TaxTMI 
TaxTMI 
2023 (5) TMI 458
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....g, leasing and financing of computer hardware, 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 Pric....
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.... this ground. Accordingly, the ground no.2 is dismissed as not pressed. Denial of relief u/s.10AA of the Act - Ground No.3 7. Ground No.3 relates to the rejection of claim made 10AA of the Act. The 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,....
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....5. Considering that, the facts are being similar to the previous year, we are of the considered opinion that the view taken by the DRP for the assessment year 2014-15 holds good in rejecting the claim of the assessee and upholding the action of the AO in 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 ....
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....convertible foreign exchange in the form of EEFC account extracts. Similarly, the assessee has given common inter-company accounting system invoices mapped to SOFTEX forms, letter from RBI reinstating the approval for bank account outside India etc., in order substantiate 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 ....
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....ons of business under the umbrella of which specific an individual Statement of Work (SOW) are formed. These SOW, is in fact, enumerate the specific scope and nature of the particular task or project that has to be rendered by a particular unit under the overall ambit of the MSA. Clarification has been sought whether more than one SOW 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, expor....
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....regard. Further, we agree with Ld. Counsel that, for purpose of eligibility of claim under section 10AA of the Act, this objection does not have any relevance. Therefore, respectfully following the same, this objection raised by authorities below is rejected at the threshold. Non submission of accounting invoices to STPI/SEZ authorities / Non approval by SEZ authorities C.8.3 In the present 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....
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....on under section 10A from assessment year 2000-01. Ld. Counsel placed reliance upon decision of Hon'ble Delhi High Court in case of Tata communication Internet Services Ltd. (supra), wherein, Hon'ble Court upheld the view taken by this Tribunal that, conditions mentioned in section 80IA(3) of the Act, which is parimateria to section 10AA (4) of the Act, cannot be considered for every year of the claim of deduction under section 80 IA of the Act, but can be considered 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 ....
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....f assessee as directed hereinabove, r.w., our observations in para D.9.4 hereinabove 14. We also notice that the AO has selectively considered the issues restored by the DRP. The DRP vide para 2.3.7 of the order extracted in the earlier part of the order, has directed the AO to verify the details with regard to (i) Receipt of software income in convertible foreign exchange (ii) Common inter-company accounting system invoices mapped SOFTEX forms. (iii)Letter from RBI reinstating the approval for 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 reject....
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....9,03,856 7 Others (1,322) 8 Grand Total 4,24,25,60,246 18. On further objections raised the DRP held that - " '2.4.10 In this regard, it is stated that the assessee had submitted the following documents in support of his claim before the AO, which were not taken into consideration by the AO. 1. sample copies of invoices along with relevant form/ certificate (reimbursements and others) for amounts on which tax has not been deducted at source, during the course of the assessment proceeding vide submission dated July 14, 2021. 2. Invoice-wise summary of the sample 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 dat....
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....cted to verify nature of payment in the light of invoices filed by assessee. DRP is also directed to analyse payment made to non-residents on which tax has not been deducted at source in light of Explanation 2 to section 195. DRP shall grant proper opportunity of being heard to assessee." 21. The ld AR also submitted that the DRP further remanded the matter to the AO and upon verification of the submissions of the assessee with regard to these payments, the AO held that substantial payments (immigration, travel Other reimbursements etc.) made by the assessee are in the nature of reimbursement of expenses (Page 16 of the remand report, page 622 of paper book 2). The ld AR therefore prayed that since the payments in the year 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....
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....Government must also respect the same. The revenue authorities however disallowed the amount under the ESBP and also disallowed as a part of disallowance of payments to AEs thereby leading to a double disallowance of the same expense. 26. The ld AR further submitted that the copies of invoices raised by IBM US evidencing cross charges made by IBM US to IBM India towards ESBP expenses have already been submitted before the lower authorities (Page 1177 to 1247 of paper book 4). 27. The ld AR placed reliance is placed on various decisions in favour of the assessee in this regard. The ld AR also submitted that the coordinate bench in assessee's own case for AY 2015-16 has considered the allowability of ESBP expenses and held in favour of 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 ....
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....ares was done by the assessee in strict compliance with SEBI regulations, which mandate that the difference between the market prices and the price at which the option is exercised by the employees is to be debited to the profit and loss . . . the Tribunal in its order stated that it was a benefit conferred on the employee. So far as the company is concerned, once the option was given and exercised by the employee, the liability in this behalf got ascertained. This was recognised by the SEBI and the entire employees stock option plan was governed by the guidelines issued by the SEBI. On the facts thus found, the Tribunal held that it was not a case of contingent liability depending on the various factors on which the assessee had no control. The expenditure in this behalf was an ascertained liability, thus the 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 jurisdict....
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....is not only paying of expenditure but also incurring of the expenditure which entails deduction u/s 37(1) subject to the fulfilment of other conditions by undertaking to issue shares at discounted premium, the company does not pay anything to its employees but incurs obligation of issuing shares at a discounted price on a future date in lieu of their services, which is nothing but an expenditure u/s 37(1) of the Act 9.3.6 if some of the options remain unvested or are not exercised, the discount hitherto claimed as deduction is required to be reversed and offered for taxation in such later year. We, therefore, hold that the discount in relation to options vesting during the year cannot be held as a contingent liability. 10.8 Reverting to the questions of 'when' and 'how much' of deduction for discount on options 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.&#....
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....ly over the vesting period of four years." To summarize, Special Bench held that discount on the issue of ESOPs cannot be inter-alia treated as capital expenditure and held that being part of package of remuneration to employees, the obligation incurred for issuing shares to employees at a discounted price at a future date in lieu of their services, is an allowable deduction under section 37(1) of the Act. The Hon'ble Tribunal further held that incurring liabilities towards the discounted premium, which is compensation to employees, is directly linked with the span of services put in by each employee and liability to issue stock options at discount is incurred during the vesting period and the amount of deduction is to be calculated as per the terms of the ESOP scheme, hence the discount was deductible over the vesting period. Further the Special 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." ....
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....essee filed its objections before the DRP who gave partial relief to the assessee in TP adjustment and remitting issues back to AO for verification of details pertaining to other additions / disallowances. The AO passed the final assessment order revising the additions / disallowances as per below table and this appeal is against the final order of assessment passed by the AO pursuant to the DRP directions. 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 85,22,98,240 3 Disallowance of ESBP expenses 52,94,10,972 4 TP adjustment 33,72,33,087 35. Ground No.1 is general in nature. The Ground no.2 is not pressed by Ld A.R. 36. Ground no.3 relates to the disallowance of deduction claimed u/s 10A and 10AA of the Act. For the year under consideration also the AO has verified the receipt of sale proceeds of software 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 ye....
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....he absence of any agreement with the AE, there cannot be any adjustment towards AMP expenses. The Ld.AR relied on following decisions submitted that incurring of AMP expenses does not constitute an international transaction : i. Acer India Private Limited in IT (TP) a number 27/B/2017 ii. Essilor India (P.) Ltd. v. Dy. CIT [2016] 68 taxmann.com 311 (Bang. - Trib.) iii. DCIT v. Nike India (P.) Ltd. [IT (TP) Appeal No. 232 (Bang.) of 2014] 42. The ld DR relied on the orders of the lower authorities. 43. We heard both the parties. We notice that the coordinate bench in assessee's own case for AY 2015-16, has considered a similar issue and held that - "15. We refer to para 101 of the decision of the Hon'ble Delhi High Court in case of Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT [2015] 55 taxmann.com 240/231 Taxman 113/374 ITR 118 wherein the Hon'ble Court held that, once the TPO accepts and adopts TNM Method and then chooses 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 expens....
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...., be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to' the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise." 16. Thus, under section 92B(1)an 'international transaction' means- (a) a transaction between two or more AEs, either or both of whom are non-resident (b) the transaction is in the nature of purchase, sale or lease of tangible or intangible property or provision of service or lending or borrowing money or any other transaction having a bearing on the profits, incomes or losses of such enterprises, and (c) shall include a mutual agreement or arrangement between two or more AEs for allocation or apportionment or contribution to the any cost or expenses incurred or to be incurred in connection- with the - benefit, service or facility provided or to 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 o....
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....t furnished any documentation with regard to the various pleas such as AMP expenses pertain to respective segments etc. Therefore respectfully following the decision of coordinate bench on assessee's own case for AY 2015-16 we remand this issue to the AO/TPO to verify the aspect based on the documents/evidences submitted by the assessee with similar direction that in the event it is found that the expenditure is factored in net cost for computing margin, no separate adjustment needs to be made. Accordingly, this ground of appeal stands allowed for statistical purposes. 45. Ground no. 11 is in respect of TDS credit not granted to assessee. We direct the AO to grant the credit for TDS deducted on verification in accordance with law. Grounds Nos. 12 to 15 are consequential in nature and do not require separate adjudication. IT(TP)A No.870/Bang/2022 46. We shall now take up the appeal filed by the assessee for AY 2018-19. The assessee filed the return of income for AY 2018-19 on 29.11.2018 declaring an income of Rs.3931,81,24,560. The case was selected for scrutiny under CASS and the notice u/s.143(2) was duly served on the assessee. Since the assessee company has internationa....
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.... the AO. This ground is allowed in favour of the assessee. 50. 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. 51. 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. Rejection of claim for refund of excess DDT paid - Ground 6 52. Ground 6 with regard to rejection of claim for refund of excess Dividend Distribution Tax (DDT) paid. The ld AR submitted that the Assessee is a subsidiary of IBM WTC which is a tax resident of the United States and 99.99% of the equity shares of assessee are held by IBM WTC. During Assessment Year 2018-19, the assessee declared dividend to IBM WTC and had paid the DDT at the rate of 20.36% as per the provisions of section 115-O of the Act as per details given below - Date of declaration of interim dividend Amount of dividend declared, distributed and paid - INR DDT paid at 20.36% - INR ....