Court : Mumbai Income Tax Appellate Tribunal
Citation: Accenture Services Pvt. Ltd. [2010-TIOL¬409-ITAT-MUM]
Brief : On the issue of deductibility of certain business expenditure incurred by the Taxpayer, under the provisions of the Indian Tax Laws (ITL), The ITAT allowed the deduction of the expenditure which was found to be inextricably linked to and expended for the purpose of the Taxpayer’s business.
Background and facts of the case
Under the ITL, an expenditure, which is expended wholly and exclusively for the purpose of the business of a taxpayer and which is not capital or personal in nature, will be allowed as a deduction against the taxable profits of the taxpayer.
The Taxpayer, an incorporated entity in India, was engaged in the business of software development and information technology (IT) based services. Further, the Taxpayer was also engaged in the business of providing coordinated consulting to its clients operating on a global basis.
Entities of the Accenture group (Group entities) entered into a Cost Contribution Account (CCA) to provide uniform and high quality services to their clients and to mutually share the benefits such as global consistency in business practices, economies of scale, increased efficiency and access to skills and expertise from all parts of the global organization.
The Taxpayer entered into a service agreement with various Group entities, under which technical services under the CCA, were rendered among st themselves. All the transactions were routed through common platforms and billed together. During the year, the Taxpayer claimed deduction of payments made for technical services to a Group entity in the Netherlands. The payments were made on an arm’s length price (ALP) as determined by the Transfer Pricing Officer (TPO).
The Taxpayer issued shares of its parent company to its employees under an employees’ stock purchase plan (ESPP). The difference between the market price and the exercise price of such shares was payable to the parent company. The Taxpayer claimed deduction of such payments made in respect of ESPP.
The Taxpayer claimed inclusion of receipts from reimbursement of expenses (including telecommunication charges) in the profits from the business of export of software and IT enabled services, which were eligible for tax holiday as provided under the ITL.
The Tax Authority rejected the above claims of the Taxpayer.
On an appeal, the first appellate authority allowed the deduction of expenses under the CCA as well as the payments made in respect of ESPP and partly allowed the eligibility of reimbursement of expenses for tax holiday. Aggrieved by the above, the Tax Authority and the Taxpayer preferred appeal before the ITAT.
Issues under consideration
Whether the expenditure incurred for rendering technical services to the Group entity under the CCA was an allowable deduction under the ITL.
Whether the expenditure on the allotment of shares under ESPP was an allowable deduction under the ITL.
Whether the reimbursement of expenditure in relation to the business of export of software and IT enabled services is eligible for tax holiday under the ITL.
Contentions of the Tax Authority
There was no reasoning behind the quantification and no basis for the allocation of expenditure for technical services under the CCA. Further, the entire scheme adopted by the Taxpayer under the CCA was with a view to reduce its income by claiming such fees paid to Group entities.
The expenditure incurred on allotment of shares to the employees under ESPP is not that of the Taxpayer as the benefit of such expenditure accrues to the parent company and not to the Taxpayer.
The Taxpayer was not able to prove that the reimbursement of expenses relates to the business eligible for tax holiday. Further, the reimbursement of telecommunication expenses is a specific exclusion from the profits eligible for tax holiday, as provided in the ITL.
Contentions of the Taxpayer
The Taxpayer relied on the first appellate authority’s order which allowed the expenditure for technical services under the CCA on the basis of commercial expediency and reasonableness.
Certificate of auditors of the Group entity in the Netherlands was obtained, certifying that the amounts recovered from the Taxpayer were actual portions of the expenses incurred by the Taxpayer.
The receipts from reimbursement of expenses were inextricably linked to the business of export of computer software and IT enabled services, which is eligible for tax holiday under the ITL. In case the same is found not eligible for tax holiday, only the profit element, if any, relating to such reimbursements, may be excluded.
Ruling of the ITAT
The expression ‘for the purpose of business’ as used in the ITL for allowing an expenditure as a deduction against taxable profits is wide in scope. The expression not only includes day-to-day expenditure for running the business but also includes expenditure for the purpose of rationalization of its administrative and modernization of its machinery.
It may include global consistency in business practices, economies of scale, improvement in efficiency and access to skills and expertise from across the globe. Under the present circumstances of the Taxpayer’s business, technical services under a global arrangement are necessary for the purpose of business.
If an international transaction is at an ALP under the ITL, as determined by the TPO, then, the fees paid under the CCA are for the services actually rendered and such payments are allowed as a deduction under the ITL.
The first appellate authority’s order was confirmed which stated that the expenses under ESPP were incurred for motivating and awarding its employees for their hard work and it formed part of the employees’ salary cost. Further, the shares were allotted to the employees of the Taxpayer and not to the employees of the parent company. Hence, the expenses were incurred for the purpose of the business of the Taxpayer.
The receipts from reimbursement of expenses relate to the business which is eligible for tax holiday under the ITL and only the profit element of such reimbursements, if any, would be excluded from the profits eligible for tax holiday. For the purpose of deductibility of reimbursements of telecommunication charges, the matter was referred back to the Tax Authority for necessary verification.
Comment:- The present ruling throws light on the deductibility of certain expenditure like those incurred under cost contribution arrangements and employee stock purchase plans. It reiterates the principles on interpretation of the phrase ‘for the purpose of business’ which has also been examined earlier by various courts in India, including the Supreme Court.