9911796707
TMI Blog2019 (4) TMI 1770X X X X Extracts X X X X X X X X Extracts X X X X ..... e companies already retained in the SWD segment will hold good for this segment also. We therefore feel that it would be just and appropriate to remand for fresh consideration by the AO/TPO of the nature of services rendered by the Assessee in this segment. This will depend upon the terms of the Agreement between the Assessee and AE for rendering services which are in dispute. TPO will decide on the character of services rendered by the Assessee whether it is R D or SWD, after affording opportunity of being heard to the Assessee and after considering all relevant factors. Disregarding the correct business loss incremental claimed in the revised computation - reasons for filing revised computation of income was that during the time of assessment, the Assessee noticed that some adjustments in the segmental tax computation was not mirroring the segmental P LA/C. Also, certain allocation of expenses was not made in the correct units - main reason assigned by the AO for not accepting the revised computation of total income is on the basis that a revised return of income was not filed within the time limit permitted u/s.139(5) - HELD THAT:- Hon ble Delhi High Court in the case of Jai par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the AO on the basis of the dates of sales invoice that were was prior to 1.4.2008 - non-inclusion of 62,97,848 which was sales which were treated as prior period (AY 2008-09 sales) by the AO on the basis of the dates of sales invoice that were was prior to 1.4.2008 substantiates the case of the Assessee for inclusion of the aforesaid sum as part of the turnover for AY 2009-10 Non-inclusion of sales as turnover of AY 2009-10 - claim of the Assessee is that it had issued credit notes to the customers for recognizing sales for the relevant AY 2009-10 but the evidence to substantiate the same is not discernible from the material filed before us. So also the fourth component of dispute of turnover viz., a sum of 4,23,06,045 which is stated to be owing to wrong punching of amounts due to non-inclusion of certain sales not required to be reported in APR. We therefore remand the issue to the AO for consideration de novo with liberty to the Assessee to substantiate its case with necessary evidence. Non-realization of Export proceeds in convertible foreign currency in India within the time limit specified in Sec.10A(3) - Submission of the Assessee that since the export proceeds bought in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has four units viz., IDF1 unit, IDF 2 unit, MAG Unit and SWD services unit. IDF1/EHTP2 unit (hereinafter referred to as IDF 1 Unit) which manufactures and sells UPS systems and other power protection devices. The products manufactured in this unit is sold in the domestic as well as export market. (ii) IDF2 unit /EHTP1 unit (hereinafter referred to as IDF2 unit) also manufactures and sells UPS systems and other power protection devices. The products manufactured in this unit is sold in the domestic as well as export market. (ii) MAG unit which is engaged in the business of trading of UPS and other power protection devices which are procured either locally or through imports. The sales of this unit are only in domestic market. Considering sales as per excise return and including the scrap sale value again as an addition while computing total income - HELD THAT:- There is merit in the submission of the learned counsel for the Assessee that the profits of IDF 1 and IDF 2 units in so far as it relates to domestic sales of these units have to be accepted as declared by them as per the segmental profit and loss account. No specific reasons have been assigned by the AO for adopting to a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... warranty expenses is the same in the present AY as it was in AY 2008- 09. In the given facts and circumstances of the case, we are of the view that the deduction on account of provision for warrant expenses deserves to be allowed as claimed by the Assessee as the requirements for claiming deduction on account of provision for warranty liability has been satisfied. Addition of deferred service income as undisclosed income - Treatment to AMC value as deferred and not recognized as income by the Assessee in its books of accounts due to the revenue recognition policy followed by the Assessee - HELD THAT:- Assessee did not become owner of the money received unless the services are rendered and was not entitled to appropriate the same till service was rendered in lieu of which the same was received in advance. As in the case of Coral Electronics (P) Ltd. [ 2003 (12) TMI 14 - MADRAS HIGH COURT] held that the services may be rendered or may not be rendered depending upon withdrawal of the money as and when the customer required. So, it is highly uncertain as to whether it would at all remain as income of the assessee. Only when the service is done the assessee has a right over the amount t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view was not correct. On the evidence on record and given the fact that the gain on foreign exchange fluctuation is relatable to export sales and has been duly established with each item of sale and correlated with the relevant FIRC showing the dates of realization, the gain in question has to be regarded as income of IDF1 and IDF 2 units respectively and the Assessee would be entitled to deduction u/s.10A of the Act on those incomes also. We hold and direct accordingly and allow Gr.No.22 raised by the Assessee. Foreign exchange loss in MAG unit is concerned, the profits of MAG unit are taxable and it does not enjoy deduction or exemption. Therefore the loss in this unit will go to reduce the income of this unit which is otherwise taxable. The AO therefore came to the conclusion that the loss on foreign exchange claimed in this unit is not allowable because it was a domestic unit in which there cannot be forex loss and secondly he found that the proportion of loss claimed compared to the turnover was very high. These were the two reasons assigned by the AO for treating the loss as not proved and bogus. Another reason that weighed with the AO was that Tax exempt unit IDF 1 and IDF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10) and this was nothing but similar to write off of debts as bad and irrecoverable u/s.36(1)(vii) read with Sec.36(2) of the Act. This claim of the Assessee has not been examined either by the AO or CIT(A) and accordingly, it was agreed by the parties that this issue should be remanded to the AO for consideration afresh, after due opportunity to the Assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... at the following companies selected as comparable by the learned AO, learned DRP and the learned TPO as comparable in the contract software development segment should have been rejected. • Bodhtree Limited; • Infosys Limited; • Larsen and Toubro Infotech Limited; • Mindtree Limited; • Persistent Systems Limited; • Sasken Communications Technologies Limited; • Tata Elxsi Limited; and • Zylog Systems Limited 6. The learned AO, learned DRP and the learned TPO erred in not applying multiple year/prior year data for comparable companies while determining arm's length price. 7. The learned AO, learned DRP and the learned TPO erred in using data as at the time of assessment proceedings, instead of that available as on the date of preparing the Transfer Pricing documentation for comparable companies while determining arm's length price. 8. The learned AO. learned DRP and the learned TPO have erred in not granting working capital adjustments to the Appellant. 9. The learned AO, learned DRP and the learned TPO have failed to appreciate that the Appellant is a limited risk contract service provider rendering s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .59%. The Assessee in its TP Study had chosen 14 companies as comparable companies. 5. The arithmetic mean of the profit margin of the 14 companies so selected by the Assessee was 13% after adjustment and 14% without adjustment and these margins when compared to the profit margin of the Assessee was at Arm's Length after providing for (+)(-) 5% variation margin permitted under the proviso to Sec.92(2) of the Act. Since the Assessee's profit margin was within the range of profit margin of the comparable, the Assessee claimed that the price charged in the international transaction was at Arm's Length and therefore no addition by way of adjustment to ALP should be made. 6. The Assessing Officer (AO) referred the question of determination of ALP to the Transfer Pricing Officer (TPO) as is required by the provisions of Sec.92CA of the Act. The TPO after accepting some of the comparable companies chosen by the Assessee, selected 11 comparable companies. The following tables will show the final list of comparable companies and their profit margin and computation of arithmetic mean of profit margin of these 11 comparable companies and the addition to be made to the total income on acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. (segmental) 5.52 10 Larsen and Toubro infotech 24.72 11 Infosys Ltd. 45.61 12 FCS Software Solutions Ltd 16.75 13 Thinksoft Global Services Ltd. 16.27 ARITHMETIC MEAN 23.11 9. In revenue's appeal the only issue to be decided is the action of the DRP in including two comparable companies viz., FCS Software Solutions Ltd. and Thinksoft Global Services Ltd. Regarding the issue in respect of inclusion of two comparables i.e. Thinksoft Global Services Ltd. and FCS Software Solutions Ltd., we find that this tribunal on an identical issue raised by the revenue against the order of DRP including the aforesaid two companies as functionally comparable with the Assessee who was engaged in the business of providing SWD services to AE such as the Assessee, held that these two companies were functionally comparable with a company rendering SWD services, in the case of VMware Software India Pvt. Ltd. Vs. DCIT IT(TP)A.No.1311/Bang/2014 for AY 2009-10. The learned DR could not point out any difference in facts. We therefore hold that these two comparables should be included in the final list of comparables by respectfully following the judgment cited by ld. AR of assessee and f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany was more than 15% by this Tribunal in the case of VM Ware Software India Private Limited (supra). The learned DR could not point out any difference in facts. Hence, we hold this company be excluded from the list of comparable companies as the related party transactions to sales was more than 15%. 13. The learned counsel for the Assessee submitted that the TPO and DRP erred in not giving working adjustment to the profit margins of the Assessee and the comparable companies. The learned DR opposed the prayer for allowing working capital adjustment on the ground that the working of working adjustment to the profit margins was not specifically given by the Assessee and that the Assessee should not be given a second innings. We have considered the rival submissions and are of the view that in the facts and circumstances of the present case, this issue is academic because after exclusion of several companies chosen by the TPO and retained by the DRP only 6 companies remain as comparable companies and the arithmetic profit margin of these companies without working capital adjustment is 10.78% which would be within the profit margin of 5% (+) (-) permissible under the proviso to Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, the entire comparability criteria will change and the comparable companies already retained in the SWD segment will hold good for this segment also. We therefore feel that it would be just and appropriate to remand for fresh consideration by the AO/TPO of the nature of services rendered by the Assessee in this segment. This will depend upon the terms of the Agreement between the Assessee and AE for rendering services which are in dispute. The TPO will decide on the character of services rendered by the Assessee whether it is R & D or SWD, after affording opportunity of being heard to the Assessee and after considering all relevant factors. If the TPO comes to the conclusion that the nature of services rendered is SWD services, then the comparable companies chosen in the SWD services segment, which we have already decided in the earlier paragraphs, would be applicable. If he comes to the conclusion that the services rendered were in the nature of R & D and not SWD services, then the issue with regard to comparability of companies already chosen by the TPO/DRP on the basis of assumption that the Assessee is rendering R & D services and working adjustment to be made to the profit m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al precedents which have upheld the said circular. 10.6 The learned DRP ought to have observed that the enhanced claim not made in the return of income can be made before the Appellate authorities. 10.7 Notwithstanding and without prejudice to the above, the Appellant submits that the enhanced claim not made in the return of income can be made before the Appellate authorities and hence the claim is being made before the Honourable Tribunal. 18. The reasons for filing revised computation of income was that during the time of assessment, the Assessee noticed that some adjustments in the segmental tax computation was not mirroring the segmental P&LA/C. Also, certain allocation of expenses was not made in the correct units. The Assessee, after considering the above aspects re-computed the tax computation segmental wise matching with the segmental P&L A/c, which resulted in an additional loss amounting to ₹ 3,04,51,707/-. 19. The main reason assigned by the AO for not accepting the revised computation of total income is on the basis that a revised return of income was not filed within the time limit permitted u/s.139(5) of the Act and by placing reliance on the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments, additions or changes as may be found necessary by him due to error or omission which he discovers subsequent to the filing of the original return of income. Such a revised return may be filed by the assessee at any time before the end of the relevant assessment year or before the assessment is made whichever is earlier upto AY. 2017-18 the return can be revised at any time before the expiry of one year from the end of relevant assessment year or before the assessment is made whichever is earlier. At the outset, it may be stated that it is the settled position of law that in case of an assessment u/s. 143(3) of the Act, an assessee is entitled to make a fresh claim or modify a claim at any time before the completion of assessment. Actually before the amendment of S.139(5) with effect from 1.4.1989, a revised return could be filed at any time before the assessment was made. It is on account of amendment of S.143(1) with effect from 1.4.1989, that the aforesaid change in S.139(5) was necessitated. If a return of income is accepted u/s. 143(1) by issue of an intimation, then a time limit had to be prescribed for revision of such a return of income, if it was not subjected to scr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ril 1955 and explaining the ratio of the Goetz (india) Ltd. (supra) ruling, categorically held that assessee has the right to make new claims during assessment proceedings without recourse to a revised return. The Tribunal dealt with the decision of the Hon'ble Supreme Court in the case of Goetz (India) Ltd., (supra) in the following manner: "….As far as the decision of the Hon'ble Apex Court in the case of Goetze (India) Ltd. (supra) is concerned, there is no dispute that the same is binding on everybody concerned. In the said decision, the Hon'ble Apex Court has also ruled that Appellate Tribunal may adjudicate the issue if a claim is made by any party subject to satisfaction of prescribed rules, hence, even the Hon'ble Apex Court has not barred the assessee raise it's legal claim before Appellate Authorities. However, such process would result into undue hardships, delay and multiplicity of proceedings. The Hon'ble Apex Court, on numerous occasions has laid the proposition that the Assessing Authorities are bound to compute the correct income only and collect only legitimate tax, hence, merely for a procedural lapse or technicalities, in our opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder the Act, without making recourse to revised return, despite the fact that time limit for revising return under section 139(5) had expired. 25. In the light of the above judicial pronouncements on the issue, we are of the view that the interest of justice would be met, if the order of the AO/DRP on this issue is set aside and by directing the AO to look into the revised computation of total income at page 541 to 545 of the Assessee's paper book which is Annexure 2A to the letter dated 16.10.2012 filed by the Assessee before AO which is at pages 518 to 540 of Assessee's paper book. The AO will also consider the reasons for such revision of total income explained in the letter dated 16.10.2012 together with other annexure to the said letter. The AO will afford opportunity of being heard to the Assessee before taking decision on the aforesaid revised computation of total income. The relevant grounds are treated as allowed. 