TaxTMI 
TaxTMI 
2016 (6) TMI 1286
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....or A.Y. 2008-09. ITA No.282/PN/2012 filed by the assessee is directed against the order dated 20-01-2014 passed by the AO u/s.143(3) r.w.s. 144C(13) of the I.T. Act for A.Y. 2009-10. For the sake of convenience the above appeals were heard together and are being disposed of by this common order. ITA No.1338/PN/2010 (A.Y. 2006-07) : 2. In ground of appeal No.1 the assessee has challenged the order of the AO in making addition of Rs. 5,96,21,856/- on account of BPO activities following adjustment made in the TP order u/s.92CA(3) of the I.T. Act. 3. Facts of the case, in brief, are that the assessee is a domestic company engaged in the business of software development both off-shore and on site. It filed its return of income on 28-11-2006 declaring total income of Rs. 6,60,98,644/-. The said return was subsequently revised on 29-03-2008 showing a loss of Rs. 5,33,65,552/-. The AO made a reference u/s.92CA of the Act to the TPO to determine the ALP with reference to the transactions reported in Form 3CEB filed by the assessee. The TPO noted that the assessee is engaged in the business of providing software services for the number of applications for companies around the globe. The s....
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....following TNMM method. The TPO further asked the assessee to explain as to why adjustment be not made in respect of delayed realization from the Associated Enterprises taking interest at average six months LIBOR for F.Y. 2005-06 + 30 basis points + 200 basic points as guarantee commission. 6. It was submitted by the assessee that no separate benchmarking needs to be carried out for BPO activities and the same should be aggregated with software development activities and the benchmarking needs to be carried out on aggregate basis. However, the TPO was not convinced with the arguments advanced by the assessee. He noted that there is clear differentiation between software development services and BPO services. Further, an amount of Rs. 29.46 crores, which has been received by the assessee during the year from BPO services, is by no means paltry amount which can be clubbed with the software development services receipts. 7. According to the TPO as per the Transfer Pricing as well as the OECD guidelines the transactional profit method should ideally be applied on a transaction to transaction basis but in appropriate situation may be grouped or aggregated. According to him the relevant....
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.... further analysis 17 were found to be non-comparable and only 7 remained. TPO made further search on Prowess with segmental information, i.e., comparables engaged in BPO activities. This further search resulted in 30 comparables out of which on FAR analysis 23 were found to be non comparable because they had substantial transactions with related parties or negative net worth or engaged in different activities such as ITES or turnover being too law, i.e. less than Rs. 1 crore. After doing the searches as above, the TPO selected 18 comparables for final analysis. The arithmetic mean of their PLI worked out to 26.21%. Accordingly, he asked the assessee to show cause as to why arm's length price of its international transactions pertaining to BPO services be not determined following TNMM method by adopting the above arithmetic mean. 9. After considering the various submissions made by the assessee the TPO rejected the following comparables : 1. Ace software Exports Limited (Different business activity) 2. HCL Technologies Ltd. (Related party transactions) 3. CMC Limited (Related party transactions) 4. Mphasis BFL Limited (Related party transactions) 5. Datamatics Technologie....
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....so rejected by the TPO on the ground that such unit is incidental to the BPO activities of the assessee. He also rejected revised working of the results of the BPO services which was furnished by the assessee by stating that the original working is on the basis of audited accounts and therefore could not be ignored where the revised working sheet have neither been audited nor signed by the independent chartered accountant. The TPO also rejected the assessee's claim for grant of benefit of +/-5% as per section 92C by holding that ALP of the international transactions undertaken by the assessee falls beyond 5% margin of the prices of international transactions computed by the assessee. Accordingly, the TPO made adjustment of Rs. 11,92,55,177/- to the value of international transactions relating to BPO services. 14. The assessee carried the matter to the DRP. After considering the arguments advanced by the assessee the DRP held that the transactions pertaining to IT services and BPO services are fairly distinct in nature and scope and cannot be considered to be closely interlinked as per the definition given of the word 'transaction' at Rule 10A of the I.T. Rules, 1962. The DRP furth....
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....5%. The margin of the company is 2.33%. He submitted that PLI before depreciation ranges from 4.20% to 37.51% with an arithmetic mean of 19.87% as against PLI of the assessee company at 22.79%. He submitted that the TPO has proposed different set of comparables. Even in respect of comparable company by the TPO, the PLI before depreciation is 33.04% against companies the PLI of the assessee before depreciation at 29.43%. 19. Referring to the decision of the Delhi Bench of the Tribunal in the case of Schefenacker Motherson Ltd. Vs. ITO and Another reported in 123 TTJ 509 he submitted that the Tribunal in the said decision has held the working of PLI before depreciation is justified. In his alternate contention he submitted that the amount of adjustment should be computed on the cost attributable to the business with Associated Enterprises and not on the total cost. Referring to page 67 of the paper book he drew the attention of the Bench to the break- up of the turnover with the Associated Enterprise and Non- Associated Enterprises. He further submitted that the TPO has not given the benefit of +/-5% as per the proviso to sub-section (2) of section 92C on the basis of amendment made....
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.... for difference in capacity utilization, has held that depreciation being an integral part of operating cost has to be taken into account. However, this proposition overlooks an important point in the sense that if one includes depreciation on all the assets, then depreciation on unutilized capacity is also taken into account and then it is contrary to the principles laid down by the different Benches of the Tribunal that adjustment is required to be made for capacity utilization. Therefore, the above decision referred to by the Ld. Departmental Representative does not lay down the correct law. He submitted that in any case when two views are possible, then the view favourable to the assessee has to be considered. He submitted that the PLI before depreciation as computed above is 33.54% for the comparables and 29.43% of the assessee company. Therefore, the difference being less than 5% no adjustment is called for. 23. We have considered the rival arguments made by both the sides, perused the orders of the AO/TPO/DRP and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the TPO in the instant case has initially pr....
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....ty) with mean net profit of comparables. Only receipts and expenditure, having connection with international transactions, were required to be taken into account. Any receipt or expenditure having no bearing on price or margin of profit could not be taken into consideration. It is evident from statutory provisions quoted above that it is nowhere provided that deduction of depreciation is a must. Depreciation can be taken into account or disregarded in computing profit depending upon the context and purpose for which profit is to be computed. There is no formula which would be applicable universally and in all circumstances. "Net profit" used in r. 10B can be taken to mean commercial profit as held by the TPO and confirmed on appeal by the learned CIT(A). But depreciation in such profit on commercial principles has to be the "actual" ~mount by which the assets of business got depleted between the two dates separated by a year. It cannot be deprecation under tax or companies rules or as per policy of the company. In the case in hand, Revenue authorities went wrong in disregarding the context and purpose for which the "net profit" was to be computed. Depreciation, which can have varie....
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....r comparison and for computing profit. There is considerable support for the contention raised on behalf of the taxpayer in para 1.22 of the OECD Guidelines on Transfer Pricing which is reproduced below: "1.22 It may also be relevant and useful in identifying and comparing the functions performed to consider the assets that are employed or to be employed. This analysis should consider the type of assets used, such as plant and equipment, the use of valuable intangibles, etc., and the nature of the assets used, such as the age, market value, location, property right protections available, etc." (underlined, italicized in print, to emphasise) Sufficient evidence to show material differences on account of depreciation 20.3 The claim of depreciation can lead to great difference in computing profits of comparables as depreciation is permitted depending upon nature of plant/machinery and year of use. In 5th or 6th year of commencement, depreciation can be 25 to 30 per cent of amount allowed in first year to an enterprise. In these appeals, the TPO had excluded certain comparables after noting differences in their year of start of operations. These were Bhagwati Autocast Ltd. (198....
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....s of more than 2 per cent as shown above, which, in our opinion, is quite substantial. The learned CIT(A) is right in holding that working of mean profit of the TPO on the basis of three selected companies was not correct. But then the learned CIT(A) also failed to give due regard to the nature, type and age of the machinery employed by comparables or size of the companies leading to material differences. Without considering obvious material differences, the contention of the taxpayer to take profit without depreciation was rejected. We feel this rejection is not sound in law. Adverse inferences against taxpayer unjustified 21. Learned CIT(A)'s observations that taxpayers' TP report should contain analysis of distinction/dissimilarities between taxpayer and comparable also go beyond requirement of r. 10C and prescribed Form 3CEB. Therefore, his refusal to look into details and adverse inference drawn by him against the taxpayer is legally unjustified. The taxpayer was to furnish particulars required by Form 3CEB and to answer questions raised in the said form. The prescribed form only requires to give, "method used for determining the ALP" and nothing more. Completed Fo....
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....ble adjustment. This claim has not been challenged. It is clear that the best way to adjust difference on account Of depreciation was to ignore depreciation, both in case of the tested party and the comparables. After all TP adjustments are to be made of differences in price charged or paid for international transaction and not of difference in the claim of depreciation as has been done in this case. Such adjustments also matched the requirement of the context (TP principles). The basic issue involved was whether the cost paid or charged for international transactions was at arm's length or not. The factors which go to influence price, cost or profit are/were relevant for computing profit and not depreciation having no direct connection with price or profit but responsible for wide differences. The case of the Revenue is not clear. If depreciation is not leading to any difference, its exclusion is immaterial. If it is leading to differences, then differences are required to be adjusted, as required by provisions of IT Regulations. There is no way to dislodge the claim of the taxpayer. The context and purpose of legislation and facts of case overwhelmingly approve adoption of ca....
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....eady attained finality are not intended to be reopened." 26. So far as the reliance by the Ld. Departmental Representative on the decision of the Mumbai Bench of the Tribunal in the case of Petro Araldite is concerned, we find force in the argument of the Ld. Counsel for the assessee that the same is not applicable to the facts of the present case. First of all, the Tribunal has not considered the decision of the Delhi Bench of the Tribunal in the case of Schefenacker Motherson Ltd. (Supra) wherein a detailed order has been passed as the same was not brought to the notice of the Bench. Further, we also find merit in the submission of the Ld. Counsel for the assessee that the Tribunal while holding that adjustment is required to be made for difference in capacity utilization has held that depreciation being integral part of operating cost has to be taken into account. Therefore, we find merit in the submission of the Ld. Counsel for the assessee that if one includes depreciation on all assets then depreciation on unutilized capacity is also taken into account and then it is contrary to the principles laid down by the various Benches of the Tribunal that adjustment is required for c....
