IBM India Private Limited Vs Asst.CIT (ITAT Bangalore)
Held that there is no requirement for maintaining separate books of account for claiming deduction under section 10A/10AA of the Act, and books of account maintained by assessee is sufficient to enable computation of profits of various SEZ units.
Facts-
The assessee herein is a group company of M/s IBM Organisation. It functions include providing services to its group companies and undertaking distribution of group company’s products. It is engaged in the business of trading, leasing and financing of computer hardware, maintenance of computer equipment. It also provides software related services. The AO proposed various additions in the draft assessment orders of both the years, which were objected to by the assessee before Ld DRP. After receipt of directions from Ld DRP, the AO completed the assessments of both the yearsby making various additions.The assessee has preferred these appeals against the assessment orders so passed by the AO for both the years. The revenue has filed appeal for AY 2010-11 challenging relief granted by Ld DRP in that year.
Conclusion-
We are of the view that there is no requirement for maintaining separate books of account for claiming deduction under section 10A/10AA of the Act, and books of account maintained by assessee is sufficient to enable computation of profits of various SEZ units. Further the circular issued by CBDT dated 17/01/2013 (supra) also clarifies that there is no requirement in law to maintain separate books of account and the same cannot be insisted upon.
We held that the payments made for purchase of shrink wrapped software are not royalty within the meaning of India-Singapore DTAA. Disallowance deleted.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
The cross appeals relating to Assessment Year 2010-11 and the appeal filed by the assessee for AY 2011-12 are directed against the assessment orders passed by the AO u/s 143(3) r.w.s 144C of the Act for the respective years in pursuance of directions given by Ld Dispute Resolution Panel (DRP). Since common issues are urged in these appeals, they were heard together and are being disposed of by this common order, for the sake of convenience.
2. The assessee herein is a group company of M/s IBM Organisation. It functions include providing services to its group companies and undertaking distribution of group company’s products. It is engaged in the business of trading, leasing and financing of computer hardware, maintenance of computer equipment. It also provides software related services. The AO proposed various additions in the draft assessment orders of both the years, which were objected to by the assessee before Ld DRP. After receipt of directions from Ld DRP, the assessing officercompleted the assessments of both the yearsby making various additions.The assessee has preferred these appeals against the assessment orders so passed by the AO for both the years. The revenue has filed appeal for AY 2010-11 challenging relief granted by Ld DRP in that year.
ASSESSEE’S APPEAL FOR AY 2010-11
3. We shall first take up the appeal filed by the assessee for AY 2010-11. The Ground no.1 raised by the assessee is general in nature and hence it does not require any adjudication.
4. In Ground no.2, the assessee is questioning the wisdom of the AO in placing reliance on the “draft assessment order” passed for AY 2009-10 in drawing adverse conclusions in AY 2010-11. However, at the time of hearing, the ld A.R did not press this ground. Accordingly, the ground no.2 is dismissed as not pressed.
5. Ground No.3 relates to the rejection of claim made u/s 10A and 10AA of the Act. The assessee had claimed deduction of Rs.793.18 crores u/s 10A of the Act and Rs.99.07 crores u/s 10AA of the Act in respect of various units. The AO rejected both the claims on the ground that the assessee has failed to comply with various conditions prescribed in those sections for allowing deduction. The violations noted down by the AO are discussed below:-
(a) NON-SUBMISSION OF STATEMENT OF WORK(SOW) WITH STPI/SEZ AUTHORITIES:-
The assessee has registered only one “Master Service Agreement” (MSA) dated 1.1.2004 with STPI/SEZ authorities. MSA is a general document and has no specific details regarding exact nature of work to be performed by the assessee. The assessee has claimed that the ‘Document of Understanding’ (DOU) and ‘Inter Company Agreements’ (ICA) supports MSA. However, the DOU/ICA were never registered with STPI/SEZ authorities. The AO referred to the Circular dated 17-01-2013 issued by CBDT, wherein the CBDT has stated that the “Statement of Work” (SOW) would normally prevail over MSA in determining the eligibility of the assessee for tax benefits unless the AO is able to establish that there has been splitting up or reconstruction of an existing business or non-fulfilment of any other prescribed condition. The assessee has not produced SOW for each and every STPI unit to support its contentions that the eligible unit has carried out software development activity.
(b) ASSESSEE DID NOT PROVIDE SOFTWARE DEVELOPMENT SERVICES:-
The sample ICA furnished by the assessee would show that ICA is only pricing agreement and not software development agreement. It is noticed from ICA’s that the assessee has rendered only “Miscellaneous Services”, which involve server management, technical services, providing financial services, software consultancy etc. Further, it is noticed from FIRCs that the purpose of remittance was clearly mentioned as “software consultancy, technical fee, system maintenance fee etc.”
(c) NEW BUSINESS COMMENCED BY SPLITTING UP OR RECONSTRUCTION OF EXISTING BUSINESS:-
The AO also referred to the draft assessment order passed for AY 2009-10, wherein the details of violation of sub section (2) of section 10A has been discussed in detail. In AY 2009-10, the AO had held in the draft assessment order as under:-
“As MSA was the only document registered with all the STPI/SEZ units invariably it is evident tat the units commenced its business activities in the year 2005-06, 2006-07 and 200708 are nothing but splitting up or reconstruction of existing business. It is a clear cut case with ample evidences on record that such units were not new undertaking to claim the tax benefit. Prima facie such DOU and ICA cannot be admitted as evidence on the ground that it was not certified and registered in any of the STPI/SEZ unit… ”
Accordingly, the AO held that modus operandi of business, violation of SEZ Act, violation of foreign trade policy etc are similar to section 10A. The company has not given any of the software development agreement to SEZ authorities. The MSA is the prima facie evidence that they have violated sub-section 4 of section 10AA of the IT Act. In the present case, the assessee has continued the business already in existence without having any new contract agreement of alleged export of computer software. Hence the assessee is not eligible for deduction u/s 10AA of the Act.
(d) EXISTENCE OF TWO TYPES OF INVOICES AND NON-FURNISHING OF ACCOUNTING INVOICES TO STPI/SEZ AUTHORITIES:-
The AO noticed that the assessee was having two set of invoices, viz., Accounting invoice and Softex invoice. The accounting invoices are raised against various associated enterprises for whom services were rendered. The softex invoices a submitted to STPI/SEZ authorities. The AO noticed that it was not possible to match these two set of invoices completely, as the on site revenue is not declared in SOFTEX form submitted to STPI/SEZ authorities. It was also noticed that the accounting invoices are not submitted to STPI/SEZ authorities for verification of claim of software export.
(e) INCOMPLETE DETAILS RELATING TO DATACOM SERVICE PROVIDERS:-
The AO held that the assessee has not given satisfactory reply with regard to the details of datacom service providers through whom the data are transmitted, which raised doubt on export of software.
(f) NON-APPROVAL OF BANK ACCOUNT MAINTAINED IN FOREIGN COUNTRY:-
As per Explanation 2 to sec. 10A(3) of the Act, the sale proceeds shall be deemed to have been received to India where such sale proceeds are credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of RBI. The AO observed that the assessee appears to have got approval from RBI only after specific query was raised by the assessing officer. The Approval was also withdrawn in between and again given. Further, the assessee had no RBI approval during theFinancial year 2009-10 when the transactions were undertaken. Hence the assessee has not complied with the provision of Section 10A(3) of the Act.
(g) UNRELIABLE NATURE OF UNIT WISE PROFIT AND LOSS ACCOUNT:-
The assessee had claimed deduction u/s 10A/10AA of the Act based on unit wise P & L account. The AO noticed that the AO had discussed various discrepancies in the preparation of unit wise P & L account in the assessment proceedings of AY 2009-10. The AO had examined in that year the Statutory Auditor Shri J Majumdar, CA and Shri T Ravindra, who had issued certificate. By placing reliance on the findings given in AY 2009-10, the AO concluded in the current year that the assessee does not have details to establish genuineness of unit wise P & L account. Accordingly he held that the unit wise P & L account cannot be relied upon for allowing deduction u/s 10A/10AA of the Act.
