TMI Blog2019 (4) TMI 1770X X X X Extracts X X X X X X X X Extracts X X X X ..... it would be just and appropriate to remand for fresh consideration by the AO/TPO of the nature of services rendered by the Assessee in this segment. This will depend upon the terms of the Agreement between the Assessee and AE for rendering services which are in dispute. TPO will decide on the character of services rendered by the Assessee whether it is R D or SWD, after affording opportunity of being heard to the Assessee and after considering all relevant factors. Disregarding the correct business loss incremental claimed in the revised computation - reasons for filing revised computation of income was that during the time of assessment, the Assessee noticed that some adjustments in the segmental tax computation was not mirroring the segmental P LA/C. Also, certain allocation of expenses was not made in the correct units - main reason assigned by the AO for not accepting the revised computation of total income is on the basis that a revised return of income was not filed within the time limit permitted u/s.139(5) - HELD THAT:- Hon ble Delhi High Court in the case of Jai parabolic Springs [ 2008 (4) TMI 3 - DELHI HIGH COURT] has held that the appellate authorities under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to 1.4.2008 - non-inclusion of ₹ 62,97,848 which was sales which were treated as prior period (AY 2008-09 sales) by the AO on the basis of the dates of sales invoice that were was prior to 1.4.2008 substantiates the case of the Assessee for inclusion of the aforesaid sum as part of the turnover for AY 2009-10 Non-inclusion of sales as turnover of AY 2009-10 - claim of the Assessee is that it had issued credit notes to the customers for recognizing sales for the relevant AY 2009-10 but the evidence to substantiate the same is not discernible from the material filed before us. So also the fourth component of dispute of turnover viz., a sum of ₹ 4,23,06,045 which is stated to be owing to wrong punching of amounts due to non-inclusion of certain sales not required to be reported in APR. We therefore remand the issue to the AO for consideration de novo with liberty to the Assessee to substantiate its case with necessary evidence. Non-realization of Export proceeds in convertible foreign currency in India within the time limit specified in Sec.10A(3) - Submission of the Assessee that since the export proceeds bought into India after said period of 12 months are v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has four units viz., IDF1 unit, IDF 2 unit, MAG Unit and SWD services unit. IDF1/EHTP2 unit (hereinafter referred to as IDF 1 Unit) which manufactures and sells UPS systems and other power protection devices. The products manufactured in this unit is sold in the domestic as well as export market. (ii) IDF2 unit /EHTP1 unit (hereinafter referred to as IDF2 unit) also manufactures and sells UPS systems and other power protection devices. The products manufactured in this unit is sold in the domestic as well as export market. (ii) MAG unit which is engaged in the business of trading of UPS and other power protection devices which are procured either locally or through imports. The sales of this unit are only in domestic market. Considering sales as per excise return and including the scrap sale value again as an addition while computing total income - HELD THAT:- There is merit in the submission of the learned counsel for the Assessee that the profits of IDF 1 and IDF 2 units in so far as it relates to domestic sales of these units have to be accepted as declared by them as per the segmental profit and loss account. No specific reasons have been assigned by the AO for adopting to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng and claim deduction on account of warranty expenses is the same in the present AY as it was in AY 2008- 09. In the given facts and circumstances of the case, we are of the view that the deduction on account of provision for warrant expenses deserves to be allowed as claimed by the Assessee as the requirements for claiming deduction on account of provision for warranty liability has been satisfied. Addition of deferred service income as undisclosed income - Treatment to AMC value as deferred and not recognized as income by the Assessee in its books of accounts due to the revenue recognition policy followed by the Assessee - HELD THAT:- Assessee did not become owner of the money received unless the services are rendered and was not entitled to appropriate the same till service was rendered in lieu of which the same was received in advance. As in the case of Coral Electronics (P) Ltd. [ 2003 (12) TMI 14 - MADRAS HIGH COURT] held that the services may be rendered or may not be rendered depending upon withdrawal of the money as and when the customer required. So, it is highly uncertain as to whether it would at all remain as income of the assessee. Only when the service is d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that he could bring to tax the aforesaid income. This approach in our view was not correct. On the evidence on record and given the fact that the gain on foreign exchange fluctuation is relatable to export sales and has been duly established with each item of sale and correlated with the relevant FIRC showing the dates of realization, the gain in question has to be regarded as income of IDF1 and IDF 2 units respectively and the Assessee would be entitled to deduction u/s.10A of the Act on those incomes also. We hold and direct accordingly and allow Gr.No.22 raised by the Assessee. Foreign exchange loss in MAG unit is concerned, the profits of MAG unit are taxable and it does not enjoy deduction or exemption. Therefore the loss in this unit will go to reduce the income of this unit which is otherwise taxable. The AO therefore came to the conclusion that the loss on foreign exchange claimed in this unit is not allowable because it was a domestic unit in which there cannot be forex loss and secondly he found that the proportion of loss claimed compared to the turnover was very high. These were the two reasons assigned by the AO for treating the loss as not proved and bogus. Ano ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s submitted that income was account in FY 2007-08 (AY 2008-09) but was reversed in FY 2008-09 (AY 2009-10) and this was nothing but similar to write off of debts as bad and irrecoverable u/s.36(1)(vii) read with Sec.36(2) of the Act. This claim of the Assessee has not been examined either by the AO or CIT(A) and accordingly, it was agreed by the parties that this issue should be remanded to the AO for consideration afresh, after due opportunity to the Assessee. - IT(TP)A No. 299/Bang/2014, 218/Bang/2014 - - - Dated:- 30-4-2019 - SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER For the Appellant : Shri T. Suryanarayana, Advocate For the Respondent : Shri C. Sundar Rao, CIT ORDER Per N V Vasudevan, Vice President : IT(TP)A No.218/Bang/2014 is an appeal by the Revenue while IT(TP)A No.299/Bang/2014 is an appeal by the assessee. Both the appeals are directed against the order dated 31-01-2014 of the JCIT, LTU, Bangalore passed u/s.143(3) read with Sec.144C of the Income Tax Act, 1961 (Act) in relation to AY 2009-10. 2. Gr.No.1 to 9 in Assessee s appeal and the grounds of appeal raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the companies selected as comparable by the Appellant in the Transfer Pricing documentation and introducing her own set of companies as comparable that does not meet the comparability criteria in the contract software development services segment. Specifically, the Appellant submits that the following companies selected as comparable by the learned AO, learned DRP and the learned TPO as comparable in the contract software development segment should have been rejected. Bodhtree Limited; Infosys Limited; Larsen and Toubro Infotech Limited; Mindtree Limited; Persistent Systems Limited; Sasken Communications Technologies Limited; Tata Elxsi Limited; and Zylog Systems Limited 6. The learned AO, learned DRP and the learned TPO erred in not applying multiple year/prior year data for comparable companies while determining arm's length price. 7. The learned AO, learned DRP and the learned TPO erred in using data as at the time of assessment proceedings, instead of that available as on the date of preparing the Transfer Pricing documentation for comparable companies while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of comparison of profit margin of comparable companies was operating profit to operating cost (OP/OC). The price charged in the international transaction by the Assessee from its AE was ₹ 8,00,00,000/-. The Operating cost of the Assessee was ₹ 7,30,00,000/-. The operating profit was thus ₹ 70,00,000 (₹ 8,00,00,000 - 7,30,00,000). OP/OC was 9.59%. The Assessee in its TP Study had chosen 14 companies as comparable companies. 