APA Engineering Pvt Ltd., CHENNAI V. DCIT, CHENNAI

ITA 1623/CHNY/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 96526 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-12-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 30-11-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 14-07-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DR B NISCHAL
• Assessee Lawyers: T BANUSEKAR
• Keywords: Earning of tax free income
• Section: 10AA; 234B; 14A; 147; 148

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , C B ENCH, CHENNAI . , ! # $ , % & BEFORE SHRI A.MOHAN ALANKAMONY ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER ./ I.T.A.NO.1623/MDS/2015 ( / ASSESSMENT YEARS: 2010-11) M/S.APA ENGINEERING PVT. LTD., UNIT 1, JEM & JEWELLERY COMPLEX, MEPZ-SEZ, TAMBARAM, CHENNAI-600 045. VS DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-I(1), CHENNAI. PAN: AACCA9455C ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : MR.T.BANUSEKAR, C.A. /RESPONDENT BY : DR. B.NISCHAL, JCIT /DATE OF HEARING : 30 TH NOVEMBER, 2015 /DATE OF PRONOUNCEMENT : 18 TH DECEMBER, 2015 / O R D E R PER CHALLA NAGENDRA PRASAD, JM: THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE O RDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-1, CHENNA I DATED 18.02.2015 FOR THE ASSESSMENT YEAR 2010-11. 2. THE FIRST ISSUE IN THE APPEAL OF THE ASSESSEE IS THAT COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN DENYI NG DEDUCTION UNDER SECTION 10A OF THE ACT AS CLAIMED BY THE ASSESSEE. 2 ITA NO.1623/MDS/2015 3. COUNSEL FOR THE ASSESSEE SUBMITS THAT THE ISSUE IN APPEAL IS DECIDED BY THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2006-07 TO 2009-10 IN ITA NOS.2306/MDS/2013, 505, 506 & 1354/MDS/2014 DATED 30.04.2015, WHEREIN THE TRIBU NAL HELD THAT THE ASSESSEE IS ENGAGED IN MANUFACTURING ACTIV ITY /ASSEMBLING THE PRODUCT FOR EXPORTS AND ALSO RENDER ING INFORMATION TECHNOLOGY ENABLED SERVICES WHICH ENTIT LES THE ASSESSEE TO CLAIM DEDUCTION UNDER SECTION10A OF THE ACT. HOWEVER, THE COUNSEL SUBMITS THAT FOR THIS ASSESSME NT YEAR THE DEDUCTION SHALL BE ONLY 50% AND NOT 100% IN VIE W OF THE PROVISIONS OF SECTION 10A(1A) OF THE ACT. COPY OF T HE ORDER OF THE CO-ORDINATE BENCH DATED 30.04.2015 IS PLACED ON RECORD. 4. DEPARTMENTAL REPRESENTATIVE SUPPORTS THE ORDERS OF THE LOWER AUTHORITIES. 5. HEARD BOTH SIDES. PERUSED ORDERS OF LOWER AUTHOR ITIES AND THE DECISION RELIED ON. ON A PERUSAL OF THE CO- ORDINATE BENCH DECISION CITED ABOVE, WE FIND THAT SIMILAR IS SUE I.E. WHETHER THE ASSESSEE IS ENTITLED FOR DEDUCTION UNDE R SECTION 3 ITA NO.1623/MDS/2015 10A OR NOT HAS BEEN DECIDED IN FAVOUR OF THE ASSESS EE BY THE TRIBUNAL OBSERVING AS UNDER:- 2. THE ASSESSEE HAS RAISED 12,12 ,10 & 11 ELABORA TE GROUNDS IN ITS RESPECTIVE APPEALS FOR THE ASSESSMEN T YEARS 2006-07,2007-08, 2008-09 & 2009-10; HOWEVER THE CRU X OF THE ISSUES ARE THAT THE ASSESSEE IS AGGRIEVED BY TH E ORDER OF THE LD. CIT (A), WHO HAD UPHELD THE ORDER OF THE LD . ASSESSING OFFICER (I) IN DENYING RELIEF UNDER SECTION 10A OF THE ACT FOR THE ASSESSMENT YEARS 2006-07 TO 2009-10. (II) LEVY OF INTEREST U/S. 234B OF THE ACT FOR THE ASSESSMENT YEARS 2006-07 TO 2009-10. (III) RE-OPENING U/S. 147 OF THE ACT FOR THE ASSES SMENT YEAR 2007-08. IV) DISALLOWANCE U/S.14A OF THE ACT READ WITH RULE 8D OF THE ACT FOR EXPENSE INCURRED ON EARNING EXEMPT INCOME VIZ., DIVIDEND INCOME FOR THE ASSESSMENT YEAR 2007-08. (V) DISALLOWANCE U/S. 14A OF THE ACT R.W.R 8D FOR EXPENSE INCURRED ON INVESTMENTS MADE TO EARN EXEMPT INCOME FOR THE ASSESSMENT YEAR 2009-10. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE IS A PRIVATE LIMITED COMPANY, ENGAGED IN THE BUSINESS OF SOURCING AND TRADING IN AUTO PARTS, FILED ITS RETUR N OF INCOME FOR THE ASSESSMENT YEAR 2006-07 ON 31.10.2006, FOR THE ASSESSMENT YEAR 2007-08 ON 25.10.2007, FOR THE ASSESSMENT YEAR 2008-09 ON 26.09.2008 AND FOR THE ASSESSMENT YEAR 2009-10 ON 21.09.2010. ALL THE CAS ES WERE TAKEN UP FOR SCRUTINY BARRING ASSESSMENT YEAR 2007-08 WHICH WAS REOPENED BY ISSUANCE OF NOTICE U/S. 148 O F THE ACT. 4.1 GROUND NO.1 - DENYING DEDUCTION UNDER SECTION-10A O F THE ACT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS OBSERVED BY THE LD. ASSESSING OFFICER THAT THE ASSE SSEE HAD CLAIMED DEDUCTION U/S. 10A OF THE ACT FOR HAVING EN GAGED IN THE BUSINESS OF EXPORT OF COMPUTER SOFTWARE AND ART ICLES OR THINGS MANUFACTURED IN INDIA. THE LD. ASSESSING OF FICER FURTHER NOTED THE ACTIVITIES OF THE ASSESSEE AS FOL LOWS:- I) IDENTIFYING A MANUFACTURER FOR THE OVERSEAS CLIE NT, PROVIDING TECHNICAL DRAWINGS AND SUPERVISING THE MANUFACTURIN G ACTIVITY AND THEREBY DERIVING SALES COMMISSION FOR THE GOODS 4 ITA NO.1623/MDS/2015 DIRECTLY PURCHASED BY THE OVERSEAS CLIENTS FROM THE MANUFACTURERS. II) IN SOME INSTANCE THE OVERSEAS CLIENT PLACES AN ORDER WITH THE ASSESSEE COMPANY AND PAYS THE ASSESSEE COMPANY FOR THE SAME. IN TURN, THE ASSESSEE COMPANY PROCURES THE MA TERIAL FROM DIFFERENT MANUFACTURERS IN INDIA AND EXPORTS T HEM. IN THIS CASE, THE ASSESSEE RECEIVES MONEY IN FOREIGN E XCHANGE FOR THE ENTIRE VALUE OF SALES. III) THE ASSESSEE COMPANY WAS ONLY IN POSSESSION OF MACHINERIES SUCH AS 1.5 TON LG SPLIT AC, HYDRAULIC MANUAL STACKER, INSPECTION EQUIPMENTS, PACKING FED MACHINE , STRAPPING MACHINE, WEIGHTING MACHINE WHOSE TOTAL VA LUE IS NOT EXCEEDING ` 2 LAKHS AND THEREFORE, IT IS HIGHLY IMPROBABLE FOR THE ASSESSEE COMPANY TO HAVE MANUFACTURED GOODS WORTH ` 12.5 CRORES FOR EXPORT. IV) THE ASSESSEE COMPANY WAS INVOLVED IN PREPARATI ON OF DRAWINGS AS PER THE SPECIFICATION OF THE OVERSEAS C USTOMERS AND PLACING ORDER WITH THE MANUFACTURERS SO THAT TH E SAID MANUFACTURE PRODUCES THE GOODS AS PER SUCH SPECIFIC ATIONS. THUS THE ASSESSEE COMPANY WAS ONLY RECEIVING THE OR DERS FROM ITS OVERSEAS CUSTOMERS WHICH ARE PASSED ON TO OTHER MANUFACTURERS IN INDIA. V) THE COPIES OF INVOICES RAISED BY THE ASSESSEE SH OWED THAT BILLING WAS MADE UNDER THE HEAD INTERNATIONAL SALE S COMMISSION, INTERNATIONAL INSPECTION CHARGES, AN D TRANSACTION CHARGES. 4.2 BASED ON THE ABOVE OBSERVATIONS, THE LD. ASSES SING OFFICER QUERIED AS TO HOW THE ASSESSEE WOULD BE EN TITLED FOR DEDUCTION U/S. 10A BECAUSE IT APPEARED THAT THE ASS ESSEE WAS NOT ENGAGED IN MANUFACTURING ACTIVITY OR SOFTW ARE DEVELOPMENT ACTIVITY, TO BE ELIGIBLE FOR DEDUCTION U/S. 10A OF THE ACT. THE ASSESSEE IN RESPONSE MADE THE FOLLOWI NG SUBMISSIONS BEFORE THE LD. ASSESSING OFFICER:- THE ASSESSEE COMPANY WAS REGISTERED WITH MEPZ AND H AD COMMENCED ITS OPERATION IN SPECIAL ECONOMIC ZONE FR OM 01.09.2003. THEREAFTER, THE COMPANY HAS STARTED THE ACTIVITIES SUCH AS SOFTWARE DEVELOPMENT; WEB BASED SOLUTIONS S OFTWARE, CREATION AND DEVELOPMENT OF WEBSITE AND WEB CATALOG UE, MANUFACTURING AND EXPORT OF KITS FOR AUTOMOBILE IND USTRY. FROM THESE ACTIVITIES, THE ASSESSEE HAD RECEIVED COMMISS ION FROM, FOREIGN CLIENTS FOR LOCATING MANUFACTURERS, INDIAN CLIENTS FOR LOCATING BUYERS, RETAINER-SHIP CHARGES FROM OVERSEA S CLIENTS FOR SUPPLIER LIAISON, AND REVENUE FROM INTERNATIONAL AU TO-FAIR. IT WAS THEREFORE SUBMITTED THAT THE ASSESSEE WAS ELIGIBLE FOR CLAIM U/S. 10A OF THE ACT. 5 ITA NO.1623/MDS/2015 4.3 HOWEVER, THE LD. ASSESSING OFFICER DENIED THE BENEFIT OF DEDUCTION U/S. 10A OF THE ACT TO THE ASSESSEE BY HO LDING THAT THE ASSESSEE IS NOT ENGAGED IN ANY MANUFACTURI NG ACTIVITY BECAUSE OF THE FOLLOWING REASONS:- (I) THE ASSESSEE COMPANY ONLY ACTED AS INTERMEDIAR Y BETWEEN THE OVERSEAS CUSTOMERS AND THE INDIAN MANUFACTURER TO SOURCE AUTO-PARTS FROM INDIA. II) THE ASSESSEE COMPANY IS ENGAGED IN THE ACTIVITY OF ONLY IDENTIFYING A RELIABLE AND DEPENDENT MANUFACTURER T O ITS OVERSEAS CUSTOMER FOR PROCURING SMALL ORDERS BECAUS E THEY DO NOT HAVE ANY ESTABLISHMENT IN INDIA. III) THE ASSESSEE HAS A DATA BANK OF THE MANUFACTU RERS WHO PRODUCED VARIOUS COMPONENTS IN INDIA AND THROUGH A WEB- BASED INTERACTIVE TOOL, THE ASSESSEE COMPANY COMMUN ICATES TO ITS CLIENTS ABROAD THE DETAILS OF THE INDIAN MAN UFACTURERS, AND THEIR MANUFACTURING SCHEDULES. BASED ON THIS INFORMATION, THE CLIENTS OF THE ASSESSEE COMPANY EI THER PLACED ORDERS DIRECTLY WITH THE MANUFACTURERS OR TH ROUGH THE ASSESSEE AGAINST WHICH THE ASSESSEE EARNS INCOME. III) AFTER GETTING THE GOODS MANUFACTURED, THE ASS ESSEE ASSEMBLED THE PRODUCTS AND PACKS THEM FOR EXPORT. IV) THE ASSESSEE DOES NOT HAVE ANY INFRASTRUCTURE S UCH AS PLANT & MACHINERY TO MANUFACTURE THE GOODS IN INDIA . V) THE BILLS RAISED BY THE ASSESSEE ALSO SHOWED THA T IT HAS RECEIVED ONLY SALES COMMISSION, INSPECTION CHARGES AND TRANSACTION CHARGES, WHICH ESTABLISH THE FACT THAT THE ASSESSEE IS NOT ENGAGED IN ANY MANUFACTURING ACTIVI TY. 4.4 ON APPEAL, THE LD. CIT (A) CONFIRMED THE ORDER OF THE LD. ASSESSING OFFICER ACCEPTING HIS VIEWS. THE RELE VANT PORTION OF THE ORDER IS EXTRACTED HEREIN BELOW FOR REFERENCE:- 7.1. IT IS SEEN FROM THE FACTS OF THE CASE THAT THE APPELLANT WAS DOING THE SOURCING OF AUTO PARTS FOR ITS OVERSEAS C LIENTS. DURING THE A.Y 09-10, THE APPELLANT HAS REPORTED THE REVENUE A S UNDER:- ` SALES12,06,74,577 TRANSACTION CHARGES 50,30,229 SOFTWARE CONSULTANCY 36,34,439 MISCELLANEOUS INCOME 8,95,336 THE APPELLANT, THROUGH ITS EXPERTISE IN AUTOMOBILE ENGINEERING, SOURCES FROM INDIA VARIOUS AUTO COMPONENTS FOR ITS OVERSEAS CLIENTS. THE OVERSEAS CLIENTS BUY SUCH COMPONENTS' DIRECTLY FROM THE MANUFACTURERS AFTER OBTAINING THE TECHNICAL SPE CIFICATIONS FROM THE APPELLANT OR PLACE THE ORDER WITH THE APPELLANT FOR IT TO PURCHASE FROM THE ULTIMATE MANUFACTURER AND EXPORT TO THEM. FROM THE ABOVE, IT CAN BE UNDERSTOOD THAT THE APPEL LANT ACTS AS AN INTERMEDIARY BETWEEN THE OVERSEAS CUSTOMER AND INDI AN MANUFACTURER. THE OVERSEAS CUSTOMERS DO NOT HAVE AN ESTABLISHMENT IN THE FORM OF A BRANCH, ETC. IN INDI A TO IDENTIFY THE 6 ITA NO.1623/MDS/2015 RELIABLE AND DEPENDABLE MANUFACTURER FOR THEIR SMAL L ORDERS. FOR SUCH PURPOSES, THEY UTILIZE THE SERVICES OF THE APP ELLANT. AFTER GETTING THE GOODS MANUFACTURED THROUGH OTHER MANUFA CTURERS IN INDIA, THE APPELLANT UNDERTAKES FINAL ASSEMBLY AND PACKING BEFORE THEY ARE EXPORTED OUTSIDE INDIA. THIS PROCESS CANNO T BE SAID TO BE A MANUFACTURING PROCESS AND THEREFORE THE APPELLANT WAS ASKED TO EXPLAIN WHY DEDUCTION U/S L0A SHOULD NOT BE DISALLO WED IN ITS CASE. THE APPELLANT STATED THAT AN UNDERTAKING WOULD BE S AID TO BE ENGAGED IN MANUFACTURING ACTIVITY, IF IT IS DOING P ART OF THE MANUFACTURING ACTIVITY BY ITSELF AND FOR THE REST O F IT, ENGAGES THE SERVICES OF SOMEBODY ELSE. 7.2. THE APPELLANT'S SUBMISSIONS ARE NOT ACCEPTED T HAT THE ENTIRE MANUFACTURING ACTIVITY IS CARRIED OUT BY AN OUTSIDE R AND THE APPELLANT IS NOT INVOLVED IN ANY OF THE MANUFACTURI NG ACTIVITIES. IT IS ALSO TO BE NOTED THAT THE APPELLANT DOES NOT HAVE T HE PLANT AND MACHINERY TO MANUFACTURE SUCH GOODS IN INDIA. THERE FORE THE ACTIVITIES OF THE APPELLANT ARE LIKE A TRADER, WHO JUST PROCURES GOODS FROM A MANUFACTURER AND EXPORTS THEM. 7.3. FURTHER, DURING THE ASSESSMENT PROCEEDINGS, TH E APPELLANT PUT FORTH AN ALTERNATIVE ARGUMENT THAT THE RECEIPTS FROM SOFTWARE CONSULTANCY SHOULD BE GIVEN THE BENEFIT OF DEDUCTIO N U/S L0A. THE APPELLANT HAS DISCLOSED TRANSACTION CHARGES OF RS.5 0,30,229/- AND RECEIPTS FROM SOFTWARE CONSULTANCY OF RS.36,34,439/ -. THE AO EXAMINED THE INVOICES RAISED IN THIS REGARD. ON EXA MINATION, AD FOUND THAT THESE INVOICES SHOWED BILLING UNDER THE HEAD 'INTERNATIONAL SALES COMMISSION', 'INTERNATIONAL IN SPECTION CHARGES' AND 'TRANSACTION CHARGES'. AS HAS BEEN EXPLAINED AB OVE, THE ASSESSEE HAS GOT THE EXPERTISE IN SOURCING AUTO PAR TS IN INDIA. IT HAS A DATA BANK OF THE MANUFACTURERS WHO PRODUCE VA RIOUS COMPONENTS IN INDIA. THROUGH A WEB BASED INTERACTIV E TOOL, THE ASSESSEE COMPANY COMMUNICATES TO ITS CLIENTS SITUAT ED OVERSEAS THE DETAILS OF THE INDIAN MANUFACTURERS AND THEIR M ANUFACTURING SCHEDULES SOME OF THE OVERSEAS CLIENTS PLACE DIRE CT ORDERS ON THE INDIAN MANUFACTURERS. FOR THE ASSESSEE COMPANY ACTING AS A FACILITATING AGENT, INTERNATIONAL COMMISSION AND IN TERNATIONAL INSPECTION CHARGES ARE PAID BY THE OVERSEAS ENTITIE S. SUCH COMMISSION CANNOT BE SAID TO HAVE BEEN DERIVED FROM RENDERING SERVICES IN ITES FIELD OR THROUGH DEVELOPMENT OF CO MPUTER SOFTWARE. THE SERVICES RENDERED ARE BASICALLY SOURC ING OF AUTO PARTS. IN RENDERING SUCH SERVICES, THE ASSESSEE COM PANY UTILIZES INTERNET BASED TOOLS IN INTERACTING WITH ITS OVERSE AS CUSTOMERS. IT ONLY FACILITATES LOCATING A MANUFACTURER, INSPECTS THE PARTS MANUFACTURED AND GETS A COMMISSION FOR THE SAME. 7.4. IN VIEW OF THE ABOVE, THE APPELLANT CANNOT BE SAID TO BE ENGAGED IN DEVELOPMENT OF COMPUTER SOFTWARE OR REND ERING ITES SERVICES AS ENVISAGED IN SEC.10A OF THE ACT. THERE FORE, THE ACTION OF THE A.O IS JUSTIFIED IN DENYING THE CLAIM OF RS.68,86,220/- U/S.10A OF THE ACT AS THE APT IS FOUND TO BE NOT EN GAGED IN THE BUSINESS OF EXPORT OF COMPUTER SOFTWARE OR ARTICLES OR THINGS 7 ITA NO.1623/MDS/2015 MANUFACTURED IN INDIA. AS A RESULT, THIS GROUND OF APPEAL IS DISMISSED. 4.5 BEFORE US, THE LD. A.R. MADE THE FOLLOWING WRI TTEN SUBMISSIONS IN ORDER TO ESTABLISH THAT THE ASSESSEE WAS ENGAGED IN MANUFACTURING ACTIVITY AND SOFTWARE DEVELOPMENT WHICH ENTITLES IT TO CLAIM THE BENEFIT U/S.10A OF THE ACT:- MANUFACTURER 2. THE APPELLANT IS IN THE BUSINESS OF MANUFACTURIN G AUTO PARTS/COMPONENTS FOR ITS OVERSEAS CLIENTS. 3. THE MANUFACTURING PROCESS OF THE APPELLANT INVOL VES THE PROCUREMENT OF ORDERS FROM THE CUSTOMERS, PREPARATI ON OF TECHNICAL DRAWINGS AS PER THE SPECIFICATIONS OF THE CUSTOMERS, OUTSOURCING TO SUPPLIERS, SUPERVISION AT THE SUPPLI ERS PREMISES, INSPECTION, ASSEMBLING AND PACKAGING. THE DETAILED FLOW CHART SHOWING THE MANUFACTURING PROCESS OF THE APPELLANT IS REPRODUCED IN THE ASSESSMENT ORDER 4. THOUGH THE APPELLANT IS NOT PERSONALLY ENGAGED I N THE MANUFACTURE IT IS THE APPELLANT WHO PREPARES THE TE CHNICAL DRAWINGS AND GETS THE SAME DONE THROUGH JOB WORKERS SUPERVISES AND INSPECTS AT THE SUPPLIERS PREMISES. THE ULTIMAT E RESPONSIBILITY TO DELIVER THE END PRODUCT AS PER THE CUSTOMERS SPE CIFICATIONS IS ON THE APPELLANT. THEREFORE IT IS MOST HUMBLY SUBMI TTED THAT THE APPELLANT IS A MANUFACTURER AND IS ENTITLED TO CLAI M DEDUCTION U/S.10A. 5. FOR THIS PROPOSITION RELIANCE IS PLACED ON THE D ECISIONS OF THE HON'BLE MADRAS HIGH COURT IN CIT V ELGI ULTRA INDUS TRIES LTD [2012] 82 CCH 162 (MADRAS) AND HON'BLE BOMBAY HIGH COURT I N CIT V PENWALT INDIA LTD [1992]196 ITR 813 (BORN) WHERE IT HAS BEEN HELD THAT THE FACT THAT THE ASSESSEE HIMSELF IS NOT PERSONALLY ENGAGED IN ~HE MANUFACTURE WOULD NOT DISENTITLE THE ASSESSEE FROM CLAIMING THE RELIEF AS ONE ENGAGED IN MANUFACT URING ACTIVITY, FOR, SO LONG AS THE ASSESSEE EXERCISES CONTROL IN T HE WORK ENTRUSTED TO JOB WORKERS. 6. IN THE LIGHT OF THE ABOVE DECISIONS IT IS MOST H UMBLY PRAYED THAT THE HON'BLE TRIBUNAL MAY BE PLEASED TO HOLD THAT TH E APPELLANT IS A MANUFACTURER AND DIRECT THE ASSESSING OFFICER TO AL LOW THE CLAIM OF DEDUCTION U/S.10A RENDERING INFORMATION TECHNOLOGY ENABLED SERVICES ( ITES) 7.THE APPELLANT HAS ENTERED INTO AGREEMENTS WITH VA RIOUS PARTIES FOR RENDERING INFORMATION TECHNOLOGY ENABLED SERVIC ES AND USES THE FOLLOWING TOOLS TO CARRY OUT THE SAID SERVICES. COPY OF TWO AGREEMENTS FILED BEFORE THE HON'BLE BENCH DURING TH E COURSE OF THE HEARING. 8 ITA NO.1623/MDS/2015 (I) CUSTOMER ERP (II) SOURCE SMART (III) INSPECTION DASHBOARD 8. WITH THESE TOOLS THE APPELLANT IS GIVEN ACCESS T O THE ERP OF THE CUSTOMER TO THE EXTENT OF THE PURCHASE FUNCTION I.E . WHEN THE CUSTOMERS STOCK REACHES THE REORDER LEVEL, IT TRIGG ERS THE ACTION AT THE APPELLANT'S END FOR INITIATING THE PURCHASE ORD ER. AS FAR AS THE SOURCE SMART AND INSPECTION DASHBOARD ARE CONCERNED , THESE ARE SOFTWARES DEVELOPED BY THE APPELLANT, MONITORS THE ENTIRE VENDOR MANAGEMENT PROCESS. 9. IT MAY BE NOTED THAT THESE ARE THE BACK OFFICE O PERATIONS OF THE CUSTOMERS WHICH ARE DONE BY THE APPELLANT. 10. THE NOTIFICATION OF THE CBDT IN S.O.890(E) DATE D 26.09.2000 [(2000) 163 CTR (ST) 25] SPECIFIES BACK OFFICE OPER ATIONS AND WEBSITE SERVICES AS ONE OF THE INFORMATION TECHNOLO GY ENABLED SERVICES. 11. SAMPLE COPIES OF THE INVOICES RAISED IN THE NAM ES OF WATERMAN INDUSTRIES LNC AND RELIANCE PARTS CORPORAT ION FOR THE ASSESSMENT YEAR 2007-08 ALONG WITH LEDGER COPIES WE RE SUBMITTED DURING THE COURSE OF HEARING TO SHOW THAT THE APPELLANT HAS RENDERED IT ENABLED SERVICES TO ITS CUSTOMERS. 12.LN THIS CONNECTION IT IS FURTHER SUBMITTED THAT THE PAYMENTS RECEIVED FOR RENDERING THE IT ENABLED SERVICES WERE GROUPED UNDER INTERNATIONAL INSPECTION A/C, INTERNATIONAL S ALE COMMISSION A/C, INTERNATIONAL RETAINERSHIP A/C ETC. THOUGH THE Y WERE GROUPED UNDER THESE HEADS THEY WERE RECEIVED ONLY FOR RENDE RING THE IT ENABLED SERVICES TO THE OVERSEAS CUSTOMERS. 13. THE REGULAR COMMISSION, RETAINERSHIP ETC RECEIV ED LOCALLY WERE OFFERED ONLY AS COMMISSION ETC AND CREDIT FOR THE T AX DEDUCTED AT SOURCE ON THE SAME HAS BEEN CLAIMED. THE APPELLANT HAS NOT CLAIMED DEDUCTION U/S.10A ON THESE INCOMES 14.LN THE LIGHT OF THE ABOVE SUBMISSIONS IT IS MOST HUMBLY PRAYED THAT THE HON'BLE TRIBUNAL MAY BE PLEASED TO DECIDE WHETHER OR NOT THE APPELLANT IS IN THE BUSINESS OF RENDERING IT EN ABLED SERVICES AND IF THE HON'BLE TRIBUNAL IS SATISFIED THAT THE A PPELLANT IS IN FACT IS ENGAGED IN RENDERING IT ENABLED SERVICES THEN TH E HON'BLE TRIBUNAL MAY BE PLEASED TO SET ASIDE THE MATTER TO THE ASSESSING OFFICER ONLY FOR THE LIMITED PURPOSE OF QUANTIFYING THE AMOUNT OF INCOME EARNED FROM RENDERING THE IT ENABLED SERVICE S .ELIGIBLE FOR CLAIMING DEDUCTION U/S.10A. 15. THE APPELLANT IS ENGAGED IN DEVELOPMENT OF COMP UTER SOFTWARE LIKE MAKING CUSTOMIZED ELECTRONIC CATALOGS ETC. 9 ITA NO.1623/MDS/2015 16. SAMPLE COPY OF THE INVOICE RAISED IN THE NAME O F NU-LINE HEAVY DUTY ALONG WITH LEDGER COPIES WERE SUBMITTED DURING THE COURSE OF HEARING TO SHOW THAT THE APPELLANT IS ENG AGED IN THE DEVELOPMENT OF COMPUTER SOFTWARE FOR THE CUSTOMERS. 17.LN THE LIGHT OF THE ABOVE SUBMISSIONS IT IS MOST HUMBLY PRAYED THAT THE HON'BLE TRIBUNAL MAY BE PLEASED TO DECIDE WHETHER OR NOT THE APPELLANT IS ENGAGED IN DEVELOPMENT OF COMPUTER SOFTWARE AND IF THE HON'BLE TRIBUNAL IS SATISFIED THAT THE A PPELLANT IS IN FACT IS ENGAGED IN DEVELOPMENT OF COMPUTER SOFTWARE THEN THE HON'BLE TRIBUNAL MAY BE PLEASED TO SET ASIDE THE MATTER TO THE ASSESSING OFFICER ONLY FOR THE LIMITED PURPOSE OF QUANTIFYING THE AMOUNT OF INCOME EARNED FROM DEVELOPMENT OF COMPUTER SOFTWARE ELIGIBLE FOR CLAIMING DEDUCTION U/S.10A. 4.6 LD. D.R REITERATED THE REASONS CITED IN THE ORD ERS OF THE REVENUE TO JUSTIFY THE STAND OF THE REVENUE THAT TH E ASSESSEE WAS NEITHER ENGAGED IN MANUFACTURING ACTIV ITY NOR SOFTWARE DEVELOPMENT ACTIVITY AND ARGUED IN SUPPORT OF THE SAME WITH A REQUEST FOR SUSTAINING THEIR ORDERS. 4.7 WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY P ERUSED THE MATERIALS AVAILABLE ON RECORD. THE LD. A.R. HA D ARGUED BY STATING THAT THE ASSESSEE IS ENGAGED IN MANUFACT URING ACTIVITY AND RENDERING INFORMATION TECHNOLOGY ENABL ES SERVICES. TO ESTABLISH THE SAME HE HAS PRODUCED BEF ORE US THE MEMO OF UNDERSTANDING MADE BETWEEN THE ASSESSEE COMPANY AND RELIANCE GROUP/IPD GROUP. FOR REFERENCE WE HEREIN BELOW EXTRACT THE SAME:- I) MEMORANDUM OF UNDERSTANDING WITH IPD GROUP THIS COVENANT ENTERED INTO BETWEEN AUTOPARTSASIA P RIVATE LIMITED, INDIA (HEREIN REFERRED TO AS AA) AND INDUS TRIAL PARTS DEPOT IN THE CASE OF. TORRANCE, USA (HEREINAFTER REFERRED TO AS IPD), THIS AUGUST, 2005 PROVIDES THE FOLLOWING. 1. PROJECT & CONSIDERATION IPD IS PLEASED TO MANDATE AA TO ROLL-OUT THE SOF TWARE SERVICES MENTIONED BELOW: A. CREATION & MAINTENANCE OF THEIR WEB SITE AND WEB CATALOG. B. CORPORATE PRESENTATION C. DEVELOPMENT & MAINTENANCE OF WEB-BASED SOURCING CUM LOGISTICS SOLUTION. THE TOTAL CONSIDERATION FOR THE ABOVE SERVICES WILL BE USD 50,000,00 THE PAYMENT SCHEDULE FOR THE ABOVE WILL BE ON A MON THLY BASIS BASED ON THE DEVELOPMENT TIME CONSUMED @ USD 10 PER HOUR WITH PROJECT TIME ESTIMATION OF 5000 HRS. INVOICING WILL BE DONE BOTH ON A RETAINER BASIS, IN SPECTION SOFTWARE BASIS & AS AN EXTENT OF BUSINESS DONE THAT MONTH. 10 ITA NO.1623/MDS/2015 2. CONFIDENTIALTY & EXCLUSIVITY AA PROMISES TO MAINTAIN COMPLETE CONFIDENTIALITY RE GARDING ALL PROJECTS FOR WHICH IPD MANDATES IT. ALL EFFORTS WIL L BE TAKEN TO MAINTAIN UTMOST CONFIDENTIALITY TO PROTECT THE INTE REST OF IPD OR ANY COMPANY OF THAT GROUP REGARDING ALL SOFTWARE PROJEC TS FOR WHOSE EXECUTION IPD OR ANY COMPANY OF THAT GROUP MANDATES AA. THE CODES DEVELOPED FOR THIS PROJECT WILL BE THE PR OPERTY OF IPD. THE ART WORK, BRAND DEVELOPED, DESIGN & DATA WILL B E EXCLUSIVE PROPERTY OF IPD. AA WILL HAVE NO CLAIM WHATSOEVER ON THE INPUTS & OU TPUTS OF THE PROJECT AA WILL NOT APPROACH BUSINESS COMPETITORS OF IPD. 3. FIRST RIGHT OF REFUSAL AA NOTES WITH PLEASURE THE FAVORED VENDOR ST ATUS ACCORDED BY IPD WHEREBY, FOR ANY SOFTWARE PROJECT, THE IPD W ILL CONSIDER AAA AS THE PREFERRED SERVICE PROVIDER. THIS MEANS I PD WILL FIRST MAKE AN OFFER TO AA TO ROLL-OUT ANY SOFTWARE RELATE D SERVICE BEFORE MAKING AN OFFER TO ANY OTHER SOFTWARE SERVICE PROVI DER. FOR AUTOPARTASIA PVT LTD. FOR IPD GROUP SD/- SD/- MR.K.VAIDYANATHAN MR.RICHARD GRISHABAR CEO II) MEMORANDUM OF UNDERSTANDING WITH RELIANCE GROUP THIS COVENANT ENTERED INTO BETWEEN AUTOPARTSASIA P RIVATE LIMITED, INDIA (HEREIN REFERRED TO AS AA) AND RELIA NCE PARTS CORPORATION, USA (THEREINAFTER REFERRED TO AS RELI ANCE), THIS MARCH, 2005 PROVIDES THE FOLLOWING. 1. PROJECT MANDATE DETAILS: RELIANCE US PLEASED TO MAN DATE AA TO PERFORM THE FOLLOWING SOFTWARE DEVELOPMENT AND S ERVICES ON A REGULAR BASIS: 1.1. CREATION & MAINTENANCE OF THEIR WEB SITE WWW.RELIANCEPARTS.COM AND WEB CATALOG. 1.2. USAGE OF INSPECTION, SOURCING & ERP SOFTWARE T O PERFORM THE PURCHASE FUNCTIONS. 1.3. CORPORATE PRESENTATION AND OTHER SALES ORIENTE D DEVELOPMENT ON A NEED BASED MANNER. THE PAYMENT SCHEDULE FOR THE ABOVE WILL BE ON A MON THLY BASIS BASED ON THE DEVELOPMENT TIME OR SOFTWARE USAGE TIM E @ USD 10 PER HOUR WITH PROJECT TIME ESTIMATION OF 5000 HRS. A MINIMUM OF USD 2000 FOR SECTION 1.2. & USD 300 FOR SECTION 1.3 TO BE GIVEN EVERY MONTH TO COVER THE MANPOWER ALLOTTED FOR THIS PURPOSE. 11 ITA NO.1623/MDS/2015 2. CONFIDENTIALTY & EXCLUSIVITY AA PROMISES TO MAINTAIN COMPLETE CONFIDENTIALITY RE GARDING ALL PROJECTS FOR WHICH RELIANCE MANDATES IT. ALL EFFORT S WILL BE TAKEN TO MAINTAIN UTMOST CONFIDENTIALITY TO PROTECT THE INTE REST OF RELIANCE OR ANY COMPANY OF THAT GROUP REGARDING ALL SOFTWARE PROJECTS FOR WHOSE EXECUTION RELIANCE OR ANY COMPANY OF THAT GRO UP MANDATE AA. 2.1. THE CODES DEVELOPED FOR THIS PROJECT WILL BE T HE PROPERTY OF RELIANCE. 2.2. THE ART WORK, BRAND DEVELOPED, DESIGN & DATA W ILL BE EXCLUSIVE PROPERTY OF RELIANCE. 2.3. AA WILL HAVE NO CLAIM WHATSOEVER ON THE INPUTS & OUTPUTS OF THE PROJECT 2.4. AA WILL NOT APPROACH BUSINESS COMPETITORS OF R ELIANCE. 3. FIRST RIGHT OF REFUSAL AA NOTES WITH PLEASURE THE FAVORED VENDOR ST ATUS ACCORDED BY RELIANCE WHEREBY, FOR ANY SOFTWARE PROJECT. THE RELIANCE WILL CONSIDER AAA AS THE PREFERRED SERVICE PROVIDER. THI S MEANS RELIANCE WILL FIRST MAKE AN OFFER TO AA TO ROLL-OUT ANY SOFTWARE RELATED SERVICE BEFORE MAKING AN OFFER TO ANY OTHER SOFTWARE SERVICE PROVIDER. FROM THE ABOVE IT IS EVIDENT THAT THE ASSESSEES NA TURE OF ACTIVITY IS TO:- I) CREATE AND MAINTAIN WEB SITE. II) CREATE ERP SOFTWARE TO PERFORM PURCHASE FUNCT IONS. III) PRODUCE SOFTWARE RELATED TO SALES ORIENTED DE VELOPMENT AND CORPORATE PRESENTATION ON NEED BASIS. IV) THE CODE DEVELOPED FOR THE PROJECT WAS PASSED O N TO THE CLIENTS OF THE ASSESSEE. V) DESIGN AND DATA WAS ALSO PASSED ON TO THE CLIENT OF THE ASSESSEE. 4.8 THIS SCOPE OF WORK PERFORMED BY THE ASSESSE E ESTABLISHES THAT THE ASSESSEE IS CARRYING OUT INFOR MATION TECHNOLOGY ENABLED SERVICES. AS POINTED OUT BY THE ASSESSEE, THE CBDT CIRCULAR NO.S.O.890(E) DATED 26.09.2000 REPORTED IN 163 CTR (ST) 25 SPECIFIES TH AT FOR THE PURPOSE OF SECTION-10A OF THE ACT, BACK OFFICE OPERATIONS AND WEB SITE SERVICES ARE INFORMATION TE CHNOLOGY ENABLED SERVICES. THE LD. A.R. HAS ALSO EXPLAINED T HE NATURE OF ACTIVITY RENDERED BY THE ASSESSEE WITH RE SPECT TO GIVING ACCESS OF THE ERP TO ITS CLIENTS FOR THEIR P URCHASES AS FOLLOWS:- FOR INITIATING PURCHASE : WHEN THE STOCK AT THE CUSTOMERS LOCATION REACHES T HE PRE- DETERMINED RE-ORDER LEVEL, IT TRIGGERS THE ACTION A T THE ASSESSEES 12 ITA NO.1623/MDS/2015 END FOR INITIATING A PURCHASE ORDER. BASED ON THIS REQUIREMENT, THE ASSESSEE GENERATES A PURCHASE ORDER THROUGH THE CUSTOMER ERP. THIS PURCHASE ORDER (PO) ON THE VENDOR AND TH E SUBSEQUENT ACTIVITIES TAKE PLACE. IN THE EVENT THAT THE CUSTOMER NEEDS STOCK OVER AND ABOVE THE REORDER LEVEL, THE LEVEL IN THE ERP CAN BE OVERWRIT TEN BY THE CUSTOMER BASED ON THEIR INTERNAL DISCUSSIONS AND TH E ASSESSEE PROCEEDS WITH ITS ACTIVITIES AS BEFORE . FOR UPDATING STOCK RECORDS : ONCE THE PO IS MET AND THE GOODS ARE RECEIVED, INSP ECTED AND APPROVED, THE ASSESSEE UPDATES THE CUSTOMERS ERP F OR THE GOODS RECEIVED AND WAREHOUSED. THE LD. A.R. HAS ALSO EXPLAINED THAT THE ASS ESSEE WAS ENGAGED IN DEVELOPMENT OF COMPUTER SOFTWARE LIKE MA KING CUSTOMIZED ELECTRONIC CATALOGUES. MOREOVER, EVEN I F IT IS ARGUED THAT THE ASSESSEE WAS NOT DEVELOPING SOFTWAR E PROGRAMMES, IT IS APPARENT THAT THE ASSESSEE HAS BE EN ENGAGED IN SERVICES AT LEAST IN THE NATURE OF BACK OFFICE OPERATIONS. WEB SITE SERVICES RENDERED BY THE ASSES SEE CAN ALSO NOT BE DENIED. FURTHER, THE ASSESSEE HAS B EEN PROCURING ORDERS FOR ITS CUSTOMERS BY EXTENDING TEC HNICAL DRAWINGS AND SPECIFICATIONS TO THE MANUFACTURERS AN D OUTSOURCING FROM THEM BY SUPERVISING THE SUPPLIES, INSPECTING THE PRODUCTS, AND ALSO ASSEMBLING & PACK AGING THE PRODUCTS BEFORE THEY ARE EXPORTED. THE ASSESSE E HAS ALSO RELIED IN THE DECISION OF THE CASE CIT VS.ELGI ULTRA INDUSTRIES LTD IN 82 CCH (MADRAS) WHEREIN IT WAS HE LD THAT EVEN IN THE CASE OF ASSEMBLING DONE THROUGH JOB WOR K, THE ASSESSEE WOULD BE ENTITLED TO HAVE THE BENEFIT U/S. 80-IA OF THE ACT. THE RELEVANT PORTION OF THE ORDER IS EXTRA CTED HEREIN BELOW FOR REFERENCE:- 13. A READING OF THE SAID JUDGMENT SHOWS THAT THE REASONING IS SIMILAR TO WHAT IS CONSIDERED IN THE DECISION REPOR TED IN 216 ITR 566 COMMISSIONER OF WEALTH TAX V. RAMALINGAM. THUS , THE SUM AND SUBSTANCE FO THE LAW DECLARED BY THIS COURT IS THAT THE FACT THAT THE ASSESSEE HIMSELF IS NOT PERSONALLY EN GAGED IN THE MANUFACTURE, WOULD NOT DISENTITLE THE ASSESSEE FROM CLAIMING THE RELIEF AS ONE ENGAGED IN MANUFACTURING ACTIVITY, FO R, SO LONG AS THE ASSESSEE EXERCISES CONTROL IN THE WORK ENTRUSTE D TO JOB WORKERS, THE ASSESSEE WOULD BE ENTITLED TO THE RELI EF U/S. 80IA OF THE ACT. BEING A DEDUCTION PROVISION, TAKING NOTE OF THE PRESENT DAY OUTSOURCING OF VARIOUS ACTIVITIES, WE NEED TO G IVE A MEANINGFUL EXPRESSION TO ASSESSEE ENGAGED IN THE MANUFACTURING PROCESS, TO HOLD THAT SO LONG AS THE EFFECTIVE INVOLVEMENT OF THE ASSESSEE IS THERE IN THE FORM OF QUALITY CONTROL OR SUPPLY OF MATERIAL AND DYES FOR THE MANUFACTURE OF PARTS OF THE GRINDERS OR MACHINERY, EVEN IN THE CASE OF ASSEMBLI NG DONE 13 ITA NO.1623/MDS/2015 THROUGH JOB WORK, THE ASSESSEE WOULD BE ENTITLED TO HAVE THE BENEFIT U/S. 80-IA OF THE ACT. 4.9 FROM PERUSING THE INVOICES PRODUCED BY THE ASSESSEE, THE FOLLOWING FACTS ARE ALSO REVEALED. SL. NO. INVOICE NO. DATE NAME OF PARTY PARTICULARS 1 021-06 NULINE 30.06.2006 NU-LINE HEAVY DUTY DEVEL OPMENT OF NULINE WEBSITE & NULINE WEB AND CD CATALOG 2 004-WM-06 30.04.2006 WATERMAN INDUSTRIES INC. ENG INEERING SERVICES & BUSINESS DEVELOPMENT ONLINE SUPPORT APRIL 2006. 3 091 - 06 RELIANCE 31.01.2007 RELIANCE PARTS CORPORATION WEB BASED SOURCING CUM LOGISTICS SOLUTIONS FOR JANUARY 2007 4 055 - WATERMAN 20.12.2005 WATERMAN INDUSTRIES INC. SOFTWARE CONSULTANCY 5 070 - RELIANCE 31.01.2006 RELIANCE PARTS CORPORATION TRANSACTION CHARGES SOFTWARE CONSULTANCY 6 025 - RELAINCE 25.08.2005 IP PARTS INC TRANSACTION CHARGES 7 EXP - 127 - B 25.3.2006 WATERMAN INDUSTRIES INC. DESCRIPTION OF GOODS SUPPLIED 4.9.1 FROM THE ABOVE DISCUSSIONS, INVOICES RAISED B Y THE ASSESSEE AND THE ORDER OF THE JURISDICTIONAL HIGH C OURT, IT IS APPARENT THAT THE ASSESSEE IS ENGAGED IN MANUFACTUR ING ACTIVITY/ASSEMBLING THE PRODUCTS, FOR EXPORTS, AND ALSO RENDERING INFORMATION TECHNOLOGY ENABLED SERVICES W HICH ENTITLES THE ASSESSEE TO CLAIM DEDUCTION U/S.10A OF THE ACT. THUS THIS GROUND IS ANSWERED IN FAVOUR OF THE ASSES SEE FOR ALL THE ASSESSMENT YEARS IN APPEAL BEFORE US. 6. AS THE FACTS AND CIRCUMSTANCES BEING IDENTICAL FOR THIS YEAR ALSO, RESPECTFULLY FOLLOWING THE SAID DECISION , WE HOLD THAT THE ASSESSEE IS ENTITLED FOR DEDUCTION UNDER S ECTION 10A OF THE ACT. HOWEVER, THE CLAIM SHALL BE RESTRICTED ONLY TO 50% IN VIEW OF THE PROVISIONS OF SECTION 10A(1A) OF THE ACT. 7. THE ALTERNATIVE GROUND OF THE ASSESSEE IS THAT ASSESSING OFFICER OUGHT TO HAVE ALLOWED THE DEDUCTI ON UNDER SECTION 10AA OF THE ACT. 14 ITA NO.1623/MDS/2015 8. COUNSEL FOR THE ASSESSEE FAIRLY CONCEDES THAT AS SESSEE IS NOT ENTITLED TO DEDUCTION UNDER SECTION 10AA OF THE ACT. THEREFORE, THIS GROUND OF APPEAL IS DISMISSED. 9. THE LAST GROUND OF APPEAL IN ASSESSEES APPEAL I S THAT COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN UPHOL DING THE DISALLOWANCE OF ` 8,125/- UNDER SECTION 14A READ WITH RULE 8D OF THE ACT. COUNSEL FOR THE ASSESSEE SUBMIT S THAT IN VIEW OF THE SMALLNESS OF THE AMOUNT, THIS GROUND OF APPEAL IS NOT PRESSED. THUS, THIS GROUND OF APPEAL IS DISMISS ED AS NOT PRESSED. 10. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 18 TH DECEMBER, 2015. SD/- SD/- ( . ) ( ( *+ ) ( A.MOHAN ALANKAMONY ) ( CHALLA NAGENDR A PRASAD ) - / ACCOUNTANT MEMBER * - / JUDICIAL MEMBER * /CHENNAI, / /DATED 18 TH DECEMBER, 2015 SOMU 12 32 /COPY TO: 1. APPELLANT 2.RESPONDENT 3. 4 () /CIT(A) 4. 4 /CIT 5. 2 7 /DR 6. /GF .