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Deputy Commissioner of Income tax, Range-2 Versus E-Soft Technologies Ltd.

2017 (12) TMI 343 - ITAT LUCKNOW

Deduction u/s. 10A - export sales - non-receipt in convertible foreign exchange - Held that:- Provisions provided in the manual of Reserve Bank of India which clearly specify the manner of receipt in foreign exchange as well as the meaning of foreign exchange. Now on going through the provisions of section 10A(3) and Explanation thereto, Explanation-2 to section 10A and the information provided in the manual of Reserve Bank of India all together, we are of the opinion that the assessee in order .....

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10A(3) then also it cannot be accepted as there is no proper approval of Reserve Bank of India for capitalization of outstanding export sale proceeds. - In view of our detailed discussion above, are of the view that assessee is not eligible to claim deduction u/s. 10A on the export sales of ₹ 74,60,891/- as they have not been received in convertible foreign exchange as per the provisions of section 10A(3). Therefore, we set aside the order of CIT(A) and confirm the disallowance made by .....

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ct, 1961 (hereinafter referred to Act ) framed on 11/03/2014 by Dy.CIT, Range-2, Lucknow. 2. Briefly stated, the facts as culled out from the record are that the assessee is a limited company engaged in software development and consultancy. E-return was filed on 27/09/2011 showing income of ₹ 17,93,556/- after claiming deduction u/s. 10A at ₹ 1,68,30,581/-. The case was selected for scrutiny and notice u/s. 143(2) dated 07/09/2012 followed by 142(1) was issued along with the question .....

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rn namely Workflex Solutions LLC thereby not fulfilling the requirements of the provisions of section 10A(3) of the Act. Accordingly, deduction claimed u/s. 10A at ₹ 1,68,30,581/- was disallowed and income assessed at ₹ 1,86,24,130/-. 3. Aggrieved the assessee went in appeal before CIT (A) and succeeded as CIT (A) held that the assessee has complied all the conditions of claiming exemption u/s. 10A and CIT (A) also referred to the issue relating to non receipt of export sale consider .....

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e assessee is not raising any new issue but is just in support of the order of CIT(A). 5. We will first take up the Revenue s appeal raising following grounds: 1. Whether under the facts and circumstances of the case, the CIT (A) erred on facts and law in allowing the claim of exemption u/s. 10A of the IT Act by holding that during the year, the assessee satisfied the conditions as specified u/s. 10A(3) of the Act read with Explanation 2 of the section without appreciating that unlike earlier as .....

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doing so arises with the prior permission of the Hon ble Bench. 6. Learned Departmental Representative supported the findings of Assessing Officer and submitted that the assessee has not brought on the sale proceeds of ₹ 74,60,891/- in convertible foreign exchange and this fact has been confirmed in the auditor s report in Form 66F. The plea of the assessee before the lower authorities that the due amount from Workflex Solutions LLC has been converted into equity shares and has been appro .....

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ht to India within a period of 6 months from the end of the previous year. It appears that the Ld. A.O. has assumed that a sum of ₹ 74,60,891/- in convertible foreign exchange did not brought into India and therefore according to him the assessee has failed to fulfil the requirement of section 10A(3) of the Income tax Act, 1961. As a matter of fact the comment of the auditors suggests that requirement u/s. 10A(3) of the Act were duly compiled with. A reading of the report of the auditors i .....

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s report is explanatory and clarificatory as per the requirement of law, the Ld. A.O. committed mistake in taking adverse view by observing that the assessee has failed to fulfil the requirement of section 10A(3) of the Act. The amount of ₹ 6,67,229/- written off as bad debts and ₹ 67,93,662/- were converted into equity shares of Workflex Solutions LLC (USA) against the balance amount lying in the books as on 31.03.2011 of the appellant s books. Thus it cannot be said that applicati .....

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g documents along with producing books of account before the lower authorities: - Ledger copy of Workflex Solution LLC - Membership interest subscription agreement - ING Bank ODI Acknowledgement copy - ODI application form - Reserve Bank of India ODI approval letter - Share certificate issued by Workflex Solutions LLC 7.1 As per grounds of appeal by the Revenue the Ld. CIT (A) erred in holding that conditions specified under section 10A(3) of Income-tax Act, 1961 read with explanation 2 in relat .....

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e to books maintained as well as the Joint Venture Agreement with Workflex Solutions LLC USA (Foreign Entity). As the share certificate was issued by Workflex Solutions LLC on 31.12.2011, the auditor made the remark treating the date of share certificate as the date of capitalization of the amount receivable against export by allotment of equity shares as per certificate by the Foreign Entity. 7.3 It is submitted that vide RBI notification dated 07.04.2004 it is clearly stated that no separate p .....

