9911796707
TMI Blog2024 (5) TMI 215X X X X Extracts X X X X X X X X Extracts X X X X ..... xplanation 2 (iv) to section 10A of the Income Tax Act: (a) Freight & Telecommunication expenses Rs 6,20,38,757/- (b) Recovery of expenses in respect of migration/ on-the-job-training services Rs 42,61,89,516/- 2. That on facts and in law the CIT(A) erred in upholding that while computing deduction u/s 10AA of the Act following receipts are to be excluded within the ambit of "export turnover" as defined in Explanation 1 (i) to section 10AA of the Income Tax Act: (a) Freight & Telecommunication expenses Rs 3,24,95,309/- (b) Recovery of expenses in respect of migration/ on-the-job-training services Rs 60,25,09,242/- 3. That on facts and in law the CIT(A) erred in not appreciating that recovery of expenses in respect of migration/on-the-job-training services and freight and telecommunication expenses were not included in the figure of "export turnover" considered by the appellant while computing deduction u/s 10A and 10AA of the Act. 4. That on facts and in law the CIT(A) erred in upholding that recoveries from group companies to the extent of Rs. 3,84,746/- (i.e 5% of Rs. 76 ,94,926/- ) are not eligible for claiming benefit of deduction u/s 10A of the Income Tax Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nses & 5% of Rs. 76,94,926/- taken as a non-10A profit. 8. Whether on the facts and circumstances of the case & in law, the Ld. CIT(A) erred in deleting the provision for customer discount of Rs. 28,04,22,899/- ignoring the facts that the expenses were not crystallized during the year under consideration. 9. Whether on the facts and circumstances of the case & in law, the Ld. CIT(A) erred in deleting the disallowance of Rs. 39,89,616/- made by the AO on account of excess depreciation on computer peripherals. 10. The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of the hearing." 2.2. Assessee has also raised additional ground before us on 24.02.2020 stating that assessee declared and paid dividend of Rs. 5,68,34,000/- to its parent share-holders Genpact India Investments. The assessee paid dividend distribution tax (DDT) of Rs. 94,39,416/- @ 16.6087% u/s 115-O of the Income-tax Act, 1961 (hereinafter referred to as the "Act"). Genpact India Investments was a tax resident of Mauritius and was entitled to the benefits of Indo Mauritius Double Taxation Avoidance Agreement (DTAA). Under Article 10 of the said Treaty, dividends paid b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices such as data entry, data processing services, data conversion, business support and billing services to its customers. During the year under consideration, the assessee company had claimed deduction u/s 10A/10AA of the Act amounting to Rs. 378,22,79,469/-. During the year under consideration, the assessee incurred telecommunication expenses in foreign currency amounting to Rs. 23,19,55,704/-. Out of this, the amount pertaining to undertakings eligible for claiming deduction under Section 10A and 10AA of the Act was Rs. 6,20,38,757/- and Rs. 3,24,95,309/- respectively. The above amount included expenses paid to various service providers for landline, mobile connectivity, dial com connectivity, payments made for mail server and various other charges. During the year under consideration, assessee has been reimbursed a sum of Rs 42,61,89,516/- and Rs 60,25,09,242/- on account of migration / on-the-job-training activities relating to undertakings claiming deduction under Section 10A and 10AA of the Act respectively. It is submitted that under the overall ambit of IT/IT Enabled Services, assessee also provides business process outsourcing services to customers located outside India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and ground nos. 5 and 6 raised by the Revenue are dismissed. 6. Next issue to be decided is 95% of cost recovered of shared costs to be set off against the expenses of 5% of recovery to be taken as non-eligible profit.[Ground no. 4 of assessee's appeal & ground no. 7 in Revenue's appeal] 6.1 We have heard rival submissions and perused the material available on record. During the year under consideration, the assessee recovered a sum of Rs. 76,94,926/- towards reimbursement of expenses borne by the assessee for its sister concerns. The ld. AO held that amount of Rs. 76,94,926/- is income of the assessee not eligible for deduction under section 10A of the Act. In this regard, it is submitted that the above amount represents pure cost recovery which only reduces the relevant costs incurred by the assessee and there is no income element involved therein, or any income earning activity carried on by the assessee in this respect. The recoveries are inter-alia made towards travelling expenses, rental charges, transport cost incurred by the assessee on behalf of its sister concerns. The accounting treatment undertaken by the assessee in relation to above recoveries from other companies h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure are recovered by way of reimbursement. That the basis of recovery has not been explained except stating that it is a recovery from a related concern. That the details of the places and expenses for which recovery had been made has not been submitted. In short the claim that the receipts were only full recoveries, is unproved The A.O states that the major part of the recovery is on account of rent. which is netted off from the individual account of expenditure. Since it has received the approval of STPI for all its units and offices, and in the absence of details and agreements, the assessee's contention that it had given space on rent to related parties on full recovery basis is said to be unacceptable and unverifiable The AO states that there is no provision under the Act to net off ecerpts against expenses That receipts of the assessee are to be treated as s income and the outgoings are to be treated as expenditure. That since the eceipts (by way of recoveries) were on account of activities which are not entitled to deduction u/s 10-A it has been argued by the A.O. that the assessee has effectively claimed higher deduction under this section. That Fent and other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e narration of factual details on the matter of recovery at para 5 to 5 5 of the assessment order, there were contradictions in the narration itself, in so far as at para 5.1, the AO. notes that from out of a gross recovery of Rs 27,31,23,488/-, an amount of Rs 3,43,86 505/- was on account of rent (or in other words 12.5%), whereas at para 5.3 it has been stated that the major part of recovery is on account of rent In fact a broad detail of cost sharing with sister concerns including the auditor's certificate with regard to reimbursement of expenses to the appellant had been provided to the AO in course of the assessment proceedings vide letter dated 15.3.2005 Since the details of other recoveries (other than rent) amounting to Rs. 23,87,36,983/- have not been examined in course of assessment proceedings, that recourse to presumption was taken in order to hold that receipt of rent was the only substantial entry of recovery within the claims of receipts by way of reimbursement In view of the assessee's letter dated 15.3.2005 to the A.O. for explaining the modality of cost sharing with its sister concerns, and the auditor's certificate attached therewith confirming the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses for F.Y. 01-02, in respect of expenses such as rent, traveling, conveyance, communication expenses and the facilities cost etc amounting to Rs 22.97 crores (approx). I process Pvt Ltd vide letter dated 31 8 2007 has confirmed to the appellant that in terms of understanding between the appellant and I process Pvt. Ltd. for sharing certain common facilities, I Process Pvt. Ltd has reimbursed to the appellant on actual basis certain expenses incurred by the appellant on behalf of I process Pvt Ltd The appellant has also placed on record copy of the financial statements and copy of scrutiny assessment order of I Process Pvt. Ltd for AY 02-03 Letters confirming certain understanding between the appellant and SBI Cards and Payment Service Pvt Ltd (SBIC.P.SL).G.E. Capital Business Process Management Services Pvt Ltd (GECBPMSL), G.E. Money Financial Services Ltd (GEMFSL) GE Capital Services India (GECSI) towards sharing of common facilities have been submitted in course of the appeal proceedings. The scrutiny assessment orders for A.Y. 02-03 in case of GE Capital Services India and SBI Cards & Payment Services Pvt. Ltd. have also been enclosed in support of a contention that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 in cases of G E. Capital Services India, SBI Card Payment Service Pvt. Ltd, and I Process Pvt. Ltd) was pursuant to an enquiry conducted u/s 250(4) of the Act. According to the provision contained in Sec. 250(4), the C.L.T.(A) aw appeal n her enquiry as he thinks fit or may direct the A.O to make further enquiry and to report the result of the same Rule 46- A(4) contranly clarifies that nothing contained in Rule 46-A shall affect the CIT(A)'s power to direct the production of any document or the examination of any witness to enable him to dispose of the appeal. Therefore, additional evidences produced before the CIT(A) pursuant to CIT(A)'s directions would not be on a similar footing as in the case of new evidence produced before him suo moto by the appellant In case of evidences collected u/s 250(4) as in this case, Rule 46-A is not applicable and the technical objection of the Addl CIT for not admitting the additional evidence invoking the provisions of Rule 46-A is found unacceptable. On merits, therefore, the contention of the appellant on the given issue and the findings of the A. O in the assessment order and as per his report vis-a-vis the relevance of the addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss expense debited under that head is Rs 103.64 crores( or in other words 6.1% of the gross expenses) k) In respect of postage and courier charges, reimbursement is of Rs 89 791/- whereas the gross expense debited under that head is Rs. 58.55 lacs (or in other words 1 3% of the gross expense) l) In respect of recruitment and training expenses, reimbursement is of Rs. 2.49 lacs, whereas the gross experise debited under that head is Rs 121 71 crores(or in other words 0.1% of the gross expenses) m) In respect of staff welfare expenses reimbursement is of Rs29 27 lacs, whereas the gross expense debited under that head is Rs 16 62 crorest or in other words 1 70% of the gross expenses) n) In respect of salary, bonus and other expenses, reimbursement is of Rs. 277 crores, whereas the gross expense debited under that head is Rs 248 crores( or in other words 11% of the gross expenses) o) In respect of other expenses charges, reimbursement is of Rs. 9.98 lacs, whereas the gross expense debited under that head is Rs. 64.72 lacs(or in other words 15% of the gross expenses) The appellant's expenses in schedule 11 under salaries /allowances, PF and staff welfare amounted to Rs 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er directly paid or reimbursed to the appellant. Meaning thereby that the amounts reimbursed to the appellant have not been found excessive or unreasonable in the context of the business needs of the I. Process Pvt Ltd. and the fair market value of the goods and services and (acility towards which reimbursement has been made by I. Process Pvt. Ltd. 3.3(g) In so far as the so called reimbursements from L. Processes Pvt. Ltd are concerned in the light of the factual detail above, my findings are as under: (i) A receipt can partake the character of income, only if there is an element of income embedded in the said receipt, whether in full or in part A recovery as well can be taxed only if it is proved that the amount recovered represents either full or partly receipts in the nature of income Reimbursement of expenses of actual cost is not income as per CIT Vs Indi Engg Product 202 ITR 1014 (Delhi) and followed in the order of Coca Cola India Inc. Vs ACIT (2006) 7. SOT. 224 (Delhi) (ii) The auditors in the case of the appellant in their report for A.Y. 02- 03 state that the company was "reimbursed" by fellow subsidiaries for expenses incurred on their behalf The auditors in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 10A of the Act. The AO in the case of I. Process Pvt Ltd has not found the payments to the appellant by I.Process Pvt. Ltd. for services rendered by the appellant as excessive or unreasonable vis-à-vis the fair market value of the goods and services and facilities provided by the appellant or with regard to the legitimate business needs of I. Process Pvt. Ltd. Meaning thereby that I. Process Pvt. Ltd. has paid market determined rates for the services rendered by the appellant While I agree that the independent audit note or the auditor's certificate or the management certificate of the appellant or I. Process Pvt. Ltd. do not by themselves or in tandem with other evidences support a conclusion that there is nil income within the figure of reimbursement from I. Process Pvt. Ltd., I equally hold on the basis of the scrutiny assessment order in the case of I Process Pvt. Ltd for AY 02-03 that the appellant has not been paid unreasonably or excessively in respect of the services rendered by it to I. Process Pvt Ltd and in that manner that the appellant has been paid market determined rates for the services rendered I hold also that there is no concept of free tunch in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any statutory authority has been submitted in the course of appellate proceedings and also in terms of the enquiry u/s 250(4) to supstantiate the claim that the payment received from the sister concerns are pure recoveries without an element of income embedded therein. In absence of detail and supporting evidence, I hold that the amounts received from the above related concerns amounting to Rs 2.28.05 426/- has been rightly taxed as income Support for taxing the amounts is in terms of Tocheungles Stationery Mfg Co. Pvt. Ltd. Vs ITO (2006) 5 SOT 428 (Chennai), Picric Ltd. Vs JCIT (2004) 90 ITD 301 (Delhi) Srinivasa Cystine Ltd Vs JCIT 92 ITD 462 (Hyd) The AO is directed to consider an amount of Rs. 3,52,86,796/- as income not eligible to deduction u/s 10A stands deleted. The ground is partly allowed The remainder of the addition stands deleted. The ground is partly allowed." 6.3 This is not in dispute that similar findings were given by the ld. CIT(A) in A.Ys. 2003-04 to 2009-10. The ld. AO while framing the assessment for the year under consideration has again reiterated the similar findings given by him in earlier assessment years by observing as under:- "The assessee, vide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee as well as the Revenue, are in appeal before us. 6.5 The ld. CIT(DR) before us vehemently submitted that order of the ld. CIT(A) in A.Y. 2002-03 is perverse inasmuch as ld. CIT(A) had not given adequate opportunity to the ld. AO. Ld. CIT(DR) submitted that assessee has shown significant amount of expenses reimbursement from related party but the details of the same had not been furnished to the ld. AO. Further, ld. CIT(DR) argued that assessee had not demonstrated that entire amount shown as reimbursement is actually cost to cost reimbursement and that there was no profit element involved therein. The ld. CIT(DR) made further argument by stating that assessee ought to have deducted tax at source of expenses incurred by it which were subject matter of reimbursement and, therefore, disallowance u/s 40(a)(ia) of the Act would also come into operation in the instant case. 6.6 At the outset, we find that the ld. AO had not disputed the basic fact that recovery of expenses is nothing but reimbursement of expenses on actual cost to cost. Non deduction of tax at source on the expenses incurred was never the case of the ld. AO. Hence the ld. CIT DR cannot make out a fresh case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he sum of Rs. 76,94,926/- were filed by the assessee before the ld. AO or not for the year under consideration. The ld. AR rightly drew our attention to the letter dated 23.03.2015 which are enclosed in pages 161-164 of the factual paper book. The assessee has given complete basis and workings of recovery of expenses to the tune of Rs. 76,94,926/- in this letter dated 23.03.2015, filed before the ld. AO, as under: "Cost sharing details for the financial year 2010-11 Entity name Services LLC NgEN Axis GMS Grand Total Expense Head Travelling 2,200,189 - 106,176 3,108,504 5,414,869 Rental Charges - 1,669,529 - - 1,669,529 Transport - 610,528 - - 610,528 Grand Total (in Rs. ) 2,200,189 2,280,057 106,176 3,108,504 7,694,926" 6.8. We further find that the said recovery of Rs. 76,94,926/- constitute only 0.04% of the total personnel and administrative expenses and other expenses (Rs. 1788.51 crores) of the assessee. Hence, it is very clear that the details of cost recoveries were indeed filed before the ld. AO itself for the year under consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iving loans to employees and earn interest income thereon. He argued that the entities to whom funds are advanced by the assessee are having running accounts with the assessee and thus funds are advanced to benefit global operations and not Indian business. Hence, no nexus has been proved by the assessee on the deployment of the funds, which had fetched interest income for the assessee vis a vis eligible undertaking u/s 10A & 10AA of the act. Ld. CIT(DR) observed that the ld. CIT(A) had only adjudicated the legal aspect without addressing the factual foundation of these incomes having any business nexus with the eligible undertaking. He vehemently prayed for reversal of the order of ld. CIT(A) in this regard. 7.5 At the outset, the entire argument of the ld. CIT(DR) need not be gone into at all in view of the fact that the ld. AO himself had treated the said mentioned receipts as only 'business income' and not 'income from other sources', which is evident from the computation of total income, enclosed in page 20 of the assessment order. Once it is treated as 'business income', the assessee would be automatically eligible for deduction u/s 10A & 10AA of the Act. Even otherwise, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relatable to the export of services and sale proceeds thereof and consequently would be eligible for deduction u/s 10A and 10AA of the Act. It was also observed by the ld. CIT(A) that similar issue was decided in assessee's favour by the orders of his predecessors for A.Ys. 2000-01, 2002-03, 2005-06 to 2009-10. 8.4 The ld. CIT(DR) before us by referring to page 24 para 4 of the paper book, containing audited financial statements for the year ending 31.03.2011, submitted that assessee has an exposure of USD 105,000,000 foreign exchange forward contracts outstanding as on 31.03.2011. Ld. CIT(DR) argued that the forward contracts outstanding at the end of the year exceeded the entire export receivables itself and hence gain derived thereon cannot be construed as business income of the assessee and the same would have to be considered as speculative income of the assessee and consequently not eligible for deduction u/s 10A & 10AA of the Act. 8.5 At the outset, we find that assessee had furnished complete details of income from foreign exchange/forward contract gains before the ld. AO vide letter dated 27.02.2015, which is enclosed in pages 154 to 160 of the paper book. The assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lied upon hereinabove, ground no. 4 raised by the Revenue is dismissed. 9. Next issue to decided in this appeal is as to whether ld. CIT(A) was justified in deleting the disallowance made on account of customer discount of Rs. 28,04,22,899/- in the facts and circumstances of the instant case [ Ground no. 8 of Revenue's appeal] 9.1 We have heard rival submissions and perused the materials available on record. During the year under consideration, assessee and its customers mutually agreed that a discount is to be provided by the assessee (being the service provider) to the customers (being the service recipients). The basis of provisions of such discount was agreed to be the revenues earned by the assessee from the respective customers in the current period. Accordingly, during the year under consideration, amount of Rs. 28,04,22,899/- was provided by the assessee towards discount to its customers as per the prevailing industry practice on revenues earned during the current year and the same was claimed as deductible expenditure. In the notes to accounts (Schedule 13) it is stated as under:- "13. During the year ended 31 March 2011, the Company has made provision for discounts a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis and as per the prevailing industry practice revenue earned during the year. It was observed that the said discounts were not provided on ad hoc or universal basis. Instead, specific end customers were identified based on various criterions like customer relationship, brand recognition, contract longevity, contract revenue etc. and only thereafter the discount purchases were agreed to be provided to these end customers based on commercial negotiations and the agreed discount purchases were applied to the current year revenues to these identified end customers. Hence, the liability had duly crystallized during the year. This categorical finding has been followed by the ld. CIT(A) for the year under consideration also. Hence, assessee's case squarely falls within the ratio decidendi of Hon'ble Supreme Court in the case of Bharat Earth Movers Ltd. reported in 245 ITR 428 (SC) and the Hon'ble Jurisdictional High Court in the case of Insilco Ltd. reported in 320 ITR 322 (Del.) 9.6 The ld. AR before us relied on the CBDT Circular no. 12 of 2022 dated 16.06.2022 wherein vide question no. 4 in response to a specific query raised, the CBDT had replied that discounts allowed to custome ..... X X X X Extracts X X X X X X X X Extracts X X X X
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