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TMI Blog2016 (11) TMI 1635X X X X Extracts X X X X X X X X Extracts X X X X ..... /s. IBM India Pvt. Ltd. Even for some time, if we assume that the payments are fictitious and unproved, it will lead to wrong calculation of margins earned by the assessee that if the consultancy charges incurred by the assessee are added to the margins returned by the assessee for these assessment years, the net margin would go up to 51% which is quite contrary to the industrial average declared by the NASCOM. Therefore, we are of the considered view that the A.O. was erred in disallowing consultancy charges paid by the assessee. Consultancy charges paid by the assessee to M/s. I.T. Lokam Services India Pvt. Ltd. is having nexus between earning of income. The assessee has proved beyond doubt with necessary supporting documents that it has incurred consultancy charges wholly and exclusively for the purpose of business. CIT(A), without appreciating the facts, simply confirmed the additions made by the A.O. by holding that the impugned expenses have not been proved to be incurred wholly and exclusively for the purpose of assessee s business. Therefore, we set aside order passed by the CIT(A) and direct the A.O. to allow consultancy charges paid by the assessee for the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. The brief facts of the case are that the assessee is a company engaged in the business of development and export of software, filed its return of income for the assessment years 2009-10 to 2011-12 declaring total income of ₹ 2,02,17,080/-, ₹ 89,65,090/- ₹ 1,18,60,420/- respectively. The case has been selected for scrutiny under CASS, accordingly, notices u/s 143(2) 142(1) of the Income Tax Act, 1961 (hereinafter called as 'the Act') were issued. In response to notices, the authorized representative of the assessee appeared from time to time and produced relevant information along with books of accounts. The assessment for the assessment years 2009-10 to 2011-12 were completed u/s 143(3) of the Act, determining total income of ₹ 5,21,64,320/-, ₹ 4,92,30,000/- ₹ 4,54,52,730/- respectively, inter-alia making additions towards disallowance of exemption u/s 10A of the Act, disallowance of consultancy charges paid to M/s. IT Lokam Services India Pvt. Ltd. and disallowance on employees contribution to provident fund. 3. Aggrieved by the assessment order, the assessee preferred appeal before the CIT(A). Before the CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urced some of its domestic project work to M/s. I.T. Lokam Services India Pvt. Ltd. for hiring skilled software professionals to be deployed at client place. It was further submitted that the consultancy is towards service rendered by the personnel in the fields of software such as Jawa/J2EE/DB2/Web sphere technologies, etc. The assessee company mainly employed its own staff to provide services to clients, however, in cases of short fall of the personnel, it take support from other companies who had such kind of expertise and skilled employees. During the financial year relevant to assessment year 2009- 10 to 2011-12, it has outsourced part of its project work to M/s. I.T. Lokam Services India Pvt. Ltd. and paid consultancy charges. The said consultancy charges has been paid through proper banking channels after complied with TDS provisions wherever applicable. To support its arguments filed necessary bills and vouchers along with time sheets certified by the clients to prove the justification for payment of consultancy charges. 6. The A.O. after considering the explanations of the assessee held that the assessee, failed to prove the consultancy charges paid to M/s. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tracted part of work to M/s. I.T. Lokam Services India Pvt. Ltd. for which it has paid consultancy charges. The A.R. further submitted that the assessee has paid consultancy charges through proper banking channels after deducting applicable TDS under the provisions of section 194J of the Act. Therefore, the A.O. was not correct in disallowing the entire expenditure by holding that the assessee failed to prove the nexus between consultancy charges and earning of income. 8. The A.R. further submitted that the Ld. CIT(A) failed to appreciate the fact that the assessee cannot generate revenue unless expenditure is incurred. It is elementary that when there is an income, there should to be expenditure related to earning of income. It was further argued that it is appropriate to state here that M/s. I.T. Lokam Services India Pvt. Ltd. has been subject to scrutiny assessments, wherein the assessing officer while completing the assessment under question, has accepted receipt as well as expenditure incurred from out of these receipts. The A.R. further submitted that the recipient M/s. I.T. Lokam Services India Pvt. Ltd. having generated revenue from assessee company has itself ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The A.O. disallowed consultancy charges paid to M/s. I.T. Lokam Services India Pvt. Ltd. for the reason that assessee has failed to prove the nexus between consultancy charges paid and generation of revenue. The A.O. further observed that the assessee failed to furnish necessary details with regard to nature of consultancy received from M/s. I.T. Lokam Services India Pvt. Ltd. and its corresponding application/utility to the project/supporting services undertaken by the assessee to its clients. The assessee neither listed out client-wise support services along with corresponding consultancy received nor specific instances have been cited to demonstrate the necessity for obtaining the alleged consultancy. Though, the assessee claims to have engaged the services of employees of M/s. I.T. Lokam Services India Pvt. Ltd., fails to prove the nature of services availed from the company and also corresponding services to M/s. IBM India Pvt. Ltd. Therefore, opined that the consultancy charges claimed by the assessee is having no nexus with the business of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I.T. Lokam Services India Pvt. Ltd. are listed in the agreement, which proves that the assessee has availed the services of M/s. I.T. Lokam Services India Pvt. Ltd. All these aspects has been clarified to the A.O. with necessary evidences. The A.O. without appreciating the facts, simply disallowed expenditure by holding that the assessee has failed to prove the nexus between consultancy charges paid and earning of income which is incorrect. 13. Section 37(1) of the Act, is a residuary section which allows deduction of certain expenditure incurred wholly and exclusively incurred for the purpose of business. For claiming deduction of an expenditure u/s 37(1) of the Act, it should be ensured that the expenditure is not in the nature described by section 30 to 36 and it should not be in the nature of capital expenditure and personal expenditure of the assessee. The main requirement of the provisions of section 37(1) of the Act is that expenditure should have been laid out wholly and exclusively for the purpose of the business. The nexus between the expenditure and the business, in connection with which expenditure has incurred, has to be established before the assessee g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue from M/s. IBM India Pvt. Ltd. 15. The A.O. disallowed consultancy charges for the reason that the assessee has failed to prove the nexus between consultancy charges paid to M/s. I.T. Lokam Services India Pvt. Ltd. and generation of revenue. The A.O. never doubted the genuineness of expenditure incurred by the assessee. The assessee has undoubtedly proved the genuineness of expenditure by furnishing necessary evidences such as bills submitted by the company along with agreement entered for providing services. The assessee also filed copies of IT returns filed by M/s. I.T. Lokam Services India Pvt. Ltd. to prove that the recipient has offered the said consultancy charges in its income tax returns which were not disputed by the revenue. On perusal of the income tax returns filed by M/s. I.T. Lokam Services India Pvt. Ltd., the major source of revenue for the company is from consultancy charges received from the assessee. The recipient also paid more than 50% of consultancy charges as salary to its employees duly deducting tax at source wherever applicable, the proof of which has been furnished. On perusal of all these documents furnished by the assessee, it was cle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions of section 2(24)(x) r.w.s. 36(1)(va) of the Act. Therefore, disallowed employees contribution to provident fund under the provisions of section 36(1)(va) of the Act. 18. The Ld. A.R. for the assessee, at the time of hearing submitted that the issue is squarely covered by the decision of ITAT, Visakhapatnam in the case of Eastern Power Distribution Company of A.P. Ltd. in ITA No.609/Vizag/2014 dated 29.7.2016, wherein the ITAT, held that there is no distinction between employees and employer contribution to PF and if total contribution is deposited on or before the due date of furnishing return of income u/s 139(1) of the Act, then no disallowance can be made towards employees contribution to provident fund. We find that the coordinate bench of this Tribunal, in the case of Eastern Power Distribution Company of AP Limited has considered similar issue and held that if employees contribution to provident fund is paid on or before the due date of furnishing return of income u/s 139(1) of the Act, then no disallowance can be made. The relevant portion of the order is extracted hereunder: 10. Considering the facts and circumstances of this case and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing so, the deduction under the IT Act under the provisions of section 10A of the Act applies only to that activity fetching export turnover. It is evident from the said approval/certificate that all the 3 activities are clearly mentioned for the said approval/certificates are relevant to export activity alone. The A.O. referring to the certificate issued by the customs department observed that the registration granted by the Central Excise Department is only a warehouse license u/s 58 of the Customs Act, 1962 for the purpose of storage of computers, UPS, etc. Though the said license permits the assessee u/s 65 of the Customs Act, 1962 to carry out software development in relation to said goods, subject to the provisions of manufacture and other operations in ware house regulations, 1966, the same does not confer any approval or certificate enabling the assessee s premises at Bhogapuram to be classified as a distinct and separate undertaking designed to function independently as per the rules and regulations governing export oriented units. 21. It is the contention of the assessee that its unit at Bhogapuram is recognized as 100% export oriented unit by the Special Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 003-04 to assessment year 2005-06 has considered similar issue and after considering the facts of the case held that for the purpose of computation of exemption u/s 10A, turnover of the undertaking has to be considered, but not turnover of the assessee. The relevant portion of the order is extracted hereunder: It can be noted that, before its substitution by Finance Act 2001, the deduction has to be computed by taking the total turnover of the business carried on by the assessee, i.e, the turnover of all the units and operations have to be aggregated. However, after the amendment made by the Finance Act 2001, the total turnover shall comprise of the total turnover of the business carried on by he Undertaking only. The amended section is applicable for the years under consideration. Hence, the Total turnover shall comprise of the total turnover of the business carried on by the Undertaking only for the purpose of calculation of eligible amount of deduction under sectin 10A of the Act. Hence, considering the decisions of Hon'ble Courts extracted above with regard to the meaning of the term undertaking, we hold that the software division of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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