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2015 (4) TMI 1059 - ITAT CHENNAI

2015 (4) TMI 1059 - ITAT CHENNAI - TMI - Denying deduction under section-10A - Held that:- The assessee is engaged in manufacturing activity/assembling the products, for exports, and also rendering Information Technology Enabled services which entitles the assessee to claim deduction U/s.10A of the Act. - Decided in favour of the assessee.

Levy of interest U/s. 234B is mandatory see CIT Vs. Anjum M.H. Ghaswala [2001 (10) TMI 4 - SUPREME Court]

Reopening of assessment - Held .....

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.03.2008, however the relevant assessment year before us is 2007-08, therefore Rule 8D will not be applicable to the case of the assessee. In this situation, this Bench of the Tribunal has been taking a consistent view that 2% of the exempt income should be disallowed as expense incurred for earning exempt income while invoking the provisions of section 14A of the Act. Accordingly, we hereby direct the Ld. Assessing Officer to restrict the disallowance to 2% of the exempt income earned by the as .....

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3 & 505,506 & 1354/Mds. /2014 - Dated:- 30-4-2015 - SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER AND SHRI V. DURGA RAO, JUDICIAL MEMBER Appellant by : Mr.T.Banusekar, C.A Respondent by : Mr.A.V.Sreekanth, JCIT D.R ORDER PER A.MOHAN ALANKAMONY , ACCOUNTANT MEMBER: These four appeals are filed by the Assessee, aggrieved by the separate orders of the Learned Commissioner of Income Tax(A)-I, Chennai dated 20.11.2013 in ITA No.251/2013-14 passed u/s.143(3) for assessment year 2006-07, dated 31.12.2013 .....

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y the order of the Ld. CIT (A), who had upheld the order of the Ld. Assessing Officer (i) in denying relief under section 10A of the Act for the assessment years 2006-07 to 2009-10. (ii) Levy of interest U/s. 234B of the Act for the assessment years 2006-07 to 2009-10. (iii) Re-opening U/s. 147 of the Act for the assessment year 2007-08. iv) Disallowance u/s.14A of the Act read with Rule 8D of the Act for expense incurred on earning exempt income viz., dividend income for the assessment year 200 .....

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21.09.2010. All the cases were taken up for scrutiny barring assessment year 2007-08 which was reopened by issuance of notice U/s. 148 of the Act. 4.1 Ground No.1 - Denying deduction under section-10A of the Act During the course of assessment proceedings, it was observed by the Ld. Assessing Officer that the assessee had claimed deduction U/s. 10A of the Act for having engaged in the business of export of computer software and articles or things manufactured in India. The Ld. Assessing Officer .....

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nufacturers in India and exports them. In this case, the assessee receives money in foreign exchange for the entire value of sales. iii) The assessee company was only in possession of machineries such as 1.5 ton LG split AC, Hydraulic manual stacker, inspection equipments, packing fed machine, strapping machine, weighting machine whose total value is not exceeding ₹ 2 lakhs and therefore, it is highly improbable for the assessee company to have manufactured goods worth ₹ 12.5 crores .....

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ssion , international inspection charges , and Transaction charges . 4.2 Based on the above observations, the Ld. Assessing Officer queried as to how the assessee would be entitled for deduction U/s. 10A because it appeared that the assessee was not engaged in manufacturing activity or software development activity, to be eligible for deduction U/s. 10A of the Act. The assessee in response made the following submissions before the Ld. Assessing Officer:- The assessee company was registered with .....

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plier liaison, and revenue from International auto-fair. It was therefore submitted that the assessee was eligible for claim U/s. 10A of the Act. 4.3 However, the Ld. Assessing Officer denied the benefit of deduction U/s. 10A of the Act to the assessee by holding that the assessee is not engaged in any manufacturing activity because of the following reasons:- (i) The assessee company only acted as intermediary between the overseas customers and the Indian manufacturer to source autoparts from In .....

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his information, the clients of the assessee company either placed orders directly with the manufacturers or through the assessee against which the assessee earns income. iii) After getting the goods manufactured, the assessee assembled the products and packs them for export. iv) The assessee does not have any infrastructure such as Plant & Machinery to manufacture the goods in India. v) The bills raised by the assessee also showed that it has received only sales commission, inspection charg .....

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12,06,74,577 Transaction charges 50,30,229 Software consultancy 36,34,439 Miscellaneous income 8,95,336 The appellant, through its expertise in automobile engineering, sources from India various auto components for its overseas clients. The overseas clients buy such components' directly from the manufacturers after obtaining the technical specifications from the appellant or place the order with the appellant for it to purchase from the ultimate manufacturer and export to them. From the abo .....

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orted outside India. This process cannot be said to be a manufacturing process and therefore the appellant was asked to explain why deduction u/s l0A should not be disallowed in its case. The appellant stated that an undertaking would be said to be engaged in manufacturing activity, if it is doing part of the manufacturing activity by itself and for the rest of it, engages the services of somebody else. 7.2. The appellant's submissions are not accepted that the entire manufacturing activity .....

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the benefit of deduction u/s l0A. The appellant has disclosed transaction charges of ₹ 50,30,229/- and receipts from software consultancy of ₹ 36,34,439/-. The AO examined the invoices raised in this regard. On examination, AD found that these invoices showed billing under the head 'International sales commission', 'International inspection charges' and 'transaction charges'. As has been explained above, the assessee has got the expertise in sourcing auto part .....

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es. Such commission cannot be said to have been derived from rendering services in ITES field or through development of computer software. The services rendered are basically sourcing of auto parts. In rendering such services, the assessee company utilizes Internet based tools in interacting with its overseas customers. It only facilitates locating a manufacturer, inspects the parts manufactured and gets a commission for the same. 7.4. In view of the above, the appellant cannot be said to be eng .....

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as engaged in manufacturing activity and software development which entitles it to claim the benefit U/s.10A of the Act:- Manufacturer 2. The appellant is in the business of manufacturing auto parts/components for its overseas clients. 3. The manufacturing process of the appellant involves the procurement of orders from the customers, preparation of technical drawings as per the specifications of the customers, outsourcing to suppliers, supervision at the suppliers premises, inspection, assembli .....

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that the appellant is a manufacturer and is entitled to claim deduction u/s.10A. 5. For this proposition reliance is placed on the decisions of the Hon'ble Madras High Court in CIT v Elgi Ultra Industries Ltd [2012] 82 CCH 162 (Madras) and Hon'ble Bombay High Court in CIT v Penwalt India Ltd [1992]196 ITR 813 (Born) where it has been held that the fact that the assessee himself is not personally engaged in he manufacture would not disentitle the assessee from claiming the relief as one e .....

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logy enabled services and uses the following tools to carry out the said services. Copy of two agreements filed before the Hon'ble Bench during the course of the hearing. (i) Customer ERP (ii) Source Smart (iii) Inspection Dashboard 8. With these tools the appellant is given access to the ERP of the customer to the extent of the purchase function i.e. when the customers stock reaches the reorder level, it triggers the action at the appellant's end for initiating the purchase order. As fa .....

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raised in the names of Waterman Industries lnc and Reliance Parts Corporation for the assessment year 2007-08 along with ledger copies were submitted during the course of hearing to show that the appellant has rendered IT enabled services to its customers. 12.ln this connection it is further submitted that the payments received for rendering the IT enabled services were grouped under International inspection a/c, international sale commission a/c, international retainership a/c etc. Though they .....

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lant is in the business of rendering IT enabled services and if the Hon'ble Tribunal is satisfied that the appellant is in fact is engaged in rendering IT enabled services then the Hon'ble Tribunal may be pleased to set aside the matter to the Assessing Officer only for the limited purpose of quantifying the amount of income earned from rendering the IT enabled services .eligible for claiming deduction u/s.10A. 15. The appellant is engaged in development of computer software like making .....

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al is satisfied that the appellant is in fact is engaged in development of computer software then the Hon'ble Tribunal may be pleased to set aside the matter to the Assessing Officer only for the limited purpose of quantifying the amount of income earned from development of computer software eligible for claiming deduction u/s.10A. 4.6 Ld. D.R reiterated the reasons cited in the orders of the Revenue to justify the stand of the Revenue that the assessee was neither engaged in manufacturing a .....

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eference we herein below extract the same:- i) Memorandum of understanding with IPD Group This Covenant entered into between Autopartsasia Private Limited, India (herein referred to as AA) and Industrial Parts Depot In the case of. Torrance, USA (hereinafter referred to as IPD), this August, 2005 provides the following. 1.Project & consideration IPD is pleased to mandate AA to roll-out the Software Services mentioned below: a. Creation & Maintenance of their web site and web catalog. b. .....

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es to maintain complete confidentiality regarding all projects for which IPD mandates it. All efforts will be taken to maintain utmost confidentiality to protect the interest of IPD or any company of that group regarding all software projects for whose execution IPD or any company of that group mandates AA. • The codes developed for this project will be the property of IPD. • The art work, brand developed, design & data will be exclusive property of IPD. • AA will have no clai .....

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- Sd/- Mr.K.Vaidyanathan Mr.richard grishabar CEO ii) Memorandum of understanding with Reliance Group This Covenant entered into between Autopartsasia Private Limited, India (herein referred to as AA) and Reliance Parts Corporation, USA (thereinafter referred to as reliance), this March, 2005 provides the following. 1.Project Mandate details: reliance us pleased to Mandate AA to perform the following software development and services on a regular basis: 1.1. Creation & Maintenance of their w .....

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r the manpower allotted for this purpose. 2. Confidentialty & exclusivity AA promises to maintain complete confidentiality regarding all projects for which reliance mandates it. All efforts will be taken to maintain utmost confidentiality to protect the interest of Reliance or any company of that group regarding all software projects for whose execution Reliance or any company of that group mandate AA. 2.1. The codes developed for this project will be the property of Reliance. 2.2. The art w .....

