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TMI Blog2024 (5) TMI 215X X X X Extracts X X X X X X X X Extracts X X X X ..... e of tax applicable to the non-resident shareholder(s) as specified in the relevant DTAA with reference to such dividend income. Accordingly, the additional ground raised by the assessee is hereby dismissed. Computation of deduction u/s 10A and 10AA - Reduction of freight Telecommunication charges and recovery of expenses in respect of migration/ on-the-job training services from total turnover while computing deduction - HELD THAT:- This issue is no longer resintegra in view of the decision of HCL Technologies Ltd reported [ 2018 (5) TMI 357 - SUPREME COURT] wherein it was held that the items that are subject matter of reduction from export turnover in the numerator need to be reduced in the denominator from the ambit of total turnover also as admittedly total turnover is nothing but the sum total of export turnover and domestic turnover. Hence, the export turnover reflected in the numerator cannot be different from the export turnover figure reflected in the denominator. Hence, for the purpose of computing the deduction u/s 10A/10AA/10B/80HHC/80HHE etc. all items that were sought to be excluded from export turnover need to be excluded from total turnover also in order to bring pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted as business income , the assessee would be automatically eligible for deduction u/s 10A 10AA. Also the provisions of Section 10A(4) are very clear to state that the entire profits of the business of the undertaking in proportion of export turnover to total turnover would be eligible for deduction u/s 10A of the Act. Hence, subject mentioned receipts constitute business receipts would fall within the ambit of Section 10A(4) of the Act, thereby making the assessee eligible for deduction thereon. Similar is the provision in Section 10AA(7) of the Act with the same words. Hence, in view of the explicit provisions of Section 10A(4) and 10AA(7) of the Act, the arguments advanced by the ld. CIT(DR) deserve to be dismissed and we do not find any infirmity in the order of the ld. CIT(A) in this regard. Accordingly, ground nos. 1 to 3 raised by the Revenue are dismissed. Deduction u/s 10A 10AA - foreign exchange gain and forward contract gain earned by the assessee - HELD THAT:- The gain / loss arises because of the fact that at the time of booking the sales in the accounts, the exchange rate on the date of raising the invoice is taken into account. Whereas when the actual payment is rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of computers and hence eligible for depreciation at the rate applicable for computers. This issue is duly covered by the decision of BSES Yamuna Powers [ 2010 (8) TMI 58 - DELHI HIGH COURT] and in the case of Orient Ceramics [ 2011 (1) TMI 26 - DELHI HIGH COURT] - ground raised by the Revenue is dismissed. X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 5,27,296/- & Rs. 2,36,282/- from interest on employee loans as eligible for deduction u/s 10A & 10AA of the 1.T. Act 1961. 4. Whether on the facts and circumstances of the case & in law, the Ld. CIT(A) erred in treating income of Rs. 21,95,92,830/- from Foreign Exchange Gain & Forward Contract Gain as eligible for deduction u/s 10A & 10AA of the I.T. Act, 1961 ignoring the fact, that the gain is arises due to hedging activity and is not derived by the specified business activity. 5. Whether on the facts and circumstances of the case & in law, the Ld. CIT(A) erred in reducing the Freight & telecommunication charges of Rs. 6,20,38,757/- and Rs. 3,24,95,309/- from total turnover also for the purpose of computation of deduction u/s 10A & 10AA of the I.T. Act, 1961.. 6. Whether on the facts and circumstances of the case & in law, the Ld. CIT(A) erred in reducing the Expenses in respect of migration / on the job training amounting to Rs. 42,61,89,516/- and Rs. 60,25,09,242/- from total turnover also for the purpose of computation of deduction u/s 10A & 10AA of the I.T. Act, 1961. 7. Whether on the facts and circumstances of the case & in law, the Ld. CIT(A) erred in allowin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15-0 of the Act." 2.3 The aforesaid additional ground, in our considered opinion, is a pure legal issue and does not require verification of any facts. Hence the same is admitted and taken up for adjudication. 3. We find that the issue raised in the additional ground has been recently decided by the Special Bench of Mumbai Tribunal in the case of Total Oil India Pvt. Ltd. reported in 149 taxmann.com 332, wherein very same issue has been decided against the assessee. Accordingly, the additional ground raised by the assessee is hereby dismissed. 4. With regard to the regular grounds raised by the assessee and Revenue, some of them are identical and hence we proceed to dispose of the relevant issues involved therein with corresponding reference to the ground numbers of assessee as well as Revenue. 5. Reduction of freight & Telecommunication charges and recovery of expenses in respect of migration/ on-the-job training services from 'total turnover' while computing deduction u/s 10A and 10AA of the Act. [Ground nos. 1 to 3 of assessee's appeal and Ground nos. 5 & 6 of Revenue's appeal] 5.1 We have heard the rival submissions and perused the materials available on record. The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 2(iv) of Section 10A of the Act, reduced the telecommunication expenses incurred in foreign currency relating to - reimbursement received by the assessee on account of migration/ on-the-job training activities from the export turnover and correspondingly did not reduce the same from the ambit of total turnover, thereby reducing the claim of deduction u/s 10A/10AA of the Act. This issue is no longer resintegra in view of the decision of the Hon'ble Supreme Court in the case of CIT vs. HCL Technologies Ltd reported in 404 ITR 719 (SC), wherein it was held that the items that are subject matter of reduction from export turnover in the numerator need to be reduced in the denominator from the ambit of total turnover also as admittedly total turnover is nothing but the sum total of export turnover and domestic turnover. Hence, the export turnover reflected in the numerator cannot be different from the export turnover figure reflected in the denominator. Hence, for the purpose of computing the deduction u/s 10A/10AA/10B/80HHC/80HHE etc. all items that were sought to be excluded from export turnover need to be excluded from total turnover also in order to bring parity. Respectfully follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A) in A.Y. 2002-03 as under: "3 In ground No V it has been stated that the AO. has erred in considering rent and other recoveries from sister concerns amounting to Rs 27,31,23,488/- as taxable income of the appellant. With prejudice, it has been stated that the AO her erred in not allowing the expenses incurred for earning such income while taxing the same as income from other sources 3.1 The AO refers to Note No 9 of Schedule 14 (Notes to Accounts) of the balance sheet It was ascertained by the A O that the assessee had recovered an amount of Rs 3,43,86,505/- on account of rent and an amount of Rs. 23,87,36,983/- on account of other expenses from its sister concerns It was stated before the A O that the expenses recovered from the sister concerns have been netted off in individual accounts of expenses. That recoveries are in the nature of reimbursement It was contended before the A O., without prejudice, that if the reimbursements are treated as income from other sources, the same then should be taxed only after allowing the expenditure incurred for the same. The A.O states that whether or not the recoveries are pure reimbursement is not borne out by any documentary evidenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he facts of the case is not income. The appellant relies on Tejaji Farasram Kharawalla Ltd. 67 ITR 95 (SC), Industrial Engineering Projects Pvt. Ltd. 202 ITR 1014(Del) and Dunlop Rubber Co. Ltd 142 ITR 493 (Cal). It has been submitted that by reducing its cost by recoveries made the appellant has claimed only the expenses relatable to its income and is not netting off any income from expenses Without prejudice, it has been stated that if at all rental income and others are to be taxed under the head of income from other sources, the expenses incurred towards earning of such income should have been allowed in terms of the provisions contained in section 57 That the reimbursement of expense, if at all to be taxed should be taxed only after apportioning the expenses incurred for earning such income Accordingly, total cost recovery MRs 26:31 23.488 even receipts are taken as income from other sources, should be allowed as an expense against such income. That by applying the provisions of section 57 (1) expenditure in full corresponding to the receipt of income would neutralize the said receipt leaving no surplus to be taxed under any head of income 3.3(a) I nave considered tre subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - 204545 8 Legal & professional services - - - 55849 - - 1750 - 57599 9 Lease rental & Hire charges - - - 11883 - - 3891 - 15774 10 Communication charges - - 70272 57165 538249 807373 66674787 - 63147846 11 Postage & courier - - - 9312 - 15152 3506 29621 89791 12 Recruitment & training expenses - - - 25466 2175 2903 72692 145857 249093 13 Staff welfare expenses - 42065 63523 1781584 264788 371738 313248 90672 2927618 14 Salaries bonus & other allowances - - - 7186826 - 3930079 13307588 3305311 27729804 15 Interest & depreciation Recovery - - - - 500209 1414388 - - 1914597 16 Other expenses - - - 998552 - - - - 998552 Total 54868 47031 133795 12271925 7556940 18660327 229788552 3909405 27242284 It has also provided letters confirming an understanding between the appellant and I process Pvt. Ltd. for sharing certain common facilities and costs thereof. Vide letter dated 31.8 2007, the appellant required I process Pvt. Ltd. to confirm the reimbursement of expenses for F.Y. 01-02, in respect of expenses such as rent, traveling, conveyance, communication expenses and the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of the assessee. According to the A.O.. there was no valid agreement for the reimbursement of cost as claimed by the assessee for most of the period under consideration and in the absence of any such agreement and also the absence of the actual party -wise reimbursement figures the claim of the assessee should not be accepted. The Addl. Commissioner of Income tax alludes to the conditions in Rule 46-A Accordingly it has been stated that in the absence of any cogent reason to explain as to what prevented the assessee from submitting the evidences in course of assessment proceedings such evidences should not be accepted since violative of Rule 46-A 3.3(d) The evidences forwarded to the AO for his report thereon (including letters of understanding between the appellant and S.B.I.CPSF GECBPMSL, GEMFS and GECSI with regard to sharing of cost and common facilities, copies of audited accounts for AY 02-03 in the case of SBICPSF GE Capital Business Process Management Services Pvt. Ltd. GE. Capital Services India, copies of scrutiny assessment orders for A.Y. 02- 03 in cases of G E. Capital Services India, SBI Card Payment Service Pvt. Ltd, and I Process Pvt. Ltd) was pursuant to an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the gross expenses) e) In respect of insurance expenses, reimbursement is of Rs. 61.563. whereas the gross expense debited under that head is Rs. 2.92 crores(or in other words 0.2% of the gross expenses) f) In respect of printing and stationery, reimbursement is of Rs. 12.18 lacs, whereas the gross expense debited under that head is Rs 5 19 crores(or in other words 23% of the gross expenses) g) In respect of management meeting expenses, reimbursement is of Rs 2 04 lacs, whereas the gross expense debited under that head is Rs 4.78 crores (or in other words 04% of the gross expenses) h) In respect of legal and professional charges, reimbursement is of Rs 57,599/- whereas the gross expense debited under that head is Rs 21 54 crores or in other words 0.02% of the gross expense) i) In respect of lease rental and fire chargers reimbursement is of Rs 15:774/- whereas the gross expense debited under that head is Rs 4 10 crores, or in other words 35% of the gross expenses) j) In respect of communication expenses, reimbursement is of Rsatorore whereas the gross expense debited under that head is Rs 103.64 crores( or in other words 6.1% of the gross expenses) k) In respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . This is as per the audit report in respect of I. Process Pvt. Ltd. for AY 02-03 Within the amount of reimbursement to fellow subsidiaries amounting to Rs 33 61,76,015/- made by I Process Pvt. Ltd, is included the amount of reimbursement of Rs 22,97 88 552/- by I Process Pvt. Ltd. to the appellant As per P & L a/c of! Process Pvt Ltd for A.Y. 02-03, net profit as per account is Rs 33,54,47,306/- This company is engaged in the business of providing IT. enabled services to the G. E. group Companies. I. Process Pvt. Ltd. is otherwise entitled to deduction u/s 10B of the Act. A scrutiny assessment u/s 143(3) in this case as per order dated 28.02.05 by DCIT Cir.- 11(1) reveals that this company was allowed deduction u/s 10B of an amount of Rs. 34,54,08,057/- on the basis of its export turnover of Rs. 80,74,78,473/- against a total turnover of Rs 94,81,10,040/- In the scrutiny assessment order in the case of I Process Pvt. Ltd for A.Y. 02-03, neither the provisions of section 40A(2) or section 37 have been invoked in order to disallow any part of the expenditure either directly paid or reimbursed to the appellant. Meaning thereby that the amounts reimbursed to the appellant have not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x exempt in view of applicability of section 10A to the appellant's Income The view would have been justified on a broader scale, had there been two concerns, one entitled to deduction u/s 10A etc. and the other not so entitled The case of the appellant and I. Process Pvt Ltd is different in so far as both the concerns are entitled to deduction u/s 10A/108 In that view, what has been arranged by way of cost sharing arrangement between 1. Process Pvt Ltd and the appellant both eligible concerns entitled to deduction u/s 10A 10B does not have an element of tax avoidance in such arrangement Considering the evidences on record including the results of the enquiry conducted u/s 250(4) of the Act the audited accounts of the appellant and I Process Pvt. Ltd including the audit note on reimbursement of expenses in both cases, relevant for AY 02-03, the finding of the AO in the case of I. Process Pvt. Ltd. for AY 02-03, I hold that there is no factual basis for treating the entire recoveries made by the appellant from I. Process Pvt. Ltd. as income not eligible to deduction u/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.Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business needs of the counter party Similarly, the A.O. in the case of G.E.C.S.I. in his scrutiny assessment order for A.Y 02-03 dated 30.3.2005 has not found any of the payments to the appellant under repair and maintenance, salaries and other allowances, staff welfare expenses, traveling and conveyance etc. comprising a total amount of Rs. 1,22,71,925/- as excessive or unreasonable with regard to the fair market value of the services rendered or the business needs of the concerned assessee. In line with the decision to consider 5% of the reimbursement as profits of the appellant in the case of I Process Pvt. Ltd. I hold that profits of the appellant at 5% of the reimbursement from SBIC.PSL and GECSI amounting to Rs. 9,91,443/- is not entitled to any deduction u/s 10-A of the Act 3.3(i) In so far as reimbursement of expenses and user fees for facilities etc received by the appellant from other sister concerns namely GECTFS (Rs 54868/- ) GEIOC (Rs 47 031/-), GEII (Rs. 133795/-), GECBMPSL (Rs 18660327/-) & Countryande (Rs 3909405/-), no authoritative evidence or tending of any statutory authority has been submitted in the course of appellate proceedings and also in terms of the en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and, therefore, cannot qualify for exemption u/s 10A. By showing lower costs in the P&L account by netting off recoveries, the M/s Genpact India (formerly known as 'GE Capital International Services) AY 2011-12 assessee has sought to claim higher deduction u/s 10a for an income which was not derived by the undertaking in the STP area. These receipts are liable to be taxed as non-10A income and only those expenditure which are wholly and exclusively incurred for earning this income are to be excluded. Perusal of P&L A/c does not show any such expense. Therefore, these receipts of Rs. 7,694,926/- are excluded from 10A business profits and taxed as other income. Since, I am satisfied that the assessee has furnished inaccurate particulars of its income, penalty proceedings under section 271(1)(c) are being initiated separately." ) 6.4 The ld. CIT(A) by following the orders passed by his predecessors pointed out that 5% of cost recovery to be not eligible for deduction u/s 10A of the Act and remaining 95% to be eligible for deduction u/s 10A of the Act. Aggrieved by this, both the assessee as well as the Revenue, are in appeal before us. 6.5 The ld. CIT(DR) before us vehement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the observations of ld. CIT(A) for A.Y. 2002-03 had been followed successively by all the ld. CIT(A) in assessee's own case up to A.Y. 2011-12, which is the year under consideration before us. If that be the case, then entire order of ld. CIT(A) for A.Y. 2011-12 also would become perverse, according to the ld. CIT(DR), which situation cannot be entertained by this Tribunal. It would also be relevant to note that both assessee as well as the revenue are in appeal before us against the very same order of the ld. CIT(A). In fact on perusal of the details of ld. CIT(A) for A.Y. 2002-03, reproduced supra, we find that wherever details were filed by the assessee, the ld. CIT(A) had resorted to estimate 5% of the cost recovery as not attributable to Section 10A unit and consequently denied deduction u/s 10A thereon. Wherever details were not filed, no relief has been granted by the ld. CIT(A) for A.Y. 2002-03. While this is so, how the order of ld. CIT(A) could be termed as perverse for A.Y. 2002-03. In this regard, it would be relevant to ascertain, whether details of cost recoveries in the sum of Rs. 76,94,926/- were filed by the assessee before the ld. AO or not for the year under con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,36,282/- Interest on Fixed Deposit Rs. 7,88,79,143/- Rs. 45,71,778/- Interest on inter corporate loans Rs. 1,65,52,116/- Rs. 85,65,919/- 7.2. The ld. AO held that the above items of income are not eligible for claiming benefit of deduction u/s 10A & 10AA of the Act as the same are not derived or attributable to the export activity of the assessee company. According to ld. AO, these incomes have only incidental nexus with the export activity of the assessee and they do not have first degree nexus with the export activity which is eligible for deduction u/s 10A & 10AA of the Act. 7.3 The ld. CIT(A) granted relief to the assessee by placing reliance on the decision of the Hon'ble Karnataka High Court in the case of Motorola India Electronics Pvt. Ltd. reported in 225 Taxman 11 (Kar) and the provisions of Section 10A(4)/ 10B(4) of the Act. 7.4 The ld. CIT(DR) before us vehemently argued that there is no business compulsion for the assessee to deploy funds in the deposits as well as by giving 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 ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et) relating to the undertaking claiming deduction u/s 10A and 10AA is as under:- Particulars Undertaking eligible for deduction u/s 10A Undertaking eligible for deduction u/s 10AA Foreign Exchange and Forward Contract Gain Rs 14,48,82,149/- Rs 7,47,10,681/- AS-11 restatement Rs (99,61,476)/- Rs (51,36,786)/- Exchange Gain (net) Rs 13,49,20,673/- Rs 6,95,73,895/- 8.2 Ld. AO had held that foreign exchange and forward contract gain of Rs. 14.48 crores and Rs. 7.44 crores were derived by the assessee due to hedging activity and the same is not derived by the specified business activity of the undertaking in the Software Technology Park (STP) or Special Economic Zone (SEZ). With these observations, the ld. AO denied deduction u/s 10A & 10AA of the Act to the assessee on the said foreign exchange and forward contract gain. 8.3 The ld. CIT(A) granted relief to the assessee by placing reliance on various decisions and giving a categorical finding that foreign exchange gain is directly 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act of the difference of the two rates is recorded in the books separately as an exchange gain/ (loss). Hence the nature of receipt has been completely explained by the assessee. The ld. AR submitted that forward contract outstanding at the end of the year exceeding export receivables at the end of the year is of no consequence or relevance as to that extent, the sales would happen in next year. We find that the Hon'ble Madras High Court in the case of Commissioner of Income Tax v. Pentasoft Technologies Ltd. reported in 347 ITR 578 (Mad) had categorically held that gains arising out of foreign exchange fluctuations are having direct nexus over the export sales of the assessee and would be eligible for deduction u/s 10A of the Act. 8.7. Similar view was taken by the Hon'ble Bombay High Court in the case of Commissioner of Income Tax v. Gem Plus Jewellery India Ltd. Reported in 330 ITR 175 (Bom). 8.8. In view of the aforesaid observations and respectfully following the judicial precedence relied 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DR) also argued that the discounts have been provided by the assessee in ad hoc manner and that the basis of determination of discount has not been provided by the assessee. Ld. CIT(DR) argued that the entire provision made herein is nothing but provision made for unascertained liabilities and hence the ratio laid down by the Hon'ble Supreme Court in the aforesaid cases, relied upon by the ld. CIT(A) in his order, would not be applicable herein. 9.5 We find that the ld. AO in page 2 para 3 of the assessment order has stated that the ld. TPO had accepted the entire export price of the assessee to be at Arm's Length Price (ALP) and had not suggested any adjustments thereon. Hence, the entire revenue shown by the assessee (which comprises gross revenue minus discount of Rs. 28,04,22,899/-) has been accepted to at arm's length. Further, the ld. CIT(A) in A.Y. 2007-08 vide his order dated 16.04.2014 has categorically held that a provision for customer discount has been made by the assessee on a scientific 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, spec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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