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TMI Blog2018 (3) TMI 1031X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Rejection of alternate claim of deduction under section 10A of the Act WITHOUT PREJUDICE to the claim of deduction under section 10B of the Act, on the facts and in the circumstances of the case and in law, the Id. CIT(A) has erred in confirming the action of the Id. AO in complete disregard to the order of ITAT in appellant's own case for the AY 2009-10. WITHOUT PREJUDICE to the claim of deduction under section 10B of the Act, on the facts and in the circumstances of the case and in law, the Id. CIT(A) has erred in confirming the action of the Id. AO in denying the alternate claim of deduction under section 10A of the Act on the erroneous ground that the appellant does not fulfill the fundamental condition of claiming the deduction under section 10A of being located in free trade zone. WITHOUT PREJUDICE to the claim of deduction under section 10B of the Act, on the facts and in the circumstances of the case and in law, the Id. CIT(A) has erred in confirming the action of the ld.AO on the ground that the appellant has not claimed the deduction under section 10A in the return of income. 4. Disallowance of deduction under section 10B on suo-moto transfer pricing adjust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case and in law, the Id. CIT(A) has erred in confirming the action of the Id. AO in rejecting CG-VAK Software and Exports Limited (Software Services segment) as it is loss making company after excluding foreign exchange gain without providing adequate/cogent reasons. 7. Not allowing use of multiple yea f data 7.1 On the facts and circumstances of the case and in law, the learned CIT(A) erred in upholding the action of the Ld. AO in not allowing the use of multiple year data as prescribed under Rule 10B (4) of the Rules. 7.2 On the facts and circumstances of the case and in law, the learned CIT(A) erred in upholding the action of the Ld. AO in using data which was not available at the time of filing return of income for AY 2011-12, by rejecting Appellant's objections on use of contemporaneous data and ignoring the principles of impossibility of performance as per principles enshrined by the Apex Court. 8. Incorrect computation of Operating Profit/Total Cost ("OP/TC") margin 8.1 Incorrectly treating the loss/gain on account of foreign exchange fluctuations as non-operating in nature for calculating the OP/TC margin On the facts and in the circumstances of' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not pressed. 4. The learned Authorized Representative for the assessee at the outset pointed out that ground of appeal No.1 raised in the present appeal is general. Further, grounds of appeal Nos.2, 5 to 12 are not pressed and hence, the only issue which needs adjudication is in grounds of appeal No.3 and 4 and for which, the assessee has also filed modified ground of appeal No.4, which reads as under:- "On the facts and in the circumstances of the case and in law, the Ld CIT(A) has erred in sustaining the disallowance made by the ld AO under section 10B of the Act on the suo-moto transfer pricing adjustment of Rs. 64,07,399/- made by the Appellant in the return of income. Alternatively, the Appellant prays that deduction under section 10A of the Act be allowed on the suo-moto transfer pricing adjustment of Rs. 64,07,399/- made by it in its return of income." 5. Briefly, in the facts of the case, the assessee was wholly owned subsidiary of Approva US and was providing software development activities and quality assurance services to its associated enterprises on exclusive basis. The assessee also provided software maintenance and support functions like documentation of progra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (sales in this case) was not paid into India by the assessee as required by provisions of section 10A/10B of the Act. Consequently, show cause notice was issued to the assessee. Show cause notice also dealt with transfer pricing provisions and other issue which was raised i.e. wrong claim of 10B deduction which was on both counts i.e. being registered STPI unit, was not entitled to claim 10B deduction and also the benefit of said deduction on the profit from voluntary adjustment made to the value of international transactions of Rs. 64,07,399/-. The Assessing Officer vide para 5 at pages 33 onwards discussed the deduction to be allowed under section 10B of the Act. The assessee agitated that the claim of deduction under section 10B of the Act has been allowed in earlier years and since there was no change in facts, the same should be allowed in subsequent year also. The assessee also made an alternate claim of deduction under section 10A of the Act, without prejudice to its claim of deduction under section 10B of the Act, before the Assessing Officer. Further, in respect of voluntary adjustment, the assessee pointed out that export turnover was defined under Explanation (2)(iv) to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he allowability of deduction under section 10B of the Act, however, the Tribunal had impliedly upheld the disallowance of deduction claimed under section 10B of the Act. The CIT(A) held that the assessee was not entitled to claim the deduction under section 10B of the Act and also on additional income of Rs. 64,07,399/-. Vis-à-vis alternate claim of deduction under section 10A of the Act, the CIT(A) observed that the said deduction was not available to the assessee as it was not located in Free Trade Zone. Since the assessee had not claimed deduction in the return of income and had not furnished such return of income within period prescribed under section 139(1) of the Act; hence held by the CIT(A) that the assessee is not entitled to claim the aforesaid deduction under section 10A of the Act. In respect of suo-moto transfer pricing adjustment of Rs. 64,07,399/-, since the assessee had not brought the said amount in convertible foreign exchange in India, the CIT(A) held that under section 10B(3) of the Act, the deduction is to be granted only on sale proceeds brought into India within prescribed period. Section 10B(iv) of the Act provides computation formula for arriving at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice offered. Our attention was drawn to the provisions of section 92(1) of the Act, which defines the computation of income from international transactions having regard to the arm's length price. He further referred to section 92C(4) of the Act i.e. where the TP means adjustment on account of transfer pricing provisions and the proviso provides that no deduction under section 10AA of the Act is to be allowed. Then, he relied on the ratio laid down by the Hon'ble High Court of Karnataka in CIT & Anr. Vs. M/s. iGate Global Solutions Ltd. in ITA No.453/2008, judgment dated 17.06.2014 and also placed reliance on the ratio laid down by the Tribunal in the said case reported in (2008) 112 TTJ 1002 (Bang). The learned Authorized Representative