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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI ABRAHAM P. GEORGE
IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE
BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
IT(TP)A No.1548/Bang/2010 Assessment year : 2006-07
M/s. Mindteck (India) Limited, Vs. The Income Tax Officer, 16/3, Cambridge Road, Ward 12(1), Ulsoor, Bangalore. Bangalore – 560 009. PAN: AAACH 1072Q
APPELLANT RESPONDENT
Appellant by : Shri Raghunathan, Advocate Respondent by : Shri C.H. Sundar Rao, CIT-I(DR)
Date of hearing : 01.01.2015 Date of Pronouncement : 09.01.2015
O R D E R Per N.V. Vasudevan, Judicial Member
This appeal by the assessee is against the order dated 21.10.2010 the ITO, Ward 12(1), Bangalore passed u/s. 143(3) r.w.s. 144C of the Act, in relation to A.Y.2006-07.
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The Assessee has raised as much as 14 grounds of appeal in the grounds of appeal. The Assessee has also filed application seeking to
raise additional grounds of appeal. Out of the 14 grounds raised in the grounds of appeal, except grounds 3, 5, 7, 9 & 10, all other grounds were
not pressed. We therefore need to adjudicate only Grounds 3, 5, 7, 9 & 10
raised in the grounds of appeal and the additional grounds sought to be raised by the Assessee, subject to its admissibility.
Grounds 3, 5, 7 and the additional grounds sought to be raised by the Assessee are with regard to the addition to the total income by way of adjustment to the Arms’ Length Price (“ALP”) to an international
transaction carried out by the assessee u/s. 92CA of the Act. At the time of hearing of the appeal, it was submitted that the comparable companies
chosen by the TPO and the addition made by the AO in the draft assessment order which was confirmed by the DRP are identical to the
case decided by the Tribunal in ITA No.1054/Bang/2011 for AY 07-08 in
M/s. Trilogy E-Business Software India Pvt. Ltd. Vs. DCIT, Circle 12(4), Bangalore, Yodlee Infotech Vs. ITO ITA No.1397/Bang/2010 for A.Y.2006-
07 as considered by this Tribunal in the case of M/s. Actiance India Private Limited Vs. The ITO in IT(TP)A.No.1295/Bang/2010 order dated
17.10.2014. It was also submitted that the business profile of the Assessee and that of the Assessee in the case of M/s. Trilogy E-Business
Software India Pvt.Ltd. (supra), Yodlee Infotech (supra) and M/s. Actiance
India Pvt. Ltd. (supra) were also identical. This submission was found to be
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correct at the time of hearing. With this background we will now consider the factual basis of the present case and the decision rendered in the case
of Trilogy E-Business Software India Pvt.Ltd. (supra), Yodlee Infotech (supra) and M/S.Actiance India Pvt.Ltd. (supra).
The assessee is a company. It is engaged in the business of
rendering software development research and development services. The Assessee provides such services to its group companies apart from
independent customers. The total operating revenue from rendering software development services was a sum of Rs.19,47,91,538/-. Out of the
above, the revenue from rendering software development services to an Associated Enterprise (AE) was a sum of Rs.15,87,43,329/-. It is not in
dispute before us that the transaction of providing software research &
development support services by the Assessee to its related party viz., group companies was an international transaction with the AE and
therefore the price at which the assessee renders services to its AE has to
pass the Arm’s Length Price (ALP) test as laid down by section 92C of the Act.
In support of the assessee’s claim that the price charged by it for services rendered to its AE was at arms’ length, the assessee filed a report
as required by the provisions of section 92E of the Act in Form 3EB
together with detailed analysis. The assessee adopted Transaction Net Margin Method (TNMM) as the most appropriate method for determining
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the ALP. Operating profits to cost was adopted as the Profit Level Indicator (“PLI”). The PLI of the assessee was arrived at as follows:
Operating Revenue Rs.19,47,91,538 Operating Cost Rs.18,00,23,193 Operating Profit Rs.1,47,68,345 Op.pr/cost% 8.20%
The Transfer Pricing Officer (TPO) arrived at a final set of 20 6. comparables. The set of 20 comparables is given as Annexure-I to this
order.
The assessee raised various objections to the methodology adopted and the reasons assigned by the TPO for rejecting the
comparables chosen by the assessee in its TP study. In the course of proceedings before the TPO, notice u/s. 133(6) has been issued to the
companies that were chosen as comparable by the assessee as well as the
TPO and on the basis of the replies received in response to such notices, certain inferences were drawn by the TPO. The action of the TPO in
relying on some of those information was also challenged by the assessee. The TPO finally passed an order u/s. 92CA of the Act and on the basis of
the comparables set out in Annexure-I to this order, arrived at arithmetic mean of 20.48%. After factoring the working capital adjustment of -1.65%, the adjusted arithmetic mean was determined at 22.13%. The computation
of the ALP by the TPO in this regard was as follows:-
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“Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin. (Please see Annexure B for details of computation of PLI of the comparables). Based on this, the arms length price of the software development services rendered by the taxpayer to its AE(s) is computed as under: Arithmetic mean PLI 20.48% Less: Working capital Adjustment (Annexure-C) -1.65% Adj.Arithmetic mean PLU 22.13% Arm’s Length Price: Operating Cost Rs.18,00,23,193 Arms Length Margin 22.13% of the operating cost Arms Length Price (ALP) Rs.21,98,62,325/- At 119.17% of operating cost
Price received vis-à-vis the Arms Length Price: The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length Price as under: Arms Length Price (ALP) Rs.21,98,62,325/- At 119.17% of operating cost Price charged in the Rs.19,47,91,538 international transactions Shortfall being adjustment Rs.2,50,70,787 u/s.92CA
The above shortfall of Rs.2,50,70,787/- is treated as transfer pricing adjustment u/s 92CA.”
Against the said adjustment proposed by the TPO which was
incorporated in the draft assessment order by the AO, the assessee filed
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objections before the DRP. The DRP rejected those objections and confirmed the transfer pricing adjustment suggested by the TPO. The adjustment confirmed by the DRP was added to the total income of the assessee by the AO in the fair order of assessment. Against the said order of the Assessing Officer, the assessee has preferred the present appeal before the Tribunal.
The ld. counsel for the assessee brought to our notice that out of the 20 comparable companies chosen by the TPO, the following companies will have to be excluded as the turnover of these companies are more than Rs.200 crores and cannot be compared with the Assessee whose turnover is less than Rs.20 crores:
(1) Flextronics Software Systems Ltd. 595.12 crores (2) iGate Global Solutions Ltd. 527.91 crores (3) Mindtree Ltd. 448.79 crores (4) Persistent Systems Ltd. 209.18 crores (5) Sasken Communication Technologies Ltd.(Seg.) 240.03 crores (6) Infosys Technologies Ltd. 9028 crores.
Our attention was drawn to the observations of the Tribunal in the case of
Trilogy E-Business Software India Pvt.Ltd. (supra) on the
application of turnover filter and it was submitted that the aforesaid comparable companies have to be excluded from the final list of comparables selected by the TPO.
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The learned DR pointed out that at page-12 of the TPO’s order at
Para-5, the TPO has listed out the comparable criteria adopted by the
Assessee in its Transfer Pricing analysis to support the price it charged its AE for rendering software development services. One of the criteria or filter
so applied by the Assessee was choosing companies having sales of Rs.5 Crores to Rs.250 Crores. It was therefore his submission that he cannot
seek to exclude the comparable companies viz., Sasken Communication Technologies Ltd. & Persistent Systems Ltd., on the basis of Turnover filter
of above Rs.200 Crores, as these companies have turnover below Rs.250
Crores and therefore are to be considered as comparable on the basis of Assessee’s own admission.
At the time of hearing it was also noticed that the Assessee has not
raised a specific ground of objection before DRP on the application of turnover filter by excluding companies which have turnover above Rs.200
crores from the list of comparable companies on the basis of the decision rendered in the case of Trilogy E-Business (supra) rendered by the ITAT
Bangalore Benches. The learned counsel for the Assessee has filed before us an application for admission of additional ground of appeal in
which he has raised a ground objecting to selection of companies whose
turnover is above Rs.200 crores as a comparable company with that of the Assessee. In the said application for admission of additional ground of
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appeal, the Assessee has pointed out that the transfer pricing law in India is still an evolving legislation and the judicial trend set into motion by the decision based on which the exclusion of companies with turnover of Rs.200 crores from the list of comparable companies is sought on the basis of decision rendered subsequent to the filing of this appeal by the Assessee. It was pointed out that the appeal by the Assessee had been filed in Dec.2010 when the decisions referred to above, had not been rendered. Further reliance was placed on the decision of the Hon’ble Special Bench of ITAT Chandigarh in the case of Quark Systems Pvt.
LTD. (2010) 4 ITR 606 (SB)(Chandigarh) wherein the Special Bench
held that when the cause of substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred. The Special Bench further opined that Transfer pricing is in the initial stages and therefore a liberal approach by giving assessee opportunity to make out its case properly and place all relevant facts before the authorities so that ALP can be determined in accordance with law should be adopted. The Special Bench further opined that proceedings before the tax authorities are not strictly adversarial proceedings and the Assessee should not therefore be placed at disadvantage because of inadvertent and bonafide mistakes.
We have considered the submissions of the learned counsel for the Assessee and the learned DR. We are of the that the additional grounds
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sought to be raised have to be admitted for adjudication as held by the Special Bench in the case of Quark Systems Ltd. (supra). We are also of the view that the entire exercise to be carried out u/s.92 of the Act is determination of ALP and in doing so, the revenue should not be allowed to plead admission by the Assessee, though erroneous or was made under particular circumstances and therefore are not final and binding, as conclusive. We therefore admit the additional grounds raised by the Assessee for adjudication.
On the application of turnover filter in the case of Trilogy E-Business Software India (P) Ltd. (supra), this Tribunal held that while selecting comparable companies for comparability analysis held as follows:
“(1) Turnover Filter
The ld. counsel for the assessee submitted that the TPO has applied a lower turnover filter of RS. 1 crore, but has not chosen to apply any upper turnover limit. In this regard, it was submitted by him that under rule 10B(3) to the Income-tax Rules, it was necessary for comparing an uncontrolled transaction with an international transaction that there should not be any difference between the transactions compared or the enterprises entering into such transaction, which are likely to materially affect the price or cost charged or paid or profit arising from such transaction in the open market. Further it is also necessary to see that wherever there are some differences such differences should be capable of reasonable accurate adjustment in monetary terms to eliminate the effect of such differences. It was his submission that size was an important facet of the comparability exercise. It was submitted that significant differences in size of the companies would impact comparability. In this regard our attention was drawn to the decision of the Special Bench of the ITAT Chandigarh Bench in the case of DCIT v. Quark Systems
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Pvt. Ltd. 38 SOT 207, wherein the Special Bench had laid down that it is improper to proceed on the basis of lower limit of 1 crore turnover with no higher limit on turnover, as the same was not reasonable classification. Several other decisions were referred to in this regard laying down identical proposition. We are not referring to those decisions as the decision of the Special Bench on this aspect would hold the field. Reference was also made to the OECD TP Guidelines, 2010 wherein it has been observed as follows:- “Size criteria in terms of Sales, Assets or Number of Employees: The size of the transaction in absolute value or in proportion to the activities of the parties might affect the relative competitive positions of the buyer and seller and therefore comparability.” 12. The ICAI TP Guidelines note on this aspect lay down in para 15.4 that a transaction entered into by a Rs. 1,000 crore company cannot be compared with the transaction entered into by a Rs. 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate. The fact that they operate in the same market may not make them comparable enterprises. The relevant extract is as follows [on Rule 10B(3)]: “Clause (i) lays down that if the differences are not material, the transactions would be comparable. These differences could either be with reference to the transaction or with reference to the enterprise. For instance, a transaction entered into by a Rs 1,000 crore company cannot be compared with the transaction entered into by a Rs 10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate.” 13. It was further submitted that the TPO’s range (Rs. 1 crore to infinity) has resulted in selection of companies like Infosys which is 277 times bigger than the Assessee (turnover of Rs. 13,149 crores as compared to Rs. 47.47 crores of Assessee). It was submitted that an appropriate turnover range should be applied in selecting comparable uncontrolled companies.
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Reference was made to the decision of the ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, wherein relying on Dun and Bradstreet’s analysis, the turnover of RS. 1 crore to RS. 200 crores was held to be proper. The following relevant observations were brought to our notice:- “9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs.1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study.”
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It was brought to our notice that the above proposition has also been followed by the Honourable Bangalore ITAT in the following cases: 1. M/s Kodiak Networks (India) Private Limited Vs. ACIT (ITA No.1413/Bang/2010) 2. M/s Genesis Microchip (I) Private Limited Vs. DCIT (ITA No.1254/Bang/20l0). 3. Electronic for Imaging India Private Limited (ITA No. 1171/Bang/2010). It was finally submitted that companies having turnover more than Rs. 200 crores ought to be rejected as not comparable with the Assessee. 16. The ld. DR, on the other hand pointed out that even the assessee in its own TP study has taken companies having turnover of more than RS. 200 crores as comparables. In these circumstances, it was submitted by him that the assessee cannot have any grievance in this regard. 17. We have considered the rival submissions. The provisions of the Act and the Rules that are relevant for deciding the issue have to be first seen. Sec.92. of the Act provides that any income arising from an international transaction shall be computed having regard to the arm’s length price. Sec.92-B provides that “international transaction” means a transaction between two or more associated enterprises, either or both of whom are non- residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. Sec.92- A defines what is an Associated Enterprise. In the present case there is no dispute that the transaction between the Assessee and its AE was an international transaction attracting the provisions of Sec.92 of the Act. Sec.92C provides the manner of computation of Arm’s length price in an international transaction and it provides:-
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(1) that the arm’s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :— (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board.
(2) The most appropriate method referred to in sub- section (1) shall be applied, for determination of arm’s length price, in the manner as may be prescribed: Provided that where more than one price is determined by the most appropriate method, the arm’s length price shall be taken to be the arithmetical mean of such prices:
Provided further that if the variation between the arm’s length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm’s length price.
(3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that— (a) the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with
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the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm’s length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm’s length price in relation to the said international transaction in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him:”
Rule 10B of the IT Rules, 1962 prescribes rules for Determination of arm’s length price under section 92C:- “10B. (1) For the purposes of sub-section (2) of section 92C, the arm’s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :— (a)……. to (d)…….. (e) transactional net margin method, by which,— (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub- clause (ii) arising in comparable uncontrolled transactions is adjusted to take
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into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm’s length price in relation to the international transaction.
(2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:— (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail.
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(3) An uncontrolled transaction shall be comparable to an international transaction if—
(i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.
(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into :
Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared.”
A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. Before us there is no dispute that the TNMM is the most appropriate method for determining the ALP of the international transaction. The disputes are with regard to the comparability of the comparable relied upon by the TPO. 20. In this regard we find that the provisions of law pointed out by the ld. counsel for the assessee as well as the decisions referred to by the ld. counsel for the assessee clearly lay down the principle that the turnover filter is an important criteria in choosing the comparables. The assessee’s turnover is RS. 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200
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crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010) . Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz., Turnover Rs. (1) Flextronics Software Systems Ltd. 848.66 crores (2) iGate Global Solutions Ltd. 747.27 crores (3) Mindtree Ltd. 590.39 crores (4) Persistent Systems Ltd. 293.74 crores (5) Sasken Communication Technologies Ltd. 343.57 crores (6) Tata Elxsi Ltd. 262.58 crores (7) Wipro Ltd. 961.09 crores. (8) Infosys Technologies Ltd. 13149 crores.”
. 14. Respectfully following the aforesaid decision of the Tribunal in the case of Trilogy E-Business Software India Pvt.Ltd. (supra), we hold that the following companies should be excluded from the list of comparable companies”-
(1) Flextronics Software Systems Ltd. 595.12 crores (2) iGate Global Solutions Ltd. 527.91 crores (3) Mindtree Ltd. 448.79 crores (4) Persistent Systems Ltd. 209.18 crores (5) Sasken Communication Technologies Ltd.(Seg.) 240.03 crores (6) Infosys Technologies Ltd. 9028 crores.
The AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable.
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Improper selection of comparables: It was submitted by the
learned counsel for the Assessee that the following 4 companies are not
functionally comparable with that of the Assessee.
a) KALS Information Systems Limited b) Accel Transmission Limited.
In this regard our attention was drawn to the decision of the Hon’ble ITAT
Bangalore Bench in the case of Trilogy E-Business Software India Pvt.Ltd.
(supra) wherein these companies were held to be not functionally comparable with that of a pure software developer like the Assessee.
The following were the relevant observations of the Tribunal on the aforesaid comparable companies in the case of Trilogy E-Business
Software India Pvt. Ltd.(supra):
“(d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was Q 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal’s decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows:
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“16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds.” Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable.” “(e) Accel Transmatic Ltd. 48. With regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (F) Ltd v Ad. CIT 12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows:
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“In regard to Accel Transmatics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development (iii) Accel IT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development. 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different from the assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore assessee’s claim that this company was functionally different was accepted. DRP therefore directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final list of comparables for the purpose of determining TNMM margin.” 49. Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and therefore should not be taken for comparability purposes. The submission of the ld. counsel for the assessee was that if the above company should not be considered as comparable. The ld. DR, on the other hand, relied on the order of the TPO. 50. We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the
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ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables.”
The facts and circumstances under which the aforesaid companies were considered as comparable is identical in the case of the Assessee as well as in the case of Trilogy E-Business Software India Pvt.Ltd. (supra). Respectfully following the decision of the Tribunal referred to above in the case of Trilogy E-Business Software India Pvt.Ltd.(supra), we direct that the following companies be excluded from the list of 26 comparable arrived at by the TPO.
a) KALS Information Systems Limited b) Accel Transmission Limited.
As far as the comparable chosen by the TPO viz., TATA Elxsi is concerned, this Tribunal in the case of Yodlee Infotech Pvt. Ltd. Vs.
ITO in ITA No.1538/Bang/2010 by its order dated 30.8.2013, held that this company is not functionally comparable with a software development service provider. The following were the relevant observations of the Tribunal in this regard.
“15. Tata Elxsi Limited.
15.1.1 This company was selected by the TPO for inclusion in the set of comparables. Before the TPO, the
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assessee had objected to the inclusion of this company in the set of comparables for various reasons such as functional dis- similarity significant R & D activity, brand value, size, etc. The TPO, however, rejected the assessee's objections and included the company in the set of comparables. Before us, in this appeal the learned Authorised Representative reiterated that this company is not functionally comparable to the assessee as it performs a variety of activities and functions under the software development and services segment and has drawn our attention to and quoted from the Annual Report of the company.
15.1.2 The learned Authorised Representative submitted that as per the Annual Report, this company operates in two segments, namely,
Systems and Integration Support Services - which caters to the domestic market and offers integrated hardware and packaged software solutions sourced from principals and 2. Software development services - While the TPO has considered the software development and services segment as comparable to the assessee, the learned Authorised Representative submits that on perusal of the Annual Report of the company, it can be observed that the software development segment cannot be considered for analysis for the following reasons : (i) As per the Directors Report and the Management Discussion and Analysis, the software development and services segment comprises of three sub-services namely : a) Product Design Services i.e. design and development of hardware and software. b) Innovation Design Engineering i.e. Mechanical Design with a focus on Industrial Design; and c) Visual Computing Labs i.e. Animation and Special Effects for Movies and TV.
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ii) As the software development and services segment comprises of hardware, software and animation services, there is no sub-services break-up / information provided in the Annual Report OR the Databases, the learned Authorised Representative contends that this company should be rejected as a comparable as it is functionally different from the assessee. 15.2 Per contra, the learned Departmental Representative supported the orders of the authorities below on this issue.
15.3.1 We have heard both parties and perused and carefully considered the material on record including the judicial decisions relied upon. From the record, we find that this company is predominantly engaged in product designing services and not purely software development services. The references made to the Annual Report by the learned Authorised Representative show that the segment “software development and services” relates to design services and are not similar to software support services performed by the assessee in the case on hand. Further, the Mumbai ITAT in the case of Telecordia Technologies India Pvt . Ltd. (ITA No.7821/Mum/2011) has held, that this company, M/s. Tata Elxsi Ltd. is not a software development service provider, at para 7.7 on page 21 of its order which is extracted hereunder : “ 7.7 …. Tata Elxsi is engaged in development of niche product and development services, which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider 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 fit for comparability analysis for determining the arms
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length price for the assessee, hence, should be excluded from the list of comparable parties.”
As can be seen from the extracts of the Annual Report of this company, placed before us, this factual position pertaining to Tata Elxsi Ltd., has not changed from Assessment Years 2007-08 to 2008-09. In this view of the matter, we are of the view that this company is not to be considered for inclusion in the set of comparable in the case on hand for the period under consideration and therefore direct the TPO to exclude this company from the final set of comparables for the period under consideration.”
In view of the above, the aforesaid company should also be excluded for the purpose of comparison while determining the ALP of the international transaction in question.
As far as the comparable chosen by the TPO viz., Megasoft Ltd. in the list of final comparables chosen by the TPO is concerned, this Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) had held that only segmental data of the said company should be taken for the purpose of comparison. Following are the relevant observations of the Tribunal:-
“37. The next plea of the Assessee is that if at all this company is considered as a comparable then the segmental margin of 23.11% (which is the margin for software service segment) alone should be considered for comparability. On the above submission, we find that the TPO considered the segmental margin (Software service segment) in the case of Geometric, Kals Info systems, R Systems, Sasken Communication and Tata Elxsi. Before DRP the Assessee pointed out that the segmental margin of 23.11% alone should be taken for comparability. The DRP has
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not given any specific finding on the above plea of the Assessee. Perusal of the order of the TPO shows that the TPO relied on information which was given by this company in which this company had explained that it has two divisions viz., BLUEALLY DIVISION and XIUS-BCGI DIVISION. Xius- BCGI Division does the business of product software (developing software). This company develops packaged products for the wireless and convergent telecom industry. These products are sold as packaged products to customers. While implementing these standardized products, customers may request the company to customize products or reconfigure products to fit into their business environment. Thereupon the company takes up the job of customizing the packaged software. The company also explained that 30 to 40% of the product software (software developed) would constitute packaged product and around 50% to 60% would constitute customized capabilities and expenses related to travelling, boarding and lodging expense. Based on the above reply, the TPO proceeded to hold that the comparable company was mainly into customization of software products developed (which was akin to software development) internally and that the portion of the revenue from development of software sold and used for customization was less than 25% of the overall revenues. The TPO therefore held that less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO’s filter of more than 75% of revenues from software development services. Having drawn the above conclusion, the TPO did not bother to quantify the revenues which can be attributed to software product development and software development service but adopted the margin of this company at the entity level. In terms of Rule 10B(3)(b) of the Rules, an uncontrolled transaction shall be comparable to an international transaction if— (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences.
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Neither the TPO nor the DRP have noticed that there is bound to be a difference between the Assessee and Megasoft and the profit arising to the Megasoft as a result of the existence of the software product segment and no finding has been given that reasonably accurate adjustments can be made to eliminate the material effects of such differences. For this reason, we are inclined to hold that the profit margin of 23.11% which is the margin of the software service segment be taken for comparability. In view of the above conclusion, we do not wish to go into the question as to whether less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO’s filter of more than 75% of revenues from software development services.”
In view of the aforesaid decision of the Tribunal, segmental margins in so far as it relates to providing software services by Megasoft alone should be taken for the purpose of comparison.
The learned counsel for the Assessee submitted before us that if the aforesaid 9 comparable companies are excluded from the list of 20 comparable companies chosen by the TPO and segmental results (software development segment) alone of comparable company chosen by the TPO M/S. Megasoft Ltd., is taken for comparability, then the profit margin of the Assessee would be well within the (+) (-) 5% range of the arithmetic mean of the remaining comparable companies and therefore the price received by the Assessee would be considered as at Arms Length. He prayed for a limited direction to the TPO on the lines set out above and determine the ALP. It also submitted that the other issues raised by the Assessee in the grounds of appeal need not be gone into.
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We are of the view that the prayer sought for by the learned counsel for the Assessee is acceptable and accordingly, the TPO is directed to
compute ALP after excluding the 8 comparable companies dealt with in this order. The TPO is also directed to take only the software development
segment margin of the comparable company M/S.Megasoft Ltd., as was
directed and held in the case of Trilogy E-Business Software India Pvt.Ltd. (supra).
The Assessee has projected its grievance in ground No.5 that the TPO applied the arithmetic mean of the profit margins of the 20 comparable
chosen by him on all the transactions of rendering software services carried
out by the Assessee during the previous year, without restricting his action in respect of the transaction of the Assessee of rendering software services
only to its AE. In other words the non AE transactions have also been considered for arriving at the Transfer Pricing adjustment to be made by
the TPO. In this regard it may be recalled that the total operating revenue
from rendering software development services was a sum of Rs.19,47,91,538/-. Out of the above the revenue from rendering software
development services to an Associated Enterprise (AE) was a sum of Rs.15,87,43,329/-. The plea of the Assessee is that the operating margin
of the comparable should be applied by the TPO on the value of transaction with AE i.e., on the sum of Rs.15,87,43,329 and not on
Rs.19,47,91,538/-. In support of his plea the learned counsel for the
Assessee has brought to our notice the decision of the ITAT Bangalore
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Bench in the case of M/S.Kirloskar Toyota Textile Machinery Private Ltd. Vs. ACIT IT (TP) A.No1401/Bang/2010 order dated 14.11.2014 wherein the
Hon’ble Tribunal held as follows:-
“7. We have duly considered the rival contentions and carefully gone through the record. Section 92C of the Income Tax Act provides computation of income from international transaction having regard to Arm’s Length Price. It contemplates that any income arising from an international transaction shall be computed having regard to the ALP. Before us the assessee has not disputed about the nature of the international transaction with its AE in textile machinery segment. It has also not disputed selection of TNMM method for determining ALP of the international transaction. Similarly the learned Counsel for the ITA No.1401 of 2010 Kirloskar Toyoda Textile Machinery P Ltd Bangalore assessee did not dispute about the selection of comparable cases for determining the PLI of the comparables. The dispute before is, whether the arithmetic mean of the profit level indicator arrived at from the comparables could be applied to the total cost including the purchases made from unrelated parties or it is to be restricted to the purchase made from the AE. The second fold of submission is that the benefit of the proviso of section 92C(2) ought to have been given to the assessee, because in the automotive component segment, the TPO has himself given the benefit of this proviso. The contention of the learned DR was that this argument was not taken up by the assessee before the learned TPO. Therefore, it be remitted to the TPO for verification and re-adjudication. However, we find that in the TP study report, the assessee has disclosed the details of purchases in textile machinery segment from the AE. These are available on page 47 of the TP study report and they read as under: ……………………
We find that the Assessing Officer has worked out the Arm’s Length cost of operating revenue by reducing the total revenue with Arms Length mean margin which was worked out at 8.26%. In other words, the total sales have been reduced by this percentage in order to achieve the cost. This cost was further reduced by the purchases with unrelated parties and thereafter the learned TPO computed the ALP of the purchases made by the assessee from the AE. In our opinion this total exercise is erroneous, because there is no element of undue benefit which would be presumed to have been extended
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by the assessee on the purchases from the third parties. The basic anomaly in this formula would be that it could make multi-fold adjustments, for example if the assessee had made purchase of only Rs.2.00 crores from the AE and Rs.91.00 crores from unrelated parties, the adjustment worked out by the TPO in the figure would be more than the total purchases made from the AE. The learned Counsel for the assessee drew our attention towards the order of the ITAT in the case of Polartech India (P) Ltd v. Asstt. CIT (Supra). In this case the Tribunal has followed the order of the ITAT Delhi Bench and made the following observations under a similar situation: “31. For applying the TNMM in case of international transactions constituting a small portion of expenses, the only practical way of applying the TNMM is to adopt the profitability of the entire enterprise as the profitability from international transaction. It has then to be compared with the PLI of the comparable companies and adjustment made only to the international transactions. This will be achieved by taking the total adjustment applicable to the enterprise as a whole and applying pro rata, on the basis of ratio of the value of international transactions forming part of operational cost to the total operational expenses of the enterprise ITA No.1401 of 2010 Kirloskar Toyoda Textile Machinery P Ltd Bangalore as a whole. We find that the adjustment made by the TPO for this purpose is not correct. , 32. We find support of this view in the Delhi Tribunal in Electronics (I)(P) Ltd. us. Asstt. CIT (201 0) 36 SOT 227 (Del) as under: 'The assessee has also taken one alternative ground out of the total raw materials consumed by the assessee for manufacturing printed circuit boards, only 45.51 per cent of the total raw materials were imported through assessee's associate concerns, and, therefore, any adjustment, if any called for, can only be made to the 45.51 per cent of the total turnover, and not to the total turnover of the assessee. After considering the facts of the case, we do not find any difficulty in accepting this contention of the assessee that at best only 45.51 per cent of the operating profit can be attributed to imported raw material acquired from assessee's associate concerns. In the present case, the AO has calculated the operating profit on the entire sales of the assessee, which in our considered opinion, is not justified, when it is admitted position that only 45.51 per cent of raw material has been acquired by the assessee from its associate concerns for
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the purpose of manufacturing items. The assessee has stated that the operating profit if applied to 45.51 per cent of the turnover would come to Rs. 35,52,573 as against operating profit of Rs. 24,35,175 booked by the assessee, and the difference thereof would only be called for to be made as addition to the profit shown by the assessee. We, therefore, direct the AO to modify the assessment and make the adjustment only to the extent of difference in the arm's length operating profit with adjusted profit with reference to the 45.51 per cent of the turnover, and not to the total turnover of the assessee. Therefore, to this extent, the addition made by the AO and further confirmed by the CIT(A) is reduced. We order accordingly."
Therefore, the transfer pricing adjustment is to be worked out with the ALP determined for the enterprise, as a whole. Thereafter the transfer pricing adjustment for the enterprise as a whole should be allocated to the ITA No.1401 of 2010 Kirloskar Toyoda Textile Machinery P Ltd Bangalore international transaction on a pro rata basis in the ratio of operating expenses incurred through international transactions to the total operational expenses of the company. Only this proportion of the overall adjustment can be added as transfer pricing adjustment. We direct the TPO to compute the transfer pricing adjustment along these directions.”
Taking into the consideration of these factors, we accept the first fold of submission made by the learned Counsel for the assessee and direct the Assessing Officer to confine the adjustment, qua the purchases made by the assessee from the AE. To be more specific, the adjustment is to be made only to the purchases made from the AE. However, this exercise be carried out after verifying the details of purchases available on Page No.47 of the TP study report (extracted supra). The Assessing Officer first determine the purchase of raw material and components from the AE and then determine the ALP having regard to the mean profit margin of comparable cases at 8.26%.”
The learned DR relied on the order of the TPO. We have
considered the rival submissions and are of the view that in the light of the
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decision rendered in the case of Kirloskar Toyoda Textile Machinery Pvt. Ltd. (supra), the Assessing Officer should confine the adjustment, qua the transactions by the assessee with its AE alone. To be more specific, the adjustment is to be made only to the transactions with the AE.
Ground No.9(a) to (d) raised by the Assessee project the grievance of the Assessee regarding the action of the learned Assessing Officer and Honorable Dispute Resolution Panel excluding expenses incurred on travel expenses in foreign currency and expenses incurred towards communication expenses from export turnover on the ground that these expenses are incurred in rendering technical services rendered to clients outside India, while computing deduction under section 10A. It is the plea of the Assessee that at all times during the relevant previous year, it was engaged in development of computer software and not in rendering any technical services. Without prejudice to its contention that the aforesaid sums should not be excluded from the export turnover while computing deduction u/s.10A of the Act, the Assessee has also made an alternate prayer that expenses that are reduced from the export turnover should also be reduced from the total turnover and in this regard has placed reliance on
the decision of the Hon’ble Karnataka High Court in the case of CIT v.