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....ct of External commercial Borrowings for the assessees but owing to these payments not being received in time, the assessee did not receive the benefit of these funds. The DRP also rejected the objection made before him on the ground that the assessee had recovered interest from its associated enterprises during A.Y. 2003-04, 2004-05 and 2005-06. Further, had the assessee recovered the amounts from the associated enterprises within time, the working capital of the assessee would have increased. No justifiable reason was submitted before them as to why the assessee had not recovered any interest from its associated enterprises during the relevant A.Y. 2006-07. 31. We find identical issue had come up before the Tribunal in assessee's own case in A.Y. 2005-06. We find the Tribunal had restored the issue to the file of the AO with the following observations : "26. We have heard the rival contentions and perused the record. The first aspect of the issue is that admittedly, the transaction of charging interest from AEs exceeding credit period amounts to international transaction under section 92B(1) of the Act. The Hon'ble Bombay High Court in assessee's own case relating to assessmen....
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....transaction was at arm's length price. The learned Authorized Representative for the assessee before us has fairly considered that LIBOR rates have to be applied since the transaction between the assessee and its AEs is an international transaction and there is no merit in the order of CIT(A) in applying the Indian PLR rates. 29. The issue arising before us is in relation to the arm's length price of interest charged by the assessee company to its AEs on the amounts outstanding. The Mumbai Bench of Tribunal in Hinduja Global Solutions Ltd. Vs. Addl.CIT (2013) 145 ITD 361 (Mum) had held that CUP method was the most appropriate method to determine the arm's length rate of interest of the international transaction involving lending of the money by assessee in foreign currency to its AEs and LIBOR being inter-bank rate fixed for international transaction had to be adopted as arm's length rate. The Mumbai Bench of Tribunal further in DCIT Vs. Indian Hotels Co. Ltd. (supra) has applied the said principle in benchmarking the international transaction involving interest charged by the assessee on outstanding loan from its AEs. 30. Further, Pune Bench of Tribunal in Varroc Engineeri....
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....nd there is no merit in any adjustment to be made on this account. 16. The Chennai Bench of the Tribunal in M/s. Siva Industries & Holdings Limited Vs. ACIT, Chennai (2012) 26 taxmann.com 96 (Chennai) had held as under:- "The assessee had given the loan to the associated enterprises in US dollars, and assessee was also receiving interest from the associated enterprises in Indian rupees. Once the transaction between the assessee and the associated enterprises was in foreign currency and the transaction was an international transactions, then the transaction would have to be looked upon the applying the commercial principles in regard to international transactions. If that was so, then the domestic prime lending the rate would have no applicability and the international rate fixed being LIBOR would come into play. In the circumstances, the view that LIBOR rate had to be considered while determining the arm's length price interest rate in respect of the transaction between the assessee and the associated enterprises was to be upheld. As it was noticed that the average of the LIBOR rate for 1-4-2005 to 31-3-2006 is 4.42 per cent and the assessee had charged interest at 6 per ce....
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....ve." 31. The learned Departmental Representative for the Revenue placed reliance on the ratio laid down by the Delhi Bench of Tribunal in Cheil India (P.) Ltd. Vs. DCIT (supra). We find no merit in the said reliance placed upon by the learned Departmental Representative for the Revenue where it was directed that the interest should be computed on the basis of SBI base rate plus 150 basis points on the amount outstanding from the debtors. On the other hand, Pune Bench of Tribunal in Varroc Engineering (P) Ltd. Vs ACIT (supra) and other Benches of the Tribunal have upheld the application of international rates of interest to be applied for benchmarking the international transactions. 32. The assessee in the present set of facts was carrying on its business with its AEs and the majority of business receipts were receivable from the AEs. Once the transaction between the assessee and its AEs was in foreign currency, then the same part takes the nature of international transaction and the said transactions have to be looked upon by applying the commercial principles with regard to an international transaction. If that is so, then the domestic lending rates cannot be applied in order ....
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....compute the addition in the light of the direction of the Tribunal. The above ground is accordingly allowed for statistical purposes. 33. Ground of appeal No.3 by the assessee reads as under : "3. In respect of deduction u/s 10A in respect of various eligible undertakings of the Company: a. In not allowing deduction u/s 10A in respect of various eligible units amounting to Rs. 249,74,88,480. b. In assuming jurisdiction to disallow the deduction u/s 10A by observing and holding that the new units/undertakings have been formed by splitting up of a business already in existence since the 1980s, and that the profits and gains of the units/undertakings subsequently setup by the Company are not eligible for deduction u/s 10A of the Income-tax Act 1961. c. In denying the deduction u/s 10A in respect of various eligible undertakings on the basis of the nature of business. d. In re-examining the conditions of eligibility of deduction u/s 10A in respect of various undertakings established in earlier years. The Assessing Officer ought to have appreciated that the eligibility conditions in respect of splitting up of business already in existence is required to be complied with in th....
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.... the rival arguments made by both the sides, perused the orders of the AO/TPO/DRP and the paper book filed on behalf of the assessee. We find identical issue had come up before the Tribunal in assessees own case in the preceding assessment year and the Tribunal at para Nos. 12 to 18 has observed as under : "12. The issue raised by the Revenue vide its grounds of appeal is against the stand of CIT(A) in holding the assessee to be eligible for the claim of deduction under section 10A of the Act in respect of 13 units, out of which two new units were established during the year under consideration. As far as grounds of appeal No.2 and 3 raised by the Revenue are in relation to the three units i.e. Chinchwad, Akurdi and Millennium Business Park, we find that the Tribunal in ITA Nos.476/PN/2008 and 1087/PN/2008, relating to assessment year 2004-05 vide order dated 12.06.2012 had vide para 10 considered the issue of deduction under section 10A of the Act in respect of three undertakings located at Chinchwad, Akurdi and Millennium Business Park. The Assessing Officer had denied the said deduction under section 10A of the Act by treating the aforesaid units as mere expansion of the exist....
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....ssing Officer was bad in law and on facts. It was pointed out that all the three undertakings have been established in Software Technology Park and are registered with the STPI; it was asserted that all the three units satisfied the prescribed conditions under section 10A(2) of the Act. In respect of all the three units, it was submitted that they were separate and distinct from the existing undertakings. It was pointed out that the new 6 units are located at locations different from their corresponding old units; that there are substantial investments in land, building and machinery in all the three units as distinct from the old units. It was also submitted that there are separate permission for Custom Bonded Warehouses and also separate Shop & Establishment Licenses for the three units. The Commissioner of Income-tax (Appeals) has since considered the submissions of the assessee. As per the Commissioner of Income-tax (Appeals), the assessee fulfilled all the conditions prescribed under section 10A(2) of the Act. According to him, merely because the approval letter received from STPI stated the setting up of the three units as an expansion of the corresponding units, cannot be fa....
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....ial undertaking connotes expansion of the existing business of the assessee but whether it is all the same a ne and identifiable undertaking separate and distinct from the existing business." Since the provisions of law as contained in section 15C(2)(i) and 10A(2)(ii) & (iii) are in effect and in substance in pari materia as regards the point in issue involved in this appeal, I am of the considered view that the ratio of Hon'ble Supreme Court decision in case of Textile Machinery Corporation Ltd. quoted supra which has been followed with respect in several decisions, applies to the law as contained in section 10A(2)(ii) and (iii) of the Income-tax Act, 1961. In view of the foregoing discussion, taking into account the submission of the appellant and material on record, it is held that the three units at Chinchwad, Akruti and Millennium Business Park fulfill the condition laid down u/s 10A(2) of the Incometax Act, 1961 and, therefore, the AO's conclusion to the contrary in this regard, are held to be unjustified on facts and not in accordance with law." 37. Before us, the learned Departmental Representative has primarily reiterated the stand of the Assessing Officer in support....
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....icer noted that approval received from STPL for Chinchwad unit reflected it as an expansion of Software Conversion unit. Similarly, approval for Akruti unit and Millennium Business Park unit reflected them as expansions of Sigma unit and TTC unit respectively. On this singular basis, the Assessing Officer treated the three units as mere expansions and not independent units. As a result thereof, the eligibility period for claim of deduction under section 10A was also reckoned from the first year of the eligibility of the corresponding old units. The Commissioner of Income-tax (Appeals) has, however, appreciated the plea of the assessee and has held that the three units fulfilled the conditions laid down under section 10A(2) of the Act and are accordingly eligible for the claim of benefits under section 10A independent of the old units. 40. Section 10A of the Act provides for a deduction in respect of profits and gains as are derived by an undertaking from export of computer software, etc. for a period of 10 consecutive assessment years, subject of-course to fulfillment of the conditions specified by sub-section (2) of section 10A of the Act. The conditions prescribed in sub-sectio....
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....'s wish to manufacture Hydroxy Stearic Acid also by way of forward integration and amended the letter of permission to include 12 Hydroxy Stearic Acid of 12,000 MT in the very next sentence. It is observed that "Govt also approves of your 8 request for the import of additional capital goods worth Rs. 550 lakhs for the project". That clearly demonstrates that the production of Hydroxy Stearic Acid of 12,000 MT was viewed by the Government as an independent project. It was not a case for purchase of addition capital goods for the existing project. The assessee is irrespective of the number of units, is one of artificial juridical person. Therefore, a combined permission, which involves setting up for different units, is quite in order. The fact of amendment of earlier permission or of grant of separate permissions, is not really relevant. What is really to be examined is whether the units are independent of unit and whether the units are covered by the permission or not. In our humble understanding it meets both the tests. We have also noted that it is not an statutory requirement that there has to be separate permission for each unit and therefore just because the permission is gran....
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....ssessee's own case in the earlier years and since there is no change in factual aspects, we uphold the order of CIT(A) in allowing the claim of deduction under section 10A of the Act in respect of three units i.e. Chinchwad, Akurdi and Millennium Business Park as the same were independent units. The grounds of appeal No.2 and 3 raised by the Revenue in this regard are dismissed. 15. The Revenue vide ground of appeal No.6 is aggrieved by the order of CIT(A) in holding the assessee eligible for deduction under section 10A of the Act in respect of 8 old undertakings. 16. The learned Authorized Representative for the assessee pointed out that the Tribunal in assessment years 2002-03 and 2003- 04 and also in assessment year 2004-05 had allowed the claim of assessee in respect of balance said units, which were established up to assessment year 2004-05. 17. Following the same parity of reasoning, we find no merit in the ground of appeal No.6 raised by the Revenue in relation to the eligibility of deduction under section 10A of the Act vis-à-vis independent units established in earlier years by the assessee. The ground of appeal No.6 raised by the Revenue is thus, dismissed. ....
