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TMI Blog2019 (8) TMI 1226X X X X Extracts X X X X X X X X Extracts X X X X ..... terest charged by the assessee-lender. Determination of the arm's length rate of interest - CIT(A) has held that average EURIBOR for the A.Y. 2007-08 should be considered as a benchmark - HELD THAT:- While calculating EURIBOR, 15% of the lowest and 15% of the highest interest rates collected by a panel of European banks are eliminated and the remaining 70% form the basis for its calculation. In such circumstances, EURIBOR, being, not an average rate at which the loans are advanced by European banks to borrowers, cannot per se be characterized as a comparable uncontrolled rate of interest at which loans are advanced in Germany. On lines of EURIBOR, there is LIBOR (London Inter-bank Offered rate), another rate which is applied on behalf of British Bankers Association. Similar to EURIBOR, LIBOR is also a rate at which major global banks lend to one another in the international inter-bank market on short-term basis. In calculation of LIBOR, 25% of lowest and 25% of the highest values are eliminated and the remaining 50% are considered for determining LIBOR. LIBOR, as such, can also not be construed as a comparable uncontrolled transaction - in CIT Vs. Aurionpro Solutions Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turnover', one as an independent numerator in the formula and the other constituting part of total turnover in the denominator. To put it simply, telecommunication expenses etc. which have been excluded by the AO from the ambit of `export turnover' would also require exclusion from `total turnover'. Apart from the Hon'ble Karnataka High Court in Tata Elxsi Ltd. [ 2011 (8) TMI 782 - KARNATAKA HIGH COURT] , the Hon'ble Delhi High Court in CIT Vs. Genpact India [ 2011 (11) TMI 119 - DELHI HIGH COURT] has also held that communication expenses reduced from export turnover should also be reduced from total turnover for the purpose of deduction u/s.10A. Computation of deduction u/s.10A - as contended that since income from DTM and onsite services was not derived from export of computer software, the same did not qualify for the benefit of deduction - HELD THAT:- The expression 'profits of the business of the undertaking' as used in sub-section (4), in fact, gives meaning to the expression `derived from export of computer software' as used in sub-section (1) and amplifies the scope of the latter by mitigating the rigor and making the provision libera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it as per Explanation 1 to section 115JB of the Act. Now let us examine the treatment to be given in accounts on reversal of lapsed ESOPs. It is found that the SEBI guidelines, as clarified, and ICAI Guidance Note now provide for taking such amount to General Reserve Account. Initially, there was some non- meeting point between the SEBI guidelines and the ICAI Guidance Note on the treatment to discount on lapse of the ESOPs. Vide para (ii)(b) of its letter No. SEBI/CFD/DIL/ESOP/4/2008/04-08, dated 04-08-2008, the SEBI has clarified the position by amending the SEBI guidelines with immediate effect so that it is in line with the accounting treatment provided by ICAI. This position has been discussed by the ld. CIT(A) in para 256 of the impugned order, which has remained uncontroverted. Thus, it is seen that both the SEBI and ICAI guidelines are now alike and provide that the amount of discount on lapse of ESOPs should be credited to the General Reserve Account. We see no reason in not approving the action of the ld. CIT(A) in holding that such amount of ₹ 57,71,000/- was righty taken to the General Reserve Account instead of crediting it to the Profit and loss account a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two AEs, namely, Mascot Systems GmbH, Germany, on which interest of ₹ 5,21,928/- was charged @ 1.50%; and M/s. Symphoni Interactive, LLC, USA, on which interest of ₹ 24,54,741/- was charged @ 6%. The assessee declared such international transactions at ALP. The TPO observed that the arm's length interest rate would be the one which would be earned by the assessee by advancing loan to an unrelated party in India. Applying the Comparable Uncontrolled Price (CUP) method as the most appropriate method, the TPO determined the arm's length rate interest at 14%, being, the interest that is earned on BBB bonds in India. As against the actual interest received from two AEs at ₹ 29,76,669/-, the TPO determined arm's length interest income at ₹ 1,10,33,725/- and accordingly recommended transfer pricing adjustment of ₹ 80,57,056/-. The AO, in his order dated 21-02- 2011 passed u/s.143(3) r.w.s. 144C of the Income-tax Act, 1961 (hereinafter called 'the Act'), made the transfer pricing addition of the equal amount. The assessee carried the matter before the ld. CIT(A), who held that the domestic Prime Lending Rate would have no application in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ispute raised by the Revenue on this issue. The first is that the rate of interest should be considered with reference to the prime lending rate prevalent in India and the second is that the reduction in rate to 4.42% by the ld. CIT(A) is not justified. 6. As against the TPO's point of view that since the assessee in India advanced loan to its AE in Germany, which if not given, would have fetched interest @14% in India, the ld. CIT(A) has held that interest rate prevalent in the country in which the loan is received, should be considered for determining the ALP of transaction of interest received. We find that there is almost judicial consensus ad idem at the higher appellate forums on the question of which country, that is the borrower or the lender, should be considered for determining the arm's length rate of interest on loans advanced to the AEs. The Hon'ble Bombay High Court in CIT Vs. Tata Autocomp Systems Ltd. (2015) 374 ITR 516 (Bom.) has held that the ALP in case of loan advanced to AEs should be determined on the basis of rate of interest charged in the country where loan is received. The Hon'ble Delhi High Court in CIT Vs. Cotton Naturals (I) Pv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e), another rate which is applied on behalf of British Bankers Association. Similar to EURIBOR, LIBOR is also a rate at which major global banks lend to one another in the international inter-bank market on short-term basis. In calculation of LIBOR, 25% of lowest and 25% of the highest values are eliminated and the remaining 50% are considered for determining LIBOR. Therefore, LIBOR, as such, can also not be construed as a comparable uncontrolled transaction. The Hon'ble Bombay High Court in CIT Vs. Aurionpro Solutions Ltd. (2017) 99 CCH 0070 MUM-HC approved the action of the Tribunal in considering LIBOR +2% as the arm's length rate as against the TPO applying LIBOR plus 3%. Drawing an analogy from this position, we hold that EURIBOR+2% should be considered as arm's length rate of interest for determining the ALP of the international transaction of interest received by the assessee from Mascot Systems GmbH, Germany. 10. Before parting with this issue, we would like to clarify that the ld. CIT(A) has considered 4.42% as EURIBOR applicable for the assessment year under consideration by relying on an order of the Tribunal, in which the average LIBOR was consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the eligible undertaking under Chapter IV of the Act and not at the stage of computation of total income under Chapter VI of the Act. The net effect of this judgment is that the deduction is to be allowed qua the eligible undertaking standing on its own without any reference to the other eligible or non-eligible units or undertakings of the assessee. In other words, one needs to ascertain the profitability of the eligible units on stand-alone basis. If there is a profit in one or more eligible units, deduction u/s 10A should be allowed on the same notwithstanding loss in other eligible or non- eligible units. In view of this binding precedent from the Hon'ble Apex Court, it is vivid that the ld. CIT(A) has taken an unexceptionable view on this point, which cannot be interfered with. 13. The ld. DR argued that if that is the case, then the AO should be directed to find out if there is some link between the units earning profit and units suffering losses so that in such a scenario the profit/loss from such connected or linked units could be aggregated. There cannot be any dispute on the correctness of the proposition put forth on behalf of the Revenue. However, it is f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c turnover. For example, if export turnover is ₹ 100 and domestic turnover is ₹ 80, then total turnover would be ₹ 180 (₹ 100 + ₹ 80), which is sum total of both the export and domestic turnovers. If certain portion relevant to export of goods, say ₹ 10, is not to be considered as part of export turnover of ₹ 100, it is but natural that the amount of export turnover would come down to ₹ 90. In that case, total turnover would be ₹ 170 (₹ 90 as export turnover + ₹ 80 as domestic turnover). Adverting to the facts of the instant case, we find that since the amount of telecommunication charges etc. has been held by the AO himself as not forming part of `export turnover', the sequitur is that the same would also not form part of `total turnover', as there cannot be two different figures of `export turnover', one as an independent numerator in the formula and the other constituting part of total turnover in the denominator. To put it simply, telecommunication expenses etc. which have been excluded by the AO from the ambit of `export turnover' would also require exclusion from `total turnover'. Apart from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not related to STP undertakings in India was reduced, which brought down the amount of revised deduction u/s.10A to ₹ 47,44,88,710/-. The Ld. CIT(A) accepted the assessee's claim and overturned the action of the AO on this point. 17. Having heard both sides and gone through the relevant material on record, it is observed that the AO reduced profit relatable to Deputation of Technical Manpower (DTM) and Onsite software services allegedly not related to STP undertakings in India at ad hoc 4% and 20% of the eligible software development income u/s 10A of the Act as computed by him. Primarily, no reason has been attributed by the AO as to how 4% and 20% rates were determined for reducing the amount of deduction on account of DTM and onsite activities. 18. The assessee earned income from software development activity in all of its six eligible units. The question which falls for our consideration is as to whether the AO was right in holding that a part of consideration received by the assessee from the Deputation of Technical Manpower (DTM) activities and Onsite activities should be excluded from the eligible revenue? 19. Section 10A is a special ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he work to be done is drawn. In the Development stage, which is also called coding stage, the actual work is started for translating the plan into action. It is one of the most important stages of software development. In this stage, the work is divided into several modules/programmes, each of which is independently developed and coded. This activity of development of modules and coding may be done simultaneously or one after another, depending upon the nature of module and its placement or setting within the overall product. The development stage produces a final software product, which is then tested on stringent standards to ensure that it measures up to the required specifications. Once the computer software or the product passes through the testing stage, it is given to the customer for actual use. Any product so developed may need maintenance and then upgradation with the passage of time. A close scrutiny of the life cycle of a customized software, as discussed above, discerns that a lot of interaction is required between the computer software developer and the customer, which is almost present in most of the stages of software development, starting with conceptualization its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sections 10A, 10AA and 10B provided such deputation of manpower is for the development of such software and all the prescribed conditions are fulfilled.' It was brought to the notice of the CBDT that the AOs were not even following the clarification given in the Circular dated 17.1.2013. Once again, the CBDT issued Instruction no. 17/2013 dated 19.11.2013 clarifying that: `The undersigned is directed to convey that the field authorities are advised to follow the contents of the Circular in letter and spirit. It is also advised that further appeals should not be filed in cases where orders were passed prior to issue of Circular but the issues giving rise to the disputes have been clarified by the Circular'. There is hardly any need to accentuate that income-tax authorities are mere implementing agencies of the Parliament intent expressed through the enactment. They cannot suo motu usurp the power to indirectly legislate by not following the mandate of the provisions. Other income-tax authorities are bound to follow the command of the CBDT given through Circulars, even if they are not personally agreeable with the same. 22. On going through the directive of the Exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form, generating the income otherwise deductible u/s 10A of the Act. Rather the position of the employees of the assessee working outside India under its own control and guidance has been acknowledged by the AO in his order for the A.Y. 2009-10 and the ld. DR could not controvert that the nature of business in such later year was any different from that for the year under consideration. 24. To fortify the view point of the AO, the ld. DR placed on record a copy of the sample agreement between the assessee and its customers. This Consulting Service Agreement was entered into between the assessee and Royal Bank of Canada on 15-05-2006. Clause 1 of the Agreement gives description of Services and states that the assessee has agreed to perform the services of: `Technical system analysis for Capital Markets Client Authentication Infrastructure Consolitation as well as RBC Express TruePass upgrade projects'. Dates of commencement and completion have been given as 15-05-2006 and 31-10-2006 respectively. Charges have been given in Clause 3 of the Agreement as hourly rates below $66 for two Technical System Analysts. Clause 3.2 provides that the assessee may invoice the Bank mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the onshore services rendered abroad have link with agreement for services from eligible units in India. 26. On circumspection of the sample copy of the Agreement, filed by the ld. DR, between the assessee and Royal Bank of Canada as a representative of all such similar Agreements, it turns out that the assessee entered into Masters Service Agreement with several customers outside India. There was a specific tenure within which the assessee was to develop and deliver computer software or render the eligible service. A total consideration was received by the assessee under such Master Service Agreements. The AO has excluded a part of such total consideration as attributable to DTM and onsite software services by treating the same as unrelated to STP undertakings in India. The two amounts disqualified by the AO at ₹ 2.43 crore and ₹ 12.17 crore are part of the total consideration agreed between the assessee and its overseas customer for development of computer software or rendering of the eligible service, income from which has otherwise been held to be eligible for deduction u/s.10A. We fail to comprehend as to how a part of the total consideration as per Maste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision in itself. The expression `profits ... derived ...from .. export of ... computer software' employed in sub-section (1) of section 10A of the Act has been further elaborated in sub-section (4) to mean: `the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking.' The expression `profits of the business of the undertaking' as used in sub-section (4), in fact, gives meaning to the expression `derived... from ... export of ... computer software' as used in sub-section (1) and amplifies the scope of the latter by mitigating the rigor and making the provision liberal and more inclusive. There is no gainsaying that `profits of the business of the undertaking' are not only the profits derived from the export of computer software but also those which are attributable to the business of undertaking. So long as there exists a direct link between the eligible undertaking and some income, the same is profit of the business of undertaking, even if may not be derived from the export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 10,70,255/- on this score is in order, which does not warrant any further interference. This ground is, therefore, not allowed. 33. Ground no. 11 deals with discount on lapsed ESOPs amounting to ₹ 57,71,000/- taken to General Reserve instead of transferring it to the Profit and loss account in the computation of `book profit' u/s.115JB of the Act. Ground no. 12 is connected with this ground, under which the Revenue is aggrieved by the direction of the ld. CIT(A) to apply the provisions of section 41(1) towards value of lapsed ESOPs becoming chargeable to tax in the year in which deduction was claimed. 34. Succinctly, the facts of this ground are that the Registrar of Companies, Bangalore sent a reference to the AO indicating that a sum of ₹ 57,71,000/-, being, discount on ESOP on lapse of option was transferred by the assessee to General Reserve account instead of transferring it to the Profit and loss account. The AO noticed that at the time of issuance of ESOPs on discount, the assessee claimed deduction by way of debit to its Profit and loss account. Since it was reversal of such discount on the lapsing of ESOPs, the AO opined that such an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Such amount is chargeable to tax in the year in which the remission or cessation of liability takes place and not earlier year in which deduction was claimed. As admittedly, the amount of ₹ 57,71,000/- ceased to become payable in the year under consideration, we hold that such amount should be taken as income for the year under consideration. The ld. AR fairly accepted this position. 36. Now we take up the other connected ground by which the challenge has been laid to the direction of the ld. CIT(A) in not adding such an amount in the computation of `book profit' u/s 115JB of the Act. It is pertinent to note that section 115JB is a special provision for payment of tax by certain companies. Sub- section (1) starting with non-obstante clause provides that where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year is less than a specified per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nual General Meeting, then the AO is bound to accept the amount of net profit as shown in the Profit and loss account, as starting point for computing book profit as per Explanation 1 to section 115JB of the Act. 38. Now let us examine the treatment to be given in accounts on reversal of lapsed ESOPs. It is found that the SEBI guidelines, as clarified, and ICAI Guidance Note now provide for taking such amount to General Reserve Account. Initially, there was some non- meeting point between the SEBI guidelines and the ICAI Guidance Note on the treatment to discount on lapse of the ESOPs. Vide para (ii)(b) of its letter No. SEBI/CFD/DIL/ESOP/4/2008/04-08, dated 04-08-2008, the SEBI has clarified the position by amending the SEBI guidelines with immediate effect so that it is in line with the accounting treatment provided by ICAI. This position has been discussed by the ld. CIT(A) in para 256 of the impugned order, which has remained uncontroverted. Thus, it is seen that both the SEBI and ICAI guidelines are now alike and provide that the amount of discount on lapse of ESOPs should be credited to the General Reserve Account. 39. In this regard, it is noticed that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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