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Deputy Commissioner of Income Tax Centre-1, Mumbai Versus M/s. Tata Consultancy Services Ltd. and Vica-Versa

Disallowance of overseas taxes paid - AO disallowed deduction holding that such taxes are covered by the provisions of section 40(a)(ii) - Held that:- Tribunal has decided this issue against the assessee in the case of “Tata Sons Ltd.” (2010 (11) TMI 709 - ITAT, MUMBAI ), and the said decision has not been stated to have been stayed on appeal, respectfully following the same, this issue is decided against the assessee

Software expenses under section 40(a)(i) on account of non-deductio .....

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t.

The locally acquired software expenses have been treated as capital expenditure, placing reliance on various judicial decisions, which hold that the expenses on software are in the nature of capital expenditure and depreciation is to be allowed on the same. As such, expenses on imported software are also in the nature of capital expenditure and deprecation needs to be allowed thereon. The AO, therefore, is directed to allow depreciation on the imported software purchased by the ass .....

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s. Indian Petro Chemicals”, (1996 (12) TMI 66 - SUPREME COURT OF INDIA). We, therefore, do not find any justification in the action of the ld. CIT(A) to hold that the assessee being an old unit and having once claimed deduction u/s 80HHE, was not entitled to claim deduction u/s 10A from the profits of its units.

The expenditures which are required to be reduced from the export turnover as per the provisions of section 10A of the Act should also be reduced from the total turnover.

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O made an adjustment which was incorporated by the AO in the assessment order. Thereby, the AO as well as the ld. CIT(A) did not discharge necessary respective judicial functions conferred on them under sections 92C and 92CA of the Act. Further, the assessee is also correct in contending that no TP adjustment can be made in a case like the present one, where the assessee enjoys u/s 10A or 80HHE of the Act, or where the tax rate in the country of the Associated Enterprises is higher than the rate .....

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following grounds: 1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in allowing overseas taxes paid of ₹ 216,27,28,177/-. 2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in allowing penal interest paid in USA towards late payment of taxes paid of ₹ 4,61,683/-. 3. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in allowing software expenses u/s 40a(i) on account of non-deducti .....

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rnational Corporation Inc. (TAIC). 2. Apropos Ground No.1, it states that the ld. CIT(A) has erred in allowing overseas taxes paid of ₹ 216,27,28,177/-. As per the record, the assessee has paid the following Federal taxes in the USA, Canada and other Overseas branches and State taxes in the USA and Canada, which were claimed as deduction in the return of income: Federal tax of ₹ 19,99,80,754/- State taxes of ₹ 16,28,38,423/- Total Overseas tax ₹ 216,27,28,177/-. The AO di .....

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the section are retrospective in effect. It was also held that the Federal tax was eligible for relief u/s 90 of the I.T. Act. It was held that however, State taxes paid in the USA and Canada are ineligible for relief u/s 90 of the I.T. Act, read with the provisions of Article 1(3) of the Indo- Canada Treaty and Article 2(a) of the Indo-USA Treaty and that accordingly, the provisions of section 40(a)(ii) of the Act do not apply to the State Taxes. 4. At the outset, the ld. counsel for the assess .....

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t been stated to have been stayed on appeal, respectfully following the same, this issue is decided against the assessee. Ground No.1 stands dismissed. 7. As per Ground No. 2, the ld. CIT(A) erred in allowing penal interest paid in the USA towards late payment of taxes paid of ₹ 4,61,683/-. 8. This issue is relatable to Ground No.1 (supra). In view of our observations made with regard to that ground, Ground No.2 also stands rejected. 9. According to Ground No.3, the ld. CIT(A) has erred in .....

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88,831/- The AO disallowed the expenditure claimed, applying the provisions of section 40(a)(i) of the Act on the ground that the tax was required to be deducted at source u/s 195 of the Act. 10. The ld. CIT(A) allowed the claim, observing that he agreed with the contention of the assessee that payment towards purchase of software is payment for copy righted articles and hence, it only represented the purchase price of an article and could not be considered as royalty, either under the Act, or u .....

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x obligation on the payer applies on payments to nonresidents onlys if there is income chargeable to tax in India. It was held that accordingly, there was no obligation of the assessee to deduct tax at source u/s 195 of the Act, from making remittances to non-residents. The ld. CIT(A) held that he agreed with the assessee s contention that no tax was deductible on the same and accordingly, no disallowance ccould be made u/s 40(a)(i) of the Act. 11. Here, invoking the provisions of Rule 27 of the .....

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s been contended that the assessee wants to finish off the litigation and so, here also, depreciation allowed. It has been contended that it is only a timing issue and the assessee will get it over a period of five years. 12. On the other hand, the ld. DR has contended that depreciation can be allowed only if it is a capital expenditure and that in the present case, it is not so. 13. Considering the rival contentions, we find that the argument of the assessee is correct. The locally acquired sof .....

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the assessee is, hence, accepted. 14. Ground No.4 challenges the action of the ld. CIT(A) in allowing the claim u/s 10A of the Act on units on which deduction u/s 80HHE was allowed in the past and the method of computation of deduction u/s 10A of the Act. This ground comprises of two limbs. The first issue is as to whether deduction can be claimed u/s 10A of the Act in respect of units on which deduction u/s 80HHE was allowed in the past. The AO did not allow deduction u/s 10A of the Act on the .....

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export of computer software. Section 10A was substituted w.e.f. 1.4.2001, whereby, for the first time, the profit from the export of computer software was included in section 10A of the Act in respect of the newly established undertakings; that prior to that, even though section 10A was in the statute, the deduction was available only on profits and gains derived by an assessee from an industrial undertaking but was not available to the undertaking engaged in computer software; and that hence, .....

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beginning with the assessment year in which the undertaking began to produce the computer software. It has been contended that the section nowhere provides that the deduction will be available to the existing undertaking. The second proviso to section 10A can only be referred to in respect of the industrial undertakings, which were already covered u/s 10A prior to its substitution w.e.f. 1.4.2001. It has been submitted that deduction upto assessment year 2000-01 was available for the existing i .....

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ua which the deduction is claimed, the question of unintended benefit does not arise. However, the assessee, by claiming deduction u/s 10A wants to avail benefits, which are not available from AY 2001-02 u/s 80HHE of the Act, in view of the phasing out of the deduction u/s 80HHE of the Act from AY 2001-02. The assessee wants to claim one hundred percent deduction in the nature of profits u/s 10A, whereas there is no deduction available u/s 80HHE during the said year. It has been contended that m .....

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r software. The assessee company has also derived its profit from the business referred to in section 80HHE(1) and deduction under section 80HHE is claimed and allowed in the earlier year and so, no deduction under any provision of this section for the same, or any other assessment year can be allowed. This clearly indicates that if in any year deduction has been claimed, the assessee cannot claim deduction of such profits for the same year, or any other assessment year. Such profits does not me .....

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r things, i.e., hand made articles or things having artistic value, which requires the use of wood as the main rawmaterial. The undertaking exporting such articles is also covered u/ss 10A & 10B of the Act and, therefore, a restriction has been put in section 10BA, that if deduction has been claimed by an undertaking u/s(s) 10A or section 10B, the undertaking will not be eligible for deduction u/s 10BA. The profits derived from the undertaking covered u/s(s) 10A, 10B and 10BA are the income .....

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. 17. On the other hand, placing reliance on the impugned order, on behalf of the assessee, it has been contended that the deduction u/s 10A of the Act, is available for the balance number of years in respect of units where deduction u/s 80HHE of the Act has been claimed in the past. Reliance has been placed on the following case laws: i) Legato Systems India (P) Ltd.; 93 TTJ 828 (Delhi), affirmed by the Hon ble Delhi High Court in 203 CTR 101. ii) CIT vs. Excel Softec Limited , 219 CTR 405 iii) .....

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placed on Excel Software Pvt. Ltd. (supra). 18. Here, we find that in Legato Systems India (P) Limited (supra), the Delhi Bench of the Tribunal held that upon a harmonious reading of the entire provision, i.e., section 80HHE, the expression such profit as appearing in clause (v) is found to refer to the profits of a particular assessment year and the section does not place any restriction to shift the claim of deduction or exemption under any other provision in respect of profits for which no d .....

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athur vs. CBDT (supra). We, therefore, do not find any justification in the action of the ld. CIT(A) to hold that the assessee being an old unit and having once claimed deduction u/s 80HHE, was not entitled to claim deduction u/s 10A from the profits of its units. 19. The Hon ble Delhi High Court has upheld the aforesaid decision of the Tribunal in the case of CIT vs. Legato Systems India (P) Ltd. , 203 CTR 101 (Del). A similar view has been taken by the Tribunal in the case of ITO vs. Dempo Sol .....

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n the said certificate also, the date of commencement of manufacture/production has been taken as the original date and not as the date of commencement of claim u/s 10A of the Act. 20. In view of the above discussion, finding no error therein, this part of the order of the ld. CIT(A) is upheld. 21. Apropos the second limb of Ground No.4, i.e., the department s challenge to the method of computation of deduction u/s 10A of the Act, the ld. CIT(A) followed the Special Bench decision of the Tribuna .....

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numerator and the denominator, respectively, in the formula. The ld. CIT(A) directed the AO to compute the deduction after reducing the expenditure already reduced from the export turnover, from the total turnover as well. 22. Challenging the impugned order, the ld. DR has placed strong reliance on the assessment order. It has been contended that section 10A of the Act has defined the term export turnover and not the term total turnover . It has been submitted that the ITAT, Hyderabad Bench, in .....

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s definition which has been logically brought into the provisions of deduction under section 10A; that there is no specific definition or provision provided in the said section to exclude such expenditure; and that the import of such definition is not correct as per the settled position of law. It has been contended that the various judicial decisions have held that deduction u/s 80HHC of the Act is governed by the provisions of the said section, which is a code in itself; that on a similar anal .....

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these sections requires a simple interpretation and the reason as to why the legislature has not given a definition of total turnover , as given in section 80HHC, in the provisions of section 10A; that it is the discretion of the legislature to frame such a section, by which, a particular category will get a deduction on fulfilling certain conditions; that, however, at the same time, it gives discretion as to how much of that deduction should be given and as to how the deduction is to be compute .....

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done. 23. Per contra, supporting the impugned order, the ld. counsel for the assessee has contended that the term total turnover is an enlargement of the term of export turnover . The expenditures which are required to be reduced from the export turnover as per the provisions of section 10A of the Act should also be reduced from the total turnover. Reliance has been placed on the decision of the Hon ble Bombay High Court in the assessee s own case, i.e., Tata Infotech Limited. , in ITA No.3474 o .....

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rshan Chemical Industries Ltd. , 245 ITR 769 (Bom.) 24. Here, we find that the decision of the Special Bench in Sak Soft Limited (supra), holds the field. It has not been upset on appeal. No decision to the contrary has also been placed on record before us. Therefore, the action of the ld. CIT(A) in following Sak Soft Limited (supra), alsocannot be found fault with. The same is confirmed. As such, Ground No.4 is rejected. 25. As per Ground No.5, the ld. CIT(A) has erred in deleting the additions .....

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ng the provisions of section 92CA, the transfer pricing adjustment should be made. This is a statutory safeguard for the assessee. It has been contended that similarly, it is only after proper application of mind to all the facts and holding a prima facie belief that the AO can make reference to the TPO, or that the ld. CIT(A) can grant approval to such a reference. This, again, is a statutory safeguard for the taxpayer. It is submitted that CBDT Instruction No. 3 of 2003, dated 20.05.2003 detra .....

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er material or information or document. The TPO made an adjustment which was incorporated by the AO in the assessment order. On their part, the AO and the ld. CIT(A) did not discharge necessary judicial functions conferred upon them u/s 92C or 92CA of the Act. 27. On the other hand, duly supporting the action of the AO and that of the ld. CIT(A) in this regard, the ld. DR has sought to place reliance on the following case laws: i) Coca Cola India Inc vs. ACIT , 309 ITR 194 (P&H) ii) Sony Ind .....

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o follow the steps enlisted in section 92CA(1) of the Act, before making reference to the TPO. Instruction No.3/2003 is not violative of article 14 of the constitution of India. The instruction is not ultravires the Income-tax Act. The classification of International transactions is not inconsistent with, or contrary to, the objectives sought to be achieved by Chapter X of the Act. The Instruction supplements the statutory provision to achieve its objective and does not override it. It is neithe .....

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hearing is to be given to the assessee by the AO, or the ld. CIT(A) before making reference to the TPO. The conditions in section 92CA(3) of the Act are not required to be fulfilled before making reference to the TPO. CBDT Instruction No.3/2003 is binding on the AO and hence, it becomes necessary or expedient for him to refer the case to the TPO u/s 92CA(1) of the Act, if the international transaction or transactions exceeds, or exceed the limit mentioned therein. The initial burden is on the as .....

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Coca Cola Pvt. Ltd. (supra), it has been contended that as per this decision, there is no need for hearing to be given to the assessee before making reference to the TPO. Once an International transaction is there, in view of the plain and unambiguous language, ALP has to be determined. There is no requirement of showing shifting of profit, evasion of tax, etc., before invoking the provisions of Chapter X of the Act. The mere fact that the assessee has chosen one method does not take away the di .....

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ggregate value of the international transactions exceeds ₹ 5 crores. The assessee-company in that case challenged the constitutional validity of the said Circular mainly on the ground that by issuance of the Circular, the AO s ultimate decision on computation of ALP is sought to be supplanted by the decision of the TPO for transactions of value over ₹ 5 crores and the TPO is not bound to follow the steps outlined u/s 92C of the Act, which are otherwise mandatory for the AO to follow. .....

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xpedient to make such a reference. It was also held that one possible reason for absence of such requirement of formation of a prior considered opinion by the AO is that the TPO is expected to perform the same exercise, as envisaged u/s(s) 92C(1) to 92C(3) of the Act, while determining the ALP u/s 92CA(3). It was further held that the AO is not bound to accept the ALP as determined by the TPO and always persuaded by the assessee at that stage to reject the TPO s report and still proceeds to dete .....

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cretion in referring an international transaction to the TPO for determination of its ALP and it is neither arbitrary, nor unreasonable and is not ultravires the act. 31. It has rightly been contended on behalf of the assessee with regard to Sony India Pvt. Limited (supra) that the Hon ble Bombay High Court, in the case of Vodafone India Services P. Ltd. vs. Union of India , 361 ITR 531 (Bom.), has held that CBDT Instruction No.3 dated 20.05.2003 is contrary to the decision being taken therein a .....

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facie demonstrate that there is tax avoidance, before invoking the relevant provisions. It was held that before the case is referred to the TPO u/s 92CA(1) of the Act for computation of arm s length price, the AO is not required to prima facie demonstrate that any one or more of the circumstances set out in sections 92CA(3)(a),(b),(c) and /or (d) of the Act, are not satisfied. It was held that the AO is not required to record his opinion/reason before seeking the previous approval of the ld. CIT .....

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2CA(3) of the Act, is not binding on the AO, the AO may take the ALP determined by the TPO without making any change under section 92CA(3) of the Act, for making assessment. The issue of determination of quantum of ALP was remanded. 33. In Vodafone India Services P. Ltd. (supra), the Hon ble jurisdictional High Court has held the decision of the Special Bench of the Tribunal in Aztec Software Technology & Services (supra) to be not applicable in view of the amendment brought in in 2007. It w .....

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eported in Coca Cola India Inc.vs. Addl. CIT , 336 ITR 1 (SC), directed that the authorities below should decide the matter afresh, uninfluenced by any of the observations made in the High Court judgment. 35. The position obtaining with regard to these three judgments sought to be relied on by the Department is, that none of these judgments is applicable. Sony India Limited has been held to be not applicable by Vodafone India (Supra), rendered by the jurisdictional High Court. Aztec Software &am .....

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icated in any of these judgments. The assessee has contended that the AO has abrogated his obligation under a wrong assumption that CBDT Circular, i.e., CBDT Instruction No.3 of 2003 dated 20.05.2003 mandated him to go ahead without making any reference to the TPO. The AO, thus, in the present case, did not examine the question, whether he should himself accept the transfer pricing report of the assessee or whether he should himself determine the arms s length price. Therefore also, these judgme .....

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re bound to determine the ALP by applying the law and rules laid down and cannot be guided by extraneous parameters. It was held that any claim for adjustment on the basis of reason or any other factors has to be based on proper data and sound calculation and ad-hoc adjustment should not be granted. It was held that where material is available with the TPO in the current year, which is vastly different from the material available with the TPO in the earlier year, the principle of consistency doe .....

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State of Haryana , 188 ITR 402 (SC), has held that a decision on a question which has not been argued cannot be treated as a precedent. Further, when a statute vests certain powers in an authority to be exercised in a certain manner that authority has to exercise those powers only in a manner provided in the statute itself. It has been so held by the Hon ble Supreme Court in CIT vs. Anjum Ghaswala , 252 ITR 1 (SC). The Hon ble Jurisdictional High Court has also taken a similar view in the case .....

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endered by the Hon ble jurisdiction High Court post the decision of the Tribunal in Ranabaxy Laboratories (supra) and therefore, the Tribunal, clearly did not have the benefit of Vodafone India , (supra). To reiterate, in Vodafone India , (supra). CBDT Instruction No.3/2003 has been held to detract from the provisions of law. In Vodafone India (supra), it has been held that necessary hearing is required to be given to the assessee in accordance with the principles of natural justice before a ref .....

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ight. The absence of such a belief vitiates the entire proceedings. 40. Like-wise, the approval of the ld. CIT for the reference to the TPO on a proper application of mind to the relevant facts and circumstances is a condition precedent and a necessary safeguard for the statutory right of the assessee and this has to be performed not in a mechanical manner. This is what has been held by the Hon ble Supreme Court in the case of Krishna Pvt. Ltd. vs. ITO , 221 ITR 538 (SC) and by the Hon ble juris .....

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.14 of 2001, in para 55.11 thereof, it has been provided that under the new provisions the primary onus is on the taxpayer to determine an arm s length price in accordance with the rules and to substantiate the same with the prescribed documentation. Where such onus is discharged by the assessee and the data used for determining the arm s length price is reliable and correct, there cannot be any intervention by the AO. This is made clear by sub section (3) of section 92C, which provides that the .....

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ta used in computation of the arm s length price is not reliable or correct; or the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under subsection (3) of section 92D. If any one of such circumstances exists, the AO may reject the price adopted by the assessee and determine the arm s length price in accordance with the same rules. However, an opportunity has to be given to the assessee before determining .....

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guise of imposing a condition; that in fact, this is not a condition, but an impermissible attempt to re-write the section. It was held that the CBDT may control the exercise of the powers of the Officers of the Department in matters administrative, but not quasijudicial. 44. In the following decisions, amongst others, it has been held that the Tribunal can ignore alone invalid Circulars of the CBDT: (i) Tata & Iron Steel , 69 ITD 292 (Mumbai) (ii) Mahindra & Mahindra , 8 ITD 427 (Mumbai .....

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not possible. 46. Aztec Software & Technology Services (supra), holds that TP provisions are applicable even if income is exempt u/s(s) 10A/10B of the Act. However, as seen, Aztec Software & Technology Services , stands overridden by the decision of the Hon ble jurisdictional High Court in Vodafone India (supra). 47. In Motif India Infotech Pvt. Limited , the decision in ITA No. 3043/Ahd/2010, rendered on 25.03.2013, it has been held that in a case where the income derived from an intern .....

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le income in India. 49. In Cotton Naturals (I) Pvt. Ltd. vs. DCIT , 22 ITR (AT) 430 (Del) (Trib.), it was held that the assessee s substantial profits were exempt u/s 10B of the Act and the Associated Enterprises were not situated in tax havens, but in the US, where the tax rates were at par with India, or may be more than that; that the assessee s profits were exempt u/s 10B; and that hence, there was no case that the assessee would benefit by shifting profits outside India. 50. In the case of .....

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t was shifted from a higher tax jurisdiction to a lower tax jurisdiction; that in fact, there was no motive for any such shifting of profits at the hands of the assessee-company and there could have been any reason for the majority stake holder in India, i,.e., the assessee, to over pay even a single paise to the minority stake holder in Japan; that the TPO fell in error in ignoring the position that it was if and only if it stood proved that there was manipulation of prices to avoid taxes in In .....

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the assessee would harbour any motive of shifting income. 52. In the case of Philip Software , 119 TTJ 721 (Bang.), it was held that since the basic intention behind introducing the TP provisions in the Act is to prevent shifting of profits outside India, and the assessee was claiming benefit u/s 10A of the Act, the TP provisions ought not to be applied to the assessee. 53. Similar is the position in the following cases, amongst others: i) ITO vs. Zydus Altana Healthcare (P) Limited , 44 SOT 132 .....

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