Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, AHMEDABAD “D” BENCH
Before: Shri Waseem Ahmed & Shri Siddhartha Nautiyal
आदेश/ORDER
PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:-
This is an appeal filed by the assessee against the order of the ld. Commissioner of Income Tax (Appeals)-2, Ahmedabad, in proceeding u/s. 143(3) vide order dated 20/12/2016 passed for the assessment year 2008- 09.
I.T.A No. 417/Ahd/2017 A.Y. 2008-09 Page No. 2 M/s. E-Infochips Ltd. vs. ACIT
The assessee has raised the following grounds of appeal:-
“1. Ld. CIT (A) has erred in law and on facts in confirming disallowance of Rs. 16,23,369/- u/s 14A by invoking rule 8D ignoring factual matrix of the appellant. Ld. CIT (A) ought to have considered the submission of the appellant and delete the disallowance. It be so held now. 2. Ld. CIT (A) erred in law and on facts in confirming action of AO in making addition of disallowance u/s 14A of Rs. 16,23,369/- while determining book profit u/s 115JB of the Act. Ld. CIT (A) ought to have considered the fact that in book profit only permissible addition u/s 115JB can be made and disallowance u/s 14A is not mentioned in any of the clauses of that section. It be so held now. 3. Ld. CIT (A) erred in confirming action of TPO / AO in making upward adjustment of Rs. 1,12,09,548/- without considering contentions and submission of the appellant. 4. Ld. CIT (A) erred in law and on facts in confirming addition on account of upward adjustment mechanically following TPO's order ignoring fact that TPO has change the reasoning for addition than that mentioned in the show cause notice dated 15/09/2011 thus violated principle of natural justice. Ld. CIT (A) ought to have considered the submission of the appellant and delete the upward adjustment. It be so held now.
Levy of interest u/s'234B & 234D of the Act is unjustified.
Initiation of penalty proceedings u/s 271(l)(c) of the Act is unjustified.”
The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.”
I.T.A No. 417/Ahd/2017 A.Y. 2008-09 Page No. 3 M/s. E-Infochips Ltd. vs. ACIT
Grounds of Appeal number 1: disallowance of � 16,23,369/- under section 14A by invoking Rule 8D:
The brief facts of the case in relation to this ground of appeal are that during the course of assessment, the AO observed that the assessee company had made investment in shares/mutual funds of � 42,69,96,132/-. The assessee is not able to justify that the investments made in the share is from its own funds or from the funds on which no interest payment is paid by the assessee. Therefore, the AO held that the provisions of section 14A is applicable in the case of the assessee, since the assessee has not offered disallowance to work out amount under section 14A of the Act. Accordingly, the AO made disallowance of � 16, 23,369/-under section 14A of the Act.
Before Ld. CIT(Appeals), the assessee submitted that the assessee has made investments out of its own surplus funds and there is no borrowing made by the assessee. The assessee produced copy of the balance sheet before Ld. CIT(Appeals) and submitted that no new investments are made during the year under consideration. The assessee submitted that the provisions of Rule 8D are not applicable because:
a) disallowance was possible under section 14A only when expenditure is proved to be incurred for earning tax-free income b) no disallowance can be made on assumptions c) there was no expenditure on interest on investments yielding tax-free income
I.T.A No. 417/Ahd/2017 A.Y. 2008-09 Page No. 4 M/s. E-Infochips Ltd. vs. ACIT
The Ld. CIT(Appeals) however dismissed the assessee’s appeal on the ground that identical issue on similar facts has been decided in the assessee’s case by CIT (A)-VIII, Ahmedabad for assessment year 2009-10 vide order dated 15-03-2014 wherein the CIT has decided the issue against the assessee. Accordingly, Ld. CIT(Appeals) confirmed the additions made by the AO with the following observations:
“3.4. It is also worth here to mention that recently the Hon'ble Delhi High Court in the case of India Bulls Financial Services Ltd. vs. DCIT ITA No. 470/2016 dated 21/11/2016 has held that the AO did not expressly record his dissatisfaction with the assessee's working does not mean that he cannot make the disallowance. The AO need not pay lip service and formally record dissatisfaction. It is sufficient, if the order shows due application of mind to all aspects. Undoubtedly the language of section 14A presupposes that the AO has to adduce some reasons if he is not satisfied with the amount offered by way of disallowance by the assessee. At the same time section 14A(2) as indeed rule 8D(1) leave the AO equally with no choice in the matter in as much as the statute in both