Goldman Sachs Services Pvt. Ltd. Vs JCIT (ITAT Bangalore)
The issue under consideration is whether CSR is also eligible for deduction u/s 80G of the Act subject to assessee satisfying the requisite conditions prescribed for deduction u/s 80G?
In the present case, the assessee has incurred expenditure to meet the CSR (Corporate Social Responsibility) as per Policy formulated under Section 135 of the Companies Act, 2013. Out of the said amount, a sum qualified for deduction under Section 80G of the Act and therefore the assessee claimed of 50% of amount as deduction under Section 80G of the Act. The TPO/A.O. has disallowed substantial portion of donation under Section 80G of the Act on the ground that donations were not in the nature of voluntary contribution as required under CSR Policy.
ITAT states that the CSR expenses are required to be incurred by companies as per Section 135 of the Companies Act and the deduction u/s. 37(1) of the Act, is not available from Assessment Year 2015-16 as per the Explanation 2 to Section 37(1) of the Act inserted by the Finance Act No.2. 2014.Whereas, the assessee company has made a claim for deduction of CSR expenses u/s. 80G of the Income Tax Act,1961.But the assessing officer has rejected the assesses claim without verifying the nature of contributions and observed that it is not a donation, and was not spent voluntarily for the eligibility of claim u/s.80G of the Act but due to legal obligation prescribed u/s. 135 r.w. Schedule VII of Companies Act, 2013.We find that the A.O has allowed deduction u/s.80G of the Act in respect of contribution made to PM Relief Fund which is not disputed. We are of the opinion that the A.O. has not made his observations clear that no CSR expenses are eligible for deduction u/s. 80G of the Act. ITAT consider it appropriate to refer to the Clauses (iiihk) & (iiihl) of sub- section 2 of Section 80G of the Act which is the Swachh Bharat Kosh and the Clean Ganga Fund. Where these two exceptions are provided in Section 80G of the Act, it can be inferred that the other contributions made u/s. 135(5) of the Companies Act are also eligible for deduction u/s. 80G of Income Tax Act subject to assessee satisfying the requisite conditions prescribed for deduction u/s.80G of the Act. In the present case the A.O. has not dealt on these aspects, prima facie, considered the contributions as not voluntary but a legal obligation and has accepted the genuineness of the contributions. ITAT are of the opinion, that the matter has to be considered for examination and verification of facts subject to the assessee satisfying the requirements of claim u/s.80G of the Act. Accordingly, they restore the entire disputed issues to the file of A.O. for fresh examination and verification as discussed above. Accordingly, ITAT allow the appeal of the assessee.
FULL TEXT OF THE ITAT JUDGEMENT
The assessee has filed an appeal against the order under Section 143(3) r.w.s. 144C of the Income Tax Act1961 (‘the Act’) dt.17.10.2019 passed in pursuance to the directions of Dispute Resolution Panel (DRP) under Section 144C(5) of the Act dt.27.09.2019.
2. The assessee has Raised the following grounds of appeal :
1. “ The assessment order passed by the LearnedJoint Commissioner of Income-tax, Special Range – 3 (“AO”), under section 143(3) read with section 144C of the Income-tax Act, 1961 (“the Act”), the order of the LearnedTransfer Pricing Officer (“TPO”) issued under section 92CA of the Act and the directions of the HonourableDispute Resolution Panel (“DRP”) issued under section 144C(5) of the Act for the Assessment Year (“AY”) 2015-16, in so far as it is prejudicial to the interests of Goldman Sachs Services Private Limited (“GSSPL” or the “Appellant”), are not in accordance with the law, made in violation of the principles of equity and natural justice and are contrary to the facts and circumstances of the present case.
2. Adjustment under section 92CA of the Act
2.1 Rejection of the transfer pricing documentation of the Appellant
2.1.1 The Honorable DRP and the learned AO/TPO have erred in law and on facts by rejecting the Transfer Pricing (”TP”) documentation which has been prepared by the Appellant with respect to Information Technology (“IT”)&Information technology enabled service (“ITES”) segment, in the manner contemplated under the relevant provisions of the Act and the Income-tax Rules, 1962 (”the Rules”).
2.1.2 The Honorable DRP and the Learned AO/TPO have erred in law in rejecting the TP Study of the Assessee as “not reliable or correct”, under Section 92C(3) of the Act, merely because the learned TPO did not agree with the positions and filters adopted by the Assessee in its TP Study and adopted certain additional filters / modified filters in selecting the comparable companies by using non contemporaneous data of the said companies.
Rejection of the comparability analysis undertaken by the Assessee
2.1.3 The Honorable DRP and the learned AO have erred in law in confirming the actions of learned TPO in conducting a fresh search for comparable companies and by rejecting the search process carried out by the Assessee, without giving justifiable reasons. The Honorable DRP and learned TPO / AO failed to appreciate that the TPO can proceed to determine the ALP for the international transactions of the Assessee on its own only upon satisfaction of the conditions mentioned in Section 92C(3) of the Act, which were not satisfied in the impugned case. Further, the learned TPO did not consider the requirement of Rule 10D(4) of the Rules when undertaking a fresh search for comparable companies.
2.1.4 The Honorable DRP and the learned AO/TPO have erred in not providing the Assessee an opportunity of undertaking a fresh search for comparable companies at the time of TP assessment, considering the updated data available in public domain at the time of TP assessment which was used by the learned TPO in undertaking the fresh search.
2.2 Non-availability of data for FY 2014-15
The Honorable DRP and learned TPO/ AO have erred in selecting the companies only if the data pertaining to FY 2014-15 is available in the public databases.
2.3 Companies with different FY ending
The Honorable DRP and learned AO / TPO have erred in law and on facts in rejecting certain comparable companies on the basis that their year ending dates do not coincide with the Assessee’s year ending date. By doing so, the learned AO / TPO erred in disregarding various judicial pronouncements in this regard. 2.4 Usage of employee cost filter The Honorable DRP and learned AO / TPO have erred in law and on facts in using employee cost filter of 25% in selecting comparable companies.
2.5 Application of export earning filter
The Honorable DRP and learned AO / TPO have erred in law and facts in applying the export earning filter with a threshold limit of 75% in selecting the comparable companies.
2.6 Companies reporting abnormal profits ought to be rejected
The Honorable DRP and learned AO / TPO have erred in law and facts by not rejecting Rheal Software Private Limited, which reports abnormal profits.
2.7 Companies selected for exclusion by the Assessee during the course of assessment proceedings in respect of IT service segment.
The Honorable DRP and learned AO/ TPO have erred in considering the following companies as comparable to the Assessee, despite the same not being comparable to that of the Assessee due to various factors such as functional comparability, product / intangible led revenues, inadequate financial information, use of unreliable segment financials, extra ordinary events / business restructuring, abnormal year, judicial precedents etc.
(i) Infobeans Technologies Limited
(ii) Larsen & Toubro Infotech Limited
(iii) R S Software (India) Limited
(iv) Aspire Systems (India) Private Limited
(v) Cybage Software Private Limited
(vi) Infosys Limited
(vii) Inteq Software Private Limited
(viii) Mindtree Limited
(ix) Nihilent Technologies Limited
(x) Persistent Systems Limited
(xi) Rheal Software Limited
(xii) Tata Elxsi Limited
2.8 Companies sought for inclusion by the Assessee during the course of assessment proceedingsin respect to IT service segment
The Honorable DRP and learned AO / TPO have erred in law and on facts in rejecting the following comparable companies requested for inclusion by the Assessee during the course of assessment proceedings:
(i) Akshay Software Technologies Limited
(ii) Caliber Point Business Solutions Limited (Segmental)
(iii) Sagar Soft India Limited NC
(iv) TVS Infotech Limited
(v) Bells Softech Limited
(vi) Daffodil Software Limited
(vii) Evoke Technologies Limited
(viii) I2T2 India Limited
(ix) Melstar Information Technologies Ltd.
(x) Minvesta Infotech Limited
(xi) New-Age Bizsoft Solutions Pvt Ltd
2.9 Computation of operating profit margins of comparable companies
The Honorable DRP and learned AO / TPO have erred in considering provision for bad and doubtful debts as operating in nature while computing the operating profit margins of comparable companies.
2.10 Use of information obtained under Section 133(6) of the Act
2.10.1 The Honorable DRP and learned AO / TPO have erred in law and on facts by gathering information from various companies under Section 133(6) of the Act, which were not available with the Assessee at the time of preparing its TP documentation.
2.10.2 The Honorable DRP and learned AO / TPO have erred in law by relying upon the information not available in public domain while carrying out the benchmarking analysis under the Act.
2.11 Not granting working capital adjustment
2.11.1 The Honorable DRP and learned AO / TPO have erred in law by disregarding the Section 92C of the Act and Rule 10B of the Rules by not considering the working capital adjustment while computing the net profit margin which constitutes difference if any, between the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market as per 10B(3) of the Rules.
2.11.2 The Honorable DRP and learned AO / TPO have erred in law by disregarding the guidance’s prescribed in TP guidelines issued by the Institute of Chartered Accountants of India, Revised – 2017 (“ICAI Guidelines”), OECD TP guidelines for Multinational Enterprises and Tax Administration issued by Organization for Economic Cooperation and Development (“OECD Guidelines”) in July 2017, United Nations Practice Manual on Transfer Pricing for Developing Countries (2017) (“UN TP Manual”) and also a plethora of judicial pronouncements of Indian revenue authorities granting working capital adjustment while computing the arm’s length price / net margin of comparable companies to remove any material differences on account of different working capital condition that exist between the comparable companies and the Assessee.
2.12 Risk adjustment
2.12.1 The Honorable DRP and learned AO / TPO have erred in not appreciating that the Assessee operates at less than normal risks as compared to comparable companies, which carry higher risks and accordingly erred in not granting appropriate risk adjustments.
2.12.2 The Honorable DRP and learned AO / TPO have erred in concluding that there exists a single customer risk and that such a risk nullifies any risk adjustment that could be provided. Further, the Honorable DRP and learned AO / TPO have erred in concluding that there is no reliable method to compute the risk adjustment.
2.12.3 The Honorable DRP and learned AO / TPO have erred in law and on facts by not providing reasons for rejecting the methodology/workings provided by the Assessee for computing the risk adjustment.
3. Other TP related grounds
3.1 The Honourable DRP and the Learned AO/ TPO have failed to appreciate the Appellant’s commercial judgment about the application of arm’s length principle which is tied to the business realities.
3.2 The Honourable DRP and the Learned AO/ TPO have erred in law and on facts, in making several observations and findings, which are based on incorrect interpretation of law and contrary to facts of the case. 3.3 The Honourable DRP and the Learned AO/ TPO have erred in law and on facts by not relying on the judicial precedents available and submitted by the Appellant during the course of assessments.
3.4 The Honourable DRP and the Learned AO/ TPO have erred by not carrying out the determination of arm’s length price as required under section 92C of the Act read with Rule 10D of the Rules.
4. Disallowance under section 14A of the Act
4.1. The Honorable DRPand the Learned AO have erred in law and on facts in upholding the disallowance of Rs 1,37,500 under section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962 (“the Rules”) in connection with the investment of fundslargely in its group companies.
4.2. The Honorable DRP and the Learned AO have erred in law and on facts in disallowing an amount of Rs 1,37,500 under section 14A of the Act by mechanically applying Rule 8D when there is no basis to reject the Appellant’s claim that no expenditure was incurred for earning exempt income.
4.3. The Honorable DRP and the Learned AO have erred in law and on facts in not considering the contention of the Appellant that there was no exempt income earned in the first place and consequently no expenditure could have been incurred for earning exempt income during the relevant AY and hence the applicability of section 14A of the Act does not arise.
4.4. The Honorable DRP and the Learned AO have erred in not considering the decision of the Honorable Bangalore ITAT in Appellant’s own case for AY 2009-10, AY 2010-11 and AY 2011-2012, and the judgement of Commissioner of Income Tax (Appeals) [CIT(A)] for AY 2013-14, wherein the disallowance made under section 14A of the Act, on similar facts has been deleted.
5. Disallowance under section 40(a)(i) of the act towards reimbursement of salary cost
5.1 The Honorable DRP and the Learned AO have erred in law and on facts in treating the reimbursement of salary costs of INR 48,35,91,738, as constituting ‘consideration’ forthe alleged services being provided by the Appellant’s overseas associated enterprise i.e., Goldman Sachs & Co (“GS & Co”), a resident of United States of America (“USA”).
5.2 The Honorable DRP and the Learned AO have erred on facts in not appreciating the submissions made submitted by the Appellant that the expatriate employees remain in the payroll of the Appellant and are also entirely controlled by the Appellant.
5.3 The Honorable DRP and the Learned AO have erred on facts in holding that the Appellant had entered into a Secondment Agreement with GS & Co, whereas no such agreement exists between the assesse and GS & Co.
5.4 The Honorable DRP and the Learned AO have erred on facts by not appreciating that the payment was not towards rendition of any service but represents mere reimbursement of salary and other related costs on a ‘cost-to-cost’ basis.
5.5 The Honorable DRP and the Learned AO have erred in law and on facts in concluding that the reimbursement of salary costs to GS & Co amounted to payment towards Fees for Technical Services (“FTS”) under explanation 2 to section 9(1)(vii) of the Act.
5.6 The Honorable DRP and the Learned AO have erred in law and on facts in concluding that the aforesaid reimbursements paid by the Appellant to GS & Co are also taxable as FTS or as Fees for Included Services (“FIS”) under the double taxation avoidance agreement between India and USA and consequently holding the Appellant liable to deduct tax at source under section 195 of the Act, from the said payments.
5.7 The Honorable DRP and the Learned AO have erred in law and on facts in upholding the requirement of TDS under section 195 of the Act despite the salary payments having already suffered TDS under section 192 of the Act, giving rise to double taxation on the same transaction.
6. Disallowance of corporate social responsibility expenses claimed as deduction under section 80G of the Act
6.1 The honorable DRP and the learned AO have erred in law and on facts in disallowing an amount of INR 1,12,60,750 claimed as deduction under section 80G of the Act, holding that the contributions towards Corporate Social Responsibility (“CSR”) of the Appellant were not eligible for the said deduction under section 80G of the Act. 6.2 The Honorable DRP and the learned AO have erred in law by concluding that the deduction under section 80G of the Act is available only for the payments grouped as donations and not for CSR contributions.
6.3 The Honorable DRP and the learned AO have erred by concluding that the deduction under section 80G of the Actwherein there is no explicit provisions under the law to disallow the claim under section 80G of the Act, in respect of CSR contributions.
6.4 The Honorable DRP and the learned AO have erred in law by disregarding the fact that the deductions claimed under section 80G of the Act pertained to eligible payments specified under section 80G of the Act.
6.5 The Honorable DRP and the learned AO have erred in law and on facts in stating that the amount grouped under CSR contributions has not been paid by the Appellant on a voluntary basis, and hence the same is not eligible to be claimed as deduction under section 80G of the Act.”
3. The Brief facts of the case are that the assessee is subsidiary company of Goldman Sachs Mauritius LLC and Goldman Sachs (Mauritius) NBFC LLC and being part of the Goldman Sachs Group. The assessee is engaged in development of computer software and provides Software Development Services to the Associated Enterprises (AEs) outside India and has Information Technology Enabled Services (ITES) to support the business processes of the Goldman Sachs Group companies and the assessee company is compensated at Cost+ mark up of 16%. The assessee company filed the Return of Income for the Assessment Year 2015-16 electronically on 30.12.2014 with total income of Rs.383,05,12,310/-. The case was selected for scrutiny under CASS and Notice under Section 143(2) and 142(1) of the Act were issued. On perusal of the Form No.3CB filed by the assessee, the Assessing Officer found there are international transactions with its AEs, and with prior approval of Prin.CIT-3, the matter was referred to the Transfer Pricing Officer (TPO) for determination of Arm’s Length Price (ALP).The assessee has filed the TP Study report, and as per the report in the F.Y. 2014-15, it has received an amount of Rs.880,96,98,062/- from its AEs outside India in respect of software development services and the margin computed on operating cost worked out to 16%.The assessee has adopted TNMM as Most Appropriate Method (MAM), Whereas the Assessing Officer required the details as per the provisions of Section 92D of the Act along with financials, Annual Reports and copies of agreements.The assessee company has selected 14 comparables in software development services and 11 comparables in ITES as per the TP documents. The TPO has issued show cause notice to the assessee on rejection of TP Study and the assessee has filed objections, submissions referred at Para 5.3 of the T.P. Order. The TPO after rejecting the TP Study has applied the filters to the software development services segment and ITES segments. Finally, the TPO selected the comparables in software development services segment and ITES and has dealt on the functionality and margins and finally selected 16 comparables in software development services which includes 5 comparables selected by the assessee referred at Para 21 page 80 of T P Order as under:
