DCIT, NEW DELHI vs M/S XANSA INDIA LTD., NOIDA

Income Tax Appellate Tribunal, DELHI BENCH “I-2”: NEW DELHI

Before: SMT DIVA SINGH & SHRI PRASHANT MAHARISHI

For Appellant: Adv. Shri Neeraj Jain, Adv, Smt. Shaily Gupta, CA

Hearing: 30/06/2016Pronounced: 26/09/2016

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INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “I-2”: NEW DELHI

BEFORE SMT DIVA SINGH, JUDICIAL MEMBER AND

SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA No. 2283/Del/2011 (Assessment Year: 2004-05) ITA No. 3671/Del/2013 (Assessment Year: 2005-06) ITA No. 3673/Del/2013 (Assessment Year: 2006-07) ITA No. 628/Del/2013 (Assessment Year: 2009-10)

DCIT, Xansa India Ltd, Circle-18(1), Room No.211A, C-2, Sector-1, Noida, Vs. C. R. Building, New Delhi PAN:AAACI0682B (Appellant) (Respondent)

ITA No. 2577/Del/2011 (Assessment Year: 2004-05)

Xansa India Ltd, DCIT, C-2, Sector-1, Noida, Circle-18(1), Room Vs. PAN:AAACI0682B No.211A, C. R. Building, New Delhi (Appellant) (Respondent)

ITA No. 5798/Del/2012 (Assessment Year: 2008-09)

DCIT V Xansa India Limited ITA No. 2283/Del/2011 (Assessment Year: 2004-05), ITA No. 3671/Del/2013 (Assessment Year: 2005-06), ITA No. 3673/Del/2013 (Assessment Year: 2006-07), ITA No. 628/Del/2013 (Assessment Year: 2009-10) Xansa India Limited V ITO ITA NO 2577 & 4698/Del/2011/12 A Y 2004-05 and 2008-09

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Steria India Ltd, ACIT, (Earlier known as Xansa Circle-8(1), Vs. India Ltd.) C.R. Building, New Delhi Seaview Special Economic Zone, Building 4, Plot NO. 20& 21, Sector-135, Gautam Buddh Nagar, Noida, PAN:AAACX0385L (Appellant) (Respondent)

Assessee by : Sh. Ajay Vohra, Sr. Adv. Shri Neeraj Jain, Adv Smt. Shaily Gupta, CA Revenue by: Sh. Ankur Garg, CIT DR Date of Hearing 30/06/2016 Date of pronouncement 26/09/2016

O R D E R PER BENCH. 1. These are six appeals, four appeals filed by revenue and two appeals by assessee for respective years. They are heard and decided by this common order as common facts and issues are involved.

ITA No. 2283/Del/2011 (By revenue) ITA No. 2577/Del/2011 (by Assessee) (Assessment Year: 2004-05)

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The revenue has raised the following grounds of appeal in ITA No.2283/Del/2011 for the Assessment Year 2004-05 against the order of the Ld. Commissioner of Income Tax (Appeals)-XX, New Delhi[ hereinafter referred to as‟ CIT (A)‟ or the 1st appellate authority]. “(1) "On the facts and the circumstances of the case, the Ld. CIT(A) has erred in restricting to Rs1,19,35,400/-, the adjustment of Rs.9,13,20,537/-made on account of arm's length price on the ground that business support costs had not been correctly allocated by the TPO between the software and BPO segments and that Apex logical Data Conversions Pvt. Ltd., was to be considered in the set of comparable companies. (2) On the facts and circumstances of the case the Ld. CIT(A) had erred in holding that expenses incurred on telecommunication charges (Rs.2.68 crores), subsistence for onsite employees (Rs.59.71 crores) standby and call out charges (Rs.5.80 crores), traveling expenses paid in foreign currency (Rs,0.85 crores) and LERMS (Rs.1.52 crores) are not to be taken into account for the purpose of computing the profit eligible for deduction u/s 10A of the Act. (3) On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of Rs.1,09,86,543/- being 25% of the expenditure on subsistence allowance by wrongly holding that disallowance for non-deduction of IDS u/s 40a was not called for in the case land by further directing the AO to verify records to trace such expenditure not pertaining to the present year ignoring that the power to set aside issues decided in scrutiny assessments no longer rests with the CIT(A).

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(4) On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of Rs.8,27,000/- made u/s 40 A(2)(b) of the Act by not deciding the case on merits and by incorrectly holding that the onus of establishing that the said payment made on account of service charges was excessive had not been discharged by the AO. (5) On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of Rs.28,22,882/- made out of legal and professional charges expenses by incorrectly holding that the said payments made to various non-residents was not taxable in India and that the AO was not correct in invoking the provisions of section 40a(ia)of the I.T. Act".

First we deal with the appeal of the revenue. Briefly stated facts of the case are that the assessee, Xansa India Limited, a subsidiary of Xansa PLC, UK software Service Company, provides services of system integration, enterprise solution and business process outsourcing services. The 99.276% of the shares of the assessee company are held by the UK Company. It is engaged in business as contract software service provider to its UK parent which obtains all software service contracts from UK based customers. It carries out application maintenance work, which is stated to be at a low-end

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value chain in application maintenance vertical of the assessee. 4. Assessee filed its return of income on 28.10.2004 declaring a loss of Rs. 166414/-. Subsequently, this return was revised on 29.10.2005. Assessee has entered into international transactions during the year as under:-

S. No. International transaction Value (in Rs.) 1. Provision of software services (received) 182,19,05,124 2. Management services (paid) 21,97,584 3. Provision of IT enabled services (received) 18,14,42,916 4. Reimbursement (received) 7,00,00,419 5. Reimbursement (paid) 3,96,753

Therefore, reference was made by Ld. assessing officer[hereinafter referred to as “AO”] to the LD Transfer Pricing Officer [hereinafter referred to as “TPO”] to determine the arms length price [hereinafter referred to as „ALP”] u/s 92CA(3) of the income tax act [hereinafter referred to as „The Act‟] with respect to the above international transactions. The assessee while bench marking this transaction selected transaction net margin method (hereinafter referred to as TNMM) as the most appropriate method for determining its arms length price

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of the transactions. As a profit level indicator[hereinafter referred to as PLI] it selected operating margin as a percentage of operating cost. For software services it has earned operating profit by total cost margin of 36.71% and for ITES services it has shown a loss of 19.16%. As a justification for loss it was documented that substantial expansion activity in the BPO segment was carried out during the previous year and therefore there is increase in the fixed cost such as communication expenses, electricity and repair charges, therefore there is a higher fixed cost involved in the current year. The assessee for its ITES segment selected 9 comparables showing the weighted average OP/TC and PLI of 11.43% and submitted that international transaction of IT enables services are at arm‟s length. For this the assessee projected the profitability of BPO segment at 15.79% which is falling within range variance + 5%. 6. As reference was made to to ld Transfer Pricing Officer he out of 9 comparables selected by the assessee rejected 4

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comparables giving reasons for rejecting 3 comparables and selected final 5 comparables as under:-

S.No. Name of the Company Average of two years data 1. Ace Software Exports Ltd. 14.635 2. Mapro Industries 8.620 3. Fortune Infotech Ltd. 87.710 4. Nucleus Net Soft & GIS Ltd. -14.030 5. Zigma Software Ltd. 8.915 Average OP/TC for the 21.17% financial year 2003-04

Consequently, Ld. TPO determined the arm‟s length price of the international transaction of ITES of Rs. 183035000/- at Rs. 274355537/- and proposed an adjustment of Rs. 91320537/-. Consequently, assessment order u/s 143(3) of the Income Tax Act was framed on 29.12.2006 wherein the total taxable income of the assessee were assessed at Rs. 698929280/- incorporating the above addition on account of transfer pricing issues. 8. On the aspect of corporate taxation, assessee is eligible for deduction u/s 10A of the Income Tax Act and during the course of assessment proceeding the ld Assessing

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Officer held that certain income were not derived from industrial undertaking and certain income which are not part of export turn over for the purpose of working out deduction, took them for calculating total turnover. Consequently, based on the claim of the assessee of Rs. 418574482/- deduction u/s 10A was determined at Rs. 280540361/- and thereby causing disallowance of Rs. 138034121/-. 9. A further sum of Rs. 110986543/- was disallowed u/s 40a(i) of the Act for non-deduction of tax at source and payment without evidence wherein 25% of total subsistence allowance of Rs. 44.39 crore was disallowed. 10. Over and above some other disallowance were also made such as disallowance of Rs. 827000/- u/s 40A (2) of the Act and disallowance of Rs. 2822882/- on account of legal and professional charges expenses holding that it is paid to various non residence and on which tax is not deducted at source therefore disallowable u/s 40a(i) of the Act. Some other minor disallowances were also made.

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11.

The assessee aggrieved with the order of the ld Assessing Officer preferred an appeal before the ld CIT(A) –XX, New Delhi who vide order dated 28.02.2011 confirmed some additions and deleted some additions and therefore revenue as well as the assessee is in appeal before us. 12. The ground No. 1 of the appeal of the revenue is on transfer pricing issue based on the adjustment of Rs. 91320537/- made by the Ld. transfer pricing officer which has been restricted to Rs. 11935400/- on account of incorrect allocation between the software and BPO segment and rejecting the comparable Apex Logical Data Conversion Pvt. Ltd without reasoning by Ld. CIT (A). It is appropriate to state here that the assessee has also preferred appeal as per ground No. 1 against the confirmation of the addition to the extent of Rs. 11935402/-. The crux of the transfer pricing issue is with respect to incorrect determination of margins of the assessee. Admittedly the assessee in its its TP study report has also considered the margin of the provision of IT enables services having total value of the transaction of

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Rs. 181442916/- and taking appellant as tested party of (-) 19.16% and compared it with margins of the comparables computing arithmetic mean at -11.43%. However, before the Ld. Transfer Pricing Officer vide letter dated 27.10.2006 the assessee submitted that the assessee should be allowed credit for idle capacity and appropriate allocation of business support cost. It was stated that if these two adjustments are allowed then PLI of the assessee is higher than PLI of the comparables. Vide letter dated 09.10.2006 it was submitted that overheads are allocated on the basis of headcount in each business segments and therefore the mismatch has arisen between the revenue and cost. It was also submitted that in BPO segment at the ends of the year more than 300 employees are employed and therefore the higher cost is allocated. However, ld Transfer Pricing Officer rejected the contention of the assessee in para 6.4 of his order stating that the explanation submitted by the assessee are different at different point of time as firstly it was claimed on account of market strategy and

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subsequently, it is claimed on account of allocation of overheads. Therefore, he rejected the same. 13. Before the LD CIT(A) appellant submitted details of allocation of business support cost by applying different allocation keys and on such allocation the operating profit margin of ITES segment was worked out at 12%. As the margins of the comparable companies were 11.43% it was claimed that transactions are at arm‟s length after correction of above error. The LD CIT (A) accepted the allocation of the cost as submitted by the assessee. Furthermore, on the comparable of Apex Logical Data Conversion which was rejected by the ld. Transfer Pricing Officer without giving any reason was included in the comparables and thereby computed the average PLI of comparables at 17.15% and determined the arms length price of the transaction of Rs. 194970402/- against the transaction Rs. 183035000/- and confirmed the addition of Rs. 11935402/-. Therefore revenue is in appeal before us by this ground of appeal and it is appropriate to mention here that assessee is in appeal on confirmation

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of addition of Rs 11935402/-on account of transfer pricing issues. 14. The LD Departmental representative has submitted that according to para 7.14 the LD CIT(A) has accepted the explanation of the assessee with respect to allocation of business support cost as submitted by the assessee. He submitted that assessee itself has allocated the business support cost on the basis of „headcount‟ and it was accepted by the Ld. TPO. No arguments were raised for applying different allocation keys to allocate the business support cost of Rs. 564258447/- to various segments compiled with the original transfer pricing document of the appellant, he submitted that it amounts to reallocation of the cost, as Ld. Assessing Officer did not have an opportunity to examine appropriateness of these keys the matter should be sent back to the file of Ld. Assessing Officer. On the issue of rejecting the comparable of Apex Logical Data Conversion Pvt Ltd. he submitted that it is an error and therefore, the matter may be sent back to the Assessing Officer for verification.

