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TMI Blog2023 (5) TMI 458X X X X Extracts X X X X X X X X Extracts X X X X ..... rdware, maintenance of computer equipment. It also provides software related services. The AO proposed various additions in the draft assessment orders of all three years, which were objected to by the assessee before Ld DRP. After receipt of directions from Ld DRP, the AO completed the assessments of these years by making various additions. The assessee has preferred these appeals against the assessment orders so passed by the AO for all three years. 3. The common issues contented through various grounds in these appeals are tabulated below - Issue AY 2016-17 AY 2017-18 AY 2018-19 Assessment order bad in law Ground No.1 Ground No.1 Ground No.1 Reliance on Draft assessment order of AY 2009-10 for making adjustments Ground No.2 Ground No.2 Ground No.2 Denial of relief u/s.10AA Ground No.3 Ground No.3 Ground No.3 Disallowance of payments to AEs and third parties u/s.40(a) Ground No.4 Ground No.4 Ground No.4 Disallowance of ESOP expenses Ground No.5 Ground No.5 Ground No.5 Rejection of claim for refund of excess DDT N/A N/A Ground 6 Transfer Pricing adjustment N/A Ground 6 to 10 Ground 7 to 11 Variance in total income as computed in final ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee had claimed deduction of Rs.532,03,67,618 u/s 10AA of the Act in respect of various units. The AO rejected both the claims on the ground that the assessee has failed to comply with various conditions prescribed in those sections for allowing deduction. The AO after recording the various discrepancies, held that the assessee is not entitled for deduction of Rs.532,03,67,618 u/s 10AA of the Act. The AO has summarised his conclusion paragraph 9.4 at page 31 of the assessment order:- "1. The Assessee company could not substantiate its claim of manufacture and export of computer software from eligible SEZ unit as brought out in the discussion held earlier. Section 10AA gives tax benefit on the profits and gains derived by an undertaking from export of computer software that has been manufactured from eligible SEZ units. 2. And so owing to the inability of the Assessee to bring on record facts which shows that it has complied with all the regulations laid down, as is the case here, it becomes difficult to allow the claim made, when in fact, lot of anomalies pertaining to its functioning have been clearly brought out and detailed in the earlier para. 3. Regarding transmi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowing the claim of the assessee for relief under section 10AA of the Act. The directions of the DRP are assessment year 2014-15 are reproduced as under: "Having considered the submissions, we note that the assessee has registered only the MSA Agreement entered in 2004 with the STPI authorities. This is merely an umbrella agreement and does not refer to the nature of services rendered. It was represented that the assessee rendered services only to its AEs, and that the nature of services rendered were as per DOU and SOW entered with the parties. It was conceded that these DOUs & SOWs were not registered with the STPI authorities and thus we note that the compliance to the requirements of sec 10AA are not met. In view of such non-registration, the AO's inference that the assessee continued with the existing business cannot be faulted with. We also note that the assessee failed to match the accounting invoices with the Softex forms and thereby failed to satisfy the AO as to the correctness of the claim of deduction. It was contended that the invoices clearly specify the nature of services to be software consultancy, technical support fee, but the invoices were not produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its claim of tax holiday u/s. 10AA. All these documents have already been submitted by the assessee to the AO during the assessment proceedings, which have not been processed by the AO. The AO is therefore, directed to verify the same and compute the 10AA accordingly on the basis of the documents furnished." 9. In effect, the Ld DRP has given its directions with regard to the allegation of splitting/reconstruction of existing undertakings and remitted the back to the AO with a direction to verify the reconciliation of payments received with the turnover reported by the assessee, compliance on reporting requirements of turnover through statutory forms, letter from RBI reinstating the approval for Bank account outside India etc. 10. Accordingly in conformity with the directions of the DRP, the AO issued a notice u/s.142(1) to the assessee with regard to the examination of the details. In response the assessee filed the report of an independent auditor with the transactional audit report of the export transactions. The AO after examination of the report, has recorded the finding that out of the total export turnover of USD 2428.56 million, an amount of USD 2384.57 was realized by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be executed under the ambit of a particular MSA and whether SOW should be given preceded and over MSA. The matter has been examined. It is clarified that the tax benefit under section 10 AA, 10 AA and 10 B would not be denied merely on the ground that a separate and specific MSA does not exist for each SOW. The SOW would normally prevail over MSA in determining the eligibility for tax benefits unless the assessing officer is able to establish that there has been splitting up or reconstruction of an existing business or non-fulfilment of any other prescribed condition." From the above, it is clear that, benefit under section 10A,10AA and 10 B cannot be denied as separate and specific MSA does not exist for each SOW. Be that as it may, from SOFTEX forms placed in paper book at page 536 onwards, columns 7 specifically reveals, export contract/purchase order, being filed with SEZ. We also note that, each form consist enclosures, like copies of export contract, royalty agreement, communication from foreign customers. Submissions by Ld. Standing Counsel for revenue is thus found to be contrary to SEZ approvals placed at page 782 onwards of paper book volume 3. Ld. Standing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts of the case assessee placed on record approvals obtained by SEZ authorities which has not been rejected. It is noticed that nothing has been brought on record by Ld. Standing Counsel to show that alleged units ceases to be an eligible unit registered with SEZ authority. Further we refer to the decision relied upon by Ld. Counsel in case of Nippon Electronics (supra) by Hon'ble Karnataka High Court and Tata Communications Internet Services Ltd. (supra) by Hon'ble Delhi High Court. C.8.4 Respectfully following aforestated decision we agree with submissions of Ld. Counsel that, in absence of any adverse action by SEZ Authorities, no presumption could be drawn that assessee violated any requirements under the scheme. We refer to decision of Ahmedabad Tribunal in case of ITO v. E-Infotech Ltd. [2000] 124 TTJ 176, to support the aforestated view. This Tribunal in the said case has held asunder: "As regards violation of norms of STPI, we are of the view that unless violation of conditions of approval, impinge on conditions for grant of deduction under the relevant provisions of the Act, there is no ground for denial of deduction. In this case the status of tax bear as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered only in the year of formation of business. This preposition has been accepted by DRP in assessment year 2011-12 in assessee's own case. It is also noted that the amalgamation took place during the year 2004 as approved by Hon'ble Karnataka High Court, by order dated 25-9-2004, and accordingly, units stood already transferred. We also draw support from decision of Mumbai Tribunal in case of Piramal Health Care Ltd. v. Dy. CIT in [IT Appeal no. 1257 (Mum) of 2014, dated 7-5-2019], wherein, Hon'ble Bench decided an identical issue under section 80 IC(4), which is pari materia to section 10AA(4). We have perused decision of Hon'ble Supreme Court in case of ACE Multi Axes Systems Ltd. (supra), relied by Ld. Standing Counsel for revenue. Hon'ble Supreme Court in this case was considering claim u/s.80IB(2). Hon'ble Court observed asunder: "12. The scheme of the statute does not in any manner indicate that the incentive provided has to continue for 10 consecutive years irrespective of continuation of eligibility conditions. Applicability of incentive is directly related to the eligibility and not de hors the same. If an industrial undertaking does not remain sm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bank account outside India 15. The DRP has mentioned that these documents have been submitted before the AO during assessment proceedings which have not been processed and therefore directed the AO to verify these details and accordingly compute the 10AA on the basis of documents furnished. We also notice that the AO has verified only the receipt of software income wherein he has recorded the finding that out of the total export turnover of USD 2428.56 million, an amount of USD 2384.57 was realized by the assessee for the year under consideration. We further notice that the AO has mentioned that though the details are examined since the DRP has already rejected the claim of 10AA deduction, the analysis of details will not have material effect in the final order. We are unable to appreciate this finding of the AO which is apparently wrong. The DRP has directed the AO to verify the above listed details and re-compute the relief u/s.10AA whereas the AO without following the directions have retained the same addition even after recording the finding that the major portion of the software income is received into the bank account in convertible foreign exchange. 16. Considering the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mple ESBP cross charge payments made by the us to IBM US along with corresponding bank reference numbers and relevant extracts of the bank statement were submitted on July 14, 2021. 3. Details of travel/ immigration/ visa related expense reimbursement along with sample supporting documents were furnished on July 14, 2021 4. Sample copies of declarations for non-existence of Permanent Establishment (`PE), tax residency certificate, purchase orders for third party vendors who do not have a PE in India were furnished. 2.4.11 The AO vide this office letter dated 09.03.2022 was also directed to verify the documents and give a remand report to us. The remand report has not yet been received. Therefore, AO is directed to verify the contention of the assessee that these expenses are reimbursement on cost-to-cost basis and if found in order delete the addition made.' 19. As per the directions of the DRP, the AO analyzed the various aspects of the payments based on the details furnished by the assessee and gave partial relief to the assessee as under - S. No. Particulars Amounts proposed to be disallowed in the Draft order Amounts in the nature of Reimbursement on Cost to Cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under consideration are covered by the decision of Hon'ble Tribunal in assessee's own case for the current year also the issue can be remanded back to the DRP for further verification. 22. We heard ld D.R and perused the record. Out of the total disallowance as listed in the table above assignee related reimbursements for an amount of Rs.88,99,98,596 is towards reimbursements of salary expenses to IBM overseas companies towards its seconded employees. 23. The assessee had submitted that these are reimbursement of salary cost to the AEs and these salary cost has already been subject to withholding of tax u/s.192 while making the payments to employees. The AO had treated the same as fees for technical services and the said treatment is confirmed by the DRP. We notice that the co-ordinate bench in AY 2013-14, has remitted the entire issue of reimbursements to AEs and third parties to the file of Ld DRP and respectfully following the same we restore the issue for the year under consideration with similar directions. With regard to the reimbursement of secondment cost to the AEs, the coordinate bench of the Tribunal in the case of M/s. Goldman Sachs Services Pvt. Ltd vs DCIT (IT(IT)A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. (i) Dy. CIT v. Accenture Services (P.) Ltd. [IT Appeal No. 4540 (Mum.) of 2008, dated 23-3-2010] (ii) Novo Nordisk India (P.) Ltd. v. Dy.CIT [2014] 42 taxmann.com 168 / 63 SOT 242 (Bang. - Trib.) (iii) CIT v. Biocon Ltd. [2020] 121 taxmann.com 351/[2021] 276 Taxman 1/430 ITR 151 (Kar.) (iv) Apollo Tyres Ltd. v. CIT [2002] 122 Taxman 562/255 ITR 273 (SC) 28. On the contrary, the Ld.DR relied on orders passed by authorities below. 29. We heard both the parties and perused the materials on record. We notice that the coordinate bench in assessee's own case for AY 2015-16 (IT(TP)A No.289/Bang/2021 dated 14.02.2022) has considered the same issue and held that - "10. The issue of deductibility of ESOP expense issue is covered in favour of the assessee by following judicial precedents of various High court/Tribunals, including Special Bench: * Delhi High Court - Pr. CIT v. Lemon Tree Hotels (P.) Ltd. [2019] 104 taxmann.com 26 SLP granted by SC in Pr. CIT v. Lemon Tree Hotels (P.) Ltd. [2019] 104 taxmann.com 27/262 Taxman 311 (SC) "1. .............................. since the ITAT followed the previous judgments in CIT v. PVP Ventures Ltd. [2012] 23 taxma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenditure incurred being on lines of the SEBI Guidelines, there could be no interference in the relief granted by the assessing authority for the expenditure arising on account of the employees' stock option plan. This expenditure incurred as per the SEBI Guidelines and granted by the Officer could not be considered as erroneous one calling for the exercise of jurisdiction under section 263 of the Act." * Bangalore Special Bench - Biocon Ltd. v. Dy. CIT (LTU) [2013] 35 taxmann.com 335/[2014] 144 ITD 21 "9.2.6 It is quite basic that the object of issuing shares can never be lost sight of. Having seen the rationale and modus operandi of the ESOP, it becomes out-and-out clear that when a company undertakes to issue shares to its employees at a discounted premium on a future date, the primary object of this exercise is not to raise share capital but to earn profit by securing the consistent and concentrated efforts of its dedicated employees during the vesting period. Such discount is construed, both by the employees and company, as nothing but a part of package of remuneration. In other words, such discounted premium on shares is a substitute to giving direct incentive i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons is to be granted, we hold that the liability to pay the discounted premium is incurred during the vesting period and the amount of such deduction is to be found out as per the terms of the ESOP scheme by considering the period and percentage of vesting during such period. We, therefore, agree with the conclusion drawn by the tribunal in S.S.I. Ltd.'s case (supra) allowing deduction of the discounted premium during the years of vesting on a straight line basis, which coincides with our above reasoning. 12.2 It would be imperative to highlight certain points having bearing on the issue which have come to our notice during the course of hearing. The AO is directed to look, inter alia, into these aspects in quantifying the amount of eligible deduction. a. The assessee company was a closely held company in the previous year relevant to the assessment year 2003-2004 and as such there was no question of the listing of its shares and having some market price at the time of grant of options. Ordinarily, the amount of discount on premium which is written off over the vesting period represents the market price of the shares listed on the stock exchange on the date of grant of optio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecial Bench pointed out that the liability for discounts which arose or were incurred during the vesting period required adjustment due to the fact that the actual discount could only be determined at market price when the employees exercise their options. The assessee should make a suitable downward or upward adjustment at that time." 11. Before coordinate bench of this Tribunal in case of Novo Nordisk India (P.) Ltd. (supra) similar issue arose on identical facts like that of assessee. This Tribunal relied on (i) Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 1 Taxman 485/118 ITR 261 (SC) and (ii) Mysore Kirloskar Ltd. v. CIT [1987] 30 Taxman 467/166 ITR 836 (Kar.) The Tribunal held that the expenditure in question was wholly and exclusively used for the purpose of the business of the assessee and motivated its workforce and allowed the deduction u/s 37(1) of the Act. Respectfully following the above view, we direct to grant deduction to assessee on ESPO expenses in accordance with law, based on the principles laid down in the decision referred hereinabove. Accordingly this ground raised by assessee stands allowed." 30. Respectfully following the various judicia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oftware export in convertible foreign exchange as per the directions of the DRP and has recorded the finding that out of the total export turnover of USD 3686.34 million an amount of USD 3672.82 millions was realized by the assessee during the year under consideration. Similar to AY 2016- 17, the AO did not give any relief u/s.10AA based on these receipts in the final order of assessment. Following the decision rendered by us in the preceding paragraph in AY 2016-17, we allow deduction u/s.10AA to assessee relatable to sale proceeds from export of software development services with similar directions to the AO. This ground is allowed in favour of the assessee. 37. Ground no.4 relates to disallowance of payments to AEs and third parties. Following the decision rendered by us in the preceding paragraph in AY 2016-17, we restore this issue to the file of DRP with similar directions. 38. Ground 5 pertains to disallowance of ESOP expenses. Following the decision rendered by us in the preceding paragraph in AY 2016-17, we deleted the disallowance made towards ESOP expenses and allow the issue in favour of the assessee. Transfer Pricing adjustment 39. The assessee is contending the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation and segregation, it would lead to an unusual and incongruous results as AMP is the cost or expense and is not diverse. It is factored in the net profit of the interlinked transaction. This would be also in consonance with rule 10B(1)(e), which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm's length price. Then to make a comparison of a horizontal item without segregation would be impermissible. Under sections 92B to 92F, the pre-requisite for commencing the TP exercise is to show the existence of an international transaction. The next step is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be provided to one or more of such enterprises. Clauses (b) and (c) above cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of assessee is "any other transaction having a bearing" on its "profits, incomes or losses", for a 'transaction' there has to be two parties. Therefore for the purposes of the 'means' part of clause (b) and the 'includes' part of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or' 'understanding' between assessee and its AE, whereby assessee is obliged to spend excessively on AMP in order to promote the brand of AE in India. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i) (a) to (e) to section 92B are described as an 'International transaction'. This might be only an illustrative list, but significantly' it does not list AMP spending as one such transaction. The Courts held that the existence of an international transaction will have to be established de hors the BLT, the - burden is on the Revenue to first s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scrutiny under CASS and the notice u/s.143(2) was duly served on the assessee. Since the assessee company has international transactions, a reference was made to the Transfer Pricing Officer (TPO) for computation of Arm's Length Price of the transactions the assessee had with the Associated Enterprise (AE). The TPO made an adjustment towards Advertisement and Marketing (AMP) expenses for an amount of Rs.99,26,36,695. The AO after incorporating the TP adjustment made the following additions / disallowances. Sl.No. Particulars Amount INR 1 Denial of relief u/s.10AA 557,74,72,045 2 Disallowance of payments made to AE and third parties without TDS 14,74,81,447 3 Disallowance of ESBP expenses 69,26,11,610 47. The assessee filed its objections before the DRP stating that the amount of relief u/s.10AA denied by the AO in the draft assessment order is wrong and the correct amount of 10AA deduction claimed by the assessee is Rs.650,13,12,892. The DRP gave partial relief to the assessee in TP adjustment and remitted the others issues back to AO for verification of details pertaining to other additions / disallowances. The AO passed the final assessment order revising the additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ributed and paid - INR DDT paid at 20.36% - INR February 9, 2018 1566,44,27,844 318,92,77,509 March 26, 2018 1566,44,27,844 318,92,77,509 Total 3132,88,55,688 637,85,55,018 53. It is the claim of the Assessee that the Assessee beings a subsidiary of IBM WTC, US and since IBM WTC is a tax resident of the US that dividend received by IBM WTC is subject to Article 10 of Double Taxation Avoidance Agreement ("DTAA") between India and US. It is the plea of the Assessee that having regard to the provisions of Article 10 of DTAA between India and US read with section 90 of the Act, dividends declared by the Assessee is subject to dividend tax rate of 15% as per Article 10 of DTAA, as opposed to effective tax rate of 20.36% discharged by the Assessee. Therefore the Assessee has prayed for appropriate relief in the ground raised before the Tribunal. 54. We heard the heard the rival submissions and perused the material on record. The ld AR in support of the above line of reasoning, relied on a decision of the coordinate bench in the case of Giesecke & Devrient India Pvt Ltd Vs ACIT [(2020) 120 taxmann.com 338 (Del). We however notice that the correctness of the aforesaid decision ..... X X X X Extracts X X X X X X X X Extracts X X X X
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