THE HIGH COURT OF DELHI AT NEW DELHI
% Judgment delivered on: 29.09.2008
+ ITA 734/2008
COMMISSIONER OF INCOME TAX
DELHI - IV, NEW DELHI ... Appellant
- versus -
EDS ELECTRONICS DATA SYSTEMS
(INDIA) PVT. LTD ... Respondent
Advocates who appeared in this case:
For the Appellant : Ms Prem Lata Bansal
For the Respondent : Mr Aseem Mowar with Ms Mallika Poswal and
Ms Sheena Piplani
CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE RAJIV SHAKDHER
1. Whether Reporters of local papers may be allowed to
see the judgment ? Yes
2. To be referred to the Reporter or not ? Yes
3. Whether the judgment should be reported in Digest ? Yes
BADAR DURREZ AHMED, J (ORAL)
1. This appeal under Section 260 A of the Income Tax Act,
1961 (hereinafter referred to as the “said Act”) is directed against the
Tribunal’s order dated 10.03.2004 pertaining to the assessment year
2000-2001.
2. The learned counsel for the appellant/ revenue pressed two
issues before this Court. One was with regard to the payment made to
ITA No. 734/2008 Page No.1 of 8
expatriates in the sum of Rs 4,03,31,726/-. According to the revenue
the said payment could not be treated as an accrued liability in the year
in question because the Reserve Bank of India’s permission for such
remittances had been received in the subsequent year. The case of the
revenue is that since the approval for remittances had been received in
the subsequent year, there could not have been an accrued liability in
the current year.
3. The other issue sought to be raised by the revenue pertains to
the provision made for bad/ doubtful debts for the purposes of
computing book profits under Section 115 JA of the said Act. The
Assessing Officer made an addition on account of the provision which
had been claimed by the assessee. The same had been deleted by the
Income Tax Appellate Tribunal. We find that this issue is no longer
debatable inasmuch as it stands settled by several decisions of this
Court as well as the Supreme Court. The said decisions are:-
1. CIT v. Eicher Ltd: 287 ITR 170;
2. CIT v. HCL Comnet Systems & Services Ltd: 292
ITR 299;
3. Commissioner of Income Tax-IV, New Delhi v. M/s
HCL Comnet Systems & Services Ltd: Civil Appeal
No. 5800/2008 by a judgment and order dated
23.09.2008
ITA No. 734/2008 Page No.2 of 8
The decision taken by the Tribunal in deleting the addition made by the
Assessing Officer is in line with these decisions. Consequently, the
question proposed on this issue by the revenue does not call for any
further consideration by this Court.
4. Coming to the first issue sought to be raised by the revenue,
we find that the same is also covered by the decision of this Court in
the case of Bhai Sunder Dass & Sons Co. P. Ltd v. CIT: 259 ITR 33.
The factual background in respect of this issue is that the assessee
entered into an agreement with EDS Global Services Inc., USA on
21.09.1999. Under the said agreement EDS Global Services Inc., USA
provided the assessee with manpower for executing software projects.
In consideration for services rendered, the assessee reimbursed the
employment cost of the personnel, who were deputed for the purpose,
to EDS Global Services Inc., USA, at the agreed rates. The assessee,
therefore, made a provision of Rs 4,03,31,726/- in the year in question
under the head “expatriate cost” for remuneration to be reimbursed to
EDS Global Services Inc., USA. The provision had been made on the
basis of invoices raised by EDS Global Services Inc., USA on the
assessee. During the course of the assessment proceedings, the
Assessing Officer had noticed that the assessee had filed an application
with the Reserve Bank of India for approval of the agreement and
remittances to EDS Global Services Inc., USA. The requisite approval
ITA No. 734/2008 Page No.3 of 8
had been received after the expiry of the previous year relevant to the
assessment year under consideration. The Assessing Officer disallowed
the claim of the assessee on the premise that since the approval of the
agreement had not been received during the year in question, no
liability under a valid contract arose. Reliance had been placed on the
decision of the Supreme Court in the case of Nonsuch Tea Estate Ltd
v. CIT: 98 ITR 189. The learned counsel for the revenue also
advanced the very same argument and placed reliance on the said
decision of the Supreme Court.
5. We may note that the Commissioner of Income Tax
(Appeals) had deleted the addition made by the Assessing officer after
holding that the assessee was following the mercantile system of
accounting and the liability had accrued although the same was to be
discharged on a later date.
6. In the revenue’s appeal before the Tribunal, the stand taken
by the Assessing Officer was reiterated. However, after hearing the
parties and after going through the material available on record, the
Tribunal noted that the genuineness of the agreement between the
assessee and EDS Global Services Inc., USA was not in doubt and that
the assessee was following the mercantile system of accounting. The
Tribunal also noted that the liability for making the payment had arisen
ITA No. 734/2008 Page No.4 of 8
because of the terms of the contract entered into between the parties. It
is in this context that the Tribunal concluded that the approval of the
Reserve Bank of India for remittance of the payment would not come
in the way of accrual of liability under the mercantile system of
accounting. The Tribunal examined the Supreme Court decision in the
case of Nonsuch Tea Estate Ltd (supra) and noted that the said case
was distinguishable because in that case the approval of the Central
Government was a pre-condition before which commission could not
be paid to managing agents. Since the approval of the Central
Government had not been received during the relevant year, the
Supreme Court arrived at the conclusion that the liability had not
accrued in that year. The Tribunal noted, and in our view correctly,
that the assessee’s liability to pay the remuneration of the managing
agents arose only when the government conveyed its approval and not
prior to that date.
7. In the present case, the approval of the Reserve Bank of
India was not a pre-condition for entering into an agreement between
the assessee and EDS Global Services Inc., USA. The permission of
the Reserve Bank of India was required only for the purpose of
remitting the funds abroad as per the agreement. The Tribunal noted as
a finding of fact that the liability accrued for the services rendered by
the employees of EDS Global Services Inc., USA and that it was not
ITA No. 734/2008 Page No.5 of 8
the case of the revenue that the approval of the Reserve Bank of India
was required before hiring of the services of EDS Global Services Inc.,
USA. The Tribunal, therefore, concluded that the liability which
accrued under the mercantile system of accounting would be deductible
in the year of accrual itself. Consequently, the Tribunal confirmed the
order passed by the Commissioner of Income Tax (Appeals) in deleting
the addition made by the Assessing Officer.
8. We are of the view that the decision taken by the Tribunal is
absolutely correct in law. In Nonsuch Tea Estate Ltd (supra) the
Supreme Court had noted that there was an absolute bar on the
commission being paid to the managing agents unless and until the
Central Government had approved such appointments in terms of
Section 326 of the Companies Act, 1956. In the present case, there is
no such express bar. In fact, the entire argument before the authorities
below has proceeded on the basis that the approval for remittances was
granted by the Reserve Bank of India in the year subsequent to the year
in question. As noted in the Tribunals’ order it is not the case of the
revenue that the approval of the Reserve Bank of India was required
before hiring of the services of EDS Global Services Inc., USA,
meaning thereby that entering into the agreement between the assessee
and EDS Global Services Inc., USA was itself not in question. In
Nonsuch Tea Estate Ltd (supra), the Supreme Court noted its
ITA No. 734/2008 Page No.6 of 8
observations in an earlier case, namely, CIT v. A. Gajapathy Naidu :
53 ITR 114 wherein it had observed that the mercantile system of
accountancy brings into credit what is due immediately it becomes
legally due and before it is actually received; and it brings into debit
expenditure of the amount for which a “legal” liability has been
incurred before it is actually disbursed. It is in the context of the
expression “legal liability” that the Supreme Court in the case of
Nonsuch Tea Estate Ltd (supra) came to the conclusion that unless
and until the approval of the Central Government was taken for the
appointment of managing agents, the bar of Section 326 would operate
and, therefore, any liability could not be considered to be a “legal”
liability unless and until the approval of the Central Government was
taken. In the present case, as we have already noted above, there was
no legal bar to the assessee entering into the agreement with EDS
Global Services Inc., USA. The only question was of seeking approval
for remittances of the amounts outside India for which approval of the
Reserve Bank of India was required. The fact that the liability had
accrued as per the contract cannot be disputed. Once that is the case,
then, where the assessee follows the mercantile system of accounting, it
cannot be said that the liability had not accrued in terms of the contract.
9. We note that in Bhai Sunder Dass (supra) this Court had
also considered the decision of the Supreme Court in Nonsuch Tea
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Estate Ltd (supra). There also this Court noted that in Nonsuch Tea
Estate Ltd (supra) there was an absolute restriction against the
appointment and re-appointment of managing agents without the
approval of the Government and, therefore, till such approval had been
obtained and granted there was no question of liability to pay the
remuneration accruing, which was not the case in Bhai Suder Dass
(supra). In Bhai Suder Dass (supra) also there was absolutely no
restriction on the assessee entering into an agreement with any person
resident outside India for rendering of services and the restriction was
only limited to the remittances of money abroad without the permission
of the Reserve Bank of India. We find that the case of Bhai Suder
Dass (supra) is squarely applicable to the facts of the present case. The
Tribunal has correctly applied the law on the basis of the facts
determined by it.
10. Therefore, on both the issues proposed by the revenue, we
find that no substantial question of law arises for our consideration.
The appeal is dismissed.
BADAR DURREZ AHMED, J
RAJIV SHAKDHER, J
September 29, 2008
SR
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