Taxes levied in foreign countries on profits or gains is deductible u/s 37(1)

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.

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 Tribunal observed that the term ‘tax’ is defined in relation to the AY commencing on the 1st day of April, 1965 and in subsequent assessment years as meaning tax chargeable under the provisions of the Act and that this amendment was effected by the Finance Act 1965. taking cognizance of it, the Hon’ble Tribunal had held that ‘any sum paid on account of any rate or income tax and super-tax chargeable under the provisions of the Income-tax Act’ is expressly disallowed by this clause (ii) of s. 40(a).

Accordingly, the Hon’ble Tribunal observed with regard to the allow-ability of foreign taxes u/s 37 of the Act as under:

“So we have to see whether such expenditure is allowable under section 37 of the Act. In our view, rates and taxes which are payable irrespective of any profits being earned are admissible allowances under section 37 and section 40(a) (ii) does not apply to them. The tax levied by different countries is not a tax on profits but a necessary condition precedent to the earning of profits. So the AAC was absolutely justified in allowing the appeal of the assessee and we see no reason to differ from the finding.’

Reference application of the Revenue was rejected by the Tribunal which has been ratified by the Hon’ble Bombay High Court in ITA NO.123 OF 1976.

(ii) In the case of Tata Sons Limited [ITA NO.89 OF 1989], the Hon’ble Mumbai Bench of Tribunal had held on a similar issue that:-

“It is an established principle that when a 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 14.1.8 6, 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.”

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.

INCOME TAX APPELLATE TRIBUNAL, AHMEDABAD

ITA No.1821/Ahd/2005, 2274/Ahd/2006 and 2042/Ahd/2007

A.Y. :2002-03, 2003-04 and 2004-05

Mastek Limited Vs DCIT

ITA No.1883 /Ahd/2005, 2341/Ahd/2006 and 2541/Ahd/2007

A. Y. :2002-03, 2003-04 and 2004-05

DCIT  Vs Mastek Limited

Date of pronouncement: 11-05-2012

O R D E R

PER BENCH: These six appeals instituted – (i) three appeals by the assessee company and (ii) remaining three appeals by the Revenue – are directed against the impugned appellate  orders of the Ld. CIT (A) – VIII, Ahmedabad in (i) Appeal No. CIT (A)- VI II/DC/CIR/1 38/04-05, (ii) No. CIT(A)-VIII/DC-4/203/05-06; and (iii) No. CIT (A)-VIII/DC-4 /300/06-07 dated: 24.05.2005, 24.8.2006 and 28.3.2007 for the assessment years 2002-03, 2003-04 and 2004-05 respectively.

I. ITA No.1821/A/05 – A Y 2002-03 – By the assessee:

2. The assessee company has raised four grounds, out of which, in ground No.1 that the CIT (A) erred in holding that the assessee was not entitled to claim deduction u/s 80HHE of the Act on the other income of Rs.4.71 lakhs; and in ground No.4 that the CIT (A) 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 written off of Rs.1 .33 lakhs;

(5) allowing Rs.4,25,72,977/- (sic) Rs.42,57,297/- paid as Belgium tax u/s 37(1) of the Act;

(6) allowing Rs.72,11,557/- out of disallowance of Rs.74,11,557/- u/s 1 4A of the Act;

(7) deleting the addition of Rs.2,34,50,000/- being compensation received for rendering human resource support services u/s 92 of the Act; &

(8) & (9) being general in nature and no specific issues involved, they have become inconsequential.

III. ITA No.2274/A/06 – A Y 2003-04 – By the assessee:

4. The assessee company has, in this AY, raised the following grounds, namely:

(1) that the CIT (A) has erred in holding that the assessee was not entitled to deduction u/s 80HHE of the Act on the misc. income of Rs.34,73,924/- being expenses recovered from the customers;

(2) that the CIT (A) erred in upholding the stand of the AO!TPO with regard to the traveling expenses of Rs.1,26,88,612!- in relation to the seconded employees; &

(3) this ground of the assessee – CIT (A) erred in not passing a speaking order in relation to ground Nos.5.26 and 5.27 – was not pressed during the course hearing and, accordingly, this ground is dismissed as ‘not pressed.’

IV. ITA No.2341/A/06 – A Y 2003-04 – By the Revenue: 5. The Revenue has raised the following grounds:

That the CIT (A) has erred in:

(1) directing to allow exemption u!s 1 0A of the Act amounting to Rs.10,24,63,557!- in respect of Unit No.107 of SEEPZ;

(2) directing to include the income of Rs.1 ,01 ,78,964!- being exchange gain and Rs.31 ,93,255!- respectively for granting exemption! deduction u!s 1 0A!80HHE of new Units (SDF VI & VII) & STP in Pune Unit;

(3) directing to include the profit on sale of assets worth of Rs.59,851!- while working out exemption u!s 10A for STP, Pune;

(4) directing to exclude misc. income of Rs.4,72,563!- from business for calculating  exemption u!s 1 0A of the Act in respect of Unit 107;

(5) directing to treat the lease rental income from the building as income from ‘house property’ and allow the depreciation claim thereby entertaining a new ground without affording an

opportunity to the AO;

(6) directing the AO to re-compute deduction u!s 80HHE and holding that the balance 10% profit of Unit 107, new units (SDF¬VI & VII) and Pune STP Unit were eligible for computation of deduction u!s 80HHE;

(7) directing to delete Rs.5.05,80,750/- relating to Human Resource Management 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 income of Rs.29,61 ,008/- being exchange fluctuation gain for the granting exemption u/s 1 0A/80HHE of the Act;

(3) directing to delete the disallowance of Rs.1 .4 lakhs made out of interest relatable to investments yielding exempted income;

(4) restricting the disallowance of Rs.229.07 lakhs made out of administrative expenses relatable to exempted dividend income to Rs.2 lakhs;

(5) directing to treat the rental income of Rs.186. 51 lakhs under the head ‘house property’ and allow deduction u/s 24 as permissible;

(6) directing to delete the adjustment made at Rs.5,90,27,278/- relating to Human Resource Management function services based on the TPO’s order u/s 92CA(3) of the Act;

(7) directing to delete the addition made on account of adjustment relating to interest on advances paid to the employees of Rs.7,55,888/- based on TPO’s order;

(8) deleting the addition made towards TPO adjustment towards interest on account of excess credit period granted to AE at Rs.51 ,79,81 7/-;

(9) & (10) these grounds being general in nature, they do not survive for adjudication.

