Income Tax Appellate Tribunal - Delhi
Agilent Technologies (International) ... vs Department Of Income Tax on 15 April, 2002
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "A" NEW DELHI
BEFORE SHRI R.P. TOLANI AND SHRI B.K. HALDAR
ITA nos. 592 & 593 /Del/2009
Asstt. Yrs: 2003-04 & 2004-05
Asstt. Commissioner of Income-tax, Vs. M/s Agilent Technologies
Gurgaon. (International) Pvt. Ltd.,
Plot no. 90D, Udyog Vihar,
Sector-18, Gurgaon.
PAN/GIR No. AADCA4115C
( Appellant ) ( Respondent )
Appellant by : Ms. Geetmala Mohnani CIT (DR)
Respondent by : Shri Kanchan Kaushal CA
ORDER
PER R.P. TOLANI, J.M :
These are revenue's appeals against separate orders of CIT(A) relating to A.Y. 2003-04 & 2004-05. Common grounds raised for both the assessment years in question, excepting difference in quantum, are as under:
"1. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in allowing the exemption of Rs. 2,08,42,919/- ( for A.Y. 2003-04) and Rs. 7,30,54,508/- (for A.Y. 2004-05) u/s 10A of the Income Tax Act, 1961 disregarding the facts that the assessee company failed to satisfy its claim u/s 10A and it was conclusively proved that assessee company was not eligible for any deduction from its business income u/s 10A of the Income Tax Act, 1961 which had wrongly been claimed by it in the return of income.
2. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in deleting the addition of Rs. 1,15,60,649/- (for A.Y. 2003-04) and Rs. 75,50,532/- (for A.Y. 2004-05) made by the Assessing Officer on account of
2 ITA 592 & 593/Del/09 ACIT Vs. Agilent Technologies shared service cost expenses disregarding the facts that the assessee company had wrongly claimed it as a deduction in the profit & loss account as conclusively proved that no services were provided by M/s Agilent India (P) Ltd. to the assessee company.
2. Facts, in brief, are that the assessee company was incorporated on 10- 10-2001 and was registered as STPI unit at Noida under the Software Technology Parks Scheme on 8-4-2002. The assessee company provides IT enabled services ranging from Research & Development for products for Agilent's communications and life sciences solutions, ASIC design development and transaction processing a variety of corporate functions such as engineering support, finance and customer call centers in terms with Inter Company Service Agreement dated 15-4-2002 with Agilent Technologies Inc., USA.
2.1. The assessee filed its returns of income for the respective years claiming deduction u/s 10A which was disallowed by the AO on the grounds:
(1) The assessee was part of Agilent Technologies Europe BU group with ultimate holding company being Agilent Technologies Inc. USA along with other company i.e. Agilent Technologies India Pvt. Ltd.
Both the Indian companies had common directors on board i.e. Shri Ravi Malhotra and Shri Kewal Khanna.
(2) The telephonic and EPBAX equipment bills were in the name of M/s Agilent India Pvt. Ltd., Chandiwala New Delhi indicating that machinery was not exclusively used by assessee STP unit but was also used by Agilent India Pvt. Ltd.
3 ITA 592 & 593/Del/09 ACIT Vs. Agilent Technologies (3) The assets were purchased in September 2001 whereas the assessee chose to apply to STP authorities on 5-4-2002 and assets were put to use subsequently on 1-5-2002.
(4) The assessee company was incorporated on 10-10-2001 and the MOU was effective from 1-10-2001. The assessee company having been incorporated on 10-10-2001 i.e. ten days before MOU, rotation of assets purchased through a sister concern in the guise of a 'trust' by entering into a bogus MOU, was a tax evasion technique with motive to avoid payment of legit taxes.
2.2. Apropos ground no. 2, Brief facts are that the assessee company after incorporation entered into an 'Inter company Services Agreement' ('Shared service agreement') in April 2002 with Agilent India whereby its division named as General Infrastructure Organisation ('GIO') provided various administrative and logistic services to both Agilent India as well as the assessee company. Purpose of the said agreement is stated to derive the benefit of the existing facilities with Agilent India in form of qualified personnel, appropriate facilities, adequate resources and administrative requirement of business experience to discharge its responsibilities under the said Inter Company Service Agreement. The agreement, inter alia, provided the services to be rendered by Agilent India to appellant company and the basis of calculating remuneration for the same. As per the terms of the agreement, assessee company was required to compensate Agilent India for the cost of services rendered by it plus a mark-up of 10 per cent on the costs. AO disallowed these shared services expenses holding it to be a colourable device.
2.3. In first appeal CIT(A) allowed the assessee's claim u/s 10A by observing as under:
4 ITA 592 & 593/Del/09 ACIT Vs. Agilent Technologies "4.2. The AO was of the view that the machinery which has been acquired through Agilent India has been used by that Company before transfer to the assessee company. During the hearing of the appeal, assessee has filed various e-mails and other correspondence to support its claim that it is eligible for exemption u/s 10A of the Act on the ground that assets were purchased through Agilent India to expedite its business of setting up of STP unit at Noida. I have gone through the copies of internal correspondence through e-mail between 13.6.2001 and 16.8.2001 regarding setting up a new legal entry in India. The approval to set up this legal entry in principle was allowed on 16.8.2001. Therefore, it would be incorrect to reject the exemption on the technical grounds that the MOU has been entered into prior to incorporation of the company. The various objections raised by the AO ahs been dealt with in para 2.8.
above.
4.3. The consideration that has weighed heavily with the ld. AO to conclude that the assets have been used by Agilent India are the bills in respect of telephone and EPABX which are installed at Chandiwala i.e. at the premises of Agilent India. It has been explained by the ld. AR that the invoice referred to by the Ld. AO in the assessment order for upgradation of PABX at Chandiwala, New Delhi relates to the installation of interface which was required to establish the connectivity of the appellant company with Agilent US and Agilent Singapore for using voice services such as Telnet (i.e. Private Voice Net work of Agilent) and Voice Mail (in which caller can leave voice message incase the called person is not around at desk or already engaged in another call). For establishing the connectivity between two places, interfaces are required to be installed at both the places with the main equipment i.e. EPABX system. Apart from installation of EPABX system at Gurgaon site, interfaces were also required to be installed for effective connectivity. At the time of setting up of the appellant company in 2002, for using the voice services such as Telnet and Voice Mail, Agilent India infrastructure (i.e. Telnet and Voice Mail system) was used by Gurgaon office to reduce the cost. For Telnet and Voice Mail services, required hardware such as Interface cards etc. Were purchased to be installed with existing EPABX and Voice Mail 5 ITA 592 & 593/Del/09 ACIT Vs. Agilent Technologies System of Agilent India, in order to establish the connectivity and provide these services to the appellant company at Gurgaon. Therefore, the observations made by the Ld. AO that the plant or machinery (i.e. telephone and EPABX system referred above) handed over under the MOU to the appellant company were also used by Agilent India are not based on correct appreciation of facts.
4.4. The Ld. AO has not brought anything on record to support that the machinery which has been purchased through the agency of Agilent India was used by them before transferring to appellant company. In this connection the observations made by the Auditors of the appellant company as well as Agilent India cannot be ignored in the absence of evidence to the contrary. The Audited financial statements of Agilent India for the year ended March 31,2002 reflect the following note in respect of the above transaction (note no. 17 of notes to accounts);
"During the current year the company has entered into a "Memorandum of Understanding" (MOU) with Agilent Technologies INC, USA and Agilent Technologies - International Private Limited (ATIPL) for the purchase of assets of ATIPL on the basis of advice of Agilent Technologies INC, USA and the assets shall be held under Trust by Company till they are delivered to ATIPL.
Accordingly, an amount of Rs. 83,623,194 has been shown as "Assets held under trust" under the head loans and advances which represents assets purchased under MOU till March 31,2002".
The Audited financial statement of the appellant company for financial year ended March 31,2003 also reflected the following note (Note no. 4 of Notes to Accounts) "The additions to fixed assets include the following assets amounting to Rs. 93,399,866 transferred by Agilent Technologies India Private Limited (ATIPL) which were held under Trust by ATIPL. The said assets have been transferred by 6 ITA 592 & 593/Del/09 ACIT Vs. Agilent Technologies ATIPL on May 1,2002 at cost in pursuance of a Memorandum of Undertaking (MOU) dated October 1,2001 entered into between Agilent Technologies Inc., USA, ATIPL and the Company.
The consideration for the same has been discharged by the company.
A corresponding note is reflected in the Audited financial statement of Agilent India for the financial year ended March 31,2003 as under (Refer Note no. 15n of the Notes to Accounts of Schedule L of the Audited Accounts of agilent India) "During the current year, the Company has transferred assets amounting to Rs. 93.40 million to Agilent Technologies International Pvt. Ltd. (ATIPL) which were held under trust by Company. The said assets have been transferred by the Company on May 1,2002 at cost in pursuance of a Memorandum of Understanding (MOU) dated October 1,2001 entered into between Agilent Technologies Inc., USA, ATIPL and the Company."
Therefore, in view of above notes to accounts of both the legal entities, it is apparent that t he assets were not used by Agilent India prior to handing over the same to the appellant company. The additional evidence was forwarded to the assessing Officer and no adverse comments have been received. Keeping in view these facts, the AO is not justified in denying the exemption u/s 10A of the Act. Ground no. 2 of the appeal is accordingly allowed."
2.4. CIT(A), apropos second ground i.e. shared services expenses, allowed the relief by following observations:
"5.8. I have perused the facts and carefully considered the submissions. The services that have been offered by Agilent India to the appellant company are various administrative or logistics services in connection with the working of the 7 ITA 592 & 593/Del/09 ACIT Vs. Agilent Technologies appellant company and have nothing to do with the specialized activities undertaken by the appellant. The AO has objected that the agreement for such services is on a plane paper. In my view, it makes no difference whether the agreement is on a plane paper, a stamp paper or an oral one so long as both the parties agree to the terms of the agreement. In the present case, the agreement has been signed by the Authorized signatories of the both the companies and the recipient company i.e. Agilent India ahs already offered the income for taxation. It is also not the case of the revenue that the expense incurred are towards non business purposes or are in the nature of capital expenditure. There is no specific provision for disallowance of such expenses if the tax was not deducted at source. Keeping in view these facts, in my considered opinion, the AO has erred in disallowing the expenses. The AO is directed to delete the addition."
Aggrieved, Revenue is in appeal before us.
3. Learned DR relied on the order of AO on both the issues.
4. Learned counsel for the assessee, apropos ground no.1, at the out set contends that similar issue came up for consideration of AO for A.Y. 2005- 06 wherein vide its detailed order dated 31-12-2008 the AO has allowed these claims. While doing so the AO has taken note of the assessment orders for A.Y. 2003-04 and 2004-05 and the appeals filed by the assessee before CIT(A). After taking note of these facts on page 24 of its order the AO himself in para 4D at page 39 of his order has held as under:
4D. It is evident that the nature of business of the two sister concerns, Agilent India and Agilent International are different, since the former is involved in trading of analytical testing and measurement equipments while the latter, the assessee, is in the business of development of software and IT enabled services. It stands to reason that since the sister concern, Agilent India was already well-established, its services were taken for purchasing machinery on behalf of the assessee under the terms of the MOU for which the assessee company paid a mark-up on the cost for services received. Besides, even though the 8 ITA 592 & 593/Del/09 ACIT Vs. Agilent Technologies assessee company ahs paid for installing interface at Agilent India, it can clearly be seen that such was required for establishing the connectivity of the assessee company with Agilent US and Agilent Singapore for using voice services such as Telnet (i.e. Private Voice Network of Agilent ) and Voice Mail (in which caller can leave voice message in case the called person is not around at desk or already engaged in another call).
Moreover, it is important to bear in mind the observations of the Hon'ble Supreme Court as pointed out by the ld. CIT(a) in the Bajaj Tempo Ltd. vs. CIT [1992] 196 ITR 0188 (SC) and Textile Machinery Corporation Ltd. vs. CIT [1977] 107 ITR 195 (SC). The assessee company could not be said to have been formed by transfer of telephone and EPABX system since the same are not meant for being used in the manufacturing process employed by Agilent International since it is engaged in the business of development of computer software and IT enabled services. In light of the above, the assessee company cannot be said to have violated the provisions of section 10A and thus, no adverse view is being taken in this regard.
4.1. Thus, AO after duly considering orders for A.Y. 2003-04 and 2004-05 held that transfer of telephone and EPABX system will not disentitle the assessee for benefit u/s 10A as they were not used for manufacturing process or in the business of development of computer software and IT enabled services. Since the AO himself has realized the inconsistency in earlier order and allowed the claim of the assessee, accepting its plea, CIT(A)'s order was fully justified.
4.2. Ld. counsel, apropos ground no. 2, contends that:
(a) the amount was paid by way of a written agreement which was signed by the authorized signatories of both the entities. Board resolution was duly passed in the meeting of the Board of Directors of both the companies, copies whereof were filed.
9 ITA 592 & 593/Del/09 ACIT Vs. Agilent Technologies
(b) Decision regarding shared services by existing Agilent India to Agilent USA International was taken by Agilent management at the time of setting up Agilent International. In support assessee produced the relevant correspondence.
(c) Remuneration paid to Agilent India has been duly offered for taxation in its return of income.
(d) The shared services agreement was duly in the nature of general administrative which have no relation with the technical nature of business activities. The services were actually rendered by the assessee which is evident from the fact that it did not have employees performing these services. Assessee filed list of employees of Agilent India to support its claim that the assessee did not employ its work force for these services.
4.3. AO in its order for A.Y. 2005-06 has explained the shared service and has referred to the disallowance for A.Y. 2003-04 and 2004-05. In this year, however, shared services have been allowed by AO by following observations:
"The assessee company filed an appeal before the Commissioner of Income-tax (Appeals) ['CIT(A)'] for both the assessment years (i.e. 2003-04 and 2004-05) on the ground of allowance of shared service cost as a deductible expense under section 37(1).
5C. In this regard, the assessee company has got complete relief in respect of disallowance of shared service cost in the order passed by the CIT(A). While allowing the appeal of the company, the Ld. CIT(A) has held as under:
1. The services that have been offered by Agilent India to the company are various administrative or logistics services in connection with the working of the 10 ITA 592 & 593/Del/09 ACIT Vs. Agilent Technologies company and have nothing to do with the specialized activities undertaken by the company.
2. It makes no difference whether the agreement is on a plain paper, stamp paper or an oral one so long as both the parties agree to the terms of the agreement. In the present case, the agreement has been signed by the authorized signatories of both the companies and the recipient company (i.e. Agilent India) has already offered the income for taxation. It is also not the case of the revenue that the expenses incurred are towards non-
business purposes or are in the nature of capital expenditure.
5D. The assessee submitted that the assessee company does not have employees for doing work relating to administration of the company, for which it ahs taken the services of the sister concern. The list of employees of the assessee company and of the employees of Agilent International who rendered services for the assessee company were perused by the undersigned and have been placed on record. The work profile of the former is in specialized areas relating to software while the latter is in more general domain. The contract agreement and the Board resolutions relating to the contract agreement have been put on record. The recipient company has already offered the income from these services for taxation. The expenses incurred are related to the business of the assessee. Therefore, and in light of the observations of the ld. CIT(A), no adverse view is being taken in this regard.
4.4. Learned counsel further contends that AO's order has become final inasmuch as no action u/s 263 has been proposed and considerable period of more than two and half years has elapsed since AO's order.
5. We have heard rival contentions and gone through the entire material available on record. The facts have been detailed above. AO by detailed order dated 31-12-2008 for subsequent year i.e. A.Y. 2005-06 has considered all the aspects of both the issues and after referring to 11 ITA 592 & 593/Del/09 ACIT Vs. Agilent Technologies disallowances of both these amounts in A.Y. 2003-04 and 2004-05 held that both the items were to be allowed. While doing so he has conceded to CIT(A)'s order in both these years.
6.1. In our view, once the AO himself in subsequent year has held that assessee's claim u/s 10A and deduction of cost of shared services was proper, overruling other reasons adopted by him in earlier years, the situation becomes self explanatory. We see no reason to interfere with the order of CIT(A) allowing these claims in the assessment years under consideration. We hold that claims of deduction u/s 10A and the expenditure of shared services have been rightly allowed by CIT(A).We uphold the order of CIT(A) for both the assessment years in question.
6. In the result, revenue's appeals are dismissed. Order pronounced in open court on 28-7-2011.
Sd/- Sd/- (B.K. HALDAR ) ( R.P. TOLANI ) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 28th July, 2011. MP Copy to : 1. Assessee 2. AO 3. CIT 4. CIT(A) 5. DR