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2015 (4) TMI 1059

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..... 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 assessee. - Decided in favour of the assessee. Disallowance U/s. 14A r.w.r 8D for expense incurred on investments made to earn exempt income for the assessment year 2009-10 - Held that:- Since the Rule 8D is applicable for the relevant assessment year, we find that the computation of disallowance made U/s.14A of the Act by the Ld. Assessing Officer to be in order and accordingly, we hereby uphold the order of the Ld. Assessing Officer.- Decided against assessee. - I.T.A.No.2306/Mds./2013 & 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 .....

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..... s commission for the goods directly purchased by the overseas clients from the manufacturers. ii) In some instance the overseas client places an order with the assessee company and pays the assessee company for the same. In turn, the assessee company procures the material from different manufacturers 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 for export. iv) The assessee company was involved in preparation of drawings as per the specification of the overseas customers and placing order with the manufacturers so that the said manufacture produces the goods as per such specifications. Thus the assessee company was only receiving the orders from its overseas customers which are passed on to other manufacturers in India. v) The copies of .....

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..... ort. 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 charges and transaction charges, which establish the fact that the assessee is not engaged in any manufacturing activity. 4.4 On appeal, the Ld. CIT (A) confirmed the order of the Ld. Assessing Officer accepting his views. The relevant portion of the order is extracted herein below for reference:- 7.1. It is seen from the facts of the case that the appellant was doing the sourcing of auto parts for its overseas clients. During the A.Y 09-10, the appellant has reported the revenue as under:- Rs. Sales 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' dir .....

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..... ituated overseas the details of the Indian manufacturers and their manufacturing schedules Some of the overseas clients place direct orders on the Indian manufacturers. For the assessee company acting as a facilitating agent, international commission and international inspection charges are paid by the overseas entities. 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 engaged in development of computer software or rendering ITES services as envisaged in Sec.10A of the Act. Therefore, the action of the A.O is justified in denying the claim of ₹ 68,86,220/- u/s.10A of the Act as the apt is found to be not engaged in the business of export of computer software or articles or things manufactured in India. As a result, this ground of appeal .....

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..... . 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 far as the source smart and inspection dashboard are concerned, these are softwares developed by the appellant, monitors the entire vendor management process. 9. It may be noted that these are the back office operations of the customers which are done by the appellant. 10. The notification of the CBDT in S.O.890(E) dated 26.09.2000 [(2000) 163 CTR (St) 25] specifies back office operations and website services as one of the information technology enabled services. 11. Sample copies of the invoices 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, internati .....

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..... rendering information technology enables services. To establish the same he has produced before us the memo of understanding made between the assessee Company and Reliance Group/IPD Group. For reference 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. corporate Presentation c. Development Maintenance of web-based sourcing cum logistics solution. The total consideration for the above services will be USD 50,000,00 The payment schedule for the above will be on a monthly basis based on the development time consumed @ USD 10 per hour with project time estimation of 5000 hrs. Invoicing will be done both on a Retainer basis, Inspection Software basis as an extent of business done that month. 2. Confidentialty exclusivity .....

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..... ing 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 work, brand developed, design data will be exclusive property of Reliance. 2.3. AA will have no claim whatsoever on the inputs outputs of the project 2.4. AA will not approach business competitors of Reliance. 3. First right of refusal AA notes with pleasure the Favored vendor status accorded by Reliance whereby, for any software project. The Reliance will consider AAA as the preferred service provider. This means Reliance will first make an offer to AA to roll-out any software related 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 corpora .....

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..... ing done through job work, the assessee would be entitled to have the benefit U/s. 80-IA of the Act. The relevant portion of the order is extracted herein below for reference:- 13. A reading of the said judgment shows that the reasoning is similar to what is considered in the decision reported in 216 ITR 566 Commissioner 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 outsourcing of various activities, we need to give a meaningful expression to assessee engaged in the manufacturing process , to hold that so long as the effective involvement of the assessee is there in the form of quality control or supply of material and dyes for the manufacture of parts of the grinders or machinery, even in the case of assembling done through job work, the .....

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..... s on this issue before us. Therefore, we confirm the order of the Ld. CIT (A) who has only followed the decision of the Hon. Apex Court which is binding on all the Judicial Authorities below. 6.1. Ground No.3 Reopening of assessment for the assessment year 2007-08. On this issue, Ld. CIT (A) has made the following observations:- In the instant case the appellant is carrying on business in one unit and the same business 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 in fact is tangible material for the Assessing Officer to hold that deduction is not available in the subsequent year i.e. assessment year 2007-08 and that therefore there is escapement of income in that year. Therefore the action of the Assessing Officer to reopen th .....

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..... laim 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 income. However as the appellant has pointed out, the only borrowings of the pat are EPC loans and hire purchase loans, and these are loans which are strictly monitored by the banks and cannot be used for any other purpose. Therefore the appellant s claim that no part of interest expenditure relates to the exempt income is acceptable. The Assessing Officer is directed to delete the disallowance made on this account after verification of the facts stated on behalf of the appellant. To this extent the 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. .....

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