26. Gr.Nos.11 & 12 raised by the Assessee in its appeal can be decided together. These grounds read as follows: 11. Rejection of export turnover of IDF 1 unit as per the books of accounts 11.1 The learned AO/DRP has erred in considering the export sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11.10 The learned AO/DRP ought to have observed that the TP debit notes were raised so that the consideration on contract manufacturing exported is met at 15 % on costs in terms of the contract for manufacturing. 11.11 The learned AO/DRP ought to have observed that the TP debit notes were nothing but an incremental price for the goods manufactured and exported during the financial year 2008-09. Invoices pending realization 11.12 The learned AO/DRP erred in holding that the entire invoice listing is not acceptable due to certain invoices which are pending realization. 11.13 The learned AO/DRP ought to have observed that the details of unrealized invoices amounting to ₹ 1,21,36,381 have been furnished suomotto by the assessee in the invoice wise listing furnished and for the balance invoices FIRC copies have been provided substantiating the realizations. 11.14 Notwithstanding and without prejudice to the above, the Appellant submits that the amount of ₹ 1,21,36,381 should be reduced from the export turnover for AY 2009-10 and when this amount is realized by the Appellant the same should be treated as export turnover for AY 2009-10 in line with the provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be treated as export turnover for AY 2009-10 in line with the provisions of the Act". 27. Before we proceed to discuss the dispute in the aforesaid grounds of appeal, we shall set out the different units of the Assessee company. (i) IDF1/EHTP2 unit (hereinafter referred to as IDF1 unit) which manufactures and sells UPS systems and other power protection devices. The products manufactured in this unit are sold in the domestic as well as export market. (ii) IDF2/EHTP1 unit (hereinafter referred to as IDF2 unit) which also manufactures and sells UPS systems and other power protection devices. The products manufactured in this unit is sold in the domestic as well as export market. (ii) MAG unit which is engaged in the business of trading of UPS and other power protection devices which are procured either locally or through imports. The sales of this unit is only in domestic market. (iv) Software development business for Schneider Electric IT Corporation, USA (earlier known as American Power Power Conversion Corporation, USA (APCC USA) (Parent company). This unit only exports software to Schneider Electric IT Corporation, USA earlier known as APCC USA (parent company). 28. With res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India) was filed by the Assessee and this fact has been accepted by the AO in the order of Assessment (Last paragraph at page-27 of AO's order). Based on sales as per the sale invoices, the sale of IDF1 and IDF2 were 248,87,77,445 and ₹ 1429,53,87,950 respectively. The reconciliation filed by the Assessee regarding the above discrepancy was as follows: For IDF1 Unit: Particulars EHTP 2/IDF 1 (Rs) Export sales as per Sales Listing 2,488,777,445 Less: Items not forming part of APR but in Sales Listing a. TP Debit notes 665,341,262 Add: Items not in Sales Listing but reported in APR b. Sales reversed in Sales listing on CIF terms for revenue recognition c. Credit notes issued to customers 6,297,848 498,296 Less: Errors in APR due to wrong punching of amounts and due to non- inclusion of certain sales not required to be reported in APR 42,306,045 Sales reported in APR 1,787,926,281 • The export sales ₹ 248.87 crores has been substantiated with documentary evidences as obtained from third parties. In light of the above, we submit that the company has not made any incorrect submissions/replies with regard to its export sales. &bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel for the Assessee submitted that the evidence in the form of documents submitted to substantiate the sale of finished goods as appearing in the segmental Profit & Loss Account as per books of accounts maintained by the Assessee was furnished by the Assessee despite the sales documents were destroyed in fire and after enormous efforts the Assessee could get the required documents to substantiate its claim. He drew our attention to the details filed by the Assessee which are as follows: Details Submissions dated Sales register ( Page 636 of File 3) 13th December 2012 Party wise invoice wise listing (Submission at page 689 (relevant page 692) of File 3 and listing at page nos. 1898 to 1979 - File 8) 14th February 2013 100% Invoice and shipping bill copies obtained from Clearing House Agents ("CHA") and Authorized Dealer Bank (Citibank) [Submission at page 689 (relevant page 692-694) of File 3] 14th February 2013 FIRC for realization of the export proceeds obtained from the Citibank (Submission at page 689 (relevant page 695) of File 3 and copies of the FIRCs at page nos 739 to 1059 - File 4) 14th February 2013 Invoices, sales listings and FIRCs als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the paper book, relevant clauses being Clauses 5, 5.1, 5.4).The same was furnished before the learned AO vide submissions dated 4 March 2013 (Page 3390 of File No. 15). The Assessee initially invoices the export sales on the basis of estimates or applying the 15% markup on standard costing. At the time of raising the invoice, the actual cost of production is not determinable and hence standard cost is used for the purposes of determining the amount to be charged as manufacturing fees. Periodically and definitely at the end of the year, the actual expenditure incurred in undertaking the contract manufacturing activities is determined. The shortfall in invoicing, if any, is made up by raising a TP debit note so that the consideration on contract manufacturing is met at 15 % on costs. The amounts reflected in the TP debit notes represent the differential consideration for the export sales made during FY 2008-09 and accordingly the sum of ₹ 66,53,41,264/- should form part of the Export Turnover while considering the deduction under section 10A of the Income-tax Act 1961 (the Act). In this context it may be mentioned that if the above consideration were to have been billed as pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tember 2009 but after 12 months of invoicing 1.40 66.70 66.81 3 Total realized till date 5.49 247.69 265.72 Unrealized till date 0.03 1.19 - 4 Export sales as per sales listing 5.51 248.88 248.88 (chart available in submission dated 14th February 2013 at page 695 - Paper book 3) IDF2 unit: The details of the export realizations for EHTP 1 to be considered for the purposes of Section 10A as under: Particulars Amount In Crs. Refer Note USD Invoice value- INR Realization value-INR Realized till 30th September 2009 29.29 1288.64 1359.08 1 Realized post 30th September 2009 but within 12 months of invoicing as per FEMA regulations 2.77 134.99 142.87 2 Realized post 30th September 2009 but after 12 months of invoicing 0.02 0.49 0.61 3 Total realized till date 32.07 1424.12 1502.55 Unrealized till date 0.12 5.41 - 4 Export sales as per sales listing 32.19 1429.54 1429.54 (chart available in submission dated 14 February 2013 at page 695 - Paper Book 3) Note 1: This amount has been fully realized and therefore is completely eligible for Section 10A. Note 2: Invoices which were realized beyond 6 months from the end of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sales reported in APR vis-à-vis segmental profit and loss account, which is on account of the following: (i) APR invoice recorded as per date of shipment, while in financials when risk and reward of ownership is transferred. For sales on CIF terms ownership is transferred when goods reach the buyer. Errors in punching of wrong amounts (which is because APR is a manual procedure) was demonstrated with actual invoice copies. The learned counsel for Assessee submitted that the above discrepancies have been explained to the learned AO vide submissions dated 13th December 2012 (Submission page number 636 and explanation in Appendix 1, relevant pages 642 to 644 - File 3) and 14th February 2013 along with invoices and FIRCs demonstrating realization of the export (Submission page no. 689 and Explanation in Annexure 1 page 690 to 702- file 3, relevant page 696; supporting FIRCs submitted