ACIT vs EYGBS India Pvt. Ltd.

Introduction

The Income Tax Appellate Tribunal (ITAT) Bangalore Bench’s order in ACIT vs. M/s. EYGBS India Pvt. Ltd. (ITA No.2984/Bang/2018) for Assessment Year 2014-15 is a significant ruling in the realm of transfer pricing and special economic zone (SEZ) deductions. This case commentary delves into the Tribunal’s analysis of whether voluntary transfer pricing adjustments made under an Advance Pricing Agreement (APA) qualify for deduction under Section 10AA of the Income Tax Act, 1961. The Tribunal decisively upheld the assessee’s claim, clarifying that the proviso to Section 92C(4) only bars deductions on adjustments mandated by the Transfer Pricing Officer (TPO), not those voluntarily offered by the taxpayer. This ruling provides crucial clarity for multinational enterprises (MNEs) operating in India’s SEZs, reinforcing the principle that APA-driven adjustments enhance the ‘profits of the business of the undertaking’ and are thus eligible for tax benefits.

Facts of the Case

The assessee, M/s. EYGBS India Pvt. Ltd., a wholly owned subsidiary of EYGI B.V., Netherlands, provided Information Technology Enabled Services (ITES) to its Associated Enterprises (AEs). For AY 2014-15, the assessee filed its original return declaring income of Rs. 17,15,76,040 after claiming a deduction under Section 10AA of Rs. 2,83,77,353. Notably, the assessee had already declared a voluntary transfer pricing adjustment of Rs. 7,15,00,000.

Subsequently, the assessee entered into an Advance Pricing Agreement (APA) with the CBDT on 16.03.2016 under Section 92CD(1) of the Act. Pursuant to the APA, the assessee filed a modified return on 29.06.2016, declaring a taxable income of Rs. 20,36,52,110 after claiming a deduction of Rs. 3,95,10,280 under Section 10AA on the income from its Gurgaon SEZ unit. The total ALP adjustment under the APA was Rs. 11,47,09,000, of which Rs. 8,66,80,000 pertained to the SEZ unit.

The Assessing Officer (AO) denied the enhanced deduction under Section 10AA on the voluntary TP adjustment, arguing that the adjustment was made only to avoid the rigors of Section 92C(4) and that the amount did not arise from the eligible unit’s profits. The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the assessee’s appeal, relying on the Karnataka High Court’s decision in I-Gate Global Solution Ltd. and the CIT(A)’s own order for AY 2013-14, which the department had not appealed. The Revenue appealed to the ITAT.

Reasoning of the Tribunal

The ITAT’s reasoning is structured around two core legal issues: (i) whether the voluntary TP adjustment constitutes ‘profits of the business of the undertaking’ under Section 10AA, and (ii) whether the proviso to Section 92C(4) bars such a deduction.

1. Scope of ‘Profits of the Business of the Undertaking’ under Section 10AA

The Tribunal first examined the computation mechanism under the APA. It noted that the assessee had worked out the ALP adjustment of Rs. 11,47,09,000 and offered it to tax in the modified return. The Tribunal held that this adjustment was a “Voluntary Transfer Pricing adjustment” and therefore eligible for deduction under Section 10AA. The key statutory basis was Section 10AA(7), which uses the expression “profits of the business of the undertaking, being the unit.” The Tribunal distinguished this from other deduction provisions (like Sections 80I, 80IA, 80IB) that do not provide a specific formula for computing qualifying profits. The term “profits of the business of the undertaking” was interpreted as “far wider in its scope” than ‘profits and gains derived by/from an undertaking.’ Consequently, the ALP adjustment made pursuant to the APA falls within the ambit of this wider definition.

The Tribunal supported this interpretation by citing a series of judicial precedents, including the Karnataka High Court’s Full Bench decision in Hewlett Packard Global Soft Ltd. (2018) 403 ITR 453, which held that the word “derived by an undertaking of the business” in Sections 10A and 10B is wide enough to include ancillary income. Other decisions from the Karnataka High Court (Motorola India Electronics), Delhi High Court (Riviera Home Furnishing), and various ITAT benches (Maral Overseas, Hrithik Exports, Mercer Consulting) were also referenced to reinforce the broad scope of the term. The Tribunal thus concluded that “income offered to tax pursuant to voluntary Transfer Pricing adjustment should be regarded as profits of business for the purpose of computing deduction u/s. 10AA of the Act.”

2. Applicability of the Proviso to Section 92C(4)

The Tribunal then addressed the Revenue’s primary argument—that the proviso to Section 92C(4) bars the deduction. The proviso states: “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.”

The Tribunal provided a critical distinction: the proviso specifically denies deduction on adjustments made by the TPO under Section 92CA. It does not apply to voluntary adjustments made by the assessee, including those under an APA. The Tribunal emphasized that the proviso is triggered only when the income is enhanced by the TPO’s determination, not when the assessee voluntarily offers additional income. This interpretation aligns with the legislative intent to prevent double benefits on forced adjustments but not to penalize taxpayers who proactively comply with arm’s length principles.

The Tribunal further relied on the CIT(A)’s order for AY 2013-14 in the assessee’s own case, which had been accepted by the department (no appeal was filed). That order held that “the appellant is entitled to benefit under section 10AA in respect of Voluntary Transfer Pricing adjustment which stand on different footing as compared to the Transfer Pricing adjustment made by the TPO.” Additionally, the ITAT Bangalore’s own decision in the assessee’s case for AY 2010-11 (ITA 199/Bang/2015) dated 20 May 2020, following the Karnataka High Court’s decision in I-Gate Global Solutions Ltd., had already ruled that voluntary adjustments are not hit by the proviso. The Tribunal also cited the ITAT Bangalore’s decision in IBM India Pvt Ltd. (59 CCH 260) dated 31 July 2020, which held that deduction under Section 10AA is allowable on incremental income arising from an APA as per the modified return filed under Section 92CD.

Conclusion of the Tribunal

Based on the above reasoning, the ITAT dismissed the Revenue’s appeal and upheld the CIT(A)’s order. The Tribunal held that the assessee was eligible to claim deduction under Section 10AA on the voluntary transfer pricing adjustment of Rs. 8,66,80,000 made pursuant to the APA. The judgment reinforces that APA-driven adjustments, being voluntary and scientifically determined, enhance the ‘profits of the business of the undertaking’ and thus qualify for SEZ benefits. The proviso to Section 92C(4) only applies to adjustments mandated by the TPO, not to voluntary adjustments offered by the taxpayer.

Frequently Asked Questions