TaxTMI 
TaxTMI 
2017 (4) TMI 760
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....law by setting off of the losses of non-STPI unit with the profits of the STPI unit prior to allowing relief under section 10A of the Act. 2.2 The learned AO and the Hon'ble DRP erred in law by not following the interpretation of Section 10A as enunciated by the jurisdictional High Court in the case of CIT v. Yokogawa India Limited (341 ITR 385). 2.3 The learned AO and the Hon'ble DRP erred in law by relying on the judgment of the Karnataka High Court, affirmed by the Supreme Court, in the case of CIT v. Himatasingike Seide Limited (286 ITR 255) without appreciating the difference in the facts of the case of the Appellant before the bench. 3. Re-computation of the quantum of, profits of the STPI unit eligible for relief under section 10A: 3.1 The learned AO and the Hon'ble DRP erred in re-apportioning expenses by not considering the fact that the Appellant had apportioned common expenses incurred involving insurance, miscellaneous expenses, office expenses, printing and stationery, security charges and vehicle maintenance between STPI unit and non-STPI unit. 3.2 The learned AO and the Hon'ble DRP erred in contending that expenses pertaining to members....
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....ice of the international transactions. 8. The learned AO and the Hon'ble DRP erred in affirming the order of the learned TPO proposing the transfer pricing adjustment that exceeds the aggregate of profits earned by the group. Approach on the analysis to search for comparables: 9. The learned AO and the Hon'ble DRP erred in confirming the order of the learned TPO with regard to the analysis undertaken to select comparable companies and the determination of the arm's length price for the software development and consultancy services rendered to its AE. 9.1 The analysis or search process performed by the learned TPO and confirmed by the learned AO and the Hon'ble DRP involves the adoption of inappropriate filters for selection of comparable companies thereby making the arm's length price determined by the TPO for the transactions involving provision of software development services as incorrect in law. 9.2 Without prejudice to the above, the learned AO and the Hon'ble DRP erred in confirming the order of the learned TPO that involved selecting companies as comparables even though they are not comparable in respect of the factors of comparability ....
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....nd, the learned AO/TPO and the Hon'ble DRP erred in not appreciating that the provisions of sections 92 to 92F shall not be applicable to the transaction of subscription towards equity capital, pending for allotment of shares, since the same does not have any effect on the profit and loss account of the Appellant. 13.2 Without prejudice to the above grounds, the learned AO/TPO and the Hon'ble DRP erred in holding that the Appellant should have earned a return (in the nature of interest) and consequently erred in determining a notional interest as the arm's length remuneration for the advancement of loan; 14. Computation of the quantum of notional interest: 14.1 Without prejudice to the above grounds, the learned AO erred in considering the arm's length rate of interest as the SBI Prime Lending rate as per the order of the learned TPO without giving effect to the directions of the Hon'ble DRP wherein the rate of interest is directed to be considered as LIBOR adjusted for risk premium of spread rate and forex cover. 14.2 Without prejudice to the above ground, the learned AO and the Hon'ble DRP also erred in adjusting the LIBOR for risk premium of s....
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....ainst the assessee. However, it is pertinent to note that the said decision of the Hon'ble jurisdictional High Court was in respect of the dispute for the assessment year 1994-95 and there is an amendment in the provisions of sec. 10A and 10B of the Act vide Finance Act, 2000 w.e.f. 1/4/2001. By virtue of the amendment and substitution of provisions of sec. 10A and 10B, the incentive u/ss. 10A and 108 was no longer in the nature of exemption but it is in the nature of deduction. By considering the amendment/substitution of secs. 10A and 10B vide Finance Act, 2000 w.e.f. 1/4/2001, Hon'ble jurisdictional High Court vide judgment in the case of Yokogawa India Ltd. (supra) has held in paras. 16 to 23 as under: '16. The substituted s, 10A continues to remain in Chapter III. It is titled as "Incomes which do not form part of the total income". It may be noted that when s. 10A was recast by the Finance Act, 2001 (sic-2000), the Parliament was aware of the character of relief given in Chapter III. Chapter III deals with incomes which do not form part of total income. If the Parliament intended that the relief under s. 10A should be by way of deduction in the normal course of....