there under at Page nos. 739 to 1059 - File 4). It was further submitted that for preparation of excise return APR was used a basis. Thus, there was a discrepancy between export sales as per excise return and segmental profit and loss account, which was also explained in the submission dated 14 Feb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal turnover'. When a particular word is not defined by the legislature and an ordinary meaning is to be attributed to it, the said ordinary meaning is to be in conformity with the context in which it is used. 40. The quantum of deduction u/s.10A of the Act, would therefore depend on the quantum considered as Turnover of an Assessee. So also the deduction u/s.10A would depend on export turnover i.e., consideration in respect of export being received in, or brought into, India in convertible foreign exchange in accordance with section 10A (3). Turnover of IDF-1 Unit: 41. In so far as turnover of IDF-1 unit is concerned, the first dispute is with regard to non-inclusion by the revenue authorities of a sum of ₹ 66,53,41,262/- under the name TP debit notes as part of the export turnover of the Assessee for computing deduction u/s.10A of the Act. It is undisputed that the Assessee is a contract manufacturer and is entitled to a consideration of 15% on approved costs in respect of its manufactured export sales. It is also not disputed that the Assessee initially invoices the export sales on the basis of estimates or applying the 15% markup on standard costing. At the time of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ages 3551-4008, Files 15 and 16 of the paper book substantiates the case of the Assessee for inclusion of the aforesaid sum as part of the turnover for AY 2009-10. We hold accordingly. 43. The third component of the turnover which is in dispute is the non- inclusion of sales of ₹ 4,98,296 as turnover of AY 2009-10. The claim of the Assessee is that it had issued credit notes to the customers for recognizing sales for the relevant AY 2009-10 but the evidence to substantiate the same is not discernible from the material filed before us. So also the fourth component of dispute of turnover viz., a sum of ₹ 4,23,06,045 which is stated to be owing to wrong punching of amounts due to non-inclusion of certain sales not required to be reported in APR. We therefore remand the issue to the AO for consideration de novo with liberty to the Assessee to substantiate its case with necessary evidence. 44. The next aspect of turnover is the non-realization of Export proceeds in convertible foreign currency in India within the time limit specified in Sec.10A(3) of the Act. A sum of ₹ 1,26,34,663/- was stated to be Invoices pending realizations and therefore was disregarded for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 45. The first component of turnover which is in dispute is the noninclusion of ₹ 3,87,26,658/- which was sales which were treated as prior period (AY. 2008-09 sales) by the AO on the basis of the dates of sales invoice that was prior to 1.4.2008. The Assessee's method of Accounting for invoices are made following the principles of the AS - 9 Revenue recognition. In case of free-on-board (FOB) sales, the date of sale is recognized as the date on which the goods are handed over to the carrier and in the case of CIF sales the date of delivery is recognized as the date of sale. The Bills of lading/Airway Bills along with sales invoices produced in support of the claim of the Assessee which are at pages 3551-4008, Files 15 and 16 of the paper book substantiates the case of the Assessee for inclusion of the aforesaid sum as part of the turnover for AY 2009-10. We hold accordingly. 46. The next component of the turnover which is in dispute is the non- inclusion of sales of ₹ 17,64,65,522 as turnover of AY 2009-10. The claim of the Assessee is that owing to wrong punching of amounts which are not required to be reported as sales to APR. The evidence to substantiate this cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of HCL EAI Services Ltd. Vs. DCIT (supra) supports the plea of the Assessee in this regard and therefore the same is accepted. We therefore hold that what is to be excluded from turnover on the ground of non-realization of sale proceeds u/s.10A(3) is a sum of ₹ 5.41 crores. However the Assessee is permitted to claim the deduction as regards the same once the same has been realized in terms of Section 155 (11A) of the Act. 48. Thus Gr.Nos.11 & 12 are partly allowed. 49. Ground No.13 & 14 raised by the Assessee is with regard to the action of the AO and the CIT(A) in recomputing the income from IDF1 and IDF 2 units from domestic sales by these units by adopting sales as per excise returns of IDF1 and IDF2 units. "13. Considering domestic sales of IDF 1 and IDF 2 as per excise return 13.1. The learned AO/DRP has erred in considering the domestic sales for the IDF 1 and IDF 2 unit as per the excise return amounting to ₹ 1,882,165,998. 13.2. The learned AO/DRP ought to have provided the reasons for rejecting the domestic sales as per the books of accounts. 13.3. The learned AO/DRP ought to have provided the assessee an opportunity of being heard be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O recomputed the profits of the IDF 1 and 2 units. While re-computing the profits, the AO has considered the domestic sales as per the excise return and not the sales register. Scrap sales, which is already part of excise returns, was once again brought to tax. No specific reasons have been assigned for adopting this approach, except a passing reference to the fact that export sales of the Assessee have been inflated and that discussion will hold good for domestic sales as well (para 3.10 of the draft order of assessment at page-37 of the said order). 53. On the above approach of the AO which was reflected in the draft assessment order, the Assessee filed objections before the DRP. The DRP upheld the order of the AO, except in the case of double taxation of scrap sales wherein, the DRP has asked the AO to verify and provide relief if scrap sales are already part of domestic sales as per the excise return. However, the AO in the final order of assessment did not follow the directions of the DRP for the reason that as per provisions of Sec.144C of the Act, the DRP does not have power to request the AO to verify the details and hence upheld his addition para 27.4 at page 61 of the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of trade discount was also provided in the said submission. The Assessee also made submissions before the DRP on the non-consideration of the aspect of trade discount in the excise return (submission on page nos. 4878 and 4910 of File 20 for EHTP 2 and EHTP 1 respectively). 55. As far as the action of the AO in considering sales as per excise return and including the scrap sale value again as an addition while computing total income, the learned counsel submitted that the sales declared in the excise return includes scrap sale value and making addition of sale value of scrap again in the computation of total income amounts to double addition of the same income. Scrap sales has been separately shown in the Assessee's segmental P&L (₹ 1,27,94,809/- for EHTP 2 and ₹ 2,72,97,710/- for EHTP 1) page 548 in File 3 of the Paper book. The AO has considered the sales as per the excise return (which includes the scrap sales) + scrap sales reported in the segmental P&L. our attention was drawn to the AO's computation at Pages 33 and 34 of the Draft Assessment order. It was submitted that scrap sale has been subject to tax twice. The learned counsel for the Assessee brought to our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,516 and refusing to recognize loss on account of foreign exchange fluctuation as an allowable expenditure while computing income MAG unit and determining the profits of the said unit accordingly. In doing so, the AO refused to recognize the figure of sales as reported in the segmental profit and loss account of MAG unit at ₹ 1,27,09,37,458 and cost of sales at ₹ 206,47,39,851 and treating foreign exchange currency fluctuation loss of ₹ 92,78,67,516 as allowable expenditure and arriving at the profit of MAG unit in the segmental profit and loss account. 