Income Tax Appellate Tribunal - Chennai
Diebold Systems (P) Ltd. vs Asstt. Cit, Company Circle-1(4), ... on 21 April, 2006
Equivalent citations: [2006]103ITD149(CHENNAI), [2006]8SOT585(CHENNAI), (2006)101TTJ(CHENNAI)201
ORDER
Chandra Poojari, A.M. This appeal by the assessee for the assessment year 2001-02 is directed against the order of the Commissioner (Appeals) dated 28-2-2005. The first two grounds are of general in nature where the assessee contends that the assessment is bad in law and passed without application of mind. These grounds were not pressed and, therefore, not adjudicated.
2. The next ground is with regard to allowability of deduction under section 80-IA of the Income Tax Act. This issue came up for consideration before this Tribunal for the assessment year 1996-97 in ITA No. 1313/ Mds./2002 in the assessee's own case and the Tribunal, vide order dated 20-1-2006 has held that the benefit of deduction as per the mandate of the statute could only be given to the profits and gains derived from the industrial undertaking. Benefit under this section is available to the undertaking and not to the assessee. The income earned from AMC charges (Annual Maintenance Charges of ATM), installation and technical charges, consultation charges and licence fee of software constitute income of the assessee and not of Industrial Undertaking situated at Pondicherry since this income was not derived from this Industrial Undertaking as the men, material and machinery of Pondichery Industrial Undertaking were not used to earn this income and hence, not eligible for deduction under section 80-IA of the Act. Further, for this assessment year the income on account of the above elements was not earned from eligible business referred to in section 80-IA(4) of the Act. The assessee is not also entitled for deduction under section 80-IB though this section is applicable, for the same reason stated therein in that order as the above earnings were not from Industrial Undertaking situated at Pondicherry, as the benefit of deduction can be given only to the profit and gains derived from Industrial Undertaking as per section 80-IB(4) of the Act. Accordingly, this ground is rejected.
3. The next ground is that the Commissioner (Appeals) has erred in confirming the disallowance of Rs. 53,21,968 as inflation of expenses on purchase of software.
4. The brief facts of the case are that the assessee has passed a journal entry on 31-3-2001 debiting the purchase of software at Rs. 3,03,53,558 by JE No. JL559. This entry was passed to match the receipt on account of software licence fee of Rs. 5,40,05,000. The assessee reversed the provision of purchase towards actual purchase on 1-4-2001 at Rs. 2,49,31,590. According to the assessing officer, this has resulted in reduction of profit of Rs. 53,21,968 for the assessment year 2001-02. The assessing officer has made an enquiry for making such a provisional entry and also the reason for reversing the provisional entry by actual purchase for lesser amount. The assessee submitted that at the time of assessment due to delay in completion of licensing formalities with Diebold Inc., advance copies of software were installed at customer bank site and sales invoice was raised for the year 2000-01. Provision for the purchase of software was made on the basis of "indication available". The difference between the provisions and the actual cost has been reversed in the next financial year i.e., 2001-02 and included in the return of income for the next assessment year 2002-03. There is no qualification in the Audit Report for the assessment year 2002-03 regarding declaration of this additional income. The assessing officer was of the opinion that the assessee has deliberately claimed excess expenditure with an intention to conceal the income.
5. The assessee submitted before the assessing officer that the effect of this entry is compensatory in nature and there is no actual suppression of income and the revenue's interest has not been affected and there was no motive to suppress the income. This is the method of accounting followed by the assessee regularly and consistently from year to year. However, the assessing officer, not being satisfied with the contentions of the assessee, has made addition of Rs. 53,21,968, being difference between the provision of purchase entry and actual purchase. On appeal, the Commissioner (Appeals) has confirmed the action of the assessing officer. However, he has given direction to verify from the records of succeeding year and allow actual amount for which the software purchases were made by the assessee and not debited to the account of that year. In other words, the Commissioner (Appeals) was of the opinion that there shall not be any double addition or taxation in the next year.
6. The learned counsel for the assessee submitted that provision was towards the cost of software for which the assessee has placed orders with the NRI vendors. The statement given by the Director, Shri Harish Murthy on 10-1-2003 cannot be relied upon as he is not conversant with the accounting procedures and Income-Tax Law and that cannot be used as an evidence against the assessee to disallow the claim of the assessee. Actually, there was no suppression of any income by inflating the purchase figures as the assessee was consistently following this method of accounting of making provision towards the purchase on the last day of the year and reversing it on the immediate next day of the subsequent year. He further submitted that the admission to declare this amount as income for the assessment year 2001-02 was erroneously made and there was no evidence with the department to show that the assessee has suppressed the income. He relied on the judgment of Hon'ble Apex Court in the case of CIT v. C. Parakh & Co. (India) Ltd (1956) 29 ITR 661 (SC) and the judgment of Hon'ble Delhi High Court in the case of Swaran Yash v. CIT (1982) 138 ITR 734 (Del). He further submitted that even if the assessee has admitted the addition, the addition cannot be made and the assessment shall be completed in accordance with law.
7. The learned Departmental Representative, on the other hand, submitted that this was only provision for purchase. Actually, there was no purchase at all. Had the assessee purchased the goods, there should be equivalent amount of stock and the assessee had admitted vide letter dated 11-4-2003 to offer this difference of Rs. 53,21,968 as additional income for this assessment year and no appeal lies against the agreed addition. He relied on the order of this Tribunal (ITA No. 1867/(Mad.)/2000, dated 7-6-2005) in the case of Indo Doha Chemical Pharmaceuticals Ltd. v. Dy. CIT wherein this Tribunal has concurred in the view of the department that "the assessee cannot be said to be aggrieved if the revision of assessment is on agreed basis".
