9911796707
TMI Blog2016 (6) TMI 1286X X X X Extracts X X X X X X X X Extracts X X X X ..... has come down to ₹ 5,96,21,856/- after the directions of the DRP. They have further held that in absence of any justifiable reasons the final set of 11 comparables as selected by the TPO is upheld. Exclusion of depreciation for working of PLI - Hed that:- We find the Delhi Bench of the Tribunal in the case of Schefenacker Motherson Ltd. (2009 (6) TMI 125 - ITAT DELHI) while deciding an identical issue has held that for determination of ALP under TNMM assessee was justified in taking profit level indicator of comparable companies as operating cash profits without taking into consideration depreciation. 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. TP adjustment has to be made only with respect to transactions with associated enterprises based on ALP and not with respect to total purchases/sales. We, therefore, restore this issue to the file of the AO/TPO for re-computation of the TP adjustment in respect of BPO activity. Ground raised by the assessee is accordingly allowed for statistical purposes. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e order of the AO on this issue is upheld and the ground raised by the assessee is dismissed. Denial of 10A deduction - Held that:- The number of technical manpower personnel transferred to the new unit at the end of the financial year does not exceed 50% of the total technical manpower actually engaged in development of Software of IT enabled products in new unit. Since the assessee satisfies the condition as per CBDT Circular No.14/2004 dated 08-10-2014 which has already been reproduced in the preceding paragraphs at Para 59 of this order, therefore, we are of the considered opinion that denial of 10A deduction in respect of various undertakings is not justified. This ground by the assessee is accordingly allowed. Allowing deduction for ESOP cost charged to the profit and loss account by observing that it is nothing but a notional entry and no cost is actually incurred by the company - Held that:- We find from the documents filed by the Ld. Counsel for the assessee that the DRP in subsequent years, following the decision in the case of Biocon Ltd. (2013 (8) TMI 629 - ITAT BANGALORE), has allowed the claim of ESOP cost. Under these circumstances, we deem it proper to restore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Seepz, Thane, Pune, Chennai, Noida and Gandhinagar. It provides on-site services by deputing its employees at the client locations. It is subsidiaries/associates in USA, UK and Germany. It has branch offices in Japan, Australia and Sweden. The total turnover of the assessee company during the previous year is ₹ 1047.59 crores which includes other income of ₹ 49.76 crores. From the details filed by the assessee the TPO noted that the assessee has entered into following international transactions during the previous year : Sr.No. Nature of transaction Amount (Rs.) Method 1. Software development services provided by the assessee 763,77,33,322 TNMM 2. Consultancy services availed by the assessee 88,62,000 TNMM 3. Recovery of expenses received 29,91,50,332 -- 4. Reimbursement of expenses paid 6,06,70,023/- -- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipts. 7. According to the TPO as per the Transfer Pricing as well as the OECD guidelines the transactional profit method should ideally be applied on a transaction to transaction basis but in appropriate situation may be grouped or aggregated. According to him the relevant controlled transactions may best be aggregated if it is impractical to analyse all profits of each individual transactions or if such transactions are so inter related that this is the most reliable means of benchmarking the outcome of the transaction against the arm s length outcome. He noted that in assessee s case 2 segments viz., IT services and BPO services are 2 distinctly identifiable segments. The assessee has been maintaining segmental information for these 2 segments in its Annual Text Reports. The separate profitability of these 2 segments has been maintained by the assessee and has also produced the same when asked to do so. The functions carried out in these 2 segments are also different functions and are by no means related or interlinked to each other. The assessee on its website has given a detailed description of the activities carried out under BPO segment. Therefore, the transactions per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO rejected the following comparables : 1. Ace software Exports Limited (Different business activity) 2. HCL Technologies Ltd. (Related party transactions) 3. CMC Limited (Related party transactions) 4. Mphasis BFL Limited (Related party transactions) 5. Datamatics Technologies Limited (Related party transactions) 6. Tata Share Registry Limited (Different business activity) 7. MCS Limited (Different business activity) 10. So far as the objection of the assessee regarding acceptability of certain companies as comparable as proposed in the show cause notice stating that these comparables are not acceptable as comparables the TPO partly accepted the same contention. Accordingly the TPO after considering the submission made by the assessee rejected the following 7 companies in the final analysis accepting the contention of the assessee : 1. Quantum Eservices Pvt. Ltd., 2. Tricom India Ltd., 3. Indus Networks Ltd. 4. Nucleus Netsoft and GIS India Ltd. 5. Wisec Global Ltd. 6. Ultramarine Pigments Ltd. 7. Triton Corp Ltd. 11. He however accepted the following as comparables after rejecting the contention of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 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 ₹ 11,92,55,177/- to the value of international transactions relating to BPO services. 14. The assessee carried the matter to the DRP. After considering the arguments advanced by the assessee the DRP held that the transactions pertaining to IT services and BPO services are fairly distinct in nature and scope and cannot be considered to be closely interlinked as per the definition given of the word transaction at Rule 10A of the I.T. Rules, 1962. The DRP further directed the AO to verify the correct working which was certified in its report and submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depreciation ranges from 4.20% to 37.51% with an arithmetic mean of 19.87% as against PLI of the assessee company at 22.79%. He submitted that the TPO has proposed different set of comparables. Even in respect of comparable company by the TPO, the PLI before depreciation is 33.04% against companies the PLI of the assessee before depreciation at 29.43%. 19. Referring to the decision of the Delhi Bench of the Tribunal in the case of Schefenacker Motherson Ltd. Vs. ITO and Another reported in 123 TTJ 509 he submitted that the Tribunal in the said decision has held the working of PLI before depreciation is justified. In his alternate contention he submitted that the amount of adjustment should be computed on the cost attributable to the business with Associated Enterprises and not on the total cost. Referring to page 67 of the paper book he drew the attention of the Bench to the break- up of the turnover with the Associated Enterprise and Non- Associated Enterprises. He further submitted that the TPO has not given the benefit of +/-5% as per the proviso to sub-section (2) of section 92C on the basis of amendment made w.e.f. 01- 10-2009. He submitted that various benches of the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciation being an integral part of operating cost has to be taken into account. However, this proposition overlooks an important point in the sense that if one includes depreciation on all the assets, then depreciation on unutilized capacity is also taken into account and then it is contrary to the principles laid down by the different Benches of the Tribunal that adjustment is required to be made for capacity utilization. Therefore, the above decision referred to by the Ld. Departmental Representative does not lay down the correct law. He submitted that in any case when two views are possible, then the view favourable to the assessee has to be considered. He submitted that the PLI before depreciation as computed above is 33.54% for the comparables and 29.43% of the assessee company. Therefore, the difference being less than 5% no adjustment is called for. 23. We have considered the rival arguments made by both the sides, perused the orders of the AO/TPO/DRP and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the TPO in the instant case has initially proposed adjustment of ₹ 11,92,35,177/- on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rables. Only receipts and expenditure, having connection with international transactions, were required to be taken into account. Any receipt or expenditure having no bearing on price or margin of profit could not be taken into consideration. It is evident from statutory provisions quoted above that it is nowhere provided that deduction of depreciation is a must. Depreciation can be taken into account or disregarded in computing profit depending upon the context and purpose for which profit is to be computed. There is no formula which would be applicable universally and in all circumstances. Net profit used in r. 10B can be taken to mean commercial profit as held by the TPO and confirmed on appeal by the learned CIT(A). But depreciation in such profit on commercial principles has to be the actual ~mount by which the assets of business got depleted between the two dates separated by a year. It cannot be deprecation under tax or companies rules or as per policy of the company. In the case in hand, Revenue authorities went wrong in disregarding the context and purpose for which the net profit was to be computed. Depreciation, which can have varied basis and is allowed at differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt 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. (underlined, italicized in print, to emphasise) Sufficient evidence to show material differences on account of depreciation 20.3 The claim of depreciation can lead to great difference in computing profits of comparables as depreciation is permitted depending upon nature of plant/machinery and year of use. In 5th or 6th year of commencement, depreciation can be 25 to 30 per cent of amount allowed in first year to an enterprise. In these appeals, the TPO had excluded certain comparables after noting differences in their year of start of operations. These were Bhagwati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciation 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 rejection is not sound in law. Adverse inferences against taxpayer unjustified 21. Learned CIT(A)'s observations that taxpayers' TP report should contain analysis of distinction/dissimilarities between taxpayer and comparable also go beyond requirement of r. 10C and prescribed Form 3CEB. Therefore, his refusal to look into details and adverse inference drawn by him against the taxpayer is legally unjustified. The taxpayer was to furnish particulars required by Form 3CEB and to answer questions raised in the said form. The prescribed form only requires to give, method used for determini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciations 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 whether the cost paid or charged for international transactions was at arm's length or not. The factors which go to influence price, cost or profit are/were relevant for computing profit and not depreciation having no direct connection with price or profit but responsible for wide differences. The case of the Revenue is not clear. If depreciation is not leading to any difference, its exclusion is immaterial. If it is leading to differences, then differences are required to be adjusted, as required by provisions of IT Regulations. There is no way to dislodge the claim of the taxpayer. The context and purpose of legislation a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Schefenacker Motherson Ltd. (Supra) wherein a detailed order has been passed as the same was not brought to the notice of the Bench. Further, we also find merit in the submission of the Ld. Counsel for the assessee that the Tribunal while holding that adjustment is required to be made for difference in capacity utilization has held that depreciation being integral part of operating cost has to be taken into account. Therefore, we find merit in the submission of the Ld. Counsel for the assessee that if one includes depreciation on all assets then depreciation on unutilized capacity is also taken into account and then it is contrary to the principles laid do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mounts 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 capital of the assessee would have increased. No justifiable reason was submitted before them as to why the assessee had not recovered any interest from its associated enterprises during the relevant A.Y. 2006-07. 