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....the aforesaid discussion it is clear that the income of section 10A unit has to be excluded before arriving at the gross total income of the assessee. The income of section 10A unit has to be deducted at source itself and not after computing the gross total income. The total income used in the provisions of s. 10A in this context means the global income of the assessee and not the total income as defined in s. 2(45). Hence, the income eligible for exemption under s. 10A would not enter into computation as the same has to be deducted at source level, 2nd substantial question of law 20. Prior to the introduction of sub-s. (6) of s. 10A and s. 10B by the Finance Act, 2000, which came into effect from 1st April, 2001, in computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of the relevant assessment years, or of any previous year, relevant to any subsequent assessment year, sub-s. (2) of s. 32, cl. (ii) of sub-s. (iii), s. 32A cl. (ii) of sub-s. (3) of s. 32A, cl. (ii) of sub-s. (2) of s. 33 and sub-s. (4) of s. 35 of the Act or the second proviso to cl. (ix) of sub-s. (1) of s. 36 shall not be applicable ....
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....made in s, 10C which provides for exemption in respect of profits of certain undertakings in north eastern region. This makes clear the legislative intention of providing relaxation wherever it deems fit and in the present case, such relaxation has been made in s. 10A but not in s. 10C. 23. It is to be noted that the aforesaid amendment read with the Board circular does not militate against the proposition that the benefit of relief under this section is in the nature of exemption with reference to the commercial profits. However, in order to give effect to the legislative intention of allowing the carry forward of depreciation and loss suffered in respect of any year during the tax holiday for being set off against income post tax holiday, it is necessary that the notional computation of business income and the depreciation as per the provisions of the Act should be made for each year of the tax holiday period, While so computing, attention will have to be given to provisions of ss. 70, 71, 72 and s. 32(2). The amount of depreciation and business loss remaining unabsorbed at the end of the tax holiday period should be determined so that the same may be set off against the incom....
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....t the provisions of section 10A and section 10B are exemption provisions and therefore the profit of 10A and 10B units will not enter the computation of total income at all and therefore the profits of these units need not be set off against the loss of non-10B unit by invoking the provisions of section 72 of the Act. The CIT (Appeals) did not agree with the contention of the assessee and in doing so, he placed reliance on the decision of the Hon'ble Karnataka High Court in the case of CIT v. Himatasingike Seide Ltd., 286 ITR 255 (Kar). In the aforesaid decision, the Hon'ble High Court has taken the view that deduction u/s. 10B has to be allowed after set off of unabsorbed depreciation and unabsorbed investment allowance. The Hon'ble Court took the view that the aforesaid provision was only an exemption provision. The CIT (Appeals) noticed that the aforesaid decision was followed by the ITAT Bangalore Bench in the case of Intelnet Technologies India Pvt. Ltd. v. ITO, ITA No. l021/Bang/2009 dated 12.3.2010. Similar view expressed by the Delhi Bench of the Tribunal in the case of Global Vantage Pvt. Ltd. v. DCIT, 2010 TIOL 24 ITAT (DELHI) was also referred to by the CIT (....
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.... undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assesses :" (Emphasis Supplied) 64. The expression "Deduction" and "shall be allowed from the total income of the Assessee" used in the aforesaid provisions was considered by the Hon'ble High Court and it held in paras 13 to 15 of its judgment that the expression "shall be allowed from the total income of the Assessee" does not mean total income as defined u/s. 2(45) of the Act but that expression means "profits and gains of the STP undertaking as understood in its commercial sense or the total income of the STP unit. Thus the view expressed is that income of the STP undertaking gets quarantined and will not be allowed to be set off against loss of either another STP undertaking or a non-STP undertaking. The Hon'ble Court thereafter held that though the expression used in Sec. 10A was "Deduction" but in effect it was only an exemption section. These conclusions clearly emanate from para 17 of the Hon'ble Court's judgment. 65. The situation with which we are concerned in the present case is a situation where th....
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....al being devoid of any merit deserves to be dismissed and is dismissed accordingly." 67. Thus the ratio has to be confined to the facts and circumstances of the case. The aforesaid observations have to be confined to the facts of that case and as applicable to a case where brought forward losses and depreciation of the very same STP undertaking are not adjusted while arriving at the profits of the 10B unit for allowing deduction u/s. 10A/10B of the Act and not in respect of brought forward losses and depreciation of other undertakings/non-10A/10B units. S. 10A/10B(6) as amended by the FA 2003 w.r.e.f. 1.4,2001 provides that depreciation and business loss of the eligible unit relating to the AY 2001-02 & onwards is eligible for set-off & carry forward for set-off against income post tax holiday which means that they need not be so set off as mandated in the decision of the Hon'ble Karnataka High Court in the case of Himatasingike Seide Ltd. (supra). As we have already seen, in Yokogawa India Ltd. 341 ITR 385 (Kar.), it was held that even after s. 10A/10B were converted into a "deduction" provision w.e.f 1.4.2001, the benefit of relief u/s. 10A/10B is in the nature of "exempti....
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....d Representative has further submitted that the DRP has not adjudicated this issue. 8. On the other hand, the learned Departmental Representative has submitted that this claim of the assessee requires proper verification and therefore the Assessing Officer may be directed to verify the facts on this issue. 9. Having considered the rival submissions as well as the relevant material on record we find that the DRP has not adjudicated this issue therefore we direct the Assessing Officer to verify the claim of the assessee regarding the double deduction of certain expenses against the profits of the STPI Units. Hence this issue is set aside to the record of the Assessing Officer for limited purpose of verification of the facts of double deduction of certain expenses as claimed by the assessee. 10. Ground No. 4 is regarding disallowance made under Section 14A of the Act. The assessee has earned dividend income of Rs. 1,57,88,043 during the year under consideration. The assessee claimed that it has not incurred any expenses in respect of the dividend income and therefore the question of invoking the provisions of Section 14A of the Act does not arise. The Assessing Officer did no....
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....purpose of making investment. Further it is not dear that in which year and how much of investment was made. Therefore having regard to these facts when there is a reduction in the investment during the year under consideration then without giving the specific finding of using the borrowed fund as well as no disallowance in the year of investment on account of interest expenditure, we are of the view that the Assessing Officer is not justified in making the disallowance on account of interest expenditure under Section 14A of the Act. 14. As regards the disallowance on account of indirect administrative expenditure there is no dispute that there is a substantial movement in the investment portfolio of the assessee which consist of mutual funds, equity shares and inter-corporate deposits. Therefore when the assessee has taken the decision for selling and fresh investment during the year under consideration which involves a high level decision making process then the claim of the that no expenditure has been incurred for earning the dividend income is not acceptable. Accordingly, we uphold the disallowance on account of indirect administrative expenses being 0.5% of the average inv....
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....le by the employee shall be equal to the contribution payable by the employer in respect of such employee. However, the employer shall, in the first instance, pay both the contribution payable by himself i.e., the employer's contribution as well as the employee's contribution and thereafter he is entitled to recover by means of deduction from the employee the contribution which he has paid as employee's contribution. Therefore, in law, the payment of contribution by the employer to the fund under the scheme means both employer's contribution and employee's contribution. Whether he deducts the employee's contribution from the salary or not, in law, he is liable to pay the said amount. Therefore, Section 2(24)(x) of the Act makes it clear that the employee's contribution which the employer deducts from his salary before it is paid into the fund, is treated as the income of the employer, and the employer by contributing can get the deduction. That payment must be made within the due date i.e., the due date prescribed under Section 139(1) of the Act. Because it was causing lot of problem as discussed in the judgment of the Apex Court, on a representation mad....
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....g the income referred to in section 28 unless and until such sum is credited by the assessee to the employees' account in the relevant fund or funds on or before the due date as mentioned in Explanation to section 36(1)(va). Therefore, with respect to the employees contribution received by the assessee if the assessee has not credited the said sum to the employees' account in the relevant fund or funds on or before the due date mentioned in Explanation to section 36(l)(va), the assessee shall not be entitled to deductions of such amount in computing the income referred to in section 28 of the Act." 9. Sub-section (24) of Section 2 of the IT Act defines "income". Clause(x) of sub-section (24) of Section 2 of the IT Act provides that income includes any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of Employees' State-Insurance Act, 1948 (34 of 1948), or any other fund for the welfare of such employees. 10. On the basis of this provision, Mr. Aravind, learned counsel for the revenue, vehemently submitted that the employees' contribution to provident fund is al....
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....this Act, a deduction otherwise allowable under this Act in respect of- (a)xx xx xx (b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, (c) to (f) xx xx xx shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him: Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return." 15. From bare perusal of this provision, it is clear that under the provision, for IT Act, an extension is given to the employer to make payment of contribution ....
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....to as the member's contribution). 19. From bare perusal of sub-para (1) of paragraph-30, it is clear that the word "contribution" is used not only to mean contribution of the employer but also contribution to be made on behalf of the member employed by the employer directly. 20. Paragraph-38 of the PF Scheme provides for Mode of payment of contributions. As provided in sub-para (1), the employer shall, before paying the member, his wages, deduct his contribution from his wages and deposit the same together with his own contribution and other charges as stipulated therein with the provident fund or the fund under the ESI Act within fifteen days of the closure of every month pay. It is clear that the word "contribution" used in Clause (b) of Section 43B of the IT Act means the contribution of the employer and the employee. That being so, if the contribution is made on or before the due date for furnishing the return of income under sub-section (1) of Section 139 of the IT Act is made, the employer is entitled for deduction. 21. The submission of Mr. Aravind, learned counsel for the revenue that if the employer fails to deduct the employees' contribution on or before ....
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....tional Net Margin Method (TNMM) as Most Appropriate Method (MAM). Thus the assessee claimed its international transactions at Arm's Length Price ('ALP'). The TPO/A.O. rejected the TP Study Analysis of the assessee by raising various objections including multi year data instead of current year data. The TPO finally selected a set of 11 comparables as under: Sl. No. Name of the Comparable Sales (in Rs.) Cost (in Rs.) Margin 1 Kals Information Systems Ltd. 2,14,04,686 1,87,93,813 13.89% 2 Akshay Software Technologies Ltd 12,23,21,483 11,31,49,350 8.11% 3 Bodhtree Consulting Ltd 16,05,75,212 9,89,56,821 62.27% 4 R S Software (India) Ltd 1,49,57,12,634 1,36,01,02,589 9.97% 5 Tata Elxsi Ltd (segmental) 3,78,43,03,000 3,14,63,15,000 20.28% 6 Sasken Communication Technologies Ltd (seg) 4,05,31,20,000 3,18,69,97,000 27.91% 7 Persistent Systems Ltd 5,19,69,10,000 3,67,52,70,000 41.40% 8 Zylog Systems Limited 7,34,93,51,475 6,81,69,98,160 7.81% 9 Mindtree Ltd (seg) 7,93,22,79,326 5,74,06,73,058 5.52% 10 Larsen and Toubro infote....
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....d the rival submissions as well as the relevant material on record. As regards Sasken Communication Technology Ltd., we find that the turnover of this company is Rs. 479 crores in comparison to the assessee's turnover of Rs. 25.44 crores. Therefore by applying the tolerance range of 10 times of turnover of assessee in both sides, this company cannot be considered as a good comparable. Accordingly, we direct the TPO/A.O, to exclude this company form the set of comparables. KALS Information Systems Limited. 24. The functional comparability of this company has been considered by the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) in para 10.4 as under: "10.4 We have heard both parties and perused and carefully considered the material on record. We find from the record that the TPO has drawn conclusions as to the comparability of this company to the assessee based on information obtained u/s. 133(6) of the Act. This information which was not in the public domain ought not to have been used by the TPO, more so when the same is contrary to the Annual Report of the company, as pointed out by the learned Authorised Representative. We als....
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....rely on the ground that their profit is abnormally high. The Special bench held that in such cases it would require further investigation to ascertain the reasons for unusually high profit and in order to establish whether the entities with such high profits can be taken as comparable or not. In the light of the aforesaid decision of the Special Bench and in view of the admitted position that the assessee follows Fixed Price Project model where revenues from software development is recognized based on software developed and billed to clients, there is a possibility of the expenditure in relation to the revenue being booked in the earlier year. The results of Bodhtree from FYs 2003 to 2008 excluding FY 2007 as given by the learned counsel for the assessee were also perused. Perusal of the same shows, that there has been a consistent change in the operating margins. The chart filed by the assessee in this regard is given as an annexure to this order. It appears to us that the revenue recognition method followed by the assessee is the reason for the drastic variation in the profit margins of this company, in the given circumstances, we are of the view that it would be safe to exclude ....
