ITO, New Delhi V. M/s. Genpact Infrastructure (Hyderabad) Pvt. Ltd., New Delhi

ITA 2063/DEL/2015

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 6969 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 3 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-07-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Assessment Year: 2009-2010
• Appeal Filed On: 09-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MEETA SINGH
• Keywords: Business income; Transfer pricing; International transaction; Notional interest
• Section: 10AA

Judgement Text

PAGE | 1 INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C : NEW DELHI BEFORE SHRI SUDHANSHU SRIVASTAVA , JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA NO. 2063/DEL/2015 (ASSESSMENT YEAR: 2009 - 10 ) ITO, WARD - 10(1), C.R. BUILDING, NEW DELHI VS. GENPACT INFRASTRUCTURE (HYDERABAD) PVT. LTD, (NOW MERGED WITH GENPACT INDIA), DELHI INFORMATION TECHNOLOGY PARK, SHASTRI PARK, NEW DELHI PAN: AACCG6568Q (APPELLANT) (RESPONDENT) REVENUE BY : SMT MEETA SINGH, CIT DR ASSESSEE BY: NONE DATE OF HEARING 21/06 / 2018 DATE OF PRONOUNCEMENT 3 1 / 07 / 2018 O R D E R PER PRASHANT MAHARISHI, A. M. 1 . THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF THE LD CIT(A) - 44, N EW DELHI DATED 22.01.2015 FOR THE ASSESSMENT YEAR 2009 - 10. 2 . THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - PAGE | 2 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT (A) - 44 HAS ERRED IN ALLOWING DEDUCTION U/S 10AA ON FOREIGN EXCHANGE AND FORWARD CONTRACT G AIN NET OF RS.8,38,66,140/ - . 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT (A) - 44 HAS ERRED IN ALLOWING THAT THE TELECOMMUNICATION EXPENSES OF RS.11,64,517/ - SHOULD ALSO BE REDUCED FROM TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 10AA OF THE INCOME - TAX ACT. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT (A) - 44 HAS ERRED IN ALLOWING/REDUCING THE MIGRATION/ON THE JOB TRAINING EXPENSES OF RS.9,76,13,893/ - FROM THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 10 AA. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT (A) - 44 HAS ERRED IN ALLOWING INTEREST AT THE RATE OF LIBOR + 1.5% INSTEAD OF 16% RATE OF INTEREST CHARGED ON THE DELAYED PAYMENT FROM THE ASSOCIATED ENTERPRISES. 3 . THE BRIEF FACTS OF THE CASE SHOWS THAT THAT ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF PROVIDING VARIOUS BUSINESS PROCESS OUTSOURCING SERVICES INCLUDING FINANCE AND ACCOUNTING, CO LLECTIONS , INSURANCE, CUSTOMER FULFILLMENT , DATA MODELING AND ANALYTIC SUPPORT, MANAGED IT SERVICE S, SOFTWARE SOLUTIONS AND E - LEARNING. THE ASSESSEE FILED ITS RETURN OF INCOME ON 29/9/2009 DECLARING TOTAL INCOME OF RS. 20,785,431/ . THE RETURN WAS SUBSEQUENTLY REVISED ON 31/3/2011 DECLARING TOTAL INCOME OF RS. 1,031,922/ WHEREIN UNREALIZED EXPORT PROC EEDS WERE EXCLUDED FROM EXPORT TURNOVER AND DEDUCTION UNDER SECTION 10 AA WAS RECOMPUTED. DURING THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS FOUND THAT ASSESSEE HAS NOT CLAIMED DEDUCTION UNDER SECTION 10 A A IN RESPECT OF THE INTEREST FROM FIXED DEPOSIT R ECEIPTS AND INCOME FROM CURRENT ACCOUNT BALANCES OF RS. 1 894237/ . IT WAS FURTHER NOTED THAT ASSESSEE HAS SHOWN AN EXCHANGE GAIN OF RS. 86872722/ AND IT WAS CLAIMED AS INCOME ELIGIBLE FOR DEDUCTION PAGE | 3 UNDER SECTION 10 AA OF THE ACT. THE LD. ASSESSING OFFICE R DISALLOWED THE CLAIM OF THE ASSESSEE TO THAT EXTENT HOLDING THAT THE FOREIGN EXCHANGE GAIN OR LOSS IS DUE TO THE HEDGING ACTIVITY AND IS NOT DERIVED BY THE SPECIFIED BUSINESS ACTIVITY OF THE UNDERTAKING IN SEZ . THEREFORE, HE HELD THAT NO DEDUCTION IS ALL OWABLE TO THE ASSESSEE IN RESPECT OF FOREIGN EXCHANGE GAIN OR FORWARD CONTRACT LOSSES. THE LD. ASSESSING OFFICER FURTHER ADJUSTED THE EXPORT TURNOVER HOLDING THAT FREIGHT O R TELECOMMUNICATION CHARGES ARE NOT ATTRIBUTABLE TO THE DELIVERY OF THE SERVICES OUT SIDE INDIA AND THEREFORE THEY ARE REQUIRED TO BE REDUCED FROM THE TOTAL TURNOVER. 4 . BASED ON THIS , THE DEDUCTION UNDER SECTION 10 AA WAS COMPUTED AT RS. 3 3157 8603/ AND FOREIGN EXCHANGE GAIN AND FORWARD CONTRACTS GAIN OF RS. 8 386 6140 WERE TAKEN AS OTHER BUSINESS INCOME AND THEREBY THE TOTAL INCOME OF THE ASSESSEE WAS COMPUTED AT RS. 1 1642 0570/ V IDE ORDER UNDER SECTION 143 (3) READ WITH SECTION 144C (3) OF THE INCOME TAX ACT ON 16/5/2013. 5 . AGAINST THE ORDER OF THE LD. ASSESSING OFFICER ASSESSEE AGGRIEVED PREFERRED AN APPEAL BEFORE THE LD. CIT A WHO PARTLY ALLOWED THE APPEAL OF THE ASSESSEE AND THEREFORE THE REVENUE IS IN APPEAL BEFORE US ON THE ISSUE ALLOWED IN FAVOUR OF THE ASSESSEE. 6 . THE LD. DEPARTMENTAL REPRESENTATIVE RELIED UPON THE ORDERS OF THE LD. ASSESSING OFFICER. 7 . DESPITE NOTICE, NONE APPEARED ON BEHALF OF THE ASSESSEE AND THEREFORE THE ISSUE IS DECIDED ON MERITS BASED ON INFORMATION AVAILABLE ON RECORD. 8 . THE 1ST ISSUE AGITATED BY THE REVENUE IS WITH RESPECT TO THE FORWARD CONTRACT GAIN AND FOREIGN E XCHANGE GAIN OF RS. 8 386 6140 NOT CONSIDERED AS INCOME FROM THE BUSINESS OF THE EXPORT WHICH IS ELIGIBLE FOR DEDUCTION UNDER SECTION 10 AA OF THE ACT. THE LD. ASSESSING OFFICER HAS HELD THAT AS PER SCHEDULE 9 OF THE AUDITED FINANCIAL ACCOUN TS THE ASSESSEE HAS SHOWN AN EXCHANGE GAIN OF RS. 8 687 2722/ COMPRISING OF FOREIGN EXCHANGE GAIN, FORWARD CONTRACT LOSS, RESTATEMENT GAINS ON FOREIGN EXCHANGE FLUCTUATIONS ETC . THE CLAIM OF THE ASSESSEE IS THAT THAT PROVISIONS OF SECTION 10 AA OF THE INCO ME TAX ACT DOES NOT PAGE | 4 RESTRICT PROFITS DERIVED FROM THE BUSINESS OF THE UNDERTAKING BUT IS PROVIDED IN ACCORDANCE WITH FORMULA WHEREIN THE CONCEPT OF DERIVED FROM HAS LOST IT SIGNIFICANCE. THE LD. AO REJECTED THE ABOVE ARGUMENT OF THE ASSESSEE THAT THE GAIN HAS ARISE N BECAUSE OF THE DEVALUATION OF THE RUPEES WHICH HAS NOTHING TO DO WITH THE TRADE BUT THE RESULT OF THE DEVALUATION WAS THAT THE ASSESSEE BECAME ENTITLED TO RECEIVE A LARGER PRI C E IN TERMS OF RUPEES FOR IS GOODS AND THAT IS NOT DIRECTLY IN THE COU RSE OF THE TRADE AND CONSTITUTES A TRADING BUSINESS PROFIT AS THE SAME IS DUE TO THE HEDGING ACTIVITY AND IS NOT DERIVED BY THE SPECIFIED BUSINESS ACTIVITY OF THE ASSESSEE. THE LD. CIT A HAS ALLOWED THE CLAIM OF THE ASSESSEE BASED ON THE ORDER OF THE COM MISSIONER OF APPEALS IN CASE OF THE ASSESSEE FOR ASSESSMENT YEAR 2002 03 WHEREIN THE QUESTION OF THE ELIGIBILITY OF FOREIGN EXCHANGE AND FORWARD CONTRACT GAINS FOR DEDUCTION UNDER SECTION 10 A OF THE ACT HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE. FURTHE R THE IDENTICAL ISSUE IS ALSO BEEN DECIDED IN FAVOUR OF THE ASSESSEE FOR ASSESSMENT YEAR 2008 09. I N THE CASE OF CIT V. GEM PLUS JEWELLERY INDIA LTD. REPORTED IN (2010) 233 CTR (BOM) 248, THE HONBLE HIGH COURT OF BOMBAY HAS RULED THAT GAIN FROM FLUCTUAT ION OF FOREIGN EXCHANGE IS DIRECTLY RELATED WITH THE EXPORT ACTIVITIES AND SHOULD BE CONSIDERED AS INCOME DERIVED FROM EXPORT IN THE YEAR IN WHICH THE EXPORT TOOK PLACE FOR THE PURPOSE OF DEDUCTION U/S 10A OF THE ACT. IN OUR CONSIDERED VIEW THAT EXCHANGE RATE FLUCTUATION FOR CLAIMIN G DEDUCTION U/S 10AA OF THE ACT IS INCOME OF THE BUSINESS AS THE EXCHANGE RATE FLUCTUATION ARE RESULTANT FROM REALIZATION OF EXPORT SALE PROCEEDS AS PER THE EXPORT INVOICES AND AS PER THE DEFINITION OF EXPORT TURNOVER, THE CONSI DERATION RECEIVED IN RESPECT OF THE EXPORTS, FOR EXAMPLE, TOTAL AMOUNT REALIZED FOR SALE INVOICES SHALL FORM PART OF EXPORT TURNOVER. THEREFORE, THE TOTAL TURNOVER IS DENOMINATOR, WHICH SALE ALSO INCLUDES THE EFFECT OF FOREIGN EXCHANGE FLUCTUATION. THEREFO RE, SUCH INCLUSION OF FOREIGN EXCHANGE FLUCTUATION IN THE PROFITS SHALL QUALIFY FOR DEDUCTION U/S 10AA OF THE ACT. SUCH VIEW HAS BEEN AFFIRMED BY THE HON'BLE BOMBAY HIGH COURT. NO INFIRMITY IS FOUND IN THE ORDER OF THE LD CIT A. ACCORDINGLY, THE GROUND NO 1 APPEAL OF THE REVENUE IS HEREBY DISMISSED. PAGE | 5 9 . THE 2 ND GROUND OF APPEAL OF THE REVENUE IS THAT TELECOMMUNICATION EXPENSES OF RS. 11, 64, 517 SHOULD ALSO BE REDUCED FROM THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION UNDER SECTION 10 AA OF THE INC OME TAX ACT. THE CLAIM OF THE ASSESSING OFFICER IS THAT FREIGHT AND TELECOMMUNICATION CHARGES ATTRIBUTABLE TO THE DELIVERY OF THE SERVICES OUTSIDE INDIA SHOULD BE REDUCED FROM THE TOTAL TURNOVER. THE ASSESSEE SUBMITTED THAT IT SHOULD NOT BE REDUCED RELYING UPON THE DECISION OF THE HONBLE DELHI HIGH COURT IN CASE OF GEN PACT INDIA AND DECISION OF KARNATAKA HIGH COURT IN CASE OF DELL INTERNATIONAL SERVICES INDIA PRIVATE LIMITED AND SAMSUNG ELECTRONICS CO LTD. HOWEVER THE LD. ASSESSING OFFICER REJECTED THE EX PLANATION OF THE ASSESSEE AND HELD THAT TELECOMMUNICATION EXPENDITURE OF RS. 116 4517 ARE REDUCED FROM EXPORT TURNOVER ONLY AND WILL REMAIN INCLUDED IN THE TOTAL TURNOVER. THE LD. CIT A RELYING UPON THE DECISION OF THE HONBLE DELHI HIGH COURT IN ITA NO. 1519/2010 IN THE CASE OF GEN PACT INDIA WHEREIN IT HAS BEEN HELD THAT THERE SHOULD BE UNIFORMITY IN THE INGREDIENTS OF BOTH THE NUMERATOR AND DENOMINATOR IN THE FORMULA FOR COMPUTATION OF DEDUCTION UNDER SECTION 10 A OF THE INCOME TAX ACT. THEREFORE, HE D IRECTED THE AO TO INCLUDE THE TELECOMMUNICATION EXPENSES IN THE EXPORT TURNOVER IF IT IS INCLUDED IN THE TOTAL TURNOVER FOR COMPUTING DEDUCTION UNDER SECTION 10 AA OF THE ACT. AS THE LD. CIT A HAS DECIDED THE ISSUE FOLLOWING THE DECISION OF THE HONBLE D ELHI HIGH COURT WE FIND NO INFIRMITY IN HIS ORDER. FURTHER IDENTICAL VIEW HAS ALSO BEEN TAKEN BY THE HONBLE KARNATAKA HIGH COURT. IN THE RESULT GROUND NO. 2 OF THE APPEAL OF THE REVENUE IS DISMISSED. 10 . GROUND NO. 3 OF THE APPEAL OF THE REVENUE IS AGAINST TH E DIRECTION OF THE LD. CIT A IN ALLOWING THE MIGRATION/ON THE JOB TRAINING EXPENSES OF RS. 9761393/ FROM THE TOTAL TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION UNDER SECTION 10 AA OF THE ACT. THE BRIEF ISSUE IS THAT ASSESSEE HAS SPENT AN AMOUNT OF RS . 9 7, 613, 893 ON ACCOUNT OF MIGRATION/ON THE JOB TRAINING SERVICES IN RESPECT OF ITS MAIN ACTIVITIES TO THEIR CLIENT OUTSIDE INDIA IN FOREIGN CURRENCY. ACCORDING TO THE ASSESSING OFFICER THESE ARE CLEARLY IN THE NATURE OF PROVIDING OF PAGE | 6 THE SERVICES OUTSID E INDIA AND THEREFORE THESE EXPENSES ARE REQUIRED TO BE REDUCED FROM EXPORT TURNOVER AS PER DEFINITION AND ACCORDINGLY SAID SUM WAS REQUIRED TO BE EXCLUDED. THE ASSESSEE HAS SUBMITTED THAT IF AMOUNT IS REDUCED FROM EXPORT TURNOVER THEN IT SHOULD ALSO BE RE DUCED FROM THE TOTAL TURNOVER AND THE ASSESSEE PLACED RELIANCE UPON THE DECISION OF THE HONBLE DELHI HIGH COURT AND KARNATAKA HIGH COURT SUBMITTING THAT NUMERATOR AND DENOMINATOR SHOULD BE THE SAME. THE LD. ASSESSING OFFICER REJECTED THE CONTENTION OF THE ASSESSEE AND HELD THAT EXPENSE OF RS. 9 761 3893 IS REQUIRED TO BE AT REDUCED FROM EXPORT TURNOVER BUT WILL REMAIN INCLUDED IN THE TOTAL TURNOVER. THE LD. CIT A REJECTED THE FINDING OF THE LD. ASSESSING OFFICER HOLDING THAT THE HONBLE DELHI HIGH COURT IN KARNATAKA HIGH COURT HAS TAKEN A VIEW THAT NUMERATOR AND DENOMINATOR SHOULD BE SAME. THE ABOVE VIEW IS THE CORRECT VIEW OTHERWISE THE PROFIT ELIGIBLE FOR DEDUCTION WILL GIVE A DISTORTED PICTURE. THE DETAILED FINDING OF BEEN GIVEN BY THE LD. CIT A IN P ARA NO. 6 OF HIS ORDER. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. CIT A AND THEREFORE THE GROUND NO. 3 OF THE APPEAL OF THE REVENUE IS DISMISSED. 11 . THE GROUND NO. 4 OF THE APPEAL OF THE REVENUE IS WITH RESPECT TO THE DIRECTION OF THE LD. CIT A IN ALLOWING THE INTEREST AT THE RATE OF LIBOR +1.5% INSTEAD OF 16% RATE OF INTEREST CHARGED ON THE DELAYED PAYMENT FROM THE ASSOCIATED ENTERPRISES. THE TRANSFER PRICING OFFICER HAS PASSED THE ORDER UNDER SECTION 9 2C (3A) OF THE INCOME TAX ACT ON 23/1/201 3 PROPOSING AN ADJUSTMENT OF RS. 3974352 ON ACCOUNT OF THE ARMS LENGTH INTEREST TO BE CHARGED BY THE ASSESSEE ON THE PREMISES THAT ASSOCIATED ENTERPRISE IS HOLDING THAT ASSESSEE HAS EXTENDED THE CREDIT FACILITY AND DELAY IN REALIZATION OF THE DEBIT BALA NCE I N OUTSTANDING IN THE ACCOUNT OF THE ASSOCIATED ENTERPRISES. THEREFORE SUCH ADJUSTMENT WAS MADE IN THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS. THE ASSESSEE CHALLENGED THE SAME BEFORE THE LD. CIT APPEAL WHO REDUCED THE ADDITION HOLDING THA T INTEREST SHALL BE CHARGEABLE AT THE RATE OF LIBOR +1.5% INSTEAD OF 16% COMPUTED BY THE LD. TRANSFER PRICING OFFICER. THE LD. CIT A WHILE REDUCING THE INTEREST COMPONENT HAS RELIED UPON THE DECISION OF THE COORDINATE PAGE | 7 BENCH IN ITA NO 6827/MUM/2012 FOR A SSESSMENT YEAR 2008 09 WHEREIN THE COORDINATE BENCH HAS HELD THAT NOTIONAL INTEREST AT THE RATE OF LIBOR +1.5% SHOULD BE CHARGED ON THE DELAYED PAYMENTS THE ASSOCIATED ENTERPRISE. AS THE LD. CIT A HAS FOLLOWED THE DECISION OF THE COORDINATE BENCH ON T HE SIMILAR FACTS AND CIRCUMSTANCES WHERE THE INTEREST COMPONENT WAS COMPUTED ON THE DELAYED PAYMENT OF CHARGES BY THE ASSOCIATED ENTERPRISE. IN VIEW OF THIS WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. CIT A AND LD. DEPARTMENTAL REPRESENTATIVE AL SO COULD NOT SHOW US THAT THE INTEREST COMP U T A T I O N MECHANISM DIRECTED BY THE LD. CIT A IS NOT APPROPRIATE. IN VIEW OF THIS GROUND NO. 4 OF THE APPEAL OF THE REVENUE IS DISMISSED. 12 . GROUND NO. 5 OF THE APPEAL OF THE REVENUE IS GENERAL IN NATURE AND THEREFORE IT IS DISMISSED. 13 . IN THE RESULT APPEAL FILED BY THE REVENUE IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON 3 1 / 07 / 2018 . - S D / - - S D / - ( SUDHANSHU SRIVASTAVA ) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 3 1 / 07 / 2018 A K KEOT COPY FORWARDED TO 1 . APPLICANT 2 . RESPONDENT 3 . CIT 4 . CIT (A) 5 . DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI