ORDER
Pramod Kumar, A.M.
1. These two appeals pertain to the same assessee, involve common issues and were heard together. As a matter of convenience, therefore, both of these appeals are being disposed of by way of this consolidated order.
2. We will first take up ITA No. 6192/Mumbai/2004, i.e., Revenue’s appeal for the asst. yr. 1997-98. In this appeal, the only grievance raised by the Revenue is as follows :
“On the facts and in the circumstance of the case and in law, the learned CIT(A)-XL, Mumbai, has erred in deleting the disallowance of Rs. 1,66,19,762 being 20 per cent of the expenses of Rs. 8,30,98,810 reimbursed to Arthur Anderson Worldwide Society Co-operative.”
3. The material facts giving rise to this litigation before us are like this. The assessee is a chartered accountants firm and is a member of Arthur Anderson Worldwide SC (AWSC, in short), a co-operative company organised under the laws of Switzerland. In the relevant previous year, the assessee had claimed a deduction of Rs. 8,30,93,810 on account of ‘reimbursement of expenses under the member firm inter-firm agreement with Arthur Anderson Worldwide, Switzerland’, This deduction was, however, disallowed by the AO. The assessee carried the matter in appeal before the CIT(A) but without any success. However, when the matter travelled to the Tribunal in second appeal, a co-ordinate Bench of the Tribunal, in which one of us (the AM) was also present, restored the matter to the file of the AO by observing as follows :
“The claim of the assessee needs to be examined on the touchstone of Section 37(1) of the IT Act, 1961, and other related sections. We find that the AO did not have the opportunity to consider this aspect in the light of the aforesaid evidence’, which the Tribunal permitted the assessee to adduce at the time of hearing. As such, we set aside the impugned order and restore the issue to the file of the AO, with direction to decide the issue afresh, in accordance with the law, after providing adequate opportunity to the assessee of being heard.”
(additional evidences filed by the assessee under Rule 29 of the Tribunal Rules, and a list of which was also annexed to the Tribunal’s order)
That is how the AO came to be in seisin of the matter, regarding admissibility of deduction on account of reimbursement of expenses to AWSC, once again.
4. In this round of proceedings, and after an elaborate discussion on the submissions of the assessee and perusal of material shown by the assessee to explain the nature of services received from AWSC, the AO came to, inter alia, the following conclusion :
“The assessee is rendering professional and consultancy services to foreign clients and earns fees only in foreign currency. In-order to generate work from, and execute assignments for, such foreign entitles, the assessee has entered into agreement with AWSC. This arrangement entities the assessee to use the Arthur Anderson trade name also, and benefits the assessee in many significant ways. Under the arrangement, the assessee shares the costs incurred by the AWSC.
It is commercially expedient for the assessee to enter into the above arrangements with AWSC.
The assessee’s association with AWSC was key to its earning of professional fees from foreign clients.
The payments made by the assessee, as per comments received from the international Taxation division, are in the nature of payment for royalties and fees for technical services.
The assessee has filed all the documents required to support the claim for expenditure in the nature of reimbursement of expenses to AWSC.
The assessee has also satisfied the objections raised by the AO and the CIT(A) in the first round of proceedings.
The assessee has provided substantial evidence of benefits received from AWSC and utilised the same for professional activities.
The assessee has satisfied the conditions of Section 37(1) of the Act, and that the payments having been made after deduction of tax at source, disallowance under Section 40(a)(i) cannot be resorted to.”
5. The AO thus finally concluded that the payments to AWSC represent reimbursement of establishment costs, royalty for the use of name Arthur Anderson’ and access to knowledge and data base and fees for technical services for provision for various other services. On this basis, the AO held that the expenditure is incurred wholly and exclusively for the purposes of business. Having held so, however, the AO disallowed 20 per cent of the said expenditure on the ground that ‘considering the magnitude and complexity of expenditure, it cannot be ruled out that there may be an element of excess expenditure embedded in the reimbursement of cost to AWSC. A reference was then made to the training expenses, in addition to the training expenses incurred directly, and to the hotel expenses which, according to the AO, was completely verified. The disallowance was thus worked out at Rs. 1,66,19,762. Aggrieved, assessee carried the matter in appeal before the CIT(A) who deleted the impugned disallowance. While deleting the disallowance, the AO [CIT(A)] observed as follows :
“The AO has discussed at length the benefits turned by the appellant from the association of appellant with AWSC in various fields. In the light of voluminous evidence submitted by the appellant and examined by the AO, the AO has accepted that the expenditure is wholly and exclusively for the purpose of business of the appellant. The fact that appellant has also incurred separate expenses for training, etc., does not impinge upon the nature of payment to AWSC in respect of training, etc. In fact, the payment to AWSC is not specifically for training a person. Such a payment is part of the payment made for various services. The AO has not pointed out the parameters as to how the payment may be considered excessive. The inference about non-verifiability of expenses cannot be upheld in view of the fact that books of account of the appellant as well as AWSC were audited.
Therefore, the addition of Rs. 1,66,19,762 cannot be sustained and stands cancelled.”
