2019 (9) TMI 1702 - AT - Income Tax

Disallowance u/s 14A - expenditure incurred on earning exempt income - HELD THAT - It is seen that the lower authorities dealt with interest expenditure and that too on proportionate basis in the said case than direct one whereas the issue before us is that of administrative expenditure disallowance. We observe in this facts that the impugned administrative expenses disallowance is not alike former two limbs since falling in different head as well as the fact that it has to be based on computation formula only. There is no dispute that we are dealing with assessment year 2008-09 i.e. starting point of application of Rule 8D of IT Rules. The assessee admittedly has not challenged the relevant computation @ 5% given in the above statutory computation formula. We conclude in these facts that both the lower authorities have acted as per law in invoking the impugned disallowance in relation to assessee's exempt income amounting to Rs.7.7 crores.More so when the assesses has not discharged prima facie onus even to justify its suo-motu lump sum disallowance of Rs.2 lakhs only. The impugned disallowance is accordingly confirmed in principle. Alternate contention that both the lower authorities have erred in not excluding the average investment made in growth oriented debt funds and fixed maturity plan funds - We find that this is more a computation exercise wherein investment made in relation to taxable income has to be excluded for the purpose of computing disallowance in question. We thus direct the Assessing Officer to frame consequential computation as per law. TP Adjustment - Financial Guarantee given by the appellant on behalf to its Associate Enterprise (A.E) - HELD THAT - We find that recent Co-ordinate Bench in M/s Suzlon Energy Ltd.- 2017 (4) TMI 1406 - ITAT AHMEDABAD wherein as holds that such a guarantee does not amount to an international transaction under section 92BTPO had himself taken financial guarantees given by various institutions as the relevant bench mark for the performance guarantee adjustment in question. We hold in these facts and circumstance assessee s second substantive ground is accepted. Disallowance of recruitment and training expenses - Revenue challenged the order passed by CIT (A) in deleting 20% of such expenses - HELD THAT - As perused the records including the order passed by the co-ordinate Bench in 2013 (4) TMI 995 - ITAT AHMEDABAD in assessee s own case whereby and whereunder the issue has been decided in favour of the assessee as held that there is no evidence in the possession of the AO to hold that a particular expenditure on training was not business related. In fact, the argument of the appellant appears to be logical that considering the nature of the services provided a training of the technical staff is always a business necessity and because of the trained staff the appellant's revenue has substantially gone up - direct the AO to delete the disallowance on account of recruitment and training expenses. Disallowance by restricting the deduction u/s.10A - HELD THAT - It appears that the issue is squarely covered by the Hon ble Apex Court in the matter of CIT v/s. Yokogawa India Ltd 2016 (12) TMI 881 - SUPREME COURT wherein it has been held that section 10A is a deduction section. However, the stage of the deduction would be while computing the gross total income of the eligible undertaking under chapter IV of the Act and not at the stage of computation of the total income under chapter VI . It is an undisputed fact that the issue in the present appeal is identical to that of earlier assessment year and the exchange fluctuation gain was held to be arising from export business in assessment year 2001- 02 to 2005-06. Nothing has been brought on record by Revenue to controvert the findings of Ld. CIT(A) and, therefore, we find no reason to interfere in order of CIT(A) on this issue. Upward adjustment by recomputing the ALP of the international transactions of software services distributed by MUK - HELD THAT - Based on the facts and evidences provided by the appellant for AY 07-08 2013 (4) TMI 995 - ITAT AHMEDABAD and the conclusions of the ITAT Ahmedabad bench for identical facts for AY 06-07 2012 (5) TMI 206 - ITAT AHMEDABAD the appellant's contentions find favour. Therefore, MUK's operations can be considered to be correctly characterized as a distributor and a return based on sales which incentives MUK to generate more revenue appears to be appropriate. Decided against revenue. Disallowance on account of Human Resource Management function - HELD THAT - As decided in assessee own case 2012 (5) TMI 206 - ITAT AHMEDABAD A. V. 2006-07 facts and figures have revealed that following the said business strategy the business growth as a whole was much higher than the impugned compensation amount. This allegation is also to be ruled out that those very employees were otherwise regular employees of the assessee-company and they have been absorbed after their return for the period for which they were sent abroad and worked offshore with AEs. It is true that such employees are the regular group of experts but they have been paid by AEs when worked on-site abroad, which means the burden of salary for the offshore period was in fact borne by AEs, otherwise to maintain bunch of trained employees the MIL had to incur the expenditure on salary. Therefore, there was an argument of counter claims and in support reliance was placed on Boston Scientific International VV 2010 (4) TMI 876 - ITAT MUMBAI . For these reasons we also hold that the secondee-provider is not akin to recruitment service-provider or that secondment is different from recruitment . Finally, we hold that there was no legal basis for the impugned upward adjustment and the same is hereby directed to be deleted. This ground is allowed. Disallowance computed u/s.14A r.w.Rule 8D(2)(iii) while computing the Book Profit u/s 115JB - HELD THAT - We note that in the recent judgment passed in the case of ACIT vs. Vireet Investment Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI has held that the disallowances made u/s 14A r.w.r. 8D cannot be the subject matter of disallowances while determining the net profit u/s 115JB of the Act. Thus it can be concluded that the disallowance made under section 14A r.w.r. 8D cannot be resorted while determining the expenses as mentioned under clause (f) to explanation 1 to section 115JB. TP Adjustment - Comparable selection - determining the arm s length price of the international transaction of provision of software services rendered by P C Division of the appellant to its AE - HELD THAT - As decided in Revenue s appeal 2018 (3) TMI 1881 - ITAT AHMEDABAD excluding two entities M/s. Accentia Technologies Limited and M/s. Cross Domain Solutions Limited. very entities are not to be taken as comparables since the former one underwent extra ordinary merger event whereas the latter entity provided high-end KPO services.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Adjustment related to Financial Guarantee given by the appellant to its Associate Enterprise (AE).
3. Adjustment related to Performance Guarantee given by the appellant to the customers of the AE.
4. Disallowance of recruitment and training expenses.
5. Restriction of deduction under Section 10A of the Income Tax Act.
6. Upward adjustment of the Arm's Length Price (ALP) of international transactions.
7. Disallowance related to Human Resource Management (HRM) function.
8. Adjustment related to Corporate Guarantee given to MMUS.
9. Disallowance under Section 14A while computing Book Profit under Section 115JB of the Income Tax Act.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The assessee challenged the confirmation of the disallowance of Rs. 29,46,466/- made by the Assessing Officer (AO) under Section 14A read with Rule 8D(2)(iii). The AO found that the assessee earned dividend income from mutual funds, which was claimed as exempt income. The AO made a disallowance out of administrative expenses applying Rule 8D. The CIT(A) directed the AO to recalculate the disallowance after excluding investments in foreign subsidiaries and debt funds, which do not yield exempt income. The Tribunal upheld this direction, confirming that investments yielding taxable income should be excluded for computing disallowance.

2. Adjustment related to Financial Guarantee given by the appellant to its AE:
The assessee argued that the financial guarantee is a shareholder activity and quasi-equity in nature, and should not be covered under transfer pricing regulations. The CIT(A) partly upheld the adjustment made by the TPO. The Tribunal, following its earlier decision, held that financial guarantees given by the assessee to its AEs do not constitute an international transaction under Section 92B of the Act, and no ALP adjustment can be made.

3. Adjustment related to Performance Guarantee given by the appellant to the customers of the AE:
The assessee contended that the performance guarantee is a shareholder activity and no cost is incurred by the appellant. The CIT(A) enhanced the adjustment made by the TPO. The Tribunal, following the decision in the assessee's own case for A.Y. 2008-09, held that performance guarantees should not be treated as a separate international transaction and deleted the adjustment.

4. Disallowance of recruitment and training expenses:
The AO disallowed 20% of recruitment and training expenses, citing similar disallowances in earlier years. The CIT(A) deleted the disallowance, and the Tribunal upheld this decision, following its earlier orders in the assessee's own case for previous years.

5. Restriction of deduction under Section 10A of the Income Tax Act:
The AO restricted the deduction under Section 10A, excluding foreign exchange gain from the profit of the business. The CIT(A) allowed the deduction, and the Tribunal upheld this decision, following the Supreme Court's judgment in CIT v. Yokogawa India Ltd., which held that Section 10A is a deduction section and should be applied while computing the gross total income.

6. Upward adjustment of the Arm's Length Price (ALP) of international transactions:
The AO made an upward adjustment of Rs. 26,02,07,754/- based on the TPO's findings. The CIT(A) deleted the adjustment, and the Tribunal upheld this decision, following the earlier order in the assessee's own case for A.Y. 2006-07, concluding that the assessee's operations should be characterized as a distributor, not a marketing service provider.

7. Disallowance related to Human Resource Management (HRM) function:
The AO made an upward adjustment related to HRM services provided by the appellant. The CIT(A) deleted the adjustment, and the Tribunal upheld this decision, following its earlier orders, concluding that HRM functions form an integral part of the software services and should not be treated as a separate international transaction.

8. Adjustment related to Corporate Guarantee given to MMUS:
The AO made an upward adjustment related to the corporate guarantee given by the appellant to MMUS. The CIT(A) deleted the adjustment, and the Tribunal upheld this decision, following its earlier orders, concluding that such guarantees do not constitute an international transaction under Section 92B of the Act.

9. Disallowance under Section 14A while computing Book Profit under Section 115JB of the Income Tax Act:
The AO added the disallowance made under Section 14A while determining the income under MAT as per Section 115JB. The Tribunal, following the Special Bench decision in ACIT vs. Vireet Investment Pvt. Ltd., held that disallowances under Section 14A cannot be added while computing book profit under Section 115JB, and deleted the addition.

Conclusion:
The Tribunal upheld the CIT(A)'s decisions on most issues, following its earlier orders and relevant judicial precedents, providing relief to the assessee on various grounds, including disallowances under Section 14A, adjustments related to financial and performance guarantees, recruitment and training expenses, deduction under Section 10A, and HRM function adjustments.