TMI Blog2014 (8) TMI 867X X X X Extracts X X X X X X X X Extracts X X X X ..... profits of the eligible industrial undertaking did not form part of the total income at all - it did not enter the computation provision - what was to be computed was the profits of the eligible industrial undertaking and not the resultant business income after set off of loss in other activities - the loss from other business activities should not be set off against profits derived from eligible industrial undertaking - the action of the CIT (A) is upheld in directing the AO to re-compute the total income of the assessee after allowing the set off of the losses arising out of the STP units of the assessee against the income of its non-STP undertakings and to allow carry forward of unabsorbed losses and depreciation – Decided against Revenue. Travelling expenses allowed – Held that:- The matter has already been decided in assessee’s own case for the earlier assessment year, the Tribunal has held that the observations of the AO with regard to the assessee not having produced the relevant documentary evidence in the shape of bills/vouchers concerning the travelling expenses claimed, have been found by the CIT (A) to be incorrect – The finding of the CIT (A) has not been successfu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by the CIT (A)-XX, New Delhi, taking the following grounds: 1. The order of the Ld. CIT (A) is erroneous contrary to facts law. 2. On the facts and in the circumstances of the case and in law, learned CIT (Appeals) has erred in directing the A.O. to allow deduction u/s 10A in respect of GE-GDC STP Unit. 3. On the facts and in the circumstances of the case and in law, learned CIT (Appeals) has erred in directing the A.O. to allow the set off of losses arising out of STP units against the income from the STP units. 4. On the facts and in the circumstances of the case and in law, learned CIT (Appeals) has erred in directing the A.O. to allow carry forward of unabsorbed losses and depreciation of STP unit. 5. On the facts and in the circumstances of the case and in law, learned CIT (Appeals) has erred in directing the A.O. to allow travelling expenses of ₹ 11,07,62,619/-. 5.1 The Ld. CIT (A) has inter-alia ignored the fact that in spite of being specifically required the assessee did not file bills/vouchers of travelling expenses exceeding ₹ 1,00,000/- and that in the absence of the bills and vouchers the genuineness ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total Cost 334451977 86386255 420838232 Operating Profit 111736728 (10461854) 101274874 OP/T 33.41% -12.11% 24.07% NOIDA UNIT 2 Revenue 184856979 18957315 210339132 Total Cost 185551703 33041904 218593607 Operating Profit (694724) (14084589) (8254475) OP/TC -0.37% -42.63% -3.78% Chennai Revenue 171075757 64143704 26525l83 Total Cost 210078815 53680864 2637596791 Operating Profit (39003058) 10462840 1491904 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, Block-III, Ganga Shopping Complex, Sector 29, Noida in the year 1995, vide STPI Approval No.5 (7)/94/17/2260 dated 29th November, 1994. In the year 1999, however, there came about changes in the equity holding structure of the assessee and GE took equity participation in Birlasoft Inc, the parent company of the assessee. As a result of GE picking up a stake in the ultimate parent company, aggressive business plans were prepared for growth, as substantial business was expected from the overseas affiliates of GE. For rendering software services to this new client base, a new independent and integrated unit was proposed to be set up. Consequently, the assessee applied for the registration of a new STP undertaking (the GE-GDC undertaking) in November, 2000. The approval to this new unit was granted by Software Technology Parks of India, an autonomous body under the Ministry of Information Technology, Government of India on 4th December, 2000 vide approval No. Ref. No. PCMG/PSE/05/025-STPN/518. On these facts, it was submitted by the assessee before the AO that the new GE-GDC unit was a separate undertaking for the purpose of deduction under Section 10A of the Act. The AO has held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort thereof, both the units were identical. However, for AY 2003-04, the matter travelled upto the Tribunal and the Tribunal held that the first STP and the second STP undertakings of the assessee were to be treated as separate undertakings in accordance with the parameters laid down in Section 10A of the Act. A copy of the said order has been placed at pages 557-578 of the assessee's paper book. Therein (APB 572-573, para 2.10), it was held that various judicial pronouncements, as relied on by the assessee, had held that where a new undertaking has been formed with fresh capital and investment with a motive to increase the production capacity and expand the business, it cannot be said that the new undertaking was not a new industrial unit by itself; and that establishment of a new industrial unit as a part of already existing industrial establishment may result in an expansion of the industry, but if the only established unit itself is an integrated unit in which new plant and machinery are put up and the same itself, independently of the old unit, is capable of production of goods, then it can be classified as a newly established industrial undertaking. On this basis, the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any material before the Tribunal for taking a different view in the matter for the year under consideration (AY 2007-08); and that therefore, the claim of the assessee u/s 10A of the Act was being allowed. 14. In the order for AY 2007-08, vide paras 19 and 20 (APB -629), the Tribunal has, following the aforesaid Tribunal order for AY 2006-07, held that the GEDC-STP Unit, situated at Third Floor, Block 3, Sector 29, Noida, was to be treated as a separate unit, and, accordingly, deduction u/s 10A of the Act was allowable. 15. In the 'Chart on the Issues' dated 13.03.2014 filed before us by the assessee, the assessee has contended that vide order dated 06.01.2011 (APB 618), passed in ITA No.71/2010, the Hon'ble Delhi High Court has dismissed the department's appeal on the aforesaid issue. However, a perusal of the said High Court order shows that it does not deal with this issue at all. The order reads as follows: In this appeal, following question of law is proposed: Whether ITAT was correct in law in allowing depreciation to the assessee at the higher rate of 60% on computer accessories and peripherals? This issue stands decided again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AY 1999-2000 in ITA No. 838/Del/2003. 20. The AO has observed as follows: The assessee's unit under question is entitled to 'tax holiday' by way of deduction u/s 10A. Had the assessee co. been generating profits from such unit, it would have been entitled for such 'tax holiday' by way of deduction u/s 10A. It is thus clear that profits and gains from such unit would have been exempt from tax. However in the case of instant assessee co., losses are suffered in respect of such unit, which is entitled for deduction u/s 10A of the act. As stated above, as per the provisions of IT Act, loss from such source/ unit, which is exempt from tax cannot be set off against income chargeable to tax..... On the same observations and findings the assessee's claim of carry forward of losses of undertaking claiming the exemption u/s 10A is rejected and the claim of ₹ 53,732,227 of business loss and ₹ 42,927,772 of the unabsorbed depreciation is disallowed from being carry forwarded. 21. While holding that the assessee should be allowed to set off the losses arising out of its STP units against the income of its non-STP units and allowing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... export of articles or things or computer software for a period of ten consecutive assessment years beginning from the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee .. (emphasis supplied). 25. In the assessee's case for AY 99-00, vide its order dated 13.04.07 (relevant portion produced in the assessment order at pages 5 and 6 thereof), in ITA No.838/Del/2003, the Tribunal had held that as per Section 10A (1) of the Act, any profits and gains derived from an industrial undertaking, to which this Section applies, shall not be included in the total income of the assessee; that thus, the profits of the eligible industrial undertaking did not form part of the total income at all; that it did not enter the computation provision; that thus, what was to be computed was the profits of the eligible industrial undertaking and not the resultant business income after set off of loss in other activities; and that the loss from other business activities should not be set off against profits derived from eligible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no reason for us to differ from the action of the CIT (A) in directing the AO to recompute the total income of the assessee after allowing the set off of the losses arising out of the STP units of the assessee against the income of its non-STP undertakings and to allow carry forward of unabsorbed losses and depreciation as per law. Therefore, Ground Nos.3 and 4 are rejected. 31. Ground No.5 is against the action of the CIT (A) in directing the AO to allow travel expenses of ₹ 11,07,62,619/-. 32. For the year, the assessee claimed travelling expenses to the tune of ₹ 23,20,33,587/- The AO noted that for AY 2004-05, such expense was of ₹ 12,12,70,968/- and that therefore, there was an increase of close to 100%. The assessee, vide reply dated 24.09.2008, submitted the details for the last four years, as follows: F.Y. Amount (Rs.) 04-05 232033587/- 03-04 121270968/- 02-03 2052812/- 01-02 2890097/- 33. Vide reply dated 31.10.08, the assessee submitted det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee not having produced the relevant documentary evidence in the shape of bills/vouchers concerning the travelling expenses claimed, have been found by the ld. CIT (A) to be incorrect. This finding of the ld. CIT (A) has not been successfully refuted before us by the department. Therefore, there is nothing for us to differ from the CIT (A)'s conclusion that the assessee had, in fact, produced the concerned evidence before