IBM India Pvt. Ltd. Vs ACIT (ITAT Bangalore)
It has been submitted by Ld.Counsel that as a consequence of APA entered into by assessee, income was increased vis-a-vis original computation at page 322. Referring to revised computation at page 328 of paper book volume 1, he submitted that, incremental increase in the income is Rs.7,74,2 1,28,914/- pursuant to APA on which interest under section 234B cannot be living.
Having said so, Ld.Counsel also admitted that 234B is a mandatory levy, by referring to decision of Hon’ble Supreme Court in case of CIT vs. Anjum.M.H. Ghaswala reported in (2001)119 Taxman352. However, he submitted that, interest under section 234B can’t be casted, unless there is a default in making advance tax. And in the present case, there is an increase in the income of assessee, post APA. He placed reliance on decision of Hon’ble Bombay High Court in case of Prime Securities vs ACIT reported in (2012) 20 taxman.com 757, Hon’ble Gujrat High Court in case of CIT vs. Rainbow reported in 277 ITR 507 and decision of ITAT in case of JSW Steel Ltd
On the contrary, Ld.Standing Counsel for revenue, emphasised that, interest under section 234B is a mandatory levy, as the section defines levy of interest on the assessed tax. In the present facts of case, tax is assessed including incremental income due to APA and therefore the consequence should follow.
We have perused submissions advanced by both sides in light of records placed before us. Assessee does not dispute that advance tax is payable on incremental income. Tax has to be paid on additional income, which did not form part of original return of income. Ld.Counsel relied on following decisions:
Decision of Hon’ble Gufarat High Court in Rainbow Industries (P.) Ltd. (supra), relied on by Ld.Counsel is in respect of demand for interest on short payment of advance tax deleted by Tribunal. In reference before Hon’ble Court at the instance of Revenue, it was held that,
“This Tribunal as a matter of fact had found that the advance tax liability was determined by the assessee therein on the basis of its method of valuing closing stock which it had followed even for the earlier assessment years. Therefore, in the absence of the Revenue pointing out that the figures adopted for computing the income was incorrect, the levy of interest could not be sustained.”
Reliance was also placed on decision of Hon’ble Bombay High Court in Prime Securities (supra) wherein, default was committed by assessee in payment of advance tax at the time when it was paid. On these facts, Hon’ble Court held that, at the time of making payment of Advance tax, it was not possible to anticipate events and make payment of advance tax on that basis.
In the present case, it is the case of the Revenue that there is default on part of the assessee in paying Advance tax on account of incremental income received during the year under consideration, pursuant to APA dated 29/12/2016. In our view, these decisions therefore do not recue assessee.
We refer to decision of Hon’ble Bombay High Court in case of E. Merk (India) Ltd vs CIT reported in (2017) 79 taxman.com 21, wherein this decision has been dealt with as under:
“(i) Moreover, both of the above decisions of Gujarat High Court completely ignore sub-section (4) of Section 215 of the Act, which provides for reduction or waiver of the interest payable by the assessee under Section 215 of the Act. Therefore, both the above decisions of the Gujarat High Court most respectfully in our view were rendered sub-silentio. It is this sub-section (4) of Section 215 which inter alia takes into account the circumstances beyond the control of the assessee for having paid less advance tax than that finally determined to be payable. The argument of hardship, bona fide conduct etc. would be appropriately considered when applying sub-section (4) of Section 215 of the Act while considering waiver/reduction of interest payable under Section 215 of the Act. These arguments of hardship etc. cannot be subject of consideration while interpreting a fiscal legislation. There is no place for any equity while interpreting a fiscal legislation. The Apex Court in CST v. Modi Sugar Mills, AIR 1961 (SC) 1047 has observed that “In interpreting a taxing statute, equitable consideration are entirely out of place.” Therefore, the submission of the applicant assessee that non-payment of advance tax was on account of circumstances beyond the control of the assessee and for a reasonable cause, would not warrant deletion of interest payable on account of short payment/non-payment of the advance tax while considering the Sub-section (1) of Section 215 of the Act. The considerations may have been different if we were considering an application of waiver under Sub-section (4) of Section 215 of the Act. (j) In the above view the applicant assessee is liable to pay the interest under Section 215 of the Act as held by the Tribunal.”
In our view, facts considered by Hon’ble Bombay High Court in case of E-Merk (India) Ltd vs CIT (supra) is identical to the fats of the case. Respectfully following the decision of Hon’ble Bombay High Court in case of E. Merk (India) Pvt. Ltd. (supra), and in particular decision of Hon’ble Supreme Court in case of CIT vs. Anjum M. H. Ghaswala(supra), we do not find any merit in submissions of Ld.Counsel.
FULL TEXT OF THE ITAT JUDGEMENT
Present appeal has been filed by assessee against final assessment order dated 08/01/2018 passed by Ld.ACIT Circle 4(1)(2), Bangalore, under section 143 (3) r.w s.144C (1) and 92CD of the Act, on following grounds of appeal:
1. Assessment order bad in law
1.1. At the outset, M/s IBM India Private Limited (hereinafter referred to as ‘the Appellant’ or ‘the Company’) prays that the order dated January 8, 2018 received on January 10, 2018, passed under section 143(3) read with section 144C(1) and section 92CD of the Income-tax Act, 1961 (‘Act’), by the learned Assistant Commissioner of Income-tax, Circle – 4(1)(2), Bangalore (‘ACIT’), be struck down as invalid, as the order is bad in law and on facts.
2. Reliance on the Draft Assessment Order (‘DAO’) of AY 2009-10 for making adjustments for AY 2013-14
2.1. The learned ACIT and the Hon’ble Dispute Resolution Panel (‘DRP’) have erred in law and on facts by placing reliance on the DAO of AY 2009-10. Specifically, the learned ACIT and Hon’ble DRP have erred:
a) In not following the settled legal principle of res judicata not applying to income tax proceedings;
b) In not appreciating the fact that the order on which the learned ACIT had placed reliance was a draft assessment order;
C) In not appreciating the fact that the erstwhile DAO passed by the erstwhile Assessing Officer has been quashed by the Hon’ble Karnataka High Court vide its order dated July 18, 2016. ; and
d) In placing reliance on the DAO of AY 2009-10 without application of mind and without taking cognizance of the submissions/ arguments put forth during the assessment proceedings of AY 2013-14.
3. Denial of relief under section IOAA of the Act
3.1. The learned ACIT and the Hon’ble DRP have erred in law and on facts in denying the relief claimed by the Appellant under section 10AA of the Act of INR 303,16,58,824. The learned ACIT has also erred in law and on fact in denying the relief claimed by the Appellant under section 10AA of the Act on the incremental revenue pursuant to the Advance Pricing Arrangement entered by the Appellant.
3.2. The learned ACIT has erred in law and on facts by holding that the Appellant did not have any evidence for manufacture and export of computer software from eligible units in Special Economic Zone (‘SEZ’). The Hon’ble DRP has erred in fact in concluding that since Document of Understanding/Statement of Work are not registered with the SEZ authorities, the requirements of section 10AA of the Act are not met.
3.3. The learned ACIT has erred in law and on facts by concluding that the Appellant had made contrary submissions in connection to transmission or export of computer software outside India from its SEZ units without taking cognizance of the submissions made by the Appellant.
3.4. The learned ACIT and the Hon’ble DRP have erred in law and on facts by concluding that the various obligations and procedures prescribed under the SEZ schemes and regulations have not been adhered to and that for claiming tax benefit the same has to be complied with.
3.5. The learned ACIT has erred in law and on facts in holding that the unit wise P&L account submitted by the Appellant in relation to the eligible units was not a reliable document for allowing claim under section 10AA of the Act.
3.6. The learned ACIT and the Hon’ble DRP have erred in law and on facts by not taking cognizance of the judicial precedent in the Appellant’s own case, wherein the manner of determining profits eligible for tax holiday by the Appellant has been held to be accurate/appropriate.
3.7. The learned ACIT and the Hon’ble DRP have erred in law and on facts in holding that the undertakings were not independent and that they were formed by the splitting up and reconstruction of business already in existence.
3.8. The learned ACIT and Hon’ble DRP have erred in fact by relying on his analysis of Inter Company Agreements (‘ICA’) even though the Appellant has not submitted any ICA with the learned ACIT during the course of the assessment proceedings for the subject AY.
3.9. The Hon’ble DRP has erred in fact by concluding that the Appellant failed to match the accounting invoices with the SOFTEX forms without taking cognizance of the submissions made by the Appellant during the assessment proceedings for
the subject AY.
3.10. The Hon’ble DRP has erred in fact by concluding that the Appellant failed to produce invoices for verification without taking cognizance of the submissions made by the Appellant during the assessment proceedings for the subject AY.
4. Disallowance of amounts under section 37(1) which have been disallowed suo moto by the Appellant under section 40(a) of the Act
4.1. The learned ACIT has erred in facts and in law in holding that a sum of INR 3,456,564,364 disallowed by the Appellant under section 40(a) of the Act should be disallowed under section 37(1) of the Act
4.2. The learned ACIT has erred in law and on facts by not appreciating that the basis of year-end provisions, as furnished by the Appellant, demonstrate that the same are for abilities which have arisen/been incurred, and therefore, the same cannot be disallowed by under section 37(1) of the Act.
4.3. The learned ACIT has erred in law and on facts by concluding that based on the documents submitted by the Appellant, it is very clear that the amounts under dispute are not an allowable expenditure.
4.4. The learned ACIT has erred in facts and in law in concluding that the amounts are not allowable expenses without taking cognizance of the fact that the details and supportings were submitted demonstrating deduction of taxes at source (where applicable) and also establishing genuineness and business expediency of the amounts.
4.5. The learned ACIT has erred in law and on facts by holding that the fact that the provisions have been reversed subsequently signifies that the expenses provided for in the books are no more required. In doing so, the learned ACIT has failed to appreciate that the subsequent reversal is for accounting purpose (reporting correct profit for the given year), and the invoices received subsequently, and which have been offset by the reversal, corroborate the fact that the liability has been incurred in the current year.
4.6. The learned ACIT has erred in law and on facts by holding that the accounting practice adopted by the Appellant could result in merger of expense of different periods in the books. In doing so, the learned ACIT has failed to appreciate that the entries passed by the Appellant ensures that the matching principle is followed, and in case the provision exceeds the invoices received subsequently, the excess provision would be offered to tax in the subsequent year and there is no loss to the Revenue.
4.7. The Hon’ble DRP has erred in law in directing the learned ACIT to carry out further verification which is not permissible in view of section 144C(8) of the Act which clearly states that the DRP shall not issue any direction for further enquiry and passing of assessment order.
4.8. Without prejudice to the above, the learned ACIT has erred in law and on fact in not taking cognizance of the additional evidence submitted by the Appellant as a consequence of the directions of the Hon’ble DRP.
5. Disallowance under section 40(a) of the Act in respect of payments to non-resident Associated Enterprises (‘AEs’) and Non-Aes.
5.1. The learned ACIT and the Hon’ble DRP have erred in law and on facts in disallowing payments made by the Appellant to non-residents amounting to INR 981,37,37,374 under section 40(a) of the Act as follows:
5.1.1. INR 460,49,70,453 made to IBM Singapore Pte Ltd by treating the sum as ‘royalty’
5.1.2. INR 520,87,66,921 made to other non-residents by concluding that the certificates issued by the Chartered Accountant (‘CA’) are not reliable
5.2. The learned ACIT has erred in facts in disallowing the foreign payments made during the year on which tax is not deducted by not considering the evidence submitted by the Appellant.
5.3. The learned ACIT has erred in fact and in law in not appreciating that certain sums are mere reimbursements and hence cannot be considered as “income”.
5.4. The learned ACIT has erred in law and on facts in placing reliance on the sworn statement which does not pertain to the current year, in holding that the certificates issued by the CA are not reliable and disallowing the amount for the current year.
5.5. The learned ACIT and the Hon’ble DRP have erred in law in disallowing the payment made to IBM Singapore Pte Ltd given that the amendment to definition of royalty related provisions under section 9(1)(vi) of the Act is not relevant to determine disallowance for non-deduction of tax at source as the corresponding amendment has not been made under section 40(a)(i) of the Act.
5.6. The Honble DRP has erred in law in directing the learned ACIT to carry out further verification which is not permissible in view of section 144C(8) of the Act which clearly states that the DRIP shall not issue any direction for further enquiry and passing of assessment order.
5.7. Without prejudice to the above, the learned ACIT has erred in law and on fact in not taking cognizance of the additional evidence submitted by the Appellant as a consequence of the directions of the Hon’ble DRP.
6. Disallowance of claim made under section 40(a) of the Act pertaining to AY 2012-13
6.1. The learned ACIT has erred in facts and in law in disallowing a sum of INR 359,66,16,945 claimed by the Appellant under section 40(a) of the Act consequent to tax deduction and deposit (where applicable) on the amounts disallowed in AY 2012-13
6.2. The learned ACIT has erred in facts and in law in not taking cognizance of the fact that the details and supportings were submitted during the assessment proceedings of AY 2012-13, demonstrating deduction of taxes at source (where applicable) and also establishing genuineness and business expediency of the amounts
6.3 Without prejudice to the above, the learned ACIT and the Honble DRP have failed to appreciate the fact that as a consequence of the said disallowance of the amount in AY 2012-13 under section 37(1) of the Act, the Assessee is to be allowed a deduction in the current year, since the reversal of provision has been credited to the profit and loss account
7. Disallowance of depreciation on leased assets
7.1. The learned ACIT and the Hon’ble DRP have erred in law and on facts in disallowing the depreciation on leased assets (net of lease rental and interest) amounting to INR 24,60,33,070 by not following the decision of the Hon’ble Supreme Court of India in ICDS Ltd v. CIT [2013] 350 ITR 527 (SC) and other judicial precedents.
8. Disallowance under section 14A of the Act
8.1. The learned ACIT and the Hon’ble DRP have erred in law and on facts in disallowing expenditure amounting to INR 78,54,075 without appreciating that the Appellant has not earned any exempt income during the year.
8.2. The learned ACIT has erred in law and on facts, by not discharging the onus of establishing the incurrence of some expenditure in relation to earning exempt income, before invoking the provisions of Rule 8D read with section 14A of the Act.
8.3. The learned ACIT and the Hon’ble DRP have erred in law and on facts in not considering the evidence on record and by not following the judicial precedents.
9. Restriction of depreciation on computer software from 60 per cent to 25 per cent
9.1. The learned ACIT and the Hon’ble DRP have erred in law and on facts in restricting depreciation claim to a lower rate of 25% as against the Appellant’s claim for depreciation on computer software at 60% under section 32 of the Act, resulting in disallowance of INR 24,44,33,932.
9.2. The learned ACIT and the Hon’ble DRP have erred in law in concluding that only software purchased along with the computer is eligible for depreciation at the rate of 60%.
9.3. The learned ACIT and the Hon’ble DRP have erred in facts and in law in not taking into cognizance the submissions including judicial precedents made by the Appellant during the assessment proceedings of the subject AY
10. Initiation of Penalty Proceedings
10.1. The learned ACIT has erred in initiating penalty proceedings under section 271 of the Act.
11. Other grounds
11.1. The learned ACIT has erred in law and on facts in levying interest of INR 409,68,25,501 under section 234B of the Act.
11.2. The learned ACIT has erred in law and on facts in not granting credit for foreign taxes paid by the Appellant.
12. Relief
12.1. The Appellant prays that directions be given to grant all such relief arising from the preceding grounds as also all reliefs consequential thereto.
12.2 The Appellant craves leave to add to or alter, by deletion, substitution or otherwise, any or all of the above grounds of appeal, at any time before or during the hearing of the appeal.
Brief facts of the case are as under:
2. Assessee is a company, engaged in the business of trading, leasing and financing of computer hardware, maintenance of computer equipments and export of software services to associated enterprises. It filed its return of income for year under consideration on 30/11/2013, for an income of Rs.1732,49,84,290/- and claimed deduction under section 10AA amounting to Rs.303,16,58,824,. Ld.AO noted that assessee computed MAT u/s.115JB, payable at Rs.363,67,96,390/-.
2.1 Ld.AO passed draft assessment order making various additions under Transfer Pricing issue as proposed by Ld.TPO and corporate tax issues in the hands of assessee.
2.2 Aggrieved by draft assessment order, assessee filed objections before DRP. DRP its order dated 28/09/2017, upheald the observations of Ld.AO in draft assessment order.
2.3 Based on DRP direction, Ld.AO passed impugned final assessment order, by making total addition of Rs.2437,17,33,376/- in the hands of assessee.
2.4 Aggrieved by additions made by Ld.AO in final assessment order dated 08/01/2018, passed under section 143(3) r.w.144C(1) and 92CD of the Act, assessee is in appeal before us now. We shall consider observations of authorities below, and submissions advanced by both sides in respect of each ground raised by assessee as under.
3. It has been submitted that Ground No.1 raised by assessee is general in nature and therefore do not require any adjudication.
4. Ground No.2 raised by assessee, challenges reliance of Ld.AO/DRP on draft assessment order for assessment year 2009-10, which is set aside by Hon’ble Karnataka High Court in assessee’s own case, by order dated 18/07/2016. Ld.Counsel submitted that, authorities below failed to appreciate settled legal principles of res judicata, not applying to income tax proceedings, and that claim should be analysed, having regards to evidences filed by assessee for year under consideration. Before DRP, assessee raised preliminary issue in respect of validity of draft assessment order dated 29/12/2016 passed by Ld.AO.
4.1 Before DRP, similar arguments were raised by assessee. It was submitted that, said order was set-aside, since it was passed without application of mind, and without taking cognizance of submissions/arguments put forth during assessment proceedings for year under consideration.
4.2 DRP, while dealing with this issue, observed that, similar objection was raised by assessee before DRP for assessment years 2010-11 2011-12 and 20 12-13 which was rejected by observing as under:
“…………We are of the view that the evidences gathered during the proceedings for earlier assessment years can be used for proceedings for subsequent assessment years, if such evidence is a relevant to the issue in assessment year under consideration. It is also noticed by is that assessing officer before arriving on the conclusions in respect of relevant issues for assessment year has independently examined the issues by issues of various notices and hearing the assessee and only thereafter, use materials gathered during the proceedings for assessment year including the material available on records which were relevant to the assessment years under consideration. Further each of the objections raised by assessee in respect of various disallowances of expenses and deductions resulted in addition to the income, have been adjudicated in subsequent paragraphs after hearing the assessee and allowing the sufficient opportunity and therefore, in our view, the assessee should not have any grievance on this account, the objections are accordingly rejected.”
4.3 Ld.Standing Counsel for revenue, placed reliance on observations of DRP.
4.4 We have considered submissions advanced by both sides in respect of this issue, and perused order passed by Hon’ble Karnataka High Court (supra).
4.4.1 It is noted that Ld.AO/TPO referred to enquiries conducted in draft assesse order for AY:2009-10 and final assessment order for AY:2008-09, since issues were common. However, it is also noted that, Ld.AO issued show cause notice dated 21/11/2016 to verify genuineness of various claims by assessee, for year under consideration.
4.4.2 At the outset, Ld.Counsel submitted that, Ld.AO placed reliance on draft assessment order for A.Y.2009-10 which is non est in law, as it was set aside by Hon’ble Karnatake High Court (supra). It is noted that, Hon’ble Karnataka High Court, by consent of both parties, set aside the issue with a direction to pass fresh orders within specified period mentioned therein. On perusal of draft assessment order dated 29/12/2016 passed for year under consideration, Ld.AO recorded that, various enquiries were made in the backdrop of draft assessment order is for assessment year 2009-10 and 2010-11. Ld.AO also note that, assessee has been claiming deduction of its profits under section 10 AA since assessment year 2008-09, and the same has been denied by concerned assessing officers on account of one or more violations. We noted that, assessee was called upon to establish its claim for year under consideration. Assessee was also called upon to furnish evidences for export of computer software and evidences in support of eligible profit claimed u/s 10AA in computation of income. 4.4.3 In fact, Ld.CIT.DR submitted that, all issues should be restored to Ld.AO, since details filed by assessee pursuant to show cause notice issued during the year has not been carefully verified. 4.4.4 We note that, this Tribunal considered this preliminary objection while considering similar issue for assessment years 2006-07. This Tribunal set aside claim u/s. 10AA to Ld.AO for fresh decision, following its order for AY:2008-09 in IBM India (P) Ltd vs JCIT reported in (2014) 46 Taxmann.com 129. It is noted that, for asst. year 2008-09, this Tribunal dismissed various objections raised by Ld. AO to deny claim u/s. 10AA and directed Ld.AO to verify, whether convertible foreign exchange was brought into India and that, they represented consideration received for export of computer software.
4.4.5 We note that, this Tribunal for assessment year 2008- 09(supra), dealt with all objections raised by authorities below, which are common for year under consideration to deny deduction u/s. 10AA. Ld.AO for year under consideration, has referred to final assessment order passed for AY:2008-09. Therefore, in our view, it will be a futile exercise to set aside the issue to Ld. AO for fresh decision as suggested by both sides, when the issue stands squarely covered order of this Tribunal in great detail, for AY:2008- 09 (supra).
Accordingly this objection raised by assessee stands rejected.
5. Ground No.3 is raised against denial of claim under section 1OAA of the Act, amounting to Rs.303, 16,58,824/-.
Ld.AO observed that, assessee has been claiming deduction of its profits under section 1OA/ 1#AA of the Act, since assessment year 2008-09, and, assessing officers in preceding assessment years denied the claim for following violations:
