AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2018 (10) TMI 1265
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....ravelling expenses, where the same are incurred purely for purposes of business of the company. 2) The Learned Commissioner of Income-tax (Appeals) -10,Mumbai, has erred in disallowing Rs. 24,70,578/- out of total salary expenses of Rs. 1,23,52,891/-incurred for the financial year 2009-10 where the same are incurred purely for purposes of business of the company. 3) The Learned Commissioner of Income-tax (Appeals) -10, Mumbai, has erred in adding Rs. 32 Lakhs as mark up on sales of software u/s. 92 of the Income-tax Act, 1961. 4) The Appellant reserves right to add, amend or alter any of the grounds of appeal as and when found necessary." 3. The assessee is engaged in the business of developing, modifying and designing of computer software and devising, customizing and provision of technical support in developing of software programs. The assessee has debited Rs. 29,95,103/- on account of travelling expenses. During the course of assessment proceedings u/s 143(3) r.w.s. 143(2) of the 1961 Act , the assessee was asked by the AO to furnish the complete details of the travelling expenses claimed. The assessee vide reply dated 17.01.2013, submitted before the AO as under:- ....
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....also the learned AR has failed to exhibit sufficiently to show that the entire expenditure of Rs. 23.95 lakhs debited was meant for business alone. Therefore, in my considered view the disallowance of 50% of the said expenditure is fairly reasonable as it is attributable to non-business purposes. However, as pointed out earlier, at para -4 above the actual expenditure debited to P& L account under the head travelling expenditure is only Rs. 23.95 lakhs. Even going by the proposal of 50% disallowance of such expenditure by the AO the disallowance should work out to Rs. 11.97 lakhs but not Rs. 1,497,550. I, therefore, direct the AO to rework the disallowance of the rate of 50% by taking the correct amount debited in P & L A/c. under the head travelling expenses. The ground is allowed accordingly", 5. Aggrieved by the appellate order passed by learned CIT(A), the assessee has come in appeal before the tribunal . It was submitted by learned counsel for the assessee that complete details of the expenses were duly furnished before the authorities below. It was submitted that there are large number of small-small expenses which were incurred for travelling by employees and business gues....
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.... Operating & Administrative expenses Sch-F 58,79,615 57,90,036 Payment for benefit of employees Sch-E* 1,44,20,103 68,95,081 Interest & financial charges Sch-G (3255254) (963208) Depreciation 2,69,943 2,79,372 4,93,14,404 1,20,01,281 SCHEDULE-E Payment for benefit of Employees 31.03.10 Rs. 31.03.09 Rs. Staff salary & Allowance 1,23,52,891 54,16,001 Bonus salary expenses 13,10,854 11,55,475 Other benefit to employees 48,584 972 PF Employer contribution 7,07,774 3,22,633 1,44,20,103 68,95,081 The assessee had stated to have incurred travelling expenses to the tune of Rs. 29,95,103/- with respect to its employees as well business guests travels, of which 50% of the expenses were disallowed by the AO. however Ld. CIT(A) was of view that the travelling expenses claimed by the assessee in its books of accounts and in return of income filed with the Revenue, were to tune of Rs. 23.95 lac instead of Rs. 29.95 lacs as made out by the AO and hence the learned CIT(A) directed for disallowance of 50% of the said travelling expenses aggregating to the tune of Rs. 23.95 lacs incurred by the assessee. The Revenue is not in appeal as to ....
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.... expenses incurred on training of staff cannot be considered as personal or capital in nature unless incriminating material /reasons/justification for their holding to be personal/capital in nature is brought on record. Nothing incriminating is there on record to validate disallowance of 50% of travel expenses. The authorities did in-fact allowed 50% of the travel expenses and it is not a case that entire disallowance of travel expenses were made holding to be non-genuine, personal or capital in nature. No further enquiry was made by lower authorities to bring on record cogent material of discredit version of the assessee to justify disallowance of 50% of travel expenses being personal or capital in nature warranting/justifying disallowance under the provisions of the 1961 Act. Under these circumstances based on appreciation of entire material on record, the assessee did discharge its burden by placing entire material on record and no addition is warranted towards disallowance of 50% of the travelling expenses and we hereby order deletion of additions as were made by the AO and confirmed by Ld. CIT(A). We decide this issue in ground no. 1 in favour of the assessee. The assessee suc....
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....ees were filed before the Ld.AO ii) The claim of expenses is allowable u/s.36 & 37(1) of the Income Tax Act 1961 based on the fact that the expenses incurred for the purpose of business of the company and same cannot be disallowed on the ground that the income earned against the expenses incurred is disproportionate. iii) During the financial year 2009-10 the assessee received a contract from HCL Technologies and the contract is for a period of 3 years. Being the initial years of the company it is very likely the company -would have high overheads and salary cost as compared to income being at low levels as customer responses and successful contracts take time. Therefore we respectfully submit that the Ld.AO has disallowed the expenses of Rs. 24,70,578/- arbitrarily by just stating that expenses incurred are disproportionate to the income without finding any discrepancy in the details of expenses filed". The learned CIT(A) rejected the contentions of the assessee vide appellate order dated 20-08-2015, by holding as under:- "5.2. I have carefully considered the facts and circumstances of the case. The P&L Account for the A.Y. 2009-10 relevant to present assessment year ....
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....ubmitted, the AO has restricted the disallowance to only 20% (20% of Rs. 12,352,891 is Rs. 24,70,578) even though he has mentioned the disallowance at 25% in the assessment order. Since the appellant has failed to demonstrate properly to the satisfaction of the AO that the entire expenditure was meant for business, the disallowance made by the AO found to be reasonable. Even before me also the learned AR has not given any further evidence to show that the entire expenditure debited under the head staff salary and allowance was incurred only for business purpose. In view of the above discussion I conform the addition made by the AO. The ground is dismissed. 9. Aggrieved by the appellate order passed by learned CIT(A), the assessee has come in an appeal before the tribunal. It was submitted by Ld. Counsel for the assessee that it is for the assessee and not for Revenue to decide how his business should be conducted . It was submitted that there is no justification for making disallowance of salary on ad-hoc basis based on certain percentage of salary without pointed out any defects in books of accounts. The assessee relied upon the decision of Hon‟ble Supreme Court in the cas....
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....urance Company Limited for which tripartite agreement was entered into by and between assessee, National Insurance Company Limited and HCL Technologies Limited . The assessee acquired software license from its foreign parent company for Rs. 3.20 crores for meeting its obligation which was then supplied to HCL Technologies Limited for an amount of Rs. 3.20 crores for ultimate supply to National Insurance Company Limited. The said sale and purchase was routed through assessee‟s books of accounts and payments were made and received through assessee‟s bank account, albeit for both the sale and purchase the value of the software was Rs. 3.20 crores and the assessee did not earned any income/mark-up on it. The assessee earned Rs. 24 lacs from its foreign parent company for services during the year under consideration . This clearly evidences that the business was set-up/ carried on by the assessee and no defect is pointed by the AO so far as these salary payments to these professional executives-employeeswere concerned except that the allegation of the Revenue is that payments were on the higher side keeping in view income/turnover of the assessee offered for taxation. The as....
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....We are of the considered view that no disallowance of 20% of the salary expenses is warranted keeping in view factual matrix of the case, which we order deletion . This issue raised in ground number 2 is decided in favour of the assessee. We order accordingly. 11. The third addition concern itself with additions made u/s. 92 of the Act, wherein the AO observed that the assessee has purchased software for Rs. 3.2 crore from its foreign parent company based in Shanghai, China which was sold by the assessee for Rs. 3.2 crore to HCL Technologies Limited , without any mark-up for the assessee . The assessee submitted before the AO as under:- "The assesses along with group company received contract from HCL for supplying and installing of software and services for HCL Technologies. The software is the domain of assessee's holding company and the same is provided to HCL Technologies at same cost by the assesses. The assessee's margin of profit is by providing installing and after sale servicing (training) to HCL Technologies." This explanation submitted by the assessee did not found favour with the AO and the assessee was show-caused as to why no mark up for sale of product h....
