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2015 (7) TMI 568
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....arat Electronics Ltd. (BEL). The assessee is engaged in the business of manufacture of X-ray and CT tubes, HV Tanks, Detectors, parts and accessories for medical diagnostic imaging equipment, distribution of tubes, parts and accessories and provision of engineering services to its AE as contract manufacturer. During the previous year, the assessee carried out the following international transactions with its AE:- Import of raw materials for control manufacturing activity : Rs.159,74,15,702 Purchase of fixed assets for contract manufacturing activity : Rs. 4,94,76,509 Sale of manufactured goods : Rs.373,12,86,546 Provision of engineering services : Rs. 4,19,96,848 Payment of training fees : Rs. 67,972 Reimbursement of expenses : Rs. 6,78,964 Recovery of expenses : Rs. 39,99,681 5. The AO referred the determination of Arm's Length Price (ALP) in respect of international transactions entered into by the assessee. The subject matter of the dispute in grounds No.1 to 6 referred to above is with regard to determination of ALP in respect of international transaction of sale of manufactured goods by the Assessee to its AE. As already stated, the....
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....n) was 44.527%. In one of the submissions (dated 10.11.2006) filed by the assessee before the TPO, the assessee took a stand that TNMM may be adopted as the most appropriate method by retaining the same comparables chosen by the TPO. The following were the relevant submissions made by the assessee: "7. Consideration of alternate method We wish to bring to your kind attention, paragraph 2.38 of the OECD TP guidelines, which provide for an application of alternate method to substantiate the results of the Cost Plus method in the following circumstances: • If expenses reflect a functional difference, which has not been taken into account in applying the method, an adjustment to the cost plus mark up may be required. • If expenses reflect additional functions that are distinct from the activities tested by the method, separate compensation for that function may need to be deemed. Since, the comparables chosen by Your Honour perform functions which are beyond that of a contract manufacturer, the result obtained by the assessee through the application of the Cost Plus Method may also have to be substantiated through the application of the Transactional Net....
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....uld be relied upon. This being so, there is no reason to switch over from a direct method to an indirect method." 8. Thereafter the TPO proceeded to determine the ALP as follows:- 5.10.3 Comparables The following four comparables were identified in the show cause letter-dated 13.10.06: Sl. No. Name of the comparable % of GP over costs 1 Contential Surgical Suture Ltd 74.167 2 Polymedicure Ltd. 27.646 3 South India Surgical Co. Ltd. 37.833 4 Shree Pacetronix Ltd. 38.462 Avg. 44.527 Out of this Shree Pacetronix Ltd. is rejected as per the taxpayer's request since it had related party transactions. The final list is as follows: Sl. No. Name of the comparable % of GP over costs 1 Contential Surgical Suture Ltd 74.167 2 Polymedicure Ltd. 27.646 3 South India Surgical Co. Ltd. 37.833 Avg. 46.55% 5.10.4 Adjustment towards Sales functions As discussed, the normal spending on marketing. advertising & distribution comes to 8% of the sales. Therefore an 8% adjustment is given to ALP computed to neutralized the impact of these functions: Cost....
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....s regard, the assessee raised the following contentions:- "1.4. The Appellant submits that in case if your good self considers that the comparables used in the TP Study do not have the desired degree of comparability for applying CPM as the most appropriate method, we submit that it would be more appropriate to use TNMM as the most appropriate method instead of rejecting the comparables used in the TP Study. 1.5. In this regard we submit that Para 3.27 of the OECD TP guidelines state that net margins used in the TNMM are less affected by transactional differences than is the case with price, as used in the CUP method. The net margins also may be more tolerant to some of the functional differences between controlled and uncontrolled transactions than gross margins (i.e., used in the RPM and the CPM). And, the differences in the functions performed between enterprises are often reflected in variations in operating expenses. Consequently, enterprises may have a wide range of gross profit margins but still earn broadly similar levels of net profits. 1.6. In our submissions to the Ld. TPO it has been clearly established that the functional profiles of the Comp....
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....ICAI in choosing the most appropriate method. The assessee also submitted : "1.24. We further submit that the exercise of transfer pricing assessment for determining arm's length price should not be directed towards making an adjustment, but should be carried out based on the rationales of economic and commercial principles. This is also supported by the statement of the Tax Tribunal in the case of Philips Software, wherein it was held that the action of the Ld. TPO was directed towards making a higher TP adjustment. 1.25. Further, in our submissions we have also clearly brought out the fact of significant functional dissimilarities between the Company and the alleged comparables. In view of such significant functional dissimilarities, CPM is liable to be rejected as the most appropriate method, and the TNMM has to be adopted as the most appropriate method, if the comparables proposed by the Ld. TPO are considered as comparables." 12. On the above submissions made by the assessee, the CIT(A) held as follows:- "6.3.4 As laid down in the case of Aztec Software (supra), the burden to establish that international transactions were carried out at ALP ....
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....TPO was not justified in rejecting the method adopted by assessee and making adjustments by applying TNMM on the ground that assessee had incurred loss in transactions with AEs and that the method employed by assessee was complex. Following the same analogy, where CPM has been selected by the appellant and accepted by the TPO as the most appropriate method in the instant case, it is for the appellant to demonstrate the fallacies in application of CPM before putting up a case for application of TNMM. It is for the appellant to show that TNMM is more appropriate than CPM and such an appropriateness of method must be shown on the touchstone of the factors set out in Rule 1OC(2). As the appellant has failed to make out a case for adoption of TNMM as the most appropriate method on the basis of cogent material and sound reasoning, the TPO was justified in rejecting the proposal of the appellant in this regard and her action in doing so is hereby sustained." 13. In grounds 3 & 4, the assessee has specifically challenged the action of the revenue authorities in not applying the TNMM as the most appropriate method. 14. We have heard the submissions of the ld. counsel for the assess....
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....formed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects o....
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.... compulsion or prescribed definitions for direct and indirect costs, the elements or functions which constitute the cost of production can be at variance. Secondly in absence of a transparent disclosure, the inconsistencies in the accounting treatments of costs by the respective entities cannot be found out. As a result Cost Plus methodology cannot be resorted to, unless otherwise the data related to all the cost or functions are available in the public domain. 18. The next submission was that Rule 10(B) (1) (c) obligates determination of direct and indirect cost of production incurred by the enterprise in respect of property transferred or services provided. It obligates arriving at the normal gross profit markup to such costs and stipulates that the same should be computed according to the same accounting norms. Any uncertainty of the first two elements cannot be adjusted or reconciled in any manner. Adjustments are limited to only functional and other differences and not in either reconciling the direct and indirect costs or reworking the computation when the accounting norms are not the same. 19. It was further submitted the CIT(A) wrongly placed reliance on the decision ....
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.... may be differences across enterprises in the treatment of costs that affect gross profit mark ups that would need to be accounted for in order to achieve reliable comparability. Para 2.48 :... "The distinction between gross and net margin analyses may be understood in the following terms. In general, the cost plus method will use margins computed after direct and indirect costs of production, while a net margin method will use margins computed after operating expenses of the enterprise as well. It must be recognized that because of the variations in practice among countries, it is difficult to draw any precise lines between the three categories described above." 21. Reference was to the Guidance Note on Report on International Transactions under Section 92E of the Income tax Act, 1961 (Transfer Pricing) issued by ICAI ('Guidance Note') states on Page 79 as follows: "determine normal gross profit mark-up on costs in the comparable uncontrolled transactions. Such costs should be computed according to the same accounting norms. In other words, the components of costs of comparable uncontrolled transaction should be the same as those of international transaction." It....
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.... appropriate method for the following reasons; • TNMM operates at the net levels wherein the margins are more tolerant to functional difference than at gross levels; • If there exist any difference in the functions the same gets reflected in the operating expenses; • Adjustments for differences in the marketing & advertisement expenses do not result in accurate adjustment for the additional functions performed by the comparable companies vis-à-vis the Appellants with the application of CPM; • Database limitation on account of Cost of Production (COP) can also be efficiently managed with the use of information at the net level; • Differences, if any, in the cost structures also evens out at the net levels; • The absence of comparables from the same industry calls for the selection of a broader set of comparables thereby making a perfect case for testing the margins at the net level with the application of TNMM. • TNMM should be considered as the MAM where operating expenses represent additional functions but it is not clear how these additional functions are accounted for at the gross m....
