TaxTMI 
TaxTMI 
TaxTMI 
2013 (11) TMI 417
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....Rs. 12,29,14,677/-. As the assessee had entered into International Transactions in respect of software development and related services with the Associated Enterprise viz. Birla Soft Inc. USA (UK) Limited, the Assessing Officer made a reference u/s 92CA to Transfer Pricing Officer ("TPO"). On the basis of order u/s 92CA(3) passed by TPO the AO had issued draft assessment order against which assessee filed objections before Dispute Resolution Panel ("DRP"), 1, New Delhi which issued directions u/s 144C(5) on 28th September, 2012. The Assessing Officer passed the order in conformity with the DRP's directions and determined the total various at Rs. 53,51,26,850/- as under: COMPUTATION OF TOTAL INCOME: Business Income Add: Rs. 1,14,11,274/- Adjustment on a/c of ALP Rs. 523,296,756/- Income from Business Add: Rs. 53,47,08,030/- Income from House Property Rs. 418822/- Income from other sources Misc. Income on a/c of notice pay Rs. 3,552,781/- Total Assessed Income Rs. 53,51,26,852/- Rounded Off Rs. 53,51,26,850/- 3. Being aggrieved with the assessment order, the assessee is in appeal before us and has taken various grounds of appeal. 4. Ground nos. 2.1 to 2.14....
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....e companies: (a) Infosys Technologies Ltd. (b) Wipro Ltd. 2.7 That the AO/DRP erred on facts and in law in applying the additional filters of persistent losses and declining revenue for determining comparability analysis, which were unwarranted and against the intent of transfer pricing regulations. 2.8 That the AO/DRP erred on facts and in law in applying inconsistent approach by eliminating loss making companies without correspondingly eliminating super normal profit making companies. 2.9 That the AO/TPO erred on facts in law in applying inconsistent approach by eliminating company showing diminishing revenue and persistent loss making companies without eliminating following companies having significantly growth rate and abnormal high margins: S.No . Name OP/OC 1. Kals Information Systems Ltd. 41.94% 2. Infosys Technologies Ltd. 40.41% 2.10 That AO/DRP erred on facts and in law in considering companies which are functionally incomparable to the....
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.... services to associated enterprises computed at (-) 0.96% was higher than operating profit margin OP/OC% earned from rendering software development and related services to unrelated parties computed at (-)9.88%, the international transactions were considered to be at arm's length. The TPO noticed from the annual report that there were no segmental accounts with reference to related party and unrelated party. He noticed that the segmental reporting in the annual report was with reference to geographic location and different segments had been created viz. USA, Australia and others. He further noticed from the record that the revenue from USA was Rs. 2,313,140,745/-, whereas the revenue from the AE which was USA based was Rs. 2,205,794,233/-. He further noticed that the revenue from the AE which was UK based was Rs. 299,420,008/-, whereas there was no geographic segment for UK. He further noticed that the cost which were directly identifiable to the related and unrelated segments had been considered as directly allocable costs and the expenses which could not be directly allocated were based on the basis of sales earned by various units. He, therefore, concluded that the segments crea....
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.... the assessee. We, therefore, restore this matter back to the file of the AO/TPO for fresh adjudication and for the purpose of determining the arm's length price in respect of the international transactions undertaken with the associated enterprise by making internal comparison of profitability from the international transactions with associated enterprise and profitability from the international transactions with unrelated parties after allocating respective revenues and expenses to both the segmental. The AO/TPO shall provide reasonable opportunity of being heard to the assessee. The assessee shall furnish all the details and particulars before the authorities below to enable them to make internal comparison of the profitability from the international transactions with associated enterprise and unrelated parties undertaken by the assessee in the similar functional and economic scenario. We order accordingly." 7. Thus, the Tribunal has held that arm's length price of international transactions with AE's is to be determined by making internal comparison of profitability from the international transactions with associate enterprise and profitability from the international transacti....
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....ly comparable uncontrolled transactions. It is because the delegated legislature has firstly referred to the net profit margin realized by the enterprise (internal) from a comparable uncontrolled transaction and, thereafter, it points towards net profit margin realized by an unrelated enterprise (external) from a comparable uncontrolled transaction. Thus, where potential comparable is available in the shape of an uncontrolled transaction of the same applicant, it is likely to have higher degree of comparability vis-à-vis comparables identified amongst the uncontrolled transactions of third parties. The underlying object behind computing ALP of an international transaction is to find out the profits which such enterprise would have earned if the transaction had been with some third party instead of related party. When the data is available showing profit margin of that enterprise itself from a third party, it is always safe and advisable to have recourse to such internal comparable case. The reason is patent that the various factors having bearing on the quality of output, assets employed, input cost etc. continue to remain by and large same in case of an internal comparable.....
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....rm's length price of international transactions with AEs by making internal comparison of the net margin earned by the assessee from the international transactions with associated enterprises and the profit earned by the assessee from the international transactions with unrelated parties. For this purpose, the ITAT restored the matter back to the file of the AO/TPO for fresh adjudication and for the purpose of determining the arm's length price in respect of the international transactions undertaken with the associated enterprise by making internal comparison of profitability from the international transactions with unrelated parties after allocating respective revenues and expenses to both the segmental. The AO/TPO were directed to provide reasonable opportunity of being heard to the assessee while the assessee was directed to furnish all the details and particulars to enable the AO/TPO to make internal comparison of the profitability from the international transactions with associated enterprise and unrelated parties undertaken by the assessee in the similar functional and economic scenario." 14. There is no dispute that the facts and circumstances in the present assessment year....
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....6-07 (ITA No.3839/Del/10; 2007-08) and also in respect of assessment years2003-04 in ITA Nos. 3821 and 3919/Del/2006. He further pointed out that the departmental appeal on this issue has also been dismissed by the Hon'ble Delhi High Court vide ITA No. 71/2010. 19. Having heard both the parties, we find that Tribunal in para 5.6 of its order for A.Y. 2006-07 vide ITA No. 3839/Del/2010 dated 20/01/2011 has observed in para 5.6 & 5.7 as under: 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, Block-3, Sector 29, Noida in the assessment year 2002-03. The new STP Unit was treated by the assessee to an independent unit for the purpose of exemption claimed u/s 10A of the Act. However, the AO has not accepted ....
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....inery 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 ld. 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 u/s 10A." 5.7 From the said decision of Tribunal pertaining to the A.Y. 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 is to be treated as a separate and independent unit for the purpos....
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....Noida 23,54,013 - 2. Chennai 1,39,547 - 3. Hyderabad - 24,46,542 4. Banglore - 67,98,329 5. Sector-63, Noida - 10,24,37,271 Total 24,93,560 11,16,82,144 Non-STP Units S. No. STP Units Profit Loss 1. Sector-59, Noida 2,77,04,118 - 2. Singapore - 1,16,13,139 3. Australia - 56,13,326 4. Bangalore - - 5. Other - 5,11,083 6. Prague 14,45,154 - Total 2,91,49,272 1,7,37,548 24. The AO disallowed the losses of STP units to be set off against income from other units on the ground that STP units were exempt u/s 10A of the Act while profits of non STP units were taxable as normal business income. 25. Ld. Counsel submitted that this issue has been decided in favour of the assessee by the decision of ITAT in assessee's own case for AY 2006-07 and also for AY 2007-08. It was held in A.Y. 2006-07 vide ITA No. 3839/Del/2010 as under: 6.1 "The Assessing Officer has taken a view that the loss from STPI Unit, which is exempt from tax, cannot be set off against income chargeable to tax by observing that sec. 10A is an exemption provision and not a deduction provision. 6.2 In this co....
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....to the file of AO with similar directions for fresh computation. 27. In the result, this ground is allowed for statistical purposes. 28. Ground no. 5 reads as under: 5. "That the AO/DRP erred on facts and in law in not regarding miscellaneous income as part of business income instead in treating the same as "income from other sources". 5.1 That the AO/DRP erred on facts and in law in not appreciating that miscellaneous income of Rs. 35,52,781/- represented amount received on account of notice pay, which is incidental to software export business and is to be considered as part of the income of the eligible undertaking." 29. Brief facts apropos ground no. 5 are that sum of Rs. 35,52,781/- was received by assessee on account of notice pay and deduction u/s 10A was claimed. The Assessing Officer denied the deduction on the ground that this was not derived by the assessee from export of computer software and he treated the same as income from other sources and not business income. 30. Ld. DRP had confirmed the order of TPO on this count and, therefore, the AO rejected the assessee's claim. 31. Ld. Counsel for the assessee submitte....