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Income Tax Appellate Tribunal, MUMBAI BENCH “E” MUMBAI.
Before: SH. A.D. JAIN & SH. RAJENDRA
Assessment Year: 2005-06 PAN : AAACR4849R M/s. Tata Consultancy Services Ltd. vs. Addl. Commr. of Income-tax, 9th Floor, Nirmal Building, Range 2(3), Nariman Point, Mumbai. Mumbai. (Appellant) (Respondent) Appellant by:Sh. Dinesh Vyas, Sr. Advocate Respondent by:Sh. N.K. Chand, CIT(DR) Date of hearing : 30/07/2015 Date of pronouncement: 04/11/2015 ORDER PER A.D. JAIN, JM
This is assessee’s appeal for the assessment year 2005-06 against the order dated 03.08.2010, passed by the ld. CIT(A)-15, Mumbai. The assessee has raised the following grounds of appeal:
1. The ld. CIT(A) [hereinafter referred to as the CIT(A)] erred in law and on facts in not allowing deduction of taxes on assessee’s income paid to the Federal Government overseas of Rs.199,98,80,754/- on the ground that these taxes are covered under the provisions of section 40(a)(ii) of the Income tax Act, 1961 (“the Act”).
Asstt. Year : 2005-06 2. The ld. CIT(A) erred in law and on facts in not allowing deduction of interest of Rs.4,61,683/- paid for delay in payment of overseas tax u/s 40(a) of the Act. 3. The ld. CIT(A) erred in law and on facts in treating expenditure of Rs.38,59,97,989/- incurred on purchase of application software products as capital expenditure.
4. (a) The ld. CIT(A) erred in law in confirming the addition made by ld. Addl. CIT (hereinafter referred to as the ld. ACIT} by invoking the provisions of Rule 8D read with section 14A of the Act, on the ground that rule 8D is retrospective in nature and hence applicable to the assessee year under appeal.
(b) Without prejudice to the above, the ld. CIT(A) erred on facts in not considering the appellants submission that interest expenditure of Rs.10,38,82,525/- pertains to interest on pre- shipment loans, the same being for the purpose of the business of the company cannot be considered for allocation u/s 14A.
5. The ld. CIT(A) erred in treating the expenditure accounted by the appellants as prescribed by the accounting standard under its Employee Stock Purchase Scheme as Capital expenditure.
a) The ld. CIT(A) erred in law and on facts in not allowing the claim of set off of loss of Rs.21,27,69,208/- pertaining to certain STP units against taxable business income of the appellant as required u/s 70 of the Act.
b) Without prejudice to the above, the ld. CIT(A) erred in not directing the ld. ACIT to consider the revised loss after making adjustment on account of disallowance made in assessment order instead of the loss of Rs.21,27,69,208/- as claimed in return of income.”
Apropos Ground No.1, the AO made disallowance of Rs. 216,27,28,117/- representing overseas tax paid, being Federal tax paid in USA, Canada and other overseas branches and State taxes in USA and Asstt. Year : 2005-06 Canada claimed as deduction in the return of income. The AO held that such taxes were covered by the provisions of section 40(a)(ii) of the Income-tax Act, 1961 (in short, ‘the Act’).
The ld. CIT(A) upheld the disallowance, observing that the amended provisions of section 40(a)(ii) of the Act by way of insertion of Explanation-1 is clarificatory in nature and, thus, retrospective in effect.
Section 40(a)(ii) and Explanation-1 thereto reads as follows:
“40. Notwithstanding anything contrary in section 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits & gains of business or profession”. In the case of any assessee- …………… (ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains; Explanation-1- For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax u/s 90 or, as the case may be, deduction from the Indian Income-tax payable under section 91.”
As fairly contended on behalf of the assessee, the matter stands decided against the assessee by the Mumbai Bench of the Tribunal in assessee’s own case, in ITA No.4776/M/2004. An appeal against the said Tribunal order stands admitted before the Hon’ble High Court in the case of Asstt. Year : 2005-06 the assessee in of 2011, on the following substantial question of law:
“Whether on the facts and circumstances and in law, the Tribunal was right in holding that the State taxes paid by the assessee in jurisdiction other than India were not deductible as business expenditure ? 6. A copy of the order of the Hon’ble High Court, admitting the above question, as passed on 20.02.2013, has been placed in the case laws paper book. However, since the operation of the order of the Tribunal has not been stayed, the effective order in operation as on date is that of the Tribunal, whereby the matter stands decided against the assessee. Therefore, Ground No.1 is rejected.
In so far as regards Ground No.2, as per the record, the assessee had paid Rs.4,61,683/- as penal interest in USA towards late payment of tax.
This was claimed as a deduction. The AO disallowed the claim, holding the provisions of section 40(a)(ii) of the Act to be applicable. It was observed that the late filing of return or late payment of advance tax or improper payment of advance tax is compensatory in nature and is a part and parcel of the tax covered u/s 40(a)(ii) of the Act. The ld. CIT(A) upheld the disallowance of penal interest.
Asstt. Year : 2005-06 8. This matter is also covered against the assessee by the Tribunal decision in assessee’s own case in (supra). Therefore, Ground No.2 is also rejected.
As per Ground No.3, the ld. CIT(A) erred in treating expenditure of Rs.38,59,97,989/-, incurred on purchase of application software products as capital expenditure.
As per the record, the assessee incurred expenses of Rs.38,59,97,989/- on account of software acquired within India for facilitating its business operation. The AO disallowed the expenditure claimed and treated it as a capital expenditure. The ld. CIT(A) confirmed the disallowance, observing that since the software had been utilised for a period of more than one year, the expenditure could not be allowed in one year. The treatment of capitalizing the expenditure and allowing depreciation was confirmed.
The ld. counsel for the assessee has contended that since depreciation has been allowed with a view to avoid litigation requiring the interpretation of a large number of software purchase agreements, the assessee accepts the deduction of depreciation.
Accordingly, Ground No.3 is rejected, as infructuous.
Ground No. 4(a) states that the ld. CIT(A) has erred in confirming the addition made by the AO by invoking the provisions of Rule 8D of the Rules
Asstt. Year : 2005-06 read with section 14A of the Act, on the ground that Rule 8D is retrospective in nature and hence applicable to the year under appeal i.e., 2005-06.
As per Ground No.4(b), without prejudice, the ld. CIT(A) has erred in not considering the assessee’s contention that interest expenditure of Rs.10,38,82,525/- pertains to interest on pre-shipment loans and the same being for the purpose of assessee’s business, it cannot be considered for allocation u/s 14A of the Act.
Apropos the main grievance of the assessee, disallowance of Rs.32,24,49,976/- was made towards expenditure incurred to earn exempt income. In the process, Rule 8D of the Rules was applied retrospectively.
This disallowance was confirmed by the ld. CIT(A).
For the proposition that Rule 8D of the Rules has no retrospective application, on behalf of the assessee, reliance has been placed on “Godrej & Boyce Manufacturing Co. Ltd.”, 328 ITR 81 (Bom.).
Apropos the alternative contention, it has been contended that the interest expenditure of pre-shipment loans amounting to Rs.10,38,82,525/- incurred for business purposes should not be considered for disallowance u/s 14A of the Act r.w.s. 8D of the Rules. It has been contended that for the assessment years 2006-07 & 2007-08, this stand of the assessee has been accepted.
Asstt. Year : 2005-06 18. Here again, the ld. DR has placed strong reliance on the impugned order.
No decision contrary to “Godrej & Boyce Manufacturing Co. Ltd.”, (supra), has been placed before us. As per this decision, Rule 8D has no retrospective application. Therefore, it was not applicable to the year under consideration, i.e., 2005-06 and it has been wrongly applied. In this regard, the Department’s contention that the AO has not applied the provisions of Rule 8D, but has rather merely taken guidance therefrom is of no avail to the department. Once rule 8D is not applied, according to the assessee, the addition is to be sustained for Rs.17,000,686/- only. This amount represents the actual apportioned expenditure, This basis of disallowance, as per the assessee, as worked out by the assessee has been accepted by the department in the assessment years 2006-07 & 2007-08.
A perusal of the assessment order for AY 2006-07, a copy whereof has been placed on record, shows that the AO has followed/carried out the DRP’s direction. Similar is the case for the A.Y. 2007-08.
For assessment year 2006-07, the amount of Rs.16,73,399/-(employee and other cost of treasury group) and interest cost of Rs.30,4000/- was taken to be direct and indirect expenses having proximity with the earning of exempted income. Therefore, a total of Rs.19,77,399/- was disallowed. The Asstt. Year : 2005-06 assessee got a relief of Rs.3,44,60,044/-. For the assessment year 2007-08, the amount of Rs.29,17,084/- (employee cost and such other cost of treasury groups) and ( interest cost of Rs.70,792/- was taken to be direct and indirect expenditure having proximity of exempted income). Thus, a total of Rs.29,876/- was disallowed.
Accordingly, for the year under consideration, the AO shall verify and allow, on such verification, the sustained addition to the extent of Rs.17,00,686/- only, as per the contention of the assessee, according to which, it is this amount which represents actual apportioned expenditure.
In view of the above, Ground No.4(b), which is the alternative ground to Ground no. 4(a), becomes infructuous and is rejected, as such.
Coming to Ground No.5, during the year the assessee company issued and allotted shares to its employees and directors under the Employees Stock Purchase Scheme, or “ESPS Scheme”. The issue was made in accordance with the Employees Stock Option Plan or Scheme of the Central Government. An amount of Rs.186.65 crores incurred by the assessee- company under the ESPS was claimed as a deduction. The AO treated this expenditure as capital expenditure. It was observed that the Scheme had resulted in issuance of shares and the shares so issued and allocated under the Stock Option Scheme was going to increase the share capital of the Asstt. Year : 2005-06 assessee; that as per the settled provisions of law, any expenditure in relation to increase in share capital of any assessee is capital expenditure. The AO placed reliance on “Punjab State Industrial Corporation Ltd. vs. CIT”, 225 ITR 792 (SC) and “Brook Bond India Ltd. vs. CIT”, 223 ITR 776 (SC), wherein, the Hon’ble Supreme Court held that though increase in the capital results in expansion in the capital base of the company and incidently that would help in the business of the company and may also help in profit making, the expenses incurred in that connection still retain the character of a capital in nature, since the expenditure is directly related to the expansion of the capital base of the company and that therefore, the expenditure incurred on issuing shares to increase the capital by the company would not be allowable as revenue expenditure.
While confirming the addition, the ld. CIT(A) observed that the issue was not whether the expenditure was for the purpose of business, since the expenditure was definitely for the purpose of business; that the issue was as to whether the expenditure was capital expenditure or not; that the two Supreme Court decisions cited by the AO were directly in connection with the expenditure incurred to expand the capital base and the Hon’ble Supreme Court had held that the expenditure was capital in nature and that the same principle was applicable to the assessee’s case also.
Asstt. Year : 2005-06 26. The Ld. DR strongly relied on the impugned order.
In this regard, on behalf of the assessee, it has been asserted that the expenditure is for the purpose of the assessee’s business, as the shares are allotted to the employees to incentivise and remunerate them for their performance. It has further been contended that the expenditure accounted for by the assessee is as per the SEBI Guidelines. Reliance has been placed on the following case laws:
i) “Biocon Limited”, 25 ITR (T) 402 (SB) Bangalore ii) “Nova Nordisk India (P) Ltd.”, 63 SOT 242 (ITAT Banglore) iii) “SSI Ltd.”, 85 TTJ 1049 (Chennai ITAT) iv) “PVP Ventures Limited”, ( 211 Taxman 554) (Mad) v) Spray Engineering, 53 SOT 70 (ITAT Chandigarh) vi) “Dr. Reddy’s Laboratories Limited”, 30 ITR (T) 393 (ITAT Hyd) vii) “Seassoon David”, 118 ITR 261 (SC).
On the other hand, the ld. DR has placed strong reliance on the impugned order.
In this regard, the Special Bench of the Tribunal in “Biocon Limited”
(supra), has held that in the Employees’ Stock Option Scheme, the assessee company undertakes to issue shares to its employees at a future date, at a price lower than the current market price. This is achieved by granting stock
Asstt. Year : 2005-06 options to its employees at a discount. The amount of discount represents the difference between the market price of the shares at the time of the grant of option and the offer price. In order to be eligible for acquiring the shares under the employees’ stock option scheme, the concerned employees are obliged to render services to the company during the vesting period as given in the scheme. On the completion of the vesting period in the service of the company, such options vest with the employees. The options are then exercised by the employees by making application to the employer for the issue of shares against the options vested in them. The gap between the completion of the vesting period and the time for exercising the options is usually negligible. The company, on the exercise of option by the employees, allots shares to them and they can freely sell such shares in the open market subject to the terms of the employees’ stock option scheme.
Thus, it is during the vesting period that the options granted to the employees vest with them. This period commences with the grant of option and terminates when the options so granted vest in the employees after serving the company for the agreed period. By granting the options, the company gets a sort of assurance from its employees for rendering uninterrupted services during the vesting period and as a quid pro quo it
Asstt. Year : 2005-06 undertakes to compensate the employees with a certain amount given in the shape of discounted premium on the issue of shares.
29.1. Share premium is a capital receipt and not chargeable to tax in the hands of company. If a company issues shares to the public or the existing shareholders at less than the otherwise prevailing premium due to market sentiment or otherwise, such short receipt of premium would be a case of a receipt of a lower amount on capital account, because the object of issuing such shares at a lower price is nowhere directly connected with the earning of income. However, when a company undertakes to issue shares to its employees at a discounted premium at a future date, the primary object of this exercise is not to raise share capital, but to earn profit by securing the consistent and concentrated efforts of its dedicated employees during the vesting period. Such discount is construed, both by the employees and the company, as nothing but a part of package of remuneration, a substitute to giving direct incentive in cash for availing of the services of the employees.
There is no difference between the two situations: one, when the company issues shares to the public at market price and a part of the premium is given to the employees in lieu of their services, and two, when the shares are directly issued to employees at a reduced rate. In both the situations, the employees stand compensated for their effort. It follows that the discount on Asstt. Year : 2005-06 premium under the employees’ stock option scheme is simply one of the modes of compensating the employees for their services and is a part of their remuneration. Thus, such discount cannot be described as either a short capital receipt or a capital expenditure.
29.2. An expenditure must be laid out or expended wholly and exclusively for the purpose of business, so as to be eligible for deduction u/s 37(1) of the Income-tax Act, 1961. However, this section does not restrict paying out of expenditure in cash alone. Sub-section (2) of section 43 defines “paid” to mean “actually paid or incurred according to the method of accounting, upon the basis of which, the profits or gains are computed under the head “profits and gains of business or profession”. When the definition of the word “paid” u/s 43(2) is read in juxtaposition to section 37(1), not only paying of expenditure, but also incurring of expenditure qualifies for deduction u/s 37(1) subject to the fulfillment of other conditions. The meaning of the term “expenditure” is not only “paying out”, but also “incurring”. By undertaking to issue shares at a discount premium, the company does not pay anything to its employees, but incurs an obligation of issuing shares at a discounted price at a future date in lieu of their services, which is nothing but an expenditure u/s 37(1) of the Act.
