TaxTMI 
TaxTMI 
2016 (6) TMI 1286
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.... AO u/s.143(3) r.w.s.144C of the I.T. Act for 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 a....
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....ing to BPO services and ALP of these international transactions be not determined 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 bu....
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....mpanies whose net worth is positive etc. In this process he came across 24 companies. On 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....
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....he assessee company was (-) 13.33%, the TPO asked the assessee to benchmark its activities pertaining to BPO services. The margin of (-)13.33% was arrived at by the AO after rejecting the assessee's claim for excluding depreciation by holding that depreciation expenses are operating expenses and part and parcel of normal BPO operations. The submission of the assessee that depreciation on Disaster Recovery unit is an extraordinary expense was also 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/- ....
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....he BPO activity is incidental to main software activity. The company has done separate segmental reporting for software and BPO activity as directed during the assessment proceedings. As required, separate benchmarking report was also submitted during the assessment proceedings. He submitted that as per the report submitted by the company the net cost plus mark up of broadly comparable companies range from -1.10% to 19.97% with an arithmetic mean of 11.45%. 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....
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....n account differences affecting materially the profitability is to be made to the net profit margin of the comparables as regerred to in clause (e)(ii). Accordingly, the Tribunal held that depreciation cannot be excluded for the purpose of computing operating profit. He accordingly submitted that the order of the AO be upheld. 22. The Ld. Counsel for the assessee in his rejoinder submitted that the Tribunal while holding that adjustment is required to be made 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 submitt....
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.... Exclusion of depreciation was justified to eliminate the difference in technology used, age of assets used in production, difference in capacity utilization and different depreciation policies adopted by various companies. The relevant observation of the Tribunal from Para 19 to 24 read as under : "Reasons for exclusion of depreciation : 19. In the present appeal, ALP of transactions carried was to be determined by comparing net profit of the taxpayer (tested party) 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 ....
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.... companies in auto component industry". [See letter dt. 24th March, 2006 before AO and letter dt. 18th Dec., 2006 before CIT(A) where taxpayer explained its case in detail]. 20.2 We need not comment for want of details, what effect under "utilization capacity had on profits of taxpayer and comparables. But other contention that depreciation would depend upon type of technology employed, age and nature of machinery used, is quite well-founded. Above, along with size of enterprise and investment in plant/machinery were important factors to be taken into account for 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." (und....
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....in the case of the taxpayer. How above differences were not considered in applying FAR analysis? The learned CIT(A) has not said a word on "asset" employed and "risks" suffered by the tested party and the comparables. Thus, material differences needing suitable adjustment were ignored and a flawed analysis was carried even in appellate proceedings. 20.6 The AO, after looking into details of financial results of comparable enterprises, excluded all companies except the three, although two of companies selected, namely Coventry Coil-O- Matic (Haryana.) Ltd. and Roto Pumps Ltd. percentage of depreciation to total cost had differences 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 r....
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....rences in claim of depreciation and, therefore, it should have been excluded in computing "operating profit" as warranted by rules. On the other hand, the differences as per the chart are accepted. The finding that cash profit cannot be considered is not legally correct. The taxpayer in order to get adjustment of difference in depreciation furnished arm's length working after excluding depreciation and by taking all other expenses into consideration and showed that such profit of the taxpayer was quite comparable to the mean margin of other comparables similarly computed. This demonstratively showed that deduction of depreciations was making huge difference and required suitable 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 w....
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....rities. Both the parties agreed that above figures and computations can be verified by the AO/TPO. We are also of the view that it would be appropriate to get above claim verified by the AO/TPO. Accordingly, we set aside the impugned orders of Revenue authorities including TPO and restore the matter to the file of the AO to carry above exercise. In case either on cash profit/sale basis or on cash profit/total cost of comparables finalized by the learned CIT(A), it is found that arm's length principles are satisfied in international transactions, no adjustment is to be made. Otherwise, fresh orders be passed in accordance with law in the light of above discussion. We, however, make it clear that matters which have already 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 Schefen....
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....3) of the I.T. Act. 30. After hearing both the sides we find the TPO made adjustment of Rs. 1,61,93,366/- pertaining to interest on excess credit period allowed to associated enterprises. While doing so the TPO had rejected the submission of the assessee that it was general business practice in the software industry not to charge interest on the delayed receipts from the customers and also considering the volume of business and revenue generated interest is not charged in order to maintain business relationship. It is the case of the TPO that interest ought to have been charged for delay beyond the stipulated credit period because these amounts would have earned interest at the international rates prescribed by the RBI in respect 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 capita....
