IN THE ITAT MUMBAI BENCH ‘J’
Assistant Commissioner of Income-tax
Petroleum India International
IT Appeal No. 8086 (Mum.) of 2003
C.O. NO. 6 (Mum.) of 2009
[Assessment year 2001-02]
SEPTEMBER 28, 2012
D. Karunakara Rao, Accountant Member – The appeal filed by the Revenue on 19.12.2003 is directed against the order of the CIT(A) dated 16.10.2003 in relation to assessment year 2001-2002. Assessee filed the CO on 6.1.2009.
2. Grounds raised by the Revenue read as under:
“1. On the facts and circumstances of the case and in law, the CIT(A) erred in directing to allow the deduction of Rs. 4,78,927/- u/s 80-O of the I.T. Act, 1961.
2. On the facts and circumstances of the case and in law, the CIT(A) erred in directing to allow the deduction of Rs. 10,70,75,199/- u/s 40(a)(iii) of the I.T. Act, 1961.
3. On the facts and circumstances of the case and in law, the CIT(A) erred in directing to allow relief of Rs. 1,37,49,199/- u/s 91(1) of the I.T. Act, 1961.
4. On the facts and circumstances of the case and in law, the CIT(A) erred in directing to tax the income of Rs. 1,06,80,410/- under the head ‘Business Income” instead of taxing the same under the head ‘Income from Other Sources”.
3. Briefly stated the facts of the case are that the assessee is engaged in the business relating to Technical consultancy and Operational services and filed the return of income at Rs 17.17 crores and the assessment was completed u/s 143(3) of the Act determining the assessed income at Rs. 28.16 cr (rounded off) after making various additions and some of them are subject matter of appeals before us. In this regard, at the outset, the learned Counsel for the assessee filed copies of orders of the Tribunal in various appeals of the assessee and mentioned that the grounds of the assessee’s appeal are actually covered and, therefore, appeal of the assessee is required to be allowed in part. Ground-wise adjudication is given in the succeeding paragraphs.
4. Ground no.1 relates to the claim of deduction of Rs. 4,78,927/- u/s 80-O of the I.T. Act, 1961. In this regard Ld Counsel mentioned that an identical issue was decided by the Tribunal in connection with ITA No. 6791/M/2002 for AY 1999-2000 as per the discussion given in para 8 to 12 of the order dated 16.4.2012. We have perused the said paragraphs which read as under:
“8. Against the allowance of deduction u/s. 80-O, the revenue is in appeal and against the quantum of deduction determined by CIT(A) u/s. 80-O, the assessee has filed a C.O. Both the sides are before the ITAT and we take up the appeal by the department as well as the CO filed by the assessee and on the facts emerging from the orders of the revenue authorities and for the convenience, we are passing a common order.
9. Before us, the DR reiterated the observations of the AO and prayed to sustain the disallowance. On the other hand Senior AR submits that the issue of allowance of deduction has first to be seen from the observation of the AO i.e. the AO has based his decision on the decision arrived at by the order of the CIT(A) in assessment year 1993-94 to 1997-98, wherein the claim was disallowed. The AO in the current year takes those decisions of the revenue authorities as basis and disallows the claim of the assessee. The Senior AR pointed out that if the decision of CIT(A) for assessment years 1993-94 to 1997-98 has to be taken to be the basis then the case of the AO and the DR falls, because the decision of CIT(A) for those years was reversed by the decision of the ITAT wherein the ITAT had accepted the claim of deduction u/s. 80-O made by the assessee.
10. On the other hand, the Senior AR took us through the paper book filed by the assessee and submitted that the issue of disallowance cannot arise because even in the amended provisions of Section 80-O which are effective 6 Petroleum India International from 1998, the existence of the word “design” continues. He, therefore, submitted that when the contracts as entered by PII are seen, the headings of the contracts talks about “Supply of Consultancy for Implementation of Design Development by Petroleum India International for SOLIMA REFINERY, Tamatave, Madagascar”. The AR pointed out that the Terms of Reference also talked about “design” and Deliverables of the Assignment also provides that the process design of PII will be customized for implementation of Solima Refinery. He further pointed out that responsibilities of PII for the assignment has comprehensive responsibilities, not just supply of manpower as the DR had pointed out.
11. We have heard the submissions from both the sides, one thing is clear that the DR has not challenged the allowability of deduction u/s. 80-O, he has shown serious reservations on the basis of allowability, i.e. whether the deduction should be allowed on net amount or on gross amount. The DR pointed out the decisions of Hon’ble Bombay High Court in the case of CIT v. Asian Cable Corpn. Ltd. I.T. Reference No. 530 of 1987, reported in 129 Taxman 590. The DR has also referred to the decision of Hon’ble Karnataka High Court in the case of ACIT v. Abcon Engg. & Systems (P.) Ltd. reported in 164 Taxman 600 on the issue of allowability on export proceeds. Besides this, the AR also placed reliance on the decision of ITAT Bangalore in the case of ITO v. Vivek Prabakar Kunte, ITA No. 79/Bangalore/2001, reported in 92 ITD 71, wherein it was held that the objective of Sec. 80-O is mainly the supply of technical know-how or technical services to developing countries.
12. We find that the issue of disallowance in the current appeal is virtually infructuous, following the decision of the assessee’s own case in the preceding years and even after going through the provisions of the Act in preamendment period and post amendment (relevant to the assessee), wherein we find the word “design” still exist. We cannot accept the submission of the DR that the assessee was primarily supplying man power and not comprehensive technical services. We find and hold that the assessee was Petroleum India International supplying comprehensive technical services for designing and development of Salima Refinery, which would also include “to depute a competent team of professionals ………” as one of the services besides other services as mentioned in the terms of Reference and Deliverables of the assignment. We, therefore, hold that the assessee is eligible for claiming deduction u/s. 80-O. This ground, therefore, filed by the revenue is rejected.”
5. It is a fact that the supply of man power is one of the services rendered by the assessee and otherwise, mainly the assessee does the supply of comprehensive technical services for designing and development. Considering the commonality of the facts of the issue, we are of the opinion that the assessee is entitled to relief as given by the CIT(A), therefore, ground raised by the Revenue is required to be dismissed. Accordingly, ground no. 1 is dismissed.
6. Ground no. 2 of the Revenue’s appeal relates to deduction u/s 40(a)(iii) of the Income Tax Act, 1961. In this regard, the learned Counsel mentioned that the said issue is also covered in favour of the assessee by the order of the Tribunal in assessee’s own case for AYs 1989-90, 1990-91 and 1991-92 vide paras 17 & 18 of the order dated 21.4.2008.
“17. We have considered the issue and perused the record and various cases referred to. In our view the CIT(A) is correct in deleting the disallowance made by the Assessing Office on merits as there is no employee-employer relationship between the seconded persons and the PII i.e. the assessee. Secondment is a terms used generally for deputing employees of one organization to another for a fixed period generally not more than one year as a part of contract/service agreement for rendering specialized services. This term is broadly used to cover a temporary movement or loan of employee and it is increasingly recognized as a valuable tool for development. Secondment of employee offer career development opportunities and gives flexibility of working pattern in either selected employees or placing them at the required position or places without having to take them on regular employment basis. Generally secondment last for not more than a year unless specifically provided for and the organization that supply the secondees continue to pay their salary and allowances during the secondment period and during the period this cost is generally reimbursed by the host organization. The secondment also taken place within the organization or externally to another organization, i.e. from public sector to private sector or to a voluntary organization. This is external secondment. According to the Oxford Dictionary this word has arisen in early 19th Century from the French word ensecond. In the secondment process, as demonstrated before us, the secondee will continue to be on the parent organization and continues to draw all the pay and allowances as applicable in the parent organization.
18. In the present case, the secondment undertaken by the PII is an external secondment from a member organization to a foreign organization with whom the assessee is entered into agreement. In this process, as submitted, the assessee do not taken them as their employees and secondee continues to be o the rolls of the parent organization even though their services are temporarily placed with the other organization, may be PII or the foreign organization. Even though the learned DR tried to bring in the employee-employer relationship by identifying certain clauses of the agreement with the foreign company to state that the control and management over the personnel seconded in view of various terms and conditions of the agreement between the foreign company and the assessee company for deputing the technical personnel. The supervisory control and management and disbursement of amounts does not give rise to any employee-employer relationship. As seen from the paper book filed, particularly with reference to the secondment letter given in the case of Shri S.B. Thakur (supra) it is very clear that such seconded personnel continue to be employee of the Indian Oil Corporation and the salary and emoluments are governed by the rules of that organization. In fact, the Department also accepted this fact as far as reimbursement of salary and other allowances by the assessee company to the member company is concerned. Therefore, it can be stated that the seconded personnel were not employees of the assessee company and so the foreign allowance paid to them by the assessee company cannot be considered as part of salary and so provisions of section 40(a)(iii) are not applicable. Similar situation arose in the case of Emil Webber (supra), who is deputed by a foreign company to an Indian Company and the Hon’ble Supreme Court in the above said case held that overseas allowances is not chargeable under the head “Salary”. Therefore, section 40(a)(iii) does not apply. Similar view is also endorsed by the Hon’ble Kerala High Court in the case of CIT v. G. Eroppino Giovanni 196 ITR 618. In view of this, the CIT(A) is correct in holding that there is no employee-employer relationship so as to consider the disallowance under section 40(a)(iii) of the Act.”
7. From the above, it is evident that the impugned payments made cannot be taxed under the head “Salaries” in view of the judgment of Hon’ble Supreme Court in the case of Emil Webber v. CIT  200 ITR 483/67 Taxman 532 (SC) on the reasoning that there is no employee-employer relationship so as to be considered for the disallowance u/s 40(a)(iii) of the Act. By considering the commonality of the facts, we are of the opinion that ground no. 2 is covered in favour of the assessee. Accordingly, ground raised by the Revenue is dismissed.
8. Ground no.3 relates to grant of relief u/s 91(1) of the Act. In this regard also learned Counsel for the assessee filed a copy of the order of the Tribunal for the assessment year 1996-97 vide ITA No. 825/M/2002 and others dated 5.9.2008 in assessee’s own case. Further, he mentioned that the issue relating to the applicability of provisions of section 91(1) of the Act are discussed in para 10, 11, and 14 of the said order dismissing the appeals of the Revenue which read as under:
“10. The only ground of appeal of the Revenue is as under:
“In the facts and circumstances of the case and in law, the CIT(A) erred in directing to allow a relief of Rs. 31,94,792/- claimed by the assessee u/s 91(1) of the Act, although the assessee has not paid the taxes in Kuwait before the end of the previous year, since there was no agreement between India & Kuwait Govt. for double taxation.”
11. The Ld. DR submitted that the word “paid” in Sec. 91(1) of the Act means constructive payment of tax and the onus is on the assessee to lead evidence that the taxes had in fact being paid in any country with which there is no agreement u/s 90 for avoidance of double taxation. He submitted that the assessee’s submission that in accordance with mercantile system of accounting, it is entitled to deduction of taxes not paid during the relevant period is not sustainable in law. The Ld. Counsel for the assessee submitted that the taxes were actually paid by the assessee in subsequent years and this has been recorded by the CIT(A) in his appellate order. The Ld. Counsel for the assessee submitted that the ground of appeal of revenue for the relevant year is that the only objection of the revenue is that the assessee has not aid the taxes in Kuwait before the end of the relevant previous year. He submitted that the CIT(A) has recorded in para-10 of his order that the assessee has made actual payment of taxes in Kuwait in five installments in subsequent periods and has furnished before him the original documents evidencing the payments.
12. We have considered the rival submissions carefully. We find that the language of Sec. 91(1) of the Act is un-ambiguous on the issue, which provides that where the assessee proves that in respect of his income which accrued or arose during the previous year outside India and he has paid in any country with which there is no agreement u/s 90 for the relief or avoidance of double taxation, he shall be entitled to deduction from the Indian Income Tax payable by him of a sum calculated on such doubly taxed income. We find that nowhere in the provision of sec. 91(1) of the Act, it is provided that the payment of taxes outside India shall be during the relevant previous year itself. The purpose of this provision of section 91(1) of the Act is to provide relief in a case where the assessee has paid the taxes outside the country, not to subject such assessee to double taxation on the same income. If the interpretation put forward by the Ld. CIT DR is accepted, it shall render the provision of sec. 91(1) itself as redundant. We find that the assessee has discharges its onus of proving that it has in fact made the payment of taxes in Kuwait in subsequent periods. The CIT(A) has recorded the dates and amount of payment of taxes in Kuwait by the assessee and has recorded that the assessee has furnished before him the original documents evidencing these payments and the same have also been furnished before the Assessing Officer and has been verified by him. There is no material before us to controvert these findings of the CIT(A). In these facts of the case, we hold that the assessee is entitled to relief u/s 91(1) of the Act and the order of the CIT(A) is confirmed and the ground of appeal of the revenue is dismissed.
9. From the above, it is evident that the assessee made the payment of taxes in Kuwait and the dates and amounts of the said payments of taxes were made available before the CIT(A). Original documents were also filed evidencing the same for relief in respect of the said taxes paid in Kuwait u/s 91(1) of the Act. Therefore, the assessee is entitled to said relief. Accordingly, ground no.3 raised by the Revenue is dismissed.
10. Ground no. 4 relates to taxability of income of Rs. 1,06,80,410/- i.e. gain in foreign exchange fluctuation, under the head “Business Income” instead of taxing the same under the head “Income from Other Sources”. In this regard, learned Counsel referred to a copy of the order of the Tribunal in assessee’s own case vide order dated 16.4.2012 (supra) and mentioned that the identical issue was adjudicated in assessee’s own case vide para 13 to 21 of the Tribunal’s order which read as under:
“13. Ground No. 4 raised by the Revenue is against the CIT(A)’s order wherein the gain in foreign exchange fluctuation has been allowed as business income instead of treating and taxing it as income from other sources.
14. The AO has mentioned in the assessment order that this is an increment due to exchange fluctuation, which has no nexus with the business of the assessee and hence is taxable under the head “Income from other sources”. Not satisfied with the view of the AO, the assessee carried its grievance before CIT(A).
The CIT(A) accepted the contentions and view propounded by the assessee and held that gains arising from foreign exchange fluctuations were current business funds from routine business operations and any change in their value directly affects the profits of the business. He, therefore, directed the AO to treat these gains as income from business and not income from other sources.
15. The revenue not satisfied with the decision of the CIT(A), has carried the grievance before the ITAT.
16. Before us, the DR submitted that the view taken by the AO was correct and is now covered by the decision of Hon’ble Bombay High Court in the case of CIT v. Shah Originals, ITA No. 431 of 2008 reported in 327 ITR 19.
17. The Senior AR, however submitted that the case of Shah Originals, per se, pertained to interest earned in the foreign currency lying in EEFC account 8 Petroleum India International and it cannot go into the gain or loss on account of currency fluctuation, which is directly related to the business/export proceeds received by the assessee in foreign currency. On this ground, the assessee submitted that the view taken by the CIT(A) was correct.
18. The Senior AR, submitted that in the case at hand, the whole issue pertains to proceeds received in foreign exchange and it was during the course of business that there was fluctuation in the currency, because of which the assessee had booked a gain on fluctuation.
19. Having heard the views of either side, we went into the question that was referred before the Hon’ble Bombay High Court in the case of Shah Originals. The question referred to the Hon’ble Bombay High Court included the words “receipts on account of foreign exchange fluctuation on EEFC account…..”
20. The Hon’ble Bombay High Court has held that gains on exchange fluctuation does not have a nexus when the funds are kept in EEFC account and there is a variation in the exchange rate. We, respectfully follow the decision of Jurisdictional High Court, wherein it has been held that the gain on account of fluctuation in the foreign currency which takes place after the export proceeds have been realized and such funds or part thereof are parked in the EEFC account would be treated as income from other sources.
21. On going through the arguments of both the sides, we deem it fit to direct the AO to verify the exchange fluctuation account, as maintained by the assessee, i.e. if the exchange fluctuation is on the export proceed stage itself, then it has to be treated as gain in business and if the gains on exchange fluctuation occurs on the funds lying parked in EEFC account, then in that case, the case of Shah Originals is to be applied and treat that gain as income from other sources.
Further, he mentioned that the assessee is entitled to relief in this regard by virtue of jurisdictional High Court judgment in the case of CIT v. Shah Originals  327 ITR 19/191 Taxman 81 (Bom.), wherein it was held that the gains on account of fluctuation in foreign currency would be treated as ‘income from other sources’. On the other hand, Ld DR for the revenue relied on the orders of the AO.
Accordingly, we direct the AO to verify the exchange fluctuation account. If the exchange fluctuation is on the export proceeds itself, then it has to be treated as gain in business and if the gains on exchange fluctuation occurs on the funds lying parked in EEFC account, then in that case, the case of Shah Originals (supra) is to be applied and treat that gain as income from other sources. Accordingly, the ground raised stands covered by the said decision of the Tribunal in the assessee’s own case. Accordingly, ground no. 4 stands disposed off.
11. In the result, the appeal of the Revenue is allowed in part.
12. Assessee filed the Corss Objection on 6.1.2009 with delay of 1529 days. The grounds of Cross Objection relating to the claim of deduction u/s 80-O of the Act, read as under:
“1. The Commissioner (Appeals) erred in reducing the deduction u/s 80-O of the Income Tax Act, 1961 to Rs. 4,78,927/- as against Rs. 28,02,900/- claimed by the Respondent.
2. He failed to appreciate that the material placed on record by the Respondent was sufficient to support the Respondent’s claim for deduction u/s 80-O.
3. The respondent prays that it be allowed the deduction of Rs. 28,02,900/- u/s 80-O of the Act as claimed by it.”
13. Before us, Ld Counsel for the assessee mentioned that the said CO was filed belatedly and brought to our attention the contents of the accompanying application and the affidavit filed by the assessee. From the said application for condonation, the assessee read out the reason for the said delay and the same read as under:
“However, oversight in not having filed the cross-objections was noticed by us only recently during the conference with our Senior Counsel, Mr. S.E. Dastur.”
Further, referring to the affidavit dated 16.1.2009 filed by the assessee, Ld Counsel brought to our notice that the necessity of filing the CO was noticed only during the assessee’s conference with his Counsels and he read out the contents of the para 2 and 3 of the said affidavit. The said paragraphs are extracted as under:
“2. That while preparing for the said appeal on 26th December, 2008 in the conference with the Counsels, it was noticed that against certain aspects decided by the CIT(A), it was necessary to file corss-objections.
3. That, therefore, Petroleum India International has filed cross objections on 06.01.2009 along with the application for condonation of delay.”
14. Thus, learned Counsel for the assessee submitted that the reason of “oversight” and the realization of the need to file cross objection was noticed only when they had a conference with his Counsels, constitutes ‘reasonable cause’ and prayed for condonation of said delay of 1529 days.
15. Per contra, learned DR vehemently opposed the said prayer of Ld Counsel for the assessee and mentioned that the ‘oversight’ mentioned should be construed as assessee’s negligence in filing the CO in time and the same does not amount to ‘sufficient cause’ within the meaning section 253(5) of the Act. Further, he argued that it is not comprehensible that the assessee has not consulted the Advocates for nearly four years three months before they are advised to file CO finally. Further also, Ld DR has brought to our notice the fact of non furnishing of any affidavit by the Advocates, who had conference with the assessee affirming the assertions of the assessee. Thus, there is no evidence or reasonable explanation in support of the request for condonation of delay. As per learned DR, the request of the assessee for condonation of delay should be rejected in view of the specific provisions of section 253(5) of the Act.
16. We have heard both the parties of the litigation on the preliminary issue of condonation of delay of 1529 days and perused the contents of the said application for condonation and the affidavit submitted by the assessee. There is no dispute on the fact of delay of 1529 days as well as on non furnishing of any affidavit by the Counsels affirming that assessee had a conference with the Counsels which give raise to the necessity of filing the impugned cross objections. Further, there is no explanation as to why and under what circumstances; the assessee approached the Counsels on 26.12.2008 only and not within 30 days from the receipt of the notice. The explanation given by the assessee, both in the application of condonation as well as in the affidavit of the assessee, are not explained with supportive evidences. In this regard, we have perused the relevant provisions of subsection (4) and (5) of the section 253 of the Act and the same are reproduced here for ready reference as under:
“(4) The Assessing Officer or the assessee, as the case may be, on receipt of notice that an appeal against the order of the Deputy Commissioner (Appeals) or, as the case may be, the Commissioner (Appeals) or the Assessing Officer in pursuance of the directions of the Dispute Resolution Panel has been preferred under sub-section (1) or sub-section (2) or sub-section (2A) by the other party, may, notwithstanding that he may not have appealed against such order or any part thereof; within thirty days of the receipt of the notice, file a memorandum of cross-objections, verified in the prescribed manner, against any part of the order of the Assessing Officer (in pursuance of the directions of the Dispute Resolution Panel) or Deputy Commissioner (Appeals) or, as the case may be, the Commissioner (Appeals), and such memorandum shall be disposed of by the Appellate Tribunal as if it were an appeal presented within the time specified in sub-section (3) or sub-section (3A).
(5) The Appellate Tribunal may admit an appeal or permit the filing of a memorandum of cross-objections after the expiry of the relevant period referred to in sub-section (3) or sub-section (4), if it is satisfied that there was sufficient cause for not presenting it within that period.”
17. Sub-section (4) of section 253 of the Act mandates that the assessee should file Cross Objections within the 30 days from the date of receipt of the notice. In case of failure to file in that period, subsection (5) confers powers on the Tribunal to permit the filing of CO after the expiry of 30 days and the same subjected fulfillment of certain conditions by the assessee. The assessee has the duty of satisfying the Tribunal about the existence of ’cause’ and it should be sufficient enough for not presenting the CO within 30 days specified in subsection (4) of section 253 of the Act. Thus, the onus is on the assessee to explain to the Tribunal about the “sufficient cause” for the delay and the Tribunal should be satisfied about the said sufficient cause. It is true that the words “sufficient cause” for not filing the CO within the period of limitation no doubt is to be applied in a reasonable manner but depending upon the facts and circumstances of each case. Party has to give satisfactory explanation. In any case, it was the duty of Cross Objector to give satisfactory explanation to the Tribunal about the delay in filing the CO. In the absence of the same, the prayer for condonation must not be granted. It cannot be overlooked that on expiry of the period of limitation prescribed for seeking legal remedy, rights accrue in favour of the other party of the litigation.
18. In the present case, assessee failed to explain the cause of delay of 1529 days in filing the Cross Objection. Further, the explanation of the assessee, which revolves around the ‘oversight’ and assessee’s conference with his counsel after expiry of four years, in our opinion does not constitute ‘sufficient cause’ within the meaning of section 253(5) of the Act. It is not in the normal course that the assessee has not met his counsel for all these four years. As such there is no confirmation from the said Counsel by way of any affidavit that the assessee had impugned conference to advise for filing the impugned CO. In our opinion, the delay shows the indifferent attitude of the assessee to the matter. In such a factual situation, the sufficient cause as contemplated u/s 253 (5) of the Act does not exist. In the present case, there is a negligence on part of the appellant and it is a case of absence of due diligence. Further also, the assessee has not demonstrated that it was beyond his control that the Cross Objection could not be filed before the expiry of the limitation period of 30 days specified in section 253(4) of the Act. Therefore, delay in filing the Cross Objection remains unexplained. In view of the above legal and factual discussion, we are of the considered opinion that there is no sufficient cause for condonation of delay of 1529 days. Consequently, the impugned application for condonation of delay by the Cross Objector, Respondent is dismissed.
19. In the result, Revenue appeal is allowed in part and the Cross Objection is dismissed.