M/s Bechtel India Pvt. Ltd., New Delhi V. DCIT, New Delhi

CO 248/DEL/2011

• Counselvise Citation: [2013] 122 COUNSELVISE.COM (IT) 8339 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 8 month(s) 6 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 28-03-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 31-01-2013
• Assessment Year: 2003-2004
• Appeal Filed On: 22-07-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SUDEEP RAS
• Assessee Lawyers: PEEYUSH JAIN
• Keywords: Related party transaction; Business income; Transfer pricing; Opportunity of being heard; International transaction; Bad and doubtful debts; Revenue expenditure
• Section: 80HHC; 80IB; 12

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I: NEW DELHI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI I.C. SUDHIR, JUDICIAL MEMBER ITA NO. 3233/DEL/2011 ASSESSMENT YEAR: 2003-2004 DCIT, CIRCLE 2(1), ROOM NO. 398D, C.R. BLDG., NEW DELHI. VS. BECHTEL INDIA PVT. LTD., 418, NAURANG HOUSE, 21, K.G. MARG, PUSA ROAD, NEW DELHI. PAN NO. AAACB0298A (APPELLANT) (RESPONDENT) & CROSS OBJECTION NO. 248/DEL/2011 (ITA NO. 3233/DEL/2011) ASSESSMENT YEAR: 2003-04 BECHTEL INDIA PVT. LTD., 418, NAURANG HOUSE, 21, K.G. MARG, PUSA ROAD, NEW DELHI. PAN NO. AAACB0298A VS. DCIT, CIRCLE 2(1), ROOM NO. 398D, C.R. BLDG., NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY : SH. PEEYUSH JAIN, CIT(DR) RESPONDENT BY : S/SH. SANDEEP CHAWLA, CA, AMITAVA SEN GUPTA, CA & SUDEEP RASTOGI, CA ITA NO. 3233/D/11 & CO NO. 248/D/11 2 O R D E R PER BENCH THE APPEAL FILED BY THE REVENUE AND CROSS OBJECTIO N BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER PASSED BY THE LD. CI T(A) DATED 29.03.2011 FOR A.Y. 2003-04. 2. THE ASSESSEE COMPANY, IN THE RELEVANT ASSESSMENT YEAR, WAS ENGAGED, INTER-ALIA, IN PROVIDING TECHNICAL CONSULT ANCY RELATING TO ENGINEERING SERVICES. THE ASSESSEE IS 99.99% SUBSI DIARY OF BECHTEL CORPORATION, USA AND .01% SHAREHOLDING LIES WITH AM ERICAN BECHTEL INC., USA. THE ASSESSEE PRIMARILY PROVIDED TECHNICAL SUP PORT SERVICES IN RESPECT OF ENGINEERING DESIGN AND DRAWING TO OTHER BECHTEL ENTITIES BOTH WITHIN AND OUTSIDE INDIA. THE ASSESSEE HAD FILED I TS RETURN OF INCOME DECLARING TOTAL INCOME OF RS. 5,53,32,791/-. THE A SSESSMENT WAS COMPLETED AT A TOTAL INCOME OF RS. 14,80,10,030/- A S UNDER: - WITH THESE REMARKS, THE INCOME OF THE ASSESSEE IS C OMPUTED AS UNDER: 1. INCOME FROM BUSINESS 98926104.00 BUSINESS INCOME (AS PER RETURN) 98141474. 00 ADD: I) DISALLOWANCE OUT OF SOFTWARE EXPENSES 784630.00 2. ADDITION ON ACCOUNT OF ORDER OF TPO 80819778 .00 3. INCOME FROM OTHER SOURCES (FDR INTEREST) 967979.00 4. GROSS TOTAL INCOME 180713861.00 5. DEDUCTION UNDER CHAPTER VI-A (U/S 80HHE) 32 703830.00 6. TOTAL INCOME 148010031.00 ITA NO. 3233/D/11 & CO NO. 248/D/11 3 3. THE DEDUCTION U/S 80HHE WAS COMPUTED AS UNDER: - COMPUTATION OF DEDUCTION U/S 80HHE 1. EXPORT TURNOVER 496743546 2. TOTAL TURNOVER AS PER FORM 10CCAF 557365790 ADD : I) AS PER TPO ORDER 80819778 II) SALE OF PC, SCRAP ETC. 555904 III) BAD DEBTS RECOVERED 1488373 IV) LIABILITIES WRITTEN BACK 12327948 V) REIMBURSEMENT OF EXPENSES 72496365 167688368 725054158 3. PROFIT OF BUSINESS PROFITS & GAINS OF BUSINESS 98926104 LESS : 90% OF I) DISCOUNT RECEIVED (539819) 485837 II) INTEREST FROM CUSTOMER (3300322) 2970290 3456127 95469977 4. PROFIT ELIGIBLE FOR DEDUCTION 95469977 X 496743546 = 65407660 725054158 5. DEDUCTION U/S 80HHE = 50% OF (4) = 32703830 4. BEING AGGRIEVED WITH THE ORDER OF ASSESSING OFFI CER, THE ASSESSEE PREFERRED APPEAL BEFORE LD. CIT(A), WHO PARTLY ALLO WED THE ASSESSEES APPEAL. NOW THE DEPARTMENT IS IN APPEAL BEFORE US AND ASSESSEE HAS FILED CROSS OBJECTION. 5. FIRST WE TAKE UP THE DEPARTMENTS APPEAL VIDE IT A NO. 3233/DEL/2011. THE DEPARTMENT HAS TAKEN FOLLOWING GROUNDS OF APPEAL: ITA NO. 3233/D/11 & CO NO. 248/D/11 4 1. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETING ADDITION OF RS. 8,08,19,778/- MADE ON ACCOUNT OF ARMS LENGTH PRICE AS: A) TPO HAS OBSERVED THAT THE COMPARABLES SELECTED ARE ENGAGED IN ACTIVITIES WHICH ARE REGULAR ENGINEERING PRODUCTS AND PROJECTS ARE IN NO WAY CONNECTED WITH ENGINEERING DRAWING SERVICES RENDERED BY THE ASSESSEE. B) FURTHER TPO HAS OBSERVED THAT THE CIT(A) IS NOT VERY CLEAR ABOUT THE COMPARABLES TO BE SUED AND HAS TAKEN SOME COMPARABLES FROM THE ITES SEGMENT AND SOME FROM THE ENGINEERING SECTOR, EVEN THOUGH THESE DO NOT MATCH THE CORE COMPETENCE OF THE ASSESSEE. 2. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETING THE ADDITION OF RS. 8,08,19,778/- MADE TO THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 80HHE OF THE I.T. ACT IGNORING THAT NO DEDUCTION U/S 80HHE OF THE I.T. ACT, 1961 IS ALLOWED ON THE SAME AS PER THE SPECIFIC PROVISIONS OF FIRST PROVISO TO SEC. 92C(4) OF THE I.T. ACT, 19 61. 3. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETING THE ADDITION OF RS. 9,67,979/- MADE ON ACCOUNT OF INTEREST FROM BANK IGNORING THAT IN THE COMPUTATION OF INCOME THE ASSESSEE REMOVED BANK INTEREST FROM ITS BUSINESS INCOME, BUT ONLY 90% OF THE SAME WAS REDUCED TO ARRIVE AT PROFIT OF BUSINESS FOR COMPUTATION OF DEDUCTION U/S 80HHE OF THE I.T. ACT. ITA NO. 3233/D/11 & CO NO. 248/D/11 5 4. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETING THE ADDITION OF RS. 33,00,322/- MADE ON ACCOUNT OF INTEREST FROM CUSTOMERS IGNORING THAT EXPLANATION (D) TO SEC. 80HHE(5) SPECIFICALLY PROVIDES FOR REMOVAL OF 90% OF SUCH INTEREST INCOME TO ARRIVE AT PROFIT OF BUSINESS FOR COMPUTING DEDUCTION U/S 80HHE OF THE I.T. ACT. WHEN THE INTEREST RECEIVED IS SPECIFICALLY MENTIONED IN CLAUSE (D) OF THE AFORESAID EXPLANATION, THERE WAS NO NEED TO LOOK AT THE RESIDUARY PORTION. 5. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETING ADDITION OF RS. 5,55,904/- MADE ON ACCOUNT OF SALE OF SCRAP IGNORING THAT THE CONTENTION OF THE ASSESSEE THAT SALE OF PC/SERVER, SCRAP, ETC. WAS ELIGIBLE FOR DEDUCTION U/S 80HHE OF THE I.T. ACT IS AGAINST THE VERY SPIRIT OF THE SECT ION WHICH DEALS WITH DEDUCTION ON EXPORT OF COMPUTER SOFTWARE. NO ADJUSTMENT WHATSOEVER MADE IN THIS REGARD BY THE ASSESSEE HAS RESULTED IN CLAIMING DEDUCTION U/S 80HHE OF THE I.T. ACT ON SALE OF PC/SERVER, SCRAP ETC., WHICH IS AGAINST THE INTENT OF SEC. 80HHE OF THE I.T. ACT. 6. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETING ADDITION OF RS. 1,23,27,948/- MADE ON ACCOUNT OF LIABILITIES WRITTEN BACK IGNORING THAT LIABILITIES WRITTEN BACK WERE PART OF THE TOTAL BUSINESS RECEIPT OF THE ASSESSEE AND, THEREFORE, TH E SAME SHOULD BE ADDED IN THE TOTAL TURNOVER FOR ITA NO. 3233/D/11 & CO NO. 248/D/11 6 COMPUTATION OF DEDUCTION U/S 80HHE OF THE I.T. ACT. 7. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETING ADDITION OF RS. 7,24,96,365/- MADE ON ACCOUNT OF REIMBURSEMENT OF EXPENSES IGNORING THAT THE PROVISIONS OF THE I.T. ACT DO NOT ALLOW AN Y SUCH ACCOUNTING WHERE CERTAIN RECEIPTS AND EXPENSES ARE NOT SHOWN AS A PART OF PROFIT & LOSS ACCOUNT. 6. BRIEF FACTS APROPOS GROUND NO. 1 ARE THAT THE AS SESSEE HAD ENTERED INTO FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES DURING THE YEAR UNDER CONSIDERATION: S.NO. INTERNATIONAL TRANSACTION METHOD USED TO JUSTIFY ARMS LENGTH PRICE VALUE (IN RS.) 1. PURCHASE OF MOTOR VEHICLE TNMM 300,000.00 2. SERVICES RENDERED TNMM 500,622,032.00 3. REIMBURSEMENT OF EXPENSES (RECVD.) -- 71,097,927.00 4. REIMBURSEMENT OF EMPLOYEE RELATED EXPENSES (PAID) -- 1,227,182.00 THEREFORE, THE AO HAD REFERRED THE MATTER TO TRANSF ER PRICING OFFICER FOR DETERMINATION OF ARMS LENGTH PRICE. 7. THE TPO OBSERVED THAT THE TNMM IS THE MOST APPRO PRIATE METHOD FOR APPLYING THE ARMS LENGTH PRINCIPLE WITH REGARD TO INTERNATIONAL TRANSACTIONS CARRIED OUT BY THE ASSESSEE CONSIDERING THE ASSESSE E TO BE IN THE BUSINESS OF IT/IT ENABLED SERVICES. THE PLI USED BY THE COM PANY WAS OPERATING PROFIT/OPERATING REVENUE. HE DETERMINED THE ARMS LENGTH PRICE AS UNDER: ITA NO. 3233/D/11 & CO NO. 248/D/11 7 COMPUTATION OF ARMS LENGTH PRICE BASED ON THE MEAN OF 20.78%, COMPUTED ABOVE, AND TH E FINANCIAL RESULTS OF THE COMPANY, THE ALP IS COMPUTED AS FOLLOWS: 1) ASSESSEE COMPANY EARNED OPERATING PROFIT @ 8.0% = 4,00,03,830 2) TOTAL REVENUE = 50,06,22,032 3) ARMS LENGTH PLI AS COMPUTED ABOVE = 20.78% ADJUSTMENT TO THE INTERNATIONAL TRANSACTION AT ARMS LENGTH MARGIN IS COMPUTED IN THE FOLLOWIN G MANNER: (OP + ADJUSTMENT)_________________ = 20.78% TOTAL REVENUE + ADJUSTMENT ADJUSTMENT = 0.2078 OP/(1-0.2078) = RS. 8,08,19,778 4) + 5% BAND = 5% OF 50,06,22,032 = 2,50,31,101 SINCE, THE + 5% BAND IS VIOLATED WITH REGARD TO THE ALP, THE ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION IS COMPUTED AT RS. 581,44 1,810/-. THE ASSESSING OFFICER IS DIRECTED TO MAKE AN ADDITION OF RS. 8,08,19,778/- TO THE INCOME OF THE ASSESSEE IN THE RELEVANT ASSESSMENT YEAR. ACCORDINGLY, THE AO HAD MADE AN ADDITION OF RS. 8,0 8,19,778/-. 8. LD. CIT(A) ACCEPTED THE ASSESSEES CONTENTIONS T HAT IT WAS NOT ENGAGED IN THE BUSINESS OF ITES SERVICES BUT GAVE S UPPORT SERVICES LIKE ENGINEERING, DESIGN AND DRAWING FOR COMPLETION OF P ROJECT LIKE BRIDGE ETC. AND THUS, WAS NOT IN SOFTWARE DEVELOPMENT BUSINESS BUT IN ENGINEERING, DESIGN AND DRAWING BUSINESS BY USE OF SOFTWARE FOR DESIGN AND DRAWING. 