NEC HCL SYSTEM TECHNOLOGIES LTD.,NEW DELHI vs. ACIT, NEW DELHI

NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: ―E‖ NEW DELHI BEFORE SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER

ITA No: 5497/Del/2012 AY : - 2008-09

NEC HCL System Technologies Ltd Vs ACIT 96, Nehru Place New Delhi Circle-13(1) New Delhi 110 019 New Delhi PAN AACCN2062Q (Appellant) (Respondent)

AND

ITA No: 5804/Del/2012 AY : - 2008-09

ACIT Vs NEC HCL System Technologies Circle-13(1) Ltd New Delhi 96, Nehru Place (Appellant) New Delhi New Delhi 110 019 PAN AACCN2062Q (Respondent) Assessee by : Shri Ajay Vohra Sr. Advocate Shri Aditya Vohra, Advocate Revenue by : Shri Anuj Arora, CIT (DR)

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NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09

Date of Hearing : 02.11.2015 Date of pronouncement : 22.01.2016

O R D E R PER BENCH

Grounds of appeal

Disallowance of set off of losses of STPI unit against the profit of non - STPI unit - INR 5.490,557 That, on the facts and circumstances of the case and in law, 1. the Hon'ble Commissioner of Income Tax (Appeals) (CIT(A)) has erred in upholding the action of the Learned AO in not allowing set-off of losses incurred by the STPI unit of Rs. 5,490,557 which is entitled for deduction under section 10A of the Act against the business profits from Non - STPI unit of Rs. 7,460,124. 2. the Hon'ble CIT(A) has erred in holding that since section 10A of the Act provides for an 'exemption', the losses, if any incurred by units eligible for benefit under section 10A should be treated as losses from a ' source exempt from tax' and therefore, is eligible for set off against Non- STPI income. 3. the Hon'ble CIT(A) has erred in holding that a declaration under section 10A(8) making the claim of deduction under section 10A is a pre- requisite for allowing set off of losses from the STPI unit against income from a Non- STPI unit. While doing so, the Hon'ble CIT(A) has inter- alia erred in not following the decision 2 | P a g e

NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 of jurisdictional Tribunal in the case of Moser Bear India V JCIT [2951TR 148 (Delhi ATJ)]. 4. the Hon'ble CIT (A) has erred in not applying the various precedents cited by the Appellant (including that of Jurisdictional Tribunal) wherein, in identical circumstances, the Tribunals have allowed setting off losses of STPI units against the profits of Non-STPI units. 5. the Hon'ble CIT(A) has erred in not directing the Learned AO to allow set off of brought forward losses and unabsorbed depreciation against the assessed business income and other income.

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NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 AO completed assessment proceedings for the subject AY and passed an assessment order dated December 9, 2011 under section 143(3) of the Act determining the assessed income of the Appellant at Rs 179,945,360 after making following adjustments to the returned income of the Appellant:- a) disallowance under section 40(a)(i) of the Act on account of non- deduction of TDS on outsourcing cost paid by Japan BO to HCL Japan Ltd. of Rs 166637966/- b) rejection of claim of set off of loss from STPI unit against other business profits of Rs. 5,490,557/- 4. Aggrieved by the order passed by the AO under section 143(3) of the Act dated December 9, 2011, the appellant has preferred an appeal. Ld. CIT (A) passed order on 18/08/2012 wherein he confirmed the action of AO of rejection of set off of loss from STPI unit against other business profits of Rs. 5,490,557/- and deleted the disallowance u/s 40a(i) of the Act. . Solitary ground raised by the appellant in this appeal before us is against the rejection of claim of set off loss of eligible unit against the business income of the assessee. 5. Ld. AR of the Appellant Shri Ajay Vohra submitted that though honourableDelhi high court in case of CIT V Kei Ind Limited 373 ITR 574 has decided the issue against the assessee. However later on CBDT has come out with the circular no. 7/DV/2013 [FILE NO.279/MISC./M- 116/2012-ITJ], DATED 16-7-2013 where in it is directed that If after 4 | P a g e

NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 aggregation of income in accordance with the provisions of sections 70 and 71 of the Act, the resultant amount is a loss (pertaining to assessment year 2001-02 and any subsequent year) from eligible unit it shall be eligible for carry forward and set off in accordance with the provisions of section 72 of the Act. Similarly, if there is a loss from an ineligible unit, it shall be carried forward and may be set off against the profits of eligible unit or ineligible unit as the case may be, in accordance with the provisions of section 72 of the Act. Therefore in view of this circular the assessee is eligible for of set off losses of STPI unit against the profit of non - STPI unit of Rs. 5.490,557. He further submittedthat this circular is the accepted position by CBDT andtherefore despite the decision of Honourable Delhi High court deciding otherwise the assessee is eligible for claim of the set off this loss of STPI unit against the profits of Non- eligible units. To strengthen his argument he also took us through various paragraphs of the circular. He further submitted that the circulars are binding on lower authorities andthat circular shall prevails over the decision of honourable Delhi high court. 6. Regarding his submission that the circulars issued by CBDT are binding on Revenue authorities he relied up on decision of Honourable supreme court in case of Navnitlal C Jhaveri V ACIT 56 ITR 198 (SC) , Ellerman Lines Ltd V CIT 82 ITR 913 (SC ), K P verghese V ITO 131 ITR 597 and UCO bank V CIT 237 ITR 889. 5 | P a g e

NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 7. Ld. DR on the other hand submitted that this circular is issue in 2013 where as the appeal pertains to AY 2008-09 and therefore cannot be made applicable in case of the assessee. He further submitted that now the issue is squarely covered in favour of the revenue in view of the decision of honourable jurisdiction High court in the case of CIT V Kie IndLimited 373 ITR 574. 8. In rejoinder,Ld. AR submitted that CBDT has given a general direction on the interpretation of law by CBDT and it does not apply to a specific year but to the mechanism of computation of total income and set off losses. Therefore, it should apply with equal force to the period prior to issue of the circular. He further submitted that as this circular is beneficial to the assessee it should be applied in favour of the assessee and benefit should be granted to the assesse. 9. We have carefully considered the rival contentions. The facts of the case are not indispute that assessee has one unit, which is eligible to claim deduction u/s 10A of the income tax Act, which has incurred loss. Assessee has asked for the set off this loss against the income of other non-eligible unit. Honourable Delhi high court in case of CIT V Kei Industries limited 373 ITR 574 dated 13.03.2015 has held that:-

―13. This court in TEI Technologies (P.) Ltd. (supra) also ruled out that by virtue of Section 80A (4) the position is any different. It was held that even if Section 10A/ Section 10B are treated as exemption provisions, Section 80A (4) cannot defeat that interpretation. The object of Section 80-A (4) was explained as ensuring that "double benefit does not result to an assessee in respect of the same income, once 6 | P a g e

NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 under Section 10A or Section 10B or under any of the provisions of Chapter VIA and again under any other provision of the Act." It was held that even if Section 10A or Section 10B is construed as exemption provisions, "it is still possible to invoke the sub-section and ensure that the assessee does not obtain a deduction in respect of the exempted income under any other provision of the Act. The only object of the sub-section is to ensure that there is no double benefit arising to the assessee in respect of the same income." 14. In this case, this court is of the opinion that TEI Technologies (P.) Ltd. (supra) applies. The tax-exempt income of the assessee, eligible under Section 10-B could not have been set off against the losses from tax-liable income.‖ 10. However subsequent to that decision CBDT has come out with the circular dated 16/07/2013 which provides as under :- ―SECTION 10A, READ WITH SECTIONS 10AA & 10B OF THE INCOME-TAX ACT, 1961 - FREE TRADE ZONE - CLARIFICATION ON ISSUES RELATING TO APPLICABILITY OF CHAPTER IV OF THE ACT AND SET OFF AND CARRY FORWARD OF BUSINESS LOSSES CIRCULAR NO. 7/DV/2013 [FILE NO.279/MISC./M-116/2012- ITJ], DATED 16-7-2013 It has been brought to the notice of the Board that the provisions of 10A/10AA/10B/10BA of the Income-tax Act, with regard to applicability of Chapter IV of the Act and set off and carry forward of losses, are being interpreted differently by the Officers of the Department as well as by different High Courts. 2. The two sections 10A and 10B of the Act were initially placed on statute in 1981 and 1988 respectively, and continued with some modifications and amendments till 31.03.2001. Section 10A as inserted by Finance Act, 1981 read as under: "10A. Special provision in respect of newly established industrial undertakings in the free trade zones.—(1) Subject to the provisions of this section, any profits and gains derived by an assessee from

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NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 an industrial undertaking to which this section applies shall not be included in the total income of the assessee." 2.1 Similarly section 10B as inserted by Finance Act, 1988 read as under: "10B. Special provision in respect of newly established hundred per cent export oriented undertakings.—Subject to the provisions of this section, any profits and gains derived by an assessee from a hundred per cent export oriented undertaking (hereafter in this section referred to as the undertaking) to which this section applies shall not be included in the total income of the assessee." 3. Vide Finance Act, 2000 sections 10A and 10B of the Act were substituted. Section 10A as substituted by Finance Act, 2000 reads as under: "10A. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed form the total income of the assessee...." 3.1 Similarly, section 10B as substituted by Finance Act, 2000 reads as under: "10B. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to

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NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee..." 3.2 The effect of the substitution of sections 10A and 10B of the Act has been elaborated in Circular No. 794 dated 9.8.2000 which clearly provides that the new provisions provide for deduction in respect of profits and gains derived by an undertaking from export of articles or things or computer software. 4. Sub-section (6) of sections 10A and 10B were amended by Finance Act, 2003 with retrospective effect from 1-4-2001. Circular No. 7/2003, dated 5- 9-2003 explains the amendments brought by Finance Act, 2003. The relevant paragraph is reproduced below: "20. Providing for carry forward of business losses and unabsorbed depreciation to units in Special Economic Zones and 100% Export Oriented Units. 20.1 Under the existing provisions of sections 10A and 10B, the undertakings operating in a Special Economic Zone (under section 10A) and 100% Export Oriented Units (EOU's) (under section 10B) are not permitted to carry forward their business losses and unabsorbed depreciation. 20.2 With a view to rationalize the existing tax incentives in respect of such units, sub-section (6) in sections 10A and 10B has been amended to do away with the restrictions on the carry forward of business losses and unabsorbed depreciation. 20.3 The amendments have been brought into effect retrospectively from 1-4-2001 and have been made applicable to business losses or unabsorbed depreciation arising in the assessment year 2001- 02 and subsequent years."

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NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 5. From the above it is evident that irrespective of their continued placement in Chapter III, sections 10A and 10B as substituted by Finance Act, 2000 provide for deduction of the profits and gains derived from the export of articles or things or computer software for a period of 10 consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such article or thing or computer software. The deduction is to be allowed from the total income of the assessee. The term 'total income' has been defined in section 2 (45) of the IT Act and it means the total amount of income referred to in section 5, computed in the manner laid down in the Income-tax Act. 5.1 All income for the purposes of computation of total income is to be classified under the following heads of income and computed in accordance with the provisions of Chapter IV of the Act- • Salaries • Income from house property • Profits and gains of business and profession • Capital gains • Income from other sources 5.2 The income computed under various heads of income in accordance with the provisions of Chapter IV of the IT Act shall be aggregated in accordance with the provisions of Chapter VI of the IT Act, 1961. This means that first the income/loss from various sources i.e. eligible and ineligible units, under the same head are aggregated in accordance with the provisions of section 70 of the Act. Thereafter, the income from one ahead is aggregated with the

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NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 income or loss of the other head in accordance with the provisions of section 71 of the Act. If after giving effect to the provisions of sections 70 and 71 of the Act there is any income (where there is no brought forward loss to be set off in accordance with the provisions of section 72 of the Act) and the same is eligible for deduction in accordance with the provisions of Chapter VI-A or sections 10A, 10B etc. of the Act, the same shall be allowed in computing the total income of the assessee. 5.3 If after aggregation of income in accordance with the provisions of sections 70 and 71 of the Act, the resultant amount is a loss (pertaining to assessment year 2001-02 and any subsequent year) from eligible unit it shall be eligible for carry forward and set off in accordance with the provisions of section 72 of the Act. Similarly, if there is a loss from an ineligible unit, it shall be carried forward and may be set off against the profits of eligible unit or ineligible unit as the case may be, in accordance with the provisions of section 72 of the Act. 6. The provisions of Chapter IV and Chapter VI shall also apply in computing the income for the purpose of deduction under sections 10AA and 10BA of the Act subject to the conditions specified in the said sections.‖ 11. On conjoint reading of the circular, it is apparent that regarding claim of set off losses of eligible unit against the profits of non-eligible units and loss of non-eligible unit against the profits of eligibleunits’ differentinterpretation are made by assessing officer as well as various high courts. Therefore, to set the controversy at rest CBDT issued this

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NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 circularas guidance to its field officers and made the stand of the board clear on the interpretationof those provisions. 12. It is now the law of the land laid down by Honourable Supreme Court in case of Navnitlal C Jhaveri V CIT and other decisions that acircular issued by the board would be binding on all officers and all persons employed in the execution of the act. It is also a settled law that even if such circulars are found not to be in accordance with the law and they depart and deviate from the construction of law. Hon. Supreme court in case of Uco bank V CIT In 237 ITR 889 has held as under :-

“In the case of Navnit Lal (C.) Javeri v. K. K. Sen, AAC [1965] 56 ITR 198, the legal effect of such circular is, inter alia, considered by a Bench of five judges of this court. Section 2(6A)(e) and section 12(1B) were introduced in the Income-tax Act by the Finance Act 15 of 1955, which came into force on April 1, 1955. The Government, however, realised that the operation of section 12(1B) would lead to extreme hardship because it would have covered the aggregate of all outstanding loans of past years and would impose an unreasonably high liability on the shareholders to whom the loans might have been advanced. The Minister, therefore, gave an assurance in Parliament that outstanding loans and advances which are otherwise liable to be taxed as dividends in the assessment years 1955-56 will not be subjected to tax if it is shown that they had been genuinely refunded to the respective companies before June 30, 1955. Accordingly, a circular was issued by the Central Board of Revenue on May 10, 1955, pointing out to all Income-tax Officers that it was likely that some of the companies might have advanced loans to their shareholders as a result of genuine transactions of loans, and the idea was not to affect such transactions and not to bring them within the mischief of the new provision. The officers, therefore, were asked to intimate to all the companies that if the loans were repaid before June 30, 1955, in a genuine manner, they would not be taken into account in determining the tax liability of the shareholders to whom they may have been advanced despite the new section. This circular was held by this court as binding on the Revenue, though limiting the operation of section 12(1B) or excluding certain transactions from the ambit of section 12(1B). It was so held because the circular was considered as issued for the purpose of proper administration

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NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 of the provisions of section 12(1B) and the court did not look upon this circular as being in conflict with section 12(1B). A similar view of the Central Board of Direct Taxes circulars has been taken in the case of K. P. Varghese v. ITO [1981] 131 ITR 597, by a Bench of two judges consisting of P. N. Bhagwati and E. S. Venkataramiah, JJ. The Bench has held that circulars of the Central Board of Direct Taxes are legally binding on the Revenue and this binding character attaches to the circulars even if they be found not in accordance with the correct interpretation of the section and they depart or deviate from such construction. Citing the decision of Navnit Lal (C.) Javeri v. K. K. Sen, AAC [1965] 56 ITR 198 (SC), this court observed that circulars issued by the Central Board of Direct Taxes under section 119 of the Act are binding on all officers and persons employed in the execution of the Act even if they deviate from the provisions of the Act. In Keshavji Ravji and Co. v. CIT [1990] 183 ITR 1, a Bench of three judges of this court has also taken the view that circulars beneficial to the assessee which tone down the rigiour of the law and are issued in exercise of the statutory powers under section 119 are binding on the authorities in the administration of the Act. The benefit of such circulars is admissible to the assessee even though the circulars might have departed from the strict tenor of the statutory provision and mitigated the rigour of the law. This court, however, clarified that the Board cannot preempt a judicial interpretation of the scope and ambit of a provision of the Act. Also a circular cannot impose on the taxpayer a burden higher than what the Act itself, on a true interpretation, envisages. The task of interpretation of the laws is the exclusive domain of the courts. However, the Board has the statutory power under section 119 to tone down the rigour of the law for the benefit of the assessee by issuing circulars to ensure a proper administration of the fiscal statute and such circulars would be binding on the authorities administering the Act. In the case of C. B. Gautam v. Union of India [1993] 199 ITR 530 at page 546, a Bench of five judges of this court considered as enforceable, Instruction No. 1A-88 issued by the Central Board of Direct Taxes relating to the enforcement of the provisions of Chapter XX-C of the Income-tax Act. The Central Board pointed out in the said instruction that in administering the provisions of the said Chapter, it has to be ensured that no harassment is caused to bona fide and honest purchasers or sellers of immovable property and that the power of pre-emptive purchase has to be exercised by the appropriate authority only when it has good reason to believe that the property has been sold at an undervalue and there is payment of black money in the transaction. The instruction that when the property is put up for sale by the appropriate authority, the reserve price should be fixed at a minimum of 15 per cent. above the purchase price shown as the apparent consideration under the agreement between the parties, was held to be binding on the authority. The Constitution Bench in the above case also approved of the decision of this court in K. P. Varghese v. ITO [1981] 131 ITR 597.

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NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 There are, however, two decisions of this court which have been strongly relied upon by the respondents in the present case. The first decision is the majority judgment in State Bank of Travancore v. CIT [1986] 158ITR 102, decided by a Bench of three judges of this court by a majority of two to one. This judgment directly deals with interest on “sticky advances” which have been debited to the customer but taken to the interest suspense account by a banking company. The majority judgment has referred to the circular of October 6, 1952, and its withdrawal by the second circular of June 20, 1978. The majority appears to have proceeded on the basis that by the second circular of June 20, 1978, the Central Board had directed that interest in the suspense account on “sticky” advances should be includible in the taxable income of the assessee and all pending cases should be disposed of keeping these instructions in view. The subsequent circular of October 9, 1984, by which, from the assessment year 1979-80 the banking companies were given the benefit of the circular of October 9, 1984, does not appear to have been pointed out to the court. What was submitted before the court was, that since such interest had been allowed to be exempted for more than half a century, the practice had transformed itself into law and this position should not have been deviated from. Negativing this contention, the court said that the question of how far the concept of real income enters into the question of taxability in the facts and circumstances of the case, and how far and to what extent the concept of real income should intermingle with the accrual of income, will have to be judged “in the light of the provisions of the Act, the principles of accountancy recognised and followed, and feasibility”. The court said that the earlier circulars being executive in character cannot alter the provisions of the Act. These were in the nature of concessions which could always be prospectively withdrawn. The court also observed that the circulars cannot detract from the Act. The decision of the Constitution Bench of this court in Navnit Lal (C.) Javeri v. K. K. Sen, AAC [1965] 56 ITR 198, or the subsequent decision in K. P. Varghese v. ITO [1981] 131 ITR 597 (SC), also do not appear to have been pointed out to the court. Since the later circular of October 9, 1984, was not pointed out to the court, the court naturally proceeded on the assumption that the benefit granted under the earlier circular was no longer available to the assessee and those circulars could not be resorted to for the purpose of overcoming the provisions of the Act. Interestingly, the concurring judgment of the second judge has not dealt with this question at all but has decided the matter on the basis of other provisions of law. The said circulars under section 119 of the Income-tax Act were not placed before the court in the correct perspective because the later circular continuing certain benefits to the assessees was overlooked and the withdrawn circular was looked upon as in conflict with law. Such circulars, however, are not meant for contradicting or nullifying any provision of the statute. They are meant for ensuring proper administration of the statute, they are designed to mitigate the rigours of the application of a particular provision of the statute in certain situations by applying a beneficial interpretation to the provision in question so as to benefit the assessee and

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NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 make the application of the fiscal provision, in the present case, in consonance with the concept of income and in particular, notional income as also the treatment of such notional income under accounting practice. In the premises the majority decision in the State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), cannot be looked upon as laying down that a circular which is properly issued under section 119 of the Income-tax Act for proper administration of the Act and for relieving the rigour of too literal a construction of the law for the benefit of the assessee in certain situations would not be binding on the departmental authorities. This would be contrary to the ratio laid down by the Bench of five judges in Navnit Lal (C.) Javeri v. K. K. Sen [1965] 56 ITR 198 (SC). In fact State Bank of Tranvancore v. CIT [1986] 158 ITR 102 (SC), has already been distinguished in the case of Keshavji Ravji and Co. v. CIT [1990] 183 ITR 1 (SC), by a Bench of three judges in a similar fashion. It is held only as laying down that a circular cannot alter the provisions of the Act. It being in the nature of a concession, could always be prospectively withdrawn. In the present case, the circulars which have been in force are meant to ensure that while assessing the income accrued by way of interest on a “sticky” loan, the notional interest which is transferred to a suspense account pertaining to doubtful loans would not be included in the income of the assessee, if for three years such interest is not actually received. The very fact that the assessee, although generally using a mercantile system of accounting, keeps such interest amounts in a suspense account and does not bring these amounts to the profit and loss account, goes to show that the assessee is following a mixed system of accounting by which such interest is included in its income only when it is actually received. Looking to the method of accounting so adopted by the assessee in such cases, the circulars which have been issued are consistent with the provisions of section 145 and are meant to ensure that assessees of the kind specified who have to account for all such amounts of interest on doubtful loans are uniformly given the benefit under the circular and such interest amounts are not included in the income of the assessee until actually received if the conditions of the circular are satisfied. The circular of October 9, 1984, also serves another practical purpose of laying down a uniform test for the assessing authority to decide whether the interest income which is transferred to the suspense account is, in fact, arising in respect of a doubtful or “sticky” loan. This is done by providing that non-receipt of interest for the first three years will not be treated as interest on a doubtful loan. But if after three years the payment of interest is not received, from the fourth year onwards it will be treated as interest on a doubtful loan and will be added to the income only when it is actually received. We do not see any inconsistency or contradiction between the circular so issued and section 145 of the Income-tax Act. In fact, the circular clarifies the way in which these amounts are to be treated under the accounting practice followed by the lender. The circular, therefore, cannot be treated as contrary to section 145 of the Income-tax Act or illegal in any form. It is meant for a uniform administration of law by all the income-tax authorities

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NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 in a specific situation and, therefore, validly issued under section 119 of the Income-tax Act. As such, the circular would be binding on the Department. The other judgment on which reliance was placed by the Department was a judgment of a Bench of two judges of this court in Kerala Financial Corporation v. CIT [1994] 210 ITR 129, where this court, following the majority view in State Bank of Travancorev. CIT [1986] 158 ITR 102 (SC), held that interest which had accrued on a “sticky” advance has to be treated as income of the assessee and taxable as such. It is said that ultimately, if the advance takes the shape of a bad debt, refund of the tax paid on the interest would become due and the same can be claimed by the assessee in accordance with law. For reasons set out above, we are not in agreement with the said judgment. The relevant circulars of the Central Board of Direct Taxes cannot be ignored. The question is not whether a circular can override or detract from the provisions of the Act ; the question is whether the circular seeks to mitigate the rigour of a particular section for the benefit of the assessee in certain specified circumstances. So long as such a circular is in force it would be binding on the departmental authorities in view of the provisions of section 119 to ensure a uniform and proper administration and application of the Income-tax Act. 13. Earlier to the above circular,it has been held by Honourable Bombay high court in case of Hindustan lever Limited V DCIT 325 ITR 102 (Bom) thatloss in eligible unit could be set off against the profits of the business. It is also noted in the circular at para No. one that It has been brought to the notice of the Board that the provisions of 10A/10AA/10B/10BA of the Income-tax Act, with regard to applicability of Chapter IV of the Act and set off and carry forward of losses, are being interpreted differently by the Officers of the Department as well as by different High Courts. Therefore, it cannot be said that circular is against the provision of the law merely because different high courts

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NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 have interpreted the law differently. It is apparent that this circular is issued with an intention to clarify anomaly in law and its interpretation. Undoubtedly circular is beneficial to the assessee as it sets certaincontroversy involved therein to rest. Therefore we are of the opinion that this issue now should be decided in view of the above circular where in it is provided that If after aggregation of income in accordance with the provisions of sections 70 and 71 of the Act, the resultant amount is a loss (pertaining to assessment year 2001-02 and any subsequent year) from eligible unit it shall be eligible for carry forward and set off in accordance with the provisions of section 72 of the Act.Therefore, according to us assesse’s claim deserves to be considered favourably in view of the beneficial circular issued by CBDT. However at the time of making assessment AO was not having the privilege of this circular , we set aside this matter to the file of with direction to grant benefit of deduction of set off of losses of STPI unit of Rs 54,90,557/- against the profit of non - STPI unit in accordance with this circular. 14. In the result, appeal of the assessee is allowed with above directions.

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NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 15. In the appeal of the revenue in ITA No. 5804/Del/2012,following grounds were raised. 1. Whether on the facts & in the circumstances of the case, the Ld. CIT (A) has erred in deleting the addition of Rs. 16,66,37,966/- by not appreciating the fact that the Japan Branch neither has an independent identity nor it has any business activity of its own and the outsourcing cost of payment made by the assessee to HCL Japan is deemed income within the meaning of Sec. 9 (1) (vii) of the Act. 2. Whether on the facts & in the circumstances of the case, the Ld. CIT(A) has erred in not appreciating the fact that the invoices filed by the assessee shows that NEC HCL Systems Technology India is the exporter and NEC System Technologies Ltd. Japan is the buyer and the source of payment or income of the non-resident is India.

established a branch office in Japan ('Japan

BO) for the purpose of furthering the objects of the Indian Company in

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NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 Japan. The Japan BO was mainly formed for undertaking extensive sales

and marketing activities for NEC HCL India to bid for the projects and to

obtain work from the competitors who are not only in Japan

but even outside Japan. The Japan BO also serves as the point of contact

between the customers and NEC HCL India. Japan BO is full-fledged,

independent, empowered and competent to undertake any and all

activities and objects for which the assessee company was established.

In furtherance of the JV Agreement entered, as mentioned above, a

Framework Agreement dated June 1, 2006 was signed between the

assessee, HCL Technologies (JV Partner) and HCL Japan Ltd., a company

incorporated in Japan for the purpose of subcontracting software

development work to HCL Japan Ltd obtained by Japan BO from NEC

Corporation, Japan, which could not have been serviced by the assessee.

In accordance with the above agreements, Japan BO undertook

marketing and sales efforts and obtained work / projects from NEC

Corporation Japan. The projects which are not serviced by NEC HCL

India, assessee were sub contracted to HCL Japan by the Japan BO as

agreed. HCL Japan raised invoice on Japan BO for the sub contracted

work. Japan BO makes payment to HCL Japan as outsourcing cost. Such

outsourcing cost represents the expenses paid by the Japan BO and are

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NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 accordingly debited in the profit and loss account of the Japan BO which

is then consolidated with the audited financial statements of NEC HCL

India. During the year under reference, Japan BO paid outsourcing cost

of Rs. 166,637,966 to HCL Japan which is also evident from Note 7.2

ofthe audited financial statements of the Appellant. Admittedly no tax

was withheld on the payment made to HCL Japan being a non resident

company as assessee believed that the payment was covered by the

exception carved out under section 9(1)(vii)(b) being fees paid in respect

of its business carried on by Japan BO outside India. During the course of

assessment proceedings, the Learned AO had asked assessee to furnish

reasons as to why no disallowance should be made under section 40(a)

(i) of the Income tax Act, 1961 since no tax has been deducted on the

outsourcing cost paid by Japan BO to HCL Japan. In response to the

query raised by the Learned AO, the assessee submitted that though

the outsourcing cost paid to a non resident company is covered within

the provisions of section 9(1)(vii) fees for technical services, however,

the same is covered by the exception carved out by section 9(1)(vii)(b) of

the Act because expenses are incurred in foreign currency for availing

facilities/ services for its branch in Japan which are utilized by the Japan

BO for carrying out its business outside India. The Learned AO rejected

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NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 the contentions of assessee that such expenses are

covered by the exception carved out by section 9(1)(vii)(b) of the Act

and disallowed the outsourcing cost in accordance with the provisions of

section 40(a) (i) on account of the fact that tax had not been withheld on

the said payment. While reaching to this conclusion, the Learned AO

observed that the a. Branch had no independent identity, b. the outsourcing activity was undertaken by the assessee from

India, c. the Japan BO does not undertake the sub -contracting activity; d. the Japan BO is merely an extension of the Indian Company e. in the agreement entered into with NEC Corporation,

there is no reference to the Japan BO; f. merely because invoices have been raised on Japanbranch by HCL

Japan is incorrect and contrary to the facts mentioned in the

agreement; g. JapanBO has been created only for proper execution of the JV

agreement and also its employees are

appointed for carrying out sales, marketing activity and general

administration work.

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NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 h. Rejected the argument that Japan BO has an independent

existence in Japan and carries out business

activities in Japan. 17. Aggrieved by the order of the Learned AO, the Appellant preferred

appeal before CIT (A) who deleted the disallowance u/s 40a(i) holding

that case of the assessee is covered by exclusion of section 9(1) (vii) (b)

of the Income tax act as assessee carried on the business in

Japanthrough its branch office which is a permanent establishment in

Japan of the assessee , the Japan Branch office has its independent

existence and carries on business in that country complying with the

Japanese laws locally, payments are also made outside Indiai.e. by

Japan BO to HCL Japan Limited and are alsodebited in the books of

Japan branch office, appropriates taxes have been paid in Japan as the

income of Japan BO is Japan sourced income, only for purposes of the

balance sheet of the assessee company profit and loss etc. are

incorporated in the balance sheet of the assessee, credits for taxes paid

in Japan by Branch office are also claimed as credit of foreign taxes in

case of return of income of the assessee company in India and Fees for

technical services are utilised by the Japan branch office in Japan only.

Further ld. CIT (A) also held that as per article 12 (6) of the Indo Japan

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NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 DTAA fees for technical services paid by Japan PE of the assessee (

JapanBranch) would be taxed in Japan only because , assessee has a PE

in Japan and this Fees for technical services is in connection with the

business of PE and payments of such fees is also borne by the Japan

branch of the assesse. Therefore he held that there is no liability

fastened on the assessee company of withholding tax u/s 195 of the

Income tax act and therefore he deleted the disallowance u/s 40a(i) of

The income Tax act of Rs. 16,66,37,966/-. 18. Before us the Ld. Dr submitted that the carve out the clause (b) to section 9(1) (vii) is not available to the assessee as branch office has very little role to play in earning this income and hence this income has deemed to accrue or arise in Indiaand therefore tax is required to be deducted. He further submitted that all services are renderedin India and therefore income has accrued to the recipient in India and hence there is failure to deduct tax at sources of this amount by the assessee. He further argued that for the reason stated by AO at page no 18 and 1 of the assessment order the work was not carried on by the Japan branch of the assessee but it was carried out in India. He further attempted to support this argument by drawing our attention to page no 49 of the paper book where details of the staff employed by the Japan branch is given stating that this staff were not capable of doing the work. Therefore, he submitted that the

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NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 assessee failed to deduct tax at sources on this payment and hence disallowance u/s 40a (i) may be confirmed. 19. Ld. AR submitted that the facts of the case stated by CIT (A) at page no 10 to 13 of his order clearly shows the facts of the case which clearly proves that assessee’ s case falls under the exceptions carved out by clause (b) of section 9 (1) (vii) of the Income tax Act. 20. He further submitted that at para no 3.3 at page no 14 of the order of CIT (A) clearly shows the details furnished by the assessee before CIT (A) who in turn admitted the additional evidence after giving proper opportunity to the AO by obtaining remand report. It was submitted that these details proves that thepayments has been made by JapanBO and serviceswererendered by Japan BO. He alsoreferred to the agreement between the Japan BO and HCl Japan limited relating to this payments. Therefore he submitted that according to section 9(1) (vii) (b) of the income tax act the payment does not results in to income of the recipient as it does not deemed to accrue or arise in India. He submittedthat the reliance on page no 18 and 19 of the assessment order by DR isunfounded; as these allegationsare not based on the facts, which is proved by the documentssubmitted before CIT (A) at para no 3.3 of his order. He further submitted that this issue is now squarely covered in favour of the assessee by the decision of honourable Delhi high court in case of Lufthansa cargo 375 ITR 85 (Del).He alternatively submitted 24 | P a g e

NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 that Income is also not taxable in India provision of article 12 (6) of the Indo Japan DTAA which has bene considered by CIT (A) correctly. He further submitted that in subsequent assessment year 2010-11 on identical facts the ld. DRP has considered all these arguments and has directed AO to delete the similar additions. Therefore, he supported the order of CIT (A) and submitted that the disallowance is deleted correctly. 21. In rejoinder LD DR submitted that services provided by the Japan BO are highly technical and cannot be provided by the employees employed by the Japan BO and thereforethe case does not fall in the exception section 9(1) (vii) as claimed by the assessee. 22. We have carefully considered the rival contentions. The facts in present case have already been brought by us in at the beginning. Based on those facts assessee has a branch office in Japan, which is carrying on the business outside India,and therefore it is a permanent establishment of the assessee company in Japan. This branch has been granted statutory permissions vide approval letter dated 28/06/2006. This branch has employees its ownstaffs, which is carrying on business in Japan. Assessee has submitted the details of employees in Japan along with their Job profile. In the Jobprofile, we have seen that who are engaged in the business development activities of the BO of the assessee in Japan.Further, after obtaining the work by Japan BO it was outsourced to HCLJapan Limited to whom these payments are made byJapan BO. Ld. 25 | P a g e

NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 AO has lost sight of the fact that Japan BO has not fully executed the work but it was outsourced to HCL Japan Limited. Ld AO has also lost sight of the nature of work being carried out by Japan BO. The customers of NEC HCL India are NEC Corporation and its group companies based outside India. For procurement of projects from these customers, Japan BO undertakes sales and marketing activities for NEC HCL India to bid for the projects. It is pertinent to note that the staff of the branch office has the benefit of knowing the local language and hence are well equipped to undertake business development in Japan for the assessee company. Japan BO acts as a point of contact between the customers and NEC HCL India. Therefore actual work carried out by Japan BO staff is business development activities of obtaining the client and for this assessee has demonstrated that it has adequate staff for carrying on such work. As per details furnished Japan BO had 5 employees as sales

managers for carrying out sales and marketing activities and 2 managers

for general administrative affairs of the company. These employees also

possess the technical skills required to understand the requirements of

the projects. They are also supported by contractual staff comprising of

3 people and staff recruited in terms of service agreement with NEC ST. Assessee has substantiated by providing their job profile.Further Assessee has submitted the details of projectsoutsourcedto

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NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 HCLJapanLimited byJapanBO and corresponding month wise revenue earned and cost incurred by the Japan BO. It has also submitted the copy of the bank statement of the Japan BO where the payments have been made by itto HCLJapan Limited. Further assessee has also substantiated the argument of rendering of services in Japan where the sample projects details were alsosubmitted along with the sample copies of the bills of the work carried out outside India. Assessee has also submitted the financialstatements of the JapanBO where in the project cost is debited in Profit and loss statement ofJapan BO. Further, the copy of computation of total Income for offering the tax in Japan by the Branch office was also submitted along with copy of the return of income filed by Japan BO in Japan. All these overwhelming documents submitted by the assessee remained uncontroverted by the AO in remand proceedings before CIT (A) as well as before us. Further AOhas not ledus to any evidence that services have not been rendered by the Japan BO of the assesseethrough its outsourcing agreement with HCL Japan Limited. 23. On the backdrop of above facts it needs to be examinedthat whether the case of the assessee falls in the carve out of fees for technical services deemed to accrue or arise in India or not. According to the provision of section 9 ( 1) ( vii) of the act incomes shall be deemed to accrue or arise in India way of fees for technical services payable by a person who is a resident of India. Exception is carved out if such fees are payable in 27 | P a g e

NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India. Admittedly, in this case assessee is carrying on the business outside India through its Japan Branch office. Japan BO is the branch office of the assessee company and it is matter of common sense that the financial statements of the japan branch are required to be incorporated in the financial statements of the assessee company to complete the accounts of the assessee company. Merely because of this reason, it cannot be said that the expense of Fees for technical services are borne out by the assessee and not by Japan BO of the assessee. Therefore we fully agree with the reasoning of CIT (A) that the payments of fees for technical services borne by the Japan BO of the assessee is not subject to withholding tax u/s 195 of the Income tax act because there is no income deemed to accrue or arise in India in the hands of recipient of such fees. Ld. AR of the assessee has further relied up on the decision of the Honourable Delhi high court where in the provisions of section 9 (1) (vii) (b) were considered as under :-

“ In this context, we may fruitfully refer to the dictionary meaning of 'consultation' in Black's Law Dictionary, eighth edition. The word 'consultation' has been defined as an act of asking the advice or opinion of someone (such as a lawyer). It means a meeting in which a party consults or confers and eventually it results in human interac tion that leads to rendering of advice." Thus, it is evident that the "source" rule, i.e., the purpose of the expen diture incurred, i.e., for earning the income from a source in India, is appli

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NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 cable. This was clearly stated by the Supreme Court, when it later held that (page 467 of 371 ITR) : "The exception carved out in the latter part of clause (b) applies to a situation when fee is payable in respect of services utilised for busi ness or profession carried out by an Indian payer outside India or for the purpose of making or earning of income by the Indian assessee i.e. the payer, for the purpose of making or earning any income from a source outside India. On a studied scrutiny of the said clause, it becomes clear that it lays down the principle what is basically known as the 'source rule', that is, income of the recipient to be charged or chargeable in the country where the source of payment is located, to clarify, where the payer is located. The clause further mandates and requires that the services should be utilised in India." 25. In the present case, the Income-tax Appellate Tribunal held that the overwhelming or predominant nature of the assessee's activity was to wet- lease the aircraft to LCAG, a foreign company. The operations were abroad and the expenses towards maintenance and repairs payments were for earning abroad. In these circumstances, the Income-tax Appellate Tribunal's factual findings cannot be faulted. The question of law is answered in favour of the assessee and against the Revenue.”

Ratio laid down by Honourable Delhi high court squarely applies to the facts of the case of the assessee as the expenses of the FTS is borne by the Japan Bo of the assessee for earning the Income Outside India. Hence in the present case no income is chargeable to tax in India u/s 9(1) (vii) of the Act and hence no tax is required to be withheld as per the Income Tax Act.

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NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 conclusion of CIT (A) for AY 2008.09, which can be applied to similar facts for this year. The DRP is of the view that the income is not taxable in India and therefore there is no question of any tax deduction at source on such payments made. Therefore AO is directed to delete the addition made in this regard.” It is apparent that collegium of the superior officers of the revenue has accepted the decision of CIT (A) in subsequent years in toto still revenue has challenged the same issue before us in earlier year. It shows that revenue itself has accepted in subsequent years that impugned payments are not subject to withholding taxes.

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NEC HCL System Technologies Ltd. V ACIT ITA No 5497/Del /2012 A.Y. 2008-09 ACIT V NEC HCL System Technologies Ltd. ITA No 5804/Del/2012 A.Y. 2008-09 Dated: 22 /01/2016 A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi

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