HONEYWELL AUTOMATION INDIA LTD (FORMERLY KNOWN AS TATA HONEYWEL LTD.), Pune v. DCIT,Cir.7, Pune

ITA 401/PUN/2007 | 2001-2002
Pronouncement Date: 07-09-2011 | Result: Partly Allowed

Appeal Details

RSA Number 40124514 RSA 2007
Assessee PAN AAACT3904F
Bench Pune
Appeal Number ITA 401/PUN/2007
Duration Of Justice 4 year(s) 5 month(s) 23 day(s)
Appellant HONEYWELL AUTOMATION INDIA LTD (FORMERLY KNOWN AS TATA HONEYWEL LTD.), Pune
Respondent DCIT,Cir.7, Pune
Appeal Type Income Tax Appeal
Pronouncement Date 07-09-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted A
Tribunal Order Date 07-09-2011
Date Of Final Hearing 08-07-2011
Next Hearing Date 08-07-2011
Assessment Year 2001-2002
Appeal Filed On 14-03-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A PUNE BEFORE SHRI SAILENDRA KUMAR YADAV (JM) AND SHRI D. KARUNAKARA RAO (AM) ITA NO. 401&402/PN/2007 (AYS : 2001-02 & 2002-03) HONEYWELL AUTOMATION INDIA LTD ( FORMERLY TATA HONEYWELL LTD) 56&57 HADAPSAR INDUSTRIAL ESTATE HADAPSAR PUNE 411 013 PAN : AAACT3904F .. APPELLANT V. DCIT CIRCLE 7 PUNE 411 004 . RESPONDENT APPELLANT BY : SHRI DP BAPAT CA RD ONKAR CA RESPONDENT BY : SHRI HARESWAR SARMA CIT DR ORDER PER D. KARUNAKARA RAO AM THERE ARE TWO APPEALS UNDER CONSIDERATION FOR THE A YS 2001-02 AND 2002- 03. THE ISSUES ARE COMMON AND THEREFORE WITH THE C ONSENT OF THE PARTIES WE HAVE DECIDED TO TAKE UP THE APPEAL NO 401/PN/2007 F OR ADJUDICATING BOTH THE APPEALS AS THE GROUNDS FACTS AND THE ARGUMENTS OF THE PARTIES ARE ESSENTIALLY COMMON. APPEAL NO 401/PN/2007 IS FILED BY THE ASSESSEE AGAI NST THE IMPUGNED ORDER OF THE CIT(A)- III PUNE DATED 29-12-2006 FO R THE A.Y. 2001-02. THE GROUNDS OF THE APPEAL WITH THE CONCISE GROUND 1 RE AD AS UNDER: 1. WHETHER THE LOWER AUTHORITIES WERE JUSTIFIED IN REJECTING THE BOOKS OF ACCOUNTS AND IN ESTIMATING THE AMOUNT OF DEDUCTION UNDER SECTION 10A TO RS 5 69 99 894 BEING 50% OF THE COST AS AGAINST THE AMOUNT CLAIMED BY THE ASSESSEE OF RS 11 95 79 294/-. 2. THE LD CIT(A) HAS FURTHER ERRED IN UPHOLDING DISALL OWANCE OF PROVISIONS OF RS 51 53 103 TOWARDS LEAVE ENCASHMENT . 3. THAT INTEREST U/S 234D OF THE ACT IS CHARGEABLE FOR THE PERIOD BEGINNING FROM 1.6.2003. 2. BRIEFLY STATED RELEVANT FACTS OF THE CASE FOR TH E AY 2001-02 ARE THAT THE ASSESSEE FORMERLY CALLED TATA HONEYWELL LTD AND BEING A LISTED COMPANY HAS BEEN JOINTLY PROMOTED BY HONEYWELL INC . USA AND TATA GROUP IN INDIA EACH OF WHOM HELD 40% OF THE PAID-UP SHARE C APITAL OF THE COMPANY IN THE RELEVANT FINANCIAL YEAR AND THE BALANCE 20% WAS HELD BY THE PUBLIC. 2 ASSESSEE HAS MULTIPLE SEGMENTS OF THE BUSINESS. ONE SEGMENT OF THE BUSINESS CARRIED ON BY THE ASSESSEE IS OF DESIGNING SUPPLY/ERECTION OF AUTOMATION EQUIPMENTS MAINLY TO THE CUSTOMERS IN IN DIA. THE REVENUES DERIVED FROM THIS SEGMENT ARE NOT ELIGIBLE FOR EXEMPTION/DE DUCTION UNDER SECTION 10A. THE OTHER SEGMENT OF BUSINESS IS PROVISION OF ENGIN EERING/DESIGNING SERVICES RELATING TO INDUSTRIAL/BUSINESS AUTOMATION SYSTEMS TO OVERSEAS CUSTOMERS (SUBSTANTIALLY TO HONEYWELL ASSOCIATES) FROM SET-UP IN SOFTWARE TECHNOLOGY PARKS (STP) IN PUNE AND IN CHENNAI. THE REVENUES FROM TH IS SEGMENT OF BUSINESS ARE CLAIMED EXEMPT UNDER SECTION 10A OF THE ACT. ASSESS EE FILED THE RETURN OF INCOME ON 31.10.2001 DECLARING THE TOTAL INCOME OF RS 4 24 16 268 AFTER CLAIMING EXEMPTION UNDER SECTION 10A FOR THE STP UN ITS AMOUNTING TO RS 11 95 79 294/-. ASSESSEE REVISED THE INCOME TO RS 5 41 17 010/- BY FILING REVISED RETURN OF INCOME. DURING THE SCRUTINY PROCEEDINGS AO NOTICED CERTAIN ERRORS IN THE BOOKS OF ACCOUNTS WITH REFERENCE TO THE ALLOCAT ION OF EXPENSES TO THE STP UNITS AND OTHERS AND THUS AO INVOKED THE PROVISION S OF SECTION 145 OF THE ACT. 3. RELEVANT QUESTIONABLE PARAMETERS FOR THE AO ARE GIVEN INTHIS FOLLOWING TABLE AS UNDER: SEGMENT WISE TURNOVER AND PROFITS FOR THE YEAR (RS. IN CRORES) --------------------------------------------------- --------------------------- DOMESTIC STP UNIT TOTAL TURNOVER 258.8 0 17.09 RS 275.89 PROFITS AS PER COMPUTATION OF INCOME 5.41 11 .95 RS 17.36 PERCENTAGE OF PROFIT ON SALES 2.09% 69.92% 6.29% PERCENTAGE OF PROFIT ON COST 2.13% 232.49% 6.71% RESULTANTLY THE AO MADE ASSESSMENT OF ITS INCOME B Y DETERMINING THE TOTAL INCOME AT RS 15 05 05 103/- AS AGAINST THE REVISED INCOME OF RS 5 41 17 010/-. THUS THE REJECTION OF THE BOOKS OF ACCOUNTS AND RE VISING OF THE INCOME OF THE STP UNITS AND CONSEQUENT EFFECTS ARE THE AREAS OF D ISPUTES. 4. REGARDING THE REJECTION OF THE BOOKS OF THE ASSE SSEE AO FOUND VARIOUS DISCREPANCIES IN THEM THAT HAS AN EFFECT OF INCREAS ING OF THE PROFITS OF THE ELIGIBLE UNDERTAKINGS. THE FACTS BROUGHT OUT BY THE AO FOR C ONCLUDING THE BOOKS ARE NOT RELIABLE ARE DISCUSSED IN PARA 2.3 OF THE ASSESSMEN T ORDER AND THE SAME ARE EXTRACTED BELOW. 2.3...... WRONG ALLOCATION OF MANPOWER COSTS: 3 2.3.1. IT WAS ALSO NOTICED IN THE PROFIT AND LOSS ACCOUNT SUBMITTED FOR THE STP UNITS THAT THE TOTAL SALARY WAGES ETC. FO R THE TWO UNITS AMOUNTED TO RS.4.65 CRORES OUT OF WHICH ONLY 45.7% AMOUNTING TO 2.12 CRORES WAS ALLOCATED TO THE STP UNITS AND REMAINING WAS TAKEN TO THE DOM ESTIC BUSINESS OF THE ASSESSEE. THE ASSESSEE WAS THEREFORE ASKED TO EX PLAIN THIS DISCREPANCY AND THE BASIS OF ALLOCATION OF MANPOWER COSTS TO STP UN ITS. 2.3.2. IN RESPONSE THE ASSESSEE HAS FILED LETTER D T.26-2-2004 IN WHICH IT WAS STATED AS UNDER. THE TOTAL EXPENDITURE ON SALARIES AND WAGES FOR B OTH CHENNAI AND PUNE UNITS ARE RS.465 LACS. AS EXPLAINED TO YOU DURING THE COURSE OF OUR HEARINGS IN THIS FINANCIAL YEAR IN ORDER TO ENSURE A GREATER S YNERGY AND SHARING OF BEST BUSINESS PRACTICES ETC. THE DOMESTIC ENGINEERING GROUP WAS ALSO PHYSICALLY SITTING ALONG WITH EXPORT ENGINEERING GROUP. THE I NTENTION WAS TO SHARE THE BEST PRACTICES BETWEEN DOMESTIC AND GLOBAL ENGINEERING S ERVICES. HOWEVER WE WERE NOT VERY SUCCESSFUL IN THIS EXPERIMENT RESULTING I N A LARGE CUSTOMER DISSATISFACTION ISSUE DUE TO WHICH THIS GROUP WAS DEMERGED FROM F.Y.2001-02 ONWARDS. IN THE FINANCIAL ACCOUNTING SYSTEM FOR SA LARY THIS GROUP WAS GIVEN ONE COMMON DEPARTMENT CODE. IN ORDER TO COPE THE EXPEN SES ATTRIBUTABLE FOR THE EXPORT OF SERVICES WE HAVE IDENTIFIED THE TOTAL MA N-HOURS THAT WERE BILLED BY THIS GROUP FOR BOTH DOMESTIC AND EXPORT SERVICES. THE S ALARY EXPENSES PERTAINING TO STP1 WEE TAKEN IN THIS RATIO. WE HAVE A PRIMAVERA SOFTWARE PACKAGE WHICH IS BASICALLY USED FOR PROJECT SCHEDULING AND TIME TRAC KING. BASED ON THE PRIMAVERA DATA THE MAN-HOURS ATTRIBUTABLE TO STP1 WERE COMPU TED. THE DETAILS ARE ATTACHED IN ANNEXURE VII. WHILE DOING THIS SUPERVISORY AND IDLE TIME MAN-H OURS WERE NOT CAPTURED. HENCE THE ALLOCATION OF SALARY TO THE E XTENT OF THIS HAS BEEN UNDERSTATED. WE BELIEVE THAT IDLE TIME/SUPERVISORY MAN-HOURS ARE AROUND 10% TO 151% OF THE TOTAL MAN-HOURS AVAILABLE. HENCE IT WOULD BE FAR TO ASSUME THAT THE SALARY COSTS ATTRIBUTABLE TO STP1 ARE UNDERSTAT ED TO THE EXTENT OF 15% AND WHAT SHOULD HAVE GOT CHARGED TO STP1 WAS AROUND 54% OF THE SAME WHICH TRANSLATES APPROXIMATELY TO RS.38 LACS. 2.3.3. IT WAS THUS ADMITTED THAT SALARY COST TO TH E EXTENT OF 15% WAS NOT ALLOCATED TO STP UNITS WHICH AMOUNTED TO APPROX IMATELY TO RS.38 LACS. ALTHOUGH VIDE ORDER SHEET ENTRY DT.17-2-2004 SHRI SOWNI HAD ADMITTED THAT AROUND 75% OF THE TOTAL SALARY COST WOULD BE A FAIR ALLOCATION TO THE STP UNITS- DIFFERENCE WORKING UT TO RS.1.36 CRORES. 2.4 WRONG FIGURES OF MAN-HOURS TAKEN : 2.4.1. THE EXTRACT OF DATA FROM PRIMAVERA SOFTWARE FOR F.Y.2000-01 SUBMITTED BY THE ASSESSEE IS AS UNDER. TOTAL CEE EMPLOYEES (INCL.CONTRACTS) 169 TOTAL AVAILABLE MH FOR PER WEEK 373490 BILLABLE MH FOR EXPORTS 177741 BILLABLE MH FOR DOMESTIC 150931 TOTAL BILLABLE MH 3328672 NON BILLABLE MH 44666 NON BILLABLE DEFAULT ACTIVITIES 52 TOTAL NON BILLABLE MH 44818 2.4.2. FROM THE ABOVE IT IS SEEN THAT THE TOTAL B ILLABLE HOURS FOR EXPORTS WERE SHOWN AT 1 77 741 WHEREAS IN THE PROFIT AND LO SS ACCOUNT FOR THE STP UNITS THEE HOURS WERE TAKEN AT 1 71 000 AS PER NOTE NO.4. THE OTHER FIGURES REGARDING THE NUMBER OF EMPLOYEES AND TOTAL NUMBER OF MAN HOUR WERE THE SAME. IT IS THUS NOTICED THAT THE PERCENTAGE OF MA N HOURS SPENT ON STP WORK FOR THE COST ALLOCATION TO STP UNITS WAS UNDERSTATE D IN THE PROFIT AND LOSS ACCOUNT AT 45.7%. VIDE ORDER SHEET ENTRY DT. 11-3-2004 SH RI SOWANI ACCEPTED THAT THIS 4 WAS A MISTAKE AND BY ADOPTING THE CORRECT AN HOURS AS PER PRIMAVERA SOFTWARE I.E. 1 77 741 HOURS THE SALARY COST ALLOCABLE TO T HE STP UNITS WOULD GO UP. 2.5. WRONG ALLOCATION OF HI SPEC SALARIES : 2.5.1. IN ANNEXURE II TO THE PROFIT AND LOSS ACCOU NT OF THE STP PUNE UNITS IT IS SEEN THAT THE SALARIES RELATING TO EMPLOYEES WORKIN G ON HIGH SPEC JOBS AMOUNTING TO RS.31 57 109 WERE ALSO DIVIDED BETWEEN THE STP UNITS AND DOMESTIC BUSINESS IN THE RATIO 45.7% TO 54.3%. THE ASSESSEE WAS ASKED WHY THIS SALARY COST WAS APPORTIONED WHEN THE EMPLOYEES RELATING TO THE HIGH SPEC JOBS WERE ENGAGED ONLY FOR THE STP UNITS AND NOT FO R THE DOMESTIC BUSINESS OF THE ASSESSEE IN RESPONSE VIDE LETTER DT.10-3-2004 THE ASSESSEE ADMITTED THE MISTAKE AND STATED AS UNDER. IN THE SALARY AND WAGES GROUPING THE TOTAL HIGH SPECS SALARY COST IS RS.31.57 LACS. ERRONEOUSLY THIS AMOUNT HAS ALSO G OT APPORTIONED AT 45.7% ONLY TO THE STP UNIT. THE ENTIRE AMOUNT NEEDS TO BE CHA RGED TO THE STP UNIT AND AS SUCH THE DIFFERENT OF RS.17.14 LACS NEEDS TO BE FU RTHER DEBITED TO THE STP PROFIT AND LOSS ACCOUNT. IT IS THUS ADMITTED BY THE ASSE SSEE THAT THE STP PROFITS ARE OVER STATED BY RS.17.14 LACS. 2.6. WRONG CLAIM OF EXEMPTION U/S 10A FOR PROFIT ON REIMBURSEMENT OF TRAVEL EXPENSES. VIDE LETTER DT.26-2-2004 THE ASSESSEE HAS SUBMITT ED DETAILED REVENUE BREAKUP OF THE STP UNITS FOR A.Y.2001-02. IN THIS IT IS NOTICED THAT THE REVENUE OF RS.17.10 CRORES INCLUDES A SUM OF RS.54 LACS BY WAY OF DEBIT NOTE. VIDE ORDER SHEET ENTRY DT.4-3-2004 IT WAS EXPLAINED BY SHRI SOWANI THAT THIS REPRESENTED THE DISCOUNT GIVEN BY THE TRAVEL AGENT ON THE FOREIGN TRAVEL UNDERTAKEN BY THE EMPLOYEES OF THE COMPANY WHICH W AS FULLY REIMBURSED BY HONEYWELL INC. AT THE ORIGINAL BILL PRICE OF THE TR AVEL AGENT. HOWEVER BY LETTER DT.10-3-204 IT AS SUBMITTED AS UNDER. IN OUR SUBMISSION DT.26-2-2004 WE HAD STATED THAT THE AMOUNT OF RS.54 LACS IS RECEIVED TOWARDS THE REIMBURSEMENT OF EXPEN SES AND INCLUDED IN THE TOTAL REVENUE. AS EXPLAINED TO YOU THE DEBT N OTES FOR REIMBURSEMENTS ARE RAISED BY US COMPLETION OF INDIV IDUAL TOURS AS OF 31 ST ARCH EVERY YEAR. THERE ARE UNFINISHED TOURS FOR WH ICH DEBIT NOTES ARE NOT RAISED AS A MATTER OF CONSISTENT ACCOUNTING PRACTIC E. THE COMPANY TREATS THE EXPENDITURE AS COSTS INCURRED AND DOES NOT CLAS SIFY SUCH COTS AS PRE- PAID EXPENSES. IN THE SUBSEQUENT YEAR WHEN THE DEB T NOTES ARE RAISED THE INCOME GETS ACCOUNTED. THIS PHENOMENA DOES NOT RESULT IN ANY EXCESS INCOME/COSTS IN ANY PARTICULAR YEAR AS THIS HAPPENS EVERY YEAR AND THE SAME PRACTICE IS FOLLOWED CONSISTENTLY EVER Y YEAR. 2.6.2. IT WAS THUS CLAIMED THAT THE SUM OF R.54 LA CS WAS NOT A DISCOUNT GIVEN BY THE TRAVEL AGENT AS EXPLAINED EARLIER BUT IT REPRESENTED HE DIFFERENCE BETWEEN THE RAVEL COSTS DEBITED TO THE STP PROFIT A ND LOSS A/C AND THE REIMBURSEMENTS CREDITED. THUS IT AS THE EXCESS OF REIMBURSEMENTS OVER THE TRAVEL COSTS INCURRED BY THE COMPANY FOR THE YEAR. IT WAS A PROFIT RELATING TO THE STP UNIT BUT IT WAS NOT A PROFIT DERIVED BY THE UND ERTAKING FROM THE EXPORT OF COMPUTER SOFTWARE FOR WHICH EXEMPTION U/S 10A IS AV AILABLE. IN OTHER WORDS EXEMPTION ON HIS PROFIT WAS NOT ALLOWABLE U/S 10A A S IT IS NOT DERIVED FROM THE EXPORT OF COMPUTER SOFTWARE. SHRI SOWANI ACCEPTED THIS FACT VIDE ORDER SHEET ENTRY DT.11-3-2004. CONSEQUENTLY THE PROFIT ALLOW ABLE FOR EXEMPTION U/S 10A FOR THE YEAR WOULD GET REDUCED BY RS.54 LACS. 2.7. NO ALLOCATION OF LEARNING AND DEVELOPMENT EXPENSES: IN THE COMPENSATION REVISION PROPOSAL SUBMITTED BY THE ASSESSEE TO HONEYWELL INC. ON PAGE NO.3 IT IS SEEN THAT THE AS SESSEE COMPANY HAS CLAIMED 5 THAT TO CONTINUE DELIVERING GREATER VALUE TO HONEY WELL TATA HONEYWELL HAS BEEN INVESTING CONSIDERABLY ON LEARNING AND DEVELOPMENT AND CONTINUOUS SKILLS UPGRADATION. A BAR GRAPH ON THE SAME PAGE SHOWED APPROXIMATELY 975 AN DAYS SPENT ON LEARNING AND DEVELOPMENT. HOWEVER IN T HE PROFIT AND LOSS ACCOUNT RELATING TO STP UNITS NO COSTS RELATING TO LEARNIN G AND DEVELOPMENT HAVE BEEN DEBITED/ALLOCATED. VIDE ORDER SHEET ENTRY DT.4-3-2 04 SHRI SOWANI ACCEPTED THAT LEARNING AND DEVELOPMENT COSTS HAVE NOT BEEN ALLO CATED TO THE STP UNITS WHICH WAS A MISTAKE. VIDE ORDER SHEET ENTRY DT.11-3-2004 IT WAS STATED BY SHRI SOWANI THAT APPROXIMATE LEARNING AND DEVELOPMENT CO STS ALLOCABLE TO THE STP UNITS WOULD BE RS.6.52 LACS OUT OF RS.56.57 LACS O LEARNING AND DEVELOPMENT EXPENSES INCURRED FOR THE ENTIRE COMPANY. THIS ALL OCATION IS IN THE RATIO OF MANPOWER EMPLOYED IN THE STP UNITS TO THE TOTAL MAN POWER EMPLOYED IN THE COMPANY WHICH IS 98 OUT OF 850. THUS THE STP PRO FITS WOULD COME DOWN FURTHER BY RS.6.52 LACS. 2.8. NO ALLOCATION OF MANPOWER COSTS TOWARDS SA LE THROUGH PHYSICAL . IN THE DETAILED REVENUE BREAKUP SUBMITTED BY THE A SSESSEE VIDE LETTER DT.26-2-2004 IT IS SEEN THAT OUT OF THE TOTAL REVE NUE OF RS.17.10 CRORES REVENUE OF RS.27 LACS IS DUE TO SALE THROUGH PHYSICAL. A GAINST THIS SALE NO MANPOWER COSTS HAVE BEEN ALLOCATED AS THE NUMBER OF HOURS TA KEN FOR ALLOCATION WERE BASED ON THE OFFSHORE AND ON-SITE WORK ONLY. VIDE ORDER SHEET ENTRY DT.11-3- 2004 SHRI SOWANI ACCEPTED THAT SOME SALARY/MANPOWE R COST SHOULD FURTHER BE ALLOCATED TO THE STP UNITS AAINST THE SALE THROUGH PHYSICAL THE QUANTIFICATION OF WHICH WAS NOT POSSIBLE AT THIS ST AGE. IT IS SIMILARLY SEEN THAT THE MANPOWER COSTS RELATING TO THE NODCO SALES OF R S.1.79 CRORES AND OTHERS RS. 42 LACS IS SIMILARLY NOT BEEN DEBITED/ALLOCATE D IN THE STP PROFIT AND LOSS ACCOUNT. 2.9 DISCREPANCY BETWEEN ANNUAL REPORTS TO STP1 AND P&L ACCOUNT : AS STATED EARLIER THE ASSESSEE COMPANY IN THE CO MPENSATION REVISION PROPOSAL SUBMITTED TO HONEYWELL INC. USA HAD STATE D THE MANPOWER COSTS INCURRED DURING F.Y.2001-02 TO BE 28.62% OF THE TUR NOVER ACCORDING TO WHICH FOR THE CURRENT TURNOVER OF 17.10 CRORES THE MANPO WER COSTS SHOULD BE APPROXIMATELY RS.4.89 CRORES. HOWEVER THE MANPOWE R COSTS SHOWN IN THE PROFIT AND LOSS ACCOUNT ARE AT ONLY RS.2.96 CRORES. IN T HIS CONNECTION THE ASSESSEE WAS ASKED TO PROVIDE DETAILS OF THE INFORMATION/PER IODICAL REPORTS SUBMITTED BY THEM TO THE SOFTWARE TECHNOLOGY PARKS OF INDIA THE GOVERNING BODY OF THE GOVERNMENT OF INDIA RUNNING THE SCHEME UNDER WHICH THE ASSESSEE HAS CLAIMED EXEMPTION U/S 10A. COPIES OF ANNUAL REPORTS SUBMIT TED BY THE COMPANY FOR THE PUNE UNIT AND THE CHENNAI UNIT ARE ANNEXED O THE AS SESSMENT ORDER AS ANNEXURE 3 2.9.2 IN THIS REPORT THE WAGE BILL (FOR EXPORT AC TIVITY ONLY) IS STATED TO BE AS UNDER. WAGE BILL ( FOR EXPORT ACTIVITIES ONLY) STP PUNE UNIT RS.438.69 LACS STP CHENNAI UNIT RS. 12.62 LACS TOTAL RS. 511.31 LACS 2.9.3. IT IS THUS SEEN FROM THE REPORTS WHICH ARE DULY CERTIFIED BY A CHARTERED ACCOUNTANT THAT THE MAN-POWER COSTS RELA TING TO THE EXPORT ACTIVITIES ONLY ARE STATED TO BE RS.5.11 CR FOR THE CURRENT Y EAR AGAINST THE MANPOWER COSTS OF RS.2.96 CR SHOWN IN THE PROFIT AND LOSS AC COUNT. THIS FIGURE OF RS.5.11 CR WORKS OUT TO 29.8% OF TURNOVER WHICH TALLIES WI TH THE MANPOWER COSTS OF 28.62% STATED BY THE ASSESSEE COMPANY HONEYWELL INC . IN THE COMPENSATION REVISION PROPOSAL REFERRED TO EARLIER.... 6 2.9.4 IN THIS CONNECTION THE ASSESSEES EXPLANATI ON WAS CALLED FOR VIDE ORDER SHEET ENTRY DT.4-3-204. IN RESPONSE THE ASSESSEE FILED LETTER DT.10-3-2004 IN WHICH IT IS STATED THAT: AT THE END OF EACH FINANCIAL YEAR A RETURN IN TH E PRESCRIBED FORMAT IS SUBMITTED TO THE SOFTWARE TECHNICAL PARK OF INDIA STATING OUT CERTAIN DETAILS. THE DATA FOR THIS RETURN IS COMPL IED FROM THE ACCOUNTING SYSTEM. AS EXPLAINED TO YOU DURING THE FINANCIAL YEAR 200-01 THE ENTIRE ENGINEERING GROUP WAS ASSIGNED ONE BUSINESS UNIT CO DE IN THE ACCOUNTING SYSTEM. THE TOTAL COSTS ATTRIBUTABLE TO THIS BUSINESS UNIT CODE HAVE BEEN CONSIDERED BY THE CHARTERED ACCOUNTA NT FOR THE STP1 RETURN. THE MISTAKE IN THE RETURN HAS BEEN THAT SA LARY COSTS TOWARDS DOMESTIC ENGINEERING SHOULD HAVE BEEN EXCLUDED WHIC H WAS NOT DONE. AS SUCH THERE IS A DIFFERENCE BETWEEN THE PROFIT A ND LOSS ACCOUNT AND THE STP1 RETURN AS IN THE FORMER ONLY SALARY COSTS FOR EXPORT ENGINEERING HAS BEEN TAKEN INTO ACCOUNT. 2.9.5. IT IS THUS CLAIMED THAT THE WAGE BILL OR TH E MANPOWER COSTS OF THE STP UNITS HAS BEEN WRONGLY REPORTED TO THE S OFTWARE TECHNOLOGY PARK OF INDIA IN THE ANNUAL RETURNS SUBMITTED BY TH E ASSESSEE COMPANY. 2.10. ALLOCATION OF MANPOWER COSTS AND NO DTA S ALES : IT IS ALSO NOTICED THAT THE TOTAL SALARIES AND WAG ES SHOWN IN THE ANNEXURE II TO THE PROFIT AND LOSS ACCOUNT OF THE S TP UNITS COME TO RS.4.65 CR. OUT OF THIS ONLY 45.7% HAS BEEN ALLOCATED O THE SAT P UNITS AND REMAINING SALARY EXPENSES HAVE BEEN ALLOCATED TO THE DOMESTIC BUSINE SS OF HE ASSESSEE COMPANY. IT WAS STATED BY SHRI SOWANI THAT SUCH AN ALLOCATIO N HAS NEVER BEEN DONE N THE PAST NOR IN FUTURE AFTER THE A.Y.2001-02. IN THIS CONNECTION IT IS ALSO SEEN THAT THE STP UNITS ARE REQUIRED TO BE CUSTOM BONDED AND HE SALES MADE FROM THE STP UNITS IN THE DOMESTIC TARIFF AREA SHOULD BE REP ORTED SOFTWARE TECHNOLOGY PARKS OF INDIA. IN THE CURRENT F.Y. THE ASSESSEE C OMPANY HAS NOT REPORTED ANY DOMESTIC TARIFF AREA SALES TO THE SOFTWARE TECHNOLO GY PARKS OF INDIA. 2.11. ADMISSION BY THE ASSESSEE COMPANY : 2.11.1. FROM ALL THE ABOVE IT IS SEEN THAT THE ASS ESSEE HAS ADMITTED THE FOLLOWING ERRORS/MISTAKES WITH RESPECT TO THE MANPO WER COSTS ALLOCATED TO THE STP UNITS: SN PARTICULARS AMOUNT(RS.) 1. NON ALLOCATION AND IDLE TIME AND SUPERVISORY COS TS 38.0 LACS 2. WRONG ADOPTION AND BILLABLE MAN HOURS 8.38 LACS 3. WRONG ALLOCATION OF HIGH SPECS SALARIES TO DOMES TIC TO 17.14 LACS 4. WRONG CLAIM OF EXEMPTION U/S 10A ON PROFITS DUE TO EXCESS REIMBURSEMENT OF TRAVEL EXPENSES 54.0 LACS 5. NO ALLOCATION OF LEARNING AND DEVELOPMENT COSTS 6.52 LACS 6. NO ALLOCATION OF MANPOWER COSTS TOWARDS SALE THROUGH PHYSICAL -- ------------ TOTAL 124.04 LACS -------------- 2.11.2 THUS THE ASSESSEE COMPANY HAS ADMITTED TO HAVE ALLOCATED LESS EXPENSES OF STP UNITS BY RS.124.04 LACS OR THAT EXEMPTION U/S 10A HAS BEEN CLAIMED EXCESS TO THE EXTENT OF RS.124.04 LACS . BESIDES THE ASSESSEE COMPANY CLAIMED O HAVE REPORTED WRONG WAGE BILLS IN THEIR ANNUAL REPORT TO THE STPI AT RS.5.11 CRORES AGAINST MANPOWER COST OF RS.2.96 CR SHOWN IN PROFIT & LOSS ACCOUNT. 5. THUS PARA 2.22 AND ITS PARAGRAPHS INDICATE THAT THERE ARE MISTAKES IN THE BOOKS MAINTAINED BY THE ASSESSEE WHO ADMITTED THE SAME DURING THE ASSESSMENT PROCEEDINGS. THE QUANTITY OF SUCH INFLAT ION OF THE EXEMPT PROFITS IS 7 UNDISPUTEDLY KEPT BY THE AO AT 124.04 LAKHS. THUS THE AO REJECTED THE BOOKS OF ACCOUNTS WITH WHICH THE ASSESSEE IS NOW AGGRIEVE D BEFORE US AND THEREFORE THE FIRST LIMB OF THE GROUND 1 OF THIS APPEAL. WE S HALL TAKE UP THIS GROUND 1 WHICH HAS TWO LIMBS (I) REJECTION OF THE BOOKS AND (II) ASSESSMENT OF THE CORRECT AND ELIGIBLE PROFITS OF THE STP UNITS U/S 10A OF TH E ACT. THE ISSUE WISE ANALYSIS AND ADJUDICATION IN THE SUCCEEDING PARAGRAPHS. 6. REJECTION OF BOOKS OF ACCOUNTS : ON FINDING THAT THE ASSESSEE HAS BOTH DOMESTIC AND EXPORTS SEGMENTS THE AO COMPARED THE PROFIT PERCENTAGES OF THE BOTH THE SEGMENTS AND FOUND THAT THE PROFITS MARGIN S OF THE EXPORT SEGMENTS (STP UNIT) ARE EXORBITANTLY HIGH VIS AVIS THE DOMES TIC RESULTS. CONSEQUENTLY THE AO EXAMINED THE BOOKS OF ACCOUNTS AND MADE ENQUIRIE S AND FOUND CERTAIN MISTAKES IN THE ACCOUNTS OF THE ASSESSEE WHICH LED TO THE INCORRECT RESULTS OF THE PROFITS OF THE STP UNITS. THESE MISTAKES REVOLVE AR OUND (I) NON ALLOCATION OF IDLE TIME/SUPERVISORY COST; (II) WRONG ADOPTION OF BILLA BLE MAN HOURS; (III) WRONG ALLOCATION HI SPEC SALARIES; (IV) LEARNING & DEVELO PMENT COSTS; (V) ALLOCATION OF MANPOWER COSTS TOWARDS SALE THROUGH PHYSICAL (VI) N ON CONSIDERATION OF THE REIMBURSEMENT OF THE EXPENSES TO THE EXTENT OF RS 5 4 LAKHS ETC. THUS AS PER THE AO FAILURE TO MAKE PROPER DEBIT OF THE CORRECT EXP ENDITURE THE PROFITS OF THE STP UNITS ARE INFLATED. IN RESPONSE TO THE SAME TH E ASSESSEE ADMITTED THE SAME AND SUBMITTED THAT THESE MISTAKES ARE INADVERTENT A ND DUE TO SOFTWARE DEFICIENCIES. ASSESSEE MADE WRITTEN SUBMISSION IN T HIS REGARD AS DETAILED IN PARA 4.18 AND 4.19 OF THE IMPUGNED ORDER. THESE ARE EXTRACTED AS UNDER FOR COMPLETENESS OF THE ORDER. THEY ARE: 4.18 PURSUANT TO THE ENQUIRY MADE BY ME REGARDING THE MANNER IN WHICH THE ASSESSING OFFICER CAME TO ASCERTAIN THE EXACT AMOUN TS OF MISTAKES IN THE ALLOCATION OF EXPENSES AND THE CAUSATIVE FACTORS THEREOF FOLLOWI NG SUBMISSIONS HAVE BEEN FILED BEFORE ME IN THE COURSE OF APPELLATE PROCEEDINGS. A. NON-ALLOCATION OF IDLE TIE/SUPERVISORY COSTS ( P AGE 5 OF THE ASSESSMENT ORDER PARA 2.3) IN THE PROFIT & LOSS ACCOUNT OF THE STP UNIT THE SALARY COST WAS CHARGED OFF AT 45.7% OF THE TOTAL SALARY COST IN PROPORTION TO THE MAN HOURS WORKED FOR THE STP UNIT AS IN THE FINANCIAL ACCOUNTING SYSTEM ONE CO MMON DEPARTMENT CODE CAME TO BE ALLOTTED TO THE EMPLOYEES WORKING FOR STP AND NO N-STP UNITS. THE WORKING FOR THE SAME AS ALREADY PLACED BEFORE YOUR HONOURS VIDE OUR SUBMISSION DT.18 TH JUNE 2004 PAGE 9 IS REPRODUCED BELOW. PARTICULARS NOS/AMOUNT TOTAL NUMBER OF EMPLOYEES IN EXPORTS DEPARTMENT 169 TOTAL MAN-HOURS 3 73 490 (8.5 HRS/DAYS X 5 DAYS/WEEK X 52 WEEKS) MAN HOURS WORKED FOR STP 1 71 000 STP MAN HOURS PERCENTAGE TO TOTAL MAN HOURS 45.7 ACCORDINGLY 15% IDLE/SUPERVISORY HOURS ARE ADDED T O THE ACTUAL BILLED HOURS OF 1 71 000 TO ARRIVE AT TOTAL HOURS FOR THE STP UNIT WHICH IS 1 96 650. THE REVISED PROPORTION OF STP MAN HOURS TO TOTAL MAN HOURS IS T HEN 52.65% INSTEAD OF 45.7% AS REPORTED IN THE PROFIT AND LOSS ACCOUNT. THE SA ID REVISED RATIO IN THE ORDER IS ACCEPTED TO BE 54% ON CONSERVATIVE BASIS. THE TOTAL SALARY COSTS ARE RS.4.65 CRORES OUT OF WHICH RS.2.12 CRORES WERE ALLOCATED TO STP UNIT BASED ON THE ORIGINAL RATIO OF 45.7%. BY APPLYING THE REVISED R ATIO OF 54% THE ALLOCABLE SALARY 8 WOULD BE 2.50 CRORES (I.E. RS.4.65 CRORES X 54%) LEADING TO AN ADDITION OF RS. 38 LACS ( RS.2.50 CRORES LES RS.2.23 CRORES) B. WRONG ADOPTION OF BILLABLE MAN-HOURS ( PAGE NO.6 O F THE ASSESSMENT ORDER PARA 2.4) THE MAN HOURS CONSIDERED FOR STP UNIT WERE 1 71 000 WHEREAS MAN HOURS BASED ON THE PRIMA VERA SOFTWARE USED FOR THE PURPOSE OF TRACKING THE MAN HOURS WERE 1 77 741 HOURS. THUS MAN HOURS CONSIDERED SHORT WHI LE ALLOCATING THE SALARY WERE 6 741 HOURS.THE SALARY ALLOCATED TO STP UNIT IS RS. 2.12 CRORES BASED ON 1 71 000 HOURS WORKED FOR STP. THE PROPORTIONATE SALARY FOR ADDITIONAL 6 741 HOURS WORKS OUT TO RS.8.38 LACS . C. WRONG ALLOCATION OF HI SPEC SALARIES (PAGE 6 OF THE ASSESSMENT ORDER PARA 2.5) AS EXPLAINED IN CLAUSE (A) ABOVE THE RATIO OF 45.7 % WAS APPLIED TO THE SALARY COSTS OF THE STP UNIT AS IN THE FINANCIAL ACCOUNTS THE SALARIES OF EMPLOYEES WORKING FOR STP UNIT AND NON-STP UNIT CAME TO BE CL UBBED TOGETHER. DURING THE YEAR UNDER CONSIDERATION THE COMPANY HAD ALSO PROV IDED HIGH END SERVICES TO ITS CUSTOMERS THROUGH HI SPEC DIVISION. THE EMPLOYEES FOR THIS DIVISION WERE IDENTIFIED SEPARATELY AND THEIR SALARY OF RS.31.57 LACS WAS CONSIDERED IN TOTAL SALARY CORRECTLY.HOWEVER WHILE APPLYING THE PROPOR TION OF 45.7% THE SAME WAS ERRONEOUSLY APPLIED TO THE HI SPEC DIVISIONS SALAR IES OF RS.31.57 WHICH RESULTED INTO UNDERSTATEMENT OF HI SPEC SALARIES BY 54.3% (I .E. 100% LESS 45.7%) WHICH RESULTED INTO LOWER COST ALLOCATION OFF RS.17.14 LA CS (I.E.311.57 LACS X 54.3%) D. LEARNING & DEVELOPMENT COSTS (PAGE 8 OF THE ASSE SSMENT ORDER PARA 2.7) TOTAL LEARNING AND DEVELOPMENT COSTS DURING THE YEA R UNDER CONSIDERATION WERE RS.556.57 LACS WHICH COMPRISES OF I) FOREIGN TRAININGS EXPENSES RS.3.39 LA CS II) INLAND TRAINING EXPENSES RS.53.18 LACS AS ALL TRAINING FACILITIES/PROGRAMS AREA AR RANGED BY ONE OF THE SUPPORT DEPARTMENTS I.E. HUMAN RESOURCES AND ADMINISTRATIO N THE ACCOUNTING FOR THE SAME DOES NOT HAPPEN SEPARATELY FOR EACH BUSINESS U NIT. AS SUCH THESE EXPENSES WERE NOT CAPTURED IN THE PROFIT & LOSS ACCOUNT. FOR THE PURPOSE OF ESTIMATING THE AMOUNT OF LEARNING & DEVELOPMENT EXPENSES TO BE APP ORTIONED TO THE STP UNIT THE SAME IS CONSIDERED ON AN POWER BASIS. DURING TH E YEAR UNDER CONSIDERATION THE TOTAL NUMBER OF EMPLOYEES WORKING FOR THE COMPA NY ARE 850 OUT OF WHICH A LIST OF 98 EMPLOYEES WAS PLACED BEFORE THE ASSESSIN G OFFICER FOR EMPLOYEES WORKING FOR STP UNIT.SO THE ENTIRE LEARNING & DEVE LOPMENT EXPENSES WERE BIFURCATED IN THE PROPORTION OF MANPOWER WHICH AMOUNTED TO RS.6.53 LACS. E. ALLOCATION OF MANPOWER COSTS TOWARDS SALE THROU GH PHYSICAL ( PAGE 8 OF THE ASSESSMENT ORDER PARA 2.8) IN THIS REGARD IT IS SUBMITTED THAT THE SALARY COST DEBITED TO PROFIT & LOSS ACCOUNT AS REPORTED IN ANNEXURE I ENCLOSED HEREWITH IS I N EXCESS OF THE EXCESS OF THE ACTUAL SALARY COSTS OF THE EMPLOYEES WORKING FOR TH E STP UNIT. 4.19 REGARDING THE ALLEGED ERROR CONCERNING REIMBUR SEMENT OF EXPENSES OF RS.54 LACS IT AS SUBMITTED BEFORE THE ASSESSING OFF ICER AS ALSO BEFORE E THAT THE DEBIT NOTES WERE RAISED DURING THE YEAR TOWARDS THE REIMBURSABLE EXPENSES WHICH WERE INCURRED IN A.Y.2000-01. IT HAS BEEN AR GUED THAT SINCE THE PROFITS OF THAT YEAR WERE DIMINISHED TO THIS EXTENT THE REIMB URSEMENT CLAIM CREDITED TO 9 THE PROFIT & LOSS ACCOUNT OF THE YEAR UNDER CONSIDE RATION SHOULD NOT BE EXCLUDED FROM THE ELIGIBLE PROFITS U/S 10A. 7. THUS THE BOOKS OF ACCOUNTS OF THE ASSESSEE WERE AUDITED AND ASSESSEE FOLLOWED A METHOD OF ACCOUNTING IE (A) DIRECT REVE NUES AND EXPENSES ARE ACCOUNTED ON ACTUAL BASIS; (B) COMMON OPERATING SAL ARIES ARE ALLOCATED IN THE RATIO OF MAN HOURS; (C) FACILITY COMMON EXPENSES AR E ALLOCATED IN THE RATIO OF OCCUPATION OF BUILDING AREA AND (D) THE OTHER COMMO N EXPENSES ARE APPORTIONED IN THE RATIO OF TURNOVER; (E) THE AO DID NOT FIND A NY DEFECT IN THE METHOD OF ACCOUNTING EMPLOYED FOR DRAWING UP THE ACCOUNTS. HO WEVER THE AO DID NOT ACCEPT THE CORRECTNESS OF THE ACCOUNTS FOR THE FOLL OWING REASONS: (REFER PARA 2.11.1 / PG10 PARA 2.9.1 / PG 8 AND PARA 2.12.2 / PG 11 OF THE ASSESSMENT ORDER). (A) MISTAKES IN THE ALLOCATION OF SALARY DU E TO NON-CONSIDERATION OF IDLE TIME LEARNING AND DEVELOPMENT COSTS ETC AS DISCUSS ED ABOVE. (B) THE ASSESSEE HAD INCLUDED AN AMOUNT OF RS 54 LACS BEING THE REI MBURSEMENT OF TRAVEL CLAIMS AS INCOME OF THE UNDERTAKING IN A Y 2001-02 THOUGH THE SAME PERTAINED TO A Y 2000-01; (C) THERE WERE ERRORS IN THE RETURNS FILED WITH THE STP AUTHORITIES AS STATED BY THE AO; (D) THE PROFIT/COSTS PERCENTAGE I N THE COMPENSATION REVISION PROPOSAL FOR F Y 2001-02 RELEVANT TO A Y 2002-03 WA S 40% AS AGAINST PROFIT RATIO OF 232.49% IN A Y 2001-02. FINALLY THE AO INVOKED THE PROVISIONS OF SECTION 145 OF THE ACT. AGGRIEVED WITH THE ABOVE THE ASSES SEE RAISED THIS ISSUE BEFORE THE CIT(A) AND MADE VARIOUS SUBMISSIONS. THE CASE O F THE ASSESSEE IN THEIR OWN WORDS ON THIS ISSUE ARE ENLISTED AS UNDER: (PARA 4. 18 PAGE 11/17 PARA 4.19/PG 13 OF CIT(A) ORDER ARE RELEVANT. 1) THE ERRORS WERE CAUSED DUE TO INADVERTENT ERRORS DU E TO SHEER HUMAN FALLIBILITIES IN APPLYING THE ALLOCATION PRINCIPLES . 2) REGARDING TRAVEL COSTS REIMBURSEMENT OF RS. 54 LACS IT WAS URGED THAT THERE WAS NO DISPUTE ABOUT THE ELIGIBILITY OF EXEMP TION THEREOF; THE ONLY ISSUE WAS THAT THE THOUGH THE CLAIM WAS INCREASED T O THAT EXTENT IN A Y 2001-02 THERE WAS CORRESPONDING UNDERSTATEMENT OF CLAIM IN A Y 2000- 01. IN OTHER WORDS IT WAS TIMING DIFFERENCE ONLY. 3) REGARDING THE RETURNS FILED WITH THE STP AUTHORITIE S CLARIFICATIONS WERE PROVIDED TO THE CIT (A) AS PER PARAS 4.21 TO 4.24 O N PAGE 14 OF THE ORDER OF CIT (A). 4) IN PARTICULAR IT WAS POINTED OUT THAT THE AO HAD ERRED IN RECORDING THE FINDING THAT THE SALARY COSTS HAD DECLINED DESPITE THE INCREASE IN THE NUMBER OF EMPLOYEES AS CLARIFIED IN PARA 20 ON PAG E 13 OF THE APPELLATE ORDER. THE FINDING OF THE AO WAS INCORRECT AS PER T HE FACTS ON RECORD. 5) REGARDING THE DICHOTOMY BETWEEN THE PROFITS/COSTS P ERCENTAGE IN THE COMPENSATION REVISION PROPOSAL FOR F Y 2001-02 VIS- A VIS THE ACTUAL NUMBERS FOR THAT YEAR VIZ: A Y 2002-03 A RECONCIL IATION WAS PROVIDED TO THE CIT(A) EXPLAINING THAT THE CALCULATION IN THE R EVISION PROPOSAL WAS BASED ON GROSS COSTS WITHOUT CONSIDERING THE REIMBU RSEMENTS OF EXPENSES INCURRED IN THE COURSE OF RENDERING ON-SITE SERVICE S AND FURTHER THAT THE REVENUES WERE CONSIDERED THEREIN AT USD 17 DOLLARS PER HOUR FOR STANDARD 10 SERVICES AS AGAINST THE ACTUAL REVENUE OF USD 23.58 PER HOUR. THE CIT(A) WAS PLEASED TO CALL FOR A REMAND REPORT FROM THE A O IN RESPECT OF THIS EXPLANATION AND THE RECONCILIATION IS PLACED AT PA GE 28 OF THE PAPER BOOK. THE CIT(A) WAS PLEASED TO RECORD THE FINDING IN PAR A 4.42 ON PAGE 22 OF THE APPELLATE ORDER THAT THE AO DID NOT FIND ANY FL AW WITH THE EXPLANATION FILED. 8. ON HEARING ABOVE SUBMISSIONS OF THE ASSESSEE TH E CIT(A) CONSIDERED THE SAME AND HELD THAT THEAO RIGHTLY INVOKED THE PROVIS IONS OF SECTION 145 OF THE ACT. RELEVANT DISCUSSION IS AVAILABLE IN PARAGRAPH 4.43 OF THE IMPUGNED ORDER OF HTE CIT(A). FROM THE SAID PARAGRAPHS IT IS EVIDENT THAT THE CIT(A) REJECTED THE ARGUMENTS RELATING INADVERTENCE IN VIEW OF THE PLET HORA OF ERRORS AND DISCREPANCIES WHICH RENDERED THE BOOKS UNACCEPTABL E. 9. AGGRIEVED WITH THE ABOVE ORDER OF THE CIT(A) TH E ASSESSEE RAISED BEFORE US THIS ISSUE IN THE FIRST LIMB OF THE GROUND 1 OF THIS APPEAL. DURING THE PROCEEDINGS BEFORE US LD COUNSEL FOR THE ASSESSEE MADE VARIOUS SUBMISSIONS AND IN SHORT THEY ARE: 1) THE ERRORS IN THE ALLOCATION OF SALARY COSTS WERE M ERE 6.19% OF THE TOTAL CLAIM FOR EXEMPTION. 2) OVERSTATEMENT OF CLAIM OF RS 54 LACS TOWARDS REIMBU RSEMENT OF SALARY COSTS WAS NEUTRALISED BY UNDERSTATEMENT OF CLAIM BY THE CORRE SPONDING AMOUNT IN IMMEDIATELY PRECEDING YEAR. 3) IN RESPONSE TO THE QUERIES RAISED BY THE HONOURABLE MEMBERS IN THE COURSE OF THE HEARING WRITTEN CLARIFICATIONS DATED 7 TH JULY 2011 HAVE BEEN FILED AND PLACED ON THE RECORDS. 4) THE NATURE AND EXTENT OF ERRORS ARE OVERWHELMINGLY SUGGESTIVE OF HUMAN FALLIBILITIES AND THE PROBABILITY OF INADVERTENCE COMBINED WITH THE A BSENCE OF ALLEGATION OF FUDGING OF ACCOUNTS BY THE LOWER AUTHORITIES SHOULD EXTRICATE THE CASE OF THE ASSESSEE FROM THE PROVISIONS OF SECTION 145(3) OF THE ACT. 5) THE LOWER AUTHORITIES HAVE NOT REFUTED THE CORRECTN ESS OF THE CLARIFICATIONS SUBMITTED IN RESPECT OF STP RETURNS AND OTHER RELATED ISSUES. 6) THE AO DID NOT FIND ANY FLAW IN THE COURSE OF REMAN D PROCEEDINGS REGARDING THE CLARIFICATIONS EXPLANATIONS AND RECONCILIATION PROV IDED WITH REFERENCE TO THE ALLEGED DICHOTOMY BETWEEN THE PROFITS/COSTS PERCENTAGE AS C ALCULATED IN THE COMPENSATION REVISION PROPOSAL FOR F Y 2001-02 VIS-A-VIS ACTUAL NUMBERS FOR THAT YEAR RELEVANT TO A Y 2002-03 AS NOTED BY THE CIT (A). 7) THE APPELLANT IS A PUBLIC LIMITED COMPANY QUOTED ON THE STOCK EXCHANGE WHOSE ACCOUNTS ARE AUDITED BY STATUTORY AUDITORS. THE COMPANY HAS DRAWN UP ITS ACCOUNTS BY ADOPTING WELL RECOGNISED METHOD OF ACCOUNTING AND THE ACCOUN TING STANDARDS NOTIFIED. IN WORKING OUT THE CLAIM FOR DEDUCTION U/S 10A SOME INSIGNIFIC ANT ERRORS AND THAT TOO REGARDING ALLOCATION OF COMMON EXPENSES CAME TO OCCUR. THE AC COUNTS OF APPELLANT COMPANY AS A WHOLE WERE COMPLETE AND CORRECT AND THERE WERE NO O MISSIONS IN THE SAID ACCOUNTS. PROVISIONS OF SEC. 10A DO NOT REQUIRE MAINTENANCE O F SEPARATE SET OF ACCOUNTS AND SUB SECTION 5 THEREOF ONLY REQUIRES THAT THE DEDUCTION CLAIMED BE CERTIFIED. THE WORKING OF PROFITS OF 10 A UNDERTAKING WAS BASED ON THE INFORM ATION CULLED OUT FROM THE ACCOUNTS MAINTAINED. THE LEARNED A.O. OR CIT APPEALS HAVE NO WHERE STATED THAT THE ACCOUNTS OF THE APPELLANT COMPANY WERE INCOMPLETE AND INCORRECT OR THAT THE APPELLANT HAD NOT FOLLOWED RECOGNISED METHOD OF ACCOUNTING OR ACCOUNT ING STANDARDS NOTIFIED. IN THE LIGHT OF THE SAID FACTS THE ACCOUNTS OF THE APPELLANT OUG HT NOT TO HAVE BEEN REJECTED. THE BOOK RESULTS BEING SUBSTANTIALLY ACCURATE AND COMPLETE THEY SHOULD NOT BE REJECTED; RATHER THE CLAIM OF THE ASSESSEE SHOULD ONLY BE ADJUSTED F OR THE ADMITTED ERRORS. RELIANCE IS PLACED ON THE PRINCIPLES LAID DOWN BY THE SUPREME C OURT IN THE CASE OF H M ESSUFALI ( 90 11 ITR 271 276). RELIANCE IS ALSO PLACED ON THE FOLLOW ING PRECEDENTS FOR THE PROPOSITION THAT THE BOOK RESULTS SHOULD NOT BE REJECTED ON ACCOUNT OF MINOR ERRORS.CITATION RELIED ON ARE: UTTAMCHAND CHUNA PATHAR UDYOG- 65 ITD 460- RA; PADM ACHAND RAMGOPAL- 76 ITR 719- SC; BADSHAH CONSTRUCTION COMPANY- 127 TAXMANN 153 ( INDORE)ETC. 10. PER CONTRA LD DR FOR THE REVENUE RELIED HEAVIL Y ON THE ORDERS OF THE BOTH AO AND THE CIT(A) AND ARGUED VEHEMENTLY IN FAVOUR O F CONFIRMING THE ORDER OF THE CIT(A). FURTHER LD DR MADE VARIOUS SUBMISSIONS AND THEY ARE: 1.THE ERRORS OF ALLOCATION OF EXPENSES WERE NOT TRIVIAL; RATHER THEY WERE HORRIBLE; 2. THE PROFITS FROM THE TAXABLE SOURCE OF INCOME WERE BARE LY 2% OF THE COSTS AS AGAINST 232% OF COSTS IN RESPECT OF EXEMPT SOURCE OF INCOME ; 3. THE OBSERVATIONS OF THE SUPREME COURT IN THE CASE OF H M ESUFALI (SUPRA) ON WHICH RELIANCE IS PLACED BY THE AR ARE OUT OF CONTEXT; 4. THE FINDING OF THE SU PREME COURT IN THE CASE OF H M ESUFALI (SUPRA) WAS AGAINST THE ASSESSEE. MOREOVE R THIS FINDING WAS BASED ON THE TRANSACTIONS OF JUST 19 DAYS OF THE FINANCIAL Y EAR WHICH LED TO THE REJECTION OF THE BOOKS OF ACCOUNTS WHICH WAS CONFIRMED BY THE SU PREME COURT. IN OTHER WORDS OMISSION TO ENTER THE SALES INVOICES OF JUST 19 NINETEEN DAYS LED TO THE REJECTION OF THE BOOKS OF ACCOUNT. THEREFORE THE P LEA OF THE ASSESSEE THAT THE EXTENT AND EFFECT OF THE ERRORS WERE TRIVIAL WHICH DID NOT WARRANT REJECTION OF THE BOOKS OF ACCOUNT WAS NOT ACCEPTABLE; 5) THE DETAILS (OF REIMBURSEMENTS) WERE NEVER FILED BEFORE THE A.O. DURING THE COURSE OF AS SESSMENT PROCEEDINGS FOR A.Y. 2001-02 WHICH IS THE LEAD YEAR OF INVESTIGATION ON THE ISSUE; 6) IN THE REMAND REPORT (PAGE 29 TO 36 OF THE PAPER BOOK FILED BY T HE ASSESSEE) THE A.O SUBMITTED THAT THE SAME CANNOT BE TREATED AS PROFIT DERIVED BY THE UNDERTAKING ON WHICH EXEMPTION/DEDUCTION U/S 10A OF I.T.; 7) I T IS INCONCEIVABLE THAT SUCH A PROPOSAL WAS PREPARED AND SENT BY THE MARKETING DEP ARTMENT WITHOUT THE CONCURRENCE OF ACCOUNT DEPARTMENT IN A REPUTED ORGA NIZATION; 8) THE LEARNED CIT(A) HAS ACCEPTED THE DETAILS FILED BEFORE HIM O N THE ISSUE BUT DOES NOT SEEM TO HAVE VERIFIED AND ADJUDICATED UPON THE ISSUE; 9) THE LEARNED COUNSEL OF THE ASSESSEE HAS ALSO STATED THAT SINCE LEARNED A.O. HA S NOT COMMENTED ADVERSELY IN RESPECT OF RECONCILIATION DURING THE COURSE OF REAS SESSMENT PROCEEDINGS FOR A.Y. 1999-2000 IT CAN BE SAID THAT THE A.O. HAS ACCEPTE D THE RECONCILIATION IN RESPECT OF DEBIT NOTES. THIS ARGUMENT HAS NO BASIS AS STAN D OF THE A.O. IS ALWAYS CLEAR THAT DEBIT NOTES DO NOT REPRESENT INCOME OF THE UND ERTAKING FROM EXPORT OF ARTICLES OR THING OR COMPUTER SOFTWARE. MERELY BECA USE THE A.O. AT ANY GIVEN POINT OF TIME THAT TOO IN A DIFFERENT ASSESSMENT YE AR HAS NOT COMMENTED ADVERSELY DOES NOT LEAD TO THE CONCLUSION THAT HE H AS ACCEPTED THE RECONCILIATION. THE ISSUE NEEDS TO BE EXAMINED IN TOTALITY AND NOT ON THE BASIS OF ALLEGED SILENCE OF THE AO IN A DIFFERENT ASSESSMENT YEAR; 10) IT IS NOT CORRECT TO STATE THAT ONLY 12 PROFIT MARGIN OF REVISION STATEMENT BEING 40% ON CO ST WAS CONSIDERED BY THE A.O. WHILE ESTIMATING THE PROFIT MARGIN OF COST PL US 50% IN THE ASSESSMENT ORDER. IN THIS REGARD PARA 2.12.6 OF PAGE 13 OF TH E ASSESSMENT ORDER MAY KINDLY BE REFERRED TO. IN THE ABOVE QUOTED PARA THE AO HA S MADE THE FOLLOWING REMARKS IT IS THUS SEEN THAT COMPANIES OF GOOD STA NDING AND REPUTE ENGAGED IN SIMILAR WORK HAVE BEEN EARNING PROFIT MARGIN OF 20 -25% DURING A.Y. 2001-02 AGAINST THE ASSESSEE CLAIMING PROFIT MARGIN OF APPR OXIMATELY 70%. THE LEARNED CIT(A) HAS ALSO DISCUSSED THE COMPARABLE TWO CASES AND HAS COME TO THE FINDING THAT THAT THE AO HAS ALREADY GIVEN HEAVY DISCOUNT AFTER DISCUSSING COMPARABLE CASES AND ARRIVING AT THE PROFIT OF COST PLUS 50% IN THE ASSESSMENT ORDER. THE CONCLUDING REMARK OF THE LD. CIT(A) (LAST LINE ON P AGE 27) IS WORTH MENTIONING WHICH READS AS UNDER: IT IS VITALLY IMPORTANT TO CONSIDER THAT THE ASSES SING OFFICER HAS ALREADY GIVEN SUFFICIENT SET OFF FOR RE ASONS OF HIGH PROFIT BY RESTRICTING THE PROFITS @ 50% AS AGAINST 20-25% IN OTHER COMPA RABLE CASES WHICH IS MORE THAN ENOUGH TO TAKE CARE OF ANY REASON GIVEN BY ASS ESSEE IN GENERAL FOR EARNING HIGHER PROFITS. SUCH A HEAVY DISCOUNT HAVING ALREA DY ALLOWED BY THE ASSESSING OFFICER IN MY OPINION NO FURTHER RELIEF IS DESERVE D BY THE APPELLANT ON THIS SCORE. THEREFORE WHILE DECIDING THE ISSUE BESIDES EXAMIN ING THE ISSUE OF REIMBURSABLE EXPENSES FINDING ON THE ISSUE OF TWO C OMPARABLE CASES WHICH ALSO HAPPEN TO BE THE BASIS FOR ARRIVING AT THE PROFIT M ARGIN OF COST PLUS 50% BY THE AO AND ALSO APPROVED BY THE LEARNED CIT(A) IS A MUS T. FURTHER THE SUBMISSIONS OF LD DR ARE AS UNDER: BOOKS OF ACCOUNTS WERE REJECTED AFTER FINDING A NUM BER OF DEFECTS IN ALLOCATION OF VARIOUS EXPENSES WHICH WERE INTEND ED TO ARTIFICIALLY INFLATE THE EXEMPTED PROFIT OF THE UNDERTAKING U/S 10A OF THE ACT. THE ASSESSEE HAD NO OPTION BUT TO ACCEPT THE DEFEC TS. ONCE THE DEFECTS IN ALLOCATION TO THE TUNE OF RS.1. 20 CRORES WERE NOTICED AND ADMITTED BY THE ASSESSEE THE BOOKS OF A CCOUNTS AUTOMATICALLY LOST ITS SANCTITY. THE LEARNED COUNSEL OF THE ASSESSEE STATES THAT TH E DEFECTS REPRESENTED ONLY 6% OF TOTAL EXPENSES AND THEREFORE THERE WAS NO REASON FOR REJECTION OF THE BOOKS OF ACCOUNTS. HE F URTHER SUBMITTED THAT THE ERRORS WERE UNINTENDED AND IT WAS NOT THE CASE OF THE A.O THAT ACCOUNTS WERE FUDGED OR MANIPULATED. HE ALSO S UBMITTED THAT THESE WERE ARITHMETICAL MISTAKES BEING OF INADVERTE NT NATURE. THE SUBMISSIONS OF THE LEARNED COUNSEL ARE BEREFT O F MERIT. THE BOOKS OF ACCOUNTS OF THE ASSESSEE WERE AUDITED AND DESPITE RESOURCE CRUNCH AND PAUCITY OF TIME THE A.O WAS ABL E TO DETECT A NUMBER OF DEFECTS IN ALLOCATION OF VARIOUS EXPENSES . THE ARGUMENT THAT THE DEFECT REPRESENTED ONLY 6 % O F TOTAL AMOUNT AND THEREFORE TRIVIAL IN NATURE IS ALSO NEED S TO BE REJECTED. IN FACT THE DEFECTS ARE NOT TRIVIAL BUT H ORRIBLE IN NATURE. THE LEARNED COUNSEL OF THE ASSESSEE IS TRYING TO TR IVIALIZE THE ISSUE. IN A BLOOD TEST ONLY 2 TO 5 ML OF BLOOD SAMP LE IS TAKEN FOR 13 ANALYSIS IN A PATHOLOGICAL LABORATORY IN ORDER TO A RRIVE AT A CONCLUSION. ENTIRE BLOOD OF THE BODY IS NOT CONSIDE RED FOR ANALYSIS. COMING TO THE ISSUE OF MISTAKE BEING INADVERTENT IN NATURE IT IS SUBMITTED THAT THE LEARNED COUNSEL OF THE ASSESSEE COULD NOT THROW ANY LIGHT ON THE ISSUE DESPITE REPEATED QUERY OF THE BENCH. AS FAR AS THE CONTENTION OF THE LEARNED COUNSEL OF THE ASSESSEE THAT IT IS NOT THE CASE OF THE A.O THAT THE BOOKS O F ACCOUNTS WERE FUDGED OR MANIPULATED IT IS SUBMITTED THAT THERE W AS NO NEED TO COME TO THIS TYPE OF CONCLUSION BY THE A.O AS HE WA S CONCERNED WITH VERIFYING THE CORRECTNESS OF ALLOCATION OF VAR IOUS EXPENSES BETWEEN ELIGIBLE AND INELIGIBLE UNITS. THEREFORE T HE ARGUMENT OF THE LEARNED AR IS WITHOUT ANY MERIT AND NEEDS TO BE REJECTED. RELIANCE ON THE DECISION OF HONBLE APEX COURT IN THE CASE OF COMMISSIONER OF SALES TAX VS H.M.ESUFALI H.M.ABDULA LI 90 ITR 271. THE LEARNED COUNSEL OF THE ASSESSEE HAS STRONGLY RE LIED UPON THE OBSERVATIONS OF HONBLE APEX COURT ON PAGE 276 OF T HE ABOVE QUOTED JUDGEMENT WHICH READS AS UNDER: SOMETIMES THERE MAY BE INNOCENT OR TRIVIAL MISTAKES IN THE ACCOUNTS MAINTAINED BY THE ASSESSEE. THERE M AY BE EVEN CERTAIN UNINTENDED OR UNIMPORTANT OMISSIONS IN THOS E ACCOUNTS BUT YET THE ACCOUNTS MAY BE ACCEPTED AS GENUINE AND SUBSTANTIALLY CORRECT. THE RELIANCE ON THE ABOVE OBSERVATION OF HONBLE AP EX COURT IS OUT OF CONTEXT AND MISPLACED. THE OBSERVATIONS SHOU LD BE SEEN IN THE CONTEXT IN WHICH IT WAS MADE AND THEN SIMIL ARITY OF FACTS OF THE CASE SHOULD BE CLEARLY ESTABLISHED BEFORE RE LYING ON THE SAME . THE HONBLE APEX COURT IN THE CASE OF SUN ENGINEE RING WORKS 198 ITR 297(320) HAS MADE FOLLOWING REMARKS IT IS NEITHER DESIRABLE NOR PERMISSIBLE TO PICK OUT A WORD OR SENTENCE. THE DECISION TAKES COLOUR FROM THE QUESTI ON INVOLVED IN THIS CASE EXACTLY SAME HAS BEEN DONE. OBSERVATI ONS OF THE HONBLE APEX COURT HAVE BEEN PICKED UP OUT OF C ONTEXT IGNORING THE SUBSEQUENT PARAGRAPHS OF THE SAME JUDG MENT. IN FACT IN THE VERY SAME CASE THE HONBLE APEX COURT H AS APPROVED THE ESTIMATION OF TURNOVER FOR THE ENTIRE YEAR BASE D UPON EVIDENCE FOR 19 DAYS ONLY. IN PERCENTAGE TERM 19 D AYS WORKS OUT AT 5.5 % OF TOTAL 365 DAYS IN A YEAR. THE HONB LE APEX COURT ALSO AWARDED COST AGAINST THE ASSESSEE. IN FACT THE ABOVE QUOTED DECISION SUPPORTS THE CASE OF THE DEPARTMENT . THEREFORE IT IS SUBMITTED THAT THE THERE IS NO MER IT IN THE GROUND TAKEN BY THE ASSESSEE. STRONG RELIANCE IS AL SO PLACED UPON THE ORDER OF A.O/CIT(A). SUBMITTED........ 9. FURTHER DURING THE TIME OF REBUTTAL LD ASSESSE ES COUNSEL FILED THE FOLLOWING ISSUES WISE REPLIES TO THE ISSUES RAISED BY THE DR IN HIS ARGUMENTS AND THE SAME ARE PRODUCED AS UNDER. 1. THE ERRORS OF ALLOCATION OF EXPENSES WERE NOT TRIVI AL; RATHER THEY WERE HORRIBLE. REPLIES : THE NATURE AND EFFECT OF THE ERRORS SHOULD LEAD AN Y AUTHORITY TO A FAIR AND REASONABLE CONCLUSION THAT THEY WERE CAUSED BY HUMA N FALLIBILITIES. PREPONDERANCE OF 14 PROBABILITY WEIGHS IN FAVOUR OF THIS CONCLUSION RAT HER THAN THE PROPOSITION CANVASSED BY THE LEARNED DR. IT IS SUBMITTED THAT THE APPELLANT IS A PUBLIC LIMI TED COMPANY QUOTED ON THE STOCK EXCHANGE WHOSE ACCOUNTS ARE AUDITED BY STATUTORY AUDITORS. T HE COMPANY HAS DRAWN UP ITS ACCOUNTS BY ADOPTING WELL RECOGNISED METHOD OF ACCO UNTING AND THE ACCOUNTING STANDARDS NOTIFIED. IN WORKING OUT THE CLAIM FOR DE DUCTION U/S 10A SOME INSIGNIFICANT ERRORS AND THAT TOO REGARDING ALLOCATION OF COMMON EXPENSES CAME TO OCCUR. THE ACCOUNTS OF APPELLANT COMPANY AS A WHOLE WERE COMPL ETE AND CORRECT AND THERE WERE NO OMISSIONS IN THE SAID ACCOUNTS. PROVISIONS OF SEC. 10A DO NOT REQUIRE MAINTENANCE OF SEPARATE SET OF ACCOUNTS AND SUB SECTION 5 THEREOF ONLY REQUIRES THAT THE DEDUCTION CLAIMED BE CERTIFIED. THE WORKING OF PROFITS OF 10 A UNDERTAKING WAS BASED ON THE INFORMATION CULLED OUT FROM THE ACCOUNTS MAINTAINED . THE LEARNED A.O. OR CIT APPEALS HAVE NOWHERE STATED THAT THE ACCOUNTS OF THE APPELL ANT COMPANY WERE INCOMPLETE AND INCORRECT OR THAT THE APPELLANT HAD NOT FOLLOWED RE COGNISED METHOD OF ACCOUNTING OR ACCOUNTING STANDARDS NOTIFIED. IN THE LIGHT OF THE SAID FACTS THE ACCOUNTS OF THE APPELLANT OUGHT NOT TO HAVE BEEN REJECTED. 2. THE PROFITS FROM THE TAXABLE SOURCE OF INCOME WE RE BARELY 2% OF THE COSTS AS AGAINST 232% OF COSTS IN RESPECT OF EXEMPT SOURCE OF INCOME . REPLIES THE REASON FOR THE PERCENTAGE VARIATION WAS EXPLAIN ED TO THE CIT(A) AND NOTED BY HIM AT PARA 4.11 ON PAGE 8 OF THE ORDER. MOREOVER T HE DR HAS NOT CONSIDERED THE RELEVANT FACT THAT IN ABSOLUTE TERMS THE BOOK PROFI TS OF THE TAXABLE SOURCES OF INCOME WERE RS 10.11 CRORES AND THOSE OF THE STP UNITS WER E RS 11.96 CRORES AS PER PAGE 3 OF THE PAPER BOOK. THE PROFITS OF STP UNDERTAKINGS WER E THEREFORE NOT MISALIGNED FROM THE PROFITS EARNED FROM TAXABLE SOURCES OF INCOME. 3. THE OBSERVATIONS OF THE SUPREME COURT IN THE CASE O F H M ESUSUFALI (SUPRA) ON WHICH RELIANCE IS PLACED BY THE AR ARE OUT OF CONTEXT. REPLIES ON THE CONTRARY THE OBSERVATIONS OF THE SUPREME COU RT ARE VERY MUCH WITHIN THE CONTEXT. THE SUPREME COURT WAS CONCERNED WITH THE C ONDITIONS WHICH EMPOWER THE AO TO MAKE BEST JUDGEMENT ASSESSMENT. EVEN IN THE ASSE SSEES CASE THIS IS PRECISELY THE ISSUE. WITHOUT PREJUDICE EVEN AN OBITER DICTA PRONO UNCED BY THE SUPREME COURT IS A BINDING PRECEDENT. 4. THE FINDING OF THE SUPREME COURT IN THE CASE OF H M ESUSUFALI (SUPRA) WAS AGAINST THE ASSESSEE. MOREOVER THIS FINDING WAS BASED ON THE T RANSACTIONS OF JUST 19 DAYS OF THE FINANCIAL YEAR WHICH LED TO THE REJECTION OF THE BO OKS OF ACCOUNTS WHICH WAS CONFIRMED BY THE SUPREME COURT. IN OTHER WORDS OMISSION TO E NTER THE SALES INVOICES OF JUST 19 NINETEEN DAYS LED TO THE REJECTION OF THE BOOKS OF ACCOUNT. THEREFORE THE PLEA OF THE ASSESSEE THAT THE EXTENT AND EFFECT OF THE ERRORS W ERE TRIVIAL WHICH DID NOT WARRANT REJECTION OF THE BOOKS OF ACCOUNT WAS NOT ACCEPTABL E. REPLIES A. IN THE CASE DECIDED BY THE SUPREME COURT THE FLYIN G SQUAD OF THE SALES TAX DEPARTMENT INSPECTED THE BUSINESS PREMISES OF THE ASSESSEE AND FOUND THAT SALES INVOICES FOR A PERIOD OF 19 DAYS WERE NOT ENTERED IN THE BOOKS OF ACCOUNT. B. THE ASSESSEE IN THAT CASE INITIALLY PROTESTED THAT THE BILL BOOKS DID NOT BELONG TO HIM BUT LATER ADMITTED THAT THAT THE SALE INVOICES CONTAINE D IN THE SAID BILL BOOKS WERE NOT ENTERED IN THE ACCOUNTS. 15 C. BASED ON ABOVE THE AUTHORITIES REACHED AN UNCONTRO VERTED FINDING THAT THE ASSESSEE IN THAT CASE HAD DEALINGS OUTSIDE THE ACCOUNTS AND THE REFORE THE ACCOUNTS WERE REJECTED AND FINALLY THE SUPREME COURT CONFIRMED THIS FINDIN G. D. IT IS RESPECTFULLY SUBMITTED THAT THE FACTS OF THE CASE DECIDED BY THE SUPREME COURT ARE MATERIALLY DISTINCT FROM THE FACTS OF THE CASE BEFO RE THE HONOURABLE TRIBUNAL. BY NO STRETCH OF IMAGINATION THE ASSESSEE COULD HAVE CONT ENDED IN THAT CASE THAT THE OMISSIONS IN THE ACCOUNTS WERE UNINTENDED OR UNIMPO RTANT. ADMISSION OF DEALINGS OUTSIDE THE ACCOUNTS CAN CERTAINLY NOT FALL WITHIN THESE TERMS. HOWEVER THE MISTAKES OF ALLOCATION OF EXPENSES CAUSED DUE TO HUMAN FAILURES DO FALL WITHIN THE AMBIT OF THESE TERMS USED BY THE SUPREME COURT. IT IS SUBMITTED THAT TO PLACE THE FACTS IN THE PRE SENT APPEAL OF THE ASSESSEE WITH THE FACTS BEFORE THE SUPREME COURT ON THE SAME FOOTING WILL B E GROSSLY UNFAIR AND UNREASONABLE. 5) THE DETAILS (OF REIMBURSEMENTS) WERE NEVER FILED BE FORE THE A.O. DURING THE COURSE OF ASSESSMENT PROCEEDINGS FOR A.Y. 2001-02 WHICH IS THE LEAD YEAR OF INVESTIGATION ON THE ISSUE. REPLIES A. THE CONTENTION OF THE LEARNED DR IS CONTRARY TO THE FACTS ON THE RECORDS. B. THE STP PROFIT AND LOSS ACCOUNT IS AT PAGE 5 OF THE PAPER BOOK WHICH SHOWS EXPENDITURE ON SELLING ADMINISTRATION AND OTHER EXPENSES OF RS 1 58 27 390. THE BREAK-UP OF THIS EXPENDITURE IS AT 7 OF THE PAPER BOOK WHICH CLEARLY SHOWS REIMBURSEMENT OF EXPENDITURE OF RS 2 28 92 718 FROM THE GROSS EXPENSES OF RS 3 87 20 108 RESULTING IN THE NET CHARGE OF RS 1 58 27 390. THESE ACCOUNTS WERE ALREADY ON THE RECORDS OF THE AO WHICH WERE ALSO FILED WITH THE CIT(A). C. THEREFORE IT IS FACTUALLY INCORRECT FOR THE DR TO AVER THAT THE DETAILS WERE NEVER FILED WITH THE AO. D. IN THE COURSE OF THE REMAND PROCEEDINGS BEFORE THE AO THE COPIES OF DEBIT NOTES WERE FILED ONLY BY WAY OF CORROBORATIVE MATERIAL AS NOTE D BY THE AO IN THE REMAND REPORT IN PARA 4 WHICH IS PLACED AT PAGE 35 OF THE PAPER BOOK . THEREFORE IT IS SUBMITTED THE PRIMARY EVIDENCE WAS ALREADY ON THE RECORDS OF THE AO WHICH WAS SUPPLEMENTED BY CORROBORATIVE MATERIAL IN THE COURSE OF THE REMAND PROCEEDINGS. EVEN OTHERWISE THE CIT(A) HAS PROVIDED COGENT REASONS FOR ADMISSION OF ADDITIONAL EVIDENCE-IF IT IS SO REGARDED- IN PARA 4 .42 ON PAGE 22 OF THE APPELLATE ORDER READ WITH PARA 4.37 OF THE APPELLATE ORDER. 6) IN THE REMAND REPORT (PAGE 29 TO 36 OF THE PAPER BOOK FILED BY THE ASSESSEE) THE A.O.............SUBMITTED THAT THE SAME CANNOT BE T REATED AS PROFIT DERIVED BY THE UNDERTAKING ON WHICH EXEMPTION/DEDUCTION U/S 10A OF I.T. REPLIES A. THE LEARNED DR HAS NOT NOTICED A SPECIFIC CLAUSE NO 4 IN THE SERVICE AGREEMENT WHICH IS ON RECORDS AT PAGE 61 OF THE PAPER BOOK. B. THIS CLAUSE SPECIFICALLY PROVIDES THAT THE ASSESSEE SHALL BE REIMBURSED THE EXPENSES AT ACTUAL INCURRED OR ARISING OUT OF THE ENGINEERING SERVICE S. C. WITHOUT PREJUDICE THE REIMBURSEMENT OF EXPENSES IS NOT OF INCOME CHARACTER AT ALL SINCE IT REPRESENTS THE RECOUPMENT OF ACTUAL COSTS WHICH REDUCE THE EXPENSES THAT ARE CHARGED TO THE PROFIT AND LOSS ACCOUNT. THE EFFECT ON THE PROFITS WILL BE NEUTRAL IN EITHER CASE. RELIANCE IN THIS BEHALF IS PLACED ON THE DECI SION OF THE DELHI HIGH COURT IN THE CASE OF PEROT SYSTEMS- 2010-TIOL-672-HC-DEL-IT A COPY O F WHICH IS ENCLOSED HEREWITH. 7) IT IS INCONCEIVABLE THAT SUCH A PROPOSAL WAS PREPAR ED AND SENT BY THE MARKETING DEPARTMENT WITHOUT THE CONCURRENCE OF ACCOUNT DEPAR TMENT IN A REPUTED ORGANIZATION. REPLIES AT THE VERY INITIAL STAGE BEFORE THE AO THE THEN CF O OF THE ASSESSEE COMPANY HAD MADE SUBMISSION IN WRITING THAT THE COMPENSATION REVISIO N PROPOSAL WAS NOT VALIDATED OR 16 CONFIRMED BY THE ACCOUNTS DEPARTMENT. PLEASE SEE PA RA 2.12.2 ON PAGE 11 OF THE ASSESSMENT ORDER. 8) THE LEARNED CIT(A) HAS ACCEPTED THE DETAILS FILED BEFORE HIM ON THE ISSUE BUT DOES NOT SEEM TO HAVE VERIFIED AND ADJUDICATED UPON THE ISSUE. REPLIES HERE AGAIN THE SUBMISSION OF THE LEARNED DR IS NOT AS PER THE FINDING ON THE RECORDS. IN PARA 4.42 ON PAGE 22 OF THE APPELLATE ORDER THE LE ARNED CIT(A) HAS CATEGORICALLY RENDERED A FINDING THAT THE ASSESSING OFFICER HAS N OT POINTED OUT ANY FLAW IN THE EXPLANATION OF THE APPELLANT. IN FACT THIS IS THE VERY GRIEVANCE OF THE ASSESSEE THAT DESPITE THIS FINDING THE LEARNED CIT(A) REJECTED THE CASE OF THE ASSESSEE. 9) THE LEARNED COUNSEL OF THE ASSESSEE HAS ALSO STATE D THAT SINCE LEARNED A.O. HAS NOT COMMENTED ADVERSELY IN RESPECT OF RECONCILIATION DU RING THE COURSE OF REASSESSMENT PROCEEDINGS FOR A.Y. 1999-2000 IT CAN BE SAID THAT THE A.O. HAS ACCEPTED THE RECONCILIATION IN RESPECT OF DEBIT NOTES. THIS ARG UMENT HAS NO BASIS AS STAND OF THE A.O. IS ALWAYS CLEAR THAT DEBIT NOTES DO NOT REPRES ENT INCOME OF THE UNDERTAKING FROM EXPORT OF ARTICLES OR THING OR COMPUTER SOFTWARE. MERELY BECAUSE THE A.O. AT ANY GIVEN POINT OF TIME THAT TOO IN A DIFFERENT ASSESSMENT YE AR HAS NOT COMMENTED ADVERSELY DOES NOT LEAD TO THE CONCLUSION THAT HE HAS ACCEPTE D THE RECONCILIATION. THE ISSUE NEEDS TO BE EXAMINED IN TOTALITY AND NOT ON THE BASI S OF ALLEGED SILENCE OF THE AO IN A DIFFERENT ASSESSMENT YEAR. REPLIES IN FACT ONLY BECAUSE THE AO DID NOT RENDER ANY FIND ING ON THE RECONCILIATION FURNISHED BY THE ASSESEE IN THE COURSE OF THE PROCEEDINGS FOR A Y 1999-00 THE LEARNED CIT(A) CALLED UPON THE AO TO SUBMIT THE REMAND REPORT OF THE AO I N THE COURSE OF THE APPELLATE PROCEEDINGS FOR A Y 2001-02 AS IS EVIDENT FROM PAR AS 4 AND 5 OF THE REQUISITION FOR REMAND REPORT WHICH IS PLACED AT PAGES 26 AND 27 OF THE PAPER BOOK. THEREFORE THE SUBMISSION OF THE LEANED DR IS NOT BO RNE OUT FROM THE RECORDS; INDEED THE AO WAS ACCORDED FULL OPPORTUNITY TO MEET THE CONTEN TIONS OF THE ASSESSEE. 10) IT IS NOT CORRECT TO STATE THAT ONLY PROFIT MARGIN OF REVISION STATEMENT BEING 40% ON COST WAS CONSIDERED BY THE A.O. WHILE ESTIMATING T HE PROFIT MARGIN OF COST PLUS 50% IN THE ASSESSMENT ORDER. IN THIS REGARD PARA 2.12.6 O F PAGE 13 OF THE ASSESSMENT ORDER MAY KINDLY BE REFERRED TO. IN THE ABOVE QUOTED PARA THE AO HAS MADE THE FOLLOWING REMARKS IT IS THUS SEEN THAT COMPANIES OF GOOD STAN DING AND REPUTE ENGAGED IN SIMILAR WORK HAVE BEEN EARNING PROFIT MARGIN OF 20- 25% DURING A.Y. 2001-02 AGAINST THE ASSESSEE CLAIMING PROFIT MARGIN OF APPROXIMATELY 70%. THE LEARNED CIT(A) HAS ALSO DISCUSSED THE COMPARABLE TWO CASES AND HAS COM E TO THE FINDING THAT THAT THE AO HAS ALREADY GIVEN HEAVY DISCOUNT AFTER DISCUSSING C OMPARABLE CASES AND ARRIVING AT THE PROFIT OF COST PLUS 50% IN THE ASSESSMENT ORDE R. THE CONCLUDING REMARK OF THE LD. CIT(A) (LAST LINE ON PAGE 27) IS WORTH MENTIONING W HICH READS AS UNDER: IT IS VITALLY IMPORTANT TO CONSIDER THAT THE ASSESSING OFFICER HA S ALREADY GIVEN SUFFICIENT SET OFF FOR REASONS OF HIGH PROFIT BY RESTRICTING THE PROFITS @ 50% AS AGAINST 20-25% IN OTHER COMPARABLE CASES WHICH IS MORE THAN ENOUGH TO TAKE C ARE OF ANY REASON GIVEN BY ASSESSEE IN GENERAL FOR EARNING HIGHER PROFITS. SU CH A HEAVY DISCOUNT HAVING ALREADY ALLOWED BY THE ASSESSING OFFICER IN MY OPINION NO FURTHER RELIEF IS DESERVED BY THE APPELLANT ON THIS SCORE. THEREFORE WHILE DECIDING THE ISSUE BESIDES EXAMINING THE ISSUE OF REIMBURSABLE EXPENSES FINDING ON THE ISSUE OF TWO COMPARABLE CASES WHICH ALSO HAPPEN TO BE THE BASIS FOR ARRIVING AT THE PRO FIT MARGIN OF COST PLUS 50% BY THE AO AND ALSO APPROVED BY THE LEARNED CIT(A) IS A MUST. 17 REPLIES A. FIRST THE CONCLUDING PART OF THE CONTENTIONS ADVAN CED BY THE LEARNED DR NEED TO BE DEALT WITH. IT IS RESPECTFULLY SUBMITTED THAT THE A O DID NOT BASE HIS ESTIMATE ON THE PROFITS OF THE ALLEGED COMPARABLE CASES. RATHER IT NEEDS SPECIFIC EMPHASIS THAT THE AO BASED HIS ESTIMATE ON THE PROFIT MARGIN REFLECTED I N THE FLAWED COMPENSATION REVISION PROPOSAL. THEREFORE FINDING OF THE CIT(A) THAT THE AO HAD GIVEN SUFFICIENT SET-OFF WITH REFERENCE TO THE PROFIT MARGINS OF COMPARABLE CASES IS CONTRARY TO THE PROCESS OF ESTIMATION EMPLOYED BY THE AO. B. WITHOUT PREJUDICE THE FLAWS IN THE FINDINGS OF THE LEARNED CIT(A) WITH RESPECT ARE AS UNDER. C. THE DISSIMILARITIES WITH THE STP UNDERTAKINGS OF TH E ASSESSEE WITH REGARD TO FUNCTIONS RISKS AND RESOURCES EMPLOYED HAVE BEEN BROUGHT ON R ECORD AS PER PAGES 51 TO 54 OF THE PAPER BOOK. IN PARTICULAR REFERENCE IS INVITED TO P AGES 53 AND 54 OF THE PAPER BOOK WHERE THE ACTIVITY PROFILES OF THE ALLEGED COMPARAB LE CASES OF WIPRO AND GEOMETRIC SOFTWARE ARE PLACED ON THE RECORDS. BOTH THESE ENTE RPRISES ARE ENGAGED IN DIVERSE ACTIVITIES WHEREAS THE ASSESSEE COMPANY IS ENGAGED IN THE LIMITED SEGMENT OF RENDERING ENGINEERING AND DESIGNING SERVICES FOR INDUSTRIAL A ND BUILDING AUTOMATION. THERE IS NEITHER ANY FINDING EITHER BY THE AO OR THE CIT(A) NOR ANY INFORMATION HAS BEEN PROVIDED BY THESE ENTERPRISES IN THEIR RESPONSES TO THE AO P URSUANT TO THE ENQUIRIES CONDUCTED BY HIM AS TO THE AMOUNT OF PROFITS DERIVED FROM THE S EGMENT OF ACTIVITY OUT OF THEIR DIVERSE VARIETIES OF THEIR ACTIVITIES WHICH COULD BE FAIR LY COMPARED WITH THE PROFITS DERIVED BY THE STP UNDERTAKINGS OF THE ASSESSEE WHICH ARE ENGA GED IN THE RESTRICTED ACTIVITY FIELD. D. THE CIT (A) HAS ERRED GIVING THE FINDING IN PARA 4. 44 ON PAGE 24 OF THE APPELLATE ORDER THAT THESE DISSIMILARITIES CANNOT CAUSE SIGNIFICANT VARIATIONS IN THE COMPARATIVE PROFITS. ON THE OTHER HAND ON THE BASIS OF SETTLED PRINCIPLE S APPLICABLE TO THEORY OF TRANSFER PRICING SUCH DISSIMILARITIES STRIKE AT THE VERY ROO T OF THE COMPARABILITY AND MORE SO WHEN SUCH FUNDAMENTAL DIFFERENTIALS ARE ALSO NOT AM ENABLE TO COMPENSATORY ADJUSTMENTS. 10. WE HAVE HEARD THE PARTIES AND PERUSED THE ORDER S OF THE REVENUE AND THE AVAILABLE PAPERS BEFORE US. WE HAVE ALSO PERUSED THE WRITTEN SUBMISSIONS AND THE CITATIONS RELIED UPON BY BOTH THE PARTIES. AT THE END ON THIS ISSUE OF INVOKING OF THE PROVIS IONS OF SECTION 145 OF THE ACT WE FIND THAT THE CASE OF THE ASSESSEES COUNSEL IS THAT IT IS NOT A FIT CASE FOR INVOKING OF THE SAID PROVISIO NS AND THEREFORE BOOKS SHOULD NOT HAVE BEEN REJECTED IN THIS CASE CO NSIDERING THE TRIVIALITY OF THE ERRORS ETC. THUS FROM THE ASSESS EES POINT OF VIEW THE AO INVALIDLY ASSUMED JURISDICTION U/S 145 OF THE AC T AND CIT(A) ERRED IN CONFIRMING THE SAME. ON THE OTHER HAND THE CASE OF THE REVENUE IS THAT THE BOOKS ARE NOT ONLY INCOMPLETE BUT ALSO INACCURATE AND THUS THE CORRECT PROFITS OF THE ASSESSEE/UNDERTAKING CAN NOT BE COMPUTED ARRIVED AT WITH THE HELP OF THE BOOKS WHICH ARE FU LL OF MISTAKES. THEREFORE IT IS A FIT CASE FOR REJECTION U/S 145 O F THE ACT. WE NEED TO SORT OUT THIS DEADLOCK AND FOR THIS PURPOSE WE HAV E TRAVELLED TO ELUCIDATE THE SCOPE OF THE PROVISIONS OF SECTION 14 5 OF THE ACT. THE AMENDED PROVISIONS APPLY TO THIS CASE AND THE SAID AMENDED PROVISIONS READ AS UNDER: 18 11. SECTION 145 RELATING TO METHOD OF ACCOUNTING. SECTION 145 A S APPLICABLE TO AY 91-92 READS AS UNDER :- (1) INCOME CHARGEABLE UNDER THE HEAD PROFITS AN D GAINS OF BUSINESS OR PROFESSION OR INCOME FROM OTHER SOURCES SHALL BE SUBJECT TO THE PROVISIONS OF SUB-SECTION (2) BE COMPUTED IN ACCOR DANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY EMPLOY ED BY THE ASSESSEE. (2) THE CENTRAL GOVERNMENT MAY NOTIFY IN THE OFFIC IAL GAZETTE FROM TIME TO TIME ACCOUNTING STANDARDS TO BE FOLLOWED BY ANY CLASS OF ASSESSEES OR IN RESPECT OF ANY CLASS OF INCOME. (3) WHERE THE ASSESSING OFFICER IS NOT SATISFIED ABOUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE OR WHERE METHOD OF ACCOUNTING PROVIDED IN SUB-SECTION (1) OR ACCOUNTING STANDARDS AS NOTIFIED UNDER SUB-SECTION (2) HAVE NOT BEEN REGULARLY FOLLOWED BY THE ASSESSEE THE ASSESSING OFFICER MAY MAKE AN ASSESSM ENT IN THE MANNER PROVIDED IN SECTION 144. A. SUB-SECTION AND (3) ABOVE IS SAME AS THE SUB SECTIO N (2) OF THE PRE AMENDED SECTION 145 OF THE INCOME TAX ACT AND IT HA S FOLLOWING INGREDIENTS NAMELY: (A) AO BEING NOT SATISFIED ABOUT THE CORREC TNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE OR ASSESSEES FAILURE TO TO NOT TO FOLLOW REGULARLY THE METHOD OF ACCOUNTING/ACCOUNTING STANDARDS; AND (B) MAKING OF AN ASSESSMENT IN THE MANNER PROVIDED IN SECTION 145. T HE EXPRESSIONS THE CORRECTNESS AND COMPLETENESS OF ACCOUNTS ARE UN DEFINED HERE. BEFORE ANALYSING THE EXPRESSION IE (I) AO BEING NOT SATIS FIED; (II) THE COMPLETENESS OF THE ACCOUNTS; (III) CORRECTNESS OF THE ACCOUNTS I T IS NECESSARY TO ELABORATE ON WHAT CONSTITUTES THE ACCOUNTS OF THE ASSESSEE USE D IN CONJUNCTION WITH THE CORRECTNESS OR COMPLETENESS. THE SAME HAS NOT BEE N DEFINED IN THE ACT IN THAT FORM. HOWEVER THE FINANCE ACT 2001 INTRODUCED CL AUSE 12(A) OF SECTION 2 PROVIDING FOR AN INCLUSIVE DEFINITION FOR BOOKS OR BOOKS OF ACCOUNTS. THE CLAUSE 12(1) READS AS FOLLOWS :- (12A) BOOKS OR BOOKS OF ACCOUNTS INCLUDES LEDGER S DAY-BOOKS CASH BOOKS ACCOUNT-BOOKS AND OTHER BOOKS WHETHER KEPT IN WRITTEN FORM OR AS PRINT-OUTS OF THE DATA STORED IN A FLOPPY DISC TA PE OR ANY OTHER FORM OF ELECTROMAGNETIC DATA STORAGE DEVICE. B. THE ABOVE DEFINITION PROVIDES THE LIST OF BOOKS TO BE KEPT AND MANNER OF KEEPING WHETHER ANY PRINT OR ELECTRONIC FORMS. THE DAY-BOOKS IS NOT DEFINED NEVERTHELESS IT IS IN THE COMMON KNOWLEDGE IT REFE RS TO CERTAIN REGISTRARS TO BE MAINTAINED TO CONTAIN THE DETAILS OF EACH DAY PARTI CULARS WITH REFERENCE TO RAW MATERIALS RECEIVED OR ISSUED OR CONSUMED OR STOCK O F RAW MATERIALS REMAINED IN STORES IN RESPECT OF BOTH MANUFACTURING OR/ AND TRA DING OR ANY OTHER DAY-TO-DAY ACTIVITIES OF THE BUSINESS. FOR THIS ORDER THERE I S NO NEED FOR EXPLAINING MUCH ON 19 THE DEFINITION OF BOOKS OF ACCOUNTS AS THE PRESENT DISPUTE IN OUR OPINION RELATES TO ONLY ON THE COMPLETENESS OR CORRECTNESS ASPECTS. THEREFORE WE RESTRICT THE PRESENT DISCUSSION ONLY ON THE MEANINGS OF EXPRESSI ONS CORRECTNESS AND COMPLETENESS OF ASSESSEES ACCOUNTS. C. REGARDING THE COMPLETENESS OF ACCOUNTS IN OUR OPINION IT NOT ONLY REFERS TO THE LIST OF THE BOOKS OF ACCOUNTS TO BE M AINTAINED BY THE ASSESSEE AS PER THE STATUTE BUT ALSO TO ALL THE ACCOUNTING ENT RIES FOR ALL THE TRANSACTION DONE DURING THE PREVIOUS YEAR. IN OTHER WORDS THE FAI LURE OF THE ASSESSEE TO MAINTAIN RELEVANT REGISTERS OR ANY OTHER BOOKS DESC RIBED IN THE LIST WITH ALL THE TRANSACTIONS PROPERLY RECORDED IN ACCORDANCE WITH T HE SET PRINCIPLES OF ACCOUNTING MAKES THE ACCOUNTS OF THE ASSESSEE INCO MPLETE. REGARDING THE CORRECTNESS OF THE ACCOUNTS IN OUR OPINION IT R EFERS TO THE QUALITY OR ACCURACY OR RELIABILITY OF THE ACCOUNTS MAINTAINED BY THE AS SESSEE AND IT COVERS THE RECONCILABLE MISTAKES OR ERRORS IN ACCOUNTS. THUS THE COMPLETENESS REFERS TO LIST OF BOOKS OF ACCOUNTS AND ENTRIES THEREIN AND T HE ACCURACY REFERS TO THE QUALITY/ACCURACY/RELIABILITY OF THE ACCOUNTS OF THE ASSESSEE. REGARDING THE REJECTION OF BOOKS OF ACCOUNTS ACCEPTING THE BOOK S OF ACCOUNTS OF THE ASSESSEE IS A RULE AND REJECTING THE SAME IS AN EXCEPTION. THIS IS THE PRINCIPLE IN EXISTENCE. IN ORDER TO ARRIVE AT SUCH CONCLUSIONS BY THE AO IT MUST BE SHOWN THAT THE AO HAS TAKEN INTO CONSIDERATION RELEVANT F ACTORS AND NOT OMITTED TO CONSIDER THE MATERIAL BEFORE HIM. 12. IN THE LIGHT OF THE ABOVE SCOPE OF THE PROVISIO NS WE NEED TO APPLY THE ABOVE TO THE FACTS OF THE PRESENT CASE WHERE THERE IS UNDISPUTED AND EXRESS MISTAKES IN THE ACCOUNTS. IT IS A FACT THE SAID INA CCURACY AMOUNTS TO RS 124.04 LAKHS AND WORKS OUT TO NEARLY 6% OF THE PROFITS AND THE ASSESSEE DESCRIBES THE SAME AS TRIVIAL AND IGNORABLE. STAND OF REVENUE IN THIS REGARD IS THAT THE AO HAS ONLY TO ESTABLISH THE INACCURACY IN THE BOOKS OF AC COUNTS MAINTAINED BY THE ASSESSEE AND THE TRIVIALITY OF OTHERWISE IS NOT THE ISSUE. FURTHER THEY ARE OF THE VIEW THAT THE SAID SUPREME COURT JUDGMENT HAS NOT R ELEVANT TO THE POST AMENDED PROVISIONS OF SECTION 145 OF THE ACT. CHRON OLOGICALLY YES IT IS TRUE THAT THE SAID JUDGMENT RELATES TO THE POST AMENDED PERIO D. THE PROVISIONS ARE CLEAR THAT IN PRINCIPLE THAT THE AO CAN ASSUME JURI SDICTION U/S 145 OF THE ACT EITHER FOR THE REASONING OF THE INCOMPLETE NESS OF THE BOOKS OR FOR THE REASONING OF THE INACCURACY OF THE SAME. IN THE INSTANT CASE THE INACCURACY IS OBVIOUS AND THEREFORE WE HAVE NO PROBLEM IN COMING TO THE CONCLUSION THAT THE BOOKS ARE INACCUR ATE. WE HAVE ALSO 20 CONSIDERED THE ASSESSEES ARGUMENT WHETHER THE BOOK S CAN BE REJECT FOR TRIVIAL INACCURACY AS MADE OUT BY THE ASSESSEE WITH THE HELP OF THE CITED JUDGMENTS. IN OUR OPINION THE SAID JUDGMENT DOES NOT RELATE THE POST AMENDED PERIOD IN TIME AND AMENDED PROVISIONS DOES NOT PROVIDE FOR ANY LEVERAGE TO THE QUANTIFY OF INACCURACY IN T HE BOOKS MAINTAINED BY THE ASSESSEE. CONSIDERING THE FACT THAT THE AO H AS DUG OUT MULTIPLE INACCURACIES AS DETAILED ABOVE IN OUR OPINION THE ASSESSEES EXPLANATION HAS TO BE REJECTED AND THE IMPUGNED INA CCURACIES ARE UNREASONABLE. ASSESSEE MUST BE CAREFUL IN MAINTAINI NG THE BOOKS AND THE RESPONSIBILITY IS MORE ON THE ASSESSEE WHEN IT HAS CLAIMED EXEMPTION U/S 10A OF THE ACT. WHAT IF THE PRESENT I S TAKEN NOT TAKEN UP FOR THE SCRUTINY U/S 143(2) OF THE ACT? THE ASSE SSEE WOULD HAVE GONE WITH THE CLAIM OF HIGHER AND INFLATED EXEMPTIO NS U/S 10A OF THE ACT. IN ALTERNATIVE IF THE PRESENT FALLS IN THE CA TEGORY OF COMPULSORY SCRUTINY THE ASSESSEE STILL GUILTY OF NOT MAINTAIN ING THE BOOKS ACCURATELY. IT IS THE LAW THAT THE BOOKS CAN BE REJ ECTED EITHER FOR DEFAULT OF INCOMPLETE BOOKS OR FOR INACCURATE BOOKS . IN OUR OPINION THE TRIVIALITY OF THE DEFAULT IS NO EXCUSE AS PER T HE AMENDED PROVISIONS OF SECTION 145 OF THE ACT. FURTHER THE DEFAULT WH ICH IS QUANTIFIED TO BE AROUND RS 1.24 CR IN OUR OPINION CANNOT DESCRIBED TRIVIAL IN THIS CASE AS IT IS THE CASE OF EXEMPTION U/S 10A OF THE ACT A ND THE ASSESSEE IS EXPECTED TO BE EXTREMELY RESPONSIBLE IN MATTERS OF MAINTENANCE OF THE BOOKS OF SUCH EXEMPT UNDERTAKINGS. WITHOUT GOING IN TO THE REASONS WHETHER BONA FIDE OR OTHERWISE WE ARE OF THE CONSIDERED OPINION TH E AO HAS RIGHTLY REJECTED THE BOOKS AS PER THE PROVIS IONS OF SECTION 145(3) OF THE ACT. ACCORDINGLY THE RELEVANT GROUNDS OF THE APPEAL ARE DISMISSED. ISSUE OF ESTIMATION OF PROFITS OF THE STP UNITS 13. IN THE PRECEDING PARAGRAPHS WE HAVE UPHELD THE AOS DECISION IN REJECTING THE BOOKS OF THE ACCOUNTS FOR THE DETA ILED REASONS MENTIONED THEREIN. THAT LEAVES THE ISSUE OF THE BE ST JUDGMENT ASSESSMENT IN THE MANNER PRESCRIBED IN SECTION 144 OF THE ACT. AT THE END OF THE ASSESSMENT THE AO HELD THAT ONLY THE SU M OF RS 5 69 99 894/- IS THE ALLOWABLE PROFITS AND THE SAME IS ELIGIBLE FOR EXEMPTION U/S 10A OF THE ACT. OTHERWISE CLAIM OF TH E ASSESSEE IS RS 11 95 79 294/-. THE DIFFERENCE BEING RS 6 25 79 4 00/- IS DISALLOWED 21 AND ADDED TO THE TOTAL INCOME RETURNED FOR THE AY 2 001-02. WHEREAS FOR THE AY 2002-03 THE ASSESSEES CLAIM OF EXEMPTI ON U/S 10A IS RS 15.41 CR (ROUNDED OFF) AND THE AO RESTRICTED THE EX EMPTION CLAIM TO RS 8.51 CR ONLY. IT RESULTED IN MAKING ADDITION OF RS 6.9 CR FOR THE AY 2002-03. BOTH THESE ADDITIONS ARE CONTESTED BY THE ASSESSEE BEFORE US NOW. ASSESSEE IS AGGRIEVED WITH THE SAME AND IT IS THE SECOND LIMB OF THE FIRST CONCISE GROUND. DURING THE ASSESSMENT PROCEEDINGS THE AO HAVING REJECTED THE BOOKS OF ACCOUNT ASKED T HE ASSESSEE TO JUSTIFY THE VERY PROFIT PERCENTAGES OF THE STP UNIT S WHOSE PROFITS ARE EXEMPT U/S 10A OF THE ACT. REFERRING TO THE PROFITS PERCENTAGES OF EXEMPT AND NON EXEMPT UNITS OF THE ASSESSEE FOR THE RELEVANT PERIOD AO OBSERVED THAT THE PROFIT PERCENTAGE OF THE STP UNITS IS 232.49% IE VERY HIGH WHEREAS THE PROFIT PERCENTAGE OF DOMESTIC UNITS OF 2.31%. FURTHER AO NOT ONLY REFERRED TO THE BLATANT MISTAKES IN ARRIVING AT THE SAID HUGE PROFIT PERCENTAGES OF THE STP UNITS BUT ALSO REFERRED TO THE COMPENSATION REVISION PROPOSAL (CRP ) SUBMITTED BY THE ASSESSEE HIMSELF TO THE HONEYWELL INC USA AN ALLIANCE PARTNER. THE CRP INDICATES THAT THE PROFIT MARGIN @ 40% OVER THE COSTS AND THE IMPUGNED STP UNITS ARE PROMINENTLY MEANT FOR TH IS ALLIANCE PARTNER OF THE ASSESSEE. THE FOLLOWING TABLES CONFI RM THE ABOVE POSITIONS. TABLE SHOWING TURNOVER & PROFITS OF VARIOUS UNIT (R S. IN CR) --------------------------------------------------- --------------------------- DOMESTIC STP UNIT TOTAL TURNOVER 258.8 0 17.09 RS 275.89 PROFITS AS PER COMPUTATION OF INCOME 5.41 1 1.95 RS 17.36 PERCENTAGE OF PROFIT ON SALES 2.09% 69.92% 6.29% PERCENTAGE OF PROFIT ON COST 2.13% 232.49 % 6.71% TABLE SHOWING PROFIT MARGIN @ 40% ON THE COST VIDE THE CRP PARTICULARS COSTS CRP COST P&L A/C FOR FY 00-01 SALE 100% 100% 22 TOTAL COST 74.53% 30.04% PROFIT MARGIN @ 40% ON COST 28.556% 69.96% TOTAL 100% 100% 14. AO ASKED THE ASSESSEE TO JUSTIFY THE ABOVE CLAI MS OF THE ASSESSEE AND PROPOSAL TO ADOPT THE PROFIT MARGINS A S PER THE CRP. IN RESPONSE ASSESSEE CONTENDED THAT THAT THE (I) THE FIGURES OF CRP ARE SUPPLIED BY THE MARKETING DEPARTMENT UNCONFIRMED BY THE FINANCE& ACCOUNTS DEPARTMENT AND THEREFORE THEY ARE NOT COR RECT AND CREDIBLE FIGURES; AND (II) CRP IS MEANT FOR FY 2001-02 AND N OT FOR THE YEAR UNDER CONSIDERATION. FURTHER THE AO ASKED THE ASSE SSEE TO CONFIRM THE COST ANALYSIS LEADING TO 232.49% MARGIN OF THE STP UNITS. IN RESPONSE THE ASSESSEE FILED THE FOLLOWING RESPONSE IE WE CONFIRM AND REITERATE THAT AS STATED VIDE OUR SUBMISSION DT 26 .2.2004 THE ESTIMATION GIVEN BY OUR MARKING DEPT WAS INCORRECT AND SHOULD NOT BE TREATED AS THE BASE FOR FINANCIAL YEAR 2000-01. THUS THE AO CAME TO THE CONCLUSION THAT THE SAID BOOK RESULTS OF THE AS SESSEE ARE NOT CREDIBLE AND ASSESSEE HAS EXPLANATION TO JUSTIFY TH E SAME. FURTHER HE CAME TO THE CONCLUSION THAT THE FIGURES IN THE CRP ARE ACTUAL AND NOT MERE ESTIMATES AS CONTENDED BY THE ASSESSEE. AO REA SONED THAT THE ASSESSEE THE ALLIANCE PARTNER OF SUCH REPUTE SHALL NOT SUBMIT THE CRP IN CASUAL MANNER TOO. FURTHER THE AO COLLECTED THE BOOK RESULTS OF THE COMPARABLE COMPANIES IE WIPRO TECHNOLOGIES LTD AND GEOMETRIC SOFTWARE LTD AND CONCLUDED THAT THEIR PROFIT MARGIN S VARY FROM 20- 25% ONLY AGAINST THE PROFIT MARGIN OF 69.96% . 15. THUS THE AO CONSIDERED THE INCONGRUOUS PROFIT M ARGINS OF VARIOUS SEGMENTS OF THE ASSESSEE IE DOMESTIC AND ST P UNNITS CUM THE HIGH PITCHED MARGINS OF THE STP UNITS ON ONE SIDE A ND THE LOWER PROFIT MARGINS OF THE COMPARABLE CASES IE WIPRO AND GEOMET RIC SOFTWARE COMPANIES ON THE OTHER AND REJECTED THE BOOK RESULT S OF THE ASSESSEE. RESULTANTLY KEEPING IN TUNE WITH THE PROVISIONS OF SECTION 145(3) OF THE ACT THE AO ASSUMED THE POWERS OF THE BEST JUDGM ENT ASSESSMENT AND PROCEEDED TO IN PRINCIPLE RELY ON THE CONTENTS OF THE CRP. THUS THE AO IS OF THE OPINION THAT THE ESTIMATION OF THE PROFIT OF THE STP UNITS @ 50% OF THE COST IS PROPER. RELEVANT DISCUSSI ON IS GIVEN IN PARA 23 2.12 OF THE ORDER OF THE AO AND PARA 2.12.6 TO 2.12 .9 ARE REPRODUCED AS UNDER: 2.12.6 IT IS THUS SEEN THAT COMPANIES OF GOOD STAN DING AND REPUTE ENGAGED IN SIMILAR WORK HAVE BEEN EARNING PR OFIT MARGIN OF 20-25% DURING THE AY 2001-02 AGAINST THE ASSESSE E CLAIMING PROFIT MARGIN OF APPROXIMATELY 70%. 2.12.7 IN VIEW OF THE NUMBER OF DEFECTS FOUND AND A DMITTED BY THE ASSESSEE IN THE CALCULATION OF PROFITS OF TH E STP UNITS AND THE EXEMPTION CLAIMED UNDER SECTION 10A AS REPORTED IN THE CRP THE BOOK RESULTS ARE REJECTED U/S 145(3) OF TH E I T ACT 1961 AND THE INCOME EARNED BY THE STP UNITS IS CALC ULATED AS UNDER: STP TURNOVER 17 09 99 684/- PROFIT ESTIMATED @ 50% OF COST: 5 69 99 894/- 2.12.8 PROFIT AS A PERCENTAGE OF COST IS TAKEN AT 5 0% INSTEAD OF 40% REPORTED FOR AY 2002-03 ALLOWING FO R A 10 PERCENTAGE POINT VARIATION IN FAVOUR OF THE ASSESSE E. THIS IS ON THE PREMISE OF INCREASE IN COST OVER SUCCESSIVE YEA RS. 2.12.9 THUS THE EXEMPTION U/S 10A IS ALLOWABLE AT 5 69 99 894/-AS AGAINST RS 11 95 79 294/- CLAIMED I N THE RETURN OF INCOME. THE DIFFERENCE BEING RS 6 25 79 400/- I S DISALLOWED AND ADDED TO THE TOTAL INCOME RETURNED. THUS THE AO MADE ADDITION OF RS 6 25 79 400/- WITH WHICH THE ASSESSEE IS AGGRIEVED AND FILED AN APPEAL BEFORE TH E CIT(A). 16. ASSESSEE SUBMITTED THAT THE PROFIT MARGINS OF D OMESTIC AND STP SEGMENTS ARE INCOMPARABLE AS THEY ARE OF DIFFERENT BUSINESS ACTIVITIES AND THE TURN OVERS. FURTHER THE ASSESSEE ARGUED TH AT THE AO FAILED TO FIND ANY SPECIFIC CONCEPTUAL DEFECTS IN THE METHOD ADOPTED BY THE ASSESSEE IN COMPUTING THE PROFITS OF THE STP UNITS. ASSESSEE FURTHER MENTIONED THAT THE MISTAKES IF ANY IN ALLOCATION OF EXPENDITURE AMOUNTS TO ONLY RS 1.24 CRORES WHICH IS NEGLIGIBLE. FURTHER THE ASSESSEE FOUND FAULT WITH THE AO DECISION TO RELY O N THE SO CALLED COMPARABLE IE WIPRO AND GEOMETRIC SOFTWARE COMPANIE S AND ATTEMPTED TO DEMONSTRATE THAT THEY ARE INCOMPARABLE PARA 4.44 TO 4.48 OF THE IMPUGNED ORDER ARE RELEVANT. 17. ATTEMPTING TO BRIDGE THE GAP BETWEEN THE FIGURE S OF CRP AND THE BOOK RESULTS THE ASSESSEE SUBMITTED FOR FACTORING THE SAME AND MENTIONED THAT THE AO FAILED TO CONSIDER THE AMOUNT S INVOLVED IN THE REIMBURSEMENT OF EXPENDITURE. ASSESSEE GOT REIMBU RSEMENT OF THE EXPENDITURE AMOUNTING RS 2.29 CR INCURRED ON THEIR EMPLOYEES TRAVEL ABROAD. OF COURSE THE SAID FIGURE SHOULD BE RS 54 LAKHS FOR THE AY 24 UNDER CONSIDERATION AS PER THE AO VIDE DISCUSSION O N PAGE 7 OF THE AOS ORDER. ACTUALLY THE ASSESSEE SUBMITTED ADDITIONAL EVIDENCE RELATING THE SAID DEBIT NOTES RELATING TO THE SAID REIMBURSEMENT OF EXPENDITURE BEFORE THE CIT(A) AND THE AO OPPOSED TH E ADMISSION OF THE SAME IN THE REMAND PROCEEDINGS. AS PER THE AO T HE PROVISIONS OF RULE 46A DOES NOT PERMIT ADMISSION OF SUCH ADDITION AL EVIDENCE. ON THE OTHER HAND THE CASE OF THE ASSESSEE IS THAT TH ERE IS NO ROLE OF 46A AND IT IS MERELY A CASE OF OTHER EXPLANATION BEFORE THE CIT(A) AND PLEADED FOR CONSIDERING THE SAID DEBIT NOTES DURING THE FIRST APPELLATE PROCEEDINGS. AS PER THE ASSESSEE IF THESE DEBIT NO TES ARE CONSIDERED THERE WILL BE HARDLY ANY DIFFERENCE BETWEEN THE CRP FIGURES AND THE BOOK RESULTS. AS PER THE ASSESSEE IF THESE DEBIT N OTES ARE TO BE FACTORED IN THE WORKING MADE BY THE MARKETING DIVIS ION THE DICHOTOMY BETWEEN THE PROFIT MARGIN WORKED OUT BY IT AND THAT AS PER THE P & L ACCOUNT OF STP UNDERTAKINGS WILL BE NARROWED DOWN C ONSIDERABLY. 18. AT THE END OF THE FIRST APPELLATE PROCEEDINGS VIDE THE PARA 4.42 OF HIS ORDER THE CIT(A) CAME TO THE CONCLUSION THA T THE IMPUGNED DEBIT NOTES THE ADDITIONAL EVIDENCE MUST BE ADMI TTED. REGARDING THE COMPARABLES OF WIPRO AND GEOMETRIC SOFTWARE COMPANI ES AS STATED IN PARA 4.44 CIT(A) WAS NOT SATISFIED WITH THE EXPLAN ATION OF THE ASSESSEE AND HELD THAT THE ASSESSEES EXPLANATION I N INCONCLUSIVE IN PROVING THE VARIATION OF PROFITS IE 20-25% OF THE C OMPARABLES VIS AVIS ASSESSEES 70% (ROUNDED OFF). IN THE PROCESS THE C IT(A) REJECTED THE HYPER TECHNICAL APPROACH OF THE ASSESSEE IN ARGUING IN FAVOUR FOR THE INCOMPARABILITY OF THE SAID CASES TO THAT OF THE AS SESSEE. OTHERWISE THE ASSESSEES SUBMISSIONS REVOLVE AROUND THE DOM AIN EXPERTISE OF THE STP UNITS AND THEREFORE HIGHER PROFITS OF THE STP UNITS WAS ALSO REJECTED BY THE CIT(A) HOLDING THAT THE ASSESSEE FA ILED TO DEMONSTRATE THE SAME CONCLUSIVELY. FINALLY THE CIT(A) HELD THA T THE AO IS REASONABLE IN GRANTING RELIEF OF 10% OVER AND ABOVE 40% PROPOSED IN THE CRP OF THE ASSESSEE. SUCH HUGE DISCOUNT ALREADY ALLOWED BY THE AO THE CIT(A) REFUSED TO GRANT FURTHER RELIEF TO T HE ASSESSEE AND AT THE END OF THE FIRST APPELLATE PROCEEDINGS THE CIT (A) CONFIRMED THE DISALLOWANCE OF RS 6 25 79 400/-. AGGRIEVED WITH TH E SAME THE ASSESSEE IS IN THE APPEAL BEFORE US. 25 19. DURING THE PROCEEDINGS BEFORE US LD COUNSEL FO R THE ASSESSEE ELABORATELY DETAILED ALL THE ARGUMENTS THAT WERE TA KEN BEFORE THE LOWER AUTHORITIES AND PRAYED THAT THE BOOK RESULTS MUST BE ACCEPTED WITHOUT ANY AMENDMENT. THE WRITTEN SUBMISSION ON TH E ISSUE OF ESTIMATION IS REPRODUCED AS UNDER: ESTIMATION OF INCOME EXEMPT UNDER SECTION 10A 1) ...... 2) THE SUBMISSIONS IN THIS BEHALF ARE AS UNDER: A. THE PROFIT RATIO OF 40% OF F Y 2001-02 STATED IN TH E COMPENSATION REVISION PROPOSAL IS RECONCILED WITH THE ACTUAL PROFITS AT 195% OF COSTS FOR THAT YEAR AS PER THE FINDING OF THE CIT(A) IN PARAS 4.31 TO 4.39 ON PAGES 17 TO 21 OF T HE APPELLATE ORDER AND IN PARA 4.42 ON PAGE 22 OF THE APPELLATE ORDER READ WITH THE WORKIN G OF RECONCILIATION AT PAGE 28 OF THE PAPER BOOK. B. THEREFORE THE VERY BASIS OF THE ESTIMATE MADE BY TH E AO HAS BEEN REVISED CONSEQUENT UPON THE REMAND REPORT OF THE AO AND THE FINDING TH EREON BY THE CIT (A). C. THOUGH THE AO DID NOT BASE THE ESTIMATE ON THE PROF IT RATIOS OF THE ALLEGED COMPARABLE CASES OUT OF ABUNDANT CAUTION THE DISSIM ILARITIES WITH THE STP UNDERTAKINGS OF THE ASSESSEE WITH REGARD TO FUNCTIO NS RISKS AND RESOURCES EMPLOYED HAVE BEEN BROUGHT ON RECORD AS PER PAGES 51 TO 54 O F THE PAPER BOOK. IN PARTICULAR REFERENCE IS INVITED TO PAGES 53 AND 54 OF THE PAPE R BOOK WHERE THE VARIEGATED ACTIVITY PROFILES OF THE ALLEGED COMPARABLE CASES OF WIPRO A ND GEOMETRIC SOFTWARE ARE PLACED ON THE RECORDS AS DISTINGUISHED FROM THE RES TRICTED ACTIVITY OF THE ASSESSEE. THERE IS NEITHER ANY FINDING EITHER BY THE AO OR TH E CIT(A) NOR ANY INFORMATION HAS BEEN PROVIDED BY THESE ENTERPRISES IN THEIR RESPONS ES TO THE AO PURSUANT TO THE ENQUIRIES CONDUCTED BY HIM AS TO THE PROFITS EARNED BY THESE ENTERPRISES FROM THE ACTIVITIES SIMILAR TO THOSE PERFORMED BY THE ASSES SEE. D. THE CIT (A) HAS ERRED GIVING THE FINDING IN PARA 4. 44 ON PAGE 24 OF THE APPELLATE ORDER THAT THESE DISSIMILARITIES CANNOT CAUSE SIGNIFICANT VARIATIONS IN THE COMPARATIVE PROFITS. ON THE OTHER HAND ON THE BASIS OF SETTLED PRINCIPLE S APPLICABLE TO THEORY OF TRANSFER PRICING SUCH DISSIMILARITIES STRIKE AT THE VERY ROO T OF THE COMPARABILITY AND MORE SO WHEN SUCH FUNDAMENTAL DIFFERENTIALS ARE ALSO NOT AM ENABLE TO COMPENSATORY ADJUSTMENTS. E. ON PAGE 27 OF THE APPELLATE ORDER THE CIT(A) HAS RE FERRED TO THE PROVISIONS OF 80 IA(8) READ WITH SECTION 10A(7) AND HELD THAT THE STP UNIT S OF THE ASSESSEE HAS EARNED MUCH MORE THAN THE ORDINARY. THIS FINDING OF THE CIT (A) IS NOT TENABLE ON THE BASIS OF THE FACTS ON RECORD. FIRST THE CIT(A) HAS OMITTED TO CONSIDER THAT THE INVOICI NG RATE FOR THE GENERAL SERVICES RENDERED TO HONEYWELL GROUP HOLDING 40% OF THE PAID UP CAPITAL WAS SAME AS THAT CHARGED TO AN ENTERPRISE IN TATA GROUP- WHICH IS NOT ASSOCIATED WITH THE HONEYWELL GROUP- WHICH ALSO HELD 40% OF THE PAID U P CAPITAL OF THE ASSESSEE COMPANY. MORE PERTINENTLY THE REVENUES EARNED FROM HONEYWELL GROUP ARE EXEMPT UNDER SECTION 10A WHEREAS THE REVENUES EARNED FROM TATA ENTERPRISE IN INDIA ARE TAXABLE. THESE FACTS HAVE BEEN STATED ON PAGE 10 OF THE APPELLATE ORDER. SECOND IT IS DEMONSTRABLY UNTENABLE TO INVOKE THE PROVISIONS OF SECTION 10A(7) IN THE FACTS OF THE ASSESSEES CASE SINCE IT WILL BE INCONCEIVABLE TO A LLEGE THE MOTIVE TO A SHAREHOLDER HOLDING 40% STAKE IN THE CAPITAL OF TRANSFERRING EX CESSIVE PROFITS TO THE INVESTEE COMPANY FROM WHICH 60% WILL BE FOR THE BENEFIT OF T HE NON-ASSOCIATE SHAREHOLDERS. REVISED ESTIMATE OF THE PROFITABILITY BASED ON THE RECONCILED RATIO OF PROFITS IN THE COMPENSATION REVISION PROPOSAL: A. IF THE ESTIMATE OF THE PROFITS AS PER AOS STAND IS TO BE REWORKED BASED ON THE RECONCILED PROFITABILITY OF THE COMPENSATION REVISI ON PROPOSAL THE RESULT WILL BE AS UNDER. B. PAGE 28 OF THE PAPER BOOK MAY BE REFERRED TO WHERE THE PROFITS/COSTS RATIO OF 40% AS PER THE COMPENSATION REVISION PROPOSAL HAS BEEN REC ONCILED TO THE ACTUAL RATIO OF 195% (PRE-CORRECTION RATIO) RELATING TO A Y 2002-03 AFTE R CONSIDERING THE REIMBURSEMENT OF EXPENSES AND THE ACTUAL BILLING RATE. HOWEVER IT BE ARS NOTICE THAT THE COSTS CONSIDERED IN THE SAID RECONCILIATION ARE BEFORE THE CORRECTION O F ALLOCATION OF EXPENSES CONSIDERED IN 26 THE ACCOUNTS OF STP UNITS IN A Y 2002-03 AS CLEARLY MENTIONED IN COLUMN 4 OF THE CHART AT PAGE 28 OF THE PAPER BOOK. C. POST CORRECTION THE PROFITS/COSTS RATIO STANDS REVI SED DOWNWARDS TO 153%- FROM 195% - AS STATED BY THE AO IN PARA 3.2.3 ON PAGE 5 OF THE ASSESSMENT ORDER FOR A Y 2002-03. D. IN THE PREMISE THEREFORE THE REVISED ESTIMATE OF PR OFITS WILL WORK TO 163% (153%+10%) OF COSTS IN A Y 2001-02 AS AGAINST 232% CLAIMED IN RETURN OF INCOME AND 50% ALLOWED BY AO. FROM THE ARGUMENTS OF THE ASSESSEE PROFITS AT 40% OVER THE COST WORKS OUT TO STP PROFITS @ 153% FOR THE AY 2002-03. SIMILARLY FOR THE AY 2001-02 THE REVISED PROFITS WILL WORK OUT TO 16 3% INCLUDING THE 10% ALLOWED BY THE AO FOR THIS YEAR. 20. PER CONTRA LD DR FOR THE REVENUE VEHEMENTLY SUPPORTED THE ESTIMATIONS OF THE AO AND PRAYED FOR CONFIRMING THE ORDER OF THE CIT(A). ON THE ISSUE OF DEBIT NOTES LD DR MADE T HE FOLLOWING WRITTEN SUBMISSIONS AND THEY ARE EXTRACTED AS UNDER: THE DETAILS WERE NEVER FILED BEFORE THE A.O DURING THE COURSE OF ASSESSMENT PROCEEDINGS FOR A.Y 2001-02 WHICH IS THE LEAD YEAR OF INVESTIGATION ON THE ISSUE. THE DETAILS WERE SUBMITTED BEFORE THE LEARNED CIT ( A) AS ADDITIONAL EVIDENCE WHICH WAS ADMITTED BY HIM AFTER OBTAINING THE REMAND REPORT OF THE A.O. IN THE REMAND REPORT DATED 6/11/2006 (PAGE 29 TO 36 OF THE PAPER BOOK FILED BY THE ASSESSEE) THE A.O NOT ONLY OBJECTED T O ADMISSION OF ADDITIONAL EVIDENCE BUT ALSO SUBMITTED THAT THAT TH E SAME CANNOT BE TREATED AS PROFIT DERIVED BY THE UNDERTAKING ON WHI CH EXEMPTION/ DEDUCTION U/S 10A OF I.T.ACT CAN BE CLAIMED. SECTION 10 A BENEFIT IS AVAILABLE TO THE UNDERTAKI NG ON THE PROFIT AND GAINS DERIVED FROM THE EXPORT OF ARTICLES OR THING OR COMPUTER SOFTWARE. CLAIM OF REIMBURSEMENT BY WAY OF ALLEGED DEBIT NOTE S AMOUNTING TO RS.2 28 92 718/- WAS OVER AND ABOVE INVOICE PRICE .( KINDLY REFER 8 TH LINE ON PAGE 9 OF CIT(A)S ORDER FOR A.Y 2001-02. T HIS BEING SO IT CANNOT BE SAID THAT IT IS IN CONNECTION WITH INSTALLATION OF SOFTWARE WHICH IS THE SUBJECT MATTER OF EXPORT. IN FACT THERE IS NO CONNE CTION BETWEEN EXPORT INVOICE OF SOFTWARE AND REIMBURSEMENT OF EXPENSES. SINCE REIMBURSEMENT OF EXPENSES WERE OVER AND ABOVE INVOICE RATE THE SAME CANNOT BE CONSIDERED FOR ARRIVING AT THE PROFIT MARGIN BASED ON BILLABLE MAN HOURS AS STATED ON PAG E 28 OF THE PAPER BOOK FILLED BY THE ASSESSEE. IN FACT DUE TO V ERY SAME REASONS REIMBURSEMENT OF EXPENSES WAS NOT CONSIDERE D BY THE ASSESSEE WHILE SENDING THE REVISION PROPOSAL WHERE PROFIT WAS WORKED OUT AT 40 % PLUS COST . 27 IT IS INCONCEIVABLE THAT SUCH A PROPOSAL WAS PREPAR ED AND SENT BY THE MARKETING DEPARTMENT WITHOUT THE CONCURRENCE OF ACC OUNT DEPARTMENT IN A REPUTED ORGANIZATION. THEREFORE THE THEORY OF DE BIT NOTES OVER AND ABOVE WHAT HAS BEEN CONSIDERED BY THE A.O IS NOTHIN G BUT AN AFTERTHOUGHT AND NEEDS TO BE REJECTED. THE LEARNED CIT (A) HAS ACCEPTED THE DETAILS FILED BEFORE HIM ON THE ISSUE BUT DOES NOT SEEM TO HAVE VERIFIED AND ADJUDICATED UPON THE ISSUE. HAD HE VERIFIED AND ACCEPTED THE RECONCILIATION HE WOUL D HAVE ALSO ACCEPTED THE COMPUTATION SUBMITTED BY THE ASSESSEE IN RESPEC T OF PROFIT MARGIN. SINCE CIT (A) HAS DISMISSED THE APPEAL ON MERIT TOO IT CAN BE SAFELY CONCLUDED THAT THE LEARNED CIT (A) HAS REJECTED THE RECONCILIATION IN RESPECT OF PROFIT MARGIN SUBMITTED BY THE ASSESSEE. THE LEARNED COUNSEL OF THE ASSESSEE HAS ALSO STATED THAT SINCE LEARNED A.O HAS NOT COMMENTED ADVERSELY IN RESPECT OF RECON CILIATION DURING THE COURSE OF REASSESSMENT PROCEEDINGS FOR A.Y 1999-200 0 IT CAN BE SAID THAT THE A.O HAS ACCEPTED THE RECONCILIATION IN RESPECT OF DEBIT NOTES. THIS ARGUMENT HAS NO BASIS AS STAND OF THE A.O IS ALWAYS CLEAR THAT DEBIT NOTES DO NOT REPRESENT INCOME OF THE UNDERTAKING WHICH CA N BE SAID TO BE DERIVED BY THE UNDERTAKING FROM EXPORT OF ARTICLES OR THING OR COMPUTER SOFTWARE. MERELY BECAUSE THE A.O AT ANY GIVEN POINT OF TIME THAT TOO IN A DIFFERENT ASSESSMENT YEAR HAS NOT COMMENTED ADVERSE LY DOES NOT LEAD TO THE CONCLUSION THAT HE HAS ACCEPTED THE RECONCILIAT ION. THE ISSUE NEEDS TO BE EXAMINED IN TOTALITY AND NOT ON THE BASIS OF ALLEGED SILENCE OF THE AO IN A DIFFERENT ASSESSMENT YEAR. PROPOSAL MADE BY THE ASSESSEE TO HONEYWELL INC USA FOR REVISION OF THE TERMS OF ALLIANCE AGREEMENT WAS MADE IN AUGUST 2002 .HOWEVER THE PROPOSAL WAS BASED ON ACTUAL FINANCIAL NUMBERS FOR F.Y 2001-02. IN A BEST JUDGMENT ASSESSMENT THE A. O WAS PERFECTLY JUSTIFIED IN TAKING THE PROFIT MARGIN BEING 40 % PLUS COST AS ONE OF THE BA SE . IT IS NOT CORRECT TO STATE THAT ONLY PROFIT MARGIN OF REVISION STATEMENT BEING 40% ON COST WAS CONSIDERED BY THE A.O WHILE E STIMATING THE PROFIT MARGIN OF COST PLUS 50% IN THE ASSESSMENT ORDER. IN THIS REGARD PARA2.12.6 OF PAGE 13 OF THE ASSESSMENT ORDER MAY K INDLY BE REFERRED TO. IN THE ABOVE QUOTED PARA THE A.O HAS MADE THE FOLLO WING REMARKS IT IS THUS SEEN THAT COMPANIES OF GOOD STANDING AND REPUT E ENGAGED IN SIMILAR WORK HAVE BEEN EARNING PROFIT MARGIN OF 20-25% DURING A.Y.2001- 02 AGAINST THE ASSESSEE CLAIMING PROFIT MARGIN OF A PPROXIMATELY 70%. THE LEARNED CIT (A) HAS ALSO DISCUSSED THE COMPAR ABLE TWO CASES AND HAS COME TO THE FINDING THAT THAT THE AO HAS AL READY GIVEN HEAVY DISCOUNT AFTER DISCUSSING COMPARABLE CASES AND ARRI VING AT THE PROFIT OF COST PLUS 50% IN THE ASSTT. ORDER. THE CONCLUDING R EMARK OF THE LD.CIT(A) (LAST LINE ON PAGE27)IS WORTH MENTIONING WHICH READ S AS UNDER: IT IS VITALLY IMPORTANT TO CONSIDER THAT THE ASSESSING OF FICER HAS ALREADY GIVEN SUFFICIENT SETOFF FOR REASONS OF HIGH PROFIT BY RE STRICTING THE PROFITS@ 50% AS AGAINST 20-25 % IN OTHER COMPARABLE CASES WHICH IS MORE THAN ENOUGH TO TAKE CARE OF ANY REASON GIVEN BY ASSESSEE IN GEN ERAL FOR EARNING HIGHER PROFITS. SUCH A HEAVY DISCOUNT HAVING ALREADY ALLOW ED BY THE ASSESSING OFFICER IN MY OPINION NO FURTHER RELIEF IS DESERVE D BY THE APPELLANT ON THIS SCORE. THEREFORE WHILE DECIDING THE ISSUE BESIDES EXAMINI NG THE ISSUE OF REIMBURSABLE EXPENSES FINDING ON THE ISSUE OF TWO COMPARABLE CASES WHICH ALSO HAPPEN TO BE THE BASIS FOR ARRIVIN G AT THE PROFIT 28 MARGIN OF COST PLUS 50 % BY THE A.O AND ALSO APPROV ED BY THE LEARNED CIT (A) IS A MUST. SINCE REIMBURSEMENTS ARE CLAIMED TO BE BASED ON ACTUAL THERE CANNOT BE PROFIT ELEMENT AND IN ORDER TO ARRIVE AT THE REA L PROFIT OF THE UNDERTAKING ELIGIBLE FOR BENEFIT UNDER SECTION 10 A OF THE I.T.ACT THE SAME NEEDS TO BE EXCLUDED . WITHOUT PREJUDICE TO THE ABOVE EVEN IF THERE IS AN Y PROFIT ELEMENT THE SAME CANNOT BE SAID TO BE PROFIT DERIVED BY THE UND ERTAKING AND STILL NEEDS TO BE EXCLUDED FOR THE PURPOSE OF BENEFIT U/S 10A. PROFIT MARGIN @195% PLUS COST AS CLAIMED BY THE ASS ESSEE ON PAGE 28 OF PAPER BOOK FILED BY THE ASSESSEE AND WHICH IS BEING REQUESTED TO BE CONSIDERED BY THE LEARNED COUNSEL OF THE ASSESSEE I S TOO HIGH TO BE ADOPTED IN ASSESSEES CASE IN VIEW OF COMPARATIVE CASES D ISCUSSED BY THE A.O AS WELL AS REVISION PROPOSAL SENT BY THE AS SESSEE ITSELF. STRONG RELIANCE IS PLACED ON THE ORDER OF A.O AS WE LL AS CIT (A) ON THE ISSUE. THEREFORE IN VIEW OF THE ABOVE SUBMISSIONS AND TOT ALITY OF FACTS IT IS SUBMITTED THAT THE APPEAL OF THE ASSESSEE BE DISMIS SED FOR BOTH THE YEARS. SUBMITTED 21. WE HAVE HEARD THE PARTIES AND PERUSED THE ORDER S OF THE REVENUE PAPERS AVAILABLE BEFORE US AND THE WRITTEN SUBMISSIONS OF THE PARTIES IN THE DISPUTE. FROM THE DATA TABULATED IN THE PRECEDING PARAGRAPHS FOR THE AY 2001-02 WE FIND THAT THE TURNOVER IS 17.09 CR AND PROFITS WORKS OUT TO RS 11.95 CR IE WORKS OUT TO 69.92%. CONSIDERING THE COST AS PER THE ASSESSEE T HE % OF PROFIT OF THE STP UNITS ON COST WORKS OUT TO 232.49%. WHEREAS THE ASS ESSEES DATA OF THE % OF PROFIT OF THE STP UNITS ON COST WORK AS PER THE CRP IS ONLY 40%. FURTHER THE ASSESSEES REJECTED BOOKS ADVOCATES FOR 69.96% OVER THE COST. HOWEVER REJECTING ABOVE CLAIMS THE AO ALLOWED THE % OF PRO FIT OF THE STP UNITS ON COST AT RS 50% FOR THE AY 2001-02. ALL THESE DATA WORKED OUT WITHOUT CONSIDERING THE REIMBURSEMENT OF THE EXPENDITURE WHICH IS THE SUBJ ECT MATTER OF DISPUTE BEFORE US. AO CONSIDERED THE COMPARABLE CASES WHICH ARE O THER ARE NOT ACCEPTED BY THE ASSESSEE AS COMPARABLES ON MANY GROUNDS. WITH R EGARD TO THESE REIMBURSED EXPENSES THE CASE OF THE ASSESSEE IS THAT IF THE SAME ARE CONSIDERED THE GAP IN THE PROFITS MARGINS ARE GREAT LY RECONCILABLE AND CONSEQUENTLY THE UNRECONCILED GAP WORKS OUT TO NEG LIGIBLE ONE AND IT SHOULD BE IGNORED AND CONSEQUENTLY THE BOOK RESULTS SHOULD B E ACCEPTED. FURTHER THE ASSESSEE IS OF VIEW THAT THE AO ACCEPTED THE NEED F OR CONSIDERING SUCH REIMBURSED EXPENDITURE WHICH OF COURSE THE DR RE JECTS SUCH AN UNDERSTANDING OF THE ASSESSEE. OTHERWISE THE DR RAISED VARIOUS S UBMISSIONS BEFORE US STATING THAT THESE REIMBURSED EXPENDITURE HAS NO PROFIT COM PONENT THESE ARE OUTSIDE 29 THE SCOPE OF THE EXEMPTION PROVISIONS U/S 10A OF TH E ACT ETC AS EXTRACTED IN THE PRECEDING PARAGRAPHS OF THIS ORDER. ON THE CONTRARY THE ASSESSEE RAISED VARIOUS OTHER COUNTER SUBMISSIONS AND IN FAVOUR OF THE ASSE SSEE. 22. THUS GROUND 1 HAS TWO LIMBS AND FIRST ONE REL ATES TO THE VALIDITY OF THE INVOKING OF THE PROVISIONS OF SECTION 145 OF THE AC T AND WE HAVE UPHELD THE DECISION OF THE AO IN THIS REGARD. THE SECOND LIMB OF THE GROUND RELATES TO THE BEST JUDGMENT IN THE MANNER OF THE PROVISION OF SEC TION 144 OF THE ACT. AS PER THE REVENUE PROFIT PERCENTAGE @ 232.49% IS TOO HIG H AND THEY HELD THAT THE % OF PROFIT OF THE STP UNITS ON COST @ 50% IS REASONA BLE. THIS IS AGAINST THE 40% AS PER THE CRP MADE BY THE ASSESSEE DURING THE AY 2 002-03. FURTHER THE AO RELIES ON THE COMPARABLE CASES OF WIPRO AND GEOMETRIC SOFTWARE COMPANIES OF COURSE THE CIT(A) SUMMARILY REJECTED WITHOUT PR OPER ANALYSIS OR REASONING. PER CONTRA THE CASE OF THE ASSESSEE IS THAT THE SAID COMPARABLE CASES ARE IN FACT NOT COMPARABLE ONES CO NSIDERING THE SERVICES PRODUCT LINES ETC. FURTHER AS PER THE AS SESSEE THE PROFIT % OF 232.49 HAS TO BE ADJUSTED DOWNWARDS IF THE REI MBURSEMENT OF EXPENDITURE IS CONSIDERED. IN THAT CASE THE GAP I S REDUCED MARGINALLY. CONSIDERING THE ABOVE DIVERGENT POSITIONS WE HAVE PERUSED THE ORDER OF THE CIT(A) AND FIND THAT THE SAME HAS NOT MET VA RIOUS ARGUMENTS OF THE ASSESSEE. EVEN DURING THE PROCEEDINGS BEFORE US THE PARTIES HAVE FAILED TO DEMONSTRATE VARIOUS ASPECT RELATING TO TH E SAID REIMBURSEMENTS AND ITS IMPACT ON THE PROFIT MARGIN OF RS 232.49%. THUS SO FAR AS THE REIMBURSED EXPENDITURE IS CON CERNED WE FIND THERE IS LACK OF FACTUAL CLARITY. IT IS NOT CLEAR WHY ONLY RS 54 LAKHS WERE MENTIONED N THE BOOKS INITIALLY WHICH WAS SUBSEQUENTLY REVISED TO RS. 2.29 CRORES. WHY THE DEBIT NOTES WERE AVAILABLE FOR ONLY RS 2.09 CR AGAINST T HE CLAIM OF RS 2.29 CR? WHAT EXACTLY IS THE NATURE OF THESE REIMBURSEMENTS AND W HETHER THEY ARE DISCOUNTS ALLOCATED BY THE PRINCIPLE COMPANY TO THE STP UNITS OF THE ASSESSEE OR OTHERWISE?. IF THEY ARE NOT DISCOUNTS WHICH IS IN T HE NATURE OF THE PROFIT HOW THEY ARE PROFITS DERIVED FROM THE ASSESSEES ELIGI BLE UNDERTAKINGS AND ELIGIBLE FOR EXEMPTION? CIT(A) HAS NOT ATTENDED TO THIS PART OF THE ARGUMENTS RAISED BEFORE HIM DESPITE THE MATTER REMANDED BY HIM TO THE ASSES SING OFFICER DURING THE FIRST APPELLATE PROCEEDINGS. WHAT ARE THE FACTS OF THESE REIMBURSED EXPENDITURE WHETHER THESE REIMBURSEMENTS OF THE TRAVEL EXPENDIT URE OF THE EMPLOYEE OF THE COMPANY HAVE PROFIT ELEMENT AT ALL IF SUCH PROFITS AND IF THE ANSWER IS POSITIVE IF SUCH PROFITS UNRELATED TO THE EXPORT ACTIVITY PER SE CONSTITUTES PROFITS AND GAINS 30 DERIVED FROM THE UNDERTAKING FROM THE EXPORT OF SUC H ARTICLE OR THINGS OR COMPUTER SOFTWARE AND THEREFORE ELIGIBLE PROFITS FOR CLAIM OF EXEMP TION U/S 10A OF THE ACT ETC. CIT(A) HAS NOT DEALT WITH RELEVANT SUBMISSIONS BEFORE REJECTION OF THE ASSESSEES SUBMISSIONS. 23. SO FAR AS THE ADMISSION OF THE ADDITIONAL EVIDE NCE IS CONCERNED WE FIND THERE IS NO ERROR ON PART OF THE CIT(A) IN BOTH ADM ITTING REMANDING AND CONSIDERING THE SAME WHILE DECIDING THE ISSUE. HOWE VER WE OBJECT THE ORDER OF THE CIT(A) IN HIS FAILURE TO REASON OUT AS TO HOW S UCH REIMBURSEMENTS ARE TAKEN CARE OF BY THE 10% SET OFF ALLOWED BY THE AO OVER A BOVE THE PROFIT @ 40% OVER THE COST. HIS ORDER IS SILENT ON THIS ISSUE. 24. THEREFORE ON THIS ISSUE OF BEST JUDGMENT OF TH E PROFITS FOR BOTH THE AYS IN THE INTEREST OF THE JUSTICE AND FOR WANT OF FACT ON THESE IMPUGNED REIMBURSEMENT EXPENDITURE WE ARE OF THE OPINION T HIS LIMB OF THE GROUND MUST BE SET ASIDE TO THE FILES OF THE AO FOR BRINGING FA CTUAL CLARITY ON (I) WHAT ARE THESE REIMBURSEMENTS; (II) IF THESE REIMBURSEMENTS HAVE PROFIT ELEMENTS AT ALL; (III) IF THERE IS PROFITS ELEMENT IF THEY FALL IN THE SCOPE OF THE PROVISIONS OF SECTION 10A OF THE ACT; (IV) WHAT IS THE ROLE OF THESE PROF ITS ELEMENTS WHEN COMES TO COMPUTATION OF PROFIT% ON THE COST ETC. (IV) THERE IS NO CLARITY ON THE PROFIT MARGINS OF 69.96% OVER THE COST VIS A VIS THE PROFI T MARGINS OF 232.49% WHICH IS DISCUSSED IN THE PRECEDING PARAGRAPHS. (V). IN A DOPTING THE FIGURE OF 50% OVER THE COST NEITHER OF THE REVENUE AUTHORITIES HAS GI VING REASON FOR GRANTING THE LEVERAGE OF 10% OVER THE 40% MENTIONED IN THE CRP I N THE BEST JUDGMENT ASSESSMENT. WHAT IS THE JUSTIFICATION FOR THE SAID 10% MARGIN AND FOR WHAT IT IS GIVEN TO THE ASSESSEE? WILL THIS MARGIN GRANTED BY THE AO QUANTITATIVELY ACCOUNTS FOR (I) THE DEFECTS OR INACCURACIES FOUND IN THE BO OKS OR (II) SET OFF CLAIMS OF REIMBURSED EXPENDITURE OF THE ASSESSEE? WHY THIS 10% OF ADDITIONAL RELIEF MUST BE GRANTED TO THE ASSESSEE WHEN AO HAS RESORTED TO THE COST PLUS PROFIT PRINCIPLE? THERE IS NO CONVINCING REPLY FROM THE RE VENUE BEFORE US. IN ALTERNATIVE THE ORDERS OF THE REVENUE ARE ALSO DEF ICIENT ON THE REASONING ON THESE QUERIES. WHETHER THE PRINCIPLES OF BEST JUDGM ENT PERMIT THE AO GRANT SUCH UNJUSTIFIED RELIEFS IGNORING THE PRINCIPLES OF CONS ISTENCY? IN THAT CASE WHY THE FIGURES OF THE COMPARABLE CASES EI WIPRO AND GEOMETRIC SOFTWARE COMPANIES WERE NOT CONSIDERED AFTER MAKING REASONABLE ADJUS TMENTS BASED ON THE SOUND LOGIC? THEREFORE IN OUR OPINION THE AO AND THE CIT(A) HAVE NOT DONE THE BEST JUDGMENT IN THE MANNER PROVIDED IN SECTION 144 OF THE ACT. THERE ARE LARGE NUMBER OF JUDICIAL PRECEDENTS IN OPERATION ON THE ISSUE OF BEST JUDGMENT 31 REFERRED TO IN SECTION 144 OF THE ACT. IN PRINCIPLE THE BEST JUDGMENT DOES NOT MEAN WILD AND UNREASONABLE ESTIMATIONS. THE VERY EX PRESSION BEST JUDGMENT ASSESSMENT IMPLY THE JUDGMENT OF THE AO AND THE SA ID JUDGMENT MUST BE SUPPORTED BY THE MATERIAL OR DATA GATHERED BY HIM F OR THIS PURPOSE BOTH FROM INTERNAL AS WELL AS THE EXTERNAL SOURCES. THUS WE CAN NOT APPROVE THE BEST JUDGMENT ASSESSMENT MADE BY THE AO AND SUSTAINED B Y THE CIT(A) IN THE PRESENT FORM. THEREFORE WE ARE OF THE CONSIDERED O PINION THE AO MUST MAKE BEST JUDGMENT ASSESSMENT AS PER THE MANNER PROVID ED IN SECTION 144 OF THE ACT AND FOR THIS WE HAVE DECIDED TO SET ASIDE THE ORDER OF THE CIT(A) FOR THIS LIMITED PURPOSE . IT GOES WITHOUT SAYING THAT THE AO MUST GRANT REA SONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. ASSESSE E IS DIRECTED TO FURNISH ANY AND EVERY RELEVANT INFORMATION TO ADVANCE HIS CASE FOR MAKING OF THE BEST JUDGMENT AS PER THE PROVISIONS OF SECTION 145(3) OF THE ACT. CIT(A) IS ALSO DIRECTED TO CONSIDER THE EXISTING SUPREME COURT JUD GMENT IN THE CASE OF THE LIBERTY INDIA LTD 317 ITR 218. IN THE SET ASIDE PROCEEDINGS AT THE TIME OF DECIDING THE ISSUE RELATING TO IF THE SAID REIMBURS ED RECEIPTS CONSTITUTES PROFITS AND GAINS DERIVED FROM THE UNDERTAKING FROM THE EXPORT OF SUCH ARTIC LE OR THINGS OR COMPUTER SOFTWARE ONES AND ELIGIBLE FOR EXEMPTION U/S 10A OF THE AC T. ACCORDINGLY THE SECOND LIMB OF THE GROUND 1 RELATI NG TO THE BEST JUDGMENT ASSESSMENTS IN BOTH THE APPEALS ARE SET ASIDE . 24. GROUND 2 RELATES TO ALLOWING OF THE PROVISION TOWARDS LEAV E ENCASHMENT. ON FACTS THE ASSESSEE CREATED A ACTUARIAL BASIS CENTRIC PROVISION AND AO DID NOT ALLOW THE SAID CLAIM IN ROUTINE MANNER FOLLOWIN G HIS DECISION IN EARLIER YEARS. HOWEVER HE IGNORED THE FACT THAT THE CIT(A) HAVE A LLOWED THE CLAIM OF THE ASSESSEE IN THE APPELLATE PROCEEDINGS. DURING THE F IRST APPELLATE PROCEEDINGS THE ASSESSEE SUBMITTED THAT CLAIM OF THE ASSESSEE WAS A LLOWED CONSISTENTLY IN FAVOUR OF THE ASSESSEE SINCE AY1998-99 ONWARDS AS DISCUSSE D IN PARA 6.2 OF THE IMPUGNED ORDER. HOWEVER IN THIS YEAR CIT(A) CONFI RMED THE DISALLOWANCE MECHANICALLY RELYING ON THE ORDER OF THE AO. PARA 6 .3 IS RELEVANT. 25. DURING THE PROCEEDINGS BEFORE US LD COUNSEL FO R THE ASSESSEE DEMONSTRATED THAT THIS ADDITION IS CONFIRMED BY THE CIT(A) FOR THE FIRST TIME IGNORING THE FACT OF ACTUARIAL-BASIS-CENTRIC CREATI ON OF THE PROVISION AND THE RULING APEX COURTS JUDGMENT IN THE CASE OF BHARAT EARTH M OVERS LTD 245 ITR 428 SC. ON THE OTHER HAND LD DR RELIED ON THE ORDER OF THE CIT(A). WE HAVE HEARD THE PARTIES ON THIS ISSUE AND PERUSED THE RELEVANT MATE RIAL ON RECORD. IT IS A FACT THAT THE ASSESSEES PROVISION IS CREATED BASED ON THE AC TUAL METHOD. THE SAME IS NOT 32 DISPUTED BY THE AO. AO AND THE CIT(A) HAVE ROUTINEL Y DISTINGUISHED THE SAID APEX COURTS JUDGMENT. WE HAVE PERUSED THE SAID JUD GMENT AND THE APEX COURT HAS ON FACTS DEALT WITH THE ISSUE OF LEAVE ENCASHM ENT AND UPHELD THE CASE OF THE ASSESSEE AND THE FOLLOWING HELD PORTION IS EXTRACTED AS UNDER. THE LAW IS SETTLED. IF THE BUSINESS LIABILITY HAS DEFINITELY ARISEN DURING THE ACCOUNTING YEAR THE DEDUCTION SHOULD BE ALLOWED AL THOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A LATER DATE. WHAT S HOULD BE CERTAIN IS THE INCURRING OF THE LIABILITY. IT SHOULD ALSO BE CAPABLE OF BEING ESTIMATED WITH R EASONABLE CERTAINTY ALTHOUGH THE ACTUAL QUANTIFICATION MAY NOT BE POSS IBLE. IF THESE REQUIREMENTS ARE SATISFIED THE LIABILITY IS NOT A CONTINGENT ONE. THE LIABILITY IN PRESENTI THOUGH IT WILL BE DISCHARGED AT A FUTURE DATE. IT D OES NOT MADE ANY DIFFERENCE IF THE FUTURE DATE THE LIABILITY SHALL HAVE TO BE DISCHAR GED IS NOT CERTAIN. 26. FROM THE ABOVE IT IS SELF-EXPLANATORY THAT THE INCURRING OF LIABILITY SHOULD BE CERTAIN DURING THE YEAR AND SUCH LIABILITY SHOULD BE CAPABLE OF ESTIMATION WITH REASONABLE CERTAINTY. ACTUAL METHOD OF ESTIMAT ION WAS ACCEPTED BY THE APEX COURT AS THE CAPABLE ONE. THEREFORE WE FIND N O REASON TO INTERFERE WITH THE CLAIM OF THE ASSESSEE. CONSEQUENTLY THE DECISI ONS OF THE REVENUE AUTHORITIES ON THIS DISALLOWNCE ARE REVERSED. ACCORDINGLY THE GROUND 2 OF THE ASSESSEES APPEAL FOR THE AY 2001-02 IS ALLOWED . 27. GROUND 3 OF THE APPEAL FOR THE AY 2001-02 RELATES TO THE PR OVISIONS OF SECTION 234D OF THE ACT. THE IS COMMON GROUND TO TH E ASSESSEES APPEAL FOR THE AY 2002-03. ASSESSEE IS OF THE OPINION THE AMENDED PROVISIONS OF THIS SECTION ARE APPLICABLE TO THE IMPUGNED AYS. ON THE OTHER HA ND THE AO/ CIT(A) ARE OF THE VIEW THAT THEY ARE OPERATIVE FROM 1.6.2003 PROS PECTIVELY. BEFORE US BOTH PARTIES MENTIONED THAT THE ISSUE IS NOW SETTLED AT THE LEVEL OF THE SPECIAL BENCH OF THE TRIBUNAL MUMBAI BENCH IN THE CASE OF EKTA PR OMOTERS 113 ITD 799. WE HAVE HEARD THE PARTIES AND PERUSED THE SAID CITATIO N AND FIND THAT THE RATIO OF THE SAME COVERS THE CASE UNDER CONSIDERATION. IN VIEW O F THE IMPORTANCE THE CONCLUSION PART OF THE SAID ORDER IS REPRODUCED AS UNDER. SECTION 234D INSERTED IN THE INCOME TAX ACT 61 B Y THE TAXATION LAWS (AMENDMENT) ACT 2003 W.E.F 1ST JUNE 2003 BEING S UBSTANTIVE IN NATURE HAS NO RETROSPECTIVE EFFECT HENCE APPLICABLE FROM THE AY 2004-05 ONLY; INTEREST U/S 234D IS CHARGEABLE FROM THE AY 2004-05 ONLY AND IT COULD NOT BE CHARGED FOR EARLIER ASSESSMENT YEARS EVEN THOUGH REGULAR ASSESSMENTS FOR SUCH EARLIER ASSESSMENT YEARS ARE FRAMED AFTER 1 ST JUNE 2003 OR REFUND IS GRANTED FOR THOSE YEARS AFTER THE SAID DATE. 28. THE DECISION IS UNAMBIGUOUS IN STATING THAT THE INTEREST ON THE EXCESS REFUND COULD NOT BE CHARGED FOR EARLIER ASSESSMENT YEARS EVEN THOUGH THE 33 REGULAR ASSESSMENTS FOR EARLIER ASSESSMENT YEARS IE EARLIER TO THE AY 2004-05 ARE FRAMED AFTER 1 ST JUNE 2003 OR THE REFUND IS GRANTED FOR THOSE YEAR S AFTER THE SAID DATE. THE IMPUGNED AYS BEING 2001-02 AND 2002- 03 IE EARLIER TO 2004-05 FALL OUTSIDE THE SCOPE OF THE PROVISIONS OF SECTION 234D OF THE ACT AND THEREFORE THE AO IS UNJUSTIFIED IN LEVY OF INTEREST ON THE EX CESS REFUND AND HENCE THE ASSESSEE IS ENTITLED TO RELIEF. ACCORDINGLY THE RE LEVANT GROUNDS IN BOTH THE APPEALS OF THE ASSESSEE ARE ALLOWED . 29. IN THE RESULT BOTH APPEALS OF THE ASSESSEE ARE PARTLY ALLOWED PROTANTO . ORDER IS PRONOUNCED IN THE OPEN COURT ON 7 TH SEPTEMBER 2011. SD/- SD/- (SAILENDRA KUMAR YADAV) (D.KARUNAKARA RAO) JUDICIAL MEMBER ACC OUNTANT MEMBER PUNE DATED THE 7TTH SEPTEMBER 2011. PNR COPY OF THE ORDER IS FORWARDED TO : 1. ASSESSEE 2. ACIT CENTRAL 7 PUNE 3. CIT(A)-III PUNE 4. CIT III PUNE 5. D.R. ITAT BENCH 6. GAURD FILE BY ORDER ASSISTANT REGISTRAR I.T.A.T PUNE