2023 (4) TMI 889 - AT - Income Tax

ITAT decision favors Assessee on non-compete fee, ESOP, Section 80HHE, depreciation. Partial win for Revenue on transfer pricing.

DCIT-2 (3), Mumbai Versus M/s Zensar Technologies Ltd.

The ITAT upheld most of the CIT(A)'s decisions, granting relief to the Assessee on various issues including non-compete fee amortization, ESOP expenses, ... Amortisation of Non-compete Fee - payments made to one Asia Logistics for non-competing for one year for procuring business in China - AO held that the non compete fee cannot be fully allowed as a deduction and needs to be amortised over the period of non competing - HELD THAT:- In assessee’s case, the agreement of non-competence is entered into for a period of one year and two years and the Assessee has incurred the liability towards the same in the year under consideration. Hence, respectfully following the decision of Taparia Tools (2015 (3) TMI 853 - SUPREME COURT]), we uphold the decision of the Ld.CIT(A) in deleting the disallowance of non-competence fees. This ground of the revenue is dismissed accordingly. Disallowance of Employee Stock Option Expenses (ESOP) - AO made addition reason that the no option has been exercised during the year and that the Assessee did not provide any plausible reason for claiming the expenses as a deduction - HELD THAT:- As relying on New Delhi Television Ltd case [2016 (7) TMI 1486 - DELHI HIGH COURT] we hold that the ESOP expenses be allowed as a deduction and therefore see no reason to interfere with the decision of the Ld.CIT(A). This ground is dismissed accordingly. Deduction u/s 80HHE after setting off earlier years brought forward business losses - assessee's contention for allowing deduction u/s 80HHE against income from Other Sources is not found tenable in view of the overriding effect of the provisions of section 80AB - HELD THAT:- We notice that sub-section (3) of section 80HHE which deals with the manner of computation of eligible deduction states that for the purpose of deduction “Profits derived from the business” shall be considered and that sub-section (1) of section 80A clearly states that in computing the total income of an assessee, there shall be allowed from his “gross total income”, the deductions specified in sections 80C to 80U. We are, therefore, of the considered view that the ratio laid down by the Hon’ble Supreme Court in Reliance Energy [2021 (4) TMI 1237 - SUPREME COURT] is clearly applicable to Assessee’s case also and accordingly the assessee has correctly claimed the deduction under section 80HHE from gross total income. Further, we notice that the co-ordinate bench in Assessee’s own case has allowed the issue in favour of the Assessee considering the decision of the Apex Court. Uphold the decision of the CIT(A) to allow the deduction under section 80HHE and this ground of the Revenue is dismissed. Depreciation on Software Expenses - Depreciation allocated on the basis of respective turnover of STPI and Non-STPI units - DR submitted that the depreciation claim for STPI & non-STPI should be segregated since the depreciation claimed in respect of STPI units was adjustable against the income exempt under section 10A and not against the profits of other units - HELD THAT:- We accordingly, remand the issue back to Assessing Officer with a direction to consider the above working and re-compute the exemption under section 10A considering the depreciation pertaining to STPI unit and allow the balance amount of Rs.2,57,910/- as a deduction while computing taxable income of the Assessee. This ground of the Revenue is allowed for statistical purposes. Depreciation claim for the purpose of Section 10A exemption - HELD THAT:- From the perusal of the above workings as submitted by the Assessee before the lower authorities, it is clear that the adjustment of difference in depreciation to the profits eligible for exemption under section 10A will not result in any addition to total income. This is so because any increase or decrease to the profit due to the depreciation adjustment, i.e. adding back book depreciation & deduction of depreciation as per section 32 will be exempt under section 10A since there is no dispute that the Assessee is entitled to claim exemption under section 10A. Accordingly when the adjusted profit is also eligible for exemption under section 10A there is no question of making any addition towards the adjustment made to depreciation. We accordingly uphold the view taken by the CIT(A) in deleting the addition made in this regard. This ground of the Revenue is dismissed. TP Adjustment - secondment of employees by Assessee to its AE - HELD THAT:- CIT(A) has recomputed the TP adjustment taking into account the Indian salary and after excluding 5 employees, who have left within 6 months or who have rejoined Assessee. Whether an adjustment is required, we are of the considered view that an adjustment is warranted for the benefit derived by the AE due to deployment of personnel for which the Assessee is required to be compensated. However, the benchmarking done by the TPO by applying the same rate of thirty party placement agency is not correct, since there are additional services/benefits provided by third-party agencies while providing Recruitment Services whereas in Assessee’s case, it is a pure deployment of personnel with regard to software services. Accordingly since there is need for an adjustment for the benefit derived we hold that the TP adjustment is to be revised to Rs.4,00,000/-. This ground of the Revenue is partly allowed. Issues Involved:1. Amortisation of Non-compete Fee2. ESOP Expenses3. Deduction under Section 80HHE4. Depreciation on Software Expenses5. Depreciation Claim for Section 10A Exemption6. Transfer Pricing AdjustmentSummary:1. Amortisation of Non-compete Fee:The Assessing Officer disallowed a portion of the non-compete fee, arguing it should be amortised over the period of benefit. The CIT(A) deleted this disallowance, relying on the Assessee's own case and the Supreme Court's decision in Empire Jute Co. Ltd. The ITAT upheld CIT(A)'s decision, referencing the Supreme Court's ruling in Taparia Tools Ltd vs JCIT, which allows full deduction of such fees in the year incurred.2. ESOP Expenses:The Assessing Officer disallowed the ESOP expenses, citing no options were exercised during the year. The CIT(A) allowed the deduction, considering it an ascertained liability. The ITAT upheld this decision, citing precedents from various High Courts, including the Delhi High Court in PCIT vs New Delhi Television Ltd, affirming ESOP expenses as allowable deductions.3. Deduction under Section 80HHE:The Assessing Officer denied the deduction under Section 80HHE due to nil business income after setting off brought forward losses. The CIT(A) allowed the deduction, relying on the Assessee's own case and other precedents. The ITAT upheld this, referencing the Supreme Court's decision in CIT vs Reliance Energy Ltd, which allows deductions from gross total income, not just business income.4. Depreciation on Software Expenses:The CIT(A) directed the Assessing Officer to grant depreciation on software expenses treated as capital in nature. The ITAT remanded the issue back to the Assessing Officer to re-compute the exemption under Section 10A, considering the depreciation pertaining to STPI units and allowing the balance as a deduction.5. Depreciation Claim for Section 10A Exemption:The Assessing Officer treated the difference between book and tax depreciation as not eligible for Section 10A exemption. The CIT(A) deleted this addition, stating the adjustment would not result in any further addition to total income. The ITAT upheld this decision, agreeing that the adjusted profit is also eligible for exemption under Section 10A.6. Transfer Pricing Adjustment:The TPO made an adjustment based on the salary costs of seconded employees, applying a placement agency rate. The CIT(A) reduced this adjustment, considering Indian salaries and excluding certain employees. The ITAT partially upheld the adjustment, revising it to Rs.4,00,000, acknowledging the need for compensation but rejecting the benchmarking with third-party placement agencies.Conclusion:The ITAT upheld most of the CIT(A)'s decisions, providing relief to the Assessee on multiple grounds while partially allowing the Revenue's appeal on the transfer pricing adjustment. The appeal was partly allowed.