Income Tax Appellate Tribunal - Pune
Tata Technologies Ltd.,, Pune vs Assessee on 29 May, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "B", PUNE
BEFORE: SHRI R.K. PANDA, ACCOUNTANT MEMBER
AND
SHRI VIKAS AWASTHY, JUDICIAL MEMBER
ITA Nos. 18 & 19/PN/2012
Assessment Years : 2004-05 & 2005-06
Tata Technologies Limited, Joint Commissioner
Plot No. 25, Pune Infotech Park, of Income Tax,
Vs.
Hinjewadi, Pune-411057 Range-10, Pune
(Appellant) (Respondent)
PAN No. AAACT3092N
ITA Nos. 36 & 37/PN/2012
Assessment Years : 2004-05 & 2005-06
Joint Commissioner of Tata Technologies Ltd.,
Income Tax (OSD), Vs. Telco Premises, Pimpri,
Circle-1(2), Pune Pune-411018
(Appellant) (Respondent)
PAN No. AAACT3092N
ITA Nos. 2114 & 2115/PN/2013
Assessment Years : 2007-08 & 2008-09
Tata Technologies Limited, Additional Commissioner of
Plot No. 25, Pune Infotech Park, Income Tax,
Vs.
Hinjewadi, Pune-411057 Range-1, Pune
(Appellant) (Respondent)
PAN No. AAACT3092N
ITA No. 2083/PN/2013
Assessment Year : 2008-09
Dy. Commissioner of Tata Technologies Ltd.,
Income Tax, 25, Pune Infotech Park,
Vs.
Circle-1(2), Pune Hinjewadi, Pune-411057
(Appellant) (Respondent)
PAN No. AAACT3092N
Assessee By: Shri Rajendra Agiwal
Revenue By: Shri B.C. Malakar
Date of hearing : 20-05-2015
Date of pronouncement : 29-05-2015
2
ITA Nos. 18, 19, 36 & 37/PN/2012 and 2114, 2115 & 2083/PN/2013,
A.Ys. 2004-05, 2005-06 and 2007-08 & 2008-09
ORDER
PER VIKAS AWASTHY, JM:-
These are seven set of appeals against the order of Commissioner of Income Tax (Appeals)-V, Pune for the assessment years 2004-05, 2005-06, 2007-08 and 2008-09. Four appeals have been filed by the assessee and three appeals are by the Revenue. The assessee has filed ITA No. 18/PN/2012 assailing the order of Commissioner of Income Tax (Appeals) dated 24-10-2011 for the assessment year 2004-05. The Revenue has filed Cross Appeal in ITA No. 36/PN/2012. In ITA No. 19/PN/2012 filed by the assessee, the order of Commissioner of Income Tax (Appeals) dated 24-10-2011 for the assessment year 2005-06 is under challenge. The Revenue has also filed Cross Appeal in ITA No. 37/PN/2012. In ITA No. 2114/PN/2013, the assessee has impugned the order of CIT(A) dated 29-08-2013 for the assessment year 2007-08. In ITA No.2115/PN/2013 the assessee has assailed the order of Commissioner of Income Tax (Appeals)-I, Pune dated 29-08-2013 for the assessment year 2008-09. The Revenue has filed Cross Appeal for the same assessment year in ITA No. 2083/PN/2013.
2. In the appeals filed by the assessee, the issues raised in all the appeals are common. Similarly, in the appeals of the Revenue, the grounds of appeal for all the impugned assessment years are common. Since, the issues raised in the appeals and the facts in all the appeals are similar, the appeals are taken up together for adjudication. The issues raised by the assessee in its appeals are as under:
1. Disallowance of software expenditure by holding it as capital in nature.3
ITA Nos. 18, 19, 36 & 37/PN/2012 and 2114, 2115 & 2083/PN/2013, A.Ys. 2004-05, 2005-06 and 2007-08 & 2008-09
2. Disallowance of deduction on amortised lease premium expenditure, landscaping and development charges.
3. Disallowance of provision for expenditure in respect of benefit under Bhavishya Kalyan Yojana (BKY) an employee welfare scheme.
4. Disallowance of provision for Medi-claim insurance coverage scheme.
5. Disallowance of deduction claimed u/s. 35D in relation to expenditure incurred for increasing authorized share capital.
6. Disallowance of entrance fee paid to Poona Club.
7. Disallowance of deduction u/s. 80HHE of the Act.
8. Reallocation of expenditure between Software Technology Park (STP) and Non-STP Unit.
9. Re-computation of deduction u/s. 10A of the Act.
10. Levy of Interest u/s. 234B and 234C.
3. The gist of grounds raised by the Revenue in appeals for the impugned assessment years is as under:
1. Expenditure for obtaining license to use software held as Revenue expenditure whereas it should have been held as capital in nature.
2. Deleting of disallowance u/s. 14A of the Act.
3. Enhanced deduction u/s. 10A with respect to disallowance of expenditure-Travelling and Conveyance, depreciation etc.
4. Disallowance of taxes and employees cost paid in Korea.
4. The brief facts of the case as emanating from records are: The assessee is in the business of Information Technology Support, SAP Implementation, CAD/CAM Consultancy, Trading in Software and 4 ITA Nos. 18, 19, 36 & 37/PN/2012 and 2114, 2115 & 2083/PN/2013, A.Ys. 2004-05, 2005-06 and 2007-08 & 2008-09 Hardware, Networking solutions, I.T. Training etc. In its return of income for the impugned assessment years the assessee has claimed deduction u/s. 80HHE and u/s. 80G. The assessee has also claimed exemption u/s. 10A of the Act. During the course of scrutiny assessment in the impugned assessment years the Assessing Officer made certain disallowances/additions in the income return by the assessee.
Aggrieved by the assessment orders, the assessee preferred appeals before the Commissioner of Income Tax (Appeals) for the respective assessment years. The Commissioner of Income Tax (Appeals) partly accepted the appeals of the assessee. Against the orders of Commissioner of Income Tax (Appeals) both the assessee and the Revenue have come in appeal before the Tribunal.
