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TMI Blog2006 (4) TMI 217X X X X Extracts X X X X X X X X Extracts X X X X ..... nd not to the assessee. The income earned from AMC charges (Annual Maintenance Charges of ATM), installation and technical charges, consultation charges and licence fee of software constitute income of the assessee and not of industrial undertaking situated at Pondicherry since this income was not derived from this industrial undertaking as the men, material and machinery of Pondicherry industrial undertaking were not used to earn this income and hence, not eligible for deduction under s. 80-IA of the Act. Further, for this assessment year the income on account of the above elements was not earned from eligible business referred to in s. 80-IA(4) of the Act. The assessee is not also entitled for deduction under s. 80-IB though this section is applicable, for the same reason stated therein in that order as the above earnings were not from industrial undertaking situated at Pondicherry, as the benefit of deduction can be given only to the profit and gains derived from industrial undertaking as per s. 80-IB(4) of the Act. Accordingly, this ground is rejected. 3. The next ground is that the CIT(A) has erred in confirming the disallowance of Rs. 53,21,968 as inflation of expenses on pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision was towards the cost of software for which the assessee has placed orders with the NRI vendors. The statement given by the director, Shri Harish Murthy on 10th Jan., 2003 cannot be relied upon as he is not conversant with the accounting procedures and IT law and that cannot be used as an evidence against the assessee to disallow the claim of the assessee. Actually, there was no suppression of any income by inflating the purchase figures as the assessee was consistently following this method of accounting of making provision towards the purchase on the last day of the year and reversing it on the immediate next day of the subsequent year. He further submitted that the admission to declare this amount as income for the asst. yr. 2001-02 was erroneously made and there was no evidence with the Department to show that the assessee has suppressed the income. He relied on the judgment of Hon'ble apex Court in the case of CIT vs. C. Parakh & Co. (India) Ltd. (1956) 29 ITR 661 (SC) and the judgment of Hon'ble Delhi High Court in the case of Swaran Yash vs. CIT (1982) 138 ITR 734 (Del). He further submitted that even if the assessee has admitted the addition, the addition cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -02 and file a revised return claiming this amount as a deduction in the asst. yr. 2002-03. We are waiting for the completion of this assessment to file the revised return." 9. The above contents show that the assessee is fully aware of the fact and consequence of its statement and submission. Now, the assessee coming back with the plea that the agreed addition was erroneously made cannot be accepted. First of all, there is no evidence to show that the provision for purchase was made on the basis of specific purchase price of the software. The assessee cannot also say that within less than 24 hours, it has collected full information regarding the actual purchase price of the software. Further, the assessee cannot have any grievance towards addition as the assessee itself has agreed for offering this amount for taxation while examining under s. 131 of the IT Act and also by its own letter cited. In the case of Ramanlal Kamdar vs. CIT 1976 CTR (Mad) 185 : (1977) 108 ITR 73 (Mad), the Hon'ble Madras High Court has held that once the assessee had stated that it had no objection to the proposed revision or addition and the assessment was made as proposed by the assessee, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e did not fall within the purview of cl. 2(a) of s. 40A of the Act. 12. The brief facts of the issue are that the assessee has a 50 : 50 joint venture with HMA Data Systems (P) Ltd., and Diebold Inc., USA engaged in the manufacture and trading of Automated Teller Machines & Accessories. M/s Chip Trans and M/s Diebold Inc., USA were associate concerns of the assessee-company. The managing director, Shri Harish Murthy was substantially interested in HMA Data Systems Ltd., and Chip Trans, USA. Thus, HMA Data Systems (P) Ltd., Diebold Inc., USA., HMA Software (P) Ltd., and Chip Trans, USA are specified persons as enumerated under s. 40A(2)(a) of the IT Act. During the year, the assessee has purchased software from Chip Trans, USA., Diebold Inc., USA and HMA Software (P) Ltd. The assessee has purchased ATM related software from Chip Trans, USA during the period 1st April, 2000 to 31st Oct., 2000. The AO compared the purchase cost and sales price of software. As mentioned by the AO, the purchase and sales cost of soft ware are as follows: --------------------------------------------------------------- Name of the No. of Purchase Sale Profit/Loss Company software price price (In Rup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIF Chennai US $ $ 1,328.00 ----------------------------------- ----------------------- Customs Duty Calculations CIF US $ $ 8,358.38 CIF US $ $ 1,328.00 CIF INR 3,92,843.63 CIF INR 62,416.00 Assessable value (AV) 3,96,772.06 Assessable 63,040.16 1% x CIF value (AV) 1% x C Basic customs duty (BCD) 99,193.02 -- (AV x 25%) Counterveiling duty (CVD) 79,354.41 -- (AV + BCD + SC x 16%) Special Addl. duty 4% 23,012.78 -- Customs duty 2,01,560.21 Clearing 2,206.41 charges 3.5% on AV Clearing charges 3.5% on 13,887.02 AV Landed cost 6,08,290.85 Landed cost 64,622.41 Maintenance modules 1,333.20 Local ----------------------------------- ----------------------- Ex factory Price 6,09,424.05 Ex factory 64,622.41 Hardware Software Price ------------------------------------------------------------ Total order value HW 9,55,882.35 Total 2,00,000 proposed order value SW proposed Margin on HW 3,46,458.30 Margin on 1,35,377.59 SW ------------------------------------------------ Total ex factory cost (HW & SW) 6,74,046.46 ------------------------------------------------ Brokerage 4,20,000.00 ------------------------------------------------ Total Cost 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price price ---------------------------------------------------------- 1. BOP Jalandhar 318 2,25,000 50,568 ---------------------------------------------------------- 2. BOP Banga 319 2,25,000 50,568 ---------------------------------------------------------- 3. BOP Patiala 320 2,25,000 50,568 ---------------------------------------------------------- 4. BOP Nabha 321 2,25,000 50,568 ---------------------------------------------------------- 5. BOP Chandni Chowk 322 2,25,000 50,568 ---------------------------------------------------------- 6. BOP Jalandhar 323 2,25,000 50,568 ---------------------------------------------------------- 7. BOP Chandigarh 324 2,25,000 50,568 ---------------------------------------------------------- Thereafter, the AO has arrived at the cost of 282 sets of software purchased from Diebold Inc., at Rs. 88,410 each (Rs. 2,49,31,590 divided by 282) and the cost of 312 sets of software purchased from Chip Trans at Rs. 2,05,090 (Rs. 6,39,88,366 divided by 312). According to the AO, the average price paid to Chip Trans for the same software purchased from Diebold Inc., was very excessive as compared to the cost of Diebold Inc. On comparison, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 709 software sets had been imported 2. Annexure 2 Invoicewise details of the 3-20 software sets imported showing reconciliation with similar list submitted vide letter dt. December 19, 2003. 3. Annexure 3 Copies of the invoices as 21-146 received from M/s Chip Trans, USA 4. Annexure 4 Quantitative details of 147 software, namely opening balance, receipts, issue & closing balance. 5. Annexure 5 Copy of the software stock 148-244 register 6. Annexure 6 Quantitative reconciliation of 245-248 the software sourced from M/s Chip Trans, USA with the stock Register 7. Annexure 7 Quantitative Reconciliation of 249-252 the software issued with the stock register 15. The learned counsel for the assessee vehemently argued that all purchases were approved by the customs authorities and as such, customs approved details cannot be questioned by the Department. He contended that when payments are approved by one wing of the Government, there is no question of such payments being treated as excessive or unreasonable. For this purpose, he relied on the judgment of the Hon'ble Delhi High Court in the case of CIT vs. Shriram Pistons & Rings Ltd. (1989) 80 CTR (D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il, 2003, it is stated that sale price has been determined on the basis of actual invoice issued to the bank. As regards the cost of software the software required as per the requirement of bank is prepared by the assessee by combining 2 to 3 softwares and the cost as per letter dt. 11th April, 2003 is the actual cost of such combined software. As far as sale and purchase out of provisions (software supplied by Diebold Inc. USA entry dt. 31st March, 2001), the set of software as required by bank has directly been sent to India. Thus, the software supplied by Diebold is a made to order software and hence there was delay in supply of software." 17. We have heard the rival submissions and perused the material on record. Though the assessee has stated that it has purchased 709 sets of software from Chip Trans, USA, it has not been able to co-relate as to how the 709 sets of software were embedded or grouped and sold to various parties. The assessee has not corroborated the unit-wise purchase cost and sale price of software set in its new place of purchase of 709 software sets. It is clear beyond doubt that the sale was for 312 sets of software only as the assessee itself has admitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purchase of software from Chip Trans to Diebold Inc., USA w.e.f. 31st Oct., 2000. The purchase was stopped because, the managing director, Harish Murthy was no more managing director of the assessee-company and also the new managing director, was not interested in Chip Trans. 19. Further, when we analyze the purchase price and the sale price, it is interesting to not!3 that the sale price of software sold by the assessee-company to various banks was usually same, i.e., RS.2,25,000. However, the purchase price of software purchased from Chip Trans varies from Rs. 3,17,646 to Rs. 3,34,004. In the case of Diebold, the purchase price of software was usually Rs. 50,568. The assessee was selling the software set at loss when the purchase was made from Chip Trans and made exorbitant profit when the purchase was made from Diebold Inc. Even at the cost of repetition, we reproduce the relevant chart below: Comparative chart indicating software purchase price regarding supply to Bank of Punjab Ltd., by Chip Trans. & Diebold in asst. yr. 2001-02. ---------------------------------------------------------- S. Purchase from Chip Trans Inv. No. Selling Purchase No. price price -------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been or is to be made to any person referred to in cl. (b) of this sub-section, and the AO is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction." Sec. 40A(2) of the Act put curb on expenditure in respect of payment made to close associates referred in cl. (a) of the section towards purchase of goods, services rendered, facilities offered and it empowers the AO to disallow so much of expenditure in respect of which payment has been made to the above category of persons as is considered by the AO excessive or unreasonable having regard to the fair market value of the goods, service rendered or facilities offered for which the payment was made or the legitimate needs of business of the assessee or the benefit derived by or accruing to the assessee therefrom. There is no plea by the assessee that Chip Trans, USA., is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... UTI - Jublee Hills 376 2,28,000 1,98,639 1 ------------------------------------------------------------ J&K Bank - Lajpat Nagar 377 2,00,000 2,01,979 1 ------------------------------------------------------------ J&K Bank - Ansal Plaza. 379 2,00,000 2,01,979 1 ------------------------------------------------------------ Abhudaya Bank 380 41,000 36,246 1 ------------------------------------------------------------ XXX XXX XXX XXX XXX ------------------------------------------------------------ XXX XXX XXX XXX XXX ------------------------------------------------------------ 5,48,94,300 6,46,39,832 312* ------------------------------------------------------------ * The list is very exhaustive and hence only an extract is copied for clarity. It was also clarified in the order-sheet dt. 19th Dec., 2003 wherein the assessee has affixed its signature for the method adopted for determining the sale value and also actual cost of software set. 21. Another argument of the assessee is that the purchases were approved by the customs authorities and hence, cannot be questioned by the Department as excessive or unreasonable. This plea of the assessee has no merit since it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Add: Freight ...... 2,457,389 ----------- (A) Total ...... 104,838,458 (B) Machines ...... 268 (C) Avg. Cost (A + B) ...... 391,188 ----------- Thus, he considered at the cost of ATM supplied by Chip Trans at Rs. 3,26,651. He compared the cost of ATM CD supplied by Diebold Inc., at Rs. 3,91,589 with ATM CD supplied by Chip Trans at Rs. 3,26,651 and in the opinion of the CIT(A) the average cost of CD supplied by Diebold was more to the tune of Rs. 71,310. However, he sustained the addition made by the A.O. 25. After hearing he rival parties, we are of the considered opinion that the CIT(A) took the average cost of ATM CD supplied by Chip Trans at Rs. 3,26,651 as against the average cost considered by the AO at Rs. 4,53,329. The addition was made by the AO on account of payment of excess amount towards purchase of ATM CD from Chip Trans. In the findings of the CIT(A), the price paid to ATM CD purchased from Chip Trans was lower than the cost of Diebold Inc. In other words, s. 40A(2)(a)/40A(2)(b) was invoked in view of the fact that the price paid to Chip Trans was excess and unreasonable. The findings of the CIT(A) was contrary to the findings of the AO and he adopted the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------- For the assessment year under consideration, the assessee claimed the payment of sales commission of Rs. 41,64,000. The payment of commission works out to 42 per cent in the case of Silver Line Appliances (P) Ltd., and 25 per cent each in the case of Kalpita Agencies and General Glass Works Ltd. The AO disallowed this commission for the reason that there was no evidence to show that these entities have rendered any kind of service and the Bank of Punjab Ltd., was not aware of these sales agents. On appeal, the CIT(A) confirmed the order of the AO. Aggrieved, the assessee is in appeal before us on this issue. 29. The learned counsel for the assessee submitted that during the preceding year, the assessee appointed sales agents for increasing its sales and paid commission to them at piece rate on the basis of orders procured by them. The total commission that was payable to the agents on the order of 100 machines procured by them from Bank of Punjab Ltd., was Rs. 35,000,000. The main services rendered by the sales agent for which they were paid commission by the assessee are in the nature of relationship services to obtain orders and as the services are relationship based, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Menon & Ors. (1995) 127 CTR (SC) 263 : (1995) 215 ITR 364 (SC) (3) A.P.L (India) (P) Ltd. vs. Dy. CIT (2005) 97 TTJ (Mumbai) 187 : (2005) 96 ITD 227 (Mumbai) The learned counsel for the assessee further submitted that the assessee has established the identity of the sales agents by producing documentary evidence which has not been rebutted by the AO and hence the assessee cannot be held to have failed to prove its case. The learned counsel for the assessee also relied on the following case law: (i) V.I.P. Industries Ltd. vs. IAC (1991) 36 ITD 70 (Bom)(TM) (ii) ITO vs. Super Chemical Distributor (2005) 1 SOT 102 (Del) (iii) IAC vs. Haryana Conductors Ltd. (1990) 50 Taxman 291 (Del)(Mag) (iv) CIT vs. Pune Pharma (P) Ltd. (2005) 193 CTR (MP) 73 : (2004) 270 ITR 382 (MP) (v) Bharat Bijlee Ltd. vs. Dy. CIT (2001) 71 TTJ (Mumbai) 909 : (1999) 71 ITD 412 (Mumbai) 30. On the other hand, the learned Departmental Representative submitted that the commission was paid to identify the customers as evident from the agreement with the agents. This commission is said to have been paid for transactions with Bank of Punjab Ltd., The assessee was transacting with the Bank of Punjab Ltd., si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order with us. Q.9 Who negotiated the order of Bank of Punjab Ltd., and with whom? A.9 From the side of Diebold HMA (P) Ltd., it was P.P. Manjunath Rao. Mr. Sachin Handoo, Harish Murthy and Rajeev Malhotra. From the bank side it was Mr. Chander Singh. D.P. Singh and finally the director Tejbeer Singh. Q.10 When you have negotiated the deal with the banks directly, why was it that huge commission was paid to the 4 concerns referred to above? A.10 They have done liaisoning work for the company. Q.11 Who were the persons representing (a) General Glass company (b) Kalpita Agencies (c) Silverline Appliances (d) Infoset E-Com Systems Ltd. with whom the company Diebold HMA (P) Ltd. negotiated. A.11 As far as (a) General Glass Company (b) Kalpita Agencies and Silverline Appliances are concerned, right now I am not able to furnish details regarding the person/persons with whom the deal was negotiated. Q.13 How did they meet you? Where did they meet you? And what was the basis for payment of commission? A.13 I have not met them personally. As far as the basis of commission is concerned it is based on order quantity and a certain percentage of value. Q.14 If the order is from o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lable. We are, therefore, inclined not to accept the agreement exchanged between the assessee and the so-called selling agents as genuine. In our opinion, this arrangement was only a make believe arrangement as a devise to minimize the tax liability of the assessee firm for the primary reason that the assessee has been doing business with the Bank of Punjab Ltd., since the year 1995. We cannot accept this to be a business decision to boost the sales. When we see this arrangement in the light of the surrounding circumstances, we are driven to the conclusion that the apparent is not real. 33. After going through the entire facts and circumstances of the case and evidence gathered by the AO, we are unable to disagree with the conclusion reached by the lower authorities. Avoidance of tax liability by so arranging commercial affairs that charge of tax is reduced is not prohibited. Taxpayer may resort to divert the income before it accrues or arises to him. Effectiveness of devise depends not upon considerations of morality but on the operation of the IT Act. But in this case, the assessee has adopted devices to make it appear that the income which belongs to the assessee had been earne ..... X X X X Extracts X X X X X X X X Extracts X X X X
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