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2015 (5) TMI 970

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..... The amount is in the character of loan or borrowing after the stipulated credit period and consequently, such recovery of dues in the international transaction with its AEs is to be benchmarked by applying CUP method of international bank rates. Accordingly, we hold that LIBOR plus rates have to be applied to the amounts due from the AEs beyond the period of 25 days, which was the weighted average number of days delay allowed to the third parties. After excluding the period of 25 days, interest is to be charged on the balance number of days of delay by applying LIBOR plus rates. We find that the TPO had applied average rate of LIBOR plus 300 basis points as the reasonable rate of interest, which the assessee should have charged to its AEs. The TPO had also charged plus 200 basis points as guaranteed commission. The CIT(A) has given a finding that in the absence of any expenditure having been incurred by the assessee on such guaranteed commission, there was no merit in including the same. The Revenue is not in appeal against the said finding of the CIT(A) and in the totality of the above said facts and circumstances, where it has not been established that the assessee has not pa .....

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..... ommissioner of Income tax (Appeals) erred in holding that there was no splitting of the existing business and the business is not integral part of the original undertaking since 1980, commonality of business utilization of certain resources and allocation of common expenses etc. does not in any way come in the way to decide the eligibility of deduction u/s.10A and, therefore, all the undertakings of the assessee are eligible for claim of deduction u/s 10A of the Income tax Act, 1961. 2) The learned Commissioner of Income tax (Appeals) erred in allowing deduction u/s.10A in respect of 3 units at Chinchwad Akrudi and Millenium Business Park without appreciating that the approving authority i.e. Software Technology Park of India (STPI) had approved the above three units as expansion of the existing units on the basis of the assessee's application stating these units to be expansion of the existing units. Thereby, not fulfilling the condition laid down U/s.10A(2) of the Act. 3) The learned Commissioner of Income tax (Appeals) erred in concluding that Chinchwad unit, Akrudi unit and Millenium Business Park were not formed by splitting or reconstruction of the existing business .....

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..... di and Millennium Business Park. Further, the Revenue is in appeal against the allowance of deduction under section 10A of the Act in respect of new unit at Bangalore and SPZ 47 vide grounds of appeal Nos.4 and 5. Another issue raised by the Revenue vide ground of appeal No.6 is against allowance of deduction under section 10A of the Act in respect of other 8 units. The Revenue vide grounds of appeal No.7 and 8 is aggrieved against the allowance of set off of losses of unit eligible for deduction under section 10A of the Act against the business profit in contravention of provisions of the Act. 6. The learned Authorized Representative for the assessee at the outset pointed out that the issue in the present appeal is squarely covered by the orders of Tribunal in earlier years. 7. The learned Departmental Representative for the Revenue placed reliance on the orders of authorities below. 8. Briefly, in the facts of the present case, the assessee was engaged in the business of software development both on-site and off-shore. During the year under consideration, the assessee had 14 units, income of which was claimed to be exempt under the provisions of section 10A of the Act. T .....

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..... to whether in the new unit, substantially same persons were carrying on the same business or not. In the case of the Bangalore unit, more than 28% of the software engineers were old employees of the company, working in various existing units and had been transferred / shifted from such old units, during the first year of operation and the new unit as such, was carrying on the same business of software development. As per the Assessing Officer, the unit was clearly found by splitting and reconstruction of the existing business, as provided in section 10A(2)(ii) of the Act. Since the assessee had not given any details of the work order or clients of the new unit to show that the unit was given any fresh work order or otherwise carrying on any business different from the existing business, and hence was an independent unit on its own, was held to be not eligible for deduction under section 10A of the Act. 9. In respect of SPZ-47, Mumbai, the Assessing Officer noted that the unit was basically a system hub, a server unit, providing support to business operations by other units. The Assessing Officer further observed that The fact that the assessee has two old software units in close .....

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..... observed that the Assessing Officer had denied the deduction as the said unit was a system hub, but as per the assessee, the said unit was not a system hub and it used software technology with which it could carry out the work of de-bugging, patch-work and other software writing from India to the client s location in a foreign country. The CIT(A) thus, held that the objection raised by the Assessing Officer was mis-conceived. The CIT(A) further held that since there was no case of splitting up of existing business, the assessee was entitled to the claim of deduction under section 10A of the Act in respect of Bangalore unit and SPZ-47. 11. The Revenue is in appeal against the said order of CIT(A). 12. The issue raised by the Revenue vide its grounds of appeal is against the stand of CIT(A) in holding the assessee to be eligible for the claim of deduction under section 10A of the Act in respect of 13 units, out of which two new units were established during the year under consideration. As far as grounds of appeal No.2 and 3 raised by the Revenue are in relation to the three units i.e. Chinchwad, Akurdi and Millennium Business Park, we find that the Tribunal in ITA Nos.476/PN/2 .....

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..... the eligible period for deduction under section 10A of the Act with respect to the said three units would also be reckoned from the first year of the eligibility of the corresponding old units. Aggrieved with the aforesaid stand of the Assessing Officer, assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals). 36. In appeal, assessee contended that the action of the Assessing Officer was bad in law and on facts. It was pointed out that all the three undertakings have been established in Software Technology Park and are registered with the STPI; it was asserted that all the three units satisfied the prescribed conditions under section 10A(2) of the Act. In respect of all the three units, it was submitted that they were separate and distinct from the existing undertakings. It was pointed out that the new 6 units are located at locations different from their corresponding old units; that there are substantial investments in land, building and machinery in all the three units as distinct from the old units. It was also submitted that there are separate permission for Custom Bonded Warehouses and also separate Shop Establishment Licenses for the three .....

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..... 204 in 107 ITR is reproduced as under: There is great scope of expansion of trade industry. The fact that an assessee by establishment of new industrial undertaking expands his existing business, which he certainly does, would not, on that score, deprive him of the benefit u/s 15C. Every new creation in business is some kind of expansion and advancement. The true test is not whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is all the same a ne and identifiable undertaking separate and distinct from the existing business. Since the provisions of law as contained in section 15C(2)(i) and 10A(2)(ii) (iii) are in effect and in substance in pari materia as regards the point in issue involved in this appeal, I am of the considered view that the ratio of Hon ble Supreme Court decision in case of Textile Machinery Corporation Ltd. quoted supra which has been followed with respect in several decisions, applies to the law as contained in section 10A(2)(ii) and (iii) of the Income-tax Act, 1961. In view of the foregoing discussion, taking into account the submission of the appellant and material on record, it is h .....

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..... ver a period of time with the increase in the number of employees, etc. as also number of locations at which it operates through different units. In this context, the Assessing Officer noted that the assessee had treated three units, namely, Chinchwad Unit, Akruti Unit and Millennium Business Park unit as separate independent units for the purposes of deduction under section 10A of the Act. The Assessing Officer noted that approval received from STPL for Chinchwad unit reflected it as an expansion of Software Conversion unit. Similarly, approval for Akruti unit and Millennium Business Park unit reflected them as expansions of Sigma unit and TTC unit respectively. On this singular basis, the Assessing Office r treated the three units as mere expansions and not independent units. As a result thereof, the eligibility period for claim of deduction under section 10A was also reckoned from the first year of the eligibility of the corresponding old units. The Commissioner of Income-tax (Appeals) has, however, appreciated the plea of the assessee and has held that the three units fulfilled the conditions laid down under section 10A(2) of the Act and are accordingly eligible for the claim o .....

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..... ng unit. As evident from the land allotment letter dated 19th July, 1995 issued by the Gujarat Industrial Development Corp. Ltd. it is clear that the land allotted for the new unit is plot #624/1 and 2, and 625 to 627 whereas the existing plant was in plot 3 602. The production of 12 Hydroxy Stearic Acid is authorized by the letter dt 27th January 1995 which states that the Government has taken note of assessee s wish to manufacture Hydroxy Stearic Acid also by way of forward integration and amended the letter of permission to include 12 Hydroxy Stearic Acid of 12,000 MT in the very next sentence. It is observed that Govt also approves of your 8 request for the import of additional capital goods worth ₹ 550 lakhs for the project . That clearly demonstrates that the production of Hydroxy Stearic Acid of 12,000 MT was viewed by the Government as an independent project. It was not a case for purchase of addition capital goods for the existing project. The assessee is irrespective of the number of units, is one of artificial juridical person. Therefore, a combined permission, which involves setting up for different units, is quite in order. The fact of amendment of earlier permi .....

