DCIT, BANGALORE vs. M/S CORE OBJECTS INDIA PVT. LTD.,, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE BEFORE SHRI. CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER IT(TP)A No.517/Bang/2015 Assessment Year : 2010-11

The Dy. Commissioner of M/s Harman Connected Income-Tax, Services Corporation Pvt. Circle-6(1)(1), Ltd., Bengaluru. Vs. No.3&3A, EOIZ Industrial Area, Survey No.85 & 86, Sadamangala Village, Krishnarajapuram Hobli, Bangalore-560 066.

PAN – AACCC 2040 B APPELLANT RESPONDENT

IT(TP)A No.570/Bang/2015 Assessment Year : 2010-11

M/s Harman Connected The Dy. Commissioner of Services Corporation Pvt. Income-Tax, Ltd., Circle-6(1)(1), No.3&3A, EOIZ Industrial Vs. Bengaluru. Area, Survey No.85 & 86, Sadamangala Village, Krishnarajapuram Hobli, Bangalore-560 066.

PAN – AACCC 2040 B APPELLANT RESPONDENT

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Assessee by : Shri Muzaffar Hussain, CIT (DR) Revenue by : Smt. Tanmayee Rajkumar, Advocate

Date of Hearing : 02-02-2021 Date of Pronouncement : 01-04-2021 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present cross appeal are filed by revenue and assessee against order dated 30/01/2015 passed by Ld.DCIT Circle 6(1)(2), Bangalore under section 143 (3) read with section 144C(13) of the Act for assessment year 2010-11 on following grounds of appeal: ITA No.517/B/2015 “1. The directions of the Dispute Resolution Panel are opposed to law and facts of the case. 2. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in law in holding that the size, turnover and brand of the company are the deciding factors for treating a company as a comparable and accordingly erred in excluding Infosys Ltd., M/s. KALS Information Systems Ltd., Persistent Systems Ltd., M/s. Tata Elxsi Ltd., Sasken Communication Tech. Ltd., R.S.Software India Ltd. as comparables without appreciating the fact that the TPO had discussed regarding comparables and included the companies as rule 1OB(3) requires that not only the transactions but the enterprises should also be comparable in TNMM. 3. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in appreciating that the directions issued are beyond the mandate of the provisions of Sec. 144C of the IT Act. 4. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in super imposing the decision of other benches of FIAT in the case of assessee to reject these comparables when selection of comparables in a case depends in transfer pricing on assessee specific FAR analysis. 5. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in relying on decision of other benches of FIAT and

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ought to have decided the comparability of these companies on the basis of specific facts brought on record by the TPO in the case of the assessee. 6. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in not appreciating that the payments for the purchase of computer software falls under the purview of 'royalty' as defined in Explanation 2 to sec. 9(1)(iv) of the Act and are liable for TDS u/s 194J of the Act. 7. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in not appreciating that the disallowance u/s 40(a)(ia) of the Act was made on the findings of the AO for not deducting TDS on the purchase of software and also on legal and professional fees. 8. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in not appreciating that the sub leased rental income is taxable without any adjustment against the business expenditure of the STPI units of the assessee. 9. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in directing the AO to reduce expenses on telecommunication, Software expenses, travel and other expenses incurred in foreign currency both from export turnover and as well as from total turnover for the purpose of computation of deduction u/s 10A of the Income tax Act without appreciating the fact that the statute allows exclusion of such expenditure only from the Export turnover by way of specific definition of export turnover defined in the Act and there is no specific provision in section 10A warranting exclusion of above expenses from the total turnover also. 10. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in placing reliance on the decision of the Hon'ble High Court of Karnataka in the case of M/s. Tata Elxsi Ltd. which has not become final since the same has been not accepted by the Department and SLPs are pending before the Hon'ble Supreme Court. 11. For these and other grounds that may be urged at the time of hearing, it is prayed that the directions of the Dispute Resolution Panel in so far as it relates to the above grounds may be reversed. 12. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above.” ITA No. 570/B/2016 I. Transfer Pricing The grounds mentioned hereinafter are without prejudice to one another. 1. The learned Deputy Commissioner of Income-tax (Transfer Pricing-IV), Bangalore ("Transfer Pricing Officer" or "learned TPO") grossly erred in determining an adjustment u/s 92CA of the Income-tax Act, 1961 to the Arm's Length Price ('ALP') of the international transactions entered into

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by the Appellant with its Associated Enterprises ("AEs") with respect to the software development services. 2. The Appellant aggrieved by the TPO order further appealed before the Honorable Dispute Resolution Panel ("DRP") against the TPO order and subsequently, the learned Assessing Officer ("learned AO") issued the final assessment order with a transfer pricing ("TP") adjustment of INR 4,77,30,553/-. 3. The learned AO/learned TPO/ Hon'ble DRP erred in not acknowledging the voluntary payment of true-up adjustment offered suo-moto for tax by the assessee. 4. The learned AO / learned TPO / Hon'ble DRP erred in rejecting the TP documentation maintained by the Appellant on invoking provisions of sub-section (3) of 92C of the Act contending that the information or data used in the computation of the ALP is not reliable or correct. In doing so, the learned AO/ learned TPO has grossly erred in: a. Rejecting comparability analysis carried in the TP documentation and in conducting a fresh comparability analysis by introducing various filters in determining the ALP. b. Including companies that do not satisfy the test of comparability. Specifically the following companies selected as comparable by the learned AO/learned TPO ought to have been rejected: . Larsen and Toubro Infotech Limited . ICRA Techno Analytics Limited c. Rejecting companies that are comparable to the Appellant while performing the comparability analysis. Specifically, the following companies ought to have been included as comparable: • Akshay Software Technologies Limited • Quintegra Solutions Limited 5. The learned AU / learned TPU erred in not applying the turnover filter in selecting the comparable companies. 6. The learned AU / learned TPU I Honble DRP erred in not considering the multiple year financial data of comparable companies while determining the ALP. 7. The learned AO / learned TPO / Hon'ble DRP erred in application of different financial year ending filter. 8. The learned AU / learned TPO I Hon'ble DRP erred in applying onsite filter to reject the companies that are comparable to the Appellant. 9. The learned AU / learned TPO I Hon'ble DRP erred in using data as at the time of assessment proceedings, instead of that available as on the date of preparing the TP documentation for comparable companies while determining ALP. 10. The learned AU / learned TPO I Hon'ble DRP erred in computation of working capital adjustment.

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II. The learned AU / learned TPO / Hon'ble DRP erred in ignoring the limited risk nature of the contractual services provided by the Appellant and in not providing an appropriate adjustment towards the risk differential, even when the full- fledged entrepreneurial companies are selected as Comparable companies. II Corporate Tax 1. Set off and carry forward of business loss of Noida unit 1.1 The learned AO has erred in not setting off the business loss amounting to Rs. 5,14,01,852 pertaining to Noida unit against the income chargeable to tax under the head 'Profits and Gains from Business' after claim of deduction u/s 10A for the Bangalore and Pune units. 2. Set off of loss under the head 'Income from other Sources 2.1 Without prejudice to the above, the learned AU has further allowing set off of loss under the head 'Income from other Sources' amounting to Rs. 2,16,0 17 against the income chargeable to tax under the head 'Profits and Gains from Business'. 2.2 In case your Honour allows the loss of the Noida unit to be set off against the income chargeable to tax under the head 'Profits and Gains from Business' after claim of deduction under section 1 OA for the Bangalore and Pune units., the learned AO be directed to allow carry forward of the loss under the head 'Income from other Sources' amounting to Rs. 2, 16,017 for set off against income in subsequent years. 3. Interest under section 234B The learned AO has erred in levying interest under section 234B of the Act amounting to Rs. 8,802,484. 4. Interest under section 234C The learned AO has erred in levying interest under section 234C of the Act amounting to Rs. 60,382. The appellant craves to leave/ to add to ! to alter/ to amend/ to rescind/ to modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing this appeal.” 2. At the outset the Ld.Counsel submitted that, following additional grounds has been raised by assessee vide application dated 25/03/2018 before this Tribunal. “Based on the facts and circumstances of the case, MIs. Harman Connected Services Corporation India Private Limited [Formerly known as Core Objects India Private Limited] ("the Appellant"), respectfully submits

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the following additional grounds of appeal for admission before Your Honours: Transfer pricing grounds 1. The Honourable DRP has erred in upholding the order the Ld. TPO considering ICRA Techno Analytics Ltd. ("ICRA") as comparable to the Appellant despite the same being functionally different to the Appellant or fails to meet the legally acceptable criteria for comparability; 2. The Ld AO / TPO / DRP erred in not considering the fact that the Appellant does not have any working capital risk, therefore, no negative working capital adjustment should be allowed; Corporate tax grounds 3. Without prejudice to our primary contention that the sub-lease income (net of rental expense) is to be treated as income from other sources, if the expenses in relation to the sub-lease income are treated as part of the STP business, then the corresponding sub-lease income should also be treated as part of profits of the STP business eligible for deduction under section 10A of the Act. The said grounds are independent and without prejudice to the other grounds of appeal preferred by the Appellant. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above ground of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Honorable Income Tax Appellate Tribunal to decide this appeal according to law. The Appellant does not have a Managing Director and hence these additional grounds of appeal are signed by the Director of the Company in accordance with the provisions of the Act. 3. Ld.Counsel submitted that, amongst the TP adjustment, assessee wishes to seek exclusion of ICRA Techno Analytics Ltd. she submitted that though this comparable was selected by assessee, she placed reliance on the decision of Chandigarh Special Bench in case of Quark Systems Pvt.Ltd., reported in (2010) 4 ITR (T) 606. Placing reliance on the ratio of this decision, the Ld.Counsel submitted that, assesee seek exclusion of a comparables selected by it in its TP study as not being comparable, even of such plea is raised for the 1st time before this Tribunal. She also submitted that the decision of Chandigarh

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Special Bench in case of Quark Systems Pvt.Ltd.(supra) has been affirmed by Hon’able Punjab and Haryana High Court reported in 244 CTR 542. 4. The next issue raised in the additional ground is regarding computation of negative working capital adjustment. She submitted that the Ld.TPO computed negative working capital adjustment for the comparable companies by using the standard template of computation, without appreciating the fact that assessee is a captive service provider funded by its associated enterprises. She submitted that, this issue was not contested before the DRP, however several subsequent rulings of various benches of this Tribunal has held that negative working capital cannot be effected and therefore assessee wishes to raise this issue by way of additional ground. 5. The next issue raised in the additional ground is regarding the expenditure not disallowed by the Ld.AO against the sublease income. The Ld.Counsel submitted that the contentions of assessee were accepted by the DRP and directed the Ld.AO to delete the addition. However the Ld.AO allowed the expenditure in computing the income under other sources thereby loss of Rs.3 crores was not set off while computing the total income in the hands of assessee. Alternatively, she submitted that the entire rental income to be treated as business income which is eligible for claiming deduction under section 10 A of the Act.

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It has been submitted by the Ld.Counsel that all these issues are to be decided to ascertain the correct taxable income in the hands of assessee. She also submitted that no new record needs to be verified in order to adjudicate these grounds and accordingly requested for admission of the additional grounds raised before this Tribunal. She placed reliance on the decision of Hon’ble Supreme Court in case of National Thermal Power Co Ltd.vs CIT, reported in (1998) 229 ITR 383 and Jute Corporation India Ltd. vs CIT reported in (1991) 187 ITR 688 in support of admitting the additional grounds. 6. The Ld.CI.TDR strongly opposed to the admission of additional ground raised by assessee for the reason that they were not alleged by assessee before the DRP. We have perused submissions advanced by both sides in light of records placed before us. 7. We note that the issue raised in additional grounds, arise out of records placed before us, and that it would be disposed off based on the materials placed before us. Moreover, there are no estoppels that an issue arising out of the records could not be alleged by assessee before this Tribunal. To meet the ends of justice it is necessary that these issues deserves to be considered for determining the correct taxable income in the hands of assessee in accordance with law. We are therefore admitting the additional grounds raised by assessee for adjudication.

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Brief facts of the case are as under: 8. The assessee is stated to be a subsidiary of Core Objects Software Inc., USA, which in turn is held by Symphony Services Corp. US. The assessee was incorporated under the provisions of Companies Act 1956, and is engaged in provision of software development and related services. 9. The assessee filed its return of income on 12/10/2010. Subsequently the return was revised on 15/10/2010 wherein additional income of Rs.1,20,30,165/- was offered as adjustment voluntarily. The return was processed under section 143(1) of the Act, and notice under section 143(2) of the Act was issued to the assessee. In response to statutory notices, representative of assessee appeared before the Ld.AO and filed requisite details as called for. 10. While going through the details, the Ld.AO found that assessee has entered into international transaction that exceeded Rs.15 crores, and accordingly, a reference was made to the Transfer Pricing officer to determine the arm’s length price of such international transaction. 11. Upon receipt of reference, the Ld.TPO called for economic details of the international transaction in Form 3 CEB. The Ld.TPO observed that assessee had following international transaction with its associated enterprises: Outcome of TP Order Particulars Amount in Rs.

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Software Development 33,90,53,318 Adjustment of Services (Core US) Rs. 6,04,40,428/-. Software Development Services 3,11,05,603 Accepted to be at arm's (CoreObjects UK Ltd.) length 10,29,02,306 Accepted to be at arm's Advances (receipt) length 61,90,674 Accepted to be at arm's Reimbursement (receipt) length

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Mark-up on SI. Mark-up on No. Total Costs Total Costs Name of the Company (WC-unadj) (WC - adj) (in °A)) (in %) 1 ICRA Techno Analytics Ltd. (seg) 24.94 26.79 2 lnfosys Ltd 44.98 41.07 3 Kals Information Systems Ltd. (seg) 32.55 34.41 4 Larsen & Toubro lnfotech Ltd. 19.33 21.55 5 Mindtree Ltd. (seg) 14.83 14.89 16. The Ld.TPO thus computed the proposed adjustment at Rs.6,04,40,428/- being shortfall in arms length price. The Ld.TPO also worked out working capital adjustment at (-)0.61% to the average margin of the comparables. It has been submitted that the Ld.TPO while computing the shortfall did not consider the additional income voluntarily offered by assessee. 17. On receipt of the Transfer Pricing order with the proposed adjustment, the Ld.AO passed draft assessment order on 24/03/2013 under section 144C(1) of the Act. In the draft assessment order so passed the Ld.AO:- • disallowed depreciation on computer software at Rs.7,46,162/- for non-deduction of TDS; • disallowed payments on which TDS was not deducted under section 40(a)(ia) of the Act at Rs.7,46,162/-; • disallowed professional charges for non-deduction of TDS under section 40(a)(ia) of the Act amounting to Rs.51,00,689/-;

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• disallowed a sum of Rs.21,73,081/- under the head income from other sources which was set off against the rental expenditure by assessee; • recomputed the deduction under section 10A of the Act thereby reducing the deduction to Rs.46,80,755/- as against Rs.6,58,74,683/- claimed by assessee. 18. Upon receipt of the draft assessment order, assessee raised objections before DRP. 19. In regards to the transfer pricing adjustment, the DRP directed exclusion of Infosys Ltd., Kals Information Systems Ltd., Persistent Systems Ltd., Tata Elxsi Ltd., and Sasken Communications Ltd., by accepting the contentions of assessee. The DRP also excluded RS Software India Ltd., and Persistent Systems and Solutions Ltd., suo moto. In respect of the remaining comparables DRP rejected the submissions of assessee. Regarding corporate tax issues raised, the DRP held that; • disallowance of depreciation on software under section 40(a)(ia) of the Act, on account of non-deduction of TDS is not sustainable. • Directed the Ld.AO to verify the claim of TDS having deducted on professional fees paid and to allow the claim of assessee accordingly. • DRP accepted the contention of assessee that in computing deduction under section 10A of the Act, additions made on

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account of disallowance under section 40(a)(ia) of the Act has to be ignored. • As regards computation of 10A deduction, the DRP directed the Ld.AO to compute in accordance with the decision of Hon’ble Karnataka High Court in case of CIT vs Tata Elxsi Ltd., and others reported in (2011) 247 CTR 334; • the DRP also directed the Ld.AO to recompute the loss arising out of Noida unit against the business income after excluding the transfer pricing adjustment located by assessee in the computation. • DRP also directed to grant TDS credit after verifying the claim of assessee. 20. The Ld.AO upon receipt of DRP directions called upon assessee to file various details. In compliance assessee filed all relevant details to the Ld.AO, however the same was not considered in accordance with the directions of DRP. Aggrieved by the orders of the Ld.AO, assessee as well as revenue are in appeal before us. 21. Main issues alleged by assessee as well as revenue under Transfer Pricing grounds are relating to the comparables included/excluded by the Ld.AO/TPO. 21. Before we undertake comparability analysis it is (sine qua non) to understand the functions performed, assets owned and risks assumed by assessee. Functions:

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performance of the market, financial risk etc., are born by the AE. 25. From the above it is clear that assessee is a captive service provider to its associated enterprises carrying out its functions as required and specified by the AE. It is also clear that assessee assumes low risk while providing the software development service and is characterised as a low risk contract service provider. 26. At the outset, Ld.Counsel, submitted that in assessee’s appeal, she has been instructed to restrict her arguments to Grounds No.3, 4 (b), (c) and Additional Ground No.1, 2. Amongst corporate tax issues the Ld.Counsel argued on issues raised in Ground Nos.1, 2 and Additional Ground No.3. 27. It has been submitted that other grounds are either general or consequential in nature, and therefore do not require separate adjudication. 1st we shall deal with the issues raised by assessee in its appeal. 28. Ground No. 3 is in respect of not acknowledging voluntary adjustment of Rs.1,20,30,165/- offered by assessee as suo moto in the revised return filed. 29. The Ld.TPO proceeded to make adjustment of Rs.6,04,40,428/- considering the price received at Rs.37,01,58,923/-, ignoring the voluntary adjustment of Rs.1,20,30,165/-

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TPO is false and contrary to the facts emerging from the audited P&L accounts, report u/s 92E (in Form 3CEB) and TP study. 3.1.1.3 Perusal of the auditor's report u/s 92E (Col. 10 in Part B of Form 3CEB) shows that the value of international transactions with AEs for software development services as per books of accounts was Rs.3701,58,923/- only (Refer Annexure 2). Value of international transactions with AEs as per ALP as been shown at Rs.3821,89,088/-. In the last Column of Ann. 2of the auditor’s report, the adjustment to total income is shown at Rs.120, emphasis added). This report is apparently based on TP documentation/study maintained by the assessee. 3.1.1.32 As seen from the undated Transfer Pricing Study report prepared by Raghuraman & Chythanya Advocates, filed with Vol.2 dated 24.4.2014, the operating margin of the assessee company on export (to AEs) revenue of Rs.3701,58,9231- was 6.01% only (Refer Ann 2 of TP Study), and not 9.46%. The TP report (Page 36 of TPR) also states that the net margin of the 12 comparable companies works out to 9.46% whereas Core Objects India's operating margin of 6.01% on cost is lower than the net margin of the comparable companies. In the conclusion Para 4 of the TP study (Page 37) it has been stated that, "as per the analysis the international transaction under taken by Core Objects India with its group company during the year ended March 31, 2010 with respect to software development and support services are not at price within the range of those identified from 'comparables'. This may warrant offer of additional income to tax to the extent of Rs.12046446/- subject to appropriate reliefs." In our view, this observation in the TP study is misleading and not in accordance with the law, and the offer of additional income to tax 'subject to relief' is without legal sanction. Second Proviso to Section 92C(2) clearly provides that "if the variation between the arm's length p1-ice so determined and the price at which the international transaction has actually been taken does not exceed five percent of latter, the price at which the international transaction has actually been taken shall be deemed to be at arm 's length price."

It is clear that the mean margin of comparables was found in the TP study to be which was within the range of +1- 5% of the operating margin of the assessee company (6.01%), and hence the actual international transactions of the assessee was at arm's length price. The alleged offer of additional income to tax is without any legal sanctity, within the meaning of Rule 10D of IT Rule r.w.section 92C, 920 and 92E of the IT Act 1961. More so, in view of the anent to proviso to Section 92C by Finance Act2009 which has taken aw the option earlier available to the assessee. Therefore, the TPO and Assessing Officer have rightly rejected the TP documentation, while making TP adjustment

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to total income of the assessee. We have also noted that the TP adjustment of Rs.12046446/ worked out by the assessee, has not been added to the total income, but allocated among the three STP units and deduction u/s 10A has been claimed as profits of the undertakings, which is not Correct in our view. 3.1.1.4 While filing the revised return on 15.10.2010, the assessee has allocated the alleged TP adjustment of Rs.120,30,1641- as income/profits among three of the STPI units at Bengaluru, Noida & Pune and claimed deduction u/s.10A. We have perused the auditor's report in Form 56 (Rule 160) for the computation of deduction LI/S 10A as under:

Particulars STP STP Noida STP Pune Inc From STP Total Total other Rs. Bengaluru source income from business or profession Profit as per P&L A/c 62070954 (51560848) 3823649 14333755 (215157) 14118597 Add: Depreciation as per 22570821 Nil Nil 22570821 Nil 22570821 books Add: Inadmissible expenses 327387 3512007 12030164 12030164 Addition u/s.92E — 8190770 Transfer Pricing adjustment Less: Depredation as per 2046496 Nil Nil 2046496 Nil 2046496 IT Act Others Profits from business 65874983 (51401852) 8186989 22660120 215968 22444151 Less: Deduction u/s.10A 62614737 6931232 69545969 - 69545969

It is noticed from schedule lii of the report, that TP adjustment has been allocated to various STP units as 'inadmissible expenses' in an arbitrary manner claimed to be adjustment u/s 92E and treated as profits of business of the undertakings, although the allocated adjustment has been reduced from the export turnover for the purpose of computation of 10A deduction. 3.1.1.5 Even if we accept the assessee's claim for the argument’s sake that adjustment of Rs.120,30,164/- has been made by the assessee and therefore the TP adjustment determined by the TPO should have been reduced to that extent, We are of the view that the core issue is whether the TP adjustment by the assessee based on its own TP study should be added to the total income for tax purposes or whether it can be allocated among STP and 10A deduction

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claimed/allowed on such adjustment. We are in agreement that the TP adjustment cannot be allocated to STP undertaking to inflate the profits of such units for claiming deduction. It is a settled position of law that for the benchmarking of international transactions of a particular nature (as listed in Col,8 -13 of Part B of Form 3CEB) with the AEs, the aggregated profit margins and aggregated value of transactions at the entity level only could be taken, and it is not permissible to benchmark each of the SIP units on a standalone basis. In case of DCIT Vs Birla Soft India Ltd (2014) 150 ITD 378 (Delhi), Hon’ble [TAT Delhi held where the assessee had three STP units that since profits of each of the STP units of the assessee company could not be evaluated independently of one another, and they could not be segregated for the purpose of determining the ALP relating to assessee's international transactions, where the assessee was being remunerated by the AE on cost plus mark-up basis. 3.1.1.52 It is relevant to refer to clause (I) of sub-Rule IOD(1) reproduced as under: "(1) Every person who has entered into an international transaction shall keep and maintain the following information and documents, namely- (a) ……….. (1) details of the adjustments if any, made to the transfer prices to align them with arm's length prices determined under these rules and consequent adjustment made to the total income for tax purposes." (emphasis supplied) As may be seen from the said sub-rule that any adjustment determined (by an assessee or by the AO) under these rules shall be made to the total income of an assessee for tax purposes, and not to the profits of any particular undertaking belonging to the assessee. Since the deduction u/s.10A is based on books of accounts and compliance to the requirement of bringing in foreign exchange for the profits to be eligible for deduction, the TP adjustment amount cannot be said to be profits or income of an undertaking for the purpose of deduction. Further, the TP adjustment has to be made only after being determined under the Rules (1OB, 10C & 10D), and not other-wise. It is clear to us that the aforesaid ALP adjustment of Rs. 120,30,164/- has not been determined in the TP documentation maintained by the assessee in accordance with Rule 1OD of the IT Rules, 1962, read with Section 92C, 92D and 92E of the Income Tax Act and it remains an arbitrary, artificial and unsubstantiated figure.” 31. The Ld.Counsel submitted that, in the original return filed by assessee revenue of Rs.37,01,58,923/- was shown to be the

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value of international transaction for software development services, with an operating margin of 6.01%. It was submitted that while filing the revised return on 15/10/2010, the assessee voluntarily offered Rs.1,20,30,164/- as additional income to increase its margin. She thus submitted that while the price at which the assessee had rendered SWD services was Rs. 37,01,58,923/-, it suo moto made addition of Rs.1,20,30,164/- on account of the price received against SWD services. She submitted that if any adjustment is to be made the same ought to be made after taking into consideration the voluntary addition of Rs.1,20,30,164/-. The Ld.Counsel submitted that the said additional adjustment was suo moto made by assessee in the revised return for the sake of determining the ALP of the transaction, since margin of assessee was very low. 32. The Ld.Counsel submitted that, the Ld.TPO should have considered Rs.38,21,89,088/- that was offered in the revised return, which included voluntary addition of Rs.1,20,30,165/- for computing ALP of the transaction, thereby the operating profit markup of 9.46% was earned by assessee . 33. The Ld.Counsel further submitted that, the voluntary adjustment was allocated as expenditure among the 3 STPI units at Bangalore, Noida and Pune, against which deduction under section 10A was claimed, which is not questioned by the Ld.AO. She submitted that the 10A deduction is also available to assessee on the voluntary adjustment offered by assessee.

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Issue 1 : 37. Admittedly, assessee included voluntary addition of Rs.1,20,30,165/- for computing ALP of the transaction. Under section 92C of the Act, when assessee enters into an international transaction with its associated enterprise, the arms length price of the transaction is to be computed as per section 92C by the Ld.TPO, in the hands of assessee. In other words, section provides computation of income from international transaction having regards to the arm’s length price. Such income if any, so computed by the Ld.TPO in respect of the international transaction between assessee and the associated enterprise is notional income in the hands of assessee which is as per section 92C(4) of the Act. However in the present case, it is not the Ld.AO/TPO but the assessee who was offered voluntarily additional income for computing ALP of the transaction in the revised return during the transfer pricing proceedings. Therefore, in our view such additional income cannot be ignored for computing the proposed adjustment in respect of the international transaction by the Ld.AO/TPO. Issue 2 : 38. Now coming to the 2nd part of disallowance by the Ld. AO under section 10A regarding the voluntary income offered by assessee for computing the transfer pricing adjustment. 39. On one hand, it is the assessee’s contention that provisions of section 92(4) will not be applicable in this case as the transfer

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pricing adjustment has been made voluntarily by the assessee and once the income has been offered to tax, it forms part of the profit of the business and the deduction u/s 10A cannot be denied. The Ld.Counsel relied on decisions referred to herein above in support of this contention. 39.1 The facts leading to this controversy are that, while filing its income tax return, the assessee compared its operating margin with the comparable companies. Since the operating margin earned by the assessee was lower than the operating margin earned by the comparable companies, the assessee made a voluntary transfer pricing adjustment amounting to Rs. Rs.1,20,30,165/-. A revised return was therefore filed which included the voluntary adjustment made by the assessee. DRP noticed that, Assessee in From 56(report filed by auditor for computation of deduction under section 10A), allocated the voluntary TP adjustment to various STPI units as ‘inadmissible expenses”, for which there is no basis. DRP noticed that though the voluntary TP adjustment has been treated as profits of the business of the undertaking, the same has been reduced from export turnover for purposes of computation of deduction under section 10A. The assessee thus claimed deduction under section 10A amounting to Rs.6,95,45,969/- which was subsequently denied by the DRP. The DRP denied such allocation to STPI undertaking, and thereby inflate the profits of such units for claiming deduction.

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39.2 DRP was of the opinion that since deduction u/s.10A is based on the books of accounts, and compliance to requirement of brining in foreign exchange for the profits to be eligible for deduction, the voluntary TP adjustment cannot be said to be profits or income of the undertaking for the purpose of deduction. DRP thus held that, where the consideration has not been earned by the undertaking or accounted in its books of account as export receivables nor the consideration is received in or brought into India by assessee, the same cannot be included in the export turnover of undertaking for computing the deduction. DRP also excluded the same from total income. The DRP further held that; 3.1.1.7 …………………………… It would be absurd to allow deduction under section 10A to an assessee only because he admits and declares in the return of income any amount of profit as voluntary TP adjustment, based on sheer imagination or variation from the mean margin of comparables selected by it, merely because the profits are exempt from tax………………… This would result in the entire provisions in Chapter-X of the IT Act relating to transfer pricing otiose and rendered ineffective. Hon’ble P&H High Court in case of Coca-Cola (2009) 309 ITR 194 have examined in detail the legislative intent behind the provisions in Chapter-X. It is also a matter of common knowledge and record that provisions of sections 10A/10AA/10B except rack are incentives with an aim to augment the foreign exchange for the country. These provisions cannot be a licensed to an assessee to charge a lower price or pay a higher price than the ALP, in international transactions with the AE’s. An interpretation which frustrates the legislative intent both for earning foreign exchange for the country, as also preventing flight/shifting of income/capital to other countries is best avoided. Therefore the TPO/Assessing Officer is right in ignoring the TP adjustment made by the assessee to the profits of 10AA unit and making the TP addition to the gross total income of the assessee.” 40. The DRP thus following decision of Hon’able Karnataka High Court in case of Yokogawa reported in (2012) 341 ITR 385 and

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the decision of Mumbai Tribunal in case of Deloitte Consulting India Pvt. Ltd., reported in (2014) 151 ITD 454, held that, no TP adjustment would enter the computation of deduction under section 10A/10AA/10B etc. 41. We have perused the submissions advanced by both sides in light of records placed before us. 42. In case of I-Gate Global Solutions Ltd. vs. ACIT (supra), came up for hearing before the Coordinate Bench of this Tribunal, this Tribunal took the view that the assessee was entitled to deduction u/s 10A in respect of income declared in the return of income on the basis of computation of ALP. The relevant portion of the ITAT’s order narrating the facts and the observation is reproduced here in under:- “The last grievance is in respect of not allowing deduction under s. 10A on the adjustment made by the assessee to the arm's length price. In the instant case, the assessee company entered into transaction with associated enterprise. The assessee company determined arm's length price and accordingly made adjustment to the income because arm's length price determined was more than the consideration, at which the transactions were shown in the books of account. The deduction under s. 10A has not been allowed as per proviso to s. 92C(4). As per this proviso, no deduction under s. 10A or 10B or under Chapter VI-A is to be allowed in respect of amount of income, by which the total income of the assessee is enhanced after computation of income under the sub-section. The learned Authorized Representative during the course of proceedings has referred to the word 'enhanced'. In case the income is enhanced, then deduction is not permissible. However, in the instant case, income has not been enhanced because the same was already returned by the assessee. In the Memo Explaining the Provisions of Finance Bill, 2006, it has been mentioned as under: “Under sub-s. (4), it has been provided that on the basis of arm's length price so determined, the A.O. may compute the total income of an assessee. The first proviso to sub-s. (4) provides that where the total income of the assessee as computed by AO is higher than the

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income declared by the assessee, no deduction under s. 10A or s. 10B or under 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 subsection." From the Memo Explaining the Provisions of Finance Bill, 2006 as well as from the literal meaning of the word 'enhanced1, it is clear that if income increased, as a result of computation of arm’s length price, then such increase is not to be considered for deduction under s. 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 the 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. In the result, both appeals are partly allowed.” 43. This order of the Coordinate Bench was upheld by Hon’ble Karnataka High Court in ITA 453/2008 wherein, vide order dated 17.6.2014, the Hon’ble Karnataka High Court answered the Substantial Question of Law no.4 against the revenue and in favour of the assessee. We further note that, view taken by coordinate bench of this Tribunal in case of I-Gate Global Solutions Ltd. Vs ACIT (supra) has been followed in following cases by various benches of this Tribunal, and had accordingly allowed the deduction u/s.10A of the Act on the voluntary TP adjustments made by the assessee: (i) G.S. Engineering & Construction India of the ITAT Delhi Bench reported in 93 taxmann.com 154 (Delhi Tribunal) (ii) QX KPO Services Pvt. Ltd. vs. ITO of the Ahmedabad Tribunal in ITA No.2043/AHD/2014 (iii) Approva Systems Pvt. Ltd. vs DCIT of the Pune Bench of ITAT in ITA No.1051/Pune/2015 (iv) Sumtotal Systems India (P) Ltd. vs DCIT of the Hyderabad Tribunal reported in 88 taxmann.com 897 44. The ratio of the aforesaid orders of the Tribunal, which we are bound to follow, is that; the first proviso to section 92C(4) of

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the Act is evidently applicable only to situations where adjustment to the ALP is made by the Assessing Officer/TPO/Ld. DRP and not to the voluntary adjustment made by the assessee itself. We note that, various Hon’ble High Courts and the co- ordinate Benches of the Tribunal have allowed revised enhanced deduction u/s 10A of the Act on the additions to the income made during the revised return/course of assessment. Further, we also note that, if the legislature intended to treat the adjustments made by the Assessing Officer at par with the voluntary adjustment made by the assessee, the same would have been expressed, and section 92C(4) would not have referred to computation of income made by the Assessing Officer in terms of the ALP determined u/s 92C(3) based on ‘enhanced’ income. We therefore find merit in the arguments advanced by the Ld.Counsel in this regards. 45. The Ld.Counsel before us submitted that assessee does not have any other income other than the income generated from the units that is eligible for deduction under section 10A of the Act. It is also been submitted that the assessee has excluded voluntary TP adjustment from 'export turnover' in line with the computation mechanism prescribed in section 10A, however, the voluntary transfer pricing adjustment made by the assessee to forms part of the ‘profits of the business’ for the purposes of claiming deduction u/s.10A of the Income Tax Act.

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such voluntary adjustment. In support we rely on the decision of Hon’ble Supreme Court in case of CIT vs Yokogawa, (supra) and decision of Hon’ble Karnataka High Court in case of Karle International Pvt.Ltd., vs ACIT (supra) and to grant deduction in accordance with law having regard to the ratio laid down by various (High Courts) and coordinate benches of this Tribunal in the decisions relied on hereinabove. Assessee is directed to file all relevant information/details in support of its claim based on which the Ld.AO shall carry out necessary verification. Needless to say that assessee shall be granted proper opportunity of being heard in accordance with law. Accordingly this issues No.2 alleged by assessee stands allowed for statistical purposes. 48. Ground 4 (b) and Additional ground 1 is seeking exclusion of Larsen and Toubro Infotech Ltd. and ICRA Techno Analytics Ltd. Larsen and Toubro Infotech Ltd. 49. It was submitted that Larsen and Toubro Infotech Ltd. included without considering the fact that, these comparables are functionally not similar with that of assessee and also that they fail the turnover filter. The Ld.AR submitted that applying the upper limit for turnover filter while carrying out the benchmarking analysis is necessary as asked Ld.TPO has excluded comparables which is less than Rs.1crore turnover. He submitted that, Larsen and Toubro Infotech Ltd., having high

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turnover of more than 200 crores deserves to be excluded by applying an upper turnover limit. 50. The Ld.Councel submitted that for the same year under consideration this Tribunal excluded this comparables for having high turnover. He submitted that coordinate bench of this Tribunal in case of Genesis Integrating systems vs.DCIT reported in (2012) 20 taxmann.com 715, suggested guideline regarding considering turnover filter and the categorisation of software companies. This Tribunal took view that the Dunn and Bradstreet study to be adopted as a method of classification of companies by size. It was submitted that the 3 categories of firms were identified that is small with turnover less than 200 crore, medium with turnover Rs. 200 to 2000 crore and large with turnover greater than 2000 crore. The Ld.AR further submitted that, ITAT Mumbai Tribunal in case of Capgemini India Pvt.Ltd., vs ACIT reported in (2015) 58 taxmann.com 175 has held that the concept of economic upscale cannot be applied to service delivering companies and that there is no empirical evidence to suggest that margins are related to turnover. Hence it was submitted by the Ld.Counsel that company having huge brand value and intangibles with diversified activities of software development, consultancy, engineering services except rack cannot be compared with the captive service provider like that of assessee that earns revenue on cost plus basis.

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and Capegemini India (P.) Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra).” 55. For the above reasons we direct Ld. AO/TPO to exclude Larsen and Toubro Infotech Ltd., on the issue of application of upper turnover filter from the finalist. ICRA Techno Analytics Ltd. 56. The Ld.Counsel submitted that this comparable was included in the final list without considering the fact that this comparable is functionally different. She submitted that this comparable is engaged in diversified business activities and earns revenue from sublicensing. The Ld.Counsel placed reliance on decision of coordinate bench of this Tribunal in case of Electronics for Imaging India Pvt.Ltd., (supra) and Applied Materials India Pvt.Ltd., (supra) for assessment year 2010-11 where this

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comparable has been excluded as not comparable with a captive service provider like assessee. 57. On the contrary, Ld.CIT.DR placed reliance on observations of orders passed by authorities below. 58. We have perused submissions advanced by both sides in light of records placed before us. 59. Coordinate bench of this tribunal in case of Electronics for Imaging India Pvt.Ltd., (supra) has analysed the objections raised by assessee before us having regards to the annual report of this comparable as under: (1) ICRA Techno Analytics Ltd. (seg) 14. At the outset, we note that apart from having the related party revenue at 20.94% of the total revenue, this company was also found to be functionally not comparable with software development services segment of the assessee. The DRP has given its finding at pages 13 to 14 as under:— "Having heard the contention, on perusal of the annual report, it is noticed by us that the segmental information is available for two segments i.e., services and sales. However, it is evident from the annual report that the service segment comprises of software development, software consultancy, engineering services, web development, web hosting, etc. for which no segmental information is available and therefore, the objection of the assessee is found acceptable. Accordingly, Assessing Officer is directed to exclude the above company from the comparables." 15. We find that the facts recorded by the DRP in respect of business activity of this company are not in dispute. Therefore, when this company is engaged in diversified activities of software development and consultancy, engineering services, web development & hosting and substantially diversified itself into domain of business analysis and business process outsourcing, then the same cannot be regarded as functionally comparable with that of the assessee who is rendering software development services to its AE. 16. In view of the above facts, we do not find any error or illegality in the findings of the DRP that this company is functionally not comparable with that of a pure software development service provider

