Income Tax Appellate Tribunal - Hyderabad
Dcit, Central Circle-2(1), Hyd, ... vs Annapurna Business Solutions, Hyd, ... on 17 December, 2019
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "B": HYDERABAD
BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER
AND
SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER
ITA No. A.Y. Appellant Respondent
831/H/2015 to 2005-06 to Annapurna Business Dy.Commissioner
836/H/2015 2010-11 Solutions of Income Tax
6-3-866/A, Central Circle-3
Suite No.401 Hyderabad
298/Viz/2016 2004-05 Maheswari Mekins Asst.Commissioner
Mayank Plaza of Income Tax
Greenlands Road Circle-2(1)
Begumpet Guntur
Hyderabad
864/H/2015 to 2005-06 to Dy.Commissioner of Annapurna
869/H/2015 2010-11 Income Tax Business Solutions
Circle-2(1) 6-3-866/A,
Hyderabad Suite No.401
334/Viz/2016 2004-05 Asst.Commissioner Maheswari Mekins
of Income Tax Mayank Plaza
Circle-2(1) Greenlands Road
Guntur Begumpet
Hyderabad
For Assessee : Shri S.Rama Rao, AR
For Revenue : Shri Y.V.S.T.Sai, CIT-DR
Date of Hearing : 18-10-2019
Date of Pronouncement : 17-12-2019
आदे श /O R D E R
Per Bench :
These appeals are filed by the assessee against the orders of the
Commissioner of Income Tax (Appeals) [CIT(A)]-12,Hyderabad in I.T.A.Nos.
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I.T.A. Nos.831/H/2015 to 836/H/2015 and 298/Viz/2016
I.T.A.Nos.864/H/2015 to 869/H/2015 and 334/Viz/2016.
M/s Annapurna Business Solutions, Hyderabad
269 to 274/CIT(A)-12/Hyd/2014-15 dated 31.03.2015 for the Assessment
Year (A.Y.) 2005-06 to 2010-11 and CIT(A) order No.ITA NO.277/CIT(A)-
1/GNT/2011-12 dated 30.03.2016 for the A.Y.2004-05.
The Department had filed the appeals challenging the orders of the
Ld.CIT(A). For the A.Y.2004-05 to 2006-07, the department challenged the
order of the Ld.CIT(A) on two issues. Firstly, the department agitated for
holding that the assessee is engaged in export of software and secondly for
allowing the deduction of 70% of the profits u/s 10A. For the A.Y.2007-08
to 2010-11, the department raised one more issue i.e. deletion of addition
made protectively in respect of the receipts of VLS IT services for H1B visa
processing which were substantively assessed in the hands of the VLS IT
Services.
In the assessee's appeal, the assessee agitated for restricting the
deduction u/s 10A only to the extent of 70% of the profits instead of
allowing 100%. For the sake of convenience, these appeals are clubbed,
heard together and a common order is being passed as under.
2. First issue in these appeals is related to the deduction u/s 10A of the
Income Tax Act, 1961 (in short 'Act'). Brief facts of the case are that a
search and seizure operation u/s 132 of Income tax Act ('act' in short) was
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conducted in the case of M/s Annapurna Business Solutions (in short 'ABS')
on 16.09.2010. M/s ABS is the partnership firm instituted by partnership
deed dated 02.01.2002. The firm has four partners with equal share of
25% each, namely Smt. Tunuguntla Annapurna, Smt.Tunuguntla Saritha, Sri
Tunuguntla Jagan Mohan Rao and Sri Tunuguntla Nanda Kishore. The firm
is engaged in the business of software development and providing services
in information technology. It started operations originally from Guntur, but
within short period of 10 months, it has shifted to Hyderabad. The firm is
exporting the software products to USA based company namely M/s VLS
Systems Inc., which is a company incorporated in USA, 100% share holding
of the US based company is held by Sri Thunuguntla Nanda Kishore and his
wife, Smt.T.Saritha. Shri T.Nanda Kishore is also called as Kris Nanda in US,
thus both the concerns are family concerns of Tunuguntla family. During
the course of search and seizure operations conducted in this case, it was
noticed by the income tax department that the assessee is indulging in
fabricating the evidences and claiming the software export. The Assessing
Officer (AO) also alleged that the assessee has resorted to fraudulent ways
to claim the deduction u/s 10A on the profits netted by the assessee under
the Software Technology Parks of India ( in short 'STPI') scheme.
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2.1. During the course of search various documents were found and
seized as per Annexures to the panchnama. One of such document is an
agreement dated 08.01.2002 between VLS Systems Inc., and the assessee,
which was submitted to Software Technology Parks of India (STPI) for
getting it registered as 100% EOU. The AO observed that Shri Nanda
Kishore has signed the agreements representing two different entities in
different names i.e. in the name of T.Nanda Kishore representing the ABS
and Kris Nanda representing VLS systems Inc., which the AO suspected
that the assessee signed in different names to give an impression that the
said agreement was executed by two different persons, despite the fact that
both signatories are one and the same. The issue of signing the agreements
in two different names was confronted with Shri Nanda Kishore during the
course of search and in the statement recorded u/s 132(4) from
01.02.2013 to 04.02.2013. In response to question No.54 of the of the
statement, Shri Nanda Kishore had stated that he could not recollect
signing the agreement in two different names, later on he clarified that he
is known as Nanda Kishore in India and people call him as Kris Nanda in
USA.
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2.2. The AO verified the agreements in detail and observed that as per
the agreement, the assessee firm is required to supply the manpower to its
client, VLS Systems Inc.. In para No.2 of the said agreement, the services to
be rendered was reproduced as per which, on the request of VLS Systems
Inc.( in short 'VLS'), vendors are required to provide services or persons
recommended by vendor and selected by VLS (collectively 'contractors') to
perform services. From the agreement, the AO further found that no
product development, i.e. software development is envisaged in the said
contract. However, for the purpose of the registration/renewal with STPI
the assessee firm has submitted another agreement called 'Master Services
Agreement' dated 06.06.2002 and in the said agreement there was a
provision for development of software and IT Enabled services to the
vendee(VLS). The AO observed that the said agreement dated 06.06.2002
was not available at the time of original registration or in the immediate
years thereof. According to the AO this agreement of 06.06.2002 was an
afterthought to support his claim for deduction u/s 10A as software
developer. The AO came to conclusion that the agreement dated
06/06/2002 was neither originally available nor submitted to the STPI.
The AO drawn such conclusion on the basis of the correspondence
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retrieved by the Investigation team from the seized hard disk marked as
Annexure A/ABS/PO-02/9, wherein, certain e-mail correspondence was
found between Nanda Kishore and Hari Babu the employee of the assessee
firm. As per the E-mail correspondence Mr. Nanda Kishore had asked the
employee of ABS Shri Hari Babu to get the signature of Sri Jagan Mohan
Rao on the agreement on behalf of the firm M/s ABS on 19.03.2008. Thus,
the Ld.AO viewed that the said agreement dt 06.06.2002 was not available
originally and it was prepared subsequently and sent for the signature of
Shri Jagan Mohan Rao as per e-mail correspondence dt. 19.03.2008, which
was confirmed by Shri Hari Babu (admin staff of ABS) to the Investigation
Team. AO viewed that this was post script prepared by the assessee to
mislead the authorities to claim the deduction u/s 10A.
2.3. Thirdly, the AO observed from comparing the invoices raised and the
agreements entered into that agreements were entered for IT enabled
services, whereas the invoices were raised for software development thus
viewed that both the agreements and the invoices were apparently
contradicting each other.
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2.4. Fourthly, the AO found that VLS Inc has claimed to have sold its
products to Megasoft Consultants Inc.,USA, whereas Megasoft Limited, the
Indian Arm of the foreign company denied having purchased any software
from M/s VLS Inc. As per the copy of the agreement submitted by Megasoft
Ltd the contract agreement dated 14.09.2007 was for manpower supply.
2.5. Fifthly, the AO found the deviations during the post search enquiries
from the assessee's submissions and the information collected from
Megasoft Limited. VLS submitted an invoice No.20227 dated 05.05.2008
that was raised on Megasoft for ITRM customization for an amount of
$100,000 and submitted to STPI vide letter dated 19.05.2008, whereas the
same invoice No.20227 dt.05.05.2008 raised on Megasoft for customization
was for an amount of $1000 to the department. Therefore, the AO viewed
that there was malafide intention and manipulations for claiming the
deduction u/s 10A.
2.6. Sixthly, the AO has recorded the statement from V.Hari Babu (staff of
ABS) who has stated that the amounts in the invoice was changed at the
behest of Sri Nanda Kishore as $1000/- to $1,00,000 for submission to
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STPI. The AO also extracted the Email correspondence in the assessment
order at para No.9 of page No.9 which supports the statement of Hari Babu.
2.7. The AO has asked the details of products developed by the assessee,
Shri Nanda Kishore in his deposition stated that M/s ABS has developed
number of projects over the years as per clients order. One of such product
was ITRM, an applicant tracking and customer relationship management
system. He stated that ITRM was developed in USA in the year 1997, later a
newer version was developed starting in the year 2002 by the assessee
firm. However, the AO disbelieved the assessee's submissions, and viewed
that the assessee received foreign remittances from export of man power
supply but not from software development. The AO further stated in the
assessment order that there were evidences to believe that no software
was developed by M/s ABS as there were lots of discrepancies with regard
to product development and the year in which it was stated to be
developed. The AO reproduced the Email correspondence in the
assessment order between Kris Nanda and Hari Babu dated 07.10.2008
which reads as under :
"Attached is the updated project details document. The same has been
updated in our website. Based on this, you can print the 7010 and any other
invoices using this MEMS project, related documents and send it with Mohini.
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We will add the CUCS - Credit Union Compliance System details
tomorrow, which can be used for other PO and Invoices (Ref. page Nos. 284 to
286 of Annexure)."
2.8 The AO was of the view that VLS and ABS are indulging in fabricating
the evidences to claim computer software export and in fact no physical
export of software was made and the assessee has resorted to fraudulent
ways to claim deduction u/s 10A on its profits. The AO further observed
that M/s ABS not maintained the time records or material like source code
of the software developed to indicate that the firm was actually involved in
developing software. During the course of search, no documentation was
found to acknowledge that the firm has actually developed any code.
2.9. The AO was of the opinion that the assessee is actually involved in
hiring of people for it's client M/s VLS Systems Inc., USA. M/s VLS Systems
Inc., is a placement agency of software professionals in USA, as per the note
submitted to the American Embassy for issue of visas to its prospective
employees. From the seized material marked as Annexure A/AMS/PO-2/5,
the AO found purchase orders and agreements entered with various US
organizations specifying the software personnel requirements and the
compensation amounts agreed. To meet the requirements, it recruits
software professionals both from India and USA and place them with
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various organizations in USA on contract basis. The AO further observed
that the software personnel required at various organizations with
specified skill set are either received directly by VLS, USA or through
enquiries made by its employees either in India or in USA. Based on these
requirements, the Indian arm M/s ABS scans the job portals like
Monster.com. (Shri Kris Nanda has taken membership of Monster.com and
signed as T.N.Kishore) and shortlists the personnel based on experience
and skills. The shortlisted candidates are then put through initial
interviews by technical recruiters locally and subsequently by the
concerned organizations. The AO found one such agreement which is
extracted in para No.10.8 of the assessment order which reads as under :
"....where as employee currently desires to be employed, by employer as Sr.
Technical Recruiter, for the purpose assisting Employer to fulfil its contractual
obligations to its clients, as well as assisting to identify and obtain new clients /
new client business and assist employer in getting new solutions / IT contract
staffing business, identify prospective candidates for project assignments at
client sites as well as to identify prospective candidates for India operations and
Employer desires to employer employee..."
From the agreement, the AO observed that the bonuses are linked to
dollar margin that the parent US company makes on placement of
candidate selected by these technical recruiters of ABS. The AO further
observed that the candidates selected by recruiters are taken to USA on
H1B Visa. They are subsequently placed with various organizations on
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hourly rate. Part of this hourly compensation is retained by M/s VLS and
the balance is paid to the candidates. The candidate who opt to go to USA
on H1B Visa have to pay certain amount as deposit for visa processing and
the said amounts were collected and deposited into the bank accounts of
Shri Hari Babu, employee of VLS IT Services and Shri R.Naresh, brother-in-
law of Shri Nanda Kishore.. The AO observed that M/s VLS IT Services was
created to enter into agreements with prospective H1B visa holders and
the payment received on this account were not deposited into its account
but deposited in third partly accounts. There were no employees on the
rolls of M/s VLS, USA in India and also on the rolls of M/s Sri VLS IT
Services. The entire work relating to identifying and recruiting software
professionals for it's parent company is carried out by the assessee.
2.10. On the day of search, statements were recorded from various
employees working at M/s ABS and most of them admitted that they were
basically into recruitment and not into developing any software. The AO
extracted the statement from Shri Samuel Kiran Kumar, Shri D.Sukumar.
Both of them have stated that they are in the activity of recruitment of
manpower. The Managing partner, Shri Nanda Kishore did not produce the
particulars of sales by M/s VLS, USA of the software developed by its Indian
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arm M/s ABS. The AO also found that percentage of profit shown by the
company M/s VLS Inc., in the income tax returns filed with US authorities
was 8.5 percent of gross profit and net profit of 2.1 %, whereas M/s ABS
has declared the net profit of 90.40%. The AO compared the profits of the
reputed software companies who have shown the net profit or operating
profits to total cost from 4.32% to 70.68% as per the list compiled by the
AO in page No.17. Therefore, the AO held that with all the above
information, the assessee has neither developed any software nor made the
software exports and fabricated the evidences to claim deduction u/s 10A.
Thus, held that the assessee is not entitled for deduction u/s 10A,
accordingly disallowed the exemption claimed by the assessee and taxed
the entire profits. For the sake of clarity and convenience, we extract
incomes computed by the AO for the impugned assessment years from
A.Y.2004-05 to 2010-11 as under :
Returned Assessed
A.Y. Remarks
Income Income
2004-05 24,74,310 4,11,62,448
2005-06 50,53,680 7,50,81,605 In correct adoption of
returned income
2006-07 54,13,290 4,62,53,332
2007-08 42,19,372 12,35,02,448 In correct adoption of
returned income
2008-09 60,43,941 6,46,25,873 In correct adoption of
returned income
2009-10 83,81,380 10,38,57,509 In correct adoption of
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returned income
2010-11 129,99,407 12,25,01,521 In correct adoption of
returned income
Except for A.Y.2004-05 and A.Y.2006-07, mistakes were crept in
computation of assessed income. It appears that while computing the total
income, the AO has adopted incorrect returned income. Hence, the AO is
directed verify the computation of total income and pass necessary
rectifications at the time of giving effect to this order.
3. Against the order of the AO, the assessee went on appeal before the
CIT(A) and submitted point-wise clarifications before the Ld.CIT(A) with
regard to various issues raised by the AO in the assessment order. The
assessee submitted that it has never indulged in malpractices or the
manipulations and it is a genuine software company. With regard to
agreement dated 08.01.2002 between VLS Systems Inc., and the assessee
firm, inrespect of signature of Shri T.Nanda Kishore he he could not give
immediate reply due to the fear of legal repercussions if any though signed
genuinely. He stated that his name is T Nanda Kishore and he is one of the
partners of the assessee firm and he is also called as Kris Nanda in USA.
Hence he submitted that he had signed the agreement with Indian name
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for the Indian firm and the other one with name by which he is called in
USA. He further clarified that he tried to clarify the position before the AO,
but he could not get the opportunity in spite of making efforts. Therefore he
submitted a letter in the office of the Director General of Investigation with
clarification and he further stated that he did not commit any wrong by
signing two different firms in different capacities with the name what he is
called. The assessee further submitted in written submissions that he had
approached the AO twice, but the AO refused to entertain the submissions
of the assessee, hence he has filed the copy of the letter in the office of the
Director General of Investigation (DG). Copy of letter was also enclosed in
his letter furnished before the Ld.CIT(A) in Annexure -4 and submitted that
there was no malafide intention in signing the agreement on behalf of both
the parties in two different names which he is called commonly.
3.1. With regard to the agreement dt.06.06.2002 between the ABS and
VLS, the assessee submitted that when ABS was asked by STPI, Hyderabad
to submit the copy of the agreement between ABS and VLS for renewal of
license. A new agreement with same old contents was signed and
submitted to STPI due to misplacement of original agreement. He further
stated that VLS also lost it's copy of original agreement in the fire accident.
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Report of fire accident in USA along with e-mail communication between
VLS and Hartford Insurance regarding insurance claims for loss was
furnished before the Ld.CIT(A) in Annexure 5. This new copy of agreement
was signed by Shri T.Nanda Kishore and Shri Jagan Mohan Rao on behalf of
the ABS.
3.2. Regarding supply of ITRM software to Megasoft, USA. The assessee
had enclosed the copies of agreement along with proof of negotiation of
ITRM price and the signed copies of agreement along with proof of
installing the ITRM software in Megasoft, USA Server in Virginia, USA
clarifying the issues raised by Megasoft Solutions before the CIT(A) in
Annexure-6. Regarding allegation of the AO that the assessee has not
supplied the software to Megasoft the assessee clarified that the suspicion
was based on the letter received from Megasoft India Ltd., from the
Chartered Accountants M/s T.R.Rajendran & Co., Chennai. It has no
relevance to the supply made by the assessee to VLS and VLS to Megasoft,
since, the assessee had never claimed to have supplied the software to
Megasoft India Ltd. The assessee further questioned the authority of the
Indian Chartered Accountant to issue such letter without having any
evidence. The assessee also furnished the information regarding the
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receipt of US$1,41,458 from Megasoft USA, for supply of it's products. The
assessee furnished the breakup of the payments stating that US$11,650
was paid by Megasoft USA towards ITRM software product license and its
customization and US $127808 towards employees of VLS who worked in
the sites of Megasoft, USA. Thus submitted that neither the amount nor
nature of work / services rendered by VLS to Megasoft, USA were matching
with the information furnished by the Indiand Chartered Accountant to the
department, hence there is no truth in the information furnished by
Megasoft India Ltd.
3.3. Regarding the allegation of AO on the use of Monster India.com, the
assessee submitted that ABS has developed multiple products by hiring
software engineers who are provided salary, benefits like 2 weeks vacation,
one week sick leave, health and dental insurance, 401K and profit sharing
and make work on client projects in USA. VLS is not a placement agency.
ABS used Monster India membership to hire the employees who can work
in ABS, Hyderabad office. Monster, USA was used by ABS employees in
Hyderabad in the night shift to identify candidates in USA for software jobs
given by VLS clients in USA. The same Monster USA account is used by
technical recruiters in USA for IT software jobs in USA. Thus submitted
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that the Monster.com was used for the purpose of it's own office of ABS and
VLS, but not for recruitment of manpower supply to US companies.
3.4. With regard to non development of software by the assessee as
alleged by the AO, the assessee submitted that the AO has landed in wrong
conclusions on presumptions and surmises. The assessee stated that ABS
has developed the software and the statements recorded from its
employees viz., Shri Rachakonda Naresh, Shri Samul Kumar and Shri
D.Sukumar, does not contain any evidence to show that the ABS has not
developed the software as alleged by the AO. The assessee further
submitted before the Ld.CIT(A) that it was engaged in the development of
software and provided IT enabled services to it's client M/s VLS Systems
Inc. Chantilly, VA, USA (VLS) but never recruited any manpower to the said
organization or any other person either in USA or in India. The assessee
also furnished various details of various software developed by it and
supplied to VLS.
3.5. Regarding higher margin, the assessee submitted that the companies
listed by the AO in the assessment order are into software services in India
and other foreign countries and most of them have 25 - 50% of the
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employees on Bench. Whereas, the assessee having no employees on
Bench and all it's employees are full time developers of software and in
ITES, there is no idle employee on ABS rolls, hence, the AO's observation
that the salaries as percentage of revenue is very less compared to others is
not justified. Further he submitted that rent cost and other running
expenses were very less compared to other companies. There is no interest
cost to the assessee. Therefore submitted that the profit in the assessee
firm is more than other companies.
3.6. Written submissions filed by the assessee before the Ld.CIT(A) was
sent to the AO and the AO submitted the remand report which was
furnished to the assessee for rejoinder and the assessee has furnished the
rejoinder to the Ld.CIT(A) clarifying various issues. The AO in the remand
report objected for admission of additional evidence under Rule 46A with
regard to registration of Monster.com. After considering the remand report,
rejoinder and the arguments of the assessee, the Ld.CIT(A) given a finding
stating that the AO did not bring any evidence which has impact on the
activity of the assessee by signing differently as Nanda Kishore and Krish
Nanda.
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3.7. With regard to second issue of singing the agreement, the Ld.CIT(A)
observed that by keeping the document with assessee itself, whom the
assessee was misleading, is not clarified by the AO. Similarly, the Ld.CIT(A)
observed that the AO mentioned that the agreement was only for supply of
manpower and he had ignored the opening words of the sentence which
starts with 'services'. The Ld.CIT(A) further observed that the AO should
have examined what inference can be drawn from the membership of
Monster.com., with regard to software development. Sale of software to
Megasoft, anamoly in invoices , discrepancies regarding the development
of product in different years etc., were given undue weightage by the AO
for holding that the assessee is not exporting the software, which according
to the Ld.CIT(A) do not have any direct impact on the claim of deduction
u/s 10A. According to the Ld.CIT(A) the issues that have an impact which
need to be examined are
(a) The act of development of software as shown in source codes
and in email correspondence indicating the consultation and
changes made in the course of development work.
(b) The act of export as evidenced in log sheets, STPI forms
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(c) The adequacy or otherwise of infrastructure and expenditure
to support the incomes
(d) The breakup of income and the expenditure claims.
3.8. The Ld.CIT(A) examined the above issues and found that the assessee
firm is registered as STPI unit from 16.01.2002 and was having approvals
for all the assessment years in question. The change of registered office
from Guntur to Hyderabad and subsequently from Ameerpet to Begumpet
was also approved. The date of commercial production was taken as
24.10.2002 by STPI. The firm furnished all approval documents in the
course of appellate proceedings. The assessee firm filed the returns of
income for the six assessment years in question both in original and in
response to notice u/s 153A of the Act. The turnover breakup of software
development and ITES services income was furnished in para No.10 of the
Ld.CIT(A) order from A.Y.2005-06 to 2010-11 as under :
ITEM A.Y.2005-06 A.Y.2006-07 A.Y.2007-08 A.Y.2008-09 A.Y.2009-10 A.Y.2010-11
Total 38708384 45065555 68480351 39666281 60355222 74905950
turnover
Total 3694422 4225517 10987314 12918125 15491657 16568641
expenses
Total
income
40067642 46253328 61712409 32812097 53244950 71436236
including
interest
income
Audit report 35013962 40840038 57493037 26748156 44863565 58436829
for Sec.10A
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M/s Annapurna Business Solutions, Hyderabad
Taxable 5053680 5413290 4219372 6063941 8381385 12999407
Income
Party wise
breakup of 37995318 44462281 68480352 39666281 56043569 74426023
turnover
(total)
IT Sales 7959095 10410572 8870676 13900739 18139440 27185715
ITES Sales 30036223 34051709 59609675 25765542 37904129 47240308
3.9. The assessee also furnished the clarifications regarding number of
hours billed and its feasibility before the AO as per page No.18 of the
assessment order for the A.Y.2010-11. The assessee also submitted the
details of break up given to IT and ITES worked hours linking to the
purchase order and invoice number for all the assessment years. The
assessee furnished list of employees salary paid. The Ld.CIT(A) examined
the above details and the sworn statements recorded from Sri Kishore
Kumar on 16.09.2010 and source control logs for the A.Ys. 2008-09 and
2009-10 furnished by the assessee. The Ld.CIT(A) also verified the FTP logs
for transmission of the export of the software which was furnished by the
assessee in 6000 pages by way of example for few logs for different years. The
proof of transmission of software by FTP was part of initial filing of 1206
pages in 11 annexures. Before the Ld.CIT(A), the assessee stated that the
observation of the AO with regard to firm having only machinery worth
Rs.5.09 lakhs and air conditions worth Rs.12,000/- is wrong and it has filed
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the complete details of the assets worth 39.37 lakhs as against 5 lakhs
mentioned by the AO. The Ld.CIT(A) verified the copies of export clearance
certificate from STPI, agreement between VLS and its clients and
association communication by email and the email communication to show
software development and ITES provided etc. which were are also enclosed
in the annexure-A. With regard to work hours for the F.Y. 2009-10, salary
payments for the month of April 2008 runs into Rs.6,80,411/- per month.
Annexure'C' containing program implemented / changed on VmACT
product with IP addresses was placed in Annexure A-D of the appellate
order. On going through various documents filed before the CIT(A) and the
trial left in the computer, prior to the date of search, in most of the cases
and part of seized hard discs, the Ld.CIT(A) found the software related
activity and its export made by the assessee. Accordingly, the Ld.CIT(A)
upheld the contention of the assessee that the assessee is engaged in
software development and export of software and with regard to adequacy
of infrastructure and expenditure to support the incomes of the assessee.
However, the Ld.CIT(A), after examination of the total turnover, the
expenditure incurred and the income declared by the assessee found that
the expenditure of the assessee was very low when compared to the
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comparable cases in this line of business. In the assessee's case, the
Ld.CIT(A) observed that in the initial year, the expenditure was very low
and it has increased to 32% in 2008-09 and again dipped subsequently.
Therefore, the Ld.CIT(A) invoked the provisions of section 10A(7) r.w.s.
80IA(10) of the Act and viewed that estimation the extent of 70% of the
profits declare is reasonable and accordingly allowed the exemption of
70% of the profits declared and the remining 30% of the profits are
directed to be taxed. Accordingly, the Ld.CIT(A) partly allowed the appeal
of the assessee in respect of deductions claimed by the assessee u/s 10A of
the Act. Identical issue is involved for the A.Y. 2004-05 in I.T.A. No.298 also.
4. For the A.Y.2008-09 to 2010-11, additional issue involved is with
regard to H1B visa processing fee, which was stated to be collected by the
assessee firm and deposited in the accounts of V.Hari Babu, C.R.Naresh and
Naga mohan Rao as discussed in the assessment order of VLS IT Services,
Hyd. The AO assessed the said sums in the hands of VLS IT Services on
substantive basis relying on agreements between VLS and VLS IT services
and protectively in the hands of the assessee firm. The total income
assessed by the AO in respect of H1B Visa processing in the hands of VLS
IT Services, year wise is as under :
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A.Y. Addition made
2007-08 40,97,000
2008-09 50,65,620
2009-10 57,48,994
2010-11 47,64,850
2011-12 19,74,116
5. Aggrieved by the order of the Ld.CIT(A), the department has filed
appeals for allowing exemption u/s 10A to the extent of 70% instead of
denying the entire exemption claimed by the assessee and the assessee
filed appeals challenging the order of the Ld.CIT(A) for taxing the profits to
the extent of @30%.
6. During the appeal hearing, the Ld.DR assailing the order of the
Ld.CIT(A) submitted that the assessee has neither developed any software
nor it has infrastructure to develop the software as claimed by the assessee.
The Ld.DR further submitted that in fact the assessee is engaged in the
recruitment of manpower and supply of manpower to the parent company,
VLS Systems Inc, therefore, argued that the claim made by the assessee
with regard to software export is bogus. Referring to the statement
recorded from Vaka Hari Babu, employee dated 16.11.2010, the Ld.DR
argued that the assessee company is engaged in the processing of H1B visas
but not in export of software. Referring to question No.12 of V.Hari Babu in
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statement dt.16.11.2010, the Ld.DR stated that e-mail was sent by Shri
Hari Babu to VLS Systems Inc. (Shri Kris Nanda) on the subject of H1B visa
payments which shows that it has received H1B processing fee for an
amount of Rs.1,10,000/- in respect of Bhargavi Mallay Joysula, Sitaram
Malapaka and Jagan Mohan Naidu Sammeta which was deposited by Shri
Hari Babu in the account of Shri Naresh, brother-in-law of Kris Nanda/
Nanda Kishore. Referring to question No.13, Ld.DR argued that Shri Hari
Babu confirmed that the above persons i.e. M.Bhargavi and others are from
India, but not from USA. In question No.14 Shri Hari Babu denied having
Annapurna Business Solutions involved in H1B processing and he
submitted that VLS IT Services carrying on the activity of H1B processing,
but not ABS. Referring to Master Services Agreement dt.08.01.2002, which
was placed in P.B. 125, the Ld.DR submitted that the agreement was
entered for manpower recruitment, but not for software export and further
submitted that the said agreement was signed by Shri T.Nanda Kishore on
behalf of ABS and Kris Nanda on behalf of VLS Systems Inc., thereby
submitted that both the firms VLS as well as ABS belong to the same person
and signature in two different names is only with a malafide intention to
fabricate the agreement in different identities in different capacities. The
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Ld.DR taking our attention to various correspondences, the agreements
and the salary payments made to various employees of the ABS, submitted
that the assessee is engaged in the manpower recruitment, but not
software. Though the assessee stated that the VLS IT, India is engaged in
the manpower recruitment, there is no separate staff for VLS IT Systems, it
is operating from the premises of Ameerpet and the entire operations are
being carried out by the staff of ABS. In a nut shell, the Ld.DR argued that
the assessee company is engaged in body shopping, but not in software
development services, thus not entitled for deduction u/s 10A.
6.1. During the search, the department laid hands on the vendor service
agreement dt. 08.01.2002, which was entered into by VLS IT Solutions, USA
and the assessee company, ABS. The agreement was signed by Shri
T.Nanda Kishore on behalf of M/s ABS and by Shri Kris Nanda on behalf of
VLS Systems Inc. Since both the sides, the agreement was signed by Shri
T.Nanda Kishore, Managing Partner of the assessee firm, during the course
of search operations, the assessee was asked to explain the reasons for
signing the agreement in two different names giving impression that two
different persons had signed the agreements and the assessee has given
very vague and evasive reply initially and later on submitted that he is
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known as Kris Nanda in USA and T.Nanda Kishore in India, thus, he has
signed in two different names. The Ld.DR argued that VLS Sytems Inc. and
the ABS are owned by Shri T.Nanda Kishore and T.Saritha and the assessee
is showing 100% identity mapping. During the course of search, another
agreement was found in the premises of the assessee dated 06.06.2002, for
project assignment services for providing business process outsourcing call
centre and other related services. The DR submitted that the said
agreement was signed by Shri Nanda Kishore and it does not bear signature
of the second part. In the post search proceedings, the assessee signed the
agreement on the same date of 06.06.2002 showing the signature of Nanda
kishore and T.Jagan Mohan Rao to mislead the government authorities at
various stages and the Ld.DR submitted that the agreement was also
contrary to the invoices produced by the assessee. The Ld.DR further
submitted that the assessee raised a bill in the name of Megasoft
Consultants Inc. through its Indian arm Megasoft Ltd. None of the
transactions were in the nature of software development, but are in the
nature of hiring of software consultants on contract. The agreement
dt.14.07.2007 was between two concerns, i.e. Megasoft Ltd and VLS
Systems Inc. was for manpower supply, but not for software development
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of the company. During the course of search, the department found
mismatch of the amounts raised in invoices in the case of Megasoft Ltd.,
relating to claim of deductions u/s 10A vis-à-vis the invoice submitted
before STPI. In this case invoice furnished before STPI for ITRM
customization was $100,000 and $1,000 before the department. Thus, the
Ld.DR submitted that the assessee has manipulated the invoices, which is
evident from the mail extracts. It was also submitted by the Ld.DR that
before US Embassy, VLS submitted a note for issue of visas to its
prospective employees, thus submitted that the assessee is basically a
placement agency to supply software professionals was admitted by the
company itself. The Ld.DR further submitted that the purchase orders and
agreements with various organizations of USA prove the fact that the
software persons are recruited in India and USA and are placed with the
organizations by VLS Systems Inc and received the compensations amounts
on hourly rates. The Ld.DR further submitted that the assessee scans the
job portals like Monster.com and Shri T.Nanda Kishore took membership of
Monster.com and singed as T.Nanda Kishore. He shortlists the candidates
with required skill tests after scanning the profiles available in the
websites, put them through interview by technical recruiters locally and
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thereafter by the concerned organizations. Evidence was also available in
the form of agreements. The selected candidates are taken to USA on H1B
Visa on hourly compensation and part of the compensation was retained by
VLS Systems Inc and the balance was paid to the candidates. However, the
assessee is not recording the fee in the books of accounts of the assessee.
The amounts collected from various candidates as deposit for Visa
processing fee are deposited in the accounts of the employees of the
assessee. The Ld.DR argued that this activity is with an intention to
camouflage the activity of manpower recruitment / supply as that of export
of software services. The Ld.DR further submitted that the entity by name
VLS IT Services was created to enter into agreements with prospective H1B
visa holders. There are no employees in India on the rolls of M/s VLS, USA
or VLS IT Services and all the related work is being done by the assessee.
On the day of search statements of various employees was recorded and
they stated that they are into recruitment work and not into the
development of any software. Shri T.Nanda Kishore also failed to produce
the details of any sale of software by VLS, USA from the software claimed to
be exported by the assessee to VLS, USA.
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6.2. The Ld.DR argued that the trading results of VLS Systems Inc. was
not made available by the assessee to the AO and the assessee was showing
more than 80% of the net profit out of the turnover which is highly
impossible in this line of business. The AO collected the trading results of
reputed companies listed in stock exchange, wherein, the profit margins
were ranging from 10% to 66%. The Ld.DR further submitted that to earn
such abnormal profits, the assessee must be in a possession of unique
premium product or service but the same was not found on record.
6.3. The Ld.DR submitted that profile of the employees indicate salary
received by them is not commensurating with the skills set as claimed by
the assessee. Most of the employees have alias names which are normally
used by the call centre operators, but no such activity was recorded by the
assessee in its books. The Ld.DR further argued that except one or two
employees, most of them have no skill for development of software. The
Ld.DR further submitted that VLS IT Services, a firm in which Shri Jagan
Mohan Rao and Shri T.Nanda Kishore are partners facilitates for the work
of recruiting software professionals and visa processing and the amounts
so collected were deposited either in the accounts of Hari Babu or Shri
Naresh or Naga Madhav. Therefore, collections made by the VLS IT
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Services are also the income of the assessee, because, it was the assessee
who undertook all the work and the collection of fee by another entity to
camouflage the activity of manpower supply to software services.
6.4. The Ld.DR further submitted that the Ld.CIT(A) in his order stated
that there were number of stray factors like agreements signed by both the
parties by the same person, service agreement kept by the assessee to
mislead the agreement for supply of manpower, membership of
Monster.com, the correspondence available in the course of search etc.
does not establish that there was no software development work which is
incorrect observation. The Ld.DR submitted that the Ld.CIT(A) was of the
opinion that the factors such as issue of source codes, e-mail
correspondence indicating consultation and changes in the course of
development work, the act of export as evidenced in log sheets, STPI
forms, adequacy of infrastructure, breakup of income and expenditure
claims has an impact on export activities of the assessee. According to the
Ld.DR All these issues required to be answered by the assessee and not by
the AO. The Ld.DR further submitted that mere filing of softex forms
before STPI prove the transmission of data but not indicate that there was
real export of software. STPI is concerned with flow of foreign exchange
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into India and STPI can read the contents of the transmitted data. As seen
from the invoices on record, the same software is transmitted repeatedly.
The Ld.DR submitted that appropriate proof would be in the form of sale or
licensing of software by VLS Inc. at USA and linkage of development of such
software by employees of the assessee. The Ld.CIT(A) tabulated the
segment wise (IT and ITES) breakup of total turnover, total expenses, total
income including interest income, claimed u/s 10A, taxable income for
different years, while doing so, the Ld.CIT(A) failed to appreciate employee
cost as the percentage of revenue is very low. The STPI logs and e-mails no
way provide conclusive proof of claims of the assessee.
6.5. The Ld.CIT(A) invoked the provisions of 10A(7) r.w.s. 80IA(10)
because the transaction is between the two parties, arranged in such a way
that the assessee derived more than the ordinary profits expected in this
line of business. The Ld.DR argued that the Ld.CIT(A) restricted the claim
of exemption u/s 10A to 70%, however, the Ld.CIT(A) ought to have
appreciated the fact that the assessee being engaged in the manpower
services, not entitled for deduction u/s 10A of the Act. The Ld.CIT(A)
overlooked the fact that the affairs of the VLS Inc and its financials were not
disclosed by the assessee to prove the activity of software development or
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sale or licensing at USA. More so, when there is cogent evidence that
placing of people in third party companies at USA. The Ld.CIT(A) also failed
to appreciate that if the assessee was really exporting software, there was
no need to recruit software professionals and send them on H1B Visa to
USA. Besides, there was no need to camouflage the activity through
collection of money on account of M/s VLS IT Services, which have no
employees and to deposit the amount in the accounts of the individual
employees of the assessee. The Ld.DR further submitted that the Ld.CIT(A)
has drawn the conclusion on development of products in different years.
The assessee should have tabulated product wise, service wise, export bills
with the value, manner of utilization of services by M/s VLS Systems Inc.
either in its own installations or to its client at USA and furnish the
confirmations from the client. The assessee did not furnish any such
details. On the other hand, there was a systematic activity of recruitment of
software professions and hiring them on hourly basis is available on
record. The Ld.DR in detail explained the process of recruitment done by
the assessee through VLS IT and VLS Systems Inc and further submitted
that platforms like ITRM may be useful to the assessee and VLS Systems for
their own recruitment work. The Ld.DR submitted that the entire
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operation is nothing but body shopping and the assessee conducted the
online interviews with vague USA names and also online aptitude tests etc.
to arrange people to work at USA through VLS Systems for which the
amount is received from VLS Systems Inc. The Ld.DR submitted that there
is no evidence having made the export by the assessee, therefore, argued
that there is no software export or software development by the assessee
except body shopping, hence requested to set aside the order of the
Ld.CIT(A) and allow the appeals of the department.
6.6. With regard to restriction of profits to the extent of 30%, the Ld.DR
submitted that the Ld.CIT(A) is wrong in invoking section 10A(7) and
80IA(10), when there is no export of software at all. The Ld.CIT(A) ought
to have disallowed the entire deduction claimed by the assessee and upheld
the order of the AO, since there was no software export, except body
shopping. Thus, argued that the Department to be allowed and dismiss the
cross appeals filed by the assessee.
7. Per contra, the Ld.AR submitted that the department has disallowed
the claim of deduction u/s 10A of the assessee on surmises and conjectures
without any valid evidence. The assessee is engaged in the software
35
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development and Information Technology Enabled Services, registered
with STPI, Hyderabad, granted permission to the assessee firm in setting up
of 100% export oriented unit vide letter dated 16.01.2002. Change in
address was permitted by the STPI. The STPI granted extension of
approval vide letter dated 12.06.2008 from 24.10.2007 to 23.10.2012. The
grant of approval by STPI was based on the Master Service Agreement
entered into between the assessee and VLS Systems Inc. USA. According to
the Master Service Agreement, the assessee has software engineering
resources and personnel to perform such software development services.
The amount realized by the assessee for supply of software developed by it
under ITES was received through banking channels and is certified by the
STPI. The assessee supplied the software developed by it to VLS Systems
Inc. It has developed the Information Technology Resource Management
System (ITRM). The scope of project included in the following features
besides HR application...
A) Quick TS/eIPS/Time Tracking - a Time tracking and Accounts
Payable System;
B) Mems- Membership & Even Management System
C) VmAct - Innovative platform for Vendor Management, Contingent
Workforce Management, Control your spending;
D) Temple Track - an application system aimed to serve the needs of
any Religious Organisations; and
36
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E) Parent Student Update - Software used for Student Test &
Analytical Tool
Details of software exported by the assessee are ITRM, Quick TS/
EIPS/ Time tracking etc. The Ld.AR explained in detail with regard to above
projects of HR applications during the appeal hearing. The Ld.AR further
submitted that the assessee has developed all these applications using
Microsoft technology including Visual Studio, C#.NET ASP.NET, Ajax,
JQuery, JavaScript, HTML, XML, TFS (Team Foundation Server). The
assessee further submitted that all these products are transferred using
FTP (File Transfer Protocol), a tool to transfer the software and its
associated documents from one computer /server in Hyderabad, India to a
server in VA, USA. Each of these computers are assigned an IP address
which is a unique number given to computer software. Each IP address is
unique to each country and each state within the country. The logs of these
can be found on each of these servers which tracks the date and time of
each FTP transfer along with duration of transfer. Log is similar to a phone
bill which lists the date and time stamp along with duration of the calls.
Around 10 to 12 voice over IP phonse are used in calling the prospective
clients in USA, on supporting these software are used. These are phones
with the USA number which can be used from India. With these phones, the
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assessee employee can call only the numbers in USA and not in India. The
phone bills in each month in US$ were also recovered from the seized
material. These phone bills show the list of calls made by the assessee
employees to VLS clients on behalf of VLS. Few phone bills along with call
data was submitted to the AO and the Ld.CIT(A). Few employees of the
assessee firm who are taking care of customers in USA are given pseudo
names for easy understanding of name which are familiar to USA citizens.
All these products developed by the assessee are reported on monthly
basis to STPI. A quarterly report of software development along with logs
to show transfer of the software from Hyderabad to USA was recoded and
submitted to STPI. The Ld.AR submitted that the activities of the assessee
firm are approved by STPI to be software development and IT enabled
services. The entire turnover is from supply of software development. No
receipt in connection with the supply of personnel was admitted as its
income. In fact the activity of supply of personnel i.e. VLS IT Services and
the income from the said source is assessed in the assessment of VLS IT
services. Therefore, the Ld.AR submitted that the income derived by the
assessee is from software development of ITES and not from supply of
manpower. With regard to allegation that profit margin is higher, the
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Ld.AR submitted that utilization of 100% capabilities of employees without
allowing the employees on Bench and quantum of rent contributed for
increase in the income. The assessee further submitted that there was
substantial interest income on its deposits and the assessee did not debit
any interest as there were no borrowings. No financial charges were
debited to P&L account and the managing partner himself is qualified and
capable of rendering technical services and is able to manage the affairs of
the firm and the profit element is higher in the case of the assessee.
7.1. With regard to other allegations raised by the AO, the Ld.AR
submitted that Shri Nanda Kishore has signed as representative of Indian
Firm as Shri T.Nanda Kishore and Kris Nanda representing US firm, since
he was known in US circles as Kris Nanda and there is no malafide
intention in signing differently. Representing VLS Systems.Inc. Shri Nanda
Kishore has signed as Kris Nanda in the capacity of President, whereas in
the case of ABS he is representing as partner. Initially he could not give the
same reply, since he was not known the legal repercussions of signing the
agreement in different capacities with different names. Later on he has
submitted a letter in the office of the DG clarifying the position and
regarding his representation of both the firms.
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7.2. Regarding another agreement between ABS and VLS, the assessee
clarified that the original agreement between the assessee and VLS was lost
and they were required to submit the copy of the agreement for renewal of
license. Therefore, new agreement was signed by Shri T.Nanda Kishore on
behalf of VLS and Shri T.Jagan Mohan Rao on behalf of the assessee which
was furnished later to the department.
7.3. Regarding sale of ITRM software to Megasoft Ltd., the Ld.AR
submitted that the software was sold to Megasoft Inc. US, but not to
Megasoft India Ltd., therefore the letter given by its Indian arm of Megasoft
India Ltd., has no relevance on this issue. The Ld.AR submitted that the
assessee has already furnished the invoices for sale of software to Megasoft
before the Ld.CIT(A). With regard to the Ld.DR's contention that the
employees ratio and the expenditure, the assessee submitted that there
were no staff on the Bench and there was no payment of interest and the
rent is very less in the assessee's case.
8. The Ld.AR argued that there is no case for invoking the provisions
u/s 80IA(10) or 10A(7) of the Act. The transaction was not arranged to
increase the profits, therefore, the question of deriving excess profits does
not arise. The Ld.A.R submitted that the assessee has exported the software
40
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and received the Foreign Exchange through Banking channels as per the
agreed rate. Though the importer is assessee's close associate the US laws
also restricts the payment to Arm's Length Price. There was no inflation or
suppression of expenditure in the assessee's case and the entire
expenditure was debited to the P&L account. Neither the AO nor the
Ld.CIT(A) has made out a case that the assessee suppressed the expenses
or shifted the expenses to the other concern to claim such deduction. In
fact the AO taxed the entire income claimed as deduction u/s 10A and the
Ld.CIT(A) blindly estimated the income without bringing any arrangement
or the defects in the books of accounts of the assessee. The Ld.AR further
submitted that even it is presumed that expenditure relatable to VLS IT
systems has to be considered in the hands of the assessee firm, the same
required to be allowed as deduction in the hands of VLS IT systems. The
AO assessed the entire receipts as income in the hands of VLS IT Systems.
Hence, argued that the Ld.CIT(A) committed an error in restricting the
exemption to the extent of 70% and requested to set aside the order of the
Ld.CIT(A) and dismiss the appeal of the revenue and allow the appeal of the
assessee.
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9. With regard to financials of VLS Inc., the assessee submitted that
there is no provision to call for the financials of the VLS Inc since it is a
foreign organization and it is for the department to make enquiries relating
to the financials of VLS Inc. The financials of VLS Inc has no impact over the
payment to the assessee merely because VLS Inc is a sister concern of the
assessee. As stated already since the assessee company is engaged in the
software development, the assessee company is in constant touch with the
recruitment of software professionals for it's own use as well as for the VLS
System Inc. Therefore, argued that the contention of the Ld.DR that
software professionals are recruited by the assessee company to process
the H1B is against the truth and without any basis. The Ld.AR argued that
H1B Visas was processed by VLS IT Systems and the entire receipts
deposited in individual accounts of the various persons were assessed in
the hands of VLS IT Systems, hence, there is no case for again attaching the
said expenditure/income to the assessee. The Ld.AR further submitted that
the Ld.DR's argument that the collection of amounts from US based
organization for placing of manpower is remitted to the assessee's account
is baseless and without any evidence. With regard to tabulation of different
products developed by the assessee firm in different years, the Ld.AR
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submitted that the entire information of development of software was
placed before the Ld.CIT(A) which was discussed in para No.17 of the order
of the Ld.CIT(A). Therefore, the argument of the Ld.DR that the assessee
has not furnished the details is far from the truth. Merely because VLS
Systems Inc has declared before American Embassy that one of the
activities are recruitment, it does not bar the VLS Systems Inc to import the
software from India and it's Indian arm is not barred from exporting the
software. Therefore, the contention of the department that since VLS
Systems Inc has declared before American Embassy that it is a placement /
recruitment agency cannot be made hindrance to the export activity of the
assessee. The argument of the Ld.DR that the assessee company is engaged
in the body shopping is purely on presumptions and surmises without any
basis. The Ld.AR argued that except suspicions, the department has not
brought on record any evidence to show that the assessee company is
engaged in the body shopping. The Ld.AR reiterated the submissions made
before the CIT(A) and stated that all the queries raised by the AO were
suitably replied by the assessee before the Ld.CIT(A) and also in the course
of appeal hearing before the ITAT. The activities of the assessee are export
of software and no receipt in connection with the supply of personnel was
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admitted as its income. Even with regard to Mega Soft, the Ld.AR
submitted that the assessee had admitted the income of one thousand
dollars and claimed deduction u/s 10A on one thousand dollars only, but
not one lakh dollars as alleged by the department. The activity of supply of
personnel is that of VLS IT Services and the income from the said sources
was assessed in the hands of VLS IT Services by the AO substantially which
was also confirmed by the Ld.CIT(A). Therefore, the issue with regard to
supply of personnel is put at rest by assessing the income in the hands of
VLS IT Systems. The Ld.AR argued that the assessee is in the activity of
development and export of software, but not for the supply of personnel.
Therefore, requested to allow the appeal of the assessee and set aside the
orders of the Ld.CIT(A).
10. We have heard both the parties and perused the material placed on
record. A search u/s 132 was carried out in the case of the assessee on
16.09.2010 and during the course of search, certain material was found by
the AO which led the AO to believe that the assessee is making false claims
for deduction u/s 10A. Firstly, the agreement dated 08.01.2002 between
VLS Sytems Inc and the assessee firm which was submitted to the STPI for
getting it registered as 100% EOU, wherein it was observed that Shri T
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Nanda Kishore alias Kris Nanda has signed the Vendor Service Agreement
between the two entities in two different names which led the AO to
believe that the assessee is fabricating the evidences and has signed in two
different names as T Nanda Kishore for the assessee and as Kris Nanda for
VLS Systems Inc, thus viewed that it is a calculated ploy of the assessee..
For this query, the assessee has replied that he has signed the agreement
representing ABS as T Nanda Kishore and on behalf of the VLS Systems Inc,
he had signed as Kris Nanda, as he is called in US by name Kris Nanda. This
issue was clarified by the assessee by a letter submitted in the office of
Director General of Income Tax (Investigation) and submitted that there
was no malafide intention. From the reply of the assessee, we do not see
any malafide intention, since, the assessee was staying in US and called as
Kris Nanda and there is no reason to suspect the signing of the agreement
in the name of Kris Nanda / Nanda Kishore. Though the assessee filed letter
in the office of Director General Investigation, no evidence was brought by
the department to suspect the genuineness. Therefore, we hold that it is not
a reason to suspect the activity of the assessee.
11. Secondly, the department found that there was no software
development agreement envisaged in the agreement dated 08.01.2002.
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However, the department found another agreement called Master Services
Agreement dated 06.06.2002, wherein, there was a provision for
development of software. The copy of the agreement was retrieved from
the seized hard disk marked as A/ABS/PO-02/9. The AO suspected the
agreement as fabricated one and viewed that the said agreement was not
available originally and made subsequently as an afterthought to claim
deduction u/s 10A as software developer. According to the AO, the
agreement was prepared in 2008. In the instant case, search was
conducted on 06.09.2010 and by the time the search was conducted, the
agreement was available in the seized material in the premises of the
assessee. The assessee replied that since the assessee has lost it's copy of
the original agreement and it has to submit the copy of the agreement to
STPI for renewal, he has asked the employee Mr.Hari to get the signature
of Jagan Mohan Rao on the agreement on behalf of the ABS firm. This
signed agreement was submitted to the STPI for renewal of registration.
The original agreement was stated to be lost by VLS also in fire accident.
The agreement signed by both the parties was furnished during the post
search proceedings. The correspondence shows that the agreement was
signed by Sri T.Jagan Mohan Rao during 2008. The assessee clarified that
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the original agreement was submitted to the STPI at the time of registration
and subsequently copy of agreement was prepared only for renewal of
licence. As discussed the copy of agreement was available in the seized
material in soft form. The department did not make any enquiries with the
STPI and did not bring any evidence to show that the said agreement dated
06.06.2002 was not submitted to the STPI originally. Therefore, there is no
reason to disbelieve the copy of the Services Agreement dated 06.06.2002
as fabricated one or made as an afterthought.
12. The third issue is with regard to invoices submitted to the STPI. The
AO contended that the agreement was pertaining to IT Enabled Services,
invoices raised and submitted to the STPI were related to export of
software products. Since the assessee claims that it has sold the software
products, the invoices raised are in tune with the activity of the assessee.
Therefore, there is no reason to suspect the invoice raised by the assessee.
The issue with regard to Megasoft Consultants Inc, the AO suspected the
sale of software to Megasoft Consultants because of the reason that the
Indian arm of Megasoft had denied the transaction. The assessee submitted
that it has not sold the software product to Megasoft India Ltd and it has
sold to Megasoft, US and the firm ABS on behalf of VLS submitted product
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licence agreement between VLS and Megasoft to support that it sold the
products to them on invoices raised on Megasoft. Since there was no direct
evidence brought by the Department from Megasoft US, there is no reason
to disbelieve the transaction. Similarly, in the case of amount of invoice
raised, the assessee company raised invoice for an amount of one thousand
dollars on Megasoft for customisation services and claimed the same for
deduction u/s 10A. The assessee stated that the invoice of one lakh dollars
were submitted to STPI for registration purposes which the department
also did not make any objection before the STPI. Therefore, on this issue
also, the department failed to prove that the assessee was not engaged in
the software export.
13. With regard to products developed by ABS, the assessee submitted
that none of the statements recorded from the employees contained any
evidence to suggest that the ABS has not developed any software. The
assessee has furnished before the Ld.CIT(A) copies of export clearance
certificates from STPI, agreement between VLS and it's clients and
communication by e-mail to show software development and ITES
provided in product information for five products namely, ITRM, Parent
update, MEMS etc., ABS and VLS employees letters in 1200 pages and called
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for the remand report from the AO. Merely because of VLS Systems Inc has
mentioned before American Embassy that the company was into placement
services also, it is not barred from importing software from the assessee.
Similarly, the assessee is not barred from exporting software to it's
importing organization and no such material was brought on record.
Therefore, on this issue, neither the department brought any evidence
prohibiting the assessee to make exports or importing company to import
the software. Though the Ld.AO held that the assessee is engaged in the
body shopping, the entire receipts on account of recruitment of personnel
were assessed in the hands of VLS IT Services substantively on the basis of
agreements, thus the department has accepted that recruitment of
manpower and personnel supply was the activities of VLS IT Services, but
not of the assessee. Though the AO has alleged that the profit was
abnormally high, the AO has not computed the income on account of export
activity, referred the issue to TPO for Arms length and brought on record
comparables and made the T.P.study. Instead taxed the entire income
declared by the assessee, thus, there is no reason for justification to tax the
entire income earned by the assessee denying the deduction claimed. Once,
the AO has taxed the entire income admitted by the assessee without
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computing the income or estimating the income, there is no reason to
disbelieve the income earned by the assessee from the export activity.
From the above, it is clear that the assessee has answered all the issues
raised by the AO as well as the DR suitably in it's reply submitted to the
Ld.CIT(A) which was not countered by the department. The issues raised
by the AO such as signatures in two different names, agreement dated
06.06.2002, invoice on Megasoft, invoices raised by the assessee, the
statements recorded from the employees, the staff position, percentage of
income, reasons for membership with Monster.com, discrepancies
regarding year of development of different products etc. at best are leads
for suspicion or leads for investigation, but not a conclusive proof to hold
that the assessee has not made the exports once the assessee places the
evidences for transmitting the data and has approval from STPI. Unless the
department establishes that the export itself was a bogus from the
importer or importing country by making suitable enquiries or furnishes
the evidence from the STPI it cannot be held that there was no exports. In
the instant case, the assessee has placed evidence before the CIT(A) and
also in two paper books containing the details of ITES worked hours,
purchase orders, employee wise breakup, STPI clearance, inward
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remittances etc. The assessee has developed the software and made export
to VLS Systems Inc., USA which has imported the software from the
assessee as per it's requirement and design. There was an evidence
furnished by the assessee as observed from the Ld.CIT(A) order that the
data was transmitted from India to USA and the export proceeds were
realized through banking channels which was not in dispute. Neither the
department furnished evidence from the importer that it has not made
imports nor any evidence brought on record from the importing country
with regard to bogus nature of exports made by the assessee. During the
appeal hearing, as well as before the CIT(A), the assessee submitted that
the assessee had exported the software to VLS Systems, i.e. ITRM
(Information Technology Resource Management as per the Master Services
Agreement). Quick TS/eIPS/Time Tracking, MeMs, VMAct, Temple Track,
Parent Student Update etc. All the material about this product,
development activities over 20 lakhs line of softex code, programming in
lines of software with computer standards and design specifications are
part of the seized material. The assessee submitted that the brief of all this
activites was given to Ld.CIT(A) from the seized hard disk. On an average,
there were 38 to 40 employees working in product development and
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support employees who provided IT Enabled Services. The salaries of all
these employees are deposited in their account and PF was paid. The proof
of payment of PF was also provided to the AO.
14. During the appeal hearing, the Ld.AR submitted that for initial
products, Visual Source Safe-VSS was used later on TFS was used. All the
applications were developed by using Microsoft Technologies including
Visaual Studio, C#Net, ASP.NET, Ajax, J Query, JavaScript, HTMS, XML, TFS
(Team Foundation Servicer) and SQL server and all these products are
transferred using FTP (File Transfer Protocol), a tool to transfer the
software and its associated documents from one computer/server in
Hyderabad, to a server in VA, USA. Each of these computers are assigned
an IP address, which is a unique number given to a computer servicer.
Each IP address is unique to each country and each state within the
country. The logs of these can be found on each of the server which tracks
the date and time of each FTP transfer along with duration of transfer. Log
is similar to a phone bill which lists the date and time stamp along with
duration of the call. Around 10 - 12 voice over IP phones were used in
calling the prospective clients in USA on supporting these software were
used. Few phone bills, along with date was submitted to the AO and the
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Ld.CIT(A). Few employees of ABS who were customer facing in USA are
given pseudo names for easy understanding of names which are familiar to
USA citizens. All these products developed by ABS are on monthly basis to
STPI. A quarterly report on the software development along with logs to
show transfer of this software from Hyderabad Office to USA are recoded
and submitted to STPI. However, the AO did not bring any evidence to
disprove the claim of the assessee.
15. As per section10A of the Income tax Act the profits and gains derived
by an undertaking from the export of articles or things or computer
software for a period of ten consecutive assessment years beginning with
the assessment year relevant to the previous year in which the undertaking
begins to manufacture or produce such articles or things or computer
software, as the case may be, shall be allowed from the total income of the
assessee. The computer software is defined in the Income tax act as per
which
(a) any computer programme recorded on any disc, tape, perforated
media or other information storage device; or
(b) any customized electronic data or any product or service of
similar nature, as may be notified 55 by the Board, which is
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transmitted or exported from India to any place outside India by any
means;
As seen from the order of the Ld.CIT(A), the assessee has transmitted
the data from India to US through the infrastructure of STPI. STPI is a
Government agency in India and established in 1991 under the Head of
Communications and Information Technology that manages the Software
Technology Park scheme. It provides physical infrastructure, including
dedicated high speed connectivity to technology parks, freedom for 100%
foreign equity investment and tax incentives. STPI provides physical
hosting for the National Internet Exchange of India. STP schemes provide
facilities for IT industry, helping them undertake software development
and IT enabled services for 100% exports that include professional
services. For that, data communication links have been established,
providing high speed connectivity. The objective of STPI is encouraging,
promoting and boosting the software exports from India. It also maintains
internal engineering resources to provide consulting, training and
implementation services. The salient features of STPI scheme was
approval under single window clearance mechanism, 100% foreign export
oriented scheme for undertaking software development for software
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export using data communication link or in the form of physical exports
including professional services. Once the unit is located in STPI, the
assessee can make export in single window using the lines and
infrastructure of STPI. As rightly held by CIT(A), the documentation
prescribed by the STPI is sufficient to hold that the assessee made the
exports. Softex forms are proof of transmission of data. Ld.DR also argued
that Softex forms are proof of transmission of data. Mere transmission of
data from India to outside India is sufficient to hold that the assessee has
made the exports. In this case the assessee submitted the bundles of
information with regard to transmission of data as observed from the order
of Ld.CIT(A). Hence, the responsibility is more on the AO to prove that
there was no software export with direct evidence. In the instant case, the
department has not established that that there was no software export by
the assessee from the STPI inspite of conducting the search. As seen from
the orders of the lower authorities, the assessee has used the infrastructure
made available by STPI for transmitting the data, the details of
transmission of the data was submitted to the Ld.CIT(A) as well as the AO.
The assessee submitted that the data was transmitted in FTP logs. The
Ld.CIT(A) after verifying the information filed by the assessee given a
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finding that the assessee has developed and exported the software. For the
sake of clarity and convenience, we extract relevant part of the order of the
Ld.CIT(A) in para No.9 to 10, 11 to 18 as under :
"9.0. The appellant firm was registered at STPI from 16.01.2002 and was
having approvals thereafter for all the asst. years in question. The change
of registered office from Guntur to Hyderabad and subsequently from
Ameerpet to Begumpet was also approved. Date of commercial production
was taken as 24J0.2002 by STPJ. The company furnished all the approval
documents in course of appellate proceedings.
10.0. For the six assessment years under question, the turnover of the
company, the expenses claimed, the total income, income for 10A deduction
as per Audit Report and the taxable Income returned by the company both in
the originally filed returns and in the returns filed in response to notices u/s
153A is tabulated below. This turnover breakup also gives the breakup
between the software development stage and the ITES services income.
ITEM A.Y.2005-06 A.Y.2006-07 A.Y.2007-08 A.Y.2008-09 A.Y.2009-10 A.Y.2010-11
Total 38708384 45065555 68480351 39666281 60355222 74905950
turnover
Total 3694422 4225517 10987314 12918125 15491657 16568641
expenses
Total
income
40067642 46253328 61712409 32812097 53244950 71436236
including
interest
income
Audit report 35013962 40840038 57493037 26748156 44863565 58436829
for Sec.10A
Taxable 5053680 5413290 4219372 6063941 8381385 12999407
Income
Party wise
breakup of 37995318 44462281 68480352 39666281 56043569 74426023
turnover
(total)
IT Sales 7959095 10410572 8870676 13900739 18139440 27185715
ITES Sales 30036223 34051709 59609675 25765542 37904129 47240308
11.0 in course of the appellate proceedings, clarifications were also sought
regarding the number of hours billed and its feasibility (page 18 of the asst.
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order for the AY 2010-11). The appellant submitted the details giving a break
up of IT & ITES worked hours linking it to the purchase order and invoice
number as well for all the asst. years in appeal. The relevant statement for AY
2010-11 is enclosed as Annexure A (one page). {page 31 of this order}.
12.0 The appellant also furnished the list of employees and salary paid
along with details of PF credited for the AYs under question. Letters sent to
the bank regarding salary and the salary sheet of April, 2008 is enclosed for
the sake of immediate reference as Annexure B (5 pages). -(pages 32, 33, 34,
35, & 36 of this order}. The appellant had also filed copies of employment
letters and employment agreement in support of the claim. All the details
filed by the appellant are placed on record.
13.0 As claimed in the written submissions reproduced supra, the
appellant also furnished copies of sworn statements from the employees of
the firm wherein, they have clearly mentioned the work they have
undertaken in software. Sworn statement of Sri Kishore Kumar recorded
on 16.09.10 is perused and in this statement he has categorically stated
that he is services team leader and had worked on enhancing and
modifying IT cubes (AASA) and also works on task assigned by his project
manager either through email or by phone. He stated that he modified and
incorporated the changes in the programme and sends the modified
version. He also mentioned that all the communications are by way of
email.
14.0 Source control logs for the years 2008-09 and 2009-10 were filed by
way of sample. For immediate and ready reference so as to get a feel of how
this looks, three sheets are enclosed as ANNEXURE C (3 pages) (pages 37, 38
& 39 of this order}.
15.0 The appellant also stated that the AO had wrongly stated that there
was no export of software without even verifying the record. It was
submitted that FTP Lag actually gives data with complete addresses of the
system from which software was transmitted and also the time and date of
such transmission. The code address is also unique linking the country
and station right down to the computer server system from which it was
sent. It was mentioned that there are more than 6000 pages of FTP Log
and by way of example few logs for different years were filed and for the
sake of immediately reference two log sheets for FY 2008-09 are enclosed
as ANNEXURE 0 (one page) {page 40 of this order} The proof of
transmission of software by FTP was part of initial filing of 1206 pages in
11 annexures, which was sent to the AO for his remand report.
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16.0 In the asst; order at page 19, it was also stated that the assessee firm
had worth only Rs.5.09 lakhs and air conditions worth Rs 12,000 only. The AO
was thus questioning the very availability of infrastructure to take up such
jobs. The appellant strongly contested this and furnished the complete details
of infrastructure with copies of bills running into nearly 79 pages vide
annexure 8 of the initial written submissions totaling nearly 1206 pages that
was sent to the AD for remand report. From the information filed, it is seen
that the appellant has computers and related infrastructure wortfrR.39.37
lakhs as against five lakhs mentioned by the AO.
17.0 Copies of export clearance certificate from STPI (121 pages),
agreement between VLS and its clients and association communication by
email (166 pages) email communication to show software development and
ITES provided (683 pages) in product information for five products namely
ITRM, Parent Update, MEMS etc., (60 pages), AS and VLS Employees letters
(19 pages) were all part of submissions running into 1206 pages which was
sent to the AO and where remand report was called for.
18.0 On going through the various documents filed and the trial left in the
computer (prior to the date of search in most of the cases and part of seized
hard disc and hence not an afterthought / insertion) through the emails and
the time and date log and which was furnished through FTP log sheets, the
software related activity and it export of the appellant cannot be denied.
Thus, questions raised in para 8 at (a), (b) and (c) given hereunder for ready
reference have to be answered in favour of the appellant.
(a) The act of development as shown in source codes.
(b) The act of export as evidenced in log sheets, STPI forms.
(c) The adequacy or otherwise of infrastructure and expenditure
to support the incomes."
15.2. In the instant case, though the department has alleged that the
assessee is not exporting the software, but engaged in the body shopping
no conclusive evidence was brought on record to support the department's
contention. As per the provisions of section 10A of the Act, the assessee
engaged in the export of software is entitled for deduction of 100% profits
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I.T.A.Nos.864/H/2015 to 869/H/2015 and 334/Viz/2016.
M/s Annapurna Business Solutions, Hyderabad
derived from the export of software. In the instant case, by providing
various details, information, the assessee has proved that it was in the
activity of software export and received foreign exchange on account of
software export. No enquiries were made with the importing country, no
evidence was brought on record from the STPI to establish that the
assessee's claim is bogus. Therefore, we have no reason to disbelieve the
export of software made by the assessee. Thus we hold that the assessee
made export of software and entitled for deduction u/s 10A of the Act.
16. The next issue is invoking the provisions of section 10A(7) and
80IA(10) by the Ld.CIT(A). The assessee as well as the department have
challenged the order of the Ld.CIT(A) on this issue. Though the Ld.AO in its
order stated that the profit is very high in the assessee's case and the
organizations carrying on similar line of business are deriving lesser profit,
the AO did not compute the income from the business separately either by
estimation or following the accounting principles. The AO also did not
make transfer pricing study and the case was not referred to TPO for
determination of Arms Length. The AO has to compare the case of the
assessee with cases of identical facts but not on similar facts. In the instant
case the assessee submitted that it has not paid the interest, less rent and
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I.T.A.Nos.864/H/2015 to 869/H/2015 and 334/Viz/2016.
M/s Annapurna Business Solutions, Hyderabad
no idle employment. The AO has consider the identical facts and and bring
the comparable cases for estimation of income. In the instant case neither
the CIT(A) nor the AO made the above analysis and considered the profits
of the assessee. The department has to make out case that the assessee
has arranged the activity systematically to reduce the profit .There is no
taxable entity in India which can absorb the expenditure of the assessee
except the VLS IT systems and the entire receipts were taxed in the case of
VLS IT systems. ABS is the only institution which is receiving the foreign
exchange.
17. The assessee during the appeal hearing submitted that the assessee
company utilized 100% capabilities of employees without allowing the
employees on bench. The assessee has no idle employees on its rolls. Rent
paid by the assessee is 0.5% of the revenue, whereas, in many other cases,
it was about 5%. Apart from the above, the assessee has no interest costs
since there were no borrowings. The department did not controvert the
submissions of the assessee. The AO also did not refer the transactions to
TPO at the time of assessment to determine the Arms Length Price. The
issue with regard to determination of higher percentage of margin and
invoking the provisions of section 10A(7) and 80IA(10) was considered by
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I.T.A.Nos.864/H/2015 to 869/H/2015 and 334/Viz/2016.
M/s Annapurna Business Solutions, Hyderabad
ITAT Hyderabad in the case of DCIT Circle-8(1), Hyderabad Vs. Quick MD,
Hyderabad in I.T.A. No.97/hyd/2015 in the order dated 26.08.2015 and
dismissed the appeal of the department. For the sake of clarity and
convenience, we extract relevant part of the order of the Tribunal from
para 8 to 8.2 which reads as under :
"8. We have considered the submissions of the parties and perused the orders of
revenue authorities as well as other materials on record. We have also carefully
applied our mind to the decisions cited at the bar. The issue arising for
consideration before us has two aspects, factual and legal. As far as the factual
aspect is concerned, there is no dispute that assessee on a turnover of Rs. 83.49
crores has declared a profit of 81.36 crores, which works out to 97.40%. AO is of
the view that assessee has declared unreasonably high rate of profit only for the
purpose of claiming exemption u/s 10A of the Act. Therefore, invoking the
provisions of section 10A(7) read with section 80IA(10) of the Act, AO has
restricted the profit margin of assessee to 74% and computed exemption u/s
10A accordingly. However, as can be seen from the facts on record, assessee for
bench marking price charged for international transactions with AE has
conducted a TP study, wherein certain comparable companies having average
arithmetic mean of 36.53% have been selected. TPO has also independently
conducted analysis by selecting comparables on his own. The average
arithmetic mean of comparables selected by TPO worked out to 52.69%. On a
careful examination of the comparables selected by assessee, it is found that OP
to sale ratio of the comparable companies fluctuates from as low as 11.88% to
a high of 74.26%. Similarly OP to OC ratio of comparable companies selected by
TPO indicates lowest OP to OC of 7.42% as against the highest OP to OC of
289.50%. Even, the comparable companies considered by AO indicate that OP
to sales ratio of two companies is 85% and 88%, whereas, margin of another
company is 51%. Thus, analysis of the profit margin of comparable companies
selected by assessee, TPO and AO, as indicated above, would show that the
profit margin is fluctuating from very low of 11.87% to a high of 88%.
Therefore, considered in the aforesaid perspective, profit margin declared by
assessee at 97.40% cannot be considered to be unreasonable or unbelievable
considering other factors pointed out by assessee like limited nature of
expenditure incurred by assessee and the amount of risk involved as well as
niche business area. Moreover, when comparable companies selected by AO
himself show profit margin of 88% and 85%, there is not much variance
between profit margin shown by assessee. Further, it has been brought to our
notice by ld. AR, which has not been controverted by ld. DR, in the subsequent
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I.T.A.Nos.864/H/2015 to 869/H/2015 and 334/Viz/2016.
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AY also assessee has declared profit at 96% and has also paid taxes of about 15
crores since the tax holiday has already expired. Considered in the aforesaid
perspective, AO's conclusion that only for the purpose of claiming higher
exemption u/s 10A, assessee enhanced its profit margin, cannot be accepted.
8.1. As far as legal aspect is concerned, on plain reading of section 80IA(10),
which is referred to in section 10A(7) of the Act, it is very much clear that the
basic condition to be satisfied by AO is, he must establish it on record that
assessee and its related party have arranged the business transaction in such a
way that it produces more than the ordinary profit to the assessee carrying on
the eligible business. Only when AO establishes on record such arrangement, he
can proceed to estimate the profit of assessee at a reasonable rate. In the facts
of the present case, on careful reading of the assessment order, we do not find
any conclusive finding of AO that assessee and its AE have arranged business
transactions in a manner to generate more than ordinary profit to assessee. At
least, there is nothing mentioned in the assessment order to suggest that AO has
satisfied such condition. Therefore, without establishing through positive
evidence that assessee and its related party have arranged their business
transaction in a manner to produce more than ordinary profit to assessee, AO
cannot invoke the provisions of section 10A(7) read with section 80IA(10) on
mere presumptions and surmises. The coordinate bench of this Tribunal while
considering identical issue in case of Aquila Software Services Hyderabad Pvt
Ltd. Vs. DCIT, ITA No. 423/Hyd/14, dated 30/06/2015, held as under:
"7. We have considered the submissions of the parties and perused the
orders of revenue authorities as well as other materials on record. As
far as the applicability of section 10A(7) is concerned, in our view, the
issue has attained finality as the directions of ITAT in the earlier round
of litigation has not been challenged by assessee or by revenue.
Keeping this in view, we have to decide whether disallowance of
deduction u/s 10A of the Act by applying the provisions of section
80IA(1) is valid. As can be seen, section 10A of the Act allows
exemption at 100% of the profit earned by assessee from export of
software. However, deduction u/s 10A is subject to 10A(7), which in
turn refers to section 80IA(8) and 80IA(10) of the Act. Since 80IA(8) is
not relevant for our purpose, there is no need to discuss the same. As
far as the provisions contained u/s 80IA(10) is concerned, it reads as
under: "Where it appears to the AO that, owing to the close connection
between the assessee carrying on the eligible business to which this
section applies and any other person, or for any other reason, the
course of business between them is so arranged that the business
transacted between them produces to the assessee more than the
ordinary profits which might be expected to arise in such eligible
business, the AO shall, in computing the profits and gains of such
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I.T.A.Nos.864/H/2015 to 869/H/2015 and 334/Viz/2016.
M/s Annapurna Business Solutions, Hyderabad
eligible business for the purposes of the deduction under this section,
take the amount of profits as may be reasonably deemed to have been
derived therefrom." On plain reading of the aforesaid provision, it is
clear that as per the said provision three conditions have to be fulfilled.
Firstly, there must be close connection between assessee carrying on
the eligible business and the other person. Secondly, the business
between assessee and such other closely connected person should be so
arranged that business transacted between them produces more than
the ordinary profits to assessee carrying on eligible business. If AO is
satisfied with the aforesaid two conditions, then, as per the third
condition, he may take the amount of profits as may be reasonably
deemed to have been derived from transactions of such business in
computing profits of such eligible business for the purpose of deduction
under the said section. Considering the facts of the present case in the
light of the aforesaid statutory provisions, it is to be seen that the first
condition is fulfilled as assessee and its AE are related parties.
However, as far as the second condition i.e. existence of arrangement
between assessee and its related party by which these transactions so
arranged has to produce more than the ordinary profits in the hands
of assessee, whether has been fulfilled or not needs to be examined. On
perusal of the assessment order, it is very much evident that only
relying upon TP document of assessee wherein it is stated that average
profit margin of comparable company is 15% as against 50% of
assessee, AO has concluded that profit earned by assessee is not at
arm's length. AO has not given a conclusive finding as to whether
earning of such excess profit is as a result of business arrangement
between the parties. Even, ld. CIT(A) has also not given any factual
finding on the issue to conclusively prove that assessee and its related
party has arranged their business affairs in such a manner that it will
result in more than reasonable profit to assessee. Merely relying upon
the fact that in the TP documentation the average margin of
comparable companies are 15% where as the assessee has shown
profit at 50%, the departmental authorities have reduced the
deduction claimed u/s 10A by restricting the profit from the eligible
business of assessee to 20% of the turnover. In our view, the
Department having not fulfilled the conditions of section 80IA(10),
disallowance in the present case is not justified. At the cost of
repetition, it needs to be stated that only relying upon TP
documentation, AO has inferred that the profit earned by assessee at
50% is more than the arm's length profit. However, without bringing
material on record that the profit earned by assessee at 50% is not the
profit ordinarily earned in similar line of business, it cannot be said
that it is not at arm's length. Moreover, excess profit may be due to
various reasons. Therefore, without analysing those factors, it cannot
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I.T.A.Nos.864/H/2015 to 869/H/2015 and 334/Viz/2016.
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be said that only because average profit earned by comparables is
15%, the profit earned by assessee at 50% is not reasonable. The
Chennai Bench of the Tribunal in case of Tweezmen India Pvt. Ltd., Vs.
Addl. CIT, 133 TTJ 308 while considering similar issue held that the
provisions of section 80IA(10) do not give arbitrary power to AO to fix
the profits of assessee. AO has to specify as to why he feels that profits
of assessee are being shown at higher figure. AO has to further show as
to how he has computed ordinary profits which he deems to be profit
which assessee might be reasonably expected to generate. The Bench
held that AO would be expected to use a comparable case to determine
the possible ordinary profit which assessee could be expected to
generate from his business. In the absence of any other substantial
evidence with him, when using a comparable, assessee's own past and
future performance would obviously be the best comparable.
Comparing assessee's modus operandi of conducting its business with
another when the same are not of equal terms would be a travesty of
justice in so far as the financial charges. The use of plant & machinery,
depreciation thereon, the location which would affect the cost of
transportation as also the cost of labour, cost of power and fuel would
have to be seen. The ITAT, Delhi Bench in case of AT Keatney India Ltd.
Vs. Addl. CIT (supra), the facts of which are more or less identical to
the facts of the present case, while deciding similar issue held as under:
"11. Adverting to the facts of the extant case, we find that the AO
simply relied on the TP study report submitted by the assessee to form
a bedrock for the disallowance of the part of the amount of deduction
u/s 10A, without firstly showing that there existed any arrangement
between the assessee and its overseas related party, by which the
transactions were so arranged as to produce more than the ordinary
profits in the hands of the assessee. The assessment year under
consideration is 2009-10. Neither the proviso to sub-section (10)
existed at that time, nor such a proviso can be applied as we are
dealing with an international transaction and not specified domestic
transaction. Under these circumstances, we are of the considered
opinion that the impugned order upholding the invocation of sub-sec.
(10) of sec. 80IA cannot be countenanced to this extent. Ergo, it is held
that the ld. CIT(A) erred in sustaining the disallowance made by the
Assessing Officer by restricting the amount of deduction u/s 10A of the
Act to Rs. 2.63 crore as against Rs. 8.22 crore claimed by the assessee.
The impugned order on this issue is overturned and it is directed to
allow deduction as claimed." Examining the facts of the present case in
the light of the decisions referred to hereinabove, it is noticed that in
the present case also AO has simply relied on the TP study report of
assessee to conclude that the profit earned by assessee cannot be
considered to be reasonable profit earned from eligible business and
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on that basis has disallowed part of the deduction u/s 10A. Therefore,
since AO has not conclusively proved the fact that there is an
arrangement between assessee and its AE by which the transactions
were so arranged as to produce more than the ordinary profits in the
hands of assessee, disallowance of part deduction claimed by applying
the provisions of section 80IA(10), in our view is not justified. Since ld.
CIT(A) upheld the disallowance without examining the aforesaid
aspect, order of ld. CIT(A) deserves to be set aside. The conditions of
section 80IA(1) having not been fully complied by AO, disallowance of
deduction claimed u/s 80IA(10), in our view is not justified.
Accordingly, we delete the addition made by AO in this regard."
8.2. The principle decided as aforesaid by the coordinate bench clearly
applies to the facts of the present case. Though, it may be a fact that ld. CIT(A)'s
finding is cryptic and there is no discussion on the issue of assessee's claim of
deduction u/s 10A, but, considering the fact that disallowance u/s 10A of the
Act by AO is not valid in view of the reasons stated by us hereinbefore, no useful
purpose would be served by setting aside the impugned order of ld. CIT(A).
Accordingly, we dismiss the grounds raised by department."
17.1. In the instant case the AO has not made out a case for invoking the
provisions to section 10A(7) and 80IA(10) and the issue was not referred
to the Transfer Pricing Officer. The Ld.CIT(A) also blindly estimated the
profits without bringing any comparable case on identical facts to hold that
transactions were so arranged as to produce more than the ordinary profits
in the hands of assessee. In the case decided by the coordinate bench in the
case of Quick MD also, the profit was 97.40%. The Coordinate Bench
decided the issue against the department on similar facts of the assessee's
case. Since the facts are similar and the AO did not make out case, the
transactions are so arranged to increase the profits. Hence we are unable to
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I.T.A.Nos.864/H/2015 to 869/H/2015 and 334/Viz/2016.
M/s Annapurna Business Solutions, Hyderabad
sustain the order of the Ld.CIT(A) to restrict the profits to the extent of
70% instead of allowing 100% of profits for deduction u/s 10A.
Accordingly, we set aside the order of the Ld.CIT(A) and direct the AO to
allow the deduction of 100% profits as per law. The appeals of the revenue
on this issue is dismissed and allow the appeals of the assessee.
18. The next issue in Department's appeal is with regard to receipts on
account of recruitment of personnel. The AO has taxed the entire receipts
in the hands of VLS IT Systems substantively and protectively in the hands
of the assessee firm. The AO placed reliance on the agreements between the
VLS Inc. and VLS IT Systems for making the substantive assessment in the
hands of the VLS IT systems. The department has challenged the order of
the Ld.CIT(A) for the A.Y.2007-08 to 2010-11. The Ld.CIT(A) confirmed
the substantive assessment in the hands of VLS IT Systems and deleted the
protective addition in the hands of the assessee. During the appeal hearing
no material was placed before us to reverse the order of the Ld.CIT(A).
Therefore, we uphold the order of the Ld.CIT(A) with regard to confirming
the addition in the hands of VLS IT Systems relating to the receipts of
manpower selection and dismiss the appeal of the revenue.
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I.T.A.Nos.864/H/2015 to 869/H/2015 and 334/Viz/2016.
M/s Annapurna Business Solutions, Hyderabad
19. In the result appeals of the revenue are partly allowed and the
appeals of the assessee are allowed.
Sd/- Sd/-
(डि.एस. सुन्दर डसिंह) (वी.दु गगा रगव)
(D.S. SUNDER SINGH) (V. DURGA RAO)
ले खग सदस्य/ACCOUNTANT MEMBER न्यगडिक सदस्य/JUDICIAL MEMBER
दिन ां क /Dated : 17.12.2019
L.Rama, SPS
आदेश की प्रतितिति अग्रेतिि/Copy of the order forwarded to:-
1. दनर् ा रिती/ The Assessee - Annapurna Business Solutions, 6-3-866/A,
Suite No.401, Maheswari Mekins Mayank Plaza, Greenlands Road
Begumpet, Hyderabad
2. ि जस्व/The Revenue - Dy.Commissioner of Income Tax, Central Circle-3
Hyderabad (ii) Asst.Commissioner of Income Tax, Circle-2(1), Guntur
3. The Principal Commissioner of Income Tax (Central), Hyderabad
4. The Commissioner of Income Tax (Appeals)-12, Hyderabad
5. तिभागीय प्रतितिति, आयकर अिीिीय अतिकरण, तिशाखािटणम/DR, ITAT, Visakhapatnam
6.गार्ड फ़ाईि / Guard file
आदेशािुसार / BY ORDER
// True Copy // Sr. Private Secretary ITAT, Visakhapatnam