the AO. On merit, the Tribunal (APB 591), for AY 2006-07, observed as follows: At this stage, it is pertinent to note the settled proposition that when once an outlay is made for the purpose of the business, it need not turn out to be profitable. It is a mistake to suppose that any deductible expenditure must not only be incurred for the purpose of business or trade but must also be profitably laid out. The deductible expenditure incurred for the purpose of business does not require the presence of a receipt on the credit side to justify deduction of an expense. It is not as if the expenditure should be co-related to profits or turnover and it is deductible only if profit is made or turnover is increased. It is well-settled that expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee towards notice period was to be treated as income derived from the eligible undertaking and that deduction u/s 10A of the Act shall be allowed accordingly. The CIT (A) followed this order to hold that the miscellaneous income should be treated as income from business. 46. For AY 2007-08 (APB 616, para 18), the ITAT decision for AY 2006-07 was followed by the Tribunal. For AY 2008-09 (APB 631-632), a similar view was taken by the Tribunal. 47. Here again, the facts for the year under consideration remain the same as those present in the earlier years. In accordance with the Tribunal orders for those years (supra), we hold that the amount received by the assessee towards notice period is to be treated as income derived from the eligible undertaking and deduction u/s 10A of the Act is to be allowed accordingly. The finding of the ld. CIT (A) to this effect is, accordingly, upheld. Ground No.6 is rejected. 48. Ground No.7 challenges the action of the ld. CIT (A) in deleting the addition of ₹ 8,59,418/- made on account of excess claim of depreciation on computer peripherals. The CIT (A) followed the Tribunal order for AY 2006-07 in the assessee's case and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e taxable income of the assessee has increased and, therefore, the assessee is to be granted enhanced credit of taxes paid in Australia. 55. Here, we find that indeed, considering the additions made, the taxable income of the assessee has increased. As such, enhanced credit of taxes paid in Australia needs to be granted to the assessee. As such, the CIT (A) has rightly remitted the matter to the file of the AO to allow this claim of the assessee on examination. Ground No.8 stands rejected. 56. Ground No.9 states that the ld. CIT (A) has erred in deleting the addition of ₹ 7,25,40,785/- made u/s 92CA (3) of the Act, on account of transfer pricing adjustment. In this matter, the facts as per the record are that the assessee company is engaged in software development and related services to its Associated Enterprises (AEs). The assessee is a 100% subsidiary of Birlasoft Enterprises India which, in turn, is a 100% subsidiary of Birlasoft Inc., USA. The assessee provides customized software to its related parties. It does offshore, i.e. on site delivery of the software also. The assessee is paid at the cost plus agreed markup and reimbursement of over head expenses by its AE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total Cost 151955943 43812111 193768054 Operating Profit (84453233) (33683814) (113785034) OP/TC -55.58% -76.88% 58.12% GE-GDC NOIDA STP Revenue 446188705 75924401 522113106 Total Cost 334451977 86386255 420838232 Operating Profit 111736728 (10461854) 101274874 OP/T 33.41% -12.11% 24.07% NOIDA UNIT 2 Revenue 184856979 18957315 210339132 Total Cost 185551703 33041904 218593607 Operating Profit (694724) (14084589) (8254475) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... marked by the TPO without segregating them between related and unrelated parties. 56.4 In this way, the TPO compared the margin, i.e. OP/TC of each unit independently. He compared the margin of unrelated transaction with the related party transactions of each unit separately. The OP/TC earned by the Chennai unit in its related party transaction was lower than the margin earned from unrelated party transaction. The TPO held that the international transactions of other unit was at arm's length, but made adjustment to the international transaction undertaken by the Chennai unit, based on revised accounts of the Chennai unit, as submitted by the assessee. The unrelated party transaction resulted into a margin of 19.47% as against -4.27% from the related party transaction. As a result, the difference of ₹ 7,25,40,785/- was added to the international transaction to bring it at arm's length. 57. In the impugned order, the ld. CIT (A) has observed: 14.8. The TPO had benchmarked the international transaction unit wise instead of entity wise in the AY 2004-05. This matter had travelled to the Hon'ble ITAT and it pronounced its decision on 11.06.2011 deciding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t level. As the PLI of the international transaction falls within +/-5% as computed by the appellant, the benefit of proviso to section 92C(2) is available to the appellant. Therefore, this ground of the appellant is allowed. The AO/ TPO is directed to delete the adjustment made to international transaction. 58. Thus, the CIT (A) observed that whereas the TPO had benchmarked the international transaction unitwise, instead of entitywise, for AYs 2004-05 and 2006-07, the Tribunal, for both these years, had decided this issue in favour of the assessee, holding that the benchmarking of the international transactions had to be done entitywise. He, following the said Tribunal orders, directed the AO/TPO to delete the adjustment made to the international transactions. While doing so, he also observed that the TPO had not done any separate evaluation of the unitwise assets employed and functions performed and risks undertaken. 59. The ld. DR has contended that the ld. CIT (A) has erred in deleting the addition correctly made by the AO; that the assessee is into software services; that the assessee has four units, all of which have different profitability; that the assessee employed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated services with its associated enterprises (AE's), i.e., Birla Soft Inc., USA and Birla Soft (UK) Ltd. It applied the TNMM for benchmarking the international transactions of provision of software development services as the most appropriate method, with OP/OC as the profit level indicator (PLI). It aggregated the margin from the provision of software development services from all its STP units. The TPO, however, benchmarked each of the STP units on a stand alone basis. The assessee considered its international transactions to be at arm's length, taking the operating profit margin earned from the services rendered to its AEs, computed at 2.04%, rather than the operating profit margin earned by it from rendering of services to unrelated parties, computed at 2.51%, to be within the safe harbour range of (+)/(-) 5%. The TPO, however, considered the related margin of the assessee's Chennai STP unit at (-) 4.27%, arriving at an arm's length margin of 30.26%, thus making an addition of ₹ 7,25,40,785/-. Therefore, the TPO did not accept the comparison at the entity level, observing that the three STP units of the assessee, to which the international transactions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. We therefore, direct 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 international transactions with associated enterprises and the profit earned by the assessee from the international transactions with unrelated parties. In this respect, the assessee has already given his working by allocating revenue and expenses to both the segmental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing basis (the position remains the same for the year under consideration also). It was observed that there was unity of business, administrative control and funds, etc., in each of the STP units of the assessee, and that because of such commonness of management and interlacing of funds, etc., or software development services, it was not practically possible to carry out an independent FAR analysis of each unit with the existing comparables. It remains undisputed that the position, as above, remains the same for the year under consideration also. The Tribunal orders for the earlier years have not been shown to have been upset, or even stayed, on appeal. Therefore, since there continues to be unity of business and administrative control and interlacing of funds amongst the units of the assessee company, for this year also, it is not possible to carry out an independent FAR analysis of each unit with existing comparables. The assessee had provided various kinds of software related services, such as software development services, software maintenance and repair services and quality testing services, etc., from each of its STP units located in Noida and Chennai. These services were ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that when data is available showing profit margin of that enterprise itself from a third party, it is always safe and advisable to have recourse to such internal comparable case; that the reason for this is that various factors having bearing on the quality of output, assets employed, input cost, etc., continue to remain, by and large the same in the case of an internal comparable; that the effect of difference due to such inherent factors on the comparison made with the third parties gets neutralized when comparison is made with internal comparables; and that therefore, an internally comparable uncontrolled transaction is more noteworthy than an externally comparable uncontrolled transaction. 70. In Destination of the World (sub continent) (P.) Ltd.' (supra), it has been held, inter alia, that the OECD Guidelines mention that net margin of the tax payer from the controlled transactions should be established with reference to the net margin which the same tax payer earns in comparable uncontrolled transactions; that where this is not possible, the net margin that would have been earned in comparable transactions by an independent enterprise, may serve as a guide; that thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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