5 Section 10A, proviso to Section 92C(4) – Section 92C(4) does not apply to income offered as part of voluntary transfer pricing (TP) adjustment. Voluntary TP adjustment being a notional income will not form part of turnover for computation of deduction u/s. 10A.

1.       TS-116-ITAT-2018(PUN)

Approva Systems Pvt. Ltd vs. DCIT

ITA No.1051/PUN/2015

A.Y.: 2011-12

Date of Order: 12^th March, 2018

Facts

Taxpayer, an Indian company was a 100% export oriented unit engaged in the business of providing software development service to its US affiliate (FCo), as a captive service provider. Taxpayer was also eligible to claim deduction u/s. 10A ^1.

For the relevant year under consideration, Taxpayer voluntarily offered additional income to tax in respect of its services to FCo, basis its transfer pricing (TP) documentation and claimed a deduction u/s 10A on such additional income.

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1   There was litigation on the issue of whether the Taxpayer was eligible to claim deduction u/s 10A or 10B. The Tribunal in this decision held that the Taxpayer was eligible to claim deduction u/s 10B.

AO contended that proviso to section 92C(4) will apply to such income and no deduction can be allowed u/s.10A. Without prejudice, since the Taxpayer failed to bring into India the export proceeds in relation to the voluntary adjustment, it was not eligible to claim deduction u/s. 10A in respect of such income.

Taxpayer contended that such additional income represented the TP adjustment made to the profits of the business and not the turnover and hence there was no requirement to realise the same in convertible foreign exchange in India. Further Taxpayer contended that the additional income was not determined by AO, but by itself on a voluntary basis and hence proviso to section 92C(4) is not applicable in respect of such income.

On appeal, the CIT(A) upheld the order of AO. Aggrieved the Taxpayer appealed before the Tribunal.

Held

– The income which is computed u/s. 92(1) in respect of an international transaction is a notional income in the hands of Taxpayer.

–   Section 92C(4) of the Act requires the AO to compute the income of the Taxpayer as per the arm’s length price (ALP) determined u/s. 92C(3). The proviso, to section 92C(4) further provides that no deduction will be allowed to a Taxpayer u/s. 10A in respect of such amount of income which is enhanced by AO having regard to the ALP u/s. 92C(3).

 –  In the present case, the additional income was determined by the Taxpayer and not the AO. The Taxpayer voluntarily offered an additional income to tax. Hence proviso to section 92C (4) does not apply to such income. Reliance in this regard was placed on Austin Medical Solutions Pvt. Ltd. vs. ITO (I.T. (TP) A. No.542/Bang/2012) and IGate Global Solutions Ltd. vs. ACIT (2008) 24 SOT 3.

–  As per section 10A deduction is allowed on the profits derived from export of articles or things or computer software upto an amount which bears to the profits of the Taxpayer, the same proportion as the export turnover bears to the total turnover of the Taxpayer. Once the additional notional income has been so offered to tax, it forms part of profits of business.

Thus, the additional income notionally computed u/s. 92(1) would form part of the profits of the Taxpayer for the purpose of section 10A, however, such notional income does not qualify as export turnover or total turnover. Hence there is no requirement to realis e such income in the form of convertible foreign exchange in India. Hence Taxpayer is eligible to claim deduction on such additional income.