TaxTMI 
TaxTMI 
2011 (1) TMI 406
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....4C read with section 143(3) of the Act: (i) Disallowance of deduction under section 10A of the Act in respect of 3rd floor of (GE-GDC) STPI Unit; (ii) Disallowance of set off of profit of STPI Unit, of Rs. 1,38,883 against the loss of other units/income; (iii) Disallowance of Misc. income as part of business income for the purpose of claiming deduction under section 10A of the Act; (iv) Disallowance of Travelling Expenses amounting to Rs. 14.07 cr. (approx.); (v) Depreciation on Computer Peripherals; (vi) Disallowance of delayed payment towards EPF." 4. In this ground, the assessee has taken a general and preliminary objection that the AO has made the various additions and disallowances mentioned in the ground without there being any direction or approval by the DRP u/s 144C of the Act, and, as such, these additions could not be made in the assessment order passed u/s 143(3) read with section 144C of the Act. However, the assessee has disputed all these additions or disallowances on their merit under ground Nos. 4 to 10. 5. The first item of disallowance raised in ground No. 2(i) read with ground Nos. 4 to 4.2 is on accoun....
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.... with the result of reconstruction of the first unit. It would be appreciated that GE-GDC. undertaking and the first STP units are two distinct and separate undertakings and, thus, GE-GDC undertaking cannot be regarded as an extension of the first STP unit. 5.5 The learned counsel for the assessee further submitted that the ITAT in the case of the assessee for the assessment year 2003-04, has held that both the units, being separate and independent of each other, were eligible for deduction u/s 10A of the Act. 5.6 We have heard both the parties and carefully perused the orders of the authorities below. The assessee company is engaged in the activities of software development and related services. The software related business is being carried out from the STP Unit and the exemption u/s 10A has been claimed. Originally, the assessee company had set up a STP Unit at 2nd floor, Block-3, Sector -29, Noida and it was registered as STP Unit in the year of 1995. Thereafter, another new STP Unit was set up at 3rd Floor, Biock-3, Sector-29, Noida in the assessment year 2002-03. The new STP Unit was treated by the assessee to be an independent unit for the purpose of exemption claimed ....
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....unit itself is an integrated unit in which new plant and machinery are put up and the same itself independently of the old unit capable of production of goods, then it can be classified as a newly established industrial undertaking. This makes it abundantly clear that even if the new unit was established by the assessee company as expansion of its existing unit, a substantial fresh capital having been invested in the said unit and it was capable of doing business of its own independent of the old unit, the same was eligible to be treated as a newly established undertaking. In our opinion, the learned CIT (Appeals) thus was not correct in holding that both the units were liable to be treated as one unit for the purpose of computing deduction under section 10A." 5.7 From the said decision of Tribunal pertaining to the assessment year 2003-04, it is clear that the Tribunal has taken a view that new unit cannot be treated to be as one and same unit with the existing unit for the purpose of computing deduction u/s. 10A of the Act. Respectfully following the Tribunal's order passed in the assessment year 2003-04, we allow this ground raised by the assessee and hold that the new unit i....
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....cisions. Respectfully following the aforesaid decisions, we restore the matter back to the file of the AO for his fresh computation by treating the provisions of section 10A to be in the nature of deduction provision and not exemption. The AO shall recompute the total income of the assessee in the light of the aforesaid decisions after providing reasonable opportunity of being heard to the assessee. The assessee shall furnish a fresh computation of income to the AO in the light of the principles and propositions laid down in the cases referred to hereinabove. We order accordingly. 7. Next ground vide ground No. 2(iii) read with ground Nos. 6 to 6.2 is with regard to the assessee's claim of miscellaneous income as part of business income instead of treating the same as income from other sources as held by the AO. 7.1 The AO held that miscellaneous income of Rs. 24,56,485 is assessable as income from other sources and, accordingly, disallowed deduction in respect of the same income u/s 10A of the Act. 7.2 It was contended by the assessee that the amount of Rs. 24,56,485 was actually received towards notice pay receivable from employees working in the software units. The amou....
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....O made disallowance of Rs. 14,07,18,569 being the difference between travelling expenses of Rs. 37,27,52,156 incurred in the relevant previous year and the travelling expenses of Rs. 23,20,33,587 incurred in the immediate preceding previous year, by observing that there was an increase of about 50% in travelling expenses as compared to the immediately preceding previous year while turnover of the assessee in the current year had decreased in comparison to the last year. During the course of the assessment proceedings, the assessee submitted the details of the travelling expenses justifying foreign travelling expenses vide its reply dated 11.11.2009. The AO stated that no satisfactory reply or submission was submitted but only details of these expenses were provided by the assessee. The AO thereafter made comparison between the travelling expenses incurred in the current year with that of the earlier 5 years. The AO stated that in order to claim expenditure u/s 37(1), the burden to prove that the expenses were laid out and expanded for the purpose of business was upon the assessee. The AO thus, taken a view that the assessee has failed to discharge his onus by not substantiating the....
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....31-Mar-2006 31-Mar-2005 (Rupees) (Rupees) INCOME Turnover - Export 1,807,817,212 1,452,166,891 - Domestic 160,756,572 128,689,886 Other income 11 23,995,281 18,877,423 1,992,569,065 1,599,734,200 From the aforesaid details, we find that the export sales has been increased from Rs. 145,21,66,891 to Rs. 180,78,17,212 and the domestic turnover has been increased from Rs. 12,80,89,886 to Rs. 16,07,56,572 and other income has increased from Rs. 188,77,423 to Rs. 239,95,281, in the current Financial Year as compared to the immediately preceding year. Therefore, the AO's observation that though the travelling expenses have increased as compared to the immediately preceding year, the turnover has been decreased, is incorrect. Further, the AO has accepted the fact that the assessee vide reply dated 11.11.2009 submitted the details of travelling expenses with just....
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.... of the discussions made above, we delete the disallowance of travelling expenses made by the AO. In other words, this issue is decided in favour of the assessee. 9. Next ground is ground No. 2(v) read with ground No.8 relating to the assessee's claim of depreciation on computer peripheral at 60% which has been allowed by the AO only at 15%. The assessee claimed depreciation on computer peripheral at 60%. However, the AO allowed the depreciation only at 15% by treating the computer peripheral as normal plant and machinery. This issue is now squarely covered by the decision of jurisdictional Delhi High Court in the case of CIT v. BSES Rajdhani Powers Ltd. In ITA 1266/2010, dated 31st August, 2010, where it has been held that the Tribunal has rightly allowed depreciation on computer peripherals at 60%. Respectfully following the above referred decision, we direct the AO to allow depreciation on computer peripherals at 60% claimed by the assessee. 10. Next issue involved in ground No. 2(vi) read with ground No.9 is with regard to the disallowance of Rs. 1,04,102 being the payment towards Provident Fund deposited beyond due date. 10.1 In the course of hearing of this appeal, i....
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....ed with the operating profit margin earned from rendering software development and related services to unrelated parties. The operating results of the assessee in respect of the international transactions with associated enterprise were computed at -0.47% as against the operating profit margin of -6.89% earned from unrelated parties. The detailed particulars in this respect are as under:- RELATED PARTY SEGMENT Particulars Rs. Income: 1,363,095,493 - Revenue from services Total operating income 1,363,095,493 Expenditure: - Salary cost 593,468,593 - Travel & conveyance expenses 237,457,500 - Cost of outsourced work (52,346,314) - Allocable project delivery overheads 114,013,520 - Allocable corporate overheads 472,865,331 - Increase in work-in-process 4,047,796 Total operating cost 1,369,506,426 Operating profit (6,410,933) Operating profit/operating cost (-) 0.47% UNRELATED PARTY EXPORT SEGMENT Particulars Rs. Income: - Revenue from services 418,424,690 Total operating income 418,424,690 Expenditure: - Salary cost 120,912,941 - T....
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....ional transactions to be at arm's length. However, the Transfer Pricing Officer rejected the internal bench marking carried out by the assessee for the reason that the assessee did not maintain segmental accounts for the related and non-related transactions and there was no segregation of these activities in the audited Financials. The TPO therefore, rejected the basis adopted by the assessee. The TPO then passed order under section 92CA(3) of the Act and bench marked the operating profit margin of the assessee at entity level with the margin of six comparable uncontrolled companies as under:- Sl. No. Name of the company Operating Profit (OP/OC) 1. Persistant Systems Private Limited 24.68% 2. Mindtree Limited (Segmental) 15.22% 3. Visualsoft Technologies Limited (Segmental) 16.76% 4. Satyam Computers Services Limited 29.87% 5. Zylog Systems Limited 17.14% 6. Sasken Communications Technologies Limited 13.29% (Segmental) Average 19.49% 12.6 In the terms of order under section 92CA(3) of the Act passed by the TPO, the AO made a draft assessment and send the same to DRP for its appr....
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.... is not reliable as the assessee has not maintained the same. The DRP has also observed that the inclusion of Satyam Computers Ltd. in the final list of operating profit on operating cost should be removed from the calculations of the mean margin of the comparable and the AO was directed to recalculate the margin and make appropriate addition. 12.8 After receiving the order passed under section 144C by the DRP, the AO recalculated the arm's length margin in the light of the direction given by the DRP and adjustment of Rs. 45,15,21,255 was made to the total income of the assessee. 13. The learned counsel for the assessee has submitted before us that Accounting Standard-17 on segmental Reporting issued by the Institute of Chartered Accountants of India prescribes requirement of reporting of financial information about the different types of projects and services that the business segment produce which includes different geographical areas in which it operates. He further submitted that the transactions between the associated enterprises and uncontrolled enterprises were identical and thus, separate segmented reporting of financial/operating results of transactions with associat....
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....prises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realized by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction." 14. The learned counsel for the assessee, Shri Ajay Vohra, has thus submitted that in the case of present assessee, TNMM could appropriately be applied considering internal comparable uncontrolled transactions entered into by the assessee with unrelated parties. He further submitted that such internal comparable provide the best guide and ideal benchmark for international transactions; and such internal comparables available in the case of present assessee are to be preferred for the purpose of benchmarking at international transactions applying TNMM, instead of relying on external comparables. In this respect, he drew our attention to paragraph 3.26 of the OECD guidelines, which reads as under : "3.26 The transactio....
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....xist internal comparables, which could be applied for determining the arm's length price of international transactions. At this stage, he pointed out that even the TPO in the assessee's case for assessment year 2005-06 accepted the internal benchmarking undertaken to determine the arm's length price and the TPO in that year in fact, has computed adjustment on the basis of internal benchmarking while applying TNMM. He further submitted that no reason has been given by the TPO to deviate from the method accepted by him in the preceding assessment year 2005-06. 14.3 It was further submitted by the learned counsel for the assessee that benchmarking of the operating results from the international transactions of rendering software development and related services to AEs as well as Non-AEs by applying TNMM, cannot be disregarded on account of lack of segmental reporting, which is not applicable for the reason that the services. provided to the AEs as well as non-AEs are similar services. He, therefore, concluded that the working of operating profit margin from transactions with AEs and non-AEs undertaken by the assessee by making internal comparison is to be accepted for the purpose o....
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....lopment and related services to unrelated parties. However, the TPO has rejected the assessee's this method and has determined Arm's Length Price of international transactions undertake by the assessee company with its AEs by comparing the same with uncontrolled comparable companies. The TPO has rejected the method of internal comparison adopted by the assessee for the reason that the assessee did not maintain segmental accounts and has not reported segmental sults in the audited financial statements. In this connection, we have gone through Accounting Standard-17 issued by the Institute of Chartered Accountants of India. AS-17 requires reporting of financial information about the different types of products and services that the business segment produces, which includes different geographical areas in which it operates. For the purpose of segmental reporting in terms of guidelines prescribed under AS-17, a "Reportable Segment" has been defined in paragraph 5 of AS-17, which reads as under:- "5. The following terms are used in this Statement with the meanings specified: A business, segment is a distinguishable component of an enterprise that is engaged in providing an individ....
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....e, the assessee was not, required for segmental reporting nor for disclosing separate financial information in respect of transactions entered into with AEs and non-AEs. In other words, guidelines provided under AS-17 are not applicable to assessee's case. We, therefore, hold that the lack of segmental reporting for the reason that the transactions with AEs and non-AEs belong to the same item of software related services, cannot be made a basis for rejecting assessee's method of computing the Arm's Length Price by way of internal comparison made between the transaction with AEs and unrelated parties. 16.3 In the present case, the assessee has determined separate profitability in respect of its transaction with AEs and unrelated party on scientific basis considering defined allocation keys. The revenue for transaction with AEs and non-AEs is known and has been taken by the assessee at actual figure. Only certain small other income, namely, interest, dividend, rental income, excess liability written back, etc. has been allocated amongst the two segments in the ratio of revenue of each segment. This method cannot said to be absurd and baseless so as liable to be rejected. Similarly....
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....th associated enterprises and unrelated parties, and such comparison of profitability on transaction to transaction basis was to be preferred over entity level comparison for application of TNMM under the Transfer Pricing Regulations. The relevant Para of the Tribunal's decision are Paras 68, 70, 71A, 71B, 72 & 73. 17. Furthermore, it is pertinent to note that the Transfer Pricing Officer himself in the assessee's own case relating to the assessment year 2005-06 has adopted the internal bench marking method to determine the arm's length price of the international transactions undertaken by the assessee with related parties. In that year, the TPO has in fact, computed adjustment on account of arm's length price on the basis of internal bench marking applying TNMM. The Transfer Pricing Officers order u/s 92CA(3) for the A.Y. 2005-06 is placed at pages 199 to 203 of the Paper Book filed by the assessee, which indicates that the Transfer Pricing Officer has determined the arm's length price by applying the internal bench marking using TNMM. In the present order passed by the TPO, he has not given any reason to deviate from the method accepted by him in the immediately preceding asse....