TMI Blog2016 (3) TMI 1126X X X X Extracts X X X X X X X X Extracts X X X X ..... arrived at after excluding certain expenses, the same should also be excluded from the total turnover in the denominator. Disallowance of interest paid to Telelogic Sweden (AE) - revenue or capital - Held that:- Though the assessee has failed to establish that the acquisition of fixed assets was made out of its own free reserves, however we find that there is a substance in the alternate plea of the assessee that the addition if any can be made only in respect of addition to the fixed assets post issuance of debentures because prior to the receipt of the debenture proceeds the borrowed fund cannot be utilized for the purpose of purchasing the asset. Accordingly, we direct the Assessing Officer to verify the exact date of acquisition of the fixed assets and then to decide the issue of disallowance of interest only in respect of the fixed assets acquired post issuance of debentures or payment of which is made post issuance of debentures. Disallowance of rent equalization amount - Held that:- We allow the claim of the assessee on this issue regarding rent equilisation amount. Disallowance of consultancy charges - Held that:- When the DRP has already directed the Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in making a addition of INR 33,452,024 to the total income of the Appellant on account of adjustment to the arm s length price with respect to software development service transaction entered into by the Appellant with its associated enterprises. b) The AO/TPO erred in law and on facts as he failed to establish that the Appellant shifted profits outside India. 2 Comparability analysis adopted by the TPO for determination of arm s length price a) The AO/ TPO grossly erred on facts and in law in rejecting the filters and search process adopted by the Appellant in the Transfer Pricing Study. Further, the AO/TPO also erred on facts and in law by conducting a fresh benchmarking analysis in respect of captive software services provided by the Appellant and wrongly comparing the Appellant s activities with companies operating as full-fledged entrepreneurs without considering the differences in functions performed, assets employed and risks assumed by the Appellant vis- -vis comparable companies. b) The AO/TPO erred in law in applying arbitrary filters as criterion for rejection of companies identified by the Appellant in the Transfer Pricing Study such as (i) companies whos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the proviso to Section 92C(2) of the Act. 6 Grant of lower deduction under section 10A of the Income-tax Act, 1961 a) On the facts and in the circumstances of the case, the learned AO has erred in reducing the travel expenses incurred in foreign currency amounting to ₹ 6,669,249 from the export turnover while computing the deduction under section 10A of the Act irrespective of the fact that the Appellant is engaged in software development activity and not rendering technical services outside India. b) On the facts and in the circumstances of the case, the learned AO has erred in reducing the telecommunication expenses of ₹ 2,983,358 from the export turnover irrespective of the fact that entire expenses cannot be attributable to the delivery of computer software outside India. c) On the facts and in the circumstances of the case, the learned AO has erred in treating the insurance expenses of ₹ 9,763,523 as incurred for delivery of computer software outside India. d) Without prejudice to the above, on the facts and in the circumstances of the case, the learned AO has erred in erroneously considering Telecommunication charges as ₹ 2,983,358 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e subject assessment year in case the additions/ disallowances made in earlier years assessment orders are deleted by the appellate authorities. 12 Directions issued by the Honorable DRP The Honorable DRP has erred in law and on facts in not taking congnizance of the objections filed by the Appellant in relation to the draft assessment order issued by the AO/ TP order and confirming the draft order of the AO. 13 Interest under section 234B of the Act The learned AO has erred in levying interest under section 234B of the Act amounting to ₹ 1,173,089. 14 Penalty under section 271(1)(c) The learned AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act. Relief a) The Appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. b) The Appellant craves leave to add to or alter, by deletion, substitution, modification or otherwise, the above grounds of appeal, either before or during the hearing of the appeal. Further, the Appellant prays that the adjustment in relation to transfer pricing matters made by the learned AO/TPO and upheld by Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduct development Software Development Services. 21,72,52,102 Indian Global Services. 2,87,31,881 International Telemarketing 1,32,57,075 Accounting Services 19,07,807 Consultancy Fees received. 12,61,497 Consultancy Services Paid 14,35,960 Issue of debentures. 18,50,00,000 Payment of interest (paid) 23,31,506 Reimbursement of expenses (paid) 8,76,299 Recovery of expenses (received) 24,27,098 The assessee has bench marked its international transactions by adopting the TNMM as Most Approriate Method ( MAM ) for all three segments in its T.P. Analysis report. The TPO accepted the transactions in respect of distribution segment and ITES at arm s length. However, the TP Study analysis in respect of software development services was rejected by the TPO. Therefore, the only dispute before us is regarding the adju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14. R Systems International Ltd. 22.35 7.35 16.87 14.72 15. Sagarsoft (India) Ltd. -11.62 23.08 6.17 7.92 16. Shree Tulsi Online.Com Ltd. 3.33 15.66 NA 9.22 17. Vama Industries Ltd. 23.05 10.99 NA 18.50 Arithmetical Mean 13.64 The TPO rejected 12 out of the 17 comparables selected by the assessee and carried out a fresh search for including 15 more comparable companies. Accordingly, the TPO has considered 20 comparable companies to determine the ALP as under : Sl.No. Name of the company Operating Margin on Cost (%) Adjusted Margin on Cost (%) 1. Avani Cimcon Technologies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO/A.O before the DRP but could not succeed. 5. Before us, the ld. AR has submitted that 13 out of 20 companies considered by the TPO for determination of ALP in respect of international transactions for providing software development services, are not comparable with the assessee. Thus, the ld. AR submitted that these 13 companies should be excluded from the set of comparables for determination of the ALP. He has contended that all these 13 companies have been considered by the coordinate Bench of this Tribunal in the series of decisions including the decision in the case of M/s 3DPLM Software Solutions Ltd V/s DCIT in IT(TP)A No.1303/Bang/2012 (AY-2008-09) dated 28.11.2013. Thus, the ld. AR has pointed out that this Tribunal in various cases has held that these companies cannot be considered as comparables with the software development services as provided by the assessee. He has also invited our attention to various decisions of this Tribunal wherein these companies were rejected as comparables of software development services provider. Apart from these 12 companies selected by TPO the ld. AR is also seeking exclusion of M/s Bodhtree Consulting Ltd from the list of compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .5.5.2015 in ITA No.1540/Bang/2012 and therefore the comparability of these 13 companies have been covered by the findings of the Tribunal in the case of Kodiak Network India Pvt. Ltd. (supra). 7.2 The assessee is seeking exclusion of 2 comparable companies namely Persistent Systems Pvt. Ltd. and Quintegra Solutions Ltd. from the list of comparable companies which was also part of the assessee's TP Analysis and therefore the assessee has filed additional grounds as under : 1. The learned TPO has erred in selecting Persistent Systems Limited as a comparable in the order u/s 92CA, despite that the company is functionally not comparable to the business of the Appellant. 2. The learned TPO has erred in selecting Quintegra Solutions Limited as a comparable in the order u/s 92CA, despite that the company is functionally not comparable to the business of the Appellant. The learned Authorised Representative has however pointed out that out of these 13 comparables sought to be excluded by the assessee 2 comparable companies namely Persistent Systems Limited and Quintegra Solutions Ltd. were also part of the T.P. Analysis of the assessee. The learned Authorised Representati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparables. The assessee has raised objection regarding 13 comparables out of 20 selected by the TPO. The companies against which the assessee raised objections are as under: S.No. Name of the Company 1 AvaniCimcon Technologies Ltd 2 Bodhtree Ltd 3 Celestial Biolabs Ltd 4 E-Zest Solutions Ltd 5 Infosys Technologies Ltd 6 KALS Information Systems Ltd (Seg.) 7 Lucid Software Ltd 8 Persistent Systems Ltd 9 Quintegra Solutions Ltd 10 Softsole India Ltd 11 Tata Elxsi Ltd (Seg.) 12 Thirdware Solutions Ltd (Seg 13 Wipro Ltd (Seg.) 22. We note that the comparability of these 13 companies have been examined by this Tribunal in series of decision as re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration (i.e. Assessment Year 2008-09). In support of this contention, it was submitted that :- (i) The extract from the Website of the company clearly indicates that it is primarily engaged in development of software products. The extract mentions that this company offers customised solutions and services in different areas; (ii) The Website of this company evidences that this company develops and sells customizable software solutions like DX Change, CARMA, etc. 7.4 The learned Authorised Representative submitted that a co-ordinate bench of the Tribunal in its order in Curram Software International Pvt. Ltd., in its order in ITA No.1280/Bang/2012 dt.31.7.2013 has remanded the matter back to the file of the Assessing Officer / TPO to examine the comparability of this company afresh, by making the following observations at paras 9.5.2 and 9.5.3 thereof :- 9.5.2 As regards the submission of the learned Authorised Representative, we are unable to agree that this company has to be deleted from the list of comparables only because it has been deleted from the set of comparables in the case of Triology EBusiness Software India Pvt. Ltd. (supra). No doubt this company has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uate opportunity of being heard and to make its submissions in the matter, which shall be duly considered before passing orders thereon. It is ordered accordingly. The learned Authorised Representative submits that this company was selected as a comparable by the TPO not by any FAR analysis or as per the search process conducted by the TPO, but only as an additional comparable for the reason that it was selected as a comparable in the earlier year i.e. Assessment Year 2007-08 on the basis of information obtained under section 133(6) of the Act. In this regard, the learned Authorised Representative took us through the relevant portions of the TP order under section 92CA of the Act and the show cause notices for both the earlier year i.e. Assessment Year 2007-08 and for this year and contended that the selection of this company as a comparable violates the principle enunciated in Curram Software International Pvt. Ltd. (supra) that a company can be selected as a comparable only on the basis of FAR analysis conducted for that year and therefore pleaded for its exclusion. The learned Authorised Representative also submitted that he has brought on record sufficient evidence to show ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 dt.22.2.2013, and in the case of Triology E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011), we direct the A.O./TPO to omit this company from the list of comparables. 8.0 Bodhtree Consulting Ltd. 8.1 This company has been selected as a comparable company to the assessee by the TPO; the inclusion of which was not objected to by the assessee before both the TPO and the DRP. The assessee has not objected to the inclusion of this company in the list of comparables, as can be seen from the grounds of appeal raised in Form 36B before this Tribunal. 8.1 However in the course of proceedings before us, the learned Authorised Representative objected to the inclusion of this company as a comparable for the following reasons : (i) This company has reported abnormally fluctuating margins in the period from 2005 to 2011, which indicate abnormal business factors and abnormal profit margins and hence should not be considered as comparable to the assessee. (ii) The abnormally fluctuating margins indicate that this company bears higher risk in contrast to the assessee who has earned consistent margins over the y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparables for the reasons that it is functionally different form the assessee and that it fails the employee cost filter. The TPO, however, brushed aside the objections raised by the assessee by stating that the objections of functional dissimilarity has been dealt with in detail in the T.P. order for Assessment Year 2007- 08. As regards the objection raised in respect of the employee cost filter issue, the TPO rejected the objections by observing that the employee cost filter is only a trigger to know the functionality of the company. 9.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable, as the company is into bio-informatics software product /services and the segmental break up is not provided. It was submitted that :- (i) This company is engaged in the development of products in the field of biotechnology, pharmaceuticals, etc. and therefore is not functionally comparable to the assessee; (ii) This company has been held to be functionally incomparable to software service providers by the decision of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra); (iii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly clear from this, that the TPO has not carried out any independent FAR analysis for this company for this year viz. Assessment Year 2008-09. To that extent, in our considered view, the selection process adopted by the TPO for inclusion of this company in the list of comparables is defective and suffers from serious infirmity. 9.4.2 Apart from relying on the afore cited judicial decisions in the matter (supra), the assessee has brought on record IT(TP)A 1380/Bang/2012 Page 8 of 34 substantial factual evidence to establish that this company is functionally dis-similar and different from the assessee in the case on hand and is therefore not comparable and also that the findings rendered in the cited decisions for the earlier years i.e. Assessment Year 2007-08 is applicable for this year also. We agree with the submissions of the assessee that this company is functionally different from the assessee. It has also been so held by co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) as well as in the case of Triology E-Business Software India Pvt. Ltd. (supra). In view of the fact that the functional profile of and other parameters o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8-09 and therefore this company cannot be considered for the purpose of comparability in the case on hand and hence ought to be excluded from the list of comparables. In support of this contention, the learned Authorised Representative drew our attention to various parts of the Annual Report of this company. (v) This company is engaged not only in the development of software products but also in the provision of training services as can be seen from the website and the Annual Report of the company for the year ended 31.3.2008. (vi) This company has two segments; namely, a) Application Software Segment which includes software product revenues from two products i.e. Virtual Insure and La-Vision and b) The Training segment which does not have any product revenues. 10.3 Per contra, the learned Departmental Representative contended that the decision of the co-ordinate bench of the Tribunal in the case of Triology E-Business Software India Pvt. Ltd. (supra) was rendered with respect to F.Y.2006-07 and therefore there cannot be an assumption that it would continue to be applicable to the year under consideration i.e. A.Y. 2008-09. To this, the counter argument of the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral grounds like functional dis-similarity, brand value, size, etc. The TPO, IT(TP)A 1380/Bang/2012 Page 26 of 34 however, brushed aside the objections of the assessee and included this company in the set of comparables. 12.2 Before us, the learned Authorised Representative of the assessee contended that this company i.e. Wipro Ltd., is not functionally comparable to the assessee for the following reasons :- (i) This company owns significant intangibles in the nature of customer related intangibles and technology related intangibles, owns IPRs and has been granted 40 registered patents and has 62 pending applications and its Annual Report confirms that it owns patents and intangibles. (ii) the ITAT, Delhi observation in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856(Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and a market leader assuming all risks leading to higher profits, cannot be considered as comparable to captive service providers assuming limited risk; (iii) the co-ordinate bench of the ITAT, Mumbai in the case of Telecordia Technologies India Pvt. Ltd. (ITA No.7821/Mum/2011) has held that Wipro Ltd. is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the set of comparable companies in the case on hand for the year under consideration. 13. Tata Elxsi Ltd. 13.1 This company was a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables on several counts like, functional dis-similarity, significant R D activity, brand value, size, etc. The TPO, however, rejected the contention put forth by the assessee and included this company in the set of comparables. 13.2 Before us it was reiterated by the learned Authorised Representative that this company is not functionally comparable to the assessee as it performs a variety of functions under software development and services segment namely - (a) product design, (b) innovation design engineering and (c) visual computing labs as is reflected in the annual report of the company. The learned Authorised Representative submitted that, (i) The co-ordinate bench of the Mumbai Tribunal in the case of Telcordia Technologies (P.) Ltd. (supra) has held that Tata Elxsi Ltd. is not a functionally comparable for a software development service provider. (ii) The facts pertaining to Tata Elxsi Ltd . have not c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable portion. As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly. 14. E-Zest Solutions Ltd. 14.1 This company was selected by the TPO as a comparable. Before the TPO, the assessee had objected to the inclusion of this company as a comparable on the ground that it was functionally different from the assessee. The TPO had rejected the objections raised by the assessee on the ground that as per the information received in response to notice under section 133(6) of the Act, this company is engaged in software development services and satisfies all the filters. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elopment services, this company i.e. e-Zest software Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co-ordinate bench of this Tribunal in the case of Capital I-Q Information Systems (India) (P.) Ltd. (supra) that KPO services are not comparable to software development services and are therefore not comparable. Following the aforesaid decision of the co-ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest software Ltd . be omitted from the set of comparables for the period under consideration in the case on hand. The A.O./TPO is accordingly directed. 15. Thirdware Solutions Ltd. (Segment) 15.1 This company was proposed for inclusion in the list of comparables by the TPO. Before the TPO, the assessee objected to the inclusion of this company in the list of comparables on the ground that its turnover was in excess of ₹ 500 Crores. Before us, the assessee has objected to the inclusion of this company as a comparable for the reason that apart from software development services, it is in the business of product development a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egard, the learned Authorised Representative submitted that - (i) This company is engaged in the development of software products. (ii) This company has been held to be functionally different and therefore not comparable to software service providers by the order of a coordinate bench of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT(TP)A No.845/Bang/2011), following the decision of Mumbai Tribunal in the case of Telcordia Technologies India (P.) Ltd.(ITA No.7821/Mum/2011) (iii) The rejection of this company as a comparable to software service providers has been upheld by the co-ordinate benches of this Tribunal in the cases of LG Soft India (P.) Ltd and CSR India (P.) Ltd. (supra) and by the Delhi Bench of the Tribunal in the case of Transwitch India (P.) Ltd. (supra).(ITA No.6083/Del/2010) (iv) The factual position and circumstances pertaining to this company has not changed from the earlier Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09 and therefore on this basis, this company cannot be considered as a comparable in the case on hand. (v) The relevant portion of the Annual Report of this company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this company as a comparable for the reasons that this company being engaged in software product designing and analytic services, it is functionally different and further that segmental results are not available. The TPO rejected the assessee's objections on the ground that as per the Annual Report for the company for Financial Year 2007-08, it is mainly a software development company and as per the details furnished in reply to the notice under section 133(6) of the Act, software development constitutes 96% of its revenues. In this view of the matter, the Assessing Officer included this company i.e. Persistent Systems Ltd., in the list of comparables as it qualified the functionality criterion. 