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TMI Blog2015 (5) TMI 970X X X X Extracts X X X X X X X X Extracts X X X X ..... b) In confirming the amount of adjustment of Rs. 3,12,52,083/- on account of delayed recoveries from Associated Enterprises c) In holding that the TPO has applied external CUP of international bank rate d) In not appreciating that there is no industry practice to charge interest on delayed recoveries from customers and the appellant also has not charged interest on delayed recoveries from Non-Associated Enterprises e) Without prejudice to above, in holding that the amount of adjustment is required to be computed @ 7% being the prevailing rate on short term deposits of 90 days 2. The appellant craves leave to add, modify or withdraw any of the grounds of appeal at the time of hearing. 4. The Revenue in ITA No. 342/PN/2013 has raised the following grounds of appeal:- 1) The learned Commissioner of Income tax (Appeals) erred in holding that there was no splitting of the existing business and the business is not integral part of the original undertaking since 1980, commonality of business utilization of certain resources and allocation of common expenses etc. does not in any way come in the way to decide the eligibility of deduction u/s.10A and, therefore, all the undertakings o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowing set off of the 10A unit losses against the business profit even though the assessee had not exercised the option under sub section (8) of section 10A of not to avail the benefit of section 10A. 5. First, we shall take up the appeal filed by the Revenue, under which the issue in ground of appeal No.1 is against the allowance of deduction under section 10A of the Act in respect of all the undertakings of the assessee. The Revenue vide ground of appeal No.1 is aggrieved by the order of CIT(A) in allowing deduction under section 10A of the Act to the assessee in respect of its 13 units. The Revenue vide grounds of appeal No.2 and 3 is aggrieved by the order of CIT(A) in allowing the deduction under section 10A of the Act in respect of three units i.e. Chinchwad, Akurdi and Millennium Business Park. Further, the Revenue is in appeal against the allowance of deduction under section 10A of the Act in respect of new unit at Bangalore and SPZ 47 vide grounds of appeal Nos.4 and 5. Another issue raised by the Revenue vide ground of appeal No.6 is against allowance of deduction under section 10A of the Act in respect of other 8 units. The Revenue vide grounds of appeal No.7 and 8 is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter considering the provisions of section 10A of the Act noted that the costing and pricing of the software development / product was based on the number of persons / engineers required for a given period to complete the given project. Therefore, manpower was the main yardstick to ascertain the independence of units. So far as the deployment of capital and manpower and splitting of the business and production on such units was concerned, the Assessing Officer noted that in the assessee's line of business, software engineers were the main capital and asset which were not fixed to ground or place, but they were highly mobile and transferrable and even the work they did was transferrable from one place to other. In line thereof, the Assessing Officer made enquiries as to whether in the new unit, substantially same persons were carrying on the same business or not. In the case of the Bangalore unit, more than 28% of the software engineers were old employees of the company, working in various existing units and had been transferred / shifted from such old units, during the first year of operation and the new unit as such, was carrying on the same business of software development. As pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee was held to be eligible for deduction under section 10A of the Act in respect of three units. The CIT(A) further noted that his predecessor given relief for 11 units. Out of remaining 11 units in the earlier assessment years, the Tribunal had given relief to the assessee with respect to only to three units, but since no Miscellaneous Petition was filed by the department, then he was of the view that the assessee is entitled to the claim of deduction in respect of balance units. Further, he considered the claim of the assessee in respect of two units established during the year and after deliberating upon the issue, held that carrying on of new business was not necessary to avail the deduction under section 10A of the Act. In respect of SPZ-47 unit, the CIT(A) observed that the Assessing Officer had denied the deduction as the said unit was a system hub, but as per the assessee, the said unit was not a system hub and it used software technology with which it could carry out the work of de-bugging, patch-work and other software writing from India to the client's location in a foreign country. The CIT(A) thus, held that the objection raised by the Assessing Officer was mis-conceive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ligible units at Chinchwad, Akruti and Millennium Business Park were not new units but only expansion of the 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 O fficer 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly point to be seen in the present case is whether the three units can be said to be formed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the decision of the Mumbai Bench of the Tribunal in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. The only plea of the Revenue 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the matter, 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 years and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 reconstruction 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 respect of unit at SPZ 47, the new employees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eparate 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. 19. Now, coming to the grounds of appeal No.7 and 8 raised by the Revenue. The issue is with regard to the set off of losses of units eligible for deduction under section 10A of the Act against business income of the undertaking. The said issue is squarely covered by the order of the Tribunal in assessee's own case relating to assessment year 2004-05, which in turn had followed the earlier order of the Tribunal in assessment year 2002-03 observing as under:- "14. In Ground No. 5, the 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. 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 bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to set-off of losses sustained by the 10A eligible units against the normal business income. In this view of the matter, we therefore find no reason to uphold the orders of the authorities below on the impugned aspect. As a result, we set aside the order of the Commissioner of Income-tax (Appeals) and direct 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 computing income as per normal provisions of the Act. As a result thereof, Ground of appeal No .1 raised by the assessee stands allowed." The learned Counsel for the assessee also filed a copy of the judgment of the Hon'ble Bombay High Court in assessee's own case (supra) for the assessment year 2001-02 wherein the claim of the assessee relating to the set off of the losses against the other business profits was approved by the Hon'ble High Court. In view of this, we accordingly 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nst the credit period provided under the respective contracts for different assessment years. On examination of details provided by the assessee, the TPO noted that there was substantial delay in receipt of payments from AEs as against dues from third parties. The tabulated details relating to the year under consideration are available at page 2 of the order passed by the TPO under section 92CA(3) of the Act. The weighted average number of days' delays in respect of AEs was 39 and in relation to non- AEs was 25 for the year under appeal. 23. The assessee for the year under consideration had received interest of Rs. 3.34 crores on its bank deposits, loan to employees and others as per tabulated details available at page 6 of the order of TPO. The plea of the assessee before the TPO was that as general business practice in the software industry, no interest was charged on the delayed receipt from customers. The TPO considered the copies of communication vis-à-vis the rates of interest as might have been chargeable from the assessee and / or from AEs for foreign currency loans and determined the arm's length price of interest charged by the assessee from its AEs @ 7.25% i.e. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessment year 2002-03 in Income Tax Appeal No.1148/ 2012 vide judgment dated 28.02.2013 has held that in view of the amendment by Finance Act, 2012 with retrospective effect from 01.04.2002, the said transaction of charging of interest from the AEs is covered under the amended provisions of section 92B(1) of the Act. The second aspect of the issue arising before us is whether interest charged by the assessee from its AEs was at arm's length price. The assessee was carrying on its business through its AEs and had settled some credit terms with its AEs vis-à-vis the payments to be received by it. In the Form No.3CEB, the assessee had declared the transaction of interest received on delayed payments with its AEs as an international transaction, under which it had received Rs. 3.12 crores. However, during the proceeding before the TPO, it was noted that there was delay in realization of amount due from AEs beyond credit perio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Engineering (P) Ltd. Vs ACIT (supra) had observed as under:- "15........while benchmarking the international transactions what has to be seen is the comparison between related transactions i.e. where the assessee has advanced money to its associated enterprises and charged interest then the said transaction is to be compared with a transaction as to what rate the assessee would have charged, if it had extended the loan to the third party in foreign country. Once there is a transaction between the assessee and its associated enterprises in foreign currency, then the transaction would have to be looked upon by applying the commercial principles with regard to the international transactions. In that case, the international rates fixed being LIBOR+ rates would have an application and the domestic prime lending rates would not be applicable. The assessee has further explained that it had raised the loan from Citi Bank on international rates for the purpose of investment in the share appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 cent which was higher than the LIBOR rate, no addition on this account was liable to be made in the hands of the assessee. In the circumstances, the addition made by the Assessing Officer on this count was deleted." 17. The Mumbai Bench of the Tribunal in DCIT Vs. Tech Mahindra Ltd. (2011) 12 taxmann.com 132 (Mum.) held that where there is a choice between the interest rate of currency other than the currency in which transaction had taken place and the interest rate in respect of the currency in which transaction has taken place, the latter should be adopted. Where the transaction is between the assessee and its associated enterprises in foreign currency and the transaction is international transaction, then the transaction would have to be looked upon by applying commercial principles in regard to international transactions. 18. Similar principle has been laid down by the Mumbai Bench of the Tribunal in Hinduja Global Solutions Ltd. Vs. ACIT (2013) 35 taxmann.com 348 (Mumbai - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to benchmark the transaction of the assessee with its AEs and the international rates fixed by LIBOR would come into play. There was substantial delay in receipt of payment from AEs and substantial amount stood unrecovered from the AEs beyond the stipulated periods. The assessee initially did not charge interest from the AEs and subsequently, charged interest from AEs at AFR i.e. America n Federal Rate @ 2.98%. The amount is in the character of loan or borrowing after the stipulated credit period and consequently, such recovery of dues in the international transaction with its AEs is to be benchmarked by applying CUP method of international bank rates. Accordingly, we hold that LIBOR plus rates have to be applied to the amounts due from the AEs beyond the period of 25 days, which was the weighted average number of days delay allowed to the third parties. After excluding the period of 25 days, interest is to be charged on the balance number of days of delay by applying LIBOR plus rat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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