8. We have heard the rival submissions and perused the material on record. Admittedly, the assessee has passed a Journal Entry for purchase of software on 31-3-2000 for Rs. 3,02,53,558 and reversed it on the first day of the next year at Rs. 2,49,31,590. This has resulted in claiming of excess expenditure for the assessment year before us to the tune of Rs. 53,21,968. The time gap between these two Journal Entries is just a day or less than a day. For both the entries, the assessee has not brought on record any evidence for determining the cost of purchase. According to the assessee the entries were made as indications available. The nature and specific sources of indication have not been brought either to the notice of the authorities below or to our notice. In our opinion, it is just a discard entry. When this information was brought to the notice of the assessee, the assessee has agreed to offer this amount as income for the assessment year and also stated in the letter dated 11 -4-2003 that excess provision in the purchase price has been reduced in the subsequent year. Hence, they will file revised return for the assessment year 2002-03. After this statement, the assessing officer stopped the probe and added this amount to the income of the assessee. Further, in letter dated 14-10-2003, the assessee has reiterated as follows :
"The provision for purchases Rs. 3,02,53,558 was reversed on 1-4-2001 and the actual purchases were accounted for.
During the course of assessment proceedings we have offered Rs. 5,321,968 as income for the assessment year 2001-02 and file a revised return claiming this amount as a deduction in the assessment year 2002-03.
We are waiting for the completion of this assessment to file the revised return.'
9. The above contents show that the assessee is fully aware of the fact and consequence of its statement and submission. Now, the assessee coming back with the plea that the agreed addition was erroneously made cannot be accepted. First of all there is no evidence to show that the provision for purchase was made on the basis of specific purchase price of the software. The assessee cannot also say that within less than 24 hours, it has collected full information regarding the actual purchase price of the software. Further, the assessee cannot have any grievance towards addition as the assessee itself has agreed for offering this amount for taxation while examining under section 131 of the Income Tax Act and also by its own letter cited (supra). In the case of Raman lal Kamadar v. CIT (1977) 108 ITR 73 (Mad), the Hon'ble Madras High Court has held that once the assessee had sated that it had no objection to the proposed revision or addition and the assessment was made as proposed by the assessee, the assessee could not be said to have been aggrieved by the order of the assessing officer. The assessee can be said to have been aggrieved by the order of the assessing officer only when the assessing officer unilaterally made addition and in that case only the assessee has a right to appeal against that order.
10. In the present case the Director, Shri Harish Murthy was examined on oath under section 131 of the Act on 10-1-2003 and he categorically admitted to offer this amount as income of the assessee. Even if there was purchase amounting to Rs. 3,02,53,558 instead of Rs. 2,49,31,590, the balance of Rs. 53,21,968 should have been shown as stock which was not sold, whereas there was no indication that this amount was included in the closing stock, On this account also, the assessee has no case. Further, in the Income-tax proceedings, each assessment year is an independent assessable unit and the real income of each assessment year shall be ascertained and taxed. Even postponement of tax liability from one year to another year is not permissible. In this background, if we analyze the strategy adopted by the assessee, the assessee has made an attempt to postpone the tax liability. The assessee is liable to compute the profits and gains of business in accordance with the method of accounting regularly employed by the assessee. if the method of accounting employed by the assessee does not reflect the true picture or real profit of the assessee and the proper profit cannot be deduced from that account and account is not complete to the satisfaction of the assessing officer, the assessing officer has the liberty to compute the profit. Accordingly, we are convinced that the assessee has actually inflated the purchase without making any actual purchase to the above extent. Further, the Commissioner (Appeals) has given specific directions to the assessing officer that there shall not be any double addition in the assessment year 2002-03 and the assessee has the option to file the revised return. If the assessee opts not to file revised return for the assessment year 2002-03, then it is the fault of the assessee and not the fault of the department. Hence, we have no hesitation in confirming the action of the lower authorities and reject the ground taken by the assessee.
11. The next ground is that the Commissioner (Appeals) has grossly erred in law in not appreciating that given the facts of the present case, the assessing officer erred in applying the provisions of section 40A(2)(a) since the party to whom payments were made did not fall within the purview of clause 2(a) of section 40A of the Act.
12. The brief facts of the issue are that the assessee has a 50:50 joint venture with HMA Data Systems Pvt. Ltd. and Deibold Inc., USA engaged in the manufacture and trading of Automated Teller Machines & Accessories. M/s. Chip Trans and M/s. Deibold Inc., USA were associate concerns of the assessee-company. The Managing Director, Shri Harish Murthy was substantially interested in MA Data Systems Ltd., and Chip Trans, USA. Thus, HMA Data Systems Pvt. Ltd., Diebold Inc., USA, HMA Software Pvt. Ltd., and Chip Trans, USA are specified persons as enumerated under section 40A(2)(a) of the Income Tax Act. During the year, the assessee has purchased software from Chip Trans, USA, Diebold Inc., USA and MA Software Pvt. Ltd. The assessee has purchased ATM related software from Chip Trans, USA during the period 1-4-2000 to 31-10-2000. The assessing officer compared the purchase cost and sales price of software. As mentioned by the assessing officer, the purchase and sales cost of software are as follows :
Name of the Company No. of Software Purchase Price Sale Price (In Rupees) Profit/Loss Chip Trans, USA 312 6,46,39,832 5,48,94,300 97,45,532 Diebold Inc., USA 282 49,31,590 5,40,05,000 (+) 2,90,73,450
13. During the year, according to the assessing officer, the assessee has purchased 312 sets of software from Chip Trans and 282 sets of software from Diebold Inc., USA. The assessing officer has collected the costing details of software supplied by these companies which are as follows:
Bank of Punjab Ltd.
All Figures in INR unless otherwise mentioned 1064ixFL Hardware 46.35 to a $ Software CIF Chennai $7,396.50 CIF Chennai US $ $ Customs Duty Calculations CIF US $ $ 7,396.50 CIF US $ $ 1,256.00 CIF INR 3,42,827.78 CIF INR 58,215.60 Assessable Value (A.V.) Assessable Value (A.V.) 1% X CIF 3,46,256.05 1% X C 58,797.76 Basic Customs Duty (BCD)
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(A.V. X 25%) 69,251.21 Counterveiling duty (CVD) (AV + BCD + SC X 16%) 66,481.16
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Special Additional Duty 4% 19,279.54
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Customs Duty 1,55,011.91 Clearing Charges 3.5% Clearing Charges 3.5% on A.V 2,351.91 On AV 13,850.24 Landed Cost 5,11,689.93 Landed Cost 60,567.51 Local 1,333.20 Ex-factory Price Ex-factory Software Hardware 5,12,823.13 Price 60,567.51 Total order value Hw proposed 7,89,215.69 Total order value SW proposed 2,25,000 Margin on Hw 2,76,392.56 Margin on Sw 1,64,432.49 Total Ex-factory Cost (Hw & Sw) 5,73,390.64 Commission 2,80,000.00 Total Cost 8,53,390.64 Total order Value (Hw & Sw) 10,14,215.69 Total Margin 1,60,825.05 Margin %age 15.86% Bank of Punjab Ltd.
All Figures in INR unless otherwise mentioned 1062ixFL Hardware 47.00 to a $ Software CIF Chennai $ 8,358.38 CIF Chennai US $ $ 1,328.00 Customs Duty Calculations CIF US $ $ 8,358.38 CIF US $ $ 1,328.00 CIF INR 3,92,843.63 CIF INR 62,416.00 Assessable Value (A.V.) Assessable Value (A.V.) 1% X CIF 3,96,772.06 1%XC 63,040.16 Basic Customs Duty (BCD)
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(A.V. X 25%) 99,193.02 Counterveiling duty (CVD) (AV + BCD + SC X 16%) 79,354.41 Special Additional Duty 4% 23,012.78 Customs Duty 2,01,560.21 Clearing Charges 3.5% Clearing Charges 3.5% on A.V. 2,206.41 On AV 13,887.02 Landed Cost 6,08,290.85 Landed Cost 64,622.41 Maintenance modules Local 1,333.20 Ex factory Price 6,09,42405 Ex factory Software 64,622.41 Hardware Price Total order value Hw 9,55,882.35 Total order value 2,00,000 proposed Sw proposed Margin on Hw 3,46,458.30 Margin on Sw 1,35,377.59 Total Ex factory Cost (Hw & Sw) 6,74,046.46 Brokerage 4,20,000.00 Total Cost 10,94,046.46 Total order Value (Hw & Sw) 11,55,882.35 Total Margin 61,835.89 Margin %age 5.35% According to the above chart, the cost of Cash Dispenser software supplied by Diebold Inc., was Rs. 60,567 and the ATM Software was Rs. 64,622. This cost of software matches with the value of software in closing stock for the assessment years 1998-99 and 1999-2000. The assessing officer further discussed on the purchase price and sales price of software sets purchased from Chip Trans and Diebold Inc., as under:-
Comparative Chart Indicating Software Purchase Price Regarding Supply to Bank of Punjab Ltd., Ltd., by Chip Trans. & Diebold in A.Y. 2001-02 S. No. Purchased from Chip Trans Inv. No. Selling Price Purchase Price
1.
BOP Autocare Centre, New Delhi 1,110 225,000 317,646
2. BOP Laxmi Super, New Delhi 1,111 225,000 317,646
3. BOP Shamnath Marg, New Delhi 1,112 225,000 317,646
4. GT Mandigobindge, Punjab 1,164 225,000 323,148
5. GT Road Malout, Punjab 1,165 225,000 323,148
6. Circular Road, Punjab 1,166 225,000 320,259
7. Bengali Market, New Delhi 1,237 225,000 320,259
8. Tobaco House, Calcutta 1,560 225,000 331,010
9. Sector 32, Chandigarh 1,601 225,000 334,004
10. Pakhwal RS, Ludhiana 1,602 225,000 334,004
11. S.D. Road, Secunderabad 1,742 225,000 331,010 S. No. Purchased/from Diebold Inc. Inv. No. Selling Price Purchase Price
1. BOP Jalandhar 318 225,000 50,568
2. BOP Banga 319 225,000 50,568
3. BOP Patiala 320 225,000 50,568
4. BOP Nabha 321 225,000 50,568
5. BOP Chandni Chowk 322 225,000 50,568
6. BOP Jalandhar 323 225,000 50,568
7. BOP Chandigarh 324 225,000 50,568 Thereafter, the assessing officer has arrived at the cost of 282 sets of software purchased from Diebold Inc., at Rs. 88,410 each (Rs. 2,49,31,590 divided by 282) and the cost of 312 sets of software purchased from Chip Trans at Rs. 2,05,090 (Rs. 6,39,88,366 divided by 312). According to the assessing officer, the average price paid to Chip Trans for the same software purchased from Diebold Inc., was very excessive as compared to the cost of Diebold Inc. On comparison, the assessing officer was of the opinion that the cost price paid to Chip Trans was very heavy and unreasonable compared to the prevailing market price which is not legitimate. Therefore, he invoked the provisions of section 40A(2)(a)(b) of the Income Tax Act. Thus, the assessing officer fixed the cost of software purchased from Diebold Inc. at Rs. 88,410 and to this cost he added 10% to the software purchased from Chip Trans as these were supplied on credit basis, thus arriving at the cost of software purchased from Chip Trans at Rs. 97,251 and thereby arrived at the cost of 312 sets as under:-
(a) Amount actually paid for 312 sets of software Rs. 6,39,88,366
(b) Amount payable to Chip Trans for.312 sets of software at Rs. 97,251 each Rs. 3,03,42,312
(c) Amount excess paid (a-b) Rs. 3,36,46,054 This excess payment of Rs. 3,36,46,054 to Chip Trans was disallowed under section 40A(2)(a) of the Income Tax Act by the assessing officer. Against this disallowance, the assessee went in appeal before the Commissioner (Appeals) who has confirmed the action of the assessing officer. Aggrieved, the assessee is in appeal before us on this issue.
