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TMI Blog2011 (1) TMI 406X X X X Extracts X X X X X X X X Extracts X X X X ..... ITAT, Delhi Bench in the case of Jubilant Empro (P.) Ltd. v. DCIT in ITA No. 107/Del/2007 - Held that: the notice period pay was to be considered as income derived by the eligible undertaking and as such, notice period pay would go to reduce the expenses on account of salary and the real nature of the transaction will not have any affect on the income derived by the assessee from the eligible undertaking - Appeal is allowed by way of remand Regarding travelling expense - In the details, unit-wise details of travelling and conveyance expenses have been furnished - It is well settled that expenditure wholly and exclusively for the purpose of business cannot be disallowed merely because the assessee's income or the turnover would be very much reduced thereby - In the present case, the Assessing Officer has not brought any material or evidence on record to show and establish that the travelling expenses incurred by the assessee during the year under consideration have not been expended for the purpose of assessee's business or has not been incurred in the course of carrying of any business activity of the assessee - Decided in the favour of the assessee Regarding depreciation on co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grounds taken in the appeal shall take care of the various additions made by the Assessing Officer in the assessment. 3. Ground No. 2 raised by the assessee is as under:- "2. That the assessing officer erred on facts and in law in not appreciating that in absence of any direction issued by the Dispute Resolution Panel (DRP), the following additions/disallowances, proposed in the draft order, could not be made in the order passed under section 144C read with section 143(3) of the Act: (i) Disallowance of deduction under section 10A of the Act in respect of 3rd floor of (GE-GDC) STPI Unit; (ii) Disallowance of set off of profit of STPI Unit, of Rs. 1,38,883 against the loss of other units/income; (iii) Disallowance of Misc. income as part of business income for the purpose of claiming deduction under section 10A of the Act; (iv) Disallowance of Travelling Expenses amounting to Rs. 14.07 cr. (approx.); (v) Depreciation on Computer Peripherals; (vi) Disallowance of delayed payment towards EPF." 4. In this ground, the assessee has taken a general and preliminary objection that the AO has made the various additions and disallowances mentioned in the ground without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same building. Moreover, both the units are separate and independent from each other and the approval for both the units were granted separately, i.e., the approval for the first undertaking was given on 29.11.1994 and subsequent approval dated 4.12.2000 was granted for the new unit. The assessee, therefore, submitted that it is erroneous to hold that the second unit situated at the 3rd floor was set up with the result of reconstruction of the first unit. It would be appreciated that GE-GDC. undertaking and the first STP units are two distinct and separate undertakings and, thus, GE-GDC undertaking cannot be regarded as an extension of the first STP unit. 5.5 The learned counsel for the assessee further submitted that the ITAT in the case of the assessee for the assessment year 2003-04, has held that both the units, being separate and independent of each other, were eligible for deduction u/s 10A of the Act. 5.6 We have heard both the parties and carefully perused the orders of the authorities below. The assessee company is engaged in the activities of software development and related services. The software related business is being carried out from the STP Unit and the exemp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been formed with fresh capital and investment with a motive to increase the production capacity and expand its business, then it cannot be said that the new undertaking was not the new industrial unit by itself. It was also held that establishment of new industrial unit as a part of already existing industrial establishment may result in an extension of the industry, but if the newly established unit itself is an integrated unit in which new plant and machinery are put up and the same itself independently of the old unit capable of production of goods, then it can be classified as a newly established industrial undertaking. This makes it abundantly clear that even if the new unit was established by the assessee company as expansion of its existing unit, a substantial fresh capital having been invested in the said unit and it was capable of doing business of its own independent of the old unit, the same was eligible to be treated as a newly established undertaking. In our opinion, the learned CIT (Appeals) thus was not correct in holding that both the units were liable to be treated as one unit for the purpose of computing deduction under section 10A." 5.7 From the said decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mentioned in the section itself that what is to be given is only a deduction and not exemption after amendment made with effect from 1st April, 2001. It was further held therein that the intention of this legislature w.e.f. 1st April, 2001 was to give only deduction and not exclusion from total income. 6.4 We have heard both the parties and have gone through the aforesaid decisions. Respectfully following the aforesaid decisions, we restore the matter back to the file of the AO for his fresh computation by treating the provisions of section 10A to be in the nature of deduction provision and not exemption. The AO shall recompute the total income of the assessee in the light of the aforesaid decisions after providing reasonable opportunity of being heard to the assessee. The assessee shall furnish a fresh computation of income to the AO in the light of the principles and propositions laid down in the cases referred to hereinabove. We order accordingly. 7. Next ground vide ground No. 2(iii) read with ground Nos. 6 to 6.2 is with regard to the assessee s claim of miscellaneous income as part of business income instead of treating the same as income from other sources as held by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period is to be treated as income derived from the eligible undertaking and deduction u/s 10A shall be allowed accordingly. The AO shall modify the assessment order in the light of this direction and allow the deduction u/s 10A in terms of this order. 