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TMI Blog2013 (12) TMI 1539X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Yashpal Sahini (2007 (7) TMI 7 - HIGH COURT , BOMBAY), the revenue will be precluded from recovering taxes/amounts as evidenced by the TDS certificates filed by the assessee before the AO, till completion of due verification by the AO. TPA - selection of comparables - Held that:- Assessee predominantly functions as a provider of information technology (IT) products and services, inter alia undertaking export of software services and trading activities. The Assessee's primary business segments consist of export services, trading and leasing of company's products. The export services comprise of Global Business Services are) Application Management Services The trading segment offers a broad range of products from entry level, mid-range to high-end servers and main frames, presenting the best technology and practices to support e-business infrastructure requirements. The IBM Global Financing (IGF) segment providers flexible and attractive financing and leasing programmes to fund the IT requirement of India customers, thus companies functionally dissimilar with that of assessee need to be excluded from the final list of comparable. - IT (TP) Appeal No. 1543 (Bang.) of 2012 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;IBM WTC'), which in turn, is a wholly-owned subsidiary of International Business Machines Corporation ('IBM Corp'). The Assesses is engaged in me business of Trading, Leasing and financing of Computer Hardware and Software, Maintenance of Computer Equipment, Development of Computer Software and related services and Consultancy in Information Technology (IT) Systems Integration, IT Enabled Services 3.2 In the return of income filed for AY 2008-09, the assessee claimed deduction u/s.10A and 10AA of the Act. The assesses had 8 STP units and the profits derived by these units from the export of computer software are eligible for deduction u/s. 10A of the Act. The assesses also had 2 SEZ units and the profits of these units were eligible for deduction u/s. 10AA of the Act. The claim of the assessee for deduction u/s.10A 10AA of the Act was as follows: Deduction u/s. of the Act Sl. No. Location of STPI units Amount 1. STP-2 Bangalore 314,75,61,402 2. STP-Chennai 7,13,17,620 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authority as is authorised under any law for the time being in force for regulating payments and dealings in foreign exchange. Explanation 2 : The sale proceeds referred to In this sub-section shall be deemed to have been received in India where such sale proceeds are credited to a separate account maintained for the purpose by the assesses with any bank outside India with the approval of the Reserve Bank of India.' 3.5 The above provisions show that sale proceeds have to be brought into India in convertible foreign exchange within a stipulated period. Explanation 2 deems credit of sate proceeds to a separate account maintained for the purpose of receiving sale proceeds with the approval of Reserve Bank of India as equivalent to bringing in sale proceeds into India in convertible foreign exchange. It needs to be clarified here that if there is no RBI approved Bank Account in which sale proceeds of export of computer software are credited, still under the main provisions of Sec 10A(1) of the Act, the assesses can get the benefit of deduction u/s.10A of the Act, to the extent the assesses establishes that sale proceeds of computer software exported out of India were bro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e approval for maintaining and operating overseas bank account with HSBC Bank, New York and that the assessee's request is under active consideration with the RBI. 3.8 The AO was however of the view that in the absence of RBI's approval as contemplated u/s. 10A(3) of the Act, the claim of the assessee for deduction u/s. 10A of the Act cannot be entertained. The AO also sought certain clarification from RBI regarding Circular No.54 dated 29.06.2002. The RBI in reply submitted that the aforesaid Circular will not permit the assessee to continue the operations of USD denominated account with HSBC Bank, New York, without the approval of RBI. The RBI also pointed out that the assessee has approached it through Deutsche Bank requesting the RBI to condone the delay in seeking approval for renewal of the account and the matter is under examination. The AO, however, held that the assessee was not entitled to claim deduction u/s 10A of the Act, because deposit of sale proceeds of STP unit in a bank account outside India was without the mandatory approval of RBI tor such account. Accordingly, the AO rejected the claim of the assesses for deduction u/s. 10A of the Act. 3.9 Anothe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... According to the AO, books of account are always written on the basis of the primary documents like bills and vouchers in respect of incomes and expenses. When these documents are not maintained separately (unit-wise), and it is not possible to identify and track expenses or income relating to a unit of the business, and therefore the profits declared for such units is evidently incorrect. He was of the view that the fundamental accounting rule requires that the primary documents determine the type of identification of the accounting entry. In the absence of such identifiable primary documents, whatever recordings made in the accounts become unreliable. Thus working out unit-wise profit solely on such unreliable entries in accounts, without reference to corroborative primary documents, would only amount to arbitrary action for which no credibility can be attached to. Therefore the AO was of the view that the deduction claimed under Sec. 10A/10AA was incorrect. He was of the view that the assessees does not identify the expenses/revenues on the basis of cost center. In the absence of separate books of account and in the absence of cost center accounting (which is followed by sever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10A is made. ' 3.15 According to the AO, the above basis of allocation by the auditors of revenue and expenses unit-wise was not reliable and there is no system that has been followed by the assessee to allocate such revenues and expenses. He held that the assessee has failed to demonstrate a proper system of tracking the expenses and revenues and allocation. The above position was with reference to AY 07-08. According to the AO, the position remained the same for the present assessment year (08-09) also. 3.16 Thereafter, the AO was of the view that the decision of ITAT in assessee's own case, wherein it was held that there is no need to maintain separate books, but the books maintained by the assesses should enable computation of profits from the activity; if applied to the case of the assesses would only show that the profits of the various units cannot be computed from the accounting system followed by the assessee. The AO thereafore rejected the claim of the assessee for deduction u/s. 10A of the Act. For identical reasons, as given for rejecting the claim of the assessee for deduction u/s. 10A of the Act, the AO also rejected the claim of the assesses for deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Identifiable method of tracking an expense or Income relating to a unit of business. The fundamental accounting rule require that the primary documents determine the type or identification of the accounting entry. In the absence of such identifiable primary documents of accounting, whatever recordings made in the accounts become unreliable. Therefore the observations of the DRP are: (a) The assessee is determining the profits of unit without any basis. (b) The method, if any, adopted by the assessee for determination unit-wise profit is not open for verification by any authority (c) Neither the statutory auditor nor independent auditor have verified the procedure adopted by the assessee for determination unitwise profit. (d) In the absence of identifiable unit-wise bills and vouchers. the claim of the assessee that has sufficient systems to determine profit derived from STPI units is without any basis. 2.6 The 56F Audit Report furnished by the assessee's Independent Auditor Shri T Ravindra, CA from Krishnaswamy and Co., under the provision of Sec 10A(5) is not reliable since the Auditors have not examined all the bank statements of all the bank account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here was no requirement to maintain separate books of account for the various units. The Tribunal on the above submissions made on behalf of the assessee held that there was no requirement u/s. 10A of the Act to maintain separate books of account and that the assessee maintains books and records to enable computation of income of various units which are claimed as deduction u/s. 10A of the Act. 3.21 The ld. counsel for the assessee brought to our notice that section 10A as amended w.e.f 2001-02 also did not impose any requirement of maintenance of separate books. It was submitted that in section 80HHC(3), there was a specific provision that the assessee claiming deduction under the said section should maintain separate books of account. Similarly, our attention was drawn to section 11 (4A) of the Act, wherein it has been provided that a trust carrying on business should maintain separate book of account. It was submitted by him that wherever the legislature intended separate books of account to be maintained, it is specifically so provided. His submission was that in the absence of such specific provisions in section 10A of the Act, it was clear that maintaining separate books o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undertaking', but the post-amended section does. In this connection, it is most appropriate to recall the finding of the earlier Bench in an identical issue in the assessee's own case for the immediately preceding assessment year [in ITA No.3464/Bang/2004 dated 31.10.2007], wherein the Hon'ble Bench, after analyzing various rulings of the Hon'ble highest judiciary of the land, primarily, in the cases of (i) CWT v. Kripashankar Dayashanker Worah (1971) 81 ITR 763, (ii) in Philip John Plasket Thomas v. CIT (1963) 49 ITR 97 (SC) and (iii) Smt. Tarulata Shyam v. CIT (1977) 108 ITR 345 (SC and also extensively quoting the provisions of S.10A of the Act, had observed thus - 17. The learned Commissioner of income-tax (A) He noted in his order that the assessee could fall within the ambit of section 10A of the Act, all that it takes to satisfy the conditions laid down therein. Further, the assessee has satisfied and fulfilled the conditions based on which it was permitted to establish STP units at Bangalore, Pune and Delhi. He further observed that even the Assessing Officer could not find anything which would go to show that the assessee has failed to fulfil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid down in the provisions of s 10A of the Act and also in conformity with the rulings of the Hon'ble Supreme Court referred supra and the finding of the Hon'ble Bench in the assessee's own case for the immediately preceding AY cited above, we are of the considered view that the ld. CIT (A) was not justified in denying the legitimate claim of the assessee u/s 10A of the Act. it is ordered accordingly.' (Emphasis supplied) 3.23 Our attention was also drawn to the decision of the Hon'ble Karnataka High Court in the case of CIT v. Fusion Software Engg. (P.) Ltd. [2012] 18 taxmann.com 57, wherein the Hon'ble Karnataka High Court held that assessee need not be denied exemption u/s 10A merely on the ground that no separate accounts were maintained regarding STP unit and other units. The Hon'ble court found that the finding recorded by the Tribunal was a finding of fact and did not call for any interference. 3.24 The ld. counsel for the assesses then drew our attention to the material which had been placed by the assessee before the AO in connection with maintenance of separate books of account for each of the STP/SEZ units. (A) The ld. counsel fat t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue of each of the STPI unit with the bank statements. Reconciliation of the expenses pertaining to the STP units with the bank statements. Reconciliation of the revenue pertaining to the domestic unit with the bank statements. Reconciliation of the expenses pertaining to the domestic unit with the bank statements; and Reconciliation of the bank statements with the profit and loss account of IBM India. The assesses explained to the AO that ft was in the process of putting together the information in reconciliation of the revenues with bank statements and will provide the same at the earliest possible. (D) In another letter dated 09.12.2011 [copy at pages 455 of PB-1(1)], the assessees in Annexures 5 6 gave the details of the bank account that it maintained with various banks in India and abroad. The hard copy of printouts of HSBC Bank, USA were given to the AO by the assessee, which are at pages 533 to 589 of PB-1(2) filed by the assessee. (E) In another letter dated 14.12.2011, the assessee gave the details of export proceeds realised in Deutsche Bank account in India. The same is at page 581 of PB-1(2) filed by the assesses. (F) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceeds in India or (ii) bring the export proceeds to India after the same is received outside India. Explanation 2 to section 10A(3) further provides that export proceeds shall be deemed to be received in India (With reference to (i) above) if the same is credited to a separate bank account maintained outside India with approval from RBI. While it is our contention that export proceeds are received and credited to the overseas bank account with adequate approvals, we also wish to submit that the export proceeds are substantially repatriated/brought into India and credited to the Indian bank accounts of IBM India, at regular intervals. Therefore, we believe that the requirement in section 10A(3) of the Act is satisfied on bringing the export proceeds into India, without prejudice to our contention that the Overseas bank account to which 1he export proceeds are initially credited are with adequate approvals. 3.27 It was the contention of the Id. counsel for the assesses that the requirements of section 10A(3) is that the sate proceeds of articles/things or computer software exported out of India should be received in, or brought into, India by the assesses in convertible for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee did not maintain separate books of account for STP and non-STP units and that the sane was a violation of the compliance as per the FTP Guidelines and conditions of LOP. All the aforesaid evidences were sought to be filed as additional evidence. 3.29 In the application for admission of additional evidence, the assesses has submitted that these documents transpired after the order of DRP. Since these documents are necessary effective disposal of ground No.3 raised by the assesses, if was prayed that the same should be admitted as additional evidence. 3.30 The ld. DR, however, brought to our notice that the aforesaid letter dated 04.01.2013 of RBI has since been withdrawn by RBI vide letter dated 08.05.2013. A copy of the same has been filed before us. The same is annexed as ANNEXURE-III to this order. In this letter, the RBI has informed the assessees that there is no bifurcation of offshore and onsite details and therefore the authorised dealer is not able to verify and confirm independently compliance of Circular No. 54 dated 20.08.2002. Hence, the letter dated 4.1.2013 is being withdrawn. 3.31 In the light of the aforesaid latter of the RBI, II is clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te Resolution Panel to the Assessing Officer to examine based on details and for which sufficient opportunity was not given to Company to submit before passing the order under section 143(3), read with section 144C of the Act. It is claimed that the above documents are necessary for the effective disposal of the captioned appeal as mentioned above. We may clarify that as far as Gr. No. 3 is concerned, the relevant documents sought to be filed as additional evidence is only document at Sl.Nos.1 and 2. The other documents are relevant for adjudication of Gr. No. 6. the admissibility of the other documents will be considered a little later. We will confine out decision to admission of documents at SI.Nos.1 and 2 alone in the discussion and decision on Gr.No.3. 3.34 According to the ld. counsel for the assesses, the following documents which were already filed before the lower authorities together with additional documents now sought to be filed will show that the assesses has complied with the conditions mentioned in section 10A(3) of the Act. without taking recourse to Explanation-2 to section 10A(3) of the Act: (i) Letter given to the AO, by the assesses has giving details of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction u/s 10A/10AA was claimed. On the issue with regard to the absence of approval of RBI in the bank account maintained by the assessee outside India where sale proceeds of exports were credited, the ld. DR submitted that there was no valid approval in science at any point of time and therefore deduction u/s. 10AA was rightly rejected by the revenue authorities. 3.39 With regard to the absence of separate books of accounts for various STP units, the ld. DR submitted that the assessee has primarily placed reliance on the earlier orders of the Tribunal According to him, the earlier order of the Tribunal needs reconsideration for the following reasons:- (a) Foreign Trade (Development Regulation) Act. 1992) [ FT Act ] was enacted and repealed the Exports imports Control Act. Section 19 of the FT Act, empowers the Government to frame rules Section 19(3) of the FT Act casts a duty on the DG of FT to carry out foreign trade policy of the Government. Para 2,4 of the FT Policy 2004-2009 centers power on the DGFT to notify Handbook of Procedures Chapter II of the said Handbook of Procedures deals with EOUs, EHTPs, STPs and BTPs. Para 6.32 says that where an Industrial enterpr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed on 22.08.2013, the ld. DR has sought to file the following documents as additional evidence:- Sl. No. Particulars Pages Nos. 1. FIRCs (both the sides) belonging to remittance from HSBC, New York and other banks that were NOT endorsed/realized as per FEMA guidelines but the company claimed the same us software export proceeds. 24-34 2. FIRCs (both sides) that were endorsed/realized belatedly after filing return of income and after completion of she assessment proceedings (obtained from AD on 18-7-2013) 35-62 3. Foreign Inward Remittance Certificates (FIRC) issued by AD 63-213 bank pertaining to AY 2008-09 obtained from AD on 18-7-2013 63-213 4. Payment advices issued by AD bank confirming the nature of 214-223 payment made to IBM GST was technical support charges for a sum of 44,122,768 USS (For 40a(ia) disallowance) 214-223 5. Inter Company Agreements (ICA) reflecting the nature o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by (he STPI/SEZ authorities through softex forms. It is further claimed by the AO that analysis of the FIRCS representing the foreign Inward remittances ONLY to the assessee's Deutsche Bank (to the exclusion of foreign exchange retained at unauthorized HSBC, NY a/c in USA) would show that about US S 1106.68 million ($ 1083.66 million + US 5 26 million) or about Ra.4400 crore of receipts of the assesses in FY 2007-08 (AY 2008-09) is unrelated to any business of the assessee, let alone the business of STP/SEZ units (details given in Annex-3 and 2 to the application for admission of additional evidence), These receipts have till date not been accounted for by any of the STPI/SEZ authorities or the RBI as export proceeds, and is Illegal money brought in India, and fraudulently certified by the auditor. It is further claimed that out of 22 FIRCs endorsed partially or wholly by softex/export invoices with total value of US $ 1147.8 million, more US $ 351.43 million or about ₹ 1405 crore (@ ₹ 40A = 1 US $) were endorsed/certified by such softax/export invoices till the date of auditor's certificate and filing of return by the assesses (Annexure-1 to the application fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of IT Act from VSNL/TATA Communications Ltd dated 12.8.2013 reply from VSNL/Tata Communication dated 23.8.2013 4 6-9 5 Reply of VSNL/TATA Commn. dated 16.9.2013 confirming no connections/connectivity have been provided in Bangalore STPI-2, Noida STPI and Kolkata STPI, and Assessing Officer's letter dated 28.08.2013 5 10-11 6 Letter of AT T (India) dated 11.9.2013 confirming that no connections/connectivity was provided outside India 6 12-13 7 RBI letter dated 26.8.2013 appointing Deutsche Bank to conduct transactional audit highlighting the trail of each and every export transaction and to match contract-wise repatriation of 30% onsite revenue pertaining to IBM India Pvt Ltd from 2001-2012. 7 14 8 Form 26-AS For AY 2008-09 (first and last page copy) - TDS credit 8 15-16 9 Notice u/s 154 dated 26.10.2012 issued to IBM India Pvt Ltd proposing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Notification 23/2000 RB dated 3.5.2000 2 31 to 38 3 APDIR series Circular No. 25 dated 1.11.2004 3 39 4 Exchange Control Manual for export of computer software 4 40-41 5 FAQ on softex form find softex submission procedure 5 42-47 6 FIRCs of FY 2007-08 6 48-74 6A Softex summary of STPI Unit II, Bangalore 6A 75-76 7 Letter from STPI Chennai 7 77 8 Letter from STPI Gurgaon 8 78-80 9 Letter from STPI Hyderabad 9 81 10 Letter from STPI Mumbai 10 82 11 Letter from STPI Pune 11 83 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reply dated 6.3.2013 32 209-224 33 Show cause notice 20.3.2013 33 225-238 34 Inter-company agreements (ICA) (separate book) 34 288 (281) 35 Reply dated 6.11.2012 identifying the FIRC's into bank account 35 239-242 36 FIRC's for system maintenance Fee, service Fee, supply of hardware and software, software consultancy etc 36 243-260 (b) PB-2 contains pages 1 to 65 comprising of following documents:- Sl. No. Description Page 1 Summary of FIRCs by Deutsche Bank 1-4 2 Correspondence between/among RBI/IBM/Deutsche Bank/AO 5-22 3 IBM Agreement For services between and among related companies 23-27 4 IBM Customer Agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 999 30 8 Letter of renewal dated 18.1.2000 31 9 RRI Letter dated 8.5.2013 32 10 Letter dated 28.06.2013 of Deutsche Bank with details of remittance abroad by IBM India with and without TDS 33- 168 (d) PB-4 containing pages 1 to 248 comprises of following documents:- Sl. No. Particulars Pages nos. of the PB 1 Show cause notices issued by AO dated 18-7-2011 and 22-9-2011 calling for the unit-wise details 1-15 2 Reply of assessee company dated 14-12-2011 without any particulars of FIRC copies 16-17 3 Unsigned reply of the AR filed on 23-12-2011 i.e. after passing the assessment order 18-21 4 Letter of RBI dated 8-5-2013 issued to IBM India (P) Limited 22 where the permission granted earlier to maintain and operate a bank account outside the country ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 Reply of VSNL/Tata Commn. dated 16.9.2013 confirming No connections/connectivity have been provided in Bangalore STPI-2, Noida STPI and Kolkata STPJ, and Assessing Officer's letter dated 28.08.2013 5 10-11 6 Letter of AT T (India) dated 11.9.2013 confirming that no connections/connectivity was provided outside India 6 12-13 7 RBI letter dated 26.8.2013 appointing Deutsche Bank to conduct transactional audit highlighting the trail of each and every export transaction and to match contract-wise repatriation of 30% onsite revenue pertaining to IBM India Pvt Ltd from 2001 to 2012. 7 14 8 Form 26-AS for AY 2008-09 (first and last page copy) - TDS credit 8 15-16 9 Notice u/s 154 dated 26.10.2012 issued to IBM India Pvt Ltd proposing to restrict the TDS credit to ₹ 126,22,29,214 for AY 2008-09 9 17-18 10 Modus operandi of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the records of assessment. According to him, in the absence of any application under Rule 29 of ITAT Rules, the Tribunal cannot consider its admissibility, except to the extent that the Tribunal feels that the documents are relevant for deciding the issue before the Tribunal. It was further submitted by him that the Tribunal in its order sheet entry dated 10.7.2013 recorded that the DR has no further evidence, Contrary to the same, the revenue has filed PB-5 and application for admission of additional evidence. It was his submission that revenue has filed PB-5 and application tor admission of additional evidence contrary to its undertaking before the Tribunal on 10.7.2013. 3.45 The ld. counsel tor the assesses submitted that even on merits, the additional evidence sought to be filed by Use revenue cannot be admitted. In this regard, the 14 counsel submitted that in case of an eligible assessee, the procedure for making an assessment is laid out in section 144C of the Act. The assessee is admittedly, an eligible assessee, in whose case, assessment has to be completed in the manner contemplated u/s. 144C of the Act, He drew our attention to the provisions of section 144C(6) (7) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itional evidence now sought to be filed by the revenue, a new case is sought to be made out to the effect that the sale proceeds received by the assesses in fact does not represent sale proceeds of export of computer software. According to him, this is clearly not permissible as the AO is seeking to set up a new case and in doing so, is seeking to rely on the additional evidence. In this regard, the ld. counsel for the assesses placed reliance on the following decisions:- (a) CIT v. Babuial Nim [1963] 47 ITR 864 (MP). The facts of the case were that the AO found some deposits in the Bank A/C, of the Assesses, The source of funds for making such deposit was explained by the Assessee as from and out of past savings and some legacy left by an ancestor of the family. The explanation was not found satisfactory by the AO as well as the first appellate authority. Before Tribunal, the Assessee the assessee contended for the first time that he did not deposit cash in the bank account and that the entry evidencing deposit of money in the bank was made by the pass book just to enable the Assessee to furnish a solvency certificate for recognizing the assessee as approved contractor. The Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of r. 27 is when on examining the evidence as it stands some inherent lacuna or defect becomes apparent, not where a discovery is made outside the Court, of fresh evidence and an application made to import It : that the true test is whether the Appellate Court is able to pronounce decision on the material before it without taking into consideration the additional evidence sought to be adduced; and that the requirement must be the requirement of the Court, in Arjan Singh v. Kartar Singh (supra), it was pointed out that the discretion given by order XLI, r. 27, CPC, to the Appellate Court to receive additional evidence is not an arbitrary one, but is a Judicial one circumscribed by the limitations given in that rule, and that if additional evidence is allowed to be adduced contrary to the principles governing the reception of such evidence, it would be a case of Improper exercise of discretion and the additional evidence so brought on record must be ignored and the case decided as if it is non-existent. Here the statement which the assesses gave before the Tribunal and the affidavit which he filed were not for the reason that the Tribunal found Itself unable to decide the appeal on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duress or threat. In such a situation there was no justification for the Tribunal for entertaining the new case which was put forward by the assessee for the first time before it and for directing him to file an affidavit to support it. The affidavit which the assessee filed and the material which he produced before the Tribunal constituted additional evidence which the Tribunal admitted contrary to r. 29 of the ITAT Rules, 1946. That evidence must be excluded from consideration on the authority of the decision of the Supreme Court in Arjan Sigh v. Kartar Singh (supra). On that exclusion there remains no material to support the finding of the Tribunal that a sum of ₹ 50,000 was not credited in cash by the assessee on 24th March, 1954, with Ramchandra Sons, the bankers. It must be added that the ledger entry at page 16 of the paper-book showing an advance of ₹ 50,000 by Ramchandra Sons, bankers to the assessee, on the basis of a promissory note does not seem to have been relied upon by the Tribunal. There is no reference to it in any order of the Tribunal and the assessee himself did not refer to it in the affidavit which he filed before the Tribunal and say that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal evidence. Reply given by the authorities alone is sought to be filed as additional evidence, without disclosing what is the query raised by the AO, for which the various parties had given replies. According to him, it is not possible to appreciate the veracity of additional evidence without knowing the context and content of the letter written by the AO. It was his submission that it is not known as to whether the additional evidence sought to be filed is the complete reply given by the parties to the AO or as to whether the revenue is seeking to file the letters which are in their favour alone as additional evidence. 3.48 The ld. DR, on the submissions made by the ld. counsel for the assesses on admission of additional evidence, submitted before us that by filing the additional evidence, the revenue is not seeking to improve its case in this regard, it was his submission that the finding of the AO that the assesses has not maintained separate books of accounts for each of the units separately only means that he has doubted even the receipt of export profits as arising on export of computer software. in this regard, the ld, DR relied on the findings at the DRP in para 2.4 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... failed to furnish the bank account with Marine Midland Bank HSBC USA, where the amounts were credited allegedly for software exports by 10A units. It was also submitted that the FIRCs submitted by the assessee only show that the amounts have been transferred from the overseas account of the assessee. There is no reference to endorsements of softex invoices or forms in respect of specific units. 