2019 (4) TMI 1770 - AT - Income Tax

TP Adjustment - determination of Arm s Length Price (ALP) in respect of international transactions of rendering Software Development Services (SWD services) AND rendering of Research and Development Services by the Assessee to its Associate Enterprise (AE) - HELD THAT - Assessee is engaged in the business of providing software development services to its overseas Associated Enterprises thus companies functionally dissimilar with that of assessee need to be deselected from final list. Company be excluded from the list of comparable companies as the related party transactions to sales was more than 15%. Research and development service segment - In the light of the TPO s acceptance in AY 20010-11 2011-12 that the nature of services rendered was akin to SWD services, the entire comparability criteria will change and the comparable companies already retained in the SWD segment will hold good for this segment also. We therefore feel that 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 Act, were free to consider a claim made by an Assessee even in the absence of a revised return of income and that the requirement for filing a revised return of income as laid down by the Hon ble Supreme Court in the case of Goetz India Ltd. 2006 (3) TMI 75 - SUPREME COURT is applicable only when a claim is made contrary to the return of income before the AO. The Hon ble Delhi High Court in the case of Bharat Aluminium . 2007 (5) TMI 228 - DELHI HIGH COURT has inter-alia ruled that assessee can file revised computation in the course of ongoing assessment proceedings under the Act, without making recourse to revised return, despite the fact that time limit for revising return u/s 139(5) had expired. - we are of the view that the interest of justice would be met, if the order of the AO/DRP on this issue is set aside and by directing the AO to look into the revised computation of total income filed by the Assessee before AO. The AO will also consider the reasons for such revision of total income explained in the letter dated 16.10.2012 together with other annexure to the said letter. Rejection of export turnover of IDF 1 unit as per the books of accounts - non-inclusion by the revenue authorities of a sum under the name TP debit notes as part of the export turnover of the Assessee for computing deduction u/s.10A - HELD THAT - 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. Assessee raised TP debit notes on APCC USA in respect of its export sales amounting to USD 1,39,85,083 (in ₹ 66,53,41,264) and these debit notes were raised during the previous year relevant to AY 2009-10. Hence, we hold that the revenue authorities were not justified in not considering ₹ 66,53,41,262 as part of the export turnover of the Assessee in IDF-1 unit for AY 2009-10. Non-inclusion of 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 - 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 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 2013 (11) TMI 772 - ITAT BANGALORE 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 the Act. Turnover of IDF-2 unit - non-inclusion of sales which were treated as prior period (AY. 2008-09 sales) by the AO on the basis of the dates of sales invoice that was prior to 1.4.2008 - Assessee s method of Accounting for invoices are made following the principles of the AS 9 Revenue recognition. In case of free-on-board (FOB) sales, the date of sale is recognized as the date on which the goods are handed over to the carrier and in the case of CIF sales the date of delivery is recognized as the date of sale. The Bills of lading/Airway Bills along with sales invoices produced in support of the claim of the Assessee 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 owing to wrong punching of amounts which are not required to be reported as sales to APR. The evidence to substantiate this claim is not discernible. 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) - what is to be excluded from turnover on the ground of non-realization of sale proceeds u/s.10A(3) is a sum of ₹ 5.41 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) Considering domestic sales of IDF 1 and IDF 2 as per excise return - Double taxation of scraps sales - HELD THAT - As 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 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 a course of substituting the sales figures as reflected in the books of account, which is supported by the sales invoices produced before the AO at the time of assessment proceedings. The AO is directed to verify figures of trade discount and exclude them from sales figure. Similarly the AO is directed to verify if income from sale of scrap has been doubly taxed and if so, allow relief to the Assessee. The AO will afford opportunity of being heard to the Assessee before giving effect to this order. Domestic sales of IDF 1 and IDF2 - We are convinced that the 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 unit. The same should be considered as domestic sales of IDF 1 and IDF2. We hold and direct accordingly. Similarly the cost of sales should be taken as per the segmental Profit and Loss Account. The issue with regard to foreign exchange fluctuation loss whether should be regarded as allowable deduction while computing income of MAG Unit or not will be discussed and dealt with while dealing with a specific ground of appeal on foreign exchange fluctuation gain and loss which is Gr.No.22 23 of the grounds of appeal of the Assessee in this appeal. Deduction on account of provision for warranty comprises - HELD THAT - Actual warranty expenses were always claimed apart from deduction claimed on account of provision for warranty. The closing balance in the provision for warranty account on the last of the earlier financial year which is opening balance of the current financial year is reversed on the first day of current financial year. Thereafter the actual warranty expenses is claimed as deduction on the basis of actuals and anticipated liability on account of warranty claims in future in respect of sales already recognized in the books of account is estimated on a scientific basis and deduction 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. Provision for warrant expenses - HELD THAT - The method of providing 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 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. Addition of deferred service income (sundry debtors) as undisclosed income - 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 deleted. Disallowing claim of deduction u/s.10A for the software unit - aforesaid sum was treated as Income from other sources rather than income of the unit which was eligible for deduction u/s.10A - HELD THAT - Nothing turns on the finding of the AO that the income that was claimed as deduction of software unit u/s.10A of the Act, being considered as Income from other sources by the AO and such finding in the light of the material brought to our notice by the Assessee noted in the earlier paragraphs dealing with this issue clearly is unsustainable. Direct the AO to allow deduction u/s.10A of the Act after due verification of the documents cited in the earlier paragraph and after affording Assessee opportunity of being heard. Thus Gr.No.21 is treated as allowed but sent for the limited extent of verification of the details brought to our notice like softex forms, realization of export proceeds within the time limit etc. Treating foreign exchange gain of IDF 1 IDF 2 units as income from other sources and considering the loss in foreign exchange currency as not allowable deduction in computing income of the MAG unit - HELD THAT - If the evidence filed by the Assessee was insufficient, the AO ought to have held that the claim for having earned income is not established and therefore ought not to have taxed the said sum as income from other sources. His action in accepting the gain and treating it as income from other sources, clearly shows that he wanted the foreign exchange gain not to be treated as income 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. 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. Another reason that weighed with the AO was that Tax exempt unit IDF 1 and IDF 2 were making a gain on account of forex currency while taxable unit MAG unit is making a loss, which is not probable. It has to be clarified that the IDF1 and IDF 2 unit exports and therefore increase in the foreign exchange value vis- -vis Indian rupee will result in gain. Whereas MAG unit purchases and any adverse foreign exchange fluctuation vis- -vis Indian rupee will result in the amount payable by the Assessee to be more. 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 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 (on turnover of ₹ 83.27 crores the loss on foreign exchange was at ₹ 30.18 Crores). This has been explained by the Assessee as owing to loss on foreign exchange currency in respect of purchases in the earlier years and therefore comparing the forex loss with the imports of the current year would not be in order. Loss on account of foreign currency claimed in the MAG unit has to be allowed as it has been established that a loss has arisen. The loss is in connection with business of the Assessee and therefore has to be allowed while computing income of MAG unit. We hold and direct accordingly and allow Gr.No.23 raised by the Assessee. Reversal of Prior period revenue of MAG (equivalent to expense in the current year) considered as prior period of revenue for current year - HELD THAT - As 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.

Summary

Issues Involved:
1. Determination of Arm’s Length Price (ALP) for Software Development Services (SWD) and Research and Development (R&D) Services.
2. Inclusion of Comparable Companies in ALP Determination.
3. Rejection of Revised Computation of Total Income.
4. Determination of Export Turnover for IDF1 and IDF2 Units.
5. Domestic Sales and Scrap Sales for IDF1 and IDF2 Units.
6. Foreign Exchange Gain and Loss Treatment.
7. Provision for Warranty Expenses.
8. Deferred Service Income.
9. Deduction under Section 10A for Software Unit.
10. Prior Period Revenue Reversal.
11. Charging of Interest under Sections 234B and 234C.

Detailed Analysis:

1. Determination of Arm’s Length Price (ALP) for SWD and R&D Services:
The appeals by the Assessee and Revenue centered on the ALP determination for international transactions of providing SWD and R&D services to its AE. The Assessee adopted the Transaction Net Margin Method (TNMM) and selected 14 comparable companies, while the TPO selected 11 comparables. The DRP included two additional comparables, resulting in 13 comparables. The Tribunal upheld the inclusion of these two companies based on past judgments.

2. Inclusion of Comparable Companies in ALP Determination:
The Tribunal excluded five companies (Kals Information Systems Ltd., Bodhtree Consulting Ltd., Tata Elxsi Ltd., Persistent Systems Ltd., and Infosys Ltd.) from the comparables list, citing functional dissimilarity with the Assessee’s SWD services. Similarly, Sasken Communication Technologies Ltd. and Larsen & Toubro Infotech Ltd. were excluded due to functional dissimilarity and high related party transactions, respectively.

3. Rejection of Revised Computation of Total Income:
The AO rejected the Assessee’s revised computation of total income as it was not filed within the time limit under Section 139(5) and relied on the Supreme Court's decision in Goetz India Ltd. The Tribunal, however, directed the AO to consider the revised computation, emphasizing the correct assessment of tax liability.

4. Determination of Export Turnover for IDF1 and IDF2 Units:
The Tribunal addressed discrepancies in export turnover between the APR and segmental P&L accounts. It held that certain sales, including TP debit notes and sales recognized based on revenue recognition principles, should be included in the export turnover. The Tribunal also allowed the Assessee to claim deduction for unrealized export proceeds once realized under Section 155(11A).

5. Domestic Sales and Scrap Sales for IDF1 and IDF2 Units:
The Tribunal directed the AO to verify and adopt domestic sales as per the segmental P&L accounts, excluding trade discounts and avoiding double taxation of scrap sales.

6. Foreign Exchange Gain and Loss Treatment:
The Tribunal held that foreign exchange gains related to business activities should be treated as business income and eligible for deduction under Section 10A. It also allowed the foreign exchange loss claimed by the MAG unit, rejecting the AO’s conclusion of lack of evidence.

7. Provision for Warranty Expenses:
The Tribunal allowed the actual warranty expenses incurred and the provision for warranty expenses, finding the Assessee’s method of creating the provision scientific and consistent with past assessments.

8. Deferred Service Income:
The Tribunal deleted the addition of deferred service income, recognizing the Assessee’s consistent accounting policy under AS-9 and the fact that the income was offered to tax in subsequent years.

9. Deduction under Section 10A for Software Unit:
The Tribunal found that the Assessee exported software and realized export proceeds within the permissible time, allowing the deduction under Section 10A. It also directed the AO to verify the documents and allow the deduction accordingly.

10. Prior Period Revenue Reversal:
The Tribunal remanded the issue of reversal of prior period revenue to the AO for fresh consideration, directing verification of the Assessee’s claim.

11. Charging of Interest under Sections 234B and 234C:
The Tribunal directed the AO to provide consequential relief for interest under Section 234B and to compute interest under Section 234C based on the returned income.

Conclusion:
The Tribunal provided detailed directions on various issues, emphasizing correct tax liability assessment and adherence to accounting standards, while allowing the Assessee’s claims on several grounds and directing the AO to verify and reassess certain aspects.