Income Tax Appellate Tribunal - Pune
Deputy Commissioner Of Income-Tax,, ... vs Igate Global Solutions Ltd.,, ... on 5 August, 2019
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "C", PUNE
BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND
SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER
आयकर अपील सं. / IT(TP)A No.286/BANG/2013
िनधा रण वष / Assessment Year : 2007-08
DCIT, Circle-11(4), M/s. iGate Global Solutions Ltd.,
Bangalore Vs. 158-162(P) & 165-170 (P)
EPIP Phase-II, Whitefield,
Bangalore - 66
PAN : AABCM4573E
(Appellant) (Respondent)
Assessee by Shri Padamchand Khincha
Revenue by Shri Sandip Garg, CIT
Date of hearing 02 -08-2019
Date of pronouncement 05-08-2019
आदेश / ORDER
PER R.S.SYAL, VP :
This appeal by the Revenue emanates from the order passed by the Commissioner of Income-tax (Appeals) on 31-12-2012 in relation to the assessment year 2007-08.
2. The first effective issue raised in this appeal is against the direction of the ld. CIT(A) to compute the arm's length price (ALP) of the rate of interest charged by the assessee on loan advanced to its Associated enterprise (AE) situated in Germany by adopting the 2 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
average EURIBOR rate of 4.42% as applicable to the assessment year 2007-08.
3. Briefly stated, the facts of the case are that the assessee, an Indian company, is a subsidiary of iGate Incorporated, USA. It acts as a single source broad range of information technology applications, solutions and services that include client/server position and development. The assessee filed its return declaring loss of Rs.1.48 crore and odd. Certain international transactions were reported in Form No.3CEB. The Assessing Officer (AO) referred the determination of the ALP of the international transactions to the Transfer Pricing Officer (TPO). The instant dispute is only concerned with the international transaction of `Interest income'. The assessee advanced loans to its two AEs, namely, Mascot Systems GmbH, Germany, on which interest of Rs.5,21,928/- was charged @ 1.50%; and M/s. Symphoni Interactive, LLC, USA, on which interest of Rs.24,54,741/- was charged @ 6%. The assessee declared such international transactions at ALP. The TPO observed that the arm's length interest rate would be the one which would be earned by the assessee by advancing loan to an unrelated party in India. Applying the Comparable Uncontrolled Price (CUP) method as the most 3 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
appropriate method, the TPO determined the arm's length rate interest at 14%, being, the interest that is earned on BBB bonds in India. As against the actual interest received from two AEs at Rs.29,76,669/-, the TPO determined arm's length interest income at Rs.1,10,33,725/- and accordingly recommended transfer pricing adjustment of Rs.80,57,056/-. The AO, in his order dated 21-02- 2011 passed u/s.143(3) r.w.s. 144C of the Income-tax Act, 1961 (hereinafter called 'the Act'), made the transfer pricing addition of the equal amount. The assessee carried the matter before the ld. CIT(A), who held that the domestic Prime Lending Rate would have no application in this regard and further that an international rate like LIBOR or EURIBOR would come into play as the loan in question was denominated in Euros to a subsidiary located in Germany. He, therefore, held that EURIBOR was the correct rate to be adopted for evaluation of arm's length rate of interest and noted in para 104 of his order that the average LIBOR rate as per the decision rendered by the Tribunal in another case was 4.42% for the A.Y. 2007-08. Consequently, he directed the AO to compute the ALP by adopting the average EUBIBOR rate of 4.42%, against which the Revenue has come up in appeal before the Tribunal. 4
IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
4. We have heard both the sides and gone through the relevant material on record. It is observed from the order passed by the TPO that the assessee advanced loans to its two AEs, one in the USA and the other in Germany. In so far as loan to Symphoni Interactive LLC, an Associated Enterprise in the USA is concerned, the assessee charged interest @ 6%. The ld. CIT(A) has recorded that the assessee also paid interest to another AE in the USA, namely, iGate Corporation, USA at 5.9% on its External Commercial Borrowings (ECB). He further recorded in para 57 of the impugned order that the TPO accepted this transaction and made no transfer pricing adjustment on this score, thereby, he also impliedly accepting this transaction at ALP. The view point of the ld. CIT(A) on this point is not fully correct. We have noted above that the TPO worked out the transfer pricing adjustment by considering the loans advanced by the assessee to both of its AEs, including Symphoni Interactive LLC, USA. Be that as it may, it is seen that the ld. CIT(A) also impliedly accepted the interest earned by the assessee from Symphoni Interactive LLC, USA, at 6% as at ALP, against which the Department has no grudge as the assail is only to the application of EURIBOR of 4.42%, which relates to the loan advanced by the assessee to Mascot GmbH, Germany. As such, we 5 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
are confining ourselves only to international transaction of receipt of interest from Mascot GmbH, Germany. As against the assessee charging interest at the rate of 1.50% from Mascot GmbH, Germany, the TPO determined the arm's length rate of interest at 14%, which the ld. CIT(A) reduced to 4.42% by treating it as the average EURIBOR rate for the year under consideration.
5. There are two facets of the dispute raised by the Revenue on this issue. The first is that the rate of interest should be considered with reference to the prime lending rate prevalent in India and the second is that the reduction in rate to 4.42% by the ld. CIT(A) is not justified.