31. We find identical issue had come up before the Tribunal in assessee s own case in A.Y. 2005-06. We find the Tribunal had restored the issue to the file of the AO with the following observations : 26. We have heard the rival contentions and perused the record. The first aspect of the issue is that admittedly, the transaction of charging interest from AEs exceeding credit period amounts to international transaction under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 CIT(A) in applying the Indian PLR rates. 29. The issue arising before us is in relation to the arm's length price of inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 loan to the associated enterprises in US dollars, and assessee was also receiving interest from the associated enterprises in Indian rupees. Once the tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 2,86,27,089/- instead of ₹ 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 upon by the learned Departmental Representative for the Revenue where it was directed that the interest should be computed on the basis of SBI base rate plus 150 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 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 amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 up before the Tribunal in assessees own case in the preceding assessment year and the Tribunal at para Nos. 12 to 18 has observed as under : 12. The issue raised by the Revenue v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 Technology Park and are registered with the STPI; it was asserted that all the three units satisfied the prescribed conditions under section 10A(2) of the Act. In respect of all the three units, it was submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 identifiable undertaking separate and distinct from the existing business. Since the provisions of law as contained in section 15C(2)(i) and 10A(2)(ii) (iii) are in effect and in substance in pari materia a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 expansion of Software Conversion unit. Similarly, approval for Akruti unit and Millennium Business Park unit reflected them as expansions of Sigma unit and TTC unit respectively. On this singular basis, the Assessing Officer treated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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 forward integration and amended the letter of permission to include 12 Hydroxy Stearic Acid of 12,000 MT in the very next sentence. It is observed that Govt also approves of your 8 request for the import of additional capital goods worth ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 since there is no change in factual aspects, we uphold the order of CIT(A) in allowing the claim of deduction under section 10A of the Act in respect of three units i.e. Chinchwad, Akurdi and Millennium Business Park as the same were independent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 respect of unit at SPZ 47, the new employees totaled to 65 along with transferred employees of 6, resulting in total employees of 71 percentage and the percentage of transferred employees to the total employees was 8.45%. Hence for both the units even if we consider the transferred emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds 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: a. In drawing conclusion of earning more than average profits on the basis of comparables used in transfer pricing analysis having different purpose b. In holding that profit of ₹ 69,23,94,757 is more than ordinary profit and hence not eligible for deduction u/s 10A, without establi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 position during the relevant year, this issue is again decided in favour of the assessee. 43. We further find the Pune Bench of the Tribunal in the case of M/s. Honeywell Automation India Pvt. has held as under : 22. Before we proceed further, it would be appropriate to examine the scope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an 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 profits. Therefore, section 10A(7) r.w.s. 80- IA(10) of the Act can be invoked only where it is shown that the course of business is so arranged which reflects an abuse of tax concession whereby the business transacted between two entities is so arranged, which produces to the assessee more than the ordinary profits which might be expec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing 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 plain language but the same has to be understood in the context in which it is placed in the section. Notably, section 80- IA(10) of the Act restricts the plain meaning of the term arranged because it is placed between the words ..the course of business between them is so arranged that the business transacted between them produces to the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fects 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 more than the ordinary profits would suffice. In other words, as per the Revenue, the existence of close connection and high profits would lead to a presumption that there is an arrangement within the meaning of section 80- IA(10) of the Act. The aforesaid plea, in our view, not only belies the language of section 80-IA(10) but also the legislative intent whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 apple. It is known fact that profitability of software units is always higher than hardware unit. The test whether the appellant has earned more than ordinary profits, in this case, the answer is obvious NO, even as found by the AO. When the profits earned are reasonable and not excessive, there is no reason to sustain the addition Further there is no evidence of existence of any a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 out on the basis of arm's length price. The Transfer Pricing Officer, therefore, concluded that no transfer pricing adjustment is called for in the present case. The Assessing Officer has made the reference to the Transfer Pricing Officer under section 92CA. The reference is made for the purpose of computing income arising from an international transaction with regard to the arm's leng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 has held that the Assessing Officer was not justified to invoke the provisions of section 80-IA(10) read with section 10B(7) so as to reduce the eligible profits on the basis of the arm's length price computed by the Transfer Pricing Officer without showing how he determined that the assessee had shown more than ordinary profits . As rightly argued by learned senior counsel the arm's length ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment 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 of the Assessing Officer to restrict the deduction u/s 10A of the Act to ₹ 7,74,60,281/- as against the claim of ₹ 36,35,09,382/- is hereby set-aside. Thus, assessee succeeds on this aspect. 44. In view of the above, we restore the issue to the file of the AO with a direction to verify the records and if under identical circumstances the DRP has decided the issue in favour of the assessee in its own case for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee that the issue has also been dealt with by the Hon ble jurisdictional High Court in the case of Hindustan Unilever Ltd v DCIT 38 DTR 91 (Bom.) affirming the stand of the assessee. 5. In the above background, we find ample merit in the Ground of appeal raised by the assessee. The Assessing Officer, while computing the income did not allow the claim for the loss suffered in the units which were otherwise eligible for benefits of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 following the decision of the Tribunal and in absence of any contrary material brought to our notice this ground by the assessee is allowed. 49. Ground No. 6 was not pressed by the Ld. Counsel for the assessee for which the Ld. Departmental Representative has no objection. Accordingly, this ground by the assessee is dismissed as not pressed . 50. Ground of appeal No.7 by the assessee reads as under : 7. In respect of computation of tax liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee 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 ₹ 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 the profits and gains of the units/undertakings subsequently set up by the company are not eligible for deduction u/s.10A of the Income tax Act, 1961. c. In denying the deduction u/s.10A in respect of various eligible undertakings on the basis of the nature of business. d. In re-examining the conditions of eligibility of deduction u/s.10A in respect of various undertakings established in earlier years. The Assessing Officer ought to have appreciated t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 of comparables used in transfer pricing analysis having different purpose. b. In holding that profit of ₹ 121,53,71,070/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious 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 matter is pending before Hon ble Bombay High Court. 68. Aggrieved with such order of the AO the assessee is in appeal bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that year only. He further submitted that eventhough as per the provisions of section 32(2) brought forward unabsorbed depreciati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee 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 ₹ 3,31,98,668/- to the total income on account of interest chargeable on delayed receipts from the associated enterprises following adjustment of ₹ 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 ₹ 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 adjustment without applying any specified method. 78. After hearing both the sides we find the above ground is identical to ground of appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertakings under section 10A. 85. After hearing both the 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 ₹ 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 ₹ 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 apply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ligible undertakings. 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 Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, the assessee satisfies the employee condition as per CBDT Circular No.14/2004 dated 08-10-2014 which has already been reproduced in the preceding paragraphs. Under these circumstances we hold that the denial of 10A deduction in respect of various undertakings is not justified. Grounds raised by the assessee are accordingly allowed. 92. Ground of appeal No.4 by the assessee reads as under : Not setting off of losses of 10A undertakings against other income by holding that losses of units, if eligible u/s.10A, shall not be adjusted against taxable profits 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncluding the terms and conditions are governed by SEBI guidelines. Further, the accounting of the same is also governed by guidance note issued by the Institute of Chartered Accountants of India, i.e. guidance note on accounting for employee share based payments. Thus the amount charged to the profit and loss account representing the cost or expenditure on employee compensation by way of ESOP is determinable and scientifically computed. Hence, the same is allowable as deduction while computing the total income. The assessee also relied on the decision of the Bangalore Special Bench of the Tribunal in the case of Biocon Limited. 98. 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 ₹ 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, th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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