ACIT Vs EYGBS India Pvt. Ltd. (ITAT Bangalore)
The issue under consideration is whether the 1st proviso of section 92C(4) is triggered when the income computation for deduction u/s 10AA is enhanced only in the computation of income and no such entries are made in the books of account?
ITAT states that, the ITAT Bangalore in case of IBM India Pvt Ltd has held that deduction under section 10AA of the Act has to be allowed on incremental income arisen pursuant to APA as per modified return filed under section 92CD of the Act as same is not hit by proviso to section 92C(4) of the Act. Accordingly, in light of the above judicial precedents, ITAT hold that the ALP adjustment made pursuant to APA by the assessee in respect of Gurqaon SEZ unit results in increase in profits of the business of the undertaking/unit, the increased profits of the assessee being eligible for deduction under section 10AA of the Act given the wide nature of the expression used in section 10AA i.e. ‘Profits of the business of the undertaking/unit’ and that the proviso to section 92C(4) is not a bar to allowing such a claim. In the result, the appeal by the revenue is dismissed.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal by the revenue is against the order dated 18.7.2018 of the CIT(Appeals)-2, Bengaluru for the assessment year 2014-15.
2. The grounds of appeal raised by the revenue reads as follows:-
“CIT(A) has erred in interpreting the 1st proviso of section 92C(4) of the Income Tax Act by unnecessarily inserting the wards ‘Voluntary’ before the ‘enhancement of income’ after the computation of income uls 92C(4).
CIT(A) has erred in not realizing that the 1st proviso of section 92C(4) is triggered when the income computation for deduction u/s 10AA is enhanced only in the computation of income and no such entries are made in the books of account.”
3. The assessee is a wholly owned subsidiary of EYGI B.V., Netherlands, engaged in the business of providing back office support services in the nature of Information Technology Enabled Services (ITES) to its Associated Enterprises (“AEs”).
4. The transaction of providing ITES to AE was an international transaction and the price received by the assessee from AE has to pass the test of arm’s length price [ALP] as laid down in section 92 of the Income-tax Act, 1961 [the Act]. The assessee filed its original return of income on 27.11.2014 declaring income of Rs.17,15,76,040 after claiming deduction under Chapter VI-A of Rs.3,17,588 and deduction under section 10AA of Rs.2,83,77.353 out of gross total income of Rs.20,02,70,978. The assessee had declared voluntary transfer pricing adjustment of Rs.7,15,00,000/- (Rs.1.54.00,000/- pertaining to the STPI unit and Rs.5,61,00,000/- pertaining to the SEZ unit).
5. The assessee entered into an Advance Pricing Agreement (APA) with the CBDT on 16.03 2016 as per Section 92CD(1) of Act. The assessee filed a modified return of income on 29.06 2016. In the APA signed with the CBDT, the Assessee had agreed to recover profit margin at 17.5% [grossed up with income tax and Dividend distribution tax which aggregates to 20.58% for AY 2014-15] for services rendered to its AEs.
6. In the modified return filed in compliance to section 92CD of the Act. the assessee declared a taxable income of Rs.20.36.52,110 after claiming deduction of Rs. 3,95,10.280 under section 10AA of the Act on the income from Gurgaon SEZ Unit. The total ALP adjustment done by the assessee pursuant to APA in the Modified return was Rs.11,47,09,000 (Rs.2,80,29.000 pertaining to the STPI unit and Rs.8,66,80,000 pertaining to the SEZ unit).
7. During the Assessment proceedings, the AO referred the matter to the Transfer Pricing Officer [TPO] for determination of ALP of international transactions entered into by the assessee. In compliance with APA terms, the Assessee had filed the annual compliance report with the TPO on 14.06.2016, pursuant to which the TPO vide order dated 25.04.2017 accepted the international transaction entered by the Assessee, as at arm’s length.
8. The assessee claimed deduction u/s. 10AA of the Act in respect of the voluntary TP adjustment made in the revised return of income in respect of TP adjustment voluntarily made of the SEZ Unit at Gurgaon which unit was eligible for deduction u/s. 10AA of the Act. The AO denied the revised claim of deduction u/s. 10AA.
9. The AO gave the following reasons for his action:-
