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2010 (3) TMI 1107 - AT - Income TaxDeduction of expenditure u/s 37(1) - expenses incurred in respect of M/s Accenture Organisation International Services Agreement (SA) - software development and information technology enabled services - scope of expression 'for the purpose of business or profession'. HELD THAT - The scope of expression 'for the purpose of business or profession' is wider in scope and its range is wide. It may take not only day-to-day running of business but also rationalization of its administrative and modernization of its machinery. It may include global consistency in business practices, economies of scale improvements in efficiency and its productivity and access to the skills and expertise from all parts of global organizations. In the case under consideration, services covered under ISA have been classified in to eight different categories, which are the global business, strategy, client business development, knowledge, quality and risk management, personnel and policies, communication and information services, global facilities management, finance, legal and tax services and education development services. Under the present circumstances of the business, such global arrangement is necessary for the purpose of business. The expenditure incurred for such global arrangement is allowable expenses u/s 37(1) of the Act. In addition to that, we find that the payment of expenditure is at arm's length determined by the TPO u/s 92CA(3) of the Act. We do not find any substance in the case of the revenue because when an international transaction at arms length as determined by the TPO in the said transaction, it cannot be said that the assessee has paid the prices under the said transaction without obtaining any services. The contention of the revenue is baseless and the expenditure is incurred for the purpose of business. Therefore, we are of the view that the CIT(A) has rightly allowed the claim of the assessee. Thus, ground no.1 of the revenue is dismissed. Disallowance of expenses paid to M/s Little and Co. towards professional fees for rebranding exercise and review of leave and license agreement u/s 35 of the Act - HELD THAT - We find that the CIT(A) has given categorical finding that expenses incurred were wholly and exclusively for the purpose of business, revenue in nature and expenditure cannot be considered as preliminary expenses which is neither capital expenditure nor personal expenditure. There is no contrary material on the record. Thus, we uphold the order of the CIT(A) on this issue. Disallowance on customs duty - Nature of expenditure - Revenue Or Capital - HELD THAT - We have heard the learned representatives of the parties and perused the record. The CIT(A) gave a finding after considering the assessee's submission that the claim of the assessee is a revenue expenses incurred for the purpose of business. The revenue had failed to point out any contrary material against the findings of the CIT(A). In the light of that fact, we incline to uphold the order of CIT(A) and dismiss the ground raised by the revenue. Disallowance of expenses on employees stock purchase plan - expenses incurred for the benefit of parent company - HELD THAT - The CIT(A) has given a categorical finding after examining the relevant material and submission of the assessee that shares were allotted to its employees and not to the employees of the parent company. The expenses incurred by the assessee to motivate and award its employees for their hard work, which amounts salary cost of the assessee company. The expenditure incurred by the assessee for the purpose of business on employees is allowable expenses. The CIT(A) has examined the entire scheme and found that such expenses are business expenses and should be allowable as deduction. Since there is no contrary material to the findings of the CIT(A), in the light of that we confirm the order of CIT(A) on this issue. In the result, the appeal of the revenue is dismissed. Disallowance u/s 10A - reimbursement of expenses - method of accounting - HELD THAT - In the case under consideration the assessee has followed second method of accounting that is when the assessee incurred such reimbursable expenses and accounted for in profit and loss account the eligible profit was reduced as total expenses including reimbursement part of expenses were debited to profit and loss account. At that time if profit is not increased then the same cannot be reduced when the amount of expenditure is reimbursed. The CIT (A) has appreciated the accounting method followed by the assessee and deleted disallowance of claim made by the AO except in respect of Reimbursement of telecommunication charges. The CIT(A) invoked Explanation 2(iv) to section 10A of the Act in respect of Reimbursement of telecommunication charges. In principle we agree with finding of the CIT (A) in respect of reimbursement of expenses. We also find force in alternate submission of the learned AR that if it is held that the receipts for the reimbursable expenses are not eligible for deduction u/s 10A of the Act, only profits, if any, relating to such reimbursable expenses should be considered as being not eligible for deduction u/s 10A of the Act. Further, same should not part of total turnover and export turnover. On an analysis of definition of 'export turnover' as provided in clause (iv) of the Explanation 2 to section 10A, we notice that for the purpose of not including in the consideration received in or brought into India in convertible foreign exchange there are two types of expenditures. The first type of expenditure is freight, telecommunication charges, or insurance attributable to the delivery of article or thing or computer software out of India. The second type of expenditure is expenditure, if any, incurred in foreign exchange in providing technical services outside India. The basic idea or intention for deducting the first type of expenditure, i.e., freight, telecommunication charges, or insurance charges is that delivery of goods should be Free on Board (FoB). The goods exported at FoB is important in the sense that deduction under section 10A is permissible only in respect of consideration received against goods and not for the consideration received against freight etc. All the assessees should get deduction under section 10A on consideration received against supply of goods at FoB. Therefore, the condition of delivery of goods at FoB has been put and the definition of export turnover as provided in clause (iv) of Explanation 2 to section 10A is required to be interpreted accordingly. We therefore send back matter of this cross ground of appeal and Co to the file of the AO for necessary verifications in the light of discussions. The AO will provide reasonable opportunity of hearing to the assessee. Disallowance of deduction u/s 10A - foreign exchange fluctuation without appreciating that the same is not derived from export business but the same is income from other sources - HELD THAT - We find that in the case of Sujata Grover 2001 (11) TMI 232 - ITAT DELHI-E held that 'basic character of the receipt of foreign currency remains the same i.e. it remains attributable to the export effected by the assessee.' Following the said decision of ITAT, in the case of Renaissance Jewellery Pvt. Ltd. V. ITO 2005 (5) TMI 246 - ITAT BOMBAY-G held that 'exchange gain arising on account of change in exchange rate after the end of accounting year constitutes part of export turnover eligible for deduction u/s 10A.' We find that the issue under consideration is covered by the decisions of ITAT mentioned above and the order of CIT(A) is in consonance with those decisions of ITAT, therefore, we do not find any infirmity in the order of CIT(A) and the same is hereby confirmed on the issue. In the result, the appeal of the revenue is partly allowed for statistical purposes and the C.O. filed by the assessee is allowed for statistical purposes as indicated above. It is to note that grounds of CO has been taken as per separate summary sheet of grounds of appeal as well grounds of CO. filed by the learned AR.
Issues Involved:
1. Deletion of disallowance of expenses under the Accenture Organisation International Services Agreement (ISA). 2. Deletion of disallowance of expenses paid to M/s Little and Co. for rebranding and review of leave and license agreement. 3. Deletion of disallowance of 30% of conveyance and communication expenses. 4. Deletion of disallowance of customs duty as revenue expenditure. 5. Deletion of disallowance of expenses on Employee Stock Purchase Plan (ESPP). 6. Deduction under Section 10A of the Income Tax Act. 7. Deletion of disallowance of bad debts. 8. Deletion of disallowance under Section 40(a)(i) related to reimbursement of training expenses. 9. Applicability of interest under Section 234D. Analysis: 1. Deletion of Disallowance of Expenses under ISA: The Revenue's appeal against the deletion of disallowance of Rs. 1,29,16,425/- incurred under ISA was dismissed. The CIT(A) observed that the Transfer Pricing Officer (TPO) had reviewed and found the arms-length price adopted by the appellant to be in order. The CIT(A) noted that the AO did not provide material to rebut the TPO's conclusions. The expenditure was deemed fair and reasonable, and the transaction was considered a legitimate business expense under Section 37(1) of the Act. The Tribunal upheld the CIT(A)'s decision, noting that the expenses were at arm's length as determined by the TPO. 2. Deletion of Disallowance of Expenses Paid to M/s Little and Co.: The disallowance of Rs. 10,42,394/- paid to M/s Little and Co. for professional fees related to rebranding and review of leave and license agreement was deleted by the CIT(A). The CIT(A) held that these expenses were not preliminary expenses under Section 35D(2) and were revenue in nature. The Tribunal upheld this decision, finding no contrary material on record. 3. Deletion of Disallowance of 30% of Conveyance and Communication Expenses: The AO disallowed 30% of conveyance and communication expenses on an ad-hoc basis. The CIT(A) deleted this disallowance, noting that the expenses were incurred for business purposes. The Tribunal upheld the CIT(A)'s decision, finding no evidence to the contrary. 4. Deletion of Disallowance of Customs Duty: The AO disallowed Rs. 5,09,958/- as capital expenditure. The CIT(A) deleted this disallowance, noting that the expenses were for computer spare parts and not capital in nature. The Tribunal upheld this decision, finding the expenses to be revenue in nature and incurred for business purposes. 5. Deletion of Disallowance of Expenses on ESPP: The AO disallowed Rs. 9,06,788/- related to ESPP, arguing it benefited the parent company. The CIT(A) deleted this disallowance, noting that the shares were allotted to the appellant's employees and were akin to salary costs. The Tribunal upheld this decision, finding the expenses to be business expenses. 6. Deduction under Section 10A: The Tribunal addressed multiple issues related to Section 10A deductions, including the treatment of reimbursable expenses and foreign exchange fluctuation gains. The CIT(A) directed the AO to compute the deduction by excluding telecommunication charges from both export and total turnover. The Tribunal upheld this approach, emphasizing the need for consistency in accounting methods and the inclusion of only the profit element in reimbursable expenses. 7. Deletion of Disallowance of Bad Debts: The AO disallowed bad debts, questioning their irrecoverability. The CIT(A) allowed the deduction, noting that the debts were written off in the accounts and met the conditions under Section 36(1)(vii). The Tribunal upheld this decision, finding that the assessee had fulfilled the necessary conditions. 8. Deletion of Disallowance under Section 40(a)(i): The AO disallowed reimbursement of training expenses, treating them as fees for technical services. The CIT(A) deleted this disallowance, following the decision for AY 2001-02. The Tribunal sent the matter back to the AO for verification, following the precedent set in the earlier year. 9. Applicability of Interest under Section 234D: The CIT(A) held that Section 234D, introduced from 01.06.2003, could not be applied to AY 2003-04 or earlier years. The Tribunal upheld this decision, following the ITAT Special Bench ruling in ITO vs. Ekta Promoters. Conclusion: The Tribunal dismissed or upheld the CIT(A)'s decisions on most issues, emphasizing the consistency in accounting methods, the legitimacy of business expenses, and the adherence to statutory provisions. The matters related to Section 40(a)(i) were sent back to the AO for further verification.
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