TaxTMI 
TaxTMI 
2018 (10) TMI 1265
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....ai, has erred in disallowing Rs. 11,97,000/- our Travelling 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 as....
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....r all it is the satisfaction of the AO which counts in framing the assessment. Even before me 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 n....
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.... 3,20,00,000 0 34,40,00,000 0 Expenditure Purchase of Software License 3,20,00,000 0 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 t....
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....hese expenses being incurred in connection with capital outlay or being capital in nature is provided by the AO and these are merely conjectures and surmises which cannot take the place of the proof. The 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....
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....Act. 8. Aggrieved by the assessment order passed by the AO, the assessee filed first appeal with learned CIT(A) and submitted as under:- "i) Full details of salary paid with the designation and work profile of employees 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) rejec....
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....AO has asked the appellant to furnish full details of the expenditure claimed of Rs. 12,352,891. After careful examination, the AO during the course of assessment proceedings, has made a proposal for a disallowance of 2/3 of such expenditure, vide his order sheet entry dated 4.2.2013. However while concluding the assessment, in the light of the explanation submitted, 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 ....
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....ed between assessee, HCL Technologies Limited and National Insurance Company Limited wherein the assessee is OEM-CI consortium partner of HCL Technologies Limited , the prime tenderer , for the RFP No. #NIC/IT/RFP/1/2008 dated 7th May 2008 for implementing and commissioning the „Enterprise Architecture Solutions for Insurance‟ issued by National Insurance 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 . ....
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....ove that the salaries paid to these employees were excessive. The only grievance of the revenue is that the said salary expenses were on the higher side vis-a-vis business generated by the assessee during the year, which in our opinion is no reason for making disallowance keeping in view factual matrix of the case and the explanation submitted by the assessee. 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....
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....al company and the order was obtained from HCL Technologies because of the license held by the principal company. The sale of licence to HCL Technologies does not give rise to profit of asessee company as the licence is held by principal company and there were no efforts made by the asessee company in the sale of this licence. ii) Carrying out FAR analysis (functions performed, assets employed and risk assumed), 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 ....
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....nd no TP study was conducted by the Revenue. It was submitted that the assessee purchased the said software from its holding company and sold the same to HCL Technologies Ltd. at the same value i.e. Rs. 3.20 crores . It was submitted that only billing was done by the assessee company while the HCL Technologies Ltd. downloaded the software directly from the websites of the foreign parent company of the assessee. It was submitted that 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....
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....s 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 . The assessee is contending that the assessee has not done any value addition to the software supplied by 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 ....
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.... in contradistinction with its foreign parent company based in Shanghai, China. As could be seen from the sub-contractor agreement dated 21.11.2008, a large number obligations are placed on the assessee with respect to sale of software to be made to HCL Technologies Limited for ultimate user by National Insurance Company Limited, even post sale of software. The assessee being consortium partner has to execute and undertaken vast activities 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 b....
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....mark-up as detailed above after winning RFP from National Insurance Company Limited is to be evaluated on the touchstone of commercial prudence and expediency to see that it does not transgress those limits and boundaries as set out by doctrine of commercial expediency to shift profits to foreign tax jurisdiction while Indian tax jurisdiction is burdened with costs. In this situation protection granted by doctrine of commercial jurisprudence 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 softw....