The AO as well as the CIT(A) were wrong in coming to a conclusion that the assessee is not entitled to deduction u/s 80-O on the ground that it has only deputed certain personnel for working in the foreign enterprises. Even a promise to render services at a future date would entitle the assessee for deduction u/s 80-O in view of the specific wordings in the section.
When the assessee is not a dealer in foreign exchange and when the transaction is purely incidental to the assessee’s regular course of business the loss would be allowable. It has further been specifically held that foreign exchange cannot be claimed as a commodity in which the assessee was dealing and therefore the transaction did not come within the substantial part of section 43(5) itself.
IN THE INCOME TAX APPELLATE TRIBUNAL
BEFORE SHRI J. SUDHAKAR REDDY, AM AND SHRI R.S. PADVEKAR, JM
(Assessment year 1996-97)
|Voltas International Ltd.
(since amalgamated with Voltas Ltd wef 01-04-2001) Voltas Ltd, Voltas House ‘A’ Dr. Babasaheb Ambedkar Road Chinchpokli, Mumbai-33 PAN: AAACV3570F
|Vs.||The ACIT, Range 7(3)
O R D E R
1. This appeal filed by the assessee is directed against the order of the CIT(A)-XXX, Mumbai dated 22-02-2005 for the assessment year 1996-97.
2. The assessee is in the business of undertaking air conditioning and refrigeration projects on turnkey basis outside India as well as undertakes exports and civil constructions. It originally filed its return of income on 30-11-1996 declaring Nil income and thereafter filed a revised return on 28-07-1997. The return was originally processed u/s 143(1)(a) on 12-08-1997 without any adjustments and thereafter picked up for scrutiny and order u/s 143(3) was passed by the assessing officer. The assessing officer during the course of assessment re-computed deductions u/s 80-O, 80HHB and 80HHC. He further disallowed expenditure incurred on the guest house u/s 37(4) as well as expenditure covered by provisions of section 37(2A); under rule 60 and also an amount of Rs. 2,13,31,570 claimed by the assessee company as speculation loss. Aggrieved, the assessee carried the matter in appeal. The first appellate authority granted part relief. Further aggrieved the assessee is in appeal before us.
3. Effectively, the assessee has raised three grounds of appeal. The first ground is on the computation of deduction u/s 80-O which is in two parts. We will be dealing with the various facets of arguments in later part of this order. Ground NO.2 is against the disallowance u/s 37(4). Ground NO.3 is against the disallowance of business loss on the ground that it is speculation loss.
4. We have heard Shri Percy Pardiwalla, the learned counsel for the assessee and Shri SP Choudhary, the learned departmental representative.
5. The first contention of Shri Pardiwalla, on the computation of deduction u/s 80-O is that the deduction should have been allowed on the gross receipt and not on the net receipts. Admittedly this issue is covered against the assessee by the judgment of the Hon’ble jurisdictional High Court in the case of CIT vs Asian Cable Corporation Ltd 262 ITR 537 (Bom). This argument of the assessee thus fails.
6. The second limb of argument of Shri Pardiwalla is that, when direct cost is available, estimating the expenditure, i.e. attributing the earning of income, at 10% of the total receipts is bad in law. Shri SP Choudhary submits that the assessee has not given any information or has furnished any evidence on the quantum of expenditure incurred by the assessee for earning the income which is eligible for deduction u/s 80-O and that under those circumstances the revenue authorities were right in disallowing the expenses on adhoc basis.
5.3 After hearing rival contentions we find that the assessee in this case, while claiming that direct cost is available, has not chosen to give the details either to the assessing officer or to the first appellate authority. Even before us, no document is filed or pleadings made to demonstrate that a particular figure is the direct cost of the assessee for earning the income which is eligible for deduction u/s 80-O. The assessee has only shown cost of trips undertaken to Dubai as the only direct expenditure and was claiming deduction on the rest of the amount, without evidence. This, in our considered opinion, is not the entire direct cost of the assessee. Under these facts and circumstances, especially as the assessee has not furnished the required information or evidence, we are of the considered opinion that the revenue authorities hade no other alternative, but to estimate a percentage of expenditure and deduct the same from the gross receipts before allowing deduction u/s 80-0. Ground 1 (a) of the assessee, therefore, fails.
7. This brings us to ground 1 (b) the facts are brought out at paragraph 5 on pages 4 & 5 of the CIT(A)’s order which reproduces the relevant portions from the assessment order. The submissions of the assessee are at paragraph 5.1 on pages 5 & 6 of the CTI(A)’s order. The assessee in this case was required to undertake the following responsibilities, the scope of which is given in the technical services agreement with BEMCO. The responsibilities are given at para 2 on page 2 of the assessee’s paper book which are reproduced for ready reference:
Without prejudice to the generality of Clause 1 above, VIL shall provide the following technical and scientific services to BEMCO in relation to the said activities, as and when requested by the Board of Directors of BEMCO:-
2.1 Design of systems and preparation of general layout plans together with Technical data.
2.2 Preparation of design, specification, drawings and other data of all the equipment, tools and other materials etc. required.
2.3 Advice on selection of the relevant materials, equipment and tools.
2.4 Recruitment of technical and any other personnel required by the company.
2.5 Generally such other technical services as may be reasonably required by SEMCO from time to time in connection with the said activities.
3. RESPONSIBILITIES OF BEMCO
3.1 BEMCO shall provide No Objection Certificates and Visas for the staff of VIL including engineers and technicians as required for the purpose of the said activities at its own cost.
3.2 SEMCO shall at its cost, provide all the amenities and facilities reasonably required by VIL in discharge of its obligations with respect to its employees and other staff deputed to the company.
3.3 SEMCO shall appoint, depute or recruit all managerial supervisory, clerical, skilled and unskilled personnel.
4. CONSIDERATION FOR THE TECHNICAL KNOW-HOW AND TECHNICAL SERVICES:
4.1 In consideration of the technical know-how to be provided and the technical services to be rendered by VIL, SEMCO shall pay to VIL within six month from the close of the financial year, a remuneration equivalent to 12% of the annual net profit of the company. The profit for this purpose is to be compiled after deducting all expenses from the revenue for the year under review but before accounting for the technical services and business development fees.”
8. The assessee claims that the company has entered into technical service agreement with following joint ventures abroad, viz. Universal Voltas Airconditioning & Refrigeration Co, M/s Saudi Ensas and M/s Bahrain Electro Mechanical Co. In consideration of the technical services rendered by the assessee company to the joint ventures, the company claims to have received technical services fees towards services rendered outside India and the same is deductible u/s 80-O. The learned counsel for the assessee points out that the remuneration was received by the assessee for the aforesaid services as a percentage of profits of a foreign enterprise. He sought to demonstrate that the services in this case are linked with the profits of the foreign enterprise for which technical services are rendered. He also pointed out that the CBDT /Chief Commissioner of Income-tax have approved the aforesaid agreements for the purpose of section 80-O. He vehemently contends that the assessing officer was wrong in coming to a conclusion that the assessee has only deputed its personnel to the foreign enterprises during the year and therefore it was not entitled to deduction u/s 80-O. It was further submitted that even if it is assumed that during the year the assessee has not rendered any services, but has, in fact, received the fees for the services rendered in the past, still the assessee would be entitled for deduction u/s 80-O as the section is available for technical services that have been rendered or agreed to be rendered. The learned counsel further took this bench to section 80-O as well as Explanation 2 to section 9(1 )(vii) and contended that even it is to be held that the assessee has only deputed personnel, the provision of personnel would also fall under the ken of the term “technical services”. The learned counsel referred to page 4 of the assessment order where at paragraph 4 the assessing officer has acknowledged that the assessee has, as part of the technical service agreement, seconded and deputed the assessee’s employees to those companies. The second objection of the assessing officer was that during the period of secondment, the assessee continues to have lien on their job in the assessee company, but at the same time acknowledge that the assessee company has not made any salary or allowances for the period of secondment. He drew the attention of the bench to page 31 of the assessee’s paper book which is copy of a letter given to one Mr. P George Mathews who has been deputed / seconded to Saudi Ensas Ltd as Accounts Manager and drew the attention of the bench to clauses 7(b) and 10 and submitted that from the terms of employment it is clear that the deputed employees takes orders only from the foreign company and not from the assessee company during this period of deputation to the foreign company. He laid special emphasis on clause 10 of the deputation order and contended that the assessee company would be entitled to certain compensation on the happening of certain events. He pointed out that the CIT(A) has relied upon the judgment of the Hon’ble Delhi High Court in the case of JK Investors (Bom) Ltd vs CBDT 118 ITR 17 (Del) which has been overruled by the judgment of the Hon’ble Supreme Court in the case of CBDT vs Oberoi Hotels Ltd 231 ITR 148. He laid specific emphasis on the judgment of the Delhi High Court reported in 256 ITR 761 (Del) in the case of Raunaq International Ltd vs UOI & Anr where the assessee has sent specialized I foreign technicians for technical assistance and the application for approval of the agreement was rejected by the authorities and the Hon’ble High Court has held that rejection is bad in law.
9. On ground No.2, the learned counsel fairly submitted that the issue of allowability of expenditure on guest house is against the assessee by the judgment of the Hon’ble Calcutta High Court in the case of Britannia Industries Ltd vs CIT 257 ITR 681 (Cal). Respectfully following the same, we reject this ground.
10. On ground NO.3 the learned counsel for the assessee submits that the issue is covered in favour of the assessee by the decision of Mumbai Bench “J” of the Tribunal in the case of M/s Gill & Co Ltd in ITA NO.216/Mum/2002 for the assessment year 1996-97 order dated 21-02-2003 as well as the decision of the Hon’ble jurisdictional High Court in the case of CIT vs Badridas Gauridu (P) Ltd reported in 261 ITR 256 (Bom) wherein it was held that when the ,assessee was not a dealer in foreign exchange he his entitled to claim the loss as a business loss.
11. The learned departmental representative, Shri Choudhary, on the other hand, contended that the assessee has only deputed certain personnel to the foreign companies for working on their sites and thus the revenue authorities were right in rejecting the claim of the assessee u/s 80-O. He specifically drew the attention of the bench to the findings of the assessing officer at pages 2 to 5 of the assessment order and pointed out that in this case no technical services whatsoever has been rendered by the assessee company and it is totally its employees who were sent on deputation and who had rendered services to the foreign company. He submitted that once these employees are seconded and deputed to a foreign company, he becomes an employee of that company and is no more an employee of the assessee company. He vehemently contended that the assessee company has not rendered any service and has also not filed any evidence of services having rendered by it. He further relied on the order of the first appellate authority specifically to para 5.2 on page 7 and relied on the same. He submitted that the first appellate authority has rightly concluded that in sum and substance the assessee seems to have been provided only manpower consisting of non-technical personnel being Account Managers and supervisors and some technical personnel on a tenure of two years for foreign enterprise. Such personnel have rendered the services to the foreign enterprises and drew their salary from the foreign enterprises. On the ground that the assessee has not furnished documentary evidence of providing designs or drawings and laid out plans to the foreign enterprises it was held that the judgment of the Hon’ble Bombay High Court in the case of Eastern Consultants Pvt Ltd vs CBDT 145 ITR 647 (Bom) is applicable to the facts of the case. He prayed that the order of the revenue authorities be upheld.
12. On the issue of allowability of loss on cancellation of forward contract, the learned departmental representative submitted that this is a speculation loss and consequently falls within the provisions of section 43(5) as it was settled without actual delivery. He relied on the decision of the first appellate authority at paragraphs 17 to 26 of the order and submitted that the first appellate authority has clearly brought out the factual difference between the decisions in the case of Gill & Co Ltd (supra) and the case of the assessee. He relied on the order of the CIT(A).
13. After hearing rival contentions and on perusal of the papers on record and the orders of the authorities below as well as the case laws cited we hold as follows:
13.1 Section 80-0 as it stood in the impugned assessment year reads as follows:
“80-O. Where the gross total income of an assessee, being an Indian company or a person other than a company who is resident in India, includes any income received by the assessee from the government of a foreign State or foreign enterprise in consideration for the use outside India of any patent, invention, design or registered trade mark and such income is received in convertible foreign exchange in India, or having been converted into convertible foreign exchange outside India, is brought into India, by or on behalf of the assessee in accordance with any law for the time being in force for regulating payments and dealings in foreign exchange, there shall be allowed, in accordance with and subject to the provisions of this section, a deduction of an amount equal to –
(i) forty per cent for an assessment year beginning on the 1st day of April. 2001
Explanation 2 to section 9(1 )(vii) reads as follows:
“Explanation .- for the purposes of this clause, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”,”
13.2 As per Explanation 2 to section 9(1)(vii), rendering of any managerial, technical or consultancy services include, the provisions for services of technical and other personnel. The Hon’ble Delhi High Court in the case of Raunaq International Ltd (supra) was considering a case of an assessee which is engaged in the business of export of engineering and industrial goods. Technical know how to indigenous manufacturers was provided by the sales engineers of the petitioner as the exports comprised of sophisticated goods. Such technical assistance was also provided in the development of various engineering and industrial goods for the purpose of exports. An Iraq government company known as a State Company for Rubber Industries (Baghdad)(SCRI) sought technical assistance of the petitioner pursuant whereto 16 specialists were deputed for the purpose of sharing experience for running the factory as also for improving and developing technical and managerial skills of its personnel as also to participate in the practical application of the planned technology. On the ground that providing of such technical assistance would entitled the petitioner to claim deduction under section 80-O of the Income-tax Act, an application was filed for approval of the agreement before the prescribed authority. The application was rejected. On a writ petition against the order, it was held that the petitioner was entitled to exemption in terms of section 80-O of the Act and the same had wrongly been denied to the petitioner. The impugned order could not be sustained and was liable to be set aside. Thus by applying the decision of the Hon’ble Delhi High Court to the facts of the case, we have to necessarily hold that the assessing officer as well as the CIT(A) were wrong in coming to a conclusion that the assessee is not entitled to deduction u/s 80-0 on the ground that it has only deputed certain personnel for working in the foreign enterprises.
13.3 The second objection of the revenue that no evidence has been provided by the assessee that it actually rendered certain technical services. The assessee has in fact provided copies of the technical service agreement entered into by the assessee company with the foreign enterprises and it is an admitted fact that its technical service agreements have been approved by the CBDT /Chief CIT. While so it is not proper to doubt the genuineness of these agreements and hold that the assessee has received remuneration without rendering of any service whatsoever. As rightly pointed out by Shri Pardiwalla, even a promise to render services at a future date would entitle the assessee for deduction u/s 80-O in view of the specific wordings in the section. Thus we allow ground 1(b) of the assessee.
13.4 Coming to ground the facts of the case are that the assessee during the previous year entered into a contract on 08th August, 1995 with a foreign bank, M/s Legend Commodities, Switzerland for supply of 25,000 MT of price at a unit price of US$ 247 per M.T. for a total value of US$ 6.175 million. The assessee had earlier entered into another agreement with an Indian company, M/s Western India Sugar & Chemical Industries (WISCL), New Delhi on 03-08-1995 for supply of rice. The assessee was to purchase rice from WISCL and sold it to a foreign buyer M/s Legend Commodities, Switzerland. Payment was made to WISCL through Inland LC and the assessee’s margin in the trading transaction was US$1.20 per MT. The total margin was estimated at US$ 30,000.
13.6 Subsequently the assessee entered into a foreign exchange forward contract with SBI on 16-08-1995. According to this contract with SBI the assessee agreed to sell the foreign exchange received on export to the bank at a negotiated exchange rate during the specified period mentioned in the contract.
The details are as follows:
1 US$ = Rs. 31.55 during 01.10.95 to 31.10.95
2 US$ = Rs. 31.70 during 16.11.95 to 15.12.95
The forward contract period corresponded to the likely dates of shipment which was to be in two lots.
13.7 WISCL had failed to honour its contract to sell rice to the assessee. In turn, the assessee failed in its contract to export the rice to the foreign buyer. Meanwhile the forward contract with the bank matured and was rolled over at a higher rate necessitating payment of cancellation charges and interest on different rates to the bank. Ultimately the assessee terminated the two contracts. The total payments made by the assessee to SBI amounted to Rs.2, 13,31,571 on account of cancellation charges of the contracts and interest. The assessee claimed the same as business loss. The assessing officer invoked section 43(5) and on the ground that there was no delivery of any goods in this case and as the contract is settled other than by actual delivery, the loss therein is to be treated as a speculative loss.
13.8 On appeal the first appellate authority held that the payments made to SBI on account of cancellation of the forward contract was just a make belief transaction as the assessee only wanted to speculate in foreign currency. On factual matrix we are of the considered opinion that the revenue authorities have erred in not allowing the loss claimed by the assessee. The undisputed fact is that this payment was made to SBI and in pursuance of a forward foreign exchange contract. In fact the entire issue was considered at length. The judgment of the Mumbai Bench “J” of the Tribunal in the case of M/s Gill & Co (supra) has wrongly been distinguished by the CIT(A). The entire argument of the learned departmental representative is that the assessee has entered into a make belief colourable transaction with a view to claim this loss. We do not think so. No company would loose money to a public sector bank just to make a make belief transaction. In the case of M/s Gill & Co Ltd (supra), this bench of the Tribunal had clearly given a finding that when the assessee is not a dealer in foreign exchange and when the transaction is purely incidental to the assessee’s regular course of business the loss would be allowable. It has further been specifically held that foreign exchange cannot be claimed as a commodity in which the assessee was dealing and therefore the transaction did not come within the substantial part of section 43(5) itself. At paragraph 17, the Tribunal has held that it is not a case of settlement of a contract but it is cancellation of a contract, as is evident from the cancellation charges paid to the bank and such cancellation charges are in the nature of damages paid for non performance of contract and therefore the transaction cannot be said to be transaction for settlement of contract and hence section 43(5) is not attracted. At page 18 it was further held that the transaction entered into by the assessee is also covered by the Board circular No.23D(XXXIX)[F.No.412/(4)60/TPL] dated 12.9.1960 and gave a finding that at best this is a hedging loss. This decision is applicable in all force to the facts of the case. Even otherwise the judgment of the Hon’ble Bombay High Court in the case of CIT vs Badridas Gauridu (P) Ltd (supra) has held as follows:
“Held, dismissing the appeal, that the assessee was not a dealer in foreign exchange. The assessee was an exporter of cotton. In order to hedge against losses, the assessee had booked foreign exchange in the forward market with the bank. However, the export contracts entered into by the assessee for export of cotton in some cases failed. In the circumstances, the assessee was entitled to claim deduction in respect of Rs.13.50 lakhs as a business loss.”
Applying the ratio of the above decisions to the facts of the case in hand, we allow this ground of the assessee.
14. In the result, the appeal filed by the assessee is allowed in part.
15. Order pronounced on this 18th July, 2008.