Asst. CIT, Circle -2(2), Hyderabad V. Ms. IIC Systems Pvt. Ltd., Hyderabad

CO 32/HYD/2013

• Counselvise Citation: [2014] 122 COUNSELVISE.COM (IT) 9408 (ITAT-HYDERABAD)
• Duration Of Justice: 7 month(s) 25 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 19-02-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2006-2007
• Appeal Filed On: 24-06-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P SOMASEKHAR REDDY
• Assessee Lawyers: SUBRAMANYAM CHIMALAPATI
• Keywords: Rejection of books of accounts; Business income; Business expenditure; Double taxation relief; Principle of natural justice; Non-deduction of tax
• Section: 40A(3); 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A : HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA.NO.318 & 319/HYD/2013 ASSESSMENT YEAR 2005-06 & 2006-07 M/S. IIC SYSTEMS PVT. LTD. HYDERABAD PAN AAACI 4455N VS. ACIT, CIRCLE 2(1) HYDERABAD (APPELLANT) (RESPONDENT) ITA.NO.398 & 399/HYD/2013 ASSESSMENT YEAR 2005-06 & 2006-07 ACIT, CIRCLE 2(2) HYDERABAD VS. M/S. IIC SYSTEMS PVT. LTD. HYDERABAD PAN AAACI 4455N (APPELLANT) (RESPONDENT) CROSS OBJECTION NO. 31 & 32/HYD/2013 ARISING OUT OF ITA.NO.398 & 399/HYD/2013 ASSESSMENT YEAR 2005-06 & 2006-07 M/S. IIC SYSTEMS PVT. LTD. HYDERABAD PAN AAACI 4455N VS. ACIT, CIRCLE 2(2) HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : MR. SUBRAMANYAM CHIMALAPATI FOR REVENUE : MR. P. SOMASEKHAR REDDY, CIT DR DATE OF HEARING : 29.01.2014 DATE OF PRONOUNCEMENT : 19.02.2014 ITA.NO.318, 319/HYD/2013, 399 & 398/HYD/2013 & CO31 & 32/HYD/2013 M/S. IIC SYSTEMS PRIVATE LIMITED, HYDERABAD ORDER PER BENCH THESE CROSS-APPEALS ARE BY ASSESSEE AND REVENUE AND CROSS OBJECTIONS BY ASSESSEE ARE ON THE SPECIFIC GROUNDS RAISED BY THE REVENUE IN THEIR APPEALS FOR THE ASSESS MENT YEARS 2005-2006 AND 2006-2007. SINCE COMMON ISSUES ARE INVOLVED IN THESE APPEALS, THESE ARE HEARD TOGETHER AND DECIDED BY THIS COMMON ORDER. 2. WE HAVE HEARD THE LEARNED COUNSEL AND THE LEARNED D.R. AND PERUSED THE PAPER BOOKS PLACED ON RECORD ALONG WITH WRITTEN SUBMISSIONS. 3. BRIEFLY STATED, THE ASSESSEE COMPANY IS IN THE BUSINESS OF CALL CENTRE SERVICES, SOFTWARE TECHNOLOGY SERV ICES, PROVISION OF PERSONNEL ETC., AND ALSO EXECUTED A SOFTWARE CONTRACT TO IBM LIMITED. WHILE COMPLETING THE ASSES SMENT UNDER SECTION 143(3), THE A.O. INVOKED PROVISIONS OF SECT ION 40(A)(IA) ON THE PAYMENTS MADE TO M/S. APOLLO CONSULTI NG SERVICES CORPORATION USA (ACSC) ON THE REASON THAT THE AMOUNTS WERE REMITTED WITHOUT DEDUCTING TAX UNDER SECTI ON 195 OF THE I.T. ACT. THE AMOUNT DISALLOWED IN A.Y. 2005 -2006 WAS TO THE TUNE OF RS.14,05,09,382/- AND IN A.Y. 2006 -07 WAS TO THE TUNE OF RS.14,22,41,612/-. IN ADDITION TO THE A BOVE, THE A.O. DISALLOWED CERTAIN EXPENDITURE STATING THAT ASSESS EE HAS INFLATED EXPENSES WHICH WAS QUANTIFIED AT RS.1,33,4 6,705/- FOR A.Y. 2005-06 AND RS.1,45,06,710/- FOR A.Y. 2006-07. 4. IN THE APPEALS BEFORE THE CIT(A), THE ASSESSEE RELIED ON THE ORDERS OF THE ITAT WHEREIN IT WAS HELD THAT ITA.NO.318, 319/HYD/2013, 399 & 398/HYD/2013 & CO31 & 32/HYD/2013 M/S. IIC SYSTEMS PRIVATE LIMITED, HYDERABAD PAYMENTS PAID TO APOLLO CONSULTING SERVICES CORPORATION USA DO NOT COME UNDER THE PURVIEW OF TDS PROVISIONS AND THEREFORE, PROVISIONS OF SECTION 195 ARE NOT ATTRACTED. FOL LOWING THE DECISION OF THE ITAT FOR THE SAME ASSESSMENT YEARS GI VEN UNDER SECTION 195 READ WITH SECTION 201(1), THE LEARNED CIT(A) DELETED THE ADDITIONS SO MADE. ON THE ISSUE OF ALLEGE D EXPENDITURE, THE LEARNED CIT(A) PARTIALLY SUSTAINED THE ADDITIONS TO THE EXTENT OF RS.1 CRORE IN A.Y. 2005-20 06 AND RS.1.10 CRORES FOR A.Y. 2006-07. 5. THE ASSESSEE IS AGGRIEVED ON THE SUSTENANCE OF DISALLOWANCE OF EXPENDITURE, WHEREAS, REVENUE IN ITS APP EALS IS CONTESTING A NEW ISSUE. IT WAS THE CONTENTION OF THE REVENUE THAT THE A.O. IN HIS REMAND REPORT DOUBTED THE GENUIN ENESS OF PAYMENT TO ACSC AND CIT(A) SHOULD HAVE CONSIDERED TH E REMAND REPORT INSTEAD OF DELETING THE ADDITION MADE UN DER SECTION 40(A)(IA) OF THE ACT. ASSESSEE IN ITS CROSS OBJECTION IS CONTESTING THE REVENUES GROUNDS ON THE REASON THAT IS SUES WERE NEITHER DEALT BY THE A.O. IN HIS ORDER NOR IT WAS B EFORE THE CIT(A), THEREFORE, REVENUE CANNOT RAISE THE GROUNDS. 6. ISSUE OF INFLATED EXPENDITURE: AS BRIEFLY STATED ABOVE, THE A.O. WAS ALLEGING THAT ASSESSEE HAS INFLATED EXPENDITURE. THE REASON FOR SUCH OBSERVATION WAS THAT T HE PROFIT IN THE YEAR HAS COME DOWN AND A.O. SOUGHT EXPLANAT ION VIDE ITS LETTER DATED 14.11.2007. IN THE LETTER A.O. WAS OF THE VIEW THAT ASSESSEE BOOKED HUGE EXPENDITURE UNDER THE HE AD SALARIES WHICH IS TO THE TUNE OF 62% OF THE RECEIPTS AND THEREFORE, PROPOSED THE DISALLOWANCE OF SALARIES. ASSESSE E REPLIED VIDE LETTER DATED 07.12.2007 EXPLAINING THE N ATURE OF EXPENDITURE WITH REASONS. HOWEVER, A.O. WHILE COMPLETING THE ITA.NO.318, 319/HYD/2013, 399 & 398/HYD/2013 & CO31 & 32/HYD/2013 M/S. IIC SYSTEMS PRIVATE LIMITED, HYDERABAD ASSESSMENT, CHANGED HIS STAND AND RESORTED TO DISALLOWANC E OF PART OF THE TOTAL EXPENDITURE CLAIMED. SINCE NO SPECIFIC NATURE OF EXPENDITURE WHICH WAS INFLATED WAS IDENTIFIED, AO H AS RESORTED TO A METHOD OF CALCULATION. A.O. COMPARED DOMESTI C BUSINESS EXPENDITURE WITH PREVIOUS YEAR DOMESTIC BUSIN ESS EXPENDITURE. SINCE EARLIER YEAR ASSESSEE HAD EXPORT BUSI NESS AS WELL AND AS THE EXPENDITURE IN THAT YEAR WAS NOT SE GMENT WISE, A.O. CALCULATED PERCENTAGE OF EXPORT BUSINESS E XPENSES VIS--VIS EXPORT BUSINESS INCOME AND ARRIVED AT 80% OF EXPENSES. OUT OF THE TOTAL EXPENSES IN EARLIER YEAR OF RS.4,51,29,344/- THE EXPENSES PERTAINING TO EXPORT BUS INESS WAS ARRIVED AT RS.66,34,876/- AND BALANCE EXPENDITUR E WAS CONSIDERED FOR DOMESTIC BUSINESS EXPENSES. THAT PERCENTAG E IN EARLIER YEAR I.E., A.Y. 2004-05 WAS CONSIDERED IN THIS YEAR ON THE TOTAL TURNOVER AND ARRIVED AT A POSSIBLE EXPENDITURE OF RS.3,06,15,678/- WHICH ASSESSEE SHOULD HAVE INCURRED AS PER A.O.. SINCE, ASSESSEES EXPENDITURE CLAIM WAS TO THE TU NE OF RS.4,39,62,389/- THE DIFFERENCE OF EXPENDITURE OF RS.1,33,46,705/- WAS CONSIDERED AS INFLATED EXPENDITU RE FOR A.Y. 2005-2006. SIMILAR WORKING WAS UNDERTAKEN FOR A. Y. 2006-07 WHEREIN THE A.O. DISALLOWED AN AMOUNT OF RS.14,22,41,612/- 6.2. ASSESSEE CONTESTED BEFORE CIT(A), MAKING VARIOUS EXPLANATIONS AND ALSO STATING THAT ASSESSEE FURNISHE D ALL THE STATEMENT OF ACCOUNTS, COPIES OF BANK STATEMENTS, PROOF OF PAY- ROLLS, TDS MADE, PROFESSIONAL TAX PAID TO EVIDENCE THE SALARIES WHICH HAVE BEEN PAID. THEREFORE, IT WAS SUBMITTED THAT A.O. WAS NOT JUSTIFIED IN CONCLUDING THAT SALARIES ARE INFL ATED WITHOUT PINPOINTING ANY INSTANCE OF BOGUS EXPENSES OR ITA.NO.318, 319/HYD/2013, 399 & 398/HYD/2013 & CO31 & 32/HYD/2013 M/S. IIC SYSTEMS PRIVATE LIMITED, HYDERABAD EMPLOYEES ETC., IT WAS FURTHER SUBMITTED THAT THE CALL CENTRE INCOME HAS INCREASED BY 400% AND COMPARED TO CALL CENTRE INCOME IN A.Y. 2004-05. AS AGAINST RS.76,84,085/- TU RNOVER IN A.Y. 2004-05, THE TURNOVER WAS TO THE TUNE OF RS.4.01 CRORES DURING THIS YEAR. THEREFORE, ADOPTING THE SO-CALLED PE RCENTAGE BY BACKWARD CALCULATIONS DOES NOT INDICATE THE ACTUAL EXPENDITURE INCURRED. IT WAS FURTHER SUBMITTED THAT MER ELY PERCENTAGE OF LOSS OR PROFIT IN A PARTICULAR YEAR DOES NOT NECESSARILY LEAD TO THE INFERENCE THAT THERE HAS BEE N SUPPRESSION OF INCOME OR INFLATION OF EXPENDITURE. ASSES SEE RELIED ON VARIOUS DECISIONS. LEARNED CIT(A) DID NOT AG REE AND UPHELD THE ADDITION ON ACCOUNT OF INFLATION OF EXPENDIT URE. HOWEVER, CONSIDERING THE INFLATION WHICH HAS TO BE TAKEN I NTO ACCOUNT, GENERAL TREND OF INCREASE IN SALARIES, THE AMOUN TS WAS RESTRICTED TO RS.1 CRORE FOR A.Y. 2005-06 AND RS.1.10 CRORES FOR A.Y. 2006-07. ASSESSEE IS CONTESTING THE SAME IN ITS APPEALS. 6.3. THE FIRST OBJECTION RAISED BY ASSESSEE COMPANY WAS THAT ORIGINALLY THE A.O. ISSUED SHOW CAUSE FOR INCRE ASE IN THE SALARY, WHEREAS AT THE TIME OF PASSING THE ASSESS MENT ORDER WITHOUT GIVING ANY FAIR CHANCE TO ASSESSEE, RESORTE D TO A DIFFERENT METHOD FOR DISALLOWING THE EXPENDITURE, THEREBY , VIOLATING THE PRINCIPLES OF NATURAL JUSTICE. 6.4. THE SECOND OBJECTION WAS THAT A.O. RESORTED TO ESTIMATE IN A MECHANICAL WAY WITHOUT CONSIDERING THE CH ANGE IN BUSINESS PROFILE, INCREASE IN CALL CENTRE INCOME A ND DEPLOYMENT OF PERSONNEL. 6.5. THE THIRD OBJECTION WAS THAT A.O. HAS NEITHER REJECTED THE BOOKS OF ACCOUNTS NOR FOUND OUT ANY SPECI FIC ITA.NO.318, 319/HYD/2013, 399 & 398/HYD/2013 & CO31 & 32/HYD/2013 M/S. IIC SYSTEMS PRIVATE LIMITED, HYDERABAD NATURE OF EXPENDITURE WHICH WAS INFLATED AND THE METHODOLOGY ADOPTED BY THE A.O. WAS NOT CORRECT. 6.6. IT WAS SUBMITTED THAT DISALLOWANCE OF EXPENDITURE CAN BE RESORTED ONLY WHEN THE EXPENDITURE WAS NOT SUPPO RTED BY BILLS, EXPENDITURE WAS BOGUS, EXPENDITURE WAS OUTSIDE THE PURVIEW OF SECTION 37 OR EXPENDITURE WAS IN THE NATURE CONTEMPLATED UNDER PROVISIONS OF SECTION 40A(3) ETC., THE PRESENT CASE DOES NOT FIT IN ANY OTHER OF THOSE CONDITIONS STATED ABOVE AS A.O. NEITHER REJECTED THE BOOKS OF ACCO UNTS NOR POINTED OUT ANY MISTAKES IN THE METHOD FOLLOWED. NOT ONL Y THAT ASSESSEE HAS FURNISHED ALL THE BILLS AND IN FACT MOST OF THE NATURE OF EXPENDITURE WAS ALSO SUBJECT MATTER OF SURVEY I N THE COURSE OF PAYMENTS TO FOREIGN COMPANIES AND THEREFORE , THERE IS NO NEED FOR DISALLOWING ANY EXPENDITURE. ASSESSEE HAS RELIED ON VARIOUS CASE LAWS ON VARIOUS PRINCIPLES (A) INCREASE IN EXPENDITURE NEED NOT BE JUSTIFIED FO R INCREASING THE PROFIT CIT VS. WALCHAND & CO. (P) LTD. 65 ITR 38 1 AND CIT VS. SALITHO ORES LTD. 344 ITRT 161 (BOM.) (B) REASONABLENESS OF EXPENDITURE IS TO BE TAKEN FROM THE BUSINESS POINT OF VIEW CIT VS. DALMIA CEMENT (BHARAT) LTD. 254 ITR 377 (DEL.) (C) DISALLOWING PART OF EXPENDITURE WITHOUT SPECIFYING REASONS IS NOT VALID ITAT DELHI BENCH ORDER IN THE CASE OF TRIPAT K AUR VS. ACIT ITA.NO.3244/DEL/2012 DT.07.09.2012 (D) EXPENDITURE WHICH IS UNDER SECTION 37(1) HAS TO BE ALLOWED CIT VS. ORACLE INDIA (P) LTD. 243 CTR 103 ( DEL.) ITA.NO.318, 319/HYD/2013, 399 & 398/HYD/2013 & CO31 & 32/HYD/2013 M/S. IIC SYSTEMS PRIVATE LIMITED, HYDERABAD 7. THE LEARNED D.R. HOWEVER, SUBMITTED THAT ASSESSEE HAS NOT JUSTIFIED EXPENDITURE CLAIM AND SUPPORTED THE O RDERS OF THE LEARNED A.O. AND CIT(A). 8. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE DETAILS AS PLACED ON RECORD WITH THE RELEVANT CASE LAW. THERE IS NO DISPUTE WITH REFERENCE TO THE FACT THAT A.O. ISSUED SHOW CAUSE NOTICE WITH REFERENCE TO THE SO CALLED INFLATIO N IN SALARY EXPENDITURE, WHICH THE ASSESSEE HAS JUSTIFIED BY FURN ISHING VARIOUS DETAILS. WITHOUT ANY FURTHER NOTICE, THE A.O. CALCULATED THE PERCENTAGE OF EXPENDITURE ON DOMESTIC TURNOVER IN EARL IER YEAR AND ARRIVED AT THE SO CALLED EXPENDITURE WHICH AS SESSEE COULD HAVE SPENT FOR EARNING THE INCOME DURING THE YEAR. ACCORDINGLY, OUT OF THE TOTAL CLAIM OF EXPENDITURE, HE DETERMINED THE DOMESTIC EXPENDITURE AT 80% OF THE TURNOVE R AND DISALLOWED THE EXPENDITURE. THIS SORT OF BACKWARD CALCULATION, IN THE ABSENCE OF ANY ALLEGATION ABOUT NON - MAINTENANCE OF BOOKS, NON-FURNISHING OF VOUCHERS, NON- COMPLIANCE OF THE NOTICES, CANNOT BE ACCEPTED AS THE PROVISIONS OF THE ACT ARE VERY SPECIFIC AND CLEAR. A.O. C AN ONLY RESORT TO ESTIMATE OF INCOME UNDER SECTION 145, IF COND ITIONS SPECIFIED THERE IN ARE SATISFIED. EXPENDITURE CAN BE VERIFIED UNDER SECTION 37(1) AND ONLY AO FINDS OUT THAT EXPENDIT URE IS NOT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS, HE CAN DISALLOW SUCH EXPENDITURE. THERE IS NO SUCH FINDING IN T HIS ORDER. ASSESSEE HAS JUSTIFIED THE EXPENDITURE BY EXPLAINI NG THE CHANGE OF BUSINESS PROFILE, INCREASE IN CALL CENTRE INCOM E AND ALSO BY FURNISHING NECESSARY STATEMENTS AND VOUCHERS B EFORE THE AUTHORITIES. WITHOUT EXAMINING THESE, IN OUR VIEW, A.O. AND CIT(A) ERRED IN RESORTING TO MATHEMATICAL JUGGLERY SO AS TO ITA.NO.318, 319/HYD/2013, 399 & 398/HYD/2013 & CO31 & 32/HYD/2013 M/S. IIC SYSTEMS PRIVATE LIMITED, HYDERABAD DENY THE EXPENDITURE CLAIMED BY THE ASSESSEE. THERE IS NO BASIS FOR A.O. DISALLOWANCE OF THE SO CALLED INFLATED EXPENDITURE AND LEARNED CIT(A) ALSO DID NOT APPLY HIS MIND IN REST RICTING THE AMOUNT ON AN ADHOC BASIS TO RS.1 CRORE AND RS.1.10 CR ORES WITHOUT ANY BASIS. AT LEAST, HE SHOULD HAVE EXAMINED THE CONTENTIONS OF THE ASSESSEE AND PROVED THAT THEY ARE NOT CORRECT. WITHOUT DOING ANYTHING ON RECORD, THIS SORT OF DISALLOWANCE OF EXPENDITURE CLAIMED BY THE ASSESSEE CANN OT BE ACCEPTED OR JUSTIFIED. IN VIEW OF THIS, WE HAVE NO HES ITATION IN CANCELLING THE SO-CALLED DISALLOWANCE OF EXPENDITURE RES ORTED BY THE ASSESSING OFFICER. A.O. IS DIRECTED TO ALLOW E XPENDITURE AS CLAIMED. SINCE ITS FACTUAL ISSUE AND MOST OF PRINC IPLES RELIED ON BY THE ASSESSEE ALSO SUPPORTS THE CONTENTIONS, WE NEED NOT GO INTO TO ANALYZING THE VARIOUS PRINCIPLES. SUFFICE TO SAY, THAT A.OS ACTION CAN NOT BE JUSTIFIED ON THE FACTS OF THE C ASE. ACCORDINGLY, DISALLOWANCE IS DELETED. GROUNDS ARE ALLO WED. ISSUE OF NON GENUINE EXPENDITURE RAISED IN REVENUE APPEALS : 9. THIS ISSUE ARISES IN A PECULIAR WAY. AS BRIEFLY STATED EARLIER, A.O. HAS RESORTED TO DISALLOWANCE OF EXPE NDITURE UNDER SECTION 40(A)(IA). THE LEARNED CIT(A) DELETED THE ADDITION FOLLOWING THE ORDERS OF THE ITAT IN THE SAME A.YS ON THE S AME ISSUE, DECIDED WHEN THE ISSUE WAS TAKEN-UP UNDER SECTI ON 195/201(1) CONSEQUENT TO SURVEY PROCEEDINGS CONDUCTED ON THE ASSESSEE. THEREFORE, TO THE EXTENT OF DISALLOWANCE UNDER SECTION 40(A)(IA), ISSUE HAS ALREADY BEEN CONCLUDED AT THE LEVEL OF ITAT. REVENUE IS ALSO NOT IN APPEAL ON THIS ISSUE. A S CAN BE SEEN FROM THE GROUNDS RAISED BEFORE US, WHAT THE REVENUE IS CONTESTING IS THAT LD. CIT(A) IN THE COURSE OF APPEAL ITA.NO.318, 319/HYD/2013, 399 & 398/HYD/2013 & CO31 & 32/HYD/2013 M/S. IIC SYSTEMS PRIVATE LIMITED, HYDERABAD PROCEEDINGS HAS ASKED THE A.O. TO EXAMINE THE GENUINENE SS OF THE EXPENDITURE PAID TO M/S. APOLLO CONSULTING SERVICE S CORPORATION USA. THE A.O. IN HIS REMAND REPORT AFTER REPORTING VARIOUS ISSUES OBSERVED THAT THE INFORMATION FURNISHED BY THE ASSESSEE IS NOT SUFFICIENT TO VERIFY THE GENUINENESS OF THE TRANSACTIONS BETWEEN IBM BANGALORE AND ASSESSEE COMPAN Y AND BETWEEN THE ASSESSEE COMPANY AND APOLLO CONSULTING SERVICES CORPORATION USA. THIS REMAND REPORT WAS PLACED BEFORE THE LEARNED CIT(A), HOWEVER, IN THE FINAL ORDER, LEARNED CIT(A) DID NOT DISCUSS ANYTHING ABOUT THE CONTENTIONS IN REMAND REPORT AND ACCEPTED THE ASSESSEES CONTENTION ABOUT THE DISALLOWANCE MADE UNDER SECTION 40(A)(IA). IT WAS THE REVENUES CONTENTION THAT LEARNED CIT(A) DID NOT ADJUDIC ATE THAT THE EXPENDITURE IS NOT GENUINE AS REPORTED BY THE A.O. ACCORDINGLY, REVENUE HAS RAISED THE FOLLOWING GROUNDS : 2. THE CIT(A) ERRED IN LAW AND ON FACTS IN IGNORING THE ENQUIRIES DIRECTED TO HIS PREDECESSOR AND ALSO IN IGN ORING REMAND SUBMIT IN PURSUANCE OF SUCH DIRECTIONS. 3. THE CIT(A) ERRED ON FACT AND IN LAW IN GRANTING RELI EF TO THE ASSESSEE THOUGH THE PAYMENT MADE BY THE ASSESSEE TO M/S. APOLLO CONSULTING SERVICES CORPORATION IS NOT GENUINE. 4. THE CIT(A) ERRED IN LAW AND ON FACTS IN GRANTING RELI EF ON PAYMENTS MADE TO M/S. APOLLO CONSULTING SERVICES CORPORATION, USA DESPITE THE FACT THAT THE ASSESSEE COULD NOT PRODUCE ANY EVIDENCE IN SUPPORT OF GENUINENESS O F THE PAYMENT. 10. THE CROSS OBJECTIONS ARE CHALLENGING THE ABOVE GROUNDS RAISED BY THE ASSESSEE STATING THAT THE ISSUE DOES NOT ARISE OUT OF THE CIT(A) ORDER AND RAISED BY THE REVENU E FOR THE FIRST TIME BEFORE THE ITAT. ITA.NO.318, 319/HYD/2013, 399 & 398/HYD/2013 & CO31 & 32/HYD/2013 M/S. IIC SYSTEMS PRIVATE LIMITED, HYDERABAD 11. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE DO NOT SEE ANY MERIT IN THE REVENUES GROUNDS. FACTS OF THE C ASE IN BRIEF ARE THAT M/S IIC SYSTEMS (P) LTD., IS A COMPANY INCORPORATED IN INDIA AND IS A SUBSIDIARY OF INDOTRONIX INTERNATIONAL CORPORATION, USA. THE ASSESSEE AND IBM GLOB AL SERVICES INDIA (P) LTD, BANGALORE ENTERED INTO A CONTRA CT W.E.F. 1ST JAN., 2004 FOR PROVIDING SOFTWARE PERSONNEL FOR THE PROJE CTS OF IBM ACROSS THE GLOBE INCLUDING USA. THE ASSESSEE IN T URN HAS ENTERED INTO A CONTRACT ON 2ND JAN., 2004 WITH M/ S APOLLO CONSULTING SERVICES CORPORATION, USA (ACSC) FOR PROCURING SOFTWARE PERSONNEL IN USA FOR THE PROJECTS OF IBM IN USA. AS PER THE ARRANGEMENT, WHENEVER IBM BANGALORE ISSUED WORK AUTHORIZATION/PURCHASE ORDER, THE ASSESSEE IN TURN ISSUE D A WORK ORDER/PURCHASE ORDER ON ACSC, USA WHO PROCURED THE REQUIRED PERSONNEL AND DEPLOYED THEM ON THE PROJECTS OF IBM, USA. FOR THE SERVICES RENDERED, ACSC USED TO RAISE AN IN VOICE ON THE ASSESSEE ON MONTHLY BASIS AND IN TURN THE ASSE SSEE RAISED INVOICE ON IBM. THE PAYMENTS DUE TO ACSC, USA WAS REMITTED IN US DOLLARS. HOWEVER, SUCH REMITTANCES HAVE BE EN MADE WITHOUT DEDUCTION OF TAX AT SOURCE. THE AO WAS OF THE VIEW THAT SINCE THE REMITTANCES TO ACSC WERE MADE FOR SUPPLY OF SOFTWARE PROFESSIONALS FOR EXECUTING THE ONSITE WORK IN USA IN CONNECTION WITH THE CONTRACT BETWEEN THE ASSESSEE AND IBM GLOBAL SERVICES (INDIA) (P) LTD., THE AMOUNTS CREDITE D TO THE ACCOUNT OF OR REMITTED TO ACSC, ARE IN THE NATURE OF FEES FOR TECHNICAL SERVICES COVERED UNDER S. 9(1)(VII)(B) OF T HE ACT. ACCORDINGLY, THE AO ISSUED A SHOW-CAUSE NOTICE TO THE ASSESSEE PROPOSING TO TREAT IT AS AN ASSESSEE IN DEFAUL T FOR NON-DEDUCTION OF TAX ON THE REMITTANCES AMOUNTING TO RS. ITA.NO.318, 319/HYD/2013, 399 & 398/HYD/2013 & CO31 & 32/HYD/2013 M/S. IIC SYSTEMS PRIVATE LIMITED, HYDERABAD 14,05,09,382 FOR AY 2005-06 AND RS. 14,22,41,612 FOR A Y 2006-07. NOT CONVINCED WITH THE OBJECTIONS OF THE ASSES SEE IN RESPONSE THERETO, THE AO HELD THE VIEW THAT THE ARRANGEM ENT OF THE ASSESSEE WITH ACSC IS NOT A SIMPLE ARRANGEMENT FOR S UPPLY OF PERSONNEL TO EXECUTE THE CONTRACTS OF IBM IN USA, SINC E ACCORDING TO HIM THE AGREEMENT BY THE ASSESSEE WITH I BM PLACED HEAVY RESPONSIBILITIES ON THE ASSESSEE. 11.1. CONSEQUENT TO THE FURTHER ORDERS ON THE ISSUE, THE MATTER ULTIMATELY REACHED TO ITAT IN ACIT VS. M/S. I IC SYSTEMS PVT. LTD. 33 DTR 422. IN THAT CASE, IT WAS H ELD THAT PAYMENTS MADE TO M/S. APOLLO CONSULTING SERVICES CORPORATION USA CANNOT BE TREATED AS FEES FOR INCLUDED SERVICES WITHIN THE MEANING OF ARTICLE 12(4)(B) OF DTA A AND PROVISIONS OF SECTION 90(2) ARE APPLICABLE EVEN IF THE PA YMENTS CONSTITUTE FEES FOR TECHNICAL SERVICES UNDER SECTION 9( 1)(VII). SINCE THEY ARE NOT CHARGEABLE UNDER THE IT ACT, PROVISIONS OF SECTION 195 ARE NOT ATTRACTED AND ASSESSEE HAS NO LIABIL ITY TO DEDUCT TAX AT SOURCE. THIS ORDER WAS ISSUED ON 9 TH OCTOBER, 2009. AT THE SAME TIME, VIDE LETTER DATED 11.06.200 9 ON THE APPEALS IN QUANTUM BEFORE HIM, LD.CIT(A) HAS ASKED T HE A.O. TO EXAMINE VARIOUS AGREEMENTS TO KNOW THE GENUINENESS O F THE TRANSACTIONS BETWEEN IBM BANGALORE AND ASSESSEE COMPAN Y AND BETWEEN ASSESSEE COMPANY AND M/S. APOLLO CONSULTING SERVICES CORPORATION USA. IN RESPONSE, THE A.O. HAS SE NT REMAND REPORT DATED 14.02.2011, FOLLOWED BY ANOTHER REPORT DATED 11.09.2012. ON PERUSAL OF THESE REPORTS, EXCEPT FLEETING REMARK THAT THE INFORMATION FURNISHED BY THE ASSESSEE IS NOT SUFFICIENT TO VERIFY GENUINENESS OF THE TRANSACTIONS , THERE IS NOTHING ON RECORD TO INDICATE THAT THE AMOUNTS PAID BY THE ITA.NO.318, 319/HYD/2013, 399 & 398/HYD/2013 & CO31 & 32/HYD/2013 M/S. IIC SYSTEMS PRIVATE LIMITED, HYDERABAD ASSESSEE TO M/S. APOLLO CONSULTING SERVICES CORPORATION US A ARE NOT GENUINE. WITHOUT ESTABLISHING THAT EXPENDITURE IS BOGUS/ NOT GENUINE, WE ARE UNABLE TO UNDERSTAND HOW REVENUE CAN RAISE THIS GROUND BEFORE US WHEN, THE CIT(A ) HAVING CO-TERMINUS POWERS, DID IN FACT ASKED THE A.O. T O EXAMINE THE TRANSACTIONS AND FOR THE REASONS BEST KNOWN TO HIM, DID NOT GIVE ANY FINDING ON THE ISSUE BUT DELE TED THE ADDITION MADE ORIGINALLY BY THE A.O. NOT ONLY THE ABO VE, EVEN THE ORDER OF THE ITAT DO INDICATE THAT THESE TRANSACTIONS HAVE BEEN VERIFIED BY THE A.O. IN DETAIL AND THERE WERE REM AND REPORTS BEFORE THE CIT(A) VIDE LETTER DATED 12.12.2006 AND FURTHER REPORT AGAINST THE ASSESSEES LETTER DATED 20.1 2.2006. THE ORDER OF THE CIT(A)-II DATED 05.01.2007 DO INDICAT E THAT ALL THE TRANSACTIONS WERE INDEED VERIFIED IN DETAIL BY THE A.O. AND THERE IS A FINDING BY THE CIT(A) IN PARA 4.12 AS UNDE R : 4.12. IN THE PRESENT CASE, AS EVIDENT FROM THE AGRE EMENTS AND RELEVANT INVOICES AND DOCUMENTS, THERE IS NO DOU BT THAT THE SOFTWARE PERSONNEL ARE DEPLOYED ONLY FOR A SPECIFI C PROJECT AS DETERMINED BY IBM TO CARRY OUT WORK TO B E ASSIGNED BY THE PRE-DETERMINED PROJECT MANAGER AND AFTER COMPLETION OF THE PROJECT THEY DO NOT REMAIN WITH TH E APPELLANT COMPANY WHO IS THE ACQUIRER OF THE SAID PER SONNEL SERVICES SINCE EACH WORK AUTHORIZATION/PURCHASE ORD ER ISSUED BY IBM SPECIFIES THE PERIOD IN TERMS OF HOUR FOR WHICH THE MANPOWER (RESOURCE) IS REQUISITIONED. SIMILARLY, WHAT SOFTWARE IS TO BE DEVELOPED IS NOT KNOWN TO THE APP ELLANT WHO IS THE ACQUIRER OF PERSONNEL FROM APPOLLO. OTHERW ISE ALSO THE SOFTWARE THAT IS DEVELOPED BY THE SAID SOFT WARE PERSONNEL ALSO DO NOT REMAIN WITH THE APPELLANT BECA USE THE SAME IS TRANSFERRED TO IBM, USA ALONG WITH ALL INTELLE CTUAL PROPERTY. IN FACT, CLAUSE NO.9 OF THE AGREEMENT BET WEEN THE APPELLANT AND IBM DEFINES THAT ALL DEVELOPED WORKS BELON G EXCLUSIVELY TO THE BUYER AND ARE WORKS MADE FOR HIRE. IF ANY DEVELOPED WORKS ARE NOT CONSIDERED WORKS MADE FOR H IRE OWNED BY OPERATION OF LAW, THE SUPPLIER ASSIGNS THE OWNERSHIP OF COPYRIGHT IN SUCH WORKS TO THE BUYER I .E., IBM. ITA.NO.318, 319/HYD/2013, 399 & 398/HYD/2013 & CO31 & 32/HYD/2013 M/S. IIC SYSTEMS PRIVATE LIMITED, HYDERABAD THUS, IN THE LIGHT OF THE DECISION OF ITAT IN THE AFOREMENTIONED CASE, THE SO CALLED TECHNICAL SERVICE IN THE FORM OF PROCUREMENT OF MANPOWER THAT IS RENDERED BY APPOLLO TO THE APPELLANT AND APPELLANT TO IBM DOES NOT HAVE THE ELEMENT OF DURABILITY OR PERMANENCY. THE FRUITS O F THE SERVICE IN THE FORM OF SOFTWARE PROGRAMME ETC., IS N EITHER KNOWN TO THE ACQUIRER I.E., THE APPELLANT AT THE FIR ST INSTANCE; NOR DOES IT REMAIN AVAILABLE WITH HIM SUBSEQUENTLY. ACCORDINGLY, IN MY VIEW, THE SERVICES RENDERED BY AP POLLO FOR WHICH THE PAYMENT HAS BEEN MADE BY THE APPELLAN T IS MORE OF A PLACEMENT OR RECRUITMENT IN NATURE AND WI LL NOT COME WITHIN THE PURVIEW OF FEES FOR INCLUDED SERVI CES WITHIN THE MEANING OF ARTICLE 12(4)(B) OF THE DTAA BETW EEN INDIA & USA SINCE THE PAYMENT MADE BY THE APPELLANT IS ONLY AGAINST PURCHASE BY IBM OF CERTAIN QUANTITY OF MAN- HOURS AND NOT FOR MAKING AVAILABLE BY APPOLLO ANY SPE CIFIC TECHNOLOGY OR ANY TECHNICAL PLAN, TECHNICAL DESIGN E TC., 12. THE FINDINGS OF THE LEARNED CIT(A) WERE THE BASI S FOR THE ORDER OF THE ITAT WHEREIN IT WAS HELD THAT THE PAYME NTS MADE TO M/S. APOLLO CONSULTING SERVICES CORPORATION USA DOES NOT COME WITHIN THE PURVIEW OF PROVISIONS OF SECTION 195. MAY BE CONSIDERING THE ORDERS OF THE CIT(A) IN PARALLEL PROCEEDINGS UNDER SECTION 195/201, THE PRESENT CIT(A) DID NOT CONSIDER FIT ENOUGH TO CONSIDER THE ISSUE OF GENUINEN ESS OF THE EXPENDITURE, WHEN THERE ARE ALREADY FINDINGS ON THE IS SUE WHICH WAS EXAMINED IN DETAIL BY THE CIT(A) IN ANOTHER PROCEEDING. IN VIEW OF THIS, WE ARE NOT IN A POSITION TO HOLD THAT EXPENDITURE IS NOT GENUINE. ON A FLEETING REMARK MADE BY THE A.O. MAY NOT REQUIRE THE ATTENTION OF THE LEARNED CIT(A ), WHEN THERE IS OVERWHELMING EVIDENCE THAT THE PAYMENTS ARE IN DEED MADE TO M/S. APOLLO CONSULTING SERVICES CORPORATION USA AS PART OF BUSINESS TRANSACTIONS. IN VIEW OF THIS, WE ARE NOT IN A POSITION TO CONSIDER THE REQUEST OF THE LEARNED D.R. THA T THE ISSUE IS REQUIRED TO BE RE-EXAMINED BY THE A.O. NOT ON LY ON MERITS BUT ALSO ON LEGAL PRINCIPLES, WE CANNOT ENTERTAIN THE ITA.NO.318, 319/HYD/2013, 399 & 398/HYD/2013 & CO31 & 32/HYD/2013 M/S. IIC SYSTEMS PRIVATE LIMITED, HYDERABAD GROUNDS RAISED BY THE REVENUE, AS THE ISSUE IS NOT ARI SING OUT OF THE ORDER OF THE LEARNED CIT(A). IN VIEW OF THIS, WHILE ACCEPTING THE ASSESSEES CROSS OBJECTIONS ON THE ISSUE, WE DO NOT SEE ANY MERIT IN CONSIDERING THE REVENUES GROUNDS. THEREFORE, GROUND NOS. 2 TO 4 OF THE REVENUE ARE DISMISSED . 13. GROUND NOS. 4 AND 5 PERTAIN TO THE ISSUE OF RELI EF GRANTED BY THE LEARNED CIT(A) ON THE SO-CALLED INFLATED EXPENDITURE. THIS ISSUE WAS ALREADY CONSIDERED BY US IN DETAIL IN PARA 6 TO 8 ABOVE. AS, WE HAVE ALREADY DELETED TH E DISALLOWANCE OF EXPENDITURE TO THE EXTENT CONFIRMED BY THE LEARNED CIT(A), WE DO NOT SEE ANY MERIT IN THE REVENUE S GROUNDS. ACCORDINGLY, THE APPEALS OF THE REVENUE IN BOT H THE YEARS STANDS DISMISSED. 14. IN THE RESULT, ASSESSEES APPEALS IN ITA.NO.318 & 319/HYD/2013 ARE CONSIDERED AS ALLOWED AND REVENUES APPEALS IN ITA.NO.398 & 399/HYD/2013 ARE DISMISSED AN D CROSS OBJECTIONS NO.31 & 32/HYD/2013 (ARISING OUT OF ITA.NO.398 & 399/HYD/2013) OF THE ASSESSEE ARE CONSIDE RED ALLOWED FOR ACADEMIC PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH FEB. 2014. SD/- SD/- (SAKTIJIT DEY) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACOUNTANT MEMBER HYDERABAD, DATED 19 TH FEBRUARY, 2014 VBP/- ITA.NO.318, 319/HYD/2013, 399 & 398/HYD/2013 & CO31 & 32/HYD/2013 M/S. IIC SYSTEMS PRIVATE LIMITED, HYDERABAD COPY TO : 1. M/S. IIC SYSTEMS PVT. LTD., 405, BABUKHAN MILLENNI UM CENTRE, RAJBHAVAN ROAD, NEAR YASHODA HOSPITAL, SOMAJIGUDA, HYDERABAD 2. THE ACIT, CIRCLE 2(2), HYDERABAD. 3. CIT(A) - III , HYDERABAD 4. C IT - II , HYDERABAD 5. D.R. ITAT, A BENCH, HYDERABAD.