M/s. Schneider Electric IT Business India Private Limited, Bengaluru V. Joint Commissioner of Income Tax, LTU, Bengaluru

ITTPA 299/BANG/2014

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 6378 (ITAT-BANGALORE)
• Duration Of Justice: 5 year(s) 22 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 30-04-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 08-04-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: C SUNDAR RAO
• Assessee Lawyers: T SURYANARAYANA
• Keywords: Related party transaction; Business income; Depreciation; Transfer pricing; Rectification of order; Opportunity of being heard; International transaction; Services rendered outside India; Working capital adjustments; Procedural lapse; Competent authority; Revised return; Revenue expenditure; TDS; Set aside
• Section: 92C; 143(3); 37(1); 139(5); 143(1); 195; 263; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI JASON P. BOAZ , ACCOUNTANT MEMBER IT(TP)A NO. A.Y. APPELLANT RESPONDENT 299/BANG/14 2009-10 SCHNEIDER ELECTRIC IT BUSINESS INDIA PRIVATE LIMITED, (FORMERLY KNOWN AS AMERICAN POWER CONVERSION (INDIA) PRIVATE LIMITED), 4 TH FLOOR, ELECTRA, WING A, EXORA BUSINESS PARKS, MARATHAHALLI SARJAPUR OUTER RING ROAD, BANGALORE [PAN: AACCA6398Q] JOINT COMMISSIONER OF INCOME TAX, LTU, BANGALORE 218/BANG/14 2009-10 JOINT COMMISSIONER OF INCOME TAX, LTU, BANGALORE M/S. SCHNEIDER ELECTRIC IT BUSINESS INDIA PRIVATE LIMITED, (FORMERLY KNOWN AS AMERICAN POWER CONVERSION (INDIA) PRIVATE LIMITED), NO. 187/3 & 188/3, JIGANI, BANGALORE [P AN: AACCA6398Q] A SSESSEE BY : SHRI T. S URYANARAYANA , A DVOCATE RE VENUE BY : S HRI C. SUNDAR RAO, CIT DATE OF HEARING : 1 9 - 0 3 - 2019 DATE OF PRONOUNCEMENT : 30 - 0 4 - 201 9 O R D E R PER N V VASUDEVAN, VICE PRESIDENT : IT(TP)A NO.218/BANG/2014 IS AN APPEAL BY THE REVENU E WHILE IT(TP)A NO.299/BANG/2014 IS AN APPEAL BY THE ASSESS EE. BOTH THE : 2 : IT(TP)A NOS. 299 & 218/BANG/2014 APPEALS ARE DIRECTED AGAINST THE ORDER DATED 31-01- 2014 OF THE JCIT, LTU, BANGALORE PASSED U/S.143(3) READ WITH SEC.144C OF THE INCOME TAX ACT, 1961 (ACT) IN RELATION TO AY 2009-10. 2. GR.NO.1 TO 9 IN ASSESSEES APPEAL AND THE GROUND S OF APPEAL RAISED BY THE REVENUE IN ITS APPEAL ARE WITH REGARD TO DETERMINATION OF ARMS LENGTH PRICE (ALP) IN RESPECT OF INTERNATIONA L TRANSACTIONS OF (A) RENDERING SOFTWARE DEVELOPMENT SERVICES (SWD SE RVICES) (B) RENDERING OF RESEARCH AND DEVELOPMENT SERVICES BY T HE ASSESSEE TO ITS ASSOCIATE ENTERPRISE (AE). THESE GROUNDS READ AS FOLLOWS: GROUNDS OF APPEAL RAISED BY ASSESSEE: 1. THE LEARNED ASSESSING OFFICER ('LEARNED AO') AND TH E LEARNED DISPUTE RESOLUTION PANEL (LEARNED DRP) ERRE D IN LAW AND IN FACTS IN UPHOLDING THE ADJUSTMENT TO THE TRA NSFER PRICE OF THE APPELLANT IN THE CONTRACT SOFTWARE DEVELOPMENT SERVICES BY RS.9,819,200 AND IN THE CONTRACT RESEARCH AND DEVEL OPMENT (R&D) SERVICES BY RS.28,882,400. 2. THE LEARNED AO, THE LEARNED DRP AND THE LEARNED TPO ERRED IN REJECTING THE TRANSFER PRICING ('TP') DOCUMENTATION MAINTAINED BY THE APPELLANT ON INVOKING PROVISIONS OF SUB-SECT ION (3) OF 92C OF THE INCOME TAX ACT, 1961 CONTENDING THAT THE INFORMATION OR DATA USED IN THE COMPUTATION OF THE ARM'S LENGTH PRICE IS NOT RELIABLE OR CORRECT. 3. THE LEARNED AO, LEARNED DRP AND THE LEARNED TPO ERR ED IN REJECTION OF COMPARABILITY ANALYSIS CARRIED IN THE TRANSFER PRIC ING DOCUMENTATION AND IN CONDUCTING A FRESH COMPARABILI TY ANALYSIS ON APPLICATION OF ADDITIONAL FILTERS FOR DETERMINAT ION OF THE ARM'S LENGTH PRICE FOR CONTRACT SOFTWARE DEVELOPMENT AND CONTRACT R&D SERVICES SEGMENTS. 4. THE LEARNED AO, LEARNED DRP AND THE LEARNED TPO HAV E NOT : 3 : IT(TP)A NOS. 299 & 218/BANG/2014 APPRECIATED THE FUNCTIONS UNDERTAKEN BY THE APPELLA NT IN THE R&D SEGMENT WHICH ARE PREDOMINANTLY IN THE NATURE OF SO FTWARE DEVELOPMENT SERVICES AND THEREBY ERRONEOUSLY COMPAR ED THE MARK-UP ON COST EARNED BY THE APPELLANT IN THIS SEGMENT WIT H THAT EARNED BY THE ENTREPRENEURIAL R&D SERVICES PROVIDERS. THE LE ARNED AO HAS ERRED IN REJECTING COMPANIES SELECTED AS COMPARABLE BY THE APPELLANT IN THE TP DOCUMENTATION AND HAS ERRED IN SELECTING COMPANIES WHICH ARE NOT COMPARABLE TO THE APPELLANT. SPECIFICALLY AURINGENE DISCOVERY TECHNOLOGIES LTD CELESTIAL BIOLABS JUBILANT CHEMYS OIL FIELD INSTRUMENTS (INDIA) LTD TATA ELXSI LTD TCG LIFESCIENCE TECHNO-CHEMIE(INDIA) LTD VIMTA LAB ENGINEERS LIMITED. 5. THE LEARNED AO, LEARNED DRP AND THE LEARNED TPO ERR ED IN REJECTING THE COMPANIES SELECTED AS COMPARABLE BY T HE APPELLANT IN THE TRANSFER PRICING DOCUMENTATION AND INTRODUCING HER OWN SET OF COMPANIES AS COMPARABLE THAT DOES NOT MEET THE COMP ARABILITY CRITERIA IN THE CONTRACT SOFTWARE DEVELOPMENT SERVI CES SEGMENT. SPECIFICALLY, THE APPELLANT SUBMITS THAT THE FOLLOW ING COMPANIES SELECTED AS COMPARABLE BY THE LEARNED AO, LEARNED DRP AND THE LEARNED TPO AS COMPARABLE IN THE CONTRA CT SOFTWARE DEVELOPMENT SEGMENT SHOULD HAVE BEEN REJEC TED. BODHTREE LIMITED; INFOSYS LIMITED; LARSEN AND TOUBRO INFOTECH LIMITED; : 4 : IT(TP)A NOS. 299 & 218/BANG/2014 MINDTREE LIMITED; PERSISTENT SYSTEMS LIMITED; SASKEN COMMUNICATIONS TECHNOLOGIES LIMITED; TATA ELXSI LIMITED; AND ZYLOG SYSTEMS LIMITED 6. THE LEARNED AO, LEARNED DRP AND THE LEARNED TPO ERR ED IN NOT APPLYING MULTIPLE YEAR/PRIOR YEAR DATA FOR COMP ARABLE COMPANIES WHILE DETERMINING ARM'S LENGTH PRICE. 7. THE LEARNED AO, LEARNED DRP AND THE LEARNED TPO ERR ED IN USING DATA AS AT THE TIME OF ASSESSMENT PROCEEDINGS , INSTEAD OF THAT AVAILABLE AS ON THE DATE OF PREPARING THE TRANSFER PRICING DOCUMENTATION FOR COMPARABLE COMPANIES WHILE DETERM INING ARM'S LENGTH PRICE. 8. THE LEARNED AO. LEARNED DRP AND THE LEARNED TPO HAV E ERRED IN NOT GRANTING WORKING CAPITAL ADJUSTMENTS TO THE APPELLA NT. 9. THE LEARNED AO, LEARNED DRP AND THE LEARNED TPO HAV E FAILED TO APPRECIATE THAT THE APPELLANT IS A LIMITED RISK CON TRACT SERVICE PROVIDER RENDERING SOFTWARE SERVICES AND R&D SERVIC ES. THEREBY, THE LEARNED AO, LEARNED DRP AND THE LEARNED TPO ERRED I N NOT PROVIDING APPROPRIATE ADJUSTMENT TOWARDS THE RISK D IFFERENTIAL, WHEN THE COMPARABLES SELECTED ARE FULL-FLEDGED ENTREPREN EURIAL COMPANIES. GROUNDS OF APPEAL RAISED BY REVENUE: 1. THE ORDER OF HON'BLE DRP IS OPPOSED TO LAW AND FACT S OF THE CASE. 2. THE HON'BLE DRP HAS ERRED IN INCLUDING M/S FCS SOLU TIONS AND M/S THINKSOFT GLOBAL SERVICES LTD WHICH TPO HAS EXC LUDED UNDER RULE 18B(3) OF IT RULES BEING NOT COMPARABLE COMPANIES. SOFTWARE DEVELOPMENT SERVICES SEGMENT: 3. FIRST WE SHALL TAKE UP FOR CONSIDERATION THE DET ERMINATION OF ALP IN THE SWD SERVICES SEGMENT. THE ASSESSEE IS EN GAGED IN THE : 5 : IT(TP)A NOS. 299 & 218/BANG/2014 BUSINESS OF PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ITS OVERSEAS ASSOCIATED ENTERPRISES ('AE' FOR SHORT). IT IS NOT IN DISPUTE THAT THE TRANSACTION OF RENDERING OF SOFTWARE DEVELOPMENT SE RVICES BY THE ASSESSEE TO ITS AE WAS AN INTERNATIONAL TRANSACTION AND IN VIEW OF THE PROVISIONS OF SEC. 92 OF THE INCOME TAX ACT, 1961 ( ACT), INCOME ARISING FROM SUCH INTERNATIONAL TRANSACTIONS HAS TO BE DETERMINED HAVING REGARD TO ARMS LENGTH PRICE (ALP). THE ISSU ES TO BE DECIDED IN THE CROSS APPEALS ARE DETERMINATION OF ALP OF TH E INTERNATIONAL TRANSACTION OF PROVIDING SOFTWARE DEVELOPMENT SERVI CES BY THE ASSESSEE TO ITS AE. 4. DURING THE PREVIOUS YEAR 2008-09 RELEVANT TO THE ASSESSMENT YEAR 2009-10, THE ASSESSEE RENDERED SOFTWARE DEVELO PMENT TO ITS AES. AS REGARDS THE INTERNATIONAL TRANSACTION OF PROVISI ON OF SOFTWARE DEVELOPMENT (SWD) SERVICES TO ITS AES, THE ASSESSEE RECEIVED CONSIDERATION OF RS.8,00,00,000/- FOR RENDERING SOF TWARE DEVELOPMENT SERVICES FROM ITS AE. IN SUPPORT OF ITS CLAIM THAT THE PRICE CHARGED BY IT IN THE INTERNATIONAL TRANSACTION THE ASSESSEE FI LED A TRANSFER PRICING STUDY (TP STUDY) IN WHICH THE ASSESSEE ADOPTED TRAN SACTION NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD (MAM) FOR DETERMINATION OF ALP. THE PROFIT LEVEL INDICATOR ( PLI) CHOSEN FOR THE PURPOSE OF COMPARISON OF PROFIT MARGIN OF COMPARABL E COMPANIES WAS OPERATING PROFIT TO OPERATING COST (OP/OC). THE PRICE CHARGED IN THE INTERNATIONAL TRANSACTION BY THE ASSESSEE FROM ITS AE WAS RS.8,00,00,000/-. THE OPERATING COST OF THE ASSESSE E WAS RS.7,30,00,000/-. THE OPERATING PROFIT WAS THUS RS. 70,00,000 : 6 : IT(TP)A NOS. 299 & 218/BANG/2014 (RS.8,00,00,000 - 7,30,00,000). OP/OC WAS 9.59%. THE ASSESSEE IN ITS TP STUDY HAD CHOSEN 14 COMPANIES AS COMPARABLE COMPANIES. 5. THE ARITHMETIC MEAN OF THE PROFIT MARGIN OF THE 14 COMPANIES SO SELECTED BY THE ASSESSEE WAS 13% AFTER ADJUSTMENT A ND 14% WITHOUT ADJUSTMENT AND THESE MARGINS WHEN COMPARED TO THE P ROFIT MARGIN OF THE ASSESSEE WAS AT ARMS LENGTH AFTER PROVIDING FO R (+)(-) 5% VARIATION MARGIN PERMITTED UNDER THE PROVISO TO SEC .92(2) OF THE ACT. SINCE THE ASSESSEES PROFIT MARGIN WAS WITHIN THE R ANGE OF PROFIT MARGIN OF THE COMPARABLE, THE ASSESSEE CLAIMED THAT THE PRICE CHARGED IN THE INTERNATIONAL TRANSACTION WAS AT ARMS LENGT H AND THEREFORE NO ADDITION BY WAY OF ADJUSTMENT TO ALP SHOULD BE MADE . 6. THE ASSESSING OFFICER (AO) REFERRED THE QUESTION OF DETERMINATION OF ALP TO THE TRANSFER PRICING OFFICE R (TPO) AS IS REQUIRED BY THE PROVISIONS OF SEC.92CA OF THE ACT. THE TPO AFTER ACCEPTING SOME OF THE COMPARABLE COMPANIES CHOSEN B Y THE ASSESSEE, SELECTED 11 COMPARABLE COMPANIES. THE FOLLOWING TAB LES WILL SHOW THE FINAL LIST OF COMPARABLE COMPANIES AND THEIR PROFIT MARGIN AND COMPUTATION OF ARITHMETIC MEAN OF PROFIT MARGIN OF THESE 11 COMPARABLE COMPANIES AND THE ADDITION TO BE MADE TO THE TOTAL INCOME ON ACCOUNT OF DETERMINATION OF ALP BY THE T PO. COMPARABLES SELECTED BY THE TPO AND THEIR ARITHMETI C MEAN: SL. NO. NAME OF THE COMPANY MARK UP UNADJUSTED (%) 1 KALS INFORMATIO N SYSTEMS LTD. 13.89 : 7 : IT(TP)A NOS. 299 & 218/BANG/2014 2 AKSHAY SOFTWARE TECHNOLOGIES LTD. 8.11 3 BODHTREE CONSULTING LTD. 62.27 4 R S SOFTWARE (INDIA) LTD. 9.97 5 TATA ELXSI LTD. (SEGMENTAL) 20.28 6 SASKEN COMMUNICATION TECHNOLOGIES LTD. (SEGMENTAL) 27.91 7 PERSISTENT SYSTEMS LTD. 4 1.40 8 ZYLOG SYSTEMS LTD. 7.81 9 MINDTREE LTD. (SEGMENTAL) 5.52 10 LARSEN AND TOUBRO INFOTECH 24.72 11 INFOSYS LTD. 45.61 ARITHMETIC MEAN 24.32 COMPUTATION OF ARMS LENGTH PRICE BY THE TPO AND TH E ADJUSTMENT MADE TOWARDS THE SWD SERVICES PROVIDED BY THE ASSES SEE: ARMS LENGTH MEAN MARGIN 24.32% LESS: WORKING CAPITAL ADJUSTMENT* - ADJUSTED MEAN MARGIN OF THE COMPARABLES 24.32% OPERATING COST 7,30,00,000/- ARMS LENGTH PRICE (ALP) 119.35% OF OPERATING COST 9,07,53,600/- PRICE RECEIVED 8,00,00,000/- SHORTFALL BEING ADJUSTMENT U/S. 92CA 1,07,53,600/- 7. THE DIFFERENCE BETWEEN THE PRICE CHARGED BY THE ASSESSEE AND THE ALP DETERMINED BY THE TPO VIZ., RS.1,07,53,600/ - WAS ADDED TO THE TOTAL INCOME BY THE AO IN HIS DRAT ASSESSMENT O RDER AS ADDITION ON ACCOUNT OF SHORTFALL BEING ADJUSTMENT U/S.92CA OF T HE ACT. 8. THE ASSESSEE FILED OBJECTIONS TO THE DRAFT ASSES SMENT ORDER BY THE AO BEFORE THE DISPUTES RESOLUTION PANEL (DRP). THE DRP REJECTED THE OBJECTION OF THE ASSESSEE TO THE ACTION OF CHOO SING SOME OF THE COMPANIES OUT OF THE 11 COMPARABLE COMPANIES CHOSEN BY THE TPO. THE ASSESSEE PLEADED FOR INCLUSION OF TWO COMPANIES IN THE LIST OF : 8 : IT(TP)A NOS. 299 & 218/BANG/2014 COMPARABLE COMPANIES VIZ., FCS SOFTWARE SOLUTIONS L TD. AND THINKSOFT GLOBAL SERVICES LTD. THIS PLEA OF THE ASSESSEE WAS ACCEPTED BY THE DRP. AS A RESULT OF THE ORDER OF THE DRP, THE FOLL OWING 13 COMPANIES REMAINED AS COMPARABLE COMPANIES AND THE ARITHMETIC MEAN OF PROFIT MARGIN OF THESE COMPARABLE COMPANIES WERE AS FOLLOW S: LIST OF COMPARABLES POST DRPS DIRECTIONS: SL. NO. NAME OF THE COMPANY MARK UP UNADJUSTED (%) 1 KALS INFORMATION SYSTEMS LTD. 13.89 2 AKSHAY SOFTWARE TECHNOLOGIES LTD. 8.11 3 BODHTREE CONSULTING LTD. 62.27 4 R S SOFTWARE (INDIA) LTD. 9.97 5 TATA ELXSI LTD. (SEGMENTAL) 20.28 6 SASKEN COMMUNICATION TECHNOLOGIES LTD. (SEGMENTAL) 27.91 7 PERSISTENT SYSTEMS LTD. 41.40 8 ZYLOG SYSTEMS LTD. 7.81 9 MINDTREE LTD. (SEGMENTAL) 5.52 10 LARSEN AND TOUBRO INFOTECH 24.72 11 INFOSYS LTD. 45.61 12 FCS SOFTWARE SOLUTIONS LTD 16.75 13 THINKSOFT GLOBAL S ERVICES LTD. 16.27 ARITHMETIC MEAN 23.11 9. IN REVENUES APPEAL THE ONLY ISSUE TO BE DECIDED IS THE ACTION OF THE DRP IN INCLUDING TWO COMPARABLE COMPANIES VIZ., FCS SOFTWARE SOLUTIONS LTD. AND THINKSOFT GLOBAL SERVICES LTD. REGARDING THE ISSUE IN RESPECT OF INCLUSION OF TWO COMPARABLES I.E. THI NKSOFT GLOBAL SERVICES LTD. AND FCS SOFTWARE SOLUTIONS LTD., WE F IND THAT THIS TRIBUNAL ON AN IDENTICAL ISSUE RAISED BY THE REVENU E AGAINST THE ORDER OF DRP INCLUDING THE AFORESAID TWO COMPANIES AS FUNCTI ONALLY : 9 : IT(TP)A NOS. 299 & 218/BANG/2014 COMPARABLE WITH THE ASSESSEE WHO WAS ENGAGED IN THE BUSINESS OF PROVIDING SWD SERVICES TO AE SUCH AS THE ASSESSEE, HELD THAT THESE TWO COMPANIES WERE FUNCTIONALLY COMPARABLE WITH A C OMPANY RENDERING SWD SERVICES, IN THE CASE OF VMWARE SOFTW ARE INDIA PVT. LTD. VS. DCIT IT(TP)A.NO.1311/BANG/2014 FOR AY 2009 -10. THE LEARNED DR COULD NOT POINT OUT ANY DIFFERENCE IN FA CTS. WE THEREFORE HOLD THAT THESE TWO COMPARABLES SHOULD BE INCLUDED IN THE FINAL LIST OF COMPARABLES BY RESPECTFULLY FOLLOWING THE JUDGMENT CITED BY LD. AR OF ASSESSEE AND FIND NO MERIT IN THE APPEAL BY THE REV ENUE AND DISMISS THE SAME. 10. AS FAR AS THE APPEAL OF THE ASSESSEE IS CONCERN ED, THE FIRST ASPECT IS WITH REGARD TO EXCLUSION OF SOME OF THE COMPARAB LE COMPANIES CHOSEN BY THE TPO AND RETAINED BY THE DRP AS COMPAR ABLE COMPANIES. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFO RE US THAT THE COMPARABILITY OF THE FOLLOWING 5 COMPARABLE COMPANI ES OUT OF THE 13 COMPANIES THAT REMAIN AFTER THE ORDER OF THE DRP VI Z., (I) KALS INFORMATION SYSTEMS LTD., (II) BODHTREE CONSULTING LTD., (III) TATA ELXSI LTD., (IV) PERSISTENT SYSTEMS LTD. AND (V) IN FOSYS LTD. WAS CONSIDERED BY THE TRIBUNAL IN THE CASE OF INFINERA INDIA (P) LTD. VS. ITO (2016) 72 TAXMANN.COM 68 (BANG-TRIBUNAL). THE SAID DECISION WAS ALSO IN RELATION TO AY 2009-10. IN THE AFORESA ID DECISION THE ISSUE RAISED WAS AGAINST INCLUDING THE AFORESAID FIVE COM PANIES AS COMPARABLE COMPANIES. THE PLEA OF THE ASSESSEE WAS THAT THE AFORESAID FIVE COMPANIES ARE NOT FUNCTIONALLY COMPARABLE WITH THE ASSESSEE WHO WAS ENGAGED IN THE BUSINESS OF PROVIDING SWD SERVIC ES TO AE. IT IS : 10 : IT(TP)A NOS. 299 & 218/BANG/2014 ALSO NOT IN DISPUTE BEFORE US THAT THE FUNCTIONAL P ROFILE OF THE ASSESSEE IN THIS APPEAL AND THE ASSESSEE IN THE DECISION REN DERED IN THE CASE OF INFINERA INDIA (P) LTD.(SUPRA) ARE IDENTICAL. IN TH E CASE OF INFINERA INDIA (P) LTD.(SUPRA) THIS TRIBUNAL HELD THAT THE AFORESA ID 5 COMPANIES ARE NOT FUNCTIONALLY COMPARABLE WITH A COMPANY RENDERIN G SWD SERVICES. THE LEARNED DR COULD NOT POINT OUT ANY DIFFERENCE I N FACTS. HENCE, WE HOLD THESE 5 COMPANIES BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES AS FUNCTIONALLY NOT COMPARABLE WITH THE A SSESSEE COMPANY. 11. SIMILARLY ONE OF THE COMPARABLE COMPANY CHOSEN BY THE TPO AND RETAINED BY THE DRP VIZ., SASKEN COMMUNICATION TECHNOLOGIES LTD. WAS HELD TO BE FUNCTIONALLY DISMISSILAR WITH A N ASSESSEE WHO WAS ENGAGED IN THE BUSINESS OF PROVIDING SWD SERVICES T O AE SUCH AS THE ASSESSEE, IN THE CASE OF VM WARE SOFTWARE INDIA PR IVATE LIMITED (SUPRA). THE LEARNED DR COULD NOT POINT OUT ANY DIF FERENCE IN FACTS. HENCE, WE HOLD THIS COMPANY BE EXCLUDED FROM THE LI ST OF COMPARABLE COMPANIES AS FUNCTIONALLY NOT COMPARABLE WITH THE A SSESSEE COMPANY. 12. SIMILARLY ONE OF THE COMPARABLE COMPANY CHOSEN BY THE TPO AND RETAINED BY THE DRP VIZ., LARSEN & TOUBRO INFOT ECH LTD., WAS HELD TO BE NOT COMPARABLE COMPANY FOR THE REASON THAT TH E RELATED PARTY TRANSACTION TO SALES OF THIS COMPANY WAS MORE THAN 15% BY THIS TRIBUNAL IN THE CASE OF VM WARE SOFTWARE INDIA PRIV ATE LIMITED (SUPRA). THE LEARNED DR COULD NOT POINT OUT ANY DIF FERENCE IN FACTS. HENCE, WE HOLD THIS COMPANY BE EXCLUDED FROM THE LI ST OF COMPARABLE COMPANIES AS THE RELATED PARTY TRANSACTIONS TO SALE S WAS MORE THAN 15%. : 11 : IT(TP)A NOS. 299 & 218/BANG/2014 13. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TPO AND DRP ERRED IN NOT GIVING WORKING ADJUSTMENT TO THE P ROFIT MARGINS OF THE ASSESSEE AND THE COMPARABLE COMPANIES. THE LEA RNED DR OPPOSED THE PRAYER FOR ALLOWING WORKING CAPITAL ADJUSTMENT ON THE GROUND THAT THE WORKING OF WORKING ADJUSTMENT TO THE PROFIT MAR GINS WAS NOT SPECIFICALLY GIVEN BY THE ASSESSEE AND THAT THE ASS ESSEE SHOULD NOT BE GIVEN A SECOND INNINGS. WE HAVE CONSIDERED THE RIV AL SUBMISSIONS AND ARE OF THE VIEW THAT IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE, THIS ISSUE IS ACADEMIC BECAUSE AFTER EXCLUSION OF S EVERAL COMPANIES CHOSEN BY THE TPO AND RETAINED BY THE DRP ONLY 6 CO MPANIES REMAIN AS COMPARABLE COMPANIES AND THE ARITHMETIC PROFIT M ARGIN OF THESE COMPANIES WITHOUT WORKING CAPITAL ADJUSTMENT IS 10. 78% WHICH WOULD BE WITHIN THE PROFIT MARGIN OF 5% (+) (-) PERMISSI BLE UNDER THE PROVISO TO SEC.92(2) OF THE ACT. THEREFORE, WE DISMISS THE PLEA OF THE ASSESSEE IN THIS REGARD. WE MAKE IT CLEAR THAT WE HAVE NOT D ECIDED ON THE MERITS OF THE CLAIM OF THE ASSESSEE ON THIS ISSUE. THE TP O IS DIRECTED TO COMPUTE THE ALP AS PER THE DIRECTIONS GIVEN ABOVE A FTER AFFORDING ASSESSEE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE . RESEARCH AND DEVELOPMENT SERVICES SEGMENT: 14. AS FAR AS DETERMINATION OF ALP IN THIS SEGMENT IS CONCERNED, THE DISPUTES RAISED BY THE ASSESSEE ARE THAT THE NATURE OF SERVICES RENDERED BY THE ASSESSEE TO ITS AE WAS SWD SERVICES AND IT I S NOT CORRECT TO CHARACTERIZE THE SAME AS R& D SERVICES. THOUGH THI S WAS THE BASIS ON WHICH THE TP STUDY WAS UNDERTAKEN BY THE ASSESSEE, THE ASSESSEE SUBMITS THAT THERE IS NO ESTOPPELS IN THE MATTER OF DETERMINATION OF : 12 : IT(TP)A NOS. 299 & 218/BANG/2014 ALP. THE LEARNED COUNSEL IN THIS REGARD HAS ALSO PO INTED OUT THAT THE TPO IN AY 10-11 & 2011-12 ACCEPTED THE CLAIM OF THE ASSESSEE IN THIS REGARD AND THE RELEVANT ORDERS OF TPO WAS ALSO PLAC ED BEFORE US. THE OTHER GRIEVANCE PROJECTED BY THE ASSESSEE IS THAT E VEN ASSUMING THAT THE ASSESSEE IS TO BE REGARDED AS RENDERING R & D S ERVICES TO ITS AE, THE COMPARABLE COMPANIES CHOSEN BY THE TPO AND RETA INED BY THE DRP ARE NOT COMPARABLE FUNCTIONALLY AND OTHERWISE. THE OTHER GRIEVANCE PROJECTED BY THE ASSESSEE IS REGARDING NOT GRANTING WORKING CAPITAL ADJUSTMENT TO THE PROFIT MARGINS OF COMPARABLE COMP ANIES AND THE PROFIT MARGINS OF THE ASSESSEE BEFORE COMPARING THE PROFIT MARGINS WITH COMPARABLE COMPANIES TO ARRIVE AT ALP. 15. THE LEARNED DR ON THE OTHER HAND WHILE POINTING OUT THAT THE ASSESSEE IN HIS TP STUDY HAS CHOSEN TO CHARACTERIZE THE TRANSACTION WITH AE AS R & D SERVICES CANNOT NOW BE PERMITTED T O SAY THAT THE NATURE OF SERVICES IS AKIN TO SWD SERVICES. IN THI S REGARD HE ALSO DREW OUR ATTENTION TO THE AGREEMENT BETWEEN THE ASSESSEE AND ITS AE UNDER WHICH THE SERVICES IN QUESTION WERE RENDERED BY DRA WING OUR ATTENTION TO PAGE 4997 OF THE ASSESSEES PAPER BOOK. 16. WE HAVE HEARD THE RIVAL CONTENTIONS AND THE NAT URE OF SERVICE AS SET OUT IN THE NOTE FILED AS PART OF THE WRITTEN SU BMISSION BEFORE US. WE ARE NOT REPRODUCING THE NOTE FILED BY THE PARTIES B EFORE US AND THE CONTENTIONS PUT FORTH THEREIN BECAUSE IT REQUIRES E XAMINATION BY THE AO/TPO. WE ARE OF THE VIEW THAT IN THE LIGHT OF TH E TPOS ACCEPTANCE IN AY 20010-11 & 2011-12 THAT THE NATURE OF SERVICE S RENDERED WAS AKIN TO SWD SERVICES, THE ENTIRE COMPARABILITY CRIT ERIA WILL CHANGE AND : 13 : IT(TP)A NOS. 299 & 218/BANG/2014 THE COMPARABLE COMPANIES ALREADY RETAINED IN THE SW D SEGMENT WILL HOLD GOOD FOR THIS SEGMENT ALSO. WE THEREFORE FEEL THAT IT WOULD BE JUST AND APPROPRIATE TO REMAND FOR FRESH CONSIDERATION B Y THE AO/TPO OF THE NATURE OF SERVICES RENDERED BY THE ASSESSEE IN THIS SEGMENT. THIS WILL DEPEND UPON THE TERMS OF THE AGREEMENT BETWEEN THE ASSESSEE AND AE FOR RENDERING SERVICES WHICH ARE IN DISPUTE. THE TPO WILL DECIDE ON THE CHARACTER OF SERVICES RENDERED BY THE ASSESSEE WHETHER IT IS R & D OR SWD, AFTER AFFORDING OPPORTUNITY OF BEI NG HEARD TO THE ASSESSEE AND AFTER CONSIDERING ALL RELEVANT FACTORS . IF THE TPO COMES TO THE CONCLUSION THAT THE NATURE OF SERVICES RENDE RED IS SWD SERVICES, THEN THE COMPARABLE COMPANIES CHOSEN IN THE SWD SER VICES SEGMENT, WHICH WE HAVE ALREADY DECIDED IN THE EARLIER PARAGR APHS, WOULD BE APPLICABLE. IF HE COMES TO THE CONCLUSION THAT THE SERVICES RENDERED WERE IN THE NATURE OF R & D AND NOT SWD SERVICES, T HEN THE ISSUE WITH REGARD TO COMPARABILITY OF COMPANIES ALREADY CHOSEN BY THE TPO/DRP ON THE BASIS OF ASSUMPTION THAT THE ASSESSEE IS REN DERING R & D SERVICES AND WORKING ADJUSTMENT TO BE MADE TO THE P ROFIT MARGIN OF COMPARABLE COMPANIES CHOSEN ON THAT BASIS ARE LEFT OPEN FOR CONSIDERATION DE NOVO BY THE TPO IN THE SET ASIDE P ROCEEDINGS. 17. GR.NO.10 (GR.NO.10.1. TO 10.7) RAISED BY THE A SSESSEE IN ITS APPEAL IS WITH REGARD TO THE ACTION OF THE AO/DRP I N DISREGARDING THE REVISED COMPUTATION OF TOTAL INCOME WHEREBY THE LOS S DECLARED IN THE ORIGINAL COMPUTATION FILED ALONG WITH THE RETURN OF INCOME AT LOSS OF RS.9,40,42,566/- UNDER THE HEAD BUSINESS (COPY OF T HE RETURN IS AT PAGE 345 OF ASSESSEES PAPER BOOK) WAS REVISED TO LOSS O F RS.12,44,94,273/- : 14 : IT(TP)A NOS. 299 & 218/BANG/2014 BY FILING A REVISED COMPUTATION OF TOTAL INCOME (CO PY OF WHICH IS AT PAGE- 541 OF ASSESSEES PAPER BOOK ALONG WITH REASO NS FOR FILING REVISED COMPUTATION OF TOTAL INCOME CONTAINED IN SU BMISSION FILED BEFORE AO DATED 16.10.2012 WHICH IS AT 518 TO 540 A LONG WITH ANNEXURE AT PAGE 542 TO 567). ADMITTEDLY, NO REVIS ED RETURN OF INCOME WAS FILED. THE RELEVANT GROUNDS READ AS FOLLOWS: 10. DISREGARDING THE CORRECT BUSINESS LOSS INCREME NTAL CLAIMED IN THE REVISED COMPUTATION - RS. 3,04,51,707 10.1 THE LEARNED AO/DRP HAS ERRED IN REJECTING THE REVISED COMPUTATION FILED BY THE APPELLANT DURING THE COURS E OF ASSESSMENT PROCEEDINGS PURSUANT TO WHICH THE LOSS OF RS. 9,40, 42,566 WAS INCREASED TO RS. 12,44,94,273. 10.2 THE LEARNED AO/DRP OUGHT TO HAVE OBSERVED THAT THE COMPUTATION OF TOTAL INCOME WAS REVISED ONLY ONCE T O REFLECT THE CORRECT NUMBERS FLOWING FROM THE SEGMENTAL PROFIT AND LOSS ACCOUNT. 10.3 THE LEARNED AO/DRP OUGHT TO HAVE OBSERVED THAT HAVING ACCEPTED THE STARTING BASE AS THE PROFIT/LOSS AS PER THE SEG MENTAL PROFIT AND LOSS ACCOUNT IT IS BUT NATURAL THAT THE ALLOWANCES/DISAL LOWANCES IN THE SEGMENTAL COMPUTATION SHOULD BE THE RESPECTIVE COMP ONENTS OF THE P&L ACCOUNT. 10.4 THE LEARNED AO/ DRP OUGHT TO HAVE OBSERVED THA T HAD THE APPELLANT NOT FILED THE REVISED COMPUTATION EVEN TH EN THE AU OUGHT TO HAVE GIVEN EFFECT TO THE REVISED COMPUTATION SUO-MU TO AS THIS IS THE CORRECT COMPUTATION REFLECTING THE ALLOWANCES/DISALLOWANCE AS PER THE SEGMENTAL PROFIT AND LOSS ACCOUNT. 10.5 THE LEARNED AO/DRP HAS ERRED IN NOT CONSIDERIN G THE CIRCULAR (CIRCULAR NO. 14(XL-35) DATED 11.04.1955) ISSUED BY THE CENTRAL BOARD OF REVENUE (CBR). THE LEARNED AO/DRP ERRED IN CONCLUDING THAT THE ABO VE CIRCULAR DOES NOT APPLY TO THE INCOME-TAX ACT 1961 AND ERRED : 15 : IT(TP)A NOS. 299 & 218/BANG/2014 IN NOT PLACING RELIANCE ON SEVERAL JUDICIAL PRECEDE NTS WHICH HAVE UPHELD THE SAID CIRCULAR. 10.6 THE LEARNED DRP OUGHT TO HAVE OBSERVED THAT TH E ENHANCED CLAIM NOT MADE IN THE RETURN OF INCOME CAN BE MADE BEFORE THE APPELLATE AUTHORITIES. 10.7 NOTWITHSTANDING AND WITHOUT PREJUDICE TO THE A BOVE, THE APPELLANT SUBMITS THAT THE ENHANCED CLAIM NOT MADE IN THE RET URN OF INCOME CAN BE MADE BEFORE THE APPELLATE AUTHORITIES AND HENCE THE CLAIM IS BEING MADE BEFORE THE HONOURABLE TRIBUNAL. 18. THE REASONS FOR FILING REVISED COMPUTATION OF INCOME WAS THAT DURING THE TIME OF ASSESSMENT, THE ASSESSEE NOTICED THAT SOME ADJUSTMENTS IN THE SEGMENTAL TAX COMPUTATION WAS NO T MIRRORING THE SEGMENTAL P&LA/C. ALSO, CERTAIN ALLOCATION OF EXPEN SES WAS NOT MADE IN THE CORRECT UNITS. THE ASSESSEE, AFTER CONSIDER ING THE ABOVE ASPECTS RE-COMPUTED THE TAX COMPUTATION SEGMENTAL WISE MATC HING WITH THE SEGMENTAL P&L A/C, WHICH RESULTED IN AN ADDITIONAL LOSS AMOUNTING TO RS 3,04,51,707/-. 19. THE MAIN REASON ASSIGNED BY THE AO FOR NOT ACCEPTI NG THE REVISED COMPUTATION OF TOTAL INCOME IS ON THE BASIS THAT A REVISED RETURN OF INCOME WAS NOT FILED WITHIN THE TIME LIMIT PERMI TTED U/S.139(5) OF THE ACT AND BY PLACING RELIANCE ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF GOETZ INDIA LTD. VS. C IT 284 ITR 232(SC). IN THE SAID DECISION THE HONBLE SUPREME C OURT HELD THAT THE AO CANNOT EXAMINE A CLAIM MADE BEFORE HIM THAT IS C ONTRARY TO OR IN MODIFICATION OF THE CLAIM AS MADE IN THE ORIGINAL R ETURN FILED, WITHOUT A REVISED RETURN OF INCOME BEING FILED MAKING A NEW O R MODIFIED CLAIM. : 16 : IT(TP)A NOS. 299 & 218/BANG/2014 THE CONCLUSION OF THE AO ON THIS ASPECT IS CONTAINE D IN PAGE-12 OF THE IMPUGNED ORDER AT PARAGRAPH 2.2. THOUGH THERE ARE ALLEGATIONS BY THE AO THAT THE ASSESSEE HAS FILED SEVERAL REVISED COMP UTATIONS AND DOUBTED THE GENUINENESS OF CLAIM MADE IN A REVISED COMPUTATION OF INCOME, THE BASIS ON WHICH THE AO REFUSED TO EXAMIN E THE REVISED COMPUTATION OF INCOME IS BY PLACING RELIANCE ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF GOETZ (INDIA) LTD.(SUPRA). THE DRP UPHELD THE ORDER OF THE AO. 20. THE LEARNED COUNSEL BROUGHT TO OUR NOTICE THE REASO NS FOR FILING REVISED COMPUTATION OF TOTAL INCOME WERE COMPLETELY EXPLAINED BY THE ASSESSEE AND THAT THERE WAS NO LEGALLY JUSTIFIABLE REASONS ASSIGNED BY THE REVENUE AUTHORITIES FOR DISREGARDING THE REVISE D COMPUTATION OF TOTAL INCOME. A RECONCILIATION BETWEEN THE LOSS DE CLARED IN THE ORIGINAL RETURN OF INCOME AND LOSS DECLARED IN THE REVISED R ETURN OF INCOME IS ALSO GIVEN IN THE WRITTEN NOTE FILED BEFORE US. WE DO NOT WISH TO GO INTO THOSE DETAILS BECAUSE EXAMINATION OF THOSE DET AILS WAS NEITHER MADE BY THE AO NOR THE DRP. 21. THE LEARNED DR RELIED ON THE ORDER OF THE AO/DRP. H IS SUBMISSION WAS THAT IF THERE IS A CHANGE IN CLAIM O F RELIEF U/S.10A CONSEQUENT TO THE REVISED COMPUTATION OF TOTAL INCO ME, THEN IT HAS TO BE ACCOMPANIED BY REVISED CERTIFICATE OF CHARTERED ACC OUNTANT IN FORM 56F. THE ALLEGED 5 TH COMPUTATION OF TOTAL INCOME IS AT PAGE 541 TO 545 OF THE ASSESSEES PAPER BOOK WHICH IS ANNEXURE 2A T O THE LETTER DATED 16.10.2012 FILED BY THE ASSESSEE BEFORE AO WHICH IS AT PAGES 518 TO : 17 : IT(TP)A NOS. 299 & 218/BANG/2014 540 OF ASSESSEES PAPER BOOK. THE CONSENSUS OF THE PARTIES WAS THAT IF AT ALL THE REVISED COMPUTATION HAS TO BE CONSIDERED THEN IT IS THIS REVISED COMPUTATION THAT SHOULD BE THE BASIS FOR CO MPUTATION OF TOTAL INCOME. 22. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENT IONS AND THE MATERIAL ON RECORD. AN ASSESSEE WHO IS REQUIRED TO FILE A RETURN OF INCOME IS ENTITLED TO REVISE THE RETURN OF INCOME U NDER SECTION 139(5) OF THE ACT, ORIGINALLY FILED BY HIM TO MAKE SUCH AMENDMENTS, AD DITIONS OR CHANGES AS MAY BE FOUND NECESSARY BY HIM DUE TO ERROR OR OMISSION WHICH HE DISCOVERS SUBSEQUENT TO THE FILING OF THE ORIGINAL RETURN OF INCOME. SUCH A REVISED RETURN MAY BE FILED BY THE A SSESSEE AT ANY TIME BEFORE THE END OF THE RELEVANT ASSESSMENT YEAR OR B EFORE THE ASSESSMENT IS MADE WHICHEVER IS EARLIER UPTO AY. 2017-18 THE R ETURN CAN BE REVISED AT ANY TIME BEFORE THE EXPIRY OF ONE YEAR F ROM THE END OF RELEVANT ASSESSMENT YEAR OR BEFORE THE ASSESSMENT I S MADE WHICHEVER IS EARLIER. AT THE OUTSET, IT MAY BE STATED THAT IT I S THE SETTLED POSITION OF LAW THAT IN CASE OF AN ASSESSMENT U/S. 143(3) OF TH E ACT, AN ASSESSEE IS ENTITLED TO MAKE A FRESH CLAIM OR MODIFY A CLAIM AT ANY TIME BEFORE THE COMPLETION OF ASSESSMENT. ACTUALLY BEFORE THE AMEND MENT OF S.139(5) WITH EFFECT FROM 1.4.1989, A REVISED RETURN COULD B E FILED AT ANY TIME BEFORE THE ASSESSMENT WAS MADE. IT IS ON ACCOUNT OF AMENDMENT OF S.143(1) WITH EFFECT FROM 1.4.1989, THAT THE AFORES AID CHANGE IN S.139(5) WAS NECESSITATED. IF A RETURN OF INCOME IS ACCEPTED U/S. 143(1) BY ISSUE OF AN INTIMATION, THEN A TIME LIMIT HAD TO BE PRESCRIBED FOR REVISION OF SUCH A RETURN OF INCOME, IF IT WAS NOT SUBJECTED TO SCRUTINY : 18 : IT(TP)A NOS. 299 & 218/BANG/2014 U/S. 143(3) OF THE ACT. NO SUCH TIME LIMIT IS REQUI RED TO BE PRESCRIBED IN RESPECT OF AN ASSESSMENT U/S. 143(3) OF THE ACT. A REVISED RETURN MAY NOT SAVE PENALTY OR PROSECUTION IN RELATION TO THE ORIGINALLY FILED RETURN OF INCOME. IN OTHER WORDS, CASES OF CONCEALMENT AND FALSE STATEMENTS ARE NOT COVERED U/S. 139(5). THE VERY PURPOSE OF AS SESSMENT PROCEEDINGS BEFORE THE TAXING AUTHORITY IS TO CORRE CTLY ASSESS THE TAX LIABILITY OF AN ASSESSEE IN ACCORDANCE WITH LAW. TH EREFORE IT IS NOT CORRECT ON THE PART OF THE AO TO REFUSE TO SCRUTINI ZE THE REVISED COMPUTATION OF TOTAL INCOME. HIS ACTION IN THIS REG ARD WHICH WAS CONFIRMED BY THE DRP IS UNSUSTAINABLE AND IS HEREBY HELD TO BE NOT IN ACCORDANCE WITH LAW. 23. WE MAY ALSO ADD THAT THE DECISION RENDERED IN THE C ASE OF GOETZ INDIA PVT.LTD. (SUPRA) BASED ON WHICH THE REVENUE A UTHORITIES DREW THEIR CONCLUSIONS TO IGNORE THE REVISED COMPUTATION OF TOTAL INCOME HAS BEEN SUBJECT MATTER OF SEVERAL JUDICIAL PRONOUNCEME NTS. IN THE CASE OF JUTE CORPORATION OF INDIA LTD. VS. CIT (1990) 53 TA XMAN 85(SC), IT WAS HELD THAT THE FIRST APPELLATE AUTHORITY HAS WID E POWERS U/S.251(1)(A) OF THE ACT AND CAN ENTERTAIN AN ADDIT IONAL CLAIM, IN NATIONAL THERMAL POWER CO. LTD. VS. CIT 229 ITR 383 (SC) IT WAS HELD THAT THE PURPOSE OF PROCEEDINGS UNDER THE ACT IS FOR CORRECT DETERMINATION OF TAX LIABILITY AND EXAMINATION OF C LAIM ON THE BASIS OF FACTS ALREADY ON RECORD SHOULD BE ENTERTAINED. IN CIT VS. PRUITHIVI BROKERS & SHAREHOLDERS (2012) 23 TAXMANN.COM 23 (BO M) RAMCO CEMENTS LTD. VS. DCIT (2015) 55 TAXMANN.COM 79 (MAD ) RAKESH SINGH VS. ACIT (2012) 26 TAXMANN.COM 240(BANG-ITAT) AND : 19 : IT(TP)A NOS. 299 & 218/BANG/2014 CHICAGO PNEUMATIC INDIA LTD. VS. DCIT (2007) 15 SOT 252 (MUM- ITAT) IT WAS HELD THAT APPELLATE AUTHORITIES HAVE P OWER TO ENTERTAIN A NEW CLAIM DE HORS FILING REVISED RETURN OF INCOME A ND THAT THE PROHIBITION LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF GOETZ INDIA LTD. VS CIT 284 ITR 323 (SC) IS NOT APP LICABLE TO THE APPELLATE AUTHORITIES UNDER THE ACT. IN THE CASE OF CHICAGO PNEUMATIC INDIA LTD. VS. DCIT 15 SOT 252 (2007) (ITAT) (DEL), THE DELHI ITAT, IN THE CONTEXT OF ALLOW ABILITY OF NEW CLAIMS DURIN G THE ASSESSMENT PROCEEDINGS WITHOUT HAVING RECOURSE TO A REVISED RE TURN, HAS, PLACING RELIANCE ON PRINCIPLE EMBEDDED IN ARTICLE 265 OF IN DIAN CONSTITUTION (NO TAX CAN BE COLLECTED EXCEPT BY THE AUTHORITY OF LAW), CBDT CIRCULAR NO. 14 DATED 11 APRIL 1955 AND EXPLAINING THE RATIO OF THE GOETZ (INDIA) LTD. (SUPRA) RULING, CATEGORICALLY HE LD THAT ASSESSEE HAS THE RIGHT TO MAKE NEW CLAIMS DURING ASSESSMENT PROC EEDINGS WITHOUT RECOURSE TO A REVISED RETURN. THE TRIBUNAL DEALT WI TH THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF GOETZ (INDIA) LTD., (SUPRA) IN THE FOLLOWING MANNER: .AS FAR AS THE DECISION OF THE HON'BLE APEX COURT IN THE CASE OF GOETZE (INDIA) LTD. (SUPRA) IS CONCERNED, THERE IS NO DISPUTE THAT THE SAME IS BINDING ON EVERYBODY CONCERNED. IN THE SAID DECISION, THE HON'BLE APEX COURT HAS ALSO RULED THAT APPELLATE TR IBUNAL MAY ADJUDICATE THE ISSUE IF A CLAIM IS MADE BY ANY PART Y SUBJECT TO SATISFACTION OF PRESCRIBED RULES, HENCE, EVEN THE H ON'BLE APEX COURT HAS NOT BARRED THE ASSESSEE RAISE IT'S LEGAL CLAIM BEFORE APPELLATE AUTHORITIES. HOWEVER, SUCH PROCESS WOULD RESULT INT O UNDUE HARDSHIPS, DELAY AND MULTIPLICITY OF PROCEEDINGS. THE HON'BLE APEX COURT, ON NUMEROUS OCCASIONS HAS LAID THE PROPOSITION THAT TH E ASSESSING AUTHORITIES ARE BOUND TO COMPUTE THE CORRECT INCOME ONLY AND COLLECT ONLY LEGITIMATE TAX, HENCE, MERELY FOR A PROCEDURAL LAPSE OR TECHNICALITIES, IN OUR OPINION, THE ASSESSEE SHOULD NOT BE COMPELLED TO : 20 : IT(TP)A NOS. 299 & 218/BANG/2014 PAY MORE TAX THAN WHAT IS DUE FROM HIM. THEREFORE, THIS SITUATION HAS NECESSARILY TO BE LOOKED UPON FROM THE ANGLE OF DUT IES OF ASSESSING AUTHORITIES AS STATED EARLIER, CEDT IS THE APEX BOD Y FOR TAX ADMINISTRATION AND IT CAN ALSO ISSUE DIRECTIONS WHI CH ARE FOR THE BENEFIT OF THE ASSESSEE'S THOUGH SUCH DIRECTIONS MAY NOT BE INCONSONANCE WITH THE PROVISIONS OF LAW, HENCE, IF A CIRCULAR IS NOW ISSUED DIRECTING THE ASSESSING AUTHORITIES TO GRANT RELIEFS/REFUNDS WHIL E COMPLETING THE ASSESSMENT PROCEEDINGS, EVEN THOUGH SUCH CIRCULAR M AY BE AT VARIANCE WITH THE LAW, AS PRONOUNCED BY THE HON'BLE SUPREME COURT, BUT THE SAME WOULD BE BINDING ON THE SUBORDINATE INCOME-TAX AUTHORITIES. IN OUR OPINION, THEREFORE, CIRCULARS OF SAME NATURE WH ICH HAVE BEEN ALREADY ISSUED WOULD NOT BECOME IRRELEVANT OR CAN B E IGNORED. ADMITTEDLY, THE CIRCULAR ISSUED IN 1995 HAS NOT BEE N WITHDRAWN, HENCE, IT HAS GOT BINDING FORCE ON THE SUBORDINATE AUTHORI TIES EVEN AS ON DATE. ACCORDINGLY, WE HOLD THAT THE ASSESSING OFFICER IS BOUND TO ASSESS THE CORRECT INCOME AND FOR THIS PURPOSE, THE ASSESSING OFFICER MAY GRANT RELIEFS/REFUNDS SUO MOTO OR CAN DO SO ON BEING POIN TED OUT BY THE ASSESSEE IN THE COURSE OF ASSESSMENT PROCEEDINGS FO R WHICH ASSESSEE HAS NOT FILED REVISED RETURN, ALTHOUGH, AS PER LAW, THE ASSESSEE IS REQUIRED TO FILE THE REVISED RETURN ..... ' 24. THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CAS E CIT VS RAMCO INTERNATIONAL 221 CTR 491 (2008) HC (P&H) DIS TINGUISHED THE JUDGEMENT OF HONBLE SUPREME COURT IN THE CASE OF G OETZ (INDIA) PVT.LTD.(SUPRA) AND ALLOWED THE CLAIM OF THE ASSESS EE WHICH WAS MADE IN COURSE OF THE ASSESSMENT PROCEEDINGS AND NOT BY FILING REVISED RETURN. THE HONBLE DELHI HIGH COURT IN THE CASE O F JAI PARABOLIC SPRINGS 306 ITR 42 (DELHI) HAS HELD THAT THE APPELL ATE AUTHORITIES UNDER THE ACT, WERE FREE TO CONSIDER A CLAIM MADE B Y AN ASSESSEE EVEN IN THE ABSENCE OF A REVISED RETURN OF INCOME AND TH AT THE REQUIREMENT FOR FILING A REVISED RETURN OF INCOME AS LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF GOETZ INDIA LTD. (SUPR A) IS APPLICABLE ONLY WHEN A CLAIM IS MADE CONTRARY TO THE RETURN OF INCOME BEFORE THE AO. THE HONBLE DELHI HIGH COURT IN THE CASE OF BHA RAT ALUMINIUM : 21 : IT(TP)A NOS. 299 & 218/BANG/2014 163 TAXMAN 430J, HAS INTER-ALIA RULED THAT ASSESSEE CAN FILE REVISED COMPUTATION IN THE COURSE OF ONGOING ASSESSMENT PRO CEEDINGS UNDER THE ACT, WITHOUT MAKING RECOURSE TO REVISED RETURN, DESPITE THE FACT THAT TIME LIMIT FOR REVISING RETURN UNDER SECTION 139(5) HAD EXPIRED. 25. IN THE LIGHT OF THE ABOVE JUDICIAL PRONOUNCEMENTS O N THE ISSUE, WE ARE OF THE VIEW THAT THE INTEREST OF JUSTICE WOU LD BE MET, IF THE ORDER OF THE AO/DRP ON THIS ISSUE IS SET ASIDE AND BY DIR ECTING THE AO TO LOOK INTO THE REVISED COMPUTATION OF TOTAL INCOME A T PAGE 541 TO 545 OF THE ASSESSEES PAPER BOOK WHICH IS ANNEXURE 2A TO T HE LETTER DATED 16.10.2012 FILED BY THE ASSESSEE BEFORE AO WHICH IS AT PAGES 518 TO 540 OF ASSESSEES PAPER BOOK. THE AO WILL ALSO CONS IDER THE REASONS FOR SUCH REVISION OF TOTAL INCOME EXPLAINED IN THE LETTER DATED 16.10.2012 TOGETHER WITH OTHER ANNEXURE TO THE SAID LETTER. THE AO WILL AFFORD OPPORTUNITY OF BEING HEARD TO THE ASSESSEE B EFORE TAKING DECISION ON THE AFORESAID REVISED COMPUTATION OF TO TAL INCOME. THE RELEVANT GROUNDS ARE TREATED AS ALLOWED. 26. GR.NOS.11 & 12 RAISED BY THE ASSESSEE IN ITS APPEAL CAN BE DECIDED TOGETHER. THESE GROUNDS READ AS FOLLOWS: 11. REJECTION OF EXPORT TURNOVER OF IDF 1 UNIT AS PER T HE BOOKS OF ACCOUNTS 11.1 THE LEARNED AO/DRP HAS ERRED IN CONSIDERING TH E EXPORT SALES FOR IDF 1 AS PER THE ANNUAL PERFORMANCE REPORT (APR ) AND THE EXCISE RETURN AMOUNTING TO RS. 1,787,926,281 RESULTING IN A LOWER EXPORT SALES BEING CONSIDERED. : 22 : IT(TP)A NOS. 299 & 218/BANG/2014 11.2 THE LEARNED AO/DRP HAS ERRED IN REJECTING THE INVOICE WISE LISTING PROVIDED TO THE AO ALONG WITH THE INVOICE C OPIES, SHIPPING BILLS AND FOREIGN INWARD REMITTANCES CERTIFICATE (FIRC) F OR THE ENTIRE EXPORT SALES AND COMPUTING THE SALES AS PER THE APR AND EX CISE RETURN FILED, DESPITE ACKNOWLEDGING AND PLACING THE SAME ON RECOR D. 11.3 THE LEARNED AO/DRP HAS ERRED IN REJECTING THE INVOICE-WISE LISTING PLACED ON RECORD BY THE APPELLANT FOR EXPOR T SALES ON THE GROUNDS THAT: THERE ARE CERTAIN INVOICES DATED PRIOR TO 1 APR IL 2008 EXPORT TURNOVER EARNED THROUGH RAISING OF TRANSFE R PRICING (TP) DEBIT NOTES IS ON ACCOUNT OF TP ADJUSTMENTS UN DER SECTION 92C OF THE ACT. CERTAIN INVOICES ARE PENDING REALIZATION. INVOICES PRIOR TO 1 APRIL 2008 11.4 THE LEARNED AO/DRP OUGHT TO HAVE OBSERVED THAT THE ACCOUNTING FOR THE INVOICES IS DONE AS PER THE REVE NUE RECOGNITION POLICY OF THE ASSESSEE WHICH IS IN LINE WITH ACCOUN TING STANDARD 9 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. 11.5 THE LEARNED AO/DRP OUGHT TO HAVE OBSERVED THAT THE ABOVE INVOICES ARE FOR GOODS SOLD ON 'FREE ON BOARD' OR ' CASH INSURANCE FREIGHT' BASIS AND THE BILL OF LADING DATE FOR THE SAID INVOICES IS POST 1 APRIL 2008 AND IS ACCORDINGLY BOOKED AS REVENUE FOR THE YEAR ENDED MARCH 2009. 11.6 THE LEARNED AO/DRP OUGHT TO HAVE OBSERVED THAT SALES ARE RECOGNIZED ONLY IF THE GOODS ARE BOARDED ON THE SHI P THE EVIDENCE OF WHICH IS THE BILL OF LADING SUBMITTED. TRANSFER PRICING (TP) DEBIT NOTES 11.7 THE LEARNED AO/DRP HAS ERRED IN CONCLUDING THA T THE EXPORT TURNOVER EARNED THROUGH RAISING OF TP DEBIT NOTES A MOUNTING TO USD 1,39,85,083 (RS. 66,53,41,264) IS ON ACCOUNT OF TP ADJUSTMENTS UNDER SECTION 92C OF THE ACT. 11.8 THE LEARNED AO/DRP ERRED IN HOLDING THAT THERE WAS NO PHYSICAL EXPORT OF GOODS FROM THE FACTORY OF THE AP PELLANT FOR : 23 : IT(TP)A NOS. 299 & 218/BANG/2014 WHICH SUCH DEBIT NOTES WERE RAISED. 11.9 THE LEARNED AO/DRP OUGHT TO HAVE OBSERVED THAT THE ASSESSEE IS A CONTRACT MANUFACTURER FOR APC US AND OTHER OVERSEAS AFFILIATES AND THAT SUCH TP DEBIT NOTES WERE RAISED PURSUANT TO THE CON TRACT FOR MANUFACTURING ENTERED INTO BETWEEN THE ASSESSEE AND APC USA FOR THE EXPORT OF GOODS. 11.10 THE LEARNED AO/DRP OUGHT TO HAVE OBSERVED THA T THE TP DEBIT NOTES WERE RAISED SO THAT THE CONSIDERATION ON CONT RACT MANUFACTURING EXPORTED IS MET AT 15 % ON COSTS IN TERMS OF THE CO NTRACT FOR MANUFACTURING. 11.11 THE LEARNED AO/DRP OUGHT TO HAVE OBSERVED THA T THE TP DEBIT NOTES WERE NOTHING BUT AN INCREMENTAL PRICE FOR THE GOODS MANUFACTURED AND EXPORTED DURING THE FINANCIAL YEAR 2008-09. INVOICES PENDING REALIZATION 11.12 THE LEARNED AO/DRP ERRED IN HOLDING THAT THE ENTIRE INVOICE LISTING IS NOT ACCEPTABLE DUE TO CERTAIN INVOICES W HICH ARE PENDING REALIZATION. 11.13 THE LEARNED AO/DRP OUGHT TO HAVE OBSERVED THA T THE DETAILS OF UNREALIZED INVOICES AMOUNTING TO RS. 1,21,36,381 HA VE BEEN FURNISHED SUO- MOTTO BY THE ASSESSEE IN THE INVOICE WISE LISTING F URNISHED AND FOR THE BALANCE INVOICES FIRC COPIES HAVE BEEN PROVIDED SUB STANTIATING THE REALIZATIONS. 11.14 NOTWITHSTANDING AND WITHOUT PREJUDICE TO THE ABOVE, THE APPELLANT SUBMITS THAT THE AMOUNT OF RS. 1,21,36,381 SHOULD B E REDUCED FROM THE EXPORT TURNOVER FOR AY 2009-10 AND WHEN THIS AMOUNT IS REALIZED BY THE APPELLANT THE SAME SHOULD BE TREATED AS EXPORT TURN OVER FOR AY 2009-10 IN LINE WITH THE PROVISIONS OF THE ACT. 12. REJECTION OF EXPORT TURNOVER OF IDF 2 UNIT AS P ER THE BOOKS OF ACCOUNTS 12.1 THE LEARNED AO/DRP HAS ERRED IN CONSIDERING TH E EXPORT SALES FOR THE IDF 2 UNIT AS PER THE APR AND THE EXCISE RE TURN AMOUNTING TO RS. 1415,76,49,095 RESULTING IN A LOWER EXPORT SALE S BEING CONSIDERED. : 24 : IT(TP)A NOS. 299 & 218/BANG/2014 12.2 THE LEARNED AO/DRP HAS ERRED IN REJECTING THE INVOICE WISE LISTING PROVIDED TO THE AO ALONG WITH THE INVOICE COPIES, SHIPPING BILLS AND FOREIGN INWARD REMITTANCES CERTIFICATE (FIRC) FOR T HE ENTIRE EXPORT SALES AND COMPUTING THE SALES AS PER THE APR AND EXCISE R ETURN FILED DESPITE ACKNOWLEDGING AND PLACING THE SAME ON RECOR D. 12.3 THE LEARNED AO/DRP HAS ERRED IN REJECTING THE INVOICE-WISE LISTING PLACED ON RECORD BY THE ASSESSEE FOR EXPORT SALES ON THE GROUNDS THAT: THERE ARE CERTAIN INVOICES DATED PRIOR TO 1 APRIL 2008 CERTAIN INVOICES ARE PENDING REALIZATION. INVOICES PRIOR TO 1 APRIL 2008 12.4 THE LEARNED AO/DRP OUGHT TO HAVE OBSERVED THAT THE ACCOUNTING FOR THE INVOICES IS DONE AS PER THE REVE NUE RECOGNITION POLICY OF THE ASSESSEE WHICH IS IN LINE WITH ACCOUNTING ST ANDARD 9 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. 12.5 THE LEARNED AO/DRP OUGHT TO HAVE OBSERVED THAT THE ABOVE INVOICES ARE SOLD ON 'FREE ON BOARD' OR 'CASH INSUR ANCE FREIGHT BASIS AND THE BILL OF LADING DATE FOR THE SAID INVOICES I S POST 1 APRIL 2008 AND IS ACCORDINGLY BOOKED AS REVENUE FOR THE YEAR ENDED MARCH 2009. 12.6 THE LEARNED AO/DRP OUGHT TO HAVE OBSERVED THAT SALES ARE RECOGNIZED ONLY IF THE GOODS ARE BOARDED ON THE SHI P THE EVIDENCE OF WHICH IS THE BILL OF LADING SUBMITTED. INVOICES PENDING REALIZATION 12.7 THE LEARNED AO/DRP ERRED, IN HOLDING THAT THE ENTIRE INVOICE LISTING IS NOT ACCEPTABLE DUE TO CERTAIN INVOICES W HICH ARE PENDING REALIZATION. 12.8 THE LEARNED AO/DRP OUGHT TO HAVE OBSERVED THAT THE DETAILS OF UNREALIZED INVOICES AMOUNTING TO RS. 4,47,23,920 HA VE BEEN FURNISHED SUO- MOTTO BY THE ASSESSEE IN THE INVOICE WISE LISTING F URNISHED AND FOR THE BALANCE INVOICES FIRC COPIES HAVE BEEN PROVIDED SUB STANTIATING THE REALIZATIONS. 12.9 NOTWITHSTANDING AND WITHOUT PREJUDICE TO THE A BOVE, THE APPELLANT : 25 : IT(TP)A NOS. 299 & 218/BANG/2014 SUBMITS THAT THE AMOUNT OF RS. 4,47,23,920/- SHOULD BE REDUCED FROM THE EXPORT TURNOVER FOR AY 2009-10 TILL ITS REALIZATION AND WHEN THIS AMOUNT IS REALIZED BY THE APPELLANT THE SAME SHOULD BE TREATE D AS EXPORT TURNOVER FOR AY 2009-10 IN LINE WITH THE PROVISIONS OF THE ACT. 27. BEFORE WE PROCEED TO DISCUSS THE DISPUTE IN THE AFO RESAID GROUNDS OF APPEAL, WE SHALL SET OUT THE DIFFERENT U NITS OF THE ASSESSEE COMPANY. (I) IDF1/EHTP2 UNIT (HEREINAFTER REFERRED TO AS IDF1 UNIT) WHICH MANUFACTURES AND SELLS UPS SYSTEMS AND OTHER POWER PROTECTION DEVICES. THE PRODUCTS MANUFACTURED IN THIS UNIT ARE SOLD IN THE DOMESTIC AS WELL AS EXPORT MARKET. (II) IDF2/EHTP1 UNIT (HEREINAFTER REFERRED TO AS IDF2 UNIT) WHICH ALSO MANUFACTURES A ND SELLS UPS SYSTEMS AND OTHER POWER PROTECTION DEVICES. THE PRO DUCTS MANUFACTURED IN THIS UNIT IS SOLD IN THE DOMESTIC A S WELL AS EXPORT MARKET. (II) MAG UNIT WHICH IS ENGAGED IN THE BUSIN ESS OF TRADING OF UPS AND OTHER POWER PROTECTION DEVICES WHICH ARE PR OCURED EITHER LOCALLY OR THROUGH IMPORTS. THE SALES OF THIS UNIT IS ONLY IN DOMESTIC MARKET. (IV) SOFTWARE DEVELOPMENT BUSINESS FOR SCH NEIDER ELECTRIC IT CORPORATION, USA (EARLIER KNOWN AS AMERICAN POWER P OWER CONVERSION CORPORATION, USA (APCC USA) (PARENT COMP ANY). THIS UNIT ONLY EXPORTS SOFTWARE TO SCHNEIDER ELECTRIC IT CORPORATION, USA EARLIER KNOWN AS APCC USA (PARENT COMPANY). 28. WITH RESPECT TO EXPORT SALES IN IDF1 AND IDF 2 UNI TS, THE ASSESSEE IS A CONTRACT MANUFACTURER FOR SCHNEIDER E LECTRIC IT CORPORATION, USA (FORMERLY KNOWN AS AMERICAN POWER CONVERSION CORPORATION, USA) AND OTHER OVERSEAS AFFILIATES. TH E ASSESSEE IS : 26 : IT(TP)A NOS. 299 & 218/BANG/2014 ENTITLED TO A CONSIDERATION OF 15% ON APPROVED COST S IN RESPECT OF THE ABOVE. IDF1 AND IDF2 UNIT ARE ENTITLED TO CLAIM BE NEFIT OF DEDUCTION ON THEIR PROFITS U/S.10A OF THE ACT. THE AO WAS OF THE VIEW THAT THE ASSESSEE HAS SHOWN MORE PROFITS IN IDF1 AND IDF2 UN ITS WHEREAS HE HAS SHOWN LOSS IN MAG UNIT BECAUSE THE PROFITS OF M AG UNIT ARE TAXABLE. WITH THIS APPROACH HE HAS PROCEEDED TO EX AMINE THE CLAIM OF THE ASSESSEE FOR DEDUCTION U/S.10A OF THE IDF 1 AND IDF2 UNITS. THE APPROACH OF THE AO WAS INCORRECT BECAUSE AS WE HAVE SEEN IN THE EARLIER PARAGRAPH, MAG UNIT WAS DOING TRADING AND T HEIR PROFITS OR COST OF SALES CANNOT BE COMPARED WITH PROFITS OR COST OF SALES OF IDF 1 AND IDF2. 29. THE AO OBTAINED THE ANNUAL PERFORMANCE REPORT (APR ) FROM THE SOFTWARE TECHNOLOGY PARKS OF INDIA (STPI). APR IS A STATEMENT SUBMITTED TO STPI FOR PERFORMANCE APPRAISAL. THE R EVENUE RECOGNIZED THEREIN MAY NOT TALLY WITH THE TURNOVER AS SHOWN IN THE PROFIT & LOSS A/C. OF THE ASSESSEE FOR MANY REASONS SUCH AS REVEN UE RECOGNITION POLICY FOLLOWED BY AN ASSESSEE, RECOGNITION OF SALE VALUE AS PER THE PROVISIONS OF SEC.92 OF THE ACT BY MAKING ADJUSTMEN T TO ARMS LENGTH PRICE ON SALE TO A RELATED PARTY. THE SALES AS SHO WN IN THE APR FOR THE RELEVANT PREVIOUS YEAR OF IDF1 WAS RS. 178.79 CRS A ND SALES OF IDF 2 WAS RS. 1415.76 CRS. THE EXCISE RETURNS FILED TO TH E EXCISE AUTHORITIES ALSO REFLECTED THE SAME AMOUNT AS SHOWN IN THE APR. 30. THE AO ISSUED A NOTICE DATED 3 RD DECEMBER 2012 TO THE ASSESSEE ASKING FOR THE REASONS FOR THE DIFFERENCE IN THE AP R AND THE SEGMENTAL : 27 : IT(TP)A NOS. 299 & 218/BANG/2014 P&L. THE ASSESSEE REPLIED TO THE AFOREMENTIONED QU ERY BY PROVIDING RECONCILIATION BETWEEN SALES SHOWN IN APR AND THAT RECORDED IN THE PROFIT & LOSS ACCOUNT STATEMENT OF THE ASSESSEE. T HE RECONCILIATION SO FILED IS PART OF THE SUBMISSIONS DATED 13 TH DECEMBER 2012 (PAGES 642-645 FILE 3 OF THE PAPERBOOK) 14 TH FEBRUARY 2013 (PAGE 689 FILE 3 OF THE PAPERBOOK) AT PAGES 698-700 AND 14 TH MARCH 2013 (PAGES 4024-4028 OF FILE 17). EVERY INDIVIDUAL ITEM OF SALE INVOICE TOGETHER WITH FOREIGN INWARD REMITTANCE CERTIFICATE (FIRC) ( EVIDENCING REALIZATION OF SALE PROCEEDS ON EXPORT FROM OUTSIDE INDIA) WAS FILED BY THE ASSESSEE AND THIS FACT HAS BEEN ACCEPTED BY THE AO IN THE ORDER OF ASSESSMENT (LAST PARAGRAPH AT PAGE-27 OF AOS ORDER ). BASED ON SALES AS PER THE SALE INVOICES, THE SALE OF IDF1 AND IDF2 WERE 248,87,77,445 AND RS. 1429,53,87,950 RESPECTIVELY. THE RECONCILI ATION FILED BY THE ASSESSEE REGARDING THE ABOVE DISCREPANCY WAS AS FOL LOWS: FOR IDF1 UNIT: PARTICULARS EHTP 2/IDF 1 (RS) EXPORT SALES AS PER SALES LISTING 2,488,777,445 LESS: ITEMS NOT FORMING PART OF APR BUT IN SALES LISTING A. TP DEBIT NOTES 665,341,262 ADD: ITEMS NOT IN SALES LISTING BUT REPORTED IN APR B. SALES REVERSED IN SALES LISTING ON CIF TERMS FOR REVENUE RECOGNITION C. CREDIT NOTES ISSUED TO CUSTOMERS 6,297,848 498,296 LESS: ERRORS IN APR DUE T O WRONG 42,306,045 : 28 : IT(TP)A NOS. 299 & 218/BANG/2014 PARTICULARS EHTP 2/IDF 1 (RS) PUNCHING OF AMOUNTS AND DUE TO NON- INCLUSION OF CERTAIN SALES NOT REQUIRED TO BE REPORTED IN APR SALES REPORTED IN APR 1,787,926,281 THE EXPORT SALES RS. 248.87 CRORES HAS BEEN SUBSTAN TIATED WITH DOCUMENTARY EVIDENCES AS OBTAINED FROM THIRD PARTIE S. IN LIGHT OF THE ABOVE, WE SUBMIT THAT THE COMPANY HAS NOT MADE ANY INCORRECT SUBMISSIONS/REPLIES WITH REGARD TO ITS EX PORT SALES. ACCORDINGLY, WE SUBMIT THAT THE CORRECT EXPORT TURN OVER FOR THE PURPOSE OF 10A OUGHT TO BE RS. 248.87 CRORES. FOR IDF 2 UNIT PARTICULARS EHTP 1/IDF 2 (RS) EXPORT SALES AS PER SALES LISTING 14,295,387,959 ADD: ITEMS NOT IN SALES LISTING BUT REPORTED IN APR A. SALES REVERSED IN SALES LISTING ON CIF TERMS FOR REVENUE RECOGNIT IO N 38,726,658 LESS: ERRORS IN APR DUE TO WRONG PUNCHING OF AMOUNTS AND DUE TO NON- INCLUSION OF CERTAIN SALES NOT REQUIRED TO BE REPORTED IN APR 176,465,522 SALES REPORTED IN APR 14,157,649,095 THE EXPORT SALES OF RS. 1,429.53 CRORES HAS BEEN SU BSTANTIATED WITH DOCUMENTARY EVIDENCES AS OBTAINED FROM THIRD P ARTIES. IN LIGHT OF THE ABOVE, WE SUBMIT THAT THE COMPANY HAS NOT MADE ANY INCORRECT SUBMISSIONS/REPLIES WITH REGARD TO ITS EX PORT SALES. ACCORDINGLY, WE SUBMIT THAT THE CORRECT EXPORT TURN OVER FOR THE PURPOSE OF 10A OUGHT TO BE RS.1429.53 CRORES PLUS F OREX GAIN OF RS. 46.14 CRORES AMOUNTING TO RS. 1475.67 CRORES. : 29 : IT(TP)A NOS. 299 & 218/BANG/2014 31. THE AO ON EXAMINATION OF THE RECONCILIATION TOGETH ER WITH THE SALE INVOICE PRODUCED BY THE ASSESSEE, POINTED OUT THE FOLLOWING ASPECTS: IN RESPECT OF EDF-1 UNIT, THE AO WAS OF THE VIEW (I) THAT SALES TOTALLING RS.2,70,84,828/- THAT WERE CONSIDERED AS PART OF SALE FOR AY 2009-10 RELATED TO INVOICES RAISED FROM 22.3.200 8 TILL 29.3.2008 AND THESE SALES OUGHT TO HAVE BEEN RECOGN ISED AS SALES OF AY 2008-09 AND NOT 2009-10 AS DONE BY THE ASSESS EE. (II) THAT SALE VALUE TO THE TUNE OF RS.1,26,34,663/- WAS PENDING REALIZATION; (III) TRANSFER PRICING ADJUSTMENT OF RS.66,53,41,261/- CANNOT BE REGARDED AS SALE BECAUS E FOR SUCH SALES THERE IS NO SALES INVOICE NOR FIRC EVIDENCING RECEIPT OF EXPORT PROCEEDS IN FOREIGN CURRENCY. HENCE, THIS A MOUNT SHOULD ALSO BE NOT RECOGNIZED AS PART OF TURNOVER OF THE A SSESSEE. IN RESPECT OF EDF-2 UNIT , THE AO OBSERVED THAT 97 INVOICES WHICH PERTAINED TO AY 2008-09 (SALE FROM 8.2.2008 T O 27.3.2008) OF THE SALE VALUE OF RS.34,46,54,061/- W ERE RECORDED AS SALES OF AY 2009-10 WHEREAS THEY OUGHT TO HAVE B EEN RECOGNIZED AS SALE OF AY 2008-09. ON THE BASIS OF THE ABOVE FINDINGS, THE AO PROCEEDE D TO ADOPT THE SALE FIGURE AS PER THE APR AND CENTRAL EXCISE RETURNS. 32. ON APPEAL BY THE ASSESSEE, THE DRP CONFIRMED THE O RDER OF THE AO. HENCE, GRD.NO.11 & 12 BY THE ASSESSEE BEFORE T HE TRIBUNAL. : 30 : IT(TP)A NOS. 299 & 218/BANG/2014 33. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THA T THE EVIDENCE IN THE FORM OF DOCUMENTS SUBMITTED TO SUBS TANTIATE THE SALE OF FINISHED GOODS AS APPEARING IN THE SEGMENTAL PROFIT & LOSS ACCOUNT AS PER BOOKS OF ACCOUNTS MAINTAINED BY THE ASSESSEE WA S FURNISHED BY THE ASSESSEE DESPITE THE SALES DOCUMENTS WERE DESTROYED IN FIRE AND AFTER ENORMOUS EFFORTS THE ASSESSEE COULD GET THE REQUIRE D DOCUMENTS TO SUBSTANTIATE ITS CLAIM. HE DREW OUR ATTENTION TO T HE DETAILS FILED BY THE ASSESSEE WHICH ARE AS FOLLOWS: DETAILS SUBMISSIONS DATED SALES REGISTER ( PAGE 636 OF FILE 3) 13 TH DECEMBER 2012 PARTY WISE INVOICE WISE LISTING (SUBMISSION AT PAGE 689 (RELEVANT PAGE 692) OF FILE 3 AND LISTING AT PAGE N OS. 1898 TO 1979 FILE 8) 14 TH FEBRUARY 2013 100% INVOICE AND SHIPPING BILL COPIES OBTAINED FROM CLEARING HOUSE AGENTS (CHA) AND AUTHORIZED DEALER BANK (CITIBANK) [SUBMISSION AT PAGE 689 (RELEVANT PAGE 692 - 694) OF FILE 3] 14 TH FEBRUARY 2013 FIRC FOR REALIZATION OF THE EXPORT PROCEEDS OBTAINE D FROM THE CITIBANK ( SUBMISSION AT PAGE 689 (RELEVANT PAGE 695) OF FILE 3 AND COPIES OF THE FIRCS AT PAGE NOS 739 TO 1059 FILE 4) 14 TH FEBRUARY 2013 INVOICES, SALES LISTINGS AND FIRCS ALSO GIVEN VIDE SUBMISSION DATED 13 TH DECEMBER 2012 (SUBMISSION AT PAGE 636, RELEVANT PORTION AT PAGE 641) 13 TH DECEMBER 2012 THE ABOVE RECONCILIATION ACCORDING TO HIM EXPLAINS THE DIFFERENCE BETWEEN THE APR AND SEGMENTAL P & L. HE LAID EMPHA SIS ON THE FACT THAT THE AO IN PAGE 27 OF ASSESSMENT ORDER ACKNOWLE DGES THAT THE : 31 : IT(TP)A NOS. 299 & 218/BANG/2014 ABOVE EVIDENCE WAS FURNISHED AND DOES NOT DOUBT THE GENUINENESS OF THESE DOCUMENTS. 34. ON THE OBSERVATIONS OF THE AO IN THE ORDER OF ASSE SSMENT REGARDING RECOGNITION OF SALE OF AY 2008-09 IN AY 2 009-10, HE SUBMITTED THAT ACCOUNTING FOR INVOICES ARE MADE FOL LOWING THE PRINCIPLES OF THE AS 9 REVENUE RECOGNITION AS STA TED IN SCHEDULE 18(H) OF THE ANNUAL REPORT AT PAGE 232 OF PAPER BOO K NO.2). IN CASE OF FREE-ON-BOARD (FOB) SALES, THE SELLER FULFILS HIS O BLIGATIONS WHEN THE GOODS HAVE PASSED OVER THE SHIPS RAIL/AIRCRAFT AS THE CASE MAY BE, THE BILL OF LADING/ AIRWAY BILL WOULD INDICATE THE DATE OF BOARDING THE GOODS ON THE VESSEL/AIRCRAFT. IN CASE OF COST IN SURANCE FREIGHT BASIS SALES (CIF SALES) , REVENUE RECOGNITION WILL BE W HEN THE GOODS ARE DELIVERED TO THE BUYER I.E., MUCH AFTER THE DATE OF BILL OF LADING AND THE BILL OF LADING DATE IS POST APRIL 1, 2008 AND IS AC CORDINGLY BOOKED AS REVENUE FOR THE YEAR ENDED MARCH 2009. HE DREW OUR ATTENTION TO THE BILLS OF LADING/AIRWAY BILLS ALONG WITH SALES INVOI CES PRODUCED IN SUPPORT OF THE SAME (PAGES 3551-4008, FILES 15 AND 16 OF THE PAPER BOOK). HE THEREFORE SUBMITTED THAT THESE INVOICES SHOULD BE CONSIDERED AS SALES FOR FY 2008-09 RELEVANT TO AY 2009-10 ONLY . THESE SUBMISSIONS WERE NEITHER CONSIDERED BY AO NOR BY TH E DRP. 35. AS FAR AS THE TRANSFER PRICING DEBIT NOTES AMOUNTIN G TO USD 1,39,85,083 EQUIVALENT TO RS.66,53,41,264/- RAISED BY THE ASSESSEE (SUBMISSION DATED 4 TH MARCH 2013- PAGE NUMBER 3390 TO 3547- FILE 15) IN THE CASE OF IDF-1 UNIT ARE CONCERNED, THE LEARNE D COUNSEL FOR THE : 32 : IT(TP)A NOS. 299 & 218/BANG/2014 ASSESSEE SUBMITTED THAT THE SAME WILL NOT BE REFLEC TED IN APR SALES AS THERE IS NO REQUIREMENT TO REPORT THE SAME IN THE A PR. HE SUBMITTED THAT ACCORDING TO THE AO THERE WAS NO PHYSICAL EXPO RT OF GOODS FROM THE FACTORY OF THE ASSESSEE FOR WHICH SUCH DEBIT NO TES WERE RAISED. IN THIS REGARD HE SUBMITTED THAT THE ASSESSEE IS A CON TRACT MANUFACTURER AND IS ENTITLED TO A CONSIDERATION OF 15% ON APPROV ED COSTS IN RESPECT OF ITS MANUFACTURED EXPORT SALES (AGREEMENT AVAILAB LE PAGES 3396-3403 OF FILE 15 OF THE PAPER BOOK, RELEVANT CLAUSES BEIN G CLAUSES 5, 5.1, 5.4).THE SAME WAS FURNISHED BEFORE THE LEARNED AO V IDE SUBMISSIONS DATED 4 MARCH 2013 (PAGE 3390 OF FILE NO. 15). THE ASSESSEE INITIALLY INVOICES THE EXPORT SALES ON THE BASIS OF ESTIMATES OR APPLYING THE 15% MARKUP ON STANDARD COSTING. AT THE TIME OF RAISING THE INVOICE, THE ACTUAL COST OF PRODUCTION IS NOT DETERMINABLE AND H ENCE STANDARD COST IS USED FOR THE PURPOSES OF DETERMINING THE AMOUNT TO BE CHARGED AS MANUFACTURING FEES. PERIODICALLY AND DEFINITELY AT THE END OF THE YEAR, THE ACTUAL EXPENDITURE INCURRED IN UNDERTAKING THE CONTRACT MANUFACTURING ACTIVITIES IS DETERMINED. THE SHORTFA LL IN INVOICING, IF ANY, IS MADE UP BY RAISING A TP DEBIT NOTE SO THAT THE CONSIDERATION ON CONTRACT MANUFACTURING IS MET AT 15 % ON COSTS. THE AMOUNTS REFLECTED IN THE TP DEBIT NOTES REPRESENT THE DIFFERENTIAL CO NSIDERATION FOR THE EXPORT SALES MADE DURING FY 2008-09 AND ACCORDINGLY THE SUM OF RS 66,53,41,264/- SHOULD FORM PART OF THE EXPORT TURNO VER WHILE CONSIDERING THE DEDUCTION UNDER SECTION 10A OF THE INCOME-TAX ACT 1961 (THE ACT). IN THIS CONTEXT IT MAY BE MENTIONE D THAT IF THE ABOVE CONSIDERATION WERE TO HAVE BEEN BILLED AS PART OF T HE EXPORT INVOICES : 33 : IT(TP)A NOS. 299 & 218/BANG/2014 (I.E., IN THE SITUATION IF ASSESSEE WERE TO HAVE ES TIMATED ITS MANUFACTURING COSTS CORRECTLY AT THE INCEPTION OF T HE YEAR ITSELF), THESE WOULD HAVE FORMED PART OF THE RESPECTIVE EXPORT INV OICES AND HENCE ELIGIBLE FOR EXPORT TURNOVER UNDER SECTION 10A. THE FACT THAT THESE HAVE BEEN RAISED AS PART OF A SEPARATE TP DEBIT NOT E DOES NOT IN ANY WAY TAKE AWAY THE FACT THAT THESE ARE DIRECTLY LINK ED TO THE EXPORT OF GOODS MADE DURING FY 2008-09 AND IS HENCE ELIGIBLE AS PART OF EXPORT TURNOVER FOR SECTION 10A PURPOSES. THE TERM EXPORT TURNOVER AS DEFINED IN SECTION 10A OF THE ACT MEANS THE CONSIDE RATION IN RESPECT OF EXPORT OF ARTICLES OR THINGS. IN PRACTICAL BUSINESS PARLANCE, THE CONSIDERATION COULD BE RECEIVED IN ONE OR MULTIPLE INVOICES. THIS IS A COMMERCIAL ARRANGEMENT. THE CONSIDERATION RECEIVED FROM TP DEBIT NOTES IS IDENTIFIABLE WITH THE EXPORT OF ARTICLES O R THINGS, AND HENCE THE SAME PARTAKE THE CHARACTER OF EXPORT TURNOVER FOR T HE PURPOSES OF SECTION 10A OF THE ACT. THE ASSESSEE RAISED TP DEB IT NOTES ON APCC USA IN RESPECT OF ITS EXPORT SALES AMOUNTING TO USD 1,39,85,083 (IN RS. 66,53,41,264). THE SNAPSHOT OF THE TP DEBIT NO TES RAISED DURING THE FY 2008-09 IS AS GIVEN BELOW: DEBIT NOTE DATE PARTICULARS DEBIT NOTE NO. AMOUNT (USD) AMOUNT (RS.) 31-MAR-09 APCC - USA DEBTORS MFGFY08090-14 17,85,319 8,31,19,090 30-SEP-08 APCC - USA DEBTORS RIHAB202-13 24,61,371 10,53,17,389 31-DEC-08 APCC - USA DEBTORS RIHAB101-25 97,38,393 47,69,04,785 TOTAL 1,39,85,083 66,53,41,264 : 34 : IT(TP)A NOS. 299 & 218/BANG/2014 HE SUBMITTED THAT THE ABOVE EXPLANATION WAS NOT CON SIDERED BY THE AO OR BY THE DRP. 36. AS FAR AS IDF-1 UNIT AND IDF-2 UNIT EXPORT TURNOVER IS CONCERNED, THE AOS ACTION OF CONSIDERING TURNOVER OF RS.1,26,34,663/- AND RS.4,55,03,164 RESPECTIVELY AS INVOICES PENDING REALIZATIONS AND THEREFORE TO BE DISREGARDED FOR THE PURPOSE OF CONS IDERING EXPORT TURNOVER OF THE ASSESSEE FOR THAT UNIT, THE LEARNED COUNSEL BROUGHT TO OUR NOTICE THE DETAILS OF INVOICE REALIZATION IN RE SPECT OF IDF-1 UNIT AND IDF-2 UNIT RESPECTIVELY, WHICH IS AS FOLLOWS: IDF-1 UNIT: PARTICULARS AMOUNT (IN CRS.) REFER NOTE USD INVOICE VALUE- INR REALIZATION VALUE-INR REALIZED TILL 30 TH SEPTEMBER 2009 4.08 180.91 198.91 1 REALIZED POST 30 TH SEPTEMBER 2009 BUT WITHIN 12 MONTHS OF INVOICING AS PER FEMA REGULATIONS - - REALIZED POST 30 TH SEPTEMBER 2009 BUT AFTER 12 MONTHS OF INVOICING 1.40 66.70 66.81 3 TOTAL REALIZED TILL DATE 5.49 247.69 265.72 UNREALIZED TILL DATE 0.03 1.19 - 4 EXPORT SALES AS PER SALES LISTING 5.51 248.88 248.88 : 35 : IT(TP)A NOS. 299 & 218/BANG/2014 (CHART AVAILABLE IN SUBMISSION DATED 14 TH FEBRUARY 2013 AT PAGE 695 PAPER BOOK 3) IDF2 UNIT: THE DETAILS OF THE EXPORT REALIZATIONS FOR EHTP 1 T O BE CONSIDERED FOR THE PURPOSES OF SECTION 10A AS UNDER: PARTICULARS AMOUNT IN CRS. REFER NOTE USD INVOICE VALUE- INR REALIZATION VALUE-INR REALIZED TILL 30 TH SEPTEMBER 2009 29.29 1288.64 1359.08 1 REALIZED POST 30 TH SEPTEMBER 2009 BUT WITHIN 12 MONTHS OF INVOICING AS PER FEMA REGULATIONS 2.77 134.99 142.87 2 REALIZED POST 30 TH SEPTEMBER 2009 BUT AFTER 12 MONTHS OF INVOICING 0.02 0.49 0.61 3 TOTAL REALIZED TILL DATE 32.07 1424.12 1502.55 UNREALIZED TILL DATE 0.12 5.41 - 4 EXPORT SALES AS PER SALES LISTING 32.19 1429.54 1429.54 (CHART AVAILABLE IN SUBMISSION DATED 14 FEBRUARY 20 13 AT PAGE 695 PAPER BOOK 3) NOTE 1: THIS AMOUNT HAS BEEN FULLY REALIZED AND THEREFORE I S COMPLETELY ELIGIBLE FOR SECTION 10A. NOTE 2: INVOICES WHICH WERE REALIZED BEYOND 6 MONTHS FROM T HE END OF THE FY BUT WITHIN 12 MONTHS FROM THE DATE OF THE INVOICE. : 36 : IT(TP)A NOS. 299 & 218/BANG/2014 NOTE 3: INVOICES WHICH WERE REALIZED POST 6 MONTHS FROM THE END OF FY AND ALSO FROM THE 12 MONTHS FROM THE DATE OF INVOIC ING AS PER PROVISION OF SECTION 10A EXPORT PROCEEDS SHO ULD BE REALIZED WITHIN 6 MONTHS FROM THE END OF FY OR SUCH FURTHER PERIOD AS THE COMPETENT AUTHORITY MAY ALLOW IN THIS BEHALF COMPETENT AUTHORITY' MEANS THE RESERVE BANK OF IND IA (RBI) OR SUCH OTHER AUTHORITY AS IS AUTHORIZED FOR REGULA TING PAYMENTS AND DEALINGS IN FOREIGN EXCHANGE 1 NOTIFICATION NO. FEMA 176 / 2008-RB ISSUED BY THE R BI WHEREIN TIME LIMIT FOR REALIZATION OF EXPORT PROCEE DS WAS ENHANCED FROM 6 MONTHS TO 12 MONTHS FROM DATE OF EX PORT IT IS THE SUBMISSION THAT SINCE THE EXPORT PROCEEDS BOUGHT INTO INDIA AFTER SAID PERIOD OF 12 MONTHS ARE VIA A FIRC DULY RECEIVED FROM THE AUTHORIZED DEALER, SAME SHOULD BE DEEMED TO BE ALLOWED BY THE COMPETENT AUTHORITY AND THUS IS T O BE ALLOWED IN TERMS OF SECTION 155(11A). NOTE 4: THIS AMOUNT IS UNREALIZED AS OF DATE AND THEREFORE THE SAME MAY NOT BE CONSIDERED AS PART OF EXPORT TURNOVER FOR AY 2009-1 0. IT WAS SUBMITTED THAT SHOULD PERMITTED TO CLAIM THE DEDUCT ION AS REGARDS THE SAME ONCE THE SAME HAS BEEN REALIZED IN TERMS OF SE CTION 155 (11A) OF THE ACT. IT WAS FURTHER SUBMITTED BY HIM THAT THE OBSERVATIONS OF THE AO THAT THERE ARE INVOICES PENDING REALIZATION OF E XPORT PROCEEDS WERE MADE FOR THE FIRST TIME IN THE DRAFT ASSESSMENT ORD ER, WITHOUT THE : 37 : IT(TP)A NOS. 299 & 218/BANG/2014 ASSESSEE BEING ISSUED ANY NOTICE ON THE SAID ISSUE. THE ASSESSEE MADE SUBMISSIONS ON THE AVAILABILITY OF THE DEDUCTION UN DER SECTION 10A AS ABOVE BEFORE THE DRP AT PAGE 4902 OF PAPER BOOK NO. 20. THE AFORESAID SUBMISSIONS MADE TO DRP WERE NOT CONSIDER ED BY IT. IN SUPPORT OF HIS CONTENTION REGARDING REALIZATION OF EXPORT PROCEEDS, THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE FOLL OWING JUDICIAL PRONOUNCEMENTS. DCIT V. SEEC TECHNOLOGIES P. LTD [ORDER DATED 10 AP RIL 2012 IN ITA NO. 1614/HYD/2010] HCL EAI SERVICES LTD.V. DCIT [2013] 35 TAXMANN.COM 146 (BANGALORE - TRIB.) BAJAJ TEMPO V CIT (1992) 196 ITR 188 (SC ) DCIT V. IGATE GLOBAL SOLUTIONS LTD ( JUDGMENT OF TH IS HONBLE TRIBUNAL DATED 10 MAY 2013 IN ITA NO. 429/BANG/2012 ) 37. THE LEARNED COUNSEL SUBMITTED THAT THE SALES AS P ER APR SHOULD NOT BE CONSIDERED BECAUSE, THERE IS DISCREPANCY IN THE AMOUNT OF SALES REPORTED IN APR VIS--VIS SEGMENTAL PROFIT AND LOSS ACCOUNT, WHICH IS ON ACCOUNT OF THE FOLLOWING: (I) APR INVOICE RECOR DED AS PER DATE OF SHIPMENT, WHILE IN FINANCIALS WHEN RISK AND REWARD OF OWNERSHIP IS TRANSFERRED. FOR SALES ON CIF TERMS OWNERSHIP IS TR ANSFERRED WHEN GOODS REACH THE BUYER. ERRORS IN PUNCHING OF WRONG AMOUNTS (WHICH IS BECAUSE APR IS A MANUAL PROCEDURE) WAS DEMONSTRATED WITH ACTUAL INVOICE COPIES. THE LEARNED COUNSEL FOR ASSESSEE SU BMITTED THAT THE ABOVE DISCREPANCIES HAVE BEEN EXPLAINED TO THE LEAR NED AO VIDE : 38 : IT(TP)A NOS. 299 & 218/BANG/2014 SUBMISSIONS DATED 13 TH DECEMBER 2012 (SUBMISSION PAGE NUMBER 636 AND EXPLANATION IN APPENDIX 1, RELEVANT PAGES 642 T O 644 - FILE 3) AND 14 TH FEBRUARY 2013 ALONG WITH INVOICES AND FIRCS DEMONS TRATING REALIZATION OF THE EXPORT (SUBMISSION PAGE NO. 689 AND EXPLANATION IN ANNEXURE 1 PAGE 690 TO 702- FILE 3, RELEVANT PAGE 6 96; SUPPORTING FIRCS SUBMITTED THERE UNDER AT PAGE NOS. 739 TO 105 9 FILE 4). IT WAS FURTHER SUBMITTED THAT FOR PREPARATION OF EXCISE RE TURN APR WAS USED A BASIS. THUS, THERE WAS A DISCREPANCY BETWEEN EXPORT SALES AS PER EXCISE RETURN AND SEGMENTAL PROFIT AND LOSS ACCOUNT, WHICH WAS ALSO EXPLAINED IN THE SUBMISSION DATED 14 FEBRUARY 2013 (SUBMISSIO N PAGE NUMBER 689 AND EXPLANATION IN ANNEXURE 1 PAGE 690 TO 702- FILE 3). IT WAS ALSO SUBMITTED THAT THE AO WAS NOT RIGHT IN HIS OBS ERVATIONS THAT FOR EXPORT OF COMPONENTS THE ASSESSEE HAS NOT FURNISHED ANY DETAILS. THE INVOICES ALONG WITH FIRCS DEMONSTRATING REALIZATION OF THE EXPORT OF COMPONENTS WERE FURNISHED BEFORE THE LEARNED AO VID E SUBMISSIONS DATED 13 TH DECEMBER 2012 AT PAGE 646, AND 14 FEBRUARY 2013 (SUBMISSION AT PAGE 689, 695 OF FILE 3 (INVOICE-WIS E SALES LISTING IN FILE NO. 8 OF THE PAPER BOOK INCLUDES SALES OF COMP ONENTS AS WELL) AND SUPPORTING FIRCS SUBMITTED THERE UNDER AT PAGE NOS. 739 TO 1059 FILE 4). SEPARATE SALES INVOICES FOR COMPONENTS WA S ALSO GIVEN AS IS EVIDENT IN THE SUBMISSION AT PAGE 646 PAPER NPPL NO. 3. THE LEARNED COUNSEL THEREFORE PRAYED THAT THE EXPORT TURNOVER A S PER THE SEGMENTAL P & L OF THE ASSESSEE TO BE ADOPTED. 38. THE LEARNED DR REITERATED THE CASE OF THE AO AS REF LECTED IN THE DRAFT ASSESSMENT ORDER. : 39 : IT(TP)A NOS. 299 & 218/BANG/2014 39. UNDER SEC.10A OF THE ACT, A DEDUCTION OF SUCH PROFITS AND GAINS AS ARE DERIVED BY AN UNDERTAKING FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE FOR A PERIOD OF TEN CONSECUTIVE A SSESSMENT YEARS BEGINNING WITH THE ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WHICH THE UNDERTAKING BEGINS TO MANUFACTURE OR PROD UCE SUCH ARTICLES OR THINGS OR COMPUTER SOFTWARE, AS THE CASE MAY BE, SHALL BE ALLOWED FROM THE TOTAL INCOME OF THE ASSESSEE. SEC.10(4) L AYS DOWN THAT THE PROFITS DERIVED FROM EXPORT OF ARTICLES OR THINGS O R COMPUTER SOFTWARE SHALL BE THE AMOUNT WHICH BEARS TO THE PROFITS OF T HE BUSINESS OF THE UNDERTAKING, THE SAME PROPORTION AS THE EXPORT TURN OVER IN RESPECT OF SUCH ARTICLES OR THINGS OR COMPUTER SOFTWARE BEARS TO THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING. EXPL ANATION 2(IV) DEFINES EXPORT TURNOVER' TO MEAN THE CONSIDERATION IN RES PECT OF EXPORT BY THE UNDERTAKING OF ARTICLES OR THINGS OR COMPUTER SOFTW ARE RECEIVED IN, OR BROUGHT INTO, INDIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE IN ACCORDANCE WITH SUB-SECTION (3), BUT DOES NOT INCLU DE FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA OR EXPENSES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA. NEITHER SECTION 10A NOR SECTION 2 O F THE ACT DEFINE THE TERM TOTAL TURNOVER. WHEN A PARTICULAR WORD IS NO T DEFINED BY THE LEGISLATURE AND AN ORDINARY MEANING IS TO BE ATTRIB UTED TO IT, THE SAID ORDINARY MEANING IS TO BE IN CONFORMITY WITH THE CO NTEXT IN WHICH IT IS USED. : 40 : IT(TP)A NOS. 299 & 218/BANG/2014 40. THE QUANTUM OF DEDUCTION U/S.10A OF THE ACT, WOULD THEREFORE DEPEND ON THE QUANTUM CONSIDERED AS TURNOVER OF AN ASSESSEE. SO ALSO THE DEDUCTION U/S.10A WOULD DEPEND ON EXPORT T URNOVER I.E., CONSIDERATION IN RESPECT OF EXPORT BEING RECEIVED I N, OR BROUGHT INTO, INDIA IN CONVERTIBLE FOREIGN EXCHANGE IN ACCORDANCE WITH SECTION 10A (3). TURNOVER OF IDF-1 UNIT: 41. IN SO FAR AS TURNOVER OF IDF-1 UNIT IS CONCERNED, T HE FIRST DISPUTE IS WITH REGARD TO NON-INCLUSION BY THE REVENUE AUTH ORITIES OF A SUM OF RS.66,53,41,262/- UNDER THE NAME TP DEBIT NOTES AS PART OF THE EXPORT TURNOVER OF THE ASSESSEE FOR COMPUTING DEDUCTION U/ S.10A OF THE ACT. IT IS UNDISPUTED THAT THE ASSESSEE IS A CONTRACT MA NUFACTURER AND IS ENTITLED TO A CONSIDERATION OF 15% ON APPROVED COST S IN RESPECT OF ITS MANUFACTURED EXPORT SALES. IT IS ALSO NOT DISPUTED THAT THE ASSESSEE INITIALLY INVOICES THE EXPORT SALES ON THE BASIS OF ESTIMATES OR APPLYING THE 15% MARKUP ON STANDARD COSTING. AT THE TIME OF RAISING THE INVOICE, THE ACTUAL COST OF PRODUCTION IS NOT DETERMINABLE A ND HENCE STANDARD COST IS USED FOR THE PURPOSES OF DETERMINING THE AM OUNT TO BE CHARGED AS MANUFACTURING FEES. PERIODICALLY AND DEFINITELY AT THE END OF THE YEAR, THE ACTUAL EXPENDITURE INCURRED IN UNDERTAKIN G THE CONTRACT MANUFACTURING ACTIVITIES IS DETERMINED. THE SHORTFA LL IN INVOICING, IF ANY, IS MADE UP BY RAISING A TP DEBIT NOTE SO THAT THE CONSIDERATION ON CONTRACT MANUFACTURING IS MET AT 15 % ON COSTS. THE AMOUNTS REFLECTED IN THE TP DEBIT NOTES REPRESENT THE DIFFERENTIAL CO NSIDERATION FOR THE EXPORT SALES MADE DURING FY 2008-09 AND ACCORDINGLY THE SUM OF RS : 41 : IT(TP)A NOS. 299 & 218/BANG/2014 66,53,41,264/- SHOULD FORM PART OF THE EXPORT TURNO VER WHILE CONSIDERING THE DEDUCTION UNDER SECTION 10A OF THE INCOME-TAX ACT 1961 (THE ACT). AS RIGHTLY CONTENDED BY THE LEARNE D COUNSEL FOR THE ASSESSEE, THE TERM EXPORT TURNOVER AS DEFINED IN SECTION 10A OF THE ACT MEANS THE CONSIDERATION IN RESPECT OF EXPORT OF ARTICLES OR THINGS. IN PRACTICAL BUSINESS PARLANCE, THE CONSIDERATION C OULD BE RECEIVED IN ONE OR MULTIPLE INVOICES. THE CONSIDERATION RECEIV ED FROM TP DEBIT NOTES IS IDENTIFIABLE WITH THE EXPORT OF ARTICLES O R THINGS, AND HENCE THE SAME PARTAKE THE CHARACTER OF EXPORT TURNOVER FOR T HE PURPOSES OF SECTION 10A OF THE ACT. THE ASSESSEE RAISED TP DEB IT NOTES ON APCC USA IN RESPECT OF ITS EXPORT SALES AMOUNTING TO USD 1,39,85,083 (IN RS. 66,53,41,264) AND THESE DEBIT NOTES WERE RAISED DURING THE PREVIOUS YEAR RELEVANT TO AY 2009-10. HENCE, WE HOLD THAT T HE REVENUE AUTHORITIES WERE NOT JUSTIFIED IN NOT CONSIDERING R S.66,53,41,262 AS PART OF THE EXPORT TURNOVER OF THE ASSESSEE IN IDF-1 UNI T FOR AY 2009-10. 42. THE SECOND COMPONENT OF TURNOVER WHICH IS IN DISPUT E IS THE NON-INCLUSION OF RS.62,97,848 WHICH WAS SALES WHICH WERE TREATED AS PRIOR PERIOD (AY 2008-09 SALES) BY THE AO ON THE BA SIS OF THE DATES OF SALES INVOICE THAT WERE WAS PRIOR TO 1.4.2008. TH E ASSESSEES METHOD OF ACCOUNTING FOR INVOICES ARE MADE FOLLOWING THE P RINCIPLES OF THE AS 9 REVENUE RECOGNITION. IN CASE OF FREE-ON-BOARD (FOB) SALES, THE DATE OF SALE IS RECOGNIZED AS THE DATE ON WHICH THE GOODS ARE HANDED OVER TO THE CARRIER AND IN THE CASE OF CIF SALES TH E DATE OF DELIVERY IS RECOGNIZED AS THE DATE OF SALE. THE BILLS OF LADIN G/AIRWAY BILLS ALONG WITH SALES INVOICES PRODUCED IN SUPPORT OF THE CLAI M OF THE ASSESSEE : 42 : IT(TP)A NOS. 299 & 218/BANG/2014 WHICH ARE AT PAGES 3551-4008, FILES 15 AND 16 OF TH E PAPER BOOK SUBSTANTIATES THE CASE OF THE ASSESSEE FOR INCLUSIO N OF THE AFORESAID SUM AS PART OF THE TURNOVER FOR AY 2009-10. WE HOL D ACCORDINGLY. 43. THE THIRD COMPONENT OF THE TURNOVER WHICH IS IN DIS PUTE IS THE NON- INCLUSION OF SALES OF RS.4,98,296 AS TURNOVER OF AY 2009-10. THE CLAIM OF THE ASSESSEE IS THAT IT HAD ISSUED CREDIT NOTES TO THE CUSTOMERS FOR RECOGNIZING SALES FOR THE RELEVANT AY 2009-10 B UT THE EVIDENCE TO SUBSTANTIATE THE SAME IS NOT DISCERNIBLE FROM THE M ATERIAL FILED BEFORE US. SO ALSO THE FOURTH COMPONENT OF DISPUTE OF TUR NOVER VIZ., A SUM OF RS.4,23,06,045 WHICH IS STATED TO BE OWING TO WRONG PUNCHING OF AMOUNTS DUE TO NON-INCLUSION OF CERTAIN SALES NOT R EQUIRED TO BE REPORTED IN APR. WE THEREFORE REMAND THE ISSUE TO T HE AO FOR CONSIDERATION DE NOVO WITH LIBERTY TO THE ASSESSEE TO SUBSTANTIATE ITS CASE WITH NECESSARY EVIDENCE. 44. THE NEXT ASPECT OF TURNOVER IS THE NON-REALIZATION OF EXPORT PROCEEDS IN CONVERTIBLE FOREIGN CURRENCY IN INDIA W ITHIN THE TIME LIMIT SPECIFIED IN SEC.10A(3) OF THE ACT. A SUM OF RS.1, 26,34,663/- WAS STATED TO BE INVOICES PENDING REALIZATIONS AND THER EFORE WAS DISREGARDED FOR THE PURPOSE OF CONSIDERING EXPORT T URNOVER OF THE ASSESSEE FOR IDF-1 UNIT. THE ASSESSEE HAS FILED TH E FOLLOWING RECONCILIATION TO SHOW THAT THE AMOUNT TO BE EXCLUD ED FROM EXPORT TURNOVER IS ONLY A SUM OF RS.1.19 CRORES AS PER THE FOLLOWING CHART. : 43 : IT(TP)A NOS. 299 & 218/BANG/2014 PARTICULARS AMOUNT (IN CRS.) REFER NOTE USD INVOICE VALUE- INR REALIZATION VALUE-INR REALIZED TILL 30 TH SEPTEMBER 2009 4.08 180.91 198.91 1 REALIZED POST 30 TH SEPTEMBER 2009 BUT WITHIN 12 MONTHS OF INVOICING AS PER FEMA REGULATIONS - - REALIZED POST 30 TH SEPTEMBER 2009 BUT AFTER 12 MONTHS OF INVOICING 1.40 66.70 66.81 3 TOTAL REALIZED TILL DATE 5.49 247.69 265.72 UNREALIZED TILL DATE 0.03 1.19 - 4 EXPORT SALES AS PER SALES LISTING 5.51 248.88 248.88 AS FAR AS SALES REALIZATION BEING ITEM NO.1 AND 2 A RE CONCERNED, THERE CAN BE NO DISPUTE ON CONSIDERING THE ABOVE REALIZAT IONS AS SALE OF THE RELEVANT AY. AS FAR AS ITEM NO.3 I.E, INVOICES WHI CH WERE REALIZED POST 6 MONTHS FROM THE END OF FY AND ALSO FROM THE 12 MONTHS FROM THE DATE OF INVOICING, IS CONCERNED, THE PROVISIONS OF SECTION 10A OF THE ACT PROVIDES THAT EXPORT PROCEEDS SHOULD BE REALIZE D WITHIN 6 MONTHS FROM THE END OF FY OR SUCH FURTHER PERIOD AS THE CO MPETENT AUTHORITY MAY ALLOW IN THIS BEHALF. COMPETENT AUTHORITY' ME ANS THE RESERVE BANK OF INDIA (RBI) OR SUCH OTHER AUTHORITY AS IS AUTHORIZED FOR REGULATING PAYMENTS AND DEALINGS IN FOREIGN EXCHANG E. NOTIFICATION : 44 : IT(TP)A NOS. 299 & 218/BANG/2014 NO. FEMA 176 / 2008-RB ISSUED BY THE RBI WHEREIN TI ME LIMIT FOR REALIZATION OF EXPORT PROCEEDS WAS ENHANCED FROM 6 MONTHS TO 12 MONTHS FROM DATE OF EXPORT. IT IS THE SUBMISSION O F THE ASSESSEE THAT SINCE THE EXPORT PROCEEDS BOUGHT INTO INDIA AFTER S AID PERIOD OF 12 MONTHS ARE VIA A FIRC DULY RECEIVED FROM THE AUTHOR IZED DEALER, SAME SHOULD BE DEEMED TO BE ALLOWED BY THE COMPETENT AUT HORITY AND THUS IS TO BE ALLOWED IN TERMS OF SECTION 155(11A). THE DECISION OF ITAT BANGALORE BENCH IN THE CASE OF HCL EAI SERVICES LT D. VS. DCIT (SUPRA) SUPPORTS THE PLEA OF THE ASSESSEE IN THIS R EGARD AND THEREFORE THE SAME IS ACCEPTED. WE THEREFORE HOLD THAT WHAT IS TO BE EXCLUDED FROM TURNOVER ON THE GROUND OF NON-REALIZATION OF S ALE PROCEEDS U/S.10A(3) IS ONLY A SUM OF RS.1.19 CRORES. HOWEVER THE ASSESSEE IS PERMITTED TO CLAIM THE DEDUCTION AS REGARDS THE SAM E ONCE THE SAME HAS BEEN REALIZED IN TERMS OF SECTION 155 (11A) OF THE ACT. TURNOVER OF IDF-2 UNIT: 45. THE FIRST COMPONENT OF TURNOVER WHICH IS IN DISPUTE IS THE NON- INCLUSION OF RS.3,87,26,658/- WHICH WAS SALES WHICH WERE TREATED AS PRIOR PERIOD (AY. 2008-09 SALES) BY THE AO ON THE B ASIS OF THE DATES OF SALES INVOICE THAT WAS PRIOR TO 1.4.2008. THE AS SESSEES METHOD OF ACCOUNTING FOR INVOICES ARE MADE FOLLOWING THE PRIN CIPLES OF THE AS 9 REVENUE RECOGNITION. IN CASE OF FREE-ON-BOARD (F OB) SALES, THE DATE OF SALE IS RECOGNIZED AS THE DATE ON WHICH THE GOOD S ARE HANDED OVER TO THE CARRIER AND IN THE CASE OF CIF SALES THE DATE O F DELIVERY IS RECOGNIZED AS THE DATE OF SALE. THE BILLS OF LADIN G/AIRWAY BILLS ALONG WITH SALES INVOICES PRODUCED IN SUPPORT OF THE CLAI M OF THE ASSESSEE : 45 : IT(TP)A NOS. 299 & 218/BANG/2014 WHICH ARE AT PAGES 3551-4008, FILES 15 AND 16 OF TH E PAPER BOOK SUBSTANTIATES THE CASE OF THE ASSESSEE FOR INCLUSIO N OF THE AFORESAID SUM AS PART OF THE TURNOVER FOR AY 2009-10. WE HOL D ACCORDINGLY. 46. THE NEXT COMPONENT OF THE TURNOVER WHICH IS IN DISP UTE IS THE NON- INCLUSION OF SALES OF RS.17,64,65,522 AS TURNO VER OF AY 2009-10. THE CLAIM OF THE ASSESSEE IS THAT OWING TO WRONG PU NCHING OF AMOUNTS WHICH ARE NOT REQUIRED TO BE REPORTED AS SALES TO A PR. THE EVIDENCE TO SUBSTANTIATE THIS CLAIM IS NOT DISCERNIBLE. WE THER EFORE REMAND THE ISSUE TO THE AO FOR CONSIDERATION DE NOVO WITH LIBE RTY TO THE ASSESSEE TO SUBSTANTIATE ITS CASE WITH NECESSARY EVIDENCE. 