Deloitte Consulting India Pvt. Ltd vs. ACIT (ITAT Mumbai)

S. 271(1)(c): The giving up of a bogus claim for deduction to eschew inquiry by AO/ TPO is not voluntary & bona fide & attracts levy of penalty

The assessee entered into a software development service agreement with Deloitte Consulting, USA (“Deloitte”), to provide software related services to Deloitte. Deloitte enters into consulting assignments with its US clients. For such assignments, the areas pertaining to software development and information technology services are provided by the assessee. The assessee’s income was eligible for 100% deduction u/s 10A. The assessee claimed a deduction towards reimbursement of marketing support services in the return of income. As the said arms length price of similar reimbursement had been determined by the TPO at Rs. Nil for the earlier years, the assessee, after the reference was made by the AO to the TPO, withdrew the claim for deduction and stated that no transfer pricing adjustment was required to be made. It also stated that its income should be enhanced by the disallowance and s. 10A deduction granted on the enhanced income. The AO & TPO rejected the withdrawal of the claim and determined the ALP thereof at Rs. Nil. The claim for s. 10A deduction on the said enhanced income was rejected by relying on s. 92CA(4). The said view of the AO was upheld by the Tribunal. In the s. 271(1)(c) penalty proceedings, the assessee claimed that no penalty can be levied on the basis that (a) there was merit in its claim for deduction of the marketing expenditure and that claim was voluntarily given up only to avoid litigation, (b) that in view of Gems Jewellery 330 ITR 175 (Bom), the enhanced income was eligible was s. 10A deduction and so there was no tax effect and (c) there was full disclosure of the material facts in the return. The AO & CIT(A) rejected the claim. On appeal to the Tribunal HELD dismissing the Tribunal:

(i) There is no question of any reimbursement by the assessee to Deloitte and it does not lie in the assessee’s mouth to contend that the expenses of five senior manager level personnel of Deloitte was borne from a commercial perspective or as a prudent businessman. Also, the revision by the assessee of its return/s is not valid because the reference to the TPO is much prior to the date of ‘revision’. The ‘revision’ made in anticipation of the proposed adjustment by the TPO is thus not voluntary but guided by the motive to eschew an adjustment and, resultantly, the debilitating impact of s. 92C(4). Voluntariness, and bona fides, it is trite law, are essential ingredients of a valid revision u/s139(5). The revision is also beyond the time limit prescribed u/s 139(5);

(ii) The argument, based on Gems Jewellery 330 ITR 175 (Bom), that s. 10A deduction should be granted on the enhanced income after disallowance, and that the bar in s. 92C(4) should not apply is also flawed. The ‘revised return’ is non-est in law and the only valid return is its original return/s whereby claim for marketing expenses has been made. Accordingly, the enhancement of its income is only in consequence of the adjustment to the returned income u/s 92C(4) r/ws 92CA(4). The rigor of s. 92C(4) is thus attracted, and despite the assessee’s income bearing the same quality or character, would stand disqualified to that extent for being allowed deduction u/s10A in its respect;

(iii) It is not surprising that no revised report u/s 92E accompanies the ‘revised returns’. Though the assessee seeks to justify the same on the basis that there is no provision for ‘revision’ of the said report, we find the same specious and per se unacceptable. Anything which is wrong, or discovered as so, is not valid. The same therefore has to be necessarily withdrawn, admitting the same as not correct and, further, furnishing in its stead, what it deems as the correct version. The TP report is the assessee’s justification for having incurred the expenditure on an arm’s length basis. What the assessee does in the present case is to disclaim the expenditure or withdraw the claim in its respect. The plea is false. The assessee in fact can be said to have under the circumstances made a bogus claim per its original return/s. The assessee, thus, has no case at the threshold, which gets aborted by it disclaiming its transaction. The question of proving its international transactions, which would be its explanation, thus just does not arise;

(iv) The assessee’s next plea is of a complete disclosure of material facts, made, adverting to the audit report u/s 92E. We are at loss to fathom even the import of the argument. It is only on failing, and abysmally at that, to demonstrate any business purpose of its relevant international transaction that a TP adjustment, valuing the same at nil, was advised by the TPO and came to be made. The disclosure per the audit report u/s 92E is thus both false and misleading. The argument of complete disclosure, unless the same is true, is of little consequence in law and, in fact, itself false. As such, looked at from any angle there has been both concealment as well as furnishing inaccurate particulars of income in the present case (Mak Data 352 ITR 1 (Del) affirmed in 358 ITR 593 (SC) referred)