TaxTMI 
TaxTMI 
2015 (11) TMI 862
X X X X Extracts X X X X
X X X X Extracts X X X X
....0A on units on which deduction u/s 80HHE was passed and method of computation of deduction u/s 10A of the I.T. Act. 5. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the additions on account of Transfer Pricing adjustment in relation to transaction with Associated Enterprises M/s. Tata America International Corporation Inc. (TAIC)." 2. Apropos Ground No.1, it states that the ld. CIT(A) has erred in allowing overseas taxes paid of Rs. 216,27,28,177/-. As per the record, the assessee has paid the following Federal taxes in the USA, Canada and other Overseas branches and State taxes in the USA and Canada, which were claimed as deduction in the return of income: Federal tax of Rs. 19,99,80,754/- State taxes of Rs. 16,28,38,423/- Total Overseas tax Rs. 216,27,28,177/-. The AO disallowed deduction for Rs. 2162728177/- holding that such taxes are covered by the provisions of section 40(a)(ii) of the Income tax Act, 1961. 3. The Ld. CIT(A) confirmed the disallowance of Federal tax of Rs. 199.99 crores. However, deduction of State Taxes of Rs. 16.28 crores was allowed. It was held that since the amended provisions of section 40(a)(ii), ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d with the contention of the assessee that payment towards purchase of software is payment for copy righted articles and hence, it only represented the purchase price of an article and could not be considered as royalty, either under the Act, or under the DATA; that it is purely in the nature of business income and in the absence of a permanent establishment in India of the nonresident payees, the amount so remitted to the non-resident is not chargeable to tax. The ld. CIT(A) relied on the decision in the case of "ACZ India (P) Ltd.", 2010-TIOL-187- Del-IT and that in the case of "Parsad Production Limited", rendered by the Chennai Special Bench of the Tribunal in ITA No.663/Mad/2003. The ld. CIT(A) agreed with the view that withholding tax obligation on the payer applies on payments to nonresidents onlys if there is income chargeable to tax in India. It was held that accordingly, there was no obligation of the assessee to deduct tax at source u/s 195 of the Act, from making remittances to non-residents. The ld. CIT(A) held that he agreed with the assessee's contention that no tax was deductible on the same and accordingly, no disallowance ccould be made u/s 40(a)(i) of the Act. 1....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ded by the AO. It has been contended that at the time of commencement/inception of the undertaking, deduction u/s 10A of the Act was not available for export of computer software. Section 10A was substituted w.e.f. 1.4.2001, whereby, for the first time, the profit from the export of computer software was included in section 10A of the Act in respect of the newly established undertakings; that prior to that, even though section 10A was in the statute, the deduction was available only on profits and gains derived by an assessee from an industrial undertaking but was not available to the undertaking engaged in computer software; and that hence, deduction u/s 10A is not allowable to the undertakings which were already in existence and claiming deduction u/s 80HHE of the Act. It has been contended that the assessee-company, upto 1998-99, opted out of the deduction u/s 80-O and section 80HHE, which was more beneficial to the assessee for its units in AY 1999-2000. In AY 1999-2000 & in AY 2000- 01, the assessee claimed deduction u/s 80HHE. Section 10A was substituted w.e.f. 1.4.2001, in which, the deduction was allowed for the 10 years beginning with the assessment year in which the under....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y other assessment year. "Such profits" does not mean profit of that year alone, but the profit of such nature earned in any assessment year. If the legislative intention was otherwise, there was no need to employ the phrase "for the same or any other assessment year". This clearly indicates that the assessee cannot opt for deduction under any provision of the Act in the subsequent years. Then, section 10BA, inserted w.e.f. 1.2.2004, allows the deduction from the profits and gains derived from an undertaking from the export of eligible articles or things, i.e., hand made articles or things having artistic value, which requires the use of wood as the main rawmaterial. The undertaking exporting such articles is also covered u/ss 10A & 10B of the Act and, therefore, a restriction has been put in section 10BA, that if deduction has been claimed by an undertaking u/s(s) 10A or section 10B, the undertaking will not be eligible for deduction u/s 10BA. The profits derived from the undertaking covered u/s(s) 10A, 10B and 10BA are the income which do not form part of the total incomes, whereas the deduction u/s(s) 10A and 80HHE is allowed out of gross total income. Therefore, the assessee do....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... therefore, do not find any justification in the action of the ld. CIT(A) to hold that the assessee being an old unit and having once claimed deduction u/s 80HHE, was not entitled to claim deduction u/s 10A from the profits of its units. 19. The Hon'ble Delhi High Court has upheld the aforesaid decision of the Tribunal in the case of "CIT vs. Legato Systems India (P) Ltd.", 203 CTR 101 (Del). A similar view has been taken by the Tribunal in the case of "ITO vs. Dempo Solutions Pvt. Ltd.", 200 Taxman 26 (Del), as also in the case of "DCIT vs. Interra Software India P. Ltd.", 112 TTJ 982 and in the case of "Vidya Tech Solutions Pvt. Ltd." 8 ITR (AT) 705 ( ITAT Delhi). Further, in keeping with "Excell software Tech. Limited" (supra), there is no attempt by the assessee to extend the period of the tax holiday by exercising option to claim deduction u/s 10A instead of u/s 80HHE of the Act. The claim of deduction u/s 10A was supported by the requisite audit certificate. In the said certificate also, the date of commencement of manufacture/production has been taken as the original date and not as the date of commencement of claim u/s 10A of the Act. 20. In view of the above discussion, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ection, i.e., section 10A, is also a code in itself; that the legislature, in its wisdom, has introduced the section in Chapter III, i.e., Incomes which do not form part of total income and not under Chapter VIA of the Act; that the CBDT, in circular No.694, dated 23.11.1994, clarified the intention of bringing in sections 10A & section 10B in the Act, that the attempt to introduce these sections requires a simple interpretation and the reason as to why the legislature has not given a definition of "total turnover", as given in section 80HHC, in the provisions of section 10A; that it is the discretion of the legislature to frame such a section, by which, a particular category will get a deduction on fulfilling certain conditions; that, however, at the same time, it gives discretion as to how much of that deduction should be given and as to how the deduction is to be computed; and that therefore, section 10A requires to be read in a holistic manner. It has been contended that the meaning of a word or a phrase has to be adopted by considering the context in which it has been used; that the meaning given to a particular expression in one enactment cannot be bodily fitted into another ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er application of mind to all the facts and holding a prima facie belief that the AO can make reference to the TPO, or that the ld. CIT(A) can grant approval to such a reference. This, again, is a statutory safeguard for the taxpayer. It is submitted that CBDT Instruction No. 3 of 2003, dated 20.05.2003 detracts the AO and the ld. CIT(A) from the above obligation in complete violation of the statutory provisions of the principles of natural justice. It has been submitted that in the present case, in compliance of the said CBDT Instruction No.3 of 2003, the AO did not himself examine the issue of transfer pricing and with the approval of the ld. CIT(A), made a reference to the TPO u/s 92CA(1) of the Act. The AO and the ld. CIT(A) did not apply their minds to the Transfer Pricing Report, or to any other material or information or document. The TPO made an adjustment which was incorporated by the AO in the assessment order. On their part, the AO and the ld. CIT(A) did not discharge necessary judicial functions conferred upon them u/s 92C or 92CA of the Act. 27. On the other hand, duly supporting the action of the AO and that of the ld. CIT(A) in this regard, the ld. DR has sought to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gulations. Industry average (Nasscom) cannot be taken as up. The TNMM requires comparability at a broad functional level. The Special Bench of the Tribunal upheld the use of current year data. With reference to "Coca Cola Pvt. Ltd." (supra), it has been contended that as per this decision, there is no need for hearing to be given to the assessee before making reference to the TPO. Once an International transaction is there, in view of the plain and unambiguous language, ALP has to be determined. There is no requirement of showing shifting of profit, evasion of tax, etc., before invoking the provisions of Chapter X of the Act. The mere fact that the assessee has chosen one method does not take away the discretion of the TPO to select any other method. Restriction of payment or remission imposed by the RBI or FERA cannot control the provisions of Chapter X of the Act; ALP has to be determined in such cases also. 30 In this regard, it is seen that in "Sony India Pvt. Limited" (supra), their Lordships of the Hon'ble Delhi High Court were considering CBDT Instruction No.3 dated 20.05.2003, which provides that a compulsory reference has to be made to the TPO to determine arm's length pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....1 (Bom.), has held that CBDT Instruction No.3 dated 20.05.2003 is contrary to the decision being taken therein and it is not binding on the AO. It was held that this Instruction departs from the provisions of law. It was held that the decision in "Sony India Limited" (supra), is not applicable after the amendment of 2007 (paras 35 to 37 of the judgment are relevant in this regard). 32. In "Aztec Software & Technology Services Ltd." (supra), the Bangalaore Special Bench) of the Tribunal held that it is not a legal requirement under the provisions contained in Chapter X of the Act, that the AO should prima facie demonstrate that there is tax avoidance, before invoking the relevant provisions. It was held that before the case is referred to the TPO u/s 92CA(1) of the Act for computation of arm's length price, the AO is not required to prima facie demonstrate that any one or more of the circumstances set out in sections 92CA(3)(a),(b),(c) and /or (d) of the Act, are not satisfied. It was held that the AO is not required to record his opinion/reason before seeking the previous approval of the ld. CIT u/s 92CA(1) of the Act. It was held that before making a reference to the TPO u/s 92CA....
