Deduction claimed under sec 80 O cannot include sundry expenses

IN THE INCOME TAX APPELLATE TRIBUNAL

MUMBAI BENCH ‘E’ MUMBAI

BEFORE SHRI P.M. JAGTAP (ACCOUNTANT MEMBER) AND

SHRI VIVEK VARMA (JUDICIAL MEMBER)

ITA No.6791/Mum/2002 – A.Y-1999-2000

ITA No. 5530/Mum/2003- A.Y. 2000-2001

ITA No. 8125/Mum/2004- A.Y. 2002-2003

The Dy. CIT, Circle 19(3),

Piramal Chambers,

R. No. 305, 3rd Floor, Parel,

Mumbai-400 012

(Appellant)

Vs.

M/s. Petroleum India International,

C-5 Keshwa, Bandra Kurla Complex,

Bandra(E),

Mumbai-400 051

PAN-AAAAPOO17B

 (Respondent)

C.O. No. 4/Mum/2009 – A.Y. 1999-2000

(Arising out of ITA No. 6791/Mum/2002)

AND

C.O. No. 5/Mum/2009 – A.Y. 2000-2001

(Arising out of ITA No. 5530/Mum/2003)

M/s. Petroleum India International,

C-5 Keshwa, Bandra Kurla Complex,

Bandra(E),

Mumbai-400 051

(Cross Objector)

Vs.

The Dy. CIT, Circle 19(3),

Piramal Chambers,

R. No. 305, 3rd Floor, Parel,

Mumbai-400 012

 (Respondent)

Department by: Shri B. Jaya Kumar

Assessee by: Shri S.E. Dastur, Senior Advocate &

Shri Niraj Sheth

Date of Hearing: 29.3.2012

Date of pronouncement: 16.4.2012

O R D E R

PER VIVEK VARMA, JM:

ITA No. 6791/M/02- Revenue’s Appeal

The department has filed the appeal against the order of CIT(A) XIX, Mumbai, dated 30.09.2012. The revenue has raised six grounds out of which Petroleum India 2 International grounds No. 2 & 3 were not pressed by Ld. DR. Therefore it is dismissed as not pressed. Ground No. 6 is general and needs no consideration.

2. The two effective grounds taken up by the Revenue are grounds No. 1 and 4. Ground No.1 pertains to the direction of CIT(A) to allow deduction u/s 80 O of the Income Tax Act, which had been disallowed by the AO.

3. The facts relating to the issue are as under:-

The appellant AOP is a consortium of ten Public Sector Companies in the petroleum sector as its members. It is engaged in the business of providing operational assistance and technical back-up to foreign oil companies at the contractual rate. The AO disallowed the deduction claimed for the reason that no documentary evidence was furnished to prove the claim and because the claims raised u/s.80 O in the earlier years had been rejected and the same had been confirmed in first appeal. The AO also stated that the total expenses incurred in implementing the project have been shown at Rs. 10,64,020. However, it was not clear whether indirect expenses like traveling, insurance, living expenses etc. are included in this amount.

4. At the time of assessment proceedings the AO observed as under:-

Deduction u/s.80-O has been claimed on gross receipts. However, the assessee vide their letter dt. 19.02.2002 has intimated that expenses to the extent of Rs.4,13,685/- in foreign currency were incurred in earning such income. No details have been furnished giving the bifurcation of such expenses. Even the computation of deduction u/s.80-O has not been filed. Nature of business is stated to provide specialized technical services mainly for foreign clients in the following areas:-

1. Technical Backup Services.

2. Provision of Specialized Training Facilities to meet client requirements.

3. Provision of Consultancy Services.

4. Contracting Services such as Turn around Maintenance of Refineries.

5. Other Exploration, Production and Refinery related services.

There is no change in the nature of business as compared to the earlier years.

DEDUCTION U/S 80-O:- the assessee was requested to prove their claim for deduction u/s. 80-O with documentary evidences in their favour. The assessee vide letter dt. 11.03.2002 has submitted as under (as extracted):-

M/s Galana, Madagascar had approached PII to suggest ways and means to make the Refinery situated in Madagscar viable. In the initial stages before the Management contract was entered into PII was approached by the client to do the design of the refinery process with regard to crude mix, products slate, economics of maximization of crude yield. PII with its vast experience in the field for so many years has developed model design and blueprint which with appropriate adjustment could be of great use in the exercise entrusted to it. The exercise involved a lot of technical and highly skilled effort in studying the present system and implementing the design as prepared by PII for the profitable running of the refinery. Hence, the income so received from M/s Galana during 1998-99 is related to the use of design in improving the performance of Galana Refinery. The consideration received satisfies the necessary conditions for being eligible to deduction u/s. 80-O. Subsequently, PII has entered into a management contract with M/s Galana, Madagascar for Management of their refinery.

