TaxTMI 
TaxTMI 
2014 (8) TMI 867
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....es of the case and in law, learned CIT (Appeals) has erred in directing the A.O. to allow carry forward of unabsorbed losses and depreciation of STP unit. 5. On the facts and in the circumstances of the case and in law, learned CIT (Appeals) has erred in directing the A.O. to allow travelling expenses of Rs. 11,07,62,619/-. 5.1 The Ld. CIT (A) has inter-alia ignored the fact that in spite of being specifically required the assessee did not file bills/vouchers of travelling expenses exceeding Rs. 1,00,000/- and that in the absence of the bills and vouchers the genuineness of the expenses cannot be accepted. 6. On the facts and in the circumstances of the case and in law, learned CIT (Appeals) has erred in directing the A.O. to treat the miscellaneous income in the shape of recovery of notice pay as income of the unit eligible for deduction u/s 10A of the IT Act. 7. On the facts and in the circumstances of the case and in law, learned CIT (Appeals) has erred in deleting the addition of Rs. 8,59,418/- made on account of excess claim of depreciation on computer peripherals. ....
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....OP/TC NIL 4.88% 4.88% Company as a whole Revenue 869624151 686907736 1598448572 Total Cost 882018439 710599803 1593597143 Operating Profit (12414287) (23692067) 4851429 OP/TC -1.41% -3.33% 0.30% 3. The assessee benchmarked its international transactions using the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) with operating profit/operating cost (OP/OC) as the profit level indicator (PLI). It had related party transactions as well as unrelated party transactions in the same line of business. As such, internal TNMM was employed, i.e., margin on cost earned from the unrelated party transactions was compared with the margin on cost earned from the related parties. The TP documentation of the assessee concluded that the operating margin of the assessee from software services to unrelated parties was 2.51%, whereas the margin of the assessee from associated enterprises was 2.04% and the operating profit earned by the assessee being, according to the assessee, within (-) 2.62% and 7.63%, i.e., (+)/(-) 5% range, the transactions between the assessee and ....
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....ness. 6. The Ld. CIT(A) directed the AO to give the benefit of Section 10A of the Act to the GE-GDC Unit of the assessee. 7. Aggrieved, the department has raised Ground No.2. 8. The Ld. DR has contended that the ld. CIT (A) has erred in directing the AO to allow deduction u/s 10A to the assessee in respect of its GE-GDC STP Unit; that the ld. CIT (A) has failed to take into consideration that the new unit started by the assessee was situated in the same building as housed the assessee's existing unit; that the ld. CIT (A) also failed to appreciate that both the units were doing the same business; that in this manner, the ld. CIT (A) failed to comprehend that the old unit and the new unit of the assessee were identical and that as such, the new business started by the assessee company was but an extension of its existing business. 9. The ld. Counsel for the assessee, on the other hand, has placed strong reliance on the impugned order . It has been contended that the issue stands squarely covered in favour of the assessee in the assessee's own case, by the Tribunal orders for AYs 2003-04, 2006-07 and 2008-09. It has further been submitted that the department's....
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....r AY 2006-07 has been placed at APB 585-597. It is reported as 136 TTJ 505 (Del). Therein (para 5.7, at page 512 of the report, as contained at APB 589), the Tribunal followed its aforesaid order for AY 2003-04 and again decided the issue in favour of the assessee, holding that the new unit of the assessee was to be treated as separate and independent unit for the purpose of computing deduction u/s 10A of the Act. The AO was directed to allow deduction u/s 10A in respect of the assessee's new unit set up at Third Floor, Block-3, Sector 29, Noida. It is the aforesaid two Tribunal orders in the assessee's own case, i.e., for AYs 2003-04 and 2006-07, which have been followed by the CIT (A) in allowing the assessee's ground of appeal in this regard and directing the AO to give the benefit of Section 10A of the Act to the GE-GDC STP Unit of the assessee. 12. Before us, the ld. Counsel for the assessee has placed further reliance on the Tribunal orders in the assessee's case for AYs 2007-08 and 2008-09. The order for AY 2007-08 is at APB 598-617, whereas that for AY 2008-09 is to be found at APB 624-632. 13. In the order for AY 2007-08, the Tribunal, in para 8 (APB ....
