2016 (11) TMI 1635 - AT - Income Tax

Disallowance of consultancy charges paid - assessee has paid consultancy charges to M/s. I.T. Lokam Services India Pvt. Ltd., which is a subsidiary company of the assessee - A.O. disallowed consultancy charges for the reason that the assessee has failed to prove the nexus between consultancy charges paid to M/s. I.T. Lokam Services India Pvt. Ltd. and generation of revenue - HELD THAT - On perusal of the income tax returns filed by M/s. I.T. Lokam Services India Pvt. Ltd., the major source of revenue for the company is from consultancy charges received from the assessee. The recipient also paid more than 50% of consultancy charges as salary to its employees duly deducting tax at source wherever applicable, the proof of which has been furnished. On perusal of all these documents furnished by the assessee, it was clear that the consultancy charges paid by the assessee is genuine and also the assessee has proved the necessity of incurring such consultancy charges in relation to its works executed to M/s. IBM India Pvt. Ltd. Even for some time, if we assume that the payments are fictitious and unproved, it will lead to wrong calculation of margins earned by the assessee that if the consultancy charges incurred by the assessee are added to the margins returned by the assessee for these assessment years, the net margin would go up to 51% which is quite contrary to the industrial average declared by the NASCOM. Therefore, we are of the considered view that the A.O. was erred in disallowing consultancy charges paid by the assessee. Consultancy charges paid by the assessee to M/s. I.T. Lokam Services India Pvt. Ltd. is having nexus between earning of income. The assessee has proved beyond doubt with necessary supporting documents that it has incurred consultancy charges wholly and exclusively for the purpose of business. CIT(A), without appreciating the facts, simply confirmed the additions made by the A.O. by holding that the impugned expenses have not been proved to be incurred wholly and exclusively for the purpose of assessee s business. Therefore, we set aside order passed by the CIT(A) and direct the A.O. to allow consultancy charges paid by the assessee for the assessment years 2009-10 to 2011-12. Disallowance of employees contribution to provident fund - addition u/s 2(24)(x) r.w.s. 36(1)(va) - contribution deposited on or before the due date of furnishing return of income u/s 139(1) - HELD THAT - We find that the coordinate bench of this Tribunal, in the case of Eastern Power Distribution Company of AP Limited 2016 (9) TMI 1040 - ITAT VISAKHAPATNAM has considered similar issue and held that if employees contribution to provident fund is paid on or before the due date of furnishing return of income u/s 139(1) of the Act, then no disallowance can be made. If employees contribution to provident fund is paid within the due date specified u/s 139(1) of the Act, then no disallowance can be made towards employees contribution to provident fund. Therefore, we direct the A.O. to allow contribution to provident fund for the assessment year 2009-10 to 2011-12. Addition of export profit under the provisions of section 10A - HELD THAT - In assessee s own case for the assessment year 2003-04, we are of the view that for the purpose of determination of exemption u/s 10A, the turnover of the undertaking has to be considered, but not turnover of the assessee. The CIT(A), after considering the relevant facts and also following coordinate bench decision has rightly deleted additions made by the A.O. towards disallowance of exemption claimed u/s 10A. We do not see any error or infirmity in the order of the CIT(A). Hence, we inclined to uphold CIT(A) order and dismiss appeal filed by the revenue.

Summary

Issues Involved:
1. Disallowance of consultancy charges paid to M/s. I.T. Lokam Services India Pvt. Ltd.
2. Disallowance of employees' contribution to provident fund.
3. Disallowance of exemption under section 10A of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Consultancy Charges:
The assessee, a software development and export company, paid consultancy charges to its subsidiary, M/s. I.T. Lokam Services India Pvt. Ltd., for hiring skilled software professionals. The Assessing Officer (A.O.) disallowed these charges, arguing that the assessee failed to prove the necessity and nexus between the consultancy charges and revenue generation. The A.O. emphasized that the assessee did not provide adequate evidence to demonstrate that the expenditure was incurred wholly and exclusively for business purposes as required under section 37 of the Income Tax Act.

The assessee contended that the consultancy charges were genuine and necessary for fulfilling its contractual obligations with M/s. IBM India Pvt. Ltd. The payments were made through proper banking channels with applicable TDS deductions. The assessee provided agreements, bills, and time sheets certified by the client to substantiate the charges.

The Tribunal found that the assessee had adequately demonstrated the necessity and genuineness of the consultancy charges. The Tribunal noted that the A.O. did not dispute the genuineness of the expenditure but questioned its necessity. The Tribunal concluded that the consultancy charges were incurred wholly and exclusively for business purposes and directed the A.O. to allow these charges for the relevant assessment years.

2. Disallowance of Employees' Contribution to Provident Fund:
The A.O. disallowed the employees' contribution to the provident fund, citing that the deposits were not made within the due date specified under the Provident Fund Act, thus contravening section 2(24)(x) read with section 36(1)(va) of the Income Tax Act.

The assessee argued that the issue was covered by a decision of the ITAT, Visakhapatnam, which held that if the total contribution (employees' and employer's) is deposited on or before the due date of furnishing the return of income under section 139(1), no disallowance should be made.

The Tribunal, following the precedent, held that if the employees' contribution to the provident fund is paid within the due date specified under section 139(1) of the Act, no disallowance could be made. The Tribunal directed the A.O. to allow the contribution for the relevant assessment years.

3. Disallowance of Exemption under Section 10A:
The A.O. recomputed the exemption under section 10A by considering the total turnover of the assessee from all units, arguing that the recognition by the Visakhapatnam Special Economic Zone (VSEZ) was for the assessee as a whole, not just the Bhogapuram unit.

The assessee contended that its Bhogapuram unit was a recognized 100% export-oriented unit and that the turnover of this unit alone should be considered for the exemption. The assessee cited a previous ITAT decision in its favor, which held that after the amendment of section 10A by the Finance Act, 2001, the turnover of the eligible unit alone should be considered for the exemption.

The Tribunal, following its earlier decision, held that for the purpose of exemption under section 10A, the turnover of the undertaking (Bhogapuram unit) alone should be considered, not the total turnover of the assessee. The Tribunal upheld the CIT(A)'s decision to delete the additions made by the A.O. and dismissed the revenue's appeal.

Conclusion:
The Tribunal allowed the appeals filed by the assessee regarding the disallowance of consultancy charges and employees' contribution to the provident fund. It dismissed the revenue's appeals concerning the disallowance of exemption under section 10A for the assessment years 2009-10, 2010-11, and 2011-12. The order was pronounced in the open court on 25th November 2016.