IBM India (P.) Ltd. v. JCIT - Taxpublishers.in

SUBSCRIBE FOR FULL CONTENT


The Tax PublishersIT (Tp) Appeal No. 1543 (Bang) of 2012 2014 TaxPub(DT) 2742 (Bang-Trib) : (2014) 059 (II) ITCL 0302 : (2014) 149 ITD 0191 IBM India (P.) Ltd. v. JCIT INCOME TAX ACT, 1961 --Transfer pricing--Computation of ALPReimbursement of expenses--TPO was of the opinion that amount received by assessee towards reimbursement of expenses in nature of staff welfare, employees expenses, travelling and conveyance, was to be treated as operating revenue while computing PLI. DRP upheld the same. However, assessee had taken a specific plea before authorities below that there was no mark up on recovery transactions and therefore, reimbursement was to be excluded from its operating revenue. *Held:* Acceptable. Neither TPO nor DRO gave any specific finding on plea put forth by assessee, as such issue was remanded back for fresh consideration while setting aside addition made by lower authorities. The assessee has filed rectification application under section 154 to the DRP pointing out that in the ground of objection No. 10 the assessee has taken a specific plea that there is no mark-up on recovery transactions and therefore, reimbursement should be excluded from the operating revenue of the assessee and the fact that the said issue was not considered by the DRP in its order. The DR reiterated the stand of the TPO on this issue. [Para 9.32] Neither the TPO nor the DRP has given any specific finding on the plea put forth by the assessee. Therefore, it is considered appropriate to direct the TPO to consider the submissions of the assessee which are reiterated in the application filed before the DRP under section 154. The TPO will afford an opportunity of being heard to the assessee before deciding the issue. The issue with regard to adjustment on account of ALP of international transactions is directed to be recomputed by the TPO in the light of the decision and direction given in this order. [Para 9.33] Income Tax Act, 1961, Section 92C INCOME TAX ACT, 1961 --Capital or revenue expenditure--Club membership fee Entrance fee paid for acquiring corporate club membership fee --Entrance fee for acquiring corporate club membership incurred by assessee is not capital expenditure The AO and the DRP relied on the decision of the Kerala High Court in the case of Framatone Connector OEN Ltd. in coming to the conclusion that the expenditure incurred on acquiring capital membership is capital in nature. It is, however, seen that the jurisdictional High Court of Karnataka in the case of Infosys Technologies Ltd. and Sandur Manganese & Iron Ores Ltd. held that fee paid for obtaining corporate membership is revenue expenditure. Following the view expressed by the Karnataka High Court, the entrance fee for acquiring corporate club membership incurred by the assessee has to be allowed as revenue expenditure. [Para 5.7] Income Tax Act, 1961, Section 37(1) INCOME TAX ACT, 1961 --Dispute Resolution Panel (DRP)--Powers of DRP Setting aside of order of AO for fresh consideration--DRP has no power to set aside any proposed variation or issue any direction under section 144C(5) for further enquiry and passing of the assessment order, as such DRP has therefore exceeded its jurisdiction in setting aside the issue to AO for fresh consideration, Issue is, therefore, remanded back to DRP. A perusal of the draft order of assessment shows that the AO has accepted in para 5.4 of his draft order the AO accepted that the assessee has created the provision on a scientific basis based on empirical data, trends, projections, etc. The AO disallowed the claim for deduction in his draft assessment order only for the reason that the assessee was not writing back unutilised provision for warranty. The issue before the DRP was, therefore, as to whether there was any unutilized provision which had to be written back by assessee. The DRP did not doubt the finding of the AO with regard to the method of providing for liability for warranty adopted by the assessee as scientific. The DRP wanted the AO to examine whether unutilized provision for warranty existed and whether it was written back. The DRP also wanted the AO to examine the alternate plea of the assessee to allow the expenditure actually incurred on account of providing for warranty claims. [Para 4.21] It is clear from the provision of section 144C(7) and (8) that the DRP has no power to set aside any proposed variation or issue any direction under section 144C(5) for further enquiry and passing of the assessment order. The DRP has, therefore, exceeded its jurisdiction in setting aside the issue to the AO for fresh consideration. Therefore the directions of the DRP in this regard are set aside and the issue is remanded to the DRP for fresh consideration after affording due and proper opportunity to the assessee. Consequently, the order of the AO making impugned addition is also set aside and the issue is remanded to the DRP for fresh consideration. [Para 4.22] Income Tax Act, 1961, Section 144C Income Tax Act, 1961, Section 37(1) IBM India (P.) Ltd. v. JCIT In the ITAT, Bangalore Bench B N.V. Vasudevan, J.M. & Jason P. Boaz, A.M. IT (Tp) Appeal No. 1543 (Bang) of 2012 20 December 2013 A.Y. 2008-09 *Counsel :* Percy Padiwalla, for the Appellant. S.K. Ambastha, for the Respondent. ORDER N.V. Vasudevan, J.M. This is an appeal by the assessee against the order dated 29-10-2012 of the JCIT, (LTU) Bangalore, passed under section 143(3) read with section 144C of the Income-tax Act, 1961 (the Act), relating to assessment year 2008-09. Ground No. 1 raised by the Assessee is a general ground and challenges the impugned order as not in accordance with law and contrary to facts and circumstances of the case and in violation of principle of equity and natural justice. This ground does not require specific adjudication. 2. In Ground No.2, the Assessee has contended that the DRP has exceeded its jurisdiction while giving directions to the assessing officer, these grounds are linked with Ground Nos. 4 and 6 and will be dealt with while dealing with those grounds. 3. Ground No.3 challenges the order of the AO/DRP denying the claim of the assessee for relief under section 10A/10AA of the Act. These grounds read as follows: '3. Relief under section 10A and under section 10AA of the Act 3.1 The Learned assessing officer and the Honble DRP have erred in law and on facts in plac'ing reliance on the assessment orders of assessment year 2005-06 and assessment year 2007-08, in finalizing the assessment order for the assessment year 2008-09. 3.2 The learned assessing officer and the Honble DRP have erred in law and on facts in disal'lowing the relief claimed by the Appellant under section 10A and section 10AA of the Act amounting to Rs.5,400,537,759 and Rs. 128,296,962. 3.3 The learned assessing officer and the Honble DRP have erred in law and on facts in deny'ing the claim of relief under section 10A and section 10AA of the Act on the basis of non-maintenance of separate books and, holding that the profits of the units as not being quantifiable in a correct, certain and exact manner. 3.4 The learned assessing officer and the Honble DRP have erred in law and on facts in denying the entire relief under section 10A of the Act on the basis of not having approval to operate an overseas bank account and, without prejudice, disregarding the fact that the Appellant repatriates substantial portion of the export revenues to India, into its Indian bank accounts.' 3.1 The assessee is a wholly-owned subsidiary of IBM World Trade Corpora'tion (TBM WTC), which in turn, is a wholly-owned subsidiary of International Business Machines Corporation (IBM Corp). The Assessee is engaged in the business of Trading, Leasing and financing of Computer Hardware and Software, Maintenance of Computer Equipment, Development of Computer Software and related services and Consultancy in Information Technology (IT) Systems Integration, IT Enabled Services. 3.2 In the return of income filed for assessment year 2008-09, the assessee claimed deduction under sections 10A and 10AA of the Act. The assessee had 8 STP units and the profits derived by these units from the export of computer software are eligible for deduction under section 10A of the Act. The assessee also had 2 SEZ units and the profits of these units were eligible for deduction under section 10AA of the Act. The claim of the assessee for deduction under sections 10A & 10AA of the Act was as follows: Deduction under section 10A of the Act SUBSCRIBE FOR FULL CONTENT