(h) NON-SATISFACTORY REPLY RECEIVED FROM VARIOUS COUNTRIES:-
The AO made requests through the competent authority of CBDT seeking information under DTAA from various Countries described in Form No.3CEB. The purpose of request was to verify genuineness of various details furnished by the assessee during assessment proceedings. The AO received replies from various Countries, but they had followed uniform pattern and further replies were not satisfactory. Accordingly, the AO concluded that the assessee has ensured that standard reply was provided by all the AEs so as to avoid submission of various details sought. He also held that no AE has confirmed that IBM India is providing software development service to them. He also held that no ledger in the name of IBM India and Bank account is available with AEs’ which can support genuineness of payments made to IBM India.
5.1 In view of the above discussed discrepancies, the AO held that the assessee is not entitled for deduction of Rs.793.18 crores u/s 10A and Rs.99.07 crores u/s 10AA of the Act. The AO has summarised his conclusion paragraph 1.5.8 at page 41 of the assessment order:-
1. The detailed discussion made in the previous paragraph has revealed a fact that the assessee company could not substantiate its claim of manufacture and export of computer software from eligible STPI/SEZ unit. Section 10A/10AA gives tax benefit on the profits and gains derived by an undertaking from export of computer software that has been manufactured from eligible STPI/SEZ units.
2. For transmission of data from eligible STPI/SEZ units to outside India contradictory submission has been made by the assessee to different authorities.
4. The scheme of STPI notified by Government of India has been violated thoroughly by IBM India P Ltd. Not even a single software development agreement was registered by IBM India P Ltd with any of the STPI units. For the onsite development of computer software the company has unable to establish the direct nexus between the eligible unit and the client.
3. The DOU’s was not registered with any of the STPI/SEZ unit.
4. The ICA given by the company has categorically revealed a fact that the company has rendered some miscellaneous services. Such miscellaneous services include system management, server management, technical support fee, software consultancy etc.
5. The MSA and ICA have revealed a fact that the undertakings commenced the business activity after 2004-05 were not new undertaking that began to manufacture or produce the computer software and rather all such undertakings have continued the business already in existence. It is violation of sub section (2) of section 10A.
6. Huge amount were remitted from HSBC New York for which RBI approval was not available during the year when transaction was carried out.
5. The references made u/s 90 of IT Act has revealed various discrepancy as discussed above.
7. It has been established that unit wise P & L account is not reliable document. The CA who has issued a certificate about the true and correct nature of the unit wise P&L account has admitted in sworn statement that it did not reflect the true and correct profit.
5.2 The Ld DRP confirmed the disallowance of deduction claimed u/s 10A/10AA of the Act for the reasons discussed hereinafter. With regard to the allegation of splitting up/reconstruction of existing business, the Ld DRP held as under:-
“In regard to above, we agree with the submission of the assessee that the issue of splitting and reconstruction of the business can be examined only in the first year of the commencement of the undertaking. This view finds support from the rationale of the decision of Hon’ble Delhi High Court in the case of CIT vs. Tata Communication Internet Services Ltd 17 taxmann.com 241 (Delhi HC) and the decision of the Hon’ble Karnataka High Court in the case of Nippon Electronics (India) P Ltd 181 ITR 518, however, the issue becomes academic in nature due to our directions (supra) confirming the denial of deduction u/s 10A and 10AA of the I T Act.”
5.3 With regard to other discrepancies noticed by AO, the Ld DRP has referred to the notice u/s 142(1) issued on 02-12-2014 by the AO, wherein the AO had asked the assessee to furnish following information which are necessary to ascertain the correctness of claim of deductions u/s 10A and 10AA of the I T Act:-
1. Copy of bank book/bank ledger of all the bank accounts including the HSBC account maintained at New Yorkby explaining nature and sources of each credit and debit which was shown to the CA who has audited the books of accounts.
