TMI Blog2006 (4) TMI 217X X X X Extracts X X X X X X X X Extracts X X X X ..... rom AMC charges (Annual Maintenance Charges of ATM), installation and technical charges, consultation charges and licence fee of software constitute income of the assessee and not of industrial undertaking situated at Pondicherry since this income was not derived from this industrial undertaking as the men, material and machinery of Pondicherry industrial undertaking were not used to earn this income and hence, not eligible for deduction under s. 80-IA of the Act. Further, for this assessment year the income on account of the above elements was not earned from eligible business referred to in s. 80-IA(4) of the Act. The assessee is not also entitled for deduction under s. 80-IB though this section is applicable, for the same reason stated therein in that order as the above earnings were not from industrial undertaking situated at Pondicherry, as the benefit of deduction can be given only to the profit and gains derived from industrial undertaking as per s. 80-IB(4) of the Act. Accordingly, this ground is rejected. 3. The next ground is that the CIT(A) has erred in confirming the disallowance of Rs. 53,21,968 as inflation of expenses on purchase of software. 4. The brief facts o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware for which the assessee has placed orders with the NRI vendors. The statement given by the director, Shri Harish Murthy on 10th Jan., 2003 cannot be relied upon as he is not conversant with the accounting procedures and IT law and that cannot be used as an evidence against the assessee to disallow the claim of the assessee. Actually, there was no suppression of any income by inflating the purchase figures as the assessee was consistently following this method of accounting of making provision towards the purchase on the last day of the year and reversing it on the immediate next day of the subsequent year. He further submitted that the admission to declare this amount as income for the asst. yr. 2001-02 was erroneously made and there was no evidence with the Department to show that the assessee has suppressed the income. He relied on the judgment of Hon'ble apex Court in the case of CIT vs. C. Parakh Co. (India) Ltd. (1956) 29 ITR 661 (SC) and the judgment of Hon'ble Delhi High Court in the case of Swaran Yash vs. CIT (1982) 138 ITR 734 (Del). He further submitted that even if the assessee has admitted the addition, the addition cannot be made and the assessment shall be comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing this amount as a deduction in the asst. yr. 2002-03. We are waiting for the completion of this assessment to file the revised return." 9. The above contents show that the assessee is fully aware of the fact and consequence of its statement and submission. Now, the assessee coming back with the plea that the agreed addition was erroneously made cannot be accepted. First of all, there is no evidence to show that the provision for purchase was made on the basis of specific purchase price of the software. The assessee cannot also say that within less than 24 hours, it has collected full information regarding the actual purchase price of the software. Further, the assessee cannot have any grievance towards addition as the assessee itself has agreed for offering this amount for taxation while examining under s. 131 of the IT Act and also by its own letter cited. In the case of Ramanlal Kamdar vs. CIT 1976 CTR (Mad) 185 : (1977) 108 ITR 73 (Mad), the Hon'ble Madras High Court has held that once the assessee had stated that it had no objection to the proposed revision or addition and the assessment was made as proposed by the assessee, the assessee could not be said to have been ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew of cl. 2(a) of s. 40A of the Act. 12. The brief facts of the issue are that the assessee has a 50 : 50 joint venture with HMA Data Systems (P) Ltd., and Diebold Inc., USA engaged in the manufacture and trading of Automated Teller Machines Accessories. M/s Chip Trans and M/s Diebold Inc., USA were associate concerns of the assessee-company. The managing director, Shri Harish Murthy was substantially interested in HMA Data Systems Ltd., and Chip Trans, USA. Thus, HMA Data Systems (P) Ltd., Diebold Inc., USA., HMA Software (P) Ltd., and Chip Trans, USA are specified persons as enumerated under s. 40A(2)(a) of the IT Act. During the year, the assessee has purchased software from Chip Trans, USA., Diebold Inc., USA and HMA Software (P) Ltd. The assessee has purchased ATM related software from Chip Trans, USA during the period 1st April, 2000 to 31st Oct., 2000. The AO compared the purchase cost and sales price of software. As mentioned by the AO, the purchase and sales cost of soft ware are as follows: --------------------------------------------------------------- Name of the No. of Purchase Sale Profit/Loss Company software price price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SW) 5,73,390.64 ------------------------------------------------ Commission 2,80,000.00 ------------------------------------------------ Total Cost 8,53,390.64 ------------------------------------------------ Total order value (HW SW) 10,14,215.69 ------------------------------------------------ Total margin 1,60,825.05 ------------------------------------------------ Margin percentage 15.86% ------------------------------------------------ Bank of Punjab Ltd. 1064ixFL All figures in INR unless otherwise mentioned Hardware 47.00 to a $ Software ----------------------------------- ----------------------- CIF Chennai $ 8,358.38 CIF Chennai US $ $ 1,328.00 ----------------------------------- ----------------------- Customs Duty Calculations CIF US $ $ 8,358.38 CIF US $ $ 1,328.00 CIF INR 3,92,843.63 CIF INR 62,416.00 Assessable value (AV) 3,96,772.06 Assessable 63,040. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asst. yr. 2001-02. ---------------------------------------------------------- S. Purchase from Chip Trans Inv. No. Selling Purchase No. price price ---------------------------------------------------------- 1. BOP Autocare Centre, 1,110 2,25,000 3,17,646 New Delhi ---------------------------------------------------------- 2. BOP Laxmi Super New Delhi 1,111 2,25,000 3,17,646 ---------------------------------------------------------- 3. BOP Shamnath Marg, 1,112 2,25,000 3,17,646 New Delhi ---------------------------------------------------------- 4. GT Mandigobindge Punjab 1,164 2,25,000 3,23,148 ---------------------------------------------------------- 5. GT Road Malout, Punjab 1,165 2,25,000 3,23,148 ---------------------------------------------------------- 6. Circular Road, Punjab 1,166 2,25,000 3,20,259 ---------------------------------------------------------- 7. Bengali Market, New Delhi 1,237 2,25,000 3,20,259 ---------------------------------------------------------- 8. Tobaco House, Calcutta 1,560 2,25, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n credit basis, thus arriving at the cost of software purchased from Chip Trans at Rs. 97,251 and thereby arrived at the cost of 312 sets as under: (a) Amount actually paid for 312 sets of ... Rs. 6,39,88,366 software (b) Amount payable to Chip Trans for 312 ... Rs. 3,03,42,312 sets of software at Rs. 97,251 each (c) Amount excess paid (a - b) ... Rs. 3,36,46,054 This excess payment of Rs. 3,36,46,054 to Chip Trans was disallowed under s. 40A(2)(a) of the IT Act by the AO. Against this disallowance, the assessee went in appeal before the CIT(A) who has confirmed the action of the AO. Aggrieved, the assessee is in appeal before us on this issue. 14. The learned counsel for the assessee submitted that the assessee has purchased 709 sets of software from Chip Trans, USA, though it was stated as 696 before the AO and filed an affidavit confirming the purchase of 709 sets of software. He further submitted that the mistake was due to wrong punching of number of software sets imported. Further, the software sets purchased or sold consists of large number of individual software which were bundled or embedded as per needs of the customers. They were collectiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Hon'ble Delhi High Court in the case of CIT vs. Shriram Pistons Rings Ltd. (1989) 80 CTR (Del) 159 : (1990) 181 ITR 230 (Del); and in the case of Addl. CIT vs. Nestle India Ltd. (2005) 94 TTJ (Del) 53 and decision of the Pune Bench of the Tribunal in the case of Kinetic Honda Motor Ltd. vs. Jt. CIT (2001) 72 TTJ (Pune) 72 : (2001) 77 ITD 393 (Pune). 16. The learned Departmental Representative, on the other hand, submitted that there is no merit in the claim of the assessee that it has purchased 709 sets of software from Chip Trans. At the time of assessment, it was stated that the assessee has purchased 696 sets of software. Now the assessee is changing its stance and stating that it has purchased 709 sets of software and made an affidavit to that effect. This is only self-serving in nature. On 11th April, 2003, the assessee has filed a letter where it is clearly mentioned that it is 312 sets of software and it has given item-wise cost of each set of software and sale price. He drew our attention to the details of software purchased by the assessee which was enclosed to the letter dt. 11th April, 2003. According to this, the assessee has purchased only 312 sets at a cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s clear beyond doubt that the sale was for 312 sets of software only as the assessee itself has admitted vide letter dt. 11th April, 2003 that it has sold 312 sets of software for Rs. 5,48,94,300, the purchase cost of which was Rs. 6,46,39,832. Had it sold 709 sets of software, corresponding amount of balance should have been there in the closing stock. But according to the statement furnished at p. 147 of Annex. IV of the paper book submitted by the assessee on 6th March, 2006, the stock available was 131 only from the purchase made from Chip Trans, USA 18. Another argument of the assessee is that it has clubbed the software according to the requirement of the customers. It transpires from the order sheet entry dt. 19th Dec., 2003 that the software was prepared according to the need of the customer bank by clubbing more than one software and cost was determined on actual cost basis of the combined software and the cost of this software was as mentioned in the letter dt. 11th April, 2003. In this letter, the assessee has given the details of software, sale value and purchase price of them. According to this letter, the assessee has sold 312 sets of software for a sale value of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ----------------------------------------------- S. Purchase from Chip Trans Inv. No. Selling Purchase No. price price ---------------------------------------------------------- 1. BOP Autocare Centre, 1,110 2,25,000 3,17,646 New Delhi ---------------------------------------------------------- 2. BOP Laxmi Super New Delhi 1,111 2,25,000 3,17,646 ---------------------------------------------------------- 3. BOP Shamnath Marg, 1,112 2,25,000 3,17,646 New Delhi ---------------------------------------------------------- 4. GT Mandigobindge Punjab 1,164 2,25,000 3,23,148 ---------------------------------------------------------- 5. GT Road Malout, Punjab 1,165 2,25,000 3,23,148 ---------------------------------------------------------- 6. Circular Road, Punjab 1,166 2,25,000 3,20,259 ---------------------------------------------------------- 7. Bengali Market, New Delhi 1,237 2,25,000 3,20,259 ---------------------------------------------------------- 8. Tobaco House, Calcutta 1,560 2,25,000 3,31,010 ----------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , services rendered, facilities offered and it empowers the AO to disallow so much of expenditure in respect of which payment has been made to the above category of persons as is considered by the AO excessive or unreasonable having regard to the fair market value of the goods, service rendered or facilities offered for which the payment was made or the legitimate needs of business of the assessee or the benefit derived by or accruing to the assessee therefrom. There is no plea by the assessee that Chip Trans, USA., is not a specified person and s. 40A(2)(a) is not applicable. Admittedly, as enumerated in the facts of the case, Mr. Harish Murthy, managing director, of the assessee-company was interested in HMA Data Systems (P) Ltd., and also in Chip Trans, USA. The assessee is a specified person as per s. 40A(2)(a) of the Act. In our opinion, the conditions laid down in s. 40A(2)(a) are squarely applicable to the facts of this case. The purchase price paid by the assessee towards purchase cost of software has directly resulted in deriving benefit to the specified person who has substantial interest in other companies. The payment for purchase of software sets was very excessive and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... XXX XXX XXX XXX XXX ------------------------------------------------------------ XXX XXX XXX XXX XXX ------------------------------------------------------------ 5,48,94,300 6,46,39,832 312* ------------------------------------------------------------ * The list is very exhaustive and hence only an extract is copied for clarity. It was also clarified in the order-sheet dt. 19th Dec., 2003 wherein the assessee has affixed its signature for the method adopted for determining the sale value and also actual cost of software set. 21. Another argument of the assessee is that the purchases were approved by the customs authorities and hence, cannot be questioned by the Department as excessive or unreasonable. This plea of the assessee has no merit since it is apparent from the. facts of the case and material placed before us that the assessee has voluntarily paid excess amount than the fair market value, and the customs authorities have not approved the value of the goods but only collected the duty leviable on them. Hence, in our considered opinion, s. 40A(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t (A + B) ...... 391,188 ----------- Thus, he considered at the cost of ATM supplied by Chip Trans at Rs. 3,26,651. He compared the cost of ATM CD supplied by Diebold Inc., at Rs. 3,91,589 with ATM CD supplied by Chip Trans at Rs. 3,26,651 and in the opinion of the CIT(A) the average cost of CD supplied by Diebold was more to the tune of Rs. 71,310. However, he sustained the addition made by the A.O. 25. After hearing he rival parties, we are of the considered opinion that the CIT(A) took the average cost of ATM CD supplied by Chip Trans at Rs. 3,26,651 as against the average cost considered by the AO at Rs. 4,53,329. The addition was made by the AO on account of payment of excess amount towards purchase of ATM CD from Chip Trans. In the findings of the CIT(A), the price paid to ATM CD purchased from Chip Trans was lower than the cost of Diebold Inc. In other words, s. 40A(2)(a)/40A(2)(b) was invoked in view of the fact that the price paid to Chip Trans was excess and unreasonable. The findings of the CIT(A) was contrary to the findings of the AO and he adopted the cost price of ATM CD supplied by Chip Trans at Rs. 3,26,651 which is lesser t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -------------------------------------------- For the assessment year under consideration, the assessee claimed the payment of sales commission of Rs. 41,64,000. The payment of commission works out to 42 per cent in the case of Silver Line Appliances (P) Ltd., and 25 per cent each in the case of Kalpita Agencies and General Glass Works Ltd. The AO disallowed this commission for the reason that there was no evidence to show that these entities have rendered any kind of service and the Bank of Punjab Ltd., was not aware of these sales agents. On appeal, the CIT(A) confirmed the order of the AO. Aggrieved, the assessee is in appeal before us on this issue. 29. The learned counsel for the assessee submitted that during the preceding year, the assessee appointed sales agents for increasing its sales and paid commission to them at piece rate on the basis of orders procured by them. The total commission that was payable to the agents on the order of 100 machines procured by them from Bank of Punjab Ltd., was Rs. 35,000,000. The main services rendered by the sales agent for which they were paid commission by the assessee are in the nature of relationship services to obtain orders and as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 02 ITR 774 (Ker) (2) Asstt. CIT vs. A.K. Menon Ors. (1995) 127 CTR (SC) 263 : (1995) 215 ITR 364 (SC) (3) A.P.L (India) (P) Ltd. vs. Dy. CIT (2005) 97 TTJ (Mumbai) 187 : (2005) 96 ITD 227 (Mumbai) The learned counsel for the assessee further submitted that the assessee has established the identity of the sales agents by producing documentary evidence which has not been rebutted by the AO and hence the assessee cannot be held to have failed to prove its case. The learned counsel for the assessee also relied on the following case law: (i) V.I.P. Industries Ltd. vs. IAC (1991) 36 ITD 70 (Bom)(TM) (ii) ITO vs. Super Chemical Distributor (2005) 1 SOT 102 (Del) (iii) IAC vs. Haryana Conductors Ltd. (1990) 50 Taxman 291 (Del)(Mag) (iv) CIT vs. Pune Pharma (P) Ltd. (2005) 193 CTR (MP) 73 : (2004) 270 ITR 382 (MP) (v) Bharat Bijlee Ltd. vs. Dy. CIT (2001) 71 TTJ (Mumbai) 909 : (1999) 71 ITD 412 (Mumbai) 30. On the other hand, the learned Departmental Representative submitted that the commission was paid to identify the customers as evident from the agreement with the agents. This commission is said to have been paid for transactions with Bank of Punjab Ltd., The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unjab Ltd., only? A.8 Yes. They introduced one customer who placed order with us. Q.9 Who negotiated the order of Bank of Punjab Ltd., and with whom? A.9 From the side of Diebold HMA (P) Ltd., it was P.P. Manjunath Rao. Mr. Sachin Handoo, Harish Murthy and Rajeev Malhotra. From the bank side it was Mr. Chander Singh. D.P. Singh and finally the director Tejbeer Singh. Q.10 When you have negotiated the deal with the banks directly, why was it that huge commission was paid to the 4 concerns referred to above? A.10 They have done liaisoning work for the company. Q.11 Who were the persons representing (a) General Glass company (b) Kalpita Agencies (c) Silverline Appliances (d) Infoset E-Com Systems Ltd. with whom the company Diebold HMA (P) Ltd. negotiated. A.11 As far as (a) General Glass Company (b) Kalpita Agencies and Silverline Appliances are concerned, right now I am not able to furnish details regarding the person/persons with whom the deal was negotiated. Q.13 How did they meet you? Where did they meet you? And what was the basis for payment of commission? A.13 I have not met them personally. As far as the basis of commission is concerned it is based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... failed to prove its case. Nature of service rendered by the agents are not at all available. We are, therefore, inclined not to accept the agreement exchanged between the assessee and the so-called selling agents as genuine. In our opinion, this arrangement was only a make believe arrangement as a devise to minimize the tax liability of the assessee firm for the primary reason that the assessee has been doing business with the Bank of Punjab Ltd., since the year 1995. We cannot accept this to be a business decision to boost the sales. When we see this arrangement in the light of the surrounding circumstances, we are driven to the conclusion that the apparent is not real. 33. After going through the entire facts and circumstances of the case and evidence gathered by the AO, we are unable to disagree with the conclusion reached by the lower authorities. Avoidance of tax liability by so arranging commercial affairs that charge of tax is reduced is not prohibited. Taxpayer may resort to divert the income before it accrues or arises to him. Effectiveness of devise depends not upon considerations of morality but on the operation of the IT Act. But in this case, the assessee has adopted ..... X X X X Extracts X X X X X X X X Extracts X X X X
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