47. THE NEXT ASPECT OF TURNOVER IS THE NON-REALIZATION OF EXPORT PROCEEDS IN CONVERTIBLE FOREIGN CURRENCY IN INDIA W ITHIN THE TIME LIMIT SPECIFIED IN SEC.10A(3) OF THE ACT. A SUM OF RS.4, 55,03,164 WAS STATED TO BE INVOICES PENDING REALIZATIONS AND THER EFORE WAS DISREGARDED FOR THE PURPOSE OF CONSIDERING EXPORT T URNOVER OF THE ASSESSEE FOR IDF-2 UNIT. THE ASSESSEE HAS FILED THE FOLLOWING RECONCILIATION TO SHOW THAT THE AMOUNT TO BE EXCLUD ED FROM EXPORT TURNOVER IS A SUM OF RS.5.41 CRORES AS PER THE FOLL OWING CHART. PARTICULARS AMOUNT IN CRS. REFER NOTE USD INVOICE VALUE- INR REALIZATION VALUE-INR REALIZED TILL 30 TH SEPTEMBER 2009 29.29 1288.64 1359.08 1 : 46 : IT(TP)A NOS. 299 & 218/BANG/2014 REALIZED POST 30 TH SEPTEMBER 2009 BUT WITHIN 12 MONTHS OF INVOICING AS PER FEMA REGULATIONS 2.77 134.99 142.87 2 REALIZED POST 30 TH SEPTEMBER 2009 BUT AFTER 12 MONTHS OF INVOICING 0.02 0.49 0.61 3 TOTAL REALIZED TILL DATE 32.07 1424.12 1502.55 UNREALIZED TILL DATE 0.12 5.41 - 4 EXPORT SALES AS PER SALES LISTING 32.19 1429.54 1429.54 AS FAR AS SALES REALIZATION BEING ITEM NO.1 AND 2 A RE CONCERNED, THERE CAN BE NO DISPUTE ON CONSIDERING THE ABOVE REALIZAT IONS AS SALE OF THE RELEVANT AY. AS FAR AS ITEM NO.3 I.E, INVOICES WHI CH WERE REALIZED POST 6 MONTHS FROM THE END OF FY AND ALSO FROM THE 12 MONTHS FROM THE DATE OF INVOICING, IS CONCERNED, THE PROVISIONS OF SECTION 10A OF THE ACT PROVIDES THAT EXPORT PROCEEDS SHOULD BE REALIZE D WITHIN 6 MONTHS FROM THE END OF FY OR SUCH FURTHER PERIOD AS THE CO MPETENT AUTHORITY MAY ALLOW IN THIS BEHALF. COMPETENT AUTHORITY' ME ANS THE RESERVE BANK OF INDIA (RBI) OR SUCH OTHER AUTHORITY AS IS AUTHORIZED FOR REGULATING PAYMENTS AND DEALINGS IN FOREIGN EXCHANG E. NOTIFICATION NO. FEMA 176 / 2008-RB ISSUED BY THE RBI WHEREIN TI ME LIMIT FOR REALIZATION OF EXPORT PROCEEDS WAS ENHANCED FROM 6 MONTHS TO 12 MONTHS FROM DATE OF EXPORT. IT IS THE SUBMISSION O F THE ASSESSEE THAT SINCE THE EXPORT PROCEEDS BOUGHT INTO INDIA AFTER S AID PERIOD OF 12 MONTHS ARE VIA A FIRC DULY RECEIVED FROM THE AUTHOR IZED DEALER, SAME : 47 : IT(TP)A NOS. 299 & 218/BANG/2014 SHOULD BE DEEMED TO BE ALLOWED BY THE COMPETENT AUT HORITY AND THUS IS TO BE ALLOWED IN TERMS OF SECTION 155(11A). THE DECISION OF ITAT BANGALORE BENCH IN THE CASE OF HCL EAI SERVICES LT D. VS. DCIT (SUPRA) SUPPORTS THE PLEA OF THE ASSESSEE IN THIS R EGARD AND THEREFORE THE SAME IS ACCEPTED. WE THEREFORE HOLD THAT WHAT IS TO BE EXCLUDED FROM TURNOVER ON THE GROUND OF NON-REALIZATION OF S ALE PROCEEDS U/S.10A(3) IS A SUM OF RS.5.41 CRORES. HOWEVER THE ASSESSEE IS PERMITTED TO CLAIM THE DEDUCTION AS REGARDS THE SAM E ONCE THE SAME HAS BEEN REALIZED IN TERMS OF SECTION 155 (11A) OF THE ACT. 48. THUS GR.NOS.11 & 12 ARE PARTLY ALLOWED. 49. GROUND NO.13 & 14 RAISED BY THE ASSESSEE IS WITH RE GARD TO THE ACTION OF THE AO AND THE CIT(A) IN RECOMPUTING THE INCOME FROM IDF1 AND IDF 2 UNITS FROM DOMESTIC SALES BY THESE U NITS BY ADOPTING SALES AS PER EXCISE RETURNS OF IDF1 AND IDF2 UNITS. 13. CONSIDERING DOMESTIC SALES OF IDF 1 AND IDF 2 AS PER EXCISE RETURN 13.1. THE LEARNED AO/DRP HAS ERRED IN CONSIDERING T HE DOMESTIC SALES FOR THE IDF 1 AND IDF 2 UNIT AS PER THE EXCISE RETURN A MOUNTING TO RS. 1,882,165,998. 13.2. THE LEARNED AO/DRP OUGHT TO HAVE PROVIDED THE REASONS FOR REJECTING THE DOMESTIC SALES AS PER THE BOOKS OF AC COUNTS. 13.3. THE LEARNED AO/DRP OUGHT TO HAVE PROVIDED THE ASSESSEE AN OPPORTUNITY OF BEING HEARD BEFORE REJECTING THE DOM ESTIC SALES AS PER BOOKS OF ACCOUNTS. 13.4. THE LEARNED AO/DRP OUGHT TO HAVE OBSERVED THA T THE AMOUNTS IN THE EXCISE RETURN IS GROSS OF TRADE DISCOUNT OF RS. 123 ,700,612 AND THEREFORE HAS RESULTED IN THE DOMESTIC SALES BEING CONSIDERED AS HIGHER TO THIS EXTENT THAN AS REPORTED IN THE FINANCIAL STATEMENTS. : 48 : IT(TP)A NOS. 299 & 218/BANG/2014 14. DOUBLE TAXATION OF SCRAPS SALES AMOUNTING TO R S. 40,092,519 14.1. THE LEARNED AO/DRP HAS ERRED IN CONSIDERING T HE DOMESTIC SALES FOR THE IDF 1 AND IDF 2 UNIT AS PER THE EXCISE RETURN W HICH IS INCLUSIVE OF SCRAP SALES. 14.2. THE LEARNED AO/DRP HAS ERRED IN ONCE AGAIN CO NSIDERING SCRAP SALES WHILE RE-COMPUTING THE PROFITS TO IDF 1 AND IDF 2 A MOUNTING TO RS. 1,27,94,809 AND RS. 2,72,97,710 RESPECTIVELY. 14.3. THE LEARNED AO OUGHT TO HAVE OBSERVED THAT TH E ABOVE HAS RESULTED IN DOUBLE TAXATION OF SCRAP SALES. 50. WE HAVE ALREADY DISCUSSED SIMILAR ISSUE OF RECOMPUT ING SALES FIGURE IN IDF1 AND IDF 2 UNITS WHILE DECIDING GR.NO .11 & 12 IN ASSESSEES APPEAL AND THOSE GROUNDS WERE IN RESPECT OF EXPORT SALES OF THESE UNITS . IN GR.NO.13 & 14 THE ASSESSEE HAS PROJECTED ITS GRIEVANCE REGARDING RE-COMPUTATION OF SALES IN THE DOMESTIC MARKET . WE HAVE ALREADY SEEN WHILE DEALING WITH GR.NO.11 & 12 THAT THE ASSESSEE HAS FOUR UNITS VIZ., IDF1 UNIT, IDF 2 UNIT, MAG UNIT AN D SWD SERVICES UNIT. IDF1/EHTP2 UNIT (HEREINAFTER REFERRED TO AS IDF 1 UNIT) WHICH MANUFACTURES AND SELLS UPS SYSTEMS AND OTHER POWER PROTECTION DEVICES. THE PRODUCTS MANUFACTURED IN THIS UNIT IS SOLD IN THE DOMESTIC AS WELL AS EXPORT MARKET. (II) IDF2 UNIT /EHTP1 UN IT (HEREINAFTER REFERRED TO AS IDF2 UNIT) ALSO MANUFACTURES AND SEL LS UPS SYSTEMS AND OTHER POWER PROTECTION DEVICES. THE PRODUCTS MANUFA CTURED IN THIS UNIT IS SOLD IN THE DOMESTIC AS WELL AS EXPORT MARKET. ( II) MAG UNIT WHICH IS ENGAGED IN THE BUSINESS OF TRADING OF UPS AND OTHER POWER PROTECTION : 49 : IT(TP)A NOS. 299 & 218/BANG/2014 DEVICES WHICH ARE PROCURED EITHER LOCALLY OR THROUG H IMPORTS. THE SALES OF THIS UNIT ARE ONLY IN DOMESTIC MARKET. 51. IN GR.NO.13 & 14 THE DISPUTE IS WITH REGARD TO FIGU RE OF SALES ADOPTED BY THE AO WHILE COMPUTING PROFITS ARISING O UT OF DOMESTIC SALES OF THESE UNITS BY ADOPTING THE FIGURES AS REF LECTED IN THE EXCISE RETURN FILED FOR THESE UNITS RATHER THAN THE SALES OF THESE UNITS AS RECORDED IN THE BOOKS OF ACCOUNTS (SALES REGISTER). THE ACTION OF THE AO WAS CONFIRMED BY THE DRP. 52. THE AO RECOMPUTED THE PROFITS OF THE IDF 1 AND 2 UNITS. WHILE RE-COMPUTING THE PROFITS, THE AO HAS CONSIDERED THE DOMESTIC SALES AS PER THE EXCISE RETURN AND NOT THE SALES REGISTER. SCRAP SALES, WHICH IS ALREADY PART OF EXCISE RETURNS, WAS ONCE AGAIN BROU GHT TO TAX. NO SPECIFIC REASONS HAVE BEEN ASSIGNED FOR ADOPTING TH IS APPROACH, EXCEPT A PASSING REFERENCE TO THE FACT THAT EXPORT SALES O F THE ASSESSEE HAVE BEEN INFLATED AND THAT DISCUSSION WILL HOLD GOOD FO R DOMESTIC SALES AS WELL (PARA 3.10 OF THE DRAFT ORDER OF ASSESSMENT AT PAGE-37 OF THE SAID ORDER). 53. ON THE ABOVE APPROACH OF THE AO WHICH WAS REFLE CTED IN THE DRAFT ASSESSMENT ORDER, THE ASSESSEE FILED OBJECTIO NS BEFORE THE DRP. THE DRP UPHELD THE ORDER OF THE AO, EXCEPT IN THE C ASE OF DOUBLE TAXATION OF SCRAP SALES WHEREIN, THE DRP HAS ASKED THE AO TO VERIFY AND PROVIDE RELIEF IF SCRAP SALES ARE ALREADY PART OF DOMESTIC SALES AS PER THE EXCISE RETURN. HOWEVER, THE AO IN THE FINAL ORDER OF ASSESSMENT DID NOT FOLLOW THE DIRECTIONS OF THE DRP FOR THE RE ASON THAT AS PER : 50 : IT(TP)A NOS. 299 & 218/BANG/2014 PROVISIONS OF SEC.144C OF THE ACT, THE DRP DOES NOT HAVE POWER TO REQUEST THE AO TO VERIFY THE DETAILS AND HENCE UPHE LD HIS ADDITION PARA 27.4 AT PAGE 61 OF THE FINAL ORDER OF ASSESSMENT. 54. THE SUBMISSION MADE BY THE LEARNED COUNSEL FOR THE ASSESSEE BEFORE US WAS THAT THE AO OUGHT TO HAVE CONSIDERED THE DOMESTIC SALES AS PER THE SEGMENTAL PROFIT AND LOSS ACCOUNT. IT W AS SUBMITTED THAT THE DOMESTIC SALES OF IDF 1 (EHTP -2) AND IDF 2 (EHTP 1) IS RS. 49,82,46,245/- AND RS. 101,15,90,862/- RESPECTIVELY , TOTALLING TO RS. 150,98,37,107/-. OUR ATTENTION WAS DRAWN TO THE SE GMENTAL BREAK-UP AVAILABLE AT PAGE 548 FILE 3 OF PAPER BOOK OF ASSES SEE. IT WAS SUBMITTED THAT THE ACTION OF THE AO IN RE-COMPUTING THE PROFITS OF THE SAID 2 UNITS, BY CONSIDERING THE DOMESTIC SALES AT RS. 55,25,46,883/- AND RS. 132,96,19,115/- TOTALLING TO RS. 188,21,65, 998/- FOR IDF 1 AND 2 UNITS, ADOPTING THE FIGURES OF SALES AS PER THE E XCISE RETURN WAS INCORRECT. THE LEARNED COUNSEL FOR THE ASSESSEE AL SO DREW OUR ATTENTION TO THE FACT THAT THE DIFFERENCE IN THE DOMESTIC SAL ES AS PER THE EXCISE RETURN AND THE SEGMENTAL P & L ARE ON ACCOUNT OF 1) RS. 24,24,16,413/- OF EXCISE DUTY PAID (ORIGINALLY, THE AO HAD NOT GIV EN DEDUCTION OF THE SAME IN THE ORIGINAL ASSESSMENT ORDER BUT GAVE DEDU CTION OF THE SAME IN THE RECTIFICATION ORDER DATED 18 TH AUGUST 2014) AND 2) AN AMOUNT OF RS. 12,99,12,478/- REPRESENTING TRADE DISCOUNTS FOR THE TWO UNITS PUT TOGETHER (RS. 4.08 CR FOR EHTP 2 AND RS. 8.29 CR FO R EHTP 1. WHILE THE SALES REPORTED IN THE EXCISE RETURN INCLUDES TH E AMOUNT OF TRADE DISCOUNT, THE SEGMENTAL P&L REPORTED DOMESTIC SALES NET OF TRADE DISCOUNT. THE LEARNED COUNSEL SUBMITTED THAT THE AO HAS NOT PROVIDED : 51 : IT(TP)A NOS. 299 & 218/BANG/2014 ANY REASON FOR NOT CONSIDERING THE DOMESTIC SALES A S PER THE BOOKS OF ACCOUNTS AND NEITHER WAS THE ASSESSEE PUT ON NOTICE REGARDING THE SAME. OUR ATTENTION WAS ALSO DRAWN TO THE FACT THA T THE ASSESSEE SUBMITTED BEFORE THE AO, THE COMPLETE DETAILS OF DO MESTIC SALES OF IDF 1 AND IDF 2 UNITS ALONG WITH SAMPLE INVOICES VIDE SUBMISSIONS DATED 4 TH MARCH 2013 (SUBMISSION ON PAGE 3256 - FILE 14, RELEVANT PORTIO N AT PG. 3257 AND LISTING PAGE NOS. 3277 TO 3327- FILE 1 4 AND INVOICES ON PAGE 3328 TO 3332-FILE 14). OUR ATTENTION WAS ALSO DRAWN TO THE FACT THAT IN A SUBMISSION DATED 14 TH MARCH 2013 DETAILS OF DOMESTIC SALES REGISTER WAS RE-SUBMITTED (SUBMISSION ON PAGE 4020 FILE 17, RELEVANT PORTION AT PAGE 4028 AND LISTING AT PAGE NOS. 4048- 4120 -FILE 17). THE RECONCILIATION OF THE AMOUNT OF RS. 12.99 CR ON ACC OUNT OF TRADE DISCOUNT WAS ALSO PROVIDED IN THE SAID SUBMISSION. THE ASSESSEE ALSO MADE SUBMISSIONS BEFORE THE DRP ON THE NON-CONSIDER ATION OF THE ASPECT OF TRADE DISCOUNT IN THE EXCISE RETURN (SUBM ISSION ON PAGE NOS. 4878 AND 4910 OF FILE 20 FOR EHTP 2 AND EHTP 1 RESP ECTIVELY). 55. AS FAR AS THE ACTION OF THE AO IN CONSIDERING SALES AS PER EXCISE RETURN AND INCLUDING THE SCRAP SALE VALUE AGAIN AS AN ADDITION WHILE COMPUTING TOTAL INCOME, THE LEARNED COUNSEL SUBMITT ED THAT THE SALES DECLARED IN THE EXCISE RETURN INCLUDES SCRAP SALE V ALUE AND MAKING ADDITION OF SALE VALUE OF SCRAP AGAIN IN THE COMPUT ATION OF TOTAL INCOME AMOUNTS TO DOUBLE ADDITION OF THE SAME INCOME. SCR AP SALES HAS BEEN SEPARATELY SHOWN IN THE ASSESSEES SEGMENTAL P&L (R S. 1,27,94,809/- FOR EHTP 2 AND RS. 2,72,97,710/- FOR EHTP 1) PAGE 5 48 IN FILE 3 OF : 52 : IT(TP)A NOS. 299 & 218/BANG/2014 THE PAPER BOOK. THE AO HAS CONSIDERED THE SALES AS PER THE EXCISE RETURN (WHICH INCLUDES THE SCRAP SALES) + SCRAP SAL ES REPORTED IN THE SEGMENTAL P&L. OUR ATTENTION WAS DRAWN TO THE AOS COMPUTATION AT PAGES 33 AND 34 OF THE DRAFT ASSESSMENT ORDER. IT WAS SUBMITTED THAT SCRAP SALE HAS BEEN SUBJECT TO TAX TWICE. THE LEAR NED COUNSEL FOR THE ASSESSEE BROUGHT TO OUR ATTENTION ASSESSEES SUBMIS SION DATED 16 TH OCTOBER 2012 (PAGES 518-540, AT PAGE 524 OF FILE NO . 2) WHEREIN SAMPLE SCRAP INVOICES WERE GIVEN AT FILE 13 PAGES 3 084-3173. IT WAS POINTED OUT THAT THE EXCISE RETURNS (AVAILABLE AT P AGES 572-635 OF FILE NO. 3) DEMONSTRATE THAT SCRAP IS INCLUDED AS PART O F THE SAME. IT WAS POINTED OUT THAT THE DRP IN ITS DIRECTIONS AT PAGE 61, DIRECTED THE AO TO VERIFY WHETHER SCRAP SALES WERE DOUBLE TAXED AND IF SO, TO NOT ADD THE SAME ONCE AGAIN. THE LEARNED COUNSEL FOR THE ASSESS EE THEREFORE PRAYED THAT THE AO SHOULD BE DIRECTED TO ADOPT THE DOMESTIC SALES AS PER SEGMENTAL P&L WHICH IS SALES NET OF NET OF TRAD E DISCOUNT AND SALE OF SCRAP HAS BEEN REPORTED SEPARATELY IN ITS SEGMEN TAL. IT WAS SUBMITTED THAT BY CONSIDERING THE SALES AS PER THE EXCISE RETURN, THE AO HAS NOT GRANTED THE ASSESSEE THE BENEFIT OF THE TRA DE DISCOUNT AND HAS DOUBLY TAXED SCRAP SALES. 56. THE LEARNED DR RELIED ON THE ORDER OF THE AO/DR P. 57. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND ARE OF THE VIEW THAT THE SUBMISSIONS OF THE ASSESSEE HAVE MERIT. W E ARE OF THE VIEW THAT THE RECONCILIATION PROVIDED BY THE ASSESSEE PR IMA FACIE PROVES ITS CASE. IT IS UNDISPUTED THAT ALL SALES INVOICES WERE PROVIDED BY THE : 53 : IT(TP)A NOS. 299 & 218/BANG/2014 ASSESSEE BEFORE THE AO. THEREFORE THERE IS MERIT I N THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE PROFI TS OF IDF 1 AND IDF 2 UNITS IN SO FAR AS IT RELATES TO DOMESTIC SALES OF THESE UNITS HAVE TO BE ACCEPTED AS DECLARED BY THEM AS PER THE SEGMENTAL P ROFIT AND LOSS ACCOUNT. NO SPECIFIC REASONS HAVE BEEN ASSIGNED BY THE AO FOR ADOPTING TO A COURSE OF SUBSTITUTING THE SALES FIGU RES AS REFLECTED IN THE BOOKS OF ACCOUNT, WHICH IS SUPPORTED BY THE SALES I NVOICES PRODUCED BEFORE THE AO AT THE TIME OF ASSESSMENT PROCEEDINGS . THE AO IS DIRECTED TO VERIFY FIGURES OF TRADE DISCOUNT AND EX CLUDE THEM FROM SALES FIGURE. SIMILARLY THE AO IS DIRECTED TO VERIFY IF INCOME FROM SALE OF SCRAP HAS BEEN DOUBLY TAXED AND IF SO, ALLOW RELIEF TO THE ASSESSEE. THE AO WILL AFFORD OPPORTUNITY OF BEING HEARD TO TH E ASSESSEE BEFORE GIVING EFFECT TO THIS ORDER. GR.NO.13 & 14 ARE THU S TREATED AS ALLOWED TO THE EXTENT INDICATED ABOVE. 58. GR.NO.15 IS IDENTICAL TO GR.NOS.13 & 14. GR.NO.15 RELATES TO THE ACTION OF THE REVENUE AUTHORITIES IN DETERMINING TH E PROFITS OF MAG UNIT BY ADOPTING THE SALES FIGURE OF RS.302,31,90,9 78 AND COST OF SALES AT RS.92,78,67,516 AND REFUSING TO RECOGNIZE LOSS O N ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION AS AN ALLOWABLE EXPENDITURE WH ILE COMPUTING INCOME MAG UNIT AND DETERMINING THE PROFITS OF THE SAID UNIT ACCORDINGLY. IN DOING SO, THE AO REFUSED TO RECOGNI ZE THE FIGURE OF SALES AS REPORTED IN THE SEGMENTAL PROFIT AND LOSS ACCOUNT OF MAG UNIT AT RS.1,27,09,37,458 AND COST OF SALES AT RS.206,47 ,39,851 AND TREATING FOREIGN EXCHANGE CURRENCY FLUCTUATION LOSS OF RS.92 ,78,67,516 AS : 54 : IT(TP)A NOS. 299 & 218/BANG/2014 ALLOWABLE EXPENDITURE AND ARRIVING AT THE PROFIT OF MAG UNIT IN THE SEGMENTAL PROFIT AND LOSS ACCOUNT. 59. WE HAVE ALREADY SEEN WHILE DEALING WITH GR.NO.1 1 & 12 THAT THE ASSESSEE HAS FOUR UNITS VIZ., IDF1 UNIT, IDF 2 UNIT , MAG UNIT AND SWD SERVICES UNIT. IDF1/EHTP2 UNIT (HEREINAFTER RE FERRED TO AS IDF 1 UNIT) WHICH MANUFACTURES AND SELLS UPS SYSTEMS AND OTHER POWER PROTECTION DEVICES. THE PRODUCTS MANUFACTURED IN TH IS UNIT IS SOLD IN THE DOMESTIC AS WELL AS EXPORT MARKET. (II) IDF2 U NIT /EHTP1 UNIT (HEREINAFTER REFERRED TO AS IDF2 UNIT) ALSO MANUFAC TURES AND SELLS UPS SYSTEMS AND OTHER POWER PROTECTION DEVICES. THE PRO DUCTS MANUFACTURED IN THIS UNIT IS SOLD IN THE DOMESTIC A S WELL AS EXPORT MARKET. (II) MAG UNIT WHICH IS ENGAGED IN THE BUSIN ESS OF TRADING OF UPS AND OTHER POWER PROTECTION DEVICES WHICH ARE PR OCURED EITHER LOCALLY OR THROUGH IMPORTS. THE SALES OF THIS UNIT ARE ONLY IN DOMESTIC MARKET. 60. THE AO NOTICED THAT THE SALES AS PER TRIAL BALA NCE AS ON 31.3.2009 DOMESTIC SALES OF MAG UNIT WAS REPORTED A T RS.302,31,90,978/-. WHEREAS THE DOMESTIC SALES AS PER THE SEGMENTAL PROFIT AND LOSS ACCOUNT WAS SHOWING SALES OF ONLY R S.127,09,37,459/-. THE ASSESSEE FILED A RECONCILIATION OF THE SALES FI GURE OF RS.127,09,37,459/- AS PER THE SEGMENTAL PROFIT AND LOSS ACCOUNT BASED ON WHICH INCOME FROM IDF 1 UNIT/IDF 2 UNIT AND MAG UNIT WERE DECLARED IN THE RETURN OF INCOME. THE SAME HAS BEE N EXTRACTED BY THE AO IN PAGE-40 OF THE ORDER OF ASSESSMENT. THE EXPL ANATION OF THE : 55 : IT(TP)A NOS. 299 & 218/BANG/2014 ASSESSEE WITH REGARD TO THE SALES AS DECLARED IN TH E TRIAL BALANCE AS ON 31.3.2009 AND THE SEGMENTAL PROFIT AND LOSS ACCOUNT AS ON 31.3.2009 WAS CLEARLY GIVEN IN ASSESSEES REPLY DATED 14.3.20 13. THE SAME IS AS FOLLOWS: 3. DOMESTIC TURNOVER AND COST OF SALES DOMESTIC UN IT (MAG) A. THE AMOUNT CONSIDERED BY YOUR GOODSELF IN THE NOTIC E IS RS. 3,023,190,978 BEING THE NET SALES OF MAG UNIT AS PE R THE TRIAL BALANCE. B. AS STATED IN OUR SUBMISSION DATED 13 DECEMBER 2012, THE AMOUNT BOOKED AS SALES IN THE MAG UNIT IS THE SALES PERTAI NING TO THE FOLLOWING: I. MAG TRADED; II. IDF 1/EHTP 2 DOMESTIC SALES; AND III. IDF 2/EHTP 1 DOMESTIC SALES C. AS PER THE CODING SYSTEM OF ACCOUNTING FOLLOWED BY THE COMPANY, THE TRIAL BALANCE OF MAG UNIT CAPTURES THE TOTAL DOMEST IC SALES OF THE COMPANY. OUT OF THE TOTAL DOMESTIC SALES ACCOUNTED UNDER MAG UNIT, THE DOMESTIC SALES PERTAINING TO IDF 1 AND IDF 2 WI LL BE CONSIDERED TO THE RESPECTIVE UNITS ON THE BASIS OF THE INVOICE DETAILS. D. THE DETAILS OF DOMESTIC SALES CONSIDERED IN THE RES PECTIVE UNITS IS PROVIDED BELOW: PARTICULARS IDF1/EHTP2 (RS) IDF2/EHTP1 (RS) MAG TRADED (RS) TOTAL (RS) DOMESTIC SALES FG 498,246,245 1,011,590,862 1,270,937,459 2,780,774,565 ADD: EXCISE DUTY 242,416,413 TOTAL DOMESTIC SALES 3,023,190,978 E. WE SUBMIT THAT THE METHOD OF CAPTURING SALES IS NOT DETERMINATIVE TO CALCULATE THE UNIT WISE PROFIT OR LOSS DATA. IN OR DER TO ARRIVE AT THE CORRECT UNIT WISE PROFIT OR LOSS, THE ASSESSEE SUBM ITS THAT SEGMENTAL PROFIT AND LOSS ACCOUNT SHOULD BE CONSIDERED. ACCOR DINGLY, THE : 56 : IT(TP)A NOS. 299 & 218/BANG/2014 AMOUNT APPEARING IN THE MAG TRADE SEGMENTAL OF RS. 1,270,937,459 IS THE CORRECT AMOUNT OF SALES IN MAG UNIT. IN THIS REGARD, WE HAVE ATTACHED THE DOMESTIC SALES LISTING OF IDF 1 AND IDF 2 AS PER ANNEXURE 3. F. WE SUBMIT THAT PURCHASE ACCOUNT EXPENSES AMOUNTING TO RS. 206,47,39,851 PERTAINS TO MAG UNIT AND IT IS FORMIN G PART OF THE COST OF GOODS SOLD AMOUNTING TO RS. 1,136,872,335. G. NOTWITHSTANDING AND WITHOUT PREJUDICE TO OUR ABOVE SUBMISSIONS, SHOULD YOUR GOODSELF CONSIDER THE NET DOMESTIC SALE AS PER TRIAL BALANCE OF MAG UNIT, WE SUBMIT THAT THE TOTAL EXPENSES ATTRIBUTABLE TO DOMESTIC SALES S HOULD ALSO BE REDUCED WHILE DETERMINING THE PROFITS DERIVED FR OM DOMESTIC SALES. WHILE COMPUTING THE TOTAL TURNOVER OF IDF1 AND IDF2 NO DOMESTIC SALES TO BE RECKONED AS PART OF TOTAL TURN OVER. ACCORDINGLY, WE SUBMIT THAT THE DEDUCTION UNDER SEC TION 10A OF THE ACT WOULD CORRESPONDINGLY GO UP. 61. AFTER EXTRACTING THE RECONCILIATION, THE AO IN PAGE-41 OF HIS ORDER PARA-1 OBSERVED AS FOLLOWS: AS PER THE RECONCILIATION A SUM OF RS.1,75,22,53,5 20 WAS REDUCED AS IDF1/ IDF-2 DOMESTIC SALES. HOWEVER, IN THE SAME S HEET ONLY A SUM OF RS.54,99,40,665/- AND RS.61,27,06,304 WAS REDUCE D AS DTA SALES AGAINST IDF 1 AND IDF 2. HAD THIS BEEN THE CASE TH EY SHOULD HAVE REDUCED ONLY RS.116,26,46,969/- (RS.54,99,40,665 + RS.61,27,06,304) AGAINST RS.175,22,53,520/-. IT IS PERTINENT TO MENTION HERE THAT THE SUM OF RS.116,26,46,969/- IS NOTHING BUT THE INTER DIVISION PURCHASE THAT WAS TALLIED WITH TRIAL BALANCE AND THE RELEVANT PAGE WAS SCANNED AND PRESENTED AT POINT NU MBER-2 62. IN PARA 3.10.1 OF HIS ORDER THE AO HAS EXTRACTE D THE REPLY DATED 14.3.2013 WHICH WE HAVE EXTRACTED IN THE EARLIER PA RAGRAPH BUT HAS QUOTED ONLY FROM PARAGRAPH ( E ) OF THE REPLY WITHO UT QUOTING : 57 : IT(TP)A NOS. 299 & 218/BANG/2014 PARAGRAPHS (A) TO ( D). A READING OF PARAGRAPH (A) TO (D) OF THE REPLY DATED 14.3.2003 FILED BY THE ASSESSEE WOULD SHOW TH AT MAG UNIT CAPTURES THE TOTAL DOMESTIC SALES OF IDF 1 AND IDF 2 AND SALE OF MAG UNIT. THE SALES OF MAG UNIT ON ITS OWN WAS ONLY RS .127,09,37,459. IDF 1 AND IDF 2 UNITS DOMESTIC SALES WERE ALSO CAPT URED AS SALES OF MAG UNIT IN THE BALANCE SHEET AND THIS WAS DUE TO S YSTEM OF ACCOUNTING FOLLOWED BY THE COMPANY. THE DIFFERENCE IN FIGURES POINTED OUT BY THE AO AT PAGE 41 OF HIS ORDER, WHIC H WE HAVE EXTRACTED IN THE EARLIER PARAGRAPH IS AN INCORRECT COMPARISON BECAUSE RS. 116.26 CRORES REPRESENTS THE COST AT WHICH THE GOODS ARE T RANSFERRED INTER-UNIT FROM IDF TO MAG, WHEREAS RS. 175.22 CR REPRESENTS T HE SALE VALUE WHICH IS OFFERED TO TAX IN THE IDF UNITS. THE RELEV ANT ENTRY FOR RS. 116.26 CRORES IN THE TRIAL BALANCE OF MAG UNIT IS A VAILABLE AT PAGE 38 OF THE ASSESSMENT ORDER UNDER THE PURCHASE ACCOUNT ( RELEVANT ENTRY PURCHASES INTER DIVISION). THIS WAS DULY EXPLAINED TO THE AO VIDE ASSESSEES SUBMISSION DATED 13 TH DECEMBER 2012 (FILE 3 PAGES 636- 688 AT PAGES 641-642) AND ANNEXURE 5 AND 7 TO THE S AID SUBMISSION ALSO PROVIDED THE LEDGER ACCOUNT EXTRACTS IN SUPPOR T OF THE SAME. THE AO HAS ACTED ARBITRARILY IN EXTRACTING SELECTIVELY FROM THE REPLY DATED 14.3.2013 IN THE ORDER OF ASSESSMENT AND HAS FAILED IN HIS DUTY TO CONSIDER THE RECONCILIATION AS GIVEN BY THE ASSESSE E. THE DRP IN ITS ORDER HAS ALSO ADOPTED THE SAME COURSE ADOPTED BY T HE AO. THE RECONCILIATION AT PAGE-40 OF THE AOS ORDER ALSO CA PTURES THE SAME POSITION. THEREFORE NOTHING TURNS ON DIFFERENCE IN FIGURES IN THE TRIAL : 58 : IT(TP)A NOS. 299 & 218/BANG/2014 BALANCE AND THE SEGMENT PROFIT AND LOSS ACCOUNT, AS WAS SOUGHT TO BE MADE BY THE AO. 63. AFTER MAKING THE AFORESAID OBSERVATIONS, THE A O RECOMPUTED THE PROFITS OF THE MAG UNIT, AS FOLLOWS: SL NO. ADJUSTMENT MADE AMOUNT (RS.) 1 TURNOVER FOR MAG UNIT CONSIDERED FROM TRIAL BALANCE AT RS. 3,02,31,90,978 INSTEAD OF THE SEGMENTAL P&L AT RS. 1,27,09,37,458 1,75,22,53,519 2 COST OF SALES CONSIDERED FROM TRIAL BALANCE AT RS. 206,47,39,851/- INSTEAD OF SEGMENTAL P & L AT RS. 113, 68,72,335/- 92,78,67,516 3 LOSS ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION DISALLOWED 30,18,63,653 AS ALREADY STATED IT IS THE PLEA OF THE ASSESSEE TH AT THE AMOUNTS BOOKED IN THE SALES OF MAG UNIT IN THE TRIAL BALANCE PERTA INS TO (I) MAG TRADING (II) IDF 1 ( EHTP 2) DOMESTIC SALES AND (II I) IDF 2 (EHTP 1) DOMESTIC SALES. IT IS THE PLEA OF THE ASSESSEE THA T ON ACCOUNT OF CONSIDERING THE TURNOVER OF THE MAG UNIT AS REFLECT ED IN THE TRIAL BALANCE AND NOT AS PER THE SEGMENTAL P & L OF THE A SSESSEE, THERE IS DOUBLE TAXATION OF THE DOMESTIC SALES OF IDF1 AND 2 AND MAG UNIT. THE FOREIGN EXCHANGE LOSS IS ALLOWABLE DEDUCTION. : 59 : IT(TP)A NOS. 299 & 218/BANG/2014 64. THE DRP IN ITS DIRECTIONS GAVE LIMITED RELIEF T O THE ASSESSEE BY DIRECTING THE AO TO VERIFY THE CLAIM OF DOUBLE TAXA TION AND ALLOW THE CLAIM IF FOUND CORRECT. (PAGE 71 OF THE DRP DIRECTI ONS). HOWEVER, IN THE FINAL ASSESSMENT ORDER, THE AO HAS NOT CONSIDER ED THE SAME CITING SECTION 144C(8) AND (13) WHEREIN IT IS PROVIDED THA T THE DRP DOES NOT HAVE POWER TO REMAND ANY ISSUE AND HAS TO SETTLE AL L ISSUES. 65. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE SALES OF MAG UNIT AS REPORTED IN THE SEGMENTAL PROFIT AND LO SS ACCOUNT SHOULD BE TAKEN AND NOT THE FIGURE AS FOUND IN THE TRIAL B ALANCE. IT WAS HIS SUBMISSION THAT THE ASSESSEE HAS PROPERLY RECONCILE D THE DIFFERENCE IN FIGURES BY POINTING OUT THAT THE SALE FIGURE AS REF LECTED IN THE TRIAL BALANCE IS NOTHING BUT INCLUSIVE OF THE SALES BY IN TERNAL TRANSFER FROM MAG UNIT TO IDF 1 AND IDF 2 UNITS. WE HAVE ALREADY EXTRACTED THE RECONCILIATION IN THE ASSESSEES LETTER DATED 14.3. 2013 IN THE EARLIER PART OF THIS ORDER ON THIS ISSUE. THE LEARNED COUN SEL FOR THE ASSESSEE POINTED OUT THAT THE SUM OF RS. 1,75,22,53,519 REPR ESENTS DOMESTIC SALES (INCLUSIVE OF EXCISE DUTY COMPONENT) OF MANU FACTURED GOODS OF IDF 1 AND IDF 2. THE ASSESSEE HAS REPORTED THE ABO VE DOMESTIC SALES AS PART OF THE SEGMENTAL P&L OF IDF 1 AND IDF 2. IT WAS POINTED OUT BY HIM THAT THE AO HAS CONSIDERED AN AMOUNT OF RS. 188 ,21,65,998/- AS DOMESTIC SALES OF IDF UNITS FROM EXCISE RETURNS, WH ICH IS SALES OF RS. 175,22,53,519 PLUS TRADE DISCOUNTS OF RS. 12,99,12, 479/-, AS STATED EARLIER. IT WAS SUBMITTED BY HIM THAT THE AO, BY AD OPTING THE FIGURES IN THE TRIAL BALANCE OF THE MAG UNIT (WHICH ALSO INCLU DED SALES OF THE IDF UNITS), HAS ONCE AGAIN CONSIDERED THE SUM OF RS. 1,75,22,53,519 AS PART : 60 : IT(TP)A NOS. 299 & 218/BANG/2014 OF MAG P&L THEREBY RESULTING IN DOUBLE TAXATION OF THE SAME AMOUNT IN MAG UNIT AS WELL AS IDF 1 AND IDF 2 I.E., SAME A MOUNT IS TAXED TWICE. 66. THE LEARNED COUNSEL FOR THE ASSESSEE EXPLAINED THAT GOODS MANUFACTURED BY IDF 1 AND IDF 2 UNITS WHEN SOLD IN DOMESTIC MARKET IS CAPTURED AS SALES IN MAG UNIT. IT WAS SUBMITTED THAT THE ADJUSTMENT BY THE AO CONSIDERING THE SALES AS PER THE TRIAL BA LANCE HAS LED TO THE DOUBLE TAXATION OF THE SAME AMOUNT IN THE MAG UNIT AND IDF 1 / IDF 2. THESE DOMESTIC SALES PERTAIN TO EOU UNITS WHICH ARE IDF 1 AND IDF2, AND THEREFORE OUGHT TO HAVE BEEN REFLECTED IN IDF1 AND IDF 2 RESPECTIVELY, AND NOT THE MAG UNIT. THE LEARNED COU NSEL DREW OUT ATTENTION TO THE SEVERAL SUBMISSIONS MADE BEFORE TH E AO HIGHLIGHTING THE ABOVE ASPECT. THE ASSESSEE VIDE ITS SUBMISSION DATED 13 TH DECEMBER 2012 EXPLAINED THAT AN AMOUNT OF RS. 175,2 2,53,520/- BEING THE DOMESTIC SALES OF IDF 1 AND 2 HAD ALREADY BEEN OFFERED TO TAX (AT PAGE 636, RELEVANT PAGE 642 OF FILE 3). VIDE SUBMIS SION DATED 4 TH MARCH 2013 (FILE14 OF THE PAPER BOOK, PAGES 3256 TO 3389), THE ASSESSEE REITERATED ITS EARLIER SUBMISSION AND GAVE AN ENTIRE LISTING OF THE DOMESTIC SALES OF IDF 1 AND 2 (AT PAGE 3257) AN D SAMPLE INVOICES (AT PAGES 3328-3332). VIDE ITS SUBMISSION DATED 13 TH DECEMBER 2012, THE ASSESSEE HAD SUBMITTED TO THE AO THE BOOKS OF A CCOUNT OF THE ASSESSEE IN SOFT VERSION (PAGE 3174 FILE 14 OF TH E PAPER BOOK). THE DOUBLE TAXATION CAN BE VERIFIED BY EXAMINING ANY OF THE SAMPLE INVOICES, WHICH WILL FIGURE BOTH IN THE DOMESTIC SA LES LISTING OF IDF 1 AND 2 (WHICH CAN BE CORRELATED TO THE EXCISE RETURN OF THAT UNIT) AND IN : 61 : IT(TP)A NOS. 299 & 218/BANG/2014 THE SALES LEDGER OF MAG UNIT AS PER THE TRIAL BALAN CE. VIDE SUBMISSION DATED 14 TH MARCH 2013 (PAGES 4020-4153 OF THE PAPERBOOK- FILE 17, RELEVANT PAGE 4028), THE ASSESSEE ONCE AGAIN EXPLAI NED THE CONCEPT AND RESUBMITTED THE ENTIRE DOMESTIC SALES LISTING O F IDF 1 AND 2, AS REQUIRED BY THE AO. 67. THE LEARNED COUNSEL THUS SUBMITTED THAT SALES AS PER THE SEGMENTAL P&L ACCOUNT FOR MAG UNIT AMOUNTING TO RS. 1,27,09,37,458/- SHOULD BE CONSIDERED. THE SALES OF RS. 1,75,22,53,519/- BEING DOMESTIC SALES OF IDF 1 AND IDF 2 SHOULD NOT BE CONSIDERED AS SALES OF MAG THE SAME SHOULD BE CO NSIDERED AS DOMESTIC SALES OF IDF 1 AND IDF2. WITHOUT PREJUDIC E TO THE ABOVE CLAIM IT WAS SUBMITTED THAT, IF THE SALES OF THE MA G UNIT OF IS TAKEN AS PER THE TRIAL BALANCE, THEN THE SUCH DOMESTIC SALES SHOULD BE REDUCED FROM THE RESPECTIVE IDF UNITS. FURTHER IF DOMESTIC SALES OF IDF 1 AND IDF 2 ARE TAXED IN THE MAG UNIT, THE CORRESPONDING COST TO SUCH SALES WHICH ARE ALLOCATED TO IDF 1 AND IDF 2 IN THE SEGME NTAL PROFIT AND LOSS ACCOUNT SHOULD ALSO BE REMOVED FROM IDF 1 AND IDF 2 AND CONSIDERED AS COST OF MAG UNIT. WITHOUT PREJUDICE IT WAS SUBM ITTED THAT WHILE COMPUTING THE TOTAL TURNOVER OF IDF UNITS 1 AND 2, NO DOMESTIC SALES SHOULD BE RECKONED WHILST COMPUTING THE DEDUCTION U NDER SECTION 10A OF THE ACT. 68. THE LEARNED DR RELIED ON THE ORDER OF THE AO/DR P. : 62 : IT(TP)A NOS. 299 & 218/BANG/2014 69. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE RI VAL SUBMISSIONS. WE FIND MERIT IN THE SUBMISSIONS MADE BY THE ASSESS EE. AS WE HAVE ALREADY MENTIONED IN THE EARLIER PARAGRAPHS ON THIS ISSUE, THE AO AND THE DRP HAVE SELECTIVELY QUOTED FORM THE REPLY OF T HE ASSESSEE DATED 14.3.2013 WITHOUT QUOTING THE RELEVANT PART OF THE REPLY OF THE ASSESSEE WHICH GIVES RECONCILIATION OF THE FIGURES OF DOMEST IC SALES IN IDF 1 AND IDF 2 UNITS. IF ONLY IF THEY HAD DEALT WITH THE CL AIM OF THE ASSESSEE IN THE LETTER DATED 14.3.2013 AND THE EARLIER LETTERS OF THE ASSESSEE ON THIS ISSUE, THE ISSUE WOULD NOT HAVE ARISEN BEFORE THIS FORUM FOR CONSIDERATION. NOT DEALING WITH A CLAIM AND MAKING AN ARBITRARY ADDITION IN OUR VIEW CANNOT BE SUSTAINED. ON THE F ACTS OF THE CASE, WE ARE CONVINCED THAT THE SALES AS PER THE SEGMENTAL P &L ACCOUNT FOR MAG UNIT AMOUNTING TO RS.1,27,09,37,458/- SHOULD BE CONSIDERED. THE SALES OF RS. 1,75,22,53,519/- BEING DOMESTIC SALES OF IDF 1 AND IDF 2 SHOULD NOT BE CONSIDERED AS SALES OF MAG UNIT. THE SAME SHOULD BE CONSIDERED AS DOMESTIC SALES OF IDF 1 AND IDF2. WE HOLD AND DIRECT ACCORDINGLY. SIMILARLY THE COST OF SALES SHOULD BE TAKEN AS PER THE SEGMENTAL PROFIT AND LOSS ACCOUNT. THE ISSUE WITH R EGARD TO FOREIGN EXCHANGE FLUCTUATION LOSS WHETHER SHOULD BE REGARDE D AS ALLOWABLE DEDUCTION WHILE COMPUTING INCOME OF MAG UNIT OR NOT WILL BE DISCUSSED AND DEALT WITH WHILE DEALING WITH A SPECI FIC GROUND OF APPEAL ON FOREIGN EXCHANGE FLUCTUATION GAIN AND LOSS WHICH IS GR.NO.22 & 23 OF THE GROUNDS OF APPEAL OF THE ASSESSEE IN THIS AP PEAL. IN THE RESULT GR.NO.15 IS TREATED AS ALLOWED. : 63 : IT(TP)A NOS. 299 & 218/BANG/2014 70. GR.NO.16 & 17 RAISED BY THE ASSESSEE WERE NOT P RESSED FOR ADJUDICATION BECAUSE IN RECTIFICATION PROCEEDINGS, THE AO HAS ALLOWED RELIEF TO THE ASSESSEE IN RESPECT OF THE GRIEVANCE PROJECTED IN THOSE GROUNDS. HENCE, GR.NO.16 & 17 ARE DISMISSED AS NOT PRESSED. 71. GR.NO.18 RAISED BY THE ASSESSEE IS WITH REGARD TO CLAIM OF DEDUCTION ON ACCOUNT OF PROVISIONS FOR WARRANTY. T HE RELEVANT GROUND OF APPEAL OF THE ASSESSEE READS THUS: 18. DISALLOWANCE OF PROVISION FOR WARRANTY : RS. 6 7,25,51,172 BREAK-UP OF THE ABOVE EXPENSES IS AS UNDER: ACTUAL EXPENSE - RS. 51,27,80,127 PROVISION FOR WARRANTY - RS. 15,97,71,045 18.1. THE LEARNED AO/DRP HAS ERRED IN DISALLOWING T HE ACTUAL WARRANTY EXPENSE DEBITED TO THE PROFIT AND LOSS ACCOUNT AMOU NTING TO RS. 51,27,80,127 BY TREATING THIS ALSO AS A PROVISION F OR WARRANTY. 18.2. THE LEARNED AO/DRP HAS ERRED IN HOLDING THAT THE IN WARRANTY EXPENSES AND POST WARRANTY EXPENDITURE DEBITED TO T HE PROFIT AND LOSS ACCOUNT WAS NOT SUPPORTED WITH ANY EVIDENCES. 18.3. THE LEARNED AO/DRP OUGHT TO HAVE APPRECIATED THE FACT THAT THE APPELLANT HAS PROVIDED THE FOLLOWING DETAILS: INVOICE-WISE AND PARTY-WISE DETAILS FOR THE ACTU AL WARRANTY EXPENSES DEBITED TO THE PROFIT AND LOSS ACCOUNT. SAMPLE INVOICE COPIES FOR THE SUBSTANTIATING TH E ABOVE DETAILS PROVISION FOR WARRANTY - RS. 15,97,71,045 18.4. THE LEARNED AO/DRP HAS ERRED IN CONCLUDING TH AT THE PROVISIONS FOR WARRANTY IS NOT ON A SCIENTIFIC BASIS AS THE DETAIL S OF THE UTILIZATION OF THE WARRANTY HAVE NOT BEEN PROVIDED. : 64 : IT(TP)A NOS. 299 & 218/BANG/2014 18.5. THE LEARNED AO/DRP OUGHT TO HAVE APPRECIATED THAT THE PROVISION FOR WARRANTY CREATED IS ON A SCIENTIFIC BASIS AND T HE APPELLANT HAS FURNISHED DETAILED WORKINGS AND A WRITE-UP ON THE B ASIS FOR CREATION OF THE PROVISIONS FOR WARRANTY BEING ON THE PAST TRENDS OF FAILURE OF THE PRODUCT. 18.6. THE LEARNED AO HAS ERRED IN REJECTING THE CLA IM OF THE APPELLANT THAT THE WARRANTY PROVISIONS ARE ON A SCIENTIFIC BA SIS AS CONCLUDED IN THE ASSESSMENTS FOR THE AY 2007-08 AND THE UNDERLYING F ACTS HAVE NOT UNDERGONE A CHANGE IN THE CURRENT ASSESSMENT YEAR. 18.7. THE LEARNED AO/DRP HAS ERRED IN CONCLUDING TH AT THE WARRANTY PROVISIONS CREATED DURING ANY OF THE YEARS HAVE NOT BEEN REVERSED. THE LEARNED AO HAS ERRED IN DISREGARDING THE LEDGERS PR OVIDED BY THE APPELLANT WHEREIN IT HAS BEEN CLEARLY SEEN THAT THE WARRANTY PROVISIONS OF A PARTICULAR YEAR ARE REVERSED IN THE BEGINNING OF THE NEXT YEAR . 18.8. THE LEARNED AO FAILED TO APPRECIATE THE FACT THAT THE WARRANTY PROVISIONS CREATED DURING THE YEAR ARE REVERSED DUR ING THE BEGINNING OF THE NEXT YEAR AND THE ACTUAL WARRANTY EXPENSES INCURRED DURING THE YEAR ARE DIRECTLY DEBITED TO THE PROFIT AND LOSS ACCOUNT ALTERNATE GROUND FOR WARRANTY PROVISION AND EXPENSE S: 18.9. NOTWITHSTANDING AND WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED AO/DRP OUGHT TO HAVE OBSERVED THAT THE DISALLOWANCE OF THE WARRANTY EXPENSES AND PROVISION FOR WARRANTY SHOULD GO TO INCREASE THE 'P ROFITS AND GAINS FROM BUSINESS AND PROFESSION' OF THE RESPECTIVE UNITS. 18.10. THE LEARNED AO/DRP ERRED IN NOT CONSIDERING THE INCREASED PROFITS AND GAINS OF BUSINESS CONSEQUENT TO THE ABOVE DISALLOW ANCE IN COMPUTING THE TAX HOLIDAY BENEFIT UNDER SECTION 10A OF THE ACT FOR ID F 1 AND IDF 2 UNITS. 72. THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCO UNT OF PROVISION FOR WARRANTY COMPRISES OF THREE ELEMENTS, VIZ., (I) POST WARRANTY EXPENSES (ACTUALLY INCURRED IN THE PREVIOUS YEAR) R S.6,13,26,593/- (II) IN WARRANTY EXPENSES (ACTUALLY INCURRED DURING THE PREVIOUS YEAR) RS.45,14,60,360/- AND (III) PROVISION FOR WARRANTY OF RS.15,97,40,517/. THE TOTAL OF THE AFORESAID THREE SUMS IS A SUM OF R S.67,25,27,470/-. THESE FIGURES ARE EVIDENT FROM ANNEXURE-16 TO THE R EPLY DATED : 65 : IT(TP)A NOS. 299 & 218/BANG/2014 13.12.2012 FILED BY THE ASSESSEE BEFORE THE AO. TH IS LETTER OF THE ASSESSEE ALONG WITH ANNEXURE IS AT PAGE-636 TO 688 OF PAPER BOOK NO.3 FILED BY THE ASSESSEE. ANNEXURE-16 TO THIS LETTER WHICH EXPLAINS THE BASIS OF PROVISION FOR WARRANTY IS AT PAGES- 685 TO 688 OF PAPER BOOK NO.3 FILED BY THE ASSESSEE. THE AO IN MAKING THE D ISALLOWANCE HAS MENTIONED IN THE ORDER OF ASSESSMENT THAT THE ASSES SEE HAS NOT FURNISHED THE BASIS OF HIS CLAIM FOR DEDUCTION ON A CCOUNT OF PROVISION OF WARRANTY, WHICH IS FACTUALLY INCORRECT. PERUSAL OF ANNEXURE-16 TO THE LETTER DATED 13.12.2012 FILED BY THE ASSESSEE B EFORE THE AO, SHOWS THAT THE PROVISION ON ACCOUNT OF WARRANTY EXPENSES WAS A SUM OF RS.33,74,40,517/- OUT OF WHICH THE ASSESSEE ON HIS OWN HAS DISALLOWED A SUM OF RS.17,76,69,472/- IN THE COMPUTATION OF TO TAL INCOME. THE ACTUAL DIFFERENCE BETWEEN THE PROVISION FOR WARRANT Y EXPENSES IN THE PROFIT AND LOSS ACCOUNT OF RS.33,74,40,517/- AND PR OVISION FOR WARRANTY EXPENSES CLAIMED BY THE ASSESSEE AND CONSIDERED BY THE AO AT RS.15,97,40,517/- IS RS.17,77,00,000/-. THERE IS TH EREFORE A SLIGHT VARIATION IN THE FIGURES OF PROVISION WHICH IS CLAI MED TO HAVE BEEN DISALLOWED BY THE ASSESSEE IN THE COMPUTATION OF TO TAL INCOME BY RS.30,528 (RS.17,77,00,000- RS.17,76,69,472). NEVER THELESS, THE CLAIM FOR DEDUCTION ON ACCOUNT OF PROVISION FOR WARRANTY EXPENSES CONSIDERED FOR DISALLOWANCE BY THE AO IS A SUM OF R S.15,97,40,517/-. WE SHOULD THEREFORE PROCEED ON THE BASIS THAT THE P ROVISION FOR WARRANTY EXPENSES CLAIMED BY THE ASSESSEE IS A SUM OF RS.15,97,40,517 AND THE REMAINING SUM CLAIMED ON AC COUNT OF PROVISION FOR WARRANTY IS ON ACTUAL WARRANTY EXPENS ES INCURRED. : 66 : IT(TP)A NOS. 299 & 218/BANG/2014 73. THE ASSESSEE PROVIDES WARRANTY COVERAGE FOR GOODS DOMESTICALLY SOLD. THE WARRANTY SO PROVIDED CONSISTS OF IN WAR RANTY EXPENSES AND POST WARRANTY EXPENSES: IN WARRANTY EXPENSES: I.E., CUSTOMERS WHO REQUIRE SERVICE DURING THE DEFINED FACTORY WARRANT PERIOD OF OPERATION USE IN-WARRANTY SERVICE. ALL SALES CONTRACTS OF THE ASSESSEE PROVIDES FOR WA RRANT/AFTER SALES SERVICES FOR FREE SUPPLY OF MATERIAL, BOUGHT OUT SE RVICES DURING THE WARRANTY PERIOD. THE DEFINED WARRANTY PERIOD OF TH E ASSESSEE ON SALES IS 2 YEARS IN RESPECT OF GOODS PRODUCED IN INDIA AN D 1 YEAR IN RESPECT OF GOODS THAT IS IMPORTED INTO INDIA. DEFECTIVE PRODUC ES ARE RETURNED BY THE CUSTOMER TO AUTHORIZED PLACEMENT CENTRE (APC) F OR REPLACEMENT OR REPAIR DURING THE STANDARD WARRANTY PERIOD. ANY DEFECT DURING THE IN- WARRANTY PERIOD IS HANDLED BY SERVICE TEAM AND EXPE NSES RELATING TO THE SAME ARE BOOKED UNDER IN-WARRANTY PURCHASES AND IN-WARRANTY EXPENSES. IN-WARRANTY PURCHASES COMPRISES MAINLY OF LOCAL PUR CHASES FOR SUPPORT OF SERVICE AND IMPORT PURCHASES (ALONG WITH DUTY EL EMENT). THE ITEMS BOOKED UNDER THIS HEAD OF EXPENSES MAINLY RELATE TO : -PURCHASE/CHARGING OF BATTERY, PURCHASE OF RAW MATE RIALS FOR SUPPORT OF SERVICE BUSINESS, PURCHASE OF PACKING MATERIAL, PURCHASE OF CARTON BOZES, IMPORTED RAW MATERIAL (ALL FROM GROUP COMPANY) AND PAYMENT OF IMPORT DUTY FOR PROCUREMENT OF MATERIAL. IN-WARRANTY EXPENSES: THE ITEMS BOOKED UNDER THIS HEAD OF EXPENSES MAINLY RELATES TO : 67 : IT(TP)A NOS. 299 & 218/BANG/2014 -AUTHORIZED SERVICES PROVIDER (ASP) CLAIMS SETTLED BY APC FOR IN- WARRANTY SERVICE SUPPORT, RMA (RETURNED MATERIAL AU THORIZATION) RELATES TO EXPENSE FOR RETURNED MATERIAL RECEIVED F ROM VENDOR/ASP, AND COVER FREIGHT FROM WAREHOUSE TO ASP LOCATIONS, TO CUSTOMER LOCATION AND FREIGHT FROM CUSTOMER LOCATIONS. THESE EXPENSES ARE DEBITED TO MAG UNIT. POST WARRANTY EXPENSES: POST WARRANTY EXPENSES PERTAIN TO THE PROVISION OF SERVICES BY THE ASSESSEE AFTER THE EXPIRY OF THE WARRANTY PERIOD TO THE CUSTOMERS. THESE SERVICES ARE PROVIDED TO THE CUSTOMERS BASED ON CERTAIN ANNUAL MAINTENANCE CONTRACTS (AMCS) BETWEEN THE CUSTOMER A ND THE COMPANY. THE POST WARRANTY EXPENSES MAINLY COMPRISES OF EXPE NSES INCURRED BY THE COMPANY OR THROUGH ASP AND COMPRISES OF THE FO LLOWING: - ASP CLAIMS-CALL BASED EXPENSES CLAIM DONE BY ASPS TO APC, TEMPORARY HELP INCURRED-MANPOWER SUPPORT BY ROLEX L OGISTICS, TRAVELLING EXPENSES INCURRED FOR CATERING THE SERVI CE REPAIR WORK, FREIGHT CHARGES, PROFESSIONAL SERVICES-MANPOWER SUP PORT SERVICE, SOFTWARE SUPPORT SERVICE, LOGISTIC AND FACILITY CON SULTATION CHARGES, LEGAL SERVICES, ETC. AND TELEPHONE EXPENSE S/ELECTRICITY EXPENSE/FOOD EXPENSES. 74. THE ACCOUNTING ENTRIES SUMMARY FOR WARRANT Y EXPENSES PASSED BY THE ASSESSEE IN ACCOUNT FOR WARRANTY EXPENSES IS AS FOLLOWS: : 68 : IT(TP)A NOS. 299 & 218/BANG/2014 (A) THE PROVISION FOR WARRANTY CREATED DURING THE PRECE DING FINANCIAL YEAR IS REVERSED DURING THE BEGINNING OF THE CURRENT FINANCIAL YEAR AND OFFERED AS INCOME WHILE COMPUTIN G THE TAXABLE INCOME. (B) THE ACTUAL WARRANTY EXPENSES INCURRED FOR THE YEAR ARE DEBITED AS EXPENSES IN THE CURRENT FINANCIAL YEAR; (C) DURING THE YEAR END, THE ASSESSEE REVIEWS THE AMOUN T REQUIRED TO BE PROVIDED AS WARRANTY BASED ON THE WARRANTY PO LICY OF THE ASSESSEE. THE ASSESSEE PROVIDES FOR WARRANTY BASED ON THE AVERAGE FIELD FAILURE RATE OF EACH PRODUCT AND AVER AGE ACTUAL REPAIR COST INCURRED FOR EACH PRODUCT. THESE ARE B ASED ON THE FEED BACK OF THE SERVICE ENGINEERS WHO ARE IN-CHARG E OF REAPIRS AND REPLACEMENTS OF DEFECTIVE PRODUCTS. FURTHER AD JUSTMENTS ARE MADE TO EITHER INCREASE OR DECREASE THIS PROVISION BASED ON THE ASSESSMENT OF RISK EXPOSURE. 75. THE ENTRIES PASSED FOR THE RELEVANT PREVIOU S YEAR IN THE BOOKS OF ACCOUNT OF THE ASSESSEE IS AS FOLLOWS: SL NO. PARTICULARS DEBIT (RS) CREDIT (RS) 1 PROVISION FOR WARRANTY ACCOUNT DR 252,283,455 TO WARRANTY EXPENSES ACCOUNT 252,283,455 (BEING REVERSAL OF OPENING PROVISIONS) 2 POST WARRANTY EXPENSES ACCOUNT DR 61,326,5 93 TO CASH/BANK/CREDITOR ACCOUNT 61,326,593 : 69 : IT(TP)A NOS. 299 & 218/BANG/2014 (BEING THE POST WARRANTY EXPENSES ENTRY) 3 WARRANTY EXPENSE ACCOUNT DR 451,460,360 TO CASH/BANK/CREDITOR ACCOUNT 451,460,360 (BEING THE WARRANTY EXPENSES ENTRY) 4 WARRANTY EXPENSE ACCOUNT DR 589,723,972 TO PROVISION FOR WARRANTY ACCOUNT 589,723,972 (BEING THE WARRANTY PROVISIONS CREATION ENTRY) 5 PROFIT AND LOSS ACCOUNT DR 850,227,470 TO WARRANTY EXPENSES ACCOUNT 451,460,360 TO POST WARRANTY EXP 61,326,593 TO P ROVISION FOR WARRANTY 337,440,517 (BEING THE TRANSFER OF THE WARRANTY EXPENSE TO THE PROFIT AND LOSS ACCOUNT) FURTHER, WE WISH TO SUBMIT THAT THE PROVISION CREAT ED FOR WARRANTY FOR THE RELEVANT FINANCIALS YEAR AMOUNTING TO RS.33.7 CRORE S HAS BEEN EXPENDED IN THE IMMEDIATELY SUBSEQUENT YEAR. IN WARRANTY ACCOUNTING: THE AMOUNT BOOKED AS EXPENSES IN THE MAG UNIT IS TH EN PASSED ON TO THE OTHER UNITS TO WHICH THE ORIGINAL SALE PERTAINS. IT MAY BE NOTED THAT ON AN AVERAGE THE COMPANY RECE IVES AROUND 20,000 SERVICE REQUESTS PER MONTH. IN VIEW OF THE VOLUMIN OUS NATURE OF THE TRANSACTIONS THE COMPANY IT IS DIFFICULT TO TRACK T HE WARRANTY EXPENSE CUSTOMER-WISE OR ORDER WISE. POST WARRANTY EXPENSES: THE INCOME RECEIVED FROM THE PROVISION OF THESE SER VICES IS BOOKED IN THE MAG UNIT UNDER SCHEDULE 11 INCOME FROM ANNUAL MAI NTENANCE AND : 70 : IT(TP)A NOS. 299 & 218/BANG/2014 SUPPORT SERVICES. ACCORDINGLY, THE EXPENSES INCURR ED FROM THE PROVISION OF THE POST WARRANTY SERVICES ARE ALSO BOOKED UNDER TH E MAG UNIT. 76. THE ABOVE WERE THE FACTS ON THE CLAIM FOR DE DUCTION ON ACCOUNT OF WARRANTY EXPENSES MADE BY THE ASSESSEE BEFORE THE A O. 77. THE AO HOWEVER DISALLOWED THE ENTIRE AMOUNT TOWARDS WARRANTIES AMOUNTING TO RS. 67.26 CR. THE AO PROCEEDED ON THE BASIS THAT THE ENTIRE AMOUNT DEBITED TO THE PROFIT AND LOSS ACCOUN T AS IN-WARRANTY EXPENSES AND POST WARRANTY IS ALSO PROVISION FOR WA RRANTY. THE AO DID NOT APPRECIATE THE CONTENTION NOR DID HE DEAL WITH THE CONTENTION OF THE ASSESSEE THAT ACTUAL WARRANTY EXPENSES AMOUNTING TO RS. 51,27,80,127 (IN-WARRANTY RS. 45,14,60,360 AND POST WARRANTY RS. 6,13,19,767) INCURRED DURING THE YEAR ARE ALSO DEBITED TO THE PR OFIT AND LOSS ACCOUNT AND THOSE EXPENSES CANNOT BY ANY STRETCH OF IMAGINA TION BE DISALLOWED. THE AO HAS MADE REFERENCE TO CERTAIN FIGURES IN PAR A 6.3 SUB- PARAGRAPH-2 AT PAGE 52 OF HIS ORDER AND THOSE FIGUR ES HAVE NOTHING TO DO WITH CLAIM FOR DEDUCTION OF EXPENDITURE ON ACCOU NT OF WARRANTY AND THOSE FIGURES RELATE TO THE PROVISION FOR WARRANTY AS PER BOOKS OF ACCOUNTS WHEREAS WHAT IS RELEVANT TO BE SEEN IS WHA T HAS BEEN CLAIMED AS DEDUCTION IN THE COMPUTATION OF INCOME. THE CONC LUSIONS OF THE AO WERE THAT (1)THE IN-WARRANTY AMOUNT AND POST WARRAN TY AMOUNT DEBITED TO THE PROFIT AND LOSS ACCOUNT WAS NOT SUPP ORTED BY ANY EVIDENCES; (2) PROVISION FOR WARRANTY HAS NOT BEEN CREATED ON A SCIENTIFIC BASIS FOR THE REASON THAT THERE IS NO DA TA AVAILABLE. THE DRP CONFIRMED THE ACTION OF THE AO BY OBSERVING THAT TH E ASSESSEE HAS NOT : 71 : IT(TP)A NOS. 299 & 218/BANG/2014 PROVIDED ANY OF THE FACTUAL DATA IN SUPPORT OF THE CLAIMS OF THE WARRANTY AND THEREFORE REJECTED THE OBJECTIONS RAIS ED BY THE ASSESSEE. 78. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE F IRST AND FOREMOST SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE WAS THAT THE ACTUAL WARRANTY EXPENSE IN WARRANTY (RS 45,14,60,360) AN D POST WARRANTY (RS 6,13,19,767) WAS ERRONEOUSLY CONSIDERED AS PROV ISION FOR WARRANTY. IT WAS BROUGHT TO OUR NOTICE THAT THESE EXPENSES COMPRISES OF PURCHASE OF BATTERY, RAW MATERIAL, PACKING MATER IAL, CARTON BOXES, IMPORT OF RAW MATERIAL, PAYMENT OF IMPORT DUTY, ASP CLAIMS, FREIGHT CHARGES, ETC. OUR ATTENTION WAS DRAWN BY HIM TO THE EVIDENCE IN SUPPORT OF THE WARRANTY EXPENSE WERE SUBMITTED TO T HE AO VIDE SUBMISSIONS DATED 4 TH MARCH 2013 (PAGE NUMBER 4154 TO 4555-FILE 18). DETAILED PARTY WISE BREAKUP OF THE EXPENSE (APPROX. 14000 INDIVIDUAL LINE ITEMS (PAGES 4166-4530) WERE FILED BY THE ASSE SSEE. SAMPLE INVOICES FOR THE EXPENSES INCURRED (PAGES 4531-4555 ) WERE ALSO FILED BY THE ASSESSEE. DESPITE SUCH EVIDENCE HAVING BEEN FILED, THE AO HAS OBSERVED THAT NO EVIDENCE WAS FILED BY THE ASSESSEE IN SUPPORT OF THE CLAIM FOR DEDUCTION. THE INVOICES THAT WERE DESTROY ED IN FIRE HAS NOTHING TO DO WITH INVOICES RELATING TO ACTUAL INCU RRING OF WARRANTY EXPENSES. THESE INVOICES WERE PRODUCED BEFORE THE A O. IT WAS SUBMITTED THAT ACTUAL EXPENDITURE INCURRED ON PROVI DING WARRANT CLAIMS WAS AN EXPENDITURE OF REVENUE NATURE INCURRED WHOLL Y AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE AND HAD TO BE ALLOWED AS DEDUCTION UNDER SECTION 37(1) OF THE ACT. AS PER TH E WARRANTY POLICY OF THE ASSESSEE, WARRANTY SERVICES ARE PROVIDED ONLY I N RESPECT OF : 72 : IT(TP)A NOS. 299 & 218/BANG/2014 DOMESTIC SALES MADE BY THE ASSESSEE. THE LEARNED CO UNSEL FOR THE ASSESSEE POINTED OUT THAT SINCE THE POST WARRANTY I NCOME IS BOOKED AND REFLECTED ON THE MAG UNIT, THE CORRESPONDING COST I S ALSO BOOKED IN THE MAG UNIT AND ALSO BROUGHT TO OUR NOTICE THAT THIS A SPECT WAS EXPLAINED TO THE AO VIDE SUBMISSIONS DATED 13TH DECEMBER 2012 . THE LEARNED DR RELIED ON THE ORDER OF THE AO/DRP. 79. WE HAVE CAREFULLY CONSIDERED THE RIVAL SU BMISSIONS. AS RIGHTLY SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE, THE ACTUAL WARRANTY EXPENSES WERE ALWAYS CLAIMED APART FROM DEDUCTION C LAIMED ON ACCOUNT OF PROVISION FOR WARRANTY. THE CLOSING BALA NCE IN THE PROVISION FOR WARRANTY ACCOUNT ON THE LAST OF THE EARLIER FIN ANCIAL YEAR WHICH IS OPENING BALANCE OF THE CURRENT FINANCIAL YEAR IS RE VERSED ON THE FIRST DAY OF CURRENT FINANCIAL YEAR. THEREAFTER THE ACTU AL WARRANTY EXPENSES IS CLAIMED AS DEDUCTION ON THE BASIS OF ACTUALS AND ANTICIPATED LIABILITY ON ACCOUNT OF WARRANTY CLAIMS IN FUTURE IN RESPECT OF SALES ALREADY RECOGNIZED IN THE BOOKS OF ACCOUNT IS ESTIMATED ON A SCIENTIFIC BASIS AND DEDUCTION ON ACCOUNT OF PROVISION FOR WARRANTY IS CLAIMED. THIS HAS BEEN MADE CLEAR BY THE ASSESSEE IN HIS SUBMISSI ON DATED 13.12.2012 AND ANNEXURE-16 TO THE SAID LETTER FILED BEFORE THE AO. THEREFORE THERE IS NO REASON WHY THE ACTUAL EXPENDI TURE INCURRED ON PROVIDING WARRANT CLAIMS SHOULD NOT BE ALLOWED AS D EDUCTION. THE EVIDENCE FILED BY THE ASSESSEE IN THIS REGARD BEFOR E THE AO VIDE SUBMISSIONS DATED 4 TH MARCH 2013 ( PAGE NUMBER 4154 TO 4555-FILE 18) GIVING ALL DETAILS, DETAILED PARTY WISE BREAKUP OF THE EXPENSE (APPROX. 14000 INDIVIDUAL LINE ITEMS (PAGES 4166-4530) AND S AMPLE INVOICES FOR : 73 : IT(TP)A NOS. 299 & 218/BANG/2014 THE EXPENSES INCURRED (PAGES 4531-4555) CLEARLY PRO VES THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF THE AFORESAID SUMS. WE THEREFORE HOLD THAT DISALLOWANCE OF WARRANTY EXPENSES TO THE EXTEN T OF ACTUALS INCURRED BY THE ASSESSEE VIZ., IN WARRANTY (RS 45,14,60,36 0) AND POST WARRANTY (RS 6,13,19,767) SHOULD BE ALLOWED AS DEDU CTION. WE HOLD AND DIRECT ACCORDINGLY. 80. AS FAR AS DEDUCTION ON ACCOUNT OF PROVISION FOR WARRANT EXPENSES OF RS.15,97,71,045/- IS CONCERNED, WE HAVE HEARD TH E RIVAL SUBMISSIONS. THE CONDITIONS FOR ALLOWING PROVISION ON ACCOUNT OF PROVISION FOR WARRANTY EXPENSES HAS BEEN LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA (P) LTD (314 ITR 62) WHEREIN THE HONORABLE APEX COURT HAS STATED THA T PROVISION FOR WARRANTY SHALL BE ALLOWED IF IT IS MADE ON SCIENTIF IC BASIS. THE ASSESSEE HAS FILED A CHART EXPLAINING AS TO HOW THE PRINCIPL ES LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROL S (SUPRA) HAS BEEN SATISFIED IN ITS CASE. PRINCIPLES LAID DOWN FOR PROVISION FOR WARRANTY TO BE TREATED SCIENTIFIC APPLICABILITY TO THE ASSESSEE 1 PRESENT OBLIGATION OUT OF OBLIGATING EVENTS WHICH INVOLVES OUTFLOW OF RESOURCES THERE IS PRESENT OBLIGATION ON THE COMPANY TO MEET COST FOR WARRANTY IN EVENT OF DEFECTS IN PRODUCTS WHICH WOULD INVOLVE OUTFLOW OF RESOURCES 2 A RELIABLE ESTIMATE CAN BE MADE REPAIR COST AND MLO COST INCURRED IS MULTIPLIED BY ACTUAL FFR RATE AND NUMBER OF PRODUCTS SOLD TO COMPUTE PROVISION. THUS, ESTIMATE MADE BY COMPANY CAN BE CONSIDERED RELIABLE : 74 : IT(TP)A NOS. 299 & 218/BANG/2014 PRINCIPLES LAID DOWN FOR PROVISION FOR WARRANTY TO BE TREATED SCIENTIFIC APPLICABILITY TO THE ASSESSEE 3 WARRANTY COST WAS AN INTEGRAL PART OF THAT SALE PRICE WARRANTY PROVIDED FOR DOMESTIC SALES AT TIME OF SALE. THUS, WARRANTY COST IS AN INTEGRAL PART OF SALES 4 A HISTORICAL TREND USED AS A BASIS FOR CREATION OF PROVISION PROVISION CREATED IS BASED ON THE FIELD FAILURE RATE OF THE PRODUCTS IN PAST. THUS, A HISTORICAL TREND OF ACTUAL FAILURE OF PRODUCTS HAS BEEN USED AS A BASIS FOR CREATING THE PROVISION 5 REVERSAL OF UNUTILIZED PROVISIONS IN CASE OF COMPAN Y THE ENTIRE PROVISION IS REVERSED IN NEXT YEAR AND ACTUAL EXPENSE IS BOOKED IN PROFIT AND LOSS A/C. THUS, THERE IS NO QUESTION OF UNUTILIZED PROVISION 81. THE METHOD OF CREATION OF PROVISION FOR WARR ANTY BY THE ASSESSEE IS SCIENTIFIC. A PERUSAL OF THE DETAILED WORKINGS F OR THE PROVISION FOR WARRANTY WERE FURNISHED BEFORE THE LEARNED AO VIDE SUBMISSIONS DATED 4 TH MARCH 2013 (PAGE NUMBER 4154 TO 4162 - FILE 18 OF THE PAPER BOOK, RELEVANT PAGES 4160-4164). THE WORKINGS ANNEXED TO THE SAID SUBMISSION ARE AVAILABLE IN FILES 5 AND 6 OF THE PA PER BOOKS WITH COMPLETE LISTING OF THE SALES. ALSO, THE SAME WER E EVEN EXPLAINED IN DETAIL IN THE SUBMISSIONS DATED 13 TH DECEMBER 2012 (PAGE NO 685 TO 688 FILE 3), WHERE THE ACCOUNTING ENTRIES WERE ALSO EXPLAINED. THE ASSESSEE SUBMITS THAT THE DETERMINATION OF PROVISIO N IS AN ELABORATE EXERCISE COVERING ALL PRODUCTS SOLD AND INVOLVES OF AROUND 35,000 LINE ITEMS. THE AO HELD THAT PROVISION FOR WARRANTY MADE BY THE ASSESSEE : 75 : IT(TP)A NOS. 299 & 218/BANG/2014 IS NOT SCIENTIFIC BECAUSE DETAILS OF THE UTILIZATIO N OF THE WARRANTY HAVE NOT BEEN PROVIDED. IN NONE OF THE YEARS THE UNUTILI ZED WARRANTY PROVISION WAS REVERSED AND CREDITED INTO THE P&L AC COUNT; UTILIZATION CAN BE VERIFIED ONLY IF THE NAME OF THE CUSTOMER AN D THE SALES INVOICE ARE PROVIDED TO VERIFY THE PERIOD OF WARRANTY AND N AME OF THE CUSTOMER AGAINST WHOM THE WARRANTY PROVISION WAS UTILIZED OU T OF THE EXISTING PROVISION, ETC. 82. THESE CONCLUSIONS OF THE AO ARE UNSUSTAINABLE B ECAUSE THE ENTIRE PROVISION CREATED BY THE ASSESSEE IS REVERSE D IN THE NEXT YEAR AND ACTUAL WARRANTY EXPENSE INCURRED IS CHARGED TO THE PROFIT AND LOSS ACCOUNT. THUS, IN THE CASE OF THE ASSESSEE THERE IS NO REQUIREMENT FOR MAINTAINING THE DETAILS OF UTILIZATION AS MENTIONED BY THE LEARNED AO AS THERE IS NO UNUTILIZED PROVISION. THE TREND OF PROVISION FOR WARRANTY I.E., THE ACTUAL EXPENSE VIS--VIS THE CLOSING PROV ISION FOR WARRANTY AND ALSO REVERSAL OF WARRANTY HAVE ALL BEEN FURNISHED B Y THE ASSESSEE BEFORE THE AO. (SUBMISSION AT PAGE 4747 OF FILE 20 OF THE PAPERBOOK (RELEVANT PAGES 4786-4793). THE LEDGER EXTRACTS FOR THE PROVISION A/C FOR THE YEAR ENDED 31 ST MARCH 2008 AND 31 ST MARCH 2009 WERE ALSO MADE AVAILABLE AT PAGES 4793-4794. THE UTILIZATION IN THE CASE OF ASSESSEE IS IN THE FORM OF EVIDENCE FOR ACTUAL EXPE NSE INCURRED, WHICH WAS FURNISHED BEFORE THE LEARNED AO VIDE SUBMISSIONS DATED 4 TH MARCH 2013 ( PAGE NUMBER 4154 TO 4162 - FILE 18 OF THE PAPER B OOK). THE METHOD OF CREATION OF PROVISION FOR WARRANTY IS A ROBUST METHOD OF DETERMINATION OF PROVISION FOR WARRANTY. THE SAME I S AS FOLLOWS: : 76 : IT(TP)A NOS. 299 & 218/BANG/2014 (I) PROVISIONS FOR THE PREVIOUS YEAR IS REVERSED COMPLE TELY AT THE BEGINNING OF THE CURRENT YEAR. (II) AT THE YEAR END, THE COMPANY REVIEWS THE AMOUNT REQUIRED TO BE PROVIDED AS WARRANTY BASED ON THE WA RRANTY POLICY OF THE COMPANY. (III) THE SALES REGISTER FOR THE PAST 3 YEARS ARE TAKEN A S BASIS FOR CREATION OF THE PROVISIONS FOR WARRANTY. (IV) THE PROVISION IS CREATED ON THE BASIS OF FIELD FAIL URE RATE (FFR) IDENTIFIED PER PRODUCT FOR THE PAST ONE YEAR (I.E. 2008 FOR 2009 EXPENSES). FURTHER ADJUSTMENTS ARE MA DE TO EITHER INCREASE OR DECREASE THIS PROVISION BASED ON THE ASSESSMENT OF RISK EXPOSURE. (V) THE PROVISION IS CREATED AS UNDER : FFR * COST PER PRODUCT* NUMBER OF PRODUCTS SOLD. COST REFERS TO FOLLOWING: O MATERIAL, LABOR AND OVERHEAD (MLO) COST FOR PRODUCTS FULLY REPLACED; O REPAIRS AND FREIGHT COSTS FOR THE PRODUCTS REPAIRED . 83. IT IS ALSO CLEAR THAT THE METHODOLOGY FOLLOWED BY THE ASSESSEE WAS HELD TO BE SCIENTIFIC FOR AY 2008-09. AOS ORDE R DATED 6 TH JULY 2012 CLEARLY STATES THE METHOD OF CREATION OF WARRA NTY IS SCIENTIFIC- PAGE 5 PARA 2.7 (PAGE OF 4959- FILE 20): ON GOING THROUGH THE ASSESSEE SUBMISSIONS, IT IS SEEN THAT ASSESSEE HAS CREATED THE PROVISIONS ON A SCIENTIFIC BASIS BASED ON EMPIRICAL DATA, TRENDS, PROJECTIONS, ETC 84. THE METHOD OF PROVIDING AND CLAIM DEDUCTION ON ACCOUNT OF WARRANTY EXPENSES IS THE SAME IN THE PRESENT AY AS IT WAS IN AY 2008- : 77 : IT(TP)A NOS. 299 & 218/BANG/2014 09. IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CA SE, WE ARE OF THE VIEW THAT THE DEDUCTION ON ACCOUNT OF PROVISION FOR WARRANT EXPENSES DESERVES TO BE ALLOWED AS CLAIMED BY THE ASSESSEE A S THE REQUIREMENTS FOR CLAIMING DEDUCTION ON ACCOUNT OF PROVISION FOR WARRANTY LIABILITY HAS BEEN SATISFIED. GR.NO.18 RAISED BY THE ASSESSE E IS ACCORDINGLY ALLOWED. 85. GR.NO.19 RAISED BY THE ASSESSEE PROJECTS ITS GR IEVANCE REGARDING TREATMENT BY THE REVENUE AUTHORITIES OF A SUM OF RS .5,38,22,153/- WHICH IS PART OF THE AMC VALUE WHICH WAS DEFERRED A ND NOT RECOGNIZED AS INCOME BY THE ASSESSEE IN ITS BOOKS OF ACCOUNTS DUE TO THE REVENUE RECOGNITION POLICY FOLLOWED BY THE ASSESSEE. GR.NO .19 READS AS FOLLOWS: 19. ADDITION OF DEFERRED SERVICE INCOME AS UNDISCL OSED INCOME - RS. 5,38,22,153 19.1 THE LEARNED AO/ DRP HAS ERRED IN CONSIDERING T HE SUM OF RS. 5,38,22,153 AS UNDISCLOSED INCOME. 19.2. THE LEARNED AO/DRP OUGHT TO HAVE OBSERVED THA T THE AMOUNT CANNOT BE TREATED AS UNDISCLOSED INCOME AS THE APPE LLANT HAS PROVIDED THE DETAILS OF THE SOURCE OF THE INCOME SUCH AS PARTY N AMES, INVOICE NUMBERS, INVOICE PERIOD, CONTRACT VALUE, ETC. 19.3. THE LEARNED AO/DRP HAS FAILED TO APPRECIATE T HE FACT THAT THE SERVICE INCOME OF RS. 5,38,22,153 IS THE ADVANCE AM OUNT RECEIVED DURING THE YEAR AND IT IS NOT ACCRUED IN THE FY 2008-09. 19.4. THE LEARNED AO/DRP HAS FAILED TO APPRECIATE T HE FACT THAT THE APPELLANT IS CONSISTENTLY FOLLOWING THE METHOD OF A CCOUNTING FOR DEFERRED SERVICE INCOME AS PER ACCOUNTING STANDARD (AS) 9 - REVENUE RECOGNITION. : 78 : IT(TP)A NOS. 299 & 218/BANG/2014 19.5. THE LEARNED AO/DRP HAS ERRED IN NOT APPRECIAT ING THE FACT THAT THE APPELLANT HAS CONSIDERED THE DEFERRED SERVICE I NCOME OF THE FY 2008-09 AS INCOME IN THE SUBSEQUENT YEARS ON RENDER ING THE SERVICES TO THE CUSTOMERS AND SUCH INCOME HAS BEEN OFFERED T O TAX IN THE YEAR IN WHICH IT HAS ACCRUED. 19.6. THE LEARNED AO/DRP HAS ERRED IN STATING THAT THE CORRESPONDING EXPENDITURE IS ALREADY DEBITED INTO THE PROFIT AND LOSS ACCOUNT. 19.7. THE LEARNED AO/DRP OUGHT TO HAVE OBSERVED THA T NO SERVICES WERE RENDERED AND NO COST TO THIS EFFECT WAS INCURRED DU RING THE YEAR. 86. THE FACTS AS FAR AS GR.NO.19 ARE CONCERNED ARE THAT THE ASSESSEE IS PRINCIPALLY ENGAGED IN THE BUSINESS OF MANUFACTU RE AND TRADING OF UPS SYSTEMS AND OTHER POWER PROTECTION DEVICES. THE ASSESSEE IS ALSO ENGAGED IN PROVIDING REPAIRS AND MAINTENANCE SERVIC ES TO THE CUSTOMERS BASED ON ANNUAL MAINTENANCE CONTRACTS (A MCS). THE ASSESSEE ENTERS INTO AMCS FOR PROVISION OF REPAIRS AND MAINTENANCE SERVICES. THIS IS DONE FOR THE PERIOD AFTER EXPIRY OF THE WARRANTY PERIOD. THE AMCS ARE PERIOD SPECIFIC E.G 1 YEAR CONTRACT, 2 YEAR CONTRACT ETC. THE INCOME IN RESPECT OF THE SAME IS BOOKED IN THE MAG UNIT. THE REVENUE RECOGNITION POLICY OF THE ASSESSEE IN RECOR DING REVENUES FROM AMC ARE GIVEN IN SCHEDULE 18 TO THE NOTES TO ACCOUN TS (NOTE 2(H) (B) ) AND IS AS FOLLOWS: SERVICE INCOME PRIMARILY COMPRISES INCOME FROM SUP PORT AND MAINTENANCE CONTRACTS AND IS RECOGNIZED ON A PRO-RA TA BASIS OVER THE PERIOD OF THE CONTRACTS, OVER WHICH THE SERVICE IS RENDERED. ACCORDING TO THE ASSESSEE THIS REVENUE RECOGNITION POLICY OF THE ASSESSEE IS IN LINE WITH THE ACCOUNTING STANDARD (A S) 9 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) THE APPLICATION OF : 79 : IT(TP)A NOS. 299 & 218/BANG/2014 WHICH IS MANDATORY FOR THE ASSESSEE. THE SERVICE I NCOME WHICH PERTAINS TO THE SUBSEQUENT YEAR IS NOT RECOGNIZED A S INCOME IN THE CURRENT YEAR. EXAMPLE : AMC CONTRACT VALUE = RS 100 PERIOD : 1 JULY 2008 TILL 30 JUNE 2009 INCOME RECOGNIZED IN THE CURRENT YEAR = 1 JULY 2008 TILL 31 MAR 2008 I.E, 274 DAYS / 366 DAYS * RS 100 = RS. 74.86 INCOME TO BE DEFERRED AND RECOGNIZED IN YEAR ENDED 31 MARCH 2010 IS 92 /366 * 100 = RS.25.14 THE SUM OF RS.5,38,22,153 WHICH IS THE SUBJECT MATT ER OF ADDITION IN GR.NO.19 IS INCOME RECOGNITION OF WHICH BY THE ASSE SSEE FOR AY 2009-10 WAS DEFERRED PURSUANT TO ITS ACCOUNTING POL ICY GIVEN ABOVE. 87. THE AO CONSIDERED THE DEFERRED SERVICE INC OME AMOUNTING TO RS.5,38,22,153 AS UNDISCLOSED INCOME. ACCORDING TO THE AO ONCE INCOME HAS ACCRUED OR ARISEN TO THE ASSESSEE THE SA ME HAS TO BE RECOGNIZED AS INCOME IN THE YEAR IN WHICH IT ACCRUE S OR ARISES, WHEN THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCO UNTING. FURTHER THE AO ALSO OBSERVED THAT THERE WAS NO OPENING BALA NCE IN SERVICE INCOME LEDGER, WHEREAS THE WORKINGS FOR DEFERRED SE RVICE INCOME FURNISHED BY THE ASSESSEE HAS OPENING BALANCE. THE DRP UPHELD THE ORDER OF THE LEARNED AO. 88. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE AMOUNT FOR THE AMC CONTRACTS ARE RECEIVED IN ADVANCE BY TH E ASSESSEE, BUT : 80 : IT(TP)A NOS. 299 & 218/BANG/2014 INCOME RECOGNITION FOR SUCH AMOUNTS IS DONE PROPORT IONATELY OVER THE PERIOD OF THE CONTRACT. ACCORDING TO HIM, DOING SO IS PERMISSIBLE UNDER ACCOUNTING STANDARD (AS) 9 OF ICAI. HE SUBMITTED T HAT THE SERVICE INCOME WHICH WAS DEFERRED IN THE CURRENT FY HAS BEE N BOOKED IN THE P&L ACCOUNT FOR THE SUBSEQUENT YEARS AND HAS BEEN O FFERED TO TAX. HE SUBMITTED THAT THE AO AND DRP WERE NOT RIGHT IN CHA RACTERIZING THE INCOME IN QUESTION AS UNDISCLOSED INCOME. ACCORDING TO HIM THE AMOUNT IN QUESTION IS VERY MUCH DISCLOSED IN THE BO OKS OF ACCOUNTS OF THE ASSESSEE AND THEREFORE CANNOT BE SAID TO BE UND ISCLOSED INCOME. THE ASSESSEE HAS AN EXPLANATION FOR THE SUM FOUND R ECORDED IN THE BOOKS OF ACCOUNTS AND THE EXPLANATION IS THAT IT IS RECOGNIZED AS INCOME IN SUBSEQUENT AY. THEREFORE THE SUM IN QUESTION CA NNOT BE SAID TO BE UNDISCLOSED INCOME. HIS SUBMISSION WAS THAT THE ASS ESSEE WAS JUSTIFIED IN DEFERRING RECOGNIZING INCOME BECAUSE T HE INCOME DEFERRED WAS RIGHTFULLY INCOME OF ANOTHER AY. IN THIS REGARD HE DREW OUR ATTENTION TO THE WORKING OF DEFERRED SERVICE INCOME FURNISHED BEFORE THE AO IN ASSESSEES SUBMISSIONS DATED 16 TH OCTOBER 2012 CONTAINING, INTER-ALIA, THE FOLLOWING (SUBMISSION PAGE 518 TO 540 AT PAGE 523 OF FILE 3. CONNECTED WORKINGS AT ANNEXURE 9 THERETO ARE AVAILABLE AT PAGE NOS. 1620 TO 1897 FILE 7): (I) PARTY NAMES (II) INVOICE NUMBER (III) INVOICE PERIOD (IV) CONTRACT VALUE (V) NUMBER OF DAYS WITHIN FY 2009 (VI) THE AMOUNT OF INCOME WHICH FALLS OUTSIDE FY 2009, ETC. : 81 : IT(TP)A NOS. 299 & 218/BANG/2014 89. ON THE OBSERVATION OF THE AO WHETHER EXPENSES H AVE ALSO BEEN DEFERRED, THE LEARNED COUNSEL FOR THE ASSESSEE SUBM ITTED THAT THERE WILL BE NO DEFERRED COST SUCH INCOME AS THE SAME HAS NOT BEEN INCURRED AND WILL BE INCURRED ONLY IN THE SUBSEQUENT PERIOD WHEN THE AMC IS PERFORMED BY THE ASSESSEE. THERE WILL BE NO OPENING BALANCE IN SERVICE INCOME LEDGER BECAUSE THAT DEFERRED EXPENSE S BECAUSE IT IS TRANSFERRED TO PROFIT & LOSS ACCOUNT WILL BE CLOSED . THE OPENING BALANCE WILL APPEAR ONLY IN DEFERRED INCOME LEDGER AND NOT IN THE SERVICE INCOME LEDGER WHICH IS EVIDENT FROM THE SER VICE LEDGER MADE AVAILABLE TO THE AO VIDE SUBMISSION DATED 30 TH AUGUST 2012 AT PAGES 364- 498 OF FILE -2. IT WAS SUBMITTED THAT THERE I S NO BASIS FOR THE AO TO CONCLUDE THAT THE SERVICE INCOME HAS ACCRUED IN THE CURRENT FY. IT WAS SUBMITTED THAT THE AO HAS NOT APPRECIATED THE C ONCEPT OF DEFERRED REVENUE, EVEN AFTER THE ELABORATE SUBMISSIONS OF TH E ASSESSEE. HE PLACED RELIANCE ON THE FOLLOWING DECISIONS IN SUPPO RT OF THE CLAIM OF THE ASSESSEE THAT THE ASSESSEE WAS ENTITLED TO DEFE R RECOGNITION OF INCOME. CIT V. PUNJAB TRACTORS CO-OP. MULTIPURPOSE SOCIETY LTD. [1997] 95 TAXMAN 579 (PUNJ. & HAR.) CIT V. CORAL EL ECTRONICS (P.) LTD. [2005] 142 TAXMAN 481 (MAD.)ACIT V. IOT INFRASTRUCT URE & ENERGY SERVICES LTD. [2013] 39 TAXMANN.COM 195 (MUMBAI - TRIB.). THE LEARNED COUNSEL FOR THE ASSESSEE PRAYED THAT TH E ADDITION OF DEFERRED SERVICE INCOME AMOUNTING TO RS.5,38,22,153 AS UNDISCLOSED INCOME SHOULD BE DELETED AS THE SAME IS NOT INCOME FOR THE YEAR. 90. THE LEARNED DR RELIED ON THE ORDER OF THE AO/DRP AN D ALSO A DECISION OF THIS TRIBUNAL IN THE CASE OF M/S.OPTUM HEALTH & : 82 : IT(TP)A NOS. 299 & 218/BANG/2014 TECHNOLOGY (INDIA) PVT.LTD. VS. ITO ITA NO.1068/BAN G/2016 ORDER DATED 8.2.2019 WHEREIN ON IDENTICAL FACTS, THE TRIB UNAL HELD THAT INCOME CANNOT BE DEFERRED AND HAD TO BE RECOGNIZED IN THE YEAR OF ENTERING INTO THE AMC. IT WAS SUBMITTED BY HIM THAT ALL INVOICES WERE NOT PRODUCED BEFORE THE AO AND IT HAS TO BE SEEN AS TO WHAT IS T HE CORRESPONDING ACCOUNTING TREATMENT FOR PURCHASE OF MATERIALS, WHE THER THEY WERE CLAIMED IN THE YEAR IN WHICH INCOME WAS DEFERRED AN D OFFERED TO TAX. THE TERMS OF THE AMC HAS TO BE EXAMINED. 91. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. THE FIRST ASPECT WHICH WE WOULD LIKE TO CLARIFY IS THAT IT WA S NOT CORRECT ON THE PART OF THE AO TO CHARACTERIZE THE SUM OF RS.5,38,2 2,153 AS UNDISCLOSED INCOME. THE INCOME IS DISCLOSED IN THE BOOKS OF ACCOUNTS BUT IS NOT RECOGNIZED FOR THE PURPOSE OF INCOME TAX COMPUTATION BECAUSE OF THE ASSESSEES ACCOUNTING POLICY WHICH I N TURN IS BASED ON AS-9 OF ICAI. THE SECOND ASPECT WHICH HAS TO BE CL ARIFIED IS THAT THE DEFERMENT OF REVENUE AS NOT PERTAINING TO THE RELEV ANT AY 2009-10 IS ALSO SUBSTANTIATED BY THE ASSESSEE AND THE BASIS OF DEFERRAL OF REVENUE IS CLEARLY GIVEN IN PAPER BOOK NO.7 PAGES 1620 TO 1 897. THEREFORE THERE CAN BE NO DISPUTE THAT THE INCOME DEFERRED DID NOT PERTAIN TO AY 2009- 10, IF ONE WERE TO ACCEPT THAT DEFERRAL OF INCOME, THOUGH IT HAS ACCRUED TO AN ASSESSEE, IS POSSIBLE. THE PRINCIPAL QUESTIO N THEREFORE THAT NEEDS TO BE ADDRESSED IS REGARDING WHETHER DEFERRING REVE NUE IS PERMISSIBLE UNDER THE MERCANTILE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE : 83 : IT(TP)A NOS. 299 & 218/BANG/2014 WHERE INCOME THAT ACCRUES OR ARISES TO AN ASSESSEE HAS TO BE REGARDED AS INCOME. 92. THE LEARNED COUNSEL FOR THE ASSESSEE IN HIS REJOIND ER SUBMITTED THAT THE DECISION OF THE TRIBUNAL RENDERED IN THE C ASE OF M/S. OPTUM HEALTH & TECHNOLOGY (INDIA) PVT.LTD. (SUPRA) IS CLE ARLY DISTINGUISHABLE BECAUSE IN THAT CASE NOT ONLY WAS THE REVENUE RECEI VED BUT ALSO SERVICES WERE RENDERED AND STILL THE ASSESSEE CHOSE TO DEFER REVENUE RECOGNITION AND IT WAS IN THOSE CIRCUMSTANCES, THE TRIBUNAL HELD THAT DEFERRING REVENUE WAS NOT PROPER AND HAD TO BE REGA RDED AS INCOME OF THE RELEVANT YEAR. 93. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO THE R IVAL SUBMISSIONS. SIMILAR ISSUE HAD ARISEN FOR CONSIDER ATION IN THE CASE OF PUNJAB TRACTORS CO-OP. MULTIPURPOSE SOCIETY LTD. (S UPRA) BEFORE THE HONBLE PUNJAB & HARYANA HIGH COURT. IN THAT CASE THE FACTS WERE THAT THE ASSESSEE WAS ENGAGED IN THE PURCHASE AND SALE O F TRACTORS, MOTOR CYCLES, ETC., AND DOING THEIR REPAIRING. IT HAD REC EIVED ADVANCES FROM THE BUYERS OF TRACTORS TO COVER THEIR SERVICE CHARG ES FOR A PERIOD OF ONE YEAR AFTER THE EXPIRY OF INITIAL WARRANTY PERIOD. I T HAD SHOWN SAME ON THE LIABILITY SIDE IN THE BALANCE SHEET FOR THE ASS ESSMENT YEAR 1978-79 UNDER THE HEAD 'POST-WARRANTY SERVICE ADVANCES' (PW S ADVANCES). IT USED TO MAKE ADJUSTMENT OF THE AMOUNT RECEIVED FROM PWS ADVANCES ACCOUNT TO THE WORKSHOP INCOME ACCOUNT DURING THE Q UARTER IN WHICH THE WORK OF REPAIRS AND SERVICES WAS DONE, AND INCL UDED THE AMOUNT SO ADJUSTED AS INCOME OF THE RELEVANT YEAR. OUT OF THE AGGREGATE AMOUNT : 84 : IT(TP)A NOS. 299 & 218/BANG/2014 SHOWN IN PWS ADVANCES ACCOUNT, THE ASSESSING OFFICE R TREATED PROPORTIONATE SUM FOR THE PERIOD COVERED AS THE ASS ESSEE'S INCOME FOR THE ASSESSMENT YEAR IN QUESTION. THE COMMISSIONER I NVOKED SECTION 263 AND HELD THAT THE ENTIRE AMOUNTS RECEIVED IN TH E PREVIOUS YEAR TOWARDS PWS ADVANCES WERE TRADING RECEIPTS OF THE Y EAR DIRECTLY CONNECTED WITH THE BUSINESS OF SERVICING AND REPAIR S OF TRACTORS. HE, ACCORDINGLY, SET ASIDE THE ASSESSMENT. ON APPEAL, T HE TRIBUNAL UPHELD THE ASSESSING OFFICER'S ACTION DISAGREEING WITH THE FINDING OF THE COMMISSIONER. ON REFERENCE, THE HONBLE PUNJAB & H ARYANA HIGH COURT HELD AS FOLLOWS: THE TAXABILITY OF INCOME NORMALLY DEPENDS UPON THE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE. EVEN IN THE CASE OF AN AS SESSEE FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING, A MERE CLAIM, BY T HE ASSESSEE IN RESPECT OF AN AMOUNT WITHOUT THE RIGHT TO CLAIM CANNOT FORM TH E BASIS FOR TAXABILITY. WHERE THE ASSESSEE FOLLOWS THE CASH SYSTEM OF ACCOU NTING, THE TAXABILITY IS TO BE BASED ON RECEIPT BASIS AND NOT ON ACCRUAL BASIS. RECEIPT, EITHER ACCRUED OR DEEMED, IS NOT MADE A CONDITION PRECEDENT TO TAX ABILITY. PROFITS OR GAINS ARE TAXABLE IF THEY HAVE ACCRUED OR HAVE ARISEN OR ARE, UNDER THE ACT, DEEMED TO HAVE ACCRUED OR ARISEN TO THE ASSESSEE IN THE ACCOUNTING YEAR. GENERALLY, INCOME MUST ACCRUE FIRST, RECEIPT NORMAL LY FOLLOWS THE ACCRUAL. IN OTHER WORDS, THE RIGHT TO RECEIVE MUST COME INTO EX ISTENCE BEFORE THE ACTUAL RECEIPT TAKES PLACE. RECEIPT, BY ITSELF, IS NOT SUF FICIENT TO ATTRACT TAX. IT IS ONLY RECEIPT AS 'INCOME' WHICH WOULD ATTRACT TAX. EVERY RECEIPT BY THE ASSESSEE IS, THEREFORE, NOT NECESSARILY INCOME IN HIS HANDS. IT BEARS THE CHARACTER OF INCOME AT THE TIME WHEN IT ACCRUES IN THE HANDS OF THE ASSESSEE AND THEN IT BECOMES ELIGIBLE TO TAX. WHAT IS RELEVANT TO DETERM INE WHETHER MONEY RECEIVED IS INCOME OR SIMPLY AN ADVANCE, IS THE INI TIAL CHARACTER OF THE RECEIPT AND NOT THE HEAD UNDER WHICH THE AMOUNT IS CREDITED IN THE BOOKS OF ACCOUNT. IF NO INCOME HAS RESULTED, IT CANNOT BE SA ID THAT INCOME ACCRUED MERELY ON THE GROUND THAT THE ASSESSEE HAS BEEN FOL LOWING THE MERCANTILE SYSTEM OF ACCOUNTING. : 85 : IT(TP)A NOS. 299 & 218/BANG/2014 THE HONBLE COURT ACCORDINGLY UPHELD THE STAND OF T HE ASSESSEE. HOLDING THAT THE ASSESSEE DID NOT BECOME OWNER OF T HE MONEY RECEIVED UNLESS THE SERVICES ARE RENDERED AND WAS NOT ENTITL ED TO APPROPRIATE THE SAME TILL SERVICE WAS RENDERED IN LIEU OF WHICH THE SAME WAS RECEIVED IN ADVANCE. 94. THE HONBLE MADRAS HIGH COURT IN THE CASE OF CORAL ELECTRONICS (P) LTD. (SUPRA) ALSO DEALT WITH SIMILA R CASE. THE ASSESSEE IS A PRIVATE LIMITED COMPANY CARRYING ON BUSINESS I N TELEVISION SETS. IN THE PREVIOUS YEAR ENDING 31ST MARCH, 1983, AND 31ST MARCH, 1988 CORRESPONDING TO THE ASSESSMENT YEARS 1983-84 AND 1 988-89, RESPECTIVELY, THE ASSESSEE HAD COLLECTED SERVICE CH ARGES, WHICH WERE BIFURCATED INTO TWO ITEMS, ONE AS PERTAINING TO YEA R AND ANOTHER PERTAINING TO THE SUBSEQUENT ASSESSMENT YEAR AND, T HEREFORE, EXCLUDED FROM CONSIDERATION IN DETERMINING THE TOTAL INCOME OF YEAR. THE ASSESSING OFFICER TREATED IT AS INCOME AND TAXED TH E SAME. THE TRIBUNAL HAS HELD THAT IT IS NOT TAXABLE INCOME. ON A REFERENCE THE HONBLE COURT HELD THE AMOUNT THAT WAS RECEIVED WAS ONLY AS CHARGES FOR THE SERVICES TO BE RENDERED IN FUTURE. THE SERV ICES MAY BE RENDERED OR MAY NOT BE RENDERED DEPENDING UPON WITHDRAWAL OF THE MONEY AS AND WHEN THE CUSTOMER REQUIRED. SO, IT IS HIGHLY UN CERTAIN AS TO WHETHER IT WOULD AT ALL REMAIN AS INCOME OF THE ASS ESSEE. ONLY WHEN THE SERVICE IS DONE THE ASSESSEE HAS A RIGHT OVER T HE AMOUNT THAT WAS DEPOSITED. TILL THEN, HE HAS NO RIGHT OVER THE SAME . IT IS IN THAT SENSE TILL : 86 : IT(TP)A NOS. 299 & 218/BANG/2014 THEN, IT CANNOT BE CONSIDERED AS AN INCOME OF THE A SSESSEE AND IS NOT ELIGIBLE TO TAX. 95. THE MUMBAI ITAT IN THE CASE OF ACIT VS. IOT INFRAST RUCTURE & ENERGY SERVICES LTD. (SUPRA) HAD TO DEAL WITH IDE NTICAL CASE. THE FACTS OF THAT CASE WERE THAT THE ASSESSEE HAD NOT O FFERED FOR TAX AN AMOUNT BEING DIFFERENCE BETWEEN PROGRESS BILLING AS ON 31-3-2007 AND CUMULATIVE REVENUE BOOKED AS PER ACCOUNTS AS ON 31- 3-2007 IN RESPECT OF THREE CONTRACTS. THE ASSESSEE EXPLAINED TO ASSE SSING OFFICER THAT PROGRESS BILLING WAS INCLUSIVE OF ADVANCES RECEIVED FROM CUSTOMERS WHICH AMOUNT DID NOT REFLECT WORK PERFORMANCE. IT WAS ALSO EXPLAINED THAT PROGRESS BILLING WAS DONE NOT ONLY FOR AMOUNT OF WORK DONE BUT ALSO FOR MOBILISATION AND OTHER ADVANCES RECEIVABLE BY IT AS PER TERMS OF RELEVANT CONTRACT AND THAT MOBILISATION AND OTHE R ADVANCES RECEIVED BY ASSESSEE BY RAISING PROGRESS BILLINGS DID NOT RE PRESENT INCOME OF ASSESSEE AT TIME OF RAISING PROGRESS BILLS AND SAME THEREFORE HAD NO EFFECT WHATSOEVER ON INCOME OF ASSESSEE, WHICH WAS RECOGNISED BY METHOD OF PERCENTAGE OF COMPLETION. THE ASSESSING O FFICER, HOWEVER, HELD THAT AMOUNT DUE TO CUSTOMERS AS SHOWN BY ASSES SEE WAS NOTHING BUT UNDERSTATEMENT OF ITS PROFITS AND ADDED SAME TO TOTAL INCOME OF ASSESSEE. ON FURTHER APPEAL THE QUESTION BEFORE TH E TRIBUNAL WAS AS TO WHETHER AMOUNT DUE TO CUSTOMERS AS SHOWN BY ASSESSE E WAS NOTHING BUT RECEIPT OF ADVANCE BEFORE ACCRUAL OF INCOME AND , THEREFORE, SAME COULD NOT BE TREATED AS INCOME OF ASSESSEE AT POINT OF RECEIPT. THE TRIBUNAL HELD IN FAVOUR OF THE ASSESSEE. : 87 : IT(TP)A NOS. 299 & 218/BANG/2014 96. AS FAR AS THE DECISION OF THE TRIBUNAL IN THE CASE OF M/S.OPTUM HEALTH & TECHNOLOGY (INDIA) PVT. LTD., IS CONCERNED , AS RIGHTLY CONTENDED BY THE LEARNED COUNSEL FOR THE ASSESSEE T HE FACTS WERE THAT THE SUMS WERE RECEIVED IN ADVANCE AND IN RESPECT OF THE SUMS RECEIVED SERVICES WERE ALSO PERFORMED BUT STILL THE ASSESSEE DID NOT RECOGNIZE REVENUE BUT POSTPONED RECOGNITION BASED ON THE BILL S RAISED ON THE CLIENTS FOR SERVICES PERFORMED. THOUGH THERE ARE OB SERVATIONS IN THE ORDER OF THE TRIBUNAL THAT POSTPONEMENT OF RECOGNIT ION OF INCOME IS NOT POSSIBLE ON THE BASIS OF AS-9 OF ICAI WHEN INCOME A CCRUES OR ARISES UNDER THE MERCANTILE SYSTEM OF ACCOUNTING, THOSE OB SERVATIONS HAVE TO BE CONFINED AS DECISION ON THE FACTS OF THAT CASE. IN THE LIGHT OF THE DECISION OF THE HONBLE HIGH COURTS OF PUNJAB & HAR YANA AND THE HONBLE MADRAS HIGH COURT, WE ARE OF THE VIEW THAT THE CLAIM MADE BY THE ASSESSEE DESERVES TO BE ACCEPTED. ACCORDINGLY THE ADDITION MADE BY THE AO AND CONFIRMED BY THE DRP IS DIRECTED TO B E DELETED. GR.NO.19 IS ACCORDINGLY ALLOWED. 97. IN GR.NO.20, THE ASSESSEE HAS PROJECTED ITS GRIEVAN CE AGAINST THE ACTION OF THE REVENUE AUTHORITIES IN TAXING DEFERRE D INCOME OF RS.2,90,49,991/-. THE RELEVANT GROUNDS OF APPEAL O F THE ASSESSEE READS AS FOLLOWS: 20. ADDITION OF DEFERRED SERVICE INCOME (SUNDRY DE BTORS) AS UNDISCLOSED INCOME - RS. 2,90,49,941/- 20.1. THE LEARNED AO/DRP HAS ERRED IN CONSIDERING T HE SUNDRY DEBTORS OF RS. 2,90,49,941 AS UNDISCLOSED INCOME. : 88 : IT(TP)A NOS. 299 & 218/BANG/2014 20.2. THE LEARNED AO/DRP ERRED IN HOLDING THAT NO D ETAILS WERE FURNISHED IN RESPECT OF THIS TRANSACTION 20.3. THE LEARNED AO/DRP OUGHT TO HAVE OBSERVED THA T THE DETAILS OF THE SOURCE OF THE INCOME WAS FURNISHED BEFORE THE LEARN ED DRP ALONG WITH EVIDENCES SUCH AS PURCHASE ORDER, INVOICES, LEDGER FOR SUNDRY DEBTORS, ETC. VIDE NOTES ON ARGUMENTS DATED 21 NOVEMBER 2013. 20.4. THE LEARNED AO/DRP OUGHT TO HAVE OBSERVED THA T AN INCOME CANNOT BE CONSIDERED AS AN UNDISCLOSED INCOME IF THE DETAI LS OF THE SOURCE OF THE INCOME ARE FURNISHED. 20.5. THE LEARNED AO/DRP HAS FAILED TO APPRECIATE T HE FACTS THAT THE APPELLANT IS CONSISTENTLY FOLLOWING THE METHOD OF A CCOUNTING FOR DEFERRED SUNDRY DEBTORS AS PER AS 9-REVENUE RECOGNITION. 20.6. THE LEARNED AO/DRP HAS ERRED IN NOT APPRECIAT ING THE FACT THAT THE APPELLANT HAS CONSIDERED THE DEFERRED SUNDRY DEBTOR S OF THE FY 2008-09 AS INCOME IN THE SUBSEQUENT YEARS ON RENDERING THE SER VICES TO THE CUSTOMERS AND SUCH INCOME HAS BEEN OFFERED TO TAX IN THE YEAR IN WHICH IT HAS ACCRUED. 98. AS FAR AS THE AFORESAID GROUND OF APPEAL IS CONCER NED, THE FACTS ARE IDENTICAL TO GR.NO.19 REGARDING DEFERRED INCOME FROM PROVIDING AMC. THE AO IN THE COURSE OF ASSESSMENT PROCEEDING S NOTICED ON A PERUSAL OF THE SERVICE INCOME LEDGER ACCOUNT OF THE UNIT WHICH WAS NOT ELIGIBLE FOR DEDUCTION U/S.10A OF THE ACT, THAT A S UM OF RS.2,90,49,941/- WAS DEBITED IN THE SERVICE INCOME ACCOUNT. ACCORDING TO THE AO, THERE WAS NO EXPLANATION ON TH E AFORESAID DEBIT ENTRY IN THE SERVICE INCOME LEDGER ACCOUNT AND THER EFORE THE SAME WAS TREATED AS INCOME OF THE ASSESSEE. 99. BEFORE THE DRP THE ASSESSEE SUBMITTED THAT IT ENTER ED INTO A CONTRACT WITH BHARTI AIRTEL LTD., FOR RENDERING INS TALLATION SERVICES. THE CONTRACT VALUE WAS A SUM OF RS.2,90,49,491/-. T HE ASSESSEE : 89 : IT(TP)A NOS. 299 & 218/BANG/2014 BOOKED THE ENTIRE REVENUE AS ON 31.3.2009. AT THE TIME OF FINALIZATION OF FINANCIAL STATEMENTS, THE ASSESSEE NOTICED THAT THE INSTALLATION WORK HAD NOT BEEN COMPLETED AND THEREFORE THIS INCOME SH OULD NOT BE RECOGNIZED FOR FY 2009. CONSEQUENTLY, THE SERVICE INCOME RECOGNIZED WAS REVERSED BY DEBITING THE SERVICE INCOME ACCOUNT . THE ASSESSEE ALSO POINTED OUT THAT THIS SUM WAS BOOKED AS REVENU E OF AY 2010-11 AND WAS OFFERED TO TAX. 100. THE DRP HOWEVER DID NOT DISCUSS ANY OF THE ABOVE SU BMISSIONS AND HELD THAT THE ASSESSEE HAS NOT PROVIDED ANY DET AILS AND CONFIRMED THE ORDER OF THE AO. 101. BEFORE THE TRIBUNAL THE LEARNED COUNSEL FOR THE AS SESSEE SUBMITTED THE FOLLOWING DETAILS WITH REGARD TO THE CONTRACT FOR INSTALLATION BETWEEN THE ASSESSEE AND BHARTI AIRTEL LTD. PO NUMBER/ DATE INVOICE NUMBER/ DATE INVOICE AMOUNT (RS.) DETAILS FURNISHED BEFORE THE LEARNED DRP BAL MO U.P/ WEST/ PUR/ 5548 DATED 23-OCT 2008 BANG/ IDC/ SI- 0826 DATED 31 ST MAR 2009 1,54,52,141 PO INVOICE LEDGER FOR SERVICE INCOME LEDGER FOR BHARTI AIRTEL LIMITED JOURNAL ENTRY FOR THE TRANSACTION BAL MO U.P/ WEST/ PUR/ 5572 DATED 05-NOV 2008 BANG/ IDC/ SI- 0827 DATED 31 ST MAR 2009 1,35,97,800 PO INVOICE LEDGER FOR SERVICE INCOME LEDGER FOR BHARTI : 90 : IT(TP)A NOS. 299 & 218/BANG/2014 AIRTEL LIMITED JOURNAL ENTRY FOR THE TRANSACTION LEDGER FOR SUNDRY DEBTORS TOTAL 2,90,49,991 102. HE POINTED OUT THAT UNDER CLAUSE 2(C) OF THE TERMS AND CONDITIONS CONTAINED IN THE PO (AVAILABLE AT PAGE 4 854 OF FILE 20), DEALING WITH PAYMENTS IT IS CLEARLY PROVIDES AS U NDER: THE DELIVERY OF PRODUCTS BY THE SUPPLIER TO THE COM PANY WILL NOT CONSTITUTE ACCEPTANCE OF THE SAID PRODUCTS BY THE COMPANY. ACC EPTANCE OF PRODUCTS WILL BE COMPLETED AND COMMUNICATED ONLY AFTER INSPE CTION AND SATISFACTORY TESTING OF THE PRODUCTS BY THE COMPANY. TILL ACCEPT ANCE OF THE PRODUCTS BY THE COMPANY THE PRODUCTS SHALL REMAIN WITH THE COMP ANY ON SUPPLIERS ACCOUNT ON APPROVAL BASIS ONLY. THE RISK OF LOSS OR DAMAGE TO THE PRODUCT PASSES TO THE COMPANY UPON ACCEPTANCE OF THE PRODUC TS BY THE COMPANY. ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE T HE ABOVE CLAUSE IN THE CONTRACT BETWEEN THE PARTIES WOULD SHOW THAT TH E ASSESSEE COULD NOT HAVE RECOGNIZED THE INCOME UNTIL THE PRODUCTS W ERE TESTED AND ACCEPTED BY THE CUSTOMER. SINCE THAT EVENT DID NOT HAPPEN DURING THE RELEVANT PREVIOUS YEAR, THE ASSESSEE WAS JUSTIFIED IN NOT RECOGNIZING INCOME FROM THE AFORESAID CONTRACTS. ACCORDING TO H IM THE ACTION OF THE ASSESSEE WAS IN TUNE WITH THE TERMS OF ACCOUNTI NG STANDARD 9 OF ICAI, IN RESPECT OF SALE OF GOODS WHICH ARE DELIVER ED SUBJECT TO CONDITIONS SUCH AS INSTALLATION, INSPECTION ETC., W HEREIN IT IS PROVIDED THAT REVENUE OUGHT NOT BE RECOGNIZED UNTIL THE CUST OMER ACCEPTS THE DELIVERY AND INSTALLATION/ INSPECTION AS COMPLETE. THE LEARNED COUNSEL THEREFORE PRAYED THAT THE ADDITION OF DEFERRED INCO ME (SUNDRY DEBTORS) : 91 : IT(TP)A NOS. 299 & 218/BANG/2014 AMOUNTING TO RS.2,90,49,991 AS UNDISCLOSED INCOME S HOULD BE DELETED AS THE SAME IS NOT INCOME FOR THE YEAR IN QUESTION I.E. FY 08-2009 RELEVANT TO AY 2009-10. THE LEARNED DR RELIED ON T HE ORDER OF THE AO/DRP AND REITERATED SUBMISSIONS AS WERE MADE WITH REFERENCE TO GR.NO.19. 103. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSION S AND ARE OF THE VIEW THAT THE STAND TAKEN BY THE ASSESSEE DESER VES TO BE ACCEPTED. ADMITTEDLY POSITION IS THAT INCOME FROM THE AFORESA ID CONTRACTS WAS OFFERED TO TAX IN THE SUBSEQUENT ASSESSMENT YEAR. T HEREFORE THE ADDITION IN THIS YEAR IS REVENUE NEUTRAL. WE ARE T HEREFORE OF THE VIEW THAT WITHOUT GOING INTO THE CORRECTNESS OF THE CLAI M OF THE ASSESSEE FOR DEFERRING ITS INCOME TO SUBSEQUENT ASSESSMENT YEAR, ON THE FACTS OF THIS CASE, THE ADDITION MADE CANNOT BE SUSTAINED AND THE SAME IS DIRECTED TO BE DELETED. GR.NO.20 IS ACCORDINGLY ALLOWED. 104. GR.NO.21 RAISED BY THE ASSESSEE PROJECTS ITS GRIEVA NCE IN THE ACTION OF THE REVENUE AUTHORITIES IN DISALLOWING CL AIM OF DEDUCTION U/S.10A OF THE ACT FOR THE SOFTWARE UNIT OF RS.8,80 ,48,316/-. THE AFORESAID SUM WAS TREATED AS INCOME FROM OTHER SOU RCES RATHER THAN INCOME OF THE UNIT WHICH WAS ELIGIBLE FOR DEDUCTION U/S.10A OF THE ACT. THE RELEVANT GROUNDS OF APPEAL OF THE ASSESSEE READ S THUS: 21. DISALLOWANCE OF DEDUCTION UNDER SECTION 10A FOR THE SOFTWARE UNIT: RS. 88,048,316 21.1. THE LEARNED AO/ DRP HAVE ERRED IN DENYING THE DEDUCTION UNDER SECTION 10A OF THE ACT FOR THE SOFTWARE UNIT. : 92 : IT(TP)A NOS. 299 & 218/BANG/2014 21.2. THE LEARNED AO/ DRP HAS ERRED IN HOLDING THAT THERE IS NO EXPORT OF SOFTWARE SERVICES DURING THE FY 2008-09. 21.3. THE LEARNED AO/DRP OUGHT TO HAVE APPRECIATED THAT THE APPELLANT HAS FURNISHED ALL DOCUMENTS EVIDENCING EX PORT OF SOFTWARE INCLUDING INVOICES, SOFTEX, FIRC'S, BANK STATEMENTS FOR THE RECEIPT OF FOREIGN EXCHANGE ON EXPORT OF SOFTWARE, ETC. 21.4. THE LEARNED AO/DRP HAS ERRED IN HOLDING THAT THE SALE PROCEEDS WAS NOT BROUGHT INTO INDIA AS CONVERTIBLE FOREIGN EXCHANGE WITHIN THE PRESCRIBED TIME LIMIT GIVEN U/S . 10A(3) OF THE INCOME-TAX ACT, 1956 (THE ACT) I.E. 6 MONTHS FROM THE END OF THE FINANCIAL YEAR OR, WITHIN SUCH FURTHER PERIOD AS TH E COMPETENT AUTHORITY MAY ALLOW IN THIS BEHALF. 21.5. THE LEARNED AO/DRP OUGHT TO HAVE OBSERVED THA T BY THE NOTIFICATION NO. FEMA 176/2008-RB DATED 23 JULY 200 8 ISSUED BY THE RESERVE BANK OF INDIA (RBI) WHEREIN THE TIME LI MIT FOR THE REALIZATION OF THE EXPORT PROCEEDS FOR THE SOFTWARE WAS ENHANCE D FROM 6 MONTHS TO 12 MONTHS FROM THE DATE OF EXPORT (BEING THE INVOICE D ATE). 21.6. THE LEARNED AO/DRP OUGHT TO HAVE OBSERVED THA T THE APPELLANT HAS REALIZED THE ENTIRE SALE PROCEEDS IN CONVERTIBL E FOREIGN CURRENCY. 21.7. THE LEARNED AO/DRP OUGHT TO HAVE OBSERVED THA T THE OUT OF THE TOTAL SALE PROCEEDS OF USD 2,625,77,961 (IN RS. 24, 69,47,550), A SUM OF USD 35,24,475 (IN RS. 17,68,89,224) HAVE BEEN REALIZED WITHIN 12 MONTHS FROM THE DATE OF RAISING THE INVOICE. 21.8. THE LEARNED AO/DRP FURTHER OUGHT TO HAVE OBSE RVED THAT THE BALANCE SALE PROCEEDS OF RS. 8,56,88,735 HAS BEEN B ROUGHT INTO INDIA AFTER 12 MONTHS AND THAT THE SAME SATISFIES THE CON DITIONS LAID DOWN UNDER SECTION 10A IN RESPECT OF REALIZATION. 105. WE HAVE ALREADY SEEN THAT THE ASSESSEE HAS FOUR DI FFERENT UNITS AND ONE SUCH UNIT IS SOFTWARE DEVELOPMENT SERVICES UNIT. IN THIS UNIT SOFTWARE DEVELOPMENT SERVICES ARE RENDERED TO APCC, USA, THE HOLDING COMPANY OF THE ASSESSEE. THE ASSESSEE CLAI MED DEDUCTION L : 93 : IT(TP)A NOS. 299 & 218/BANG/2014 U/S.10A ON THE PROFITS OF THIS UNIT AT A SUM OF RS. 8,98,26,852 AS PER FORM NO.56F. THE AO WHILE EXAMINING THE CLAIM OF T HE ASSESSEE FIRSTLY NOTICED THAT THE TURNOVER DECLARED BY THE A SSESSEE IN THE SOFTWARE UNIT WAS RS.24,69,47,550/- AND TO THIS TUR NOVER OTHER INCOME OF RS.55,853/- AND FOREX GAIN OF RS.4,21,81,949/- W AS ADDED AND TOTAL INCOME WAS SHOWN AT RS.28,91,85,353/-. THE TURNOVE R AS PER THE ANNUAL PERFORMANCE REPORT TO BE SUBMITTED TO THE ST PI WAS ONLY A SUM OF RS.16,60,96,000/-. 106. THE AO ON EXAMINATION OF THE CLAIM OF THE ASSESSEE FOR DEDUCTION U/S.10A OF THE ACT, RAISED THE FOLLOWING QUERIES: (I) AS PER AGREEMENT BETWEEN THE ASSESSEE AND APCC, USA , THE ASSESSEE WAS TO RENDER ONLY RESEARCH & DEVELOPMENT AND THAT CANNOT BE REGARDED AS SERVICE OF SOFTWARE DEVELOPME NT OR IT ENABLED SERVICES THAT ARE NOTIFIED BY CBDT FOR BEIN G ELIGIBLE TO CLAIM DEDUCTION U/S.10A OF THE ACT. (II) THERE WAS NO EVIDENCE OF HAVING EXPORTED THE COMPUT ER SOFTWARE. (III) THE INCOME FROM DEVELOPING SOFTWARE WAS NEVER SHOW N IN THE SERVICE TAX RETURNS FILED BY THE ASSESSEE. (IV) THE SOFTWARE SERVICE DEVELOPMENT AGREEMENT WAS ENT ERED INTO WITH APCC, USA ON 1.1.2001 I.E., PRIOR TO AMENDMENT OF SEC.10A OF THE ACT. A NEW SECTION 10A WAS SUBSTITU TED BY THE FINANCE ACT, 2000 W.E.F. 1.4.2001 (V) THE SALE PROCEEDS ARE NOT BROUGHT INTO THE COUNTRY IN CONVERTIBLE FOREIGN EXCHANGE WITHIN THE TIME LIMIT PRESCRIBED I N SEC.10A(3) OF THE ACT. : 94 : IT(TP)A NOS. 299 & 218/BANG/2014 107. ACCORDING TO THE AO, THE ASSESSEE FILED SUBMISSION ON 14.2.2013 TO THE AFORESAID QUERIES BUT WITHOUT SET TING OUT WHAT THE REPLY WAS, THE AO PROCEEDED TO HOLD THAT THE ASSESS EE WAS NOT ENTITLED TO DEDUCTION UNDER SECTION 10A FOR THE SOFTWARE UNI T ON THE GROUNDS THAT: THERE IS NO EXPORT OF SOFTWARE SERVICES DURING THE FY 2008-09 COMMENCEMENT OF BUSINESS BY SOFTWARE UNIT IS BEFORE INTRODUCTION OF AMENDED SECTION 10A OF THE ACT. AGREEMENT FOR ACTIVITIES UNDERTAKEN BY SOFTWARE UNI T HAS BEEN ENTERED AFTER COMMENCEMENT OF OPERATIONS AND B EFORE THE INTRODUCTION OF SECTION 10A IN THE ACT SALE PROCEEDS NOT REALIZED WITHIN THE PRESCRIBED TI ME LIMITS 108. THE AO THEREAFTER PROCEEDED TO RE-COMPUTE THE PROF ITS OF THE SOFTWARE UNIT BY DISALLOWING THE FOREIGN EXCHANGE GAIN AND BRINGING TO TAX THE INCOME OF SOFTWARE UNIT AS INCOME FROM O THER SOURCES (IFOS) ( PAGE 36 OF THE FINAL ASSESSMENT ORDER) . HOWEVER, IN THE FINAL COMPUTATION BY AO, THE INCOME FROM SOFTWARE U NIT IS COMPUTED AS BUSINESS INCOME (PAGE 44 OF THE FINAL ASSESSMENT ORDER). THE DRP UPHELD THE ORDER OF THE AO. HENCE, GR.NO.21 BY THE ASSESSEE BEFORE THE TRIBUNAL. 109. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE CONCLUSION OF THE REVENUE AUTHORITIES THAT THE ASSE SSEE DID NOT EXPORT SOFTWARE IS CONTRARY TO THE EVIDENCE ON RECORD FILE D BY THE ASSESSEE TO SHOW THAT IT HAD EXPORTED SOFTWARE. OUR ATTENTION WAS DRAWN BY HIM TO THE FOLLOWING DOCUMENTS: : 95 : IT(TP)A NOS. 299 & 218/BANG/2014 DETAILS SUBMISSIONS DATED CERTIFIED SOFTEX FORMS STATING DULY CERTIFIED FOR THE EXPORTS OF SOFTWARE DEVELOPMENT- SIGNED BY DIRECTOR OF STPI (PAGE NO. 640, 661 TO 672 FILE 3) AND (PAGE 4983 TO 4996 OF FILE 20) 13 TH DECEMBER 2012 AND 4 TH MARCH 2013 AUDITED FINANCIALS STATING THAT THE SOFTWARE HAS BEEN EXPORTED (PAGE NO 215 TO 248 FILE 2) 21 ST NOVEMBER 2011 INVOICE COPIES SPECIFICALLY STATING EXPORT INVOICES (PAGE NO 666 AND 671 FILE 3) AND (PAGE NO. 4990 AND 4995 - FILE 20) 13 TH DECEMBER 2012 AND 4 TH MARCH 2013 AGREEMENT FOR EXPORT OF SOFTWARE TO APCC USA (PAGE 656-660 OF FILE 3) (PAGE 4997 TO 5001 OF FILE 20) 13 TH DECEMBER 2012 AND 4 TH MARCH 2013 FIRCS EVIDENCING REALIZATION OF EXPORT PROCEEDS ON EXPORT OF SOFTWARE (PAGE 5085 TO 5088 OF FILE 20) 4 TH MARCH 2013 BANK STATEMENTS FOR THE RECEIPT OF FOREIGN EXCHANGE ON EXPORT OF SOFTWARE (PAGE 636 OF FILE 3) 13 TH DECEMBER 2012 LETTER PROVIDED BY APCC USA CONFIRMING THE RECEIPT OF SERVICES THEREIN (PAGE 5083 TO 5084 OF FILE 20) 4 TH MARCH 2013 HE DREW OUR ATTENTION TO THE FACT THAT IN THE TRANS FER PRICING ORDER PASSED BY THE TPO U/S.92CA OF THE ACT FOR THE RELEV ANT AY, THE TPO HAS ACCEPTED THAT THE ASSESSEE EXPORTED SOFTWARE SE RVICES AND HAS EVEN MADE AN ADJUSTMENT IN RESPECT OF THE PRICE RECEIVED BY THE ASSESSEE FOR : 96 : IT(TP)A NOS. 299 & 218/BANG/2014 THE SAME, WHICH ONLY DEMONSTRATES THAT THE AOS CON TENTION AS TO THE NON-EXISTENCE OF EXPORTS IS WHOLLY WITHOUT ANY BASI S. IT WAS SUBMITTED BY HIM THAT THE CONCLUSION OF THE AO THAT THE ASSES SEE NEVER EXPORTED SOFTWARE IS THEREFORE INCORRECT. 110. WITH REGARD TO THE FINDING OF THE AO THAT THE AGREE MENT DATED 1.1.2001 ENTERED INTO BY THE ASSESSEE WITH APCC, US A PRIOR TO INTRODUCTION OF AMENDED PROVISIONS OF SEC.10A OF TH E ACT, THE LEARNED COUNSEL SUBMITTED THAT THE DATE OF AGREEMENT BEIN G BEFORE AMENDMENT OF SECTION 10A HAS NO RELEVANCE FOR THE PURPOSE OF DETERMINING THE ELIGIBILITY UNDER SECTION 10A HE BROUGHT TO OUR NO TICE THAT THE FIRST PROVISO TO SECTION 10A(1) ALLOWS BENEFIT UNDER SECT ION 10A BY EXTENDING THE BENEFIT OF DEDUCTION U/S.10A OF THE A CT TO UNDERTAKINGS WHICH WERE ENTITLED FOR SUCH BENEFIT BEFORE THE SUB STITUTION OF SECTION BY FINANCE ACT, 2000 FOR UNEXPIRED PERIOD OF AFORES AID TEN CONSECUTIVE ASSESSMENT YEARS. THEREFORE IT WAS SUBMITTED THAT THE SOFTWARE UNIT OF THE ASSESSEE WAS ELIGIBLE FOR DEDUCTION UNDER THE P ROVISIONS OF SECTION 10A PRIOR TO ITS AMENDMENT. HENCE, BY THE VIRTUE O F THE PROVISO, THE COMPANY WOULD BE ENTITLED TO CLAIM DEDUCTION UNDER SECTION 10A POST ITS AMENDMENT TOO. 111. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE OBSERVATIONS OF THE AO THAT THE AGREEMENT FOR RENDE RING THE SOFTWARE DEVELOPMENT SERVICES WAS ENTERED IN JANUARY 2001 WH ILE THE OPERATIONS WERE COMMENCED IN FY 2000-2001 IS CONCERRECT AND TH AT THE ACTIVITIES OF THE ASSESSEE COMMENCED ONLY FROM 1 ST JUNE 2000 (AY 2001-02) AS : 97 : IT(TP)A NOS. 299 & 218/BANG/2014 IS EVIDENT FROM THE ANNUAL REPORT AT PAGE 230, FILE 2 OF THE PAPERBOOK AND THE SUBMISSIONS MADE BEFORE THE DRP AT PAGE 495 0, FILE 20. IT WAS SUBMITTED BY HIM THAT THE AGREEMENT ENTERED INT O BY THE ASSESSEE FOR EXPORT OF SERVICES WAS VALID FOR AY 2009-10. I T WAS SUBMITTED THAT IN THE EVENT IT IS CONSIDERED THAT THERE HAS BEEN N O EXPORT OF SERVICES FOR THE PERIOD BEFORE THE DATE OF AGREEMENT (I.E. 1 ST JANUARY 2001) THEN BENEFIT UNDER SECTION 10A SHOULD BE DENIED ONLY FOR THAT PERIOD AND NOT FOR AY 2009-10. 112. WITH REGARD TO CONTENTION OF THE AO THAT THE ASSESS EE DID NOT REALIZE THE EXPORTS PROCEEDS WITHIN THE TIME PRESCR IBED U/S.10A(3) OF THE ACT AND ON THAT BASIS THE ASSESSEE IS NOT ENTIT LED TO CLAIM DEDUCTION U/S.10A OF THE ACT, THE LEARNED COUNSEL SUBMITTED T HAT THE ENTIRE EXPORT PROCEEDS FOR THE SOFTWARE UNIT HAVE BEEN REALIZED. HE DREW OUR ATTENTION TO THE FOLLOWING DETAILS IN THE TABLE GIV EN BELOW: INVOICE DETAILS REALIZATION DETAILS INVOICE NO./ DATE AMOUNT (IN USD) AMOUNT (IN RS.) FIRC NO. REALIZATI ON DATE AMOUNT (IN USD) AMOUNT (IN RS.) SW001/200 8-09 DATED 31-03-2009 32,93,611 13,96,09,560 AD- 0413 44 15-OCT- 09 32,93,611 16,60,96,789 SW002/200 8-09 DATED 31-03-2009 20,50,899 10,73,37,951 AD- 0597 26 10-DEC- 09 2,30,864 1,07,92,436 AD- 3353 96 10-OCT- 11 18,20,035 8,56,88,735 TOTAL 24,69,47,550 2,625,77,961 : 98 : IT(TP)A NOS. 299 & 218/BANG/2014 (THE ABOVE TABULATION IS AVAILABLE AT PAGE 4983 OF FILE 20 AND WAS FILED BEFORE THE REVENUE AUTHORITIES ) 113. THE LEARNED COUNSEL CONTENDED THAT AS PER PROVISIO N OF SECTION 10A EXPORT PROCEEDS SHOULD BE REALIZED WITHIN 6 MON THS FROM THE END OF FY OR SUCH FURTHER PERIOD AS THE COMPETENT AUTHO RITY MAY ALLOW IN THIS BEHALF. COMPETENT AUTHORITY' MEANS THE RESER VE BANK OF INDIA OR SUCH OTHER AUTHORITY AS IS AUTHORIZED FOR REGULATIN G PAYMENTS AND DEALINGS IN FOREIGN EXCHANGE. VIDE NOTIFICATION NO . FEMA 176 / 2008-RB ISSUED BY THE RBI, THE TIME LIMIT FOR REALI ZATION OF EXPORT PROCEEDS FOR SOFTWARE WAS ENHANCED FROM 6 MONTHS TO 12 MONTHS FROM DATE OF EXPORT (PAGE NO. 5408-5409 OF THE CASE LAW PAPER BOOK). IT WAS SUBMITTED THAT EXTENSION OF TIME LIMIT FOR REAL IZATION OF EXPORT PROCEEDS BY COMPETENT AUTHORITY UNDER FEMA CAN BE S AID TO BE APPROVAL GRANTED UNDER SECTION 10A. FOR EXPORT PRO CEEDS AMOUNTING TO RS. 8,56,88,735, SINCE EXPORT PROCEEDS BOUGHT INTO INDIA AFTER SAID PERIOD OF 12 MONTHS ARE VIA A FIRC DULY RECEIVED FR OM THE AUTHORIZED DEALER, SAME SHOULD BE DEEMED TO BE ALLOWED BY THE COMPETENT AUTHORITY AND OUGHT TO BE ALLOWED IN TERMS OF SECTI ON 155(11A) OF THE ACT. IT WAS SUBMITTED THAT IN THE LIGHT OF THE ABOV E SUBMISSIONS AND EVIDENCE, IT SHOULD BE HELD THAT THE ASSESSEE IS EL IGIBLE FOR BENEFIT UNDER SECTION 10A OF THE ACT FOR THE AMOUNT OF SALE PROCEEDS REALIZED. 114. THE LEARNED COUNSEL ALSO SUBMITTED THAT THE ACTION OF THE AO IN TREATING THE INCOME OF THE SOFTWARE UNIT AS INCOME FROM OTHER SOURCES WAS UNSUSTAINABLE. ACCORDING TO HIM ONCE IT IS ADM ITTED THAT THERE WAS : 99 : IT(TP)A NOS. 299 & 218/BANG/2014 SOFTWARE DEVELOPMENT, (WHETHER IN THE NATURE OF RES EARCH & DEVELOPMENT OR OTHERWISE), INCOME FROM SUCH SERVICE S CANNOT BE TREATED AS INCOME FROM OTHER SOURCES. OUR ATTENTION WAS DRAWN TO THE FOLLOWING EVIDENCE WHICH WERE FURNISHED IN THE COUR SE OF ASSESSMENT PROCEEDINGS, WOULD CLEARLY DEMONSTRATE THE STAND OF THE ASSESSEE: DETAILS SUBMISSIONS DATED CERTIFIED SOFTEX FORMS 13 TH DECEMBER 2012 AND 4 TH MARCH 2013 IN THE FINANCIAL STATEMENTS OF THE COMPANY SOFTWARE UNIT HAS BEEN TREATED AS SEPARATE BUSINESS SEGMENT 21 ST NOVEMBER 2011 INVOICE COPIES RAISED ON SEITC USA 13 TH DECEMBER 2012 AND 4 TH MARCH 2013 AGREEMENT FOR EXPORT OF SOFTWARE TO SEITC USA 13 TH DECEMBER 2012 AND 4 TH MARCH 2013 FIRCS EVIDENCING REALIZATION OF EXPORT PROCEEDS 4 TH MARCH 2013 LETTER PROVIDED BY SEITC USA CONFIRMING THE RECEIPT OF SERVICES THEREIN 4 TH MARCH 2013 HE BROUGHT TO OUR NOTICE THAT THE MAIN OBJECTS OF T HE MEMORANDUM OF ASSOCIATION OF THE COMPANY STATES AS UNDER: TO MANUFACTURE, DEVELOP, IMPROVE, MAINTAIN, SERVIC E, BUY, SELL, IMPORT, EXPORT, EXCHANGE AND OTHERWISE DEAL IN ALL KINDS OF POWER SUPPLIES OF GENERAL OR ANY CUSTOMIZED SPECIFICATIONS AND ALL KI NDS OF COMPUTER AND MICROPROCESSOR BASED SYSTEMS, THEIR PARTS, COMPONEN TS AND SYSTEMS, : 100 : IT(TP)A NOS. 299 & 218/BANG/2014 COMPUTER HARDWARE AND ACCESSORIES AND RELATED EQUIP MENT , SELL OR OTHERWISE DEAL IN ALL KINDS OF COMPUTER HARDWARES, SOFTWARES, THEIR PROGRAMMES AND ACCESSORIES, INCLUDING SECURITY SYST EMS, DIAGNOSIS TO SET UP TRAINING INSTITUTIONS AND CONSULTANCY IN COMPUTER A ND ALLIED FIELDS. THE EXTRACT OF THE MEMORANDUM OF ASSOCIATION OF THE COMPANY WHEREIN SOFTWARE HAS BEEN STATED TO BE ONE OF THE M AIN OBJECTIVES OF THE COMPANY HAS BEEN SUBMITTED BEFORE THE LEARNED A O. IT WAS SUBMITTED BY HIM THAT ALL OF THE AFORESAID CONTENTI ONS WERE PUT FORTH BEFORE THE DRP IN THE SUBMISSIONS BEFORE IT AT PAGE S 4935-4951 OF FILE NO. 20, WHICH WERE NOT APPRECIATED BY IT. 115. HE PLACED RELIANCE ON THE FOLLOWING CASES: A. DCIT V. SEEC TECHNOLOGIES PVT. LTD. [ ORDER DATED 10.04.2012 IN ITA NO. 1614/HYD/2010] B. HCL EAI SERVICES LTD. V. DCIT [2013] 35 TAXMANN.COM 146 (BANGALORE - TRIB.) C. DCIT V. IGATE GLOBAL SOLUTIONS LTD ( JUDGMENT OF TH IS HONBLE TRIBUNAL DATED 10 MAY 2013 IN ITA NO. 429/BANG/2012 ) D. BAJAJ TEMPO V. CIT [ 1992] 196 ITR 188 (SC) 116. HE PRAYED THAT IT SHOULD BE HELD THAT: A. PROFITS OF THE SOFTWARE UNIT SHOULD BE CONSIDERED A S BUSINESS INCOME B. SUCH PROFITS SHOULD BE ALLOWED DEDUCTION UNDER SECT ION 10A 117. THE LEARNED DR RELIED ON THE ORDER OF THE DRP. : 101 : IT(TP)A NOS. 299 & 218/BANG/2014 118. WE HAVE CAREFULLY CONSIDERED THE CONTENTIONS OF TH E ASSESSEE AND THE GROUNDS ON WHICH THE REVENUE AUTHORITIES DE NIED THE BENEFIT OF DEDUCTION U/S.10A OF THE ACT TO THE ASSESSEE ON PRO FITS OF THE SOFTWARE UNIT. THE EVIDENCE IN THE FORM OF SOFTEX FURNISHED BY THE ASSESSEE WHICH WERE IN THE PAPER BOOK AND REFERRED TO IN THE TABLE GIVEN IN THE EARLIER PARAGRAPHS DEALING WITH THIS ISSUE, CLEARLY SHOWS THAT THERE WAS EXPORT OF COMPUTER SOFTWARE BY THE ASSESSEE. IN FA CT THE TPO HAS IN THE ORDER PASSED U/S.92CA OF THE ACT HAS PROCEEDED ON THE BASIS THAT THE ASSESSEE EXPORTED COMPUTER SOFTWARE AND DETERMI NED THE ALP FOR THAT TRANSACTION. IT IS THEREFORE NOT CORRECT ON T HE PART OF THE AO/DRP TO CONCLUDE THAT THE ASSESSEE NEVER EXPORTED COMPUT ER SOFTWARE. SUCH CONCLUSIONS ARE CONTRARY TO MATERIAL ON RECORD AND IN COMPLETE DISREGARD TO SUCH MATERIAL. ON THE ASPECT OF THE AG REEMENT WITH APCC, USA AND THE ASSESSEE FOR DEVELOPMENT OF SOFTW ARE BEING FOR THE PERIOD PRIOR TO 1.4.2001, IT IS SEEN THAT THE S OFTWARE SERVICE DEVELOPMENT AGREEMENT WAS ENTERED INTO WITH APCC, U SA ON 1.1.2001 I.E., PRIOR TO AMENDMENT OF SEC.10A OF THE ACT. A NEW SECTION 10A WAS SUBSTITUTED BY THE FINANCE ACT, 200 0 W.E.F. 1.4.2001. FIRST PROVISO TO SECTION 10A(1) ALLOWS BENEFIT UNDE R SECTION 10A BY EXTENDING THE BENEFIT OF DEDUCTION U/S.10A OF THE A CT TO UNDERTAKINGS WHICH WERE ENTITLED FOR SUCH BENEFIT BEFORE THE SUB STITUTION OF SECTION BY FINANCE ACT, 2000 FOR UNEXPIRED PERIOD OF AFORES AID TEN CONSECUTIVE ASSESSMENT YEARS. THEREFORE SOFTWARE UNIT OF THE A SSESSEE WAS ELIGIBLE FOR DEDUCTION UNDER THE PROVISIONS OF SECTION 10A P RIOR TO ITS AMENDMENT. HENCE, BY THE VIRTUE OF THE FIRST PROVIS O, THE ASSESSEE : 102 : IT(TP)A NOS. 299 & 218/BANG/2014 WOULD BE ENTITLED TO CLAIM DEDUCTION UNDER SECTION 10A POST ITS AMENDMENT TOO. WITH REGARD TO THE OBSERVATIONS OF T HE AO THAT THE AGREEMENT FOR RENDERING THE SOFTWARE DEVELOPMENT SE RVICES WAS ENTERED IN JANUARY 2001 WHILE THE OPERATIONS COMMEN CED IN FY 2000- 2001 IT IS SEEN THAT THE ACTIVITIES OF THE ASSESSEE COMMENCED ONLY FROM 1 ST JUNE 2000 (AY 2001-02) AS IS EVIDENT FROM THE ANNU AL REPORT AT PAGE 230, FILE 2 OF THE PAPER BOOK AND THE SUBMISSI ONS MADE BEFORE THE DRP AT PAGE 4950, FILE 20. IN ANY EVENT ABSENC E OF AN AGREEMENT TO DEVELOP SOFTWARE FOR EXPORT WOULD NOT BE ELIGIBL E FOR DEDUCTION ONLY FOR THE PERIOD PRIOR TO 1.1.2001. AS FAR AS AY 200 9-10 IS CONCERNED, THE AGREEMENT DATED 1.1.2001 STILL HOLDS GOOD AND T HE PERIOD FOR WHICH THE ASSESSEE CLAIMS BENEFIT OF SEC.10A DEDUCTION IS ALSO WITHIN THE PERMISSIBLE PERIOD. 119. AS FAR AS REALIZATION OF EXPORT PROCEEDS BY THE ASS ESSEE IS CONCERNED, IT IS SEEN FROM THE DETAILS GIVEN BY THE ASSESSEE IN THE EARLIER PARAGRAPHS OF THIS ORDER ON THIS ISSUE THAT THE ASSESSEE HAS ESTABLISHED THAT THE EXPORT PROCEEDS WERE REALIZED WITHIN THE TIME PERMITTED BY THE PROVISIONS OF SEC.10A(3) OF THE AC T AND AS PER THE JUDICIAL DECISIONS CITED BY THE LEARNED COUNSEL FOR THE ASSESSEE IN SUPPORT OF SUCH CONCLUSION. IT IS REITERATED THAT INVOICES WHICH WERE REALIZED POST 6 MONTHS FROM THE END OF FY AND ALSO WITHIN 12 MONTHS FROM THE DATE OF INVOICING, THE PROVISIONS OF SECTI ON 10A OF THE ACT PROVIDES THAT EXPORT PROCEEDS SHOULD BE REALIZED WI THIN 6 MONTHS FROM THE END OF FY OR SUCH FURTHER PERIOD AS THE COMPETE NT AUTHORITY MAY ALLOW IN THIS BEHALF. COMPETENT AUTHORITY' MEANS THE RESERVE BANK : 103 : IT(TP)A NOS. 299 & 218/BANG/2014 OF INDIA (RBI) OR SUCH OTHER AUTHORITY AS IS AUTH ORIZED FOR REGULATING PAYMENTS AND DEALINGS IN FOREIGN EXCHANGE. NOTIFIC ATION NO. FEMA 176 / 2008-RB ISSUED BY THE RBI WHEREIN TIME LIMIT FOR REALIZATION OF EXPORT PROCEEDS WAS ENHANCED FROM 6 MONTHS TO 12 MO NTHS FROM DATE OF EXPORT. THEREFORE REALIZATION WITHIN 12 MONTHS F ROM THE DATE OF EXPORT HAS TO BE CONSIDERED AS PROPER REALIZATION. THE EXPORT PROCEEDS BOUGHT INTO INDIA AFTER SAID PERIOD OF 12 MONTHS AR E VIA A FIRC DULY RECEIVED FROM THE AUTHORIZED DEALER, SAME SHOULD BE DEEMED TO BE ALLOWED BY THE COMPETENT AUTHORITY AND THUS IS TO B E ALLOWED IN TERMS OF SECTION 155(11A). THE DECISION OF ITAT BANGALOR E BENCH IN THE CASE OF HCL EAI SERVICES LTD. VS. DCIT (SUPRA) SUP PORTS THE PLEA OF THE ASSESSEE IN THIS REGARD AND THEREFORE THE SAME IS ACCEPTED. 120. IN VIEW OF THE AFORESAID CONCLUSIONS, NOTHING TURNS ON THE FINDING OF THE AO THAT THE INCOME THAT WAS CLAIMED AS DEDUCTION OF SOFTWARE UNIT U/S.10A OF THE ACT, BEING CONSIDERED AS INCOME FROM OTHER SOURCES BY THE AO AND SUCH FINDING IN THE LI GHT OF THE MATERIAL BROUGHT TO OUR NOTICE BY THE ASSESSEE NOTED IN THE EARLIER PARAGRAPHS DEALING WITH THIS ISSUE CLEARLY IS UNSUSTAINABLE. 121. WE DIRECT THE AO TO ALLOW DEDUCTION U/S.10A OF THE ACT AFTER DUE VERIFICATION OF THE DOCUMENTS CITED IN THE EARL IER PARAGRAPH AND AFTER AFFORDING ASSESSEE OPPORTUNITY OF BEING HEARD . THUS GR.NO.21 IS TREATED AS ALLOWED BUT SENT FOR THE LIMITED EXTENT OF VERIFICATION OF THE DETAILS BROUGHT TO OUR NOTICE LIKE SOFTEX FORMS, RE ALIZATION OF EXPORT PROCEEDS WITHIN THE TIME LIMIT ETC. : 104 : IT(TP)A NOS. 299 & 218/BANG/2014 122. GR.NO.22 & 23 RAISED BY THE ASSESSEE ARE WITH REGAR D TO THE ACTION OF THE REVENUE AUTHORITIES IN TREATING FOREI GN EXCHANGE GAIN OF IDF 1 & IDF 2 UNITS OF RS.126,48,37,681 AS INCOME F ROM OTHER SOURCES AND CONSIDERING THE LOSS IN FOREIGN EXCHANGE CURREN CY OF RS.30,18,63,653/- AS NOT ALLOWABLE DEDUCTION IN COM PUTING INCOME OF THE MAG UNIT. THE RELEVANT GROUNDS OF APPEAL READ T HUS: 22. FOREIGN EXCHANGE GAIN OF IDF 1, IDF 2 AND SOFTW ARE UNIT TREATED AS INCOME FROM OTHER SOURCES - RS. 1,26,48,37,681 22.1. THE LEARNED AO/DRP ERRED IN CONSIDERING THE E NTIRE FOREIGN EXCHANGE GAIN OF IDF 1 (RS. 76,12,17,996), IDF 2 (R S. 46,14,37,736) AND SOFTWARE UNIT (RS 4,21,81,949) AMOUNTING TO RS 1,26,48,37,681 AS INCOME FROM OTHER SOURCES DUE TO LACK OF EVIDENCE. 22.2. THE LEARNED AO/DRP HAS ERRED IN CONTENDING TH AT NO EVIDENCE WAS FURNISHED IN SUPPORT OF THE FOREIGN EXCHANGE WO RKINGS 22.3. THE LEARNED AO/DRP OUGHT TO HAVE OBSERVED THA T THE WORKINGS FOR FOREIGN EXCHANGE GAIN RUNNING UP TO APPROX. 50, 000 LINE ITEMS WERE FURNISHED BEFORE THE LEARNED AO AND DRP 22.4. THE LEARNED AO/DRP OUGHT TO HAVE OBSERVED THA T THE APPELLANT HAS FURNISHED 100% EXPORT INVOICES FOR THE CURRENT FY ( I.E. 2008-09) OBTAINED FROM INDEPENDENT THIRD PARTY COVERING 4944 INVOICES (77 BOX FILES) ALONG WITH FIRC EVIDENCING REALIZATION. THE ABOVE WOULD FORM THE BASIS FOR FOREIGN EXCHANGE WORKINGS IN RESPECT FOR EXPORT SALES MADE DURING THE YEAR. 22.5 THE LEARNED AO/DRP HAS ACKNOWLEDGED FACT THAT THE APPELLANT HAS FURNISHED EXPORT INVOICES OBTAINED FROM 3RD PAR TY IN HIS ORDER ON PAGE NUMBER 27. HOWEVER, THESE INVOICES HAS BEEN IGNORE D WHILE DISCUSSING THE ADJUSTMENT FOR FOREIGN EXCHANGE 22.6 THE LEARNED AO/DRP OUGHT TO HAVE OBSERVED THAT THE EXCHANGE GAIN HAS ARISEN ONLY ON ACCOUNT OF THE BUSINESS ACT IVITIES OF THE APPELLANT RELATING TO EXPORTS OF FINISHED GOODS AND THEREFORE IS ONLY IN : 105 : IT(TP)A NOS. 299 & 218/BANG/2014 THE NATURE OF BUSINESS INCOME AND NOT IN THE NATURE OF INCOME FROM OTHER SOURCES 22.7. THE LEARNED AO/ DRP ERRED IN NOT CONSIDERING THE SUPREME COURT DECISION IN THE CASE OF CIT V. WOODWARD GOVERNOR INDIA (P) LIMITED AND HONDA SIEL POWER PRODUCTS LTD (312 ITR 254) AND SUTLEJ COTTON MILLS LTD. V. CIT (116 ITR 1) ON THE SAID ISSUE. 23. DISALLOWANCE OF FOREIGN EXCHANGE LOSS OF MAC UN IT - RS. 30,18,63,653 23.1. THE LEARNED AO/DRP HAS ERRED IN DISALLOWING T HE FOREIGN EXCHANGE LOSS OF MAG UNIT 23.2. THE LEARNED AO/DRP HAS ERRED IN COMPARING THE TOTAL GOODS IMPORTED OF THIS UNIT FOR THE CURRENT YEAR WITH THE FOREIGN EXCHANGE LOSS OF RS.30,18,63,653 OF THE UNIT. 23.3. THE LEARNED AO/DRP HAS FAILED TO APPRECIATE T HE FACT THAT THE FOREIGN EXCHANGE LOSS AMOUNTING TO RS. 30,18,63,653 COMPRISES OF IMPORTS FOR THE CURRENT YEAR WHEREIN PAYMENTS HAVE BEEN MADE, YEAR- END UNPAID IMPORT PAYMENTS REINSTATEMENT AND PAYMEN T OF THE INVOICES PERTAINING TO THE PAST YEARS. 