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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 ..... n in its invoice and confirming the addition - HELD THAT:- On going through the above operative part of the impugned order, it is overt that the ld. CIT(A) has confined his decision precisely to the view point of the AO as incorporated in the assessment order. All the submissions made by the assessee beyond the assessment order, which have bearing on the ultimate decision, albeit recorded in the impugned order, remained unaddressed - 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivirus 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 the Parwanoo unit was that of CD writing with the help of a few unskilled employees, whereas the software development required for the antivirus, was being done by the Pune R D Centre only. He took note of the fact that only 19 employees were working at Parwanoo unit with their educational qualifications ranging from 10th to Graduation and the highest annual salary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith 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 ₹ 1.82 crore, as against the AO s own such calculation at ₹ 98.65 lakh. Taking note of section 80IC(7) r.w.s.80IA(8) and further section 80IA(10), the AO called upon the assessee to submit its point of view on cost of CD writing. The assessee, without prejudice to its submission that deduction u/s.80IC was rightly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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 or thing, not being any article or thing specified in the Thirteenth Schedule, or which manufactures or produces any article or thing, not being any article or thing specified in the Thirteenth Schedule and undertakes substantial expansion during the period beginning- (i) .. ( ii ) on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 product which should be taken into consideration for computing the deduction u/s.80IC. The reason is that the profit in respect of the outsourced activity will naturally have the mark-up of the supplier added to his cost price, which also goes into the cost base of the el ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 dealings have been valued in such a manner so as to increase the amount of profit in the eligible business. It is with a view to remedy such situations that sub-section (8) and (10) of section 80IA come into play to adjust the profit of the eligible and non-eligib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 the cost base of the Parwanoo unit. Consequently, the total profit earned from the ultimate sale of the Antivirus software, included in Parwanoo unit s profit, also consists of the profit attributable to the software development, which activity has not t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 unit. Deduction u/s.80IC(1) was available on profits and gains derived from business of an undertaking and not profits and gains derived from an undertaking. The AO wrongly re-characterized the transaction of transfer of packaged s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellate 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 order, which have 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. 19. The next issue raised in this appeal is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction u/s.80IC of the Act amounting to ₹ 40.77 crore. The assessee also reported certain Specified Domestic Transactions (SDTs) aggregating to ₹ 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 allowed only to the extent of the activity of CD writing carried out in the Parwanoo unit. Unlike the preceding year in which the disallowance of deduction u/s 80IC was restricted only to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed 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 price as so determined by the Transfer Pricing Officer . It is vivid from the mandate of the sub-section (4) that where the ALP of a SDT has been determined by the TPO, the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pune. Thereafter, he reduced the allocated common cost of ₹ 15.72 crore to find out the cost of CD writing at Parwanoo unit at ₹ 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re disallowance made by the AO in respect of sales made to third parties as well, cannot be accorded our imprimatur. 29. As can be seen 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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