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....ed), no profit accrues to assessee company on sale of license to HCL Technologies. iii) The assessee company's role is in the second part of contract relating to implement of software, training of staff at HCL Technologies and maintenance of software. In the second part of the contract, assessee company received full support from the principal company for execution of the contract and technical assistance was given at Nil cost." The replies of the assessee did not found favour with Ld. CIT(A) , who dismissed the appeal of the assessee by holding as under:- "6.2. I have carefully considered the facts of the case and the submissions of the Id.AR. It was submitted before me that the role of the appellant is to sell the software to HCL Technologies on cost-to-cost basis on behalf of the principal company at Singapore(sic. Shanghai). The role of the appellant is implementation, training and maintenance of the software in India for which it charged the service charges of Rs. 24 lakhs during the year. So far so good. However the AO has observed that there is no mentioning in the agreement with HCL Technology that the product will be delivered by the appellant on behalf of the p....
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....t since the assessee did not incur any expenses nor any value additions were done by the assessee to software sold, hence no mark-up was added. It was submitted that additions were made to the tune of 10% as mark up on the sale of software by the learned AO which was later confirmed by learned CIT(A) . It was submitted that services contract/AMC were awarded to the assessee vide sub- contractor agreement dated 21.11.2008 and the assessee benefited from the said sub-contractor agreement awarded in its favour for rendering of services/maintenance/AMC. It is claimed that Revenue towards services/maintenance/AMC was received by the assessee in subsequent years which was offered for taxation which can be verified by the Revenue. Our attention was drawn to page 70/pb which carried details of financials associated with the sub-contractor agreement dated 21.11.2008 as to values associated with sale of software and services associated with maintenance/AMC/services. On the other hand, the Ld. DR relied upon the order of the authorities below and it was submitted that since billing towards sale of software was done by the assessee , there should be some profit/mark up earned by the assessee w....
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....y parent company to HCL Technologies Limited for making ultimate delivery to National Insurance Company Limited and the said software was directly downloaded by HCL Technologies Limited from the website of foreign parent company of the assessee based at Shanghai, China without intervention of the assessee to be ultimately supplied to National Insurance Company Limited under an contractual obligation as stipulated in the agreements . Thus, a claim is made out that no expenses were incurred by the assessee for supply of software as well no value addition being done by the assessee to said software, there arises no need of mark-up on said software value for the assessee. It is also claimed that the assessee will be benefitted by a simultaneous contract it got for services/maintenance/AMC with respect to software supplied by the foreign parent company to HCL Technologies Limited for ultimate delivery to end customer namely National Insurance Company Limited, which it is claimed will generate revenue for the assessee in years to come which is the reason for non charging of mark-up on sale of software. The doctrine of commercial expediency is invoked by referring to decision of Hon‟....
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....vities by way of participating in RFP, tendering, negotiations etc which include huge efforts and expertise . This entail huge costs both in terms of time , manpower, expertise and cost and involves use of infrastructure including manpower and travelling to participate in the tender and finally after going through all the stipulated processes and procedures to win the tender in its favour outcasting rivals. Thus, the costs associated and incurred in connection with participation in and finally winning tender both direct and indirect costs enter Profit and Loss account which needs to be neutralised with Revenues from these contracts based on the concept of matching principles. The doctrine of commercial expediency and non interference of Revenue cannot be stretched and allowed to invoked in the cases when the tax-payer incur costs to participate and win the tenders for supply of products/services and when it comes to booking of Revenue, the same is being billed on costs to costs basis without any profit/mark-up element . Even post sale of this software, the assessee is burdened with onerous responsibilities which found mentioned in the sub-contractors agreement. Reference is drawn t....
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....prudence shall fail and revenue will be definitely entitle to lift the veil and see behind the smoke screen , the true colours of transaction entered into by the assessee with a view to shift profits to foreign tax jurisdiction. After all commercial expediency involves working in a manner which is commercial expedient for the tax-payer and not to work in the manner so as to shift profits to its foreign parent company and erode tax base in India. There is no such vested right in the assessee to work under the garb of commercial expediency in a manner prejudicial to the legitimate revenue expectation of the Government of India supported by the provisions of the 1961 Act and the mandate of Article 265 of the Constitution of India. The manner in which software costs are billed by the assessee in the instant case puts heavy onus on the assessee to prove that there is no booking of costs with respect to entire spectrum and process of bidding for RFP issued by National Insurance Company, in consortium with its partner HCL Technologies India Private Limited while profits stood shifted in favour of its foreign parent company. To contend that the assessee will be benefitted in future years w....