5. The arithmetic mean of the profit margin of the 14 companies so selected by the Assessee was 13% after adjustment and 14% without adjustment and these margins when compared to the profit margin of the Assessee was at Arm s Length after providing for (+)(-) 5% variation margin permitted under the proviso to Sec.92(2) of the Act. Since the Assessee s profit margin was within the range of profit margin of the comparable, the Assessee claimed that the price charged in the international transaction was at Arm s Length and therefore no addition by way of adjustment to ALP should be made. 6. The Assessing Officer (AO) referred the question of determination of ALP to the Transfer Pricing Officer (TPO) as is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00,000/- Arm s Length Price (ALP) 119.35% of Operating Cost 9,07,53,600/- Price Received 8,00,00,000/- Shortfall being adjustment u/s. 92CA 1,07,53,600/- 7. The difference between the price charged by the Assessee and the ALP determined by the TPO viz., ₹ 1,07,53,600/- was added to the total income by the AO in his drat assessment order as addition on account of shortfall being adjustment u/s.92CA of the Act. 8. The Assessee filed objections to the draft assessment order by the AO before the Disputes Resolution Panel (DRP). The DRP rejected the objection of the Assessee to the action of choosing some of the companies out of the 11 comparable companies chosen by the TPO. The Assessee pleaded for inclusion of two companies in the list of comparable companies viz., FCS Software solutions Ltd. and Thinksoft Global Services Ltd. This plea of the Assessee was accepted by the DRP. As a result of the order of the DRP, the following 13 companies remained as comparable companies and the arithmetic mean of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparable with a company rendering SWD services, in the case of VMware Software India Pvt. Ltd. Vs. DCIT IT(TP)A.No.1311/Bang/2014 for AY 2009-10. The learned DR could not point out any difference in facts. We therefore hold that these two comparables should be included in the final list of comparables by respectfully following the judgment cited by ld. AR of assessee and find no merit in the appeal by the revenue and dismiss the same. 10. As far as the appeal of the Assessee is concerned, the first aspect is with regard to exclusion of some of the comparable companies chosen by the TPO and retained by the DRP as comparable companies. The learned counsel for the Assessee submitted before us that the comparability of the following 5 comparable companies out of the 13 companies that remain after the order of the DRP viz., (i) Kals Information Systems Ltd., (ii) Bodhtree Consulting Ltd., (iii) Tata Elxsi Ltd., (iv) Persistent Systems Ltd. and (v) Infosys Ltd. was considered by the Tribunal in the case of Infinera India (P) Ltd. Vs. ITO (2016) 72 taxmann.com 68 (Bang-Tribunal). The said decision was also in relation to AY 2009-10. In the aforesaid decision the issue raised was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view that in the facts and circumstances of the present case, this issue is academic because after exclusion of several companies chosen by the TPO and retained by the DRP only 6 companies remain as comparable companies and the arithmetic profit margin of these companies without working capital adjustment is 10.78% which would be within the profit margin of 5% (+) (-) permissible under the proviso to Sec.92(2) of the Act. Therefore, we dismiss the plea of the Assessee in this regard. We make it clear that we have not decided on the merits of the claim of the Assessee on this issue. The TPO is directed to compute the ALP as per the directions given above after affording Assessee opportunity of being heard to the Assessee. RESEARCH AND DEVELOPMENT SERVICES SEGMENT: 14. As far as determination of ALP in this segment is concerned, the disputes raised by the Assessee are that the nature of services rendered by the Assessee to its AE was SWD services and it is not correct to characterize the same as R D Services. Though this was the basis on which the TP study was undertaken by the Assessee, the Assessee submits that there is no estoppels in the matter of determ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le companies chosen in the SWD services segment, which we have already decided in the earlier paragraphs, would be applicable. If he comes to the conclusion that the services rendered were in the nature of R D and not SWD services, then the issue with regard to comparability of companies already chosen by the TPO/DRP on the basis of assumption that the Assessee is rendering R D services and working adjustment to be made to the profit margin of comparable companies chosen on that basis are left open for consideration de novo by the TPO in the set aside proceedings. 17. Gr.No.10 (Gr.No.10.1. to 10.7) raised by the Assessee in its appeal is with regard to the action of the AO/DRP in disregarding the revised computation of total income whereby the loss declared in the original computation filed along with the return of income at loss of ₹ 9,40,42,566/- under the head business (copy of the return is at page 345 of Assessee s paper book) was revised to loss of ₹ 12,44,94,273/- by filing a revised computation of total income (copy of which is at page- 541 of Assessee s paper book along with reasons for filing revised computation of total income contained in submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocation of expenses was not made in the correct units. The Assessee, after considering the above aspects re-computed the tax computation segmental wise matching with the segmental P L A/c, which resulted in an additional loss amounting to ₹ 3,04,51,707/-. 19. The main reason assigned by the AO for not accepting the revised computation of total income is on the basis that a revised return of income was not filed within the time limit permitted u/s.139(5) of the Act and by placing reliance on the decision of the Hon ble Supreme Court in the case of Goetz India Ltd. Vs. CIT 284 ITR 232(SC). In the said decision the Hon ble Supreme Court held that the AO cannot examine a claim made before him that is contrary to or in modification of the claim as made in the original return filed, without a revised return of income being filed making a new or modified claim. The conclusion of the AO on this aspect is contained in page-12 of the impugned order at Paragraph 2.2. Though there are allegations by the AO that the Assessee has filed several revised computations and doubted the genuineness of claim made in a revised computation of income, the basis on which the AO refused to ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titled to make a fresh claim or modify a claim at any time before the completion of assessment. Actually before the amendment of S.139(5) with effect from 1.4.1989, a revised return could be filed at any time before the assessment was made. It is on account of amendment of S.143(1) with effect from 1.4.1989, that the aforesaid change in S.139(5) was necessitated. If a return of income is accepted u/s. 143(1) by issue of an intimation, then a time limit had to be prescribed for revision of such a return of income, if it was not subjected to scrutiny u/s. 143(3) of the Act. No such time limit is required to be prescribed in respect of an assessment u/s. 143(3) of the Act. A revised return may not save penalty or prosecution in relation to the originally filed return of income. In other words, cases of concealment and false statements are not covered u/s. 139(5). The very purpose of assessment proceedings before the taxing authority is to correctly assess the tax liability of an assessee in accordance with law. Therefore it is not correct on the part of the AO to refuse to scrutinize the revised computation of total income. His action in this regard which was confirmed by the DRP is u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue if a claim is made by any party subject to satisfaction of prescribed rules, hence, even the Hon'ble Apex Court has not barred the assessee raise it's legal claim before Appellate Authorities. However, such process would result into undue hardships, delay and multiplicity of proceedings. The Hon'ble Apex Court, on numerous occasions has laid the proposition that the Assessing Authorities are bound to compute the correct income only and collect only legitimate tax, hence, merely for a procedural lapse or technicalities, in our opinion, the assessee should not be compelled to pay more tax than what is due from him. Therefore, this situation has necessarily to be looked upon from the angle of duties of Assessing Authorities as stated earlier, CEDT is the Apex body for tax administration and it can also issue directions which are for the benefit of the assessee's though such directions may not be inconsonance with the provisions of law, hence, if a circular is now issued directing the assessing authorities to grant reliefs/refunds while completing the assessment proceedings, even though such circular may be at variance with the law, as pronounced by the Hon'bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for such revision of total income explained in the letter dated 16.10.2012 together with other annexure to the said letter. The AO will afford opportunity of being heard to the Assessee before taking decision on the aforesaid revised computation of total income. The relevant grounds are treated as allowed. 26. Gr.Nos.11 12 raised by the Assessee in its appeal can be decided together. These grounds read as follows: 11. Rejection of export turnover of IDF 1 unit as per the books of accounts 11.1 The learned AO/DRP has erred in considering the export sales for IDF 1 as per the Annual Performance Report (APR) and the excise return amounting to ₹ 1,787,926,281 resulting in a lower export sales being considered. 11.2 The learned AO/DRP has erred in rejecting the invoice wise listing provided to the AO along with the invoice copies, shipping bills and Foreign inward remittances certificate (FIRC) for the entire export sales and computing the sales as per the APR and excise return filed, despite acknowledging and placing the same on record. 11.3 The learned AO/DRP has erred in rejecting the invoice-wise listing placed on r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not acceptable due to certain invoices which are pending realization. 11.13 The learned AO/DRP ought to have observed that the details of unrealized invoices amounting to ₹ 1,21,36,381 have been furnished suomotto by the assessee in the invoice wise listing furnished and for the balance invoices FIRC copies have been provided substantiating the realizations. 11.14 Notwithstanding and without prejudice to the above, the Appellant submits that the amount of ₹ 1,21,36,381 should be reduced from the export turnover for AY 2009-10 and when this amount is realized by the Appellant the same should be treated as export turnover for AY 2009-10 in line with the provisions of the Act. 12. Rejection of export turnover of IDF 2 unit as per the books of accounts 12.1 The learned AO/DRP has erred in considering the export sales for the IDF 2 unit as per the APR and the excise return amounting to ₹ 1415,76,49,095 resulting in a lower export sales being considered. 12.2 The learned AO/DRP has erred in rejecting the invoice wise listing provided to the AO along with the invoice copies, shipping bills and Foreign inward remittances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re sold in the domestic as well as export market. (ii) IDF2/EHTP1 unit (hereinafter referred to as IDF2 unit) which also manufactures and sells UPS systems and other power protection devices. The products manufactured in this unit is sold in the domestic as well as export market. (ii) MAG unit which is engaged in the business of trading of UPS and other power protection devices which are procured either locally or through imports. The sales of this unit is only in domestic market. (iv) Software development business for Schneider Electric IT Corporation, USA (earlier known as American Power Power Conversion Corporation, USA (APCC USA) (Parent company). This unit only exports software to Schneider Electric IT Corporation, USA earlier known as APCC USA (parent company). 28. With respect to export sales in IDF1 and IDF 2 units, the Assessee is a contract manufacturer for Schneider Electric IT Corporation, USA (formerly known as American Power Conversion Corporation, USA) and other overseas affiliates. The Assessee is entitled to a consideration of 15% on approved costs in respect of the above. IDF1 and IDF2 unit are entitled to claim benefit of deduction on their profits u/s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it: Particulars EHTP 2/IDF 1 (Rs) Export sales as per Sales Listing 2,488,777,445 Less: Items not forming part of APR but in Sales Listing a. TP Debit notes 665,341,262 Add: Items not in Sales Listing but reported in APR b. Sales reversed in Sales listing on CIF terms for revenue recognition c. Credit notes issued to customers 6,297,848 498,296 Less: Errors in APR due to wrong punching of amounts and due to non- inclusion of certain sales not required to be reported in APR 42,306,045 Sales reported in APR 1,787,926,281 The export sales ₹ 248.87 crores has been substantiated with documentary evidences as obtained from third parties. In light of the above, we submit that the company has not made any incorrect sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27.3.2008) of the sale value of ₹ 34,46,54,061/- were recorded as sales of AY 2009-10 whereas they ought to have been recognized as sale of AY 2008-09. On the basis of the above findings, the AO proceeded to adopt the sale figure as per the APR and Central Excise returns. 32. On appeal by the Assessee, the DRP confirmed the order of the AO. Hence, Grd.No.11 12 by the Assessee before the Tribunal. 33. The learned counsel for the Assessee submitted that the evidence in the form of documents submitted to substantiate the sale of finished goods as appearing in the segmental Profit Loss Account as per books of accounts maintained by the Assessee was furnished by the Assessee despite the sales documents were destroyed in fire and after enormous efforts the Assessee could get the required documents to substantiate its claim. He drew our attention to the details filed by the Assessee which are as follows: Details Submissions dated Sales register ( Page 636 of File 3) 13th December 2012 Party wise invoice wise listing (Sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r FY 2008-09 relevant to AY 2009-10 only. These submissions were neither considered by AO nor by the DRP. 35. As far as the Transfer pricing debit notes amounting to USD 1,39,85,083 equivalent to ₹ 66,53,41,264/- raised by the Assessee (Submission dated 4th March 2013- Page number 3390 to 3547- file 15) in the case of IDF-1 unit are concerned, the learned counsel for the Assessee submitted that the same will not be reflected in APR sales as there is no requirement to report the same in the APR. He submitted that according to the AO there was no physical export of goods from the factory of the Assessee for which such debit notes were raised. In this regard he submitted that the Assessee is a contract manufacturer and is entitled to a consideration of 15% on approved costs in respect of its manufactured export sales (agreement available pages 3396-3403 of File 15 of the paper book, relevant clauses being Clauses 5, 5.1, 5.4).The same was furnished before the learned AO vide submissions dated 4 March 2013 (Page 3390 of File No. 15). The Assessee initially invoices the export sales on the basis of estimates or applying the 15% markup on standard costing. At the time of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MFGFY08090-14 17,85,319 8,31,19,090 30-Sep-08 APCC - USA Debtors RIHAB202-13 24,61,371 10,53,17,389 31-Dec-08 APCC - USA Debtors RIHAB101-25 97,38,393 47,69,04,785 Total 1,39,85,083 66,53,41,264 He submitted that the above explanation was not considered by the AO or by the DRP. 36. As far as IDF-1 unit and IDF-2 unit export turnover is concerned, the AO s action of considering turnover of ₹ 1,26,34,663/- and ₹ 4,55,03,164 respectively as Invoices pending realizations and therefore to be disregarded for the purpose of considering export turnover of the Assessee for that unit, the learned counsel brought to our notice the details of invoice realization in respect of IDF-1 unit and IDF-2 unit respectively, which is as follows: IDF-1 UN ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.77 134.99 142.87 2 Realized post 30 th September 2009 but after 12 months of invoicing 0.02 0.49 0.61 3 Total realized till date 32.07 1424.12 1502.55 Unrealized till date 0.12 5.41 - 4 Export sales as per sales listing 32.19 1429.54 1429.54 (chart available in submission dated 14 February 2013 at page 695 Paper Book 3) Note 1: This amount has been fully realized and therefore is completely eligible for Section 10A. Note 2: Invoices which were realized beyond 6 months from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er APR should not be considered because, there is discrepancy in the amount of sales reported in APR vis- -vis segmental profit and loss account, which is on account of the following: (i) APR invoice recorded as per date of shipment, while in financials when risk and reward of ownership is transferred. For sales on CIF terms ownership is transferred when goods reach the buyer. Errors in punching of wrong amounts (which is because APR is a manual procedure) was demonstrated with actual invoice copies. The learned counsel for Assessee submitted that the above discrepancies have been explained to the learned AO vide submissions dated 13th December 2012 (Submission page number 636 and explanation in Appendix 1, relevant pages 642 to 644 - File 3) and 14th February 2013 along with invoices and FIRCs demonstrating realization of the export (Submission page no. 689 and Explanation in Annexure 1 page 690 to 702- file 3, relevant page 696; supporting FIRCs submitted there under at Page nos. 739 to 1059 File 4). It was further submitted that for preparation of excise return APR was used a basis. Thus, there was a discrepancy between export sales as per excise return and segmental profit an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces outside India. Neither Section 10A nor Section 2 of the Act define the term total turnover . When a particular word is not defined by the legislature and an ordinary meaning is to be attributed to it, the said ordinary meaning is to be in conformity with the context in which it is used. 40. The quantum of deduction u/s.10A of the Act, would therefore depend on the quantum considered as Turnover of an Assessee. So also the deduction u/s.10A would depend on export turnover i.e., consideration in respect of export being received in, or brought into, India in convertible foreign exchange in accordance with section 10A (3). Turnover of IDF-1 Unit: 41. In so far as turnover of IDF-1 unit is concerned, the first dispute is with regard to non-inclusion by the revenue authorities of a sum of ₹ 66,53,41,262/- under the name TP debit notes as part of the export turnover of the Assessee for computing deduction u/s.10A of the Act. It is undisputed that the Assessee is a contract manufacturer and is entitled to a consideration of 15% on approved costs in respect of its manufactured export sales. It is also not disputed that the Assessee initially invo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bills of lading/Airway Bills along with sales invoices produced in support of the claim of the Assessee which are at pages 3551-4008, Files 15 and 16 of the paper book substantiates the case of the Assessee for inclusion of the aforesaid sum as part of the turnover for AY 2009-10. We hold accordingly. 43. The third component of the turnover which is in dispute is the non- inclusion of sales of ₹ 4,98,296 as turnover of AY 2009-10. The claim of the Assessee is that it had issued credit notes to the customers for recognizing sales for the relevant AY 2009-10 but the evidence to substantiate the same is not discernible from the material filed before us. So also the fourth component of dispute of turnover viz., a sum of ₹ 4,23,06,045 which is stated to be owing to wrong punching of amounts due to non-inclusion of certain sales not required to be reported in APR. We therefore remand the issue to the AO for consideration de novo with liberty to the Assessee to substantiate its case with necessary evidence. 44. The next aspect of turnover is the non-realization of Export proceeds in convertible foreign currency in India within the time limit specified in Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onths from the end of FY or such further period as the competent authority may allow in this behalf. Competent authority means the Reserve Bank of India ( RBI ) or such other authority as is authorized for regulating payments and dealings in foreign exchange. Notification No. FEMA 176 / 2008-RB issued by the RBI wherein time limit for realization of export proceeds was enhanced from 6 months to 12 months from date of export. It is the submission of the Assessee that since the export proceeds bought into India after said period of 12 months are via a FIRC duly received from the Authorized Dealer, same should be deemed to be allowed by the Competent Authority and thus is to be allowed in terms of Section 155(11A). The decision of ITAT Bangalore Bench in the case of HCL EAI Services Ltd. Vs. DCIT (supra) supports the plea of the Assessee in this regard and therefore the same is accepted. We therefore hold that what is to be excluded from turnover on the ground of non-realization of sale proceeds u/s.10A(3) is only a sum of ₹ 1.19 crores. However the Assessee is permitted to claim the deduction as regards the same once the same has been realized in terms of Section 155 (11A) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1359.08 1 Realized post 30 th September 2009 but within 12 months of invoicing as per FEMA regulations 2.77 134.99 142.87 2 Realized post 30 th September 2009 but after 12 months of invoicing 0.02 0.49 0.61 3 Total realized till date 32.07 1424.12 1502.55 Unrealized till date 0.12 5.41 - 4 Export sales as per sales listing 32.19 1429.54 1429.54 As far as sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d before rejecting the domestic sales as per books of accounts. 13.4. The learned AO/DRP ought to have observed that the amounts in the Excise Return is gross of trade discount of ₹ 123,700,612 and therefore has resulted in the domestic sales being considered as higher to this extent than as reported in the financial statements. 14. Double taxation of scraps sales amounting to ₹ 40,092,519 14.1. The learned AO/DRP has erred in considering the domestic sales for the IDF 1 and IDF 2 unit as per the excise return which is inclusive of scrap sales. 14.2. The learned AO/DRP has erred in once again considering scrap sales while re-computing the profits to IDF 1 and IDF 2 amounting to ₹ 1,27,94,809 and ₹ 2,72,97,710 respectively. 14.3. The learned AO ought to have observed that the above has resulted in double taxation of scrap sales . 50. We have already discussed similar issue of recomputing sales figure in IDF1 and IDF 2 units while deciding Gr.No.11 12 in Assessee s appeal and those grounds were in respect of export sales of these units. In Gr.No.13 14 the Assessee has projected its grievance re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the details and hence upheld his addition para 27.4 at page 61 of the final order of assessment. 54. The submission made by the learned counsel for the Assessee before us was that the AO ought to have considered the domestic sales as per the segmental profit and loss account. It was submitted that the domestic sales of IDF 1 (EHTP -2) and IDF 2 (EHTP 1) is ₹ 49,82,46,245/- and ₹ 101,15,90,862/- respectively, totalling to ₹ 150,98,37,107/-. Our attention was drawn to the segmental break-up available at Page 548 File 3 of paper book of Assessee. It was submitted that the action of the AO in re-computing the profits of the said 2 units, by considering the domestic sales at ₹ 55,25,46,883/- and ₹ 132,96,19,115/- totalling to ₹ 188,21,65,998/- for IDF 1 and 2 units, adopting the figures of sales as per the excise return was incorrect. The learned counsel for the Assessee also drew our attention to the fact that the difference in the domestic sales as per the excise return and the segmental P L are on account of 1) ₹ 24,24,16,413/- of excise duty paid (originally, the AO had not given deduction of the same in the original assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p sale has been subject to tax twice. The learned counsel for the Assessee brought to our attention Assessee s submission dated 16th October 2012 (pages 518-540, at page 524 of File No. 2) wherein sample scrap invoices were given at File 13 pages 3084-3173. It was pointed out that the excise returns (available at pages 572-635 of File No. 3) demonstrate that scrap is included as part of the same. It was pointed out that the DRP in its directions at page 61, directed the AO to verify whether scrap sales were double taxed and if so, to not add the same once again. The learned counsel for the Assessee therefore prayed that the AO should be directed to adopt the domestic sales as per segmental P L which is sales net of net of trade discount and sale of scrap has been reported separately in its segmental. It was submitted that by considering the sales as per the excise return, the AO has not granted the Assessee the benefit of the trade discount and has doubly taxed scrap sales. 56. The learned DR relied on the order of the AO/DRP. 57. We have considered the rival submissions and are of the view that the submissions of the Assessee have merit. We are of the view that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tection devices. The products manufactured in this unit is sold in the domestic as well as export market. (ii) MAG unit which is engaged in the business of trading of UPS and other power protection devices which are procured either locally or through imports. The sales of this unit are only in domestic market. 60. The AO noticed that the sales as per Trial Balance as on 31.3.2009 domestic sales of MAG unit was reported at ₹ 302,31,90,978/-. Whereas the domestic sales as per the segmental profit and loss account was showing sales of only ₹ 127,09,37,459/-. The Assessee filed a reconciliation of the sales figure of ₹ 127,09,37,459/- as per the segmental profit and loss account based on which income from IDF 1 unit/IDF 2 unit and MAG unit were declared in the return of income. The same has been extracted by the AO in page-40 of the order of Assessment. The Explanation of the Assessee with regard to the sales as declared in the Trial Balance as on 31.3.2009 and the segmental profit and loss account as on 31.3.2009 was clearly given in Assessee s reply dated 14.3.2013. The same is as follows: 3. Domestic turnover and cost of sales domestic unit (M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the profits derived from domestic sales. While computing the total turnover of IDF1 and IDF2 no domestic sales to be reckoned as part of total turnover. Accordingly, we submit that the deduction under section 10A of the Act would correspondingly go up . 61. After extracting the reconciliation, the AO in page-41 of his order para-1 observed as follows: As per the reconciliation a sum of ₹ 1,75,22,53,520 was reduced as IDF1/ IDF-2 domestic sales. However, in the same sheet only a sum of ₹ 54,99,40,665/- and ₹ 61,27,06,304 was reduced as DTA sales against IDF 1 and IDF 2. Had this been the case they should have reduced only ₹ 116,26,46,969/- (₹ 54,99,40,665 + ₹ 61,27,06,304) against ₹ 175,22,53,520/-. It is pertinent to mention here that the sum of ₹ 116,26,46,969/- is nothing but the inter division purchase that was tallied with trial balance and the relevant page was scanned and presented at point number-2 62. In para 3.10.1 of his order the AO has extracted the reply dated 14.3.2013 which we have extracted in the earlier paragraph but has quoted only from paragraph ( e ) of the reply witho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 113,68,72,335/- 92,78,67,516 3 Loss on account of foreign exchange fluctuation disallowed 30,18,63,653 As already stated it is the plea of the Assessee that the amounts booked in the sales of MAG unit in the Trial Balance pertains to (i) MAG Trading (ii) IDF 1 ( EHTP 2) domestic sales and (iii) IDF 2 (EHTP 1) domestic sales. It is the plea of the Assessee that on account of considering the turnover of the MAG unit as reflected in the Trial Balance and not as per the segmental P L of the Assessee, there is double taxation of the domestic sales of IDF1 and 2 and MAG unit. The foreign exchange loss is allowable deduction. 64. The DRP in its directions gave limited relief to the Assessee by directing the AO to verify the claim of double taxation and allow the claim if found correct. (Page 71 of the DRP Directions). However, in the final assessment order, the AO has not considered the same citing Section 144C(8) and (13) wherein it is provided that the DRP does not have power to remand any issue and has to settle all issues. 65. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ok, pages 3256 to 3389), the Assessee reiterated its earlier submission and gave an entire listing of the domestic sales of IDF 1 and 2 (at page 3257) and sample invoices (at pages 3328-3332). Vide its submission dated 13th December 2012, the Assessee had submitted to the AO the books of account of the Assessee in soft version (Page 3174 File 14 of the paper book). The double taxation can be verified by examining any of the sample invoices, which will figure both in the domestic sales listing of IDF 1 and 2 (which can be correlated to the excise return of that unit) and in the sales ledger of MAG unit as per the Trial Balance. Vide submission dated 14th March 2013 (Pages 4020-4153 of the paperbook- File 17, relevant page 4028), the Assessee once again explained the concept and resubmitted the entire domestic sales listing of IDF 1 and 2, as required by the AO. 67. The learned counsel thus submitted that sales as per the segmental P L account for MAG unit amounting to ₹ 1,27,09,37,458/- should be considered. The sales of ₹ 1,75,22,53,519/- being domestic sales of IDF 1 and IDF 2 should not be considered as sales of MAG The same should be considered as domesti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r.No.16 17 raised by the Assessee were not pressed for adjudication because in rectification proceedings, the AO has allowed relief to the Assessee in respect of the grievance projected in those grounds. Hence, Gr.No.16 17 are dismissed as not pressed. 71. Gr.No.18 raised by the Assessee is with regard to claim of deduction on account of provisions for warranty. The relevant ground of appeal of the Assessee reads thus: 18. Disallowance of provision for warranty : ₹ 67,25,51,172 Break-up of the above expenses is as under: Actual expense - ₹ 51,27,80,127 Provision for warranty - ₹ 15,97,71,045 18.1. The learned AO/DRP has erred in disallowing the actual warranty expense debited to the profit and loss account amounting to ₹ 51,27,80,127 by treating this also as a provision for warranty. 18.2. The learned AO/DRP has erred in holding that the in warranty expenses and post warranty expenditure debited to the profit and loss account was not supported with any evidences. 18.3. The learned AO/DRP ought to have appreciated the fact that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of three elements, viz., (i) Post Warranty expenses (actually incurred in the previous year) ₹ 6,13,26,593/- (ii) in warranty expenses (actually incurred during the previous year) ₹ 45,14,60,360/- and (iii) Provision for warranty of ₹ 15,97,40,517/. The total of the aforesaid three sums is a sum of ₹ 67,25,27,470/-. These figures are evident from Annexure-16 to the reply dated 13.12.2012 filed by the Assessee before the AO. This letter of the Assessee along with annexure is at page-636 to 688 of paper book no.3 filed by the Assessee. Annexure-16 to this letter which explains the basis of provision for warranty is at pages- 685 to 688 of paper book No.3 filed by the Assessee. The AO in making the disallowance has mentioned in the order of Assessment that the Assessee has not furnished the basis of his claim for deduction on account of provision of warranty, which is factually incorrect. Perusal of Annexure-16 to the letter dated 13.12.2012 filed by the Assessee before the AO, shows that the provision on account of warranty expenses was a sum of ₹ 33,74,40,517/- out of which the Assessee on his own has disallowed a sum of ₹ 17,76,69,472/- in the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of expenses mainly relates to -Authorized services provider (ASP) claims settled by APC for inwarranty service support, RMA (returned material authorization) relates to expense for returned material received from vendor/ASP, and Cover freight from warehouse to ASP locations, to customer location and freight from customer locations. These expenses are debited to MAG unit. Post Warranty Expenses: Post warranty expenses pertain to the provision of services by the Assessee after the expiry of the warranty period to the customers. These services are provided to the customers based on certain Annual Maintenance contracts (AMCs) between the customer and the company. The post warranty expenses mainly comprises of expenses incurred by the company or through ASP and comprises of the following: - ASP claims-call based expenses claim done by ASP s to APC, Temporary help incurred-Manpower support by Rolex logistics, travelling expenses incurred for catering the service repair work, freight charges, professional services-manpower support service, software support service, logistic and facility consultation charges, legal services, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 451,460,360 To Cash/Bank/Creditor account 451,460,360 (Being the warranty expenses entry) 4 Warranty expense account Dr 589,723,972 To provision for warranty account 589,723,972 (Being the warranty provisions creation entry) 5 Profit and loss account Dr 850,227,470 To warranty expenses Account 451,460,360 To Post Warranty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s what is relevant to be seen is what has been claimed as deduction in the computation of income. The conclusions of the AO were that (1)The in-warranty amount and post warranty amount debited to the profit and loss account was not supported by any evidences; (2) provision for warranty has not been created on a scientific basis for the reason that there is no data available. The DRP confirmed the action of the AO by observing that the Assessee has not provided any of the factual data in support of the claims of the warranty and therefore rejected the objections raised by the Assessee. 78. We have heard the rival submissions. The first and foremost submission of the learned counsel for the Assessee was that the Actual warranty expense In warranty (₹ 45,14,60,360) and post warranty (₹ 6,13,19,767) was erroneously considered as provision for warranty. It was brought to our notice that these expenses comprises of purchase of battery, raw material, packing material, carton boxes, import of raw material, payment of import duty, ASP Claims, freight charges, etc. Our attention was drawn by him to the evidence in support of the warranty expense were submitted to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee in this regard before the AO vide submissions dated 4th March 2013 ( page number 4154 to 4555-file 18) giving all details, detailed party wise breakup of the expense (approx. 14000 individual line items (pages 4166-4530) and sample invoices for the expenses incurred (pages 4531-4555) clearly proves the claim of the Assessee for deduction of the aforesaid sums. We therefore hold that disallowance of warranty expenses to the extent of actuals incurred by the Assessee viz., In warranty (₹ 45,14,60,360) and post warranty (₹ 6,13,19,767) should be allowed as deduction. We hold and direct accordingly. 80. As far as deduction on account of provision for warrant expenses of ₹ 15,97,71,045/- is concerned, we have heard the rival submissions. The conditions for allowing provision on account of provision for warranty expenses has been laid down by the Hon ble Supreme Court in the case of Rotork Controls India (P) Ltd (314 ITR 62) wherein the Honorable Apex Court has stated that provision for warranty shall be allowed if it is made on scientific basis. The Assessee has filed a chart explaining as to how the Principles laid down by the Hon ble Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also explained. The Assessee submits that the determination of provision is an elaborate exercise covering all products sold and involves of around 35,000 line items. The AO held that provision for warranty made by the Assessee is not scientific because details of the utilization of the warranty have not been provided. In none of the years the unutilized warranty provision was reversed and credited into the P L account; Utilization can be verified only if the name of the customer and the sales invoice are provided to verify the period of warranty and name of the customer against whom the warranty provision was utilized out of the existing provision, etc. 82. These conclusions of the AO are unsustainable because the entire provision created by the Assessee is reversed in the next year and actual warranty expense incurred is charged to the Profit and Loss Account. Thus, in the case of the Assessee there is no requirement for maintaining the details of utilization as mentioned by the learned AO as there is no unutilized provision. The trend of provision for warranty i.e., the actual expense vis- -vis the closing provision for warranty and also reversal of warranty have all b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on for warranty liability has been satisfied. Gr.No.18 raised by the Assessee is accordingly allowed. 85. Gr.No.19 raised by the Assessee projects its grievance regarding treatment by the revenue authorities of a sum of ₹ 5,38,22,153/- which is part of the AMC value which was deferred and not recognized as income by the Assessee in its books of accounts due to the revenue recognition policy followed by the Assessee. Gr.No.19 reads as follows: 19. Addition of deferred service income as undisclosed income - ₹ 5,38,22,153 19.1 The learned AO/ DRP has erred in considering the sum of ₹ 5,38,22,153 as undisclosed income. 19.2. The learned AO/DRP ought to have observed that the amount cannot be treated as undisclosed income as the Appellant has provided the details of the source of the income such as party names, invoice numbers, invoice period, contract value, etc. 19.3. The learned AO/DRP has failed to appreciate the fact that the service income of ₹ 5,38,22,153 is the advance amount received during the year and it is not accrued in the FY 2008-09. 19.4. The learned AO/DRP has failed to appreciate the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year ended 31 March 2010 is 92 /366 * 100 = ₹ 25.14 The sum of ₹ 5,38,22,153 which is the subject matter of addition in Gr.No.19 is income recognition of which by the Assessee for AY 2009-10 was deferred pursuant to its accounting policy given above. 87. The AO considered the deferred service income amounting to ₹ 5,38,22,153 as undisclosed income. According to the AO once income has accrued or arisen to the Assessee the same has to be recognized as income in the year in which it accrues or arises, when the Assessee is following mercantile system of Accounting. Further the AO also observed that there was no opening balance in service income ledger, whereas the workings for deferred service income furnished by the Assessee has opening balance. The DRP upheld the order of the learned AO. 88. The learned counsel for the Assessee submitted that the amount for the AMC contracts are received in advance by the Assessee, but income recognition for such amounts is done proportionately over the period of the contract. According to him, doing so is permissible under Accounting Standard (AS) 9 of ICAI. He submitted that the service income which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titled to defer recognition of income. CIT v. Punjab Tractors Co-op. Multipurpose Society Ltd. [1997] 95 TAXMAN 579 (PUNJ. HAR.) CIT v. Coral Electronics (P.) Ltd. [2005] 142 TAXMAN 481 (MAD.)ACIT v. IOT Infrastructure Energy Services Ltd. [2013] 39 taxmann.com 195 (Mumbai - Trib.). The learned counsel for the Assessee prayed that the addition of deferred service income amounting to ₹ 5,38,22,153 as undisclosed income should be deleted as the same is not income for the year. 90. The learned DR relied on the order of the AO/DRP and also a decision of this Tribunal in the case of M/s.Optum Health Technology (India) Pvt.Ltd. Vs. ITO ITA No.1068/Bang/2016 order dated 8.2.2019 wherein on identical facts, the tribunal held that income cannot be deferred and had to be recognized in the year of entering into the AMC. It was submitted by him that all invoices were not produced before the AO and it has to be seen as to what is the corresponding accounting treatment for purchase of materials, whether they were claimed in the year in which income was deferred and offered to tax. The terms of the AMC has to be examined. 91. We have carefully considered the rival ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count during the quarter in which the work of repairs and services was done, and included the amount so adjusted as income of the relevant year. Out of the aggregate amount shown in PWS Advances Account, the Assessing Officer treated proportionate sum for the period covered as the assessee's income for the assessment year in question. The Commissioner invoked section 263 and held that the entire amounts received in the previous year towards PWS Advances were trading receipts of the year directly connected with the business of servicing and repairs of tractors. He, accordingly, set aside the assessment. On appeal, the Tribunal upheld the Assessing Officer's action disagreeing with the finding of the Commissioner. On reference, the Hon ble Punjab Haryana High Court held as follows: The taxability of income normally depends upon the system of accounting followed by the assessee. Even in the case of an assessee following the mercantile system of accounting, a mere claim, by the assessee in respect of an amount without the right to claim cannot form the basis for taxability. Where the assessee follows the cash system of accounting, the taxability is to be based on r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stomer required. So, it is highly uncertain as to whether it would at all remain as income of the assessee. Only when the service is done the assessee has a right over the amount that was deposited. Till then, he has no right over the same. It is in that sense till then, it cannot be considered as an income of the assessee and is not eligible to tax. 95. The Mumbai ITAT in the case of ACIT Vs. IOT Infrastructure Energy Services Ltd. (supra) had to deal with identical case. The facts of that case were that the Assessee had not offered for tax an amount being difference between progress billing as on 31-3-2007 and cumulative revenue booked as per accounts as on 31-3-2007 in respect of three contracts. The assessee explained to Assessing Officer that progress billing was inclusive of advances received from customers which amount did not reflect work performance. It was also explained that progress billing was done not only for amount of work done but also for mobilisation and other advances receivable by it as per terms of relevant contract and that mobilisation and other advances received by assessee by raising progress billings did not represent income of assessee at tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hed before the learned DRP along with evidences such as purchase order, invoices, ledger for sundry debtors, etc. vide notes on arguments dated 21 November 2013. 20.4. The learned AO/DRP ought to have observed that an income cannot be considered as an undisclosed income if the details of the source of the income are furnished. 20.5. The learned AO/DRP has failed to appreciate the facts that the Appellant is consistently following the method of accounting for deferred sundry debtors as per AS 9-revenue recognition. 20.6. The learned AO/DRP has erred in not appreciating the fact that the Appellant has considered the deferred sundry debtors of the FY 2008-09 as income in the subsequent years on rendering the services to the customers and such income has been offered to tax in the year in which it has accrued . 98. As far as the aforesaid ground of appeal is concerned, the facts are identical to Gr.No.19 regarding deferred income from providing AMC. The AO in the course of assessment proceedings noticed on a perusal of the service income ledger account of the unit which was not eligible for deduction u/s.10A of the Act, that a sum of ₹ 2,90 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ledger for service income Ledger for Bharti Airtel Limited Journal entry for the transaction Ledger for Sundry debtors Total 2,90,49,991 102. He pointed out that under Clause 2(c) of the terms and conditions contained in the PO (available at page 4854 of File 20), dealing with Payments it is clearly provides as under: The delivery of products by the supplier to the Company will not constitute acceptance of the said products by the Company. Acceptance of products will be completed and communicated only after inspection and satisfactory testing of the products by the Company. Till acceptance of the products by the Company the products shall remain with the Company on supplier s account on approval basis only. The risk of loss or damage to the product passes to the Company upon acceptance of the products by the Company. According to the learned counsel for the Assessee the above clause in the contract between the parties would show that the Assessee could not hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated that the Appellant has furnished all documents evidencing export of software including invoices, softex, FIRC's, bank statements for the receipt of foreign exchange on export of software, etc. 21.4. The learned AO/DRP has erred in holding that the sale proceeds was not brought into India as convertible foreign exchange within the prescribed time limit given u/s. 10A(3) of the Income-tax Act, 1956 ( the Act ) i.e. 6 months from the end of the financial year or, within such further period as the competent authority may allow in this behalf. 21.5. The learned AO/DRP ought to have observed that by the Notification No. FEMA 176/2008-RB dated 23 July 2008 issued by the Reserve Bank of India (RBI) wherein the time limit for the realization of the export proceeds for the software was enhanced from 6 months to 12 months from the date of export (being the invoice date). 21.6. The learned AO/DRP ought to have observed that the Appellant has realized the entire sale proceeds in convertible foreign currency. 21.7. The learned AO/DRP ought to have observed that the out of the total sale proceeds of USD 2,625,77,961 (in ₹ 24,69,47,550), a sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 10A for the software unit on the grounds that: There is no export of software services during the FY 2008-09 Commencement of business by software unit is before introduction of amended section 10A of the Act. Agreement for activities undertaken by software unit has been entered after commencement of operations and before the introduction of section 10A in the Act Sale proceeds not realized within the prescribed time limits 108. The AO thereafter proceeded to re-compute the profits of the Software unit by disallowing the foreign exchange gain and bringing to tax the income of software unit as income from other sources ( IFOS ) ( Page 36 of the Final assessment order). However, in the final computation by AO, the income from software unit is computed as Business income (Page 44 of the Final assessment order). The DRP upheld the order of the AO. Hence, Gr.No.21 by the Assessee before the Tribunal. 109. The learned counsel for the Assessee submitted that the conclusion of the revenue authorities that the Assessee did not export software is contrary to the evidence on record filed by the Assessee to show tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed provisions of Sec.10A of the Act, the learned counsel submitted that the date of agreement being before amendment of section 10A has no relevance for the purpose of determining the eligibility under section 10A He brought to our notice that the first proviso to section 10A(1) allows benefit under section 10A by extending the benefit of deduction u/s.10A of the Act to undertakings which were entitled for such benefit before the substitution of section by Finance Act, 2000 for unexpired period of aforesaid ten consecutive assessment years. Therefore it was submitted that the Software unit of the Assessee was eligible for deduction under the provisions of section 10A prior to its amendment. Hence, by the virtue of the proviso, the Company would be entitled to claim deduction under section 10A post its amendment too. 111. The learned counsel for the Assessee submitted that the observations of the AO that the agreement for rendering the software development services was entered in January 2001 while the operations were commenced in FY 2000-2001 is concerrect and that the activities of the Assessee commenced only from 1st June 2000 (AY 2001-02) as is evident from the annual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... available at page 4983 of File 20 and was filed before the revenue authorities ) 113. The learned counsel contended that as per provision of section 10A export proceeds should be realized within 6 months from the end of FY or such further period as the competent authority may allow in this behalf. Competent authority means the Reserve Bank of India or such other authority as is authorized for regulating payments and dealings in foreign exchange. Vide Notification No. FEMA 176 / 2008-RB issued by the RBI, the time limit for realization of export proceeds for software was enhanced from 6 months to 12 months from date of export (Page No. 5408-5409 of the Case law paper book). It was submitted that extension of time limit for realization of export proceeds by competent authority under FEMA can be said to be approval granted under section 10A. For export proceeds amounting to ₹ 8,56,88,735, since export proceeds bought into India after said period of 12 months are via a FIRC duly received from the Authorized Dealer, same should be deemed to be allowed by the Competent Authority and ought to be allowed in terms of Section 155(11A) of the Act. It was submitted that in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsultancy in computer and allied fields. The extract of the Memorandum of Association of the Company wherein software has been stated to be one of the main objectives of the Company has been submitted before the learned AO. It was submitted by him that all of the aforesaid contentions were put forth before the DRP in the submissions before it at pages 4935-4951 of File No. 20, which were not appreciated by it. 115. He placed reliance on the following cases: a. DCIT v. SEEC Technologies Pvt. Ltd. [order dated 10.04.2012 in ITA No. 1614/Hyd/2010] b. HCL EAI Services Ltd. v. DCIT [2013] 35 taxmann.com 146 (Bangalore - Trib.) c. DCIT v. iGate Global Solutions Ltd ( judgment of this Hon ble Tribunal dated 10 May 2013 in ITA No. 429/Bang/2012) d. Bajaj Tempo v. CIT [ 1992] 196 ITR 188 (SC) 116. He prayed that it should be held that: a. Profits of the software unit should be considered as business income b. Such profits should be allowed deduction under section 10A 117. The learned DR relied on the order of the DRP. 118. We have carefully considered the contentions of the Assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efit of Sec.10A deduction is also within the permissible period. 119. As far as realization of export proceeds by the Assessee is concerned, it is seen from the details given by the Assessee in the earlier paragraphs of this order on this issue that the Assessee has established that the export proceeds were realized within the time permitted by the provisions of Sec.10A(3) of the Act and as per the judicial decisions cited by the learned counsel for the Assessee in support of such conclusion. It is reiterated that Invoices which were realized post 6 months from the end of FY and also within 12 months from the date of invoicing, the provisions of section 10A of the Act provides that export proceeds should be realized within 6 months from the end of FY or such further period as the competent authority may allow in this behalf. Competent authority means the Reserve Bank of India ( RBI ) or such other authority as is authorized for regulating payments and dealings in foreign exchange. Notification No. FEMA 176 / 2008-RB issued by the RBI wherein time limit for realization of export proceeds was enhanced from 6 months to 12 months from date of export. Therefore realization w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... furnished before the learned AO and DRP 22.4. The learned AO/DRP ought to have observed that the Appellant has furnished 100% export invoices for the current FY (i.e. 2008-09) obtained from independent third party covering 4944 invoices (77 box files) along with FIRC evidencing realization. The above would form the basis for foreign exchange workings in respect for export sales made during the year. 22.5 The learned AO/DRP has acknowledged fact that the Appellant has furnished export invoices obtained from 3rd party in his order on page number 27. However, these invoices has been ignored while discussing the adjustment for foreign exchange 22.6 The learned AO/DRP ought to have observed that the exchange gain has arisen only on account of the business activities of the appellant relating to exports of finished goods and therefore is only in the nature of Business Income and not in the nature of Income from Other Sources 22.7. The learned AO/ DRP erred in not considering the Supreme Court decision in the case of CIT v. Woodward Governor India (P) Limited and Honda Siel Power Products Ltd (312 ITR 254) and Sutlej Cotton Mills Ltd. v. CIT (116 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same. The Accounting policy followed by the Assessee in the matter of recognizing foreign exchange gain/loss is that Foreign currency transactions are recorded in reporting currency, by applying to foreign currency amount the exchange, rate between the reporting currency and foreign currency at the date of transaction. Foreign currency monetary items are reported using the closing rate. Exchange differences arising on the settlement of monetary items or on reporting monetary items of company rates different from those at which they are initially recorded during the year or reported in previous financial statements are recognized as income or as expense in the year in which they arise. 