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TMI Blog2011 (12) TMI 385X X X X Extracts X X X X X X X X Extracts X X X X ..... ious year. 2.1 That the assessing officer/DRP erred on facts and in law in disregarding the internal benchmarking undertaken by the assessee for determining the arm's length price of the international transactions applying TNMM on the ground that - (i) the related party and unrelated party transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis. (ii) the appellant did not maintain segmental accounts for the related and non related transactions and there was no segregation of these activities in the audited financials. (iii) the appellant has artificially bifurcated its account in two segments of related and non related, in absence of any credible, explained or disclosed basis of allocation of expenses. (iv) the appellant was not able to produce any such documents or data which can be said to be substantial proof of maintenance of segmental accounts. 2.2 That the assessing officer/DRP erred on facts and in law in disregarding the segmental profitability submitted by the appellant, holding as under: (i) The appellant did not maintain audited segmental accounts; (ii) The segmental acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Software Systems Ltd. c. IGate Global Solutions Ltd. d. Mindtree Limited e. Wipro Limited 2.10 That the assessing officer/DRP erred on facts and in law in selecting Celestial Bio Labs, a company operating in pharmaceutical industry, as a comparable to appellant. 2.11 That the assessing officer/DRP erred in selecting Megasoft Ltd. as a comparable to assessee, disregarding the fact that it has related party transaction in excess of 25% of its revenue. 2.12 That the assessing officer/DRP erred in considering Accel Transmatic Ltd as a comparable to the assessee, disregarding the fact that it does not satisfy the filter of employee cost ratio. 2.13 That the assessing officer/DRP erred in rejecting Indium Software (India) Limited as a comparable allegedly on the ground that the sale from software services is less than 1 crore without considering the actual turnover of Rs. 6.49 crore. 2.14 That the assessing officer/DRP erred in rejecting following comparable companies proposed by the appellant allegedly on the ground of functional incomparability: a. Indium Software (India) Limited b. Intense Technologies Ltd. c. Sagarsoft (India) Ltd. d. V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In law in not allowing deduction under section l0A of the Act in respect of the 3rd floor GE-GDC STPI unit. 3.1 That the assessing officer/DRP erred on facts and in law in holding that GE- GDC unit is not altogether different or new unit but an extension of an existing STP unit as both the units are situated in the same building and doing the same business. 3.2 That the assessing officer/DRP erred on facts and in law in not appreciating that GE-GDC was set up as an independent stand alone unit with substantial fresh investment of Rs. 8.42 Crores and was separately registered with STPI and custom authority as a new undertaking for production of computer software. 4. That the assessing officer/DRP erred on facts and in law in not allowing profit of non STPI Units to be set off against the loss of STP units allegedly holding that loss from such source/ unit, which is exempt from tax, cannot be set off against income chargeable to tax. 4.1 That the assessing officer erred on facts and in law in not appreciating that section 10A of the Act is a deduction provision and the profits of the unit eligible for deduction under section 10A of the Act would form part of income computed under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee cannot place new arguments before the Assessing Officer as it had ample opportunities to do so before the TPO. (v) In the order, the TPO has already dealt with each aspect in detail for the determination of correct arms length price for the international transactions undertaken by the assessee. In view of the above reasons, I am satisfied and in agreement with the order dated 26.10.2010 u/s 92CA(3) passed by the Transfer Pricing-II (1), New Delhi. The provisions of section 92CA(4) of the Income-tax Act, 1961 are reproduced as under:- "(4) on receipt of the order under sub-section (3), the Assessing Officer shall proceed in compute the total income of the assessee under sub-section (4) of section 92C having regard to the arm's length price determined under sub-section (3) by the Transfer Pricing Officer." In view of the above provisions, an addition of Rs. 51,76,94,438/- is made in the income of the assessee being difference between arm's length price." 2.1 In this case draft of the proposed order of assessment was forwarded to the assessee on 30.12.2010. Against the draft order, the assessee filed detailed objections before the Dispute Resolution Panel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the addition of an amount of Rs. 51,76,94,438/-. 3. The assessee is now in appeal before us against the aforesaid findings of the AO in terms of directions contained in order dated 10th August of the DRP. While inviting our attention to the directions of the DRP, the learned AR contended that the addition has been made, inter alia, on the basis of similar facts and circumstances obtaining in the preceding assessment year 2006-07 wherein the ITAT vide their order dated 29.01.2011 concluded on this issue as under:- "17. In the light of the discussions made above, we therefore, hold that the assessee was justified in undertaking internal bench making analysis on stand alone basis by placing on record working of operating profit margin from international transactions with AEs and transactions with unrelated parties undertaken in similar functional and economic scenario, and the same should be the basis for determination of arm's length price in respect of international transactions undertaken with the associated enterprise. In the light of the facts of the present case as discussed above, we therefore, hold that the Transfer Pricing Officer had no mandate to have recourse to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the DRP. 4. We have heard both the parties and gone through the facts of the case as also the aforesaid decision dated 20th January, 2011 of the ITAT for the AY 2006-07.We find that the ITAT in the preceding assessment year concluded that the assessee was justified in undertaking internal bench marking analysis on stand alone basis by placing on record working of operating profit margin from international transactions with AEs and transactions with unrelated parties undertaken in similar functional and economic scenario, and the same should be the basis for determination of arm's length price in respect of international transactions undertaken with the associated enterprise. It was further concluded that the TPO had no mandate to have recourse to external comparables when, in the present case, internal comparables were available, which could be applied for determining the arm's length price of international transactions with AEs. Accordingly, the ITAT directed the Assessing Officer/Transfer Pricing Officer to determine arm's length price of international transactions with AEs by making internal comparison of the net margin earned by the assessee from the internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same building and doing same business and the assessee having admitted that the new unit was set up to meet the increased client demand while the original unit at second floor at Sector-29, Noida was closed by the assessee and all the employees working in this unit were absorbed in the third floor unit in the same complex as also the major part of the fixed assets were transferred to the third floor GE-GDC unit. Similar findings were recorded by the learned CIT(A) for the assessment year 2003-04, where it was held that new unit was the extension of the earlier unit. Accordingly, the assessee company was asked to explain as to why the new STP unit established be not treated as reconstruction of the assessee company's original business and why both units should not be treated as single unit , the nature of business and the kind of services provided by the assessee being the same in the two units. After considering the reply of the assessee, the AO concluded that the assessee was not entitled to any deduction u/s 10A of the Act, since 10 years had already expired in the period relevant to the AY 2005-06. 6. The assessee approached DRP against the aforesaid findings of the AO in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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(A) however, held that the said new unit was not set up by the assessee company by way of reconstruction or splitting up of the unit already in existence. In its appeal by revenue against the said order of learned CIT(A), the decision so rendered by learned CIT(A) has not been challenged and the same, therefore, has become final. The learned 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 of 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 learned counsel for the assessee has relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndependent unit for the purpose of computing deduction u/s 10A of the Act, following the order of the ITAT for the AY 2003-04. Since facts obtaining in the year under consideration are similar to the facts and circumstances in the preceding assessment years while the Revenue have not placed before us any material so as to enable us to take a different view in the matter in the year under consideration, we have no hesitation in allowing the claim of the assessee u/s 10A of the Act. Consequently, ground nos.3 to 3.2 in the appeal are allowed. 9. Ground nos. 4 & 4.1 in the appeal relate to set off of profit of non-STPI units against the loss of STPI units. On perusal of computation of total income, the AO noticed that the assessee claimed the following losses:- [In Rs.] "1. Hyderabad (STP Undertaking) - Rs. 14,393,084 2. Bangalore II (STP Undertaking) - Rs. 11,451,484 Total-A - Rs. 25,844,568 3. Singapore (Non-STP undertaking - Rs. 5,033,751 Total-B - Rs. 5,033,751 Grand Total(A+B)- 30,878,319 9.1 Relying upon his findings in the assessment order for the AYs 2003-04 and 2004-05 & 2006-07, the AO concluded that losses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on and not exemption. The Assessing Officer shall recompute the total income of the assessee in the light of the aforesaid decisions after providing reasonable opportunity of being heard to the assessee. The assessee shall furnish a fresh computation of income to the Assessing Officer in the light of the principles and propositions laid down in the cases referred to hereinabove. We order accordingly." 12.1 On the other hand, the ld. DR supported the findings of the AO in the light of directions of the DRP. 13. We have heard both the parties and gone through the facts of the case as also the aforesaid decision dated 20th January, 2011 of the ITAT for the AY 2006-07. Indisputably, facts and circumstances in the year under consideration are similar to the facts and circumstances in the preceding assessment year. We find that the ITAT in the preceding assessment year restored the matter back to the file of the AO for fresh computation by treating the provisions of section 10A to be in the nature of deduction provision and not exemption. Inter alia, the AO was directed to recompute the total income of the assessee in the light of the various decisions referred to in the said order aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AT for the preceding assessment year wherein the ITAT concluded as under :- "7.2 It was contended by the assessee that the amount of Rs. 24,56,485/- was actually received towards notice pay receivable from employees working in the software units. The 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 section 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. 7.3 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 learned counsel for the assessee upon the decision of ITAT, Delhi Bench in the case of Jubilant Empro (P) Ltd. v. DCIT in I.T.A. No. 107/D/2007. In the above referred case of Jubilant Empro (P) Ltd. pertaining to the assessment year 2000-01, the assessee had recovered a sum of Rs. 4,95,070/- being notice period pay. This sum was recovered from the employees, who had ..... X X X X Extracts X X X X X X X X Extracts X X X X
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