(Prayer: ITA No.811/2006 is filed U/s.260-A of I.T.Act, 1961 arising out of order dated 25-11-2005 passed in ITA No.572/Mum/2000 for the assessment year 1995-96, praying to formulate the substantial questions of law, allow the Appeal and set aside the order passed by the ITAT, Bangalore in ITA No.572/Mum/2000 dated 25-11-2005 confirming the order of the appellate commissioner and confirm the order passed by the Deputy Commissioner of Income Tax, special Range-15, Mumbai and etc.,)
1. These four appeals by the Revenue arise out of the assessment orders passed by the Assessing Officer in respect of the respondent-assessee, an Indian Company, for the assessment years 1995-96, 1996-97, 1997-98 and 1998-99 respectively.
2. All these four appeals involve common questions which had been noticed as under when the appeals were admitted for examination on 5.9.2007.
1. Whether the Tribunal is correct in holding that in accordance with Section 80I(9) of the Act, the Assessing Officer has to adduce evidence and assign reasons cogently and assign reasons for invoking the Section and cannot just presume the existence of close connection/arrangement for the purpose of invoking Section 80I(9) of the Act.
2. Whether the Tribunal is correct in holding that in accordance with Section 80I(9) read with Section 10A(6) the assessee and its supplier Digital Group Worldwide/Overseas need not actually maintain books separately but deciphering the profit would be sufficient compliance.
3. Whether the Appellate Commissioner is correct in holding that before the books could be rejected, the Assessing Officer has to satisfy himself the provisions of Section 145 of the Act and not Section 80I(9) read with Section 10A(6) of the Act.
3. At the time of hearing Sri.G.Kamaladhar, Standing counsel appearing for the appellant-revenue, submitted that yet another question viz., ‘whether the appellate authorities were correct in holding that the MODVAT credit income as well as value of the closing stock for the current assessment year, as held by the Assessing Officer, is also a question that arises for examination in the above four appeals Sri.Suryanarayana, learned counsel appearing for the respondent-assessee having submitted that this question also arises and may be examined in these appeals for our answer, we are examining the appeals in the context of these questions for the purpose of disposal of these four appeals.
4. We have heard Sri.Kamaladhar, learned standing counsel appearing for the appellant/revenue and Sri.T.Suryanarayana, learned counsel appearing for the Revenue.
5. The assessee is a Indian Company and carries on the business of manufacture of hardware and software and exports its products, both hardware and software. While the first question relating to the entitlement claimed by the assessee under the provisions of Section 10A of the Income Tax Act, 1961 (for short hereinafter referred to as ‘the Act’) is in respect of the two units which are involved in creation of software and which is exported, the second question relating to MODVAT credit, which the assessee had claimed, as available to it at the end of the accounting period and as reflected in his books of accounts as unutilised MODVAT credit, is a question which arises in general and in respect of entire manufacture and trading activity of the assessee.
6. The bone of contention between the revenue and the assessee on the first question is one of entitlement or otherwise of exemption in terms of Section 10A of the Act, at a percentage or a ratio of value of the exports, as a deduction available to the assessee in computing its total income, was due to the reason that the assessing officer opined the amount so claimed for each of the assessment year as under:-
|1995-96||Total Turnover||Profit Shown||Rate of Profit|
|Profit of IDC Unit||7,69,49,886||1,86,38,204||24.22%|
|Profit of STP Unit||34,54,02,490||6,66,78,880||19.30%|
|Profit of the company as a whole including the profit of the above two units||157,12,77,172||13,15,03,732||8.36%|
|Profit of the company excluding profits of these two units||114,89,24,796||4,61,18,648||4.01%|
|1996-97||Total Turnover||Profit Shown||Rate of Profit|
|Profit of IDC Unit||9,44,16,251||2,67,97,100||28.59%|
|Profit of STP Unit||25,00,85,009||4,95,02,285||19.79%|
|Profit of the company as a whole including the profit of the above two units||231,26,18,342||20,88,71,794||9.03%|
|Profit of the company excluding profits of these two units||196,81,17,082||13,23,72,409||6.73%|
|1997-98||Total Turnover||Profit Shown||Rate of Profit|
|Profit of IDC Unit||3,42,91,058||1,99,22,412||58.1%|
|Profit of STP Unit||28,42,09,546||5,68,72,575||20.01%|
|Profit of the company as a whole including the profit of the above two units||282,11,68,223||37,91,72,831||13.44%|
|Profit of the company excluding profits of these two units||250,26,67,619||30,23,77,844||12.08%|
|1998-99||Total Turnover||Profit Shown||Rate of Profit|
|Profit of IDC Unit||15,29,69,362||9,19,43,640||60.09%|
|Profit of STP Unit||32,70,06,769||10,07,85,585||30.81%|
|Profit of the company as a whole including the profit of the above two units||3,35,57,90,872||38,20,11,409||11.45%|
|Profit of the company excluding profits of these two units||2,85,57,94,741||18,92,82,184||6.63%|
7. Provisions of Section 10A (6) and 80 I (9) reads as under:-
S.80-I. (9) Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the business of the industrial undertaking or the hotel or the operation of the ship or the business of repairs to ocean-going vessels or other powered craft to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in the business of the industrial undertaking or the hotel or the operation of the ship or the business of repairs to ocean-going vessels or other powered craft, the Assessing Officer shall, in computing the profits and gains of the industrial undertaking or the hotel or the ship or the business of repairs to ocean-going vessels or other powered craft for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom.
10A. (1) Subject to the provisions of this section, any profits and gains derived by an assessee from an industrial undertaking to which this section applies shall not be included in the total income of the assessee.
10A (6) The provisions of sub-section (8) and sub-section (9) of Section 80-I shall, so far as may be, apply in relation to the industrial undertaking referred to in this section as they apply for the purposes of the industrial undertaking referred to in section 80-I.
8. The assessing officer concluded the assessment on this aspect by re-computing the amount of profit from the export of software by the two units viz. Santha Cruz Electronics Export Processing Zone in Mumbai and another unit located in Software Technology Park in Bangalore by taking the rate of profit attributable to the export activity to be at the same rate as is the average rates provided in respect of the entire business activity of the assessee for each year assessment orders were passed on such premise.
9. While looking into the manner of computing of the profits of the assessee, as revealed in the profit and loss account, and noticing that the value of the closing stock has been taken at a lower amount corresponding to the amount of MODVAT credit said to be available to the assessee on the last day of the accounting period, which for the assessment year 1995-96 was noticed at 1,18,61,885/- and after having called upon the assessee to furnish the details of the justification, but the assessee merely contending that as it had not added the corresponding duty amount to its purchases and the expenditure claimed towards the cost of purchase of its raw-material being exclusive of the duty paid for the purpose of preparation of the profit and loss account, but at the same time not producing any commensurate evidence or material to show the actual amount of duties paid by it to this extent i.e., to the extent of 1,18,61,885/- rejected the contention of the assessee and also rejected the method of maintenance of the accounts of the assessee for purpose of ascertaining the taxable profits of the assessee and proceeded to add back this amount to the value of the stock and on such premise re-computed the profit and brought the corresponding amount to tax.
10. The assessee being aggrieved on such inference drawn by the Assessing Officer and the conclusions and on other aspects also had preferred appeals for each of the four assessment years to the Commissioner of Income tax Appeals.
11. Insofar as the question of adding back the MODVAT credit to the value of the stock in trade for the assessment years 1995-96 and 1996-97 is concerned, the Commissioner of Appeals purporting to follow the earlier view on this aspect taken by the predecessor Commissioner of appeals in respect of the very assessee for the earlier years and purporting to follow the ratio laid down by the Income Tax Appellate Tribunal, Mumbai Bench in the case of S.H.Khelkar in 44 ITA 170, opined that adding back was not warranted and directed deletion of the amounts.