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ircular is as under: Capitalization of Exports In terms of Regulation 11(1) of Notification No. FEMA120/RB- 2004 dated July 07, 2004 [Foreign Exchange Management Transfer or Issue of any Foreign Security Regulations,2004] as amended from time to time, an Indian Party making direct investment outside India in accordance with Regulations, by way of capitalization, in full or part of the amount due to the Indian Party from the foreign entity on account of payment for export of plant, machinery, equ .....

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assessee also submitted that during the course of proceedings the Hon ble Tribunal wanted to know as to how the capitalization of the amount due as payment for export of software to the Foreign Entity can be treated as compliance to Section 10A(3) of the Income-tax Act. According to Section 10A(3) it shall be treated as complied if the sale proceeds of computer software exported out of India are received in or brought into India by the assessee in convertible Foreign Exchange with in a period of .....

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being treated by Reserve bank of India as convertible Foreign Exchange for the purposes of the Foreign Exchange Management Act, 1999 and any Rules made thereunder for the time being in force. Learned counsel for the assessee submitted that a reading of the above explanation makes it clear that the expression competent authority means the Reserve Bank of India regulating payments and dealing in Foreign Exchange. As per the statement of objects of FEMA effective from 01.06.2000 the object is to c .....

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ith the sole responsibility of FERA and Reserve Bank of India is also Sole guardian and only custodian of Foreign Exchange of India. In the case of Sudhir Shanti Lal Mehta v. CBI [2009] 96 SCL 403 (SC) it was held by the Apex Court that directions issued by RBI have Statutory Force and can be termed as law in force. Vide Notification No. FEMA120/RB-2004 (copy enclosed) the RBI made regulations relating to transfer or issue of any foreign security by a person resident in India. The relevant regul .....

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he supply of technical know-how, consultancy, managerial or other services Provided that where the export proceeds have remained unrealized beyond a period of six months from the date of export, and fees, royalties, commissions or other entitlements of the Indian party have remained unrealised from the date on which such payment is due, such proceeds shall not be capitalised without the prior permission of the Reserve Bank. (2) An Indian Software exporter may receive in the form of shares upto 2 .....

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uity participation in the JV/WOS abroad , and also quoting Identification Number, if already allotted by Reserve Bank. (2) Notwithstanding anything contained in Regulation 11 of the Foreign Exchange Management (Export of Goods and Services) Regulations, 2000, the Indian Party shall, within 15 days of effecting the shipment of the goods, submit to the Reserve Bank a custom certified copy of the invoice through the branch of an authorised dealer designated by it (3) An Indian Party capitalising ex .....

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are was exported by assessee company which is a 100% EOU Unit and the export proceeds have been capitalised as per Form ODI dated 24.07.2012 and the same was submitted to RBI by ING Vyasa Bank in connection with acquisition of the JV under automatic route for oversees direct investment in terms of Notification issued by RBI from time to time. Under the automatic route an Indian Party does not require any prior approval from RBI for making direct investment in a JV abroad. The Indian Party should .....

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D Bank and/or the Indian Party. As per guidelines of RBI for capitalisation of exports dues are one of the sources of funds for oversees direct investment. In view of above noted facts and procedure laid down by RBI through FEMA it is evident that the assessee company had complied with the necessary requirements of RBI which is the authority under FEMA as stated u/s. 10A of Income-tax Act under which such deduction is claimed. The appeal filed by the Department may kindly be dismissed and the cl .....

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n u/s. 10A of the Act. This fact is not disputed by any of the party. The sole issue which is there before us for adjudication is about the sum of ₹ 74,60,891/- comprising of sale proceeds of ₹ 67,93,662/- which was not received in convertible foreign exchange and the payment of ₹ 6,67,229/- which has been written of as bad debt. This sum of ₹ 74,60,891/- was due to be received from Workflex Solutions LLC. Learned counsel for the assessee is also accepting the fact that n .....

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ny/LLC which if have been done as per the guidelines provided by Reserve Bank of India then the amount of such sum be capitalized as overseas direct investment is to be considered as to have fulfilled the condition of section 10A(3) of the Act relating to receipt of sale consideration in convertible foreign exchange. Learned counsel for the assessee has also referred to the ledger copy of Workflex Solutions LLC, interest subscription agreement, letter of authorized dealer i.e. ING Bank for recei .....

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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. Further in Explanation-2 to section 10A in its sub clause (ii) reference is convertible foreign exchange which means a foreign exchange which is for the time being treated by the Reser .....

