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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N. V. VASUDEVAN & SHRI B. R. BASKARAN
IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI N. V. VASUDEVAN, VICE PRESIDENT AND SHRI B. R. BASKARAN, ACCOUNTANT MEMBER IT(TP)A No.602/Bang/2016 Assessment Year : 2011-12 M/s. Tesco Bengaluru Private Limited, DCIT, Vs. (earlier known as Tesco Hindustan Service Circle – 7(1)(1), Centre Private Limited), Bengaluru. No.81 and 82, Tesco H S C, EPIP Area, White Field, Bengaluru-560 066. PAN : AABCT 8915 B APPELLANT RESPONDENT Assessee by : Shri. T. Suryanarayana, Advocate Revenue by : Shri. Sumer Singh Meena, CIT(DR)(ITAT), Bengaluru. Date of hearing : 22.02.2022 Date of Pronouncement : 23.05.2022 O R D E R Per B. R. Baskaran, Accountant Member:
The assessee has filed this appeal challenging the assessment order dated 27-01-2016 passed by the assessing officer for assessment year 2011-12 u/s 143(3) r.w.s 144C(13) of the Act in pursuance of the directions given by Ld Dispute Resolution Panel (DRP).
2. At the time of hearing, the Ld Senior Advocate Shri T Suryanarayana, did not press Ground Nos. 1 to 17 relating to transfer pricing adjustment in IT(TP)A No.602/Bang/2016 Page 2 of 11 Software development services and I T Enabled Services. Similarly, he did not press Ground nos. 22 to 26 relating to (a) disallowance of expenses for non-deduction of tax at source (b) short credit of TDS (c) arithmetical error in computing total income (d) disallowance of miscellaneous expenses relating to Penalty (e) Levy of interest u/s 234C Accordingly, all these grounds are dismissed as Not Pressed. Ground No.27 relates to levy of interest u/s 234B and 234D. Since it is consequential in nature, it does not require specific adjudication.
3. Remaining grounds give rise to the following issues:- (a) Transfer pricing adjustment in respect of Reimbursement of expenses. (b) Disallowance of Vehicle lease rentals (c) Restricting the deduction claimed u/s 10A of the Act (d) Disallowance of Provision for sub-contracting expenses.
The assessee is engaged in the business of software development and providing IT enabled services. It is an 100% export oriented unit registered under STPI scheme. It was earlier known as Tesco Hindustan Service Centre P Ltd. It is a company belonging to Tesco Stores Ltd, a company incorporated in UK.
The first issue relates to the Transfer pricing adjustment made in respect of reimbursement of expenses. The facts relating thereto are set out in brief. The TPO noticed that the assessee has reimbursed expenses to its Associated Enterprises to the tune of Rs.44,30,01,748/-, which inter alia consisted of an item titled as “Reimbursement of Expenses paid Share based
IT(TP)A No.602/Bang/2016 Page 3 of 11 payments cross charged” amounting to Rs.2,29,82,094/-. The assessee submitted that these payments are reimbursement to its AE on actual basis without any mark-up. The TPO accepted the explanations of the assessee for all the payments except the amount of Rs.2,29,82,094/-. He took the view that Share based payments cross charged is to be treated as Intragroup Services for the following reason:- “An intra-group service is a service performed by one member of a multinational group for the benefit of one or more group companies. The intra group services may be performed by a parent company or a sister company for any one or more of the group companies.”
The TPO also listed out types of intra group services and also discussed certain case laws. Finally, the TPO held as under:- “1. The taxpayer did not prove that the payment for these intra group services resulted into any benefit to the taxpayer, as the same were given to the employee’s of the taxpayer company and they were issued as incentives to the employees of the taxpayer company free of cost and hence, there was no need for the taxpayer company to make payment for the same. The taxpayer company has not proved that it had carried out a cost-benefit analysis before entering into the agreement with its AE, but the assessee company did not submit any details or agreement in this regard.
The taxpayer was required to submit whether the AE is providing similar services to unrelated parties; or whether it is receiving such services from non-AEs, but the assessee company did not submit any details in this regard.
The OECD guidelines identify certain services or activities that are deemed to be non-beneficial and therefore not chargeable for the recipient. The main categories of non-beneficial services identified: Shareholder/custodial services; stewardship/duplicative services; services that provide incidental benefits; passive association benefits; and on-call services. The above payment comes under the OECD guidelines in intra group services under shareholder/custodial services which are deemed to be non-beneficial and therefore not chargeable for the recipient but as the taxpayer company has paid /Re-imbursed
IT(TP)A No.602/Bang/2016 Page 4 of 11 the said amount the transaction is treated as NIL by applying CUP method. Hence the arms length price for payment towards intra group services Rs.2,29,82,094/- would be treated as NIL or to the extent it is shown that the benefit actually derived from such payment by applying CUP method.”
The Ld DRP upheld the transfer pricing adjustment made by the TPO.
5.1 The Ld A.R submitted that the TPO as well as Ld DRP has not properly understood the nature of transaction with regard to reimbursement of share based payments. The Ld A.R submitted that the AE has devised “International Bonus Plan” for issuing shares to the employees of the group. Accordingly, the AE has issued shares as an incentive to certain employees of the assessee who satisfied certain criterian as part of their compensation. Since these shares are issued at free of cost to the employees of the assessee, the AE has cross charged the cost of shares to the assessee. He submitted that these payments have been included in the cost of services provided by the assessee to its AE in Software development services and ITE services. Accordingly, the above said cost has been re-charged to the AE with a mark- up. The Ld A.R submitted that this expenditure is part of operating cost and hence this transaction is interlinked and inter related with the main activity of the company. He submitted that the assessee has applied TNM method by aggregating these expenses and hence it is subsumed in the ALP of the software development services and ITE services.
5.2 The Ld A.R reiterated that the reimbursement of share issued as incentive to the employees cannot be treated as separate international transactions. In any case, the assessee has aggregated the expenses as part
IT(TP)A No.602/Bang/2016 Page 5 of 11 of cost of services and charged to AE with mark-up. He submitted that the TPO has accepted the aggregation of expenses in the succeeding year. He also submitted that the “safe harbour rules for International transactions” included in Rule 10TA defines the term “operating expenses” in clause (j). As per the said definition, the “costs relating to Employee Stock Option Plan or similar stock based compensation provided for by the associated enterprises of the assessee to the employees of the assessee” is included in “Operating Expenses”. The Ld A.R submitted that the assessee has actually included the reimbursement towards shares issued as incentive as part of operating expenses only. Accordingly, the Ld A.R submitted that TPO and Ld DRP are not justified in treating this reimbursement as a separate international transaction and further holding that its ALP as NIL.
5.3 The Ld D.R, on the contrary, submitted that the Safe harbour rules prescribed under Rule 10TA shall apply only to eligible assesses. In the instant case, TPO has given valid reasons for treating this reimbursement as separate international transaction. Since the assessee has failed to give the details for which reimbursements were made and further this is non- beneficial shareholder services, the TPO has determined the ALP of this reimbursement as NIL.
5.4 We heard the rival contentions on this issue and perused the record. The facts submitted by the assessee is that the group company has issued shares to the employees of the assessee as part of its “International Bonus Plan”. The AE has charged the assessee towards the cost of the shares and the same has been reimbursed. It is pertinent to note that the assessee is being reimbursed by its AE as cost plus mark up basis for IT and ITE
IT(TP)A No.602/Bang/2016 Page 6 of 11 services. It is submitted that the assessee has included the amount of reimbursement so made towards the cost of shares issued to its employees in the ‘cost of services’ and accordingly, it has been charged back to the AE with mark-up. We notice that the shares were issued at free of cost to the “employees” of the assessee and hence the assessee has reimbursed the cost of shares to the AE, meaning thereby, the assessee has incurred this expenditure on behalf of its employees only. In this scenario, in our view, the TPO was not correct in treating it as non-beneficial shareholder services, since the issue of shares was to the employees of the assessee as part of incentive plan designed for the employees. Accordingly, we are of the view that the cost of reimbursement of this amount was an item of expenditure incurred by the assessee on behalf of its employees and hence it should form part of operating cost of the assessee. The Ld A.R submitted that the above said reimbursement was included as a part of the cost of services provided to its AE. We also find that the treatment so given by the assessee also finds support from Rule 10TA(j), which defines the expression “operating expenses”. Hence we are of the view that this reimbursement forms integral part of cost of services provided by the assessee and accordingly, it cannot be treated as separate international transaction. In our considered view, the assessee has rightly aggregated the same with the cost of services. The Ld A.R also submitted that the TPO himself has aggregated this expenditure as part of cost of services in the succeeding year.
5.5 Accordingly, we are of the view that the TPO was not correct in treating this reimbursement as separate international transaction and determining its ALP as NIL. Accordingly, we direct the AO/TPO to delete the transfer pricing adjustment of Rs.2,29,82,094/- made in respect of this IT(TP)A No.602/Bang/2016 Page 7 of 11 reimbursement. It should be aggregated with the cost of providing software development services/ ITE services and the ALP determined for these transactions after including this expenditure under TNM method would meet the requirements of law. We order accordingly.
The next issue relates to the disallowance of vehicle lease rental expenses. The assessee claimed vehicle lease rentals of Rs.1,34,61,853/- as expenditure. The AO took the view that the assessee has actually purchased the vehicles and the lease rent payments have been made towards the cost of purchases of vehicles. The AO also noticed that the above said amount consisted of repayment of principal portion of Rs.101 lakhs and repayment of interest amount of Rs.33 lakhs. He also noticed that identical claim has been disallowed in AY 2008-09 and 2009-10. Accordingly, the AO disallowed the claim and Ld DRP also did not give any relief to the assessee.
6.1 We notice that it is an recurring issue and identical disallowance made in the assessee’s own case relating to AY 2010-11 in IT(TP)A No.191/Bang/2015 dated 25.1.2017 has been deleted following the decision rendered by Hon’ble Supreme Court in the case of ICDS Ltd vs. CIT (2013)(350 ITR 527), wherein it was held that the lessor shall be entitled to depreciation on assets leased out by him. Consequently, the lease rental payments made by the lessee is allowable as expenditure in his hands. The above said decision rendered in AY 2010-11 was followed in the assessee’s own case in AY 2009-10 in IT(TP)A No.262/Bang/2014 dated 25.10.2021. In the instant case, the assessee herein is the lessee and hence the lease rental payments are allowable as expenditure. Accordingly, following the above said decisions, we direct the AO to delete this disallowance.
IT(TP)A No.602/Bang/2016 Page 8 of 11 7. The next issue relates to the deduction claimed u/s 10A of the Act. The assessee had claimed deduction u/s 10A to the tune of Rs.74.50 crores. After the direction given by DRP, the deduction worked out to Rs.90.68 crores. However, the AO restricted the claim to the extent of Rs.74.50 crores, as originally claimed by the assessee.
7.1 The AO, in the draft assessment order, reduced following expenses from Export turnover for computing deduction u/s 10A of the Act:- Telecommunication expenses - 2,88,23,733 Freight expenses - 21,02,018 Insurance - 5,72,180 Expenditure incurred in foreign currency 32,25,12,394 ------------------ 35,40,10,325 ============ Accordingly, the AO computed revised export turnover at Rs.507.89 crores after reducing above expenses and computed deduction u/s 10A on the above said revised turnover, which has resulted in a deduction of Rs.84.78 crores. The Ld DRP directed the AO to reduce the above said expenses from total turnover also. Accordingly, the deduction came to be worked out to Rs.90.68 crores. However, the AO restricted the claim to the amount of Rs.74.49 crores as claimed by the assessee.
7.2 We heard the parties on this issue and perused the record. The plea of Ld A.R was that the AO should have allowed the deduction as per the direction given by Ld DRP. The Ld D.R, on the contrary, submitted that the deduction was allowed as claimed by the assessee. Section 10A is a beneficial provision and the said deduction has to be computed in accordance with the provisions of sec.10A of the Act. The mistake, if any, made by the assessee in computing the quantum of deduction, in our view,
IT(TP)A No.602/Bang/2016 Page 9 of 11 cannot be a ground to reduce the amount of deduction. What is allowable as per law should have been allowed by the AO. Accordingly, we direct the AO to allow deduction u/s 10A of the Act as per law, irrespective of the quantum of deduction claimed by the assessee.
The next issue contested by the assessee relates to disallowance of sub-contracting expenses of Rs.14,69,04,475/-. The assessee had made yearend provision for the above said amount towards sub-contracting expenses payable by it. Since the assessee did not deduct tax at source u/s 194C of the Act, the AO disallowed the same u/s 40(a)(ia) of the Act. The Ld DRP directed the Assessing officer to verify the claim in accordance with law. The AO retained the disallowance in the final assessment order after examining the claim.
8.1 The Ld A.R submitted that the yearend provision has been reversed in the subsequent year and further the TDS has been deducted when payments were actually made to the sub-contractors. Accordingly, he submitted that the AO was not right in disallowing the claim u/s 40(a)(ia) of the Act. Alternatively, the Ld A.R submitted that the assessee should be allowed deduction in the subsequent year, when the TDS was deducted.
8.2 We heard Ld DR and perused the record. We notice from the objections filed by the assessee before Ld DRP, the assessee has submitted that it has deducted tax at source on the amount of Rs.7.34 crores, the details of which are furnished below:-
IT(TP)A No.602/Bang/2016 Page 10 of 11 (a) TDS deducted & paid in FY 2010-11 - Rs.7,02,34,983 (b) Deductee submitted NIL certificate - Rs. 30,84,366 (c) In the nature of reimbursements - Rs. 1,40,446 (d) Reversal of provision entry - Rs. 1,26,665 (e) Transfer of expenses to different account And TDS deducted - Rs. 6,77,676 (f) Difference - Rs. 5,25,438 Before us, the Ld A.R submitted that the assessee may be given deduction in the succeeding year, when the TDS was deducted. However, the details have been furnished only to the extent of Rs.7.34 crores. We notice that this bench of Tribunal has analysed the issue relating to liability to deduct tax at source from yearend provisions in the case of Biocon Ltd vs. DCIT (ITA No.1248/Bang/2014 dated 21.03.2022), wherein the Tribunal has analysed the TDS liability under different situation and rendered its decision on each of the situation. Different kinds of situations are warranted, since the yearend provisions are made on estimated basis and most of the times it is so made without receipt of invoices from the goods supplier/service provider. Accordingly, we are of the view that this issue requires fresh examination at the end of AO by duly considering the decision rendered by the Tribunal in the case of Biocon Ltd (supra). Accordingly, we set aside the order passed by the AO on this issue and restore the same to his file for examining this issue afresh. All contentions are left open.
IT(TP)A No.602/Bang/2016 Page 11 of 11 9. In the result, the appeal of the assessee is treated as allowed for statistical purposes.
Pronounced in the open court on the date mentioned on the caption page.