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....s Invoice Amount Total Realized Invoice X No of days delay Weighted Average No. of days delays Other [Non-AE's] 75,09,72,178 72,88,22,867 18,87,31,35,331 25 Total No. of Weighted Average for AE's 75,09,72,178 72,88,22,867 18,87,31,35,331 25 28. The assessee had applied TNNM method in holding that its international transactions were at arm's length price, whereas the TPO computed the margins on the basis of CUP method in view of the transactions of the assessee with the AEs and also with the non- AEs. Thereafter, the TPO applied LIBOR plus rates and the cost of guarantee cost in order to determine the arm's length price of the interest of excess credit period allowed to the AEs. The CIT(A) on the other hand, applied the Indian Prime Lending rates in order to compute whether the said 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 CI....
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....e on the other hand, claims that it had borrowed the money on LIBOR+ rates i.e. international rates, which were Japanese based LIBOR+ rates which were lower than the US based LIBOR+ rates. The plea of the assessee before us was that it had advanced the loan to its associated enterprises on LIBOR+ rates i.e. 4.75%. In the totality of the facts and circumstances where the assessee has the internal CUP of operating at international rates available and since the said loan raised by the assessee at international rates was advanced to its associated enterprises, we find no merit in the order of the TPO in applying the domestic loan rates i.e. BPLR rates for benchmarking transaction of charging of interest on the loans advanced to the associated enterprises by the assessee. Where the assessee had made the borrowings on LIBOR+ rates and advanced the same at LIBOR+ rates, then the said transaction is at arm's length price and 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 l....
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....ced the same on LIBOR+ rates to its associated enterprises, then the said transaction with its associated enterprises is within arm's length price. The TPO / AO thus, directed to re-compute the arm's length price of the international transactions. Another aspect to be kept in mind is the plea of the assessee with regard to the interest receivable. The assessee had also raised the issue that the TPO had adopted the interest receivable from associated enterprise company at Rs. 2,86,27,089/- instead of Rs. 2,91,82,060/- which is disclosed in the audit report in Form No.3CEB. The Assessing Officer is also directed to verify the claim of the assessee in this regard and compute the arm's length price of the international transactions. Reasonable opportunity of being heard shall be afforded to the assessee by the Assessing Officer / Transfer Pricing Officer. The grounds of appeal Nos.1 and 2 raised by the assessee are thus, allowed as indicated above." 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 u....
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....e Revenue is not in appeal against the said finding of the CIT(A) and in the totality of the above said facts and circumstances, where it has not been established that the assessee has not paid any commission, there was no merit in charging plus 200 basis as guaranteed commission. However, we uphold the order of TPO in benchmarking the transaction of interest due on amounts outstanding from its AEs at LIBOR plus 300 basis points. The Assessing Officer / TPO shall determine the adjustment, if any, to be made in the hands of assessee on account of interest chargeable on the amounts due from its AEs beyond the credit period of 25 days after allowing the benefit of interest recovered by the assessee from its AEs. The grounds of appeal raised by the assessee are thus, partly allowed." 32. Respectfully following the decision of the Tribunal in assessee's own case in the immediately preceding assessment year we restore the issue to the file of the AO with a direction to recompute 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 respe....
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....anies which are the major players in the business. These 5 had been included even in the 38 companies for transfer pricing study. Moreover, the Assessing Officer should have appreciated that in Transfer Pricing analysis the purpose of selecting comparables is different. The same cannot be formed the basis for invoking the provisions of section 10A(7). To do so, existence of arrangement between the assessee and the other persons by which business is transacted between them and which produces to the assessee more than the ordinary profits will have to be established. "The Assessing Officer has not proved the ordinary profits in such type of business and of such voluminous facts obtained in our case". It has also been stated that it needs to be appreciated that 4 of its units being 10A undertakings had even suffered losses during this year. Various decisions were also relied upon. However, the DRP was also not convinced with the arguments advanced by the assessee and upheld the action of the AO. 36. 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 find identical issue had come ....
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....he existing units. As per the Assessing Officer, Chinchwad Unit was an expansion of Software and Conversion Unit; Akruti unit was considered as expansion of Sigma Unit and Millennium Business Park unit was considered as expansion of TTC unit. The Assessing Officer treated the aforesaid units as mere expansions of the existing units on the basis of the approval letters received from the Software Technology Park of India (in short "STPI"). Accordingly, the Assessing Officer noted that the profitability of the aforesaid three units was liable to be combined with that of the corresponding old units. Similarly, the Assessing Officer also concluded that the eligible period for deduction under section 10A of the Act with respect to the said three units would also be reckoned from the first year of the eligibility of the corresponding old units. Aggrieved with the aforesaid stand of the Assessing Officer, assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals). 36. In appeal, assessee contended that the action of the Assessing Officer was bad in law and on facts. It was pointed out that all the three undertakings have been established in Software Tech....
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.... by splitting up or reconstruction of business already in existence and in this regard respectfully following the ratio decidendi of Hon'ble Supreme Court decision in the case of Textile Machinery Corporation Ltd v CIT quoted supra, I am of the considered view that it cannot be said that the three units are formed by the splitting up or reconstruction of business already in existence. It may also be mentioned that the Hon'ble Supreme Court held that benefit of section 15C shall be applicable even in case of expansion of business and the relevant portion of decision of Hon'ble Supreme Court in the case of Textile Machinery Corporation as contained in page 203 & 204 in 107 ITR is reproduced as under: "There is great scope of expansion of trade & industry. The fact that an assessee by establishment of new industrial undertaking expands his existing business, which he certainly does, would not, on that score, deprive him of the benefit u/s 15C. Every new creation in business is some kind of expansion and advancement. The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is all the same a ne and id....
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....n the case of Jayant Agro Organics Ltd Akhandanad, Mumbai v Jt.CIT in ITA No 5439/Mum/01 dated 3.3.2006 wherein similar argument set up by the Revenue was not found cogent to deny the claim of deduction under section 10A of the Act. 39. In the above background, we have carefully considered the rival submissions. Notably, the assessee is a company engaged in the business of development and export of computer software. It has been explained before the lower authorities that the business of the assessee is on an increasing scale. It has expanded its business by establishing new undertakings at different locations. It is explained that the turnover of the company has substantially increased over a period of time with the increase in the number of employees, etc. as also number of locations at which it operates through different units. In this context, the Assessing Officer noted that the assessee had treated three units, namely, Chinchwad Unit, Akruti Unit and Millennium Business Park unit as separate independent units for the purposes of deduction under section 10A of the Act. The Assessing Officer noted that approval received from STPL for Chinchwad unit reflected it as an e....
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....ue is that in the approvals granted by the STPI, the three units have been referred to as an expansion of the corresponding old units. The moot question is as to whether such a plea of the Revenue is potent to effect the assessee's entitlement for deduction under section 10A of the Act. Similar plea of the Revenue in the context of section 10B of the Act was a subject matter of consideration by our co-ordinate Bench in the case of Jayant Agro Organics Ltd. Akhandanad, (supra) wherein following discussion is worthy of notice: "8. Revenue has vehemently contended that there is no independent Government approval of the new unit and all that the Government has permitted is enhancement in capacity of the existing unit. As evident from the land allotment letter dated 19th July, 1995 issued by the Gujarat Industrial Development Corp. Ltd. it is clear that the land allotted for the new unit is plot #624/1 and 2, and 625 to 627 whereas the existing plant was in plot 3 602. The production of 12 Hydroxy Stearic Acid is authorized by the letter dt 27th January 1995 which states that the Government has taken note of assessee's wish to manufacture Hydroxy Stearic Acid also by way of for....
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...., we find no error in the approach of the Commissioner of Income-tax (Appeals) in having allowed the claim of assessee for the benefits under section 10A of the Act on the three units treating the same as independent units. Thus, Ground Nos 1 & 2 of the appeal of the Revenue are dismissed." 13. There being no change in the facts and circumstances of the case, on the above parity of reasoning, we find no error in the approach of the Commissioner of Income-tax (Appeals) in having allowed the claim of assessee for the benefits under section 10A of the Act on the three units treating the same as independent units. Thus, Ground Nos 1 to 4 of the appeal of the Revenue are dismissed." 13. Further the Hon'ble Bombay High Court in Income Tax Appeal (L) No.1820/2012 vide judgment dated 28.02.2013 had dismissed the appeal of the Revenue against the order of Tribunal, in turn following the ratio laid down by the Hon'ble High Court in Income Tax Appeal No.1148/2012 relating to assessment year 2002-03, judgment dated 28.02.2013. 14. The issue arising in the grounds of appeal No.2 and 3 is identical to the issue before the Tribunal in assessee's own case in the earlier ....
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.... laid down by the CBDT. Section 10A(2)(iii) of the Act prohibits formation of new units by way of transfer of previously used plant & machinery to the new unit. However, the explanatory memorandum to the said section does not express additional objective of employment generation. There is no legal requirement of having certain percentage of new employees in the new unit in section 10A of the Act. However, CBDT has clarified vide Circular No.14/2014, dated 08.10.2014 that transfer or re-deployment of technical manpower from the existing units to the new units located at SEZ in the first year of commencement of business, shall not construe as to splitting up or re-construction of the existing business, provided the number of technical manpower so transferred at the end of the financial year does not exceed 50% of the total technical manpower actually engaged in the development of software or IT enabled projects in the new unit. As per details furnished by the assessee in the new unit at Bangalore, the new employees employed were 289 and the transferred employees were 112 i.e. total employees 401 percentage and percentage of transferred employees to the total employees was 27.93%. In ....
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.... from year to year holding the same to be a separate unit. Following the same line of reasoning, we uphold the order of CIT(A) in holding the assessee to be eligible for the deduction under section 10A of the Act in respect of its Bangalore unit and the unit at SPZ 47, Mumbai. The grounds of appeal No.4 and 5 raised by the Revenue are thus, dismissed. 37. Since it is the submission of the Ld. Counsel for the assessee that no new undertakings were set up by the assessee in the current year and deduction was allowed in respect of undertakings established upto A.Y. 2005-06, therefore, we restore this issue to the file of the AO who shall verify the records and in case no new undertakings are set up during the impugned assessment year, then following the order of the Tribunal allow deduction u/s.10A in respect of various eligible undertakings of the company. Needless to say, the AO shall give due opportunity of being heard to the assessee. Ground of appeal No.3 by the assessee is accordingly allowed. 38. Grounds of appeal No.4 by the assessee reads as under : "4. In respect of invoking provisions of section 10A(7) read with section 80IA(10) on protective basis: ....
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.... favour of the assessee. Even the various benches of the Tribunal have also decided the issue in favour of the assessee, therefore, the grounds raised by the assessee should be allowed. He relied on the decision of the Pune Bench of the Tribunal in the case of M/s. Honeywell Automation India Ltd. Vs. DCIT vide ITA No.18/PN/2011 order dated 21-02-2015 for A.Y. 2006-07. 41. The Ld. Departmental Representative on the other hand heavily relied on the order of the AO. 42. We have considered the rival arguments made by both the sides, perused the orders of the authorities below and the paper book filed on behalf of the assessee. We have also gone through the various decisions cited before us. It is the submission of the Ld. Counsel for the assessee that the DRP has decided the issue in favour of the assessee in its own case for A.Yrs. 2010-11 and 2011-12 which reads as under : "5.6 Findings : This issue has been adjudicated by the DRP in assessee's own case for A.Y. 2010-11. It has been held by the DRP in A.Y. 2010-11 that the necessary pre-condition for invoking section 10A(7) and 10AA(9) are not satisfied. Considering that there is no change in the factual posit....
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....it is also manifested in the language of section 10A(7) r.w.s. 80-IA(10) of the Act. We say so for the reason that the phraseology of section 80-IA(10) of the Act itself suggests that the profits and gains of an eligible business cannot be tinkered with by the Assessing Officer merely because they are more than the ordinary profits or that they are quite high. The existence of substantial or more than ordinary profits by itself does not sufficiently empower the Assessing Officer to disregard them and determine the profits which he may consider to be reasonably deemed to have been derived therefrom. The presence of the expression "the course of business ............ is so arranged ............. that the business transacted ............... produces to the assessee more than ordinary profits" is significant and its understanding has to be prefaced by the legislative objective of plugging abuse of the tax concessions granted u/s 10A of the Act by manipulation of profits between associated parties. In other words, the import of the expression "so arranged" has to be read in conjunction with the legislative intent that there should not be any abuse of tax concession by manipulation of pr....
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....iated enterprises whereby the services have been provided by the assessee to them and therefore the same is to be understood as an "arrangement" within the meaning of section 10A(7) r.w.s. 80-IA(10) of the Act. Along with the aforesaid, it has also been emphasized, on the basis of the language of section 80- IA(10) of the Act that, the Assessing Officer is not required to be prove that there is an arrangement for producing more than ordinary profits. Whereas, as per the Ld. CIT-DR, section provides that arrangement leading to production of more than ordinary profit will satisfy the necessary condition of section 80-IA(10) of the Act. Thus, according to the Ld. CIT-DR, in the instant case there is an arrangement and it has lead to production of more than the ordinary profits. According to the Ld. CIT-DR, the meaning of the words "so arranged" in section 80-IA(10) of the Act only seeks to ensure that there was an agreement between the assessee and associated enterprise. 25. We have carefully examined the aforesaid contentions of the Ld. CITDR. In our considered opinion, the import of the expression "arranged" in section 80-IA(10) of the Act is not to be understood in its pla....
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....ecessarily mean that it must be an agreement or understanding which affects their rights" [underlined for emphasis by us] 27. The aforesaid clearly points out that the Hon'ble High Court imparted meaning to the word "arrangement" in the context of section 391(1) of the Companies Act, 1956 to mean that it must be an agreement or understanding which affects the rights between the company and its creditors or any class of them and between the company and its members or any class of them. By the same analogy in the present context, we have to understand the meaning of the expression "as arranged" in section 10A(7) r.w.s. 80-IA(10) of the Act to mean a situation whereby the course of business has been so arranged that the business transacted produces to the assessee more that the ordinary profits with an intent to abuse the tax concessions granted in section 10A of the Act. Moreover, if one is to understand the import of the expression "so arranged" in section 80-IA(10) of the Act as canvassed by the Ld. CIT-DR, it would mean that for the purposes of fulfillment of the conditions prescribed in section 10A(7) r.w.s. 80-IA(10) of the Act, existence of mere close connection and....
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....t whether the AO has discussed objectively the conditions mentioned in the section to disturb the results declared by the appellant. In this case, the AO has failed to adduce any evidence or reason to satisfy the invoking of s. 80-1(9). First of all, a mere substantial profit does not give rise to any valid view that there could be any arrangement. It is a case of joint venture listed Indian company, where all arrangements are open for scrutiny and acceptance not only by digital group worldwide but also from joint venture partners and shareholders. Digital group overseas will not pay undue sum, which it cannot recoup entirely to exclusion of others. Hence nothing can be arranged to the exclusive benefit of overseas partner. One cannot presume the existence of close connection or possibility of an arrangement for earning more than ordinary profits. In this case the profits earned is comparable with the profits earned by other companies in the same industry. Hence there is no case for further verification. The AO has compared the profit of software unit with that of hardware unit. Thus the foundation itself is on wrong premise. There cannot be comparison between an orange and an appl....
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....xpected to arise in such a business. Be that as it may, the aforesaid is not enough to say that the course of business has been so arranged to result in more than ordinary profits. However, from the side of the Revenue, it was pointed out that the Transfer Pricing comparability analysis itself suggests that the profit margins of the assessee are more than the ordinarily accepted margin in this line of business. The moot question is as to whether the same can be considered as a material to indicate that the course of business between the assessee and the associated enterprises has been so arranged, so as to result in 'more than the ordinary profits' within the meaning of section 10A(7) r.w.s. 80- IA(10) of the Act. In this context, we may refer to the decision of the Chennai Bench of the Tribunal in the case of Visual Graphics Computing Services India (P) Ltd. vs. ACIT, 148 TTJ 621 (Chennai), wherein following discussion is relevant :- "We heard both sides in detail and considered the issue. As far as the present case is concerned, the Transfer Pricing Officer has made a categorical finding that the operating profit reported by the assessee is higher than the profit worked ....
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....ustment that the Assessing Officer would like to make with reference to the first segment must be made independent of the order of the Transfer Pricing Office under section 92CA. To state in simple terms, the transfer pricing regime is different from regular computation of income. Section 10A belongs to that part of regular computation of income and it should be computed independent of transfer pricing regulations and transfer pricing orders. It is not therefore, permissible for the Assessing Officer to work out section 10A deduction on the basis of arm's length price profit generated out of the order of the Transfer Pricing Officer. In fact these issues have already been considered in various orders of the Tribunal. The Income-tax Appellate Tribunal, Chennai "A" Bench in the case of Tweezerman (India) P. Ltd. v. Addl. CIT [2010] 4 ITR (Trib) 130 (Chennai) (133 TTJ 308) has considered the matter in detail and held that the reduction of eligible profits of an assessee as done by the Assessing Officer by invoking the provisions of section 80-IA(10) read with section 10B(7), in the context of the Transfer Pricing Officer's order is unsustainable. The Tribunal....
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....mine if the profits derived from the eligible business by the assessee is more than the ordinary profits, then the A.O. has to arrive as to what could be the reasonable profit from the such eligible business and such profit has to be then taken as reasonably deemed to have been derived from the eligible business for the purposes of computing deduction under the section." 33. The aforesaid discussion in the assessment order reveals that as per the Assessing Officer, the existence of close connection and more than ordinary profits is enough to assume an arrangement as contemplated u/s 80- IA(10) of the Act. The aforesaid understanding, in our view, is directly contrary to the judgement of the Hon'ble Karnataka High Court in the case of H.P. Global Soft Ltd. (supra) and our discussion in the earlier part of this order. 34. In view of the aforesaid, we conclude by holding that in the present case, the Assessing Officer has not proved that any arrangement had been arrived between the parties which resulted in higher profits. Consequently, the re-working of the profits by Assessing Officer by invoking section 10A r.w.s. 80-IA(10) of the Act is not justified. The action ....
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....rmal provisions of the Act. Similar issue has been considered by our co-ordinate Bench in assessee's own case for assessment years 2002-03 and 2003-04 (supra), wherein the order of the Commissioner of Income-tax (Appeals) has been set aside with directions to the Assessing Officer to allow set-off of the losses of the section 10A eligible units against the normal business income of the assessee while 9 computing income as per normal provisions of the Act. The relevant findings of the Tribunal as contained in paras 3 to 5 of its order are reproduced hereinbelow for the sake of brevity: "3. In the first Ground, dispute relates to the action of the Assessing Officer in adding back losses suffered by the section 10A eligible units while computing income of the assessee under the normal provisions of the Act. 4. In this connection, it was a common point between the parties that similar issue has been adjudicated by the Pune Bench of the Tribunal in assessee's own case for the immediately preceding assessment year 2001-02 vide ITA No 274/PN/2005 dated 29.5.2009 in favour of the assessee. Apart therefrom, it has been pointed out by the learned representative for the asse....
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....affirm the order of the Commissioner of Income-tax (Appeals) and thus dismiss the Ground of appeal of the Revenue." 20. We further find that the Revenue in an appeal filed before the Hon'ble Bombay High Court in Income Tax Appeal No.1148/2012 relating to assessment year 2002-03 had raised the issue vide ground of appeal a & b in respect of set off of losses against the business profits including the specific provisions of section 10A(6) of the Act and also taking note of the provisions of section 10A(8) of the Act. The Hon'ble Bombay High Court vide judgment dated 28.02.2013 held that both the issues were covered against the Revenue and in favour of the assessee in line with the ratio laid down by it in assessee's own case in Income Tax Appeal No.2177/2012 rendered on 01.07.2011. The Hon'ble Bombay High Court had also in the appeal filed by the Revenue relating to assessment year 2004-05 in Income Tax Appeal (L) No.1820/2012 vide judgment dated 28.02.2013 had dismissed the similar issue raised by the Revenue. Following the same parity of reasoning, we find no merit in the grounds of appeal No.7 and 8 raised by the Revenue and same are dismissed." 48. Respectfully follow....
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....d. c. In concluding that delayed recoveries from AEs is an international transaction requiring adjustment under transfer pricing." 56. After hearing both the sides we find the above ground is identical to ground of appeal No.2 in ITA No.1338/PN/2010. We have already decided the issue and the ground raised by the assessee has been restored to the file of the AO with certain directions. Following the same reasoning the above grounds by the assessee are also restored to the file of the AO with a direction to decide the issue afresh in the light of the directions given in ITA No.1338/PN/2010 for A.Y. 2006-07. The above grounds are accordingly allowed for statistical purposes. 57. Ground of appeal No.2 by the assessee reads as under : 2. 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. 324,43,57,607/-. 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 t....
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....on is satisfied as per the CBDT Circular No.14/2004 dated 08-10-2014. The relevant clause (3) of the said circular reads as under : "3. The matter has been re-examined by the Board. In supersession of the Circular No.12/2014 dated 18th July, 2014, it has now been decided that the transfer or re-deployment of technical manpower from existing units(s) to a new unit located in SEZ, in the first year of commencement of business, shall not be construed as splitting up or reconstruction of an existing business, provided the number of technical manpower so transferred as at the end of the financial year does not exceed 50 per cent of the total technical manpower actually engaged in development of software or IT enabled products in the new unit." 60. We therefore hold that denial of 10A deduction in respect of various undertakings is not justified. Accordingly, the grounds raised by the assessee on this issue are allowed. 61. Ground of appeal No.3 by the assessee reads as under : "3. In respect of invoking provisions of section 10A(7) read with section 80IA(10) on protective basis. a. In drawing conclusion of earning more than average profits on the basis o....
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....at the above amount should be adjusted against profit/income of the assessee including profit from non 10A undertaking. Various decisions were also relied upon. It was further argued that the Tribunal in assessee's own case for A.Y. 2001-02 has allowed adjustment of loss incurred in 10A unit against profits of non 10A unit. The AO observed that the department has not accepted the order of the ITAT in assessee's own case for A.Y. 2001-02 and an appeal has been filed before Hon'ble Bombay High Court which is pending. He accordingly disallowed the assessee's claim for this assessment year as well. Referring to provisions of section 10A the AO however noted that by allowing set off of losses of such units we may end up subsidizing the assessee's taxable profit of the year also may be from other business. According to him, after adjustment, there may be no loss to be carried forward to the next year and set off, when the 10A unit becomes profit making unit exempt. The AO accordingly denied the adjustment of the impugned losses against the taxable profit of the assessee and instead allowed the same to be carried forward. 67. The DRP upheld the action of the AO on the ground that the m....
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....reference to such profits. The business loss is allowed to be carried forward and set-off as per the provisions of section 72. The provisions of section 72 allowing set-off of brought forward business loss are falling in Chapter VI and deduction u/s 10B is allowed under Chapter III i.e. Incomes which do not form part of total income. 72. He submitted that income from business is computed and deduction u/s 10A is granted in respect of such eligible profits at this stage only and the balance profit, if any, only form part of income and thereafter provisions of section 72 will have to be given effect to. In section 10A it is not provided that Income from business computed at this stage is required to be reduced by brought forward losses and the balance is only entitled to deduction u/s 10A. Infact, considering the scheme of section, deduction u/s 10A is allowed on year to year basis in respect of profits of the year as per the formula provided in sub-section 4. As per sub-section 4 the profits eligible for deduction u/s 10A are in proportion of the export turnover to the total turnover of the business carried on by the undertaking. All the amounts required in this formula are of th....
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....ions." 76. Nothing contrary was brought to our notice as to whether the Hon'ble High Court has decided the issue in favour of the assessee or not. Since in the preceding years the matter has been decided against the assessee and assessee is in appeal before the Hon'ble High Court, therefore, in view of judicial precedents the order of the AO on this issue is upheld and the ground raised by the assessee is dismissed. ITA No.2507/PN/2012 (A.Y. 2008-09) : 77. Ground of appeal No.1 by the assessee reads as under : "1. In making addition of Rs. 3,31,98,668/- to the total income on account of interest chargeable on delayed receipts from the associated enterprises following adjustment of Rs. 5,20,11,247/- proposed in the transfer pricing order u/s.92CA(3) of the Income tax Act. The learned transfer pricing assessing officer erred : a. In concluding that the sum of Rs. 5,20,11,247/- is to be the arm's length compensation receivable by the assessee on account of interest chargeable on the amounts due from the associate entities beyond the credit period stipulated under the contract. b. In not appreciating the facts obtained in the case of proposing adjust....
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....e 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 which is covered by the decision of the ITAT vide ITA No.342/PN/2013 order dated 27-05-2013 for A.Y. 2005-06. One undertaking was established in A.Y. 2007-08 and we have already decided the issue vide ITA No.1451/PN/2011 in the preceding paragraphs. 9 undertakings were established upto A.Y. 2004-05 and the same has already been decided in favour of the assessee. Thus, we find only one new undertaking was established in the current year at Gurgaon. From the details submitted by the assessee in the paper book, we find the new technical personnel engaged in the new unit are as under : Technical personnel Admin. Personnel Total New Employees 40 2 42 Transferred employees 18 - 18 Total employees as on 31-03-2005 58 - 60 % of transferred to total 31.03% 81. From the above, it is clear that the number of technical manpower personnel tra....
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....sides, we find the above ground is identical to ground of appeal No.4 in ITA No.1451/PN/2011 for A.Y. 2007-08. We have already decided the issue in the preceding paragraphs and the ground raised by the assessee has been dismissed. Following the same reasoning the above ground by the assessee is dismissed. 86. Ground of appeal No.6 being general in nature is dismissed. ITA No.282/PN/2014 (A.Y. 2009-10) : 87. Ground of appeal No.1 by the assessee reads as under : "1. In making addition of Rs. 3,14,81,509/- to the total income, on account of interest chargeable on delayed receipts from the associated enterprises following adjustment made in the transfer pricing order u/s.92CA(3) of the Income tax Act. The learned transfer pricing assessing officer erred : a. In concluding that the sum of Rs. 3,14,81,509/- is to be the arm's length compensation receivable by the assessee on account of interest chargeable on the amounts due from the associate entities beyond the credit period stipulated under the contract. b. In not appreciating the facts obtained in the case of proposing adjustment without applying any specified method. c. In not appreciatin....
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.... f. In holding and concluding that new unit at Noida SEZ is not exception to the stand taken by the Department and is clearly formed by the splitting up and the reconstruction of the existing business as provided in section 10AA(4)(ii) of the Act on the basis that some of the employees have been transferred to this unit and new unit is also carrying on the same business of software development/IT enabled services." 3. In holding that the unit at TTC BPO is formed by splitting up and reconstruction of the existing BPO business of the assessee which is being carried on at NDS 58 unit and thereby including the profits of the TCC BPO business in the profits of the NDA 58 unit for the purpose of allowing deduction u/s.10A and not considering the new unit at TTC BPO as a separate and independent undertaking for the purpose of section 10A." 90. After hearing both the sides, we find there are 16 eligible undertakings in the current year. There is no dispute about one BPO undertaking. Thus, out of the remaining 15 undertakings, 2 undertakings were established in A.Y. 2005-06 and the issue stands covered in favour of the assessee by the decision of the Tribunal in ITA No.342/PN....
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....ot be adjusted against taxable profits of the assessee as per the provisions of section 10A(6) and instead shall be adjusted against the profits of eligible undertakings under section 10A. 93. After hearing both the sides, we find the above ground is identical to ground of appeal No.5 in ITA No.1338/PN/2010 for A.Y. 2006-07. We have already decided the issue and allowed the ground raised by the assessee. Following the same reasonin this ground by the assessee is allowed. 94. Ground of appeal No.5 by the assessee reads as under : "In respect of invoking provisions of section 10A(7)/10AA(9) read with section 80IA(10) : a. In drawing conclusion of earning more than average profits on the basis of comparables used in transfer pricing analysis having different purpose, without establishing the ordinary profits in this business. b. In holding that profit of Rs. 50,77,52,091/- in respect of software business on protective basis and Rs. 18,70,35,470/- in respect of BPO business (viz.,total Rs. 69,47,87,561/-) are more than ordinary profit and hence not eligible for deduction u/s.10A. c. In not appreciating that the profit margin of the assessee is ....
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....so relied on the decision of the Bangalore Special Bench of the Tribunal in the case of Biocon Limited. 98. However, the AO was not satisfied with the explanation given by the assessee. After considering all the facts, arguments and evidences putforth by the assessee the AO held that such ESOP cost charges to the profit and loss account is nothing but a notional entry and no cost is actually incurred by the company. He accordingly disallowed the claim of deduction of Rs. 20,19,042/- 99. The assessee approached the DRP, however, the DRP was also not satisfied with the arguments advanced by the assessee and upheld the action of the AO. Subsequently, the AO in the order passed u/s.143(3) r.w.s.144C disallowed the above amount. 100. Aggrieved with such order of the AO the assessee is in appeal before us. 101. The Ld. Counsel for the assessee referring to the decision of the Bangalore Special Bench of the Tribunal in the case of Biocon Ltd. (Supra) submitted that the issue stands decided in favour of the assessee. He submitted that following the above decision the DRP in subsequent assessment years has allowed such claim of the assessee. He accordingly submitted that the cla....