Income Tax Appellate Tribunal – Bangalore
M/S. Trianz Holdings Private … vs Assistant Commissioner Of Income … on 16 November, 2021 IN THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCHES “C”, BANGALORE
Before Shri Chandra Poojari, AM & Shri George George K, JM
IT(TP)A No.2639/Bang/2019 : Asst.Year 2015-2016
M/s.Trianz Holdings Pvt. Ltd. The Assistant Commissioner
#165/2, 6th Floor, Kalyani v. of Income-tax, Circle 7(1)(1)
Magnum, Doraisanipalya, IIM Post Bangalore.
Bennerghatta Road
Bangalore – 560 076.
PAN : AAFCA8051P.
(Appellant) (Respondent)
Appellant by : Sri.K.R.Vasudevan, Advocate
Respondent by : Sri.Pradeep Kumar, CIT-DR
Date of
Date of Hearing : 15.11.2021 Pronouncement : 16.11.2021
ORDER
Per George George K, JM
This appeal at the instance of the assessee is directed
against final assessment order dated 30.10.2019. The
relevant assessment year is 2015-2016.
2. The assesee has raised 36 grounds in its memorandum
of appeal. However, learned AR had argued only following six
issues:-
Transfer Pricing Adjustment
(i) Business model not understood / appreciated properly
(Grounds 7 and 8)
(ii) Transaction Net Margin Method (TNMM) adopted as
Most Appropriate Method (MAM) (grounds 11 to 25) –
Alternative grounds.
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M/s Trianz Holdings Private Limited.
(iii) Interest on outstanding receivables (grounds 26 to 31)
Corporate Tax Issues
(iv) Disallowance u/s 14A of the I.T.Act [ground 32(b)]
(v) Non-deduction of TDS on software expenses (ground 33)
(vi) Deduction u/s 10AA of the I.T.Act to be allowed on
assessed income (ground 34).
We shall adjudicate the above issues as under:
Transfer Pricing Adjustment
Business model not understood / appreciated properly
(Grounds 7 and 8)
3. The brief facts of the case are as follows:
The assessee, an Indian company, is engaged in
providing ITES to global customers. For its operations in USA,
the company operates through its subsidiary in USA. As per
the business model, Trianz India has set up a subsidiary in
USA, i.e., Trianz Inc., which enters into contract with US
customers for provision of services. This is supported by a
service agreement. Trianz Inc., in turn enters into an
agreement with Trianz India, for rendering the same services,
back to back, based on SoWs, with the same conditions.
Consequently, Trianz USA remits the entire revenue earned
from third party customers to Trainz India. Trianz India
reimburses the cost incurred by Trianz USA in procuring the
contract. This arrangement is supported by two agreements,
Revenue sharing agreement and cost sharing agreement.
According to the assessee, based on the above business model
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M/s Trianz Holdings Private Limited.
where Trianz India receives the entire revenue earned by
Trianz USA from third party customers, considering the pass-
through nature of the transaction, CUP methodology was
applied as the most appropriate method. According to the
assessee, the same is a settled principle and supported by
judicial pronouncement in the case of DCIT v. Calance
Software Pvt. Ltd. [ITA No.5023/Delhi/2012].
3.1 The TPO rejected TP study of the assessee. The TPO
adopted TNMM method instead of CUP method adopted by
the assessee in its TP study. The TPO held that all the risks
are borne by the AE, Trianz Inc. In coming to such a
conclusion, the TPO has relied on the service agreement
between the customer and Trianz Inc. The TPO did consider
the agreement between Trianz India and Trianz Inc.
3.2 The view taken by the TPO was affirmed by the DRP and
assessee is in appeal before us. According to the learned AR it
is Trianz India, that bears all the entrepreneurial risks, as
was clearly mentioned in the TP report. This FAR analysis has
been changed, without any basis or reasoning. In this
context, the learned AR relied on the order of the Tribunal in
assessee’s own case for assessment year 2014-2015 in
IT(TP)A No.3136/Bang/2018 (order dated 26.02.2020). The
learned AR submitted that on identical facts for Asst.Year
2014-2015, the ITAT in assessee’s own case set aside the TP
adjustment and directed the AO / TPO to redo TP analysis,
since business model of assessee was not properly
4 IT(TP)A No.2639/Bang/2019.
M/s Trianz Holdings Private Limited.
appreciated. It was submitted that facts in this case being
similar, an identical view may be taken in this case also.
