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2016 (6) TMI 1286

ransactions pertaining to BPO services. TPO noted that out of the 11 comparables 7 do not qualify to be treated as comparables since either they were into different functions or had substantial transactions with related parties. The TPO therefore made fresh searches and after considering the various objections of the assessee had retained 7 comparables out of 30 selected by him. Thus, in effect, the TPO took final set of 11 companies as comparables and determined the arithmetic mean at 21.67% and accordingly made adjustment of ₹ 11,92,55,177/- in respect of BPO activity which has come down to ₹ 5,96,21,856/- after the directions of the DRP. They have further held that in absence of any justifiable reasons the final set of 11 comparables as selected by the TPO is upheld. - Exclusion of depreciation for working of PLI - Hed that:- We find the Delhi Bench of the Tribunal in the case of Schefenacker Motherson Ltd. (2009 (6) TMI 125 - ITAT DELHI) while deciding an identical issue has held that for determination of ALP under TNMM assessee was justified in taking profit level indicator of comparable companies as operating cash profits without taking into consideration depr .....

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sses against the other business profits allowed - Denial of 10A deduction in respect of various undertakings is not justified. Accordingly, the grounds raised by the assessee on this issue are allowed. - Setting off of brought forward loss of NDA (BPO) unit before allowing deduction u/s.10A in respect of profits of the said unit for the current year and thereby restricting the deduction u/s.10A to Rs. Nil - Held that:- Since in the preceding years the matter has been decided against the assessee and assessee is in appeal before the Honíble High Court, therefore, in view of judicial precedents the order of the AO on this issue is upheld and the ground raised by the assessee is dismissed. - Denial of 10A deduction - Held that:- The number of technical manpower personnel transferred to the new unit at the end of the financial year does not exceed 50% of the total technical manpower actually engaged in development of Software of IT enabled products in new unit. Since the assessee satisfies the condition as per CBDT Circular No.14/2004 dated 08-10-2014 which has already been reproduced in the preceding paragraphs at Para 59 of this order, therefore, we are of the considered .....

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me on 28-11-2006 declaring total income of ₹ 6,60,98,644/-. The said return was subsequently revised on 29-03-2008 showing a loss of ₹ 5,33,65,552/-. The AO made a reference u/s.92CA of the Act to the TPO to determine the ALP with reference to the transactions reported in Form 3CEB filed by the assessee. The TPO noted that the assessee is engaged in the business of providing software services for the number of applications for companies around the globe. The software services are provided off-shore and on site. The assessee has off-shore Development Centres at Seepz, Thane, Pune, Chennai, Noida and Gandhinagar. It provides on-site services by deputing its employees at the client locations. It is subsidiaries/associates in USA, UK and Germany. It has branch offices in Japan, Australia and Sweden. The total turnover of the assessee company during the previous year is ₹ 1047.59 crores which includes other income of ₹ 49.76 crores. From the details filed by the assessee the TPO noted that the assessee has entered into following international transactions during the previous year : Sr.No. Nature of transaction Amount (Rs.) Method 1. Software development services .....

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been received by the assessee during the year from BPO services, is by no means paltry amount which can be clubbed with the software development services receipts. 7. According to the TPO as per the Transfer Pricing as well as the OECD guidelines the transactional profit method should ideally be applied on a transaction to transaction basis but in appropriate situation may be grouped or aggregated. According to him the relevant controlled transactions may best be aggregated if it is impractical to analyse all profits of each individual transactions or if such transactions are so inter related that this is the most reliable means of benchmarking the outcome of the transaction against the arm s length outcome. He noted that in assessee s case 2 segments viz., IT services and BPO services are 2 distinctly identifiable segments. The assessee has been maintaining segmental information for these 2 segments in its Annual Text Reports. The separate profitability of these 2 segments has been maintained by the assessee and has also produced the same when asked to do so. The functions carried out in these 2 segments are also different functions and are by no means related or interlinked to e .....

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e not determined following TNMM method by adopting the above arithmetic mean. 9. After considering the various submissions made by the assessee the TPO rejected the following comparables : 1. Ace software Exports Limited (Different business activity) 2. HCL Technologies Ltd. (Related party transactions) 3. CMC Limited (Related party transactions) 4. Mphasis BFL Limited (Related party transactions) 5. Datamatics Technologies Limited (Related party transactions) 6. Tata Share Registry Limited (Different business activity) 7. MCS Limited (Different business activity) 10. So far as the objection of the assessee regarding acceptability of certain companies as comparable as proposed in the show cause notice stating that these comparables are not acceptable as comparables the TPO partly accepted the same contention. Accordingly the TPO after considering the submission made by the assessee rejected the following 7 companies in the final analysis accepting the contention of the assessee : 1. Quantum Eservices Pvt. Ltd., 2. Tricom India Ltd., 3. Indus Networks Ltd. 4. Nucleus Netsoft and GIS India Ltd. 5. Wisec Global Ltd. 6. Ultramarine & Pigments Ltd. 7. Triton Corp Ltd. 11. He however .....

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dering the arguments advanced by the assessee the DRP held that the transactions pertaining to IT services and BPO services are fairly distinct in nature and scope and cannot be considered to be closely interlinked as per the definition given of the word transaction at Rule 10A of the I.T. Rules, 1962. The DRP further directed the AO to verify the correct working which was certified in its report and submitted by the AO for the purpose of calculating the operating income, operating cost and PLI for the BPO scheme and rework out the adjustment to the ALP of the international transactions. 15. The DRP rejected the contention of the assessee that the expenses pertaining to the depreciation on disaster recovery unit should be termed as extraordinary expenses as it is incidental to the BPO activities of the assessee. The contention of the assessee that depreciation shall be excluded from the operating cost as it is higher due to the fact that in assessee s case the activity being commenced recently was also rejected by the DRP according to which the cost of depreciation decreases as the age of fixed asset increases. However, as the age of fixed assets increases other cost relating to fi .....

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al cost. Referring to page 67 of the paper book he drew the attention of the Bench to the break- up of the turnover with the Associated Enterprise and Non- Associated Enterprises. He further submitted that the TPO has not given the benefit of +/-5% as per the proviso to sub-section (2) of section 92C on the basis of amendment made w.e.f. 01- 10-2009. He submitted that various benches of the Tribunal have held that this adjustment is mandatory and the amendment is prospective and therefore will not apply to the year under consideration. He further submitted that no such T.P. adjustment on BPO activity has been made in subsequent years. He accordingly submitted that the adjustment made by the TPO in respect of the BPO activity should be deleted as no such adjustment was made in subsequent years. 20. Referring to the decision of the Mumbai Bench of the Tribunal in the case of Penzzoil Quaker State India Ltd. Vs. DCIT he submitted that the Tribunal in the said decision has held that the Transfer Pricing adjustment has to be made only with respect to transactions with Associated Enterprises based on ALP and not with respect to total purchases/sales. He submitted that similar view has be .....

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e difference being less than 5% no adjustment is called for. 23. We have considered the rival arguments made by both the sides, perused the orders of the AO/TPO/DRP and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the TPO in the instant case has initially proposed adjustment of ₹ 11,92,35,177/- on account of international transactions pertaining to BPO services which has come down to ₹ 5,96,21,856/- after the direction of the DRP. We find the assessee has benchmarked its BPO activities by taking 11 comparables whose weighted average arithmetic mean of the operating margin was 11.45%. We find the TPO noted that out of the 11 comparables 7 do not qualify to be treated as comparables since either they were into different functions or had substantial transactions with related parties. The TPO therefore made fresh searches and after considering the various objections of the assessee had retained 7 comparables out of 30 selected by him. Thus, in effect, the TPO took final set of 11 companies as comparables and determined the arithmetic mean at 21.67% and accordingly made adjustment of ₹ 11,92,55,1 .....

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quot; mount by which the assets of business got depleted between the two dates separated by a year. It cannot be deprecation under tax or companies rules or as per policy of the company. In the case in hand, Revenue authorities went wrong in disregarding the context and purpose for which the "net profit" was to be computed. Depreciation, which can have varied basis and is allowed at different rates is not such an expenditure which must be deducted in all situations. It has no direct connection or bearing on price, cost or profit margin of the international transactions. Principles emphasized in the case of Bangalore Clothing (supra) by Bombay High Court are attracted here. Object and purpose of the transfer pricing to compare like with the like, and to eliminate differences, if any, by suitable adjustment is to be seen. Therefore, there was justification on the part of the taxpayer in pleading that profits be taken without deduction of depreciation as depreciation was leading to large differences in margins for various reasons. Guidance Note of ICAI accepts cash profit/sale as a base under TNMM 20. The taxpayer also relied upon para 22.4 of guidance note on transfer prici .....

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as depreciation is permitted depending upon nature of plant/machinery and year of use. In 5th or 6th year of commencement, depreciation can be 25 to 30 per cent of amount allowed in first year to an enterprise. In these appeals, the TPO had excluded certain comparables after noting differences in their year of start of operations. These were Bhagwati Autocast Ltd. (1982), Jay Ushin Ltd. (1986), Shardlow India Ltd. (1980) etc. Thus, age of plant/machinery and other related information is available on record and, therefore, contention of the taxpayer on differences in claim of depreciation is fully established on record. Further vast difference in depreciation is also evident from the following Table 3 showing comparison of percentage of depreciation to the total cost in accounts of taxpayer and comparables : x x x x x x x x x x 20.4 As against ratio of 8.17 per cent of the taxpayer, only Ring Plus Aqua Ltd. had the closest ratio of 8.45 per cent. Such ratio in other enterprises varied between 2.34 per cent to 5.99 per cent which is quite large having regard to mean margin which on cost is approximately 9 per cent only. Obviously there are differences between the machinery employed b .....

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C and prescribed Form 3CEB. Therefore, his refusal to look into details and adverse inference drawn by him against the taxpayer is legally unjustified. The taxpayer was to furnish particulars required by Form 3CEB and to answer questions raised in the said form. The prescribed form only requires to give, "method used for determining the ALP" and nothing more. Completed Form 3CEB was filed. Dissimilarities and differences, if any, are to be noted and discussed during the course of proceedings before the TPO and not in TP report. The approach adopted in this case was wrong would be more than clear from provisions of sub-s. (2) of s. 92CA reproduced below: "(2) Where a reference is made under sub-so (1), the TPO shall serve a notice on the assessee requiring him to produce or cause to be produced on a date to be specified therein, any evidence on which the assessee may rely in support of the computation made by him of the ALP in relation to the international transaction referred to in sub-s. (1)." 21.1 It is quite clear from above that supporting evidence is to be produced before the TPO and this was done. TPO has not raised any objection on this score. The learned .....

