesaid query, the assessee explained that it was not registered with the authorit y of Industries (Development & Regulation) Act, 1951 but was registered under the Punjab Shops and Commercial Establishment Act, 1958. The Assessing Officer held that the approval by the Software Technology Park of India (STPI in short) cannot be said to have fulfilled the conditions of section 10B of the Act, disentitling the assessee to the exemption u/s 10B of the Act. Reliance was placed on Infotech Enterprises Ltd Vs. JCIT [85 ITD 325 (Hyd)]. The Assessing Officer held the assessee not entitled to claim the exemption u/s 10B of the Income Tax Act, because of non fulfillment of the under mentioned conditions:-
1. The services rendered by the assessee company i.e. qualit y assurance and code testing is not covered in the definition of computer software as defined in Explanation 7 2(i) of section 10-B and the Notification No. 11521 dated 26 t h Sept, 2000 issued by CBDT in this regard;
2. Non availabilit y of production data;
3. Restructuring of business already in existence;
4. No approval from the Board appointed by the Central Government in exercise of powers conferred by section 14 of the Industries (Development and Regulation) Act, 1961 and rules made under that Act;
5. The assessee company has filed report in Form 56G onl y for unit located at Mohali whereas no business is carried from this unit and no prescribed report for unit at SPIC Centre, Sector 12, Chandigarh and SCO 156-157, 4 t h Floor, Sector 34, Chandigarh had been filed;
6. The assessee company had not mentioned the location from where the invoices had been issued i.e. the invoices do not bear the address of the unit from which such invoices had been issued;
7. As per invoices submitted the payments term is 30 days (net) from the date of invoice / authorization but from the details filed and foreign inward remittances certification it is evident that the assessee company had received payment in advance. It clearl y shows that there is contradiction in the invoice and the payment received.
Thus affairs declared by the assessee are not verifiable; and
8. As per the consulting agreement, the assessee company is eligible for remuneration @ 13.5% of the actual expenses incurred. On perusal of invoices it is clear that the assessee has charged remuneration @ 13.5% of the expenses incurred but the expenses shown in the books of 8 account are not in line with the remuneration received b y the assessee company.
10. Before the C IT(A) the Ld. AR for the assessee point wise met the objections of the Assessing Officer.
i) The first plea of the Ld. AR was that the business of the assessee company does not fall under Explanation (2)(i)(b) of section 10B of the Act but falls under the Explanation 2 (i)(a) of the Act. The assessee was engaged in the development of software which qualifies for exemption under Explanation 2(i)(a) of section 10B of the Act. Reference was made to several documents including approved invoices, agreements with clients, process, list of manpower and their qualification, software developed and other details / information filed before the Assessing Officer in support of the contention that assessee was engaged in the business of development of software. It was thus pleaded that the conclusion of the Assessing Officer that the business of the assessee did not fall under Explanation 2(i)(b) of section 10B of the of the Act was irrelevant.
ii) The second contention of the Ld. AR for the assessee was that the development of software falls under service sector category for which no production records as such are maintained. However, necessary information has to be filed with STP I including annual as well monthl y profits report, all invoices showing services provided, name of foreign part y, total amount received and also declaration being Software Export Declaration (Softax) form with STP I, declaration of export of each month, details of manpower engaged, time sheets, internet usage, etc. 9
iii) The claim of the assessee was that the project undertaken by it was in the nature of production for which approvals were granted by STPI under the delegated powers of RBI under FEMA. It was claimed that the requirements were given to the assessee by the client and the software development was done according to the specification provided by the customer by developing the product, regular meeting were conducted, status reports were sent on periodical basis and working software was delivered at a predetermined schedule. The assessee company claimed that the work as per the requirements of foreign buyer company was done and also progress made on the software was sent through internet against which invoices were raised and foreign inward remittance was received.
iv) In respect of the restructuring of business already in existence, it was explained that vide note 6 of accounts, it was declared by the assessee company that loaned equipment worth Rs. 19.69 lakhs on loan basis were received from the Principal as per the agreement between the companies. With regard to the location of business it was explained that there is no merit in the contention of the Assessing Officer that the business activities were initiall y started from the Mohali address, which was onl y the registered office of the assessee company and no production was ever carried out from the said location.
The Ld. AR provided details of all the locations of the assessee company as incorporated under para 24 at pages 12 & 13 of the appellate order and also tabulated the details of the units under para 25 at page 14 of the appellate order. In summary, it was explained that there was no production / services provided any time from the Mohali address. After granting of space at Spic centre, Chandigarh, and various permissions, assessee commenced its STPI unit from there and on 28.3.2003 and capital goods were imported for the said premises. 10 Further, expansion was done at SCO 156-157, sector 34, Chandigarh on 27 t h July 2004, for which capital goods were also imported after grant of requisite permissions. The denial of exemption u/s 10B of the Act on account of re-structuring of business and no computer(s) being purchased was thus claimed to be without any basis. It was also alleged that the Assessing Officer failed to give any opportunit y to rebut the said allegations.
v) In respect of no approval from the Board, it was pointed out that though such approval is necessary from the Board but 100% EOU should be registered with the Board is nowhere mentioned. Further, it was argued that the Assessing Officer had failed to ask whether approval was taken from the Board. The reliance by the Assessing Officer on Infotech Enterprises Ltd Vs. JCIT (supra), was claimed to be misplaced by the Ld. AR for the assessee, in the present case, as assessee was claiming exemption under the new STP scheme which came into existence from 1.4.1994 vide amendment by the Finance Act, 1993, whereas in the facts of M/s Infotech Enterprises Ltd, the exemption was claimed in respect of unit coming into existence on 26.9.1991.
vi) The other two objections of the Assessing Officer were in respect of the non mentioning of location in the invoices issued. It was explained by the Ld. AR that the assessee company is one unit and other units are mere expansion of the existing unit and all the invoices were at the registered office addresse of the assessee company. Further, it was contended that all the invoices issued by the assessee company were approved by STPI.
vii) The next contention of the Assessing Officer was that as per the invoices, payment term was 30 days from the date of invoice / authorization but from the details filed and foreign investment Remittance Certificate it was evident 11 that the payment were received in advance. As per the Assessing Officer the affairs declared by the assessee thus were not verifiable. In repl y, it was explained by the Ld. AR that there was no relation between the invoices raised and amount received for the purpose of exemption and further it was claimed that there was no law against taking advances from the client.
viii) The Assessing Officer at page 9 states that as per the consulting agreement, the assessee was eligible for remuneration @ 13.5% of the actual expenses incurred. The Assessing Officer further noted from the perusal of invoices that the assessee had charged remuneration @ 13.5% of the expenses incurred but the expenses shown in the books of account were not in line with the remuneration received by the assessee company. In repl y, before the CIT(A), the Ld. AR contends that the remuneration stated were minimum remuneration agreed upon at the time of contract which were increased on 1.4.2004.
11. The repl y of the assessee was confronted to the Assessing Officer who vide office letter No. 169 dated 17.3.2008 furnished its report which in turn was confronted to the assessee to which another repl y was filed by the assessee. The tabulated version of contention of the Assessing Officer and the repl y of the assessee are incorporated at pages 21 to 23 of the appellate order. The contention of the Assessing Officer in the remand report was that the assessee had not able to prove which software was produced and on which media it was told and how it is quoted. The repl y of the assessee was that all the work done in relation to the development of software was stored on the hard disk of the computer and was exported through satellite link. The next limb of the objection of the Assessing Officer was that the assessee was carrying out job work for the parent 12 company and that too on the computer of the parent company. In repl y, it was explained that the assessee was not doing job work for the associate enterprise but was engaged into programming to render quality and testing assurance services, which are the programs which enables the computer to find out errors and bugs.
12. The C IT(A) on perusal of the rival contentions observed that the assessee was not engaged in any new production of the software and it was onl y the parent company, which developed the software. The CIT(A) held the assessee to have done job work for the various companies. The quantum of salaries paid to the key persons by the assessee company, as per CIT(A), indicated that assessee was not involved in the development of software and the same indicates that the assessee was only doing job work. The CIT(A) further held that the case of the assessee was covered by the notification No. SO-890(E) dated 26.9.2000. The C IT(A) observed that the assessee was doing back up office operations for the parent company and hence was entitled to the claim of deduction u/s 10B of the Act. In respect of the units operated by the assessee company, the C IT(A) observed that the address of Mohali was onl y a registered office address and no activit y was carried out at Mohali. The other two units were the places from where the assessee was found to be operating. It was further held that there was no specific provision that the equipment should be owned by the assessee and job work can be done even on loaned equipment. The CIT(A) held the assessee to have given sufficient evidence that the equipment was imported and loaned to it. In respect of the approval from the Board, the CIT(A) vide office letter dated 13.10.2008 asked the assessee to furnish the necessary evidence of the approval given by the Board as per the requirements u/s 10B of the Act. 13 The Ld. counsel furnished repl y dated 5.11.2008 before the CIT(A) which is incorporated in para 44at page 22 of the appellate order, under which it was explained that the Ministry of Industry (Department of Industrial Development ) had delegated the powers to STPI to approve 100% EOU. It was further claimed by the assessee that the copy of the approval letter from STP I of 100% EOU status given to the assessee company was already placed on record. The C IT(A) observed that the relevant notification under the legislation, which would be considered as the approval given by the Board, was filed by the assessee.
13. The next issue addressed by the C IT(A) was the invoking of section 10B(7) and estimation of the profits of the assessee company which will be addressed by us in paras hereinafter. The exemption u/s 10B of the Income Tax Act was thus allowed to the assessee. The Revenue is in appeal against the aforesaid order of the CIT(A).
14. The Ld. DR for the Revenue placed reliance on the order of the Assessing Officer. The AR for the assessee pointed out that the exemption u/s 10B of the Act was disallowed by the Assessing Officer in the year under appeal. However, in succeeding years similar deduction claimed u/s 10B of the Act was allowed to the assessee.
15. We have heard the rival contentions and perused the records. The assessee company, a private limited company was incorporated on 22.8.2002 under the Companies Act, 1956. The copy of Registration certificate along with the copy of the Memorandum & Articles of Association are enclosed at pages 85 to 104 of the paper book. The assessee company was registered under the Software Technology Park 14 Scheme of Government of India vide approval No. STPIM/PCMG/PSE/02/199-7492 dated 17.2.2003 as 100% Export Oriented Unit. The copy of the same is enclosed at pages 105 to 109 of the paper book. The assessee company entered into an agreement with STP I on 17.2.2003, copy of the said agreement is attached at 111 to 113 of paper book. On 4.3.2003, the company entered into an agreement with Chandigarh Administration for allotment of space, on lease, at First Floor, SPIC Center, PEC Campus, Sector 12, Chandigarh. The copy of allotment letter is enclosed at page 114 of the paper book. The assessee compan y got certification of Bonding of Operational Area from STP I on 17.3.2003, copy of which is placed at pages 129 of the paper book. The assessee further received the green card and RCMC from STP I, vide letter dated 20.3.2003 placed at page 125 of the paper book. The assessee further claims to have received Importer Exporter Code from Director General of Foreign Trade on 20.3.2003 and also approval for import of capital goods from STP I on 17.3.2003. After completing all the legal formalities and having all necessary approvals and permissions, the assessee compan y commenced its commercial operation from Ist Jul y 2003 and intimation letter was submitted to the STP I regarding commencement of the commercial operations. The assessee started another unit at SCO 156- 157, 4 t h Floor, Sector 34, Chandigarh on 27.7.2004.
16. As per the assessee Bebo Stands for "Be Extension", "Be Offshore". Presentl y, the assessee company is running its STP I unit and provides Software development service and Qualit y Assurance services. The assessee further pointed out that it was a Microsoft Certified company and bear Microsoft Certified Partner Logo. The assessee company worked on various domains like Microsoft, Linux, Unix and Solaris. 15
17. The assessee company entered into a consulting agreement with M/s Raico Inc. dba QASource, USA on 1.2.2003 for providing consulting services and the same is filed with the Software Technology Park of India. The assessee company is exporting entire services to M/s Raico Inc. dba QASource, USA, in pursuance of the said agreement. The copy of Consulting Agreement is enclosed at pages 355 to 360 of the paper book.
18. As per the consulting Agreement, the recitals between M/s Raico Inc. dba QASource, USA (hereinafter referred to as the Company) and the assessee (referred to as Consultant) are as under:-
i) The Consultant having expertise in the area of the company's business, was willing to provide consulting services to the Company, in turn to the employees or to other affiliated companies.
ii) The Company had developed certain proprietary information, which it considered vital to its business and goodwill. Further, certain services to be provided by the Consultant for the Company would be services provided to a part y / client, for whom the Company was providing services.
Under the agreement, the proprietary information was to be communicated to the Consultant in the course of providing consulting services to the Company.
Further, the parties agreed to the under mentioned conditions:-
a) The company has engaged the consultant to render as an independent contractor for providing consulting services and any such other Project Assignments as may be agreed in writing between the two from time to time.16
b) That the company will provide certain Proprietary Information which the company had developed and considers it vital to its business and goodwill. The Proprietary and Confidential information shall include but be not limited to :
i) Formulas, research and development techniques, processes, trade secrets, computer programs, software, electronic codes, mast works, inventions, innovations, patents, patent applications, discoveries, improvements, date know how, formats, test results and research projects;
ii) Information about costs, profits, markets, sales, contracts and list of customers, and distributors.
iii) Business, marketing and strategic plans
iv) Forecasts, unpublished financial information,
budgets, projections and customer identities,
characteristics and agreements and
v) Employee personal files and compensation
information
c) That the Proprietary information will necessary be
communicated to or acquired by Consultant and its Agents in the course of providing consulting services to the Company and the company desires to obtain the services of Consultant onl y, if in doing so, it can protect the Proprietary information and goodwill.
19. Further, it was agreed upon between the parties :-
That the company has provided the above proprietary information, equipments, etc so that the services to be provided by the Consultant are as per its specifications and 17 project plans and also to ensure qualit y and timel y delivery, confidentialit y and to protect its goodwill and interest. These facilities have been provided to assist the Consultant so that there are no variations in the final outcome of the services.
20. That as agreed between the parties the remuneration for the services provided by the assessee were agreed to be "an amount equal to 10% of the actual expenses described in the preceding sentence." The said total cost was to include all taxes, duties, cess levied by the tax authorities or any other authorit y in India except for income tax / wealth tax. The conditions of payment were subject to issue of invoices within 45 days after completion of the monthl y or other applicable billing date/s. It was further provided that the invoices were payable 30 days after the end of the month in which the same were issued.
21. The parties executed an addendum to the consulting agreement under which w.e.f. Ist April, 2004 the remuneration was fixed at 13.5% of the actual expenses as against 10% of the actual expenses, provided in the agreement dated 1.2.2003. In the said addendum, it was further provided that w.e.f. Ist October 2004, the whole of the remuneration clause in para 2 (i), (ii) and (iii) shall be substituted by new clause as under:-
Remuneration:-
Services are placed on the basis of a fixed hourly rate, determined by the Company in agreement with the Consultant, for each category of engineer employed / hired by the Consultant and working on the Assignments given by the Company to the Consultant.
The rate per hour for the different categories of engineers shall be as follows:
Level 1 - USD 7 per Hour 18 Level 2 - USD 9 per Hour The scope of work and other terms and conditions as already specified in the said Consulting Agreement shall remain in force subject to any changes, modification and amendments as and when required and as agreed to between Raico Inc. Dba QASource and Bebo Technologies Private Limited from time to time. This addendum may please be kept attached to the Consulting Agreement dated Ist February 2003.
22. The assessee had claimed deduction u/s 10B of the Income Tax Act on the profits of business carried on by the assessee. The issue arising in the ground of appeal raised by the Revenue is against the order of C IT(A) holding the assessee eligible for the exemption u/s 10B of the Income Tax Act.
23. Section 10 B provides as under:-
Special provisions in respect of newly established hundred per cent export- oriented undertakings .
10B. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred per cent export-oriented 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 articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee :
Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to the deduction referred to in this sub-section only for the unexpired period of aforesaid ten consecutive assessment years :
[Provided [further] that for the assessment year beginning on the 1st day of April, 2003, the deduction under this sub-section shall be ninety per cent of the profits and gains derived by an undertaking from the export of such articles or things or computer software:] Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, [2012] and subsequent years :19
[Provided also that no deduction under this section shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified under sub-section (1) of section 139.] (2) This section applies to any undertaking which fulfils all the following conditions, namely :--
(i) it manufactures or produces any articles or things or computer software;
(ii)it is not formed by the splitting up, or the reconstruction, of a business already in existence :
Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section ;
(iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.
24. Sub Section (7) of section 10B provides as under:-
The provisions of sub-section (8) and sub-section (10) of section 80-IA shall, so far as may be, apply in relation to the undertaking referred to in this section as they apply for the purposes of the undertaking referred to in section 80-IA.
25. Explanation 2 of section 10B defines computer software as under:-
Explanation 2 under section 10B (8), clause (i) defines computer software as under:-
(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 notified21 by the Board, which is transmitted or exported from India to any place outside India by any means;20
26. Under the provisions of section 10B of the Income Tax Act, a person deriving income from a 100% export oriented undertaking shall be exempt from tax for a period of 10 consequent assessment years starting from the previous year in which the undertaking begins to manufacture or produce articles of things or computer software, as the case may be, on the fulfillment of the following conditions:-
a) The unit is engaged in the export of article of things or computer software;
b) That the unit has not been formed by splitting up or reconstruction of an existing business; and
c) That it has not been formed by the transfer to a new business of machinery or plant previousl y used for any purpose.
27. It is further provided that deduction u/s 10B of the Act shall be to the extent of 90% of the profits and gains derived by an undertaking from the export of such articles or things or computer software. The proviso under the section further stipulates that the eligible assessee would be entitled to deduction under this section onl y on furnishing of the return of income on or before the due dates specified u/s 139(1) of the Act. Under sub section (3) to section 10B of the Act, it is provided that the sale proceeds are to be received or brought into India in foreign convertible exchange within the period of 6 months from the end of the specified year or within such extended period as the competent authorit y may allow in this regard. The credit of the sale proceeds in the separate account outside India with the approval of the RBI is held to be in compliance with the provisions of the Act. The deduction u/s 10B(1) is not admissible to the assessee unless the assessee furnishes the report of an Accountant in the prescribed form alongwith return of income. Under sub section (7) to section 10B of the Act, it is provided that the provisions of 21 sub sections (8) & (10) to section 80IA of the Act are applicable in relation to an undertaking, while computing the profit of business u/s 10B of the Act. An option is given to the assessee not to claim the deduction u/s 10B of the Act for any of the relevant assessment year/s within the block of ten consecutive assessment years, by furnishing a declaration in writing to the Assessing Officer before the due date of furnishing of return of income u/s 139(1) of the Act, in this regard as per the Section 10B(8) of the Act. The definitions of terms relevant to the section are defined as per Explanation 2 u/s 10B of the Act and 'computer software' is defined under Explanation (2)(i) of the Act. As per Explanation (2)(i)(a) of section 10B of the Act, computer software means a computer program recorded on new disc, tape, perforated media or other information storage device and as per Explanation 2 (i)(b) any customized electronic or data or any product / services of similar nature as may be notified by the Board, both of which are transmitted / exported from India to any place outside India by any means. The CBDT as per notification No. 890E dated 26.9.2000 had notified the list of services eligible under the category of computer software which in turn is eligible for deduction us/ 10B of the Act. The notification issued by CBDT provides as under:-
"In Exercise of powers conferred by Explanation 2(i)(b) of section 10B, Central Board of Direct Taxes vide Notification No. 11521 dated 26th Sept. 2000 has notified the information technology enabled products or services for the purpose of said clause as under:-
i) Back office operations
ii) Call centres
iii) Content Development or Animation
iv) Data Processing
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v) Engineering and design
vi) Geographic information S ystem Services
vii) Human Resource Services
viii) Insurance Claim processing
ix) Legal Databases
x) Medical Transcription
xi) Payroll
xii) Remote Maintenance
xiii) Revenue Accounting
xiv) Support Centers ; and
xv) Website services
(Notification No. 11521/F.No. 142/49/2000-TPL) The copy of the notification is placed at page 17 of the Paper book-II.