3.3 The learned Departmental Representative supported the
orders of the Income Tax Authorities, without mentioning the
ITAT’s order in assessee’s own case for assessment year 2014-
2015, in his written submission.
3.4 We have heard rival submissions and perused the
material on record. The primary issue argued is that transfer
pricing adjustment has been made without properly
appreciating the business model of the assessee. This issue
was there in the appeal for the assessment year 2014-2015,
wherein the Tribunal in IT(TP)A No.3136/Bang/ 2018 (order
dated 26.02.2020), after examining the facts of the case, had
accepted the contention of the assessee that the TPO
conducted transfer pricing analysis on erroneous
understanding of the business model of the assessee.
Accordingly, the entire transfer pricing issue was set aside to
the TPO with a direction that the transfer pricing analysis
may be carried out having regard to the business model of the
assessee. The relevant finding of the Co-ordinate Bench of the
Tribunal in assessee’s own case, reads as follow:-
“18. We observe that, Ld.TPO considered assessee to be a contract
service provider, assuming minimal risk, which is contrary to the business
model of assessee. We agree with contention of Ld.AR that Ld.TPO
conducted TP analysis on erroneous understanding of business model of
assessee, and comparables selected by Ld.TPO cannot be looked into.
19. We are therefore of opinion that, adjustment made by Ld.AO on the
proposed adjustment by Ld.TPO should be revisited de novo. Accordingly,
we set aside all issues raised by assessee on transfer pricing issues to
Ld.AO/TPO. LD.AO/TPO is directed to carry out transfer pricing analysis
5 IT(TP)A No.2639/Bang/2019.
M/s Trianz Holdings Private Limited.
having regard to the business model of assessee. It is also directed that
comparables selected should be functionally similar with assessee, having
similar business model like assessee.
20. Assessee is directed to produce all relevant documents to bring out its
role in providing services to the parties situated outside India. Ld.TPO is
also directed to grand working capital adjustments in comparables in
actual where ever necessary, for computing correct margins of
comparables. Needless to say, that assessee shall be granted proper
opportunity of being represented.”
3.5 Since the facts for the assessment year 2015-2016 is
identical to the facts considered by the Tribunal for
assessment year 2014-2015, we restore the entire transfer
pricing analysis for de novo consideration to the AO / TPO. It
is ordered accordingly.
3.6 In the result, grounds 7 and 8 are allowed for statistical
purposes.
TNMM adopted as the MAM (grounds 11 to 25)
4. These grounds are essentially alternative grounds with
regard to TP adjustment. Since the main issue on the
business model are not accepted and restored to the files of
the AO / TPO, these grounds are rendered infructuous and
the same is dismissed as such.
Interest on outstanding receivables (grounds 26 to 31)
5. The TPO computed the delayed trade receivables under
the weighted average method. The TPO by adopting the net
interest rate of 4.38%, on average net receivables that is
outstanding for the period exceeding 60 days, computed the
interest adjustment on outstanding receivables amounting to
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M/s Trianz Holdings Private Limited.
Rs.2,06,65,442. The relevant finding of the AO / TPO, reads
as follows:-
“25.1 As discussed in the preceding paragraphs, interest on
the delayed trade receivables was proposed to be computed
under the weighted average method. To calculate the
weighted average delay, the assessee was asked to furnish
invoice wise details of all the trade receivables from AEs
during the year giving details of the amount raised in invoice,
date of invoice, date of receipt, delay in number of days.
However, the assessee failed to submit the required data in
the format asked.
