TMI Blog2023 (5) TMI 458X X X X Extracts X X X X X X X X Extracts X X X X ..... This ground is allowed in favour of the assessee. Payments made to AEs and third parties without TDS - assessee submitted before the AO that these are payments towards cost to cost reimbursements and other payments on which there is no liability to deduct tax - HELD THAT:- We notice that the co-ordinate bench in AY 2013-14 [ 2020 (8) TMI 196 - ITAT BANGALORE] has remitted the entire issue of reimbursements to AEs and third parties to the file of Ld DRP and respectfully following the same we restore the issue for the year under consideration with similar directions. With regard to the reimbursement of secondment cost to the AEs Tribunal in the case of M/s. Goldman Sachs Services Pvt. Ltd vs DCIT [ 2022 (4) TMI 1444 - ITAT BANGALORE] had held that the reimbursement made by the assessee in India to overseas entity, towards the seconded employees cannot be regarded as Fee For technical Services . Therefore the DRP while considering the issue of assignee fees reimbursements is directed to consider the decision of Goldman Sachs Services Pvt. Ltd (supra). Needless to say that the assessee be given an opportunity of being heard. It is ordered accordingly. Disallowance of ES ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TAT), Bangalore. ORDER PER PADMAVATHY S., ACCOUNTANT MEMBER These appeals are against the separate final orders of assessment passed by the Deputy Commissioner of Income Tax, Circle 3(1)(1), Bangalore ( the AO ) u/s. 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 [the Act] dated 31.07.2022 for the assessment years 2016-17 to 2018-19. Since common issues are urged in these appeals, they were heard together and are being disposed of by this common order, for the sake of convenience. 2. The assessee herein is a group company of M/s IBM Organization. It functions include providing services to its group companies and undertaking distribution of group company s products. It is engaged in the business of trading, leasing and financing of computer hardware, maintenance of computer equipment. It also provides software related services. The AO proposed various additions in the draft assessment orders of all three years, which were objected to by the assessee before Ld DRP. After receipt of directions from Ld DRP, the AO completed the assessments of these years by making various additions. The assessee has preferred these appeals against the assessment orders so pass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up the appeal for the assessment year 2016-17. The assessee filed the return of income for AY 2016-17 on 26.11.2016 declaring an income of Rs.2830,42,32,680. The case was selected for scrutiny under CASS and the notice u/s.143(2) was duly served on the assessee. Since the assessee company has international transactions, a reference was made to the Transfer Pricing Officer (TPO) for computation of Arm s Length Price of the transactions the assessee had with the Associated Enterprise (AE). The TPO made an adjustment towards Advertisement and Marketing (AMP) expenses for an amount of Rs.40,05,98,097. The AO after incorporating the TP adjustment made the following additions / disallowances. Sl. No. Particulars Amount INR 1 Denial of relief u/s.10AA 532,03,67,618 2 Disallowance of payments made to AE and third parties without TDS 424,25,59,887 3 Disallowance of ESBP expenses 273,90,00,000 5. The assessee filed its objections before the DRP who gave relief to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cord to prove otherwise. 4. The scheme of STPI notified by Government of India was not scrupulously followed/ adhered to by IBM India Pvt. Ltd. Not even a single software development agreement was registered by IBM India Pvt. Ltd with any of the STPI units. For the onsite development of computer software the company was unable to establish the direct nexus between the eligible unit and the client. 5. The DOU's/SOWs was found not registered with any of the SEZ unit as was the case in the past. 6. The MSA and ICA have clearly revealed the fact that the undertakings commenced the business activity after 2004-05 and thus were not new undertakings that began to manufacture or produce the computer software. Rather all such undertakings have continued the business which was already in existence. It is violation of sub-section (2) of section 10A. 7. It has also been established that unit wise P L account is not reliable document. The CA who has issued a certificate about the true and correct nature of the unit wise P L account has admitted in sworn statement that it did not reflect the true and correct profit. And though the Assessee pointed out that this should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertible foreign exchange was brought into India and it represented consideration received for the export of computer software, the DRP during the current year proceedings has provided several opportunities to the assessee to produce the necessary documents and evidences. The assessee has not produced any documents and evidences before us but only stated that the assessee may be allowed production of the evidences before the AO as these evidences are voluminous in nature. As a matter of principle of natural justice, the NFAC/AO was requested to verify the documents and cause necessary verification vide this office letter dated 09.03.2022. The assessee, also during the DRP hearing simply stated that the documents being voluminous in nature could not be produced for verification and requested to direct the AO to examine the issue and conclude accordingly. Regarding the remanded issues, the NFAC/AO has been again asked to expedite the proceedings vide this office letter dated 28.04.2022 and 24.05.2022. However, no response has been received as yet. Therefore, the DRP proceeds to decide the issue based on the information available on record. 2.3.7 The DRP has given several opportu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2020 relating to AY 2013-14. 12. The Ld DR relied on the decision of the lower authorities. 13. We notice that the coordinate bench of the Tribunal in assessee own case has considered the issue of relief u/s.10AA on various grounds alleged by the AO. The various issues based on which the AO denied the relief u/s.10AA and the relevant discussions made by the Tribunal are extracted below:- Assessee is engaged in software development activity A.5 We have perused submissions advanced by both sides in light of records placed before us. Objection raised by authorities below is that, assessee did not establish by way of documentary evidences regarding services rendered to its AE's globally, and that, these were in the nature of software development services. It has been alleged by revenue that, MSA dated 1-1-2004, was the only document registered with STPI/SEZ authorities, which do not specify the scope of work. We place reliance upon Circular no. 01/2013, dated 17-1-2013 issued by CBDT, wherein, necessity to have separate master service agreement for each work contract and to what extent it is relevant has been dealt with as under: (2) .. (i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. Counsel submitted that, assessee claimed deduction under section 10AA of the Act for year under consideration, however, for purposes of definition of 'computer software', one has to refer to Explanation 2 to Section 10A(8) of the Act. Ld. Counsel submitted that 'computer software' for purposes of section 10AA would mean: (i) computer software means,- (a) any computer program recorded on any disk, tape, perforated media or other information storage devices;or (b) any customised electronic Data or any product or service of similar nature, as may be notified by the board, which is transmitted or exported from India to any place outside India by any means. We note that transfer pricing adjustment proposed by Ld. TPO was in respect of payments received on account of services rendered by assessee under software development segment. Therefore, it cannot be held that services rendered by assessee, does not fall under software development service segment. So, to allege that, assessee was providing miscellaneous services, is like blowing hot and cold at the same time. Revenue has not been able to prove anything contrary by way of documentary e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... show that approvals relied upon by Ld. Counsel referred to herein above has been rejected by SEZ authority. Therefore, respectfully following ratio laid down by Hon'ble Supreme Court in case of Gestetner Duplicators (P.) Ltd. (supra), it was not open for authorities below to assume any violation under SEZ Act, 2005 so long as certificates of approval/renewal of units are not withdrawn by a process known to law. We are therefore of opinion that this objection raised by Ld. AO does not hold good in test of law. Separate books of account and unit wise P L account not maintained E.4.4 In view of the above, respectfully following observations by this Tribunal in asst. year 2008-09, we are of the view that there is no requirement for maintaining separate books of account for claiming deduction under section 10A/10AA of the Act, and books of account maintained by assessee is sufficient to enable computation of profits of various SEZ units. Further the circular issued by CBDT dated 17-1-2013 (supra) also clarifies that there is no requirement in law to maintain separate books of account and the same cannot be insisted upon. We therefore do not find any merit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility only to those undertakings as are not formed by splitting up of existing business, transfer to a new business of machinery or plant previously used. Certain other qualifications have to continue to exist for claiming the incentive such as employment of particular number of workers as per sub-clause 4(i) of clause 2 in an assessment year. For industrial undertakings other than small scale industrial undertakings, not manufacturing or producing an article or things specified in 8th Schedule is a requirement of continuing nature. Hon'ble Supreme Court, categorically observed in above referred paragraph that, condition regarding formation are required to be established in the initial year alone. On the basis of above discussions, that the satisfaction of conditions in section 10AA(4) are required to be satisfied in the year of formation, we hold, this objection raised by Ld. AO does not hold good for the year under consideration. Verification of receipts of sale proceeds of computer software exported outside India, being brought in convertible foreign exchange 6.11 As observed in detail by coordinate bench of Pune Tribunal, following ratio laid do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stored the issue only with respect to verification of receipts of sale proceeds in convertible foreign exchange into India. For the year under consideration, it is noticed that the AO has verified these details and has given a clear finding in page 55 56 of final assessment order, though he has not reworked the relief u/s.10AA. In view of this discussion and considering the decision of the Tribunal in assessee s own case, we allow deduction u/s.10AA to assessee relatable to sale proceeds from export of software development services. The AO is directed to compute the relief u/s.10AA and deleted the addition accordingly. This ground is allowed in favour of the assessee. Payments made to AEs and third parties without TDS Ground No.4 17. The AO observed that during the year under consideration, the assessee has paid substantial amount to various AEs and third parties. Based on the details furnished by the assessee the AO noticed an amount of Rs.611,92,32,304 is paid without deducting TDS. The assessee submitted before the AO that these are payments towards cost to cost reimbursements and other payments on which there is no liability to deduct tax. The AO after considerin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... analyzed the various aspects of the payments based on the details furnished by the assessee and gave partial relief to the assessee as under S. No. Particulars Amounts proposed to be disallowed in the Draft order Amounts in the nature of Reimbursement on Cost to Cost basis examined as per the directions of DRP order Amounts proposed to be disallowed in this order 1 Immigration related reimbursements 137,06,42,309 125,56,56,552 11,49,85,757 2 Stock Option reimbursements 189,04,83,899 189,04,83,899 - 3 Assignee related reimbursements 88,99,98,596 - 88,99,98,596 4 Third party reimbursements and Others 1,39,57,887 - 1,39,57,887 5 Travel related reimbursements 2,95,75,021 - 2,95,75,021 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s listed in the table above assignee related reimbursements for an amount of Rs.88,99,98,596 is towards reimbursements of salary expenses to IBM overseas companies towards its seconded employees. 23. The assessee had submitted that these are reimbursement of salary cost to the AEs and these salary cost has already been subject to withholding of tax u/s.192 while making the payments to employees. The AO had treated the same as fees for technical services and the said treatment is confirmed by the DRP. We notice that the co-ordinate bench in AY 2013-14, has remitted the entire issue of reimbursements to AEs and third parties to the file of Ld DRP and respectfully following the same we restore the issue for the year under consideration with similar directions. With regard to the reimbursement of secondment cost to the AEs, the coordinate bench of the Tribunal in the case of M/s. Goldman Sachs Services Pvt. Ltd vs DCIT (IT(IT)A Nos. 362 to 369 338 to 345/Bang/2020 dated 29.04.2022) had held that the reimbursement made by the assessee in India to overseas entity, towards the seconded employees cannot be regarded as Fee For technical Services . Therefore the DRP while considering t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Ltd. [2020] 121 taxmann.com 351/[2021] 276 Taxman 1/430 ITR 151 (Kar.) (iv) Apollo Tyres Ltd. v. CIT [2002] 122 Taxman 562/255 ITR 273 (SC) 28. On the contrary, the Ld.DR relied on orders passed by authorities below. 29. We heard both the parties and perused the materials on record. We notice that the coordinate bench in assessee s own case for AY 2015-16 (IT(TP)A No.289/Bang/2021 dated 14.02.2022) has considered the same issue and held that 10. The issue of deductibility of ESOP expense issue is covered in favour of the assessee by following judicial precedents of various High court/Tribunals, including Special Bench: Delhi High Court - Pr. CIT v. Lemon Tree Hotels (P.) Ltd. [2019] 104 taxmann.com 26 SLP granted by SC in Pr. CIT v. Lemon Tree Hotels (P.) Ltd. [2019] 104 taxmann.com 27/262 Taxman 311 (SC) 1. since the ITAT followed the previous judgments in CIT v. PVP Ventures Ltd. [2012] 23 taxmann.com 286/211 Taxman 554 (Mad.) the expenditure had to be allowed. 2. Although the Revenue urges that in terms of Circular No. 9 of 2007, the expenditure ought not to be allowed given that actual expenditure towards acquisit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the SEBI Guidelines and granted by the Officer could not be considered as erroneous one calling for the exercise of jurisdiction under section 263 of the Act. Bangalore Special Bench - Biocon Ltd. v. Dy. CIT (LTU) [2013] 35 taxmann.com 335/[2014] 144 ITD 21 9.2.6 It is quite basic that the object of issuing shares can never be lost sight of. Having seen the rationale and modus operandi of the ESOP, it becomes out-and-out clear that when a company undertakes to issue shares to its employees at a discounted premium on a future date, the primary object of this exercise is not to raise share capital but to earn profit by securing the consistent and concentrated efforts of its dedicated employees during the vesting period. Such discount is construed, both by the employees and company, as nothing but a part of package of remuneration. In other words, such discounted premium on shares is a substitute to giving direct incentive in cash for availing the services of the employees. There is no difference in two situations viz., one, when the company issues shares to public at market price and a part of the premium is given to the employees in lieu of their services and two, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge of vesting during such period. We, therefore, agree with the conclusion drawn by the tribunal in S.S.I. Ltd.'s case (supra) allowing deduction of the discounted premium during the years of vesting on a straight line basis, which coincides with our above reasoning. 12.2 It would be imperative to highlight certain points having bearing on the issue which have come to our notice during the course of hearing. The AO is directed to look, inter alia, into these aspects in quantifying the amount of eligible deduction. a. The assessee company was a closely held company in the previous year relevant to the assessment year 2003-2004 and as such there was no question of the listing of its shares and having some market price at the time of grant of options. Ordinarily, the amount of discount on premium which is written off over the vesting period represents the market price of the shares listed on the stock exchange on the date of grant of option as reduced by the price at which option is given to the employees. However, presently there is no availability of any market price of such shares on the date of grant of option as the company came to be listed on a stock exchange in a sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcise their options. The assessee should make a suitable downward or upward adjustment at that time. 11. Before coordinate bench of this Tribunal in case of Novo Nordisk India (P.) Ltd. (supra) similar issue arose on identical facts like that of assessee. This Tribunal relied on (i) Sassoon J. David Co. (P.) Ltd. v. CIT [1979] 1 Taxman 485/118 ITR 261 (SC) and (ii) Mysore Kirloskar Ltd. v. CIT [1987] 30 Taxman 467/166 ITR 836 (Kar.) The Tribunal held that the expenditure in question was wholly and exclusively used for the purpose of the business of the assessee and motivated its workforce and allowed the deduction u/s 37(1) of the Act. Respectfully following the above view, we direct to grant deduction to assessee on ESPO expenses in accordance with law, based on the principles laid down in the decision referred hereinabove. Accordingly this ground raised by assessee stands allowed. 30. Respectfully following the various judicial precedence discussed above and the principles laid down therein, we hold that the ESBP expenses incurred by the assessee is and allowable expense and the disallowance is hereby deleted. 31. Ground no.6 relates to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 35. Ground No.1 is general in nature. The Ground no.2 is not pressed by Ld A.R. 36. Ground no.3 relates to the disallowance of deduction claimed u/s 10A and 10AA of the Act. For the year under consideration also the AO has verified the receipt of sale proceeds of software export in convertible foreign exchange as per the directions of the DRP and has recorded the finding that out of the total export turnover of USD 3686.34 million an amount of USD 3672.82 millions was realized by the assessee during the year under consideration. Similar to AY 2016- 17, the AO did not give any relief u/s.10AA based on these receipts in the final order of assessment. Following the decision rendered by us in the preceding paragraph in AY 2016-17, we allow deduction u/s.10AA to assessee relatable to sale proceeds from export of software development services with similar directions to the AO. This ground is allowed in favour of the assessee. 37. Ground no.4 relates to disallowance of payments to AEs and third parties. Following the decision rendered by us in the preceding paragraph in AY 2016-17, we restore this issue to the file of DRP with similar directions. 38. Ground 5 pertains to disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15. We refer to para 101 of the decision of the Hon'ble Delhi High Court in case of Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT [2015] 55 taxmann.com 240/231 Taxman 113/374 ITR 118 wherein the Hon'ble Court held that, once the TPO accepts and adopts TNM Method and then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation and segregation, it would lead to an unusual and incongruous results as AMP is the cost or expense and is not diverse. It is factored in the net profit of the interlinked transaction. This would be also in consonance with rule 10B(1)(e), which mandates only arriving at the net profit margin by comparing the profits and loss account of the tested party with the comparable. The TNM Method proceeds on the assumption that functions, assets and risk being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g a bearing on the profits, incomes or losses of such enterprises, and (c) shall include a mutual agreement or arrangement between two or more AEs for allocation or apportionment or contribution to the any cost or expenses incurred or to be incurred in connection- with the - benefit, service or facility provided or to be provided to one or more of such enterprises. Clauses (b) and (c) above cannot be read disjunctively. Even if resort is had to the residuary part of clause (b) to contend that the AMP spend of assessee is any other transaction having a bearing on its profits, incomes or losses , for a 'transaction' there has to be two parties. Therefore for the purposes of the 'means' part of clause (b) and the 'includes' part of clause (c), the Revenue has to show that there exists an 'agreement' or 'arrangement' or' 'understanding' between assessee and its AE, whereby assessee is obliged to spend excessively on AMP in order to promote the brand of AE in India. As far as the legislative intent is concerned, it is seen that certain transactions listed in the Explanation under clauses (i) (a) to (e) to section 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance with law. Grounds Nos. 12 to 15 are consequential in nature and do not require separate adjudication. IT(TP)A No.870/Bang/2022 46. We shall now take up the appeal filed by the assessee for AY 2018-19. The assessee filed the return of income for AY 2018-19 on 29.11.2018 declaring an income of Rs.3931,81,24,560. The case was selected for scrutiny under CASS and the notice u/s.143(2) was duly served on the assessee. Since the assessee company has international transactions, a reference was made to the Transfer Pricing Officer (TPO) for computation of Arm s Length Price of the transactions the assessee had with the Associated Enterprise (AE). The TPO made an adjustment towards Advertisement and Marketing (AMP) expenses for an amount of Rs.99,26,36,695. The AO after incorporating the TP adjustment made the following additions / disallowances. Sl.No. Particulars Amount INR 1 Denial of relief u/s.10AA 557,74,72,045 2 Disallowance of payments made to AE and third parties without TDS 14,74,81,447 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ains to disallowance of ESOP expenses. Following the decision rendered by us in the preceding paragraph in AY 2016-17, we deleted the disallowance made towards ESOP expenses and allow the issue in favour of the assessee. Rejection of claim for refund of excess DDT paid Ground 6 52. Ground 6 with regard to rejection of claim for refund of excess Dividend Distribution Tax (DDT) paid. The ld AR submitted that the Assessee is a subsidiary of IBM WTC which is a tax resident of the United States and 99.99% of the equity shares of assessee are held by IBM WTC. During Assessment Year 2018-19, the assessee declared dividend to IBM WTC and had paid the DDT at the rate of 20.36% as per the provisions of section 115-O of the Act as per details given below Date of declaration of interim dividend Amount of dividend declared, distributed and paid INR DDT paid at 20.36% - INR February 9, 2018 1566,44,27,844 318,92,77,509 March 26, 2018 1566,44,27,844 318,92,77,509 Total 3132,88,55,688 ..... 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