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or wide differences. The case of the Revenue is not clear. If depreciation is not leading to any difference, its exclusion is immaterial. If it is leading to differences, then differences are required to be adjusted, as required by provisions of IT Regulations. There is no way to dislodge the claim of the taxpayer. The context and purpose of legislation and facts of case overwhelmingly approve adoption of cash profit only. 23. The taxpayer in both the assessment years showed before the Revenue authorities that profit shown by the taxpayer satisfies arm's length requirement on ratio of cash profit to sales if uniformly applied. As the deduction of depreciation is leading to wide differences, the same should be excluded. The only reason given for rejecting taxpayer's analysis and for making adjustment in the two years is that use of ratio of cash profit without depreciation is not permitted under the law. This view in the light of above discussion cannot be accepted as correct and is disapproved. AO directed to examine/verify taxpayer's claim 24. The learned CIT(A) determined ALP by taking ratio of profit/total cost (OP/TC) and thus made adjustment in the two assessment y .....

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reciation being integral part of operating cost has to be taken into account. Therefore, we find merit in the submission of the Ld. Counsel for the assessee that if one includes depreciation on all assets then depreciation on unutilized capacity is also taken into account and then it is contrary to the principles laid down by the various Benches of the Tribunal that adjustment is required for capacity utilization. In any case when two views are possible, the view which is favourable to the assessee must be followed in view of the decision of Hon ble Supreme Court in the case of CIT Vs. Vegetable Products Ltd. reported in 88 ITR 192. 27. According to the Ld. Counsel for the assessee the PLI before depreciation as computed above comes to 33.54% for the comparables whereas the PLI for the companies comes to 29.43% and therefore difference being less than 5% no adjustment is called for. However, the same needs verification. We, therefore, restore this issue to the file of the AO with a direction to verify the authenticity of the above arguments. 28. So far as the argument of the Ld. Counsel for the assessee that amount of adjustment which is calculated on the total cost of the BPO is t .....

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ed the issue to the file of the AO with the following observations : 26. We have heard the rival contentions and perused the record. The first aspect of the issue is that admittedly, the transaction of charging interest from AEs exceeding credit period amounts to international transaction under section 92B(1) of the Act. The Hon ble Bombay High Court in assessee s own case relating to assessment year 2002-03 in Income Tax Appeal No.1148/2012 vide judgment dated 28.02.2013 has held that in view of the amendment by Finance Act, 2012 with retrospective effect from 01.04.2002, the said transaction of charging of interest from the AEs is covered under the amended provisions of section 92B(1) of the Act. The second aspect of the issue arising before us is whether interest charged by the assessee from its AEs was at arm s length price. The assessee was carrying on its business through its AEs and had settled some credit terms with its AEs vis-à-vis the payments to be received by it. In the Form No.3CEB, the assessee had declared the transaction of interest received on delayed payments with its AEs as an international transaction, under which it had received ₹ 3.12 crores. How .....

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

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respect of the transaction between the assessee and the associated enterprises was to be upheld. As it was noticed that the average of the LIBOR rate for 1-4-2005 to 31-3-2006 is 4.42 per cent and the assessee had charged interest at 6 per cent which was higher than the LIBOR rate, no addition on this account was liable to be made in the hands of the assessee. In the circumstances, the addition made by the Assessing Officer on this count was deleted. 17. The Mumbai Bench of the Tribunal in DCIT Vs. Tech Mahindra Ltd. (2011) 12 taxmann.com 132 (Mum.) held that where there is a choice between the interest rate of currency other than the currency in which transaction had taken place and the interest rate in respect of the currency in which transaction has taken place, the latter should be adopted. Where the transaction is between the assessee and its associated enterprises in foreign currency and the transaction is international transaction, then the transaction would have to be looked upon by applying commercial principles in regard to international transactions. 18. Similar principle has been laid down by the Mumbai Bench of the Tribunal in Hinduja Global Solutions Ltd. Vs. ACIT (2 .....

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

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various undertakings established in earlier years. The Assessing Officer ought to have appreciated that the eligibility conditions in respect of splitting up of business already in existence is required to be complied with in the year of formation of the undertaking e. In relying on various observations and conclusions recorded in the assessment order for A.Y. 2004-2005 and A.Y. 2005-06 and thereby not allowing deduction u/s 10A in respect of various eligible undertakings. 34. Facts of the case, in brief, are that the assessee had claimed for this assessment year deduction u/s.10A in respect of 11 units. Identical issue was involved in the assessments for the assessment year 2004-05 and 2005-06. For the assessment year 2004-05, the CIT(A) allowed the assessee s ground(s). However, the department has not accepted the order of the CIT(A) and has preferred an appeal against the same before the ITAT where the matter is pending. Even for the assessment year 2005-06, the AO disallowed the assessee s claim of deduction u/s.10A. During the previous year relevant to the said assessment year, two new EOU units had been set up/started by the assessee at Bangalore and Mumbai. The AO held that .....

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espect of three undertakings located at Chinchwad, Akurdi and Millennium Business Park. The Assessing Officer had denied the said deduction under section 10A of the Act by treating the aforesaid units as mere expansion of the existing units on the basis of approval letters received from Software Technology Park of India (STPI). The Tribunal in turn, relying on the ratio laid down by the Co-ordinate Bench in assessee s own case for assessment years 2002-03 and 2003-04, held as under:- 12. We have carefully considered the rival submissions. We find that the issue stands fully covered in favour of the assessee and against the Revenue by the decision of our co-ordinate Bench in assessee s own case for the assessment years 2002-03 and 2003-04. For the sake of brevity, we extract the relevant portion of the order of the Tribunal hereinbelow: 34 In this appeal of the Revenue, Ground No. 1 relates to the action of the Commissioner of Income-tax (Appeals) in holding that the three units at Chinchwad, Akruti and Millennium Business Park were new Units and not expansion of the existing units and, therefore, the period of eligibility of deduction under section 10A of the Act is liable to be co .....

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conditions prescribed under section 10A(2) of the Act. According to him, merely because the approval letter received from STPI stated the setting up of the three units as an expansion of the corresponding units, cannot be fatal to the plea set up by the assessee that the three units in question are independent and distinct units liable for an independent claim of deduction under section 10A, since all the prescribed conditions have been fulfilled. The following discussion of the Commissioner of Income-tax (Appeals) in para 3.2 of the order is worthy of notice: 3.2 (c) Section 10A(2) requires the appellant to fulfill three conditions. The conditions contained under sub-clause (i) & (ia) of section 10A(2) are positive relating to manufacturing or production of article or thing and sub-clause (ii) & (iii) of section 10A(2) say that such undertaking is not formed by splitting up or reconstruction of a business already in existence or it is not formed by the transfer to a new business or machinery or plant previously used for any purpose. As is clear from the details submitted by the appellant, the three units which are subject matter of appeal, are not formed by the transfer of .....

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sion to the contrary in this regard, are held to be unjustified on facts and not in accordance with law. 37. Before us, the learned Departmental Representative has primarily reiterated the stand of the Assessing Officer in support of the case of the Revenue. As per the learned Departmental Representative, the approval for setting up of the three units clearly bring out the fact that the new units are mere expansion of the existing units and they cannot be treated as independent units. In this manner, the order of the Commissioner of Income- tax (Appeals) is sought to be assailed. 38. On the other hand, the learned Counsel for the assessee has vehemently pointed out that the Commissioner of Income-tax (Appeals) has factually appreciated that all the three units are physically located at different locations and that they are independent with substantial investments. It has also been pointed out that merely because the Government approval refers to the new units as an expansion of the existing units cannot be construed as non-fulfillment of the conditions prescribed 7 under section 10A(2) of the Act. It is pointed out that it is not a case of expansion of an existing unit, but certain .....

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t of computer software, etc. for a period of 10 consecutive assessment years, subject of-course to fulfillment of the conditions specified by sub-section (2) of section 10A of the Act. The conditions prescribed in sub-section (2) of section 10 have been noticed by the Commissioner of Income-tax (Appeals), namely, that the undertaking has to begin manufacture or produce computer software during the previous year relevant to the assessment year commencing on or after the first day of April, 1994 in any software technology park; and that the undertaking is not formed by splitting up or reconstruction of the business already in existence; and, that the undertaking is not formed by transfer to a new business of machinery or plant previously used for any purpose. We have carefully perused the relevant conditions and find that the Commissioner of Income- tax (Appeals) has rightly concluded that all the three aspects are fulfilled by the three units in question. The Commissioner of Income-tax (Appeals) has discussed the physical location of each unit, the investment in fixed assets of each unit as well as the turnover of each unit and on such factual analysis, it has been concluded that th .....

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not. In our humble understanding it meets both the tests. We have also noted that it is not an statutory requirement that there has to be separate permission for each unit and therefore just because the permission is granted by the Government by way of amending the original permission letter does not affect the eligibility for deduction u/s 10B in any manner. 42. From the aforesaid, it is quite clear that the manner in which the approval has been granted is not relevant to examine the assessee s case for claim of deduction under section 10A of the Act with respect to the three units. What is really to be examined is as to whether the three units are independent units and that they fulfill the conditions prescribed under section 10A(2) of the Act. There is no prohibition that an expansion in the same line of business achieved by setting up a new independent unit would lead to denial of deduction under section 10A of the Act. In this background, in the earlier part of this order we have already noted with approval the factual findings of the Commissioner of Income-tax (Appeals) that the three units are separate and independent production units and the same cannot be treated as mere .....

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the eligibility of deduction under section 10A of the Act vis-à-vis independent units established in earlier years by the assessee. The ground of appeal No.6 raised by the Revenue is thus, dismissed. 18. Now, coming to the grounds of appeal No.4 and 5 raised by the Revenue in respect of two new units established at Bangalore and SPZ 47 established at Mumbai. The contention of the assessee before us was that the said units have been established by the assessee as a separate undertaking where the activity carried on by the assessee is in relation to the different projects. The profits of the said units being separate, independent undertakings were claimed to be eligible for exemption under section 10A of the Act. The case of the assessee before us is that fresh STPI approval was taken by the assessee, copy of which is placed at pages 135 to 139 of the Paper Book and registration under Custom Bonding and Shop Act was also done. Similarly, in respect of SPZ 47 unit, the assessee obtained the STPI approval and also the registration under Custom Bonding and Shop Act. The employees working under each of the units were separate. It was admitted by the learned Authorized Representat .....

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oftware support. The unit was engaged in the development and maintenance of the system software. The conclusion of the CIT(A) was that the system was engaged in different line of software business and was not a system hub or server unit providing support to the business operations by other units. The said finding of the CIT(A) has not been controverted by the learned Departmental Representative for the Revenue and in view thereof, we find no merit in the observations of the Assessing Officer in this regard. Further, the assessee had also furnished on record the investment made in plant & machinery in both the undertakings where both the units have complied with the conditions prescribed under section 10A of the Act and are independent and separate undertakings working from different locations with new plant & machinery, having adequate skilled staff to carry out its operations and are independently viable undertakings earning profits / losses, which are attributable to the business carried on by the assessee in the separate units. The said units are eligible for claim of deduction under section 10A of the Act since the same were not formed by splitting up or reconstruction .....

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the provisions of section 10A(2) r.w.s. 80IA(10). As per the present review report submitted by the assessee the average profit margin of the selected comparable companies was 14.52% as against the profit margin of 23.95% of the assessee. The AO adopted the profit level of 14.52% as ordinary profit level and the assessees profit over and above the 14.52% margin of ₹ 69,23,94,757/ was proposed to be treated as more than ordinary profit and sales not entitled to deduction u/s.10A. Consequently, the AO determined the ordinary profit which might be expected in respect of business of the 10A units at ₹ 180,50,93,723/- as against the claim of ₹ 249,74,88,480/- in the return of income. The DRP also upheld the action of the AO. 40. The Ld. Counsel for the assessee submitted that the AO denied deduction u/s.10A in case of all, invoked except BPO undertaking, however on protective basis. He invoked the provisions of section 10A(7) r.w.s. 80IA(40. He submitted that all the 3 associated enterprises are foreign companies wholly owned subsidiaries in USA, UK and Germany. Being foreign companies they are not assessed to income tax in India. They are mainly marketing arms. He su .....

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rofits of the unit in the free trade zone will be computed after taking the cost of the goods transferred to or from the unit on the basis of the market value of such goods. The applied sub-section (9) of section 80-I empowers the Income-tax Officer to determine the reasonable profits that could be attributed to the qualifying undertaking in the free trade zone in cases where, owing to the close connection between the Assessee and any other persons or for any other reason, the course of the business is so arranged that the industrial undertaking set up in the free trade zone derives more than ordinary profits which may be expected to arise in that business. This provision has been made with a view to avoiding abuse of the new tax concessions by manipulation of profits between associate concerns or different units of the same concern. [underlined for emphasis by us] 23. Quite clearly, the provisions of section 10A(7) of the Act intend to plug abuse of tax concession by manipulation of profits between associated concerns or between different units of the same concern. The objective of the aforesaid Provision is that the tax concessions are not abused by manipulation of profits. In ou .....

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other person; and, (ii) more than ordinary profits is not sufficient to justify invoking of section 80-IA(10) of the Act in the absence of there being any material to say that the course of business between them is so arranged to abuse the tax concessions granted u/s 10A of the Act by manipulating profits between associated persons. Ostensibly, the same is required to be demonstrated on the basis of a cogent material and evidence. In other words, the presence of the expression so arranged has to be understood in the context of the abuse of tax concession which is sought to be plugged by the provisions of section 10A(7) r.w.s. 80-IA(10) of the Act. 24. On this aspect, the Ld. CIT-DR had vehemently argued, based on the judgement of the Hon ble Bombay High Court in the case of Bank of India Ltd. (supra) that the meaning of the word arranged in section 80-IA(10) of the Act has to be understood to mean an agreement or an understanding between the parties concerned. The relevant portion of the decision of the Hon ble Bombay High Court has been reproduced in the earlier part of this order, according to which, it is said that the term arrangement in plain language means any agreement or u .....

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ood in the context in which they are placed in section 80-IA(10) of the Act. A mere agreement between the assessee and the associated enterprises for transacting business is not enough to invoke section 80-IA(10) of the Act. 26. In-fact, even the Hon ble Bombay High Court in the case of Bank of India Ltd. (supra) has also appreciated the contextual meaning of the expression arrangement . The issue before the Hon ble Bombay High Court was with regard to the scheme of re- construction or arrangement contained in section 391(1) of the Companies Act, 1956. In the context of section 391(1) of the Companies Act, 1956, the Hon ble High Court was dealing with the meaning of the word arrangement . After having explained the meaning of the term arrangement in plain language, which we have referred earlier, the Hon ble High Court went on to say as under in the context of the word arrangement qua section 391(1) of the Companies Act, 1956 :- Section 391(1), however, in any opinion somewhat restricts this otherwise unlimited import of the term arrangement in so far as the said section applies only to an agreement or understanding between the company and its creditors or any class of them, or bet .....

