DCIT, New Delhi V. M/s Ciena India Pvt Ltd, New Delhi

ITA 1057/DEL/2015

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6353 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 1 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-03-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I2
• Next Hearing Date: 28-02-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 20-02-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN
• Assessee Lawyers: HIMANSHU SHEKHAR SINHA
• Keywords: Services rendered outside India; Wholly owned subsidiary; Set aside
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 92; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-2 : NEW DELHI) BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.1057/DEL./2015 (ASSESSMENT YEAR : 2010-11) DCIT, CIRCLE 6 (1), VS, M/S. CIENA INDIA PVT. LTD. , NEW DELHI. FF, NAVJYOTI INSTITUTE, SECTOR B, POCKET 11, VASANT KUNJ, NEW DELHI 110 070. (PAN : AACCC6131B) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI HIMANSHU SHEKHAR SINHA, ADVOCAT E MOHD. FAHAD KHALID & MS. REETIKA GARG, CAS REVENUE BY : SHRI PEEYUSH JAIN, CIT DR DATE OF HEARING : 28.02.2017 DATE OF ORDER : 22.03.2017 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : THE APPELLANT, DEPUTY COMMISSION OF INCOME-TAX, CI RCLE 6 (1), NEW DELHI (HEREINAFTER REFERRED TO AS THE REV ENUE) BY FILING THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 29.12.2014, PASSED BY THE AO UNDER SECTION 143(3)/1 44C OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR ITA NO.1057/DEL./2015 2 2010-11 IN CONSONANCE WITH THE ORDERS PASSED BY THE LD. DRP/TPO ON THE GROUNDS INTER ALIA THAT :- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE HONBLE DRP HAS ERRED IN DIRECTING THE A O DELETE THE DISALLOWANCE AMOUNTING TO RS.3,96,37,875 /- TERMING IT AS AN ACCOUNTING ENTRY LINKED TO THE CRE DITORS FOR FIXED ASSETS BY IGNORING THE FACT THAT THE ASSE SSEE HAS GOT ACQUIRED THE ASSET IN QUESTION AND SECTION 43A OF THE INCOME-TAX ACT, 1961 IS APPLICABLE ONLY WHEN AN ASSESSEE HAS ACQUIRED AN ASSET. 2. BRIEFLY STATED FACTS OF THIS CASE ARE : THE ASSE SSEE COMPANY IS WHOLLY OWNED SUBSIDIARY OF CIENA CORPORATION OF USA AND IS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT AND MARKE TING SOFTWARE SERVICES TO ITS OVERSEAS GROUP COMPANY. THE ASSESS EE BEING INCORPORATED ON JUNE 27, 2005 IS A 100% EXPORT ORIE NTED UNIT UNDER SOFTWARE TECHNOLOGY PARK SCHEME AND COMMENCED ITS O PERATION FROM APRIL 10, 2006. IN RETURN, FOR ITS SERVICES I .E. CONTRACTUAL SOFTWARE DEVELOPMENT AND MARKET SOFTWARE SERVICES, THE ASSESSEE COMPANY IS REMUNERATED ON COST PLUS BASIS. THE ROL E OF THE ASSESSEE IS TO EXCLUDE THE WORK SUB-CONTRACT BY ITS AE WHICH ESSENTIALLY INCLUDES DEVELOPMENT OF SOFTWARE. ITA NO.1057/DEL./2015 3 3. APART FROM ADDITION OF RS.57,85,92,473/- ON ACCO UNT OF ALP, THE AO MADE ADDITION OF RS.7,13,33,358/- BY NOTICIN G IN THE COMPUTATION OF INCOME THAT THE ASSESSEE HAS DEDUCTE D RS.7,13,33,358/- ON ACCOUNT OF PAYMENT RELATING TO FIXED ASSETS AND AS SUCH CAPITALIZED AS PER SECTION 43A OF THE ACT. AO OBSERVED THAT FROM THE PERUSAL OF THE CHART OF FIXED ASSET AND DE PRECIATION, SINCE NO SUCH ADDITION HAS BEEN MADE BY THE ASSESSEE, THE AM OUNT CANNOT BE CAPITALIZED AS PER SECTION 43A OF THE ACT. 4. HOWEVER, THE ASSESSEE CARRIED THE MATTER BEFORE THE LD.DRP BY RAISING OBJECTIONS WHICH HAVE BEEN ALLOWED AND ADDI TION OF RS.7,13,33,358/- HAS BEEN DELETED. FEELING AGGRIEV ED, THE REVENUE HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING TH E PRESENT APPEAL. 5. ASSESSEE CLAIMED DEDUCTION OF RS.7,13,33,358/- I N THE COMPUTATION OF INCOME ON ACCOUNT OF PAYMENTS RELATI NG TO FIXED ASSETS AND AS SUCH CAPITALIZED IN ACCORDANCE WITH S ECTION 43A OF THE ACT. HOWEVER, AO CAME TO THE CONCLUSION THAT SINCE NO SUCH ADDITION HAS BEEN MADE BY THE ASSESSEE, THE AMOUNT OF RS.7,13,33,358/- CANNOT BE CAPITALIZED AND MADE THE ADDITION THEREOF IN THE CAPITAL ACCOUNT OF THE ASSESSEE IN HIS DRAFT ORDER. 6. LD. AR FOR THE ASSESSEE WHILE REFERRING TO THE D ETAILED CALCULATION OF THE FOREIGN EXCHANGE GAIN TO THE TUN E OF RS.2,78,86,957/- CREDITED TO THE PROFIT & LOSS ACCO UNT PROVIDED THE ITA NO.1057/DEL./2015 4 DETAIL THEREOF IN TABULATED FORM TO THE LD. DRP WHI CH IS REPRODUCED FOR READY PERUSAL AS UNDER :- S.NO. PARTICULARS AMOUNT (IN INR) NATURE OF EXPENSE 1 PAYMENT PURCHASE OF FIXED ASSETS 3,16,95,482 CAPITAL IN NATURE AND THEREFORE REDUCED IN THE TAX COMPUTATION 2 REINSTATEMENT OF CLOSING BALANCE OF CREDITORS FOR FIXED ASSETS 3,96,37,875 TOTAL (A) 7,13,33,357 3 RECEIPT EXPORT OF SERVICES (1,67,79,355) REVENUE IN NATURE 4 REINSTATEMENT OF CLOSING BANK BALANCE (1,88,55,960) 5 REINSTATEMENT OF CLOSING BALANCE OF DEBTORS 1,50,10,630) 6 REINSTATEMENT OF CLOSING BALANCE OF CREDITORS (OTHER THAN FIXED ASSETS) 88,24,829 7 BANK TRANSFERS (15,58,728) 8 PAYMENT OTHERS (64,457) TOTAL (B) (4,34,44,301) NET EXCHANGE GAIN BOOKED IN PROFIT AND LOSS ACCOUNT (A+B) 2,78,89,056 7. UNDISPUTEDLY, THE TAXPAYER EARNED FOREIGN EXCHAN GE GAIN TO THE TUNE OF RS.7,13,33,357/- ON THE LIABILITIES QUA THE PURCHASE OF FIXED ASSETS OUT OF WHICH RS.3,16,95,482/- WAS RELEASED O N PAYMENT OF LIABILITIES QUA PURCHASE OF FIXED ASSETS WHICH WAS REDUCED FROM THE WRITTEN DOWN VALUE OF THE FIXED ASSETS IN ACCORDANC E WITH THE PROVISIONS CONTAINED U/S 43A OF THE ACT. IN THESE CIRCUMSTANCES, THE BALANCE AMOUNT OF EXCHANGE GAIN OF RS.3,96,37,875/- AS REFERRED TO AT SL.NO.2 OF THE AFORESAID TABLE WAS BOOKED ON ACCOUN T OF REINSTATEMENT OF LIABILITIES PERTAINING TO THE PURC HASE OF FIXED ASSETS AND BEING CAPITAL IN NATURE THUS REDUCED WHILE CALC ULATING THE TAXABLE ITA NO.1057/DEL./2015 5 INCOME. SINCE THE EFFECT OF FOREIGN EXCHANGE DIFFE RENCE U/S 43A OF RS.3,16,95,482/- HAS BEEN CONSIDERED BY REDUCING TH E VALUE OF THE FIXED ASSETS VIZ. COMPUTER LAB AND OTHERS WHICH IS IN ACCORDANCE WITH SECTION 43A OF THE ACT AND THE LD. DRP HAS RIGHTLY CALCULATED THAT THE DISALLOWANCE TO THE EXTENT OF RS.3,16,95,482/- IS N OT SUSTAINABLE. 8. LD. DRP ALSO OBSERVED AS TO THE SECOND COMPONENT OF THE PROPOSED ADDITION OF RS.7,13,33,357/- THAT THE SAID AMOUNT OF RS.3,96,37,875/- PERTAINS TO THE REINSTATEMENT OF C LOSING BALANCE OF CREDITORS FOR FIXED ASSETS, WHICH REPRESENT ONLY TH E NOTIONAL ENTRY AND THAT TOO IN CONNECTION WITH LOAN FOR PURCHASE OF PL ANT AND MACHINERY WHICH IS ON CAPITAL ACCOUNT. 9. SINCE THE AMOUNT OF RS.3,96,37,875/- IS A NOTION AL SUM AND IF AN ACCOUNTING ENTRY LINKED TO THE CREDITOR FOR FIXE D ASSETS, IT CANNOT PARTAKE THE CHARACTER OF INCOME IN THE HANDS OF TAX PAYERS. SO, IT BEING A RUNNING ACCOUNT OF FIXED ASSETS PAYMENT HAS BEEN REDUCED AS PER NOTIONAL ENTRIES. EVEN OTHERWISE, ASSESSEE PAI D TAX ON BOOK PROFIT ON MAT BASIS AND IT WILL NOT AFFECT THE TAXABILITY OF THE ASSESSEE IN ANY MANNER. RATHER IT WILL ONLY AFFECT THE FIXED A SSETS ON ACCOUNT OF FOREIGN EXCHANGE GAIN. SO, WHEN THE FOREIGN EXCHAN GE GAIN WILL NOT REDUCE THE COST OF FIXED ASSETS, IT IS NOT AN INCOM E IN THE HANDS OF THE ASSESSEE. SO, IN THESE CIRCUMSTANCES, WE FIND NO I LLEGALITY OR PERVERSITY IN THE FINDINGS RETURNED BY THE LD. DRP DELETING THE ITA NO.1057/DEL./2015 6 ADDITION IN QUESTION. SO, GROUND TAKEN IN THE PRES ENT APPEAL IS DETERMINED AGAINST THE REVENUE. 10. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, THE P RESENT APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON THIS 22 ND DAY OF MARCH, 2017. SD/- SD/- (R.S. SYAL) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 22 ND DAY OF MARCH, 2017 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.