ASSTT COMMISSIONER OF INCOME TAX , CIRCLE -1, PUNE vs. M/S PERSISTENT SYSTEMS LIMITED, PUNE

Both the parties herein submitted that in these cases facts and circumstances and the issues involved are identical. After hearing the parties, all these cases are heard together and disposed of vide this consolidated order.

ITA No.497/PUN/2020 A.Y. 2014-15 3. In the Revenue has raised following grounds of appeal: “1.On the facts and circumstances of the case, the Ld.CIT(Appeals) has erred in deleting the disallowance u/s 35(2AB) of the IT Act, 1961 holding that before. tenth Amendment Rule, 2016, the Department of Scientific & Industrial Research (DSIR) was having no such power to quantify the expenditure incurred on in-house R & D facility without appreciating the fact that the DSIR guidelines provide for submission of Auditor's Certificate every year, which is scrutinized and even before the amendment it was incumbent upon the prescribed authority to go through the details submitted to it.

The brief facts on this issue are that during the course of assessment proceedings, the assessee company was requested to justify its claim of deduction u/s.35(2AB) of the Act. The assessee in reply had filed written submissions before the Assessing Officer. In the said written submissions, it has been stated that in the computation of taxable income for assessment year 2015-16, the company had claimed deduction of Rs.419.49 lakhs u/s.35(2AB) of the Act in respect of expenditure incurred on in-house research and development carried out at in-house R & D unit as approved by DSIR u/s.35(2AB) of the Act and the details of deduction claimed are as follows :

The Courts have held that for deduction under section 35(2AB) of the Act, first step was the recognition of facility by the prescribed authority and entering an agreement between the facility and the prescribed authority. Once such an agreement has been executed, under which recognition has been given to the facility, then thereafter the role of Assessing Officer is to look into and allow the expenditure incurred on in- house R&D facility as weighted deduction under section 35(2AB) of the Act. Accordingly, we hold so. Thus, we reverse the order of Assessing Officer in curtailing the deduction claimed under section 35(2AB) of the Act by ₹ 6,75,000/-. Thus, grounds of appeal No.10.1, 10.2 and 10.3 are allowed.”

The Ld. DR fairly conceded that the issue is covered in favour of the assessee by the said decision of the Pune Bench of the Tribunal (supra.). In view thereof, maintaining the principle of consistency with the same parity of reasoning on the same set of facts and circumstances, we respectfully follow the order of the Co-ordinate Bench in (supra.) and since the Ld. CIT(Appeals) has relied on this decision and provided relief to the assessee, therefore, we do not find any reason to interfere with the findings of the Ld. CIT(Appeals) which is hereby upheld and relief provided to the assessee is sustained. Ground No.1 raised in appeal by the Revenue is dismissed.

Ground Nos. 2 and 3 pertains to the grievance of the Revenue in respect of the deletion of disallowance u/s.14A r.w.r.8D of the Income Tax Rules, 1962 (hereinafter referred to as „the Rules).

The brief facts on this issue are that on verification of the Balance Sheet for the year under consideration, the Assessing Officer found that the assessee company has made investment in Mutual funds and Bonds to the extent of Rs.484,71,19,658/-. That as per provision of section 14A of the Act for the purpose of computing the total income under this chapter i.e. Chapter-IV, computation of total income, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. On verification of the details of disallowances it was seen that the assessee has not made any disallowance on this account. The Assessing Officer on examination of facts of the case observed that investment made and expenditure incurred, he was not satisfied with the correctness of the claim of the assessee. The Ld. AR of the assessee was asked to explain as to whether or not the assessee is maintaining separate detail of expenditures related tax free income earned by the assessee company. In reply, the assessee submitted that it is not maintaining separate details, though during the year under consideration assessee company has earned dividend income exempt u/s.10(34) of the Act and interest on tax free bonds to the tune of Rs.14,95,13,959/- and Rs.2,32,17,334/- respectively. Thereafter, the assessee was asked to explain as to why Rule 8D should not be applied for calculating the disallowance u/s.14A of the Act. Thereafter, the Assessing Officer has greatly in depth analyzed the provisions of Section 14A r.w.r.8D vis-à-vis facts of the assessee‟s case. The sanctity and justification for incorporating Section 14A in the Income Tax Act has been well explained by the Assessing Officer vide Para 8.4 onwards of his order.

The Assessing Officer vide Para 8.9 observed that the assessee has debited interest expenditure for which the assessee was not maintaining separate fund flow for tax free investment made and regular business activity. Further the assessee has incurred various kinds of expenses in its profit and loss account. It is not possible that the assessee has not incurred any expenditure in connection with such investments and earning of such exempt income. Further the assessee has not disallowed any expenses however, the provisions of section 14A applies to direct as well as indirect expenses. The Assessing Officer further observed that the claim of the assessee that it had not borrowed any funds for the purpose of investment in securities to earn exempt income, was also not tenable since entire money in the business comes in a common kitty. The monies received as share capital, as term loan, as working capital, as sales proceeds etc. do not have any different colour. Whatever are the receipts in the business they have the colour of business receipts and no separate identification sources have no concern whatsoever. Thereafter, the Assessing Officer made disallowance at the rate of one half percent of the average value of investment i.e. 0.50% of Rs.406,47,45,829/- i.e. Rs.2,03,23,729/- as per provisions of section 14A r.w.r.8D of the Rules.

The Ld. CIT(Appeals) at Para 4.4 of his order has given his findings and therein, he has stated that the assessee made suo-moto disallowance of Rs.16.8 lakhs. He has further stated that the issue is covered in favour of the assessee in its own case by his predecessor‟s order for the assessment year 2013-14 which has been recently upheld by the Pune Bench of the Tribunal in dated 28.02.2020 and following the said order, the Ld. CIT(Appeals) has provided relief to the assessee deleting the disallowance u/s.14A r.w.r.8D of the Rules made by the Assessing Officer.

First of all, we observe that nowhere in the assessment order it has been stated that the assessee had made suo-moto disallowance of Rs.16.8 lakhs. The Ld. CIT(Appeals) has made this findings but the basis of such findings is not there in his order. Secondly, the case law relied on by the Ld. CIT(Appeals) for providing relief to the assessee, the rationale therein was that while making disallowance u/s.14A r.w.r.8D of the Rules, the Assessing Officer must be satisfied as to why such disallowance has been made and vis- à-vis facts of the assessee‟s case. However, as noted by us, the Assessing Officer in the case before us has made detailed analysis in the assessment order regarding the applicability of Section 14A r.w.r.8D of the Rules with the facts of the assessee‟s case and further that why such disallowance was required that has also been explained by the Assessing Officer. This findings sans satisfaction is not the case here. That further, he has made disallowance only one half percent of the average value of investment i.e. 0.50% of Rs.406,47,45,829/- i.e. Rs.2,03,23,729/-. Therefore, it becomes essential to verify whether the assessee had actually made suo-moto disallowance of Rs.16.8 lakhs and whether the same had been analyzed by the Assessing Officer while making disallowance of 0.50% at the time of assessment. For this exercise, in the interest of justice, the issue needs to be remanded back to the file of Assessing Officer for adjudication after detailed verification as indicated hereinabove while complying with the principles of natural justice and as per law. Thus, Ground Nos. 2 & 3 raised in appeal by the Revenue are allowed for statistical purposes.

Brief facts on this issue are that the assessee company is engaged in the international transaction pertaining to the software development services with its associated enterprises during the financial year 2013-14 relevant to assessment year 2014-15. Receipt of fees towards software development services rendered to Persistent Systems Inc. That for the year under consideration, the total international transaction pertaining to the software development services by Pune SEZ Unit and Hyderabad SEZ unit of assessee company with AE amounts to Rs.39,12,23,042/-. The assessee has claimed deduction u/s.10AA of the Act against the profit earned by Pune SEZ unit The profit margin (OP/sales) of the assessee from its AE transaction for these transaction has been derived at 35.04% whereas the profit margin of the comparable companies as per the TP report of the assessee is 18.52% ( as per single year comparable margin). The assessee company was show caused why the excess profit shown because of close business connection between the group companies should not be excluded from the eligible profit for the purpose of determining the deduction allowability u/s.10AA of the Act and why disallowance u/s.10AA(9) r.w.s. 80IA(10) of the Act should not be made for the year under the consideration i.e. 2014-15. Thereafter, the assessee submitted detailed written submissions which are on record and has been made part of the assessment order. Thereafter, the Assessing Officer analyzed the provision of Section 10AA(9) r.w.s.80IA(10) of the Act and observed that where it appears to the Assessing Officer that owing to the close connection between the assessee carrying on the eligible business and any other person or for any other reason, the course of business between them is so arranged that the business transacted between the eligible person and „other person produces to the assessee more than the ordinary profits, then the Assessing Officer while computing the profits and gains of the eligible business for the purpose of granting deduction u/s.10AA can readjust the amount of profit as would reasonably be derived from such eligible business. The Assessing Officer pointed out key words „close connection‟ and „arrangement‟ between the assessee and other persons and such arrangement produces „more than ordinary profits‟ in the eligible business. The Assessing Officer further observed that the assessee has been transacting with its group companies since past so many years and accordingly, it can be deemed that there exist „close connection‟ between the assessee and its group companies. The Assessing Officer also observed that in the present case, the facts and circumstances and higher profits in the case of Pune SEZ unit and Hyderabad SEZ unit do provide clear indications of an existence of an „arrangement‟ between the assessee and its AEs. Finally, the Assessing Officer vide Para 9.5 of his order excluded an amount of Rs.6,59,44,850/- from eligible profits for the purposes of computation of deduction u/s.10AA(9) of the Act.

The Ld. CIT(Appeals) vide Para 5.5 has recorded his findings on the issue and therein, he observed that the TPO has not drawn any adverse inference in view of healthy margins of 35.04%. The Assessing Officer on the other hand had proceeded to disallow a part of deduction u/s.10AA of the Act on the total sales of Rs.44,08,91,258/- from Pune SEZ and Hyderabad SEZ to the AEs. This was done without any cogent basis and that further, the Ld. CIT(Appeals) also relied on the decision of his predecessor deleting this addition which was further upheld by the Pune Bench of the Tribunal in CO No.40/PUN/2019 dated 28.02.2020 for the assessment year 2013-14. The Pune Bench of the Tribunal on this issue has held as follows:

We have perused the case record and heard the rival contentions. We have also given considerable thought to the findings of the Ld. CIT(Appeals). It is evident from the findings of the Ld. CIT(Appeals) that identical disallowance made in earlier assessment years 2009-10, 2010-11 & 2011-12 in assessee’s own case and the Ld. CIT(Appeals) has placed reliance on the decision of the Pune Bench of the Tribunal in assessee’s own case in ITA Nos.946 to 948/PN/2013 dated 23.12.2016 which was decided in favour of the assessee. The crux of the decision of the Tribunal held in favour of the assessee was that mere existence of the close connection and 'more than ordinary profits' are not enough to assume an arrangement as contemplated u/s. 80-IA(10) of the Act. The Assessing Officer is also required to prove any such arrangement existing which resulted in more than ordinary profits. The learned AO has not proved any arrangement between the parties in the facts of the case. Therefore, following the decision of the Pune Bench of the Tribunal in assessee’s own case (supra.), we are of the opinion that the order of the Ld. CIT(Appeals) is fair and reasonable and it does not call for any interference. Hence, relief provided to the assessee by the Ld.CIT(Appeals) is hereby sustained. Thus, Ground No.1 raised in appeal by the Revenue is dismissed.”

The Ld. DR fairly conceded that in the given set of facts and circumstances, the issue is squarely covered in favour of the assessee and the addition has been rightly deleted by the Ld. CIT(Appeals).

The Pune Bench of the Tribunal on this issue observed that mere existence of the close connection and earning more than ordinary profits are not enough to assume an arrangement as contemplated u/s.80IA(10) of the Act. The Assessing Officer is also required to prove any such arrangement existing which resulted in more than ordinary profits. In the entire assessment order, the Assessing Officer has not specifically spelled out what exact arrangement existed between the parties in the present case which resulted in more than ordinary profits. Therefore, we do not find any infirmity with the findings of the Ld. CIT(Appeals) and relief provided to the assessee is hereby sustained. Thus, Ground No.4 raised in appeal by the Revenue is dismissed.

The Revenue has also raised additional grounds of appeal

The Pune Bench of the Tribunal in assessee‟s own case in CO No.40/PUN/2019 for assessment year 2013-14 dated 28.02.2020 on the issue of „education cess‟ has held and observed as follows:

The Ld. Counsel for the assessee also submitted that the amount involved in „education cess‟ needs to be verified and therefore, prayed for remanding this issue to the file of the Assessing Officer for verification of the amount. The Ld. DR did not raise any objection on this proposition.

We observe that the Ld. CIT(Appeals) vide Para 7.3 of his order relying on the decision in assessee‟s own case for the assessment year 2013-14 (supra.) has decided the issue in favour of the assessee. We agree on principle that the amount involved in „education cess‟ is an allowable expenditure and it is in favour of the assessee. However, the Ld. Counsel for the assessee submitted that the amount involved in „education cess‟ needs to be verified by the Assessing Officer. Therefore, as per aforesaid observation, we set aside the order of the Ld. CIT(Appeals) on this issue and remand the same to the file of the Assessing Officer for verification of the amount of expenditure on education cess and re-adjudicate while complying with the principles of natural justice and as per law. Thus, additional grounds raised by the Revenue are allowed for statistical purposes.

In the result, appeal of the Revenue in is partly allowed for statistical purposes.

In the Revenue has raised following grounds of appeal: “1.On the facts and circumstances of the case, the Ld.CIT(Appeals) has erred in deleting the disallowance u/s 35(2AB) of the IT Act, 1961 holding that before. tenth Amendment Rule, 2016, the Department of Scientific & Industrial Research (DSIR) was having no such power to quantify the expenditure incurred on in-house R & D facility without appreciating the fact that the DSIR guidelines provide for submission of Auditor's Certificate every year, which is scrutinized and even before the amendment it was incumbent upon the prescribed authority to go through the details submitted to it.

The Revenue has also raised additional grounds of appeal

In the result, appeal of the Revenue in is partly allowed for statistical purposes.

In the Revenue has raised following grounds of appeal:

On the facts and circumstances of the case, the Ld. CIT(Appeals) has erred in deleting the disallowance u/s.10AA(9) r.w.s. 801A(10) of the Income tax Act, 1961 without appreciating the fact that the assessee itself in the comparables furnished in its transfer pricing report had 'shown 'ordinary profit' to be of 12.44% as against net profit 'margin of 21.01% shown by the assessee.

The Ld. CIT(Appeals) vide Para 3.5 of his order has provided relief to the assessee relying on the decision of the Pune Bench of the Tribunal in (supra.) wherein the relief on this issue was provided to the assessee on the ground that no satisfaction was recorded by the Assessing Officer while making such addition. We have observed in ITA No.497/PUN/2020, the Assessing Officer had made detailed analysis of the said provisions and required satisfaction has also been recorded in his order. The same observation holds good for this year also. We further observe that this issue in earlier years have been remanded to the file of the Assessing Officer for verification as per our observation therein and accordingly, for this year also, the issue needs to be verified that once the assessee had made suo- moto disallowance of Rs.16.74 lakhs and in the given circumstances when the Assessing Officer had made disallowance deducting such suo-moto disallowance made by the assessee then whether such disallowance made for this year is made at the same percentage or more than 0.50% made in respect of earlier two years. In view thereof, we set aside the order of the Ld. CIT(Appeals) on this issue and remand the matter back to the file of the Assessing Officer for verification and re-adjudication after complying with the principles of natural justice and as per law. Thus, Ground Nos. 1 and 2 raised in appeal by the Revenue are allowed for statistical purposes.

Both parties herein have agreed that Ground No.3 raised in for the assessment year 2016-17 is similar and identical to Ground No.4 raised in ITA No.497/PUN/2020 for assessment year 2014- 15. Therefore, our decision rendered in ITA No.497/PUN/2020 for assessment year 2014-15 while adjudicating the Ground No.4 shall apply mutatis-mutandis to ITA No.499/PUN/2020 for Ground No.3 also for the assessment year 2016-17. Thus, Ground No.4 raised by Revenue in this appeal is dismissed.

The Revenue has also raised additional grounds of appeal which reads as follows:

In the result, appeal of the Revenue in is partly allowed for statistical purposes.

In the combined result, all the appeals of the Revenue are partly allowed for statistical purposes.