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TMI Blog2022 (3) TMI 1335X X X X Extracts X X X X X X X X Extracts X X X X ..... essment proceedings, the Assessing Officer (AO) observed that the assessee was into the business of manufacture and sale of Antivirus software `Net Protector', with one unit in Pune (Taxable) and the other in Parwanoo, Himachal Pradesh (Non-taxable) because of deduction u/s.80IC of the Act. The assessee was called upon to explain the process of manufacture of the Antivirus software in Parwanoo, in response to which, it was submitted that the raw material for the manufacturing activity, consisted of blank CDs, which are procured from third party vendors. After checking on computer, the same are kept for writing in the CD writer racks, where CD writing takes place. It was explained that similar process is followed for manufacturing at both the units, viz., Pune and Parwanoo. On further inquiry about the Antivirus software development, the assessee submitted that its R&D Centre in Pune is involved in updating and managing the Master software. The updated software is uploaded on a server as an FRP file. The master software is updated by downloading the updated software and after that production is carried out on its updated software. The AO observed that the only activity undertaken at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibutable to sales to Pune unit at Rs. 89,68,217/-. A mark up of 10% was added to such costs for finding out the market value of CD writing at Rs. 98,65,039/-. In this manner, he computed excess profit of total sales to Pune unit at Rs. 13.98 crore (Rs. 14.97 crore minus Rs. 98.65 lakh). The assessee was confronted with this calculation and called upon to explain its stand. In reply, the assessee submitted that it set up separate Sales depot/trading in Pune with a view of operational efficiency of its Parwanoo Manufacturing unit. Because of the Maharashtra VAT Act and Rules, the assessee was required to have a single VAT and CST for all the units sales from Pune. With a view to overcome the difficulty in selling software directly to independent customers in Maharashatra, the assessee submitted that it made sales to Pune unit and thereafter the Pune unit made sales directly to the customers in Maharashtra. The AO took note of the provisions of section 80IA(8) of the Act and issued notice u/s.133(6) to Centre for Development of Advanced Computing, Pune (CDAC) requesting them to furnish cost of CD writing. The reply was received giving cost of CD writing of 4,93,250 units at Rs. 1.82 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Parwanoo unit and not the software development. As against that, the stand point of the assessee is that the costs incurred by the R&D Centre in Pune for developing the Antivirus software were allocated between the Pune and Parwanoo units on the basis of number of units sold and since such costs were included in the cost base of the Parwanoo unit, the entire profit earned from the sale made by the Parwanoo unit to the Pune unit was eligible for deduction u/s.80IC of the Act. 5. In order to appreciate the rival contentions, it would be apt to take note of sub-sections (1), relevant part of sub-section (2) and relevant part of sub-section (3) of section 80IC, as under: "(1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (2), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains, as specified in sub-section (3). (2) This section applies to any undertaking or enterprise,- (a) which has begun or begins to manufacture or produce any article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the profit of the eligible unit at Parwanoo from the activity done thereat is eligible for deduction and nothing more than that. 7. Broadly, the activity of producing the Antivirus software of the assessee has two sub-activities, viz., the Software development activity and of writing such developed software on CDs. The former activity is done at R&D Centre, Pune, which is not covered u/s 80IC. Costs incurred by the R&D Centre are proportionately charged to the Parwanoo unit without any mark-up. Only the latter activity is done at the eligible unit in Parwanoo. Ex consequenti, only the profit of the latter activity is eligible for the deduction. In that view of the matter and in the strict sense, profit relating to software development activity embedded in the total profit on sale, though realized by the Parwanoo unit, is not eligible for deduction u/s.80IC because such activity was not done at the Parwanoo unit. 8. In order to produce some article at an eligible unit, there can be a situation in which an assessee may outsource some part of the activity from a third party and then produce its finished product. In that case, it is the ultimate profit on the sale of finished produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom: ...." 11. We have noted above that sub-section (3) read with sub-section (1) of section 80IC stipulates computing the profit of the eligible unit from the books maintained by the assessee without making any adjustment outside the books of account. In a case, where an assessee has both eligible and non-eligible businesses, and there are some inter-transfer of goods or services between the two, there may be a temptation to value the transfer of such goods or services between the two businesses in such a way that higher profit results in the eligible business availing deduction with the resultant lower profit in the fully taxable business. Similarly, there can be a situation in which the eligible business of the assessee has business dealings with another connected person and such business deali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsferring the CD writing activity to the Pune unit at higher than market price and the second will arise when the Pune R&D Centre transfers the software development activity to the Parwanoo unit at a lower than market price. Both such situations will lead to needlessly pushing the profit of the Parwanoo unit. The AO has restricted the deduction by opining that the CD writing done by the eligible business of the Parwanoo unit for the non-eligible business of the Pune unit was not at market value and then he went on to find out the market value of the CD writing activity done by the Parwanoo unit and arrived at the amount of excess deduction. Impliedly, he invoked the first situation dealt with by sub-section (8) of section 80IA. 13. Let us examine if sub-section (8) of section 80IA of the Act was, in principle, correctly applied. We have found it as an admitted position that the activity of the software development and maintenance is done by the R&D Centre of the assessee in Pune and charged, inter alia, to the Parwanoo unit at cost without any mark-up. This deciphers that only the cost element involved in the software development done at the R&D Centre in Pune has become part of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business or vice versa. He accentuated on the use of the word `business' in the provision and stated that since the assessee had only one business, with one unit in Pune and other in Parwanoo, section 80IA(8) was not magnetized. 15. There is no force in this contention. The stand of the assessee ab initio had been that the Pune had four independent units, namely, R&D Centre, Head Office, Manufacturing unit and Sales Depot and one Manufacturing unit in Parwanoo. As the R&D Centre in Pune is doing the only activity of software development and not the CD writing or its sale, the same clearly becomes a business independent of the Parwanoo unit, which is into CD writing and its sale and not in software development. 16. At this point, it would be apt to record that the assessee raised several contentions in support of its case before the ld. CIT(A) challenging the assessment order, some of which were beyond the discussion made in the assessment order. To be more particular, the assessee, inter alia, submitted that: * VAT and CST problem necessitated the sale of packaged software from Parwanoo unit through the Pune unit. * Sale from Pune Sales Depot was part of business of Parwanoo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , albeit recorded in the impugned order, remained unaddressed. In other words, the impugned order does not deal with all the issues raised by the assessee. The ld. AR emphatically submitted, which we also endorse, that the ld. first appellate authority ought to have disposed of all the points raised by the assesee so that an effective challenge could be laid before the Tribunal against his decision, if warranted. In view of the fact that several issues raised by the assessee have not been adjudicated by the ld. CIT(A), we are of the considered opinion that it would be in the fitness of the things if the impugned order is set-aside and the matter is restored to his file for dealing with all such issues and then pass a speaking order thereon. We order accordingly. Needless to say, an adequate opportunity of hearing will be granted by the CIT(A) to the assessee in such proceedings. Before parting with this issue, it is hereby clarified that we have confined our discussion supra only to the issues raised by the AO and upheld by the ld. CIT(A) or the argument advanced by the ld. AR before the Tribunal. All other issues, taken up before the ld. CIT(A) and not dealt with in the impugned o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e claim u/s.80IC to the tune of Rs. 9,86,61,718/-. 24. Briefly stated, the facts for this year are that the assessee filed its return declaring total income of Rs. 6.26 crore, after claiming deduction u/s.80IC of the Act amounting to Rs. 40.77 crore. The assessee also reported certain Specified Domestic Transactions (SDTs) aggregating to Rs. 59.80 crore in Form No. 3CEB. The AO made a reference to the Transfer Pricing officer (TPO) for determining the Arm's Length Price (ALP) of the SDTs. The TPO accepted the transactions at ALP. When the matter came up before the AO for passing the final assessment order, he took note of the fact that the assessee claimed excess deduction u/s.80IC of the Act in respect of the Parwanoo unit as was done in the preceding year. The reason for the AO's opinion was that the assessee was doing the only activity of CD writing in the Parwanoo unit, whereas the Antivirus software development activity was taken care of by the R&D Centre of the assessee situated in Pune. As against that, the deduction u/s 80IC was claimed on the profit arising from both the activities. He called upon the assessee to explain the reasons as to why the deduction u/s.80IC be not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f all, we take up the assessee's first contention about lack of jurisdiction of the AO in making the disallowance of deduction u/s.80IC in the light of the fact that the TPO passed the order accepting the SDTs at ALP. We have gone through the order dated 17-08-2016 passed by the TPO u/s.92CA(3) of the Act, whose copy is available at pages 51 to 53 of the paper book. It can be seen from such order that the SDTs reported by the assessee and considered by the TPO are primarily of 'Sale from unit at Himachal Pradesh to unit at Pune' and 'Allocation of common expenses from Pune unit to Himachal Pradesh unit'. The assessee applied the Comparable Uncontrolled Price (CUP) method for demonstrating that these transactions were at ALP. The TPO accepted the declared value as the ALP. The argument of the ld. AR about the binding nature of the TPO's order and the consequential AO's lack of jurisdiction to proceed further on this issue dwells on section 92CA(4) of the Act, which provides that: "On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under the sub-section (4) of section 92C in conformity with the arm's length p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unit at Rs. 3.86 crore. This amount was subjected to 10% mark-up for finding out the market value of the CD writing activity. This is how, the AO proceeded to compute excess deduction u/s 80IC at Rs. 27.60 crore w.r.t. the CD writing on total sales made by the Parwanoo unit. We have discussed supra that section 80IA(8) of the Act deals with two situations, one, in which the goods or services of the eligible business (Parwanoo unit) are transferred to non-eligible business of the assessee (Pune unit), and second, in which the goods or services of any non-eligible business of the assessee (Pune R&D Centre) are transferred to the eligible business (Parwanoo unit). Both the situations are like two water-tight compartments and no overlapping can happen in the sense that for one particular transaction, it can be either of the two situations and not a mixture of both. In the facts and circumstances of the case, the first situation will result as consequence of the AO finding out the market value of the activity of CD writing done by the Parwanoo unit and the second on the AO finding out the market value of the activity of the software development done by the R&D Centre Pune. Though both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the impugned order that the assessee raised similar contentions before the ld. CIT(A) as were taken up before him for the A.Y. 2012-13, the crux of which has been briefly reproduced above in para 16 of this order. Similar to the preceding year, the ld. CIT(A) for this year too, failed to dispose off some of such contentions. Following the same view as taken for the preceding year qua such undisposed off contentions, we set-aside the impugned order and remit the matter to the file of the ld. CIT(A) for passing a speaking order on such issues. It is again clarified at the cost of repetition for this year also that we have confined our discussion and decision only to the issues raised by the assessee and decided in the first appeal. The other issues taken up before the ld. CIT(A) but not dealt with in the impugned order, which have also not been argued before the Tribunal because of non-decision by the ld. CIT(A) thereon, are left open for an appropriate decision by the ld. first appellate authority. It goes without saying that the assessee will be allowed an adequate opportunity of hearing in the consequential proceedings. 30. In the result, the appeal of the Revenue is dismiss ..... X X X X Extracts X X X X X X X X Extracts X X X X
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