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2016 (11) TMI 1051 - ITAT DELHI

2016 (11) TMI 1051 - ITAT DELHI - TMI - Transfer pricing adjustment - international transactions of appellant pertaining to provision of IT enabled services to its associated enterprise has resulted into a loss originally shown by the assessee at 19.16 % - Held that:- As the allocation keys for allocating indirect cost earlier adopted by the appellant was "headcount" and now also the appellant for most of the indirect expenditure has retained the same allocation key and out of indirect expenses .....

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of the Ld. assessing officer for verification of the correctness of allocation keys, because in the remand report Ld. assessing officer could not point out any infirmity or irrationality involved in adoption of the allocation keys suggested by the assessee further even the 1st appellate authority is also convinced about the appropriateness of the allocation key and before us the Ld. departmental representative could not point out any error in the order of the keys adopted by the assessee in the .....

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ed by Ld. Transfer pricing officer without assigning any reason, the Ld. CIT (A) has included this comparable in the final set of comparable companies. Before us Ld. departmental representative could not point out any reason that why this comparable was excluded from the final list without giving any reason. The appellant has also included this comparable into its TP study report and also neither the Ld. transfer pricing officer nor Ld. departmental representative could point out that this compa .....

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Held that:- As the issue has already been decided by the coordinate bench in the assessee‟s own case for assessment year 2003- 2004 wherein it has been held that though the term „total turnover” has not been defined under section 10 A of the act and items which have been excluded from export turnover in the numerator must also be extruded from total turnover in the denominator for computing deduction under section 10 A of the act. The Ld. departmental representative could not point out any .....

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allowance - Held that:- We reject the contention of revenue that balance 25 % expenditure is without any basis and evidence. He also held that the payment is business expenditure as it is paid by way of salary or remuneration to the employees. Similarly he set aside the disallowance for the purpose of verification of the assessing officer in case if the total amount of expenditure on subsistence allowances not related to the previous year and then to make disallowance of the expenditure to that .....

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im of the assessee form that aspect and quantify the disallowance, if any. In view of this, we confirm the order of the first appellate authority deleting the disallowance of subsistence allowance expenses. - Decided against revenue - Addition u/s 40A - Held that:- The provisions of section 40 A (2) (a) speaks that where any expenditure has been incurred by the assessee paid to a specified person and Ld. assessing officer forms an opinion that such expenditure is excessive or unreasonable ha .....

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refore we confirm the finding of the Ld. CIT appeal in deleting the above disallowance. - TDS u/s 195 - addition of legal and professional charges expenses by holding that the said payments made to various non-resident was taxable in India invoking the provisions of section 40 (a) (ia) - Held that:- n the present case it was not the case of the ld AO that recipient of such income has any permanent establishment in India further the argument of the Ld. AR has also not been disputed that none .....

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tted by the assessee as except the ledger accounts no details are available. Further this argument is also not considered by lower authorities. Therefore in the interest of justice we set aside this issue to the file of the Ld. assessing officer to determine when the bills have been approved and admitted by the appellant, if they are admitted by assessee in the current previous year then though they may pertain to the earlier previous year the expenses are allowable - ITA No. 2283/Del/2011, ITA .....

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mon order as common facts and issues are involved. ITA No. 2283/Del/2011 (By revenue) ITA No. 2577/Del/2011 (by Assessee) (Assessment Year: 2004-05) 2. The revenue has raised the following grounds of appeal in ITA No.2283/Del/2011 for the Assessment Year 2004-05 against the order of the Ld. Commissioner of Income Tax (Appeals)-XX, New Delhi[ hereinafter referred to as‟ CIT (A)‟ or the 1st appellate authority]. (1) "On the facts and the circumstances of the case, the Ld. CIT(A) h .....

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.2.68 crores), subsistence for onsite employees (Rs.59.71 crores) standby and call out charges (Rs.5.80 crores), traveling expenses paid in foreign currency (Rs,0.85 crores) and LERMS (Rs.1.52 crores) are not to be taken into account for the purpose of computing the profit eligible for deduction u/s 10A of the Act. (3) On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of ₹ 1,09,86,543/- being 25% of the expenditure on subsistence allow .....

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ding the case on merits and by incorrectly holding that the onus of establishing that the said payment made on account of service charges was excessive had not been discharged by the AO. (5) On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of ₹ 28,22,882/- made out of legal and professional charges expenses by incorrectly holding that the said payments made to various non-residents was not taxable in India and that the AO was not corr .....

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to its UK parent which obtains all software service contracts from UK based customers. It carries out application maintenance work, which is stated to be at a low-end value chain in application maintenance vertical of the assessee. 4. Assessee filed its return of income on 28.10.2004 declaring a loss of ₹ 166414/-. Subsequently, this return was revised on 29.10.2005. Assessee has entered into international transactions during the year as under:- S. No. International transaction Value (in R .....

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ereinafter referred to as The Act‟] with respect to the above international transactions. The assessee while bench marking this transaction selected transaction net margin method (hereinafter referred to as TNMM) as the most appropriate method for determining its arms length price of the transactions. As a profit level indicator[hereinafter referred to as PLI] it selected operating margin as a percentage of operating cost. For software services it has earned operating profit by total cost .....

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.43% and submitted that international transaction of IT enables services are at arm‟s length. For this the assessee projected the profitability of BPO segment at 15.79% which is falling within range variance + 5%. 6. As reference was made to to ld Transfer Pricing Officer he out of 9 comparables selected by the assessee rejected 4 comparables giving reasons for rejecting 3 comparables and selected final 5 comparables as under:- S.No. Name of the Company Average of two years data 1. Ace Sof .....

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herein the total taxable income of the assessee were assessed at ₹ 698929280/- incorporating the above addition on account of transfer pricing issues. 8. On the aspect of corporate taxation, assessee is eligible for deduction u/s 10A of the Income Tax Act and during the course of assessment proceeding the ld Assessing Officer held that certain income were not derived from industrial undertaking and certain income which are not part of export turn over for the purpose of working out deducti .....

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e also made such as disallowance of ₹ 827000/- u/s 40A (2) of the Act and disallowance of ₹ 2822882/- on account of legal and professional charges expenses holding that it is paid to various non residence and on which tax is not deducted at source therefore disallowable u/s 40a(i) of the Act. Some other minor disallowances were also made. 11. The assessee aggrieved with the order of the ld Assessing Officer preferred an appeal before the ld CIT(A) -XX, New Delhi who vide order dated .....

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ing by Ld. CIT (A). It is appropriate to state here that the assessee has also preferred appeal as per ground No. 1 against the confirmation of the addition to the extent of ₹ 11935402/-. The crux of the transfer pricing issue is with respect to incorrect determination of margins of the assessee. Admittedly the assessee in its its TP study report has also considered the margin of the provision of IT enables services having total value of the transaction of ₹ 181442916/- and taking ap .....

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tted that overheads are allocated on the basis of headcount in each business segments and therefore the mismatch has arisen between the revenue and cost. It was also submitted that in BPO segment at the ends of the year more than 300 employees are employed and therefore the higher cost is allocated. However, ld Transfer Pricing Officer rejected the contention of the assessee in para 6.4 of his order stating that the explanation submitted by the assessee are different at different point of time a .....

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orrection of above error. The LD CIT (A) accepted the allocation of the cost as submitted by the assessee. Furthermore, on the comparable of Apex Logical Data Conversion which was rejected by the ld. Transfer Pricing Officer without giving any reason was included in the comparables and thereby computed the average PLI of comparables at 17.15% and determined the arms length price of the transaction of ₹ 194970402/- against the transaction ₹ 183035000/- and confirmed the addition of &# .....

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ocated the business support cost on the basis of headcount‟ and it was accepted by the Ld. TPO. No arguments were raised for applying different allocation keys to allocate the business support cost of ₹ 564258447/- to various segments compiled with the original transfer pricing document of the appellant, he submitted that it amounts to reallocation of the cost, as Ld. Assessing Officer did not have an opportunity to examine appropriateness of these keys the matter should be sent back .....

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ellant company is at startup stage and has very low capacity utilization with respect to its ITES segment, as it is only the 2nd year of its operation. He further referred that originally the allocation of the overhead between the software division and BPO segment was based on headcount‟ in each department. This fact was submitted to the assessing officer vide letter dated 27/10/2006 wherein it was submitted that without prejudice that the loss of 19.6% in BPO segment is largely attributab .....

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ount was inconsistent with economic reality and resulted in disproportionate allocation of expenses in as much as a higher business support cost for the whole year gets allocated to the BPO segment while most of the employees in the BPO segments were recruited in the 2nd half of the year. He further submitted that such fallacy is apparent when compared with the gross margin prior to allocation of business support cost in case of software division and BPO division. After that he referred to the v .....

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e cost it is located on the basis of seats. He also referred to a chart submitted wherein after such allocation profit before interest and taxes as percentage of cost was 12% and the profit level indicator was worked out as 17.5%. In nutshell he submitted that headcount of the employees is not correct allocation key for allocation of business support cost. For this proposition a relied upon the decision of the Hon‟ble Delhi High Court in case of CIT versus EHPT India private limited (ITA N .....

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eason that even if assessee has taken headcount allocation key originally but it can be corrected at any time. He further referred to the decision of special bench in case of DCIT versus Quark systems private limited (ITA number 100 & 115/CHD/2009) to state that the transfer pricing documentation would not act as an estoppels for suggesting correct treatment of allocation of expenditure. He further referred to the fact that during the course of assessment proceedings, assessee filed correct .....

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ndirect expenses may also be made on the basis of the revenue of the respective segment. He submitted a chart wherein if the location of indirect cost is taken on the basis of the revenue, e profit level indicator of the assessee would be 41.18% whereas of the comparable companies is 11.43% as per TP documentation and 21.17% as per the computation made by the Ld. transfer pricing officer therefore he submitted that if the business support services cost are located on the basis of revenue earned .....

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be taken to be an arithmetical mean of such prices or at the option of the assessee, a price which may vary from the arithmetical mean by not exceeding 5% of such mean. He therefore submitted that it is a standard deduction of 5% for which appellant assessee is eligible when more than one price is determined. For this proposition he referred to the decision of SAP labs India private limited (6 ITR (TRI) 81 (Bangalore)) and other decisions. In the result he submitted that that the Ld. CIT (A) ha .....

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d into a loss originally shown by the assessee at 19.16 %. Earlier according to the assessee such losses arose because of initial period of setting up of the business of BPO segment of the appellant and it was gestation period therefore there was a mismatch between the cost incurred in respect of the same segment and the revenue generated there from. Before learned CIT (A) appellant reworked operating profit margins of the various divisions after re allocating business support cost on different .....

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loyees, conveyance expenses, Gen Administration expenses, IT expenses, communication, head count was taken as allocation key. For the purpose of the space cost of it is allocated with respect to number of seats in each same segment and when there are vacant seats cost is allocated to the IT segment. These allocations of expenses are verified by the Ld. 1st appellate authority. The 1st appellate authority has not found any of the allocation keys to be unreasonable and improper. Further more if th .....

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m the Ld. assessing officer as mentioned in para 7.14 of his order. There is no adverse comment from Ld. assessing officer mentioned by Ld. CIT appeal on any irrationality involved in the allocation keys applied by the assessee. Similarly Ld. Departmental representative also could not point out any irrationality or inappropriateness involved in allocation keys mentioned at para 7.6 of the order of the Ld. CIT (A). We also perused the various allocation keys used. In fact on perusal of this alloc .....

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a primitive stage or in a start-up stage. In any case it may be an idle capacity created and therefore for the working out of the PLI of the BPO segment that particular cost also requires to be eliminated. In view of the above facts and circumstances, we do not see any infirmity in the revised working of allocation of direct cost of business support services as well as allocation of indirect business support cost based on headcount and space cost on the basis of number of desk. Further with resp .....

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ase the revenue as well as appellant both has agreed that transactional net margin method is the most appropriate method for determination of ALP. This method compares the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise and net profit margin is computed after determining the appropriate cost incurred. Therefore the determination of the cost incurred for the purpose of determining ALP is an important task. There may be dire .....

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he appellant to fulfill the object of determination of the arm‟s length pricing of an international transaction. As the allocation keys for allocating indirect cost earlier adopted by the appellant was headcount‟ and now also the appellant for most of the indirect expenditure has retained the same allocation key and out of indirect expenses some of the direct expenses have been identified and are allocated to a particular business segment, further when neither the remand report nor b .....

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t point out any infirmity or irrationality involved in adoption of the allocation keys suggested by the assessee further even the 1st appellate authority is also convinced about the appropriateness of the allocation key and before us the Ld. departmental representative could not point out any error in the order of the keys adopted by the assessee in the order of the Ld. that 1st appellate authority. It is also important to note that even if the business support cost is located on the basis of re .....

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ies. Before us Ld. departmental representative could not point out any reason that why this comparable was excluded from the final list without giving any reason. The appellant has also included this comparable into its TP study report and also neither the Ld. transfer pricing officer nor Ld. departmental representative could point out that this company was functionally not comparable with the appellant we find no infirmity in the order of Ld. CIT appeal in including this comparable for the comp .....

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accordingly for the purpose of computing the profit eligible for deduction under section 10 A of the income tax act. The Ld. assessing officer while working out the deduction under section 10 A of the income tax act with respect to the software technology Park industrial undertaking of the appellant has noted that a expenses of ₹ 509376201 has been excluded from the export turnover as well as total turnover of the assessee. Therefore he held that according to the form No. 56F, assessee ha .....

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ppellant preferred an appeal before the Ld. CIT appeal submitting that the though export turnover has been defined under the act but term total turnover‟ has not been defined therefore the above expenses which are required to be reduced from export turnover must also be reduced from the total turnover. Ld. CIT appeal accepted the contention of the assessee in view of the order of coordinate bench dated 26th -06- 2009 in ITA No. 3475/del/2007 for assessment year 2003- 2004 in case of appell .....

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n and travel, etc., incurred in foreign currency have to be excluded from export turnover as well as from the total turnover while computing deduction under section 10A of the Act as expenses incurred in foreign currency specified above are not includible in export turnover‟ as per clause (iv) of the explanation 2 to that section. He further referred to number of decisions where in it is held that for computation of deduction under section 10A of the Act, total turnover in the denominator .....

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expense or expenses in providing technical services outside India during the year, are reduced from the export turnover, such sums will also have to be reduced from the total turnover of the company. He further submitted that there is no change in the facts and in the law. 23. We have carefully considered the rival contentions. As the issue has already been decided by the coordinate bench in the assessee‟s own case for assessment year 2003- 2004 wherein it has been held that though the ter .....

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re inclined to confirm the order of the Ld. CIT appeal where he followed the decision of the coordinate bench in case of assessee for the previous year and directed the assessing officer to recompute the deduction under section 10 A of the income tax act. In view of this ground No. 2 of the appeal of the revenue is dismissed. 24. Ground No. 3 of the appeal of the revenue is against the decision of the Ld. CIT appeal who deleted the disallowance of ₹ 110986543/- being 25% of the expenditure .....

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nt of subsistence allowance to its employees who are positioned overseas to its holding company. These expenditure was paid on the basis of the actual vouchers and details submitted by the employees to the appellant and it was contended by appellant before the assessing officer that this is a reimbursement of the expenditure incurred by the appellant‟s employees. However the Ld. assessing officer disallowed 25% of the subsistence allowance paid by the appellant stating that deduction for t .....

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held that such subsistence allowance would be taxable in the hands of the employees if it is demonstrated that the entire payment is not actually spent for official purposes by the employees. He further noted that since 75% of the expenses are supported by the evidence of the actual expenditure it is allowed by the Ld. assessing officer and to the extent of 25% of the amount merely declaration has been furnished with respect to the such amount spent in the course of travel abroad. He held that .....

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ore while making payment to the holding company the assessee should have deducted tax at source under section 195 of the income tax act which assessee has failed to do. Therefore he contended that disallowance has rightly been made by the Ld. assessing officer. 27. Ld. authorized representative submitted that during the relevant assessment year, the assessee incurred expenditure of ₹ 44,39,46,173 for reimbursement of subsistence allowance paid by Xansa Plc. to the assessee‟s employee .....

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ees of the assessee on travel, which is reimbursed, by the assessee to Xansa U K. The reimbursement of the amount paid by way of subsistence allowance to the employees of the assessee by Xansa UK does not have any element of income. It is submitted that the assessee has merely reimbursed the actual expenses initially paid by Xansa UK on behalf of the assessee to the employees of the assessee on account of subsistence allowance. He submitted plethora of judicial precedents where it is held that m .....

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to the extent the expenses has actually been incurred on subsistence, i.e. food, conveyance, telephone, etc. and other petty expenses for which the employee may not have in their possession supporting papers in the form of bills or vouchers, etc. Our attention was also invited to the decision of the Supreme Court in the case of CIT vs. ITI Limited (CA Nos. 1001, 1002 to 1009 of 2005) rendered vide order dated 21.01.2009, wherein it is held that the employer, for allowing exemption of local trav .....

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, who were on travel overseas for business purposes of the assessee. Further, payment of subsistence allowance to the employees has been made by Xansa UK on behalf of and as per instructions of the assessee. The payment is made to Xansa UK towards reimbursement for the amount of subsistence allowance paid by them to its employees on tour for official purposes. Such payment has been made through banking channel and the factum of payment to Xansa UK is also not disputed. It would further be apprec .....

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elopment. In case of the assessee, too, payment to Xansa UK on account of reimbursement of subsistence allowance paid to the employees of the assessee, were liable to deduction of tax at source under section 192 of the Act (subject to exemption available under section 10(14)(i) of the Act). The assessee was, therefore, it was submitted, not required to deduct tax at source there from under section 195 of the Act. It is submitted that the aforesaid claim of non withholding of tax at source on rei .....

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amount of reimbursement as the same was not chargeable to tax in India and hence the assessee was under no obligation to make a reference to the assessing officer in this regard. He argued that requirement of obtaining a no objection certificate from the Income-tax authority for remittances to non-resident in terms of section 195(2) of the Act has been done away vide circular Nos. 759 dated 18-11-1007, 767 dated 22-05-1998 and further amended vide circular No. 10 of 2002 dated 09-10-2002 issued .....

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on the basis of a certificate issued by a Chartered Accountant certifying that no tax was required to be deducted from such payment. He relied up on the decision of Honourable Supreme Court in GE India Technology Centre (supra), where in it is held that no tax is required to be deducted under section 195(1) of the Act from the payment to non-resident, which is not chargeable to tax in India. The Supreme Court further held that the payer is required to obtain certificate under section 195(2) of .....

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contentions and also perused the material available on record. The claim of the subsistence allowance of ₹ 43946173/-paid by appellant company to its UK holding company is on account of reimbursement of the expenses on deputation. Admittedly no tax has been deducted on the sum under section 195 of the income tax act under the pretext that there is no income chargeable to tax in India as it is a case of pure reimbursement of expenses. This was one of the reasons for disallowance of the sum .....

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ncluded. Therefore the addition was made. The 1st appellate authority has deleted disallowance on various issues except the issue of prior period expenses for which the issue is set aside , considering all the aspects for which the disallowances been made as under:- FINDING 11.60 I have considered the order of the assessing officer and submissions made by the appellant with regard to the disallowance of subsistence allowance. My conclusions in this regard are as follows: (a) Section 40falfi) rea .....

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ary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",- . . (a) in the case of any assessee- (i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,- (A) outside India; or (B) in India to a non-resident, not being a company o .....

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is deductible at source under Chapter-XVII-B and such tax has not been deducted. For making disallowance under section 40a(i), the payment should be of a sum chargeable under this Act on which tax id deductible at source under Chapter XVII-B. Therefore, we are required to examine as to the payment of subsistence allowance by the appellant is chargeable under this Act and tax was deductible at source from such payment. 11.63 The appellant is rendering software development services to the custome .....

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es Act, 1956 having its registered office at D-l/3, Okhla Industrial Area, Phase-II, New Delhi, India and Corporate Office at C-2, Sector-1, Noida, India (hereinafter referred to as US Infotech'). Whereas • IIS Infoteoh is a software development organization that develops software and undertakes software projects both offshore and onshore for overseas clients; and • Fl may require software products and services from time to time which US Infotech is keen to provide. NOW THEREFORE I .....

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s intended that US Infotech shall be Fl's first choice supplier for such software and services." 1 1.64 It has been stated by the AR that the appellant in respect of employees on travel overseas for software projects pays subsistence allowance. 75% of such subsistence allowance is paid to the employees based on supporting papers / vouchers for the actual expenses on boarding, lodging, etc. incurred by them. The remaining 25% of subsistence allowance is paid to the employees to take into .....

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wance on behalf of the appellant to its employees, who are on travel to UK. The said amount paid by Xansa-UK towards subsistence allowance to the employees is reimbursed by the appellant. 11. 66 The employees subsequently on their return from travel settle their tour expenses with the appellant and submit vouchers / supporting papers for the expenses incurred by them to the extent of 75% of the subsistence allowance and for balance 25%, a confirmation/certificate certifying that to that extent t .....

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of the subsistence allowance, the employees have submitted a declaration / confirmation of having spent the amount to that extent on food, telephone, etc., during their stay / travel outside India. In view of the findings on record, it cannot be disputed that subsistence allowance to the extent of 25% is paid to the employees. However, the further expenses incurred by the employees out of such amount is not supported by actual vouchers. In view of the aforesaid categorical facts discernable fro .....

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not have any element of income and the same cannot be subjected to tax in India in the hands of the non resident. Reliance may be placed in this regard on the following decisions: • CIT vs. Tejaji Farasram Kharawalla Ltd.(1968) 67 ITR 95 (SC) • Van Oord : 189 Taxman 232 (Del-HC) • CIT vs. Fortis Health care Ltd.: 181 Taxman 257 (Del-HC) • Cholamandalam General Insurance Ltd.:.309 ITR 356 (AAR) • CIT vs. Industrial Engineering Products (P) Ltd.: 202 ITR 1014 (Del- HC) &b .....

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rsement of the amount of subsistence allowance initially paid by Xansa-UK on behalf of the appellant to its employees, such payment in absence of their being any element of income is not chargeable to tax in India. 11.70 Under Section 195 of the Act, an obligation is cast on a person making payment to a non-resident of any sum, which is chargeable under the provisions of the Act, to deduct tax at the rates in force at the time of payment o£ such sum or at the time of credit thereof to the .....

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ndia 11.72 The Supreme Court, recently, in the case of GE India Technology Centre (P) Ltd. vs CIT: 327 ITR 456 held that no tax is required to be deducted under section 195(1) of the Act from the payment to non resident which are not chargeable to tax in India. The Supreme Court further held that the payer is required to obtain certificate under section 195(2) of the Act from the assessing officer only in a case where the payer is sure that the payment is liable to tax in India, but is not certa .....

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.T. Act in the case of non-residents only and not in the case of residents. Failure to deduct the tax under this Section may disentitle the payer to any allowance apart from prosecution under Section 276B. Thus, Section 195 imposes a statutory obligation on any person responsible for paying to a nonresident, any interest (not being interest on securities) or any other sum (not being dividend) chargeable under the provisions of the l.T. Act, to deduct income tax at the rates in force unless he is .....

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to pay tax would also render a person liable to penalty under Section 201 read with Section 221 of the l.T. Act. In addition, he would also be liable under Section 201(1A) to pay simple interest at 12 per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. The most important expression in Section 195(1) consists of the of the words "chargeable under the provisions of the Act". A person paying interest .....

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whole of which are pure income payments, it also covers composite payments which has an element of income embedded or incorporated in them. Thus, where an amount is payable to a non-resident, the payer is under an obligation to deduct TAS in respect of such composite payments. The obligation to deduct TAS is, however, limited to the appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the non-resident. This obligation being limited to the a .....

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gineering [68 ITR 457] it was pointed out that if the payment made by the resident to the non-resident was an amount which was not chargeable to tax in India, then no tax is deductible at source even though the assessee had not made an application under Section 18(3B) (now Section 195(2) of the I.T. Act). The application of Section 195(2) pre- supposes that the person responsible for making the payment to the non-resident is in no doubt that tax is payable in respect of some part of the amount t .....

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from the Department that no tax was due. That certificate was required to be given to RBI for making remittance. It was held in the case of Czechoslovak Ocean Shipping International Joint Stock Company vs. ITO [81 ITR 162(Calcutta)] that an application for NOC cannot be said to be an application under Section 195(2) of the Act. While deciding the scope of Section 195(2) it is important to note that the tax which is required to be deducted at source is deductible only out of the chargeable sum. .....

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easoning of ours is based on the decision of this Court in Transmission Corporation (supra) in which this Court has observed that the provision of Section 195(2) is a safeguard. From this it follows that where a person responsible for deduction is fairly certain then he can make his own determination as to whether the tax was deductible at source and, if so, what should be the amount thereof. Submissions and findings thereon 8. If the contention of the Department that the moment there is remitta .....

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tion and Others vs. CIT 314 ITR 309]" 11.73 Therefore, in my view, since the payment to Xansa-UK is only a reimbursement of subsistence allowance paid to the employees of the appellant, and is not chargeable to tax in India, no tax was required to be deducted from such payment and hence provisions of section 40a(i) cannot be invoked to make disallowance. 11.74 Section 10(14)(i) of the Act exempts certain special allowance or benefit which are granted to meet expenses wholly, necessarily and .....

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paid by way of per diem (subsistence) allowance to the employees for the purpose of deduction of tax at source under the head 'salaries' as per section 192 of the Act, the assessee obtains from the employees evidence of actual expenses incurred against such subsistence allowance. 11.76 The payment of subsistence, therefore, would be taxable in the hands of the employees, if it is demonstrated that the entire amount is not actually spent for official purpose by the employees. In the prese .....

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oyees to the extent of 25% of the subsistence allowance, the said amount would become taxable in the hands of the employees and the appellant would be in default of deduction of tax at source from such payment under section 192 of the Act. 11.77 It is noted that for the failure of tax deduction at source from payment of salary under section 192 of the Act, there is no disallowance provided under section 40a(i) / 40a(ia) of the Act. Considering the matter from the above perspective, too, in my vi .....

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pose of allowing exemption^ under section 10(14)(i) of the Act read with Rule 2BB(i) of the Income-tax Rules to ascertain whether such amount of subsistence allowance was actually incurred as expenditure for official purpose by the employees. Further, the said amount is paid by Xansa-UK to the employers and, in turn, the entire amount has been reimbursed by the appellant to Xansa-UK. The 25% of the amount paid as subsistence allowance which is held as non business expenditure by the assessing of .....

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aimed as deduction in the relevant previous year relates to expenditure actually incurred in the preceding previous year. If the expenditure is not incurred in the relevant previous year, the same cannot be allowed as deduction. The assessing officer is directed to examine from records the total amount of expenditure on subsistence allowance which does not relate to the relevant previous year and make disallowance of the same. 29. On perusal of the above decision it is apparent that the 1st appe .....

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eable to tax in the hands of the employees only, and as it is an expenditure of the employer incurred wholly and exclusively for the purposes of the business, which cannot be disallowed in parts. We also concur with the reasons given that such subsistence allowance is supported by the evidence of the actual expenditure incurred for official purposes to the extent of 75% and for the balance 25%, employees have submitted a declaration of having spent in the said amount in the course of travel abro .....

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n prevalent practice and it is not an disallowable expenditure. Therefore, also we reject the contention of revenue that balance 25 % expenditure is without any basis and evidence. He also held that the payment is business expenditure as it is paid by way of salary or remuneration to the employees. Similarly he set aside the disallowance for the purpose of verification of the assessing officer in case if the total amount of expenditure on subsistence allowances not related to the previous year a .....

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rder of ld CIT (A) in directing ld AO to verify the claim of the assessee form that aspect and quantify the disallowance, if any. In view of this, we confirm the order of the first appellate authority deleting the disallowance of subsistence allowance expenses and dismiss ground No. 3 of the appeal of the revenue. 30. Ground No. 4 of the appeal of the revenue is against disallowance of ₹ 827000/- paid to M/s Roto power projects private limited by invoking provisions of section 40 A (2) (b) .....

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der section 40A(2)(b) of the Act, alleging that there was no legitimate business need for incurring such expenditure. On appeal before the Ld. CIT appeal the addition was deleted, therefore revenue has challenged this issue before us. 31. Ld. departmental representative relied upon the order of the assessing officer and submitted that the assessee could have easily bought the diesel from any petrol pump , no liasoning charges are required to be paid and therefore there is no legitimate need for .....

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fficer and, therefore, disallowance made by the assessing officer has rightly been deleted. 33. We have carefully considered the rival contentions. In the present case we do not find any finding in the order of the Ld. assessing officer about the what is the market value of the services that has been rendered and whether there was any need of such services and what is the benefit derived by the assessee from the payments. After examining these 3 aspects the Ld. assessing officer must compare the .....

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sessee or the benefit derived by or accruing to him, then he can disallow so much of the expenditure as is considered by him to be excessive or unreasonable. In the present case we do not find any opinion of the Ld. assessing officer that how such expenditure is excessive or unreasonable. The 1st appellate authority has also deleted this addition on the same ground therefore we confirm the finding of the Ld. CIT appeal in deleting the above disallowance. In the result ground No. 4 of the appeal .....

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al expenditure without deduction of tax under section 195 of the income tax act. Therefore invoking the provisions of section 40 (a) (i) the amount was disallowed. 36. Ld. departmental representative submitted that the payment of legal and professional fees , the income is chargeable to tax in India in view of the provisions of section 9(1)(vii) rws explanation 2 of the income tax act. It was further submitted that according to the article 23 of the double taxation avoidance agreement such incom .....

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ign / lay out services, and provided assistance in engagement of overseas consultants, lawyers, to explore the possibilities of acquisition of businesses. He further submitted that in terms of, payments for rendering any technical and consultancy services which make available technical knowledge, skill, etc., are included within the ambit of fees for technical services under the Indo-UK DTAA. He referred that definition of the term fees for technical services in terms the Article 13(4)(c) of the .....

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ined as payments of any kind to any person in consideration for the rendering of any technical or consultancy services if such services make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. Thus, Article 13(4)(c) of the India-UK DTAA is pari materia with Article 12(4)(b) of the India-USA DTAA. He further relied on the decision of Hon‟ble Supreme Court of India in case of UOI v. Azad .....

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incurred by them on behalf of the assessee. Such payments not being in the nature of royalty or fee for technical services, covered under Article 13 of the DTAA with UK were not liable to tax in India. Also, payment aggregating to ₹ 2,38,491 comprising of ₹ 70,035, ₹ 1,15,372 and ₹ 53,084, were paid to E&Y, Singapore were on account of professional services rendered by them and they were not in the nature of fee for technical services‟ covered under Article 12( .....

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ere is no requirement of tax deduction at source on the sums in India applying the provisions of the double taxation avoidance agreement as according to him they are not chargeable to tax in India. He referred to the number of decisions of various courts to support his argument placed before us. Regarding the contention of the Ld. departmental representative that in the present case article 23 shall apply which is pertaining to other income, he submitted that in the present case in the hands of .....

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uble Taxation Avoidance Agreement between India and UK and India and Singapore, which are relevant for deciding taxability or otherwise of the above payment aggregating to ₹ 28,22,882 made by the appellant to non resident entities. It is not disputed that payment of ₹ 17,17,863 to Xansa UK consisting of ₹ 17,05,830 and ₹ 12,033 is towards recharge for the management services and the same is not in the nature of technical fee. The said payment would not, in any case, made .....

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would not be taxable in India. 14.23 Similarly, payment of ₹ 4,91,754 to Xansa UK towards reimbursement of legal or professional expenses, too, not being in the nature of royalty or fee for technical services, covered under Article 13 of the Double Taxation Avoidance Agreement with UK, is not liable to tax in India. Also, payment aggregating to ₹ 2,38,491 comprising of ₹ 70,035, ₹ 1,15,372 and ₹ 53,084, were paid to E&Y, Singapore was on account of professional .....

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Singapore and it is, in fact, independent personal sendees covered under Article 14 of the Double Taxation Avoidance Agreement with Singapore. The said payment also is not liable to tax in India as the same does not involve stay of service provider in India for the period exceeding 90 days. The aggregate payment of ₹ 28,22,882, therefore, made to the non resident is not taxable in India. Tax, therefore, is not required to be deducted from such payment and there is no occasion to invoke sec .....

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" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including the provision of ser- vices of technical or other personnel) which : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this Article is received ; or (b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b .....

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in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received ; or (b) make available technical knowledge, experience, skill, knowhow or processes, which enables the person acquiring the services to apply the technology cont .....

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UK company in terms of an agreement between the appellant and that UK company dated 16/04/2003 for provision of the management services in relation to advise and guidance on key management decisions to explore the possibilities of the acquisition of the businesses. According to us the Ld. CIT appeal has correctly held that the above test of make available is not satisfied in terms of the provisions of article 13 of the Indo UK DTAA hence the fees paid by appellant to the UK company would not be .....

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before us could draw our attention towards the fact that how these services have been made available to the assessee by the various service providers. We also do not find content of any services where the ld AO has shown that such services have been made available to the assessee in terms of the requirement of the DTAA. Therefore we do not find any infirmity in the order of the Ld. 1st appellate authority in holding that that these income are not chargeable to tax in India in terms of the double .....

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ally owned by a resident of a Contracting State, wherever arising, other than income paid out of trusts or the estates of deceased persons in the course of administration, which are not dealt with in the foregoing Articles of this Convention, shall be taxable only in that State. 2. The provisions of paragraph 1 shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being a resident of a Contracting State, carr .....

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and 2 of this Article, items of income of a resident of a Contracting State not dealt with in the foregoing articles of this Convention, and arising in the other Contracting State may be taxed in that other State. In the present case it was not the case of the ld AO that recipient of such income has any permanent establishment in India further the argument of the Ld. AR has also not been disputed that none of the services have been rendered in India. In view of this according to the article 7 of .....

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d the following grounds of appeal in ITA No.2577/Del/2011 for the Assessment Year 2004-05:- 1. That the Commissioner of Income-tax (Appeals) (UCIT(A)") erred on facts and in law in sustaining addition to the income of the appellant to the extent of ₹ 1,19,35,402 on account of the alleged difference in the arm's length price of the international transaction of provision of IT enabled services by the appellant to its Associated Enterprise, Xansa UK. 1.1 That the CIT(A) erred on fact .....

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rovider and appropriate adjustment in the operating profit margin of the assessee or the comparable companies was required to be made on this account. 1.4 Without prejudice, the CIT(A) erred on facts and in law in not considering the four years' average operating results of the appellant for the purpose of benchmarking international transactions of provision of IT enabled services to its associated enterprise. 1.5 Without prejudice, that the CIT(A) erred on facts and in law in not considerin .....