X X X X Extracts X X X X
X X X X Extracts X X X X
....owhere argued or adjudicated in any of these judgments. The assessee has contended that the AO has abrogated his obligation under a wrong assumption that CBDT Circular, i.e., CBDT Instruction No.3 of 2003 dated 20.05.2003 mandated him to go ahead without making any reference to the TPO. The AO, thus, in the present case, did not examine the question, whether he should himself accept the transfer pricing report of the assessee or whether he should himself determine the arms's length price. Therefore also, these judgments are not applicable and they do not help the cause of the Department. 36. The Department has further sought to place reliance on "Interra Information Technology (I) Pvt. Limited vs. DCIT", (2012) 27 Taxman.com.1(Del) (Trib.). In that case, considering assessment years 2006- 07 & 2007-08, it was held that it cannot be laid down as a proposition that transfer pricing adjustment cannot exceed total profits earned by the group. It was held that the assessee as well as the Revenue Authorities are bound to determine the ALP by applying the law and rules laid down and cannot be guided by extraneous parameters. It was held that any claim for adjustment on the basis of reaso....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... In the case of "Johari Lal vs. CIT", 88 ITR 439 (SC), it has been held that the prima facie belief of the AO that it is necessary or expedient to make a reference to the TPO is the condition precedent to be satisfied upon application of mind to the material or information or document in his possession. Such prima facie belief is a condition precedent and is mandatory and it is the statutory safeguard for the assessee's statutory right. The absence of such a belief vitiates the entire proceedings. 40. Like-wise, the approval of the ld. CIT for the reference to the TPO on a proper application of mind to the relevant facts and circumstances is a condition precedent and a necessary safeguard for the statutory right of the assessee and this has to be performed not in a mechanical manner. This is what has been held by the Hon'ble Supreme Court in the case of "Krishna Pvt. Ltd. vs. ITO", 221 ITR 538 (SC) and by the Hon'ble jurisdictional Bombay High Court in the case of "German Remedies", 287 ITR 494 (Bom.). 41. In "CIT vs. Amedius", 351 ITR 82 (Del.), it has been held that it is primarily the duty of the AO to compute the arm's length price in relation to an international transactoion....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ol the exercise of the powers of the Officers of the Department in matters administrative, but not quasijudicial. 44. In the following decisions, amongst others, it has been held that the Tribunal can ignore alone invalid Circulars of the CBDT: (i) "Tata & Iron Steel", 69 ITD 292 (Mumbai) (ii) "Mahindra & Mahindra", 8 ITD 427 (Mumbai) and (iii) "Pardeep Agencies vs. ITO", 18 SOT 12 (Delhi) (SB) 45. The assessee has further sought to support the ld. CIT(A)'s order on the contention that Transfer Pricing adjustment cannot be made in a case where the assessee enjoys benefit u/s 10A or section 80HHE of the Act, or where the tax rate in the country of the Associated Enterprise is higher than the Indian rate and where, accordingly, establishment of tax avoidance or manipulation of prices or establishment of shifting of profits is not possible. 46. "Aztec Software & Technology Services" (supra), holds that TP provisions are applicable even if income is exempt u/s(s) 10A/10B of the Act. However, as seen, "Aztec Software & Technology Services", stands overridden by the decision of the Hon'ble jurisdictional High Court in "Vodafone India" (supra). 47. In "Motif India Infotech Pvt. Limi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....any transactions; that further, application of tax jurisprudence provisions could have been justified, if the rate of tax was lower in Japan as compared to that in India, which was not so; and that it was, therefore, beyond comprehension as to why the assessee would harbour any motive of shifting income. 52. In the case of "Philip Software", 119 TTJ 721 (Bang.), it was held that since the basic intention behind introducing the TP provisions in the Act is to prevent shifting of profits outside India, and the assessee was claiming benefit u/s 10A of the Act, the TP provisions ought not to be applied to the assessee. 53. Similar is the position in the following cases, amongst others: i) "ITO vs. Zydus Altana Healthcare (P) Limited", 44 SOT 132 (Mumbai) ii) "ACIT vs. Dufon Laboratories", 39 SOT 59 (Mumbai) and iii) "IJM (India) Infrastructure", 28 ITR (Trib) 176 (Hyd) 54. For the above discussion, the assessee's support to the impugned order on both counts is found to be correct. The AO erred in not himself examining the issue of TP and with the approval of the ld. CIT, made a reference to the TPO u/s 92CA(1) of the Act; that the AO as well as the ld. CIT(A) failed to apply their....