Deloitte Consulting India P.Ltd, ... vs Assessee

BEFORE S/SHRI B.R.BASKARAN (AM) AND AMIT SHUKLA, (JM) सव ी बी.आर.बा करन, लेखा सद य एवं अ मत शु ला, या यक सद य के सम

आयकर अपील सं./I.T.A. No.157/Mum/2012 ( नधारण वष / Assessment Year: 2007-08)

Deloitte Consulting India बनाम/ The Income Tax Officer, Ward Pvt.Ltd., 2(2)(3), Vs. Fairmont, Level-2, Aayakar Bhavan, Hiranandani Business Park, Maharshi Karve Road, Powai, Mumbai-400020 Mumbai-400076 (अपीलाथ /Appellant) .. ( यथ / Respondent)

थायी ले ख ा सं . /जीआइआर सं . /PAN/GIR No. :AACCM6469N

अपीलाथ ओर से / Appellant by S/Shri Madhur Agrawal And Ketan Ved यथ क ओर से/Rspondent by S/Shri N K Chand and Premanand J

सन ु वाई क तार ख / Date of Hearing : 10.6.2015 घोषणा क तार ख /Date of Pronouncement : 15.7.2015

आदे श / O R D E R

PER B.R. BASKARAN (AM)

The appeal filed by the assessee is directed against the order dated 9.12.2011 passed by Ld CIT(A)-5, Mumbai and it relates to the assessment year 2007-08. Following two issues are contested before us:-

(a) Computation of deduction u/s 10A of the Act. (b) Disallowance u/s 14A of the Act.

2. The assessee is engaged in the business of software development and is also providing information technology services. The assessee 2 I T A N o . 1 5 7 / Mu m / 2 0 1 2

claimed deduction u/s 10A of the Income Tax Act, 1961 (the Act) on the profit generated from the business. In the Profit and Loss account, the assessee had debited expenses reimbursed to its Associate Enterprises (AE) relating to onsite managers' salary and expenses amounting to Rs.4.83 crores. It is pertinent to note that the said reimbursement was an International Transaction entered with its AE and the same required Transfer pricing (T.P.) study. However, while computing the total income, the assessee disallowed the above said amount of Rs.4.83 crores, i.e., while arriving the total income the above said amount was not claimed as deduction. Accordingly, the assessee contended that it had not claimed the above said amount of Rs.4.83 crores and hence no T.P. adjustment/study is required in respect of this transaction. The Transfer pricing officer also did not examine this claim, since the assessee had informed him that it has suo-motu disallowed the payment made by it to its AE in relation to reimbursement of onsite managers' salary and expenses.

3. The AO noticed that the assessee had disallowed identical claim made in the immediately preceding year also suo motu and the AO, in that year, had taken the view that the amount so disallowed cannot be considered as part of the income exempt u/s 10A of the Act. Accordingly, by following the decision taken in that year, the AO held that the assessee is not entitled for deduction under section 10A of the Act in respect of the suo-motu disallowance of reimbursement of expenses made by the assessee.

4. The AO also noticed that the assessee has received a dividend income of Rs.1.65 crores and claimed the same as exempt u/s 10(34) of the Act. However, the assessee did not make any disallowance u/s 14A of 3 I T A N o . 1 5 7 / Mu m / 2 0 1 2

the Act on the ground that it did not incur any expenditure for earning the dividend income. The AO did not accept the contentions of the assessee and accordingly disallowed 5% of the dividend income u/s 14A of the Act.

5. In the appellate proceedings, the ld. CIT (A) upheld the rejection of claim u/s 10A of the Act in respect of expenditure disallowed by the assessee suo motu. The ld. CIT (A), however, set aside the matter relating to the disallowance to be made u/s 14A of the Act to the AO. Aggrieved, by the order of Ld. CIT(A), the Revenue has filed this appeal before us.

6. The ld. Counsel appearing for the assessee fairly admitted that the issue relating to denial of deduction u/s 10A of the Act in respect of suo- motu disallowance of expenditure was considered by the Tribunal in the immediately preceding year, i.e. AY 2006-07, and the same decided against the assessee by the Mumbai Bench of the Tribunal reported as Deloitte Consulting India (P) Ltd. vs. Dy. CIT (2012) 150 TTJ 824 (Mum.) (Trib.). He further submitted that the assessee had filed Miscellaneous Application against the order of the Tribunal passed for assessment year 2006-07, but it was also dismissed by the Tribunal. The Ld. AR, however, contended that any amount disallowed while computing the income from business would also be eligible for deduction u/s 10A of the Act, as the amount so disallowed would also form part of business income. In this regard, he placed reliance on the decision of Hon'ble Jurisdictional Bombay High Court rendered in the case of CIT Vs. Gem Plus Jewellery India Ltd (2011) 330 ITR 175(Bom). He submitted that the Tribunal, in AY 2006-07, did not have occasion to consider the decision rendered by the Hon'ble Bombay High Court referred above. Accordingly, the ld. AR submitted that the deduction u/s 10A of the Act should be allowed on the suo motu disallowance made by the assessee.

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7. He further submitted that the suo-motu disallowance made by the assessee would not fall in the category of enhancement of income stated in the proviso to sec. 92C(4) of the Act, since it was not an adjustment made by the AO. It is pertinent to note here that the proviso to sec. 92C(4) bars allowing deduction u/s 10A of the Act on the amount of income enhanced by the AO on account of determination of Arms Length Price. In this regard, the ld. AR placed reliance on the decision of Bangalore Bench of the Tribunal rendered in the case of I Gate Global Solutions Ltd. vs Assistant Commissioner Of Income (2007) 112 TTJ Bang 1002, wherein the Tribunal has held that the amount disallowed by the assessee on its own after ascertaining Arm's Length Price (ALP) cannot be considered to be a case of enhancement of income within the meaning of proviso to Section 92C(4) of the Act and hence the assessee would be entitled to exempt u/s 10A of the Act in respect of income declared in the return of income. The ld. AR further submitted that the TPO has also not suggested any adjustment and hence proviso to section 92C(4) will not apply to the suo motu disallowance made by the assessee.

8. The ld. DR, on the contrary, submitted that the identical disallowance made on its own by the assessee was held to be not eligible for deduction u/s 10A of the Act by the Tribunal in AY 2006-07. The Ld D.R further submitted that the assessee has preferred appeal before the Hon'ble High Court of Bombay challenging the order passed by the Tribunal in AY 2006-07 and the same has also been admitted. He further submitted that the decision rendered by the Jurisdictional High Court in the case of Gem Plus Jewellery India Ltd (supra) cannot be applied to the facts of the present case, since the disallowance made in that case under the provisions of section 36(1)(iv) of the Act. He submitted that the 5 I T A N o . 1 5 7 / Mu m / 2 0 1 2

disallowance u/s 36(1)(iv) of the Act is required to be made due to the legal fiction created in the statute, whereas in the instant case, the assessee itself has disallowed the expenditure, which otherwise is allowable at ALP after carrying out transfer pricing study. Thus, the suo- motu disallowance made by the assessee cannot be equated with the amount disallowed as per the statutory provisions. The ld. DR further submitted that the assessee, in its Transfer Pricing Study furnished in form No.3CEB, has claimed that the reimbursement of expenditure was at ALP. The Ld D.R submitted that the assessee had suo motu disallowed the same in the computation of income under the impression that the ALP shall be determined at NIL value, in which case, the disallowance that is required to be made would not be eligible for deduction u/s 10A of the Act as per the proviso to section 92C(4) of the Act.

9. The ld. DR placed reliance on the decision of Mumbai Bench of the Tribunal in the case of M/s Agilisys IT Services India Pvt Ltd V/s ITO in ITA No.2113/Mum/2011 (AY-2003-04) dated 29.4.2015, wherein suo motu disallowance made by the assessee was held to be not eligible for deduction u/s 10B of the Act.

10. In the rejoinder, the ld. AR submitted that the decision rendered in the case of M/s Agilisys IT Services India Pvt Ltd (supra) is not applicable to the facts to the instant case. The ld. AR submitted that the Transfer Pricing Adjustment made in the above said case was pertaining to export sales reported by the assessee and as per the proviso to 10B(3) sale process have to be brought into India in foreign exchange within six months. Since the sales relating to the Transfer Pricing Adjustment would not result in receipt of foreign exchange, the Tribunal held that the deduction u/s 10B of the Act would not be available in respect of Transfer 6 I T A N o . 1 5 7 / Mu m / 2 0 1 2

Pricing Adjustment suo motu made by the assessee. He submitted that, in the instant case, the disallowance made by the assessee does not relate to sales and hence the question of bringing the foreign exchange into India does not arise.

11. With regard to the disallowance made u/s 14A of the Act, the Ld A.R reiterated the submissions that the assessee did not incur any expenditure in earning the dividend income and hence no expenditure needs to be disallowed u/s 14A of the Act. On the contrary, the ld D.R submitted that the Ld CIT(A) has only set aside the matter to the file of the AO.

12. We have heard rival submissions and perused the record. We notice that the assessee had disallowed identical claim made in AY 2006- 07 and the same was also held to be not eligible for deduction u/s 10A by the assessing officer on the reasoning that the income pertaining to suo motu disallowance made by the assessee does not bear the character of income having nexus with the software development activity carried on by the assessee. The Tribunal has further noticed that the finding of the Ld CIT(A) that the income arising out of the adjustment is not derived by the undertaking from the Export has not been controverted by the assessee. The Tribunal has further noticed that the assessee has not complied with the provisions of sec. 10A in respect of the suo-motu disallowance made by the assessee. In fact, it is the stand of the assessee that the reimbursements made by it was at ALP as evidenced by the report filed in Form 3CEB and it has also claimed the same as deduction by debiting the reimbursements as an item of expenditure in the Profit and loss account. Hence the suo-motu disallowance made by the assessee actually contradicts its stand taken by it in the financial statements as well as in the report furnished in Form 3CEB.

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13. Though the decision rendered in the case of M/s Agilisys IT services India Pvt Ltd pertained to suo-motu disallowance made in respect of sale receipts, the Tribunal has confirmed the rejection of deduction u/s 10B of the Act only on the reasoning that the conditions prescribed under that section has not been complied with in respect of addition made suo-motu in respect of sale receipts. In the above said case, the assessee's sale price was seen under priced while making Transfer pricing study and accordingly the income was enhanced. The assessee had claimed deduction u/s 10B of the Act on the said enhancement made through T.P study, which was rejected by the Tribunal. The following observations made by the Tribunal are relevant here:-

"15. Coming to the conduct of the assessee, there is no doubt that the assessee has suo moto made transfer pricing adjustment. At this point assuming that there is no enhancement by the TPO and the assessee is allowed the benefit of section 10B of the Act then, every tax payer will first under price its sale with associated enterprises and thereafter suo moto enhance the sale price by making transfer pricing adjustment and claiming the deduction u/s 10B of the Act, stating that under price sales originally declared by the assessee in its books of account have been brought in India in convertible foreign exchange thereby keeping a certain portion of the sale abroad.

16. In our considered opinion and understanding of the law and the understanding of the legislative intention, we cannot permit the assessee to stretch the benevolent provision to avail the benefit which the legislature never intended to. In the case in hand, there is no dispute that the assessee has under priced its services to AE's and therefore made transfer pricing adjustment suo moto. This peculiar conduct of the assessee, if allowed to claim deduction u/s 10B of the Act, will go against the legislative intention. We, therefore, decline to interfere with the finding of the lower authorities. In our considered opinion, the assessee is not entitled for deduction u/s 10B of the Act in respect of the addition of Rs.4,09,54,804/- suo moto made by the assessee as per Form 3CEB. The cases relied upon by the assessee have not considered the 8 I T A N o . 1 5 7 / Mu m / 2 0 1 2

relevant provisions of the Act with legislative intent and are therefore distinguished from peculiar facts and modus operandi of the case in hand...

In the instant case, the assessee has determined the reimbursements at ALP in form no. 3CEB, whereas in M/s Agilisys IT services India Pvt Ltd, the ALP of sale receipts was determined at higher figure than that reported and hence due adjustments were made. In respect of the adjustments made due to the TP study was held to be not eligible for deduction u/s 10B of the Act by the Tribunal for the reasons stated therein. In effect, the sale price adjustment has not resulted in receipt of foreign exchange.

14. In the instant case also, the assessee has not generated any foreign exchange out of the suo-motu disallowance made by it. In fact, the assessee has actually spent money on reimbursements and hence there is no question of generating any income out of suo-motu disallowance of the expenditure incurred. Hence, in the absence of any income, it would not be possible to say that the suo-motu disallowance of any expenditure (which has already resulted in out go of money) would give rise to receipt of any money, which can be called as income generated out of software development activity. Thus, in our view, the ratio of the decision rendered in the case of Agilisys IT services India Pvt Ltd can be applied in the facts of the present case also. Even otherwise it is not a case of disallowance that is required to be made under the statutory provisions due to legal fiction. We notice that the Tribunal, while disposing of the identical issue in AY 2006-07, has taken into account the decision rendered by the Bangalore bench of Tribunal in the case of I Gate Global Solutions (supra). Hence, for the additional reasons discussed supra and also by following the decision rendered by the Tribunal in AY 2006-07 on identical issue, we are of the view that the Ld CIT(A) was justified in confirming the order of 9 I T A N o . 1 5 7 / Mu m / 2 0 1 2

the AO in rejecting the claim for deduction u/s 10A of the Act in respect of suo-motu disallowance made by the assessee.

15. The next issue relates to the disallowance made u/s 14A of the Act. We notice that the ld CIT(A) had only set aside the issue to the file of the AO for fresh consideration in the light of decision rendered in the case of Godrej & Boyce mfg. Co. Ltd (328 ITR 81) by the Hon'ble Bombay High Court. Hence, we do not find any infirmity in the decision of Ld CIT(A) on this issue.

15. In the result, the appeal filed by the assessee is dismissed.

Pronounced accordingly on 15th July, 2015.

घोषणा खुले यायालय म दनांकः 15th July, 2015 को क गई ।

Sd sd

(अ मत शु ला / AMIT SHUKLA) (बी.आर.बा करन / B.R. BASKARAN) या यक सद य / JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER

मुंबई Mumbai: 15th July,2015.

व. न.स./ SRL , Sr. PS

आदे श क त ल प अ े षत/Copy of the Order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent. 3. आयकर आयु त(अपील) / The CIT(A)- concerned 4. आयकर आयु त / CIT concerned 5. वभागीय त न ध, आयकर अपील य अ धकरण, मुंबई / DR, ITAT, Mumbai concerned 6. गाड फाईल / Guard file.

आदे शानुसार/ BY ORDER, True copy सहायक पंजीकार (Asstt. Registrar) आयकर अपील य अ धकरण, मंब ु ई /ITAT, Mumbai