Tata Elxsi Ltd [2012] 349 ITR 98 (Karn).
We have heard the ld. counsel for the assessee and the ld. DR on the issues raised in ground No.9(a) to (d). Taking into consideration the
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decision rendered by the Hon’ble High Court of Karnataka in the case of
CIT v. Tata Elxsi Ltd [2012] 349 ITR 98 (Karn), we are of the view
that it would be just and appropriate to direct the Assessing Officer to exclude expenses incurred in foreign currency towards travelling and expenses incurred towards communication both from export turnover and total turnover, as has been prayed for by the assessee in ground No.9(d ). In view of the acceptance of the alternative prayer in ground No.9, we are of the view that no adjudication is required on ground No.9 (a) to (c).
Ground No.10 raised by the Assessee reads as follows:
“10. Non-grant of set-off of brought forward business loss and unabsorbed depreciation: a) The DRP and AO erred in not allowing a set-off of brought forward business loss and unabsorbed depreciation against the alleged income. b) The DRP erred in directing the AO to set-off of brought forward business loss and unabsorbed depreciation before computing the deduction under Section 10A.
The Assessee filed return of income for AY 06-07 declaring loss of Rs.8,43,640/-. The Assessee had claimed deduction u/s.10A of the Act at Rs.1,51,13,126/-. The total turnover, Export Turnover and profits of the business on the basis of which the Assessee computed deduction u/s.10A was Total Turnover of Rs.3,43,60,420, Export turnover of Rs.3,43,60,420 and profits of the business of Rs.3,01,66,703/-. The AO excluded travelling expenses and communication expenses from the Export Turnover and
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adopted Export turnover at Rs.3,01,66,703/-. By doing so, the AO allowed deduction u/s.10A of the Act only at Rs.1,32,68,557/-. While deciding
Gr.No.9 we have already held that whatever is excluded from the export turnover should also be excluded from the Total Turnover while computing
deduction u/s.10A of the Act. We have also seen that the TPO suggested
an upward revision of the ALP of the international transaction as a result of which a sum of Rs.2,49,98,778 had to be added to the total income of the
Assessee. We have also adjudicated on the said adjustment in the other grounds of appeal dealt with in the earlier part of this order. The resultant
computation of total income by the AO in the order of assessment was as follows:
Total Loss as per return of income Rs. 8,43,640 Add: On account of recomputed 10A resultant Disallowance of ineligible 10A claim as discussed above Rs. 18,44,569 Add: Difference on account of ALP suggested By the TPO and subsequently reworked in Accordance with the directions of DRP Rs.2,49,98,778 Taxable Income from Business Rs.2,59,99,707 Add: Income from House Property Rs. 51,966 Add: Income from other sources (Dividend received from foreign company) Rs. 96,60,230 Total assessed income Rs. 3,57,11,933
As on the first day of the previous year relevant to AY 06-07, the Assessee had the following unabsorbed depreciation and brought forward
loss:-
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Business Loss Rs.8,39,67,017 Unabsorbed Depreciation Rs.3,22,16,422 Capital Loss Rs.40,87,032
The AO did not allow set off of any of the above loss either against income from business of Sec.10A unit or other business income nor against income from House Property or Income from other sources.
Before DRP the Assessee raised objection (objection No.28) wherein the Assessee pleaded (i) allowing setting off the brought forward loss/unabsorbed depreciation against addition made consequent to Transfer Pricing adjustment of Rs.2,49,98,778 and bringing to tax income from Sec.10A unit which was held to be taxable consequent to reworking of deduction u/s.10A of the Act at Rs.10,00,929/-. (ii) Allowing setting off of unabsorbed depreciation against dividend income from received from foreign subsidiary of Rs.96,60,230 and income from house property amounting to Rs.51,996/-.
The DRP did not accept the aforesaid claim of the Assessee by holding that Sec.10A is a deduction provision and therefore deduction u/s.10A had to be computed after setting off of brought forward losses/unabsorbed depreciation relating to earlier assessment years against profits of the eligible unit. In holding as above, the DRP followed the decision of the Hon’ble ITAT Bangalore Bench in the case of Intellinet
Technologies Pvt. Ltd. ITA No.1021/Bang/2009 dated
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12.3.2010. As a result, the deduction u/s.10A of the Act would stand fully
withdrawn. Added to that the income declared by the Assessee under the head Income from other sources (dividend from foreign company) and income from House Property would also get taxed.
Aggrieved by the aforesaid directions of the DRP, the Assessee has raised ground No.10 before the Tribunal, which we have set out earlier. We have heard the submissions of the learned AR who placed reliance on the decision rendered by the Bangalore Bench of ITAT in the case of Karle
International (P) Ltd. Vs. ACIT ITA No.381/Bang/2012 order dated
12.10.2012 wherein this Tribunal held that provisions of Sec.10A are not deduction provisions and they are exemption provisions. In doing so the Tribunal followed the decision of the Hon’ble Karnataka High Court in the case of CIT Vs. Yokogawa India Ltd. ITA No.78/2011. In the case of
Yokogawa India Ltd. (supra), the High Court had to consider two issues for AY 2001-02 & onwards as to whether,
(i) the loss incurred by a non-eligible unit &
(ii) the brought forward unabsorbed loss & unabsorbed depreciation of the eligible unit has to be set-off against the profits of the eligible unit before allowing deduction u/s 10A/ 10B.
HELD, answering both questions in favour of the assessee:-
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(a) On issue (i), s. 10A was amended by the FA 2000 w.e.f. 1.4.2001 to convert it from an “exemption” provision to a “deduction” provision. S.
10A allows deduction “from the total income“. The phrase “total income” in s. 10A means “the total income of the STP unit” and not
“total income of the assessee“. Consequently, s. 10A deduction has
to be given before computing the “profits & gains of business” under Chapter IV. This proposition is in line with the form of return. Allowing
deduction at the earliest stage of business income computation will blur the difference between “commercial profits” and “tax profits“.
Further, though s. 10A was amended to make it a “deduction” provision, it continues to remain in Chapter III and was not moved to
Chapter VI-A. The result is that even now s. 10A is in the nature of
an “exemption” provision and the profits of the eligible unit have to be deducted at source level and do not enter into the computation of
income. Consequently, the losses suffered by non-eligible units cannot be set-off against the eligible profits;
(b) On issue (ii), s. 10A(6) as amended by the FA 2003 w.r.e.f. 1.4.2001
provides that depreciation and business loss of the eligible unit relating to the AY 2001-02 & onwards is eligible for set-off & carry
forward for set-off against income post tax holiday. This amendment does not militate against the proposition that the benefit of relief u/s
10A is in the nature of exemption with reference to commercial
profits. However, to give effect to the legislative intention of allowing
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the carry forward of depreciation and loss suffered in respect of any year during the tax holiday for being set off against income post tax holiday, it is necessary that a notional computation of business income and the depreciation should be made for each year of the tax holiday period. Such loss is eligible to be carried forward. But, as the income of the 10A unit has to be excluded at source itself before arriving at the gross total income, the question of setting off the loss of the current year’s or the brought forward business loss (and unabsorbed depreciation) against the s. 10A profits does not arise.
The submission of the learned counsel for the Assessee was that in view of the decision of the Hon’ble Karnataka High Court in the case of Yokogawa (supra), the directions of the DRP which are based on a decision rendered by ITAT prior to the decision of the Hon’ble Karnataka High Court in the case of Yokogawa (supra), is not valid. The learned DR relied on the order of the DRP.
It was pointed out by the Bench that in view of the provisions of Sec.92C(4) proviso, the Assessee would not be entitled to deduction u/s.10A of the Act on the amount added to total income. The same reads thus:
“(4) Where an arm’s length price is determined by the Assessing Officer under sub-section (3), the Assessing Officer may compute
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the total income of the assessee having regard to the arm’s length price so determined : Provided that no deduction under section 10A or section 10AA or section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub- section :”
The learned counsel for the Assessee fairly conceded that the addition to total income by way of adjustment to the ALP of international transaction will not be entitled to deduction u/s.10A of the Act. He however submitted that if the brought forward business loss relates to non-10A units the loss should be set off in accordance with the provisions of Sec.72 of the Act. He also submitted that if the carried forward loss contains any loss of 10A unit, to that extent the Assessee would not be entitled to set off against any other income since the profit or loss of Sec.10A unit during the tax holiday period is quarantined and carried forward to the assessment years immediately following the last of the assessment years for which the Assessee is entitled to claim exemption u/s.10A, for being set off in accordance with law as if it were any other loss to be dealt with in accordance with Sec.70 to 72 and 32(2) of the Act.
We have considered the rival submissions. The legal position that emanates from the decisions referred to above can be summed up thus:-
(i) The carried forward business loss of Sec.10A unit cannot be set off or carried forward during the tax holiday period against any income.
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(ii) The carried forward business loss to the extent it pertains to non- 10A unit can be set off against income of non-10A unit.
(iii) Sec.10A is an exemption provision and therefore will not enter the
computation of total income and therefore there is no question of any carried forward loss being set off against the profits eligible for
deduction u/s.10A of the Act; and
(iv) the profit or loss of Sec.10A unit during the tax holiday period is
quarantined and loss if any is carried forward to the assessment
years immediately following the last of the assessment years for which the Assessee is entitled to claim exemption u/s.10A, for being
set off in accordance with law as if it were any other loss to be dealt with in accordance with Sec.70 to 72 and 32(2) of the Act.
We are also of the view that the DRP’s order/directions on this issue based on a Tribunal decision rendered prior to the decision of the Hon’ble
Karnataka High Court in the case of Yokogawa (supra) cannot be sustained. We direct the AO to decide the claim of the Assessee in the
light of the legal position set out in the earlier para of this order after analyzing the factual position prevailing in the present case. The AO will
afford opportunity of being heard to the Assessee before deciding the
issue. Thus ground No.10 is treated as allowed to the extent indicated above.
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In the result, appeal by the Assessee is partly allowed.
Pronounced in the open court on this 9th day of January, 2015.
Sd/- Sd/-
( JASON P. BOAZ ) ( N.V. VASUDEVAN ) Accountant Member Judicial Member
Encl: Annexure-I
Bangalore, Dated, the 9th January, 2015.
/D S/
Copy to:
Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file
By order
Assistant Registrar / Senior Private Secretary ITAT, Bangalore.