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TMI Blog2016 (11) TMI 1635X X X X Extracts X X X X X X X X Extracts X X X X ..... ng total income of Rs. 2,02,17,080/-, Rs. 89,65,090/- & Rs. 1,18,60,420/- respectively. The case has been selected for scrutiny under CASS, accordingly, notices u/s 143(2) & 142(1) of the Income Tax Act, 1961 (hereinafter called as 'the Act') were issued. In response to notices, the authorized representative of the assessee appeared from time to time and produced relevant information along with books of accounts. The assessment for the assessment years 2009-10 to 2011-12 were completed u/s 143(3) of the Act, determining total income of Rs. 5,21,64,320/-, Rs. 4,92,30,000/- & Rs. 4,54,52,730/- respectively, inter-alia making additions towards disallowance of exemption u/s 10A of the Act, disallowance of consultancy charges paid to M/s. IT Lokam Services India Pvt. Ltd. and disallowance on employees contribution to provident fund. 3. Aggrieved by the assessment order, the assessee preferred appeal before the CIT(A). Before the CIT(A), the assessee has filed elaborate written submissions. The CIT(A) after considering the explanations filed by the assessee, partly allowed the appeal filed by the assessee for the assessment year 2009-10 to 2011-12. The CIT(A) for the reasons re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are such as Jawa/J2EE/DB2/Web sphere technologies, etc. The assessee company mainly employed its own staff to provide services to clients, however, in cases of short fall of the personnel, it take support from other companies who had such kind of expertise and skilled employees. During the financial year relevant to assessment year 2009- 10 to 2011-12, it has outsourced part of its project work to M/s. I.T. Lokam Services India Pvt. Ltd. and paid consultancy charges. The said consultancy charges has been paid through proper banking channels after complied with TDS provisions wherever applicable. To support its arguments filed necessary bills and vouchers along with time sheets certified by the clients to prove the justification for payment of consultancy charges. 6. The A.O. after considering the explanations of the assessee held that the assessee, failed to prove the consultancy charges paid to M/s. I.T. Lokam Services India Pvt. Ltd. with necessary supporting evidences. Though, the assessee claims to have paid consultancy charges towards outsourced part of its project work to M/s. I.T. Lokam Services India Pvt. Ltd. failed to prove the necessity of making such payments and also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, the A.O. was not correct in disallowing the entire expenditure by holding that the assessee failed to prove the nexus between consultancy charges and earning of income. 8. The A.R. further submitted that the Ld. CIT(A) failed to appreciate the fact that the assessee cannot generate revenue unless expenditure is incurred. It is elementary that when there is an income, there should to be expenditure related to earning of income. It was further argued that it is appropriate to state here that M/s. I.T. Lokam Services India Pvt. Ltd. has been subject to scrutiny assessments, wherein the assessing officer while completing the assessment under question, has accepted receipt as well as expenditure incurred from out of these receipts. The A.R. further submitted that the recipient M/s. I.T. Lokam Services India Pvt. Ltd. having generated revenue from assessee company has itself paid salaries to its employees numbering 45 to 50 which is almost 50% of its receipts by way of bank transfers to the respective accounts of the employees duly deducting tax at source wherever applicable and proof of which has been furnished. All these facts were explained during the course of assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue. The A.O. further observed that the assessee failed to furnish necessary details with regard to nature of consultancy received from M/s. I.T. Lokam Services India Pvt. Ltd. and its corresponding application/utility to the project/supporting services undertaken by the assessee to its clients. The assessee neither listed out client-wise support services along with corresponding consultancy received nor specific instances have been cited to demonstrate the necessity for obtaining the alleged consultancy. Though, the assessee claims to have engaged the services of employees of M/s. I.T. Lokam Services India Pvt. Ltd., fails to prove the nature of services availed from the company and also corresponding services to M/s. IBM India Pvt. Ltd. Therefore, opined that the consultancy charges claimed by the assessee is having no nexus with the business of the assessee. 11. It is the contention of the assessee that consultancy charges paid to M/s. I.T. Lokam Services India Pvt. Ltd. is a genuine business transaction for availing services of software professionals to be deployed in its project undertaken with M/s. IBM India Pvt. Ltd. The assessee further contended that it has paid con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prove the nexus between consultancy charges paid and earning of income which is incorrect. 13. Section 37(1) of the Act, is a residuary section which allows deduction of certain expenditure incurred wholly and exclusively incurred for the purpose of business. For claiming deduction of an expenditure u/s 37(1) of the Act, it should be ensured that the expenditure is not in the nature described by section 30 to 36 and it should not be in the nature of capital expenditure and personal expenditure of the assessee. The main requirement of the provisions of section 37(1) of the Act is that expenditure should have been laid out wholly and exclusively for the purpose of the business. The nexus between the expenditure and the business, in connection with which expenditure has incurred, has to be established before the assessee gets entitled to deduction u/s 37(1) of the Act. Therefore, to claim a particular expenditure deductible under the provisions of section 37(1) of the Act, the assessee needs to prove beyond doubt that the expenditure is incurred wholly and exclusively for the purpose of business. Once the assessee proves that the expenditure is incurred wholly and exclusively for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of expenditure by furnishing necessary evidences such as bills submitted by the company along with agreement entered for providing services. The assessee also filed copies of IT returns filed by M/s. I.T. Lokam Services India Pvt. Ltd. to prove that the recipient has offered the said consultancy charges in its income tax returns which were not disputed by the revenue. On perusal of the income tax returns filed by M/s. I.T. Lokam Services India Pvt. Ltd., the major source of revenue for the company is from consultancy charges received from the assessee. The recipient also paid more than 50% of consultancy charges as salary to its employees duly deducting tax at source wherever applicable, the proof of which has been furnished. On perusal of all these documents furnished by the assessee, it was clear that the consultancy charges paid by the assessee is genuine and also the assessee has proved the necessity of incurring such consultancy charges in relation to its works executed to M/s. IBM India Pvt. Ltd. 16. The another important aspect to be considered in this case is that the assessee has declared average margin of 25 to 30% on its consultancy income received from domestic proj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rein the ITAT, held that there is no distinction between employees and employer contribution to PF and if total contribution is deposited on or before the due date of furnishing return of income u/s 139(1) of the Act, then no disallowance can be made towards employees contribution to provident fund. We find that the coordinate bench of this Tribunal, in the case of Eastern Power Distribution Company of AP Limited has considered similar issue and held that if employees contribution to provident fund is paid on or before the due date of furnishing return of income u/s 139(1) of the Act, then no disallowance can be made. The relevant portion of the order is extracted hereunder: "10. Considering the facts and circumstances of this case and also following the judicial precedents as discussed above, we are of the view that there is no distinction between employees' and employer contribution to PF, and if the total contribution is deposited on or before the due date of furnishing return of income u/s 139(1) of the Act, then no disallowance can be made towards employees' contribution to provident fund. The CIT(A) after considering the relevant details rightly deleted the additions made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e license u/s 58 of the Customs Act, 1962 for the purpose of storage of computers, UPS, etc. Though the said license permits the assessee u/s 65 of the Customs Act, 1962 to carry out software development in relation to said goods, subject to the provisions of manufacture and other operations in ware house regulations, 1966, the same does not confer any approval or certificate enabling the assessee's premises at Bhogapuram to be classified as a distinct and separate undertaking designed to function independently as per the rules and regulations governing export oriented units. 21. It is the contention of the assessee that its unit at Bhogapuram is recognized as 100% export oriented unit by the Special Commissioner VSEZ. While issuing the certificate the authority has mentioned the name and address of the assessee, however recognized the location of the factory at Bhogapuram unit which is alone eligible for carrying out 100% EOU activities. The assessee further contended that to be an exporter, the assessee needs to obtain export oriented warehouse license from the Central Excise and Customs department, wherein the authority has certified that the unit at Bhogapuram is an export or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turnover of all the units and operations have to be aggregated. However, after the amendment made by the Finance Act 2001, the total turnover shall comprise of the total turnover of the business carried on by he "Undertaking" only. The amended section is applicable for the years under consideration. Hence, the Total turnover shall comprise of the total turnover of the business carried on by the Undertaking only for the purpose of calculation of eligible amount of deduction under sectin 10A of the Act." "Hence, considering the decisions of Hon'ble Courts extracted above with regard to the meaning of the term undertaking, we hold that the software division of the assessee company located at Bhogapuram has to be taken as a separate undertaking for the purpose of calculating deduction under section 10A of the Act and consequently, we hold that the turnover pertaining to the other two units should not be included in "Total Turnover" for the purpose of calculation of deduction under section 10A of the Act." 8.4 We notice that the learned CIT(A), in the assessment year 2005- 06, has accepted this claim of the assessee on the basis of the decisions of Bangalore Bench of ITAT and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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