9. AT THE OUTSET, LD. COUNSEL FOR THE ASSESSEE FAIR LY SUBMITTED THAT THIS MATTER NEEDS TO GO BACK TO AO/TPO FOR RE-ADJUDICATI ON OF THE ISSUE IN THE LIGHT OF TRIBUNALS ORDER DT. 21/12/2012 FOR AY 200 4-05 AND 2005-06 VIDE ITA NO. 3233/D/11 & CO NO. 248/D/11 8 ITA NOS. 4338/D/11 & 4339/D/11 RESPECTIVELY, WHEREI N TRIBUNAL IN PARA 5 HAS OBSERVED AS UNDER: 5. IN VIEW OF THE ABOVE SUBMISSION OF BOTH THE PARTIES, WE SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW ON THIS POINT AND RESTORE THE MATTER TO THE F ILE OF THE ASSESSING OFFICER AND DIRECT HIM TO AGAIN REFER THE MATTER TO THE TPO FOR DETERMINING THE ARMS LENGTH PRICE AFRESH IN THE LIGHT OF HIS ORDER FOR AY 2008-09 TREATING THE ASSESSEE COMPANY AS INVOLVED IN THE BUSINESS OF ENGINEERING, DESIGN AND DRAWING. NEEDLESS TO MENTION THAT AO/TPO WHILE RE-ADJUDICATING THE ISSUE WILL ALLOW ADEQUATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 10. LD. DR SUBMITTED THAT AO/TPO SHOULD BE DIRECTED TO EXAMINE WHETHER THE ASSESSEE WAS IN THE SAME LINE OF BUSINE SS OR NOT IN THE CURRENT ASSESSMENT YEAR AS IN AY 2008-09. 11. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. 12. RESPECTFULLY FOLLOWING THE DECISION FOR AY 2004 -05 & 2005-06 (SUPRA), WE SET ASIDE THE ORDERS OF AUTHORITIES BELOW ON THI S POINT AND RESTORE THE MATTER TO THE FILE OF AO AND DIRECT HIM TO AGAIN RE FER THE MATTER TO THE TPO FOR DETERMINING THE ARMS LENGTH PRICE AFRESH IN TH E LIGHT OF HIS ORDER FOR AY 2008-09 AFTER VERIFYING WHETHER THE ASSESSEE WAS CA RRYING ON SAME ITA NO. 3233/D/11 & CO NO. 248/D/11 9 FUNCTIONS IN THE YEAR UNDER CONSIDERATION AS IN AY 2008-09. IN CASE HE FINDS THAT THERE IS NO CHANGE IN FUNCTIONAL PROFILE THEN THE ASSESSEE COMPANY SHOULD BE TREATED AS INVOLVED IN THE BUSINE SS OF ENGINEERING, DESIGN AND DRAWING AND ACCORDINGLY, ARMS LENGTH PR ICE IS TO BE DETERMINED. NEEDLESS TO MENTION THAT AO/TPO, WHILE ADJUDICATING THE ISSUE, WILL ALLOW ADEQUATE OPPORTUNITY OF BEING HEA RD TO THE ASSESSEE. 13. IN THE RESULT, THIS GROUND IS ALLOWED FOR STATI STICAL PURPOSES. 14. BRIEF FACTS APROPOS GROUND NO. 2 ARE THAT AO DE NIED DEDUCTION U/S 80HHE CLAIMED BY ASSESSEE IN REGARD TO THE ADDITION OF RS. 8,08,19,778/- MADE IN PURSUANCE TO THE DIRECTIONS OF DRP IN VIEW OF FIRST PROVISO TO SEC. 92C(IV) OF THE INCOME TAX ACT. 15. LD. CIT(A) OBSERVED THAT SINCE HE HAD DELETED T HE TRANSFER PRICING ADDITION, THEREFORE, THE ADDITION OF THE IMPUGNED A MOUNT TO THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING 80HHE DEDUCTI ON, WAS CONSEQUENTIAL IN NATURE AND, THEREFORE, DELETED THE SAME. HE FURTHER POINTED OUT THAT, IN ANY CASE, ADDITION OF THE IMPU GNED AMOUNT TO THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTATION OF DEDUCTIO N U/S 80HHE WAS AGAINST THE FIRST PROVISO TO SEC. 92C(4) OF THE ACT WHICH PROVIDES THAT DEDUCTIONS CONTEMPLATED, INTER-ALIA, UNDER CHAPTER VI-A ARE NOT TO BE ALLOWED WITH RESPECT TO TRANSFER PRICING ADJUSTMENT S. ITA NO. 3233/D/11 & CO NO. 248/D/11 10 16. WE FIND THAT TRIBUNAL IN AY 2004-05 HAS CONSIDE RED THIS ISSUE AND HAS OBSERVED IN PARA 14 AS UNDER: 14. FROM THE PROVISO TO SEC. 92C(4), IT IS EVIDENT TH AT NO DEDUCTION IN CHAPTER VI-A IS TO BE ALLOWED IN RESPECT OF THE INCOME WHICH IS ENHANCED AFTER THE COMPUTATION OF INCOME IN THE SAID SECTION. THUS, T HE ASSESSEE IS NOT ENTITLED FOR DEDUCTION UNDER CHAPTE R VI- A IN RESPECT OF THE ADDITION MADE AS PER THE TPOS ORDER. DESPITE THE ABOVE SPECIFIC PROVISION, THE ASSESSING OFFICER ENHANCED THE TOTAL TURNOVER BY TH E ADDITION MADE AS PER THE TPOS ORDER, WHICH HAS THE EFFECT OF REDUCING THE DEDUCTION U/S 80HHE. HOWEVE R, THE FINDING OF THE TPO IS THAT THE INTERNATIONAL TRANSACTION OF THE ASSESSEE IS NOT AT ARMS LENGTH AND, THEREFORE, BY DETERMINING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION, HE PROPOSED THE ADDITION OF RS. 6,93,21,169/-. THOUGH WHILE CONSIDERING GROUND NO. 1 OF THE REVENUES APPEAL WE HAVE ALREADY SET A SIDE THIS MATTER TO THE FILE OF THE AO, HOWEVER, EVEN IF SOME ADDITION IS REQUIRED TO BE MADE BY DETERMINING THE ALP, THE QUESTION IS WHETHER THE SAME WILL HAVE THE EFFECT OF ENHANCING THE TOTAL TURNOVER. IF AT ALL THE EFFECT IS TO BE GIVEN TO THE ENHANCEMENT OF INCOME MADE BY THE TPO, IT WILL HAVE THE IMPACT OF INCREASING THE ASSESSEES EXPORT TURNOVER, THEN TOTAL TURNOVER AND FINALLY, THE TOTAL INCOME. IF ALL THREE ARE INCREA SED, OBVIOUSLY, THE DEDUCTION CLAIMED BY THE ASSESSEE UN DER ITA NO. 3233/D/11 & CO NO. 248/D/11 11 CHAPTER VI-A WOULD INCREASE. THE PROVISO TO SEC. 92C(4) PROHIBITS ANY DEDUCTION UNDER CHAPTER VI-A T O BE ALLOWED ON THE ENHANCEMENT MADE AS PER THE TPOS ORDER. THEREFORE, THE ONLY LOGICAL CONCLUSION THAT CAN BE DRAWN IS THAT NO EFFECT IS TO BE GIVEN TO THE AD DITION MADE BY THE ASSESSING OFFICER AS PER THE TPOS ORDE R WHILE COMPUTING DEDUCTION UNDER CHAPTER VI-A. THE ASSESSING OFFICERS VIEW CANNOT BE ACCEPTED THAT BY THE ENHANCEMENT OF INCOME AS PER THE TPOS ORDER, ONLY THE TOTAL TURNOVER WOULD BE INCREASED AND NOT THE EXPORT TURNOVER OR THE TOTAL INCOME. IN VIEW OF TH E ABOVE, WE UPHOLD THE ORDER OF LD. CIT(A) ON THIS PO INT ALSO. ACCORDINGLY, GROUND NO. 2 OF THE REVENUES APPEAL IS REJECTED. 17. HAVING HEARD BOTH THE PARTIES, AS WE HAVE ALREA DY RESTORED THE ISSUE RELATING TO TRANSFER PRICING ADJUSTMENT TO THE FILE OF AO, WE RESTORE THIS ISSUE ALSO TO THE FILE OF AO TO DECIDE THIS ISSUE AFRESH IN THE LIGHT OF AFOREMENTIONED OBSERVATIONS. IN THE RESULT, THIS G ROUND IS ALLOWED FOR STATISTICAL PURPOSES. 18. GROUND NOS. 3 TO 7 ARE IN RESPECT OF COMPUTATIO N OF DEDUCTION ADMISSIBLE U/S 80HHE. THE AO HAS OBSERVED THAT THE ISSUE OF ALLOWABILITY OF DEDUCTION U/S 80HHE WAS DISCUSSED IN DETAIL IN T HE ASSESSMENT ORDER FOR THE AY 2002-03 AND, THEREFORE, THE ASSESSEE WAS ELIGIBLE FOR DEDUCTION ITA NO. 3233/D/11 & CO NO. 248/D/11 12 U/S 80HHE. THE ONLY DISPUTE IS REGARDING CERTAIN I TEMS TO BE INCLUDED/EXCLUDED FOR COMPUTING DEDUCTION U/S 80HHE . 19. BRIEF FACTS APROPOS GROUND NO. 3 ARE THAT THE A SSESSEE HAD EARNED INTEREST ON FDR AMOUNTING TO RS. 9,67,979/-, 90% OF WHICH WAS REDUCED TO ARRIVE AT PROFIT OF BUSINESS FOR COMPUTATION OF D EDUCTION U/S 80HHE OF THE INCOME TAX ACT. THE AO, TREATING THE INTEREST INCO ME AS INCOME FROM OTHER SOURCES, EXCLUDED THE SAME FROM PROFITS AND G AINS OF BUSINESS OR PROFESSION AND, THUS, DENIES DEDUCTION U/S 80HHE. 20. LD. CIT(A) ALLOWED THE ASSESSEES APPEAL OBSERV ING THAT IN VIEW OF THE LANGUAGE OF EXPLANATION (D) TO SEC. 80HHE OF TH E ACT, THE ASSESSEE HAD RIGHTLY EXCLUDED 90% OF INTEREST INCOME WHILE C OMPUTING DEDUCTION U/S 80HHE. 21. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. 22. EXPLANATION (D) TO SEC. 80HHE DEFINES PROFITS O F THE BUSINESS AS COMPUTED UNDER THE HEAD PROFITS AND GAINS OF BUSIN ESS OR PROFESSION. THUS, IF AN ITEM IS NOT COMING WITHIN THE AMBIT OF PROFITS AND GAINS OF BUSINESS OR PROFESSION, THIS EXPLANATION IS OF NO A SSISTANCE TO ASSESSEE. IN THE PRESENT CASE, INTEREST ON FDR WAS TAXABLE AS I NCOME FROM OTHER ITA NO. 3233/D/11 & CO NO. 248/D/11 13 SOURCES AND, THEREFORE, THE AO RIGHTLY DENIED THE DEDUCTION U/S 80HHE ON THE INTEREST EARNED ON FDR. 23. WE, ACCORDINGLY, SET ASIDE THE ORDER OF LD. CIT (A) ON THIS ISSUE. 24. IN THE RESULT, THIS GROUND IS ALLOWED. 25. BRIEF FACTS APROPOS GROUND NO. 4 ARE THAT IN TH E PROFIT AND LOSS ACCOUNT, ASSESSEE HAD SHOWN INTEREST FROM CUSTOMER S AT RS. 33,00,322/-. THE AO NOTICED THAT ASSESSEE HAD NOT REDUCED 90% OF THE SAME TO ARRIVE AT PROFIT OF BUSINESS AS PER EXPLANATION (D) TO S EC. 80HHE. THE ASSESSEES CONTENTION WAS THAT THE INTEREST WAS REC EIVED FROM ITS CLIENT, M/S HALDIA PETRO CHEMICALS LTD. AND EARNED IN THE N ORMAL COURSE OF BUSINESS AND WAS, THEREFORE, INCLUDED IN PROFITS AN D GAINS OF BUSINESS OR PROFESSION. THE CONTENTION OF ASSESSEE WAS THAT 90 % OF IT WAS NOT LIABLE TO BE REDUCED AS IT WAS NOT COVERED BY ANY OTHER RECE IPT OF SIMILAR NATURE AS MENTIONED IN EXPLANATION (D) TO SEC. 80HHE. THE AO , HOWEVER, DID NOT ACCEPT THE ASSESSEES CONTENTION AND REDUCED 90% OF SUCH INTEREST INCOME TO ARRIVE AT PROFIT OF BUSINESS AS PER EXPLANATIO N (D) TO SEC. 80HHE. 26. LD. CIT(A) ACCEPTED THE ASSESSEES CONTENTION O BSERVING THAT THE RECEIPT ON ACCOUNT OF DELAYED PAYMENT IS A TRADING RECEIPT AND HAS A DIRECT NEXUS WITH THE BUSINESS OF THE ASSESSEE. ITA NO. 3233/D/11 & CO NO. 248/D/11 14 27. LD. DR SUBMITTED THAT IMMEDIATE SOURCE OF INTER EST IS TO BE LOOKED INTO FOR DECIDING WHETHER THE INTEREST HAS BEEN DER IVED FROM BUSINESS AS CONTEMPLATED U/S 80HHE OR NOT. HE RELIED ON FOLLOW ING DECISIONS IN SUPPORT OF HIS CONTENTION: I) 227 ITR 552 IN THE CASE OF INDIA LEATHER CORPOR ATION P. LTD. VS. CIT (SC); II) 262 ITR 278 IN THE CASE OF PANDIAN CHEMICALS LT D. VS. CIT (SC); III) 317 ITR 218 [2009] IN THE CASE OF LIBERTY INDI A VS. CIT (SC). 28. LD. COUNSEL SUBMITTED THAT INTEREST ON DELAYED PAYMENT IS ESSENTIALLY IN THE NATURE OF SERVICE INCOME AND NOT INTEREST. HE REFERRED TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. GOV INDA CHAUDHARY AND SONS, WHEREIN IT WAS HELD THAT IF THE AMOUNTS UNDER A CONTRACT WERE NOT PAID AT THE PROPER TIME AND INTEREST WAS AWARDED TO THE RESPONDENT FOR SUCH DELAY, THE INTEREST WAS ONLY AN ACCRETION TO T HE RESPONDENT RECEIPTS FROM THE CONTRACT AND WAS ATTRIBUTABLE TO AND INCID ENTAL TO THE BUSINESS CARRIED ON BY IT. THE INTEREST PAYABLE TO THE RESP ONDENT PAR TAKE OF THE SAME CHARACTER AS THE RECEIPTS FOR THE PAYMENT OF W HICH IT WAS OTHERWISE ENTITLED UNDER THE CONTRACTS IN WHICH PAYMENT HAD B EEN DELAYED AS A RESULT OF DISPUTES BETWEEN THE PARTIES. IT WAS FURTHER HE LD THAT THE INTEREST AWARDED COULD NOT BE SEPARATED FROM THE OTHER AMOUN TS GRANTED TO THE RESPONDENT UNDER THE AWARDS AND TREATED AS INCOME FROM OTHER SOURCES. ITA NO. 3233/D/11 & CO NO. 248/D/11 15 LD. COUNSEL FURTHER REFERRED TO THE DECISION OF CHA NDIGARH BENCH OF TRIBUNAL IN THE CASE OF HERO CYCLES LTD. VS. ASSTT. CIT, 142 TAXMANN 87, WHEREIN THE TRIBUNAL ACCEPTED THE ASSESSEES CONTEN TION AND HELD THAT THE INTEREST ON DELAYED PAYMENT DOES NOT COME WITHIN TH E PURVIEW OF EXPLANATION (BAA) TO SEC. 4A OF SEC. 80HHC AND THUS , 90% OF SUCH INTEREST WAS NOT REQUIRED TO BE REDUCED. IT WAS ARGUED BEF ORE TRIBUNAL THAT INTEREST RECEIVED ON ACCOUNT OF LATE PAYMENT DID NOT ATTRACT THE PROVISIONS OF EXPLANATION (BAA) TO SUB-SECTION (4A) OF SEC. 80HHC . 