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a prima-facie satisfaction of an existence of tax avoidance is sufficient. In this context, we may refer to the decision of the Bangalore Bench of the Tribunal in the case of Digital Equipment India Ltd. (supra), wherein similar argument from the side of the Revenue has been addressed. The Bangalore Bench of the Tribunal was dealing with invoking of section 10A(6) r.w.s. 80-I(9) of the Act for assessment year 1995-96, which are pari-materia to section 10A(7) r.w.s. 80- IA(10) of the Act invoked by the Revenue before us. The following discussion is relevant :- The requirements under the section are : (a) There must be a close connection between the appellant and other person. (b) The course of business between them should be so arranged that it produces to the appellant more than the ordinary profits from such business. To satisfy the above test the AO has to adduce evidence and reasons cogently and the same is open to verification by the appellate authorities. The primary rule of evidence is that "what is apparent is real" unless proved otherwise by the person alleging it otherwise. The manner of satisfaction outlined in the section should be based on evidence and not on .....

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rder, there is no material or any evidence which has been brought out to say that the course of business between assessee and the associated enterprises has been so arranged that the business transacted has produced to the assessee more than the ordinary profits. 31. No doubt, there is a close connection between assessee and the associated enterprises and to that extent section 10A(7) r.w.s. 80- IA(10) of the Act has been rightly examined by the income-tax authorities. The second aspect that the course of business was so arranged so as to result in more than ordinary profits is not at all forthcoming from the order of the Assessing Officer. There is no material or evidence referred to in the assessment order to indicate that the course of business has been so arranged so as to inflate profits with the intent to abuse tax concession u/s 10A of the Act. At this point, we may make a reference to the stand of the Assessing Officer that the operating profit margins of the assessee are substantially higher than the average operating margin of the comparables selected by the assessee in its Transfer Pricing Study. This has formed the basis for the Assessing Officer to say that assessee ha .....

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icer suggests that the operating profit declared by an assessee is compatible to the arm's length price norms and no adjustment is necessary, the operation of all those provisions come to an end. If the, Assessing Officer has to make any other adjustment towards computing deduction available under section 10A, the computation has to be made in the context of section 10A(7) read with section 80-IA(10). It is clear that in a case of transfer pricing assessment, it has got two segments. The first segment consists of rules and procedures for computing the income other than the income arising out of international transactions with associate enterprise. The second segment consists of rules and procedures in connection with computation of income from international transactions with associate enterprises on the basis of the arm's length price. The second segment relating to computation of the arm's length price, is a set of rules for the purposes of transfer pricing matters and those procedures and rules can be used only for the purpose serving the object of section 92. When the Transfer Pricing Officer states that there is no need of transfer pricing adjustment, the matter sho .....

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n our considered opinion, the result of the Transfer Pricing assessment can at best be taken as an indicator for the Assessing Officer to investigate as to whether or not there exists any arrangement which has resulted in more than ordinary profits qua the requirements of section 10A(7) r.w.s. 80-IA(10) of the Act. Even if it is accepted that the difference between the operating margins of the assessee and the comparables show existence of more than the ordinary profits in the hands of the assessee, so however, it was still imperative for the Assessing Officer to establish on the basis of substantive evidence and corroborative material that qua section 10A r.w.s. 80-IA(10) of the Act, the course of business between the assessee and the associated enterprises is so arranged that the business transacted between them produces to the assessee more than the ordinary profits with the intent of abusing tax concession. Quite clearly, in the entire assessment order, there is no whisper of any material or evidence in this regard. In-fact, the approach of the Assessing Officer is quite misdirected as the following discussion in his order shows :- Accordingly, the section only encumbers the A. .....

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of the assessee. 46. The Ld. Counsel for the assessee at the outset submitted that the issue stands decided in favour of the assessee by the decision of Hon ble Bombay High Court in assessee s own case which has been followed by the Tribunal in A.Y. 2005-06. No SLP was also filed by the revenue before the Hon ble Supreme Court. 47. After hearing both the sides, we find the Tribunal in assessee s own case for A.Y. 2005-06 at para 19 and 20 of the order has observed as under : 19. Now, coming to the grounds of appeal No.7 and 8 raised by the Revenue. The issue is with regard to the set off of losses of units eligible for deduction under section 10A of the Act against business income of the undertaking. The said issue is squarely covered by the order of the Tribunal in assessee s own case relating to assessment year 2004-05, which in turn had followed the earlier order of the Tribunal in assessment year 2002-03 observing as under:- 14. In Ground No. 5, the dispute relates to the action of the Assessing Officer in adding back losses suffered by the section 10A eligible units while computing income of the assessee under the normal provisions of the Act. Similar issue has been considere .....

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to be understood that the provision, as applicable for the assessment year under consideration, is not in the nature of an exemption. Therefore, the assessee was entitled to set-off of losses sustained by the 10A eligible units against the normal business income. In this view of the matter, we therefore find no reason to uphold the orders of the authorities below on the impugned aspect. As a result, we set aside the order of the Commissioner of Income-tax (Appeals) and direct the Assessing Officer to allow set-off of the losses of the section 10A eligible units against the normal business income of the assessee while computing income as per normal provisions of the Act. As a result thereof, Ground of appeal No .1 raised by the assessee stands allowed. The learned Counsel for the assessee also filed a copy of the judgment of the Hon ble Bombay High Court in assessee s own case (supra) for the assessment year 2001-02 wherein the claim of the assessee relating to the set off of the losses against the other business profits was approved by the Hon ble High Court. In view of this, we accordingly affirm the order of the Commissioner of Income-tax (Appeals) and thus dismiss the Ground of .....

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dit after proper verification. So far as charging of interest under section 234C is concerned, the AO shall also verify since according to the assessee no interest is payable u/s.234C of the I.T. Act, 1961. 54. Ground of appeal No.7 by the assessee is accordingly partly allowed for statistical purposes. ITA No.1451/PN/2011 (A.Y. 2007-08) : 55. Ground of appeal No.1 by the assessee reads as under : 1. In making addition of ₹ 1,56,13,322/- to the total income on account of interest chargeable on delayed receipts from the associated enterprises following adjustment of ₹ 2,57,76,711/- made in the transfer pricing order u/s.92CA(3) of the Income tax Act. The learned transfer pricing assessing officer erred : a. In concluding that the sum of ₹ 2,57,76,711/- is to be the arm s length compensation receivable by the assessee on account of interest chargeable on the amounts due from the associate entities beyond the credit period stipulated under the contract. b. In making adjustments without applying any specified method. c. In concluding that delayed recoveries from AEs is an international transaction requiring adjustment under transfer pricing. 56. After hearing both the .....

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eceding paragraphs. Thus, there is only one undertaking established in the current year at Airoli. From the various details furnished by the assessee in the paper book we find the new technical personnel engaged in the new units are as under : Airoli Technical personnel Admin. Personnel Total New Employees 432 16 448 Transferred employees 227 7 234 Total as at 31-03-2005 659 23 682 Transferred employees 227 Total employees 659 % of transferred to total 14.45% 59. From the above it is clear that the number of technical manpower transferred to new unit at the end of the financial year does not exceed 50% of the total technical manpower actually engaged in development of software or IT enabled products in new unit. Thus, the employee condition is satisfied as per the CBDT Circular No.14/2004 dated 08-10-2014. The relevant clause (3) of the said circular reads as under : 3. The matter has been re-examined by the Board. In supersession of the Circular No.12/2014 dated 18th July, 2014, it has now been decided that the transfer or re-deployment of technical manpower from existing units(s) to a new unit located in SEZ, in the first year of commencement of business, shall not be construed a .....

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1338/PN/2010. We have already decided the issue and the ground raised by the assessee has been allowed. Following the same reasonings this ground by the assessee is allowed. 65. Ground of appeal No.5 by the assessee reads as under : 5. In setting off of brought forward loss of NDA (BPO) unit before allowing deduction u/s.10A in respect of profits of the said unit for the current year and thereby restricting the deduction u/s.10A to Rs. Nil as against claim of the company at ₹ 7,78,59,734/-. 66. Facts, in brief, are that the assessee company had shown loss of ₹ 7,78,59,734/- in respect of its BPO activities carried out in NDA58 unit. It was claimed that the above amount should be adjusted against profit/income of the assessee including profit from non 10A undertaking. Various decisions were also relied upon. It was further argued that the Tribunal in assessee s own case for A.Y. 2001-02 has allowed adjustment of loss incurred in 10A unit against profits of non 10A unit. The AO observed that the department has not accepted the order of the ITAT in assessee s own case for A.Y. 2001-02 and an appeal has been filed before Hon ble Bombay High Court which is pending. He accord .....

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efined as per clause (v) of Explanation 2 as under- "relevant assessment years" means any assessment years falling within a period of ten consecutive assessment years, referred to in this section. " 71. He submitted that in the assessee s case relevant assessment year will be A.Y. 2011-2012 as no deduction u/s 10A is permissible from A.Y. 2012-2013. Thus, this loss is required to be set-off after A.Y. 2011-2012 and not before that. Profits and gains of the business of the undertaking are computed as per the normal provisions of income from business/profession as per the provisions of section 28 to 44 and deduction is allowed u/s 10A with reference to such profits. The business loss is allowed to be carried forward and set-off as per the provisions of section 72. The provisions of section 72 allowing set-off of brought forward business loss are falling in Chapter VI and deduction u/s 10B is allowed under Chapter III i.e. Incomes which do not form part of total income. 72. He submitted that income from business is computed and deduction u/s 10A is granted in respect of such eligible profits at this stage only and the balance profit, if any, only form part of income and .....

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f the assessee including profit from non 10A undertaking. We find the AO rejected the claim of the assessee in the draft assessment order and when the assessee approached the DRP, the DRP vide para 8.1.1 of the order has rejected the objection of the assessee by observing as under : The panel is of the view as this very matter is pending before Bombay High Court, it would only be reasonable and in the interest of revenue that the claim of set off for the present Asst. Year too is denied. Accordingly, the panel confirms the action proposed in this matter in the draft assessment order and rejects the assessee s objections. 76. Nothing contrary was brought to our notice as to whether the Hon ble High Court has decided the issue in favour of the assessee or not. Since in the preceding years the matter has been decided against the assessee and assessee is in appeal before the Hon ble High Court, therefore, in view of judicial precedents the order of the AO on this issue is upheld and the ground raised by the assessee is dismissed. ITA No.2507/PN/2012 (A.Y. 2008-09) : 77. Ground of appeal No.1 by the assessee reads as under : 1. In making addition of ₹ 3,31,98,668/- to the total in .....

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g deduction u/s.10A in respect of various eligible undertakings. f. In holding and concluding that new unit at Gurgaon is not exception to the stand taken by the Department and is clearly formed by the splitting up and the reconstruction of the existing business as provided in section 10A(2)(ii) of the Act on the basis that some of the employees have been transferred to this unit and new unit is also carrying on the same business of software development/ IT enabled services. 80. After hearing both the sides, we find there are total 14 eligible undertakings in the current year. There is no dispute about one BPO undertaking. Thus, out of the remaining 13 undertakings 2 undertakings were established in A.Y. 2005-06 which is covered by the decision of the ITAT vide ITA No.342/PN/2013 order dated 27-05-2013 for A.Y. 2005-06. One undertaking was established in A.Y. 2007-08 and we have already decided the issue vide ITA No.1451/PN/2011 in the preceding paragraphs. 9 undertakings were established upto A.Y. 2004-05 and the same has already been decided in favour of the assessee. Thus, we find only one new undertaking was established in the current year at Gurgaon. From the details submitted .....

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s under : 4. Not setting off of losses of 10A undertakings against other income by holding that losses of new units, if eligible u/s.10A, shall not be adjusted against taxable profits of the assessee, and instead shall be adjusted against the profits of eligible undertakings under section 10A. 85. After hearing both the sides, we find the above ground is identical to ground of appeal No.4 in ITA No.1451/PN/2011 for A.Y. 2007-08. We have already decided the issue in the preceding paragraphs and the ground raised by the assessee has been dismissed. Following the same reasoning the above ground by the assessee is dismissed. 86. Ground of appeal No.6 being general in nature is dismissed. ITA No.282/PN/2014 (A.Y. 2009-10) : 87. Ground of appeal No.1 by the assessee reads as under : 1. In making addition of ₹ 3,14,81,509/- to the total income, on account of interest chargeable on delayed receipts from the associated enterprises following adjustment made in the transfer pricing order u/s.92CA(3) of the Income tax Act. The learned transfer pricing assessing officer erred : a. In concluding that the sum of ₹ 3,14,81,509/- is to be the arm s length compensation receivable by the .....

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undertaking. e. In relying on various observations and conclusions recorded in the assessment order for earlier years and thereby not allowing deduction u/s.10A/10AA in respect of various eligible undertakings. f. In holding and concluding that new unit at Noida SEZ is not exception to the stand taken by the Department and is clearly formed by the splitting up and the reconstruction of the existing business as provided in section 10AA(4)(ii) of the Act on the basis that some of the employees have been transferred to this unit and new unit is also carrying on the same business of software development/IT enabled services. 3. In holding that the unit at TTC BPO is formed by splitting up and reconstruction of the existing BPO business of the assessee which is being carried on at NDS 58 unit and thereby including the profits of the TCC BPO business in the profits of the NDA 58 unit for the purpose of allowing deduction u/s.10A and not considering the new unit at TTC BPO as a separate and independent undertaking for the purpose of section 10A. 90. After hearing both the sides, we find there are 16 eligible undertakings in the current year. There is no dispute about one BPO undertaking. T .....

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undertakings under section 10A. 93. After hearing both the sides, we find the above ground is identical to ground of appeal No.5 in ITA No.1338/PN/2010 for A.Y. 2006-07. We have already decided the issue and allowed the ground raised by the assessee. Following the same reasonin this ground by the assessee is allowed. 94. Ground of appeal No.5 by the assessee reads as under : In respect of invoking provisions of section 10A(7)/10AA(9) read with section 80IA(10) : a. In drawing conclusion of earning more than average profits on the basis of comparables used in transfer pricing analysis having different purpose, without establishing the ordinary profits in this business. b. In holding that profit of ₹ 50,77,52,091/- in respect of software business on protective basis and ₹ 18,70,35,470/- in respect of BPO business (viz.,total ₹ 69,47,87,561/-) are more than ordinary profit and hence not eligible for deduction u/s.10A. c. In not appreciating that the profit margin of the assessee is comparable with the average profits of the top software companies. d. In not establishing any arrangement between the assessee and other persons so as to produce to the assessee more than .....

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rguments and evidences putforth by the assessee the AO held that such ESOP cost charges to the profit and loss account is nothing but a notional entry and no cost is actually incurred by the company. He accordingly disallowed the claim of deduction of ₹ 20,19,042/- 99. The assessee approached the DRP, however, the DRP was also not satisfied with the arguments advanced by the assessee and upheld the action of the AO. Subsequently, the AO in the order passed u/s.143(3) r.w.s.144C disallowed the above amount. 100. Aggrieved with such order of the AO the assessee is in appeal before us. 101. The Ld. Counsel for the assessee referring to the decision of the Bangalore Special Bench of the Tribunal in the case of Biocon Ltd. (Supra) submitted that the issue stands decided in favour of the assessee. He submitted that following the above decision the DRP in subsequent assessment years has allowed such claim of the assessee. He accordingly submitted that the claim of deduction on account of ESOP should be allowed. 102. The Ld. Departmental Representative on the other hand heavily relied on the order of the AO. 103. After hearing both the sides, we find from the documents filed by the L .....

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