9911796707
TMI Blog2012 (9) TMI 89X X X X Extracts X X X X X X X X Extracts X X X X ..... December, 2010 and this was therefore beyond the statutorily allowed time. As per the assessee, it was not an 'eligible assessee' falling within Section 144C(15)(b) of the Act, and therefore, the extended time period for completing the assessment was not available to the A.O. 3. Fact apropos this issue are that assessee, engaged in the business of developing and selling automotive embedded software to group companies and also providing business outsourcing support, was functioning as a 100% Export Oriented Unit (EOU). For the impugned assessment year, assessee filed a return on 31st October, 2007 declaring income of Rs. 19,95,386/- and there was a claim for deduction of Rs. 21,19,96,264/- under Section 10B of the Act. During the course of assessment proceedings, a reference was made by the Assessing Officer to Transfer Pricing Officer (TPO) under Section 92CA(1) of the Act in respect of the international transactions entered by the assessee with its Associated Concerns. The TPO called for various details, which were duly furnished by the assessee. Thereafter, order was passed by TPO under Section 92CA(3) of the Act, wherein it was ruled that no adjustment was required to the value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, had not become final. 5. Now before us, learned A.R., strongly assailing the orders of the A.O. as well as the DRP, submitted that under Section 144C(15) of the Act, when variation to the arm's length price was not required to be made, based on the order of Transfer Pricing Officer, assessee was no longer an "eligible assessee" and hence, the draft of the proposed order of assessment could never have been validly made by the A.O. Strongly relying on the decision of Hon'ble Gujarat High Court in the case of Pankaj Extrusion Ltd. (supra), learned A.R. submitted that when there was no variation of income by virtue of order of the TPO, the assessee could not be considered an 'eligible assessee' and therefore, procedures for issue of draft assessment order and further steps required under Section 144C of the Act would not apply. According to him, once the procedure under Section 144C of the Act was not effectively followed, then the assessment could be framed on the assessee only under Section 143(3) of the Act in accordance with normal procedure. Here, the final assessment order was passed on 27.9.2011 and this was beyond the time period allowed for making a regular ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92CA would not apply by virtue of above conclusion. On the other hand, counsel for the Department contended that if the petitioner does not wish to raise any objection to the draft order, it would be open for the A.O. to treat the assessment order accompanying impugned communication as final order of assessment." Thus their Lordship had not considered the issue of time limits at all, whether it was one under proviso to Section 153 or under Section 144C(13). What is required under Section 144C(1) of the Act is that the variation in the income or loss returned should be resulting out of an order of Transfer Pricing Officer. Though there has been no revision in the ALP recommended by the Transfer Pricing Officer, he had in his clarificatory order clearly mentioned that the excess profit shown by the assessee had to be considered for taxation. Therefore, we cannot say that the variation in the income or loss returned was not on account of the order of Transfer Pricing Officer. Even otherwise, the proposed draft assessment order is only a procedural requirement and assessee's interests are not prejudiced. It is in a sense an in-built protection given to the assessee, whereby an option ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he TPO, then he has to pass a draft assessment order. Whether those adjustments are sustainable or not, is a different issue. The legality or illegality of those adjustments do not determine the validity and limitation of an assessment made under sec.143(3). 47. Therefore, it is necessary to see that the reference made to the TPO, the order passed by the TPO, the draft assessment order passed by the Assessing Officer and the directions issued by the DRP are all pre-assessment procedures of aid and guidance provided to the assessing authority by the statute. If any irregularity is committed by the Assessing Officer in following the above set of pre-assessment procedures, such irregularity does not make the assessment order illegal. At the best, it makes the order only irregular. 48. In the present case, when the adjustments made by the Assessing Officer are deleted by the Tribunal, that irregularity is automatically cured. In such circumstances, the assessment order need not be invalidated. The assessment order does not become void ab initio. In the present case, the irregularity will be rectified as soon as the Assessing Officer passes the order to give effect to the order of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessary to the value of international transactions entered into by the assessee. It is hereby clarified that the findings and discussions made in this order are applicable only in respect of reference received for Assessment Year 2007-08 and not for any other Assessment Year." The TPO in her clarifications dated 29.12.2010, had stated as follows:- "Based on the TNMM Method chosen by the assessee, the arm's length price in relation to the International transaction on comparison with the average PLI - 10.0% of the comparables, is determined as per the provision of Sec. 92C(2) of the I.T. Act as follows:- Arithmetic mean of the comparable 10.06% OP/Cost of the Assessee Company 24.09% Income earned from software and ITES 94,72,56,794 Total expenditure incurred 77,63,41,070 PBIT of Assessee 18,78,86,520 Excess Profit earned 77,63,41,070 x 24.09/100 = Rs. 18,17,20,564 77,63,41,070 x 10.06/100 = Rs. 7,80,99,912/- Difference Rs. 10,89,20,652/- Accordingly it is evident that International transaction carried on by the assessee with its AE is above the arm's length price 10,89,20,652/- which is the difference between the operating profit shown by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r at para 8 of its order: "8. We have considered the rival submissions. A perusal of the order of the TPO for the relevant assessment year shows that the TPO has verified the ALP and has confirmed that no adjustment on account of transfer pricing was required to be made. The provisions of transfer pricing relate to international transactions between two or more AEs. The intention of the provisions of transfer pricing is to see to it that when international transactions are done between two or more AEs, the affairs of the enterprises are not adjusted in such a manner as to deprive the country or the local AE of the correct revenue, which would result in the reduction of taxable income of the local AE in the country. In the present case, undisputedly, the TPO has confirmed that the local AE being the assessee herein has received the revenue due to it and there is no adjustment made in the affairs of the AE so as to deprive the revenues of the assessee in the country. Reading of the provisions of s. 10B shows that the deduction of the profits and gains derived by the assessee from 100 per cent export-oriented undertaking is granted. The provisions of s. 10B(7) provide for the applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO and the A.O. showed a far lower margin than even the mean of the profit level indicator of the so-called comparables. At the time of hearing, the learned Departmental Representative was vehemently of the view that the transfer pricing action by the TPO at the behest of the A.O. was a separate proceeding and the A.O. while completing the assessment by invoking the provisions of s. 10B(7) r/w s. 80-IA(10) was doing an independent action though using the evidence and documents which had been submitted before the TPO. Even if this submission of the learned Departmental Representative is accepted, then it becomes incumbent upon the A.O. to specify as to why he feels that the profits disclosed by the assessee are higher than the ordinary profits which might be expected to arise in the assessee's business. The provisions of s. 80-IA(10) do not give an arbitrary power to the A.O. to fix the profits of the assessee. The A.O. has to specify as to why he feels that the profits of the assessee are being shown at a higher figure, which he has done by alleging the close proximity between the assessee and the USA company with whom the assessee is transacting. He has further to show as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of Rs. 3.54 crores as done by the A.O. by invoking the provisions of s. 80-IA(10) r/w s. 10B(7) of the Act is unsustainable and consequently the same is deleted in toto." Since the fact situation is very similar here also, we are of the opinion that assessee could not have been denied deduction under Section 10B of the Act by invoking sub-section (7) thereof read with Section 80-IA(10) of the Act, simply based on the TPO order. The A.O. is, therefore, directed to re-work the deduction under Sec. 10B of the Act considering the profits shown by the assessee in Form No.56G filed by it. 12. In the result, ground Nos.3 to 6 of the assessee stand allowed to the extent cited above. 13. Vide its ground No.7, grievance of the assessee is that the A.O. made an addition of Rs. 10,89,20,652/- as TP adjustment, while at the same time denying deduction under Section 10B of the Act on said sum, considering it to be excess profit. 14. We are of the opinion that this issue can be resolved without much quarrel. Relevant part of the report dated 16.9.2010 of the TPO is reproduced at para 8 above. TPO has recommended that there was no requirement of revision of the value of international t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the end of relevant previous year. Based on this observation of the auditors, Assessing Officer in his draft assessment order under Section 144C of the Act, proposed to reduce from the export turnover this sum of Rs. 7,05,40,982/-. Before the DRP, submission of the assessee was that RBI had, vide Circular No.25 dated 1st November, 2004, provided general permission to export-oriented units to bring the sale proceeds in convertible foreign exchange within twelve months from the date of export. As per the assessee, the competent authority mentioned in Section 10B(3) of the Act was RBI, and the circular applied. Assessee also filed before the DRP, a list showing dates of receipt of foreign exchange from its sales. DRP was of the opinion that there was merit in the grievance of the assessee and directed the A.O. to verify the details and evidence filed by the assessee in the paperbook and to give assessee appropriate relief. Pursuant to such direction, the Assessing Officer took up the matter once again for verification. Assessing Officer, after verifying the details furnished by the assessee, concluded that the sum of Rs. 7,05,40,982/- mentioned in Form No.56G, had to be reduced fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ory figures given by the assessee, it was impossible that assessee would have received the stated amount from the said concern, that too, more than what was due. Relying on paper-book filed him, learned D.R. submitted that a total export turnover of Rs. 94,72,56,794/- were on account of sales to three parties of which one was M/s Visteon Corporation, USA (Rs. 84,12,72,058) and one was M/s Visteon Japan Ltd., Japan (Rs. 6,54,89,416/-) and the third one was Yanfeng Visteon Ltd., China (Rs. 4,04,94,820/-). Therefore, according to him, assessee's argument that the whole sum of Rs. 7,05,40,982/- claimed as received during the period allowed under Section 10B(3) of the Act, had come from Yanfeng Visteon Ltd., China alone could not be believed. It could only mean that payments received were from one of the above companies and not from Yanfeng Visteon Automotive Electronics Co. Ltd., China, since there were no sales whatsoever to the latter in the relevant previous year. Learned D.R. pointed out that the addition made under Section 10B(3) of the Act by the A.O. was Rs. 9,49,44,729/- and this comprised two more items other than Rs. 7,05,40,982/-, claimed as received from Yanfeng Visteon Aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be considered received by the assessee, that too from Yanfeng Visteon, China and not Yangeng Visteon Automotive Electronics Co. Ltd. Therefore, the A.O. was of the opinion that names differed and no credit could be given for alleged receipts of Rs. 7,05,40,982/-. List of sundry creditors of assessee as on 31st March, 2007 placed before us by learned D.R., reads as under:- Sl.No. Name of the Party along with address Amount (INR) Nature of Transaction Purpose 1. Visteon - Philiphines 3,211,933 Receivables Reimbursement 2. Visteon (Thailand) Limited 2,979,651 Receivables Reimbursement 3. Visteon Electronics Systems - USA 186,394,345 Receivables Software services rendered 4. Visteon Electronics Systems - USA - BPO 31,183,680 Receivables Software services rendered 5. Visteon Japan, Ltd. 11,279,260 Receivables Software services rendered 6. Yanfeng Visteon Automotive Electronics Co. Ltd., China 70,311,303 Receivables Software services rendered As per the above list, what was due by the assessee from Yanfeng Visteon Automotive Electronics Co. Ltd., China, was Rs. 70,311,303/-. Other receivables have also been shown, but these were all in the name of M/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de to Dispute Resolution Panel and where objections are filed by the assessee, the procedure to be followed is clearly set out in sub-section (5) to (13) of Section 144C of the Act, which is reproduced hereunder for brevity:- (5) The Dispute Resolution Panel shall, in a case where any objection is received under sub-section (2), issue such directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment. (6) The Dispute Resolution Panel shall issue the directions referred to in sub-section (5), after considering the following, namely:- (a) draft order; (b) objections filed by the assessee; (c) evidence furnished by the assessee; (d) report, if any, of the Assessing Officer, Valuation Officer or Transfer Pricing Officer or any other authority; (e) records relating to the draft order; (f) evidence collected by, or caused to be collected by, it; and (g) result of any enquiry made by, or caused to be made by, it. (7) The Dispute Resolution Panel may, before issuing any directions referred to in sub-section (5),- (a) make such further enquiry, as it thinks fit; or (b) cause any further enquiry to be made by any income-tax author ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In our opinion, this is nothing but equivalent to a set aside, with direction for making further enquiry and thereafter to pass the assessment order. The Assessing Officer could not have made any further addition to the original proposal in the draft assessment order, once it was subject to a proceeding by the Dispute Resolution Panel, except for completing the assessment in confirmation with directions of Dispute Resolution Panel. DRP had no powers to issue directions which gave scope for "further enquiry". Reduction of Rs. 2,05,86,262/- and also Rs. 27,03,972/- from export turnover were resulting out of further enquiries made by the A.O. pursuant to the DRP direction. No doubt, the figures for such addition might have been taken by the A.O. from the details submitted by the assessee. But, nevertheless, a departure from the draft assessment order in a substantial manner so as to include items which were not originally considered, cannot be done in view of the clear wordings of the Sections. We are, therefore, of the opinion that exclusion of Rs. 2,05,86,262/- and Rs. 27,03,972/- from the export turnover were not warranted. Insofar as exclusion of Rs. 7,05,40,982/- is concerned, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , will remain same. If the total profits are Rs. 100 as mentioned by learned D.R. and a sum of Rs. 200 out of total turnover Rs. 1000/- has not been realized, the equation to be applied for working out deduction under Section 10B of the Act, in our opinion, will be - Rs 100 x Rs. 800 and not Rs. 100 x Rs. 800 Rs. 1000 Rs. 800 No doubt, the Special Bench of this Tribunal in the case of Sak Soft Ltd. (supra) had held that if export turnover in the numerator was to be reduced by an amount the same should be excluded from total turnover also. It was held by the Special Bench that the component of export turnover and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Nos. 13 to 18, assessee is aggrieved that Assessing Officer excluded expenses incurred in foreign exchange from export turnover though such expenses were not included in the export turnover at all. Further, as per the assessee, in the case of telecommunication expenses, these were incurred in Indian currency and could not be excluded from export turnover at all. Alternatively, it is submitted that if at all these were excluded from export turnover, it had also to be excluded from total turnover. 31. Insofar as the claim of the assessee that expenses, which were not included export turnover could not have been deducted while computing the deduction under Section 10B, we are afraid we cannot accept. Definition of "export turnover" given in clause (iii) to Explanation 2 in Section 10B, reads as under:- "(iii ) "export turnover" means the consideration in respect of export 35[by the undertaking] of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 2009. It was after such decision of Special Bench that the co-ordinate Bench took a different view in the case of Astron Document Management P. Ltd. (supra). The decision of Astron Document Management P. Ltd. (supra) was given on 19th August, 2011 and for coming to a conclusion that telecommunication expenses incurred had to be excluded from the export turnover, irrespective of the fact whether it was spent in Indian Rupee or foreign currency, reliance was placed on the decision of Special Bench in the case of Sak Soft Ltd. (supra). It will be pertinent to note para 6 of the order of Special Bench in Sak Soft Ltd. (supra)'s case, which is reproduced hereunder:- "6. The interveners have also adopted the same line of argument. Some of them have adopted a broader base in the sense that their arguments were not limited to the exclusion of expenses incurred in foreign exchange in providing technical services outside India, but also extended to the exclusion of freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India. Since these expenses are also to be statutorily excluded from the export turnover, accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry clear from the above para. It was after effecting such clarification or modification to the question raised before it, that the Special Bench gave a final ruling that freight, telecommunication charges or insurance attributable to delivery of articles or things or computer software outside India or expenses, if any incurred, in foreign exchange for providing technical services outside India had to be excluded from the export turnover as well as the total turnover. Since the decision relied on by the learned D.R. has been given after the decision of Special Bench in Sak Soft Ltd. 's case and based on the conclusion of Special Bench, we are inclined to follow the latter decision in preference to the decision given prior to the decision of Special Bench in Sak Soft Ltd. (supra)'s case. We are reproducing the decision of co-ordinate Bench in the case of Astron Document Management P. Ltd. (supra) for brevity:- "15. We have perused the orders and heard the rival contentions. Though the A.O. has considered definition of "export turnover" as given in sub-clause (iv) of Explanation 2 to Section 10A of the Act, assessee here had claimed deduction under Section 10B, and therefore, definit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the delivery of computer software outside India, had to be excluded from the export turnover whether or not billings of the assessee specifically included such telecommunication expenses. Effect of any exclusion from a given sum will be reduction of such sum and the strenuous effort to differentiate between 'exclusion' and 'reduction' is, in our opinion, an endeavour to stretch interpretation of ordinary words to out of ordinary meanings. Special Bench in the case of Sak Soft Ltd. (supra) held as under at para 27 of its order:- "27. At this juncture, it is necessary to refer to one aspect of the matter. It may be an easy task to exclude the freight, telecom charges or insurance attributable to the delivery of computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India from the export turnover and the total turnover if they are separately mentioned in the invoice raised by the assessee. In the course of the arguments addressed on behalf of M/s Sak Soft Ltd. a question arose as to what would happen if these items are not separately shown in the invoice and are included in the total amount raised by the in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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