these provisions mandates that the particular methodology connected should be followed. In other words, the AO is under a mandate to apply the formula as it were under Rule 8D because of section 14A(2). If in a given case, therefore the AO is confronted with the figure which prima facie is not in accordance with what should approximately be the figure on a fair working out of the provisions is but bound to reject it. In such circumstances, the AO ordinarily would express his opinion by rejecting the disallowance offered and then proceed to work out the methodology enacted. Since in the instant case, the AO has drawn the satisfaction for making the disallowance as per the discussion made in the assessment order, thus, the conditions of section 14A(2) have been complied with. 3.5. Considering the above facts of the case and the fact that identical issue on similar facts has been decided by the CIT(A) - VIII, Ahmedabad for A. Y. 2009-10 against the appellant, taking the similar view, the disallowance made by the AO u/s. 14A r.w. Rule 8D(2)(iii) is confirmed and ground of appeal for this year is also dismissed.” 5. The assessee is in appeal before us against the aforesaid additions confirmed by Ld. CIT(Appeals). During the hearing, it was brought to our notice that the ITAT in the assessee’s own case for assessment year 2009-10
I.T.A No. 417/Ahd/2017 A.Y. 2008-09 Page No. 5 M/s. E-Infochips Ltd. vs. ACIT
has restored the matter to the file of AO for fresh adjudication with the following observations:
“8. The contention of the assessee is that the Assessing Officer has failed to correlate the expenditure made and the income earned. Ld. Counsel has also drawn our attention to paper book pages 23 & 24 and stated that the Assessing Officer has included these investments, where income thereon is taxed. We find merit in this contention of the Id. Counsel of the assessee. Therefore, after considering the facts on record, the issue of disallowance under section 14A is restored to the Assessing Officer for re-computing the same after excluding those investments, where the income arising therefrom is already taxed. This ground of the assessee's appeal is allowed for statistical purposes.”
5.1 Respectfully following the order of ITAT in assessee’s own case for assessment year 2009-10 reproduced above, we are hereby restoring the matter back to the file of AO with similar directions to re-compute the disallowance under section 14A of the Act, after giving due opportunity of hearing to the assessee to present its case.
In the result, ground number 1 of assessee’s appeal is allowed for statistical purposes.
Ground number 2:determining book profit u/s 115JB by including disallowance under section 14A of � 16,23,369/-
This ground relates to Ld. CIT(Appeals) confirming the determination of book profit by including therein disallowance of � 16,23,369/- made under section 14A of the Act while computing income under section 115JB of the Act. The counsel for the assessee submitted that this issue is directly covered in favour the assessee by order of ITAT for assessment year 2009-
I.T.A No. 417/Ahd/2017 A.Y. 2008-09 Page No. 6 M/s. E-Infochips Ltd. vs. ACIT
10 in the assessee’s own case (reference Paragraphs 12-14 of ITAT order). In response, DR relied upon the observations made by the assessing officer and Ld. CIT(Appeals) in their respective orders.
We have heard the rival contentions and perused the material on record. Recently the Supreme Court of India in the case of Atria Power Corporation Ltd. [2022] 142 taxmann.com 413 (SC) dismissed the SLP of the Department against High Court ruling that disallowance made under section 14A could not be added in assessee-company's income for purpose of computation of income under section 115JB of the Act. The Karnataka High Court in the case of J.J. Glastronics (P.) Ltd. [2022] 139 taxmann.com 375 (Karnataka) held that amounts disallowed under section 14A could not be added to net profit while computing book profit under section 115JB of the Act. The ITAT Ahmedabad in the case of Vishal Export Overseas Ltd [2022] 143 taxmann.com 305 (Ahmedabad - Trib.) held that disallowances made under section 14A read with rule 8D could not be applied to provision of section 115JB of the Act. The Delhi ITAT in the case of Vireet Investment (P.) Ltd [2017] 82 taxmann.com 415 (Delhi - Trib.) (SB) held that computation under clause (f) of Explanation 1 to section 115JB(2), is to be made without resorting to computation as contemplated under section 14A read with rule 8D. In view of the consistent position of law on this issue, we are hereby allowing assessee’s appeal with respect to ground number 2.
In the result, ground number 2 of the assessee’s appeal is allowed.
I.T.A No. 417/Ahd/2017 A.Y. 2008-09 Page No. 7 M/s. E-Infochips Ltd. vs. ACIT
Grounds Number 3: Upward adjustment of � 1,12,09,548/- made by the TPO/AO:
The brief facts related to this ground of appeal are that the assessee is engaged in the business of technology and software services in the field of semi-conductor and product engineering domain. The assessee has a subsidiary in USA (AE), which is engaged in the business of technology and software services provided by the AE to its USA clients. The assessee entered into agreement with the aforesaid AE under which certain employee (engineer) was to be provided/seconded by the assessee to its AE and for such services, the assessee would be charging a fee @22% of the sales bills raised by the AE to its USA customers. The aforesaid employee would be working on L-1 Visa in USA during the period of its stay in USA. The TPO made an upward adjustment � 1,12,09,548/- on the ground that apart from fee of 22% as mentioned above which was to be charged by the assessee from its AE in USA, as per the terms of the agreement, the AE was also under an obligation to bear the salary cost of the seconded employee and therefore, the assessee should have been reimbursed, in addition to the fee of 22%, the salary cost of the employee so seconded by the assessee to its AE in USA, as well. Accordingly, the Ld. Assessing Officer made an upwards adjustment of � 1,12,09,548/- on account of the salary cost which was required to be reimbursed by the AE to the assessee in India.
In appeal, the assessee contended that the said adjustment was made by the TPO/AO without giving an opportunity of hearing to the assessee. The assessee submitted that in the show cause notice issued by the TPO
I.T.A No. 417/Ahd/2017 A.Y. 2008-09 Page No. 8 M/s. E-Infochips Ltd. vs. ACIT
dated 15-09-2011, an adjustment of � 6,00,11,801/- was proposed to be made on the ground that the AE was only engaged in marketing services, however, subsequently the TPO changed its position and made an adjustment of � 1,12,09,548/- towards the salary cost was required to be reimbursed by the AE to the assessee in India. Accordingly, the aforesaid adjustment was made without giving due opportunity of hearing to the assessee to present its case on merits. The assessee contended that so far as merits of the addition is concerned, as per the terms of agreement, there was nothing in the agreement which indicated that the cost of the seconded employees was to be born by the AE of the assessee in USA and therefore in addition to the fee of 22%, the AE was under an obligation to also reimburse the cost of such seconded employees, to the assessee in India. The assessee drew the attention of Ld. CIT(Appeals) to various clauses of the agreement to contend that as per the terms of the agreement, the TPO/AO erred in facts and in law in holding that an additional sum of � 1,12,09,548/- towards salary cost was required to be reimbursed by the AE to the assessee in India. Further, the assessee submitted that the AO has wrongly noted in the order that no reply has been filed by the assessee, whereas the assessee had filed its objections and reply by way of letter dated 08-11-2011 before the AO objecting to such adjustment. Accordingly, the assessee contended that the order passed by TPO/AO was against the principles of natural justice: firstly for the reason that on merits, the AE was not under an obligation to bear the Indian salary as per the terms of contract and hence this upward adjustment is required to be deleted, secondly, once the TPO has not challenged the ALP charged by the assessee from its AE, it would be beyond the scope of the TPO to interpret the terms of the contract in a manner so as to charge an
I.T.A No. 417/Ahd/2017 A.Y. 2008-09 Page No. 9 M/s. E-Infochips Ltd. vs. ACIT
additional amount which is not chargeable as per the terms of the agreement between the assessee and its AE and thirdly, the order was passed without adhering to the principles of natural justice, since the show cause notice was modified and additions were made on a different basis without allowing an opportunity for the assessee to present its case on merits on the issue under consideration.
11.1 However, Ld. CIT(Appeals) dismissed the assessee’s appeal with the following observations:
“4.3 Decision: I have carefully considered the facts of the case, assessment order and submission of the appellant. The AO has made the upward adjustments in respect of supply of software engineers and engineering services provided to its AE based at USA. The AO/TPO observed that the appellant has supplied the engineers to its AE who travel on L-Visa wherein they became the legal employees of the assessee on the basis of secondment made by the appellant to the AE. It becomes apparent that the AE undertook functions related to rendering of services to the end clients and incurs expenditure for the same instead of just carrying out marketing activities. These engineers were employed by the AE through employment agreement for carrying out the services required to be performed in accordance with the agreement entered into by the AE with end clients. According to the same, the entire expenditure related to the provisions of services was required to be borne by the AE as contended by the appellant itself and as a result of that the engineers become a legal employees of the AE as a result of such employment agreement. It has been observed by the AE/TPO that as per the agreement the AE was required to pay a part of the salary for the engineers in India. Thus it was clear that part of the salary paid to engineer in India was the liability of the AE and not of the appellant. As per the details of salary submitted it was found that the appellant was incurring the expenditure on account of salary paid in India which was the legal obligation of the AE as per the employment agreement perused by the Assessing Officer/TPO in the proceedings before them. The salary expenditure which was to be charged from the AE was over and above to be determined @ 22% of the revenue earned by the AE from its end clients. Thus it cannot be inferred that the 22% fee charged by the appellants included the salary payments made by the appellant for and on behalf of the AE to the engineers who employed with the AE. In fact the assessee was remunerated @22% in lieu of its services
I.T.A No. 417/Ahd/2017 A.Y. 2008-09 Page No. 10 M/s. E-Infochips Ltd. vs. ACIT
for providing the engineers to the associate enterprises and for providing the training and skill set enhancement of the engineers in order that they should be able to work for the AE, which has been admitted by the appellant in its submission dtd. 13.7.2011 before the lower authorities. Thus, the expenditure incurred by the appellant for the salary paid in India was not to be included at all for deciding the rate of 22%. As per the agreement, the AE was required to reimburse any expenditure incurred by the appellant on its behalf and consequently the payment of salary for the period in which the engineer worked for the AE was to be borne officially by the AE and not by the appellant. Since the salary for the said period under which the engineers have worked for the AE ought to have been reimbursed to the appellant which has not done so for which the upward adjustments by the AO has been correctly made in the order. Since the appellant has not derived any benefit from such engineers and therefore the expenditure related to them was not to be incurred by the appellant. It is worth here mention that the fee @22% given to the appellant was for the other purposes as discussed previously but not towards the reimbursement of the salary. Thus the external CUP using as a MAM to ascertain the arms length price has been found in order and accordingly the salary cost incurred by the appellant towards such engineers who employed with the AE has been considered for upward adjustment.
4.4 With regard to the objection of absence of observance of principle of natural justice followed by the TPO and A.O. it has been noticed that the TPO has issued the show cause notice dtd. 15-09-2011 which has been duly replied by the appellant on 23.9.2011 and the same have been fully considered by the TPO before taking the decision on the issue. Merely the decision taken by the TPO was different from the proposed addition in the show cause notice would not once again warranted the second show cause notice therefore the appellant's ^contention in this regard is of no relevance. Even the AO has also issued the show cause notice through order sheet entry dtd. 2.11.2011 and thereafter order has been passed on 9.12.2011 having considered the facts and material on record. The appellant's further plea that there was no clause in the agreement for work order for the reimbursement of the salary paid by the assessee for the employees who are seconded to the AE. In this regard, it is worth here to mention that the TPO in its order at para No.6.3(second part) it has been observed that as per the sample copy of the employment agreement the associate enterprise was required to pay a part of the salary for the engineers in India. Therefore it was clear that the part of the salary paid to the engineers was the liability of the AE and not of the appellant.
In view of the aforesaid discussion, the upward adjustment made by the AO is justified and hence confirmed.”
I.T.A No. 417/Ahd/2017 A.Y. 2008-09 Page No. 11 M/s. E-Infochips Ltd. vs. ACIT
The assessee is in appeal before us against the aforesaid additions confirmed by Ld. CIT(Appeals). The counsel for the assessee primarily reiterated the aforesaid submissions earlier made before Ld. CIT(Appeals) during the course of appellate proceedings. In response, the DR placed reliance on the observations made by CIT in the appellate order.
We have heard the rival contentions and perused the material on record. In our considered view, we find merit in the submissions of the assessee that in the instant set of facts, inadequate opportunity was given by the TPO/AO to the assessee to present its case on merits. On merits, the contention of the assessee is that as per the terms of the contract, the salary cost was to be borne by the assessee in India and nowhere do the terms of the contract suggest that the assessee was to be reimbursed in respect of such salary cost by the AE. In view of the above contentions raised by the counsel for the assessee, in the interest of justice, we are hereby remitting the case to the file of AO for fresh consideration, after giving due opportunity of hearing to the assessee to present its case on merits.
In the result, ground number 3 and 4 of the assessee’s appeal are allowed for statistical purposes.
The other grounds of appeal raised by the assessee are general in nature and do not require any specific adjudication.
I.T.A No. 417/Ahd/2017 A.Y. 2008-09 Page No. 12 M/s. E-Infochips Ltd. vs. ACIT
In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open court on 20 -12-2022
Sd/- Sd/- (WASEEM AHMED) (SIDDHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad : Dated 20/12/2022 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से,
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद