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India: Tribunal allows section 10A deduction on additional income resulting from APA

India: Tribunal allows section 10A deduction

The Pune Bench of the Income-tax Appellate Tribunal held that a deduction under section 10A (a tax incentive measure) cannot be denied with respect to additional income as reported by the taxpayer on its amended return. The additional income flowed from the terms of an advance pricing agreement (APA) that in turn increased the operating margin reported by the taxpayer.


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The case is: Dar Al Handasah Consultants v. DCIT (ITA No, 1413/PUN/2019)


The taxpayer for the assessment year 2010-2011 reported an international transaction (IT-enabled design engineering services) that was referred to a Transfer Pricing Officer for a determination of the arm’s length price and who in January 2015 proposed a transfer pricing adjustment based on a comparability analysis.

In the meantime, the taxpayer entered into an APA with the Indian tax authorities. The APA (concluded in November 2015) resolved the arm’s length price issue with the parties agreeing to an operating margin of not less than 17%. The APA applied for a number of years, including a “rollback” to cover 2010-2011.

The taxpayer then filed an amended return for 2010-2011 reporting the 17% operating margin pursuant to the APA (the originally declared profit margin was 15%) and thus resulted in more taxable income in India. In addition, the “enhanced” income was brought into India pursuant to convertible foreign exchange in December 2015—that is, within a period of one month from the date of the APA.

The taxpayer on the amended return also claimed a deduction under section 10A of the Indian income tax law for the amount equal to the increased income. (In general, section 10A is a tax incentive that allows a deduction with respect to certain undertakings.) The tax authority’s Assessing Officer, however, rejected the claim for the deduction under section 10A on the basis that it would be permissible only to the extent as stipulated in the APA and because the APA did not provide for a deduction under section 10A. Further, the Assessing Officer rejected the section 10A deduction because a specific provision of section 10A provides that sales proceeds regarding the export of software must be brought into India in convertible foreign exchange within a period of six months from the end of the prior tax year—and in this case, the enhancement to the sales value was brought into India in convertible foreign exchange after this six-month period.

Tribunal’s decision

The tribunal held that the deduction under section 10A cannot be disallowed in respect of additional income reported in the amended return because it was not a transfer pricing addition made by the Assessing Officer. Rather, in this case, the additional transfer pricing-related income was reported by the taxpayer pursuant to the terms of the APA.

The tribunal, thus, concluded that the deduction under section 10A with regard to additional income reported on the amended return (pursuant to the APA) was not barred by other tax law measures. Further, the tribunal held that the deduction under section 10A is available to the taxpayer in this case because the amended return did not breach the APA (which was limited in scope to determining the arm’s length price—and nothing more).

The tribunal explained the interaction of a separate provision (section 92CD) of the tax law that reflects a separate, designated procedure for dealing with tax assessments made pursuant to an APA and specific time limits and how that measure did not prevent the application of section 10A to deny the taxpayer’s claim for a deduction under this tax incentive measure.

Read a December 2019 report [PDF 294 KB] prepared by the KPMG member firm in India

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