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Facts
The assessee company, engaged in IT enabled services, filed its return of income. The AO finalized the assessment at a higher income. The PCIT initiated revision proceedings under Section 263, holding the AO's order erroneous and prejudicial to the revenue.
Held
The Tribunal held that the PCIT erred in invoking Section 263. The assessee had offered income from its Philippines branch to tax in India, and the calculation of taxable income by the assessee was as per Indian Income Tax Act provisions and the DTAA.
Key Issues
Whether the PCIT correctly invoked Section 263 to revise the assessment order, alleging understatement of income from the Philippines branch, when the assessee had offered income to tax as per Indian law and DTAA.
Sections Cited
263, 143(3), 90, 67, 144B, 24
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Income Tax Appellate Tribunal, “C” BENCH, AHMEDABAD
Before: DR. B.R.R. KUMAR, VICE-SHRI T.R. SENTHIL KUMAR
O R D E R
PER DR. B.R.R. KUMAR, VICE-PRESIDENT:
- This appeal filed by the assessee is directed against the order passed by the learned Principal Commissioner of Income-Tax, Ahmedabad-3 [herein-after referred to as “PCIT”] dated 21.03.2024, in exercise of her revisionary powers under Section 263 of the Income-tax Act, 1961 [hereinafter referred to as “the Act”], for the Assessment Year (AY) 2018- 19. 2. The Assessee has taken following grounds of appeal :- “1. The order passed by the learned PCIT under Section 263 of the Act is bad in law and needs to be quashed. It is submitted it be so held now.
2. The learned PCIT erred on facts and in law in holding that the order passed by the Assessing officer ('AO') under Section 143(3) of the Act was erroneous and prejudicial to the interest of the revenue and thereby setting aside the order with direction for fresh assessment order. It is submitted it be so held now. TTEC India Customer Solutions Pvt Ltd Vs. PCIT Asst. Year : 2018-19 - 2– 2.1. The learned PCIT erred in facts and in law in invoking Explanation 2 to Sub-Section (1) of Section 263 of the Act while holding that the assessment order was passed without proper enquiry and verification of facts when in fact inquiry had been made-and-details were submitted in the course of regular assessment proceedings. It is submitted it be so held now. 2.2. The learned PCIT erred in facts and in law in holding that the contention raised by the Appellant necessitates re-verification of the matter in its entirety without appreciating that Section 263 does not confer the power to re-review the same set of records. It is submitted it be so held now.
3. The learned PCIT has erred in law and in facts in not appreciating that during assessment proceedings inquiry regarding deduction under Section 90 was made and Form No.67 giving details of income doubly tax along with taxes paid outside India were filed and accordingly relief was granted. It is submitted it be so held now.
4. The learned PCIT has erred in law and in facts in holding that there is understatement of income to the tune of Rs.15,85,46,365/-. It is submitted it be so held now. 4.1. The learned PCIT failed to appreciate that appellant has considered the total income and expense of the Philippine's branch in its profit & loss account prepared in India for the company as a whole and has offered the income of Philippines Branch to tax amounting to Rs. 13,32,45,195/- workout as per the provisions of the Income Tax Act and thus there is no understatement of income. It is submitted it be so held now.”
The brief facts of the case are that the assessee is a company engaged in the business of I.T. enabled services, BPO service providers. The assessee had filed return of income for the year under consideration on 28.11.2019 declaring total income of Rs. 4,89,31,010/-. The case was selected for scrutiny and assessment was finalized 143(3) r.w.s 144B of the Income-tax Act on 20.09.2021 by assessing the total income at Rs.7,02,12,474/-. On verification of assessment records, the Ld. PCIT observed that the assessee had paid tax of Rs.8,75,37,468/- in Philippines, for the year under consideration, with the rate of tax @30%, but the assessee had shown income from Philippines of Rs. 13,32,45,195/- only. The Ld. PCIT was of the TTEC India Customer Solutions Pvt Ltd Vs. PCIT Asst. Year : 2018-19 - 3– opinion that since the assessee had paid tax of Rs.8,75,37,468/- in Philippines @ 30%, then the income offered by the assessee in Philippines should be at least Rs.29,17,91,560/-; therefore, instead of offering income of Rs.29,17,91,560/-, the assessee had only offered the income of Rs. 13,32,45,195/- from Philippines, thereby the assessee had not offered the correct income for taxation in India which resulted in under-assessment of Rs. 15,85,46,365/- (291791560- 133245195).
The Ld. PCIT accordingly held that the assessment order passed by the Assessing Officer u/s 143(3) of the Act dated 20.09.2021 was erroneous and prejudicial to the interest of the Revenue. She therefore set aside the issue and directed the Assessing Officer to pass a fresh assessment order, after verifying the income earned by the assessee from outside India.
Aggrieved by the order of the Ld. PCIT, the assessee is now in appeal before the Tribunal.
6. Before us, Ld. Counsel for the assessee submitted, repeating the arguments taken before the Ld. PCIT, that :- • The taxable income of the company as per Philippines ITR Rs.29,76,23,986/- was computed as per the requirement of the Philippines law and the assessee had considered the total income and expenses of the philippine’s branch in its profit & loss account prepared in India for the company as a whole and had offered the income earned in Philippine’s to tax in India. • The income earned in Philippines, being income of branch, is incorporated in financials of assessee company and is subject to Indian Income tax based on the provisions of Income Tax Act, 1961. TTEC India Customer Solutions Pvt Ltd Vs. PCIT Asst. Year : 2018-19 - 4– • The assessee company's branch is a PEZA (Philippine Economic Zone Authority) registered ECO zone IT Enterprise which enjoys tax holiday In Philippines as per domestic laws of Philippines. Originally, the tax holiday was granted till 30th September 2014. Post expiration of the holiday the PEZA, vide letter dated 25th July 2014, granted further extension for tax incentive as per which branch is entitled for exemption from all national and local taxes. But, in lieu of tax exemption, assessee's branch is required to pay 5% final tax on gross income as provided under section 24 of Republic Act 7916 of Philippines. • Since Form no.67, tax paid outside India is mentioned at Rs. 8,75,37,468/- and tax rate is 30%, accordingly the Ld. PCIT held that the income of Philippines branch ought to have been Rs.29,17,91,560/- . The Ld. AR submitted that as per Philippines law the tax is computed on gross income without granting deduction of operating expenses. The Ld. AR enclosed the Financials of the Philippines branch along with the copy of the return of income filed in Philippines Branch.
On the other hand, Ld. DR submitted that :-
The assessee has tried to demonstrate that taxable income in Philippine’s tax return of Peso 23,48,74,438/-, INR. 29,76,23,986/- has already considered in the taxable income of Rs. 13,32,45,195/-. TTEC India Customer Solutions Pvt Ltd Vs. PCIT Asst. Year : 2018-19 - 5– The Ld. DR argued that the assessee is making adjustments of addition/deductions in taxable income earned in Philippines as well as same addition/deductions in Indian rupees to arrive at the taxable income of Rs. 13,32,45,195/- in India and the said income is also shown by assessee in its ITR. These adjustments made by the assessee to taxable income as per Philippines ITR of PHP 23,48,74,438/- is actually the income earned by the assessee from outside India and the assessee is not allowed to avail deductions on the income earned from outside India as per the provisions of Income -tax Act, 1961. The Ld DR argued that the contention of the assessee is not backed by any corroborative evidence and relevant provisions of the law to substantiate the allowability of deductions or additions. The Ld. DR argued that the contention of the assessee is just forsake of argument. The Ld DR argued that it is quite evident that the assessee company has shown income only of Rs. 13,32,45,195/- as income from outside India, after making the adjustments, which is not allowed to the assessee, and the assessee’s total income from outside India should be Rs. 29,17,91,560/- The Ld DR argued that the assessee has paid tax @ 30% amounting to Rs. 8,75,37,468/- in Philippines, but the assessee has shown Income from Philippines of Rs. 13,32,45,195/- instead of Rs.29,17,91,560/-. The remaining income of Rs. 15,85,46,365/- has not been disclosed during the filing of ITR. Further, no verification with respect to the above issue was conducted by the then AO during TTEC India Customer Solutions Pvt Ltd Vs. PCIT Asst. Year : 2018-19 - 6– the course of assessment proceeding. Failure to do so, has resulted in underassessment of Rs. 15,85,46,365/-. The Ld DR argued that the Assessing Officer has failed to bring the above details on record and did not verify the above issue in its right perspective or on the above lines. Thus, the income of the assessee has resulted in underassessment of Rs. 15,85,46,365/-. Therefore, the impugned assessment order is erroneous and it is prejudicial to the interest of revenue, as income was under assessed leading to the loss of revenue.
Heard both the parties and perused the material available on record.
7.1 From financials, we find that the income before taxes is PHP 11,15,09,560. Schedule 10 of the return of income reveals that the net income of Philippines branch is considered as PHP 11,15,09,560 and from this net income before tax. The net taxable income has been derived at PHP 23,48,74,438, which when converted works out to Rs.29,76,23,986/- and tax on this amount @ 30% is paid in Philippines. The Ld. AR demonstrated that taxable income in Philippines tax return INR 29,76,23,986/- is considered in India Financials and has been offered to tax in India, as below:-
Particulars Amount in PHP Amount in INR Exchange rate 1.267162 Profit as per PH return 234,874,138 297,623,986 Other not allowable expenses as per PH return 213,917 271,067 Unrealised forex as per PH return Add: 4,452,810 3,514,002 5,623,551 Retirement expense paid 7,125,951 Total _______________ 9,331,469 11,849,828 TTEC India Customer Solutions Pvt Ltd Vs. PCIT Asst. Year : 2018-19 - 7– Amount in PHP Amount in INR Opex expenses not allowed in PH 146,690,461 return 115,762,981 Retirement expenses disallowed in PH return 2,216,356 2,808,482 Realized exchange loss Less: 2,274,163 2,881,733 Accrued 13th month & leave 10,883,082 13,790,629 Bad debt expense 1,579,766 2,001,819 Net Income before tax as per PH return 111,509,561 141,300,639 Depreciation as per PH financials 10,678,087 13,530,867 Depreciation as per India financials as per Companies Act 15,860,994 20,098,451 Actuarial loss on retirement liability accounted in Gratuity expense in India financials 549,025 695,704 Leave expense reversed later in PH Less: financials 2,355,907 2,985,316 Intercompany transactions (Write off of IC balance between India and PH) 2,863,639 3,628,695 Additional Expenses booked for provision for salary expense 3,015,670 3,821,343 Profit before tax 97,542,412 123,602,048 Profit before tax in India books 37,542,412 123,602,048 Based on the profit as per books in India, taxable income under Indian Income Tax Act has been worked out as under:
Particulars Amount (INR) Profit before tax 12,36,02,048 Depreciation as per Companies Act 20,098,451 Penalties disallowed u/s 37 69,980 Add: Bonus, leave encashment & gratuity u/s 43B 1,04,58,526 Provision for Bad debts 19,62,593 15,61,91,598 Bonus & leave encashment u/s 43B 60,63,856 Less: Depreciation as per Income tax Act 1,68,82,546 Total income taxable in India in respect of Philippines 13,32,45,195 7.2 From the above, it can be observed that the revenue & profit earned in Philippines is included in Indian Financials and has been offered to tax as per Indian Income Tax Act. The taxable income of the company as per Philippines ITS Rs.29,76,23.986 is computed as per the requirements of the TTEC India Customer Solutions Pvt Ltd Vs. PCIT Asst. Year : 2018-19 - 8– Philippines law. The assessee has considered the total income & expenses of the Philippine's branch in its profit & loss account prepared in India for the company as a whole and has offered the income earned in Philippine’s to tax in India. As required by the Article 24 of the DTAA, the assessee has computed the taxable income of the Philippines branch as per the provisions of Indian Income Tax Act to determine the income doubly taxed in India & Philippines. Such doubly taxed income worked out to Rs.13,32,45,195/- which has been mentioned in the Form no 67. From the entire events and accounting, it is clear that the income as mentioned in the notice of Rs. 29,17,91,560/- being 100% of the tax payable in Manila of Rs. 8,75,37,468/- @ 30% is taxed in India. Accordingly, no further income needs to be taxed in India. The amount of Rs.13,32,45,195/- is income of the Philippines as worked out under the Indian Income Tax Act.
7.3 In view of the these facts on the merits of the case, we hold that there is neither any error committed by the Assessing Officer nor any prejudice is caused to the department by the virtue of order u/s 143(3) of the Act.
In the result, the appeal of the assessee is allowed.