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Income Tax Appellate Tribunal, “A’’ BENCH: BANGALORE
Before: SHRI CHANDRA POOJARI & SMT. BEENA PILLAI
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
The Assessee has raised following additional grounds in IT(TP)A No.217/Bang/2017 for the A.Y. 2011-12:-
IT(TP)A No.217 /Bang/2017 Technicolor India Pvt. Ltd., Bangalore
Page 2 of 10 “Ground No.9 Without prejudice to ground No.5 and 6 of the concise grounds of appeal, even assuming but not admitting that the amount of Rs.2,04,36,385 is disallowed on account of depreciation claimed on purchase of software, the AO/DRP has erred in not granting relief under section 10A of the Income Tax Act, 1961 (“Act”) on the enhanced income.
Ground No.10 On the facts and circumstances of the case and in law, the TPO/AO/DRP have erred in not considering the margin earned by the Appellant from Non-Associated Enterprises (“Non-AE”) transaction as an internal comparable under Transactions Net Margin Method (“TNMM”) for its transaction with AE’s.”
The assessee filed petition for admission of additional grounds and placed reliance on the judgement in the case of NTPC Vs. CIT (229 ITR 383) and pleaded that the additional grounds may be admitted in view of the above judgement, which was not raised in earlier occasion inadvertently.
We have heard the rival submissions and perused the materials available on record. In our opinion, there is a reasonable cause for not raising these additional grounds on earlier occasion since all the facts are already on record and there is no necessity of investigation of fresh facts so as to adjudicate these grounds. Accordingly, these grounds are admitted for adjudication.
At the time of argument, the assessee has not pressed any main grounds and made an endorsement to this effect. Accordingly, the mains grounds are dismissed as not pressed.
Coming to the additional ground No.9, the assessee wants disallowance of non-granting of depreciation at Rs.2,04,36,385/- to be treated as a part business income so as to account deduction u/s 10AA of the Income-tax Act,1961 ['the Act' for short] placing reliance
IT(TP)A No.217 /Bang/2017 Technicolor India Pvt. Ltd., Bangalore
Page 3 of 10 on the judgement of Hon’ble Karnataka High Court in the case of M Pact Technologies Services Pvt. Ltd. in ITA No.228/Bang/2013 dated 11.7.2018 in which it was held as under:-
“5. In so far as the substantial question of law Nos.5 and 6 are concerned, learned counsel for the Revenue submitted that the ITAT in its Order dated 21.12.2012 has recorded the findings, the relevant portion of which is extracted below for ready reference:- 14. Having heard both the parties and having considered their rival contentions, we find that the disallowance u/ s 40a (ia) is to be made of the expenses incurred and claimed by the assessee but before the payment of which, the assessee has failed. to deduct tax at source. The genuineness of the expenditure is not in dispute. The dispute is whether TDS was to be made before making the payment. Without going into the nature of the transaction, we are inclined to accept the alternate plea of the assessee that the disallowance of the expenditure would automatically enhance the taxable income of the assessee and the assessee is eligible for the deduction u/ s 10A of the Income-tax Act on the enhanced income. Thus, this ground of appeal is allowed".
The relevant portion of the Circular No.37/2016 dated 02.11.2016 issued by the Central Board of Direct Taxes, Department of Revenue, Ministry of Finance, Government of India, relating to the subject: Chapter VI-A deduction on enhanced profits, is quoted hereunder: "The issue of the claim of higher education on the enhanced profits has been a contentious one. However, the courts have generally held that if the expenditure disallowed is related to the business activity against which the Chapter VI-A deduction has been claimed, the deduction needs to be allowed on the enhanced profits. Some illustrative cases upholding this view are as follows: (i) If an expenditure incurred by assessee for the purpose of developing a housing project was not allowable on account of non-deduction of TDS under law, such disallowance would ultimately increase assessee's profits from business of developing housing project. The ultimate profits of assessee after adjusting disallowance
IT(TP)A No.217 /Bang/2017 Technicolor India Pvt. Ltd., Bangalore
Page 4 of 10 under section -40(a)(ia) of the Act would qualify for deduction under section 80IB of the Act. This view was taken by the courts in the following cases: (a) Income-tax Officer-Ward 5/1] vs. Keval Construction, Tax Appeal No.443 of 2012, December 10 2012, Gujarat High Court [b] Commissioner of Income-tax-IV, Nagpur vs. Sunil Vishwambharnath Tiwari. IT Appeal No.2 of 2011, September 11 2015, Bombay High Court (ii) If deduction under section 4043] of the Act is not allowed, the same would have to be added to the profits of the undertaking on which the assessee would be entitled for deduction. -under section 80-IB of the Act."
Applying the same analogy, it can be held that if deduction u/s. 40(a.1[ia] of the Act is not allowed, the same could have been to be added to the profits of the undertaking on which the Assessee would be entitled for deduction u/s. 10A of the Act. This view is fortified by the decision of Bombay High Court in the case of `Commissioner of Income Tax v. Gem Plus Jewellery India Ltd.,' [2011] 330 ITR 175 [Bom], wherein it is held thus: "13. By reason of the judgment of the Supreme Court in Commissioner of Income Tax v. Alom Extrusions Limited [2009] 319 ITR 306 the employer's contribution was liable to be allowed, since it was deposited by the due date for the filing of the return. The peculiar position, however, as it obtains in the present case arises out of the fact that the disallowance which was effected by the Assessing Officer has not, the Court is informed, been challenged by the assessee. As a matter of fact the question of law which is formulated by the Revenue proceeds on the basis that the assessed income was enhanced due to the disallowance of the employer's as well as the employees' contribution towards Provident Fund / ESIC and the only question which is canvassed on behalf of the Revenue is whether on that basis the Tribunal was j1Lstified in directing the Assessing Officer to grant the exemption under Section 10A. On this position, in the present case it cannot be disputed that the net consequence of the disallowance of the employer's and the employee's contribution is that the business profits have to that extent been enhanced. There was, as we have already noted, an add back by the Assessing Officer to the income. All profits of the unit of the assessee have been derived from manufacturing activity. The salaries paid by the assessee, it has not been disputed, relate to the manufacturing activity. The
IT(TP)A No.217 /Bang/2017 Technicolor India Pvt. Ltd., Bangalore
Page 5 of 10 disallowance of the Provident Fund/ ESIC payments has been made because of the statutory provisions - Section 43B in the case of the employer's contribution and Section 36(v) read with Section 2(24)(x) in the case of the employee's contribution which has been deemed to be the income of the assessee. The plain consequence of the disallowance and the add hack that has been made by the Assessing Officer is an increase in the business profits of the assessee. The contention of the Revenue that in computing the deduction under Section 10A the addition made on account of the disallowance of the Provident Fund / ESIC payments ought to be ignored cannot be accepted. No statutory provision to that effect having been made, the plain consequence of the disallowance made by the Assessing Officer must follow. The second question shall accordingly stand answered against the Revenue and in favour of the assessee."
T his C ou rt in I T A No .5 36/2 015 C / w I TA No.537/2015 delivered on 25.06.2018 (Prl. Commissioner of Income Tax & Anr. Vs, M/s. Softbrands India Pvt. Ltd.,) has held that these types of cases, unless an ex facie perversity in the findings of the learned Income Tax Appellate Tribunal is established by the appellant, the appeal at the instance of an assessee or the Revenue under Section 260-A of the Act is not maintainable.
The relevant portion of the said judgment is quoted below for ready reference: "Conclusion: 55. A substantial quantum of international trade and transactions depends upon the fair and quick judicial dispensation in such cases. Had it been a case of substantial question of interpretation of provisions of Double Taxation Avoidance Treaties (DTAA), interpretation of provisions of the Income Tax Act or Overriding Effect of the Treaties over the Domestic Legislations or the questions like Treaty Shopping, Base Erosion and Profit` Shifting (BEPS), Transfer of Shares in Tax Havens (like in the case of Vodafone etc.), if based on relevant facts, such substantial questions of law could be raised before the High Court under Section 260-A of the Act, the Courts could have embarked upon such exercise of framing and answering such substantial question of law. On
IT(TP)A No.217 /Bang/2017 Technicolor India Pvt. Ltd., Bangalore
Page 6 of 10 the other hand, the appeals of the present tenor as to whether the comparables have been rightly picked up or not, Filters for arriving at the correct list of comparables have been rightly applied or not, do not in our considered' opinion, give rise to any substantial question of law. 56. We are therefore of the considered opinion that the present appeals filed by the Revenue do not give rise to any substantial question of low and the suggested substantial questions of law do not meet the requirements of Section 260- A of the Act and thus the appeals filed by the Revenue are found to be devoid of merit and the same are liable to be dismissed. 57. We make it clear that the same yardsticks and parameters will have to be applied, even if such appeals are filed by the Assessees, because, there may be cases where the Tribunal giving its own reasons and findings has found certain comparables to be good comparables to arrive at an 'Arm's Length Price' in the case of the assessees with which the assessees may not be satisfied and have filed such appeals before this Court. Therefore we clarify that mere dissatisfaction with the findings of facts arrived at by the learned Tribunal is not at all a sufficient reason to invoke Section 260-A of the Act before this Court. 58. The appeals filed by the Revenue are therefore dismissed with no order as to costs."
Having heard the learned. counsels for the parties, we are therefore of the opinion that no substantial question of law arises in the present case also. The appeal filed by the Appellants- Revenue is liable to be dismissed and it is dismissed accordingly. No costs.”
In view of the above judgement of the jurisdictional High Court, we are inclined to hold that the disallowance of depreciation claimed on purchase of software to be treated as part of the business income to grant deduction u/s 10AA of the Act. This additional ground of assessee is allowed.
The next additional ground No.10 reads as under:-
IT(TP)A No.217 /Bang/2017 Technicolor India Pvt. Ltd., Bangalore
Page 7 of 10 Ground No.10 On the facts and circumstances of the case and in law, the TPO/AO/DRP have erred in not considering the margin earned by the Appellant from Non-Associated Enterprises (“Non-AE”) transaction as an internal comparable under Transactions Net Margin Method (“TNMM”) for its transaction with AE’s.”
7.1 After hearing both the parties, in the case of e4e Business Solutions India Pvt. Ltd. in IT(TP)A No.324/Bang/2015 dated 4.11.2015 for the assessment year 2010-11, it was held as under:- 7.1 We find that in IT(TP)A No.214/Bang/2015 and IT(TP)A No.179/Bang/15 in the case of M/s Mylan Labs Ltd. at para-10 it has been held as follows; "10. The TPO had applied external TNMM on entity level and on this issue, the Third Member decision of the Mumbai Bench of the Tribunal in the case of M/s. Technimont ICB Pvt. Ltd. v. Addl. CIT in ITA No.4608/Mum/2010 for AY 2005-06, order dated 17.7.2012 is relevant. In para 10 of the said order, the Tribunal held as under: - "10. Clause (i) of. Rule 10B(e) stipulates that net profit margin from an international transaction with an AE is computed in relation to cost incurred or sales effected or assets employed etc. Clause (ii) is material for the present purpose. It provides that the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base. The `base' of this provision takes one back to clause (i) which refers to cost incurred or sales effected or assets employed or to be employed. On splitting clause (ii) into two parts, it divulges that the reference is made to internal and external comparables. One part of clause (ii) refers to the net profit margin realised by the enterprise from a comparable uncontrolled transaction' and the other part talks of the net profit margin realised by an uncontrolled enterprise from a comparable uncontrolled transaction'. It transpires that whereas the first part refers to the profit margin .from internal comparable uncontrolled transactions, the second part refers to profit margin from -an external comparable uncontrolled transaction. Thus it is discernible that what is to be compared under this method is profit from a comparable uncontrolled transaction. The word `comparable' may encompass internal comparable or external comparable. There is cue in the rule itself as to preference to be given to internal comparable uncontrolled transactions vis-a-vis externally comparable uncontrolled transactions. It is because the delegated legislature has firstly referred to the net profit margin
IT(TP)A No.217 /Bang/2017 Technicolor India Pvt. Ltd., Bangalore
Page 8 of 10 realized by the enterprise (internal) from a comparable uncontrolled transaction and, thereafter, it points towards net profit margin realized by unrelated enterprise (external) from a comparable uncontrolled transaction. Thus where potential comparable is available in the shape of an uncontrolled transaction of the same assessee, it is likely to have higher degree of comparability vis-a-vis comparables identified amongst the uncontrolled transactions of third parties. The underlying object behind computing ALP of an internal transaction is to find out the profits which such enterprise would have earned if the transaction had been with some third party instead of related party. When the data is available showing profit margin of that enterprise itself from a third party, it is always safe and advisable to have recourse to such internal comparable case. The reason is patent that the various factors having bearing on the quality of output. assets employed, input cost etc. continue to remain by and large same in case of an internal comparable. The effect of difference due to such inherent factors on comparison made with the third parties, gets neutralized when comparison is made with internal comparable. Ex consequenti, it follows that an internal comparable uncontrolled transaction is more noteworthy vis-a-vis its counterpart i.e. external comparable." 11. It has also been brought to our notice that in the subsequent year i.e. AY 2011-12, the TPO has accepted the internal comparability.
The Id. DR relied on the order of DRP. 13. We are in conformity and are inclined to follow the decision of the Third Member, ITAT Mumbai Bench in the case of M/s. Tecnimont ICB Private Ltd. (supra) wherein it is held that “………The underlying object behind computing ALP of an international transaction is to find out the profits which such enterprise would have earned if the transaction had been with some third party instead of related party. When the data is available showing profit margin of that enterprise itself from a third party, it is always safe and advisable to have recourse to such internal comparable case. 14. Hence we are of the opinion that the TPO had erred in choosing an external comparable, when there was an internal comparable uncontrolled transaction which the assessee had taken in its TP study. The assessee's appeal is allowed".
IT(TP)A No.217 /Bang/2017 Technicolor India Pvt. Ltd., Bangalore
Page 9 of 10 Respectfully following the decision of the Co-ordinate Bench authored by JM in this appeal, we direct the TPO to choose internal comparable in controlled transaction as against an external comparable.” 8. In view of the above order of the Tribunal, we are inclined to decide the issue in favour of the assessee and direct the TPO to chose margin earned by non-AE transactions as an internal comparable on controlled transaction under TNMM as against the external comparable. Accordingly, the entire TP issue is remitted to the AO/TPO for fresh consideration to decide in the light of the above.
In the result, the appeal of the assessee in ITA No.300/Bang/2016 is partly allowed for statistical purposes.
IT(TP)A No.217/Bang/2017 for the AY 2011-12:-
At the time of hearing, the assessee has not pressed this appeal and made endorsement to this effect. Accordingly, this appeal is dismissed as not pressed.
In the result, the appeal filed by the assessee in IT(TP)A No.300/Bang/2016 is partly allowed for statistical purposes and ITA No.217/Bang/2017 is dismissed. Order pronounced in the open court on 29th Jun, 2022
Sd/- Sd/- (Beena Pillai) (Chandra Poojari) Judicial Member Accountant Member
Bangalore, Dated 29th Jun, 2022. VG/SPS
IT(TP)A No.217 /Bang/2017 Technicolor India Pvt. Ltd., Bangalore
Page 10 of 10 Copy to:
The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order
Asst. Registrar, ITAT, Bangalore.