for the assessee further stated that the CIT(A) had observed that Tribunal had not considered the claim of section 10A of the Act, where profits are to be received in foreign exchange. Our attention was drawn to the ratio laid down by Bangalore Bench of Tribunal in M/s. Austin Medical Solutions Pvt. Ltd. Vs. ITO in I.T. (TP) A. No.542/Bang/2012, relating to assessment year 2008-09, order dated 17.07.2015, wherein similar issue of claiming 10A d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 92(1) of the Act which talked about income and not turnover and hence, the observations of authorities below were held to be not cogent. Under proviso to section 92C of the Act, where the TPO makes disallowance, it is provided that the assessee would not get 10A deduction. However, in the final analysis, he placed reliance on the decision of the Hon'ble High Court of Karnataka in CIT & Anr. Vs. M/s. iGate Global Solutions Ltd. (supra). He also pointed out that the decision of non-jurisdictional was binding on the Tribunal as laid down by the Hon'ble Bombay High Court CIT Vs. Smt. Godavaridevi Saraf (1978) 113 ITR 589 (Bom). He also relied on the decision of Pune Bench of Tribunal in ACIT Vs. Aurangabad Holiday Resorts (P.) Ltd. (2009) 118 ITD 1 (Pune) and on other decisions on this issue. 13. We have heard the rival contentions and perused the record. The first issue which arises by way of ground of appeal No.3 is whether the assessee is entitled to claim the deduction under section 10B or 10A of the Act. The assessee in the return of income had claimed the deduction under section 10B of the Act. However, during the course of assessment proceedings, the assessee filed an alte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion under section 10B/10A of the Act on TP adjustment of Rs. 64,07,399/-. The assessee on its own motion had offered adjustment on account of transfer pricing provision to the extent of Rs. 64,07,399/-. The computation of income is placed at page 40 of the Paper Book. The assessee claims that on the aforesaid additional income offered, it is entitled to claim the benefit of deduction under section 10B/10A of the Act. We may point herein itself that in the return of income, the assessee had claimed the said deduction under section 10B of the Act. However, during the course of hearing before the authorities below, the said claim was revised to 10A deduction. The question thus, which arises before us is whether the assessee is entitled to claim 10A deduction on the additional TP adjustment offered by the assessee on its own motion in the return of income. The assessee was 100% Export Oriented Unit which was captive service provider to its associated enterprises. The total exports were to the associated enterprises and the plea of assessee in this regard is that foreign exchange due on exports has been received in India in time. In order to adjudicate the issue, we need to take into co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer pricing provisions to the extent of Rs. 64,07,399/-. The said income was offered as part of business profits of assessee and was declared as income from business in the computation of income filed by the assessee. The issue which arises is whether on such additional income, the assessee is entitled to claim the benefit of section 10B/10A of the Act. In the first instance, in the paras hereinabove, the assessee is found to be entitled to claim the deduction under section 10A of the Act, which has also been allowed to the assessee in earlier years. Consequently, we restrict our observations to the aforesaid claim whether to be allowed or not in the case of assessee under section 10A of the Act. In this regard, there is need to look at the computation provisions provided in sub-section (4) to section 10A of the Act. The said sub-section reads as under:- "10(A)(1).. (2)... (3)... (4)For the purposes of sub-sections (1) and (1A), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uce section 10A(1). "Section 10A. Special provision in respect of newly established undertakings in free trade zone, etc.-(1) Subject to the provisions of this section a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee : Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to deduction referred to in this sub-section only for the unexpired period of the aforesaid ten consecutive assessment years : Provided further that where an undertaking initially located in any free trade zone or export processing zone is subsequently located in a special economic zone, by reason of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndertaking' means an undertaking, which is mainly engaged in the business of generation or distribution of electricity or another form of power or in the construction of ships or in the manufacture or processing of goods or in mining. Hence, the meaning of 'industrial undertaking' is not restricted to one unit. The undertaking is to be considered as consisting of a number of units provided all the units are engaged in any of the activities mentioned in Explanation to section 33B. Industrial undertaking has also been defined in Explanation to section 10(15). 20. Before us, it has not been clarified that Pune unit is an independent unit and is in no way related with the activities carried out at Bangalore or Chennai unit. In absence of the facts, it is not possible to say that Pune unit was an independent undertaking engaged in the business of software development, which was in no way related to the software development done at Bangalore or Chennai unit. In case, the Pune unit is found to be independent, then loss from such unit is to be independently calculated. In case such unit is associated with the activities, which are carried out at Bangalore or Chennai unit, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chapter VI-A will be allowed in respect of the amount of income, by which the total income of the assessee is enhanced after computation of income under sub-section." 23. From the Memo Explaining the Provisions of Finance Bill, 2006 as well as from the literal meaning of the word 'enhanced', it is clear that if income increased, as a result of computation of aim's length price, then such increase is not to be considered for deduction under section 10A.In the instant case, the assessee himself has computed the arm's length prices and has disclosed the income on the basis of arm's length prices. It is not a case, where there is an enhancement of income due to determination of arm's length price. Hence, it is held that assessee was entitled to deduction under section 10A in respect of income declared in the return of income on the basis of computation of arm's length price." 21. The Hon'ble High Court of Karnataka in its order in the case of CIT & Anr. Vs. M/s. iGate Global Solutions Ltd. (supra) considered the following substantial question of law raised by the Revenue. "(4) Whether the Tribunal was correct in holding that deduction u/s. 10A of the ..... 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