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....98,75,310 (70,59,000 USD) towards subscription in equity share capital of subsidiary namely Logix America Inc pending for allotment of shares as on 31.3.2009. The assessee has not considered this as an international transactions and claimed that the above transaction would not be falling under the provisions of Chapter XA of the Act as the same did not result in any income or expense or interest expenses to the assessee. The TPO has held that the fund remitted to the subsidiary for subscription of equity shares constituted international transactions under Section 92B of the Act because such funds are in the nature of debt. Accordingly, the TPO/A.O. proposed a TP Adjustment of Rs. 4,20,59,102 as arm's length interest. The assessee challenged the action of the TPO/A.O. before the DRP but could not succeed however the DRP has directed the TPO/A.O. to allow some adjustment while computing the arm's length interest in this respect. 32. Before us, the learned Authorised Representative submitted that the allotment of equity shares in the subsidiary cannot be classified as international transaction as defined in Section 92B of the Act. He has further contended that by remitting ....
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....mittance. Thus till the allotment of shares the allotting company cannot have any right to use the share application money rather the share application money has to be kept in a separate bank account under share application money account, it is also the case of the assessee that remittance of money for subscription of equity share is not a transaction of purchase and sale of share and therefore the money remitted by the assessee remains the money of the assessee till the shares are allotted. Therefore, allotting company has no access or right to use the said money till the allotment of shares. !n this case the assessee has remitted this amount during the year under consideration as per the details given at page 707 of the paper book. It is also undisputed fact that no shares were allotted to the assessee till the end of the financial year as on 31.3.2009. thus when this money was available with the AE of the assessee for utilization then it loses the character of share application money and therefore the rule as laid down by the various decisions of this Tribunal relied upon by the learned Authorised Representative will not be applicable in a case where the money is available to th....
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....issue in terms of Section 144C(8) of the Act. 3. The DRP erred in directing the AO to follow the ratio laid down by the Hon'ble Court in the case of CIT v. Tata Elxsi Ltd. [2012] 349 ITR 98 (Kar.) and exclude telecommunication expenses of Rs. 16,55,095/- and expenses incurred in foreign currency of Rs. 54,57,604/- from the export turnover also while computing the deduction u/s. 10A of the I.T. Act, without appreciating the fact that there is no provision in section 10A that such expenses should be reduced from the total turnover also, as clause (iv) of the Explanation to section 10A provides that such expenses are to be reduced only from the export turnover. 4. The DRP erred in not appreciating the fact that the jurisdictional High Court's decision in the case of Tata Elxsi Ltd. (supra) has not been accepted by the department and an appeal has been filed before the Hon'ble Supreme Court. 5. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the DRP be reversed and that of the Assessing Officer be restored. 6. The appellate craves leave to add, to alter, to amend or delete any of the grounds that m....
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....g. Export turnover in respect of the articles or things or computer software. Total turnover of the business carried on by the undertaking The total turnover of the business carried on by the undertaking would consist of the turnover from export and the turnover from local sales. The export turnover constitutes the numerator in the formula prescribed by sub-section (4). Export turnover also forms a constituent element of the denominator inasmuch as the export turnover is a part of the total turnover. The export turnover, in the numerator must have the same meaning as the export turnover which is constituent element of the total turnover in the denominator. The legislature has provided a definition of the expression "export turnover" in Expln. 2 to s. 10A which the expression is defined to mean the consideration in respect of export by the undertaking of articles, things or computer software received in or brought into India by the assessee in convertible foreign exchange but so as not to include inter alia freight, telecommunication charges or insurance attributable to the delivery of the articles, things or software outside India. Therefore in computin....
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....s outside India are to be excluded, both from the export turnover and from the total turnover, which are the numerator and the denominator respectively in the formula ..... " The formula for computation of the deduction under section 10A would be as under: Profits of the business x export turnover/Total turnover From the aforesaid judgments, what emerges is that, there should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10A is a beneficial section. It is intended to provide incentives to promote exports. The incentive is to exempt profits relatable to exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers, Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of section 80HHC,....