TMI Blog2010 (3) TMI 1107X X X X Extracts X X X X X X X X Extracts X X X X ..... es covered under ISA have been classified in to eight different categories, which are the global business, strategy, client business development, knowledge, quality and risk management, personnel and policies, communication and information services, global facilities management, finance, legal and tax services and education development services. Under the present circumstances of the business, such global arrangement is necessary for the purpose of business. The expenditure incurred for such global arrangement is allowable expenses u/s 37(1) of the Act. In addition to that, we find that the payment of expenditure is at arm's length determined by the TPO u/s 92CA(3) of the Act. We do not find any substance in the case of the revenue because when an international transaction at arms length as determined by the TPO in the said transaction, it cannot be said that the assessee has paid the prices under the said transaction without obtaining any services. The contention of the revenue is baseless and the expenditure is incurred for the purpose of business. Therefore, we are of the view that the CIT(A) has rightly allowed the claim of the assessee. Thus, ground no.1 of the reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses were debited to profit and loss account. At that time if profit is not increased then the same cannot be reduced when the amount of expenditure is reimbursed. The CIT (A) has appreciated the accounting method followed by the assessee and deleted disallowance of claim made by the AO except in respect of Reimbursement of telecommunication charges. The CIT(A) invoked Explanation 2(iv) to section 10A of the Act in respect of Reimbursement of telecommunication charges. In principle we agree with finding of the CIT (A) in respect of reimbursement of expenses. We also find force in alternate submission of the learned AR that if it is held that the receipts for the reimbursable expenses are not eligible for deduction u/s 10A of the Act, only profits, if any, relating to such reimbursable expenses should be considered as being not eligible for deduction u/s 10A of the Act. Further, same should not part of total turnover and export turnover. On an analysis of definition of 'export turnover' as provided in clause (iv) of the Explanation 2 to section 10A, we notice that for the purpose of not including in the consideration received in or brought into India in convertible fore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes and the C.O. filed by the assessee is allowed for statistical purposes as indicated above. It is to note that grounds of CO has been taken as per separate summary sheet of grounds of appeal as well grounds of CO. filed by the learned AR. - R. K. Gupta (Judicial Member) and A. L. Gehlot (Accountant Member) For the Petitioner : S. S. Rana For the Respondent : Rajan Vora, Ritika Sachade Cross Objections Appeal : C.O. No. 214/M/08 ITA No. 4540/M/08, C.O. No. 47/M/09 ITA No. 5029/M/08, C.O. No. 20/M/09 ITA No. 4541/M/08, C.O. No. 44/M/09 ITA No. 5008/M/08, C.O. No. 45/M/09 ITA No. 5009/M/08 ORDER These appeals filed by the Revenue are directed against the orders of CIT(A) of two different assesses, namely M/s Accenture Services Pvt. limited (In short ASPL) and M/s Accenture India Pvt. Ltd (in short AIPL). The assesses also filed cross objections against the orders of CIT(A). Since identical issues are involved in these appeals and Cross Objections, they were heard together and, therefore, for the sake of convenience, a common order is passed. ITA No.4540/M/08 : By Revenue in (ASPL) 2. This appeal is filed by the revenue against the order of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te concern. 4.1 The AO concluded that the entire scheme of arrangement is nothing but an after thought adopted by the assessee to reduce its income by debiting expenses in the name of technical services obtained from its parent organisation. The CIT(A) deleted the said addition by observing as under:- 2.20 I have gone through the facts, material on record and the submissions made by the appellant. I have noted that a reference to TPO is sought in cases involving special attention from a transfer pricing perspective. Once the arms length price adopted by the appellant has been a subject matter of adequate review by the TPO and found to be in order. I have also analysed the decision of the Special Bench in the case of Aztec Software as relied upon by the appellant, and am of the view that the AO should be bound by the analysis undertaken and order passed by the TPO unless the AO can satisfactorily prove otherwise. Since the AO has not placed any material on record to rebut the TPO's conclusions, I agree with the appellant's contention that the order of the TPO should be followed as regards the payments made by the appellant under the above mentioned agreements. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on happening of an event is not allowable expenditure. The learned DR has also relied upon the judgment of Dalmia Dairy Industries Ltd. v. Commissioner of Income-tax 241 ITR 9.(Delhi) where it was held that Sale consideration to be satisfied by export of cement-Cement not supplied-Litigation expenses for realising value of cement and interest thereon--Not deductible as business expenditure-. The learned DR further submitted that the burden is on the assessee to establish that the expenditure has been incurred for the purpose of business, for which he relied upon the following judgments:- a. L.H. Sugar Factory and Oil Mills (P.) Ltd. v. Commissioner of Income-tax 1 25 ITR 293(SC) b. Goodlas Nerolac Paints Ltd. v. Commissioner of Income-tax 137 ITR 58(Bomb) c. Parasmani Investment Co.(P.) Ltd. V. ACIT, 85 ITD 133(KOL) (TM) d. Andrew Yule and Co. Ltd. v. Commissioner of Income-tax 49 ITR 57(Cal) e. Ram Bahadur Thakur Ltd. v. Commissioner of Income-tax 261 ITR 390(Ker) 6. The learned AR, on the other hand, relied upon the order of CIT(A) and submitted that the assessee has claimed deduction in respect of amounts paid under ISA u/s 37(1) of the Act, being laid out or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has satisfied all the conditions of section 37(1) of the Act, therefore, the CIT(A) has rightly allowed the deduction on the basis of commercial expediency and reasonableness of the expenditure. The learned AR in support of his contention relied upon the following judgments:- 1. CIT vs. Malayalam Plantations Ltd., [1964] 53 ITR 140. 2. Sasson J. David and Co. (P.) Ltd. V. CIT, [1979] 118 ITR 261 = (2002-TII-36-SC-INTL). 3. CIT vs. Dhanrajgiri Raja Narasingirji [1973], 91 ITR 544 4. Income Tax V. Sales Magnesite (Pvt. Ltd., [1995] 214 ITR 1 5. Bombay Steam Navigation Co. Pvt. Ltd. V. CIT [1965] 56 ITR 52(SC). 6. CIT vs. Chandulal Keshavlal and Co. [1960] 38 ITR 601 7. CIT vs. Panipat woolen and General Mills Co. Ltd., [1976] 103 ITR 66) (SC) 8. CIT vs. Jagannath Kisonlal [1956] 30 ITR 654 (Bom.) 9. Sanjeevi and Co. V. CIT, [1966] 62 ITR 156 (Mad.). 10. CIT V. Raman and Raman Ltd. [1966] 71 ITR 345 (Mad.) 11. Newtone Studios Ltd. v. CIT [1955] 28 ITR 378 12. CIT V. Hindustan Motors Ltd. [1989] 175 ITR 411 (Cal.) 13. CIT vs. Development Trust Pvt. Ltd., [1992] 198 ITR 766 (All.) 14. Amarjothi Pictures V. CIT [1968] 69 ITR 755 (Mad.) 15. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in to eight different categories, which are the global business, strategy, client business development, knowledge, quality and risk management, personnel and policies, communication and information services, global facilities management, finance, legal and tax services and education development services. Under the present circumstances of the business, such global arrangement is necessary for the purpose of business. The expenditure incurred for such global arrangement is allowable expenses u/s 37(1) of the Act. In addition to that, we find that the payment of expenditure is at arm's length determined by the TPO u/s 92CA(3) of the Act. We do not find any substance in the case of the revenue because when an international transaction at arms length as determined by the TPO in the said transaction, it cannot be said that the assessee has paid the prices under the said transaction without obtaining any services. The contention of the revenue is baseless and under the facts and circumstances of the case, the expenditure is incurred for the purpose of business. Therefore, we are of the view that the CIT(A) has rightly allowed the claim of the assessee. Thus, ground no.1 of the reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ployees. The CIT(A) after considering the assessee's submissions held as under:- 6.6 I have gone through the facts and material on record. I have noted that AO has disallowed the expenditure on an adhoc basis at 30%. The arguments of the appellant clearly indicate that such expenditure is incurred for the purpose of business only and whole expenditure should be allowed as deduction. As such I delete the adhoc addition made by the AO as above. 13. We have heard the learned representatives of the parties and perused the record. There is no contrary material on record nor any thing against the findings of the CIT(A) has been pointed out by the learned DR at the time of hearing before us. In that view of the matter, we do not find any infirmity in the order of the CIT(A) in deleting ad-hoc disallowance made by the AO. 14. Ground No.4 is against the action of the CIT(A) in deleting the disallowance of ₹ 5,09,958/- made by the AO on account of customs duty as revenue expenditure. 15. The AO disallowed the amount of ₹ 5,09,958/- being clearance charges for import duty paid on servers by treating the same as capital in nature. The CIT(A) after considering th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g as under:- I have gone through the submissions of the appellant and perused the material on record and noted that the common shares of Accenture Ltd. the parent company, have been allotted to the employees of ASPL and not to the employees of the parent company. Though the shares of the parent company have been allotted, the same have been given to the employees of the appellant at the behest of the appellant. It is an expense incurred by the appellant to retain, motive and award its employees for their hard work and is akin to the salary costs of the appellant. As has been pointed out by the appellant, this is a common practice to retain and motivate hard-working employees which is being followed by all major companies such as Infosys. Further, the amount that has been claimed by the appellant is the difference in the market price of the shares of Accenture Ltd and the exercise price of such shares by the employees of AIPL and not the entire share price of the shares allotted. Further, such shares have not been issued out of the share capital of the appellant and hence cannot be said to be a capital expenditure. I have analysed the decision of SSI Ltd. relied on by the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue's appeal. The learned AR further submitted that ground Nos. 3 and 4 in respect of ₹ 5,09,958/- towards custom duty paid and the expenditure incurred towards employees share purchase plan are in support of order of CIT(A). 23. After hearing the learned DR and after considering the findings given in revenue's appeal where in we dismissed the revenue appeal, since we dismissed the revenue appeal and the CO by assessee is consequential to the revenue's appeal, the CO filed by the assessee becomes infructuous, therefore, the CO is dismissed as infructuous. ITA NO. 5029/M/08 By Revenue and C.O. 47/M/09 By assesee (ASPL) 24. This appeal filed by the revenue against the order of CIT(A)- XXVII, Mumbai passed on 21.05.2008 for the assessment year 2003-04. 25. Ground No.1 is against the deletion of disallowance u/s 10A of reimbursement of expenses of ₹ 19,81,27,943/- made by the AO. 26. During the assessment proceedings, the AO noticed that the assessee has claimed deduction u/s 10A of the Act amounting to ₹ 39,94,62,356/-. The AO noticed that the assessee did not furnish any details regarding receipts from reimbursable expenses. The AO was o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommunication charges amounting to ₹ 18,382,911) should not be excluded from the export turnover of the Mumbai undertaking for the purposes of section 10 computation. These receipts are nowhere specified in Explanation 2(iv) of section 10A of the Act which defines explicitly as to what is to be reduced from export turnover of the undertaking. 1.32 However, given that Explanation 2(iv) to section 10A of the Act clearly mentions that telecommunication charges attributable to the delivery of computer software outside India should be excluded from the export turnover, I agree with the contention of the AO that the reimbursement of telecommunication charges amounting to ₹ 18,182,911 should be reduced from the export turnover of the Mumbai undertaking for the purposes of computing the deduction u/s 10A. 1.33 I have also gone through the decisions cited by the appellant in support of its contention that where certain items are excluded from the export turnover of the Mumbai undertaking, the same should also be reduced from the total turnover of the undertaking on the principles of parity for the purpose of computation of section 10A deduction. I agree with the appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s pertaining to the reimbursable expenses are directly relatable to and derived from the business of development and export of computer software and IT enables services as undertaken by the Mumbai undertaking of assessee. The reimbursable expenses primarily consist of the following: i) Travel cost ii) Visa expenses iii) Hardware or software purchase for specific projects iv) Reimbursement of telecommunication charges (amounting to ₹ 18,382,911); and v) Cost contribution pool reimbursements. 28.1 The learned AR submitted that the manner in which the receipts relating to the reimbursable expenses have been treated in the computation of total income by the assessee as it becomes evident that these receipts are inextricably linked to the business of development and export of computer software and IT enabled services undertaken by the Mumbai undertaking of assessee. The learned AR submitted that for the purposes of computation of deduction u/s 10A of the Act, the assessee has included the receipts in respect of the reimbursable expenses in the profits of the business of the Mumbai undertaking as well as the export turnover and the total turnover of this undertaki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e incurred on the boarding and lodging and other allowances paid to the engineers and consultants who are sent abroad for doing outside work. The learned AR further submitted that a plain reading of the Explanation 2(iv) to section 10A indicates that what are sought to be excluded from export turnover are only the expenses which have been incurred in foreign exchange in providing technical services outside India. In support of his contention, the learned AR relied upon the decision of Bangalore bench of ITAT in the case of Infosys Technologies Ltd. and in the case of DCIT V. Wipro Ltd., ITA No.1072/Bag/2007 dt. 30th January, 2009 = (2009-TII-30-ITAT-BANG-INTL). The learned AR further submitted that without prejudice to the above submitted that if it is considered that the said reimbursable expenses should not form part of the export turnover of the Mumbai undertaking eligible to take deduction u/s 10A of the Act. The learned AR in support of his contention relied upon the Special Bench decision of ITAT, Chennai in the case of ITO V. Sak Soft Ltd., 313 ITR 353 (Chennai) (SB). The learned AR has also relied upon the following judgments:- 1. Mphasis Ltd. V. ACIT, ITA No.524/Bang/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method of account all expenditure including reimbursed expenses are debited to profit and loss account by under respective heads of expenditure. When amount is reimbursed the consolidated amount of reimbursed expenses credited to profit and loss account. The problem arises while calculating profit for the purpose of deduction u/s 10A and others in cases where assessee follows second type of method of account. To appreciate the issue one has to keep in mind a fundamental principle in respect of reimbursement is that there is no element of profit. In the case under consideration the assessee has followed second method of accounting that is when the assessee incurred such reimbursable expenses and accounted for in profit and loss account the eligible profit was reduced as total expenses including reimbursement part of expenses were debited to profit and loss account. At that time if profit is not increased then the same cannot be reduced when the amount of expenditure is reimbursed. The CIT (A) has appreciated the accounting method followed by the assessee and deleted disallowance of claim made by the AO except in respect of Reimbursement of telecommunication charges (amounting to &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted out of India but which does not include freight and insurance. Similarly, total turnover for the purpose of deduction under section 80HHC which is defined in Explanation (ba) at the end of section 80HHC in the negative term as not including freight and insurance attributable to transport of goods or merchandise beyond the custom station and profit on sale of licence, cash assistance, duty draw back etc. Thus the term 'export turnover' does not include freight and insurance attributable to transport. Explanation (c) to section 80HHE is similar to clause (iv) of Explanation 2 of section 10A. 29.4 On an analysis of definition of 'export turnover' as provided in clause (iv) of the Explanation 2 to section 10A, we notice that for the purpose of not including in the consideration received in or brought into India in convertible foreign exchange there are two types of expenditures. The first type of expenditure is freight, telecommunication charges, or insurance attributable to the delivery of article or thing or computer software out of India. The second type of expenditure is expenditure, if any, incurred in foreign exchange in providing technical services outsid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtible foreign exchange received is consideration of the goods only. Where such expenses are separately charged in the invoices, the consideration received in convertible foreign exchange includes the value of the goods and such expenses. If the consideration received is only against the goods then there is no need to deduct such expenses from the consideration received in convertible foreign exchange. In cases where such expenses are separately charged, the expenses are required to be reduced from the consideration received for the purpose of arriving all the export turnover. The logic and reason behind this have been explained by the CBDT vide its Circular No.564, dated 5-7-1990 quoted above that the delivery of the goods should be Free on Board (FoB). Both the situations can be explained by a simple example. Mr. X exported goods out of India and received consideration ₹ 1,000 in convertible foreign exchange which is only in respect of goods. Mr. Y in a similar type of transaction charged ₹ 1,000 for goods and ₹ 100 for such expenses. Total convertible foreign exchange received in case of X is ₹ 1,000 and in case of Y is ₹ 1,100. In case of Mr. Y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication from record, we therefore send back matter of this cross ground of appeal and Co to the file of the AO for necessary verifications in the light of above discussions. The AO will provide reasonable opportunity of hearing to the assessee. 30. Ground No.2 is in respect of disallowance of deduction u/s 10A of ₹ 26,31,604/-on foreign exchange fluctuation without appreciating that the same is not derived from export business but the same is income from other sources. 31. The AO disallowed ₹ 26,31,604/- u/s 10A of the Act being the income in the nature of other income on the basis that such other income does not pertain to and is not directly inked to the business of the export of software or IT enabled services of the assessee. The details of these expenses are as under:- 1. Foreign exchange fluctuation gain - ₹ 25,87,815/- 2. Interest income on short term deposits - ₹ 23,788/- 3. Miscellaneous income - ₹ 20,000/-. 32. The CIT(A) in respect of foreign exchange fluctuation ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing the conclusions drawn therein, we confirm the order of CIT(A). 40. In the result, the appeal of the revenue is partly allowed for statistical purposes and the C.O. filed by the assessee is allowed for statistical purposes as indicated above. It is to note that grounds of CO has been taken as per separate summary sheet of grounds of appeal as well grounds of CO. filed by the learned AR. ITA NO. 4541/M/08 and CO NO. 20/M/09 IN THE CASE OF ACCENTURE INDIA PVT. LTD. 41. Ground No.1 is against the action of the CIT(A) in deleting the amount of ₹ 5,40,15,935/- being expenses incurred for job in process. 42. During the course of assessment proceedings, the AO noticed that the assessee has incurred expenses on certain running jobs during the subject assessment year that have not been completely and finally billed. The AO was of the view that such job during the subject assessment year beyond the amount billed should have been carried to P and L A/c and the balance sheet of the assessee as jobs in progress. The AO, accordingly, disallowed an amount of ₹ 5,40,15,935/- during the subject assessment year on this account. While disallowing the said expenses the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levied on the assessee since section 234D. 47. The learned AR submitted that this is covered in favour of the assessee by the decision of ITAT Special Bench in the case of ITO vs. Ekta Promoters, 304 ITR 1 (Delhi SB) wherein it has been held that section 234D which has been brought to the statute from 01.06.2003 cannot be applied to AY 2003-04 or earlier years. 48. After hearing the learned DR and perusing the Special Bench decision of ITAT cited supra, we confirm the order of CIT(A) on this issue. 49. The CO filed by the assessee is in support of order of CIT(A) as stated in facts sheet filed by the learned AR, since we confirm the order of CIT(A) in revenue's appeal, the CO becomes infructuous, therefore, the CO is dismissed as infructuous. 50. In the result, the appeal of the revenue and the CO of the assessee are dismissed. ITA NO. 5008/M/08 and 5009/M/09 IN THE CASE OF ACCENTURE INDIA PVT. LTD. 51. These appeals filed by the revenue are against the orders of CIT(A) - XXVII, Mumbai for AY 2003-04 and 2004-05. Since the issues are identical in both these appeals, the same are decided as under:- 52. To decide these appeals, the facts from AY 2003-04 are t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year. It is not required for the assessee to establish that the debt has become bad in view of the amendment to the provisions of section 36(1)(vii) by the Direct Tax Laws (Amendment) Act, 1987 with effect from April 1, 1989. 4.11 The contention of the AO regarding the honesty and judgement of the assessee regarding the writing off the bad debts does not hold good. It has been left to the prudence of the businessman to judge himself whether the debt has become bad or irrecoverable. A decision to write off a bad debt based on commercial considerations is sufficient ground for claiming the bad debt as a deduction. There is no burden on the assessee to provide the AO with demonstrative and infallible proof of the fact that the debts have gone bad. 4.12 The basis for claiming the deduction for bad debts also seems to fair and reasonable and contention of the AO that bad debt must be actually written off in the accounts in bonafide manner and assessee has just passed entry in the accounts in order to claim deduction is not justifiable. The appellant has also submitted the reasons for the write off of such bad debts. 4.13 Further, I have gone through the decisions in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fulfilled for allowability of bad debt:- i) it must be a proper debt or a part thereof ii) it has been written off as bad and irrecoverable in the accounts of the assessee for the previous year, and iii) it has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year. 58. The CIT(A) allowed the bad debts claim of the assessee u/s 36(1)(vii) after considering the facts of the case by holding that the basis for claiming the deduction for bad debts seems to fair and reasonable and contention of the AO that bad debt must be actually written in the account in bonafide manner and the assessee has just passed entry in the accounts in order to claim is not justifiable. We are of the view that the assessee has fulfil led the conditions laid down u/s 36(1)(vii) and the CIT(A) had examined the case before allowing the bad debts claim of the assessee. Therefore, we incline to uphold the order of the CIT(A) on this count and dismiss the ground raised by the revenue in both the years under consideration. 59. 5th common ground in both the appeals are that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,675/- paid to the Indian third parties as per the provisions of the Act and deposited the same into the government treasury. 63. We have heard the learned representatives of the parties and perused the record. On identical set of facts this issue has been sent to the file of the AO by ITAT in assessee's own case for Ay 2001.2002 vide ITA NO 8962/Mum/2004 order dated 29.1.2009. Since facts are identical and CIT (A) has also followed their order for AY 2001-2002 which has been set aside by the ITAT and the matter send back to the file of the AO. We respectfully follow that order of the ITAT and in the light of that we also send back this matter to the file of the AO with identical directions. The AO is further direct to verify the contention of learned AR that the assessee had deducted at source on the training expenses of ₹ 256,675/- paid to the Indian third parties as per the provisions of the Act and deposited the same into the government treasury. 63.4 In the result, the appeal of the revenue are partly allowed for statistical purposes. C.O. 44/M/09 and 45/M/09 FOR AY 2003-04 and 2004-05 IN THE CASE OF ACCENTURE INDIA PVT. LTD. 64. It is to note that ground ..... X X X X Extracts X X X X X X X X Extracts X X X X
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