2020 (8) TMI 196 - AT - Income Tax

Deduction u/s 10AA - Special provisions in respect of newly established Units in Special Economic Zones - MSA does not reveal any specific details regarding software development activity - HELD THAT - Benefit under section 10A,10AA and 10 B cannot be denied as separate and specific MSA does not exist for each SOW. Be that as it may, from SOFTEX forms placed in paper book at page 536 onwards, columns 7 specifically reveals, export contract/purchase order, being filed with SEZ. We also note that, each form consist enclosures, like copies of export contract, royalty agreement, communication from foreign customers. Submissions by Ld.Standing Counsel for revenue is thus found to be contrary to SEZ approvals placed - transfer pricing adjustment proposed by Ld.TPO was in respect of payments received on account of services rendered by assessee under software development segment. Therefore, it cannot be held that services rendered by assessee, does not fall under software development service segment. So, to allege that, assessee was providing miscellaneous services, is like blowing hot and cold at the same time. Revenue has not been able to prove anything contrary by way of documentary evidences on this aspect before us. Therefore, this objection raised by revenue does not hold good in eyes of law and is rejected. No evidence of data transmission and export of software outside India - Coordinate bench of this Tribunal for assessment year 2008-09 2013 (12) TMI 1539 - ITAT BANGLORE has already taken a view that declaration on STPI forms should be held to be sufficient in this regard. Further, we agree with Ld.Counsel that, for purpose of eligibility of claim under section 10AA of the Act, this objection does not have any relevance. Therefore, respectfully following the same, this objection raised by authorities below is rejected at the threshold. Non submission of accounting invoices to STPI/SEZ authorities, Non approval of units by SEZ authority - In the present facts of the case assessee placed on record approvals obtained by SEZ authorities which has not been rejected. It is noticed that nothing has been brought on record by Ld.Standing Counsel to show that alleged units ceases to be an eligible unit registered with SEZ authority - in absence of any adverse action by SEZ Authorities, no presumption could be drawn that assessee violated any requirements under the scheme - Nothing has been placed on record by Revenue to show that approvals relied upon by Ld.Counsel referred to herein above has been rejected by SEZ authority. Respectfully following ratio laid in case of Gestentner Duplicators Pvt.Ltd vs CIT 1978 (12) TMI 1 - SUPREME COURT it was not open for authorities below to assume any violation under SEZ Act, 2005 so long as certificates of approval/renewal of units are not withdrawn by a process known to law - this objection raised by Ld.AO does not hold good in test of law. RBI Approval for bank account maintained outside India with regard to export earnings not obtained - Apprehension of revenue regarding the question as to whether, foreign exchange remittances were in relation to export of computer software outside India. Assessee has placed on record SOFTEX forms at pages 536 of volume 2. Category mentioned in Column 9 in the form indicates that proceeds have been received for software exported under. However, from the reasoning by authorities below, it is noted that it has not verified, as to whether, convertible foreign exchange brought into India, represents consideration received towards export of computer software. As relying on own case 2008-09 2013 (12) TMI 1539 - ITAT BANGLORE we remand this issue to DRP to verify receipts if sale proceeds of computer software exported out of India, being brought into India in convertible foreign exchange. DRP is at liberty to examine whether, convertible foreign exchange brought into India represents consideration received for export of computer software. Analysis of books of account and unit wise P L account - Following observations by this Tribunal in asst. year 2008-09, we are of the view that there is no requirement for maintaining separate books of account for claiming deduction under section 10A/10AA of the Act, and books of account maintained by assessee is sufficient to enable computation of profits of various SEZ units. Further the circular issued by CBDT dated 17/01/2013 (supra) also clarifies that there is no requirement in law to maintain separate books of account and the same cannot be insisted upon. AO held that assessee continued existing business through SEZ units - Satisfaction of conditions in section 10AA(4) are required to be satisfied in the year of formation, we hold, this objection raised by Ld.AO does not hold good for the year under consideration. Exports proceeds declared by assessee in SOFTEX forms, has not been considered by authorities below - Assessee is directed to file all requsite information, as far as possible, mentioned in paragraph D..6.9.4, hereinabove. Ld.AO is directed to verify these documents and allow deduction to assessee relatable to sale proceeds from export of software development services. Eligibility of assessee to claim deduction under section 10AA - AO did not accept claim of assessee for enhanced deduction on additional income for purposes of computing deduction under section 10AA of the Act, though there was sufficient time to pass respective orders as per section 92CD(5)(b) - HELD THAT - Assessee is eligible to claim deduction under section 10AA, on incremental income arisen pursuant to APA dated 29/12/2016. We direct DRP to grant deduction under section 10AA of the Act, to the extent of sale proceeds received from export of software services, brought into India in convertible foreign exchange within stipulated period. Disallowance under section 37 (1) - why amounts disallowed under section 40(a) suo moto by assessee, should not be disallowed under section 37(1) ? - payments that were reversed as on 1st April 2012 - HELD THAT - From written submissions filed by assessee, we note that provisions in the books of account for assessment years 2012-13 and 2013-14 are towards sub contracting charges, commission, professional charges, contractor s charges, advertise meant and marketing expenses, recruitment expenses, repair and maintenance expenses, general expenditures, rent and others. It cannot be doubted that these are not related to day-to-day running of business of assessee. Thus, we are of the opinion that, these expenses cannot be disallowed u/s 37 (1). Assessee, suo moto disallowed these provision accounts under section 40(a) of the Act for non-deduction of TDS during the relevant year. All these aspects requires proper verification by DRP. Disallowance of provision account under section 40(a), and its subsequent reversal requires proper verification. Authorities below have not verified submissions of assessee, in light of financial accounts for A.Y 2012-13 and TDS returns filed for subsequent assessment years, AY 2013-14 2014- 15, vis- -vis, invoices raised by payee during assessment years AY 2013-14 2014-15. Assessee raised identical issue before this Tribunal in assessment year 2008-09 set-aside the issue for fresh consideration to DRP, by observing that, DRP does not have power to set aside any proposed variation or issue with a direction under section 144C(5) of the Act, for further enquiry and passing of assessment order - respectfully following the view taken by Hon ble Bench for AY 2008- 09, we set aside for these issue to DRP for fresh consideration. TDS u/s 195 - Disallowance under section 40(a) - payments made to associated enterprises and non-associated enterprises, without TDS compliance - HELD THAT - We have perused observations of this Tribunal for assessment year 2008-09 wherein, Hon ble Bench remanded the issue to DRP for fresh consideration and decision. Respectfully, following the same, we remand the issue to DRP with similar direction to consider the claim of assessee in light of evidences filed, after affording opportunity of being heard in accordance with law. Assessee is directed to file invoices raised in support of payments made by assessee to relevant parties. Assessee is at liberty to file all relevant details/evidences to substantiate its claim. DRP is then directed to verify nature of payment in the light of invoices filed by assessee. DRP is also directed to analyse payment made to non-residents on which tax has not been deducted at source in light of Explanation 2 to section 195. DRP shall grant proper opportunity of being heard to assessee. Disallowance of depreciation on leased assets - HELD THAT - We note that this being a recurring issue a consistent approach has to be taken in this regard. Admittedly assessee has capitalised these assets. On one hand, Ld.AO accepts lease rentals received by assessee to be business income, and on the other hand disallowed depreciation. In our view, assessee is eligible for depreciation on leased assets, however the same has to be computed in accordance with law having regard to schedule of assets. In the interest of Justice, we remit this issue too Ld.AO for proper verification of all details filed by assessee and to consider claim in accordance with ratio laid down by Hon ble Supreme Court in case of ICDS Ltd. 2013 (1) TMI 344 - SUPREME COURT . Needless to say that proper opportunity of being heard must be provided to assessee in accordance with law. Disallowance u/s 14A - HELD THAT - It is noted that admittedly there is no exempt income earned by assessee during the year under consideration. Therefore respectfully following case of Cheminvest Ltd 2015 (9) TMI 238 - DELHI HIGH COURT disallowance under section 14 A stands deleted. Depreciation on computer software been restricted from 60% to 25% - HELD THAT - Coordinate bench in case of Infosys Ltd. vs ACIT 2017 (11) TMI 1675 - ITAT BANGALORE we direct Ld.AO to consider the claim of assessee. Ld. AO is directed to verify if there is any software purchased that falls in the category of revenue expenditure, as then the question of granting depreciation would not arise. In respect of the other computer software that are capitalized, depreciation is to be granted to assessee at 60%. Needless to say that proper opportunity must be granted to assessee in accordance with law. Levy of interest under section 234B - HELD THAT - Assessee is liable to pay interest under section 234B of the Act, on incremental income pursuant to APA.

Summary

Issues Involved:
1. Validity of the assessment order.
2. Reliance on the Draft Assessment Order (DAO) of AY 2009-10 for making adjustments for AY 2013-14.
3. Denial of relief under section 10AA of the Act.
4. Disallowance under section 37(1) of the Act.
5. Disallowance under section 40(a) of the Act in respect of payments to non-resident Associated Enterprises (AEs) and Non-AEs.
6. Disallowance of claim under section 40(a) of the Act pertaining to AY 2012-13.
7. Disallowance of depreciation on leased assets.
8. Disallowance under section 14A of the Act.
9. Restriction of depreciation on computer software from 60% to 25%.
10. Initiation of penalty proceedings under section 271 of the Act.
11. Levy of interest under section 234B of the Act.
12. Other grounds and reliefs.

Issue-wise Detailed Analysis:

1. Validity of the Assessment Order:
The Tribunal did not specifically address this issue as it was general in nature and did not require adjudication.

2. Reliance on the DAO of AY 2009-10:
The Tribunal noted that the reliance on the DAO of AY 2009-10 was inappropriate as it was set aside by the Karnataka High Court. The Tribunal emphasized that the issues should be analyzed based on the evidence filed for the current year. The objection raised by the assessee was rejected, following the Tribunal's previous decisions for earlier years.

3. Denial of Relief under Section 10AA of the Act:
The Tribunal examined various objections raised by the authorities, including non-registration of documents with SEZ authorities, non-submission of accounting invoices, and non-approval of units by SEZ authority. The Tribunal referred to its previous decisions and the Supreme Court's rulings, concluding that the objections did not hold merit. The Tribunal remanded the issue to the DRP to verify the receipts of sale proceeds of computer software exported out of India, being brought into India in convertible foreign exchange.

4. Disallowance under Section 37(1) of the Act:
The Tribunal noted that the assessee followed a consistent accounting procedure and created provisions based on scientific methodology. The Tribunal emphasized that business liabilities should be allowed as expenditure, even if they are to be discharged in the future. The Tribunal remanded the issue to the DRP for verification of the details filed by the assessee and to consider the claim in accordance with law.

5. Disallowance under Section 40(a) of the Act:
The Tribunal observed that the payments made by the assessee to non-resident entities required detailed verification. The Tribunal remanded the issue to the DRP to verify the nature of payments and the applicability of TDS provisions, considering the evidence filed by the assessee.

6. Disallowance of Claim under Section 40(a) of the Act Pertaining to AY 2012-13:
The Tribunal noted that the issue required proper verification. The Tribunal directed the DRP to verify the details filed by the assessee regarding the disallowances made under section 40(a) for non-deduction of TDS and to consider the claim in accordance with law.

7. Disallowance of Depreciation on Leased Assets:
The Tribunal observed that the assessee was eligible for depreciation on leased assets, provided the ownership was established. The Tribunal remanded the issue to the AO for verification of the details filed by the assessee and to consider the claim in accordance with the Supreme Court's decision in ICDS Ltd vs CIT.

8. Disallowance under Section 14A of the Act:
The Tribunal noted that the assessee did not earn any exempt income during the year. Following the Delhi High Court's decision in Cheminvest Ltd vs CIT, the Tribunal deleted the disallowance under section 14A.

9. Restriction of Depreciation on Computer Software:
The Tribunal directed the AO to verify if the software purchased fell in the category of revenue expenditure. For capitalized software, the Tribunal directed the AO to grant depreciation at 60%, following the Tribunal's decision in Infosys Ltd vs ACIT.

10. Initiation of Penalty Proceedings:
The Tribunal did not adjudicate this issue as it was premature.

11. Levy of Interest under Section 234B of the Act:
The Tribunal held that the assessee was liable to pay interest under section 234B on the incremental income pursuant to the APA, following the Supreme Court's decision in CIT vs. Anjum.M.H.Ghaswala and the Bombay High Court's decision in E.Merk (India) Ltd vs CIT.

12. Other Grounds and Reliefs:
The Tribunal directed the DRP to grant all such reliefs arising from the preceding grounds and consequential reliefs.

Conclusion:
The Tribunal allowed the appeal partly, remanding several issues to the DRP for verification and fresh consideration, while providing specific directions for each issue. The Tribunal emphasized the need for proper verification of details and adherence to legal principles and precedents.