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d service before making an offer to any other software service provider. From the above it is evident that the assessee s nature of activity is to:- i) Create and maintain web site. ii) Create ERP Software to perform purchase functions. iii) Produce software related to sales oriented development and corporate presentation on need basis. iv) The code developed for the project was passed on to the clients of the assessee. v) Design and data was also passed on to the client of the assessee. 4.8 Thi .....

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he ERP to its clients for their purchases as follows:- For initiating purchase: When the stock at the customers location reaches the pre-determined reorder level, it triggers the action at the assessee s end for initiating a Purchase order. Based on this requirement, the assessee generates a Purchase order through the customer ERP. This Purchase Order (PO) on the vendor and the subsequent activities take place. In the event that the customer needs stock over and above the reorder level, the leve .....

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e assessee was not developing software programmes, it is apparent that the assessee has been engaged in services at least in the nature of back office operations. Web site services rendered by the assessee can also not be denied. Further, the assessee has been procuring orders for its customers by extending technical drawings and specifications to the manufacturers and outsourcing from them by supervising the supplies, inspecting the products, and also assembling & packaging the products bef .....

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sioner of Wealth Tax V. Ramalingam. Thus, the sum and substance fo the law declared by this Court is that the fact that the assessee himself is not personally engaged in the manufacture, would not disentitle the assessee from claiming the relief as one engaged in manufacturing activity, for, so long as the assessee exercises control in the work entrusted to job workers, the assessee would be entitled to the relief U/s. 80IA of the Act. Being a deduction provision, taking note of the present day .....

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essee, the following facts are also revealed. Sl. No. Invoice No. Date Name of party Particulars 1 021-06 Nuline 30.06.2006 Nu-Line Heavy duty Development of Nuline Website & Nuline Web and cd catalog 2 004-WM-06 30.04.2006 Waterman Industries Inc. Engineering services & Business development online support April 2006. 3 091-06 Reliance 31.01.2007 Reliance Parts Corporation Web based sourcing cum logistics solutions for January 2007 4 055-Waterman 20.12.2005 Waterman Industries Inc. Softw .....

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echnology Enabled services which entitles the assessee to claim deduction U/s.10A of the Act. Thus this ground is answered in favour of the assessee for all the assessment years in appeal before us. 5.1. Ground No.2 - Levy of interest U/s. 234B of the Act On levy of interest U/s.234B of the Act, the Ld. CIT (A) upheld the order of the Ld. Assessing Officer relying on the decision of the Hon ble Apex Court in the case of CIT Vs. Anjum M.H. Ghaswala in 252 ITR 1 wherein it was held that interest U .....

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ess and unit continuously exist in the assessment year 2006-07 as well as the year under appeal. The deduction claimed is in respect of the same unit and both years are part of the 10-year tax holiday period. Therefore what applied in one year will equally apply in the other year. In scrutiny proceedings for assessment year 2006-07 if, based on some material or basis, it has been concluded that the appellant is not eligible for deduction U/s. 10A then it would apply to subsequent year also. This .....

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e, is therefore upheld and the grounds taken in this regard are dismissed. Considering the facts and circumstances of the case, we do not find it necessary to interfere with the order of the Ld. CIT (A) because the return was only processed U/s. 143(1) of the Act and within a period of four years the assessment was reopened based on the information gathered while making assessment in the case of the assessee for the earlier period viz. A.Y. 2006-08. Accordingly this ground raised by the assessee .....

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he view that though the assessee had claimed that the borrowed funds were not utilized for making investment, the same cannot be clearly established because funds were utilized from the common kitty of the company. Thereafter, the Ld. Assessing Officer invoked the Section 14A read with Rule 8D relying in the decisions of ITAT Special Bench, Mumbai vide its order dated 20.10.2008 in CIT Vs. Daga Capital Management Pvt Ltd (ITA No.1372/Del./2005), Maxopp Investments Ltd. Vs. ACIT (ITA No.183/Del./ .....

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pellant s submissions in this regard. The provisions under Rule 8D are applicable from A.Y. 2008-09. The Assessing Officer has considered the appellant s claim that no expenditure were incurred in relation to the exempt income and has rejected the said claim on the ground that pat has incurred expenses on managerial remuneration. To this extent the stand of the Assessing Officer is justified. The Assessing Officer has also computed a portion of the interest expenses as relating to the exempt inc .....

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e grounds of appeal are considered allowed for statistical purposes. The disallowance U/s. 14A may therefore be restricted o one half percentage fo the average investments and the disallowance made out of interest expenditure is directed to be deleted after verification as directed above. These grounds of appeal, therefore, are partly allowed. 7.2. Before us, the Ld. A.R. made the following written submissions:- 18. The A.O. has disallowed a sum of ₹ 2,34,025/- U/s.14A. The Ld. CIT (A) has .....

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