THE ACIT, Visakhapatnam V. Miracle Software Systems (India) PVt. Ltd., Visakhapatnam

ITA 5/VIZ/2016

• Counselvise Citation: [2016] 130 COUNSELVISE.COM (IT) 9718 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 10 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-11-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2011-2012
• Appeal Filed On: 07-01-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: T S N MURTHY
• Keywords: Corroborative evidences; Capital expenditure
• Section: 143(3); 142(1); 37(1); 37

Judgement Text

ITA NOS.711, 712, 739 & 740/VIZAG/2013, 403/VIZAG/2 015 & 5/VIZAG/2016 MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD., VISAKHAPA TNAM 1 , , IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM . , . , $ BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI G. MANJUNATHA, ACCOUNTANT MEMBER ./I.T.A.NO.711/VIZAG/2013 ( / ASSESSMENT YEAR: 2009-10) MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD. VISAKHAPATNAM VS. JCIT, RANGE - 3, VISAKHAPATNAM [PAN: AABCM4988R ] ( % / APPELLANT) ( &'% / RESPONDENT) ./I.T.A.NO.739/VIZAG/2013 ( / ASSESSMENT YEAR: 2009-10) DCIT, CIRCLE - 3(1), VISAKHAPATNAM VS. MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD. VISAKHAPATNAM ( % / APPELLANT) ( &'% / RESPONDENT) ./I.T.A.NO.712/VIZAG/2013 ( / ASSESSMENT YEAR: 2010-11) MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD. VISAKHAPATNAM VS. D CIT, CIRCLE - 3(1),, RANGE - 3, VISAKHAPATNAM ( % / APPELLANT) ( &'% / RESPONDENT) ITA NOS.711, 712, 739 & 740/VIZAG/2013, 403/VIZAG/2 015 & 5/VIZAG/2016 MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD., VISAKHAPA TNAM 2 ./I.T.A.NO.740/VIZAG/2013 ( / ASSESSMENT YEAR: 2010-11) DCIT, CIRCLE - 3(1), VISAKHAPATNAM VS. MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD. VISAKHAPATNAM ( % / APPELLANT) ( &'% / RESPONDENT) ./I.T.A.NO.403/VIZAG/2015 ( / ASSESSMENT YEAR: 2011-12) MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD. VISAKHAPATNAM VS. DCIT, CIRCLE - 3(1), RANGE - 3, VISAKHAPATNAM ( % / APPELLANT) ( &'% / RESPONDENT) ./I.T.A.NO.5/VIZAG/2016 ( / ASSESSMENT YEAR: 2011-12) ACIT, CIRCLE - 3(1), VISAKHAPATNAM VS. MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD. VISAKHAPATNAM ( % / APPELLANT) ( &'% / RESPONDENT) / APPELLANT BY : SHRI C. SUBRAHMANYAM, AR / RESPONDENT BY : SHRI T.S.N. MURTHY, DR / DATE OF HEARING : 04.10.2016 / DATE OF PRONOUNCEMENT : 25.11.2016 ITA NOS.711, 712, 739 & 740/VIZAG/2013, 403/VIZAG/2 015 & 5/VIZAG/2016 MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD., VISAKHAPA TNAM 3 / O R D E R PER G. MANJUNATHA, ACCOUNTANT MEMBER: THESE CROSS APPEALS FILED BY THE ASSESSEE AND REVE NUE ARE DIRECTED AGAINST SEPARATE, BUT IDENTICAL ORDERS OF THE CIT(A), VISAKHAPATNAM FOR THE ASSESSMENT YEARS 2009-10, 201 0-11 & 2011-12. SINCE, THE FACTS ARE IDENTICAL AND ISSUES ARE COMMO N, THEY ARE CLUBBED, HEARD TOGETHER AND DISPOSED-OFF BY WAY OF THIS COMM ON ORDER FOR THE SAKE OF CONVENIENCE. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A COMPANY ENGAGED IN THE BUSINESS OF DEVELOPMENT AND EXPORT O F SOFTWARE, FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEARS 2009-10 T O 2011-12 DECLARING TOTAL INCOME OF ` 2,02,17,080/-, ` 89,65,090/- & ` 1,18,60,420/- RESPECTIVELY. THE CASE HAS BEEN SELECTED FOR SCRUT INY UNDER CASS, ACCORDINGLY, NOTICES U/S 143(2) & 142(1) OF THE INC OME TAX ACT, 1961 (HEREINAFTER CALLED AS 'THE ACT') WERE ISSUED. IN RESPONSE TO NOTICES, THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE APPEARED FROM TIME TO TIME AND PRODUCED RELEVANT INFORMATION ALONG WITH BOOKS OF ACCOUNTS. THE ASSESSMENT FOR THE ASSESSMENT YEARS 2009-10 TO 2011 -12 WERE COMPLETED U/S 143(3) OF THE ACT, DETERMINING TOTAL INCOME OF ` 5,21,64,320/-, ` 4,92,30,000/- & ` 4,54,52,730/- RESPECTIVELY, INTER-ALIA ITA NOS.711, 712, 739 & 740/VIZAG/2013, 403/VIZAG/2 015 & 5/VIZAG/2016 MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD., VISAKHAPA TNAM 4 MAKING ADDITIONS TOWARDS DISALLOWANCE OF EXEMPTION U/S 10A OF THE ACT, DISALLOWANCE OF CONSULTANCY CHARGES PAID TO M/S. IT LOKAM SERVICES INDIA PVT. LTD. AND DISALLOWANCE ON EMPLOYEES CONTR IBUTION TO PROVIDENT FUND. 3. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A), THE ASSESSEE HAS FILED ELABORATE WRITTEN SUBMISSIONS. THE CIT(A) AFTER CONSIDERING THE EXPLANATIONS FILED BY THE ASSESSEE, PARTLY ALLOWED THE APPEAL FILED BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2009-10 TO 2011-12. THE CIT(A) FOR THE REASONS RECORDED IN HIS ORDER, DIRECTED THE A.O. TO ALLOW E XEMPTION U/S 10A OF THE ACT TOWARDS EXPORT PROFIT, HOWEVER, CONFIRMED A DDITIONS MADE TOWARDS DISALLOWANCE OF CONSULTANCY CHARGES AND DIS ALLOWANCE OF EMPLOYEES CONTRIBUTION TO PROVIDENT FUND FOR THE AS SESSMENT YEARS 2009-10 TO 2011-12. AGGRIEVED BY THE CIT(A) ORDER, THE ASSESSEE AS WELL AS REVENUE ARE IN APPEAL BEFORE US. 4. THE ASSESSEE AND REVENUE HAVE FILED COMMON GROUN DS FOR ALL THE ASSESSMENT YEARS. FROM THESE GROUNDS OF APPEAL, TH E ASSESSEE HAS AGITATED TWO ISSUES I.E. (1) DISALLOWANCE OF CONSUL TANCY CHARGES PAID TO M/S. I.T. LOKAM SERVICES INDIA PVT. LTD. (2) DISAL LOWANCE OF EMPLOYEES CONTRIBUTION TO PROVIDENT FUND. THE REVENUE HAS RA ISED COMMON ISSUE ITA NOS.711, 712, 739 & 740/VIZAG/2013, 403/VIZAG/2 015 & 5/VIZAG/2016 MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD., VISAKHAPA TNAM 5 FOR ALL THE ASSESSMENT YEARS, WHEREIN THE REVENUE H AS CHALLENGED DELETIONS MADE BY THE CIT(A) TOWARDS EXPORT PROFIT UNDER THE PROVISIONS OF SECTION 10A OF THE ACT. 5. THE FIRST ISSUE THAT CAME UP FOR OUR CONSIDERATI ON IS ADDITIONS TOWARDS CONSULTANCY CHARGES PAID TO M/S. I.T. LOKAM SERVICES INDIA PVT. LTD. THE FACTS RELATING TO THE ISSUE ARE THAT THE ASSESSEE HAS PAID CONSULTANCY CHARGES TO M/S. I.T. LOKAM SERVICES IND IA PVT. LTD., WHICH IS A SUBSIDIARY COMPANY OF THE ASSESSEE. TO ASCERTAIN THE NATURE OF CONSULTANCY CHARGES PAID, THE A.O. SOUGHT TO LOOK I NTO THE MATTER OF SERVICES RENDERED BY THE ASSESSEE AND JUSTIFICATION FOR THE PAYMENT. ACCORDINGLY, ISSUED SHOW CAUSE NOTICE AND ASKED TO EXPLAIN AND JUSTIFY THE CONSULTANCY CHARGES PAID TO M/S. I.T. LOKAM SER VICES INDIA PVT. LTD. IN RESPONSE TO SHOW CAUSE NOTICE, THE ASSESSEE SUBM ITTED THAT IT IS ENGAGED IN THE BUSINESS OF DEVELOPMENT OF SOFTWARE AND RELATED CONSULTANCY SERVICES. IN THE PROCESS, IT HAS ENTER ED INTO AN AGREEMENT WITH M/S. IBM INDIA PVT. LTD. FOR PROVIDING SOFTWAR E SUPPORT DEVELOPMENT ACTIVITIES INCLUDING BUT NOT LIMITED TO SOFTWARE DEVELOPMENT, SOFTWARE TESTING, PUBLICATION DEVELOPM ENT, PROGRAMME MAINTENANCE, SOFTWARE DEVELOPMENT SUPPORT AND OR SU CH OTHER ACTIVITIES AS MAY BE DEFINED BY THE BUYER TO THE SUPPLIER IN T HE RELEVANT WORK ITA NOS.711, 712, 739 & 740/VIZAG/2013, 403/VIZAG/2 015 & 5/VIZAG/2016 MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD., VISAKHAPA TNAM 6 ASSIGNMENT. THE ASSESSEE FURTHER SUBMITTED THAT TO COMPLETE ITS WORK ORDERS, IT HAS OUTSOURCED SOME OF ITS DOMESTIC PROJ ECT WORK TO M/S. I.T. LOKAM SERVICES INDIA PVT. LTD. FOR HIRING SKILLED S OFTWARE PROFESSIONALS TO BE DEPLOYED AT CLIENT PLACE. IT WAS FURTHER SUBMIT TED THAT THE CONSULTANCY IS TOWARDS SERVICE RENDERED BY THE PERS ONNEL IN THE FIELDS OF SOFTWARE SUCH AS JAWA/J2EE/DB2/WEB SPHERE TECHNOLOG IES, ETC. THE ASSESSEE COMPANY MAINLY EMPLOYED ITS OWN STAFF TO P ROVIDE SERVICES TO CLIENTS, HOWEVER, IN CASES OF SHORT FALL OF THE PER SONNEL, IT TAKE SUPPORT FROM OTHER COMPANIES WHO HAD SUCH KIND OF EXPERTISE AND SKILLED EMPLOYEES. DURING THE FINANCIAL YEAR RELEVANT TO A SSESSMENT YEAR 2009- 10 TO 2011-12, IT HAS OUTSOURCED PART OF ITS PROJEC T WORK TO M/S. I.T. LOKAM SERVICES INDIA PVT. LTD. AND PAID CONSULTANCY CHARGES. THE SAID CONSULTANCY CHARGES HAS BEEN PAID THROUGH PROPER BA NKING CHANNELS AFTER COMPLIED WITH TDS PROVISIONS WHEREVER APPLICA BLE. TO SUPPORT ITS ARGUMENTS FILED NECESSARY BILLS AND VOUCHERS ALONG WITH TIME SHEETS CERTIFIED BY THE CLIENTS TO PROVE THE JUSTIFICATION FOR PAYMENT OF CONSULTANCY CHARGES. 6. THE A.O. AFTER CONSIDERING THE EXPLANATIONS OF T HE ASSESSEE HELD THAT THE ASSESSEE, FAILED TO PROVE THE CONSULTANCY CHARGES PAID TO M/S. I.T. LOKAM SERVICES INDIA PVT. LTD. WITH NECESSARY SUPPORTING EVIDENCES. ITA NOS.711, 712, 739 & 740/VIZAG/2013, 403/VIZAG/2 015 & 5/VIZAG/2016 MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD., VISAKHAPA TNAM 7 THOUGH, THE ASSESSEE CLAIMS TO HAVE PAID CONSULTANC Y CHARGES TOWARDS OUTSOURCED PART OF ITS PROJECT WORK TO M/S. I.T. LO KAM SERVICES INDIA PVT. LTD. FAILED TO PROVE THE NECESSITY OF MAKING S UCH PAYMENTS AND ALSO FAILED TO PROVE THE NEXUS BETWEEN CONSULTANCY CHARG ES PAID TO M/S. I.T. LOKAM SERVICES INDIA PVT. LTD. AND EARNING OF REVEN UE. THE A.O. FURTHER OBSERVED THAT TO CLAIM ANY EXPENDITURE TO BE DEDUCT IBLE UNDER THE PROVISIONS OF SECTION 37 OF THE ACT, THE ONUS IS ON THE ASSESSEE TO PROVE BEYOND DOUBT WITH NECESSARY EVIDENCES THAT THE ASSE SSEE HAS INCURRED SAID EXPENDITURE WHOLLY AND EXCLUSIVELY FOR THE PUR POSE OF ITS BUSINESS. THE FACT THAT THE ASSESSEE HAD EFFECTED TDS ON THES E PAYMENTS DO NOT IMPART THE BUSINESS CHARACTER TO AN EXPENDITURE WHI CH OTHERWISE DO NOT POSSESS SUCH INGREDIENTS. IN VIEW OF THE ASSESSEE S INABILITY TO SPECIFICALLY DEMONSTRATE THE NATURE OF CONSULTANCY SERVICES OBTAINED FROM ITS SUBSIDIARY M/S. I.T. LOKAM SERVICES INDIA PVT. LTD. HELD THAT THE ALLEGED EXPENDITURE TOWARDS CONSULTANCY CHARGES PUR PORTEDLY PAID TO M/S. I.T. LOKAM SERVICES INDIA PVT. LTD. HAS NO NEX US WITH THE BUSINESS OF THE ASSESSEE. ACCORDINGLY, DISALLOWED CONSULTAN CY CHARGES PAID TO M/S. I.T. LOKAM SERVICES INDIA PVT. LTD. FOR THE AS SESSMENT YEARS 2009- 10 TO 2011-12. ITA NOS.711, 712, 739 & 740/VIZAG/2013, 403/VIZAG/2 015 & 5/VIZAG/2016 MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD., VISAKHAPA TNAM 8 7. THE LD. A.R. FOR THE ASSESSEE SUBMITTED THAT THE LD. CIT(A) ERRED IN CONFIRMING THE ADDITIONS MADE BY THE A.O. TOWARD S DISALLOWANCE OF CONSULTANCY CHARGES PAID TO M/S. I.T. LOKAM SERVICE S INDIA PVT. LTD., DESPITE PROVING EXPENDITURE WITH NECESSARY SUPPORTI NG BILLS AND VOUCHERS. THE A.R. FURTHER SUBMITTED THAT THE ASSE SSEE COMPANY IS IN THE BUSINESS OF DEVELOPMENT OF SOFTWARE AND EXPORT IS ENTERED INTO AGREEMENT WITH M/S. IBM INDIA PVT. LTD. FOR PROVIDI NG SOFTWARE DEVELOPMENT RELATED SERVICES. IN THE PROCESS, THE ASSESSEE COMPANY ENTERED INTO ANOTHER AGREEMENT WITH M/S. I.T. LOKAM SERVICES INDIA PVT. LTD. FOR PROVIDING SOFTWARE SUPPORT SERVICES IN CON NECTION WITH THE PROJECT WORK UNDER TAKEN BY THE ASSESSEE COMPANY WI TH M/S. IBM INDIA PVT. LTD. AS PER THE TERMS AND CONDITIONS OF AGREE MENT WITH M/S. IBM INDIA PVT. LTD., THE ASSESSEE COMPANY NEEDS TO PROV IDE REQUIRED NUMBER OF SKILLED AND TRAINED SOFTWARE PROFESSIONALS. SIN CE, THE ASSESSEE COMPANY DOES NOT HAVE REQUIRED NUMBER OF EMPLOYEES ON ITS OWN, IT HAS SUB CONTRACTED PART OF WORK TO M/S. I.T. LOKAM SERVICES INDIA PVT. LTD. FOR WHICH IT HAS PAID CONSULTANCY CHARGES. TH E A.R. FURTHER SUBMITTED THAT THE ASSESSEE HAS PAID CONSULTANCY CH ARGES THROUGH PROPER BANKING CHANNELS AFTER DEDUCTING APPLICABLE TDS UNDER THE PROVISIONS OF SECTION 194J OF THE ACT. THEREFORE, THE A.O. WAS NOT CORRECT IN DISALLOWING THE ENTIRE EXPENDITURE BY HO LDING THAT THE ITA NOS.711, 712, 739 & 740/VIZAG/2013, 403/VIZAG/2 015 & 5/VIZAG/2016 MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD., VISAKHAPA TNAM 9 ASSESSEE FAILED TO PROVE THE NEXUS BETWEEN CONSULTA NCY CHARGES AND EARNING OF INCOME. 8. THE A.R. FURTHER SUBMITTED THAT THE LD. CIT(A) F AILED TO APPRECIATE THE FACT THAT THE ASSESSEE CANNOT GENERATE REVENUE UNLESS EXPENDITURE IS INCURRED. IT IS ELEMENTARY THAT WHEN THERE IS A N INCOME, THERE SHOULD TO BE EXPENDITURE RELATED TO EARNING OF INCOME. IT WAS FURTHER ARGUED THAT IT IS APPROPRIATE TO STATE HERE THAT M/S. I.T. LOKAM SERVICES INDIA PVT. LTD. HAS BEEN SUBJECT TO SCRUTINY ASSESSMENTS, WHEREIN THE ASSESSING OFFICER WHILE COMPLETING THE ASSESSMENT U NDER QUESTION, HAS ACCEPTED RECEIPT AS WELL AS EXPENDITURE INCURRED FR OM OUT OF THESE RECEIPTS. THE A.R. FURTHER SUBMITTED THAT THE RECI PIENT M/S. I.T. LOKAM SERVICES INDIA PVT. LTD. HAVING GENERATED REVENUE F ROM ASSESSEE COMPANY HAS ITSELF PAID SALARIES TO ITS EMPLOYEES N UMBERING 45 TO 50 WHICH IS ALMOST 50% OF ITS RECEIPTS BY WAY OF BANK TRANSFERS TO THE RESPECTIVE ACCOUNTS OF THE EMPLOYEES DULY DEDUCTING TAX AT SOURCE WHEREVER APPLICABLE AND PROOF OF WHICH HAS BEEN FUR NISHED. ALL THESE FACTS WERE EXPLAINED DURING THE COURSE OF ASSESSMEN T PROCEEDINGS, THEREFORE, THE A.O. WAS NOT CORRECT IN DISALLOWING THE CONSULTANCY CHARGES PAID. IT WAS FURTHER ARGUED THAT EVEN ASSU MING THAT THE PAYMENTS ARE FICTITIOUS AND UNPROVED, IT WILL LEAD TO WRONG CONCLUSION OF ITA NOS.711, 712, 739 & 740/VIZAG/2013, 403/VIZAG/2 015 & 5/VIZAG/2016 MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD., VISAKHAPA TNAM 10 MARGINS EARNED BY THE ASSESSEE. THE MARGINS IN SAI D TYPE OF ACTIVITY AS PER THE INDUSTRY NORM AS GIVEN BY ITS ASSOCIATION N ASCOM RANGES FROM 22 TO 26%. IF SUCH EXPENDITURE OF CONSULTANCY CHAR GES IS NOT CONSIDERED AS EXPENDITURE FROM THE CONSULTANCY INCO ME RECEIVED, THE ASSESSEES MARGIN WILL GO UP TO 51%, WHICH IS QUITE CONTRARY TO THE RESULTS DECLARED BY THE ASSOCIATION NASCOM. THERE FORE, THE A.O. WAS INCORRECT IN DISALLOWING IN TOTAL CONSULTANCY CHARG ES PAID BY THE ASSESSEE. 9. ON THE OTHER HAND, THE LD. D.R. STRONGLY SUPPORT ED ORDER OF THE CIT(A). THE D.R. FURTHER SUBMITTED THAT THE ASSESS EE FAILED TO PROVE THE NEXUS BETWEEN CONSULTANCY CHARGES PAID TO M/S. I.T. LOKAM SERVICES INDIA PVT. LTD. AND EARNING OF REVENUE FROM M/S. IB M INDIA PVT. LTD. THOUGH, THE ASSESSEE CLAIMS TO HAVE ENTERED INTO AG REEMENT WITH M/S. I.T. LOKAM SERVICES INDIA PVT. LTD., FAILED TO FURN ISH AGREEMENT BEFORE THE ASSESSING OFFICER DURING THE ASSESSMENT PROCEED INGS FOR THE ASSESSMENT YEAR 2009-10 & 2010-11, NOR DURING THE A PPELLATE PROCEEDINGS. IT IS ONLY FOR THE ASSESSMENT YEAR 20 11-12, THE ASSESSEE HAS SOUGHT TO FURNISH THE AGREEMENT COPY, WHICH IN ALL LIKELIHOOD APPEARS TO BE ANTEDATED OTHERWISE THERE WAS NO REAS ON WHY THE SAME WAS NOT PRODUCED EARLIER. THE D.R. FURTHER SUBMITT ED THAT THOUGH THE ITA NOS.711, 712, 739 & 740/VIZAG/2013, 403/VIZAG/2 015 & 5/VIZAG/2016 MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD., VISAKHAPA TNAM 11 ASSESSEE FILED COPIES OF INVOICES THEY ARE ONLY SEL F-SERVING DOCUMENTS DESIGNED TO PAINT A COLOUR OF GENUINENESS TO THE AS SESSEES TRANSACTIONS WITH M/S. I.T. LOKAM SERVICES INDIA PVT. LTD. THE ASSESSEE HAS MERELY TRIED TO DIVERT ITS PROFITS TO A SUBSIDIARY COMPANY IN THE GUISE OF CONSULTANCY CHARGES WITHOUT SATISFYING THE RIGORS O F THE PROVISIONS OF SECTION 37 OF THE ACT. IT IS THE SUBSTANCE OF THE TRANSACTION THAT SHOULD PREVAIL, RATHER THAN THE FORM, THEREFORE, THE A.O. HAS RIGHTLY DISALLOWED CONSULTANCY CHARGES AND HIS ORDER SHOULD BE UPHELD. 10. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATE RIALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHOR ITIES BELOW. THE A.O. DISALLOWED CONSULTANCY CHARGES PAID TO M/S. I. T. LOKAM SERVICES INDIA PVT. LTD. FOR THE REASON THAT ASSESSEE HAS FA ILED TO PROVE THE NEXUS BETWEEN CONSULTANCY CHARGES PAID AND GENERATION OF REVENUE. THE A.O. FURTHER OBSERVED THAT THE ASSESSEE FAILED TO FURNIS H NECESSARY DETAILS WITH REGARD TO NATURE OF CONSULTANCY RECEIVED FROM M/S. I.T. LOKAM SERVICES INDIA PVT. LTD. AND ITS CORRESPONDING APPL ICATION/UTILITY TO THE PROJECT/SUPPORTING SERVICES UNDERTAKEN BY THE ASSES SEE TO ITS CLIENTS. THE ASSESSEE NEITHER LISTED OUT CLIENT-WISE SUPPORT SERVICES ALONG WITH CORRESPONDING CONSULTANCY RECEIVED NOR SPECIFIC INS TANCES HAVE BEEN CITED TO DEMONSTRATE THE NECESSITY FOR OBTAINING TH E ALLEGED CONSULTANCY. ITA NOS.711, 712, 739 & 740/VIZAG/2013, 403/VIZAG/2 015 & 5/VIZAG/2016 MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD., VISAKHAPA TNAM 12 THOUGH, THE ASSESSEE CLAIMS TO HAVE ENGAGED THE SER VICES OF EMPLOYEES OF M/S. I.T. LOKAM SERVICES INDIA PVT. LTD., FAILS TO PROVE THE NATURE OF SERVICES AVAILED FROM THE COMPANY AND ALSO CORRESPO NDING SERVICES TO M/S. IBM INDIA PVT. LTD. THEREFORE, OPINED THAT TH E CONSULTANCY CHARGES CLAIMED BY THE ASSESSEE IS HAVING NO NEXUS WITH THE BUSINESS OF THE ASSESSEE. 11. IT IS THE CONTENTION OF THE ASSESSEE THAT CONSU LTANCY CHARGES PAID TO M/S. I.T. LOKAM SERVICES INDIA PVT. LTD. IS A GE NUINE BUSINESS TRANSACTION FOR AVAILING SERVICES OF SOFTWARE PROFE SSIONALS TO BE DEPLOYED IN ITS PROJECT UNDERTAKEN WITH M/S. IBM INDIA PVT. LTD. THE ASSESSEE FURTHER CONTENDED THAT IT HAS PAID CONSULTANCY CHAR GES THROUGH BANKING CHANNELS, DULY DEDUCTING APPLICABLE TDS, THE PROOF OF WHICH HAS BEEN FURNISHED TO THE A.O. IT WAS FURTHER SUBMITTED THA T M/S. I.T. LOKAM SERVICES INDIA PVT. LTD. IS NOT A SHAM ENTITY, WHIC H IS ASSESSED TO THE INCOME TAX DECLARING RECEIPTS RECEIVED FROM THE ASS ESSEE COMPANY. THEREFORE, THE A.O. WAS NOT CORRECT IN DISALLOWING THE CONSULTANCY CHARGES PAID IN TOTAL WITHOUT POINTING OUT ANY SPEC IFIC OBSERVATIONS WITH REGARD TO THE GENUINENESS OF THE CONSULTANCY CHARGE S PAID. THE ASSESSEE FURTHER CLAIMS THAT IT HAS ENTERED INTO AG REEMENT WITH M/S. IBM INDIA PVT. LTD. FOR PROVIDING SOFTWARE DEVELOPMENT RELATED SERVICES FOR ITA NOS.711, 712, 739 & 740/VIZAG/2013, 403/VIZAG/2 015 & 5/VIZAG/2016 MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD., VISAKHAPA TNAM 13 WHICH IT WAS PAID CHARGES ON HOURLY BASIS. AS PER THE SAID AGREEMENT, IT NEEDS TO DEPLOY AS MANY NUMBER OF TRAINED AND SKILL ED SOFTWARE PROFESSIONALS AT THE WORK SITE AND THE EMPLOYER M/S . IBM INDIA PVT. LTD. MAKES PAYMENT ON HOURLY BASIS BASED ON THE TIME SHE ET CERTIFIED BY THE COMPANY. IT WAS FURTHER SUBMITTED THAT BY REFERRING TO THE AGREEMENTS BETWEEN THE ASSESSEE AND THE IBM, THE SCOPE OF WORK INCLUDES SOFTWARE SUPPORT DEVELOPMENT ACTIVITIES INCLUDING, BUT NOT L IMITED TO SOFTWARE DEVELOPMENT, SOFTWARE TESTING, PUBLICATION DEVELOPM ENT, PROGRAMME MAINTENANCE, SOFTWARE DEVELOPMENT SUPPORT AND SUCH OTHER ACTIVITIES AS MAY BE DEFINED BY THE BUYER. 12. THE DETAILS OF WORKS TO BE PROVIDED AND CHARGES FOR SUCH WORK PROVIDED IN A SEPARATE ANNEXURE-I APPENDED TO THE A GREEMENT. SINCE, THE ASSESSEE COMPANY DOES NOT HAVE REQUIRED NUMBER OF TRAINED AND SKILLED SOFTWARE PROFESSIONALS, IT HAS ENTERED INTO AGREEMENT WITH M/S. I.T. LOKAM SERVICES INDIA PVT. LTD., A SUBSIDIARY O F THE ASSESSEE TO HIRE THE SOFTWARE PROFESSIONALS TO BE DEPLOYED IN CLIENT PLACE. THE ASSESSEE HAS FURNISHED COPIES OF AGREEMENT ENTERED WITH M/S. I.T. LOKAM SERVICES INDIA PVT. LTD. AND ALSO COPIES OF BILLS S UBMITTED ALONG WITH TIME SHEETS CERTIFIED BY M/S. IBM INDIA PVT. LTD. THE N ATURE OF WORK EXECUTED BY THE ASSESSEE TO M/S. IBM INDIA PVT. LTD . AND THE NATURE OF ITA NOS.711, 712, 739 & 740/VIZAG/2013, 403/VIZAG/2 015 & 5/VIZAG/2016 MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD., VISAKHAPA TNAM 14 CONSULTANCY SERVICES AVAILED FROM M/S. I.T. LOKAM S ERVICES INDIA PVT. LTD. ARE LISTED IN THE AGREEMENT, WHICH PROVES THAT THE ASSESSEE HAS AVAILED THE SERVICES OF M/S. I.T. LOKAM SERVICES IN DIA PVT. LTD. ALL THESE ASPECTS HAS BEEN CLARIFIED TO THE A.O. WITH NECESSA RY EVIDENCES. THE A.O. WITHOUT APPRECIATING THE FACTS, SIMPLY DISALLO WED EXPENDITURE BY HOLDING THAT THE ASSESSEE HAS FAILED TO PROVE THE N EXUS BETWEEN CONSULTANCY CHARGES PAID AND EARNING OF INCOME WHIC H IS INCORRECT. 13. SECTION 37(1) OF THE ACT, IS A RESIDUARY SECTIO N WHICH ALLOWS DEDUCTION OF CERTAIN EXPENDITURE INCURRED WHOLLY AN D EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINESS. FOR CLAIMING DEDUCTIO N OF AN EXPENDITURE U/S 37(1) OF THE ACT, IT SHOULD BE ENSURED THAT THE EXPENDITURE IS NOT IN THE NATURE DESCRIBED BY SECTION 30 TO 36 AND IT SHO ULD NOT BE IN THE NATURE OF CAPITAL EXPENDITURE AND PERSONAL EXPENDIT URE OF THE ASSESSEE. THE MAIN REQUIREMENT OF THE PROVISIONS OF SECTION 3 7(1) OF THE ACT IS THAT EXPENDITURE SHOULD HAVE BEEN LAID OUT WHOLLY A ND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. THE NEXUS BETWEEN THE EXPENDITURE AND THE BUSINESS, IN CONNECTION WITH WHICH EXPENDITURE HAS INCURRED, HAS TO BE ESTABLISHED BEFORE THE ASSESSEE GETS ENTITLED TO DEDUCTION U/S 37(1) OF THE ACT. THEREFORE, TO CLAIM A PARTICULAR EXPEN DITURE DEDUCTIBLE UNDER THE PROVISIONS OF SECTION 37(1) OF THE ACT, THE ASS ESSEE NEEDS TO PROVE ITA NOS.711, 712, 739 & 740/VIZAG/2013, 403/VIZAG/2 015 & 5/VIZAG/2016 MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD., VISAKHAPA TNAM 15 BEYOND DOUBT THAT THE EXPENDITURE IS INCURRED WHOLL Y AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. ONCE THE ASSESSEE PROVES T HAT THE EXPENDITURE IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS, THEN THE EXPENDITURE IS DEDUCTIBLE EVEN IF IT MAY BRING A BE NEFIT TO THE THIRD PARTY. 14. IN THE LIGHT OF THE ABOVE LEGAL POSITION, IF WE EXAMINE THE FACTS OF THE PRESENT CASE, WE FIND THAT THE ASSESSEE HAS INC URRED CONSULTANCY CHARGES IN ITS BUSINESS. THE ASSESSEE HAS ENTERED INTO AGREEMENT WITH M/S IBM INDIA PVT. LTD. FOR PROVIDING IT RELATED CO NSULTANCY SERVICES. ON PERUSAL OF THE AGREEMENT ENTERED BY THE ASSESSEE WI TH M/S. IBM INDIA PVT. LTD., THE SCOPE OF WORK INCLUDES SOFTWARE DEVE LOPMENT ACTIVITIES WHICH WERE LISTED OUT IN ANNEXURE-I ANNEXED TO THE AGREEMENT. ON FURTHER VERIFICATION OF THE AGREEMENT, THE CLIENT H AS AGREED TO MAKE THE PAYMENT TO THE ASSESSEE ON HOURLY BASIS. CLAUSE 8 OF THE AGREEMENT STIPULATES THAT THE ASSESSEE SHOULD SUBMIT ITS BILL FOR CONSULTANCY CHARGES ALONG WITH NECESSARY SUPPORTING DOCUMENTS L IKE APPROVED TIME SHEETS CERTIFIED BY THE CLIENT. THEREFORE, FROM TH ESE FACTS IT IS CLEAR THAT M/S. IBM INDIA PVT. LTD. WOULD MAKE THE PAYMENT TO THE ASSESSEE ON DEPLOYMENT OF NUMBER OF SKILLED AND TRAINED SOFTWAR E PROFESSIONALS BASED ON THE APPROVED TIME SHEETS CERTIFIED BY THE CLIENTS. A CAREFUL ITA NOS.711, 712, 739 & 740/VIZAG/2013, 403/VIZAG/2 015 & 5/VIZAG/2016 MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD., VISAKHAPA TNAM 16 EXAMINATION OF THE TECHNICAL SERVICES AGREEMENT WIT H M/S. IBM INDIA PVT. LTD., THE ASSESSEES MAIN JOB IS TO PROVIDE TR AINED AND SKILLED SOFTWARE PROFESSIONALS TO THE CLIENTS. IT IS THE C LAIM OF THE ASSESSEE THAT IT DOES NOT HAVE REQUIRED NUMBER OF TRAINED AND SKI LLED SOFTWARE PROFESSIONALS BECAUSE OF WHICH IT HAS SUB CONTRACTE D PART OF ITS WORK TO ITS SUBSIDIARY COMPANY M/S. I.T. LOKAM SERVICES IND IA PVT. LTD. M/S. I.T. LOKAM SERVICES INDIA PVT. LTD. PROVIDES TRAINED SOF TWARE PROFESSIONALS FOR WHICH THE ASSESSEE HAS PAID CONSULTANCY CHARGES BASED ON THE BILLS SUBMITTED BY THE COMPANY ALONG WITH APPROVED TIME S HEETS FURNISHED BY THE CLIENT M/S. IBM INDIA PVT. LTD. THEREFORE, WE ARE OF THE VIEW THAT THE A.O. WAS ERRED IN HOLDING THAT THERE IS NO NEXU S BETWEEN THE CONSULTANCY CHARGES PAID TO M/S. I.T. LOKAM SERVICE S INDIA PVT. LTD. AND GENERATION OF REVENUE FROM M/S. IBM INDIA PVT. LTD. 15. THE A.O. DISALLOWED CONSULTANCY CHARGES FOR THE REASON THAT THE ASSESSEE HAS FAILED TO PROVE THE NEXUS BETWEEN CONS ULTANCY CHARGES PAID TO M/S. I.T. LOKAM SERVICES INDIA PVT. LTD. AN D GENERATION OF REVENUE. THE A.O. NEVER DOUBTED THE GENUINENESS OF EXPENDITURE INCURRED BY THE ASSESSEE. THE ASSESSEE HAS UNDOUBT EDLY PROVED THE GENUINENESS OF EXPENDITURE BY FURNISHING NECESSARY EVIDENCES SUCH AS BILLS SUBMITTED BY THE COMPANY ALONG WITH AGREEMENT ENTERED FOR ITA NOS.711, 712, 739 & 740/VIZAG/2013, 403/VIZAG/2 015 & 5/VIZAG/2016 MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD., VISAKHAPA TNAM 17 PROVIDING SERVICES. THE ASSESSEE ALSO FILED COPIES OF IT RETURNS FILED BY M/S. I.T. LOKAM SERVICES INDIA PVT. LTD. TO PROVE T HAT THE RECIPIENT HAS OFFERED THE SAID CONSULTANCY CHARGES IN ITS INCOME TAX RETURNS WHICH WERE NOT DISPUTED BY THE REVENUE. ON PERUSAL OF TH E INCOME TAX RETURNS FILED BY M/S. I.T. LOKAM SERVICES INDIA PVT. LTD., THE MAJOR SOURCE OF REVENUE FOR THE COMPANY IS FROM CONSULTANCY CHARGES RECEIVED FROM THE ASSESSEE. THE RECIPIENT ALSO PAID MORE THAN 50% OF CONSULTANCY CHARGES AS SALARY TO ITS EMPLOYEES DULY DEDUCTING T AX AT SOURCE WHEREVER APPLICABLE, THE PROOF OF WHICH HAS BEEN FU RNISHED. ON PERUSAL OF ALL THESE DOCUMENTS FURNISHED BY THE ASSESSEE, I T WAS CLEAR THAT THE CONSULTANCY CHARGES PAID BY THE ASSESSEE IS GENUINE AND ALSO THE ASSESSEE HAS PROVED THE NECESSITY OF INCURRING SUCH CONSULTANCY CHARGES IN RELATION TO ITS WORKS EXECUTED TO M/S. IBM INDIA PVT. LTD. 16. THE ANOTHER IMPORTANT ASPECT TO BE CONSIDERED I N THIS CASE IS THAT THE ASSESSEE HAS DECLARED AVERAGE MARGIN OF 25 TO 3 0% ON ITS CONSULTANCY INCOME RECEIVED FROM DOMESTIC PROJECT W ORKS. THE ASSESSEE CLAIMS THAT AVERAGE MARGIN IN THIS TYPE OF ACTIVITY AS PER THE INDUSTRY NORM AS GIVEN BY ITS ASSOCIATION NASCOM IS RANGES FROM 22 TO 26%. EVEN FOR SOME TIME, IF WE ASSUME THAT THE PAY MENTS ARE FICTITIOUS AND UNPROVED, IT WILL LEAD TO WRONG CALCULATION OF MARGINS EARNED BY THE ITA NOS.711, 712, 739 & 740/VIZAG/2013, 403/VIZAG/2 015 & 5/VIZAG/2016 MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD., VISAKHAPA TNAM 18 ASSESSEE THAT IF THE CONSULTANCY CHARGES INCURRED B Y THE ASSESSEE ARE ADDED TO THE MARGINS RETURNED BY THE ASSESSEE FOR T HESE ASSESSMENT YEARS, THE NET MARGIN WOULD GO UP TO 51% WHICH IS Q UITE CONTRARY TO THE INDUSTRIAL AVERAGE DECLARED BY THE NASCOM. THEREFO RE, WE ARE OF THE CONSIDERED VIEW THAT THE A.O. WAS ERRED IN DISALLOW ING CONSULTANCY CHARGES PAID BY THE ASSESSEE. 17. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THIS CASE, WE ARE OF THE VIEW THAT CONSULTANCY CHARGES PAID BY THE ASSESSEE TO M/S. I.T. LOKAM SERVICES INDIA PVT. LTD. IS HAVING NEXUS BETWEEN EA RNING OF INCOME. THE ASSESSEE HAS PROVED BEYOND DOUBT WITH NECESSARY SUP PORTING DOCUMENTS THAT IT HAS INCURRED CONSULTANCY CHARGES WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE CIT(A ), WITHOUT APPRECIATING THE FACTS, SIMPLY CONFIRMED THE ADDITI ONS MADE BY THE A.O. BY HOLDING THAT THE IMPUGNED EXPENSES HAVE NOT BEEN PROVED TO BE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ASSESSEES BUSINESS. THEREFORE, WE SET ASIDE ORDER PASSED BY THE CIT(A) AND DIRECT THE A.O. TO ALLOW CONSULTANCY CHARGES PAID BY THE ASSESSEE F OR THE ASSESSMENT YEARS 2009-10 TO 2011-12. 17. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATI ON IS DISALLOWANCE OF EMPLOYEES CONTRIBUTION TO PROVIDENT FUND. THE A .O. DISALLOWED ITA NOS.711, 712, 739 & 740/VIZAG/2013, 403/VIZAG/2 015 & 5/VIZAG/2016 MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD., VISAKHAPA TNAM 19 EMPLOYEES CONTRIBUTION TO PROVIDENT FUND FOR THE RE ASON THAT THE ASSESSEE HAS FAILED TO DEPOSIT EMPLOYEES CONTRIBUTI ON TO PROVIDENT FUND WITHIN THE DUE DATE SPECIFIED UNDER THE PROVISIONS OF PROVIDENT FUND ACT. ACCORDING TO THE A.O., EMPLOYEES CONTRIBUTION TO PR OVIDENT FUND NOT DEPOSITED WITHIN THE DUE DATE SPECIFIED UNDER THE P ROVISIONS OF PROVIDENT FUND ACT, IS IN CONTRAVENTION OF PROVISIO NS OF SECTION 2(24)(X) R.W.S. 36(1)(VA) OF THE ACT. THEREFORE, DISALLOWED EMPLOYEES CONTRIBUTION TO PROVIDENT FUND UNDER THE PROVISIONS OF SECTION 36(1)(VA) OF THE ACT. 18. THE LD. A.R. FOR THE ASSESSEE, AT THE TIME OF H EARING SUBMITTED THAT THE ISSUE IS SQUARELY COVERED BY THE DECISION OF ITAT, VISAKHAPATNAM IN THE CASE OF EASTERN POWER DISTRIBU TION COMPANY OF A.P. LTD. IN ITA NO.609/VIZAG/2014 DATED 29.7.2016 , WHEREIN THE ITAT, HELD THAT THERE IS NO DISTINCTION BETWEEN EMPLOYEES AND EMPLOYER CONTRIBUTION TO PF AND IF TOTAL CONTRIBUTION IS DEP OSITED ON OR BEFORE THE DUE DATE OF FURNISHING RETURN OF INCOME U/S 139(1) OF THE ACT, THEN NO DISALLOWANCE CAN BE MADE TOWARDS EMPLOYEES CONTRIBU TION TO PROVIDENT FUND. WE FIND THAT THE COORDINATE BENCH OF THIS TRI BUNAL, IN THE CASE OF EASTERN POWER DISTRIBUTION COMPANY OF AP LIMITED HA S CONSIDERED SIMILAR ISSUE AND HELD THAT IF EMPLOYEES CONTRIBUTI ON TO PROVIDENT FUND IS ITA NOS.711, 712, 739 & 740/VIZAG/2013, 403/VIZAG/2 015 & 5/VIZAG/2016 MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD., VISAKHAPA TNAM 20 PAID ON OR BEFORE THE DUE DATE OF FURNISHING RETURN OF INCOME U/S 139(1) OF THE ACT, THEN NO DISALLOWANCE CAN BE MADE. THE RELEVANT PORTION OF THE ORDER IS EXTRACTED HEREUNDER: 10. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THI S CASE AND ALSO FOLLOWING THE JUDICIAL PRECEDENTS AS DISCUSSED ABOV E, WE ARE OF THE VIEW THAT THERE IS NO DISTINCTION BETWEEN EMPLOYEES AND EMPLOYER CONTRIBUTION TO PF, AND IF THE TOTAL CONTRIBUTION IS DEPOSITED O N OR BEFORE THE DUE DATE OF FURNISHING RETURN OF INCOME U/S 139(1) OF THE AC T, THEN NO DISALLOWANCE CAN BE MADE TOWARDS EMPLOYEES CONTRIBUTION TO PROV IDENT FUND. THE CIT(A) AFTER CONSIDERING THE RELEVANT DETAILS RIGHT LY DELETED THE ADDITIONS MADE BY THE A.O. WE DO NOT SEE ANY REASONS TO INTE RFERE WITH THE ORDER OF THE CIT(A). HENCE, WE INCLINED TO UPHOLD THE CI T(A) ORDER AND DISMISS THE APPEAL FILED BY THE REVENUE. 19. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE AND ALSO RESPECTFULLY FOLLOWING THE COORDINATE BENCH DECISIO N, WE ARE OF THE VIEW THAT IF EMPLOYEES CONTRIBUTION TO PROVIDENT FUND IS PAID WITHIN THE DUE DATE SPECIFIED U/S 139(1) OF THE ACT, THEN NO DISAL LOWANCE CAN BE MADE TOWARDS EMPLOYEES CONTRIBUTION TO PROVIDENT FUND. THEREFORE, WE DIRECT THE A.O. TO ALLOW CONTRIBUTION TO PROVIDENT FUND FO R THE ASSESSMENT YEAR 2009-10 TO 2011-12. 20. THE NEXT ISSUE THAT EMANATES FROM THE REVENUE A PPEAL FOR THE ASSESSMENT YEAR 2009-10 TO 2011-12 IS TOWARDS DISAL LOWANCE OF EXEMPTION U/S 10A OF THE ACT. THE A.O. RE-COMPUTED EXEMPTION U/S 10 OF THE ACT, BY TAKING EXPORT TURNOVER OF BHOGAPURAM UNIT TO THE TOTAL ITA NOS.711, 712, 739 & 740/VIZAG/2013, 403/VIZAG/2 015 & 5/VIZAG/2016 MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD., VISAKHAPA TNAM 21 TURNOVER OF THE ASSESSEE FROM ALL THE UNITS FROM AL L SERVICES. THE A.O. WAS OF THE OPINION THAT THE RECOGNITION GIVEN BY TH E SPECIAL COMMISSIONER, VISAKHAPATNAM SPECIAL ECONOMIC ZONE A ND VISAKHAPATNAM EXPORT PROCESSING ZONE IS FOR THE ASS ESSEE AS A WHOLE BUT NOT FOR THE BHOGAPURAM UNIT ALONE. THE A.O. FU RTHER WAS OF THE OPINION THAT THE HONBLE ITAT, IN THE PREVIOUS FINA NCIAL YEARS HAS CONSIDERED THE ISSUE AND ARRIVED AT A CONCLUSION TH AT TURNOVER OF A UNIT ALONE HAS TO BE CONSIDERED FOR THE PURPOSE OF EXEMP TION U/S 10A OF THE ACT. BUT, FACT IS THAT THE ASSESSEE AS A WHOLE IS RECOGNIZED AS 100% EXPORT ORIENTED UNIT BY THE SPECIAL COMMISSIONER, V ISAKHAPATNAM SPECIAL ECONOMIC ZONE. THE A.O. REFERRING TO THE A PPROVAL GRANTED BY THE VISAKHAPATNAM SPECIAL ECONOMIC ZONE, OBSERVED T HAT ACCORDING TO THE APPROVAL GIVEN BY THE VSEZ, THE ASSESSEE AS A W HOLE IS ENGAGED IN ALL 3 TYPES OF ACTIVITIES. THE REGISTRATION GRANTE D BY VSEZ IS NOT LIMITED TO THE SOFTWARE ACTIVITY ALONE, IN FACT IT COVERS A LL THE ACTIVITIES OF THE ASSESSEE. IT BEING SO, THE DEDUCTION UNDER THE IT ACT UNDER THE PROVISIONS OF SECTION 10A OF THE ACT APPLIES ONLY T O THAT ACTIVITY FETCHING EXPORT TURNOVER. IT IS EVIDENT FROM THE SAID APPRO VAL/CERTIFICATE THAT ALL THE 3 ACTIVITIES ARE CLEARLY MENTIONED FOR THE SAID APPROVAL/CERTIFICATES ARE RELEVANT TO EXPORT ACTIVITY ALONE. THE A.O. RE FERRING TO THE CERTIFICATE ISSUED BY THE CUSTOMS DEPARTMENT OBSERVED THAT THE REGISTRATION ITA NOS.711, 712, 739 & 740/VIZAG/2013, 403/VIZAG/2 015 & 5/VIZAG/2016 MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD., VISAKHAPA TNAM 22 GRANTED BY THE CENTRAL EXCISE DEPARTMENT IS ONLY A WAREHOUSE LICENSE U/S 58 OF THE CUSTOMS ACT, 1962 FOR THE PURPOSE OF STORAGE OF COMPUTERS, UPS, ETC. THOUGH THE SAID LICENSE PERMI TS THE ASSESSEE U/S 65 OF THE CUSTOMS ACT, 1962 TO CARRY OUT SOFTWARE D EVELOPMENT IN RELATION TO SAID GOODS, SUBJECT TO THE PROVISIONS O F MANUFACTURE AND OTHER OPERATIONS IN WARE HOUSE REGULATIONS, 1966, T HE SAME DOES NOT CONFER ANY APPROVAL OR CERTIFICATE ENABLING THE ASS ESSEES PREMISES AT BHOGAPURAM TO BE CLASSIFIED AS A DISTINCT AND SEPAR ATE UNDERTAKING DESIGNED TO FUNCTION INDEPENDENTLY AS PER THE RULES AND REGULATIONS GOVERNING EXPORT ORIENTED UNITS. 21. IT IS THE CONTENTION OF THE ASSESSEE THAT ITS U NIT AT BHOGAPURAM IS RECOGNIZED AS 100% EXPORT ORIENTED UNIT BY THE SPEC IAL COMMISSIONER VSEZ. WHILE ISSUING THE CERTIFICATE THE AUTHORITY H AS MENTIONED THE NAME AND ADDRESS OF THE ASSESSEE, HOWEVER RECOGNIZE D THE LOCATION OF THE FACTORY AT BHOGAPURAM UNIT WHICH IS ALONE ELIGI BLE FOR CARRYING OUT 100% EOU ACTIVITIES. THE ASSESSEE FURTHER CONTENDE D THAT TO BE AN EXPORTER, THE ASSESSEE NEEDS TO OBTAIN EXPORT ORIEN TED WAREHOUSE LICENSE FROM THE CENTRAL EXCISE AND CUSTOMS DEPARTM ENT, WHEREIN THE AUTHORITY HAS CERTIFIED THAT THE UNIT AT BHOGAPURAM IS AN EXPORT ORIENTED WARE HOUSE U/S 58 OF THE CUSTOMS ACT, 1962 WHICH IS ELIGIBLE TO CARRY ITA NOS.711, 712, 739 & 740/VIZAG/2013, 403/VIZAG/2 015 & 5/VIZAG/2016 MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD., VISAKHAPA TNAM 23 OUT THE EXPORT ACTIVITIES. THE ASSESSEE FURTHER CO NTENDED THAT PRIOR TO AMENDMENT OF SECTION 10A BY THE FINANCE ACT, 2001 W .E.F. 1.4.2001, FOR THE PURPOSE OF SUB SECTION (1), THE PROFITS DERIVED FROM EXPORT OF ARTICLES OR GOODS SHALL BE THE AMOUNT WHICH BEARS TO THE PRO FITS OF THE BUSINESS, THE SAME PROPORTION AS THE EXPORT TURNOVER IN RESPE CT OF SUCH ARTICLES OR THINGS BEARS TO THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE ASSESSEE. AFTER THE AMENDMENT OF SECTION 10A W.E.F . 1.4.2001, PROFITS AND GAINS DERIVED BY AN UNDERTAKING FROM THE EXPORT OF ARTICLES OR THINGS ALONE HAS TO BE CONSIDERED FOR THE PURPOSE OF DETER MINATION OF EXEMPTION U/S 10A OF THE ACT. THE ITAT, AFTER ANAL YZING THE PROVISIONS OF SECTION 10A AND ALSO CONSIDERED THE FACTS OF THE ASSESSEE IS HAVING A 100% EXPORT ORIENTED UNIT AT BHOGAPURAM HAS ALLOWED THE CLAIM OF THE ASSESSEE THAT THE TURNOVER OF THE ELIGIBLE UNIT ALO NE HAS TO BE CONSIDERED FOR THE PURPOSE OF COMPUTATION OF EXEMPTION U/S 10A OF THE ACT. THEREFORE, THE A.O. WAS NOT CORRECT IN HOLDING THAT THE TOTAL TURNOVER OF THE ASSESSEE HAS TO BE CONSIDERED FOR THE PURPOSE O F DETERMINATION OF EXEMPTION U/S 10A OF THE ACT. 22. THE LD. A.R. FOR THE ASSESSEE, AT THE TIME OF H EARING SUBMITTED THAT THE ISSUE IS COVERED BY THE DECISION OF ITAT, VISAKHAPATNAM IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2003-04 , 2004-05 AND ITA NOS.711, 712, 739 & 740/VIZAG/2013, 403/VIZAG/2 015 & 5/VIZAG/2016 MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD., VISAKHAPA TNAM 24 2005-06 IN ITA NO.409/VIZAG/2007. THE A.R. FURTHER SUBMITTED THAT THE ITAT, IN ASSESSEES OWN CASE HELD THAT FOR THE PURP OSE OF DEDUCTION U/S 10A OF THE ACT, THE TURNOVER OF THE UNDERTAKING HAS TO BE CONSIDERED, BUT NOT TURNOVER OF THE ASSESSEE. WE HAVE CONSIDERE D THE CASE LAW RELIED UPON BY THE ASSESSEE, IN THE LIGHT OF THE FA CTS OF THE PRESENT CASE AND FIND THAT THE COORDINATE BENCH OF THIS TRIBUNAL , IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2003-04 TO ASSESSMENT YEAR 2005-06 HAS CONSIDERED SIMILAR ISSUE AND AFTER CONSIDERING THE FACTS OF THE CASE HELD THAT FOR THE PURPOSE OF COMPUTATION OF EXEMPTION U/ S 10A, TURNOVER OF THE UNDERTAKING HAS TO BE CONSIDERED, BUT NOT TURNO VER OF THE ASSESSEE. THE RELEVANT PORTION OF THE ORDER IS EXTRACTED HERE UNDER: 'IT CAN BE NOTED THAT, BEFORE ITS SUBSTITUTION BY F INANCE ACT 2001, THE DEDUCTION HAS TO BE COMPUTED BY TAKING THE TOTAL TU RNOVER OF THE BUSINESS CARRIED ON BY THE ASSESSEE, I.E, THE TURNOVER OF AL L THE UNITS AND OPERATIONS HAVE TO BE AGGREGATED. HOWEVER, AFTER THE AMENDMENT MADE BY THE FINANCE ACT 2001, THE TOTAL TURNOVER SHALL COMPRISE OF THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY HE 'UNDERTAKING' ONLY. T HE AMENDED SECTION IS APPLICABLE FOR THE YEARS UNDER CONSIDERATION. HENCE , THE TOTAL TURNOVER SHALL COMPRISE OF THE TOTAL TURNOVER OF THE BUSINES S CARRIED ON BY THE UNDERTAKING ONLY FOR THE PURPOSE OF CALCULATION OF ELIGIBLE AMOUNT OF DEDUCTION UNDER SECTIN 10A OF THE ACT.' 'HENCE, CONSIDERING THE DECISIONS OF HON'BLE COURTS EXTRACTED ABOVE WITH REGARD TO THE MEANING OF THE TERM UNDERTAKING, WE H OLD THAT THE SOFTWARE DIVISION OF THE ASSESSEE COMPANY LOCATED AT BHOGAPU RAM HAS TO BE TAKEN AS A SEPARATE UNDERTAKING FOR THE PURPOSE OF CALCUL ATING DEDUCTION UNDER SECTION 10A OF THE ACT AND CONSEQUENTLY, WE HOLD TH AT THE TURNOVER PERTAINING TO THE OTHER TWO UNITS SHOULD NOT BE INC LUDED IN 'TOTAL TURNOVER' FOR THE PURPOSE OF CALCULATION OF DEDUCTI ON UNDER SECTION 10A OF THE ACT.' 8.4 WE NOTICE THAT THE LEARNED CIT(A), IN THE ASSES SMENT YEAR 2005- 06, HAS ACCEPTED THIS CLAIM OF THE ASSESSEE ON THE BASIS OF THE DECISIONS ITA NOS.711, 712, 739 & 740/VIZAG/2013, 403/VIZAG/2 015 & 5/VIZAG/2016 MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD., VISAKHAPA TNAM 25 OF BANGALORE BENCH OF ITAT AND ALSO BY PLACING RELI ANCE ON THE DECISION OF HYDERABAD BENCH OF ITAT, IN THE CASE OF ITO, WARD-1 (2) VS. D.E. BLOCK INDIA SOFTWARE LTD (ITA NA 893 AND 894/HYD/2006), WH EREIN A SIMILAR VIEW WAS EXPRESSED. IN THE INSTANT CASE BOTH THE NU MERATOR AND DENOMINATOR PERTAIN TO THE EXPORT TURNOVER ONLY, I. E, THE TOTAL TURNOVER OF THE UNDERTAKING IS ONLY THE EXPORT TURNOVER. HENCE, CONSISTENT WITH THE VIEW TAKEN BY OTHER BENCHES OF THE TRIBUNAL CITED A BOVE, WE ALSO HOLD THAT THE COMMUNICATION CHARGES THAT WERE DEDUCTED F ROM THE EXPORT TURNOVER SHOULD ALSO BE DEDUCTED FROM THE TOTAL TUR NOVER ALSO'. 23. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THI S CASE AND ALSO RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINA TE BENCH, IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2003-04, WE ARE OF THE VIEW THAT FOR THE PURPOSE OF DETERMINATION OF EXEMPTION U/S 10A, THE TURNOVER OF THE UNDERTAKING HAS TO BE CONSIDERED, BUT NOT TURNOVER OF THE ASSESSEE. THE CIT(A), AFTER CONSIDERING THE RELEVANT FACTS AN D ALSO FOLLOWING COORDINATE BENCH DECISION HAS RIGHTLY DELETED ADDIT IONS MADE BY THE A.O. TOWARDS DISALLOWANCE OF EXEMPTION CLAIMED U/S 10A. WE DO NOT SEE ANY ERROR OR INFIRMITY IN THE ORDER OF THE CIT( A). HENCE, WE INCLINED TO UPHOLD CIT(A) ORDER AND DISMISS APPEAL FILED BY THE REVENUE FOR THE ASSESSMENT YEAR 2009-10 TO 20111-12. 24. IN THE RESULT, THE APPEALS FILED BY THE ASSESSE E IN ITA NOS.711 & 712/VIZAG/2013 AND ITA NO.403/VIZAG/2015 ARE ALLOWE D AND APPEALS FILED BY THE REVENUE IN ITA NOS.739 & 740/VIZAG/201 3 AND ITA ITA NOS.711, 712, 739 & 740/VIZAG/2013, 403/VIZAG/2 015 & 5/VIZAG/2016 MIRACLE SOFTWARE SYSTEMS INDIA PVT. LTD., VISAKHAPA TNAM 26 NO.5/VIAG/2016 FOR THE ASSESSMENT YEARS 2009-10, 20 10-11 & 2011-12 ARE DISMISSED. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 25 TH NOV16. SD/- SD/- ( . ) ( . ) (V. DURGA RAO) (G. MANJUNATHA) /JUDICIAL MEMBER /ACCOUNTANT MEMBER # /VISAKHAPATNAM: ' /DATED : 25.11.2016 VG/SPS )# *# /COPY OF THE ORDER FORWARDED TO:- 1. / THE APPELLANT M/S. MIRACLE SOFTWARE SYSTEMS IND IA PVT. LTD., MIG-19, LAWSONS BAY COLONY, VISAKHAPATNAM 2. / THE RESPONDENT THE JCIT RANGE-3, VISAKHAPATNAM 3. / THE RESPONDENT THE DCIT, CIRCLE-3(1), RANGE-3, VISAKHAPATNAM 4. / THE RESPONDENT THE ACIT, CIRCLE-3(1), VISAKHAP ATNAM 5 + / THE CIT-1, VISAKHAPATNAM 6. + ( ) / THE CIT (A), VISAKHAPATNAM 7. # . , . , # / DR, ITAT, VISAKHAPATNAM 8 . / GUARD FILE / BY ORDER // TRUE COPY // 12 . (SR.PRIVATE SECRETARY) . , # / ITAT, VISAKHAPATNAM