CHANDRA POOJARI, A.M. ORDER This appeal by assessee for asst. yr. 2001-02 is directed against order of CIT(A), dt. 2 8 th Feb., 2005. first two grounds are general in nature where assessee contends that assessment is bad in law and passed without application of mind. These grounds were not pressed and, therefore, not adjudicated. 2. next ground is with regard to allowability of deduction under s. 8 -IA of IT Act. This issue came up for consideration before this Tribunal for asst. yr. 1996-97 in ITA No. 1313/Mds/2002 in assessee s own case and Tribunal, vide order dt. 20th Jan., 2006 has held that benefit of deduction as per mandate of statute could only be given to profits and gains derived from industrial undertaking. Benefit under this section is available to undertaking and not to assessee. income earned from AMC charges (Annual Maintenance Charges of ATM), installation and technical charges, consultation charges and licence fee of software constitute income of assessee and not of industrial undertaking situated at Pondicherry since this income was not derived from this industrial undertaking as men, material and machinery of Pondichery industrial undertaking were not used to earn this income and hence, not eligible for deduction under s. 8 -IA of Act. Further, for this assessment year income on account of above elements was not earned from eligible business referred to in s. 8 -IA(4) of Act. assessee is not also entitled for deduction under s. 8 -IB though this section is applicable, for same reason stated therein in that order as above earnings were not from industrial undertaking situated at Pondicherry, as benefit of deduction can be given only to profit and gains derived from industrial undertaking as per s. 8 -IB(4) of Act. Accordingly, this ground is rejected. 3 . next ground is that CIT(A) has erred in confirming disallowance of Rs. 53,21,96 8 as inflation of expenses on purchase of software. 4. brief facts of case are that assessee has passed journal entry on 31st March, 2001 debiting purchase of software at Rs. 3,03,53,55 8 by JE No. JL559. This entry was passed to match receipt on account of, software licence fee of Rs. 5,40,05,000. assessee reversed provision of purchase towards actual purchase on 1st April, 2001 at Rs. 2,49,31,590. According to AO, this has resulted in reduction of profit of Rs. 53,21,96 8 for asst. yr. 2001-02. AO has made enquiry for making such provisional entry and also reason for reversing provisional entry by actual purchase for lesser amount. assessee submitted that at time of assessment due to delay in completion of licensing formalities with Diebold Inc., advance copies of software were installed at customer bank site and sales invoice was raised for year 2000-01. Provision for purchase of software was made on basis of "indication available". difference between provisions and actual cost has been reversed in next financial year, i.e., 2001-02 and included in return of income for next asst. yr. 2002-03. There is no qualification in audit report for asst. yr. 2002-03 regarding declaration of this additional income. AO was of opinion that assessee has deliberately claimed excess expenditure with intention to conceal income. 5 . assessee submitted before AO that effect of this entry is compensatory in nature and there is no actual suppression of income and Revenue s interest has not been affected and there was no motive to suppress income. This is method of accounting followed by assessee regularly and consistently from year-to-year. However, AO, not being satisfied with contentions of assessee, has made addition of Rs. 53,21,96 8 , being difference between provision of purchase entry and actual purchase. On appeal, CIT(A) has confirmed action of AO. However, he has given direction to verify from records of succeeding year and allow actual amount for which software purchases were made by assessee and not debited to account of that year. In other words, CIT(A) was of opinion that there shall not be any double addition or taxation in next year. 6 . learned counsel for assessee submitted that provision was towards cost of software for which assessee has placed orders with NRI vendors. statement given by director, Shri Harish Murthy on 10th Jan., 2003 cannot be relied upon as he is not conversant with accounting procedures and IT law and that cannot be used as evidence against assessee to disallow claim of assessee. Actually, there was no suppression of any income by inflating purchase figures as assessee was consistently following this method of accounting of making provision towards purchase on last day of year and reversing it on immediate next day of subsequent year. He further submitted that admission to declare this amount as income for asst. yr. 2001-02 was erroneously made and there was no evidence with Department to show that assessee has suppressed income. He relied on judgment of Hon ble apex Court in case of CIT vs. C. Parakh & Co. (India) Ltd. (1956) 29 ITR 661 (SC) and judgment of Hon ble Delhi High Court in case of Swaran Yash vs. CIT (19 8 2) 13 8 ITR 734 (Del). He further submitted that even if assessee has admitted addition, addition cannot be made and assessment shall be completed in accordance with law. 7. learned Departmental Representative, on other hand submitted that this was only provision for purchase. Actually, there was no purchase at all. Had assessee purchased goods, there should be equivalent amount of stock and assessee has admitted vide letter dt. 11th April, 2003 to offer this difference of Rs. 53,21,96 8 as additional income for this assessment year and no appeal lies against agreed addition. He relied on order of this Tribunal in ITA No. 1 8 67/Mds/2000 dt. 7th June, 2005 in case of Indo-Doha Chemical Pharmaceuticals Ltd. vs. Dy. CIT wherein this Tribunal has concurred with view of Department that assessee cannot be said to be aggrieved if revision of assessment is on agreed basis. 8 . We have heard rival submissions and perused material on record. Admittedly, assessee has passed journal entry for purchase of software on 31st March, 2000 for Rs. 3,02,53,55 8 and reversed it on first day of next year at Rs. 2,49,31,590. This has resulted in claiming of excess expenditure for assessment year before us to tune of Rs. 53,21,96 8 . time gap between these two journal entries is just day or less than day. For both entries, assessee has not brought on record any evidence for determining cost of purchase. According to assessee, entries were made as indications available. nature and specific sources of indication have not been brought either to notice of authorities below or to our notice. In our opinion, it is just discard entry. When this information was brought to notice of assessee, assessee has agreed to offer this amount as income for assessment year and also stated in letter dt. 11th April, 2003 that excess provision in purchase price has been reduced in subsequent year. Hence, they will file revised return for asst. yr. 2002-03. After this statement, AO stopped probe and added this amount to income of assessee. Further, in letter dt. 14th Oct., 2003, assessee has reiterated as follows : "The provision for purchases Rs. 3,02,53,55 8 was reversed on 1st April, 2001 and actual purchases were accounted for. During course of assessment proceedings we have offered Rs. 53,21,96 8 as income for asst. yr. 2001-02 and file revised return claiming this amount as deduction in asst. yr. 2002-03. We are waiting for completion of this assessment to file revised return." 9. above contents show that assessee is fully aware of fact and consequence of its statement and submission. Now, assessee coming back with plea that agreed addition was erroneously made cannot be accepted. First of all, there is no evidence to show that provision for purchase was made on basis of specific purchase price of software. assessee cannot also say that within less than 24 hours, it has collected full information regarding actual purchase price of software. Further, assessee cannot have any grievance towards addition as assessee itself has agreed for offering this amount for taxation while examining under s. 131 of IT Act and also by its own letter cited (supra). In case of Ramanlal Kamdar vs. CIT 1976 CTR (Mad) 1 8 5 : (1977) 10 8 ITR 73 (Mad), Hon ble Madras High Court has held that once assessee had stated that it had no objection to proposed revision or addition and assessment was made as proposed by assessee, assessee could not be said to have been aggrieved by order of AO. assessee can be said to have been aggrieved by order of AO only when AO unilaterally made addition and in that case only assessee has right to appeal against that order. 10. In present case director, Shri Harish Murthy was examined on oath under s. 131 of Act on 10th Jan., 2003 and he categorically admitted to offer this amount as income of assessee. Even if there was purchase amounting to Rs. 3,02,53,55 8 instead of Rs. 2,49,31,590, balance of Rs. 53,21,96 8 should have been shown as stock which was not sold, whereas there was no indication that this amount was included in closing stock. On this account also, assessee has no case. Further, in income-tax proceedings, each assessment year is independent assessable unit and real income of each assessment year shall be ascertained and taxed. Even postponement of tax liability from one year to another year is not permissible. In this background, if we analyze strategy adopted by assessee, assessee has made attempt to postpone tax liability. assessee is liable to compute profits and gains of business in accordance with method of accounting regularly employed by assessee. If method of accounting employed by assessee does not reflect true picture or real profit of assessee and proper profit cannot be deduced from that account and account is not complete to satisfaction of AO, AO has liberty to compute profit. Accordingly, we are convinced that assessee has actually inflated purchase without making any actual purchase to above extent. Further, CIT(A) has given specific directions to AO that there shall not be any double addition in asst. yr. 2002-03 and assessee has option to file revised return. If assessee opts not to file revised return for asst. yr. 2002-03, then it is fault of assessee and not fault of Department. Hence, we have no hesitation in confirming action of lower authorities and reject ground taken by assessee. 11. next ground is that CIT(A) has grossly erred in law in not appreciating that given facts of present case, AO erred in applying provisions of s. 40A(2)(a) since party to whom payments were made did not fall within purview of cl. 2(a) of s. 40A of Act. 12. brief facts of issue are that assessee has 50 : 50 joint venture with HMA Data Systems (P) Ltd., and Diebold Inc., USA engaged in manufacture and trading of Automated Teller Machines & Accessories. M/s Chip Trans and M/s Diebold Inc., USA were associate concerns of assessee- company. managing director, Shri Harish Murthy was substantially interested in HMA Data Systems Ltd., and Chip Trans, USA. Thus, HMA Data Systems (P) Ltd., Diebold Inc., USA., HMA Software (P) Ltd., and Chip Trans, USA are specified persons as enumerated under s. 40A(2)(a) of IT Act. During year, assessee has purchased software from Chip Trans, USA., Diebold Inc., USA and HMA Software (P) Ltd. assessee has purchased ATM related software from Chip Trans, USA during period 1st April, 2000 to 31st Oct., 2000. AO compared purchase cost and sales price of software. As mentioned by AO, purchase and sales cost of soft ware are as follows : No. Name of Purchase Name of Purchase of Sale price Profit/Loss price software (In company Rupees ) Chip 6,46,39, 8 5,4 8 (-) 312 Trans, USA 32 ,94,300 97,45,532 Diebold 2 8 (+) 49,31,590 5,40,05,000 Inc., USA 2 2,90,73,450 13. During year, according to AO, assessee has purchased 312 sets of software from Chip Trans and 2 8 2 sets of software from Diebold Inc., USA. AO has collected costing details of software supplied by these companies which are as follows : Bank of Punjab Ltd. 1064ixFL All figures in INR unless otherwise mentioned Hardware Software 46.35 to $ CIF CIF Chennai $ 7,396.50 Chennai US $ Customs Duty Calculations $ CIF US $ $ 7,396.50 CIF US $ 1,256.00 3,42, 8 27.7 5 8 CIF INR CIF INR 8 ,215.60 Assessable Assessable 5 8 value (AV) 3,46,256.05 value (AV) ,797.76 1% x CIF 1% x C Basic customs duty 69,251.21 (BCD) (AV x 25%) Counterveiling duty (CVD) (AV + 66,4 8 1.16 BCD + SC x 16%) Special Addl. 19,279.54 duty 4% Clearing Customs duty 1,55,011.91 charges 3.5% on 2,351.91 AV Clearing charges 3.5% on 13, 8 50.24 AV 5,11,6 8 Landed Landed cost 60,567.51 9.93 cost Maintenance 1,333.20 modules Local Ex factory 5,12, 8 Ex factory 60,567.51 price hardware 23.13 software price Total Total order value 7, 8 order value 2,25,000 HW 9,215.69 SW proposed proposed Margin Margin 2,76,392.56 1,64,432.49 on HW on SW Total ex factory cost (HW & SW) 5,73,390.64 Commission 2, 8 ,000.00 Total Cost 8 ,53,390.64 Total order value (HW & SW) 10,14,215.69 Total margin 1,60, 8 25.05 Margin percentage 15. 8 6% Bank of Punjab Ltd. 1062ixFL All figures in INR unless otherwise mentioned Hardware Software 47.00 to $ $ 8 ,35 8 .3 CIF $ 1,32 8 CIF Chennai 8 Chennai US $ .00 Customs Duty Calculations $ 8 ,35 8 .3 $ 1,32 8 CIF US $ CIF US $ 8 .00 3,92, 8 CIF INR CIF INR 62,416.00 43.63 Assessable Assessable value (AV) 3,96,772.06 value (AV) 63,040.16 1% x CIF 1% x C Basic customs duty 99,193.02 (BCD) (A.V x 25%) Counterveiling duty (CVD) (AV + 79,354.41 BCD + SC x 16%) Special Addl. 23,012.7 8 duty 4% Customs duty 2,01,560.21 Clearing Clearing charges 3.5% on 13, 88 7.02 charges 3.5% on 2,206.41 AV AV 6,0 8 ,290. Landed Landed cost 64,622.41 85 cost Maintenance 1,333.20 modules local Ex factory Ex factory 6,09,424.05 64,622.41 Price Hardware Software Price Total Total order value 9,55, order value 2,00,000 HW 88 2.35 SW proposed proposed Margin 3,46,45 Margin 1,35,377.59 on HW 8 .30 on SW Total ex factory cost (HW & SW) 6,74,046.46 Brokerage 4,20,000.00 Total cost 10,94,046.46 Total order value (HW & SW) 11,55, 88 2.35 Total margin 61, 8 35. 8 9 Margin percentage 5.35% According to above chart, cost of cash dispenser software supplied b y Diebold Inc., was Rs. 60,567 and ATM software was Rs. 64,622. This cost of software matches with value of software in closing stock for asst.yr. 199 8 -99 and 1999-2000. AO further discussed on purchase price and sales price of software sets purchased from Chip Trans and Diebold Inc., as under :Comparative chart indicating software purchase price regarding supply to Bank of Punjab Ltd., by Chip Trans. & Diebold in asst. yr. 2001-02. Purchase S. Inv. Selling Purchase from Chip No. No. price price Trans BOP Autocare 1. 1,110 2,25,000 3,17,646 Centre, New Delhi BOP 2. Laxmi Super 1,111 2,25,000 3,17,646 New Delhi BOP Shamnath 3. 1,112 2,25,000 3,17,646 Marg, New Delhi GT 4. Mandigobindge 1,164 2,25,000 3,23,14 8 Punjab GT Road 5. 1,165 2,25,000 3,23,14 8 Malout, Punjab Circular 6. 1,166 2,25,000 3,20,259 Road, Punjab Bengali 7. Market, New 1,237 2,25,000 3,20,259 Delhi Tobaco 8. House, 1,560 2,25,000 3,31,010 Calcutta Sector 9. 1,601 2,25,000 3,34,004 32, Chandigarh Pakhwal 10. 1,602 2,25,000 3,34,004 RS, Ludhiana S.D. 11. Road, 1,742 2,25,000 3,31,010 Secunderabad Purchased S. Inv. Selling Purchase from Diebold No. No. price price Inc. BOP 31 1. 2,25,000 50,56 8 Jalandhar 8 BOP BOP 2. 319 2,25,000 50,56 8 Banga BOP 3. 320 2,25,000 50,56 8 Patiala BOP 4. 321 2,25,000 50,56 8 Nabha BOP 5. 322 2,25,000 50,56 8 Chandni Chowk BOP 6. 323 2,25,000 50,56 8 Jalandhar BOP 7. 324 2,25,000 50,56 8 Chandigarh Thereafter, AO has arrived at cost of 2 8 2 sets of software purchased from Diebold Inc., at Rs. 88 ,410 each (Rs. 2,49,31,590 divided by 2 8 2) and cost of 312 sets of software purchased from Chip Trans at Rs. 2,05,090 (Rs. 6,39, 88 ,366 divided by 312). According to AO, average price paid to Chip Trans for same software purchased from Diebold Inc., was very excessive as compared to cost of Diebold Inc. On comparison, AO was of opinion that cost price paid to Chip Trans was very heavy and unreasonable compared to prevailing market price which is not legitimate. Therefore, he invoked provisions of s. 40A(2)(a)(b) of IT Act. Thus, AO fixed cost of software purchased from Diebold Inc at Rs. 88 ,410 and to this cost he added 10 per cent to software purchased from Chip Trans as these were supplied on credit basis, thus arriving at cost of software purchased from Chip Trans at Rs. 97,251 and thereby arrived at cost of 312 sets as under : Rs. (a) Amount actually paid for 312 sets of ...... 6,39, 88 software ,366 (b) Amount payable to Chip Trans for Rs. ...... 312 sets of software at Rs. 97,251 each 3,03,42,312 Rs. (c) Amount excess paid (a - b) ...... 3,36,46,054 This excess payment of Rs. 3,36,46,054 to Chip Trans was disallowed under s. 40A(2)(a) of IT Act by AO. Against this disallowance, assessee went in appeal before CIT(A) who has confirmed action of AO. Aggrieved, assessee is in appeal before us on this issue. 14. learned counsel for assessee submitted that assessee has purchased 709 sets of software from Chip Trans, USA., though it was stated as 696 before AO and filed affidavit confirming purchase of 709 sets of software. He further submitted that mistake was due to wrong punching of number of software sets imported. Further, software sets purchased or sold consists of large number of individual software which were bundled or embedded as per needs of customers. They were collectively called as software sets and assessee has maintained regular books of account and stock register showing purchase, sales and stock. He further submitted that AO wrongly took purchase from Chip Trans at 312 instead of 709 sets. purchase of 312 sets is factually incorrect. Actually it was 709 sets which is supported by purchase bills. He drew our attention to pp. 197 to 199 of paper book I which shows details of purchase of 697 sets of software from Chip Trans during year 2000-01 at cost of Rs. 6,27,24, 8 79. He further drew our attention to paper book filed on 6th March, 2006 containing Annexs. I to VII as below : S. Annexure Page Particulars No. No. No. Affidavit of appellant under r. 10 of Annexure ITAT Rules, 1963 to 1. 1-2 1 affirm fact that 709 software sets had been imported Invoicewise details of software sets Annexure imported showing 2. 3-20 2 reconciliation with similar list submitted vide letter dt. December 19, 2003. Copies of Annexure 21- 3. invoices as received from 3 146 M/s Chip Trans, USA Quantitative details of software, namely Annexure 4. opening balance, 147 4 receipts, issue & closing balance. Annexure Copy of 14 8 5. 5 software stock register -244 Quantitative reconciliation of Annexure 245- 6. software sourced from 6 24 8 M/s Chip Trans, USA with stock register Quantitative Annexure Reconciliation of 249- 7. 7 software issued with 252 stock register 1 5 . learned counsel for assessee vehemently argued that all purchases were approved by customs authorities and as such, customs approved details cannot be questioned by Department. He contended that when payments are approved by one wing of Government, there is no question of such payments being treated as excessive or unreasonable. For this purpose, he relied on judgment of Hon ble Delhi High Court in case of CIT vs. Shriram Pistons & Rings Ltd. (19 8 9) 8CTR (Del) 159 : (1990) 1 8 1 ITR 230 (Del); and in case of Addl. CIT vs. Nestle India Ltd. (2005) 94 TTJ (Del) 53 and decision of Pune Bench of Tribunal in case of Kinetic Honda Motor Ltd. vs. Jt. CIT (2001) 72 TTJ (Pune) 72 : (2001) 77 ITD 393 (Pune). 1 6 . learned Departmental Representative, on other hand, submitted that there is no merit in claim of assessee that it has purchased 709 sets of software from Chip Trans. At time of assessment, it was stated that assessee has purchased 696 sets of software. Now assessee is changing its stance and stating that it has purchased 709 sets of software and made affidavit to that effect. This is only self-serving in nature. On 11th April, 2003, assessee has filed letter where it is clearly mentioned that it is 312 sets of software and it has given item-wise cost of each set of software and sale price. He drew our attention to details of software purchased by assessee which was enclosed to letter dt. 11th April, 2003. According to this, assessee has purchased only 312 sets at cost of Rs. 6,46,39, 8 32 and sold same for Rs. 5,4 8 ,94,300. sale price mentioned in statement fully agrees with sale price mentioned by AO in assessment order at p. 20, which is reproduced above. He further submitted that had assessee purchased 709 sets or 696 sets of software, there should be equivalent number of software sets in closing stock. But actually, closing stock shows only 131 sets and this statement was produced by assessee as Annex. IV in p. 147 of paper book vide letter dt. 6th March, 2006. According to this statement, there is no equivalent amount of closing stock. Further, he drew our attention to order-sheet entry of assessment record dt. 19th Dec., 2003 wherein assessee has stated as follows : "Shri P. Giridhar, Director Finance attended with Shri J. Vinodh, Executive (Finance) and furnished letter dt. 19th Dec, 2003. It is contended that 696 pieces of software has been purchased from Chip Trans as against 312 agreed earlier which is quantity of software sold and purchased, details of which were furnished along with letter dt. 11th April, 2003. Software stock record is also produced. When asked to clarify as to how assessee determined sale value and purchase price of software given vide letter dt. 11th April, 2003, it is stated that sale price has been determined on basis of actual invoice issued to bank. As regards cost of software software required as per requirement of bank is prepared by assessee by combining 2 to 3 softwares and cost as per letter dt. 11th April, 2003 is actual cost of such combined software. As far as sale and purchase out of provisions (software supplied by Diebold Inc. USA entry dt. 31st March, 2001), set of software as required by bank has directly been sent to India. Thus, software supplied by Diebold is made to order software and hence there was delay in supply of software." 1 7 . We have heard rival submissions and perused material on record. Though assessee has stated that it has purchased 709 sets of software from Chip Trans, USA., it has not been able to co-relate as to how 709 sets of software were embedded or grouped and sold to various parties. assessee has not corroborated unit-wise purchase cost and sale price of software set in its new place of purchase of 709 software sets. It is clear beyond doubt that sale was for 312 sets of software only as assessee itself has admitted vide letter dt. 11th April, 2003 that it has sold 312 sets of software for Rs. 5,4 8 ,94,300, purchase cost of which was Rs. 6,46,39, 8 32. Had it sold 709 sets of software, corresponding amount of balance should have been there in closing stock. But according to statement furnished at p. 147 of Annex. IV of paper book submitted by assessee on 6th March, 2006, stock available was 131 only from purchase made from Chip Trans, USA. 1 8 . Another argument of assessee is that it has clubbed software according to requirement of customers. It transpires from order sheet entry dt. 19th Dec., 2003 that software was prepared according to need of customer bank by clubbing more than one software and cost was determined on actual cost basis of combined software and cost of this software was as mentioned in letter dt. 11th April, 2003. In this letter, assessee has given details of software, sale value and purchase price of them. According to this letter, assessee has sold 312 sets of software for sale value of Rs. 5,4 8 ,94,300 and its purchase price was Rs. 6,46,39, 8 32. assessee has not denied that these details have not been supplied by it. From this it is inferred that assessee has purchased software on order of customers and combined software together at time of sale. It is also evident from statement furnished by assessee on 11th April, 2003 that assessee has effected sales of 312 sets from purchase made during year and even according to its own calculation, assessee has incurred loss. We have also gone through cost analysis statement submitted by assessee itself (which is reproduced above) which shows that cash dispenser software purchased from Diebold Inc., was Rs. 60,567 and cost of ATM software was Rs. 64,622. software supplied by Chip Trans was at Rs. 88 ,410 as is evident from actual purchase entry made on 1st April, 2001 by journal entry for Rs. 2,49,31,590 for 2 8 2 sets (2,49,31,590 divided by 2 8 2). AO has given 10 per cent margin on this at Rs. 8 , 8 41 [ 8 , 8 410 (+) 8 , 8 41] and arrived at amount payable to Chip Trans at Rs. 97,251 per set as software sets supplied by both parties are identical in nature since end user is common. It is also admitted fact that assessee has switched over to purchase of software from Chip Trans to Diebold Inc., USA w.e.f. 31st Oct., 2000. purchase was stopped because, managing director, Harish Murthy was no more managing director of assessee-company and also new managing director, was not interested in Chip Trans. 19. Further, when we analyze purchase price and sale price, it is interesting to note that sale price of software sold by assessee-company to various banks was usually same, i.e., Rs.2,25,000. However, purchase price of software purchased from Chip Trans varies from Rs. 3,17,646 to Rs. 3,34,004. In case of Diebold, purchase price of software was usually Rs. 50,56 8 . assessee was selling software set at loss when purchase was made from Chip Trans and made exorbitant profit when purchase was made from Diebold Inc. Even at cost of repetition, we reproduce relevant chart below : Comparative chart indicating software purchase price regarding supply to Bank of Punjab Ltd., by Chip Trans. & Diebold in Asst. yr. 2001-02. Purchase S. Inv. Selling Purchase from Chip No. No. price price Trans BOP Autocare 1. 1,110 225,000 317,646 Centre, New Delhi BOP 2. Laxmi Super, 1,111 225,000 317,646 New Delhi BOP Shamnath 3. 1,112 225,000 317,646 Marg, New Delhi GT 4. Mandigobindge 1,164 225,000 323,14 8 Punjab GT Road 5. 1,165 225,000 323,14 8 Malout, Punjab Circular 6. 1,166 225,000 320,259 Road, Punjab Bengali 7. Market, New 1,237 225,000 320,259 Delhi Tobaco 8. House, 1,560 225,000 331,010 Calcutta Sector 9. 1,601 225,000 334,004 32, Chandigarh Pakhwal 10. 1,602 225,000 334,004 RS, Ludhiana S.D. 11. Road, 1,742 225,000 331,010 Secunderabad Purchased S. Inv. Selling Purchase from Diebold No. No. price price Inc. BOP 31 1. 225,000 50,56 8 Jalandhar 8 BOP 2. 319 225,000 50,56 8 Banga BOP 3. 320 225,000 50,56 8 Patiala BOP 4. 321 225,000 50,56 8 Nabha BOP 5. 322 225,000 50,56 8 Chandni Chowk BOP 6. 323 225,000 50,56 8 Jalandhar BOP 7. 324 225,000 50,56 8 Chandigarh 2 0 . Now we have to consider whether invoking provisions of s. 40A(2)(a) of IT Act by AO is justified or not. Sec.40A(2)(a) reads as under : "Where assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in cl. (b) of this sub-section, and AO is of opinion that such expenditure is excessive or unreasonable having regard to fair market value of goods, services or facilities for which payment is made or legitimate needs of business or profession of assessee or benefit derived by or accruing to him there-from, so much of expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as deduction." Sec. 40A(2) of Act put curb on expenditure in respect of payment made to close associates referred in cl. (a) of section towards purchase of goods, services rendered, facilities offered and it empowers AO to disallow so much of expenditure in respect of which payment has been made to above category of persons as is considered by AO excessive or unreasonable having regard to fair market value of goods, service rendered or facilities offered for which payment was made or legitimate needs of business of assessee or benefit derived by or accruing to assessee therefrom. There is no plea by assessee that Chip Trans, USA., is not specified person and s. 40A(2)(a) is not applicable. Admittedly, as enumerated in facts of case, Mr. Harish Murthy, managing director, of assessee-company was interested in HMA Data Systems (P) Ltd., and also in Chip Trans, USA. assessee is specified person as per s. 40A(2)(a) of Act. In our opinion, conditions laid down in s. 40A(2)(a) are squarely applicable to facts of this case. purchase price paid by assessee towards purchase cost of software has directly resulted in deriving benefit to specified person who has substantial interest in other companies. payment for purchase of software sets was very excessive and unreasonable having regard to market value of goods, legitimate needs of assessee s business and benefit derived by assessee. These facts are evident from comparison of purchase price paid for software purchased from Diebold Inc., USA and Chip Trans, USA. affidavit filed by assessee regarding purchase of 709 software and also statement and letter dt. 6th March, 2006 at Annexure (supra) are only self-serving in nature as assessee has failed to furnish item-wise cost of each software embedded to each software set sold by assessee and assessee has not also co-related cost of software purchased with software sold as it has made in letter dt. 11th April, 2003, wherein assessee has furnished purchase cost of each software set and sale value and assessee itself has given that assessee has purchased 312 sets at cost of Rs. 6,46,39, 8 32 and sale value was Rs. 5,4 8 ,94,300 which is as follows : Software details for period 2000 Inv. Sale No. Bank site Cost No. value of sets Vysya Bank 332 75,000 40,000 1 Ghaziabad Vysya Bank 351 75,000 40,000 1 Kempagowda Rd UTI - 2,2 8 352 2,40,512 1 Surat ,000 ICICI Bank - Saki 353 1,75,000 1,74,715 1 Naka UTI - 2,2 8 1,9 8 Madyamgram 375 1 ,000 ,639 ,000 ,639 (Nabapally Br) UTI - 2,2 8 1,9 8 376 1 Jublee Hills ,000 ,639 J&K Bank 377 2,00,000 2,01,979 1 - Lajpat Nagar J&K Bank 379 2,00,000 2,01,979 1 - Ansal Plaza Abhudaya 38 41,000 36,246 1 Bank XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX 5,4 8 6,46,39, 312* ,94,300 8 32 * list is very exhaustive and hence only extract is copied for clarity. It was also clarified in order-sheet dt. 19th Dec., 2003 wherein assessee has affixed its signature for method adopted for determining sale value and also actual cost of software set. 2 1 . Another argument of assessee is that purchases were approved by customs authorities and hence, cannot be questioned by Department as excessive or unreasonable. This plea of assessee has no merit since it is apparent from facts of case and material placed before us that assessee has voluntarily paid excess amount than fair market value, and customs authorities have not approved value of goods but only collected duty leviable on them. Hence, in our considered opinion, s. 40A(2)(a) is squarely applicable to facts of this case and lower authorities are justified in disallowing excess payment made towards purchase of software sets and same is confirmed. ground taken by assessee is rejected. 2 2 . next ground is that CIT(A) erred on facts and in law in confirming disallowance of Rs. 2,10,00,000 on account of excessive price paid for purchase of hardware. 2 3 . brief facts of this issue are that assessee has purchased following hardware from Chip Trans and Diebold Inc., USA : Name No. Model Consideration Au Price Basis of supplier of M/cs. Chip 1064 12,34,05, 8 8 4} 4,16,911 C&F Trans CDs 15 1062 212} ATMs Diebold 1064 3,7 8 6 22,71,317 FOB Inc. CDs ,552 1062 10,23, 8 3, 8 2,01 26 8 FOB ATMs 1,069 8 AO computed average cost of CD and ATM purchased from Diebold Inc with CD and ATM purchased from Chip Trans. As mentioned above, average purchase price of ATM from Chip Trans works out to Rs. 4,53,329 (9,61,05, 8 15 divided by 212) as against Rs. 3, 8 2,019 purchased from Diebold Inc. assessee submitted before AO that this variation was due to C&F freight in case of Chip Trans. However, cost of Diebold Inc., was as per FOB value. AO, after giving credit to freight and insurance, estimated variation at around Rs. 10,000 per ATM purchased from Chip Trans and in opinion of AO, price paid to Chip Trans for purchase of ATM is in excess of Rs. 10,000 and thus, he estimated addition in purchase of 212 ATMs at Rs. 21 lakhs and added. same to income of assessee, invoking provisions of s. 40A(2)(a)/40A(2)(b) of IT Act. 2 4 . On appeal, CIT(A) ascertained average price of ATM purchased from Diebold Inc. at Rs. 3,91,1 88 on basis of letter filed by assessee on 23rd Dec., 2003. computation was as follows : FOB Price ...... 102,3 8 1,069 Add : Freight ...... 2,457,3 8 9 (A) Total ...... 104, 8 3 8 ,45 8 (B) Machines ...... 26 8 (C) Avg. Cost (A B) ...... 391,1 88 Thus, he considered at cost of ATM supplied by Chip Trans at Rs. 3,26,651. He compared cost of ATM CD supplied by Diebold Inc., at Rs. 3,91,5 8 9 with ATM CD supplied by Chip Trans at Rs. 3,26,651 and in opinion of CIT(A) average cost of CD supplied by Diebold was more to tune of Rs. 71,310. However, he sustained addition made by AO. 25. After hearing he rival parties, we are of considered opinion that CIT(A) took average cost of ATM CD supplied by Chip Trans at Rs. 3,26,651 as against average cost considered by AO at Rs. 4,53,329. addition was made by AO on account of payment of excess amount towards purchase of ATM CD from Chip Trans. In findings of CIT(A), price paid to ATM CD purchased from Chip Trans was lower than cost of Diebold Inc. In other words, s. 40A(2)(a)/40A(2)(b) was invoked in view of fact that price paid to Chip Trans was excess and unreasonable. findings of CIT(A) was contrary to findings of AO and he adopted cost price of ATM CD supplied by Chip Trans at Rs. 3,26,651 which is lesser than price paid to Diebold Inc. If it was actually lesser than price paid to Diebold Inc., there could not have been any addition and provision of s. 40A(2)(a)/40A(2)(b) of Act would not have been invoked. basis for adopting average price of Rs. 3,26,651 for ATM CD supplied by M/s Chip Trans has not come through. Hence, we are not in position to express any opinion on this. Accordingly, we set aside this issue to file of AO to examine correct price paid for ATM CD to Chip Trans and thereafter compare it with price paid to Diebold Inc. On comparison if AO finds that price paid to Chip Trans was excessive or unreasonable, then he is directed to invoke provisions of s. 40A(2)(a)/40A(2)(b) of Act and our findings with regard to purchase of software set in earlier paragraphs will be applicable to purchase of hardware. In this context, we make it abundantly clear that AO, while concluding this issue, is directed to give due credit towards difference on account of C&F Price and FOB price. 26. This issue is allowed for statistical purpose. 2 7 . last issue is that CIT(A) has erred on facts and law in confirming disallowance of Rs. 4,164,000 on account of sales commission paid to independent parties as being excessive. 2 8 . brief facts of issue are that assessee was doing business with Bank of Punjab Ltd., for many years. assessee claimed payment of commission to following four entities on account of sale order received from Bank of Punjab Ltd. : Name of Sl. concern to whom Date of Amount No. Brokerage/Commission payment (Rs.) is paid General Glass 1. 2 8 .07.99 7,000,000 Works, Mumbai Kalpita Agencies, 2. 2 8 .07.99 7,000,000 Mumbai Silverline 3. 2.05.2000 12,500,000 Appliances, New Delhi Infonet E-Com 4. 2.05.2000 8 ,500,000 Systems Ltd. Total 35,000,000 For assessment year under consideration, assessee claimed payment of sales commission of Rs. 41,64,000. payment of commission works out to 42 per cent in case of Silver Line Appliances (P) Ltd., and 25 per cent each in case of Kalpita Agencies and General Glass Works Ltd. AO disallowed this commission for reason that there was no evidence to show that these entities have rendered any kind of service and Bank of Punjab Ltd., was not aware of these sales agents. On appeal, CIT(A) confirmed order of AO. Aggrieved, assessee is in appeal before us on this issue. 2 9 . learned counsel for assessee submitted that during preceding year, assessee appointed sales agents for increasing its sales and paid commission to them at piece rate on basis of orders procured by them. total commission that was payable to agents on order of 100 machines procured by them from Bank of Punjab Ltd., was Rs. 35,000,000. main services rendered by sales agent for which they were paid commission by assessee are in nature of relationship services to obtain orders and as services are relationship based, and work on contracts of persons involved, no contemporary/recordable documentation is generated. However, payment of commission is made by cheque on receipt of order but commission is charged to P&L a/c in year machine is dispatched and payment mechanism is based on actual order received which is evident from copy of ledger account of commission and brokerage for period 1994 to 2003, i.e., from inception of company. These details were placed before AO vide letter dt. 9th Dec., 2003. AO, though admitted that commission was paid to get orders, he held it to be in nature of kickback and corruption money and disallowed commission payment. learned counsel for assessee vehemently argued that AO has not brought any evidence on record to prove that money has flown to assessee by way of kickback He contended that oral denial of purchaser as to involvement of agents does not in any way point out to irresistible and irrevocable conclusion that commission was paid for no work done. There is no material on record to warrant such inference. reason as to why payment of commission to sales agent was made is anybody s guess but it would not have been paid without services having been rendered. preponderance of probabilities favours assessee. learned counsel for assessee further argued that commercial expediency and reasonableness of expenditure has to be determined by assessee and it is not for Department to determine necessity, need and quantum of particular expenditure. AO did not even examine sales agents independently and action of AO in invoking provisions of Explanation to s. 37(1) of IT Act for making disallowance is bad in law. He contended that this provision can be invoked only if payment is incurred for any purpose prohibited by law or any purpose which is offence. In this case, since no money has been paid to Government servant or employee of bank, said Explanation is not applicable as kind of expenditure is neither prohibited by law or is offence. In support of this argument, learned counsel for assessee relied on following case law : (1) K.N. Narayana Iyer vs. CIT (1992) 10 8 CTR (Ker) 149 : (1993) 202 ITR 774 (Ker) (2) Asstt. CIT vs. A.K. Menon & Ors. (1995) 127 CTR (SC) 263 : (1995) 215 ITR 364 (SC) (3) A.P.L (India) (P) Ltd. vs. Dy. CIT (2005) 97 TTJ (Mumbai) 1 8 7 : (2005) 96 ITD 227 (Mumbai) learned counsel for assessee further submitted that assessee h s established identity of sales agents by producing documentary evidence which has not been rebutted by AO and hence assessee cannot be held to have failed to prove its case. learned counsel for assessee also relied on following case law : (i) V.I.P. Industries Ltd. vs. IAC (1991) 36 ITD 70 (Bom)(TM) (ii) ITO vs. Super Chemical Distributor (2005) 1 SOT 102 (Del) (iii) IAC vs. Haryana Conductors Ltd. (1990) 50 Taxman 291 (Del)(Mag) (iv) CIT vs. Pune Pharma (P) Ltd. (2005) 193 CTR (MP) 73 : (2004) 270 ITR 3 8 2 (MP) (v) Bharat Bijlee Ltd. vs. Dy. CIT (2001) 71 TTJ (Mumbai) 909 : (1999) 71 ITD 412 (Mumbai) 30. On other hand, learned Departmental Representative submitted that commission was paid to identify customers as evident from agreement with agents. This commission is said to have been paid for transactions with Bank of Punjab Ltd., assessee was transacting with Bank of Punjab Ltd., since 1995 and no commission was paid to anybody till 1999. It is, therefore, evident that no service was rendered by so-called agents. He contended that for obtaining orders worth of Rs. 11 crores, commission was claimed to have been paid to tune of Rs. 3.5 crores, i.e., about 32 per cent which is abnormally high. It is observed from sworn statement from Shri P.P. Manjunath Rao, Vice President, Sales and Operations of assessee-company that commission was paid to four concerns to identify only one customer, i.e., Bank of Punjab Ltd. party to whom agents were stated to have been employed, i.e., Bank of Punjab Ltd., did not furnish any confirmation letter to that effect. learned Departmental Representative relied on judgment of Hon ble Supreme Court in case of CIT vs. Calcutta Agency Ltd. (1951) 19 ITR 191 (SC) and submitted that onus is on assessee to prove that expenditure was incurred wholly and exclusively for purpose of business. He also relied on decision of Tribunal, Chennai Bench in case of Tamilnadu Minerals vs. Jt. CIT (2005) 95 ITD 294 (Chennai) in support of above statement. 3 1 . We have heard rival submissions and perused material on record. AO issued summons to Shri P.B. Manjunatha Rao, Vice President (Sales and Operations) of assessee-company and examined him on oath. On examination, Shri Manjunatha Rao stated as under : "Q.4 Do you know, who are persons behind following companies ? (a) General Glass Company (b) Kalpita Agencies (c) Silverline Appliances (d) Infoset E-com Systems Ltd. A.4 I do not know persons behind these companies. Q.5 Is there any agreement with all these companies regarding services to be rendered ? A.5 There is agreement with Infoset E-Com Systems Ltd. With others there is only sales representative letters. Q.6 Why is it that there is no formal agreement with 3 other concerns ? A.6 Their activity was lead generation and arranging meeting with customers. Q.7 Who were customers introduced by 3 entities, with whom you have not entered into agreement ? A.7 It is Bank of Punjab Ltd., only. Q. 8 Do you mean to say that companies (a) General Glass Company (b) Kalpita Agencies (c) Silverline Appliances introduced only one customer viz. Bank of Punjab Ltd., only ? A. 8 Yes. They introduced one customer who placed order with us. Q.9 Who negotiated order of Bank of Punjab Ltd., and with whom ? A.9 From side of Diebold HMA (P) Ltd., it was P.P. Manjunath Rao, Mr. Sachin Handoo, Harish Murthy and Rajeev Malhotra. From bank side it was Mr. Chander Singh, D.P. Singh and finally director Tejbeer Singh. Q.10 When you have negotiated deal with banks directly, why was it that huge commission was paid to 4 concerns referred to above ? A.10 They have done liaisoning work for company. Q.11 Who were persons representing (a) General Glass company (b) Kalpita Agencies (c) Silverline Appliances (d) Infoset E-Com Systems Ltd. with whom company Diebold HMA (P) Ltd. negotiated. A.11 As far as (a) General Glass Company (b) Kalpita Agencies and Silverline Appliances are concerned, right now I am not able to furnish details regarding person/persons with whom deal was negotiated. Q.13 How did they meet you ? Where did they meet you ? And what was basis for payment of commission ? A.13 I have not met them personally. As far as basis of commission is concerned it is based on order quantity and certain percentage of value. Q.14 If order is from one company, why should 4 entities be paid commission ? A.14 These orders were for various periods. Q.15 If one of companies was capable of getting order, why is it that others were approached for same order A.15 way they handled deal, we were not comfortable and hence had to approach others who expressed their interest to represent us." 32. On going through above questionnaire, even person incharge of sales was not aware of marketing activities done by sales agents. He was not aware of details of orders procured by these sales agents. Even Vice President of Bank of Punjab Ltd., was not aware of sales agents. assessee has been dealing with Bank of Punjab Ltd., since 1995 and business was continuous one. In our opinion, assessee has failed to establish that there was necessity to identify once again Bank of Punjab Ltd., as its customer. There is nothing on record to show that assessee has derived business advantage by paying sales commission. expenditure wholly and exclusively incurred for purpose of business was allowable as business expenditure. mere exchange of agreement between assessee and its sales agents for payment of commission does not entitle assessee to claim such expenditure and does not prove that payment was wholly and exclusively made for purpose of assessee s business. Though there was existence of agreement and payment was made through banking channels, still it is open to AO to consider relevant factor and determine for himself whether commission said to have been paid to selling agents or any part thereof is properly deductible under s. 37 of IT Act. deposition recorded by AO referred to above clearly proves beyond doubt that selling agency is not known to Bank of Punjab Ltd. If selling agency actually identified bank and negotiated business with them, at least person in high helm of affairs in bank would have known. This is not case here. argument of learned counsel for assessee has no merit. We are unable to accept contention of assessee. AO has considered all relevant evidence and gave ample opportunity to assessee to prove its claim but assessee has failed to prove its case. Nature of service rendered by agents are not at all available. We are, therefore, inclined not to accept agreement exchanged between assessee and so-called selling agents as genuine. In our opinion, this arrangement was only make believe arrangement as devise to minimize tax liability of assessee firm for primary reason that assessee has been doing business with Bank of Punjab Ltd., since year 1995. We cannot accept this to be business decision to boost sales. When we see this arrangement in light of surrounding circumstances, we are driven to conclusion that apparent is not real. 33. After going through entire facts and circumstances of case and evidence gathered by AO, we are unable to disagree with conclusion reached by lower authorities. Avoidance of tax liability by so arranging commercial affairs that charge of tax is reduced is not prohibited. Taxpayer may resort to divert income before it accrues or arises to him. Effectiveness of devise depends not upon considerations of morality but on operation of IT Act. But in this case, assessee has adopted devices to make it appear that income which belongs to assessee had been earned by some other person by make-believe arrangements. In these circumstances, income that may be proposed to be diverted should be brought to tax in hands of assessee only. In our opinion, assessee has not expended any money towards sales commission as there was no evidence to show that services were actually rendered by so-called sales agents. In view of above findings, we reject this ground. 34. In result, appeal filed by assessee is allowed in part for statistical purpose. *** DIEBOLD SYSTEMS (P) LTD. v. ASSISTANT COMMISSIONER OF INCOME TAX