Income Tax Appellate Tribunal - Bangalore
Goldman Sachs Services Private ... vs Deputy Commissioner Of Income-Tax, ... on 5 April, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
"A" BENCH : BANGALORE
BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND
SHRI S. JAYARAMAN, ACCOUNTANT MEMBER
IT(TP)A No. 66/Bang/2014
Assessment Year : 2009-10
M/s. Goldman Sachs Services Pvt.
Ltd.,
The Deputy Commissioner of
Crystal Downs, Embassy Golf
Income tax,
Links Business Park,
Circle - 11(3), Vs.
Off: Intermediate Ring Road,
Bangalore.
Bangalore - 560 071.
PAN: AACCG 2435N
APPELLANT RESPONDENT
CO No. 43/Bang/2016 in IT(TP)A No. 66/Bang/2014
Assessment Year : 2009-10
M/s. Goldman Sachs Services Pvt.
Ltd.,
The Deputy Commissioner
Crystal Downs, Embassy Golf
of Income Tax,
Links Business Park,
Circle 3(1)(2) [erstwhile Vs.
Off: Intermediate Ring Road,
Circle - 11(3)],
Bangalore - 560 071.
Bangalore.
PAN: AACCG 2435N
APPELLANT RESPONDENT
Appellant by : Shri Mukesh Butani, Advocate
Respondent by : Shri G. R. Reddy, CIT(DR)
Date of hearing : 08.02.2017
Date of Pronouncement : 05.04.2017
IT (TP)A No. 66/Bang/2014 & CO No. 43/Bang/2016
Page 2 of 22
ORDER
Per Vijay Pal Rao, Judicial Member
This appeal by the revenue and Cross Objection by the assessee are directed against the assessment order dated 30.12.2013 passed u/s. 143(3) r.w.s. 144C of the IT Act in pursuant to the directions of the DRP dated 18.11.2013 for the assessment year 2009-10. The revenue has raised the following grounds as under.
IT (TP)A No. 66/Bang/2014 & CO No. 43/Bang/2016 Page 3 of 22
2. Ground no. 1 is general in nature and does not require any specific adjudication.
3. Ground no. 2 is regarding working capital adjustment restricted by the TPO but allowed by the DRP. The TPO has restricted the working capital adjustment to 0.91% instead of actual working capital computed. The DRP directed the TPO to carry out the working capital adjustment as per the actual figures without putting any cap.
4. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. At the outset we note that an identical issue has been considered by this Tribunal in assessee's own case for the assessment year 2010-11 vide order dated 06.01.2017 in IT(TP) Nos. 267 & 222/Bang/2015 in para 10 as under:
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5. In view of the decision of the coordinate bench of the Tribunal in assessee's own case for the assessment year 2009-10 we do not find any reason to interfere with the directions of DRP of this issue. Consequently this ground of the revenue's appeal is dismissed.
6. Ground nos. 3 to 5 are regarding the alternative claim of assessee that the income enhanced due to disallowance u/s. 40(a)(ia) of the Act is eligible for deduction u/s. 10A. The AO has made a disallowance u/s. 40(a)(ia) in the draft assessment for want of deduction of tax source in respect of the expenses which are claimed to be reimbursement towards power and fuel expenses. The AO held that these expenses are incurred against the services rendered and therefore liable for TDS. Since the assessee did not IT (TP)A No. 66/Bang/2014 & CO No. 43/Bang/2016 Page 6 of 22 deduct the TDS therefore the AO disallowed this amount of Rs. 6,08,46,978/-.
7. Before the DRP the assessee contented that these expenses are not incurred towards any service rendered by M/s. Golflinks Software Park Pvt. Ltd. But these were only reimbursement of the expenses towards power and fuel. The DRP while adjudicating the objection on this issue directed the AO to verify whether any service has been rendered by M/s. Golflinks Software Park Pvt. Ltd. or the expenditure is purely in the nature of reimbursement on account of power and fuel. Since the assessee also raised an alternative plea that even in the case of disallowance u/s. 40(a)(ia) the enhanced income of the undertaking of the assessee is eligible for deduction u/s. 10A. The DRP has accepted this alternative plea of the assessee by holding that such enhanced profit of business undertaking would qualify for deduction u/s. 10A.
8. Before us, the ld. DR has submitted that the Ahmedabad bench of the Tribunal in case of DCIT Vs Rameshbhai C. Prajapati 29 taxmann.com 64 has held that the amount disallowed u/s. 40(a)(ia) cannot be taken into account to determine the profit of business for the purpose of computing deduction u/s. 80-IB. Thus, the ld. DR has submitted that the IT (TP)A No. 66/Bang/2014 & CO No. 43/Bang/2016 Page 7 of 22 disallowance made u/s. 40(a)(ia) is not eligible for deduction u/s. 10A of the IT Act.
9. On the other hand, the ld. AR of the assessee has submitted that the said decision of the Ahmedabad bench of the Tribunal relied upon by the revenue has been reversed by the Hon'ble Gujarat High Court in case of ITO Vs Keval Construction. Therefore this issue is covered by the decision of Hon'ble Gujarat High Court in case of ITO Vs Keval Construction 354 ITR 13 and submitted that the Hon'ble High Court has held that even if certain expenditure which were incurred by the assessee for the purpose of developing house project was not allowable by virtue of section 40(a)(ia) of the Act for want of TDS it cannot be denied that such disallowance would ultimately go to increase the assessee's profit from the business of developing house project and would qualify for deduction as provided under the law.
10.Having considered the rival submissions as well as relevant material on record, at the outset we note that this issue of disallowance made u/s. 40(a)(ia) eligible for deduction of tax holiday under law is covered by the decision of Hon'ble Gujarat High Court in case of ITO Vs Keval IT (TP)A No. 66/Bang/2014 & CO No. 43/Bang/2016 Page 8 of 22 Construction (supra) wherein the Hon'ble High Court has held in para 5 as under:
"5. Having heard counsel on both the question today in this appeal, we find no error in the Tribunal's ultimate conclusion. Even if a certain expenditure which was incurred by the assessee for the purpose of developing housing project was not allowable by virtue of section 40(a)(ia) of the Act, since the assessee had not deducted the tax at source as required under law, it cannot be denied that such disallowance would ultimately go to I increase the assessee's profit from the business of developing housing project. Whatever be the ultimate profit of assessee as computed even after making disallowance under section 40(a)(ia) of the Act, would qualify for deduction as provided under the law."
11.Following the decision of Hon'ble Gujarat High Court we upheld the directions of the DRP on this issue. Since the alternative claim of the assessee is allowed therefore we do not propose to go into the issue of nature of payment in question. The same becomes infructuous.
12.Ground nos. 6 & 7 regarding the issue of exclusion of communication expenses from the export turnover as well as total turnover while computing the deduction u/s. 10A.
13.We have heard the ld. DR as well as ld. AR and considered the relevant material on record. At the outset we note that this issue is covered by the IT (TP)A No. 66/Bang/2014 & CO No. 43/Bang/2016 Page 9 of 22 decision of jurisdiction High Court in case of CIT Vs Tata Elxsi Ltd (349 ITR 98). The DRP has directed the AO to exclude the communication expenses both from export turnover as well as total turnover while computing the deduction u/s. 10A by following the decision of Hon'ble jurisdictional High Court in case of Tata Elxsi Ltd(supra). Thus we do not find any error or illegality in the directions of the DRP qua this issue. Cross Objection No. 43/Bang/2016:
1. In the Cross objection the assessee has raised the following grounds.
IT (TP)A No. 66/Bang/2014 & CO No. 43/Bang/2016 Page 10 of 22 IT (TP)A No. 66/Bang/2014 & CO No. 43/Bang/2016 Page 11 of 22 IT (TP)A No. 66/Bang/2014 & CO No. 43/Bang/2016 Page 12 of 22
2. Ground no. 1 is general in nature and does not require any specific adjudication.
3. Ground nos. 2 to 4 regarding the rejection of TP study documents. At the time of hearing, the ld. AR of the assessee has stated that the assessee does not press these grounds and the same may be dismissed as not pressed. Accordingly, when the assessee has not pressed these grounds and also not advanced any arguments then these ground nos. 2 to 4 are dismissed being not pressed.
IT (TP)A No. 66/Bang/2014 & CO No. 43/Bang/2016 Page 13 of 22
4. Ground nos. 5 to 7 regarding comparability of the companies selected by the TPO. The only grievance of the assessee is regarding two companies namely Accentia Technologies Limited and eClerx Services Limited selected by the TPO. The ld. AR of the assessee has submitted that these two companies are functionally not comparable to the assessee and therefore has to be excluded from the set of comparables. He has submitted that the functional comparability of these two companies have been examined by the coordinate bench of this Tribunal in case of Unisys India Private Ltd. Vs. DCIT in IT(TP)A Nos. 67 and 70/Bang/2015 vide order dated 30.09.2015. He has also relied upon the decision of Hon'ble Delhi High Court in case of Rampgreen Solutions (P.) Ltd. Vs CIT 377 ITR 533. On the other hand, the ld. DR has relied upon the orders of the authorities below and submitted that the functional comparability has been examined by TPO as well as DRP and therefore these two companies are found as functionally comparable to the assessee.
5. Having considered the rival submissions as well as relevant material on record, at the outset we note that the functional comparability of these two companies have been examined by the coordinate bench of this Tribunal in case of Unisys India Private Ltd. Vs. DCIT (supra) in para 49 to 51 and 53 to 54 as under:
IT (TP)A No. 66/Bang/2014 & CO No. 43/Bang/2016 Page 14 of 22 IT (TP)A No. 66/Bang/2014 & CO No. 43/Bang/2016 Page 15 of 22 IT (TP)A No. 66/Bang/2014 & CO No. 43/Bang/2016 Page 16 of 22 IT (TP)A No. 66/Bang/2014 & CO No. 43/Bang/2016 Page 17 of 22
6. Thus it is clear that the Tribunal for the same assessment year 2009-10 after examining the functional profiles of these two companies as well as the assessee who was captive service provider of ITES found that these two companies are not good comparables of ITES segment of the assessee. The Hon'ble Delhi High Court in case of Rampgreen Solutions (P.) Ltd. Vs CIT (supra) while dealing with the issue of comparability of eClerx Services Ltd. has upheld the exclusion of eClerx Services Ltd. from the set of comparables. Accordingly, in view of the above facts and circumstances as well as the decision of the coordinate benches of this Tribunal we direct the AO / TPO to exclude these two companies namely Accentia Technologies Limited and eClerx Services Limited from the set of comparables.
7. Ground nos. 8 and 9 regarding the foreign exchange gain / loss was treated as non-operating in nature.
8. We have heard the ld. AR as well as the ld. DR and considered the relevant material on record. There is no quarrel on this aspect that if the foreign exchange gain / loss arising on account of fluctuation of foreign exchange rate in respect of export realization then the same would be part of operating profit or cost as case may be. However, for the purpose of computing the margins for the assessment year under consideration only IT (TP)A No. 66/Bang/2014 & CO No. 43/Bang/2016 Page 18 of 22 the gain or loss which pertains to the export made during the year under consideration has to be taken into account as operating revenue or cost. Accordingly, we direct the AO / TPO to compute the operating margins of the assessee as well as comparable companies by considering the gain or loss arising from forex fluctuation on account of the exports made during the year.
9. Ground no. 10 is regarding risk adjustment. We have heard the ld. AR as well as the DR and considered the relevant material on record. Though the assessee has claimed risk adjustment on the ground that assessee being a captive service provider operates at low risk level in comparison to comparable companies however, the assessee has not furnished the relevant details and computation of risk level of the assessee as well as the comparable companies. Therefore in the absence of the relevant details and working it is not possible to work out the adjustment on account of difference in risk level of assessee and comparable. Accordingly, this ground of the assessee's Cross Objection is dismissed.
10.Ground nos. 11 and 12 are regarding exclusion of telecommunication expenses from export turnover as well as total turnover while computing the deduction u/s. 10A. The issue in this ground is common as in the appeal of the revenue therefore, in view of our finding of this issue while IT (TP)A No. 66/Bang/2014 & CO No. 43/Bang/2016 Page 19 of 22 dealing with the revenue's appeal these two grounds of the assessee's cross objection stands dismissed.
11.Ground nos. 13 to 16 are regarding disallowance u/s. 40(a)(ia). The issue raised in these grounds of the cross objection of the assessee is common to the issue raised by the revenue in ground nos. 3 to 5. In view of the finding of this issue while dealing with the revenue's appeal ground nos. 13 to 16 of the cross objections of the assessee stands dismissed.
12.Ground nos. 17 to 21 are regarding disallowance u/s. 14A r.w. Rule 8D of IT Rules. We have heard the ld. AR as well as the ld. DR and considered the relevant material on record. The ld. AR of the assessee has submitted that an identical issue has been considered by the Tribunal in the assessee's own case for the assessment year 2010-11 vide order dated 06.01.2017. He has relied upon the decision of Hon'ble Delhi High Court in case of Cheminvest Ltd. Vs CIT (378 ITR 33) and submitted that the Hon'ble High Court has reversed the decision of the Tribunal and held that when no exempt is received or receivable in the year under consideration no disallowance is called for u/s. 14A. Thus, the ld. AR has submitted that when the assessee has not earned any exempt income then the provisions of section 14A will not apply.
IT (TP)A No. 66/Bang/2014 & CO No. 43/Bang/2016 Page 20 of 22
13.On the other hand, the ld. AR has submitted that the Hon'ble High Court in the case of Cheminvest Ltd. Vs CIT (supra) was dealing with the question of disallowance u/s. 14A on account of interest expenditure attributable to long term investment. Whereas in the case of the assessee the disallowance has been made by the AO on account of administrative expenses which is only 0.5% of the average investment as per rule 8D(2)(iii) of IT Rules. Thus he has submitted that the decision relied upon by ld. AR is not applicable.
14.Having considered the rival submissions as well as relevant material on record, we note that for the year under consideration, the assessee has made fresh investment in the shares and therefore the earlier order of this Tribunal in assessee's own case is not applicable for the year under consideration. As regards the decision of the Hon'ble Delhi High Court in case of Cheminvest Ltd. Vs CIT (supra) the issue involved in the said case was disallowance u/s. 14A on account of interest however, the Hon'ble High Court while deciding the issue has held in para 21 to 23 as under.
21. There is merit in the contention of Mr. Vohra that the decision of the Supreme Court in Rajendra Prasad Moody's case (supra) was rendered in the context of allowability of deduction under Section 57(iii) of the Act, where the expression used is 'for the purpose of making or earning such income'. Section 14A of the Act on the other hand contains IT (TP)A No. 66/Bang/2014 & CO No. 43/Bang/2016 Page 21 of 22 the expression 'in relation to income which does not form part of the total income.' The decision in Rajendra Prasad Moody's case (supra) cannot be used in the reverse to contend that even if no income has been received, the expenditure incurred can be disallowed under Section 14A of the Act.
22. In the impugned order, the ITAT has referred to the decision in Maxopp Investment Ltd's. case (supra) and remanded the matter to the AO for reconsideration of the issue afresh. The issue in Maxopp Investment Ltd's. case (supra) was whether the expenditure (including interest on borrowed funds) in respect of investment in shares of operating companies for acquiring and retaining a controlling interest therein was disallowable under Section 14A of the Act. In the said case admittedly there was dividend earned on such investment. In other words, it was not a case, as the present, where no exempt income was earned in the year in question. Consequently, the said decision was not relevant and did not apply in the context of the issue projected in the present case.
23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression 'does not form part of the total income' in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.
15.Accordingly, following the decisions of Hon'ble Delhi High Court in case of Cheminvest Ltd. Vs CIT (supra) we delete the disallowance made by the AO u/s. 14A.
IT (TP)A No. 66/Bang/2014 & CO No. 43/Bang/2016 Page 22 of 22
16.In the result, the appeal of the revenue is dismissed and Cross Objections of the assessee are partly allowed.
Pronounced in the open court on this 05th day of April, 2017 Sd/- Sd/-
(S. JAYARAMAN) (VIJAY PAL RAO)
Accountant Member Judicial Member
Bangalore,
Dated, the 05th April, 2017.
/ MS/
Copy to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT, Bangalore.
6. Guard file
By order
Assistant Registrar,
ITAT, Bangalore.