14. The learned counsel for the assessee submitted that the assessee has purchased 709 sets of software from Chip Trans, USA, though it was stated as 696 before the assessing officer and filed an affidavit confirming the purchase of 709 sets of software. He further submitted that the mistake was due to wrong punching of number of software sets imported. Further, the software sets purchased or sold consist of large number of individual software which were bundled or embedded as per needs of the customers. They were collectively called as software sets and the assessee has maintained regular books of account and stock register showing purchase, sales and stock. He further submitted that the assessing officer wrongly took the purchase from Chip Trans at 3 12 instead of 709 sets. The purchase of 312 sets is factually incorrect. Actually it was 709 sets which is supported by purchase bills. He drew our attention to Pages 197 to 199 of the Paper Book-I which shows the details of purchase of 697 sets of software from Chip Trans during the year 2000-01 at a cost of Rs. 6,27,24,879. He further drew our attention to the Paper Book filed on 6-3-2006 containing Annexures I to VII as below S. No. Annexure No. Particulars Page No.
1. Annexure 1 Affidavit of the appellant under rule 10 of the (TAT Rules, 1963 to affirm the fact that 709 software sets had been imported 1-2
2. Annexure 2 Invoice-wise details of the Software Sets imported showing reconciliation with similar list submitted vide Letter dated 19-12-2003 3-20
3. Annexure 3 Copies of the Invoices as received from M/s. Chip Trans, USA 21-146
4. Annexure 4 Quantitative details of Software, namely opening balance, receipts, issue & closing balance 147
5. Annexure 5 Copy of the Software Stock Register 148-244
6. Annexure 6 Quantitative Reconciliation of the Software sourced from M/s. Chip Trans, USA with the Stock Register 245-248
7. Annexure 7 Quantitative Reconciliation of the Software Issued with the Stock Register 249-252
15. The learned counsel for the assessee vehemently argued that all purchases were approved by the customs authorities and as such, customs approved details cannot be questioned by the department. He contended that when payments are approved by one wing of the Government there is no question of such payments being treated as excessive or unreasonable. For this purpose, he relied on the judgment of the Hon'ble Delhi High Court in the case of CIT v. Shriram Pistons & Rings Ltd. (1990) 181 ITR 230 (Del); and in the case of Addl. CIT v. Nestle India Ltd. (2005) 94 TTJ 532 (Delhi) and decision of the Pune Bench of the Tribunal in the case of Kinetic Honda Motor Ltd. v. Joint CIT (2001) 77 ITD 393 (Pune).
16. The learned Departmental Representative, on the other hand, submitted that there is no merit in the claim of the assessee that it has purchased 709 sets of software from Chip Trans. At the time of assessment, it was stated that the assessee has purchased 696 sets of software. Now the assessee is changing its stance and stating that it has purchased 709 sets of software and made an affidavit to that effect. This is only self-serving in nature. On 11-4-2003, the assessee has filed a letter where it is clearly mentioned that it is 312 sets of software and it has given item-wise cost of each set of software and sale price. He drew our attention to the details of software purchased by the assessee which was enclosed to the letter dated 11-4-2003. According to this, the assessee has purchased only 312 sets at a cost of Rs. 6,46,39,832 and sold the same for Rs. 5,48,94,300. The sale price mentioned in the statement fully agrees with the sale price mentioned by the assessing officer in the assessment order at page 20, which reproduced above. He further submitted that had the assessee purchased 709 sets or 696 sets of software, there should be equivalent number of software sets in the closing stock. But actually, the closing stock shows only 131 sets and this statement was produced by the assessee as Annexure IV in page 147 of the Paper Book vide letter dated 6-3-2006. According to this statement, there is no equivalent amount of closing stock. Further, he drew our attention to the order sheet entry of assessment record dated 19-12-2003 wherein the assessee has stated as follows :-
'Shri P. Giridhar, Director Finance attended with Shri J. Vinodh, Executive (Finance) and furnished letter dated 19-12-2003. It is contended that 696 pieces of software has been purchased from Chip Trans as against 312 agreed earlier which is the quantity of software sold and purchased, details of which were furnished along with letter dated 11-4-2003. Software stock record is also produced. When asked to clarify as to how the assessee determined the sale value and purchase price of software given vide letter dated 11-4-2003, it is stated that sale price has been determined on the basis of actual invoice issued to the bank. As regards the cost of software, the software required as per the requirement of bank is prepared by the assessee by combining 2, to 3 softwares and the cost as per letter dated 11-4-2003 is the actual cost of such combined software.
As far as sale and purchase out of provisions (software supplied by Diebold Inc., USA entry dated 31-3-2001), the set of software as required by bank has directly been sent to India. Thus, the software supplied by Diebold is a made to order software and hence there was delay in supply of software."
17. We have heard the rival submissions and perused the material on record. Though the assessee has stated that it has purchased 709 sets of software from Chip Trans, USA, it has not been able to co-relate as to how the 709 sets of software were embedded or grouped and sold to various parties. The assessee has not corroborated the unit-wise purchase cost and sale price of software set in its new place of purchase of 709 software sets. It is clear beyond doubt that the sale was for 312 sets of software only as the assessee itself has admitted vide letter dated 11-4-2003 that it has sold 312 sets of software for Rs. 5,48,94,300, the purchase cost of which was Rs. 6,46,39,832. Had it sold 709 sets of software, corresponding amount of balance should have been there in the closing stock. But according to the statement furnished at Page 147 of Annexure IV of the Paper Book submitted by the assessee on 6-3-2006, the stock available was 131 only from the purchase made from Chip Trans, USA.
18. Another argument of the assessee is that it has clubbed the software according to the requirement of the customers. It transpires from the order sheet entry dated 19-12-2003 that the software was prepared according to the need of the customer bank by clubbing more than one software and cost was determined on actual cost basis of the combined software and the cost of this softwae was as mentioned in the letter dated 11-4-2003. In this letter, the assessee has given the details of software, sale value and purchase price of them. According to this letter, the assessee has sold 312 sets of software for a sale value of Rs. 5,48,94,300 and its purchase price was Rs. 6,46,39,832. The assessee has not denied that these details have not been supplied by it. From this it is inferred that the assessee has purchased the software on the order of the customers and combined the software together at the time of sale. It is also evident from the statement furnished by the assessee on 11-4-2003 that the assessee has effected sales of 312 sets from the purchase made during the year and even according to its own calculation, the assessee has incurred loss. We have also gone through the cost analysis statement submitted by the assessee itself (which is reproduced above) which shows that the Cash Dispenser Software purchased from Diebold Inc., was Rs. 60,567 and cost of ATM software was Rs. 64,622. The software supplied by Chip Trans was at Rs. 88,410 as is evident from the actual purchase entry made on 1-4-2001 by Journal Entry for Rs. 2,49,31,590 for 282 sets (2,49,31,590 divided by 282). The assessing officer has given 10 per cent margin on this at Rs. 8,841 ((88410) + (8841)) and arrived at the amount payable to Chip Tarns at Rs. 97,251 per set as the software sets supplied by both the parties are identical in nature since the end user is common. It is also an admitted fact that the assessee has switched over to the purchase of software from Chip Trans to Diebold Inc., USA with effect from 31-10-2000. The purchase was stopped because, the Managing Director, Harish Murthy was no more M.D., of the assessee-company and also the new M.D., was not intersted in Chip Trans.
19. Further, when we analyze the purchase price and the sale price, it is interesting to note that the sale price of software sold by the assessee-company to various banks was usually same i.e., Rs. 2,25,000. However, the purchase price of software purchased from Chip Trans varies from Rs. 3,17,646 to Rs. 3,34,004. In the case of Diebold, the purchase price of software was usually Rs. 50,568. The assessee was selling the software set at loss when the purchase was made from Chip Trans and made exorbitant profit when the purchase was made from Diebold Inc. Even at the cost of repetition, we reproduce the relevant chart below:
Comparative Chart Indicating Software Purchase Price Regarding Supply to Bank of Punjab Ltd., Ltd., by Chip Trans. & Diebold in A.Y. 2001-02 S.No. Purchase from Chip Trans Inv. No. Selling Price Purchase Price
1.
BOP Autocare Centre, New Delhi 1,110 225,000 317,646
2. BOP Laxmi Super, New Delhi 1,111 225,000 317,646
3. IBOP Shamnath Marg, New Delhi 1,112 225,000 317,646
4. GT Mandigobindge, Punjab 1,164 225,000 323,148
5. GT Road Malout, Punjab 1,165 225,000 323,148
6. Circular Road, Punjab 1,166 225,000 320,259
7. Bengali Market, New Delhi 1,237 225,000 320,259
8. Tobaco House, Calcutta 1,560 225,000 331,010
9. Sector 32, Chandigarh 1,601 225,000 334,004
10. Pakhwal RS, Ludhiana 1,602 225,000 334,004
11. S.D. Road, Secunderabad 1,742 225,000 331,010 S. No Purchased from Diebold Inc. Inv. No Selling price Purchase price
1. BOP Jalandhar 318 225,000 50,568
2. BOP Banga 319 225,000 50,568
3. BOP Patiala 320 225,000 50,568
4. BOP Nabha 321 225,000 50,568
5. BOP Chandni Chowk 322 225,000 50,568
6. BOP Jalandhar 323 225,000 50,568
7. BOP Chandigarh 324 225,000 50,568
20. Now we have to consider whether invoking the provisions of section 40A(2)(a)(a) of the Income Tax Act by the assessing officer is justified or not. Section 40A(2)(a) reads as under:
"Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this subsection, and the assessing officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to excessive or unreasonable shall not be allowed as a deduction."
Section 40A(2) of the Act put curb on expenditure in respect of payment made to close associates referred in clause (a) of the section towards purchase of goods, services rendered, facilities offered and it empowers the assessing officer to disallow so much of expenditure in respect of which payment has been made to the above category of personnel as is considered by the assessing officer excessive or unreasonable having regard to the fair market value of the goods, service rendered or facilities offered for which the payment was made or the legitimate needs of business of the assessee or the benefit derived by or accruing to the assessee therefrom. There is no plea by the assessee that Chip Trans, USA, is not a specified person and section 40A(2)(a) is not applicable. Admittedly, as enumerated in the facts of the case, Mr. Harish Murthy, MD of the assessee-company was interested in HMA Data Systems P Ltd., and also in Chip Trans, USA. The assessee is a specified person as per section 40A(2)(a) of the Act. In our opinion, the conditions laid down in section 40A(2)(a) are squarely applicable to the facts of this case. The purchase price paid by the assessee towards purchase cost of software has directly resulted in deriving benefit to the specified person who has substantial interest in other companies. The payment for purchase of software sets was very excessive and unreasonable having regard to the market value of the goods, legitimate needs of the assessee's business and benefit derived by the assessee. These facts are evident from the comparison of purchase price paid to software purchased from Diebold Inc., USA and Chip Trans, USA. The affidavit filed by the assessee regarding the purchase of 709 software and also the statement and the letter dated 6-3-2006 at Annexure (supra) are only self-serving in nature as the assessee has failed to furnish item-wise cost of each software embedded to each software set sold by the assessee and the assessee has not also co-related the cost of software purchased with the software sold as it has made in the letter dated 11-4-2003, wherein the assessee has furnished the purchase cost of each software set and sale value and the assessee itself has given that the assessee has purchased 312 sets at a cost of Rs. 6,46,3 9,832 and the sale value was Rs. 5,48,94,300 which is as follows:-
Software details for the period 2000-01 Bank Site Inv. No. Sale Value Cost No. of Sets Vysya Bank - Ghaziabad 332 75,000 40,000 1 Vysya Bank - Kempagowda Rd.351
75,000 40,000 1 UTI Surat 352 2,28,000 2,40,512 1 ICICI Bank - Saki Naka 353 1,75,000 1,74,715 1 UTI Madyamgram(Nabapally Br.) 375 2,28,000 1,98,639 1 UTI Jublee Hills 376 2,28,000 1,98,639 1 J&K Bank - Lajpat Nagar 377 2,00,000 2,01,979 1 J&K Bank - Ansal Plaza 379 2,00,000 2,01,979 1 Abhudaya Bank 380 41,000 36,246 1 ** ** ** ** ** ** ** ** ** ** 5,48,94,300 6,46,39,832 312 (The list is very exhaustive and hence only an extract is copies for clarity) it was also clarified in the order sheet dated 19-12-2003 wherein the assessee has affixed its signature for the method adopted for determining the sale value and also actual cost of software set.
21. Another argument of the assessee is that the purchases were approved by the customs authorities and, hence, cannot be questioned by the department as excessive or unreasonable. This plea of the assessee has no merit since it is apparent from the facts of the case and material placed before us that the assessee has voluntarily paid excess amount than the fair market value, and the customs authorities have not approved the value of the goods but only collected the duty leviable on them. Hence, in our considered opinion, section 40A(2)(a) is squarely applicable to the facts of this case and the lower authorities are justified in disallowing the excess payment made towards purchase of software sets and the same is confirmed. The ground taken by the assessee is rejected.
22. The next ground is that the Commissioner (Appeals) erred on facts and in law in confirming the disallowance of Rs. 2,10,00,000 on account of excessive price paid for purchase of hardware.
23. The brief facts of this issue are that the assessee has purchased following hardware from Chip Trans and Diebold Inc., USA :-
Name of Supplier Model No. of M/cs.
Consideration A u Price Basis Chip Trans 1064 CDs 84 12,34,05,815 4,16,911 .
C&F 1062 ATMs 212 Diebold Inc. 1064 CDs 6 22,71,317 3,78,552 FOB 1062 ATMs 268 10,23,81,069 3,82,018 FOB The assessing officer computed the average cost of CD and ATM purchased from Diebold Inc. with CD & ATM purchased from Chip Trans. As mentioned above, the average purchase price of ATM from Chip Trans works out to Rs. 4,53,329 (9,61,05,815 divided by 212) as against Rs. 3,82,019 purchased from Diebold Inc. The assessee submitted before the assessing officer that this variation was due to C&F freight in the case of Chip Trans. However, the cost of Diebold Inc., was as per FOB value. The assessing officer, after giving credit to freight and insurance, estimated the variation at around Rs. 10,000 per ATM purchased from Chip Trans and in the opinion of assessing officer, the price paid to Chip Trans for the purchase of ATM is in excess of Rs. 10,000 and thus, he estimated the addition in the purchase of 212 ATMs at Rs. 21 lakhs and added the same to the income of the assessee, invoking the provisions of section 40A(2)(a)/40A(2)(b) of the Income Tax Act.
24. On appeal, the Commissioner (Appeals) ascertained the average price of ATM purahsed from Diebold Inc. at Rs. 3,91,188 on the basis of letter filed by the assessee on 23-12-2003. The computation was as follows FOB Price 102,381,069 Add- Freight 2,457,389 (A) Total 104,838,458 (B) Machines 268 (C) Avg. Cost (A B) 391,188_ Thus, he considered at the cost of ATM sup plied by Chip Trans at Rs. 3,26,651. He compared the cost of ATM CD supplied by Diebold Inc., at Rs. 3,91,589 with ATM CD supplied by Chip Trans at Rs. 3,26,651 and in the opinion of the Commissioner (Appeals) the average cost of CD supplied by Diebold was more to the tune of Rs. 71,310. However, he sustained the addition made by the assessing officer.
25. After hearing the rival parties, we are of the considered opinion that the Commissioner (Appeals) took the average cost of ATM CD supplied by Chip Trans at Rs. 3,26,651 as against the average cost considered by the assessing officer at Rs. 4,53,329. The addition was made by the assessing officer on account of payment of excess amount towards purchase of ATM CD from Chip Trans. In the findings of the Commissioner (Appeals), the price paid to ATM CD purchased from Chip Trans was lower than the cost of Diebold Inc. In other words, section 40A(2)(a)(a)/40A(2)(b) was invoked in view of the fact that the price paid to Chip Trans was excess and unreasonable. The findings of the Commissioner (Appeals) was contrary to the findings of the assessing officer and he adopted the cost price of ATM CD supplied by Chip Trans at Rs. 3,26,651 which is lesser than the price paid to Diebold Inc. If it was actually lesser than the price paid to Diebold Inc., there could not have been any addition and the provision of section 40A(2)(a)(a)/40A(2)(b) of the Act would not have been invoked. The basis for adopting the average price of Rs. 3,26,651 for ATM CD supplied by M/s. Chip Trans has not come through. Hence, we are not in a position to express any opinion on this. Accordingly, we set aside this issue to the file of the assessing officer to examine the correct price paid for ATM CD to Chip Trans and thereafter compare it with the price paid to Diebold Inc. On comparison if the assessing officer finds that the price paid to Chip Trans was excessive or unreasonable, then he is directed to invoke the provisions of section 40A(2)(a)(a)/40A(2)(b) of the Act and our findings with regard to purchase of software set in earlier paragraphs will be applicable to the purchase of hardware. In this context, we make it abundantly clear that the assessing officer, while concluding this issue, is directed to give due credit towards the difference on account of C&F price and FOB price.
26. This issue is allowed for statistical purpose.
27. The last issue is that the Commissioner (Appeals) has erred on facts and law in confirming the disallowance of Rs. 41,64,000 on account of sales commission paid to independent parties as being excessive.
28. The brief facts of the issue are that the assessee was doing business with the Bank of Punjab Ltd., for many years. The assessee claimed payment of commission to the following four entities on account of sale order received from Bank of Punjab Ltd., Ltd. :-
Sl. No. Name of the concern to whom Brokerage/ Commission is paid Date of payment Amount (Rs.)
1.
General Glass Works, Mumbai 28-7-1999 70,00,000
2. Kalpita Agencies, Mumbai 28-7-1999 70,00,000
3. Silverline Appliances, New Delhi 2-5-2000 1,25,00,000
4. Infonet ECom Systems Ltd. 2-5-2000 85,00,000 2-5-2000 3,50,00,000 For the assessment year under consideration, the assessee claimed the payment of sales commission of Rs. 41,64,000. The payment of commission works out to 42 per cent in the case of Silver Line Appliances P Ltd., and 25 per cent each in the case of Kalpita Agencies and General Glass Works Ltd. the assessing officer disallowed this commission for the reason that there was no evidence to show that these entities have rendered any kind of service and the Bank of Punjab Ltd., was not aware of these sales agents. On appeal, the Commissioner (Appeals) confirmed the order of the assessing officer. Aggrieved, the assessee is in appeal before us on this issue,
29. The learned counsel for the assessee submitted that during the preceding year, the assessee appointed sales agents for increasing its sales and paid commission to them at price rate on the basis of orders procured by them. The total commission that was payable to the agents on the order of 100 machines procured by them from Bank of Punjab Ltd., was Rs. 3,50,00,000. The main services rendered by the sales agent for which they were paid commission by the assessee are in the nature of relationship services to obtain orders and as the services are relationship based and work on the contracts of persons involved, no contemporary/recordable documentation is generated. However, the payment of commission is made by the cheque on receipt of order but the commission is charged to P&L account in the year the machine is dispatched and the payment mechanism is based on actual order received which is evident from the copy of the Ledger account of Commission & Brokerage for the period 1994 to 2003, i.e., from the inception of the company. The details were placed before the assessing officer vide letter dated 9-12-2003. The assessing officer, though admitted that the commission was paid to get orders, he held it to be in the nature of kick-back and corruption money and disallowed the commission payment. The learned counsel for the assessee vehemently argued that the assessing officer has not brought any evidence on record to prove that the money has flown to the assessee by way of kick-back. He contended that the oral denial of the purchaser as to the involvement of the agents does not in any way point out to the irresistible and irrevocable conclusion that commission was paid for no work done. There is no material on record to warrant such an inference. The reason as to why the payment of commission to sales agent was made is any body's guess but it would not have been paid without the services having been rendered. The preponderance of probabilities favours the assessee. The learned counsel for the assessee further argued that the commercial expediency and the reasonableness of the expenditure has to be determined by the assessee and it is not for the department to determine the necessity, need and quantum of a particular expenditure. The assessing officer did not even examine the sales agents independently and the action of the assessing officer in invoking the provisions of Explanation to section 37(1) of the Income Tax Act for making the disallowance is bad in law. He contended that this provision can be invoked only if the payment is incurred for any purpose prohibited by law or any purpose which is an offense. In this case, since no money has been paid to Govt. servant or the employee of the Bank, the said Explanation is not applicable as the kind of expenditure is neither prohibited by law nor is an offence. in support of this argument, the learned counsel for the assessee relied on the following case law :-
(1) K.R. Narayana Iyer v. CIT (1993) 202 ITR 774 (Ker.) (2) CIT v. A.K. Menon (1995) 215 ITR 364 (SC)1 (3) A.P.L. (India) (P) Ltd. v. Dy. CIT (2005) 96 ITD 227 (Mum.) The learned counsel for the assessee further submitted that the assessee has established the identity of the sales agents by producing documentary evidence which has not been rebutted by the assessing officer and hence the assessee cannot be held to have failed to prove its case. The learned counsel for the assessee also relied on the following case law
(i) VIP Industries Ltd. v. Inspecting Asstt. CIT (1991) 36 ITD 700 (TM) (Bom.)
(ii) ITO v. Super Chemical Distributor (2005) 1 SOT 102 (Del)
(iii) Inspecting Asstt. CIT v. Haryana Conductors (P) Ltd. (1990) 50 Taxman 291 (Mag.) (Delhi)
(iv) CIT v. Pure Pharma (P) Ltd. (2004) 270 ITR 382 (MP)
(v) Bharat Bijlee Ltd. v. Dy. CIT ( 1999) 71 ITD 412 (Mum.)
30. On the other hand, the learned Departmental Representative submitted that the commission was paid to identify the customers as evident from the agreement with the agents. This commission is said to have been paid for transactions with Bank of Punjab Ltd. The assessee was transacting with the Bank of Punjab Ltd., since 1995 and no commission was paid to anybody till 1999. It is, therefore, evident that no service was rendered by the so called agents. He contended that for obtaining orders worth of Rs. 11 crores, commission was claimed to have been paid to the tune of Rs. 3.5 crores i.e., about 32 per cent which is abnormally high. It is observed from the sworn statement from Shri P.P. Manjunath Rao, Vice President, Sales & Operations of the assessee-company that commission was paid to four concerns to identify only one customer i.e., Bank of Punjab Ltd. The party to whom agents were stated to have been employed, i.e., Bank of Punjab Ltd., did not furnish any confirmation letter to that effect. The learned Departmental Representative relied on the judgment of the Hon'ble Supreme Court in the case of CIT v. Calcutta Agency Ltd. (1951) 19 ITR 191 (SC) and submitted that the onus is on the assessee to prove that the expenditure was incurred wholly and exclusively for the purpose of business. He also relied on the decision of the ITAT, Chennai Bench in the case of Tamil Nadu Minerals Ltd. v. Jt. CIT (2005) 95 ITD 294 (Chen) in support of the above statement.
31. We have heard the rival submissions and perused the material on record. The assessing officer issued summons to Shri PB Manjunatha Rao, Vice President (Sales & Operations) of the assessee-company and examined him on oath. On examination, Shri Manjunatha Rao stated as under:-
Q.4 Do you know, who are the persons behind following companies?
(a) General Glass Company;
(b) Kalpita Agencies
(c) Silverline Appliances
(a) Infosct Ecom Systems Ltd.
A.41 do not know the persons behind these companies.
0.5 Is there any agreements with all these companies regarding services to be rendered?
A.5 There is an agreement with Infoset E Com Systems Ltd. With others there is only Sales representative letters.
Q.6 Why is it that there is no formal agreement with 3 other concerns?
A.6 Their activity was lead generation and arranging meeting with the costumers.
Q.7 Who were the customers introduced by the 3 entities, with whom you have not entered into an agreement?
A.7 It is Bank of Punjab Ltd., only.
Q.8 Do you mean to say that the companies (a) General Glass Company
(b) Kalpita Agencies
(c) Silverline Appliances introduced only one customer viz. Bank of Punjab Ltd., only?
A.8 Yes. They introduced one customer who placed order with us.
Q.9 Who negotiated the order of Bank of Punjab Ltd., & with whom?
A.9 From the side of Diebold HMA Pvt. Ltd., it was P.P. Manjunatha Rao, Mr. Sachin Handoo, Harish Murthy & Rajeev Malhotra. From the Bank side it was Mr. Chander Singh, D.P. Singh and finally the Director Tejbeer Singh.
Q. 10 When you have negotiated the deal with the banks directly, why was it that huge commission was paid to the 4 concerns referred to above?
A. 10 They have done liaisoning work for the company.
Q. 11 Who were the persons representing
(a) General Glass Company
(b) Kalpita Agencies
(c) Silverline Appliances
(a) Infoset Ecom Systems Ltd.
with whom the company Diebold HMA Pvt. Ltd. negotiated?
A. 11 As far as (a) General Glass Company (b) Kalpita Agencies & Silverline Appliances are concerned, right now I am not able to furnish details regarding the person/persons with whom the deal was negotiated.
Q. 13 How did they meet you? Where did they meet you? And what was the basis for payment of commission?
A. 13 1 have not met them personally. As far as the basis of commission is concerned it is based on order quantity and a certain percentage of value.
Q. 14 If the order is from one company, why should 4 entities be paid to the commission?
A. 14 These orders were for various periods.
Q. 15 If one of the company was capable of getting the order, why is it that others were approached for the same order ?
A. 15 The way they handled the deal, we were not comfortable and hence had to approach others who expressed their interest to represent us."
32. On going through the above questionnaire, even the person In-charge of sales was not aware of the marketing activities done by the sales agents. He was not aware of the details of orders procured by these sales agents. Even the Vice President of the Bank of Punjab Ltd., was not aware of the sales agents. The assessee has been dealing with the Bank of Punjab Ltd., since 1995 and the business was continuous one. In our opinion, the assessee has failed to establish that there was necessity to identify once again the Bank of Punjab Ltd., as its customer. There is nothing on record to show that the assessee has derived business advantage by paying sales commission. The expenditure wholly and exclusively incurred for the purpose of business was allowable as business expenditure. The mere exchange of agreement between the assessee and its sales agents for payment of commission does not entitle the assessee to claim such an expenditure and does not prove that the payment was wholly and exclusively made for the purpose of assessee's business. Though there was existence of agreement and payment was made through Banking channels, still it is open to the assessing officer to consider the relevant factor and determine for himself whether the commission said to have been paid to the selling agents or any part thereof, is properly deductible under section 37 of the Income Tax Act. The deposition recorded by the assessing officer referred to above clearly proves beyond doubt that the selling agency is not known to the Bank of Punjab Ltd., if the selling agency actually identified the bank and negotiated business with them, at least the person in the high helm of affairs in the bank would have known. This is not the case here. The argument of the learned counsel for the assessee has no merit. We are unable to accept the contention of the assessee. The assessing officer has considered all relevant evidence and gave ample opportunity to the assessee to prove its claim but the assessee has failed to prove its case. Nature of service rendered by the agents are not at all available. We are, therefore, inclined not to accept the agreement exchanged between the assessee and the so called selling agents as genuine. In our opinion, this arrangement was only a make believe arrangement as a device to minimize the tax liability of the assessee-firm for the primary reason that the assessee has been doing business with the Bank of Punjab Ltd., since the year 1999. We cannot accept this to be a business decision to boost the sales. When we see this arrangement in the light of the surrounding circumstances, we are driven to the conclusion that the apparent is not real.
33. After going through the entire facts and circumstances of the case and evidence gathered by the assessing officer, we are unable to disagree with the conclusion reached by the lower authorities. Avoidance of tax liability by so arranging commercial affairs that charge of tax is reduced is not prohibited. Taxpayer may resort to divert the income before it accrues or arises to him. Effectiveness of device depends not upon considerations of morality but on the operation of the Income Tax Act. But in this case, the assessee has adopted devices to make it appear that the income which belongs to the assessee had been earned by some other person by make believe arrangements. In these circumstances, the income that may be proposed to be diverted should be brought to tax in the hands of the assessee only. In our opinion, the assessee has not expended any money towards sales commission as there was no evidence to show that the services were actually rendered by so called sales agents. In view of the above findings, we reject this ground.
34. In the result, the appeal filed by the assessee is allowed in part for statistical purpose.