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....g profits may make it difficult to evaluate the comparability of gross margins, while the use of net profit indicators may avoid the problem." 27. Attention was also invited to the Australian transfer pricing guidelines provide that: [TR 97/20 3.52. on Profit methods] "....it might not be possible or practicable to use traditional methods because: i. there is insufficient reliable data to analyze comparability so as to determine an arm's length outcome other than through a profit split or a profit comparison at the net profit level. For example, if selling, general and administrative costs that are treated as part of costs of goods sold for an independent enterprise cannot be identified so as to adjust the gross margin in a reliable application of cost plus, it may be necessary to examine net margins in the absence of more reliable comparisons; ii. the product or service in question is unique or contains outof- the-ordinary intangibles; iii. while theoretically sound, the traditional methods may not be practicable because of the complexity of the business situation or the extent and diversity of the taxpayer's crossborder dealings with associat....
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.... Less: Cost of production Materials cost 2,960,589,360 Personnel cost 19,078,438 Consumables 45,584,322 Depreciation 108,652,580 Repairs and maintenance 37,932,517 Transport and packing 5,144,710 Excise duty 5,623,804 Power and fuel 54,102,259 Insurance 3,874,650 Add: Opening WIP 56,967,585 Less: Closing WIP (87,633,645) Cost of Production B 3,209,916,579 Gross Margin C = A-B 1,117,885,548 Gross Margin / CoP as considered by the learned TPO D = C/ B 34.83% Less: Other Operating expenses of GE BE Opening stock of finished goods 16975272 Closing stock of finished goods (4,150,577) Salary expense 34,258,518 Other Depreciation 24,832,551 Repairs and maintenance-Others 2,722,192 Subcontracting charges 12,132,002 Communication exp 8,092,662 Travel & Conveyance 8,027,514 Legal & Professional fee &nbs....
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....had further pointed out that the comparable chosen by the TPO were manufacturing medical consumables viz., disposal syringes, disposable sutures, disposable needles etc., and that the same cannot be compared with contract manufacturing of tubes, inserts, detectors, tanks and other parts and accessories for medical diagnostic imaging equipment which the Assessee manufactures and which are incorporated by the AE into equipment which are capital goods. On the above submission, the learned DR has submitted that it cannot be said that product similarity has no relevance. Product similarity is also important. If there is no product similarity then even though there may be functional similarity then CPM may not be the right method. Without prejudice to the above submission, it was also submitted that in the present case, the TPO has given due weightage to functional similarity also. iii) The Assessee had relied on para 1.41 of the OECD guidelines which provides that comparability even where products are different can be undertaken but the functions undertaken should be similar. On the above submission of the Assessee the learned DR has submitted that the TPO has considered bot....
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....make adjustment to profit margins on account of marketing, selling and distribution expenses, the same cannot affect gross margins. vii) On the submissions of the Assessee as to which method is superior whether CPM or TNMM, the learned DR has submitted that the issue is as to which method is most appropriate to the facts of the present case and not which method is superior. viii) The learned DR also submitted that the TP documents have been prepared by the Assessee bonafide and good faith and therefore rejection thereof is not warranted, in so far as MAM is concerned. 32. We have given a careful consideration to the rival submissions. We shall first recapitulate the sequence of events. The dispute raised by the Assessee in Gr.No.1 to 7 relate to the determination of Arm's Length Price (ALP) in respect of the international transaction of sale of manufactured goods by the Assessee to one its Associated Enterprise (AE). The Assessee manufactures components of medical devices and sells it to its AE. The pricing is claimed to be based on the GE Global pricing policy. The Assessee sources raw material and components, performs the manufacturing functions and supplies ....
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.... care is needed to ensure that the industry segment or group of segments being compared are sufficiently similar, especially in relation to functions performed and levels of profitability. 34. The Assessee justified its action in choosing comparable companies from auto ancillary and other industries for the reason that those companies also supply components/semi-finished goods to Original Equipment Manufacturers (OEMS) and was therefore akin to contract manufacturing. Those companies also did not perform functions like marketing and advertisement. The TPO on the above stand of the Assessee referred to para 1.20 of OECD Guidelines wherein it has been laid down that comparability should be based on functions performed and not on the basis of functions not performed. The TPO also referred to the advertising and marketing functions which were not being performed by the Assessee as well as the comparable companies identified by the Assessee as having no relevance because of the gross mark up on cost which is the PLI adopted by the Assessee and therefore for comparability at the level of gross mark up on cost of the products sold, those expenses were immaterial. 35. One of the obje....
