YCH Logistics (India) Private Limited, Kancheepuram V. DCIT, CHENNAI

ITA 322/CHNY/2016

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9061 (ITAT-CHENNAI)
• Duration Of Justice: 4 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 12-07-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 15-02-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MILAND MADHUKAR BHUSARI
• Keywords: Transfer pricing; Business expenditure; International transaction; Rule of consistency; Services rendered outside India; Initiation of penalty proceedings; Revenue expenditure
• Section: 143(3); 92D; 10AA; 234B; 37(1)

Judgement Text

, , IN THE INCOME - TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , . , BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER & SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ./ I.T.A.NO. 322/MDS/2016 / ASSESSMENT YEAR :20 11 - 1 2 YCH LOGISTICS (INDIA) PRIVATE LIMITED, PLOT NO. DV1, SIPCOT HI - TECH SEZ PHASE II, SIRUMANGADU VILLAGE, SRIPERUMBUDUR TALUK, KANCHEEPURAM DISTRICT, TAMIL NADU 602 10 5. [PAN: A AACY2873L ] VS. THE DEPUTY COMMISSIONER OF INCOME TAX , CORPORATE CIRCLE 3 ( 2 ), CHENNAI. ( / APPELLANT ) ( / RESPONDENT ) / APPELLANT BY : SHRI RAGHUNATHAN SAMPATH, ADVOCATE / RES PONDENT BY : SHRI MILAND MADHUKAR BHUSARI , CIT / DATE OF HEARING : 07 . 04 .201 6 / DATE OF P RONOUNCEMENT : 30 . 0 6 .201 6 / O R D E R PER DUVVURU RL REDDY , JUDICIAL MEMBER : TH I S APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LD. DISPUTE RESOLUTION PANEL - 2, BANGALORE , DATED 17 . 12 . 20 1 5 REL EVANT TO THE ASSESSMENT YEAR 2011 - 1 2 . THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS: 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSIN ESS OF WAREHOUSING, FREIGHT AND DISTRIBUTION AND FILED ITS OF INCOME ADMITTING A TOTAL LOSS OF .8,45,48,991/ - FOR THE ASSESSMENT YEAR 2011 - 12 ON 17.11.2011. IN PURSUANCE TO SECTION 92(CA)(1) OF THE INCOME TAX ACT, 1961 I.T.A. NO . 322 /M/ 16 2 [ ACT IN SHORT], A REFERENCE WAS MADE TO THE TPO [DCIT] TO DETERMINE ARM S LENGTH PRICE WITH REFERENCE TO ALL THE TRANSACTIONS REP ORTED IN FORM NO. 3CEB FILED BY THE ASSESSEE. ACCORDINGLY, A NOTICE UNDER SECTION 92CA(2) OF THE ACT WAS ISSUED TO THE ASSESSEE ON 31.01.2014 TO FURNISH THE DETAILS OF DOCUMENTS AND INFORMATION CALLED FOR, IN AN ENCLOSED QUESTIONNAIRE. THE ASSESSEE HAS SUB MITTED THE DETAILS CALLED FOR ON 29.05.2014. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND DETAILS FURNISHED BY THE ASSESSEE, THE TPO HAS RECOMMENDED A DOWNWARD ADJUSTMENT OF . 7,40,95,333/ - IN RESPECT OF TPO TRANSACTION. FURTHER, THE ASSESSEE HAS CLAIMED DEDUCTION UNDER SECTION 10AA OF THE ACT TO THE EXTENT OF .10,06,80,541/ - . THE TPO HAS OBSERVED THAT THE SERVICE PROVIDED IN INDIA WAS CONSUMED WITHOUT REVERTING BACK TO FORE IGN PRINCIPALS FOR CONSUMPTION ABROAD. ULTIMATE OUTCOME OF SERVICE HAVING BEEN EXHAUSTED IN INDIA, THERE APPEARS TO BE NO EXPORT OF SUCH SERVICES SINCE EFFORTS IN INDIA GENERATED SERVICE RECEIPTS IN INDIA ONLY. THE BENEFIT OF SERVICE TERMINATED IN INDIA ON LY WITHOUT TRAVELLING ABROAD. THEREFORE, HE HELD THAT MERE RECEIPT OF PAYMENTS IN FOREIGN CURRENCY DOES NOT MAKE THE ASSESSEE ELIGIBLE TO CLAIM DEDUCTION UNDER SECTION 10AA OF THE ACT. IN VIEW OF THE ABOVE, THE DEDUCTION CLAIMED BY THE ASSESSEE UNDER SECTI ON 10AA OF THE ACT OF .10,06,80,541/ - WAS DISALLOWED. THE ASSESSEE HAS CLAIMED AN EXPENDITURE OF .24,98,559/ - BEING INTEREST PAID TOWARDS DELAYED PAYMENT OF TDS OF .2,82,125/ - AND SERVICE TAX OF .22,16,434/ - . SINCE THE INTEREST PAYMENT ON STATUTORY DUE S IS OF I.T.A. NO . 