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....%. In respect of unit at SPZ 47, the new employees totaled to 65 along with transferred employees of 6, resulting in total employees of 71 percentage and the percentage of transferred employees to the total employees was 8.45%. Hence for both the units even if we consider the transferred employees, but the same is within the parameters laid down by the CBDT vide Circular dated 08.10.2014 and hence transfer of old employees to the new units cannot be construed as splitting up or re-construction of existing business. Another objection raised by the Assessing Officer in respect of unit at SPZ 47 was that it was a system hub. However, the plea of the assessee before us and the CIT(A) was that it was engaged in providing remote infrastructure management through technology software and equipment and with the said software, the assessee could directly access from India the software and systems at clients location and carried out necessary de-bugging, patch-work and also providing software support. The unit was engaged in the development and maintenance of the system software. The conclusion of the CIT(A) was that the system was engaged in different line of software business and was not a ....
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....g conclusion of earning more than average profits on the basis of comparables used in transfer pricing analysis having different purpose b. In holding that profit of Rs. 69,23,94,757 is more than ordinary profit and hence not eligible for deduction u/s 10A, without establishing the ordinary profits in the business of the Company c. In not establishing any arrangement between the assessee and other persons so as to produce to the assessee more than ordinary profits d. In holding that the close business connection between the group companies has enabled the assessee company to show more than ordinary profits in respect of 10A units/ e. In restricting deduction u/s 10A at Rs. 180,50,93,723 as against claim of the Company at Rs. 249,74,88,480. 39. Facts of the case, in brief, are that the AO in the draft assessment order did not allow the deduction u/s.10A in respect of various eligible undertakings of the company. However, on protective basis, he proposed to invoke the provisions of section 10A(2) r.w.s. 80IA(10). As per the present review report submitted by the assessee the average profit margin of the selected comparable companies was 14.52% as against the profit margin of....
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....avour of the assessee." 43. We further find the Pune Bench of the Tribunal in the case of M/s. Honeywell Automation India Pvt. has held as under : "22. Before we proceed further, it would be appropriate to examine the scope and intent of the provisions of section 10A(7) r.w.s. 80-IA(10) of the Act. In this context, a reference has been made to the CBDT Circular No.308 dated 29.06.2008 wherein the reasons for introduction of sub-section (7) to section 10A of the Act has been explained. In-particular, reference has been made to the following contents of the Circular :- "The provisions of sub-section (8) and sub-section (9) of section 80-I will also apply in relation to the industrial undertaking referred to in the new section 10A as they apply in relation to an industrial undertaking referred to under section 80-I. Under the applied sub-section (8) of section 80-I, it is provided that where an Assessee has several units, some in the free trade zone and some outside, the profits of the unit in the free trade zone will be computed after taking the cost of the goods transferred to or from the unit on the basis of the market value of such goods. The applied sub-section (9) of sectio....
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....s shown that the course of business is so arranged which reflects an abuse of tax concession whereby the business transacted between two entities is so arranged, which produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business. The emphasis is to eschew those 'more than the ordinary profits' which are as a result of a business between two closely connected concerns having been arranged with the intent of abuse of the tax concession. Ostensibly, in the present case, the Revenue would have to justify that the course of business between assessee and the associated enterprises has been 'so arranged' which produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business with the intention of abusing the tax concession granted in section 10A of the Act. The mere existence of (i) a close connection between the assessee and the other person; and, (ii) more than ordinary profits is not sufficient to justify invoking of section 80-IA(10) of the Act in the absence of there being any material to say that the course of business between them is "so arranged" to abuse the tax concessions gran....
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...., section 80- IA(10) of the Act restricts the plain meaning of the term "arranged" because it is placed between the words "........the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business........." . Therefore, it would necessarily mean that the 'arrangement' referred to is an arrangement of the course of business which produces to the assessee more than the ordinary profits with the intent of abusing the tax concession. Thus, the word "arranged" in the section does not envisage a simple arrangement, but a arrangement of "the course of business transacted" which produces to the assessee more than ordinary profits which might be expected to arise in such a business with the intent of abusing the tax concessions. Therefore, the meaning of the words "so arranged" have to be understood in the context in which they are placed in section 80-IA(10) of the Act. A mere agreement between the assessee and the associated enterprises for transacting business is not enough to invoke section 80-IA(10) of the Act. 26. In-fact, even the Hon'ble Bom....
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....fits would lead to a presumption that there is an "arrangement" within the meaning of section 80- IA(10) of the Act. The aforesaid plea, in our view, not only belies the language of section 80-IA(10) but also the legislative intent which seeks to curtail the abuse of tax concession by manipulation of profits between associated concerns. Therefore, an arrangement which is referred to in section 10A(7) r.w.s. 80-IA(10) of the Act has to be one which is prefaced by an intention to abuse the tax concessions, as per the intendment of the legislature. Therefore, existence of a mere agreement to do business is not enough to fulfill the requirement of section 10A(7) r.w.s. 80-IA(10) of the Act in the context of the words "the course of business between them is so arranged". 28. At this stage, we may also address the argument of the Ld. CIT- DR that the burden cast on the Assessing Officer in section 10A(7) r.w.s. 80-IA(10) of the Act is much lighter and even a prima-facie satisfaction of an existence of tax avoidance is sufficient. In this context, we may refer to the decision of the Bangalore Bench of the Tribunal in the case of Digital Equipment India Ltd. (supra), wherein similar argu....
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....ofits, in this case, the answer is obvious NO, even as found by the AO. When the profits earned are reasonable and not excessive, there is no reason to sustain the addition Further there is no evidence of existence of any arrangement as contemplated under s. 80-1(9)." 29. Quite clearly, as per the Tribunal the question is not whether the onus is light or heavy but whether the Assessing Officer has discussed objectively the conditions mentioned in the section to disturb the results declared by the appellant. 30. Now, the case of the Assessing Officer is that the profits derived by the assessee from the eligible business are more than the ordinary profits and therefore he is empowered to arrive at what could be a reasonable profit from such eligible business and such profit be taken as reasonably deemed to have been derived from the eligible business for the purposes of computing the deduction u/s 10A of the Act. We find that in the entire assessment order, there is no material or any evidence which has been brought out to say that the course of business between assessee and the associated enterprises has been so arranged that the business transacted has produced to the assessee ....
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....er has made the reference to the Transfer Pricing Officer under section 92CA. The reference is made for the purpose of computing income arising from an international transaction with regard to the arm's length price as provided in section 92. Therefore, it is to be seen that the scope and extent of reference made by the Assessing Officer to the Transfer Pricing Officer is confined to the singular purpose stated in section 92. Sections 92A, 92B, 92C, 92CB, 92D, 92E and section 92F are all precisely defining and facilitating provisions ultimately for the purpose of computing the income as stated in section 92. All the above stated sections provided in Chapter X of the Income- tax Act, 1961 belong to a separate code as such, enacted for the purpose of computing income from international transactions having regard to the arm's length price so as to confirm that there is no avoidance of tax by an assessee. Therefore, where in a case, the Transfer Pricing Officer suggests that the operating profit declared by an assessee is compatible to the arm's length price norms and no adjustment is necessary, the operation of all those provisions come to an end. If the, Assessing Officer....
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....computed by the Transfer Pricing Officer without showing how he determined that the assessee had shown more than "ordinary profits". As rightly argued by learned senior counsel the arm's length price is determined on the basis of the most appropriate method. The most appropriate method is chosen either on profit basis method or price basis method. In the latter ease, profits are not at all considered. In that method, profit is only a derivative of prices. When profits itself is not worked out, how is it justified to adopt the arm's length price profits to determine what is "ordinary profits" for the purpose of section 10A(7)? In the facts and circumstances of the case, we hold that the Assessing Officer has erred in reducing Rs. 4,48,50,795 from the eligible profits of the assessee under section 10A. The said adjustment made by the assessing authority in computing the deduction under section 10A is accordingly, deleted." 32. In our considered opinion, the result of the Transfer Pricing assessment can at best be taken as an indicator for the Assessing Officer to investigate as to whether or not there exists any arrangement which has resulted in more than ordinary profi....
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....he file of the AO with a direction to verify the records and if under identical circumstances the DRP has decided the issue in favour of the assessee in its own case for A.Yrs. 2010-11 and 2011-12 then to decide the issue in the light of the direction of the DRP. Grounds raised by the assessee are accordingly allowed for statistical purposes. 45. Ground of appeal No.5 by the assessee reads as under : "Not setting off of losses of 10A undertakings against other income. a. In holding that losses of new units, if eligible u/s.10A, shall not be adjusted against taxable profits of the assessee, and instead shall be carried forward to be set off against the future profits of such eligible units. b. In respect of 10A units of the company engaged in BPO business, viz, NDA-58, in not allowing set off of loss of Rs. 1,56,51,973/- by holding that the losses from units, the income of which is claimed exempt cannot be set off against the taxable income of the assessee." 46. The Ld. Counsel for the assessee at the outset submitted that the issue stands decided in favour of the assessee by the decision of Hon'ble Bombay High Court in assessee's own case which has been followed by the Trib....
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.... while computing the income did not allow the claim for the loss suffered in the units which were otherwise eligible for benefits of section 10A of the Act. The Assessing officer proceeded on the assumption that section 10A provided for an exemption from taxation and, therefore, the loss of such an entity could not be set off against the normal business income of the assessee. The Hon'ble High Court in the case of Hindustan Unilever Ltd. (supra) was examining a similar proposition, though in the context of section 10B of the Act. The provisions of section 10B of the Act are pari materia to those of section 10A which is the subject matter of controversy before us. It has been noted that subsequent to the amendment with effect from 1.4.2001, the provision provides for a deduction of such profits and gains as are derived by an undertaking from the export of articles or thing or computer software duly established in free trade zones, etc. Consequently, it has to be understood that the provision, as applicable for the assessment year under consideration, is not in the nature of an exemption. Therefore, the assessee was entitled to set-off of losses sustained by the 10A eligible units ag....
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....ot pressed'. 50. Ground of appeal No.7 by the assessee reads as under : 7. In respect of computation of tax liability - while computing the demand at Rs. 126,18,27,467. a. In granting credit for TDS only for Rs. 55,54,583/- as against claim of Rs. 57,85,136/-. b. In charging interest u/s.234C at Rs. 5,21,682/- where in fact no interest is payable u/s.234C as per the return of income filed by the assessee." 51. The Ld. Counsel for the assessee did not press ground of appeal No.7(b) for which the Ld. Departmental Representative has no objection. Accordingly, the same is dismissed as 'not pressed'. 52. So far as ground of appeal No.7(a) is concerned, it is the submission of the Ld. Counsel for the assessee that a direction may be given to the AO to verify the TDS certificates and grant credit after proper verification. 53. After hearing both the sides, we restore this issue to the file of the AO with a direction to verify the claim of TDS and give credit after proper verification. So far as charging of interest under section 234C is concerned, the AO shall also verify since according to the assessee no interest is payable u/s.234C of the I.T. Act, 1961. 54. Ground of appeal....
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....sing Officer ought to have appreciated that the eligibility conditions in respect of splitting up of business already in existence is required to be complied within the year of formation of the undertaking. e. In relying on various observations and conclusions recorded in the assessment order for earlier years and thereby not allowing deduction u/s.10A in respect of various eligible undertakings. 58. After hearing both the sides we find there are total 14 eligible undertakings in the current year. There is no dispute about one BPO undertaking. Thus out of the remaining 13 undertakings 2 undertakings were established in A.Y. 2005-06 and 10 undertakings were established upto A.Y. 2004-05. Therefore, the issue of deduction u/s.10A in respect of the 12 undertakings, is covered by the decision of the order of the Tribunal vide ITA No.2540/PN/2012 and 342/PN/2013 for A.Y. 2005-06 in assessee's own case vide order dated 27-05-2015 which has already been reproduced in the preceding paragraphs. Thus, there is only one undertaking established in the current year at Airoli. From the various details furnished by the assessee in the paper book we find the new technical personnel engaged in t....
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....enabled the assessee company to show more than ordinary profits in respect of 10A units. e. In restricting deduction u/s.10A at Rs. 206,48,90,988/- (viz. Rs. 202,89,86,537/- in respect of software business and Rs. 3,59,04,451/- in respect of BPO business), as against claim of the company at Rs. 332,22,17,341/-." 62. After hearing both the sides we find the above ground is identical to ground of appeal No.4 in ITA No.1338/PN/2010. We have already decided the issue and the ground raised by the assessee has been allowed with certain directions to the AO to verify. Following the same reasonings this ground by the assessee is allowed. 63. Ground of appeal No.4 by the assessee reads as under : "4. Not setting off of losses of 10A undertakings against other income by holding that losses of new units, if eligible u/s.10A, shall not be adjusted against taxable profits of the assessee, and instead shall be carried forward to be set off against the future profits of such eligible units." 64. After hearing both the sides we find the above ground is identical to ground of appeal No. 5 in ITA No.1338/PN/2010. We have already decided the issue and the ground raised by the assessee has been....
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....t year 2004-2005. Thus, the losses suffered in earlier years are required to be set-off against other income in the same year and balance, if any, is required to be carried forward. Similarly, the Hon'ble Bombay High Court in the case of Hindustan Unilever Limited (38 DTR 91) has held that in case of loss of an eligible unit u/s 10B the same should be set-off against normal business income. In view of this, presently the amount of brought forward loss, if any, of BPO undertaking is not certain. 70. The Ld. Counsel for the assessee further submitted that as per the provisions of clause (ii) of sub-section 6 of section 10A and the opening portion of sub-section 6, loss of eligible undertaking entitled to deduction u/s.10A is allowed to be carried forward from A.Y. 2001-2002 and is allowed to be set-off in the year immediately succeeding the last of the relevant assessment year or of any previous year relevant to any subsequent assessment year. Thus, the loss allowed to be carried forward is required to be set-off after the end of the relevant Assessment Year. Relevant assessment year is defined as per clause (v) of Explanation 2 as under- "relevant assessment years" means any ....
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....ngly submitted that, in short, both brought forward Depreciation and Business loss are not required to be set-off as long as the undertaking eligible for deduction u/s 10A and the entire profits of the undertaking are allowed while computing deduction u/s 10A. 73. For the above proposition he relied on the following case laws: 1. Changepond Technologies (P) Ltd. v. ACIT - 119 TTJ 18/22 SOT 220 /6 DTR 344 - Chennai ITAT 2. KPIT Cummins Infosystems (Bangalore) (P) Ltd. v. ACIT - 120 TTJ 956 / 26 SOT 529 / 15 DTR 385 - Bangalore ITAT 74. The Ld. Departmental Representative on the other hand heavily relied on the order of the AO, 75. We have considered the rival arguments made by both the sides, perused the orders of the AO and DRP and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. From the facts of the case, we find the assessee company had shown loss of Rs. 7,78,59,734/- in respect of its BPO activities carried out in NDA 58 unit. It was claimed that the above amount should be adjusted against profit/income of the assessee including profit from non 10A undertaking. We find the AO rejected the claim of the assessee....
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....ndertakings of the company : a. In not allowing deduction u/s.10A in respect of various eligible units amounting to Rs. 286,19,14,217/-. b. In assuming jurisdiction to allow the deduction u/s.10A by observing and holding that the new units/undertakings have been formed by splitting up of a business already in existence since the 1980s, and that the profits and gains of the units/undertakings subsequently setup by the company are not eligible for deduction u/s.10A of the Income Tax Act, 1961. c. In denying the deduction u/s.10A in respect of various eligible undertakings on the basis of the nature of business. d. In re-examining the conditions of eligibility of deduction u/s.10A in respect of various undertakings established in earlier years. The Assessing Officer ought to have appreciated that the eligibility conditions in respect of splitting up of business already in existence is required to be complied with in the year of formation of the undertaking. e. In relying on various observations and conclusions recorded in the assessment order for earlier years and thereby not allowing deduction u/s.10A in respect of various eligible undertakings. f. In holding and concludi....
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....d Rs. 22,02,53,102/- in respect of BPO business (including Rs. 14,64,442/- on protective basis) are more than ordinary profit and hence not eligible for deduction u/s. 10A, without establishing the ordinary profits in the business of the Company c. In not establishing any arrangement between the assessee and other persons so as to produce to the assessee more than ordinary profits d. In holding that the close business connection between the group companies has enabled the assessee company to show more than ordinary profits in respect of 10A units. e. In restricting deduction u/s 10A at Rs. 244,66,30,423/- (viz. Rs. 236,45,12,581/- in respect of software business and Rs. 8,21,17,842/- in respect of BPO business), as against claim of the Company at Rs. 316,42,85,161/-." 83. After hearing both the sides we find the above ground is identical to ground of appeal No.4 in ITA No.1338/PN/2010. We have already decided the issue and the ground raised by the assessee has been allowed with certain directions to the AO to verify. Following the same reasonings this ground by the assessee is allowed. 84. Ground of appeal No.4 by the assessee reads as under : "4. Not setting off of losse....
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....s are accordingly allowed for statistical purposes. 89. Grounds of appeal No.2 and 3 by the assessee reads as under : "In respect of deduction u/s.10A/10AA in respect of various eligible undertakings of the company : a. In not allowing deduction u/s.10A/10AA in respect of various eligible units amounting to Rs. 314,92,25,203/- b. In assuming jurisdiction to disallow the deduction u/s.10A/10AA by observing and holding that the new units/undertakings have been formed by splitting up of a business already in existence since the 1980s, and that the profits and gains of the units/undertakings subsequently setup by the company are not eligible for deduction u/s.10A/10AA of the Income Tax Act, 1961. c. In denying the deduction u/s.10A/10AA in respect of various eligible undertakings on the basis of the nature of business etc. d. In re-examining the conditions of eligibility of deduction u/s.10A in respect of various undertakings established in earlier years. The Assessing Officer ought to have appreciated that the eligibility conditions in respect of splitting up of business already in existence is required to be complied with in the year of formation of the undertaking. e. I....
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....Total employees 304 Transferred employees 661 % of transferred to total 45.99% TCC BPO Technical personnel Admin. Personnel Total New Employees 12 0 12 Transferred employees 4 0 4 Total as at 31-03-2005 16 0 16 Total employees 4 Transferred employees 16 % of transferred to total 25.00% 91. From the above, it is clear that number of technical manpower transferred to new unit at the end of the financial year does not exceed 50% of the total technical manpower actually engaged in development of software or IT enabled products in new units. Therefore, the assessee satisfies the employee condition as per CBDT Circular No.14/2004 dated 08-10-2014 which has already been reproduced in the preceding paragraphs. Under these circumstances we hold that the denial of 10A deduction in respect of various undertakings is not justified. Grounds raised by the assessee are accordingly allowed. 92. Ground of appeal No.4 by the assessee reads as under : "Not setting off of losses of 10A undertakings against other income by holding that losses of units, if eligible u/s.10A, shall not be adjusted against taxable profits ....
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....not allowing deduction for ESOP cost of Rs. 20,19,042/- charged to the profit and loss account by observing that it is nothing but a notional entry and no cost is actually incurred by the company." 97. Facts of the case, in brief, are that the assessee during the year has incurred expenditure of Rs. 20,19,042/- in respect of ESOP compensation. The AO asked the assessee to justify the claim of allowability of ESOP. It was submitted that ESOP is just another form of employee compensation and accepted business practice. The issue of shares under ESOP including the terms and conditions are governed by SEBI guidelines. Further, the accounting of the same is also governed by guidance note issued by the Institute of Chartered Accountants of India, i.e. guidance note on accounting for employee share based payments. Thus the amount charged to the profit and loss account representing the cost or expenditure on employee compensation by way of ESOP is determinable and scientifically computed. Hence, the same is allowable as deduction while computing the total income. The assessee also relied on the decision of the Bangalore Special Bench of the Tribunal in the case of Biocon Limited. 98. How....