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....reated as comparable to those operating in the overseas markets because of the differences in geographic locations, conditions prevailing in the domestic and export markets, size of markets, cost of labour and capital, level of competition and overall economic development. The CIT(A) therefore felt that the TPO should be directed to apply the filter of exports revenues to operating revenues being more than 25% filter and re-compute ALP. The CIT(A) however gave a rider to his own direction as above by adding that if the TPO can demonstrate that there would be no difference in pricing as well as margins between the domestic and export sectors of the industry then he can ignore this filter. 38. The first issue that needs to be addressed is with regard to the claim of the Assessee that TNMM should be adopted as the MAM instead of CPM. On the above issue, the Revenue authorities proceeded on the basis that once the Assessee has chosen a particular method as MAM then he cannot go back on it. The Revenue authorities further relied on a ruling of the Pune Bench of ITAT in the case of MSS India (P) Ltd. (supra) wherein it was held that Profit methods are pressed into service only when th....
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....thods might be used to 'approximate arm's length conditions when traditional methods cannot be relied / applied alone or exceptionally cannot be applied at all'. The transaction profit methods should be applied only when standard or traditional methods are incapable of being properly applied in the facts of a case. While traditional methods seek to compute the prices at which international transactions would normally be entered into by the associated enterprise, but for their interdependence and relationship, transactional profit methods seek to compute the profits that the tested party would normally earn on such transactions with unrelated parties. It is only axiomatic that the profits earned by an enterprise are dependent on several factors, and not only on the prices at which transactions have been entered into with the associated enterprises. The profit based results, thus, admit possibility of vitiation of results by a number of factors, which are not relevant to the determination of prices at which international transactions are entered into by the associated enterprises. These methods, which are a step removed from the methods of computing the prices at which independent tr....
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....omputation of arm's length price. 92C. (1) The arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe24, namely :- (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed24 by the Board. (2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed." "Rule 10C. (1) For the purposes of sub-section (1) of section 92C, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction, and which provides the most reliable measure of an arm's length price in relation to the international transaction. (2) In selecting the most appropriate method as specified in....
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....he complexity of the manufacturing or assembly; manufacturing, production, process engineering, procurement, purchasing, and inventory control activities; test functions; selling, general, and administrative expenses; foreign currency risks; and contractual terms (the scope and terms of warranties provided, sales of purchase volume, credit terms, etc.). Applicabilty to contact manufacturing services In the case of the above referred services provided by GE BE, it has a long term contractual obligation to provide services to GEMS global and its affiliates. As the said services are provided predominantly to related parties, application of CPLM would be appropriate in this case. Further, based upon the similarity of functions, risks, and contractual terms, the CPLM would be suitable in arriving at the arm's length price. Based upon the above, it would be relevant to note that an external comparability analysis has been undertaken to substantiate the arm's length price." Also, in the TP Study, the appellant has specifically rejected TNMM as the MAM, by observing as follows : "Applicability to contract manufacturing services : TNMM is generally considered to be a re....
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....s of the OECD recognized methods; the appropriateness of the method considered in view of the nature of the controlled transaction, determined in particular through a functional analysis; the availability of reliable information (in particular uncontrolled comparable) needed to apply the selected method and/or other methods; and the degree of comparability between controlled and uncontrolled transactions, including the reliability of comparability adjustments that may be needed to eliminate material differences between them. No one method is suitable in every possible situation, nor is it necessary to prove that a particular method is not suitable under the circumstances. (emphasis supplied) In this regard, it may be necessary to highlight here that there are certain key differences between OECD Guidelines and Indian Regulations in respect of the transfer Pricing methods. One of the differences is that while OECD guidelines, in exceptional circumstances, permit the use of more than one transfer pricing method to demonstrate the arms' length nature of related party transactions, the Indian TP Rules advocate the use of ONLY ONE TP method - 'the Most Appropriate Method'. Henc....
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.... lays down selection of MAM and the relevant guidelines are as under: "6.2.20 When to Use the Cost Plus Method 6.2.20.1. The cost plus method is typically applied in cases involving the intercompany sale of tangible property where the related party manufacturer performs limited manufacturing functions or in the case of the intra group provision of services. The method usually assumes the incurrence of low risks, because the level of the costs will then better reflect the value being added and hence the market price. Note that if the contract is based on actual costs, the contractual terms may include incentives or penalties depending on the performance of the contract manufacturer. 6.2.20.2. The cost plus method is also generally used in transactions involving a contract manufacturer, a toll manufacturer or a low risk assembler which does not own product intangibles and incurs little risks. The related customer involved in the controlled transaction will generally be much more complex than the contract manufacturer in terms of functions performed (e.g. conducting marketing and selling functions, coordination of production and sales, giving instructions to....
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....ver, reflect supervisory, general, and administrative expenses because they are accounted for as costs of goods sold. Accordingly, the gross profit markıups of UT1, UT2, and UT3 must be adjusted to provide accounting consistency. If data is not sufficient to determine whether such accounting differences exist between the controlled and uncontrolled transactions the reliability of the results will decrease. 6.2.21.3. Example 3 The facts are the same as in Example 1 above, except that under its contract with FS, LCO uses materials consigned by FS.UT1,UT2, andUT3, on the other hand, purchase their own materials, and their gross profit markıups are determined by including the costs of the materials. The fact that LCO does not carry an inventory risk by purchasing its own materials while the uncontrolled producers carry inventory is a significant difference that may require an adjustment if the difference has a material effect on the gross profit markıups of the uncontrolled producers. Inability to reasonably ascertain the effect of the difference on the gross profit mark-ups will affect the reliability of the results of UT1, UT2 and UT3. ....
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....he objection of the assessee needs to be analysed in the light of Rule 10C(2)(d) and (e). It is the contention of the assessee the comparables chosen by the TPO, being full-fledged manufacturers, the degree of comparability required is not existing between the assessee's international transactions vis-à-vis the transactions of the comparable companies. This objection has been duly taken note of by the TPO and he has applied Rule 10C(2)(e) granting adjustments. While the assessee may well contend that the adjustments granted are not reliable and accurate, seeking a change of the method itself is not within the scope and coverage of Rule 10C. In this regard, it would be relevant to mention that the assessee had earlier adopted CPM as the MAM and had suggested TNMM ony as an alternative approach. For instance, in the submissions made before the CIT (Appeals) by letter dated 9.2.2009 at pages 115 and 116 of the paper book, the assessee has stated as under : " Comparability analysis considering Cost Plus Method > The basic parameter on which the CPM operates is functional similarity. The appellant is a contract manufacturer and accordingly the comparables chosen by t....
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.... : - That there are significant differences in the functions performed by these comparables primarily with respect to the additional marketing and the selling function, vis-à-vis GE BE which does not perform any marketing or selling activity; - This is evident from the significant marketing and selling expenses of these companies which further underline the differences in the functions performed as against GE BE which has no marketing or selling expenses; - There is a return on these additional functions performed by the ld. TPO comparables which is embedded in the selling price and consequently in the gross margins of these companies; and - Thus, in order to compute appropriate gross mark-up comparable to the gross mark-up of GE BE, an adjustment to the gross margins earned by these companies is warranted for applying the CPM as the appropriate method. > It is noteworthy that the above rationale is also appreciated by the ld. TPO who has proceeded to provide such an adjustment by eliminating the selling and marketing cost form the sales and consequently its impact on the gross profits. Having said this, the appellant submits that the ld. TPO is grossly incorr....
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....bunal that the assessee has changed its stand, stating that TNMM is the MAM and that it would be absurd to consider CPM to be the MAM. TNMM was broached as an alternative approach only during the appellate proceedings. As we have already held, the concept of alternate approach or use of more than one method is not recognized in Indian TP Rules. The Indian TP Rules recognize use of only one method - the most appropriate method (MAM). Based on the discussions in the pre paragraph of this order, CPM is the MAM in this case. 49. Having said so, one should embark upon the stand taken by the Assessee as to why TNMM is the most appropriate method to be adopted for determining ALP in the case of the Assessee. The arguments advanced on behalf of the Assessee have already been set out in the earlier part of this order and are not being repeated. The arguments proceed on purely theoretical basis without citing as to how the required data of direct and indirect costs of production of the property in the case of the comparable companies chosen by the TPO are not available. No specific instance as to how in the case of comparable companies chosen by the TPO, indirect costs of production has b....
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....l be difficulty in computation of the cost of production and gross profit is again an argument in the air without any specific instance having been pointed out referable to the three comparable companies chosen by the TPO. In any event such differences as laid down in para 2.46 of the OECD TP guidelines, where the accounting practices differ in the controlled transaction and the uncontrolled transaction, appropriate adjustments should be made to the data used to ensure that the same type of costs are used in each case to ensure consistency. 52. The argument on behalf of the Assessee that a contract manufacturer and does not perform functions like marketing, selling and distribution. The expenses on marketing, selling and distribution are expenses which will be relevant only when computing net profit and therefore those expenses are irrelevant while applying CPM. Similarity of functions to the gross profit level will only be relevant. In such cases it has to be demonstrated as to how lower net profit and higher gross profit takes a comparable company out of the comparability. Alternatively, it can be shown as to why the gross margin of the comparable company need to be reduced be....
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....nted Unit ('ECU') by exporting spare parts, components etc., was ineligible for deduction under section 10B of the Act and thereby reducing deduction under the said section allowable to the Appellant. 9. That on the facts and in the circumstances of the case the Learned CIT(A) erred in confirming the action of the AO in treating the export of spare parts, components as a "trading activity". 56. The facts that are material for deciding the aforesaid grounds are as follows. The assessee apart from carrying out contract manufacturing and selling products to its AE, also exported spares components / parts. The assessee received a sum of Rs. 54,77,838 on export of such spares. The corresponding cost of spares so exported was Rs. 45,98,000. The assessee earned a net profit of Rs. 8,79,838 on export of spares components. The question before the AO was as to whether this profit has to be considered as profits of the business while computing deduction u/s. 10B of the Act. According to the AO and the CIT(A), the condition for grant of deduction u/s. 10B is activity of manufacture and since income derived from trading is not eligible for deduction u/s. 10B of the Act, the income from tradi....
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.... cost providing the mechanism for computing the "profits of the business" eligible for deduction under section 10B of the Act. Once an income forms part of the business of the income of the eligible undertaking of the assessee, the same cannot be excluded from the eligible profits for the purpose of computing deduction under section 10B of the Act. As per the computation made by the Assessing Officer himself, there is no dispute that both these incomes have been treated by the Assessing Officer as business income. The CBDT Circular No.564 dated 5th July, 1990 reported in 184 ITR (St.) 137 explained the scope and ambit of section 80HHC and the mode of determination of profits derived by an assessee from the export of goods, ITAT, Special Bench in the case of International Research Park Laboratories Ltd. (supra), after following the aforesaid Circular, held that straight jacket formula given in sub-section (3) has to be followed to determine the eligible deduction. The Hon'ble Supreme Court in the case of P.R. Prabhakar V CIT (2006) 284 ITR 584/154 Taxman 503 had approved the principle laid down in the Special Bench decision in International Research Park Laboratories Ltd. (supra....
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....from the total turnover while computing deduction u/s. 10B of the Act. This issue is no longer res integra and has been settled by the decision of the Hon'ble High Court of Karnataka in the case of Tata Elxsi Ltd. 348 ITR 98 (Kar), wherein the Hon'ble High court has held that whatever is excluded from the export turnover should also be correspondingly reduced from the total turnover while computing deduction u/s. 10B of the Act. Following the decision of the Hon'ble High Court of Karnataka, we direct the AO to exclude the turnover from export of spares & components both from the total turnover as well as the export turnover. 62. In the result, the appeal by the assessee is partly allowed. ITA No.815/Bang/2010 63. Grounds 1, 6 & 7 are general in nature and calls for no adjudication. 64. Grounds 2 & 3 raised by the revenue reads as follows:- "2. The learned CIT(A) has erred in holding that the income from scrap sales would form part of the profits of the undertaking eligible for deduction u/s. 10B of the Act. 3. The learned CIT(A) has erred in allowing the assessee's appeal following the decision of the Hon'ble ITAT in the assessee's own case in ITA No.3624....