TMI Blog2014 (8) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... he segments – Decided in favour of Assessee. GE-GDC different unit or the extension of existing STP – Held that:- Assessee company is engaged in the activities of software development and related services - The software related business is being carried out from the STP Unit and the exemption u/s 10A has been claimed - new STP Unit was treated by the assessee to be an independent unit for the purpose of exemption claimed u/s 10A of the Act – AO has not accepted the claim of the assessee by holding that the new unit is nothing but an extension of the existing unit and not entitled to separate deduction of exemption u/s 10A - as decided in assessee’s own case for the earlier assessment year, it has been held that the new unit cannot be treated to be as one and same unit with the existing unit for the purpose of computing deduction u/s 10A of the Act – Decided in favour of Assessee. Miscellaneous income part of business or income from other sources – Held that:- The notice period pay was to be considered as income derived by the eligible undertaking and as such notice period pay would go to reduce the expenses on account of salary and the real nature of the transaction will not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment order dated 19.02.2014 passed by the AO under section 143(3) read with Section 144C of the Income Tax Act 1961 (herein after the Act ),in pursuance to direction issued by after the Dispute Resolution Panel (DRP) for Assessment Year 2009-10. 2. Ground No. 1 is general in nature and it needs no adjudication inasmuch as all other grounds taken in the appeal shall take care of the additions made by the AO in the assessment order. 3. Now, we shall come to the ground No. 2 to 2.12 regarding the issue about Transfer Pricing Adjustment. In these ground, it has been alleged by the assessee that the Assessing Officer has erred in making adjustment of ₹ 34,25,12,827/- to the income of the assessee on account of the difference in the Arms length price of the international transactions undertaken by the assessee during the year under consideration. It has been further alleged that the Assessing Officer has erred on facts and in law in disregarding the internal bench marking undertaken by the assessee for determining the arm s length price of the international transactions applying TNMM. It has further been alleged that the Assessing Officer has erred on facts and law in disr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 747,666,506 91,612,972 Foreign exchange difference 306,071,598 Cost of outsourced work 8,914,847 43,493,110 Depreciation/ amortization 164,533,159 7,606,499 Fringe benefit tax 13,497,634 620,387 Bank charges 1,927,929 677,550 Total operating cost 2,902,721,947 472,967,849 Operating Profit (142,674,443) (20,548,722) Operating Profit/ Operating Cost -4.92% -4.34% 8. As afore-stated, for the purpose of benchmarking international transaction of provision of software development services, the appellant applied Transactional Net Margin Method (TNMM) as the most appropriate method with OP/OC % as the profit level indicator. While applying TNMM the assessee had compared the entity vide profit margin earned from transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with third party unrelated customers (hereinafter referred to as third party contracts ) during the financial year 2008-09. The appellant provides similar software design and development services in respect of these third party contracts. And since internal comparables were available for the purpose of benchmarking, the appellant has relied upon the profit margin earned on such third party contracts for the purpose of justifying international transactions entered into with the associated enterprise at arm s length. For the purpose of applying TNMM in the Transfer Pricing documentation, operating margins earned by the appellant while rendering services as to the AEs has been compared with operating margins earned from unrelated customers. 12. The ld counsel relied upon the following cases wherein the Tribunal, upheld the internal benchmarking undertaken by the assessee:- (i) Destination of the World Vs. DCIT (ITA No. 5534/Del/2010) (ii) Interra Information Technologies India (P) Ltd., Vs. DCIT (ITA No. 5568 5680/De/2011) (iii) Lummus Technology Heat Transfer BV Vs. DCIT (ITA NO. 6227/De/2012). 13. As per Shri Ajay Vohra, Rule 10B(1)(e) of the Rules provides that for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions to be unreliable. The TPO has held that the segmented profitability, as certified by the Chartered Accountant, does not elucidate the under lying allowability involved in allocation of different items of expenditure. According to TPO, while some of the items of expense have been allocated based on actual bill, most of others are merely based on revenue appropriation of two segments. According to the ld counsel, the DRP has upheld the aforesaid finding of the TPO and has baldly observed that the assessee has distorted the various items of account while allocating between AE and no AE segments. 16. According to Shir Ajay Vohra, the TPO/DRP have, on principle, did not dispute the reliance of internal benchmarking analysis for determining the arm s length price and have only rejected the claim of the appellant on the ground of veracity of the segmented profitability as certified by the Chartered Accountant. According to the ld counsel, the aforesaid observations of the TPO/DRP are incorrect and not tenable. The Chartered Accountant in their certificate placed at pages 322-326 have clearly stated the basis of allocating the various cost between the AE and non AE segments. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nternational transactions with unrelated parties. In this respect the assessee has already given his working by allocating revenue and expenses to both the segmental and determined separate profitability. However, on perusal of the TPO s order, we find that the TPO has not undertaken any exercise to examine the correctness of the workings done by the assessee. We, therefore, restore this matter back to the file of the Assessing Officer/ Transfer Pricing Officer for fresh adjudication and for the purpose of determining the arm s length price in respect of the international transactions undertaken with the associated enterprise by making internal comparison of profitability from the international transactions with associated enterprise and profitability from the international transactions with unrelated parties after allocating respective revenues and expenses to both the segmental. The Assessing Officer/TPO shall provide reasonable opportunity of being heard to the assessee. The assessee shall furnish all the details and particulars before the authorities below to enable them to make internal comparison of the profitability from the international transactions with associated enterpr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of an existing STP unit as both the unit are situated in the same building and doing the same business. 20. Brief fact of the case is that the assessee company is engaged in the activities of software development and related services. The software related business is being carried out from the STP Unit and the exemption u/s 10A has been claimed. Originally, the assessee company had set up a STP Unit at 2nd Floor, Block-3, Sector-29, Noida and it was registered is STP Unit in the year of 1995. Thereafter, another new STP Unit was set up at 3rd Floor, Block-3, Sector-29, Noida in the assessment year 2002-03. The new STP Unit was treated by the assessee to be an independent unit for the purpose of exemption claimed u/s 10A of the Act. However, the Assessing Officer has not accepted the claim of the assessee by holding that the new unit is nothing but an extension of the existing unit and not entitled to separate deduction of exemption u/s 10A. 21. Aggrieved by the said order of the AO and DRP the assessee is before us. 22. According to the ld counsel Shri Ajay Vohra, the AO/DRP erred in not appreciating that GE-GDC was set up as an independent stand alone unit with substa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee company by way of reconstruction or splitting up of the unit already in existence. In its appeal by revenue against the said order of ld CIT(A), the decision so rendered by ld CIT(A) has not been challenged and the same, therefore, has become final. The ld CIT(A) however, further held that the establishment of a new unit by the assessee company was a part of expansion of its existing unit and since both these units were entitled for deduction u/s 10A, the said deduction should be computed on the combined profit of both these units treating the same as one unit. He, however, has not given any reason whatsoever or has not referred to any provisions of the Act to support his conclusion that both the units should have been treated as one unit for the purpose of computing deduction u/s 10A. 2.10 At the time, of hearing before us, the ld counsel for the assessee has relied on the various judicial pronouncements wherein it was held that where a new undertaking has been formed with fresh capital and investment with a motive to increase the production capacity and expand its business, then it cannot be said that the new undertaking was not the new industrial unit by itself. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software units. According to Shri Ajay Vohra, the said amount was received towards reduction of salary cost debited to the eligible undertaking. In the light of these facts, the assessee claimed the miscellaneous income as income derived from the eligible undertaking for the purpose of sec. 10A of the Act. The assessee s claim has been rejected by the Assessing Officer by treating the miscellaneous income as income from other sources and not income derived from eligible undertaking. The ld counsel pointed out that the co-ordinate bench of the Tribunal has decided this issue in favour of the assessee in assessee s own case for A.Y.s 2003-04, 2004-05, 2005-06, 2006-07, 2007-08 and 2008-09. 26. For AY 2006-07 the Tribunal held as on this issue is as follows:- We have heard both the parties and perused the material on record. In the course of hearing of this appeal, reliance was placed by the ld counsel for the assessee upon the decision of ITAT, Delhi Bench in the case of Jubilant Empro (P) Ltd. Vs. DCIT in ITA NO. 107/Del/2007=(2007-TIOL-458-ITAT-DEL). In the above referred case of jubilant empro (P) Ltd. pertaining to the Assessment Year 2000-01, the assessee had recovered a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment on capital items at ₹ 11.7 crores after excluding the components of foreign exchange fluctuation and assets taken on finance and thereafter computed interest @ 15% on ₹ 11.7 crores thereby capitalizing interest of ₹ 1,75,50,000/- and corresponding disallowance as revenue expenditure. The DRP upheld the said order of the AO. Aggrieved by the said order the assessee is before us. 30. The ld counsel Shri Ajay Vohra contended that the AO has erred in capitalizing the interest for the period after the assets have been put to use, which according to him is not the mandate of the proviso to Section 36(1)(iii) of the Act and further submitted that the additions to fixed asset made during the relevant previous year are, software, leasehold improvements, computer hardware, office equipments and furniture fixtures. And as there is no interregnum in acquisition and put to use of these assets, requiring mandatory capitalization of interest for the period when the loan was taken, for purchase of such assets and the date when such assets were put to use, the impugned order is not correct as per law. Therefore, it was submitted that in terms of the proviso to sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18,02,34,546/- 34. Out of the aforesaid total addition of ₹ 18,02,34,546/- , ₹ 1,52,57,346/- was addition on account of foreign exchange fluctuation of ₹ 4,79,38,507 on asset taken on finance lease. The auditors, however, in their report observed that short term funds amounting to ₹ 60.36 crore had been used for long term purposes, as follows:- Paticulars Rs. Crore Short term funds (i) Unsecured loan 37,50,00,000 (ii) Secured loans 34,61,56,856 Less: Long term use Fixed assets-net block 78,02,80,997/- Net amount 60,36,15,834/- 35. The Assessing Officer on the basis of the aforesaid, observed that short term borrowed funds amounting to ₹ 11.7 crores (Rs. 18.02 crores (-) 1.53 crores (-) 4.7 crores) have been diverted for purchase of fixed asset and, therefore, interest pertaining to such funds amounting to ₹ 11.7 crores ought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... put to use shall be disallowed. Therefore in order to apply the proviso to Section 36(1)(iii) of the Act to the facts of the present case, that is in other words, before disallowing the interest expenditure on the Fund borrowed for procurement of asset for extension of existing business, the AO has to record as a matter of fact the date on which the assessee borrowed the fund for acquisition of asset for extension of business and the date on which the asset thus procured was put to use is absolutely necessary. However in the instant case, we find that no such exercise has been done by the AO to find out the date on which the assessee borrowed the fund for acquisition of asset in the relevant AY and we also find that no attempt has been made by the AO to find out on which date the asset thus procured with the said borrowed fund have been put to use. Only after the dates as afore-stated has been found out then only one can compute the disallowance as prescribed by the proviso to section 36(1)(ii) of the Act. In the said circumstances we set aside the impugned order on this issue and remand this issue back to the file of AO, with a direction to AO to find out the date on which the as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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