In absence of proper invoice wise details, the average of net
receivables from AEs as on opening and closing days of the
FY is treated as unsecured loan from the taxpayer to its AEs
for the entire year. Interest is calculated, using LIBOR – 6
months + 400 basis points applicable for the FY 2014-15 and
which works out to 4.3836%. The detailed computation is as
follows:-
31.03.2015 31.03.2014
Receivables from AEs (A) 493,189,330.00 605,548,935
Payable due to AEs (B) 6,675,690.00 7,804,540
Net receivables (C=A-B) 486,513,640.00 642,744,395
Average net receivables 564,629,017.50
Interest Rate 4.38%
Period of delay (days) 305.00
Interest Amount 2,06,65,422
*Period of delay is 365 – allowed period of 60 days.
Thus, arms length interest amount to be charged works out to
Rs.2,06,65,422. The same is treated as adjustment u/s 92CA for
interest on delayed receivables.”
5.1 Aggrieved, the assessee filed objections before the
Dispute Resolution Panel (DRP). The DRP by placing on
reliance on the explanation 2 inserted by section 92B of the
I.T.Act with retrospective effect from 01.04.2002 and the
various judicial pronouncements, held non-charging or under
charging of interest on excess period of credit allowed to the
7 IT(TP)A No.2639/Bang/2019.
M/s Trianz Holdings Private Limited.
AE for realization of invoices would tantamount to an
international transaction. Further, the DRP held that
weighted average method adopted by the TPO is incorrect. The
DRP directed the TPO to compute interest adjustment invoice-
wise with reference to the amounts received beyond the credit
period / not received within the credit period. The relevant
directions of the DRP reads as follows:-
“42.11 The weighted average approach method adopted
by the TPO is not in line with the above principle. Under the
weighted average approach, credit is given to amounts
received before the agreed credit period which is incorrect as
the TPO’s jurisdiction lies only in regard to amounts received
beyond the credit period /not received within the credit period.
Accordingly, we consider it appropriate to direct the TPO to
compute adjustment invoice wise with reference to amounts
received beyond the credit period / not received within the
credit period. As per the inter-company agreement, credit
period were 30 days. Hence, the Panel is of the considered
opinion that the credit period of 60 days allowed by the TPO is
more than reasonable. The TPO is directed to allow the said
credit period of 60 days from the date of invoice and
determine the delayed period of the receivables. Accordingly,
the ALP interest adjustment may be recomputed. Taking into
account all these factors we consider it appropriate to direct
the assessee to file complete information relating to the
outstanding receivables such as date of invoice and the date
of realisation in respect of the invoice raised during the subject
year i.e. 2014-15, and also all the invoices which represent
the opening balance as on 1.04.2014. Grounds disposed off
accordingly.”
5.2 Aggrieved, the assessee has raised this issue before the
Tribunal. The gist of the submissions made by the learned AR
are as follows:-
(a) The weighted average method adopted by TPO is
incorrect.
8 IT(TP)A No.2639/Bang/2019.
M/s Trianz Holdings Private Limited.
(b) The assessee has not charged interest on
outstanding receivables, both from AEs and Non-AEs
and hence the Benchmarking analysis should be done
with uncontrolled transactions and not by adopting an
arbitrary number.
(c) The average credit period for both the AEs and non-
AEs are the same and the credit period is about 99 days
for invoices raised during the current year and 74 days
for the invoices raised during the earlier year, which is
within the credit period allowed in the RBI circular.
(d) The rate of LIBOR at 6 months + 400 basis points
adopted by the TPO is without any basis. The rate
should be adopted after a proper benchmarking
analysis.
(e) The DRP directed the TPO to rework the interest
computation based on the delay of individual invoices,
which has not been done.
5.3 The learned Departmental Representative supported the
order of the AO / TPO.
5.4 We have heard rival submissions and perused the
material on record. The DRP has directed the TPO to re-work
the interest computation based on the delay of individual
invoices. However, the DRP has not complied with the
directions of DRP. The TPO was wrong in stating that the
assessee did not furnish the invoice wise details of trade
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M/s Trianz Holdings Private Limited.
receivables. These details are furnished by the assessee vide
its letter dated 24.10.2018 and are placed on record at pages
597 to 612 of the paper book, Volume-II. The assessee had
given detailed submissions on the issue (refer page 471 to 476
of the paper book) and the same has not been considered by
the TPO. The TPO is directed to re-work the interest
computation based on the delay of individual invoice as per
the directions of the DRP. It is ordered accordingly.
