Section 10A benefit allowed on Enhanced Income pursuant to MAP Resolution

Dell International Services India Private Limited v. DCIT (ITAT Bangalore)

Benefit of Section 10A of the Act is Allowed on Enhanced Income Pursuant to Mutual Agreement Procedure (MAP) Resolution

Outcome: In favor of Assessee

Facts:

1. During the relevant year, the assessee has provided ITeS and Software Development Services (SWD) of INR 629,43,81,078 and INR 149,69,17,786 respectively for which a TP Adjustment to INR 154,56,23,611 towards ITeS and INR 22,98,32,484 towards SWD respectively was made by Ld. TPO.

ITeS Segment:

2. As far as TP Adjustment towards ITeS services is concerned, during the pendency of the appeal before Ld. CIT (A), the assessee’s AE in USA went to the MAP resolution as per Article 27 of India-USA DTAA for determining the ALP of this transaction. As per resolution dated 28.10.2015, the export income of the assessee was enhanced by INR 31,05,17,297.

3. AO passed the order u/r 44H (4) of the Rules and denied to allow deduction u/s 10A of the Act on such enhanced income arrived at in the MAP. Ld. AO allowed the deduction u/s 10A of the Act only to the extent of INR 132,97,49,723 based on the assessment order u/s 143 (3) of the Act.

4. CIT (A) upholds the decision of Ld. AO and held that adjustment made as per MAP resolution is not disclosed in the books of accounts of the assessee and hence, cannot be allowed for deduction. Thus, aggrieved assessee preferred appeal before the tribunal.

SWD Segment:

5. TPO rejected 14 out of 17 comparable companies chosen by the assessee and on his own chose 23 other comparable companies. Ld. TPO arrived at arithmetic mean of 24.13% of such 26 comparable companies as against the OPM of 16.11% of the Assessee and thereby made the upward adjustment of an amount INR 22,98,32,484.

6. CIT (A) upholds the TP Adjustments as made by Ld. TPO towards SWD services. Hence, aggrieved assessee preferred appeal before the tribunal.

Issues:

1. Hon’ble CIT (A) has erred in not allowing deduction u/s 10A of the Act on the enhanced export income amounting to Rs. 31,05,17,297 determined as per MAP resolution between the Competent Authorities of India and USA and as accepted by the assessee.

2. Hon’ble CIT (A) has erred in upholding the adjustment made by Ld. TPO despite the submission of the assessee that 14 out of 26 comparable companies as chosen by Ld. TPO for comparison purpose are not comparable to the assessee on account of functional dissimilarity, outsourcing of work, failing 25% employee-cost filter, ownership of intangibles, unavailability of segment break-up etc?

ITAT’s Decision:

ITeS Segment:

1. Hon’ble ITAT held that the taxpayer was to be allowed the benefit of section 10A with respect to the amount settled under the MAP.

Observations and findings of Hon’ble ITAT are:

2. As per First proviso to section 92C(4) of the Act, deduction u/s 10A will not be allowed in respect of amount of income by which the total income of the assessee is enhanced after computation of income u/s. 92C(4) of the Act by TPO which in turn is based on the Arm’s Length Price computed by Ld. AO pursuant to order of TPO passed u/s.92CA(3) of the Act.

3. The addition on account of determination of ALP can be in a different manner

• suo motu by the assessee in his return of income;
• by the  AO which  has  been  accepted   by  the assessee  or  to  the  extent  confirmed  by  the  appellate forums under the Act;
• determined by an APA
• is made as per the safe harbour rules framed under section 92CB; or
• is arising as a result of resolution of an assessment by way of MAP under an agreement entered into under section

4. The proviso  to  section  92CA(4)  of  the  Act  will  apply  only  to adjustment  to transfer  pricing  made  by the AO which  is enumerated  in para 4 (bullet 2) above and not to any other modes of determination of ALP.

5. The purpose for which the first proviso of section 92C(4) of the Act was enacted is given in the CBDT Circular No. 14/2001 dated 09.1.2001 as follows:-

“55.12 The first proviso to section 92C(4) recognizes the commercial reality that even when a transfer pricing adjustment is made under that sub-section,  the amount represented  by the adjustment  would  not  actually  have  been  received  in India  or would have actually gone out of the country. Therefore, it has been  provided  that  no  deductions  u/s  10A  or  10B  or  under Chapter VI-A shall be allowed in respect of the amount of adjustment.”

6. However, in the  present  case  the Assessee  had to increase its taxable income  and  the  same  was  to  be  subsequently  invoiced  and realized and thereby there was inflow of foreign exchange  in India which was the condition precedent in MAP resolution.

7. Further, it is also undisputed that the assessee has received foreign exchange in respect of the sum agreed under the MAP and has duly accounted for in its books of account in AY 2016-17.   However, the said income was excluded in the computation of total income in AY 2016- 17.  On identical facts, Pune Tribunal in the case of Dar Al Handasah Consultants (Shair & Partners) India Private Limited took the view that deduction u/s. 10A has to be allowed in the assessment year in which the international transaction took place.

8. This tribunal strongly placed reliance in the case of:

• Dar Al Handasah Consultants (Shair & Partners) India Private Limited vs. DCIT  (ITA  No.1413/PUN/2019,  dated  02 Dec  2019)

SWD Segment:

9. Hon’ble ITAT relied on the decision of NXP Semiconductors India Pvt. Ltd. [TS-427-ITAT-2014(Bang)-TP] and exclude 14 comparable companies on the following basis: