LTIMindtree Limited Vs ACIT (ITAT Mumbai)
ITAT Mumbai held that TPO was correct in concluding that the rate at which loan is taken by the Appellant cannot be taken as internal CUP to benchmark the loan given by the Appellant to its AE as there is a difference in credit rating of the Appellant and its AE.
Facts- The case of the Appellant was selected for scrutiny and notice under Section 143(2) of the Act was issued. During the assessment proceedings, AO noted that the Appellant has entered into the international transactions with its Associated Enterprises (AEs) and therefore, reference was made to Transfer Pricing Officer (TPO) u/s. 92CA(1) of the Act.
It was also observed that the revenue earned from onsite services provided by the Appellant cannot be considered as export of software from India derived from STPI Units located in India. Therefore, proposed disallowance of 53.40% of the deduction claimed by the Appellant u/s. 10A of the Act in proportion of Software Development Expenses plus Administration & Another Expenses incurred by the Appellant outside India aggregating to INR 871,75,78,841/- and the total Software Development Expenses plus Administration & Another Expenses incurred by the Appellant aggregating to INR 1632,29,65,745/- and computed the amount of disallowance
On the basis of the above directions issued by the DRP, the Assessing Officer passed the Final Assessment Order, dated 15.01.2014, at assessed income of INR 205,26,28,060/- after (a) making Transfer Pricing Addition of INR 2,72,430/-, (b) making proportionate disallowance of INR 172,94,09,811/- out of deduction of INR 263,04,15,538/- claimed by the Appellant under Section 10A of the Act in the Return of Income.
Conclusion- We find that the Appellant has adopted the rate of interest on which funds were borrowed by the Appellant as internal CUP to benchmark interest rate on which funds were given to the subsidiary. In our view, TPO was correct in concluding that the rate at which loan is taken by the Appellant cannot be taken as internal CUP to benchmark the loan given by the Appellant to its AE. In the facts of the present case, it cannot be disputed that there is a difference in credit rating of the Appellant and its AE. In our view, the same would impact the rate at lending to the Appellant/AE. Accordingly, we confirm the rejection of internal CUP as adopted by the Appellant for benchmarking the international transaction under consideration.
Held that for the Assessment Year 2009-10 deduction claimed by the Appellant under Section 10A of the Act in respect of revenue from onsite services cannot be denied on the ground that the onsite services are not connected to the eligible units located in India.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. The present appeal is directed against the Assessment Order dated, 15/01/2014, passed under Section 143(3) read with Section 144C(13) of the Income Tax Act, 1961 [hereinafter referred to as „the Act’], as per directions, dated 31/12/2013, issued by the Dispute Resolution Panel-III, Mumbai (hereinafter referred to as „the DRP’) under Section 144C(5) of the Act while disposing Objection Number 161 pertaining to Assessment Year 2009-10.
2. The Grounds of Appeal raised by the Assessee are as under:
1. “On the fats and in the circumstances of the case and in law, the learned Assessing Officer, relying on the direction of Dispute Resolution Panel – III, Mumbai [“DRP”], erred in making addition of Rs. 2,72,430/- by way of adjustment to the transfer price of the international transaction entered in to by the appellant with its associated enterprise by invoking the provisions of Section 92CA(3) of the Act.
2. On the facts and in the circumstances of the case and in law, the learned Assessing Officer, relying on the direction of DRP, erred in treating the onsite software development services as “supply of manpower” and “body shopping” and not as “export of software” so as to reduce the claim of the appellant under Section 10A of the Act by Rs. 172,94,09,811/-.
3. Without prejudice to Ground no.2, on the facts and in the circumstances of the case and in law, the learned Assessing Officer, relying on the direction of DRP, erred in adopting the proportion of software development costs incurred outside India to quantify and disallow the claim attributable to “supply of manpower” / “body shopping” as aforesaid.
4. Without prejudice to Ground no. 2 and 3, on the facts and the circumstances of the case and in law, the learned Assessing Officer, relying on the direction of DRP, erred in holding that the onsite software development services rendered by the appellant to its customers do not form part of exports of the Undertaking comprised in the Software Technology Park Units (“STPI Units”) and on that basis holding that in any case the deduction under Section 10A needed to be recomputed and reduced to Rs. 151,70,24,446/-.
5. Without prejudice to Ground no. 2, 3 and 4, of the facts and in the circumstances of the case and in law, the learned Assessing Officer, relying on the direction of DRP, erred in holding that communication charges of Rs. 9,27,34,738/-incurred in Indian Rupees and expenditure in foreign currency of Rs. 8,82,15,41,969/- are liable to be excluded from the export turnover for the purpose of computing the deduction under Section 10A of the Act.
6. The appellant company craves leave to add, to, to amend, to alter or modify any or all the aforesaid grounds of appeal.”
3. The Appellant has also raised the following additional ground of appeal vide letter, dated 23/06/2017:
1. “Without prejudice to grounds 2 and 3, on the facts and in the circumstances of the case and in law, the Assessing Officer be directed to adopt actual profitability of onsite work instead of determining the profit by adopting the proportion of software development cost incurred outside India for calculation of disallowance u/s 10A attributable to “supply of manpower”/”body shopping” and also grant DIT relief of Rs. 11,52,25,628/- in respect of the same.”
4. The relevant facts in brief are that the assessee filed return of income for the Assessment Year 2009-10 on 26.09.2010 declaring total income of INR 30,25,87,218/- under normal provisions of the Act which was revised on 29.03.2011. In the revised return of income, the Appellant declared total income of INR 32,29,45,823/-under normal provision of the Act. The case of the Appellant was selected for scrutiny and noticed under Section 143(2) of the Act was issued.
5. During the assessment proceedings, the Assessing Officer noted that the Appellant has entered into the international transactions with its Associated Enterprises (AEs) and therefore, reference was made to the Transfer Pricing Officer (“in short TPO”) under Section 92CA(1) of the Act on 21.09.2010. The TPO, vide order, dated 26.12.2012 passed under Section 92CA(3) of the Act, proposed transfer pricing adjustment to INR 2,72,430/- in respect of interest received by the Appellant on loan advanced by the Appellant to its AE. The above transfer pricing adjustments were incorporated in the Draft Assessment Order, dated 28.03.2013.
6. In the Draft Assessment Order, the Assessing Officer also proposed disallowance of INR 172,94,09,811/- out of aggregate deduction of INR 263,04,15,538/- claimed by the Appellant under Section 10A of the Act on the ground that the Appellant was engaged in providing services which were in the nature „Body Shopping‟ as opposed to export of software as contended by the Appellant. The Assessing Officer, without prejudice to the aforesaid disallowance of deduction under Section 10A of the Act, observed even if the Appellant is considered to be engaged in the business of export of software, the revenue earned from onsite services provided by the Appellant cannot be considered as export of software from India derived from STPI Units located in India. Therefore, proposed disallowance of 53.40% of the deduction claimed by the Appellant under Section 10A of the Act in proportion of Software Development Expenses plus Administration & Another Expenses incurred by the Appellant outside India aggregating to INR 871,75,78,841/- and the total Software Development Expenses plus Administration & Another Expenses incurred by the Appellant aggregating to INR 1632,29,65,745/- and computed the amount of disallowance as under:
