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Logix Microsystems Ltd. Versus Deputy Commissioner of Income-tax, Circle-11 (5) , Bangalore

2017 (4) TMI 760 - ITAT BANGALORE

Setting off of losses of non-STPI Unit against the profits of the STPI Unit prior to allowing the deduction under Section 10A - Held that:- By following the latest judgment of the Hon'ble Supreme Court in CIT v. Yokogawa India Ltd. [2016 (12) TMI 881 - SUPREME COURT] based on the substituted/amended provisions of Sec. 10A/10B which are applicable in the case of the assessee as well as the decision of the Tribunal in case of Biocon Ltd. (2014 (12) TMI 838 - ITAT BANGALORE), we decide this issue i .....

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r limited purpose of verification of the facts of double deduction of certain expenses as claimed by the assessee. - Disallowance made under Section 14A - Held that:- It is apparent that as far as the interest expenditure is concerned there is a reduction in the investment during the year under consideration and therefore no interest bearing fund was used for investment during the year under consideration. Even otherwise the Assessing Officer has not given a finding that the assessee has use .....

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n account of interest expenditure under Section 14A of the Act. - As regards the disallowance on account of indirect administrative expenditure there is no dispute that there is a substantial movement in the investment portfolio of the assessee which consist of mutual funds, equity shares and inter-corporate deposits. Therefore when the assessee has taken the decision for selling and fresh investment during the year under consideration which involves a high level decision making process then .....

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AKA HIGH COURT] by itself it is not sufficient to hold that the employer is not entitled for deduction as contemplated under Section 36(1)(va) of the IT Act r/w Section 43-B of the IT Act - The word “contribution” is used not only to mean contribution of the employer but also contribution to be made on behalf of the member employed by the employer directly - the word “contribution” used in Clause(b) of Section 43-B of the IT Act means the contribution of the employer and the employee - That bein .....

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ideration as per the details given at page 707 of the paper book. It is also undisputed fact that no shares were allotted to the assessee till the end of the financial year as on 31.3.2009. thus when this money was available with the AE of the assessee for utilization then it loses the character of share application money and therefore the rule as laid down by the various decisions of this Tribunal relied upon by the learned Authorised Representative will not be applicable in a case where the mo .....

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sions of Section 92B of the Act as it has a direct bearing on the profit and loss as well as the assets of the enterprises. Further as per the Explanation to Section 92B(1) of the Act till the date of allotment it will constitute as capital financing/advance to the AE. - We find substance so far as the applicability of LIBOR because the remittance has been made in foreign currency and therefore it is appropriate to apply the LIBOR rate for determining the arm's length interest. Further the c .....

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ny merit or substance in this contention of the learned Authorised Representative. - Deduction under section 10A - Held that:- Respectfully following the aforementioned decision of the Hon'ble High Court of Karnataka in the case of Tata Elxsi Ltd. (2011 (8) TMI 782 - KARNATAKA HIGH COURT ), we uphold the order of the DRP in directing the Assessing Officer to reduce the expenditure incurred in foreign currency from both export turnover and total turnover for the purpose of computing the deduc .....

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pursuant to the directions of the Dispute Resolution Panel (in short 'DRP') dt.30.12.2013 for the Assessment Year 2009-10. 2. First we take up the assessee's appeal wherein the assessee has raised the following grounds : 1. " That on the facts and in the circumstances of the case, the order passed by the learned AO based on the directions issued by the DRP is bad in law. Corporate Tax Issues: 2. Relief under section 10A of the Act: 2.1 The learned AO and the Hon'ble DRP err .....

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, in the case of CIT v. Himatasingike Seide Limited (286 ITR 255) without appreciating the difference in the facts of the case of the Appellant before the bench. 3. Re-computation of the quantum of, profits of the STPI unit eligible for relief under section 10A: 3.1 The learned AO and the Hon'ble DRP erred in re-apportioning expenses by not considering the fact that the Appellant had apportioned common expenses incurred involving insurance, miscellaneous expenses, office expenses, printing a .....