28. In the facts of the present case and on perusal of the Agreement entered into by the assessee with its Principal, it is evident that the assessee is providing services to the client and the project undertaken was in the nature of production for which approvals were granted by STPI. The Development of the project undertaken is according to the specifications provided by the client or the customers. The assessee company is engaged in the programming to render qualit y and testing assurance services as per the requirements of its clients and all the progress made is on a software developed by the clients and the same is transmitted to the clients through internet. Such services carried on by the assessee are in the nature of back office operations and are covered b y the notification issued by the CBDT vide No. 890E dated 26.9.2000 which has notified the information technology enabled products or services to be considered under Explanation 2 to section 10B of the Act. We uphold the order of C IT(A) in this regard.
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29. We find that the assessee had made similar claim of exemption u/s 10B of the Act in the succeeding years i.e. assessment years 2006-07 and 2007-08. During the assessment proceedings, the submission of the assessee in support of their claim were as under:-
a) The software code of our customers is sent to us either via internet or via Compact Discs. The data so received is stored on a Hard Disk or a Network Disk.
b) Bebo engineers work on customized software code locally on their computers which is sent to our office via internet or CD and once work is completed then code is transmitted to the client via internet.
c) All of the Applications we engineer are either web based and or desktop based, however, the common element in all of the work we do is that it is working on same type of software code written in various languages such as Java, C++, Ruby on Rails, Net etc.
d) In a typical scenario, Client would send us the web address and ask the team in India to execute their software engineering tasks to work on the development of the application. Our teams perform engineering tasks on the software and post the results in the source code repository system at the client site on record the results in the database at client site or email the work product to the client. In all events, the code is transmitted either via the internet or via CDs to our office, initially stored on local drives and at the end of each day completed source code is electronically transmitted to the client site to be merged and store on their repository systems and electronic media such as hard drives.
30. The Assessing Officer vide assessment order dated 12.11.2009 relating to assessment year 2006-07 had held the assessee eligible to the exemption claimed u/s 10B of the Act by holding as under:-
19. "On the basis of written submission and information furnished by the assessee, I am of the considered opinion that though the assessee is not engaged fully in the development of computer Software as there is no new production of the software. Yet, the assessee's case is squarely covered as per the Notification No. SO 890 (E) dated 26.9.2000 which has notified that a number of IT enabled services such as back office operations, call centers, Content Development and Animation, data process, Revenue accounting, engineering 24 and design, Geography Information Services, human & resource services, Insurance claim, processing payroll, medical transcription, remote maintenance, support centres, web site services as information enabled products or services etc. that would qualify as computer software for the purposes of section 10-A/10-B of the Income Tax Act. The assessee is doing the back up office operations for M/s RAICO INC. DBA QA Source, USA and therefore is eligible for deduction u/s 10-B of the Income Tax Act.
31. In assessment year 2007-08, the Assessing Officer while passing the order u/s 143(3) of the Act dated 12.11.2009 granted the exemption u/s 10B of the Act to the assessee and the following office note was annexed to the assessment order, which is available in the paper book filed by the Revenue relating to assessment year 2007-08 at pages 21 to 32 of the paper book. The office note reads as under:-
"1. The assessee company is in the business of providing software development and is eligible exemption u/s 10B of the Income Tax Act, 1961 in respect of profit earned from such activity. The assessee, besides the exempt income, has other income under the head income from other sources, capital gains and dividend income exempt u/s 10.
2. The assessee's case is covered as per Notification No. 50890 (E) dated 26.9.2000 which has notified that a number of I.T. enabled sources such as back office operations, call centers, data process etc. would qualify as computer software for the purposes of section 10A/10B of Income Tax Act, 1961. The assessee is doing back office operation for M/s RAICO Inc. DBA QA Source, USA & is therefore eligible for deduction u/s 10B of Income Tax Act, 1961."
32. In the totalit y of facts and circumstances, we hold that the assessee is doing back office operations for its clients and hence is eligible for exemption claimed u/s 10B of the Income Tax Act. The next objection of the Assessing Officer in denying the exemption u/s 10B of the Act to the assessee was the non availabilit y of production data which has no merit in view of the assessee carrying out back office operations for it 25 clients, which is project of service industry for which production data is not maintainable.
33. The Assessing Officer had denied the deduction u/s 10B of the Act by observing that there was restructuring of business already in existence as the assessee was found to be operating from three different places and no new computers were purchased by the assessee for carrying on its business of computer software. The assessee had shown the initial location of its company at 491, Phase IV, Mohali which was the registered office of the assessee company. The plea of the assessee in this regard is that the said address is the residence of one of the directors of the assessee company and the same was utilized for the registration of the company. It is claimed by the assessee that no production / services were ever provided from the said premises. The assessee company started its business of computer software from SP IC Centre, PEC Campus, Sector 12, Chandigarh which was allotted to the assessee on lease by Chandigarh Administration on 4.3.2003. The assessee obtained the green card and RCMC from STP I on the aforesaid address on 17.3.2003 and also got the approval from STPI for importing capital goods on the said address on 17.3.2003. The license for private bonded warehouse dated 27.3.2003 is issued for the above said address and the assessee commenced its operation as an STP I Unit from 28.3.2003 from the said address. Further, the assessee in order to expand its business took another space on lease being 4 t h Floor at SCO 156-57, 4 t h Floor, Sector 34-A, Chandigarh on 27.7.2004. The approval from the STP I for importing capital goods was received on 22.2.2005 and the assessee company exported its entire software development from the above said address.
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34. The second aspect of the issue is non purchase of capital goods by the assessee in Unit I at SP IC Centre, Chandigarh and Unit II at Sector 34-A, Chandigarh. The allegation of the Assessing Officer were that no capital goods were purchased by the assessee and hence it is presumed that the business at Unit I & Unit II was carried on after restructuring of the existing unit at Mohali, which is not permissible in view of the provisions of section 10B(2) of the Act . The assessee vide its written submissions furnished before the CIT(A) had tabulated the details of the units of the assessee company which are reproduced under para 25 at page 14 of the appellate order. The Unit I at SPIC Centre, Chandigarh received its STPI approval on 12.3.2003 whereas the Unit II at Sector 34-C, Chandigarh received its STPI approval on 5.8.2004. The claim of the assessee is that the equipments were loaned from its Principal which were pre loaded with the information on which the assessee had to carry on its progress reports in connection with the customers and export of said services to M/s Raico Inc. dba QASource, USA. The assessee had imported the capital goods for unit-I at the value of Rs. 8,37,479/- during the period 22.4.2003 on 11.11.2003 and for the Unit II for Rs. 19.69 lacs from 20.10.2004 to 5.3.2005. The information in respect of the loaned equipment received from Principal as per the Agreement between the assessee company and its Principal was declared by way of Note No.6 to the notes of accounts annexed to the balance sheet for the respective years. The said note 6 is reproduced under para 22 at pages 11 & 12 of the appellate order under which it has been declared that the aforesaid equipment includes computer software, computer code, sources code, requisite know-how in the form of design and other facilities according to the requirement of the projects. Further, it was declared that the equipment would be returned after the completion of the project / term of 27 agreement. From the perusal of the terms of the agreement which are referred to by us in the paras hereinabove, we have noted that it was agreed between parties that Company would provide the proprietar y information, equipment etc so that the services be provided by the consultant (i.e. the assessee) as per the specifications and projected plans of the Company, to ensure qualit y and timel y delivery and confidentialit y. It is pertinent to mention here that equipments which had been provided by the Company to the Consultant were preloaded with certain Proprietary Information which was developed by the company. The highl y sophisticated, advanced and proprietary software which were bundled in the equipments were given by the Company to the Consultant and the Consultant i.e. the assessee had to provide the customized services on the said facilities. The said facilities were provided to the assessee company so that there was no variation in the final outcome of the services provided to the various customers of the company.
35. In the entiret y of facts and circumstances, we uphold the order of CIT(A) in this regard that the assessee was carrying on its business from Unit I at SPIC Centre, Chandigarh and Unit II at Sector 34-A, Chandigarh. The address of Mohali was onl y a registered office of the assessee company from which no activit y was carried out by the assessee company. There is no restructuring of business of the assessee. Further, the assessee having carried out its work on the loaned equipments and evidence in respect of which was considered by the C IT(A), the assessee is entitled to the claim of deduction u/s 10B of the Act. Further, there is no merit in the observation of the Assessing Officer that the non mentioning of the location from where the invoices were issued, disentitles the assessee to the claim of deduction u/s 10B of the Act. The 28 assessee with its registered office at Mohali and its Unit I and Unit II at Chandigarh was operating as a composite unit and there is no requirement to furnish the addresses of the individual places from which services were rendered as against the mentioning of registered office on the invoices issued by the assessee
36. The next objection of the Assessing Officer was that there was no approval from the Board appointed by the Central Government for 100% EOU status. The C IT(A) vide letter dated 13.10.2008 requisitioned the assessee to furnish the necessary evidence of approval given as per the requirements of section 10B of the Act to which the assessee furnished a repl y dated 5.11.2008. The Explanation of the assessee was that the Ministry of Industries (Department of Industrial Development) had delegated the powers to STP I to approve and register the 100% EOU, a copy of the delegation of powers in this regard is referred to para 44 of the appellate order and further the copy of the approval letter from STP I already filed on record was referred to by the assessee before the C IT(A).
37. The observations of CIT(A) are as under:-
"44. The Assessing Officer has also denied deduction u/s 10B taking the view that there is no approval from the Board appointed by the Central Government for 100% EOU status. Vide this office letter dated 13/10/08, the assessee was asked to furnish necessary evidence of the approval given by the Board as per requirements u/s 10B. The counsel furnished reply dated 5/11/08 and submitted as under:-
"In this regard it is submitted that the Ministry of Industry (Department of Industrial Development) has delegated the powers to STPI to approve & register the 100% EOU. The copy of powers delegated to STPI under section 14 of Industrial (Development & Regulation ) Act 1951 (55 of 1951) read with sub rule (2) of rule 10 of the Registration & Licensing of 29 Industrial Rules 1952 by Ministry of Industry Department of Industrial Development vide Notification No. SO-117(E) dated 22.2.93 is enclosed for your perusal. The copy of said approval letter from STPI as 100% EOU status given to Bebo Technologies Pvt Ltd. has already been placed on record."
38. The C IT(A) held the status of 100% EOU to be granted to the assessee.
39. The Ld. DR for the Revenue before us has failed to point out any contrary evidence to the same. The Ld. counsel for the assessee drew our attention to the gazetted notification in this regard placed at page 16 of the paper book-II under which the powers had been given to consider the application for setting up of units under STP Scheme operated vide custom notification No. 138 & 140 dated 22.10.1991. The said committee was also empowered to consider the proposals for industrial license, foreign technical collaboration agreement and import of capital goods. The assessee has furnished the Registration under the Software Technology Park Scheme of India vide approval No. STPIM/PCMG/PSE/02/199-7492 dated 17.2.2003 registering the assessee as an 100% EOU. The copy of the said certificate is enclosed at pages 105 to 109 of the paper book alongwith the copy of the agreement entered into by the assessee company with STP I on17.2.2003, a copy of which is enclosed at pages 111 to 113 of the paper book. In view of the above said evidence, upholding the order of CIT(A), we hold that the assessee is entitled to deduction u/s 10B of the Act as a 100% EOU on being registered with STPI. . In the entiret y of facts and circumstances of the case and in view of our observation in paras hereinabove, we uphold the order of C IT(A) in holding that the assessee is eligible to the exemption 30 claimed u/s 10B of the Act. Accordingl y, ground No.2 raised by the Revenue is thus dismissed.
40. The second aspect of the disallowance u/s 10B of the Act was the computation of income in the hands of the assessee on account of the services provided by the assessee to its client in USA. The Assessing Officer in the assessment order relating to assessment year 2005-06 had observed from Form 3CEB attached with the return of income that M/s Raico Inc. dba QASource, USA was an associated enterprises of the assessee company as per the provisions of section 92A(2) of the Income Tax Act by way of equit y contribution. The Assessing Officer was of the view that according to section 10B (7) of the Act, the provisions of section 80IA(10), in case where assessee had shown excessive profits, were applicable according to which the Assessing Officer had the power to determine the income of the assessee company which would have been receivable / derived by it from the eligible business. The Assessing Officer recomputed the profits of business on matching receipts and the expenditure shown by the assessee and was of the view that the assessee had under stated the expenditure incurred by it to the extent of Rs. 48,22,679/- after observing that the profits derived by the assessee at 49.03% of the receipts for the period starting from October 2004 were excessive as compared to the agreement between the parties that w.e.f. 1.4.2004, the assessee shall be paid remuneration with mark up of 13.5% as per the addendum to the agreement was unreasonable for the period starting from October 2004. The Assessing Officer thus held that the assessee had incurred expenditure out of books of account. Accordingl y the addition u/s 69C of the Act amounting to Rs. 48,22,679/- was made by the Assessing Officer.
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41. The Assessing Officer in the proceedings relating to assessment year 2006-07 held the assessee to be eligible for deduction u/s 10B of the Income Tax Act, but further had invoked the provisions of section 10B(7) of the Act and had observed that the provisions of section 80IA (10) of the Act were squarely applicable to the assessee's case. The assessee in assessment year 2006-07 had shown gross receipts of Rs. 4.03 crores from associate enterprises against which total expenses to the tune of Rs. 1.8 Crores were claimed. The profits derived by the assessee from providing services assured at 54.14% of the receipts were found to be highl y disproportionate to the expenses claimed. The explanation of the assessee that the parent company was paying remuneration on with mark up @ 13.5% from April, 2004 but w.e.f. October 2004, the invoices were raised on man hour basis, on the basis of the addendum to the original counseling agreement and the revision of the salary of key persons in 2004, was brushed aside by the Assessing Officer. The explanation of the assessee is incorporated at pages 6 of the assessment order. Further, instances of comparable case were given by the assessee. However, the explanation of the assessee for the revision of its remuneration from cost plus rates of the business, to payment on the basis of man hour basis was found by the Assessing Officer not justified vis-a-vis the profits shown b y the assessee @ 54.14%. The same was held by the Assessing Officer to be excessive and Assessing Officer was of the view that profits up to 22% was reasonable and was eligible for deduction u/s 10B of the Act. The difference of profits shown by the assessee over and above 22% was treated as income from undisclosed sources resulting in an addition of Rs. 1,30,21,367/-.
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42. The Assessing Officer while completing the assessment relating to assessment year 2007-08, held the assessee to have shown excessive profits from the business. A comparison was made to the results declared by M/s Quark S ystems Pvt and M/s Quark Media Pvt Ltd, who had shown the net profit & sales ratio at 12.3% and 20.85% respectivel y, scale down the profits of the assessee company to 22% and addition of Rs. 1,82,50,265/-was made being excessive profits claimed being not eligible to the deduction u/s 10B of the Income Tax Act.
43. The CIT(A) in assessment year 2005-06 was of the view that for the period starting from October 2004, a reasonable profit should be adopted at cost plus @ 17% as against the profits shown by the assessee company. Further, in assessment year 2006-07 and 2007-08, the C IT(A) held that the reasonable profits during the respective years should be adopted at cost plus 22% as against the profits shown by the assessee and the excessive profits declared by the assessee were held to be not eligible for the deduction u/s 10B of the Act. The assessee is in appeal against the aforesaid orders of the C IT(A) relating to assessment years 2005-06 to 2007-08 and has raised the aforesaid issues vide ground Nos 1 & 2 in the captioned years. The Revenue vide ground No.3 is aggrieved by the order of C IT(A) relating to assessment year 2005-06 in deleting the addition made by the Assessing Officer u/s 69C read with section 10B(7) of the Income Tax Act. The second part of the ground of appeal raised by the Revenue is in connection with the relief granted by the CIT(A) u/s 14A of the Act, which shall be dealt by us along with ground No.3 raised by the assessee in this connection.
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44. The profits declared by the assessee were found by the authorities below to be excessive speciall y in the facts of the present case where the assessee was exporting its computer software to an associate concern. Admittedl y, the assessee company is carrying on the computer software operations in consultation with one of its associate concern and u/s 10B(7) of the Income Tax Act the Assessing Officer is empowered to look into the magnitude of profit shown by the assessee where it is of the view that provisions of section 80IA(8) and (10) of the Income Tax Act are attracted.
45. The section 80IA(8) & (10) of the Act reads as under:-
80IA (8 & 10) of the Act.
[Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc. (8) Where any goods [or services] held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods [or services] held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods [or services] as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods [or services] as on that date :
Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the eligible business in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit.
[Explanation.--For the purposes of this sub-section, "market value", in relation to any goods or services, means the price that such goods or services would ordinarily fetch in the open market.] (10) Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted 34 between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom.
46. Under section 80IA(10) of the Act, where it is apparent to the Assessing Officer that the arrangements between the assessee carrying on the eligible business and any other associate person with whom it is carrying on the business transactions, is so arranged, that it results in more than ordinary profits to the assessee, which might be expected to arise in such carrying on of the business, the Assessing Officer is empowered to adopt a reasonable amount of profits deemed to have been derived from carrying on of such eligible business. The pre condition for invoking of the provisions to the section 80IA (10) of the Act is the assessee having declared more than ordinary profits which might be expected to arise in the line of eligible business carried on by the assessee. Thus the question to be addressed in the present set of facts and circumstances is whether the assessee has declared more than its share of profits from the eligible business.
47. The assessee has entered into a consulting agreement with M/s Raico Inc. dba QASource, USA and as per the terms of the said agreement, the assessee was entitled to remuneration equivalent to 10% of actual expenses described in the preceding sentence of the agreement. The 'total cost' was also referred to in the said agreement. The parties executed an addendum to the consulting agreement under which it was provided that w.e.f. 1.4.2004, the remuneration is fixed at 13.5% of actual expenses is to be paid as against 10% of the actual expenses, provided in the consulting agreement dated 1.2.2003. It was further provided in the 35 said addendum that w.e.f. 1.10.2004 the whole of the remuneration clause shall be substituted by a new clause under which the assessee was entitled to remuneration on man hour basis. The assessee has placed the copy of the addendum to the consulting agreement at pages 361 to 363 of the paper book. The clause in respect of remuneration as per the addendum is reproduced by us in the paras herein above. The terms of the agreement entered into between the assessee and its clients are to be considered by the STPI and the assessee in this regard had furnished as copy of the service agreement to the Additional Director, STPI, Mohali for registration of Services Agreement vide its letter dated 30.6.2003 placed at page 364 of the paper book. The addendum to the Consultant Agreement was also forwarded to the Additional Director, STPI, Mohali on 30.11.2004. The said communication is placed at page 365 of the paper book. Further, we find that during the course of assessment proceedings, the assessee furnished letter dated 26.12.2007, in which it was explained as under:-
The assessee company is engaged in the filed of software development and other related activities and hence not maintaining any production records. However, copies of the following documents are enclosed herewith:-
a) Export invoices approved by the STPI under the provisions of FF
b) Monthly returns submitted with the STPI showing the export and
c) Annual Return submitted the STPI
d) Status report of software development activities.
e) Proof of computer purchased
f) Proof of internet connection.
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The details of the employees of the assessee company along with their qualifications and Form No.16 are enclosed herewith.
The said letter is enclosed at pages 63 to 65 of the paper book filed by the department relating to assessment year 2005-06.
48. The assessee has furnished before us the copies of the bills raised by it for the services provided to its clients. The initial payments up to 31.3.2004 were raised with a MARK UP @ 10%. The copies of the said bills are placed at pages 58 & 59 of the paper book. The bills starting from April 2004 to 30.9.2004 were raised with MARK UP @ 13.5% and are placed at pages 60 & 65 of the paper book. Thereafter, with effect from October 2004 the bills were raised on the basis of man hour basis and as per the rates fixed between the parties on account of level-I and level II of employees. The copies of the said bill are placed at pages 66 to 67 of the paper book. As per the requirements of its registration with STPI, the assessee has to furnish the information in respect of the export invoices raised by it during each month and also the foreign exchange receipt by it during the said period alongwith details of expenses incurred for the aforesaid month in Softex form/s. The assessee has placed on record the Softex form furnished for the month of April 2004 at pages 131 to 135 of the paper book under which it had enclosed the copies of the export invoices issued in the month of April 2004 alongwith details of expenses in the month of April 2004 and copy of FIRC received in the month of April 2004. Similar information has been furnished by the assessee for the period May 2004 to March 2005 at apges 136 to 189 of the paper book. Further, the assessee had furnished the annual progress 37 report for the financial year 2004-05 to the STPI and the copies of same are pages 192 to 193 of the paper book.
49. We find that the assessee company had raised the bills for the services rendered by it in consonance with the terms of agreement settled between it and its clients. The first bills were raised as per the remuneration clause agreed upon between the assessee and its clients as per the consulting agreement dated 1.1.2003. However, the terms of remuneration were amended as per the addendum to the consulting agreement between the parties with amendment taking effect from 1.4.2004. As per the said addendum to the consulting agreement w.e.f. April 2004, remuneration was fixed with mark up @ 13.5% and w.e.f. October 2004, the assessee was entitled to receive the payments on man hour basis as against the initital agreement between parties to receive the payments for the services rendered on a MARK UP on the expenses incurred by it.
50. From the perusal of the aforesaid details it is apparent that the assessee company raises monthl y invoices, for the services rendered and copies of the same are submitted to the STPI for their perusal. The copies of the Export Declaration submitted in the form of Softex forms for the year under consideration are enclosed in the paper book filed by assessee. The copy of the Annual Return filed for the relevant financial year is also enclosed at pages 192 & 193 of the paper book. The information in respect of remuneration charged by the assessee on month wise basis was furnished before the STPI on a regular basis which is not disputed to by the Revenue authorities. The copies of the submissions made by the 38 assessee before the Assessing Officer are enclosed in the paper book filed by the Revenue in this regard, a reference to which has been made by us in paras hereinabove.
51. In the totalit y of facts and circumstances, we find that the total remuneration declared by the assessee is backed by the bills raised by the assessee as per the terms of agreement between the parties, which in turn are open for scrutiny before the STP I authorities, which had recognized the status of the assessee to be 100% EOU. In the gamit of evidence available on record, we find no merit in the rejection of the book results shown by the assessee from year to year. The Assessing Officer in any case had failed to bring on record any discrepancy in the said bills of remuneration maintained by the assessee except for its contention that the profits shown by the assessee were relativel y on a higher side for period starting October 2004, which in any case were on account of change in the remuneration clause. In the absence of any specific instances being referred to by the Assessing Officer we find no merit in the order of the Assessing Officer in invoking the provisions of section 92 of the Act on the surmise that the profits shown by the assessee on account of transaction with a relative concern were on a higher side. Further, the Assessing Officer has failed to point out the basis for estimating the GP rate in the hands of the assessee.
52. We further find that the assessee had furnished on record a Certificate from STPI dated 9.7.2009 during the proceedings relating to assessment year 2006-07, which reads as under:-
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STPI ref No. STPIM/PCMG/PSE/02/199-759/2009 dated 9.7.2009 To whom it may Concern This is to certify that M/s Bebo Technologies Pvt Ltd is registered with STPI vide approval No. STPIM/PCMG/PSE/02/199-8210 dated 12.3.2003 and renewed levy of penalty vide STPM/pcmg/pse/02/199-2093 DATED 19.3.2008 for manufacture and export of Computer Software/IT Enabled services.
The unit has commenced their operation on 28.3.2003. Since Octobers 2004 & till date the unit is providing services to their overseas client and charged them on man hour basis between US$ 7 to US$ 10 depending upon the level of engineers. The rates charged by them are comparable with other units providing such services.
53. As per the above said certificate, the rates charged by the assessee were found to be comparable with other units providing such services. In view of the same, there is no merit in the allegation that profits shown by assessee are on the higher side. Further, the basis for making the addition in assessment year 2007-08 was the results shown by a concern M/s Quark Systems Pvt and M/s Quark Media Pvt Ltd. It is an established principle of natural justice that no body is to be condemned unheard and the case of the assessee is that the rates shown by the said concerns could not be applied to determine its profits as the said information was not confronted to it and further the business activit y carried on by the two concerns were not identical. We find similar issue of estimation of profits arose before the Mumbai Bench of the Tribunal in Fabula Trading Company (P) Lt v ITO [(2009) 21 DTR (Mumbai)(Trib) 210] wherein on similar issue it has been held as under:-
"16................It is an established principle that there is no merit in estimating the trading results of a particular year based on the trading results shown in preceding or succeeding year. Similarly, there is no merit in comprising the trading results of a concern 40 with the trading results of another concern carrying on similar or same business. In the facts and circumstances of the case before us, we find no merit in the gross profit rate shown by the assessee and delete the addition made on basis for invoking the provisions of S.92 of the Act, hence the addition made by the Assessing Officer is directed to be deleted. Thus, the grounds of appeal raised by the assessee are allowed."
54. In the facts and circumstances of the present case before us, we find no merit in the orders of the authorities below in reworking the profits of the assessee company which in turn are eligible for deduction u/s 10B of the Act. There is no merit in appl ying the provisions of section 80IA(10) to the profits declared by the assessee to rework the profits of eligible business, which in turn are entitled to the benefit of exemption u/s 10B of the Act. Accordingl y, we direct the Assessing Officer to accept the results shown by the assessee in the captioned years i.e. assessment years 2005-06 to 2007-08 as the profits of the eligible business, which in turn are entitled to the benefit of exemption u/s 10B of the Act. Accordingl y, ground Nos. 1 & 2 raised by the assessee in all the years under consideration are allowed.
55. The Assessing Officer while computing the income in assessment year 2005-06 after holding the assessee to have shown higher profits of eligible business had made a disallowance u/s 69C of the Act on account of expenditure relatable to the earning of the higher receipts vis-a-vis the expenditure shown for the year under consideration. In view of our observation in the paras hereinabove, we uphold the order of C IT(A) in deleting the addition made u/s 69C of the Act, which in any case is attracted in such cases, where in any financial year the assessee is found to have incurred any expenditure, in respect of which, he offers no 41 explanation about the source of such expenditure or part thereof or the explanation offered by him, in the opinion of the Assessing Officer is not satisfactory, such an expenditure is deemed to be income of the assessee for the financial year. The provisions of section 69C are not attracted in the present case as there is no finding of the Assessing Officer of the assessee having incurred such expenditure for earning of the receipts of the eligible business. The addition was made on the presumption that in order to earn such higher revenues, the assessee is deemed to have incurred such an expenditure. Upholding the order of the C IT(A) in this regard, we dismiss the ground No.3 raised by the Revenue in this connection.
56 Another issue has been raised by the assessee in assessment year 2005-06 with regard to the disallowance made by invoking the provisions of section 14A of the Income Tax Act. The Revenue is also in appeal in this regard by way of ground No.3 (2 n d part). From the perusal of the appellate order, we find that the Assessing Officer had determined the expenses relatable to earning of dividend income @ 10% and made a disallowance of Rs. 5,54,752/-. The C IT(A) upholding the order of the Assessing Officer in invoking the provisions of section 14A upheld addition of Rs. 5,54,752/- and also held that the assessee was not eligible for deduction u/s 10B of the Act as per para 55 of the appellate order. In view thereof, where the addition has been upheld by the CIT(A), the ground of appeal raised by the Revenue in this regard is misconceived and hence the same is dismissed.
57. Now coming to the issue of expenses to be disallowed in relation to the exempt income earned by the undertaking and the application of the 42 provisions of section 14A of the Act, we find that the issue stands covered by the ratio laid down by the Hon'ble Bombay High Court in Godrej & Bo yce M f g.C o. Lt d. V DC IT & Anr, [ 234 C TR 1 (Bom )] wherei n t he cons t i t ut i onal val i dit y of S ect i on 14A(2 )&(3 ) of I.T.A ct and R ul e 8D o f t he Incom e Tax Rul es was chal l en ge d. The C ourt held t hat t he provi s i ons of R ul e 8D were not ul t ra vi rus t he provi s i ons of S ect i on 14A and i t was al s o hel d t hat t he s am e do not offend Art i cl e 14 of t he C ons t i t ut i on. It wa s furt her h el d t hat t he provi s i on of R ul e 8D w as t o be appl i ed pros pect i vel y w.e. f. 01.04.20 07 i .e. i n rel at i on t o as s es s m ent ye a r 20 08-09 and s ubs equent ye ars as t he M em orandum e x pl ai ni ng t he provi s i ons of t he Fi nance Bi l l 2006 s t at es t hat t hi s am endm ent woul d t ake ef fect f rom 01.04.2007. The C ourt s furt her hel d t hat even i n t he abs ence o f s ub-s ect i on (2) and (3) of S ect i on 14A and R ul e 8D, t he As s es s i ng O ffi c er was not precl ud ed from m aki ng appor t i onm ent on account of adm i ni s t rat i ve ex pendi t ure rel at abl e t o ea rni ng of ex em pt i ncom e. Fol l owi ng t he rat i o l ai d down b y t he Hon 'bl e B om ba y Hi gh C ourt i n Godrej & Bo yce M f g.C o. Lt d. (s upra), w e are of t he vi ew t hat adm i ni s t rat i ve ex pendi t ure at t ri but abl e t o s uch ex em pt i ncom e m eri t s to be di s al l owed.
58. We hold that certain portion of the expenditure relatable to earning of dividend income merits to be disallowed. The assessee during the year under consideration had declared dividend income of Rs. 10,54,254/-. The Assessing Officer disallowed 10% of personal and administrative expenses incurred by the assessee as being relatable to the earning said dividend income. We find that the said disallowance is on a higher side and restrict the disallowance to Rs. 2 lacs, keeping in view the quantum 43 of dividend income earned by the assessee. Accordingl y, ground No.3 raised by the assessee is partl y allowed.
59. The assessee has also filed Cross objections in assessment year 2005-06. The ground Nos. 1 & 2 raised by the assessee in its Cross objections are in support of the order of CIT(A) in allowing exemption u/s 10B of the Act and in deleting the addition u/s 69C of the Act. In view of our order in dismissing the grounds of appeal raised by the Revenue in this regard, the ground Nos 1 & 2 raised in the Cross Objection become infructuous. The ground No.3 is against the disallowance of expenses in view of the provisions of section 14A of the Act which also becomes infructuous on account of our partl y allowing the claim of the assessee in connection with Ground No.3 raised by assessee in this behalf. The Cross objections are thus dismissed.
60. In the result, appeal of the assessee in assessment year 2005-06 is partl y allowed and for assessment years 2006-07 and 2007-08 are allowed. The appeal of the Revenue and cross objections filed by the assessee in assessment year 2005-06 are dismissed.
Order Pronounced in the Open Court on this 29 t h day of April, 2011.
Sd/- Sd/-
(D.K.SRIVASTAVA) (SUSHMA CHOWLA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated : 29 t h April, 2011
Rkk
Copy to:
44
1. The Appellant
2. The Respondent
3. The CIT
4. The CIT(A)
5. The DR
True Copy
By Order
Assistant Registrar,
ITAT, Chandigarh