M/s Tavant Technologies India Pvt Ltd , Bangalore V. Deputy Commissioner of Income Tax Circle-12(4), Bangalore

ITA 967/BANG/2017

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 1328 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 1 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-06-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 02-05-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: VIMAL ANAND
• Assessee Lawyers: V K GURUNATHAN
• Keywords: Transfer pricing; International transaction; Earning of tax free income; Rule 8D
• Section: 43B; 143(3); 142(1); 234B; 14A; 250

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, BENGALURU BEFORE SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER ITA NO. 967 /BANG/201 7 (ASSESSMENT YEAR: 2009-10) M/S.TAVANT TECHNOLOGIES INDIA PVT. LTD. CSRIE-11, NO.12, GUAVA GARDEN, 5 TH BLOCK, KORAMANGALA, BENGALURU-560095. PAN:AABCT3261 E VS. APPELLANT DEPUTY COMMISSIONER OF INCOME - TAX, CIRCLE 12(4), BENGALURU. RESPONDENT APPELLANT BY : SHRI V.K.GURUNATHAN, ADVOCATE. RESPONDENT BY : SHRI VIMAL ANAND, ADDL.CIT(DR) DATE OF HEARING: 02/05/2019 DATE OF PRONOUNCEMENT: 14/06/2019 O R D E R PER PAVAN KUMAR GADALE, JM : THE ASSESSEE HAS FILED THE APPEAL AGAINST THE ORDER OF THE CIT(A), MYSORE, PASSED U/S 143(3) READ WITH SECTION 144C AND 250 OF THE INCOME-TAX ACT,1961 ['THE ACT' FOR SHORT ]. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUN DS OF APPEAL: 1. THE LEARNED CIT (APPEALS) ERRED IN PASSING THE ORD ER IN THE MANNER HE DID. 2. THE LEARNED CIT (APPEALS) GROSSLY ERRED IN CONFIRMI NG THE ADDITIONS MADE BY THE AO UNDER SECTION 14A READ WITH RULE 8D OF THE RULES ALTHOUGH THERE WAS NO SPECIFIC EXPENDITURE INCURRED WHILE EARNING THE ITA NO.967/BANG/2017 PAGE 2 OF 8 EXEMPTED INCOME AND ALSO THERE WAS NO NEXUS BETWEEN THE EXPENDITURE AND EXEMPTED INCOME THAT WAS ESTABLISHED BY THE APPELLANT. 3. THE LEARNED CIT (APPEALS) ERRED IN CONFIRMING THE PROVISION THAT WAS MADE FOR LONG TERM RETENTION BON US TO THE EMPLOYEES WHICH WAS SUBSEQUENTLY PAID TO THE EMPLOYEES WHICH WAS THE PART OF THE SALARY ITSELF. 4. THE LEARNED CIT (APPEALS) FAILED TO CONSIDER THAT T HE PROVISION MADE TOWARDS LONG TERM RETENTION BONUS OF THE EMPLOYEES IS A PART OF THEIR PAY PACKAGE NEGOTI ATED WITH THE EMPLOYEES AND AS SUCH THE PROVISION OF SEC TION 43B IS NOT APPLICABLE TO SALARY EXPENSES. 5. THE LEARNED CIT (APPEALS) GROSSLY ERRED IN CONFIRMI NG THE ADDITIONS MADE BY THE AO TOWARDS RENT EQUALIZAT ION PROVISION BY NOT CONSIDERING THE FACT THAT THE APPE LLANT DURING THE YEAR HAD REVERSED AN AMOUNT FOR RENT EQUALIZATION PROVISION WHICH WAS PROVIDED IN THE PREVIOUS YEAR AND HAD ALSO DEBITED AN AMOUNT OF RS.3,72,599/- BEING THE PROVISION FOR RENT EQUALIZA TION FOR THE YEAR WHICH IS IN ACCORDANCE WITH THE ACCOUN TING STANDARDS. 6. THE LEARNED CIT (APPEALS) FAILED TO CONSIDER THAT S UCH AMOUNT TOWARDS RENT EQUALIZATION PROVISION SHOULD B E ALLOWED AS EXPENDITURE AFTER GIVING EFFECT TO REVER SAL OF PROVISION. 7. THE LD CIT(A) FAILED TO CONSIDER THAT THE EXPENDITU RE INCURRED IN FOREIGN CURRENCY TOWARDS TELECOMMUNICATION, INSURANCE 86 FREIGHT CHARGES HAD TO BE REDUCED FROM THE TOTAL TURNOVER AS IT WAS ALREAD Y REDUCED FROM THE EXPORT TURNOVER. THE ABOVEMENTIONE D REDUCTION NEEDS TO BE MADE IN THE LIGHT OF THE DECI SION OF THE HON'BLE JURISDICTIONAL HIGH COURT OF KARNATA KA. 8. THE LEARNED CIT (APPEALS) ERRED IN CONFIRMING THE L EVY OF INTEREST UNDER SECTION 234B OF THE ACT. 9. FOR THESE AND SUCH OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, THE APPELLANT PRAYS THAT THE APPEA L MAY BE ALLOWED. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASS ESSEE IS IN THE BUSINESS OF PROPERTY DEVELOPMENT AND FILED THE RETU RN OF ITA NO.967/BANG/2017 PAGE 3 OF 8 INCOME ON 28/09/2009 WITH BOOK PROFITS U/S 115 JB O F RS.23,97,38,525/-. THE CASE WAS SELECTED FOR SCRUT INY AND NOTICES U/S 143(2) AND 142(1) WERE ISSUE. IN COMPL IANCE, AR OF THE ASSESSEE APPEARED ON VARIOUS DATES AND FURNI SHED THE RELEVANT DETAILS, PARTICULARS AND CLARIFICATIONS AS CALLED FOR. SINCE THE ASSESSEE HAS INTERNATIONAL TRANSACTIONS, REFERENCE WAS MADE TO THE TRANSFER PRICING OFFICER (TPO) WHER EAS THE TPO BY ORDER DATED 27/04/ 2012 MADE NO ADJUSTMENT TO TH E ARM'S LENGTH PRICE OF THE ASSESSEE. ON THE DISPUTED ISSU E, THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAS RECEI VED DIVIDEND INCOME OF RS.84,91,571/- AND CLAIMED AS EXEMPT. WH EREAS NO EXPENSES HAVE BEEN DISALLOWED BY THE ASSESSEE FOR E ARNING OF SUCH INCOME. THE AO, APPLIED THE PROVISIONS OF SEC TION 14A R.W.S. RULE 8D(2)(III) AND CALCULATED % OF AVERAGE INVESTMENTS WORKED OUT TO RS.4,18,230/-. SIMILARLY , AO HAS DISALLOWED THE CLAIM OF LONG-TERM RETENTION BONUS O F RS.10,31,070/- AS IT WAS NOT PAID ON OR BEFORE THE DUE DATE OF FILING RETURN U/S 139(1) OF THE ACT. FURTHER AO FO UND THAT THE ASSESSEE HAS CLAIMED RS.3,72,599/- TOWARDS RENT EQU ALIZATION RESERVE OF THE CURRENT YEAR AND WHEREAS THE AO IS O F THE OPINION THAT IT DOES NOT RELATE TO THE RELEVANT PERIOD AND DISALLOWED THE CLAIM. SIMILARLY, AO WHILE COMPUTING THE DEDUCTION U/S 10A OF THE ACT, HAS NOT ALLOWED THE CLAIM OF FREIGHT CHARG ES, INSURANCE, ITA NO.967/BANG/2017 PAGE 4 OF 8 TELE-COMMUNICATION EXPENSES FROM THE TOTAL TURNOVER AS THE SLP FILED BY THE REVENUE IS PENDING BEFORE THE HON BLE SUPREME COURT AGAINST THE ORDER OF THE HONBLE HIGH COURT AND THE EXPENSES INCURRED IN FOREIGN CURRENCY TOWARDS P ROVIDING TECHNICAL SERVICES OUTSIDE INDIA HAS TO BE REDUCED ONLY FROM EXPORT TURNOVER AND NOT FROM TOTAL TURNOVER AND RES TRICTED THE CLAIM OF DEDUCTION U/S 10A OF THE ACT AND DETERMINE D THE TOTAL INCOME AND PASSED THE ORDER U/S 143(3) R.W.S. 144C DATED 18/3/2013. 4. AGGRIEVED BY THE ORDER, THE ASSESSEE HAS F ILED AN APPEAL WITH THE CIT(A). WHEREAS THE CIT(A) HAS NOT GRANTE D THE RELIEF ON THE DISPUTED ISSUES BUT GRANTED RELIEF ON OTHER ADDITIONS AND PARTLY ALLOWED THE APPEAL OF THE ASSESSEE. 5. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESS EE HAS FILED AN APPEAL BEFORE THE TRIBUNAL. THE LEARNED A R OF THE ASSESSEE ON THE ISSUE OF DISALLOWANCE U/S 14A SUBMI TTED THAT THE CIT(A) HAS ERRED IN CONFIRMING THE ADDITION MAD E BY THE AO WHERE NO EXPENDITURE WAS INCURRED BY THE ASSESSEE A ND THE APPLICATION OF RULE 8D(2)(III) WAS NOT PROPERLY CON SIDERED. THE LEARNED AR FURTHER SUBMITTED THAT THE CIT(A) HAS CO NFIRMED THE ADDITION MADE FOR LONG TERM RETENTION BONUS PAID TO THE EMPLOYEES AS PART OF SALARY AND IS AN ASCERTAINED L IABILITY AND ITA NO.967/BANG/2017 PAGE 5 OF 8 THEREFORE, IT HAS TO BE ALLOWED AS BUSINESS DEDUCTI ON AND FALL UNDER THE PURVIEW OF SECTION 43B OF THE ACT. ON TH E THIRD DISPUTED ISSUE, THE LEARNED AR SUBMITTED THAT THE C IT(A) HAS ERRED IN CONFIRMING THE ADDITION IN RESPECT OF RENT EQUALIZATION PROVISION AS THE ASSESSEE HAS REVERSED THE AMOUNT F OR RENT EQUALIZATION PROVISION WHICH WAS CONSIDERED IN THE EARLIER YEAR AS PER THE ACCOUNTING STANDARDS AND HAS TO BE ALLOW ED AS EXPENDITURE. ON THE LAST DISPUTED ISSUE, THE LEARNE D AR SUBMITTED THAT THE CIT(A) HAS ERRED IN CONFIRMING T HE DISALLOWANCE OF CLAIM U/S 10A OF THE ACT WHEREAS TH E ISSUE IS COVERED BY THE JURISDICTIONAL HIGH COURT IN THE CAS E OF TATA ELXSI (349 ITR 98) AND FILED PAPER BOOK TO SUBSTANTIATE T HE CLAIM ALONG WITH JUDICIAL DECISIONS. CONTRA, THE LD. DR RELIED ON THE ORDER OF THE CIT(A). 6. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. ON THE FIRST DISPUTED ISSUE OF DISALLO WANCE U/S 14A R.W. RULE 8D(2)(III), LEARNED AR ARGUED THAT THE AS SESSEE HAS NOT INCURRED ANY EXPENDITURE FOR EARNING DIVIDEND I NCOME AND HENCE, NO DISALLOWANCE IS CALLED FOR. ON PERUSAL O F THE ASSESSMENT ORDER, WE FOUND THAT THE AO HAS CALCULAT ED DISALLOWANCE UNDER RULE 8D(2)(III) CONSIDERING % O F AVERAGE VALUE OF INVESTMENT. AS RIGHTLY POINTED OUT BY THE LEARNED AR THAT THE AO HAS CONSIDERED THE VALUE OF ALL INVESTM ENTS AS ON ITA NO.967/BANG/2017 PAGE 6 OF 8 1/4/2008 AND AS ON 31/3/2009 AND CALCULATED. IN TH E SPECIAL BENCH DECISION OF TRIBUNAL RENDERED IN THE CASE OF VIREET INVESTMENTS (165 ITD 27)(DEL.), IT HAS BEEN HELD THAT WHERE FOR THE PURPOSE OF CALCULATION OF DISALLOWANCE UNDE R RULE 8D, ONLY THOSE INVESTMENTS WHICH YIELDED EXEMPT INCOME HAVE TO BE CONSIDERED. CONSIDERING THE ABOVE FACTS AND CIR CUMSTANCES, WE RESTORE THIS DISPUTED ISSUE TO THE FILE OF THE A O TO RECOMPUTE THE DISALLOWANCE CONSIDERING THE DECISION OF THE SP ECIAL BENCH IN THE CASE OF VIREET INVESTMENTS (SUPRA) WHERE ONLY DIVIDEND YIELDING INVESTMENT HAS TO BE CONSIDERED FOR THE PU RPOSE OF CALCULATION OF AVERAGE VALUE OF INVESTMENTS UNDER R ULE 8D(2)(III). ACCORDINGLY, THE GROUND OF APPEAL OF T HE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. 7. ON THE SECOND DISPUTED ISSUE WITH RESPECT TO DISALLOWANCE OF LONG-TERM RETENTION BONUS, THE LEAR NED AR CONTENTION THAT BONUS PAID TO EMPLOYEES HAS TO BE A LLOWED. BUT ON PERUSAL OF THE ASSESSMENT ORDER, WE FOUND TH AT THE AO HAS CONSIDERED THE PROVISION OF LONG-TERM RETENTION BONUS AS AN ASCERTAINED LIABILITY AND IT WAS NOT PAID BEFORE DUE DATE OF FILING OF RETURN OF INCOME U/S 139(1) OF THE ACT AN D DISALLOWED APPARENTLY U/S 43B OF THE ACT, WHICH THE LEARNED AR CONCEDES. IN THE CIRCUMSTANCES, WE ARE OF THE SUBSTANTIVE OPI NION THAT THE CLAIM SHALL NOT BE ALLOWABLE FOR THE ASSESSMENT YEAR 2009- ITA NO.967/BANG/2017 PAGE 7 OF 8 10. BUT IF THE ASSESSEE HAS PAID IN SUBSEQUENT YEAR, THE CLAIM HAS TO BE ALLOWED ON PAYMENT BASIS AND GROUND OF APPEAL IS DISMISSED. 8. ON THIRD DISPUTED ISSUE, THE LEARNED AR SUBM ITTED THAT THE ASSESSEE-COMPANY HAS CLAIMED RENT EQUALIZATION PROVISION AS IT WAS PROVIDED IN THE EARLIER YEAR. BUT WE FIND THAT THESE FACTS ARE NOT EMERGING FROM THE ORDER OF THE AO OR FROM THE ORDER OF THE APPELLATE AUTHORITY. THEREFORE, WE RE STORE THIS DISPUTED ISSUE TO THE FILE OF THE AO TO VERIFY THE MATERIAL AND EVIDENCE IN RESPECT OF CLAIM MADE IN THE EARLIER YE ARS AND ALLOW THE DEDUCTION AND THIS GROUND OF APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. 9. THE LAST GROUND OF APPEAL BEING THAT THE AO HAS RESTRICTED THE CLAIM OF EXPENSES TOWARDS TELECOMMUNICATION EXP ENDITURE, INSURANCE INCURRED IN FOREIGN CURRENCY FOR PROVIDIN G TECHNICAL SERVICES OUTSIDE INDIA, BY ALLOWING THE DEDUCTION O NLY FROM EXPORT TURNOVER. THE LEARNED AR RELIED ON THE DECI SION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF TATA ELXSI (SUPRA) WHERE THE HONBLE HIGH COURT HELD THAT FOR THE PURPOSE OF COMPUTING EXEMPTION U/S 10A, WHEN THE EXPORT TURNOVER IN THE NUMERATOR IS TO BE ARRIVED AT AFTER EXCLUDING COMMUNICATION E XPENSES, THE SAME SHOULD ALSO BE EXCLUDED IN COMPUTING THE EXPOR T TURNOVER AS A COMPONENT OF TOTAL TURNOVER IN THE DONOMINATOR . WE, ITA NO.967/BANG/2017 PAGE 8 OF 8 RELYING ON THE DECISION OF THE JURISDICTIONAL HIGH COURT AND DIRECT THE AO TO REDUCE THE EXPENSES INCURRED IN FO REIGN EXCHANGE FROM THE EXPORT TURNOVER AS WELL AS TOTAL TURNOVER AND ALLOW THE CLAIM U/S 10A AND THE GROUND OF APPEA L OF THE ASSESSEE IS ALLOWED. 10. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 14 TH JUNE, 2019. SD/- SD/- (B.R. BASKARAN) (PAVAN KUMAR GADALE) ACCOUNTANT MEMBER JUDICIAL MEMBER PLACE : BENGALURU D A T E : 14/06/2019 SRINIVASULU, SPS COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A)- 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME-TAX APPELLATE TRIBUNAL BANGALORE