2018 (11) TMI 1822 - AT - Income Tax

Addition on account of excess profit adjustment under section 10AA(9) read with section 80IA(10) - As argued transactions with the Associated Enterprise have not been arranged to produce more than ordinary profits with the intent to abuse tax incentive - HELD THAT - In assessee s own case for A.Y. 2011- 12 2017 (11) TMI 1933 - ITAT PUNE held that the excess profits should be considered on the basis of difference of 16.34% and 20% as against 16.34% and 28% held by AO. In the present case the Assessing Officer has not proved that any arrangement had been arrived between the parties which resulted in higher profits. Consequently the re-working of the profits by Assessing Officer by invoking section 10A r.w.s. 80- IA(10) of the Act is not justified - AO was not justified in working out the excess profit on the basis of presumptions and reducing the claim of deduction of assessee u/s 10AA of the Act. We therefore set aside the action of the AO. Thus the ground of the assessee is allowed and the Revenue is dismissed. Disallowance of expenditure in respect of RSA token expenses - revenue or capital expenditure - HELD THAT - Expenditure incurred on RSA tokens is for the purpose of business operations and for conducting the business in an efficient manner. In such a situation we are of the view that the expense is a revenue expenditure and therefore the AO was not justified in disallowing RSA token expenses. We accordingly hold that the RSA token expense to be of revenue in nature and direct the AO to allow the expenditure. We further direct the AO to take into consideration the depreciation already granted while allowing the claim of RSA token expenses. Thus the ground No.2 of the assessee is allowed.

Summary

Issues Involved:
1. Addition on account of excess profit adjustment under section 10AA(9) read with section 80IA(10) of the Act.
2. Disallowance of expenditure in respect of RSA expenses.
3. Validity of the order passed by the CIT(A) in the name of a dissolved entity.

Detailed Analysis:

1. Addition on Account of Excess Profit Adjustment under Section 10AA(9) read with Section 80IA(10) of the Act:
The primary issue revolves around whether the assessee's claim for deduction under section 10AA should be restricted due to alleged "more than ordinary profits" arising from transactions with Associated Enterprises (A.Es). The Assessing Officer (AO) argued that the assessee's profit margin of 28% was significantly higher than the 16.34% margin of comparable companies, suggesting an arrangement to produce more than ordinary profits. Consequently, the AO reduced the deduction claimed by the assessee.

The CIT(A), following a similar case from the previous assessment year (A.Y. 2011-12), directed the AO to adopt an ordinary profit margin of 20% instead of 16.34%. Both the assessee and the Revenue appealed this decision.

The Tribunal, referencing its decision in the assessee's own case for A.Y. 2011-12, found no material evidence indicating that the course of business was arranged to inflate profits. The Tribunal emphasized that the AO's conclusions were based on presumptions without substantive evidence. The Tribunal thus allowed the assessee's appeal and dismissed the Revenue's appeal, reiterating that the AO was not justified in restricting the deduction under section 10AA.

2. Disallowance of Expenditure in Respect of RSA Expenses:
The second issue concerns the disallowance of expenses related to RSA (Restricted Security Access) tokens, which the AO categorized as capital expenditure, allowing only depreciation on the amount. The CIT(A) upheld the AO's decision.

The Tribunal, however, found that RSA tokens, used for providing wireless/remote access to the assessee's internal network, do not independently perform any function and are integral to the business operations. The Tribunal cited legal precedents emphasizing that expenses facilitating business operations and efficiency, without creating a new asset, should be considered revenue expenditure. Consequently, the Tribunal directed the AO to allow the RSA token expenses as revenue expenditure, adjusting for any depreciation already granted.

3. Validity of the Order Passed by the CIT(A) in the Name of a Dissolved Entity:
The assessee raised an issue regarding the validity of the CIT(A)'s order, which was passed in the name of a dissolved entity. The assessee argued that the order should be void ab initio due to the dissolution of Amdocs Development Center Delhi Private Limited.

However, during the proceedings, the assessee chose not to press this ground. Consequently, the Tribunal dismissed this ground as not pressed.

Conclusion:
The Tribunal's decision resulted in the partial allowance of the assessee's appeal and the dismissal of the Revenue's appeal. The Tribunal upheld the assessee's claim for deduction under section 10AA, rejecting the AO's adjustments based on presumptions of inflated profits. Additionally, the Tribunal categorized the RSA token expenses as revenue expenditure, contrary to the AO's and CIT(A)'s capital expenditure classification. The issue regarding the validity of the CIT(A)'s order was dismissed as not pressed by the assessee.