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y disallowing a sum of ₹ 41,94,650/- under section 14A while computing the taxable income under the Act. More specifically the objections are as follows: 4.1 The learned AO and the Hon'ble DRP erred in rejecting the submission of the Appellant that section 14A would not be applicable in its case since it has not incurred any expenditure in relation to exempt income, 4.2 The learned AO and the Hon'ble DRP erred in law in disallowing the expenses under section 14A without any specifi .....

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section 36(l)(va) r/w 43B(b) with respect to the employees' contribution to provident fund which was credited to the employees' account in the relevant fund after the due date specified under the provisions of the relevant fund/law but before the date of filing of the return of income under the Act. The learned AO, based on the directions of the Hon'ble DRP failed to appreciate the ratio laid down by the jurisdictional High Court in CIT v. Sabari Enterprises (298 ITR 141). Transfer .....

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ng the international transactions in determining the arm's length price of the international transactions. 8. The learned AO and the Hon'ble DRP erred in affirming the order of the learned TPO proposing the transfer pricing adjustment that exceeds the aggregate of profits earned by the group. Approach on the analysis to search for comparables: 9. The learned AO and the Hon'ble DRP erred in confirming the order of the learned TPO with regard to the analysis undertaken to select compar .....

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law. 9.2 Without prejudice to the above, the learned AO and the Hon'ble DRP erred in confirming the order of the learned TPO that involved selecting companies as comparables even though they are not comparable in respect of the factors of comparability as provided in Rule 10B i.e. functions performed, risks assumed, assets employed, capital size, companies with super normal profits etc. 10. Computation of operating margins of comparables chosen by learned TPO: 10.1 The learned AO/TPO and the .....

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the comparables. 11. Computation of operating margin and operating cost base of the Appellant: 11.1 The learned AO/TPO and the Hon'ble DRP erred in considering the operating profit margin earned and the operating cost incurred by the Appellant from the aggregate of export transactions (including those with unrelated parties) for the purpose of determining arm's length price, as against considering the operating profit margin earned and the operating cost incurred on the international tra .....

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h price on share-application money remitted to the subsidiary: Applicability of Transfer Pricing provisions to share-application money: 12. Without prejudice to the above grounds, the learned AO/TPO and the Hon'ble DRP erred in holding that the funds remitted by the Appellant to subscribe to equity capital in its foreign subsidiary are advances to the subsidiary. 13. The learned AO/TPO and the Hon'ble DRP erred in considering the funds remitted to the subsidiary for subscription in its e .....

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/TPO and the Hon'ble DRP erred in holding that the Appellant should have earned a return (in the nature of interest) and consequently erred in determining a notional interest as the arm's length remuneration for the advancement of loan; 14. Computation of the quantum of notional interest: 14.1 Without prejudice to the above grounds, the learned AO erred in considering the arm's length rate of interest as the SBI Prime Lending rate as per the order of the learned TPO without giving ef .....

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f interest 100 basis points as a cover for fluctuation in foreign exchange. 14.4 Without prejudice to the above grounds, the order of the learned AO, based on the directions of the Hon'ble DRP suffers from infirmities in that the Hon'ble DRP has not considered the objections raised by the Appellant with regards to the computation of interest on the aggregate amount of remittance during the year as against TPO's own order stating that the interest should be computed on monthly outstan .....

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assessee has relied upon the decision of the Hon'ble jurisdictional High Court in the case of CIT v. Yokogawa India Ltd. [2012] 341 ITR 385 as well as the decision in the case of CIT v. Aurigene Discovery Technologies Ltd. [IT Appeal No. 549/2013, dated 5-9-2014] and submitted that the Hon'ble High Court has reiterated the view taken in the case of Yokogawa India Ltd. (supra). He has also relied upon the decision of this Tribunal dated 30/4/2014 in the case of Biocon Ltd. v. Dy. CIT [201 .....

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material on record. There is no dispute that the Hon'ble jurisdictional High Court in the case of Himatasingike 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 .....

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uot;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. Chapter III deals with incomes which do not form part of total income. If the Parliament intended that the relief under s. 10A should be by way of deduction in the normal course of computation of total income, it could have placed the same in Chapter VI-A which houses the sections l .....

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tinues to be an exemption. Chapter VII deals with the incomes forming part of the total income on which no income-tax is payable. These are the incomes which are exempted from charge, but are included in the total income of the assessee. The Parliament despite being conversant with the implications of this chapter, has consciously chosen to retain s. 10A in Chapter III. 17. If s. 10A is to be given effect to as a deduction from the total income as defined in s. 2(45), it would mean that s. 10A i .....

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the provisions of the Act should not include s. 10A. In other words, the gross total income would be arrived at after considering s. 10A deduction also. Therefore, it would be inappropriate to conclude that s. 10A deduction is to be given effect to after Chapter VI-A deductions are exhausted. 18. It is after the deduction under Chapter VI-A that the total income of an assessee is arrived at. Chapter VI-A deductions are the last stage of giving effect to all types of deductions permissible under .....

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t 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 .....

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ion to any such allowance or deduction. Similarly no loss as referred to in sub-s. (1) or in s. 72 or sub-s. (1) or sub-s. (3) of s. 74 insofar as such loss relates to the business of the undertaking was permitted to be carried forward or set off where such loss relates to any of the relevant assessment years. 21. It is in this background the Finance Act, 2003 was introduced by inserting the words "the year ending up to the first day of April, 2001", for that in cls. (1) and (2) of sub .....

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rry forward of depreciation and business loss relating to any year of the tax holiday period to be set off against income of any year post tax holiday. This is supported by Circular No. 7 of 2003 [(2003) 184 CTR (St) 33] wherein the board has stated that the purpose of amendment is to entitle an assessee to the benefit of carry forward of depreciation and loss suffered during the tax holiday period. The circular dt, 5th Sept., 2003 reads as under : "20. Providing for carry forward of busine .....

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amended to do away with the restrictions on the carry forward of business losses and unabsorbed depreciation. The amendments have been brought into effect retrospectively from 1st April, 2001 and have been made applicable to business losses 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 .....

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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 depreciation and business loss remaining unabsorbed at the end of th .....

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ssions. The issue raised by the assessee in ground No. 21 is identical to the ground raised by the assessee in Biocon (supra). The facts of the case before the Tribunal in the case of Biocon (supra) were that the assessee during the previous year had four units which were entitled to claim deduction u/s. 10B of the Act viz., CMZ Unit, SAP Unit, RHI Unit and IFP Unit The assessee had claimed deduction u/s. 10B of the Act in respect of the aforesaid units totalling ₹ 157,22,33,066 which is t .....

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The AO firstly noticed that there was income from other sources to the extent of ₹ 4,71,15,896 and such had to be set off against the loss of the non-10B units. Accordingly, the AO held that the loss of the non-108 units that had to be considered for carry forward would be ₹ 101,21,03,280. Thereafter, the AO was of the view that income of the 10B units had to be set off against the toss of the non-10B units and if it is so set off, there will be no loss that needs to be carried forwa .....

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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. Himatasingike Seide Ltd., 286 ITR 255 (Kar). In the aforesaid decision, the Hon' .....

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bunal in the case of Global Vantage Pvt. Ltd. v. DCIT, 2010 TIOL 24 ITAT (DELHI) was also referred to by the CIT (A). A contrary view was expressed by the Bangalore Bench of the Tribunal in the case of KPIT Cummins Info Systems (Bangalore) Pvt. Ltd. v. ACIT, 120 TO 956. The CIT (A) found that in the case of Global Vantage Pvt. Ltd. (supra) decided by the Delhi Tribunal this decision has been held to be not in tune with the decision of the Hon'ble High Court of Karnataka in the case of Himata .....

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e issue in the following words: 63. We have given a careful consideration to the rival submissions. The issue as to whether the provisions of Sec. 10B of the Act are deduction provisions or exemption provisions will assume great importance. The reason is that if the provisions are considered as exemption provisions then they will not enter the computation of total income and therefore the loss of the eligible unit cannot be set off against the profits of the non-eligible unit. This issue has alr .....

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rt noticed that Sec. 10-A(l) of the Act (which is in pari materia with Sec. 10-B of the Act) read as follows: "10B. Special provisions in respect of newly established undertaking in 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 .....

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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 Hon'ble Court thereafter held that though the expression used in Sec. 1 .....

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milar situation as set out above. In view of the aforesaid decision of the Hon'ble Karnataka High Court, we are of the view that the claim as made by the Assessee for carry forward of loss of the non-eligible unit had to be allowed without set off of profits of the 10A/10B unit. We hold accordingly and allow the relevant grounds of appeal of the Assessee. 66. We may also observe that the Hon'ble Karnataka High Court's decision in the case of Himatasingike Seide (supra) has held that .....

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bsorbed depreciation of AY 1988-89. It claimed that as s. 10 B conferred "exemption" for the profits of the EOU, the said brought forward depreciation could not be set-off from the profits of the EOU but was available to be set-off against income from other sources. It was also claimed that the profits had to be computed on a "commercial" basis. The AO accepted the claim though the CIT revised his order u/s. 263 and directed that the exemption be computed after set-off. On ap .....

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erved 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 v .....

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ns that they need not be so set off as mandated in the decision of the Hon'ble Karnataka High Court in the case of Himatasingike Seide Ltd. (supra). As we have already seen, in Yokogawa India Ltd. 341 ITR 385 (Kar.), it was held that even after s. 10A/10B were converted into a "deduction" provision w.e.f 1.4.2001, the benefit of relief u/s. 10A/10B is in the nature of "exemption" with reference to "commercial profits" and that as the income of the s. 10A unit ha .....

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ssee deserves to be accepted. We may also observe that CBDT circular No. 7 dated 16.07.2013, on the facts and circumstances of the present case is not a benevolent circular vis-a-vis, the assessee, and therefore the decision to the contrary of the Hon'ble Karnataka High Court in the case of Yokogawa India (supra) will continue to apply. For the reasons given above, we direct the Assessing Officer to accept the claim of the assessee, as raised in ground No. 21.' 5.5 We further note that t .....

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without setting off the domestic losses. 6. Ground No. 3 is regarding allocation of expenses between the STPI Unit and non-STPI Unit on the basis of turnover ratio. 7. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. The only grievance of the assessee on this issue is that certain expenses have been charged to STPI Unit twice. He has referred to the details pertaining to the insurance, miscellaneous .....

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e requires proper verification and therefore the Assessing Officer may be directed to verify the facts on this issue. 9. Having considered the rival submissions as well as the relevant material on record we find that the DRP has not adjudicated this issue therefore we direct the Assessing Officer to verify the claim of the assessee regarding the double deduction of certain expenses against the profits of the STPI Units. Hence this issue is set aside to the record of the Assessing Officer for lim .....

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id not accept this contention of the assessee. The Assessing Officer noted that the assessee has claimed expenses of ₹ 19,57,430 on account of interest of working capital facility. Accordingly, the Assessing Officer has made the disallowance of ₹ 7,98,531 on account of proportionate indirect interest. The Assessing Officer has also made disallowance on account of indirect administrative expenses being 0.5% on average investment amounting to ₹ 33,96,119. Thus the Assessing Offic .....

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v. Dy. CIT [2010] 328 ITR 81 as well as decision of Hon'ble Delhi High Court in the case of Maxopp Investments Ltd. v. CIT [2012] 347 ITR 272. 12. On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below and submitted that when there is a purchase and sale of investment during the year under consideration then the provisions of Section 14A are attracted in respect of the expenditure incurred for earning the exempt income. The assessee ha .....

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31.3.2008 and 31.3.2009 at ₹ 9,21,00,000 and ₹ 50,90,00,000. Thus it is apparent that as far as the interest expenditure is concerned there is a reduction in the investment during the year under consideration and therefore no interest bearing fund was used for investment during the year under consideration. Even otherwise the Assessing Officer has not given a finding that the assessee has used borrowed fund for the purpose of making investment. Further it is not dear that in which y .....

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nce on account of indirect administrative expenditure there is no dispute that there is a substantial movement in the investment portfolio of the assessee which consist of mutual funds, equity shares and inter-corporate deposits. Therefore when the assessee has taken the decision for selling and fresh investment during the year under consideration which involves a high level decision making process then the claim of the that no expenditure has been incurred for earning the dividend income is not .....

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lowance proposed by the Assessing Officer. 16. Before us, the learned Authorised Representative of the assessee has submitted that this issue is covered by the decision of the Hon'ble jurisdictional High Court in the case of CIT v. Sabari Enterprises [2008] 298 ITR 141 (Kar.) as well as in the case of Essae Teraoka (P.) Ltd. v. Dy. CIT [2014] 366 ITR 408 (Kar.). 17. On the other hand, the learned Departmental Representative has relied upon the orders of authorities below. 18. Having consider .....

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: "Whether in law, the Tribunal was justified in affirming the finding of Assessing Officer in denying the appellant's claim of deductions of the employees contribution to PF/ESI alleging that the payment was not made by the appellant in accordance with the provisions u/s. 36(1)(va) of the IT Act?"' While deciding the above question of law, the Hon'ble High Court has observed and held in paras 6 to 23 as under: '6. We have perused both the Judgments. This Court, after c .....

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ontribution payable by the employee shall be equal to the contribution payable by the employer in respect of such employee. However, the employer shall, in the first instance, pay both the contribution payable by himself i.e., the employer's contribution as well as the employee's contribution and thereafter he is entitled to recover by means of deduction from the employee the contribution which he has paid as employee's contribution. Therefore, in law, the payment of contribution by .....

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hat payment must be made within the due date i.e., the due date prescribed under Section 139(1) of the Act. Because it was causing lot of problem as discussed in the judgment of the Apex Court, on a representation made by the industry, subsequent amendment was carried out to mitigate the difficulties caused to the employer under Section 43B of the Act. Though such contributions are not paid within the time prescribed under the relevant Act, if those contributions are paid before the due dated pr .....

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find any substance in this appeal. Therefore, the appeal is dismissed." 7. The Gujarat High Court in Gujarat State Road Transport Corpn. (supra) considered the question with respect to the disallowance of the amount being employees' contribution to PF Account/ESI Contribution which admittedly the assessee did not deposit with the PF Department/DSI Department on or before the due date under the PF Act and/or ESI Act. 8. The Gujarat High Court also considered the relevant provisions of th .....

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are of the such employees is to be treated as income and on fulfilling the condition as mentioned under section 36(1)(va), the assessee shall be entitled to deduction with respect to such employees' contribution. Section 2(24)(x) refers to any sum received by the assessee from his employees as contribution and does not refer to employer's contribution. Under the circumstances and so long as and with respect to any sum received by the assessee from any of his employees to which provisions .....

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39; account in the relevant fund or funds on or before the due date mentioned in Explanation to section 36(l)(va), the assessee shall not be entitled to deductions of such amount in computing the income referred to in section 28 of the Act." 9. Sub-section (24) of Section 2 of the IT Act defines "income". Clause(x) of sub-section (24) of Section 2 of the IT Act provides that income includes any sum received by the assessee from his employees as contributions to any provident fund .....

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of the IT Act. 11. From bare perusal of this provision, we do find ourselves in agreement with Mr. Aravind, learned counsel for the revenue. But in our opinion, that by itself is not sufficient to hold that the employer is not entitled for deduction as contemplated under Section 36(1)(va) of the IT Act r/w Section 43-B of the IT Act. 12. Section 36 provides for other deductions. Sub-section (1), thereof states that the deductions provided for in the following clauses shall be allowed in respect .....

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nes "due date". It means the date on or before which the employer is supposed to deposit the "contribution" as contemplated within the time stipulated under the provisions of the PF Scheme or under the provisions of the ESI Act. 13. Thus, from bare perusal of Clause (va) of Section 36(1) of the IT Act, it is clear that any sum received by the assessee-employer from any of his employees towards the employees' contribution as contemplated by sub-para (1) of paragraph-29 of .....

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ave perused Section 43B of the IT Act very carefully. The relevant portion of the said Section, for our purpose, reads thus: "43B. Certain deductions to be only on actual payment.- Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of- (a)xx xx xx (b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare .....

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n his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return." 15. From bare perusal of this provision, it is clear that under the provision, for IT Act, an extension is given to the employer to make payment of contribution to provident fund or any other fund till the "due date" .....

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tribution to any fund such as provident fund shall be allowed if it is paid on or before the due date as contemplated under Section 139(1) of the IT Act. This provision has nothing to do with the consequences, provided for under the PF Act/PF Scheme/ESI Act, for not depositing the "contribution" on or before the due dates therein. 16. In the present case, admittedly, though the employer did not deposit the contribution, within the stipulated time, as contemplated by paragraph-30 of the .....

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ayable in respect of a member under the Scheme or the contribution payable in respect of an employee to whom the Insurance Scheme applies. If this definition is read with sub-para (1) of paragraph-29 in Chapter-V of the PF Scheme, it would mean that the contributions payable by the employer under the Scheme shall be at a particular rate and the contribution payable by the assessee shall be equal to the contribution payable by the employer. 18. Paragraph-30 of the PF Scheme provides for payment o .....

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on" is used not only to mean contribution of the employer but also contribution to be made on behalf of the member employed by the employer directly. 20. Paragraph-38 of the PF Scheme provides for Mode of payment of contributions. As provided in sub-para (1), the employer shall, before paying the member, his wages, deduct his contribution from his wages and deposit the same together with his own contribution and other charges as stipulated therein with the provident fund or the fund under t .....

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f the employer fails to deduct the employees' contribution on or before the due date, contemplated under the provisions of the PF Act and the PF Scheme, that would have to be treated as income within the meaning of Section 2(24)(x) of the IT Act and in which case, the assessee is liable to pay tax on the said amount treating that as his income, deserves to be rejected. 22. With respect, we find it difficult to endorse the view taken by the Gujarat High Court. We agree with the view taken by .....

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le companies. The assessee is a public limited company incorporated under Companies Act, 1956. The assessee's business activities are in three segments which are business solutions, automotive solutions and enterprise product. The automotive solution segments are operated in US market by Associated Enterprises (AEs) whereas the other segments predominantly operated in domestic markets. The financial results as well as international transactions reported by the assessee have been reproduced b .....

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o benchmark its international transactions regarding provision of software development and consultancy services to its AEs, the assessee selected 11 comparable companies with an average margin of 15.52% on cost in comparison to the assessee's margin at 22.90 on total cost. The assessee adopted Transactional Net Margin Method (TNMM) as Most Appropriate Method (MAM). Thus the assessee claimed its international transactions at Arm's Length Price ('ALP'). The TPO/A.O. rejected the TP .....

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a Elxsi Ltd (segmental) 3,78,43,03,000 3,14,63,15,000 20.28% 6 Sasken Communication Technologies Ltd (seg) 4,05,31,20,000 3,18,69,97,000 27.91% 7 Persistent Systems Ltd 5,19,69,10,000 3,67,52,70,000 41.40% 8 Zylog Systems Limited 7,34,93,51,475 6,81,69,98,160 7.81% 9 Mindtree Ltd (seg) 7,93,22,79,326 5,74,06,73,058 5.52% 10 Larsen and Toubro infotech 19,50,83,81,374 15,64,12,76,626 24.72% 11 Infosys Ltd 2,02,64,00,00,000 1,39,17,00,00,000 45.61% Average mean 24.32% After making negative working .....

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e has submitted that Sasken Communication Technology Ltd. is required to be rejected by applying turnover filter of 10 times of assessee's turnover in the software development segment. He has pointed out that the assessee's turnover is ₹ 25.44 crores and therefore the companies which are having a turnover of more than ₹ 254 crores and less than ₹ 2.5 crores are required to be excluded. He has referred to the Annual Report of the Sasken Communication Technology Ltd. and .....

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been considered by the co-ordinate bench of this Tribunal in the case of Marlabs Software (P.) Ltd. v. Dy. CIT [IT (TP) A No. 72/Bang/2014, vide order dated 10-12-2014]. Thus the learned Authorised Representative has submitted that these companies have to be excluded from the set of comparables. 22. On the other hand, the teamed Departmental Representative has submitted that the TPO/A.O. has duly examined the functional comparability of these companies and found that the prominent activity of t .....

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ssee in both sides, this company cannot be considered as a good comparable. Accordingly, we direct the TPO/A.O, to exclude this company form the set of comparables. KALS Information Systems Limited. 24. The functional comparability of this company has been considered by the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra) in para 10.4 as under: "10.4 We have heard both parties and perused and carefully considered the material on record. We find from th .....

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and in the case of Triology E-Business Software India (P.) Ltd. (supra) have held that this company was developing software products and was not purely or mainly a software service provider. Apart from relying of the above cited decisions of co-ordinate benches of the Tribunal (supra), the assessee has also brought on record evidence from various portions of the company's Annual Report to establish that this company is functionally dissimilar and different form the assessee and that since th .....

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sistency, we follow the earlier decision of this Tribunal and direct the Assessing Officer/TPO to exclude this company from the set of comparables. Bodhtree Consulting Limited. 25. We have considered the rival submissions as well as the relevant material on record. We find that the comparability of this company has been considered by this Tribunal in the case of Marlabs Software (P.) Ltd. (supra) in para 9.3 as under: '9.3 We have heard both parties and perused and carefully considered the m .....

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pra) had an occasion to deal with the question as to whether high profit margin making companies should be excluded as a comparable. The Special Bench after considering several aspects held in para 88 of its order that the potential comparable companies cannot be excluded merely on the ground that their profit is abnormally high. The Special bench held that in such cases it would require further investigation to ascertain the reasons for unusually high profit and in order to establish whether th .....

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by the learned counsel for the assessee were also perused. Perusal of the same shows, that there has been a consistent change in the operating margins. The chart filed by the assessee in this regard is given as an annexure to this order. It appears to us that the revenue recognition method followed by the assessee is the reason for the drastic variation in the profit margins of this company, in the given circumstances, we are of the view that it would be safe to exclude Bodhtree Consulting from .....

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ng profit margin of the assessee as well as comparables by considering foreign exchange gain or loss as non-operating in nature. 27. The learned Authorised Representative of the assessee has submitted that this Tribunal has taken a consistent view that the foreign exchange fluctuation gain/loss is operating in nature if it arises from sale proceeds. Thus it has to be part of the operating margin of the assessee as well as the comparables. 28. On the other hand, the ld. DR has submitted that only .....

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rable companies. However we find substance in the contention of the ld. DR that the foreign exchange fluctuation gain or loss in respect of the sale proceeds of the current year can be considered as operating profit or cost of the year and not the gain or loss arising on account of realization of sale of earlier year. Accordingly, we set aside this issue to the record of the TPO/A.O. for verification of the relevant facts and then recompute the margin of the assessee as well as the comparable co .....

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hares as on 31.3.2009. The assessee has not considered this as an international transactions and claimed that the above transaction would not be falling under the provisions of Chapter XA of the Act as the same did not result in any income or expense or interest expenses to the assessee. The TPO has held that the fund remitted to the subsidiary for subscription of equity shares constituted international transactions under Section 92B of the Act because such funds are in the nature of debt. Accor .....

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ction 92B of the Act. He has further contended that by remitting fund for subscribing the equity shares of the subsidiary of the assessee is not purchasing any shares as it is not an acquisition of an already existing asset. The issue of shares contemplates creation of shares as an asset. When the shares are issued by a company there is neither purchase nor sale of any share. Thus remittance of money for subscription of equity shares of the subsidiary cannot be classified as international transa .....

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ged on such remittances. Alternatively he has submitted that the interest rates has to be applied by considering the LIBOR rate and further only for the period from the date of remittances to the end of the financial year after allowing a grace period of 180 days. The learned Authorised Representative has contended that the TPO/A.O. has committed an error for making adjustment for the whole year and not from the date of remittance to the AE. 33. On the other hand, the learned Departmental Repres .....

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e remittance is made as share application money for allotment of shares and shares are allotted within a reasonable period of time then the said payment of money to the AE cannot be considered as loan or advance for the purpose of international transaction under Section 92B of the Act. However, it is pertinent to note that the share application money does not belong to the allotting company till the shares are actually allotted against the said remittance. Thus till the allotment of shares the a .....

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to use the said money till the allotment of shares. !n this case the assessee has remitted this amount during the year under consideration as per the details given at page 707 of the paper book. It is also undisputed fact that no shares were allotted to the assessee till the end of the financial year as on 31.3.2009. thus when this money was available with the AE of the assessee for utilization then it loses the character of share application money and therefore the rule as laid down by the vari .....

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financial year relevant to the assessment year under consideration will constitute an international transaction as per the provisions of Section 92B of the Act as it has a direct bearing on the profit and loss as well as the assets of the enterprises. Further as per the Explanation to Section 92B(1) of the Act till the date of allotment it will constitute as capital financing/advance to the AE. We hold accordingly. 35. As regards the alternative plea of the assessee, we find substance so far as .....

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2009. As regards allowing the time period of 180 days, since this is not a case of an ordinary time period of allotment and therefore when this money was available with the AE for use then we do not find any merit or substance in this contention of the learned Authorised Representative. IT (TP) A No. 280/Bang/2014 (Revenue's appeal) 36. The revenue has raised the following grounds : 1. The order of the Dispute Resolution Panel is opposed to law and the facts and circumstances of the case. 2. .....

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P is not empowered to set aside the issue in terms of Section 144C(8) of the Act. 3. The DRP erred in directing the AO to follow the ratio laid down by the Hon'ble Court in the case of CIT v. Tata Elxsi Ltd. [2012] 349 ITR 98 (Kar.) and exclude telecommunication expenses of ₹ 16,55,095/- and expenses incurred in foreign currency of ₹ 54,57,604/- from the export turnover also while computing the deduction u/s. 10A of the I.T. Act, without appreciating the fact that there is no pro .....

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y be urged at the time of hearing, it is humbly prayed that the order of the DRP be reversed and that of the Assessing Officer be restored. 6. The appellate craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal. 37. Ground No. l is general in nature and does not require any specific adjudication. 38. Ground No. 2 is regarding arm's length interest in respect of share application money. This ground is common to the grounds .....

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ue before us for adjudication i.e. expenses incurred in foreign currency attributable to the delivery of computer software abroad is reduced from export turnover an equal amount should also be reduced from total turnover while computing the deduction under section 10A of the Act, is covered in favour of the assessee by the decision of the Hon'ble Karnataka High Court in the case of Tata Elxsi Ltd. (supra), in this order, the Hon'ble Court held - 'The Bombay High Court had an occasion .....

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s applied to the profits of the business of the undertaking in computing the profits of the business of the undertaking in computing the profits derived from export In other words the profits of the business of the undertaking are multiplied by the export turnover in respect of the articles, things or, as the case may be, computer software and divided by the total turnover of the business carried on by the undertaking. The formula which is prescribed by sub-section (4) of section 10A is as follo .....

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nover also forms a constituent element of the denominator inasmuch as the export turnover is a part of the total turnover. The export turnover, in the numerator must have the same meaning as the export turnover which is constituent element of the total turnover in the denominator. The legislature has provided a definition of the expression "export turnover" in Expln. 2 to s. 10A which the expression is defined to mean the consideration in respect of export by the undertaking of article .....

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rges are liable to be excluded in computing export turnover, a similar exclusion has not been provided in regard to total turnover. The submission of the revenue, however, misses the point that the expression "total turnover" has not been defined at all by Parliament for the purposes of s. 10A. However, the expression ''export turnover" has been defined. The definition of "export turnover" excludes freight and insurance. Since export turnover has been defined by .....

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o be accepted, the same expression viz. 'export turnover' would have a different connotation in the application of the same formula. The submission of the Revenue would lead to a situation where freight and insurance, though these have been specifically excluded from 'export turnover' for the purposes of the numerator would be brought in as part of the 'export turnover' when it forms an element of the total turnover as a denominator in the formula. A construction of a sta .....

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(4) of section 10B, the freight, telecom charges or insurance attributable to the delivery of articles or things or computer software outside India or the expenses, if any, incurred in foreign exchange in providing the technical services outside India are to be excluded, both from the export turnover and from the total turnover, which are the numerator and the denominator respectively in the formula ..... " The formula for computation of the deduction under section 10A would be as under: P .....

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ss and domestic business, the legislature intended to have a formula to ascertain the profits from export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers, Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of section 80HHC, the export profit is to be derived from the total business i .....

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and the denominator of the formula. in view of the commonality, the understanding should also be the same. In other words, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover cannot be different. Therefore, though there is no definition of the term 'total turnover' in s .....

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; 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 a .....

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