125. The foreign exchange gain for IDF 1, IDF 2 and software unit amounting to a total of ₹ 126,48,37,681 has been treated as business income of the respective units. Further, since the same has arisen primarily on account of exports it has been included in the export turnover for the purposes of computing deduction under section 10A of the Act. With respect to foreign exchange loss pertaining to MAG unit since the same has arisen primarily on account of current year imports and im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For IDF 1 and software unit 13th December 2012 (at pages 636-649 of File No. 3 of the paper book, relevant page 646, to be read along with File No. 10 of the paper book) b. For IDF 2 4th March 2013 (at pages 713-729 of File No. 3 of the paper book, relevant pages 719-727 to be read with File 9 of the paper book) 128. The learned counsel for the Assessee further submitted that detailed note on foreign exchange has also been furnished vide submissions 13th December 2012 and 4th March 2013 at the above pages of the paper book. It was submitted that the Assessee has furnished 100% export invoices for the current FY (i.e. 2008-09) obtained from independent third party covering 4944 invoices (77 box files) along with FIRC evidencing realization for both EHTP units vide submissions dated 14th February 2013 (at pages 689-707 of File No. 3 of the paper book, relevant pages 692-696). The above would form the basis for foreign exchange workings in respect for export sales made during the year. Similarly, export invoices for the software unit for the exports made during the year were also furnished to the AO vide submission dated 4th march 2013 at pages 4985-4996 of Fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xchange loss is that a unit having domestic sales cannot have any foreign exchange loss. It was pointed out by him that the Assessee has not booked any forex loss on domestic sales as obviously domestic sales cannot have forex loss. He explained as to how foreign exchange loss arose in the MAG unit. In the MAG unit the loss arose on account of the following: i. Imports for the current year, reinstated in the current year either on payment or on year end reinstatement ii. Imports for the earlier years which have not been paid as on 1st April 2008, reinstated in the current year either on payment or on year end reinstatement. (This submission was made before the DRP and is available at page 4773 of File no. 20 of the paper book. The AO, although required evidence in support of the loss which was given, never sought an explanation on this point in any show cause notice and made the observations for the first time in the draft assessment order) 133. It was submitted that the AO s observations that the turnover and forex loss claimed were disproportionate was not correct because some portion of the forex loss is in connection with imports of earli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble for deduction and loss eligible for deduction in computing income, the learned counsel relied on the following decisions. a. CIT v. Infosys Technologies Ltd [2012] 18 taxmann.com 169 (Karnataka) b. CIT v. Novell Software Development (I) (P.) Ltd [2013] 35 taxmann.com 414 (Karnataka) c. CIT v. Pentasoft Technologies Ltd. [2013] 33 taxmann.com 570 (Madras) d. Changepond Technologies (P.) Ltd. v. ACIT [2008] 22 SOT 220 (Chennai) e. CIT v. Woodward Governor India (P.) Ltd. [2009] 179 TAXMAN 326 (SC) 135. The learned counsel prayed that the Foreign exchange gain should be treated as business income and consequently foreign exchange gain of the IDF-1, IDF-2 and software units should inevitably form part of export turnover for computing deduction under section 10A. Forex loss of the MAG unit should be allowed as business loss. 136. The learned DR submitted that there has been no correlation of the foreign exchange gain with individual item of export and FIRC, Similarly the loss on account of foreign exchange fluctuation in the MAG unit has also not been proved by the Assessee. He relied on the order of the AO/DRP. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 695. The Assessee provided 4944 invoices (77 box files) along with FIRC evidencing realization for both IDF1 and IDF 2 units. The documents filed by the Assessee before the AO (copies of working of foreign exchange gain) are at paper book No.9,10,11 and 12 from pages-1980 to 2769 ) and it gives a complete break up of realized and unrealized foreign exchange gain, loss or gain in respect of each item of sale. The AO made no comment on all these evidence. 139. The AO in the order of assessment without making reference to the above has merely stated as follows (Para 4.2 of the AO s order at page-46): 4.2 Analysis of the reply and conclusion: The reply of the Assessee is not acceptable on the fact that annexure 10,11,12 given on the date of hearing was not supported with any bills and invoices. It was computer generated document where the postings were made indiscriminately for which no material evidences are placed on record. In order to treat this as income from business/forex gain the assessee company should have furnished necessary documentary evidences. However a computer generated statement was given where the company has posted some amounts fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount payable by the Assessee to be more. 143. It is seen from the evidence filed by the Assessee, which are the same letters and annexures thereto, which we have discussed while discussing foreign exchange gain in IDF 1 and IDF 2 unit, clearly gave the basis and break up of the loss in foreign exchange. The evidence in the form of individual purchases which gave raise to the loss have all been placed by the Assessee in paper book No. 13 ( pages-3176 to 3240) along with letter dated 13.12.2012 filed by the Assessee before the AO (copy at page-3174 of paper book No.13). In the light of overwhelming evidence the conclusion of the AO that there is lack of evidence to prove the foreign exchange loss in MAG unit is unsustainable. The conclusion of the AO that MAG unit being a local unit cannot have forex loss is again unsustainable because the loss in question is on account of import of trading items and there is bound to be a loss when one imports and the value of Indian rupee vis- -vis the foreign currency in which payments for imports have to be made, payment depreciates. The other conclusion of the AO is that the loss is disproportionate to the turnover of MAG unit ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The AO considered expense under the head prior period income amounting to ₹ 2,44,90,252 as an income rather than an expense. The learned DRP has upheld the order of the learned AO. 146. In the submissions before the DRP- Page 4812 and 4813- File 20) the Assessee submitted that a sum of ₹ 2,44,90,252 which represents reversal of prior period income has been considered as taxable revenue for Financial year ended 2009 by the learned AO. It was submitted that income was account in FY 2007-08 (AY 2008-09) but was reversed in FY 2008-09 (AY 2009-10) and this was nothing but similar to write off of debts as bad and irrecoverable u/s.36(1)(vii) read with Sec.36(2) of the Act. This claim of the Assessee has not been examined either by the AO or CIT(A) and accordingly, it was agreed by the parties that this issue should be remanded to the AO for consideration afresh, after due opportunity to the Assessee. Accordingly, Gr.No.24.2 is treated as allowed for statistical purpose. 147. Gr.No.25 regarding non-grant of credit for TDS of ₹ 68,54,813 was not pressed because in rectification proceedings the credit was allowed. Similarly Ground No.28 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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