TaxTMI 
TaxTMI 
2012 (5) TMI 421
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....lakhs; and in ground No.4 that the CIT (A) erred in not passing a speaking order in relation to ground Nos. 8(k), 8(l) and 8(m) were not pressed during the course of hearing before this Bench. Thus, ground Nos.1 and 4 are dismissed as 'not pressed'. In the remaining grounds, the cruxes of the issues raised are reformulated as under: (1) that the CIT (A) erred in holding that the traveling expenses of Rs.1,32,52,859/- in relation to the seconded employees; (2) that the CIT (A) erred in upholding that the disallowance of Rs.5,61,000/- towards legal fees paid to Baker & Mckinsey being non-business expenses of the assessee. II. ITA No.1883/A/05 - A Y 2002-03 - By the Revenue: 3. The Revenue has raised the following grounds: That the CIT (A) has erred in: (1) granting exemption of income u/s 10A of the Act amounting to Rs.9,99,70,054/- in respect of Unit No.107; (2) directing to exclude the income of Rs.16,48,000/- being exchange fluctuation gain and other income of Rs.1000/- for granting exemption u/s 10A in respect of new Unit in SEEPZ and STP in Pune Unit; (3) directing to recalculate deduction u/s 80HHE of the Act after considering the exchange fluctuation ga....
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..../s 80HHE; (7) directing to delete Rs.5.05,80,750/- relating to Human Resource Management function based on the TPO's order u/s 92CA(3) of the Act; (8) directing to delete the addition of Rs.9,77,598/- made on account of adjustment relating to interest on advances paid to the employees based on TPO's order; & (9) & (10) these grounds being general in nature, they do not survive for adjudication. V. ITA No.2042/A/07 - A Y 2004-05 - By the assessee: 6. The grounds raised by the assessee are listed out as under: (1) That the CIT (A) has erred in disallowing depreciation on leased assets amounting to Rs.41,41,761/-; (2) that the CIT (A) erred in upholding the stand of the AO/TPO in respect of the traveling expenses of Rs.1,67,98,984/- in relation to the seconded employees; (3) that this ground of the assessee - CIT (A) erred in not passing a speaking order in relation to ground No.5.5 - was not pressed during the course hearing and, accordingly, this ground is dismissed as 'not pressed.' VI. ITA No.2541/A/07 - A Y 2004-05 - By the Revenue: 7. The Revenue has raised the following grounds: That the CIT (A) erred in: (1) directing to allow exemption ....
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....evious year. According to the TPO, the assessee had a regular practice of seconding various persons to its AEs located at USA, UK, Belgium, Singapore and Malaysia. In all these cases, the persons cease to remain on the payrolls of the assessee and were shifted to the payrolls of the AEs. With regard to the on-site activity, the entire activity had been performed by the AEs and all costs have been borne by them in this regard. Accordingly, the entire revenues were also billed by the AEs on the customers in their own accounts. The assessee had a technical support agreement with the AEs at US, Belgium and UK wherein certain services to support the AEs on-site activities were rendered by the assessee. For the support services, the assessee was separately remunerated to the extent of the services rendered. Accordingly, it follows that any expenditure incurred for transportation of these seconded persons to the AEs location should be borne by the AEs respectively. Accordingly, the assessee was required to explain as to why the amount of expenditure incurred in this regard had not been recovered by it from the respective AEs. 12. After due consideration of the assessee's response, the ....
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....nnot be held to be for the business purposes of the assessee company during the FY 2001-02 as the income on behalf of the projects for which these persons were working on-line on behalf of the associated enterprises are being received by the associated enterprises and not the assessee company. This amount incurred for traveling of such seconded employees at the request of the associated enterprise's was therefore recoverable by the assessee company from the respective associated enterprises' and credited to the P & L a/c for the previous year. The addition made by the assessing officer by way of adjustment of Rs.1,32,52,859/- is, therefore, justified and the action of the assessing officer and TPO is upheld." 15. On present appeal, it was contended by the learned A R that the CIT (A) ought to have appreciated the business rationale provided by the assessee viz., the secondment of the person leads to more offshore business for the assessee as well as the fact that the associated enterprises bear the expenses for the seconded persons returning back to India. 16. On the other hand, the learned D R supported the stand of the authorities below on the issue. 17. We have duly con....
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.... explained that on a bona-fide belief that the fees was considered to be genuine business expenditure incurred on commercial consideration and, thus, it was neither treated as an expenditure relating to AE nor recovered from the AE or disclosed as an international transaction in Form 3CEB. Considering that the amounts were in the nature of pre-incorporation expenses of the subsidiary in Belgium and the same ought to have been recovered from the AE and the assessee had failed to do so, the TPO treated Rs.5,61,000/- as costs recoverable from the AE in accordance with arm's length principle. Accordingly, adjustment to the total income on account of cost allocable to the AE was made to the extent of Rs.5,61,000/- [courtesy Page 143 of PB I]. 21. The learned CIT (A) had, after duly analyzing the reasoning of the TPO and the contentions of the assessee, observed in his impugned order that it was a clear case of not a business expenditure of the assessee and, thus, inadmissible u/s 37 of the Act. Since the expenditure was in the nature of international transaction and a capital expenditure of the subsidiary company off-shore, he had justified the TPO's stand in adjusting the same u/s 9....
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....wn case for the AYs 1996-97 to 98-99) wherein the ITAT held as under: '20............................................................................................. 20.1............................................................................................ 20.2............................................................................................ 20.3. We find merit in the reliance of learned counsel on the Hon'ble Supreme Court in the cases of Textile Machinery Corporation Ltd and Indian Aluminum Co. Ltd., and Gujarat High Court (supra) [CIT v. Satellite Engineering Ltd. 113 ITR 208 (Guj)] inasmuch as these authorities have laid down settled proposition that it is not necessary that separate books of accounts should be maintained in respect of new unit, even if, new unit is formed for the expansion of assessee's business, the same is eligible and unit established by the side of old unit is also eligible. In consideration of these case laws, facts and circumstances, we have no hesitation to hold that Unit-107 was a new unit, not formed by splitting or reconstruction of business of Unit-106. The newly established unit, conforms to conditions laid down by sect....
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....s on account of exports or otherwise. In these circumstances, we vacate the findings of ld. CIT (A) and restore the matter to the file of the AO with the directions to ascertain the nature of gain. In the event such gain is derived from the export of goods or articles manufactured or produced by the taxpayer, exemption/ deduction u/s 10A or 80HHE as the case may be, should be allowed in accordance with law after allowing sufficient opportunity to the taxpayer........." 29. The above view has also been reinforced by the Hon'ble Bench in its findings for the AY 2006-07 in the assessee's own case. 30. In consonance with the findings of the earlier Benches (supra) we are of the considered view that the present issues should also be remitted back to the file of the AO for fresh consideration as contemplated by the Benches referred above. It is ordered accordingly. (4) Deletion of disallowance of loans/advances written off of Rs.1.33 lakhs 31. By the by, a similar issue to that of the present one came up before the earlier Bench for adjudication. After considering the rival submissions, the Bench had recorded its view for the AY 2000-01 in the assessee's own case, the substan....
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.... being a bad debt is allowable as trading loss under s.28 of the I.T. Act, 1961. 14.1. In the light of aforesaid decision of Hon'ble jurisdictional High Coujrt and the nature of advances detailed in the order of the ld CIT (A), suggest that these amounts were advanced during the course of carrying on of business and are directly connected with their business activities. Thus, these amounts forgone are business loss and are allowable." 32. In consonance with the observations of the earlier Bench (supra), we tend to decide the issue in favour of the assessee. It is ordered accordingly. (5.) Allowing of Rs.42,57,297/- paid as Belgium tax as deduction u/s 37(1) of the Act: 33. Briefly, the assessee had, in its account, debited Rs.42,57,297/- on account of taxes paid in Belgium and claimed the said expenditure u/s. 37 of the Act. Being queried, the assessee contended that u/s 37, all taxes and rates were allowable irrespective of the place where they are lived i.e., whether in India or elsewhere. However, u/s 40(a)(ii), Indian income-tax which is a tax levied on the profits and gains chargeable under the Act and that alone is not deductible. On the other hand, it was ....
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....r of claim of deduction as specifically prohibited u/s 40(a)(ii) of the Act and explanation makes it clear that the tax is global tax of the entity and not just Indian Income-tax as canvassed by the assessee; (iii) the tax of the PE on its income was equivalent to Indian Income-tax had the income been offered for tax within the country. Hence, the tax represents an amount equivalent to Indian Income-tax Act; (iv) since the tax has been paid on a portion of income attributable to the PE, the assessee should have claimed credit for such tax, if the same income was included in the income being taxed in India. It is a matter of DTAA and not deduction for the purpose of business which should be allowed; and that the tax cannot be allowed as deduction in the accounts of the assessee as there was no provision that such tax should be paid in India. The only condition is that the tax is paid on income from business and profession. In conclusion, it was contended that the learned CIT (A) had erred on this count. 37. On the other hand, the learned A R reiterated more or less what has been presented before the first appellate authority. In furtherance, it was argued by exten....
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....ll taxes and rates are allowable irrespective of the place where they are levied i.e., whether in India or in a foreign country. However, u/s 40(a)(ii) Indian Income-tax which is a tax levied on the profits and gains chargeable under the Act is not deductible. On the other hand, all other taxes levied in foreign countries whether on profits or gains or otherwise are deductible under the provisions of s. 37 and payment of such taxes does not amount to application of income. 38. We have attentively considered the rival submissions and also perused the relevant case records. 39. Due consideration of the provisions of s.37 and s.40(a)(ii) of the Act as well, it emerges that u/s 37, all taxes and rates are allowable irrespective of the place where they are lived i.e., whether on Indian soil or offshore, whereas u/s 40(a)(ii) of the Act, income-tax which is a tax leviable on the profits and gains chargeable under the Act is deductible. On the other hand, all other taxes levied in foreign countries whether on profits or gains or other wise are deductible under the provisions of s. 37 of the Act and payment of such taxes does not amount to application of income. 40. Let us now hav....
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....evenue was rejected by the Tribunal which has been ratified by the Hon'ble Bombay High Court in ITA NO.123 OF 1976. (ii) In the case of Tata Sons Limited [ITA NO.89 OF 1989], the Hon'ble Mumbai Bench of Tribunal had held on a similar issue that:- "It is an established principle that when a matter is settled by higher courts in a case of a particular assessee, at least in that case litigation cannot be allowed to perpetuate for an indefinite period. In the instant case, the issue is not only settled in favour of the assessee in its own case by the tribunal in ITA Nos. 5708/Mum/82 and 5790/Mum/83 dated 23.10.82, but even after rejection of Revenue's Application under section 256(1) in RA Nos.305 AND 306/Bom/85 dated 14.1.86, its application under section 256(2) on the issue has been rejected by the High court by its order dated 29/3/93 in ITA No.89 of 1989. thus, the issue has reached finality in the assessee's own case and it cannot be dragged into further litigation." 41. Taking into account all these facts and circumstances of the issue and in consonance with the findings of the Hon'ble Benches of Mumbai Tribunal (supra), we are of the firm view that the learned CIT (A) w....
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....come up for AY 2001-02. The total dividend income earned last year was Rs.63.68 lacs and as per para 8 of the order dated 12.10.2004, a sum of Rs.2 lacs was considered as reasonable amount relating to administrative expenses incurred for earning said income for this year also. For reasons recorded therein this disallowance is restricted to Rs.2 lacs for this year also and assessee company get a relief of Rs.46,61,357/-. To summarize the total disallowance of Rs.74,11,557/- gets reduced to Rs.2 lacs only." 45. The learned D R supported the stand of the AO but dissented with the findings of the learned CIT (A). 46. On the other hand, the learned A R submitted that the CIT (A) had taken a judicious view in arriving at such a conclusion which requires no intervention. 47. We have carefully considered the submissions of either side and also gone through the case records. 48. Incidentally, the earlier Bench, in the assessee's own case for the AY 2001-02, had an occasion to deal with a similar issue to that of the present one. Elaborately quoting the amended provisions of s. 14A of the Act, the relevant rule 8D and also extracting the findings of the Mumbai Special Benc....
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....t all, it is held that 1 ½ months' salary of the person deputed (12.5% of the annual salary) in the overseas subsidiary is the arm's length compensation for the service rendered of providing suitable software personnel. In this connection, the third party charges paid by the assessee to other recruitment agencies @ 12.5% of the annual salary is taken as the benchmark. The arm's length price is hence calculated in the following manner: > Total No. of persons seconded (as per assessee's Letter dated 25.8.2004) 263 (in numbers) > 12.5% of annual salary of 263 persons seconded Rs.568.5 lakhs > Arms' length price for the human resource Management service Rs.568.5 lakhs Amount already charged by the assessee (assessee's letter dt: 22.7.2004) Rs. 334.0 lakhs adjustment to the total income (i.e., income to be increased) Rs.234.5 lakhs" 51. On his part, the learned CIT (A) had, after taking into account the assessee's submission, reasoning of the TPO and for the elaborate reasons therein, arrived at a conclusion that:- "(f) (On page 25) In view of the above findings, the action of the assessing officer/TPO in respect of the addition of Rs.234.5 lacs in the TPO's....
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.... to transaction between such associates and these take precedence over other provisions; 53. On the other hand, the learned AR while supporting the CIT (A)'s stand drew the attention of this Bench of the Tribunal's findings in an identical issue in the assessee's own case for the AY 2006-07. 54. The earlier Bench, in the assessee's own case for the AY 2006- 07, after much deliberations, had observed thus: "27. (On page 74) The assessee has made out a case that by such an arrangement of sending the employees to AEs in return assessee has also been benefited. Employees, after returning, are with upgraded skills, better experience, update knowledge and with a better delivery skills. This is one part of the advantage and the other part of the advantage happened to be procurement of 'offshore' business in high volume. We are, therefore, of the view that the comparability analysis as carried out by the TPO do not match with the facts of the case. It is not appropriate to hold that HRM function as carried out by this assessee is to be taken as recruitment services. We therefore hold that the assessee was not functioning as an external recruitment agency. At the cost of repetition....
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....ther income' included in profit of the business as per books were not profit derived from export business and have to be excluded from the profit of the business. 57. On appeal, the learned CIT (A) had observed that: "3.5. (On page 5) As regards 80HHE deduction, the AO vide para 5.4. had excluded 90% of misc. income of Rs.42,26,000/- under the head 'other income. The bifurcation for the above is as under: New Units (SDF VI & VII) Rs.30,01,361 Unit 107 Rs. 4,72,563 Mahape Unit Rs. 54,732 Others Rs. 6,97,125 3.5.1. Thus, the appellant itself has excluded Rs.6,97,125/- in their computation of deduction u/s 80HHE. As regards Mahape Unit, the net result was a business loss and, hence, the above sum of Rs.54,732/- is not part of the profit considered for deduction u/s 80HHE and hence no adjustment is called for in respect of this sum. However, as regards new units and unit 107, the said items of Rs.30,01,361/- and Rs.4,72,563/- respectively were not excluded and the AO's action as regards these two items is in order. Thus, the exclusion shall be 90% of Rs.34,73,924/- in place of 90% of Rs.42,26,000/-. The deduction u/s 80HHE shall be revised accordingly. 58. Befor....
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....erused the reasoning of the AO as well as the CIT (A). With due respects, we have gone through the observations of the Hon'ble Apex Court cited supra. Taking into account the contentions of the AO and the judicial view on a similar issue, the matter is remitted back to the file of the AO with a specific direction to recalculate the workings in the light of the observations of the Hon'ble Apex Court on the issue. It is ordered accordingly. (2.) Confirming the disallowance of Rs.1,26,88,612/- being traveling expenses of seconded employees: 60. A similar issue came up before this Bench for the AY 2002-03 in the assessee's own case (supra) and the findings recorded therein hold good for this AY also. It is ordered accordingly. IV. ITA No.2341/A/06 - A Y 2003-04 - By the Revenue: (1) Exemption u/s 10A of the Act amounting to Rs.10,24,63,557/- in respect of Unit No.107 of SEEPZ: 61. This ground has since been decided in favour of the assessee for the AY 2002-03 in the Departmental appeal (supra), this ground is decided against the Revenue. (2) Exchange fluctuation gain for new units for the purpose of exemption u/s 10A & deduction u/s 80HHE of the Act: 62. Inc....
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....for calculating deduction u/s 10A/80HHE, the AO vide para 4.5 of his order excluded misc. income of Rs.30,01,3621/- in computing the profit of the business eligible for exemption u/s 10A in respect of new units (SDF VI & VII). This adjustment, it is since verified was effect by the appellant also in the computation of deduction u/s 10A in respect of the said units. As such, the AO has not disallowed anything in addition and, hence, the exclusion of the said item of misc. income while computing deduction u/s 10A is in order and thus sustained. For the same logic in respect of unit 107 now held as eligible for deduction u/s 10A vide ground No.1 above, the exclusion of other income of Rs.4,72,563/- is found to be correct and the AO while giving effect to this order shall exclude the above sum in computing exemption u/s 10A in respect of Unit 107." 68. With regard to the eligibility for deduction u/s 10A vide ground No;1, the learned CIT (A) had observed thus: "2.3...................The AO had simply quoted the disallowance for the earlier assessment orders and repeated the same for this year as well. It is noticed that for AYs 1996-97 to 2002-03 this ground was allowed in favour....
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....depreciation as against income assessable under the house property. However, it is to be noted that the AO although disallowed the depreciation did not compute the rental income under the head 'house property'. To this extent, the action of the AO in disallowing depreciation but treating the income as part of business is anomalous. On the facts obtaining in this case, the income by way of monthly rent on licence agreement (permissive User Agreement) shall be assessed as income from house property and in doing so the appellant was entitled to deduction permissible u/s 24 of the Act. The AO is directed to compute the income accordingly....." 72. In this connection, we would like to make the point clear that though the ground raised by the assessee relates to disallowance of depreciation of leased assets of Rs.3,84,684/-, the CIT (A) after duly analyzing the pros and cons of the issue as recorded elaborated in his impugned order had arrived at a conclusion at para 4.1. which is, for the purpose of clarity, extracted supra. The CIT had, in fact, directed that the rentals on lease agreement shall be assessee as income from house property and the assessee was entitled for deduction pe....
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....allowed only deduction u/s 80HHE. Now as the profits of Unit 107 is held as eligible for exemption u/s 10A, the balance 10% profits in respect of Unit 107, new units (SDF VI & VII) and Pune Unit are eligible for computation of deduction u/s 80HHE and the AO is directed to recomputed the same in the light of the above directions. 5.2. However, as regards the export turnover and total turnover for computing the deduction u/s 80HHE, 10% of the export turnover and total turnover of 4 eligible units (new units SDF VI & VII) Unit 107 and SDP Pune shall be included in the export turnover and total turnover respectively as 10% of the profits of those units are now considered for computing deduction u/s 80HHE. This is to match the eligible profit with the corresponding export turnover and total turnover. The deduction u/s 80HHE M shall be reworked accordingly." 75. This has been objected to by the Ld. D R, in stead, he fully supported the stand of the AO on this issue. 76. On the other hand, the learned AR was in support of the learned CIT (A)'s findings. He had also placed reliance on the ruling of (i) the Hon'ble Madras High Court in Tax Case (Appeals) No.695 of 2010 dated 2.8.20....
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....ount was recovered from the salaries and sent back at regular intervals. There was no material on record that the fund of the assessee was enjoyed by the AEs and that the expenditure was wholly in connection with the movement of the employees for onsite job and not to meet any cost of AEs as the said sum was ultimately recoverable in the subsequent salary. Thus, the contention of the assessee that the said adjustment was purely notional especially when the AEs did not charge any agency charges for collecting and remittance back is tenable. In fact, bank charges for remittance of funds were borne by AEs. In view of the matter, the CIT (A) took a view that the said adjustment cannot be recovered from the AEs and, thus, cannot constitute the income of the appellant company and accordingly, directed the AO to delete the said adjustment. 82. Before us, the learned DR supported the reasoning of the TPO as well as AO, but, vehemently argued that the CIT (A) had failed to see reason and without analyzing the background, on which the TPO had made the adjustment, deleted the addition. It was, therefore, pleaded that the stand of the TPO/AO requires to be sustained. 83. On the other hand, the....
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.... scaled down to Rs.9,77,598/- through his order u/s 92CA(5) r.w.s.154 of the Act [Refer: P 110 of PB]. 88. After taking into account the reasoning of the learned TPO, reversal effected by the learned CIT (A) and also keeping in view the arguments put-forth by the learned AR during the course of hearing, we are of the considered view that the reasoning of the TPO was quite reasonable and balanced one too. Accordingly, the addition made by the AO is sustained and the finding of the learned CIT (A) is reversed. IV. ITA No.2042/A/06 - A Y 2004-05 - By the assessee: (1) Disallowance of depreciation on lease assets amounting to Rs.41,41,761/-: 89. The assessee had claimed depreciation on a building which has been given on lease to Mastek DC a group concern. As the said asset, according to the AO was not used by the assessee for its business purposes during the year under consideration, the assessee was required to explain as to why the depreciation so claimed on such asset should not be denied. 90. After due consideration of the assessee's contentions as recorded in his impugned order, the AO, by extensively quoting the provisions of s.32 (1) of the Act, had observed thus: ....
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....gular business activities from the said premises. Taking shelter under the provisions of s. 22 of the Act, it was contended that the rent income was received as a result of exploitation of commercial asset, and, accordingly the source of rent income was use of commercial asset. 93. Placing strong reliance on the ratio laid down by the Hon'ble Supreme Court in the case of Universal Plast Ltd v. CIT [(1999) 237 ITR 454 (SC)], it was contended that the assessee had not let out the premises for a permanent period and only a part of the premises was let out while the assessee continued to carry out its business activities from the same premises and that the proposition laid down by the Hon'ble Court directly applicable to the assessee who had rightly claimed depreciation on the leased assets. 94. The learned D R valiantly supported the stand of the authorities below and pleaded that the findings of the learned CIT (A) be upheld. 95. We have carefully considered the rival submissions and also critically perused the relevant records. 96. It is an undisputed fact that the assessee had let-out a sizeable area in the premises; say exactly 1/3rd of its total area to Mastek DC, app....
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....berated upon (supra) and since the assessee had not let-out a portion of its premises temporarily as advocated, we are of the firm view that the ratio laid down by the Hon'ble Supreme Court, strongly relied on by the assessee, cannot come to its rescue. Accordingly, we are of the firm that the learned AO as well as the learned CIT (A) were within their realms to reject the asssesee's claim. It is ordered accordingly. (2) Disallowance of traveling expenses of Rs.1,67,98,984/- in relation to seconded employees: 100. Incidentally, this issue has been decided against the assessee for the reasons recorded therein for the assessment year 2002-03 in the assessee's own case(supra). As the issue is similar for this AY too, our findings for the earlier AY hold good for this AY also. In a nut shell, this issue is decided against the assessee. VI. ITA No.2541/A/07 - A Y 2004-05 - By the Revenue 101. Before venture to adjudicate the grievances of the Revenue put forth in its appeal for the AY under dispute, we would like to clarify that we have duly taken care of the submissions made by either party, carefully considered the relevant case records and also the case laws relied....