2018 (3) TMI 1881 - AT - Income Tax

Revenue appeal dismissed, CIT(A)'s decisions upheld. Assessee's cross appeal partly allowed, with directions to recompute disallowance under section 14A.

D.C.I.T. (OSD) -I, Versus Mastek Limited And Mastek Limited Versus A.C.I.T. (OSD) -1, Range – 4, Ahmedabad

D.C.I.T. (OSD) -I, Versus Mastek Limited And Mastek Limited Versus A.C.I.T. (OSD) -1, Range – 4, Ahmedabad - TMI Issues Involved:1. Upward adjustment related to the international transaction of software services.2. Upward adjustment related to the international transaction of Information Technology Enabled Services (ITES).3. Upward adjustment on fee for performance guarantee.4. Upward adjustment related to human resource management services.5. Disallowance under section 14A read with rule 8D(2)(iii) for administrative expenses related to exempt income.Detailed Analysis:1. Upward Adjustment Related to the International Transaction of Software Services:The Revenue's appeal challenged the CIT(A)'s deletion of an upward adjustment of Rs. 26,07,06,640/- related to the assessee's international transaction of software services distributed by its UK-based associated enterprise, Mastek UK (MUK). The CIT(A) deleted the adjustment, noting that MUK was characterized as a distributor assuming normal risk and not merely a marketing service provider. This characterization had been upheld by the ITAT in previous years (A.Y. 2006-07 and 2007-08). The tribunal affirmed the CIT(A)'s decision, citing judicial consistency and lack of any distinction in facts or law for the relevant assessment year.2. Upward Adjustment Related to the International Transaction of ITES:The Revenue's second substantive ground contested the CIT(A)'s deletion of an upward adjustment of Rs. 29,07,087/- related to the provision of ITES to Carretek LLC. The CIT(A) had recomputed the arm's length margin after excluding two comparables, Accentia Technologies Ltd. and Cross Domain Solutions Ltd., based on the tribunal's co-ordinate bench decision. The tribunal upheld the CIT(A)'s decision, noting that the exclusion of these entities was justified due to extraordinary events and high-end KPO services, respectively.3. Upward Adjustment on Fee for Performance Guarantee:The Revenue's third ground challenged the CIT(A)'s reduction of the upward adjustment on the fee for performance guarantee from 2% to 0.11%. The CIT(A) noted that the performance guarantee was provided to ensure quality and timely services, and the TPO's comparison with financial guarantees was not justified. The tribunal referenced the co-ordinate bench decision in M/s Suzlon Energy Ltd. vs. ACIT, which held that such guarantees do not amount to an international transaction under section 92B of the Act. The tribunal agreed with the CIT(A)'s detailed analysis and upheld the decision.4. Upward Adjustment Related to Human Resource Management Services:The Revenue's last substantive ground contested the CIT(A)'s deletion of an upward adjustment of Rs. 1,81,79,272/- related to human resource management services. The CIT(A) followed the tribunal's order in the assessee's case for A.Y. 2006-07, which held that HRM functions were an integral part of the software development services and not a separate international transaction. The tribunal affirmed the CIT(A)'s decision, noting that the facts for the relevant year were similar to those in earlier years.5. Disallowance Under Section 14A Read with Rule 8D(2)(iii):The assessee's cross appeal contested the disallowance of Rs. 57,56,632/- under section 14A read with rule 8D(2)(iii) for administrative expenses related to exempt income. The CIT(A) upheld the disallowance, noting that the assessee had not maintained proper accounts for such expenditure. The tribunal observed that the disallowance was based on a statutory computation formula applicable from A.Y. 2008-09 and confirmed the disallowance in principle. However, the tribunal directed the Assessing Officer to exclude the average investment made in growth-oriented debt funds and fixed maturity plan funds yielding only taxable income from the computation.Conclusion:- The Revenue's appeal was dismissed, and the CIT(A)'s decisions on all upward adjustments were upheld.- The assessee's cross appeal was partly allowed, with directions to recompute the disallowance under section 14A by excluding investments yielding taxable income.