Income Tax Appellate Tribunal - Ahmedabad
Fortune Infotech Ltd., Baroda vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "D"
Before SHRI BHAVNESH S AINI,JM & SHRI A N P AHUJ A, AM
ITA no.1384/Ahd/2008
(Assessment Year:-2004-05)
Fortune Infotech Limited, V/s Assistant Commissioner of
Plot No. 160/4, Old Chhani Income-tax, Circle-1(2)
Road, Baroda Baroda
PAN: AAACC 7460 R
[Appellant] [Respondent]
ITA no.1386/Ahd/2008
(Assessment Year:-2004-05)
Assistant Commissioner of V/s Fortune Infotech Limited,
Income-tax, Circle-1(2) Plot No. 160/4, Old Chhani
Baroda Road, Baroda
[Appellant] [Respondent]
Assessee by :- Shri M G Patel, AR
Revenue by:- Shri B L Yadav, DR
O R D E R
A N Pahuja: These cross appeals against an order dated 17-01- 2008 of the ld. CIT(Appeals)-V, Baroda for the Assessment Year 2004-05, raise the following grounds:-
ITA No.1384/ Ahd/08[Assessee] "[1] The Learned Commissioner of Income-tax (Appeals)-V Baroda has erred in law as well as on facts of the case by confirming the disallowance of Rs.4,94,720/- being expenditure incurred by the Appellant on certification viz. BS 7799 and ISO 9001 holding the same as being in nature of capital expenditure.
[2] The Learned Commissioner of Income-tax (Appeals)-V Baroda has erred in law as well as on facts of the case by confirming the disallowance of Rs.1,26,000/- made u/s 40A(2)(b) of the I.T. Act, 1961 in respect of lease rent paid.
[3] The Learned Commissioner of Income-tax (Appeals)-V Baroda has erred in law as well as on facts of the case by not allowing deduction u/s 10B of the IT Act,1961 in respect of subsidy amount of Rs.45,59,177/- holding the same as not being business income.
2 ITA nos.1384 & 1386/Ahd./08 [4] The Appellant prays for the following:-
(i) To allow of Rs.4,94,720/- in respect of expenditure incurred by the Appellant on certification viz. BS 7799 and ISO 9001.
(ii) To delete of Rs.1,26,000/- made u/s 40A(2)(b) of the IT Act, 1961.
(iii) To allow deduction u/s 10B of the IT Act, 1961 in respect of subsidy amount of Rs.45,59,177/-.
[4] Your Appellant reserves the right to add, alter, amend and / or withdraw any of the above grounds of appeal."
ITA No.1386/ Ahd/2008[Revenue] "[1(a)] On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of training expenditure of Rs.20,94,291/- and apprentice wages of Rs.22,806/-.
[1(b)] The Ld. CIT(A) failed to appreciate that the subsequent agreement made in the month of February, 2003 between the assessee company and Fortune Infotech USA. Further, in terms of its submissions dated 24th August, 2006 as well as 29th August, 2006 it was stated by the assessee that they are not governed by the provisions of Apprentices Act, 1961.
[2(a)] On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs.20,01,210/- out of managerial remuneration under section 40A(2)(b) of the Act.
[2(b)] The Ld. CIT(A) failed to appreciate that the assessee failed to genuinely explain the substantial increase in remuneration paid to directors at Rs.34,22,638/- for the year under assessment as against Rs.10,40,882/- of earlier assessment year neither during the assessment proceedings before the AO nor during the appellate proceedings before the Ld. CIT(A).
[3] The appellant craves leave to add to, amend or alter the above grounds as may be deemed necessary."