5. First, we will take up the appeals of the assessee for adjudication. Shri Rajendra Agiwal appearing on behalf of the assessee filed paper book containing case laws with certain documents in support of his submissions. The ld. AR contended that the first issue raised in appeals relate to disallowance of software expenditure. The same has been adjudicated in assessee's own case in ITA No. 1345/PN/2011 for the assessment year 2001-02 decided on 27-02-2015. The Tribunal has decided the issue in favour of the assessee.
Shri B.C. Malakar representing the Department placed reliance on the findings of Commissioner of Income Tax (Appeals) on the issues. 5.1 The assessee has purchased computer software for its daily operation. The assessee has claimed the expenditure incurred on acquiring license to use computer software as Revenue expenditure. The 5 ITA Nos. 18, 19, 36 & 37/PN/2012 and 2114, 2115 & 2083/PN/2013, A.Ys. 2004-05, 2005-06 and 2007-08 & 2008-09 Assessing Officer held that the expenditure incurred on obtaining licence to use computer software has resulted in an enduring benefit. The assessee has made payment in lump sum and expenditure has been incurred to increase the profit earning capacity. The Assessing Officer concluded that the expenditure is capital in nature. The Commissioner of Income Tax (Appeals) after analyzing various computer software purchased during the relevant period partly accepted the appeal of the assessee. The Commissioner of Income Tax (Appeals) segregated the expenditure incurred on acquiring computer software based on the logic and reasoning given by him in his order for the assessment year 2001-
02. 5.2 We observe that the issue raised in the present set of appeals, is identical to the one adjudicated by the Co-ordinate Bench in ITA No. 1345/PN/2011 (supra). The Tribunal held that the expenditure on acquiring computer software as revenue in nature. The relevant extract of the findings of the Tribunal are reproduced here-in-below:
"12. We have heard the rival contentions and perused the record. The assessee was engaged in the business of software development and provisions of software services. As per the assessee, the range of services included IT consultancy, transfer of SAP licenses, SAP implementation and maintenance, providing networking solutions, CAD/CAM engineering and design consultancy with a focus on the automotive sector. During the year under consideration, the assessee had incurred expenditure on software amounting to Rs.37,81,284/-. The assessee had given the break-up of the software expenses before the CIT(A) in tabulated form, which were reproduced at pages 9 to 11 of the appellate order. The first expenditure incurred by the assessee was on account of Annual subscription charges of Rs.73,920/- which has been allowed as an expenditure by the CIT(A), against which, the Revenue has not filed any appeal. The second set of expenditures were claimed to be for specific purposes i.e. specific projects undertaken by the assessee in 6 ITA Nos. 18, 19, 36 & 37/PN/2012 and 2114, 2115 & 2083/PN/2013, A.Ys. 2004-05, 2005-06 and 2007-08 & 2008-09 the ordinary course of carrying on its business. The assessee had spent Rs.4,000/-on purchasing of study material i.e. Cisco Internetworking CD Microlan. Another expenditure of Rs.2,29,725/- was incurred on excise package software which was also claimed to be for said purpose for implementing at Tata Motors. Both these expenditures were held to be capital by the CIT(A).
13. The Hon'ble Bombay High Court in CIT Vs. Raychem RPG Ltd. (supra) while considering the issue of allowability of expenditure incurred on software, has laid down the proposition that where the impugned software does not form part of fixed profit making apparatus of the assessee, then the same is to be allowed as revenue expenditure. Where the software package facilitates the assessee in trading operations or enabling the management to conduct assessee's business more efficiently or more profitably and hence, the said expenditure is revenue expenditure. The view of the Tribunal in the case was upheld by the Hon'ble Bombay High Court (supra).
14. In view of the ratio laid down by the Hon'ble Bombay High Court in CIT Vs. Raychem RPG Ltd. (supra), where the expenditure has been incurred for facilitating the business and which does not form part of profit making apparatus, then the software expenditure is to be allowed as revenue expenditure. The expenditure incurred by the assessee totaling Rs.2,33,725/- has been incurred in the ordinary course of carrying on the business and does not form part of its profit making apparatus, hence, the said expenditure is duly allowable as revenue expenditure in the hands of the assessee.
15. The next set of expenditure incurred by the assessee was on acquisition of license to use the software, but there is no acquisition of ownership rights of the software. The assessee had incurred expenditure of Rs.12,56,870/- on the acquisition of Windchill Software which is a PDM software purchased for developing resources and providing customization and implementation services to customers. Another expenditure of Rs.16,86,394/- was incurred for the acquisition of Flexible Pro-Engineer software, which was admittedly, first time acquisition and was acquisition of rights to run the said software. The Windchill software was upgraded regularly 7 ITA Nos. 18, 19, 36 & 37/PN/2012 and 2114, 2115 & 2083/PN/2013, A.Ys. 2004-05, 2005-06 and 2007-08 & 2008-09 and similarly, the other software Flexible Pro-Engineer software was also upgraded regularly. The functionality test laid down by the Special Bench of Delhi Tribunal in Amway India Enterprises Vs. DCIT (supra) is to be applied for determining the nature of expenditure to be capital or revenue. Where the assessee had incurred expenditure on software which has been acquired to facilitate the smooth functioning of day-to-day business operations of the assessee and which do not form part of its profit making apparatus, then the expenditure is allowable as revenue expenditure in the hands of the assessee. Accordingly, we direct the Assessing Officer to allow the expenditure of Rs.12,56,870/-
and Rs.16,86,394/- as revenue expenditure.
16. Further the assessee had incurred the expenditure on the under-mentioned items:-
Sr No Description Amount
(Rs.)
1 Firewall 4.1 CD 96,000
2 MS Office 2000 19,800
3 Macromedia Flash & 39,500
Fireworks for Website
Design
4 Upgradation cost of 15 3,75,075
R/3 MySAP Licenses for
TTL
17. The aforesaid expenditure incurred by the assessee was the acquisition of software programmes which in turn, were utilized to conduct day-to-day business activities more efficiently. Further, the expenditure incurred on upgradation of the system i.e. conversion from R3 software to MySAP license was required at regular intervals and such upgradation was to gain operational efficiency in the areas of the sales, distribution and production planning. Since the expenditure had been incurred to facilitate efficiency in the business resulting in more profitability, the said expenditure is to be allowed as revenue expenditure. The ground of appeal No.1 raised by the assessee is thus, allowed."
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ITA Nos. 18, 19, 36 & 37/PN/2012 and 2114, 2115 & 2083/PN/2013, A.Ys. 2004-05, 2005-06 and 2007-08 & 2008-09 In the assessment years under the appeal, the expenditure relates to purchase of computer software and there has been no change in the facts and circumstances. The Ld. Departmental Representative has also not been able to controvert the findings of Tribunal. We are of the considered opinion that the issue is squarely covered by the aforesaid decision of the Tribunal. Accordingly, this ground of appeal of the assessee is allowed.
6. The second issue raised in the appeals is disallowance of deduction for amortised lease premium expenditure, landscaping and development charges. The ld. AR of the assessee fairly conceded that this issue was decided against the assessee in ITA No. 1345/PN/2011 (supra). We observe that the Tribunal after considering the plea of the assessee with regard to amortization of lease hold premium has rejected the same by following the decision of Co-ordinate Bench in the case of M/s. Drillbits International P. Ltd. Vs. DCIT in ITA No. 1361/PN/2010 for assessment year 2006-07 decided on 23-08-2011. Respectfully following the same this ground of appeal of the assessee is dismissed.
7. The third and fourth issues raised in the appeals are :
(i) disallowance of provision for expenditure under Bhavishya Kalyan Yojana (BKY), employees welfare scheme; and, (ii) disallowance of provision for medi-claim insurance.
The ld. AR of the assessee submitted that similar issues were considered by the Tribunal in ITA No. 1345/PN/2011 (supra) and the same were decided in favour of the assessee. On the other hand the ld. DR submitted that the issue with respect to both the schemes have been considered by the Co-ordinate Bench of the Tribunal in assessee's own 9 ITA Nos. 18, 19, 36 & 37/PN/2012 and 2114, 2115 & 2083/PN/2013, A.Ys. 2004-05, 2005-06 and 2007-08 & 2008-09 case for the assessment year 2001-02. The Tribunal has remitted the matter back to the Assessing Officer with a direction to determine the deduction on account of BKY scheme and medi-claim insurance. 7.1 We have heard the submissions made by the representatives of rival sides and have perused the orders of the authorities below. The Assessing Officer has disallowed the amount on account of both the welfare schemes by holding them to be contingent in nature. The Commissioner of Income Tax (Appeals) upheld the findings of Assessing Officer and dismissed this ground of appeal.
7.2 We observe that both the issues are considered by the Tribunal in ITA No. 1345/PN/2011 (supra). The findings of the Co-ordinate Bench are as under:
"87. The learned Authorized Representative for the assessee stressed before us that the liability had been worked out on the basis of actuarial valuation and where the valuation has been made on a scientific basis, then such liability is to be allowed in the hands of the assessee as held by the Hon'ble Supreme Court in Rotork Controls India (P) Ltd. Vs. CIT (supra). Further reliance on was placed on the ratio laid down by the Chandigarh Bench of the Tribunal in M/s. Glaxo Smithkline Consumer Healthcare Ltd. Vs. ACIT (supra). On the perusal of the order of Tribunal in assessee's own case for the earlier years, it is apparent that the Tribunal has come to a finding that the liability of the assessee has not crystallized in the year under consideration, since the said liability would only arise on the happening of certain events which would happen in the future, hence the liability is a contingent liability. The issue of the liability having been worked out on the basis of AS-15 or scientific method is different aspect of the issue, but the first point to be considered is the nature of liability i.e. whether it had arisen in the year under consideration or it would arise on the happening of certain event in future. The finding of the Tribunal in the case of 10 ITA Nos. 18, 19, 36 & 37/PN/2012 and 2114, 2115 & 2083/PN/2013, A.Ys. 2004-05, 2005-06 and 2007-08 & 2008-09 assessee was that the liability to pay under BKY Scheme or Mediclaim Insurance Scheme would only arise on the happening of certain events in future and consequently, the Tribunal came to a finding that the liability having not been crystallized during the year under consideration was a contingent liability and was not allowable in the hands of the assessee. We are in conformity with the finding of Tribunal in this regard and applying the same, we hold that assessee is not entitled to the claim of allowance of provision for expenditure under BKY Scheme of Rs.54,16,204/- and also the provision made for expenditure in respect of Mediclaim Insurance Coverage Scheme amounting to Rs.19,53,311/-. However, as held by the Tribunal, the assessee is entitled to claim of expenditure in respect of benefit payable to Ex-employees, who have retired & fulfill the conditions of the Scheme. Reference is made to paras 46 and 51 of the order of the Tribunal (supra). Accordingly, we direct the Assessing Officer to determine the deduction on account of BKY Scheme and Medical Insurance Scheme, in view thereof, the grounds of appeal Nos.3 and 4 raised by the assessee are thus, partly allowed."
Since, the issue in present set of appeals is similar to the one already decided by the Tribunal, we remit this issue back to the Assessing Officer with a direction to determine the deduction on account of BKY scheme and medi-claim insurance in the same terms. Accordingly, both the grounds of appeal are partly allowed.
8. The fifth issue raised in the appeals of the assessee is disallowance of deduction u/s. 35D. The assessee has claimed deduction of expenditure incurred on increasing in authorized share capital. The ld. AR of the assessee fairly admitted that this issue has been decided by the Tribunal against the assessee in ITA No. 1345/PN/2011 (supra). The Co-ordinate Bench of the Tribunal while adjudicating this issue has placed reliance on the decision of Hon'ble Supreme Court of India in the case of Brooke Bond India Ltd. Vs. CIT reported as 225 ITR 798 (SC) and 11 ITA Nos. 18, 19, 36 & 37/PN/2012 and 2114, 2115 & 2083/PN/2013, A.Ys. 2004-05, 2005-06 and 2007-08 & 2008-09 judgement in the case of Punjab State Industrial Development Corporation Ltd. Vs. CIT reported as 225 ITR 792 (SC). The Tribunal held that undisputedly the expenditure was incurred by the assessee for increasing share capital thus it is capital in nature. Thus, the same cannot be considered for computing deduction u/s 35D of the Act. In the present set of appeals also, it is an admitted position that the expenditure claimed as deduction under section 35D is with respect to increase in authorized share capital. Respectfully following the same ratio, this ground of the appeal raised by the assessee is dismissed.
9. The sixth issue raised in the appeals by the assessee is disallowance of Corporate Membership entrance fee paid to Poona Club. The contention of the assessee is that the expenditure is allowable since it is incurred for the purpose of its business. The Assessing Officer rejected the contentions of assessee and held that the expenditure for obtaining Corporate Membership will result into enduring benefit to the assessee and will also further the business prospects of the assessee. The expenditure on acquiring membership is one time, therefore, the same is capital expenditure. The ld. Commissioner of Income Tax (Appeals) upheld the findings of the Assessing Officer and confirmed the disallowance.
9.1 The ld. AR of the assessee submitted that the assessee is providing Corporate Membership to its senior employees in order to assist them with the opportunities to establish better business contacts, thereby enhancing and promoting the business of the company. Since, expenditure incurred is wholly and exclusively for its business the same is claimed as Revenue expenditure u/s. 37 of the Act. The ld. AR in support of his submissions placed reliance on the decision of Pune 12 ITA Nos. 18, 19, 36 & 37/PN/2012 and 2114, 2115 & 2083/PN/2013, A.Ys. 2004-05, 2005-06 and 2007-08 & 2008-09 Bench in ITA Nos. 1812 & 1813/PN/2013 in the case of Intervalve (India) Ltd. Vs. ACIT decided on 30-04-2015. The ld. AR further referred to the Full Bench decision of Hon'ble Punjab and Haryana High Court in the case of CIT Vs. Groz Beckert Asia Limited reported as 351 ITR 196 (FB). On the other hand the ld. DR supported the findings of Commissioner of Income Tax (Appeals).
9.2 We have heard the submissions of the rival sides and examined the orders of the authorities below. We are of the view that the this issue is squarely covered by the Full Bench decision of Hon'ble Punjab and Haryana High Court in the case of CIT Vs. Groz Beckert Asia Limited (supra). The Hon'ble High Court has held that the Corporate Membership of the club was obtained for running business with a view to produce profit. Such membership did not bring into existence an asset or an advantage for enduring benefit of business. It is an expenditure incurred for the period of membership and is not long lasting. By subscribing to membership of a club, no capital asset was created, only, a privilege to use facilities of a club, were conferred and that too for a limited period.
9.3 The Co-ordinate Bench of the Tribunal in the case of Intervalve (India) Ltd. Vs. ACIT (supra) after analyzing the case laws far and against applied the ratio laid down by the Hon'ble Supreme Court of India in the case of CIT Vs. Vegetable Products Limited., reported as 88 ITR 192 and decided the issue in favour of the assessee. The Tribunal held that the entrance fees of membership for the business club is Revenue expenditure. In the light of above decisions, we hold that the expenditure incurred by the assessee towards payment of Corporate Membership fee of the club for its employees is Revenue expenditure. Accordingly, this ground of appeal of the assessee is allowed. 13
ITA Nos. 18, 19, 36 & 37/PN/2012 and 2114, 2115 & 2083/PN/2013, A.Ys. 2004-05, 2005-06 and 2007-08 & 2008-09
10. The seventh issue raised in the appeals of the assessee is disallowance of deduction u/s. 80HHE of the Act. During the relevant period the assessee has claimed deduction u/s. 80HHE of the Act. The Assessing Officer disallowed the deduction on the ground that assessee has claimed double benefit of deduction/exemption on the same profits. In Form No.10CCAF, the Auditors of the assessee reported that the export turnover for the purpose of the computation of the quantum of deduction u/s. 80HHE also includes export turnover of the unit on which the assessee has claimed exemption u/s. 10A of the Act. The Assessing Officer held that once the profits have been considered for exemption u/s. 10A the same profits cannot be considered again for computing deduction u/s. 80HHE. By including the export turnover of the unit taking benefit of section 10A, the export turnover computed for the purpose of determining the quantum of deduction u/s. 80HHE the assessee is claiming double benefit of deduction/exemption on the same profits. The Assessing Officer further held that for the purpose of computing business profits as per Explanation (d) to section 80HHE, 90% of receipts on account of Annual Maintenance Cost (AMC) are also required to be reduced along with interest, rent etc. These receipts do not have any element of turnover.
10.1 The ld. AR of the assessee submitted that the issue regarding eligibility of the assessee to claim deduction u/s. 80HHE after inclusion of turnover of the undertaking availing the benefit of exemption u/s. 10A was considered by the Co-ordinate Bench of the Tribunal in ITA No. 1345/PN/2011 for assessment year 2001-02 (supra). The Tribunal held that the assessee is eligible to claim deduction u/s 80HHE on the export turnover of EOU.
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ITA Nos. 18, 19, 36 & 37/PN/2012 and 2114, 2115 & 2083/PN/2013, A.Ys. 2004-05, 2005-06 and 2007-08 & 2008-09 10.2 The second limb of the argument of the assessee is that the authorities below have erred in reducing 90% of AMC income from the turnover while calculating 'business profits' as per Explanation (d) to section 80HHE of the Act. The contention of the assessee is that the AMC activities carried out by the assessee are part of its regular business activity. The AMC includes corrective and preventive maintenance services. The said services are carried out for proper performance of software. The business activity of the assessee includes CAD/CAM consultancy, information technology support etc. to its customers. The AMC receipts are integral part of business income and does not fall under the head "Income from other sources". In support of his submissions the ld. AR has placed reliance on the decision of Hon'ble Karnataka High Court in the case of CIT Vs. Motor Industries Co. Ltd. reported as 331 ITR 79 (Kar.) and the judgment of the Hon'ble' High Court of Bombay in the case of CIT Vs. Pfizer Ltd. reported as 330 ITR 62 (Bom.). The ld. AR pointed out that the exclusion of AMC receipts have been done by the Revenue only in the assessment year 2004-05. In the earlier assessment years and the succeeding assessment years the Revenue has not raised any objection on inclusion of AMC receipts. Whereas, the assessee has been consistently showing AMC receipts under the head "Business Income". There has been no change in the business of the assessee or the accounting treatment given by the assessee to the AMC receipts.
10.3 On the other hand, the ld. DR vehemently defended the findings of the CIT(A). The ld. DR submitted that the assessee in claiming double benefit on the export turnover of EOU. After having claimed the benefit of section 10A, the assessee has again claimed deduction u/s 80HHE on same profits. This is against the spirit of the Act. 15
ITA Nos. 18, 19, 36 & 37/PN/2012 and 2114, 2115 & 2083/PN/2013, A.Ys. 2004-05, 2005-06 and 2007-08 & 2008-09 10.4 We have heard the submissions of both the sides and have examined the findings of the authorities below on this issue. The grievance of the assessee in disallowing deduction u/s 80HHE is two fold. The fist limb of submissions is that for computing deduction u/s 80HHE, the export turnover of the unit on which benefit of section 10A has been claimed has to be included. We find that this issue has been decided by the Tribunal in assessee's own case for the assessment year 2001-02. The relevant extract of the order of the Tribunal deciding the issue in favour of the assessee is as under:
94. We have heard the rival contentions and perused the record.
The issue in the present appeal is against the exclusion of export turnover of the EOU unit while computing the deduction under section 80HHE of the Act. Similar issue in respect of computation of deduction under section 80HHE of the Act vis-à-vis the inclusion / exclusion of the export sales arose before the Tribunal in Serum Institute of India Ltd. Vs. ACIT (supra) and it was held as under:-
"47. Inclusion of the export sales of the EOU unit in the 'export turnover', the numerator of the formula devised for computation the allowable deduction u/s 80HHC is the main contention of the revenue. Revenue has taken the argument against such inclusion, while it pleads for inclusion relevant turnover of the EOU unit in the 'total turnover', the denominator in the said formula. Per contra, relying on various decisions, the assessee takes the stand that the inclusions of Export turnover and the total turnover of the EOU unit has to be done in export turnover and total turnover in the formula. For this, we undertake to examine the relevant provisions to adjudicate if such inclusions are prevented or otherwise. We shall first take up the export turnover as defined in the Act. The expression 'export turnover' is defined in the Explanation (b) to Section 80HHC of the Act and the same is reproduced as under
"(b) "export turnover" means the sale proceeds received in, or brought into, India by the assessee in convertible foreign exchange in accordance with clause (a) of sub-section (2) of any goods or merchandise to which this www.taxguru.in28 ITA No.948/PN/2005 Assessment Year:2001-02 Serum 16 ITA Nos. 18, 19, 36 & 37/PN/2012 and 2114, 2115 & 2083/PN/2013, A.Ys. 2004-05, 2005-06 and 2007-08 & 2008-09 Institute of India Ltd. section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962"
48. From the above, the legislature has used the expressions 'the sale proceeds received in, or brought into, India by the assessee' and the expressions 'by the assessee' deserves emphasis as it connotes that the 'export turnover' should be of assessee level. Meaning thereby, the assessee's level 'export turnover' needs to be considered. The expression is wide enough to include the export sales of the 'EOU unit'. Further, by the use of expression 'any' before 'goods and merchandise' all the goods and merchandise is covered. However, the restriction apply to such goods and merchandise, which are listed in clause (b) of Section 80HHC (2) i.e. Mineral oil and minerals and ores (other than processed minerals and ores specified in 12th Schedule to Act."
95. The CIT(A) had placed reliance on the ratio laid down by Mumbai Bench of the Tribunal in Tata BP Solar India Ltd. Vs. ACIT reported in 103 ITD 386 (Mum) (Trib) in holding that the Assessing Officer was correct in excluding the export turnover while computing exemption under section 80HHE of the Act. The Pune Bench of the Tribunal in Serum Institute of India Ltd. Vs. ACIT in ITA No.948/PN/2005, relating to assessment year 2001-02, vide order dated 18.01.2012 had considered the ratio laid down by the Mumbai Bench of the Tribunal in Tata BP Solar India Ltd. Vs. ACIT (supra) and reliance was placed on the ratio laid down by the Hon'ble Bombay High Court in Hindustan Unilever Ltd. Vs DCIT (2010) 325 ITR 102 (Bom) and it was held that the assessee was entitled for inclusion of export sales in the export turnover.
96. Further, section 80HHE (5) of the Act provides that where a deduction under section 80HHE of the Act is claimed and allowed in respect of eligible profits, no deduction shall be allowed in relation to such profits under any other provisions of the Act. In the case of the assessee, the eligible profits considered for deduction under section 80HHE of the Act excluded the profits that had already been claimed under section 10A of the Act. Hence, there is no case of 17 ITA Nos. 18, 19, 36 & 37/PN/2012 and 2114, 2115 & 2083/PN/2013, A.Ys. 2004-05, 2005-06 and 2007-08 & 2008-09 double deduction of profits by including the export turnover of STP in the export turnover for claiming deduction under section 80HHE of the Act.
97. We find support from the ratio laid down by the Delhi Bench of the Tribunal in Jindal Exports (P.) Ltd. Vs. ACIT reported in 31 ITD 217 (1989), wherein it was held as under:-
"There is one more aspect of the matter section 80HHC does not make any distinction between the export turnover from the Free Trade Zone and from other areas. The revenue may feel that once the entire income of the industrial undertaking is exempt under sec. 10A a further deduction under sec. 80HHC in respect of the same turnover may give an unintended advantage to the assessee. In actual practice however it may not be so. If the undertaking incurs a loss, then the advantage or benefit under sec. 10A may be illusory. Why should the assessee be denied deduction allowable under section 80HHC ? This is particularly so when the gross total income, in any case, has to be a positive figure before any deduction under Chapter VIA can be allowed.
30. We are of the considered view that deduction under sec. 80HHC cannot be denied simply because the income of the industrial undertaking is exempt under sec. 10A. But even if two reasonable constructions of the relevant provisions are possible, that construction which favours the assessee, must be adopted - CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC)"
98. In the above said facts and circumstances, we direct the Assessing Officer to include the export turnover of the EOU unit while computing the deduction under section 80HHE of the Act. The ground of appeal No.5 raised by the assessee is thus, allowed. The Revenue has not been able to controvert the findings of the Tribunal. We, therefore, respectfully follow the same and direct the Assessing Officer to include the export turnover of EOU while computing deduction 80HHE of the Act.
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ITA Nos. 18, 19, 36 & 37/PN/2012 and 2114, 2115 & 2083/PN/2013, A.Ys. 2004-05, 2005-06 and 2007-08 & 2008-09 10.5 Now, we proceed with the second limb of the submissions. It is an undisputed fact that the assessee has been showing AMC charges in the profit and loss account under the head "Income from services". A perusal of the profit and loss account for the year ended 31-03-2004 would show that under the head "Income", the assessee has three sub heads viz "Income from services", "Sale of products" and "Other income". Under the head "Income from services" the assessee has included income from various services rendered by it and AMC charges. Under the head "Sale of products" the revenue generated from sale of own products and trading products is included whereas under
the head other income, interest income, foreign currency gain miscellaneous income is reckoned. It is also not disputed that the assessee has been consistently following similar method of accounting in respect of AMC charges for the past several years, as well as, in the subsequent years. It is also not disputed that the assessee is primarily engaged in providing I.T. related services. Therefore, by no stretch of imagination the AMC charges received by the assessee can be held to be income of the assessee under the head "Other sources". In view of the above undisputed facts, we are of the considered view that the AMC receipts are integral part of the business income of the assessee.
Accordingly, this ground in the appeals of the assessee is allowed.
11. The eighth issue raised in the appeals of the assessee is reallocation of expenses between STP unit and Non-STP unit. The assessee claimed exemption u/s. 10A in respect of STP unit at Hinjewadi. The total consultancy offshore income admitted by the assessee is Rs.8,06,74,660/- and the profit on account of its offshore activities has been admitted by the assessee as Rs.1,80,21,965/-. For claiming exemption u/s. 10A, the assessee has apportioned expenses to 19 ITA Nos. 18, 19, 36 & 37/PN/2012 and 2114, 2115 & 2083/PN/2013, A.Ys. 2004-05, 2005-06 and 2007-08 & 2008-09 STP unit on certain basis. The expenditure relates to : (a) Depreciation on vehicles Rs.71,72,724/-, (b) Travelling and Conveyance Rs.4,03,33,670/- and (c) Expenses on account of payment made to Tata Technology (US), subsidiary of assessee Rs.19,13,22,405/-. The contention of the assessee is that offshore work is carried out by the STP unit at Hinjewadi and the onsite work is undertaken by the Non-STP unit. The activities of STP unit mostly constitute engineering design services. The activities of the Non-STP unit mostly constitute ERP implementation. The company claimed deduction u/s. 10A of the Act in respect of STP unit alone. The assessee apportioned the expenses between STP and Non-STP unit on the following basis:
Nature of expense Basis of Apportionment Other salary costs (e.g. gratuity, Direct salary cost superannuation, etc.) Expenses like bus transport and Number of employees canteen Expenses like depreciation on Area occupied by STP premises buildings, power, water, security and conservancy charges Other common expenses Turnover from respective activities
11.1 The depreciation on vehicles has been allocated by the assessee on the basis of turnover. The reasons for adopting this method of allocation by the assessee is that the depreciation on vehicles could not be directly identified to either of the units as the vehicles were used for the entire business of the assessee altogether. The Assessing Officer rejected the allocation model. The Assessing Officer held that the depreciation should be apportioned on the basis of allocation of vehicles to the employees of STP and Non-STP unit. The vehicles in most of the cases have been assigned to specific employees of the assessee company. Therefore, it would not be difficult to identify the vehicles assigned to the 20 ITA Nos. 18, 19, 36 & 37/PN/2012 and 2114, 2115 & 2083/PN/2013, A.Ys. 2004-05, 2005-06 and 2007-08 & 2008-09 employees of the STP unit and Non-STP unit. The CIT(A) accepted the Assessing Officer's method of allocation of depreciation.
We are of the considered view that allocation of depreciation on the basis of turnover is not acceptable. The depreciation on vehicles can be allowed on the basis of use of vehicles for the specific unit. Vehicles are allocated to the staff of the STP and Non-STP unit. The vehicles allocated to two different units can be identified. Depreciation on the asset utilized for a particular unit has to be allocated to that unit alone. We do not find any infirmity in the method of depreciation on vehicles adopted by the authorities below. The submissions of the Ld. AR on this issue are rejected.
11.2 As regards allocation of travelling and conveyance expenditure is concerned, the assessee has allocated the same on the basis of directly identifiable expenses directly linked to STP unit and Non-STP unit. The common expenses are allocated on the basis of turnover. The Assessing Officer has allocated the travelling expenses on the basis of foreign offshore activities and foreign onsite activities. It is an admitted position that offshore activities are carried out by the STP unit and onsite work is undertaken by the Non-STP unit. Any expenditure relating to travelling and conveyance can be fairly allocated on the basis of activity being carried out at the respective place of work. As far as common expenses are concerned the same can be allocated on the basis of turnover. The assessee has allocated directly identifiable expenditure on actual basis to the STP and Non-STP unit and common expenses on the basis of turnover. We do not find any error in allocating of travelling and conveyance expenditure on actual directly identifiable basis. Accordingly, the contentions of the assessee are accepted. 21
ITA Nos. 18, 19, 36 & 37/PN/2012 and 2114, 2115 & 2083/PN/2013, A.Ys. 2004-05, 2005-06 and 2007-08 & 2008-09 11.3 The third expenditure allocation of which has been disputed is payments made to Tata Technology (US). The assessee has allocated selling and administrative cost for both STP and Non-STP units on actual basis whereas the Revenue has reallocated the expenditure on the basis of revenue of offshore activity and onsite activity of Tata Technology (US). The allocation of any expenditure on certain criteria is done, where the expenditure incurred is not identifiable. Where the expenditure can be duly identified with respect to separate units the actual expenditure relating to such units should be accepted. The question of allocation of expenses on the basis of turnover/revenue or any other criteria does not arise, in case of identifiable expenditure. The contention of the assessee is that the selling and administrative costs for both the units were identifiable and are invoiced on the basis of actual cost incurred on both the units. Since, the expenditure are identifiable unit wise, and have been separately invoiced, we accept the contention of the assessee.
However, we remit the latter two issues back to the Assessing Officer to verify the allocation of both expenses on above noted basis. The Assessing Officer after affording opportunity of hearing to the assessee shall allocate expenditure to STP and Non-STP units. This ground raised in the appeals of the assessee is, thus, partly accepted in aforesaid terms.
12. The ninth issue raised in the appeals is re-computation of deduction u/s. 10A of the Act. The Assessing Officer after reallocation of certain expenditure [depreciation on vehicles, travelling and conveyance and payment to Tata Technology (US)] has restricted the claim of exemption u/s. 10A in the assessment year 2004-05 and 2005-06. 22
ITA Nos. 18, 19, 36 & 37/PN/2012 and 2114, 2115 & 2083/PN/2013, A.Ys. 2004-05, 2005-06 and 2007-08 & 2008-09 Since, the ground of appeals of the assessee with regard to reallocation of the expenses has been partly accepted. We remit this issue back to the Assessing Officer for re-computation of exemption u/s. 10A in accordance with the directions of the Tribunal in respect of allocation of expenses and in line with the decision of Hon'ble Bombay High Court in the case of CIT vs. Gem Plus Jewellery India Ltd. reported as 330 ITR 175 (Bom). This ground of appeals of the assessee is allowed for statistical purpose.
13. The last and tenth issue raised in the appeals of the assessee is levy of interest u/s. 234B and 234C of the Act. It is a well settled law that levy of interest u/s. 234B and 234C is mandatory and consequential. Accordingly, this ground of appeals of the assessee is dismissed.
14. In the result, the appeals of the assessee in ITA No. 18/PN/2012 for the assessment year 2004-05, ITA No. 19/PN/2012 for the assessment year 2005-06, ITA No. 2114/PN/2013 for the assessment year 2007-08 and ITA No. 2115/PN/2013 for the assessment year 2008-09 are partly allowed.
15. Now, we proceed on to decide the appeals of the Revenue. The first issue raised by the Revenue in its appeal is with respect to expenditure on computer software acquired by assessee. The contention of the Revenue is that the expenditure on computer software has been wrongly held as revenue expenditure. Expenditure on acquiring computer software is capital in nature. The assessee has also raised this issue in its appeals assailing part disallowance of expenditure on acquiring computer software. The issue has been dealt with in detail while 23 ITA Nos. 18, 19, 36 & 37/PN/2012 and 2114, 2115 & 2083/PN/2013, A.Ys. 2004-05, 2005-06 and 2007-08 & 2008-09 deciding the appeals of the assessee. The contentions of the assessee have been accepted and the issue has been decided in favour of the assessee. Accordingly, this ground in the appeals of the Revenue has to fail.
16. The next issue raised by the Revenue in its appeals relates to disallowance u/s. 14A. The assessee has made investment in shares of Tata Technology (US), a 100% subsidiary of the assessee. The assessee has claimed interest expenditure in the assessment years 2004-05 and 2005-06. The Assessing Officer held that the expenditure incurred for earning income exempt from tax is not allowable under the provisions of section 14A. The Assessing Officer estimated the disallowance @ 2.5% and computed interest attributable to long term investment. The Commissioner of Income Tax (Appeals) reversed the findings of the Assessing Officer on the ground that no dividend was earned by the assessee from the investments made in Tata Technology (US). Even if the assessee would have earned dividend on such investment it is taxable in India being dividend earned from foreign country. Therefore, the provisions of section 14A of the Act are not applicable. We are in agreement with the findings of Commissioner of Income Tax (Appeals) on this issue. Accordingly, this ground in the appeals of Revenue is dismissed being devoid of any merit.
17. The next issue raised by the Revenue in its appeal for assessment years 2005-06 and 2008-09 is that the Commissioner of Income Tax (Appeals) has erred in not considering the fact that the expenditure on travelling and conveyance including foreign offshore activities and expenditure on depreciation is not to be considered for exemption u/s. 10A of the Act. The Revenue has not been able to substantiate the 24 ITA Nos. 18, 19, 36 & 37/PN/2012 and 2114, 2115 & 2083/PN/2013, A.Ys. 2004-05, 2005-06 and 2007-08 & 2008-09 ground raised in the appeal. We do not find any infirmity in the findings of the Commissioner of Income Tax (Appeals) on this issue. Accordingly, this ground of appeals of the Revenue is dismissed being devoid of merit.
18. The last issue raised by the Revenue in its appeal for the assessment year 2008-09 relates to deleting of disallowance of taxes claimed to be payments on account of VAT, Advance tax, Employee Cost etc. paid in Korea. The Assessing Officer made disallowance of Rs.67,68,686/- u/s. 40(a)(ii) r.w. Explanation (1). The Assessing Officer held that as per the provisions of section 40(a)(ii) no deduction is to be allowed for payment made in the nature of any rate or tax levied on profits or gains of any business or profession. In appeal the Commissioner of Income Tax (Appeals) reversed the findings of Assessing Officer with the following observations:
7.2 The submissions made by the appellant are carefully examined with reference to the financial statements of the appellant for the year under consideration and the legal position as applicable to the year. The main contention of the appellant is that the branch taxes of Rs.67,68,686/- paid in Korea through Paek & Co. were debited to the provision for taxation account below the line in the Profit & Loss account and was never claimed as deduction in the computation of taxable income of the appellant. There is merit in the contention of the appellant. As noticed from the P&L account for the year under consideration and the movement of the provisions for taxation account, as extracted hereinabove, the Korean taxes were passed through provision for taxation account, which is below the line item in the P&L account. For ready reference, the relevant portion of the P&L account filed by the appellant for the year is scanned and reproduced hereunder:
Profit : (Loss)/Before Tax 23,652.11 22,289.97 Provision for Taxation 4,331.46 1,754.31 Current tax 1,316.84 492.52 Tax for earlier year 79.51 --25
ITA Nos. 18, 19, 36 & 37/PN/2012 and 2114, 2115 & 2083/PN/2013, A.Ys. 2004-05, 2005-06 and 2007-08 & 2008-09 Deferred Tax Charge/(Credit) 2.77 52.34 Fringe Benefit Tax 91.12 80.46 Profit : (Loss)/After Tax 2,841.22 1,128.99 Balance brought forward 1,679.79 1,194.16 from previous year Add : Writeback of provision ---- 300.00 for Diminution in value of Investment Profit Available for 4,521.01 2,623.15 Appropriations Appropriations It is also noticed that while computing taxable income, the appellant has considered profit after tax (PAT) of Rs.28,41,21,875/- as base and the provisions for taxation aggregating to Rs.14,94,95,009/- have been added back by the appellant. The relevant portion of the statement of total income is also scanned and reproduced hereunder for immediate references :
Statement of Income
Amount (Rs.) Amount (Rs.)
INCOME FROM BUSINESS
Profit as per Profit and Loss Account (after tax) 284,121,876
Less : Interest Income Considered separately 19,949,994
Add : DISALLOWANCES 139,634.693
Provision for Income Tax 276.979
Provision for Deferred Tax 9,112,239
Provision for Fringe Benefit Tax 471,098
Provision for Wealth Tax 2,849
Foreign Currency loss capitalized for tax purpose 238,248
Unrealised Foreign Currency loss of capital nature 110,086
debited to P&L
Loss on Sale/Scrap of Fixed Assets 70,814,303
Depreciation as per Companies Act 121,260
Donations (14,719,000)
U/s.43B for leave encashment liability (2,138,692)
u/s.43B for Performance Bonus 10,825,797
Unpaid Superannuation 1,931,877
Provision for doubtful debts 216,681,738 216,681,738
480,853,619
As could be seen from the above scanned impression, the provision for taxes paid in Korea, which form part of 'provision for income-tax' of Rs.13.96 crores was not claimed as deduction in the computation of income. When the amount paid towards Korean taxes was not claimed as deduction either on provision basis or on payment basis, 26 ITA Nos. 18, 19, 36 & 37/PN/2012 and 2114, 2115 & 2083/PN/2013, A.Ys. 2004-05, 2005-06 and 2007-08 & 2008-09 the AO is not justified in making the disallowance by invoking the provisions of sec. 40(a)(ii). Similarly, in the case of tax, withheld of salary paid to the employees of Korean branch, no deduction was claimed by the appellant and therefore, question of disallowance of the TDS does not arise. Accordingly, the addition of Rs.67,68,686/- (67,22,378 + 46,308) made by the AO on this ground is deleted.
18.1 We have heard the submissions made by the representatives of rival sides and have perused the orders of the authorities below. It is an un-rebutted fact that the assessee has not claimed any deduction with respect to payment of tax, rates etc. in Korea. The assessee has created provision for the same. The assessee in Profit & Loss Account for the period relevant to the impugned assessment year has debited the 'Provision for taxation account' below the line. This factual findings have not been refuted by the Revenue. We do not find any infirmity in the findings of the Commissioner of Income Tax (Appeals) on this issue.
Accordingly, this ground of appeal of the Revenue is dismissed.
19. In the result, the three appeals of the Revenue i.e. ITA No. 36/PN/2012 for the assessment year 2004-05, ITA No. 37/PN/2012 for the assessment year 2005-06 and ITA No. 2083/PN/2013 for the assessment year 2008-09 are dismissed for the reasons aforesaid.
Order pronounced on Friday, the 29th day of May, 2015 at Pune Sd/- Sd/-
(R.K. PANDA) (VIKAS AWASTHY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Pune, Dated: 29th May, 2015
RK/Sujeet
27
ITA Nos. 18, 19, 36 & 37/PN/2012 and 2114, 2115 & 2083/PN/2013, A.Ys. 2004-05, 2005-06 and 2007-08 & 2008-09 Copy to 1 Assessee 2 Department 3 The CIT(A)-V, Pune 4 The CIT-I, Pune 5 The DR, ITAT, "B" Bench, Pune.
6 Guard file.
By Order //True Copy// Assistant Registrar, Income Tax Appellate Tribunal, Pune