17.2 Before us, the assessee objected to the inclusion of this company as a comparable submitting that this company is functionally different and also that there are several other factors on which this company cannot be taken as a comparable. In this regard, the learned Authorised Representative submitted that : (i) This company is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding that this company qualifies all the filters applied by the TPO. On the issue of acquisitions, the TPO rejected the assessee's objections observing that the assessee has not adduced any evidence as to how this event had an any influence on the pricing or the margin earned. 18.2 Before us, the assessee objected to the inclusion of this company for the reason that it is functionally different and also that there are other factors for which this company cannot be considered as a comparable. It was submitted that, (i) Quintegra Solutions Ltd., the company under consideration, is engaged in product engineering services and not in purely software development services. The Annual Report of this company also states that it is engaged in preparatory software products and is therefore not similar to the assessee in the case on hand. (ii) In its Annual Report, the services rendered by the company are described as under : Leveraging its proven global model, Quintegra provides a full range of custom IT Solution (such as development, testing, maintenance, SAP, product engineering and infrastructure management services), proprietary software products and consultancy servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gibles or IPRs, then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted form the list of comparables, as in the case on hand. 18.5 We also find from the Annual Report of Quintegra Solution Ltd. that there have been acquisitions made by it in the period under consideration. It is settled principle that where extraordinary events have taken place, which has an effect on the performance of the company, then that company shall be removed from the list of comparables. 18.6 Respectfully following the decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra), we direct that this company i.e. Quintegra Solution Ltd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider. 19. Softsol India Ltd. 19.1 This company was selected by the TPO as a comparable. The assessee objected to the inclusion of this company as a comparable on the grounds that this company is functionally different and dis-similar from it. The TPO reje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra) and it was found that the said company is engaged in the different field of services i.e. product designing and analytic services as well as in proprietary of software product and are in research and development activity which has resulted in creation of its intellectual property rights. Therefore, the said company is not functionally comparable with pure software development service activity. Once the company is found to be a non-comparable company with the assessee, the same is required to be excluded from the set of comparables even if the said company is selected by the assessee itself. This view was taken by the decision of the Special Bench of Chandigarh Tribunal in the case QUARK SYSTEMS (P.) LTD (supra). 25. Thus, out of 20 comparables 12 companies are required to be excluded from the list of comparables for determining the ALP. Accordingly, we direct the TPO/AO to exclude the following companies from the set of comparables and recomputed the ALP after considering the claim of risk adjustment as well as working capital adjustment: S.No. Name of the Company 1 Avani Cimcon Technologies Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und No.6 is regarding the rejection of travel expenses incurred in foreign currency from the export turnover. 12. We have heard the rival submissions as well as considered the relevant material on record. At the outset, we note that this issue is covered by the decision of the Hon'ble jurisdictional High Court of Karnataka in the case of CIT V Tata Elxsi Ltd Others (2011) 247 CTR 334 (Karnataka) wherein it has been held that while computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded from the total turnover in the denominator. The relevant finding of the Hon ble jurisdictional High Court reads as follows:- ..Section 10A is enacted as an incentive to exporters to enable their products to be competitive in the global market and consequently earn precious foreign exchange for the country. This aspect has to be borne in mind. While computing the consideration received from such export turnover, the expenses incurred towards freight, telecommunication charges, or insurance attributable to the delivery of the articles or things or computer software outside India, or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atute prescribed a formula and in the said formula, export turnover is defined, and when the total turnover includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. Thus, there is no error committed by the Tribunal in following the judgments rendered in the context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same . Respectfully following the judgment of Hon'ble jurisdictional High Court, we direct the A.O. to exclude travel expenses incurred in foreign currency from the total turnover as well. 13. Ground No.7 is regarding disallowance of interest paid to Telelogic Sweden (AE). The Assessing Officer noted that the assessee has acquired fixed asset to the tune of ₹ 1,31,52,489 during the financ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the acquisition of fixed assets was made out of its own free reserves, however we find that there is a substance in the alternate plea of the assessee that the addition if any can be made only in respect of addition to the fixed assets post issuance of debentures because prior to the receipt of the debenture proceeds the borrowed fund cannot be utilized for the purpose of purchasing the asset. Accordingly, we direct the Assessing Officer to verify the exact date of acquisition of the fixed assets and then to decide the issue of disallowance of interest only in respect of the fixed assets acquired post issuance of debentures or payment of which is made post issuance of debentures. 18.1 Ground No.8 is regarding disallowance of rent equilisation amount. The Assessing Officer has noted that the assessee has debited an amount of ₹ 5,47,46,191 towards rent expenditure. On verification of record, it was found that an amount of ₹ 8,01,624 is a provision which has not been added back to the total income of the assessee. The Assessing Officer disallowed a sum of ₹ 5,21,056 pertaining to STPI and ₹ 2,80,568 to non-STPI unit on the ground that it is an uncertain lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epted the judgment of Hon'ble jurisdictional High Court and filed an appeal before the Hon'ble Supreme Court. Since nothing has brought before us to show that these judgments of Hon'ble jurisdictional High Court and Hon'ble Delhi High Court have either been reversed or the same has been stayed by the Hon'ble Supreme Court therefore, in the absence of any contrary judgment of the Hon'ble Supreme Court, the judgment of Hon'ble jurisdictional High Court is binding on this Tribunal as well as on the DRP. Accordingly, we allow the claim of the assessee on this issue regarding rent equilisation amount. 21. Ground No.9 is regarding disallowance of consultancy charges. We note that the TPO has found this payment of consultancy charges at arm s length however, the Assessing Officer disallowed the consultancy charges on the ground that the assessee has failed to prove that the service was rendered by the AE. The DRP has directed the Assessing Officer to decide this issue afresh after affording an opportunity to the assessee in para 23.4 as under : 23.4 The Panel has carefully considered the issue in dispute and the facts relating thereto. It observes that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been consistently allocating the common expenses on the basis of head counts which has been accepted by the Assessing Officer in the past. However, for the year under consideration, the Assessing Officer has decided to change the basis of apportionment and allocated the expenses on the basis of turnover. He has thus contended that the action of the Assessing Officer is against the rule of consistency. In support of his contention he has relied upon the judgment of Hon'ble Delhi High Court in the case of CIT Vs. EHPT India Pvt. Ltd. in ITA No.1172/Bang/2008 and submitted that the Hon'ble High Court has held that allocation method consistently accepted by both the tax payer and tax department in the past and having regard to the nature of the business and other relevant factor. If it is reasonable method and the allocation does not distort the profits then it should not be disturbed. 24. On the other hand, the learned Departmental Representative has relied upon the orders of authorities below and submitted that the turnover basis is more reasonable than the head count. 25. Having considered the rival submissions and the relevant material on record, we find that the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aterial on record. There is no dispute that the Hon'ble jurisdictional High Court in the case of Himatsinghika Seide Ltd. (supra) had decided this issue in favour of the revenue and against the assessee. However, it is pertinent to note that the said decision of the Hon'ble jurisdictional High Court was in respect of the dispute for the assessment year 1994-95 and there is an amendment in the provisions of sec.10A and 10B of the Act vide Finance Act, 2000 w.e.f. 1/4/2001. By virtue of the amendment and substitution of provisions of sec.10A and 10B, the incentive u/s 10A and 10B was no longer in the nature of exemption but it is in the nature of deduction. By considering the amendment/substitution of sec. 10A and 10B vide Finance Act, 2000 w.e.f. 1/4/2001, Hon'ble jurisdictional High Court vide judgment in the case of Yokogawa India Ltd.(supra) has held in paras.16 to 23 as under: 16. The substituted s. 10A continues to remain in Chapter III. It is titled as Incomes which do not form part of the total income . It may be noted that when s. 10A was recast by the Finance Act, 2001 (sic- 2000), the Parliament was aware of the character of relief given in Chapter III. Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng effect to all deductions under the Act. There cannot be any further deduction from the total income as the total income is itself arrived at after all deductions. 19. From the aforesaid discussion it is clear that the income of 10A unit has to be excluded before arriving at the gross total income of the assessee. The income of 10A unit has to be deducted at source itself and not after computing the gross total income. The total income used in the provisions of s. 10A in this context means the global income of the assessee and not the total income as defined in s. 2(45). Hence, the income eligible for exemption under s. 10A would not enter into computation as the same has to be deducted at source level. 2nd substantial question of law 20. Prior to the introduction of sub-s. (6) of s. 10A and s. 10B by the Finance Act, 2000, which came into effect from 1st April, 2001, in computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of the relevant assessment years, or of any previous year, relevant to any subsequent assessment year, sub-s. (2) of s. 32, cl. (ii) of sub-s. (iii), s. 32A cl. (ii) of sub-s. (3) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or unabsorbed depreciation arising in the asst. yr. 2001-02 and subsequent years. 22. It is interesting to note that such relaxation has not been made in s. 10C which provides for exemption in respect of profits of certain undertakings in north eastern region. This makes clear the legislative intention of providing relaxation wherever it deems fit and in the present case, such relaxation has been made in s. 10A but not in s. 10C. 23. It is to be noted that the aforesaid amendment read with the Board circular does not militate against the proposition that the benefit of relief under this section is in the nature of exemption with reference to the commercial profits. However, in order to give effect to the legislative intention of allowing the carry forward of depreciation and loss suffered in respect of any year during the tax holiday for being set off against income post tax holiday, it is necessary that the notional computation of business income and the depreciation as per the provisions of the Act should be made for each year of the tax holiday period. While so computing, attention will have to be given to provisions of ss. 70, 71, 72 and s. 32(2). The amount of deprecia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO expressed the opinion that provisions of section 10B are deduction provisions and therefore effect will have to be given to the provisions of section 72 of the Act, even in respect of profits of the 10B unit. Accordingly, the claim of the assessee for carry forward of loss of non- 10B unit was not allowed by the AO. On appeal by the assessee, it was contended that the provisions of section 10A and section 10B are exemption provisions and therefore the profit of 10A and 10B units will not enter the computation of total income at all and therefore the profits of these units need not be set off against the loss of non-10B unit by invoking the provisions of section 72 of the Act. The CIT(Appeals) did not agree with the contention of the assessee and in doing so, he placed reliance on the decision of the Hon ble Karnataka High Court in the case of CIT v. Himatsingike Seide Ltd., 286 ITR 255 (Kar). In the aforesaid decision, the Hon ble High Court has taken the view that deduction u/s. 10B has to be allowed after set off of unabsorbed depreciation and unabsorbed investment allowance. The Hon ble Court took the view that the aforesaid provision was only an exemption provision. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... free trade zone etc.,-(1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the Previous-year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee : (emphasis supplied) 64. The expression Deduction and shall be allowed from the total income of the Assessee used in the aforesaid provisions was considered by the Hon ble High Court and it held in para 13 to 15 of its judgment that the expression shall be allowed from the total income of the Assessee does not mean total income as defined u/s.2(45) of the Act but that expression means profits and gains of the STP undertaking as understood in its commercial sense or the total income of the STP unit. Thus the view expressed is that income of the STP undertaking gets quarantined and will not be allowed to be set off against loss of either another STP undertaking or a non STP undertaking. The H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9.9.2013 against the aforesaid decision of the Hon ble Karnataka High Court, the Hon ble Supreme Court observed as follows while dismissing the appeal:- Having perused the records and in view of the facts and circumstances of the case, we are of opinion that the civil appeal being devoid of any merit deserves to be dismissed and is dismissed accordingly. 67. Thus the ratio has to be confined to the facts and circumstances of the case. The aforesaid observations have to be confined to the facts of that case and as applicable to a case where brought forward losses and depreciation of the very same STP undertaking are not adjusted while arriving at the profits of the 10B unit for allowing deduction u/s.10A/10B of the Act and not in respect of brought forward losses and depreciation of other undertakings/non-10A/10B units. S. 10A/10B(6) as amended by the FA 2003 w.r.e.f. 1.4.2001 provides that depreciation and business loss of the eligible unit relating to the AY 2001-02 onwards is eligible for set-off carry forward for set-off against income post tax holiday which means that they need not be so set off as mandated in the decision of the Hon ble Karnataka High Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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