322 /M/ 16 3 PENAL IN NATURE, THE EXPENDITURE CLAIMED BY THE ASSESSEE WAS DISALLOWED. FROM THE FINANCIAL STATEMENT, IT WAS OBSERVED THAT THE ASSESSEE HAS DEBITED AN AMOUNT OF .47,68,131/ - TOWARDS FOREIGN EXCHANGE LOSS UNREALIZED. HOWEVER, THE ASSESSEE HAS NO T ADDED BACK THE SAME IN THE COMPUTATION OF TOTAL INCOME AND SINCE THIS EXPENSE IS NOTIONAL, THE SAME WAS ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. 3. AGAINST FINDINGS OF THE TPO, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. DRP. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE LD. DRP VIDE ITS ORDER DATED 17.12.2015 PARTLY ALLOWED THE APPEAL OF THE ASSESSEE. 4. ACCORDINGLY, THE ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) R.W.S.92CA(3) R.W.S 144C(5) OF THE ACT DATED 12.01.201 6 BY DETERMINING TOTAL INCOME OF THE ASSESSEE AT .9,49,92,014/ - . 3. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE TRIBUNAL. THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THE LD. DRP WAS NOT CORRECT IN REJECTING THE METHOD ADOPTED BY THE ASSESSEE FOR DETERMINING THE ARM S LENGTH SINCE THE NATURE OF THE MANAGEMENT SUPPORT SERVICES RECEIVED FROM ITS ASSOCIATED ENTERPRISES (AES ) IN ITS TRANSFER PRICING DOCUMENTATION MAINTAINED UNDER SECTION 92D OF THE ACT READ WITH RULE 10D. HE FURTHER S UBMITTED THAT THE ASSESSEE HAS ADOPTED TRANSACTIONAL NET I.T.A. NO . 322 /M/ 16 4 MARGIN METHOD (TNMM) IN ITS TRANSFER PRICING DOCUMENTATION, ITS OPERATING PROFIT MARGIN (AS ARRIVED AT AFTER FACTORING ITS ENTIRE MANAGEMENT SUPPORT SERVICES COST) WERE CONCLUDED AT ARM S LENGTH , THE REBY EVIDENCING THE ARM S LENGTH NATURE OF ITS INTERNATIONAL TRANSACTIONS. THEREFORE, THE LD. DRP WAS NOT CORRECT IN REJECTING THE AGGREGATED APPROACH UNDER TNMM ON UNSUBSTANTIATED BASIS AND ADOPTING TRANSACTION SPECIFIC APPROACH. IT WAS ALSO SUBMITTED THA T IN EARLIER YEARS THE TPO HAS ADOPTED AGGREGATED TNMM APPROACH AND CONCLUDED THAT THE ASSESSEE S INTERNATIONAL TRANSACTIONS WERE AT ARM S LENGTH. THEREFORE, THE TPO WAS NOT CORRECT IN DISREGARDING THE PRINCIPLE OF CONSISTENCY ALTHOUGH THE FACTS OF THE REL EVANT ASSESSMENT YEAR UNDER CONSIDERATION ARE SIMILAR TO THAT OF THE EARLIER ASSESSMENT YEAR 2009 - 10. 4. WITH REGARD TO THE DISALLOWANCE OF DEDUCTION UNDER SECTION 10AA OF THE ACT, THE AUTHORITIES BELOW WERE ERRED IN DISALLOWING THE DEDUCTION UNDER SECT ION 10AA OF THE ACT ON THE GROUND THAT THE ASSESSEE HAS NOT MADE ANY EXPORT OF SERVICES FROM INDIA AND THE SERVICES WERE PROVIDED ONLY IN INDIA. IT WAS SUBMITTED THAT THE ASSESSEE WAS PROVIDING WAREHOUSING AND LOGISTICS SERVICES TO DELL INDIA AND FAILED TO APPRECIATE THAT THE SAID SERVICES WERE RENDERED TO FOREIGN SUPPLIERS, WHICH OTHERWISE, THE SAID SERVICES WERE EXPORTED OUTSIDE INDIA. I.T.A. NO . 322 /M/ 16 5 5. WITH REGARD TO THE DISALLOWANCE ON ACCOUNT OF UNREALIZED FOREIGN EXCHANGE LOSS, THE LD. COUNSEL FOR THE ASSESSEE H AS SUBMITTED THAT THE AUTHORITIES BELOW WERE ERRED IN NOT CONSIDERING THE FACT THAT THE UNREALIZED FOREIGN EXCHANGE LOSS ARISING ON ACCOUNT OF RESTATEMENT OF DEBTORS/CREDITORS ARE IN THE NATURE OF REVENUE EXPENDITURE AND IT IS AN ALLOWABLE BUSINESS EXPENDI TURE UNDER SECTION 37(1) OF THE ACT. 6. ON THE OTHER HAND, THE LD. DR STRONGLY SUPPORTED THE ORDERS OF AUTHORITIES BELOW. 7. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. THE FIRST ISSUE R AISED IN THE APPEAL OF THE ASSESSEE RELATES TO DETERMINATION OF ARM S LENGTH PRICE UNDER SECTION 92CA OF THE ACT. THE ASSESSEE HAS ADOPTED TNMM METHOD FOR DETERMINING THE ARM S LENGTH. THE ASSESSEE WAS SHOW - CAUSED ON 04.12.2014 TO FILE ITS REPLY AND AFTER CONSIDERING THE SUBMISSIONS AND PERUSAL OF E - MAILS, ETC. THE TPO HAS OBSERVED THAT IN TRANSFER PRICING WHEREVER IT IS POSSIBLE IT IS IMPORTANT TO BENCHMARK THE AE TRANSACTIONS SEPARATELY FOR A BETTER COMPARABILITY. THE ASSESSEE MAY HAVE MANY TRANSACTIONS V IZ., SALES, PURCHASES, LOAN, GUARANTEE, ETC. BUT COMBINING THEM AND STUDYING UNDER A SINGLE METHOD WOULD NOT BE FIT TO BE CALLED AS MOST APPROPRIATE METHOD . THE TERM MOST APPROPRIATE METHOD IS OF HIGHER SUPERLATIVE LANGUAGE I.E., GIVEN THE CHOICE BETWE EN VARIOUS METHODS; HE ASSESSEE HAS TO SELECT A I.T.A. NO . 322 /M/ 16 6 METHOD WHICH WOULD GIVE A CLOSEST PROXIMITY TO THE ALP VALUE. IN SUCH A SCENARIO, COMBINING ALL THE AE TRANSACTIONS AND STUDYING UNDER TNMM IS NOT A MOST APPROPRIATE METHOD . THE PROJECT MANAGEMENT COST HAS TO BE BENCHMARKED SEPARATELY BY ANALYZING THE EACH ACTUAL SERVICES RECEIVED BY THE ASSESSEE. HENCE, THE TNMM SELECTED BY THE ASSESSEE TO BENCHMARK PROJECT MANAGEMENT COST WAS REJECTED BY THE TPO AND HELD THAT ADOPTION OF CUP WOULD THE MOST APPROPRIATE METH OD BY OBSERVING AS UNDER: I. THE ASSESSEE COMPANY HAS PAID RS.740,95,333/ - TO ITS AE M/S. YCH PTE. LTD., SINGAPORE AS MANAGEMENT FEE WHICH IS 7.86% OF THE SALES TURNOVER. THE PAYMENT WAS EXPLAINED TO BE FOR CORPORATE LEVEL MANAGEMENT AND ADMINISTRATIVE S UPPORT RELATED CHARGES, SALES & MARKETING SUPPORT RELATED CHARGES AND CROSS CHARGES, IT SUPPORT AND SOFTWARE RELATED CROSS CHARGES, LEASED LINE CHARGES, TRAVEL EXPENSES, TRADEMARK. THE TPO DISAPPROVED THE APPROACH OF THE ASSESSEE TO GROUP ALL THE SERVICES AND ANALYSED UNDER TNMM WHICH IS NOT APPROPRIATE. THE TPO SINGLED OUT PROJECT MANAGEMENT COST TO BENCHMARK SEPARATELY AND ADOPTED CUP AS MAM. II. MOST OF THE E - MAIL CORRESPONDENCES WERE FOUND TO BE ROUTINE IN NATURE REFLECTING DAY - TO - DAY COMMUNICATION W HICH IS IN THE NATURE OF GENERAL FUNCTIONS OF THE COMPANY RELATING SHARE HOLDER SERVICES AND CAN BE CATEGORIZED AS 'STEWARDSHIP SERVICES'. III. THE ASSESSEE COMPANY HAS ADMITTEDLY TRAINED PERSONNEL TO CARRY OUT KEY MANAGERIAL FUNCTIONS. IV. ASSESSEE COMPANY HAS HIGHER LEVEL MANAGERIAL FUNCTIONARIES SUCH AS DIRECTOR SALES, GM RISK & INSURANCE, COUNTRY HEAD, GM SRM, FINANCE DIRECTOR, EXECUTIVE DIRECTOR, ETC. HENCE, IT CANNOT BE SAID THAT THE COMPANY WAS NOT HAVING SENIOR AND COMPETENT HIGHER LEVEL MANAG ERS. V. THE TPO HAS RELIED ON SEVERAL COURT DECISIONS IN SUPPORT OF HIS CONCLUSION THAT THERE WAS NO COMMENSURATE SERVICE OR BENEFIT RECEIVED BY THE ASSESSEE IN LIEU OF THE AMOUNT PAID TO THE AE. I.T.A. NO . 322 /M/ 16 7 KNORR BREMESE INDIA LTD. ITAT, NEW DELHI GEM PLUS IND IA PVT. LTD, ITAT, BANGALORE VI. THE TPO HAS OBTAINED SAMPLES OF E - MAIL COMMUNICATION IN SUPPORT OF HIS OBSERVATION THAT THE SAME ARE ROUTINE DAY - TO - DAY EXCHANGES. 8. DURING THE COURSE OF DRP PROCEEDINGS, THE LD. COUNSEL FOR THE ASSESSEE HAS REITERA TED THE SUBMISSIONS AS MADE BEFORE THE TPO. DURING THE COURSE OF HEARING THE ASSESSEE WAS ASKED TO PRODUCE THE AGREEMENT WITH YCH SINGAPORE WHICH WOULD BE THE BASIS FOR PAYMENT OF MANAGEMENT SUPPORT SERVICE BY THE ASSESSEE. HOWEVER, THE ASSESSEE COULD NOT PRODUCE THE AGREEMENT EITHER BEFORE THE LD. DRP OR EVEN BEFORE THE TRIBUNAL . IT WAS SUBMITTED THAT THE AMOUNT OF MANAGEMENT SUPPORT SERVICES WAS PAID BY ASSESSEE AS ALLOCATED TO IT BY THE SINGAPORE AE. BUT, NO DETAILS OF SPECIFIC SERVICES OR THE BASIS OF A LLOCATION COULD BE FURNISHED BY THE ASSESSEE IN SUPPORT OF ITS CLAIM. THEREFORE, AFTER CONSIDERATION OF ALL ASPECTS, THE DRP WAS OF THE OPINION THAT THE DECISION OF THE TPO CANNOT BE FAULTED WITH. THE APPROACH OF TPO TO ADOPT TRANSACTION SPECIFIC ANALYSIS ALSO CANNOT BE WRONGED AS THIS APPROACH CONFIRMS TO THE BASIC PRINCIPLES OF COMPARABILITY ANALYSIS. CONSEQUENTLY, THE OBJECTION OF THE ASSESSEE WAS REJECTED BY THE DRP. IN VIEW OF THE ABOVE, WE FIND NO INFIRMITY IN THE ORDER PASSED BY THE LD. DRP AND DISMI SS THE GROUND RAISED BY THE ASSESSEE. I.T.A. NO . 322 /M/ 16 8 9 . THE NEXT ISSUE RAISED IN THE APPEAL OF THE ASSESSEE IS WITH REGARD TO THE CLAIM OF DEDUCTION UNDER SECTION 10AA OF THE ACT TO THE EXTENT OF .10,06,80,541/ - . THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE TPO FAILED TO APPRECIATE THAT THE MANAGEMENT SUPPORT SERVICES RECEIVED FROM AES ARE INEXTRICABLY LINKED TO THE LOGISTICS SER VICES RENDERED BY THE ASSESSEE IN INDIA. THE ASSESSEE HAS COMPLIED WITH THE CONDITIONS LAID DOWN FOR CLAIMING DEDUCTION UNDER SECTION 10AA OF THE ACT. THE ASSESSEE HAS OBTAINED NECESSARY APPROVAL FROM THE SEZ AUTHORITIES. FURTHER, A UNIT WAS SET UP IN THE SEZ AND BECOME AN ENTREPRENEUR AS DEFINED WITHIN THE MEANING OF SECTION 2(I) OF THE SPECIAL ECONOMIC ZONE ACT, 2005 ( SEZ ACT ). THE UNIT HAS COMMENCED OPERATIONS AND PROVIDES SERVICES TO FOREIGN PARTIES AFTER THE RELEVANT ASSESSMENT YEAR AS SPECIFIED IN T HE ACT. IN VIEW OF THE ABOVE, THE ASSESSEE HAS COMPLIED WITH THE CONDITIONS AS LAID DOWN UNDER SECTION 10AA OF THE ACT AND THEREFORE, THE ASSESSEE IS ELIGIBLE TO CLAIM DEDUCTION THEREON. THE ASSESSEE HAS ALSO FURNISHED A LEGAL OPINION SUPPORTING THE CLAIM OF DEDUCTION UNDER SECTION 10AA OF THE ACT. 1 0 . BEFORE THE LD. DRP, THE ASSESSEE HAS SUBMITTED A BRIEF DESCRIPTION OF THE OPERATIONS CARRIED OUT BY THE ASSESSEE IN THE SEZ UNIT AND THE SAME IS REPRODUCED AS UNDER: THE FOREIGN PARTIES ENTER INTO AN AGREE MENT WITH THE ASSESSEE FOR RECEIVING SUPPLY CHAIN MANAGEMENT/VENDOR MANAGED INVENTORY SERVICES. I.T.A. NO . 322 /M/ 16 9 UNDER THE TERMS OF SUCH AGREEMENT THE ASSESSEE IMPORTS THE GOODS FROM THE FOREIGN PARTIES AND STORES THE SAME IN ITS WAREHOUSE ON BEHALF OF SUCH FOREIGN PARTI ES. THE GOODS ARE SUBSEQUENTLY SUPPLIED BY THE ASSESSEE TO PARTIES IN INDIA, AS DESIGNATED BY THE FOREIGN PARTIES. IT WOULD BE PERTINENT TO NOTE THAT THE OWNERSHIP/TITLE IN THE GOODS IMPORTED (AS IMPORTER ON RECORD) BY THE ASSESSEE LIE WITH THE FOREIGN PARTIES UNTIL THEY ARE DELIVERED TO THE PARTIES IN INDIA. THE ASSESSEE PROVIDES SERVICE TO THE FOREIGN PARTIES AS PER THEIR INSTRUCTIONS. FURTHER, IN THE EVENT GOODS ARE NOT DELIVERED TO THE PARTIES IN INDIA THEN THE SAME WOULD BE SENT BACK TO THE FOREIGN PARTIES. FURTHER, THE ASSESSEE RAISES INVOICES IN CONVERTIBLE FOREIGN CURRENCY ON THE FOREIGN PARTIES FOR THE AFOREMENTIONED LOGISTICS AND SUPPLY CHAIN SERVICES PROVIDED BY IT TO THE FOREIGN PARTIES. CONSIDERING THE ABOVE ARRANGEMENT, THE ASSESSEE WIS HES TO SUBMIT THAT THE AFOREMENTIONED SERVICES ARE PROVIDED TO THE FOREIGN PARTIES OUT OF INDIA FROM THE SEZ. ACCORDINGLY, THE SAME SHALL BE REGARDED AS EXPORT OF SERVICES. IN THIS REGARD, IT WOULD BE PERTINENT TO NOTE THAT THE TERM 'EXPORT IN RELATION T O THE SEZ' HAS BEEN DEFINED IN EXPLANATION I TO SECTION 10AA OF THE ACT. THE RELEVANT EXTRACT OF THE SAME HAS BEEN REPRODUCED BELOW: 'MEANS TAKING GOODS OR PROVIDING SERVICES OUT OF INDIA FROM A SPECIAL ECONOMIC ZONE BY LAND, SEA, AIR, OR BY ANY OTHER MO DE, WHETHER PHYSICAL OR OTHERWISE . AS IT IS EVIDENT FROM THE ARRANGEMENT, THE ASSESSEE SUBMITS THAT THE AFOREMENTIONED LOGISTICS AND SUPPLY CHAIN SERVICES ARE PROVIDED BY IT TO THE FOREIGN PARTIES LOCATED OUTSIDE INDIA FROM ITS UNIT IN SEZ. MOREOVER, THE ASSESSEE NEITHER RENDERS ANY SERVICES TO THE PARTIES IN INDIA NOR DOES IT RECEIVE ANY CONSIDERATION FROM THOSE PARTIES IN RESPECT OF THE CLAIM MADE UNDER SECTION 10AA OF THE ACT. THEREFORE, THE ASSESSEE SUBMITS THAT SINCE THE SERVICES HAVE BEEN PROVIDED O UT OF INDIA FROM THE SEZ, THE ASSESSEE WOULD BE ELIGIBLE TO CLAIM DEDUCTION UNDER SECTION 10AA OF THE ACT. I.T.A. NO . 322 /M/ 16 10 FURTHER, THE ASSESSEE REITERATES ITS CLAIM THAT THE SAID SERVICES ARE EXPORTED OUT OF INDIA AND RECOGNIZED BY THE SEZ AUTHORITIES BY SUBMITTING THE BELOW: ANNUAL PERFORMANCE REPORT TO THE SEZ AUTHORITIES, WHEREIN THE SUBJECT SERVICE IS SHOWN AS EXPORT RESULTING IN NET FOREIGN EXCHANGE INFLOW TO THE ASSESSEE. THE SAME HAS BEEN ACKNOWLEDGED BY THE SEZ AUTHORITIES. REFER ENCLOSURE EXHIBIT 10. FORM 5 6F (CHARTERED ACCOUNTANT CERTIFICATE), ENCLOSED AS EXHIBIT 11, WHICH SUBSTANTIATES THE CLAIM OF DEDUCTION UNDER SECTION 10AA OF THE ACT. 11 . THE LD. DRP HAS FURTHER OBSERVED THE ASSESSING OFFICER HAS LISTED OUT THE CONDITIONS TO BE SATISFIED FOR CLAIM OF DEDUCTION U/S. 10AA AT PAGE 2 OF HIS ORDER. AFTER EXAMINING THE SUBMISSION OF THE ASSESSEE THE ASSESSING OFFICER HAS OBSERVED THAT: 'FROM THE ABOVE IT IS EVIDENT THAT THE ASSESSEE COMPANY PROVIDING SERVICES ONLY IN INDIA. THE ASSESSEE IS NOT ELIGIBLE TO CLAIM DEDUCTION U/S.10 AA BECAUSE, THERE WAS NO EXPORT OF SERVICES FROM INDIA. FURTHER, THE ASSESSEE HAS ONLY RECEIVED PAYMENTS IN FOREIGN CURRENCIES FROM THE SUPPLIERS OF DELL FOR PROVIDING WAREHOUSING AND LOGISTIC SERVICES TO DELL IN INDIA. THE SERVICE P ROVIDED IN INDIA WAS CONSUMED WITHOUT REVERTING BACK TO FOREIGN PRINCIPALS FOR CONSUMPTION ABROAD. ULTIMATE OUTCOME OF SERVICE HAVING BEEN EXHAUSTED IN INDIA, THERE APPEARS TO BE NO EXPORT OF SUCH SERVICES SINCE EFFORTS IN INDIA GENERATED SERVICE RECIPIENT IN INDIA ONLY. THE BENEFIT OF SERVICE TERMINATED IN INDIA ONLY WITHOUT TRAVELLING ABROAD. SO, MERE RECEIPT OF PAYMENTS IN FOREIGN CURRENCY DOES NOT MAKE THE ASSESSEE ELIGIBLE TO CLAIM DEDUCTION U/S.10AA.' 12. THE SUBMISSION S OF THE ASSESSEE AND THE REA SONING AND JUSTIFICATION ADVANCED BY THE ASSESSING OFFICER FOR DISALLOWING DEDUCTION UNDER SECTION 10AA OF THE ACT HAVE BEEN CONSIDERED BY THE LD. DRP AND TO CLARIFY AS TO WHETHER PROVIDING SERVICES FROM SEZ WITHIN INDIA WILL AMOUNT TO EXPORT OF I.T.A. NO . 322 /M/ 16 11 SERVICES T O FOREIGN COUNTRY SO AS TO QUALIFY FOR DEDUCTION UNDER SECTION 10AA OF THE ACT, THE SAME IS REPRODUCED AS UNDER: T HE SECTION 10AA( I )(I) READS AS UNDER: '(I) HUNDRED PERCENT OF PROFITS AND GAINS DERIVED FROM THE EXPORT, OF SUCH ARTICLES OR THINK OR FROM SE RVICES FOR A PERIOD OF 5 CONSECUTIVE ASSESSMENT YEAR ..... ' 13. AFTER CONSIDERING THE ABOVE PROVISIONS, SUBMISSIONS OF THE ASSESSEE AND ALSO THE OBSERVATIONS OF THE ASSESSING OFFICER, THE LD. DRP HAS OBSERVED THAT THE PLAIN READING OF THE SECTION MAKES I T CLEAR THAT THE PROFIT AND GAIN HAS TO BE DERIVED FROM THE EXPORT OF ( I .) ARTICLES OR ( II. ) THINGS OR ( III. ) SERVICES IN ORDER TO BE ELIGIBLE FOR DEDUCTION UNDER THIS SECTION. EXPORT WILL NECESSARILY MEAN SENDING THE ARTICLES, OR THINGS OR SERVICES OUT OF INDIA. THE ATTEMPT OF ASSESSEE TO EXPLAIN THAT THE TERM 'EXPORT' HAS BEEN USED IN THE CONTEXT OF 'ARTICLE OR THINGS' AND NOT IN THE CONTEXT OF THE WORD 'SERVICES' MEANING THERE BY THAT THE REQUIREMENT OF EXPORT IS ONLY FOR ARTICLES AND THINGS AND NOT FOR SERVICES, IS NOT CORRECT. ALL THE THREE SEGMENTS I.E. ARTICLES, THINGS, SERVICES ARE REQUIRED TO BE EXPORTED SO THAT THE PROFITS AND GAINS FROM THE EXPORT IN FOREIGN CURRENCY CAN BE ELIGIBLE FOR DEDUCTION U/S. 10AA. THEREFORE, AFTER DUE CONSIDERATION, THE LD. DRP WAS OF THE VIEW THAT THE OBJECTION OF THE ASSESSEE CANNOT BE UPHELD. 14. ON BEING AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. THE LD. COUNSEL FOR THE ASSESSEE HAS REITERATED THE SUBMISSIONS AS MADE I.T.A. NO . 322 /M/ 16 12 BEFORE THE AUTHORITIES BELOW. ON T HE OTHER HAND, THE LD. DR SUPPORTED THE ORDERS OF AUTHORITIES BELOW. 15. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. IT IS AN ADMITTED FACT THAT T HE ASSESSEE IS A UNIT SET UP IN THE SEZ AND AN ENTREPRENEUR AS DEFINED IN SECTION 2(J) OF THE SPECIAL ECONOMIC ZONE ACT, 2005 ('SEZ ACT'); AND THE UNIT HAS COMMENCED OPERATIONS AND PROVIDES SERVICES TO FOREIGN PARTIES AFTER THE RELEVANT ASSESSMENT YEAR AS SPECIFIED IN THE ACT. JUST BECAUSE THE ASSES SEE IS A UNIT IN THE SEZ, IT CANNOT CLAIM THE DEDUCTION UNDER SECTION 10AA OF THE ACT. TO CLAIM THE DEDUCTION UNDER SECTION 10AA OF THE ACT, THE ASSESSEE SHOULD HAVE EXPORTED ANY ARTICLES OR THINGS OR SERVICES. EXPORT WILL NECESSARILY MEAN SENDING THE ARTI CLES, OR THINGS OR SERVICES OUT OF INDIA. BUT, IN THE INSTANT CASE, THE ASSESSEE HAS PROVIDED WAREHOUSING AND LOGISTIC SERVICES TO DELL IN INDIA AND RECEIVED PAYMENTS IN FOREIGN CURRENCIES, WHICH CANNOT AMOUNT TO EXPORT OF ANY ARTICLE OR THING OR SERVICES OUT OF INDIA. THE LD. AR HAS SUBMITTED THAT THE SEZ ACT, 200 6 SHALL HAVE THE OVERRIDING EFFECT ON INCOME TAX ACT, 1961 IN VIEW OF THE SECTION 51 OF THAT ACT. FOR THAT PURPOSE, HE RELIED ON VARIOUS JUDGEMENTS LIKE SURYA ROSHNI LTD. V. COMMISSIONER OF CENTR AL EXCISE, ROHTAK 2012 (285) ELT 518 (TRI. - DELHI). ACCORDING TO HIM, AS PER RULE 76 OF SEZ RULES, 2006, THE SERVICES RENDERED IN RESPECT OF FOLLOWING ALSO CONSIDERED AS SERVICES AMOUNTING TO RENDERING SERVICES: I.T.A. NO . 322 /M/ 16 13 (A) WAREHOUSING (B) TRANSPORT SERVICES AND S ERVICES ANXILLARY TO ALL MODES OF TRANSPORT, PIPELINES TRANSPORT. FROM THAT ANALOGY, HE SUBMITS THAT THE WAREHOUSING SERVICES RENDERED BY THE ASSESSEE TO NON - RESIDENT IN INDIA IN RESPECT OF INCOME IN CONVERTIBLE FOREIGN EXCHANGE ARE ELIGIBLE FOR EXEMPTION UNDER SECTION 10AA OF THE ACT. FURTHER, HE RELIED ON THE JUDGEMENT OF THE JAIPUR BENCH OF THE TRIBUNAL IN THE CASE OF ACIT V. GOENKA DIAMONDS & JEWELLERS LTD. 50 SOT 307 (JP), WHEREIN IT WAS HELD THAT THE WORD SERVICES AS MENTIONED IN SECTION 10AA OF TH E ACT CANNOT BE CONSTRUED INCONSISTENTLY WITH THE DEFINITION OF THE TERM SERVICES GIVEN IN THE SEZ ACT. UNDER THE SEZ ACT, THE TRADING IS INCLUDED IN THE SERVICES PROVIDED THE TRADING IS EXPORT OF IMPORTED GOODS. 16. IN OUR OPINION, THE ABOVE ARGUMENT OF THE LD. AR OF THE ASSESSEE CANNOT BE CONSIDERED TO THE FACTS OF THE PRESENT CASE. IN THE PRESENT CASE, THE SERVICE WAS RENDERED BY THE ASSESSEE IN INDIA THOUGH THE RECEIPT WAS IN FOREIGN CURRENCY AND FOR ANY STRETCH OF IMAGINATION, IT CANNOT BE CONSIDER ED AS EXPORT IN TERMS OF SECTION 10AA OF THE ACT. ACCORDINGLY, THE GROUND RAISED BY THE ASSESSEE IS DISMISSED. 1 7 . THE NEXT GROUND RAISED IN THE APPEAL OF THE ASSESSEE RELATES TO DISALLOWANCE OF UNREALIZED FOREIGN EXCHANGE LOSS TREATING IT AS NOTIONAL EX PENSES. I.T.A. NO . 322 /M/ 16 14 1 8 . THE ASSESSEE HAS INCURRED UNREALIZED FOREIGN EXCHANGE LOSS AMOUNT TO .47,65,131/ - AND DEBITED THE SAME TO THE PROFIT AND LOSS ACCOUNT DURING THE YEAR UNDER CONSIDERATION. AFTER EXAMINING THE FINANCIAL STATEMENTS AND THE BREAK - UP OF FOREIGN EXCHANGE LOSS DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER HAS NOT ACCEPTED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT THE SAID EXPENDITURE IS NOTIONAL IN NATURE. 1 9 . BEFORE THE LD. DRP, THE A SSESSEE HAS SUBMITTED THAT THE UNREALIZED FOREIGN EXCHANGE LOSS AMOUNTING TO . 47 , 65,131 / - IS IN THE NATURE OF REVENU E AND HENCE SHOULD BE ALLOWABLE AS BUSINESS EXPENDITURE UNDER SECTION 37(1) OF THE AC T. IT IS SEEN THAT THE CBDT HAS ISSUED INSTRUCTION NO.3/2010 CLARIFYING THE TREATMENT OF GAIN/LOSS ARISING FROM ACTUAL TRANSACTIONS IN FOREX DERIVATIVES. THE INSTRUCTION I S BINDING ON THE DEPARTMENT. THE ASSESSING OFFICER HAS FOLLOWED THE INSTRUCTION AND HAS HELD THAT TH E UNREALISED LOSS AS A RESULT OF FLUCTUATION IN FOREIGN CURRENCY AS ON BALANCE SHEET DATE COULD NOT BE ALLOWED. THE RELIANCE OF ASSESSEE IN DECISION OF WOODWARD GOVERNOR INDIA PVT. LTD. 312 ITR 254 (SC) WILL NOT HELP AS THE PORTION OF LOSS IS NOTIONAL AND UNREALISED. THEREFORE, THE DECISION OF THE ASSESSING OFFICER IS UPHELD AND THE OBJECTION OF THE ASSESSEE IS REJECTED. 20 . BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE SIMPLY REITERATED THE SUBMISSIONS AS MADE BEFORE THE AUTHORITIES BELOW. THE LD. COUNSEL FOR THE ASSESSEE COULD NOT ABLE TO DEMONSTRATE AS TO HOW THE EXPENDITURE, WHICH IS I.T.A. NO . 322 /M/ 16 15 IN THE NATURE OF NOTIONAL COULD BE TREATED AS AN ALLOWABLE AS BUSINESS EXPENDITURE UNDER SECTION 37(1) OF THE ACT. 2 1 . WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS ON RE CORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. I T IS NOT IN DISPUTE THAT THE ASSESSEE HAS BEEN CONSISTENTLY FOLLOWING A SYSTEM OF ACCOUNTING FOR RECORDING THE EXCHANGE VARIATION BOTH WHEN IT IS A LOSS AS WELL AS WHEN THERE IS A GAIN AS ON THE LAST DAY OF EVERY FINANCIAL YEAR. IT IS ALSO NOT IN DISPUTE THAT THE FOREIGN EXCHANGE FLUCTUATION IS NOT ON CAPITAL ACCOUNT. ACCORDING TO THE REVENUE AUTHORITIES THE LOSS OR GAIN FOR FOREIGN EXCHANGE SHOULD BE TAKEN ONLY AT THE TIME OF REMITTANCE AND ONLY THEN THERE CAN BE AN ACCRUAL. THIS ISSUE HAS BEEN CONSIDERED BY THE SPECIAL BENCH OF THE TRIBUNAL IN T HE CASE OF OIL & NATURAL GAS CORPN. LTD. VS. D Y. CIT (2002) 77 TT J ( D EL)(SB) 387 : (2002) 83 IT D 151 ( D EL)(SB). THE SAID BENCH HAS HELD THAT IN THE CASE WHERE AN ASSESSEE CONSISTENTLY FOLLOWS A SYSTEM OF ACCOUNTING BY WHICH THE FLUCTUATION IN FOREIGN EXCHANGE CURRENCY IS DULY ACCOUNTED FOR AT THE END OF THE ACCOUNTING YEAR, THE SAME CANNOT BE SAID TO BE NOTIONAL AND IT CANNOT BE SAID THAT THE ASSESSEE COULD CLAI M THE FLUCTUATION LOSS OR GAIN ONLY IN THE YEAR WHEN THE LOAN WAS ACTUALLY REPAID. THE TRIBUNAL HELD THAT THE LOSS WAS NOT A NOTIONAL LOSS AND WAS TO BE ALLOWED AS DEDUCTION. THE TRIBUNAL ALSO REFERRED TO THE AS - 2 OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (THE ASSESSEE IN THE PRESENT CASE FOLLOWS SUCH AN ACCOUNTING STANDARD). IN VIEW OF THE ABOVE THE LOSS ON ACCOUNT OF FOREIGN EXCHANGE CLAIMED BY THE I.T.A. NO . 322 /M/ 16 16 ASSESSEE DESERVES TO BE ALLOWED AND ACCORDINGLY THE GROUND RAISED BY THE ASSESSEE IS ALLOWED. 22 . WITH REGARD TO THE OTHER GROUNDS SUCH AS, LEVY OF PENALTY, NON - CREDIT OF TDS AND LEVY OF INTEREST UNDER SECTION 234A AND 234B OF THE ACT, THE LD. DRP HAS OBSERVED THAT LEVY OF INTEREST IS CONSEQUENTIAL AND THEREFORE, DIRECTED THE ASSESSING OFFICER TO CALC ULATE THE INTEREST AFTER GIVING EFFECT TO THE ORDER OF THE DRP. IT WAS ALSO HELD THAT THE ASSESSING OFFICER CANNOT BE PREVENTED FROM INITIATION OF PENALTY PROCEEDINGS. WITH REGARD TO NON - CREDIT OF TDS, THE ASSESSING OFFICER WAS DIRECTED TO VERIFY THE SAME AND ALLOW CREDIT AS PER LAW. IN VIEW OF THE ABOVE FINDINGS OF THE LD. DRP, WHICH IS IN ORDER, WE ARE OF THE OPINION THAT OUR INTERFERENCE IS NOT CALLED FOR. THUS, THE GROUNDS RAISED BY THE ASSESSEE ARE DISMISSED. 2 3 . IN THE RESULT, THE APPEAL FILED BY TH E ASSESSEE IS PARTLY ALLOWED . ORDER PRONOUNCED ON THE 30 TH JUNE , 201 6 AT CHENNAI. SD/ - SD/ - ( CHANDRA POOJARI ) ACCOUNTANT MEMBER ( DUVVURU RL REDDY ) JUDICIAL MEMBER CHENNAI, DATED, THE 30 . 0 6 .201 6 VM/ - / COPY TO: 1. / A PPELLANT , 2. / RESPONDENT , 3. ( ) / CIT(A) , 4. / CIT , 5. / DR & 6. / GF.