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TMI Blog2024 (12) TMI 1048X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee under the head other income has never been questioned. There is no contrary evidences/documents placed by the revenue on record before us to doubt the evidences filed by the Ld. AR. Under such circumstances we do not find any reason to doubt the expenditure incurred by the assessee on cost to cost basis. It is also not the case of the revenue that the mark-up has been charged by the assessee has these documents are made by the assessee in respect of those employees who were deputed by the parent company to assist the assessee. It has to be therefore considered to have been incurred for the purposes of business. We therefore of the opinion that this expenditure is allowable u/s. 37(1). Nature of expenditure - Software License Fee - HELD THAT:- Admittedly, the assessee capitalised such software that are purchased on perpetual license model. However there is no denial of the fact that, there are certain software purchased by the assessee which are useful only for short period of time or that requires regular update, for which subscription fee is to be paid. Revenue has not doubted the fact that, software is used by the assessee depending upon the project and therefore cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst speculation - HELD THAT:- Under section 43 (5) of the act, speculative transaction has been defined to mean a transaction in which a contract for the purchase or sale of commodities settled otherwise than by the actual delivery or transfer of such commodity. However in the present facts of the case, assessee being neither a dealer in foreign exchange or the any, other commodities, but was an exporter of the software services, in order to hedge against any losses, booked foreign-exchange in the forward market with the bank. As some of the contracts entered into by assessee for export of services failed in some cases loss was earned. Thus in our opinion the loss so earned by the assessee was in the course of rendering its services outside India and has to be treated as a business loss. See Vishindas Holaram [ 2014 (9) TMI 788 - BOMBAY HIGH COURT] - Smt. Beena Pillai, JM And Shri Omkareshwar Chidara, AM For the Appellant : Shri Nitesh Joshi, AR For the Revenue : Shri Pravin Salunkhe, Sr. DR ORDER PER BENCH: Present case appeals filed by the assessee as well as revenue arises out of the consolidated order passed by the Ld. CIT(A) dated 16/10/2023 for the years under considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under:- Sr. No. Issues A.Y.2011-12 ITA No. 4767/M/2023 A.Y.2012-13 ITA No. 4682/M/2023 A.Y.2013-14 ITA No. 4715/M/2023 A.Y.2014-15 ITA No. 4683/M/2023 A.Y.2015-16 ITA No. 4684/M/2023 1. Disallowance of amount paid to Larsen Toubro Limited towards cost of ESOP benefit given by it to the assessee s employees or by the employees deputed by them to it. Gr. No. 1 Gr. No. 1 Gr. No. 1 Gr. No. 1 Gr. No. 1 3.2. Both sides submitted that, facts for all the years under consideration regarding these issues are similar except for some difference in the amount of the claim raised by the assessee. Brief Facts leading to the above issue are as under: 3.2.1.The Ld.AR submitted that the assessee during the year under consideration paid certain amount towards reimbursement of cost to M/s. L T Ltd. towards cost incurred on stock options issued to eligible employees of L T Ltd. deputed with the assessee being L T Valdel Engineering Ltd. The Ld.AR submitted that Ld.AO disallowed expenses related to reimbursement on the ground that the ESOP Scheme, the employees are allowed to opt for equity share of the holding company under satisfaction of certain condition. He submitted that the assessee (L T Vald ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... towards the deputed employees and that the assessee had not issued any equity shares to such employees. He emphasized that the payment made by the assessee is only the reimbursement of cost incurred by the ultimate holding company on these employees who were deputed with the assessee and were actually on the payroll of the ultimate holding company. It is submitted that the assessee deducted taxe at source against the payment made to the holding company and further assessee issued Form 16 A to the ultimate holding company for deducting TDS on the amounts reimbursed by the assessee. 3.2.6. It is submitted by the assessee that, the holding company gave confirmation regarding the same and has offered to tax, such cost reimbursed the assessee treating the same as other income in its books of accounts has paid necessary taxes on it. The Ld.AR submitted that, the assessee in its books of accounts treated the said reimbursement of charges made to its holding company as professional fees and deducted taxes as per the provision of section 194J of the Act. 3.2.7. The Ld. AR submitted that, the expenditure incurred by the assessee on cost to cost basis in such manner on behalf of deputed emplo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the paper book that was debited to the Profit Loss A/c. He also referred to employee wise breakup for ESOP Stock and the certificate issued form the holding company to support his submission that the expenditure is not claimed twice i.e. by the assessee and the L T Company being the holding company. The Ld. AR further submitted that, the salary paid by the assessee to these deputed employees, were never doubted by the revenue authorities, wherein, ESOP expenses are considered as perquisite in the hands of the such employee. Under such circumstances, the Ld. AR prayed that, the expenditure incurred by the assessee towards the reimbursement of cost to the ultimate holding company being L T Ltd. is an allowable expenditure in the hands of the assessee. 3.3. On the contrary, the Ld. DR placed reliance of the orders passed by the authorities below, however, could not controvert the categorical evidences furnished by the assessee. We have perused the submission advanced by both sides in the light of the records placed before us. The Ld. CIT(A) in the impugned orders referred to the order of coordinate bench of this Tribunal for assessment year 2010-11 wherein the issue was remanded w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e employees deputed by its holding company was a capital outgo. 30. CIT(A) after going through the submissions of the assessee and after obtaining a remand report from the AO was of the opinion that there was nothing wrong in defraying the discount relating to the ESOP, which had to be borne by the employer over its vesting period. However, he was of the opinion that the scheme of ESOP was between the employees of holding company and M/s. L T Ltd. CIT (A) noted that the debit notes issued by the holding company did not have the names of the employees. There was no written agreement between the assessee and its holding company with regard to the contractual obligation assessee had in relation to those employees who were deputed by the holding company to the assessee. As per the CIT (A), though the liability under ESOP scheme would be deductible in the hands of the holding company in accordance with the decision of the Special Bench in the case of Biocon Ltd, v. DCIT [(2013) 144 ITD 21], this would not entitle a person who was not a direct employer to claim such benefit. He thus upheld the disallowance. 31. Now before us, Ld. AR submitted that the payments effected by the assessee to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not supported with calculations; and the intention of allotting equity shares under the ESOP was clear from the nature of payment made. The AO, therefore, treated the same as a capital expenditure and brought the corresponding amount of Rs. 5,27,68,682/- to tax as an inadmissible expenditure. 34. It is the undisputed fact that assessee was not able to It is a lower authorities any contract it had entered with produce before the L T Ltd, its holding company for reimbursement of employee cost. However, it is also not disputed that the employees were deputed to the assessee and they worked for the assessee. Reimbursement for this to M/s. L T Ltd, claimed by the assessee were all allowed by the Revenue, but for the ESOP. No doubt necessity of incurring an expenditure cannot be questioned by the Revenue, for it is in the domain of a businessman. However, production of evidence to show that the expenditure was incurred for the purpose of business is the onus of the assessee. What the assesse had produced before the lower authorities is only certain debit notes with narrations which did not give any details. No doubt before the CIT (A), it had produced a letter dt. 13.12.2012 from L T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mited) amounting to Rs. 60,17,836/-. This amount has been treated as Other Income in the books of M/s. Larsen Toubro Limited and has been offered to tax, and, b) To the eligible employees of M/s. L T-Valdel Engineering Limited amounting to Rs. 2,75,20,188/-. The said cost has been recovered from M/s. L T-Valdel Engineering Limited through debit advises. The amortized cost of such ESOPs is recovered on a quarterly basis and for the FY 2011-12 an amount of Rs. 3,35,38,024/- has been recovered from M/s. L T-Valdel Engineering Limited. 3.4.2. He submitted that similar confirmation was given by the holding company for each assessment years under consideration. The assessee has placed at page 33 the extract of TDS certificate u/s. 203 of the Act, wherein TDS u/s. 194 J of the Act is deducted by the assessee, in the name of L T Ltd. 3.4.3. The assessee has filed in the paper book with details of salary, allowances paid by the assessee to such deputed employees, wherein the reimbursement made by the assessee to the ultimate holding company qua such employees considered as ESOP charges. For the sake of convenience the annexure referred for assessment year 2012-13 is scanned and reproduced a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TDS by the assessee or by the holding company. The confirmation of L T in respect of treating the reimbursed cost received from assessee under the head other income has never been questioned. There is no contrary evidences/documents placed by the revenue on record before us to doubt the evidences filed by the Ld. AR. Under such circumstances we do not find any reason to doubt the expenditure incurred by the assessee on cost to cost basis. It is also not the case of the revenue that the mark-up has been charged by the assessee has these documents are made by the assessee in respect of those employees who were deputed by the parent company to assist the assessee. It has to be therefore considered to have been incurred for the purposes of business. We therefore of the opinion that this expenditure is allowable u/s. 37 (1) of the Act. We thus held that this issue in favour of the assessee and Ground No. 1 raised in the assessee s appeals for all the years under consideration stands allowed. 5. Departmental appeal: In the appeals filed by the revenue, it is submitted that, all the issues are common for the years under consideration. Accordingly all grounds raised by the revenue in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software resulted in enduring benefit to the assessee. The Ld.DR thus placed reliance on the orders passed by the Ld.AO. A.4. On the contrary the Ld.AR submitted that, the assessee is engaged in the activity of engineering consultancy in the upstream domain of oil and gas sector. It is submitted that, THE assessee needs to use sophisticated modelling and analysis software and rendered consultancy services. It is submitted that the software required by the assessee for its activities are generally very high-end applications that carry very high price tag. The Ld.AR specifically mentioned that the licenses that are purchased on perpetual model are being capitalised in the books as is evident from the depreciation schedule. He brought our notice the depreciation schedule of the audited financials at the pages in the paper book filed before us for the years under consideration. A.5. The Ld.AR submitted that, the assessee is also procuring software for short periods like a month or quarter, under revenue model to handle the spikes in project requirements. It is submitted that periodic maintenance fee is also paid in respect of such short term license and are charged as revenue expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t enabled it to meet specifically user problem faced by the Respondent-Assessee. The impugned order also records the fact that in view of fast changing technology, software has to be regularly updated so as to keep pace with the changing technology. On the aforesaid facts the view taken by the Tribunal that the expenditure of Rs. 38.90 Lakhs is on Revenue account is an entirely possible view. So far as the Revenue's grievance that once the CIT(A) has recorded the fact that benefit obtained is of enduring nature ipso facto it must be held to be capital and not revenue in nature is contrary to the decision of the Supreme Court in Empire Jute Co. Ltd. v. CIT (1980) 3 Taxman 69. In the above case, while dealing with a similar submission, the Court has observed as under: ..................There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee was already carrying on its business and that it constituted spitting up of the existing business. It was also denied for the reason that no plant and machinery was acquired during the initial year and that the existing infrastructure was split and hence undertaking has been formed by splitting up the business already in existence. The Ld.AR submitted that findings based on identical disallowance of deductin was made in subsequent assessment years also. B.2.1. However from assessment year 2008-09, the deduction was denied on additional ground that, the assessee is engaged in research and analysis being in the nature of information technology assisted, and does not fall under the category of information technology enabled product and services as notified by CBDT by notification dated 26/09/2000. B.3. The Ld.AR submitted that, in line with the disallowance made for assessment year 2002-03 the disallowance u/s. 10A as made in all the subsequent assessment year with the additional condition that was included from assessment year 2008-09. The Ld.AR submitted that, the demerged company appealed against the disallowances before the Ld.CIT(A) from assessment years 2002-03 to 2004-0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an admitted position that assessee is a sophisticated hardware/software to produce and export engineering designs, drawings, plans, analysis reports et cetera. Assessee is governed by the directorate of software technology Parks of India being the STP registered unit. It is not doubted that the assessee has received consideration in convertible foreign exchange and has made declaration before the exchange control for conversion of the foreign exchange into Indian currency. We refer to the decisions of coordinate bench of Hon ble Delhi Tribunal in case of Outsourcing Services Pvt.Ltd vs ITO in ITA No.1204/Del/2011 vide order dated 27/05/2011 wherein, it has been held that export of customised electronic data as required by the definition of computer software would make an assessee eligible to claim the deduction under section 10A of the act. B.7.1. Further the CBDT issued circular no. 2/2013 dated 17/01/2014, wherein more has been clarified that as regards the issue relating to export of computer software, direct tax benefit under section 10 A, 10AA and 10 B of the act is available. As regards the primary conditions based on which the Ld.AO denied the claim, we note that, Hon ble Ka ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction under Section 10A of the Act. It is further submitted that the Tribunal erred in proceeding on the assumption that the nature of the business of the assessee does not require any infrastructure. In support of aforesaid submission, reliance has been placed on decision of the Supreme Court in 'DEPUTY COMMISSIONER OF INCOME TAX 11(1), BANGALORE VS. ACE MULTI AXES SYSTEMS LTD., (2017) 88 N.COM 69 (SC). 4. On the other hand, learned counsel for the assessee submitted that the assessee is registered as STPL and was granted approval on 14.09.2001. It is further submitted that concurrent findings of fact have been recorded by the Commissioner of Income Tax (Appeals) as well as the Tribunal with regard to eligibility of the assessee to claim benefit of deduction under Section 10A of the Act, which have not been challenged as perverse. It is further submitted that the assessee was engaged on site development of software program and the programs were delivered at the premises of clients at the work site in South Korea and therefore, there was no need of a full fledged infrastructure facility and the assessee has therefore, rightly been held entitled to deduction under Section 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ES VS. CIT', 300 ITR 205 SCC 211 and 'MANGALORE GANESH BEEDI WORKS VS. CIT', 378 ITR 640 (SC) @ 648]. A three judge bench of the Supreme Court in HAZARI 'SANTOSH VS. PURSHOTTAM TIWARI', (2001) 3 SCC 179 while dealing with the expression to be a question of law involving in the case' held that 'to be a question of law involving in the case', there must be first a foundation for it laid in pleadings and the questions emerged from sustainable findings of fact arrived at by courts of fact and it must be necessary to decide that question of law for a just and proper decision of the case. It has been held that entirely a new point raised for the first time before the High Court is not a question involved in a case unless, it goes to the root of the matter. In 'HERO VINOTH (MINOR) VS. SESHAMMAL', (2006) 5 SCC 545 while dealing with the scope of Section 260A of the Act, it was held that this court will not interfere with findings of the court, unless the courts have ignored material evidence or acted on no evidence or have drawn wrong inferences from proved facts by applying the law erroneously or the decision is based on no evidence. The aforesaid d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mers. It was noted that such forward contracts were incidental to carrying on its business. The Ld. CIT(A) placed reliance on the decision of Hon ble Bombay High Court in case of CIT vs Badridas reported in (2003) 261 ITR 256 in support of the view. Aggrieved by the observations of the Ld.CIT(A), the revenue raised this issue before this Tribunal. D.3. The Ld.AR at the outset submitted that assessee does not deal in commodities or foreign-exchange contracts and therefore provisions of section 43 (5) of the act does not apply. It is submitted that the claim is made on the principles of matching concept and is based on the accounting standard as per the Income tax Act. It is submitted that, the assessee takes forward cover which is incidental to the regular business of the assessee to hedge against losses or cover the losses arising due to the difference in foreign exchange fluctuation rates. The Ld.AR placed reliance on following decisions in support of this contention: Decision of Hon ble Bombay High Court in case of CIT vs D. Chetna and Co.Ld reported in (2016) 75 taxman.com 300 Decision of this tribunal in case of the CIT vs GBTL Ltd reported in (2021)128 taxman.com 417 Decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a business loss. In support of this view reliance was placed on the decision of Hon ble Bombay High Court in case of CIT vs Vishindas Holaram reported in (2014) 50 taxman.com 337, wherein, Hon ble Court observed and held as under: 9. With the assistance of Mr.Malhotra and Mr.Pardiwalla, we have perused the memo of appeal and all necessary annexures thereto. We have also perused the relevant statutory provisions. In our view, the concurrent findings of the Commissioner and the Tribunal with regard to the nature of the transaction that it not being speculative in character is not perverse or vitiated by an error of law apparent on the face of record. The Division Bench held that once the main business is identified, if some incidental activities or transaction or dealing in foreign exchange is undertaken but that is also related to some extent to the main business activity, then, it could not be said that the assessee is in speculative business or speculative dealings is ordinarily a part of his business. We find that any larger question or controversy need not be addressed in the facts of the case before us. Once it is undisputed that the assessee is in the business of exports of ..... 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