Income Tax Appellate Tribunal - Bangalore
M/S. Schneider Electric It Business ... vs Joint Commissioner Of Income Tax, Ltu, ... on 30 April, 2019
IN THE INCOME TAX APPELLATE TRIBUNAL
"A" BENCH : BANGALORE
BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT
AND
SHRI JASON P. BOAZ, ACCOUNTANT MEMBER
IT(TP)A No. A.Y. Appellant Respondent
Schneider Electric IT
Business India Private
Limited,
(Formerly known as
American Power Conversion Joint Commissioner of
299/Bang/14 2009-10 (India) Private Limited), Income Tax, LTU,
th
4 Floor, Electra, Wing A, BANGALORE
Exora Business Parks,
Marathahalli
Sarjapur Outer Ring Road,
BANGALORE
[PAN: AACCA6398Q]
M/s. Schneider Electric IT
Business India Private
Limited,
Joint Commissioner of (Formerly known as
218/Bang/14 2009-10 Income Tax, LTU, American Power Conversion
BANGALORE (India) Private Limited),
No. 187/3 & 188/3, Jigani,
BANGALORE
[PAN: AACCA6398Q]
Assessee by : Shri T. Suryanarayana, Advocate
Revenue by : Shri C. Sundar Rao, CIT
Date of hearing : 19-03-2019
Date of Pronouncement : 30-04-2019
ORDER
Per N V Vasudevan, Vice President :
IT(TP)A No.218/Bang/2014 is an appeal by the Revenue while IT(TP)A No.299/Bang/2014 is an appeal by the assessee. Both the :2: IT(TP)A Nos. 299 & 218/Bang/2014 appeals are directed against the order dated 31-01-2014 of the JCIT, LTU, Bangalore passed u/s.143(3) read with Sec.144C of the Income Tax Act, 1961 (Act) in relation to AY 2009-10.
2. Gr.No.1 to 9 in Assessee's appeal and the grounds of appeal raised by the revenue in its appeal are with regard to determination of Arm's Length Price (ALP) in respect of international transactions of
(a) rendering Software Development Services (SWD services) (b) rendering of Research and Development Services by the Assessee to its Associate Enterprise (AE). These Grounds read as follows:
Grounds of Appeal raised by assessee:
1. The learned Assessing Officer ("learned AO") and the learned Dispute Resolution Panel (learned DRP) erred in law and in facts in upholding the adjustment to the transfer price of the Appellant in the contract software development services by Rs.9,819,200 and in the contract Research and Development (R&D) services by Rs.28,882,400.
2. The learned AO, the learned DRP and the learned TPO erred in rejecting the Transfer Pricing ('TP') documentation maintained by the Appellant on invoking provisions of sub-section (3) of 92C of the Income Tax Act, 1961 contending that the information or data used in the computation of the arm's length price is not reliable or correct.
3. The learned AO, learned DRP and the learned TPO erred in rejection of comparability analysis carried in the Transfer Pricing documentation and in conducting a fresh comparability analysis on application of additional filters for determination of the arm's length price for contract software development and contract R&D services segments.
4. The learned AO, learned DRP and the learned TPO have not :3: IT(TP)A Nos. 299 & 218/Bang/2014 appreciated the functions undertaken by the Appellant in the R&D segment which are predominantly in the nature of software development services and thereby erroneously compared the mark-up on cost earned by the Appellant in this segment with that earned by the entrepreneurial R&D services providers. The learned AO has erred in rejecting companies selected as comparable by the appellant in the TP documentation and has erred in selecting companies which are not comparable to the Appellant. Specifically • Auringene Discovery Technologies Ltd • Celestial Biolabs • Jubilant Chemys • Oil Field Instruments (India) Ltd • Tata Elxsi Ltd • TCG Lifescience • Techno-Chemie(India) Ltd • Vimta Lab • Engineers Limited.
5. The learned AO, learned DRP and the learned TPO erred in rejecting the companies selected as comparable by the Appellant in the Transfer Pricing documentation and introducing her own set of companies as comparable that does not meet the comparability criteria in the contract software development services segment.
Specifically, the Appellant submits that the following companies selected as comparable by the learned AO, learned DRP and the learned TPO as comparable in the contract software development segment should have been rejected.
• Bodhtree Limited;
• Infosys Limited;
• Larsen and Toubro Infotech Limited;
:4:IT(TP)A Nos. 299 & 218/Bang/2014 • Mindtree Limited;
• Persistent Systems Limited;
• Sasken Communications Technologies Limited;
• Tata Elxsi Limited; and • Zylog Systems Limited
6. The learned AO, learned DRP and the learned TPO erred in not applying multiple year/prior year data for comparable companies while determining arm's length price.
7. The learned AO, learned DRP and the learned TPO erred in using data as at the time of assessment proceedings, instead of that available as on the date of preparing the Transfer Pricing documentation for comparable companies while determining arm's length price.
8. The learned AO. learned DRP and the learned TPO have erred in not granting working capital adjustments to the Appellant.
9. The learned AO, learned DRP and the learned TPO have failed to appreciate that the Appellant is a limited risk contract service provider rendering software services and R&D services. Thereby, the learned AO, learned DRP and the learned TPO erred in not providing appropriate adjustment towards the risk differential, when the comparables selected are full-fledged entrepreneurial companies.
Grounds of Appeal raised by Revenue:
1. The order of Hon'ble DRP is opposed to law and facts of the case.
2. The Hon'ble DRP has erred in including M/s FCS Solutions and M/s Thinksoft Global Services Ltd which TPO has excluded under rule 18B(3) of IT Rules being not comparable companies.
SOFTWARE DEVELOPMENT SERVICES SEGMENT:
3. First we shall take up for consideration the determination of ALP in the SWD services segment. The Assessee is engaged in the :5: IT(TP)A Nos. 299 & 218/Bang/2014 business of providing software development services to its overseas Associated Enterprises ('AE' for short). It is not in dispute that the transaction of rendering of software development services by the Assessee to its AE was an international transaction and in view of the provisions of sec. 92 of the Income Tax Act, 1961 (Act), income arising from such international transactions has to be determined having regard to Arms Length Price (ALP). The issues to be decided in the cross appeals are determination of ALP of the international transaction of providing software development services by the Assessee to its AE.
4. During the previous year 2008-09 relevant to the assessment year 2009-10, the Assessee rendered software development to its AEs.
As regards the international transaction of provision of software development (SWD) services to its AEs, the Assessee received consideration of Rs.8,00,00,000/- for rendering Software Development Services from its AE. In support of its claim that the price charged by it in the international transaction the Assessee filed a Transfer Pricing study (TP Study) in which the Assessee adopted Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for determination of ALP. The profit level indicator (PLI) chosen for the purpose of comparison of profit margin of comparable companies was operating profit to operating cost (OP/OC). The price charged in the international transaction by the Assessee from its AE was Rs.8,00,00,000/-. The Operating cost of the Assessee was Rs.7,30,00,000/-. The operating profit was thus Rs.70,00,000 :6: IT(TP)A Nos. 299 & 218/Bang/2014 (Rs.8,00,00,000 - 7,30,00,000). OP/OC was 9.59%. The Assessee in its TP Study had chosen 14 companies as comparable companies.
5. The arithmetic mean of the profit margin of the 14 companies so selected by the Assessee was 13% after adjustment and 14% without adjustment and these margins when compared to the profit margin of the Assessee was at Arm's Length after providing for (+)(-) 5% variation margin permitted under the proviso to Sec.92(2) of the Act. Since the Assessee's profit margin was within the range of profit margin of the comparable, the Assessee claimed that the price charged in the international transaction was at Arm's Length and therefore no addition by way of adjustment to ALP should be made.
6. The Assessing Officer (AO) referred the question of determination of ALP to the Transfer Pricing Officer (TPO) as is required by the provisions of Sec.92CA of the Act. The TPO after accepting some of the comparable companies chosen by the Assessee, selected 11 comparable companies. The following tables will show the final list of comparable companies and their profit margin and computation of arithmetic mean of profit margin of these 11 comparable companies and the addition to be made to the total income on account of determination of ALP by the TPO.
Comparables selected by the TPO and their arithmetic mean:
Sl. No. Name of the Company Mark up
Unadjusted
(%)
1 Kals Information Systems Ltd. 13.89
:7:
IT(TP)A Nos. 299 & 218/Bang/2014
2 Akshay Software Technologies Ltd. 8.11
3 Bodhtree Consulting Ltd. 62.27
4 R S Software (India) Ltd. 9.97
5 Tata Elxsi Ltd. (segmental) 20.28
6 Sasken Communication Technologies Ltd.
27.91
(segmental)
7 Persistent Systems Ltd. 41.40
8 Zylog Systems Ltd. 7.81
9 Mindtree Ltd. (segmental) 5.52
10 Larsen and Toubro infotech 24.72
11 Infosys Ltd. 45.61
ARITHMETIC MEAN 24.32
Computation of arm's length price by the TPO and the adjustment made towards the SWD services provided by the Assessee:
Arm's Length Mean Margin 24.32% Less: Working Capital Adjustment* - Adjusted mean margin of the comparables 24.32% Operating Cost 7,30,00,000/- Arm's Length Price (ALP) 119.35% of Operating Cost 9,07,53,600/- Price Received 8,00,00,000/- Shortfall being adjustment u/s. 92CA 1,07,53,600/-
7. The difference between the price charged by the Assessee and the ALP determined by the TPO viz., Rs.1,07,53,600/- was added to the total income by the AO in his drat assessment order as addition on account of shortfall being adjustment u/s.92CA of the Act.
8. The Assessee filed objections to the draft assessment order by the AO before the Disputes Resolution Panel (DRP). The DRP rejected the objection of the Assessee to the action of choosing some of the companies out of the 11 comparable companies chosen by the TPO. The Assessee pleaded for inclusion of two companies in the list of :8: IT(TP)A Nos. 299 & 218/Bang/2014 comparable companies viz., FCS Software solutions Ltd. and Thinksoft Global Services Ltd. This plea of the Assessee was accepted by the DRP. As a result of the order of the DRP, the following 13 companies remained as comparable companies and the arithmetic mean of profit margin of these comparable companies were as follows:
List of comparables post DRP's directions:
Sl. No. Name of the Company Mark up
Unadjusted (%)
1 Kals Information Systems Ltd. 13.89
2 Akshay Software Technologies Ltd. 8.11
3 Bodhtree Consulting Ltd. 62.27
4 R S Software (India) Ltd. 9.97
5 Tata Elxsi Ltd. (segmental) 20.28
6 Sasken Communication Technologies Ltd.
27.91
(segmental)
7 Persistent Systems Ltd. 41.40
8 Zylog Systems Ltd. 7.81
9 Mindtree Ltd. (segmental) 5.52
10 Larsen and Toubro infotech 24.72
11 Infosys Ltd. 45.61
12 FCS Software Solutions Ltd 16.75
13 Thinksoft Global Services Ltd. 16.27
ARITHMETIC MEAN 23.11
9. In revenue's appeal the only issue to be decided is the action of the DRP in including two comparable companies viz., FCS Software Solutions Ltd. and Thinksoft Global Services Ltd. Regarding the issue in respect of inclusion of two comparables i.e. Thinksoft Global Services Ltd. and FCS Software Solutions Ltd., we find that this tribunal on an identical issue raised by the revenue against the order of DRP including the aforesaid two companies as functionally :9: IT(TP)A Nos. 299 & 218/Bang/2014 comparable with the Assessee who was engaged in the business of providing SWD services to AE such as the Assessee, held that these two companies were functionally comparable with a company rendering SWD services, in the case of VMware Software India Pvt.
Ltd. Vs. DCIT IT(TP)A.No.1311/Bang/2014 for AY 2009-10. The learned DR could not point out any difference in facts. We therefore hold that these two comparables should be included in the final list of comparables by respectfully following the judgment cited by ld. AR of assessee and find no merit in the appeal by the revenue and dismiss the same.
10. As far as the appeal of the Assessee is concerned, the first aspect is with regard to exclusion of some of the comparable companies chosen by the TPO and retained by the DRP as comparable companies. The learned counsel for the Assessee submitted before us that the comparability of the following 5 comparable companies out of the 13 companies that remain after the order of the DRP viz., (i) Kals Information Systems Ltd., (ii) Bodhtree Consulting Ltd., (iii) Tata Elxsi Ltd., (iv) Persistent Systems Ltd. and (v) Infosys Ltd. was considered by the Tribunal in the case of Infinera India (P) Ltd. Vs. ITO (2016) 72 taxmann.com 68 (Bang-Tribunal). The said decision was also in relation to AY 2009-10. In the aforesaid decision the issue raised was against including the aforesaid five companies as comparable companies. The plea of the Assessee was that the aforesaid five companies are not functionally comparable with the Assessee who was engaged in the business of providing SWD services to AE. It is : 10 : IT(TP)A Nos. 299 & 218/Bang/2014 also not in dispute before us that the functional profile of the Assessee in this appeal and the Assessee in the decision rendered in the case of Infinera India (P) Ltd.(supra) are identical. In the case of Infinera India (P) Ltd.(supra) this Tribunal held that the aforesaid 5 companies are not functionally comparable with a company rendering SWD services. The learned DR could not point out any difference in facts. Hence, we hold these 5 companies be excluded from the list of comparable companies as functionally not comparable with the Assessee company.
11. Similarly one of the comparable company chosen by the TPO and retained by the DRP viz., Sasken Communication Technologies Ltd. was held to be functionally dismissilar with an Assessee who was engaged in the business of providing SWD services to AE such as the Assessee, in the case of VM Ware Software India Private Limited (supra). The learned DR could not point out any difference in facts. Hence, we hold this company be excluded from the list of comparable companies as functionally not comparable with the Assessee company.
12. Similarly one of the comparable company chosen by the TPO and retained by the DRP viz., Larsen & Toubro Infotech Ltd., was held to be not comparable company for the reason that the related party transaction to sales of this company was more than 15% by this Tribunal in the case of VM Ware Software India Private Limited (supra). The learned DR could not point out any difference in facts. Hence, we hold this company be excluded from the list of comparable companies as the related party transactions to sales was more than 15%.
: 11 :IT(TP)A Nos. 299 & 218/Bang/2014
13. The learned counsel for the Assessee submitted that the TPO and DRP erred in not giving working adjustment to the profit margins of the Assessee and the comparable companies. The learned DR opposed the prayer for allowing working capital adjustment on the ground that the working of working adjustment to the profit margins was not specifically given by the Assessee and that the Assessee should not be given a second innings. We have considered the rival submissions and are of the view that in the facts and circumstances of the present case, this issue is academic because after exclusion of several companies chosen by the TPO and retained by the DRP only 6 companies remain as comparable companies and the arithmetic profit margin of these companies without working capital adjustment is 10.78% which would be within the profit margin of 5% (+) (-) permissible under the proviso to Sec.92(2) of the Act. Therefore, we dismiss the plea of the Assessee in this regard. We make it clear that we have not decided on the merits of the claim of the Assessee on this issue. The TPO is directed to compute the ALP as per the directions given above after affording Assessee opportunity of being heard to the Assessee.
RESEARCH AND DEVELOPMENT SERVICES SEGMENT:
14. As far as determination of ALP in this segment is concerned, the disputes raised by the Assessee are that the nature of services rendered by the Assessee to its AE was SWD services and it is not correct to characterize the same as R& D Services. Though this was the basis on which the TP study was undertaken by the Assessee, the Assessee submits that there is no estoppels in the matter of determination of : 12 : IT(TP)A Nos. 299 & 218/Bang/2014 ALP. The learned counsel in this regard has also pointed out that the TPO in AY 10-11 & 2011-12 accepted the claim of the Assessee in this regard and the relevant orders of TPO was also placed before us. The other grievance projected by the Assessee is that even assuming that the Assessee is to be regarded as rendering R & D services to its AE, the comparable companies chosen by the TPO and retained by the DRP are not comparable functionally and otherwise. The other grievance projected by the Assessee is regarding not granting working capital adjustment to the profit margins of comparable companies and the profit margins of the Assessee before comparing the profit margins with comparable companies to arrive at ALP.
15. The learned DR on the other hand while pointing out that the Assessee in his TP Study has chosen to characterize the transaction with AE as R & D Services cannot now be permitted to say that the nature of services is akin to SWD services. In this regard he also drew our attention to the Agreement between the Assessee and its AE under which the services in question were rendered by drawing our attention to Page 4997 of the Assessee's paper book.
16. We have heard the rival contentions and the nature of service as set out in the note filed as part of the written submission before us. We are not reproducing the note filed by the parties before us and the contentions put forth therein because it requires examination by the AO/TPO. We are of the view that in the light of the TPO's acceptance in AY 20010-11 & 2011-12 that the nature of services rendered was akin to SWD services, the entire comparability criteria will change and : 13 : IT(TP)A Nos. 299 & 218/Bang/2014 the comparable companies already retained in the SWD segment will hold good for this segment also. We therefore feel that it would be just and appropriate to remand for fresh consideration by the AO/TPO of the nature of services rendered by the Assessee in this segment. This will depend upon the terms of the Agreement between the Assessee and AE for rendering services which are in dispute. The TPO will decide on the character of services rendered by the Assessee whether it is R & D or SWD, after affording opportunity of being heard to the Assessee and after considering all relevant factors. If the TPO comes to the conclusion that the nature of services rendered is SWD services, then the comparable companies chosen in the SWD services segment, which we have already decided in the earlier paragraphs, would be applicable. If he comes to the conclusion that the services rendered were in the nature of R & D and not SWD services, then the issue with regard to comparability of companies already chosen by the TPO/DRP on the basis of assumption that the Assessee is rendering R & D services and working adjustment to be made to the profit margin of comparable companies chosen on that basis are left open for consideration de novo by the TPO in the set aside proceedings.
17. Gr.No.10 (Gr.No.10.1. to 10.7) raised by the Assessee in its appeal is with regard to the action of the AO/DRP in disregarding the revised computation of total income whereby the loss declared in the original computation filed along with the return of income at loss of Rs.9,40,42,566/- under the head business (copy of the return is at page 345 of Assessee's paper book) was revised to loss of Rs.12,44,94,273/-
: 14 :IT(TP)A Nos. 299 & 218/Bang/2014 by filing a revised computation of total income (copy of which is at page- 541 of Assessee's paper book along with reasons for filing revised computation of total income contained in submission filed before AO dated 16.10.2012 which is at 518 to 540 along with annexure at page 542 to 567). Admittedly, no revised return of income was filed. The relevant grounds read as follows:
"10. Disregarding the correct business loss incremental claimed in the revised computation - Rs. 3,04,51,707 10.1 The learned AO/DRP has erred in rejecting the revised computation filed by the Appellant during the course of Assessment Proceedings pursuant to which the loss of Rs. 9,40,42,566 was increased to Rs. 12,44,94,273.
10.2 The learned AO/DRP ought to have observed that the computation of total income was revised only once to reflect the correct numbers flowing from the segmental Profit and Loss account.
10.3 The learned AO/DRP ought to have observed that having accepted the starting base as the Profit/Loss as per the segmental Profit and Loss account it is but natural that the allowances/disallowances in the segmental computation should be the respective components of the P&L account.
10.4 The learned AO/ DRP ought to have observed that had the Appellant not filed the revised computation even then the AU ought to have given effect to the revised computation suo-muto as this is the correct computation reflecting the allowances/disallowance as per the segmental Profit and Loss account.
10.5 The learned AO/DRP has erred in not considering the Circular (Circular No. 14(XL-35) dated 11.04.1955) issued by the Central Board of Revenue (CBR).
• The learned AO/DRP erred in concluding that the above circular does not apply to the Income-tax Act 1961 and erred : 15 : IT(TP)A Nos. 299 & 218/Bang/2014 in not placing reliance on several judicial precedents which have upheld the said circular.
10.6 The learned DRP ought to have observed that the enhanced claim not made in the return of income can be made before the Appellate authorities.
10.7 Notwithstanding and without prejudice to the above, the Appellant submits that the enhanced claim not made in the return of income can be made before the Appellate authorities and hence the claim is being made before the Honourable Tribunal.
18. The reasons for filing revised computation of income was that during the time of assessment, the Assessee noticed that some adjustments in the segmental tax computation was not mirroring the segmental P&LA/C. Also, certain allocation of expenses was not made in the correct units. The Assessee, after considering the above aspects re-computed the tax computation segmental wise matching with the segmental P&L A/c, which resulted in an additional loss amounting to Rs 3,04,51,707/-.