Aggrieved by the relief so given by the CIT(A), Revenue is in appeal before us.
6. Shri Venupani, learned Departmental Representative, appeared for the Revenue, and Shri Dastur, along with Shri Sonde, appeared for the assessee. Learned representatives have been heard, material before us carefully perused, and factual matrix of the case, as also the applicable legal position, duly considered.
7. A plain reading of the assessment order indicates that while the AO had in effect held the deduction in respect of the reimbursement of expenses is admissible because he had given categorical findings in support of the expenditure being for the purposes of business and commercially expedient, he had also made a ‘token disallowance” of 20 per cent of the expenses to cover the possible loss of revenue, 20 per cent of the said expenditure on the ground that “considering the magnitude and complexity of expenditure, it cannot be ruled out that there may be an element of excess expenditure embedded in the reimbursement of cost to AWSC”. The AO accepts that the accounts were duly audited, that expenses are justified on the grounds of business expediency and in the light of the substantial benefit received from AWSC and yet he makes an ad hoc disallowance of 20 per cent of expenses. In our considered view, however, such an approach is entirely unsustainable in law. The very concept of token disallowance is bad in law, because such a disallowance is inherently based on ‘surmises and conjectures’ and devoid of a legally sustainable foundation. It is a case where one accepts all the contentions but not the consequences flowing from accepting the same. That cannot meet our approval. The CIT(A) was quite justified in deleting the disallowance. We approve and confirm the stand of the CIT(A). His action of deleting the disallowance does not call for any interference by us. Accordingly, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter.
8. ITA No. 6192/Mumbai/2004, is thus dismissed.
9. We now take up ITA No. 1735/Mumbai/2002, i.e., assessee’s appeal for the asst. yr. 1998-99.
10. In the first ground of appeal, the assessee has raised the following grievance :
“The CIT(A) had erred in confirming the disallowance of Rs. 9,25,02,953 paid to Arthur Anderson Worldwide SC (AWSC) towards reimbursement of its establishment costs on the ground that CIT(A)-III has held in respect of asst. yr. 1997-98, that the reimbursement of establishment expenses is not payment made wholly and exclusively for the professional purpose and that the facts of the case in asst. yr. 1997-98 being the same, the CIT(A) has no reasons to differ from the view taken by the CIT(A)-III, Mumbai.”
11. Learned representatives agree that whatever is decided in the Revenue’s appeal for the asst. yr. 1997-98, the same will follow here as well. The nature of payment and all the material facts are the same. In 1997-98, on the matter being restored to the file of the AO for adjudication de novo, the AO himself has decided the issue in favour of the assessee but made a kind of token disallowance of 20 per cent of expenses, to cover any possible leakage of revenue by the possibility of expenses being excessive in nature. This disallowance was deleted by the CIT(A) and that action of the CIT(A) has since been approved by us. In effect, therefore, entire expenditure on account of reimbursement to AWSC has been allowed in the asst. yr. 1997-98. In this view of the matter, no disallowance is called for in the present assessment year, i.e. asst. yr. 1998-99, as well. Following our order for the asst. yr. 1997-98 and in the light of AO’s categorical findings in the remand proceedings, we deem it fit and proper to direct the AO to delete the impugned disallowance. The assessee gets relief accordingly.
12. Ground No. 1 is thus allowed.
13. In ground No. 2, the assessee has raised the following grievance :
“The CIT(A) has erred in confirming the disallowance of deduction of Rs. 1,17,50,722 claimed under Section 80HHE of the IT Act, 1961 (“the Act”), on the ground that the appellant failed to substantiate its claim of providing technical services for development of computer software.”
14. So far as this grievance of the assessee is concerned, the material facts are like this. In the course of scrutiny assessment proceedings, the AO noticed that the assessee has claimed deduction of Rs. 1,17,59,722 under Section 80HHE of the Act. The AO requisitioned information and documents in support of the said claim of deduction. In response to this requisition, the assessee submitted a copy of the invoice and foreign inward remittance certificate for the fees earned in respect of technical services rendered outside India in connection with development of computer software. The assessee also submitted the details of fees earned in respect of providing technical services outside India and details of nature of work done for each of the software development job. The details of technical personnel, along with their technical qualification, deployed in connection with development of computer software were also filed. Upon examining these details and upon considering the submissions made by the assessee, however, the AO was not impressed with the merits of the said claim of deduction. The AO took note of the position that the assessee-firm was a member of Arthur Anderson Worldwide (AWSC) to which the assessee-firm also provided management and consultancy services. As per details submitted, according to the AO, the assessee-firm was deputing its personnel to the AWSC who in turn were deputing those employees to various contracts/project undertaken by them. By a single invoice, the assessee billed AWSC for US $ 19,24,888 in respect of the computer service and software. The assessee’s deduction under Section 80HHE was in respect of US $ 5,98,579 billed on account of computer services and software. The AO also observed that there was no specific contract between AWSC and the assessee for development of software. The AO took note of the appraisal reports of persons said to be working on the software development projects but did not attach much importance to the same on the ground that the same cannot be treated as evidence of services provided for developing software. The AO also took note of the letter received from Arthur Anderson Consulting confirming that personnel were deputed at their clients for software development but rejected the same as of any (sic-no) evidentiary value on the ground that it does not provide any evidence to show that technical services were actually utilized for development of software. The letters written by AWSC to the assessee-firm on requirement of various personnel for deputations to the clients by observing that ‘the assessee is a member firm of AWSC and, therefore, procuring such documents in the guise of consultancy for development of computer software to benefit the interest of its member firm (assessee) cannot be ruled out’. It was also noted that the assessee has given a gist of technical services provided by its personnel at the clients of AWSC, but this was also rejected on the ground that no corroborative evidence was there to support the same. The AO was also of the view that most of the persons sent to these jobs were “B.Coms, M.Coms and MBAs’ without any technical qualifications. He thus held that these personnel did not have the requisite qualifications to carry out the job of development of computer software. The AO also concluded that the “assessee was simply supplying technical manpower to AWSC for carrying out various consultancy and management services in assisting them in execution of their contracts”. For all these reasons, the AO declined deduction under Section 80HHE to the assessee. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. The CIT(A) observed that, as rightly pointed out by the AO, none of the documents conclusively prove that the services were rendered for development of computer software. It was also observed that it is not for the Anderson Consulting to confirm the services rendered, but such a confirmation should come only from the clients concerned. The CIT(A) went on sharing the AO’s scepticism that the chances of” claiming what was received as consultancy and management services as amounts received on account of technical services for development of software in order to get the deduction under Section 80HHE cannot be ruled out. The AO’s action was thus confirmed in first appeal. The assessee is not satisfied and is in second appeal before us.
15. We have heard the rival contentions, carefully perused the material before us and duly considered factual matrix of the case as also the applicable legal position.
16. We find that Section 80HHE of the Act provides the condition of eligibility for deduction under that section as that the assessee should be engaged in the business of (i) export out of India of computer software or its transmission from India to a place outside India by any means; or (ii) providing technical services outside India in connection with the development or production of computer software. Therefore, once an assessee can establish that the technical services were provided in connection with or for the purpose of the development of computer software, the assessee will be eligible for being considered for deduction under Section 80HHE. In the case before us, the assessee has furnished full details of the clients to whom the services were rendered in connection with development of software. These clients, as evident from the list of recipients of services at p. 104 of the paper book, include Nokia Telecommunication (Finland), Bayerische Verinsba (Germany}, Department of Social Security (United Kingdom), Shell International (United Kingdom), West Pac (Australia), Prudential Corporation (United Kingdom) and Caterpillar Asia (Singapore). The precise nature of services are also on record at p. 105 of the paper book. The qualifications of the persons actually working on these projects are also furnished. No doubt some of these persons are plain graduates but that fact by itself cannot mean that they lacked the requisite technical expertise to make a useful contribution in the development of computer software. In any event, detailed technical appraisals of the employees deputed on various software development jobs overseas are also on record. We have perused these details and we are of the view that these evidence cannot be simply brushed aside as the authorities below have chosen to do. We have also perused the confirmations by the local affiliate of AWSC who is handing the project and client concerned. The way these projects work is like this. Once a need arises for technical services at a project, the AWSC affiliate handling that project circulates the requirements to other offices. One such notification from Anderson Consulting (Finland) was placed before us at pp. 112 and 113 of the paper book. This communication gives details of the project, the work opportunity and the needed skills. Upon selection of the persons, the selected persons are taken on the project to render the technical services. The technical appraisals of the persons working on the project are also documented as also a confirmation is obtained from the AWSC affiliate handling the project.
17. In our considered view, these documents reasonably establish the fact that the said technical services are indeed rendered by the assessee’s personnel. The mere fact that most of these evidences are in the nature of documentation of AWSC affiliates cannot lead to the conclusion that the documentation is unreliable. We have also noted that the detailed billing particulars in respect of each project are available. However, only because AWSC makes one billing adjustment does not vitiate the fact that the complete details of the relevant earnings are on record. It is not necessary that in respect of each billing unit a separate entry is required to be made by the AWSC. In our considered view, reasonable evidence in support of the services having been rendered by the assessee’s personnel is on record. Even though the evidences are internal to the extent the evidences are primarily from AWSC, this fact by itself cannot indicate that the evidences are fabricated or unreliable, These are contemporaneous evidences and constitute reasonable basis for a finding that the assessee’s personnel have rendered technical services for or in connection with development of computer software. We have also noted that the requisite chartered accountant certificate under Section 80HHE is also placed on record and no faults have been noticed in the same. The doubts raised by the AO and the CIT(A) are, in our considered view, ill-founded and unsustainable in law. Keeping in view of these facts, as also entirety of the case, we deem it fit and proper to direct the AO to grant deduction under Section 80HHE in accordance with the law and in the light of our above observations. The assessee will get relief accordingly.
18. Ground No. 2 is thus allowed for statistical purposes.
19. In the result, the assessee’s appeal is partly allowed.
20. To sum up, while Revenue’s appeal is dismissed, the assessee’s appeal is partly allowed.