29. LD. DR, IN THE REJOINDER, SUBMITTED THAT THE DE CISION OF HONBLE SUPREME COURT IN THE CASE OF GOVINDA CHAUDHARY & SO NS (SUPRA) WAS IN RESPECT OF AY 1972-73 WHEN SEC. 80HHE WAS NOT THERE . HE POINTED OUT THAT THE DECISION IN THE CASE OF HERO CYCLES CITED BY THE ASSESSEE IS IN THE CONTEXT OF SEC.80HHC AND NOT IN THE CONTEXT OF 80HH E. HE SUBMITTED THAT IN THE PRESENT CASE IMMEDIATE SOURCE IS DELAYED REC EIPT WHICH IS NOT DERIVED FROM BUSINESS. 30. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HA VE PERUSED THE RECORD OF THE CASE. 31. THERE IS NO DISPUTE THAT THE IMPUGNED AMOUNT WA S ASSESSABLE AS BUSINESS INCOME OF ASSESSEE. HOWEVER, THE CORE OF DISPUTE IS WHETHER IN VIEW OF EXPLANATION (D) TO SEC. 80HHE, WHICH DEFINE S THE PROFITS OF THE ITA NO. 3233/D/11 & CO NO. 248/D/11 16 BUSINESS, 90% OF THE IMPUGNED AMOUNT IS TO BE REDU CED OR NOT AS IT IS IN THE FORM OF INTEREST ON DELAYED PAYMENT. LD. COUNS ELS CONTENTION THAT IT ACTUALLY WAS IN THE NATURE OF SERVICE INCOME WAS NE VER TAKEN BEFORE LOWER REVENUE AUTHORITIES. BE THAT AS IT MAY, IN OUR OPI NION, NOMENCLATURE IS OF NO CONSEQUENCE. WE HAVE TO EXAMINE THE TRUE NATURE OF RECEIPT. AS FAR AS THE DECISION OF HONBLE SUPREME COURT IN THE CASE O F GOVINDA CHAUDHARY & SONS (SUPRA) IS CONCERNED, THE DISPUTE WAS WHETHE R THE INTEREST AWARDED TO ASSESSEE BY ARBITRATOR IN RESPECT OF A CONTRACT, WAS ASSESSABLE AS BUSINESS INCOME OR AS INCOME FROM OTHER SOURCES. T HE HONBLE SUPREME COURT HELD THAT IT WAS TO BE ASSESSED AS BUSINESS I NCOME AND NOT AS INCOME FROM OTHER SOURCES. IN THE PRESENT CASE ALS O THERE IS NO DISPUTE THAT THE IMPUGNED AMOUNT WAS BUSINESS INCOME. HOWE VER, FOR THE PURPOSES OF CLAIMING DEDUCTION U/S 80HHE, THE PROFI TS OF THE BUSINESS HAVE BEEN SPECIFICALLY DEFINED IN EXPLANATION (D) TO SEC . 80HHE WHICH READS AS UNDER: 80HHE (1) WHERE AN ASSESSEE, BEING AN INDIAN COMPANY OR A PERSON (OTHER THAN A COMPANY) RESIDENT IN INDIA, IS ENGAGED IN THE BUSINESS OF,- I) EXPORT OUT OF INDIA OF COMPUTER SOFTWARE OR ITS TRANSMISSION FROM INDIA TO A PLACE OUTSIDE INDIA BY ANY MEANS; II) PROVIDING TECHNICAL SERVICES OUTSIDE INDIA IN CONNECTION WITH THE DEVELOPMENT OR PRODUCTION OF COMPUTER SOFTWARE, ITA NO. 3233/D/11 & CO NO. 248/D/11 17 THERE SHALL, IN ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS OF THIS SECTION, BE ALLOWED, IN COMPUTIN G THE TOTAL INCOME OF THE ASSESSEE, [A DEDUCTION TO T HE EXTENT OF THE PROFITS, REFERRED TO IN SUB-SECTION ( 1B),] DERIVED BY THE ASSESSEE FROM SUCH BUSINESS. --------------------------------------------------- - EXPLN. (D) PROFITS OF THE BUSINESS MEANS THE PROFITS OF THE BUSINESS AS COMPUTED UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION AS REDUCED BY (1) NINETY PER CENT OF ANY RECEIPTS BY WAY OF BROKERAGE, COMMISSION, INTEREST, RENT, CHARGES OR ANY OTHER RECEIPT OF A SIMILAR NATURE INCLUDED IN SUCH PROFITS; AND (2) THE PROFITS OF ANY BRANCH, OFFICE, WAREHOUSE OR ANY OTHER ESTABLISHMENT OF THE ASSESSEE SITUATE OUTSIDE INDIA. THEREFORE, NOW WE HAVE TO EXAMINE WHETHER THE INTER EST RECEIVED ON DELAYED PAYMENT COULD BE TREATED AS AN INCOME DERIV ED FROM EXPORT OF CUSTOMIZED ELECTRONIC DATA IN THE FORM OF DESIGNS, DRAWINGS, CALCULATION AND OTHER RELEVANT DATA SHEET RELATING TO PROJECT E NGINEERING AND COMMERCIAL SOLUTIONS FOR POWER PLANT, REFINERY, PET ROCHEMICAL PLANT ETC. THE HONBLE SUPREME COURT IN THE CASE OF LIBERTY IN DIA VS. CIT, 317 ITR 218, WHILE CONSIDERING THE SCOPE OF DERIVE FROM; I N THE CONTEXT OF SEC. 80I, 80IA & 80IB, HELD THAT PROFITS DERIVED BY WAY OF IN CENTIVE IN THE FORM OF DUTY DRAWBACK AND DEPB ARE NOT PROFITS DERIVED FROM ELIG IBLE BUSINESS U/S 80IB AS THEY FLOW FROM THE SCHEMES FRAMED BY THE CENTRAL GOVERNMENT. IT WAS ITA NO. 3233/D/11 & CO NO. 248/D/11 18 HELD THAT BY USING THE EXPRESSION DERIVED FROM PA RLIAMENT INTENDED TO COVER SOURCES NOT BEYOND THE FIRST DEGREE. IN VIE W OF THIS DECISION, THE INTEREST ON DELAYED PAYMENT CANNOT BE TREATED AS IN COME DERIVED FROM ACTIVITIES CONTEMPLATED U/S 80HHE. 32. IN THE RESULT, THIS GROUND IS ALLOWED. 33. BRIEF FACTS APROPOS GROUND NO. 5 ARE THAT ASSES SEE HAD SHOWN AN AMOUNT OF RS. 10,95,723/- AS MISCELLANEOUS INCOME I N THE PROFIT AND LOSS ACCOUNT AND HAD CLAIMED DEDUCTION U/S 80HHE ON THIS INCOME. THE ASSESSEE EXPLAINED THAT MISCELLANEOUS INCOME INCLUD ED RS. 5,39,819/- ON ACCOUNT OF DISCOUNT RECEIVED FROM AIR LINES AND RS. 5,55,904/- ON SALES OF PARTS OF PC/SERVER, CARTRIDGE, SCRAPS ETC. 34. AS REGARDS, RECEIPTS OF RS. 5,55,904/-, THE AO OBSERVED THAT THE SAME CANNOT BE CONSIDERED FOR PURPOSES OF DEDUCTION U/S 80HHE. HOWEVER, TAKING INTO CONSIDERATION THE NATURE OF RE CEIPT HE TREATED THE SAME AS PART OF TOTAL TURNOVER FOR COMPUTING DEDUCT ION U/S 80HHE. 35. LD. CIT(A) HELD THAT THE IMPUGNED AMOUNT COULD NOT BE CONSIDERED AS AMOUNT RECEIVED AGAINST RENDERING OF SERVICES AN D HENCE, COULD NOT BE MADE PART OF TOTAL TURNOVER. ITA NO. 3233/D/11 & CO NO. 248/D/11 19 36. LD. DR RELIED ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. JACKSEN ENGINEERING LTD., 341 ITR 580, W HEREIN IT WAS HELD THAT ASSESSEE WAS NOT ENTITLED FOR DEDUCTION U/S 80IA IN RESPECT OF TRADE ADVANCES FORFEITED BY IT ON ACCOUNT OF BREACH OF CO NTRACT AS THE SAID SUM WAS NOT DERIVED FROM ANY GOODS OR SERVICES PRODUCED BY ASSESSEE. LD. DR FURTHER REFERRED TO THE DECISION OF HONBLE MADR AS HIGH COURT IN THE CASE OF PANDIAN CHEMICALS LTD. VS. CIT, 270 ITR 448 , WHEREIN IT WAS HELD THAT THE INCOME FROM THE SALE OF SCRAP WAS NOT RELA TABLE TO THE INDUSTRIAL ACTIVITIES OF THE ASSESSEE FOR THE PURPOSES OF SEC. 80HH OF THE INCOME TAX ACT. 37. LD. COUNSEL FOR THE ASSESSEE REFERRED TO THE DE CISION OF HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. ASHOK LEYL AND LTD., 297 ITR 107,WHEREIN IT WAS, INTER-ALIA, HELD THAT SCRAP SAL ES DOES NOT FORM PART OF TURNOVER. HE ALSO REFERRED TO THE DECISION OF HONB LE MUMBAI HIGH COURT IN THE CASE OF CIT VS. SUDARSHAN CHEMICAL INDUSTRIES L TD., 245 ITR 769, WHEREIN IT WAS, INTER-ALIA, HELD THAT IN THE TURNOV ER ONLY THOSE ITEMS ARE TO BE INCLUDED WHICH HAS NEXUS WITH THE SALE PROCEED. IT WAS FURTHER HELD THAT THE EXPORT PROFITS COULD NOT BE REDUCED ARTIFICIALL Y BY INCLUDING STATUTORY LEVIES IN THE DENOMINATOR, NAMELY TOTAL TURNOVER. THEREFORE, THE TURNOVER SHOULD BE RESTRICTED TO SUCH RECEIPTS WHICH HAVE EL EMENT OF PROFIT IN IT. IT IS THE ONLY ACTUAL SALE PRICE WHICH IS RELEVANT. ANYT HING CHARGED BY THE ITA NO. 3233/D/11 & CO NO. 248/D/11 20 ASSESSEE BY WAY OF EXCISE DUTY AND SALES TAX COULD NOT BE TAKEN INTO ACCOUNT AS THEY DO NOT HAVE ANY ELEMENT OF PROFIT. LD. COUNSEL SUBMITTED THAT IN VIEW OF DECISION OF HONBLE MUMBAI HIGH COU RT ALSO, SINCE THE SCRAP SALES HAD NO ELEMENT OF PROFIT, THEREFORE, IT COULD NOT FORM PART OF TOTAL TURNOVER . 38. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. 39. WE FIND CONSIDERABLE FORCE IN THE ARGUMENTS OF LD. COUNSEL FOR THE ASSESSEE BECAUSE THE IMPUGNED RECEIPTS WERE FROM SA LE OF PC/SERVER SCRAP ETC. WHICH HAD NO ELEMENT OF PROFIT IN IT. T HEREFORE, WHEN THEY WERE EXCLUDED FOR BEING ELIGIBLE FOR DEDUCTION U/S 80HHE THEN CONSEQUENTLY THEY COULD NOT BE INCLUDED IN THE TOTAL TURNOVER FOR COM PUTING DEDUCTION U/S 80HHE. FOLLOWING THE DECISION IN THE CASE OF SUDER SHAN CHEMICAL INDUSTRIES LTD. (SUPRA) AND MADRAS HIGH COURT IN TH E CASE OF ASHOK LEYLAND (SUPRA), WE UPHOLD THE ORDER OF LD. CIT(A). 40. IN THE RESULT, THIS GROUND IS DISMISSED. 41. BRIEF FACTS APROPOS GROUND NO. 6 ARE THAT ASSES SEE HAD WRITTEN BACK A SUM OF RS. 1,23,27,948/- IN THE PROFIT AND LOSS ACC OUNT UNDER THE SUB HEAD LIABILITY NO LONGER REQUIRED WRITTEN BACK. ITA NO. 3233/D/11 & CO NO. 248/D/11 21 42. THE AO HELD THAT THESE WERE TO BE INCLUDED IN T OTAL TURNOVER FOR COMPUTATION OF DEDUCTION U/S 80HHE. 43. BEFORE LD. CIT(A) IT WAS POINTED OUT THAT CREDI T OF THIS AMOUNT TO PROFIT AND LOSS ACCOUNT WAS IN ACCORDANCE WITH THE PROVISI ONS OF SEC. 41 OF THE ACT. IT WAS SUBMITTED THAT THESE LIABILITIES HAD N O LINK WITH THE TURNOVER OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION I.E. FOR THE F.Y. 2002-03. FURTHER IT WAS SUBMITTED THAT TOTAL TURNOVER AS DEF INED IN CLAUSE (E) TO SEC. 80HHE OF THE ACT SHALL HAVE EFFECT SO AS TO EXCLUDE RECEIPTS U/S 28(IIIA), (IIIB) & (IIIC) WHICH CLEARLY SHOWED THAT THE LEGIS LATURE INTEND TO EXCLUDE ALL RECEIPTS WHICH HAD NO NEXUS WITH SALE PROCEEDS FROM EXPORT ACTIVITIES. IT WAS SUBMITTED THAT IN THE FORMULA FOR CALCULATION O F DEDUCTION U/S 80HHE, WHEN THE NUMERATOR (I.E.) EXPORT TURNOVER SPEAKS OF TURNOVER OF CUSTOMIZED ELECTRONIC DATA, THE DENOMINATOR SHOULD ALSO BE OF SIMILAR NATURE, I.E., THE TOTAL (DOMESTIC AND EXPORT) TURNOVER OF THE ASSESSE E FROM THE BUSINESS OF CUSTOMIZED ELECTRONIC DATA. LD. CIT(A) ACCEPTED TH E ASSESSEES CONTENTION AND DIRECTED THE AO NOT TO INCLUDE THE AMOUNT OF L IABILITY NO LONGER REQUIRED WRITTEN BACK TO BE INCLUDED IN THE TOTAL TURNOVER. 44. LD. CIT(A) ALLOWED THE ASSESSEES APPEAL AGAINS T WHICH DEPARTMENT DID NOT PREFER ANY APPEAL BEFORE THE TRIBUNAL. THE REFORE, FOR THIS ITEM ALSO THE DEPARTMENT SHOULD NOT HAVE PREFERRED ANY APPEAL . HE FURTHER POINTED OUT THAT LIABILITY WRITTEN BACK CANNOT FORM PART OF TOTAL TURNOVER. HE REFERRED ITA NO. 3233/D/11 & CO NO. 248/D/11 22 TO PARA 45.1 OF CIT(A) ORDER, WHEREIN, IN REGARD TO BAD DEBTS, IT WAS CONTENDED THAT SERVICE INCOME (IN RESPECT OF WHICH BAD DEBT OCCURRED TO THE ASSESSEE) HAD ALREADY BEEN INCLUDED IN THE TOTA L TURNOVER OF THE YEAR IN WHICH SUCH INCOME ACCRUED TO THE ASSESSEE. THUS, IN CLUSION OF THE SAME AGAIN TO THE TOTAL TURNOVER IN THE CAPTIONED ASSESS MENT YEAR WOULD RESULT IN CONSIDERING THE SAME REVENUE TWICE FOR THE PURPOSE OF TOTAL TURNOVER. HE ALSO RELIED ON THE DECISION OF HONBLE MUMBAI HIGH COURT IN THE CASE OF SUDERSHAN CHEMICAL INDUSTRIES LTD. (SUPRA). 45. LD. DR SUBMITTED THAT IT IS NOT CLEAR WHETHER T HESE LIABILITIES WERE INCURRED ON ACCOUNT OF REVENUE EXPENSES OR NOT. HE , THEREFORE, SUBMITTED THAT THE MATTER NEEDS TO BE EXAMINED BY AO AFRESH T O FIND OUT WHETHER ASSESSEE HAD ACTUALLY CLAIMED THESE AMOUNTS AS REVE NUE EXPENDITURE IN EARLIER YEAR AND ALSO WHETHER IN THOSE YEARS ASSESS EE WAS ELIGIBLE FOR DEDUCTION U/S 80HHE. 46. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT AO HAD GIVEN SIMILAR FINDINGS IN REGARD TO BAD DEBTS. 47. WE HAVE CONSIDERED THE SUBMISSION OF BOTH THE P ARTIES AND HAVE PERUSED THE RECORD OF THE CASE. THERE IS NO DISPUT E THAT THE IMPUGNED AMOUNT IS TO FORM PART OF PROFIT OF BUSINESS FOR TH E PURPOSES OF DEDUCTION U/S 80HHE. THE ONLY DISPUTE IS WHETHER THE IMPUGNE D AMOUNT IS TO BE ITA NO. 3233/D/11 & CO NO. 248/D/11 23 INCLUDED IN THE TOTAL TURNOVER FOR THE PURPOSE OF C OMPUTATION OF DEDUCTION U/S 80HHE OR NOT. WE FIND THAT IN THE TAX AUDIT RE PORT CONTAINED AT PAGE 599 OF PAPER BOOK, IT IS CLEARLY STATED BY THE AUDI TORS THAT THIS AMOUNT CONSTITUTES RECEIPTS U/S 41(1) OF THE I.T. ACT. TH EREFORE, LD. DRS CONTENTION THAT THE MATTER SHOULD BE RESTORED BACK TO THE FILE OF AO, CANNOT BE ACCEPTED. WE HAVE TO PROCEED BY TAKING THESE AMOUN TS AS BEING CLAIMED AS REVENUE EXPENDITURE IN EARLIER YEARS. WHEN THES E AMOUNTS WERE CLAIMED IN EARLIER YEARS THE PROFITS OF THE RESPECT IVE YEARS WERE REDUCED TO THIS EXTENT. THERE WAS NO EFFECT ON TURNOVER OF TH E RESPECTIVE YEARS BECAUSE THESE AMOUNTS WERE CLAIMED ONLY AS EXPENDIT URE AND DID NOT AFFECT THE TURNOVER OF THE RESPECTIVE YEAR. THEREF ORE, IN THE CURRENT ASSESSMENT YEAR WHEN THESE AMOUNTS ARE WRITTEN BACK THEN THEY CANNOT FORM PART OF TOTAL TURNOVER. WE, THEREFORE, DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF LD. CIT(A). 48. IN THE RESULT, THIS GROUND IS DISMISSED. 49. BRIEF FACTS APROPOS GROUND NO. 7 ARE THAT THE A O NOTICED THAT THERE WERE CERTAIN RECEIPTS WHICH DID NOT FORM PART OF TH E PROFIT AND LOSS ACCOUNT. HE REQUIRED THE ASSESSEE TO EXPLAIN AS TO WHY THE S AME MAY NOT BE INCLUDED IN THE TOTAL TURNOVER FOR COMPUTATION OF D EDUCTION U/S 80HHE OF THE I.T. ACT. THE ASSESSEE EXPLAINED THAT IN THE COURS E OF RENDERING THE SERVICE, THE ASSESSEE INCURRED CERTAIN EXPENSES LIK E TRAVELING, BOARDING ITA NO. 3233/D/11 & CO NO. 248/D/11 24 AND LODGING EXPENSES. THESE WERE REIMBURSED BY THE CLIENTS ON ACTUAL BASIS. IT WAS ALSO POINTED OUT THAT DURING THE YEA R, THE ASSESSEE RECOVERED REIMBURSEMENTS AGGREGATING TO RS. 7,24,96,365/- (RS . 42,38,653/- FROM DOMESTIC CUSTOMERS AND RS. 6,82,57,712/- FROM OVERS EAS CUSTOMERS). THE ASSESSEE EXPLAINED THAT SINCE THESE WERE NOT PART O F THE PROFIT AND LOSS ACCOUNT, THEY WERE NEITHER INCLUDED IN THE EXPORT T URNOVER NOR TOTAL TURNOVER AS THERE WAS NO PROFIT ELEMENT IN THE SAME. THE AO HELD THAT INCOME TAX ACT DOES NOT ALLOW ANY SUCH ACCOUNTING WHERE CERTAI N RECEIPTS AND EXPENSES ARE NOT SHOWN AS PART OF PROFIT AND LOSS A CCOUNT. HE HELD THAT THIS AMOUNT FORMS PART OF TOTAL TURNOVER BUT NOT PA RT OF EXPORT TURNOVER. 50. LD. CIT(A) FOLLOWING THE DECISION FOR ASSESSMEN T YEARS 2001-02 & 2002-03 HELD THAT THIS DID NOT FORM PART OF TOTAL T URNOVER WHICH FINDING HAS BEEN CONFIRMED BY THE TRIBUNAL. 51. HAVING HEARD BOTH THE PARTIES, WE FIND THAT TRI BUNAL IN ASSESSMENT YEARS 2004-05 & 2005-06 VIDE ITA NOS. 4338/DEL/2011 & 4339/DEL/2011 RESPECTIVELY VIDE ORDER DATED 21/12/2012, FOLLOWING THE DECISION OF ASSESSEES OWN CASE FOR ASSESSMENT YEARS 2001-02 & 2002-03, UPHELD THE FINDING OF LD. CIT(A) WITH REGARD TO DEDUCTION OF R EIMBURSEMENT OF EXPENSES FROM THE TOTAL TURNOVER. IN A.Y. 2001-02 AND 2002- 03, TRIBUNAL HAD HELD AS UNDER: ITA NO. 3233/D/11 & CO NO. 248/D/11 25 13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT THE REIMBURSEMENT OF EXPENSES ACTUALLY INCURRED BY THE ASSESSEE COMPANY ON BEHALF OF ITS CLIENTS WAS CLAIMED BY IT FROM THEM AS PER T HE AGREEMENT AND EVEN THE BILLS FOR SUCH REIMBURSEMENT WERE SEPARATELY RAISED BY IT ON THE CONCERNED CUSTOMERS AS IS EVIDENT FROM THE DETAILS FURNISHED BY THE LEARNED COUNSEL FOR THE ASSESSEE AT PAGE NOS. 2 5 TO 27 OF HIS PAPER BOOK. THE REIMBURSEMENT SO CLAIMED WAS ONLY TO THE EXTENT OF THE EXPENSES ACTUALLY INCURRED BY THE ASSESSEE COMPANY ON BEHALF OF ITS CLIENTS AND IT IS NOT EVEN THE CASE OF THE REVENUE THAT ANY PROFIT ELEMENT WAS INVOLVED IN SUCH REIMBURSEMENTS. IN THE CASE OF CIT VS. INDUSTRIAL ENGINEERING PROJECTS PVT. LTD. (SUPRA), HONBLE DEL HI HIGH COURT HAS HELD RELYING ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF TEJAJI FARASRAM KHARAWALLA (SUPRA) THAT REIMBURSEMENT OF EXPENSES CAN UNDER NO CIRCUMSTANCES BE REGARDED AS A REVENUE RECEIPT. 14. IN THE CASE OF CIT VS. SUDERSHAN CHEMICAL INDUSTRIES LTD. (SUPRA), HONBLE BOMBAY HIGH COURT HAS AN OCCASION TO CONSIDER A SIMILAR ISSUE IN THE CONTEXT OF COMPUTATION OF DEDUCTION U/S 80HHC AND I T WAS HELD THEREIN THAT THE RELEVANT PROVISIONS OF SE C. 80HHC CLEARLY SHOW THAT THE TOTAL TURNOVER INCLUDES ANYTHING WHICH HAS NEXUS WITH SALE PROCEEDS AND EXCLUDES EVERYTHING WHICH HAS NO SUCH NEXUS. IT WA S ITA NO. 3233/D/11 & CO NO. 248/D/11 26 FURTHER HELD THAT TURNOVER SHOULD BE RESTRICTED ONL Y TO SUCH RECEIPTS WHICH HAVE AN ELEMENT OF PROFIT IN IT . AS THE PROVISIONS OF SEC. 80HHC RELEVANT IN THIS CONTE XT ARE ANALOGOUS TO THE PROVISIONS OF SEC. 80HHE AS POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE, WE ARE OF THE VIEW THAT THE RATIO OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF SUDERSHAN CHEMICAL INDUSTRIES LTD. (SUPRA) IS EQUALLY APPLICA BLE TO THE ISSUE INVOLVED IN THE PRESENT APPEAL AND SUPPORTS THE CASE OF THE ASSESSEE. KEEPING IN VIEW THE SAID DECISION AS WELL AS THE OTHER JUDICIAL PRONOUNCEMENTS REFERRED TO HEREINABOVE AND CONSIDERING ALL THE FACTS OF THE CASE, WE HOLD THAT THERE WAS NO INFIRMITY IN THE IMPUGNED ORDER OF THE LD. CIT(A) IN DIRECTING THE AO NOT TO INCLUDE THE RECEI PTS BY THE ASSESSEE ON ACCOUNT OF REIMBURSEMENT OF EXPENSES IN ITS TURNOVER FOR THE PURPOSE OF COMPUTI NG DEDUCTION U/S 80HHE. THE SAME IS, THEREFORE, UPHEL D AND GROUND NO. 2 OF THE REVENUES APPEAL IS DISMISSED. 52. RESPECTFULLY FOLLOWING THE ABOVE DECISION OF IT AT, WE UPHOLD THE FINDING OF LD. CIT(A) WITH REGARD TO REDUCTION OF R EIMBURSEMENT OF EXPENSES FROM TOTAL TURNOVER. 53. IN THE RESULT, THIS GROUND IS DISMISSED. ITA NO. 3233/D/11 & CO NO. 248/D/11 27 54. IN THE RESULT, DEPARTMENTS APPEAL IS PARTLY AL LOWED FOR STATISTICAL PURPOSES. 55. NOW WE TAKE UP THE ASSESSEES CROSS OBJECTION V IDE CO NO. 248/DEL/2011. THE ASSESSEE HAS TAKEN FOLLOWING GRO UNDS IN ITS CROSS OBJECTION: 1. THAT WITHOUT PREJUDICE TO THE RELIEF GIVEN BY THE LD. COMMISSIONER OF INCOME-TAX (APPEALS) (LD. CIT(A)) IN DELETING THE ADDITION OF RS. 80,819,778 MADE TO THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE AND WITH RESPECT TO GROUND NO. 1(A) AND 1(B) RAISED BY THE INCOME- TAX DEPARTMENT IN ITS APPEAL NO. 3233/DEL-2011, THE ASSESSEE SUBMITS THAT BECHTEL INDIA PRIVATE LIMITED (BIPL) IS ENGAGED IN PROVISION OF ENGINEERING DESIGN SERVICES TO ITS ASSOCIATED ENTERPRISES AND ACCORDINGLY, IT CANNOT BE COMPARED WITH THE COMPANIES PROVIDING INFORMATION TECHNOLOGY (IT)/IT ENABLED SERVICES FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH RESULTS. 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, AND IN ANY EVENT, THE IMPACT OF FOREIGN EXCHANGE FLUCTUATIONS SHOULD BE ELIMINATED WHILE COMPUTING OPERATING PROFIT/TOTAL COST MARGIN OF THE ASSESSEE AS THE FOREIGN EXCHANGE LOSS/GAIN IS NON-OPERATING IN NATURE. 3. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, AND IN ANY EVENT, COMPANIES HAVING ITA NO. 3233/D/11 & CO NO. 248/D/11 28 PERCENTAGE OF RELATED PARTY TRANSACTIONS TO OPERATING REVENUE OF MORE THAN 10-15 PERCENT SHOULD NOT BE INCLUDED IN THE FINAL SET OF COMPARABLE COMPANIES FOR THE PURPOSE OF BENCHMARKING THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE. 4. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, AND IN ANY EVENT, BENEFIT OF A CAPACITY UTILIZATION ADJUSTMENT SHOULD BE ALLOWED TO THE ASSESSEE TO ACCOUNT FOR THE IDLE CAPACITY COSTS INCURRED BY IT DURING THE RELEVANT PERIOD. 5. THAT IN ANY EVENT, THE BENEFIT OF THE +/-5% RANGE FROM THE ARITHMETICAL MEAN MARGIN OF COMPARABLE COMPANIES AS PROVIDED IN PROVISO TO SEC. 92C(2) OF THE INCOME TAX ACT, 1961 IS ALLOWABLE TO THE ASSESSEE IN RESPECT OF ITS INTERNATIONAL TRANSACTIONS. 56. AS FAR AS GROUND NO. 1 IS CONCERNED THE SAME IS IN SUPPORT OF LD. CIT(A)S ORDER AND, THEREFORE, DOES NOT CALL FOR AN Y ADJUDICATION. 57. AS FAR AS GROUND NO. 2 IS CONCERNED, WE FIND TH AT NO SUCH GROUND WAS TAKEN BEFORE LD. CIT(A) AND, THEREFORE, THIS GROUND IS MISCONCEIVED. 58. AS FAR AS GROUND NOS. 3 TO 5 ARE CONCERNED, THE SE RELATE TO TRANSFER PRICING ISSUE WHICH HAS BEEN RESTORED TO THE FILE O F AO/TPO IN THE ITA NO. 3233/D/11 & CO NO. 248/D/11 29 DEPARTMENTS APPEAL VIDE GROUND NOS. 1 & 2. THEREF ORE, THESE GROUNDS ARE ALSO ALLOWED FOR STATISTICAL PURPOSES. 59. IN THE RESULT, CROSS OBJECTION BY ASSESSEE IS P ARTLY ALLOWED FOR STATISTICAL PURPOSES. 60. CONSEQUENTLY APPEAL PREFERRED BY REVENUE AND CR OSS OBJECTION FILED BY ASSESSEE, BOTH, ARE PARTLY ALLOWED FOR STATISTIC AL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 28/03/2013 SD/- SD/- (I.C. SUDHIR) JUDICIAL MEMBER (S.V. MEHROTRA) ACCOUNTANT MEMBER DATED: 28.03.2013 *KAVITA COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI. TRUE COPY BY ORDER DEPUTY REGISTRAR