TMI Blog2017 (8) TMI 1499X X X X Extracts X X X X X X X X Extracts X X X X ..... n foreign currency is reduced from export turnover an equal amount should also be reduced from total turnover while computing the deduction under section 10A of the Act, is covered in favour of the assessee by the decision in the case of CIT v. Tata Elxsi Ltd.[2011 (8) TMI 782 - KARNATAKA HIGH COURT] - decided in favour of assessee Setting off of the business losses pertaining to non-STPI against the profits of STPI units prior to allowing the deduction under Section 10A - Held that:- As relying on M/S YOKOGAWA INDIA LTD. case [2016 (12) TMI 881 - SUPREME COURT] we decide this issue in favour of the assessee and direct the Assessing Officer to allow the deduction under Section 10A of the Act prior to setting off of losses pertaining to non-STPI units against the profits of STPI units. Disallowance under Section 14A - Held that:- As regards the claim of the assessee that the assessee has not used any borrowed fund for the purpose of investment of ₹ 103,43,87,000 we find that this aspect of the matter has not been properly examined by the authorities below therefore, in the absence of proper examination of the fact of availability of the non-interest bearing fund with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pricing Officer are bad in law (a) The final order issued by the Deputy Commissioner of Income Tax- Circle 11(1) ['ITO' or 'AO], is bad on facts and in law and is in violation of the principles of natural justice. Without prejudice to the above, the order issued by the AO is bad in law insofar as the fact that the AO did not issue to ABB Global Industries Services Limited ('the Appellant or 'the Company'), a show cause notice, as per proviso to section 92C(3) of the Income-tax Act, 1961 ['the Act']. (b) The AO has erred in law in making a reference to the Transfer Pricing Officer ['TPO'], inter alia, since he has not recorded an opinion that any of the conditions in section 92C(3) of the Act, were satisfied in the instant case. The AO also erred in not following the provision contained in section 92CA(1) of the Act. 2. The fresh comparable search undertaken by the AO/TPO is bad in law (a) The AO/TPO erred on facts and in law in conducting a fresh benchmarking analysis using non contemporaneous data and substituting the Appellant's analysis with fresh benchmarking analysis on his own conjectures and surmises. (b) On th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch was not available in public domain, in arriving at a fresh set of companies using his power under section 133(6), which is grossly unjustified. 4. Erroneous data used by the AO/TPO (a) The AO/TPO has erred in law in using data, which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Appellant. (b) The AO/TPO erred in law in not applying the multiple-year data while computing the margin of alleged comparable companies. 5. Non-allowance of appropriate adjustments to the comparable companies, by the AO/TPO The AO/TPO erred in law and on facts in not allowing appropriate adjustments under Rule 10B to account for, inter alia, differences in (a) accounting practices, (b) marketing expenditure adjustment, (c) research and development expenditure adjustment, (d) risk profile between the Appellant and the comparable companies, (e) capacity adjustment; and (f) depreciation adjustment. 6. Variation of 5% from the arithmetic mean The AO/TPO erred in law in not granting the benefits of proviso to section 92C(2) of the Act available to the Appellant. 7. Grant of lower deduction under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... product to the end-user. 10. Disallowance under section 14A of the Act (a) On the facts and in the circumstances of the case, the learned AO has erred in disallowing an amount of ₹ 29,514,479 under section 14A of the Act in relation to investments made in the equity shares of Raman Boards Limited, without considering the fact that: (i) The Appellant has not received any income which does not form part of the total income for the AY 2008-09; and (ii) The Appellant has not incurred any expenses given the fact that the said investment is not made out of borrowed funds. 11. Disallowance of provision created for payment of royalty (a) On the facts and in the circumstances of the case, the learned AO has erred in disallowing an amount of ₹ 4,137,000 representing provision created for payment of royalty, without considering the fact that the said provision was created as per the audited accounts and prescribed accounting policies. (b) On the facts and in the circumstances of the case, the learned AO has erred in not taking cognizance of the decision of the Karnataka High Court in the case of M/s Prakash Leasing Limited [208 Taxman 464] 12. Interest und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Authorised Representative of the assessee has submitted that except the companies namely Persistent Systems Ltd., Tata Elxsi Ltd (Seg.), E-Zest Solutions Ltd. and Kals Information System Limited (Seg.), the assessee raised the objections against all other companies selected by the TPO though the grounds of seeking exclusion of these companies from the set of comparables were different from the grounds now raised by the assessee. He has further submitted that when these companies are functionally not comparable to the assessee then the assessee can raise the objections against the functional comparability of these companies even at this stage. He has relied upon the decisions of the Chandigarh Special Bench of this Tribunal in the case of Dy. CIT v. Quark Systems (P.) Ltd. [2010] 38 SOT 207. He has also relied upon the decision of Hon'ble Bombay High Court in the case of CIT v. Tata Power Solar Systems Ltd. [2017] 245 Taxman 93/77 taxmann.com 326 and submitted that the Hon'ble High Court has upheld the order of the Tribunal holding that merely because the assessee has included a company in its TP Study that would not by itself stopped from establishing that the said compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h are, in fact comparable. The impugned order has on FAR analysis found that M/s. Indowind Energy Ltd. and B. F. Utilities Ltd. are not comparable. They are in a different area i.e. wind energy while the Respondent-Assessee is in the field of solar energy. Accordingly in view of the decision of Quark Systems (P.) Ltd. (supra) as well as the decision of Hon'ble Bombay High Court in the case of Tata Power Solar System Ltd. (supra), we admit the additional grounds raised by the assessee for adjudication on merits. 6. Ground Nos.1 to 6 including additional grounds are regarding the TP Adjustment consequent to determination of Arm s Length Price (ALP) on the basis of the set of comparables selected by the TPO. 7. The assessee is a subsidiary of ABB Holdings (South Asia) Limited and a group company of ABB Boveri Group Company where 99.9% of equity share capital is held by ABB Holdings (South Asia) Limited. The assessee is engaged in providing software development services to its Associated Enterprises (AEs). The dispute before us is only in respect of the software development services provided by the assessee to the tune of ₹ 150,35,94,000. The operating margin of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 Mean (Average) 23.65 Accordingly, the TPO after allowing the working capital adjustment of 3.49% has computed the adjusted mean margin of at 20.16% and proposed an adjustment under Section 92CA of ₹ 16,78,17,180. The assessee is now seeking exclusion of 12 companies from the set of 20 selected by the TPO as under : S. No. Name of the Company 1 Avani Cimcon Technologies Ltd 2 Celestial Biolabs Ltd 3 E-Zest Solutions Ltd 4 Infosys Technologies Ltd 5 KALS Information Systems Ltd (Seg.) 6 Lucid Software Ltd 7 Persistent Systems Ltd 8 Quintegra Solutions Ltd 9 Softsole India Ltd 10 Tata Elxsi Ltd (Seg.) 11 Thirdware Solutions Ltd (Seg) 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only uncontrolled and unrelated comparble prices has to be considered for determining the ALP and therefore the comparable entity should not have any RPT. However it is not practically possible to find out the comparable entities / companies having 0% RPT. Therefore by considering this issue of tolerance range of RPT for selecting the comparable companies this Tribunal has in due course allowed the RPT from 5% to 25% depending upon the availability of the comparable companies. Thus in case where there is no difficulty in searching the comparable companies then the RPT should be minimum of 5% and in the extreme case where the suitable comparables are not found then this range of RPT can be relaxed upto 25%. Thus the tolerance range of 25% of RPT is allowed only in the exceptional cases. The Tribunal after considering these facts and various decisions wherein this issue has been examined has taken a consistent view that in normal circumstances when there is no difficulty in searching the comparable companies the RPT of comparable companies shall not be more than 15%. In the case of assessee the TPO has selected 20 comparable companies in the final set and therefore this fact itself m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The companies against which the assessee raised objections are as under: S. No. Name of the Company 1 Avani Cimcon Technologies Ltd 2 Bodhtree Ltd 3 Celestial Biolabs Ltd 4 E-Zest Solutions Ltd 5 Infosys Technologies Ltd 6 KALS Information Systems Ltd (Seg.) 7 Lucid Software Ltd 8 Persistent Systems Ltd 9 Quintegra Solutions Ltd 10 Softsole India Ltd 11 Tata Elxsi Ltd (Seg.) 12 Thirdware Solutions Ltd (Seg) 13 Wipro Ltd (Seg.) 22. We note that the comparability of these 13 companies have been examined by this Tribunal in series of decision as referred by the ld. AR. In the case of M/s 3DPLM Software Solutions Ltd (supra), the co-ordinate Bench o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) The extract from the Website of the company clearly indicates that it is primarily engaged in development of software products. The extract mentions that this company offers customised solutions and services in different areas; (ii) The Website of this company evidences that this company develops and sells customizable software solutions like DX Change, CARMA, etc. 7.4 The learned Authorised Representative submitted that a co-ordinate bench of the Tribunal in its order in Curram Software International Pvt. Ltd., in its order in ITA No.1280/Bang/2012 dt.31.7.2013 has remanded the matter back to the file of the Assessing Officer / TPO to examine the comparability of this company afresh, by making the following observations at paras 9.5.2 and 9.5.3 thereof :- 9.5.2 As regards the submission of the learned Authorised Representative, we are unable to agree that this company has to be deleted from the list of comparables only because it has been deleted from the set of comparables in the case of Triology E-Business Software India Pvt. Ltd. (supra). No doubt this company has been deleted as a comparable in the case of Triology E-Business Software India Pvt. Ltd. (supra) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered before passing orders thereon. It is ordered accordingly. The learned Authorised Representative submits that this company was selected as a comparable by the TPO not by any FAR analysis or as per the search process conducted by the TPO, but only as an additional comparable for the reason that it was selected as a comparable in the earlier year i.e. Assessment Year 2007-08 on the basis of information obtained under section 133(6) of the Act. In this regard, the learned Authorised Representative took us through the relevant portions of the TP order under section 92CA of the Act and the show cause notices for both the earlier year i.e. Assessment Year 2007-08 and for this year and contended that the selection of this company as a comparable violates the principle enunciated in Curram Software International Pvt. Ltd. (supra) that a company can be selected as a comparable only on the basis of FAR analysis conducted for that year and therefore pleaded for its exclusion. The learned Authorised Representative also submitted that he has brought on record sufficient evidence to show that the functional profile of this company remains unchanged from the earlier year and hence t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Triology E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011), we direct the A.O./TPO to omit this company from the list of comparables. 8.0 Bodhtree Consulting Ltd. 8.1 This company has been selected as a comparable company to the assessee by the TPO; the inclusion of which was not objected to by the assessee before both the TPO and the DRP. The assessee has not objected to the inclusion of this company in the list of comparables, as can be seen from the grounds of appeal raised in Form 36B before this Tribunal. 8.1 However in the course of proceedings before us, the learned Authorised Representative objected to the inclusion of this company as a comparable for the following reasons : (i) This company has reported abnormally fluctuating margins in the period from 2005 to 2011, which indicate abnormal business factors and abnormal profit margins and hence should not be considered as comparable to the assessee. (ii) The abnormally fluctuating margins indicate that this company bears higher risk in contrast to the assessee who has earned consistent margins over the years, indicating difference in the risk profile between this company and the assessee. (iii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls the employee cost filter. The TPO, however, brushed aside the objections raised by the assessee by stating that the objections of functional dissimilarity has been dealt with in detail in the T.P. order for Assessment Year 2007-08. As regards the objection raised in respect of the employee cost filter issue, the TPO rejected the objections by observing that the employee cost filter is only a trigger to know the functionality of the company. 9.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable, as the company is into bio- informatics software product /services and the segmental break up is not provided. It was submitted that :- (i) This company is engaged in the development of products in the field of bio-technology, pharmaceuticals, etc. and therefore is not functionally comparable to the assessee; (ii) This company has been held to be functionally incomparable to software service providers by the decision of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra); (iii) The co-ordinate bench of this Tribunal in its order in the case of Triology E Business Sof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is for this company for this year viz. Assessment Year 2008-09. To that extent, in our considered view, the selection process adopted by the TPO for inclusion of this company in the list of comparables is defective and suffers from serious infirmity. 9.4.2 Apart from relying on the afore cited judicial decisions in the matter (supra), the assessee has brought on record IT (TP) A 1380/Bang/2012 Page 8 of 34 substantial factual evidence to establish that this company is functionally dis-similar and different from the assessee in the case on hand and is therefore not comparable and also that the findings rendered in the cited decisions for the earlier years i.e. Assessment Year 2007-08 is applicable for this year also. We agree with the submissions of the assessee that this company is functionally different from the assessee. It has also been so held by co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) as well as in the case of Triology E-Business Software India Pvt. Ltd. (supra). In view of the fact that the functional profile of and other parameters of this company have not changed in this year under consideration, which fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of comparability in the case on hand and hence ought to be excluded from the list of comparables. In support of this contention, the learned Authorised Representative drew our attention to various parts of the Annual Report of this company. (v) This company is engaged not only in the development of software products but also in the provision of training services as can be seen from the website and the Annual Report of the company for the year ended 31.3.2008. (vi) This company has two segments; namely, (a) Application Software Segment which includes software product revenues from two products i.e. 'Virtual Insure' and 'La-Vision' and (b) The Training segment which does not have any product revenues. 10.3 Per contra, the learned Departmental Representative contended that the decision of the co-ordinate bench of the Tribunal in the case of Triology E- Business Software India Pvt. Ltd. (supra) was rendered with respect to F.Y.2006-07 and therefore there cannot be an assumption that it would continue to be applicable to the year under consideration i.e. A.Y. 2008-09. To this, the counter argument of the learned Authorised Representative is that the functi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arity, brand value, size, etc. The TPO, IT(TP)A 1380/Bang/2012 Page 26 of 34 however, brushed aside the objections of the assessee and included this company in the set of comparables. 12.2 Before us, the learned Authorised Representative of the assessee contended that this company i.e. Wipro Ltd., is not functionally comparable to the assessee for the following reasons :- (i) This company owns significant intangibles in the nature of customer related intangibles and technology related intangibles, owns IPRs and has been granted 40 registered patents and has 62 pending applications and its Annual Report confirms that it owns patents and intangibles. (ii) the ITAT, Delhi observation in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856(Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and a market leader assuming all risks leading to higher profits, cannot be considered as comparable to captive service providers assuming limited risk; (iii) the co-ordinate bench of the ITAT, Mumbai in the case of Telecordia Technologies India Pvt. Ltd. (ITA No.7821/Mum/2011) has held that Wipro Ltd. is not functionally comparable to a software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies in the case on hand for the year under consideration. 13. Tata Elxsi Ltd. 13.1 This company was a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables on several counts like, functional dis-similarity, significant R D activity, brand value, size, etc. The TPO, however, rejected the contention put forth by the assessee and included this company in the set of comparables. 13.2 Before us it was reiterated by the learned Authorised Representative that this company is not functionally comparable to the assessee as it performs a variety of functions under software development and services segment namely - (a) product design, (b) innovation design engineering and (c) visual computing labs as is reflected in the annual report of the company. The learned Authorised Representative submitted that, (i) The co-ordinate bench of the Mumbai Tribunal in the case of Telcordia Technologies (P.) Ltd. (supra) has held that Tata Elxsi Ltd. is not a functionally comparable for a software development service provider. (ii) The facts pertaining to Tata Elxsi Ltd. have not changed from the earlier year i.e. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable portion. As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly. 14. E-Zest Solutions Ltd. 14.1 This company was selected by the TPO as a comparable. Before the TPO, the assessee had objected to the inclusion of this company as a comparable on the ground that it was functionally different from the assessee. The TPO had rejected the objections raised by the assessee on the ground that as per the information received in response to notice under section 133(6) of the Act, this company is engaged in software development services and satisfies all the filters. 14.2 Before us, the learned Authorised R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-Zest software Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co-ordinate bench of this Tribunal in the case of Capital I-Q Information Systems (India) (P.) Ltd. (supra) that KPO services are not comparable to software development services and are therefore not comparable. Following the aforesaid decision of the co-ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest software Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The A.O./TPO is accordingly directed. 15. Thirdware Solutions Ltd. (Segment) 15.1 This company was proposed for inclusion in the list of comparables by the TPO. Before the TPO, the assessee objected to the inclusion of this company in the list of comparables on the ground that its turnover was in excess of ₹ 500 Crores. Before us, the assessee has objected to the inclusion of this company as a comparable for the reason that apart from software development services, it is in the business of product development and trading in software and giving lice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tative submitted that - (i) This company is engaged in the development of software products. (ii) This company has been held to be functionally different and therefore not comparable to software service providers by the order of a co-ordinate bench of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT(TP)A No.845/Bang/2011), following the decision of Mumbai Tribunal in the case of Telcordia Technologies India (P.) Ltd. (ITA No.7821/Mum/2011) (iii) The rejection of this company as a comparable to software service providers has been upheld by the co-ordinate benches of this Tribunal in the cases of LG Soft India (P.) Ltd and CSR India (P.) Ltd. (supra) and by the Delhi Bench of the Tribunal in the case of Transwitch India (P.) Ltd. (supra).(ITA No.6083/Del/2010) (iv) The factual position and circumstances pertaining to this company has not changed from the earlier Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09 and therefore on this basis, this company cannot be considered as a comparable in the case on hand. (v) The relevant portion of the Annual Report of this company evidences that it is in the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the reasons that this company being engaged in software product designing and analytic services, it is functionally different and further that segmental results are not available. The TPO rejected the assessee's objections on the ground that as per the Annual Report for the company for Financial Year 2007-08, it is mainly a software development company and as per the details furnished in reply to the notice under section 133(6) of the Act, software development constitutes 96% of its revenues. In this view of the matter, the Assessing Officer included this company i.e. Persistent Systems Ltd., in the list of comparables as it qualified the functionality criterion. 17.2 Before us, the assessee objected to the inclusion of this company as a comparable submitting that this company is functionally different and also that there are several other factors on which this company cannot be taken as a comparable. In this regard, the learned Authorised Representative submitted that : (i) This company is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand. (ii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fies all the filters applied by the TPO. On the issue of acquisitions, the TPO rejected the assessee's objections observing that the assessee has not adduced any evidence as to how this event had an any influence on the pricing or the margin earned. 18.2 Before us, the assessee objected to the inclusion of this company for the reason that it is functionally different and also that there are other factors for which this company cannot be considered as a comparable. It was submitted that, (i) Quintegra Solutions Ltd., the company under consideration, is engaged in product engineering services and not in purely software development services. The Annual Report of this company also states that it is engaged in preparatory software products and is therefore not similar to the assessee in the case on hand. (ii) In its Annual Report, the services rendered by the company are described as under : Leveraging its proven global model, Quintegra provides a full range of custom IT Solution (such as development, testing, maintenance, SAP, product engineering and infrastructure management services), proprietary software products and consultancy services in IT on various platforms a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e considered as a comparable company to one that does not own intangibles and requires to be omitted form the list of comparables, as in the case on hand. 18.5 We also find from the Annual Report of Quintegra Solution Ltd. that there have been acquisitions made by it in the period under consideration. It is settled principle that where extraordinary events have taken place, which has an effect on the performance of the company, then that company shall be removed from the list of comparables. 18.6 Respectfully following the decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra), we direct that this company i.e. Quintegra Solution Ltd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider. 19. Softsol India Ltd. 19.1 This company was selected by the TPO as a comparable. The assessee objected to the inclusion of this company as a comparable on the grounds that this company is functionally different and dis-similar from it. The TPO rejected the assessee's objectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id company is engaged in the different field of services i.e. product designing and analytic services as well as in proprietary of software product and are in research and development activity which has resulted in creation of its intellectual property rights. Therefore, the said company is not functionally comparable with pure software development service activity. Once the company is found to be a non-comparable company with the assessee, the same is required to be excluded from the set of comparables even if the said company is selected by the assessee itself. This view was taken by the decision of the Special Bench of Chandigarh Tribunal in the case QUARK SYSTEMS (P.) LTD (supra). 25. Thus, out of 20 comparables 12 companies are required to be excluded from the list of comparables for determining the ALP. Accordingly, we direct the TPO/AO to exclude the following companies from the set of comparables and recomputed the ALP after considering the claim of risk adjustment as well as working capital adjustment: S. No. Name of the Company 1 Avani Cimcon Technologies Ltd 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed in a number of cases in co-ordinate benches of ITAT. Hence, this issue is decided against the revenue and in favour of assessee. Accordingly, the Assessing Officer is directed to recompute the deduction under Section 10A of the Act by reducing the telecommunication expenses both from export turnover as well as total turnover. 15. Ground No.8 is regarding setting off of the business losses pertaining to non-STPI against the profits of STPI units prior to allowing the deduction under Section 10A of the Act. 15.1 We have heard the learned A.R. as well as learned D.R. and considered the relevant material on record. At the outset, we note that this issue is covered in favour of the assessee and against the revenue by the decision of the Hon'ble jurisdictional High Court in the case of CIT v. Yokogawa India Ltd. [2012] 341 ITR 385/21 taxmann.com 154 (Kar.) which has been upheld by the Hon'ble Supreme Court vide decision reported in Yokogawa India Ltd. (supra) wherein the Hon'ble Supreme Court has held in paras 15 to 17 as under : 15. Sub-section 4 of Section 10A which provides for pro rata exemption, necessarily involving deduction of the profits arising out o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be, and this shall not have any material relationship with the other business of the assessee outside these zones or units for the purposes of this provision. 17. If the specific provisions of the Act provide [first proviso to Sections 10A(1); 10A (1A) and 10A (4)] that the unit that is contemplated for grant of benefit of deduction is the eligible undertaking and that is also how the contemporaneous Circular of the department (No. 794 dated 09.08.2000) understood the situation, it is only logical and natural that the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore, immediately after the stage of determination of its profits and gains. At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in Sections 70, 72 and 74 of the Act would be premature for application. The deductions under Section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression total income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment and thus, no disallowance to be made under Section 14A of the Act. Further there is no exempt income during the year under consideration earned by the assessee therefore, the provisions of section 14A cannot be invoked. In support of his contention he has relied upon the decision of Hon'ble Delhi High Court in the case of Cheminvest Ltd. v. CIT [2015] 378 ITR 33/234 Taxman 761/61 taxmann.com 118. Further the learned Authorised Representative has submitted that the assessee has not incurred any expenditure in relation to its investment which were made in the F.Y. 2007-08 therefore there will not be any disallowance under Section 14A when the Assessing Officer has not given a finding that the claim of the assessee is not correct. 20. On the other hand, the learned Departmental Representative has submitted that the income includes negative income being loss and therefore even if the assessee has not earned any dividend income but the investment is capable of earning the exempt income then the provisions of Section 14A are applicable for disallowance of the expenditure in respect of the exempt income. He has relied upon the orders of the authorities below. 21. We have c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of s. 57(iii) and that purpose must be making or earning of income. s. 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of s. 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure. 21. There is merit in the contention of Mr. Vohra that the decision of the Supreme Court in Rajendra Prasad Moody's case (supra) was rendered in the context of allowability of deduction under Section 57(iii) of the Act, where the expression used is 'for the purpose of making or earning such income'. Section 14A of the Act on the other hand contains the express ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,37,000 representing the provision created for royalty to be paid to ABB Technology Ltd. by applying the provisions of Section 40(a)(ia) of the Act for want of TDS. 24. Before us, the learned Authorised Representative of the assessee has submitted that there was no payment during the year under consideration and the assessee has subsequently reversed the provision and added to the income of the assessee for the subsequent assessment year i.e. 2009-10. Hence the learned Authorised Representative has submitted that this amount has been taxed by the Assessing Officer twice for the Assessment Year under consideration and again for the Assessment Year 2009-10. He has thus pleaded that if this amount of disallowance made by the Assessing Officer is confirmed for the year under consideration then the said amount should not be taxed for the Assessment Year 2009-10. 25. On the other hand, the learned Departmental Representative has submitted that this is a factual aspect to be verified by the Assessing Officer whether this amount was again taxed in the subsequent assessment year or not. 26. Having considered the rival submissions as well as the relevant material on record, we note ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
