MELSTAR INFORMATION TECHNOLOGIES LTD, JALNA V. ASST CIT CIR 8(2), MUMBAI

ITA 2368/MUM/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 88279 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 10 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-02-2015
• Appeal Filed By: Assessee
• Bench Allotted: K
• Next Hearing Date: 07-10-2014
• Assessment Year: 2003-2004
• Appeal Filed On: 10-04-2012
• Court: TRIBUNAL
• Keywords: Transfer pricing; Business expenditure; International transaction; Rule of consistency; Question of law; Bad and doubtful debts; Notional interest; Commercial expediency
• Section: 92C; 80HHC; 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER ITA NO. 2368/MUM/2012 ASSESSMENT YEAR: -2003-04 MELSTAR INFORMATION TECHNOLOGIES LTD. MELSTAR HOUSE, G-4, M.I.D.C CROSS ROAD, A, ANDHERI EAST, MUMBAI 400 093. VS.` ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 8(2), MUMBAI. PAN: - AABCM6270G APPELLANT RESPONDENT ITA NO. 2369/MUM/2012 ASSESSMENT YEAR: -2004-05. MELSTAR INFORMATION TECHNOLOGIES LTD. MELSTAR HOUSE, G-4, M.I.D.C CROSS ROAD, A, ANDHERI EAST, MUMBAI 400 093. VS.` DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 8(2), MUMBAI. PAN:-AABCM6270G APPELLANT RESPONDENT ITA NO.2165/MUM/2012 ASSESSMENT YEAR: -2003-04 JOINT COMMISSIONER OF INCOME TAX CIRCLE 8(2), MUMBAI. VS.` MELSTAR INFORMATION TECHNOLOGIES LTD. MELSTAR HOUSE, G-4, M.I.D.C CROSS ROAD, A, ANDHERI EAST, MUMBAI 400 093.. PAN: - AABCM6270G APPELLANT RESPONDENT ITA NO.2166/MUM/2012 ASSESSMENT YEAR: -2004-05 DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 8(2), MUMBAI. VS.` MELSTAR INFORMATION TECHNOLOGIES LTD. MELSTAR HOUSE, G-4, M.I.D.C CROSS ROAD, A, ANDHERI EAST, MUMBAI 400 093 PAN: - AABCM6270G APPELLANT RESPONDENT MELSTAR INFORMATION 2 | P A G E ORDER PER BENCH THESE TWO SET OF CROSS APPEALS ARE DIRECTED AGAINST THE TWO SEPARATE ORDERS OF CIT(A) BOTH DATED 19.01.2012 FOR A.Y. 2003- 04 AND 2004-05. FOR THE A.Y. 2003-04, THE ASSESSEE HAS RAISED FOLLOWING CONC ISE GROUNDS:- GROUND NO ;-' (1) TO (8) LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFIRMING THE ADDITION OF RS. 6,534,709/- TO THE RETURNED INCOME MADE BY LEARNED ASSESSING OFFICER, ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IN PURSUANCE OF ORDER U NDER SECTION 92CA(3) OF THE ACT PASSED BY THE TRANSFER PRICING OFFICER ( TPO ). APPELLANT SUBMITS THAT IN VIEW OF THE FACTS AND CIR CUMSTANCES OF THE CASE AS WELL AS IN LAW, SUCH ADJUSTMENTS MADE TO THE VALUE OF INTERNAT IONAL TRANSACTION OUGHT TO BE DELETED. GROUND NO :-(9) LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFIRMING THE ORDER PASSED BY LEARNED ASSESSING OFFICER IN NOT ALLOWING 'TDS CERT IFICATES NOT RECEIVED FROM DEBTORS' HENCE WRITTEN OFF TO THE TUNE OF RS.131,545/-. APPELLANT SUBMITS THAT IN VIEW OF THE FACTS AND CIR CUMSTANCES OF THE CASE AS WELL AS IN LAW, 'TDS CERTIFICATES NOT RECEIVED FROM DEBTORS' H ENCE WRITTEN OFF OUGHT TO BE ALLOWED AS BUSINESS EXPENDITURE. ASSESSEE BY SHRI SANJAY C. SHAH REVENUE BY SHRI N. PADMANABHAN DATE OF HEARING 04.02.2015 DATE OF PRONOUNCEMENT 13.02.2015 MELSTAR INFORMATION 3 | P A G E GROUND NO :-10 LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFIRMING ORDER OF LEARNED ASSESSING OFFICER IN NOT ALLOWING STAFF ADVANCES WR ITTEN OFF THE TUNE OF RS.188,382/-. APPELLANT SUBMITS THAT IN VIEW OF THE FACTS AND CIR CUMSTANCES OF THE CASE AS WELL AS IN LAW, THE STAFF ADVANCES WRITTEN OFF OUGHT TO BE ALL OWED AS BUSINESS EXPENDITURE UNDER SECTION 37(1) OF THE ACT. GROUND NO :-11 LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN NOT PASSING A SPEAKING ORDER TO ALTERNATIVE CLAIM FILED BY THE APPELLANT WHICH I S REPRODUCED HEREIN BELOW :- 'WITHOUT PREJUDICE TO THE ABOVE IT IS SUBMITTED THA T IN CASE BAD DEBTS ARE HELD TO BE NOT ALLOWABLE THAN THE SAID ITEMS WHICH RELATES TO LOA UNITS. SHOULD BE DISALLOWED/ADDED BACK WHILE COMPUTING DEDUCTION U/S LOA OF THE ACT. ACCORDINGLY AMOUNT OF DEDUCTION U/S LOA OF THE ACT SHALL INCREASE TO THAT EXTENT. ' APPELLANT SUBMITS THAT IN ABOVE FACTS AND CIRCUMSTA NCES OF THE CASE AS WELL AS IN LAW, THE DISALLOWANCE IF AT ALL SUSTAINED PERTAINING TO LOA UNIT OUGHT TO BE MADE OUT OF PROFITS OF 10A UNIT. GROUND NO :-12 LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFIRMING THE ORDER PASSED BY LEARNED ASSESSING OFFICER IN DISALLOWING A SUM OF R S.7,20,886/- OUT OF ADVANCE GIVEN TO ITS AUSTRALIA BRANCH BY US BRANCH. APPELLANT SUBMITS THAT IN VIEW OF THE FACTS AND CIR CUMSTANCES OF THE CASE AS WELL AS IN LAW THE SAID AMOUNT OUGHT TO HAVE BEEN ALLOWED AS B USINESS EXPENDITURE. 2. GROUND NOS. 1 TO 8 ARE REGARDING ADDITION OF RS. 65 ,35,709/- ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. THE ASSESSEE IN THI S CASE IS ENGAGED IN THE ACTIVITIES IN THE FIELD OF INFORMATION TECHNOLOGY AN D PROVIDING SOFTWARE MELSTAR INFORMATION 4 | P A G E APPLICATION SOLUTIONS BOTH IN INDIA AND ABROAD. THE AS SESSEE RECEIVED FEES FOR RENDERING OF SOFTWARE SERVICES AGGREGATING TO RS. 15 6,616,204/-FROM ITS ASSOCIATED ENTERPRISES AND ALSO PAID FEES FOR AVAILING SOFTWARE SERVICES TO RS. 41,565,151/- TO ITS ASSOCIATED ENTERPRISES. THE ASSE SSEE APPLIED TNMM AS MOST APPROPRIATE METHOD FOR THE PURPOSE OF BENCH MAR KING THE SAID INTERNATIONAL TRANSACTION. THE ASSESSING OFFICER RE JECTED THE TNMM AS MOST APPROPRIATE METHOD AND ADOPTED CUP METHOD AS MOST AP PROPRIATE FOR DETERMINATION OF ARMS LENGTH PRICE. SINCE THERE WAS INTERNAL CUP IN THE CASE OF THE ASSESSEE AS THE ASSESSEE WAS PROVIDING THE SAME SERVICES TO THE NON AES, THEREFORE, THE ASSESSEE HAS NOT RAISED THE ISSUE OF ADOPTING THE CUP AS MOST APPROPRIATE METHOD BY TPO IN THE PRESENT APPEALS. T HE GRIEVANCE OF THE ASSESSEE IS LIMITED ONLY ON THE POINT OF AGGREGATED PRICE CHARGED BY THE ASSESSEE FROM AE WAS NOT ACCEPTED BY THE TPO AND THE TPO HAS SELECTED ONLY THOSE PRICES WHICH ARE FOUND LESS THAN THE ARMS LE NGTH PRICE AND EXCLUDED THE PRICE WHICH ARE FOUND MORE THAN ARMS LENGTH PRICE. THE ASSESSEE CHALLENGED THE ACTION OF TPO BEFORE THE CTI(A) BUT COULD NOT S UCCEED. 2.1 WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVE A S WELL AS LD. DR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE LD. AU THORIZED REPRESENTATIVE HAS SUBMITTED THAT THE ASSESSEE IS PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ITS AE AS WELL AS NON AE AND CHARGED THEM ON THE BASI S OF MAN HOURS. THE T.P.O HAS SELECTED RATE OF CHARGE IN RESPECT OF VARIOUS ME MBERS OF THE TEAM WHERE THERE IS A DIFFERENCE IN THE RATE AND THE ASSESSEE IS CHARGING LESS FROM THE AE. AS FAR AS THE RATE CHARGED BY THE ASSESSEE WHICH IS MORE THAN THE RATE CHARGED FROM THE NON AE, THE TPO HAS EXCLUDED THE SAID PRICE FOR THE PURPOSE OF COMPUTING THE MARGIN OF THE ASSESSEE ON THE PRICE C HARGED FROM THE AE. THUS MELSTAR INFORMATION 5 | P A G E THE LD. AUTHORIZED REPRESENTATIVE HAS SUBMITTED THAT FOR THE PURPOSE OF DETERMINING THE ALP, THE AGGREGATED PRICE CHARGED BY T HE ASSESSEE FROM AE HAS TO BE TAKEN INTO CONSIDERATION AND NOT THE INDIVID UAL RATE OF MAN HOUR IN RESPECT OF THE TEAM MEMBERS PROVIDING SERVICES OF SOFTWARE DEVELOPMENT. IN SUPPORT OF HIS CONTENTION, HE HAS RELIED UPON THE DEC ISION OF PUNE BENCHES OF THIS TRIBUNAL IN THE CASE OF CUMMINS INDIA LTD. VS. ACIT 31 CCH 171)(PUNE) AS WELL AS IN THE CASE OF DEMAG CRANES & COMPONENTS (INDIA) PVT. LTD. VS DCIT 34 CCH 378. THE LD. AUTHORIZED REPRESENTATIVE HAS SUBMITTED THA T THE ADJUSTMENT HAS TO BE MADE ON AGGREGATED BASIS AND NOT O N INDIVIDUAL LINE BY LINE ITEM OF INCOME AS THE ENTIRE REVENUE IS FROM S OFTWARE DEVELOPMENT SERVICES WHICH IS A COMPOSITE WORK AND NO PART OF WO RK IS INDEPENDENT OF OTHER PART. ALL THE ACTIVITIES PERFORMED BY DIFFERENT SKILLS OF PERSONS ARE INEXTRICABLY INTERCONNECTED AND HENCE INCOME FROM SOF TWARE DEVELOPMENT SERVICES IS EARNED FROM COMPOSITE ACTIVITY. 2.2 ON THE OTHER HAND, THE LD. DR HAS SUBMITTED THAT EACH AND EVERY TRANSACTION HAS TO BE CONSIDERED AS SEPARATE INTERNAT IONAL TRANSACTION AND, THEREFORE, THE ARMS LENGTH PRICE OF EACH TRANSACTI ON HAS TO BE DETERMINED SEPARATELY AND INDEPENDENTLY AS PER CHAPTER X OF THE I NCOME TAX ACT. 2.3 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD. FOR THE PURPOSE OF PROVIDING SOFTWARE DEVELO PMENT SERVICES, THE ASSESSEE HAS CHARGED ITS AE AS WELL AS NON AE BASED ON HOURLY RATES. THE DETAILS OF THE RATES ARE GIVEN BY THE TPO AT PAGE 3 OF THE ORDER AS UNDER:- MELSTAR INFORMATION 6 | P A G E SR. NO. CLASS OF EMPLOYEES CHARGED TO MELSTAR UK CHARGED TO UNRELATED PARTY. 1. PROJECT MANAGER 37.32 35.63 2. PROJECT LEADER 20.25 26.26 3. DEVELOPER 9.56 16.03 4. TESTER 9.56 17 2.4 IT IS PERTINENT TO NOTE THAT THE RATES AS GIVEN IN THE ABOVE TABLE ARE THE BASIS OF CHARGING THE PRICE OF THE SERVICES PROVIDE D BY THE ASSESSEE TO ITS CLIENTS. IT IS NOT DISPUTED THAT THE INVOICE RAISED BY THE ASSESSEE IS COMPOSITE INVOICE WITH RESPECT TO THE SERVICES OF SOFTWARE DEV ELOPMENT PROVIDED TO THE AE AS WELL AS NON AE. THOUGH THE PRICE CHARGED TO TH E PARTIES IS ON THE BASIS OF HOURLY RATES AS GIVEN IN THE ABOVE TABLE, HOWEVER, WE DO FIND MERITS IN THE CONTENTION OF THE LD. AUTHORIZED REPRESENTATIVE THA T THE SERVICES PROVIDED BY THE ASSESSEE IS A COMPOSITE WORK OF DEVELOPMENT OF S OFTWARE BY THE TEAM AND THE WORK OF ONE MEMBER OF TEAM CANNOT BE SEPARATED FOR THE PURPOSE OF CHARGING THE PRICE BUT IT IS ONLY THE BASIS OF CHAR GING THE PRICE OF THE FINAL PRODUCT. THEREFORE, THE TRANSACTION BETWEEN THE ASSE SSEE AND ITS CLIENTS IS TO PROVIDE SOFTWARE DEVELOPMENT SERVICES AND IS NOT TO P ROVIDE MAN HOUR SERVICES. THE SERVICE WHICH IS IN THE FORM OF SOFTW ARE DEVELOPMENT IS A WORK CARRIED OUT BY THE TEAM AND, THEREFORE, THE TRANSACT ION INVOLVING PROVIDING OF SERVICES TO THE AE/CLIENTS IS THE SOFTWARE DEVELOPME NT AND NOT THE MAN HOURS. EVEN OTHERWISE, WHEN THE RATE OF MAN HOURS CHARGED B Y THE ASSESSEE FOR THE PURPOSE OF RENDERING THE SERVICES OF SOFTWARE DEVEL OPMENT IF TREATED AS SEPARATE PRICE THEN THESE NUMBER OF TRANSACTIONS AR E SO CLOSELY LINKED OR CONTINUOUS IN NATURE AND ARISING FROM THE CONTINUOUS TRANSACTION OF SUPPLY OF SERVICES THAT THE PRICE OF ONE TRANSACTION CANNOT B E DETERMINED INDEPENDENTLY WITHOUT HAVING BEEN INFLUENCED ON THE PRICE OF THE OTHER CLOSELY LINKED TRANSACTION OR BEING INFLUENCED BY THE PRICE OF OTHE R CLOSELY LINKED TRANSACTION. MELSTAR INFORMATION 7 | P A G E THEREFORE, THE PORTFOLIO APPROACH IS TO BE TAKEN IN TO ACCOUNT IN THE COMPARABILITY ANALYSIS. THE AGGREGATION AND CLUBBIN G OF CLOSELY LINKED TRANSACTIONS ARE PERMITTED UNDER RULE 10A(B) AS WEL L AS IT IS ALSO SUPPORTED BY OECD TRANSFER PRICING GUIDELINES. THEREFORE, IN ORDER TO EXAMINE WHETHER ALL TRANSACTIONS ARE CLOSELY LINKED OR CONTINUOUS, IT IS TO BE CONSIDERED THAT ONE TRANSACTION IS FOLLOW ON OF THE EARLIER TRANSACTION AND EACH SUBSEQUENT TRANSACTION IS CARRIED OUT IS DEPENDENT WHOLLY OR SUBS TANTIALLY ON THE EARLIER TRANSACTION. IN SUCH A CASE, THE TRANSACTIONS ARE C ONSIDERED TOBE CLOSELY LINKED OR CONTINUOUS AND, THEREFORE, FOR THE PURPOSE OF VA LUATION THESE HAS TO BE AGGREGATED. ACCORDINGLY, WHEN THE OVERALL PRICE CHAR GED FOR A PARTICULAR SERVICE IS THE FINAL PRICE OF A SERVICE AND THE SAME HAS TO BE COMPARED WITH OVER ALL PRICE CHARGED FOR THE SAME SERVICES PROVIDED TO UN RELATED PARTY HAS TO BE COMPARED. THE VARIOUS RATES OF MAN HOURS APPLIED B Y THE ASSESSEE FOR THE PURPOSE OF PRICE CHARGED FOR THE SERVICES RENDERED TO THE AE AND NON AE CANNOT REMAIN UNINFLUENCED BY EACH OTHER IN DETERMIN ING THE PRICE AND MARGIN INVOLVED IN THE TRANSACTION BECAUSE THE FINAL PRODUC T BEING THE SOFTWARE DEVELOPMENT SERVICE IS POSSIBLE ONLY BY INTEGRATED CO NTRIBUTION OF THE ENTIRE TEAM. THEREFORE, SUCH TRANSACTIONS CAN BE SAID TO BE CLOSELY LINKED TRANSACTION. THE CASE OF THE ASSESSEE IS AT BETTER FOOTING THAN THE VARIOUS CLOSELY LINKED AND CONTINUOUS NATURE OF TRANSACTIONS BECAUSE THE MAN H OUR RATES ARE ONLY THE BAIS OF PRICE CHARGED BY THE ASSESSEE AND NOT THE INDEPENDE NT PRICE FOR AN INDEPENDENT SERVICE. ACCORDINGLY, WE ARE OF THE VIEW THAT THE PRICE CHARGED BY THE ASSESSEE FOR RENDERING THE FINAL COMPOSITE WORK OF SOFTWARE DEVELOPMENT SERVICE IS THE AGGREGATE PRICE AND CANNOT BE BIFURC ATED ON THE BASIS OF THE MAN HOUR RATE OF EACH MEMBER OF THE TEAM. AS WE HAVE AL READY OBSERVED THAT THE ASSESSEE IS PROVIDING THE SOFTWARE DEVELOPMENT SERVI CES AND NOT THE MAN HOUR TO ITS CLIENTS, THEREORE, IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE AS WELL MELSTAR INFORMATION 8 | P A G E AS THE ABOVE DISCUSSION, WE SET ASIDE THE ORDERS OF AU THORITIES BELOW AND DIRECT THE ASSESSING OFFICER/TPO TO RECOMPUTED AND DETERMINE THE ALP IN RESPECT OF SOFTWARE DEVELOPMENT SERVICES BY TAKING INTO CONSIDE RATION THE AGGREGATED PRICE CHARGED BY THE ASSESSEE FROM AE AS WELL AS NON AE AND NOT BY SELECTING THE INDEPENDENT MAN HOUR RATE BASED ON WHICH, THE ASSE SSEE CHARGED PRICE FROM AE AND NON AE. 3. GROUND NO. 9 IS REGARDING DISALLOWANCE OF BAD DEBTS W RITTEN OFF ON ACCOUNT OF NON RECEIPT OF TDS CERTIFICATE FROM DEBTO RS. THE ASSESSEE HAS WRITTEN OFF A SUM OF RS. 1,31,545/- ON ACCOUNT OF TDS DEDUCTED BY THE DEBTORS BUT THE TDS CERTIFICATE WAS NOT ISSUED TO THE ASSESS EE. THE ASSESSING OFFICER HAS DISALLOWED THE CLAIM OF THE ASSESSEE. THE ASSESS EE CHALLENGED THE ACTION OF ASSESSING OFFICER BEFORE CIT(A) BUT COULD NOT SUCCEE D. BOTH THE ASSESSING OFFICER AND CIT(A) HAS DISALLOWED THE CLAIM OF THE AS SESSEE ON THE GROUND THAT THE ASSESSEE HAS NOT SATISFIED THE REQUIREMENT OF SE CTION 36(1)(VII). 3.1 BEFORE US, THE LD. AUTHORIZED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THIS AMOUNT REPRESENTS THE TDS DEDUCTE D BY THE DEBTORS BUT THE ASSESSEE HAS NOT RECEIVED THE TDS CERTIFICATE AN D, THEREFORE, TO THE EXTENT OF THIS AMOUNT, THE ASSESSEE HAS ALREADY OFFERED TO TAX WITHOUT GETTING THE BENEFIT OF TDS CREDIT. ACCORDINGLY, THE ASSESSEE WRITTEN OF F THIS AMOUNT FOR WANT OF RECEIPT OF TDS CERTIFICATE FROM THE DEBTORS. IN SUP PORT OF HIS CONTENTION, HE HAS RELIED UPON THE DECISION OF DELHI BENCHES OF THIS TRI BUNAL IN THE CASE OF ACIT VS. KELLY SERVICES INDIA PVT. LTD. (34 CCH 342) . HE HAS ALSO RELIED UPON THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF TRF LTD. VS. CIT (323 ITR 397). MELSTAR INFORMATION 9 | P A G E 3.2 ON THE OTHER HAND, THE LD. DR HAS SUBMITTED THAT THIS IS NOT AN AMOUNT RECEIVABLE FROM THE DEBTORS AND THERE IS NOT QUESTION OF THE DEBTS GONE BAD OR BECOME IRRECOVERABLE. THEREFORE, IN THE ABSENCE OF THE AMOUNT REPRESENTS DEBT OR UNRECOVERABLE , THE SAME CANNOT BE ALLOWED AS BAD DEBTS AS PER SECTION 36(1)(VII) OF THE INCOME TAX ACT. HE HAS RELIED UPON THE ORDERS OF AUTHORITIES BELOW. 3.3 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE THAT THE ASSESSEE HAS AL READY OFFERED THE AMOUNT TO TAX BEING PART OF SALES TURNOVER. HOWEVER, THE TDS DEDUCTED BY THE DEBTORS APPEARS TO HAVE NOT BEEN DEPOSITED IN THE GOVERNMENT ACCOUNT AND, THEREFORE, THE DEBTORS HAS NOT ISSUED TDS CERTIFICATE TO THE ASS ESSEE. THE ASSESSEE HAS ALREADY PAID TAX ON THIS ACCOUNT WITHOUT HAVING THE REAL INCOME AND WITHOUT RECEIVING THE TDS CERTIFICATE AGAINST THE SAID DEDUCT ION OF THE AMOUNT BY THE DEBTORS. THE NON REALIZATION OF THE SUM REPRESENTED B Y THE TDS RECEIVABLE IS CLEARLY A LOSS SUFFERED IN THE COURSE OF BUSINESS AN D, THEREFORE, IS AN ALLOWABLE CLAIM OF THE ASSESSEE. AN IDENTICAL ISSUE HAS BEEN CONSIDERED BY THE DELHI BENCHES OF THIS TRIBUNAL IN THE CASE OF ACIT VS. KELLY SERVICES INDIA PVT. LTD. (SUPRA) IN PARA 16 AS UNDER:- PUNJAB AND HARYANA HIGH COURT IN THE CASE OF CIT V S. SHREYANS INDUSTRIES LIMITED, OBSERVED THAT ASSESSEE WAS NOT ALLOWED CREDIT FOR T HE TDS FOR WANT OF TDS CERTIFICATES AND IN SPITE OF BEST EFFORTS, THE ASSE SSEE COULD NOT OBTAIN TDS CERTIFICATES. THUS IT WAS A CASE OF LOSS WHICH HAS ARISEN TO THE ASSESSEE DURING THE COURSE OF ITS BUSINESS. THE ISSUE INVOLVED IN INSTANT CASE HAVING THE SIMILAR FACTS AS INVOLVED IN THE CASE OF CIT VS. SHREYANS INDUSTRIES LIMITED. ORDER PASSED BY CIT(A) UPHELD. INDIAN MELSTAR INFORMATION 10 | P A G E ALUMINIUM CO. LTD. VS. CIT 79 ITR 514 (SC), NOT APP LICABLE. CIT VS. SHREYANS INDUSTRIES LIMITED, APPLIED. 3.4 FOLLOWING THE DECISION OF CO-ORDINATE BENCHES OF THIS TRIBUNAL, ACIT VS. KELLY SERVICES INDIA PVT. LTD. (SUPRA), WE ALLOW THE CLAIM OF THE ASSESSEE. 4. GROUND NO. 10 & 11 IS REGARDING DISALLOWANCE OF STAFF ADVANCES WRITTEN OFF. 4.1 WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVE A S WELL AS LD. DR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE LD. AU THORIZED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEE HAS WRITTEN OFF THE UNRECOVERABLE ADVANCES GIVEN TO STAFF/EMPLOYEES OF T HE ASSESSEE. IN SUPPORT OF HIS CONTENTION, HE HAS RELIED UPON THE DECISION OF T HIS TRIBUNAL IN THE CASE OF CIBA INDIA LTD. VS. DDIT (INTERNATIONAL TAXATION) 1 47 ITD 580 (MUMBAI) AS WELL AS IN THE CASE OF ESSAR OIL LIMITED VS. ADDITIONAL CIT (37 CCH 048) AND SUBMITTED THAT THE ISSUE IS COVERED IN FAVOUR O F THE ASSESSEE BY THE DECISIONS OF THIS TRIBUNAL. 4.2 ON THE OTHER HAND, THE LD. DR HAS OBJECTED TO THE CLAIM OF THE ASSESSEE ON THE GROUND THAT THE ADVANCE GIVEN TO THE EMPLOYEES C ANNOT BE TREATED AS BAD DEBTS AS IT CANNOT BE SAID TO BE UNRECOVERABLE DEBT. H E HAS RELIED UPON THE ORDERS OF AUTHORITIES BELOW. MELSTAR INFORMATION 11 | P A G E 4.3 HAVING CONSIDERED THE RIVAL SUBMISSIONS AS WELL A S RELEVANT MATERIAL ON RECORD, WE ARE OF THE VIEW THAT IF THE ADVANCES WERE GIVEN BY THE ASSESSEE UNDER SOME SPECIFIC SCHEME OR FOR SPECIFIC PURPOSES AS PER THE POLICY OF THE ASSESSEE AND, THEREAFTER, IF THE RECIPIENT EMPLOYEE HAS LEFT THE SERVICE OF THE ASSESSEE THEN THE SAID ADVANCE WHICH BECOMES IRRECOV ERABLE AND CONSEQUENTLY IS AN ALLOWABLE CLAIM. SINCE THE FACT ON THIS POINT HAS NEITHER BEEN RECORDED NOR DISCUSSED BY THE AUTHORITIES BELOW, THEREFORE, THIS I SSUE REQUIRES PROPER VERIFICATION AND EXAMINATION. ACCORDINGLY, WE SET A SIDE THIS ISSUE TO THE RECORD OF ASSESSING OFFICER TO VERIFY WHETHER THE ADVANCES IN QUESTION WERE GIVEN TO THE STAFF WHO HAS ALREADY LEFT THE SERVICE OF THE AS SESSEE AND FURTHER WHETHER THE CLAIM OF THE ASSESSEE IS ALLOWABLE IN VIEW OF T HE DECISIONS RELIED UPON BY THE ASSESSEE. NEEDLESS TO SAY THE ASSESSING OFFICER SHOULD GIVE A PROPER OPPORTUNITY OF HEARING TO THE ASSESSEE. ALTERNATIVE LY, THE ASSESSEE HAS ALSO SUBMITTED THAT EVEN IF THE CLAIM OF THE ASSESSEE IS DISALLOWED THEN THE SAID AMOUNT IS ELIGIBLE FOR DEDUCTION U/S 10A. SINCE THIS ISSUE HAS NOT BEEN EXAMINED BY THE AUTHORITIES BELOW, THEREFORE, THE AL TERNATIVE PLEA OF THE ASSESSEE SHALL ALSO BE CONSIDERED AND EXAMINED BY THE ASSESSING OFFICER. 5 GROUND NO. 12 IS REGARDING THE DISALLOWANCE OF ADVAN CES GIVEN TO AUSTRALIAN BRANCH BY US BRANCH. 5.1 THE ASSESSING OFFICER DISALLOWED A SUM OF RS. 7 ,20,886/- BEING THE AMOUNT WRITTEN OFF OUT OF AMOUNT ADVANCED TO AUSTRAL IA SUBSIDIARY COMPANY OF THE ASSESSEE. THE ASSESSING OFFICER MADE DISALLOWA NCE ON ACCOUNT OF CAPITAL ADVANCE AND NOT ON ACCOUNT OF ANY TRADE ACTIVITY. MELSTAR INFORMATION 12 | P A G E 5.2 THE ASSESSEE CHALLENGED THE ACTION OF ASSESSING OFFICER BEFORE CIT(A) AND SUBMITTED THAT THE AMOUNT WRITTEN OFF PERTAINS T O THE AUSTRALIAN SUBSIDIARY COMPANY OF THE ASSESSEE WHO WAS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND SOFTWARE SERVICES SIMILAR TO THE BUSINESS OF THE ASSESSEE. THE PURPOSE OF THE ADVANCE WAS TO MEET WOR KING CAPITAL NEEDS. HOWEVER, DUE TO LOSSES INCURRED BY THE SAID SUBSIDIARY COMPANY, THERE WAS NO HOPE FOR RECOVERING THE SAID AMOUNT AND HENCE THE ASS ESSEE WRITTEN OFF THE SAME. CIT(A) DID NOT ACCEPT THE CONTENTION OF THE ASS ESSEE AND CONFIRMED THE DISALLOWANCE. 5.3 BEFORE US, THE LD. AUTHORIZED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THE ADVANCE WAS GIVEN TO THE 100% SUBS IDIARY OF THE ASSESSEE. DUE TO LOSS INCURRED BY THE SUBSIDIARY, THE BUSINESS WAS CLOSED AND, THEREFORE, THE ADVANCE AMOUNT WAS WRITTEN OFF BY THE ASSESSEE. HE HAS FURTHER SUBMITTED THAT THE SAID ADVANCE WAS GIVEN IN FURTHERANCE OF ASS ESSEES OWN BUSINESS AND OUT OF COMMERCIAL EXPEDIENCY, THE WRITTEN OFF ADVANCE TO THE SUBSIDIARY WAS INCURRED IN THE ORDINARY COURSE OF BUSINESS AND, THE REFORE, IS AN ALLOWABLE BUSINESS EXPENDITURE U/S 37 OF THE ACT. IN SUPPORT O F HIS CONTENTION, HE HAS RELIED UPON THE FOLLOWING DECISIONS:- (I) DCIT VS. APPOLLO INTERNATIONAL (46 CCH 302) (II) DCIT VS ALL INDIA REPORTERS PVT. LTD. (40 CCH 163) (III) ITW SIGNODE INDIA LTD. VS. CIT (110 TTJ (HYD) 170 (IV) CIT VS. GILLANDERS ARBUTNOT & CO. LTD. (1981) 2 4 CTR (CAL) 339 MELSTAR INFORMATION 13 | P A G E 5.4 ON THE OTHER HAND, THE LD. DR HAS RELIED UPON THE ORDERS OF AUTHORITIES BELOW AND SUBMITTED THAT THE AMOUNT IN QUESTION WAS NOT A TRADING ADVANCE BUT IT WAS IN THE NATURE OF CAPITAL OF THE SUBSIDIA RY, THEREFORE, THE NON RECOVERY OF THE SAID AMOUNT CANNOT BE SAID TO BE AN ALLOWABLE EXPENSE. THE AMOUNT WAS GIVEN TO THE SUBSIDIARY OF THE ASSESSEE AND CANNOT BE TREATED AS NON RECOVERABLE. 5.5 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD. THE ASSESSEE CLAIMED TO HAVE GIVEN A LOAN OF RS. 7,20,886/- TO ITS AUSTRALIA BASED SUBSIDIARY. THE ASSESSEE CLAIMED THAT THE SAID LOAN WAS GIVEN FOR MEETING THE WORKING CAPITAL REQUIREMENT OF THE ASSESSEE SUBSIDIARY WHICH WAS ALSO ENGAGED IN THE SAME BUSINESS OF SOFTWARE DEV ELOPMENT AS OF THE ASSESSEE. THE SUBSIDIARY HAS SUFFERED A HUGE LOSS AND CONSEQUENTLY THE BUSINESS WAS CLOSED. ACCORDINGLY, THE ASSESSEE WRITT EN OFF THE AMOUNT AND CLAIMED AS BAD DEBT. WE FIND THAT THE FACTS OF THE SA ID LOAN WAS GIVEN BY THE ASSESSEE TO MEET THE REQUIREMENT OF WORKING CAPITAL OF THE SUBSIDIARY AND THE SUBSIDIARY WAS ENGAGED IN THE SAME BUSINESS AS OF THE ASSESSEE HAS NOT BEEN CONSIDERED AND DISCUSSED BY THE AUTHORITIES BELOW. THE I SSUE HAS BEEN CONSIDERED BY THE VARIOUS DECISIONS AS RELIED UPON BY T HE ASSESSEE AND FOUND TO BE AN ALLOWABLE CLAIM WHEN THE AMOUNT WAS GIVEN FOR EXPENSES AND WORKING CAPITAL OF THE SUBSIDIARY WHICH WAS CONSIDERED TO BE FOR COMMERCIAL EXPEDIENCY OF THE ASSESSEES BUSINESS. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO VERIFY THE FACT AS CLAIMED BY THE ASSESSE E THAT THE AMOUNT IN QUESTION WAS ADVANCED TO THE SUBSIDIARY OF THE ASSESSEE FOR M EETING THE WORKING CAPITAL REQUIREMENT AND THE SUBSIDIARY WAS ALSO ENGAGED IN T HE SAME BUSINESS AND MELSTAR INFORMATION 14 | P A G E THEN DECIDE THE MATTER IN THE LIGHT OF VARIOUS DECISI ONS AS RELIED UPON BY THE ASSESSEE. 6. FOR THE A.Y. 2004-05, THE ASSESSEE HAS RAISED FOL LOWING CONCISE GROUNDS:- CONCISE GROUNDS OF APPEAL 1. LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERR ED IN CONFIRMING THE ADDITION OF RS . 87,37,753/- TO THE RETURNED INCOME MADE BY LEARNED ASSESSING OFFICER, ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IN PURSU ANCE OF ORDER UNDER SECTION 92CA(3) OF THE ACT PASSED BY THE TRANSFER PRICING O FFICER ( TPO ). APPELLANT SUBMITS THAT IN VIEW OF THE FACTS AND CIR CUMSTANCES OF THE CASE AS WELL AS IN LAW, THE ABOVE ADDITIONS MADE TO THE TOTAL INCOM E-OF THE APPELLANT OUGHT TO BE DELETED. 2. LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERR ED IN CONFIRMING THE ORDER PASSED BY LEARNED ASSESSING OFFICER / TRANSFER PRIC ING OFFICER IN MAKING AN ADJUSTMENT OF RS 68,31,502/- AS NOTIONAL INTEREST R ECEIVABLE ON THE INTEREST FREE ADVANCES GRANTED TO ASSOCIATED ENTERPRISES BY THE A PPELLANT COMPANY WITHOUT APPRECIATING THE FACTS AND CIRCUMSTANCES OF THE CAS E IN THEIR CORRECT PERSPECTIVE. APPELLANT SUBMITS THAT IN ABOVE FACTS AND CIRCUMSTA NCES OF THE CASE AS WELL AS IN LAW, SUCH ADJUSTMENTS ARE BAD IN LAW AND DESERVES T O BE DELETED. 3. LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERR ED IN CONFIRMING THE ORDER PASSED BY LEARNED ASSESSING OFFICER / TRANSFER PRIC ING OFFICER IN MAKING AN ADJUSTMENT OF RS 6,32,121/- AS NOTIONAL INTEREST FO R DELAY IN RECOVERY OF DUES FOR SOFTWARE DEVELOPMENT SERVICES PROVIDED TO ASSOCIATE D ENTERPRISES BY THE APPELLANT COMPANY WITHOUT APPRECIATING THE FACTS AND CIRCUMST ANCES OF THE CASE IN THEIR CORRECT PERSPECTIVE. APPELLANT SUBMITS THAT IN ABOVE FACTS AND CIRCUMSTA NCES OF THE CASE AS WELL AS IN LAW, SUCH ADJUSTMENTS ARE BAD IN LAW AND DESERVES T O BE DELETED. MELSTAR INFORMATION 15 | P A G E 4. LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERR ED IN CONFIRMING THE ADDITION OF RS 12,74,130/- MADE IN THE ORDER PASSED BY LEARN ED ASSESSING OFFICER / TRANSFER PRICING OFFICER ON ACCOUNT OF SERVICES PROVIDED TO AE ALLEGEDLY AT A LOWER RATE WITHOUT APPRECIATING THE FACT THAT THE ECONOMIC ANA LYSIS OF THE INTERNATIONAL TRANSACTION CARRIED OUT BY THE APPELLANT COMPANY IS AFTER CONSIDERING THE SOFTWARE DEVELOPMENT SERVICES PROVIDED TO ASSOCIATED ENTERPR ISE AND HENCE THE AMOUNT CHARGED BY THE APPELLANT COMPANY IS AT ARMS LENGTH AND THEREFORE NO ADJUSTMENTS DECLARED TO THE VALUE OF INTERNATIONAL TRANSACTION DECLARED IS REQUIRED. APPELLANT SUBMITS THAT IN VIEW OF THE FACTS AND CIR CUMSTANCES OF THE CASE AS WELL AS IN LAW, SUCH ADJUSTMENTS MADE TO THE VALUE OF INTER NATIONAL TRANSACTION OUGHT TO BE DELETED. 5. LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERR ED IN CONFIRMING THE ORDER PASSED BY LEARNED ASSESSING OFFICER / TRANSFER PRIC ING OFFICER IN APPLYING THE COMPARABLE UNCONTROLLED PRICE METHOD WITHOUT APPREC IATING THE FACTS OF THE CASE. LEARNED ASSESSING OFFICER / TRANSFER PRICING OFFICE R HAS ERRED IN REJECTING TNNM METHOD AS THE MOST APPROPRIATE METHOD ADOPTED BY TH E APPELLANT. APPELLANT SUBMITS THAT IN VIEW OF THE FACTS AND CIR CUMSTANCES OF THE CASE AS WELL AS IN LAW, TNMM OUGHT TO BE THE MOST APPROPRIATE METHO D AS ADOPTED BY APPELLANT. 6.1 GROUND NO. 1 IS GENERAL IN NATURE AND DOES NOT REQ UIRE ANY SPECIFIC FINDING OR ADJUDICATION. 6.2 GROUND NO. 2 IS REGARDING TRANSFER PRICING ADJUS TMENT ON ACCOUNT OF NOTIONAL INTEREST ON FREE ADVANCE GRANTED TO THE AE . 6.3 WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVE A S WELL AS LD. DR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE ASSESS EE HAS GIVEN LOAN TO ITS SUBSIDIARY COMPANY AND HAS NOT CHARGED INTEREST ON TH E SAME. THE ASSESSEE HAS ALSO NOT REPORTED THE SAID TRANSACTION AS INTERN ATIONAL TRANSACTION. THE MELSTAR INFORMATION 16 | P A G E TPO HAS CONSIDERED THE CUP AS THE MOST APPROPRIATE METHOD AND DETERMINED THE ARMS LENGTH INTEREST AT 10% PER ANNUM ON THE A DVANCES GIVEN TO THE US BASED AE. 6.4 THE ASSESSEE CHALLENGED THE ACTION OF ASSESSING OFFICER/TPO BEFORE THE CIT(A). THE CIT(A) MODIFIED THE ARMS LENGTH INTERES T ON THE ADVANCES GIVEN TO THE AE AND DIRECTED THE TPO TO ADOPT THE RATE OF INTE REST AT 6 MONTHS LIBOR+3.5% TO THE LOAN GIVEN TO THE AE. 6.5 HAVING CONSIDERED THE RIVAL SUBMISSIONS AS WELL A S RELEVANT MATERIAL ON RECORD, AT THE OUTSET, WE NOTE THAT THIS ISSUE HAS BEEN CONSIDERED BY THE TRIBUNAL IN THE NUMBER OF DECISIONS WHERE THE ARMS LENGTH RATE OF INTEREST IS CONSIDERED AS LIBOR +2%. IN THE CASE OF AURIONPRO SO LUTIONS LTD. VS. ADDITIONAL CIT IN ITA NO. 7872/MUM/2011, THE TRIBUNA L HAS HELD THAT THE LOAN GIVEN TO THE AE IS AN INTERNATIONAL TRANSACTION. HO WEVER, BY FOLLOWING THE VARIOUS JUDGMENTS OF THE TRIBUNAL ON THE ISSUE OF RA TE OF INTEREST BEING ARMS LENGTH INTEREST, THE TRIBUNAL HAS HELD IN PARA 8.13 AS UNDER:- 8.13 THOUGH IN PRINCIPLE WE DO CONCUR WITH THE VIE W OF DRP ON THIS ISSUE, HOWEVER, SINCE THE ISSUE OF LIBOR HAS BEEN CONSIDERED AND DE CIDED BY THE TRIBUNAL IN VARIOUS CASES AS RELIED UPON BY THE ASSESSEE (SUPRA); THERE FORE, TO MAINTAIN THE RULE OF CONSISTENCY, WE FOLLOW THE DECISION OF THE COORDINA TE BENCHES OF THIS TRIBUNAL, AND ACCEPT LIBOR FOR BENCHMARKING INTEREST ON INTEREST FREE LOANS TO AES. SINCE THE LIBOR IS A RATE APPLICABLE IN THE TRANSACTIONS BETW EEN THE BANKS AND FURTHER THE LOANS ADVANCED BY THE BANK TO CLIENTS ARE SECURE BY SECURITY AND GUARANTEE; THEREFORE, A LOAN WHICH HAS BEEN ADVANCED WITHOUT A NY SECURITY OR GUARANTEE AS IN THE CASE OF THE ASSESSEE HAS TO BE BENCHMARK BY TAK ING THE ARMS LENGTH INTEREST RATE AS LIBOR PLUS. THOUGH THE TPO TOOK ALP ASS LIB OR + 3%; HOWEVER, IN OUR VIEW, THE APPROPRIATE RATE WOULD BE LIBOR PLUS 2%. WE ACC ORDINGLY, DIRECT THE AO/TPO TO DETERMINE THE ARMS LENGTH INTEREST BY CONSIDERING THE LIBOR PLUS 2% ON THE MELSTAR INFORMATION 17 | P A G E MONTHLY CLOSING BALANCE OF ADVANCES DURING THE FINA NCIAL YEAR RELEVANT TO THE AY UNDER CONSIDERATION. 6.6 ACCORDINGLY, WE MODIFY THE ORDER OF CIT(A) AND DIR ECT THE ASSESSING OFFICER/TPO TO CONSIDER THE ARMS LENGTH RATE AS LIB OR +2%. 7. GROUND NO. 3 IS REGARDING THE NOTIONAL INTEREST F OR DELAY IN RECOVERY OF DUES FOR SOFTWARE DEVELOPMENT SERVICES PROVIDED TO AE. 7.1 AT THE TIME OF HEARING THE LD. AUTHORIZED REPRESE NTATIVE OF THE ASSESSEE SUBMITTED THAT THIS ISSUE RAISED IN THE GROUND NO. 3 H AS BEEN ALLOWED BY THE CIT(A) AND, THEREFORE, THE ASSESSEE DOES NOT PRESS GR OUND NO. 3 AND THE SAME MAY BE DISMISSED AS WITHDRAWN. 7.2 IN VIEW OF THE FACT THAT THIS GROUND DOES NOT ARI SE FROM THE IMPUGNED ORDER OF CIT(A) AS THE ISSUE WAS DECIDED IN FAVOUR OF T HE ASSESSEE, ACCORDINGLY, THIS GROUND OF THE ASSESSEES APPEAL IS DISMISSED AS WITHDRAWN. 8. GROUND NO. 4 AND 5 IS REGARDING ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMEN IN RESPECT OF SOFTWARE DEVELOPMENT SERVICE S PROVIDED TO AE. THE ISSUE RAISED IN GROUND NO. 4 AND 5 IS IDENTICAL TO THE ISSUE RAISED IN GROUND NO. 1 TO 8 FOR A.Y. 2003-04. ACCORDINGLY, THIS ISSUE IS SE T ASIDE TO THE RECORD OF ASSESSING OFFICER/TPO WITH THE SAME DIRECTIONS AS GI VEN FOR A.Y. 2003-04. MELSTAR INFORMATION 18 | P A G E 8.1 THE ASSESSEE HAS ALSO RAISED COMMON ADDITIONAL GR OUNDS FOR BOTH A.Y.S WHICH READS AS UNDER:- LD. COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFIRMING THE ORDER PASSED BY LD. ASSESSING OFFICER/TRANSFER PRICING OFFICER IN N OT GRANTING BENEFIT OF VARIATION OF 5% AS PROVIDED IN SECOND PROVISO OF SECTION 92C OF THE ACT. APPELLANT IS ELIGIBLE FOR VARIATION UPTO 5% AS PROV IDED IN SECOND PROVISO TO SECTION 92C OF THE ACT. 8.2 SINCE THE ADDITIONAL GROUND RAISED BY THE ASSESSEE IS PURELY LEGAL IN NATURE AND FURTHER THE ISSUE OF TRANSFER PRICING ADJ USTMENT HAS BEEN SET ASIDE TO THE RECORD OF ASSESSING OFFICER FOR DETERMINATION OF ALP, ACCORDINGLY, THE ADDITIONAL GROUND RAISED BY THE ASSESSEE FOR BOTH THE A.YS IS SET ASIDE TO THE RECORD OF ASSESSING OFFICER/TPO FOR CONSIDERATION AND FOR DECIDING AS PER LAW. 9. THE REVENUE HAS RAISED COMMON GROUNDS IN BOTH THE APPEALS. THE GROUND RAISED FOR A.Y. 2003-04 ARE AS UNDER:- GROUNDS OF APPEAL 'ON THE FACTS AND IN THE CIRCUMSTANCE OF THE CASE A ND IN LAW, THE LEARNED CIT(A) ERRED IN DIRECTING THE AO. TO REDUCE RS.5,72,02,717 / - INCURRED IN FOREIGN CURRENCY FOR THE PURPOSE OF TECHNICAL CONSULTANCY SERVICES A ND RS.7,53,197/ - FOR COMMUNICATION EXPENSES, FROM THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/ S.10A OF THE ACT, WITHOUT APPRECIATING THAT THERE IS NO SUCH PRESCRIPTION IN SECTION LOA' . 2. 'ON THE FACTS AND IN THE CIRCUMSTANCE OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN DIRECTING THE AO. TO REDUCE RS.5,72,02,717 / - INCURRED IN FOREIGN CURRENCY FOR THE PURPOSE OF TECHNICAL CONSULTANCY SERVICES A ND RS.7,53,197/ - FOR COMMUNICATION EXPENSES, FROM THE TOTAL TURN OVER FO R THE PURPOSE OF COMPUTATION OF MELSTAR INFORMATION 19 | P A G E DEDUCTION U/S. LOA OF THE ACT, WITHOUT APPRECIATING THAT THE DEPARTMENT HAS NOT ACCEPTED THE DECISION OF THE JURISDICTIONAL HIGH CO URT ON THE SAME ISSUE IN THE CASE OF CIT VS. GEM PLUS JEWELLERY INDIA P LTD. 330 ITR 175 AND AN SLP HAS BEEN FILED'. 9.1 THE ONLY ISSUE ARISES FOR OUR CONSIDERATION AND A DJUDICATION IS REGARDING THE AMOUNT OF EXPENSES INCURRED IN FOREIGN CURRENCY FOR TECHNICAL SERVICES AND COMMUNICATION EXPENSES EXCLUDED FROM EXPORT TURNOVER WHICH WERE ALSO DIRECTED BY THE CIT(A) TO BE EXCLUDED FROM TOTAL TURNO VER FOR THE PURPOSE OF COMPUTING THE TAX U/S 10A. 9.2 WE HAVE HEARD THE LD. DR AS WELL AS LD. AUTHORIZE D REPRESENTATIVE AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. AT THE O UTSET, WE NOTE THAT THE CIT(A) HAS DECIDED THIS ISSUE BY FOLLOWING THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. GEM JEWELLERY INDIA LTD. (HC) (BOMBAY) (2011) 330 ITR 175 . WE FURTHER NOTE THAT AN IDENTICAL ISSUE HAS BEEN CONSIDERED AND DECIDED BY THE CHENNAI SPECIAL BENCH IN THE CASE OF ITO VS. SAK SOFT LTD. (2009) 121 TTJ (CHENNAI) (SB) 865 , WHEREIN THE SPECIAL BENCH HAS DECIDED THE ISSUE BY FOLLOWING THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. LAKSMI MACHINE WORKS (2007) 210 CTR (SC) 1. IN A RECENT DECISION IN THE CASE OF CIT VS. GEM JEW ELLERY INDIA LTD (SUPRA), THE HONBLE HIGH COURT HAS HELD IN PARA 6 TO 8 AS UNDER:- 6. THE EXPORT TURNOVER, IN THE NUMERATOR MUST HAVE THE SAME MEANING AS THE EXPORT TURNOVER WHICH IS A CONSTITUENT ELEMENT OF T HE TOTAL TURNOVER IN THE DENOMINATOR. THE LEGISLATURE HAS PROVIDED A DEFINIT ION OF THE EXPRESSION 'EXPORT TURNOVER' IN EXPLANATION (2) TO SECTION 10A BY WHIC H THE EXPRESSION IS DEFINED TO MEAN THE CONSIDERATION IN RESPECT OF EXPORT BY THE UNDERTAKING OF ARTICLES, THINGS OR COMPUTER SOFTWARE RECEIVED IN OR BROUGHT INTO INDIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE BUT SO AS NOT TO INCLUDE INTER ALI A FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY O F THE ARTICLES, THINGS OR SOFTWARE MELSTAR INFORMATION 20 | P A G E OUTSIDE INDIA. THEREFORE IN COMPUTING THE EXPORT TU RNOVER THE LEGISLATURE HAS MADE A SPECIFIC EXCLUSION OF FREIGHT AND INSURANCE CHARG ES. 7. THE SUBMISSION WHICH HAS BEEN URGED ON BEHALF OF THE REVENUE IS THAT WHILE FREIGHT AND INSURANCE CHARGES ARE LIABLE TO BE EXCL UDED IN COMPUTING EXPORT TURNOVER, A SIMILAR EXCLUSION HAS NOT BEEN PROVIDED IN REGARD TO TOTAL TURNOVER. THE SUBMISSION OF THE REVENUE, HOWEVER, MISSES THE POIN T THAT THE EXPRESSION 'TOTAL TURNOVER' HAS NOT BEEN DEFINED AT ALL BY PARLIAMENT FOR THE PURPOSES OF SECTION 10A. HOWEVER, THE EXPRESSION 'EXPORT TURNOVER' HAS BEEN DEFINED. THE DEFINITION OF 'EXPORT TURNOVER' EXCLUDES FREIGHT AND INSURANCE. S INCE EXPORT TURNOVER HAS BEEN DEFINED BY PARLIA MENT AND THERE IS A SPECIFIC EXCL USION OF FREIGHT AND INSURANCE, THE EXPRESSION 'EXPORT TURNOVER' CANNOT HAVE A DIFFEREN T MEANING WHEN IT FORMS A CONSTITUENT PART OF THE TOTAL TURNOVER FOR THE PURP OSES OF THE APPLICATION OF THE FORMULA. UNDOUBTEDLY, IT WAS OPEN TO PARLIAMENT TO MAKE A PROVISION TO THE CONTRARY. HOWEVER, NO SUCH PROVISION HAVING BEEN MA DE, THE PRINCIPLE WHICH HAS BEEN ENUNCIATED EARLIER MUST PREVAIL AS A MATTER OF CORRECT STATUTORY INTERPRETATION. ANY OTHER INTERPRETATION WOULD LEAD TO AN ABSURDITY . IF THE CONTENTION OF THE REVENUE WERE TO BE ACCEPTED, THE SAME EXPRESSION, VIZ., 'EX PORT TURNOVER' WOULD HAVE A DIFFERENT CONNOTATION IN THE APPLICATION OF THE SAM E FORMULA. THE SUBMISSION OF THE REVENUE WOULD LEAD TO A SITUATION WHERE FREIGHT AND INSURANCE, THOUGH IT HAS BEEN SPECIFICALLY EXCLUDED FROM 'EXPORT TURNOVER' FOR TH E PURPOSES OF THE NUMERATOR WOULD BE BROUGHT IN AS PART OF THE 'EXPORT TURNOVER ' WHEN IT FORMS AN ELEMENT OF THE TOTAL TURNOVER AS A DENOMINATOR IN THE FORMULA. A CONSTRUCTION OF A STATUTORY PROVISION WHICH WOULD LEAD TO AN ABSURDITY MUST BE AVOIDED. 8. THE VIEW WHICH WE HAVE TAKEN IS CONSISTENT WITH THE VIEW WHICH WAS TAKEN, THOUGH IN THE CONTEXT OF SECTION 80HHC, BY A DIVISI ON BENCH OF THIS COURT IN CIT VS. SUDARSHAN CHEMICALS INDUSTRIES LTD. (2000) 245 ITR 769 1. IN SUDARSHAN CHEMICALS INDUSTRIES LTD.'S CASE (SUPRA) THE QUESTION OF LAW THAT FELL FOR DECISION WAS WHETHER SALES TAX AND EXCISE DUTY OUGHT TO BE INCLUDED IN T HE TOTAL TURNOVER WHILE WORKING OUT THE DEDUCTION UNDER SECTION 80HHC. FOR THE PURP OSES OF SECTION 80HHC, CLAUSE (B) OF SUBSECTION (3) PROVIDES THAT THE PROFITS DER IVED FROM EXPORT SHALL BE COMPUTED IN TERMS OF THE PROPORTION BETWEEN THE EXPORT TURNO VER TO THE TOTAL TURNOVER AS APPLIED TO THE PROFITS OF BUSINESS. HON'BLE MR. JUS TICE S.H. KAPADIA (AS THE LEARNED CHIEF JUSTICE THEN WAS) SPEAKING FOR A DIVISION BEN CH OF THIS COURT DID NOT ACCEPT THE CONTENTION OF THE REVENUE THAT SINCE THE LEGISLATUR E HAD EXCLUDED ONLY INSURANCE AND FREIGHT FROM THE TOTAL TURNOVER, IT WAS NOT OPE N TO THE ASSESSEE TO CONTEND THAT EXCISE DUTY AND SALES TAX SHOULD ALSO BE EXCLUDED. IN THAT CONTEXT, THE DIVISION BENCH OBSERVED THAT THE MEANING OF EXPORT TURNOVER IN CLA USE (B) OF THE EXPLANATION TO SECTION 80HHC SHOWED THAT EXPORT TURNOVER DID NOT I NCLUDE EXCISE DUTY AND SALES TAX. THE DIVISION BENCH OBSERVED THAT THE EXPORT TU RNOVER IS THE NUMERATOR IN THE FORMULA WHEREAS THE TOTAL TURNOVER IS THE DENOMINAT OR. THE FORMULA HAVING BEEN PRESCRIBED TO ARRIVE AT PROFITS FROM EXPORTS, SALES TAX AND EXCISE DUTY COULD NOT FORM MELSTAR INFORMATION 21 | P A G E PART OF THE TOTAL TURNOVER. IF THE DENOMINATOR WERE TO INCLUDE THOSE TWO ITEMS AND THE NUMERATOR EXCLUDED THEM, THE FORMULA (NOTED THE DIVISION BENCH), WOULD BECOME UNWORKABLE. IN THE CIRCUMSTANCES, THE DIVISI ON BENCH HELD THAT WHILE ASCERTAINING THE EXPORT PROFITS, EXCISE DUTY AND SA LES TAX COULD NOT BE INTRODUCED TO INFLATE THE TOTAL TURNOVER ARTIFICIALLY IN ORDER TO REDUCE THE BENEFIT TO WHICH THE ASSESSEE IS ENTITLED. THE DECISION OF THE DIVISION BENCH OF THIS COURT IN SUDARSHAN CHEMICAL INDUSTRIES LTD.'S CASE (SUPRA) HAS BEEN CI TED WITH APPROVAL BY THE SUPREME COURT IN CIT VS. LAKSHMI MACHINE WORKS (2007) 290 I TR 667 1. THE SAME VIEW HAS BEEN TAKEN BY THE SUPREME COURT IN CIT VS. CATAPHAR MA (INDIA) (P.) LTD. (2007) 292 ITR 641 2 IN WHICH THE DECISION OF THE DIVISION BEN CH IN SUDARSHAN CHEMICAL INDUSTRIES LTD.'S CASE (SUPRA) HAS ALSO BEEN ADVERT ED TO. 9.3 ACCORDINGLY, IN VIEW OF THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH COURT, WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE IMPUGN ED ORDER OF CIT(A). 10. IN THE RESULT, APPEALS OF THE ASSESSEE ARE PAR TLY ALLOWED WHEREAS THOSE BY THE REVENUE ARE DISMISSED. ORDER PRONOUCNED IN THE OPEN COURT ON THIS 13 TH DAY OF FEBRUARY 2015. SD/- SD/- ( D. KARUNAKARA RAO ) (VIJAY PAL RAO) (ACCOUNTANT MEMBER/ YS[KK LNL; YS[KK LNL; YS[KK LNL; YS[KK LNL; ) (JUDICIAL MEMBER/ U;KF;D LNL; U;KF;D LNL; U;KF;D LNL; U;KF;D LNL; ) MUMBAI DATED 13 -02-2015 SKS SR. P.S, COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, K BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI