Income Tax Appellate Tribunal - Bangalore
Timken Engineering And Research India ... vs Assessee on 24 February, 2012
Page 1 of 31 1 ITA No.974 & 983/Bang/2008
INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCHES 'A'
BEFORE SHRI N K SAINI, ACCOUNANT MEMBER AND
SHRI GEORGE GEORGE K, JUDICIAL MEMBER
ITA No.974/Bang/2008
(Asst. Year 2004-05)
Timken Engineering & Research The Deputy
India Pvt. Ltd., Sy.No.(S), 39(P), Commissioner of
41(P), 42(P), Electronic City Phase V Income Tax, Circle-
II, Doddathogur Village, Begur s 12(3), Bangalore.
Hobli Taluk, Bangalore South
District, Bangalore-560 100.
PA No.AABCT2265L
(Appellant) (Respondent)
ITA No.983/Bang/2008
(Asst. Year 2004-05)
The Deputy Timken Engineering & Research
Commissioner of India Pvt. Ltd., Sy.No.(S), 39(P),
Income Tax, Circle- Vs 41(P), 42(P), Electronic City
12(3), Bangalore. Phase II, Doddathogur Village,
Begur Hobli Taluk, Bangalore
South District, Bangalore-560
100.
PA No.AABCT2265L
(Appellant) (Respondent)
Date of Hearing : 24.02.2012
Date of Pronouncement : 24.02.2012
Assessee by : Shri Kunj Vaidya, C.A.
Revenue by : Shri Etwa Munda, CIT-II
Page 2 of 31 2 ITA No.974 & 983/Bang/2008
ORDER
PER BENCH :
These appeals instituted by the assessee and the revenue are directed against the order of the Ld. CIT(A)-IV, Bangalore dated 28.04.2008. The relevant assessment year is 2004-05.
2. Since these appeals pertain to the same assessee, they are heard together and dispose off by this consolidated order for the sake of convenience and brevity.
First we shall consider the assessee's appeal.
ITA No.974/Bang/2008 (Assessee's appeal)
3. The grounds raised by the assessee reads as follows:-
i) That the order passed by the learned CIT(A) to the extent prejudicial to the appellant is bad in law and liable to be quashed.
ii) That on the facts and in the circumstances of the case, the learned CIT(A) erred in upholding the Assessing Officer's action in invoking the provisions of section 92CA(1) of the I T Act, 1961 and referring the computation of the Arm's Length Price to the Transfer Pricing Officer.
iii) That the learned CIT(A) erred in not holding that in absence of a charging provision in the Act, addition to chargeable income cannot be made merely through a transfer pricing adjustment (difference between transaction price of the appellant and alleged arm's length price determined by the Assessing Officer/Transfer Pricing Officer).Page 3 of 31 3 ITA No.974 & 983/Bang/2008
iv) That the learned CIT(A) erred in not quashing the adjustment to the transfer price of the appellant, as made by the Assessing Officer, without application of mine, by purely relying on the order of the Transfer Pricing Officer.
v) That on the facts and in the circumstances of the case, the learned CIT(A) erred in holding that the mark-up on total cost (operating profit to total cost ratio of comparables considering Transactional Net Margin Method (TNMM) being the appropriate method) in the case of the appellant, for the purpose of determining Arm's Length Price of international transactions in provision of Research and Development Services (R&D Services) should be 31.73% as against the 5% determined by the appellant.
vi) That on the facts and in the circumstances of the case, the learned CIT(A) erred in holding that the mark-up on total cost (operating profit to total cost ratio of comparables considering Transactional Net Margin Method (TNMM) being the appropriate method) in the case of the appellant, for the purpose of determining Arm's Length Price of international transactions in provision of Information Technology Services (IT Services) should be 25.35% as against the 5% determined by the appellant.
vii) That the learned CIT(A) erred in not holding that comparables have to be selected on the basis of data available at the time of preparation of the transfer pricing documentation and not as of any subsequent date.
viii) That even assuming but not admitting that data subsequently available can be used, such data is to be restricted to comparables originally selected by the appellant.
ix) That on the facts and in the circumstances of the case, the learned CIT(A) erred (while determining the mark-up on total cost of comparables under TNMM) in not including the data of certain comparable companies in the list of comparables selected/considered by the appellant Page 4 of 31 4 ITA No.974 & 983/Bang/2008 in support of the arm's length nature of its transfer price.
x) That on the facts and in the circumstances of the case, the learned CIT(A) erred in reinstating the following companies namely Intertec Communications Private Limited and Igate Global Solutions Limited as comparables for the purpose of determining the arm's length price of IT services.
xi) That the learned CIT(A) erred in upholding the action of the Assessing Officer/Transfer Pricing Officer in making a presumptive adjustment for normalization of expenses for the uncontrolled comparable companies.
xii) That the learned CIT(A) erred in holding that it was mandatory for the Assessing Officer/Transfer Pricing Officer to use only the data of comparable companies for the same financial year as under appeal, while determining the mark-up on total cost of comparables under TNMM.
xiii) That the learned CIT(A) erred in not considering the risk free nature of the appellant's business while determining the Arm's Length Price of the international transactions.
xiv) That the learned CIT(A) erred in not allowing the benefit of +/-5% as provided in proviso to section 92C(2) of the Act while recomputing the Arm's Length Price.
xv) That the learned CIT(A) erred in upholding the charging of interest under section 234B and 234D of the Act. xvi) That the appellant craves leave to add to and/or alter, amend, rescind or modify the grounds taken hereinabove before or at the time of hearing of this appeal.
3.1 The facts in relation to assessee's appeal are as follows:-
The assessee company is a wholly owned subsidiary of the Timken Company, USA (Associated Enterprises). The assessee undertakes the following services to its Associated Enterprises:-
• Research and development ("R&D") services; • Information Technology ("IT") support services;Page 5 of 31 5 ITA No.974 & 983/Bang/2008
• Corporate shared services (back office support services); • Global sourcing services.
For the above services, according to the assessee, it was compensated on a cost plus 5 percent basis.
3.1.1 The assessee filed return of income on 30/10/2004 declaring an income of Rs.54,70,420/-. The assessment was completed under section 143(3) of the Act vide order dated 28/12/2006 fixing the total income at Rs.5,24,37,710/-. The Assessing Officer in transfer pricing adjustment, added a sum of Rs.4,52,05,820/- (ALP difference in IT Services Rs.4,00,66,493/- + ALP difference in R&D services of Rs.51,36,327/-).
3.2 On appeal, the learned CIT(A) re-computed the adjustment to arm's length price (ALP) under section 92CA by adopting PLI (operating profit as a percentage of operating costs) at 31.73 % for the R&D segment and 25.35% for the IT services segment being the arithmetical mean as against 30.09% and 26.23% determined by the TPO. The relevant finding of the CIT(A) reads as follows:-
"I recomputed the adjustment to the Arm's Length Price under section 92CA by adopting the PLI (operating profit as a percentage of operating costs) at 31.73% for R&D Segment and 25.35% for the IT services segment being the arithmetical mean as against 30.09% and 26.23% determined by the TPO. Despite adopting the arithmetic mean at a lower percentage as compared to that of the TPO with regard to the IT services segment, the adjustment to the ALP is a higher figure due to an arithmetical error which seems to have been committed in the TPO's computation of ALP adjustment for the IT Page 6 of 31 6 ITA No.974 & 983/Bang/2008 services segment which the Assessing Officer is directed to rectify in the manner laid down below:
IT Services Segment :
Table : 17
Particulars Amount in
(Rs.)
a) Total operating cost (excluding 19,96,33,798
non-operating expenses such as
forex loss, interest etc.)
b) Net margin of the comparables 25.35%
in TNMM as discussed after
making adjustments
c) Arm's Length Price of the 25,02,40,965
international transactions applying
the Net margin (19,96,33,798 x
125.35/100)
d) ALP of the international 20,96,15,489
transactions as per the books of
account
(e) Adjustment to ALP under 4,06,25,476
section 92CA (c-d)
R&D Services Segment:
Table : 18
Particulars Amount in
(Rs.)
a) Total operating cost (excluding 2,04,83,570
non-operating expenses such as
forex loss, etc.)
b) Net margin of the comparables 31.73%
in TNMM as discussed after
making adjustments
c) Arm's Length Price of the 2,69,83,006
international transactions applying
the Net margin (2,04,83,570 x
131.73/100)
d) ALP of the international 2,15,07,749
transactions as per the books of
account
(e) Adjustment to ALP under 54,75,257
section 92CA (c-d)
Page 7 of 31 7 ITA No.974 & 983/Bang/2008
3.3 The detailed determination of Arm's Length Price (mark-up) by
the assessee, the TPO and the CIT(A) with reference to IT support service and R&D service are as follows:-
1. IT Support Services:
Determination of arm's length price (mark-up) for FY 2003-04 Particulars The Appellant The TPO The CIT(A) IT Support Services Most Transactional Net Margin Method appropriate method Profit Level Operating profit/total cost Indicator (PLI Filters Adopted i) Prowess & Capitaline i) Rejected database updated until companies having May 21, 2004 related party
ii) Keyword search query transactions > 25% was applied resulting in of total revenue.
705 companies ii) Rejected
iii) Rejected companies companies having
for which sufficient foreign exchange
financial data was not earning < 25% of
available. total revenue.
iv) Rejected companies iii) Rejected
for which sufficient companies based on
descriptive information is fictional
not available to determine comparability.
comparability. iv) Rejected
v) Rejected companies companies incurring
that have been declared continuous losses.
sick.
vi) Rejected companies
that have ceased business
operations or are
currently inactive.
vii) Rejected companies
that have experienced
exceptional year of
operation.
Page 8 of 31 8 ITA No.974 & 983/Bang/2008
viii) Rejected companies
that are engaged in
activities other than
provision of services.
ix) Rejected companies
that are engaged in
provision of services not
comparable to R&D
services.
x) Rejected companies
which themselves had
submitted transaction
with related parties.
xi) Rejected companies
for which segmental
information was not
available/insufficient to
undertake analysis.
xii) Rejected companies
that experience
persistent operating
losses.
Number of 24 12 14
comparables
Financial data of Financial data for FY FY 2003-04 FY 2003-04
comparables 2001-02, FY 2002-03 and
FY 2003-04 (to the
extent available for the
latest year)
Arithmetical 6.56% (post working 28.23% (without 28.10% (without
mean operating capital adjustment) working capital working capital
mark up on cost adjustment) adjustment)
26.23% (with 25.35% (with
working capital working capital
adjustment) adjustment)
Adjustment Rs.4,00,66,493 Rs.4,06,25,476
amount
Page 9 of 31 9 ITA No.974 & 983/Bang/2008
II. Research & Development Services:
Determination of arm's length price (mark-up) for FY 2003-04 Particulars The Appellant The TPO The CIT(A) IT enabled Services Most Transactional Net Margin Method appropriate method Profit Level Operating profit/total cost Indicator (PLI Number of 9 7 7 comparables Financial data of Financial data for FY FY 2003-04 FY 2003-04 comparables 2001-02, FY 2002-03 And FY 2003-04 (to the Extent available for The latest year) Arithmetical 7.56% (post working 32.09% (without 33.95% (without Mean operating Capital adjustment) working capital working capital Mark up on cost Adjustment) 30.09% adjustment) (with working capital 31.73% (with Adjustment) working capital Adjustment) Adjustment Rs.51,39,327/- Rs.54,75,257/-
amount 3.4 The assessee being aggrieved by the re-computation of adjustment to the ALP is in appeal before us.
3.5 Although the assessee has taken 16 grounds of appeal, in the course of hearing of the appeal, the learned AR submitted that the instant case is squarely covered by the order of the Tribunal in the case of M/s Genisys Integrating Systems (India) Pvt. Ltd. (ITA No.1231/Bang/2010 dated 5th August, 2011). He confined his argument to three aspects, namely, Page 10 of 31 10 ITA No.974 & 983/Bang/2008
(i) the company which is having turnover more than Rs.1 crore but less than Rs.200 crores only shall be taken into consideration as comparable since the assessee was having a turnover range of 20 crores;
(ii) to give the standard deduction of 5% under the proviso to section 92C(2) of the Act;
(iii) when companies which are loss making are excluded from the comparables then super profit making company should also be excluded.
It was submitted that the above issues were deliberated in the order of the Tribunal in the case of M/s Genisys Integrating Systems (India) Pvt. Ltd. and specific directions were incorporated in the order though the case was remanded by the Tribunal to the Assessing Officer. 3.5.1 The assessee also filed a petition for admission of additional documents. The additional documents were filed in the form of a paper book filed on 29/11/2011. The petition filed by the assessee for admission of the additional evidence reads as follows:-
"The appellant would like to submit that the following documents which came in the public domain subsequent to the proceedings before the Transfer Pricing Officer and the Commissioner of Income Tax (Appeals)-IV, Bangalore is now submitted to the Hon'ble Tribunal since, it is very much necessary for the disposal of the appeal and render justice to the appellant.Page 11 of 31 11 ITA No.974 & 983/Bang/2008
Sl. Contents Page No. in the paper
No. book submitted on
November 29, 2011
From To
1 Annexure C : Chairman's letter 39 43
to the Board of Directors in the
case of Satyam Computers
Services Ltd. dated January 7,
2009
2 Annexure G : Excerpts of 212 213
interview with COO of Infosys
Technologies Ltd. on brand value
dated January 12, 2011
The Hon'ble Tribunal would note that the financial of Satyam Computer Services Ltd. cannot be relied upon as the same is falsified over the years. This fact came to the notice of the Appellant vide the above mentioned letter from Chairman of Satyam Computer Services Ltd. dated January 7, 2009. Hence, the same is now relied upon by the Appellant for the rejection of the company as comparable.
Also, as submitted before the Hon'ble Tribunal, Infosys Technologies Ltd., a company selected as comparable, charges premium in the pricing for its services over the peers in the industry due to the brand value and the leading position that it enjoys. Therefore, Infosys cannot be compared with the captive operations of the appellant. This claim of the appellant is substantiated by the above article came in the public domain on January 12, 2011.
As mentioned earlier, apart from the above documents, the appellant had also submitted copies of the annual reports of the comparables contested in the synopsis in the paper book submitted on November 29, 2011. These annual reports contain facts, which came to the notice of the appellant subsequently and now necessary for the disposal of the appeal equitably. For ease of reference of Page 12 of 31 12 ITA No.974 & 983/Bang/2008 the Hon'ble Tribunal following copies of annual reports are submitted in the paper book on November 29, 2011.
Sl. Contents Page No. in the paper
No. book submitted on
November 29, 2011
From To
1 Annexure A : Annual report of 13 37
I-Power Solutions India Ltd. for
FY 2003-04.
2 Annexure B : Computation of 38 38
mark up on cost for I-Power
Solutions India Ltd.
3 Annexure D : Annual report of 44 73
VMF Soft Tech Ltd. for FY
2003-04
4 Annexure E : Computation of bad 74 74
debts as a percentage of
revenue in the case of VMF Soft
Tech Ltd.
5 Annexure F : Annual report of 75 211
Infosys Technologies Ltd. for
FY 2003-04
6 Annexure H : Annual report of 214 298
Mahindra Consulting Ltd. for FY
2003-04
7 Annexure I : Annual report of 300 321
Cherrysoft Technologies Ltd.
for FY 2003-04
8 Annexure J : Annual report of 322 365
Vimta Labs Ltd. for FY 2003-04
Since these documents are necessary for the disposal of the appeal before the Hon'ble Tribunal, it is humbly prayed before the Hon'ble Tribunal to consider these documents and an opportunity shall be provided to the appellant to present its arguments in relation to the above comparables, before disposing the matter".
3.5.2 The learned AR essentially submitted that the specific directions contained in the order of the Tribunal in the case of M/s Genisys Integrating Systems (India) Pvt. Ltd. (supra) may be incorporated in this Page 13 of 31 13 ITA No.974 & 983/Bang/2008 case also wherever the facts are found identical while remanding the case to the AO.
3.6 The learned DR opposed the admission of additional evidence and submitted that the assessee ought to have filed these documents before the authorities below. It was contended that since these documents were not furnished earlier they shall not be admitted. Alternatively it was stated that if these are admitted in evidence then an opportunity need to be given to the Assessing Officer for rebuttal.
3.7 We have heard the rival submissions and perused the materials on record. The Tribunal in the case of M/s Genisys Integrating Systems (India) Pvt. Ltd. (ITA No.1231/Bang/2010 dated 5th August, 2011) had given specific direction to be followed by the Transfer Pricing Officer. The specific directions issued by the Tribunal in the case of M/s Genisys Integrating Systems (India) Pvt. Ltd. are reproduced below for ready reference:-
a) The operating revenue and the operating cost of the transactions relating to associated enterprises only shall be considered;
b) The comparables having the turnover of more than 1.00 crore but less than 200.00 crores only shall be taken into consideration;
c) All the information relating to comparables which are sought to be used against the assessee shall be furnished to the assessee;
d) The assessee shall be given an opportunity of cross examining the parties whose replies are sought to be used against the assessee if the assessee so desires;Page 14 of 31 14 ITA No.974 & 983/Bang/2008
e) To consider the objections of the assessee that relate to additional comparables sought to be adopted by the TPO and pass a detailed order; and
f) To give the standard deduction of 5% under the proviso to section 92C(2) of the Act.
3.7.1 The Assessing Officer shall consider the above directions contained in the order of the Tribunal in M/s Genisys Integrating Systems (India) Pvt. Ltd. and decide whether it is applicable to the facts of the instant case. According to the learned AR, if the dictum laid down by the Tribunal with reference to the turnover filter in the case of M/s Genisys Integrating Systems (India) Pvt. Ltd. is applied to the facts of this case, many companies, which are selected as comparables in the transfer pricing adjustment (software development service segment) would be rejected. According to the learned AR, adopting the turnover filter between 1 crore to 200 crores, the following companies selected by the CIT(A) would be rejected:-
• I-Power Solutions India Ltd.
• Igate Global Solutions Ltd. (Mascot Systems) • Infosys Technologies Ltd.
• Larsen and Toubro Infotech Ltd.
• Satyam Computer Services Ltd.
• VMF Soft Tech Ltd.
3.7.2 The issue of standard deduction of 5% as provided under the proviso to section 92A(2) before making adjustment for price is squarely covered by various orders of the Tribunal namely, M/s Genisys Integrating Systems (India) Pvt. Ltd., M/s Sap Labs India Pvt. Ltd. v ACIT 2010-TII-44- Page 15 of 31 15 ITA No.974 & 983/Bang/2008
ITT-BANG-TP, Philips Software Centre Pvt. Ltd. 26 SOT 226 and MSS India Private Limited 32 SOT 132.
3.7.3 The assessee has filed a petition for admission of additional documents. As per the provisions contained in Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963, the parties shall not be entitled to produce additional documents either oral or documentary before the Tribunal. The provisions contained in the said rule are pari materia with the order 41 Rule 27 of the Code of Civil Procedure, 1908 which also does not allow the parties to appeal to adduce any additional evidence unless and until such exceptional circumstances are set out. In the present case, the assessee had moved a petition for admission of additional evidence. These documents were not available when the proceedings were pending before the TPO and the CIT(A). It came into the public domain subsequent to the proceedings before the authorities below. Therefore, the assessee was prevented from producing the same. For proper appreciation of facts and for equitable disposal of the case, these documents are very material/essential and go to the root of the controversy.
3.7.4 As regards to the admission of the additional evidence, the Hon'ble Madras High Court in the case of Anaikar Trade and Estates (P) Ltd (No.2) vs. CIT, 186 ITR 313 has held as under:
"The Tribunal has discretion to allow the production of additional evidence under Rule 29 of the ITAT Rules, 1963 if the Tribunal requires any document to be produced or affidavit to be filed to enable it to pass orders or for any other substantial cause, it may allow the document to be Page 16 of 31 16 ITA No.974 & 983/Bang/2008 produced or the affidavits to be filed. Even if there was a failure to produce the documents before the ITO and the A.A.C, the Tribunal has the jurisdiction in the interests of justice to allow the production of such vital documents."
3.7.5 In the present case also, the documents furnished by the assessee are vital which go to the root of the present controversy, so these are to be admitted in the interest of natural justice but these documents are required to be examined and considered at the level of the AO. We, therefore, set aside the impugned order and remand the present issue back to the file of the AO to be decided afresh in accordance with law after providing due and reasonable opportunity of being heard to the assessee. 3.7.6 For the aforesaid view, we are also fortified by the decision of the ITAT Delhi Bench 'F' in the case of UOP LIC v Additional Director of Income-tax, International taxation, Circle 2(2) New Delhi (2007) 108 lTD 186 wherein relevant findings given in paras No, 30, 31 33, 48, 52 read as under:
"30. It is a settled position that production of additional evidence at the appellate stage is not a matter of right to litigating public and allowing of production of additional evidence is in the discretion of the Tribunal. The said discretion, however, is to be exercised judicially and not arbitrarily. As held by Hon'ble Madhya Pradesh High Court in the case of CIT V. Kum. Satya Setia (1983) 143 ITR 486, it is within the discretion of the appellate authority to allow production of additional evidence if the said authority requires any document to enable it to pass orders or for any other substantial cause. The Tribunal is the final fact finding body under the scheme of the Income Tax Act, Page 17 of 31 17 ITA No.974 & 983/Bang/2008 1961 and powers, therefore, have necessarily to be exercised by it for deciding the questions of fact. While exercising its powers, if the Tribunal is of the opinion that additional evidence is material in the interest of justice for deciding a particular issue, its discretion cannot be interfered with unless it has been exercised on non existing or imaginary grounds. In the case or Mahavir Singh (supra) cited by the Ld. Counsel for the assessee it was held that section 107 of CPC enables an appellate court to take additional evidence or to require such other evidence to be taken subject to such conditions and limitations as are prescribed under Order 41 of Rule 27 of CPC. It was also held that the parties are not entitled, as of right, to the admission of such evidence and the matter is entirely in the discretion of the court which is of course to be exercised judicially and sparingly. It was observed that Order 41 Rule 27 of CPC envisages certain circumstances when additional evidence can be adduced and one of such circumstances is where the appellate court requires any document to be produced or any witness to be examined to enable it to pronounce judgment or for any other substantial cause. It was also clarified that the expression "to enable it to pronounce judgment" contemplates a situation when the appellate court finds itself unable to pronounce judgment owing to a lacuna or defect in the evidence as it stands. In the context, it was further clarified that the ability to pronounce a judgment is to be understood as the ability to pronounce a judgment satisfactory to the IT mind of court delivering it. This position was reiterated again by the Hon'ble Supreme Court in the case of Syed Abdul Khader Vs. Rami Reddy AIR, 1979 S.C. 553 cited by the Ld. Counsel for the assessee. In the case of Municipal Corp. of Greater Bombay Vs. Lala Panchan AIR 1965 S.C. 1008 cited by the Ld. Counsel for the assessee, it was observed by the Hon'ble Supreme Court that the power to admit additional evidence does not entitle the appellate court to let in fresh evidence only for the purpose of pronouncing judgment in a particular way Page 18 of 31 18 ITA No.974 & 983/Bang/2008 and it is only for removing a lacuna in the evidence that the appellate court is empowered to admit additional evidence. In the case of Arjan Singh V. Kartar Singh AIR 1951 S.C. 193, it was held that the discretion given to the appellate court by Order 41, Rule 27 of CPC to receive and admit additional evidence is not an arbitrary one but is a judicial one circumscribed by the limitations specified in that Rule. It was also held that the legitimate occasion for the application of the said Rule is when on examining the evidence as it stands some inherent lacuna or defect becomes apparent. To the similar effect is another decision of Hon'ble Supreme Court in the case of Natha Singh Vs. Financial Commissioner Taxation AlR 1976 S.C. 1053.
31. As per rule 29 of the Appellate Tribunal Rules, 1963, the Tribunal has the power to allow additional evidence not only if it requires such evidence "to enable it to pronounce judgment" but also "for any other substantial cause". There may be cases where even though the Tribunal finds that it is able to pronounce Judgment on the stage of record as it is and so it cannot strictly say that it requires additional evidence to enable it to pronounce judgment it still considers that in the interest of justice, something which remains obscure, should be filed up so that it can pronounce the judgment in a more satisfactory manner. Such requirement of the Tribunal is likely to arise ordinarily when some inherent lacuna or defect becomes apparent upon its appreciation of the evidence. The power of the Tribunal to admit addition evidence in support of the claim in appeal is discretionary and no fetters can be imposed on the exercise of such power. However, as held by Hon'ble Allahabad High Court in the case of Ram Prasad Sharma Vs. CIT (1979) 119 ITR 867 and by the Hon'ble Andhra Pradesh High Court in the case of A. K. Babu Khan Vs. CWT (1976) 102 ITR 756 it is not an arbitrary power but it is a judicial one circumscribed by the limitations given Page 19 of 31 19 ITA No.974 & 983/Bang/2008 in Rule 29 of the Appellate Tribunal Rules, 1963. The conditions precedent for the exercise of power under Rule 29 must, therefore, be found to have been established. However, where there is no lack of evidence but yet the plea in support of admitting the evidence is so decisive and of clinching value with reference to the points at issue, it is open to the Tribunal to invoke its power of allowing additional evidence to render substantial justice and not to deprive the party of such justice on technical grounds. Further as held by Hon'ble Bombay High Court in the case of Velji Dooraj & Co. Vs. CIT (1968) 68 ITR 708, when the evidence was available to the party at the initial stage and had not been produced by him, the mere fact that evidence sought to be produced is vital and important does not provide a substantial cause to allow its admission at the appellate stage. The admissibility of additional evidence depends on whether or not the substantial cause and not to enable the assessee or the Department to tender fresh evidence to support a new point or to make out a new case. In the case of N. Kamalam (supra) it was held that the provisions of Rule 27 of Order 41 of CPC, 1908 are not designed to help parties to patch up weak points and make up for omissions earlier made.
33. It is also well settled that once additional evidence is taken into consideration, it has to be read as part or the record and before drawing any inference on the basis of contents of that document admitted as additional evidence, an opportunity has to be given to the other side to explain or rebut the same. As held by Hon'ble Madras High Court in the case of RSS Shanmugam Pillai & Sons (supra), if the Tribunal finds that the documents filed are quite relevant and for the purpose of deciding the issue before it, it would be well within its powers to admit the evidence, consider the same on merits or remit the matter to the lower authorities for examining the same. in the case of Smt. Urmila Ratilal (supra), Hon'ble Gujarat High Court has Page 20 of 31 20 ITA No.974 & 983/Bang/2008 held that when the additional evidence field by the revenue was admitted by the Tribunal overruling the objection raised by the assessee, interest of justice demanded that the assessee was given an opportunity to explain or rebut the additional evidence before relying on the same. In the case of Charbhai Biri Works Vs. Asstt CIT (2003) 87 ITO 189, cited by the Ld. Counsel for the assessee, it was held by the Pune Bench of ITAT in it Third Member decision that when the documents which were not available before the Assessing Officer were produced before the Tribunal for the first time and the same were admitted as additional evidence being material to be restored to the file of the Assessing Officer to verify correctness and authenticity of such documents and to adjudicate the matter afresh after providing adequate opportunity to the assessee of being heard.
48. As already noted, the additional evidence would be relevant to consider and decide the case already made out by the Revenue and it is, therefore not a case of tendering of fresh evidence by the department to support a new point or to make out a new case. According to us, the additional evidence filed by the revenue is quite relevant for the purpose of deciding the issue before us and the same, therefore, can be admitted as per rule 29 of Appellate Tribunal Rules, 1963 as held by Hon'ble Madras High Court in the case of RSS Shanmugam Pi1lai & Sons (supra). The said additional evidence also needs to be taken into consideration in the interest of justice for deciding the issue relating to the PE.
52. As already noted the assessee was given an opportunity during the course of hearing to advance the arguments on the admission of additional evidence as well as on merits of the issue taking into consideration the said additional evidence and availing this opportunity, Ld. Counsel for the assessee has not only raised elaborate arguments on both these aspects but has also filed, a detailed written Page 21 of 31 21 ITA No.974 & 983/Bang/2008 submission. In the said written submission an attempt has been made by him to explain each and every document sought to be filed by the revenue as additional evidence in order to rebut the case sought to be made out by the Revenue relying on the same on merits. Keeping in view the fact that the additional evidence so produced by the revenue as well as elaborate explanation offered by him assessee to rebut the same is voluminous running into several pages, which requires in-depth examination, we find that it would be fair and proper and in the interest of justice to restore the issue relating to PE to the file of the Assessing Officer for deciding the same afresh after examining the additional evidence as well as explanation offered by the assessee while rebutting the same. The assessee shall also be at liberty to adduce further evidence to support its case before the Assessing Officer who shall take into consideration the same in accordance with law. Since the other issues raised in this appeal related to the main issue of PE, we deem it appropriate to restore these issues also to the file of the Assessing Officer for fresh decision along with the main issue. In so far as the issue relating to the levy of interest u/s 234B is concerned, the Ld. Counsel for the assessee has contended before us that the same is squarely covered in favour of the assessee by the decision of Delhi Special bench of ITAT in the case of Motorola inc. Vs. Dy. CIT (2005) 95 ITD 269. We, therefore, direct the Assessing Officer to decide the issue relating to levy of interest u/s 234B in the light of the decision of Special Bench in the case of Motorola inc (supra). The impugned order of the Ld. CIT(A) on all the issues involved in the present appeal is accordingly set aside and the matter is restored to the file of the Assessing Officer for fresh decision as per the directions given hereinabove."
3.7.7 In view of the above, the impugned order of the ld. CIT(Appeals) is set aside and the issue is remanded back to the file of the Page 22 of 31 22 ITA No.974 & 983/Bang/2008 AO for fresh adjudication in accordance with law, after providing due and reasonable opportunity of being heard to the assessee. As stated earlier, the Assessing Officer shall consider whether the issue that is raised in the instant case is covered by the dictum laid down by the Tribunal in the case of M/s Genisys Integrating Systems (India) Pvt. Ltd. It is ordered accordingly.
3.7.8 In the result, the appeal filed by the assessee is allowed for statistical purposes.
ITA No.983/Bang/2008 (Revenue's appeal)
4. The effective grounds raised by the revenue reads as follows:-
2) The learned CIT(A) has erred in law and on facts in directing the Assessing Officer to exclude the expenses incurred in foreign currency from the total turnover for the purpose of computing deduction under section 10A.
3) The learned CIT(A) has erred in holding that the expenses incurred for purchase of software are revenue in nature without considering the fact that the software is giving enduring benefit to the assessee.
4.1 The facts in relation to ground no.2 mentioned above are as follows:-
The assessee had claimed deduction under section 10B of the Act to the extent of Rs.51,39,238/-. The Assessing Officer recalculated the deduction by reducing from the export turnover, the communication expenses. The Assessing Officer while doing so had placed reliance on the Page 23 of 31 23 ITA No.974 & 983/Bang/2008 Explanation 2(iii) to 10B. The Assessing Officer also rejected the alternative contention of the assessee that if the communication expenses are reduced from the export turnover while calculating deduction under section 10B of the Act, the same should also be reduced from the total turnover.
4.2 The CIT(A) on appeal accepted the alternative contention of the assessee and directed the Assessing Officer to reduce the communication expenses both from the export turnover as well as from the total turnover. The CIT(A) had placed reliance on the orders of the Tribunal in the case of CIT v M/s Tata Elxsi Ltd. & Others (ITA No.315/Bang/2006) & DCIT v Binary Semantics Ltd. (109 TTJ 556).
4.3 At the very outset, it was pointed out by the learned AR that the order of tribunal relied on by the first appellate authority has been affirmed by the Hon'ble jurisdictional High Court in the case of CIT v M/s Tata Elxsi Ltd. & Others (2011-TIOL-684-HC-KAR-II).
4.4 The learned DR was unable to controvert the submissions made by the learned AR.
4.5 We have heard the rival submission and perused the material on record. The Hon'ble Karnataka High Court in the case of CIT v M/s Tata Elxsi Ltd. & Others had held that while computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export Page 24 of 31 24 ITA No.974 & 983/Bang/2008 turnover as it is a component of total turnover in the denominator. The relevant finding of the Hon'ble jurisdictional High Court reads as follows:-
"...........Section 10A is enacted as an incentive to exporters to enable their products to be competitive in the global market and consequently earn precious foreign exchange for the country. This aspect has to be borne in mind. While computing the consideration received from such export turnover, the expenses incurred towards 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 should not be included. However, the word total turnover is not defined for the purpose of this section. It is because of this omission to define 'total turnover', the word 'total turnover' falls for interpretation by this Court;
........In section 10A, not only the word 'total turnover' is not defined, there is no clue regarding what is to be excluded while arriving at the total turnover. However, while interpreting the provisions of section 80HHC, the courts have laid down various principles, which are independent of the statutory provisions. There should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10A is a beneficial section which intends to provide incentives to promote exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In Page 25 of 31 25 ITA No.974 & 983/Bang/2008 the case of section 80HHC, the export profit is to be derived from the total business income of the assxcessee, whereas in section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. To the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. If the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term 'total turnover' in section 10A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. When the statute prescribed a formula and in the said formula, 'export turnover' is defined, and when the 'total turnover' includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. Thus, there is no error committed by the Tribunal in following the judgements rendered in the context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same".Page 26 of 31 26 ITA No.974 & 983/Bang/2008
4.6 The Hon'ble Mumbai High Court in the case of Gem Plus Jewellery India Ltd. (supra), in identical circumstances, held that since the export turnover forms part of the total turnover, if an item is excluded from the export turnover, the same should also be reduced from the total turnover to maintain parity between numerator and denominator while calculating deduction u/s 10A of the Act. The relevant finding of the Hon'ble Mumbai High Court reads as follows:-
"The total turnover of the business carried on by the undertaking would consist of the turnover from export and the turnover from local sales. The export turnover constitutes the numerator in the formula prescribed by sub-section (4). Export turnover also forms a constituent element of the denominator in as much as the export turnover is a part of the total turnover. The export turnover, in the numerator must have the same meaning as the export turnover which is constituent element of the total turnover in the denominator. The legislature has provided a definition of the expression "export turnover" in Expln.2 to s.10A which the expression is defined to mean the consideration in respect of export by the undertaking of articles, things or computer software received in or brought into India by the assessee in convertible foreign exchange but so as not to include inter alia freight, telecommunication charges or insurance attributable to the delivery of the articles, things or software outside India. Therefore in computing the export turnover the legislature has made a specific exclusion of freight and insurance charges. The submission which has been urged on behalf of the revenue is that while freight and insurance charges are liable to be excluded in computing export turnover, a similar exclusion has not been provided in regard to total turnover. The submission of the revenue, however, misses the point that the expression "total turnover" has not been defined Page 27 of 31 27 ITA No.974 & 983/Bang/2008 at all by Parliament for the purposes of s.10A. However, the expression "export turnover" has been defined. The definition of "export turnover" excludes freight and insurance. Since export turnover has been defined by Parliament and there is a specific exclusion of freight and insurance, the expression "export turnover" cannot have a different meaning when it forms a constituent part of the total turnover for the purposes of the application of the formula. Undoubtedly, it was open to Parliament to make a provision which has been enunciated earlier must prevail as a matter of correct statutory interpretation. Any other interpretation would lead to an absurdity. If the contention of the Revenue were to be accepted, the same expression viz. 'export turnover' would have a different connotation in the application of the same formula. The submission of the Revenue would lead to a situation where freight and insurance, though these have been specifically excluded from 'export turnover' for the purposes of the numerator would be brought in as part of the 'export turnover' when it forms an element of the total turnover as a denominator in the formula. A construction of a statutory provision which would lead to an absurdity must be avoided. Moreover, a receipt such as freight and insurance which does not have any element of profit cannot be included in the total turnover. Freight and insurance charges do not have any element of turnover. For this reason in addition, these two items would have to be excluded from the total turnover particularly in the absence of a legislative prescription to the contrary - CIT v Sudarshan Chemicals Industries Ltd. (2000) 163 CTR (Bom) 596: (2000) 245 ITR 769 (Bom) applied; CIT v Lakshmi Machine Works (2007) 210 CTR (SC) 1: (2007) 290 ITR 667 (SC) and CIT v Catapharma (India) (P) Ltd. (2007) 211 CTR (SC) 83: (2007) 292 ITR 641 (SC) relied on"
4.7 In the case of Sak Soft Ltd. (supra), the assessee was engaged in the business of exporting computer software and claimed deduction u/s Page 28 of 31 28 ITA No.974 & 983/Bang/2008 10B of the Act. In completing the assessment u/s 143(3) of the Act, the AO reduced the expenditure incurred in foreign exchange in providing the technical services outside India, from the export turnover without corresponding reduction from total turnover, thereby reducing the deduction claimed by the assessment u/s 10B of the Act. 4.8 In light of the above facts, the Special Bench held as under:-
"For the above reasons, we hold that for the purpose of applying the formula under sub-section (4) of section 10B, the freight, telecom charges or insurance attributable to the delivery of articles or things or computer software outside India or the expenses, if any, incurred in foreign exchange in providing the technical services outside India are to be excluded both from the export turnover and from the total turnover, which are the numerator and the denominator respectively in the formula. The appeals filed by the department are thus dismissed".
4.9 In the light of the above judgements of the Hon'ble High Courts and the order of the Special Bench, we are of the view that the CIT(A) is justified in directing the Assessing Officer to exclude the above mentioned expenditure both from the export turnover as well as from the total turnover while calculating deduction under section 10A of the Act. Therefore, the order of the CIT(A) is correct and in accordance with law and no interference is called for. In the result, ground no.2 raised by the revenue is dismissed.
5. The facts in relation to ground no.3 in revenue's appeal are as follows:-
Page 29 of 31 29 ITA No.974 & 983/Bang/2008
The assessee had debited an amount of Rs.52,02,934/- as expenditure for purchase of different software licences. It was disallowed by the Assessing Officer since according to him; these licences were valid for more than one year and it provide an enduring benefit to the assessee.
It was concluded by the Assessing Officer that these expenses are to be treated as capital expenditure and depreciation on the same was allowed.
5.1 The CIT(A) on appeal placed reliance on the order of the Tribunal in the case of M/s Software & Silicon Systems India Pvt. Ltd. v ITO (ITA No.44/Bang/2006 dated 26/10/2007) and decided the matter in favour of the assessee.
5.2 Aggrieved, the revenue is in appeal before us.
5.3 The learned DR submitted that the issue of allowance of expenditure with reference to purchase of software licences has been considered by the Hon'ble jurisdictional High Court in the case of CIT v M/s Toyota Kriloskar Motors Pvt. Ltd. (ITA No.174/2009 dated 23rd March, 2011). The learned DR also relied on the order of the Special Bench in the case of Amway India Enterprises v DCIT (301 ITR (AT) 1) and stated that the CIT(A) had not analysed the various tests that has been laid down by the Hon'ble Special Bench to determine whether the expenditure incurred for the purchase of computer software is capital or revenue.
5.4 The learned AR on the other hand supported the order of the first appellate authority.
Page 30 of 31 30 ITA No.974 & 983/Bang/20085.5 We have heard the rival submissions and perused the materials on record. The Hon'ble jurisdictional High Court in the case of CIT v M/s Toyota Kriloskar Motors Pvt. Ltd. (ITA No.174/2009 dated 23rd March, 2011) has considered whether the expenditure in respect of purchase of software is capital or revenue. The Hon'ble High Court at para 3 of its judgement held as follows :-
"As rightly pointed out by the authorities, when the life of a computer or software is less than two years and as such, the right to use it is for a limited period, the fee paid for acquisition of the said right is allowable as revenue expenditure and these software if they are licenced for a particular period, for utilising the same for the subsequent years fresh licence fee is to be paid. Therefore, without renewing the licence or without paying the fee on such renewal, it is not possible to use those software. In those circumstances, the findings recorded by the authorities that the fee paid for obtaining the software and the licence and for renewing the same is to be construed as only revenue expenditure do not call for interference by this Court.
5.6 The Special Bench in the case of Amway India Enterprises v DCIT (301 ITR (AT) 1) had laid down various tests to determine whether the expenditure incurred for purchase of computer software is capital or revenue. In the instant case, the CIT(A) did have the benefit of the judgement of Hon'ble jurisdictional High Court in the case of CIT v M/s Toyota Kriloskar Motors Pvt. Ltd. (supra) when she passed the impugned order. The CIT(A) has also not referred to the order of the Special Bench of the Tribunal in the case of Amway India Enterprises (Supra). The Special Page 31 of 31 31 ITA No.974 & 983/Bang/2008 Bench had laid various principles to determine whether the expenditure incurred for the purchase of a software licence is capital or revenue. The judgement of Hon'ble jurisdictional High Court and the order of the Special Bench cited supra are directly applicable to the facts of the instant case.
Since the impugned order of the CIT(A) did not consider the judgement of the Hon'ble High Court and the order of the Special Bench, we deem it fit and proper to restore the matter to the Assessing Officer for an elaborate discussion on the same. The assessee shall produce the details with reference to the expenditure incurred and shall cooperate with the Assessing Officer for expeditious disposal of the matter. It is ordered accordingly. Therefore, ground no.3 is allowed for statistical purposes.
6. In the result, the appeal filed by the revenue is partly allowed for statistical purposes and the appeal filed by the assessee is allowed for statistical purposes.
Order pronounced in the open court on 24th day of February, 2012 Sd/- Sd/-
(N K SAINI) (GEORGE GEORGE K)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Copy to:-
1. The Revenue 2. The Assessee 3. The CIT concerned 4. The CIT(A)
concerned 5. The DR 6. GF
MSP/- By Order
Asst. Registrar, ITAT, Bangalore.