TMI Blog2023 (4) TMI 889X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed as a deduction and therefore see no reason to interfere with the decision of the Ld.CIT(A). This ground is dismissed accordingly. Deduction u/s 80HHE after setting off earlier years brought forward business losses - assessee's contention for allowing deduction u/s 80HHE against income from Other Sources is not found tenable in view of the overriding effect of the provisions of section 80AB - HELD THAT:- We notice that sub-section (3) of section 80HHE which deals with the manner of computation of eligible deduction states that for the purpose of deduction Profits derived from the business shall be considered and that sub-section (1) of section 80A clearly states that in computing the total income of an assessee, there shall be allowed from his gross total income , the deductions specified in sections 80C to 80U. We are, therefore, of the considered view that the ratio laid down by the Hon ble Supreme Court in Reliance Energy [ 2021 (4) TMI 1237 - SUPREME COURT] is clearly applicable to Assessee s case also and accordingly the assessee has correctly claimed the deduction under section 80HHE from gross total income. Further, we notice that the co-ordinate bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s required to be compensated. However, the benchmarking done by the TPO by applying the same rate of thirty party placement agency is not correct, since there are additional services/benefits provided by third-party agencies while providing Recruitment Services whereas in Assessee s case, it is a pure deployment of personnel with regard to software services. Accordingly since there is need for an adjustment for the benefit derived we hold that the TP adjustment is to be revised to Rs.4,00,000/-. This ground of the Revenue is partly allowed. - I.T.A. No.5653/Mum/2009 - - - Dated:- 19-4-2023 - Amit Shukla (Judicial Member) And Ms. Padmavathy S. (Accountant Member) For the Assessee : Shri Nitesh Joshi For the Department: Shri Manoj Kumar CIT DR ORDER PER : MS PADMAVATHY S. (AM) This appeal of the Revenue is against order of the Commissioner of Incometax (Appeals)-XXXII, Mumbai [hereinafter Ld.CIT(A)] dated 23/07/2009 for the assessment year 2004-05. 2. The Revenue raised the following grounds of appeal:- On the facts and in the circumstances of the case and in law. the learned C1T(A) has erred in allowing relief to the assessee to the extent imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of Rs. 1.61,18.819/- in the computation of total income, being the adjustment of depreciation not done by the assessee in respect of the income exempt u/s. 10A without appreciating the fact that in the computation of business income of the non-exempt units, the assessee has added back depreciation only to the extent of Rs.2.03.94.326/- while in the computation of depreciation as per the Income-tax Act. the assessee has exclude a higher depreciation of Rs.3,65,13.145/- pertaining to exempt units from the depreciation on the entire block of assets without furnishing any details in respect of the claim during the course of the assessment proceedings. 6(a) The CIT(A) erred in directing the A.O. to make adjustment in respect of the Arm's Length Price at Rs.8.18.792/- after verifying the correctness of the said III figure and its computation done, by the CIT(A) instead of the adjustment of Rs. 22,88.380/-done by the A.O. u/s.92(l) of the IT. Act. (b) The CIT(A) ought to have held that the commission rate of 1 1.25% should have been applied to U.S. salaries of the seconded personnel instead of to the Indian salaries for the purpose of computing the Arm's Length Price. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed u/s.10A due to difference in depreciation between book depreciation and depreciation u/s.32 of the Act for Rs.1,61,18,819/-. The Assessing Officer further denied the deduction claimed under section 80HHE by the Assessee while concluding the assessment under section 143(3). The Assessee preferred appeal before the CIT(A) against the order of the Assessing Officer. 4. The Ld.CIT(A) gave relief to the assessee except for treatment of rent and interest Income as income from other sources by Assessing Officer as against the treatment of the same as business income by the Assessee. With regard to the transfer pricing adjustment, the Ld.CIT(A) gave partial relief to the Assessee and upheld the addition for Rs.8,18,782/-. Aggrieved by the order of the Ld.CIT(A), the Revenue is in appeal before the ITAT. 5. Amortisation of Non-compete Fee (Ground No.1) 5.1 During the course of assessment proceedings, the Assessing Officer noticed that the Assessee has debited a sum of Rs.62,68,000/- towards non-compete fee. The assessee submitted that these are payments made to one Asia Logistics Ltd Rs.12,68,000 for non-competing for one year for procuring business in China, and that Rs.5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Hon ble Supreme Court in the case of Taparia Tools Ltd vs JCIT (2015) 372 ITR 605 (SC) and that the Hon ble Apex Court in the said case has distinguished the decision in the case of Madras Industrial Investment Corporation (supra). 8. We have heard the parties and perused the material on record. We notice that the Hon ble Supreme Court in the case of Taparia Tools Ltd vs JCIT (supra) has considered a similar issue and held that 11) Insofar as the first reason, namely, non-convertible debentures were issued for a period of five years is concerned, that is clearly not tenable. While taking this view, the AO clearly erred as he ignored by ignoring the terms on which debentures were issued. As noted above, there were two methods of payment of interest stipulated in the debenture issued. Debenture holder was entitled to receive periodical interest after every half year @ 18% per annum for five years, or else, the debenture holder could opt for upfront payment of ₹ 55 per debenture towards interest as one time payment. By allowing only 1/5th of the upfront payment actually incurred, though the entire amount of interest is actually incurred in the very first year, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ...The term interest has been defined under Section 2(28A) of the Act. Briefly, interest payment is an expense under Section 36(1)(iii). Interest on monies borrowed for business purposes is an expenditure in a business [see 35 ITR 339 Madras]. For claiming deduction under Section 36(1)(iii), the following conditions are required to be satisfied viz. the capital must have been borrowed; it must have been borrowed for business purpose and the interest must be paid. The word Paid is defined in Section 43(2). It means payment in accordance with the method followed by the assessee. In the present case, therefore, the word Paid in Section 36(1)(iii) should be construed to mean paid in accordance with the method of accounting followed by the assessee i.e. Mercantile System of accounting... Notwithstanding the aforesaid, the High Court chose to decline the whole deduction in the year of payment, thereby affirming the orders of the authorities below, by invoking the 'Matching Concept'. It is observed by the High Court that under the mercantile system of accounting, book profits are liable to be Civil Appeal Nos. 6366-6368 of 2003 and taxed and in order to determin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year, on exercising of this option, has arisen and this liability was to pay the interest @ ₹ 55 per debenture. In Bharat Earth Movers v. Commissioner of Income Tax1, this Court had categorically held that if a business liability has arisen in the 1 (2000) 6 SCC 645 Civil Appeal Nos. 6366-6368 of 2003 and accounting year, the deduction should be allowed even if such a liability may have to be quantified and discharged at a future date. Following passage from the aforesaid judgment is worth a quote: The law is settled: if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. The present case is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Thus in the case of Hindustan Aluminium Corporation Ltd. vs. CIT, (1982) 30 CTR (Cal) 363: (1983) 144 ITR 474 (Cal) the Calcutta High Court upheld the claim of the assessee to spread out a lump sum payment to secure technical assistance and training over a number of years and allowed a proportionate deduction in the accounting year in question. 16. Issuing debentures at a discount is another such instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures. 17) Thus, the first thing which is to be noticed is that though the entire expenditure was i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee had initially intended to make such an option. However, it abandoned the same before reaching the crucial stage, inasmuch as, in the income tax return filed by the assessee, it chose to claim the entire expenditure in the year in which it was spent/paid by invoking the provisions of Section 36(1)(iii) of the Act. Once a return in that manner was filed, the AO was bound to carry out the assessment by applying the 3 (1972) 3 SCC 252 4 (1997) 6 SCC 117 5 (1978) 4 SCC 358 6 (1999) 8 SCC 338 Civil Appeal Nos. 6366-6368 of 2003 and provisions of that Act and not to go beyond the said return. There is no estoppel against the Statute and the Act enables and entitles the assessee to claim the entire expenditure in the manner it is claimed. 21) In view of the aforesaid discussion, we are of the opinion that the judgment and the orders of the High Court and the authorities below do not lay down correct position in law. The assessee would be entitled to deduction of the entire expenditure of ₹ 2,72,25,000 and ₹ 55,00,000 respectively in the year in which the amount was actually paid. The appeals are allowed in the aforesaid terms with no orders as to costs. 9. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0] 245 ITR 428 and Rotork Controls India (P.) Ltd. v. CIT[2009] 314 ITR 62 (SC), it becomes vivid that the mandate of these cases is applicable with full force to the deductibility of the discount on incurring of liability on the rendition of service by the employees. The factum of the employees becoming entitled to exercise options at the end of the vesting period and it is only then that the actual amount of discount would be determined, is akin to the quantification of the precise liability taking place at a future date, thereby not disturbing the otherwise liability which stood incurred at the end of the each year on availing of the services. As regards the contention of the learned Departmental representative about the contingent liability arising on account of the options lapsing during the vesting period or the employees not choosing to exercise the option, we find that normally it is provided in the schemes of ESOP that the vested options that lapse due to non-exercise and/or unvested options that get cancelled due to resignation of the employees or otherwise, would be available for grant at a future date or would be available for being re-granted at a future date. If ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... premium under ESOP as a benefit provided by the employer to its employee during the course of service. If the Legislature considers such discounted premium to the employees as fringe benefit or 'any consideration for employment', it is not open to argue contrary. Once it is held as ; consideration for employment, the natural corollary which follows is that such discount (/) is a expenditure; (ii) such expenditure is on account of an ascertained (not contingent) liability; and (Hi) cannot be treated as a short capital receipt. In view of the foregoing discussion, we are of the considered opinion that discount on shares under the ESOP is an allowable deduction. II. If yes, then when and how much ? Having seen that the discount under ESOP is a deductible expenditure under section 37(1), the ne: question is that 'when' and for 'how much' amount should the deduction be granted ? The assessee is a limited company and hence it is obliged to maintain its accounts on mercantile basis Under such system of accounting, an item of income becomes taxable when a right to receive it is final acquired notwithstanding the fact that when such income is actually ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hough the assessee had Nil business income after set off of brought forward business loss, the Assessee is having capital gains Income from Other Sources thereby the gross total income being positive, is entitled to claim deduction under section 80HHE. However, the Assessing Officer did not accept the contention of the assessee by holding that The contentions raised by the assessee are perused. The assessee's contention for allowing deduction u/s 80HHE against income from Other Sources is not found tenable in view of the overriding effect of the provisions of section 80AB which state as under: . : 80AB. Deductions to be made with reference! to the income included in the gross total income. Where any deduction is required to be made or allowed under any section included in this Chapter under the heading C.-Deductions in respect of certain incomes in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s per Section 80HHE(3) of the Act, the said profit derived shall be the amount which bears to the profits of the business, the same proportion as the export turnover bears to the total turnover. We find from the perusal of the provisions of Section 80HHE of the Act, as per Clause(d) of the explanation below the said Section, the starting point for computation of profits of the business is the profits of the business as computed under the head profits and gains of business or profession. It is pertinent to note that Section 29 of the Act mandate that the business income shall be computed in accordance with the provisions contained in Section 30-43D of the Act. Hence, the profit qualifying for deduction u/s.80HHE of the Act is the profit of the current year. The set off of brought forward business loss is governed by the provisions of Section 72 of the Act and it has no relevance for this purpose. Hence, in our considered opinion, the eligible profits u/s.80HHE cannot be reduced by the brought forward business loss. 6.2. We find that the ld. CIT had held that the profits of the business for the year under consideration has to be reduced by the brought forward losses from earli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been duly addressed in para 3 4 of the said decision. In that case, the Hon ble Supreme Court was concerned with the deduction u/s.80IA of the Act. Based on the interpretation of Section 80IB and 80IA of the Act, it was held that in para 12 13 thereon that the profit eligible for deduction would be net profit made by the assessee from the eligible business and such deduction is to be allowed from gross total income. We find that similar view has been taken by the Hon ble Jurisdictional High Court in the following cases:- a) CIT vs. Tridoss Laboratories reported in 328 ITR 448 b) V.M.Salgaocar Brothers (P) Ltd., vs. ACIT reported in 81 taxmann.com 357. c) CIT vs. Eskay Knit (India) Pvt. Ltd., in Income Tax Appeal No.184 of 2007 dated 25/03/2010. d) CIT vs. J.B.Boda Co., Pvt. Ltd., in Income Tax Appeal No.3224 of 2009 dated 18/10/2010. 6.5. In the instant case, we find that if the set off of brought forward business loss was not taken into account, the assessee would have been entitled to deduction of the entire amount of profit eligible for deduction u/s.80HHE of the Act of Rs.7,65,2,042/-. But since the deduction under 80HHE of the Act is restri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so on the decision of the Bombay High Court in the case of V.M. Salgaonkar Brother (P) Ltd vs ACIT (2015) 281 CTR 191 (Bombay). 20 We heard the parties perused the material on record. We notice that the similar issue has been considered by the Hon ble Supreme Court in the case of Reliance Energy Ltd (supra) where it is held that 9. The controversy in this case pertains to the deduction under Section 80-IA of the Act being allowed to the extent of business income only. The claim of the Assessee that deduction under Section 80-IA should be allowed to the 5 (1986) 3 SCC 538 6 [2010] 328 ITR 448 (Bombay) extent of gross total income was rejected by the Assessing Officer. It is relevant to reproduce Section 80AB of the Act which is as follows: 80AB. Deductions to be made with reference to the income included in the gross total income. Where any deduction is required to be made or allowed under any section included in this Chapter under the heading C. Deductions in respect of certain incomes in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s derived from such business for ten consecutive assessment years. ** ** (5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made. 11. The essential ingredients of Section 80-IA (1) of the Act are: a) the gross total income of an assessee should include profits and gains; b) those profits and gains are derived by an undertaking or an enterprise from a business referred to in subsection (4); c) the assessee is entitled for deduction of an amount equal to 100% of the profits and gains derived from such business for 10 consecutive assessment years; and d) in computing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 80-IA for the assessment year 2002-03 as accepted by the Assessing Officer, was arrived at by taking into account the profits from the eligible business as the only source of income . He submitted that, however, sub-section (5) is a step antecedent to the treatment to be given to the deduction under sub-section (1) and is not concerned with the extent to which the computed deduction be allowed. To explain the interplay between sub-section (5) and sub-section (1) of Section 80-IA, it will be useful to refer to the facts of this Appeal. The amount of deduction from the eligible business computed under Section 80-IA for the assessment year 2002-03 is Rs. 492,78,60,973 /-. There is no dispute that the said amount represents income from the eligible business under Section 80-IA and is the only source of income for the purposes of computing deduction under Section 80-IA. The question that arises further with reference to allowing the deduction so computed to arrive at the total income of the Assessee cannot be determined by resorting to interpretation of sub- section (5). 14 . It will be useful to refer to the judgment of this Court relied upon by the Revenue as well a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the Fifth Schedule. It was argued on behalf of the Revenue that the profits from the automobile ancillaries industry of the assessee must be reduced by the loss suffered by the assessee in the manufacture of alloy steels. This Court was not in agreement with the submissions made by the Revenue. It was held that the profits and gains by an industry entitled to benefit under Section 80-E cannot be reduced by the loss suffered by any other industry or industries owned by the assessee. 15. In the case before us, there is no discussion about Section 80-IA(5) by the Appellate Authority, nor the Tribunal and the High Court. However, we have considered the submissions on behalf of the Revenue as it has a bearing on the interpretation of sub-section (1) of Section 80-IA of the Act. We hold that the scope of sub-section (5) of Section 80- IA of the Act is limited to determination of quantum of deduction under sub-section (1) of Section 80-IA of the Act by treating eligible business as the only source of income . 21. We notice that sub-section (3) of section 80HHE which deals with the manner of computation of eligible deduction states that for the purpose of deduction Profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I units Turnover % Allocated depreciation STPI units depreciation Ashoka Plaza - STPI 103,422,838 8.2% 51,173 51,173 The Orion - STPI 360,673,260 28.5% 180,343 180,343 Bldg A - STPI 287,642,678 22.7% 143,826 143,826 Non STPI 515,803,002 40.7% 257,910 257,910 Total 1,267,541,778 100.0% 633,792 375,882 25. We accordingly, remand the issue back to Assessing Officer with a direction to consider the above working and re-compute the exemption under section 10A considering the depreciation pertaining to STPI unit and allow the balance amount of Rs.2,57,910/- as a deduction while computing taxable income of the Assessee. This ground of the Revenue is allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the Assessee held that 10.2. I have considered the above submission of the appellant. I agree with the same. The appellant, from its own computation as above is entitled to deduction/exemption u/s 10A to the extent of Rs.13,06,95,380/- as per IT Act in respect of STPI units. In the computation of income filed with the return of income the exemption u/s 10A has been claimed at Rs.14,68,199/- as under: Profits and Gains of Business 15,86,62,527 Less : Exempt u/s 10A:STP units i) Ashoka Plaza Unit I, Pune 3,37,07,572 ii) Orion-Unit II,Pune 4,69,33,824 iii) Building A-Unit III, Pune 6,61,72,803 Less : Dividend Exemption u/s 10(33) 3,73,884 14,71,88,083 Net Profits Chargeable 1,14,74,444 10.3 However, the figure of Pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic projects and once the project is completed, the personnel return to India to join back Assessee s company. The Assessee further submitted that this is a normal practice in software industry. The Assessee also submitted that during the year under consideration 35 persons were sent to Zensas US and out of these 14 persons have rejoined Assessee in subsequent years. It was also submitted that they are not in the nature of recruitment services and in the earlier year TP adjustment has been incorrectly made applying placement agency rate of 11.25%. However, the TPO did not accept the submissions and proceeded to make an adjustment as under:- Total number of skilled software personnel seconded to the US AE 35 Total salary of these 35 personnel [converted from US $756,730 AT Rs.44.50 per US $ Rs.3,36,74,485 11.25% of the salary costs treated as arm s length price Rs. 37,88,380 Less : Human resource costs already allocated to the US AE Rs. 15,00,000 Adjustment Rs.22,88,380 34. Befo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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