VERIZON DATA SERVICES INDIA PRIVATE LIMITED,CHENNAI vs. DCIT, CHENNAI

आयकर अपील"य अ"धकरण, ’सी’ "यायपीठ, चे"नई। IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH: CHENNAI "ी जॉज" माथन, "या"यक सद य एवं "ी एस जयरामन, लेखा सद य के सम% BEFORE SHRI GEORGE MATHAN, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER आयकर अपील सं./ITA No.998/Chny/2017 "नधा"रण वष" /Assessment Year: 2011-12

Vs. M/s.Verizon Data Services India – The Dy. Commissioner of- Pvt. Ltd., Income Tax, 8th Floor, Citius B-Block, Plot No.1, Corporate Circle-3(2), SIDCO Industrial Estate, Guindy, Chennai. Chennai-600 032. [PAN: AABCV 1758 N] (अपीलाथ'/Appellant) (()यथ'/Respondent)

: Mr.Sriram Seshadri, CA अपीलाथ' क* ओर से/ Appellant by : Mr.N.Madhavan, ACIT ()यथ' क* ओर से /Respondent by : सुनवाई क* तार"ख/Date of Hearing 06.03.2018 घोषणा क* तार"ख / : 06.03.2018 Date of Pronouncement आदेश / O R D E R PER GEORGE MATHAN, JUDICIAL MEMBER:

ITA No.998/Chny/2017 is an appeal filed by the assessee against the Order of Commissioner of Income Tax (Appeals)-13, Chennai, in ITA No.11/CIT(A)-13/2011-12 dated 27.01.2017 for the AY 2011-12. 2.0 Shri N.Madhavan, ACIT., represented on behalf of the Revenue and Shri Sriram Seshadri, CA., represented on behalf of the assessee. :- 2 -:

3.0 In the assessee’s appeal, the assessee has raised the following

grounds:

General

2.1 The Ld. CIT(A) and AO have erred in law and on facts in deducting the foreign currency expenditure on technical & help desk service charges and travelling expenses from ‘export turnover’ while computing deduction under section 10A of the Act.

2.2 The Ld. CIT(A) and the Ld. AO have erred in treating the expenditure on technical and help desk service charges as having been incurred in connection with rendering technical services outside India without considering the facts of the case and nature of such expenses.

2.3 The Ld. CIT(A) and the Ld.AO have failed to appreciate that services are received by the Appellant from the above mentioned resident service providers and no services have been rendered by the Appellant outside India.

2.4 Without prejudice to the above, the Ld. CIT(A) and the Ld.AO have erred in law and facts by excluding the above expenses only from the export turnover without excluding the same from the total turnover for computing deduction under section 10A of the Act.

2.5 The Ld. CIT(A) failed to apply the order of the jurisdictional tribunal ruling in the Appellant’s own case for earlier assessment years, wherein, the Hon’ble ITAT has held that items excluded from export turnover needs to excluded from total turnover.

Items excluded from profits eligible for deduction under section 10A of the Act

3.1 The Ld. CIT(A) and the Ld.AO have erred in excluding the voluntary disallowance made by the Appellant under section 43B of the Act from the total profits of the undertaking while computing deduction under section 10A of the Act, on the ground that such disallowance is penal in nature.

3.2 The Ld. CIT(A) and the Ld. AO have erred in not allowing deduction under section 10A of the Act on the enhanced profit computed as per provisions of section 29 of the Act.

4.1 The Ld. CIT(A) and the Ld. AO have erred in disallowing, under section 37 of the Act, the expenditure of INR 9,350,469 incurred by the Appellant towards purchases of Memory Cards for computers by treating the same as expenditure of capital in nature.

4.2 The Ld. CIT(A) and the Ld. AO ought to have appreciated that the expenditure was incurred to ensure that the system continue to meet business requirement and deliverables by functioning at its normal capacity and do not yield enduring benefits of capital nature to the Appellant. :- 3 -:

4.3 Without prejudice to the above, the Ld. CIT(A) and the Ld. AO erred in not adding back the expenditure incurred on memory cards to profits eligible for deduction under section 10A of the Act. 5. Interest paid on delayed remittance of taxes and provident fund 5.1 The Ld. CIT(A) has erred in upholding the disallowance of interest expenditure on delayed payment of certain taxes and PF contribution under section 37 of the Act. 5.2 The Ld. CIT(A) and Ld. AO both have erred in not allowing deduction under section 10A of the Act on the enhanced profit computed as per provisions of section 29 of the Act. Disallowance of reimbursement of salary cost of seconded employees to GTE-OC 6.1 The Ld. AO and the Ld. CIT (A) have erred in law and on facts by disallowing the reimbursement of expenditure made to GTE-OC without considering the fact that the issue of withholding on payments to GTE-OC is already pending before the Authority for Advanced Rulings for disposal. 6.2 Without prejudice to our above contention, the Ld. AO and the Ld. CIT(A) have erred in law and on facts by disallowing the reimbursement of expenditure made to GTE under section 40(a)(i) of the Act by erroneously concluding that the said payments constitute Fee for Included Services under the Tax Treaty between India and US.

4.0 Ground No.1 is general in nature which does not require any adjudication.

5.0 In regard to Ground Nos.2 to 2.5, it was submitted that the issue

was against the action of the Ld.CIT(A) in upholding the exclusion from export turnover for deduction u/s.10A of the Act the help desk service

charges and the travelling expenses. It was submitted that in view of the decision of the Hon’ble ITAT Special Bench in the case of M/s.Sak Soft

Ltd., reported in 30 SOT 55 (Chennai) (SB), the help desk service charges

and the travelling expenses having been reduced from the export

turnover, the same was liable to be reduced from the total turnover also.

5.1 In reply, the Ld.DR vehemently supported the order of the Ld.CIT(A). :- 4 -:

5.2 We have considered the rival submissions.

5.3 As it is noticed that the issue is squarely covered by the decision of the Hon’ble ITAT Special Bench (Chennai) in the case of M/s.Sak Soft Ltd.,

referred to supra, the AO is directed to reduce the help desk service

charges and the travelling expenses from the export turnover as also from the total turnover for the purpose of computing the deduction u/s.10A of the Act. Consequently, Ground Nos.2 to 2.5 of the assessee’s appeal is partly allowed.

6.0 In regard to Ground Nos.3 to 3.2, it was submitted that the issue

was against the action of the Ld.CIT(A) in not granting the deduction

u/s.10A in respect of the voluntary disallowance made u/s.43B of the Act.

It was a submission that the issue is squarely covered by the decision of the Hon’ble Bombay High Court in the case of M/s.Gem Plus Jewellery

India Ltd., reported in 194 Taxman 192 (Bombay), wherein in Para No.12,

the Hon’ble High Court categorically held that “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”. :- 5 -:

6.1 In reply, the Ld.DR vehemently supported the order of the Ld.CIT(A).

6.2 We have considered the rival submissions.

6.3 As it is noticed that the issue is now squarely covered by the decision of the Hon’ble Bombay High Court in the case of M/s.Gem Plus

Jewellery India Ltd., referred to supra, respectfully following the principles

of the decision of the Hon’ble Bombay High Court in the case of M/s.Gem

Plus Jewellery India Ltd., the AO is directed to grant the assessee the benefit of deduction u/s.10A by including voluntary disallowance made by the assessee u/s.43B of the Act. Consequently, Ground Nos.3 to 3.2 of the assessee’s appeal stands allowed.

7.0 In regard to Ground Nos.4 to 4.3, it was submitted that the issue

was against the action of the Ld.CIT(A) in upholding the action of the AO

in treating the purchase of RAM in respect of the computers of the assessee as a capital expenditure. It was a submission that the RAM were basically Memory Cards for increasing the efficiency of the computers of the assessee and they were basically spare parts. It was a submission

that the same were Revenue expenditure in nature. It was a submission

that the issue is squarely covered by the decision of the Hon’ble ITAT

Mumbai Benches in the case of M/s.APL India (P) Ltd., reported in 33

taxmann.com 138 (Mumbai-Trib.), wherein it has been held that “Whether :- 6 -:

parts like CD ROM drive, hard disk drive and RAM being spares of Central

Processing Unit of computer cannot be considered as separate and independent machinery, thus, expenditure incurred on such parts is allowable as Revenue expenditure”.

7.1 In reply, the Ld.DR vehemently supported the order of the AO and the Ld.CIT(A).

7.2 We have considered the rival submissions.

7.3 As it is noticed that the issue is now squarely covered by the decision of the Hon’ble ITAT Mumbai Benches in the case of M/s.APL India

(P) Ltd., referred to supra, respectfully following the decision of the Hon’ble ITAT Mumbai Benches in the case of M/s.APL India (P) Ltd., on this issue, the AO is directed to grant the assessee the benefit of the Revenue expenditure in respect of the cost incurred for the purchase of the RAM Memory Cards for the computer equipments. Consequently,

Ground Nos.4 to 4.3 of the assessee’s appeal stands allowed.

8.0 In regard to Ground Nos.5 to 5.2, it was submitted that the issue

was against the action of the Ld.CIT(A) in upholding the disallowance of the interest expenditure on delayed payment of service tax and PF

contribution u/s.37 of the Act. It was a submission that in respect of the PF contribution the assessee was not pressing the ground. It was a :- 7 -:

submission that the interest expenditure on the delayed payment of the service tax had been treated penal in nature by the AO and the Ld.CIT(A).

It was a submission that the same was compensatory in nature as has been held by the Delhi Benches of this Tribunal in the case of M/s.Messee

Dusseldorf India (P) Ltd., wherein, the Hon’ble ITAT has held as follows:

Interest paid by assessee on late deposit of service-tax, is allowable [In favour of assessee] Interest paid by the assessee for the delayed payment of service-tax is compensatory and has the same character as service-tax, and therefore, the same is allowable.

8.1 It was a submission that the same was liable to be allowed as Revenue expenditure.

8.2 In reply, the Ld.DR vehemently supported the order of the AO and the Ld.CIT(A).

8.3 We have considered the rival submissions.

8.4 As it is noticed that the issue is squarely covered by the decision of the Hon’ble ITAT Delhi Bench in the case of M/s.Messee Dusseldorf India

(P) Ltd., referred to supra, respectfully following the decision of the Hon’ble ITAT Delhi Bench in the case of M/s.Messee Dusseldorf India (P)

Ltd., the AO is directed to grant the assessee the benefit of deduction of the interest paid on the delayed payment of the service-tax as the same is compensatory in nature as Revenue expenditure. The disallowance made

in respect of the PF Contribution stands upheld as the same has not been :- 8 -:

pressed by the assessee. Consequently, Ground Nos.5 to 5.2 of the assessee’s appeal are partly allowed.

9.0 In regard to Ground Nos.6.1 & 602, it was submitted by the Ld.AR

that the issue was against the action of the AO & the Ld.CIT(A) in disallowing the reimbursement of the expenditure made by the assessee

without considering the fact that the issue of withholding tax on the payments to GTE-OC was pending before the Authority for Advanced

Rulings (in short “AAR”). It was a submission that the AAR had disposed

off the matter and the assessee had taken up the matter in appeal to the Hon’ble Madras High Court which had upheld the findings of the AAR that the payment to GTE-OC was not reimbursement. However, the Hon’ble

Jurisdictional High Court on the issue as to whether the employee had provided technical services or not, had been restored to the file of the AAR

for re-adjudication. It was a submission that against the order of the Hon’ble Jurisdictional High Court, the assessee has filed an SLP to the Hon’ble Supreme Court and against the order of the Hon’ble Jurisdictional

High Court, the AAR also filed an SLP to the Hon’ble Supreme Court

stating that the issue should not have been set aside to the AAR. It was a submission that both on behalf of the assessee and the Revenue that they

had no objection, if the issue was restored to the file of the AO for re-

adjudication after awaiting the final decision in respect of the AAR.

9.1 We have considered the submissions. :- 9 -:

9.2 As the issue, whether the payment to GTE-OC in respect of employee deputed to the assessee was reimbursement or not and as to whether the said employee had provided any technical services or was providing managerial services are issues in dispute. Though, the assessee

has submitted that it has deducted TDS u/s.192 of the Act. The dispute

would also centre on, whether the TDS liable to be made u/s.195 of the Act. These issues are now pending before the Hon’ble Supreme Court on account of SLP filed both by the assessee and the AAR against the Writ

Petition order of the Hon’ble Jurisdictional High Court of Madras. This being so, the issues in regard to this payment made to GTE-OC are restored to the file of the AO for re-adjudication after awaiting final

decision in respect of the AAR in the case of the assessee on the issue.

Consequently, Ground Nos.6.1 & 6.2 are partly allowed for statistical

purposes.

Order pronounced in the Open Court on March 06, 2018, at Chennai. (एस जयरामन) (जॉज" माथन) (S. JAYARAMAN) (GEORGE MATHAN) लेखा सद य/ACCOUNTANT MEMBER "या"यक सद य/JUDICIAL MEMBER :- 10 -:

चे"नई/Chennai, 1दनांक/Dated: March 06, 2018. TLN

आदेश क* ("त2ल3प अ4े3षत/Copy to: 1. अपीलाथ'/Appellant 4. आयकर आयु5त/CIT 2. ()यथ'/Respondent 5. 3वभागीय ("त"न"ध/DR 3. आयकर आयु5त (अपील)/CIT(A) 6. गाड" फाईल/GF