12. Insofar as the question of the profit from software manufacturing export units, i.e. the two software export units of the assessee is concerned, the Appellate Commissioner opined that the requirements of the provisions of Section 80-I (9) of the Act is two fold, that, not merely there should be a close connection between the assessee company and the foreign buyer which may be a reason for assessee for indulging in boosting its profits or proportionate profit margin from the export activity of the notified items, but also that there should be material to indicate that the assessee had indulged in an arrangement with its foreign buyer so as to produce to the assessee more profits than ordinarily what profits the assessee might have expected to arise from out of such business and the Assessing officer having not indicated any material or evidence to disclose any arrangement between the assessee and its foreign buyer, held that, there is no reason to reject the profit attributable to such units as claimed by the assessee and as indicated in its profit and loss account statement, which according to the Appellate Commissioner was one conforming to the profit margin as was prevalent in other software manufacturing units which were also exporting the software created by it and claiming Section 10A benefit. The Appellate Commissioner applied this view for all the four assessment years of the assessee.
13. It was now the turn of the Revenue to go in appeal before the Tribunal, but the Tribunal as per the common order dated 25.11.2005 dismissed the appeals rejecting the contentions urged on behalf of the Revenue both on the aspect of Section 10-A benefit claimed by the assessee and so also the MODVAT credit aspect.
14. It is because of the failure of the Revenue before the Tribunal, the present appeals and on the questions as above.
15. Adverting to the question relating to Section 10A benefit of the assessee, submission of Sri.G.Kamaladhar, learned standing counsel for the Revenue, is that the assessee had not maintained any separate accounts to indicate the precise profits attributable to the two export units; that the assessee had not placed even any material or books of accounts relating to these units to indicate either at the manner of arriving at the profits attributable too these units or in any other way, that when the Assessing officer has noticed the close relationship between the assessee and the foreign buyer which is not all in dispute and if the Assessing officer also had noticed the abnormal high profit ratio shown by the assessee only in respect of the export units and in comparison to the average profits of the entire production of the assessee, if the Assessment officer found that the profit margin attributable to the export sales was abnormally high and therefore, if had applied the profit margin at the average profit margin of the assessee inclusive of the export business, that was a very reasonable thing to do and as enabled u/s.80I (9) of the Act and in such circumstances, there was no occasion for the Appellate Commissioner as well as the Tribunal to have interfered with such order of the Assessing Authority.
16. Mr.Kamaladhar has also placed reliance on the judgment of the Supreme Court in the case of Mazagaon Dock Ltd. -vs- Commissioner of Income tax/Excess Profits Tax reported in (1958) 034 ITR 0368. Drawing our attention to the judgment of the Supreme Court in this case which was in the context of the provisions of Section 42(2) of the Indian Income Tax Act (X) of 1922, which provision also deals with a situation of an arrangement between a resident and a non-resident ensuring that the profits attributable to the resident assessee are transferred to the non-resident or the resident assessee by an arrangement with a non-resident business contact, ensuring that its profits are reduced, will be a situation attracting the provisions of Section 42 of the Income Tax Act 1922 and the Supreme Court having rejected the stand of the assessee, in that case that there was no liability on the part of the resident which had not been clearly spelt out by the Assessing Officer, the same logic applies to the present situation also and when once the Assessing Officer noticed there was not only close relationship, but also that the profit margin attributable to the export activity was abnormally high in comparison to its other business activity, there was no occasion for the Appellate Commissioner or the Tribunal to interfere with this order and therefore, submits that the orders passed by the Appellate Commissioner and the Tribunal should be set aside and the order passed by the Income Tax Officer should be restored.
17. Insofar as the question relating to adding back of the MODVAT credit to the closing stock of the assessee at the end of the accounting period is concerned, it is submitted that the Appellate Commissioner as well as the Tribunal have, without assigning proper reasonings and without even demonstrating as to how the order passed by the Assessment officer is either erroneous in law or on facts, had simply set aside the assessment order on this aspect and therefore, it is not sustainable.
18. It is also submitted that the assessee had not placed any material either before the Assessing Authority or before the Appellate Authority to show that he had actually paid the corresponding excise duty, customs up to the amount of the MODVAT credit which it had claimed as MODVAT credit available to it at the end of the accounting period and therefore, was to be excluded in computing the value of the closing stock; that when the initial payments itself had not been demonstrated, a claim of this nature was not tenable. It is also pointed out that the Assessing Officer found sufficient reasons to reject the manner of maintenance of the accounts for the purpose of arriving at the profits of the assessee and in exercise of the powers u/s.143(2) of the Act, if had rejected the accounting method being of the opinion that such manner was nothing but a devise to under state the profits of the assessee and if had made addition of the amount of the duty claimed as a deduction form the value of the stock, there was nothing wrong with the same and the Appellate Commissioner and the Commissioner should not have interfered with the conclusion of the Assessing Officer.
19. On the other hand, Sri.Suryanarayana, learned counsel appearing on behalf of the assessee with reference to the question of claim u/s.10A of the Act submits that the Assessing Officer had without any proper reason or justification proceeded to re-determine the profit margin; that the Appellate Authority had examined the matter in detail before the Commissioner, and found that in comparison the profit margin attributable to the export activity of the two units in respect of export of software by the two units compared favourably with the profit margin of similar companies in the same line of activity and therefore, there was no reason or justification even to express any doubt or suspicion, moreover when the Assessing officer had not noticed any other material indicative of such arrangement, there was no reason to re-determine the profit. He also submits that the assessee having maintained its account books in a standard form and procedure, there was no reason for the assessing officer to reject the same by invoking Section 145 (2) of the Act.
20. Insofar as the question of arresting the profit margin of the assessee at the same percentage in respect of the over all business of the assessee is concerned that it was without justification and therefore, the order of the assessment is not sustainable and the order of the Appellate Authority is to be sustained. Also submits that the profit margin in software business is always comparatively much higher than that in hardware business and this aspect, the Assessing Officer had lost sight of.
21. Insofar as the aspect of adding back MODVAT credit to the value of the stocks at the end of the accounting period is concerned, the learned counsel for the assessee submits that the assessee having maintained its books of accounts in the standard form, there was no reason for the Assessing Officer to have rejected it and the same has been very correctly set-right by the Appellate Authorities.
22. Insofar as the reliance placed by Kamaladhar, learned counsel for the Revenue on the judgment of this Court in ITA No.3223/2005 (The Commr of Income Tax - vs – M/S. Digital Global Soft Ltd.) is concerned, submits that the question raised therein is not exactly as in the present situation; that it was a case of customs and excise duty paid and for which deduction had been claimed and the remission order by this Court was only to ascertain whether the amounts have been paid or not and not on the questions as raised in the present appeals which relate to MODVAT credit amount.
Mr. Suryanarayana further, submits that the Tribunal has correctly disposed of the appeals on these two aspects and therefore questions raised are required to be answered in favour of the assessee and against the revenue.
23. We have bestowed our attention to the submissions made at the bar, perused the order of the Assessing authority, Commissioner for Income Tax (appeals) and also of the Income tax Appellate Tribunal.
24. Insofar as the first question is concerned, while it is true that there did exist a close connection between the assessee company and the foreign buyer and it is not disputed that the other requirement such as the nature of arrangement and the manner of rejection of the profits margin due to export sales as inflated profits attributable to export activities, having not been disclosed by the Assessing Officer and though considerable reliance is placed by the learned counsel for the respondent on the judgment of the Supreme Court, while it is true that to some extent these two provisions are analogous (S. 42 and Section 80I (9) of the Act) the questions that were examined in the judgment of the Supreme court were not on the so called arrangement aspect, but mainly as to the deeming provision operating against the resident or the non-resident and also as to the manner of business activity and existence of the business connection which argument on behalf of the assessee was negatived.
25. The course of business was so arranged that the business transaction between two units of the assessee which might expected to arise in the business undertaking or the hotel. The word ‘appears’ cannot be taken in isolation de-hors the qualifying words of ‘so arranged’ with the business more than the ordinary profits. While on the first aspect there is not much dispute. The second requirement viz., it is a course of business is so arranged as to result in an inflated profit is not forthcoming from the order of the Assessing Officer and unfortunately for the Revenue the findings of the Appellate Authority which also go into the facts is that the profit margin as revealed by the assessee is a reasonable profit margin in comparison to other similar units. Ultimately, there being no material to indicate that the course of business had been so arranged as to inflate profits, i.e. to show a higher profit margin to the two export units of the assessee, we are unable to answer the question infavour of the Revenue, but the only answer can be that the tribunal was justified in taking this view and therefore, the first question is answered in the affirmative and in favour of the assessee and against the Revenue.
26. Insofar the second question is concerned, we notice that the question basically arise because the Assessing Authority rejected the method of accounting followed by the assessee for the purpose of computing its profits in terms of the profit and loss account and the Appellate Commissioner as well as the Tribunal have found that there was no reason or justification for the Assessing Officer to have rejected the books of accounts as maintained by the assessee which was according to standard accounting practices.
27. The Tribunal and the Appellate Commissioner have opined that for the purpose of computing the profits of the assessee that the assessee having followed the standard accounting practice, the Assessing Officer should have accepted the accounts as maintained by the assessee in terms of Section 145(1) of the Act and should not have rejected the same by invoking Section 145 (2) of the Act. We notice that while rejecting of the accounts maintained by the assessee in terms of the provisions of Section 145 (2), has enabled the Assessing Officer to proceed pass best judgment assessment, but at the same time the order should spell out reasons and the basis for passing a best judgment order.
28. The reason if at all as discernable from the assessment order on this aspect can only be that the Assessing Officer is of the view that the assessee was not entitled for the deduction in terms of Section 43B of the Act as the actual payments had not been made good by placing before the Assessing Officer the commensurate material for the accounting period of excise duty and customs.
29. In this regard submission on behalf of the assessee to the effect that it was not a deduction claimed against the payment, but an available MODVAT credit which was taken out of the value of the closing stock as the assessee had not factored the duties paid by it at the stage of valuing its purchases.
30. We are of the view that it was not an accounting procedure that was involved in a claim made by the assessee insofar as the deduction was claimed attributable to the MODVAT credit, but a specific deduction claimed in respect of the available MODVAT credit, but at the same time we also find that the Assessing Officer possibly could not have added back the entire MODVAT credit without affording opportunity to the assessee to make good the actual duty payments it had made in respect of the purchases and in respect of which amount the assessee wanted a deduction to be made or an addition to be made to its cost of purchase of the raw material.
31. This aspect having not been examined by any of the authorities below, we are of the opinion that this requires proper examination at the level of the Assessing Officer. Therefore, the second question posed for our answer is answered in the negative and against the assessee but after setting aside the orders of the Tribunal and the Appellate Commissioner on this aspect the matter is remanded to the Assessing Officer on this aspect i.e., regarding the claim of the assessee for reducing the MODVAT credit available to it at the end of accounting period from the date of the closing stock and for such purpose, the Assessing Officer shall give an opportunity to the assessee to place material and pass orders afresh on this aspect of the matter.
32. Accordingly, these appeals are allowed in part, but only to the limited extent indicated above to enable the assessee to make good its claim towards the value of excise duty paid by the assessee to its vendors and seek for reduction in value proportionately. Having regard to the discussion above on the second question, the matter is remanded to the Assessing Authority. However, it is open for the assessee to adduce evidence or material to make good its claim, before the Assessing Officer on this aspect also.
Appeals allowed in part, parties to bear their respective costs.