DCIT Vs Zensar Technologies Ltd (ITAT Mumbai)
ITAT Mumbai held that deduction under section 80HHE of the Income Tax Act is allowed against the gross total income.
Facts- The return was selected for scrutiny and the notice u/s. 143(2) was served on the assessee. Since the assessee had international transaction, a reference was made to the Transfer Pricing Officer (TPO). The TPO made a Transfer Pricing Adjustment of Rs,22,88,380/-, towards salary cost of employees who are seconded to the US Associated Enterprise (AE).
AO while passing the assessment order made disallowance towards Non compete Fee of Rs.43,90,000/- and Employee Stock Options of Rs. 22,08,491 besides the above transfer pricing adjustment. The AO also treated a sum of Rs.1,48,43,768/- as income from other sources as against the treatement of interest and rental income as business income by the assessee. AO also made an addition towards excess exemption claimed u/s.10A due to difference in depreciation between book depreciation and depreciation u/s.32 of the Act for Rs.1,61,18,819/-. AO further denied the deduction claimed under section 80HHE by the Assessee while concluding the assessment u/s. 143(3).
The Assessee preferred appeal before the CIT(A). CIT(A) gave relief to the assessee except for treatment of rent and interest ‘Income as income from other sources’ by Assessing Officer as against the treatment of the same as business income by the Assessee. With regard to the transfer pricing adjustment, the Ld.CIT(A) gave partial relief to the Assessee and upheld the addition for Rs.8,18,782/-. Aggrieved by the order of the Ld.CIT(A), the Revenue is in appeal before the ITAT.
Conclusion- In assessee’s case, the agreement of non-competence is entered into for a period of one year and two years and the Assessee has incurred the liability towards the same in the year under consideration. Hence, in our considered view, the ratio laid down by the Apex Court is applicable in Assessee’s case and, therefore, respectfully following the above decision of the Apex Court in Taparia Tools (supra), we uphold the decision of the Ld.CIT(A) in deleting the disallowance of non competence fees. This ground of the revenue is dismissed accordingly.
We are, therefore, of the considered view that the ratio laid down by the Hon’ble Supreme Court in Reliance Energy (supra) is clearly applicable to Assessee’s case also and accordingly the assessee has correctly claimed the deduction under section 80HHE from gross total income. Further, we notice that the co-ordinate bench in Assessee’s own case has allowed the issue in favour of the Assessee considering the decision of the Apex Court. We, therefore, uphold the decision of the CIT(A) to allow the deduction under section 80HHE and this ground of the Revenue is dismissed.
Held that the adjustment of difference in depreciation to the profits eligible for exemption under section 10A will not result in any addition to total income. This is so because any increase or decrease to the profit due to the depreciation adjustment, i.e. adding back book depreciation & deduction of depreciation as per section 32 will be exempt under section 10A since there is no dispute that the Assessee is entitled to claim exemption under section 10A. Accordingly when the adjusted profit is also eligible for exemption under section 10A there is no question of making any addition towards the adjustment made to depreciation. We accordingly uphold the view taken by the CIT(A) in deleting the addition made in this regard. This ground of the Revenue is dismissed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal of the Revenue is against order of the Commissioner of Income-tax (Appeals)-XXXII, Mumbai [hereinafter ‘Ld.CIT(A)] dated 23/07/2009 for the assessment year 2004-05.
2. The Revenue raised the following grounds of appeal:-
“On the facts and in the circumstances of the case and in law. the learned C1T(A) has erred in allowing relief to the assessee to the extent impugned in the grounds enumerated below:
1. The Ld.CIT(A) erred in deleting the disallowance of Rs.43.90.000/- by way of non-compete fees and holding that the expenditure incurred for non-compete fees should be allowed as revenue expenditure in full in the relevant assessment year without appreciating the fact that the assessee derived continued benefit over the agreement period in respect of the non-compete fees and hence, the relevant expenditure by way of non-compete fees should have been spread over the period of the benefit in view of the decision of the Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. vs. C1T [225 ITR 802 (SC)].
2. The CIT(A) erred in deleting the disallowance of Rs.22,08,494/- being the employees’ stock option expenses claimed by the assessee without appreciating the fact that no such option was exercised by the assessee during the relevant previous year.
3.
(a) The C1T(A) erred in directing the A.O. to grant the assessee deduction u/s.SOHHE in respect of “profit of the business” without setting off of the brought forward business loss relying on the decisions of the Mumbai ITAT in case of Unichem Laboratories Limited and Cabot India Limited, which, in turn, were based on the decision of the Hon’ble Bombay High Court in the case of Shirke Construction Equipment Limited, without appreciating the fact that the decision of the Hon’ble Bombay High Court in the case of Shirke Construction Equipment Limited has been overruled by the Hon’ble Supreme Court in the case of M/s. IPCA Laboratories Limited vs. DCIT in 266 ITR 521 (SC).
(b) The CIT(A) ought to have held that the Section 80-AB had an overriding effect over all other sections in the Chapter VI-A and hence, no deduction U/S.80-HHE was available to the assessee on account of there being no business income of the nature referred to in the Section 80-HHE was included in the gross total income after set-off of brought forward business losses.
4. The CIT(A) erred in allowing the depreciation of Rs.6,33.792/- on account of software expenses in respect of STP units, without appreciating the fact that the depreciation claimed in respect of such units was adjustable against the income exempt u/s. 10A and not against the profits of other units.
5. The CIT(A) erred in directing the A.O. to delete the disallowance of depreciation of Rs. 1.61,18.819/- in the computation of total income, being the adjustment of depreciation not done by the assessee in respect of the income exempt u/s.l0A without appreciating the fact that in the computation of business income of the non-exempt units, the assessee has added back depreciation only to the extent of Rs.2.03.94.326/- while in the computation of depreciation as per the Income-tax Act. the assessee has exclude a higher depreciation of Rs.3,65,13.145/- pertaining to exempt units from the depreciation on the entire block of assets without furnishing any details in respect of the claim during the course of the assessment proceedings.
6. (a) The C1T(A) erred in directing the A.O. to make adjustment in respect of the Arm’s Length Price at Rs.8.18.792/- after verifying the correctness of the said III figure and its computation done, by the CIT(A) instead of the adjustment of I! Rs.j22,88.380/-done by the A.O. u/s.92(l) of the IT. Act.”
(b) The CIT(A) ought to have held that the commission rate of 1 1.25% should have been applied to U.S. salaries of the seconded personnel instead of to the Indian salaries for the purpose of computing the Arm’s Length Price.
(c) Length Price on the international transactions only in respect of the personnel who remained in employment for more than six months based on the assessee’s claim that in the case of such personnel, fees were refundable by the respective recruiting agencies without appreciating the fact that such provision was applicable irrespective of whether the concerned personnel were in the U.S. or in India and was meant to re-coup the losses of the assessee till new appointments to the posts of the outgoing personnel were made and was not in any way related to the nature of the impugned international transactions.
7. For these and other grounds that may be urged at the time of hearing, the decision of the CIT(A) may be set aside on such above grounds and the order of the A.O. restored.”
3. The Assessee is a company engaged in the business of development and marketing of software having units at SEEPZ, Noida, Ashok Plaza and Monali, Chandigarh. The Assesse is the wholly owned subsidiary of Zensar Technologies Inc, USA. The assessee provides technical services outside India in connection with development and production of computer software. The assessee filed the return of income for A.Y. 2004-05 on 28/10/2004 declaring a total income at Nil after setting off brought forward business losses from previous years of Rs.2,36,35,058/- against business income and after adjusting the deduction claimed under section 80HHE of the Income Tax Act, 1961 (in short, “the Act”) against other income of Rs.1,53,80,174/-. The return was processed under section 143(1) on 11/07/2006. Subsequently the return was selected for scrutiny and the notice under section 143(2) was served on the assessee. Since the assessee had international transaction, a reference was made to the Transfer Pricing Officer (TPO). The TPO made a Transfer Pricing Adjustment of Rs,22,88,380/-, towards salary cost of employees who are seconded to the US Associated Enterprise (AE). The Assessing Officer while passing the assessment order made disallowance towards Non compete Fee of Rs.43,90,000/- and Employee Stock Options of Rs. 22,08,491 besides the above transfer pricing adjustment. The AO also treated a sum of Rs.1,48,43,768/- as income from other sources as against the treatement of interest and rental income as business income by the assessee. The AO also made an addition towards excess exemption claimed u/s.10A due to difference in depreciation between book depreciation and depreciation u/s.32 of the Act for Rs.1,61,18,819/-. The Assessing Officer further denied the deduction claimed under section 80HHE by the Assessee while concluding the assessment under section 143(3). The Assessee preferred appeal before the CIT(A) against the order of the Assessing Officer.
4. The Ld.CIT(A) gave relief to the assessee except for treatment of rent and interest ‘Income as income from other sources’ by Assessing Officer as against the treatment of the same as business income by the Assessee. With regard to the transfer pricing adjustment, the Ld.CIT(A) gave partial relief to the Assessee and upheld the addition for Rs.8,18,782/-. Aggrieved by the order of the Ld.CIT(A), the Revenue is in appeal before the ITAT.
5. Amortisation of Non-compete Fee (Ground No.1)
5.1 During the course of assessment proceedings, the Assessing Officer noticed that the Assessee has debited a sum of Rs.62,68,000/- towards non-compete fee. The assessee submitted that these are payments made to one Asia Logistics Ltd Rs.12,68,000 for non competing for one year for procuring business in China, and that Rs.50 lakhs was paid to Suntech Data Systems P Ltd towards non competing for 2 years. The Assessing Officer further noticed that the assessee has entered into agreements with these parties dated 19/02/2004 & 12/08/2003 respectively. The Assessing Officer held that the non compete fee cannot be fully allowed as a deduction and needs to be amortised over the period of non competing. Accordingly, the Assessing Officer allowed a sum of Rs.18,78,000/- as computed below and disallowed the balance of Rs.43,90,000/-.