The Tax PublishersIT (Tp) Appeal No. 1543 (Bang) of 2012
2014 TaxPub(DT) 2742 (Bang-Trib) : (2014) 059 (II) ITCL 0302 : (2014) 149 ITD 0191

IBM India (P.) Ltd. v. JCIT

INCOME TAX ACT, 1961

--Transfer pricing--Computation of ALPReimbursement of expenses--TPO was of the opinion that amount received by assessee towards reimbursement of expenses in nature of staff welfare, employees expenses, travelling and conveyance, was to be treated as operating revenue while computing PLI. DRP upheld the same. However, assessee had taken a specific plea before authorities below that there was no mark up on recovery transactions and therefore, reimbursement was to be excluded from its operating revenue. Held: Acceptable. Neither TPO nor DRO gave any specific finding on plea put forth by assessee, as such issue was remanded back for fresh consideration while setting aside addition made by lower authorities.

The assessee has filed rectification application under section 154 to the DRP pointing out that in the ground of objection No. 10 the assessee has taken a specific plea that there is no mark-up on recovery transactions and therefore, reimbursement should be excluded from the operating revenue of the assessee and the fact that the said issue was not considered by the DRP in its order. The DR reiterated the stand of the TPO on this issue. [Para 9.32] Neither the TPO nor the DRP has given any specific finding on the plea put forth by the assessee. Therefore, it is considered appropriate to direct the TPO to consider the submissions of the assessee which are reiterated in the application filed before the DRP under section 154. The TPO will afford an opportunity of being heard to the assessee before deciding the issue. The issue with regard to adjustment on account of ALP of international transactions is directed to be recomputed by the TPO in the light of the decision and direction given in this order. [Para 9.33]

Income Tax Act, 1961, Section 92C

INCOME TAX ACT, 1961

--Capital or revenue expenditure--Club membership fee Entrance fee paid for acquiring corporate club membership fee --Entrance fee for acquiring corporate club membership incurred by assessee is not capital expenditure

The AO and the DRP relied on the decision of the Kerala High Court in the case of Framatone Connector OEN Ltd. in coming to the conclusion that the expenditure incurred on acquiring capital membership is capital in nature. It is, however, seen that the jurisdictional High Court of Karnataka in the case of Infosys Technologies Ltd. and Sandur Manganese & Iron Ores Ltd. held that fee paid for obtaining corporate membership is revenue expenditure. Following the view expressed by the Karnataka High Court, the entrance fee for acquiring corporate club membership incurred by the assessee has to be allowed as revenue expenditure. [Para 5.7]

Income Tax Act, 1961, Section 37(1)

INCOME TAX ACT, 1961

--Dispute Resolution Panel (DRP)--Powers of DRP Setting aside of order of AO for fresh consideration--DRP has no power to set aside any proposed variation or issue any direction under section 144C(5) for further enquiry and passing of the assessment order, as such DRP has therefore exceeded its jurisdiction in setting aside the issue to AO for fresh consideration, Issue is, therefore, remanded back to DRP.

A perusal of the draft order of assessment shows that the AO has accepted in para 5.4 of his draft order the AO accepted that the assessee has created the provision on a scientific basis based on empirical data, trends, projections, etc. The AO disallowed the claim for deduction in his draft assessment order only for the reason that the assessee was not writing back unutilised provision for warranty. The issue before the DRP was, therefore, as to whether there was any unutilized provision which had to be written back by assessee. The DRP did not doubt the finding of the AO with regard to the method of providing for liability for warranty adopted by the assessee as scientific. The DRP wanted the AO to examine whether unutilized provision for warranty existed and whether it was written back. The DRP also wanted the AO to examine the alternate plea of the assessee to allow the expenditure actually incurred on account of providing for warranty claims. [Para 4.21] It is clear from the provision of section 144C(7) and (8) that the DRP has no power to set aside any proposed variation or issue any direction under section 144C(5) for further enquiry and passing of the assessment order. The DRP has, therefore, exceeded its jurisdiction in setting aside the issue to the AO for fresh consideration. Therefore the directions of the DRP in this regard are set aside and the issue is remanded to the DRP for fresh consideration after affording due and proper opportunity to the assessee. Consequently, the order of the AO making impugned addition is also set aside and the issue is remanded to the DRP for fresh consideration. [Para 4.22]

Income Tax Act, 1961, Section 144C

Income Tax Act, 1961, Section 37(1)

IBM India (P.) Ltd. v. JCIT

In the ITAT, Bangalore Bench B N.V. Vasudevan, J.M. & Jason P. Boaz, A.M.

IT (Tp) Appeal No. 1543 (Bang) of 2012

20 December 2013 A.Y. 2008-09

Counsel : Percy Padiwalla, for the Appellant. S.K. Ambastha, for the Respondent.

ORDER

N.V. Vasudevan, J.M.

This is an appeal by the assessee against the order dated 29-10-2012 of the JCIT, (LTU) Bangalore, passed under section 143(3) read with section 144C of the Income-tax Act, 1961 (the Act), relating to assessment year 2008-09.

Ground No. 1 raised by the Assessee is a general ground and challenges the impugned order as not in accordance with law and contrary to facts and circumstances of the case and in violation of principle of equity and natural justice. This ground does not require specific adjudication.

2. In Ground No.2, the Assessee has contended that the DRP has exceeded its jurisdiction while giving directions to the assessing officer, these grounds are linked with Ground Nos. 4 and 6 and will be dealt with while dealing with those grounds.

3. Ground No.3 challenges the order of the AO/DRP denying the claim of the assessee for relief under section 10A/10AA of the Act. These grounds read as follows:

'3. Relief under section 10A and under section 10AA of the Act

3.1 The Learned assessing officer and the Honble DRP have erred in law and on facts in plac'ing reliance on the assessment orders of assessment year 2005-06 and assessment year 2007-08, in finalizing the assessment order for the assessment year 2008-09.

3.2 The learned assessing officer and the Honble DRP have erred in law and on facts in disal'lowing the relief claimed by the Appellant under section 10A and section 10AA of the Act amounting to Rs.5,400,537,759 and Rs. 128,296,962.

3.3 The learned assessing officer and the Honble DRP have erred in law and on facts in deny'ing the claim of relief under section 10A and section 10AA of the Act on the basis of non-maintenance of separate books and, holding that the profits of the units as not being quantifiable in a correct, certain and exact manner.

3.4 The learned assessing officer and the Honble DRP have erred in law and on facts in denying the entire relief under section 10A of the Act on the basis of not having approval to operate an overseas bank account and, without prejudice, disregarding the fact that the Appellant repatriates substantial portion of the export revenues to India, into its Indian bank accounts.'

3.1 The assessee is a wholly-owned subsidiary of IBM World Trade Corpora'tion (TBM WTC), which in turn, is a wholly-owned subsidiary of International Business Machines Corporation (IBM Corp). The Assessee is engaged in the business of Trading, Leasing and financing of Computer Hardware and Software, Maintenance of Computer Equipment, Development of Computer Software and related services and Consultancy in Information Technology (IT) Systems Integration, IT Enabled Services.

3.2 In the return of income filed for assessment year 2008-09, the assessee claimed deduction under sections 10A and 10AA of the Act. The assessee had 8 STP units and the profits derived by these units from the export of computer software are eligible for deduction under section 10A of the Act. The assessee also had 2 SEZ units and the profits of these units were eligible for deduction under section 10AA of the Act. The claim of the assessee for deduction under sections 10A & 10AA of the Act was as follows:

Deduction under section 10A of the Act