TMI Blog2018 (7) TMI 1877X X X X Extracts X X X X X X X X Extracts X X X X ..... eparately without aggregating it with all services rendered ITES segment. The DRP has also failed to rectify the error committed by the Transfer Pricing Officer by benchmarking it separately. Since, the Transfer Pricing Officer has not benchmarked this particular transaction by aggregating it with other ITES, we are inclined to restore the issue to the Assessing Officer for undertaking the necessary exercise of benchmarking the transaction by aggregating with other ITES and determine the arm's length price by applying the average margin of the comparables selected under the ITES segment, subject to our direction contained in this order with regard to the comparables under ITES segment. Mode of computation of deduction under section 10A and section 10AA of the Act after reducing / setting-off of losses in some other STP / SEZ unit - Held that:- The issue now stands settled by the decision of the Hon'ble Supreme Court in Yokogawa India Ltd. [2016 (12) TMI 881 - SUPREME COURT] wherein, held that even after amendment made to section 10A of the Act by making it a deduction provision instead of exemption provision, there is no material change in the nature of deduction claimed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7-2018 - Saktijit Dey And Rajesh Kumar, JJ. P.J. Pardiwalla and Nishant Thakkar for the Appellant. Saurabh Deshpande for the Respondent. ORDER Saktijitdey, The aforesaid appeal by the assessee is directed against assessment order dated 29th October 2010, passed under section 143(3) r/w 144C of the Income-tax Act, 1961 (for short the Act ) for the assessment year 2008-09, in pursuance to the directions of the Dispute Resolution Panel-I (DRP), Mumbai. 2. Brief facts are, the assessee an Indian Company is a subsidiary of M/s. Beaumont Development Centre Holding Ltd. and part of the Accenture Group. The assessee is basically providing Software Development Services (SDS), Information Technology Enabled Services (ITES) and Consultancy Services (CS) to its group entities worldwide. For the assessment year under dispute, the assessee filed its return of income on 28th September 2008, declaring loss of ₹ 39,38,42,462, after claiming deduction under section 10A of the Act. Subsequently, the assessee filed a revised return of income on 18th March 2010, claiming additional TDS. The return of income filed by the assessee was selected for scrutiny and in co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es under Transactional Net Margin Method (TNMM) with average margin of 11.06% as against the margin shown by the assessee at 15.26%. Hence, the price charged to the AE was claimed to be at arm's length. The Transfer Pricing Officer after examining the fresh list of comparables submitted by the assessee accepted some of the comparables while rejecting many. Having done so, the Transfer Pricing Officer on analyzing the objections of the assessee in respect of fresh comparables proposed by him rejected assessee's objection in respect of 11 comparables and included them in the list of comparables selected by him. Thus, the final set of comparables selected by the Transfer Pricing Officer consisted of 18 companies having average arithmetic mean of 31.36% as against assessee's margin of 15.26%, which resulted in an upward adjustment of the arm's length price amounting to ₹ 178,10,59,529. On the basis of the adjustment made by the Transfer Pricing Officer the Assessing Officer framed the draft assessment order making addition of the said amount. Being aggrieved of the draft assessment order, the assessee raised objections before the DRP. 4. DRP after considering t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he has selected this company, though, it fails the on-site revenue filter. Referring to the Profit Loss account of this Company as on 31st March 2008, the learned Sr. Counsel submitted that as against total sales of ₹ 60.31 crores the total expenditure was ₹ 45.37 crores. He submitted, out of the total expenditure an amount of ₹ 36.40 crores relate to employee cost and on-site development expenses. Referring to Schedule-VIII of the profit and loss account, the learned Sr. Counsel submitted, out of employee related and on-site development cost of ₹ 36.40 crores, on-site development expenses amounted to ₹ 31.45 crores which works out to almost 80% of the employee cost towards on-site development. That being the case, the company cannot be considered as comparable since it is not functionally similar to the assessee. In support of such contention, the learned Authorised Representative relied upon the following decisions:- (i) BP India Services (P.) Ltd. v. Asstt. CIT [2015] 55 taxmann.com 150 (Mum. - Trib.) (ii) Capgemini India (P.) Ltd. v. ITO [2016] 66 taxmann.com 163 (Mum. - Trib.) (iii) Zyme Solutions (P.) Ltd. v. ACIT [IT (TP) Appeal No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer is companies whose on-site revenue is more than 60% of the export revenue are to be excluded. On a perusal of the Profit Loss account of Acropetal Technologies Ltd., it is noticed that out of the total expenditure of ₹ 36.40 crores debited to the Profit Loss account for employee related and on-site development expenditure, an amount of ₹ 31.45 crores is towards on-site development expenditure. In addition, the company has reported expenditure in foreign currency amounting to ₹ 32,38,72,105. The aforesaid figures clearly indicate that the company has substantial on-site development activities and if the proportionate revenue from on-site development is considered compared to on-site development expenses, it certainly works out to more than 60% of the export revenue. Though, the Transfer Pricing Officer has referred to the company's reply in response to notice issued under section 133(6) of the Act to state that the company has reported nil on-site revenue, however, the reason for doing so as stated by the company in the said letter is, since, the billing is done from head office for the total work carried out on-site as well as offshore the contract r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ok, contended that it has shown inventories which indicates that it develops software products. Thus, it was submitted, the company cannot be considered as a comparable. The learned Sr. Counsel submitted, as per segmental information in the Annual Report, though, the company derives income from two segments i.e., application software and training, however, there is no separate segment to account for products sale. Thus, in the absence of adequate segmental break-up the company cannot be considered as a comparable. The learned Sr. Counsel submitted, the Transfer Pricing Officer has rejected assessee's comparable Larsen Toubro Infotech Ltd. alleging that it is engaged in sale of products. He submitted, the very same reason also applies to this company. In support of his contention, the learned Sr. Counsel relied upon the following decisions:- (i) Invensys Development Centre (India) (P.) Ltd. v. Asstt. CIT [2015] 53 taxmann.com 76/68 SOT 247 (URO) (Hyd. - Trib.) (ii) Net Cracker Technology Solutions (India) (P.) Ltd. v. Addl. CIT [IT Appeal No. 86 (Hyd.) of 2013, dated 17-6-2015] (iii) 3DPLM Software Solutions Ltd. v. Dy. CIT [2014] 42 taxmann.com 333 (Bang. - Trib.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of the assessee has simply stated that the company is in the business of application software which is similar to the assessee. It is relevant to note, in a number of decisions of different Benches of the Tribunal for the very same assessment year, this company has been rejected as a comparable to a software service provider on the reasoning that it is also involved in development and sale of product. The ratio laid down in these decisions squarely applies to the facts of the present case. Pertinently, in course of hearing, it was brought to our notice by the learned Sr. Counsel for the assessee that the Transfer Pricing Officer relying upon the information sought by another Transfer Pricing Officer in case of some other assessee has utilised it in the present case. Referring to the copy of the said reply at Page-940 of the paper book the learned Sr. Counsel submitted that the export sales figure mentioned in the said reply does not tally with the export sales figure mentioned in the audited annual account of the assessee for the relevant previous year. On factual verification, we find the aforesaid contention of the learned Sr. Counsel to be correct. Thus, on the basis of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rilogy E-Business Software India (P.) Ltd. v. Dy. CIT [2016] 70 taxmann.com 378 (Bang. - Trib.) (v) DCIT v. Cypres Semiconductors Technology (P.) Ltd. [IT (TP) Appeal No. 463 (Bang.) of 2013, dated 7-2-2017] (vi) DCIT v. IDS Software Solutions India (P.) Ltd. [IT (TP) Appeal No. 214 (Bang.) of 2014, dated 16-2-2016] (vii) DCIT v. Century Link Technologies India (P.) Ltd. [IT (TP) Appeal No. 214 (Bang.) of 2014, dated 9-6-2017] (viii) Trianz Holdings (P.) Ltd. v. Dy. CIT [2017] 81 taxmann.com 246 (Bengaluru - Trib.) (ix) Tavant Technologics India (P.) Ltd. (supra) (x) Dy. CIT v. PMC Sierra India (P.) Ltd. [IT (TP) Appeal No. 882 (Bang.) of 2013, dated 26-8-2016] (xi) CIT v. Intoto Software India (P.) Ltd. [IT Appeal No. 233 of 2014, dated 27-3-2017] (xii) MWH India (P.) Ltd. v. Dy. CIT [2017] 88 taxmann.com 22 (Mum. - Trib.) 15. The learned Departmental Representative relied upon the observations of DRP and the Transfer Pricing Officer. 16. We have considered rival submissions and perused materials on record. The main planks on which the assessee seeks exclusion of this company as a comparable is, it is functionally dissimilar to the assessee being invo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as distribution network. He submitted, in the notes to accounts of the company it has been stated that the company has earned foreign exchange revenue from services rendered and software. He submitted, due to this factor, the company cannot be considered as a comparable. Further, he submitted, the information obtained by the Transfer Pricing Officer under section 133(6) of the Act is not available in public domain. He submitted, due to insufficient information, details of related party transactions are not available to evaluate comparability as per the filter applied by the Transfer Pricing Officer. In support of such contention, the learned Sr. Counsel relied upon the following decisions:- (i) Invensys Development Centre India (P.) Ltd. v. Asstt. CIT [2015] 53 taxmann.com 76/68 SOT 247 (URO) (Hyd. - Trib.) (ii) Net Cracker Technology Solutions (I) (P.) Ltd. (supra) (iii) UCB India (P.) Ltd. (supra) (iv) 3DPLM Software Solutions Ltd., (supra) (v) Symphony Services Pune (P.) Ltd. v. ITO [2014] 46 taxmann.com 182/65 SOT 30 (URO) (Pune - Trib.) (vi) Dy. CIT v. Misys Software Solutions (I) (P.) Ltd. [2017] 87 taxmann.com 170 (Bang. - Tirb.) (vii) ITO v. Ketera Soft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is relevant to observe, in course of hearing the learned Sr. Counsel for the assessee had submitted that in the event of exclusion of Acropetal Technologies Ltd. (ACG), R.S. Software (India) Ltd., Kals Information Systems Ltd., Third ware Solutions Ltd. and E-Zest Solutions Ltd. from the list of comparables in the software services segment, assessee's margin of 14.20% would fall within 5% range of the arithmetic mean of the rest of the comparables. In view of the aforesaid submissions of the learned Sr. Counsel for the assessee we refrain from deliberating on the acceptability or otherwise of the following comparables in the software services segment and issues relating to these comparables are left open for consideration, if warranted, in any other assessment year:- (i) Avani Simcon Technologies Ltd. (ii) E-Infochips Ltd. (iii) SIP Technologies and Exports Ltd. (iv) Wipro Ltd. (SEG) and (v) Infosys Technologies Ltd. 21. The Assessing Officer is directed to determine the arm's length price of the international transaction relating to software development services keeping in view our observations herein above. 22. The next dispute is with regard to se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia (P.) Ltd. [2011] 11 taxmann.com 427/200 Taxman 92 (Mag.) (Punj. Har.) (iii) Symantec Software Solutions (P.) Ltd. v. ACIT [IT Appeal No. 7623 (Mum.) of 2012] (iv) Xander Advisorsd India (P.) Ltd. v. Asstt. CIT [2014] 52 taxmann.com 228/[2015] 153 ITD 528 (Delhi - Trib.) (v) Dell International Service India (P.) Ltd. v. Dy. CIT [2018] 89 taxmann.com 44 (Bang. - Trib.) (vi) Aptean Software India (P.) Ltd. v. ITO [2014] 52 taxmann.com 407/[2015] 152 ITD 311 (Bang. - Trib.) (vii) Citrix R D India (P.) Ltd. v. Dy. CIT [2016] 68 taxmann.com 42 (Bang. - Trib.) (viii) Yodlee Infotech (P.) Ltd. v. ITO [IT (TP) Appeal No. 108 (Bang.) of 2014, dated 12-12-2014] (ix) International Specialty Products India (P.) Ltd. v. ITO [2015] 54 taxmann.com 251 (Hyd. - Trib.) (x) LG Chemical India (P.) Ltd. v. ACIT [IT Appeal No. 1819 (Delhi) of 2015, dated 3-5-2016] 25. The learned Departmental Representative relied upon the observations of the DRP and the Transfer Pricing Officer. 26. We have considered rival submissions and perused materials on record. As could be seen from the facts on record, both these companies are engaged in KPO services involving CAD/CAM and G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Capital IQ Information Systems (I) (P.) Ltd. v. Addl. CIT [2014] 49 taxmann.com 313 (Hyd. - Trib.) (vi) Market Tools Research (P.) Ltd. v. Dy. CIT [2013] 40 taxmann.com 390/[2014] 148 ITD 631 (Hyd. - Trib.) (vii) Tracmail (I) (P.) Ltd., (supra) (viii) Maersk Global Services Centres India (P.) Ltd. v. Asstt. CIT [2012] 22 taxmann.com 33/53 of 86 (URO) (Mum.) (ix) Lionbridge Technologies (P.) Ltd. v. ITO [2014] 48 taxmann.com 46/151 ITO 553 (Mum. - Trib.) (x) Symphony Marketing Solutions India (P.) Ltd., (supra) (xi) HSBC Electronic Data Processing India (P.) Ltd., dated 14.10.2014 (xii) Stream International Services (P.) Ltd. v. Asstt. CIT [2015] 53 taxmann.com 19/152 ITD 664 (Mum. - Trib.) (xiii) ExxonMobil Co. India (P.) Ltd. v. Addl. CIT [2018] 92 taxmann.com 5 (Mum. - Trib.) (xiv) NCS Pearson India (P.) Ltd. v. ACIT [IT Appeal No.99 (Delhi) of 2018] (xv) Maersk Global Centre (I) (P.) Ltd. v. Dy. CIT [2015] 56 taxmann.com 129/69 SOT 33 (URO) (Mum. - Trib.) (xvi) PTC Software India (P.) Ltd. v. Dy. CIT [2014] 52 taxmann.com 351/[2015] 67 SOT 138 (URO) (Pune - Trib.) (xvii) Ventura India v. ACIT [IT Appeal No.1788 (Pun.) of 2014, dated 9-3-2018] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction of this company, the learned Sr. Counsel for the assessee submitted that as per the information available in the website of the company, it is engaged in rendering software development and KPO services relating to software development and maintenance services, software testing services, infrastructure set-up and management, consulting services, architecture, configuration and installation, etc. Thus, it was submitted that the company being functionally different cannot be treated as comparable to the assessee. Further, the learned Sr. Counsel submitted that the financials of the company provided by the Transfer Pricing Officer do not contain the director's report, management discussion and analysis. He submitted, these information are also not available in the public domain. He submitted, in the absence of complete annual report, the assessee cannot verify comparability of this company, hence, it should be rejected. In support of his contention, the learned Sr. Counsel relied upon the following decisions:- (i) Pr. CIT v. Aptara Technology (P.) Ltd. [2018] 92 taxmann.com 240 (Bom.); (ii) Hyundai Motors India Engineering (P.) Ltd. (supra) (iii) Market Tools Researc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny as a comparable to assessee in assessment year 2009-10. He submitted, though, it is a fact that in the relevant previous year, B2K Corp Ltd. a subsidiary merged with the assessee, however, the scheme of amalgamation has not affected the business operations of the assessee since the said subsidiary was also engaged in the same line of business. He submitted, since the merger of the subsidiary has not impacted the profitability in any manner and both the merged and merging company are functionally similar, the company cannot be rejected. In support of such contention, the learned Sr. Counsel relied upon the following decisions:- (i) Willis Processing Services (India) (P.) Ltd. v. Asstt. CIT [2017] 83 taxmann.com 198 (Mum. - Trib.) (ii) Evalueserve SEZ (Gurgaon) (P.) Ltd. v. Asstt. CIT [2017] 83 taxmann.com 371 (Delhi - Trib.) 34. The learned Departmental Representative submitted that this company is simply a call centre, hence, cannot be considered to be a comparable to BPO service provider. Further, he submitted that since in the relevant previous year, there is a merger the company cannot be selected as a comparable. 35. We have considered rival submissions and perus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eased substantially during the year. Thus, he submitted, due to the merger there was an impact on the profitability of the company. He submitted, though, for the very same reason of merger the Transfer Pricing Officer and DRP have excluded Allsec Technologies Ltd., ignoring the same reasoning Aaccentia technologies Ltd. Was selected. He submitted, the Department cannot be allowed to take such inconsistent stand in the matter of selecting / rejecting comparables. 37. The learned Sr. Counsel for the assessee submitted, if Allsec Technologies Ltd. is rejected on account of merger, this company should also be rejected for the same reason. 38. The learned Departmental Representative relied upon the observations of the DRP and the TPO. 39. We have considered rival submissions and perused materials on record. On a perusal of the order passed by the Transfer Pricing Officer, it is noticed that while considering assessee's objection against selecting this company on account of merger of two entities the Transfer Pricing Officer has rejected such objection and selected the company by stating that the acquired / merged entity are also in the same business and assessee's opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the DRP. He submitted, the Transfer Pricing Officer himself has allowed working capital adjustment in Assessment Year 2012-13. In this context he drew our attention to Transfer Pricing Officer's order for the said assessment year placed at page 1256 of the paper book. Thus, he submitted, Transfer Pricing Officer may be directed to allow working capital adjustment in similar line. Learned Departmental Representative submitted, issue may be restored to Transfer Pricing Officer for considering assessee's claim. Having considered rival submissions we find that in Assessment Year 2012-13 the Transfer Pricing Officer himself has allowed working capital adjustment to the assessee. That being the case, we direct the Assessing Officer/Transfer Pricing Officer to consider assessee's claim of working capital adjustment while computing the margins of the comparables. 42. At this juncture, it is necessary to observe, in the course of hearing the learned Departmental Representative had submitted that while examining the suitability and unsuitability of comparables objectivity has to be applied. The learned Departmental Representative submitted that neither the assessee nor the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntal Representative wants to do at this stage is to call into question selection of certain comparables by the TPO himself. This, in our view, is impermissible. While dealing with similar argument advanced by the Department in case of ACIT v. Maersk Global Service Centre (India) (P.) Ltd. [2011] 16 taxmann.com 47/133 ITD 543 (Mum.) the Tribunal observed in the following manner:- 40. Having exhausted the argument that the ld. CIT(A) should have examined the cases cited by the assessee as comparable, the ld. DR then took upon herself the task of distinguishing some of such cases. Referring to the material on record, it was stated that in certain cases, the comparison was not proper. She argued that such cases be excluded from the final list drawn by the ld. CIT(A) for the purposes of determining the ALP. When the learned AR objected to this argument advanced on behalf of the Revenue by stating that the learned Departmental Representative could not improve the order of the TPO, the learned Departmental Representative pressed into service the Special Bench order in the case of Dy. CIT v. Quark Systems (P.) Ltd. [2010] 38 SOT 307/4 ITR (Trib.) 606 (Chd.) (SB)]. 41. Primarily we n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld amount to conferring the jurisdiction of the CIT u/s 263 to the Departmental Representative, which is not permitted by the statute. Let us take another situation. Suppose a particular deduction is permissible on the cumulative satisfaction of three conditions. The AO examines the case and finds the very first condition as lacking. Without examining the fulfilment or otherwise of the other two conditions, he rejects the claim. In that case if such first requirement is subsequently found to be fulfilled in the appellate proceedings, the Departmental Representative can very well point out to the tribunal that the other two conditions were also not fulfilled. By so contending the DR cannot be said to set up a new case. Rather it would amount to supporting the viewpoint of the Assessing Officer on the question of deduction. But in no circumstance the Departmental Representative can be allowed to take a stand contrary to the one taken by the AO/TPO. 43. The Special Bench of the Tribunal in Mahindra Mahindra Ltd. v. Dy. CIT [2009] 122 TTJ (Mum.) (SB) 577/30 SOT 374 / [2010] 122 ITD 216 (Mum.) has laid down the proposition to the effect that the Departmental Representative has no j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the first appellate authority were under challenge and they were being scrutinized by the Tribunal, then it was open for the Tribunal to consider the complaint of the revenue with regard to its findings. The Tribunal performed its duty in law when it proceeded to find out whether the learned Commissioner of Income Tax (Appeals) (the First appellate authority) order was perverse or vitiated by any error of law apparent on the face of record. It also considered the complaint as to whether the Commissioner exercised his discretion of his powers as the first appellate authority arbitrarily and capriciously. Having found no basis in all these complaints and dismissing the appeals of the revenue, the Tribunal did not commit any error. To our mind, the order of the Tribunal is not vitiated by any serious legal infirmity nor is it perverse, rather it is unfortunate that a detailed and properly reasoned order of the first appellate authority and the second appellate authority is being challenged and that too on such grounds by the revenue. We would highly appreciate the parties not discrediting the Tribunal or the first appellate authority in this manner. The complaints about unfair trea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds services rendered under the Intellectual Property Services Agreement (IPSA). 48. Brief facts are, apart from the services rendered by the assessee in the nature of software services and ITES under the Delivery Centre Agreement (DCA), the assessee had entered into a separate agreement with the A.E. viz. IPSA for providing certain other services. While benchmarking the arm's length price under the IPSA, the assessee treated an amount of ₹ 90,41,87,522, received from A.E. as ITES and accordingly to bench marked it by aggregating with the revenue received from ITES rendered under the DCA. However, an amount of ₹ 8,47,34,817, received from the A.E. towards services rendered under the IPSA was segregated by the assessee and a separate benchmarking was conducted in the transfer pricing study since the assessee was of the view that the services rendered in respect of such revenue earned from the A.E. is neither in the nature of software services nor ITES. Proceeding on the aforesaid basis, the assessee set out to benchmark the transaction by adopting TNMM as the most appropriate method with operating profit to operating cost as the Profit Level Indicator (PLI). Undert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... however, he submitted, that by itself will not prevent the assessee from objecting to similar benchmarking made by the Transfer Pricing Officer in the impugned assessment year. Without prejudice to the aforesaid submission, the learned Sr. Counsel submitted, in case this particular transaction is classified as ITES, it should be aggregated with the entire ITES segment for benchmarking purpose and cannot be benchmarked separately as has been done by the Transfer Pricing Officer. The learned Sr. Counsel submitted, in that event, the margin of comparables pertaining to ITES segment should also apply to this transaction for determining the arm's length price. 51. The learned Departmental Representative relying upon the observations of the Transfer Pricing Officer submitted, after a thorough analysis the Transfer Pricing Officer has come to a valid conclusion that the services rendered under the IPSA is in the nature of ITES. As regards assessee's contention to aggregate this transaction with the entire transaction under the ITES segment and apply the margin of the comparable selected under ITES segment, the learned Departmental Representative submitted that assessee's c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transaction by aggregating with other ITES and determine the arm's length price by applying the average margin of the comparables selected under the ITES segment, subject to our direction contained in this order with regard to the comparables under ITES segment. 53. In ground No.15, the assessee has challenged the mode of computation of deduction under section 10A and section 10AA of the Act after reducing / setting-off of losses in some other STP / SEZ unit. 54. Brief facts are, the assessee has eight Special Economic Zone (SEZ) units functioning at Mumbai, Hyderabad, Bangalore, Chennai, Pune, Haryana and Chennai SEZ. In the return of income filed, the assessee claimed deduction under section 10A of the Act in respect of three SEZ units independently which have made profit during the year. The Assessing Officer while examining assessee's claim of deduction under section 10A of the Act, was of the view that assessee's claim of deduction under section 10A, unit-wise, is not allowable, since, such deduction has to be allowed from the total income of the assessee. Referring to his decision in assessee's own case for the preceding assessment year, the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee's claim of deduction under section 10A of the Act unit-wise is allowable. The Assessing Officer is directed to compute the deduction accordingly. 59. In ground No.16, the assessee has challenged disallowance of deduction under section 10A of the Act in respect of income / profit derived under the intellectual property services agreement. During the assessment proceedings, the Assessing Officer noticed that in the relevant previous year the assessee claimed to have received an amount of ₹ 90,41,87,522, under the IPSA agreement which is claimed to be in the nature of ITES. Further, he found that the margin earned by the assessee at 15% of the aforesaid amount received the assessee was claimed as deduction under section under section 10A of the Act. The Assessing Officer referring to the assessment order passed for the preceding assessment year held that the income derived under the IPSA agreement is not in the nature of ITES, hence, assessee is not eligible for deduction 10A of the Act in such income. Accordingly, he disallowed assessee's claim of deduction under section 10A of the Act with regard to the profit derived from the said activity. Though, the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber 2010. A careful reading of the observations of the Transfer Pricing Officer in Para-15.2 of his order would clearly establish that by referring to the CBDT notification under consideration he has concluded that the income from IPSA agreement either has to be classified under software development or ITES. On further analysis, he has finally concluded that the services rendered are more akin to ITES. Accordingly, the Transfer Pricing Officer has proceeded to benchmark the revenue received from IPSA agreement as ITES. Thus, the contention of the Department that the Transfer Pricing Officer has not recorded any conclusive finding with regard to the nature of income from IPSA agreement is contrary to facts on record. In any case of the matter, when the Transfer Pricing Officer has classified the income received under IPSA agreement to be of the nature of ITES and has also benchmarked it as such, the Assessing Officer cannot take a contrary view by stating that it is not in the nature of ITES only for disallowing assessee's claim of deduction under section 10A of the Act. The Department cannot be permitted to take contrary view with regard to the nature of a particular item of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to that extent. Hence, assessee should be allowed deduction under section 10A of the Act on such enhanced profit. The DRP after considering the submissions of the assessee did not find any merit in them. The DRP observed, once the liability is not ascertained and merely is a provision, it cannot be allowed as deduction under section 37(1) of the Act. Further, the DRP held that once the assessee debits some expenditure to the Profit Loss account it is liable to withhold tax on such payment if it comes within the purview of TDS provision. Thus, the DRP held that disallowance made under section 40(a)(ia) of the Act by the Assessing Officer was proper. 66. The learned Sr. Counsel for the assessee drawing our attention to the tax audit report submitted in the paper book contended that the auditor has certified that except the amount of ₹ 4,05,40,683, the other inadmissible expenditure has been disallowed under section 40(a)(ia) of the Act. Further, explaining the reason for not deducting tax on the aforesaid amount, it was submitted that liability to deduct tax at source would not arise as the names of the parties are not ascertainable. Without prejudice to the aforesaid sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year.Then only, it can be allowed as deduction under section 37(1) of the Act. Further, the onus is on the assessee to demonstrate that the payee is not identifiable when the payment was debited to the books of account. Thus, these facts require to be verified by the Assessing Officer. Moreover, it is evident, during the proceeding before the DRP the assessee has contended that out of the amount of ₹ 4,05,40,683, claimed as deduction, an amount of ₹ 3,05,66,130 pertains to STPI/SEZ unit eligible for deduction under section 10A of the Act. It is the contention of the assessee that once such amount is disallowed under section 40(a)(ia) of the Act, the profit of the eligible unit is enhanced to that extent, hence, is entitled to deduction under section 10A of the Act. Though, we find substantial force in the aforesaid contention of the assessee, however, it is observed that the DRP has not at all considered the aforesaid claim in proper perspective. In our considered opinion, if the expenditure claimed by the assessee pertains to STPI / SEZ unit, on disallowance of such deduction the profit of STPI / SEZ unit will get enhanced, hence, the assessee will be eligible to avail ..... X X X X Extracts X X X X X X X X Extracts X X X X
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