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....07-08 and 2008-09 also. Therefore, finding no error therein, the order of the ld. CIT (A) in this regard is upheld. Ground No.2 is, accordingly rejected. 17. Ground Nos.3 and 4 relate to the action of the ld. CIT (A) in directing the AO to allow the set off of losses arising out of the assessee's STP unit against the income from its non-STP units (mistakenly typed as 'STP Units' in Ground No.3) and in directing the AO to allow carry forward of unabsorbed losses and depreciation of the assessee's STP units. 18. As per the record, during the previous year relevant to the assessment year under consideration, the assessee was engaged in the activities of software development and related services. The software services were being carried out from its undertakings at Noida and Chennai set up in accordance with the Software Technology Park ('STP') Scheme notified by the Government of India, Ministry of Commerce and Industry and branch offices in Australia and Singapore (hereinafter referred to as 'Non STPI undertakings'). The assessee company has incurred business loss amounting to Rs. 152,333,790 in its various STP and Non STP undertakings. The detai....
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.... and the profits and gains from such units would have been exempt from tax, but since the STP Unit of the assessee had suffered losses, the losses from such unit could not be set off against income chargeable to tax; and that the same was the position with regard to the claim of carry forward of unabsorbed depreciation. 23. The ld. Counsel for the assessee, on the other hand, has submitted that this issue is covered in favour of the assessee by the Tribunal orders for AYs 2006-07 to 2008-09 (supra). It has been further contended that moreover, recently, the CBDT, vide Circular No.7/2013 dated 16.07.2013, clarified that irrespective of their continued placement in Chapter III, Sections 10A and 10B of the Act, as substituted by Finance Act, 2000, provide for deduction of profits and gains derived from the export of articles or things or computer software; that tax benefit u/s 10B of the Act is in the nature of deduction; that income/loss from various sources, i.e., eligible and ineligible units, under the same head have to be aggregated in accordance with the provisions of Section 70 of the Act; and that therefore, loss from ineligible unit would have to be set off against the pro....
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....l (APB 589 & 590), restored the matter to the file of the AO for fresh adjudication by treating the provisions of Section 10A of the Act to be in the nature of a deduction provision and not an exemption provision. While doing so, the Tribunal followed the decisions in Mindtree Consulting (P.) Ltd. v. Asstt. CIT [2006] 102 TTJ 691 (Bang.), Honeywell International (India) (P.) Ltd. v. Dy. CIT [2008] 26 SOT 503 (Delhi), Navin Bharat Industries Ltd. v. Dy. CIT', [2004] 90 ITD 1 (Mum) (TM), Hindustan Unilever v. Dy. CIT [2010] 325 ITR 102 and Scientific Atlanta India Technology (P.) Ltd. v. Asstt. CIT' [2010] 38 SOT 252 (Chennai). For AY 2007-08, the Tribunal followed (APB 613-614) its order for AY 2006-07, noting that for that year, even the DRT had referred to the ITAT decision for AY 2006-07 and remanded the matter to the AO for fresh adjudication with similar directions as issued for AY 2006-07. 28. For AY 2008-09, the Tribunal (APB 631, para 26), followed the Tribunal orders for AYs 2006-07 and 2007-08 in restoring the issue to the file of the AO for fresh adjudication. 29. Further, in Sovika Infotek Ltd. v. ITO [2008] 23 SOT 271 (Mum), it has been held that the asses....
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....ses of more than Rs. 1 lac, which were specifically asked for, were also not filed. From this, the AO observed that the assessee had failed to discharge its onus to substantiate the claim of the expenses and to justify the same. The travelling expenditure in excess of the amount claimed in the earlier year was disallowed by the AO as such, also for the reason that the turnover of the assessee company had decreased in comparison to the earlier year. 35. The ld. CIT (A), while directing the AO to delete the addition, held that the disallowance made was purely ad hoc; that the assessee had produced books of account before the AO, which books were audited; and that there was nothing on record to show that the AO had asked the assessee for further evidence to justify the claim of expenses. Besides, the ld. CIT (A) followed the Tribunal order in the assessee's case for AY 2006-07 in this regard. 36. The ld. DR has challenged the CIT (A)'s action, alleging that the CIT (A) ignored the fact that in spite of being specifically required to do so, the assessee did not file bills/vouchers for travelling expenses exceeding Rs. 1 lac and that in the absence thereof, the genuineness....
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.... miscellaneous income earned by the assessee in the shape of recovery of notice pay as income of its unit eligible for deduction u/s 10A of the Act. 41. The AO asked the assessee to show as to why the said income should not be treated as income from other sources and be included for the computation of deduction u/s 10A of the Act. The assessee, vide reply dated 28.08.08, stated that the miscellaneous income consisted of notice pay recovered from its employees, which income was incidental to the software export and hence, it formed part of the normal business profit and loss account of the assessee. However, the AO treated the miscellaneous income as income from other sources. 42. The ld. CIT (A) relied on the Tribunal decision in the assessee's case for AY 2006-07 and gave the impugned direction to the AO. 43. The ld. DR has contended that the ld. CIT (A) has failed to consider that the miscellaneous income of the assessee was not of the same nature as interest income and was rightly treated by the AO as income from other sources. 44. The ld. Counsel for the assessee has placed reliance on the impugned order. Reliance has also been placed on the Tribunal orders for ....
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.... claim. However, the AO rejected the claim of the assessee and disallowed the credit of taxes paid in Australia against the Indian tax liability of the assessee company. 52. The CIT (A) has observed as follows:- "The aforesaid claim of Rs. 1,261,811 made by the appellant was duly allowed by the Ld. AO in his assessment order. However, AO failed to take cognizance of the fact that after taking into consideration 'he additions made in the assessment order, the taxable income of the appellant, had increased and therefore the Ld. AO should have granted an enhanced credit of the taxes paid in Australia." In view of the above, there seems to be no dispute in principal between the AO and the appellant about the credit, of taxes paid in Australia by the appellant. The AO is directed to give credit to the taxes paid as per the DTAA between India and Australia. 53. The ld. DR has contended that while wrongly directing the AO to allow the credit for taxes paid in Australia, the ld. CIT (A) has failed to consider that this claim had not been examined by the AO and once this was so, the ld. CIT (A) ought to have remitted the issue to the file of the AO, ....
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....ed parties was 2.51%, whereas the margin of the assessee from associated enterprises was 2.04% and since the operating profit, which the assessee earns was within -2.62% and 7.63% (i.e., +/- 5% range), the transaction between the assessee and its associated enterprise had been considered to be at arm's length. In other words, on comparison, the assessee found that the international transactions fell within the proviso to section 92C(2) of the IT Act and, therefore, maintained that its transactions are at arm's length. 56.2 Neither there is any dispute about the most appropriate method used by the assessee, nor on the PLI. However, the TPO did not accept the comparison at the entity level. The assessee had various STPI units. The TPO asked for Form No. 56F in respect of each of the units and also to provide unit-wise details of related and unrelated party transactions, which were submitted by the assessee on 08.10.2008 to the TPO, as below: Related Unrelated Total NOIDA unit I Revenue 67502710 10128297 81983020 Total Cost 151955943 43812111 193768054 Operating Profit (84453233) (....
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....elated transaction with the related party transactions of each unit separately. The OP/TC earned by the Chennai unit in its related party transaction was lower than the margin earned from unrelated party transaction. The TPO held that the international transactions of other unit was at arm's length, but made adjustment to the international transaction undertaken by the Chennai unit, based on revised accounts of the Chennai unit, as submitted by the assessee. The unrelated party transaction resulted into a margin of 19.47% as against -4.27% from the related party transaction. As a result, the difference of Rs. 7,25,40,785/- was added to the international transaction to bring it at arm's length. 57. In the impugned order, the ld. CIT (A) has observed: "14.8. The TPO had benchmarked the international transaction unit wise instead of entity wise in the AY 2004-05. This matter had travelled to the Hon'ble ITAT and it pronounced its decision on 11.06.2011 deciding in favor of the appellant. For the AY 2006-07 also the appellant benchmarked its international transaction at the entity wise under TNMM using OP/TC as the PLI. Dispute Resolution Pane....
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....ion falls within +/-5% as computed by the appellant, the benefit of proviso to section 92C(2) is available to the appellant. Therefore, this ground of the appellant is allowed. The AO/ TPO is directed to delete the adjustment made to international transaction." 58. Thus, the CIT (A) observed that whereas the TPO had benchmarked the international transaction unitwise, instead of entitywise, for AYs 2004-05 and 2006-07, the Tribunal, for both these years, had decided this issue in favour of the assessee, holding that the benchmarking of the international transactions had to be done entitywise. He, following the said Tribunal orders, directed the AO/TPO to delete the adjustment made to the international transactions. While doing so, he also observed that the TPO had not done any separate evaluation of the unitwise assets employed and functions performed and risks undertaken. 59. The ld. DR has contended that the ld. CIT (A) has erred in deleting the addition correctly made by the AO; that the assessee is into software services; that the assessee has four units, all of which have different profitability; that the assessee employed the TNMM, whereas the TPO went unitwise; that ext....
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....ctions of software development and related services with its associated enterprises (AE's), i.e., Birla Soft Inc., USA and Birla Soft (UK) Ltd. It applied the TNMM for benchmarking the international transactions of provision of software development services as the most appropriate method, with OP/OC as the profit level indicator (PLI). It aggregated the margin from the provision of software development services from all its STP units. The TPO, however, benchmarked each of the STP units on a stand alone basis. The assessee considered its international transactions to be at arm's length, taking the operating profit margin earned from the services rendered to its AEs, computed at 2.04%, rather than the operating profit margin earned by it from rendering of services to unrelated parties, computed at 2.51%, to be within the safe harbour range of (+)/(-) 5%. The TPO, however, considered the related margin of the assessee's Chennai STP unit at (-) 4.27%, arriving at an arm's length margin of 30.26%, thus making an addition of Rs. 7,25,40,785/-. Therefore, the TPO did not accept the comparison at the entity level, observing that the three STP units of the assessee, to which....
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....e we therefore, hold that the assessee was justified in undertaking internal bench marking analysis on standalone 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 determination of arm's length, price in respect of international transactions undertaken with the associated enterprise. In the light of the facts of the present case as discussed above, we therefore, hold that the Transfer Pricing Officer had no mandate to have recourse to external comparables when, in the present case, internal comparables were available, which could be applied for determining the arm's length price of international transactions with AEs. We therefore, direct the Assessing Officer, Transfer Pricing Officer to determine arm'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. In ....
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.... the assessee were rendered to the same AEs of the assessee, i.e., Birla Soft Inc. and Birla Soft UK, on a continuing basis (the position remains the same for the year under consideration also). It was observed that there was unity of business, administrative control and funds, etc., in each of the STP units of the assessee, and that because of such commonness of management and interlacing of funds, etc., or software development services, it was not practically possible to carry out an independent FAR analysis of each unit with the existing comparables. It remains undisputed that the position, as above, remains the same for the year under consideration also. The Tribunal orders for the earlier years have not been shown to have been upset, or even stayed, on appeal. Therefore, since there continues to be unity of business and administrative control and interlacing of funds amongst the units of the assessee company, for this year also, it is not possible to carry out an independent FAR analysis of each unit with existing comparables. The assessee had provided various kinds of software related services, such as software development services, software maintenance and repair services an....
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....ofits which such enterprise would have earned, if the transaction had been with some third party, instead of the related party; that when 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; that the reason for this is that various factors having bearing on the quality of output, assets employed, input cost, etc., continue to remain, by and large the same in the case of an internal comparable; that the effect of difference due to such inherent factors on the comparison made with the third parties gets neutralized when comparison is made with internal comparables; and that therefore, an internally comparable uncontrolled transaction is more noteworthy than an externally comparable uncontrolled transaction. 70. In Destination of the World (sub continent) (P.) Ltd.' (supra), it has been held, inter alia, that the OECD Guidelines mention that net margin of the tax payer from the controlled transactions should be established with reference to the net margin which the same tax payer earns in comparable uncontrolled transactions; that where this is not possible, the n....