59. We have already seen while dealing with Gr.No.11 & 12 that the Assessee has four units viz., IDF1 unit, IDF 2 unit, MAG Unit and SWD services unit. IDF1/EHTP2 unit (hereinafter referred to as IDF 1 Unit) which manufactures and sells UPS systems and other power protection devices. The products manufactured in this unit is sold in the domestic as well as export market. (ii) IDF2 unit /EHTP1 unit (hereinafter referred to as IDF2 unit) also manufactures and sells UPS systems and other power protection devices. The products manufactured in this unit is sold in the domestic as well as export market. (ii) MAG unit w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trade segmental of ₹ 1,270,937,459 is the correct amount of sales in MAG unit. In this regard, we have attached the domestic sales listing of IDF 1 and IDF 2 as per Annexure 3. f. We submit that purchase account expenses amounting to ₹ 206,47,39,851 pertains to MAG unit and it is forming part of the cost of goods sold amounting to ₹ 1,136,872,335. g. Notwithstanding and without prejudice to our above submissions, should your goodself consider the net domestic sale as per Trial Balance of MAG unit, we submit that - • The total expenses attributable to domestic sales should also be reduced while determining the profits derived from domestic sales. • While computing the total turnover of IDF1 and IDF2 no domestic sales to be reckoned as part of total turnover. Accordingly, we submit that the deduction under section 10A of the Act would correspondingly go up". 61. After extracting the reconciliation, the AO in page-41 of his order para-1 observed as follows: "As per the reconciliation a sum of ₹ 1,75,22,53,520 was reduced as IDF1/ IDF-2 domestic sales. However, in the same sheet only a sum of ₹ 54,99,40,665/- and ₹ 61,27 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvations, the AO recomputed the profits of the MAG unit, as follows: Sl no. Adjustment made Amount (Rs.) 1 Turnover for MAG unit considered from Trial Balance at Rs. 3,02,31,90,978 instead of the segmental P&L at ₹ 1,27,09,37,458 1,75,22,53,519 2 Cost of sales considered from Trial Balance at ₹ 206,47,39,851/- instead of segmental P & L at ₹ 113,68,72,335/- 92,78,67,516 3 Loss on account of foreign exchange fluctuation disallowed 30,18,63,653 As already stated it is the plea of the Assessee that the amounts booked in the sales of MAG unit in the Trial Balance pertains to (i) MAG Trading (ii) IDF 1 ( EHTP 2) domestic sales and (iii) IDF 2 (EHTP 1) domestic sales. It is the plea of the Assessee that on account of considering the turnover of the MAG unit as reflected in the Trial Balance and not as per the segmental P & L of the Assessee, there is double taxation of the domestic sales of IDF1 and 2 and MAG unit. The foreign exchange loss is allowable deduction. 64. The DRP in its directions gave limited relief to the Assessee by directing the AO to verify the claim of double taxation and allow the claim if found correct. (Page 71 of the DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plained that an amount of ₹ 175,22,53,520/- being the domestic sales of IDF 1 and 2 had already been offered to tax (at page 636, relevant page 642 of File 3). Vide submission dated 4th March 2013 (File14 of the paper book, pages 3256 to 3389), the Assessee reiterated its earlier submission and gave an entire listing of the domestic sales of IDF 1 and 2 (at page 3257) and sample invoices (at pages 3328-3332). Vide its submission dated 13th December 2012, the Assessee had submitted to the AO the books of account of the Assessee in soft version (Page 3174 - File 14 of the paper book). The double taxation can be verified by examining any of the sample invoices, which will figure both in the domestic sales listing of IDF 1 and 2 (which can be correlated to the excise return of that unit) and in the sales ledger of MAG unit as per the Trial Balance. Vide submission dated 14th March 2013 (Pages 4020-4153 of the paperbook- File 17, relevant page 4028), the Assessee once again explained the concept and resubmitted the entire domestic sales listing of IDF 1 and 2, as required by the AO. 67. The learned counsel thus submitted that sales as per the segmental P&L account for MAG unit a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound of appeal on foreign exchange fluctuation gain and loss which is Gr.No.22 & 23 of the grounds of appeal of the Assessee in this appeal. In the result Gr.No.15 is treated as allowed. 70. Gr.No.16 & 17 raised by the Assessee were not pressed for adjudication because in rectification proceedings, the AO has allowed relief to the Assessee in respect of the grievance projected in those grounds. Hence, Gr.No.16 & 17 are dismissed as not pressed. 71. Gr.No.18 raised by the Assessee is with regard to claim of deduction on account of provisions for warranty. The relevant ground of appeal of the Assessee reads thus: "18. Disallowance of provision for warranty : ₹ 67,25,51,172 Break-up of the above expenses is as under: • Actual expense - ₹ 51,27,80,127 • Provision for warranty - ₹ 15,97,71,045 18.1. The learned AO/DRP has erred in disallowing the actual warranty expense debited to the profit and loss account amounting to ₹ 51,27,80,127 by treating this also as a provision for warranty. 18.2. The learned AO/DRP has erred in holding that the in warranty expenses and post warranty expenditure debited to the profit and loss account was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... warranty comprises of three elements, viz., (i) Post Warranty expenses (actually incurred in the previous year) ₹ 6,13,26,593/- (ii) in warranty expenses (actually incurred during the previous year) ₹ 45,14,60,360/- and (iii) Provision for warranty of ₹ 15,97,40,517/. The total of the aforesaid three sums is a sum of ₹ 67,25,27,470/-. These figures are evident from Annexure-16 to the reply dated 13.12.2012 filed by the Assessee before the AO. This letter of the Assessee along with annexure is at page-636 to 688 of paper book no.3 filed by the Assessee. Annexure-16 to this letter which explains the basis of provision for warranty is at pages- 685 to 688 of paper book No.3 filed by the Assessee. The AO in making the disallowance has mentioned in the order of Assessment that the Assessee has not furnished the basis of his claim for deduction on account of provision of warranty, which is factually incorrect. Perusal of Annexure-16 to the letter dated 13.12.2012 filed by the Assessee before the AO, shows that the provision on account of warranty expenses was a sum of ₹ 33,74,40,517/- out of which the Assessee on his own has disallowed a sum of ₹ 17,7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es to -Authorized services provider (ASP) claims settled by APC for inwarranty service support, RMA (returned material authorization) relates to expense for returned material received from vendor/ASP, and Cover freight from warehouse to ASP locations, to customer location and freight from customer locations. These expenses are debited to MAG unit. Post Warranty Expenses: Post warranty expenses pertain to the provision of services by the Assessee after the expiry of the warranty period to the customers. These services are provided to the customers based on certain Annual Maintenance contracts (AMCs) between the customer and the company. The post warranty expenses mainly comprises of expenses incurred by the company or through ASP and comprises of the following: - ASP claims-call based expenses claim done by ASP's to APC, Temporary help incurred-Manpower support by Rolex logistics, travelling expenses incurred for catering the service repair work, freight charges, professional services-manpower support service, software support service, logistic and facility consultation charges, legal services, etc. and telephone expenses/electricity expense/food expenses. 74. The Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the transactions the Company it is difficult to track the warranty expense customer-wise or order wise. Post warranty expenses: The income received from the provision of these services is booked in the MAG unit under Schedule 11 - Income from annual maintenance and support services. Accordingly, the expenses incurred from the provision of the post warranty services are also booked under the MAG unit". 76. The above were the facts on the claim for deduction on account of warranty expenses made by the Assessee before the AO. 77. The AO however disallowed the entire amount towards warranties amounting to ₹ 67.26 cr. The AO proceeded on the basis that the entire amount debited to the profit and loss account as in-warranty expenses and post warranty is also provision for warranty. The AO did not appreciate the contention nor did he deal with the contention of the Assessee that actual warranty expenses amounting to ₹ 51,27,80,127 (in-warranty - ₹ 45,14,60,360 and post warranty - ₹ 6,13,19,767) incurred during the year are also debited to the profit and loss account and those expenses cannot by any stretch of imagination be disallowed. The AO has mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only in respect of domestic sales made by the Assessee. The learned counsel for the Assessee pointed out that since the post warranty income is booked and reflected on the MAG unit, the corresponding cost is also booked in the MAG unit and also brought to our notice that this aspect was explained to the AO vide submissions dated 13th December 2012. The learned DR relied on the order of the AO/DRP. 79. We have carefully considered the rival submissions. As rightly submitted by the learned counsel for the Assessee, the actual warranty expenses were always claimed apart from deduction claimed on account of provision for warranty. The closing balance in the provision for warranty account on the last of the earlier financial year which is opening balance of the current financial year is reversed on the first day of current financial year. Thereafter the actual warranty expenses is claimed as deduction on the basis of actuals and anticipated liability on account of warranty claims in future in respect of sales already recognized in the books of account is estimated on a scientific basis and deduction on account of provision for warranty is claimed. This has been made clear by the Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a historical trend of actual failure of products has been used as a basis for creating the provision 5 Reversal of unutilized provisions In case of Company the entire provision is reversed in next year and actual expense is booked in profit and loss A/C. Thus, there is no question of unutilized provision 81. The method of creation of provision for warranty by the Assessee is scientific. A perusal of the detailed workings for the provision for warranty were furnished before the learned AO vide submissions dated 4th March 2013 (page number 4154 to 4162 - file 18 of the paper book, relevant pages 4160-4164). The workings annexed to the said submission are available in Files 5 and 6 of the paper books with complete listing of the sales. Also, the same were even explained in detail in the submissions dated 13th December 2012 (Page no 685 to 688 File 3), where the accounting entries were also explained. The Assessee submits that the determination of provision is an elaborate exercise covering all products sold and involves of around 35,000 line items. The AO held that provision for warranty made by the Assessee is not scientific because details of the utilization of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he products repaired. 83. It is also clear that the methodology followed by the Assessee was held to be scientific for AY 2008-09. AO's order dated 6th July 2012 clearly states the method of creation of warranty is scientificpage 5 para 2.7 (Page of 4959- file 20): "On going through the assessee submissions, it is seen that assessee has created the provisions on a scientific basis based on empirical data, trends, projections, etc" 84. The method of providing and claim deduction on account of warranty expenses is the same in the present AY as it was in AY 2008- 09. In the given facts and circumstances of the case, we are of the view that the deduction on account of provision for warrant expenses deserves to be allowed as claimed by the Assessee as the requirements for claiming deduction on account of provision for warranty liability has been satisfied. Gr.No.18 raised by the Assessee is accordingly allowed. 85. Gr.No.19 raised by the Assessee projects its grievance regarding treatment by the revenue authorities of a sum of ₹ 5,38,22,153/- which is part of the AMC value which was deferred and not recognized as income by the Assessee in its books of accounts due to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ro-rata basis over the period of the contracts, over which the service is rendered." According to the Assessee this revenue recognition policy of the Assessee is in line with the Accounting Standard (AS) 9 issued by the Institute of Chartered Accountants of India (ICAI) the application of which is mandatory for the Assessee. The service income which pertains to the subsequent year is not recognized as income in the current year. • Example : * AMC contract value = ₹ 100 * Period : 1 July 2008 till 30 June 2009 * Income recognized in the current year = 1 July 2008 till 31 Mar 2008 i.e, 274 days / 366 days * ₹ 100 = ₹ 74.86 * Income to be deferred and recognized in year ended 31 March 2010 is 92 /366 * 100 = ₹ 25.14 The sum of ₹ 5,38,22,153 which is the subject matter of addition in Gr.No.19 is income recognition of which by the Assessee for AY 2009-10 was deferred pursuant to its accounting policy given above. 87. The AO considered the deferred service income amounting to ₹ 5,38,22,153 as undisclosed income. According to the AO once income has accrued or arisen to the Assessee the same has to be recognized as income in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit & Loss Account will be closed. The opening balance will appear only in deferred income ledger and not in the service income ledger which is evident from the service ledger made available to the AO vide submission dated 30th August 2012 at pages 364- 498 of File -2. It was submitted that there is no basis for the AO to conclude that the service income has accrued in the current FY. It was submitted that the AO has not appreciated the concept of deferred revenue, even after the elaborate submissions of the Assessee. He placed reliance on the following decisions in support of the claim of the Assessee that the Assessee was entitled to defer recognition of income. CIT v. Punjab Tractors Co-op. Multipurpose Society Ltd. [1997] 95 TAXMAN 579 (PUNJ. & HAR.) CIT v. Coral Electronics (P.) Ltd. [2005] 142 TAXMAN 481 (MAD.)ACIT v. IOT Infrastructure & Energy Services Ltd. [2013] 39 taxmann.com 195 (Mumbai - Trib.). The learned counsel for the Assessee prayed that the addition of deferred service income amounting to ₹ 5,38,22,153 as undisclosed income should be deleted as the same is not income for the year. 90. The learned DR relied on the order of the AO/DRP and also a decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Hon'ble Punjab & Haryana High Court. In that case the facts were that the assessee was engaged in the purchase and sale of tractors, motor cycles, etc., and doing their repairing. It had received advances from the buyers of tractors to cover their service charges for a period of one year after the expiry of initial warranty period. It had shown same on the liability side in the balance sheet for the assessment year 1978-79 under the head 'Post-Warranty Service Advances' (PWS Advances). It used to make adjustment of the amount received from PWS Advances Account to the Workshop Income Account during the quarter in which the work of repairs and services was done, and included the amount so adjusted as income of the relevant year. Out of the aggregate amount shown in PWS Advances Account, the Assessing Officer treated proportionate sum for the period covered as the assessee's income for the assessment year in question. The Commissioner invoked section 263 and held that the entire amounts received in the previous year towards PWS Advances were trading receipts of the year directly connected with the business of servicing and repairs of tractors. He, accordingly, set aside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d service charges, which were bifurcated into two items, one as pertaining to year and another pertaining to the subsequent assessment year and, therefore, excluded from consideration in determining the total income of year. The Assessing Officer treated it as income and taxed the same. The Tribunal has held that it is not taxable income. On a reference the Hon'ble Court held the amount that was received was only as charges for the services to be rendered in future. The services may be rendered or may not be rendered depending upon withdrawal of the money as and when the customer required. So, it is highly uncertain as to whether it would at all remain as income of the assessee. Only when the service is done the assessee has a right over the amount that was deposited. Till then, he has no right over the same. It is in that sense till then, it cannot be considered as an income of the assessee and is not eligible to tax. 95. The Mumbai ITAT in the case of ACIT Vs. IOT Infrastructure & Energy Services Ltd. (supra) had to deal with identical case. The facts of that case were that the Assessee had not offered for tax an amount being difference between progress billing as on 31-3-2007 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 2,90,49,991/-. The relevant grounds of appeal of the Assessee reads as follows: "20. Addition of deferred service income (sundry debtors) as undisclosed income - ₹ 2,90,49,941/- 20.1. The learned AO/DRP has erred in considering the sundry debtors of ₹ 2,90,49,941 as undisclosed income. 20.2. The learned AO/DRP erred in holding that no details were furnished in respect of this transaction 20.3. The learned AO/DRP ought to have observed that the details of the source of the income was furnished before the learned DRP along with evidences such as purchase order, invoices, ledger for sundry debtors, etc. vide notes on arguments dated 21 November 2013. 20.4. The learned AO/DRP ought to have observed that an income cannot be considered as an undisclosed income if the details of the source of the income are furnished. 20.5. The learned AO/DRP has failed to appreciate the facts that the Appellant is consistently following the method of accounting for deferred sundry debtors as per AS 9-revenue recognition. 20.6. The learned AO/DRP has erred in not appreciating the fact that the Appellant has considered the deferred sundry debtors of the FY 2008-09 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out that under Clause 2(c) of the terms and conditions contained in the PO (available at page 4854 of File 20), dealing with "Payments" it is clearly provides as under: "The delivery of products by the supplier to the Company will not constitute acceptance of the said products by the Company. Acceptance of products will be completed and communicated only after inspection and satisfactory testing of the products by the Company. Till acceptance of the products by the Company the products shall remain with the Company on supplier's account on approval basis only. The risk of loss or damage to the product passes to the Company upon acceptance of the products by the Company." According to the learned counsel for the Assessee the above clause in the contract between the parties would show that the Assessee could not have recognized the income until the products were tested and accepted by the customer. Since that event did not happen during the relevant previous year, the Assessee was justified in not recognizing income from the aforesaid contracts. According to him the action of the Assessee was in tune with the terms of Accounting Standard - 9 of ICAI, in respect of sale of goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act") i.e. 6 months from the end of the financial year or, within such further period as the competent authority may allow in this behalf. 21.5. The learned AO/DRP ought to have observed that by the Notification No. FEMA 176/2008-RB dated 23 July 2008 issued by the Reserve Bank of India (RBI) wherein the time limit for the realization of the export proceeds for the software was enhanced from 6 months to 12 months from the date of export (being the invoice date). 21.6. The learned AO/DRP ought to have observed that the Appellant has realized the entire sale proceeds in convertible foreign currency. 21.7. The learned AO/DRP ought to have observed that the out of the total sale proceeds of USD 2,625,77,961 (in ₹ 24,69,47,550), a sum of USD 35,24,475 (in ₹ 17,68,89,224) have been realized within 12 months from the date of raising the invoice. 21.8. The learned AO/DRP further ought to have observed that the balance sale proceeds of ₹ 8,56,88,735 has been brought into India after 12 months and that the same satisfies the conditions laid down under section 10A in respect of realization". 105. We have already seen that the Assessee has four different uni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeded to re-compute the profits of the Software unit by disallowing the foreign exchange gain and bringing to tax the income of software unit as income from other sources ("IFOS") ( Page 36 of the Final assessment order). However, in the final computation by AO, the income from software unit is computed as Business income (Page 44 of the Final assessment order). The DRP upheld the order of the AO. Hence, Gr.No.21 by the Assessee before the Tribunal. 109. The learned counsel for the Assessee submitted that the conclusion of the revenue authorities that the Assessee did not export software is contrary to the evidence on record filed by the Assessee to show that it had exported software. Our attention was drawn by him to the following documents: Details Submissions dated Certified softex forms stating "duly certified for the exports of software development"- Signed by Director of STPI (Page no. 640, 661 to 672 - File 3) and (page 4983 to 4996 of File 20) 13th December 2012 and 4th March 2013 Audited financials stating that the software has been exported (Page no 215 to 248 - File 2) 21st November 2011 Invoice copies specifically stating "export invoices" (Page ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee commenced only from 1st June 2000 (AY 2001-02) as is evident from the annual report at Page 230, File 2 of the Paperbook and the submissions made before the DRP at page 4950, File 20. It was submitted by him that the agreement entered into by the Assessee for export of services was valid for AY 2009-10. It was submitted that in the event it is considered that there has been no export of services for the period before the date of agreement (i.e. 1st January 2001) then benefit under section 10A should be denied only for that period and not for AY 2009-10. 112. With regard to contention of the AO that the Assessee did not realize the exports proceeds within the time prescribed u/s.10A(3) of the Act and on that basis the Assessee is not entitled to claim deduction u/s.10A of the Act, the learned counsel submitted that the entire export proceeds for the software unit have been realized. He drew our attention to the following details in the table given below: Invoice Details Realization details Invoice No./ Date Amount (in USD) Amount (in Rs.) FIRC No. Realizati on Date Amount (in USD) Amount (in Rs.) SW001/200 8-09 dated 31-03-2009 32,93,611 13,96,09,560 AD- 041 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... voice copies raised on SEITC USA 13th December 2012 and 4th March 2013 Agreement for export of software to SEITC USA 13th December 2012 and 4th March 2013 FIRCs evidencing realization of export proceeds 4th March 2013 Letter provided by SEITC USA confirming the receipt of services therein 4th March 2013 He brought to our notice that the main objects of the Memorandum of Association of the Company states as under: "To manufacture, develop, improve, maintain, service, buy, sell, import, export, exchange and otherwise deal in all kinds of power supplies of general or any customized specifications and all kinds of computer and microprocessor based systems, their parts, components and systems, computer hardware and accessories and related equipment , sell or otherwise deal in all kinds of computer hardware's, software's, their programmes and accessories, including security systems, diagnosis to set up training institutions and consultancy in computer and allied fields." The extract of the Memorandum of Association of the Company wherein software has been stated to be one of the main objectives of the Company has been submitted before the learned AO. It was su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the provisions of section 10A prior to its amendment. Hence, by the virtue of the first proviso, the Assessee would be entitled to claim deduction under section 10A post its amendment too. With regard to the observations of the AO that the agreement for rendering the software development services was entered in January 2001 while the operations commenced in FY 2000- 2001 it is seen that the activities of the Assessee commenced only from 1st June 2000 (AY 2001-02) as is evident from the annual report at Page 230, File 2 of the Paper book and the submissions made before the DRP at page 4950, File 20. In any event absence of an Agreement to develop software for export would not be eligible for deduction only for the period prior to 1.1.2001. As far as AY 2009-10 is concerned, the Agreement dated 1.1.2001 still holds good and the period for which the Assessee claims benefit of Sec.10A deduction is also within the permissible period. 