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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SMT. ASHA VIJAYARAGHAVAN & SHRI INTURI RAMA RAO
Per Asha Vijayaraghavan, Judicial Member
This appeal by the revenue is directed against the order dated 03.09.2015 of the CIT(Appeals)-5, Bengaluru relating to assessment year 11.01.2012.
2. The assessee is primarily engaged in the business of designing and development of products in relation to chip-to-chip analysis and other elements of semi computer software development services to Rambus Inc.
USA. The company filed its return of income for the AY 2008-09 on 30.09.2008 declaring a total income of Rs.97,498 after making necessary adjustments in accordance with the provisions of the Income-tax Act, 1961 [ “the Act”]. The case was taken up for scrutiny assessment proceedings and notice u/s. 143(2) was served upon the assessee. The case was referred to Transfer Pricing Officer (TPO) u/s. 92CA of the Act. The TPO in the assessment order dated 28.10.2011 made adjustments u/s. 92CA of the I.T. Act.
3. As per the assessment order, the mark up percentage applied by the assessee company on its software development activities was accepted to be at arm’s length. The AO added back the tax paid on account of salary paid to expatriate employee by assuming that such taxes were borne by the assessee company on behalf of the employee and hence could not be allowed as expenditure in the hands of the assessee company. The AO also reduced telecommunication charges, insurance expenses, the expenditure incurred on foreign currency from export turnover and had not excluded the same from total turnover while computing deduction u/s. 10A of the Act. The AO disallowed reimbursement of expenses of Rs.40,41,375 considering the same as not incurred by the assessee on the ground that the assessee was unable to substantiate its claim with supporting evidence and also the assessee has not used for mark-up in its transfer pricing.
During the appeal proceedings, as regarding reducing the expenditure incurred in foreign currency on account of telecommunication expenses and insurance expenses from the export turnover while computing the deduction u/s. 10A of the Act, the CIT(Appeals) held the issue in favour of the assessee by following the decision of the Hon'ble jurisdictional High Court in the case of Tata Elxsi Ltd. v. ACIT (349 ITR 98) wherein it was held that where certain expenses are excluded from the export turnover for the purpose of calculating deductions admissible under the Act, such expenses should also be excluded from the total turnover as the export turnover forms part of the total turnover.
So far as payment of income tax by the assessee company on behalf o the expat employee is concerned, the CIT(Appeals) following the earlier decision of the ITAT Bangalore in assessee’s own case for the 2009-10 allowed the assessee’s claim wherein the Tribunal in IT(TP)A No.23/Bang/2015 by order dated 22.7.2015 held as under:-
“We find that in both the above decisions, it has been held that remuneration and the Income-tax thereon paid on behalf of the employee there is an allowable expenditure u/s 37 of the Act. In view of the same, we allow the assessee’s ground of appeal.”
4. With respect to the issue of reimbursement of expenses, the CIT(Appeals) observed that the relevant debit notes and invoices provided by Rambus Inc on which basis reimbursement was made related to travelling expenses of employees of assessee company and also found that they were used for mark-up in its transfer pricing. The CIT(Appeals) therefore allowed this ground.
Aggrieved by the order of CIT(Appeals), the revenue is in appeal before us and has raised the following grounds:-
“1. The order of the learned CIT(A) is opposed to law and facts of the case.
2. On the facts and in the circumstances of the case, the CIT(A) erred in law in directing the Assessing Officer to reduce the expenditure incurred on telecommunication, travel etc., incurred in foreign currency, both from the Export turnover as well as total turnover for the purpose of computation of deduction u/s 10 of the IT Act without appreciating the fact that the statute allows exclusion of such expenditure only from the ETO by way of specific definition of export turnover as envisaged by sub- clause (4) of Explanation 2 below sub-section 8 of section 10A. On the other hand, there is no specific provision in section 10A warranting exclusion of the above expenses from the total turnover also.
3. On the facts and in the circumstances of the case the learned CIT(A) erred in allowing the appeal of the assessee as the payment of income tax by the assessee company on behalf of the expat employee though may be in accordance to the terms of the contract of services, is the liability of the employee and not the assessee, and the same cannot be claimed as an expenditure by the assessee in accordance to provision of Income tax Act, 1961 r.w.s. 200 of Companies Act,1956.
On the facts and in the circumstances of the case the learned CIT(A) erred in law directly admitting the additional evidence submitted by the assessee w.r.t. the reimbursement of expenses without giving a reasonable opportunity to the AO to examine the same, as per provisions of Rule 46A.
5. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored.
6. On these and any other grounds that may be urged at the time of hearing, the Hon'ble ITAT is pleaded to quash the order of CIT(Appeals).”
We have heard both the parties and perused the material on record. Ground No.2 raised by the revenue relates to reducing the expenditure incurred in foreign currency both from the total turnover as well export turnover for the purpose of computing deduction u/s. 10A of the Act. This issue is covered by the decision of the Hon'ble jurisdictional High Court in the case of Tata Elxsi Ltd. (supra) and the CIT(Appeals) has rightly followed the decision of the Hon’ble High Court and hence we confirm the same.
Ground No.3 relates to the issue of payment of income tax by the assessee company on behalf of expat employee. Since the CIT(Appeals) has followed the decision of the coordinate Bench of this Tribunal in allowing the assessee’s appeal on this ground, we find no infirmity in the order of CIT(Appeals) and confirm the same.
Regarding the next issue of reimbursement of expenses raised vide ground No.4 that the CIT(Appeals) admitted additional evidence submitted by the assessee on this issue without giving a reasonable opportunity to the AO to examine the issue according to the provisions of Rule 46A, the ld. counsel for the assessee submitted that the details were already before the AO and hence the provisions of Rule 46A would not be applicable. The ld. counsel for the assessee produced before us the submissions made before the TPO dated 11.10.2011 which also contains the details in Part VIII under ‘Other submissions’. The ld. counsel brought to our notice that after noting the submissions made by the assessee, the TPO had passed the order dated 28.10.2011 and has held that no adjustment is required u/s. 92CA to the arm’s length price determined by the taxpayer in respect of the international transactions entered into with its AEs during the year.
We have gone through the records and perused the evidence produced by the ld. counsel for the assessee viz., letter dated 27.7.2011 wherein the break-up of reimbursements paid to Rambus Inc. totaling to INR 13,119,306 has been stated in Annexure-I. We have perused the Paperbook filed before the AO on 11.10.2011 which contains the details of reimbursement expenses paid. We are of the opinion that there has been no violation of the provisions of Rule 46A as the assessee has produced the set of documents/relevant papers which have later on been produced before the CIT(Appeals) also. Hence, we dismiss this ground raised by the revenue.
Grounds No.1, 5 & 6 are general in nature requiring no specific adjudication.
In the result, the appeal by the revenue is dismissed.
Pronounced in the open court on this 30th day of June, 2016.