Case Law Details
Barclays Shared Services Private Limited Vs ACIT (ITAT Pune)
Conclusion: Amount of income which qualifies for deduction is the profits of the business of the undertaking and not any income earned by assessee de hors the business of the undertaking. If the relevant items of income are held to be falling under the head `Income from other sources’, the same will not qualify for deduction under sectio 10A, 10AA.
Held: Assessee was engaged in the business of providing IT Enabled services. It filed its return declaring total income at Nil under regular provisions and at Rs.45,85,14,327/-u/s.115JB. In the computation of income under the regular provisions, assessee claimed deduction u/ss. 10A and 10AA. AO, during the course of assessment proceedings, observed that assessee claimed deduction, inter alia, on five items totalling Rs.1,20,86,914/- which were clubbed under the main head of ‘Other income’, viz., (1) Interest on Short Term Fixed Deposits – Rs.99,02,569/-; (2) Recovery/Reimbursement of expenses from group companies – Rs.20,23,083-; (3) Gain on sale of Fixed Assets – Rs.1,000/-; (4) Sale of Scrap – Rs.1,31,005/-; and (5) Other income – Rs.29,257/-. On being called upon to explain as to how assessee was eligible for deduction u/ss.10A and 10AA on the interest income, assessee submitted that it placed its unutilized funds in short term fixed deposits with banks in order to effectively manage the working capital requirements of its business. It was held that an item of income, in order to be covered under the qualifying amount, must have some nexus with the business of the undertaking, which need not necessarily be derived from it. What we need to appreciate is that the amount of income which qualifies for deduction is the profits of the business of the undertaking and not any income earned by the assessee de hors the business of the undertaking. Assessee accepted that if the relevant items of income were held to be falling under the head `Income from other sources’, the same will not qualify for deduction. Thus, the nature of income ad seriatim was to be determined so as to find out the head of income under which they fall and their consequential treatment as qualifying income. Interest on fixed deposits amounting to Rs.99.02 lakh would not be included in the qualifying amount for the purposes of granting deduction u/ss.10A/10A. Once the amount had been included in the expenses which had gone to reduce the ‘profits of the business of the undertaking’, its re-imbursement as a sequitur, would obviously be a part of the qualifying amount for the purposes of deduction under the sections. Therefore, deduction was granted on such recovery/reimbursement of expenses from group companies. Where the assessee did not include the amount in the qualifying amount, there could be no question of reducing it. It was not disputed that the scrap emanated from the normal working items of the assessee company, whose costs were debited to the Profit and loss account. On sale of such scrap, against which the expenses were booked in the computation of the qualifying amount, the receipt would form part of the qualifying amount. Assessee did not explain the nature of this income before the authorities below as to how it was in relation to the ‘profits of the business of undertaking’. Same position continues before the Tribunal as well. In view of the fact that even the nature of income was not known to the assessee, it could not form part of the ‘profits of the business of undertaking’.
FULL TEXT OF THE ORDER OF ITAT PUNE
This appeal by the assessee is directed against the order dated 17-11-2017 passed by the CIT(A)-5, Chennai in relation to the assessment year 2010-11.
2. The first major issue raised in this appeal is against restricting deductions u/ss. 10A and 10AA of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) on several counts.
3. Briefly stated, the facts of the case are that the assessee is engaged in the business of providing Information Technology Enabled services. It filed its return declaring total income at Nil under regular provisions and at Rs.45,85,14,327/-u/s.115JB of the Act. In the computation of income under the regular provisions, the assessee claimed deduction u/ss. 10A and 10AA of the Act. The Assessing Officer (AO), during the course of assessment proceedings, observed that the assessee claimed deduction, inter alia, on five items totalling Rs.1,20,86,914/- which were clubbed under the main head of ‘Other income’, viz., (1) Interest on Short Term Fixed Deposits – Rs.99,02,569/-; (2) Recovery/Reimbursement of expenses from group companies – Rs.20,23,083-; (3) Gain on sale of Fixed Assets – Rs.1,000/-; (4) Sale of Scrap – Rs.1,31,005/-; and (5) Other income – Rs.29,257/-. On being called upon to explain as to how the assessee was eligible for deduction u/ss.10A and 10AA on the interest income, the assessee submitted that it placed its unutilized funds in short term fixed deposits with banks in order to effectively manage the working capital requirements of its business. Relying on the judgment of Hon’ble jurisdictional High Court in CIT Vs. Menon Impex (P) Ltd. (2003) 259 ITR 403 (Mad), the AO held that the assessee was not eligible for deduction on interest income. Similar view was canvassed on all the remaining items. No reprieve was allowed in the first appeal. That is how the assessee is before the Tribunal.
4. We have heard the rival submissions through Virtual Court and gone through the relevant material on record. It is seen that the AO did not dispute the otherwise eligibility of the assessee to deductions u/ss.10A and 10AA of the Act. The limited point under consideration instantly is non-granting of deduction on the above mentioned five items of income. In order to appreciate as to whether these income items qualify for such deductions, we need to look into the relevant provisions. Firstly, we take up section 10A of the Act, which is a special provision in respect of newly established undertakings in free trade zone etc. Material part of subsection (1) of section 10A states that: `Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software …. shall be allowed from the total income of the assessee’. Thus, deduction has been provided on such profits and gains as are derived by an undertaking from the export of articles or things or computer software etc. Sub-section (4) of section 10A elucidates the meaning of the term ‘profits derived from export of articles or things or computer software’ as used in sub-section (1). The later sub-section states that: `For the purposes of sub-sections (1) and (1A), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking.’ The narrowed expression ‘derived from’ as used in sub-section (1) needs to be understood in the hue of sub-section (4) which talks of ‘profits of the business of the undertaking’. On a reading of sub-section (4) in juxtaposition to sub-section (1) of section 10A, it becomes palpable that the deduction has been provided on proportionate basis on the ‘profits of the business of the undertaking’. In order to be covered within the qualifying amount, it is essential that such amount must answer to the description of ‘profits of the business of the undertaking’. The provisions of section 10AA, insofar as the present issue is concerned, are almost similar inasmuch as the expression: ‘profits and gains derived from the export of such articles or things..’ as used in sub-section (1) of section 10AA has been explained under sub-section (7) to be: `the amount which bears to the profits of the business of the undertaking, being the Unit, the same proportion as the export turnover in respect of such articles or things or services bears to the total turnover of the business carried on by the undertaking’. Thus, it can be seen that section 10AA is almost similar to section 10A insofar as this aspect is concerned.
5. On an overview of the above provisions, it becomes crystal clear that an item of income, in order to be covered under the qualifying amount, must have some nexus with the business of the undertaking, which need not necessarily be derived from it. What we need to appreciate is that the amount of income which qualifies for deduction is the profits of the business of the undertaking and not any income earned by the assessee de hors the business of the undertaking. The ld. AR fairly accepted if the relevant items of income are held to be falling under the head `Income from other sources’, the same will not qualify for deduction. We, ergo, proceed to determine the nature of income ad seriatim so as to find out the head of income under which they fall and their consequential treatment as qualifying income.
1. Interest on short term fixed deposits:
6. The assessee submitted before the AO that it `placed its unutilized funds in short term fixed deposits with banks in order to effectively manage the working capital requirements of its business’. On a specific query, the ld. AR stated, as is also borne out from the reply submitted before the authorities below, that the fixed deposits were not meant to be furnished as primary or collateral securities for obtaining credit facilities from the bank. The contention of the assessee raised before the AO that the surplus funds were invested in fixed deposits, in order to effectively manage the working capital requirements of its business, would have merited acceptance, if such fixed deposits had been utilized in any manner in assisting the working capital requirements. However, the position is clearly converse before us. If the assessee, instead of making fixed deposits with banks had deposited the amount in the cash credit or overdraft or any other such account maintained with the banks, that would have been a case of effectively managing working capital requirements of the business. Here, we are confronted with a situation in which the assessee has rather chosen to earn interest income on the amount of fixed deposits, even for a short duration during which the funds were unutilized. Under such circumstances, we fail to appreciate as to how such interest income can be classified as ‘profits of the business of the undertaking’. The same, being alien to the business of the undertaking do not partake the character of ‘profits of the business of the undertaking’. In that view of the matter, such interest income cannot be included in the qualifying amount for the purposes of deduction u/ss.10A/10AA of the Act.
7. The AO has relied on the judgment in Menon Impex (P) Ltd.(supra) which is a jurisdictional high Court judgment of the assessee in which claim u/s.10A has been denied in respect of the interest income earned from banks. The counter judgment relied on by the ld. AR is that of the Hon’ble Karnataka High Court in CIT Vs. Hewlett Packard Global Soft Ltd. (2017) 87 taxmann.com 182 (Kar) (FB) in which interest from bank deposits has been made eligible for exemption u/s.10A or 10B. We need to go with and follow the Menon judgment for two reasons. First is that the same is of the Hon’ble jurisdictional High Court, which is binding on the assessee and secondly, we are concerned with section 10A/10AA which are in the nature of deduction provisions, whereas the Hewlett Packard dealt with sections 10A/10B, the then exemption provisions. The ld. DR has also relied on the judgment of Hon’ble Uttarakhand High Court in Conventional Fastener & Ors. Vs. CIT (2018) 301 CTR 625 (Uttarakhand) in which it has been held that no deduction u/s.80IC can be allowed in respect of interest income earned from fixed deposits. In view of the foregoing discussion, we are fully satisfied that the authorities below were justified in not including the interest on fixed deposits amounting to Rs.99.02 lakh in the qualifying amount for the purposes of granting deduction u/ss.10A/10A of the Act. The assessee fails on this score.
2. Recovery/reimbursement of expenses from group companies.
8. The next item in dispute is recovery/reimbursement of expenses from group companies. The AO has not separately discussed this item in the assessment order. In the Statement of facts before the ld. CIT(A), the assessee submitted the nature of such amount by explaining that it was incurred by the assessee on behalf of its group companies and subsequently recovered and shown as credit in the Profit and loss account. That is how that the assessee claimed such an amount to be eligible for deductions. The ld. CIT(A) did not concur with the assessee.
9. Having heard both the sides and gone through the relevant material on record, it is observed that the assessee incurred certain expenses on behalf of its group companies which were included in its total expenses. Thereafter, a sum of Rs.20.23 lakh was recovered from group companies as reimbursement, which was shown to the credit of the Profit and loss account. Once the amount has been included in the expenses which has gone to reduce the ‘profits of the business of the undertaking’, its re-imbursement as a sequitur, would obviously be a part of the qualifying amount for the purposes of deduction under the sections. We, therefore, overturn the impugned order on this score and order to grant deduction on such recovery/reimbursement of expenses from group companies. The assessee succeeds here.
3. Gain on sale of fixed assets
10. The next item in dispute is gain on sale of fixed assets. The ld. AR submitted that the assessee never claimed any deduction in respect of this item and the AO was not justified in excluding it. The ld. DR could not controvert the position stated on behalf of the assessee as was also stated before the ld. CIT(A) in the statement of facts. In view of this factual scenario, where the assessee did not include the amount in the qualifying amount, there can be no question of reducing it. We, order accordingly. The assessee succeeds on this count.
4. Sale of scrap.
11. The next item is sale of scrap amounting to Rs.1,31,005/-. Again, the AO did not discuss this item in the assessment order. The assessee, in the statement of facts before the ld. CIT(A), reiterated its position.
12. Having gone through the relevant facts and circumstances, it is not disputed that the scrap emanated from the normal working items of the assessee company, whose costs were debited to the Profit and loss account. On sale of such scrap, against which the expenses were booked in the computation of the qualifying amount, the receipt would form part of the qualifying amount. We order accordingly. The assessee succeeds.
5. Other income
13. The last item is a question is `Other income’ of 29,257/-. The assessee did not explain the nature of this income before the authorities below as to how it was in relation to the ‘profits of the business of undertaking’. Same position continues before the Tribunal as well. In view of the fact that even the nature of income is not known to the assessee, we fail to comprehend as to how it can form part of the ‘profits of the business of undertaking’. The assessee fails on this score.
14. The next ground on the computation of the qualifying amount for the grant of deductions u/s 10A/10AA is disallowance of provision for leave encashment. The AO observed that the assessee made provision for leave encashment in section 10A unit at Rs.63.81 lakh and 10AA unit at Rs.7.43 lakh. The same was added back while computing eligible amount. However, while consolidating the accounts, the assessee added Rs.88.40 lakh towards provision for leave encashment as against Rs.71.24 lakh. Hence, provision was found by the AO to be more to the extent of Rs.17.15 lakh. The AO reduced such amount of Rs.17,15,686/- from the qualifying amount towards deductions u/ss.10A/10AA of the Act. The ld. CIT(A) echoed the assessment order on this issue.
15. The case of the AO is that the assessee added back provision for leave encashment amounting to Rs.88.40 lakh but did not reduce Rs.17.15 lakh. We have examined the computation of income, whose copy has been placed at pages 19 and 20 of the paper book. It can be seen from such computation that the assessee, in fact, added back Rs.88,40,364/- with the narration “Provision for Leave Encashment outstanding as on March 31, 2010” and thereafter reduced the amount of Rs.17,15,686/- with the narration “Payment of Leave Encashment against the pending provision as on April 1, 2010”. It appears that the AO did not examine the computation of income in totality and reduced the claim by Rs.17.15 lakh which had already been reduced suo motu by the assessee in the computation of total income. It is with such adjusted profit that the assessee went on to claim deduction u/ss.10A/10AA. This ground is, therefore, allowed.
16. The next issue concerning with the deductions u/ss.10A/10AA is that the AO erred in making adjustment by excluding Rs.17,86,89,000/- incurred towards foreign travel expenses and Rs.6,35,17,000/- incurred towards communication/connectivity charges from export turnover. During the course of assessment proceedings, the assessee was asked to submit details of amount incurred towards telecommunication charges and expenses incurred in foreign exchange in providing services outside India. On perusal of such details, the AO observed that the assessee had not reduced these amounts from the export turnover. He, ergo, reduced these two items from the `Export turnover’ without giving consequential effect to the `Total turnover’ while working out the amount of deduction u/ss.10A/10AA. No succour was provided by the ld. CIT(A).
17. After considering the rival submissions and perusing the relevant material on record, it is observed that the assessee, initially did not reduce the amount of the above referred two expenses from total turnover and also export turnover. The AO, however, computed the amount of deduction u/ss.10A/10AA by reducing these two amounts from the amount of `Export turnover’ only. The CBDT in its circular No.04/2018, copy placed at page 240 of the paper book, has provided that while computing deduction u/s.10A, the amount of freight, telecommunication charges and insurance expenses should be excluded from both the `Export turnover” and `Total turnover’. The Hon’ble Punjab & Haryana High Court in CIT Vs. Mercer Consulting (India) Pvt. Ltd. (2017) 390 ITR 615 (P&H) has also held that telecommunication charges should be excluded from both the `Export turnover’ and also the `Total turnover’ in the formula while computing deduction u/ss.10A/10AA. In view of the foregoing, it is evident that the amount of expenses incurred by the assessee in foreign exchange should be reduced from both the `Export turnover’ as well as `Total turnover’ while computing deduction u/ss.10A/10AA. As the AO reduced such amounts only from the `Export turnover’ and not the `total turnover’, we direct to exclude these amounts from `Total turnover’ as well while computing the deductions.
18. In view of the foregoing discussion, we set-aside the impugned order on the question of deductions u/s 10A/10AA of the Act and restore the matter to the file of AO with a direction to compute the same in accordance with our above observations.
19. The next independent ground No.2 is against the disallowance of `Provision for performance bonus’ amounting to Rs.5,60,27,567/- and `Provision for expenses’ amounting to Rs.21,36,44,810/- while computing book profits u/s.115JB of the Act on the ground that such expenses are ‘unascertained liabilities’.
20. The factual scenario of these two amounts is that the assessee did not add back `Provision for expenses’ at Rs.23.77 crore and `Provision for performance bonus’ at Rs.5.60 crore while computing book profit u/s.115JB. On being called upon to explain as to why such amounts were not added back, the assessee submitted that these provisions were in respect of crystallized liability of bonus and the expenses incurred for which bills etc. were to be received and hence, were ‘ascertained liability’. The AO added back these two amounts by holding that the assessee did not furnish as to how these provisions were computed with reasonably certainty. The ld. CIT(A) accorded his imprimatur to the view point of the AO.
21. We have heard the rival submissions and gone through the relevant material on record. Section 115JB is a special provision for payment of tax by certain companies. Under this section, `book profit’ is computed which is then taken into consideration for working out the amount of tax to be paid. Explanation to section 115JB defines the expression “book profit” to mean the profits as shown in the Profit and loss account as increased by certain items and thereafter as reduced by certain items. One of the items which have been mentioned for increase is clause (c), namely, `the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities’. Thus, it is evident that while computing amount of `book profit’, any amount transferred to provision account, which is not an ascertained liability, is liable to be added back to the amount of profit as shown in the Profit and loss account. If on the other hand, the provision has been made in respect of ascertained liability, the same would not be added back.
22. Adverting to the facts of the instant case, it is seen that the first item is `Provision for expenses’ made by the assessee during the year at Rs.21,36,44,810/-. Though the AO mentioned that the assessee did not furnish as to how these provisions were computed while making disallowance in para 4 of his order, however, while considering incorrect claim of depreciation in para 6 of his order, observed that “the assessee company also quoted the following judicial decisions with supporting evidences like list of persons to whom the performance bonus was provided, ledger copies of provision for expenses, showing various heads of expenditure and the corresponding provisions made”. There is an apparent contradiction in the recording made by the AO. We have gone through the relevant parts of the assessee’s tax audit report for the year under consideration, as per which the assessee made provision for bonus. Except for a sum of Rs.6.36 lakh, the assessee paid the entire amount of bonus in the succeeding year. Thus, it is overt that the provision for bonus is an ascertained liability which was largely discharged in the immediately succeeding year.
23. The next is the item of `Provision for expenses’. Details of such provision have been placed at page 64 of the paper book. Such provision includes salary, employee incentive, staff cost, car hire charges, staff training expenses, staff welfare expenses, repairs, maintenance, electricity, travelling, bank charges and insurance etc. On the later pages, the assessee has placed copious details of such expenses. All these expenses are in the nature of regular business expenses incurred by the assessee during the year for which bills were not received by the year end, leading to creation of a provision. Since such provision is in respect of ‘ascertained liability, the same cannot be added back while computing book profit u/s.115JB of the Act. We, therefore, order to treat both the amounts in question as provisions for ascertained liability and not to make any addition to the book profit in this regard. This ground is allowed.
24. Ground no.4 is against allowing of depreciation on computers/computer peripherals at 15% instead of 60% claimed by the assessee. The AO allowed depreciation on computers/computer peripherals @15% as against the assessee’s claim of 60%. The ld. CIT(A) echoed the assessment order.
25. Having heard both the sides and gone through the relevant material on record, we find from the ground of appeal that this grievance is only about the rate at which depreciation should be allowed on computers/computer peripherals. Whereas the assessee claimed depreciation @60%, the AO restricted it to 15%. We have gone through the details of such amounts on which the assessee claimed depreciation at the increased rate. Such details have been placed at page 138 onwards of the paper book. On going through such details, it is manifested that the assessee claimed depreciation at higher rate only in respect of computers purchased by it for rendering IT enabled services. There is no dispute about the eligibility of depreciation on computers at 60%.
26. However, in respect of computer peripherals, the Special Bench of the Tribunal in DCIT Vs. Data Craft India Ltd. (2010) 133 TTJ (SB) 377 has held that routers and switches should also be classified under the term “computers” subject to higher rate of depreciation. The Hon’ble Delhi High Court in CIT Vs. BSES Yamuna Towers Ltd. 2010-TIOL-636-HC-DEL-IT has also made the assessee entitled to higher rate of depreciation in respect of routers and switches. In view of the foregoing discussion, it is graphically clear that the assessee is rightly entitled to the higher rate of depreciation of 60% on computers/computer peripherals etc. The impugned order is overturned on this issue and the necessary relief is allowed.
27. The additional ground taken by the assessee in respect of depreciation disallowed, which is subject matter of ground no.4 vis-a-vis claim of deduction u/ss.10A/10AA, has become infructuous in view of our decision in favour of the assessee on ground no.4. This ground is thus dismissed as having become academic.
28. In the result, the appeal is partly allowed.
Author Bio