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..... gh Court in Income Tax Appeal (L) No.1820/2012 vide judgment dated 28.02.2013 had dismissed the appeal of the Revenue against the order of Tribunal, in turn following the ratio laid down by the Hon ble High Court in Income Tax Appeal No.1148/2012 relating to assessment year 2002-03, judgment dated 28.02.2013. 14. The issue arising in the grounds of appeal No.2 and 3 is identical to the issue before the Tribunal in assessee s own case in the earlier years and since there is no change in factual aspects, we uphold the order of CIT(A) in allowing the claim of deduction under section 10A of the Act in respect of three units i.e. Chinchwad, Akurdi and Millennium Business Park as the same were independent units. The grounds of appeal No.2 and 3 raised by the Revenue in this regard are dismissed. 15. The Revenue vide ground of appeal No.6 is aggrieved by the order of CIT(A) in holding the assessee eligible for deduction under section 10A of the Act in respect of 8 old undertakings. 16. The learned Authorized Representative for the assessee pointed out that the Tribunal in assessment years 2002-03 and 2003-04 and also in assessment year 2004-05 had allowed the claim of assessee in .....

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..... financial year does not exceed 50% of the total technical manpower actually engaged in the development of software or IT enabled projects in the new unit. As per details furnished by the assessee in the new unit at Bangalore, the new employees employed were 289 and the transferred employees were 112 i.e. total employees 401 percentage and percentage of transferred employees to the total employees was 27.93%. In respect of unit at SPZ 47, the new employees totaled to 65 along with transferred employees of 6, resulting in total employees of 71 percentage and the percentage of transferred employees to the total employees was 8.45%. Hence for both the units even if we consider the transferred employees, but the same is within the parameters laid down by the CBDT vide Circular dated 08.10.2014 and hence transfer of old employees to the new units cannot be construed as splitting up or re-construction of existing business. Another objection raised by the Assessing Officer in respect of unit at SPZ 47 was that it was a system hub. However, the plea of the assessee before us and the CIT(A) was that it was engaged in providing remote infrastructure management through technology software and .....

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..... year 2002-03 observing as under:- 14. In Ground No. 5, the dispute relates to the action of the Assessing Officer in adding back losses suffered by the section 10A eligible units while computing income of the assessee under the normal provisions of the Act. Similar issue has been considered by our co-ordinate Bench in assessee s own case for assessment years 2002-03 and 2003-04 (supra), wherein the order of the Commissioner of Income-tax (Appeals) has been set aside with directions to the Assessing Officer to allow set-off of the losses of the section 10A eligible units against the normal business income of the assessee while 9 computing income as per normal provisions of the Act. The relevant findings of the Tribunal as contained in paras 3 to 5 of its order are reproduced hereinbelow for the sake of brevity: 3. In the first Ground, dispute relates to the action of the Assessing Officer in adding back losses suffered by the section 10A eligible units while computing income of the assessee under the normal provisions of the Act. 4. In this connection, it was a common point between the parties that similar issue has been adjudicated by the Pune Bench of the Tribunal in a .....

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..... for the assessment year 2001-02 wherein the claim of the assessee relating to the set off of the losses against the other business profits was approved by the Hon ble High Court. In view of this, we accordingly affirm the order of the Commissioner of Income-tax (Appeals) and thus dismiss the Ground of appeal of the Revenue. 20. We further find that the Revenue in an appeal filed before the Hon ble Bombay High Court in Income Tax Appeal No.1148/2012 relating to assessment year 2002-03 had raised the issue vide ground of appeal a b in respect of set off of losses against the business profits including the specific provisions of section 10A(6) of the Act and also taking note of the provisions of section 10A(8) of the Act. The Hon ble Bombay High Court vide judgment dated 28.02.2013 held that both the issues were covered against the Revenue and in favour of the assessee in line with the ratio laid down by it in assessee s own case in Income Tax Appeal No.2177/2012 rendered on 01.07.2011. The Hon ble Bombay High Court had also in the appeal filed by the Revenue relating to assessment year 2004-05 in Income Tax Appeal (L) No. 1820/2012 vide judgment dated 28.02.2013 had dismissed .....

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..... details available at page 6 of the order of TPO. The plea of the assessee before the TPO was that as general business practice in the software industry, no interest was charged on the delayed receipt from customers. The TPO considered the copies of communication vis- -vis the rates of interest as might have been chargeable from the assessee and / or from AEs for foreign currency loans and determined the arm s length price of interest charged by the assessee from its AEs @ 7.25% i.e. 2.25% being rate of interest at LIBOR + 3% and guarantee cost thereupon @ 12%. Accordingly, the TPO determined the arm s length price of excess credit period allowed to the AEs at ₹ 4,82,95,149/- and after giving credit of the interest recovered by the assessee from its AEs at ₹ 1,53,77,716/- proposed adjustment of ₹ 3,29,17,433/-. Similar adjustment was proposed for assessment years 2003-04 and 2004-05 by the TPO vide its order dated 29.08.2008. The Assessing Officer vide order passed under section 143(3) of the Act added the said adjustment on account of interest under section 92C(4) of the Act at ₹ 3,29,17,433/-. The CIT(A) directed the Assessing Officer to compute the arm s l .....

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..... arm s length price. The assessee was carrying on its business through its AEs and had settled some credit terms with its AEs vis- -vis the payments to be received by it. In the Form No.3CEB, the assessee had declared the transaction of interest received on delayed payments with its AEs as an international transaction, under which it had received ₹ 3.12 crores. However, during the proceeding before the TPO, it was noted that there was delay in realization of amount due from AEs beyond credit period in respect of associate entities as under:- Status AE s Invoice Amount Total Realized Invoice X No of days delay Weighted Average No of days delays Patni Inc, USA 592,33,38,933 580,83,75,342 199,37,97,33,476 34 Pati UK 31,51,88,988 30,81,78,039 34,97,56,88,595 111 Patni GmbH 708,59,602 692,33,110 878,56,93,667 124 Total No. of Weighte .....

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..... ng interest charged by the assessee on outstanding loan from its AEs. 30. Further, Pune Bench of Tribunal in Varroc Engineering (P) Ltd. Vs ACIT (supra) had observed as under:- 15 ..while benchmarking the international transactions what has to be seen is the comparison between related transactions i.e. where the assessee has advanced money to its associated enterprises and charged interest then the said transaction is to be compared with a transaction as to what rate the assessee would have charged, if it had extended the loan to the third party in foreign country. Once there is a transaction between the assessee and its associated enterprises in foreign currency, then the transaction would have to be looked upon by applying the commercial principles with regard to the international transactions. In that case, the international rates fixed being LIBOR+ rates would have an application and the domestic prime lending rates would not be applicable. The assessee has further explained that it had raised the loan from Citi Bank on international rates for the purpose of investment in the share application money of its associated enterprises, which in turn was partly converted from .....

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..... hat the average of the LIBOR rate for 1-4-2005 to 31-3-2006 is 4.42 per cent and the assessee had charged interest at 6 per cent which was higher than the LIBOR rate, no addition on this account was liable to be made in the hands of the assessee. In the circumstances, the addition made by the Assessing Officer on this count was deleted. 17. The Mumbai Bench of the Tribunal in DCIT Vs. Tech Mahindra Ltd. (2011) 12 taxmann.com 132 (Mum.) held that where there is a choice between the interest rate of currency other than the currency in which transaction had taken place and the interest rate in respect of the currency in which transaction has taken place, the latter should be adopted. Where the transaction is between the assessee and its associated enterprises in foreign currency and the transaction is international transaction, then the transaction would have to be looked upon by applying commercial principles in regard to international transactions. 18. Similar principle has been laid down by the Mumbai Bench of the Tribunal in Hinduja Global Solutions Ltd. Vs. ACIT (2013) 35 taxmann.com 348 (Mumbai Trib.). 19. In the entirety of the above facts and circumstances, we hold .....

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..... mmercial principles with regard to an international transaction. If that is so, then the domestic lending rates cannot be applied in order to benchmark the transaction of the assessee with its AEs and the international rates fixed by LIBOR would come into play. There was substantial delay in receipt of payment from AEs and substantial amount stood unrecovered from the AEs beyond the stipulated periods. The assessee initially did not charge interest from the AEs and subsequently, charged interest from AEs at AFR i.e. America n Federal Rate @ 2.98%. The amount is in the character of loan or borrowing after the stipulated credit period and consequently, such recovery of dues in the international transaction with its AEs is to be benchmarked by applying CUP method of international bank rates. Accordingly, we hold that LIBOR plus rates have to be applied to the amounts due from the AEs beyond the period of 25 days, which was the weighted average number of days delay allowed to the third parties. After excluding the period of 25 days, interest is to be charged on the balance number of days of delay by applying LIBOR plus rates. We find that the TPO had applied average rate of LIBOR pl .....

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