5.5 In the result, grounds 26 to 31 are allowed for statistical
purposes.
Corporate Tax Issues
Disallowance u/s 14A of the I.T.Act [ground 32(b)]
6. The assessee has claimed that it has not in receipt of
any exempt income during the relevant assessment year.
Therefore, it was submitted that the disallowance by invoking
the provisions of section 14A of the I.T.Act is untenable. In
this context, the learned AR relied on the judgment of the
Hon’ble Madras High Court in the case of CIT v. Chettinad
Logistics Pvt.Ltd. (2017) 95 taxmann.com 221 (Mad.). It was
submitted that the SLP filed against the judgment of the
Hon’ble Madras High Court in the case of CIT v. Chettinad
Logistics Pvt. Ltd. (supra) was dismissed by the Hon’ble
Supreme Court in the judgment reported in 95 taxmann.60
(SC).
6.1 We have heard rival submissions and perused the
material on record. It is settled position of law that if the
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M/s Trianz Holdings Private Limited.
assessee is not in receipt of any exempt income in the
relevant assessment year, no disallowance u/s 14A of the
I.T.Act can be resorted to. In this context, we rely on the
judgment of the Hon’ble Madras High Court in the case of CIT
v. Chettinad Logistics Pvt. Ltd. (supra). The SLP filed as against
the judgment of the Hon’ble Madras High Court was rejected
by the Hon’ble Apex Court. The relevant finding of the Hon’ble
Madras High Court reads as follows:-
“10.In the instant case, there is no dispute that no income i.e.,
dividend, which did not form part of total income of the Assessee was
earned in the relevant assessment year.
10.1.Therefore, to our minds, the addition made by the Assessing
Officer by relying upon Section 14 A of the Act, was completely
contrary to the provisions of the said Section.
10.2.Mr.Senthil Kumar, who appears for the Revenue, submitted that
the Revenue could disallow the expenditure even in such a
circumstance by taking recourse to Rule 8D.
10.3.According to us, Rule 8D, only provides for a method to determine
the amount of expenditure incurred in relation to income, which does
not form part of the total income of the Assessee.
10.4.Rule 8 D, in our view, cannot go beyond what is provided
in Section 14 A of the Act.
11.Furthermore, we may note that a similar argument was sought to be
advanced by the Revenue in the matter concerning, M/s.Redington
(India) Limited Vs. The Additional Commissioner of Income Tax, which
was, subject matter of T.C.A.No.520 of 2016.
11.1.A Co-ordinate Bench of this Court, vide judgment dated
23.12.2016, rejected the plea of the Revenue advanced in that behalf.
11.2.As a matter of fact, a perusal of the judgment would show that the
Revenue had sought to argue that because exempt income could be
earned in future years, therefore, recourse could be taken to the
provisions of Section 14A of the Act, to disallow expenditure. In other
words the stand taken by the Revenue was irrespective of the fact
whether or not income was earned in the concerned assessment year
11 IT(TP)A No.2639/Bang/2019.
M/s Trianz Holdings Private Limited.
expenditure under Section 14A could be disallowed against anticipated
income.
11.3.Pertinently, the Division Bench in M/s.Redington (India) Limited
case has repelled this precise argument.
12.The Division Bench, in our view, quiet correctly held that, the
computation of total income, in terms of Section 5 of the Act, is made
qua real income and not, vis-a-vis, notional income.
12.1.The Division Bench went on to hold that Section 4 of the Act
brings to tax, that income, which is relatable to the assessment year in
issue. The Division Bench, thus, held that where no exempt income is
earned in the previous year, relevant to the assessment year in issue,
provisions of Section 14 A of the Act, read with Rule 8 D could not be
invoked.
12.2.While coming to this conclusion, the Division Bench also took
note of the aforementioned Circular, issued by the Board.
12.3.The reasoning of the Division Bench is contained in the following
part of the judgment:
“4.The admitted position is that no exempt income has been earned by
the assessee in the financial year relevant to the assessment year in
issue. The order of assessment records a finding of fact to that effect.
The issue to be decided thus lies within the short compass of whether a
disallowance in terms of s.14A of the Act read with Rule 8D of the
Rules can be contemplated even in a situation where no exempt income
has admittedly been earned by the assessee in the relevant financial
year.
7.Per contra, Sri.T.Ravikumar appearing on behalf of the revenue drew
our attention to the marginal notes of s.14 A pointing out that the
provision would apply not only where exempted income is ‘included’ in
the total income, but also where exempt income is ‘includable’ in total
income.
8.He relied upon a Circular issued by the Central Board of Direct taxes
in Circular No.5 of 2014 dated 11.2.2014 to the effect that s.14A was
intended to cover even those situations whether there is a possibility of
exempt income being earned in future. The Circular, at paragraph 4,
states that it is not necessary for exempt income to have been included
in the income of a particular year for the disallowance to be triggered.
According to the Learned Standing Counsel, the provisions of s.14A
are made applicable, in terms of sub section (1) thereof to income
‘under the act’ and not ‘of the year’ and a disallowance under s.14A
r.w.Rule 8D can thus be effected even in a situation where a tax payer
has not earned any taxable income in a particular year.
12 IT(TP)A No.2639/Bang/2019.
M/s Trianz Holdings Private Limited.
9.We are unable to subscribe to the aforesaid view. The provisions
of section 14A were inserted as a response to the judgments of the
Supreme Court in Commissioner of Income Tax Vs. Maharashtra Sugar
Mills Limited (1971) (82 ITR 452) and Rajasthan State Ware Housing
Corporation Vs. Commissioner of Income Tax ((2002) 242 ITR 450) in
terms of which, expenditure incurred by an assessee carrying on a
composite business giving rise to both taxable as well as non-taxable
income, was allowable in entirety without apportionment. It was thus
that s.14A was inserted providing that no deduction shall be allowable
in respect of expenditure incurred in relation to the earning of income
exempt from taxation. As observed by the Supreme Court in the
judgment in the case of Commissioner of Income Tax vs. Walfort
Share and Stock Brokers (P) Ltd (2010) 326 ITR 1 ‘…. The mandate of
s.14A is clear. It desires to curb the practice to claim deduction of
expenses incurred in relation to exempt income against taxable income
and at the same time avail of the tax incentive by way of an exemption
of exempt income without making any apportionment of expenses
incurred in relation to exempt income.’
10.The provision this is clearly relatable to the earning of actual income
and not notional or anticipated income. The submission of the
Department to the effect that s.14A would be attracted even to exempt
income ‘includable’ in total income would entail the assessment of
notional income, assumed to be exempt in the future, in the present
assessment year. The computation of total income in terms of s.5 of the
Act is on real income and there is no sanction in law for the assessment
of admittedly notional income, particularly in the context of effecting a
disallowance in connection therewith.
11.The computation of disallowance in terms of Rule 8D is by way of a
determination involving direct as well as indirect attribution. Thus,
accepting the submission of the Revenue would result in the imposition
of an artificial method of computation on notional and assumed
income. We believe this would be carrying the artifice too far.
(emphasis is ours)
13.Mr.Senthil Kumar, seeks to distinguish the judgment in
M/s.Redington (India) Limited case based on the fact that Rule 8D had
not kicked-in by AY 2007-08, which was the AY being considered in the
said case.
14.According to us, this was not the argument, put forth, before the
Division Bench. As a matter of fact, the Revenue relied heavily on Rule
8D.
14.1.Mr.Ravikumar, who appeared for the Revenue, in that matter and
who is present in this Court, informs us that he had in fact argued that
the Rule was clarifactory in nature and would apply retrospectively,
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M/s Trianz Holdings Private Limited.
and that, the Division Bench, therefore, discussed the impact of Rule
8D of the Rules.