23.4. THE LEARNED AO/DRP HAS FAILED TO APPRECIATE T HE FACT THAT THE ASSESSEE HAS PRODUCED THE LEDGERS AND THE WORKINGS FOR THE FOREIGN EXCHANGE LOSS ALONG WITH DETAILED WORKINGS FOR THE SAME HIGHLIGHTING THE PARTY WISE DETAILS. 23.5. THE LEARNED AO/DRP ERRED IN NOT CONSIDERING T HE SUPREME COURT DECISION IN THE CASE OF CIT V. WOODWARD GOVER NOR INDIA (P) LIMITED AND HONDA SIEL POWER PRODUCTS LTD (312 ITR 254) AND SUTLEJ COTTON MILLS LTD. V. CIT (116 ITR 1) ON THE SAID IS SUE. 23.6. NOTWITHSTANDING AND WITHOUT PREJUDICE TO THE ABOVE THE LEARNED AO/DRP HAVING CONSIDERED THE FOREIGN EXCHANGE GAIN AND FOREIGN EXCHANGE LOSS AS INCOME FROM OTHER SOURCES OUGHT TO HAVE SET OFF THE SAME IN ARRIVING AT THE TAXABLE INCOME : 106 : IT(TP)A NOS. 299 & 218/BANG/2014 123. THE ASSESSEE HAS HAD A NET FOREIGN EXCHANGE GAIN AM OUNTING TO RS. 962,974,029/-. THE DETAILS OF UNIT WISE FOREIGN EXCHANGE GAIN/ (LOSS) ARE AS UNDER: PARTICULARS AY 2009-10 FOREIGN EXCHANGE GAIN FOR IDF 1 76,12,17,996 FOREIGN EXCHANGE GAIN FOR IDF 2 46,14,37,736 FOREIGN EXCHANGE GAIN FOR SOFTWARE UNIT 4,21,81,949 FOREIGN EXCHANGE LOSS FOR MAG UNIT (301,863,653) [AVAILABLE AT PAGE 728 OF FILE NO. 3 OF THE PAPER BOOK] 124. THE ACCOUNTING POLICY FOLLOWED BY THE ASSESSEE FOR RECORDING FOREIGN EXCHANGE GAIN/LOSS IS IN ACCORDANCE WITH TH E REQUIREMENTS OF ACCOUNTING STANDARD (AS) 11 OF ICAI AND IT IS MANDA TORY FOR THE ASSESSEE TO FOLLOW THE SAME. THE ACCOUNTING POLICY FOLLOWED BY THE ASSESSEE IN THE MATTER OF RECOGNIZING FOREIGN EXCHA NGE GAIN/LOSS IS THAT FOREIGN CURRENCY TRANSACTIONS ARE RECORDED IN REPOR TING CURRENCY, BY APPLYING TO FOREIGN CURRENCY AMOUNT THE EXCHANGE, R ATE BETWEEN THE REPORTING CURRENCY AND FOREIGN CURRENCY AT THE DATE OF TRANSACTION. FOREIGN CURRENCY MONETARY ITEMS ARE REPORTED USING THE CLOSING RATE. EXCHANGE DIFFERENCES ARISING ON THE SETTLEMENT OF M ONETARY ITEMS OR ON REPORTING MONETARY ITEMS OF COMPANY RATES DIFFERENT FROM THOSE AT WHICH THEY ARE INITIALLY RECORDED DURING THE YEAR O R REPORTED IN PREVIOUS FINANCIAL STATEMENTS ARE RECOGNIZED AS INC OME OR AS EXPENSE IN THE YEAR IN WHICH THEY ARISE. : 107 : IT(TP)A NOS. 299 & 218/BANG/2014 125. THE FOREIGN EXCHANGE GAIN FOR IDF 1, IDF 2 AND SOFT WARE UNIT AMOUNTING TO A TOTAL OF RS. 126,48,37,681 HAS BEEN TREATED AS BUSINESS INCOME OF THE RESPECTIVE UNITS. FURTHER, SINCE TH E SAME HAS ARISEN PRIMARILY ON ACCOUNT OF EXPORTS IT HAS BEEN INCLUDE D IN THE EXPORT TURNOVER FOR THE PURPOSES OF COMPUTING DEDUCTION UN DER SECTION 10A OF THE ACT. WITH RESPECT TO FOREIGN EXCHANGE LOSS PER TAINING TO MAG UNIT SINCE THE SAME HAS ARISEN PRIMARILY ON ACCOUNT OF C URRENT YEAR IMPORTS AND IMPORT PAYABLES OF PRIOR YEARS IT HAS BEEN CLAI MED AS AN ALLOWABLE LOSS WHILE COMPUTING TAXABLE INCOME FOR THE MAG UNI T. 126. THE AO WHILE CONSIDERING THE CLAIM OF THE ASSESSEE FOR CONSIDERING FOREIGN EXCHANGE GAIN AS PROFIT OF THE BUSINESS OF THE SEC.10A UNITS IDF 1 AND IDF 2 RESPECTIVELY AND ALLO WING LOSS ON FOREIGN EXCHANGE FLUCTUATION IN RESPECT OF MAG UNIT , ACKNOWLEDGED THAT THE ASSESSEE HAD FURNISHED THE FOREX FLUCTUATI ON PROFIT/LOSS WORKING (VIDE PARAGRAPH 4.2 AT PAGE-46 OF THE AOS ORDER) BUT WITHOUT COMMENTING ON THE CORRECTNESS OF THE STATEMENTS SO SUBMITTED HELD THAT ANNEXURE 10,11 AND 12 GIVEN ON THE DATE OF HEARING WAS NOT SUPPORTED WITH ANY BILLS AND INVOICES AND THAT WHAT WAS GIVEN WAS A COMPUTED GENERATED DOCUMENT WHERE POSTINGS WERE MADE INDISCR IMINATELY FOR WHICH NO MATERIAL EVIDENCES ARE PLACED ON RECORD. SINCE IT WAS NOT ESTABLISHED THAT THE FOREX GAIN/LOSS HAD CONNECTION WITH THE BUSINESS OF THE ASSESSEE, THE AO TREATED THE GAIN AS INCOME FRO M OTHER SOURCES AND CONSEQUENTLY THE DEDUCTION CLAIMED U/S.10A OF THE A CT WOULD ALSO BE DENIED ON THIS SUM OF RS.126,48,37,681/-. WITH REG ARD TO THE LOSS ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION CLAIMED BY THE ASSESSEE IN THE : 108 : IT(TP)A NOS. 299 & 218/BANG/2014 MAG UNIT OF RS.30,18,63,653/- CLAIMED BY THE ASSESS EE, THE AO HELD THE ASSESSEE DID NOT FILE ANY EVIDENCE TO SHOW THAT THERE WAS SUCH A LOSS. HE ALSO HELD THAT THE MAG UNIT WAS DOING DOM ESTIC SALES AND THEREFORE CANNOT HAVE FOREX LOSS IGNORING THE FACT THAT THE TRADING ITEMS IN MAG UNIT ARE IMPORTED FROM GROUP ENTITIES OUTSID E THE COUNTRY. HE ALSO OBSERVED THAT LACK OF EVIDENCE FOR THE FOREX L OSS IN CONNECTION WITH THE IMPORT PURCHASES MADE BY THE ASSESSEE WAS RS.83.27 CRORES AND THERE CANNOT BE FOREX LOSS OF RS.30.18 CRORES A ND SUCH HUGE LOSS ON IMPORTS IN THE CURRENT YEAR MUST BE BOGUS EXPENDITU RE. THE DRP UPHELD THE ORDER OF THE AO. 127. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THA T THE AO AND THE DRP HAVE ERRED IN COMING TO THE CONCLUSION THAT THE ASSESSEE FAILED TO GIVE WORKING OF FOREIGN EXCHANGE GAIN/LOS S. IN THIS REGARD, THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUR ATTEN TION TO WORKING OF FOREIGN EXCHANGE LOSS/GAIN WHICH WAS GIVEN FOR EACH ITEM OF EXPORT AS WELL AS IMPORT. THE WORKING FOR FOREIGN EXCHANGE GA IN RUNNING UPTO APPROX. 50,000 LINE ITEMS WERE FURNISHED BEFORE THE LEARNED AO VIDE FOLLOWING SUBMISSIONS: A. FOR IDF 1 AND SOFTWARE UNIT 13 TH DECEMBER 2012 ( AT PAGES 636-649 OF FILE NO. 3 OF THE PAPER BOOK, RELE VANT PAGE 646, TO BE READ ALONG WITH FILE NO. 10 OF THE PAPER BOOK) B. FOR IDF 2 4 TH MARCH 2013 ( AT PAGES 713-729 OF FILE NO. 3 OF THE PAPER BOOK, RELEVANT PAGES 719-727 TO BE R EAD WITH FILE 9 OF THE PAPER BOOK) : 109 : IT(TP)A NOS. 299 & 218/BANG/2014 128. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER SUBMI TTED THAT DETAILED NOTE ON FOREIGN EXCHANGE HAS ALSO BEEN FUR NISHED VIDE SUBMISSIONS 13 TH DECEMBER 2012 AND 4 TH MARCH 2013 AT THE ABOVE PAGES OF THE PAPER BOOK. IT WAS SUBMITTED THAT THE ASSESSEE HAS FURNISHED 100% EXPORT INVOICES FOR THE CURRENT FY ( I.E. 2008-09) OBTAINED FROM INDEPENDENT THIRD PARTY COVERING 4944 INVOICES (77 BOX FILES) ALONG WITH FIRC EVIDENCING REALIZATION FOR B OTH EHTP UNITS VIDE SUBMISSIONS DATED 14 TH FEBRUARY 2013 (AT PAGES 689-707 OF FILE NO. 3 OF THE PAPER BOOK, RELEVANT PAGES 692-696). THE ABOVE WOULD FORM THE BASIS FOR FOREIGN EXCHANGE WORKINGS IN RESPECT FOR EXPORT SALES MADE DURING THE YEAR. SIMILARLY, EXPORT INVOICES FOR THE SOFTWARE UNIT FOR THE EXPORTS MADE DURING THE YEAR WERE ALSO FURNISHED TO THE AO VIDE SUBMISSION DATED 4 TH MARCH 2013 AT PAGES 4985-4996 OF FILE NO. 20 OF THE PAPER BOOK. 129. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO DREW OUR ATTENTION TO THE FACT THAT AO HAS ACKNOWLEDGED FACT THAT THE ASS ESSEE HAS FURNISHED EXPORT INVOICES OBTAINED FROM 3 RD PARTY IN HIS ORDER ON PAGE NUMBER 27 OF THE ASSESSMENT ORDER. HOWEVER, THESE INVOICES HA VE BEEN IGNORED WHILE DISCUSSING THE ADJUSTMENT FOR FOREIGN EXCHANG E. IT WAS ARGUED THAT THE AO FOREIGN EXCHANGE GAIN IN CASE OF IDF1, IDF 2 AND SOFTWARE UNIT IS MAJORLY ON ACCOUNT OF EXPORTS DUE TO THE INCREASE IN THE VALUE OF USD AGAINST RUPEE. HE DREW OUR ATTENT ION TO THE FOREIGN EXCHANGE GAIN SNAPSHOTS FOR AY 2009-10: : 110 : IT(TP)A NOS. 299 & 218/BANG/2014 PARTICULARS AMOUNT 127 EXPORT TURNOVER (EXCLUDES FOREIGN EXCHANGE) 1,703 % OF FOREIGN EXCHANGE TO EXPORT TURNOVER 7% [AVAILABLE AT PAGE 4764 OF FILE NO. 20 OF THE PAPER BOOK] 130. DEPRECIATION OF THE INR VIS-A-VIS USD PARTICULARS USD INR AS ON 31.03.2008 1 40.26 AS ON 31.03.2009 1 51.43 DEPRECIATION % 28% [ AVAILABLE AT PAGE 4764 OF FILE NO. 20 OF THE PAPE R BOOK] 131. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE FOREIGN EXCHANGE GAIN OF IDF1, IDF2 AND SOFTWARE UNIT IS ON ACCOUNT OF BUSINESS TRANSACTIONS AND HENCE, THE SAME SHOULD BE CONSIDERED AS BUSINESS INCOME AND NOT INCOME FROM OTHER SOURCES. HE FURTHER SUBMITTED THAT THE AO MADE AN ADDITION TO ITS INCOM E UNDER THE HEAD INCOME FROM OTHER SOURCES. THEREFORE, IT IS EVIDE NT THAT HE AGREES THAT THERE IS A FOREIGN EXCHANGE GAIN AND IF THAT BE SO, IT OUGHT TO BE ALLOCATED TO ONE OF THE UNITS (WHICH OUGHT TO BE TH E EHTP UNITS OR THE : 111 : IT(TP)A NOS. 299 & 218/BANG/2014 SOFTWARE UNIT GIVEN THAT THE MAG UNIT HAS NO EXPORT S) AND CANNOT BE MERELY ADDED TO THE INCOME OF THE ASSESSEE. 132. WITH REGARD TO DISALLOWING LOSS ON ACCOUNT OF FOREI GN EXCHANGE FLUCTUATION IN THE MAG UNIT, THE LEARNED COUNSEL BR OUGHT TO OUR NOTICE THAT ONE OF THE REASONS CITED BY THE AO TO DISALLOW THE FOREIGN EXCHANGE LOSS IS THAT A UNIT HAVING DOMESTIC SALES CANNOT HAVE ANY FOREIGN EXCHANGE LOSS. IT WAS POINTED OUT BY HIM TH AT THE ASSESSEE HAS NOT BOOKED ANY FOREX LOSS ON DOMESTIC SALES AS OBVI OUSLY DOMESTIC SALES CANNOT HAVE FOREX LOSS. HE EXPLAINED AS TO HO W FOREIGN EXCHANGE LOSS AROSE IN THE MAG UNIT. IN THE MAG UNIT THE LO SS AROSE ON ACCOUNT OF THE FOLLOWING: I. IMPORTS FOR THE CURRENT YEAR, REINSTATED IN THE CUR RENT YEAR EITHER ON PAYMENT OR ON YEAR END REINSTATEMENT II. IMPORTS FOR THE EARLIER YEARS WHICH HAVE NOT BEEN PAID AS ON 1 ST APRIL 2008, REINSTATED IN THE CURRENT YEAR EITHER ON PAYMENT OR ON YEAR END REINSTATEMENT. (THIS SUBMISSION WAS MADE BEFORE THE DRP AND IS AVA ILABLE AT PAGE 4773 OF FILE NO. 20 OF THE PAPER BOOK. THE AO, ALTHOUGH REQUIRED EVIDENCE IN SUPPORT OF THE LOSS W HICH WAS GIVEN, NEVER SOUGHT AN EXPLANATION ON THIS POINT IN ANY SHOW CAUSE NOTICE AND MADE THE OBSERVATIONS FOR THE FIRS T TIME IN THE DRAFT ASSESSMENT ORDER) 133. IT WAS SUBMITTED THAT THE AOS OBSERVATIONS THAT TH E TURNOVER AND FOREX LOSS CLAIMED WERE DISPROPORTIONATE WAS NO T CORRECT BECAUSE SOME PORTION OF THE FOREX LOSS IS IN CONNECTION WIT H IMPORTS OF EARLIER YEARS AND THEREFORE COMPARING THE FOREX LOSS WITH T HE AMOUNT OF IMPORTS FOR THE CURRENT YEAR AS DONE BY THE AO IN P AGE 39 OF THE ORDER : 112 : IT(TP)A NOS. 299 & 218/BANG/2014 WAS INCORRECT. IT WAS SUBMITTED THAT IMPORTS ARE FO R THE BUSINESS PURPOSES OF MAG UNIT. IT WAS SUBMITTED THAT THE AO OUGHT TO HAVE APPRECIATED THAT THE FOREIGN EXCHANGE LOSS DUE TO T HE INCREASE IN THE VALUE OF USD AGAINST RUPEE AS DEPICTED UNDER: PARTICULARS USD INR AS ON 31.03.2008 1 40.26 AS ON 31.03.2009 1 51.43 DEP RE CIATION % 28% (AVAILABLE AT PAGE 4772 OF FILE NO. 20 OF THE PAPER BOOK) IT WAS SUBMITTED THAT DUE TO THE RATE FLUCTUATION, THE AMOUNT PAYABLE TOWARD IMPORT PURCHASES HAS INCREASED. 134. IT WAS SUBMITTED THAT THE AO HAS ERRED IN HOLDING T HAT THERE IS LACK OF EVIDENCE FOR THE FOREIGN EXCHANGE LOSS. OU R ATTENTION WAS BROUGHT TO THE FACT THAT THE ASSESSEE HAS SUBMITTED DETAILED WORKINGS OF FOREIGN EXCHANGE LOSS AS EVIDENCE VIDE ANNEXURE NUMBER 12 TO SUBMISSIONS DATED 13 TH DECEMBER 2012 ( AT PAGES 636-649 OF FILE NO. 3 OF THE PAPER BOOK, RELEVANT PAGE 646 TO BE READ W ITH FILE NO. 14 OF THE PAPER BOOK) (DETAILED WORKINGS OF APPROXIMATELY 2500 INDIVIDUAL LINE ITEMS). OUR ATTENTION WAS ALSO DRAWN TO THE R EVENUE RECOGNITION POLICY THE ASSESSEE CONSISTENTLY FOLLOWED AS PER AS - 11 AND MADE SUBMISSIONS VIDE ITS SUBMISSION DATED 4 TH MARCH 2013 (AT PAGES 728- 729 OF FILE NO. 3 OF THE PAPER BOOK). IT WAS SUBMITTED THAT THE AO HAS ACCEPTED THE FACT THAT THERE IS A GAIN BUT REFUSES TO ALLOW DEDUCTION ON : 113 : IT(TP)A NOS. 299 & 218/BANG/2014 SUCH GAIN U/S.10A OF THE ACT AND BRINGS IT TO TAX U NDER THE HEAD INCOME FROM OTHER SOURCES AND WHEN IT COMES TO FO REIGN EXCHANGE LOSS, THE AO REALIZING THAT SUCH LOSS WILL BRING DO WN THE PROFITS OF THE MAG UNIT WHICH IS NOT ENTITLED TO ANY EXEMPTION OF ITS INCOME HAS REFUSED TO ALLOW THE LOSS HOLDING THAT THERE CANNOT BE ANY LOSS AT ALL. IT WAS SUBMITTED THAT THE FOREIGN EXCHANGE LOSS BEING ON BUSINESS ACCOUNT SHOULD BE ALLOWED AS ELIGIBLE BUSINESS EXPE NSE/LOSS UNDER THE PROVISIONS OF THE ACT. IN SUPPORT OF THE CLAIM THA T FOREIGN EXCHANGE LOSS OR GAIN ON REVENUE ACCOUNT SHOULD BE REGARDED AS INCOME ELIGIBLE FOR DEDUCTION AND LOSS ELIGIBLE FOR DEDUCTION IN CO MPUTING INCOME, THE LEARNED COUNSEL RELIED ON THE FOLLOWING DECISIONS. A. CIT V. INFOSYS TECHNOLOGIES LTD [2012] 18 TAXMANN.C OM 169 (KARNATAKA) B. CIT V. NOVELL SOFTWARE DEVELOPMENT (I) (P.) LTD [20 13] 35 TAXMANN.COM 414 (KARNATAKA) C. CIT V. PENTASOFT TECHNOLOGIES LTD. [2013] 33 TAXMAN N.COM 570 (MADRAS) D. CHANGEPOND TECHNOLOGIES (P.) LTD. V. ACIT [2008] 22 SOT 220 (CHENNAI) E. CIT V. WOODWARD GOVERNOR INDIA (P.) LTD. [2009] 179 TAXMAN 326 (SC) 135. THE LEARNED COUNSEL PRAYED THAT THE FOREIGN EX CHANGE GAIN SHOULD BE TREATED AS BUSINESS INCOME AND CONSEQUENT LY FOREIGN EXCHANGE GAIN OF THE IDF-1, IDF-2 AND SOFTWARE UNIT S SHOULD INEVITABLY FORM PART OF EXPORT TURNOVER FOR COMPUTI NG DEDUCTION UNDER : 114 : IT(TP)A NOS. 299 & 218/BANG/2014 SECTION 10A. FOREX LOSS OF THE MAG UNIT SHOULD BE A LLOWED AS BUSINESS LOSS. 136. THE LEARNED DR SUBMITTED THAT THERE HAS BEEN N O CORRELATION OF THE FOREIGN EXCHANGE GAIN WITH INDIVIDUAL ITEM OF E XPORT AND FIRC, SIMILARLY THE LOSS ON ACCOUNT OF FOREIGN EXCHANGE F LUCTUATION IN THE MAG UNIT HAS ALSO NOT BEEN PROVED BY THE ASSESSEE. HE RELIED ON THE ORDER OF THE AO/DRP. 137. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS. WE SHALL FIRST TAKE UP FOR CONSIDERATI ON THE FOREIGN EXCHANGE GAIN IN IDF 1 AND IDF 2 UNIT OF A SUM OF R S.126,48,37,681/- WHICH WAS TREATED AS INCOME FROM OTHER SOURCES AND CONSEQUENTLY DEDUCTION U/S.10A OF THE ACT TO THAT EXTENT WAS DEN IED TO THE ASSESSEE. THE FIRST AND VERY IMPORTANT THING TO NOTICE ON THI S CLAIM OF THE ASSESSEE IS THAT THE AO DID NOT DISPUTE THE QUANTIF ICATION OF THE FOREIGN EXCHANGE FLUCTUATION GAIN AS COMPUTED BY THE ASSESS EE. THIS IS EVIDENT FROM THE FACT THAT THE AO CONSIDERED A SUM OF RS.1,26,48,37,681/- AS INCOME OF THE ASSESSEE FROM OTHER SOURCES. IN A REPLY TO THE QUERY OF THE AO ON THE FOREIGN EXCHANG E GAIN IN IDF1 AND IDF 2 UNIT, THE ASSESSEE VIDE ITS REPLY DATED 13.12 .2012 ( COPY AT PAGE 646 OF PAPER BOOK 3) GAVE THE FOLLOWING REPLY FOR FOREIGN EXCHANGE GAIN IN IDF1 UNIT AND LOSS IN MAG UNIT: PLEASE FIND ENCLOSED THE FOREX GAINS WORKINGS FOR IDF!/EHTP 2 AND SOFTWARE UNITS VIDE ANNEXURE 10 & 11 RESPECTI VELY. PLEASE FIND ENCLOSED THE FOREX LOSS WORKINGS FOR MA G UNIT VIDE ANNEXURE-12. : 115 : IT(TP)A NOS. 299 & 218/BANG/2014 SIMILARLY IN A REPLY DATED 4 TH MARCH, 2013 (COPY AT PAGE 719 TO 729 PAPER BOOK NO.3) THE ASSESSEE GAVE THE FOLLOWING DE TAILS (AT PAGE- 719); 1.FOREIGN EXCHANGE GAIN/LOSS OF IDF1 AND IDF 2 U NIT: 1.1. BREAK UP OF FOREIGN EXCHANGE FLUCTUATION: THE UNIT WISE BREAK-UP OF FOREX GAIN/LOSS LINKED TO THE AMOUNT CREDITED TO THE PROFIT AND LOSS ACCOUNT FOR THE FIN ANCIAL YEAR ENDED MARCH, 2009 ARE PROVIDED BELOW: (AMOUNT IN RS.) IDF1/EHTP2 IDF2/EHTP1 MAG SOFTWARE TOTAL 761,217,996 461,437,736 (301,863,653 42,181,949 902,974,029 IN THIS REGARD, WE REFER TO OUR SUBMISSIONS DATED 1 3 DECDEMBER, 2012 WHEREIN WE HAVE FURNISHED THE WORKINGS FOR SOFTWARE UNIT AND IDF UNIT 1. IN CONTINUANCE TO THE SAME, PLEASE FIND ENCLOSED THE FOREIGN EXCHANGE WORKINGS FOR IDF UNIT 2 FOR YOUR REFERENCE VIDE ANNEXURE. 138. SIMILARLY IN A LETTER DATED 14.2.2013, THE ASS ESSEE HAS GIVEN COMPLETE EXPORT INVOICES AND COPIES OF FIRCS. COPIE S OF THESE DOCUMENTS ARE AT PAPER BOOK 689, 690 AND 695. THE A SSESSEE PROVIDED 4944 INVOICES (77 BOX FILES) ALONG WITH FIRC EVIDEN CING REALIZATION FOR BOTH IDF1 AND IDF 2 UNITS. THE DOCUMENTS FILED BY THE ASSESSEE BEFORE THE AO (COPIES OF WORKING OF FOREIGN EXCHANG E GAIN) ARE AT PAPER BOOK NO.9,10,11 AND 12 FROM PAGES-1980 TO 27 69 ) AND IT GIVES A COMPLETE BREAK UP OF REALIZED AND UNREALIZED FORE IGN EXCHANGE GAIN, LOSS OR GAIN IN RESPECT OF EACH ITEM OF SALE. THE A O MADE NO COMMENT ON ALL THESE EVIDENCE. : 116 : IT(TP)A NOS. 299 & 218/BANG/2014 139. THE AO IN THE ORDER OF ASSESSMENT WITHOUT MAKI NG REFERENCE TO THE ABOVE HAS MERELY STATED AS FOLLOWS (PARA 4.2 OF THE AOS ORDER AT PAGE-46): 4.2 ANALYSIS OF THE REPLY AND CONCLUSION: THE REPLY OF THE ASSESSEE IS NOT ACCEPTABLE ON THE FACT THAT ANNEXURE 10,11,12 GIVEN ON THE DATE OF HEARING WAS NOT SUPPO RTED WITH ANY BILLS AND INVOICES. IT WAS COMPUTER GENERATED DOCU MENT WHERE THE POSTINGS WERE MADE INDISCRIMINATELY FOR WHICH NO MA TERIAL EVIDENCES ARE PLACED ON RECORD. IN ORDER TO TREAT THIS AS IN COME FROM BUSINESS/FOREX GAIN THE ASSESSEE COMPANY SHOULD HAV E FURNISHED NECESSARY DOCUMENTARY EVIDENCES. HOWEVER A COMPUTE R GENERATED STATEMENT WAS GIVEN WHERE THE COMPANY HAS POSTED SO ME AMOUNTS FOR WHICH NO EVIDENCES ARE GIVEN. UNDER THESE CIRCUMST ANCES, THE ENTIRE AMOUNT OF RS.126,48,37,681/- IS ADDED AS INCOME FRO M OTHER SOURCES AS PROPOSED IN THE SHOW CAUSE NOTICE. 140. IF THE EVIDENCE FILED BY THE ASSESSEE WAS INSU FFICIENT, THE AO OUGHT TO HAVE HELD THAT THE CLAIM FOR HAVING EARNED INCOME IS NOT ESTABLISHED AND THEREFORE OUGHT NOT TO HAVE TAXED T HE SAID SUM AS INCOME FROM OTHER SOURCES. HIS ACTION IN ACCEPTING THE GAIN AND TREATING IT AS INCOME FROM OTHER SOURCES, CLEARLY S HOWS THAT HE WANTED THE FOREIGN EXCHANGE GAIN NOT TO BE TREATED AS INCO ME OF IDF1 AND IDF 2 UNIT BECAUSE THE INCOME WOULD BE EXEMPT U/S.10A A ND IT WAS ONLY BY TREATING IT AS INCOME FROM OTHER SOURCES THAT HE CO ULD BRING TO TAX THE AFORESAID INCOME. THIS APPROACH IN OUR VIEW WAS NO T CORRECT. 141. ON THE EVIDENCE ON RECORD AND GIVEN THE FACT T HAT THE GAIN ON FOREIGN EXCHANGE FLUCTUATION IS RELATABLE TO EXPORT SALES AND HAS BEEN DULY ESTABLISHED WITH EACH ITEM OF SALE AND CORRELA TED WITH THE RELEVANT FIRC SHOWING THE DATES OF REALIZATION, THE GAIN IN QUESTION HAS TO BE : 117 : IT(TP)A NOS. 299 & 218/BANG/2014 REGARDED AS INCOME OF IDF1 AND IDF 2 UNITS RESPECTI VELY AND THE ASSESSEE WOULD BE ENTITLED TO DEDUCTION U/S.10A OF THE ACT ON THOSE INCOMES ALSO. WE HOLD AND DIRECT ACCORDINGLY AND A LLOW GR.NO.22 RAISED BY THE ASSESSEE. 142. AS FAR AS FOREIGN EXCHANGE LOSS IN MAG UNIT IS CONCERNED, THE PROFITS OF MAG UNIT ARE TAXABLE AND IT DOES NOT ENJ OY DEDUCTION OR EXEMPTION. THEREFORE THE LOSS IN THIS UNIT WILL GO TO REDUCE THE INCOME OF THIS UNIT WHICH IS OTHERWISE TAXABLE. THE AO TH EREFORE CAME TO THE CONCLUSION THAT THE LOSS ON FOREIGN EXCHANGE CLAIME D IN THIS UNIT IS NOT ALLOWABLE BECAUSE IT WAS A DOMESTIC UNIT IN WHICH T HERE CANNOT BE FOREX LOSS AND SECONDLY HE FOUND THAT THE PROPORTIO N OF LOSS CLAIMED COMPARED TO THE TURNOVER WAS VERY HIGH. THESE WERE THE TWO REASONS ASSIGNED BY THE AO FOR TREATING THE LOSS AS NOT PRO VED AND BOGUS. ANOTHER REASON THAT WEIGHED WITH THE AO WAS THAT TA X EXEMPT UNIT IDF 1 AND IDF 2 WERE MAKING A GAIN ON ACCOUNT OF FO REX CURRENCY WHILE TAXABLE UNIT MAG UNIT IS MAKING A LOSS, WHICH IS NOT PROBABLE. IT HAS TO BE CLARIFIED THAT THE IDF1 AND IDF 2 UNIT EXPORTS AND THEREFORE INCREASE IN THE FOREIGN EXCHANGE VALUE VIS--VIS IN DIAN RUPEE WILL RESULT IN GAIN. WHEREAS MAG UNIT PURCHASES AND ANY ADVERS E FOREIGN EXCHANGE FLUCTUATION VIS--VIS INDIAN RUPEE WILL RE SULT IN THE AMOUNT PAYABLE BY THE ASSESSEE TO BE MORE. 143. IT IS SEEN FROM THE EVIDENCE FILED BY THE ASSE SSEE, WHICH ARE THE SAME LETTERS AND ANNEXURES THERETO, WHICH WE HAVE D ISCUSSED WHILE DISCUSSING FOREIGN EXCHANGE GAIN IN IDF 1 AND IDF 2 UNIT, CLEARLY GAVE : 118 : IT(TP)A NOS. 299 & 218/BANG/2014 THE BASIS AND BREAK UP OF THE LOSS IN FOREIGN EXCHA NGE. THE EVIDENCE IN THE FORM OF INDIVIDUAL PURCHASES WHICH GAVE RAISE T O THE LOSS HAVE ALL BEEN PLACED BY THE ASSESSEE IN PAPER BOOK NO. 13 ( PAGES-3176 TO 3240) ALONG WITH LETTER DATED 13.12.2012 FILED BY T HE ASSESSEE BEFORE THE AO (COPY AT PAGE-3174 OF PAPER BOOK NO.13). IN THE LIGHT OF OVERWHELMING EVIDENCE THE CONCLUSION OF THE AO THAT THERE IS LACK OF EVIDENCE TO PROVE THE FOREIGN EXCHANGE LOSS IN MAG UNIT IS UNSUSTAINABLE. THE CONCLUSION OF THE AO THAT MAG U NIT BEING A LOCAL UNIT CANNOT HAVE FOREX LOSS IS AGAIN UNSUSTAINABLE BECAUSE THE LOSS IN QUESTION IS ON ACCOUNT OF IMPORT OF TRADING ITEMS A ND THERE IS BOUND TO BE A LOSS WHEN ONE IMPORTS AND THE VALUE OF INDIAN RUPEE VIS--VIS THE FOREIGN CURRENCY IN WHICH PAYMENTS FOR IMPORTS HAVE TO BE MADE, PAYMENT DEPRECIATES. THE OTHER CONCLUSION OF THE A O IS THAT THE LOSS IS DISPROPORTIONATE TO THE TURNOVER OF MAG UNIT (ON TU RNOVER OF RS.83.27 CRORES THE LOSS ON FOREIGN EXCHANGE WAS AT RS.30.18 CRORES). THIS HAS BEEN EXPLAINED BY THE ASSESSEE AS OWING TO LOSS ON FOREIGN EXCHANGE CURRENCY IN RESPECT OF PURCHASES IN THE EARLIER YEA RS AND THEREFORE COMPARING THE FOREX LOSS WITH THE IMPORTS OF THE CU RRENT YEAR WOULD NOT BE IN ORDER. 144. WE ARE THEREFORE OF THE VIEW THAT THE LOSS ON ACCOUNT OF FOREIGN CURRENCY CLAIMED IN THE MAG UNIT HAS TO BE ALLOWED AS IT HAS BEEN ESTABLISHED THAT A LOSS HAS ARISEN. THE LOSS IS IN CONNECTION WITH BUSINESS OF THE ASSESSEE AND THEREFORE HAS TO BE AL LOWED WHILE COMPUTING INCOME OF MAG UNIT. WE HOLD AND DIRECT A CCORDINGLY AND ALLOW GR.NO.23 RAISED BY THE ASSESSEE. : 119 : IT(TP)A NOS. 299 & 218/BANG/2014 145. OUT OF GR.NO.24 RAISED BY THE ASSESSEE ONLY GR .NO.24.2 WAS PRESSED FOR ADJUDICATION. THE SAID GROUND RELATES TO REVERSAL OF PRIOR PERIOD REVENUE OF MAG (EQUIVALENT TO EXPENSE IN THE CURRENT YEAR) CONSIDERED AS PRIOR PERIOD OF REVENUE FOR CURRENT Y EAR. THE FACTS AS FAR AS THIS GROUND OF APPEAL IS CONCERNED ARE THAT THE ASSESSEE GAVE THE FOLLOWING TREATMENT IN THE SEGMENT PROFIT AND LOSS ACCOUNT OF MAG UNIT BUT THE AO GAVE A DIFFERENT TREATMENT AND AS A RESULT, REVERSAL OF PRIOR PERIOD REVENUE OF MAG UNIT RESULTED IN THE LO SS CLAIMED BY THE ASSESSEE IN THIS UNIT BEING REDUCED. THE FOLLOWIN G CHART EXPLAINS THE POSITION IN THIS REGARD: RS. IN CRORES: TREATMENT BY ASSESSEE IN THE SEGMENTAL P&L OF MAG UNIT TREATMENT BY AO (PAGE 43 OF THE ASSESSMENT ORDER) EXPENSES REVENUE REDUCTION FROM PROFITS ADDITION TO PROFITS ACTUAL DEPICTION NET AMOUNT BEING GROSS PROFIT LESS OPERATING EXPENSES, LESS DEPRECIATION AND LESS FINANCE EXPENSES : RS. (47.21) LESS: EXPENSES BEING PRIOR PERIOD REVENUE REVERSED : (RS. 2.45) AOS DEPICTION NET AMOUNT BEING GROSS PROFIT LESS OPERATING EXPENSES, LESS DEPRECIATION AND LESS FINANCE EXPENSES : RS. 64.36 ADD: PRIOR PERIOD REVENUE : RS. 2.45 NET PROFIT / (LOSS) : RS. (49.66) [EXCLUDIN G OTHER EXPENSES] NET PROFIT / (LOSS) : RS. 66.81 : 120 : IT(TP)A NOS. 299 & 218/BANG/2014 THE AO CONSIDERED EXPENSE UNDER THE HEAD PRIOR PER IOD INCOME AMOUNTING TO RS. 2,44,90,252 AS AN INCOME RATHER TH AN AN EXPENSE. THE LEARNED DRP HAS UPHELD THE ORDER OF THE LEARNED AO. 146. IN THE SUBMISSIONS BEFORE THE DRP- PAGE 4812 A ND 4813- FILE 20) THE ASSESSEE SUBMITTED THAT A SUM OF RS. 2,44,9 0,252 WHICH REPRESENTS REVERSAL OF PRIOR PERIOD INCOME HAS BEEN CONSIDERED AS TAXABLE REVENUE FOR FINANCIAL YEAR ENDED 2009 BY TH E LEARNED AO. IT WAS SUBMITTED THAT INCOME WAS ACCOUNT IN FY 2007-08 (AY 2008-09) BUT WAS REVERSED IN FY 2008-09 (AY 2009-10) AND THI S WAS NOTHING BUT SIMILAR TO WRITE OFF OF DEBTS AS BAD AND IRRECO VERABLE U/S.36(1)(VII) READ WITH SEC.36(2) OF THE ACT. THIS CLAIM OF THE A SSESSEE HAS NOT BEEN EXAMINED EITHER BY THE AO OR CIT(A) AND ACCORDINGLY , IT WAS AGREED BY THE PARTIES THAT THIS ISSUE SHOULD BE REMANDED T O THE AO FOR CONSIDERATION AFRESH, AFTER DUE OPPORTUNITY TO THE ASSESSEE. ACCORDINGLY, GR.NO.24.2 IS TREATED AS ALLOWED FOR S TATISTICAL PURPOSE. 147. GR.NO.25 REGARDING NON-GRANT OF CREDIT FOR TDS OF RS.68,54,813 WAS NOT PRESSED BECAUSE IN RECTIFICATION PROCEEDING S THE CREDIT WAS ALLOWED. SIMILARLY GROUND NO.28 REGARDING CHARGING OF INTEREST U/S.220 OF THE ACT OF RS.16,18,121/- WAS ALLOWED IN RECTIFICATION PROCEEDINGS AND HENCE NOT PRESSED. GR.NO.26 WITH R EGARD TO CHARGING INTEREST U/S.234B OF THE ACT IS PURELY CONSEQUENTIA L AND THE AO IS DIRECTED TO GIVE CONSEQUENTIAL RELIEF. GR.NO.27 IS WITH REGARD TO CHARGING OF INTEREST U/S.234C OF THE ACT, WHICH SHO ULD BE ON THE RETURNED INCOME AS IS THE MANDATE OF SEC.234-C OF T HE ACT. THE AO IS : 121 : IT(TP)A NOS. 299 & 218/BANG/2014 DIRECTED TO WORK OUT INTEREST U/S.234C OF THE ACT O N THE RETURNED INCOME. 148. IN THE RESULT, APPEAL BY THE ASSESSEE IS PARTL Y ALLOWED, WHILE THE APPEAL BY THE REVENUE IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS 30 TH DAY OF APRIL, 2019 SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVAN) A CCOUNTANT MEMBER VICE PRESID ENT BANGALORE, DATED, THE 30 TH APRIL, 2019. TNMM : 122 : IT(TP)A NOS. 299 & 218/BANG/2014 COPY TO: 1. THE APP ELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE