Section 10AA Deduction on Enhanced Income Earned through APA

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:-

• It appears that the assessee has declared voluntary transfer pricing adjustment only in anticipation of TP adjustments by the TPO and to avoid rigors of Section 92C(4) of the Act;
• Assessee has failed to substantiate and furnish as to how the amount of Rs.8,66,80,000 being TP adjustment has arisen out of the eligible unit and to be treated as eligible unit: and that the claim of enhanced deduction on the basis of the APA is not arising out of the profits of the eligible unit: and
• The amount of TP adjustment alleged as deemed income for the purpose of being part of profits of business of the undertaking is clearly not allowable as per provisions of Section 2(24) of the Act.”

10. Aggrieved by the order of the AO, the assessee preferred an appeal before CIT(A).

11. The learned CIT(A) after considering the submissions filed by the assessee and relying on the order of Hon’ble Karnataka High Court in case of I-Gate Global Solution Ltd (supra) and order of predecessor CIT(A) for AY 2013-14, ITA No.453 of 2008 dated 17.07.2014 allowed the claim of deduction under section 10AA in respect of ALP adjustment pursuant to APA of Rs.8,66,80,000/- in respect of Gurgaon SEZ unit terming it as voluntary adjustment not hit by provisions of section 92C(4).

12. Aggrieved by the order of the CIT(A), department has preferred an appeal before the Tribunal. The ld. DR relied on the order of the AO, while the ld. counsel for the assessee relied on the order of the CIT(Appeals).

13. We have considered the rival submissions. The first aspect which we notice is that according to the computation mechanism provided under the APA agreement, the assessee worked out the ALP adjustment of Rs.11,47,09.000/- (Rs.2.80.29.000 pertaining to the STPI unit and Rs.8,66.80,000 pertaining to the Gurgaon SEZ unit), which has been offered to tax in Modified Return filed in accordance with APA terms. The ALP adjustment made by the assessee pursuant to APA is a Voluntary Transfer Pricing adjustment and is therefore eligible for deduction under section 10AA of the Act, as section 10AA(1) read with 10AA(7) of the Act uses the expression Profits and gains derived from the export of the unit which is wide in nature and covers the increased profits of the Company after making the ALP adjustment pursuant to APA.

14. Section 10AA(1) of the Act provides for deduction of such profits and gains as are derived by a unit from exports. In this regard. Section 10AA(7) of the Act provides that for the purpose of Section 10AA(1), profits derived from export of articles or things or services (including computer software) shall be the amount which bears to the “profits of the business of the undertaking. being the unit”, the same proportion as the export turnover bears to the total turnover of the business carried on by the undertaking. Accordingly, Section 10AA specifically provides a formula for computation of ‘profits derived from export of articles or things or computer software’ and section 10AA(7) of the Act, uses the expression “profits of the business of the undertaking. being the unit” which is unlike the deductions specified in sections 801, 80IA, 80IB. etc which do not provide for a specific formula to arrive at the qualifying profits i.e. ‘profits and gains derived by/from an undertaking’. Further, the term “profits of the business of the undertaking” is far wider in its scope than ‘profits and gains derived by/from an undertaking‘. Accordingly. ALP adjustment made pursuant to APA would fall within ambit of scope of deduction.

15. In the following decisions, it has been held that the word “derived by an undertaking of the business” in Section 10A and 10B are far wider to include ancillary income as well within its ambit:-

• Hewlett Packard Global Soft Ltd. [2018] 403 ITR 453 (Karnataka) (FB);
• Motorola India Electronics (P.) Ltd. [2014] 265 CTR 94 (Karnataka)
• Riviera Home Furnishing [2016] 65 com 287 (Delhi)
• Maral Overseas Limited [2012] 136 ITD 177 (Indore – Trib.) (SB)
• Hrithik Exports (P.) Ltd. [IT Appeal No. 219 of 2014, dated 13.11.2014
• Mercer Consulting (India) (P.) Ltd. [2014] 150 ITD 1′(Delhi Trib.)

16. We therefor hold that income offered to tax pursuant to voluntary Transfer Pricing adjustment should be regarded as profits of business for the purpose of computing deduction u/s. 10AA of the Act.

17. The next aspect which requires consideration is as to, whether ALP adjustment pursuant to APA falls within the ambit of proviso to Section 92C(4) of the Act. Provisions of Section 92C(4) reads as follows:-

“Where an arm’s length price is determined by the Assessing Officer under sub-section (3). the Assessing Officer may compute the total income of the assessee having regard to the arm’s length price so determined.

Provided that no deduction under section 10A or section 10AA or section 10B or under Chapter Vl-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section.”

18. On a reading of the above proviso to Section 92C(4) of the Act, it may be noted that the Act specifically denies claim of deduction under section 10AA of the Act on any adjustment made by the Transfer Pricing Officer under Section 92CA of the Act. Thus, the taxpayer is not eligible to claim the deduction under Sectionl0AA of the Act on the enhanced income on account of TP adjustment made by the TPO. However, on the contrary, increased income on account of voluntary transfer pricing adjustment or ALP adjustment pursuant to APA, made by the assessee would be eligible for claiming deduction under section 10AA of the Act.

19. The allowability of deduction under section 10AA in respect of Voluntary transfer pricing adjustment in the case of assessee for AY 2013­14 came up for consideration before CIT(A) and it was held as follows:-

“…….. It is seen that appellant as well as the AO have accepted in principle that the issue has been dealt with by the Jurisdictional High Court in the case of l-gate Global Solutions Pvt Ltd in order dated 17.6.2014 in ITA 453/2008 holding that the benefit of section 10AA is to be allowed in respect of Voluntary Transfer Pricing adjustment. following the order of Jurisdictional High Court in the case (supra). in the case of appellant also. the appellant is entitled to benefit under section 10AA in respect of Voluntary Transfer Pricing adjustment which stand on different footing as compared to the Transfer Pricing adjustment made by the TPO. It is held accordingly.”

20. The aforesaid order of the CIT(Appeals) for AY 2013-14 on the said issue has been accepted by the department and no further appeal before the Tribunal has been filed by department.

21. Further, the ITAT Bangalore in assessee’s own case for AY 2010-11 (ITA 199/Bang/2015) dated 20 May, 2020 relying on the decision of Hon’ble Karnataka High Court in case of I-Gate Global Solutions Ltd (supra), Pune Tribunal decision in case of Apoorva Systems (P) Ltd (92 com 82) and Delhi Tribunal in case of AT Kearney India Private Limited (ITA No 2623/De1/2015) dated 21 June 2019 held that assessee was eligible to claim deduction under section 10AA in respect of voluntary transfer pricing adjustment made on scientific basis in the computation of income in respect of Gurqaon SEZ unit as same was not hit by proviso to section 92C(4) of the Act.

22. The ITAT Bangalore in case of IBM India Pvt Ltd (59 CCH 260) dated 31 July 2020 , following the decision of Pune Tribunal in case of DAR AL Handasah Consultants (Shair & partners) India Pvt Ltd (2020) 203 TTJ 0218 (Pune), 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.

23. Accordingly, in light of the above judicial precedents, we 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.

24. In the result, the appeal by the revenue is dismissed. Pronounced in the open court on this 31^st day of August, 2020.