TMI Blog2004 (11) TMI 505X X X X Extracts X X X X X X X X Extracts X X X X ..... stinations of tours on local conveyance, telephones and petty expenses holding that these expenses fall within the ambit of the phrase "any other expenditure (including hotel expenses or allowances paid"). 1( a ). The CIT(A) failed to appreciate the fact that the term "any other expenditure" is related to the expenses incurred while travelling and on hotel for stay and not expenses incurred at the place of visit to attend the business matters. 1( b ). The CIT(A) erred in not following the decisions of Appellate Tribunal, Bombay in the following cases on identical point which were in favour of the appellant and which were brought to his notice during the course of hearing on the ground that the same decisions were not accepted by the department: (1) Sunderam Finance Ltd. v. IAC [1984] 171 Taxman 29 (Mad. - Trib.) (SB) (2) IAC v. Fulford India Ltd. [1989] 34 TTJ (Bom.) 285 1( c ). He ought to have followed the same as they were rendered by judicial authority superior to him and were binding on him. 3. Both the parties agreed at the time of hearing that the issue raised in ground No. 1 stands covered in favour of the assessee by the decision in CIT v. Chemet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India." 5. In brief, the facts of the case are that the assessee had claimed deduction under section 80-O amounting to Rs. 6,75,803 being 50% of Rs. 13,51,600 representing commission received from its foreign principals during the previous year relevant to the assessment year under appeal. The claim of the assessee before the Assessing Officer was that it was providing/furnishing commercial information to its foreign principals and also advising them on commercial aspects of the transactions relating to the purchase of cotton from India based upon its knowledge, experi- ence and skill which the assessee had accumulated over a number of years. It was claimed by the assessee before the Assessing Officer that the aforesaid information and advice though given from India was actually used by the foreign principals outside India to decide upon whether they should tender or not tender and, if so, the terms and conditions on which the tender was to be placed. It was thus the case of the assessee before the Assessing Officer that though the services were rendered from India they were actually used outside India by its foreign principals. The assessee further claimed before the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal service to its foreign principals. ( iii )The said information was provided/furnished by the assessee-firm to the foreign principals in order to help them to decide upon the procurement of cotton from various available sources including the sources in India. ( iv )The information was passed on by the assessee-firm to the foreign principals for use outside India in consideration of which the assessee-firm received the commission from foreign principals in convertible foreign exchange. 8. On the basis of the aforesaid factual matrix, the learned counsel for the assessee submitted that all the conditions prescribed by section 80-O stood fulfilled and hence deduction under section 80-O should have been allowed to the assessee. 9. As regards the observation of the Assessing Officer that the information concerning industrial and commercial knowledge, experience of skill made available by the assessee-firm to its foreign principals was not meant for use outside India, the learned counsel for the assessee submitted that the assessee had indeed made available or provided information concerning industrial or commercial knowledge, experience or skill to its foreign principals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overnment or enterprise by the assessee. From the aforesaid, it follows that deduction under section 80-O was available during the assessment year under appeal only when income arising to an assessee was in consideration ( i ) for the use outside India of, amongst others, information concerning industrial, commercial or scientific knowledge, experience or skill made available or provided or agreed to be made available or provided to a foreign Government or enterprise by the assessee; or ( ii ) of technical or professional services rendered or agreed to be rendered outside India to such Government or enterprise by the assessee. The case of the assessee is that its case for deduction falls under both the aforesaid limbs of section 80-O. However, the only ground on which the assessee was denied deduction under section 80-O by the Assessing Officer and confirmed by the learned CIT(A) was that the information concerning industrial and commercial knowledge, experience of skill as made available by the assessee-firm to its foreign principals was not meant for use outside India. We shall now consider whether the case of the assessee falls under any of the aforesaid limbs so as to be entitl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct that the particular man is a member of an organized professional body with a recognized standard of ability enforced before he can enter it and a recognized standard of ability enforced while he is practicing it. This aspect assumes greater importance in certain situations. For example, the services rendered by a lawyer to his client by virtue of his enrolment with the Bar Council will no doubt be a professional service. But when the same lawyer is elevated and occupies a high judicial office discharging the judicial functions of the State, can it be said that he is still rendering professional service? The answer lies in the fact that, as a lawyer, he was rendering professional service by virtue of his enrolment with a professional body, i.e., the Bar Council and in the further fact that he was rendering service pursuant to a contract for service with his client. When the same lawyer is elevated and occupies a high judicial office, he discharges the judicial functions of the State not by virtue of his enrolment with a professional body but by virtue of his appointment to the high judicial office and also because of the fact that, as a holder of the judicial office, he disch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al service through employment of purely intellectual skill by the members of a learned profession, on the other hand, is real and not illusory. ( ii )It is equally relevant to bear in mind as to whether the man rendering the service is a member of an organized professional body with a recognized standard of ability enforced before he can enter it and a recognized standard of ability enforced while he is practicing it to arrive at the finding as to whether a profession is exercised or not though this fact by itself may not always settle the issue. Enrolment of a professional with a professional body is different from the membership of a body of traders or trade/business associations. ( iii ) Professional service unlike business service is not a salable commodity and hence is not guided so much by profit considerations as by professional ethics which requires a particular standard of service to be maintained towards the client. 16. To conclude, while every professional service amounts to service but every service does not amount to professional service . It is, therefore, not possible to treat every service as professional service . 17. We shall now take up the term tech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urely or pre-dominantly manual or non-technical skill with little or no engineering expertise in rendering them will be clearly outside the scope of technical service within the meaning of section 80-O." 14. We are in complete agreement with the aforesaid analysis as regards the meaning and scope of professional service or technical service occurring in section 80-O. Besides, judicial discipline requires us to follow the order of a co-ordinate Bench and this is more so when one of us is a party to that order. In our view the activities performed by the assessee in the case before us simply amounted to sharing certain commercial information developed by the assessee based on its own experience and skill with its foreign principals which, following the reasoning given in PN Writer Co. s case ( supra ), would not constitute technical or professional service within the meaning of section 80-O. The submission made by the learned counsel that the information furnished by the assessee to its foreign principals amounted to its having rendered technical or professional service to the foreign principals is, therefore, rejected. However, the assessee may still be entitled to ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formation of stipulated type provided by the assessee was not for use outside India. The crucial test or decisive factor is whether the commission received by the assessee from its foreign principals was in consideration for the use outside India of the said information, skill or experience provided by the assessee and not whether the foreign principals used the said information, skill or experience provided by the assessee for deciding upon the cotton procurement from India or other sources. If the commission is received, in convertible foreign exchange, from a foreign State or a foreign enterprise, in consideration, for the use outside India, of any information concerning, inter alia, industrial or commercial knowledge, experience or skill provided by the assessee seeking deduction and other conditions of section 80-O are also fulfilled, the assessee cannot be denied deduction on the sole ground that the said information, after being used by a foreign enterprise outside India, helped the foreign enterprise using such information to procure goods from India in preference to any other country. The requirement that the commission etc. should be in consideration for the use outside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred for earning commission income, interest or service charges for the reason that Explanation ( e ) does not define "indirect cost" as contended by the DCIT. The appellant submits that clause (1) to section 80HHC provides that the deduction under section 80HHC will be allowed to the extent of profits derived by the assessee from export of goods eligible for deduction under the said section. Clause 3( b ) to section 80HHC provides that where the export out of India is of trading goods, the profits derived from such exports shall be export turnover as reduced by the direct costs and indirect costs attributable to such exports. Explanations ( d ) and ( e ) to this sub-section explain the meaning of terms direct cost and indirect cost respectively. Thus, Explanation ( e ) to sub-section 80HHC 3( b ) is applicable for working out direct and indirect cost attributable to export turnover. It does not state that there are no direct cost for earning commission and other income. 3( c ) The word "attributable" used in the said section indicates that the expenses directly related to exports as well as to the commission and other income receipts are to be excluded from the tota ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Departmental authorities including the learned DR that the assessee, in addition to the income derived from export of cotton, also derived substantial income by way of commission from Government enterprises for handling their export of cotton out of India. The assessee has reportedly earned commission income of Rs. 88 lakhs from such Government bodies as against its export turnover of Rs. 169 lakhs. The case of the assessee is that it had to incur expenditure, which is estimated to be 10% of total receipts from commission, etc., for earning substantial income from activities other than sale/export of the goods/merchandise and hence the expenditure so incurred for earning such income should be deducted in order to arrive at the indirect cost attributable to export. Sub-section 3( b ) of section 80HHC provides that where the export out of India is of trading goods, the profits derived from such export shall be the export turnover in such trading goods as reduced by direct cost as well as indirect cost attributable to such exports. Explanation ( e ) to sub-section (3) of section 80HHC needs to be interpreted to explain what has been provided in the main sub-section, i.e., sub-se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts of the case are that the assessee claimed before the Assessing Officer that expenditure of Rs. 1,17,500 was incurred on payment of legal fees in connection with the setting up of a new manu-facturing project in collaboration with certain Japanese concern which did not ultimately materialize and hence the assessee claimed that the expenditure was not attributable to any of the existing business activities of the assessee. The Assessing Officer did not agree with the submissions of the assessee and held that the assessee had incurred the aforesaid expen-diture on account of professional fee which was in the nature of indirect cost and consequently included the same in the indirect cost shown by the assessee. On appeal, the learned CIT(A) held that the aforesaid expenses were relatable to the business of the assessee indirectly and hence confirmed the action of the Assessing Officer in adding the aforesaid amount to the indirect cost shown by the assessee. 21. We have considered the rival submissions as also the facts and circumstances of the case. Expenditure amounting to Rs. 1,17,500 was incurred by way of legal and professional expenses for setting up a new project. The e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of commission received from foreign parties for the supply of the aforesaid information. 24. The aforesaid ground has been decided by us in the appeal filed by the assessee for the assessment year 1992-93. Following the same, we reverse the order of the authorities below and direct the Assessing Officer to calculate and allow the deduction to the assessee in terms of section 80-O. We allow ground No. 1 raised by the assessee. Ground No. 2 : Estimation of direct costs 25. Ground No. 2 taken by the assessee reads as under : "2( a ) The CIT(A) has erred in confirming the DCIT s order rejecting the appellant s claim that the sum of Rs. 3,27,374 being 10% of the total commission and other receipts would be reasonable estimate of the direct cost of earning commission and other income. 2( b ) The CIT(A) failed to appreciate the fact that the word "attributable" used in section 80HHC indicates that the expenses directly related to export turnover as well as local turnover and the receipts are required to be excluded from the gross cost for the purpose of working out indirect cost. He further failed to appreciate that the direct cost in respect of commission and other income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 217 ITR 862 (Cal.) and CIT v. Anjani Kumar Co. Ltd. [2003] 259 ITR 114 (Raj.), the learned Counsel for the assessee submitted that the aforesaid expenses were allowable. 32. We have considered the rival submissions. It is not in dispute that the assessee had incurred the expenditure for setting up a new factory and hence it was capital in nature. There is no evidence on record to show that the impugned expenditure was incurred on the existing business. Assessing Officer has taken the correct view and hence his order is restored and that of the CIT(A) reversed. Ground No. 1 taken by the department is allowed. 33. Ground No. 2 reads as under : "On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing to exclude a sum of Rs. 13,97,342 being freight and insurance charges from direct costs for the purpose of computing relief under section 80HHC failing to appreciate that clause ( d ) of Explanation to section 80HHC(3) does not justify any such adjustment." 34. The assessee has shown direct cost of Rs. 1,17,12,937 for the purposes of deduction under section 80HHC. While working out the direct costs, the assessee included th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppreciate that clause ( e ) of Explanation to section 80HHC(3) does not justify any such adjustment. Donation Rs. 8,05,021 Repair Maintenance Rs. 220 Depreciation Rs. 56,502 Insurance premium Rs. 14,142 Bad debts written off Rs. 2,854 39. As regards donation amounting to Rs. 8,05,021 the claim of the assessee before the Assessing Officer was that the said amount of donation was not allowable as business expenditure and hence the same should not form part of indirect cost. The Assessing Officer, however, held that since the donation was not direct cost it was liable to be included in the indirect cost for the purpose of computation of deduction under section 80HHC. On appeal, the learned CIT(A) agreed with the assessee. 40. On careful consideration of the relevant aspects of the case, we are of the view that donation cannot be regarded as business expenditure. It is not entitled to deduction even under section 37. Though, it is entitled for some deduction in terms of the provisions of section 80G subject to the fulfilment of the condition contained therein. Since donation is not business ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iate that clause ( d ) of Explanation to section 80HHC(3) does not justify any such adjustment." 47. Ground No. 1 taken by the Department is directed against the order of the learned CIT(A) directing the exclusion of costs on account of ( i ) short weight; ( ii ) quality allowance; and ( iii ) freight and insurance. We have, in Department s appeal for the assessment year 1992-93, confirmed the order of the learned CIT(A) and held that freight and insurance are not includible in direct costs and thus dismissed the Department s appeal in that behalf. Following the same, Ground No. 1 insofar as it relates to the exclusion of freight and insurance from direct costs is dismissed. However, the Department is in appeal against the exclusion of costs relating to short weight and quality allowance from direct costs. The issue with regard to short weight and quality allowance was specifically taken by the assessee in appeal before the learned CIT(A). The learned CIT(A) allowed the appeal following his order for the assessment year 1992-93 though this issue was neither raised before nor adjudicated by the CIT(A) in assessment year 1992-93. The issue with regard to short weight and qual ..... X X X X Extracts X X X X X X X X Extracts X X X X
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