2. Reflect all the credits into the P & L account and so called P & L account submitted in ROI and subsequently.
3. Copies of all the FIRCs (both front and back side), invoices (accounting invoices and SOFTEX invoices) and SOFTEX regularised against each such FIRC. Reflect all the FIRCs into the books of accounts and P&L account. Under which head the corresponding income has been offered.
4. Unit wise offshore contract/onsite contract of software development, corresponding export invoices certified by STPI authorities alongwith SOFTEX forms and link it to FIRC in following format:-
5. Party wise ledger account of export revenue and match such export revenue with the so called unit wise P&L account.
6. The AD bank has confirmed in the reply dated 18-03-2012 that the total Softex regularised by them for the AY 2010-11 was 1042,072,012 US $ (notice dated 16.4.2013). However, the turnover as per Form 56F was much more than the softex. If the company has developed any software and exported the same furnish the evidences like DOU, ICA, evidences for realisation, relevant bank account copies etc.”
The Ld DRP concurred with the view expressed by AO in respect of above mentioned points and accordingly held as under:-
“In view of the above, we are of the opinion that the assessee has failed to furnish the necessary information supported by the documents to establish the claim undertaking wise, accordingly, we uphold the disallowance of deduction u/s 10A and 10AA as proposed by the assessing officer in the draft assessment order.”
5.4 It is pertinent to note that the Ld DRP did not address on following issues/discrepancies discussed by the AO:-
(a) Only Master Service agreement has been submitted. No Statement of Work/software development was registered with STPI. DOU was not registered with any of the STPI/SEZ unit.
(b) For transmission of data from eligible STPI/SEZ units to outside India, contradictory submission has been made by the assessee to different authorities, which raised doubts on export of software.
(c) The ICA given by the company has categorically revealed that the company has rendered only miscellaneous services.
(d) Non-reconciliation of accounting invoices and softex invoices.
(e) RBI approval was not available for the bank account maintained outside India for the year under consideration.
(f) Authenticity of information received from various Associated enterprises.
(g) Authenticity of unit wise Profit and Loss account prepared by the assessee for claiming deduction.
In effect, the Ld DRP has given its directions with regard to the allegation of splitting/reconstruction of existing undertakings, the reconciliation of payments received with the turnover reported by the assessee, compliance on reporting requirements of turnover through statutory forms.
5.5 We notice that many of the alleged violations pointed out by the AO have been addressed by the Tribunal in the assessee’s own case in IT(TP)ANo.725/Bang/2018 dated 31.7.2020 relating to AY 2013-14. Relevant discussions made by the Tribunal are extracted below in the same seriatim discussed in Paragraph 5 supra:-
(A) NON-SUBMISSION OF STATEMENT OF WORK (SOW) WITH STPI/SEZ AUTHORITIES:-
This objection has been addressed by the co-ordinate bench in AY 2013-14 as under:-
“A.5 We have perused submissions advanced by both sides in light of records placed before us.
Objection raised by authorities below is that, assessee did not establish by way of documentary evidences regarding services rendered to its AE’s globally, and that, these were in the nature of software development services. It has been alleged by revenue that, MSA dated 01/01/2004, was the only document registered with STPI/SEZ authorities, which do not specify the scope of work.
We place reliance upon Circular no.01/2013, dated 17/01/2013 issued by CBDT, wherein, necessity to have separate master service agreement for each work contract and to what extent it is relevant has been dealt with as under:
“(2) …..
(i) …..
(a) …..
(b) …..
(ii). Whether it is necessary to have separate master service agreement (MSA) for each work contract and to what extent it is relevant.
As per the practice prevalent in the software development industry, generally two types of agreement entered into between the Indian software developer and the foreign client. Master Service Agreement (MSA) is an initial general agreement between a foreign client and the Indian software developers setting out the broad and general terms and conditions of business under the umbrella of which specific an individual Statement of Work (SOW) are formed. These SOW, is in fact, enumerate the specific scope and nature of the particular task or project that has to be rendered by a particular unit under the overall ambit of the MSA. Clarification has been sought whether more than one SOW can be executed under the ambit of a particular MSA and whether SOW should be given preceded and over MSA.
The matter has been examined. It is clarified that the tax benefit under section 10 AA, 10 AA and 10 B would not be denied merely on the ground that a separate and specific MSA does not exist for each SOW. The SOW would normally prevail over MSA in determining the eligibility for tax benefits unless the assessing officer is able to establish that there has been splitting up or reconstruction of an existing business or non-fulfilment of any other prescribed condition.”
From the above, it is clear that, benefit under section 10A,10AA and 10 B cannot be denied as separate and specific MSA does not exist for each SOW. Be that as it may, from SOFTEX forms placed in paper book at page 536 onwards, columns 7 specifically reveals, export contract/ purchase order, being filed with SEZ. We also note that, each form consist enclosures, like copies of export contract, royalty agreement, communication from foreign customers.
Submissions by Ld. Standing Counsel for revenue is thus found to be contrary to SEZ approvals placed at page 782 onwards of paper book volume 3. Ld. Standing Counsel for revenue also placed reliance on Circular no.1/2013 dated 17/01/2013 issued by CBDT, which addresses various requirements for being eligible to claim deduction under section 10AA of the Act, but did not bring to our notice, anything contrary except for saying that assessee did not file separate SOW with SEZ.”
(B)ASSESSEE DID NOT PROVIDE SOFTWARE DEVELOPMENT SERVICES:-
This objection has been addressed by the co-ordinate bench in AY 2013-14 as under:-
“A.5………………
Ld. Counsel submitted that, assessee claimed deduction under section 10AA of the Act for year under consideration, however, for purposes of definition of ‘computer software’, one has to refer to Explanation 2 to Section 10A(8) of the Act. Ld. Counsel submitted that ‘computer software’ for purposes of section 10AA would mean:
“ (i) “computer software” means,-
(a) any computer program recorded on any disk, tape, perforated media or other information storage devices; or
(b) any customised electronic Data or any product or service of similar nature, as may be notified by the board,
which is transmitted or exported from India to any place outside India by any means.”
We note that transfer pricing adjustment proposed by Ld.TPO was in respect of payments received on account of services rendered by assessee under software development segment. Therefore, it cannot be held that services rendered by assessee, does not fall under software development service segment. So, to allege that, assessee was providing miscellaneous services, is like blowing hot and cold at the same time. Revenue has not been able to prove anything contrary by way of documentary evidences on this aspect before us. Therefore, this objection raised by revenue does not hold good in eyes of law and is rejected.”
(C) NEW BUSINESS COMMENCED BY SPLITTING UP OR RECONSTRUCTION OF EXISTING BUSINESS:-
This view of the AO has been rejected by Ld DRP in this year.
(D) EXISTENCE OF TWO TYPES OF INVOICES AND NON-FURNISHING OF ACCOUNTING INVOICES TO STPI/SEZ AUTHORITIES:-
This objection has been addressed by the co-ordinate bench in AY 2013-14 as under:-
(I) Arguments of Counsel have been captured by the Tribunal as under in AY 2013-14:-
“C.1 Ld. Counsel submitted that accounting invoices raised on associated enterprises and SOFTEX invoices are submitted to STPI/SEZ authorities. It has been submitted that the work contract received from group entities, are executed through STPI unit’s and finished work are exported there from, as evidenced in SOFTEX Forms. Referring to page 536 of paper book Volume 2, being SOFTES Form Ld. Counsel submitted that in Column-9, under ‘Type of software exported’, assessee selected, ‘Software development’. Referring to page 539 being part of SOFTEX form.
C.2. Ld. Counsel at this juncture, took us through written submission dated 7/12/2016, filed in paper book at page 416 of paper book, to demonstrate that, invoices raised could not be co-related with work carried out for a particular overseas client by assessee. Extract of procedure adopted by assessee as submitted in written submission dated 7/12/2016 are reproduced as under:
