9911796707
TMI Blog2024 (12) TMI 324X X X X Extracts X X X X X X X X Extracts X X X X ..... new undertaking has been set up, which is eligible for deduction u/s 10A of the Act is, therefore, most relevant in the initial year of operation. Since the Revenue accepts in the initial year of operation that a new undertaking has been set up and does not fall within the exclusionary clauses that is, it is not formed by the splitting up, or the reconstruction of an extant business or by transfer to a new business of machinery or plant previously used for any purpose the controversy must rest for future years as well. This is of course subject to the condition that no additional material or facts, which establish otherwise are found subsequently. It would be debilitating to the rule of consistency and certainty in the matter of taxation, if the question of eligibility of a unit is permitted to be re-agitated on the same set of facts despite the Revenue having accepted the findings which are essentially factual findings in favour of the Assessee in the initial year(s). It is difficult to accept that the Revenue could accept a set of facts in one year and yet challenge the same in another, without any change in circumstances or any new fact coming to light. The proceeding relating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement would be relevant for determining the overarching transaction that is required to be benchmarked. This would not permit the overarching transactions to be split up between various undertakings for comparing the profit margin derived by an unrelated entity from a comparable uncontrolled transaction. In addition to the above, the learned CIT (A) had also noticed that there was interlacing of funds and unity of management which are necessary aspects required to be factored while using TNMM for determining the ALP. If in a given case, the transactions fall within the scope of a domestic specified transaction under Section 92BA of the Act, the said exercise of determining the ALP would be required. However, if a particular transaction does not fall within the sweep of the statutory provisions, it is obvious that it will not be permissible to readjust the prices on account of a possible domestic transactions that may possibly distort the quantum of benefit available u/s 10A of the Act. The only question to be addressed is whether the decision of the learned CIT (A) and the learned ITAT to direct that the ALP be determined on the basis of TNMM by comparing the PLI at an enterprise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her the directions given by the Income Tax Appellate Tribunal for computation and exemption under Section 10A of the Income Tax Act, 1961 are in accordance with law and as per the said provisions? (3) Whether the Income Tax Appellate Tribunal was right in setting aside the order of the Assessing Officer on the question of transfer pricing on the following accounts: (a) Benchmarking was to be done separately and the profits had to be determined of the entity as a whole. (b) FAR analysis in respect of three units was not possible. (c) There were functional differences between the three units. (4) Whether the Income Tax Appellate Tribunal was correct in law in holding that expenditure of Rs. 19,26,120/- was not prior period expenditure and was allowable in the year in question? FACTUAL CONTEXT 4. Before proceeding further, it would be relevant to briefly note the factual context in which the aforesaid questions of law arise. 5. The Assessee was incorporated under the Companies Act, 1956 and is engaged in the business of software development and related services. The Assessee has six units, which includes three units, that have been set up under the Software Technology Park (hereafter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... length Price (ALP). 11. During the course of the assessment proceedings, the AO found that the tax audit report furnished by the Assessee indicated that it had incurred prior period expenses of Rs. 19,26,120/- and, accordingly, the AO disallowed the same. 12. Insofar as the Assessee s claim that it had established a new STP unit is concerned, the AO found that the Assessee had set up NOIDA-I unit (a STP unit on the second floor of Block-III, Sector-29, Noida), and was conducting its business of software development and services from the said unit. Subsequently in the year 2001, the Assessee had set up another unit (NOIDA-II unit) on the third floor of the same building Block III, Sector-29, Noida for carrying on the same business. The AO held that NOIDA-II unit was a mere extension of the existing STP unit (NOIDA-I unit) and could not be considered as a new undertaking eligible under Section 10A of the Act. The AO further held that even if NOIDA-II is considered as a separate unit, deduction under Section 10A of the Act could not be allowed as the business carried on by NOIDA-II unit was identical to the business that was carried out from NOIDA-I unit that was established earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us, in aggregate an addition of Rs. 4,95,51,723/- was directed to be made to the Assessee s income. 16. Accordingly, the AO passed an assessment order dated 28.12.2006 computing the total income of the Assessee at Rs. 13,97,49,284/-. CIT (A) S ORDER 17. Aggrieved by the assessment order dated 28.12.2006, the Assessee preferred an appeal before the learned CIT (A) being Appeal No. 142/2007-08. 18. Insofar as disallowance of exemption under Section 10A of the Act with effect from AY 2005-06 is concerned, the learned CIT (A) allowed the Assessee s appeal based on the order dated 23.07.2009 passed by the learned ITAT in the Assessee s case for AY 2003-04. 19. The learned CIT (A) accepted that NOIDA-II unit was an undertaking that was eligible for deduction for the purposes of Section 10A of the Act. The learned CIT (A) held that in view of the said finding, the Assessee s claim that the income from NOIDA-II unit was eligible for deduction under Section 10A of the Act, was required to be allowed. 20. The learned CIT (A) also allowed the Assessee s claim in regard to the expense of Rs. 19,26,120/- on the ground that the said liability was crystallized in June, 2003 and thus was not a pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purposes of clause (iii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section. *** *** *** 24. The Explanation I and Explanation II to Section 80I of the Act which are equally applicable to clauses (ii) and (iii) of Section 10A (2) of the Act are set out below: Explanation 1. For the purposes of clause (ii) of this sub-section, any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely: (a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India; (b) such machinery or plant is imported into India from any country outside India; and (c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee. Explanation 2. Where in the case of an industrial undertaking, any machinery or plant or any part thereof previou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Industrial Development Authority) to set up a new facility. The Assessee had thereafter, applied for registration of NOIDA-II unit with STPI (Software Technology Parks of India) in November, 2000 which was granted by the STPI in December, 2000. 29. The Assessee explained that it had made an investment of Rs. 84,226,317/- for creation of the new facility and its gross block at the end of the FY 2001-02 had increased to Rs. 16,84,28,800/-. According to the Asssessee, this established that its gross block had practically doubled in the FY 2001-02 as compared to the FY 2000-01. The Assessee had also explained that with the addition of NOIDA-II unit, the total seating capacity increased from 300 seats to 700 seats and the effect of the same was apparent from the revenue for the year 2001-02, which had also doubled as compared to the previous year 2000-01. 30. The Assessee explained that the revenue growth could be achieved only due to substantial support from its equity partner GE. The Assessee had also substantiated its claim by furnishing the figures of turnover for the previous years. However, the AO was not persuaded to accept the same. 31. The AO also relied on the findings of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 57,615 182,479,051 248,236,666 2002-2003 127,172,783 366,056,785 493,229,568 2003-2004 193,491,959 562,387,930 755,879,889 39. Plainly, this is not a case where a separate unit has been formed by shifting the business from an existing STP unit at the far end of the exemption period solely for the purpose of continuing to avail the benefit under the Act. Although, the AO did suggest the same. But there are no facts to support this view. The learned counsel appearing for the Revenue had also sought to canvas the same, however, was unable to refer to any factual finding that would support the said view. 40. In Textile Machinery Corpn. Ltd. v. CIT (1977) 107 ITR 195, the Supreme Court had examined the exclusionary clause under Section 15C of the Indian Income Tax Act, 1922. Under the said Section, tax was not payable by an assessee on profits not exceeding 6% per annum on the capital employed in a new industrial undertaking. The said benefit was available to the new industrial undertaking, which was not formed by splitting up, or the reconstruction of business already in existence or by the transfer to a new business of building, machinery, or plant, previously used in any other busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... J. of the Calcutta High Court in Commissioner of Income Tax, West Bengal I v. Indian Aluminium Co. Ltd. (1973) 88 ITR 257, which was also rendered in the context of Section 15C of the Indian Income Tax Act, 1922: If the assessee s original business remains intact and retains its original character and the assessee establishes separate independent undertakings whether of the same or different nature in respect of the same or different commodity the subsequent undertakings cannot be called reconstruction within the meaning of section 15C (2) (i). The newness of subsequent industrial undertaking does not necessarily exclude all cases of expansion or extension of the original business. To illustrate, where the original business is only extended or expanded or developed by the assessee in the same building or enclosure with a proportionately smaller capital or where the transactions of the original business and the extended business are of such a nature that they are dependent on one another or where the requirements of the original business are subserved substantially by the product of subsequent undertakings, it may be said that such expansions cannot have the benefit of exemption un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et relief under section 15C Where, therefore, the activities or the business of the subsequent undertaking show substantial expansions they may be called industrial undertakings which are not formed by the reconstruction of the assessee's original business. 44. A.N. Sen J. penned a separate but concurring opinion in Commissioner of Income-Tax, West Bengal I v. Indian Aluminium Co. Ltd. (1973) 88 ITR 257 It is relevant to refer to the following extract of the said decision: 54. I do not see any logic in the contention that the benefit under section 15C can only be granted in respect of an industrial undertaking of an assessee, if the assessee chooses to carry on a kind of a business different from the one which is being carried on by the assessee. The intention of the legislature, to my mind, is to grant tax relief to industrial undertakings, which must, of course, satisfy the requirements of the section. The object was to promote industrial development of the country by employment of fresh capital by setting up new industrial undertakings. It does not appear from the language of the section that the legislature intended that an assessee must diversify its industrial activity an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bled. As noted before, the Assessee s claim that the sitting capacity had increased from 300 seats to 700 seats with the establishment of the new undertaking (NOIDA-II unit) has not been controverted. 46. It is also material to note that the learned ITAT had in its order dated 27.03.2009 in respect of the AY 2003-04 considered the question as to whether the new STP unit (NOIDA-II unit) was formed as a result of reconstruction of the existing business and had rejected the same. The relevant passage of the said order as set out in the written submissions filed on behalf of the Assessee which was expressly admitted by the learned counsel for the Revenue during the course of the hearing is reproduced below: 2.9 We have considered the rival submissions and also perused the relevant material on record. It is observed that the claim of assessee for deduction under section 10A in respect of profits derived from the new STP unit known as GE-GDC was disallowed by the Assessing Officer on the ground that the said unit was set-up as a result of reconstruction of the existing business of the assessee company. In his impugned order, the learned CIT(Appeals) however held that the said new unit wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ificantly, the Revenue had filed an appeal before this court (being ITA No. 71/2010) but had not proposed any question of law with regard to the ineligibility of the new STP unit (NOIDA-II unit) for deduction under Section 10A of the Act. The Revenue s appeal (ITA No. 71/2010) was dismissed by this court by an order dated 06.01.2011. 48. It is material to note that the benefit under Section 10A is in respect of an undertaking and not the assessee. In CIT v. Yokogawa India Limited (2017) 391 ITR 274, the Supreme Court had held as under: 17. From a reading of the relevant provisions of Section 10-A it is more than clear to us that the deductions contemplated therein are qua the eligible undertaking of an assessee standing on its own and without reference to the other eligible or non-eligible units or undertakings of the assessee. The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee. This is also more than clear from the contemporaneous Circular No. 794 dated 9-8-2000 which states in para 15.6 that, The export turnover and the total turnover for the purposes of Sections 10-A and 10-B shall be of the undertaking located in spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es that the undertaking must not be formed by splitting up or reconstruction of business already in existence. Clause (ii) refers to the date on which the undertaking mentioned in sub-section (1) is created or formed. On the date of formation, the undertaking should not violate the condition stipulated in clause (ii) i.e. that it should not be created by splitting up or reconstruction of a business already in existence. Clause (ii) does not have any reference to the period of 10 years stipulated in sub-section (1) to Section 10B, after an undertaking is formed or created without violation of clause (ii) to Section 10B (2). Clause (ii) to Section 10B (2) does not apply to the period, post formation of the undertaking, covered under sub-section (1), when the undertaking which at the time of formation meets the requirements of clause (ii) to Section 10B (2). The undertaking, of course meet the requirements and fulfil the condition that it manufactures or produces articles, things or computer software during the assessment year. The proviso equally supports the said interpretation as it also refers to the date of formation of the undertaking, for seeking benefit under Section 10B (1). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be taxed are based, e.g., whether a certain property is trust property or not, it has nothing to do with the fluctuations in the income; such questions if decided by a Court on a reference made to it would be res judicata in that the same question cannot be subsequently agitated. 14. One of the decisions referred to by the Full Bench was the case of Hoystead v. Commissioner of Taxation [1926 AC 155 (PC) : (1925) All ER Rep 56]. Speaking for the Judicial Committee Lord Shaw stated: Parties are not permitted to begin fresh litigation because of new views they may entertain of the law of the case, or new versions which they present as to what should be a proper apprehension by the court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted, litigation would have no end, except when legal ingenuity is exhausted. It is a principle of law that this cannot be permitted and there is abundant authority reiterating that principle. Thirdly, the same principle, namely, that of setting to rest rights of litigants, applies to the case where a point, fundamental to the decision, taken or assumed by the plaintiff and trav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided for general application. 52. We find no infirmity with the decision of the learned ITAT in upholding the view that NOIDA-II unit was entitled to deduction under Section 10A of the Act in respect of its profits and gains derived from NOIDA-I unit. 53. In view of the above, question Nos. 1 and 2 are answered in favour of the Assessee and against the Revenue. RE: QUESTION NO. 3 54. The Revenue, essentially, questions the decision of the learned CIT (A) to delete the additions made on account of transfer pricing adjustments as directed by the TPO in its order under Section 92CA (3) of the Act. The learned ITAT had upheld the decision of the learned CIT (A), which has led the Revenue to file an appeal before this court. It is material to note that there were certain issues, which were raised before the TPO as well as the learned CIT (A) including the issue regarding use of the current year s data of the comparable entities and the selection of comparables. However, none of those issues have been pressed before this court. The controversy before this court is confined to the correctness of the decision to determine the ALP at an entity level instead of separately for each of the thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of the learned CIT (A) and the learned ITAT were ex facie erroneous as it was the Assessee s case that each of its STP units was a separate undertaking. The Assessee had also claimed that the profits derived from NOIDA-I unit and NOIDA-II unit were eligible for deduction under Section 10A of the Act. This necessarily entailed that the profits and gains derived by the Assessee from those undertakings were required to be separately computed. He also submitted that computing the ALP on an entity level would enable the Assessee to its transfer business with the higher profit margin to the new undertaking while retaining the business transaction with lower margin with other undertakings that do not enjoy the benefit of deduction under Section 10A of the Act. He also referred to the observations made by the Supreme Court in CIT v. Glaxo Smithkline Asia (P.) Ltd. (2010) 195 Taxmann 35 (SC), where the Supreme Court had made observations that transfer pricing regulations should not be limited to cross border transactions and should be extended to domestic transactions as well. The court had also highlighted that in domestic transactions, under-invoicing and over-invoicing would be Rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that there was nothing erroneous in applying TNMM method for determining the ALP for each undertaking instead of for the Assessee. 60. Before proceeding further, it would be relevant to refer to Section 92 of the Act. Section 92 (1) of the Act expressly provides that any income arising from an international transaction shall be computed having regard to the arm s length price . 61. Thus, the mandate of Section 92 (1) of the Act is to recompute the income arising from an international transaction having regard to the arm s length price. 62. It is apparent from the above that the entire exercise of computing the ALP is to ensure that the tax base is not distorted on account of the transactions being between the related parties and thus controlled. With the insertion of sub-section (2B) of Section 92CA of the Act, by the Finance Act 2012, the ALP is also required to be determined for certain specified domestic transactions. The object for the same remains the same to remove any distortion on account of transactions being between related entities. 63. It would be relevant to refer to the following passages from the United Nations Practical Manual on Transfer Pricing for the Dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose between independent entities. Under the arm s length principle, intragroup transactions are tested and may be adjusted if the transfer prices or other terms of the transactions are found to deviate from those of comparable uncontrolled transactions. The arm s length principle is argued to be acceptable to everyone concerned as it uses the marketplace as the norm. 64. It is necessary to bear in mind the aforesaid principles while considering the apposite approach for determining the ALP in respect of the international transaction. 65. The expression international transaction has been defined in Section 92B of the Act. In terms of the said definition, an international transaction would include a transaction between two or more associated enterprises, either or both of whom are non-residents, which is in the nature of provision of services. Although, Section 92B of the Act uses the expression an international transaction in singular, it is now well settled that a reference to an international transaction under Section 92B of the Act would also include multiple inter-linked transactions. 66. In Sony Ericsson Mobile Communication India Pvt. Ltd. v. CIT (2015) 374 ITR 118 (Del) , thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... performed by the parties in section 92C (1) illustrates to the contrary, that the word transaction can never include and would exclude bundle or group of connected transactions. More important would be reference to the meaning of the term transaction in section 92F, clause (v), which as per the said definition includes an arrangement or understanding or action in concert whether or not the same is formal or in writing, whether or not it is intended to be enforceable by legal proceedings. Rule 10A in clause (d) states that for the purpose of this rule and rules 10AB and 10E , the term transaction would include a number of closely linked transactions . This rule in positive terms declares that the legislative intent is not to deviate from the generic rule that singular includes plural. The meaning or definition of the expression transaction in clause (d) of rule 10A read with sub-section (1) of section 92C, therefore, does not bar or prohibit clubbing of closely connected or intertwined or continuous transactions. This is discernible also from sub-rule (2) of rule 10B quoted above. The sub-rule refers to services provided , functions performed , contractual terms (whether or not suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction or the specified domestic transaction. 69. It is also relevant to note that the expression enterprise as used in Rules 10AB to 10E of the Rules is defined under Clause (aa) of Rule 10A of the Rules. The said clause is set out below: (aa) enterprise shall have the same meaning as assigned to it in clause (iii) of section 92F and shall, for the purposes of a specified domestic transaction, include a unit, or an enterprise, or an undertaking or a business of a person who undertakes such transaction; 70. As is apparent from the above, the meaning of the term enterprise for the purposes of specified domestic transactions that is, the transaction as defined under Section92F of the Act has a wider meaning and includes an undertaking or a business of a person. However, in respect of an international transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to note at this stage, that in the given cases, income of a foreign entity, which is attributable to its PE in India is chargeable to tax. Thus, in one sense, although the PE may not be a separate entity, it may nonetheless for the purposes of the Act be considered as a taxable unit. 74. The meaning of the word enterprise as used in the context of computation of ALP in respect of the international transactions and specified domestic transactions is clearly different. The legislative intent of ascribing separate meanings for the word enterprise in respect of the international transactions and specified domestic transactions is clear from the plain language of Clause (aa) of Rule 10A of the Rules. The meaning of the word enterprise in respect of the international transaction is the same as in Clause (iii) of Section 92F of the Act. However, in respect of the specified domestic transaction, the said expression would additionally encompass a unit or an enterprise or an undertaking or business of a person who undertakes such transactions. In view of the above, it is clear that the word enterprise in context of the computation of ALP of an international transaction is required to be co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nternational transactions in question. However, the AO did not accept the same on the ground that the data was not reliable. 78. The learned CIT (A) had noted that in the earlier assessment years the internal uncontrolled transactions were used for benchmarking the international transactions and thus raised doubts on the AO s conclusion to reject the internal comparables. 79. However, the controversy in the present case is in respect of the method used by the AO for benchmarking the ALP on the basis of external comparables. 80. As stated above, the expression an international transaction is required to be construed in plural and would encompass a number of transactions, which are inextricably linked. However, it is necessary that the international transactions which may be bunched together are of a similar nature and character. It is not apposite to bunch the transactions of a completely different nature, which are not interlinked or subsumed in the overarching commercial transactions that are required to be tested. 81. If the controlled international transactions are part of a particular segment, it would be relevant to ascertain the profit margin of the enterprise at a segmental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... margin from a comparable uncontrolled transaction or a number of such transactions having regard to the same base; In practice, net profit margin is ascertained at segment level where segment data are available. The unallocated expenses are allocated on a reasonable basis and the segmental net profit is determined. Where segment data are not available, net profit is normally determined at enterprise level. Where internal CUT is available transaction level net profit may be determined. (iii) In case internal CUT is not available, external CUT is taken. In such case, as discussed above, net profit margin should be taken at enterprise level (segmental or enterprise as a whole) of comparable companies. A search should be carried out to identify comparable companies on the basis of information and data available with the assessee. Where such information and data are not available, search may be carried out with reference to database in public domain. (iv) The net profit margin so identified is adjusted to take into account the transaction level and enterprise level differences if any. The differences should be those that could materially affect the net profit margin in the open market; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ALP. 85. The contention that the Assessee may be able to manage its affairs so as to ensure that its new undertaking, which is covered under Section 10A of the Act, derives a higher profit. Therefore, it may be also apposite for making transfer pricing adjustment inter se domestic units to ensure that any transaction inter se separate units of an entity are accounted for at ALP. Mr. Aggarwal had also referred to the decision in the case of CIT v. Glaxo Smithkline Asia (P.) Ltd. However, it is not necessary for this Court to address the said issue. As noted above, certain specified domestic transactions are also required to be benchmarked to impute arm s length value. If in a given case, the transactions fall within the scope of a domestic specified transaction under Section 92BA of the Act, the said exercise of determining the ALP would be required. However, if a particular transaction does not fall within the sweep of the statutory provisions, it is obvious that it will not be permissible to readjust the prices on account of a possible domestic transactions that may possibly distort the quantum of benefit available under Section 10A of the Act. The only question to be addressed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 04-05, the same is allowable as a deductible expenditure in the computation of income for AY 2004 -05. 88. The CIT (A) accepted the aforesaid contention and held as under: 13.3 I have gone through the above submission of the appellant and have also gone through the decision of Hon'ble Gujarat High Court in the case of Saurashtra Cement and Chemical Industries Ltd. vs. CIT (123 1 TR 669) and Hon'ble Allahabad High Court in the case of CIT vs. Ashok Iron and' Steel Rolling Mill (199 1 TR 815), I find that the appellant was entitled to claim a deduction of Rs 19, 26, 120, on account of payroll taxes. The actual liability to pay the reconciled payroll taxes has actually accrued and crystallized on June 30, 2003 when the reconciliation of Australian payroll taxes was done pursuant to the closure of Australian tax year. Thus, as the liability towards payroll taxes of Rs 19, 26, 120 has actually crystallized and accrued in the Assessment Year 2004-05, the same is allowable in A Y 2004-05; 89. The learned ITAT had found no infirmity with the said view. We also find no fault with the said view. Strictly speaking, no substantial question of law arises in view of the undisputed fi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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