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TMI Blog2016 (1) TMI 1084X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in holding that since section 10A of the Act provides for an 'exemption', the losses, if any incurred by units eligible for benefit under section 10A should be treated as losses from a ' source exempt from tax' and therefore, is eligible for set off against Non- STPI income. 3. the Hon'ble CIT(A) has erred in holding that a declaration under section 10A(8) making the claim of deduction under section 10A is a pre- requisite for allowing set off of losses from the STPI unit against income from a Non- STPI unit. While doing so, the Hon'ble CIT(A) has inter- alia erred in not following the decision of jurisdictional Tribunal in the case of Moser Bear India V JCIT [2951TR 148 (Delhi ATJ)]. 4. the Hon'ble CIT (A) has erred in not applying the various precedents cited by the Appellant (including that of Jurisdictional Tribunal) wherein, in identical circumstances, the Tribunals have allowed setting off losses of STPI units against the profits of Non-STPI units. 5. the Hon'ble CIT(A) has erred in not directing the Learned AO to allow set off of brought forward losses and unabsorbed depreciation against the assessed business income and other income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is directed that If after aggregation of income in accordance with the provisions of sections 70 and 71 of the Act, the resultant amount is a loss (pertaining to assessment year 2001-02 and any subsequent year) from eligible unit it shall be eligible for carry forward and set off in accordance with the provisions of section 72 of the Act. Similarly, if there is a loss from an ineligible unit, it shall be carried forward and may be set off against the profits of eligible unit or ineligible unit as the case may be, in accordance with the provisions of section 72 of the Act. Therefore in view of this circular the assessee is eligible for of set off losses of STPI unit against the profit of non - STPI unit of Rs. 5.490, 557. He further submitted that this circular is the accepted position by CBDT and therefore despite the decision of Honourable Delhi High court deciding otherwise the assessee is eligible for claim of the set off this loss of STPI unit against the profits of Non-eligible units. To strengthen his argument he also took us through various paragraphs of the circular. He further submitted that the circulars are binding on lower authorities and that circular shall prevails ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the exempted income under any other provision of the Act. The only object of the sub-section is to ensure that there is no double benefit arising to the assessee in respect of the same income." 14. In this case, this court is of the opinion that TEI Technologies (P.) Ltd. (supra) applies. The tax-exempt income of the assessee, eligible under Section 10-B could not have been set off against the losses from tax-liable income." 10. However subsequent to that decision CBDT has come out with the circular dated 16/07/2013 which provides as under :- "SECTION 10A, READ WITH SECTIONS 10AA & 10B OF THE INCOME-TAX ACT, 1961 - FREE TRADE ZONE - CLARIFICATION ON ISSUES RELATING TO APPLICABILITY OF CHAPTER IV OF THE ACT AND SET OFF AND CARRY FORWARD OF BUSINESS LOSSES CIRCULAR NO. 7/DV/2013 [FILE NO.279/MISC./M-116/2012-ITJ], DATED 16-7-2013 It has been brought to the notice of the Board that the provisions of 10A/10AA/10B/10BA of the Income-tax Act, with regard to applicability of Chapter IV of the Act and set off and carry forward of losses, are being interpreted differently by the Officers of the Department as well as by different High Courts. 2. The two sections 10A and 10B of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of profits and gains derived by an undertaking from export of articles or things or computer software. 4. Sub-section (6) of sections 10A and 10B were amended by Finance Act, 2003 with retrospective effect from 1-4-2001. Circular No. 7/2003, dated 5-9-2003 explains the amendments brought by Finance Act, 2003. The relevant paragraph is reproduced below: "20. Providing for carry forward of business losses and unabsorbed depreciation to units in Special Economic Zones and 100% Export Oriented Units. 20.1 Under the existing provisions of sections 10A and 10B, the undertakings operating in a Special Economic Zone (under section 10A) and 100% Export Oriented Units (EOU's) (under section 10B) are not permitted to carry forward their business losses and unabsorbed depreciation. 20.2 With a view to rationalize the existing tax incentives in respect of such units, sub-section (6) in sections 10A and 10B has been amended to do away with the restrictions on the carry forward of business losses and unabsorbed depreciation. 20.3 The amendments have been brought into effect retrospectively from 1-4-2001 and have been made applicable to business losses or unabsorbed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ff in accordance with the provisions of section 72 of the Act. Similarly, if there is a loss from an ineligible unit, it shall be carried forward and may be set off against the profits of eligible unit or ineligible unit as the case may be, in accordance with the provisions of section 72 of the Act. 6. The provisions of Chapter IV and Chapter VI shall also apply in computing the income for the purpose of deduction under sections 10AA and 10BA of the Act subject to the conditions specified in the said sections." 11. On conjoint reading of the circular, it is apparent that regarding claim of set off losses of eligible unit against the profits of non-eligible units and loss of non-eligible unit against the profits of eligible units' different interpretation are made by assessing officer as well as various high courts. Therefore, to set the controversy at rest CBDT issued this circular as guidance to its field officers and made the stand of the board clear on the interpretation of those provisions. 12. It is now the law of the land laid down by Honourable Supreme Court in case of Navnitlal C Jhaveri V CIT and other decisions that a circular issued by the board would be binding on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of K. P. Varghese v. ITO [1981] 131 ITR 597, by a Bench of two judges consisting of P. N. Bhagwati and E. S. Venkataramiah, JJ. The Bench has held that circulars of the Central Board of Direct Taxes are legally binding on the Revenue and this binding character attaches to the circulars even if they be found not in accordance with the correct interpretation of the section and they depart or deviate from such construction. Citing the decision of Navnit Lal (C.) Javeri v. K. K. Sen, AAC [1965] 56 ITR 198 (SC), this court observed that circulars issued by the Central Board of Direct Taxes under section 119 of the Act are binding on all officers and persons employed in the execution of the Act even if they deviate from the provisions of the Act. In Keshavji Ravji and Co. v. CIT [1990] 183 ITR 1, a Bench of three judges of this court has also taken the view that circulars beneficial to the assessee which tone down the rigiour of the law and are issued in exercise of the statutory powers under section 119 are binding on the authorities in the administration of the Act. The benefit of such circulars is admissible to the assessee even though the circulars might have departed from the st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcular of October 6, 1952, and its withdrawal by the second circular of June 20, 1978. The majority appears to have proceeded on the basis that by the second circular of June 20, 1978, the Central Board had directed that interest in the suspense account on "sticky" advances should be includible in the taxable income of the assessee and all pending cases should be disposed of keeping these instructions in view. The subsequent circular of October 9, 1984, by which, from the assessment year 1979-80 the banking companies were given the benefit of the circular of October 9, 1984, does not appear to have been pointed out to the court. What was submitted before the court was, that since such interest had been allowed to be exempted for more than half a century, the practice had transformed itself into law and this position should not have been deviated from. Negativing this contention, the court said that the question of how far the concept of real income enters into the question of taxability in the facts and circumstances of the case, and how far and to what extent the concept of real income should intermingle with the accrual of income, will have to be judged "in the light of the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epartmental authorities. This would be contrary to the ratio laid down by the Bench of five judges in Navnit Lal (C.) Javeri v. K. K. Sen [1965] 56 ITR 198 (SC). In fact State Bank of Tranvancore v. CIT [1986] 158 ITR 102 (SC), has already been distinguished in the case of Keshavji Ravji and Co. v. CIT [1990] 183 ITR 1 (SC), by a Bench of three judges in a similar fashion. It is held only as laying down that a circular cannot alter the provisions of the Act. It being in the nature of a concession, could always be prospectively withdrawn. In the present case, the circulars which have been in force are meant to ensure that while assessing the income accrued by way of interest on a "sticky" loan, the notional interest which is transferred to a suspense account pertaining to doubtful loans would not be included in the income of the assessee, if for three years such interest is not actually received. The very fact that the assessee, although generally using a mercantile system of accounting, keeps such interest amounts in a suspense account and does not bring these amounts to the profit and loss account, goes to show that the assessee is following a mixed system of accounting by which s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law. For reasons set out above, we are not in agreement with the said judgment. The relevant circulars of the Central Board of Direct Taxes cannot be ignored. The question is not whether a circular can override or detract from the provisions of the Act ; the question is whether the circular seeks to mitigate the rigour of a particular section for the benefit of the assessee in certain specified circumstances. So long as such a circular is in force it would be binding on the departmental authorities in view of the provisions of section 119 to ensure a uniform and proper administration and application of the Income-tax Act. 13. Earlier to the above circular, it has been held by Honourable Bombay high court in case of Hindustan lever Limited V DCIT 325 ITR 102 (Bom) thatloss in eligible unit could be set off against the profits of the business. It is also noted in the circular at para No. one that It has been brought to the notice of the Board that the provisions of 10A/10AA/10B/10BA of the Income-tax Act, with regard to applicability of Chapter IV of the Act and set off and carry forward of losses, are being interpreted differently by the Officers of the Department as well as by di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal services and since the income is chargeable to tax in India within the meaning of Sec. 40(a) (i) of the Act, TDS must be deducted on such payments as per the requirement of Sec. 195 of the Act. 16. Brief facts of appeal of revenue are that Assessee Company was incorporated on October 31, 2005 as a joint venture between HCL Technologies Ltd., India, NEC System Technologies Ltd., Japan and NEC Corporation, Japan. In terms of the Joint Venture Agreement entered between HCL Technologies Limited, NEC Systems Technologies Ltd and NEC Corporation representing NEC Group, it was agreed that the assessee is being established for the purpose of providing offshore centric software engineering services and solutions to NEC Group and its subsidiaries. On December 12, 2005 the assessee established a branch office in Japan ('Japan BO) for the purpose of furthering the objects of the Indian Company in Japan. The Japan BO was mainly formed for undertaking extensive sales and marketing activities for NEC HCL India to bid for the projects and to obtain work from the competitors who are not only in Japan but even outside Japan. The Japan BO also serves as the point of contact between the custo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carrying out its business outside India. The Learned AO rejected the contentions of assessee that such expenses are covered by the exception carved out by section 9(1)(vii)(b) of the Act and disallowed the outsourcing cost in accordance with the provisions of section 40(a) (i) on account of the fact that tax had not been withheld on the said payment. While reaching to this conclusion, the Learned AO observed that the a. Branch had no independent identity, b. the outsourcing activity was undertaken by the assessee from India, c. the Japan BO does not undertake the sub -contracting activity; d. the Japan BO is merely an extension of the Indian Company e. in the agreement entered into with NEC Corporation, there is no reference to the Japan BO; f. merely because invoices have been raised on Japan branch by HCL Japan is incorrect and contrary to the facts mentioned in the agreement; g. Japan BO has been created only for proper execution of the JV agreement and also its employees are appointed for carrying out sales, marketing activity and general administration work. h. Rejected the argument that Japan BO has an independent existence in Japan and carries out business a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see but it was carried out in India. He further attempted to support this argument by drawing our attention to page no 49 of the paper book where details of the staff employed by the Japan branch is given stating that this staff were not capable of doing the work. Therefore, he submitted that the assessee failed to deduct tax at sources on this payment and hence disallowance u/s 40a (i) may be confirmed. 19. Ld. AR submitted that the facts of the case stated by CIT (A) at page no 10 to 13 of his order clearly shows the facts of the case which clearly proves that assessee' s case falls under the exceptions carved out by clause (b) of section 9 (1) (vii) of the Income tax Act. 20. He further submitted that at para no 3.3 at page no 14 of the order of CIT (A) clearly shows the details furnished by the assessee before CIT (A) who in turn admitted the additional evidence after giving proper opportunity to the AO by obtaining remand report. It was submitted that these details proves that the payments has been made by Japan BO and services were rendered by Japan BO. He also referred to the agreement between the Japan BO and HCl Japan limited relating to this payments. Therefore he submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d its group companies based outside India. For procurement of projects from these customers, Japan BO undertakes sales and marketing activities for NEC HCL India to bid for the projects. It is pertinent to note that the staff of the branch office has the benefit of knowing the local language and hence are well equipped to undertake business development in Japan for the assessee company. Japan BO acts as a point of contact between the customers and NEC HCL India. Therefore actual work carried out by Japan BO staff is business development activities of obtaining the client and for this assessee has demonstrated that it has adequate staff for carrying on such work. As per details furnished Japan BO had 5 employees as sales managers for carrying out sales and marketing activities and 2 managers for general administrative affairs of the company. These employees also possess the technical skills required to understand the requirements of the projects. They are also supported by contractual staff comprising of 3 people and staff recruited in terms of service agreement with NEC ST. Assessee has substantiated by providing their job profile. Further Assessee has submitted the details of proj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices borne by the Japan BO of the assessee is not subject to withholding tax u/s 195 of the Income tax act because there is no income deemed to accrue or arise in India in the hands of recipient of such fees. Ld. AR of the assessee has further relied up on the decision of the Honourable Delhi high court where in the provisions of section 9 (1) (vii) (b) were considered as under :- "In this context, we may fruitfully refer to the dictionary meaning of 'consultation' in Black's Law Dictionary, eighth edition. The word 'consultation' has been defined as an act of asking the advice or opinion of someone (such as a lawyer). It means a meeting in which a party consults or confers and eventually it results in human interaction that leads to rendering of advice." Thus, it is evident that the "source" rule, i.e., the purpose of the expenditure incurred, i.e., for earning the income from a source in India, is applicable. This was clearly stated by the Supreme Court, when it later held that (page 467 of 371 ITR) : "The exception carved out in the latter part of clause (b) applies to a situation when fee is payable in respect of services utilised for business or p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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