Virtusa Consulting Services Pvt. Ltd. Vs DCIT (Madras High Court)
Conclusion: AO did conduct an enquiry, called for details, the details were produced and thereafter, the assessment was completed. Therefore, the finding of the PCIT was erroneous, consequently, assumption of jurisdiction under Section 263 was not sustainable. Also, there was no requirement in law to maintain separate books of account for claiming deduction under section 10A. However, since the deductions under these sections were available only to the eligible units, AO might call for such details or information pertaining to different units to verify the claim and quantum of exemption, if so required.
Held: In the instant case, PCIT proposed to set aside the assessment order by invoking his power under Section 263 on the ground that the profit percentage of 10A units was 24.6% as against 5.42% in non-10A units and the sales turnover of (>90%) was with its AEs only. Further, assessee-company had not maintained separate books of accounts for 10A units and in the absence of separate books of accounts for the 10A units, it was evident that assessee had shown lesser profit relating to non-10A units thereby, reducing the taxable profit by booking excessive expenditure. That it was stated that the average profit of 11.31% had been uniformly applied and the deduction allowed under Section 10A would have to be reworked accordingly, thereby, reducing the deduction under Section 10A, than what was claimed in the return of income. Therefore, in the opinion of the PCIT, the assessment order under Section 143(3) was erroneous and prejudicial to the interest of Revenue on the ground that the profit margin of 10A units was very high, when compared to the profit margin of non-10A units. Further, the assessee had not maintained separate books of accounts for 10A units and therefore, the average profit had to be ascertained and uniformly applied and therefore, the deduction allowed under Section 10A of the Act had to be reworked. It was held that from the assessment order under Section 143(3), AO did conduct an enquiry, called for details, the details were produced and thereafter, the assessment was completed. Therefore, the finding of the PCIT in that regard was erroneous, consequently, assumption of jurisdiction under Section 263 was not sustainable. CBDT by Circular No.1/2013, dated 17.01.2013, issued clarification that there was no requirement in law to maintain separate books of account, the same could not be insisted upon. However, since the deductions under these sections were available only to the eligible units, AO might call for such details or information pertaining to different units to verify the claim and quantum of exemption, if so required. In terms of the above clarification, there was no requirement to maintain separate books of account. By Instruction No.17/2013 dated 19.11.2013, the Field Officers of the Department were advised to follow Circular No.1/2013 dated 17.01.2013, in letter and spirit. By Instruction No.3/2014, dated 14.03.2014, the Department Representatives and the Standing Counsel of the Department were directed to be informed about Circular No.1/2013, who appear for the Department before the Tribunal and the Court. Thus, Tribunal committed an error in not interfering with the order passed by the PCIT.
FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT
This appeal, filed by the appellant/assessee under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), is directed against the order dated 18.08.2017, passed by the Income Tax Appellate Tribunal ‘D’ Bench, Chennai (for brevity “the Tribunal”) in I.T.A. No. 1218/Mds/2016 for the assessment year 2010-11.
2. The appeal is entertained on the following substantial questions of law:-
“(i) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the jurisdictional validity of the revisionary proceedings initiated by the respondent given that the original assessment order passed by the AO is not erroneous as the AO has granted deduction claimed under Section 10A of the Act only after duly verifying the documents submitted during the course of original assessment proceedings?
(ii) Whether on the facts and in the circumstances of the case the Tribunal was right in law in concluding that in the absence of separate books of accounts being maintained for the 10A units, the deduction shall be computed based on the overall average profit margin of the appellant despite the provisions of Section 10A of the Act specifically provides for unit-wise computation of deduction? and
(iii) Whether in the facts and in the circumstances of the case the Tribunal was right in remanding the case back to Assessing Officer for fresh adjudication?”
3. The assessee is a company engaged in the business of software development. For the assessment year under consideration 2010-11, they filed their return of income on 27.09.2010, declaring a taxable income of Rs.52,87,83,933/- under normal provisions, after claiming deduction of Rs.79,13,24,379/- under Section 10A of the Act and book profit of Rs.1,37,13,42,888/-. The case was selected for scrutiny and notice dated 13.08.2013, was issued under Section 143(2) of the Act. A reference was made to the Transfer Pricing Officer (TPO) under Section 92CA of the Act for determining the Arm’s Length Price (ALP) of the international transactions entered into by the assessee with its Associated Enterprises (AEs).
4. The assessee would state that during the hearing, they had submitted all details as sought for by the Assessing Officer, vide submissions dated 26.02.2014. After verification of the documents placed before the Assessing Officer, the deduction claimed under Section 10A of the Act was recomputed after excluding the expenditure incurred in foreign currency and unrealised export proceeds from the export turnover of the assessee. The Assessing Officer came to the conclusion that the deduction allowed under Section 10A of the Act amounting to Rs.76,83,44,038/- was wrongly computed by considering the export turnover and the total turnover of the entire business of the assessee instead of considering the data pertaining only to 10A units. Accordingly, by invoking power under relating to non 10A units thereby reducing the taxable profit by booking excessive expenditure. The average profit of 11.31% has to be uniformly applied and the deduction allowed u/s 10A will have to be reworked accordingly, thereby reducing the deduction under Section 10A, than what is claimed in the return of income.
“The assessee is a software exporter having 10A units and Non-10A units. The turnover and profit ratio of 10A units and Non-10A units are as given below:-