The income has been received in convertible foreign exchange in India and he deduction of an amount equal to 50% of the income so received has been claimed by PII u/s. 80-O of the Income Tax Act, 1961. The relevant copies of FIRC were submitted vide our letter dated Feb. 1, 2002. However, for convenience we are once again enclosing copies of the same. The assessee has not given bifurcation of expenses incurred on the Madagascar Project. However, schedule “I” gives the details of Madagascar Project expenses at Rs. 10,99,372/-. In this, no travel related, insurance and living expenses etc. are included. The assessees appeals on this point for the Asst. Years 1993-1994 to 1997-1998 has been dismissed. The remuneration received by them from foreign company is in substance for supply of technical personnel. Therefore, no technical services were provided.”

5. The AO after considering the detailed arguments of the assessee, came to the conclusion that the assessee had merely provided its man power and not its technical know ho for executing its project. The AO, on this consideration, followed his predecessor’s orders for assessment years 1993- 94 to 1997-98, where the claim of the assessee was rejected by the first appellate authority for assessment year 1993-94 as well. The AO, therefore, Petroleum India 4 International came to the conclusion that that deduction under section 80 O as claimed by the assessee was not eligible to it. The assessee was not satisfied with the observation of the AO, the asssessee approached the CIT(A).

6. The assessee, reiterated its submissions before the CIT(A) and the CIT(A) after taking into consideration entire facts and going through the material brought on record, observed as under in para 2.4 of his order:

“I have carefully considered the matter. The disallowance has been made by the AO routinely in a casual manner. It is seen that vide para 6 of letter dated 23/12/2002 to the AO the appellant had explained the basis of its claim for deduction u/s 80 O to the AO. A copy of the work proposal detailing the nature of the work undertaken was furnished alongwith the designs for the retail outlet infrastructure. Certificates of foreign inward remittances from the bank evidencing payments received for the said work were filed by the assessee before the AO under cover of the said letter dated 23/12/2002 and again with letter dated 26/12/2002. Vide the assessee’s letter dated 07/01/2003 and 12/01/2003 the AO was intimated that the total expenses incurred on the project were Rs. 18,37,636 out of which Rs. 13,53,708 were incurred in foreign exchange and the balance Rs. 4,83,928 in Indian rupees. Thus the contention of the AO that the details were not furnished does not appeal to be correct. It is also seen that the AO has confused the claim of deduction u/s 80 O with the rejection of the claim in the earlier years. The AO failed to realize that the scope of deduction u/s80 O has completely changed with effect from 01/04/1998. Therefore, the rejection of the claim upto 1997-98 on the finding that the appellant had not rendered any technical pr professional services abroad but had merely supplied technical personnel from India for services abroad has no bearing on the exgibility of the claim after 01/04/1998. The nature of the claim during the year under instant appeal to the extent of supply of designs for setting up retail network is entirely different from that in the years when it was held to be merely for supply of technical man power. On the careful examination of the claim I find that to the extent of supply of designs all the requisite conditions for allowance of the deduction are fulfilled. The assessee is a resident. Its gross total income includes consideration received from a foreign enterprise for the use outside India of designs and the consideration has Petroleum India 5 International been received in convertible foreign exchange with the permissible time. Thus, the deduction u/s 80 O has to be allowed to the assessee on the consideration received for supply of designs”.

The CIT(A), therefore, allowed the claim of deduction under section 80 O to the assessee.

7. However, after coming to the conclusion that deduction u/s. 80-O was allowable, the CIT(A) restricted the deduction claimed at Rs. 8,52,744/- against Rs. 13,84,754/-.

8. Against the allowance of deduction u/s. 80-O, the revenue is in appeal and against the quantum of deduction determined by CIT (A) u/s. 80-O, the assessee has filed a C.O. Both the sides are before the ITAT and we take up the appeal by the department as well as the CO filed by the assessee and on the facts emerging from the orders of the revenue authorities and for the convenience, we are passing a common order.

9. Before us, the DR reiterated the observations of the AO and prayed to sustain the disallowance. On the other hand Senior AR submits that the issue of allowance of deduction has first to be seen from the observation of the AO i.e. the AO has based his decision on the decision arrived at by the order of the CIT(A) in assessment year 1993-94 to 1997-98, wherein the claim was disallowed. The AO in the current year takes those decisions of the revenue authorities as basis and disallows the claim of the assessee. The Senior AR pointed out that if the decision of CIT (A) for assessment years 1993-94 to 1997-98 has to be taken to be the basis then the case of the AO and the DR falls, because the decision of CIT(A) for those years was reversed by the decision of the ITAT wherein the ITAT had accepted the claim of deduction u/s. 80-O made by the assessee.

10. On the other hand, the Senior AR took us through the paper book filed by the assessee and submitted that the issue of disallowance cannot arise because even in the amended provisions of Section 80-O which are effective from 1998, the existence of the word “design” continues. He, therefore, submitted that when the contracts as entered by PII are seen, the headings of the contracts talks about “Supply of Consultancy for Implementation of Design Development by Petroleum India International for SOLIMA REFINERY, Tamatave, Madagascar”. The AR pointed out that the Terms of Reference also talked about “design” and Deliverables of the Assignment also provides that the process design of PII will be customized for implementation of Solima Refinery. He further pointed out that responsibilities of PII for the assignment has comprehensive responsibilities, not just supply of manpower as the DR had pointed out.

11. We have heard the submissions from both the sides, one thing is clear that the DR has not challenged the allowability of deduction u/s. 80-O, he has shown serious reservations on the basis of allowability, i.e. whether the deduction should be allowed on net amount or on gross amount. The DR pointed out the decisions of Hon’ble Bombay High Court in the case of CIT Vs

Asian Cable Corpn. Ltd. I.T. Reference No. 530 of 1987, reported in 129 Taxman 590. The DR has also referred to the decision of Hon’ble Karnataka High Court in the case of ACIT Vs Abcon Engg. & Systems (P) Ltd. Reported in 164 Taxman 600 on the issue of allowability on export proceeds. Besides this, the AR also placed reliance on the decision of ITAT Bangalore in the case of ITO Vs Vivek Prabakar Kunte, ITA No. 79/Bangalore/2001, reported in 92 ITD 71, wherein it was held that the objective of Sec. 80-O is mainly the supply of technical know-how or technical services to developing countries.

12. We find that the issue of disallowance in the current appeal is virtually infructuous, following the decision of the assessee’s own case in the preceding years and even after going through the provisions of the Act in preamendment period and post amendment (relevant to the assessee), wherein we find the word “design” still exist. We cannot accept the submission of the DR that the assessee was primarily supplying man power and not comprehensive technical services. We find and hold that the assessee was supplying comprehensive technical services for designing and development of Salima Refinery, which would also include “to depute a competent team of professionals ………” as one of the services besides other services as mentioned in the terms of Reference and Deliverables of the assignment. We, therefore, hold that the assessee is eligible for claiming deduction u/s. 80-O. This ground, therefore, filed by the revenue is rejected.

13. Ground No. 4 raised by the Revenue is against the CIT(A)’s order wherein the gain in foreign exchange fluctuation has been allowed as business income instead of treating and taxing it as income from other sources.

14. The AO has mentioned in the assessment order that this is an increment due to exchange fluctuation, which has no nexus with the business of the assessee and hence is taxable under the head “Income from other sources”. Not satisfied with the view of the AO, the assessee carried its

grievance before CIT(A).

18. The CIT(A) accepted the contentions and view propounded by the assessee and held that gains arising from foreign exchange fluctuations were current business funds from routine business operations and any change in their value directly affects the profits of the business. He, therefore, directed the AO to treat these gains as income from business and not income from other sources.

15. The revenue not satisfied with the decision of the CIT(A), has carried the grievance before the ITAT.

16. Before us, the DR submitted that the view taken by the AO was correct and is now covered by the decision of Hon’ble Bombay High Court in the case of CIT Vs Shah Originals, ITA No. 431 of 2008 reported in 327 ITR 19.

17. The Senior AR, however submitted that the case of Shah Originals, per se, pertained to interest earned in the foreign currency lying in EEFC account and it cannot go into the gain or loss on account of currency fluctuation, which is directly related to the business/export proceeds received by the assessee in foreign currency. On this ground, the assessee submitted that the view taken by the CIT(A) was correct.

18. The Senior AR, submitted that in the case at hand, the whole issue pertains to proceeds received in foreign exchange and it was during the course of business that there was fluctuation in the currency, because of which the assessee had booked a gain on fluctuation.

19. Having heard the views of either side, we went into the question that was referred before the Hon’ble Bombay High Court in the case of Shah Originals. The question referred to the Hon’ble Bombay High Court included the words “receipts on account of foreign exchange fluctuation on EEFC account…..”

20. The Hon’ble Bombay High Court has held that gains on exchange fluctuation does not have a nexus when the funds are kept in EEFC account and there is a variation in the exchange rate. We, respectfully follow the decision of Jurisdictional High Court, wherein it has been held that the gain on account of fluctuation in the foreign currency which takes place after the export proceeds have been realized and such funds or part thereof are parked in the EEFC account would be treated as income from other sources.

21. On going through the arguments of both the sides, we deem it fit to direct the AO to verify the exchange fluctuation account, as maintained by the assessee, i.e. if the exchange fluctuation is on the export proceed stage itself, then it has to be treated as gain in business and if the gains on exchange fluctuation occurs on the funds lying parked in EEFC account, then in that case, the case of Shah Originals is to be applied and treat that gain as income from other sources.

22. The appeal, thus filed by the AO is allowed in part.

12. We now take up the corresponding issue of quantum of deduction as claimed by the assessee in C.O. No. 4/Mum/2009 for assessment year 1999- 2000. In the C.O., the assessee has claimed that deduction be allowed at Rs. 27,69,508/- as claimed by the assessee.

23. We find from para 3 of the assessment order that the deduction has been claimed at Rs. 13,84,754/- being 50% of Rs. 27,69,508/-. The CIT(A) has deducted the entire expense of Rs. 10,64,020/- and computed the deduction at 50% on Rs. 17,05,488/- and arrived at the figure of Rs. 8,52,744/-.

24. From the assessment order, we find that expense of Rs. 10,99,372/- as per Schedule-I does not include any travel related, living and insurance expenses. The assessee, however had shown the expenses on Madagascar project at Rs. 10,64,020/-. Therefore, it is likely that the entire amount of Rs. 10,64,020/- are project related expense. But before the CIT(A), it has been ascertained that it includes Rs. 4,13,685/- which includes sundry expenses, as mentioned by CIT(A) in para 2.4. We, therefore recomputed the deduction, wherein we think it proper to reduce Rs. 4,13,685/- from Rs. 10,64,020/- and reduce this figure from Rs. 27,69,508/-. From the remainder, the deduction would be allowable at 50% which will work out at Rs. 10,59,586/- [50% of Rs. 27,69,508 - (Rs. 10,64,020 – Rs. 4,13,685)].

25. In the result, the C.O. filed by the assessee is allowed in part.

ITA No. 5530/Mum/003 – A.Y. 2000-01 – Revenue’s appeal

26. Revenues grounds of appeal are identical and taken in the preceding year i.e. assessment year 1999-2000. For the sake of brevity, we will follow the decision which we have taken in the preceding year, without writing detailed order in the current year.

Ground No. 1 - Appeal is dismissed

Ground No. 2- Decision against the revenue - dismissed

Ground No. 3 Decision against the revenue - dismissed

Ground No. 4 Appeal allowed in part.

C.O. filed by the assessee allowed in part.

ITA No. 8125/Mum/04 – A.Y. 2002-03 – Revenue’s appeal

27. Grounds No. 1 & 2 are identical grounds as grounds No. 2 & 3 for assessment years 1999-2000 and 2000-01, dismissed as against the department following the decision of ITAT in assessee’s own case.

28. Ground No. 3 is identical as ground No. 4 in assessment year 1999- 2000 & 2000-01, appeal of the revenue allowed in part.

29. In the result, all the three appeals filed by the Revenue are partly allowed and the Cross Objections filed by the assessee for assessment years 1999-2000 and 2000-01 are partly allowed.

Order pronounced on 16th April, 2012

                                                        Sd/-                           Sd/-

                                             (P.M. JAGTAP)      (VIVEK VARMA)

                                         Accountant Member       Judicial Member

Mumbai, Dated 16th April, 2012

Rj

Copy to:

1. The Appellant

2. The Respondent

3. The CIT-concerned

4. The CIT(A)-concerned

5. The DR ‘E’ Bench

True Copy

By Order

Asstt. Registrar, I.T.A.T, Mumbai