6. As against the TPO's point of view that since the assessee in India advanced loan to its AE in Germany, which if not given, would have fetched interest @14% in India, the ld. CIT(A) has held that interest rate prevalent in the country in which the loan is received, should be considered for determining the ALP of transaction of interest received. We find that there is almost judicial consensus ad idem at the higher appellate forums on the question of which country, that is the borrower or the lender, should be considered for determining the arm's length rate of interest on loans 6 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
advanced to the AEs. The Hon'ble Bombay High Court in CIT Vs. Tata Autocomp Systems Ltd. (2015) 374 ITR 516 (Bom.) has held that the ALP in case of loan advanced to AEs should be determined on the basis of rate of interest charged in the country where loan is received. The Hon'ble Delhi High Court in CIT Vs. Cotton Naturals (I) Pvt. Ltd. (2015) 276 CTR 445 (Delhi) has also held that the currency in which the loan is to be repaid normally determines the rate of return on the money lent, i.e. rate of interest. The Hon'ble Bombay High Court in CIT Vs. The Great Eastern Shipping Company Ltd. (2018) 301 CTR 642 (Bom.) has reiterated that the arm's length rate of interest is to be considered with reference to the country in which the loan is received and not from where it is paid. In view of these precedents, it is palpable that the view point of the AO in considering the rate of interest prevalent in India, being, the lender country, as determinative of the ALP of rate of interest charged by the assessee, is not correct. To this extent, we uphold, in principle, the view canvassed by the ld. CIT(A) that the rate of interest prevalent in Germany, being, the country in which the loan was consumed, is determinative of the arm's length rate of interest charged by the assessee-lender.
7
IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
7. Now we espouse the second facet of the dispute relating to the determination of the arm's length rate of interest. It is seen that the ld. CIT(A) has held that average EURIBOR for the A.Y. 2007-08 should be considered as a benchmark. In determining the average EURIBOR at 4.42%, he relied on an order passed by the Tribunal in which the average LIBOR was considered at 4.42%. In other words, the ld. CIT(A) considered EURIBOR as a comparable uncontrolled transaction for the purpose of benchmarking the rate of interest charged by the assessee.
8. At this juncture, we consider it expedient to clarify that EURIBOR (Euro Inter-bank Offered rate) is not a rate of interest, in itself, at which loans are advanced by banks in Euros to borrowers. EURIBOR is a reference rate which is calculated from the average interest rate at which Euro Zone Banks offer lending on inter-bank market. While calculating EURIBOR, 15% of the lowest and 15% of the highest interest rates collected by a panel of European banks are eliminated and the remaining 70% form the basis for its calculation. In such circumstances, EURIBOR, being, not an average rate at which the loans are advanced by European banks to borrowers, cannot per se be characterized as a comparable 8 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
uncontrolled rate of interest at which loans are advanced in Germany.
9. On lines of EURIBOR, there is LIBOR (London Inter-bank Offered rate), another rate which is applied on behalf of British Bankers Association. Similar to EURIBOR, LIBOR is also a rate at which major global banks lend to one another in the international inter-bank market on short-term basis. In calculation of LIBOR, 25% of lowest and 25% of the highest values are eliminated and the remaining 50% are considered for determining LIBOR. Therefore, LIBOR, as such, can also not be construed as a comparable uncontrolled transaction. The Hon'ble Bombay High Court in CIT Vs. Aurionpro Solutions Ltd. (2017) 99 CCH 0070 MUM-HC approved the action of the Tribunal in considering LIBOR +2% as the arm's length rate as against the TPO applying LIBOR plus 3%. Drawing an analogy from this position, we hold that EURIBOR+2% should be considered as arm's length rate of interest for determining the ALP of the international transaction of interest received by the assessee from Mascot Systems GmbH, Germany.
10. Before parting with this issue, we would like to clarify that the ld. CIT(A) has considered 4.42% as EURIBOR applicable for 9 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
the assessment year under consideration by relying on an order of the Tribunal, in which the average LIBOR was considered at this level. Equality of LIBOR and EURIBOR could not be substantiated from any material on record. In the given circumstances, we set-side the impugned order and remit the matter to the file of the AO for considering EURIBOR +2% as arm's length rate of interest to be applied on loan advanced by the assessee to Mascot Systems GmbH, Germany. In case EURIBOR +2% turns out to be lower than 4.42% as directed to be applied by the ld. CIT(A) on the understanding of the same being EURIBOR simplicitor, then the addition should be restricted with reference to 4.42% rate of interest, as the assessee is not in appeal on this issue. In the otherwise scenario, the relief allowed by the ld. CIT(A) will be restricted pro tanto.
11. The next issue raised by the Revenue through ground no. 5 is qua the computation of deduction u/s.10A of the Act. The factual matrix is that that the assessee carried on its business from six STPI units located at Jakkasandra and Whitefield in Bengaluru, Chennai, Pune, Hyderabad and Noida. Operations from STPI units at Jakkasandra, Pune and Noida resulted into losses, whereas operations from other three units resulted into profits. The assessee 10 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
computed deduction u/s.10A of the Act with reference to the profits of the three STPI units without setting off losses from the other three STPI units. The AO aggregated the profits and losses from all the six STPI units and worked out the allowable deduction accordingly by multiplying the aggregate profit of business by the ratio of export turnover to total turnover. The ld. first appellate authority decided the issue in assessee's favour. Aggrieved thereby, the Revenue has approached the Tribunal.
12. We have heard both the sides and gone through the relevant material on record. Admittedly, all the six units of the assessee are eligible for deduction u/s.10A of the Act. The moot point is whether the assessee should be allowed deduction in respect of units yielding profit on standalone basis or the net resultant figure of profits/losses from all the six units should be so considered. This issue is no more res integra in view of the judgment of the Hon'ble Supreme Court in the case of CIT Vs. Yokogawa India Ltd. (2017) 291 CTR 1 (SC) in which the Hon'ble Summit Court has held that the stage of deduction u/s 10A would be at the time of computing gross total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of total income under Chapter VI of the Act. The net effect of this judgment is that the deduction is to 11 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
be allowed qua the eligible undertaking standing on its own without any reference to the other eligible or non-eligible units or undertakings of the assessee. In other words, one needs to ascertain the profitability of the eligible units on stand-alone basis. If there is a profit in one or more eligible units, deduction u/s 10A should be allowed on the same notwithstanding loss in other eligible or non- eligible units. In view of this binding precedent from the Hon'ble Apex Court, it is vivid that the ld. CIT(A) has taken an unexceptionable view on this point, which cannot be interfered with.
13. The ld. DR argued that if that is the case, then the AO should be directed to find out if there is some link between the units earning profit and units suffering losses so that in such a scenario the profit/loss from such connected or linked units could be aggregated. There cannot be any dispute on the correctness of the proposition put forth on behalf of the Revenue. However, it is found on facts that the AO has nowhere held that some eligible units having profits had any linkage with some other eligible units suffering losses. Neither it has been the contention of the assessee at any stage. In such circumstances, we cannot permit the ld. DR to set 12 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
up a new case. We, therefore, approve the view taken by the ld. CIT(A) on this issue and dismiss this ground of appeal.
14. The next issue urged by the Revenue through ground no.6 is against the exclusion of telecommunication charges and payment to employees at foreign branches from the amount of export turnover in the computation of deduction u/s.10A of the Act. Relying on the judgment in the case of CIT Vs. Tata Elxsi Ltd. and Ors (2012) 247 CTR 334(Karn) and the order passed by the Tribunal in assessee's own case, the ld. CIT(A) overturned the assessment order on this point.
15. Having heard both the sides and gone through the relevant material on record, it is seen that the AO while computing deduction u/s.10A excluded telecommunication charges etc. amounting to Rs.2,16,03,079/- from `export turnover' without giving any corresponding effect to the amount of `total turnover'. Formula for computation of deduction has been set out in sub-section (4) of section 10A providing that computation of the amount of profits derived from export of the eligible products shall be done by considering the same proportion as export turnover in respect of such products bears to the total turnover to the profits of the 13 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
business of the undertaking. There are three components involved in the computation of eligible profits. Apart from the profits of the business of the undertaking, there is a one component of export turnover and another of total turnover. The term "export turnover"
has been defined in Explanation 2(iv) to section 10A as consideration in respect of export of articles or things etc. received or brought into in India but does not include freight, telecommunication charges or insurance attributable to the delivery of articles or things etc. outside India incurred in foreign exchange in providing the technical services outside India. The term "total turnover" has not been specifically defined in the definition clause of section 10A contained in Explanation 2. However, it goes without saying that `total turnover' comprises of `export turnover' and domestic turnover. For example, if export turnover is Rs.100 and domestic turnover is Rs.80, then total turnover would be Rs.180 (Rs.100 + Rs.80), which is sum total of both the export and domestic turnovers. If certain portion relevant to export of goods, say Rs.10, is not to be considered as part of export turnover of Rs.100, it is but natural that the amount of export turnover would come down to Rs.90. In that case, total turnover would be Rs.170 (Rs.90 as export turnover + Rs.80 as domestic turnover). Adverting 14 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
to the facts of the instant case, we find that since the amount of telecommunication charges etc. has been held by the AO himself as not forming part of `export turnover', the sequitur is that the same would also not form part of `total turnover', as there cannot be two different figures of `export turnover', one as an independent numerator in the formula and the other constituting part of total turnover in the denominator. To put it simply, telecommunication expenses etc. which have been excluded by the AO from the ambit of `export turnover' would also require exclusion from `total turnover'. Apart from the Hon'ble Karnataka High Court in Tata Elxsi Ltd. (supra), the Hon'ble Delhi High Court in CIT Vs. Genpact India (2011) 203 Taxman 632 (Del) has also held that communication expenses reduced from export turnover should also be reduced from total turnover for the purpose of deduction u/s.10A. We, therefore, hold that the ld CIT(A) has taken an unimpeachable view on this issue which cannot be tinkered with. This ground fails.
16. Ground nos.7 to 9 deal with another aspect of computation of deduction u/s.10A of the Act, being, the deletion of disallowance of Rs.14,61,44,712/- towards reduction of income from Deputation of Technical Manpower (DTM) and Onsite activities from the purview of eligible income u/s.10A of the Act. Succinctly, the facts 15 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
of this issue are that the AO required the assessee to submit the Scope of works (SOWs) in respect of agreements for software development for which deduction was claimed u/s 10A. The assessee filed the same, on perusal of which the AO observed that the majority were onsite contracts without any STP/SEZ link to the Indian business and further inferred that the assessee was engaged in the business of Deputation of Technical Manpower to its clients. The assessee tendered a reply furnishing copies of Master Service Agreements (MSAs) along with SOWs and their correlation with several invoices, which did not find favour with the AO. The Officer noticed that DTM contract receipts were one of the major components of the revenue receipts of the assessee, under which software engineers were sent to the US or Europe for working in companies on short term basis. He further observed that on an average, such companies abroad were paying to the assessee US$ 6000 for each of the software professionals, against which the assessee was paying equivalent of approximately US$ 4000 to them. He further held that the services rendered by the professionals at locations abroad were not under the control and supervision of the assessee. In the ultimate analysis, the AO recomputed the amount of deduction u/s.10A by considering the amount of deduction 16 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
originally worked at Rs.62,06,33,422/-, from which a sum of Rs.2,43,57,452/-, being 4% of profits ascribed to Deputation of Technical Manpower business was reduced and a further sum of Rs.12,17,87,260/-, being 20% of profits ascribed to onsite software services not related to STP undertakings in India was reduced, which brought down the amount of revised deduction u/s.10A to Rs.47,44,88,710/-. The Ld. CIT(A) accepted the assessee's claim and overturned the action of the AO on this point.
17. Having heard both sides and gone through the relevant material on record, it is observed that the AO reduced profit relatable to Deputation of Technical Manpower (DTM) and Onsite software services allegedly not related to STP undertakings in India at ad hoc 4% and 20% of the eligible software development income u/s 10A of the Act as computed by him. Primarily, no reason has been attributed by the AO as to how 4% and 20% rates were determined for reducing the amount of deduction on account of DTM and onsite activities.
18. The assessee earned income from software development activity in all of its six eligible units. The question which falls for our consideration is as to whether the AO was right in holding that a 17 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
part of consideration received by the assessee from the Deputation of Technical Manpower (DTM) activities and Onsite activities should be excluded from the eligible revenue?
19. Section 10A is a special provision in respect of newly established undertakings in free trade zones etc. Sub-section (1) of this section provides for a deduction of profits and gains as are derived by an undertaking from the export, inter alia, of computer software for a specified period. It is not disputed that the assessee satisfied all the requisite conditions for becoming eligible to deduction under this section, which is apparent from the action of the AO in himself allowing deduction to some extent. The dispute is only to restricting the amount of deduction in respect of the alleged profits derived by the assessee from DTM and onsite charges, which in the opinion of the AO, were not derived from export of computer software.
20. The assessee is engaged in the business of computer software development from its eligible units. At this stage, it would be apposite to consider the meaning of `Computer software' given in Explanation 2(i) of section 10A as: `(a) any computer programme recorded on any disc, tape, perforated media or other information 18 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
storage device; or (b) any customized electronic data or any product or service of similar nature, as may be notified by the Board, - which is transmitted or exported from India to any place outside India by any means'. It transpires from the definition of the `computer software' that it has two clauses. The first clause deals with a computer programme which is recorded on any disc or tape etc., which may usually be off the shelf product or in other words, a product which is available as such with the assessee and is not required to be customized. The second clause deals with a customized electronic data or any product, which is required to be tailor-made. Whereas the first clause encompasses a computer programme which has already been developed by the assessee on a standard basis and is exported as such, the second clause covers developing a new computer software as per the specific requirements of the customer.
21. One has to pass through various stages to develop a computer software, such as, Conceptualization, Planning, Designing, Developing, Testing and then Maintaining. In the Conceptualization stage, the requirements of the customer are first identified to form a view of the work to be done. In the Planning stage, an overall plan of proceeding with is formalized. In the Designing stage, blueprint 19 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
of the work to be done is drawn. In the Development stage, which is also called coding stage, the actual work is started for translating the plan into action. It is one of the most important stages of software development. In this stage, the work is divided into several modules/programmes, each of which is independently developed and coded. This activity of development of modules and coding may be done simultaneously or one after another, depending upon the nature of module and its placement or setting within the overall product. The development stage produces a final software product, which is then tested on stringent standards to ensure that it measures up to the required specifications. Once the computer software or the product passes through the testing stage, it is given to the customer for actual use. Any product so developed may need maintenance and then upgradation with the passage of time. A close scrutiny of the life cycle of a customized software, as discussed above, discerns that a lot of interaction is required between the computer software developer and the customer, which is almost present in most of the stages of software development, starting with conceptualization itself. In developing a computer software of large magnitude, it is quite possible that a Software Developer may have to visit the site of the customer several times for having an on the spot information 20 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
and properly appreciating the needs so as to make the final product compliant with the requirements. There can be several other reasons necessitating a customer abroad insisting a software developer in India to develop software fully or partly at his site overseas. The stage of testing in a customized software can be properly done only at the site of the customer. The nitty-gritty of the matter is that a customized software cannot be ordinarily developed without spending some time on site with the customer. Considering the objective of deduction u/s 10A and realizing practical issues and difficulties, the Finance Act, 2001 inserted Explanation 3 w.e.f. 1.4.2001 providing: `For the removal of doubts, it is hereby declared that the profits and gains derived from on site development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India.' The Explanation contains a deeming provision and gives a practical solution to the problem by providing that profits from on site development of computer software and services for development of software outside India shall be deemed to be the profits and gains derived from the export of computer software outside India. Undeterred by the Explanation 3, some of the authorities kept on 21 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
refusing the claim of the assesses u/s 10A, as is the case under consideration, to the extent of the profits derived from onsite development of computer software and rendering of services by technical manpower outside India. The CBDT had to step in by issuing a Circular no.1/2013 dated 17.1.2013 providing that (a) : `it is clarified that the software developed abroad at a client's place would be eligible for benefits under the respective provisions, because these would amount to 'deemed export' and tax benefits would not be denied merely on this ground' and (b) `that profits earned as a result of deployment of Technical Manpower at the client's place abroad specifically for software development work pursuant to a contract between the client and the eligible unit should not be denied benefits under sections 10A, 10AA and 10B provided such deputation of manpower is for the development of such software and all the prescribed conditions are fulfilled.' It was brought to the notice of the CBDT that the AOs were not even following the clarification given in the Circular dated 17.1.2013. Once again, the CBDT issued Instruction no. 17/2013 dated 19.11.2013 clarifying that: `The undersigned is directed to convey that the field authorities are advised to follow the contents of the Circular in letter and spirit. It is also advised that further appeals 22 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
should not be filed in cases where orders were passed prior to issue of Circular but the issues giving rise to the disputes have been clarified by the Circular'. There is hardly any need to accentuate that income-tax authorities are mere implementing agencies of the Parliament intent expressed through the enactment. They cannot suo motu usurp the power to indirectly legislate by not following the mandate of the provisions. Other income-tax authorities are bound to follow the command of the CBDT given through Circulars, even if they are not personally agreeable with the same.
22. On going through the directive of the Explanation 3 and the Circulars issued by the CBDT, which are binding on the authorities under the Act, it is vivid that the benefit of deduction under section 10A caters not only to profits earned from export simplicitor of computer software but also to any profits and gains derived from onsite development of computer software and also services for development of software rendered outside India. So long as there remains a live link between onsite development of computer software and services for development of software with the development of software from the eligible undertaking, the consideration awarded for onsite development for computer software and rendering services for development of services outside 23 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
India cannot be excluded from the purview of deduction u/s.10A. However, what is essential for such onsite development or rendering of software development services outside India to qualify for the benefit of deduction is that these should be in furtherance of the development of the software product undertaken by the eligible enterprise. If onsite services are de hors the product which the assessee undertook to deliver to the foreign customer, then any profit and gain arising from such services cannot be considered as eligible for deduction. The determinative test to qualify for the benefit of deduction, in our considered opinion, is that the rendition of onsite services etc. outside India by the assessee should be an integral part of the overall computer software development project, which the assessee undertook to do for its foreign customer. So long as the onshore activities etc. performed outside India remain in furtherance of the final product to be delivered, there can be no doubt on the eligibility of profit from such activities for deduction.
23. The AO has drawn a table on page 24 of his order which gives a comparative number of professionals working onsite and offshore totalling 5062. Out of this, only 725 professionals worked outside India onsite and remaining 4337 worked offshore in India only. No evidence has been placed on record to demonstrate that the 24 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
employees of the assessee sent abroad for rendering onsite services were working under the direct control and supervision of the overseas customers and further that their services were alien to the agreements for software development projects which the assessee had undertaken to perform, generating the income otherwise deductible u/s 10A of the Act. Rather the position of the employees of the assessee working outside India under its own control and guidance has been acknowledged by the AO in his order for the A.Y. 2009-10 and the ld. DR could not controvert that the nature of business in such later year was any different from that for the year under consideration.
24. To fortify the view point of the AO, the ld. DR placed on record a copy of the sample agreement between the assessee and its customers. This Consulting Service Agreement was entered into between the assessee and Royal Bank of Canada on 15-05-2006. Clause 1 of the Agreement gives description of Services and states that the assessee has agreed to perform the services of: `Technical system analysis for Capital Markets Client Authentication Infrastructure Consolitation as well as RBC Express TruePass upgrade projects'. Dates of commencement and completion have been given as 15-05-2006 and 31-10-2006 respectively. Charges 25 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
have been given in Clause 3 of the Agreement as hourly rates below $66 for two Technical System Analysts. Clause 3.2 provides that the assessee may invoice the Bank monthly for work performed during the previous month. Clause 4 states the number of personnel assigned to perform the services, which the assessee may replace with the Bank's approval. Place for service has been given as Toronto, Ontario.
25. A perusal of the above clauses of the Agreement divulges that the assessee undertook to perform Technical systems analysis for Capital Markets Client Authentication Infrastructure Consolitation as well as RBC Express TruePass upgrade projects of its customer namely, RBC. The duration for completion of the project was fixed at 5 ½ months. Entire services were to be provided onshore at the premises of the customer in Canada. `Background and Scope' of the Agreement shows that Royal Bank of Canada required two Resources in the role of TSAs from the assessee to work on the migration of the existing security/client authorization and authentication and infrastructure from Capital Markets Platform to a Centralized RBC Platform. Next para provides that one iGate Resource will be working on existing RBC Express projects until end of August and the other iGate Resource will be working on CM 26 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
Stage 1. Then both the persons were to work together on CM Stage 2 project for delivering the needful. A careful perusal of the Agreement reveals that DTM and onsite software services rendered through the 2 iGate Resources wholly related to the project undertaken by the assessee pursuant to the Agreement. This deciphers that the DTM and onsite software services rendered by the assessee were in relation to the main service undertaken by it to be performed as per the first clause of the Agreement, income from which has been otherwise held as eligible for deduction. Notwithstanding that, the ld. AR, in reply to ld. DR's reliance on Consulting service agreement with Royal Bank of Canada, invited our attention towards another Agreement with Royal Bank of Canada dated 16-06-2005 in which services were to be rendered wholly in India. Showing to the same reference number of 2005164 in both the Agreements, viz., the one relied by the ld. DR and the one submitted by him, the ld. AR explained that there is one umbrella agreement with Royal Bank of Canada and these are sub- agreements, under which some part of the services were rendered in India while others onshore outside India. This fortifies the view point of the assessee that even the onshore services rendered abroad have link with agreement for services from eligible units in India. 27
IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
26. On circumspection of the sample copy of the Agreement, filed by the ld. DR, between the assessee and Royal Bank of Canada as a representative of all such similar Agreements, it turns out that the assessee entered into Masters Service Agreement with several customers outside India. There was a specific tenure within which the assessee was to develop and deliver computer software or render the eligible service. A total consideration was received by the assessee under such Master Service Agreements. The AO has excluded a part of such total consideration as attributable to DTM and onsite software services by treating the same as unrelated to STP undertakings in India. The two amounts disqualified by the AO at Rs.2.43 crore and Rs.12.17 crore are part of the total consideration agreed between the assessee and its overseas customer for development of computer software or rendering of the eligible service, income from which has otherwise been held to be eligible for deduction u/s.10A. We fail to comprehend as to how a part of the total consideration as per Master Service Agreement with several customers can be separated as relatable to Deputation of Technical Manpower business and onsite software development services unrelated to STP undertakings. Such DTM and onsite software services are part and parcel of the overall computer 28 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
software development projects which the assessee undertook and income from which has been otherwise held to be eligible for deduction u/s.10A. Such disqualified amounts are not independent of consideration for computer software development or rendering other eligible service, which has otherwise been conferred with deduction u/s.10A of the Act. The situation would have been otherwise if the assessee had rendered onsite software services or sent some manpower on deputation to customers outside India without having any linkage with the computer software development projects undertaken by it. As in the facts under consideration, there is only one composite amount of consideration for the eligible computer software development, in our considered opinion, the ld. CIT(A) was fully justified in rejecting the AO's point of view in bifurcating such consideration into two parts, namely, the one which is eligible towards computer software and the other which is not eligible towards DTM and onsite software services.
27. There is another aspect of the matter. The ld. DR. harped on the language of section 10A(1) of the Act to contend that only the profits and gains `derived by' the eligible undertaking from export of computer software etc. are eligible for deduction. He laid a great 29 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
deal of emphasis on the expression `derived from' used in the provision as an opening gate for eligibility of deduction. It was contended that since income from DTM and onsite services was not derived from export of computer software, the same did not qualify for the benefit of deduction.
28. This contention, in our considered, is sans merit. There are two reasons. The first is that the Explanation 3 is a deeming provision, which specifically brings profits and gains derived from on site development of computer software and services for development of software outside India within the meaning of `the profits and gains derived from the export of computer software outside India'. The second is that sub-section (1) of section 10A containing the words `derived from' is not an exhaustive provision in itself. The expression `profits ... derived ...from .. export of ... computer software' employed in sub-section (1) of section 10A of the Act has been further elaborated in sub-section (4) to mean: `the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking.' The expression `profits of the business of the undertaking' as used in sub-section (4), in fact, 30 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
gives meaning to the expression `derived... from ... export of ... computer software' as used in sub-section (1) and amplifies the scope of the latter by mitigating the rigor and making the provision liberal and more inclusive. There is no gainsaying that `profits of the business of the undertaking' are not only the profits derived from the export of computer software but also those which are attributable to the business of undertaking. So long as there exists a direct link between the eligible undertaking and some income, the same is profit of the business of undertaking, even if may not be derived from the export of computer software etc. Without accepting, even if we presume the contention of the ld. DR as correct that income from DTM and onsite software services rendered abroad cannot be considered as derived from the export of computer software, it, in any case, will have to be regarded as `profits of the business of the undertaking'. In view of the foregoing discussion, we uphold the impugned order on this score.
29. The next ground taken in this appeal is against restricting the disallowance u/s. 14A of the Act to Rs.10,16,255/- as against Rs.40,39,994/- made by the AO.
31
IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
30. Factual panorama of this ground is that the assessee earned exempt dividend income of Rs.64,14,050/- on investments amounting to Rs.32.48 crore and odd. The AO observed that in the preceding year, 25% of salary paid to Finance Executive amounting to approximately Rs.7.00 lakh, was disallowed under section 14A, which disallowance came to be upheld in the first and second appeals. For the year under consideration, the AO resorted to the provisions of Rule 8D for computing disallowance u/s.14A at Rs.40,39,994/-. The ld. CIT(A) restricted the disallowance to Rs.10,70,255/-.
31. We have heard both the sides and gone through the relevant material on record. In so far as the application of Rule 8D is concerned, we find that the assessment year under consideration is A.Y. 2007-08. Rule 8D has been prescribed as effective from the A.Y. 2008-09. The Hon'ble Supreme Court in CIT Vs. Essar Teleholdings Ltd. (2018) 401 ITR 455 (SC) has held that Rule 8D is prospective. In view of this precedent, we accord our imprimatur to the conclusion drawn by the ld. CIT(A) on non-applicability of Rule 8D to the year under consideration.
32
IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
32. As regards the quantum of disallowance u/s.14A, it is found that for the preceding year the AO made disallowance at 25% of salary paid to Financial Controller as attributable to the exempt income, which came to be countenanced up to the Tribunal level. If the same yardstick is applied, 25% of salary paid to the Financial Controller for the year under consideration comes to Rs.10,16,255/-. In addition to this, the assessee himself offered disallowance at Rs.54,000/-. Considering the facts in totality, we are of the considered opinion that the sustenance of addition by the ld. CIT(A) at Rs.10,70,255/- on this score is in order, which does not warrant any further interference. This ground is, therefore, not allowed.
33. Ground no. 11 deals with discount on lapsed ESOPs amounting to Rs.57,71,000/- taken to General Reserve instead of transferring it to the Profit and loss account in the computation of `book profit' u/s.115JB of the Act. Ground no. 12 is connected with this ground, under which the Revenue is aggrieved by the direction of the ld. CIT(A) to apply the provisions of section 41(1) towards value of lapsed ESOPs becoming chargeable to tax in the year in which deduction was claimed.
33
IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
34. Succinctly, the facts of this ground are that the Registrar of Companies, Bangalore sent a reference to the AO indicating that a sum of Rs.57,71,000/-, being, discount on ESOP on lapse of option was transferred by the assessee to General Reserve account instead of transferring it to the Profit and loss account. The AO noticed that at the time of issuance of ESOPs on discount, the assessee claimed deduction by way of debit to its Profit and loss account. Since it was reversal of such discount on the lapsing of ESOPs, the AO opined that such an amount ought to have been credited to the Profit and loss account instead of taking it directly to the balance sheet in General Reserve Account. The assessee's contention of the applicability of the judgment of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. vs. CIT (2002) 255 ITR 273 (SC) was found to be not tenable. This is how, the AO added Rs.57,71,000/- to the `book profit' of the assessee company u/s.115JB of the Act. The ld. CIT(A) overturned the assessment order on this point. He however, directed that section 41(1) of the Act should be applied qua this amount because at the time of issuing ESOP, the claim of deduction made by the assessee towards discount was allowed by way of debit to the Profit and loss account. Since now there is a reversal of such discount on lapse of ESOP, the amount should be 34 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
charged to tax u/s.41(1) in the years in which deduction was allowed.
35. Having heard both the sides and gone through the relevant material on record, it is seen as an admitted position that the assessee, at the time of issuance of ESOPs on discount, debited its Profit and loss account and accordingly claimed deduction. However, when such ESOPs lapsed, the amount of discount earlier claimed as deduction was taken directly to the General Reserve account without routing it through the Profit and Loss account. It goes without saying that that when ESOPs lapse, the cost of which was claimed by the appellant as expense in the Profit and loss account at the time of their grant, there is cessation of liability towards possible exercise of the ESOPs and hence, the value of the lapsed ESOPs becomes chargeable to tax in the assessment year in which the event of lapse occurs. It is the letter and spirit of section 41(1) of the Act. The ld. CIT(A) in para 261 of his order has also correctly observed that the provisions of section 41(1) are attracted in this case. He, however, directed: "the AO to obtain the assessment year wise details of the debits made by the appellant on account of ESOPs and disallow such amounts as were claimed as deduction in each assessment year concerned." The view point of 35 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
the ld. CIT(A) that section 41(1) gets attracted on the facts and in circumstances of the instant case is correct. However, his direction to the AO for disallowing such amount in the year of deduction, in our opinion, is not sustainable. Such amount is chargeable to tax in the year in which the remission or cessation of liability takes place and not earlier year in which deduction was claimed. As admittedly, the amount of Rs.57,71,000/- ceased to become payable in the year under consideration, we hold that such amount should be taken as income for the year under consideration. The ld. AR fairly accepted this position.
36. Now we take up the other connected ground by which the challenge has been laid to the direction of the ld. CIT(A) in not adding such an amount in the computation of `book profit' u/s 115JB of the Act. It is pertinent to note that section 115JB is a special provision for payment of tax by certain companies. Sub- section (1) starting with non-obstante clause provides that where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year is less than a specified per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee 36 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
on such total income shall be the amount of income-tax at the specified rate. The term `book profit', as used in this deeming provision, has been defined in Explanation 1 to mean the profit as shown in the statement of Profit and loss for the relevant previous year prepared under sub-section (2), as increased and decreased by certain items given therein. Thus it is evident that the starting point for the computation of `book profit' under this section is the amount of profit as shown in the Profit and loss account in accordance with the provisions of Part II of Schedule VI to the Companies Act. 1956. The amount of profit so determined becomes sacrosanct and cannot be altered.
37. The Hon'ble Supreme Court in Apollo Tyres Ltd. (supra) has held in the context of section 115J of the Act that in the computation of `book profit' u/s.115J, the AO has no power to question the correctness of the Profit and loss account drawn by the assessee in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act. It has further been laid down that while assessing the company for income-tax u/s.115J of the Act, the correctness of the Profit and loss account prepared by the company and certified by the statutory auditors as having been prepared in accordance with the requirements of parts II and III of 37 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
Schedule VI to the Companies Act cannot be examined by the AO except to the extent of giving effect to the prescription given in Explanation 1 to section 115J. Similar view has been reiterated by the Hon'ble Apex Court in CIT Vs. HCL Comnet Systems and Services Pvt. Ltd. (2008) 305 ITR 409 (SC) in the context of section 115JA of the Act. The Hon'ble Bombay High Court in CIT Vs. Adbhut Trading Company Pvt. Ltd. (2011) 338 ITR 94 (Bom.) has also laid down the same proposition in the context of section 115JB by holding that once the accounts including the Profit and loss account are certified by the authorities under the Companies Act, it is not open to the AO to contend that the Profit and loss account has not been prepared in accordance with the provisions of the Companies Act and making addition towards book profit u/s.115JB of the Act. In view of the above precedents, it is evident that, firstly, the accounts are required to be made in accordance with Parts II and III of Schedule VI to the Companies Act and secondly, once the accounts are drawn in such a way and then approved in the Annual General Meeting, then the AO is bound to accept the amount of net profit as shown in the Profit and loss account, as starting point for computing "book profit" as per Explanation 1 to section 115JB of the Act.
38
IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
38. Now let us examine the treatment to be given in accounts on reversal of lapsed ESOPs. It is found that the SEBI guidelines, as clarified, and ICAI Guidance Note now provide for taking such amount to General Reserve Account. Initially, there was some non- meeting point between the SEBI guidelines and the ICAI Guidance Note on the treatment to discount on lapse of the ESOPs. Vide para
(ii)(b) of its letter No. SEBI/CFD/DIL/ESOP/4/2008/04-08, dated 04-08-2008, the SEBI has clarified the position by amending the SEBI guidelines with immediate effect so that it is in line with the accounting treatment provided by ICAI. This position has been discussed by the ld. CIT(A) in para 256 of the impugned order, which has remained uncontroverted. Thus, it is seen that both the SEBI and ICAI guidelines are now alike and provide that the amount of discount on lapse of ESOPs should be credited to the General Reserve Account.
39. In this regard, it is noticed that the Hon'ble Supreme Court in CIT vs. Virtual Soft Systems Ltd. (2018) 404 ITR 409 (SC) has held that the Guidance Note issued by the ICAI carries great weight. The method of accounting prescribed in such a Guidance Note, in order to compute real income and offering the same for taxation, cannot be disregarded by the AO unless such action falls within the scope 39 IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
and ambit of section 145(3) of the IT Act. Similar view has been taken by the Hon'ble Bombay High Court in HDFC Bank Ltd. vs. ACIT (2019) 410 ITR 247 (Bom) by holding that the Guidance note of the ICAI, though not binding, should be followed as an external aid. In this view of the matter, we see no reason in not approving the action of the ld. CIT(A) in holding that such amount of Rs.57,71,000/- was righty taken to the General Reserve Account instead of crediting it to the Profit and loss account and hence the same cannot be added to the amount of net profit shown by the assessee for computing `book profit' u/s 115JB of the Act.
40. In so far as the argument of ld. DR to the applicability of clause (b) of Explanation 1 to section 115JB is concerned, the same, in our opinion, does not advance the case of the Revenue because what is required to be added to the net profit is the amount carried to any reserve which is otherwise debited to the Profit and loss account. Since the amount in question was not debited to the Profit and loss account for the year, the same cannot be added to the net profit for computing `book profit' u/s.115JB of the Act. We, therefore, approve the view taken by the ld. CIT(A) on this score. Thus, the ground concerning section 41(1) is allowed and that concerning section 115JB is not allowed.
40
IT(TP)A No.286/Bang/2013 M/s. IGate Global Solutions Ltd.
41. In the result, the appeal is partly allowed.
Order pronounced in the Open Court on 05th August, 2019.
Sd/- Sd/-
(PARTHA SARATHI CHAUDHURY) (R.S.SYAL)
JUDICIAL MEMBER VICE PRESIDENT
पुणे Pune; दनांक Dated : 05th August, 2019
सतीश
आदेश क ितिलिप अ िे षत/Copy
षत of the Order is forwarded to:
1. अपीलाथ / The Appellant;
2. यथ / The Respondent;
3. The CIT(A)-V, Bengaluru
4. The CCIT-II, Bengaluru
5. िवभागीय ितिनिध, आयकर अपीलीय अिधकरण, पुणे "सी" / DR 'C', ITAT, Pune;
6. गाड फाईल / Guard file.
आदेशानुसार/ ार BY ORDER, / True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune Date
1. Draft dictated on 02-08-2019 Sr.PS
2. Draft placed before author 05-08-2019 Sr.PS
3. Draft proposed & placed before JM the second member
4. Draft discussed/approved by JM Second Member.
5. Approved Draft comes to the Sr.PS Sr.PS/PS
6. Kept for pronouncement on Sr.PS
7. Date of uploading order Sr.PS
8. File sent to the Bench Clerk Sr.PS
9. Date on which file goes to the Head Clerk
10. Date on which file goes to the A.R.
11. Date of dispatch of Order.
*