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DCIT 6 (2) /ACIT-5 (2) , Mumbai Versus M/s. Firstsource Solutions Limited And Vice-Versa

2018 (2) TMI 862 - ITAT MUMBAI

Interest disallowance - CIT-A granted relief to assessee - Held that:- Order passed by Ld CIT(A) on this issue does not call for any interference, since the own funds available with the assessee is more than the value of investments made in subsidiaries and further, there is commercial expediency in making investments, since the subsidiary companies are also said to be engaged in the similar line of business activity. Accordingly we uphold the order passed by Ld CIT(A) on this issue. - Disal .....

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ited purpose of verifying as to whether the assessee and M/s ICICI Bank Ltd are paying tax at same rate, i.e., whether the transaction is revenue neutral or not, we restore this issue to the file of the assessing officer. If he is satisfied that the impugned transactions are revenue neutral, we direct the AO not to make any disallowance u/s 40A(2)(a) of the Act. - Disallowance relates to disallowance of 20% of rental expenses - A.R submitted that the assessee has submitted both the agreement .....

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restore this issue to the file of the AO. If the AO is satisfied that there is no excess payment, then no disallowance out of rental expenditure is called for. If the AO is not satisfied, he may take appropriate decision in accordance with the law - Disallowance of Provision of various expenses - Held that:- We notice that the AO did not examine the details furnished by the assessee in order to demonstrate that the concerned liability did not accrue as at the year end. Hence, we have no oth .....

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t there may be personal element. It can be noticed that the AO has made the impugned disallowance on surmises and conjectures without showing how personal element is involved in meetings and seminars. Hence we do not find any justification in making adhoc disallowance of 20% from this expenditure. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the impugned disallowance. - Adhoc disallowance of 20% made out of Staff welfare expenses - deductio .....

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d CIT(A) on this issue and direct the AO to restrict disallowance to 10% of ₹ 19.95 lakhs, for which details were not given. However, this disallowance shall be eligible for deduction u/s 10A of 10 the Act as held by Ld CIT(A), since the said decision has not been challenged by the revenue. - Interest income and miscellaneous income - assessed under the head “Income from other sources” OR "business income" - Held that:- This issue requires fresh examination at the end of AO. Accordingl .....

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- BOMBAY HIGH COURT ) and CIT Vs. Yokogawa India Ltd (2016 (12) TMI 881 - SUPREME COURT). Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow deduction u/s 10A of the Act without setting off of loss from non-STP units. - Deduction claimed u/s 10A - deduction u/s 10A shall be allowed qua unit wise instead of aggregating profits/losses of all eligible units - Held that:- Hon’ble Bombay High Court in the case of Hindustan Unilever Ltd Vs. DCIT (2010 ( .....

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s STP units, which in turn, will reduce the amount allowable u/s 10A of the Act. We have noticed that the manner of allocation of interest expenditure shall be on the basis of user of borrowed funds between STP units and non-STP units. We have also noticed that the details relating to user of borrowed funds have not been brought on record. Hence we are of the view that this issue requires fresh examination at the end of the AO. - Allocation of expenses to STP units - Held that:- Neither the .....

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revenue or capital exp - Held that:- As the assessee did not furnish any detail relating to these expenses. Hence we have no other option but to confirm the disallowance. - Setting off unabsorbed depreciation pertaining to previous years from the positive income of the units eligible for deduction u/s 10A - Held that:- his issue has been decided in favour of the assessee by Hon’ble Supreme Court in the case of CIT Vs. Yokogawa India Ltd (2016 (12) TMI 881 - SUPREME COURT) and Techno Tarp & .....

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Shri Rajesh Kumar Yadav ORDER Per B.R. Baskaran (AM) :- These cross appeals are directed against the orders passed by Ld CIT(A)-5, Mumbai and they relate to the assessment years 2004-05 and 2005-06. All these appeals were heard together and hence, they are being disposed of by this common order, for the sake of convenience. 2. The assessee company is engaged in the business of IT enabled transaction processing services. 3. We shall first take up the appeal filed by the revenue for assessment yea .....

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ck of First Ring Inc. US Rs.61,72,19,000/- The AO took the view that the assessee has diverted interest bearing loans for making above said investments, which did not yield any income. Accordingly, he computed disallowance of proportionate amount of interest relatable to the above said investments, which worked out to ₹ 61,71,318/- and disallowed the same. The Ld CIT(A) deleted this disallowance and hence the revenue is aggrieved. 5. We notice that the assessee has demonstrated before ld C .....

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presumption shall be that the assessee has used only its own funds for making investments. Further, the assessee has also contended that the subsidiary companies are also engaged in the similar line of business as that of the assessee. Accordingly it was contended, by placing reliance on the decision rendered by Hon ble Supreme Court in the case of S.A.Builders Ltd Vs. CIT (288 ITR 1), that there is commercial expediency in making investments and hence no disallowance was called for. We notice t .....

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own funds available with the assessee is more than the value of investments made in subsidiaries and further, there is commercial expediency in making investments, since the subsidiary companies are also said to be engaged in the similar line of business activity. Accordingly we uphold the order passed by Ld CIT(A) on this issue. 8. We shall now take up the appeal filed by the assessee for Assessment year 2004-05 in ITA No.4053/Mum/08. 9. The first issue relates to the disallowance of interest e .....

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f the Act. Accordingly this ground of the assesee becomes infructuous. 10. The second part relates to the non-adjudication of issue relating to allocation of interest expenditure between STP unit and non-STP unit. The Ld A.R submitted that the ld CIT(A) did not adjudicate this ground initially and hence this ground was raised. However, the Ld CIT(A) has dealt with the same in the rectification order passed u/s 154 of the Act and he has decided the same against the assessee. Hence this ground als .....

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ental payments made to M/s Customer Assets India P Ltd. 13. The assessee made following payments to M/s ICICI Bank Ltd:- Common Corporate Expenses Rs.47,50,000/- Software and Professional Fees ₹ 6,00,000/- Repairs and Maintenance ₹ 9,43,245/- The assessee submitted that it had utilized the infrastructure facilities belonging to M/s ICICI Bank Ltd, a group company, and hence the proportionate cost has been recovered by its group company. The AO noticed that these two entities did not .....

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Vs. Indo Saudi Services (Travel) P Ltd (310 ITR 306), the Ld A.R submitted that the disallowance u/s 40A(2)(a) is not called for. He further submitted that the AO has made the disallowance without showing that the payments made were in excess of Fair Market Value. In the alternative, he submitted that the disallowance, if any, sustained would also qualify for deduction u/s 10A of the Act. 15. We heard Ld D.R on this issue. There is no dispute with regard to the fact that the payments have been m .....

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of the assessee has not been examined by the tax authorities. Hence, for the limited purpose of verifying as to whether the assessee and M/s ICICI Bank Ltd are paying tax at same rate, i.e., whether the transaction is revenue neutral or not, we restore this issue to the file of the assessing officer. If he is satisfied that the impugned transactions are revenue neutral, we direct the AO not to make any disallowance u/s 40A(2)(a) of the Act. If he is not satisfied so, he may make appropriate dec .....

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td. Since the assessee did not show that the rent was paid at market rates, the AO disallowed 20% of the rental expenses, referred above. The Ld CIT(A) also confirmed the same. 17. We heard the parties on this issue. The Ld A.R submitted that M/s Customer Asia India P Ltd had entered into a rental agreement with original lessor. Since the assessee was in need of premises, it entered into an agreement with M/s Customer Asia India P Ltd. The Ld A.R submitted that the assessee has paid same rent, a .....

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agreements before the AO, but the AO has made the disallowance without verifying the assessee s claim. We find force in the arguments of the Ld A.R. If the assessee is paying rent at the very same rate at which it was payable to the original lessor by M/s Customer Asia India, then the question of payment of excess rent does not arise. We notice that the AO has not examined the relevant agreements in this regard. Hence, for the limited purpose of verification of this claim of the assessee, we re .....

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ct. The AO is directed to consider these alternative contentions also, if he is not satisfied that there was no excess rent payment. 19. Ground No.3 urged by the assessee relates to disallowance of Provision of various expenses. The assessee created provision for following outstanding expenses and claimed the same as deduction:- (a) Upkeep charges & Maintenance - ₹ 4,00,948/- (b) Travelling and Conveyance - ₹ 6,47,000/- (c) Computer expenses - ₹ 5,45,000/- (d) Legal and Pro .....

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rmed the same. 20. The Ld A.R submitted that these expenses have accrued during the year under consideration and hence the provision was created by making reliable estimates. In the subsequent years, these expenses have been paid and the un-paid amount has been taken to income account. He submitted that these provisions were made on account of accounting compulsions under matching principle and hence the same is allowable as deduction. In this regard, the assessee relied on following case law:- .....

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that the accounting principles mandates that all known provisions have to be provided for, even if the exact amount of liability is not known. A reliable estimate is required to be made for making such provisions. It is the case of the assessee that these provisions relate to expenses of routine nature and such kind of provisions are made year after year. The actual payments made against these provisions are usually debited to the concerned Provision account and the balance, if any, shall be tra .....

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s at the year end. We notice that the AO did not examine the details furnished by the assessee in order to demonstrate that the concerned liability did not accrue as at the year end. Hence, we have no other option, but to accept the explanations of the assessee, as the same is in accordance with the accounting principles and requirements. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow the expenses relating to provisions, listed above. 24. The fou .....

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assessee that the disallowance shall be eligible for deduction u/s 10A of the Act. 25. We heard the parties on this issue. The nature of expenses being Meeting and Seminar Expenses , the major part of expenses shall be incurred towards hotel charges only. We notice that the assessee has furnished all the details before the AO. We further notice that the AO has made adhoc disallowance only on presumption that there may be personal element. It can be noticed that the AO has made the impugned disal .....

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khs towards staff welfare expenses. The assessee furnished relevant details to the AO. However, the AO noticed that these expenses were incurred in respect of Canteen, food, staff medical benefit. Further a sum of ₹ 19.95 lakhs has been described as Others . Accordingly, the AO took the view that it cannot be verified that these expenses have been incurred wholly and exclusively for the purpose of business. Hence he disallowed 20% thereof. The Ld CIT(A) confirmed the disallowance, but he a .....

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re given. We are also of the view that the disallowance @ 20% is also on the higher side. Accordingly we modify the order passed by Ld CIT(A) on this issue and direct the AO to restrict disallowance to 10% of ₹ 19.95 lakhs, for which details were not given. However, this disallowance shall be eligible for deduction u/s 10A of 10 the Act as held by Ld CIT(A), since the said decision has not been challenged by the revenue. 28. The next issue relates to the interest income and miscellaneous i .....

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and deposits. Accordingly, by placing reliance on the decision rendered by Hon ble Bombay High Court in the case of CIT Vs. Green Infra Ltd (392 ITR 7), the Ld A.R submitted that the interest income is required to be assessed as business income. 30. We heard Ld D.R and perused the record. It is the case of the assessee that it has submitted relevant details relating to interest income before the AO. However, the AO observes that the assessee did not furnish any details. In any case, the Hon ble .....

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d by Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to examine this issue afresh in the light of decision rendered by Hon ble Bombay High Court in the case of Green Infra Ltd (supra). 31. The seventh ground urged by the assessee relates to the adjustment of profits of STP units against loss of non-STP units. During the year under consideration, the assessee declared profit of ₹ 628.94 lakhs from STP units and loss of ₹ 185.54 lakhs from non-STP .....

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72) and by Hon ble Supreme Court in the case of CIT Vs. Yokogawa India Ltd (391 ITR 274). Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow deduction u/s 10A of the Act without setting off of loss from non-STP units. 33. In Ground No.8, the assessee contends that the Ld CIT(A) should have directed the AO to allow deduction u/s 10A as claimed by the assessee. This ground, being general in nature, does not require any adjudication. 34. Ground No.9 rela .....

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tated that the expenses should be allowed under payment basis, if the disallowance of provision was confirmed. In the earlier paragraphs, we have deleted the disallowance of provision for various expenses. Hence, this alternative prayer of the assessee shall not survive. 36. The second additional ground of the assessee relates to the deduction claimed u/s 10A of the Act. Under this ground, it is contended that the deduction u/s 10A shall be allowed qua unit wise instead of aggregating profits/lo .....

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year 2004-05 u/s 154 of the Act. 38. The first and second ground pertains to the issue relating to the disallowance of interest expenditure of ₹ 36.93 lakhs u/s 14A of the Act. We have noticed earlier that the assessee had incurred interest expenses of ₹ 100.10 lakhs. The AO noticed that the assessee has made investments in two of its subsidiary companies. Hence the AO disallowed proportionate amount of interest, which was worked out to ₹ 61.71 lakhs as relatable to investment .....

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come into play, since the income of STP units are not includible in the total income. Accordingly he held that the disallowance u/s 14A should be computed in accordance with Rule 8D. Accordingly he directed the AO to compute disallowance as per the provisions of Rule 8D. 40. We heard the parties on this issue and perused the record. We notice that the AO has allocated a sum of ₹ 36.93 lakhs, out of aggregate interest expenses of ₹ 100.10 lakhs, as interest relatable to STP units. We .....

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hat the Ld CIT(A) has exceeded his jurisdiction u/s 154 of the Act in invoking provisions of sec. 14A of the Act in the rectification proceedings. In the alternative, it was contended that the disallowance u/s 14A is not warranted, when the assessee has not earned any exempt income. 42. We heard Ld D.R on this issue and perused the record. In our view, the Ld CIT(A) has misdirected himself by referring to the provisions of sec. 14A of the Act in order to confirm the interest expenditure allocate .....

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We have also noticed that the details relating to user of borrowed funds have not been brought on record. Hence we are of the view that this issue requires fresh examination at the end of the AO. Accordingly we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to examine the same afresh in the light of discussions made supra. 43. The third ground urged by the assessee relates to the disallowance made u/s 40A(2)(b) of the Act and .....

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e AO in the set aside proceedings. 44. We shall now take up the appeal filed by the revenue for assessment year 2005-06 in ITA No.2537/Mum/2011. The Ld CIT(A) had restored the following issues to the file of the AO for verification and for taking fresh decision:- (a) Reversal of bonus of ₹ 33,95,454/- not allowed as deduction u/s 43B of the Act. (b) Assessee s claim that the AO erred in not computing deduction u/s 10A of the Act for each unit separately and not from the gross total income .....

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out verification of facts. Accordingly we uphold his view and accordingly, the irregularity, if any stands rectified by our action of confirming the restoration of issues. 46. We shall now take up the appeal filed by the assessee for AY 2005-06 in ITA No.2658/M/2011. The first issue relates to the allocation of expenses to STP units. The AO noticed that the assessee has declared aggregate income of ₹ 297.49 lakhs from non-STP unit. The nature of income so declared is Gains/loss on sale of .....

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inst non-STP unit. The Ld CIT(A) also confirmed the same. 47. We heard the parties on this issue. We notice that the AO has drawn inferences while deciding this issue, i.e., the AO has taken the view that the non-STP unit did not carry on any business activity and hence all the expenses should be considered as related to STP units. This does not appear to be a correct reasoning. The Hon ble Bombay High Court has held in the case of Zandu Pharmaceutical Works Ltd (Income tax Appeal No.8 of 2007 d .....

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d restore the same to the file of the assessing officer with the direction to examine the nexus between the expenditure and the STP or non-STP units. The assessee is also directed to furnish all the details that may be called for by the AO in this regard. After affording adequate opportunity of being heard to the assessee, the AO may take appropriate decision in accordance with the law. 48. The next ground urged by the assessee relates to the interest income, foreign exchange loss, miscellaneous .....

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nsistent with the view taken in AY 2004-05, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO with identical directions. 49. The next ground urged by the assessee relates to the nature of legal and professional expenses of ₹ 22.40 lakhs. The tax authorities have held it to be capital in nature. The AO noticed that the assessee has taken demand draft for a sum of ₹ 16.19 lakhs in favour of Superintendent of stamps. Since it was paid to .....

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Before us also, the assessee did not furnish any detail relating to these expenses. Hence we have no other option but to confirm the disallowance of ₹ 22.40 lakhs referred above. 51. The next issue relates to the adhoc disallowance made out of Staff welfare expenses. The assessee claimed a sum of ₹ 575.41 lakhs as Staff welfare expenses. The AO made adhoc disallowance of 20% of the expenses by observing that it is difficult to verify that these expenses have been incurred for busine .....

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detail was given. Hence we have no other option but to delete the entire disallowance made by the AO. The order passed by Ld CIT(A) on this issue shall stand set aside. 53. The next issue relates to the adhoc disallowance made out of Meeting and Seminar expenses. The assessee has incurred a sum of ₹ 49.55 lakhs under this head and the AO disallowed 20% of the same on adhoc basis by observing that these expenses cannot be verified. The Ld CIT(A) also confirmed the same. 54. Identical disall .....

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k Ltd towards Common corporate expenses, software & professional fees, repairs and maintenance. The AO disallowed 50% of the expenses by invoking provisions of sec. 40(A)(2)(a) of the Act. The Ld CIT(A) also confirmed the same. 56. Identical disallowance was made by the AO in 2004-05 also and we have restored this issue to the file of AO for the limited purpose of verifying as to whether the assessee and M/s ICICI Bank Ltd pays tax at the same rate or not. Since the facts are identical in th .....

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