119. As far as realization of export proceeds by the Assessee is concerned, it is seen from the details given by the Assessee in the earlier paragraphs of this order on this issue that the Assessee has established that the export proceeds were realize ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in foreign exchange currency of ₹ 30,18,63,653/- as not allowable deduction in computing income of the MAG unit. The relevant grounds of appeal read thus: 22. Foreign exchange gain of IDF 1, IDF 2 and Software unit treated as income from other sources - ₹ 1,26,48,37,681 22.1. The learned AO/DRP erred in considering the entire foreign exchange gain of IDF 1 (₹ 76,12,17,996), IDF 2 (₹ 46,14,37,736) and Software unit (₹ 4,21,81,949) amounting to ₹ 1,26,48,37,681 as Income from Other Sources due to lack of evidence. 22.2. The learned AO/DRP has erred in contending that no evidence was furnished in support of the foreign exchange workings 22.3. The learned AO/DRP ought to have observed that the workings for foreign exchange gain running up to approx. 50,000 line items were furnished before the learned AO and DRP 22.4. The learned AO/DRP ought to have observed that the Appellant has furnished 100% export invoices for the current FY (i.e. 2008-09) obtained from independent third party covering 4944 invoices (77 box files) along with FIRC evidencing realization. The above would form the basis for foreign exchange workings in respect for ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exchange gain for IDF 1 76,12,17,996 Foreign exchange gain for IDF 2 46,14,37,736 Foreign exchange gain for software unit 4,21,81,949 Foreign exchange loss for MAG unit (301,863,653) [available at page 728 of File No. 3 of the paper book] 124. The accounting policy followed by the Assessee for recording foreign exchange gain/loss is in accordance with the requirements of accounting standard (AS) 11 of ICAI and it is mandatory for the Assessee to follow the same. The Accounting policy followed by the Assessee in the matter of recognizing foreign exchange gain/loss is that Foreign currency transactions are recorded in reporting currency, by applying to foreign currency amount the exchange, rate between the reporting currency and foreign currency at the date of transaction. Foreign currency monetary items are reported using the closing rate. Exchange differences arising on the settlement of monetary items or on reporting monetary items of company rates different from those at which they are initially recorded during the year or reported in previous financial statements are recognized as income or as expense in the year in which they arise. 125. The foreign exchange gai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the DRP have erred in coming to the conclusion that the Assessee failed to give working of foreign exchange gain/loss. In this regard, the learned counsel for the Assessee drew our attention to working of foreign exchange loss/gain which was given for each item of export as well as import. The working for foreign exchange gain running upto approx. 50,000 line items were furnished before the learned AO vide following submissions: a. For IDF 1 and software unit - 13th December 2012 (at pages 636-649 of File No. 3 of the paper book, relevant page 646, to be read along with File No. 10 of the paper book) b. For IDF 2 - 4th March 2013 (at pages 713-729 of File No. 3 of the paper book, relevant pages 719-727 to be read with File 9 of the paper book) 128. The learned counsel for the Assessee further submitted that detailed note on foreign exchange has also been furnished vide submissions 13th December 2012 and 4th March 2013 at the above pages of the paper book. It was submitted that the Assessee has furnished 100% export invoices for the current FY (i.e. 2008-09) obtained from independent third party covering 4944 invoices (77 box files) along with FIRC evidencing realization f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m that the Assessee has not booked any forex loss on domestic sales as obviously domestic sales cannot have forex loss. He explained as to how foreign exchange loss arose in the MAG unit. In the MAG unit the loss arose on account of the following: i. Imports for the current year, reinstated in the current year either on payment or on year end reinstatement ii. Imports for the earlier years which have not been paid as on 1st April 2008, reinstated in the current year either on payment or on year end reinstatement. (This submission was made before the DRP and is available at page 4773 of File no. 20 of the paper book. The AO, although required evidence in support of the loss which was given, never sought an explanation on this point in any show cause notice and made the observations for the first time in the draft assessment order) 133. It was submitted that the AO's observations that the turnover and forex loss claimed were disproportionate was not correct because some portion of the forex loss is in connection with imports of earlier years and therefore comparing the forex loss with the amount of imports for the current year as done by the AO in page 39 of the order was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT v. Woodward Governor India (P.) Ltd. [2009] 179 TAXMAN 326 (SC) 135. The learned counsel prayed that the Foreign exchange gain should be treated as business income and consequently foreign exchange gain of the IDF-1, IDF-2 and software units should inevitably form part of export turnover for computing deduction under section 10A. Forex loss of the MAG unit should be allowed as business loss. 136. The learned DR submitted that there has been no correlation of the foreign exchange gain with individual item of export and FIRC, Similarly the loss on account of foreign exchange fluctuation in the MAG unit has also not been proved by the Assessee. He relied on the order of the AO/DRP. 137. We have given a very careful consideration to the rival submissions. We shall first take up for consideration the foreign exchange gain in IDF 1 and IDF 2 unit of a sum of ₹ 126,48,37,681/- which was treated as income from other sources and consequently deduction u/s.10A of the Act to that extent was denied to the Assessee. The first and very important thing to notice on this claim of the Assessee is that the AO did not dispute the quantification of the foreign exchange fluctuation gain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lls and invoices. It was computer generated document where the postings were made indiscriminately for which no material evidences are placed on record. In order to treat this as income from business/forex gain the assessee company should have furnished necessary documentary evidences. However a computer generated statement was given where the company has posted some amounts for which no evidences are given. Under these circumstances, the entire amount of ₹ 126,48,37,681/- is added as income from other sources as proposed in the show cause notice." 140. If the evidence filed by the Assessee was insufficient, the AO ought to have held that the claim for having earned income is not established and therefore ought not to have taxed the said sum as income from other sources. His action in accepting the gain and treating it as income from other sources, clearly shows that he wanted the foreign exchange gain not to be treated as income of IDF1 and IDF 2 unit because the income would be exempt u/s.10A and it was only by treating it as income from other sources that he could bring to tax the aforesaid income. This approach in our view was not correct. 141. On the evidence on reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in unsustainable because the loss in question is on account of import of trading items and there is bound to be a loss when one imports and the value of Indian rupee vis-à-vis the foreign currency in which payments for imports have to be made, payment depreciates. The other conclusion of the AO is that the loss is disproportionate to the turnover of MAG unit (on turnover of ₹ 83.27 crores the loss on foreign exchange was at ₹ 30.18 Crores). This has been explained by the Assessee as owing to loss on foreign exchange currency in respect of purchases in the earlier years and therefore comparing the forex loss with the imports of the current year would not be in order. 144. We are therefore of the view that the loss on account of foreign currency claimed in the MAG unit has to be allowed as it has been established that a loss has arisen. The loss is in connection with business of the Assessee and therefore has to be allowed while computing income of MAG unit. We hold and direct accordingly and allow Gr.No.23 raised by the Assessee. 145. Out of Gr.No.24 raised by the Assessee only Gr.No.24.2 was pressed for adjudication. The said ground relates to Reversal of Pri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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