9911796707
TMI Blog2019 (4) TMI 1770X X X X Extracts X X X X X X X X Extracts X X X X ..... ices by the Assessee to its Associate Enterprise (AE). These Grounds read as follows: Grounds of Appeal raised by assessee: 1. The learned Assessing Officer ("learned AO") and the learned Dispute Resolution Panel (learned DRP) erred in law and in facts in upholding the adjustment to the transfer price of the Appellant in the contract software development services by Rs. 9,819,200 and in the contract Research and Development (R&D) services by Rs. 28,882,400. 2. The learned AO, the learned DRP and the learned TPO erred in rejecting the Transfer Pricing ('TP') documentation maintained by the Appellant on invoking provisions of sub-section (3) of 92C of the Income Tax Act, 1961 contending that the information or data used in the computation of the arm's length price is not reliable or correct. 3. The learned AO, learned DRP and the learned TPO erred in rejection of comparability analysis carried in the Transfer Pricing documentation and in conducting a fresh comparability analysis on application of additional filters for determination of the arm's length price for contract software development and contract R&D services segments. 4. The learned AO, learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oviding appropriate adjustment towards the risk differential, when the comparables selected are full-fledged entrepreneurial companies. Grounds of Appeal raised by Revenue: 1. The order of Hon'ble DRP is opposed to law and facts of the case. 2. The Hon'ble DRP has erred in including M/s FCS Solutions and M/s Thinksoft Global Services Ltd which TPO has excluded under rule 18B(3) of IT Rules being not comparable companies. SOFTWARE DEVELOPMENT SERVICES SEGMENT: 3. First we shall take up for consideration the determination of ALP in the SWD services segment. The Assessee is engaged in the business of providing software development services to its overseas Associated Enterprises ('AE' for short). It is not in dispute that the transaction of rendering of software development services by the Assessee to its AE was an international transaction and in view of the provisions of sec. 92 of the Income Tax Act, 1961 (Act), income arising from such international transactions has to be determined having regard to Arms Length Price (ALP). The issues to be decided in the cross appeals are determination of ALP of the international transaction of providing software develo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany Mark up Unadjusted (%) 1 Kals Information Systems Ltd. 13.89 2 Akshay Software Technologies Ltd. 8.11 3 Bodhtree Consulting Ltd. 62.27 4 R S Software (India) Ltd. 9.97 5 Tata Elxsi Ltd. (segmental) 20.28 6 Sasken Communication Technologies Ltd. (segmental) 27.91 7 Persistent Systems Ltd. 41.40 8 Zylog Systems Ltd. 7.81 9 Mindtree Ltd. (segmental) 5.52 10 Larsen and Toubro infotech 24.72 11 Infosys Ltd. 45.61 ARITHMETIC MEAN 24.32 Computation of arm's length price by the TPO and the adjustment made towards the SWD services provided by the Assessee: Arm's Length Mean Margin 24.32% Less: Working Capital Adjustment* - Adjusted mean margin of the comparables 24.32% Operating Cost 7,30,00,000/- 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., Rs. 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 objecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 against including the aforesaid five companies as comparable companies. The plea of the Assessee was that the aforesaid five companies are not functionally comparable with the Assessee who was engaged in the business of providing SWD services to AE. It is also not in dispute before us that the functional profile of the Assessee in this appeal and the Assessee in the decision rendered in the case of Infinera India (P) Ltd.(supra) are identical. In the case of Infinera India (P) Ltd.(supra) this Tribunal held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 determination of ALP. The learned counsel in this regard has also pointed out that the TPO in AY 10-11 & 2011-12 accepted the claim of the Assessee in this regard and the relevant orders of TPO was also placed before us. The other grievance projected by the Assessee is that even assuming that the Assessee is to be regarded as rendering R & D services to its AE, the comparable companies chosen by the TPO and retained by the DRP are not comparable functionally and otherwise. The other grievance projected by the Assessee is regarding not granting working capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 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 Rs. 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 submission filed before AO dated 16.10.2012 which is at 518 to 540 along with annexure at page 542 to 567). Admittedly, no revised return of income was filed. The relevant grounds read as follows: "10. Disregarding the correct business loss incremental claimed in the revised computation - Rs. 3,04,51,707 10.1 The learned AO/DRP has erred in rejecting the revised computation filed by the Appellant during the course of Assessment Proceedings pursuant to which the loss of Rs. 9,40,42,566 was increased to Rs. 12,44,94,273. 10.2 The learned AO/DRP ought to have observed that the compu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mine 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 examine the revised computation of income is by placing reliance on the decision of the Hon'ble Supreme Court in the case of Goetz (India) Ltd.(supra). The DRP upheld the order of the AO. 20. The learned counsel brought to our notice the reasons for filing revised computation of total income were completely explained by the Assessee and that there was no legally justifiable reasons assigned by the revenue authorities for disregarding the revised computation of total income. A reconciliation between the loss declared in the original return of income and loss declared in the revised return of income is also given in the written note filed before us. We do not wish to go into tho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 unsustainable and is hereby held to be not in accordance with law. 23. We may also add that the decision rendered in the case of Goetz India Pvt.Ltd. (supra) based on which the revenue authorities drew their conclusions to ignore the revised computation of total income has been subject matter of several judicial pronouncements. In the case of Jute Corporation of India Ltd. Vs. CIT (1990) 53 taxman 85(SC), it was held that the first appellate authority has wide powers u/s.251(1)(a) of the Act and can entertain an additional claim, In National Thermal Power Co. Ltd. Vs. CIT 229 ITR 383 (SC) it was held that the purpose of proceedings under the Act is for correct determination of tax liability and exam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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'ble Supreme Court, but the same would be binding on the subordinate income-tax authorities. In our opinion, therefore, circulars of same nature which have been already issued would not become irrelevant or can be ignored. Admittedly, the circular issued in 1995 has not been withdrawn, hence, it has got binding force on the subordinate authorities even as on date. Accordingly, we hold that the Assessing Officer is bound to assess the correct income and for this purpose, the Assessing Officer may grant reliefs/refunds suo moto or can do so on being pointed out by the assessee in the course of assessment proceedings for which assessee has not filed revised return, although, as per law, the assessee is required to file ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 record by the Appellant for export sales on the grounds that: * There are certain invoices dated prior to 1 April 2008 * Export turnover earned through raising of Transfer Pricing (TP) debit notes is on account of TP adjustments under section 92C of the Act. * Certain invoices are pending realization. Invoices prior to 1 April 2008 11.4 The learned AO/DRP ought to have observed that the accounting for the invoices is done as per the revenue recognition policy of the assessee which is in line with Accounting Standard 9 issued by the Institute of Chartered Accountants of India. 11.5 The learned AO/DRP ought to have observed that the above invoices are for goods sold on "free on board" or "cash insurance freight" basis and the bill of lading date for the said in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounting to Rs. 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 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. 12.3 The learned AO/DRP has erred in rejecting the invoice-wise listing placed on record by the assessee for export sales on the grounds that: * There are certain invoices dated prior to 1 April 2008 * Certain invoices are pending realization. Invoices prior to 1 April 2008 12.4 The learned AO/DRP ought to have observed that the accounting for the invoices is done as per the revenue recognition policy of the assessee which is in line with Accounting Standard 9 issued by the Institute of Chartered Accountants of India. 12.5 The learned AO/DRP ought to have observed that the above invoices are sold on 'free on board" or "cash insurance freight basis and the bill of lading date for the said invoices is post 1 April 2008 and is accordingly booked as reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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.10A of the Act. The AO was of the view that the Assessee has shown more profits in IDF1 and IDF2 units whereas he has shown loss in MAG unit because the profits of MAG unit are taxable. With this approach he has proceeded to examine the claim of the Assessee for deduction u/s.10A of the IDF 1 and IDF2 units. The approach of the AO was incorrect because as we have seen in the earlier paragraph, MAG unit was doing trading and their profits or cost of sales cannot be compared with profits or cost of sales of IDF 1 and IDF2. 29. The AO obtained the Annual Performance Report (APR) from the Software Technology Parks of India (STPI). APR is a statement submitted to STPI for performance appraisal. The revenue recognized therein may not tally with the turnover as shown in the Profit & Loss A/c. of the Assessee for many reasons such as revenue recognition policy followed by an Assessee, recognition of sale value as per the provisions of Sec.92 of the Act by making adjustment to Arm's Length Price on sale to a related party. The sales as shown in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Sales reversed in sales listing on CIF terms for revenue recognition 38,726,658 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 176,465,522 Sales reported in APR 14,157,649,095 * The export sales of Rs. 1,429.53 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 submissions/replies with regard to its export sales. * Accordingly, we submit that the correct export turnover for the purpose of 10A ought to be Rs. 1429.53 crores plus forex gain of Rs. 46.14 crores amounting to Rs. 1475.67 crores. 31. The AO on examination of the reconciliation together with the sale invoice produced by the Assessee, pointed out the following aspects: In respect of EDF-1 unit, the AO was of the view (i) that sales totalling Rs. 2,70,84,828/- that were considered as part of sale for AY 2009-10 related to invoices raised from 22.3.2008 till 29.3.2008 and these sales ought to have been recognised as sales of AY 2008-09 and not 2009-10 as done by the Assessee. (ii) that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment order acknowledges that the above evidence was furnished and does not doubt the genuineness of these documents. 34. On the observations of the AO in the order of Assessment regarding recognition of sale of AY 2008-09 in AY 2009-10, he submitted that Accounting for invoices are made following the principles of the AS - 9 Revenue recognition as stated in Schedule 18(h) of the annual report at page 232 of Paper book No.2). In case of free-on-board (FOB) sales, the seller fulfils his obligations when the goods have passed over the ship's rail/aircraft as the case may be, the Bill of lading/ airway bill would indicate the date of boarding the goods on the vessel/aircraft. In case of "cost insurance freight" basis sales ('CIF sales') , revenue recognition will be when the goods are delivered to the buyer i.e., much after the date of bill of lading and the bill of lading date is post April 1, 2008 and is accordingly booked as revenue for the year ended March 2009. He drew our attention to the Bills of lading/Airway Bills along with sales invoices produced in support of the same (pages 3551-4008, Files 15 and 16 of the paper book). He therefore submitted that these invoices shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been raised as part of a separate TP debit note does not in any way take away the fact that these are directly linked to the export of goods made during FY 2008-09 and is hence eligible as part of export turnover for section 10A purposes. The term 'export turnover' as defined in Section 10A of the Act means the consideration in respect of export of articles or things. In practical business parlance, the consideration could be received in one or multiple invoices. This is a commercial arrangement. The consideration received from TP debit notes is identifiable with the export of articles or things, and hence the same partake the character of Export Turnover for the purposes of section 10A of the Act. The Assessee raised TP debit notes on APCC USA in respect of its export sales amounting to USD 1,39,85,083 (in Rs. 66,53,41,264). The snapshot of the TP debit notes raised during the FY 2008-09 is as given below: Debit note Date Particulars Debit Note No. Amount (USD) Amount (Rs.) 31-Mar-09 APCC - USA - Debtors 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould 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 exchange1 * 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 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). Note 4: This amount is unrealized as of date and therefore the same may not be considered as part of export turnover for AY 2009-10. It was submitted that should permitted to claim the deduction as regards the same once the same has been realized in terms of Section 155 (11A) of the Act. It was further submitted by him that the observations of the AO that there are invoices pending realization of export proceeds were made for the first time in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstrating realization of the export of components were furnished before the learned AO vide submissions dated 13th December 2012 at page 646, and 14 February 2013 (Submission at page 689, 695 of File 3 (invoice-wise sales listing in File No. 8 of the paper book includes sales of components as well) and supporting FIRCs submitted there under at Page nos. 739 to 1059 - File 4). Separate sales invoices for components was also given as is evident in the submission at Page 646 - Paper nppl No. 3. The learned counsel therefore prayed that the Export turnover as per the segmental P & L of the Assessee to be adopted. 38. The learned DR reiterated the case of the AO as reflected in the draft assessment order. 39. Under Sec.10A of the Act, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee. Sec.10(4) lays down that the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the contract manufacturing activities is determined. The shortfall in invoicing, if any, is made up by raising a TP debit note so that the consideration on contract manufacturing is met at 15 % on costs. The amounts reflected in the TP debit notes represent the differential consideration for the export sales made during FY 2008-09 and accordingly the sum of Rs. 66,53,41,264/- should form part of the Export Turnover while considering the deduction under section 10A of the Income-tax Act 1961 (the Act). As rightly contended by the learned counsel for the Assessee, the term 'export turnover' as defined in Section 10A of the Act means the consideration in respect of export of articles or things. In practical business parlance, the consideration could be received in one or multiple invoices. The consideration received from TP debit notes is identifiable with the export of articles or things, and hence the same partake the character of Export Turnover for the purposes of section 10A of the Act. The Assessee raised TP debit notes on APCC USA in respect of its export sales amounting to USD 1,39,85,083 (in Rs. 66,53,41,264) and these debit notes were raised during the previous year rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - INR Realization value-INR Realized till 30th September 2009 29.29 1288.64 1359.08 1 Realized post 30th September 2009 but within 12 months of invoicing as per FEMA regulations - - Realized post 30th September 2009 but after 12 months of invoicing 1.40 66.70 66.81 3 Total realized till date 5.49 247.69 265.72 Unrealized till date 0.03 1.19 - 4 Export sales as per sales listing 5.51 248.88 248.88 As far as sales realization being item No.1 and 2 are concerned, there can be no dispute on considering the above realizations as sale of the relevant AY. As far as item No.3 i.e, Invoices which were realized post 6 months from the end of FY and also from the 12 months from the date of invoicing, is concerned, 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 whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time limit specified in Sec.10A(3) of the Act. A sum of Rs. 4,55,03,164 was stated to be Invoices pending realizations and therefore was disregarded for the purpose of considering export turnover of the Assessee for IDF-2 UNIT. The Assessee has filed the following reconciliation to show that the amount to be excluded from export turnover is a sum of Rs. 5.41 Crores as per the following chart. Particulars Amount In Crs. Refer Note USD Invoice value- INR Realization value-INR Realized till 30th September 2009 29.29 1288.64 1359.08 1 Realized post 30th September 2009 but within 12 months of invoicing as per FEMA regulations 2.77 134.99 142.87 2 Realized post 30th 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 realization being item No.1 and 2 are concerned, there can be no dispute on considering the above realizations as sale of the relevant AY. As far as item No.3 i.e, Invoices which were realized post 6 months from the end of FY and also from the 12 mont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the financial statements. "14. Double taxation of scraps sales amounting to Rs. 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 Rs. 1,27,94,809 and Rs. 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 regarding re-computation of sales in the domestic market. We have already seen while dealing with Gr.No.11 & 12 that the Assessee 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 101,15,90,862/- respectively, totalling to Rs. 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 Rs. 55,25,46,883/- and Rs. 132,96,19,115/- totalling to Rs. 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) Rs. 24,24,16,413/- of excise duty paid (originally, the AO had not given deduction of the same in the original assessment order but gave deduction of the same in the rectification order dated 18th August 2014) and 2) An amount of Rs. 12,99,12,478/- representing trade discounts for the two units put together (Rs. 4.08 cr for EHTP 2 and Rs. 8.29 cr for EHTP 1. While the sales reported in the excise return includes the amount of trade discount, the segmental P&L reported domestic sales net of trade discount. The learned counsel submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the reconciliation provided by the Assessee prima facie proves its case. It is undisputed that all sales invoices were provided by the Assessee before the AO. Therefore 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss account was showing sales of only Rs. 127,09,37,459/-. The Assessee filed a reconciliation of the sales figure of Rs. 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 (MAG) a. The amount considered by your goodself in the notice is Rs. 3,023,190,978 being the net sales of MAG unit as per the trial balance. b. As stated in our submission dated 13 December 2012, the amount booked as sales in the MAG unit is the sales pertaining to the following: i. MAG traded; ii. IDF 1/EHTP 2 domestic sales; and iii. IDF 2/EHTP 1 domestic sales c. As per the coding system of accounting followed by the company, the trial balance of MAG unit captures the total domestic sales of the company. Out of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 without quoting paragraphs (a) to ( d). A reading of paragraph (a) to (d) of the reply dated 14.3.2003 filed by the Assessee would show that MAG unit captures the total domestic sales of IDF 1 and IDF 2 and sale of MAG unit. The sales of MAG unit on its own was only Rs. 127,09,37,459. IDF 1 and IDF 2 units domestic sales were also captured as sales of MAG unit in the Balance Sheet and this was due to system of accounting followed by the company. The difference in figures pointed out by the AO at page 41 of his order, which we have extracted in the earlier paragraph is an incorrect comparison because Rs. 116.26 crores represents the cost at which the goods are transferred inter-unit from IDF to MAG, whereas Rs. 175.22 Cr represents the sale value which is offered to tax in the IDF units. The relevant entry for Rs. 116.26 crores in the Trial Balance of MAG unit is available at page 38 of the assessment order under the Purchase Account (Relevant Entry - "Purchases - Inter division"). This was duly explained to the AO vide Assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operly reconciled the difference in figures by pointing out that the sale figure as reflected in the Trial Balance is nothing but inclusive of the sales by internal transfer from MAG unit to IDF 1 and IDF 2 units. We have already extracted the reconciliation in the Assessee's letter dated 14.3.2013 in the earlier part of this order on this issue. The learned counsel for the Assessee pointed out that the sum of Rs. 1,75,22,53,519 represents domestic sales (inclusive of excise duty component) of manufactured goods of IDF 1 and IDF 2. The Assessee has reported the above domestic sales as part of the segmental P&L of IDF 1 and IDF 2. It was pointed out by him that the AO has considered an amount of Rs. 188,21,65,998/- as domestic sales of IDF units from excise returns, which is sales of Rs. 175,22,53,519 plus trade discounts of Rs. 12,99,12,479/-, as stated earlier. It was submitted by him that the AO, by adopting the figures in the trial balance of the MAG unit (which also included sales of the IDF units), has once again considered the sum of Rs. 1,75,22,53,519 as part of MAG P&L thereby resulting in double taxation of the same amount in MAG unit as well as IDF 1 and IDF 2 i.e., same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the MAG unit, the corresponding cost to such sales which are allocated to IDF 1 and IDF 2 in the segmental profit and loss account should also be removed from IDF 1 and IDF 2 and considered as cost of MAG unit. Without prejudice it was submitted that while computing the total turnover of IDF units 1 and 2, no domestic sales should be reckoned whilst computing the deduction under Section 10A of the Act. 68. The learned DR relied on the order of the AO/DRP. 69. We have given a careful consideration to the rival submissions. We find merit in the submissions made by the Assessee. As we have already mentioned in the earlier paragraphs on this issue, the AO and the DRP have selectively quoted form the reply of the Assessee dated 14.3.2013 without quoting the relevant part of the reply of the Assessee which gives reconciliation of the figures of domestic sales in IDF 1 and IDF 2 units. If only if they had dealt with the claim of the Assessee in the letter dated 14.3.2013 and the earlier letters of the Assessee on this issue, the issue would not have arisen before this forum for consideration. Not dealing with a claim and making an arbitrary addition in our view cannot be sustained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit and loss account. * Sample invoice copies for the substantiating the above details Provision for warranty - Rs. 15,97,71,045 18.4. The learned AO/DRP has erred in concluding that the provisions for warranty is not on a scientific basis as the details of the utilization of the warranty have not been provided. 18.5. The learned AO/DRP ought to have appreciated that the provision for warranty created is on a scientific basis and the Appellant has furnished detailed workings and a write-up on the basis for creation of the provisions for warranty being on the past trends of failure of the product. 18.6. The learned AO has erred in rejecting the claim of the Appellant that the warranty provisions are on a scientific basis as concluded in the assessments for the AY 2007-08 and the underlying facts have not undergone a change in the current assessment year. 18.7. The learned AO/DRP has erred in concluding that the warranty provisions created during any of the years have not been reversed. The learned AO has erred in disregarding the ledgers provided by the Appellant wherein it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nses claimed by the Assessee and considered by the AO at Rs. 15,97,40,517/- is Rs. 17,77,00,000/-. There is therefore a slight variation in the figures of provision which is claimed to have been disallowed by the Assessee in the computation of total income by Rs. 30,528 (Rs. 17,77,00,000- Rs. 17,76,69,472). Nevertheless, the claim for deduction on account of provision for warranty expenses considered for disallowance by the AO is a sum of Rs. 15,97,40,517/-. We should therefore proceed on the basis that the provision for warranty expenses claimed by the Assessee is a sum of Rs. 15,97,40,517 and the remaining sum claimed on account of provision for warranty is on actual warranty expenses incurred. 73. The Assessee provides warranty coverage for goods domestically sold. The warranty so provided consists of 'In warranty' expenses and Post Warranty Expenses: In Warranty Expenses: i.e., customers who require service during the defined factory warrant period of operation use in-warranty service. All sales contracts of the Assessee provides for warrant/after sales services for free supply of material, bought out services during the warranty period. The defined warranty period of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the current financial year and offered as income while computing the taxable income. (b) The actual warranty expenses incurred for the year are debited as expenses in the current financial year; (c) During the year end, the Assessee reviews the amount required to be provided as warranty based on the warranty policy of the Assessee. The Assessee provides for warranty based on the average field failure rate of each product and average actual repair cost incurred for each product. These are based on the feed back of the service engineers who are in-charge of reapirs and replacements of defective products. Further adjustments are made to either increase or decrease this provision based on the assessment of risk exposure. 75. The entries passed for the relevant previous year in the books of account of the Assessee is as follows: Sr. No. Particulars Debit (Rs) Credit (Rs) 1 Provision for warranty account Dr 252,283,455 To Warranty expenses Account 252,283,455 (Being reversal of opening provisions) 2 Post warranty expenses account Dr 61,326,593 To Cash/Bank/Creditor &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s account and those expenses cannot by any stretch of imagination be disallowed. The AO has made reference to certain figures in para 6.3 subparagraph- 2 at page 52 of his order and those figures have nothing to do with claim for deduction of expenditure on account of warranty and those figures relate to the provision for warranty as per books of accounts whereas 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 (Rs. 45,14,60,360) and post warranty (Rs. 6,13,19,767) was erroneously consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n on account of provision for warranty is claimed. This has been made clear by the Assessee in his submission dated 13.12.2012 and annexure-16 to the said letter filed before the AO. Therefore there is no reason why the actual expenditure incurred on providing warrant claims should not be allowed as deduction. The evidence filed by the Assessee 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 (Rs. 45,14,60,360) and post warranty (Rs. 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 Rs. 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 do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms. 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-à-vis the closing provision for warranty and also reversal of warranty have all been furnished by the Assessee before the AO. (Submission at page 4747 of File 20 of the paperbook (relevant pages 4786-4793). The Ledger extracts for the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art 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 - Rs. 5,38,22,153 19.1 The learned AO/ DRP has erred in considering the sum of Rs. 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 Rs. 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 fact that the Appellant is consistently following the method of accounting for deferred service income as per Accounting Standard (AS) 9 - revenue recognition. 19.5. The learned AO/DRP has erred in not appreciating the fact that the Appellant has considered the deferred service income of the FY 2008-09 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 was deferred in the current FY has been booked in the P&L account for the subsequent years and has been offered to tax. He submitted that the AO and DRP were not right in characterizing the income in question as undisclosed income. According to him the amount in question is very much disclosed in the books of accounts of the Assessee and therefore cannot be said to be undisclosed income. The Assessee has an explanation for the sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 submissions. The first aspect which we would like to clarify is that it was not correct on the part of the AO to characterize the sum of Rs. 5,38,22,153 as undisclosed income. The income is disclosed in the books of accounts but is not recognized for the purpose of income tax computation because of the Assessee's accounting policy which in turn is based on AS-9 of ICAI. The second aspect which has to be clarified is that the deferment of revenue as not pertaining to the relevant AY 2009-10 is also su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness 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 receipt basis and not on accrual basis. Receipt, either accrued or deemed, is not made a condition precedent to taxability. Profits or gains are taxable if they have accrued or have arisen or are, under the Act, deemed to have accrued or arisen to the assessee in the accounting year. Generally, income must accrue first, receipt normally follows the accrual. In other words, the right to receive must come into existence before the actual receipt takes place. Receipt, by itself, is not sufficient to attract tax. It is only receipt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 time of raising progress bills and same therefore had no effect whatsoever on income of assessee, which was recognised by method of percentage of completion. The Assessing Officer, however, held that amount due to customers as shown by assessee was nothing but understatement of its profits and added same to total income of assessee. On further appeal the question before the Tribunal was as to whether amount due to customers as shown by assessee was nothing but receipt of advance before accrual of income and, therefore, same could not be treated as incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 Rs. 2,90,49,941/- was debited in the service income account. According to the AO, there was no explanation on the aforesaid debit entry in the service income ledger account and therefore the same was treated as income of the Assessee. 99. Before the DRP the Assessee submitted that it entered into a contract with Bharti Airtel Ltd., for rendering installation services. The contract value was a sum of Rs. 2,90,49,491/-. The Assessee booked the entire revenue as on 31.3.2009. At the time of finalization of financial statements, the Assessee noticed that the installation work had not been completed and therefore this income should not be recognized ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 of ICAI, in respect of sale of goods which are delivered subject to conditions such as installation, inspection etc., wherein it is provided that revenue ought not be recognized until the customer accepts the delivery and installation/ inspection as complete. The learned counsel therefore prayed that the addition of deferred income (sundry debtors) amounting to Rs. 2,90,49,991 as undisclosed income should be deleted as the same is not income for the year in question i.e. FY 08-2009 relevant to AY 2009-10. The learned DR relied on the order of the AO/DRP and reiterated submissions as were made with reference to Gr.No.19. 103. We have carefully considered the rival submissions and are of the view that the stand taken by the Assessee deserves to be accepted. Admittedly position is that income from the aforesaid contracts was offered to tax in the subsequent assessment year. Therefore the addition in this year is revenue neutral. We are therefore of the view that without going into the correctness of the claim of the Assessee for deferring its income to subsequent assessment year, on the facts of this case, the addition made cannot be sustained and the same is directed to be delete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r different units and one such unit is Software Development services unit. In this unit Software Development Services are rendered to APCC, USA, the holding company of the Assessee. The Assessee claimed deduction u/s.10A on the profits of this unit at a sum of Rs. 8,98,26,852 as per Form No.56F. The AO while examining the claim of the Assessee firstly noticed that the turnover declared by the Assessee in the software unit was Rs. 24,69,47,550/- and to this turnover other income of Rs. 55,853/- and forex gain of Rs. 4,21,81,949/- was added and total income was shown at Rs. 28,91,85,353/-. The turnover as per the Annual Performance Report to be submitted to the STPI was only a sum of Rs. 16,60,96,000/-. 106. The AO on examination of the claim of the Assessee for deduction u/s.10A of the Act, raised the following queries: (i) As per Agreement between the Assessee and APCC, USA, the Assessee was to render only Research & Development and that cannot be regarded as service of software development or IT enabled Services that are notified by CBDT for being eligible to claim deduction u/s.10A of the Act. (ii) There was no evidence of having exported the computer software. (iii) T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 3) and (page no. 4990 and 4995 - File 20) 13th December 2012 and 4th March 2013 Agreement for export of software to APCC USA (Page 656-660 of File 3) (Page 4997 to 5001 of File 20) 13th December 2012 and 4th March 2013 FIRCs evidencing realization of export proceeds on export of software (Page 5085 to 5088 of File 20) 4th March 2013 Bank statements for the receipt of foreign exchange on export of software (Page 636 of File 3) 13th December 2012 Letter provided by APCC USA confirming the receipt of services therein (Page 5083 to 5084 of File 20) 4th March 2013 He drew our attention to the fact that in the Transfer Pricing Order passed by the TPO u/s.92CA of the Act for the relevant AY, the TPO has accepted that the Assessee exported software services and has even made an adjustment in respect of the price received by the Assessee for the same, which only demonstrates that the AO's contention as to the non-existence of exports is wholly without any basis. It was submitted by him that the conclusion of the AO that the Assessee never exported software is therefore incorrect. 110. With regard to the finding of the AO that the Agreement dated 1.1.2001 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Realization details Invoice No./ Date Amount (in USD) Amount (in Rs.) FIRC No. Realizati on Date Amount (in USD) Amount (in Rs.) SW001/200 8-09 dated 31-03-2009 32,93,611 13,96,09,560 AD- 0413 44 15-Oct- 09 32,93,611 16,60,96,789 SW002/200 8-09 dated 31-03-2009 20,50,899 10,73,37,951 AD- 0597 26 AD- 3353 96 10-Dec- 09 10-Oct- 11 2,30,864 18,20,035 1,07,92,436 8,56,88,735 TOTAL 24,69,47,550 2,625,77,961 (The above tabulation is 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stems, diagnosis to set up training institutions and consultancy 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 Assessee and the grounds on which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 within 12 months from the date of ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urnished 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 ITR 1) on the said issue". 23. Disallowance of foreign exchange loss of MAC unit - Rs. 30,18,63,653 23.1. The learned AO/DRP has erred in d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 Rs. 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 import payables of prior years it has been claimed as an allowable loss while computing taxable income for the MAG unit. 126. The AO while considering the claim of the Assessee for considering foreign exchange gain as profit of the business of the Sec.10A units IDF 1 and IDF 2 respectively and allowing loss on foreign exchange fluctuation in respect of MAG unit, acknowledged that the Assessee had furnished the forex fluctuation profit/loss working (vide paragraph 4.2 at page-46 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 File No. 20 of the paper book. 129. The learned counsel for the Assessee also drew our attention to the fact that AO has acknowledged fact that the Assessee has furnished export invoices obtained from 3rd party in his order on page number 27 of the assessment order. However, these invoices have been ignored while discussing the adjustment for foreign exchange. It was argued that the AO foreign exchange gain in case of IDF1, IDF 2 and Software unit is majorly on account of exports due to the increase in the value of USD against rupee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disproportionate was not correct because some portion of the forex loss is in connection with imports of earlier years and therefore comparing the forex loss with the amount of imports for the current year as done by the AO in page 39 of the order was incorrect. It was submitted that imports are for the business purposes of MAG unit. It was submitted that the AO ought to have appreciated that the foreign exchange loss due to the increase in the value of USD against rupee as depicted under: Particulars USD INR As on 31.03.2008 1 40.26 As on 31.03.2009 1 51.43 Depreciation % 28% (available at page 4772 of File No. 20 of the paper book) It was submitted that due to the rate fluctuation, the amount payable toward import purchases has increased. 134. It was submitted that the AO has erred in holding that there is lack of evidence for the foreign exchange loss. Our attention was brought to the fact that the Assessee has submitted detailed workings of foreign exchange loss as evidence vide Annexure number 12 to submissions dated 13th December 2012 ( at pages 636-649 of File No. 3 of the paper book, relevant page 646 to be read with File no. 14 of the paper book) (d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and consequently deduction u/s.10A of the Act to that extent was denied to the Assessee. The first and very important thing to notice on this claim of the Assessee is that the AO did not dispute the quantification of the foreign exchange fluctuation gain as computed by the Assessee. This is evident from the fact that the AO considered a sum of Rs. 1,26,48,37,681/- as income of the Assessee from other sources. In a reply to the query of the AO on the foreign exchange gain in IDF1 and IDF 2 unit, the Assessee vide its reply dated 13.12.2012 ( copy at page 646 of paper book 3) gave the following reply for foreign exchange gain in IDF1 unit and loss in MAG Unit: "Please find enclosed the forex gains workings for IDF!/EHTP 2 and software units vide Annexure 10 & 11 respectively. Please find enclosed the forex loss workings for MAG unit Vide Annexure-12." Similarly in a reply dated 4th March, 2013 (copy at page 719 to 729 paper book No.3) the Assessee gave the following details (at page- 719); "1.Foreign Exchange gain/loss of IDF1 and IDF 2 unit: 1.1. Break up of Foreign Exchange fluctuation: The unit wise break-up of forex gain/loss linked to the amount credited to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of IDF1 and IDF 2 unit because the income would be exempt u/s.10A and it was only by treating it as income from other sources that he could bring to tax the aforesaid income. This approach in our view was not correct. 141. 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. 142. As far as 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le computing income of MAG unit. We hold and direct accordingly and allow Gr.No.23 raised by the Assessee. 145. Out of Gr.No.24 raised by the Assessee only Gr.No.24.2 was pressed for adjudication. The said ground relates to Reversal of Prior period revenue of MAG (equivalent to expense in the current year) considered as prior period of revenue for current year. The facts as far as this ground of appeal is concerned are that the Assessee gave the following treatment in the segment Profit and Loss account of MAG unit but the AO gave a different treatment and as a result, reversal of prior period revenue of MAG unit resulted in the loss claimed by the Assessee in this unit being reduced. The following chart explains the position in this regard: Rs. In Crores: Treatment by Assessee in the segmental P&L of MAG unit Treatment by AO (Page 43 of the assessment order) Expenses Reduction from profits Actual depiction Net amount being Gross profit less operating expenses, less depreciation and less finance expenses : Rs. (47.21) Less: Expenses being prior period revenue reversed : (Rs. 2.45) Net profit / (loss) : Rs. (49.66) [excluding other expenses] Reve ..... X X X X Extracts X X X X X X X X Extracts X X X X
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