TP additions should not be considered for the purposes of Chapter VI A

IN THE ITAT NEW DELHI BENCH 'I'

Assistant Commissioner of Income-tax, Circle-2(1)

v.

Bechtel India (P.) Ltd.

IT APPEAL NOS. 4338, 4339 & 4573 (DELHI) OF 2011

CROSS-OBJECTION NO. 374 (DELHI) OF 2011

[ASSESSMENT YEARS 2004-05 AND 2005-06]

DECEMBER 21, 2012

Key Observation:

Transfer pricing additions should not be considered while computing deduction under Chapter VI-A of the Income Tax Act (‘the Act’).

Relevant Facts:

During transfer pricing audit, the transfer pricing officer (‘TPO’) considered the taxpayer to be in the business of IT/IT-enabled services and enhanced the value of international transaction by Rs. 6,93,21,169/-.

The Assessing officer while computing deduction under section 80HHE of the Act, re-computed the total turnover (Original Turnover + Rs.6,93,21,169) by adding addition prescribed by the TPO and thus re-computed and deduction under section 80HHE of the Act.

Relevant provision of the Act:

As per section 92C(4) of the Act

"Where an arm's length price is determined by the Assessing Officer under sub-section (3), the Assessing Officer may compute the total income of the assessee having regard to the arm's length price so determined

…………..

Provided that no deduction under section 10A [or section 10AA] or section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section"

Observation of the Tribunal:

“14.From the proviso to Section 92C(4), it is evident that no deduction in Chapter VI-A is to be allowed in respect of the income which is enhanced after the computation of income in the said Section. Thus, the assessee is not entitled for deduction under Chapter VI-A in respect of the addition made as per the TPO's order. Despite the above specific provision, the Assessing Officer enhanced the total turnover by the addition made as per the TPO's order, which has the effect of reducing the deduction under Section 80HHE. However, the finding of the TPO is that the international transaction of the assessee is not at arm's length and, therefore, by determining the arm's length price of the international transaction, he proposed the addition of Rs. 6,93,21,169/-........it will have the impact of increasing the assessee's export turnover, then total turnover and finally, the total income. If all three are increased, obviously, the deduction claimed by the assessee under Chapter VI-A would increase. The proviso to Section 92C(4) prohibits any deduction under Chapter VI-A to be allowed on the enhancement made as per the TPO's order. Therefore, the only logical conclusion that can be drawn is that no effect is to be given to the addition made by the Assessing Officer as per the TPO's order while computing deduction under Chapter VI-A. The Assessing Officer's view cannot be accepted that by the enhancement of income as per the TPO's order, only the total turnover would be increased and not the export turnover or the total income. In view of the above, we uphold the order of learned CIT(A) on this point also. Accordingly, ground No.2 of the Revenue's appeal is rejected.”

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CA Gaurav Garg

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