DCIT vs. M/S I2 TECHNOLOGIES PVT. LTD.,, BANGALORE

Per Shri Jason P Boaz, A.M. : This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-IV, Bangalore dt.3.5.2013 for the Assessment Year 2004-05.

2 IT(TP)A No.1239/Bang/2013 2. Briefly stated, the facts of the case are as under :-

(i) Back Office services (ITES) : Rs.3,07,92,748. (ii) Software development services : Rs.10,93,31,102.

3 IT(TP)A No.1239/Bang/2013 The assessment was completed under Section 143(3) of the Act vide order dt.29.12.2006, wherein the assessee's income was determined at Rs.29,55,49,371 in view of the Transfer Pricing Adjustment of Rs.4,01,23,850 and disallowance of the assessee's claim for deduction under Section 10A of the Act.

2.2 Aggrieved by the order of assessment dt.29.12.2006 for Assessment Year 2004-05, the assessee preferred an appeal before the CIT(Appeals) –IV, Bangalore. The learned CIT(Appeals) disposed off the appeal vide the impugned order dt.3.5.2013, allowing the assessee partial relief.

4 IT(TP)A No.1239/Bang/2013

5 IT(TP)A No.1239/Bang/2013 5. Ground Nos.2 & 3 – Deduction U/s. 10A of the Act.

5.1 In these grounds (supra), Revenue assails the action of the learned CIT(Appeals) in directing the Assessing Officer to compute the deduction under Section 10A of the Act in accordance with the decision of the Hon’ble Karnataka High Court in the case of Yokogawa Ltd. (341 ITR 385); by allowing deduction there under for each profit making STPI Unit separately and not for the company as a whole; without appreciating the fact that the Department has not accepted the said decision and has preferred an SLP before the Hon’ble Apex Court in this regard.

5.2 The ld. Departmental Representative for Revenue was heard in support of the grounds raised (supra) and placed strong reliance on the findings rendered by the Assessing Officer on this issue.

5.3 Per contra, the ld. AR for the assessee submitted that the assessee’s claim for being allowed the deduction claimed under Section 10A of the Act is squarely covered in its favour by the decision of the Hon’ble Karnataka High Court in the case of CIT Vs. Yokogawa India Ltd. (341 ITR 385). It is submitted that the learned CIT(Appeals), following the aforesaid decision, has rightly directed the Assessing Officer to 6 IT(TP)A No.1239/Bang/2013 compute the deduction under Section 10A of the Act of each STPI Unit separately before setting off the current losses and brought forward business losses and depreciation, if any.

5.4.1 We have heard the rival contentions, perused and carefully considered the material on record. From a perusal of the details on record it is seen that the Assessing Officer was of the view that deduction under Section 10A of the Act was to be allowed only on the income computed after setting off current losses and brought forward losses etc.

In this view of the matter, the Assessing Officer rejected the assessee’s entire claim for deduction under Section 10A of the Act.

5.4.2 We find that the issue in dispute before us is squarely covered in favour of the assessee by the decision of the Hon'ble Karnataka High Court in the case of CIT Vs. Yokogawa India Ltd. (supra). In its decision, the Hon'ble High Court had held that the income of section 10A unit has to be excluded at source itself before arriving at the gross total income / loss. As the deduction under Section 10A of the Act has to be computed from the total income of the assessee, the brought forward business loss and depreciation being set off against such profit and gains of the 7 IT(TP)A No.1239/Bang/2013 undertaking as a whole would not arise. In this view of the matter and respectfully following the decision of the Hon'ble Karnataka High Court in Yokogawa India Ltd. (341 ITR 385), which has since been approved by the Hon’ble Apex Court in CIT Vs Yokogawa India Ltd. (2017) 77 taxmann.com 41 (SC), we uphold the impugned orders of the learned CIT(Appeals) in directing the Assessing Officer to compute the deduction under Section 10B of the Act in the case on hand of each STPI Unit separately without setting off the current and brought forward business losses / depreciation from the assessee's income. We hold and direct accordingly. Consequently the grounds in 2 & 3 raised by Revenue are dismissed.

6.1 In this ground, Revenue contends that the learned CIT(Appeals) erred in directing the TPO to adopt the operating margin of this company at 7.33% in respect of the software development services segment without appreciating the fact that ‘bad debts written off’ are not operating in nature and that 8 IT(TP)A No.1239/Bang/2013 the TPO has correctly worked out the margin. The ld. DR was heard in support of the grounds raised.

6.2 The ld. AR for the assessee supported the finding of the learned CIT(Appeals) on this issue in the impugned order. According to the learned Authorised Representative there is no error in the learned CIT(Appeals) in holding that bad debts are operating in nature. In support of this the ld. AR placed reliance on the decision of the ITAT, Delhi Bench in the case of Techbooks International Pvt. Ltd. Vs. DCIT reported in 2015 (7) TMI 473 – ITAT, Delhi dt.6.7.2015, at para 6.2 thereof. It is also submitted that the learned CIT(Appeals) adopted the margin at 7.33% on the basis of the figures in the Annual Report of Goldstone Technologies Ltd. It is prayed, that in view of the above, Revenue’s grounds be dismissed.

6.2.1 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncement cited (supra). As per the decision of the ITAT, Delhi Bench in the case of Techbooks International Pvt. Ltd. (supra) at para 6.2 thereof, the Tribunal has held that bad debts written off are in the realm of operations of the 9 IT(TP)A No.1239/Bang/2013 assessee's business and directed the TPO to treat provision for bad debts / bad debts as an item of operating expense of the assessee; as also in the case of comparables as well. In these circumstances, we find no error in the impugned order of the learned CIT(Appeals) in directing the Assessing Officer that bad debts written off are to be treated as operating in nature. We also observe that except for raising the ground that the learned CIT(Appeals) has taken the operating margin wrongly at 7.33%, which as per the Annual Report of Goldstone Technologies Ltd., no material evidence was placed before us by the ld. DR to controvert this finding of the learned CIT(Appeals). In this factual / legal matrix of the case, we find no reason to interfere with the finding rendered by the learned CIT(Appeals) on this issue and consequently dismiss ground No.4 raised by Revenue.

10 IT(TP)A No.1239/Bang/2013 that connectivity and data base expenses are extraordinary in nature.

Before us, the ld. AR for the assessee submitted that the assessee has no objection to the Revenue’s prayer for inclusion of M/s. Allsec Technologies Ltd., in the list of comparables in the ITES segment. In these circumstances, we reverse the order of the learned CIT(Appeals) and direct the TPO to include M/s. Allsec Technologies Ltd., in the set of comparables in the ITES segment. Consequently, ground Nos. 5 & 6 of Revenue’s appeal are allowed.

Order pronounced in the open court on the 28th day of Sept.,2018.