9911796707
TMI Blog2013 (12) TMI 1539X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the AO/DRP denying the claim of the assessee for relief u/s. 10A/10AA of the Act. These grounds read as follows: "3. Relief tinder section 10A and under section 10AA of the Act 3.1 The Learned AO and the Hon'ble DRP have erred in law and on facts in placing reliance on the assessment orders of AY 2005-06 and AY 2007-08, in finalizing the assessment order for the AY 2008-09. 3.2 The learned AO and the Hon'ble DRP have erred in law and on facts in disallowing the relief claimed by the Appellant under section 10A and section 10AA of the Act amounting to Rs. 5,400,537,759 and Rs. 128,296,962. 3.3 The learned AO and the Honourable DRP have erred in law and on facts in denying the claim of relief under section 10A and section 10AA of the Act on the basis of non-maintenance of separate books and holding that the profits of the units as not being quantifiable in a correct, certain and exact manner. 3.4 The learned AO and the Hon'ble DRP have erred in law and on facts in denying the entire relief under section 10A of the Act on the basis of not having approval to operate an overseas bank account and. without prejudice, disregarding the fact that the Appellant repa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale proceeds of computer software exported out of India should be received in, or brought into, India by the Assesses in convertible foreign exchange. The said provisions read thus: '(3) This section applies to the undertaking, if the sale proceeds of articles or things or computer software exported out of India are received in, or brought into, India by the assessee in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf. Explanation 1 : For the purposes of this sub-section, the expression "competent authority" means the Reserve Bank of India or such other authority as is authorised under any law for the time being in force for regulating payments and dealings in foreign exchange. Explanation 2 : The sale proceeds referred to In this sub-section shall be deemed to have been received in India where such sale proceeds are credited to a separate account maintained for the purpose by the assesses with any bank outside India with the approval of the Reserve Bank of India.' 3.5 The above provisions show that sale proceeds have to be brought into Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever, took a stand that as per Circular AP(DIR series) No.54 dated 29.06.2002 of the RBI Exchange Control Department, grants permission to open foreign currency accounts with banks outside India, into which export proceeds can be credited through overseas bank account and amounts repatriated to India and the assessee believes that the above Circular will apply to its case and would be equivalent to the compliance of the provisions of section 10A(3) Explanation-2. The assessee also pointed out that by way of abundant caution, it had sought approval of RBI for renewal of the approval for maintaining and operating overseas bank account with HSBC Bank, New York and that the assessee's request is under active consideration with the RBI. 3.8 The AO was however of the view that in the absence of RBI's approval as contemplated u/s. 10A(3) of the Act, the claim of the assessee for deduction u/s. 10A of the Act cannot be entertained. The AO also sought certain clarification from RBI regarding Circular No.54 dated 29.06.2002. The RBI in reply submitted that the aforesaid Circular will not permit the assessee to continue the operations of USD denominated account with HSBC Bank, New Yo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aspect whether the books maintained by the assesses enabled computation of profits from the activity. According to the AO, what the Tribunal really meant was if the books of account of various units are combined with other activities, the assessee should be able to separate entries pertaining to the unit, maintain and produce records and statements separating the results. According to the AO, the assesses in the present case in the present assessment year has not been able to establish allocation of revenues and expenses unit-wise 3.12 According to the AO, books of account are always written on the basis of the primary documents like bills and vouchers in respect of incomes and expenses. When these documents are not maintained separately (unit-wise), and it is not possible to identify and track expenses or income relating to a unit of the business, and therefore the profits declared for such units is evidently incorrect. He was of the view that the fundamental accounting rule requires that the primary documents determine the type of identification of the accounting entry. In the absence of such identifiable primary documents, whatever recordings made in the accounts become unreli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or realization of export revenue (HSBC & Deutsche Bank) 8. Basis of allocation of expenses to STPI units. Further, it was also mentioned that "in auditing the accounts of the company for the purpose of claiming deduction u/s 10A, we have extensively relied on the audited Financial Statements since these provide us a high degree of reliance. We have further relied on the above mentioned documents examined by us for validating the unit-wise Profit and Loss statement on which basis the claim of Section 10A is made."' 3.15 According to the AO, the above basis of allocation by the auditors of revenue and expenses unit-wise was not reliable and there is no system that has been followed by the assessee to allocate such revenues and expenses. He held that the assessee has failed to demonstrate a proper system of tracking the expenses and revenues and allocation. The above position was with reference to AY 07-08. According to the AO, the position remained the same for the present assessment year (08-09) also. 3.16 Thereafter, the AO was of the view that the decision of ITAT in assessee's own case, wherein it was held that there is no need to maintain separate books, but the bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit in respect of each unit, (vi) No separate bank account was maintained in respect of the amounts brought into India. (vii) No separate bank accounts have been maintained in respect of export and domestic businesses. 2.5 The fundamental documents on which books are written are the primary documents like bills and vouchers in respect of incomes and expenses. When these documents are not maintained separately, there is no way for accounting entries to have an Identifiable method of tracking an expense or Income relating to a unit of business. The fundamental accounting rule require that the primary documents determine the type or identification of the accounting entry. In the absence of such identifiable primary documents of accounting, whatever recordings made in the accounts become unreliable. Therefore the observations of the DRP are: (a) The assessee is determining the profits of unit without any basis. (b) The method, if any, adopted by the assessee for determination unit-wise profit is not open for verification by any authority (c) Neither the statutory auditor nor independent auditor have verified the procedure adopted by the assessee for determination unitwi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The ld. counsel for the assessee drew our attention to the order of the Tribunal in assessee's own case for the AY. 2000-01. On an identical issue, the Tribunal in ITA No.3454/Bang/2004 by its order dated 31.10.07 considered the question, whether the books of account maintained by the assessee was sufficient to determine the profits of various STPI units. The main argument of the assessee before the Tribunal was that u/s. 10A of the Act, there was no requirement to maintain separate books of account for the various units. The Tribunal on the above submissions made on behalf of the assessee held that there was no requirement u/s. 10A of the Act to maintain separate books of account and that the assessee maintains books and records to enable computation of income of various units which are claimed as deduction u/s. 10A of the Act. 3.21 The ld. counsel for the assessee brought to our notice that section 10A as amended w.e.f 2001-02 also did not impose any requirement of maintenance of separate books. It was submitted that in section 80HHC(3), there was a specific provision that the assessee claiming deduction under the said section should maintain separate books of account. Simil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issioner of Income-tax(A) has misunderstood that the provisions were not 'undertaking' specific. The pre-amended provisions cited by the Revenue was never codified as the taw, (as it was overwritten by the subsequent amendment) (See A. N. Iyer's 'IT Laws, 2001'). Therefore, the Revenue is incorrect to cite that pre-amended provisions did not require separate books of account as there was no reference to 'undertaking', but the post-amended section does. In this connection, it is most appropriate to recall the finding of the earlier Bench in an identical issue in the assessee's own case for the immediately preceding assessment year [in ITA No.3464/Bang/2004 dated 31.10.2007], wherein the Hon'ble Bench, after analyzing various rulings of the Hon'ble highest judiciary of the land, primarily, in the cases of (i) CWT v. Kripashankar Dayashanker Worah (1971) 81 ITR 763, (ii) in Philip John Plasket Thomas v. CIT (1963) 49 ITR 97 (SC) and (iii) Smt. Tarulata Shyam v. CIT (1977) 108 ITR 345 (SC and also extensively quoting the provisions of S.10A of the Act, had observed thus - "17. The learned Commissioner of income-tax (A) ............... He noted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21] 1 KB 64 (KB) at page 71, that: "...... In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax: There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used." II. In view of the fact that the maintenance of separate books of account for STP Units is not a condition laid down in the provisions of s 10A of the Act and also in conformity with the rulings of the Hon'ble Supreme Court referred supra and the finding of the Hon'ble Bench in the assessee's own case for the immediately preceding AY cited above, we are of the considered view that the ld. CIT (A) was not justified in denying the legitimate claim of the assessee u/s 10A of the Act. it is ordered accordingly.' (Emphasis supplied) 3.23 Our attention was also drawn to the decision of the Hon'ble Karnataka High Court in