8. Now we come to ground No. 2(iv) with ground Nos. 7 to 7.3 regarding disallowance of travelling expenses. 8.1 The AO made disallowance of Rs. 14,07,18,569 being the difference between travelling expenses of Rs. 37,27,52,156 incurred in the relevant previous year and the travelling expenses of Rs. 23,20,33,587 incurred in the immediate preceding previous year, by observing that there was an increase of about 50% in travelling expenses as compared to the immediately preceding previous year while turnover of the assessee in the current year had decreased in comparison to the last year. During the course of the assessment proceedings, the assessee submitted the details of the travelling expenses justifying foreign travelling expenses vide its reply dated 11.11.2009. The AO stated that no satisfactory reply or submission was submitted but only details of these expenses were provided by the assessee. The AO thereafter made comparison ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve been carefully perused. We have perused the profit loss account for the year ended on March 31, 2006, where the total turnover and other income as compared to the immediately preceding year are given as under: - Profit and Loss Account for the year ended March 31, 2006 Schedule Year ended Year ended 31-Mar-2006 31-Mar-2005 (Rupees) (Rupees) INCOME Turnover - Export 1,807,817,212 1,452,166,891 - Domestic 160,756,572 128,689,886 Other income 11 23,995,281 18,877,423 1,992,569,065 1,599,734,200 From the aforesaid details, we find that the export sales has been increased from Rs. 145,21,66,891 to Rs. 180,78,17,212 and the domestic turnover has been increased from Rs. 12,80,89,886 to Rs. 16,07,56,572 and other income has increased from Rs. 188,77,423 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be very much reduced thereby. In the present case, the Assessing Officer has not brought any material or evidence on record to show and establish that the travelling expenses incurred by the assessee during the year under consideration have not been expended for the purpose of assessee's business or has not been incurred in the course of carrying of any business activity of the assessee. In the light of the discussions made above, we delete the disallowance of travelling expenses made by the AO. In other words, this issue is decided in favour of the assessee. 9. Next ground is ground No. 2(v) read with ground No.8 relating to the assessee's claim of depreciation on computer peripheral at 60% which has been allowed by the AO only at 15%. The assessee claimed depreciation on computer peripheral at 60%. However, the AO allowed the depreciation only at 15% by treating the computer peripheral as normal plant and machinery. This issue is now squarely covered by the decision of jurisdictional Delhi High Court in the case of CIT v. BSES Rajdhani Powers Ltd. In ITA 1266/2010, dated 31st August, 2010, where it has been held that the Tribunal has rightly allowed depreciation on compute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rlasoft Inc.USA 1,214,810,071 Software development and related services Birlasoft (UK) Ltd. 127,966,629 12.2 For the purpose of determining the arm's length price in respect of the aforesaid international transactions, the assessee applied TNMM on the basis of internal comparison whereby operating profit margin earning from rendering software development and related services to associated enterprise were compared with the operating profit margin earned from rendering software development and related services to unrelated parties. The operating results of the assessee in respect of the international transactions with associated enterprise were computed at -0.47% as against the operating profit margin of -6.89% earned from unrelated parties. The detailed particulars in this respect are as under:- RELATED PARTY SEGMENT Particulars Rs . Income: 1,363,095,493 - Revenue from services Total operating income 1,363,095,493 Expenditure: - Salary cost 593,468,593 - Travel conveyance expenses 237,457,500 - Cost of outsourced work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted the profitability from services provided to AEs as well as unrelated parties of scientific basis considering defined allocation keys and this segmentation of the profitability of the international transactions with the Associated Enterprises and unrelated parties has been duly verified and certified by the Chartered Accountant. 12.5 Since the operating profit margin earned from rendering software development and related services to the associated enterprises was worked out to be at -0.47% , which is higher than the operating profit margin earned from rendering software development and related services to unrelated parties worked out at -6.89%, the assessee considered the international transactions to be at arm's length. However, the Transfer Pricing Officer rejected the internal bench marking carried out by the assessee for the reason that the assessee did not maintain segmental accounts for the related and non-related transactions and there was no segregation of these activities in the audited Financials. The TPO therefore, rejected the basis adopted by the assessee. The TPO then passed order under section 92CA(3) of the Act and bench marked the operating profit margin of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusion of Persistent Systems Ltd. and Zylog Systems Ltd. The details filed by AR have been considered. There is no other point on which TPO's order is to be disturbed except the following. The inclusion of Satyam Computers Ltd. in the final list of operating profit on operating cost should be removed from the calculation of mean margin of comparable, AO is directed to recalculate the margins and make appropriate additions. The TPO's order is accordingly modified." 12.7 From the aforesaid order of the DRP it is seen that the DRP has upheld the order of the TPO in rejecting the internal bench marking carried out by the assessee. In other words, the TRP has taken a view that the TPO has validly rejected the internal comparables of the assessee as the segmental account of the assessee is not reliable as the assessee has not maintained the same. The DRP has also observed that the inclusion of Satyam Computers Ltd. in the final list of operating profit on operating cost should be removed from the calculations of the mean margin of the comparable and the AO was directed to recalculate the margin and make appropriate addition. 12.8 After receiving the order passed under section 144C by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realized by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom transactions undertaken with associated enterprises and unrelated parties, and such comparison of profitability on transaction to transaction basis was to be preferred over entity level comparison for application of TNMM under the Transfer Pricing regulations. 14.2 The learned counsel for the assessee thus asserted that the comparison of related party transactions with unrelated party international transactions ("Internal Comparables") entered into by the same assessee provides more reliable and accurate data as compared to using external comparables on an. entity level. He, therefore, submitted that under the Transfer Pricing Regulations, the revenue authorities does not have mandate to have recourse to external comparables in case there exist internal comparables, which could be applied for determining the arm's length price of international transactions. At this stage, he pointed out that even the TPO in the assessee's case for assessment year 2005-06 accepted the internal benchmarking undertaken to determine the arm's length price and the TPO in that year in fact, has computed adjustment on the basis of internal benchmarking while applying TNMM. He further submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies selected by the revenue authorities for the purpose of determining Arm's Length Price in respect of international transactions entered into by the assessee company with its Associated Enterprises. The assessee company is engaged in the business of software development and related services. It has entered into international transactions with its Associated Enterprises. For the purpose of determining the arm's length price in respect of the international transactions with AEs, the assessee applied TNMM on the basis of internal comparison whereby operating profit margin earned from rendering software development and related services to associated enterprises were compared with operating profit margin earned from rendering software development and related services to unrelated parties. However, the TPO has rejected the assessee's this method and has determined Arm's Length Price of international transactions undertake by the assessee company with its AEs by comparing the same with uncontrolled comparable companies. The TPO has rejected the method of internal comparison adopted by the assessee for the reason that the assessee did not maintain segmental accounts and has not rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rusal of AS-17 read with paragraph 5 thereof, we find that AS-17 requires reporting of financial information or result about the different types of products and services that the concerned business segment produces, which includes different geographical areas of business operation. In the present case before us, we find that the assessee company provides same software related services to both Associated Enterprises and unrelated parties. It is not anybody's case that the assessee company is not providing same software related services to both Associated Enterprises and unrelated uncontrolled parties. Therefore, the assessee was not, required for segmental reporting nor for disclosing separate financial information in respect of transactions entered into with AEs and non-AEs. In other words, guidelines provided under AS-17 are not applicable to assessee's case. We, therefore, hold that the lack of segmental reporting for the reason that the transactions with AEs and non-AEs belong to the same item of software related services, cannot be made a basis for rejecting assessee's method of computing the Arm's Length Price by way of internal comparison made between the transaction with AEs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable uncontrolled transactions has been possible as so done by the assessee in transfer pricing documentation and therefore, recourse to compare the net margin of controlled transaction with net margin earned in comparable transactions by an independent enterprise is not required. The co-ordinate Bench of the Tribunal in the case of UCB India (P.) Ltd. v. ACIT (supra) has also observed that notwithstanding that there was no requirement for the assessee to report segmented results in the audited accounts, the assessee was required to provide working for operating profit margin from transactions undertaken with associated enterprises and unrelated parties, and such comparison of profitability on transaction to transaction basis was to be preferred over entity level comparison for application of TNMM under the Transfer Pricing Regulations. The relevant Para of the Tribunal's decision are Paras 68, 70, 71A, 71B, 72 73. 17. Furthermore, it is pertinent to note that the Transfer Pricing Officer himself in the assessee's own case relating to the assessment year 2005-06 has adopted the internal bench marking method to determine the arm's length price of the international transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer/Transfer Pricing Officer to determine arm's length price of international transactions with AEs by making internal comparison of the net margin earned by the assessee from the international transactions with associated enterprises and the profit earned by the assessee from the international transactions with unrelated parties. In this respect, the assessee has already given his working by allocating revenue and expenses to both the segmental and determined separate profitability. However, on perusal of the TPO's order, we find that the TPO has not undertaken any exercise to examine the correctness of the workings done by the assessee. We, therefore, restore this matter back to the file of the Assessing Officer/Transfer Pricing Officer for fresh adjudication and for the purpose of determining the arm's length price in respect of the international transactions undertaken with the associated enterprise by making internal comparison of profitability from the international transactions with associated enterprise and profitability from the international transactions with unrelated parties after allocating respective revenues and expenses to both the segmental. The AO/TPO shall provi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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