THE issue before the Bench is - Whether issuance of letters to authorities for proper administration of Income-tax Act, in exercise of its administrative and vigilance functions, can be equated with giving directions to the authorities for doing assessment in a particular manner. NO is the answer.
Facts of the case
A) The assessee company is engaged in the business of imparting computer education and training to clients in over thirty countries, including learning strategy, formulation, custom content development, technology, and out sourced services amongst the top ten fortune 500 companies. The assessee had filed its return claiming exemption u/s 10B on EOU units, which was accepted by the AO during assessment. CIT, while examining the claim of the assessee for exemption u/s 10B noticed that the AO in the order passed u/s 143(3) r/w/s 153A, had not examined the exemption claimed by the assessee u/s 10B. The CIT pointed out that the AO had failed to examine whether the different industrial units as claimed, actually existed independently or the same were only expansion of the existing business. The CIT also observed that no separate books of account were maintained for each unit eligible for exemption u/s 10B and common books of account of the entire business units were maintained and only at the end of the period, for the purpose of computing deduction/ exemption under the Act, the expenses were allocated to said units to prove from branches. He accordingly held that from the net profit rate of EOU eligible units u/s 10B was far in excess of those units, which were not eligible for exemption. Accordingly, the CIT by invoking his jurisdiction u/s 263, reversed the order of the AO.
B) The assessee while filing its return, had claimed the export to 15 parties but the AO chose to examine only 6 invoices out of 12 invoices raised on Kwetliso Holdings. During the course of assessment proceedings, the AO only called for the details of receipt of US$ 60,000 equivalent to Rs. 25,20,000/- received from M/s Kwetliso Holdings in respect of six invoices only and disallowed the same. The CIT however, invoking his jurisdiction u/s 263, interfered with the examination of AO and reversed the same.
C) The CIT noticed that during the year under consideration, the assessee had received interest income from deposits at Rs. 5,97,29,499/-, interest received from loans at Rs. 1,47,00,000/- and interest received from others at Rs. 5,64,24,251/-, coming to a total of Rs. 13,08,53,750/-. He noticed that in the return of income, assessee had not shown this income under the head “income from other sources”, but had reduced it from interest paid on loans amounting to Rs. 17,03,49,186/- and had charged the difference amount of Rs. 3,94,95,436/- to P&L A/c. In the reply filed before the CIT, the assessee had submitted that during the course of assessment proceedings the AO vide questionnaire directed the assessee to furnish details of interest paid and interest received. In response thereof, the assessee, vide furnished complete details of interest income and interest paid. It was further submitted that it could not be held that the AO did not examine the details of interest income and interest expenses. The assessee further stated that by netting off of interest income against interest payment, no prejudice was caused to the revenue.
The CIT, however, did not accept the assessee's contention and observed that AO had only asked about the details of interest income and interest payment but had never asked about netting off of these. He further observed that AO never examined that interest income should have been assessed under the head “income from other sources”. As regards the assessee's contention that assessee had not claimed any deduction u/s 10B on the entire interest income of Rs.13,08,53,750/-, the CIT pointed out that assessee was talking about interest income but no where it had taken the impact of interest expenses on the taxable income of the EOU as well as non-EOU units. He pointed out that if the assessee had charged the actual interest expenditure to the respective unit, the profit of those units would have been reduced accordingly. He submitted that interest income can only be adjusted against the interest payment only if there was direct nexus between the two. He pointed out that since the assessee was not in the business of finance, direct nexus between the two amounts could not be assumed and that aspect had to be examined by the AO. He, therefore, concluded that since the AO had not inquired into the actual interest expenditure, which was attributable to various business units, therefore, it was clear that the AO had not examined the issue while passing order u/s 143(3)/153A and allowed the entire claim of interest paid to be adjusted against interest income, without making necessary verification.
D) The assessee had borrowed various loans from financial institutions, on which interest of Rs. 17,03,49,186/- had been paid and claimed the same to be adjusted against interest income. However, the CIT observed that assessee had made various investments to the tune of Rs. 57.20 crores and also given various loans and advances etc. on which no interest had been charged. The CIT referred to the reply filed by the assessee, regarding maintenance of common pool of funds and pointed out that the contention of assessee was based on presumption. He pointed out that direct nexus between interest free funds and interest free advances had to be proved. Thus, AO was required to verify and examine this nexus in course of assessment proceedings, which the AO failed to do. He further pointed out that assessee also failed to prove that some borrowing were exclusively utilized for the purposes of business and not for granting interest free advances, even in its reply filed in response to show cause notice. Since AO failed to disallow the interest expenditure, therefore, the assessment order was erroneous and prejudicial to the interests of revenue. He, accordingly, restored the matter to the file of AO for fresh consideration.
E) The assessee during the year, had claimed course execution charges of Rs. 119,81,32,796/- as against the sum of Rs. 57,59,53,934/-claimed in the immediately preceding year. Thus, the assessee had returned more than 108% increase in the said expenses during the year under consideration. He further noted that in the corresponding revenues, there had not been any such proportionate increase. He pointed out that the AO failed to examine the reasons behind such steep increase while passing order u/s 153A and allowed the expenditure as claimed by the assessee without any verification. He referred to the reply filed by the assessee wherein it was pointed out by the assessee that query regarding course execution expenses was raised by the AO and it was replied by the assessee that course execution charges comprised mainly payment to licensees towards execution of courses at Satellite Centers (STCs) and Network Centers (NWCs) as well as payment to M/s Sylvan Prometric for online testing of Microsoft certified courses, copywriting, editing translation and certificate writing mean for student. The CIT pointed out that in the questionnaire, the AO had not raised any specific question on this issue. The CIT pointed out that AO had not enquired about the reasons for steep rise in the course execution expenses. Therefore, he set aside the assessment order to AO for fresh consideration.
F) The assessee had assailed the finding of the CIT in holding that since the asessee had paid technical service fee to various nonresidents without deduction of tax at source and the AO having failed to examine the said issue, the order of the AO in this regard was erroneous and prejudicial to the interest of the Revenue. The assessee had further assailed that the CIT failed to appreciate that since under the alleged AMC contracts, the assessee had only received upgrades to software and had not received any technical service from the non-resident, the consideration paid was not subject to tax withholding u/s 195. The CIT noticed from the perusal of appraisal report that apart from import of software, assessee had to effect remittance towards “Annual Support/ Maintenance Charges” (SMC) to M/s Ansys Inc. USA, M/s Mechanical Dynamics USA, M/s Mentor Graphics Pvt. Ltd., Singapore, M/s Kokums Corporate Sweden etc. The CIT was of the opinion that payments made were on account of technical support service rendered to Indian customers in the form of annual maintenance charges.
The CIT after considering the assessee's submissions observed that softwares were supplied to customers in India and the maintenance of software was being done free of cost by overseas seller for initial few months. Thereafter, the Indian buyer had to pay for technical support service rendered to Indian customers in the form of annual maintenance charge. He observed that remittance of annual support fee / maintenance charges to the overseas suppliers was subject to withholding tax @ 20%. However, AO erred in accepting the contention that amount was paid for import of Software upgrades only, without any reason specified/ verification of the related documents by him to reach to this conclusion. He further observed that AO neither cross verified the facts from the concerned persons, nor recorded their statements, before arriving at any conclusion. The payments made for Annual Maintenance Contract (AMC)/rendering of technical services was taxable in India in the hand of overseas suppliers. Therefore it was statutory obligation on the assessee part to deduct the tax at source u/s 195, before crediting payment to overseas suppliers. As the assessee had failed to deduct tax at source the entire payment is disallowable u/s 40(a). The CIT, accordingly, held that the assessment order was erroneous as no proper inquires were made and prejudicial to the interests of revenue.
G) The CIT noticed from the assessment records that AO accepted the contention that the software titled ‘Net Varsity' was imported by M/s NIIT Delhi from NIIT USA in June 1997 and as such related to the period not covered u/s 153A. He further noticed that AO allowed depreciation on the WDV amount of the software overlooking various evidences on record which showed that ‘Net Varsity' was indeed developed in India by Centre for Research in Cognitive Systems (CRCS), which is partnership venture between NIIT/ assessee and IIT, Delhi. He further pointed out that even the website of NIIT, Delhi displayed the fact that ‘Net Varsity' was an example of research and development work of CRCS that had developed into a business for NIIT.
H) The CIT by issuing a show cause notice, pointed out that there were evidences on record which suggested that in FY 2001-02 the import of CBTs from NETg (UK) were not genuine commercial transactions. Obsolete, out dated and non saleable CBTs were imported in India after expiry of agreement between NIIT and NETg in order to remit money to NETg for payment of royalty.
Having heard the parties, the Tribunal held that,
Exemption u/s 10B vis-à-vis power u/s 263
++ as far as assessee's challenge to findings of the CIT in regard to setting aside the issue of eligibility of claim for exemption u/s 10B is concerned, admittedly the deduction u/s 10B was being claimed and allowed to assessee since A.Y 1994-95. In response to the AO's notice, the assessee had furnished approvals received from STPI authorities of relevant states, where the EOU unit was established along with note on various business units including EOU units, the nature of operations carried out by them. It is seen that in the case of HCL Technologies Ltd. vs. ACIT, it was held that it is beyond the power of the AO to examine whether the undertakings were formed in the earlier years by splitting up or reconstruction of existing business. Therefore, this could not be held to be a case where AO had not applied his mind to the assessee's claim regarding eligibility u/s 10B and, therefore, this, in the opinion of this Tribunal, does not come within the revisionary powers of the CIT. Therefore, this Tribunal holds, as regards the eligibility of claim u/s 10B, the revisional proceedings taken were not in accordance with law;
++ as regards determination of assessee's claim u/s 10B, admittedly the AO had sought justification of allocation of various expenses like course execution charges, bad debts, legal and professional charges etc. exclusively to taxable units and not to non-taxable/ EOU units. It is evident from the reply that assessee only explained the methodology followed for allocation of expenses, but did not give any details of the expenses incurred by it under various heads and its distribution amongst respective units. With reference to details furnished regarding bifurcation of the expenses, the CIT has clearly demonstrated that as regards allocation of service group expenses there was no consistent basis viz. revenue of units/manpower of units. It cannot be disputed that without bringing all these basic details on record, the AO could not take any rational decision. Therefore, this issue comes within the ambit of lack of inquiry and not inadequate inquiry. The plea of assessee that auditors had examined the issue of allocation of expenses is also not acceptable because auditors only stated that indirect expenses had been allocated on appropriate basis. The AO was required to inquire as to what was the alleged appropriate basis and whether the same in principle, was followed or not. Thus, AO failed to bring even primary facts on record to justify his conclusion in accepting the assessee's claim particularly when assessee never provided any bifurcation of common expenses amongst EOU and non EOU units. Thus, AO failed to examine whether the expenses had been distributed in proportionate manner on the basis of some specific and scientific basis between EOU and non EOU units;
++ as regards the plea of assessee on the basis of doctrine of merger in principle, this Tribunal does not agree with the counsel's submission that if a particular aspect permeates through all the A.Ys within the block period then, if, in one year the issue has been examined by the CIT(A), then doctrine of merger will not apply to other A.Ys. However, the CIT has clearly demonstrated that the issue of allocation of expenses was not examined in A.Y 2001-02. In view of this discussion, this Tribunal concur with the finding of the CIT on this issue. The next objection of the CIT was that the assessee was not maintaining separate books of account for each eligible undertaking. The assessee's submission was that the accounts were maintained through FAMS/ SAP software, which contained separate code for each head of expenditure and for each of the units of the assessee. It is found that this reply of assessee was sufficient enough for dropping the objection raised on this count by the CIT. This Tribunal accordingly, reverses the finding of CIT on this aspect;
Exported TRM vis-à-vis Interference u/s 263
++ as regards assessee's claim of exported technical reference material (TRM) to certain parties, it is observed that if the AO accepts the details furnished by assessee without proper inquiry as to the basic aspects involved in a particular case, then it is a case of lack of inquiry. The assessee's reply that from some licensees, assessee was charging technical know-how fees, was a relevant fact, which should have prompted the AO to examine in detail all the invoices raised by assessee in respect of export of TRM. The AO did not point out as to from which licensees the assessee had received technical know-how fee particularly, when he was of the opinion that assessee was camoflouging such fee with alleged export of TRM. The AO failed to conduct the basic and preliminary inquiry with regard to nature of the so called export revenue. The AO had disallowed the claim of Rs. 25.20 lacs on the ground that the amount received from Kwetliso Holdings was in lieu of technical know-how fees as opposed to export of technical reference material Softec. There seems no substance in the submission of counsel for assessee that it is a case of merger with CIT(A)'s finding because CIT(A) deleted the disallowance made by AO. The same finding will be relevant only with reference to the invoices considered by AO and not with respect to invoices in respect of rest of the parties. This Tribunal accordingly upholds the order of CIT on this aspect;
++ as regards non allocation of foreign exchange fluctuation loss to EOU unit, it is seen considering the fact that assessee was having EOU and non EOU units and was regularly exporting the software and getting the profits in foreign exchange, it was incumbent upon the AO to at least bring the primary facts on record so as to reach the level of satisfaction where he could come to the correct conclusion as to whether the foreign exchange loss pertained to EOU or non EOU units. This Tribunal therefore, sustains the finding of CIT on this count;
Interest income vis-à-vis Jurisdiction u/s 263
++ it is evident that the assessee had returned the interest income of Rs. 13,08,53,750/- as income from business. The very amount of receipt should have prompted the AO to resort to detailed inquiry on this issue. It is settled law that the order is prejudicial to the interest of revenue if AO does not apply correct position of law to the facts of the case. If the income was assessable under the head “Income from other sources”, but was returned as “Income from business”, then it could not be said that even if on ultimate analysis no loss is caused to the revenue, the order is not prejudicial to the interest of revenue. The phrase “Prejudicial to the interest of revenue”, does not imply only monetary loss, but also includes wrong application of law to the facts of the case. The assessee had netted this interest income against the interest expenditure of Rs. 17,03,49,186/-. This claim of netting off of interest made by assessee was accepted by the AO without examining the primary details regarding nexus of interest received against interest paid. It is clear that interest expenditure incurred for the purpose of business could be adjusted against business profits and not against income from other sources and, therefore, the AO was required to examine this aspect;
++ further, when assessee was claiming exemption u/s 10B in respect of certain EOUs, it was incumbent upon AO to carry out basic inquiry as to against which business unit expenses were to be allocated. There is nothing on record to suggest that this issue at all was examined by AO. The lack of necessary inquiries being made by AO resulted in passing of an erroneous order, which was prejudicial to the interest of revenue. This Tribunal accordingly, sustains the findings of CIT on this count;
Interest free advances
++ looking to the amount involved in respect of payment of interest on borrowed funds, aggregating to Rs. 17,03,49,186/-, the AO was required to at least bring on record the primary facts whether the funds were used for business purpose or for advancing interest free loans. The AO did not carry out any inquiry so as to come to the conclusion that the interest free advances were out of interest free funds. The submission advanced by assessee for the first time before the CIT was that it was having mixed fund and, therefore, the presumption was that the borrowed interest bearing funds were utilized for business purposes and the advances or loans and investments were to be presumed to have come out from interest free funds available with the assessee. There is no quarrel with this proposition in principle. But the AO was required to bring at least primary facts on record before applying this proposition to the facts of assessee's case. He had to at least consider whether there were sufficient interest free funds available with assessee or not. The AO had merely called for the details of interest received and paid, but did not examine this issue from the legal point of view. Thus, it was completely a case of non-application of mind by AO;
Course execution charges
++ it is seen that the CIT has observed that the query regarding course execution charges was raised by the AO and was replied by the assessee, wherein it was stated that course execution charges comprised mainly of payment to licensees towards execution of courses at Satellite Centres (STC) and Network Centres (NWCs) as well as payments to M/s Sylvan Prometric for online testing of Microsoft certified courses, copywriting, editing translation, certificate writing mean for student etc. However, the CIT did not take into consideration the further query raised by AO, wherein he has specifically required the assessee to give justification for increase, inter alia, in course execution expenses. This was duly replied by assessee, wherein assessee, inter alia, specifically pointed out as to why the percentage of expenses worked out 30-32% as compared to 22% in the FY 1997-98. Therefore, the very premise of the CIT, in holding the order as erroneous and prejudicial to the interest of revenue, does not survive. Once the AO had applied his mind to this issue, then at best this issue could be held to be a case of inadequate inquiry and, therefore, the CIT was required to give his findings as to how the assessment order was erroneous and prejudicial to the interest of revenue. The CIT has not given any such finding and, therefore, this Tribunal is not inclined to accept the finding of CIT on this issue;
AMC Charges vis-à-vis tax at source u/s 195
++ it is true that if import documents were available then normally the same cannot be doubted but where during course of search such documents are found which show that the actual state of affair may be different, then AO is required to go deep into the issue to find out the real state of affair. Under such circumstances, he is not supposed to simply accept the documents at its face value. He cannot abrogate his findings as an investigator. Therefore, the fact remains, whether the AO correctly appreciated the evidence found during course of search proceedings or not. The moot point for consideration is whether AO carried out necessary enquiries necessitated in the facts and circumstances of the case. Upon closely examining the queries raised by AO on different dates, it is found that queries raised were duly replied by assessee. In its query letter the AO specifically stated that assessee was acting as distributor but the distributorship agreement was not brought on record by assessee. It is pertinent to note that the AO had referred to various documents leading to conclusion that the payments were towards AMC. In regard to payment to M/s Conversant Group Corporation, the AO had referred to agreement and note of Rajesh Mathur to NIIT GIS Ltd. The assessee in its reply did not give specific replies on these counts and only gave a general reply. Similarly, AO had raised specific queries with respect to M/s Relativity Technologies and payment to M/s Prosoft Training Company. The assessee did not give specific replies and yet AO accepted the replies without assigning any reason. The AO was required to give proper reasoning before coming to any conclusion. This aspect definitely can be examined by the CIT because if AO has not properly appreciated the facts on record, which is demonstrated by the CIT in his order, then the CIT can resort to revisionary proceedings u/s 263;
++ it is found that the CIT has given his finding with reference to various e-mails to come to the conclusion that bogus purchase orders were raised to remit money for AMC contract. Therefore, it is clear that AO had not arrived at a rational conclusion. He has merely accepted the assessee's plea on this issue without proper scrutiny of documents found during the course of search. This Tribunal accordingly, confirms the order of CIT setting aside the assessment order on this issue and restores the matter to the file of AO for fresh consideration;
Depreciation on Net Varsity
++ the allowability of depreciation had to be considered from two perspectives. Firstly, whether the asset is owned by assessee and secondly whether it was put to use or not for business purpose. Normally if in one year depreciation has been allowed on an asset then, unless the asset is removed from block of asset, depreciation cannot be denied. However, when in course of search certain documents are found which show some contrary state of affair, then it is incumbent upon AO to examine those facts to arrive at proper conclusion. Else the whole purpose of passing the assessment order under section 153A would frustrate. There is no law which prohibits the AO to examine the evidence found in course of search and disallow depreciation in subsequent year, if the same is not legally allowable;
++ in the present case, the AO raised specific queries and after examining the replies filed by assessee concluded that assessee's claim was allowable. He was required to give findings with proper reasoning with reference to queries raised by him mainly on the basis of appraisal report prepared by Investigation Wing. The AO was required to record a finding how the allegation of ‘Net Varsity' software being developed in India, on the basis of details found at web site of NIIT were met by assessee and whether the same was duly rebutted asessee or not. The AO was also required to give his specific findings with reference to queries raised by him in connection with e-mail from Mr. Nicholas George to Ms. Nilangana Paul. It is seen that the findings of Enforcement Directorate were recorded on 30 th Apr, 2004 and search took place on 10 th Nov, 2004. Therefore, though ED's findings could not be ignored, but they had to be considered by AO along with material found during course of search. This Tribunal therefore, uphold the order of CIT on this issue;
TDS on remittances vis-à-vis payment of royalty
++ it is seen that the primary reason for exercising revisionary jurisdiction by CIT was on the ground that AO failed to examine the real motive and purpose for which amount was remitted to NETg. The assessee's claim for making payments towards import of CBT's came within shadow of doubt in view of e-mails exchanged between responsible employees of NIIT, found in course of search, which suggested that the payment was made towards royalty in the garb of purchases of CBT's. The statements recorded of various employees also pointed to this aspect. It cannot be denied that true character of payment to NETg had wide revenue implications. Therefore, it was incumbent upon AO to record specific findings with reference to the e-mails and statements keeping in view the reply filed by assessee. Merely accepting the reply without proper reasoning cannot be countenanced;
++ the AO performs quasi judicial functions and, therefore, has to comply with the basic canons of judicial process. Further, the AO should have become more investigative when his queries regarding sales of CBT's were not suitably replied by assessee, inasmuch as no stock of CBT's was found with K.K. Lubricant to whom alleged sales aggregating to Rs. 7.98 crores were made. No satisfactory explanation was given by Director K.K. Mittal. Then a further aspect of date of PO being subsequent to the date of agreement between NETg and APTECH, which under almost similar terms of agreement was paying royalty to NETg, should have prompted the AO to specifically deal with these queries. At this juncture assessee was not entitled to sell CBT's imported from NETg. Obviously AO should have recorded his findings on nature of payment made. Further, the statements of Shri Rajiv Tayal VP of Marketing in NIIT Ltd. confirmed that NETg was not allowing NIIT to buy new titles. If this was the state of affair, the AO was required to record a finding as to how PO's were raised and why payments made. Then a further aspect on which AO should have recorded his findings emnated from statement of Shri Ajai Wahi and Shri Katyal. As per their statement the payment was made towards minimum purchase commitment of USD 182500. But actual payment was for USD 207785 and further if NETg discontinued its relationship with NIIT then why did it insist on a minimum purchase commitment;
++ the assessee did not give any proper explanation for huge stock lying of Rs. 3.37 crore in Feb. 2001 and, still assessee imported. Further, when terms of payment were in proportion to sales, AO should have recorded specific findings for accepting assessee's explanation. The e-mails suggested that the real motive and purpose of remittance was to make payment of royalty and not to pay for the import of an outdated computer based training product (CBTs). The AO erred in accepting the import as genuine. During search operations certain e-mails were found and the statement of employees was gathered. The detailed scrutiny of these e-mails was necessary to find out the true import of the emails as to whether the payment made was towards royalty or towards purchase of software. The counsel submitted that payment made to NETg was in terms of distributorship agreement and in respect of physical import of CBTs only for which invoices relating to import were produced before AO. However, in course of search proceedings, certain evidences were brought on record, which suggested a contrary state of affair and, therefore, it was incumbent upon the AO to resort to detailed inquiry and not accept the assessee's contention based on documents available with it on the basis of which it had earlier advanced its claim. Proper appreciation of evidence on record is sine qua non under such circumstances. Merely bringing the evidence on record without proper appreciation of import of such documents cannot be said to be a case of proper inquiry. Under such circumstances, the CIT was fully justified in restoring the matter to the file of AO. In view of this, this Tribunal concurs with the finding of CIT in restoring the matter to AO as it falls within the ambit of lack of inquiry.
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