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e been received in convertible foreign exchange within a period of six months from the end of the financial year. Further Explanation-2 specifies that if the assessee is unable to receive the sale proceeds within the time limit provided but gets the approval from Reserve Bank of India allowing the assessee to receive money in any separate bank account maintained by the assessee with any bank outside India then it shall be deemed to have been received in India in convertible foreign exchange. The .....

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ed by Reserve Bank of India on 31-8-2012. This document is not a certificate for the approval of the overseas direct investment made by the assessee in the equity shares of Workflex Solutions LLC against the amount outstanding to be received rather it is merely an intimation of allotment of UIN (Unique Identification Number) to the particular transaction which has been intimated to the Reserve Bank of India on 24/08/2012 by its authorized dealer the banker of the assessee i.e. ING Bank. The norm .....

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hese details and other requirements as required to be fulfilled for the overseas direct investment are to be provided to the banker and these are further forwarded to the Reserve Bank of India. After necessary verification of records, an approval letter is granted certifying the investment in equity shares outside India. 8.2 Learned counsel for the assessee has repeatedly argued that the overseas direct investment in the form of equity shares was from the Reserve Bank of India and it has to be d .....

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refers to convertible foreign exchange means the foreign exchange for the time being treated by Reserve Bank of India as convertible foreign exchange. As per the Rules and Regulation of Reserve Bank of India, convertible foreign exchange means the permitted foreign currency. The expression permitted currency is referred in Reserve Bank of India manual as foreign currency which is further convertible i.e. currency which is permitted by the rules and regulations of the country concerned to be conv .....

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observe from going through Notification No. FEMA 14(R)/2016-4B dated May 02, 2016 relating to manner of receipt and payment throw light in the manner of receipt in foreign exchange, which we will like to reproduce below. RESERVE BANK OF INDIA FOREIGN EXCHANGE DEPARTMENT CENTRAL OFFICE MUMBAI 400 001 Notification No. FEMA 14(R)/2016-RB May 02, 2016 Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2016 In exercise of the powers conferred by Section 47 of the Foreign Exchan .....

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nd Bhutan, the Reserve Bank of India makes the following Regulations in respect of Manner of Receipt and Payment, namely 1. Short title and commencement : (i) These Regulations may be called the Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2016. (ii) They shall come into effect from the date of their publication in the Official Gazette. 2. Definitions: In these Regulations, unless the context requires otherwise, - (i) Act means the Foreign Exchange Management Act, 199 .....

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defined in these Regulations shall have the same meaning respectively assigned to them in the Act. 3. Manner of Receipt in Foreign Exchange: - (1) Every receipt in foreign exchange by an authorized dealer, whether by way of remittance from a foreign country or by way of reimbursement from his branch or correspondent outside India against payment for export from India, or against any other payment, shall be as mentioned below: (A) Members of the Asian Clearing Union (i) Bangladesh, Myanmar, Paki .....

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in any freely convertible currency in all other cases. (c) In respect of exports from India to Myanmar, payment may be received in any freely convertible currency or through ACU mechanism from Myanmar. (ii) Nepal and Bhutan - (a) Receipt may be in Rupees (b) Receipts for export of goods to Nepal may be made in free foreign exchange, provided the importer resident in Nepal has been permitted by the Nepal Rashtra Bank to make payment in free foreign exchange. However such receipts shall not be ro .....

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(i) Receipt in rupees from the account of a bank situated in any country other than a member country of the Asian Clearing Union. (ii) Receipt in any freely convertible currency. (2) (a) In respect of an export from India, receipt shall be made in a currency appropriate to the place of final destination as mentioned in the declaration form irrespective of the country of residence of the buyer. (b) Any other mode of receipt of export proceeds for an export from India in accordance with the direc .....

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order, foreign currency notes/travelers cheque from a buyer during his visit to India, provided the foreign currency so received is surrendered within the specified period to the authorized dealer of which the exporter is a customer; (ii) by debit to FCNR/NRE account maintained by the buyer with an Authorised Dealer or an Authorised Bank in India; (iii) in rupees from the credit card servicing bank in India against the charge slip signed by the buyer where such payment is made by the buyer thro .....

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ement entered into by the Exim Bank with a financial institution in a foreign state; (vi) in the form of precious metals i.e. gold/silver/platinum equivalent to value of jewellery exported by Gem & Jewellery units in Special Economic Zones and Export Oriented Units on the condition that the sale contract provides for the same and the value is declared in the relevant EDF. (2) In addition to 4(1)(i)&(iii) above, any person resident in India may also receive any payment for other than expo .....

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