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specified contract the comparable alleged for exclusion is in diversified activities for which segmental details are not available. Under such circumstances we do not find it to be a fit comparable for computing ALP of the international transaction with a captive service provider. Respectfully following the above view, we direct Ld.TPO to exclude this comparable from final list. Accordingly ground 4(b) and additional ground No. 1 raised by assessee stands allowed. 61. Ground 4(c ) has been alleged by assessee seeking inclusion of Akshay software Technologies Ltd. and Quintegra Solutions Ltd. Akshay software technologies Ltd.: 62. The Ld.Counsel submitted that the Ld.TPO rejected this company stating that it has related party transactions for more than 25% however as per the audit report the ratio comes to only 4.33%. She submitted that on an objection having raised before DRP the DRP upheld exclusion by observing that company is predominantly engaged in development of on-site software since the operating expenses incurred during the year include foreign currency expenses incurred. The DRP also notice that employee cost against the total revenue works out to 87%. Quintegra Solutions Ltd 63. As regards this comparable, the Ld. counsel submitted that TPO rate rejected this comparable by applying RPT filter however as per the audit report this company do not have any related

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party transactions. She submitted that DRP upheld exclusion by applying on-site revenue filter. 64. The Ld.Counsel submitted that DRP has applied filter which has not been considered by the Ld.TPO. She submitted that this comparable has not been rejected for functional dissimilarities by TPO/DRP. It has been submitted that this company is functionally comparable with that of assessee and satisfies the employee cost filter. 65. On the contrary, the Ld.CIT DR placed reliance on observations of authorities below. 66. We have perused submissions advanced by both sides in light of records placed before us. 67. We note that admittedly these comparables have not been objected by authorities below for functional dissimilarities. DRP has applied on-site revenue filter suo moto which has not been applied by the Ld.TPO and hence cannot be considered for purposes of upholding the exclusion. As regards the RPT filter, in our opinion this needs verification by the Ld.TPO. 68. Accordingly, we remand these comparables back to the Ld.TPO for verifying the related party transaction. In the event it is found less than 25% this comparable ease to be included in the finalist. Accordingly ground 4 (c) stands allowed for statistical purposes.

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Tribunal in case of, TNT India (P.) Ltd. reported in (2011) 10 Taxmann.com 169 (para 13), B earing Point Business Consulting (P.) Ltd. reported in (2013) 33 Taxmann.com 92 (para 5.4) and Apigee Technologies (India) (P.) Ltd. reported in (2015) 63 Taxmann.com 129 (paras 17 to 19) it has been held that positive adjustment towards working capital differences between the assessee and the comparables should be considered and appropriate adjustment granted in arriving at the profit margins of comparable companies for the purpose of comparison. Respectfully following the same, we direct the Ld.AO/TPO to grant positive working capital adjustment in actuals for determined in the profit margin of comparables. Accordingly, Ground No.10 & Additional Ground no.2 raised by assessee stands allowed for statistical purposes. Corporate tax issues (assessee’s appeal) 73. Ground 1-2 is raised by assessee as the Ld.AO did not grant setting off of business loss amounting to Rs.5,14,01,852/- pertaining to Noida unit against income chargeable to tax under the head profits and gains from business and profession after the claim of deduction under section 10 A for Bangalore and Pune units. 74. In regards to set-off of losses, the Ld.AO followed the decision of Hon’ble Karnataka in case of Yokogava, India Ltd. reported in 341 ITR 385 which is sequentially reversed by Hon’ble Supreme Court. The Ld.Counsel submitted that Hon’ble Supreme

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Court in case of CIT vs Yokogawa, reported in (2017) 77 Taxmann.com 41, has held that section 10 A the deduction provision and the deduction being at the stage of computation of business profits inter-unit set of is allowable. 75. The Ld.Sr.DR placed reliance on orders passed by authorities below. 76. We have perused submissions advanced by both sides in light of records placed before us. 77. Admittedly, the units are eligible units under section 10A of the Act. Ld.AO disallowed the claim of assessee of set of 78. The decision based on which the Ld.AO disallowed the claim of the assessee has been reversed by Hon’ble Supreme Court in case of CIT vs Yokogawa, (supra), by observing as under: 16. From a reading of the relevant provisions of Section 10A it is more than clear to us that the deductions contemplated therein is qua the eligible undertaking of an assessee standing on its own and without reference to the other eligible or non-eligible units or undertakings of the assessee. The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee. This is also more than clear from the contemporaneous Circular No. 794 dated 9.8.2000 which states in paragraph 15.6 that, "The export turnover and the total turnover for the purposes of sections 10A and 10B shall be of the undertaking located in specified zones or 100% Export Oriented Undertakings, as the case may 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

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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 of the assessee" in Section 10A has already been dealt with earlier and in the overall scenario unfolded by the provisions of Section 10A the aforesaid discord can be reconciled by understanding the expression "total income of the assessee" in Section 10A as 'total income of the undertaking'. 18. For the aforesaid reasons we answer the appeals and the questions arising therein, as formulated at the outset of this order, by holding that though Section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of the total income under Chapter VI. All the appeals shall stand disposed of accordingly.”

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The deduction under sub-Section (1) shall not be admissible for any assessment year beginning on or after the 1st day of April 2001, unless the assessee furnishes in the prescribed form, along with the return of income, the report of an accountant, as defined in the Explanation below sub-Section (2) of section 288, certifying that the deduction has been correctly claimed in accordance with the provisions of this section. Section 10B(6)(ii) Notwithstanding anything contained in any other provision of this Act, in computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of the relevant assessment year, or of any previous year, relevant to any subsequent assessment year- Xxxxx (i) (ii) no loss referred to in sub-section (1) of section 72 or sub- section (1) or sub-section (3) of section 74, in so far as such loss relates to the business of the undertaking, shall be carried forward or set off where such loss relates to any of the relevant assessment years ending before the 1st day of April 2001. Section 70(1) Save as otherwise provided in this act, where the net result for any assessment year in respect of any source falling under any head of income, other than "Capital gains", is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head. (2) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any short-term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset. (3) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any capital asset (other than a short-term capital Asset) is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset not being a short-term capital asset. Para 5.2 of Circular dated 10-7-2013 The income computed under various heads of income in accordance with the provisions of Chapter IV of the IT Act shall be aggregated in

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accordance with the provisions of Chapter VI of the IT Act, 1961. This means that first the income/loss from various sources i.e., eligible and ineligible units, under the same head are aggregated in accordance with the provisions of section 70 of the Act. Thereafter, the income from one ahead is aggregated with the income or loss of the other head in accordance with the provisions of section 71 of the Act. If after giving effect to the provisions of Sections 70 and 71 of the Act there is any income (where there is no brought forward loss to be set off in accordance with the provisions of section 72 of the Act) and the same is eligible in accordance with the provisions of Chapter VI-A or Sections 10A, 10B etc. of the Act, the same shall be allowed in computing the total income of the assessee. 7. section 10B of the Act was substituted by Finance Act, 2000 w.e.f. 1-4-2001. section 10B as it stands is not a provision in the nature of an exemption but provides for a deduction of such profit and gains as are derived by 100% export oriented undertaking from the export of articles or things or computer software for 10 consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce. section 10B does not contain any prohibition to prevent an assessee from setting off losses from one source against income from another source under the same head of income as prescribed under section 70 of the Act. section 10B(6)(ii) of the Act restricts carry forward and set off of loss under sections 72 and 74 of the Act but does not provide anything regarding intra-head set off under section 70 and inter-head set off under section 71 of the Act. The business income can be computed only after set off of business loss against the business income in the year as per provisions of section 70 of the Act. section 10A of the Act is a code by itself and it is pertinent to note that section 10A(6)(ii) does not preclude the operation of Sections 70 and 71 of the Act. Para 5.2 of the Circular issued by the Central Board of Direct Taxes dated 16-7- 2013 clearly provides that income/loss from various sources i.e. eligible and ineligible units under the same head are aggregated in accordance with provisions of section 70. 8. It is equally well settled legal proposition that where the assessee does not want the benefit of deduction from the taxable income, the same cannot be thirst upon it. There is no provision which makes compulsory on the part of income tax officer to make deduction in all cases. (See: 'CIT v. Mahindra Mills' [2000]/109 Taxman 25/243 ITR 56 (SC). From the return of income for the assessment year 2008-09 in Schedule BP, Sl.No.35(iii), the assessee has shown the deduction under section 10B of the Act as zero. Similarly, at Sl.No.57 the

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assessee has filed the deduction under section 10B as not applicable. Thus, from perusal of return of assessment year 2008-09 it is evident that the assessee has not claimed any deduction under section 10B of the Act in respect of any of the three units of the assessee. It is pertinent to mention here that section 10B(5) read with Rule 16E mandates that the assessee has to file audit report in Form-56G for claiming deduction under section 10B of the Act. Admittedly, in the instant case, the assessee has not filed any audit report in Form-56G which is a mandatory requirement for claiming deduction under section 10B of the Act. Therefore, the deduction under section 10B of the Act cannot be thirst upon the assessee. 9. Admittedly, in the instant case, two units of the assessee namely unit No. II and unit No. III were export oriented units and were eligible for exemption. The assessee had sustained loss in respect of unit No. I and therefore, the assessee had claimed set off, as permissible under section 70 of the Act and had offered the balance as income taxable under the head income from business of Rs. 12,89,762/- which has been declared in the return. The provisions of section 70 of the Act have to be given effect to. It is pertinent to mention here that Income-tax Appellate Tribunal had taken a similar view in Mindtree Consulting (P.) Ltd., supra, which was upheld by a Division Bench of this Court in Yokogawa India Ltd. (supra). Similar view has been taken by Bombay High Court in Galaxy Surfactants Ltd. (supra). We respectfully agree with the view taken by the Division Bench of this Court as well as Bombay High Court. It is pertinent to mention here that decision of the Supreme Court in Yokogawa, supra is not an authority for the proposition that an assessee cannot claim set off under section 70 of the Act and therefore, the aforesaid decision has no application to the facts of the case. Since we have dealt with the issues involved in this appeal with reference to the return filed for the assessment year 2008-09 on 30-8-2009, therefore, it is not necessary for us to deal with the contention raised by the learned counsel for the revenue that the return had filed beyond prescribed period and therefore, has no legal sanctity. In view of preceding analysis, the substantial question of law framed by this Court are answered in favour of the assessee and against the revenue. In the result, the order of the income tax appellate tribunal date 12-10-2012 in so far as it contains the finding against the Assessee is hereby quashed”. Respectfully following the aforesaid views, we are of the opinion that assessee has to be allowed inter-unit set off of loss.

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Accordingly this ground raised by assessee stands allowed. Now coming to transfer pricing issues in the appeal filed by revenue Ground No.2-5 80. We note that revenue seeks inclusion of Infosys Ltd., Kals Information Systems Ltd. (SEG), Persistent Systems Ltd. and Tata Elxi Ltd. (seg), Sask and communications technology Ltd, RS software India Ltd. 81. At the outset, the Ld.Counsel submitted that these comparables anyways are to be excluded for functional dissimilarities and also for having high turnover of more than 200 crores. 82. The Ld.Sr.DR placed reliance on the observations of Ld.AO/TPO. 83. We have perused submissions advanced by both sides in light of records placed before us. 84. While considering the comparables for exclusion in assessee’s appeal on turnover filter, we have made categorical observation regarding applicability of upper turnover filter based on the suggestions rendered by coordinate bench of this Tribunal in case of Genesis Integrating (supra). 85. The observations by us in the paragraphs hereinabove are applicable for these comparables as these comparables have turnover more than 200 crores and therefore cannot be

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considered with a captive service provider like assessee that works on cost plus basis. 86. Further it is also observed by us that functionally this comparable is are not similar with that of assessee as it has huge intangibles, and carries out services in diversified, areas which is not akin to the services rendered by assessee to its AE. 87. We therefore uphold the observation of DRP in excluding Infosys Ltd., Kals Information Systems Ltd. (SEG), Persistent Systems Ltd. and Tata Elxi Ltd. (seg), Sask and communications technology Ltd, from the finalist. R.S Software India Ltd.: 88. It is submitted that assessee do not have any objection for this company to be included in the final list of comparable. It has been submitted that, this company is functionally comparable and qualifies all filters. 89. We accordingly direct this comparable to be included in the finalist. Accordingly Ground No. 2-5 raised by revenue stands partly allowed. 90. Ground No. 6 is in respect of disallowance deleted made under section 40(a)(ia) of the Act for non-deduction of TDS towards purchase of software. 91. The Ld.Sr.DR relied on the orders passed by the Ld.AO and the draft assessment order.

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services and other sum shall not be deducted in computing the income chargeable under the head 'profits & gains of business or profession". This condition of deductibility has been stipulated u/s 40 notwithstanding anything to the contrary in section 30 to 38 of the Act. Sec. 40 begins with non-obstante clause; therefore, it has an overriding effect to the provisions of sec. 30 to 38 of the I.T. Act. The question arises is whether any amount paid outside India or to the Non Resident without deduction of tax at source and the assessee has capitalized the same in the fixed assets and claimed only depreciation is subjected to the provisions of sec. 40(a)(i) or not? The Tribunal held that it was manifest from the plain reading of provisions of sec. 40(a)(i) that an amount payable towards interest, royalty, fee for technical services or other sums chargeable under this Act shall not be deducted while computing the income under the head profit and gain of business or profession on which tax is deductible at source; but such tax has not been deducted. The expression 'amount payable' which is otherwise an allowable deduction refers to the expenditure incurred for the purpose of business of the assessee and therefore, the said expenditure is a deductible claim. Thus, section 40 refers to the outgoing amount chargeable under this Act and object to TDS under Chapter XVII-B. There is a difference between the and other kind of deduction. The other kind of deduction which includes any loss incidental to carrying on the business, bad debts etc., which are deductible items itself not because an expenditure was laid out and consequentially any sum has gone out; on the contrary the expenditure results a certain sums payable and goes out of the business of the assessee. The sum, as contemplated under sec. 40(a)(i) is the outgoing amount and therefore, necessarily refers to the outgoing expenditure. Depreciation is a statutory deduction and after the insertion of Explanation 5 to sec. 32, it is obligatory on the part of the Assessing Officer to allow the deduction of depreciation on the eligible asset irrespective of any claim made by the assessee. Therefore, depreciation is a mandatory deduction on the asset which is wholly or partly owned by the assessee and used for the purpose of business or profession which means the depreciation is a deduction for an asset owned by the assessee and used for the purpose of business and not for incurring of any expenditure. The deduction u/s 32 is not in respect of the amount paid or payable which is subjected to TDS; but is a statutory deduction on an asset which is otherwise eligible for deduction of deprecation. Depreciation is not an outgoing expenditure and therefore, the provisions of sec. 40(a)(i) of the Act are not attracted on such deduction. The provisions of section 40(a) is only an additional measure to enforce the compliance of Chapter XVIIB of the Act, by disallowing an expenditure which is otherwise allowable under the provisions of the Act.

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Therefore, the question of disallowance under Section 40(a) arises only when an expenditure is claimed by the assessee without deducting the tax at source as per the provisions of Chapter-XVIIB of the Act, 1961. In the case on hand, when the assessee has not claimed, the said payment as an expenditure then the question of disallowance under Section 40(a)(1) does not arise. The only remedy which might have been resorted to by the Assessing Officer is the action under Section 201 and 201A of the Act. Following the earlier orders of this Tribunal, we are of the considered once the assessee has capitalized the payment in question, then even the assessee has not deducted tax at source on such payment, the provisions of section 40(ia) cannot be invoked for disallowance of the claim of depreciation.” 93. It has been submitted that factually there is no change for year under consideration as compared to assessment year 2009- 10. 94. Respectfully following the view taken hereinabove, we do not find any infirmity in the action of the Ld.AO in deleting the disallowance made under section 40 (a) (ia). Accordingly this ground raised by revenue stands dismissed. 95. Ground No. 7 has been raised by revenue against the deletion of disallowance made for non-deduction of TDS on payments towards professional and legal fees. The Ld.Sr.DR placed reliance on orders passed by the Ld.AO and the draft assessment order. 96. At the outset the Ld.Counsel submitted that DRP directed assessee to file the details in respect of the same before the Ld. AO for due verification, based on which the Ld.AO was consider the claim of assessee. He submitted that, the details were actually filed before the DRP which is placed at page 181-185 of the paper book regarding the TDS having deducted in respect of

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the payments made. The Ld.AO while passing the final assessment order carried out verification in respect of the same and granted relief to assessee. 97. We have perused the submissions advanced by both sides in light of records placed before us. We do not find any infirmity in the order of the Ld.AO as relief granted to assessee is based on verification of materials/evidences produced by assessee before the DRP. Accordingly this ground raised by revenue stands dismissed. 98. Ground No. 8 is raised by revenue against the direction by DRP to the Ld.AO to grant the sublease expenses as deduction under section 57 (iii) from the sublease income under the head “income from other sources”. 99. The Ld.Counsel submitted that assessee has a part of space in the leased building for the STPI unit at Bangalore which was not utilised by assessee and therefore was subleased, against which income of Rs.21,73,081/- was received. Assessee incurred expenditure towards lease rent paid of Rs.24,73,450/- which was reduced from the lease rental earned. The Ld. AO while passing draft assessment order, disallowed the sublease expenditure in relation to the premises from which sublease rental income was earned. The Ld. AO also denied the expenses to be reduced from the profits and gains of business and profession.

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Ld.Counsel do not object to the said income to be considered under the head income from other sources however it was contended that the same has to be allowed as deduction under section 57 (iii) of the Act. The DRP on appreciating the facts was of the opinion that any expenditure incurred in relation to such income from other sources has to be allowed as deduction as per provisions of section 57(iii) of the Act, as there was a direct connection between the income and expenditure incurred. 105. We note that identical issue arose before this Tribunal in assessee’s own case in IT(TP)A No.305&248/B/2014 for assessment year 2009-10. This Tribunal vide order dated 12/02/2020 observed and held as under: “25. As regards ground No.5, the facts are that the assessee sublet a portion of the premises of which it was a lessee and earned rental income of Rs,1,31,20,320. The income so earned was offered by the assessee under the head 'income from other sources'. Against the aforesaid income, the assessee claimed deduction u/s. 57(iii) of the Act of the lease rent which the assessee paid to its lessor viz., a sum of Rs,1,81,11,130. It is the plea of the assessee that the proportionate rent of the portion of the sub-lease was not claimed as deduction while computing its income under the head 'profits & gains of business or profession'. In this background, the AO examined the claim of assessee and rejected the claim of assessee for deduction on rents paid to the landlord observing as follows:- "12.1 As seen from computation of total income, the assesee has received rental income of Rs.1,31,20,320/- but set it off against rental expenditure of Rs. 1,81,1 1,130/- resulting in loss under the head House Property of Rs.49,90,810/-. In this regard it may be noted that the rental income of the assessee in respect of housing the STPI unit at Bangalore would reduce the profit of STP Unit being the business expenditure. On the other hand, the entire amount of rental income would fall either under the head House Property or income under the head Other Sources, being sub leased rental income, and the subleased rental income is taxable without any

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adjustment against the business expenditure of STPI units. Accordingly a sum of Rs.1,31,20,320/- is brought to tax under the head Other Sources." 26. The assessee preferred objections against the action of the AO in not allowing the aforesaid deduction before the DRP, which confirmed the order of AO. The addition was incorporated in the final order of assessment against which the assessee has preferred the present appeal before the Tribunal. 27. The Id. counsel for the assessee relied on the decision of the Hon'ble High Court of Karnataka in the case of East West Hotels Ltd. V. DCIT [2011] 13 taxmann.com 167 (Kar) wherein the facts were identical to the facts in the assessee's case and the question before the Hon'ble High Court was, whether the assessee was entitled to claim deduction u/s. 57(iii) of the Act on the rents paid to the lessor against the income derived from sub- letting? The Hon'ble High Court held that deduction was admissible u/s. 57(iii) of the Act. The Id. DR, however, submitted that the case of the AO is that the sum claimed as deduction would go to reduce the profits on which deduction u/s. 10A of the Act is claimed by the assessee and therefore the question whether this sum was claimed as a deduction while computing the business of STPI unit also needs to be looked into. 28. We have considered the rival submissions. We are of the view that in the light of the decision of the Hon'ble High Court of Karnataka in the case of East West Hotels Ltd. (supra), the deduction claimed by the assessee has to be allowed. We, however, direct the AO to examine as to whether the sum claimed as a deduction has also been claimed as deduction while computing profits of the STPI unit. The AO will verify this aspect and decide on whether the claim of assessee for deduction can be allowed after affording opportunity of being heard to the assessee.” 106. Respectfully following the above observation, we also direct the Ld. AO to examine as to whether the sum claimed as deduction has also been claimed as deduction while computing profits of the STPI unit. The AO shall verify this aspect then decide on whether the claim of assessee for deduction can be allowed after affording proper opportunity of being heard in accordance with law. Accordingly this ground raised by revenue stands allowed for statistical purposes.

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Ground No. 2 (raised under corporate tax by assessee in its appeal): 107. As we have already remanded this issue, ground No. 2 raised by assessee under the corporate tax regarding set-off of loss under the head income from other sources against income chargeable to tax under the head income from profit and gains would become consequential. Accordingly this ground also stands remanded to learnt AO to be considered in accordance with law. 108. Ground No. 9 and 10 is in respect of reduction of communication expenses, insurance expenses and expenditure incurred in foreign currency from export turnover. 109. It has been submitted that the Ld.AO on direction of DRP considered communication expenses, insurance expenses and expenses incurred in foreign currency is attributable to the delivery of computer software outside India thereby excluding the same from export turnover for purposes of computation of deduction under section 10A of the Act. 110. The Ld. CIT DR placed reliance on orders passed by authorities below. 111. On the contrary, the Ld.Counsel submitted that the issue now stands settled in favour of assessee by virtue of decision by Hon’ble Supreme Court in case of CIT vs HCL Technologies Ltd., reported in (2018) 404 ITR 719.

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Copy to : 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore 6. Guard file By order

Assistant Registrar, ITAT, Bangalore

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Date Initial On Dragon 1. Draft dictated on Sr.PS -4-2021 2. Draft placed before Sr.PS author -4-2021 3. Draft proposed & placed JM/AM before the second member -4-2021 4. Draft discussed/approved JM/AM by Second Member. -4-2021 5. Approved Draft comes to Sr.PS/PS the Sr.PS/PS -4-2021 6. Kept for pronouncement Sr.PS on -4-2021 7. Date of uploading the Sr.PS order on Website -- 8. If not uploaded, furnish Sr.PS the reason -4-2021 9. File sent to the Bench Sr.PS Clerk 10. Date on which file goes to the AR 11. Date on which file goes to the Head Clerk. 12. Date of dispatch of Order. No 13. Draft dictation sheets are Sr.PS attached