S. 92C(4) Deduction under Chapter VI-A cannot be allowed on additions made as per TPO’s order

IN THE ITAT NEW DELHI BENCH ‘I’

Assistant Commissioner of Income-tax

Versus

Bechtel India (P.) Ltd.

IT APPEAL NOS. 4338, 4339 & 4573 (DELHI) OF 2011

CROSS-OBJECTION NO. 374 (DELHI) OF 2011

[ASSESSMENT YEARs 2004-05 AND 2005-06]

DECEMBER 21, 2012

ORDER

ITA No.4338/Del/2011

1. This appeal by the Revenue is directed against the order of learned CIT(A)-XX, New Delhi dated 29th July, 2011 for the AY 2004-05.

2. Ground No.1 of the Revenue’s appeal reads as under:-

“The ld.CIT(A) has erred on facts and in law in deleting addition of Rs. 6,93,21,169/- made on account of Arm’s Length Price.”

3. Though it was the Revenue’s appeal, at the outset, it was stated by the learned counsel for the assessee that the assessee derives income from the business of designing engineering projects. That during the year under consideration, the Transfer Pricing Officer (TPO) has considered the assessee to be in the business of IT/IT-enabled services and accordingly, the assessee’s transactions with the AE were benchmarked for determining the arm’s length price. That the learned CIT(A) accepted the assessee’s contention that the assessee derives income from engineering, drawing and design services and accordingly, he accepted that the assessee’s international transactions were at arm’s length price. The learned counsel submitted that in AY 2008-09, the TPO himself accepted that the assessee company is involved in the business of engineering, drawing and designing services. He, however, fairly pointed out that the CIT(A), while accepting the comparables given by the assessee in the field of engineering, drawing and design services, has not allowed any opportunity to the AO/TPO to rebut the comparables given by the assessee. He, therefore submitted that either the order of the learned CIT(A) should be sustained or the matter can be set aside to his file or even to the file of the TPO.

4. The learned DR, on the other hand, stated that on the facts of the assessee’s case, it would be fair if the matter is set aside to the file of the TPO and he is directed to readjudicate the issue in the light of his own order for AY 2008-09.

5. In view of the above submission of both the parties, we set aside the orders of the authorities below on this point and restore the matter to the file of the Assessing Officer and direct him to again refer the matter to the TPO for determining the arm’s length price afresh in the light of his order for AY 2008-09 treating the assessee company as involved in the business of engineering, design and drawing. Needless to mention that AO/TPO while readjudicating the issue will allow adequate opportunity of being heard to the assessee.

6. Ground No.2 of the Revenue’s appeal reads as under:-

“The ld.CIT(A) has erred on facts and in law in deleting disallowance of Rs. 11,95,737/- on account of deduction u/s 80HHE of the I.T. Act.”

7. At the time of hearing before us, it was pointed out by the learned counsel for the assessee that the Assessing Officer recomputed the deduction permissible under Section 80HHE by increasing the total turnover – (i) by the amount of adjustment made by the TPO and (ii) reimbursement of the expenses. He submitted that the TPO has enhanced the value of international transactions by Rs. 6,93,21,169/-. Therefore, if at all it was to be considered, it should have been considered by increasing the assessee’s income and the export turnover. The total turnover cannot be increased without increasing the export turnover. The adjustment made by the TPO was in relation to the value of the international transactions, therefore, any increase therein will first increase the export turnover, then the total turnover and finally, the total income. The Assessing Officer cannot simply increase the total turnover by the said amount. He fairly pointed out that Section 92C(4) provides that no deduction under Chapter VI-A shall be allowed in respect of the amount of income by which the total income is enhanced as per the computation under Section 92C. Therefore, the Assessing Officer is not at all justified in enhancing the total turnover by the adjustment made under Section 92C. With regard to the increase of total turnover by reimbursement of expenses, it was pointed out by the learned counsel that this issue is covered in favour of the assessee by the decision of the Tribunal in assessee’s own case for AY 2001-02 & 2002-03 vide ITA Nos.4278/Del/2005 and 1803/Del/2006. He, therefore, submitted that the order of the learned CIT(A) on this point is in accordance with law and therefore, the same should be sustained.

8. The learned DR, on the other hand, relied on the order of the Assessing Officer.

9. We have carefully considered the arguments of both the sides and perused the material placed before us. We find that the Assessing Officer, while computing deduction under Section 80HHE, increased the total turnover of the assessee. The working of the Assessing Officer under Section 80HHE is reproduced below for ready reference:-

“The deduction u/s 80HHE of the Act is recalculated as under.

10. From the above, it is evident that the Assessing Officer enhanced the total turnover by – (i) reimbursement of expenses and (ii) by the income enhanced by the TPO. The learned CIT(A) allowed the relief to the assessee, therefore, this appeal by the Revenue.

11. With regard to reimbursement of the expenses, we find that this issue is covered in favour of the assessee by the decision of ITAT in assessee’s own case for AY 2001-02 & 2002-03 (supra) wherein the ITAT held as under:-

“13. We have considered the rival submissions and also perused the relevant material on record. It is observed that the reimbursement of expenses actually incurred by the assessee company on behalf of its clients was claimed by it from them as per the agreement and even the bills for such reimbursement were separately raised by it on the concerned customers as is evident from the details furnished by the learned counsel for the assessee at page Nos.25 to 27 of his paper book. The reimbursement so claimed was only to the extent of the expenses actually incurred by the assessee company on behalf of its clients and it is not even the case of the Revenue that any profit element was involved in such reimbursements. In the case of CIT v. Industrial Engineering Projects Pvt. Ltd. (supra), Hon’ble Delhi High Court has held relying on the decision of Hon’ble Supreme Court in the case of Tejaji Farasram Kharawalla (supra) that reimbursement of expenses can under no circumstances be regarded as a revenue receipt.

14. In the case of CIT v. Sudershan Chemical Industries Limited (supra), Hon’ble Bombay High Court has an occasion to consider a similar issue in the context of computation of deduction u/s 80HHC and it was held therein that the relevant provisions of Section 80HHC clearly show that the total turnover includes anything which has nexus with sale proceeds and excludes everything which has no such nexus. It was further held that turnover should be restricted only to such receipts which have an element of profit in it. As the provisions of Section 80HHC relevant in this context are analogous to the provisions of Section 80HHE as pointed out by the learned counsel for the assessee, we are of the view that the ratio of the decision of the Hon’ble Bombay High Court in the case of Sudershan Chemical Industries Limited (supra) is equally applicable to the issue involved in the present appeal and supports the case of the assessee. Keeping in view the said decision as well as the other judicial pronouncements referred to hereinabove and considering all the facts of the case, we hold that there was no infirmity in the impugned order of the learned CIT(A) in directing the AO not to include the receipts by the assessee on account of reimbursement of expenses in its turnover for the purpose of computing deduction u/s 80HHE. The same is, therefore, upheld and ground No.2 of the Revenue’s appeal is dismissed.”

12. Respectfully following the above decision of ITAT, we uphold the finding of the learned CIT(A) with regard to reduction of reimbursement of expenses from the total turnover.

13. With regard to addition made by the Assessing Officer in the total turnover by the amount of adjustment made as per TPO’s order, we find that Section 92C(4) reads as under:-

“(4) Where an arm’s length price is determined by the Assessing Officer under sub-section (3), the Assessing Officer may compute the total income of the assessee having regard to the arm’s length price so determined :

Provided that no deduction under section 10A [or section 10AA] or section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section :”

14. From the proviso to Section 92C(4), it is evident that no deduction in Chapter VI-A is to be allowed in respect of the income which is enhanced after the computation of income in the said Section. Thus, the assessee is not entitled for deduction under Chapter VI-A in respect of the addition made as per the TPO’s order. Despite the above specific provision, the Assessing Officer enhanced the total turnover by the addition made as per the TPO’s order, which has the effect of reducing the deduction under Section 80HHE. However, the finding of the TPO is that the international transaction of the assessee is not at arm’s length and, therefore, by determining the arm’s length price of the international transaction, he proposed the addition of Rs. 6,93,21,169/-. Though while considering ground No.1 of the Revenue’s appeal we have already set aside this matter to the file of the Assessing Officer, however, even if some addition is required to be made by determining the ALP, the question is whether the same will have the effect of enhancing the total turnover. If at all the effect is to be given to the enhancement of income made by the TPO, it will have the impact of increasing the assessee’s export turnover, then total turnover and finally, the total income. If all three are increased, obviously, the deduction claimed by the assessee under Chapter VI-A would increase. The proviso to Section 92C(4) prohibits any deduction under Chapter VI-A to be allowed on the enhancement made as per the TPO’s order. Therefore, the only logical conclusion that can be drawn is that no effect is to be given to the addition made by the Assessing Officer as per the TPO’s order while computing deduction under Chapter VI-A. The Assessing Officer’s view cannot be accepted that by the enhancement of income as per the TPO’s order, only the total turnover would be increased and not the export turnover or the total income. In view of the above, we uphold the order of learned CIT(A) on this point also. Accordingly, ground No.2 of the Revenue’s appeal is rejected.

C.O. No.374/Del/2011

15. At the time of hearing before us, it is stated by the learned counsel that in the cross-objection, the assessee has only supported the order of learned CIT(A) and no further relief is claimed, therefore, the assessee’s cross-objection is treated as infructuous and dismissed as such.

ITA No.4339/Del/2011 & ITA No.4573/Del/2011

16. The only ground raised in the appeal of the Revenue reads as under:-

“The ld.CIT(A) has erred on facts and in law in restricting addition to Rs. 4,58,56,978/- as against the addition of Rs. 9,36,70,152/- made on account of Arm’s Length Price.”

17. In its appeal, the assessee has challenged the addition sustained by the learned CIT(A) i.e. Rs. 4,58,56,978/-. At the time of hearing before us, both the parties agreed that the facts of the year under consideration are identical to AY 2004-05 and, therefore, whatever view is taken in AY 2004-05 would be squarely applicable for AY 2005-06.

18. We have already considered the issue in AY 2004-05 in detail above and for the detailed discussion therein, we set aside the orders of the authorities below and restore the matter to the file of the Assessing Officer to be readjudicated as per our direction in AY 2004-05. Needless to mention that AO/TPO shall allow adequate opportunity of being heard to the assessee.

19. In the result, Revenue’s appeal for AY 2004-05 is deemed to be partly allowed, assessee’s cross-objection for AY 2004-05 is dismissed and Revenue’s appeal as well as assessee’s appeal for AY 2005-06 are deemed to be allowed for statistical purposes.