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onsidering Twin Star Software Exports Ltd. as a comparable company on the basis of the contention of the TPO that such company had a turnover much lower than that of the appellant. 1.8 Without prejudice that the CIT(A) erred in law in not allowing variation to the extent of (+/-) 5%, while determining the arm's length price of the 'international transactions. 2. That the CIT(A) erred on facts and in law in directing the assessing officer to disallow subsistence allowance relating to earl .....

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had crystallized during the previous year. 44. The assessee has also raised an additional ground of appeal as under. 1.9 That the Commissioner of income tax (A) erred on facts in law in not excluding Fortune Infotech limited which is functionally not comparable to the appellant from the final set of comparable companies. 45. For the admission of the additional ground prayer under rule 11 of the income tax appellate Tribunal Rules 1963 was filed. It was contended by Ld. authorized representative .....

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It was further submitted that in view of the various decision of coordinate benches holding that Fortune Infotech Ltd is not a valid comparable to an assessee engaged in the profession of ITES and therefore the omission to raise the additional ground of appeal is neither willful nor deliberate. In view of this he submitted that the additional ground of appeal may be admitted. 46. Referring to the comparables selected for the purpose of comparability in analysis, he submitted that the Ld. TPO and .....

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own software and therefore cannot be considered as comparable to the assessee who was engaged in providing BPO services. He further referred to the decision of Delhi bench of tribunal in case of ESL services.com private limited versus ACIT ITA No. 1940 and 1982/del/2008 for the assessment year 2008 - 09 wherein this comparable has been rejected. He therefore pressed that this comparable should be removed from the list of comparables for comparing the arms length transaction of the international .....

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for the financial year 2003 - 04 would be much less than the profit level indicator of the assessee at 12% . 47. The Ld. departmental representative objected to the additional ground of appeal submitting that assessee has already taken this comparable into its Transfer pricing Study report and therefore AO did not look into the functional dissimilarity now being pointed by the Ld. authorized representative and further this is not a legal ground and therefore same should not be admitted. 48. We h .....

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ld that assessee is not estopped from pointing out at any stage that a comparable is wrongly selected. Therefore we reject the contention of the Ld. departmental representative that though assessee has taken the same comparable into its transfer pricing study report now it cannot resile from that stand contending for its exclusion. Further, as assessee has already taken this comparable into its transfer pricing study report, which is available on record we are of the opinion that additional grou .....

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djudication of the arm's length price deciding about this comparable in view of various decisions of the coordinate benches cited before us, after providing a reasonable opportunity of being heard to the assessee. We order accordingly. 50. Coming to the ground No. 1 of the appeal of the assessee against the order of the Ld. CIT appeal in sustaining the addition to the income of the appellant to the extent of ₹ 11935402/-, it was submitted before us that that the assessing officer while .....

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an abnormal loss and not considering the 4 years average operating results of the appellant for the purpose of benchmarking of the international transactions. Assessee further contended by various grounds about inclusion of certain comparables. In nutshell, in the ground No. 1 of the appeal assessee has contended many aspects of the computation of arms length pricing of its international transactions. 51. The Ld. departmental representative submitted that the deduction within the range of + or - .....

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the Ld. assessing officer may be directed to recompute the adjustment to the arm‟s length price with reference to 95% of the arm‟s length price determined by applying transactions net marginal method. We also noted that appellant has raised this ground vide ground No. 2.1 to 2.6 before the Ld. at 1st appellate authority . Ld. 1st appellate authority has given his finding in para No. 7.14 to 7.17 of his appellate order only on allocation keys of business support cost, however despite .....

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.10.2011 passed under section 250/143(3) of the Act and therefore it is dismissed. 54. Ground No. 3 of the appeal is against the disallowance of ₹ 212941/- on account of prior period expenses confirmed by the Ld. and 1st appellate authority on the ground that the expenditure should have been claimed in the year in which it was incurred. During the relevant assessment year, the appellant had disclosed certain prior period expenses. From such expenditure, the appellant had set-off the prior .....

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(1) of the Act. On appeal before the 1st appellate authority he confirmed the disallowance and therefore assessee is in appeal before us. 55. Ld. authorized representative submitted that the assessing officer has erred in making addition of net income arising from Exports segment on the ground that prior period expense is not allowable. On the other hand, disallowance of prior period expenses of Domestic segment have been allowed. He further submitted Without prejudice, though the expenses may b .....

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r unless it can be said that the liability was determined and crystallized in the year in question on the basis of maintaining accounts on the mercantile basis. He further submitted that a similar view has been taken by the Calcutta High Court in the case of S.P. Jaiswal Estates (P) Ltd v. CIT: 216 ITR 145 and CIT v. India Foils Ltd.: 200 ITR 259.(This decision was followed by the same Court in 200 ITR 266) In view of the above said submission he submitted that that the net prior period expenses .....

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tries v. DCIT in ITA No. 2245/D/07 for assessment year 2003-04, wherein, on identical facts, the Tribunal held that once the assessing officer had assessed prior period income in the present year, there was no reason to disallow the claim of the appellant regarding the prior period expenses. In view of the aforesaid, it was submitted that the assessing officer erred in adding back prior period expenses to the profit and loss account of the appellant as the expenses had crystallized during the re .....

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years which cannot be allowed in this year and therefore the disallowance has rightly been made and confirmed by the 1st appellate authority. 57. We have carefully considered the rival contentions. The Ld. assessing officer has disallowed this expenses wide para number VIII of the assessment order wherein he held that that the prior period expenses are not allowable as expense. Ld. 1st appellate authority wide para No. 16.4 of his order has rejected the contention of the Ld. authorised represen .....

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accepted proposition that the expenses are not considered prior period expenses merely because they pertain to the earlier period to the accounting period as they may be admitted by the parties during the current year. This is also the basic principle of the mercantile system of accounting that when the parties admit the liabilities the right to recover the expenses arises. Therefore when the bills are approved and are accounted for in the books of a assessee, they accrue for the payment. Howeve .....

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though they may pertain to the earlier previous year the expenses are allowable. In the result ground No. 3 of the appeal of the assessee is allowed with above direction. 58. In the result appeal of assessee in ITA No. 2577/del 2011 for assessment year 2004 2005 is partly allowed. 59. In the result appeal for assessment year 2004 5 preferred by the revenue is dismissed and filed by the assessee is partly allowed. ITA NO 3671/Del/2013 ( By revenue ) for AY 2005-06 60. Revenue has raised the foll .....

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the appeal of the revenue is identical to the ground No. 3 of the appeal of the revenue in ITA number to 2283/ Del/ 2011 for assessment year 2004- 2005. Parties also submitted that arguments raised by them for and against this ground in that appeal are also squarely applicable to the facts of this case and therefore they may be considered. 62. We have carefully considered the rival contentions and we also perused ground No. 1 of the appeal of the revenue in this appeal with the ground No. 3 of .....

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appeal of the revenue for assessment year 2004 -2005 in case of the assessee. The parties also stated that the same arguments may also be considered while deciding this ground of appeal. 64. We have carefully considered the rival contentions and also perused ground No. 2 of the appeal of the revenue for assessment year 2004- 2005 which has been decided by us by this common order. The parties before us did not point out any change in the facts and circumstances of the case. We find both the grou .....

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appeal in ITA No.3673/Del/2013 for the Assessment Year 2006-07:- 1. Ld CIT(A) erred in law and on the fact of the case in deleting the addition of ₹ 132963891/- made by the AO by disallowing 25% of subsistence allowance. 2. Ld CIT(A) erred in law and on the facts of the case in allowing the claim of the assessee under section 10A of the Act at ₹ 1097335155/- as against ₹ 842447044/- allowed by the AO. 67. Before us the parties submitted that the ground No. 1 of the appeal of t .....

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e for assessment year 2004- 2005. The parties did not point out any change in the facts and circumstances of the case .We also are of the view that they are same except the amount of addition/disallowances. We have already dismissed the ground No. 3 of that appeal and therefore we also dismiss ground No. 1 of the appeal of the revenue in the present appeal. 69. Ground No. 2 of the appeal was also stated to be similar to ground No. 2 of the appeal of the revenue for assessment year 2004- 2005 in .....

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round No. 2 in that particular appeal where we have dismissed the ground of the appeal of the revenue. Therefore similarly for same reasons we also dismiss ground No. 2 of the appeal of the revenue for this year. 71. In the result appeal of the revenue in ITA No. 3673/ Del/ 2013 for assessment year 2006-07 filed by the revenue is dismissed. ITA NO 5798/Del/2012 A Y 2008-09 ( BY Assessee) 72. The assessee has raised the following grounds of appeal in ITA No.5798/Del/2012 for the Assessment Year 2 .....

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ppellant's employees. 2.1 That the assessing officer/DRP erred on facts and in law in not appreciating that the subsistence allowance was paid by the appellant on account of actual expenditure incurred by the appellant's employees and the same was duly supported by vouchers/ declarations given by the employees. 2.2 That the assessing officer/DRP erred on facts and in law in alternatively holding that 25% of subsistence allowance paid by the appellant was, even otherwise, disallowable und .....

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excluding the following expenditure from the 'export turnover' of Noida-4 unit, for the purpose of computing deduction under section 10A of the Act: Telecommunication charges Rs.11,876 Subsistence for onsite employees ₹ 76,42,417 Standby and callout charges ₹ 45,75.639 ₹ 1.22.29.931 3.1 That the assessing officer/DRP erred in not appreciating that both the 'export turnover' and 'total turnover' have to be computed on the same basis for the purpose of com .....

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ng officer erred in not excluding foreign exchange fluctuation loss from the 'total turnover1 of Chennai unit, for the purpose of computing deduction under section 10A of the Act. 3.4 That the assessing officer/DRP erred, while making the purported adjustment from "the export turnover", following the assessment order for preceding assessment years, without appreciating that the said issue has already been decided by the ITAT in favor of the appellant for the assessment year 2003-04 .....

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ct. 73. In the present case appellant filed its return of income on 30/09/2008 declaring income of ₹ 600115583/-and Ld. assessing officer passed an assessment order pursuant to the direction of Ld Dispute Resolution Panel making disallowance of deduction under section 10A of ₹ 583136774/-and disallowance of subsistence allowance of ₹ 15705 3928/-. Against this disallowance this appeal is filed before us. 74. Ground No. 1 of the appeal of of the assessee is general in nature and .....

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rties also submitted that there is no difference in the facts and circumstances of the case for this year. They also submitted that the same arguments which were advanced for and against that ground may be considered. 76. We have carefully considered the rival contentions and also perused relevant grounds of that appeal. We have already decided this issue in the appeal of revenue for assessment year 2004 2005 while deciding ground No. 3 of the appeal against revenue. Vide that order we have dism .....

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mstances of the case and their arguments also remain same which may be considered. 78. We have carefully considered the rival contentions and also perused the grounds of appeal and the issue involved therein. The issue is about the computation of the export turnover and total turnover while computing deduction under section 10 A of the income tax act. We have already decided ground No. 2 of the appeal of the revenue for assessment year 2004 -2005 by this order. We have dismissed that ground. The .....

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Del/2014 ( by revenue) Assessment Year 2009-10:- 81. Revenue has raised the following grounds of appeal in ITA No.628/Del/2014 for the Assessment Year 2009-10:- 1. The CIT(A) has erred in deleting the disallowance of ₹ 26339000/- being 25% of the expenditure on subsistence allowance by wrongly holding that disallowance of non-deduction of TDS u/s 40A(i) was not called for in the case by holding that there is no evidence to the effect that the parent company is having any PE in India. 2. Ld .....

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