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TMI Blog2012 (5) TMI 421X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 gain of Rs.35,04,000/-; (4) allowing loans and advances writ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 u/s 10A of the Act amounting to Rs.1,38,81,683/- in respect of Unit No.107 of SEEPZ; (2) directing not to exclude the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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 learned TPO had observed thus: "12.3.(on page 15)(Page 145 of PB) (a) no doubt to support the off shore services, on-site services have also to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king 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 considered the rival submissions and critically perused the reasons recorded by the learned TPO as well as the learned CIT (A) to negate the assessee's contention. 18. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 92B/92C of the Act as the said sum was required to be recovered from the Belgium subsidiary AE. 22. During the course of hearing, the learned AR contended that the learned CIT ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .......................................................................... 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 section 10A is eligible for exemption under section 10A. Merely because, some expenses are overlapping or common management is there, will not detract from these facts. Therefore, we uphold the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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 substances of which are extracted as under: "14. (On page 22)..............Adverting first to the case of Abdul Razak and Co. (supra) [CIT v. Abdul Razak and Co(136 ITR 825 -Guj)] relied upon on behalf of the taxpayer, the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 contended that, all other taxes levied in foreign countries whether on profit or gain or otherwise is deductible under the provisions of s.37 and payment of such taxes does not amount to application of income. 34. Brushing aside t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 extensively quoting the provisions of s.37 and s. 40(a)(ii) of the Act as well. With regard to s. 37, it was contended that the section provides for the following conditions to be fulfilled to claim an expenditure deductible under this section: (d) it sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 have a glimpse at the judicial views on a similar issue. (i) South East Asia Shipping Co. ITA No.123 of 1976 - Mumbai Tribunal: The issue, in brief, was that the tax authorities of the respective country had collected income-tax at source, according to them, a part of such earn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) was justified in his stand which requires no interference of this Bench at this juncture. It is ordered accordingly. (6.) Deletion of Rs.72,11,557/- out of disallowance of Rs.74,11,557/- u/s 14A of the Act: 42. During the year under dispute, the assessee had received income by way of dividend of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is 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 Bench in ITA No.8057/Mum/2003 dated 22.10.2008 in the case of ITO v. Daga Capital Management Pvt. Ltd for the AY 2001-02, the Bench had observed that - "16.5. (On page 14) In the case under consideration, the lower authorities had no occasion to consider applicability of the Rule 8D while the ld. CIT (A) merely restric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 order and page 3 of the AO's order dated 28.12.2004 cannot be justified accordingly directed to be deleted. In this respect, I would like to place on record that alternative of the assessee's representative that the method adopted by the TPO i.e., CUP method is not justified and that TANMM method was required to be applied for which f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, while arguing before us, the ld. DR has supported the action of the TPO primarily on the ground that by the deployment of skilled engineers at the services of AEs, those AEs have been benefited, hence, in return, the assessee should have recovered some compensation on secondments. It is not a correct approach because one has to examine the business st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome. 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. Before us, it was contended, among others, by the learned A R that since 90% of the profits of said units were eligible for deduction u/s 10A, the same has been reduced from the profits of business for the purpose of calculating deduction u/s 80HHE of the Act. Further, out of Rs.12,95,23,899/- the assessee had already reduced Rs.35,28,626/- from the profits of Units SDF VI & VII, P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. Incidentally, similar issue came up for adjudication for the AY 2002-03 in the Departmental appeal wherein in conformity with the findings of the earlier Bench in the asssessee's own for the AY 2000- 01 had remitted back the issue to the file of the AO to ascertain the nature of gain and to take appropriate action. In consonance with the above findings, we tend to remit back the present issue al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of the appellant holding that Unit 107 was an independent unit eligible for deduction u/s 10A. I have also perused the appellate order for AY 2002-03, the findings of the CIT (A) being mentioned supra. The AO has not brought on any material to disprove the claim of the appellant in this regard. It is also admitted by the AO that there was no change in the factual and legal position. This being so, I do not find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 permissible u/s 24 of the Act only. No direction to allow depreciation was ordered by the CIT (A) as apprehended by the Revenue. 73. Thus, there was no infirmity in the finding of the CIT (A) which requires our intervention. In essence, the issue was, in fact, decided by the CIT (A) against the assessee. This ground of the Revenue is dismissed. (6) To re-compute deduction u/s 80HHE and holding that the balance 10% pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 2.8.2010 in CIT v. M/s. Ambatture Clothing Ltd; and (ii) the findings of Hon'ble Kolkata Bench 'E' of Tribunal in the case of Hindustan Gum & Chemicals Ltd v. ITO - (2008) 23 SOT 143 (Kol). 77. We have carefully considered the rival submissions and also perused the case records and the case laws relied on by the learned AR. 78. As recorded earlier, the learned CIT (A) had analyzed the issue at a greater length and concluded that the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 learned AR supported the finding of the learned CIT (A) 84. We have duly considered the rival submissions and diligently perused the reasoning of the learned CIT (A) and also the relevant case records. 85. On a critical perusal of the reasoning of the learned TPO, it has been observed that the assessee queried that as to whether the advances given to the persons sent on secondment has been charged any interest, if so, the details of which be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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: "6.2.(On page 18)......................................................................... .. The two requisite for depreciation allowance are: (i) that depreciable assets is owned by the assessee; (ii) that is used for the purpose of assessee's business or profession. Both the requisite conditions have to be fulfilled for depreciation allowance. In the case of the assessee company, the assets were not used for business purpose. Under section 32 of the I T Act, deprecia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmanent 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, apparently its group concern. The assessee's contention that the activity of letting out was merely incidental to the regular business carried on by it cannot be accepted on the ground that a sizeable portion of the vast premises has been carved out and let-out to it group concern whereby the business activities of the assessee is being carried out on the segregated portion from the premises so let out. Furthermore, the assessee cannot seek refuge from the ruling of the Hon'ble Supreme Court cited supra on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0. 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 on by the respective parties. 102. We shall now proceed to deal with the issues chronologically as under: (1) To allow exemption u/s 10A of the Act amounting to Rs.1,38,81,683/- in respect of Unit No.107 of SEEPZ: 103. This issue 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: 104. By the by, a similar is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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