In a recent ruling by the Bombay High Court in the case of CCE, Nagpur vs. Ultratech Cement Ltd. (assessee), it has been held that the assessee is entitled to avail Cenvat credit on outdoor & catering services provided in the factory for employees. The judgment of the Honorable High Court has also held that the definition of input service is wider than that of 5input.
The High Courts ruling is decisive in interpreting the meaning of the expressions such asand &activities in relation to business& used in the definition of input service under CENVAT Rules.
The High Court has negated the argument of the revenue to apply the judgment of Maruti Suzuki in its entirety and instead followed only the ratio of Martuti Suzuki.
CENVAT Credit – Service Tax - input service - extends to all services used in relation to the business of manufacturing the final product – the definition of "input service" is very wide and covers not only services, which are directly or indirectly used in or in relation to the manufacture of final products but also includes various services used in relation to the business of manufacture of final products, be it prior to the manufacture of final products or after the manufacture of final products. To put it differently, the definition of input service is not restricted to services used in or in relation to manufacture of final products, but extends to all services used in relation to the business of manufacturing the final product
IN THE HIGH COURT OF BOMBAY
AT NAGPUR BENCH
Central Excise Appeal No.7 of 2010
THE COMMISSIONER OF CENTRAL EXCISE, NAGPUR
Vs
1) ULTRATECH CEMENT LTD
AT POST AWARPUR, TQ AWARPUR
DISTT CHANDRAPUR (M S)
2) THE CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL
WEST ZONAL BENCH, MUMBAI
Case Law Referred:
1. Commissioner of Central Excise vs. GTC Industries Ltd (para 7)
2. M/s Maruti Suzuki Ltd. vs. CCE. Delhi - (para 9)
3. Doypack Systems (P) Ltd. vs. Union of India (para 13)
4. All India Federation of Tax Practitioners vs. Union of India - (para 15)
5. Coca Cola India Pvt. Ltd. vs. CCE - (para 15).
JUDGEMENT
Per: J P Devadhar:
1. The substantial question of law raised by the Revenue in this appeal reads thus:
"Whether the Hon'ble CESTAT was correct in holding that the respondent is entitled to avail the CENVAT Credit on outdoor 'catering services' provided in the factory for employees of the factory as a input service credit despite the fact that outdoor catering service does not fall under the ambit of the definition of "Input service" specified under Rule 2(1) of Cenvat Credit Rules, 2004, as the catering/canteen services are neither used in or in relation to the manufacture or clearance of final product nor can it be said, to be an activity relating to business."
2. The appeal is admitted on the above substantial question of law and by consent, the appeal is taken up for final hearing.
3. The facts relevant for the present appeal are that the Respondent-assessee is engaged in the manufacture of cement which is excisable under Chapter 25 of the Central Excise Tariff Act, 1985.
4. On scrutiny of the CENVAT register, it was noticed by the Excise Authorities that, during the period 2004-08, the assessee had availed credit of service tax paid on outdoor catering services under the provisions of Cenvat Credit Rules, 2004 (In short, "the 2004 Rules") & utilized the same in paying excise duty, that is, central value added tax on clearance of cement manufactured by the assessee.
5. The Assistant Commissioner, Central Excise, Chandrapur was of the opinion that outdoor catering services was not a "Input service" under Rule 2 (1) of the 2004 Rules and therefore, the assessee was not entitled to take credit of service tax paid on outdoor catering services. On issuance of show-cause notices, the assessee contended that, under the Factories Act, 1948, it was mandatory for the assessee to provide canteen facilities to the employees working in the plant and the administrative Offices of the assessee/Company. It was contended that, in order to comply with the aforesaid statutory requirement, the assessee had engaged the services of M/s. Shrikrishna Catering Services. Since the cost of food including service tax paid thereon by the Caterer was reimbursed by the assessee, it was contended that the assessee was entitled to take credit of the said service tax and utilize the same in paying the excise duty i.e. Central Value Added Tax (CENVAT) on the cement manufactured by the assessee.
6. Rejecting the contention of the assessee, the Assessing Officer held that the service tax paid by the outdoor caterer would not qualify as "Input Service" under Rule 2(1) of the 2004 Rules. Accordingly, the Assessing Officer confirmed dis-allowance of the CENVAT credit as well as the credit of education cess/Secondary and Higher Secondary Education Cess taken by the assessee on outdoor catering services and demanded the same with interest and penalty under Rules 14 and 15 of the 2004 Rules r/w Section 11(A)(B) of the Central Excise Act, 1944 and Section 75 of the Finance Act, 1994.
7. Being aggrieved by the orders passed by the Assessing Officer, the assessee filed appeals before the Commissioner of Central Excise (A) who, by a common order dt. 24.2.2009, allowed the said appeals by following the larger Bench decision of CESTAT in the case of Commissioner of Central Excise vs. GTC Industries Ltd reported in 2008 (12) STR 468 (T-LB. The larger Bench in the case of GTC Industries Ltd. (supra) had held that the cost of food borne by the factory would form part of the cost of production and hence, credit of duty paid thereon was allowable.
8. Being aggrieved by the afore-said order passed by the Commissioner of Central Excise (A), the Revenue filed appeals before the CESTAT. By the impugned order dt.8.9.2009 the CESTAT upheld the order of the Commissioner of Central Excise (A) by following the larger Bench decision of the Tribunal in the case of GTC Industries Ltd. (supra). Challenging the said order of the Tribunal, the Revenue has filed the present appeal. We are informed that the appeal filed by the Revenue against the larger Bench decision of the Tribunal in the case of GTC Industries Ltd. (supra) is pending before the Principal Bench of this Court at Mumbai.
9. Mr. S. K. Mishra, learned Assistant Solicitor General appearing on behalf of the Revenue submitted, firstly, that the Tribunal was wrong in placing reliance on the larger Bench decision of the Tribunal in the case of GTC Industries Ltd. (supra) because, in that case, duty on the final product was payable on the assessable value; whereas in the present case, duty on the final product is payable on tonnage basis. Therefore, the larger Bench decision of the Tribunal in GTC Industries Ltd. (supra) being distinguishable on facts, the Tribunal ought not to have applied the ratio of the said decision to the facts of the present case. Secondly, the credit under Rule 2(1) of the 2004 Rules is available only if the taxable service is used in or in relation to the manufacture of the final products. The outdoor catering service is not a service used in or in relation to the manufacture of cement and therefore, the assessee could not avail credit of service tax paid on outdoor catering services. Thirdly, recent decision of the Apex Court in the case of M/s Maruti Suzuki Ltd. vs. CCE. Delhi reported in 2009 (240) ELT 641 (SC) squarely applies to the facts of the present case and in the light of the above decision of the Apex Court, the question raised in the appeal be answered in favour of the revenue.
10. On the other hand, Mr. Shridharan, learned Counsel appearing on behalf of the assessee submitted that the decision of the Tribunal is in consonance with the Scheme of the Value Added Tax and if the contention of the Revenue is accepted, it would defeat the very object of the CENVAT Scheme. Relying on the Finance Minister's speech while introducing Union Budget 2004-05, the Draft Cenvat Credit Rules, 2004 and the Press note dt. 12.8.2004, Counsel for the assessee submitted that the CENVAT Scheme introduced under the 2004 Rules envisages integration of tax on goods and services used in relation to the manufacturing business and therefore, credit of service tax paid on any taxable service that forms part of the assessable value of the final product has to be allowed under the 2004 Rules. He submitted that the expression "Input Service" as per Rule 2 (1) of the 2004 Rules cannot be restricted to the services used in or in relation to the manufacture of the final products, but is liable to be extended to all services that are used in relation to the business of the manufacturer. In the present case, the assessee, carrying on the business of manufacturing cement, is mandatorily required under the Factories Act, 1948, to supply food to the employees. He submitted that, to comply with the above statutory provisions, outdoor catering services were engaged. Such an activity mandatorily required to be complied with would be an activity relating to the business of the assessee covered under the definition 'Input service' under Rule 2 (1) of the 2004 Rules.
11. Counsel for the assessee further submitted that the inclusive part of the definition of "Input service" under Rule 2 (1) of the 2004 Rules makes it clear that credit of service tax paid on services which are used in relation to the business such as accounting, auditing, etc. would be allowable even if the said services are not per se used in or in relation to manufacture of the final product. He submitted that the very object of the Cenvat Scheme is to allow credit of taxes paid on inputs used in or in relation to the manufacture of the final product and service tax paid on services used in relation to the manufacture of final products as well as the services used in relation to the business of the manufacture. Counsel for the assessee further submitted that the expression "such as" in Rule 2 (1) of the 2004 Rules is merely illustrative and not exhaustive. Therefore, credit of service tax paid on any service used by the assessee in relation to the business of manufacturing cement has to be allowed. In support of the above contention, Counsel for the assessee referred to the meaning of the word "such as" in Concise Oxford Dictionary and Chambers Dictionary. He also relied upon the decisions of the Apex Court in the case of Good Year Ltd. vs. Collector of Customs, 1997 (95) ELT 450 and Royal Hatcheries (P) Ltd. vs. State of Andhra Pradesh reported in 1994 SUPP (1) 429.
12. Counsel for the assessee further submitted that the business activity is an integrated/continuous activity and is not confined/ restricted to mere manufacturing activity. Therefore, business activity covers all activities that are related to carrying on the business. Therefore, the term "in relation to business" in Rule 2(1) of the 2004 Rules cannot be given a restricted meaning so as to cover only those activities which churn out the final product from the raw materials. In support of the above contention, he relied upon the decisions of the Apex Court in the case of State of Karnataka vs. Shreyas Paper Pvt. Ltd. reported in 2006 (1) SCC 615, Mazgaon Dock Ltd. vs. CIT reported in AIR 1958 SC 861.
13. Counsel for the assessee further submitted that the expression "activity relating to business" in Rule 2(1) of the 2004 Rules clearly denotes that the legislature intended to give wider meaning and not narrower meaning. In this connection, he relied upon the decision of the Apex Court in the case of Doypack Systems (P) Ltd. vs. Union of India reported in 1988 (36) ELT 201 (SC).
14. Relying on the decision of the Apex Court in the case of CIT vs. Chandulal Keshavlal and Co. reported in 1960 (38) ITR 601 (SC) and Eastern Investments Ltd. vs. CIT reported in 1951 (20) ITR-I (SC), Counsel for the assessee submitted that the expenses incurred as a result of commercial expediency are covered by the term "activities relating to business". Relying on the decision of the House of Lords in the case of Customs and Excise Commissioner vs. Redrow Group PLC reported in 1999 SIMON Tax Cases 161, Counsel for the assessee submitted that where the services used have direct and immediate link with the business of the assessee, then credit of service tax paid on those services would be allowable.
15. Counsel for the assessee further submitted that the Service Tax is a Value Added Tax which, in turn, is a destination based consumption tax i.e. a tax on commercial activities and it is not a charge on the business, but a charge on the consumer. In support of this contention, he relied on the CBEC Circular No.56, dt. 25.4.2003, the Circular No.80, dt.17.9.2004, the decision of the Apex Court in the case of All India Federation of Tax Practitioners vs. Union of India reported in 2007 (7) SCC 527 and the Division Bench Judgment of this Court in the case of Coca Cola India Pvt. Ltd. vs. CCE reported in 2009 (242) ELT 268 (Bom).
16. We have carefully considered the rival submissions. Before dealing with the rival submissions, it would be appropriate to set out brief history regarding the levy of excise duty on goods manufactured in India.
17. Central Excise & Salt Act, 1944 ("1944 Act" for short) was enacted with a view to impose excise duty on goods manufactured in India. As per the 1944 Act, manufactured goods on which excise duty has been paid, if used as inputs in the manufacture of the final products, then excise duty was again leviable on the manufacture of final products. This resulted in levying duty on duty. To avoid this cascading effect of duty, proforma credit scheme was introduced under the Central Excise Law. Under the proforma credit scheme, excise duty and counter vailing duty paid on the inputs were allowed as proforma credit while paying excise duty on the final products, provided both the inputs as well as the final products were liable to duty under the same tariff item. Originally excise duty was payable at the rate prescribed under the Schedule to the 1944 Act. With the introduction of the Central Excise Tariff Act, 1985 ("1985 Act" for short), excise duty became payable at the rate prescribed under the schedule to the 1985 Act.
18. Since the benefit under the proforma credit scheme was limited to a very small area, the Government introduced the Modified Value Added Tax Scheme (MODVAT scheme) with effect from 01-3-1986. The basic object of the MODVAT scheme was to shift the burden of excise duty from the inputs to the final products so that the duty paid on inputs as well as the final products is ultimately passed on to the consumer. The MODVAT scheme was initially introduced by inserting Rule 57 A to 57 l in the Central Excise Rules, 1944 in respect of goods falling under specified chapters of the Central Excise Tariff Act, 1985. Later on the MODVAT scheme was extended to the remaining chapters of the Central Excise Tariff. Subsequently MODVAT Scheme was extended to cover capital goods by inserting Rule 57 Q to 57 U to the Central Excise Rules, 1944. As per the MODVAT Scheme, the manufacturers were entitled to take credit of duty paid on inputs used in the manufacture of the final products and utilize the said credit in paying the excise duty on the final products.
19. With the introduction of service tax in the year 1994-95, persons rendering specified services became liable to pay service tax on services rendered. 'Service Tax', as held by the Apex Court in the case of All India Federation of Tax Practitioners (supra) is a value added tax, which in turn is a general tax, which applies to all commercial activities involving production of goods and provision of services. Thus, levy of excise duty was on manufacture of goods whereas, levy of service tax was on rendering specified services.
20. Since the excise duty as well as the service tax are ultimately borne by the consumer, the Government decided to integrate the tax on goods and services under the "Value Added Tax System" ('VAT System' for short). Under the VAT System, tax is levied on the value added to any goods manufactured or services rendered each time when there is change of hand. In implementation of the VAT System, Section 3 of the 1944 Act was amended thereby renaming the levy of excise duty as "Central Value Added Tax" ('CENVAT' for short) with effect from 12-5-2000. Thereafter, the Government introduced the CENVAT Credit Rules, 2001 under which Modvat on inputs/capital goods and service tax were sought to be amalgamated into one integrated scheme. These Rules were replaced by CENVAT Credit Rules, 2002. Simultaneously, Service Tax Credit Rules, 2002 were also framed by the Government under which credit of service tax paid on services used in the output services was allowed to be taken.
21. With a view to totally integrate the tax on goods and services the Government introduced CENVAT Credit Rules, 2004 ('2004 Rules' for short) by superseding the CENVAT Credit Rules, 2002 and Service Tax Credit Rules, 2002. The object of 2004 Rules is to extend the credit of service tax and excise duty across goods and services.
22. As per Rule 3 of 2004 Rules a manufacturer or producer of final products is entitled to take credit of duty of excise, additional duty of excise, national calamity contingent duty, education cess, secondary education cess etc. paid on any input or capital goods received in the factory of manufacturer of final products on or after 10-9-2004 as well as credit of service tax paid on any input service received by the manufacturer of the final product or by the provider of output service on or after 10-9-2004. The said credit called "CENVAT Credit" can be utilized in paying excise duty (CENVAT) on the final products/service tax on any output service.
23. Rule 2 (k) and Rule 2(1) of the 2004 Rules define the expression "input" and "input service" as follows :-
"2(k) "input" means -
(i) all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not and includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in relation to manufacture of final products or for any other purpose, within the factory of production;
(ii) all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and motor vehicles, used for providing any output service;
2(1) "Input service" means any service,-
(i) used by a provider of taxable service for providing an output service, or,
(ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and (clearance of final products upto the place of removal,)
and includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit relating, share registry, and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal:"
24. In the present case, the dispute is, whether the assessee is entitled to take credit of service tax reimbursed by the assessee to the outdoor caterer (whose services were engaged for providing canteen facilities to the employees of the assessee) and utilize the said credit in discharging the excise duty/CENVAT payable on the cement manufactured by the assessee?
25. In the present case, the CESTAT following the Larger Bench decision of the Tribunal in the case of GTC Industries Ltd., (Supra) held that the assessee is entitled to the credit of service tax paid on the outdoor catering services. According to the Revenue, the Tribunal was wrong in relying upon Larger Bench decision of the CESTAT in the case of GTC Industries Ltd. (Supra) because in that case the CENVAT on the final product was payable on the assessable value, whereas in the present case the CENVAT on cement is payable on tonnage basis. We see no merit in the above contention because, if in law the assessee is entitled to take credit of service tax paid on outdoor catering services then the said credit cannot be denied merely because the duty on cement is levied on tonnage basis. Therefore, the fact that the CENVAT on cement is payable on tonnage basis cannot be a ground to deny the credit of service tax if in law the assessee is entitled to the credit of service tax paid on outdoor catering service.
26. The question, therefore, to be considered is, whether the service of an outdoor caterer used by the assessee is an 'input service' used in the manufacture of cement?
27. The definition of "input service" as per Rule 2(1) of 2004 Rules (insofar as it relates to the manufacture of final product is concerned), consists of three categories of services. The first category, covers services which are directly or indirectly used in or in relation to the manufacture of final products. The second category, covers the services which are used for clearance of the final products up to the place of removal. The third category, includes services namely;
a) Services used in relation to setting up, modernization, renovation or repairs of a factory,
b) Services used in an office relating to such factory,
c) Services like advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs,
d) Activities relating to business such as, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit relating, share registry and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal.
Thus, the definition of 'input service' not only covers services, which fall in the substantial part, but also covers services, which are covered under the inclusive part of the definition.
28. In the present case, the question is, whether outdoor catering services are covered under the inclusive part of the definition of "input service". The services covered under the inclusive part of the definition of input service are services which are rendered prior to the commencement of manufacturing activity (such as services for setting up, modernization, renovation or repairs of a factory) as well as services rendered after the manufacture of final products (such as advertisement, sales promotion, market research etc.) and includes services rendered in relation to business such as auditing, financing etc. Thus, the substantive part of the definition "input service" covers services used directly or indirectly in or in relation to the manufacture of final products, whereas the inclusive part of the definition of "input service" covers various services used in relation to the business of manufacturing the final products. In other words, the definition of "input service" is very wide and covers not only services, which are directly or indirectly used in or in relation to the manufacture of final products but also includes various services used in relation to the business of manufacture of final products, be it prior to the manufacture of final products or after the manufacture of final products. To put it differently, the definition of input service is not restricted to services used in or in relation to manufacture of final products, but extends to all services used in relation to the business of manufacturing the final product.
29. The expression "activities in relation to business" in the definition of "input service" postulates activities which are integrally connected with the business of the assessee. If the activity is not integrally connected with the business of the manufacture of final product, the service would not qualify to be a input service under Rule 2(1) of the 2004 Rules.
30. The Apex Court in the case of Maruti Suzuki Ltd. (supra) has considered the expression 'used in or in relation to the manufacture of final product' in the definition of "input" under Rule 2(k) of 2004 Rules and held as follows:-
"14... Moreover, the said expression, viz, "used in or in relation to the manufacture of the final product" in the specific/substantive part of the definition is so wide that it would cover innumerable items as "input" and to avoid such contingency the Legislature has incorporated the inclusive part after the substantive part qualified by the place of use. For example, one of the categories mentioned in the inclusive part is "used as packing material". Packing material by itself would not suffice till it is proved that the item is used in the course of manufacture of final product. Mere fact that the item is a packing material whose value is included in the assessable value of final product will not entitle the manufacturer to take credit. Oils and lubricants mentioned in the definition are required for smooth running of machines, hence they are included as they are used in relation to manufacture of the final product. The intention of the Legislature is that inputs falling in the inclusive part must have nexus with the manufacture of the final product.
16. In our earlier discussion, we have referred to two considerations as irrelevant, namely, use of input in the manufacturing process, be it direct or indirect as also absence of the input in the final product on account of the use of the expression "used in or in relation to the manufacture of final product". Similarly, we are of the view that consideration such as input being used as packing material, input used as fuel, input used for generation of electricity or steam, input used as an accessory and input used as paint are per se also not relevant. All these considerations become relevant only when they are read with the expression "used in or in relation to the manufacture of final product" in the substantive/specific part of the definition. In each case it has to be established that inputs mentioned in the inclusive part is "used in or in relation to the manufacture of final product". It is the functional utility of the said item which would constitute the relevant consideration. Unless and until the said input is used in or in relation to the manufacture of final product within the factory of production, the said item would not become an eligible input. The said expression "used in or in relation to the manufacture' have many shades and would cover various situations based on the purpose for which the input is used. However, the specified input would become eligible for credit only when used in or in relation to the manufacture of final product. Hydrogen gas used in the manufacture of sodium cyanide is an eligible input, since it has a significant role to play in the manufacturing process and since the final product cannot emerge without the use of gas. Similarly, Heat Transfer Oil used as a heating medium in the manufacture of LAB is an eligible input since it has a persuasive role in the manufacturing process and without its use it is impossible to manufacture the final product. Therefore, none of the categories in the inclusive part of the definition would constitute relevant consideration per se. They become relevant only when the above crucial requirement of being "used in or in relation to the manufacture" stands complied with. In our view, one has to therefore read the definition in its entirety."
31. In our opinion, the ratio laid down by the Apex Court in the case of Maruti Suzuki Ltd. (supra) in the context of the definition of 'input' in Rule 2(k) of 2004 Rules would equally apply while interpreting the expression "activities relating to business" in Rule 2(1) of 2004 Rules. No doubt that the inclusive part of the definition of 'input' is restricted to the inputs used in or in relation to the manufacture of final products, whereas the inclusive part of the definition of input service extends to services used prior to/during the course of/after the manufacture of the final products. The fact that the definition of 'input service' is wider than the definition of 'input' would make no difference in applying the ratio laid down in the case of Maruti Suzuki Ltd. (supra) while interpreting the scope of 'input service'. Accordingly, in the light of the judgment of the Apex Court in the case of Maruti Suzuki Ltd. (supra), we hold that the services having nexus or integral connection with the manufacture of final products as well as the business of manufacture of final product would qualify to be input service under Rule 2(1) of 2004 Rules.
32. As rightly contended by Shri Shridharan, learned Counsel for the respondent-assessee, in the present case, the assessee carrying on the business of manufacturing cement by employing more than 250 workers is mandatorily required under the provisions of the Factories Act, 1948 to provide canteen facilities to the workers. Failure to do so entails penal consequences under the Factories Act, 1948. To comply with the above statutory provision, the assessee had engaged the services of a outdoor caterer. Thus, in the facts of the present case, use of the services of an outdoor caterer has nexus or integral connection with the business of manufacturing the final product namely, cement. Hence, in our opinion, the Tribunal was justified in following the Larger Bench decision of the Tribunal in the case of GTC Industries Ltd. (supra) and holding that the assessee is entitled to the credit of service tax paid on outdoor catering service.
33. It is argued on behalf of the Revenue that not only the ratio but the decision of the Apex Court in the case of Maruti Suzuki Ltd. (supra) must be applied ipso facto to hold that the credit of service tax paid on outdoor catering services is allowable only if the said services are used in relation to the manufacture of final products. That argument cannot be accepted because unlike the definition of input, which is restricted to the inputs used directly or indirectly in or in relation to the manufacture of final products, the definition of 'input service' not only means services used directly or indirectly in or in relation to manufacture of final products, but also includes services used in relation to the business of manufacturing the final products. Therefore, while interpreting the words used in the definition of 'input service', the ratio laid down by the Apex Court in the context of the definition of 'input' alone would apply and not the judgment in its entirety. In other words, by applying the ratio laid down by the Apex Court in the case of Maruti Suzuki Ltd. (supra), it cannot be said that the definition of 'input service' is restricted to the services used in relation to the manufacture of final products, because the definition of 'input service' is wider than the definition of 'input'.
34. Therefore, the definition of input service read as a whole makes it clear that the said definition not only covers services, which are used directly or indirectly in or in relation to the manufacture of final product, but also includes other services, which have direct nexus or which are integrally connected with the business of manufacturing the final product. In the facts of the present case, use of the outdoor catering services is integrally connected with the business of manufacturing cement and therefore, credit of service tax paid on outdoor catering services would be allowable.
35. The argument of the Revenue, that the expression "such as" in the definition of input service is exhaustive and is restricted to the services named therein, is also devoid of any merit, because, the substantive part of the definition of 'input service' as well as the inclusive part of the definition of 'input service' purport to cover not only services used prior to the manufacture of final products, subsequent to the manufacture of final products but also services relating to the business such as accounting, auditing ..... etc. Thus the definition of input service seeks to cover every conceivable service used in the business of manufacturing the final products. Moreover, the categories of services enumerated after the expression 'such as' in the definition of 'input service' do not relate to any particular class or category of services, but refer to variety of services used in the business of manufacturing the final products. There is nothing in the definition of 'input service' to suggest that the Legislature intended to define that expression restrictively. Therefore, in the absence of any intention of the Legislature to restrict the definition of 'input service' to any particular class or category of services used in the business, it would be reasonable to construe that the expression 'such as' in the inclusive part of the definition of input service is only illustrative and not exhaustive. Accordingly, we hold that all services used in relation to the business of manufacturing the final product are covered under the definition of 'input service' and in the present case, the outdoor catering services being integrally connected with the business of the manufacture of cement, credit of service tax paid out on catering services has been rightly allowed by the Tribunal.
36. The argument of the Revenue that the expression "such as" in Rule 2(1) of 2004 Rules is restricted to the categories specified therein, runs counter to the C.B.E.C. Circular No.97, dated 23rd August, 2007. In that Circular the C.B.E.C. (vide para 8.3) has held that the credit of service tax paid in respect of mobile phone service is admissible provided the mobile phone is used for providing output service or used in or in relation to manufacture of finished goods. Mobile phone service is neither used in the manufacture of final product nor it is specifically included in the definition of input service. Even then, the C.B.E.C. has construed the definition of input service widely so as to cover not only the services specifically enumerated in the definition of 'input service' but also cover all services which are used in relation to the business of manufacturing the final products. Therefore, the argument of the revenue which runs counter to stand taken by the C.B.E.C. cannot be accepted.
37. In the case of Coca Cola India Pvt. Ltd. (Supra) a Division Bench of this Court has considered scope of the expression "input service' as defined in rule 2(1) of 2004 Rules. In that case, the question for consideration was, whether a manufacturer of non alcoholic beverage bases (concentrates) is eligible to avail credit of service tax paid on advertisement, sales promotion, market research etc. The argument of the revenue in that case was that the advertisements are not relatable to the concentrate manufactured by Coco Cola India Pvt. Ltd. (supra) and hence, the credit in respect thereof cannot be allowed. Considering the Finance Minister's Budget Speech for 2004-05, press note issued by the Ministry of finance along with the Draft 2004 Rules and various decisions of the Apex Court, this Court held that the expression 'activities in relation to business' in the inclusive part of the definition of 'input service' further widens the scope of input service so as to cover all services used in the business of manufacturing the final products and that the said definition is not restricted to the services enumerated in the definition of input service itself. The Court rejected the contention of the revenue that a service to qualify as an input service must be used in or in relation to the manufacture of the final products and held that any service used in relation to the business of manufacturing the final product would be an eligible input service.
38. We concur with the above decision of this Court in the case of Coco Cola India Pvt. Ltd. (supra). However, in that case, this Court has also held that the cost of any input service that forms part of value of final products would be eligible for CENVAT credit. That observation of the Division Bench is made in the context of a service which is held to be integrally connected with the business of manufacturing the final product. Therefore, the observation of the Division Bench in the case of Coca Cola India Pvt. Ltd. (supra) has to be construed to mean that where the input service used is integrally connected with the business of manufacturing the final product and the cost of that input service forms part of the cost of the final product, then credit of service tax paid on such input service would be allowable.
39. The Larger Bench of CESTAT in the case of GTC Industries Ltd. (supra) has also observed that the credit of service tax would be allowable to a manufacturer even in cases where the cost of the food is borne by the worker (see last para). That part of the observation made by the Larger Bench cannot be upheld, because, once the service tax is borne by the ultimate consumer of the service, namely the worker, the manufacturer cannot take credit of that part of the service tax which is borne by the consumer. Shri Shridharan, learned Counsel for the assessee fairly conceded to the above position in law and in fact filed an affidavit affirmed by a responsible officer of the assessee wherein it is stated that the proportionate credit to the extent embedded in the cost of food recovered from the employee/worker has been reversed.
40. For all the aforesaid reasons, the question of law framed by the revenue is answered in the affirmative, i.e. in favour of the assessee and against the revenue. However, the CENVAT credit reversed by the assessee, belatedly, having not been verified by the Excise Authorities, the Excise Authorities are directed to verify the same and pass an appropriate order in that behalf.
41. The appeal is disposed of in the above terms with no order as to costs.
Monday, November 8, 2010
Thursday, October 28, 2010
Income from supply of ‘shrink-wrapped’ software assessable as ‘royalty’. A tax-treaty can be unilaterally overridden (Microsoft Corporation vs. ADIT (ITAT Delhi))
Microsoft Corporation vs. ADIT (ITAT Delhi)
Till 31.12.1998, Microsoft Corporation directly entered into agreements with Indian distributors for sale of Microsoft products being “off the shelf”/ “shrink wrapped” software, on principal to principal basis. The Indian Distributors, in turn, sold these Microsoft products to re-sellers/consumers. The business model was changed w.e.f. 1.1.1999. Microsoft Corp granted an exclusive license to its 100% subsidiary Gracemac Corp, USA, to manufacture and distribute in the territory the MS retail software products. Gracemac in turn, entered into a license agreement with Microsoft Operations Pte Ltd, Singapore (“MO”), under which it granted the latter a license to manufacture and distribute (reproduce) Microsoft software in Singapore in consideration of a royalty ranging from 30% to 40% of the selling price (in India). MO in turn entered into a distribution agreement with Microsoft Regional Sales Corporation, USA (“MRSC”), appointing the latter as distributor for selling the Microsoft software which were manufactured by MO. MRSC, in turn, entered into agreements with various distributors in various countries including India. The distributors distributed copies of software in their respective countries. MO sold the software copies to MRSC in Singapore. The Microsoft software copies are delivered by MRSC to the Indian Distributors “ex-warehouse” in Singapore. The distributor sold the products to re-sellers in India who, in turn, sold them to end users. Microsoft Corp entered into agreements with end users to use the software products licenced to them as per terms of agreement.
In the case of Microsoft Corp (till the change), the assessee accepted that income from licensing software to OEMs was “royalty” though it argued that income from licensing software to distributors was “sale of a copyrighted article” and not assessable in India for want of a PE. In the case of Gracemac (after the change), it was argued that as the royalty was received from a Singapore company (MO), the source of the royalty (though based on sales in India) was not in India and consequently not assessable in India. In the case of MRSC, it was argued that revenue was derived from sales of software to independent distributors and not from licensing and the revenue was not assessable to tax in India for want of a PE. The AO & CIT (A) took the view that the revenue received by all three parties was assessable as “royalty” under s. 9(1)(vi) as well as Article 12 of the India-USA DTAA. On appeal to the Tribunal, HELD:
(i) The income received for supply of software is assessable as “royalty” under s. 9(1)(vi) as a copyright subsists in a computer programme and it is also a literary as also a scientific work. A computer programme is also a patent, invention or process. As end-users have made payment for transfer of rights (including the granting of a license) in respect of copyright, patent, invention, process, literary or scientific work, the payment would be in the nature of royalty. Under the Explanation to s. 9 (1) inserted by FA 2010 w.r.e.f 1.6.1976, income u/s 9(1)(vi) is deemed to accrue or arise in India even if the non-resident does not have a place of business in India;
(ii) As regards Article 12(3) of the India-USA DTAA, the definition of the term “royalty” is identical that in s. 9(1)(vi) and there is no conflict. Under both, royalties are deemed to arise in the State in which the payer is situated;
(iii) Assuming there was a conflict between the Act and the DTAA, the proposition that the DTAA will prevail over the Act is not infallible. Later domestic tax legislation can over-ride treaty provisions if there is an irreconcilable conflict (Gramophone Company of India AIR 1984 SC 667 followed). As the India-USA DTAA was entered on 20.12.1990, the subsequent retrospective amendment to s. 9 which provides that royalties will be deemed to accrue or arise in India even if the non-resident has no place of business in India will apply irrespective of any contrary provision in the India-USA DTAA;
(iv) Though the OECD Commentary provides that software supply profits are not assessable as “royalty”, the same merely contains the views of the authors and cannot be equated with the court decisions or law. Further, several Countries have expressed reservations in following the OECD commentary and there is also a cleavage of opinion in the OECD on whether a copyrighted article has copyright in it;
(v) The judgement of the Supreme Court in Tata Consultancy Services vs. State of AP 271 ITR 401 where a distinction was drawn between a “copyright” and a “copyrighted article” is not applicable as the Court was concerned with the provisions of the sales-tax act and was not concerned with the issue whether the transfer of a copyrighted software can give rise to “royalty”. Similarly, in Motorola 95 ITD 269 (SB) the Special Bench was concerned with a case where the software licensed to the cellular operator was a part of the hardware and had no independent use;
(vi) As the assessee has itself filed suits in Indian courts alleging copyright-infringement when pirated / unlicensed software is used, it cannot “blow hot & cold” in the same breath on the same issue;
(vii) Accordingly, the payments received by Microsoft Corporation from end users through distributors in respect of sale of computer software is taxable as royalty u/s 9(1)(vi);
(viii) As regards Gracemac, the argument that since EULA has been signed between end users and Microsoft Corp, no license was granted by Gracemac and consequently royalty payments are not chargeable to tax in the hands of Gracemac is not acceptable because the agreements are a “camouflage”. As end users have made payments for grant of license in respect of copyright in computer programmes, the consideration is taxable as “royalty” in the hands of Gracemac;
(ix) However, as regards MRSC, the income ought to have been assessed as business income u/s 9(1)(i) as it had a “business connection” with distributors in India and not as “royalty” as the royalty for grant of rights has already been assessed in the hands of Gracemac and there will be double taxation.
(x) The assessees (though non-residents) are liable to pay interest u/s 234A to 234C in view of Anjum Ghaswala 252 ITR 1 where the levy of interest was held mandatory in nature.
Note: A contrary view is taken in Velankani Mauritius vs. DDIT (ITAT Bangalore), Kansai Nerolac Paints vs. ADIT (ITAT Mumbai) & Dassault Systems 229 CTR 105 (AAR) that income from software supply is not “royalty” but is “business profits” & not chargeable to tax in the absence of a PE. See Also: Infotech Software Dealers Association vs. UOI (Madras High Court). On interest u/ss 234B/C see Jacabs Civil Inc (Delhi High Court)
Sunday, September 5, 2010
Software is “goods”, its supply may be a “service” and not a “sale”
Infotech Software Dealers Association vs. UOI (Madras High Court)
Though software is “goods”, its supply may be a “service” and not a “sale”
S. 65(105)(zzzze) of the Finance Act, 1995 inserted by the F (No. 2) Act, 2009 provides for the levy of service tax on “any service provided … to any person, by any other person in relation to information technology software for use in the course, or furtherance, of business or commerce, including … acquiring the right to use information technology software …” The Petitioner, an association of software resellers, contented inter alia that as software had been held to be “goods” by the Supreme Court in Tata Consultancy Services 271 ITR 401 and as there was a “sale” attracting VAT, there could not also be a “service” and that s. 65(105)(zzzze) was unconstitutional. HELD dismissing the Petition:
(i) Two questions arise for consideration: (a) whether software is goods and (b) if so, whether in all case of transactions, it would amount to sale or in some transactions it could be considered to be a service;
(ii) All software is “goods”. Article 366(12) of the Constitution defines the term “goods” to include all materials, commodities and articles. It is an inclusive definition. Though a software programme consists of various commands which enable the computer to perform a designated task and the copyright in that programme remains with the originator of the programme, yet because software is an article of value, it is “goods”. Indian law does not make a distinction between tangible property and intangible property. Tata Consultancy Services 271 ITR 401 (SC) followed;
(iii) However, while software is “goods”, all transactions are not necessarily a “sale”. The transaction may be one which is either an ‘exclusive sale’ or ‘an exclusive service’ or one which has the elements of a sale and service. A perusal of a sample ‘End User Licence Agreement’ (EULA) shows that the dominant intention of the parties is that the developer keeps the copyright of each software is only the right to use with copyright protection. By the agreement, the developer does not sell the software as such. The Petitioner in turn enters into a EULA for marketing the software to the end-user. Accordingly, when a transaction takes place between the Petitioner and its customers, it is not the sale of the software as such, but only the contents of the data stored in the software which would amount to only service. To bring the deemed sale under Article 366(29A)(d) of the Constitution, there must be a transfer of right to use any goods and when the goods as such is not transferred, the question of deeming sale of goods does not arise and in that sense, the transaction would be only a service and not a sale;
(iv) Accordingly, the argument that as software is ‘goods’, all transactions of canned / packaged software or customized software is a sale is not acceptable. The question whether a transaction amounts to a sale or service depends upon the individual transaction. Parliament cannot be said not to have the legislative competence to tax the transaction if it is shown to be a service.
Friday, August 6, 2010
Draft Point of Taxation (for Services Provided or Received in India) Rules, 2010
Draft Point of Taxation (for Services Provided or Received in India) Rules, 2010
1) These Rules shall be called the Point of Taxation (for services provided or received in India) Rules, 2010. They shall come into force on the date of their publication in the official gazette.
(Explanatory Notes)
(Explanatory Notes)
2) In these Rules, unless the context otherwise requires,-
a) “Act” means the Finance Act, 1994 (32 of 1994);
b) “ associated enterprises” shall have the meaning assigned to it in section 92 A of the Income Tax Act, 1961 (43 of 1961) ;
c) “continuous supply of service” means any service which is provided, or to be provided, under a contract, for a period exceeding six months ,or where the Central Government, by a notification, prescribes provision of a particular service to be a continuous supply of service, whether or not subject to any condition;
d) “ Invoice” shall have the meaning assigned to it in Rule 4A of the Service Tax Rules, 1994 and shall include any bill or challan as prescribed therein;
e) “ Point of taxation” means the point of time when the tax becomes payable to the Government;
f) “taxable service” means a service which is subjected to service tax, whether or not the same is fully exempt by the Central Government vide powers conferred under Section 93 of the Act;
g) ‘taxable event” means an event which causes the tax liability to arise, namely, the provision of service, issuance of invoice or the receipt of payment.
(Explanatory Notes)
3) For the purposes of these rules, -
a) A provision of service shall be treated as having taken place at the time when service is provided, or is to be provided.
b) If, before the time prescribed in sub-rule (a), the person providing the service issues an invoice or receives a payment in respect of service to be provided, the supply shall be, to the extent covered by the invoice or the payment made thereof, deemed to be have taken place at the time the invoice was issued or the payment is received, as the case may be, whichever is earlier.
(Explanatory Notes)
4) Treatment of advances: Wherever any advance, by whatever name it is known, is received by the service provider towards the provision of taxable service, the tax becomes payable on the date of receipt of each such advance.
Provided that no tax shall be payable on an interest free refundable deposit.
(Explanatory Notes)
5) For the purposes of these Rules, if there is a difference in date and time between the raising of invoice, date of payment and providing of taxable service, and the tax rate changes during such period, the point of taxation shall be determined in the following manner
a) Where a taxable service has been provided before the change of rate*, but the invoice for the same has been raised and the payment received after the change of rate, the point of taxation shall be the date of payment or issuance of invoice, whichever is earlier.
b) Where the invoice has been raised and service provided prior to a change in tax rate*, the point of taxation shall be the date of raising of invoice, provided the payment for the invoice is made within 30 days of raising of invoice. In other cases, it would be the date of payment.
c) Where the invoice has been raised prior to the change of tax rate*, but the service has been provided and the payment for the invoice made after the change in tax rate, the point of taxation shall be the date of payment.
d) Where the invoice has been raised and the payment for the invoice received before the change of tax rate*, but the service provided after the change of rate, point of taxation shall be the date of receipt of payment or date of issuance of invoice, whichever is earlier.
*(Note:- change in tax rate includes withdrawal of exemption)
(Explanatory Notes)
a) “Act” means the Finance Act, 1994 (32 of 1994);
b) “ associated enterprises” shall have the meaning assigned to it in section 92 A of the Income Tax Act, 1961 (43 of 1961) ;
c) “continuous supply of service” means any service which is provided, or to be provided, under a contract, for a period exceeding six months ,or where the Central Government, by a notification, prescribes provision of a particular service to be a continuous supply of service, whether or not subject to any condition;
d) “ Invoice” shall have the meaning assigned to it in Rule 4A of the Service Tax Rules, 1994 and shall include any bill or challan as prescribed therein;
e) “ Point of taxation” means the point of time when the tax becomes payable to the Government;
f) “taxable service” means a service which is subjected to service tax, whether or not the same is fully exempt by the Central Government vide powers conferred under Section 93 of the Act;
g) ‘taxable event” means an event which causes the tax liability to arise, namely, the provision of service, issuance of invoice or the receipt of payment.
(Explanatory Notes)
3) For the purposes of these rules, -
a) A provision of service shall be treated as having taken place at the time when service is provided, or is to be provided.
b) If, before the time prescribed in sub-rule (a), the person providing the service issues an invoice or receives a payment in respect of service to be provided, the supply shall be, to the extent covered by the invoice or the payment made thereof, deemed to be have taken place at the time the invoice was issued or the payment is received, as the case may be, whichever is earlier.
(Explanatory Notes)
4) Treatment of advances: Wherever any advance, by whatever name it is known, is received by the service provider towards the provision of taxable service, the tax becomes payable on the date of receipt of each such advance.
Provided that no tax shall be payable on an interest free refundable deposit.
(Explanatory Notes)
5) For the purposes of these Rules, if there is a difference in date and time between the raising of invoice, date of payment and providing of taxable service, and the tax rate changes during such period, the point of taxation shall be determined in the following manner
a) Where a taxable service has been provided before the change of rate*, but the invoice for the same has been raised and the payment received after the change of rate, the point of taxation shall be the date of payment or issuance of invoice, whichever is earlier.
b) Where the invoice has been raised and service provided prior to a change in tax rate*, the point of taxation shall be the date of raising of invoice, provided the payment for the invoice is made within 30 days of raising of invoice. In other cases, it would be the date of payment.
c) Where the invoice has been raised prior to the change of tax rate*, but the service has been provided and the payment for the invoice made after the change in tax rate, the point of taxation shall be the date of payment.
d) Where the invoice has been raised and the payment for the invoice received before the change of tax rate*, but the service provided after the change of rate, point of taxation shall be the date of receipt of payment or date of issuance of invoice, whichever is earlier.
*(Note:- change in tax rate includes withdrawal of exemption)
(Explanatory Notes)
6) Where a service, not being a service covered by rule 7 of these rules, is taxed for the first time -
a) no tax shall be payable to the extent the invoice has been issued and payment received before such service becomes taxable, even if the service is provided at a time when it is taxable;
b) no tax shall be payable if the payment has been received and invoice has been issued within the period prescribed under rule 4A of the Service Tax Rules, 1994.
Provided that no tax shall be payable on any service which has been provided before the service becomes taxable.
(Explanatory Notes)
7) Continuous Supply of service:
a) Continuous supply of service, the whole or part of which is determined or payable periodically or from time to time, shall be treated as separately supplied at the following times;
i) If the date of payment is prescribed in the contract, the date on which the payment is liable to be made by the service receiver, irrespective of whether or not any invoice has been raised or any payment received by the service provider;
ii) If the payment is linked to the completion of an event, the time of completion of that event;
If the date of payment is not prescribed in the contract, each time when the service provider receives the payment, or issues an invoice, whichever is earlier.
Provided that, for the provision of services covered by this Rule, no tax shall be payable on the payment received before any service becomes taxable, provided that such payment is covered by clause (i) or (iii) above.
Provide further that the clauses (i) to (iii) shall be read sequentially for the purposes of this rule.
(Explanatory Notes)
8) The point of taxation in respect of associated enterprises shall be the date on which the payment has been made, or the date of debit or credit in books of accounts, or issuance of debit or credit notes, whichever is earlier.
(Explanatory Notes)
9) In respect of royalties and similar payments, where the whole amount of the consideration for the provision of service was not ascertainable at the time when the service was performed, and subsequently the use or the benefit of these service by a person other than the supplier gives rise to any payment of consideration, the service shall be treated as having been provided each time that a payment in respect of such use or the benefit is received by the provider, or an invoice is issued by the provider, whichever is earlier.
(Explanatory Notes)
a) no tax shall be payable to the extent the invoice has been issued and payment received before such service becomes taxable, even if the service is provided at a time when it is taxable;
b) no tax shall be payable if the payment has been received and invoice has been issued within the period prescribed under rule 4A of the Service Tax Rules, 1994.
Provided that no tax shall be payable on any service which has been provided before the service becomes taxable.
(Explanatory Notes)
7) Continuous Supply of service:
a) Continuous supply of service, the whole or part of which is determined or payable periodically or from time to time, shall be treated as separately supplied at the following times;
i) If the date of payment is prescribed in the contract, the date on which the payment is liable to be made by the service receiver, irrespective of whether or not any invoice has been raised or any payment received by the service provider;
ii) If the payment is linked to the completion of an event, the time of completion of that event;
If the date of payment is not prescribed in the contract, each time when the service provider receives the payment, or issues an invoice, whichever is earlier.
Provided that, for the provision of services covered by this Rule, no tax shall be payable on the payment received before any service becomes taxable, provided that such payment is covered by clause (i) or (iii) above.
Provide further that the clauses (i) to (iii) shall be read sequentially for the purposes of this rule.
(Explanatory Notes)
8) The point of taxation in respect of associated enterprises shall be the date on which the payment has been made, or the date of debit or credit in books of accounts, or issuance of debit or credit notes, whichever is earlier.
(Explanatory Notes)
9) In respect of royalties and similar payments, where the whole amount of the consideration for the provision of service was not ascertainable at the time when the service was performed, and subsequently the use or the benefit of these service by a person other than the supplier gives rise to any payment of consideration, the service shall be treated as having been provided each time that a payment in respect of such use or the benefit is received by the provider, or an invoice is issued by the provider, whichever is earlier.
(Explanatory Notes)
Mumbai ITAT on deductability of ESSP & Cost Sharing Agreement expenses
In the Ruling of Mumbai ITAT in the case of Accenture Services Pvt Ltd, it was held that the expenses on Cost Contribution Agreements (CCA’s) and ESPP Payments are incurred for the “purpose of business” and are allowable.
IN THE INCOME TAX APPELLATE TRIBUNALBENCH 'A' MUMBAIITA No.4540/M/08Assessment Year : 2002-03M/s ACCENTURE INDIA PVT LTD 17th FLOOR, EXPRESS TOWER NARIMAN POINT, MUMBAI-21PAN NO:AABCA1826A Vs DY COMMISSIONER OF INCOME-TAX CIRCLE-3(1), ROOM NO 607 6th FLOOR, AAYAKAR BHAVAN MUMBAI-20
ORDER
These appeals filed by the Revenue are directed against the orders of CIT(A) of two different assesses, namely M/s Accenture Services Pvt. limited (In short ASPL) and M/s Accenture India Pvt. Ltd ( in short AIPL). The assesses also filed cross objections against the orders of CIT(A). Since identical issues are involved in these appeals and Cross Objections, they were heard together and, therefore, for the sake of convenience, a common order is passed.
ITA NO. 4540/M/08 :By Revenue in (ASPL)
2. This appeal is filed by the revenue against the order of CIT(A) – XXVII, passed on 25.04.2008 for the AY 2002-03.
3. Ground No. 1 is against the action of the CIT(A) in deleting disallowance of Rs. 1,29,16,425/- being expenses incurred by the assessee in respect of M/s Accenture Organisation International Services Agreement (SA).
4. Briefly the facts of the case are that the assessee company incorporated under the Indian Companies Act, 1956, is engaged in providing a range of software development and information technology enabled services. The assessee also engaged in the business of providing coordinated consulting business to its clients operating on a global basis. During the assessment proceedings, the AO noticed that the assessee had debited Rs. 1,29,16,425/- on account of payments made for technical services obtained from M/s Accenture Participation BV, Amsterdam. (In short ‘APBV). M/s APBV belonged to the parent company of the whole accenture group of companies. It was explained by the assessee to the AO that during the year services were obtained from various group companies across the world. The services had also been rendered to various group companies. In order to streamline the intra group transactions, all the transactions had been routed through common platforms and billed accordingly. The AO did not accept the assessee’s submissions for the following reasons:
i) As per the copies of agreements entered into with M/s APBV, the AO noticed that technical fees have been worked out and the amount payable was worked out towards technical fee. As per the agreement there are 8 heads classified for the purpose of determining the fees payable. Out of these eight, the charges under six heads are based on the net fee (revenue) generated by the assessee company. The AO observed that it is beyond any reasoning or logic that any services obtained by an entity should be quantified by the receipts of the entity.
ii) As regards the remaining two heads, viz., ‘personal and policies’ and ‘education development services’, the AO noticed that these issued had been examined in the case of an associate concern of the assessee, namely, M/s Accenture India Pvt. Ltd. A comparison of the calculation of the fee payable under this two heads shows that there is neither any consistency nor any logic behind the allocation of the expenditure in the case of the assessee company or its associate concern.
4.1 The AO concluded that the entire scheme of arrangement is nothing but an after thought adopted by the assessee to reduce its income by debiting expenses in the name of technical services obtained from its parent organisation. The CIT(A) deleted the said addition by observing as under:-
“2.20 I have gone through the facts, material on record and the submissions made by the appellant. I have noted that a reference to TPO is sought in cases involving special attention from a transfer pricing perspective. Once the arms length price adopted by the appellant has been a subject matter of adequate review by the TPO and found to be in order. I have also analysed the decision of the Special Bench in the case of Aztec Software as relied upon by the appellant, and am of the view that the AO should be bound by the analysis undertaken and order passed by the TPO unless the AO can satisfactorily prove otherwise. Since the AO has not placed any material on record to rebut the TPO’s conclusions, I agree with the appellant’s contention that the order of the TPO should be followed as regards the payments made by the appellant under the above mentioned agreements.
2.21 The income of the foreign recipient entities under the same agreement has been offered to tax in India by the foreign recipient entity. Further, the appellant has itself offered to tax in India the amounts received by the appellant under the agreement. Thus, the transaction appears to be a fair business transaction and since the receipts under the transaction have been appropriately offered to tax in India, I do not see any reason why the expenditure incurred under the arrangement should be disallowed.
2.22 Further, I have analysed the case of Arthur Anderson on which reliance has been placed by the appellant. The facts of ASPL’s case are similar to AA’s and the nature of the services obtained by ASPL and the manner of remuneration for the same under the ISA is similar to the services rendered to AA under the member firm inter-firm agreement and the remuneration for the same paid by AA. Given this, I am of the opinion that the expenditure incurred by ASPL under the ISA should be allowed as a deduction to ASPL under the provisions of section 37(1) of the Act.
2.23 The appellant has acknowledged that data for different periods was erroneously submitted by the AIPL and its group company, ASPL. In this regard it has come to my notice that the jurisdiction of both AIPL and ASPL have been vested with the same AO. As such assessment records, facts and other informations are already available with the AO for comparative examination and verification. The appellant has later reconciled the statement and even submitted a certificate from the Chartered Accountant for the same. The basis of allocation of costs adopted by the appellant seems fair and reasonable. Based on the above, I hereby delete the addition made by the AO on ground No.2.”
5. The learned DR has relied upon the order of the AO and submitted that the claim of the assessee is not business expenditure and the same was not required for the purpose of business at all. He, further, submitted that what type of services rendered against the payment was not explained by the assessee. He also submitted that the CIT(A) wrongly relied upon the report given by the TPO. The learned DR relied upon the judgment of Hon’ble Supreme Court in the case of Indian Molasses Co. Ltd. V. CIT, [1959] 37 ITR 66(SC) where in it has been held that putting aside of money which may become expenditure on happening of an event is not allowable expenditure. The learned DR has also relied upon the judgment of Dalmia Dairy Industries Ltd. v. Commissioner of Income-tax 241 ITR 9.(Delhi) where it was held that Sale consideration to be satisfied by export of cement-Cement not supplied-Litigation expenses for realising value of cement and interest thereon--Not deductible as business expenditure-. The learned DR further submitted that the burden is on the assessee to establish that the expenditure has been incurred for the purpose of business, for which he relied upon the following judgments:-
a. L.H. Sugar Factory and Oil Mills (P.) Ltd. v. Commissioner of Income-tax 1 25 ITR 293(SC)
b. Goodlas Nerolac Paints Ltd. v. Commissioner of Income-tax 137 ITR 58(Bomb)
c. Parasmani Investment Co.(P.) Ltd. V. ACIT, 85 ITD 133(KOL) (TM)
d. Andrew Yule and Co. Ltd. v. Commissioner of Income-tax 49 ITR 57(Cal)
e. Ram Bahadur Thakur Ltd. v. Commissioner of Income-tax 261 ITR 390(Ker)
6. The learned AR, on the other hand, relied upon the order of CIT(A) and submitted that the assessee has claimed deduction in respect of amounts paid under ISA u/s 37(1) of the Act, being laid out or expended wholly and exclusively for the purpose of business. The learned AR further submitted that the expenditure cannot be disallowed as a deduction to the assessee on the basis that the expenditure incurred was not commercially expedient and reasonable from the subjective standard of the revenue authorities. The expenditure claimed by the assessee is not in the nature described under section 30 to 36 of the Act. The expenditure is also not in the nature of capital expenditure and the same was not personal expenses. The expenditure incurred was wholly and exclusively for the purpose of business. The learned AR submitted that the Accenture group entities have recognized the need to enter into a Cost Contribution Account in order to provide seamless and uniform high quality service to their multinational clients. It is further submitted that as a result of entering into the CCA, the Accenture Group entities including the assessee (ASPL) have agreed to mutually share in the benefits arising from this pooling. Anticipated benefits accruing to the participating entities including the assessee include global consistency in business practices, economies of scale, improvements in efficiency and productivity, and access to the skills and expertise from all parts of the global organization. The learned AR while referring Clauses 3 to 7 of the ISA, which have been placed in paper book at pages 4 to 5 where detailed arrangement under ISA were given. The learned AR has also referred to pages 8 to 30 where the detailed description of the categories of services and the examples of services obtained by the assessee were given. The learned AR submitted that during the assessment proceedings, the assessee filed a detailed note on CCA under ISA along with the nature of services obtained under CCA. The assessee has also obtained a certificate from the auditors of APBV certifying that the amounts recovered from the assessee under the ISA are actual reimbursements of assessee’s portion of the costs incurred under the ISA. The learned AR further submitted that TPO has held in his order issued u/s 92CA(3) that the international transactions entered into by the assessee, which inter-alia includes the transactions under the ISA are at arm’s length price. At page 103 of the paper book, a copy of the said order of TPO has been placed. The learned AR submitted that the assessee has satisfied all the conditions of section 37(1) of the Act, therefore, the CIT(A) has rightly allowed the deduction on the basis of commercial expediency and reasonableness of the expenditure. The learned AR in support of his contention relied upon the following judgments:-
1. CIT Vs. Malayalam Plantations Ltd., [1964] 53 ITR 140.
2. Sasson J. David and Co. (P.) Ltd. V. CIT, [1979] 118 ITR 261
3. CIT Vs. Dhanrajgiri Raja Narasingirji [1973], 91 ITR 544
4. Income Tax V. Sales Magnesite (Pvt. Ltd., [1995] 214 ITR 1
5. Bombay Steam Navigation Co. Pvt. Ltd. V. CIT [1965] 56 ITR 52(SC).
6. CIT Vs. Chandulal Keshavlal & Co. [1960] 38 ITR 601
7. CIT Vs. Panipat woolen and General Mills Co. Ltd., [1976] 103 ITR 66) (SC)
8. CIT Vs. Jagannath Kisonlal [1956] 30 ITR 654 (Bom.)
9. Sanjeevi & Co. V. CIT, [1966] 62 ITR 156 (Mad.).
10. CIT V. Raman and Raman Ltd. [1966] 71 ITR 345 (Mad.)
11. Newtone Studios Ltd. v. CIT [1955] 28 ITR 378
12. CIT V. Hindustan Motors Ltd. [1989] 175 ITR 411 (Cal.)
13. CIT Vs. Development Trust Pvt. Ltd., [1992] 198 ITR 766 (All.)
14. Amarjothi Pictures V. CIT [1968] 69 ITR 755 (Mad.)
15. CIT V. Shriram Prayagdas and Mahadeo Prasad [1983] 144 ITR 883 (MP)
16. CIT Vs. Gobald Motor Service (P) Ltd. [1975] 100 ITR 240 (Mad.)
17. CIT Vs. Kamal & Co. [1993] 203 ITR 1038 (Raj.)
18. CIT V. Tirrihannah Co. Ltd. [1992] 195 ITR 393 (Cal.)
19. CIT V. Jay Engineering Works [1988] 172 ITR 341 (Del.)
20. CIT V. Arthur Anderson & Co., 94 TTJ 736 (Mum.)
6.1 The learned AR submitted that the facts in the case of CIT Vs. Aruthur Anderson & Co., 94 TTJ 736 (Mum.) are identical to the facts of the case under consideration. The learned AR submitted that the CIT(A) has allowed the expenditure on the basis that the amounts offered under the ISA has been offered to tax in India by the foreign entities and the transactions were fair business transactions. The learned AR further submitted that the TPO in his order held that the transactions entered into by the assessee under the ISA are at arm’s length price. The learned AR submitted that the revenue did not place any material or record to rebut the TPO’s conclusion and against the order of CIT(A). He accordingly, submitted that the order of CIT(A) on this issue may be confirmed.
7. We have heard the learned representatives of the parties and perused the record. The claim of the assessee is under 37(1) of the Act. In order to claim deduction of expenditure u/s 37(1) of the Act, the following conditions should be satisfied:
i) The expenditure in question should not be of the nature described under the specific provisions of section 30 to 36.
ii) the expenditure should not be of the nature of capital expenditure
iii) It should not be a personal expenditure.
iv) The expenditure should have been laid out or expended wholly and exclusively for the purposes of the business or profession.
7.1 The scope of expression ‘for the purpose of business or profession’ is wider in scope and its range is wide. It may take not only day-to-day running of business but also rationalization of its administrative and modernization of its machinery. It may include global consistency in business practices, economies of scale improvements in efficiency and its productivity and access to the skills and expertise from all parts of global organizations. In the case under consideration, services covered under ISA have been classified in to eight different categories, which are the global business, strategy, client business development, knowledge, quality and risk management, personnel and policies, communication and information services, global facilities management, finance, legal and tax services and education development services. Under the present circumstances of the business, such global arrangement is necessary for the purpose of business. The expenditure incurred for such global arrangement is allowable expenses u/s 37(1) of the Act. In addition to that, we find that the payment of expenditure is at arm’s length determined by the TPO u/s 92CA(3) of the Act. We do not find any substance in the case of the revenue because when an international transaction at arms length as determined by the TPO in the said transaction, it cannot be said that the assessee has paid the prices under the said transaction without obtaining any services. The contention of the revenue is baseless and under the facts and circumstances of the case, the expenditure is incurred for the purpose of business. Therefore, we are of the view that the CIT(A) has rightly allowed the claim of the assessee. Thus, ground no.1 of the revenue is dismissed.
8. Ground No. 2 is against the action of the CIT(A) in deleting the disallowance of expenses of Rs. 10,42,394/- paid to M/s Little & Co. towards professional fees for rebranding exercise and review of leave and license agreement u/s 35 of the Act.
9. During the course of assessment proceedings, the AO noticed that the assessee has paid Rs. 10,42,394/- to M/s Little & co. on account of professional fees for rebranding exercise and review of leave and license arrangement. The AO noted that the assessee did not submit any break-up fees paid separately for rebranding exercise and review of leave and license agreement as per the provisions of section 35B. The AO disallowed a sum of Rs. 8,33,915/- being 4/5th of the expenses of Rs. 10,42,394/-. The CIT(A) deleted the said disallowance by observing as under:-
“I have gone through the submission. On the perusal of the facts and material on record, it appears that AO has treated the whole expenditure as preliminary expenses irrespective of the fact that such expenditure are not in the nature of the expenses incurred prior to the commencement of the business or for the purposes of extension of the appellant’s undertaking or for the purposes of setting up a new industrial unit of the appellant. Hence, such expenditure cannot be considered as preliminary expenses within the meaning of section 35D(2) of the Act. In view of the above, I delete the addition made by the AO.”
10. We have heard the learned representatives of the parties and perused the record. We find that the CIT(A) has given categorical finding that expenses incurred were wholly and exclusively for the purpose of business, revenue in nature and expenditure cannot be considered as preliminary expenses which is neither capital expenditure nor personal expenditure. There is no contrary material on the record. Under the circumstances, we uphold the order of the CIT(A) on this issue.
11. Ground No. 3 is in respect of disallowance of 30% of conveyance & communication expenses as not for business expediency.
12. The AO disallowed 30% of the conveyance expenses of Rs. 2,99,903/-out of total expenses of Rs. 9,99,678/- and communication expenses of Rs. 1,99,741/- out of total expenses of Rs. 6,65,803/- on the basis that the same are not business expenses, reimbursed by the assessee to its employees. The CIT(A) after considering the assessee’s submissions held as under:-
“6.6 I have gone through the facts and material on record. I have noted that AO has disallowed the expenditure on an adhoc basis at 30%. The arguments of the appellant clearly indicate that such expenditure is incurred for the purpose of business only and whole expenditure should be allowed as deduction. As such I delete the adhoc addition made by the AO as above.”
13. We have heard the learned representatives of the parties and perused the record. There is no contrary material on record nor any thing against the findings of the CIT(A) has been pointed out by the learned DR at the time of hearing before us. In that view of the matter, we do not find any infirmity in the order of the CIT(A) in deleting ad-hoc disallowance made by the AO.
14. Ground No. 4 is against the action of the CIT(A) in deleting the disallowance of Rs. 5,09,958/- made by the AO on account of customs duty as revenue expenditure.
15. The AO disallowed the amount of Rs. 5,09,958/- being clearance charges for import duty paid on servers by treating the same as capital in nature. The CIT(A) after considering the submissions of the assessee, deleted the said disallowance by observing as under:-
“7.10 After going through the submission of the appellant and facts on records of the case, I am of the view that amount incurred on account of import duty which is paid on certain computer spare parts, miscellaneous expenses, reimbursement of conveyance expenses can not be capital in nature. Since the spare parts purchased are allowed as revenue expenditure, contention of the AO to treat such expenses as capital is not valid. Accordingly such expenditure incurred in respect of customs duty clearance charges should be allowed as deduction under the Act.
7.11 Regarding the customs duty/customs clearance charges paid to Exel India Pvt. Ltd. (Rs. 338,287) pertains to customs duty paid on the import of computer servers which are not asset of the ASPL. The servers are imported for the purpose of a particular project which is again re exported and hence cannot be treated as an asset of the ASPL. The AO’s contention to treat the amount of Rs. 60,645/- incurred towards routine customs examination charges, handling charges and documentation charges for the Cenvat Certificate as capital in nature is not valid. Hence I hereby delete the addition made by the AO.”
16. We have heard the learned representatives of the parties and perused the record. The CIT(A) gave a finding after considering the assessee’s submission that the claim of the assessee is a revenue expenses incurred for the purpose of business. The revenue had failed to point out any contrary material against the findings of the CIT(A). In the light of that fact, we incline to uphold the order of CIT(A) and dismiss the ground raised by the revenue.
17. Ground No. 5 is against the deletion of disallowance of expenses on employees stock purchase plan as the expenses incurred for the benefit of parent company.
18. The assessee company incurred certain expenses on account of payments made by it for the shares allotted to its employees in connection with the ESPP. The AO had disallowed Rs. 9,06,788/- incurred by the assessee on the ground that this expenditure is not the expenditure of assessee company but that expenditure is of parent company and the benefit of such expenditure accrues to the parent company and not assessee. The disallowance made by the AO has been deleted by the CIT(A) by observing as under:-
“I have gone through the submissions of the appellant and perused the material on record and noted that the common shares of Accenture Ltd. the parent company, have been allotted to the employees of ASPL and not to the employees of the parent company. Though the shares of the parent company have been allotted, the same have been given to the employees of the appellant at the behest of the appellant. It is an expense incurred by the appellant to retain, motive and award its employees for their hard work and is akin to the salary costs of the appellant. As has been pointed out by the appellant, this is a common practice to retain and motivate hard-working employees which is being followed by all major companies such as Infosys. Further, the amount that has been claimed by the appellant is the difference in the market price of the shares of Accenture Ltd and the exercise price of such shares by the employees of AIPL and not the entire share price of the shares allotted. Further, such shares have not been issued out of the share capital of the appellant and hence cannot be said to be a capital expenditure. I have analysed the decision of SSI Ltd. relied on by the appellant and am of the view that the same is applicable to the appellant’s case. As argued by the appellant, such expense is a qualified business expenditure and should be allowable in computing the taxable income of the appellant. This aspect has been upheld in various judicial precedents. Based on the above, I am of the opinion that such expenses qualify as business expenses of the appellant and the appellant should accordingly be given a deduction on this account. Accordingly I hereby delete the addition made by the AO on ground No. 9.”
19. We have heard the learned representatives of the parties and perused the record. The CIT(A) has given a categorical finding after examining the relevant material and submission of the assessee that shares were allotted to its employees and not to the employees of the parent company. The expenses incurred by the assessee to motivate and award its employees for their hard work, which amounts salary cost of the assessee company. The expenditure incurred by the assessee for the purpose of business on employees is allowable expenses. The CIT(A) has examined the entire scheme and found that such expenses are business expenses and should be allowable as deduction. Since there is no contrary material to the findings of the CIT(A), in the light of that we confirm the order of CIT(A) on this issue.
20. In the result, the appeal of the revenue is dismissed. C.O. NO. 214/M/08 by assessee(ASPL)
21. Ground Nos. 1 & 2 raised in C.O. are in respect of deduction u/s 10A of the Act.
22. The learned AR submitted that there is no dispute that the assessee is entitled for deduction u/s 10A of the Act. The assessee furnished return declaring loss and, therefore, the assessee did not furnish auditor’s report in form 56F along with return of income. The learned AR submitted that, auditor’s report in form 56F was furnished before the CIT (A) as there was positive income on account of addition made by the AO. The learned AR submitted that these are consequential to the effect to the issues raised in the revenue’s appeal. If the issues raised by the revenue in its appeal are decided against the revenue, there will be assessed loss and under the circumstances the question of furnishing certificate in Form No. 56F does not arise. The learned AR submitted that grounds Nos. 1 & 2 in CO are consequential to the effect of revenue’s appeal. The learned AR further submitted that ground Nos. 3 & 4 in respect of Rs. 5,09,958/- towards custom duty paid and the expenditure incurred towards employees share purchase plan are in support of order of CIT(A).
23. After hearing the learned DR and after considering the findings given in revenue’s appeal where in we dismissed the revenue appeal, since we dismissed the revenue appeal and the CO by assessee is consequential to the revenue’s appeal, the CO filed by the assessee becomes infructuous, therefore, the CO is dismissed as infructuous.
ITA NO. 5029/M/08 By Revenue & C.O. 47/M/09 By assesee (ASPL)
24. This appeal filed by the revenue against the order of CIT(A)- XXVII, Mumbai passed on 21.05.2008 for the assessment year 2003-04.
25. Ground No. 1 is against the deletion of disallowance u/s 10A of reimbursement of expenses of Rs. 19,81,27,943/- made by the AO.
26. During the assessment proceedings, the AO noticed that the assessee has claimed deduction u/s 10A of the Act amounting to Rs. 39,94,62,356/-. The AO noticed that the assessee did not furnish any details regarding receipts from reimbursable expenses. The AO was of the view that the assessee had not been able to prove the reimbursable expenses are derived from export of software and IT enables services and, therefore, cannot be considered as export turnover. The AO, accordingly, disallowed deduction u/s 10A on the total amount of Rs. 19,81,27,943/-. The CIT(A) directed the AO to compute deduction u/s 10A of the Mumbai undertaking of the assessee by leaving the profits of the undertaking as reported by the assessee in its return of income untouched but reducing only the reimbursement of telecommunication charges of Rs. 18,382,911/- from the export turnover as well as the total turnover of the Mumbai undertaking observing as under:-
“I have gone through the facts, material on record and submission made by the appellant and am of the following view:
1.28 I am of the opinion that the appellant is correct in contending that the receipts from reimbursable expenses amounting to Rs. 198,127,943/- relate to the business of the Mumbai undertaking which is eligible for the deduction under section 10A. It cannot be said that the receipts from the reimbursable expenses do not relate to the business of development and export of computer software when the STP unit of the appellant which has incurred this expenditure is engaged solely in this business and such expenses have been incurred in the course of such business. The decisions cited by the appellant in its submissions squarely apply to its case on this issue.
1.29 I also agree with the appellant’s contention that what can sought to be excluded from the computation of section 10A deduction is only the ‘profit’ element in the reimbursable expenses. It is a well settled principle that profit of a trade or business in the surplus by which the receipts from trade or business exceeded the expenditure necessary for the purpose of earning those receipts. The tax is upon income, profits or gains; it is not a tax on gross receipts.
1.30 Based on the above, I see no reason why the receipts classified under the head ‘reimbursable expenses’ amounting to Rs. 198,127,943/- should not be included in the prof its of the Mumbai undertaking of the appellant for the purposes of computing the deduction u/s 10A.
1.31 I also agree with the appellant’s contention that the amount of reimbursable expenses (except the reimbursement of telecommunication charges amounting to Rs. 18,382,911) should not be excluded from the export turnover of the Mumbai undertaking for the purposes of section 10 computation. These receipts are nowhere specified in Explanation 2(iv) of section 10A of the Act which defines explicitly as to what is to be reduced from export turnover of the undertaking.
1.32 However, given that Explanation 2(iv) to section 10A of the Act clearly mentions that telecommunication charges attributable to the delivery of computer software outside India should be excluded from the export turnover, I agree with the contention of the AO that the reimbursement of telecommunication charges amounting to Rs. 18,182,911 should be reduced from the export turnover of the Mumbai undertaking for the purposes of computing the deduction u/s 10A.
1.33 I have also gone through the decisions cited by the appellant in support of its contention that where certain items are excluded from the export turnover of the Mumbai undertaking, the same should also be reduced from the total turnover of the undertaking on the principles of parity for the purpose of computation of section 10A deduction. I agree with the appellant’s contention on this issue.
1.34 Based on the above, I hereby direct the AO to compute the section 10A deduction of the Mumbai undertaking of the Appellant by leaving the profits of the undertaking as reported by the appellant in its return of income mentioned and reducing the reimbursement of telecommunication charges of Rs. 18,382,911/- from the export turnover as well as the total turnover of the Mumbai undertaking.”
27. The revenue is in appeal against the order of CIT(A) in directing AO to allow claim of the assessee u/s 10A in respect of reimbursement of expenses of Rs. 17,81,27,943 (19,81,27,943- 1,83,82,911) by allowing the said receipts to be included in the export turnover. The assessee vide ground Nos. 1 to 3 in C.O. against the findings of the CIT(A) that reimbursement of expenses on account of telecommunication charges Rs 1,83,82,911/- are held to be not eligible for deduction u/s 10A. In Ground No. 2 is against the directions of the CIT(A) to AO to reduce the reimbursement telecommunication expenses of from export turnover and total turnover and in Ground No. 3 without prejudiced to the ground No. 1 & 2, the reimbursement of expenses should be excluded from the export turnover and total turnover.
28. The learned DR relied upon the order of AO where as the learned AR relied upon the order of CIT(A) and submitted that the assessee company incurred certain expenses in the course of undertaking its business of development and export of computer software and information technology (IT) enabled services , which is eligible for deduction u/s 10A of the Act. The learned AR further submitted that the above expenses had specifically incurred by the assessee in the course of undertaking its business eligible for deduction u/s 10A have initially been debited by the assessee under various expense heads in the profit & loss a/c. These expenses have been subsequently reimbursed by assessee’s clients to assessee at actual without profit element and the same has been disclosed under the head reimbursement expenses in the P&L A/c of assessee in the year under consideration. The learned AR submitted that the above method of accounting adopted by the assessee has also been disclosed in Schedule 13 – ‘Significant accounting policies’ under the head ‘reimbursable expenses’. The learned AR submitted that receipts pertaining to the reimbursable expenses are directly relatable to and derived from the business of development and export of computer software and IT enables services as undertaken by the Mumbai undertaking of assessee. The reimbursable expenses primarily consist of the following:
i) Travel cost
ii) Visa expenses
iii) Hardware or software purchase for specific projects
iv) Reimbursement of telecommunication charges (amounting to Rs. 18,382,911); and
v) Cost contribution pool reimbursements.
28.1 The learned AR submitted that the manner in which the receipts relating to the reimbursable expenses have been treated in the computation of total income by the assessee as it becomes evident that these receipts are inextricably linked to the business of development and export of computer software and IT enabled services undertaken by the Mumbai undertaking of assessee. The learned AR submitted that for the purposes of computation of deduction u/s 10A of the Act, the assessee has included the receipts in respect of the reimbursable expenses in the profits of the business of the Mumbai undertaking as well as the export turnover and the total turnover of this undertaking. The learned AR submitted that the AO has wrongly taxed the gross amount of the reimbursable expenses relating to the Mumbai undertaking on the basis that such receipts are not derived from the eligible business of the assessee. The learned AR has relied upon the following decisions and submitted that the assessee is entitled for deduction u/s 10A in respect of reimbursable expenses:
1. CIT Vs. Alfa Laval India Ltd., 295 ITR 451 (SC)
2. Indian Communication Network Ltd. V. Inspecting Assistant Commissioner, 50 ITD 411 (Delhi SB)
3. Samtex Fashions Ltd. ACIT, 92 ITD 535 (Delhi ITAT)
4. ITAT Mumbai decision in the case of Best Exports Centre Pvt. Ltd., ITA No. 5753/Mum/03.
5. Sony India, 114 ITD 448 (Delhi ITAT)
6. Bangalore ITAT in the case of ACIT V. Motorola India Electronics Pvt. Ltd., 295 ITR 376
7. Ahmedabad ITAT in the case of Priyanka Gems Vs. ACIT, 94 TTJ 557
8. JCIT V. Suditi Industries Ltd., ITA No. 3490/Mum/2000 (Mum ITAT)
9. M/s Padhrod V. ITO, ITA No. 4191/M/2004 (Mum ITAT)
10. CIT V. Eltek SGS (P) Ld., 215 CTR 279 (Del)
11. Shah Originals V. ACIT, 112 TTJ 754 (Mum ITAT)
28.2 The learned AR submitted that without prejudice to the above submissions, submitted that if it is held that the receipts for the reimbursable expenses are not eligible for deduction u/s 10A of the Act, only profits, if any, relating to such reimbursable expenses should be considered as being not eligible for deduction u/s 10 of the Act. The learned AR in support of his submissions relied upon the following judgments:-
1. Lalsons Enterprises V. DCIT, 89 ITD 25 (Del.)
2. CIT V. Punjab Stainless Steel Ind., 162 Taxman 9 (Delhi)
3. CIT V. Bokaro Steel Ltd., 170 ITR 522 (Patna HC)
4. CA Galikotwalla & Co., ITA No. 1512/M/96 dt. 22.11.2002 (Mum.]
5. Kedarnath Jute Mfg Co Ltd. V. [1971] 82 ITR 363 (SC)
6. Madeva Upendra Sinai V. Union of India, [197] 98 ITR 209 (SC)
28.3 The learned AR further submitted that what can be sought to be reduced from export turnover of the Mumbai undertaking can only be the items specified in Explanation 2(iv) to section 10A of the Act. It is also the submission of the learned AR that with regard to the reimbursable expenses which are in the nature of travel costs, visa expenses, etc., the learned AO has sought to adopt a position that the same relate to the expenditure incurred on the boarding and lodging and other allowances paid to the engineers and consultants who are sent abroad for doing outside work. The learned AR further submitted that a plain reading of the Explanation 2(iv) to section 10A indicates that what are sought to be excluded from export turnover are only the expenses which have been incurred in foreign exchange in providing technical services outside India. In support of his contention, the learned AR relied upon the decision of Bangalore bench of ITAT in the case of Infosys Technologies Ltd. and in the case of DCIT V. Wipro Ltd., ITA No. 1072/Bag/2007 dt. 30th January, 2009. The learned AR further submitted that without prejudice to the above submitted that if it is considered that the said reimbursable expenses should not form part of the export turnover of the Mumbai undertaking eligible to take deduction u/s 10A of the Act. The learned AR in support of his contention relied upon the Special Bench decision of ITAT, Chennai in the case of ITO V. Sak Soft Ltd., 313 ITR 353 (Chennai) (SB) .The learned AR has also relied upon the following judgments:-
1. Mphasis Ltd. V. ACIT, ITA No. 524/Bang/2008
2. Foursoft Pvt. Ltd. Vs. ACIT, ITA Nos. 1049/Hyd/05, 1125/Hyd/04 & 1179/Hyd/06
3. Nous Infosystems Pvt. Ltd. Vs. ACIT, ITA Nos. 589 & 666/Bang/08
4. Tata Elexi Ltd. (ITA No. 315/Bang/2006
5. ACIT V. Khoday India Ltd.
6. CIT V Sudarshan Chemical Industries Ltd., 245 ITR 769(Bom)
7. CIT V. I Gate Global Solutions Ltd., Bangalore ITAT
8. CIT Vs. Abad Fisheries [2002] 258 ITR 641 (Ker.)
9. CIT V. Kantilal Chhotalal 246 ITR 439 (Bom)
10. CIT Vs. Bharat Earth Movers Ltd., 268 ITR 232 (Kar] and
11. Chloride India Ld. Vs. DCIT, 53 ITD 180 (Cal.)
28.4 The learned AR submitted that the decisions mentioned above from Sl. No. 7 to 11 are in respect of section 80 HHC of the Act, the principles enunciated in these decisions should also be applied equally and consistently while computing the deduction u/s 10A of the Act.
29. We have heard the learned representatives of the parties and perused the record. The controversy in the case under consideration is in respect of method of accounting followed by the assessee in respect of reimbursement of expenses. In simple words the issue is that whether amount of reimbursement of expenses to be included in eligible business profit as well as in export turnover in the year of receipt of such amount for the purpose of computation of deduction under section 10A of the Act. To appreciate method of accounting in respect of reimbursement of expenses, we would like to go through relevant accounting entries to be passed in books of account. There are two ways of passing accounting entries in such a situation. First one is that when the assessee incurred various expenses which are to be reimbursed, in other words, the expenditure incurred on behalf of others, the amount should be debited in a separate account i.e ‘reimbursement of expenses a/c. when amount is reimbursed by the other parties said account ‘reimbursement of expenses account’ is credited. The balance of that account ‘reimbursement of expenses account’ will not part of the trading account and profit and loss account. But it will be shown in balance sheet on asset side. The second method of accounting is that whatever the expenditure incurred including expenses to be reimbursed is to be debited to respective expenses account and whenever the amount is reimbursed respective expenses account is credited. In this second method of account all expenditure including reimbursed expenses are debited to profit & loss account by under respective heads of expenditure. When amount is reimbursed the consolidated amount of reimbursed expenses credited to profit and loss account. The problem arises while calculating profit for the purpose of deduction u/s 10A & others in cases where assessee follows second type of method of account. To appreciate the issue one has to keep in mind a fundamental principle in respect of reimbursement is that there is no element of profit. In the case under consideration the assessee has followed second method of accounting that is when the assessee incurred such reimbursable expenses and accounted for in profit and loss account the eligible profit was reduced as total expenses including reimbursement part of expenses were debited to profit & loss account. At that time if profit is not increased then the same cannot be reduced when the amount of expenditure is reimbursed. The CIT (A) has appreciated the accounting method followed by the assessee and deleted disallowance of claim made by the AO except in respect of Reimbursement of telecommunication charges (amounting to Rs. 18,382,911).The CIT(A) invoked Explanation 2
(iv) to section 10A of the Act in respect of Reimbursement of telecommunication charges. In principle we agree with finding of the CIT (A) in respect of reimbursement of expenses. We also find force in alternate submission of the learned AR that if it is held that the receipts for the reimbursable expenses are not eligible for deduction u/s 10A of the Act, only profits, if any, relating to such reimbursable expenses should be considered as being not eligible for deduction u/s 10A of the Act. Further, same should not part of total turnover and export turnover.
29.1 The CIT (A) has decided the issue related to Reimbursement of telecommunication charges against assessee. To examine this issue we would like to refer Explanation 2 of section 10A which defines certain terms for the purpose of section 10A . “Export Turnover” has been defined in the said Explanation 2 to section 10A under clause (iv) which reads as under :
“(iv) “export turnover” means the consideration in respect of export (by the undertaking) of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India;”
29.2 Sub-section (4) of section 10A refers about profits of the business relating to export turnover. The said sub-section (4) of section 10A reads as under:
“[(4) For the purposes of 57 [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.]”
29.3 The meaning of ‘Export Turnover’ is also provided in other sections of the Income-tax Act, say clause (c) of section 80HHE and Explanation (b) to section 80HHC. According to Explanation (b) of section 80HHC, the sale proceeds receivable in foreign exchange as per sub-section (2)(a) of section 80HHC all goods which are exported out of India but which does not include freight and insurance. Similarly, total turnover for the purpose of deduction under section 80HHC which is defined in Explanation (ba) at the end of section 80HHC in the negative term as not including freight and insurance attributable to transport of goods or merchandise beyond the custom station and profit on sale of licence, cash assistance, duty draw back etc. Thus the term ‘export turnover’ does not include freight and insurance attributable to transport. Explanation (c) to section 80HHE is similar to clause (iv) of Explanation 2 of section 10A.
29.4 On an analysis of definition of ‘export turnover’ as provided in clause (iv) of the Explanation 2 to section 10A, we notice that for the purpose of not including in the consideration received in or brought into India in convertible foreign exchange there are two types of expenditures. The first type of expenditure is freight, telecommunication charges, or insurance attributable to the delivery of article or thing or computer software out of India. The second type of expenditure is expenditure, if any, incurred in foreign exchange in providing technical services outside India. The basic idea or intention for deducting the first type of expenditure, i.e., freight, telecommunication charges, or insurance charges is that delivery of goods should be Free on Board (FoB). The C.B.D.T. vide its Circular No. 564, dated 5-7-1990 (184 ITR (St.) 137 clarified this aspect in respect of deduction under section 80HHC, the relevant portion of the circular is reproduced as below :
“The term “export turnover” under the existing provisions, means the sale proceeds (excluding freight and insurance), receivable by the assessee in convertible foreign exchange. In other words, FoB value of exports. The Finance Act, 1990 has restricted the def inition of the term “Export turnover” to mean FoB sale proceeds actually received by the assessee in convertible foreign exchange within six months of the end of the previous year or within such further period as the Chief Commissioner/Commissioner may allow in this regard.”
29.5 On the basis of the above material and discussion, it can be said that only those freight, telecommunication charges or insurance attributable to delivery of goods out of India are to be considered while reducing from consideration received in convertible foreign exchange. Thus if such expenses are not attributable to delivery of goods outside India, such expenses are not required to be deducted from the consideration. One more aspect which is required to be considered here is that the consideration received in convertible foreign exchange is including such expenses. If such expenses are not included in the consideration received in convertible foreign exchange, deduction of such expenditures from the consideration does not arise. Normally in a transaction of purchase and sale there are two types of conditions between the parties. One is where price quoted of goods is inclusive of all expenses or in other words price quoted is only in respect of goods. Another condition where price of goods and charges of expenses are separately stated. In case where such expenses are to be separately charged, invoices are prepared showing value of the goods and such expenses. If the quoted price is inclusive of such expenses, then consolidated value of the goods is only mentioned in the invoice. In case where only value of goods is quoted, expense is borne by the supplier. In cases where expenses have not been separately charged, the convertible foreign exchange received is consideration of the goods only. Where such expenses are separately charged in the invoices, the consideration received in convertible foreign exchange includes the value of the goods and such expenses. If the consideration received is only against the goods then there is no need to deduct such expenses from the consideration received in convertible foreign exchange. In cases where such expenses are separately charged, the expenses are required to be reduced from the consideration received for the purpose of arriving all the export turnover. The logic and reason behind this have been explained by the CBDT vide its Circular No. 564, dated 5-7-1990 quoted above that the delivery of the goods should be Free on Board (FoB). Both the situations can be explained by a simple example. Mr. X exported goods out of India and received consideration Rs. 1,000 in convertible foreign exchange which is only in respect of goods. Mr. Y in a similar type of transaction charged Rs. 1,000 for goods and Rs. 100 for such expenses. Total convertible foreign exchange received in case of X is Rs. 1,000 and in case of Y is Rs. 1,100. In case of Mr. Y Rs. 100 is required to be deducted from consideration received as he is getting Rs. 100 attributable to delivery of the goods. In case of X no deduction is required from consideration received in convertible foreign exchange. Thus by reduction of Rs. 100 in case of Y the goods exported is FoB. The goods exported at FoB is important in the sense that deduction under section 10A is permissible only in respect of consideration received against goods and not for the consideration received against freight etc. All the assessees should get deduction under section 10A on consideration received against supply of goods at FoB. Therefore, the condition of delivery of goods at FoB has been put and the definition of export turnover as provided in clause (iv) of Explanation 2 to section 10A is required to be interpreted accordingly.
29.7 In the light of above discussions the facts and quantum of expenditures are required to determine after verification from record, we therefore send back matter of this cross ground of appeal and Co to the file of the AO for necessary verifications in the light of above discussions. The AO will provide reasonable opportunity of hearing to the assessee.
30. Ground No. 2 is in respect of disallowance of deduction u/s 10A of Rs. 26,31,604/-on foreign exchange fluctuation without appreciating that the same is not derived from export business but the same is income from other sources.
31. The AO disallowed Rs. 26,31,604/- u/s 10A of the Act being the income in the nature of other income on the basis that such other income does not pertain to and is not directly inked to the business of the export of software or IT enabled services of the assessee. 32. The CIT(A) in respect of foreign exchange fluctuation gain of Rs. 25,87,815/- held that income recognized on account of exchange-fluctuation has a direct nexus with the business operations of the Mumbai undertaking. The CIT(A) was of the view that foreign exchange fluctuation gain should be included in the profits of the Mumbai undertaking and should be eligible for deduction u/s 10A of the Act. However, the CIT(A) confirmed the order of AO in respect of income on short term deposits of Rs. 23,788/- and miscellaneous income of Rs. 20,000/- with the business operations of the Mumbai undertaking.
33. We have heard the learned representatives of the parties and perused the record. After considering the facts of the case, we find that ITAT Delhi Bench in the case of Sujata Grover 74 TTJ 347(Del.) held that ‘basic character of the receipt of foreign currency remains the same i.e. it remains attributable to the export effected by the assessee.’ Following the said decision of ITAT, the Mumbai bench of ITAT in the case of Renaissance Jewellery Pvt. Ltd. V. ITO [2005] 4 SOT 50 held that ‘exchange gain arising on account of change in exchange rate after the end of accounting year constitutes part of export turnover eligible for deduction u/s 10A.’ We find that the issue under consideration is covered by the decisions of ITAT mentioned above and the order of CIT(A) is in consonance with those decisions of ITAT, therefore, we do not find any infirmity in the order of CIT(A) and the same is hereby confirmed on the issue.
34. Ground No. 3 is against the deletion of disallowance of expenses of Rs. 4,00,40,832/- on account of cost pool expenses.
35. The learned AR submitted that this issue is similar to the AY 2002-03 vide Ground No. 1.
36. After hearing the learned DR, we find that since the issue is identical to that of AY 2002-03 vide Ground No. 1, we respectfully follow the conclusions in Ground No. 1 for AY 2002-03 in ITA No. 4540/M/08 (supra) and in the light of that we confirm the order of CIT(A) on this issue.
37. Ground No. 4 is against the deletion of disallowance of Rs. 68,61,271/- on account of employee share purchase plan.
38. The learned AR submitted that this issue is also similar to the issued raised in ground No. 5 in AY 2002-03 vide ITA No. 4540/M/08 (supra).
39. After hearing the learned DR, this issue has been decided by us in AY 2002-03 (supra), therefore, following the conclusions drawn therein, we confirm the order of CIT(A).
40. In the result, the appeal of the revenue is partly allowed for statistical purposes and the C.O. filed by the assessee is allowed for statistical purposes as indicated above. It is to note that grounds of CO has been taken as per separate summary sheet of grounds of appeal as well grounds of CO. filed by the learned AR.
ITA NO. 4541/M/08 AND CO NO. 20/M/09 IN THE CASE OF ACCENTURE INDIA PVT. LTD.
41. Ground No.1 is against the action of the CIT(A) in deleting the amount of Rs. 5,40,15,935/- being expenses incurred for job in process.
42. During the course of assessment proceedings, the AO noticed that the assessee has incurred expenses on certain running jobs during the subject assessment year that have not been completely and finally billed. The AO was of the view that such job during the subject assessment year beyond the amount billed should have been carried to P & L A/c and the balance sheet of the assessee as jobs in progress. The AO, accordingly, disallowed an amount of Rs. 5,40,15,935/- during the subject assessment year on this account. While disallowing the said expenses the AO has also observed that 50% of the expenses incurred in the last 3 months in the year under consideration have been incurred towards jobs that have not been completed and finally billed. The AO has also noted that the assessee would have raised advance/interim bills against these jobs, 50% of the expenses incurred towards such jobs have been taken to be recovered/billed. The AO was of the view that 50% of the expenses incurred on such jobs have not been recovered or billed by the assessee. After the said discussion, the AO held that 25% of the total expenses incurred in the last 3 months are towards jobs in progress and hence determined an amount of Rs. 5,40,15,935/- as jobs-inprocess charges. The CIT(A) after considering the assessee’s submission held that the assessee is correct in contending that the method of accounting consistently followed by the assessee in reporting its revenues and expenses should not be disturbed. The CIT(A) also agreed with the submission and the judicial precedents quoted by the assessee and also agreed with the contention of the assessee that the method of accounting consistently followed by the assessee should be accepted. The CIT(A) also observed that the same method of accounting for revenues and expenses has been accepted by the department in earlier year as well as in subsequent years.
43. We have heard the learned representatives of the parties and perused the record. We are of the considered view that it is a settled position of law that the method of accounting followed by the assessee and the same has been accepted by the department is being continuously followed by the assessee. In the light of this fact, we do not find any infirmity in the order of CIT(A).
44. Ground Nos. 2 & 3 are against the action of the CIT(A) in deleting the disallowance of an amount of Rs. 10,49,86,974/- being expenses incurred by the assessee in respect of M/s Accenture Organisation International Services Agreement (ISA) and Rs. 96,96,416/- on account of employees share purchase plan.
45. The learned representatives of the parties submitted that similar issues are decided in AY 2002-03 in ITA No. 4540/M/08 cited supra. Following the discussion and conclusions drawn therein, we confirm the order of CIT(A) on these issues.
46. Ground No. 4 is against the action of the CIT(A) in holding that no interest u/s 234D can be levied on the assessee since section 234D.
47. The learned AR submitted that this is covered in favour of the assessee by the decision of ITAT Special Bench in the case of ITO Vs. Ekta Promoters, 304 ITR 1 (Delhi SB) wherein it has been held that section 234D which has been brought to the statute from 01.06.2003 cannot be applied to AY 2003-04 or earlier years.
48. After hearing the learned DR and perusing the Special Bench decision of ITAT cited supra, we confirm the order of CIT(A) on this issue.
49. The CO filed by the assessee is in support of order of CIT(A) as stated in facts sheet filed by the learned AR, since we confirm the order of CIT(A) in revenue’s appeal, the CO becomes infructuous, therefore, the CO is dismissed as infructuous.
50. In the result, the appeal of the revenue and the CO of the assessee are dismissed.
ITA NO. 5008/M/08 & 5009/M/09 IN THE CASE OF ACCENTURE INDIA PVT. LTD.
51. These appeals filed by the revenue are against the orders of CIT(A) – XXVII, Mumbai for AY 2003-04 & 2004-05. Since the issues are identical in both these appeals, the same are decided as under:-
52. To decide these appeals, the facts from AY 2003-04 are to be taken into consideration. Ground Nos. 1, 2 & 3 are against the action of the CIT(A) in deleting i) disallowance of Rs. 5,18,37,025/- being expenses incurred by the assessee in respect of M/s Accenture Organisation International Services Agreement (ISA), ii) disallowance of Rs. 6,44,26,977/- under IEA, IAA, and BSA agreement and, iii) deleting the amount of Rs. 3,05,41,483/- on account of employee share purchase plan.
53. The learned representatives of the parties submitted that similar issues are decided in AY 2002-03 in ITA No. 4540/M/08 cited supra. Respectfully following the discussion and conclusions drawn therein, we confirm the orders of CIT(A) on these issues in both the Assessment Years AY 2003-04 and 2004-05 under consideration.
54. 4th common ground is in respect of disallowance of deduction on bad debts.
55. The AO disallowed the bad debts claim of the assessee on the ground that the assessee had not demonstrated that the bad debts written off during the subject assessment year had become irrecoverable and he also held that the debts written off by the assessee in its books of account had been written off without valid reasons and proper basis and accordingly these debts which had been written off were still realizable. Before the CIT(A), the assessee contended that all conditions as mentioned in section 36(1)(vii) and section 36(2) to claim a deduction in respect of bad debts written off have been satisfied and accordingly, the assessee is eligible to claim the bad debts written off as a deduction in computing its taxable income from business. The CIT(A) after considering the submissions of the assessee, deleting the disallowance of deduction on bad debts by observing as under:-
“I have gone through the submission of the appellant and material on record in this regard and I am of the following view:
4.10 The provisions of section 36(1)9vii) as amended with effect from April 1, 1989, requires the assessee to write off the debts in the accounts of the assessee for the previous year as it becomes bad and irrecoverable. The only condition required for claiming a deduction for such write off is that the income pertaining to the same should have been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written of for of an earlier previous year. It is not required for the assessee to establish that the debt has become bad in view of the amendment to the provisions of section 36(1)(vii) by the Direct Tax Laws (Amendment) Act, 1987 with effect from April 1, 1989.
4.11 The contention of the AO regarding the honesty and judgement of the assessee regarding the writing off the bad debts does not hold good. It has been left to the prudence of the businessman to judge himself whether the debt has become bad or irrecoverable. A decision to write off a bad debt based on commercial considerations is sufficient ground for claiming the bad debt as a deduction. There is no burden on the assessee to provide the AO with demonstrative and infallible proof of the fact that the debts have gone bad.
4.12 The basis for claiming the deduction for bad debts also seems to fair and reasonable and contention of the AO that bad debt must be actually written off in the accounts in bonafide manner and assessee has just passed entry in the accounts in order to claim deduction is not justifiable. The appellant has also submitted the reasons for the write off of such bad debts.
4.13 Further, I have gone through the decisions in the case of Oman International Bank SAOG and Anil H Rastogi (supra) on which reliance has been placed by the assessee in this regard. Also from the perusal of the submission made by the assessee in this regard, I am of the opinion that appellant has satisfied all the conditions for claiming the deduction under section 36(1)(vii) and hence deduction in respect of bad debts claimed by AIPL should be allowed.”
4.14 Based on the above, I here by delete the addition made by the AO on ground No. 4”
55.1 The learned DR has relied upon the order of AO whereas the learned AR has relied upon the order of CIT(A) and submitted that the bad debts written off are eligible for deduction u/s 36(1)(vii) for the following reasons:-
1. Assessee has written off bad debts in its books of account for AY 2003-04 and AY 2004-05 and claimed a deduction in respect of the same in its return of income for the respective years.
2. Further, the assessee has given up its claim in respect of these debts which have been written off as bad debts during AY 2003-04/AY 2004-05 since these debts had become irrecoverable.
3. Out of the total debts written off amounting to Rs. 11,215,803/- for AY 2003-04, only an amount of Rs. 49,370/- had been paid up by the clients as at March 31, 2006 (ie the date of completion of assessment proceedings for AY 2003-04) and this amount of Rs. 49,370/- has been offered to tax by Assessee in its return of income for the subsequent years.
4. The above bad debts have been taken into account in computing the income of assessee in either the year ended March 31, 2003/march 31, 2004 or in earlier years.
56. In view of the above reasons, the learned AR submitted that all conditions to claim a deduction in respect of bad debts written off have been satisfied and accordingly, the assessee is eligible to claim the bad debts written off as a deduction in computing its taxable income from business. In support of his submissions, the learned AR relied upon various judgments including judgments of jurisdictional High Court in the case of DCIT Vs. Oman International Bank SAOG, 313 ITR 128and CIT V. Star Chemicals, 313 ITR 126 (Bom.
57. We have heard the learned representatives of the parties and perused the record. As per the provisions of section 36(1)(vii) and 36(2) of the Act, the following conditions need to be fulfilled for allowability of bad debt:-
i) it must be a proper debt or a part thereof
ii) it has been written off as bad and irrecoverable in the accounts of the assessee for the previous year, and
iii) it has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year.
58. The CIT(A) allowed the bad debts claim of the assessee u/s 36(1)(vii) after considering the facts of the case by holding that the basis for claiming the deduction for bad debts seems to fair and reasonable and contention of the AO that bad debt must be actually written in the account in bonafide manner and the assessee has just passed entry in the accounts in order to claim is not justifiable. We are of the view that the assessee has fulfil led the conditions laid down u/s 36(1)(vii) and the CIT(A) had examined the case before allowing the bad debts claim of the assessee. Therefore, we incline to uphold the order of the CIT(A) on this count and dismiss the ground raised by the revenue in both the years under consideration.
59. 5th common ground in both the appeals are that the CIT(A) erred in deleting the disallowance of deduction u/s 40(a)(i) of Rs. 15,13,236/- and Rs. 1,47,16,109/- in connection with the reimbursement of training expenses to Accenture Group entities.
60. The AO held that reimbursement of training expenses to the Accenture group entity to APBV were in the nature of fees for technical services which were taxable in India in the hands of APBV under the provisions of double tax avoidance agreement between Indian and Netherlands (India-Netherlands Treaty), thus, the assessee is required to withhold tax at appropriate rates on such training expenses paid by the assessee to APBV. The CIT(A) deleted the disallowance by following his decision in AY 2001-02.
61. The learned DR has relied upon the order of the AO and the learned AR has relied upon the order of the CIT(A) and submitted that the assessee has not deducted taxes at source on the reimbursement of training expense for AYs 2003-04 and 2004-05 to the Accenture Group entities on the basis that i) reimbursement of training expenses to Accenture group entities is not taxable in India in the hands of the Accenture group entities as the trainings have been imparted to the employees of assessee outside India and ii) the assessee has reimbursed only the actual expenses incurred by the Accenture group entities in imparting such trainings to the employees of assessee and hence, in the absence of any markup/ profit on such reimbursements, the payments made to the Accenture group entities for such training expenses are not taxable in India. In support of his submissions, the learned AR has placed reliance on the following judgments:-
1. Industrial Engg. Project Pvt. Ltd., 202 ITR 1014
2. Clifford Chance (82 ITD 106)
3. Sedco Forex International Drilling Inc., 72 ITD 415
4. Rolls Royce India Ltd., 25 ITD 136
5. S G Pgnatale, 124 ITR 391
6. Mannesmann Demag Lauchhammer, 26 ITD 198
7. Dunlop Rubber Co. Ltd., 142 ITR 493
8. Styles Vs. New York Life Insurance Co. 2 TC 460 (HL)
9. Merchant Navy, 96 ITR 261
10. Bankipur Club Ltd., 226 ITR 97
11. DECTA, 237 ITR 190
62. The learned AR further submitted that for AY 2003-04, the assessee had deducted at source on the training expenses of Rs. 256,675/- paid to the Indian third parties as per the provisions of the Act and deposited the same into the government treasury.
63. We have heard the learned representatives of the parties and perused the record. On identical set of facts this issue has been sent to the file of the AO by ITAT in assessee’s own case for Ay 2001.2002 vide ITA NO 8962/Mum/2004 order dated 29.1.2009. Since facts are identical and CIT (A) has also followed their order for AY 2001-2002 which has been set aside by the ITAT and the matter send back to the file of the AO. We respectfully follow that order of the ITAT and in the light of that we also send back this matter to the file of the AO with identical directions. The AO is further direct to verify the contention of learned AR that the assessee had deducted at source on the training expenses of Rs. 256,675/- paid to the Indian third parties as per the provisions of the Act and deposited the same into the government treasury.
63.4 In the result, the appeal of the revenue are partly allowed for statistical purposes.
C.O. 44/M/09 AND 45/M/09 FOR AY 2003-04 AND 2004-05 IN THE CASE OF ACCENTURE INDIA PVT. LTD.
64. It is to note that grounds of Co have been taken as per separate summary sheet of grounds of appeal as well grounds of CO. filed by the learned AR. The CO for AY 2004-2005 is in support of the order of the CIT(A) Since we confirm the orders of the CIT(A) in revenues appeals for AY 2004-05, the COs become in fructuous therefore, the same are dismissed as in fructuous. However the CO for AY 2003-2004 wherein one of the ground related to disallowance under section 40(a)(i) . This issue has been send back to the file of the AO while deciding appeal of the revenue, following the same this ground is allowed for statistical purposes.
64.1 In the result, the C.O. No. 44 for AY 2003-04 is allowed for statistical purposes and the C.O. No. 45 for AY 2004-05 is dismissed.
65. To sum up, all the appeals and C.Os. are disposed off as under:-
i) The appeal filed by the revenue being 4540/M/08 in the case of ASPL is dismissed and the C.O. No. 214/M/08 filed by the assessee (ASPL) is also dismissed.
ii) The appeal filed by the revenue being 5029/M/08 in the case of ASPL is partly allowed for statistical purposes and the C.O. No. 47/M/09 filed by the assessee(ASPL) is allowed for statistical purposes.
iii) The appeal filed by the revenue being 4541/M/08 in the case of AIPL and the C.O. No. 20/M/09 filed by the assessee (AIPL) are dismissed.
iv) The appeals filed by the revenue being 5008 & 5009/M/09 in the case of AIPL are partly allowed for statistical purposes whereas the C.O. filed by the assessee(AIPL) being 44/M/09 for AY 2003-04 is allowed for statistical purposes and C.O. No. 45/M/09 filed by the assessee(AIPL) for AY 2004-05 is dismissed.
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