High Court Of Delhi
Nuwave E Solutions (P.) Ltd. VS. ACIT
Assessment Year : 2007-08
Section : 10A, 147
Sanjiv Khanna And Sanjeev Sachdeva, Jj.
W.P. (C.) No. 1607 Of 2013
October  29, 2013
JUDGMENT
1. Nuwave E Solutions (P.) Ltd. has filed the present writ petition for quashing/set aside reassessment proceedings initiated under section 147/ 148 of the Income-tax Act, 1961 (for short, “the Act”) pursuant to notice dated March 29, 2012, issued by the Assistant Commissioner of Income-tax, respondent No. 1.
2. The petitioner, it is stated that, was/is engaged in the business of development of software and export. It is stated that it was a 100 per cent. export oriented unit as per the certificate of registration issued by the Directorate of Software Technology Park of India dated March 31, 1999.
3. The reasons to believe, as recorded by the Assessing Officer before issuing the notice, read as under :
“Reasons for reopening the case under section 147 of the Income-tax Act in the case of M/s. Nuwave E Solutions Pvt. Ltd.-assessment year 2007-08
Return declaring an income of Rs. 1,45,48,453 was filed on October 30, 2007. Assessment, under section 143(3) of the Income-tax Act was made on December 31, 2010, at an income of Rs. 49,74,14,740.
During the year the assessee has shown a total income of Rs. 1,45,48,453. It was seen that during the year the profit of the assessee excluding other income was Rs. 49,33,50,421. The same was claimed as exempt under section 10A. The assessee had shown the profit before tax of Rs. 49.14 crores on the total turnover Rs. 56.36 crores (software sales) giving the NP rate of 87.18 per cent. The assessee has claimed exemption under section 10A of Rs. 49.33 crores. In paragraph 10 of schedule 12 of the audit report the assessee has given the following disclosure :
Related party disclosure
| Name of the related party | Relationship |
| Dr. Anil Gupta | Key management personnel |
| CAE Solution Inc. | Enterprise with common key management personnel |
Transaction with related party
| Nature of transaction | Enterprises with common key management personnel | |
| 31-03-2007 | 31-03-2006 | |
| Sale of software | 12,86,24,629 | 30,66,59,178 |
| Arbitration award | 43,49,83,092 | |
It was seen that the assessee has shown the receipts of Rs. 43.49 crores on account of arbitration award, as reported in its schedule 12 regarding significant accounting policies.
Further, it is also noticed that the assessee has raised an invoice No. 17/06/CAE, dated March 30, 2007, mentioning a payment of Rs. 1,12,49,114 (approximately Rs. 43.49 crores) with the description of goods/services as ‘computer software’ fees for export services.
The perusal of the details of legal expenses filed during the assessment proceedings it is noticed that the assessee has incurred expenses of Rs. 6,20,000 for the ‘purchase of stamp paper for arbitration work on March 29, 2007’. This fact clearly indicates that the Rs. 43.49 crores, on account of arbitration award as reported in its schedule 12 regarding significant accounting policies, is a correct statement which is further strengthened by the evidence of purchase of stamp paper as disclosed under the head legal expenses and invoice dated March 30, 2007, of $1,12,49,114 (approximately Rs. 43.49 crores).
Thus, the fact reported in paragraph 10 of schedule 12 and narration given under the head legal expenses, i.e., purchase of stamp papers for arbitration work on March 29, 2007, and invoice dated March 30, 2007, of Rs. 43.49 crores clearly indicates that the receipts of Rs. 43.49 crores was with regard to arbitration award and not for the purposes of sale of software.
I, therefore, have reasons to believe that on account of failure on the part of the assessee to disclose truly fully all material facts necessary for assessment for the assessment year 2007-08, excess exemption under section 10A of Rs. 43.49 crores has been allowed to the assessee. Thus, the income to the extent of Rs. 43.49 crores has escaped assessment within the meaning of the proviso to section 147 of the Act.
In view of the aforesaid facts, the case of the abovenamed assessee is to be reassessed under section 147/148 of the Income-tax Act, 1961.
Issue notice under section 148 of the Income-tax Act, 1961.”
4. The reading of the said reasons, elucidates that the petitioner had filed a return of income for the assessment year 2007-08 on March 30, 2007, declaring an income of Rs. 1,45,48,453. The said return was taken up for scrutiny and assessment order dated December 31, 2010, was passed. In the assessment order the Assessing Officer examined the transactions with the related party, namely, CAE Solutions Incorporated (USA). The petitioner had shown business profits of Rs. 43.49 crores which were claimed to be exempt under section 10A of the Act. The said claim was subsequently revised to Rs. 50.52 crores on account of foreign exchange fluctuation gain. The Assessing Officer in the original assessment order has recorded as under :
“4.11 Looking to the very high NP ratio of 87.18 per cent. the assessee was required to file the profit and loss account and balance-sheet of CAE Solutions Inc., US, vide order-sheet entry dated December 3, 2010, December 10, 2010, and December 14, 2010. The assessee did not file the profit and loss account and balance-sheet of CAE Solutions Inc., US. This was called for to ascertain the profits and tax liability of CAE Solutions Inc., US in the USA. Looking to the close connection between the two companies, it appears that the assessee is showing the entire profit in Indian company, i.e., M/s. Nuwave E-Solution Pvt. Ltd. and claiming it as exempt. It appears that the assessee is booking all its profits in Indian exempt company and may be showing negligible profits in CAE Solutions Inc., US in the USA. It is noticed that the key person, Dr. Anil Gupta, is working on a charity for the assessee-company. Dr. Anil Gupta does all the marketing work at the USA and gives its entire inputs for development of software and charges nothing for that. The education and salary profile of the key person of the company shows that none of them are very highly educated. Dr. Anil Gupta who holds a masters degree and does all the marketing work and gives its entire inputs for development of software, etc., does not charge anything from the company.
4.12 The assessee was also required to justify the high rate of NP ratio in the current year and also explain why no cost attributable to Dr. Anil Gupta has been debited in the company who is providing all kind of marketing, technical assistance and software development inputs, etc. The shareholding pattern of the two companies makes it quite clear that all the interest in both the companies belongs to Dr. Anil Gupta. The assessee, vide its reply dated December 30, 2010, has submitted as under :
(i) The profits so declared during the year under review is quite reasonable.
(ii) The assessee has developed tailor made highly customized non-distributable software for the client according to their specific uses and needs.
(iii) The assessee has developed tailor made highly customized non-distributable software for the client according to their specific uses and needs.
(iv) The assessee-company has passed on source code of these software so developed over a period of time during last seven to eight years to the clients during the year.
(v) The assessee-company is under obligation not to transfer/ develop identical software for the corporate world in identical activity for three years.
4.13 The assessee has not filed any corroborative evidence such as agreement, etc., in support of its argument. Therefore, the submission of the assessee is not acceptable.
4.14 Even more the falsity of the assessee’s submission is established by its disclosure given in schedule 12 regarding significant accounting policies. In paragraph 10 of schedule 12 it has been mentioned as under :
| Name of the related party | Relationship |
| Dr. Anil Gupta | Key management personnel |
| CAE Solution Inc. | Enterprise with common key management personnel |
Transaction with related party
| Nature of Transaction | Enterprises with common key management personnel | |
| 31-03-2007 | 31-03-2006 | |
| Sale of Software | 12,86,24,629 | 30,66,59,178 |
| Arbitration award | 43,49,83,092 | |
4.15 The above disclosure in the notes to account makes it apparent that if the arbitration award of Rs. 43.49 crores is excluded from the net profit of Rs. 50.59 crores then the profits for the current year would be Rs. 7,09,65,947. The profit of Rs. 7,09,65,947 on a turnover of Rs. 56,36,07,721 will give NP rate of 12.59 per cent. The NP rate of 12.59 per cent. is very well comparable with the NP rate declared by the assessee in earlier years. All this facts clearly illustrates that the assessee’s submission dated December 30, 2010, is totally false and absolutely incorrect.
4.16 The arbitration award of Rs. 43,49,83,092 received by the assessee is not part of the software export. The assessee has himself mentioned in notes to account that the sales of software at Rs. 12.86 crores and arbitration award at Rs. 43.49 crores. Thus, it clearly shows that the assessee very well knows that the arbitration award is not sales/export of software and it would not qualify for the exemption under section 10A. Therefore, the assessee concocted a story that the extraordinary profits of the current year are on account of sale of source code, etc. The above facts clearly shows that the assessee has deliberately tried to present incorrect facts of export turnover to avoid the tax liability which could have arisen, if the arbitration award was shown properly in the profit and loss account.
4.18 Even if for the argument sake it is presumed that the arbitration award is a part of export turnover of software made during the year then the cost attributable to Dr. Anil Gupta will have to be taken into account for calculating the exact profits of the company. The provisions of section 10A(7) will have to be invoked….”
The Assessing Officer, accordingly, denied exemption under section 10A in respect of arbitration award of Rs. 43.49 crores and has also recorded that penalty proceedings under section 271(1)(c) stand initiated.
The assessee has succeeded in the first appeal before Commissioner of Income-tax (Appeals), who in his order dated March 15, 2011, has recorded that the consideration received from exports did not include any amount received under an arbitration award. There was typographical error and the arbitration award was regarding another/different proceedings. The Commissioner (Appeals) has recorded the following finding :
“I have verified relevant details and documents pertaining to export sale of software which are also available on the assessment records and it has been observed as under :
| (a) | In the profit and loss account it was software sales (export) alone which was shown at the figure of Rs. 56,36,07,72. Had there been any arbitration award, it was to be shown in the profit and loss account as such. The very fact that only software sale (export) were shown in the profit and loss account goes to establish that there was typographical error in the notes to the accounts. |
| (b) | ‘Arbitration award’ being a typographical error is further proved and strengthened by the fact that the assessee had already filed softex forms with the STPI authorities enclosing the copies of all export invoices which was also filed before the Assessing Officer during the assessment proceeding. These documents which have been filed and accepted by the STPI clearly mention this amount as computer software. |
| (c) | It was mere typographical error is further evident from the Transfer Pricing Officer’s order in which the value of export of software at Rs. 56,36,07,721 to associated enterprises has been accepted. |
| (d) | This was typographical error is further evident from the report under section 10A of the Act filed with the original income-tax return and revised income-tax return, in which the auditors have certified the export of software and have no where pointed out about any ‘arbitration award’. |
Therefore, all contemporary evidences as examined by me establish the noting in the notes to the account as mere typographical error and nothing adverse can be inferred from this typographical error as is otherwise sought to be made out by the Assessing Officer. Merely relying upon the notes to the accounts would not be sufficient material to come to a conclusion that the impugned sum represents arbitration award. Admittedly, the Assessing Officer himself has mentioned in the submissions dated March 10, 2011, that the arbitration matter was pending uptill the assessment year 2007-08 and after that it was settled in the assessment year 2008-09. Meaning thereby that the assessee cannot be presumed to have received any money on account of arbitration award, as alleged, during the year. In fact, the impugned sum of Rs. 43,49,83,092 represents the value of source code supplied by the assessee to its associate enterprise during the year which is evident from invoice No. 23 and copy of softex so filed with the STPI. The assessee has recorded the invoice in its books of account as ‘free for export services’ . . . “
7. It is an accepted and admitted position that the Revenue has not accepted the order passed by the Commissioner (Appeals) and an appeal preferred by the Revenue is pending before the Income-tax Appellate Tribunal.
8. Receipt of Rs. 43.49 crores it is claimed by the assessee was for sale of source code. The payment as noted above was from a related enterprise. The transaction clearly is a subject matter of the assessment order dated December 31, 2010, and addition of Rs. 43.49 crores was made by the Assessing Officer.
9. The Commissioner (Appeals) has observed that there was no connection between the arbitration award and the said receipt/payment. It is not indicated or stated in the reasons to believe that the stamp paper purchased for arbitration work was connected with the said receipt/payment. The reasons to believe were recorded on March 28, 2012, which is after the order passed by the Commissioner (Appeals) on March 15, 2011. Questions do arise about the genuineness of the said receipt as the company making the payment was a related party incorporated in the USA. However, on these issues, the reasons to believe are silent and there is no mention thereof or allegation in the grounds recorded by the Assessing Officer.
10. We may, at this stage, also notice the reply which was filed on behalf of the petitioner, vide letter dated February 12, 2013, objecting to the initiation of the reassessment proceedings. It was stated in the letter that purchase of stamp paper had nothing to do with the invoice dated March 30, 2007, for payment of Rs. 43.49 crores. It is stated that the payment against the impugned invoice was received by the assessee in advance in the month of January, 2007.
11. Keeping in view the aforesaid clear position, we allow the present writ petition and quash the reassessment notice. We clarify that we have not examined the question of genuineness of the transaction or the merits of the original assessment order, the order passed by the Commissioner (Appeals) or the contentions of the Revenue before the Tribunal. We are informed that the notice under section 263 of the Act has been issued by the Commissioner of Income-tax. We clarify that we have not examined the validity or invalidity of the said notice.
12. The writ petition is disposed of with no orders as to costs.
[Citation : 360 ITR 351]
