THE issue before the Bench is - Whether the assessee can claim deduction u/s 10A by making suo-motu disallowance of reimbursement of expenses made by it. NO is the answer.
Facts of the case
The assessee is engaged in the business of software development and provides information technology services. The assessee had debited expenses reimbursed to its AE relating to onsite managers' salary and expenses. However, while computing the total income, the assessee disallowed the amount and was not claimed as deduction. During assessment, the TPO also did not examine this claim, since the assessee had informed him that it has suo-motu disallowed the payment made by it to its AE in relation to reimbursement of onsite managers' salary and expenses. The AO had further noticed that the assessee had claimed deduction u/s 10A an had disallowed identical claim made in the immediately preceding year also suo motu and the AO, in that year, had taken the view that the amount so disallowed cannot be considered as part of the income exempt u/s 10A. Therefore, held that the assessee was not entitled for deduction under section 10A in respect of the suo-motu disallowance of reimbursement of expenses made by the assessee.
The AO also noticed that the assessee had received a dividend income and claimed the same as exempt u/s 10(34). However, the assessee did not make any disallowance u/s 14A on the ground that it did not incur any expenditure for earning the dividend income. The AO did not accept the contentions of the assessee and accordingly disallowed 5% of the dividend income u/s 14A. On appeal, the CIT(A) upheld the rejection of claim u/s 10A in respect of expenditure disallowed by the assessee suo motu, however, set aside the matter relating to the disallowance to be made u/s 14A.
The Tribunal held that,
+ we notice that the assessee had disallowed identical claim made in AY 2006- 07 and the same was also held to be not eligible for deduction u/s 10A by the assessing officer on the reasoning that the income pertaining to suo motu disallowance made by the assessee does not bear the character of income having nexus with the software development activity carried on by the assessee. The Tribunal has further noticed that the finding of the CIT(A) that the income arising out of the adjustment is not derived by the undertaking from the Export has not been controverted by the assessee. The Tribunal has further noticed that the assessee has not complied with the provisions of sec. 10A in respect of the suo-motu disallowance made by the assessee. In fact, it is the stand of the assessee that the reimbursements made by it was at ALP as evidenced by the report filed in Form 3CEB and it has also claimed the same as deduction by debiting the reimbursements as an item of expenditure in the Profit and loss account. Hence the suo-motu disallowance made by the assessee actually contradicts its stand taken by it in the financial statements as well as in the report furnished in Form 3CEB;
+ the assessee has determined the reimbursements at ALP in form no. 3CEB, whereas in M/s Agilisys IT services India Pvt Ltd, the ALP of sale receipts was determined at higher figure than that reported and hence due adjustments were made. In respect of the adjustments made due to the TP study was held to be not eligible for deduction u/s 10B by the Tribunal for the reasons stated therein. In effect, the sale price adjustment has not resulted in receipt of foreign exchange;
+ in the instant case also, the assessee has not generated any foreign exchange out of the suo-motu disallowance made by it. In fact, the assessee has actually spent money on reimbursements and hence there is no question of generating any income out of suo-motu disallowance of the expenditure incurred. Hence, in the absence of any income, it would not be possible to say that the suo-motu disallowance of any expenditure (which has already resulted in out go of money) would give rise to receipt of any money, which can be called as income generated out of software development activity. Thus, in our view, the ratio of the decision rendered in the case of Agilisys IT services India Pvt Ltd can be applied in the facts of the present case also. Even otherwise it is not a case of disallowance that is required to be made under the statutory provisions due to legal fiction. We notice that the Tribunal, while disposing of the identical issue in AY 2006-07, has taken into account the decision rendered by the Bangalore bench of Tribunal in the case of I Gate Global Solutions. Hence, for the additional reasons discussed and also by following the decision rendered by the Tribunal in AY 2006-07 on identical issue, we are of the view that the CIT(A) was justified in confirming the order of the AO in rejecting the claim for deduction u/s 10A of the Act in respect of suo-motu disallowance made by the assessee;
+ the next issue relates to the disallowance made u/s 14A of the Act. We notice that the CIT(A) had only set aside the issue to the file of the AO for fresh consideration in the light of decision rendered in the case of Godrej & Boyce mfg. Co. Ltd 2010-TIOL-564-HC-MUM-IT by the Bombay High Court. Hence, we do not find any infirmity in the decision of CIT(A) on this issue.