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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI G.S. PANNU & SHRI AMARJIT SINGH
The captioned appeal filed by the assessee is arising from order dated 02.12.2013 passed by the Assessing Officer u/s 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 (in short ‘the Act’) giving effect to the directions of Dispute Resolution Panel (DRP) dated 31.08.2013.
2. The revised Grounds of appeal raised by the assessee in its appeal are as under :-
“1. On the facts and in the circumstances of the case, the Hon'ble DRP erred in proposing and the DCIT has further erred in confirming the addition of Rs.10,39,57,8801 to the income of the Appellant by rejecting the contentions of the Appellant including that it is engaged in provision of back office support services which are in the nature of Information Technology Enabled Services (‘ITES') as per the instructions, guidance, training and standard operating procedures of group entities in India and overseas and wrongly characterising the Appellant as a Knowledge Process outsourcing (‘KPO') company;
The reference to the Additional Commissioner of Income Tax, Transfer Pricing-I(5), Mumbai (‘TPO') under Section 92CA by the DCIT was bad in law, in excess of jurisdiction and / void in law.
2.1. The Appellant prays that the book value of the international transactions of provision of ITES, be held to be the arm's length price of the said transactions as per the Appellant's Transfer Pricing documentation, and therefore the aforesaid addition made by the DCIT be deleted.
3. On the facts, in law and in circumstances of the case, the DCIT erred in treating the interest income on deposits with banks and other receipts, amounting to Rs.23,70,66,206, as chargeable to income-tax under the head 'Income from Other Sources' as against the Appellant's claim that such interest income and other receipts is chargeable to tax under the head "Profit and Gains of Business or Profession" and eligible for deduction under section 10A of the Act.
4. On the facts, in law and in circumstances of the present case, the DCIT erred in levying interest of Rs. 43,85,85,155 under Section 234B of the Act.
5. On the facts, in law and in circumstances of the case, the DCIT has erred in initiating penalty proceedings under Section 271(1)(c) read with explanation 7 of the Act for furnishing inaccurate particulars and concealment of income.
1 Out of the original TP addition of Rs. 257,96,00,000 (based on the applied mark-up of 39.20%), MAP has been concluded for Rs 247,56,42,120 (95.97% of the total TP addition) at arm's length mark-up of 15.32%. Accordingly, the above ground has been revised to cover only the remaining addition of Rs 10,39,57,880 i.e. 4.03% of the total addition.”
The appellant before us is a company incorporated under the provisions of Companies Act, 1956 and is a wholly-owned subsidiary of J.P. Morgan Services Asia Holding Ltd., Mauritius. It is engaged in the business of development of software and rendering of IT-Enabled (ITE) services. For the Assessment Year 2009-10 it filed a return of income on 27.9.2009 declaring total income under the normal provisions of the Act at Rs.3,14,79,907/- and the book profits u/s 115JB of the Act was determined at Rs.207,05,30,443/- and accordingly, the tax liability was computed thereon. In an assessment finalised by the Assessing Officer u/s 143(3) r.w.s. 144C(13) of the Act dated 02.12.2013, after considering the directions of DRP, the total income under the normal provisions was determined at Rs.284,37,50,370/-. Since the tax payable as per the normal provisions of the Act was more than the tax payable in terms of Sec. 115JB of the Act, the final tax liability was computed in terms of normal provisions of the Act.
A major addition made was on account of Transfer Pricing adjustment relating to the international transactions entered by the assessee with its associated enterprises on account of provision of ITE services amounting to Rs.257,95,72,448/-. It has been stated before us that on this aspect assessee had initiated Mutual Agreement Procedure (MAP) under Article 27 of the India-USA DTAA so far as it related to addition towards transactions with US related entities. It has been submitted that assessee has accepted the MAP conclusion and in view of Rule 44H(4) of Income Tax Rules, 1962, assessee was withdrawing the dispute pertaining to transfer pricing addition covered under the MAP proceedings. As a consequence, by way of a communication dated 30.6.2015, the appellant-company has filed revised Grounds of appeal, which we have reproduced above. As a consequence, in the context of Grounds of appeal no. 1 to 2.1, the dispute pertains to residual addition of Rs.10,39,57,880/- as against the original transfer pricing adjustment of Rs.257,95,72,448/-.
In the above background, rival submissions have made their submissions and the relevant material has been perused. Insofar as the dispute in Grounds of appeal no. 1 to 2.1 is concerned, the same arises from the action of income-tax authorities in holding that the stated value of international transactions of rendering of ITE services to non- U.S associated enterprises is not at an arm’s length price and that an adjustment of Rs.10,39,57,880/- is required to bring such values to their arm’s length price. Notably, assessee had selected the Transactional Net Margin Method (TNMM) as the most appropriate method and the Profit Level Indicator (PLI) is canvassed at 15.07% based on the ratio of Operating Profit/Total Cost. The Transfer Pricing Officer (TPO) has not disputed the adoption of TNMM, but differed with the assessee on the selection of comparables and TPO further benchmarked the transactions of assessee as being provision of Knowledge Process Outsourcing (KPO) services. The arithmetic mean margin of the comparables selected by the TPO was determined at 39.20%.
Before us, the singular plea of assessee is that the mark-up of 15.32% determined in the MAP proceedings on account of U.S related transactions be adopted as the arm’s length margin to benchmark the residual transactions with non-U.S associated enterprises also. It is pointed out that the transactions with U.S entities was almost 96% of the total transactions and, therefore, once the margin of 15.32% has been determined for such transactions, even for residual transactions such margin be adopted as the arm’s length margin. The learned representative for the assessee pointed out that in Assessment Years 2006-07 and 2007-08 also, assessee had raised a similar point by relying on the decision in MAP proceedings, and which has been accepted by the Tribunal vide order dated 30.11.2015 in & 7822/Mum/2011, copy of which has been placed on record.
On the other hand, the ld. CIT-DR appearing for the Revenue has not contested the factual matrix brought out by the learned representative but vehemently canvassed that the decision in the MAP proceedings cannot be equated to the transfer pricing proceedings envisaged in Sec. 92C for determination of arm’s length price. Therefore, it is contended that the margin agreed in the MAP proceedings cannot be construed as an arm’s length margin for the international transactions entered with non-U.S entities. It is also contended that though the non-U.S transactions are mere 4%, but in absolute terms the value of such international transactions is substantial.
We have carefully considered the rival stands and find that in in assessee’s own case for Assessment Years 2006-07 and 2007-08, vide a common order dated 30.11.2015 (supra), an identical situation has been addressed by the Tribunal. In this context, the following discussion in the order of Tribunal is relevant :-
“3.6 We have gone through the arguments made by both the sides and also the material placed before us for our consideration. It is noted that letter dated 9th April 2015 in F-no.480/13/2010-FTD-1 has been issued in the case of the assessee company under MAP proceedings for A.Y.2006-07 to 2010-111 by the DCIT(OSD), APA-I on behalf of the Foreign Tax and Tax Research Division -I, Central Board of Direct Taxes, New Delhi wherein it has been confirmed that for A.Y.2006-07, for US related transactions, the margin has been determined at 14.38% as against margin of 21.58%, as was determined by the Transfer pricing officer (TPO). It has been further clarified by way of note in the said letter that apportionment between ‘US’ and ‘non-US’ ALP and TP adjustment had been margined out by the APA section (of FT and TR Division) on the basis of ‘US’ and ‘non- US’ revenue. It is further noted from the perusal of the annual accounts of the assessee company that aggregate turnover has been shown at Rs.47,30,521/-, and no distinction has been made between the ‘US’ and ‘non-US’ transactions. Similarly in the orders passed by the lower authorities also no such distinction as ever been made by any of the authorities. Under these circumstances, in our considered view, whatever margin has been determined for the 96% of the transactions, same margin should be determined for the remaining 4% transactions as well. It is worth noting that, even before us, no distinction in facts or nature of transactions has been brought out on record. Therefore, in our considerate view, mark-up of 14.38% should be determined for the remaining 4% transactions pertaining to ‘non- US’ entities as well. The assessee gets part relief accordingly.”
Notably, the fundamental reason prevailing with our coordinate Bench to accept the plea of assessee was that there is no distinction between the services rendered by the assessee to the U.S and non-U.S entities with respect to tested transactions. On this aspect, we find that in the instant year also, it has been canvassed before us that rendering of ITE services to associated enterprises stand on an identical footing, may it be to U.S or non-U.S based group entities. A reference has been made to the order of TPO in this context and it has been canvassed that there is no such distinction noted by the income-tax authorities. In this view of the matter, it is quite apparent that in the instant year there is a complete similarity of facts with those considered by the Tribunal in Assessment Years 2006-07 and 2007-08 (supra). Therefore, the ratio of the decision of Tribunal for Assessment Years 2006-07 & 2007-08 (supra) is fully applicable in the instant year also. Though the CIT-DR has reiterated the stand of Revenue that was before the Tribunal in earlier assessment years, but with a view to maintain consistency and judicial discipline it is in the fitness of things that the present Bench follows the precedent in assessee’s own case which continues to prevail, as it has not been altered by any higher authority. In this view of the matter, we, therefore, direct the Assessing Officer/TPO to adopt the MAP approved margin of 15.32% in the instant year for benchmarking the international transactions of rendering ITE services to non-U.S associated enterprises. As a consequence, insofar as Ground nos. 1 to 2.1 are concerned, same are allowed, as above.
The other Ground raised by the assessee is with respect to the action of income-tax authorities in holding that interest income on deposits with bank and other receipts amounting to Rs.23,70,66,206/- is liable to be assessed under the head ‘income from other sources’ and not as ‘business income’, so as to be excluded for the purpose of computation of deduction u/s 10A of the Act.
In this context, the relevant facts are that during the year under consideration assessee earned interest income on fixed deposits, which was considered as a part of income eligible for deduction u/s 10A of the Act. Notably, assessee had claimed deduction with respect to the profits from the business of its undertaking set-up under the Software Technology Park of India Scheme (STPI) unit engaged in the export of computer software and IT-Enabled services in terms of Sec. 10A of the Act. The stand of the assessee was that interest income earned on deposits had arisen in the ordinary course of business of STPI unit and hence entitled for deduction u/s 10A of the Act. The income-tax authorities have denied the claim on the ground that interest income on fixed deposits is taxable under the head ‘income from other sources’ and further that even if the same is to be taxed as ‘business income’, the same is not ‘derived’ from Sec. 10A entitled unit and, therefore, such income is not eligible for deduction u/s 10A of the Act.
Against the aforesaid, the learned representative for the assessee pointed out that the said issue had come up before the Tribunal in assessee’s own case in earlier assessment years. In this context, reference has been made to the following precedents :- i) (A.Y 2004-05) dated 26.6.2009 ii) ITA Nos. 8987/Mum/2010 & 7822/Mum/2011 (A.Ys 2006-07 & 2007-08) dated 30.11.2015
The ld. CIT-DR has not disputed the aforesaid factual matrix but pointed out that following the ratio of judgment of Hon'ble Bombay High Court in the case of Shah Originals, 327 ITR 19 (Bom.), the interest income in question is not eligible for the benefits of Sec. 10A of the Act. In this context, it is pointed out that as per the decision of Hon'ble Bombay High Court, interest income generated from deposits held in EEFC account does not qualify for being assessed as business income, but is assessable as income from other sources and, therefore, the said income was not held to have been derived from ‘export transactions’ for the purposes of Sec. 80HHC of the Act. Apart therefrom, the ld. CIT- DR has relied upon the decision of Hon'ble Supreme Court in the case of Liberty India, 317 ITR 218 (SC) to contend that the interest income cannot be said to have been derived from export transactions.
In reply, the learned representative for the assessee pointed out that the very same arguments of ld. CIT-DR have since been considered by the Tribunal specifically in its order dated 30.11.2015 (supra) for Assessment Years 2006-07 & 2007-08 and have been rejected. The learned representative also pointed out that the decision of Hon'ble Bombay High Court in the case of Shah Originals (supra), relied upon by the ld. CIT-DR, has since been considered by the Hon'ble Karnataka High Court in the case of Motorola India Electronics (P.) Ltd., 265 CTR 94 (Karnataka) in the context of deduction u/s 10B of the Act and it has been held that interest income derived from inter-corporate loans and on deposits lying in EEFC account were eligible for the benefits of Sec. 10B of the Act. The learned representative pointed out that the judgment in the case of Shah Originals (supra) has been rendered in the context of Sec. 80HHC of the Act whereas presently the issue is in relation to Sec. 10A of the Act, wherein the mechanics to compute the profits derived from export of articles and things or computer software are different and have been provided in the section itself.
We have carefully considered the rival submissions. A perusal of the precedents relied upon by the assessee clearly bear out that the arguments sought to be set-up by the ld. CIT-DR have already been considered by the Tribunal. In fact, in the lead order dated 26.6.2009 (supra) for Assessment Year 2004-05, the distinction between the operating mechanics of Sec. 10A and 80HHC of the Act have been duly noted. In this context, the following discussion in the order of Tribunal dated 26.6.2009 (supra) is relevant :-
“11. Coming to the next grievance regarding interest income not being considered as income from business, Learned counsel for the assessee fairly admitted that sum of Rs. 3,63,042/- being interest on income-tax refund, relating to software technology Park Unit I would not be eligible for deduction u/s.10A of the Act. Hence, we are required to decide on interest on fixed deposit Rs.7,96,223/- and interest on staff loan of Rs. 1,377/-. There is no dispute that assessee was a hundred per cent exporter. No doubt the Learned Departmental Representative has relied on the decision of the Kerala High Court in the case of CIT v. Jose Thomas (supra) for the proposition that interest from bank deposit could not be considered as income from business for claiming deduction u/s.80HHC of the Act. However, we find that the jurisdictional High Court in the case of CIT v. Punit Commercial Ltd. (supra) has held that where an assessee was 100 per cent exporter, deduction u/s 80HHC had to be given on the entire business income including interest on fixed deposit. According to the Hon'ble jurisdictional High Court, entire profits of 100 per cent exporter was entitled for deduction u/s.80HHC of the Act. Again the Honble Delhi High Court in the case of CIT v. Eltek S.G. (supra) has held that the term "derived by an undertaking from export of articles or things or computer software" used in section 10A was neither as broad as "attributable to' nor as narrow as "derived from". Though Section 80HHC of the Act used the term "derived from", Hon'ble jurisdictional High Court in the case Punit Commercial Ltd. (supra) held that the whole of the business income was eligible for deduction u/s.80 HHC of the Act. Further to this, we also find that Hon'ble jurisdictional High Court in the case of CIT v. Lok Holding (supra) has clearly held that if surpluses were deposited by the assessee out of its business proceeds, interest therefrom could only be considered as part of profits and gains of business of the assessee. Therefore, we are inclined to allow the claim of the assessee for treating the interest from fixed deposit of Rs. 7,96,233/- and interest on staff loan Rs.1,377/- as income falling under the head 'profits and gains from business or profession' eligible for deduction u/s. 10A of the Act. As far as the contention of the learned DR that section 10A was an exemption provision whereas section 80HHC is a deduction provision, we find that Section 10A as substituted by Finance Act 2000, with effect from 1.4.2000 clearly mentions it to be a deduction from profits and gains derived by an undertaking from export of articles or things or computer software. Therefore, it cannot be deemed as an exemption provision for the impugned assessment year. Ground No. 2 of the assessee is, therefore, partly allowed.”
Apart therefrom, the Tribunal in Assessment Years 2006-07 and 2007-08 in the consolidated order dated 30.11.2015 again reiterated the earlier decisions by explicitly bringing out the implications of sub- section (4) of Sec. 10A of the Act in the manner of computing the benefits available under Sec. 10A of the Act. The following discussion in this context is relevant :-
“5.6. Having decided the interest income as income from business, the next step is to compute the amount of deduction available u/s 10A on the amount of aforesaid interest income. It is noted that this aspect has not been decided in earlier years. Therefore, this issue needs to be decided by us, as per provisions of section 10A. It is further noted that it is a case of 100% exporter. There are no other local sales done by the assessee. It has been rightly contended by the Ld. Counsel that sub-section (4) has provided mechanism to compute the amount of profit eligible for deduction u/s 10A. For the sake of ready reference sub-section (4) is reproduced herein:
“(4) For the purpose of [sub-sections (1) and (1A)], the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking.”
5.7. In our considered view, since the income from interest has been treated as part of business income, it shall be included for determining the amount of total turnover of the business and accordingly the benefit of deduction u/s 10A shall be provided on the amount of interest income proportionately, in terms of mechanism provided in sub-section (4). In other words the amount of profit eligible for deduction u/s 10A shall be the amount which bears to the profits of the business of undertaking, the same proportion as export turnover bears to the total turnover the business of the undertaking of the assessee. The AO is directed to grant the benefit of deduction u/s 10A by re-computing the same in terms of our directions as given above.
5.8. Before we part with this issue, we shall like to clarify that we have meticulously pondered over this issue. In case, clear mandate of sub-section (4) is not followed and full deduction is allowed u/s 10A on the interest income, then it may yield absurd results and also provide benefits to assessees which were not intended to have been provided by the legislature, keeping in view objective of enactment of section 10A. At times, there may be situations where interest income would be of sizeable amount, sometimes even more than amount of profits, and in such a situation, if 100% deduction is granted to the assessee, on the interest income or any other similar income, without following mandate of sub-section (4), it may frustrate the objective of section 10A. Therefore, to avoid any such situation, clear mechanism has been provided under sub-section (4) for computation purposes. Therefore, our decision is in line with express as well as implied provisions of section 10A.”
Following the aforesaid precedents, in our view, the action of income-tax authorities is unsustainable and accordingly, the Assessing Officer is directed to allow the deduction u/s 10A of the Act after including the aforesaid interest income. Thus, on this aspect also assessee succeeds.
Insofar as the levy of interest u/s 234B of the Act is concerned, same is consequential in nature and does not require specific adjudication.
The last ground relating to initiation of penalty proceedings u/s 271(1)(c) of the Act is premature and is liable to be dismissed. We hold so.
In the result, the appeal of assessee is partly allowed, as above.
Order pronounced in the open court on 31st January, 2017.