3.52 The other submissions made in the earlier part of his submissions were also reiterated by the ld. DR, Reference was made to Circular No.1 dated 17.1.2013 clarifying issues relating to Export of Computer Software in particular our attention was drawn to the requirement of establishing direct and intimate nexus or connection or development of software done abroad with the eligible units set up in India and such development should be pursuant to a contract between the client and the eligible unit. Reference was made to the decision of the Delhi High Court in the case of CIT v. Modi Xerox [2012] 344 ITR 435/199 Taxman 265/11 taxmann.com 129 ; ITAT decision in the can of Infrasoft Technologies Ltd. v. Dy. CIT [2012] 135 ITD 19/18 taxmann.com 86 (Delhi) wherein separate books of account we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the system of cost centre. in the absence of separate books of account and in the absence of Cost Central accounting, it is not understandable as to how the expenses are allocated to various units. Our attention was drawn to page-400 of assessee's paper book No. 1(1) wherein the basis of allocation of expenses have been given. The learned counsel for the Assesses pointed that even in para 6.32 of the Handbook of procedure laid down by the DGFT dated 7.4.2006, the requirement is that it should be possible to distinguish the imports and exports or supplies effected by the STP/SEZ units from those made by the other units of the enterprise. According to him in the case of the assessee the above requirement is satisfied as the Assessee has distinguished between the activities of the STP units and non-STP units. in this regard our attention was drawn to page 62-64 of Paper book-2(1) filed by the Assesses. The cases relied upon by the learned DR were distinguished as not relevant to the present case. 3.54 We have given a careful consideration to the rival submissions. At the outset, we will consider the issue with regard to admission of additional evidence by the Assesses as w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessee, the Assessee should be permitted to rely on these documents for establishing its claim to deduction u/s. 10A of the Act. We are of the view that the above documents are necessary to enable the Tribunal to pass orders on the appeal and for a substantial cause viz., consider the claim of the Assessee for deduction u/s. 10A in the proper perspective. We are also at the view that the AO/DRP have decided the case without giving sufficient opportunity to the assessee to adduce avidence on the point of allowing deduction u/s. 10A(3) of the Act de hors Expln.2 to Sec. 10A(3) of the Act. These documents are therefore admitted as additional evidence. However, these documents by themselves are not conclusive regarding bringing into India of convertible foreign exchange which represents, sale proceeds of computer software exported out of India. The documents that Deutsche Bank has referred to in its letter dated 12.07.2013 said to have been furnished by IBM (I) Pvt. Ltd. also should be furnished before the DRP pursuant to the order, which we propose to pass in the latter part of this order on ground No. 3 raised by the assessee in this appeal whereby the issue would be required ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0AA of the Act. 3.60 We have considered the additional evidence and the rival contentions on the admission of the additional evidence sought to be filed by the Revenue contained in paper book-4. It is seen that the AO vide his letter dated 22.08.2011 called upon the assessee to explain as to whether the sale proceeds of export of computer software were credited to a separate bank account maintained for the purpose with any bank outside India as required under section 10A(3) read with Explanation-2 to section 10A(3). The AO also called upon the assessee to furnish copy of approval by RBI for the previous year. The assessee vide letter dated 02.08.2011 submitted that the assessee had an approved bank account vide RBI's approval dated 03.10.1997 maintained with HSBC Bank, New York. In terms of the approval, the assessee was required to submit an yearly audit statement showing receipts under offsite and onsite contracts undertaken by the overseas offices, expenses and repatriation thereof either to the authorised dealer or the RBI. The approval was also valid only for a certain period. The assessee pointed out that by oversight, the required audit statements were not filed with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rse of assessment proceedings. The AO did not express any opinion as to whether the Assessee exported computer software The focus of attention of the AO was only on (a) separate books of account for the various STP/SEZ units; (b) sale proceeds of computer software not deposited outside India in a Bank account approved for this purpose by the RBI. We have while dealing with the application for admission of additional evidence by the Assessee already permitted details of FIRCs and bifurcation of off shore and on site export revenues to be received as additional evidence vide para 3.58 of this order. The Revenue has obtained the aforesaid documents, after the filing of application for additional evidence before the Tribunal by the Assessee. The AO during the pendency of the present appellate proceedings obtained FIRCs pertaining to export realisations by the assessee for the period relevant to A.Y. 2008-09. Perusal of these FIRCs (copies of which are placed at pages 63 to 213 of the PB-II of the revenue) shows that purpose or remittance as found in some of the FIRCs does not show that remittances were on account of sale proceeds or export of computer software out of India. In this reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the revenue as additional evidence in its application dated nil filed on 22/08/2013 is concerned, it relates to Gr.No 6 which relates to disallowance made by the AO u/s.40(a) (i) 40(a)(ia) of the Act. As will be seen later, the order of the AO on this issue has been set aside and remanded to the AO for fresh consideration. The revenue is given liberty to rely on these documents in the set aside proceedings pursuant to the order of the Tribunal. 3.65 As far as documents sought to be filed as additional evidence vide PB-5 in the application dated 30.09.2013 containing pages 1 to 266, Sl. Nos 1 to 18 are concerned we find that documents at Sl. Nos 1 2 is a compilation of information and cannot be considered as additional evidence. Documents at Sl. Nos. 3 to 6 relate to correspondence by the AO with the services provider, whose communication facilities were used by the assesses for expiring computer software electronically from India outside the country. It is the plea of the revenue that the name given in the softex form as the service provider through which computer software were exported as VSNL, but the additional evidence now sought to be filed by the revenue shows that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14 of PB-5 filed by the revenue are the documents dealing with softex forms and the assessee's letter regarding data transmission export. For the reasons given for rejecting the documents Sl. Nos. 11 12, these documents are also found to be not relevant and hence not admitted as additional evidence. 3.71 Documents at Sl.Nos. 15 16 of PB-5 are statement of auditors. These statements. In our view, have no bearing or relevance to the issue before the Tribune for the A.Y. 2008-09 and the same are therefore are not admitted as additional evidence. 3.72 The documents at Sl.Nos. 17 18 are letters written by Deutsche Bank, authorised dealer, and sample softex actually endorsed by FIRCs for the F.Y. 2007-08. As we have already stated, these documents which are sought to be relied upon by the revenue on an apprehension that there was no export of computer software by the assessee. This apprehension will be addressed in the latter part of this order when rendering decision on merits of ground No 3 raised by the assessee vide para 3,87 of this order. 3.73 Documents in PB-2 PB-3 of the revenue to the extent that they were available when the assessment was completed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount with regard to each of the STP units. The Tribunal after elaborate discussion on the issue held that there was no requirement of maintenance of separate books of account for the various STP units. In page 23 of the Tribunal's order the revenue accepted that identification of the sales turnover of the various STP units was possible. This decision of the Tribunal has been followed in the assessee's own case in A.Y 2002-03 in ITA No 1151/Bang/2009 dated 24.06.2011. 3.78 The AO in the present assessment year i.e., A.Y. 2008-09 has accepted in para 3.5 of his order that the assessee maintained its books of accounts in the same manner as in the past. He only disputes that revenue and expenses allocation is without any basis. According to the AO the earlier order of the Tribunal on the issue has not been accepted by the Revenue and appeals have been preferred against those orders and therefore the orders of the Tribunal have not attained finality. Another reason given by the AO in para 3.3 of his order is that the ratio laid down by the Tribunal is that books of account maintained by the assessee should enable computation of profits from each of the STP units, even thoug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herwise the conditions laid down in the said section are fulfilled by an assessee Besides the above, the CA has given a detailed explanation as to how profitability of the various STP units have been arrived at The AO has also referred to the fact that audited financial statements of statutory auditors) was relied upon by Krishnaswamy Co., while certifying Form 53F of the Act We have already explained the various documents filed by the assesses before the AO on the method of maintaining books of account. There is neither a discussion nor errors pointed out by the AO or the DRP on the claim of the assessee that the documents maintained by it sufficiently enable determination of profits of each of the STP units 3.83 We are, therefore, of the view that there is no requirement for maintaining separate books of account for claiming deduction u/s. 10A/10AA of the Act and the hooks of account maintained by the assessee sufficiently enable computation of the profits of various STP/SEZ units. As we have already seen in the earlier part of the discussion in this order, the AO has not disputed the fact that the sale proceeds claimed by the assesses are from expert of computer software an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duction under the main provisions of section 10A(3) of the Act, whereby it can satisfy the AO about the receipt of sale proceeds of computer software exported out of India being brought into India in convertible foreign exchange within the period stipulated in the provisions u/s 10A(3) of the Act. As rightly submitted on behalf of the assesses, deduction u/s. 10/10AA of the Act cannot be totally denied. The fact that the assessee has exported computer software out of India and brought convertible foreign exchange into the country is not disputed. The quantum has lo be arrived at on the deduction which the assessee is entitled to has to be allowed. 3.87 We are therefore of the view that it would be just and appropriate to set aside the order of the DRP and remand the issue to the DRP for fresh consideration and direct the DRP to examine the claim of the assessee on the basis of evidence that the assessee may lead to prove the receipt of sale proceeds of computer software exported out of India being brought into India in convertible foreign exchange. The DRP will be at liberty to examine as to whether the convertible foreign exchange was brought Into India and that they represent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09 Add : Addl Provisions made during the year 277467 238265 Less: Utilised 282596 329780 At the end of the year 197395 203064 The AO called upon the Assesses to justify its claim for deduction of the aforesaid sum of ₹ 27,74,67.000. 4.2 The assessee submitted that it had debited an amount of ₹ 74,67.000/- towards provision for warranty In relation to the products sold by IBM, India. The Assessee submitted that the said provision has been made on scientific basis considering the warranty cost at earlier years. The Assessee explained that products sold by it carry warranty for specified period. For personal Computers, the warranty period was three years and for other products, the warranty period was one year During the warranty period, if any defects are noticed, necessary rectification/replacement is to be carried out by the Assessee free of cost The Assessee claimed that since, it was following mercantile system of accounting; it was required to provide for all known liabilities. Accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee created a further provision of Re.27,74.67,000/-, Therefore there was unutilised provision at the end of the year. He held that as laid by the Hon'ble Supreme Court in the decision of Rotork Control India (P.) Ltd. (supra), provision for warranty liability is deductible only if the following conditions are satisfied.:- 1. Whether the provision was created on the basis of past experience by applying scientific method of estimating the provision. 2. Whether the assessee is writing buck/reversing the expenditure or unutilised provision amount on the expiry of warranty period and offering the same as income for taxation 4.4 The AO was of the view that the assesses has created the provision on a scientific basis based on empirical data, trends, projections etc. However, the second condition of writing back the unutilized provision on the expiry of warranty period has not been satisfied by the assessee. He held that the assessee has been making additional provision year after year in spite of the balance already available in the provision account He was of the view that the opening balance of the provision account as on 01-04-2007 was Rs,20,30,64,000/- and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for products sold by the Assessee was continuous, the same would occur throughout the year. Since the books are to be closed on March. 31, the closing balance as of March 31 merely represents the warranty provision as of that date on products under warranty. This does not mean that the same is excess provision. Since the actual warranty expense amounts (as represented by the warranty utilisations above). In fact, exceed the warranty provisions created, this itself represents that the warranty provision created is not in excess. The Assessee also pointed out that in the draft order of Assessment the AO has accepted that the warranty provision method of the Assesses sum on a scientific basis. The AO's only objection was that since there was closing balance as 01 March 31, 2008, in tie Provision for Warranty A/C. and that closing balance was net reversed. This is an incorrect conclusion. As already stated the closing balance as on 1st March, 2008 is a balance In the provision account as of the closing date viz , 31st March, 2008 The fact that the warranty utilisations are more than the warranty provision created will support the argument that there was no excess provision of warr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions during the year and reversal of unutilised portion of the provision of warranty in the subsequent years 4. For AY: 2008-09, as per the assessee-company, the opening balance of warranty provision was Ra.22,30,64,000/-. The provision created during the year was Rs..27,74,67,000/-, Had this been the case utilisation of the warranty during the year of Ra.28,25,96,000/- as impossible and such claim revealed a fact that the warranty provision created by the assessee-company is unscientific and baseless. 5. The provision of warranty for the year (Rs.27,74,67,000/-) cannot be said to have been utilised In the same year on the fact that the provision for that year must be. created at the year-end on the sales m dc during that year. Hence utilisation of warranty of Ra 22,30,64,3000/- out of opening balance of ₹ 22,30,64,000/- is not appears to be true and correct. In general the utilisation of the warranty provision in any year always should be out of the opening balance on the fact that the current year provision pertains to current year sales and it would be utilised only in the subsequent year i.e.. after sale. In the present case the table presented above is the cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hod as placed before authorities was not a method, which fetches approval on touchstone of law laid down by Apex court In Rotork Controls India (P.) Ltd. (supra) The AO finally concluded as follows- 10.3.4. Conclusion: In the present case also, it is noticed that except a table of provision for warranty no other evidences were placed by the company before the AO about the utilisation of warranty and the unutilised provision reversed in the subsequent year. Since beginning no reversal was admitted in any of the assessment years. Hence, it is evident that neither the provision made during the year (Rs.27,74,67,000/-) was scientific nor no evidence for the actual utilisation warranty (Rs. 28,25,96.000/-) is available on record. Accordingly, as per the direction of DRP the entire issue has been analysed and the provision of warranty of ₹ 27,74,67,000/-is added back in place of closing balance of ₹ 19,79,35,000/-. 4.11 Aggrieved by the order of the AO, the Assessee has raised ground No.4 before the Tribunal. 4.12 We have heard the submissions of the learned counsel for the Assessee and the learned DR. The learned counsel for the Assesses submitted that in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tific, He pointed out that the predecessor AG had accepted in the draft assessment order that the Assessee made provision on a scientific basis. The DRP did not reverse the finding of the AO in the draft assessment order, it was therefore not open to the successor AO to give a finding that the provision made by the Assessee was not scientific. It was his submission that if liability by way of provision is not to be allowed, then the AO should have allowed the actual liability incurred by the Assessee during the previous year by way of liability on account of warranty claims of ₹ 28,26,96,000, It was his submission that the addition made by the Revenue was unsustainable. 4.15 In this regard, it was also pointed out by him that in Assessee's own case for A.Y. 98-99 this Tribunal had an occasion to consider similar claim of the Assessee for deduction on account of provision for warranty liability in ITA No.755/Bang/2003 in its order dated 2.3.2006 and this Tribunal held as follows 2.4 We have carefully considered the relevant facts and the argument advanced. The only reason to disallow the sum is that the liability is a contingent liability and not an accrued liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y in tax related matter. Therefore, to provide to an alternate dispute resolution mechanism which will facilitate expeditious resolution of disputes in a fast track basis. the Finance (No. 2) Act, 2009 introduced this section. The learned counsel for the Assessee drew our attention to provisions of See.144C of the Act and submitted that the following are the salient features of the aforesaid provisions which are applicable to assessment of eligible assessee: (1) The Assessing Officer shall, forward a draft of the proposed order of assessment (hereinafter in this section referred to as the draft order) to the eligible assessee if he proposes to make, on or after the Ist day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee (2) On receipt of the draft order, the eligible assessee shall, within thirty days of the receipt by him of the draft order- (a) File his Acceptance of the variations to the Assessing Officer; or (b) File his objections, if any, to such variation with,- (i) The Dispute Resolution Panel; and (ii) The Assessing Officer, (3) The Assessing Officer shall complete the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trary to the provisions of the Act. 4.19 In final conclusion it was his submission that the provision for warranty expenses as claimed by the Assessee has to be allowed as deduction as the conditions for allowing deduction of a provision as laid down in judicial decisions are duly fulfilled in the case of the assessee. 4.20 The leamed DR relied on the order of the AO/DRP 4.21 We have considered the rival submissions. A perusal of the draft order of assessment shows that the AO has accepted in para 5.4 of his draft order the AO accepted that the Assessee has created the provision on a scientific tests based on empirical data, trends, projections etc The AO disallowed the claim for deduction in his draft assessment order only for the reason that the Assessee was not writing back unutilised provision for warranty. The issue before the DRP was therefore as So whether there was any un-utilized provision which had to be written back by Assesses The DRP did not doubt the finding of the AO with regard to the method of providing for liability for warranty adopted by the Assessee as scientific. The DRP wanted the AO to examine whether unutilized provision for warranty existed and wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Name of the club Cost of services or facilities used Membership/subscription 1 Bangalore Club 1,800 501,093 2 Karnataka Golf Association 1.342 3,480,960 3 DLF Golf Resort - 3,534,771 4 The Leela Palace - 2,212,000 5 Tollygunge Club - 674,722 6 Indiranagar Club 4,000 3,131 Total 7,142 9,406,677 5.2 The Assesses claimed the aforesaid expenditure as deduction while computing income from business. The AO accepted that expenditure of ₹ 7142/- on cost of services/facilities used was undisputedly revenue expenditure. He was however of she view that the payments of ₹ 94,06,677/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he amount was disallowed and added back to the total income of the Assessee in the draft assessment order passed by the AO. 5.4 In its objection to the DRP to the draft assessment order of the AO making the aforesaid addition, the assessee reiterated submissions as made before AO. The DRP however confirmed the order of the AO. The DRP upheld the view of the AO that the expenditure brought in 'enduring benefits'. 5.5 The learned counsel for the Assessee submitted that the impugned addition has bean made treating the payment of corporate membership fee for club as capital expenditure as the benefit of such membership extends for a period of 5 years it was his submission that the following judicial pronouncements support the claim of the Assessee that the expenditure in question is revenue in nature. 1. CIT v. Infosys Technologies Ltd. [2012] 349 ITR 610/205 Taxman 250/18 taxmann.com 372 (Kar.) wherein it was held that the amount paid by assessee-company towards subscription for obtaining corporate membership in club is allowable as revenue expenditure. 2. CIT v. Sandur Manganese Iron Ores Ltd. IT Appeal Nos. 13 to 24 of 2002 dated 21.3.2005; in which the view ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rriving at the initial disallowance of ₹ 2,038,683,792. 6.1 To verify whether the assesses has deducted tax at source on all the expenses claimed as per the provisions of Chapter XVII B of the IT AO and with reference to Sec. 40(a)(i) and 40(a)(ia), the AO called upon the assessee to give details the reconcillation of expenses claimed in the P L account and expenses on which tax has been deducted at source. The assessee submitted the details by letter dated 09-12-2011. The assessee had submitted the reconciliation on Annexure-2 of the letter as under : Reconciliation of expenses as per P L and the E-TDS statement Particulars Amount Rs. Amount Rs. Expense items on which tax deduction at source (TDS) provisions are applicable 2645,80,11,565 Less : Amount on which tax has been deducted 26Q 1657,04,33,645 27Q 587,68,10,248 2244,72,43,893 Expense disallowed u/s 40(a)(i)(a) in the compu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es as per P L account 2645,80,11,565 Deduction claimed in computation of income - expenses on which tax claimed to have been deducted as discussed above. 209,31,30,953 26Q 1657,04,33,645 27Q 587,68,0,248 2244,72,43,894 Less Expense disallowed u/s 40(a)(i)(ia) in the computation of income (as per tax audit report) 406,52,14,832 Balance amount liable to be disallowed u/s 40(a)(ia)/40(a)(i) 203,86,83,792 6.3 Therefore, the AO held that the assessee has failed to deduct tax at source on the amount of ₹ 203,86,83,792/- and has, to that extent, violated the provisions Chapter XVIIB of the Income-tax Act The AO also held that the Assessee has failed to give expenditure-wise details of deduction of tax at source in spite of specifically insisting on such expenditure wise details during the assessment proceedings by letter dated 25.10.2011. The AO accordingly d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13,664) Based on the above reconciliation, the Assesses submitted that it had deducted tax at source appropriately and there is no further amount on which TDS is not done. Accordingly, the proposed addition of ₹ 2,038,683,792 to the taxable income by AO was not correct. 6.6 The split of the aforementioned amount of ₹ 6,130,897,346 was also given and the same was as follows: Particulars Amount Rs. Expenses on which TDS is not applicable since NIL rate TDS certificate have been provided by vendors. 2,692,875,119 Reimbursements of employee expenses reimbursements on which TDS is not applicable 803,360,107 TDS provisions not applicable since the income is not liable to tax in India 2,078,312,779 Staff welfare - expenses on which TDS is not applicable 229,431,072 Other expenses where TDS provisions are not applicable 326,916,269 Total 6,130,897,346 6.7 The Assesses submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion has to be decided after examination of the relevant details in complete manner before the AO. The AO in therefore, directed to seek compliance in this regard and conclude, the issue on the basis of specific findings and a speaking order, The objections in this ground are disposed of with directions as above 6.10 Aggrieved by the aforesaid directions of the DRP, the Assessee has raised Gr.Nos.6.1 to 6.3 before the Tribunal. We have heard the submissions of the learned counsel for the assessee and the teamed DR. The learned counsel for the Assessee submitted before us that the Officer in-charge of compliance with the TDS provision had determined default on account of non-deduction of tax at source at a sum less than what is claimed by the AO in the order of Assessment. According to him the determination of TDS default by the Officer in-charge of TDS provisions compliance should be the basis for the AO to make disallowance u/s. 40(a)(i) 40(a)(ia) of the Act. It was also argued that the manner in which the default u/s. 40(a)(i) 40(a)(ia) of the Act has been arrived at by the AO is also incorrect. 6.11 We raised a query as to whether the directions of the DRP setting a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eign tax credit and also enclosed copies of the foreign taxes paid challan/communication amounting to USD 0.60 crore (Rs.24.27 crore) out of which proportionate amount has been claimed as foreign tax credit in the computation of Income by the assessee amounting to ₹ 5.77 crore. Copy of the return of income of the branch office was also enclosed with the said letter. The assessee specifically pointed out that in the event the taxable income is increased in assessment, the company reserves its right to claim foreign tax credit for the actual foreign taxes paid. The annexure-2 referred to in the said letter is given as ANNEXURE-V to this order. 7.3 In its submissions before the DRP in Gr No. 12 4. the assessee specifically submitted that it had discharged total foreign taxes of ₹ 24.10.73,621, but has claimed credit for foreign taxes paid of only ₹ 5,77,86,304 since the company claimed deduction u/s.10A 10AA of the Act on its export revenues and also because the assessee was liable to pay MAT as per the provisions of Sec. 115JB of the Act The assessee also pointed out that in the event of Sec. 10A/10AA relief being not allowed the income in question would get do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 179,24,25,070) without any direction from the DRP to lower the TDS credit claim. 8.1 In the return of income filed by the assessee for AY 08-09, the assessee had claimed credit in respect of Tax Deducted at Source (TDS) amounting to ₹ 179,24,72,773. The assessee filed the original TDS certificate in respect of the claim for credit made in the return of income. The assessee by letters dated 19.1.2010, 23.4.2010 and 13.7.2010 addressed to the AO enclosed additional TDS certificates in original making additional claims to credit for TDS of ₹ 23,60,66139, ₹ 64,72,893 and ₹ 3,10,34,010 respectively. The assessee pointed out that the TDS certificates were received after the filing of the return of income and therefore are being filed to enable the officer to give further credit for TDS. 8.2 In the draft assessment order passed by the AO dated 21.12.2011, he gave credit for TDS of only ₹ 179,24,25,070. While passing the final assessment order pursuant to the directions of the DRP, the AO gave credit for TDS of only ₹ 120,22,29,214 as the credit to that extent alone was reflected in the NSDL/AST. The assessee is aggrieved by the order of the AO i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do not tally. Of course, while issuing corrective steps, the respondents can ensure that fraudulent or double claims for TDS are not made (Para 41) Another problem highlighted relates to the use of alphabets 'U', 'M' and 'P' in form 26 AS. The said alphabets stand for 'unmatched challan', 'mulched challan' and 'provisional booking'. It is stated that 'provisional booking' is applicable for DDOs, i.e., Government deductors and shall be shortly discontinued. 'Unmatched challans' relate to challans where the report by the deductor in the TDS statement are not found available in the OLTAS database (OLTAS stands for Online Tax Accounting System). The respondents will fix a time-limit within which they shall verify and correct all unmatched challans. This will necessarily require communication with the deductor and steps to rectify. The time limit fixed should take into account the due date of filing of the return and processing of the return by the Assessing Officer. An assessee as a deductee should not suffer because of fault made by deductor or inability of the Revenue to ask the deductor to rectify and correct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfortunate and a matter of regret if an assessee does not get credit, in spite of payment of tax. (Pare 55) 8.5 The learned counsel for the assessee drew our attention to instruction No.5/2013 issued by the CBDT dated 8.7.2013 pursuant to the observations of the Hon'ble Delhi High Court in the case of Court on its own motion (supra) referred to above. In para-3 of the said instruction the CBDT has directed the AO's when approached by the assessee with requisite details and particulars in the form of TDS certificate as evidence against any mismatched amount. The AO's have to verify whether or not the deductor has made payment of the TDS in the Government Account and if the payment has been made, credit of the same should be given to the assessee. 8.6 The learned counsel for the assessee prayed that the AO may be directed to carry out verification as given in the instruction referred to above and give credit for TDS without relying solely on the NSDL/AST 8.7 Our attention was also drawn by him to the provisions of Sec. 205 of the Act which provides as follows:- Section 205: Bar against direct demand on assessee. Where tax is deductible at the so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke credit of the said amount. In that event, on account of the non-availability of the credit, the assessee would be liable to pay tax once again even though the tax was deducted at source. Thus, it would be a case of double taxation which is not permissible in law. To avoid such anomaly, s. 205 has been enacted, to the effect that, once the tax is deducted at source by the employer company, then, the person from whose income, the tax has been deducted at source shall not be called to pay the said tax again. From the language of s. 205, it is clear that the bar operates as soon as it is established that the tax has been deducted at source and it is wholly irrelevant as to whether the TDS is paid to the credit of Central Government or not and whether TDS certificate in Form No. 16 has been issued or not. Also the mere fact that the employer may not issue TDS certificate to the employee does not mean that the liability of the employer ceases. The liability to pay income-tax if deducted at source is upon the employer. Even it the credit or the TDS amount is not available to the petitioner assessee for want or TDS certificate, the fact that the tax has been deducted at source from sala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 to the total income of the appellant on account of adjustment to the arm's length price with respect to software development service transaction entered into by the appellant with its associated enterprises. (b) The AO/TPO erred in law and on facts as he faded to establish that the appellant shifted profits outside India. 9.2 Comparability analysis adopted by the TPO for determination of arm's length price. (a) The AO/TPO grossly erred on facts and in law in rejecting the filters and search process adopted by the appellant in the Transfer Pricing Study. Further, the AO/TPO also erred on facts and in law by conducting a fresh benchmarking analysis in respect of captive software services provided by the appellant and wrongly comparing the appellant's activities with companies operating as full-fledged entrepreneurs without considering the differences in functions performed assets employed and risk assumed by the appellant vis-a-vis comparable companies. (b) The AO/TPO erred in law in applying arbitrary filters as criterion for rejection of companies identified by the appellant in the Transfer Pricing Study such as (i) companies whose data for financi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing a non-speaking order and not considering the rectification application preferred by the appellant in respect of pass through transactions 9.6 Variation of 5% from the arithmetic mean The AO/TPO erred in law in not granting the variation as per the proviso to sec.92C (2) of the Act. 9.7 Directions issued by the Hon'ble DRP The Hon'ble DRP has erred in law and on facts in not taking cognizance of the objections filed by the appellant in relation to the draft assessment order issued by the AO/TPO order and confirming the draft order of the AO. 9.1 The above grounds are with regard to the addition made by the AO in respect of an International transaction of software development services entered Into by the assessee with its Associated Enterprises (AE). The Assessee is a wholly owned subsidiary of IBM World Trade Corporation (IBM WTC), which in turn is a wholly owned subsidiary of International Business Machines Corporation (IBM) IBM is the corporals headquarter for the IBM Group which Includes all associated entities of IBM India (the Assessee), with whom the later has International transactions The Assessee predominantly functions as a provider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions Amount Amount received/receivable (Rs.) International Transactions 116,409,705 Sale of finished goods (computers, services etc.) 116,409,703 Purchase of traded items finished goods, spare parts, materials components 9,100,488,058 Payment of royalty for use of trademarks and technical know-how 1,721,692,517 Import of capital goods Payment of royalty for use of trademarks and technical know-how 769,071,350 Export of software services 56,182,587,236 Commission of direct sales 535,780 380 Professional and consultancy services 2,857,233,724 Sub-contracting charges 2,153,448,229 Software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal and consultancy services availed, payment for software licenses etc, were routed through profit and loss account and considered for mark-up with the AE mainly in the software development segment, the same needed to be aggregated under TNMM 9.6 TP Study furnished by the Taxpayer. The search for uncontrolled comparables was done using prowess and capital line database The search of the database yielded a set of 13 comparable with an average profit margin @ 14,44% on cost The mark-up on total cost of the taxpayer is arrived at 10.03%. As the profit margin earned by the taxpayer is with +/- range from the arithmetical mean margin, the price changed by the taxpayer in its international transactions was claimed to be at arm's length. 9.7 As already stated, the TPO accepted the TNMM as the most appropriate method in the facts and circumstances of the taxpayer's case 9.8 Final filters selected by the TPO for selection of comparables: Companies whose data is not available for the FY; 2007-08 were excluded. Companies whose software development service revenue is less than 75% of the total operating revenues were excluded. Companies whose software developmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, it is not to be considered as a comparable. 4 Kashyap Tech. Ltd. It fails the export revenue 25% of sales filter (30.41% of revenue for the FY:2007-08). Thus, it is not considered as comparable. 5 Larsen Taubtn Infotech Ltd. The Company falls 25% related party transactions filter 130 41% of revenue for the FY: 2007 08) Thus, it is not considered as comparable 6 Neilsof Ltd. It fails the export revenue 25% of sales filter applied by the TPO and hence cannot be considered as comparable. 7 PSI Data System Ltd. The company does not qualifies all the filters applied by the TPO. Thus, the company is not considered as a comparable 8 Shree Tulsi Online Com Ltd. It fails the export revenue 20% of sales fitler applied by the TPO and hence cannot be considered as comparable. 9.11 The following comparable originally proposed by the department was later withdrawn by the TPO accepting the stand of the Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R Systems Internatinal (seg) 15.30 14 II S Software !lndu j Ltd,. 7.41 15 Sasken Communciation Tech. Ltd. (seg) 7.58 16 Tata Elxsi Ltd. (seg) 18.97 17 Thirdware Solutions Ltd., 19.35 18 Wipro Ltd (seg) 28.45 19 Softsol India Ltd. 17.89 20 Lucid Software Ltd., 16.50 Average 23.65 The TPO allowed the working capital adjustment at 1 .95%, while working out the working capital adjustment The TPO applied the Prime Lending Rate (PLR) adopted by SBI for working out the working capital adjustment The Assessee had also asked for other risk adjustment while determining ALP. The TPO however did not allow any adjustment on account of risk factors. Finally, the AO computed ALP as follows: Computation of Arms Length Price:- The arithm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO erred on Facts in rejecting the comparable companies arrived at in the transfer pricing study without considering the functional and risk analysis of the assessee, (c) The TPO grossly erred on facts in benchmarking, the transactions of the captive software services of the assessee with companies Operating as full-fledged entrepreneurs without considering the differences in the function* performed, assets employed and risk undertaken by the vis-a-vis comparable companies. (d) The TPO erred in law in applying arbitrary filters to arrive at fresh set of companies as comparables to the assessee, without establishing functional comparability. (e) The TPO grossly erred in law in deviating from the uncontrolled party transaction definition as per Rule 10A of the IT Rules and arbitrarily applying a 25% related party criteria m accepting/rejecting comparables (f) The TPO grossly erred on facts to arbitrarily rejecting companies having software development revenue less than 75% of total operating revenue and applying inconsistently such filter, without considering the specific segmental results. (g) The TPO erred on facts in arbitrarily rejecting companies having export r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparables. According to the Assessee, the following companies (6 companies) should be excluded from the final list of comparable, chosen by the TPO :- (1) Avani Cincom Technologies (2) Celestial Biolabs (3) Kals Information System Ltd. 9.19The learned counsel for the assessee submitted that these companies are not a pure software service provider and are into product software development. He pointed out that the Bangalore Bench of the Tribunal in the case of M/s. Logica e-Business Software India Ltd. v. Dy. CIT [2013] 140 ITD 540/29 taxmann.com 310 (Bang.-Trib) and also in the case of M/s. Logica (P.) Ltd. v. Asstt CIT [2013] 36 taxmann.com 374 (Bang.-Trib) considered the aforesaid companies as not comparable to a company providing software development service. The following were the relevant observations of the Tribunal in the case of Loigca (P.) Ltd. (supra) '12. The next aspect which was highlighted by the Id. counsel for the assessee was that out of the 26 comparables, comparables at SI.Nos. 1, 2, 3 12 have to be rejected as they were held to be functionally not similar to a software services provider as held by this Tribunal In the case of Trilogy E-busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16417661 23249646 23359186 31108949 Operating Profit 5343350 12227877 5983623 (3069098) Operating Margin 32 55% 52.59% 25.62% 9.87% 40. It was submitted that this company has made unusually high profit during the financial year 06-07. The operating revenues increased 63.03% which indicate that it was an, extraordinary year for this company Even this growth at software industry for the previous year as per NASSCOM was 33%, The growth rate of this company was double the industry average. In view of the above, it was argued that thin company ought to have bean rejected as comparable 41. We have given a careful consideration to the submissions made on behalf of the Assessee and are of the view that the same deserves to be accepted The reasons given by the Assesses tar excluding this company as comparable are found to be acceptable The decision of ITAT (Mumbai) in the case of Telcordia Technologies Pvt Ltd. v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning and purification under wet lab procedures arc under progress with our collaborative Institute, Department of Microbiology, Osmania University, Hyderabad. In the Industrial biotechnology area, the company has signed the Technology the transfer agreement with IMTECH CHANDIGARH (a very reputed CSIR organisation) to manufacture and market initially two Enzymes, Alpha Amylase? and Alkaline Protease in India and overseas. The company is planning to set up a biotechnology facility to manufacture industrial enzyme This facility would also include the research laboratories for carrying out further R D activities to develop new candidates' drug molecules and licence them to Interested Pharma and Bio Companies across the GLOBE. The proposed Facility will be set up in Genome Valley at Hyderabad in Andhra Pradesh According to the learned D.R celestial labs is also in the field of research in pharmaceutical products and should be considered as comparable. As rightly submitted by the learned counsel for the Assessee, the discovery is in relation to a software discovery of new drugs. Moreover the company also is owner of the IPR. There is however a reference to development of a molec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for segmental data at the entity level from this company. The TPO also called for description of software development process. In response to the request of the TPO this company in its reply dated 29-3-2010 has given details of employees working in software development but it is not clear as to whether any segmental data was given or not. Besides the above there is no other detail in the TPO's order as to the nature of software development services performed by the Assessee. Celestial labs had come out with a public issue of shares and in that connection issued Draft Red Herring Prospectus (DRHP) in which the business of this company was explained as to clinical research. The TPO wanted to know as to whether the primary business of this company is software development services as indicated in the annual report for FY 06-07 or clinical research and manufacture of bioproducts and other products as stated in the DRHP. There is no reference to any reply by Celestial labs to the above clarification of the TPO. The TPO without any basis has however concluded that the business mentioned in the DRHP are the services or businesses that would be started by utilizing the funds garnered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submissions made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s 133(6) of the Act. This information obtained by issue of notice u/s. 133(6) of the Act. The information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the assessee that this company is not comparable.' 9.20 Respectfully following the decisions of the Tribunal referred to above, we hold that the aforesaid three companies have to be excluded from the list of comparables chosen by the TPO. 9.21 (4) M/s Infosys Technology Ltd.: As far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R relied on the order of the DRP. 9.22 (5) Tata Elxsi Ltd. and 6. Wipro Ltd.: The learned counsel for the Assessee placed reliance on the decision of the Bangalore Bench of the ITAT in the case of M/s Triology e-Business Software India (P.) Ltd. (supra) and also in the case of M/s Logica Pvt. Ltd. (supra) wherein this Tribunal considered the aforesaid companies as not comparable to a company providing software development services such as the assessee in the present case. 9.23 We have considered the rival submissions. This Tribunal in the case of Logica (supra) had considered, Infosys Technology Ltd. (supra) Tata Elxsi Ltd. and Wipro Ltd., as a comparable in the case of software Services Provider such as the Assessee and this Tribunal held as follows: '13. So also, the comparables listed at Sl. Nos. 10, 14 and 26 have to be rejected as functionally not comparable with that of this assessee in view of the decision of the Mumbai Bench of the Tribunal in the case of Technologies India Private Ltd. in ITA No. 7821/Mum/2011, wherein it was held as under:- 7.2 Lucid Software Limited .... (not relevant in this case) 7.4 Infosys Technologies Ltd. The paramete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and expenses, the same cannot be taken into consideration for comparability analysis. Moreover, 67% of its sales relates to its product which are sold on premium resulting into higher profitability, therefore, cannot be compared with the assessee-company at all. There are several judgments of ITAT which have been referred in para 6.5 above, that Wipro cannot be taken as comparable case for comparable ease with the company like assessee. It view of these facts and the reasoning given in the case of Infosys, we hold that Wipro also cannot be considered as a comparability analysis, hence, would not be included in the list of the comparable entities as identified by the TPO. 14. As far as comparable at Sl.No.6 24 are concerned, the comparability of the aforesaid two companies with that of the software service provider was considered by the Mumbai Bench of the Tribunal in the case of Telcordia Technologies India Private Ltd. (supra) wherein on the aforesaid two companies, the Tribunal held as follows:- 7.6 Flextronics Software System Ltd (not relevant in this case) 7.7 Tata Elxsi Limited: From the facts and material on record and submissions made by the lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y from rendering software services and sale of software was not available and therefore this was rejected as a comparable company. Similarly, in the case of Celestial Labs Ltd., the Tribunal took a view that this company was engaged in R D activity and cannot be compared with a software service provider. It is thus clear that the reason given by the Tribunal in the cases referred to by the ld. counsel for the assessee will equally apply to the present case also. We therefore accept the submissions made on behalf of the assessee and hold that companies at Sl.No. 1, 2, 3, 10, 12, 14, 24 28 be excluded from the list of comparables chosen by the TPO while computing the ALP.' 9.24 We have considered the submissions on behalf of the assessee and the decisions rendered by this Tribunal in the case of Triology E-Business Software India Ltd. (supra) and Logical (P.) Ltd. (supra) and are of the view that for the reasons given by the assessee in his submissions before us and the reasons given by the Tribunal in the cases referred to above on identical facts and circumstances. Infosys Technology Ltd. (supra). Tata Elxsi and Wipro Ltd. have to be excluded as a comparable white determi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee to be reimbursement of expenses by the associated enterprises as part of the operating revenue, white computing the PLI. In this regard, the learned counsel for the assessee draw our attention to the submissions made by the assessee before the TPO in which the assessee submitted that the assessee had recovered out of pocket expenses in the nature of travelling and conveyance expenses advertising and marketing expenses, communication expenses, employee expenses etc., from its Associated Enterprises (AE). The assessee provided break-up of amounts recovered from AG's during the year. Table-1 Recovery of expenses made by the IBM India for FY 2007-08. Nature of recoveries Amount (in Rs.) Recovery of travelling and conveyance expenses 5,643,338,106 Advertising and other Marketing Expenses 381,532,907 Recovery of miscellaneous expenses 123,507,982 Recovery of communication expenses 2,888,055 Recovery of employee expenses 819,735 T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the performance of the services themselves. In such a case, it may not be appropriate to determine arm's length pricing as a mark-up on the cost of the services but rather on the costs of the agency function itself, or alternatively, depending on the type of comparable data being used, the mark-up on the cost of services should be lower than would be appropriate for the performance of the services themselves. For example, an associated enterprise may incur the costs of renting advertising space on behalf of group members, costs that the group members would have incurred directly had they been independent. In such a case, it may well be appropriate to pass on these costs to the group recipient, without a mark-up, and to apply a mark-up only to the costs incurred by the intermediary in performing its agency function . 9.29 The Assessee thus submitted that the recoveries of such costs are on actual cost to cost basis are in line with standard industry practices. The Assessee also pointed out that the Assessee's affiliates enter into third party contracts inter alia which clearly provides for the consideration along with the out of pocket expenses at actuals. At no poi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable data being used, the mark-up on the cost of services should be lower than would be appropriate for the performance of the services themselves. In this type of cases, it will be appropriate to pass on the cost of rendering advertising space, to the credit recipient without a mark-up and to apply a mark-up only to the costs incurred by the intermediary in performing its agency function . 9.31 In view of the above, the assessee prayed that recoveries be treated on a stand-alone basis without aggregating the same with the cost of provision of services. 9.32 Our attention was also drawn to the sample contract which the assessee entered into with the associated enterprise for providing software development services. He highlighted the fact that the professional service charges were exclusively of any travel and living expenses and other reasonable expenses incurred in connection with the services. Our attention was also drawn to the fact that even the Government of India in the Ministry of Health Family Welfare, when it invites tenders excludes the travel and living expenses and other expenses incurred in connection with rendering of services. A copy of the tender inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % to the net margins of the comparable companies must be made. Reliance in this regard was placed on the decision of the Delhi Bench of ITAT in the case of Sony India (P.) Ltd. v. Dy. CIT [2008] 1141 ITD 448 (Delhi) wherein such reduction in the margins of the comparables was given. Besides the above, adjustment to the margin of the comparable companies was also sought on the ground that the comparable companies incur marketing expenditure whereas the Assessee does not incur such expenses. Our attention was drawn to the chart at page 468 of the Paper Book filed in connection with Transfer Pricing issue giving the expenditure as a percentage of sales incurred by the various comparable companies. Reliance was placed by the learned counsel for the Assessee on the decision of the Delhi Bench of the ITAT in the case of Rolls Royce Plc v. Dy. CIT [2008] 19 SOT 42 wherein such an adjustment was allowed. A chart showing the adjustment to the margin of the comparable companies on account of risk and R D expenditure and Marketing expenditure is given at page 584 of the Paper book filed for TP issue and the same is annexed as Annexure-VII to this order. The learned DR relief on the order of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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