Addl. CIT, New Delhi V. M/s. Aon Services (I) Pvt. Ltd., New Delhi

ITA 6365/DEL/2016

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 5465 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 7 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-07-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2008-2009
• Appeal Filed On: 12-12-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S.K. AGGARWAL
• Keywords: Set aside
• Section: 263; 143(3); 144C

Judgement Text

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “A”: NEW DELHI BEFORE SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER AND MS. ASTHA CHANDRA, JUDICIAL MEMBER ITA No. 6365/Del/2016 Assessment Year: 2008-09 ITA No. 3272/Del/2016 Assessment Year: 2007-08 ACIT Circle-2(2) Room No. 384A, C.R. Building. I.P. Estate New Delhi. Vs. Hewitt Associates (India) Ltd. (Now Aon Services India Pvt. Ltd.) 710, Ansal Chambers- II, 6, Bhikaji Cama Place, New Delhi. PAN AABCH1559D (Appellant) (Respondent) O R D E R PER ASTHA CHANDRA These appeals by the Revenue are directed against the orders dated 11.03.2016 and 14.10.2016 of the Ld. Commissioner of Income Tax Addl. CIT, Spl. Range-1, New Delhi. Vs. M/s. Aon Services (I) Pvt. Ltd. (Formerly, Hewitt Associates (I) Pvt. Ltd.) 710, Ansal Chambers-II, 6, Bhikaji Cama Place, New Delhi. PAN AABCH1559D (Appellant) (Respondent) Assessee by: Shri S.K. Aggarwal, CA Department by : Shri Ishtiyanque Ahmed, CIT(DR) Date of Hearing 28.04.2022 Date of pronouncement 20.07.2022 ITA No. 6365/Del/16 & ITA No. 3272/Del/16 2 (Appeals)-1, New Delhi (“CIT(A)”) pertaining to the assessment year (“AY”) 2007-08 and 2008-09 respectively. Since common issue is involved in both the appeals, these were heard together and are being disposed of by this common order. 2. The Revenue has challenged the action of the Ld. CIT(A) in deleting the disallowance of Rs. 7,30,04,275/- and Rs. 18,20,51,370/- under section 10A of the Income Tax Act, 1961 (the “Act”) made by the Ld. Assessing Officer (“AO”) in AY 2007-08 and 2008-09 respectively. 3. The assessee is a private limited company engaged in rendering human resources consulting services, pay roll outsourcing services. It is also having a captive services unit for rendering services of consulting and human resource outsourcing (HRO) business to Hewitt Affiliate. It is also involved in development and export of computer software and business process outsourcing (BPO) services to Hewitt Affiliates. 3.1 Assessment for the AY 2007-08 was originally made on 31.10.2011 under section 143(3) r.w.s 144C of the Act on total income of Rs. 42,17,42,170/- as against the ‘nil’ income declared in the return filed on 31.10.2007. Subsequently, the assessment was set aside under section 263 of the Act. Consequent thereto, the Ld. AO made fresh assessment determining total income at Rs. 49,47,46,450/- under section 143(3) r.w.s 263 of the Act on 23.02.2015 disallowing therein deduction of Rs. 7,30,04,275/- under section 10A and restricting the claim of deduction at Rs. 53,55,75,131/- as against Rs. 60,85,79,406/- claimed by the assessee. 3.2 For AY 2008-09 the original assessment was made under section 143(3) r.w.s 144C of the Act on total income of Rs. 53,53,01,615/- as against the income declared in the return filed on 30.09.2008. Subsequently, the assessment was set aside under section 263 of the Act. Consequent thereto, the Ld. AO made fresh assessment determining total income at Rs. 71,73,52,990/- under section 143(3) r.w.s 263 of the Act on ITA No. 6365/Del/16 & ITA No. 3272/Del/16 3 29.10.2015 disallowing therein deduction of Rs. 18,20,51,370/- under section 10A restricting the claim of deduction to Rs. 69,68,22,997/- as against Rs. 87,88,74,367/- claimed by the assessee. 4. Aggrieved, the assessee appealed before the Ld. CIT(A) challenging reduction in the amount of deduction claimed under section 10A of the Act in both the AY 2007-08 and AY 2008-09. The Ld. CIT(A) deleted the impugned disallowance made by the Ld. AO in both the assessment years by observing in almost identical words in the concluding para as under :- “In view of the discussion made above, it is held that Assessing Officer was not justified in allocating the royalty expenses, management fee expenses paid by the non-10A units to the Hewitt Affiliates LLC to the 10A units in proportion to the revenue earned by the units. The Assessing Officer was also not justified in further allocating the legal and professional expenses to 10A units over and above the expenses already incurred by such units. As discussed above, the royalty is paid to the Hewitt Affiliates LLC as per the clause 3 of the license agreement for the revenue derived from third parties for rendering services. Similarly, the management fee is also paid to Hewitt Affiliates LLC by the consulting division and human resource outsourcing division for utilizing services of various group entities based on their revenue contribution, therefore, these expenses cannot be apportioned to the 10A units which are captive service provider to the Hewitt Affiliates LLC. Based on these apportionment of the expenses, the deduction to the extent of Rs.7,30,04,275/- has been disallowed by the AO which is not correct and same is deleted.” 5. The Revenue is aggrieved and is before us challenging the findings of the Ld. CIT(A) in both the assessment years involved. 6. In the written submission, common for both the years the Ld. DR pointed out that the Ld. AO made out the case that the allocation of ITA No. 6365/Del/16 & ITA No. 3272/Del/16 4 expenses made by the assessee to 10A eligible units and non 10A eligible units was not appropriate. The Ld. AO observed that the assessee allegedly allocated negligible expenses to 10A eligible units as its income is exempt and allocated disproportionately higher expenses to non 10A eligible units to reduce their taxable income. Accordingly, the Ld. AO made disallowance of certain expenses claimed under non 10A units considering it to be based on wrong allocation methodology. 6.1 The Ld. DR raised common contentions with regard to corporate overhead charges and management fee. He took out the relevant extract of the agreement relating to expenses claimed under the aforesaid two heads of expenses. According to him, perusal of agreement pertaining to corporate overhead charges shows that it talks of delivery of services (Global Corporate Services and Global Business Services) for Affiliates (i.e. the assessee company). As regards management fee, the agreement shows that it talks of delivery of services (regional management functions, finance functions, human resource, marketing, sales and strategy, learning and development and information technology) for Affiliates (i.e. the assessee company). The contention of the Ld. DR is that these services are meant for capacity building of resources so that they can deliver required services to third parties. If such services are required for non 10A eligible units, then why the similar services are not required for 10A eligible units. The agreement does not specify that the services were only for non 10A eligible units or were not required for captive units (10A eligible units). It talks of the nature of services rendered. 6.2 The Ld. DR emphasised that BPO services unit (10A eligible unit) was captive service provider to non 10A eligible units which in turn catered to third party requirement. The non 10A eligible units procured orders for services from third parties and then the same work used to be outsourced to 10A eligible units. On receipt of deliverables of outsourced work from captive units, the non 10A eligible units delivered the services to its clients. ITA No. 6365/Del/16 & ITA No. 3272/Del/16 5 6.3 The Ld. DR further stated that BPO (10A eligible unit) was engaged into providing exactly similar set of services which were being provided by non 10A units to its clients. In substance, the services got delivered by 10A eligible back office units to non 10A eligible units which in turn got delivered to third parties. 6.4 According to Ld. DR, why for delivery of similar set of services, 10A eligible units do not require such corporate services and such management services. There is no justification that the corporate overhead charges and management charges ought to be allocated only to non 10A units whereas the service agreement per se does not make any such distinction. The agreement talks of the nature of services which are relevant for both 10A eligible units and non 10A eligible units as both are engaged in exactly same set of services. The hard fact is that the services to third parties get delivered only after outsourcing the same to 10A eligible units. Thus, the nature of service being exactly same, the claim of allocation to only non 10A eligible unit is not correct. 6.5 As regards advertisement, publicity, business promotion, seminar and meeting charges of non 10A units which have been allowed by the Ld. CIT(A) on the ground that such expenses incurred by non 10A units were to expand the business of third party, the Ld. DR submitted that if non 10A units got higher business by incurring such expenses, this in turn also led to higher revenue to captive units (10A eligible units) because work of such captive units was integral to outsourcing of work by non 10A units or in other words, the business of captive units (BPO division) was directly dependent on the business of non 10A units. 7. In his written submission for both the years the Ld. AR reiterated the same arguments and contentions which were advanced and raised before the Ld. CIT(A). It has been stated that the assessee in its non 10A units provides (a) consulting services to clients located in India and abroad through its Global Sourcing Division; Talent and Organisation Consultancy ITA No. 6365/Del/16 & ITA No. 3272/Del/16 6 Division (“TOC”); Talent and Organisation Consultancy Analytic Division (“TOCA”); Talent and Organisation Consultancy (Global Services) Division; and Retired Fund Management Division (“RFM”) and (b) pay roll outsourcing services to the affiliates and clients through its Multi-Process Human Resources Outsourcing Division (“MP HRO”) and Human Resource Outsourcing Division (“HRO”). In its 10A units the assessee has (a) Technology Development Centre Division (“TDC”) engaged in the development and export of software to Hewitt Affiliates, acting in the capacity of captive service provider of Consulting and HRO businesses owned by Hewitt Affiliates and is an approved 10A unit. (b) Business Process Outsourcing Services (“BPO”) rendering, inter alia, support services in relation to pension administration, health management, pay roll processing to Hewitt Affiliates for their clients, acting in the capacity of a captive service provider of Consulting and HRO businesses owned by Hewitt Affiliates and is an approved 10A unit. 7.1 In view of various business divisions, the assessee has established “cost codes” to record every cost in its accounting system for non 10A units and 10A units. It has also common cost codes for recording common costs incurred with respect to non 10A units as well as 10A units. 7.2 According to the Ld. AR as per the License Agreements between the assessee and Hewitt Associates LLC, the assessee has been given non exclusive, perpetual, worldwide, non-assignable license and right to use the intellectual property as set-forth in the said Licence Agreements. As per clause 3 thereof, in consideration for grant of licence, the assessee will pay a flat royalty fee based upon gross revenue of the assessee derived from third parties. Since non 10A units earn revenue from third parties, as per the terms of agreement, a royalty as a percentage of net revenue derived from third parties has been paid by non 10A units to Hewitt Associates LLC during both the years. In respect to 10A units, since these 10A units are captive units and render services to Hewitt group entities only, royalty was neither paid nor payable by these captive units to Hewitt Associates LLC. ITA No. 6365/Del/16 & ITA No. 3272/Del/16 7 Accordingly, royalty of Rs. 10,85,750/- and Rs. 2,60,64,000/- based on non-10A unit’s revenue has been duly accounted for in consulting and human resource outsourcing division’s P & L Account in AY 2007-08 and AY 2008-09 respectively. 7.3 Regarding management fee, it is submitted that as per Regional Headquarter Service Agreement, Hewitt Hong Kong has been designated as Asia Pacific Headquarter and has the responsibility of participating in and making strategic decisions with respect to senior staffing, practice development, key client acquisition and total compensation decisions for consulting division and human resource outsourcing division only. These regional resources do not provide services for any captive units (i.e. 10A units). Charges are allocated based on actual consumption of related services by the businesses, viz. Consulting and HRO division. Software Development Services and BPO services segment are not availing these services. 7.3.1 The methodology adopted by the assessee is that cost of regional resources serving consulting division and human resource outsourcing division are first transferred to Asia Pacific Headquarter. Thereafter, these costs (plus mark-up) are charged to various group entities which are utilising services of these regional resources (including the assessee) based on their revenue contribution from consulting division and human resource outsourcing division. 7.3.2 It is submitted that the cost incurred (including mark-up) by Hewitt Associates LLC has been charged to Hewitt group companies (including the assessee) based on their revenue from consulting and human resource outsourcing divisions only (i.e. non 10A units). Thus, the assessee contended that only the costs (including mark-up) relating to consulting (TOC, TOAC and RFM) from Asia Pacific Headquarter divisions have been invoiced to the assessee. Accordingly, the same has been duly accounted for in consulting division’s P & L Account. ITA No. 6365/Del/16 & ITA No. 3272/Del/16 8 7.3.3 It is, thus submitted that the charges made by Hewitt Associates LLC to the assessee under Regional Headquarters Services Agreement has been calculated after considering revenue from consulting division and human resource outsourcing division only and no revenue of captive units (i.e. 10A units) has been considered for calculating charge under Regional Headquarters Services Agreement. The expenses accounted on actual basis cannot be allocated to 10A units. 7.3.4 Accordingly, under Regional Business Service Agreement, charge amounting to Rs. 7,30,61,290/- and Rs. 11,23,99,588/-has been made to the assessee for consulting and human resource outsourcing division only and has been accounted for in consulting and human resource divisions P&L Account for the AY 2007-08 and AY 2008-09 respectively. 7.4 Regarding legal and professional expense, the Ld. AR submitted that these expenses are accounted on actual basis. Out of total expenditure of Rs. 6,99,85,598/- and Rs. 8,89,18,330/- under the head legal and professional services, Rs. 5,39,14,583/- and Rs. 4,22,88,729/- have been debited to 10A units which is 77.04% and 47.56% of total expenditure in AY 2007-08 and AY 2008-09 respectively. 7.4.1 In so far as legal and professional expenses for non 10A units are concerned, it is submitted that the assessee engages independent consultants having experience in human resource field on project to project basis. They were hired to deliver client project as and when required. They performed on client projects which are not related to captive units of the assessee and accordingly invoices were raised by the independent consultants for various consultancy/human resources projects (i.e. non 10A units). 7.4.2 It is contended by the Ld. AR that legal and professional fee has been duly accounted for in consulting and human resource outsourcing divisions ITA No. 6365/Del/16 & ITA No. 3272/Del/16 9 P & L Accounts (i.e. non 10A units) in both the AYs and therefore no disallowance is called for. 7.5 As regards corporate overhead charges pertaining to AY 2008-09, it is submitted by the Ld. AR that Corporate Service Agreement between the assesee and Hewitt Associates LLC stipulates that the assessee will pay a service fee (i.e. charge) to Hewitt Associates LLC based on actual costs plus mark-up for rendering services covered under Corporate Service Agreement. 7.5.1 As to the charge received by the assessee from Hewitt Associates LLC under Corporate Service Agreement, it is submitted that the cost incurred (including mark-up, if any) by Hewitt Associates LLC have been charged to Hewitt group companies (including the assessee) based on their revenue from consulting and human resource outsourcing divisions only (i.e. non 10A units). 7.5.2 The Ld. AR submitted that the charge made by Hewitt Associates LLC to the assessee under Corporate Service Agreement has been calculated after considering revenue from non 10A units only and no revenue of captive units (i.e. 10A units) has been considered for calculating charge under Corporate Service Agreement. 7.5.3 It has been the contention of the Ld. AR that the aforesaid charges were allocated based on actual consumption of related services by the businesses viz. Consulting and human resource outsourcing division. Software development services and BPO services segments are not availing these services. Accordingly, question of receiving any benefit and corresponding charge does not arise. 7.5.4 It is, thus, submitted that charge under Corporate Service Agreement amounting to Rs. 3,44,35,160/- in AY 2008-09 has been made to the assessee for consulting and human resource outsourcing division only and ITA No. 6365/Del/16 & ITA No. 3272/Del/16 10 therefore has been duly accounted for in consulting and human resource outsourcing division’s P & L Account. These expenses accounted for on actual basis cannot be allocated to 10A units. 7.6 Coming to Advertisement, Publicity and Business Promotion Expense, it is submitted that these are directly related to consulting division and human resource outsourcing division. There is no need for such expenses for 10A units which are captive units providing services to group companies. Still the actual expenditure of each unit has been debited to respective unit and hence the expenditure of non 10A units cannot be allocated to 10A units. 7.7 As to Seminar and Meeting expense, it is submitted that these expenses are directly related to non 10A units i.e. consulting division and human resource outsourcing division. Accordingly, the same are duly accounted for in consulting division’s (i.e. non 10A units) P & L Account and no disallowance is called for in AY 2008-09. 8. We have carefully considered the rival submissions of the parties, perused the orders of the Ld. AO/CIT(A) and the material available in the records. We have observed that the assessee has five units in India out of which two units are non 10A units and the remaining three are set up in the area where section 10A deductions are admissible. 8.1 On being asked about the basis of allocation of expenses by the Ld. AO, the assessee submitted details of expenses incurred on 10A units and non 10A units in both the AYs. Perusal thereof made the Ld. AO to conclude that the assessee is reducing income in the units where no deduction under section 10A is admissible by debiting expenses under the head Royalty, Management Fee and Legal and Professional Expenses in AY 2007-08 and by debiting expenses under the head Royalty, Management Fee and Corporate Overhead Charges in AY 2008-09. Accordingly, he apportioned ITA No. 6365/Del/16 & ITA No. 3272/Del/16 11 the expenses under the aforesaid heads in proportion of the revenue earned by 10A and non 10A units in both the AYs resulting in the impugned reduction of deduction under section 10A of the Act to the extent of Rs. 7,30,04,275/- and Rs. 18,20,51,370/- in AY 2007-08 and AY 2008-09 respectively. 8.2 The assessee furnished explanation / justification for allocation of expenses before the Ld. CIT(A) as also before us. The Ld. CIT(A) recorded the finding that the manner of allocation of expenses between 10A units and non 10A units are based on common principles of costing and is reasonable. We agree with the findings of the Ld. CIT(A). 8.3 The Ld. CIT(A) further observed that the assessee is following the basis as provided by Accounting Standards-17 approved by ICAI for apportionment of expenses between different units. The Ld. DR could not contradict and the above finding of the Ld. CIT(A) remained uncontroverted by the Revenue. If that be so, without bringing on record any adverse material, the accounting standard followed by the assessee for apportionment of expenses between different units cannot be faulted. We do not find any substance in the written submission filed by the Ld. DR in support of the apportionment of expenses in proportion of the revenue earned by 10A units and non 10A units done by the Ld. AO in both the AYs. 9. Accordingly, on the facts and in the circumstances of the case of the assessee, we endorse the findings of the Ld. CIT(A) that the allocation of expenses between 10A units and non 10A units made by the assessee cannot be disturbed and therefore, the disallowance of deduction to the extent of Rs. 7,30,04,275/- and Rs. 18,20,51,370/- in AY 2007-08 and AY 2008-09 respectively under section 10A of the Act has rightly been deleted by the Ld. CIT(A). The grounds taken by the Revenue in this regard in both the AYs are rejected. ITA No. 6365/Del/16 & ITA No. 3272/Del/16 12 10. In the result, the appeals of the Revenue for the AY 2007-08 and AY 2008-09 are dismissed. Order pronounced in the open court on 20 th July, 2022. sd/- sd/- (ANIL CHATURVEDI) (ASTHA CHANDRA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 20/07/2022 Veena Copy forwarded to - 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi Date of dictation Date on which the typed draft is placed before the dictating Member Date on which the typed draft is placed before the Other Member Date on which the approved draft comes to the Sr. PS/PS Date on which the fair order is placed before the Dictating Member for pronouncement Date on which the fair order comes back to the Sr. PS/PS Date on which the final order is uploaded on the website of ITAT Date on which the file goes to the Bench Clerk Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the Order