15.However, it is, our view, as indicated above, independent of the
reasoning given in M/s.Redington (India) Limited case that Rule 8D
cannot be read in a manner, which takes it beyond the scope and
content of the main provision, which is, Section 14 A of the Act.
15.1.Therefore, as adverted to above, Rule 8D, cannot come to the
rescue of the Revenue.
15.2.In any event, the Tribunal, via, the impugned judgment has
remitted the matter to the Assessing Officer.
15.3.Therefore, for the foregoing reasons, we are of the view, that no
interference is called for qua the impugned judgment.
16.To our minds, questions of law, which could have arisen are already
covered by the judgment of a Co-ordinate Bench of this Court rendered
in M/s.Redington (India) Limited case.
6.2 In light of the above judicial pronouncements, we hold
that since the assessee was not in receipt of any exempt
income during the relevant assessment year, the A.O. has
erred in making disallowance u/s 14A of the I.T.Act. It is
ordered accordingly.
6.3 In the result, grounds 32(b) is allowed.
Non-deduction of TDS on software expenses (ground 33)
7. The A.O. disallowed software expenses u/s 40(a)(ia) of
the I.T.Act by treating the same as “royalty”, hence liable for
TDS.
7.1 Before the DRP, details of the expenses were furnished
and it was pointed out that bulk of the expenses were paid to
residence and not liable for TDS. On verification of the same,
partial relief was granted and payments made to non-
residents towards purchase of software was disallowed u/s
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M/s Trianz Holdings Private Limited.
40(a)(ia) of the I.T.Act by treating the same as “royalty” and
hence liable for TDS.
7.2 Aggrieved, the assessee has raised this issue before the
Tribunal. The learned AR submitted that the payments made
for purchase of software whether it is “royalty” or not is
covered in favour of the assessee by the judgment of the
Hon’ble Apex Court in the case of Engineering Analysis Centre
of Excellence Private Limited v. CIT & Anr. [(2021) 432 ITR 471
(SC)]
7.3 The learned Departmental Representative was duly
heard.
7.4 We have heard rival submissions and perused the
material on record. In view of the latest judgment of the
Hon’ble Apex Court in the case of Engineering Analysis Centre
of Excellence Private Limited v.CIT & Anr. (supra), we restore
the issue to the files of the A.O. The A.O. is directed the
examine whether expenses incurred for purchase of software
is “royalty” and liable for deduction. The A.O. is directed to
follow the dictum laid down by the Hon’ble Apex Court in the
case of Engineering Analysis Centre of Excellence Private
Limited v.CIT & Anr. (supra). It is ordered accordingly.
7.5 In the result, ground 33 is allowed for statistical
purposes.
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M/s Trianz Holdings Private Limited.
Deduction u/s 10AA of the I.T.Act is to be allowed as
assessed income
8. In ground 33, the assessee contends that
notwithstanding and without prejudice to other grounds of
appeal, the A.O. has erred in not computing deduction u/s
10AA of the I.T.Act on assessed total income instead of
income returned by the assessee.
8.1 We have heard rival submissions and perused the
material on record. The Hon’ble jurisdictional High Court in
the case of M Pact Technology Services Pvt. Ltd. in ITA
No.228/2013 (judgment dated 11.07.2018) had held that
deduction u/s 10AA of the I.T.Act should be computed on the
assessed income and not on the returned income. The
relevant finding of the Hon’ble Karnataka High Court reads as
follows:-
“6. The relevant portion of the Circular No.37/2016 dated 02.11.2016
issued by the Central Board of Direct Taxes, Department of Revenue,
Ministry of Finance, Government of India, relating to the subject:
Chapter VI-A deduction on enhanced profits, is quoted hereunder:
“The issue of the claim of higher deduction on the enhanced profits has
been a contentious one. However, the courts have generally held that if
the expenditure disallowed is related to the business activity against
which the Chapter VI-A deduction has been claimed, the deduction
needs to be allowed on the enhanced profits. Some illustrative cases
upholding this view are as follows:
[i] If an expenditure incurred by assessee for the purpose of developing
a housing project was not allowable on account of non-deduction of
TDS under law, such disallowance would ultimately increase
assessee’s profits from business of developing housing project.
The ultimate profits of assessee after adjusting disallowance
under section 40[a][ia] of the Act would qualify for deduction
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M/s Trianz Holdings Private Limited.
under section 80IB of the Act. This view was taken by the courts in the
following cases:
[a] Income-tax Officer-Ward 5[1] vs. Keval Construction, Tax Appeal
No.443 of 2012, December 10 2012, Gujarat High Court
[b] Commissioner of Income-tax-IV, Nagpur vs. Sunil
Vishwambharnath Tiwari, 2015, Bombay High Court
[ii] If deduction under section 40A[3] of the Act is not allowed, the
same would have to be added to the profits of the undertaking on which
the assessee would be entitled for deduction under section 80-IB of the
Act.”
7. Applying the same analogy, it can be held that if deduction u/s.
40[a][ia] of the Act is not allowed, the same would have been to be
added to the profits of the undertaking on which the Assessee would be
entitled for deduction u/s. 10A of the Act. This view is fortified by the
decision of Bombay High Court in the case of ‘Commissioner of Income
Tax v. Gem Plus Jewellery India Ltd.,’ [2011] 330 ITR 175 [Bom] ,
wherein it is held thus:
“13. By reason of the judgment of the Supreme Court in Commissioner
of Income Tax v. Alom Extrusions Limited [2009] 319 ITR 306 the
employer’s contribution was liable to be allowed, since it was deposited
by the due date for the filing of the return. The peculiar position,
however, as it obtains in the present case arises out of the fact that the
disallowance which was effected by the Assessing Officer has not, the
Court is informed, been challenged by the assessee. As a matter of fact
the question of law which is formulated by the Revenue proceeds on the
basis that the assessed income was enhanced due to the disallowance
of the employer’s as well as the employees’ contribution towards
Provident Fund /ESIC and the only question which is canvassed on
behalf of the Revenue is whether on that basis the Tribunal was
justified in directing the Assessing Officer to grant the exemption
under Section 10A. On this position, in the present case it cannot be
disputed that the net consequence of the disallowance of the employer’s
and the employee’s contribution is that the business profits have to that
extent been enhanced. There was, as we have already noted, an add
back by the Assessing Officer to the income. All profits of the unit of the
assessee have been derived from manufacturing activity. The salaries
paid by the assessee, it has not been disputed, relate to the
manufacturing activity. The disallowance of the Provident Fund/ESIC
payments has been made because of the statutory provisions – Section
43B in the case of the employer’s contribution and Section 36(v) read
with Section 2(24)(x) in the case of the employee’s contribution which
has been deemed to be the income of the assessee. The plain
consequence of the disallowance and the add back that has been made
by the Assessing Officer is an increase in the business profits of the
17 IT(TP)A No.2639/Bang/2019.
M/s Trianz Holdings Private Limited.
assessee. The contention of the Revenue that in computing the
deduction under Section 10A the addition made on account of the
disallowance of the Provident Fund / ESIC payments ought to be
ignored cannot be accepted. No statutory provision to that effect
having been made, the plain consequence of the disallowance made by
the Assessing Officer must follow. The second question shall
accordingly stand answered against the Revenue and in favour of the
assessee.”
8.2 In view of the above judgment of the Hon’ble
jurisdictional High Court, we direct the A.O. to grant
deduction u/s 10AA of the I.T.Act on the assessed income
and not on the returned income. It is ordered accordingly.
8.3 In the result, ground 34 is allowed.
9. In the result, the appeal filed by the assessee is partly
allowed.
Order pronounced on this 16th day of November, 2021.
Sd/- Sd/-
(Chandra Poojari) (George George K)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Bangalore; Dated : 16th November, 2021.
Devadas G*
Copy to :
1. The Appellant.
2. The Respondent.
3. The DRP-2, Bengaluru.
4. The Pr.CIT-7, Bengaluru.
5. The DR, ITAT, Bengaluru.
6. Guard File.
Asst.Registrar/ITAT, Bangalore
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