the case of CIT v. Fusion Software Engg. (P.) Ltd. [2012] 18 taxmann.com 57, wherein the Hon'ble Karnataka High Court held that assessee need not be denied exemption u/s 10A merely on the ground that no separate accounts were maintaine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on for doubtful debts and doubtful loans & advances written off. These debts specifically related to non-export units and therefore were allocated to the non-export units. Similarly, diminution in value of investments did not pertain to export units and therefore were not allocated to the export units. (iii) The assessee also gave the following reconciliation:- ♦ Reconciliation of the revenue of each of the STPI unit with the bank statements. ♦ Reconciliation of the expenses pertaining to the STP units with the bank statements. ♦ Reconciliation of the revenue pertaining to the domestic unit with the bank statements. ♦ Reconciliation of the expenses pertaining to the domestic unit with the bank statements; and ♦ Reconciliation of the bank statements with the profit and loss account of IBM India. The assesses explained to the AO that ft was in the process of putting together the information in reconciliation of the revenues with bank statements and will provide the same at the earliest possible. (D) In another letter dated 09.12.2011 [copy at pages 455 of PB-1(1)], the assessees in Annexures 5 & 6 gave the details of the bank accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to determine the profits on which deduction u/s. 10A can be allowed. He drew our attention to the fact that even below the AO, the assessee had In its letter dated 20.10.2011 submitted as follows:- "In addition to what we have submitted earlier and without prejudice to the same, we also wish to submit that section 10A(3) of the Act allows an assesses to either (i) directly receive the export proceeds in India or (ii) bring the export proceeds to India after the same is received outside India. Explanation 2 to section 10A(3) further provides that export proceeds shall be deemed to be received in India (With reference to (i) above) if the same is credited to a separate bank account maintained outside India with approval from RBI. While it is our contention that export proceeds are received and credited to the overseas bank account with adequate approvals, we also wish to submit that the export proceeds are substantially repatriated/brought into India and credited to the Indian bank accounts of IBM India, at regular intervals. Therefore, we believe that the requirement in section 10A(3) of the Act is satisfied on bringing the export proceeds into India, without prejudice to our co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well laid standard operational procedure to keep appropriate check and accounting system for differentiation between various business units and therefore the show-cause notice and the proceedings against the assessee were being dropped is also sought to be filed as additional evidence. It is relevant to point out here that the show-cause notice was issued by She STPI on the complaint of AO that the assessee did not maintain separate books of account for STP and non-STP units and that the sane was a violation of the compliance as per the FTP Guidelines and conditions of LOP. All the aforesaid evidences were sought to be filed as additional evidence. 3.29 In the application for admission of additional evidence, the assesses has submitted that these documents transpired after the order of DRP. Since these documents are necessary effective disposal of ground No.3 raised by the assesses, if was prayed that the same should be admitted as additional evidence. 3.30 The ld. DR, however, brought to our notice that the aforesaid letter dated 04.01.2013 of RBI has since been withdrawn by RBI vide letter dated 08.05.2013. A copy of the same has been filed before us. The same is annexed as ANN ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd for which sufficient opportunity was not given to Company to submit before passing the order under section 143(3), read with section 144C of the Act. It is claimed that the above documents are necessary for the effective disposal of the captioned appeal as mentioned above. We may clarify that as far as Gr. No. 3 is concerned, the relevant documents sought to be filed as additional evidence is only document at Sl.Nos.1 and 2. The other documents are relevant for adjudication of Gr. No. 6. the admissibility of the other documents will be considered a little later. We will confine out decision to admission of documents at SI.Nos.1 and 2 alone in the discussion and decision on Gr.No.3. 3.34 According to the ld. counsel for the assesses, the following documents which were already filed before the lower authorities together with additional documents now sought to be filed will show that the assesses has complied with the conditions mentioned in section 10A(3) of the Act. without taking recourse to Explanation-2 to section 10A(3) of the Act: (i) Letter given to the AO, by the assesses has giving details of bank account Including HSBC account Copy of the letter given to the AO is at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the bank account maintained by the assessee outside India where sale proceeds of exports were credited, the ld. DR submitted that there was no valid approval in science at any point of time and therefore deduction u/s. 10AA was rightly rejected by the revenue authorities. 3.39 With regard to the absence of separate books of accounts for various STP units, the ld. DR submitted that the assessee has primarily placed reliance on the earlier orders of the Tribunal According to him, the earlier order of the Tribunal needs reconsideration for the following reasons:- (a) Foreign Trade (Development & Regulation) Act. 1992) ["FT Act"] was enacted and repealed the Exports & imports Control Act. Section 19 of the FT Act, empowers the Government to frame rules Section 19(3) of the FT Act casts a duty on the DG of FT to carry out foreign trade policy of the Government. Para 2,4 of the FT Policy 2004-2009 centers power on the DGFT to notify Handbook of Procedures Chapter II of the said Handbook of Procedures deals with EOUs, EHTPs, STPs and BTPs. Para 6.32 says that where an Industrial enterprise has both domestic and STP unit, it shall have two distinct identities with separate accounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... articulars Pages Nos. 1. FIRCs (both the sides) belonging to remittance from HSBC, New York and other banks that were NOT endorsed/realized as per FEMA guidelines but the company claimed the same us software export proceeds. 24-34 2. FIRCs (both sides) that were endorsed/realized belatedly after filing return of income and after completion of she assessment proceedings (obtained from AD on 18-7-2013) 35-62 3. Foreign Inward Remittance Certificates (FIRC) issued by AD 63-213 bank pertaining to AY 2008-09 obtained from AD on 18-7-2013 63-213 4. Payment advices issued by AD bank confirming the nature of 214-223 payment made to IBM GST was technical support charges for a sum of 44,122,768 USS (For 40a(ia) disallowance) 214-223 5. Inter Company Agreements (ICA) reflecting the nature of services tendered by IBM India (P) Limited as Miscellaneous Services and not any software development and export submitted on 20-3-2013 during the assessment proceedings for the AY 20O9-10 224-248 3.41 In the reasons adduced for admission of additional evidence, the revenue has submitted that the aforesaid additional evidence goes to show that seme of the services rendered for whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 08 (AY 2008-09) is unrelated to any business of the assessee, let alone the business of STP/SEZ units (details given in Annex-3 and 2 to the application for admission of additional evidence), These receipts have till date not been accounted for by any of the STPI/SEZ authorities or the RBI as export proceeds, and is Illegal money brought in India, and fraudulently certified by the auditor. It is further claimed that out of 22 FIRCs endorsed partially or wholly by softex/export invoices with total value of US $ 1147.8 million, more US $ 351.43 million or about Rs. 1405 crore (@ Rs. 40A = 1 US $) were endorsed/certified by such softax/export invoices till the date of auditor's certificate and filing of return by the assesses (Annexure-1 to the application for admission of additional evidence), and the balance amount (US $ 867.70 million - 351.43 million = 516.27 million) was verified/certified by the STP/SEZ authorities, after the auditor certifying it to be 'software export' proceeds. Thus about Rs. 2065 crore receipts in foreign exchange in the India bank account of the assessee was falsely certified by the auditor to be receipts of one or the other STP/SEZ unit without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 8 Form 26-AS For AY 2008-09 (first and last page copy) - TDS credit 8 15-16 9 Notice u/s 154 dated 26.10.2012 issued to IBM India Pvt Ltd proposing to restrict die TDS credit to Rs. 126.22,29,214/- for AY 2008-09 9 17-18 10 Modus operandi of routing money to HSBC as given by IBM India Pvt Ltd explained letter dated 28-3-2013 10 19-21 11 Unit wise billing details given by VSNL vide letter dated 15.7 2013 & 22.7.2013 11 22-53 12 Letter of VSNL dated 22.8.2013 confirming that only 3 connections to IBM India Pvt Ltd was provided outside India i.e. in Colombo (Sri Lanka) in the year 2012 12 54-109 13 Letter or DC SEZ Chennai dated 26.4.2013 with two-softex forms 13 110-122 14 IBM India reply dated 6 .9.2013 regarding data transmission/export 14 123 15 Statement of Sri. Jayant Mazumdar recorded u/s 131 on 26.9.2013 in the O/o JCIT (LTU) 15 124-135 16 Statement of Sri. T. Ravindra recorded u/s 131 on 26.9.2013 in the O/o JCIT (LTU) 16 136-146 17 Letter dated 20.09.2013 of Deutschse Bank (AD) with details of softex 17 147-161 18 Sample softex actually endorsed to FIRCS of FY 2007-08 (sample) 18 162-216 3.43 The learned counsel for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35 Reply dated 6.11.2012 identifying the FIRC's into bank account 35 239-242 36 FIRC's for system maintenance Fee, service Fee, supply of hardware and software, software consultancy etc 36 243-260 (b) PB-2 contains pages 1 to 65 comprising of following documents:- Sl. No. Description Page 1 Summary of FIRCs by Deutsche Bank 1-4 2 Correspondence between/among RBI/IBM/Deutsche Bank/AO 5-22 3 IBM Agreement For services between and among related companies 23-27 4 IBM Customer Agreement between International Business Machines Corp. &. Goldman Sachs &. Co. 28-40 5 New Paper Reports 6 Idea. IBM ink $600-800 mm IT outsourcing deal 41 7 Idea, extends IT outsourcing contract with IBM 42-44 8 IBM and India Tax Authority in $45 Million Services Agreement 45 9 Manappuram Finance, IBM reach IT services deal 46 10 IBM, Vodafone extend India outsourcing deal for up to $I bin-paper 47 11 IBM wins contract to manage multivendor environment at lease plan India 48 12 Indian IT firms eye Airtel's IBM contract 49 - 50 13 How IBM is helping Airtel? 51-52 14 Reliance Communications Increases Customer Base 53-57 15 Sof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany Agreements (ICA) reflecting the nature of services rendered by IBM India (P) Limited as Miscellaneous Services and not any software development and export submitted on 20-3-2013 during the assessment proceedings for the AY 2009-10. 224-248 (e) PD-5 containing pages 1 to 216 comprises of following documents:- Sl. No. Particulars Annx. No. Pages Nos. 1 Location of STPI/SEZ, units 1 1 2 Analysis of Form 56F-offshore/onsite for STP/SEZ units 2 2 3 Reply of IBM India to DC Cochin (Bangalore SEZ) dated 12.8.2013 pertaining to Data-com service provider, and Letter of DC Cochin (Bangalore SEZ) dated 4.9.2013 regarding data-com service provider-VSNL/Tata Comm. 3 3-5 4 Calling for information u/s 133(6) of IT Act from VSNL/TATA Communications Ltd dated 12.8.2013 & reply from VSNL/Tata Communication dated 23.8.2013 4 6-9 5 Reply of VSNL/Tata Commn. dated 16.9.2013 confirming No connections/connectivity have been provided in Bangalore STPI-2, Noida STPI and Kolkata STPJ, and Assessing Officer's letter dated 28.08.2013 5 10-11 6 Letter of AT & T (India) dated 11.9.2013 confirming that no connections/connectivity was provided outside India 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rding to him, in the absence of any application under Rule 29 of ITAT Rules, the Tribunal cannot consider its admissibility, except to the extent that the Tribunal feels that the documents are relevant for deciding the issue before the Tribunal. It was further submitted by him that the Tribunal in its order sheet entry dated 10.7.2013 recorded that the DR has no further evidence, Contrary to the same, the revenue has filed PB-5 and application for admission of additional evidence. It was his submission that revenue has filed PB-5 and application tor admission of additional evidence contrary to its undertaking before the Tribunal on 10.7.2013. 3.45 The ld. counsel tor the assesses submitted that even on merits, the additional evidence sought to be filed by Use revenue cannot be admitted. In this regard, the 14 counsel submitted that in case of an eligible assessee, the procedure for making an assessment is laid out in section 144C of the Act. The assessee is admittedly, an eligible assessee, in whose case, assessment has to be completed in the manner contemplated u/s. 144C of the Act, He drew our attention to the provisions of section 144C(6) & (7) of the Act, which contemplates po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled by the revenue, a new case is sought to be made out to the effect that the sale proceeds received by the assesses in fact does not represent sale proceeds of export of computer software. According to him, this is clearly not permissible as the AO is seeking to set up a new case and in doing so, is seeking to rely on the additional evidence. In this regard, the ld. counsel for the assesses placed reliance on the following decisions:- (a) CIT v. Babuial Nim [1963] 47 ITR 864 (MP). The facts of the case were that the AO found some deposits in the Bank A/C, of the Assesses, The source of funds for making such deposit was explained by the Assessee as from and out of past savings and some legacy left by an ancestor of the family. The explanation was not found satisfactory by the AO as well as the first appellate authority. Before Tribunal, the Assessee the assessee contended for the first time that he did not deposit cash in the bank account and that the entry evidencing deposit of money in the bank was made by the pass book just to enable the Assessee to furnish a solvency certificate for recognizing the assessee as approved contractor. The Tribunal called upon the assessee to fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it stands some inherent lacuna or defect becomes apparent, not where a discovery is made outside the Court, of fresh evidence and an application made to import It : that the true test is whether the Appellate Court is able to pronounce decision on the material before it without taking into consideration the additional evidence sought to be adduced; and that the requirement must be the requirement of the Court, in Arjan Singh v. Kartar Singh (supra), it was pointed out that the discretion given by order XLI, r. 27, CPC, to the Appellate Court to receive additional evidence is not an arbitrary one, but is a Judicial one circumscribed by the limitations given in that rule, and that if additional evidence is allowed to be adduced contrary to the principles governing the reception of such evidence, it would be a case of Improper exercise of discretion and the additional evidence so brought on record must be ignored and the case decided as if it is non-existent. Here the statement which the assesses gave before the Tribunal and the affidavit which he filed were not for the reason that the Tribunal found Itself unable to decide the appeal on the material before is, The assesses did not e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stification for the Tribunal for entertaining the new case which was put forward by the assessee for the first time before it and for directing him to file an affidavit to support it. The affidavit which the assessee filed and the material which he produced before the Tribunal constituted additional evidence which the Tribunal admitted contrary to r. 29 of the ITAT Rules, 1946. That evidence must be excluded from consideration on the authority of the decision of the Supreme Court in Arjan Sigh v. Kartar Singh (supra). On that exclusion there remains no material to support the finding of the Tribunal that a sum of Rs. 50,000 was not credited in cash by the assessee on 24th March, 1954, with Ramchandra & Sons, the bankers. It must be added that the ledger entry at page 16 of the paper-book showing an advance of Rs. 50,000 by Ramchandra & Sons, bankers to the assessee, on the basis of a promissory note does not seem to have been relied upon by the Tribunal. There is no reference to it in any order of the Tribunal and the assessee himself did not refer to it in the affidavit which he filed before the Tribunal and say that the deposit of Rs. 50,000 on 24th March, 1954, was out of this m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... additional evidence, without disclosing what is the query raised by the AO, for which the various parties had given replies. According to him, it is not possible to appreciate the veracity of additional evidence without knowing the context and content of the letter written by the AO. It was his submission that it is not known as to whether the additional evidence sought to be filed is the complete reply given by the parties to the AO or as to whether the revenue is seeking to file the letters which are in their favour alone as additional evidence. 3.48 The ld. DR, on the submissions made by the ld. counsel for the assesses on admission of additional evidence, submitted before us that by filing the additional evidence, the revenue is not seeking to improve its case in this regard, it was his submission that the finding of the AO that the assesses has not maintained separate books of accounts for each of the units separately only means that he has doubted even the receipt of export profits as arising on export of computer software. in this regard, the ld, DR relied on the findings at the DRP in para 2.4 of its order, extracted in the earlier part of this order) wherein it has doubte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts were credited allegedly for software exports by 10A units. It was also submitted that the FIRCs submitted by the assessee only show that the amounts have been transferred from the overseas account of the assessee. There is no reference to endorsements of softex invoices or forms in respect of specific units. 3.52 The other submissions made in the earlier part of his submissions were also reiterated by the ld. DR, Reference was made to Circular No.1 dated 17.1.2013 clarifying issues relating to Export of Computer Software in particular our attention was drawn to the requirement of establishing direct and intimate nexus or connection or development of software done abroad with the eligible units set up in India and such development should be pursuant to a contract between the client and the eligible unit. Reference was made to the decision of the Delhi High Court in the case of CIT v. Modi Xerox [2012] 344 ITR 435/199 Taxman 265/11 taxmann.com 129 ; ITAT decision in the can of Infrasoft Technologies Ltd. v. Dy. CIT [2012] 135 ITD 19/18 taxmann.com 86 (Delhi) wherein separate books of account were held to be a condition for allowing deduction u/s. 80-IA & 10B of the Act. Reference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of "Cost Central" accounting, it is not understandable as to how the expenses are allocated to various units. Our attention was drawn to page-400 of assessee's paper book No. 1(1) wherein the basis of allocation of expenses have been given. The learned counsel for the Assesses pointed that even in para 6.32 of the Handbook of procedure laid down by the DGFT dated 7.4.2006, the requirement is that it should be possible to distinguish the imports and exports or supplies effected by the STP/SEZ units from those made by the other units of the enterprise. According to him in the case of the assessee the above requirement is satisfied as the Assessee has distinguished between the activities of the STP units and non-STP units. in this regard our attention was drawn to page 62-64 of Paper book-2(1) filed by the Assesses. The cases relied upon by the learned DR were distinguished as not relevant to the present case. 3.54 We have given a careful consideration to the rival submissions. At the outset, we will consider the issue with regard to admission of additional evidence by the Assesses as well as the Revenue. 3.55 As far as the application for admission of additional evidence by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim to deduction u/s. 10A of the Act. We are of the view that the above documents are necessary to enable the Tribunal to pass orders on the appeal and for a substantial cause viz., consider the claim of the Assessee for deduction u/s. 10A in the proper perspective. We are also at the view that the AO/DRP have decided the case without giving sufficient opportunity to the assessee to adduce avidence on the point of allowing deduction u/s. 10A(3) of the Act de hors Expln.2 to Sec. 10A(3) of the Act. These documents are therefore admitted as additional evidence. However, these documents by themselves are not conclusive regarding bringing into India of convertible foreign exchange which represents, sale proceeds of computer software exported out of India. The documents that Deutsche Bank has referred to in its letter dated 12.07.2013 said to have been furnished by IBM (I) Pvt. Ltd. also should be furnished before the DRP pursuant to the order, which we propose to pass in the latter part of this order on ground No. 3 raised by the assessee in this appeal whereby the issue would be required to be considered by the DRP afresh as per directions to be given by us in para 3.87 of this ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ission of the additional evidence sought to be filed by the Revenue contained in paper book-4. It is seen that the AO vide his letter dated 22.08.2011 called upon the assessee to explain as to whether the sale proceeds of export of computer software were credited to a separate bank account maintained for the purpose with any bank outside India as required under section 10A(3) read with Explanation-2 to section 10A(3). The AO also called upon the assessee to furnish copy of approval by RBI for the previous year. The assessee vide letter dated 02.08.2011 submitted that the assessee had an approved bank account vide RBI's approval dated 03.10.1997 maintained with HSBC Bank, New York. In terms of the approval, the assessee was required to submit an yearly audit statement showing receipts under offsite and onsite contracts undertaken by the overseas offices, expenses and repatriation thereof either to the authorised dealer or the RBI. The approval was also valid only for a certain period. The assessee pointed out that by oversight, the required audit statements were not filed with RBI nor was any renewal sought for. The assessee, however, took a stand that as per Circular AP(DIR ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r software The focus of attention of the AO was only on (a) separate books of account for the various STP/SEZ units; (b) sale proceeds of computer software not deposited outside India in a Bank account approved for this purpose by the RBI. We have while dealing with the application for admission of additional evidence by the Assessee already permitted details of FIRCs and bifurcation of off shore and on site export revenues to be received as additional evidence vide para 3.58 of this order. The Revenue has obtained the aforesaid documents, after the filing of application for additional evidence before the Tribunal by the Assessee. The AO during the pendency of the present appellate proceedings obtained FIRCs pertaining to export realisations by the assessee for the period relevant to A.Y. 2008-09. Perusal of these FIRCs (copies of which are placed at pages 63 to 213 of the PB-II of the revenue) shows that purpose or remittance as found in some of the FIRCs does not show that remittances were on account of sale proceeds or export of computer software out of India. In this regard, the ld. DR sought to point out before us that since FIRCs were not filed by the assessee before the AO, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gr.No 6 which relates to disallowance made by the AO u/s.40(a) (i) & 40(a)(ia) of the Act. As will be seen later, the order of the AO on this issue has been set aside and remanded to the AO for fresh consideration. The revenue is given liberty to rely on these documents in the set aside proceedings pursuant to the order of the Tribunal. 3.65 As far as documents sought to be filed as additional evidence vide PB-5 in the application dated 30.09.2013 containing pages 1 to 266, Sl. Nos 1 to 18 are concerned we find that documents at Sl. Nos 1 & 2 is a compilation of information and cannot be considered as additional evidence. Documents at Sl. Nos. 3 to 6 relate to correspondence by the AO with the services provider, whose communication facilities were used by the assesses for expiring computer software electronically from India outside the country. It is the plea of the revenue that the name given in the softex form as the service provider through which computer software were exported as VSNL, but the additional evidence now sought to be filed by the revenue shows that VSNL did not give any data communication connection to the assessee for sending, communication outside India, but was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mission export. For the reasons given for rejecting the documents Sl. Nos. 11 & 12, these documents are also found to be not relevant and hence not admitted as additional evidence. 3.71 Documents at Sl.Nos. 15 & 16 of PB-5 are statement of auditors. These statements. In our view, have no bearing or relevance to the issue before the Tribune for the A.Y. 2008-09 and the same are therefore are not admitted as additional evidence. 3.72 The documents at Sl.Nos. 17 & 18 are letters written by Deutsche Bank, authorised dealer, and sample softex actually endorsed by FIRCs for the F.Y. 2007-08. As we have already stated, these documents which are sought to be relied upon by the revenue on an apprehension that there was no export of computer software by the assessee. This apprehension will be addressed in the latter part of this order when rendering decision on merits of ground No 3 raised by the assessee vide para 3,87 of this order. 3.73 Documents in PB-2 & PB-3 of the revenue to the extent that they were available when the assessment was completed by the AO and brought to the notice of the assessee or furnished by the assessee before the AO, will alone be considered. 3.74 As far as PB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arate books of account for the various STP units. In page 23 of the Tribunal's order the revenue accepted that identification of the sales turnover of the various STP units was possible. This decision of the Tribunal has been followed in the assessee's own case in A.Y 2002-03 in ITA No 1151/Bang/2009 dated 24.06.2011. 3.78 The AO in the present assessment year i.e., A.Y. 2008-09 has accepted in para 3.5 of his order that the assessee maintained its books of accounts in the same manner as in the past. He only disputes that revenue and expenses allocation is without any basis. According to the AO the earlier order of the Tribunal on the issue has not been accepted by the Revenue and appeals have been preferred against those orders and therefore the orders of the Tribunal have not attained finality. Another reason given by the AO in para 3.3 of his order is that the ratio laid down by the Tribunal is that books of account maintained by the assessee should enable computation of profits from each of the STP units, even though separate books of account are not maintained. Thereafter, the AO has proceeded to hold that the assessee has not been able to demonstrate the allocation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the various STP units have been arrived at The AO has also referred to the fact that audited financial statements of statutory auditors) was relied upon by Krishnaswamy & Co., while certifying Form 53F of the Act We have already explained the various documents filed by the assesses before the AO on the method of maintaining books of account. There is neither a discussion nor errors pointed out by the AO or the DRP on the claim of the assessee that the documents maintained by it sufficiently enable determination of profits of each of the STP units 3.83 We are, therefore, of the view that there is no requirement for maintaining separate books of account for claiming deduction u/s. 10A/10AA of the Act and the hooks of account maintained by the assessee sufficiently enable computation of the profits of various STP/SEZ units. As we have already seen in the earlier part of the discussion in this order, the AO has not disputed the fact that the sale proceeds claimed by the assesses are from expert of computer software and of the SEZ units In such circumstances, we have to proceed on the basis that the bifurcation of profits of the various STP/SE2 units as given by the assessee are co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being brought into India in convertible foreign exchange within the period stipulated in the provisions u/s 10A(3) of the Act. As rightly submitted on behalf of the assesses, deduction u/s. 10/10AA of the Act cannot be totally denied. The fact that the assessee has exported computer software out of India and brought convertible foreign exchange into the country is not disputed. The quantum has lo be arrived at on the deduction which the assessee is entitled to has to be allowed. 3.87 We are therefore of the view that it would be just and appropriate to set aside the order of the DRP and remand the issue to the DRP for fresh consideration and direct the DRP to examine the claim of the assessee on the basis of evidence that the assessee may lead to prove the receipt of sale proceeds of computer software exported out of India being brought into India in convertible foreign exchange. The DRP will be at liberty to examine as to whether the convertible foreign exchange was brought Into India and that they represent consideration received for export of computer software. The AO in the set aside proceedings before the DRP will be at liberty to rebut such claim of the assessee including th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 74,67.000/- towards provision for warranty In relation to the products sold by IBM, India. The Assessee submitted that the said provision has been made on scientific basis considering the warranty cost at earlier years. The Assessee explained that products sold by it carry warranty for specified period. For personal Computers, the warranty period was three years and for other products, the warranty period was one year During the warranty period, if any defects are noticed, necessary rectification/replacement is to be carried out by the Assessee free of cost The Assessee claimed that since, it was following mercantile system of accounting; it was required to provide for all known liabilities. According to the Assessee doing so will be in tune with accounting standards notified by the Central Board of Direct Taxes (CBDT) wherein it is mentioned that the provision is lo be made for all known liabilities and losses The Assessee claimed that the provision for liability on account of warranty claims in respect of sale of computers/other products made during the previous year to the extent relatable to the previous year was made by it and that the same was on the basis of scientif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng buck/reversing the expenditure or unutilised provision amount on the expiry of warranty period and offering the same as income for taxation" 4.4 The AO was of the view that the assesses has created the provision on a scientific basis based on empirical data, trends, projections etc. However, the second condition of writing back the unutilized provision on the expiry of warranty period has not been satisfied by the assessee. He held that the assessee has been making additional provision year after year in spite of the balance already available in the provision account He was of the view that the opening balance of the provision account as on 01-04-2007 was Rs,20,30,64,000/- and inspite of that the assessee made-additional provision for FY: 2007-08 at Rs. 27,74,67,000/-. The actual utilisation during the year was Rs. 28,25,96,000/-. The over provisioning and the fact that the assesses does not writ back the unavailed provision at the expiry of the warranty period, according to the AO, has resulted in situation where (he closing balance of warranty as on 31-03-2008 was Rs. 19,9,35,000/- He held that the assesses has fated to justify as to why it has failed to write back the unavai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing balance as on 1st March, 2008 is a balance In the provision account as of the closing date viz , 31st March, 2008 The fact that the warranty utilisations are more than the warranty provision created will support the argument that there was no excess provision of warranty that is carried in the books by IBM India. Therefore, having demonstrated that the warranty expenses are more than the warranty provision on an on going basis, the warranty disallowance made by the AO had to be deleted. Alternatively, it was pleaded that in case the disallowance of the closing balance is made then allowances should be made of the actual basis. 4.7 The DRP however was of view that the provision for warranty has to be created in a scientific manner and in conformity with the guidelines and judicial ratio as relied upon by the taxpayer as also by the AO. The DRP directed the AO to take further action as required. All the objections raised by the Assessee were disposed off with the aforesaid direction. 4.8 On directions given by the DRP, the AO passed his final assessment order in which he held "1. The assessee company has not reversed the utilised warranty provisions made in the previous years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be out of the opening balance on the fact that the current year provision pertains to current year sales and it would be utilised only in the subsequent year i.e.. after sale. In the present case the table presented above is the classic evidence that the assessee-company has not created the provision in any scientific manner 6. Further the assessee-company has not submitted any of the evidences regarding the alleged utilisation of warranty provision of Rs. 28,25,96,000/- with the details like names of the customers and the claim of the customer of the warranty during the year. 7. In none of the years the reversal of unutilized provision was offered us income. It cannot be said that all the provisions were actually utilised m subsequent year. Hence, as per the direction received from DRP, it is noticed that assessee-company's claim of provision of warranty is not a scientific method arid not in conformity with the guidelines and judicial ratios" 4.9 The AO also relied on the decision of the Hon'ble Karnataka High Court in the ease of CIT v. Micro Land Ltd. [2012] 347 ITR 613/204 Taxman 174/8 taxmann.com 80 wherein the Hon'ble Karnataka High Court dealt with the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee has raised ground No.4 before the Tribunal. 4.12 We have heard the submissions of the learned counsel for the Assessee and the learned DR. The learned counsel for the Assesses submitted that in the draft under of assessment passed by the AO dated 21.12.2011, the AO in para 53 of his order formulated two questions that require consideration before allowing the claim of the Assessee for deduction on account of 'Provision for warranty" viz., whether provision for warranty was created on the baste of past experience by applying scientific method of estimating the provision, Whether the Assessee was writing back/reversing the expenditure or unutilised provision amount on the expiry of warranty period and offering the same as income for taxation. 4.13 In para 5.4 of his draft order, the AO accepted that the Assessee has created the provision on a scientific basis based on empirical data, trends, projections etc. The AO disallowed the claim for deduction in his draft assessment order only for the reason that the second condition viz.. that the Assessee was not writing back unutilized provision for warranty The leamed counsel for the Assessee drew our attention to the chart at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave carefully considered the relevant facts and the argument advanced. The only reason to disallow the sum is that the liability is a contingent liability and not an accrued liability. We are unable to accept the contention. The liability to pay for warranty claim arises no sooner the sales are effected. The appellant has provided for liability on the basis of sales made during the year. Though the exact amount cannot be quantified, however, the sum is based on the scientific approach and based on .past experience. Various High Courts relied by learned counsel for assessee has held that the liability in respect of such warranty claims Is not a contingent liability but an accrued liability. The Tribunal, Bangalore in the case of Motor Industries Co Ltd. (ITA Nos 396 to 399/ Bang/1998, dt. 31st May, 2004) and the decision in the case of Wipro GE Medical Systems Ltd. in ITA Nos 322-328/Bang/2001, dt 8th July, 2002 (reported at (2003) 81 TTJ (Bang) 455-Ed.) has held that the liability towards warranty is inbuilt in the sale price itself and so the liability is not contingent but an ascertained one and to be allowed in the year of sales. We accordingly delete the disallowance of Rs. 4,9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if any, to such variation with,- (i) The Dispute Resolution Panel; and (ii) The Assessing Officer, (3) The Assessing Officer shall complete the assessment on the basis of the draft order, if - (a) The assessee intimates to the Assessing Officer the acceptance of the variation; or (b) No objections are received within the period specified in sub-section 12. (4) The Assessing Officer shall, notwithstanding anything contained in section 153, pass the assessment order under sub-section (3) within one month from the end of the month in which,- (5) The acceptance is received; or (b) The period of filing of objections under sub-section (2) expires (5) The Dispute Resolution Panel shall, in a case where any objections are received under sub-section (2), issue such directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment. (6) The Dispute Resolution Panel shall issue the directions referred to in sub-section (5), after considering the following, namely - (a) Draft order; (b) Objections filed by the assessee; (c) Evidence furnished by the assessee, (d) Report, if any, of the Assessing Officer, Valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tific. The DRP wanted the AO to examine whether unutilized provision for warranty existed and whether it was written back The DRP also wanted the AO to examine the alternate plea of the Assessee to allow the expenditure actually incurred on account of providing for warranty claims. The provisions of Sec, 144C (7) & (8) of the Act reads thus. "(7) The Dispute Resolution Panel may, before issuing any directions referred to in sub-section (5),- (a) make such further enquiry, as it thinks fit; or (b) cause any further enquiry to be made by any income-tax authority and report the result of the same to it. (8) The Dispute Resolution Panel may confirm, reduce or enhance the variations proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub-section (5) for further enquiry enquiry passing of the assessment order. Explanation. - For the removal of doubts, it is hereby declared that the power of the Dispute Resolution Panel to enhance the variation shall include and shall be deemed always to have included the power to 'consider any matter arising out of the assessment proceedings relating to the draft ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g a member of the sports club cannot be termed as a capital expenditures. (b) Olis elevator Co. India Ltd. v. CIT [1991] 195 ITR 682/[1992] 60 Taxman 215 (Mum.). It was held that the payments of club fees were of revenue nature. However, in his case the issue was whether club fees paid to employees are perquisites for the purpose of sec.40(a)(v). It was held as the payment is to improve assessee's business the expenses have to be allowed as an expenditure u/s 37. The issue involved is totally different Hence this decision has no application to the present situation. (c) Dy. CIT v. Jeena & Co. [2006] 206 Taxation 99 (Mum. ITAT) It was held that acquisition of life membership in the club was not a capital asset. 5.3 The AO however relied on the decision of the Hon'ble High Court of Kerala in the case of Framatone connector OEN Ltd. v. Dy. CIT [2007] 294 ITR 559/157 Taxman 116 (Ker.) wherein it was held that admission fee paid to acquire institutional membership in clubs is capital in nature. He also referred to the decision in the case of CIT v. Master Capital Services Ltd. [2004] 88 ITD 496 (Chd.) wherein club membership fee payment was held as capital expenditure. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the AO/DRP. 5.7 We have considered the rival submissions . The AO and the DRP relied on the decision of the Hon'ble Kerala High Court in the case of Framatone Connector OEN Ltd. (supra) in coming to the conclusion that the expenditutre incurred on Framatone Connector OEN Ltd. (supra) in coming to the conclusion that the expenditure incurred on acquiring capital membership is capital in nature. It is however seen that the Hon'ble jurisdictional High Court of Karnataka in the case of Infosys Technologies Ltd. (supra) and Sandur Manganese & Iron Ores Ltd. (supra) held that fee paid for obtaining corporate membership is revenue expenditure. Following the view expressed by the Hon'ble Karnataka High Court, we hold that the entrance fee for acquiring corporate club membership incurred by the Assessee has to be allowed as revenue expenditure. Thus Gr. No. 5 is allowed. 6.0 Gr. Nos. 6, 6.1 to 6.3 raised by the Assessee reads as follows: "6. Disallowance u/s 40(a)(i)40(a)(ia) of the Act. 6.1 The Hon'ble Dispute Resolution Panel (DRP) has erred in law and on facts in remanding to the AO for further enquiry, the issue of disallowance u/s 40(a) of the Act, which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee has not included the amount of Rs. 209.31,30,853 which has been claimed as deduction in the computation of income statement on the ground that the amount was disallowed in earlier years but claimed this year due to deductin of tax on the payments. The TDS statements in Form No 26Q & 27Q would be inclusive of the amount of Rs. 209,31,30,953 claimed in the computation of income. If this amount is excluded, the amount on which tax has bean deducted at source as per Form No. 26Q & 27Q would be Rs. 2035,41,12,941 (Rs. 2645,80,11,565 - Rs. 209,31,30,953). The reconciliation would be as under; Particulars Amount Amount (Rs.) Expense items on which tax deduction at source (TDS) provisions are applicable 2855,11,42,518 Expenses as per P & L account 2645,80,11,565 Deduction claimed in computation of income - expenses on which tax claimed to have been deducted as discussed above. 209,31,30,953 26Q 1657,04,33,645 27Q 587,68,0,248 2244,72,43,894 Less" Expense disallowed u/s 40(a)(i)(ia) in the computation of income (as per tax audit report) 406,52,14,832 Balance amount liable to be disallowed u/s 40(a)(ia)/40(a)(i) 203,86,83 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,092,213,664) Based on the above reconciliation, the Assesses submitted that it had deducted tax at source appropriately and there is no further amount on which TDS is not done. Accordingly, the proposed addition of Rs. 2,038,683,792 to the taxable income by AO was not correct. 6.6 The split of the aforementioned amount of Rs. 6,130,897,346 was also given and the same was as follows: Particulars Amount Rs. Expenses on which TDS is not applicable since NIL rate TDS certificate have been provided by vendors. 2,692,875,119 Reimbursements of employee expenses reimbursements on which TDS is not applicable 803,360,107 TDS provisions not applicable since the income is not liable to tax in India 2,078,312,779 Staff welfare - expenses on which TDS is not applicable 229,431,072 Other expenses where TDS provisions are not applicable 326,916,269 Total 6,130,897,346 6.7 The Assesses submitted that the aforesaid detailed reconciliation could not be furnished by it during the assessment proceedings for want of time. The Assessee sought leave of the DRP to kindly allow the revised reconciliation as additional evidence as the same is critical in arriving at the disa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directions as above " 6.10 Aggrieved by the aforesaid directions of the DRP, the Assessee has raised Gr.Nos.6.1 to 6.3 before the Tribunal. We have heard the submissions of the learned counsel for the assessee and the teamed DR. The learned counsel for the Assessee submitted before us that the Officer in-charge of compliance with the TDS provision had determined default on account of non-deduction of tax at source at a sum less than what is claimed by the AO in the order of Assessment. According to him the determination of TDS default by the Officer in-charge of TDS provisions compliance should be the basis for the AO to make disallowance u/s. 40(a)(i) & 40(a)(ia) of the Act. It was also argued that the manner in which the default u/s. 40(a)(i) & 40(a)(ia) of the Act has been arrived at by the AO is also incorrect. 6.11 We raised a query as to whether the directions of the DRP setting aside the issue to the AO can be sustained in the light of the provisions of Sec. 144C(8) of the Act. It was submitted that the issue ought to have been decided by the DRP as it had no power to set aside and remand issue to the AO for fresh consideration and the decision if any rendered on Gr.No.4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nch office was also enclosed with the said letter. The assessee specifically pointed out that in the event the taxable income is increased in assessment, the company reserves its right to claim foreign tax credit for the actual foreign taxes paid. The annexure-2 referred to in the said letter is given as ANNEXURE-V to this order. 7.3 In its submissions before the DRP in Gr No. 12 4. the assessee specifically submitted that it had discharged total foreign taxes of Rs. 24.10.73,621, but has claimed credit for foreign taxes paid of only Rs. 5,77,86,304 since the company claimed deduction u/s.10A & 10AA of the Act on its export revenues and also because the assessee was liable to pay MAT as per the provisions of Sec. 115JB of the Act The assessee also pointed out that in the event of Sec. 10A/10AA relief being not allowed the income in question would get doubly taxed and the tax credit claimed by the assessee it liable to be allowed in full. 7.4 The DRP decided the issue in para 12.4 of its order as follows. "12.4 The AO is directed to examine this as per law". 7.5 The AO while passing the final assessment order pursuant to directions of the DRP held as follows: "The assesses-co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee by letters dated 19.1.2010, 23.4.2010 and 13.7.2010 addressed to the AO enclosed additional TDS certificates in original making additional claims to credit for TDS of Rs. 23,60,66139, Rs. 64,72,893 and Rs. 3,10,34,010 respectively. The assessee pointed out that the TDS certificates were received after the filing of the return of income and therefore are being filed to enable the officer to give further credit for TDS. 8.2 In the draft assessment order passed by the AO dated 21.12.2011, he gave credit for TDS of only Rs. 179,24,25,070. While passing the final assessment order pursuant to the directions of the DRP, the AO gave credit for TDS of only Rs. 120,22,29,214 as the credit to that extent alone was reflected in the NSDL/AST. The assessee is aggrieved by the order of the AO in not giving credit for TDS as claimed by it and as evidenced by TDS certificates given to it by the person deducting tax at source. Hence, Gr Nos.8 to 8.3 by the assessee before the Tribunal. 8.3 In Court of its own motion v. CIT [2013] 352 ITR 273/214 Taxman 335/31 taxmann.com 31 (Delhi), the Hon'ble Delhi High Court took cognizance of Faulty processing of the Income Tax Returns and TD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisional booking' is applicable for DDOs, i.e., Government deductors and shall be shortly discontinued. 'Unmatched challans' relate to challans where the report by the deductor in the TDS statement are not found available in the OLTAS database (OLTAS stands for Online Tax Accounting System). The respondents will fix a time-limit within which they shall verify and correct all unmatched challans. This will necessarily require communication with the deductor and steps to rectify. The time limit fixed should take into account the due date of filing of the return and processing of the return by the Assessing Officer. An assessee as a deductee should not suffer because of fault made by deductor or inability of the Revenue to ask the deductor to rectify and correct. Once payment has been received by the Revenue, credit should be given to the assessee. Board will issue such suitable directions in this regard. (Para 42) Denying benefit of TDS to a taxpayer because of the fault of the deductor which is not attributable to the deductee, causes unwarranted harassment and inconvenience. The deductee feels cheated. The Revenue cannot be a silence spectator, wash their hand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the AO's when approached by the assessee with requisite details and particulars in the form of TDS certificate as evidence against any mismatched amount. The AO's have to verify whether or not the deductor has made payment of the TDS in the Government Account and if the payment has been made, credit of the same should be given to the assessee. 8.6 The learned counsel for the assessee prayed that the AO may be directed to carry out verification as given in the instruction referred to above and give credit for TDS without relying solely on the NSDL/AST 8.7 Our attention was also drawn by him to the provisions of Sec. 205 of the Act which provides as follows:- "Section 205: Bar against direct demand on assessee. Where tax is deductible at the source under the foregoing provisions of this Chapter the assessee shall not be called upon to pay tax himself to the extent to which tax has been deducted from that income." 8.8 Our attention was also drawn to the decision of the Hon'ble Bombay High Court in the case of Yashpal Sahni v. Asstt. CIT [2007] 293 ITR 539/165 Taxman 144 wherein the Hon'ble Bombay High Court held as follows: 'From the language of s. 205, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax has been deducted at source shall not be called to pay the said tax again. From the language of s. 205, it is clear that the bar operates as soon as it is established that the tax has been deducted at source and it is wholly irrelevant as to whether the TDS is paid to the credit of Central Government or not and whether TDS certificate in Form No. 16 has been issued or not. Also the mere fact that the employer may not issue TDS certificate to the employee does not mean that the liability of the employer ceases. The liability to pay income-tax if deducted at source is upon the employer. Even it the credit or the TDS amount is not available to the petitioner assessee for want or TDS certificate, the fact that the tax has been deducted at source from salary income of the petitioner would be sufficient to hold that as per s. 305, the Revenue cannot recover the TDS amount with interest from the petitioner once again. Accordingly, the Revenue is directed to refund to the petitioner within 8 weeks from today the amount of Rs. 17,89,587 with interest @ 6 per cent from the date of recovery till the date of payment. Though the credit of the TDS is not available to the petitioner, since the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n facts and in law in rejecting the filters and search process adopted by the appellant in the Transfer Pricing Study. Further, the AO/TPO also erred on facts and in law by conducting a fresh benchmarking analysis in respect of captive software services provided by the appellant and wrongly comparing the appellant's activities with companies operating as full-fledged entrepreneurs without considering the differences in functions performed assets employed and risk assumed by the appellant vis-a-vis comparable companies. (b) The AO/TPO erred in law in applying arbitrary filters as criterion for rejection of companies identified by the appellant in the Transfer Pricing Study such as (i) companies whose data for financial year (FY) 2007-08 as not available (ii) companies with software development service revenue less than 75% of total operating revenue (iii) companies with software development service revenue less than INR 1 crore (iv) companies with export sales leas that 25% of total revenue (v) companies with related party transactions greater than 25% of operating revenue (vi) companies with employee cost is less than 25% of total revenues (vii) companies with different finan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ued by the AO/TPO order and confirming the draft order of the AO." 9.1 The above grounds are with regard to the addition made by the AO in respect of an International transaction of software development services entered Into by the assessee with its Associated Enterprises (AE). The Assessee is a wholly owned subsidiary of IBM World Trade Corporation (IBM WTC), which in turn is a wholly owned subsidiary of International Business Machines Corporation (IBM) IBM is the corporals headquarter for the IBM Group which Includes all associated entities of IBM India (the Assessee), with whom the later has International transactions The Assessee predominantly functions as a provider of information technology (IT) products and services, inter alia undertaking export of software services and trading activities. The Assessee's primary business segments consist of export services, trading and leasing of company's products. The export services comprise of Global Business Services are) Application Management Services The trading segment offers a broad range of products from entry level, mid-range to high-end servers and main frames, presenting the best technology and practices to support e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r required, written back 82,153,997 Recovery of expenses in the nature of staff welfare, employee expenses, travelling and conveyance etc. 1,641,339,074 Sale of printer division 10,619,059 9.5 In Ground No.9 raised by the Assesses, we are concerned with determination of arm's length price (ALP) of Export of Software Services tot which the Assessee received a sum of Rs. 5618.25,87.236 front t1s Associated Enterprises (AE) As we have seen in the earlier paragraph, in the TP study the Assessee considered operating income from rendering software services to its AE at Rs. 5618,25,87,236. The Assessee did not include a sum of Rs. 164,13,39,074 which was received from the AE towards reimbursement of expenses in nature of staff welfare, employee expenses, travelling and conveyance etc. The TPO to whom the determination of the ALP was referred to try the AO under the provisions of Sec.92C of the Act was of the view that regarding reimbursement of expenses (.received) to the extent of Rs. 8,152.088.786/- no details were given in the TP report. In its letter dated 31-10-2011. the Assessee gave the break-up of these expenses as rotating to travel expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected. Companies who have diminishing revenues/persistent losses for the period under consideration were excluded Companies whose onsite income is more than 75%, of the export revenues were excluded. Companies that are functionally different from that of taxpayer . 9.9 Acceptance comparable of the taxpayer : Out of the comparable selected by the taxpayer, the following 5 comparables were found to be suitable for comparison by the TPO: Sl. No. Name of the comparable company Operating margin to cost (FY 2007-08) 1 LGS Global Ltd. 27.52 2 Mindtee Ltd. (Seg) 16.41 3 Persistent Systems Ltd. 20.31 4 Quintegra Solutions Ltd. 21.74 5 R. Systems International (seg.) 15.30 9.10 On an Analysis of comparables chosen In its TP report by the taxpayer, the following companies were not considered as comparable by the TPO:- Sl. No. Name of the comparable Remark* 1 Birla Technologies Ltd. Company has export sales equal to zero and hence, fails the filter of exports less than 25% of the sales not selected as comparable. 2 Computech International Ltd. It fails the compensation to employees 25% of total turnover filter applied by the TPO. Thus, it not consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions Ltd , 21.74 13 R Systems Internatinal (seg) 15.30 14 II S Software !lndu»j Ltd,. 7.41 15 Sasken Communciation Tech. Ltd. (seg) 7.58 16 Tata Elxsi Ltd. (seg) 18.97 17 Thirdware Solutions Ltd., 19.35 18 Wipro Ltd (seg) 28.45 19 Softsol India Ltd. 17.89 20 Lucid Software Ltd., 16.50 Average 23.65 The TPO allowed the working capital adjustment at 1 .95%, while working out the working capital adjustment The TPO applied the Prime Lending Rate (PLR) adopted by SBI for working out the working capital adjustment The Assessee had also asked for other risk adjustment while determining ALP. The TPO however did not allow any adjustment on account of risk factors. Finally, the AO computed ALP as follows: Computation of Arms Length Price:- The arithmetic mean of the PL1 from the final list of comparable chosen by TPO was taken as the Arm's length margin. Based on this, the arm's length price of the software services rendered by the taxpayer to its AE(s) was computed as under Arithmetic mean PLI 23.65% Less: Working capital adjustment (Annexure-C) 1.95% Adj; Arithmetic mean PLI 21,7% Arm's Length. Price O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed party criteria m accepting/rejecting comparables (f) The TPO grossly erred on facts to arbitrarily rejecting companies having software development revenue less than 75% of total operating revenue and applying inconsistently such filter, without considering the specific segmental results. (g) The TPO erred on facts in arbitrarily rejecting companies having export revenues less than 25% of total sale. (h) The TPO erred on facts in arbitrarily rejecting companies having onsite revenue more than 75% of the export revenue. (i) The TPO also erred on facts and in law in arbitrarily rejecting companies with different year ending (i.e other than 31 March, 2008) (j) The TPO erred on facts and in law in considering a net of secret data i.e data which was not available in public domain, in arriving at a fresh set of companies using his power under section 133(6) of the Act, which is grossly unjustified.Erroneous data is used by the TPO (k) TPO has erred in law in using data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the assessee. (l) The TPO erred in law and on facts in disregarding the appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Loigca (P.) Ltd. (supra) '12. The next aspect which was highlighted by the Id. counsel for the assessee was that out of the 26 comparables, comparables at SI.Nos. 1, 2, 3 & 12 have to be rejected as they were held to be functionally not similar to a software services provider as held by this Tribunal In the case of Trilogy E-business Software India Pvt. Ltd., IT No,1054/Bang/2011. The relevant paragraphs 39 to 50 of the aforesaid order of the Tribunal are as follows;- "(b) Avani Cincom Technologies Ltd. 39. As far as this company is concerned, the plea of the Assessee has been that this company is functionally different from the assessee. Based on the information available in the company's website, which reveals that this company has developed a software product by name "DXchange", it was submitted that this company would have revenue from software product sales apart from rendering of software services and therefore is functionally different from the assessee It was further submitted that the Mumbai Bench of the Tribunal to the decision in the case of Telcordia Technologies Pvt. Ltd, v. ACIT - ITA Ne.7821/Mum/2011 wheiein the Tribunal accepted the assessee's con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a comparable. (c) Celestial Lab Ltd. 42. As far as this company is concerned, the stand of the assessee is that It is absolutely a research & development company. In this regard, the following submissions were made:- ♦ In the Director's Report (page 20 of FB-II), it is stated that "the company has applied for Income Tax concession for in-house R&D centre expenditure at Hyderabad under section 35(2AD) of the Income tax Act. ♦ As per the Notes to Accounts Schedule 15, under "Deferred Revenue Expenditure" (page 31 of PB-II), it is mentioned that, "Expenditure incurred on research and development of new products has been treated as deferred revenue expenditure and the same has been written off In 10 years equally yearly instalments from the year in which it s incurred. ♦ An amount of Rs. 11,692,020/- has been debited to the Profit and Loss Account as Deferred Revenue Expenditure" (page 30 of PB II). This amounts to nearly 8.28 per cent of the sales of this company. It was therefore submitted that the acceptance of this company as a comparable for the reason that it is into pure software development activities and is not engaged m R & D activitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified company and therefore cannot be considered as comparable functionally with that of the Assessee. There has been a attempt made to identify and eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustment, the TPO has rendered this company as not qualifying for comparability. We therefore accept the plea of the assessee in this regard." 44. It was submitted that the learned DR in the above case vehemently argued that this company is into research in pharmaceutical products. The ITAT concluded that this company is owner of IPR, it has software for discovery of new drugs and has discovery of new drugs and has developed molecule to treat cancer. In the ultimate analysis, the ITAT did not consider this company as a comparable in clinical trial segment, for the reason that this company has diverse business. It was submitted that, however, from the above extracts it is clear that this company ia not into software development activities, accordingly, this company should be rejected as a comparable being functionally different. 45. From the material available on rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w that in the light of the submissions made by the Assessee and the fact that this company was basically/admittedly in clinical research and manufacture of bioproduction and other products, there is no clear basis on which the TPO concluded that this company was mainly in the business of providing software development services. We therefore accept the plea of the Assessee that this company ought not to have been considered as comparable. (d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenue from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual report, the salary cost debited under the software development expenditure was Q. 45,93,351. The same was less than 52% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India Private Limited v. DCIT, ITA No. ITA No. 1386/PN/10 wherein KALS as comparable was rejec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its brand value. The profit margin of this company after deducting brand related profits from the operating revenue would only be 11.88%. Out attention was drawn to page-723 of the paper book No. 3 filed by the assessee with regard to TP issue. Appendix -2.4 at pages 738 to 742 gives the basis on which the brand value has been evaluated. It was further submitted that this company owns significant intangible and in this regard our attention was drawn to the Annual Report of this company for FY 2007-08 wherein it has been mentioned that during the fiscal 2008 this company had generated over 102 inventions and filed an aggregate of 10 patents in India and US. It is also been mentioned that in all this company had filed 119 patent applications which are pending in India as well as in US. It was also pointed out by the learned counsel for the assessee that the R&D expenses on this company is significantly higher and therefore, this company should be excluded, as the assessee does not engage in itself in any R&D activity. Our attention was also drawn to the fact that onsite revenue of this company is more than 50%. It was submitted that the TPO had applied filters in choosing comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cle and company's growth cycle. In the case of Infosys, there are huge intangible assets which as per the information provided by the learned AR are valued at Rs. 69,522 crores, which comprises of brand value itself at Rs. 22,915 crores. Based on such fund valuation, the profit of Infosys is predominantly due to its premium branding. It is India's No. 2 software service exporter and Third in the World as an IT Service company. It is a giant company which is evident from its revenue fund from the sales which itself is more than Rs. 13145 crores and expenditure on advertisement/sales promotion and expenditure on R&D is at Rs. 69 crores and Rs. 167 crores respectively, whereas in the case of the assessee the revenue is only 10.7 crore with no expenditure on advertisement, sales and promotion etc., which are borne by the associated enterprises. Even from the test of 'FAR' i.e. function performed, assets employed and risk assumed, comparability analysis miserably fails in this case. The comparison of function and profile as has been reproduced in para 6(iv) above, mostly shows that the profit level indicators in relation to return of cost, return of sales and return of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable parties." 15. In view of the above, the ld. counsel for the assessee fairly admitted that comparable company at Sl.No.6 viz., Flextronics Software Systems Pvt. Ltd. should be taken as a comparable, while comparable at Sl.No 24 viz, Tata Elxsi Ltd. should be rejected as a comparable. 16. On the above submissions of the ld. counsel for the assessee, the ld. DR submitted that as far as functional comparability is concerned, it is not enough only to look at the fact that in the decisions relied upon by the ld. counsel for the assessee, also dealt with the case of software development and the assessee is also a software developer rendering software de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... logies: The reason assigned by the TPO for excluding this company as comparable was that the exports sales were less than 25%. In this regard, the learned counsel for the assessee drew our attention to pages -689 to 698 and page 317 of T.P. Paper book, which is a compilation of the annual reports of various companies filed by the assessee. Perusal of page-698 shows that total income from software services/licence fee of assessee was Rs. 24,12,30,696/-. It is also clear from the Director's report that the entire income were derived from exports. It thus, appears that the reason assigned by the TPO for rejecting this company as comparable which was for the reasons that the company has export sale of less than 25% of the total sales is on an erroneous basis. We therefore, hold that this company should be taken as a comparable as there is no other basis for rejecting this company as comparable assigned by the TPO. 2. PSI Data Systems Ltd.: Reason assigned by the TPO for rejecting this company as a comparable is that this company does not qualify all the filters applied by the TPO. In this regard, it is seen that the TPO in his show-cause notice dated 27-09-2011 has clearly mentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of such cost is the primary responsibility of the customer. The Assessee submitted that these reimbursements should be dealt with on a stand-alone basis without aggregating the same with the cost of provision of services. The assesses in this context also drew reference to the principles set forth in the organisation for Economic Cooperation and Development (OCED) Guidelines. The OCED Guidelines specifically address the treatment of pass through costs and whether a mark-up should be charged on such costs. The relevant extracts from para-2.83 of the OCED Guidelines referring to the treatment of pass through costs are as follows; "2.93 In applying a cost based transactional net margin method, fully loaded costs are often used, including all the direct and indirect costs attributable to the activity or transaction, together with an appropriate allocation in respect of the overheads of the business. The question can arise whether and to what extent it is acceptable at arm's length to treat a significant portion of the taxpayer's costs as pass through costs to which no profit element is attributed (i.e. as costs which are potentially excludable from the denominator of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue adding costs for the taxpayer and would, therefore, not be taken into account for computing net profit margin (operating profit/Total cost) of the taxpayer for applying the Transactional Net Margin Method (TNMM) Relevant extracts o the said decision was as follows: "40.......It is not in dispute that the assessee is engaged in undertaking advertising services for its customer/associate enterprise in the capacity of an agent................we have gone through the invoices and purchase order from third party vendors and find that they contain customer's name and all the terms of advertisement are finalised after taking the approval from the customers. The assessee simply acts as an intermediary between the ultimate customer and the third party vendor in order to facilitate placement of the advertisement. The payment made by the assessee to vendors in recovered from the respective customers or associate enterprises. In the event customer fails to pay any such amount to the advertisement agency, the bad debt risk is borne the third party vendor and not by the advertising agency i.e. the assessee. It is thus, clear that the assessee has not assumed any risk on account of non- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee while determining the ALP under the TNMM method. Our alternation as also drawn to the fact that the assessee has field rectification application u/s 154 of the IT Act, 1961 to the DRP pointing out that in the ground of objection No. 10 the assessee had taken a specific plea that there was no mark-up on recovery transactions and therefore, reimbursement should be excluded from the operating revenue of the assessee and the fact that the said issue was not considered by the DRP in its order. A copy of the rectification application filed by the assessee dated 15-10-2012 is attached as Annexure-VI to this order. The learned DR reiterated the stand of the TPO on this issue. 9.33 We have considered the rival submissions and are of the view that neither the TPO nor the DRP has given any specific finding on the plea put forth by the assessee. We therefore, consider it appropriate to direct the TPO to consider the submissions of the assessee which are reiterated in the application dated 15-10-2012 filed before the DRP u/s 154 of the IT Act, 1961. The TPO will afford an opportunity of being heard to the assessee before deciding the issue. The issue with regard to adjustment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see before DRP (Gr. No. 8) on the action of the TPO in not allowing adjustment on account of the above risks, the DRP has not given any consideration to the submissions made by the Assessee in this regard. The DRP has merely observed that the objections are general and remains unsubstantiated. There is no discussion regarding the claim of the Assessee and the data provided by the Assessee. Therefore the only ground that remains as the basis for not allowing this claim is that the industry to which the Assessee belongs is software whereas the adjustment allowed. In decided cases related to a car manufacturer. In our view this cannot be a valid basis not to allow adjustment, if otherwise, such risks exist in the software industry and which would have material bearing on the margins of comparable. We therefore deem it fit to direct the DRP to examine the claim of the Assessee on merits and after dealing with the arguments raised by the Assessee in the light of decided cases. 9.36 For statistical purposes ground No. 9 is treated as allowed. 10.0 Ground Nos. 10.1 to 10.4 regarding demand of taxes contrary to the draft order of assessment, charging of interest u/s 234-B and 234-D are c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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