Asstt. Year : 2005-06 30. Thus, the Special Bench has held that the discount on premium under one of the modes, compensating employees for their services is a part of their remuneration and as such, this discount cannot be held to be either a short capital receipt, or a capital expenditure. No decision to the contrary has been placed before us. Besides, the other decisions cited by the assessee are also on similar lines. Therefore, following “Biocon Limited” (supra) and the other case laws cited by the assessee, Ground No.5 is accepted and it is held that the employees’ stock option scheme benefit in question is taxable in the hands of the assessee’s employees as perquisite under section 43(2) of the Act. The payment having been established as salary/employee cost, the same is revenue in nature. This expenditure claimed by the assessee is to be treated as a business expenditure of the assessee. The grievance of the assessee by way of Ground No.5, accordingly, is accepted.
Turning to Ground No.6, ground no. 6(a) states that the ld. CIT(A) has erred in not allowing the assessee’s claim of set off of loss of Rs.21,27,69,208/- pertaining to certain STP units, against the taxable business income of the assessee, as per section 70 of the Act.
Ground No.6(b) states that without prejudice, the ld. CIT(A) erred in not directing the AO to consider the revised loss after making adjustment
Asstt. Year : 2005-06 on account of disallowance made in the assessment order, instead of the loss of Rs.21,27,69,208/-, as claimed by the assessee in the return of income.
As per the record, during the year under consideration, the following units of the assessee, which were otherwise eligible for deduction, had losses:
Sr.No. Name of the undertaking Business Loss (in Rs.) 1. Malad STP 1 2,08,24,076 2. Kolkata GDC STP 2,57,83,149 3. New Delhi (TCS Towers)-STP 6,20,09,085 4. Abhilash-STP 1,40,71,059 5. Thane-STP 5,93,12,566 6. Vikhroli-STP 3,07,69,272
The assessee’s set offs of the above losses were against the taxable business income u/s 70 of the Act. Further, these losses were set off against the taxable income of other STP units. The AO disallowed the assessee’s claim of loss of Rs.21,27,69,208/- pertaining to certain STP units. The AO applied the provisions of section 14A of the Act. Further, the AO disallowed the above loss as claimed in the return of income, instead of the revised loss after making adjustment on account of disallowance made in the assessment order. The ld. CIT(A) upheld the AO’s action, observing as follows:
Asstt. Year : 2005-06 “8.17. I have considered the submission of the appellant but I am not inclined to accept it. Section 10A IS PART OF Chapter III of the Income-tax Act, which relates to exempt income. Profits earned by eligible unit from export of software is exempt from the tax and is not set off against loss under the head “Profits and Gains of Business or Profession.” The exemption provided by the statute should be interpreted in a manner to meet the intention of the legislatures. Profits and losses are two sides of the same coin. One cannot have the privilege of choosing only one side of the coin. If the profit earned is to be treated as exempt, the loss incurred by the same unit cannot be permitted to be set off against the profit under the head “Profits and Gains of Business or Profession”. Various Courts have also held that profits include losses. As such this ground of the appellant is rejected and action of the AO is upheld.”
Aggrieved, the contention of the assessee is that the provisions of section 10A of the Act, as amended by the Finance Act, 2000, are those of a deduction and they are not exemption provisions. Reliance has been placed on the following case laws: “i) “Hindustan Unilever Ltd.”, 325 ITR 102 (Bom. HC) ii) “Galaxy Surfactants Ltd.”, 343 ITR 108 (Bom. HC) iii) Assessee’s Own case being “Yokogawa India Ltd. and other connected appeals”, 341 ITR 385 (Kar. HC) iv) “Black and Veatch Consulting Pvt. Ltd.”, 348 ITR 72 (Bom., HC) v) “Scientific Atlanta India Technology Pvt. Ltd.”, 2 ITR (T) 66 (Chennai Tribunal – SB) vi) “Sovika Infotech Limited v. ITO”, 23STO 271 (Mum. ITAT) vii) “Mindtree Consulting Pvt. Ltd vs. ACIT”, (102 TTJ 691) (Bang.ITAT)
Asstt. Year : 2005-06 viii) “A.V.Thomas Leather & Allied Products Ltd.”, (ITA No.1021/Mad/2008) (Chennai ITAT). ix) “Honeywell International India (P) Ltd. v. DCIT”, (108 TTJ 924) (Delhi ITAT). x) “Enercon Wind Farms (Krishna ) Ltd.”, (21 SOT 29) (Mum. ITAT). xi) “Ford Business Services Centre Pvt. Ltd.”, (114 TTJ 881) (Chennai ITAT).
Apropos this Ground No.6, the ld. counsel for the assessee has contended that without prejudice, the revised loss of Rs.19,47,56,123/-, after adjustments by the AO, should be considered for disallowance, instead of the returned loss of Rs.21,27,69,208/-.
The Ld. DR, on the other hand, has strongly relied upon the impugned order.
With regard to this issue, it is seen that in “Hindustan Unilever Ltd.”
(supra), the jurisdictional High Court, while dealing with the provisions of section 10B of the Act, the provisions whereof are like those of section 10A, were amended by the Finance Act, 2000, held, that the provisions, post amendment, are for deduction and that u/s 10B, loss in an eligible unit could be set off against the profits of business. The provisions of section 10A and those of section 10B are, mutatis mutandis, undisputedly pari-materia inter- se. Therefore, “Hindustan Unilever Ltd.” is squarely applicable to the facts
Asstt. Year : 2005-06 of the present case also. No decision contrary to this jurisdictional High Court judgment has been placed before us. Further, in “Galaxy Surfactants Ltd.” (supra), again rendered by the jurisdictional High Court and in the context of section 10B of the Act, it has been held that loss in an eligible unit can be set off against the profits of business. “Hindustan Unilever Ltd.” was referred to.
Besides, “ Yokogawa India Ltd.” (supra), according to the assessee, is the assessee’s own case, the decision wherein has been rendered by the Hon’ble Karnataka High Court. Therein, the scope of section 10A of the Act has been considered. “Hindustan Unilever Ltd.” (supra) has been referred to. It has been held that the principle in “Hindustan Unilever Ltd.” (supra), qua section 10B of the Act, equally applies to a case falling u/s 10A of the Act.
Since none of the above decisions, besides the other ones referred to by the assessee, has been countered by any decision in favour of the department, the grievance of the assessee is accepted.
The assessee has further contended that the term “loss” is different from the “expenditure” referred to section 14A of the Act and that, therefore, section 14A is not applicable to the present case. The following case laws have been relied on :
Asstt. Year : 2005-06 “i. “Hindustan Unilever Ltd.”, 325 ITR 102 (Bom. HC) ii. “Galaxy Surfactants Ltd.”, 343 ITR 108 (Bom. HC) iii. Assessee’s Own case being “Yokogawa India Ltd. and other connected appeals”, 341 ITR 385 (Kar. HC) iv) “Black and Veatch Consulting Pvt. Ltd.”, 348 ITR 72 (Bom. HC) v) “Scientific Atlanta India Technology Pvt. Ltd.”, 2 ITR (T) 66 (Chennai Tribunal – SB). vi) “Navin Bharat Industries”, 90 ITD 1 (Mumbai ITAT) vii) “Capgenimi India (P) Limited”, 141 TTJ 33 (Mumbai ITAT)
In this regard, a co-ordinate Bench of the Tribunal in “Navin Bharat Industries” (supra), has held that where expenditure is incurred in relation to income not includible in the total income, loss cannot be construed to be expenditure and section 14A of the Act is applicable qua expenditure and not qua loss.
Then, in “Capgenimi India (P) Limited”, (supra), again, a co-ordinate Bench of this Tribunal, through one of us, i.e. the ld. AM, has held that in case of loss of units, eligible for deduction u/s 10A, section 10A is a deduction provision and not an exemption provision after its amendment with effect from the assessment year 2001-02 and that, therefore, the loss from the section 10A unit has to be adjusted against the taxable profits of other units after deduction u/s 10A has been allowed in respect of each
Asstt. Year : 2005-06 eligible unit. The other case laws relied on by the assessee also hold that set off of loss of the eligible unit is allowable against the other taxable income.