19. The main reason assigned by the AO for not accepting the revised computation of total income is on the basis that a revised return of income was not filed within the time limit permitted u/s.139(5) of the Act and by placing reliance on the decision of the Hon'ble Supreme Court in the case of Goetz India Ltd. Vs. CIT 284 ITR 232(SC). In the said decision the Hon'ble Supreme Court held that the AO cannot examine a claim made before him that is contrary to or in modification of the claim as made in the original return filed, without a revised return of income being filed making a new or modified claim.: 16 :
IT(TP)A Nos. 299 & 218/Bang/2014 The conclusion of the AO on this aspect is contained in page-12 of the impugned order at Paragraph 2.2. Though there are allegations by the AO that the Assessee has filed several revised computations and doubted the genuineness of claim made in a revised computation of income, the basis on which the AO refused to examine the revised computation of income is by placing reliance on the decision of the Hon'ble Supreme Court in the case of Goetz (India) Ltd.(supra). The DRP upheld the order of the AO.
20. The learned counsel brought to our notice the reasons for filing revised computation of total income were completely explained by the Assessee and that there was no legally justifiable reasons assigned by the revenue authorities for disregarding the revised computation of total income. A reconciliation between the loss declared in the original return of income and loss declared in the revised return of income is also given in the written note filed before us. We do not wish to go into those details because examination of those details was neither made by the AO nor the DRP.
21. The learned DR relied on the order of the AO/DRP. His submission was that if there is a change in claim of relief u/s.10A consequent to the revised computation of total income, then it has to be accompanied by revised certificate of Chartered Accountant in form 56F. The alleged 5th computation of total income is at page 541 to 545 of the Assessee's paper book which is Annexure 2A to the letter dated 16.10.2012 filed by the Assessee before AO which is at pages 518 to : 17 : IT(TP)A Nos. 299 & 218/Bang/2014 540 of Assessee's paper book. The consensus of the parties was that if at all the revised computation has to be considered then it is this revised computation that should be the basis for computation of total income.
22. We have carefully considered the rival contentions and the material on record. An assessee who is required to file a return of income is entitled to revise the return of income under Section 139(5) of the Act, originally filed by him to make such amendments, additions or changes as may be found necessary by him due to error or omission which he discovers subsequent to the filing of the original return of income. Such a revised return may be filed by the assessee at any time before the end of the relevant assessment year or before the assessment is made whichever is earlier upto AY. 2017-18 the return can be revised at any time before the expiry of one year from the end of relevant assessment year or before the assessment is made whichever is earlier. At the outset, it may be stated that it is the settled position of law that in case of an assessment u/s. 143(3) of the Act, an assessee is entitled to make a fresh claim or modify a claim at any time before the completion of assessment. Actually before the amendment of S.139(5) with effect from 1.4.1989, a revised return could be filed at any time before the assessment was made. It is on account of amendment of S.143(1) with effect from 1.4.1989, that the aforesaid change in S.139(5) was necessitated. If a return of income is accepted u/s. 143(1) by issue of an intimation, then a time limit had to be prescribed for revision of such a return of income, if it was not subjected to scrutiny : 18 : IT(TP)A Nos. 299 & 218/Bang/2014 u/s. 143(3) of the Act. No such time limit is required to be prescribed in respect of an assessment u/s. 143(3) of the Act. A revised return may not save penalty or prosecution in relation to the originally filed return of income. In other words, cases of concealment and false statements are not covered u/s. 139(5). The very purpose of assessment proceedings before the taxing authority is to correctly assess the tax liability of an assessee in accordance with law. Therefore it is not correct on the part of the AO to refuse to scrutinize the revised computation of total income. His action in this regard which was confirmed by the DRP is unsustainable and is hereby held to be not in accordance with law.
23. We may also add that the decision rendered in the case of Goetz India Pvt.Ltd. (supra) based on which the revenue authorities drew their conclusions to ignore the revised computation of total income has been subject matter of several judicial pronouncements. In the case of Jute Corporation of India Ltd. Vs. CIT (1990) 53 taxman 85(SC), it was held that the first appellate authority has wide powers u/s.251(1)(a) of the Act and can entertain an additional claim, In National Thermal Power Co. Ltd. Vs. CIT 229 ITR 383 (SC) it was held that the purpose of proceedings under the Act is for correct determination of tax liability and examination of claim on the basis of facts already on record should be entertained. In CIT Vs. Pruithivi Brokers & Shareholders (2012) 23 Taxmann.com 23 (Bom) Ramco Cements Ltd. Vs. DCIT (2015) 55 taxmann.com 79 (Mad) Rakesh Singh Vs. ACIT (2012) 26 taxmann.com 240(Bang-ITAT) and : 19 : IT(TP)A Nos. 299 & 218/Bang/2014 Chicago Pneumatic India Ltd. Vs. DCIT (2007) 15 SOT 252 (Mum- ITAT) it was held that appellate authorities have power to entertain a new claim de hors filing revised return of income and that the prohibition laid down by the Hon'ble Supreme Court in the case of Goetz India Ltd. Vs CIT 284 ITR 323 (SC) is not applicable to the appellate authorities under the Act. In the case of Chicago Pneumatic India Ltd. vs. DCIT 15 SOT 252 (2007) (ITAT) (Del), the Delhi ITAT, in the context of allow ability of new claims during the assessment proceedings without having recourse to a revised return, has, placing reliance on principle embedded in Article 265 of Indian constitution (No tax can be collected except by the authority of law), CBDT Circular No. 14 dated 11 April 1955 and explaining the ratio of the Goetz (india) Ltd. (supra) ruling, categorically held that assessee has the right to make new claims during assessment proceedings without recourse to a revised return. The Tribunal dealt with the decision of the Hon'ble Supreme Court in the case of Goetz (India) Ltd., (supra) in the following manner:
"....As far as the decision of the Hon'ble Apex Court in the case of Goetze (India) Ltd. (supra) is concerned, there is no dispute that the same is binding on everybody concerned. In the said decision, the Hon'ble Apex Court has also ruled that Appellate Tribunal may adjudicate the issue if a claim is made by any party subject to satisfaction of prescribed rules, hence, even the Hon'ble Apex Court has not barred the assessee raise it's legal claim before Appellate Authorities. However, such process would result into undue hardships, delay and multiplicity of proceedings. The Hon'ble Apex Court, on numerous occasions has laid the proposition that the Assessing Authorities are bound to compute the correct income only and collect only legitimate tax, hence, merely for a procedural lapse or technicalities, in our opinion, the assessee should not be compelled to : 20 : IT(TP)A Nos. 299 & 218/Bang/2014 pay more tax than what is due from him. Therefore, this situation has necessarily to be looked upon from the angle of duties of Assessing Authorities as stated earlier, CEDT is the Apex body for tax administration and it can also issue directions which are for the benefit of the assessee's though such directions may not be inconsonance with the provisions of law, hence, if a circular is now issued directing the assessing authorities to grant reliefs/refunds while completing the assessment proceedings, even though such circular may be at variance with the law, as pronounced by the Hon'ble Supreme Court, but the same would be binding on the subordinate income-tax authorities. In our opinion, therefore, circulars of same nature which have been already issued would not become irrelevant or can be ignored. Admittedly, the circular issued in 1995 has not been withdrawn, hence, it has got binding force on the subordinate authorities even as on date. Accordingly, we hold that the Assessing Officer is bound to assess the correct income and for this purpose, the Assessing Officer may grant reliefs/refunds suo moto or can do so on being pointed out by the assessee in the course of assessment proceedings for which assessee has not filed revised return, although, as per law, the assessee is required to file the revised return ..... "
24. The Hon'ble Punjab & Haryana High Court in the case CIT vs Ramco International 221 CTR 491 (2008) HC (P&H) distinguished the judgement of Hon'ble Supreme Court in the case of Goetz (India) Pvt.Ltd.(supra) and allowed the claim of the Assessee which was made in course of the assessment proceedings and not by filing revised return. The Hon'ble Delhi High Court in the case of Jai parabolic Springs 306 ITR 42 (Delhi) has held that the appellate authorities under the Act, were free to consider a claim made by an Assessee even in the absence of a revised return of income and that the requirement for filing a revised return of income as laid down by the Hon'ble Supreme Court in the case of Goetz India Ltd. (supra) is applicable only when a claim is made contrary to the return of income before the AO. The Hon'ble Delhi High Court in the case of Bharat Aluminium : 21 : IT(TP)A Nos. 299 & 218/Bang/2014 163 Taxman 430J, has inter-alia ruled that assessee can file revised computation in the course of ongoing assessment proceedings under the Act, without making recourse to revised return, despite the fact that time limit for revising return under section 139(5) had expired.
25. In the light of the above judicial pronouncements on the issue, we are of the view that the interest of justice would be met, if the order of the AO/DRP on this issue is set aside and by directing the AO to look into the revised computation of total income at page 541 to 545 of the Assessee's paper book which is Annexure 2A to the letter dated 16.10.2012 filed by the Assessee before AO which is at pages 518 to 540 of Assessee's paper book. The AO will also consider the reasons for such revision of total income explained in the letter dated 16.10.2012 together with other annexure to the said letter. The AO will afford opportunity of being heard to the Assessee before taking decision on the aforesaid revised computation of total income.
The relevant grounds are treated as allowed.
26. Gr.Nos.11 & 12 raised by the Assessee in its appeal can be decided together. These grounds read as follows:
11. Rejection of export turnover of IDF 1 unit as per the books of accounts 11.1 The learned AO/DRP has erred in considering the export sales for IDF 1 as per the Annual Performance Report (APR) and the excise return amounting to Rs. 1,787,926,281 resulting in a lower export sales being considered.: 22 :
IT(TP)A Nos. 299 & 218/Bang/2014 11.2 The learned AO/DRP has erred in rejecting the invoice wise listing provided to the AO along with the invoice copies, shipping bills and Foreign inward remittances certificate (FIRC) for the entire export sales and computing the sales as per the APR and excise return filed, despite acknowledging and placing the same on record. 11.3 The learned AO/DRP has erred in rejecting the invoice-wise listing placed on record by the Appellant for export sales on the grounds that:
• There are certain invoices dated prior to 1 April 2008 • Export turnover earned through raising of Transfer Pricing (TP) debit notes is on account of TP adjustments under section 92C of the Act.
• Certain invoices are pending realization.
Invoices prior to 1 April 2008 11.4 The learned AO/DRP ought to have observed that the accounting for the invoices is done as per the revenue recognition policy of the assessee which is in line with Accounting Standard 9 issued by the Institute of Chartered Accountants of India.
11.5 The learned AO/DRP ought to have observed that the above invoices are for goods sold on "free on board" or "cash insurance freight" basis and the bill of lading date for the said invoices is post 1 April 2008 and is accordingly booked as revenue for the year ended March 2009.
11.6 The learned AO/DRP ought to have observed that sales are recognized only if the goods are boarded on the ship the evidence of which is the Bill of Lading submitted.
Transfer Pricing (TP) debit notes 11.7 The learned AO/DRP has erred in concluding that the export turnover earned through raising of TP debit notes amounting to USD 1,39,85,083 (Rs. 66,53,41,264) is on account of TP adjustments under section 92C of the Act.
11.8 The learned AO/DRP erred in holding that there was no physical export of goods from the factory of the Appellant for : 23 : IT(TP)A Nos. 299 & 218/Bang/2014 which such debit notes were raised.
11.9 The learned AO/DRP ought to have observed that the assessee is a contract manufacturer for APC US and other overseas affiliates and that such TP debit notes were raised pursuant to the contract for manufacturing entered into between the assessee and APC USA for the export of goods.
11.10 The learned AO/DRP ought to have observed that the TP debit notes were raised so that the consideration on contract manufacturing exported is met at 15 % on costs in terms of the contract for manufacturing.
11.11 The learned AO/DRP ought to have observed that the TP debit notes were nothing but an incremental price for the goods manufactured and exported during the financial year 2008-09.
Invoices pending realization 11.12 The learned AO/DRP erred in holding that the entire invoice listing is not acceptable due to certain invoices which are pending realization.
11.13 The learned AO/DRP ought to have observed that the details of unrealized invoices amounting to Rs. 1,21,36,381 have been furnished suo- motto by the assessee in the invoice wise listing furnished and for the balance invoices FIRC copies have been provided substantiating the realizations.
11.14 Notwithstanding and without prejudice to the above, the Appellant submits that the amount of Rs. 1,21,36,381 should be reduced from the export turnover for AY 2009-10 and when this amount is realized by the Appellant the same should be treated as export turnover for AY 2009-10 in line with the provisions of the Act.
12. Rejection of export turnover of IDF 2 unit as per the books of accounts 12.1 The learned AO/DRP has erred in considering the export sales for the IDF 2 unit as per the APR and the excise return amounting to Rs. 1415,76,49,095 resulting in a lower export sales being considered.
: 24 :IT(TP)A Nos. 299 & 218/Bang/2014 12.2 The learned AO/DRP has erred in rejecting the invoice wise listing provided to the AO along with the invoice copies, shipping bills and Foreign inward remittances certificate (FIRC) for the entire export sales and computing the sales as per the APR and excise return filed despite acknowledging and placing the same on record. 12.3 The learned AO/DRP has erred in rejecting the invoice-wise listing placed on record by the assessee for export sales on the grounds that:
• There are certain invoices dated prior to 1 April 2008 • Certain invoices are pending realization.
Invoices prior to 1 April 2008 12.4 The learned AO/DRP ought to have observed that the accounting for the invoices is done as per the revenue recognition policy of the assessee which is in line with Accounting Standard 9 issued by the Institute of Chartered Accountants of India.
12.5 The learned AO/DRP ought to have observed that the above invoices are sold on 'free on board" or "cash insurance freight basis and the bill of lading date for the said invoices is post 1 April 2008 and is accordingly booked as revenue for the year ended March 2009. 12.6 The learned AO/DRP ought to have observed that sales are recognized only if the goods are boarded on the ship the evidence of which is the Bill of Lading submitted.
Invoices pending realization 12.7 The learned AO/DRP erred, in holding that the entire invoice listing is not acceptable due to certain invoices which are pending realization.
12.8 The learned AO/DRP ought to have observed that the details of unrealized invoices amounting to Rs. 4,47,23,920 have been furnished suo- motto by the assessee in the invoice wise listing furnished and for the balance invoices FIRC copies have been provided substantiating the realizations.
12.9 Notwithstanding and without prejudice to the above, the Appellant : 25 : IT(TP)A Nos. 299 & 218/Bang/2014 submits that the amount of Rs. 4,47,23,920/- should be reduced from the export turnover for AY 2009-10 till its realization and when this amount is realized by the Appellant the same should be treated as export turnover for AY 2009-10 in line with the provisions of the Act".
27. Before we proceed to discuss the dispute in the aforesaid grounds of appeal, we shall set out the different units of the Assessee company. (i) IDF1/EHTP2 unit (hereinafter referred to as IDF1 unit) which manufactures and sells UPS systems and other power protection devices. The products manufactured in this unit are sold in the domestic as well as export market. (ii) IDF2/EHTP1 unit (hereinafter referred to as IDF2 unit) which also manufactures and sells UPS systems and other power protection devices. The products manufactured in this unit is sold in the domestic as well as export market. (ii) MAG unit which is engaged in the business of trading of UPS and other power protection devices which are procured either locally or through imports. The sales of this unit is only in domestic market. (iv) Software development business for Schneider Electric IT Corporation, USA (earlier known as American Power Power Conversion Corporation, USA (APCC USA) (Parent company). This unit only exports software to Schneider Electric IT Corporation, USA earlier known as APCC USA (parent company).
28. With respect to export sales in IDF1 and IDF 2 units, the Assessee is a contract manufacturer for Schneider Electric IT Corporation, USA (formerly known as American Power Conversion Corporation, USA) and other overseas affiliates. The Assessee is : 26 : IT(TP)A Nos. 299 & 218/Bang/2014 entitled to a consideration of 15% on approved costs in respect of the above. IDF1 and IDF2 unit are entitled to claim benefit of deduction on their profits u/s.10A of the Act. The AO was of the view that the Assessee has shown more profits in IDF1 and IDF2 units whereas he has shown loss in MAG unit because the profits of MAG unit are taxable. With this approach he has proceeded to examine the claim of the Assessee for deduction u/s.10A of the IDF 1 and IDF2 units. The approach of the AO was incorrect because as we have seen in the earlier paragraph, MAG unit was doing trading and their profits or cost of sales cannot be compared with profits or cost of sales of IDF 1 and IDF2.
29. The AO obtained the Annual Performance Report (APR) from the Software Technology Parks of India (STPI). APR is a statement submitted to STPI for performance appraisal. The revenue recognized therein may not tally with the turnover as shown in the Profit & Loss A/c. of the Assessee for many reasons such as revenue recognition policy followed by an Assessee, recognition of sale value as per the provisions of Sec.92 of the Act by making adjustment to Arm's Length Price on sale to a related party. The sales as shown in the APR for the relevant previous year of IDF1 was Rs. 178.79 Crs and sales of IDF 2 was Rs. 1415.76 Crs. The Excise returns filed to the Excise Authorities also reflected the same amount as shown in the APR.
30. The AO issued a notice dated 3rd December 2012 to the Assessee asking for the reasons for the difference in the APR and the segmental : 27 : IT(TP)A Nos. 299 & 218/Bang/2014 P&L. The Assessee replied to the aforementioned query by providing reconciliation between sales shown in APR and that recorded in the Profit & Loss Account statement of the Assessee. The reconciliation so filed is part of the submissions dated 13th December 2012 (pages 642-645 - File 3 of the paperbook) 14th February 2013 (Page 689 - File 3 of the paperbook) at pages 698-700 and 14th March 2013 (Pages 4024-4028 of File 17). Every individual item of sale invoice together with Foreign Inward Remittance Certificate (FIRC) (evidencing realization of sale proceeds on Export from outside India) was filed by the Assessee and this fact has been accepted by the AO in the order of Assessment (Last paragraph at page-27 of AO's order). Based on sales as per the sale invoices, the sale of IDF1 and IDF2 were 248,87,77,445 and Rs. 1429,53,87,950 respectively. The reconciliation filed by the Assessee regarding the above discrepancy was as follows:
For IDF1 Unit:
Particulars EHTP 2/IDF 1 (Rs)
Export sales as per Sales Listing 2,488,777,445
Less: Items not forming part of APR
but in Sales Listing
a. TP Debit notes 665,341,262
Add: Items not in Sales Listing but
reported in APR
b. Sales reversed in Sales listing 6,297,848
on CIF terms for revenue
recognition
c. Credit notes issued to 498,296
customers
Less: Errors in APR due to wrong 42,306,045
: 28 :
IT(TP)A Nos. 299 & 218/Bang/2014
Particulars EHTP 2/IDF 1 (Rs)
punching of amounts and due to non-
inclusion of certain sales not
required to be reported in APR
Sales reported in APR 1,787,926,281
• The export sales Rs. 248.87 crores has been substantiated with documentary evidences as obtained from third parties. In light of the above, we submit that the company has not made any incorrect submissions/replies with regard to its export sales.
• Accordingly, we submit that the correct export turnover for the purpose of 10A ought to be Rs. 248.87 crores.
For IDF 2 Unit
Particulars EHTP 1/IDF 2 (Rs)
Export sales as per Sales Listing 14,295,387,959
Add: Items not in Sales Listing but
reported in APR
a. Sales reversed in sales listing
on CIF terms for revenue
recognition 38,726,658
Less: Errors in APR due to wrong
punching of amounts and due to non-
inclusion of certain sales not
required to be reported in APR 176,465,522
Sales reported in APR 14,157,649,095
• The export sales of Rs. 1,429.53 crores has been substantiated with documentary evidences as obtained from third parties. In light of the above, we submit that the company has not made any incorrect submissions/replies with regard to its export sales.
• Accordingly, we submit that the correct export turnover for the purpose of 10A ought to be Rs.1429.53 crores plus forex gain of Rs. 46.14 crores amounting to Rs. 1475.67 crores.: 29 :
IT(TP)A Nos. 299 & 218/Bang/2014
31. The AO on examination of the reconciliation together with the sale invoice produced by the Assessee, pointed out the following aspects:
In respect of EDF-1 unit, the AO was of the view (i) that sales totalling Rs.2,70,84,828/- that were considered as part of sale for AY 2009-10 related to invoices raised from 22.3.2008 till 29.3.2008 and these sales ought to have been recognised as sales of AY 2008-09 and not 2009-10 as done by the Assessee. (ii) that sale value to the tune of Rs.1,26,34,663/- was pending realization; (iii) Transfer pricing adjustment of Rs.66,53,41,261/- cannot be regarded as sale because for such sales there is no sales invoice nor FIRC evidencing receipt of export proceeds in foreign currency. Hence, this amount should also be not recognized as part of turnover of the Assessee.
In respect of EDF-2 unit, the AO observed that 97 invoices which pertained to AY 2008-09 (sale from 8.2.2008 to 27.3.2008) of the sale value of Rs.34,46,54,061/- were recorded as sales of AY 2009-10 whereas they ought to have been recognized as sale of AY 2008-09.
On the basis of the above findings, the AO proceeded to adopt the sale figure as per the APR and Central Excise returns.
32. On appeal by the Assessee, the DRP confirmed the order of the AO. Hence, Grd.No.11 & 12 by the Assessee before the Tribunal.
: 30 :IT(TP)A Nos. 299 & 218/Bang/2014
33. The learned counsel for the Assessee submitted that the evidence in the form of documents submitted to substantiate the sale of finished goods as appearing in the segmental Profit & Loss Account as per books of accounts maintained by the Assessee was furnished by the Assessee despite the sales documents were destroyed in fire and after enormous efforts the Assessee could get the required documents to substantiate its claim. He drew our attention to the details filed by the Assessee which are as follows:
Details Submissions dated Sales register ( Page 636 of File 3) 13th December 2012
Party wise invoice wise listing (Submission at page 689 14th February 2013 (relevant page 692) of File 3 and listing at page nos. 1898 to 1979 - File 8) 100% Invoice and shipping bill copies obtained from 14th February 2013 Clearing House Agents ("CHA") and Authorized Dealer Bank (Citibank) [Submission at page 689 (relevant page 692-694) of File 3] FIRC for realization of the export proceeds obtained 14th February 2013 from the Citibank (Submission at page 689 (relevant page 695) of File 3 and copies of the FIRCs at page nos 739 to 1059 - File 4) Invoices, sales listings and FIRCs also given vide 13th December 2012 submission dated 13th December 2012 (submission at page 636, relevant portion at page 641) The above Reconciliation according to him explains the difference between the APR and segmental P & L. He laid emphasis on the fact that the AO in page 27 of assessment order acknowledges that the : 31 : IT(TP)A Nos. 299 & 218/Bang/2014 above evidence was furnished and does not doubt the genuineness of these documents.
34. On the observations of the AO in the order of Assessment regarding recognition of sale of AY 2008-09 in AY 2009-10, he submitted that Accounting for invoices are made following the principles of the AS - 9 Revenue recognition as stated in Schedule 18(h) of the annual report at page 232 of Paper book No.2). In case of free-on-board (FOB) sales, the seller fulfils his obligations when the goods have passed over the ship's rail/aircraft as the case may be, the Bill of lading/ airway bill would indicate the date of boarding the goods on the vessel/aircraft. In case of "cost insurance freight" basis sales ('CIF sales') , revenue recognition will be when the goods are delivered to the buyer i.e., much after the date of bill of lading and the bill of lading date is post April 1, 2008 and is accordingly booked as revenue for the year ended March 2009. He drew our attention to the Bills of lading/Airway Bills along with sales invoices produced in support of the same (pages 3551-4008, Files 15 and 16 of the paper book). He therefore submitted that these invoices should be considered as sales for FY 2008-09 relevant to AY 2009-10 only. These submissions were neither considered by AO nor by the DRP.
35. As far as the Transfer pricing debit notes amounting to USD 1,39,85,083 equivalent to RS.66,53,41,264/- raised by the Assessee (Submission dated 4th March 2013- Page number 3390 to 3547- file 15) in the case of IDF-1 unit are concerned, the learned counsel for the : 32 : IT(TP)A Nos. 299 & 218/Bang/2014 Assessee submitted that the same will not be reflected in APR sales as there is no requirement to report the same in the APR. He submitted that according to the AO there was no physical export of goods from the factory of the Assessee for which such debit notes were raised. In this regard he submitted that the Assessee is a contract manufacturer and is entitled to a consideration of 15% on approved costs in respect of its manufactured export sales (agreement available pages 3396-3403 of File 15 of the paper book, relevant clauses being Clauses 5, 5.1, 5.4).The same was furnished before the learned AO vide submissions dated 4 March 2013 (Page 3390 of File No. 15). The Assessee initially invoices the export sales on the basis of estimates or applying the 15% markup on standard costing. At the time of raising the invoice, the actual cost of production is not determinable and hence standard cost is used for the purposes of determining the amount to be charged as manufacturing fees. Periodically and definitely at the end of the year, the actual expenditure incurred in undertaking the contract manufacturing activities is determined. The shortfall in invoicing, if any, is made up by raising a TP debit note so that the consideration on contract manufacturing is met at 15 % on costs. The amounts reflected in the TP debit notes represent the differential consideration for the export sales made during FY 2008-09 and accordingly the sum of Rs 66,53,41,264/- should form part of the Export Turnover while considering the deduction under section 10A of the Income-tax Act 1961 (the Act). In this context it may be mentioned that if the above consideration were to have been billed as part of the export invoices : 33 : IT(TP)A Nos. 299 & 218/Bang/2014 (i.e., in the situation if Assessee were to have estimated its manufacturing costs correctly at the inception of the year itself), these would have formed part of the respective export invoices and hence eligible for Export Turnover under section 10A. The fact that these have been raised as part of a separate TP debit note does not in any way take away the fact that these are directly linked to the export of goods made during FY 2008-09 and is hence eligible as part of export turnover for section 10A purposes. The term 'export turnover' as defined in Section 10A of the Act means the consideration in respect of export of articles or things. In practical business parlance, the consideration could be received in one or multiple invoices. This is a commercial arrangement. The consideration received from TP debit notes is identifiable with the export of articles or things, and hence the same partake the character of Export Turnover for the purposes of section 10A of the Act. The Assessee raised TP debit notes on APCC USA in respect of its export sales amounting to USD 1,39,85,083 (in Rs. 66,53,41,264). The snapshot of the TP debit notes raised during the FY 2008-09 is as given below:
Debit note Amount Amount
Particulars Debit Note No.
date (USD) (Rs.)
APCC - USA -
31-Mar-09 MFGFY08090-14 17,85,319 8,31,19,090
Debtors
APCC - USA -
30-Sep-08 RIHAB202-13 24,61,371 10,53,17,389
Debtors
APCC - USA -
31-Dec-08 RIHAB101-25 97,38,393 47,69,04,785
Debtors
Total 1,39,85,083 66,53,41,264
: 34 :
IT(TP)A Nos. 299 & 218/Bang/2014
He submitted that the above explanation was not considered by the AO or by the DRP.
36. As far as IDF-1 unit and IDF-2 unit export turnover is concerned, the AO's action of considering turnover of Rs.1,26,34,663/- and Rs.4,55,03,164 respectively as Invoices pending realizations and therefore to be disregarded for the purpose of considering export turnover of the Assessee for that unit, the learned counsel brought to our notice the details of invoice realization in respect of IDF-1 unit and IDF-2 unit respectively, which is as follows:
IDF-1 UNIT:
Amount (In crs.) Particulars Invoice value- Realization Refer Note USD INR value-INR Realized till 30th 4.08 180.91 198.91 1 September 2009 Realized post 30th September 2009 but within 12 months of invoicing as per FEMA - -
regulations Realized post 30th September 2009 but after 1.40 66.70 66.81 3 12 months of invoicing Total realized till date 5.49 247.69 265.72 Unrealized till date 0.03 1.19 - 4 Export sales as per sales 5.51 248.88 248.88 listing : 35 : IT(TP)A Nos. 299 & 218/Bang/2014 (chart available in submission dated 14th February 2013 at page 695 - Paper book 3) IDF2 unit:
The details of the export realizations for EHTP 1 to be considered for the purposes of Section 10A as under:
Amount In Crs.
Particulars Invoice value- Realization Refer Note
USD
INR value-INR
Realized till 30th September 1
29.29 1288.64 1359.08
2009
Realized post 30th September
2009 but within 12 months of 2.77 134.99 142.87 2
invoicing as per FEMA
regulations
Realized post 30th September
2009 but after 12 months of 0.02 0.49 0.61 3
invoicing
Total realized till date 32.07 1424.12 1502.55
Unrealized till date 0.12 5.41 - 4
Export sales as per sales
32.19 1429.54 1429.54
listing
(chart available in submission dated 14 February 2013 at page 695
- Paper Book 3) Note 1:
This amount has been fully realized and therefore is completely eligible for Section 10A.
Note 2:
Invoices which were realized beyond 6 months from the end of the FY but within 12 months from the date of the invoice.: 36 :
IT(TP)A Nos. 299 & 218/Bang/2014 Note 3:
Invoices which were realized post 6 months from the end of FY and also from the 12 months from the date of invoicing As per provision of section 10A export proceeds should be realized within 6 months from the end of FY or such further period as the competent authority may allow in this behalf "Competent authority" means the Reserve Bank of India ("RBI") or such other authority as is authorized for regulating payments and dealings in foreign exchange1 Notification No. FEMA 176 / 2008-RB issued by the RBI wherein time limit for realization of export proceeds was enhanced from 6 months to 12 months from date of export It is the submission that since the export proceeds bought into India after said period of 12 months are via a FIRC duly received from the Authorized Dealer, same should be deemed to be allowed by the Competent Authority and thus is to be allowed in terms of Section 155(11A).
Note 4:
This amount is unrealized as of date and therefore the same may not be considered as part of export turnover for AY 2009-10. It was submitted that should permitted to claim the deduction as regards the same once the same has been realized in terms of Section 155 (11A) of the Act. It was further submitted by him that the observations of the AO that there are invoices pending realization of export proceeds were made for the first time in the draft assessment order, without the : 37 : IT(TP)A Nos. 299 & 218/Bang/2014 Assessee being issued any notice on the said issue. The Assessee made submissions on the availability of the deduction under Section 10A as above before the DRP at page 4902 of Paper book No. 20. The aforesaid submissions made to DRP were not considered by it. In support of his contention regarding realization of export proceeds, the learned counsel for the Assessee relied on the following judicial pronouncements.
• DCIT v. SEEC Technologies P. Ltd [order dated 10 April 2012 in ITA No. 1614/Hyd/2010] • HCL EAI Services Ltd.v. DCIT [2013] 35 taxmann.com 146 (Bangalore - Trib.) • Bajaj Tempo v CIT (1992) 196 ITR 188 (SC ) • DCIT v. iGate Global Solutions Ltd ( judgment of this Hon'ble Tribunal dated 10 May 2013 in ITA No. 429/Bang/2012)
37. The learned counsel submitted that the sales as per APR should not be considered because, there is discrepancy in the amount of sales reported in APR vis-à-vis segmental profit and loss account, which is on account of the following: (i) APR invoice recorded as per date of shipment, while in financials when risk and reward of ownership is transferred. For sales on CIF terms ownership is transferred when goods reach the buyer. Errors in punching of wrong amounts (which is because APR is a manual procedure) was demonstrated with actual invoice copies. The learned counsel for Assessee submitted that the above discrepancies have been explained to the learned AO vide : 38 : IT(TP)A Nos. 299 & 218/Bang/2014 submissions dated 13th December 2012 (Submission page number 636 and explanation in Appendix 1, relevant pages 642 to 644 - File 3) and 14th February 2013 along with invoices and FIRCs demonstrating realization of the export (Submission page no. 689 and Explanation in Annexure 1 page 690 to 702- file 3, relevant page 696; supporting FIRCs submitted there under at Page nos. 739 to 1059 - File 4). It was further submitted that for preparation of excise return APR was used a basis. Thus, there was a discrepancy between export sales as per excise return and segmental profit and loss account, which was also explained in the submission dated 14 February 2013 (Submission page number 689 and Explanation in Annexure 1 page 690 to 702- file 3). It was also submitted that the AO was not right in his observations that for export of components the Assessee has not furnished any details. The invoices along with FIRCs demonstrating realization of the export of components were furnished before the learned AO vide submissions dated 13th December 2012 at page 646, and 14 February 2013 (Submission at page 689, 695 of File 3 (invoice-wise sales listing in File No. 8 of the paper book includes sales of components as well) and supporting FIRCs submitted there under at Page nos. 739 to 1059 -
File 4). Separate sales invoices for components was also given as is evident in the submission at Page 646 - Paper nppl No. 3. The learned counsel therefore prayed that the Export turnover as per the segmental P & L of the Assessee to be adopted.
38. The learned DR reiterated the case of the AO as reflected in the draft assessment order.
: 39 :IT(TP)A Nos. 299 & 218/Bang/2014
39. Under Sec.10A of the Act, 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. Sec.10(4) lays down that the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. Explanation 2(iv) defines "export turnover" to mean the consideration in respect of export by the undertaking of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India. Neither Section 10A nor Section 2 of the Act define the term 'total turnover'. When a particular word is not defined by the legislature and an ordinary meaning is to be attributed to it, the said ordinary meaning is to be in conformity with the context in which it is used.
: 40 :IT(TP)A Nos. 299 & 218/Bang/2014
40. The quantum of deduction u/s.10A of the Act, would therefore depend on the quantum considered as Turnover of an Assessee. So also the deduction u/s.10A would depend on export turnover i.e., consideration in respect of export being received in, or brought into, India in convertible foreign exchange in accordance with section 10A (3).
Turnover of IDF-1 Unit:
41. In so far as turnover of IDF-1 unit is concerned, the first dispute is with regard to non-inclusion by the revenue authorities of a sum of Rs.66,53,41,262/- under the name TP debit notes as part of the export turnover of the Assessee for computing deduction u/s.10A of the Act. It is undisputed that the Assessee is a contract manufacturer and is entitled to a consideration of 15% on approved costs in respect of its manufactured export sales. It is also not disputed that the Assessee initially invoices the export sales on the basis of estimates or applying the 15% markup on standard costing. At the time of raising the invoice, the actual cost of production is not determinable and hence standard cost is used for the purposes of determining the amount to be charged as manufacturing fees. Periodically and definitely at the end of the year, the actual expenditure incurred in undertaking the contract manufacturing activities is determined. The shortfall in invoicing, if any, is made up by raising a TP debit note so that the consideration on contract manufacturing is met at 15 % on costs. The amounts reflected in the TP debit notes represent the differential consideration for the export sales made during FY 2008-09 and accordingly the sum of Rs : 41 : IT(TP)A Nos. 299 & 218/Bang/2014 66,53,41,264/- should form part of the Export Turnover while considering the deduction under section 10A of the Income-tax Act 1961 (the Act). As rightly contended by the learned counsel for the Assessee, the term 'export turnover' as defined in Section 10A of the Act means the consideration in respect of export of articles or things. In practical business parlance, the consideration could be received in one or multiple invoices. The consideration received from TP debit notes is identifiable with the export of articles or things, and hence the same partake the character of Export Turnover for the purposes of section 10A of the Act. The Assessee raised TP debit notes on APCC USA in respect of its export sales amounting to USD 1,39,85,083 (in Rs. 66,53,41,264) and these debit notes were raised during the previous year relevant to AY 2009-10. Hence, we hold that the revenue authorities were not justified in not considering Rs.66,53,41,262 as part of the export turnover of the Assessee in IDF-1 unit for AY 2009-10.
42. The second component of turnover which is in dispute is the non-inclusion of Rs.62,97,848 which was sales which were treated as prior period (AY 2008-09 sales) by the AO on the basis of the dates of sales invoice that were was prior to 1.4.2008. The Assessee's method of Accounting for invoices are made following the principles of the AS
- 9 Revenue recognition. In case of free-on-board (FOB) sales, the date of sale is recognized as the date on which the goods are handed over to the carrier and in the case of CIF sales the date of delivery is recognized as the date of sale. The Bills of lading/Airway Bills along with sales invoices produced in support of the claim of the Assessee : 42 : IT(TP)A Nos. 299 & 218/Bang/2014 which are at pages 3551-4008, Files 15 and 16 of the paper book substantiates the case of the Assessee for inclusion of the aforesaid sum as part of the turnover for AY 2009-10. We hold accordingly.
43. The third component of the turnover which is in dispute is the non- inclusion of sales of Rs.4,98,296 as turnover of AY 2009-10. The claim of the Assessee is that it had issued credit notes to the customers for recognizing sales for the relevant AY 2009-10 but the evidence to substantiate the same is not discernible from the material filed before us. So also the fourth component of dispute of turnover viz., a sum of Rs.4,23,06,045 which is stated to be owing to wrong punching of amounts due to non-inclusion of certain sales not required to be reported in APR. We therefore remand the issue to the AO for consideration de novo with liberty to the Assessee to substantiate its case with necessary evidence.
44. The next aspect of turnover is the non-realization of Export proceeds in convertible foreign currency in India within the time limit specified in Sec.10A(3) of the Act. A sum of Rs.1,26,34,663/- was stated to be Invoices pending realizations and therefore was disregarded for the purpose of considering export turnover of the Assessee for IDF-1 UNIT. The Assessee has filed the following reconciliation to show that the amount to be excluded from export turnover is only a sum of Rs.1.19 crores as per the following chart.
: 43 :
IT(TP)A Nos. 299 & 218/Bang/2014
Amount (In crs.)
Particulars Invoice value- Realization Refer Note
USD
INR value-INR
Realized till 30th
4.08 180.91 198.91 1
September 2009
Realized post 30th
September 2009 but
within 12 months of
invoicing as per - -
FEMA regulations
Realized post 30th
September 2009 but
1.40 66.70 66.81 3
after 12 months of
invoicing
Total realized till date 5.49 247.69 265.72
Unrealized till date 0.03 1.19 - 4
Export sales as per
5.51 248.88 248.88
sales listing
As far as sales realization being item No.1 and 2 are concerned, there can be no dispute on considering the above realizations as sale of the relevant AY. As far as item No.3 i.e, Invoices which were realized post 6 months from the end of FY and also from the 12 months from the date of invoicing, is concerned, the provisions of section 10A of the Act provides that export proceeds should be realized within 6 months from the end of FY or such further period as the competent authority may allow in this behalf. "Competent authority" means the Reserve Bank of India ("RBI") or such other authority as is authorized for regulating payments and dealings in foreign exchange. Notification : 44 : IT(TP)A Nos. 299 & 218/Bang/2014 No. FEMA 176 / 2008-RB issued by the RBI wherein time limit for realization of export proceeds was enhanced from 6 months to 12 months from date of export. It is the submission of the Assessee that since the export proceeds bought into India after said period of 12 months are via a FIRC duly received from the Authorized Dealer, same should be deemed to be allowed by the Competent Authority and thus is to be allowed in terms of Section 155(11A). The decision of ITAT Bangalore Bench in the case of HCL EAI Services Ltd. Vs. DCIT (supra) supports the plea of the Assessee in this regard and therefore the same is accepted. We therefore hold that what is to be excluded from turnover on the ground of non-realization of sale proceeds u/s.10A(3) is only a sum of Rs.1.19 crores. However the Assessee is permitted to claim the deduction as regards the same once the same has been realized in terms of Section 155 (11A) of the Act.
TURNOVER OF IDF-2 UNIT:
45. The first component of turnover which is in dispute is the non- inclusion of Rs.3,87,26,658/- which was sales which were treated as prior period (AY. 2008-09 sales) by the AO on the basis of the dates of sales invoice that was prior to 1.4.2008. The Assessee's method of Accounting for invoices are made following the principles of the AS - 9 Revenue recognition. In case of free-on-board (FOB) sales, the date of sale is recognized as the date on which the goods are handed over to the carrier and in the case of CIF sales the date of delivery is recognized as the date of sale. The Bills of lading/Airway Bills along with sales invoices produced in support of the claim of the Assessee : 45 : IT(TP)A Nos. 299 & 218/Bang/2014 which are at pages 3551-4008, Files 15 and 16 of the paper book substantiates the case of the Assessee for inclusion of the aforesaid sum as part of the turnover for AY 2009-10. We hold accordingly.
46. The next component of the turnover which is in dispute is the non- inclusion of sales of Rs.17,64,65,522 as turnover of AY 2009-10. The claim of the Assessee is that owing to wrong punching of amounts which are not required to be reported as sales to APR. The evidence to substantiate this claim is not discernible. We therefore remand the issue to the AO for consideration de novo with liberty to the Assessee to substantiate its case with necessary evidence.
47. The next aspect of turnover is the non-realization of Export proceeds in convertible foreign currency in India within the time limit specified in Sec.10A(3) of the Act. A sum of Rs.4,55,03,164 was stated to be Invoices pending realizations and therefore was disregarded for the purpose of considering export turnover of the Assessee for IDF-2 UNIT. The Assessee has filed the following reconciliation to show that the amount to be excluded from export turnover is a sum of Rs.5.41 Crores as per the following chart.
Amount In Crs.
Particulars Invoice value- Realization Refer Note
USD
INR value-INR
Realized till 30th September 1
29.29 1288.64 1359.08
2009
: 46 :
IT(TP)A Nos. 299 & 218/Bang/2014
Realized post 30th September
2009 but within 12 months of 2.77 134.99 142.87 2
invoicing as per FEMA
regulations
Realized post 30th September
2009 but after 12 months of 0.02 0.49 0.61 3
invoicing
Total realized till date 32.07 1424.12 1502.55
Unrealized till date 0.12 5.41 - 4
Export sales as per sales
32.19 1429.54 1429.54
listing
As far as sales realization being item No.1 and 2 are concerned, there can be no dispute on considering the above realizations as sale of the relevant AY. As far as item No.3 i.e, Invoices which were realized post 6 months from the end of FY and also from the 12 months from the date of invoicing, is concerned, the provisions of section 10A of the Act provides that export proceeds should be realized within 6 months from the end of FY or such further period as the competent authority may allow in this behalf. "Competent authority" means the Reserve Bank of India ("RBI") or such other authority as is authorized for regulating payments and dealings in foreign exchange. Notification No. FEMA 176 / 2008-RB issued by the RBI wherein time limit for realization of export proceeds was enhanced from 6 months to 12 months from date of export. It is the submission of the Assessee that since the export proceeds bought into India after said period of 12 months are via a FIRC duly received from the Authorized Dealer, same : 47 : IT(TP)A Nos. 299 & 218/Bang/2014 should be deemed to be allowed by the Competent Authority and thus is to be allowed in terms of Section 155(11A). The decision of ITAT Bangalore Bench in the case of HCL EAI Services Ltd. Vs. DCIT (supra) supports the plea of the Assessee in this regard and therefore the same is accepted. We therefore hold that what is to be excluded from turnover on the ground of non-realization of sale proceeds u/s.10A(3) is a sum of Rs.5.41 crores. However the Assessee is permitted to claim the deduction as regards the same once the same has been realized in terms of Section 155 (11A) of the Act.
48. Thus Gr.Nos.11 & 12 are partly allowed.
49. Ground No.13 & 14 raised by the Assessee is with regard to the action of the AO and the CIT(A) in recomputing the income from IDF1 and IDF 2 units from domestic sales by these units by adopting sales as per excise returns of IDF1 and IDF2 units.
"13. Considering domestic sales of IDF 1 and IDF 2 as per excise return 13.1. The learned AO/DRP has erred in considering the domestic sales for the IDF 1 and IDF 2 unit as per the excise return amounting to Rs. 1,882,165,998.
13.2. The learned AO/DRP ought to have provided the reasons for rejecting the domestic sales as per the books of accounts. 13.3. The learned AO/DRP ought to have provided the assessee an opportunity of being heard before rejecting the domestic sales as per books of accounts.
13.4. The learned AO/DRP ought to have observed that the amounts in the Excise Return is gross of trade discount of Rs. 123,700,612 and therefore has resulted in the domestic sales being considered as higher to this extent than as reported in the financial statements.: 48 :
IT(TP)A Nos. 299 & 218/Bang/2014 "14. Double taxation of scraps sales amounting to Rs. 40,092,519 14.1. The learned AO/DRP has erred in considering the domestic sales for the IDF 1 and IDF 2 unit as per the excise return which is inclusive of scrap sales.
14.2. The learned AO/DRP has erred in once again considering scrap sales while re-computing the profits to IDF 1 and IDF 2 amounting to Rs. 1,27,94,809 and Rs. 2,72,97,710 respectively.
14.3. The learned AO ought to have observed that the above has resulted in double taxation of scrap sales".
50. We have already discussed similar issue of recomputing sales figure in IDF1 and IDF 2 units while deciding Gr.No.11 & 12 in Assessee's appeal and those grounds were in respect of export sales of these units. In Gr.No.13 & 14 the Assessee has projected its grievance regarding re-computation of sales in the domestic market. We have already seen while dealing with Gr.No.11 & 12 that the Assessee has four units viz., IDF1 unit, IDF 2 unit, MAG Unit and SWD services unit. IDF1/EHTP2 unit (hereinafter referred to as IDF 1 Unit) which manufactures and sells UPS systems and other power protection devices. The products manufactured in this unit is sold in the domestic as well as export market. (ii) IDF2 unit /EHTP1 unit (hereinafter referred to as IDF2 unit) also manufactures and sells UPS systems and other power protection devices. The products manufactured in this unit is sold in the domestic as well as export market. (ii) MAG unit which is engaged in the business of trading of UPS and other power protection : 49 : IT(TP)A Nos. 299 & 218/Bang/2014 devices which are procured either locally or through imports. The sales of this unit are only in domestic market.
51. In Gr.No.13 & 14 the dispute is with regard to figure of sales adopted by the AO while computing profits arising out of domestic sales of these units by adopting the figures as reflected in the excise return filed for these units rather than the sales of these units as recorded in the books of accounts (Sales Register). The action of the AO was confirmed by the DRP.
52. The AO recomputed the profits of the IDF 1 and 2 units. While re-computing the profits, the AO has considered the domestic sales as per the excise return and not the sales register. Scrap sales, which is already part of excise returns, was once again brought to tax. No specific reasons have been assigned for adopting this approach, except a passing reference to the fact that export sales of the Assessee have been inflated and that discussion will hold good for domestic sales as well (para 3.10 of the draft order of assessment at page-37 of the said order).
53. On the above approach of the AO which was reflected in the draft assessment order, the Assessee filed objections before the DRP. The DRP upheld the order of the AO, except in the case of double taxation of scrap sales wherein, the DRP has asked the AO to verify and provide relief if scrap sales are already part of domestic sales as per the excise return. However, the AO in the final order of assessment did not follow the directions of the DRP for the reason that as per : 50 : IT(TP)A Nos. 299 & 218/Bang/2014 provisions of Sec.144C of the Act, the DRP does not have power to request the AO to verify the details and hence upheld his addition para 27.4 at page 61 of the final order of assessment.
54. The submission made by the learned counsel for the Assessee before us was that the AO ought to have considered the domestic sales as per the segmental profit and loss account. It was submitted that the domestic sales of IDF 1 (EHTP -2) and IDF 2 (EHTP - 1) is Rs. 49,82,46,245/- and Rs. 101,15,90,862/- respectively, totalling to Rs. 150,98,37,107/-. Our attention was drawn to the segmental break-up available at Page 548 File 3 of paper book of Assessee. It was submitted that the action of the AO in re-computing the profits of the said 2 units, by considering the domestic sales at Rs. 55,25,46,883/- and Rs. 132,96,19,115/- totalling to Rs. 188,21,65,998/- for IDF 1 and 2 units, adopting the figures of sales as per the excise return was incorrect. The learned counsel for the Assessee also drew our attention to the fact that the difference in the domestic sales as per the excise return and the segmental P & L are on account of 1) Rs. 24,24,16,413/- of excise duty paid (originally, the AO had not given deduction of the same in the original assessment order but gave deduction of the same in the rectification order dated 18th August 2014) and 2) An amount of Rs. 12,99,12,478/- representing trade discounts for the two units put together (Rs. 4.08 cr for EHTP 2 and Rs. 8.29 cr for EHTP 1. While the sales reported in the excise return includes the amount of trade discount, the segmental P&L reported domestic sales net of trade discount. The learned counsel submitted that the AO has not provided : 51 : IT(TP)A Nos. 299 & 218/Bang/2014 any reason for not considering the domestic sales as per the books of accounts and neither was the Assessee put on notice regarding the same. Our attention was also drawn to the fact that the Assessee submitted before the AO, the complete details of domestic sales of IDF 1 and IDF 2 units along with sample invoices vide submissions dated 4th March 2013 (Submission on page 3256 - file 14, relevant portion at pg. 3257 and listing page nos. 3277 to 3327- File 14 and invoices on page 3328 to 3332-File 14). Our attention was also drawn to the fact that in a submission dated 14th March 2013 details of domestic sales register was re-submitted (Submission on page 4020 file 17, relevant portion at page 4028 and listing at page nos. 4048-4120 -File 17). The reconciliation of the amount of Rs. 12.99 Cr on account of trade discount was also provided in the said submission. The Assessee also made submissions before the DRP on the non-consideration of the aspect of trade discount in the excise return (submission on page nos. 4878 and 4910 of File 20 for EHTP 2 and EHTP 1 respectively).
55. As far as the action of the AO in considering sales as per excise return and including the scrap sale value again as an addition while computing total income, the learned counsel submitted that the sales declared in the excise return includes scrap sale value and making addition of sale value of scrap again in the computation of total income amounts to double addition of the same income. Scrap sales has been separately shown in the Assessee's segmental P&L (Rs. 1,27,94,809/- for EHTP 2 and Rs. 2,72,97,710/- for EHTP 1) page 548 in File 3 of : 52 : IT(TP)A Nos. 299 & 218/Bang/2014 the Paper book. The AO has considered the sales as per the excise return (which includes the scrap sales) + scrap sales reported in the segmental P&L. our attention was drawn to the AO's computation at Pages 33 and 34 of the Draft Assessment order. It was submitted that scrap sale has been subject to tax twice. The learned counsel for the Assessee brought to our attention Assessee's submission dated 16th October 2012 (pages 518-540, at page 524 of File No. 2) wherein sample scrap invoices were given at File 13 pages 3084-3173. It was pointed out that the excise returns (available at pages 572-635 of File No. 3) demonstrate that scrap is included as part of the same. It was pointed out that the DRP in its directions at page 61, directed the AO to verify whether scrap sales were double taxed and if so, to not add the same once again. The learned counsel for the Assessee therefore prayed that the AO should be directed to adopt the domestic sales as per segmental P&L which is sales net of net of trade discount and sale of scrap has been reported separately in its segmental. It was submitted that by considering the sales as per the excise return, the AO has not granted the Assessee the benefit of the trade discount and has doubly taxed scrap sales.
56. The learned DR relied on the order of the AO/DRP.
57. We have considered the rival submissions and are of the view that the submissions of the Assessee have merit. We are of the view that the reconciliation provided by the Assessee prima facie proves its case. It is undisputed that all sales invoices were provided by the : 53 : IT(TP)A Nos. 299 & 218/Bang/2014 Assessee before the AO. Therefore there is merit in the submission of the learned counsel for the Assessee that the profits of IDF 1 and IDF 2 units in so far as it relates to domestic sales of these units have to be accepted as declared by them as per the segmental profit and loss account. No specific reasons have been assigned by the AO for adopting to a course of substituting the sales figures as reflected in the books of account, which is supported by the sales invoices produced before the AO at the time of assessment proceedings. The AO is directed to verify figures of trade discount and exclude them from sales figure. Similarly the AO is directed to verify if income from sale of scrap has been doubly taxed and if so, allow relief to the Assessee. The AO will afford opportunity of being heard to the Assessee before giving effect to this order. Gr.No.13 & 14 are thus treated as allowed to the extent indicated above.
58. Gr.No.15 is identical to Gr.Nos.13 & 14. Gr.No.15 relates to the action of the Revenue authorities in determining the profits of MAG unit by adopting the sales figure of Rs.302,31,90,978 and cost of sales at Rs.92,78,67,516 and refusing to recognize loss on account of foreign exchange fluctuation as an allowable expenditure while computing income MAG unit and determining the profits of the said unit accordingly. In doing so, the AO refused to recognize the figure of sales as reported in the segmental profit and loss account of MAG unit at Rs.1,27,09,37,458 and cost of sales at Rs.206,47,39,851 and treating foreign exchange currency fluctuation loss of Rs.92,78,67,516 as : 54 : IT(TP)A Nos. 299 & 218/Bang/2014 allowable expenditure and arriving at the profit of MAG unit in the segmental profit and loss account.
59. We have already seen while dealing with Gr.No.11 & 12 that the Assessee has four units viz., IDF1 unit, IDF 2 unit, MAG Unit and SWD services unit. IDF1/EHTP2 unit (hereinafter referred to as IDF 1 Unit) which manufactures and sells UPS systems and other power protection devices. The products manufactured in this unit is sold in the domestic as well as export market. (ii) IDF2 unit /EHTP1 unit (hereinafter referred to as IDF2 unit) also manufactures and sells UPS systems and other power protection devices. The products manufactured in this unit is sold in the domestic as well as export market. (ii) MAG unit which is engaged in the business of trading of UPS and other power protection devices which are procured either locally or through imports. The sales of this unit are only in domestic market.
60. The AO noticed that the sales as per Trial Balance as on 31.3.2009 domestic sales of MAG unit was reported at Rs.302,31,90,978/-. Whereas the domestic sales as per the segmental profit and loss account was showing sales of only Rs.127,09,37,459/-. The Assessee filed a reconciliation of the sales figure of Rs.127,09,37,459/- as per the segmental profit and loss account based on which income from IDF 1 unit/IDF 2 unit and MAG unit were declared in the return of income. The same has been extracted by the AO in page-40 of the order of Assessment. The Explanation of the : 55 : IT(TP)A Nos. 299 & 218/Bang/2014 Assessee with regard to the sales as declared in the Trial Balance as on 31.3.2009 and the segmental profit and loss account as on 31.3.2009 was clearly given in Assessee's reply dated 14.3.2013. The same is as follows:
"3. Domestic turnover and cost of sales domestic unit (MAG) a. The amount considered by your goodself in the notice is Rs. 3,023,190,978 being the net sales of MAG unit as per the trial balance.
b. As stated in our submission dated 13 December 2012, the amount booked as sales in the MAG unit is the sales pertaining to the following:
i. MAG traded;
ii. IDF 1/EHTP 2 domestic sales; and
iii. IDF 2/EHTP 1 domestic sales
c. As per the coding system of accounting followed by the company, the trial balance of MAG unit captures the total domestic sales of the company. Out of the total domestic sales accounted under MAG unit, the domestic sales pertaining to IDF 1 and IDF 2 will be considered to the respective units on the basis of the invoice details. d. The details of domestic sales considered in the respective units is provided below:
Particulars IDF1/EHTP2 IDF2/EHTP1 MAG Traded Total (Rs) (Rs) (Rs) (Rs) Domestic 498,246,245 1,011,590,862 1,270,937,459 2,780,774,565 Sales FG Add: Excise duty 242,416,413 Total domestic sales 3,023,190,978 e. We submit that the method of capturing sales is not determinative to calculate the unit wise profit or loss data. In order to arrive at the correct unit wise profit or loss, the assessee submits that segmental profit and loss account should be considered. Accordingly, the : 56 : IT(TP)A Nos. 299 & 218/Bang/2014 amount appearing in the MAG trade segmental of Rs. 1,270,937,459 is the correct amount of sales in MAG unit.
In this regard, we have attached the domestic sales listing of IDF 1 and IDF 2 as per Annexure 3.
f. We submit that purchase account expenses amounting to Rs. 206,47,39,851 pertains to MAG unit and it is forming part of the cost of goods sold amounting to Rs. 1,136,872,335.
g. Notwithstanding and without prejudice to our above submissions, should your goodself consider the net domestic sale as per Trial Balance of MAG unit, we submit that -
• The total expenses attributable to domestic sales should also be reduced while determining the profits derived from domestic sales.
• While computing the total turnover of IDF1 and IDF2 no domestic sales to be reckoned as part of total turnover. Accordingly, we submit that the deduction under section 10A of the Act would correspondingly go up".
61. After extracting the reconciliation, the AO in page-41 of his order para-1 observed as follows:
"As per the reconciliation a sum of Rs.1,75,22,53,520 was reduced as IDF1/ IDF-2 domestic sales. However, in the same sheet only a sum of Rs.54,99,40,665/- and Rs.61,27,06,304 was reduced as DTA sales against IDF 1 and IDF 2. Had this been the case they should have reduced only Rs.116,26,46,969/- (Rs.54,99,40,665 + Rs.61,27,06,304) against Rs.175,22,53,520/-. It is pertinent to mention here that the sum of Rs.116,26,46,969/- is nothing but the inter division purchase that was tallied with trial balance and the relevant page was scanned and presented at point number-2"
62. In para 3.10.1 of his order the AO has extracted the reply dated 14.3.2013 which we have extracted in the earlier paragraph but has quoted only from paragraph ( e ) of the reply without quoting : 57 : IT(TP)A Nos. 299 & 218/Bang/2014 paragraphs (a) to ( d). A reading of paragraph (a) to (d) of the reply dated 14.3.2003 filed by the Assessee would show that MAG unit captures the total domestic sales of IDF 1 and IDF 2 and sale of MAG unit. The sales of MAG unit on its own was only Rs.127,09,37,459. IDF 1 and IDF 2 units domestic sales were also captured as sales of MAG unit in the Balance Sheet and this was due to system of accounting followed by the company. The difference in figures pointed out by the AO at page 41 of his order, which we have extracted in the earlier paragraph is an incorrect comparison because Rs. 116.26 crores represents the cost at which the goods are transferred inter-unit from IDF to MAG, whereas Rs. 175.22 Cr represents the sale value which is offered to tax in the IDF units. The relevant entry for Rs. 116.26 crores in the Trial Balance of MAG unit is available at page 38 of the assessment order under the Purchase Account (Relevant Entry -
"Purchases - Inter division"). This was duly explained to the AO vide Assessee's submission dated 13th December 2012 (File 3 pages 636- 688 at pages 641-642) and Annexure 5 and 7 to the said submission also provided the ledger account extracts in support of the same. The AO has acted arbitrarily in extracting selectively from the reply dated 14.3.2013 in the order of assessment and has failed in his duty to consider the reconciliation as given by the Assessee. The DRP in its order has also adopted the same course adopted by the AO. The reconciliation at page-40 of the AO's order also captures the same position. Therefore nothing turns on difference in figures in the Trial : 58 : IT(TP)A Nos. 299 & 218/Bang/2014 Balance and the segment profit and loss account, as was sought to be made by the AO.
63. After making the aforesaid observations, the AO recomputed the profits of the MAG unit, as follows:
Sl no. Adjustment made Amount (Rs.)
1 Turnover for MAG unit considered 1,75,22,53,519
from Trial Balance at Rs.
3,02,31,90,978 instead of the segmental
P&L at Rs. 1,27,09,37,458
2 Cost of sales considered from Trial 92,78,67,516
Balance at Rs. 206,47,39,851/- instead
of segmental P & L at Rs. 113,
68,72,335/-
3 Loss on account of foreign exchange 30,18,63,653
fluctuation disallowed
As already stated it is the plea of the Assessee that the amounts booked in the sales of MAG unit in the Trial Balance pertains to (i) MAG Trading (ii) IDF 1 ( EHTP 2) domestic sales and (iii) IDF 2 (EHTP 1) domestic sales. It is the plea of the Assessee that on account of considering the turnover of the MAG unit as reflected in the Trial Balance and not as per the segmental P & L of the Assessee, there is double taxation of the domestic sales of IDF1 and 2 and MAG unit. The foreign exchange loss is allowable deduction.: 59 :
IT(TP)A Nos. 299 & 218/Bang/2014
64. The DRP in its directions gave limited relief to the Assessee by directing the AO to verify the claim of double taxation and allow the claim if found correct. (Page 71 of the DRP Directions). However, in the final assessment order, the AO has not considered the same citing Section 144C(8) and (13) wherein it is provided that the DRP does not have power to remand any issue and has to settle all issues.
65. The learned counsel for the Assessee submitted that the sales of MAG unit as reported in the segmental profit and loss account should be taken and not the figure as found in the Trial Balance. It was his submission that the Assessee has properly reconciled the difference in figures by pointing out that the sale figure as reflected in the Trial Balance is nothing but inclusive of the sales by internal transfer from MAG unit to IDF 1 and IDF 2 units. We have already extracted the reconciliation in the Assessee's letter dated 14.3.2013 in the earlier part of this order on this issue. The learned counsel for the Assessee pointed out that the sum of Rs. 1,75,22,53,519 represents domestic sales (inclusive of excise duty component) of manufactured goods of IDF 1 and IDF 2. The Assessee has reported the above domestic sales as part of the segmental P&L of IDF 1 and IDF 2. It was pointed out by him that the AO has considered an amount of Rs. 188,21,65,998/- as domestic sales of IDF units from excise returns, which is sales of Rs. 175,22,53,519 plus trade discounts of Rs. 12,99,12,479/-, as stated earlier. It was submitted by him that the AO, by adopting the figures in the trial balance of the MAG unit (which also included sales of the IDF units), has once again considered the sum of Rs. 1,75,22,53,519 as part : 60 : IT(TP)A Nos. 299 & 218/Bang/2014 of MAG P&L thereby resulting in double taxation of the same amount in MAG unit as well as IDF 1 and IDF 2 i.e., same amount is taxed twice.
66. The Learned counsel for the Assessee explained that goods manufactured by IDF 1 and IDF 2 units when sold in domestic market is captured as sales in MAG unit. It was submitted that the adjustment by the AO considering the sales as per the trial balance has led to the double taxation of the same amount in the MAG unit and IDF 1 / IDF
2. These domestic sales pertain to EOU units which are IDF 1 and IDF2, and therefore ought to have been reflected in IDF1 and IDF 2 respectively, and not the MAG unit. The Learned counsel drew out attention to the several submissions made before the AO highlighting the above aspect. The Assessee vide its submission dated 13th December 2012 explained that an amount of Rs. 175,22,53,520/- being the domestic sales of IDF 1 and 2 had already been offered to tax (at page 636, relevant page 642 of File 3). Vide submission dated 4th March 2013 (File14 of the paper book, pages 3256 to 3389), the Assessee reiterated its earlier submission and gave an entire listing of the domestic sales of IDF 1 and 2 (at page 3257) and sample invoices (at pages 3328-3332). Vide its submission dated 13th December 2012, the Assessee had submitted to the AO the books of account of the Assessee in soft version (Page 3174 - File 14 of the paper book). The double taxation can be verified by examining any of the sample invoices, which will figure both in the domestic sales listing of IDF 1 and 2 (which can be correlated to the excise return of that unit) and in : 61 : IT(TP)A Nos. 299 & 218/Bang/2014 the sales ledger of MAG unit as per the Trial Balance. Vide submission dated 14th March 2013 (Pages 4020-4153 of the paperbook- File 17, relevant page 4028), the Assessee once again explained the concept and resubmitted the entire domestic sales listing of IDF 1 and 2, as required by the AO.
67. The learned counsel thus submitted that sales as per the segmental P&L account for MAG unit amounting to Rs. 1,27,09,37,458/- should be considered. The sales of Rs. 1,75,22,53,519/- being domestic sales of IDF 1 and IDF 2 should not be considered as sales of MAG The same should be considered as domestic sales of IDF 1 and IDF2. Without prejudice to the above claim it was submitted that, if the sales of the MAG unit of is taken as per the trial balance, then the such domestic sales should be reduced from the respective IDF units. Further if domestic sales of IDF 1 and IDF 2 are taxed in the MAG unit, the corresponding cost to such sales which are allocated to IDF 1 and IDF 2 in the segmental profit and loss account should also be removed from IDF 1 and IDF 2 and considered as cost of MAG unit. Without prejudice it was submitted that while computing the total turnover of IDF units 1 and 2, no domestic sales should be reckoned whilst computing the deduction under Section 10A of the Act.
68. The learned DR relied on the order of the AO/DRP.
: 62 :IT(TP)A Nos. 299 & 218/Bang/2014
69. We have given a careful consideration to the rival submissions. We find merit in the submissions made by the Assessee. As we have already mentioned in the earlier paragraphs on this issue, the AO and the DRP have selectively quoted form the reply of the Assessee dated 14.3.2013 without quoting the relevant part of the reply of the Assessee which gives reconciliation of the figures of domestic sales in IDF 1 and IDF 2 units. If only if they had dealt with the claim of the Assessee in the letter dated 14.3.2013 and the earlier letters of the Assessee on this issue, the issue would not have arisen before this forum for consideration. Not dealing with a claim and making an arbitrary addition in our view cannot be sustained. On the facts of the case, we are convinced that the sales as per the segmental P&L account for MAG unit amounting to Rs.1,27,09,37,458/- should be considered. The sales of Rs. 1,75,22,53,519/- being domestic sales of IDF 1 and IDF 2 should not be considered as sales of MAG unit. The same should be considered as domestic sales of IDF 1 and IDF2. We hold and direct accordingly. Similarly the cost of sales should be taken as per the segmental Profit and Loss Account. The issue with regard to foreign exchange fluctuation loss whether should be regarded as allowable deduction while computing income of MAG Unit or not will be discussed and dealt with while dealing with a specific ground of appeal on foreign exchange fluctuation gain and loss which is Gr.No.22 & 23 of the grounds of appeal of the Assessee in this appeal. In the result Gr.No.15 is treated as allowed.
: 63 :IT(TP)A Nos. 299 & 218/Bang/2014
70. Gr.No.16 & 17 raised by the Assessee were not pressed for adjudication because in rectification proceedings, the AO has allowed relief to the Assessee in respect of the grievance projected in those grounds. Hence, Gr.No.16 & 17 are dismissed as not pressed.
71. Gr.No.18 raised by the Assessee is with regard to claim of deduction on account of provisions for warranty. The relevant ground of appeal of the Assessee reads thus:
"18. Disallowance of provision for warranty : Rs. 67,25,51,172 Break-up of the above expenses is as under:
• Actual expense - Rs. 51,27,80,127
• Provision for warranty - Rs. 15,97,71,045
18.1. The learned AO/DRP has erred in disallowing the actual warranty expense debited to the profit and loss account amounting to Rs. 51,27,80,127 by treating this also as a provision for warranty.
18.2. The learned AO/DRP has erred in holding that the in warranty expenses and post warranty expenditure debited to the profit and loss account was not supported with any evidences.
18.3. The learned AO/DRP ought to have appreciated the fact that the Appellant has provided the following details:
• Invoice-wise and party-wise details for the actual warranty expenses debited to the profit and loss account. • Sample invoice copies for the substantiating the above details Provision for warranty - Rs. 15,97,71,045 18.4. The learned AO/DRP has erred in concluding that the provisions for warranty is not on a scientific basis as the details of the utilization of the warranty have not been provided.: 64 :
IT(TP)A Nos. 299 & 218/Bang/2014 18.5. The learned AO/DRP ought to have appreciated that the provision for warranty created is on a scientific basis and the Appellant has furnished detailed workings and a write-up on the basis for creation of the provisions for warranty being on the past trends of failure of the product.
18.6. The learned AO has erred in rejecting the claim of the Appellant that the warranty provisions are on a scientific basis as concluded in the assessments for the AY 2007-08 and the underlying facts have not undergone a change in the current assessment year.
18.7. The learned AO/DRP has erred in concluding that the warranty provisions created during any of the years have not been reversed. The learned AO has erred in disregarding the ledgers provided by the Appellant wherein it has been clearly seen that the warranty provisions of a particular year are reversed in the beginning of the next year.
18.8. The learned AO failed to appreciate the fact that the warranty provisions created during the year are reversed during the beginning of the next year and the actual warranty expenses incurred during the year are directly debited to the profit and loss account Alternate ground for warranty provision and expenses:
18.9. Notwithstanding and without prejudice to the above, the learned AO/DRP ought to have observed that the disallowance of the warranty expenses and provision for warranty should go to increase the "profits and gains from business and profession" of the respective units.
18.10. The learned AO/DRP erred in not considering the increased 'Profits and Gains of Business' consequent to the above disallowance in computing the tax holiday benefit under section 10A of the Act for IDF 1 and IDF 2 units".
72. The claim of the Assessee for deduction on account of provision for warranty comprises of three elements, viz., (i) Post Warranty expenses (actually incurred in the previous year) Rs.6,13,26,593/- (ii) in warranty expenses (actually incurred during the previous year) Rs.45,14,60,360/- and (iii) Provision for warranty of Rs.15,97,40,517/.
The total of the aforesaid three sums is a sum of Rs.67,25,27,470/-. These figures are evident from Annexure-16 to the reply dated : 65 : IT(TP)A Nos. 299 & 218/Bang/2014 13.12.2012 filed by the Assessee before the AO. This letter of the Assessee along with annexure is at page-636 to 688 of paper book no.3 filed by the Assessee. Annexure-16 to this letter which explains the basis of provision for warranty is at pages- 685 to 688 of paper book No.3 filed by the Assessee. The AO in making the disallowance has mentioned in the order of Assessment that the Assessee has not furnished the basis of his claim for deduction on account of provision of warranty, which is factually incorrect. Perusal of Annexure-16 to the letter dated 13.12.2012 filed by the Assessee before the AO, shows that the provision on account of warranty expenses was a sum of Rs.33,74,40,517/- out of which the Assessee on his own has disallowed a sum of Rs.17,76,69,472/- in the computation of total income. The actual difference between the provision for warranty expenses in the profit and loss account of Rs.33,74,40,517/- and provision for warranty expenses claimed by the Assessee and considered by the AO at Rs.15,97,40,517/- is Rs.17,77,00,000/-. There is therefore a slight variation in the figures of provision which is claimed to have been disallowed by the Assessee in the computation of total income by Rs.30,528 (Rs.17,77,00,000- Rs.17,76,69,472). Nevertheless, the claim for deduction on account of provision for warranty expenses considered for disallowance by the AO is a sum of Rs.15,97,40,517/-. We should therefore proceed on the basis that the provision for warranty expenses claimed by the Assessee is a sum of Rs.15,97,40,517 and the remaining sum claimed on account of provision for warranty is on actual warranty expenses incurred.
: 66 :IT(TP)A Nos. 299 & 218/Bang/2014
73. The Assessee provides warranty coverage for goods domestically sold. The warranty so provided consists of 'In warranty' expenses and Post Warranty Expenses:
In Warranty Expenses: i.e., customers who require service during the defined factory warrant period of operation use in-warranty service. All sales contracts of the Assessee provides for warrant/after sales services for free supply of material, bought out services during the warranty period. The defined warranty period of the Assessee on sales is 2 years in respect of goods produced in India and 1 year in respect of goods that is imported into India. Defective produces are returned by the customer to Authorized Placement Centre (APC) for replacement or repair during the standard warranty period. Any defect during the in- warranty period is handled by service team and expenses relating to the same are booked under "In-warranty Purchases" and "in-warranty expenses".
In-warranty purchases comprises mainly of local purchases for support of service and import purchases (along with duty element). The items booked under this head of expenses mainly relate to:
-purchase/charging of battery, purchase of raw materials for support of service business, purchase of packing material, purchase of carton bozes, imported raw material (all from group company) and payment of Import duty for procurement of material. In-Warranty expenses: The items booked under this head of expenses mainly relates to : 67 : IT(TP)A Nos. 299 & 218/Bang/2014
-Authorized services provider (ASP) claims settled by APC for in- warranty service support, RMA (returned material authorization) relates to expense for returned material received from vendor/ASP, and Cover freight from warehouse to ASP locations, to customer location and freight from customer locations. These expenses are debited to MAG unit.
Post Warranty Expenses:
Post warranty expenses pertain to the provision of services by the Assessee after the expiry of the warranty period to the customers. These services are provided to the customers based on certain Annual Maintenance contracts (AMCs) between the customer and the company.
The post warranty expenses mainly comprises of expenses incurred by the company or through ASP and comprises of the following:
- ASP claims-call based expenses claim done by ASP's to APC, Temporary help incurred-Manpower support by Rolex logistics, travelling expenses incurred for catering the service repair work, freight charges, professional services-manpower support service, software support service, logistic and facility consultation charges, legal services, etc. and telephone expenses/electricity expense/food expenses.
74. The Accounting entries summary for warranty expenses passed by the Assessee in account for warranty expenses is as follows:
: 68 :IT(TP)A Nos. 299 & 218/Bang/2014
(a) The provision for warranty created during the preceding financial year is reversed during the beginning of the current financial year and offered as income while computing the taxable income.
(b) The actual warranty expenses incurred for the year are debited as expenses in the current financial year;
(c) During the year end, the Assessee reviews the amount required to be provided as warranty based on the warranty policy of the Assessee. The Assessee provides for warranty based on the average field failure rate of each product and average actual repair cost incurred for each product. These are based on the feed back of the service engineers who are in-charge of reapirs and replacements of defective products. Further adjustments are made to either increase or decrease this provision based on the assessment of risk exposure.
75. The entries passed for the relevant previous year in the books of account of the Assessee is as follows:
Sl Particulars Debit (Rs) Credit (Rs)
No.
1 Provision for warranty 252,283,455
account Dr
To Warranty expenses 252,283,455
Account
(Being reversal of opening
provisions)
2 Post warranty expenses
account Dr 61,326,593
To Cash/Bank/Creditor
account 61,326,593
: 69 :
IT(TP)A Nos. 299 & 218/Bang/2014
(Being the post warranty
expenses entry)
3 Warranty expense account Dr
451,460,360
To Cash/Bank/Creditor
account 451,460,360
(Being the warranty expenses
entry)
4 Warranty expense account Dr
589,723,972
To provision for warranty
account 589,723,972
(Being the warranty
provisions creation entry)
5 Profit and loss account Dr 850,227,470
To warranty expenses Account 451,460,360
To Post Warranty Exp 61,326,593
To Provision for Warranty 337,440,517
(Being the transfer of the
warranty expense to the Profit
and loss account)
Further, we wish to submit that the provision created for warranty for the relevant financials year amounting to Rs.33.7 crores has been expended in the immediately subsequent year.
In warranty accounting:
The amount booked as expenses in the MAG unit is then passed on to the other units to which the original sale pertains. It may be noted that on an average the Company receives around 20,000 service requests per month. In view of the voluminous nature of the transactions the Company it is difficult to track the warranty expense customer-wise or order wise.
Post warranty expenses:
The income received from the provision of these services is booked in the MAG unit under Schedule 11 - Income from annual maintenance and : 70 : IT(TP)A Nos. 299 & 218/Bang/2014 support services. Accordingly, the expenses incurred from the provision of the post warranty services are also booked under the MAG unit".
76. The above were the facts on the claim for deduction on account of warranty expenses made by the Assessee before the AO.
77. The AO however disallowed the entire amount towards warranties amounting to Rs. 67.26 cr. The AO proceeded on the basis that the entire amount debited to the profit and loss account as in-warranty expenses and post warranty is also provision for warranty. The AO did not appreciate the contention nor did he deal with the contention of the Assessee that actual warranty expenses amounting to Rs. 51,27,80,127 (in-warranty - Rs. 45,14,60,360 and post warranty - Rs. 6,13,19,767) incurred during the year are also debited to the profit and loss account and those expenses cannot by any stretch of imagination be disallowed. The AO has made reference to certain figures in para 6.3 sub- paragraph-2 at page 52 of his order and those figures have nothing to do with claim for deduction of expenditure on account of warranty and those figures relate to the provision for warranty as per books of accounts whereas what is relevant to be seen is what has been claimed as deduction in the computation of income. The conclusions of the AO were that (1)The in-warranty amount and post warranty amount debited to the profit and loss account was not supported by any evidences; (2) provision for warranty has not been created on a scientific basis for the reason that there is no data available. The DRP confirmed the action of the AO by observing that the Assessee has not : 71 : IT(TP)A Nos. 299 & 218/Bang/2014 provided any of the factual data in support of the claims of the warranty and therefore rejected the objections raised by the Assessee.
78. We have heard the rival submissions. The first and foremost submission of the learned counsel for the Assessee was that the Actual warranty expense - In warranty (Rs 45,14,60,360) and post warranty (Rs 6,13,19,767) was erroneously considered as provision for warranty. It was brought to our notice that these expenses comprises of purchase of battery, raw material, packing material, carton boxes, import of raw material, payment of import duty, ASP Claims, freight charges, etc. Our attention was drawn by him to the evidence in support of the warranty expense were submitted to the AO vide submissions dated 4th March 2013 (page number 4154 to 4555-file 18). Detailed party wise breakup of the expense (approx. 14000 individual line items (pages 4166-4530) were filed by the Assessee. Sample invoices for the expenses incurred (pages 4531-4555) were also filed by the Assessee. Despite such evidence having been filed, the AO has observed that no evidence was filed by the Assessee in support of the claim for deduction. The invoices that were destroyed in fire has nothing to do with invoices relating to actual incurring of warranty expenses. These invoices were produced before the AO. It was submitted that actual expenditure incurred on providing warrant claims was an expenditure of revenue nature incurred wholly and exclusively for the purpose of business of the Assessee and had to be allowed as deduction under section 37(1) of the Act. As per the warranty policy of the Assessee, warranty services are provided only in respect of : 72 : IT(TP)A Nos. 299 & 218/Bang/2014 domestic sales made by the Assessee. The learned counsel for the Assessee pointed out that since the post warranty income is booked and reflected on the MAG unit, the corresponding cost is also booked in the MAG unit and also brought to our notice that this aspect was explained to the AO vide submissions dated 13th December 2012. The learned DR relied on the order of the AO/DRP.
79. We have carefully considered the rival submissions. As rightly submitted by the learned counsel for the Assessee, the actual warranty expenses were always claimed apart from deduction claimed on account of provision for warranty. The closing balance in the provision for warranty account on the last of the earlier financial year which is opening balance of the current financial year is reversed on the first day of current financial year. Thereafter the actual warranty expenses is claimed as deduction on the basis of actuals and anticipated liability on account of warranty claims in future in respect of sales already recognized in the books of account is estimated on a scientific basis and deduction on account of provision for warranty is claimed. This has been made clear by the Assessee in his submission dated 13.12.2012 and annexure-16 to the said letter filed before the AO. Therefore there is no reason why the actual expenditure incurred on providing warrant claims should not be allowed as deduction. The evidence filed by the Assessee in this regard before the AO vide submissions dated 4th March 2013 ( page number 4154 to 4555-file 18) giving all details, detailed party wise breakup of the expense (approx. 14000 individual line items (pages 4166-4530) and sample invoices for : 73 : IT(TP)A Nos. 299 & 218/Bang/2014 the expenses incurred (pages 4531-4555) clearly proves the claim of the Assessee for deduction of the aforesaid sums. We therefore hold that disallowance of warranty expenses to the extent of actuals incurred by the Assessee viz., - In warranty (Rs 45,14,60,360) and post warranty (Rs 6,13,19,767) should be allowed as deduction. We hold and direct accordingly.
80. As far as deduction on account of provision for warrant expenses of Rs.15,97,71,045/- is concerned, we have heard the rival submissions. The conditions for allowing provision on account of provision for warranty expenses has been laid down by the Hon'ble Supreme Court in the case of Rotork Controls India (P) Ltd (314 ITR
62) wherein the Honorable Apex Court has stated that provision for warranty shall be allowed if it is made on scientific basis. The Assessee has filed a chart explaining as to how the Principles laid down by the Hon'ble Supreme Court in the case of Rotork Controls (supra) has been satisfied in its case.
Principles laid down for provision for Applicability to the Assessee warranty to be treated scientific 1 Present obligation out of obligating There is present obligation on the events which involves outflow of Company to meet cost for resources warranty in event of defects in products which would involve outflow of resources 2 A reliable estimate can be made Repair cost and MLO cost incurred is multiplied by actual FFR rate and number of products sold to compute provision. Thus, estimate made by Company can be considered reliable : 74 : IT(TP)A Nos. 299 & 218/Bang/2014 Principles laid down for provision for Applicability to the Assessee warranty to be treated scientific 3 Warranty cost was an integral part Warranty provided for domestic of that sale price sales at time of sale. Thus, warranty cost is an integral part of sales 4 A historical trend used as a basis Provision created is based on the for creation of provision field failure rate of the products in past. Thus, a historical trend of actual failure of products has been used as a basis for creating the provision 5 Reversal of unutilized provisions In case of Company the entire provision is reversed in next year and actual expense is booked in profit and loss A/C. Thus, there is no question of unutilized provision
81. The method of creation of provision for warranty by the Assessee is scientific. A perusal of the detailed workings for the provision for warranty were furnished before the learned AO vide submissions dated 4th March 2013 (page number 4154 to 4162 - file 18 of the paper book, relevant pages 4160-4164). The workings annexed to the said submission are available in Files 5 and 6 of the paper books with complete listing of the sales. Also, the same were even explained in detail in the submissions dated 13th December 2012 (Page no 685 to 688 File 3), where the accounting entries were also explained. The Assessee submits that the determination of provision is an elaborate exercise covering all products sold and involves of around 35,000 line items. The AO held that provision for warranty made by the Assessee : 75 : IT(TP)A Nos. 299 & 218/Bang/2014 is not scientific because details of the utilization of the warranty have not been provided. In none of the years the unutilized warranty provision was reversed and credited into the P&L account; Utilization can be verified only if the name of the customer and the sales invoice are provided to verify the period of warranty and name of the customer against whom the warranty provision was utilized out of the existing provision, etc.
82. These conclusions of the AO are unsustainable because the entire provision created by the Assessee is reversed in the next year and actual warranty expense incurred is charged to the Profit and Loss Account. Thus, in the case of the Assessee there is no requirement for maintaining the details of utilization as mentioned by the learned AO as there is no unutilized provision. The trend of provision for warranty i.e., the actual expense vis-à-vis the closing provision for warranty and also reversal of warranty have all been furnished by the Assessee before the AO. (Submission at page 4747 of File 20 of the paperbook (relevant pages 4786-4793). The Ledger extracts for the provision a/c for the year ended 31st March 2008 and 31st March 2009 were also made available at pages 4793-4794. The utilization in the case of Assessee is in the form of evidence for actual expense incurred, which was furnished before the learned AO vide submissions dated 4th March 2013 ( page number 4154 to 4162 - file 18 of the paper book). The method of creation of provision for warranty is a robust method of determination of provision for warranty. The same is as follows:
: 76 :IT(TP)A Nos. 299 & 218/Bang/2014
(i) Provisions for the previous year is reversed completely at the beginning of the current year.
(ii) At the year end, the Company reviews the amount required to be provided as warranty based on the warranty policy of the Company.
(iii) The sales register for the past 3 years are taken as basis for creation of the provisions for warranty.
(iv) The provision is created on the basis of Field Failure Rate (FFR) identified per product for the past one year (i.e. 2008 for 2009 expenses). Further adjustments are made to either increase or decrease this provision based on the assessment of risk exposure.
(v) The provision is created as under :
FFR * Cost per product* Number of products sold.
Cost refers to following:
o Material, Labor and Overhead (MLO) cost for products fully replaced;
o Repairs and freight costs for the products repaired.
83. It is also clear that the methodology followed by the Assessee was held to be scientific for AY 2008-09. AO's order dated 6th July 2012 clearly states the method of creation of warranty is scientific- page 5 para 2.7 (Page of 4959- file 20):
" On going through the assessee submissions, it is seen that assessee has created the provisions on a scientific basis based on empirical data, trends, projections, etc"
84. The method of providing and claim deduction on account of warranty expenses is the same in the present AY as it was in AY 2008- : 77 : IT(TP)A Nos. 299 & 218/Bang/2014
09. In the given facts and circumstances of the case, we are of the view that the deduction on account of provision for warrant expenses deserves to be allowed as claimed by the Assessee as the requirements for claiming deduction on account of provision for warranty liability has been satisfied. Gr.No.18 raised by the Assessee is accordingly allowed.
85. Gr.No.19 raised by the Assessee projects its grievance regarding treatment by the revenue authorities of a sum of Rs.5,38,22,153/- which is part of the AMC value which was deferred and not recognized as income by the Assessee in its books of accounts due to the revenue recognition policy followed by the Assessee. Gr.No.19 reads as follows:
"19. Addition of deferred service income as undisclosed income - Rs. 5,38,22,153 19.1 The learned AO/ DRP has erred in considering the sum of Rs. 5,38,22,153 as undisclosed income.
19.2. The learned AO/DRP ought to have observed that the amount cannot be treated as undisclosed income as the Appellant has provided the details of the source of the income such as party names, invoice numbers, invoice period, contract value, etc. 19.3. The learned AO/DRP has failed to appreciate the fact that the service income of Rs. 5,38,22,153 is the advance amount received during the year and it is not accrued in the FY 2008-09.
19.4. The learned AO/DRP has failed to appreciate the fact that the Appellant is consistently following the method of accounting for deferred service income as per Accounting Standard (AS) 9 - revenue recognition.: 78 :
IT(TP)A Nos. 299 & 218/Bang/2014 19.5. The learned AO/DRP has erred in not appreciating the fact that the Appellant has considered the deferred service income of the FY 2008-09 as income in the subsequent years on rendering the services to the customers and such income has been offered to tax in the year in which it has accrued.
19.6. The learned AO/DRP has erred in stating that the corresponding expenditure is already debited into the profit and loss account.
19.7. The learned AO/DRP ought to have observed that no services were rendered and no cost to this effect was incurred during the year".
86. The facts as far as Gr.No.19 are concerned are that the Assessee is principally engaged in the business of manufacture and trading of UPS systems and other power protection devices. The Assessee is also engaged in providing repairs and maintenance services to the customers based on Annual maintenance contracts ("AMCs"). The Assessee enters into AMCs for provision of repairs and maintenance services. This is done for the period after expiry of the warranty period. The AMCs are period specific - e.g 1 year contract, 2 year contract etc. The income in respect of the same is booked in the MAG unit. The revenue recognition policy of the Assessee in recording revenues from AMC are given in Schedule 18 to the notes to accounts (Note 2(h) (b) ) and is as follows:
"Service income primarily comprises income from support and maintenance contracts and is recognized on a pro-rata basis over the period of the contracts, over which the service is rendered."
According to the Assessee this revenue recognition policy of the Assessee is in line with the Accounting Standard (AS) 9 issued by the Institute of Chartered Accountants of India (ICAI) the application of : 79 : IT(TP)A Nos. 299 & 218/Bang/2014 which is mandatory for the Assessee. The service income which pertains to the subsequent year is not recognized as income in the current year.
• Example :
AMC contract value = Rs 100 Period : 1 July 2008 till 30 June 2009 Income recognized in the current year = 1 July 2008 till 31 Mar 2008 i.e, 274 days / 366 days * Rs 100 = Rs.
74.86 Income to be deferred and recognized in year ended 31 March 2010 is 92 /366 * 100 = Rs.25.14 The sum of Rs.5,38,22,153 which is the subject matter of addition in Gr.No.19 is income recognition of which by the Assessee for AY 2009-10 was deferred pursuant to its accounting policy given above.
87. The AO considered the deferred service income amounting to Rs.5,38,22,153 as undisclosed income. According to the AO once income has accrued or arisen to the Assessee the same has to be recognized as income in the year in which it accrues or arises, when the Assessee is following mercantile system of Accounting. Further the AO also observed that there was no opening balance in service income ledger, whereas the workings for deferred service income furnished by the Assessee has opening balance. The DRP upheld the order of the learned AO.
88. The learned counsel for the Assessee submitted that the amount for the AMC contracts are received in advance by the Assessee, but : 80 : IT(TP)A Nos. 299 & 218/Bang/2014 income recognition for such amounts is done proportionately over the period of the contract. According to him, doing so is permissible under Accounting Standard (AS) 9 of ICAI. He submitted that the service income which was deferred in the current FY has been booked in the P&L account for the subsequent years and has been offered to tax. He submitted that the AO and DRP were not right in characterizing the income in question as undisclosed income. According to him the amount in question is very much disclosed in the books of accounts of the Assessee and therefore cannot be said to be undisclosed income. The Assessee has an explanation for the sum found recorded in the books of accounts and the explanation is that it is recognized as income in subsequent AY. Therefore the sum in question cannot be said to be undisclosed income. His submission was that the Assessee was justified in deferring recognizing income because the income deferred was rightfully income of another AY. In this regard he drew our attention to the working of deferred service income furnished before the AO in Assessee's submissions dated 16th October 2012 containing, inter-alia, the following (Submission page - 518 to 540 at page 523 of File - 3. Connected workings at Annexure 9 thereto are available at Page nos. 1620 to 1897 - File 7):
(i) Party names
(ii) Invoice number
(iii) Invoice period
(iv) Contract value
(v) Number of days within FY 2009
(vi) The amount of income which falls outside FY 2009, etc. : 81 : IT(TP)A Nos. 299 & 218/Bang/2014
89. On the observation of the AO whether expenses have also been deferred, the learned counsel for the Assessee submitted that there will be no deferred cost such income as the same has not been incurred and will be incurred only in the subsequent period when the AMC is performed by the Assessee. There will be no opening balance in service income ledger because that deferred expenses because it is transferred to Profit & Loss Account will be closed. The opening balance will appear only in deferred income ledger and not in the service income ledger which is evident from the service ledger made available to the AO vide submission dated 30th August 2012 at pages 364- 498 of File -2. It was submitted that there is no basis for the AO to conclude that the service income has accrued in the current FY. It was submitted that the AO has not appreciated the concept of deferred revenue, even after the elaborate submissions of the Assessee. He placed reliance on the following decisions in support of the claim of the Assessee that the Assessee was entitled to defer recognition of income. CIT v. Punjab Tractors Co-op. Multipurpose Society Ltd. [1997] 95 TAXMAN 579 (PUNJ. & HAR.) CIT v. Coral Electronics (P.) Ltd. [2005] 142 TAXMAN 481 (MAD.)ACIT v. IOT Infrastructure & Energy Services Ltd. [2013] 39 taxmann.com 195 (Mumbai - Trib.). The learned counsel for the Assessee prayed that the addition of deferred service income amounting to Rs.5,38,22,153 as undisclosed income should be deleted as the same is not income for the year.
90. The learned DR relied on the order of the AO/DRP and also a decision of this Tribunal in the case of M/s.Optum Health & : 82 : IT(TP)A Nos. 299 & 218/Bang/2014 Technology (India) Pvt.Ltd. Vs. ITO ITA No.1068/Bang/2016 order dated 8.2.2019 wherein on identical facts, the tribunal held that income cannot be deferred and had to be recognized in the year of entering into the AMC. It was submitted by him that all invoices were not produced before the AO and it has to be seen as to what is the corresponding accounting treatment for purchase of materials, whether they were claimed in the year in which income was deferred and offered to tax. The terms of the AMC has to be examined.
91. We have carefully considered the rival submissions. The first aspect which we would like to clarify is that it was not correct on the part of the AO to characterize the sum of Rs.5,38,22,153 as undisclosed income. The income is disclosed in the books of accounts but is not recognized for the purpose of income tax computation because of the Assessee's accounting policy which in turn is based on AS-9 of ICAI. The second aspect which has to be clarified is that the deferment of revenue as not pertaining to the relevant AY 2009-10 is also substantiated by the Assessee and the basis of deferral of revenue is clearly given in paper book no.7 pages 1620 to 1897. Therefore there can be no dispute that the income deferred did not pertain to AY 2009- 10, if one were to accept that deferral of income, though it has accrued to an Assessee, is possible. The principal question therefore that needs to be addressed is regarding whether deferring revenue is permissible under the mercantile system of accounting followed by the Assessee : 83 : IT(TP)A Nos. 299 & 218/Bang/2014 where income that accrues or arises to an Assessee has to be regarded as income.
92. The learned counsel for the Assessee in his rejoinder submitted that the decision of the Tribunal rendered in the case of M/s. Optum Health & Technology (India) Pvt.Ltd. (supra) is clearly distinguishable because in that case not only was the revenue received but also services were rendered and still the Assessee chose to defer revenue recognition and it was in those circumstances, the Tribunal held that deferring revenue was not proper and had to be regarded as income of the relevant year.
93. We have given a very careful consideration to the rival submissions. Similar issue had arisen for consideration in the case of Punjab Tractors Co-op. Multipurpose Society Ltd. (supra) before the Hon'ble Punjab & Haryana High Court. In that case the facts were that the assessee was engaged in the purchase and sale of tractors, motor cycles, etc., and doing their repairing. It had received advances from the buyers of tractors to cover their service charges for a period of one year after the expiry of initial warranty period. It had shown same on the liability side in the balance sheet for the assessment year 1978-79 under the head 'Post-Warranty Service Advances' (PWS Advances). It used to make adjustment of the amount received from PWS Advances Account to the Workshop Income Account during the quarter in which the work of repairs and services was done, and included the amount so adjusted as income of the relevant year. Out of the aggregate amount : 84 : IT(TP)A Nos. 299 & 218/Bang/2014 shown in PWS Advances Account, the Assessing Officer treated proportionate sum for the period covered as the assessee's income for the assessment year in question. The Commissioner invoked section 263 and held that the entire amounts received in the previous year towards PWS Advances were trading receipts of the year directly connected with the business of servicing and repairs of tractors. He, accordingly, set aside the assessment. On appeal, the Tribunal upheld the Assessing Officer's action disagreeing with the finding of the Commissioner. On reference, the Hon'ble Punjab & Haryana High Court held as follows:
"The taxability of income normally depends upon the system of accounting followed by the assessee. Even in the case of an assessee following the mercantile system of accounting, a mere claim, by the assessee in respect of an amount without the right to claim cannot form the basis for taxability. Where the assessee follows the cash system of accounting, the taxability is to be based on receipt basis and not on accrual basis. Receipt, either accrued or deemed, is not made a condition precedent to taxability. Profits or gains are taxable if they have accrued or have arisen or are, under the Act, deemed to have accrued or arisen to the assessee in the accounting year. Generally, income must accrue first, receipt normally follows the accrual. In other words, the right to receive must come into existence before the actual receipt takes place. Receipt, by itself, is not sufficient to attract tax. It is only receipt as 'income' which would attract tax. Every receipt by the assessee is, therefore, not necessarily income in his hands. It bears the character of income at the time when it accrues in the hands of the assessee and then it becomes eligible to tax. What is relevant to determine whether money received is income or simply an advance, is the initial character of the receipt and not the head under which the amount is credited in the books of account. If no income has resulted, it cannot be said that income accrued merely on the ground that the assessee has been following the mercantile system of accounting.": 85 :
IT(TP)A Nos. 299 & 218/Bang/2014 The Hon'ble Court accordingly upheld the stand of the Assessee. Holding that the Assessee did not become owner of the money received unless the services are rendered and was not entitled to appropriate the same till service was rendered in lieu of which the same was received in advance.
94. The Hon'ble Madras High Court in the case of Coral Electronics (P) Ltd. (supra) also dealt with similar case. The assessee is a private limited company carrying on business in television sets. In the previous year ending 31st March, 1983, and 31st March, 1988 corresponding to the assessment years 1983-84 and 1988-89, respectively, the assessee had collected service charges, which were bifurcated into two items, one as pertaining to year and another pertaining to the subsequent assessment year and, therefore, excluded from consideration in determining the total income of year. The Assessing Officer treated it as income and taxed the same. The Tribunal has held that it is not taxable income. On a reference the Hon'ble Court held the amount that was received was only as charges for the services to be rendered in future. The services may be rendered or may not be rendered depending upon withdrawal of the money as and when the customer required. So, it is highly uncertain as to whether it would at all remain as income of the assessee. Only when the service is done the assessee has a right over the amount that was deposited. Till then, he has no right over the same. It is in that sense till : 86 : IT(TP)A Nos. 299 & 218/Bang/2014 then, it cannot be considered as an income of the assessee and is not eligible to tax.
95. The Mumbai ITAT in the case of ACIT Vs. IOT Infrastructure & Energy Services Ltd. (supra) had to deal with identical case. The facts of that case were that the Assessee had not offered for tax an amount being difference between progress billing as on 31-3-2007 and cumulative revenue booked as per accounts as on 31-3-2007 in respect of three contracts. The assessee explained to Assessing Officer that progress billing was inclusive of advances received from customers which amount did not reflect work performance. It was also explained that progress billing was done not only for amount of work done but also for mobilisation and other advances receivable by it as per terms of relevant contract and that mobilisation and other advances received by assessee by raising progress billings did not represent income of assessee at time of raising progress bills and same therefore had no effect whatsoever on income of assessee, which was recognised by method of percentage of completion. The Assessing Officer, however, held that amount due to customers as shown by assessee was nothing but understatement of its profits and added same to total income of assessee. On further appeal the question before the Tribunal was as to whether amount due to customers as shown by assessee was nothing but receipt of advance before accrual of income and, therefore, same could not be treated as income of assessee at point of receipt. The Tribunal held in favour of the Assessee.
: 87 :IT(TP)A Nos. 299 & 218/Bang/2014
96. As far as the decision of the Tribunal in the case of M/s.Optum Health & Technology (India) Pvt. Ltd., is concerned, as rightly contended by the learned counsel for the Assessee the facts were that the sums were received in advance and in respect of the sums received services were also performed but still the Assessee did not recognize revenue but postponed recognition based on the bills raised on the clients for services performed. Though there are observations in the order of the Tribunal that postponement of recognition of income is not possible on the basis of AS-9 of ICAI when income accrues or arises under the mercantile system of accounting, those observations have to be confined as decision on the facts of that case. In the light of the decision of the Hon'ble High Courts of Punjab & Haryana and the Hon'ble Madras High Court, we are of the view that the claim made by the Assessee deserves to be accepted. Accordingly the addition made by the AO and confirmed by the DRP is directed to be deleted. Gr.No.19 is accordingly allowed.
97. In Gr.No.20, the Assessee has projected its grievance against the action of the revenue authorities in taxing deferred income of Rs.2,90,49,991/-. The relevant grounds of appeal of the Assessee reads as follows:
"20. Addition of deferred service income (sundry debtors) as undisclosed income - Rs. 2,90,49,941/-
20.1. The learned AO/DRP has erred in considering the sundry debtors of Rs. 2,90,49,941 as undisclosed income.: 88 :
IT(TP)A Nos. 299 & 218/Bang/2014 20.2. The learned AO/DRP erred in holding that no details were furnished in respect of this transaction 20.3. The learned AO/DRP ought to have observed that the details of the source of the income was furnished before the learned DRP along with evidences such as purchase order, invoices, ledger for sundry debtors, etc. vide notes on arguments dated 21 November 2013.
20.4. The learned AO/DRP ought to have observed that an income cannot be considered as an undisclosed income if the details of the source of the income are furnished.
20.5. The learned AO/DRP has failed to appreciate the facts that the Appellant is consistently following the method of accounting for deferred sundry debtors as per AS 9-revenue recognition.
20.6. The learned AO/DRP has erred in not appreciating the fact that the Appellant has considered the deferred sundry debtors of the FY 2008-09 as income in the subsequent years on rendering the services to the customers and such income has been offered to tax in the year in which it has accrued".
98. As far as the aforesaid ground of appeal is concerned, the facts are identical to Gr.No.19 regarding deferred income from providing AMC. The AO in the course of assessment proceedings noticed on a perusal of the service income ledger account of the unit which was not eligible for deduction u/s.10A of the Act, that a sum of Rs.2,90,49,941/- was debited in the service income account. According to the AO, there was no explanation on the aforesaid debit entry in the service income ledger account and therefore the same was treated as income of the Assessee.
99. Before the DRP the Assessee submitted that it entered into a contract with Bharti Airtel Ltd., for rendering installation services. The contract value was a sum of Rs.2,90,49,491/-. The Assessee : 89 : IT(TP)A Nos. 299 & 218/Bang/2014 booked the entire revenue as on 31.3.2009. At the time of finalization of financial statements, the Assessee noticed that the installation work had not been completed and therefore this income should not be recognized for FY 2009. Consequently, the service income recognized was reversed by debiting the service income account. The Assessee also pointed out that this sum was booked as revenue of AY 2010-11 and was offered to tax.
100. The DRP however did not discuss any of the above submissions and held that the Assessee has not provided any details and confirmed the order of the AO.
101. Before the tribunal the learned counsel for the Assessee submitted the following details with regard to the contract for installation between the Assessee and Bharti Airtel Ltd.
Details furnished
PO number/ Invoice number/ Invoice
before the learned
Date Date amount (Rs.)
DRP
BAL MO U.P/ BANG/ IDC/ SI- 1,54,52,141 • PO
West/ PUR/ 5548 0826 dated 31st • Invoice
dated 23-Oct Mar 2009 • Ledger for service
2008 income
• Ledger for Bharti
Airtel Limited
• Journal entry for the
transaction
BAL MO U.P/ BANG/ IDC/ SI- 1,35,97,800 • PO
West/ PUR/ 5572 0827 dated 31st • Invoice
dated 05-Nov Mar 2009 • Ledger for service
2008 income
• Ledger for Bharti
: 90 :
IT(TP)A Nos. 299 & 218/Bang/2014
Airtel Limited
• Journal entry for the
transaction
• Ledger for Sundry
debtors
Total 2,90,49,991
102. He pointed out that under Clause 2(c) of the terms and conditions contained in the PO (available at page 4854 of File 20), dealing with "Payments" it is clearly provides as under:
"The delivery of products by the supplier to the Company will not constitute acceptance of the said products by the Company. Acceptance of products will be completed and communicated only after inspection and satisfactory testing of the products by the Company. Till acceptance of the products by the Company the products shall remain with the Company on supplier's account on approval basis only. The risk of loss or damage to the product passes to the Company upon acceptance of the products by the Company."
According to the learned counsel for the Assessee the above clause in the contract between the parties would show that the Assessee could not have recognized the income until the products were tested and accepted by the customer. Since that event did not happen during the relevant previous year, the Assessee was justified in not recognizing income from the aforesaid contracts. According to him the action of the Assessee was in tune with the terms of Accounting Standard - 9 of ICAI, in respect of sale of goods which are delivered subject to conditions such as installation, inspection etc., wherein it is provided that revenue ought not be recognized until the customer accepts the delivery and installation/ inspection as complete. The learned counsel therefore prayed that the addition of deferred income (sundry debtors) : 91 : IT(TP)A Nos. 299 & 218/Bang/2014 amounting to Rs.2,90,49,991 as undisclosed income should be deleted as the same is not income for the year in question i.e. FY 08-2009 relevant to AY 2009-10. The learned DR relied on the order of the AO/DRP and reiterated submissions as were made with reference to Gr.No.19.
103. We have carefully considered the rival submissions and are of the view that the stand taken by the Assessee deserves to be accepted. Admittedly position is that income from the aforesaid contracts was offered to tax in the subsequent assessment year. Therefore the addition in this year is revenue neutral. We are therefore of the view that without going into the correctness of the claim of the Assessee for deferring its income to subsequent assessment year, on the facts of this case, the addition made cannot be sustained and the same is directed to be deleted. Gr.No.20 is accordingly allowed.
104. Gr.No.21 raised by the Assessee projects its grievance in the action of the revenue authorities in disallowing claim of deduction u/s.10A of the Act for the software unit of Rs.8,80,48,316/-. The aforesaid sum was treated as "Income from other sources" rather than income of the unit which was eligible for deduction u/s.10A of the Act. The relevant grounds of appeal of the Assessee reads thus:
21. Disallowance of deduction under section 10A for the software unit: Rs.
88,048,316 21.1. The learned AO/ DRP have erred in denying the deduction under section 10A of the Act for the software unit.
L : 92 : IT(TP)A Nos. 299 & 218/Bang/2014 21.2. The learned AO/ DRP has erred in holding that there is no export of software services during the FY 2008-09.
21.3. The learned AO/DRP ought to have appreciated that the Appellant has furnished all documents evidencing export of software including invoices, softex, FIRC's, bank statements for the receipt of foreign exchange on export of software, etc. 21.4. The learned AO/DRP has erred in holding that the sale proceeds was not brought into India as convertible foreign exchange within the prescribed time limit given u/s. 10A(3) of the Income-tax Act, 1956 ("the Act") i.e. 6 months from the end of the financial year or, within such further period as the competent authority may allow in this behalf.
21.5. The learned AO/DRP ought to have observed that by the Notification No. FEMA 176/2008-RB dated 23 July 2008 issued by the Reserve Bank of India (RBI) wherein the time limit for the realization of the export proceeds for the software was enhanced from 6 months to 12 months from the date of export (being the invoice date).
21.6. The learned AO/DRP ought to have observed that the Appellant has realized the entire sale proceeds in convertible foreign currency.
21.7. The learned AO/DRP ought to have observed that the out of the total sale proceeds of USD 2,625,77,961 (in Rs. 24,69,47,550), a sum of USD 35,24,475 (in Rs. 17,68,89,224) have been realized within 12 months from the date of raising the invoice.
21.8. The learned AO/DRP further ought to have observed that the balance sale proceeds of Rs. 8,56,88,735 has been brought into India after 12 months and that the same satisfies the conditions laid down under section 10A in respect of realization".
105. We have already seen that the Assessee has four different units and one such unit is Software Development services unit. In this unit Software Development Services are rendered to APCC, USA, the holding company of the Assessee. The Assessee claimed deduction : 93 : IT(TP)A Nos. 299 & 218/Bang/2014 u/s.10A on the profits of this unit at a sum of Rs.8,98,26,852 as per Form No.56F. The AO while examining the claim of the Assessee firstly noticed that the turnover declared by the Assessee in the software unit was Rs.24,69,47,550/- and to this turnover other income of Rs.55,853/- and forex gain of Rs.4,21,81,949/- was added and total income was shown at Rs.28,91,85,353/-. The turnover as per the Annual Performance Report to be submitted to the STPI was only a sum of Rs.16,60,96,000/-.
106. The AO on examination of the claim of the Assessee for deduction u/s.10A of the Act, raised the following queries:
(i) As per Agreement between the Assessee and APCC, USA, the Assessee was to render only Research & Development and that cannot be regarded as service of software development or IT enabled Services that are notified by CBDT for being eligible to claim deduction u/s.10A of the Act.
(ii) There was no evidence of having exported the computer software.
(iii) The income from developing Software was never shown in the service tax returns filed by the Assessee.
(iv) The Software Service development agreement was entered into with APCC, USA on 1.1.2001 i.e., prior to amendment of Sec.10A of the Act. A new Section 10A was substituted by the Finance Act, 2000 W.e.f. 1.4.2001
(v) The sale proceeds are not brought into the country in convertible foreign exchange within the time limit prescribed in Sec.10A(3) of the Act.: 94 :
IT(TP)A Nos. 299 & 218/Bang/2014
107. According to the AO, the Assessee filed submission on 14.2.2013 to the aforesaid queries but without setting out what the reply was, the AO proceeded to hold that the Assessee was not entitled to deduction under section 10A for the software unit on the grounds that:
• There is no export of software services during the FY 2008-09 • Commencement of business by software unit is before introduction of amended section 10A of the Act. • Agreement for activities undertaken by software unit has been entered after commencement of operations and before the introduction of section 10A in the Act • Sale proceeds not realized within the prescribed time limits
108. The AO thereafter proceeded to re-compute the profits of the Software unit by disallowing the foreign exchange gain and bringing to tax the income of software unit as income from other sources ("IFOS") ( Page 36 of the Final assessment order). However, in the final computation by AO, the income from software unit is computed as Business income (Page 44 of the Final assessment order). The DRP upheld the order of the AO. Hence, Gr.No.21 by the Assessee before the Tribunal.
109. The learned counsel for the Assessee submitted that the conclusion of the revenue authorities that the Assessee did not export software is contrary to the evidence on record filed by the Assessee to show that it had exported software. Our attention was drawn by him to the following documents:: 95 :
IT(TP)A Nos. 299 & 218/Bang/2014 Details Submissions dated Certified softex forms stating "duly certified 13th December 2012 and for the exports of software development"- 4th March 2013 Signed by Director of STPI (Page no. 640, 661 to 672 - File 3) and (page 4983 to 4996 of File 20) Audited financials stating that the software 21st November 2011 has been exported (Page no 215 to 248 - File
2) Invoice copies specifically stating "export 13th December 2012 and invoices" (Page no 666 and 671 - File 3) and 4th March 2013 (page no. 4990 and 4995 - File 20) Agreement for export of software to APCC 13th December 2012 and USA (Page 656-660 of File 3) 4th March 2013 (Page 4997 to 5001 of File 20) FIRCs evidencing realization of export 4th March 2013 proceeds on export of software (Page 5085 to 5088 of File 20) Bank statements for the receipt of foreign 13th December 2012 exchange on export of software (Page 636 of File 3) Letter provided by APCC USA confirming 4th March 2013 the receipt of services therein (Page 5083 to 5084 of File 20) He drew our attention to the fact that in the Transfer Pricing Order passed by the TPO u/s.92CA of the Act for the relevant AY, the TPO has accepted that the Assessee exported software services and has even made an adjustment in respect of the price received by the Assessee for : 96 : IT(TP)A Nos. 299 & 218/Bang/2014 the same, which only demonstrates that the AO's contention as to the non-existence of exports is wholly without any basis. It was submitted by him that the conclusion of the AO that the Assessee never exported software is therefore incorrect.
110. With regard to the finding of the AO that the Agreement dated 1.1.2001 entered into by the Assessee with APCC, USA prior to introduction of amended provisions of Sec.10A of the Act, the learned counsel submitted that the date of agreement being before amendment of section 10A has no relevance for the purpose of determining the eligibility under section 10A He brought to our notice that the first proviso to section 10A(1) allows benefit under section 10A by extending the benefit of deduction u/s.10A of the Act to undertakings which were entitled for such benefit before the substitution of section by Finance Act, 2000 for unexpired period of aforesaid ten consecutive assessment years. Therefore it was submitted that the Software unit of the Assessee was eligible for deduction under the provisions of section 10A prior to its amendment. Hence, by the virtue of the proviso, the Company would be entitled to claim deduction under section 10A post its amendment too.
111. The learned counsel for the Assessee submitted that the observations of the AO that the agreement for rendering the software development services was entered in January 2001 while the operations were commenced in FY 2000-2001 is concerrect and that the activities of the Assessee commenced only from 1st June 2000 (AY 2001-02) as : 97 : IT(TP)A Nos. 299 & 218/Bang/2014 is evident from the annual report at Page 230, File 2 of the Paperbook and the submissions made before the DRP at page 4950, File 20. It was submitted by him that the agreement entered into by the Assessee for export of services was valid for AY 2009-10. It was submitted that in the event it is considered that there has been no export of services for the period before the date of agreement (i.e. 1st January 2001) then benefit under section 10A should be denied only for that period and not for AY 2009-10.
112. With regard to contention of the AO that the Assessee did not realize the exports proceeds within the time prescribed u/s.10A(3) of the Act and on that basis the Assessee is not entitled to claim deduction u/s.10A of the Act, the learned counsel submitted that the entire export proceeds for the software unit have been realized. He drew our attention to the following details in the table given below:
Invoice Details Realization details Invoice Amount Amount FIRC Realizati Amount Amount No./ Date (in USD) (in Rs.) No. on Date (in USD) (in Rs.) SW001/200 32,93,611 13,96,09,560 AD- 15-Oct- 32,93,611 16,60,96,789 8-09 dated 0413 09 31-03-2009 44 SW002/200 20,50,899 10,73,37,951 AD- 10-Dec- 2,30,864 1,07,92,436 8-09 dated 0597 09 31-03-2009 26 AD- 10-Oct- 18,20,035 8,56,88,735 3353 11 96 TOTAL 24,69,47,550 2,625,77,961 : 98 : IT(TP)A Nos. 299 & 218/Bang/2014
(The above tabulation is available at page 4983 of File 20 and was filed before the revenue authorities )
113. The learned counsel contended that as per provision of section 10A export proceeds should be realized within 6 months from the end of FY or such further period as the competent authority may allow in this behalf. "Competent authority" means the Reserve Bank of India or such other authority as is authorized for regulating payments and dealings in foreign exchange. Vide Notification No. FEMA 176 / 2008-RB issued by the RBI, the time limit for realization of export proceeds for software was enhanced from 6 months to 12 months from date of export (Page No. 5408-5409 of the Case law paper book). It was submitted that extension of time limit for realization of export proceeds by competent authority under FEMA can be said to be approval granted under section 10A. For export proceeds amounting to Rs. 8,56,88,735, since export proceeds bought into India after said period of 12 months are via a FIRC duly received from the Authorized Dealer, same should be deemed to be allowed by the Competent Authority and ought to be allowed in terms of Section 155(11A) of the Act. It was submitted that in the light of the above submissions and evidence, it should be held that the Assessee is eligible for benefit under Section 10A of the Act for the amount of sale proceeds realized.
114. The learned counsel also submitted that the action of the AO in treating the income of the software unit as income from other sources was unsustainable. According to him once it is admitted that there was : 99 : IT(TP)A Nos. 299 & 218/Bang/2014 software development, (whether in the nature of Research & Development or otherwise), income from such services cannot be treated as Income from other sources. Our attention was drawn to the following evidence which were furnished in the course of assessment proceedings, would clearly demonstrate the stand of the Assessee:
Details Submissions dated
Certified softex forms 13th December 2012 and
4th March 2013
In the financial statements of the Company 21st November 2011 software unit has been treated as separate business segment Invoice copies raised on SEITC USA 13th December 2012 and 4th March 2013 Agreement for export of software to SEITC USA 13th December 2012 and 4th March 2013 FIRCs evidencing realization of export proceeds 4th March 2013 Letter provided by SEITC USA confirming the 4th March 2013 receipt of services therein He brought to our notice that the main objects of the Memorandum of Association of the Company states as under:
"To manufacture, develop, improve, maintain, service, buy, sell, import, export, exchange and otherwise deal in all kinds of power supplies of general or any customized specifications and all kinds of computer and microprocessor based systems, their parts, components and systems, : 100 : IT(TP)A Nos. 299 & 218/Bang/2014 computer hardware and accessories and related equipment , sell or otherwise deal in all kinds of computer hardware's, software's, their programmes and accessories, including security systems, diagnosis to set up training institutions and consultancy in computer and allied fields."
The extract of the Memorandum of Association of the Company wherein software has been stated to be one of the main objectives of the Company has been submitted before the learned AO. It was submitted by him that all of the aforesaid contentions were put forth before the DRP in the submissions before it at pages 4935-4951 of File No. 20, which were not appreciated by it.
115. He placed reliance on the following cases:
a. DCIT v. SEEC Technologies Pvt. Ltd. [order dated 10.04.2012 in ITA No. 1614/Hyd/2010] b. HCL EAI Services Ltd. v. DCIT [2013] 35 taxmann.com 146 (Bangalore - Trib.) c. DCIT v. iGate Global Solutions Ltd ( judgment of this Hon'ble Tribunal dated 10 May 2013 in ITA No. 429/Bang/2012) d. Bajaj Tempo v. CIT [ 1992] 196 ITR 188 (SC)
116. He prayed that it should be held that:
a. Profits of the software unit should be considered as business income b. Such profits should be allowed deduction under section 10A
117. The learned DR relied on the order of the DRP.
: 101 :IT(TP)A Nos. 299 & 218/Bang/2014
118. We have carefully considered the contentions of the Assessee and the grounds on which the revenue authorities denied the benefit of deduction u/s.10A of the Act to the Assessee on profits of the software unit. The evidence in the form of Softex furnished by the Assessee which were in the paper book and referred to in the table given in the earlier paragraphs dealing with this issue, clearly shows that there was export of computer software by the Assessee. In fact the TPO has in the order passed u/s.92CA of the Act has proceeded on the basis that the Assessee exported computer software and determined the ALP for that transaction. It is therefore not correct on the part of the AO/DRP to conclude that the Assessee never exported computer software. Such conclusions are contrary to material on record and in complete disregard to such material. On the aspect of the Agreement with APCC, USA and the Assessee for development of software being for the period prior to 1.4.2001, it is seen that the Software Service development agreement was entered into with APCC, USA on 1.1.2001 i.e., prior to amendment of Sec.10A of the Act. A new Section 10A was substituted by the Finance Act, 2000 W.e.f. 1.4.2001. First proviso to section 10A(1) allows benefit under section 10A by extending the benefit of deduction u/s.10A of the Act to undertakings which were entitled for such benefit before the substitution of section by Finance Act, 2000 for unexpired period of aforesaid ten consecutive assessment years. Therefore Software unit of the Assessee was eligible for deduction under the provisions of section 10A prior to its amendment. Hence, by the virtue of the first proviso, the Assessee : 102 : IT(TP)A Nos. 299 & 218/Bang/2014 would be entitled to claim deduction under section 10A post its amendment too. With regard to the observations of the AO that the agreement for rendering the software development services was entered in January 2001 while the operations commenced in FY 2000- 2001 it is seen that the activities of the Assessee commenced only from 1st June 2000 (AY 2001-02) as is evident from the annual report at Page 230, File 2 of the Paper book and the submissions made before the DRP at page 4950, File 20. In any event absence of an Agreement to develop software for export would not be eligible for deduction only for the period prior to 1.1.2001. As far as AY 2009-10 is concerned, the Agreement dated 1.1.2001 still holds good and the period for which the Assessee claims benefit of Sec.10A deduction is also within the permissible period.
119. As far as realization of export proceeds by the Assessee is concerned, it is seen from the details given by the Assessee in the earlier paragraphs of this order on this issue that the Assessee has established that the export proceeds were realized within the time permitted by the provisions of Sec.10A(3) of the Act and as per the judicial decisions cited by the learned counsel for the Assessee in support of such conclusion. It is reiterated that Invoices which were realized post 6 months from the end of FY and also within 12 months from the date of invoicing, the provisions of section 10A of the Act provides that export proceeds should be realized within 6 months from the end of FY or such further period as the competent authority may allow in this behalf. "Competent authority" means the Reserve Bank : 103 : IT(TP)A Nos. 299 & 218/Bang/2014 of India ("RBI") or such other authority as is authorized for regulating payments and dealings in foreign exchange. Notification No. FEMA 176 / 2008-RB issued by the RBI wherein time limit for realization of export proceeds was enhanced from 6 months to 12 months from date of export. Therefore realization within 12 months from the date of export has to be considered as proper realization. The export proceeds bought into India after said period of 12 months are via a FIRC duly received from the Authorized Dealer, same should be deemed to be allowed by the Competent Authority and thus is to be allowed in terms of Section 155(11A). The decision of ITAT Bangalore Bench in the case of HCL EAI Services Ltd. Vs. DCIT (supra) supports the plea of the Assessee in this regard and therefore the same is accepted.
120. In view of the aforesaid conclusions, nothing turns on the finding of the AO that the income that was claimed as deduction of software unit u/s.10A of the Act, being considered as "Income from other sources" by the AO and such finding in the light of the material brought to our notice by the Assessee noted in the earlier paragraphs dealing with this issue clearly is unsustainable.
121. We direct the AO to allow deduction u/s.10A of the Act after due verification of the documents cited in the earlier paragraph and after affording Assessee opportunity of being heard. Thus Gr.No.21 is treated as allowed but sent for the limited extent of verification of the details brought to our notice like softex forms, realization of export proceeds within the time limit etc. : 104 : IT(TP)A Nos. 299 & 218/Bang/2014
122. Gr.No.22 & 23 raised by the Assessee are with regard to the action of the Revenue authorities in treating foreign exchange gain of IDF 1 & IDF 2 units of Rs.126,48,37,681 as income from other sources and considering the loss in foreign exchange currency of Rs.30,18,63,653/- as not allowable deduction in computing income of the MAG unit. The relevant grounds of appeal read thus:
22. Foreign exchange gain of IDF 1, IDF 2 and Software unit treated as income from other sources - Rs. 1,26,48,37,681 22.1. The learned AO/DRP erred in considering the entire foreign exchange gain of IDF 1 (Rs. 76,12,17,996), IDF 2 (Rs. 46,14,37,736) and Software unit (Rs 4,21,81,949) amounting to Rs 1,26,48,37,681 as Income from Other Sources due to lack of evidence.
22.2. The learned AO/DRP has erred in contending that no evidence was furnished in support of the foreign exchange workings 22.3. The learned AO/DRP ought to have observed that the workings for foreign exchange gain running up to approx. 50,000 line items were furnished before the learned AO and DRP 22.4. The learned AO/DRP ought to have observed that the Appellant has furnished 100% export invoices for the current FY (i.e. 2008-09) obtained from independent third party covering 4944 invoices (77 box files) along with FIRC evidencing realization. The above would form the basis for foreign exchange workings in respect for export sales made during the year.
22.5 The learned AO/DRP has acknowledged fact that the Appellant has furnished export invoices obtained from 3rd party in his order on page number 27. However, these invoices has been ignored while discussing the adjustment for foreign exchange 22.6 The learned AO/DRP ought to have observed that the exchange gain has arisen only on account of the business activities of the appellant relating to exports of finished goods and therefore is only in : 105 : IT(TP)A Nos. 299 & 218/Bang/2014 the nature of Business Income and not in the nature of Income from Other Sources 22.7. The learned AO/ DRP erred in not considering the Supreme Court decision in the case of CIT v. Woodward Governor India (P) Limited and Honda Siel Power Products Ltd (312 ITR 254) and Sutlej Cotton Mills Ltd. v. CIT (116 ITR 1) on the said issue".
23. Disallowance of foreign exchange loss of MAC unit - Rs. 30,18,63,653 23.1. The learned AO/DRP has erred in disallowing the foreign exchange loss of MAG unit 23.2. The learned AO/DRP has erred in comparing the total goods imported of this unit for the current year with the foreign exchange loss of Rs.30,18,63,653 of the unit.
23.3. The learned AO/DRP has failed to appreciate the fact that the foreign exchange loss amounting to Rs. 30,18,63,653 comprises of imports for the current year wherein payments have been made, year- end unpaid import payments reinstatement and payment of the invoices pertaining to the past years.
23.4. The learned AO/DRP has failed to appreciate the fact that the assessee has produced the ledgers and the workings for the foreign exchange loss along with detailed workings for the same highlighting the party wise details.
23.5. The learned AO/DRP erred in not considering the Supreme Court decision in the case of CIT v. Woodward Governor India (P) Limited and Honda Siel Power Products Ltd (312 ITR 254) and Sutlej Cotton Mills Ltd. v. CIT (116 ITR 1) on the said issue.
23.6. Notwithstanding and without prejudice to the above the learned AO/DRP having considered the foreign exchange gain and foreign exchange loss as Income from Other sources ought to have set off the same in arriving at the taxable income"
: 106 :IT(TP)A Nos. 299 & 218/Bang/2014
123. The Assessee has had a net foreign exchange gain amounting to Rs. 962,974,029/-. The details of unit wise foreign exchange gain/ (loss) are as under:
Particulars AY 2009-10
Foreign exchange gain for IDF 1 76,12,17,996
Foreign exchange gain for IDF 2 46,14,37,736
Foreign exchange gain for software unit 4,21,81,949
Foreign exchange loss for MAG unit (301,863,653)
[available at page 728 of File No. 3 of the paper book]
124. The accounting policy followed by the Assessee for recording foreign exchange gain/loss is in accordance with the requirements of accounting standard (AS) 11 of ICAI and it is mandatory for the Assessee to follow the same. The Accounting policy followed by the Assessee in the matter of recognizing foreign exchange gain/loss is that Foreign currency transactions are recorded in reporting currency, by applying to foreign currency amount the exchange, rate between the reporting currency and foreign currency at the date of transaction.
Foreign currency monetary items are reported using the closing rate. Exchange differences arising on the settlement of monetary items or on reporting monetary items of company rates different from those at which they are initially recorded during the year or reported in previous financial statements are recognized as income or as expense in the year in which they arise.
: 107 :IT(TP)A Nos. 299 & 218/Bang/2014
125. The foreign exchange gain for IDF 1, IDF 2 and software unit amounting to a total of Rs. 126,48,37,681 has been treated as business income of the respective units. Further, since the same has arisen primarily on account of exports it has been included in the export turnover for the purposes of computing deduction under section 10A of the Act. With respect to foreign exchange loss pertaining to MAG unit since the same has arisen primarily on account of current year imports and import payables of prior years it has been claimed as an allowable loss while computing taxable income for the MAG unit.
126. The AO while considering the claim of the Assessee for considering foreign exchange gain as profit of the business of the Sec.10A units IDF 1 and IDF 2 respectively and allowing loss on foreign exchange fluctuation in respect of MAG unit, acknowledged that the Assessee had furnished the forex fluctuation profit/loss working (vide paragraph 4.2 at page-46 of the AO's order) but without commenting on the correctness of the statements so submitted held that annexure 10,11 and 12 given on the date of hearing was not supported with any bills and invoices and that what was given was a computed generated document where postings were made indiscriminately for which no material evidences are placed on record. Since it was not established that the forex gain/loss had connection with the business of the Assessee, the AO treated the gain as income from other sources and consequently the deduction claimed u/s.10A of the Act would also be denied on this sum of Rs.126,48,37,681/-. With regard to the loss on account of foreign exchange fluctuation claimed by the Assessee in the : 108 : IT(TP)A Nos. 299 & 218/Bang/2014 MAG unit of Rs.30,18,63,653/- claimed by the Assessee, the AO held the Assessee did not file any evidence to show that there was such a loss. He also held that the MAG unit was doing domestic sales and therefore cannot have forex loss ignoring the fact that the trading items in MAG unit are imported from group entities outside the country. He also observed that Lack of evidence for the forex loss in connection with the import purchases made by the Assessee was Rs.83.27 Crores and there cannot be forex loss of Rs.30.18 crores and such huge loss on imports in the current year must be bogus expenditure. The DRP upheld the order of the AO.
127. The learned counsel for the Assessee submitted that the AO and the DRP have erred in coming to the conclusion that the Assessee failed to give working of foreign exchange gain/loss. In this regard, the learned counsel for the Assessee drew our attention to working of foreign exchange loss/gain which was given for each item of export as well as import. The working for foreign exchange gain running upto approx. 50,000 line items were furnished before the learned AO vide following submissions:
a. For IDF 1 and software unit - 13th December 2012 (at pages 636-649 of File No. 3 of the paper book, relevant page 646, to be read along with File No. 10 of the paper book) b. For IDF 2 - 4th March 2013 (at pages 713-729 of File No. 3 of the paper book, relevant pages 719-727 to be read with File 9 of the paper book) : 109 : IT(TP)A Nos. 299 & 218/Bang/2014
128. The learned counsel for the Assessee further submitted that detailed note on foreign exchange has also been furnished vide submissions 13th December 2012 and 4th March 2013 at the above pages of the paper book. It was submitted that the Assessee has furnished 100% export invoices for the current FY (i.e. 2008-09) obtained from independent third party covering 4944 invoices (77 box files) along with FIRC evidencing realization for both EHTP units vide submissions dated 14th February 2013 (at pages 689-707 of File No. 3 of the paper book, relevant pages 692-696). The above would form the basis for foreign exchange workings in respect for export sales made during the year. Similarly, export invoices for the software unit for the exports made during the year were also furnished to the AO vide submission dated 4th march 2013 at pages 4985-4996 of File No. 20 of the paper book.
129. The learned counsel for the Assessee also drew our attention to the fact that AO has acknowledged fact that the Assessee has furnished export invoices obtained from 3rd party in his order on page number 27 of the assessment order. However, these invoices have been ignored while discussing the adjustment for foreign exchange. It was argued that the AO foreign exchange gain in case of IDF1, IDF 2 and Software unit is majorly on account of exports due to the increase in the value of USD against rupee. He drew our attention to the Foreign exchange gain snapshots for AY 2009-10:
: 110 :IT(TP)A Nos. 299 & 218/Bang/2014 Particulars Amount 127 Export turnover (excludes foreign 1,703 exchange) % of foreign exchange to export turnover 7% [available at page 4764 of File No. 20 of the paperbook]
130. Depreciation of the INR vis-a-vis USD Particulars USD INR As on 31.03.2008 1 40.26 As on 31.03.2009 1 51.43 Depreciation % 28% [ available at page 4764 of File No. 20 of the paper book]
131. The learned counsel for the Assessee submitted that the foreign exchange gain of IDF1, IDF2 and software unit is on account of business transactions and hence, the same should be considered as business income and not income from other sources. He further submitted that the AO made an addition to its income under the head 'income from other sources'. Therefore, it is evident that he agrees that there is a foreign exchange gain and if that be so, it ought to be allocated to one of the units (which ought to be the EHTP units or the : 111 : IT(TP)A Nos. 299 & 218/Bang/2014 software unit given that the MAG unit has no exports) and cannot be merely added to the income of the Assessee.
132. With regard to disallowing loss on account of foreign exchange fluctuation in the MAG unit, the learned counsel brought to our notice that one of the reasons cited by the AO to disallow the foreign exchange loss is that a unit having domestic sales cannot have any foreign exchange loss. It was pointed out by him that the Assessee has not booked any forex loss on domestic sales as obviously domestic sales cannot have forex loss. He explained as to how foreign exchange loss arose in the MAG unit. In the MAG unit the loss arose on account of the following:
i. Imports for the current year, reinstated in the current year either on payment or on year end reinstatement ii. Imports for the earlier years which have not been paid as on 1st April 2008, reinstated in the current year either on payment or on year end reinstatement.
(This submission was made before the DRP and is available at page 4773 of File no. 20 of the paper book. The AO, although required evidence in support of the loss which was given, never sought an explanation on this point in any show cause notice and made the observations for the first time in the draft assessment order)
133. It was submitted that the AO's observations that the turnover and forex loss claimed were disproportionate was not correct because some portion of the forex loss is in connection with imports of earlier years and therefore comparing the forex loss with the amount of imports for the current year as done by the AO in page 39 of the order : 112 : IT(TP)A Nos. 299 & 218/Bang/2014 was incorrect. It was submitted that imports are for the business purposes of MAG unit. It was submitted that the AO ought to have appreciated that the foreign exchange loss due to the increase in the value of USD against rupee as depicted under:
Particulars USD INR
As on 31.03.2008 1 40.26
As on 31.03.2009 1 51.43
Depreciation % 28%
(available at page 4772 of File No. 20 of the paper book) It was submitted that due to the rate fluctuation, the amount payable toward import purchases has increased.
134. It was submitted that the AO has erred in holding that there is lack of evidence for the foreign exchange loss. Our attention was brought to the fact that the Assessee has submitted detailed workings of foreign exchange loss as evidence vide Annexure number 12 to submissions dated 13th December 2012 ( at pages 636-649 of File No. 3 of the paper book, relevant page 646 to be read with File no. 14 of the paper book) (detailed workings of approximately 2500 individual line items). Our attention was also drawn to the revenue recognition policy the Assessee consistently followed as per AS- 11 and made submissions vide its submission dated 4th March 2013 (at pages 728- 729 of File No. 3 of the paper book). It was submitted that the AO has accepted the fact that there is a gain but refuses to allow deduction on : 113 : IT(TP)A Nos. 299 & 218/Bang/2014 such gain u/s.10A of the Act and brings it to tax under the head "Income from Other sources" and when it comes to foreign exchange loss, the AO realizing that such loss will bring down the profits of the MAG unit which is not entitled to any exemption of its income has refused to allow the loss holding that there cannot be any loss at all. It was submitted that the foreign exchange loss being on business account should be allowed as eligible business expense/loss under the provisions of the Act. In support of the claim that foreign exchange loss or gain on revenue account should be regarded as income eligible for deduction and loss eligible for deduction in computing income, the learned counsel relied on the following decisions.
a. CIT v. Infosys Technologies Ltd [2012] 18 taxmann.com 169 (Karnataka) b. CIT v. Novell Software Development (I) (P.) Ltd [2013] 35 taxmann.com 414 (Karnataka) c. CIT v. Pentasoft Technologies Ltd. [2013] 33 taxmann.com 570 (Madras) d. Changepond Technologies (P.) Ltd. v. ACIT [2008] 22 SOT 220 (Chennai) e. CIT v. Woodward Governor India (P.) Ltd. [2009] 179 TAXMAN 326 (SC)
135. The learned counsel prayed that the Foreign exchange gain should be treated as business income and consequently foreign exchange gain of the IDF-1, IDF-2 and software units should inevitably form part of export turnover for computing deduction under : 114 : IT(TP)A Nos. 299 & 218/Bang/2014 section 10A. Forex loss of the MAG unit should be allowed as business loss.
136. The learned DR submitted that there has been no correlation of the foreign exchange gain with individual item of export and FIRC, Similarly the loss on account of foreign exchange fluctuation in the MAG unit has also not been proved by the Assessee. He relied on the order of the AO/DRP.
137. We have given a very careful consideration to the rival submissions. We shall first take up for consideration the foreign exchange gain in IDF 1 and IDF 2 unit of a sum of Rs.126,48,37,681/- which was treated as income from other sources and consequently deduction u/s.10A of the Act to that extent was denied to the Assessee. The first and very important thing to notice on this claim of the Assessee is that the AO did not dispute the quantification of the foreign exchange fluctuation gain as computed by the Assessee. This is evident from the fact that the AO considered a sum of Rs.1,26,48,37,681/- as income of the Assessee from other sources. In a reply to the query of the AO on the foreign exchange gain in IDF1 and IDF 2 unit, the Assessee vide its reply dated 13.12.2012 ( copy at page 646 of paper book 3) gave the following reply for foreign exchange gain in IDF1 unit and loss in MAG Unit:
" Please find enclosed the forex gains workings for IDF!/EHTP 2 and software units vide Annexure 10 & 11 respectively. Please find enclosed the forex loss workings for MAG unit Vide Annexure-12.": 115 :
IT(TP)A Nos. 299 & 218/Bang/2014 Similarly in a reply dated 4th March, 2013 (copy at page 719 to 729 paper book No.3) the Assessee gave the following details (at page-
719);
" 1.Foreign Exchange gain/loss of IDF1 and IDF 2 unit:
1.1. Break up of Foreign Exchange fluctuation:
The unit wise break-up of forex gain/loss linked to the amount credited to the profit and loss account for the financial year ended March, 2009 are provided below:
(Amount in Rs.) IDF1/EHTP2 IDF2/EHTP1 MAG Software Total 761,217,996 461,437,736 (301,863,653 42,181,949 902,974,029 In this regard, we refer to our submissions dated 13 Decdember, 2012 wherein we have furnished the workings for Software unit and IDF unit
1. In continuance to the same, please find enclosed the foreign exchange workings for IDF unit 2 for your reference vide Annexure."
138. Similarly in a letter dated 14.2.2013, the Assessee has given complete export invoices and copies of FIRCs. Copies of these documents are at paper book 689, 690 and 695. The Assessee provided 4944 invoices (77 box files) along with FIRC evidencing realization for both IDF1 and IDF 2 units. The documents filed by the Assessee before the AO (copies of working of foreign exchange gain) are at paper book No.9,10,11 and 12 from pages-1980 to 2769 ) and it gives a complete break up of realized and unrealized foreign exchange gain, loss or gain in respect of each item of sale. The AO made no comment on all these evidence.: 116 :
IT(TP)A Nos. 299 & 218/Bang/2014
139. The AO in the order of assessment without making reference to the above has merely stated as follows (Para 4.2 of the AO's order at page-46):
"4.2 Analysis of the reply and conclusion:
The reply of the Assessee is not acceptable on the fact that annexure 10,11,12 given on the date of hearing was not supported with any bills and invoices. It was computer generated document where the postings were made indiscriminately for which no material evidences are placed on record. In order to treat this as income from business/forex gain the assessee company should have furnished necessary documentary evidences. However a computer generated statement was given where the company has posted some amounts for which no evidences are given. Under these circumstances, the entire amount of Rs.126,48,37,681/- is added as income from other sources as proposed in the show cause notice."
140. If the evidence filed by the Assessee was insufficient, the AO ought to have held that the claim for having earned income is not established and therefore ought not to have taxed the said sum as income from other sources. His action in accepting the gain and treating it as income from other sources, clearly shows that he wanted the foreign exchange gain not to be treated as income of IDF1 and IDF 2 unit because the income would be exempt u/s.10A and it was only by treating it as income from other sources that he could bring to tax the aforesaid income. This approach in our view was not correct.
141. On the evidence on record and given the fact that the gain on foreign exchange fluctuation is relatable to export sales and has been duly established with each item of sale and correlated with the relevant FIRC showing the dates of realization, the gain in question has to be : 117 : IT(TP)A Nos. 299 & 218/Bang/2014 regarded as income of IDF1 and IDF 2 units respectively and the Assessee would be entitled to deduction u/s.10A of the Act on those incomes also. We hold and direct accordingly and allow Gr.No.22 raised by the Assessee.
142. As far as foreign exchange loss in MAG unit is concerned, the profits of MAG unit are taxable and it does not enjoy deduction or exemption. Therefore the loss in this unit will go to reduce the income of this unit which is otherwise taxable. The AO therefore came to the conclusion that the loss on foreign exchange claimed in this unit is not allowable because it was a domestic unit in which there cannot be forex loss and secondly he found that the proportion of loss claimed compared to the turnover was very high. These were the two reasons assigned by the AO for treating the loss as not proved and bogus. Another reason that weighed with the AO was that Tax exempt unit IDF 1 and IDF 2 were making a gain on account of forex currency while taxable unit MAG unit is making a loss, which is not probable. It has to be clarified that the IDF1 and IDF 2 unit exports and therefore increase in the foreign exchange value vis-à-vis Indian rupee will result in gain. Whereas MAG unit purchases and any adverse foreign exchange fluctuation vis-à-vis Indian rupee will result in the amount payable by the Assessee to be more.
143. It is seen from the evidence filed by the Assessee, which are the same letters and annexures thereto, which we have discussed while discussing foreign exchange gain in IDF 1 and IDF 2 unit, clearly gave : 118 : IT(TP)A Nos. 299 & 218/Bang/2014 the basis and break up of the loss in foreign exchange. The evidence in the form of individual purchases which gave raise to the loss have all been placed by the Assessee in paper book No. 13 ( pages-3176 to 3240) along with letter dated 13.12.2012 filed by the Assessee before the AO (copy at page-3174 of paper book No.13). In the light of overwhelming evidence the conclusion of the AO that there is lack of evidence to prove the foreign exchange loss in MAG unit is unsustainable. The conclusion of the AO that MAG unit being a local unit cannot have forex loss is again unsustainable because the loss in question is on account of import of trading items and there is bound to be a loss when one imports and the value of Indian rupee vis-à-vis the foreign currency in which payments for imports have to be made, payment depreciates. The other conclusion of the AO is that the loss is disproportionate to the turnover of MAG unit (on turnover of Rs.83.27 crores the loss on foreign exchange was at Rs.30.18 Crores). This has been explained by the Assessee as owing to loss on foreign exchange currency in respect of purchases in the earlier years and therefore comparing the forex loss with the imports of the current year would not be in order.
144. We are therefore of the view that the loss on account of foreign currency claimed in the MAG unit has to be allowed as it has been established that a loss has arisen. The loss is in connection with business of the Assessee and therefore has to be allowed while computing income of MAG unit. We hold and direct accordingly and allow Gr.No.23 raised by the Assessee.
: 119 :IT(TP)A Nos. 299 & 218/Bang/2014
145. Out of Gr.No.24 raised by the Assessee only Gr.No.24.2 was pressed for adjudication. The said ground relates to Reversal of Prior period revenue of MAG (equivalent to expense in the current year) considered as prior period of revenue for current year. The facts as far as this ground of appeal is concerned are that the Assessee gave the following treatment in the segment Profit and Loss account of MAG unit but the AO gave a different treatment and as a result, reversal of prior period revenue of MAG unit resulted in the loss claimed by the Assessee in this unit being reduced. The following chart explains the position in this regard:
Rs. In Crores:
Treatment by Assessee in the Treatment by AO (Page 43 of the segmental P&L of MAG unit assessment order) Expenses Revenue Reduction from profits Addition to profits Actual depiction AO's depiction Net amount being Gross profit less Net amount being Gross profit less operating expenses, less operating expenses, less depreciation and less finance depreciation and less finance expenses : Rs. (47.21) expenses : Rs. 64.36 Less: Expenses being prior Add: prior period revenue : Rs. period revenue reversed : (Rs. 2.45 2.45) Net profit / (loss) : Rs. (49.66) Net Profit / (loss) : Rs. 66.81 [excluding other expenses] : 120 : IT(TP)A Nos. 299 & 218/Bang/2014 The AO considered expense under the head prior period income amounting to Rs. 2,44,90,252 as an income rather than an expense.
The learned DRP has upheld the order of the learned AO.
146. In the submissions before the DRP- Page 4812 and 4813- File
20) the Assessee submitted that a sum of Rs. 2,44,90,252 which represents reversal of prior period income has been considered as taxable revenue for Financial year ended 2009 by the learned AO. It was submitted that income was account in FY 2007-08 (AY 2008-09) but was reversed in FY 2008-09 (AY 2009-10) and this was nothing but similar to write off of debts as bad and irrecoverable u/s.36(1)(vii) read with Sec.36(2) of the Act. This claim of the Assessee has not been examined either by the AO or CIT(A) and accordingly, it was agreed by the parties that this issue should be remanded to the AO for consideration afresh, after due opportunity to the Assessee. Accordingly, Gr.No.24.2 is treated as allowed for statistical purpose.
147. Gr.No.25 regarding non-grant of credit for TDS of Rs.68,54,813 was not pressed because in rectification proceedings the credit was allowed. Similarly Ground No.28 regarding charging of interest u/s.220 of the Act of Rs.16,18,121/- was allowed in rectification proceedings and hence not pressed. Gr.No.26 with regard to charging interest u/s.234B of the Act is purely consequential and the AO is directed to give consequential relief. Gr.No.27 is with regard to charging of interest u/s.234C of the Act, which should be on the returned income as is the mandate of Sec.234-C of the Act. The AO is : 121 : IT(TP)A Nos. 299 & 218/Bang/2014 directed to work out interest u/s.234C of the Act on the returned income.
148. In the result, appeal by the Assessee is partly allowed, while the appeal by the Revenue is dismissed.
Pronounced in the open court on this 30th day of April, 2019 Sd/- Sd/-
( JASON P. BOAZ ) ( N.V. VASUDEVAN)
ACCOUNTANT MEMBER VICE PRESIDENT
Bangalore, Dated, the 30th April, 2019.
TNMM
: 122 :
IT(TP)A Nos. 299 & 218/Bang/2014
Copy to:
1. The Appellant
2. The Respondent
3. The CIT
4. The CIT(A)
5. The DR, ITAT, Bangalore
6. Guard file
By order
Assistant Registrar,
ITAT, Bangalore