8. As the issues raised by the rival parties pertain to the same assessee and for the appreciation of facts, these appeals were heard, considered together and disposed off by this common order.

9. After taking into account the contentions of either party, diligent perusal of relevant case records, documentary evidences in the shape of voluminous paper books running into hundreds of pages furnished by the learned A R during the course of hearing and also the brief submitted by the learned D R, the issues raised by the parties concerned are adjudicated chronologically, in assessment year-wise, as under:

I. ITA No.1821/A/05 – A Y 2002-03 – By the assessee:

(1). Traveling expenses of Rs.1 .32 crores relating to seconded employees:

10. The assessee had international transactions with Majesco Software Inc. of USA, Mastek, UK Ltd of UK, Mastek Asias Pacific Pta of Singapore, Mastek MSC Sdn Bhd of Malasia, Mastek Gmbh of Germany and Mastek NV of Belgium.

11. During the course of transfer pricing proceedings, it was noticed by the TPO that the assessee had incurred a total sum of Rs.1 ,32,52,859/- on the travel cost of the seconded persons during the previous year. According to the TPO, the assessee had a regular practice of seconding various persons to its AEs located at USA, UK, Belgium, Singapore 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 offered by the assessee to its customers. However, when the activity relating to offshore and on-site have been segregated by the assessee so that all revenues relating to on-site activity are earned by the AEs, all costs incurred for the purposes of on-site activity also have to be borne by the AEs only. There is no doubt that the travel cost on account of secondment of employees is incurred only for carrying on the on-site activity. Hence, the same should also be recovered from the AEs;

(b) the fact that AEs are being the travel cost at the time the secondees return to India does not in any way alter the fact that the onward fare should have also been borne by them. The purpose of travel from India to the respective AEs location is to render on-site services. In such an event, when these secondees shift to the payrolls of the AE, their travel costs both ways should necessarily be borne by the AEs only as such expenses are incurred for the purp.ose of the business of the AE; &

(c) the last contention of the assessee that by seconding employees it receives long term benefits, is no ground for non-recovery of costs which are directly attributable to the AE, particularly in view of high attrition rates in the software industry.

13. In view of the above assertion, the traveling cost of Rs.1 ,32,52,859 constitute costs recovered by the assessee from its AEs in accordance with the arm’s length principle as it is AEs business expenditure. Since the assessee had not shown any amount recovered/recoverable from the AEs in its account, the ALP determined at cost was an adjustment to the total income of the assessee and, thus, its income was increased by Rs.1 .32 crores.

14. On appeal, the learned CIT (A) had, after due consideration of the assessee’s submission, recorded his findings that –

“(On page 27) I have considered the same and for reason similar in respect of the transactions relating to Human Resources Function in the preceding paragraphs it is held that transactions is international transactions within the meaning of section 92B/92C of the IT Act it is not in dispute that the traveling expenditure as above has been incurred on behalf of the associated enterprises. Thus, the expenditure cannot be held to be for the business purposes of the assessee company during the FY 2001-02 as the income on behalf of the projects for which these persons were working 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 debatable question is that when the assessee had segregated the off-shore and on-site activities, naturally all the revenues relating to on-site activity were earned by the AEs. If it is so, why all costs incurred for the purposes of on-site activities can’t be borne by the AEs. The purposes of travel of the secondees from

India to the respective locations of AEs were to render on-site services. The arguable question therefore now is – when the AEs were rather magnanimous in footing the bills/cost of the travels of the secondees while returning to India, why the assessee had not insisted the respective AEs to extend the same gesture when the secondees were being herded from India? The assessee’s reasoning that when the persons were seconded, they get good field experience and some of those persons return to the assessee later and work in its offshore projects thereby the assessee will be able to utilize their experience for its benefit, in our considered view, doesn’t sound well. A prudent professional like the assessee would not have ventured to drain such a considerable sum only on presumption and hypothesis.

19. Taking into account all the facts and circumstances of the issue as deliberated upon referred above, we are of the considered view that the authorities below were justified in their endeavour which requires no intervention of this Bench at this juncture. It is ordered accordingly.

20. The other issue raised was with regard to disallowance of legal fees of Rs.5.61 ,000/- paid to Baker & Mckinsey. On a perusal of the details of expenses incurred in foreign currency of Rs.5.88 lakhs on account of legal fees paid to M/s. Baker & Mckinsey, the learned TPO noticed that most of the expenses excluding Rs.26,000/- had been incurred in connection with incorporation of the subsidiary company in Belgium. She had asserted that the expenses incurred in connection with incorporation of a company be initially incurred by the promoters, but, they constitute the incorporation expenses of the new company and should have been accounted for by the new subsidiary company formed in Belgium. Being queried as to why the said amount was not recovered from its Belgium AE, the assessee appears to have explained that on a bona-fide belief that the fees was considered to be genuine business expenditure incurred on commercial consideration and, thus, it was neither treated as 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 (A) had erred by accepting the treatment accorded by the lower authorities to the legal fees paid to Baker and Mckinsey of Rs.5.61 lakhs and thereby stating that the said expenditure was not for the business of the assessee and, thus, inadmissible u/s 37 of the Act since the expenditure was in the nature of international transactions and also capital expenditure of the subsidiary company outside India. It was, further, argued that the learned CIT (A) brushed aside the assessee’s submission that those were bona-fide expenses incurred in relation to evaluating tax, legal and other implications for the possible investment in creating the Belgium subsidiary. It was, therefore, pleaded that the legitimate claim of the assessee requires to be allowed.

23. We have duly considered the contentions of the learned AR and also heard the version of the learned D R present.

24. It is an undisputed fact as admitted by the assessee before the TPO that on a bona-fide belief it had considered it as a genuine business expenditure incurred on commercial consideration and magnanimously conceded that it had neither treated the same as an expenditure relating to AE nor recovered the same from the AE. In view of the above confession, we are of the considered view that the learned TPO was within her realm to treat Rs.5,61 ,000/- as costs recoverable from AE in accordance with the arm’s length principle. It is also pertinent to mention here that the assessee had not brought on any documentary clinching proof to repudiate the TPO’s stand. Accordingly, we decide the issue against the assessee.

II. ITA No.1883/A/05 – A Y 2002-03 – By the Revenue:

1. Granting exemption u/s 10A of Rs.9.99 crores in respect of Unit No.107;

25. Incidentally, the earlier Bench in ITA Nos.2762/A/2003 & 09/A/2004 dated: 17.6.2008 for the assessment years 2000-01 and 99-00 in the assessee’s own case had dealt with a similar issue. After analyzing the issue at a greater length, the Hon’ble Bench had observed thus:

“10. (On page 16) We have gone through the order of the lower authorities and the aforesaid decision dated 7.8.2007 of the ITAT [in ITA Nos.1530/Ahd/2000, 1867/Ahd/2001 & 368/Ahd/2001 in the assessee’s own case for the AYs 1996-97 to 98-99) wherein the ITA T held as under:

’20

20.1 .

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 CIT (A) on this proposition’.

10.1. In the light of aforesaid decision of the ITAT, we have no alternative but to uphold the order of the ld. CIT (A), allowing exemption u/s 10A of the Act in respect of profits and gains derived by the taxpayer from the industrial undertaking i.e., Unit-107 ”

26. The findings of the earlier Bench have been reinforced by the Hon’ble Bench in its finding in ITA NOs. 3804 & 3684/Ahd/2004 dated 21.11.2008 (on page 5 para 4) in the assessee’s own case for the AY 2001 -02.

27. In conformity with the findings of earlier Benches cited supra, we are of the firm view that this issue should go in favour of the assessee. It is ordered accordingly.

(2) To exclude the income of Rs.1 6,48,000/- being exchange fluctuation gain and other income of Rs.1000/- for granting exemption u/s 1 0A in respect of new Unit in SEEPZ and STP in Pune Unit;

&

(3) To recalculate deduction u/s 80HHE of the Act after considering the exchange fluctuation gain of Rs.35,04,000/-.

28. Apparently, the earlier Bench in its findings for the AYs 2000- 01 & 1999-00 had deliberated a similar issue and recorded its reasoning as under:

“16.4. (On page 32 & 33) As regards income on account of exchange rate fluctuation, Hon’ble Gujarat High court in the case of CIT v. Amba Impex 282 ITR 144 (Guj) held that merely because an amount is received in a year subsequent to the year of export by way of exchange rate difference, it does not necessarily always follow that the same is not relatable to the exports made. The ITAT in the case of Renaissance Jewellery (P) Ltd v. Income-tax Officer, Ward 8(3)(3), Mumbai 289 ITRSP 65 (Mum) held that the profit on account of foreign exchange gain is directly referable to the articles and things exported by the assessee. Such profits are, therefore, of the same nature as the sale proceeds and there is no reason as to why deduction under section 10A should not be allowed in respect of such exchange gain. No contrary decision has been brought to our notice. However, in the case under consideration, it is not evident from the order of lower authorities as to whether or not gain due to difference in exchange rate is on account of exports or otherwise. In these circumstances, we vacate the findings of ld. CIT (A) and restore the matter to the file of the AO with the directions to ascertain the nature of gain. In the event such 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 facts in that case were that the assessee, M/s. Abdul Razak and Company of Dhoraji, carried on business as commission agents as well as dealers in grocery articles having their head office at Dhoraji and branches at Bombay, Mangalore, Veraval and Chorvad. In the course of assessment for the assessment year 1967-68, the assessee, inter alia, made a claim before the ITO for bad debt of Rs.78,824/- in respect of the amount due from M/s.Mohamad Peer Mohamad of Nasik. The ITO disallowed the claim on the ground that the impugned debt was neither incurred in the course of money lending nor in the course of commission agency. The ITO noted that the bad debt was written off from the Bombay books of the assessee firm. The main source of the income at Bombay arose from the commission agency and dealings in grocery articles. On appeal, AAC upheld the order of the AO. On further appeal, the Tribunal addressed itself to the alternative question whether the amount of loss could be allowed as incidental to the business under s.28 of the I.T. Act, 1961. The Tribunal having agreed to the fact that the assessee had admittedly dealings with M/s. Mohamad Peer Mohmad of Nasik, and, since there was no evidence to suggest that any partner of the said debtor-firm was related to the partner of the assessee firm, held that the impugned loss should be allowed as deduction under s.28 of the , because the said aid Act, because the said M/s. Mohamad Peer Mohmad of Nasik had approached the assessee firm to pay the amount to M/s. Gokaldas Virjibhai of Sangli. On reference, Hon ’ble High Court concluded that as held by this Court in CIT v. Equitorial Pvt. Ltd. (1974) Taxation 37(3)(-82, the debt owed by M/s. Mohamad Peer Mohmad of Nasik was one which sprang directly from the business of the assessee and was allowable as a bad debt, and, consequently, therefore, a trading loss under section 28(1). It is no doubt true that every loss is not so deductible unless it is incurred in carrying out the operation of the business [vide CIT v. Nainital Bank Ltd. (1965) 55 ITR 707 (SC)] In that view of the matter, therefore, for the reasons stated, Hon ’ble High Court held that the said loss being a bad debt is allowable as trading loss under s.28 of the I.T. Act, 1961.

14.1. In the light of aforesaid decision of Hon’ble jurisdictional High Coujrt and the nature of advances detailed in the order of the ld CIT (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 the assessee’s contention, the learned AO maintained that the scope of term ‘tax’ u/s 40(a)(ii) is not limited to tax levied under the Indian Income-tax Act, but, is wide enough to include which all taxes which are levied on property of a business. The interest on money borrowed for payment of income-tax or advance-tax are also not allowable on the same footing because the interest in such cases retain the character of income-tax. It is a case of application of profits after they have been earned, whether income-tax is paid in India or abroad. It is always an application of income. Therefore, the AO took a stand that the entire amount of Rs.42,57,297/- charged to P & L account was disallowable.

35. Aggrieved, the assessee carried the issue before the CIT (A) for relief. After due consideration of the assessee’s lengthy argument coupled with the illustration of s. 37(1) as well as s. 40(a)(ii) of the Act, the learned CIT (A) made the following observations:

“5. (On page 8) I have considered the factual position as well as case laws cited by the appellant’s representative and find that the said amount has been paid by the assessee company in respect of business done in earlier assessment years for which demand notice have been received for the current financial year. The expenditure is held to be for business purposes as the assessee company as the same is for earning of income. As far as applicability of section 40(a)(ii) is concerned, the nature of expenditure clearly does not fall in the said category as taxes has not been paid under the Indian Income-tax Act, but has been paid to carry out its business outside India. Having regard to the case laws cited by the appellant’s representative as above, the amount is clearly admissible u/s 37 (1) of the IT Act and the assessing officer is directed to allow the same accordingly.”

36. During the course of hearing, the learned D R submitted that –

(i) the income had arisen in Belgium and the expenses have been claimed in Belgium and the tax thereon had also been paid in Belgium;

(ii) since the PE resides in Belgium, the tax paid by the PE on its income cannot be subject matter of claim of deduction as specifically prohibited u/s 40(a)(ii) of the Act and explanation makes it clear that the tax is global tax of the entity and not just Indian Income-tax as canvassed by the assessee;

(iii) the tax of the FE on 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 FE, 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 should not be covered by sections 30 to36 of the Act;

(e) it should not be capital in nature;

(f) it should not be personal in nature;

(g) it should have been laid out or expended wholly and exclusively for the purpose of business or profession

37.1 After quoting the provisions of S. 40(a)(ii) of the Act, it was contended that –

(i) It may be observed from the above that any rate or tax levied on the profits or gains of any business is not allowable u/s 40(a)(ii) of the Act. The term ‘tax; has also been defined under the Act as per s.2 (43) of the Act as under:

‘Tax’ in relation to the assessment year commencing on the 1st day of April, 1965, and any subsequent assessment year means income-tax chargeable under the provisions of this Act, and in relation to any other assessment year income-tax and super-tax chargeable under the provisions of this Act prior to the aforesaid date.’

S. 37 allows the expenditure incurred wholly and exclusively for the purposes of business. But, s.40(a)(ii) expressly provides that (notwithstanding what is provided for in s.37) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at proportionate or otherwise on the basis of any such profits or gains shall not be deducted. The inescapable conclusion is that but for this express disallowance in s. 40(a)(ii), the expenditure referred to in section 40(a)(ii) was otherwise allowable in s. 37. If it was not allowable in s 37 itself, then there was no need to provide for an express disallowance in s. 40(a)(ii) at all. At this stage, the relevance of the definition of the term ‘tax’ appearing in s. 40(a)(ii) needs to be highlighted. As discussed above, the term ‘tax’ is defined in s. 2 (43) as income-tax payable under the provisions of the Income-tax Act. the legislative message is, therefore, loud and clear that what is disallowed u/s 40(a)(ii) is only the Indian Income-tax. The foreign income-tax stands on a different footing altogether when look at from the point of view of the income-tax.

37.2 In conclusion, it was submitted that –

Under section 37, all taxes and rates are allowable irrespective of the place where they are levied i.e., whether in India or in a foreign country. However, u/s 40(a)(ii) Indian Income-tax which is a tax levied on the profits and gains chargeable under the Act is not deductible. On the other 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 earnings accrued and arose in their countries which were liable to income-tax under its taxing laws. Such foreign tax claimed as a deduction by the assessee was turned down by the AO. This was reversed by the AAC with a reasoning that the ‘payment of foreign income-tax formed part of the expenditure like other usual business expenses incurred in the course of business and as such, the assessee was entitled to claim deduction of the same u/s 37 of the Act for being incurred wholly and exclusively for the purpose of business.’

On a further appeal, the Tribunal had, after due consideration of the provisions of both the sections – 37 which allows a business expenditure and 40(a)(ii) which contained prohibition –as under:

‘40(a) (ii) – any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains’

The Tribunal observed that the term ‘tax’ is defined in relation to the AY commencing on the 1st day of April, 1965 and in subsequent assessment years as meaning tax chargeable under the provisions of the Act and that this amendment was effected by the Finance Act 1965. taking cognizance of it, the Hon’ble Tribunal had held that ‘any sum paid on account of any rate or income tax and super-tax chargeable under the provisions of the Income-tax Act’ is expressly disallowed by this clause (ii) of s. 40(a).

Accordingly, the Hon’ble Tribunal observed with regard to the allow-ability of foreign taxes u/s 37 of the Act as under:

“So we have to see whether such expenditure is allowable under section 37 of the Act. In our view, rates and taxes which are payable irrespective of any profits being earned are admissible allowances under section 37 and section 40(a) (ii) does not apply to them. The tax levied by different countries is not a tax on profits but a necessary condition precedent to the earning of profits. So the AAC was absolutely justified in allowing the appeal of the assessee and we see no reason to differ from the finding.’

Reference application of the Revenue was rejected by the Tribunal which has been ratified by the Hon’ble Bombay High Court in ITA NO.123 OF 1976.

(ii) In the case of Tata Sons Limited [ITA NO.89 OF 1989], the Hon’ble Mumbai Bench of Tribunal had held on a similar issue that:-

“It is an established principle that when a 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 14.1.8 6, 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.72,1 1,557/- 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 Rs.1 .52 crores from Units of Mutual funds which was excluded by the assessee from its total income claimed to be exempt u/s 10 of the Act. Being queried as to why proportionate expenditure attributable to exempted income should not be disallowed in terms of s.14A, the assessee claimed that the investment in the units was made out of its own funds and borrowed fund was infused for the same.

43. Analyzing the provisions of s.14A of the Act and also taking refuge in the ruling of the Hon’ble Supreme Court in the case of Rajasthan State Warehousing Corporation Ltd v. CIT [245 ITR 450 (SC)], the AO had worked out the administrative and other expenses incurred to earn the exempted income of Rs.1 .52 crores at Rs.74,1 1,557/- which was disallowable u/s 1 4A of the Act.

44. On appeal, the learned CIT (A) had, after considering the assessee’s submission, observed thus:

“6. (On page 10) I have gone through the balance sheet of the assessee

company as on 31.3.2001 and also find that this issue had come up in AY 2001- 02 also whereas in earlier assessment the total investment in securities/shares were Rs.1 6215.95 lacs, in the current year the net investment has been reduced to Rs.729.83 lacs. As against this, the assessee has Rs.11474.82 lacs as share capital and other reserves and surplus on which there is no interest liability paid or debited in the profit & loss account. Even otherwise, the major portion of the expenditure of Rs.109.33 lacs relates to financial charges paid by way of lease rental on vehicles which are Rs.108.32 lacs. This expenditure cannot be correlated to the investments in shares and securities from which exempted income has been earned. In view of the above factual position and also the view taken in AY 2001-02 as per ground No.8, para 13,14 and 15, the addition made on this account is not justified, accordingly directed to be deleted. The second part of disallowance relates to the action of the assessing officer in disallowing Rs.48.61 lacs out of the administration and other expenses of Rs.2979.61 lacs. This issue had also come up for AY 2001-02. The total dividend income earned last year was Rs.63.68 lacs and as per para 8 of the order dated 12.10.2004, a sum of Rs.2 lacs was considered as reasonable amount relating to administrative expenses incurred for earning said income for this year also. For reasons recorded therein this 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. 1 4A 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 restricted the disallowance on adhoc basis. In these circumstances, we are of the opinion that section 14A has an overriding effect and applies to all expenditure in relation to exempt income even though such expenditure would have been allowable under other provisions such as 36(1)(iii, sub-section (2) to section 14A, stipulates that the AO shall determine the amount of expenditure incurred by the assessee in relation to such income in accordance with the prescribed method, if having regard to the assessee ’s accounts, he is not satisfied with the correctness of his claim. Sub-sections (2) and (3) of s.14A, though inserted by the Finance Act 2006 w.e.f. 1.4.2007, read with rule 8D, are procedural and clarificatory in nature and consequently are applicable to all the pending matters. Accordingly, the disallowance has to be worked out in the light of provisions of sub-section (2)(3) of section 14A inserted by the Finance Act 2006 read with rule 8D of the I.T. Rules 1962. For this purpose, we set aside the order of ld. CIT (A) and restore the matter to the file of AO for re-computing the disallowance in the light of provisions of sub-section (2) and (3) of section 14A, read with rule 8D of I.T. Rules 1962 ”

49. In conformity with the observations of the earlier Bench (supra), we are of the considered view that the present issue should also be remitted back to the file of the AO for similar exercise. It is ordered accordingly.

(7). Deletion of addition of Rs.2,34,50,000/- being compensation received for rendering human resource support services:

50. On the basis of TPO’s order, the AO had added Rs.234.5 lakhs to the assessee’s income from providing human resources support. On a perusal of the TPO’s order, it has been observed that the issue of Human Resources Management Services has been dealt with in an exhaustive manner and for the reasons recorded therein, the TPO had concluded thus:

“10.3. Considering assessee’s failure to justify the price charged and in the case of Singapore and Malaysia for not charging any compensation at all, it is held that 1 1/2 months’ salary of the person deputed (12.5% of the annual salary) in the overseas subsidiary is the arm’s length compensation for the service rendered of providing suitable software personnel. In this connection, the third party charges paid by the assessee to other recruitment agencies @ 12.5% 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 financial data of 7 companies is submitted, without prejudice to the assessee’s claim that there was no separate Human Resources Function provided to the associated enterprises does not required separate adjudication since the income itself has been deleted as above.”

52. The submission of the learned D R before us is summarized as under:

(i) that the assessee was charging certain amount towards the HRM service in respect of UK and USA, however, though similar services have been provided to Singapore and Indonesia AEs, no charges have been levied;

(ii) that the assessee has been unable to substantiate the level of charge recovered from the AEs in respect of HRM functions/non-levy of charge in some of the AEs;

(iii) that the premise of adjudication by the CIT (A) was wrong as he had never gone to the arm’s length principle. He had only adjudicated on the issue of whether the expenditure incurred/function performed was for the purpose of business or not;

(iv) that the CIT (A) spoke about notional income taxed in the hands of the assessee which was a clear indication that the CIT (A) was not on transfer pricing principles but on business rationale principle. If it is agreed that a service has been performed, then the cost of the service needs to be charged in an arm’s length scenario. The CIT (A) agrees that a service has been performed, but, because the service was in the business interest of the assessee, non-charging of fee has been upheld. In an arm’s length scenario, the assessee was mandated to quantify the cost of such service and charge suitable amount from the AE; and that there was no question of charging notional income to tax. No notional income has been quantified by the TPO;

(v) in view of specific provisions relating to avoidance of tax between related parties, the arm’s length principle will have to be looked into irrespective of the commercial expediency. Existence of an associate is to ensure commercial expediency. However, the Act had chosen to apply certain tax avoidance measures with reference to transaction between such associates and these take precedence over other provisions;

53. On the other hand, the learned AR while supporting the CIT (A)’s stand drew the attention of this Bench of the Tribunal’s findings in an identical issue in the assessee’s own case for the AY 2006-07.

54. The earlier Bench, in the assessee’s own case for 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 strategies and the business model of an Enterprise and if it is found that other benefits are much higher than the small amount of compensation, then naturally applying a common business acumen-ship, no compensation or mark-ups should be asked for. In the present case as well, facts and figures have revealed that following the said business strategy the business growth as a whole was much higher than the impugned compensation amount. This allegation is also to be ruled out that those very employees were otherwise regular employees of the assessee company and they have been absorbed after their return for the period for which they were sent abroad and worked ‘offshore’ with AEs. It is true that such employees are the regular group of experts but they have been paid by AEs when worked on-site abroad which means the burden of salary for the ‘offshore’ period was in fact borne by AEs, otherwise to maintain bunch of trained employees the MIL had to incur the expenditure on salary. Therefore, there was an argument of counter claims and in support reliance was placed on Boston Scientific International VV (210-TII-16-ITAT-MUM-TP). For these reasons we also hold that the secondee-provider is not akin to recruitment¬service-provider or that ‘secondment’ is different from ‘recruitment’. Finally, we hold that there was no legal basis for the impugned upward adjustment and the same is hereby directed to be deleted.”

55. In conformity with the findings of the earlier Bench supra, we are of the considered view that the assessee was entitled to the said claim and, according, decided the issue in favour of the assessee. It is ordered accordingly.

III. ITA No.2274/A/06 – A Y 2003-04 – By the assessee:

(1.) Disallowance of deduction u/s 80HHE on miscellaneous income of Rs.34,73,924/-:

56. It was the stand of the AO that the assessee had not excluded certain ‘other income’ from profit of the business for the purpose of deduction u/s 80HHE of the Act. For the detailed discussion recorded in his impugned order that the ‘other income’ included in profit of the business as per books were not profit derived from export business and have to be excluded from the profit of the business.

57. On appeal, the learned CIT (A) had observed that:

“3.5. (On page 5) As regards 80HHE deduction, the AO vide para 5.4. had excluded 90% of misc. income of Rs.42,26,000/- under the head ‘other income. 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, Pune and

Mahape. Moreover, miscellaneous income of non 10A units of Rs.6,97,125/- was reduced from the profits of business for the purpose of calculating deduction u/s 80HHE. Thus, it was claimed, the assessee had excluded entire miscellaneous income from profits of business for the purpose of calculation of deduction u/s 10A and 80HHE of the Act. Since 90% of profits of 10A units include the adjust of misc. income the said misc. income should not again be deducted from the profits of business for the purpose of computing deduction u/s 80HHE. It was, further, submitted that the AO had excluded 90% of entire other income of Rs.1.95 crores considering the same as not eligible for the deduction u/s 80HHE. Further, the AO had already reduced from the profits of the business exchange gain of Rs.1 .01 crores and Rs.31 .93 lakhs pertaining to units DF VI & VII and Pune STP respectively aggregating to Rs.1 .33 crores for the purpose of calculation of deduction u/s 10A. It was, further, submitted that the AO had also excluded profits on sale of fixed assets of Rs.59851/- in respect of Pune STP for calculating deduction u/s 1 0A of the Act. It was, therefore, pleaded that the assessee had already deducted the said amount from the profits of Pune STP, the said disallowance of Rs.59,851/- amounts to double disallowance. Taking cue from the provisions of s.10A(1), it was pleaded that s.10A refers to the profit and gains from an undertaking and does not refer to the profit and gains from an eligible activity. As such, the other income is also eligible for exemption u/s 10A. In conclusion, it was submitted that all the above other incomes were intimately connected with the business of the undertaking and as such were eligible for exemption/deduction u/s 10A/HHE of the Act and that only net income is to be excluded u/s 80HHE of the Act. Reliance was placed on the ruling of the Hon’ble Supreme Court reported in 247 CTR 372 (SC).

59. We have duly considered the submission of the learned A.R. We have also perused the reasoning of the AO as well as the CIT (A). With due respects, we have gone through the observations of the Hon’ble Apex Court cited supra. Taking into account the contentions of the AO and the judicial view on a similar issue, the matter is remitted back to the file of the AO with a specific direction to recalculate the workings in the light of the observations of the 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 1 0A 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 also to the file of the AO for similar exercise. It is ordered accordingly.

(3) Deletion of disallowance of exemption u/s 10A for STIP Unit, Pune on profit of sale of assets of Rs.59,851/-:

63. At the outset, the learned AR drew the attention of this Bench to the fact that the CIT (A) had in fact found that the assessee had not even claimed such exemption and, accordingly, submitted that the AO had made a factual error which had resulted in double disallowance.

64. We have carefully verified the findings of the CIT (A) wherein he had observed that “3.3. (On Page 5) .A perusal of the computation of total income reveals that the appellant had excluded a sum of Rs.85017/- being profit on sale of fixed assets which included the above sum of Rs.59,851/- and the corresponding sale figures have been adjusted in the block of assets for depreciation purpose. As such the exclusion of the above sum while computing deduction u/s 10A for STP Pune unit is unwarranted and is hence directed to be eliminated.” This fact has been affirmed by the learned AR with proof of Unit-wise details [source: Pages 186 -188 of PB].

65. In view of the above facts, the AO shall look into the issue afresh after affording a reasonable opportunity to the assessee which would facilitate it to produce the relevant workings for verification.

This issue is, accordingly, remitted back to the file of the AO for verification and to take corrective step, if so warrants.

(4) To exclude misc. income of Rs.4,72,563/- from business for calculating exemption u/s 10A in respect of Unit 107:

66. The grievance of the Revenue was that the CIT (A) had erred in directing the AO to exclude misc. expense of Rs.4.72 lakhs from the business profit for calculating exemption u/s 10A in respect of unit 107.

67. We have duly considered the findings of the CIT (A) wherein he had recorded as under:

“3.4. (On page 5) With regard to inclusion of misc. income of Rs.42,25,781/- from the business profits for calculating deduction u/s 10A/80HHE, the AO vide para 4.5 of his order excluded misc. income of Rs.30,01,3621/- in computing the profit of the business eligible for exemption u/s 10A in respect of new units (SDF VI & VII). This adjustment, it is since verified was effect by the appellant also in the computation of deduction u/s 10A in respect of the said units. As such, the AO has not disallowed anything 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 any reason to deviate from the findings of my predecessors on this issue and the conditions for claim u/s 10A being satisfied for this year ”

69. On his part, the learned A R submitted that the Revenue had raised this issue on a wrong notion and in fact no relief has been granted to the assessee by the learned CIT (A), but, in fact, decided the issue against the assessee.

70. We have duly considered the rival submissions and also perused the findings of the CIT (A) and observed any infirmity in his observations. Accordingly, this ground of the Revenue is dismissed.

(5). Lease rental income from the building as income from ‘house property’ and allow depreciation claim thereby entertaining a new ground without affording an opportunity to the AO:

71. At the outset, we would like to reproduce the relevant observations of the CIT (A) for appreciation of facts:

“4.1. (On page 7) It is admitted that the part of the building owned by the appellant was leased out on rent to a group concern. The above transaction was by way of Permissible User Agreement. Since the building was only leased out, the ownership remained with the appellant. The appellant was entitled to a monthly rent of Rs.43 per sq. feet. In connection with the leased out building subject to TDS – what the appellant derived from the above activity of letting off the building was in the nature of income from house property and not any lease charges arising out of any regular business activity. The objects as per memorandum of understanding will be of no assistance as it does not cover the transaction like this in its real spirit. What is to be assessed as income under a specific head cannot be computed under business head in the absence of specific facts. The decisions relied on by the appellant as to depreciation on leased assets are all rendered in the context of leased out machineries and not house property let out for rent. Accordingly, the appellant cannot claim depreciation as against income assessable under the house property. However, it is to be noted that the AO although disallowed the depreciation did not compute the rental income under the head ‘house property’. To this extent, the action of the AO in disallowing depreciation but treating the income as part of business is anomalous. On the facts obtaining in this case, the income by way of monthly rent on licence agreement (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% profit of Unit 107, new units (SDF-VI & VII) and Pune STP Unit were eligible for computation of deduction u/s 80HHE:

74. After due consideration of the issue, the learned CIT (A) has observed as under:

“5.1. (On page 8) .It is clear from the order that the AO has excluded entire profits of 3 units eligible for deduction u/s 10A even though he had allowed only 90% of the respective profits as claimed u/s 10A as per law. Thus, 10% of the profits of the units eligible for deduction u/s 10A were not included inn the profit of the business for calculating deduction u/s 80HHE. Section 80HHE(5) prohibits double deduction in respect of profits which were allowed as deduction u/s. 80HHE(5). It does not prohibit deduction under this section in respect of profits which were not allowed as exemption/deduction under any other provisions of the Act. In the case of the appellant in respect of units eligible for deduction u/s 10A, the quantum was restricted to 90% by virtue of 3rd proviso to section 10A(1). Thus, for the balance 10% of the profits which formed part of the profit of the business of the appellant, no other deduction is claimed except u/s 80HHE. The exemption u/s 10A as well as u/s 80HEE are in respect of export of computer software subject to specified conditions in the respective sections. The appellant has claimed exemption u/s 10A in respect of eligible units and for the balance income in respect of which the exemption u/s 10A is not available and which formed part of the export business activity of the appellant the deduction was claimed u/s 80HHE. The AO has not addressed this issue in his order. The contentions of the appellant in this regard are tenable and acceptable. Accordingly, the appellant is entitled for deduction u/s 80HHE in respect of balance 10% of the profits calculated with reference to the eligible units. Vide ground No.1, the deduction u/s 10A was held to be allowable for Unit 107. On this, the AO had allowed only deduction u/s 80HHE. Now as the profits of Unit 107 is held as eligible for exemption u/s 10A, the balance 10% profits in respect of Unit 107, new units (SDF VI & VII) and Pune Unit are eligible for computation of deduction u/s 80HHE and the AO is directed to recomputed the same in the light of the above directions.

5.2. However, as regards the export turnover and total turnover for computing the deduction u/s 80HHE, 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 deduction u/s 80HHE Act has to be re-worked. We find there is no any infirmity in his concurrence which attracts our intervention. We therefore decline to entertain the Revenue’s request. This issue is decided against the Revenue.

(7) Deletion of Rs.5.05,80,750/- relating to Human Resource Management function:

79. A similar issue had cropped up in the assessee’s own case for the assessment year 2006-07 and the earlier Bench for the elaborate reasons recorded therein [ITA No.3120/07 dated 29.2.201 2] the issue has been decided in favour of the assessee. In conformity with the above findings, we decide the issue in favour of the assessee.

(8) Deletion of disallowance of Rs.9,77,598/- being interest expenses on advances to the employees:

80. Basically, the issue relates to interest on advances paid to the employees of Rs.52,86,105/-. The AO made an adjustment of Rs.9.78 lakhs on the basis of TPO’s subsequent order holding that the AE could bear the interest for the period the advances was given to the seconded employees till the date of remittance back to the appellant. Before the CIT (A), it was contended that as per the regular practice the assessee gave advances to enable the employees to meet the requirements of lodging, boarding, food etc., during the first few days in AE country. It was contended that the said advances was recovered in installments from the salaries and remitted back to the assessee at regular intervals. As this was the only practice and the employees continued to remain on the pay roll of the assessee and there was no requirement for charging interest on AEs as they did not levy any agency charges for the recovery and remittance back to the assessee.

81. Considering the assessee’s contention, the CIT (A) had observed that the fact that the amount was advanced to the employees who ultimately return back on completion of onsite work was not in dispute. It was also on record that the said amount was recovered from the salaries and sent back at regular intervals. There was no material on record that the fund of the assessee was enjoyed by the AEs and that the expenditure was wholly in connection with the movement of the employees for onsite job and not to meet any cost of AEs as the said sum was ultimately recoverable in the subsequent salary. Thus, the contention of the assessee that the said adjustment was purely notional especially when 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 furnished. According to the TPO no details from the assessee were forthcoming. However, the assessee had reasoned that –

“The advances in the instant case are recovered by the AEs from the employees in installments. It is pertinent to note that the bank charges are borne by the AEs. Mastek raises the debit notes in relation to the settling advances on a month-to-month basis for employees seconded during that month. Accordingly, all the amounts are recovered from the AEs and ultimately no amount remains un-recovered.

In view of the above, it is critical to note that the said advances are ‘advances to employees’ of Mastek and, hence, the question of charging interest to AEs does not arise.” [source: page 108 of PB]

86. Considering the assessee’s contentions and that no details as called for were forth coming, the TPO had recorded his findings thus:

“13 Since the assessee has failed to provide details as called for and it has been established that the persons seconded were being sent for the benefit of AEs, the advances given to such seconded persons carried an interest cost which should have been recovered from the AEs. Since the assessee has chosen not to provide these details, I am estimating that an advance equivalent to three months salary would have been given to the employees which would have been recovered by the AEs and sent to the assessee. This amount would have remained outstanding for an average period of three months. Hence, an upward adjustment as follows, on account of interest cost not recovered from the AEs for settling advance given to the AEs is to be made.” [Refer: p 108 of PB]

87. Accordingly, the TPO had worked out the upward adjustment of Rs.52,86,1 05/- on account of interest cost not recovered from the AEs for settling advance given to the AEs. However, this figure has been scaled down to Rs.9,77,598/- through his order u/s 92CA(5) r.w.s.1 54 of the Act [Refer: P 110 of PB].

88. After taking into account the reasoning of the learned TPO, reversal effected by the learned CIT (A) and also keeping in view the arguments put-forth by the learned AR during the course of hearing, we are of the considered view that the reasoning of the TPO was quite reasonable and balanced one too. Accordingly, the addition made by the AO is sustained and the 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, depreciation is claimable by an owner of the asset and who uses the asset in question for business purpose. Both the conditions, ownership and use, have to be satisfied for claim of depreciation. The totality of the phrase “ownership and ‘use’ as occurring in the section will have to be considered. The essential ingredients of a claim for depreciation and for other allowances have to be satisfied. These deductions cannot be claimed by someone without any real connection with the asset. The section would not grant depreciation allowance to a person merely for the reason that he owns it. The use of the asset in the income-generating enterprise is equally essential.

6.3. In view of the above facts, assessee’s claim of depreciation of Rs.41,41,761/- in respect of leased building is not acceptable and tenable in law. Therefore, such depreciation allowance as claimed by the assessee is hereby disallowed….”

91. On appeal, the CIT (A) had recorded his findings as under:

“5.3. (On page 3) The facts for the current year being identical and rental income at Rs.186.51 lakhs being subject to 194(1), I do not find any reason to deviate from the findings for he preceding assessment year and, accordingly, I direct the AO to treat the income under the head house property and allow deduction u/s 24 as permissible. However, disallowance of depreciation effected at Rs.41.41 lakhs made by the AO is sustained…..”

92. Before us, it was submitted by the learned A R that the assessee had not let out its entire premises, but, considering the area of premises let-out – 34000 sft out of total of 102000 sft. – it was quite clear that the basic intention of the assessee was not to earn rent income by way of letting out the property; that the activity of letting out was merely incidental to the regular business of the assessee. It was, further, claimed that the assessee has been carrying on its regular business activities from the said premises. Taking shelter under the provisions of s. 22 of the Act, it was contended that the rent income was received as a result of exploitation of commercial asset, and, accordingly the source of rent income was use of commercial asset.

93. Placing strong reliance on the ratio laid down by the Hon’ble Supreme Court in the case of Universal Plast Ltd v. CIT [(1999) 237 ITR 454 (SC)], it was contended that the assessee had not let out the premises for a permanent 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 the premise that the Hon’ble three-Judge Bench of Court after, taking cognizance of its various decisions, ruled that ‘if only a few of the business assets are let out temporarily while the assessee is carrying out his other business activities, then it is a case of exploiting the business assets otherwise than employing them for his own use for making profit for that business.” With highest regards and respects to the ruling of the Hon’ble Court (supra), we would like to reiterate that the assessee’s case is entirely stand on a different footing, namely:

(i) the assessee has let out its sizeable portion of its premises to none other than to its group concern, namely, Mastek DC not on a temporary basis as claimed by the assessee;

Without prejudice, we would like to highlight that as long as the assessee does its business in the said premises, the so called tenant – Mastek DC – also carries on its business in its rented premises;

(ii) the observations of the Hon’ble Court (supra) was that ‘if only a few of the business are let out temporarily while the assessee is carrying out his other business activities, then

it is a case of exploiting the business assets .’

97. At this juncture, we tend to analyze the exact meaning of ‘temporary’. According to Cambridge Advanced Learner’s Dictionary [Third Edition], ‘temporary’ means ‘not lasting or needed for very long; and ‘temporarily’ (adverb) – literally means: for the time being, for the moment, provisionally, for the short term, in the short term, for the interim and so on and so forth.

98. Further, we would like to recall the assessee’s submission for the previous year relevant to the assessment year 2003-04 wherein the assessee had raised the same bogey (of temporarily rented out the premises) wanted to get away with it.

99. In view of the above facts and circumstances of the issue as deliberated upon (supra) and since the assessee had not let-out a portion of its premises temporarily as advocated, we are of the firm view that the ratio laid down by the Hon’ble Supreme Court, strongly relied on by the assessee, cannot come to its rescue. Accordingly, we are of the firm that the learned AO as well as the learned CIT (A) were within their realms to reject the asssesee’s claim. It is ordered accordingly.

(2) Disallowance of traveling expenses of Rs.1,67,98,984/- in relation to seconded employees:

100. 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 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 assessee’s own case 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 also to the file of the AO for similar exercise. It is ordered accordingly.

(3) Disallowance of Rs.1 .4 lakhs out of interest expenses related to exempted income u/s 14A:

AND

(4) Restricting of disallowance of Rs.229.07 lakhs being administrative exp. Related to exempted dividend income to Rs.2 lakhs u/s 14A:

105. Incidentally, a similar issue has been dealt with the Revenue’s appeal for the AY 2002-03 (under Ground No.6) supra. The findings recorded therein hold good for this AY also. It is ordered accordingly.

(5) Treating the rental income of Rs.186.51 lakhs under the income of ‘house property’ and allowing deduction u/s 24:

106. A similar issue had cropped up for the AY 2003-04 (Ground No;5 – Revenue’s appeal) wherein, we have confirmed the findings of the CIT (A) that the income from property shall be assessed under head ‘house property’ + permissible deduction u/s 24 of the Act, but, no depreciation will be allowed. This view has been enforced by this Bench while disposing of the assessee’s ground for this AY (supra), making it absolutely clear that the assessee shall not be entitled to depreciation on let-out building. The same yard stick applies hereto. Thus, this issue goes against the Revenue.

(6) Adjustment of Rs.5.9 crores made on human resources management services:

107. In consonance with the finding of the earlier Bench in the assessee’s own case for the AY 2006-07 cited supra, this issue goes in favour of the assessee.

(7) Deletion in addition of Rs.7.55 lakhs made on account of TPO adjust towards non-charging of interest on advances to employees:

108. Incidentally, a similar issue has been decided against the assessee in Revenue’s appeal for the AY 2003-04 [ground No.8] supra. In consonance with the above findings, the Revenue’s ground is allowed.

(8) Deletion of addition of Rs.51.79 lakhs made on account of TPO adjustment towards interest on excess credit period granted to AE:

109. By the by, an identical issue to that of the present one had cropped up for adjudication before the earlier Bench for the assessment year 2006-07 in the assessee’s own case. For the elaborate findings recorded therein, the issue has been decided in favour of the assessee. In conformity with the findings of the earlier Bench (supra), the issue is decided against the Revenue. Thus, this ground of the Revenue is dismissed.

110. In the result:

(i) The assessee’s appeals for the assessment years 2002-03 and 2004-05 are dismissed and the appeal for the AY 2003-04 is partly allowed; and

(ii) The Revenue’s appeals for the assessment years, 2002-03, 2003-04 and 2004-05 are partly allowed.

Order pronounced in the open Court on 11-05-2012