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15.

Regarding the availability of benefit of + or – 5% of range as per proviso to section 92C(2) he submitted that the same has not been decided by ld CIT(A), therefore, same may be sent back to his file. 16. Ld Authorised representative submitted that the appellant company is at startup stage and has very low capacity utilization with respect to its ITES segment, as it is only the 2nd year of its operation. He further referred that originally the allocation of the overhead between the software division and BPO segment was based on „headcount‟ in each department. This fact was submitted to the assessing officer vide letter dated 27/10/2006 wherein it was submitted that without prejudice that the loss of 19.6% in BPO segment is largely attributable to the business support cost which is allocated in the ratio of headcount in the respective segment and further it was submitted that if the allocation of the business support costs is in the ratio of the sales of the respective segment then PLI of the assessee is 41.18% whereas the PLI of the comparable companies is 11.43% and therefore the

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transaction is at arm‟s per length. He submitted that allocation of business support cost entirely on the basis of the number of employees of headcount was inconsistent with economic reality and resulted in disproportionate allocation of expenses in as much as a higher business support cost for the whole year gets allocated to the BPO segment while most of the employees in the BPO segments were recruited in the 2nd half of the year. He further submitted that such fallacy is apparent when compared with the gross margin prior to allocation of business support cost in case of software division and BPO division. After that he referred to the various business support costs and the allocation key applied for allocation of that cost to the segments of the business of the assessee. According to him wherever there is a direct Costello cable to a particular segment it was allocated as direct cost out of business support cost. Wherever issue of locating indirect cost arises the respective allocation keys are used. When the expenses are related to the number of employees it is located on

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the basis of headcount and in other cases such as space cost it is located on the basis of seats. He also referred to a chart submitted wherein after such allocation profit before interest and taxes as percentage of cost was 12% and the profit level indicator was worked out as 17.5%. In nutshell he submitted that headcount of the employees is not correct allocation key for allocation of business support cost. For this proposition a relied upon the decision of the Hon‟ble Delhi High Court in case of CIT versus EHPT India private limited (ITA No. 1172/2008). He further submitted that margin of the appellant company is at 12% which is within the range of 5% of comparables at 17.5% and therefore the international transactions of the group of IT enabled services is at arm‟s length. He submitted that there is no estoppel under the income tax proceedings in making a claim and appellant can make such a claim that is correct claim at any point of time during the continuations of assessment proceedings. He raised this argument for the reason that even if assessee has taken headcount allocation key

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originally but it can be corrected at any time. He further referred to the decision of special bench in case of DCIT versus Quark systems private limited (ITA number 100 & 115/CHD/2009) to state that the transfer pricing documentation would not act as an estoppels for suggesting correct treatment of allocation of expenditure. He further referred to the fact that during the course of assessment proceedings, assessee filed correct statement of segmented profit analysis whereby the profit of the ITES segment was 20.74% as shown in the TP study report but Ld. Transfer pricing officer did not correct that particular error. Despite direction of Ld. Dispute resolution panel to rectify the error the Ld. Transfer pricing officer summarily rejected the rectification application filed by the assessee without giving effect to the direction of DRP and the addition was made. He further submitted that alternatively the allocation of indirect expenses may also be made on the basis of the revenue of the respective segment. He submitted a chart wherein if the location of indirect cost is taken on the

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basis of the revenue, e profit level indicator of the assessee would be 41.18% whereas of the comparable companies is 11.43% as per TP documentation and 21.17% as per the computation made by the Ld. transfer pricing officer therefore he submitted that if the business support services cost are located on the basis of revenue earned by the respective division or on the basis of specific allocation keys the transactions of the assessee are at arm‟s length and the adjustments made by the Ld. TPO is incorrect. 17. With respect to the +_ 5% of the range benefit available to the assessee submitted that assessee is eligible for that particular range. He referred to the proviso to section 92C (2) of the income tax act and submitted that when there is more than one price is determined by the most appropriate method, ALP shall be taken to be an arithmetical mean of such prices or at the option of the assessee, a price which may vary from the arithmetical mean by not exceeding 5% of such mean. He therefore submitted that it is a standard deduction of 5% for which

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appellant assessee is eligible when more than one price is determined. For this proposition he referred to the decision of SAP labs India private limited (6 ITR (TRI) 81 (Bangalore)) and other decisions. In the result he submitted that that the Ld. CIT (A) has considered the correct allocation key of the business support cost of the assessee based on the appropriate allocation key with respect to each expenditure. 18. We have carefully considered the rival contentions and also perused the material available on record as well as the arguments advanced by the parties. The only dispute involved in this ground of appeal is that international transactions of appellant pertaining to provision of IT enabled services to its associated enterprise has resulted into a loss originally shown by the assessee at 19.16 %. Earlier according to the assessee such losses arose because of initial period of setting up of the business of BPO segment of the appellant and it was gestation period therefore there was a mismatch between the cost incurred in respect of the same segment and the revenue

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generated there from. Before learned CIT (A) appellant reworked operating profit margins of the various divisions after re allocating business support cost on different basis then what is taken in its transfer pricing report as well as in the order of the Ld. Transfer pricing officer. Based on above allocation keys it was contended that PLI of the appellant‟s 12% compared to 11.43% of the comparable companies. In the revised allocation of business support services cost appellant has allocated the actual expenses identifiable to each segment directly to that segment and for other expenses it has adopted various allocation keys. For costs related to the employees, conveyance expenses, Gen Administration expenses, IT expenses, communication, “head count” was taken as allocation key. For the purpose of the space cost of it is allocated with respect to number of seats in each same segment and when there are vacant seats cost is allocated to the IT segment. These allocations of expenses are verified by the Ld. 1st appellate authority. The 1st appellate authority has not found any of the

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allocation keys to be unreasonable and improper. Further more if the allocation key of headcount is applied then apparently the result gives abnormally huge margin in case of software division and loss in BPO segment; just because of the allocation of the business support cost the PLI prior to allocation which was 57% turns out into a loss which is impractical coupled with the fact that ITES segment of the appellant is at primitive stage and is only in the 2nd year of its operation. The Ld. CIT (A) has dealt with this issue after obtaining the remand report from the Ld. assessing officer as mentioned in para 7.14 of his order. There is no adverse comment from Ld. assessing officer mentioned by Ld. CIT appeal on any irrationality involved in the allocation keys applied by the assessee. Similarly Ld. Departmental representative also could not point out any irrationality or inappropriateness involved in allocation keys mentioned at para 7.6 of the order of the Ld. CIT (A). We also perused the various allocation keys used. In fact on perusal of this allocation keys it is apparent that most of the expenses incurred by the

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assessee has been allocated which are directly related to the particular segment and whenever there are indirect cost involved, they are allocated on the basis of „head count‟ only. The only difference is that in case of the cost of space which is allocated on number of desk in each segment and vacant seats are allocated to the IT segment. This method of allocation was also appropriate for the reason that BPO segment is in a primitive stage or in a start-up stage. In any case it may be an idle capacity created and therefore for the working out of the PLI of the BPO segment that particular cost also requires to be eliminated. In view of the above facts and circumstances, we do not see any infirmity in the revised working of allocation of direct cost of business support services as well as allocation of indirect business support cost based on headcount and space cost on the basis of number of desk. Further with respect to the change in the stand of appellant on various allocation keys, we are of the view that object is to find out whether the international transactions have been carried out by the assessee with

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its associated enterprise is at arm‟s length or not. Provisions of section 92C prescribes 6 methods by which this exercise can be done by adopting most appropriate method having regard to the nature of transaction or class of transactions or functions performed by the parties. In the present case the revenue as well as appellant both has agreed that transactional net margin method is the most appropriate method for determination of ALP. This method compares the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise and net profit margin is computed after determining the appropriate cost incurred. Therefore the determination of the cost incurred for the purpose of determining ALP is an important task. There may be direct and indirect cost involved in performing certain services. Where there are direct costs are involved they are required to be directly attributed to the particular profitability statement of that segment however when indirect costs are involved it is necessary that appropriate allocation keys which are

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rational and quantifiable are adopted for allocating them to the particular business segment to derive its correct profitability. This exercise can be carried out by the authorities as well as the appellant to fulfill the object of determination of the arm‟s length pricing of an international transaction. As the allocation keys for allocating indirect cost earlier adopted by the appellant was „headcount‟ and now also the appellant for most of the indirect expenditure has retained the same allocation key and out of indirect expenses some of the direct expenses have been identified and are allocated to a particular business segment, further when neither the remand report nor before us any infirmity was pointed out with respect to the allocation keys adopted by the appellant before CIT appeal, we see no infirmity in the order of Ld. CIT (A) in arriving at ALP of the international transaction of the appellant. Further we also reject the argument of the Ld. departmental representative that the issue may be set aside to the file of the Ld. assessing officer for verification of the correctness of allocation

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keys, because in the remand report Ld. assessing officer could not point out any infirmity or irrationality involved in adoption of the allocation keys suggested by the assessee further even the 1st appellate authority is also convinced about the appropriateness of the allocation key and before us the Ld. departmental representative could not point out any error in the order of the keys adopted by the assessee in the order of the Ld. that 1st appellate authority. It is also important to note that even if the business support cost is located on the basis of revenue then also PLI of the assessee is higher than the PLI of comparables. This fact also suggest that original selection of allocation keys without identifying direct cost and indirect cost and also allocation of space cost was erroneous. 19. Further with respect to exclusion of one of the comparable namely Apex Logical data Conversions Private Limited by Ld. Transfer pricing officer without assigning any reason, the Ld. CIT (A) has included this comparable in the final set of comparable companies.

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Before us Ld. departmental representative could not point out any reason that why this comparable was excluded from the final list without giving any reason. The appellant has also included this comparable into its TP study report and also neither the Ld. transfer pricing officer nor Ld. departmental representative could point out that this company was functionally not comparable with the appellant we find no infirmity in the order of Ld. CIT appeal in including this comparable for the comparability analysis of the international transaction. In the result ground No. 1 of the appeal of the revenue on the transfer pricing issues is dismissed. 20. Ground No. 2 of the appeal of the revenue is against the order of Ld. CIT appeal in directing to exclude expenses on telecommunication charges, subsistence for on-site employees charges, standby and callout charges, travelling expenses paid in foreign currency and LERMS for reducing them from export turnover but not adjusting total turnover accordingly for the purpose of computing the profit eligible for deduction under section

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10 A of the income tax act. The Ld. assessing officer while working out the deduction under section 10 A of the income tax act with respect to the software technology Park industrial undertaking of the appellant has noted that a expenses of Rs. 509376201 has been excluded from the export turnover as well as total turnover of the assessee. Therefore he held that according to the form No. 56F, assessee has already given total turnover of the business as per books of accounts at Rs. 3154493439/- which is also shown in the profit and loss account under that turnover therefore reducing this charges out of the total turnover by the assessee is nothing but claiming more deduction under section 10 A of the act. Therefore he increased the total turnover of the appellant by this sum and reduced deduction under section 10 A of the income tax act. Aggrieved by the order of the Ld. assessing officer, appellant preferred an appeal before the Ld. CIT appeal submitting that the though export turnover has been defined under the act but term „total turnover‟ has not been defined therefore the above

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expenses which are required to be reduced from export turnover must also be reduced from the total turnover. Ld. CIT appeal accepted the contention of the assessee in view of the order of coordinate bench dated 26th -06- 2009 in ITA No. 3475/del/2007 for assessment year 2003- 2004 in case of appellant holding so. Therefore aggrieved by the order of Ld. CIT appeal the revenue is in appeal before us. 21. The Ld. departmental representative reiterated the same arguments which were given in the assessment orders stating that there is no requirement of reducing the sum from the total turnover and therefore they need to be included for working out deduction under section 10 A of the income tax act. 22. Against this Ld. authorized representative submitted that the expenditure on telecommunication and travel, etc., incurred in foreign currency have to be excluded from export turnover as well as from the total turnover while computing deduction under section 10A of the Act as expenses incurred in foreign currency specified above are

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not includible in „export turnover‟ as per clause (iv) of the explanation 2 to that section. He further referred to number of decisions where in it is held that for computation of deduction under section 10A of the Act, total turnover in the denominator and export turnover in the numerator have to be read in the same manner and accordingly, the expenses incurred in foreign exchange are to be excluded from export turnover in the numerator then the same are also to excluded from total turnover in the denominator. He submitted that Delhi Bench of the Tribunal in the assessee‟s case for assessment year 2003-04 has upheld the contention in this regard. In view of the above, he submitted that even if any freight, telecommunication or insurance expense or expenses in providing technical services outside India during the year, are reduced from the export turnover, such sums will also have to be reduced from the total turnover of the company. He further submitted that there is no change in the facts and in the law.

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23.

We have carefully considered the rival contentions. As the issue has already been decided by the coordinate bench in the assessee‟s own case for assessment year 2003- 2004 wherein it has been held that though the term „total turnover” has not been defined under section 10 A of the act and items which have been excluded from export turnover in the numerator must also be extruded from total turnover in the denominator for computing deduction under section 10 A of the act. The Ld. departmental representative could not point out any infirmity in the order of Ld. CIT appeal and also could not point out any reason that why decision of the coordinate bench should not be followed by us. Therefore in view of this we are inclined to confirm the order of the Ld. CIT appeal where he followed the decision of the coordinate bench in case of assessee for the previous year and directed the assessing officer to recompute the deduction under section 10 A of the income tax act. In view of this ground No. 2 of the appeal of the revenue is dismissed.

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24.

Ground No. 3 of the appeal of the revenue is against the decision of the Ld. CIT appeal who deleted the disallowance of Rs. 110986543/- being 25% of the expenditure on subsistence allowance by wrongly holding that disallowance for non-deduction of tedious under section 40a was not called for in the case and by further directing the Ld. assessing officer to verify records to find such expenditure not pertaining to the present year ignoring that the power to set aside issue decided in scrutiny assessment is no longer rests with the Commissioner of income tax appeals. 25. During the year, the appellant has incurred expenditure of Rs 443946173/- for payment of subsistence allowance to its employees who are positioned overseas to its holding company. These expenditure was paid on the basis of the actual vouchers and details submitted by the employees to the appellant and it was contended by appellant before the assessing officer that this is a reimbursement of the expenditure incurred by the appellant‟s employees. However the Ld. assessing officer

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disallowed 25% of the subsistence allowance paid by the appellant stating that deduction for the same was claimed without any supporting evidences and alternatively no tax has been deducted on such sums therefore also the disallowance is sustained. On appeal before the Ld. CIT appeal he deleted the disallowance holding that no tax is required to be withheld in India on such payment as it is merely a reimbursement of the amount of subsistence allowance initially paid by the UK company on behalf of the appellant to its employees and there is no income chargeable to tax in India. He further held that such subsistence allowance would be taxable in the hands of the employees if it is demonstrated that the entire payment is not actually spent for official purposes by the employees. He further noted that since 75% of the expenses are supported by the evidence of the actual expenditure it is allowed by the Ld. assessing officer and to the extent of 25% of the amount merely declaration has been furnished with respect to the such amount spent in the course of travel abroad. He held that such

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expenditure cannot be disallowed when the same is confirmed by way of declaration received from various employees. Revenue aggrieved with the order of the Ld. CIT appeal has preferred this ground in the present appeal. 26. The Ld. departmental representative submitted that deduction is been claimed by the appellant without providing any details of supporting evidences for such expenditure. He further submitted that this is an allowance being paid to the employees of the appellant and therefore while making payment to the holding company the assessee should have deducted tax at source under section 195 of the income tax act which assessee has failed to do. Therefore he contended that disallowance has rightly been made by the Ld. assessing officer. 27. Ld. authorized representative submitted that during the relevant assessment year, the assessee incurred expenditure of Rs.44,39,46,173 for reimbursement of subsistence allowance paid by Xansa Plc. to the

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assessee‟s employees positioned overseas. The subsistence allowance was paid on the basis of actual vouchers/details submitted by the employees to the assessee. Such allowance was, thus, a mere reimbursement of the actual expenses incurred by the assessee‟s employees. He submitted that in terms of the agreement with Xansa UK, Xansa UK acts as a disbursing agent for payment of subsistence allowance to the employees of the assessee. Accordingly, Xansa UK makes the payment of subsistence allowance to the employees of the assessee on travel, which is reimbursed, by the assessee to Xansa U K. The reimbursement of the amount paid by way of subsistence allowance to the employees of the assessee by Xansa UK does not have any element of income. It is submitted that the assessee has merely reimbursed the actual expenses initially paid by Xansa UK on behalf of the assessee to the employees of the assessee on account of subsistence allowance. He submitted plethora of judicial precedents where it is held that mere reimbursement of expenses does not constitute

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income liable to tax and further, that there would be no obligation to deduct tax at source there from. On the issue of evidence, he stated that payment of subsistence allowance to the extent of 75% has been made based on supporting papers / vouchers for actual expenses incurred on boarding and lodging, etc. Balance amount of 25% of the subsistence allowance has been paid on the basis of self declaration in form of confirmation from the employees to the extent the expenses has actually been incurred on subsistence, i.e. food, conveyance, telephone, etc. and other petty expenses for which the employee may not have in their possession supporting papers in the form of bills or vouchers, etc. Our attention was also invited to the decision of the Supreme Court in the case of CIT vs. ITI Limited (CA Nos. 1001, 1002 to 1009 of 2005) rendered vide order dated 21.01.2009, wherein it is held that the employer, for allowing exemption of local travel allowance under section 10(5) of the Act, was under no statutory obligation to collect and examine the supporting evidence to the declaration submitted by the

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employee while deducting tax at source under section 192 of the Act. It was stated that it has been held likewise by the Supreme Court in the case of CIT vs. Larsen and Toubro Ltd & Ors.: (2009) 313 ITR 1 vide order dated 21.01.2009. He stated that it is not disputed that the payment of subsistence allowance is made to the employees, who were on travel overseas for business purposes of the assessee. Further, payment of subsistence allowance to the employees has been made by Xansa UK on behalf of and as per instructions of the assessee. The payment is made to Xansa UK towards reimbursement for the amount of subsistence allowance paid by them to its employees on tour for official purposes. Such payment has been made through banking channel and the factum of payment to Xansa UK is also not disputed. It would further be appreciated that the factum of payment of the aforesaid amount (to the extent of 25% of the subsistence allowance) to the employees of the assessee by Xansa UK is evidenced by the confirmation / declaration by the employees.

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Notwithstanding the fact, the payment of subsistence allowance to the extent of 25% has been made on the basis of confirmation / declaration from the employees, such payment has been made to the employees in the course of carrying on of the business of the assessee of software development. In case of the assessee, too, payment to Xansa UK on account of reimbursement of subsistence allowance paid to the employees of the assessee, were liable to deduction of tax at source under section 192 of the Act (subject to exemption available under section 10(14)(i) of the Act). The assessee was, therefore, it was submitted, not required to deduct tax at source there from under section 195 of the Act. It is submitted that the aforesaid claim of non withholding of tax at source on reimbursement of expenses made by the assessee was duly supported by a certificate issued by Arun K. Garg & Associates, Chartered Accountants. Therefore since the assessee was not under an obligation to deduct tax under section 195 of the Act, the disallowance made by the assessing officer invoking

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section 40(a)(i) of the Act, is not sustainable and has been rightly deleted by the CIT(A). He also stated that as assessee was under no obligation to deduct tax at source from the remittance of the amount of reimbursement as the same was not chargeable to tax in India and hence the assessee was under no obligation to make a reference to the assessing officer in this regard. He argued that requirement of obtaining a no objection certificate from the Income-tax authority for remittances to non-resident in terms of section 195(2) of the Act has been done away vide circular Nos. 759 dated 18-11-1007, 767 dated 22- 05-1998 and further amended vide circular No. 10 of 2002 dated 09-10-2002 issued by the Central Board of Direct Taxes. In terms of the circulars issued by the CBDT, instead of obtaining a no objection certificate from the Income-tax department for making remittances, certificate to this effect can be obtained from a Chartered Accountant in the prescribed form. The assessee, accordingly, in terms of circular issued by the CBDT, made the aforesaid remittances of reimbursement on

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account of payment made by Xansa UK for the subsistence allowance to the employees of the assessee, on the basis of a certificate issued by a Chartered Accountant certifying that no tax was required to be deducted from such payment. He relied up on the decision of Honourable Supreme Court in GE India Technology Centre (supra), where in it is held that no tax is required to be deducted under section 195(1) of the Act from the payment to non-resident, which is not chargeable to tax in India. The Supreme Court further held that the payer is required to obtain certificate under section 195(2) of the Act from the assessing officer only in a case where the payer is of the view that the payment is liable to tax in India, but is not certain as to what part of payment would constitute 'income' chargeable to tax in India. In that view of the matter, the disallowance of 25% of the total expenditure on subsistence allowance amounting to Rs. 44,39,46,173 is based wholly on conjectures and surmises, and has been rightly deleted by the CIT(A).

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28.

We have carefully considered the rival contentions and also perused the material available on record. The claim of the subsistence allowance of Rs 43946173/-paid by appellant company to its UK holding company is on account of reimbursement of the expenses on deputation. Admittedly no tax has been deducted on the sum under section 195 of the income tax act under the pretext that there is no income chargeable to tax in India as it is a case of pure reimbursement of expenses. This was one of the reasons for disallowance of the sum. Furthermore assessee produced the bills/ vouchers/ declaration but according to the Ld. assessing officer , assessee did not clearly establish that the bills are in connection with employees of the assessee as on none of the bills name of employees are appearing and in the breakup many expenses pertain to earlier years. Furthermore according to the Ld. assessing officer such subsistence allowance should have been reflected in form No. 16 issued by the appellant to its employees, which is not included. Therefore the addition was made. The 1st appellate

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authority has deleted disallowance on various issues except the issue of prior period expenses for which the issue is set aside , considering all the aspects for which the disallowances been made as under:-

“FINDING 11.60 I have considered the order of the assessing officer and submissions made by the appellant with regard to the disallowance of subsistence allowance. My conclusions in this regard are as follows: (a) Section 40falfi) read with section 195 of the Act - Whether payment on account of reimbursement of subsistence allowance is chargeable under the Act: 11.61 The assessing officer has made disallowance of payment made by the appellant to Xansa-UK on account of reimbursement of the amount of subsistence allowance paid by Xansa-UK to the employees of the appellant, invoking provisions of section 40a(i) of the Act. The said section reads as follows: "40. Amounts not deductible. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",- . . (a) in the case of any assessee- (i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,— (A) outside India; or (B) in India to a non-resident, not being a company or to a foreign company, on which tax is deductible at source under Chapter XVJI-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200" 11.62 Section 40a(i) of the Act provides for disallowance of any expenditure being interest, royalty, fee for technical services or other some chargeable under this Act payable to a non resident on whioch tax is deductible at source under Chapter-XVII-B and such tax has not been deducted. For making disallowance under section 40a(i), the payment should be of a sum chargeable under this Act on which tax id deductible at

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source under Chapter XVII-B. Therefore, we are required to examine as to the payment of subsistence allowance by the appellant is chargeable under this Act and tax was deductible at source from such payment. 11.63 The appellant is rendering software development services to the customers of Xansa UK, out source software development contract to the appellant on principal to principal basis in terms of agreement dated 9th day of March, 1999, relevant portion of which reads as follows: "This agreement is made this 9th day of March, 1999 between Fl Group PLC, a company having its registered office at Campus 300, Maylands Avenue, Hemal Hemastead, Hertfordshire, HP2 7TQ, England (hereinafter referred to as Fl) and US Infotech Ltd,, a company registered under the Indian Companies Act, 1956 having its registered office at D-l/3, Okhla Industrial Area, Phase-II, New Delhi, India and Corporate Office at C-2, Sector-1, Noida, India (hereinafter referred to as US Infotech'). Whereas  IIS Infoteoh is a software development organization that develops software and undertakes software projects both offshore and onshore for overseas clients; and  Fl may require software products and services from time to time which US Infotech is keen to provide. NOW THEREFORE IT IS AGREED AS FOLLOWS: 1) APPOINTMENT Fl appoints US Infotech as its preferred supplier for the provision of software development services and technical services from India in relation to software development and of consultancy services in the UK for software development and support and maintenance services in relation to'the software developed. Fl shall, from time to time, identify specific offshore development and service requirements and shall provide details thereof to US Infotech. It is intended that US Infotech shall be Fl's first choice supplier for such software and services." 1 1.64 It has been stated by the AR that the appellant in respect of employees on travel overseas for software projects pays subsistence allowance. 75% of such subsistence allowance is paid to the employees based on supporting papers / vouchers for the actual expenses on boarding, lodging, etc. incurred by them. The remaining 25% of subsistence allowance is paid to the employees to take into account petty expenses on subsistence incurred on commuting food, telephones, etc., for which the employees may not have in their possession supporting papers for actual expenses. Such expenses to the extent of 25% on subsistence, is paid on the basis of confirmation / certificate from the employees certifying

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that the amount to that extent was actually spent by them on subsistence only. 11. 65 It is also a matter of record that in terms of agreement with Xansa, made payment of subsistence allowance on behalf of the appellant to its employees, who are on travel to UK. The said amount paid by Xansa- UK towards subsistence allowance to the employees is reimbursed by the appellant. 11. 66 The employees subsequently on their return from travel settle their tour expenses with the appellant and submit vouchers / supporting papers for the expenses incurred by them to the extent of 75% of the subsistence allowance and for balance 25%, a confirmation/certificate certifying that to that extent the amount was actually spent on various expenses on subsistence, is submitted by the employee. The above fact relating to reimbursement of subsistence allowance are borne out from facts on record and are not disputed. 11.67 It is also not disputed that to the extent of 75% of the amount paid as substance allowance to the employees, the employees have furnished to the appellant supporting papers / vouchers for the actual expenses on boarding, lodging, etc., incurred by them. For the remaining 25% of the subsistence allowance, the employees have submitted a declaration / confirmation of having spent the amount to that extent on food, telephone, etc., during their stay / travel outside India. In view of the findings on record, it cannot be disputed that subsistence allowance to the extent of 25% is paid to the employees. However, the further expenses incurred by the employees out of such amount is not supported by actual vouchers. In view of the aforesaid categorical facts discernable from record, the payment of the aforesaid amount to Xansa-UK is towards reimbursement of the amount paid by the said company to the employees of the appellant as subsistence allowance. Xansa-UK in the entire transaction has only acted as conduit for making payment of subsistence allowance to the employees of the appellant and there is no income received by Xansa- UK. 11.68 It is a settled position that a mere reimbursement of expenses incurred by a non resident on behalf of a resident in India, does not have any element of income and the same cannot be subjected to tax in India in the hands of the non resident. Reliance may be placed in this regard on the following decisions: • CIT vs. Tejaji Farasram Kharawalla Ltd.(1968) 67 ITR 95 (SC) • Van Oord : 189 Taxman 232 (Del-HC) • CIT vs. Fortis Health care Ltd.: 181 Taxman 257 (Del-HC) • Cholamandalam General Insurance Ltd.:.309 ITR 356 (AAR)

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• CIT vs. Industrial Engineering Products (P) Ltd.: 202 ITR 1014 (Del- HC) • ACITvs. Modicon Network (P) Ltd.: (2007) 14 SOT 204 (Del) • Bangalore International Airport Ltd. vs. ITO: 116 ITD 446 (Bang) • Rolls Royce India Ltd. vs. ITO: 25 ITD 136(Del) • Clifford chance vs. DCIT: 82 ITD 106(Mum) • Coca Cola India Inc. vs. ACIT: 7 SOT 224(Del) 11.69 It cannot be anybody's case that the pure reimbursement of expenditure would constitute an income chargeable to tax in India in the hands of Xansa-UK. In my view, since the payment being mere reimbursement of the amount of subsistence allowance initially paid by Xansa-UK on behalf of the appellant to its employees, such payment in absence of their being any element of income is not chargeable to tax in India. 11.70 Under Section 195 of the Act, an obligation is cast on a person making payment to a non-resident of any sum, which is chargeable under the provisions of the Act, to deduct tax at the rates in force at the time of payment o£ such sum or at the time of credit thereof to the account of the payee, whichever is earlier. Thus, for application of section 195 of the Act, it would be necessary that the aforesaid payment on account of reimbursement of subsistence allowance to Xansa UK is chargeable to tax in India in its hands. 11.71 The Supreme Court in the case of Transmission Corporation of A.P. Ltd. v. CIT: 239 ITR 587, held that the tax is required to be deducted from payment made to non-resident as per section 195 of the Act, if such payment is chargeable to tax in India 11.72 The Supreme Court, recently, in the case of GE India Technology Centre (P) Ltd. vs CIT: 327 ITR 456 held that no tax is required to be deducted under section 195(1) of the Act from the payment to non resident which are not chargeable to tax in India. The Supreme Court further held that the payer is required to obtain certificate under section 195(2) of the Act from the assessing officer only in a case where the payer is sure that the payment is liable to tax in India, but is not certain as to what part of payment would constitute 'income chargeable to tax in India. In other words, where a person responsible for deduction is fairly certain that the payment is not chargeable to tax in India, he can make his own determination. Relevant observations of the Supreme Court in that case read as follows: "7. Under Section 195(1), the tax has to be deducted at source from interest (other than interest on securities) or any other sum (not being salaries) chargeable under the l.T. Act in the case of non-residents only and not in the case of residents. Failure to deduct the tax under this Section may

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disentitle the payer to any allowance apart from prosecution under Section 276B. Thus, Section 195 imposes a statutory obligation on any person responsible for paying to a nonresident, any interest (not being interest on securities) or any other sum (not being dividend) chargeable under the provisions of the l.T. Act, to deduct income tax at the rates in force unless he is liable to pay income tax thereon as an agent. Payment to non- residents by way of royalty and payment for technical .services rendered in India are common examples of sums chargeable under the provisions of the l.T. Act to which the aforestated requirement of tax deduction at source applies. The tax so collected and deducted is required to be paid to the credit of Central Government in terms of Section 200 of the l.T. Act read with Rule 30 of the l.T. Rules 1962. Failure to deduct tax or failure to pay tax would also render a person liable to penalty under Section 201 read with Section 221 of the l.T. Act. In addition, he would also be liable under Section 201(1A) to pay simple interest at 12 per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. The most important expression in Section 195(1) consists of the of the words "chargeable under the provisions of the Act". A person paying interest or any other sum to a non- resident is not liable to deduct tax if such sum is not chargeable to tax under the I.T. Act. For instance, where there is no obligation on the part of the payer and no right to receive the sum by the recipient and that the payment does not arise out of any contract or obligation between the payer and the recipient but is made voluntarily, such payments cannot be regarded as income under the I.T. Act. It may be noted that Section 195 contemplates not merely amounts, the whole of which are pure income payments, it also covers composite payments which has an element of income embedded or incorporated in them. Thus, where an amount is payable to a non-resident, the payer is under an obligation to deduct TAS in respect of such composite payments. The obligation to deduct TAS is, however, limited to the appropriate proportion of income chargeable under the Act forming part of the gross sum of money payable to the non-resident. This obligation being limited to the appropriate proportion of income flows from the words used in Section 195(1), namely, "chargeable under the provisions of the Act". It is for this reason that vide Circular No. 728 dated October 30, 1995 the CBDT has clarified that the tax deductor can take into consideration the effect of DTAA in respect of payment of royalties and technical fees while deducting TAS. It may also be noted that Section 195(1) is in identical terms with Section 18(3B) of the 1922 Act. In CIT vs. Cooper Engineering [68 ITR 457] it was pointed out that if the payment made by the resident to the non-resident was an amount which was not chargeable to tax in India, then no tax is deductible at source even though the assessee had not made an application under Section 18(3B) (now Section 195(2) of the I.T. Act). The application of Section 195(2) pre-

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supposes that the person responsible for making the payment to the non- resident is in no doubt that tax is payable in respect of some part of the amount to be remitted to a non-resident but is not sure as to what should be the portion so taxable or is not sure as" to the amount of tax to be deducted. In such a situation, he is required to make an application to the ITO(TDS) for determining the amount. It is only when these conditions are satisfied and an application is made to the ITO(TDS) that the question of making an order under Section 195(2) will arise. In fact, at one point of time, there was a provision in the I.T. Act to obtain a NOC from the Department that no tax was due. That certificate was required to be given to RBI for making remittance. It was held in the case of Czechoslovak Ocean Shipping International Joint Stock Company vs. ITO [81 ITR 162(Calcutta)] that an application for NOC cannot be said to be an application under Section 195(2) of the Act. While deciding the scope of Section 195(2) it is important to note that the tax which is required to be deducted at source is deductible only out of the chargeable sum. This is the underlying principle of Section 195. Hence, apart from Section 9(1), Sections 4, 5, 9, 90, 91 as well as the provisions of DTAA are also relevant, while applying tax deduction at source provisions. Reference to ITO(TDS) under Section 195(2) or 195(3) either by the non-resident or by the resident payer is to avoid any future hassles for both resident as well as non-resident. In our view, Sections 195(2) and 195(3) are safeguards. The said provisions are of practical importance. This reasoning of ours is based on the decision of this Court in Transmission Corporation (supra) in which this Court has observed that the provision of Section 195(2) is a safeguard. From this it follows that where a person responsible for deduction is fairly certain then he can make his own determination as to whether the tax was deductible at source and, if so, what should be the amount thereof. Submissions and findings thereon 8. If the contention of the Department that the moment there is remittance the obligation to deduct TAS arises is to be accepted then we are obliterating the words "chargeable under the provisions of the Act" in Section 195(1). The said expression in Section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct TAS only if the tax is assessable in India. If tax is not so assessable, there is no question of TAS being deducted. [See: Vijay Ship Breaking Corporation and Others vs. CIT 314 ITR 309]" 11.73 Therefore, in my view, since the payment to Xansa-UK is only a reimbursement of subsistence allowance paid to the employees of the appellant, and is not chargeable to tax in India, no tax was required to be

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deducted from such payment and hence provisions of section 40a(i) cannot be invoked to make disallowance. 11.74 Section 10(14)(i) of the Act exempts certain special allowance or benefit which are granted to meet expenses wholly, necessarily and exclusively for performance of the duties of office or employment to the extent to which such expenses are actually incurred for that purpose. Further, Rule 2BB(1) of the Income-tax Rules prescribes for the purpose of section 10(14)(i) of the Act, inter alia, any allowance granted to an employee on tour to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty. 11.75 It was submitted that for determining taxability or otherwise of the amount paid by way of per diem (subsistence) allowance to the employees for the purpose of deduction of tax at source under the head 'salaries' as per section 192 of the Act, the assessee obtains from the employees evidence of actual expenses incurred against such subsistence allowance. 11.76 The payment of subsistence, therefore, would be taxable in the hands of the employees, if it is demonstrated that the entire amount is not actually spent for official purpose by the employees. In the present case, there is no '" dispute that the payment to the extent of 75% of the subsistence allowance the employees is supported by the evidence of the actual expenditure incurred for official purpose. To the extent of 25% of the amount paid as subsistence allowance, the employees has merely furnished a declaration / confirmation for having spent the said amount in the course of travel abroad. In case, it were to be held that there was no evidence of actual expenditure incurred by the employees to the extent of 25% of the subsistence allowance, the said amount would become taxable in the hands of the employees and the appellant would be in default of deduction of tax at source from such payment under section 192 of the Act. 11.77 It is noted that for the failure of tax deduction at source from payment of salary under section 192 of the Act, there is no disallowance provided under section 40a(i) / 40a(ia) of the Act. Considering the matter from the above perspective, too, in my view, there cannot be disallowance for failure to deduct tax at source from payment of subsistence allowance. (b) The payment is a non business expenditure: 11.78 I agree with the submissions of the AR that the assessing officer is looking at the second level of evidence as to the expenditure incurred by the employees out of the payment of subsistence allowance made to them. Such evidence for actual expenditure incurred by the employees out of the

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subsistence allowance is required only for the purpose of allowing exemption^ under section 10(14)(i) of the Act read with Rule 2BB(i) of the Income-tax Rules to ascertain whether such amount of subsistence allowance was actually incurred as expenditure for official purpose by the employees. Further, the said amount is paid by Xansa-UK to the employers and, in turn, the entire amount has been reimbursed by the appellant to Xansa-UK. The 25% of the amount paid as subsistence allowance which is held as non business expenditure by the assessing officer, is confirmed by way of declaration received from employees. 11.79 It is also a settled position that any amount paid by way of salary or remuneration to the employees is to be held as allowable business expenditure. I, therefore, disagree with this contention of the assessing officer and held the entire payment of subsistence allowance as business expenditure. (d) Previous year expenditure: 11.80 The assessing officer has noted that some part of the expenditure of subsistence allowance claimed as deduction in the relevant previous year relates to expenditure actually incurred in the preceding previous year. If the expenditure is not incurred in the relevant previous year, the same cannot be allowed as deduction. The assessing officer is directed to examine from records the total amount of expenditure on subsistence allowance which does not relate to the relevant previous year and make disallowance of the same.”

29.

On perusal of the above decision it is apparent that the 1st appellate authority has considered the provisions of section 195 of the income tax act and held that that this payment of subsistence allowance is only a reimbursement of expenditure which is not chargeable to tax in India and hence no withholding tax was required to be deducted from such payment and hence provisions of section 40a (i) does not apply. Even

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otherwise he held that such payment of subsistence allowance if not fully spent for the official purposes of the employees then it would be chargeable to tax in the hands of the employees only, and as it is an expenditure of the employer incurred wholly and exclusively for the purposes of the business, which cannot be disallowed in parts. We also concur with the reasons given that such subsistence allowance is supported by the evidence of the actual expenditure incurred for official purposes to the extent of 75% and for the balance 25%, employees have submitted a declaration of having spent in the said amount in the course of travel abroad. Therefore, we do not subscribe to the argument of the Ld. departmental representative that 25% of expenditure has been claimed by the assessee without any evidence as employees have claimed such expenses from assessee by furnishing a declaration that this expenditure has been incurred by them. Reimbursement of expenses to the employees by employer on the basis of self-declaration for small

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amounts, for which it is difficult and sometimes cumbersome to obtain supporting by employees, is common prevalent practice and it is not an disallowable expenditure. Therefore, also we reject the contention of revenue that balance 25 % expenditure is without any basis and evidence. He also held that the payment is business expenditure as it is paid by way of salary or remuneration to the employees. Similarly he set aside the disallowance for the purpose of verification of the assessing officer in case if the total amount of expenditure on subsistence allowances not related to the previous year and then to make disallowance of the expenditure to that extent, if it is related to the earlier years. Ld. departmental representative could not point out any quantification made by the Ld AO about the amount expenditure related to previous year and earlier years. Therefore when the assessment order does not mention about the vouchers and declaration which are pertaining to earlier years, then in that case that verification needs to be done by the lf AO only, hence

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there is no infirmity in the order of ld CIT (A) in directing ld AO to verify the claim of the assessee form that aspect and quantify the disallowance, if any. In view of this, we confirm the order of the first appellate authority deleting the disallowance of subsistence allowance expenses and dismiss ground No. 3 of the appeal of the revenue. 30. Ground No. 4 of the appeal of the revenue is against disallowance of Rs. 827000/- paid to M/s Roto power projects private limited by invoking provisions of section 40 A (2) (b) of the income tax act deleted by the 1st appellate authority. During the relevant assessment year, the assessee had purchased diesel for the purpose of its business from Roto Power Projects (P.) Ltd. The assessee had also paid liasoning charges of Rs.8,27,000 to RPPPL, being 10% of the amount paid for purchase of diesel as per the agreement, for the additional facility of delivery of diesel at the assessee‟s premises. Such charges were, however, disallowed by the assessing officer under section 40A(2)(b) of the Act, alleging that there was no

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legitimate business need for incurring such expenditure. On appeal before the Ld. CIT appeal the addition was deleted, therefore revenue has challenged this issue before us. 31. Ld. departmental representative relied upon the order of the assessing officer and submitted that the assessee could have easily bought the diesel from any petrol pump , no liasoning charges are required to be paid and therefore there is no legitimate need for making any payment of Rs. 827,000/- therefore it was disallowed by invoking the provisions of section 40 A (2) (b) of the act. 32. Against this Ld. authorized representative submitted that The CIT(A) has fairly allowed the issue in assessee‟s favor by holding that for invoking section 40(A)(2) of the Act, it is the onus of the assessing officer to establish with evidence market value of such service charges paid to RPPPL. The said onus has clearly been not discharged by the assessing officer and, therefore, disallowance made by the assessing officer has rightly been deleted.

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33.

We have carefully considered the rival contentions. In the present case we do not find any finding in the order of the Ld. assessing officer about the what is the market value of the services that has been rendered and whether there was any need of such services and what is the benefit derived by the assessee from the payments. After examining these 3 aspects the Ld. assessing officer must compare the market price of this with the amount of payment made by the assessee for delivering diesel at the doorstep of the premises of the assessee. The provisions of section 40 A (2) (a) speaks that where any expenditure has been incurred by the assessee paid to a specified person and Ld. assessing officer forms an opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods for which the payment is made or the legitimate needs of the business of the assessee or the benefit derived by or accruing to him, then he can disallow so much of the expenditure as is considered by him to be excessive or unreasonable. In the present case we do not find any opinion of the Ld.

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assessing officer that how such expenditure is excessive or unreasonable. The 1st appellate authority has also deleted this addition on the same ground therefore we confirm the finding of the Ld. CIT appeal in deleting the above disallowance. In the result ground No. 4 of the appeal of the revenue is dismissed. 34. Ground No. 5 of the appeal of the revenue is the disallowance of Rs. 2822882/-made out of legal and professional charges expenses by holding that the said payments made to various non-resident was taxable in India by the Ld. of assessing officer by invoking the provisions of section 40 (a) (ia) is deleted by the 1st appellate authority. 35. The brief facts of the disallowances that the assessee has made the certain payments under the head legal and professional expenditure without deduction of tax under section 195 of the income tax act. Therefore invoking the provisions of section 40 (a) (i) the amount was disallowed. 36. Ld. departmental representative submitted that the payment of legal and professional fees , the income is

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chargeable to tax in India in view of the provisions of section 9(1)(vii) rws explanation 2 of the income tax act. It was further submitted that according to the article 23 of the double taxation avoidance agreement such income would be chargeable to tax as other income not as fees for technical services. He submitted that therefore tax should have been deducted on this sum, as it is chargeable to tax in India. 37. Ld. authorized representative submitted that The expenses of Rs.17,17,863 consisting of Rs. 17,05,830 and Rs.12,033 were made to Xansa, UK pursuant to agreement between it and the assessee, dated 16.4.2003. In the present case, Xansa UK has rendered management, business advisory services, design / lay out services, and provided assistance in engagement of overseas consultants, lawyers, to explore the possibilities of acquisition of businesses. He further submitted that in terms of, payments for rendering any technical and consultancy services which make available technical knowledge, skill, etc., are included within the ambit of

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“fees for technical services” under the Indo-UK DTAA. He referred that definition of the term “fees for technical services” in terms the Article 13(4)(c) of the Indo-UK DTAA is restricted in scope, in as much as payment of consideration for services of managerial, technical or consultancy nature would be regarded as 'fees for technical/included services' only if technical know-how, skill or process is “made available” to the payer. In absence thereof, the consideration cannot be termed as “fee for technical services”. He further stated that similar expression “fees for included services” defined in Article 12(4)(b) of the India-USA DTAA has been defined as “payments of any kind to any person in consideration for the rendering of any technical or consultancy services if such services make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.” Thus, Article 13(4)(c) of the India-UK DTAA is pari materia with Article 12(4)(b) of the India- USA DTAA. He further relied on the decision of Hon‟ble

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Supreme Court of India in case of UOI v. Azadi Bachao Andolan: 132 Taxman 373 (SC), Boston Consulting Group Pte Ltd. Ltd.: 93 TTJ 293 (Mum) and Tekniskil (Sendirian) Berhard v. CIT: 222 ITR 551 (AAR) wherein it has been held that in interpreting the language of a DTAA, reliance can be placed on other tax treaties wherein identical language is used. He referred to the various payments and submitted that Similarly, the payment of Rs.4,91,754 to Xansa Plc. UK was towards reimbursement of various legal / professional / consultancy charges incurred by them on behalf of the assessee. Such payments not being in the nature of royalty or fee for technical services, covered under Article 13 of the DTAA with UK were not liable to tax in India. Also, payment aggregating to Rs.2,38,491 comprising of Rs.70,035, Rs.1,15,372 and Rs.53,084, were paid to E&Y, Singapore were on account of professional services rendered by them and they were not in the nature of „fee for technical services‟ covered under Article 12(4)(b) of DTAA with Singapore since they do not make available

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technical skill, know how etc. through which the assessee is enabled to apply the said skill, know how etc. to its business. For similar reasons, payment made to Xansa Singapore of Rs.3,62,741, being reimbursement for the professional services rendered by them was not in the nature of fee for technical services in terms of Article 12 of DTAA with Singapore and therefore not liable to tax in India. In nutshell he submitted that there is no requirement of tax deduction at source on the sums in India applying the provisions of the double taxation avoidance agreement as according to him they are not chargeable to tax in India. He referred to the number of decisions of various courts to support his argument placed before us. Regarding the contention of the Ld. departmental representative that in the present case article 23 shall apply which is pertaining to other income, he submitted that in the present case in the hands of the recipient the article 7 or article 13 shall apply which is related to the business income of the recipient.

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38.

We have carefully considered the rival contentions. The Ld. 1st appellate authority has decided this issue is under:-

“14.22 I have considered the submissions of the AR. In terms of section 90(2) of the Act, provisions of Double Taxation Avoidance Agreement, if it is beneficial, is to be followed for determining the tax liability of the non resident, assessee. I have examined the Double Taxation Avoidance Agreement between India and UK and India and Singapore, which are relevant for deciding taxability or otherwise of the above payment aggregating to Rs.28,22,882 made by the appellant to non resident entities. It is not disputed that payment of Rs. 17,17,863 to Xansa UK consisting of Rs. 17,05,830 and Rs. 12,033 is towards recharge for the management services and the same is not in the nature of technical fee. The said payment would not, in any case, made available technical knowledge, technical plan and design to the appellant. The said payment, therefore, cannot be characterized as royalty or fee for technical services under Article 13 of the Double Taxation Avoidance Agreement with UK. It is also not anybody's case that Xansa UK has no permanent establishment in India. In absence of permanent establishment in India, the said payment being in the nature of business profits as per Article 7 of the Double Taxation Avoidance Agreement with UK would not be taxable in India. 14.23 Similarly, payment of Rs.4,91,754 to Xansa UK towards reimbursement of legal or professional expenses, too, not being in the nature of royalty or fee for technical services, covered under Article 13 of the Double Taxation Avoidance Agreement with UK, is not liable to tax in India. Also, payment aggregating to Rs.2,38,491 comprising of Rs.70,035, Rs. 1,15,372 and Rs.53,084, were paid to E&Y, Singapore was on account of professional services rendered by them and they were not in the nature of Tee for technical services' covered under Article 12 of DTAA with Singapore. Further, payment aggregating to Rs.2,38,491 (comprising of Rs.70,035, Rs. 1,15,372 and Rs.53,084) to E&Y, Singapore was on account of professional services rendered by them.

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14.24 The aforesaid payment is not in the nature of royalty or fee for technical services in terms of Article 12 of the Double Taxation Avoidance Agreement with Singapore and it is, in fact, independent personal sendees covered under Article 14 of the Double Taxation Avoidance Agreement with Singapore. The said payment also is not liable to tax in India as the same does not involve stay of service provider in India for the period exceeding 90 days. The aggregate payment of Rs.28,22,882, therefore, made to the non resident is not taxable in India. Tax, therefore, is not required to be deducted from such payment and there is no occasion to invoke section 40(a)(i) of the Act for non deduction of tax at source from the payment. The disallowance made by the assessing officer, therefore, is not correct and is directed to the deleted.”

39.

According to the article 13 (4) of the double taxation avoidance Agreement between India and Great Britain the definition of „fees for technical services‟ is as under:-

For the purposes of paragraph 2 of this Article, and subject to paragraph 5 of this Article, the term "fees for technical services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including the provision of ser- vices of technical or other personnel) which : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this Article is received ; or (b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received; or (c) make available technical knowledge, experience, skill, know- how or processes, or consist of the development and transfer of a tech- nical plan or technical design. 40. Similarly according to the article 12 (4) of the double taxation avoidance Agreement between India and Singapore the definition of „fees for technical services‟ is under:

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The term "fees for technical services" as used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received ; or (b) make available technical knowledge, experience, skill, knowhow or processes, which enables the person acquiring the services to apply the technology contained therein ; or (c) consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein. 41. Therefore in both the above double taxation avoidance agreement the fees for technical services is chargeable to tax only if it satisfies the “ make available” test. On looking to the various expenditure which are disallowed one of them is pertaining to the payment made to UK company in terms of an agreement between the appellant and that UK company dated 16/04/2003 for provision of the management services in relation to advise and guidance on key management decisions to explore the possibilities of the acquisition of the businesses. According to us the Ld. CIT appeal has correctly held that the above test of make available is not satisfied in terms of the provisions of article 13 of the Indo UK DTAA

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hence the fees paid by appellant to the UK company would not be taxable in India. Similarly with the fees paid to the Ernst & Young Singapore was on account of professional services rendered by them, which are not in the nature of the fees for technical services but on account of the professional services rendered by them. Similarly the amount paid to M/s Xansa , Singapore was also on account of the reimbursement of the professional services rendered by them and not being in the nature of the fees for technical services. Ld. Departmental representative before us could draw our attention towards the fact that how these services have been made available to the assessee by the various service providers. We also do not find content of any services where the ld AO has shown that such services have been made available to the assessee in terms of the requirement of the DTAA. Therefore we do not find any infirmity in the order of the Ld. 1st appellate authority in holding that that these income are not chargeable to tax in India in terms of the double taxation avoidance agreement and

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therefore no tax is required to be withheld on such payments and hence he deleted the disallowance. Regarding the argument of the Ld. departmental representative that article 23 shall apply with respect to these payments, we are of the opinion that this argument is deserves to be rejected for the reason that article 23 of India UK DTAA provides as under:

Article 23 Other income 1. Subject to the provisions of paragraph 2 of this Article, items of income beneficially owned by a resident of a Contracting State, wherever arising, other than income paid out of trusts or the estates of deceased persons in the course of administration, which are not dealt with in the foregoing Articles of this Convention, shall be taxable only in that State. 2. The provisions of paragraph 1 shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State indepen- dent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case, the provi- sions of Article 7 or Article 15 of this Convention, as the case may be, shall, apply. 3. Notwithstanding the provisions of paragraphs 1 and 2 of this Article, items of income of a resident of a Contracting State not dealt with in the foregoing articles of this Convention, and arising in the other Contracting State may be taxed in that other State.

In the present case it was not the case of the ld AO that recipient of such income has any permanent

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establishment in India further the argument of the Ld. AR has also not been disputed that none of the services have been rendered in India. In view of this according to the article 7 of the double taxation avoidance agreement as none of the recipient is carrying on business in India through any permanent establishment same shall also not be taxable in India. Therefore we reject the contention of the revenue on this account. In the result ground No. 5 of the appeal of the revenue is dismissed. 42. In the result, appeal of the revenue in ITA number to 283/Del/2011 for assessment year 2004 – 05 is dismissed. 43. Now we come to the appeal of the assessee wherein assessee has raised the following grounds of appeal in ITA No.2577/Del/2011 for the Assessment Year 2004- 05:- “1. That the Commissioner of Income-tax (Appeals) (UCIT(A)") erred on facts and in law in sustaining addition to the income of the appellant to the extent of Rs. 1,19,35,402 on account of the alleged difference in the arm's length price of the international transaction of provision of IT enabled services by the appellant to its Associated Enterprise, Xansa UK.

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1.1 That the CIT(A) erred on facts and in law in not appreciating that loss in BPO segment of the appellant was an abnormal loss due to the same being a start up unit and in the gestation period. 1.2 That the CIT(A) erred on facts and in law in not rejecting the contention of the TPO that the loss in BPO segment of the appellant was inextricably linked to the price setting mechanism of the appellant with its AE. 1.3 That the CIT(A) erred on facts and in law in not appreciating that the appellant was a low risk captive service provider and appropriate adjustment in the operating profit margin of the assessee or the comparable companies was required to be made on this account. 1.4 Without prejudice, the CIT(A) erred on facts and in law in not considering the four years' average operating results of the appellant for the purpose of benchmarking international transactions of provision of IT enabled services to its associated enterprise. 1.5 Without prejudice, that the CIT(A) erred on facts and in law in not considering the operating profit results of only start-up companies for the purpose of benchmarking international transactions of provision of IT enabled services to its associated enterprise. 1.6 That the CIT(A) erred on facts and in law in not considering Alsec Technologies Ltd. and Compudyne Winfosystems Ltd. as comparable companies on the basis of the contention of the TPO that these companies had negative net worth and abnormal financial results. 1.7 That the CIT(A) erred on facts and in law in not considering Twin Star Software Exports Ltd. as a comparable company on the basis of the contention of the TPO that such company had a turnover much lower than that of the appellant.

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1.8 Without prejudice that the CIT(A) erred in law in not allowing variation to the extent of (+/-) 5%, while determining the arm's length price of the 'international transactions. 2. That the CIT(A) erred on facts and in law in directing the assessing officer to disallow subsistence allowance relating to earlier year, without appreciating that the same was paid on account of actual expenditure incurred by the appellant's employee. 3. That the CIT(A) erred on facts and in law in upholding the disallowance of prior period expenses to the extent of Rs.2,12,941 alleging that the expenditure should have been claimed in the year in which the same were incurred. 3.1 That the CIT(A) erred on facts and in law in not appreciating that the prior period expenses were allowed which were ascertained and had crystallized during the previous year. 44. The assessee has also raised an additional ground of appeal as under. “1.9 That the Commissioner of income tax (A) erred on facts in law in not excluding Fortune Infotech limited which is functionally not comparable to the appellant from the final set of comparable companies. “ 45. For the admission of the additional ground prayer under rule 11 of the income tax appellate Tribunal Rules 1963 was filed. It was contended by Ld. authorized representative that there is no estoppels in law and it is

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open for the assessee to resile from the position wrongly taken as this comparable has been taken by the assessee in its Transfer pricing Study report. It was further submitted that above additional ground of appeal does not require any fresh adjudication into facts as the facts relating to these comparable forms part of the transfer pricing study filed by the assessee and considered by the Ld. transfer pricing officer and the 1st appellate authority. It was further submitted that in view of the various decision of coordinate benches holding that Fortune Infotech Ltd is not a valid comparable to an assessee engaged in the profession of ITES and therefore the omission to raise the additional ground of appeal is neither willful nor deliberate. In view of this he submitted that the additional ground of appeal may be admitted. 46. Referring to the comparables selected for the purpose of comparability in analysis, he submitted that the Ld. TPO and CIT (A) in their orders have considered M/s Fortune Infotech Ltd as one of the comparable companies but he submitted that it is not functionally comparable as it has

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developed its own software system for rendering specialized services and cannot be compared with the BPO services. He supported his argument by the decision of Bangalore bench of tribunal in case of 24 x 7 customer.com private Ltd versus DCIT in ITA No. 22 7/Bangalore/2010 where it has been noted that the company has developed its own software and therefore cannot be considered as comparable to the assessee who was engaged in providing BPO services. He further referred to the decision of Delhi bench of tribunal in case of ESL services.com private limited versus ACIT ITA No. 1940 and 1982/del/2008 for the assessment year 2008 – 09 wherein this comparable has been rejected. He therefore pressed that this comparable should be removed from the list of comparables for comparing the arms length transaction of the international transactions entered into by the assessee. He further submitted that after exclusion of this comparable the average operating margin of comparable companies finally selected by the Ld. Commissioner of income tax (A) reduces to 14.21% of

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the PLI of comparable companies whereas the appellant‟s margin is just 12% , if the comparable data of one year is considered. He further submitted that if the same is taken out from the comparable list of the Ld. TPO average operating profit by total cost for the financial year 2003 – 04 would be much less than the profit level indicator of the assessee at 12% . 47. The Ld. departmental representative objected to the additional ground of appeal submitting that assessee has already taken this comparable into its Transfer pricing Study report and therefore AO did not look into the functional dissimilarity now being pointed by the Ld. authorized representative and further this is not a legal ground and therefore same should not be admitted. 48. We have carefully considered the rival contentions. It is an admitted fact that appellant has taken Fortune Infotech Ltd as a comparable in its transfer pricing study report, Ld. transfer pricing officer is also accepted this as a valid comparable and on this hypothesis the Ld. transfer pricing officer framed his order under section

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92C (3) income tax Act. Now assessee wants its exclusion. As held by special bench in case of DCIT versus Quark systems private limited 4 ITR (trib) 606 wherein it is held that assessee is not estopped from pointing out at any stage that a comparable is wrongly selected. Therefore we reject the contention of the Ld. departmental representative that though assessee has taken the same comparable into its transfer pricing study report now it cannot resile from that stand contending for its exclusion. Further, as assessee has already taken this comparable into its transfer pricing study report, which is available on record we are of the opinion that additional ground of appeal needs to be admitted, as no further facts are required to be adduced. In the result we admit the additional ground of appeal for adjudication. 49. Firstly we adjudicate the additional ground of appeal and respectfully following the decision of the special bench of the tribunal in case of DCIT versus Quark systems private limited (supra) , we deem it fit and proper to remit the matter to the file of the Assessing Officer for

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consideration of claim of the taxpayer and make a de novo adjudication of the arm's length price deciding about this comparable in view of various decisions of the coordinate benches cited before us, after providing a reasonable opportunity of being heard to the assessee. We order accordingly. 50. Coming to the ground No. 1 of the appeal of the assessee against the order of the Ld. CIT appeal in sustaining the addition to the income of the appellant to the extent of Rs 11935402/-, it was submitted before us that that the assessing officer while computing the adjustment to the arm‟s length price did not consider the benefit of range of 5% available to the appellant in terms of section 92C (2) of the income tax act. The Ld. and authorized representative referred to the explanatory memorandum to the Finance Bill 2002 and also to the various decisions of the tribunal wherein it is held that that the assessee is allowed the standard deduction of 5%. Furthermore it was also submitted that that loss in BPO segment of the appellant was an abnormal loss and not considering the

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4 years average operating results of the appellant for the purpose of benchmarking of the international transactions. Assessee further contended by various grounds about inclusion of certain comparables. In nutshell, in the ground No. 1 of the appeal assessee has contended many aspects of the computation of arms length pricing of its international transactions. 51. The Ld. departmental representative submitted that the deduction within the range of + or -5% is not allowable to the assessee. 52. We have carefully considered the rival contentions. We find that in para No. 7.11 of the order of the 1st appellate authority that the assessee has contented before him that benefit of range of 5 percentage as per proviso to section 92C (2) of the act is admissible as standard deduction while computing the arm‟s length price of the international transactions. Furthermore several decisions were also quoted and it was contended without prejudice that the Ld. assessing officer may be directed to recompute the adjustment to the arm‟s length price with

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reference to 95% of the arm‟s length price determined by applying transactions net marginal method. We also noted that appellant has raised this ground vide ground No. 2.1 to 2.6 before the Ld. at 1st appellate authority . Ld. 1st appellate authority has given his finding in para No. 7.14 to 7.17 of his appellate order only on allocation keys of business support cost, however despite this we could not find any finding in the order with respect to ground No. 2.1 to 2.6 raised before him. Therefore we set aside this ground of appeal to the file of the Ld. CIT (A) to decide them afresh. Accordingly we allow ground No. 1 of the appeal of the assessee accordingly with above direction. 53. Ground No. 2 of the appeal was not pressed before us as after verification of facts, the expenditure has been allowed in the year under consideration by the assessing officer vide order dated 20.10.2011 passed under section 250/143(3) of the Act and therefore it is dismissed. 54. Ground No. 3 of the appeal is against the disallowance of Rs 212941/- on account of prior period expenses

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confirmed by the Ld. and 1st appellate authority on the ground that the expenditure should have been claimed in the year in which it was incurred. During the relevant assessment year, the appellant had disclosed certain prior period expenses. From such expenditure, the appellant had set-off the prior period income. In the return of income, assessee made a net addition of Rs. 3,15,679/- to the total income, on account of prior period expenditure, by reducing net prior period income of Rs. 2,12,941 from export segment and adding back net prior period expenditure of Rs. 5,28,620 in the domestic segment. The assessing officer, however, made an addition of Rs.2,12,941, holding that such set-off of prior period income from prior period expenditure is not allowable under section 37(1) of the Act. On appeal before the 1st appellate authority he confirmed the disallowance and therefore assessee is in appeal before us. 55. Ld. authorized representative submitted that the assessing officer has erred in making addition of net income arising from Exports segment on the ground that

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prior period expense is not allowable. On the other hand, disallowance of prior period expenses of Domestic segment have been allowed. He further submitted Without prejudice, though the expenses may be for the period prior to the relevant previous year but the expenses crystallized during the year as the expenses had been approved and passed in the accounts during the relevant previous year. He therefore referred to the decision of Hon‟ble Gujarat High Court in the case of Saurashtra Cement & Chemical Industries vs. CIT: 213 ITR 523 wherein it is held that merely because an expense relates to a transaction of an earlier year it does not become a liability payable in the earlier year unless it can be said that the liability was determined and crystallized in the year in question on the basis of maintaining accounts on the mercantile basis. He further submitted that a similar view has been taken by the Calcutta High Court in the case of S.P. Jaiswal Estates (P) Ltd v. CIT: 216 ITR 145 and CIT v. India Foils Ltd.: 200 ITR 259.(This decision was followed by the same

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Court in 200 ITR 266) In view of the above said submission he submitted that that the net prior period expenses amounting to Rs.2,12,941/- are allowable deduction under the provisions of the Act as the expenses were approved and crystallized during the relevant previous year. He alternatively submitted that once the assessing officer has assessed prior period income tabulated above, in the present year, there was no reason to disallow the claim of the assessee regarding prior period expenses. He further referred to the decision of decision of the Delhi Bench of the Tribunal in the case of Modi Industries v. DCIT in ITA No. 2245/D/07 for assessment year 2003-04, wherein, on identical facts, the Tribunal held that once the assessing officer had assessed prior period income in the present year, there was no reason to disallow the claim of the appellant regarding the prior period expenses. In view of the aforesaid, it was submitted that the assessing officer erred in adding back prior period expenses to the profit and loss account of the appellant as the expenses had

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crystallized during the relevant previous year only and, therefore, the disallowance made by the assessing officer in this regard may be deleted. He also raised an alternative argument that the assessing officer may kindly be directed to allow the expenditure relatable to the previous year relevant to assessment year 2003-04, to which such expenses pertain. 56. Ld. departmental representative relied upon the order of the lower authorities and submitted that the expenditure have been stated to be pertaining to the earlier years which cannot be allowed in this year and therefore the disallowance has rightly been made and confirmed by the 1st appellate authority. 57. We have carefully considered the rival contentions. The Ld. assessing officer has disallowed this expenses wide para number VIII of the assessment order wherein he held that that the prior period expenses are not allowable as expense. Ld. 1st appellate authority wide para No. 16.4 of his order has rejected the contention of the Ld. authorised representative that the adjustment may be

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allowed in assessment year 2003- 2004. However the detail of such liability adjustment is available at page No. 552 of the paper book wherein in schedule „O” of the annual accounts of the company bifurcated into the export segment and the domestic segment and netted adjustment of Rs. 3 15879/-is debited to the profit and loss account. Vide Paper book page No. 554 to 558 details of such expenditure in the form of the Ledger accounts are also provided. It is an accepted proposition that the expenses are not considered prior period expenses merely because they pertain to the earlier period to the accounting period as they may be admitted by the parties during the current year. This is also the basic principle of the mercantile system of accounting that when the parties admit the liabilities the right to recover the expenses arises. Therefore when the bills are approved and are accounted for in the books of a assessee, they accrue for the payment. However in the present case it is not possible to ascertain at this stage that when the bills were approved and admitted by the

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assessee as except the ledger accounts no details are available. Further this argument is also not considered by lower authorities. Therefore in the interest of justice we set aside this issue to the file of the Ld. assessing officer to determine when the bills have been approved and admitted by the appellant, if they are admitted by assessee in the current previous year then though they may pertain to the earlier previous year the expenses are allowable. In the result ground No. 3 of the appeal of the assessee is allowed with above direction. 58. In the result appeal of assessee in ITA No. 2577/del 2011 for assessment year 2004 2005 is partly allowed. 59. In the result appeal for assessment year 2004 5 preferred by the revenue is dismissed and filed by the assessee is partly allowed.

ITA NO 3671/Del/2013 ( By revenue ) for AY 2005- 06 60. Revenue has raised the following grounds of appeal in ITA No.3671/Del/2013 for the Assessment Year 2005- 06:-

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“1. Ld CIT(A) erred in law and on the facts of the case in deleting the addition of Rs. 149276005/- made by the AO by disallowing 25% of subsistence allowance. 2. ld CIT(A) erred in law and on the facts of the case in allowing the claim of the assessee under section 10A of the Act at Rs. 791913860/- as against Rs. 492560381/- allowed by the AO.” 61. Before us the parties submitted that the ground No. 1 of the appeal of the revenue is identical to the ground No. 3 of the appeal of the revenue in ITA number to 2283/ Del/ 2011 for assessment year 2004- 2005. Parties also submitted that arguments raised by them for and against this ground in that appeal are also squarely applicable to the facts of this case and therefore they may be considered. 62. We have carefully considered the rival contentions and we also perused ground No. 1 of the appeal of the revenue in this appeal with the ground No. 3 of the appeal of the revenue for assessment year 2004- 2005. The parties did not point out any change in the facts and circumstances of the case .We also are of the view that they are same except the amount of addition/disallowances. We have already dismissed the

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ground No. 3 of that appeal giving our reasons for the same and therefore for identical reasons we also dismiss ground No. 1 of this appeal of the revenue. 63. Ground No. 2 of the appeal was also stated to be similar to ground No. 2 of the appeal of the revenue for assessment year 2004 -2005 in case of the assessee. The parties also stated that the same arguments may also be considered while deciding this ground of appeal. 64. We have carefully considered the rival contentions and also perused ground No. 2 of the appeal of the revenue for assessment year 2004- 2005 which has been decided by us by this common order. The parties before us did not point out any change in the facts and circumstances of the case. We find both the grounds similar except the amounts. We have already decided ground No. 2 in that particular appeal where we have dismissed the ground of the appeal of the revenue. Therefore, similarly for identical reasons we also dismiss ground No. 2 of the appeal of the revenue for this year.

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65.

In the result appeal of the revenue in ITA No. 3671 Del 2013 for assessment year 2005 2006 filed by the revenue is dismissed.

ITA NO 3673/Del/2013 ( by revenue ) AY 2006-07

66.

Revenue has raised the following grounds of appeal in ITA No.3673/Del/2013 for the Assessment Year 2006-07:- “1. Ld CIT(A) erred in law and on the fact of the case in deleting the addition of Rs. 132963891/- made by the AO by disallowing 25% of subsistence allowance. 2. Ld CIT(A) erred in law and on the facts of the case in allowing the claim of the assessee under section 10A of the Act at Rs. 1097335155/- as against Rs. 842447044/- allowed by the AO.”

67.

Before us the parties submitted that the ground No. 1 of the appeal of the revenue is identical to the ground No. 3 of the appeal of the revenue in ITA number 2283/ Del/ 2011 for assessment year 2004- 2005. Parties also submitted arguments raised by them for and against this ground in that appeal are also squarely applicable to the facts of this case and therefore they may be considered. 68. We have carefully considered the rival contentions and we also perused ground No. 1 of the appeal of the

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revenue in this appeal with the ground No. 3 of the appeal of the revenue for assessment year 2004- 2005. The parties did not point out any change in the facts and circumstances of the case .We also are of the view that they are same except the amount of addition/disallowances. We have already dismissed the ground No. 3 of that appeal and therefore we also dismiss ground No. 1 of the appeal of the revenue in the present appeal. 69. Ground No. 2 of the appeal was also stated to be similar to ground No. 2 of the appeal of the revenue for assessment year 2004- 2005 in the case of assessee. The parties also stated that the same arguments may also be considered while deciding this ground of appeal. 70. We have carefully considered the rival contentions and also perused ground No. 2 of the appeal of the revenue for assessment year 2004- 2005 which has been decided by us by this common order. The parties before us did not point out any change in the facts and circumstances of the case. We find both the grounds similar except the

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amounts. We have already decided ground No. 2 in that particular appeal where we have dismissed the ground of the appeal of the revenue. Therefore similarly for same reasons we also dismiss ground No. 2 of the appeal of the revenue for this year. 71. In the result appeal of the revenue in ITA No. 3673/ Del/ 2013 for assessment year 2006-07 filed by the revenue is dismissed. ITA NO 5798/Del/2012 A Y 2008-09 ( BY Assessee) 72. The assessee has raised the following grounds of appeal in ITA No.5798/Del/2012 for the Assessment Year 2008- 09:- “1. That the assessing officer erred on facts and in. law in completing the assessment under section 144C/143(3) of the Income-tax Act, 1961 ('the Act') at an income of Rs. 76,64,85,790 as against income of Rs.60,01,15,583 returned by the appellant. 2. That the assessing officer/DRP erred on facts and in law in disallowing Rs. 15,70,53,928, being 25% of subsistence allowance paid by the appellant amounting to Rs. 62,82,15,691, on account of overseas stay of the appellant's employees. 2.1 That the assessing officer/DRP erred on facts and in law in not appreciating that the subsistence allowance was paid by the appellant on account of actual expenditure incurred by the appellant's employees and the same was duly supported by vouchers/ declarations given by the employees.

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2.2 That the assessing officer/DRP erred on facts and in law in alternatively holding that 25% of subsistence allowance paid by the appellant was, even otherwise, disallowable under section 40(a)(i) as the appellant failed to deduct tax at source under section 195 of the Income Tax Act, 1961 ('the Act') on the same. 2.3 That the assessing officer/DRP erred on facts and in law in not appreciating that since amount paid to Steria, UK being mere reimbursement of actual expenses paid to the appellant's employees, there was no element of income and the same did not attract the provisions of section 195 of the Act. 3. That the assessing officer/DRP erred in law in excluding the following expenditure from the 'export turnover' of Noida-4 unit, for the purpose of computing deduction under section 10A of the Act: Telecommunication charges Rs.11,876 Subsistence for onsite employees Rs. 76,42,417 Standby and callout charges Rs. 45,75.639 Rs. 1.22.29.931 3.1 That the assessing officer/DRP erred in not appreciating that both the 'export turnover' and 'total turnover' have to be computed on the same basis for the purpose of computing deduction under section 10A of the Act. By making the purported adjustment from the "export turnover" of the Noida-4 unit, without / making the similar adjustment from “the turnover" has resulted into absurd and unintended results. 3.2 That the assessing officer/DRP erred in excluding foreign exchange fluctuation gain from the 'export turnover' of Chennai unit, for the purpose of computing deduction under section 10A of the Act. 3.3 Without prejudice that the assessing officer erred in not excluding foreign exchange fluctuation loss from the 'total turnover1 of Chennai unit, for the

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purpose of computing deduction under section 10A of the Act. 3.4 That the assessing officer/DRP erred, while making the purported adjustment from "the export turnover", following the assessment order for preceding assessment years, without appreciating that the said issue has already been decided by the ITAT in favor of the appellant for the assessment year 2003-04. 3.5 Without prejudice that the assessing officer/DRP erred in not excluding foreign exchange fluctuation loss from the 'total turnover' of Noida-4 unit, for the purpose of computing deduction under section 10A of the Act, specifically in view of the fact that the foreign exchange fluctuation gain has been adjusted in the 'total turnover' of the Chennai unit. 4. That the Assessing officer /DRP erred on facts and in law in charging/ computing interest under sections 234B of the Act.”

73.

In the present case appellant filed its return of income on 30/09/2008 declaring income of Rs. 600115583/-and Ld. assessing officer passed an assessment order pursuant to the direction of Ld Dispute Resolution Panel making disallowance of deduction under section 10A of Rs. 583136774/-and disallowance of subsistence allowance of Rs. 15705 3928/-. Against this disallowance this appeal is filed before us. 74. Ground No. 1 of the appeal of of the assessee is general in nature and therefore same is dismissed.

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75.

Ground No. 2 of the appeal of the assessee is that the Ld. assessing officer on direction of Ld. DRP disallowed Rs. 15705 3928/-being 25% of subsistence allowance paid by the appellant amounting to Rs. 628215691/- on account of overseas stay of the appellant‟s employees. Parties before us submitted that this is identical to the ground No. 3 of the appeal of the revenue in case of the assessee in ITA No. 2283/DEL/2011 for assessment year 2004-05. Parties also submitted that there is no difference in the facts and circumstances of the case for this year. They also submitted that the same arguments which were advanced for and against that ground may be considered. 76. We have carefully considered the rival contentions and also perused relevant grounds of that appeal. We have already decided this issue in the appeal of revenue for assessment year 2004 2005 while deciding ground No. 3 of the appeal against revenue. Vide that order we have dismissed ground in appeal of revenue. Therefore on the same basis in this appeal of assessee for similar reasons we allow ground No. 2 of the appeal of the assessee.

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77.

Ground No. 3 of the appeal of the assessee is against reduction in deduction claimed under section 10 A of the income tax act. Parties submitted before us that this issue is identical to the ground No. 2 of the appeal of the revenue for assessment year 2004- 2005, they also submitted that there are no changes in the facts and circumstances of the case and their arguments also remain same which may be considered. 78. We have carefully considered the rival contentions and also perused the grounds of appeal and the issue involved therein. The issue is about the computation of the export turnover and total turnover while computing deduction under section 10 A of the income tax act. We have already decided ground No. 2 of the appeal of the revenue for assessment year 2004 -2005 by this order. We have dismissed that ground. Therefore similarly we allow ground No. 3 of the appeal of the assessee for similar reasons. 79. The ground No. 4 of the appeal of the assessee is against charging interest under section 234B of the income tax

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act. It was submitted before us that this is a consequential ground hence we dismiss the same. In the result ground No. 4 of the appeal of the assessee is dismissed. 80. In the result appeal of the assessee in ITA No. 5798/DEL/2012 for assessment year 2008 -2009 is partly allowed.

ITA No.628/Del/2014 ( by revenue) Assessment Year 2009-10:-

81.

Revenue has raised the following grounds of appeal in ITA No.628/Del/2014 for the Assessment Year 2009-10:- “1. The CIT(A) has erred in deleting the disallowance of Rs. 26339000/- being 25% of the expenditure on subsistence allowance by wrongly holding that disallowance of non-deduction of TDS u/s 40A(i) was not called for in the case by holding that there is no evidence to the effect that the parent company is having any PE in India. 2. Ld CIT(A) had erred in holding that expenses incurred on telecommunication charges (Rs. 2.73 lacs), subsistence for onsite employees (Rs. 410.44 lacs ) and standby and call out charges (Rs/ 51.59 lacs) are not to be taken into account for the purpose of computing the profit eligible for deduction u/s 10A of the Act.”

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82.

The ground No. 1 of the appeal of revenue is against the disallowance of subsistence allowance to the extent of 25% deleted by the Ld. CIT appeal. The parties before us submitted that this is identical to the ground No. 3 of the appeal of the revenue for assessment year 2004 -2005 when there is no change in the facts and circumstances of the case in their arguments also remain similar, which may be considered. 83. We have carefully considered the rival contentions and also perused ground No. 3 of the appeal of the revenue for assessment year 2004- 2005 and we are of the view that similar issue is involved in this ground. We have already dismissed ground No. 3 of the appeal of the revenue for assessment year 2004- 2005 therefore similarly we also dismiss ground No. 1 of the appeal of the revenue in this appeal. 84. Ground No. 2 of the appeal of the revenue is against reduction in deduction under section 10 A of the income tax act with respect to certain charges which are not part of export turnover. The parties before us submitted that

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this is identical to ground No. 2 of the appeal of the revenue for assessment year 2004- 2005. They also submitted that there is no change in the facts and circumstances of the case for this year compared to that year and their arguments also remains similar which may be considered. 85. We have carefully considered the rival contentions and also perused the ground No. 2 of the appeal of the revenue for assessment year 2004 -2005 and we are of the view that it involves the similar issue. Vide our order for AY 2004- 2005 in the appeal of the revenue wherein we have dismissed ground No. 2 of the appeal, therefore similarly we also dismiss ground No. 2 of this appeal of the revenue. 86. In the result appeal of the revenue is dismissed. Order pronounced in the open court on 26/09/2016. -Sd/- -Sd/- (DIVA SINGH) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated:26/09/2016 A K Keot

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DCIT, NEW DELHI vs. M/S XANSA INDIA LTD., NOIDA