23 ITA nos.1384 & 1386/Ahd./08
2. Adverting first to ground no.1 in the appeal of the assessee, facts, in brief, as per relevant orders are that the return declaring income of Rs.26,43,753/- filed by assessee-company on 18-10- 2004, after being processed u/s 143(1) of the Income-tax Act, 1961 [hereinafter referred to as the "Act"], was selected for scrutiny with the service of a notice u/s 143(2) of the Act on 30-03-2005.The assessee-company is engaged in the business of IT enabled services, dealing particularly in the export of electronic data captured through the process of medical transcription and insurance claims received through its foreign principal, namely, M/s Fortune Infotech Ltd., USA ["FIL, USA" for short]. The assessee-company has two 100% EOUs- one located in Baroda and the other at Bangalore. During the course of assessment proceedings, the Assessing Officer[AO in short] noticed that the assessee-company incurred expenditure of Rs.2,97,000/- and Rs.1,97,720/- for certification under BS 7799 and ISO 9001. Since the said expenditure brought enduring benefit to the assessee-company in the up-gradation of its status in the market place, the AO concluded that the entire expenditure of Rs.4,94,720/- was capital in nature and accordingly, a sum of Rs.4,94,720/- was included in the total income of the assessee.
3. On appeal, the learned CIT(A) upheld the disallowance in the following terms:-
"4.1 The learned AR has stated before me that the expenditure involved is a revenue expenditure and it is not of one time nature. He argued that it will have to be incurred on every time on renewal thereon and cannot be held as capital expenditure.
4.2 I have considered the facts of the case and the arguments of the learned AR. BS 7799 and ISO 9001 certification will certainly upgrade the status of the company. The benefits from these certificates will be available to the company for a long period of time. Therefore, the expenditure will lie in the capital field. The action of the AO is as per law and is upheld. Thus, this ground of appeal is dismissed."
34 ITA nos.1384 & 1386/Ahd./08
4. The assessee is now in appeal before us against the aforesaid findings of the learned CIT(A). The learned AR on behalf of the assessee while relying upon the decision of the ITAT Jodhpur Bench in the case of ACIT vs. Tirupati Microtech (P) Ltd. (2007) 111 TTJ (Jd) 149 / 112 ITD 328 and the decision of the ITAT Delhi Bench in the case of Climate Systems India Ltd. vs. ACIT (2010) 2 ITR (Trib.) 168 (Delhi) contended that expenditure was revenue in nature. On the other hand, the ld. DR supported the findings of the ld. CIT(A).
5. W e have heard both the parties and gone through the facts of the case as also the aforecited decisions. W hile adjudicating the claim in the context of claim of expenditure for obtaining ISO 9002 certification, a co-ordinate Bench in their decision in Tirupati Microtech (P) Ltd. (supra), while referring to decision Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. vs. CIT (1980) 124 ITR 1 concluded that since by making payments for obtaining ISO 9002 certification, the fixed capital of the company did not enhance in any manner; it rather created a positive image of products of the assessee for the smooth conduct of the business, expenditure was revenue in nature. Following this decision, another Bench in Climate Systems India Ltd.(supra) allowed the claim of the assessee on account of ISO certification charges. In the light of view taken in these decisions, especially when the ld. DR did not place any material before us so as to enable us to take a different view in the matter nor brought to our notice any contrary decision, we have no alternative but to allow the claim of the assessee. Therefore, ground no.1 in the appeal of the assessee is allowed.
6. Ground no.2 in the appeal of the assessee relates to disallowance of Rs.1,26,000/-towards lease rent u/s 40A(2)(a) of the Act . The AO noticed that the assessee paid lease rent for the use of the premises at 160/4, Old Chhani Road, Vadodara belonging to M/s Packing Products Pvt. Ltd., an associate company. The rent charges paid during the year amounted to Rs.1,80,000/- from 1-4- 4 5 ITA nos.1384 & 1386/Ahd./08 2003 to 30-09-2003 and Rs.1,000/- per month from October,2003 to 31-3-2004. However, an interest free deposit amount of Rs.40 lacs was placed at the disposal of the lessor viz. M/s Packing Products (Pvt.) Ltd. from October, 2003. The AO observed that the said deposit amount being interest free, the assessee appeared to have forgone interest income @ 15% per annum (Bank rate) in favour of M/s Packing Products (Pvt.) Ltd. Therefore, the AO observed that on account of the above transaction, the benefit by way of rent and use of interest free deposit of Rs.40 lacs enjoyed by the lessor was received by the lessor at the expense of the assessee company. Translated into financial cost incurred in this respect by the assessee company, the matrix of benefit so received was worked out by the AO as under:-
Rent payment cost Rs. 1,80,000/-
(@ Rs.30,000/- per month from 1-4-2003
to 30-9-2003)
Rent payment cost Rs. 6,000/-
(@ Rs.1,000/- per month from 1-102003
to 31-3-04
Interest forgone in respect of
M/s Packing Products (P) Ltd. Rs.40,00,000x15=Rs.300000/-
from 1-10-03 to 31-3-04) 100 x 2
Total Rs. 4,86,000/-
6.1 The AO inferred that the total cost borne by the assessee- company towards hiring of premises for its business from its associate company was Rs.4,86,000/- as against Rs.3,60,000/- paid by it in the immediately preceding year. To a query by the AO, seeking reasons for bearing higher cost than the cost borne for use of the premises in the immediately preceding previous year and also explanation, substantiating the reasonableness of such payment, the assessee in their submissions dated 24th August, 2006 and 22nd Sept. 2006,admitted that the total cost of the building together with the land was about Rs.24 lacs and considering 15% as the interest 5 6 ITA nos.1384 & 1386/Ahd./08 accruing thereon, a sum of Rs.30,000/- per month would be the possible income by way of interest on the said amount. Despite this admission in respect of bearing higher cost towards hiring the said premises and no other material having been placed before the AO , a sum of Rs.1,26,000/- was included in the total income of the assessee holding that such sum was paid unreasonably in excess by the assessee in respect of its rent to the lessor, an associate company.
7. On appeal, the learned CIT(A) upheld the addition in the following terms:-
"6.2 The AR has submitted before me that the action of the AO is not justified. He has also stated that the notional interest of 15% is also excessive.
6.3 I have considered the facts of the case, and arguments of the AR as well. I find that the AO has correctly calculated the total cost attributable to the renting of the property. It is excessive with reference to the market rate as discussed by the AO in para-9 of his assessment order. In view of this, the action of the AO is upheld and this ground of appeal is dismissed."
8. The assessee is now in appeal before us against the aforesaid findings of the learned CIT(A). The learned AR on behalf of the assessee merely reiterated their submissions before the learned CIT(A). To a query by the Bench, the ld. DR did not submit any reasons as to why deposit of Rs. 40 lacs was made with the lessor M/s Packing Products (P) Ltd. and why rent was reduced to Rs. 1000 pm.. The learned DR, on the other hand, supported the impugned order of the learned CIT(A).
9. W e have heard both the parties and gone through the facts of the case. Indisputably, M/s Packing Products (P) Ltd. , the lessor company with whom interest free deposit of Rs. 40 lacs was made, falls within the definition of 'person' u/s 40A(2)(b) of the Act. In the preceding year , the assessee paid rent @ Rs. 30,000 pm to the said lessor for use of their premises and that was 6 7 ITA nos.1384 & 1386/Ahd./08 considered reasonable. In the year under consideration, the assessee reduced the rent to Rs. 1,000 pm w.e.f October,2003. without any reasons and also made an interest free deposit of Rs. 40 lacs with the lessor. The assessee admitted before the AO that normal interest rate prevailing during the year would be @15% and to that extent interest was foregone by the assessee on the said amount. Despite specific request by the Bench, the ld. AR did not explain the purpose of said interest free deposit with the lessor or reducing the rent to Rs. 1,000/- pm w.e.f October,2003. A plain reading of the provisions of section 40A(2) of the Act reveals that where an assessee incurs any expenditure in respect of which payment is required to be made or has been made to any person referred to in clause ( b ) of section 40A(2) of the Act and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to ( a ) fair market value of the goods, services or facilities for which the payment is made; or ( b ) the legitimate needs of the business of the assessee; or ( c ) the benefits derived by or accruing to the assessee on receipt of such goods, services or facilities, then the Assessing Officer shall not allow as a deduction so much of the expenditure as is so considered by the Assessing Officer to be excessive or unreasonable. Therefore, it becomes apparent that the Assessing Officer is required to record a finding as to whether the expenditure is excessive or unreasonable in relation to any one of the three requirements prescribed, which are independent and alternative to each other. All the three requirements need not exist simultaneously. In a given case, if any one condition is shown to be satisfied the provision can be invoked and applied, if the facts so warrant. As already noted hereinbefore, the Assessing Officer has held a part of the expenditure to be excessive having regard to the fair market value of the facilities, which admittedly amounted to Rs. 30000/- pm and for recording such a finding cogent reasons are assigned by the AO. The ld. AR did not even whisper before us as to the purpose or commercial expediency of the aforesaid interest free deposit of Rs. 40 lacs nor disputed the interest @15% pa prevailing 7 8 ITA nos.1384 & 1386/Ahd./08 during the year and nor even as to why rent was reduced to Rs. 1000/- pm during the year and further did not explain even the commercial expediency in doing so. In the light of the aforesaid position in law and the findings recorded by the Commissioner (Appeals) and the Assessing Officer and in the absence of any cogent basis, it is not possible to hold that there is any legal infirmity in the impugned order of the ld. CIT(A) so as to warrant interference. Therefore, ground no.2 in the appeal of the assessee is dismissed.
10. Ground no.3 in the appeal of the assessee relates to deduction of Rs.45,59,177/- on account of subsidy u/s 10B of the Act. During the course of assessment proceedings, the AO noticed that the assessee received a sum of Rs.72,81,719/- from the Government of Gujarat under the Information Technology (IT) Industry Incentive Scheme, 1999 to 2004. This Scheme envisaged fillip to the IT Industry and its development in the State of Gujarat, creating large scale employment opportunities and provided for capital incentive subsidy @ 25% of eligible total capital investment or Rs.25 lacs whichever is less, special incentives depending upon the investment made in the Unit, turnover incentive @ 5% of eligible turnover of the assessee limited to its overall ceiling of Rs.50 lacs per annum and connectivity incentive subsidy of 50% of the lease rental paid for its data line. The AO observed from the details filed that the assessee company received 'connectivity incentive' and turnover incentive. Since the said connectivity incentive or turnover incentive received from the State Government had nothing to do with the profits derived from the exports of digital data transmission ,the AO concluded that the incentive of Rs.72,81,719/- would not qualify as profits derived from the export of computer software business of the assessee, relying, inter alia, on the decisions in Cambay Electric Supply Industrial Co, vs CIT 130 ITR 84(SC), CIT vs. Sterling Foods 237 ITR 579 (SC), Orissa State W arehousing Corporation vs CIT 237 8 9 ITA nos.1384 & 1386/Ahd./08 ITR 589 (SC), Hindustan Levers Ltd, vs CIT 239 ITR 297 (SC) and Pandian Chemicals Ltd. vs. CIT 262 ITR 278 (SC).
11. On appeal, the learned CIT(A) adjudicated the issue as under:-
"8.2 The learned AR has submitted that connectivity incentive and turn over incentive are part of business profit and the same have been rightly included in the business income. He pointed out that unlike section 80HHC of the Act, the profit of the business is not defined in section 10B of the Act. Therefore, he argued that the incentive subsidy being business income should be included in the profit of the business to be computed under section 28 of the Act. Alternatively, he has argued that connectivity incentive of Rs.27,22,542/- is received as compensation for lease line rental paid by the appellant. This subsidy goes to reduce cost of lease rent debited to profit and loss account and enhanced the profit of the undertaking by that amount. Therefore, this has to be considered for deduction under section 10B of the Act. He has relied on the decision of Gujarat High Court in the case of India Gelatine & Chemical Ltd. 275 ITR 284 (Guj) on this issue. The honourable Gujarat High Court in this decision has held that duty draw back is intended to reduce the cost of production and hence is an integral part of pricing of the goods. Therefore, part of the cost of production of the industrial undertaking which relates to duty draw back has to be treated as income derived from the industrial undertaking.
8.3 I have carefully considered the facts of the case and the arguments of the AR. After examining the scheme of incentives, I find that the turn over incentive is an independent incentive given to the appellant for encouraging business in information technology. It cannot be said to be connected with the export of computer software. As per the ratio of Sterling Foods Ltd. Vs. CIT 237 ITR 579 (SC), this cannot be taken as part of profit of the business. The action of the AO with relation to this subsidy is upheld. However, the same cannot be said regarding connectivity incentive of Rs.27, 22,542/-. As pointed out by the AO, connectivity incentive is 50% of the data transmission charges of the data line used by the appellant. This definitely goes to reduce the cost of the appellant. The appellant could as well show the data line charges net of this incentive. Therefore, to this extent, the profit of the business will be increased and the appellant will be eligible to get exemption under section 10B on this amount, as the profit of the business will be proportionately increased. The connectivity incentive is inextricably linked with the business of the export carried on by the appellant. The expenditure on data line is the main expenditure in the medical transmission business. The cost of the data line being subsidized by the government will directly reduce the cost of the exports. This will in turn increase the export profit. The AO is directed to take Rs.27,22,542/-, being connectivity incentive as profits derived from the business of exports of the appellant company and to include the same in the business income eligible for deduction under section 10B of the 9 10 ITA nos.1384 & 1386/Ahd./08 I.T.Act,1961. The rest of the disallowance made by the AO is upheld. Thus, this ground of appeal is partly allowed."
12. The assessee is now in appeal before us against the aforesaid findings of the learned CIT(A) in upholding disallowance to the extent of Rs.45,59,177/-. The learned AR on behalf of the assessee while reiterating their submissions before the learned CIT(A) contended that incentive being on turnover is nothing but business profits of the industrial undertaking and is inextricably linked and form part of the export income in as much as the same is based on export turnover. The learned DR, on the other hand, supported the findings of the AO and the ld. CIT(A).
13. W e have heard both the parties and gone through the facts of the case. The issue before us is as to whether turn over incentive granted by the State Government is part of business profits of the industrial undertaking in terms of provisions of sec. 10B of the Act. Sec. 10B makes special provisions in respect of newly established 100 per cent EOUs. Sub- s. (1) provides that a deduction of such profits and gains as are derived by a 100 per cent EOU from the export of articles or things or computer software for a period of ten years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee. Sub-s. (4) provides that for the purposes of sub-s. (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. The Expln. 2 below the section defines certain expressions occurring in the section. Clause (iii) defines what export turnover means, for the purpose of the section. It means the consideration in respect of the export by the undertaking of articles 10 11 ITA nos.1384 & 1386/Ahd./08 or things or computer software received or brought into India in convertible foreign exchange, but does not include (a) freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or (b) expenses if any, incurred in foreign exchange in providing the technical services outside India. The Explanation does not define what total turnover means in the formula prescribed by sub-s. (4). The deduction is made available on export of software turnover, the proceeds whereof are received in foreign exchange. It is not available on other export turnover, the receipts whereof are in Indian currency or in currency which is not a convertible foreign exchange. The object, therefore, appears to be to encourage more inflow of convertible exchange and not merely export of goods. Making it available with reference to the realization in convertible exchange is suggestive of the fact that it was with a view to encourage foreign exchange inflow. Under the provisions of section 10B to avail the deduction under this section the undertaking has to bring into India sale proceeds in convertible foreign exchange, which shall be physically brought to India. Repatriation of these receipts is the main contention, in availing of section 10B. The sale proceeds must be receivable in convertible foreign exchange. Therefore, the avowed object is to encourage inflow of convertible foreign exchange. If that object is kept in mind, amount received by an assessee in the form of turnover subsidy from the State Government cannot be considered to be received in the form of convertible foreign exchange. The sale proceeds received in convertible foreign exchange means the 'actual receipt' and not 'deemed receipt'.
13.1. The word "derived" has been construed as far back in 1948 by the Privy Council in CIT v. Raja Bahadur Kamakhaya Narayan Singh [1948] 16 ITR 325 when it said :
1112 ITA nos.1384 & 1386/Ahd./08 "The word 'derived' is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered................." (p. 328) 13.2 This definition was approved and reiterated in 1955 by a Constitution Bench in this Court in the decision of Mrs. Bacha F. Guzdar v. CIT [1955] 27 ITR 1. It is clear, therefore, that the word 'derived from' in section 10B the Act must be understood as something which has direct or immediate nexus with the assessee's industrial undertaking. The words 'derived from' have not been defined for the purpose of section 10B like section 80HHC and therefore its meaning has to be considered in the restricted sense as interpreted by the Hon'ble Supreme Court in various judgments including Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84. Therefore, only those profits and gains are to be exempted under section 10B which have direct and proximate relationship with the activities referable to Export Oriented Unit. In the instant case, the ld. CIT(A) after examining the scheme of incentives, concluded that the turn over incentive is an independent incentive given to the assessee for encouraging business in information technology and is in no way connected with the export of computer software. On perusal of the relevant scheme , we find that turnover incentive is granted in order to motivate higher productivity. It has nothing to do with export activities of the industrial undertaking. Since the ld. AR has not placed before us any material, evidencing that the said subsidy was indeed derived by the hundred percent export oriented industrial undertaking from the export of any computer software or electronic data, we are not inclined to interfere with the findings of the ld. CIT(A). Therefore, ground no.3 in the appeal of the assesse is dismissed.
14. Coming now to ground nos.1(a) and 1(b) in the appeal of the Revenue, the AO noticed that the assessee claimed expenses of 12 13 ITA nos.1384 & 1386/Ahd./08 Rs.20,94,291/- for training the personnel for their proficiency so that maximum efficiency could be ensured and error free electronic data could be transmitted to their principals in USA. It was stated by the assessee that before the personnel could be absorbed as regular employees, they were classified under the nomenclature of trainees eligible for stipend payment for their subsistence during the period of training. To a query by the AO, the assessee replied that that most of such persons on acquiring necessary proficiency were taken up as regular employees of the company. It was not possible for the company to take them as regular employees from the beginning since it was not certain whether they would be suitable for the employment. Since proper records were kept for such persons under training with their names, addresses and other details and bank accounts were opened in their names in which salary paid to them during the period of training was credited, the assessee requested to allow the same as business expenditure. However, the AO did not accept the submissions of the assessee on the ground that the business of medical transcription and processing of insurance claims carried on by the assessee having been exclusively procured from Fortune Infotech USA, in terms of an agreement dated 15/8/2001 the cost of initial training of the employees had to be borne by Fortune Infotech USA. However if any such trained employee quit the organization then the cost of training of the substitute employees in his or her place would have to be met by Fortune Infotech India Ltd.. Since the subsequent agreement executed on 1st Feb. 2003 was silent on the issue of training expenses to be borne by Fortune Infotech USA while there was no change in the tariff agreed to be paid by FIL (USA) which was at the rate of US dollars 0.07 per line typed, the AO disallowed the claim for deduction of Rs.20,94,291/-.
14.1 As regard expenses for imparting of practical training under the programme of Apprenticeship Training, the AO observed that these expenses will not be covered within the meaning of section 37(1) of the Act as no statutory obligation was cast on the employer under these training schemes. In terms of its submissions dated 24th Aug. 2006 as well as 29th Aug. 2006 it was stated by the assessee that these were not governed by the provisions of Apprentices Act, 13 14 ITA nos.1384 & 1386/Ahd./08 1961. The AO ,accordingly, concluded that the assessee company was not obliged to make the payments of stipend to its trainee employees who were not even registered as employees of the company till their absorption after completion of necessary training. Accordingly, relying upon CBDT circular no. 192 dated 10-3-1976 (F. No. 204/39/75-IT(A2) , the AO disallowed the amount of Rs. 22,806/- also
15. On appeal, the learned CIT(A) deleted both the disallowances in the following terms:-
"5.1 The AR has submitted that it is a common feature of BPO Companies executing medical transcription work in India to train their personnel. The appellant company has trained its persons. It has given names, addresses and bank a/c details in support of the salary paid to them. It is impossible to undertake medical transmission work with untrained personnel. In view of this, he argued that the expenditure is entirely allowable under section 37 of the I.T. Act, 1961.
5.2 I have considered the facts of the case and the arguments of the AR. There is no doubt about the genuineness of the expenditure. The payments have been made to persons who have become employees of the appellant. The payments are through cheque. The expenditure is certainly for the purposes of the business. These are regular expenses on training of employees. The appellant was required to incur such expenditure for the purpose of business. Otherwise the appellant cannot efficiently execute the work undertaken from the US company. The business of medical transcription cannot be undertaken by untrained personnel. Training apprentices before permanent employment is an accepted business practice. The earlier agreement that the initial training cost is to be born by the US company has been already revised in February 2003. At the material time, that is during the previous year the training cost has to be borne by the appellant company only. In view of this the addition made by the AO on this account cannot be sustained. The disallowance of Rs.20,94,291/- and apprentice wages of Rs.22,806/- are deleted and the appeal of the appellant is allowed."
16. The Revenue is in appeal before us against the aforesaid findings of the learned CIT(A). The learned DR supported the order 14 15 ITA nos.1384 & 1386/Ahd./08 of the AO while the learned AR on behalf of the assessee supported the findings of the learned CIT(A).
17. W e have heard both the parties and gone through the facts of the case. Indisputably and as pointed out by the ld. CIT(A) , there is no doubt about the genuineness of the expenditure. Before, 1 s t February,2003, in terms of an agreement dated 15/8/2001, the cost of initial training of the employees was borne by Fortune Infotech USA. Thereafter, the said agreement has been revised in February 2003 and as pointed out by the ld. CIT(A) during the previous year the training cost has to be borne by the assessee company only. The business of medical transcription cannot be undertaken by untrained personnel and such training before regular employment is an accepted business practice. The expenditure having been incurred on training of personnel of the assessee company and its genuineness being not in doubt, apparently such claim is admissible. In these circumstances, especially when the Revenue did not place any material before us so as to enable us to take a different view in the matter, we are not inclined to interfere with the findings of the ld. CIT(A). Therefore, ground nos.1(a) & (b) in the appeal of the Revenue are dismissed.
18. Ground no.2 in the appeal of the Revenue relates to disallowance of Rs.20,01,210/- out of managerial remuneration u/s 40A(2)(a) of the Act. On perusal of the particulars in respect of Directors Remuneration, the AO noticed that the assessee company incurred an increased cost owing to higher remuneration of Rs.34,22,638/- paid to the directors for the year under assessment as against Rs,10,40,882/- in the immediately preceding year. The comparative remuneration paid for FY 2002-2003 and 2003-2004 were as under: -
1516 ITA nos.1384 & 1386/Ahd./08 Name of the director FY 2002-03 FY 2003-04 i. Shri K.K. Patel 461122 1269504 ii. Nitin Shah 452910 1047112 iii. Asit Shroff 126850 1106022 In the case of Asit Shroff, the salary of Rs.126850/- represented the remuneration for the last quarter of the financial year 2002-2003 on account of his joining employment with the assessee company during the said period i.e @ Rs.42283/- PM . The AO was of the opinion that the following amount of remuneration was reasonable:
1) Shri K.K, Patel 461122
2) Nitin Shah 452910
3) Asit Shroff 507396
-----------
1421428
Since the profits of business for the year under assessment suffered a set back as compared to the profits of business in the immediately preceding previous year while dividend pay out for both the years remained the same and there was no exponential increase in the salary of the employees and the field staff even when the assessee procured business from FIL(USA) in entirety, the AO was of the opinion that there was no justification for payment of enhanced remuneration to the directors in the year under consideration. To a query by the AO, the assessee's representatives explained that remuneration was commensurate with the efforts put in by the directors who were all technically qualified to handle the intricate and sensitive data processing operations undertaken by the assessee company. Since the assessee did not substantiate the basis for enhancing the remuneration, the AO disallowed a sum of Rs.20,01,210/- in terms of provisions of section 40A(2)(a) read with sec. 40A(2)(b) of the Act.16
17 ITA nos.1384 & 1386/Ahd./08
19. On appeal, the learned CIT(A) deleted the disallowance in the following terms:-
"7.1 The learned AR argued that the appellant company has paid remuneration to the directors as per the provisions of section 309(3) of the Company's Act. It is within the permissible limit of 10% of the net profit. He relied on the decision of Sayaji Iron & Engineering Co. Vs. CIT 253 ITR 749 (Guj) wherein it has been held that once such remuneration was fixed as provided as provided in section 309, it was a business expenditure and no part of expenditure could be disallowed.
7.2 I have considered the facts and arguments of the learned AR. The Company has paid the remunerations according to rules and regulations of company's act. The directors are assessed to tax and the entire income from the salary and remuneration is offered to tax. The company has no direct tax advantage as the entire income even after the addition, is exempt from tax under section 10B.The argument of the AO that the remuneration is excessive is also not tenable. The directors are full time employees looking after the work of the appellant company. The directors have been paid in the range of 10 to 12 lakhs annually, which is a reasonable package in the prevalent market scenario of IT industry. Considering all these facts the disallowance made by the AO is deleted."
20 The Revenue is now in appeal before us against the aforesaid findings of the learned CIT(A). The learned DR supported the order of the AO while contending that the remuneration was increased without any corresponding in business of the company. The learned AR on behalf of the assessee supported the order of the learned CIT(A) and submitted remuneration to directors had been paid within the limit of 10% laid down in sub. section 3 of Section 309 of the Companies Act,1956 Inter alia, the ld. AR relied upon decisions in Sayaji Iron & Engineering Co. v. CIT, 253 ITR 749(Guj);Abbas Wazir (P) Ltd v. CIT (2003) 133 Taxman 702 (All);CIT v. Shriram Piston & Ring Ltd. (1990) 181 ITR 230 (Del) and Voltamp Transformer Pvt. Ltd. v. CIT- Guj 129 ITR 185 (Guj).
21. W e have heard both the parties and gone through the facts of the case as also the aforecited decisions relied upon by the ld. AR Indisputably, the salary paid to the directors of the company is within the limits prescribed under the Companies Act, 1956. In 17 18 ITA nos.1384 & 1386/Ahd./08 Sayaji Iron & Engineering Co.(supra), it was held that once the expenditure in question is in terms as provided in sections 309 and 198 of the Companies Act, 1956, there cannot be any "non-business"
purpose in so far as the assessee-company is concerned. In the case Abbas W azir (P) Ltd v. CIT 133 Taxman 702(All), Hon'ble High Court while adjudicating a similar issue held that it is not for the income-tax authorities to determine what would be commercially expedient, and that is the function of the company or the firm. The income-tax authority cannot ordinarily interfere with such matters. It was observed that it is not for the ITO to decide what would be the correct salary of the directors or other officers of the company, unless on the fact of it the salary fixed is so exorbitant and absurd, that it can clearly be said to be fictitious and aimed at tax evasion. Similar views were expressed by the Hon'ble jurisdictional High Court in Voltamp Transformer (P) Ltd.(supra). In CIT v. Shriram Piston & Ring Ltd. 181 ITR 230 (Del), the Hon'ble Delhi High Court held the Company Law Board having approved the remuneration, it could not be said that the expenditure incurred was excessive or unreasonable. In the instant case, the income of the assessee is exempt under section 10B of the Act and the ld. CIT(A) concluded that the directors being full time employees looking after the work of the assessee company, remuneration paid in the range of 10 to 12 lakhs annually, was a reasonable package in the prevalent market scenario of IT industry. The Revenue have not placed any material before us in order to controvert the aforesaid findings of the ld. CIT(A) nor brought to our notice any contrary decision so as to enable us to take a different view in the matter. In the absence of any basis, we are not inclined to interfere . Therefore, ground nos.2(a) & (b) in the appeal are dismissed.
22. No additional ground having been raised before us in terms of residuary ground no.3 in the appeal of the Revenue and ground no.5 in the appeal of the assessee while ground no.4 in the appeal of the assessee being mere prayer, all these grounds are dismissed.
23. No other plea or argument was made before us.18
19 ITA nos.1384 & 1386/Ahd./08
24. In the result, appeal of the assessee is partly allowed while that of the Revenue is dismissed.
Order pronounced in the court today on 15 -07-2011 Sd/- Sd/-
(BHAVNESH S AINI) (A N P AHUJ A) JUDICI AL MEMBER ACCOUNTANT MEMBER Dated : 15 -07-2011 Copy of the order forwarded to:
1. Fortune Infotech Limited, Plot No. 160/4, Old Chhani Road, Baroda
2. Asst. Commissioner of Income-tax, Circle-1(2) Baroda
3. CIT concerned
4. CIT(A)-V, Baroda
5. DR, ITAT, Ahmedabad Bench-D, Ahmedabad
6. Guard File BY ORDER Deputy Registrar Assistant Registrar ITAT, AHMEDABAD 19