Virtusa (India) Private Limited, Hyderabad V. The DY.CIT, Cir-3(3), Hyderabad

ITA 16/HYD/2013

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 69847 (ITAT-HYDERABAD)
• Duration Of Justice: 9 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-10-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 04-01-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Assessee Lawyers: RAVI BHARDWAJ
• Keywords: Transfer pricing; Retrospective amendment
• Section: 43B; 143(3); 10B; 28; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 16/HYD/2013 ASSESSMENT YEAR 2008-09 M/S. VIRTUSA (INDIA) PVT. LTD. HYDERABAD PAN: AABCV4077E VS. THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-3(3) HYDERABAD APPELLANT RESPONDENT APPELLANT BY: SRI RAVI BHARDWAJ RESPONDENT BY: SRI D. SUDHAKAR RAO DATE OF HEARING: 09 .10.2013 DATE OF PRONOUNCEMENT: 09.10.2013 O R D E R PER CHANDRA POOJARI, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ASSESSMENT ORDER PASSED U/S. 143(3) R.W.S. 144C(13) OF THE INCOME- TAX ACT, 1961 ON THE DIRECTION OF DISPUTE RESOLUTION PANEL (DRP), HYDERABAD FOR A.Y. 2008-09. 2. THE ASSESSEE RAISED THE FOLLOWING GROUNDS: EACH OF THE GROUNDS GIVEN BELOW IS INDEPENDENT AND WITHOUT PREJUDICE TO THE OTHER GROUNDS OF APPEAL PREFERRED BY THE APPELLANT. BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LEARNED ASSESSING OFFICER (' AO') ERRED I N: 1. CONTENDING THAT THE CHENNAI UNIT IS FORMED BY SPLITTING UP OF THE HYDERABAD UNIT FOR THE SUBJECT ASSESSMENT YEAR. WHEREAS ON THE IDENTICAL SET OF FACTS, THE LEARNED AO FOR ASSESSMENT YEAR 2006-07 AND 2007-08 HELD THAT THE CHENNAI UNIT IS FORMED BY RECONSTRUCTION OF THE HYDERABAD UNIT. THE APPROACH ADOPTED BY THE LEARNED AO FOR FRAMING THE ASSESSMENT FOR DIFFERENT ASSESSMENT YEARS ON IDENTICAL SET OF FACTS CLEARLY INDICATES AN ITA NO. 16/HYD/2013 M/S. VIRTUSA (INDIA) PVT. LTD. ====================== 2 INCONSISTENCY IN APPROACH AND LACK OF PROPER APPLICATION OF MIND. BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LEARNED AO AND THE HON'BLE DISPUTE RESOLUTION PANEL ('DRP') ERRED IN: 2. HAVING HELD THAT THE CHENNAI UNIT IS NOT FORMED BY RECONSTRUCTION OF THE HYDERABAD UNIT, THE HON'BLE DRP ERRED IN LAW AND ON FACTS BY HOLDING THAT THE CHENNAI UNIT IS NOT A DISTINCT AND INDEPENDENT UNIT BUT A CONTINUATION/EXPANSION OF THE HYDERABAD UNIT OF THE APPELLANT WITHOUT STATING ANY REASONS. 3. DISALLOWING THE ANNUAL SOFTWARE LICENSE FEES OF RS. 3,98,51,957 PAID TO INGRAM MICRO INDIA PRIVATE LIMITED UNDER SECTION 40(A)(IA) OF THE INCOME-TAX ACT, 1961 ('THE ACT') ON THE GROUND THAT THE PAYMENT IS IN THE NATURE OF ROYALTY LIABLE TO TAX DEDUCTION AT SOURCE UNDER SECTION 194J OF THE ACT. 4. WITHOUT PREJUDICE TO GROUND 3 ABOVE, ASSUMING BUT NOT ADMITTING THAT, PAYMENT MADE TOWARDS ANNUAL SOFTWARE LICENSE FEES IS CONSIDERED AS ROYALTY UNDE R SECTION 194J OF THE ACT: (A) FAILED TO APPRECIATE THAT THE APPELLANT DID NOT DEDUCTED TAX AT SOURCE BASED ON THE LAW AS EXISTED AT THE TIME OF PAYMENT/ CREDIT TO INGRAM MICRO INDI A PRIVATE LIMITED. THE EXPLANATION 4 TO SECTION 9(1)(VI) OF THE ACT WAS INSERTED BY THE FINANCE ACT 2012 WITH RETROSPECTIVE EFFECT FROM JUNE 1, 1976. HENCE, THE APPELLANT CANNOT BE FASTENED WITH RETROACTIVE LIABILITY TO WITHHOLD TAX WHICH LEADS T O IMPOSSIBILITY OF PERFORMANCE. (B) OUGHT TO HAVE CONSIDERED THE AMOUNT OF STATUTORY DISALLOWANCES AS BUSINESS PROFITS ELIGIBL E FOR DEDUCTION UNDER SECTION 10A OF THE ACT. 5. CONSIDERING THE COMMUNICATION CHARGES AND INSURANCE CHARGES INCURRED BY THE APPELLANT AS ATTRIBUTABLE TO THE DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA AND DEDUCTING THE SAME FROM THE EXPORT TURNOVER FOR THE COMPUTATION OF DEDUCTION UNDER SECTION L0A OF THE ACT. 6. CONSIDERING THE AMOUNT OF REIMBURSEMENT OF EXPENSES TO VIRTUSA CORPORATION, USA OF RS. ITA NO. 16/HYD/2013 M/S. VIRTUSA (INDIA) PVT. LTD. ====================== 3 1,08,82,616 AS EXPENDITURE INCURRED IN FOREIGN EXCHANGE IN PROVIDING TECHNICAL SERVICES OUTSIDE INDIA AND DEDUCTING THE SAME FROM THE EXPORT TURNOVER FOR THE COMPUTATION OF DEDUCTION UNDER SECTION 10A OF THE ACT. 7. WITHOUT PREJUDICE TO GROUND 5 AND 6 ABOVE, OUGHT TO HAVE APPRECIATED THAT THE COMMUNICATION CHARGES, INSURANCE CHARGES AND REIMBURSEMENT OF EXPENSES TO VIRTUSA CORPORATION, USA, IF REDUCED FROM THE EXPORT TURNOVER ARE ALSO TO BE REDUCED FROM THE TOTAL TURNOVER. 8. ADDING THE AMOUNT OF REIMBURSEMENT OF EXPENSES BY ASSOCIATED ENTERPRISES OF RS. 4,41,42,852 TO THE TOTAL TURNOVER AND EXPORT TURNOVER FOR COMPUTATION OF DEDUCTION U/S. 10A OF THE ACT. 9. REDUCING THE AMOUNT OF STATUTORY DISALLOWANCES UNDER THE ACT FROM THE BUSINESS PROFITS FOR COMPUTATION OF DEDUCTION UNDER SECTION 10A OF THE ACT. 3. BEFORE US THE ASSESSEE FILED A LETTER DATED 8 TH OCTOBER, 2013 INFORMING THAT GROUND NOS. 3, 4(A) AND 9, 5, 8 ARE NOT PRESSED. ACCORDINGLY, THESE GROUNDS ARE DISMISSED AS NOT PRES SED. 4. NOW, WE TAKE GROUND NOS. 1 AND 2 FOR ADJUDICATION W HICH READ AS FOLLOWS: 1. CONTENDING THAT THE CHENNAI UNIT IS FORMED BY SPLITTING UP OF THE HYDERABAD UNIT FOR THE SUBJECT ASSESSMENT YEAR. WHEREAS ON THE IDENTICAL SET OF FACTS, THE LEARNED AO FOR ASSESSMENT YEAR 2006- 07 AND 2007-08 HELD THAT THE CHENNAI UNIT IS FORMED BY RECONSTRUCTION OF THE HYDERABAD UNIT. THE APPROACH ADOPTED BY THE LEARNED AO FOR FRAMING THE ASSESSMENT FOR DIFFERENT ASSESSMENT YEARS ON IDENTICAL SET OF FACTS CLEARLY INDICATES A N INCONSISTENCY IN APPROACH AND LACK OF PROPER APPLICATION OF MIND. 2. HAVING HELD THAT THE CHENNAI UNIT IS NOT FORMED BY RECONSTRUCTION OF THE HYDERABAD UNIT, THE HON'BLE DRP ERRED IN LAW AND ON FACTS BY HOLDING THAT THE CHENNAI UNIT IS NOT A DISTINCT AND INDEPENDENT UNIT BUT A CONTINUATION/EXPANSION OF ITA NO. 16/HYD/2013 M/S. VIRTUSA (INDIA) PVT. LTD. ====================== 4 THE HYDERABAD UNIT OF THE APPELLANT WITHOUT STATING ANY REASONS. 5. AFTER HEARING BOTH THE PARTIES, WERE OF THE OPINION THAT SIMILAR ISSUE WAS CONSIDERED BY THIS TRIBUNAL IN AS SESSEES OWN CASE FOR A.Y. 2007-08 VIDE ORDER DATED 30.8.2013 IN ITA NO . 1962/HYD/ 2011 WHEREIN THE TRIBUNAL HELD IN PARA 25 AS FOLLOW S: ' 25. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES ON THIS ISSUE. AS CAN BE SEEN FROM THE ORDER OF THE DRP, THOUGH THEY HAVE ACCEPTED THE FACT THAT THE CHENNAI UNIT IS NOT FORMED BY RECONSTRUCTION OF THE HYDERABAD UNIT, BUT, THEY ULTIMATELY HELD THAT CHEN NAI UNIT AND HYDERABAD UNIT ARE NOT TWO DISTINCT AND INDEPENDENT UNITS. HOWEVER, ON PERUSAL OF THE AFORESAID ORDER OF THE COORDINATE BENCH, WE FIND TH AT THE ISSUE IN DISPUTE HAS BEEN SET AT REST AND DECID ED IN FAVOUR OF THE ASSESSEE. THEREFORE, FOLLOWING THE DECISION OF THE COORDINATE BENCH, WE ALLOW THE GROU ND OF THE ASSESSEE AND DIRECT THE AO TO ALLOW BENEFIT U /S. 10A OF THE ACT TO THE CHENNAI UNIT.' 6. IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, WE ARE INCLINED TO DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE. THIS G ROUND OF THE ASSESSEE IS ALLOWED. 7. THE NEXT GROUND FOR OUR CONSIDERATION IS GROUND NO. 4(B) WHICH READS AS FOLLOWS: 4(B) OUGHT TO HAVE CONSIDERED THE AMOUNT OF STATUTO RY DISALLOWANCES AS BUSINESS PROFITS ELIGIBLE FOR DEDU CTION UNDER SECTION 10A OF THE ACT. 8. AFTER HEARING BOTH THE PARTIES, WE ARE OF THE OPINIO N THAT THIS ISSUE IS SQUARELY COVERED BY THE JUDGEMENT OF ITO V S. KEVAL CONSTRUCTION (354 ITR 13) (GUJ) WHEREIN HELD THAT U LTIMATE PROFIT OF THE ASSESSEE AS COMPUTED EVEN AFTER MAKING DISALLOW ANCE U/S. 40(A)(IA) WOULD QUALIFY FOR DEDUCTION AS PROVIDED U NDER SECTION 80IB. FURTHER SAME VIEW WAS TAKEN IN THE CASE OF BARTRONI CS INDIA LTD. VS. ASSISTANT COMMISSIONER OF INCOME-TAX (52 SOT 188) (H YD) WHEREIN HELD AS UNDER: ITA NO. 16/HYD/2013 M/S. VIRTUSA (INDIA) PVT. LTD. ====================== 5 '10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIALS ON RECORD. IT IS THE WELL ESTABLISHED FACT THAT AS PER THE PROVISIONS OF SECTION 10B RECOMPUTE D PROFITS SHALL BE CONSIDERED FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S 10B. IN VIEW OF VARIO US TRIBUNALS & HIGH COURTS HAVE HELD THAT DISALLOWANCE S OF EXPENDITURE SHOULD BE COMPUTED FOR THE PURPOSE O F DEDUCTION U/S 10B ACCORDINGLY IF THE ASSESSING OFFI CER RECOMPUTES THE PROFIT FROM ELIGIBLE BUSINESS BY DISALLOWING CERTAIN EXPENDITURE AND LIABILITY U/S 4 0(A) (IA) AND 43B, SUCH RECOMPUTED PROFIT SHALL BE CONSIDERED FOR THE PURPOSE OF DEDUCTION U/S 43B. TH E ASSESSEE HAS PLACED HIS RELIANCE ON THE FOLLOWING JUDGMENTS WHICH SUPPORT THE CLAIM OF THE ASSESSEE: (A) THE DECISION OF THIS TRIBUNAL IN THE CASE OF DCIT V S. PLANET ONLINE PVT. LTD. IN ITA NO. 1016/HYD/07 WHERE IT HAS BEEN HELD: 'PROFITS AND GAINS OF BUSINESS IS DEFINED IN SECTION 28 AND AS PER SECTIO N 29 INCOME REFERRED TO IN SECTION 28 SHALL BE COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF SECTION 30 TO 43D. FROM THE ABOVE PROVISIONS IN TH E STATUTE, IT THUS CLEAR THAT THE PROFIT OF THE UNDERTAKING IN THE CASE OF THE APPELLANT HAS TO BE COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF THE SECTION 30 TO 43D., I.E., INCLUDING THE PROVISIONS OF SECTION 43B OF THE ACT. IN VIEW OF THE ABOVE LEGAL PROVISIONS IN MY CONSIDERED VIEW, EXEMPTION UNDER SECTION 10B HAS TO BE COMPUTED ON THE PROFITS DETERMINED AFTER TAKING INTO ACCOUNT THE DISALLOWANCES TO BE MADE UNDER SECTION 43B OF THE ACT.' (B) THE DELHI TRIBUNAL IN THE CASE OF ITO VS. M/S. SAHASRA ELECTRONICS PRIVATE LIMITED (2010-TIOL-89- ITAT-DEL) HELD THAT IT IS A SETTLED PROPOSITION THAT WHEN THE ASSESSEE IS CLAIMING EXEMPTION UNDER SECTION 10A AND ASSESSEE'S PROFIT FROM ELIGIBLE BUSINESS BY THE AO IS RECOMPUTED THE DEDUCTION UNDER SECTION 10A IS ALSO TO BE ALLOWED ON THE RECOMPUTED PROFIT UNDER SECTION 10A. (C) DELHI TRIBUNAL IN THE CASE OF M/S. INTERNATIONAL GO LD CO. LTD. VS. INCOME TAX OFFICER 2010-TIOL-652-ITAT- MUM) HELD THAT EVEN IF THE DISALLOWANCE IS SUSTAINED, IT WILL ONLY GO TO INCREASE THE BUSINESS PROFITS OF THE ASSESSEE WHICH IS EXEMPT UNDER SECTION 10A AS PER THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GEMPLUS ITA NO. 16/HYD/2013 M/S. VIRTUSA (INDIA) PVT. LTD. ====================== 6 JEWELLERY INDIA LTD AND ALLOWED THE ASSESSEE'S APPEAL. (D) HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. GEM PLUS JEWELLERY INDIA LTD [(2010) 233- CTR(BOM)-24 : 42-DTR-73] HELD THAT EXEMPTION UNDER SECTION 10A - PROFITS AND GAINS DERIVED FROM EXPORTS - ADDITION ON ACCOUNT OF DISALLOWANCE OF EMPLOYER'S AND EMPLOYEES' CONTRIBUTION TOWARDS PF/ESIC - DISALLOWANCE OF THE PF/ESIC PAYMENTS HAS BEEN MADE BECAUSE OF THE STATUTORY PROVISIONS I.E. SEC. 43B IN THE CASE OF THE EMPLOYER'S CONTRIBUTION AND SEC. 36(1)(V) R.W.S. 2(24)(X) IN T HE CASE OF THE EMPLOYEES' CONTRIBUTION WHICH HAVE BEEN DEEMED TO BE THE INCOME OF THE ASSESSEE - PLAIN CONSEQUENCE OF THE DISALLOWANCE AND THE ADD BACK THAT HAS BEEN MADE BY THE AO IS AN INCREASE IN THE BUSINESS PROFITS OF THE ASSESSEE - EXEMPTION UNDER SECTION LOA IS ALLOWABLE WITH REFERENCE TO SUCH ENHANCED INCOME. 11. IN VIEW OF THE ABOVE DISCUSSION, THE ASSESSING OFFICER IS DIRECTED TO CONSIDER THE ADDITIONS MADE ABOVE WHILE CALCULATING DEDUCTION U/S 10B. ACCORDINGLY THE AO IS DIRECTED TO RECOMPUTE THE DEDUCTION AFTER TAKI NG INTO ACCOUNT DISALLOWANCES MADE ABOVE. ACCORDINGLY THESE GROUNDS OF THE ASSESSEE ARE ALLOWED.' 9. IN VIEW OF THE ABOVE DISCUSSION, WE ARE INCLINED TO HOLD THAT AMOUNT OF STATUTORY DISALLOWANCE HAS TO BE CONSIDER ED AS BUSINESS PROFIT ELIGIBLE FOR DEDUCTION U/S. 10A OF THE ACT. T HIS GROUND IS ALLOWED. 10. THE NEXT GROUND FOR ADJUDICATION IS GROUND NO. 6 WH ICH READS AS FOLLOWS: 6. CONSIDERING THE AMOUNT OF REIMBURSEMENT OF EXPENSES TO VIRTUSA CORPORATION, USA OF RS. 1,08,82,616 AS EXPENDITURE INCURRED IN FOREIGN EXCHANGE IN PROVIDING TECHNICAL SERVICES OUTSIDE IN DIA AND DEDUCTING THE SAME FROM THE EXPORT TURNOVER FOR THE COMPUTATION OF DEDUCTION UNDER SECTION 10A OF TH E ACT. ITA NO. 16/HYD/2013 M/S. VIRTUSA (INDIA) PVT. LTD. ====================== 7 11. THIS ISSUE IS COVERED BY THE ORDER OF THE TRIBUNAL IN THE CASE OF SAK SOFT (313 ITR (AT) 353) AND ALSO BY THE JUDGE MENT OF BOMBAY HIGH COURT IN THE CASE OF GEM PLUS JEWELLERY (330 I TR 175) (SB) WHEREIN HELD THAT IF COMMUNICATION CHARGES, INSURAN CE CHARGES AND REIMBURSEMENT OF EXPENSES ATTRIBUTABLE TO THE DELIV ERY OF COMPUTER SOFTWARE OUTSIDE INDIA, ARE TO BE REDUCED FROM THE EXPORT TURNOVER THEN THE SAME SHOULD AS WELL BE REDUCED FROM TOTAL TURNOVER WHILE COMPUTING DEDUCTION U/S. 10A OF THE ACT. THEREFORE, FOLLOWING THE AFORESAID RATIO LAID DOWN IN THE SAID DECISIONS, WE DIRECT THE AO TO REDUCE THIS IMPUGNED AMOUNT BOTH FROM THE EXPORT TU RNOVER AS WELL AS TOTAL TURNOVER WHILE COMPUTING DEDUCTION U/S. 10 A OF THE ACT. ACCORDINGLY, THIS GROUND IS DECIDED IN FAVOUR OF THE ASSESSEE. 12. THE NEXT GROUND IS GROUND NO. 7 WHICH READS AS UNDE R: 7. WITHOUT PREJUDICE TO GROUND 5 AND 6 ABOVE, OUGHT TO HAVE APPRECIATED THAT THE COMMUNICATION CHARGES, INSURANCE CHARGES AND REIMBURSEMENT OF EXPENSES TO VIRTUSA CORPORATION, USA, IF REDUCED FROM THE EXPORT TURNOVER ARE ALSO TO BE REDUCED FROM THE TOTAL TURN OVER. 13. THIS GROUND IS COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE SPECIAL BENCH IN THE CASE OF SAK SOFT (313 I TR (AT) 353) WHEREIN HELD THAT THE ABOVE COMPONENTS ARE TO BE RE DUCED IN EXPORT TURNOVER AS WELL AS IN TOTAL TURNOVER. HOWEVER, WE MAKE IT CLEAR THAT THE ASSESSEE SHALL NOT GET DOUBLE BENEFIT ONCE VIDE GROUND NO. 6 AND ANOTHER VIDE GROUND NO. 7. OUR FINDINGS IN G ROUND NO. 7 ARE SUBJECT TO THE FINDINGS GIVEN IN GROUND NO. 6. 14. IN THE RESULT, ASSESSEE'S APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 9 TH OCTOBER, 2013. SD/ - (SAKTIJIT DEY) JUDICIAL MEMBER SD/ - (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD, DATED THE 9 TH OCTOBER, 2013 TPRAO ITA NO. 16/HYD/2013 M/S. VIRTUSA (INDIA) PVT. LTD. ====================== 8 COPY FORWARDED TO: 1. M/S. VIRTUSA (INDIA) PVT. LTD., 6 - 3 - 1192, 1 ST FLOOR, MY HOME TYCOON, BEGUMPET, KUNDANBAGH, HYDERABAD-500 016. 2. THE DEPUTY COMMISSIONER OF INCOME - TAX, CIRCLE - 3(3), 7 TH FLOOR, 'B' BLOCK, IT TOWERS, AC GUARDS, HYDERABAD-5 00 004. 3 . THE DISPUTE RESOLUTION PANEL , 2 ND FLOOR, IT TOWERS, 10 - 2 - 3, AC GUARDS, HYDERABAD-4. 4 . THE ADDL. COMMISSIONER OF INCOME - TAX, TRANSFER PRICING, 6 TH FLOOR, 'B' BLOCK, IT TOWERS, 10-2-3, AC GUARDS, HYDE RABAD-4. 5. THE DIRECTOR OF INCOME - TAX (INTERNATI ONAL TAXATION), IT TOWERS, 10-2-3, AC GUARDS, HYDERABAD-4. 6 . THE DR 'B' BENCH, ITAT, HYDERABAD