TaxTMI 
TaxTMI 
2014 (8) TMI 64
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....5,12,827/- to the income of the assessee on account of the difference in the Arms length price of the international transactions undertaken by the assessee during the year under consideration. It has been further alleged that the Assessing Officer has erred on facts and in law in disregarding the internal bench marking undertaken by the assessee for determining the arm's length price of the international transactions applying TNMM. It has further been alleged that the Assessing Officer has erred on facts and law in disregarding the segmental of profitability submitted by the assessee. 4. The relevant facts giving rise to this issue are discussed in ensuing paras. 5. The assessee company is a 100% subsidiary of Birlasoft Enterprises Ltd, India, which in turn is 100% subsidiary of Birlasoft Inc., USA. The assessee company is engaged in the business of software development and related services. 6. During the relevant previous year, the appellant entered into the international transactions of Software development and related services with the associated enterprises, viz. Birlasoft Inc. USA and Birlasoft (UK) Ltd. amounting to Rs. 2,75,96,68,216 as under:- Associated enterpr....
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....in safe harbor range of =+/-5% than operating profit margin (OP/TC%) earned from rendering software development related services to unrelated parties computed at 4.34%, the international transactions were considered to be at arm's length. 9. In the transfer pricing documentation, the assessee had computed the profitability from services provided to AEs as well as unrelated parties on scientific basis considering defined allocation keys and this segmentation of the profitability of the international transactions with the Associated Enterprises and unrelated parties had been duly verified and certified by the Chartered Accountant. The TPO rejected the internal benchmarking carried out by the applicant holding that the annual report of the appellant does not contain segmental accounts with reference to related party and unrelated party. Further, the expenses which cannot be directly allocated are based on the basis of sales. Hence according to TPO, segments created by the appellant in the transfer pricing report are artificial and thereafter the TPO, further, proceeded with the search of external comparable companies and considered 18 external comparables with OP/OC ratio of 25.83%....
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....hri Ajay Vohra, in fact internal comparables available in case of an assessee are to be preferred for the purpose of benchmarking of international transactions even in the case where TNMM is applied, instead of relying on external comparables, as provided in Paragraph 3.26 of the OECD Guidelines. Further he contended that as per the OECD Guidelines, the net margin of the taxpayer from the controlled transaction should ideally be established by reference to the net margin that the same taxpayer earns in comparable uncontrolled transactions. And where this is not possible, the net margin that would have been earned in comparable transactions by an independent enterprise may serve as a guide. Further it was submitted by the ld counsel that the OECD Guidelines on Transfer Pricing recognizes the fact that internal comparables, if available, are to be adopted in the first instance, as the preferred benchmark. And only where such internal comparables are not available, resort can be had to external comparables, which may even otherwise be difficult to obtain and information in respect of which may be incomplete and difficult to interpret. The revised OECD Transfer Pricing Guidelines issue....
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....ble for deduction under section 10A on the basis of head count and turnover analysis undertaken by the appellant ought to be accepted in the present case. And since the operating profit margin (OP/OC) earned by the appellant on transactions undertaken with the associated enterprises at -4.92%, is within safe harbor range of +/-5% than the average operating profit margin earned on similar transaction with unrelated third parties at -4.3%, the international transaction of provision of software design and development services was considered to be at arm's length price. 17. The ld counsel pointed out that a co-ordinate Bench of this Tribunal in appellant's own case for the assessment year 2006-07 reported in 136 TTJ 505, had allowed the appeal of the assessee, and held as under:- "17. In the light of the discussions made above, we therefore, hold that the assessee was justified in undertaking internal bench marking analysis on stand alone basis by placing on record working of operating profit margin from international transactions with AEs and transactions with unrelated parties undertaken in similar functional and economic scenario, and the same should be the basis for determina....
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....f the profit earned from the international transactions with AEs and profit earned, from international transactions with unrelated parties, we do not go to decide whether the external comparables selected by the TPO were proper or justified to make arm's length price in the present case as that issue has become academic at this stage." 18. We find from a perusal of the aforesaid order that the Co-ordinate Bench restored the matter back to the file of the Assessing Officer/ Transfer Pricing Officer 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 form the international transactions with associated enterprise and profitability from the international transactions with unrelated parties after allocating respective revenues and expenses to both the segments. We find that in Assessment Year 2007-08 and 2008-09, too, the Tribunal has relied on its own previous order and upheld the benchmarking analysis undertaken by the appellant considering internal comparable for determining arm's length price. Similarly, we also find t....
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....in ITA Nos. 3821 and 3919/Del/2006 and also in assessment year 2006-07, 2007-08 and 2008-09 in ITA No. 3839/Del/2010, ITA No. 4776/Del/2011 and ITA NO. 284/Del/2013, respectively. "5.5 The ld counsel for the assessee further submitted that the ITAT in the case of 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 is 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 be an independent unit for the purpose of exemption claimed u/s 10A of the Act. However, the Assessing Officer has not accepted the claim of the as....
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....en 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(A) 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." 23. 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 200304 and other Assessment Year's in assessee's own case for the AY 2005-06, 2006-07, 2007-08 and 2008-09, 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 purpose of computing deduct....
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....e notice period pay was to be considered as income derived by the eligible undertaking and as such notice period pay would go to reduce the expenses on account of salary and the real nature of the transaction will not have any affect on the income derived by the assessee from the eligible undertaking. In the earlier decision the Tribunal had taken a view that because the assessee instead of crediting the notice period pay to the salary account and reducing the salary expenses, had shown the amount separately in the profit & loss account, that book-entry by itself would not change the real nature of transaction and it was accordingly held that the recovery of notice pay represents income derived from the industrial undertaking." 27. Respectfully following the decision of the coordinate Bench, we hold that the amount received by the assessee towards notice period is to be treated as income derived from the eligible undertaking and deduction u/s 10A shall be allowed accordingly. The Assessing Officer shall modify the assessment order in the light of the aforesaid direction and allow the deduction u/s 10A of the Act in terms of this order. 28. The next ground vide Ground No. 5 is....
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....the remaining assets were, in any case, purchased out of cash flows generated from the business. Further the entire borrowings were made for specific purpose as stated hereinabove and no fresh loans were availed by the appellant during the relevant year for financing the additions to fixed asset. Shri Ajay Vohra contended that the amounts borrowed by the appellant were not related to acquisition of fixed asset and, therefore, in absence of any such evidence that such borrowed funds were actually utilized for purchase of fixed asset, the same cannot be capitalized as part of actual cost of such asset. Therefore it was prayed by the ld counsel that disallowance made by the Assessing Officer is not sustainable and is liable to be deleted. Shri Vohra submitted an alternative prayer, which is without prejudice to the aforesaid prayer of his and stated that the Assessing Officer, may be directed to allow depreciation on increased cost of acquisition/ written down value of such asset including the interest expenses of Rs. 1,75,00,000/- 31. We have heard both the parties and have carefully perused the record and gone through the case laws cited by both the parties. 32. From a perusal....
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....ence the said proviso will apply to the present Assessment Year provided the assessee's case falls under it. In terms of section 36(1)(iii) of the Act, deduction is allowed in respect of interest on capital borrowed for the purpose of business or profession. In terms of the proviso to said section, no deduction, however, is allowed in respect of capital borrowed for acquisition of an asset for extension of existing business or profession for the period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use. A reading of section 36(1)(iii) mandates that only interest for the period between the date of borrowing to the date of put to use is to be capitalized as part of actual cost of asset. In other words, no interest is required to be capitalized for the period after such assets are put to use. Therefore the interest expenditure on the utilization of borrowed funds for the acquisition of new assets, from the date of its acquisition till the date when the asset is put to use, is to be disallowed. In other words, the interest paid on the capital borrowed for acquisition of an asset for extension of ....