1. These cross appeals filed by the assessee and the revenue are directed against the orders of the Commissioner of Income-tax (Appeals)-VIII, Mumbai, for the assessment years 2000-01 and 2001-02.

ITA No. 940/M/04 : Assessment year 2000-01

2. In this appeal, the assessee has taken the following two grounds :—

"1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in issuing a notice dated 17-10-2003 for enhancement under section 251(2) of the Income-tax Act read with Explanation thereto which has consequently resulted in disallowance under section 40(a)( i) to the extent of Rs. 19,01,162. He ought not to have done so.

2. Without prejudice to Ground No. 1 on the facts and in the circumstances of the case and in law, the learned CIT(A), has erred in holding that the training expenses of the surveyors paid to Lloyds Register of Shipping London, are in the nature of as fees for technical services in terms of section 9(1)(vii) of the Act and thereby in disallowing the sum of Rs. 19,01,162 under the provisions of section 40(a)(i ) of the Income-tax Act, 1961. He ought not to have done so."

3. As regards ground No. 1, we find that during the proceedings, the Assessing Officer had noticed that assessee had incurred training expenses amounting to Rs. 56,34,250 which mainly consisted of travelling, lodging and boarding abroad. He made reference to reasonableness of expenditure and ultimately held that expenditure was excessive and after excluding the travelling cost, he disallowed 50 per cent of the balance of this expenditure.

4. On appeal, the learned CIT(A) was of the view that whole of the training expenses were in the nature of fee for technical services and since no tax has been deducted the whole of the expenditure was not allowable under section 40(a)(i ) and accordingly, he issued a notice for enhancement and ultimately disallowed a sum of Rs. 42,24,291 after excluding the expenses incurred for travelling etc.

5. Before us the learned counsel for the assessee submitted that the Assessing Officer has merely observed that expenditure was excessive and therefore, he had disallowed 50 per cent of the expenditure after excluding air travel expenditure. Assessing Officer has never touched the angle of fees for technical services and therefore, the CIT(A) should not have considered this aspect because that would amount to creating a new source of income and in this regard he relied on the decision of the Hon’ble Supreme Court in the case of CIT v. Shapoorji Pallonji Mistry [1962] 44 ITR 891.

6. On the other hand, the learned Departmental Representative submitted that by now it is settled position that first appellate authority’s powers are plenary in nature and are co-terminus with that of Assessing Officer. In this regard he relied on the decision of the Hon’ble Supreme Court in the case of CIT v. Kanpur Coal Syndicate [1964] 53 ITR 225 . He also submitted that the issue regarding training expenses itself was adjudicated by the Assessing Officer and merely because he forgot to see whether the same would constitute fee for technical services and if the same issue has been taken up by the first appellate authority by giving an enhancement notice, it cannot be said that CIT(A) has formed a new source of income.

7. We have considered the rival submissions carefully and find force in the submission of the learned Departmental Representative. Hon’ble Supreme Court in the case of Kanpur Coal Syndicate (supra) made it clear that first appellate authority has plenary powers in disposing of an appeal and the scope of his power is co-terminus with that of the Income-tax Officer. This has been interpreted by various Courts that the CIT(A) would have the same powers as the Income-tax Officer. In any case, the issue regarding training expenses was raised by the Assessing Officer himself. Though the addition was made from a different angle and CIT(A) has invoked another angle by holding that why training expense should not be considered as fee for technical services. Merely because a new angle has been examined, it cannot be said that a new source of income has been created by the CIT(A). Therefore, we find no force in this issue and dismiss the same.

8. In regard to ground No. 2, after hearing both the parties, we find that during the assessment proceedings Assessing Officer noticed that assessee had claimed expenses of Rs. 56,34,250 towards training cost. He further found that as per the claim the expenses included stay and travel cost. According to him the cost of stay was much higher and thus the expenses were on higher side. After excluding the travel expenses amounting to Rs. 9,88,000 he disallowed 50 per cent of the balance of expenses amounting to Rs. 23,23,129.

9. On appeal, CIT(A) was of the view that perusal of the detail filed would show that training expenses were in the nature of fee for technical services and would be thus covered by section 9(1)(vii)( b) of the Act and accordingly, he issued enhancement notice.

10. In response to the notice it was mainly submitted before him that training expenses could not be equated with fee for technical services because it involved one party using its own skill to perform services for another without any transfer of that skill. It was submitted that assessee was engaged in the survey of ships whereby assessee’s employees would inspect various mechanical and electrical equipments in the ship and ultimately issue a fitness certificate. By taking training from principal company, such employees had acquired only inputs to enable them to perform their work with desired state of efficiency and in fact it is the personnel of the assessee who were performing technical services. The learned CIT(A) did not agree with these submissions and after relying on the decision of the Authority for Advance Rulings in the case of Steffen, Robertson & Kirsten Consulting Engineers & Scientists, In re [1998] 230 ITR 206¹, CIT v. Krebs & Co. [1998] 229 ITR 615 ² (MP), Cochin Refineries Ltd. v. Commissioner Of Income-Tax. [1996] 222 ITR 354 (Ker.) and ITO v. SMS Schloemann Siemag Aktiengesellschaft Dusseldorf [1996] 57 ITD 254 (Hyd.), he held that training fee paid by the assessee was in fact fee paid for obtaining technical services. After reducing travelling expenses amounting to Rs. 14,09,959, he made disallowance at Rs. 42,24,291.

11. Before us the learned counsel for the assessee reiterated the submissions made before the CIT(A). He further submitted that by no stretch of imagination training fees can be called "fee for technical services". In fact assessee was engaged in the business of surveying of ships and various equipments installed in the ship and then would issue fitness certificates. For this highly technically qualified staff was employed as surveyors but still they required hands on experience and that is why they were sent for training to the principal company. The training expenses paid by the assessee company included boarding and lodging expenses and major portion pertained to such expenditure and that aspect has been totally ignored by the learned CIT(A).

12. He also referred to various decisions relied on by the learned CIT(A) and pointed out that as far as the decision in the case of Steffen, Robertson & Kirsten Consulting Engineers & Scientists, In Re ( supra) rendered by the Authority for Advance Ruling is concerned same is factually distinguishable and in any case the Ruling given by the AAR is confined to the facts of a particular case and cannot be treated as a precedent. The other two cases also involved different facts and none of them was dealing with the training expenses. Therefore, the law relied on by the learned CIT(A) is totally distinguishable. He also submitted that such training was imparted abroad and even if such training is construed as fee for technical services and such services were never rendered in India or utilized in India, and therefore, the same could not be brought under section 9(1)(vii) of the Act in view of the decision of the Hon’ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408 ¹. He also relied on the following decisions :—

(i) Commissioner Of Income-Tax v. Siemens Aktiongesellschaft [2009] 310 ITR 320² (Bom.).

(ii) Mahindra & Mahindra v. Dy. CIT [2009] 313 ITR 263 (Mum.) (SB).

(iii) Raymond Ltd. v. Dy. CIT [2003] 86 ITD 791 (Mum.).

13. On the other hand, the learned Departmental Representative strongly supported the orders of the lower authorities. He also placed reliance on the decisions relied on by the learned CIT(A).

14. We have considered the rival submissions carefully in the light of the relevant material on record as well as the decision cited by the parties. After careful perusal of various authorities relied on either side would show that they are quite distinguishable because none of the case law deals with the training expenses. In these cases some principles have been laid down. We further find that the decision relied on by the learned counsel for the assessee in the case of Ishikawajma-Harima Heavy Industries Ltd. (supra) is not applicable because that decision has been rendered in respect of section 9(1)(vii)( c) which is applicable in the case of non-residents where as clause (b) deals with residents. However, at the same time, common sense would tell us that training expenses cannot be called as "fee for technical services". For example a student passes his examina-tion of LLB, it does not mean he becomes fully equipped to deal with the cases in various fields. He needs further training under a Senior Lawyer in the chosen field say for example - taxation, service matters, civil matters or criminal matters, etc. In the modern days even these categories can be further sub-divided, for example - in the case of taxation, it can be direct taxes and indirect taxes and with further specialization, for example - say International taxation etc. Similarly, civil matters can be divided into various fields say property matters, family matters etc. What we mean to say is that a person is highly qualified by his law degree but still requires training for rendering practical aspects. Similarly, in the case before us surveyors were highly technically qualified but such persons, may need to learn practical aspects of examining various electrical and other equipments. Such training in our view is a continuous process because technology is changing very fast and one needs to keep touch with such technology and therefore, expenses incurred towards training cannot be termed as "fee for technical services". In any case, the case before us major amount has been paid by way of reimbursement for boarding and lodging arrangements also for which no separate claims have been made. Therefore, according to us, the training fee cannot be termed as "fee for technical services".

15. We further find that the learned CIT(A) has not dealt with the aspects whether such expenditure was excessive, or not as held by the Assessing Officer. Thus, while holding that these training expenses are not in the nature of fee for technical services, we remit the matter back to the file of the CIT(A) for examining whether the expenditure on training is excessive or not as held by Assessing Officer after providing adequate opportunity to the assessee of being heard.

16. In the result, the appeal is partly allowed for statistical purposes.

ITA No. 7628/M/2004 - Assessment year 2001-02

17. In this appeal, the assessee has raised the following grounds :

"On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that reimbursement of the training expenses to the surveyors, are in the nature of as fees for technical services in terms of section 9(1)(vii) of the Act and thereby erred in disallowing the sum of Rs. 2,12,162 considering it as payment to non-residents without deduction of tax under the provisions of section 40(a)( i) of the Income-tax Act. He ought not have done so."

18. After hearing both the parties, we find that the assessee had claimed total training expenses at Rs. 12,04,149 out of which only a sum of Rs. 5,31,676 was incurred on foreign training. After allowing the expenses in respect of travelling vis-a-vis fee, etc., the balance amount of Rs. 2,13,213 was treated as fee for technical services and subjected to tax which has been confirmed by the learned CIT(A).

19. This issue has been adjudicated by us in above noted appeal of the assessee in ITA No. 940/M/08 wherein we have held that training expenses cannot be construed as fee for technical services. Therefore, following that decision, we set aside the order of the learned CIT(A) and delete the addition.

20. In the result, the appeal is allowed.

ITA No. 8738/M/2004 : Assessment year 2001-02 (Departmental appeal)

21. In this appeal, the revenue has raised the following ground :—

"On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that the payment of Rs. 61,03,672 towards contribution to PF, superannuation fund and employee’s fund is admissible for deduction under section 37(1) of the Act and thus deleting the disallowance made by the Assessing Officer without appreciating the facts of the case."

22. After hearing both the parties, we find that during the assessment proceedings the Assessing Officer noticed that a sum of Rs. 61,03,672 was paid as one time contribution towards PF, superannuation fund and employee’s fund etc. It was explained that this amount was misappropriated by the brokers out of these funds while making investment. Therefore, assessee made the payment but the Assessing Officer did not agree with the explanation and observed that assessee had suffered huge losses and therefore, there was no justification in payment of ex gratia. Before the CIT(A) it was submitted that assessee company was making annual contribution to various employee’s welfare trusts. Out of trust’s funds investments were to be made and while withdrawing these amount, the same was misappropriated by the brokers. The assessee company launched criminal proceedings against the brokers. It was also explained that though the fund was insured, the insurance company had stipulated for the payment of damages only in the case of part of the misappropriated fund borne by the company. Hence, that part was paid by the assessee-company. It was also argued that the assessee was a service oriented company and was banking heavily on the performance of its employees and the employees had lost because none of their fault, the assessee thought it fit to make the payment to keep moral of the employees high. Thus, the expenditure was incurred for the purpose of business. Reliance was placed on the decision in Commissioner Of Income-Tax, Mumbai… v. Sinnar Bidi Udyog Ltd., Mumbai…. [2002] 257 ITR 216 ¹ (Bom.), Triplicane Permanent Fund Ltd. v. CIT [1989] 179 ITR 492 ² (Mad.), Chief Commissioner (Admn.) v. Karnataka Electricity Board [1992] 197 ITR 48 ³ (Kar.), CIT v. B.G. Shirke & Co. [2003] 264 ITR 83⁴ (Bom.).

23. Learned CIT(A) decided the issue in favour of the assessee vide para 10 which reads as under :—

"The submission made by the appellants’ representative has been considered. There is a merit in the claim that the impugned sum was paid as an employee welfare measure. For if this sum has not been paid, the appellant would not have got a part reimbursement of the loss from the insurance company. The loss on account of the misappropriation of the funds by the trustees as also by the broker would have affected the employees at the time of their retirement which they were otherwise entitled to as superannuary benefit. Therefore, the payment is clearly for the benefit and general welfare of the employees on the ground of commercial expediency. Such a payment is required to be held as of revenue admissible for deduction under section 37(1) of the Act. In this respect, the decisions of the Bombay High Court in the cases of Sinner Bidi Udyog Ltd. (supra) and B.G. Shirkey & Co. (supra) are relevant. Also relevant in this regard is the decision of the Apex Court in the case of Shri Venkat Rice Mills v. CIT (223 ITR 103) wherein it has been held that the contribution made to public welfare fund which is directly connected or relating to carrying on of the assessee business or which results and benefit to assessees business has to be regarded as an allowable deduction under section 37(1) of the Act."

24. Before us the learned Departmental Representative supported the order of the Assessing Officer. On the other hand, the learned counsel for the assessee supported the order of the first appellate authority.

25. After considering the rival submissions, we find that various trusts created by the assessee company PF, superannuation fund, etc., lost the money because of the broker and not because of employees. It is clear that the assessee company made the payment to keep the moral of the staff high and therefore, it cannot be said that sums were paid for the purpose of business. In view of this, we find nothing wrong in the order of the learned CIT(A) and we confirm the same.

26. In the result the appeal is dismissed.